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SCO 10Q: Doubts It Can Remain a "Going Concern" If It Has to Pay Novell Significant $$
Tuesday, September 18 2007 @ 11:15 AM EDT

SCO is telling the bankruptcy court that given a helping hand and a chance to reorganize, it can stay in business. Look at what it tells the SEC in its considerably gloomier 10Q it just filed:
On August 10, 2007, the federal judge overseeing the Company’s lawsuit with Novell, Inc. (“Novell”) ruled in favor of Novell on several of the summary judgment motions that were before the United States District Court in Utah (the “Court”). The effect of these rulings was to significantly reduce or to eliminate certain of the Company’s claims in both the Novell and IBM cases, and possibly others. ... Over the Company’s objection, a bench trial was set to begin on September 17, 2007 and the federal judge was to determine what portion, if any, of the proceeds of the fiscal year 2003 SCOsource agreements is attributable to SVRx technology and should be remitted to Novell. The range of the payment to Novell could have been from a de minimis amount to in excess of $30,000,000, the latter amount being the amount claimed by Novell, including interest. Novell has sought to impose a constructive trust on the Company’s current funds derived from these sources, which could result in a freeze of the Company’s assets, and the Court indicated that it would address that issue as well. The trial of these issues, however, was stayed as a result of the Company’s filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on September 14, 2007....As a result of both the Court’s August 10, 2007 ruling and the Company’s entry into Chapter 11, there is substantial doubt about the Company’s ability to continue as a going concern. Absent a significant cash payment to Novell for this matter, management believes it is remote that the undiscounted future cash flows generated by the Company would not be sufficient to recover the carrying values of the long-lived assets over their expected remaining useful lives.

However, if a significant cash payment is required, or significant assets are put under a constructive trust, the carrying amount of the Company’s long-lived assets may not be recovered. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The Company intends to maintain business operations throughout the bankruptcy case. Subject to the Bankruptcy Court’s approval, the Company will use its cash, cash equivalents, restricted cash and subsequent cash inflows to meet its working capital needs throughout the reorganization process.

Unless I am misreading, I gather SCO believes the only way to keep going is to stiff Novell. But I question if that is going to be possible.

If you remember the Declaration of Tor Braham in SCO v. Novell, the attorney who drew up the agreement that is now biting SCO, Novell retained an equitable interest in the very payment that SCO wishes now to avoid paying:

Further, because we were concerned about Santa Cruz's viability and what could happen to these revenues if Santa Cruz went bankrupt, at my direction we proposed contract language to Santa Cruz whereby Novell would remain the equitable owner of the SVRX Royalties under the Bankruptcy Code:
Seller and Buyer further acknowledge and agree that Seller is retaining all rights to the SVRX Royalties notwithstanding the transfer of the SVRX licenses to Buyer pursuant hereto, and that Buyer only as [sic] legal title and not an equitable interest in such royalties within the meaning of Section 541(d) of the Bankruptcy Code.

(See Exhibit 3 at NOV 41922.) In case Santa Cruz declared bankruptcy, the SVRX Royalties would be protected from the bankruptcy estate and Novell would continue to receive them.

So, assuming that Braham is correct, it's not going to be as simple to slough Novell off as it will be to not pay the pizza restaurant and the phone company. If it was always Novell's money, not a debt owed for services rendered, then how can you discharge it? I reason this way: I can't rob a bank and then offer to pay back only a small portion of the bank's money after filing for bankruptcy. It's not my money to keep. It never was my money. And it's not a debt. It's the bank's money and I should never have taken it in the first place. We'll see if the bankruptcy court agrees, but if it doesn't and forces SCO to face the music, I understand SCO is telling us it probably will not survive.

There is an odd sentence in the filing:

Berger Singerman, P.A. (“Berger”) was also a member of this group of Law Firms. With the consent of the Company, the engagement of this firm was mutually terminated. The last payment received by Berger was on November 24, 2004.

