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April 25, 2004

SCO refuses to change its ways despite investor pressure

Litigious Unix vendor SCO Group Inc will not change its methods or management despite pressure from disgruntled investor BayStar Capital Management LLC.

By CBR Staff Writer

BayStar wrote to Lindon, Utah-based SCO on April 15 asking for a refund of its $20m investment, changes to the company’s management team, and a more professional approach to its intellectual property claims against Linux.

In response SCO said it has no intention of returning the $20m, changing its management, or toning down its public statements about claims that the Linux operating system contains its intellectual property.

BayStar invested $20m in SCO in October and the company fully intends to maintain this investment, the company said in a statement. BayStar’s notification letter from last Thursday does not obligate SCO into redeeming their shares.

SCO added that it has requested more information from BayStar to clarify the investment firm’s concerns, but has not had a response.

SCO’s management has tried to reach BayStar to discuss the issues that they’ve raised in their letter, but to this point, BayStar has not provided any further communication back to SCO, the statement said. We continue to seek information from BayStar regarding how they believe SCO has breached its Exchange Agreement with BayStar, but no further information has been forthcoming. SCO believes it has fully complied with the terms of the Exchange Agreement.

Reports last week indicated that BayStar wants to see SCO strengthen its management team with executives more experienced in legal issues, potentially replacing CEO Darl McBride, and focusing attention away from its Unix products and services business in order to focus full time on maximizing the value of its intellectual property.

SCO rejected both those suggestions, however. SCO’s management team was selected by its board of directors and continues to have the full confidence of the board, the employees and many of the company’s shareholders, it said.

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The company also rejected claims by BayStar that its statements to the press regarding its intellectual property claims have been too frequent or too grand.

SCO is a publicly traded company and as such, we have an obligation to our shareholders to disclose material events that take place. As a company, we will continue to disclose information as it becomes available and this will frequently be reported on through the media, the statement continued. This includes information concerning our Unix business, our litigation and the intellectual property issues that currently face Linux. We will continue to conduct our litigation through the courts with the strong legal team that we have in place, while also continuing to disclose material information to our shareholders.

SCO chief Darl McBride has certainly been outspoken since the company announced its intellectual property claims against Linux in March 2003, drawing criticism and mirth from the Linux community. In October in an open letter to the community, McBride said: There really is no middle ground. It is no understatement to say that the future of the global economy is in the balance.

The company has also likened its case to the music industry’s battle against file sharing and appealed to US politicians claiming that open source software poses a threat to national security.

I assert that open source software – available widely through the Internet – has the potential to provide our nation’s enemies or potential enemies with computing capabilities that are restricted by US law, McBride wrote in a letter to US senators and representatives in January 2004.

SCO’s public announcements have also been undermined by disclosures made during the discovery period of its breach of contract and copyright case against IBM Corp. In August 2003, SCO said that it had identified over a million lines of code from 1,549 files of derivative works have been donated to Linux by Unix licensees, but in a February 2004 filing with the court it was only able to list 17 IBM AIX or Dynix files accounting for approximately 3,700 lines of code.

During the course of its year-long case against IBM, SCO has upped its claim for damages from $1bn to at least $5bn, but has dropped one of its most significant claims against IBM: that the company misappropriated its trade secrets. The company has also slowly moved away from claims that IBM contributed Unix System V code to Linux, instead contending that the AIX and Dynix code IBM has contributed to Lkinux is subject to SCO contracts and copyright.

This article is based on material originally published by ComputerWire

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