October 16, 2003 6:05 PM PDT

SCO gets $50 million investment

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SCO Group, the company embroiled in legal action around Linux and Unix, announced a $50 million investment by BayStar Capital on Thursday, marking a reversal of plans it discussed in May.

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SCO will use the funding primarily to boost its software development efforts and secondarily to help pay legal and licensing costs, spokesman Blake Stowell said. SCO sells the Unix operating system and licenses it to others, but more controversially, it has sued IBM over Big Blue's treatment of Unix and argues that companies should pay SCO to use Linux.

The investment is a turnaround for the Lindon, Utah-based company. In May, Chief Executive Darl McBride said on a conference call with financial analysts that SCO had investment offers on the table. "We decided not to take those investments, because we were able to generate larger amounts of cash from SCOsource," cash that wouldn't dilute shareholder's stock value, McBride said at the time.

"The ability to build a war chest at this time was too compelling to pass up," McBride said in a conference call Friday. "It's easiest to raise money when you don't need it. That's the position we're in."

A $50 million investment in May, when the company's stock was trading in the $3 range, would have diluted existing shareholders' ownership in the company much more than Thursday's investment did, he said.

BayStar bought preferred shares that are convertible at a price of $16.93 per share of common stock. That conversion that would give BayStar 2,953,000 shares, or 17.5 percent of outstanding shares, SCO said.

"With a $50 million investment from BayStar, we believe we have secured the capital necessary to fund all aspects of the long-term growth of this company," Chief Executive Darl McBride said in a statement.

The company had $11 million in cash on July 31 but now will have about $61 million, SCO said.

The new cash sends a message. "For anyone out there that was doubting we had the necessary funds to fund that litigation, they should rest easy now," Stowell said.

SCO sued IBM in March over its handling of Linux, arguing that Big Blue illegally moved Unix technology into Linux. But IBM has countersued, and Linux seller Red Hat also sued SCO in an attempt to lay the matter to rest.

SCO is scheduled to respond to IBM's amended complaint late Monday, Stowell said.

SCO's software business focuses on selling two versions of the Unix operating system, UnixWare and OpenServer, and on a Web services strategy called SCOx.

Gartner analyst George Weiss, however, believes the $3 billion lawsuit against IBM overshadows all else.

"There is no coming back from the dead if they lose," Weiss said. "It's all or nothing."

SCO's licensing program seeks to compel companies to pay $699 for a one-processor Linux server, more money for more powerful systems, and $199 for every Linux desktop. SCO pushed back a deadline to double those prices until Oct. 31.

BayStar approves of SCO's plans.

"BayStar Capital looks to invest in growth-oriented firms with strong management, substantial market opportunity and solid, comprehensive business plans, and we believe that all of those fundamentals are in place for SCO to succeed," said Lawrence Goldfarb, a BayStar general partner.

 

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