Yet the firm is representing SCO in the bankruptcy, or is asking the court to let it. Mr. Singerman will be representing SCO at the next hearing in October and attended the first hearing by telephone. So I'm not sure what to make of that. And look at this:

Because of the unique and unpredictable nature of the SCO Litigation and our entry into Chapter 11, the occurrence and timing of certain expenses is difficult to predict, and will be difficult to predict for the upcoming quarters. We will continue to make payments for technical, damage and industry experts, consultants and for other fees. However, future legal fees may include contingency payments made to the Law Firms as a result of a settlement, judgment, or a sale of our company, which could cause the cost of SCOsource licensing revenue for the three months ending October 31, 2007 or for future periods to be higher than the costs incurred for the three months ended July 31, 2007.

They can still get lawyers to agree to contingency fees? I guess that's on top of the monthly payments they told the bankruptcy court they want to pay the lawyers. It sounds like the same deal as for the SCO litigation with Boies Schiller, that they get paid in full, but there's a contigency cherry on top if there is a settlement, judgment or sale. I assume they mean a judgment favorable to SCO, which at this point seems illusory. The only other thing I notice is this part:

The Company’s foreign subsidiaries were not included in the filings and will continue their business operations without supervision from the Bankruptcy Court and will not be subject to the requirements of the Bankruptcy Code. In connection with this proceeding, the Company has filed motions with the Bankruptcy Court requesting permission to go forward on a “business as usual” basis as a debtor-in-possession. Accordingly, the Company expects to continue to have jurisdiction over its assets and business subject to the supervision and orders of the Bankruptcy Court. The Company will continue operating and will file a plan of reorganization with the Bankruptcy Court.

So apparently only the US company and US subsidiaries are in bankruptcy in Delaware. Presumably, Novell will be keeping an eye on any non-US subsidiary that suddenly needs $30,000,000 in petty cash. Joke. Joke.


SCO 10Q: Doubts It Can Remain a "Going Concern" If It Has to Pay Novell Significant $$ | 69 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
OT here, please
Authored by: Jude on Tuesday, September 18 2007 @ 11:30 AM EDT
And please make links clickable

[ Reply to This | # ]

Authored by: Nick_UK on Tuesday, September 18 2007 @ 11:31 AM EDT
If they didn't owe this money then no need to voluntarily
go bankrupt? But now by doing that, they are asking to
not pay Novell to stay afloat (i.e. not bankrupt?).

That is circular logic if ever I did see it. I will have
to try it with the bank and my mortgage.


[ Reply to This | # ]

SCO 10Q: Doubts It Can Remain a "Going Concern" If It Has to Pay Novell Significant $$
Authored by: Anonymous on Tuesday, September 18 2007 @ 11:33 AM EDT
You have it right, almost. The only HOPE of remaining in business is to stiff
Novell and all of the other creditors. But it is a forlorn hope, because nobody
in their right mind will ever do business with SCO - for all of the obvious
reasons. They always crack me up...

[ Reply to This | # ]

So the Inquirer headline was spot-on.
Authored by: Jude on Tuesday, September 18 2007 @ 11:33 AM EDT
SCO is indeed seeking court protection from its own lawsuits.

[ Reply to This | # ]

SCO 10Q: Doubts It Can Remain a "Going Concern" If It Has to Pay Novell Significant $$
Authored by: Peter H. Salus on Tuesday, September 18 2007 @ 11:34 AM EDT

The concept that SCOG can remain a "going concern" is quite

Even were one to evaluate the Novell amount as $3.49, their
other stated debts, their funds on hand, and their ever-decreasing revenues make
a week beyond chapter 11 unlikely. I doubt whether the Pipe Fairy will want to
keep on depositing funds in a black hole as IBM and Red Hat pursue counterclaims
and suits and as shareholders line up to file suit against the Board and against

I think it's a "going [out of business] concern."

Peter H. Salus

[ Reply to This | # ]

SCO 10Q: Doubts It Can Remain a "Going Concern" If It Has to Pay Novell Significant $$
Authored by: Anonymous on Tuesday, September 18 2007 @ 11:35 AM EDT
Is this the same 10Q that the accountants refused to sign off on?

