The deal releases Lindon, Utah-based SCO from certain rights that ownership of 40,000 shares of Series A-1 convertible preferred stock gave BayStar over the firm. It also brings to an end a potential battle for control of the company after BayStar stated in April that it wanted to change the management and strategy of SCO.

The investment firm had also stated that it wanted its initial $20m investment returned if its terms were not met. Instead it has now agreed to sell SCO that investment, as well as a further $20m worth of Series A-1 stock it acquired from Royal Bank of Canada in May, for just $13m in cash and just over two million shares of common stock.

RBC originally invested $30m in SCO alongside BayStar’s $20m in October 2003, but sold 20,000 of its Series A-1 shares to BayStar in May and converted the remaining 10,000 to 740,740 shares of SCO common stock, leaving BayStar in a potential powerful position to influence SCO’s legal claims that Linux contains Unix System V code.

It is not immediately clear what BayStar stands to gain from selling the Series A-1 stock at such a low price although if as it stated it is now satisfied with SCO’s management team, operating plan, and litigation management, it could stand to gain if SCO is successful and its share price climbs well above its current price of $5.40.

Under the terms of the agreement, BayStar could not now dump its common stock shareholding in SCO even if it wanted to. The investment firm has agreed not to sell in any one trading day more than 10% of SCO’s average trading volume over the preceding five trading days. Even so it will need SCO’s share price to rise above $12.83 if it is to realize a return from its investment.

SCO has certainly benefited both from the investment and the termination of the Series A-1 stock arrangement. It is now free of preferred dividend, restrictive covenants, contractual rights and a $40m payout in the event of liquidation, and has received $37m in proceeds before expenses.

The investment has not been without controversy however, as a BayStar spokesperson confirmed in March that Microsoft executives had approached it and recommended investing in SCO, apparently confirming a leaked email to SCO executives from Mike Anderer, CEO of SCO consultant S2 Partners LLC that indicated Microsoft had brought in $86m to SCO, including the BayStar investment.

SCO was certainly in dire need of that investment before it arrived, having worked its way down to cash and cash equivalents of just $14.6m at the end of its third quarter 2003. The investment boosted that cash reserve to $61m to finance its legal battles against IBM, Novell, Red Hat, AutoZone and DaimlerChrysler, although its many legal battles have also begun to take their toll, with cash down to $57.9m at the end of the first quarter of 2004.

It is not clear at the moment what cash position SCO is left with at the end of all this, as the investment retirement agreement has prompted the company to delay its second quarter earnings report until June 10.

For the quarter, SCO is predicting revenue to be between $10m and $14m, although one of the few analysts covering the firm, Dion Cornett of Decatur Jones, has predicted revenue down 46% at $11.6m and an earnings per share loss of $0.31.