Who signed the this 10Q?

[ Reply to This | # ]

newspics comments here [NT]
Authored by: rc on Tuesday, September 18 2007 @ 11:36 AM EDT
and as always, please read the important stuff down there below your comment entry form.


[ Reply to This | # ]

Corrections here, please
Authored by: rc on Tuesday, September 18 2007 @ 11:37 AM EDT
In the non-anonymous thread, sorry about that Mr Anon!

As usual, please put the fix in the subject as well as in the body.


[ Reply to This | # ]

Over the Company’s objection...
Authored by: TJ on Tuesday, September 18 2007 @ 11:47 AM EDT

I wouldn't want to be McBride in Judge Dale Kimball's courtroom next time:

Over the Company’s objection, a bench trial was set to begin on September 17, 2007 ...
You can just smell the contempt oozing from that statement.

Being as we're 5 hours ahead of Delaware, the suspense all day is making it impossible to concentrate, but there's a feeling that something definitive is afoot.

[ Reply to This | # ]

SCO 10Q: Doubts It Can Remain a "Going Concern" If It Has to Pay Novell Significant $$
Authored by: Anonymous on Tuesday, September 18 2007 @ 11:54 AM EDT
I'm assumming that the BK hearing will have a lunch break. If Novells lawyers
havn't told the Judge that SCO is telling two different stories in the morning I
wonder what happens if they do so in the afternoon?

[ Reply to This | # ]

But if they stiff Novell...
Authored by: Anonymous on Tuesday, September 18 2007 @ 12:01 PM EDT
If they stiff Novell, wouldn't their BOD then be personally liable for the
conversion? (That might be a reason to watch the Bankruptcy Court filings in
districts in which BOD members live.)

Also, how can they stiff Novell by filing for bankruptcy? They can't use
Novell's money to pay creditors, wages, or lawyers, because the money that was
converted isn't SCO's to spend. (It may be significant here that Section 523 of
the Bankruptcy statute says that there is no discharge in bankruptcy for
"defalcation while acting in a fiduciary capacity.")

[ Reply to This | # ]

SCO 10Q: Doubts It Can Remain a "Going Concern" If It Has to Pay Novell Significant $$
Authored by: rand on Tuesday, September 18 2007 @ 12:20 PM EDT
"So you see, Your Honor, we did something illegal and made a profit for the
first time in our history. We'd like the opportunity to do it again, but they
want us to pay for our crimes. Make them stop, pretty-please?"

The wise man is not embarrassed or angered by lies, only disappointed. (IANAL
and so forth and so on)

[ Reply to This | # ]

SCO 10Q: Doubts It Can Remain a "Going Concern" If It Has to Pay Novell Significant $$
Authored by: dcf on Tuesday, September 18 2007 @ 03:10 PM EDT
Novell should ask the bankruptcy court to order SCO not to commingle any
incoming money from existing SVRX licenses (less SCO's 5% fee) with other cash.
That would be an easier argument to make, since SCO has acknowledged that that
money belongs to Novell (because they were trying to argue that ONLY that money
belonged to Novell).

The bankruptcy court may be hesitant to put the Sun and MS money into a trust,
because the exact amount due to Novell is still not legally settled. Also,
putting that money in trust would immediately jeopardize SCO's survival, whereas
the purpose of Chapter 11 bankruptcy is to allow a company to survive and
re-emerge as a going concern.

If Novell were to get an order that the incoming money belonged to Novell and
was only held by SCO, then it would be harder for SCO to argue that the Sun and
MS money was a debt which was erased by bankruptcy.

[ Reply to This | # ]

adequate to make the information presented not misleading
Authored by: OutRiders on Tuesday, September 18 2007 @ 03:29 PM EDT
"although the Company believes that the following disclosures, when read
in conjunction with the audited annual financial statements and the notes
thereto included in the Company's most recent annual report on Form 10-K, are
adequate to make the information presented not misleading."

[ Reply to This | # ]

A Multi-volume set
Authored by: Nice Kitty on Tuesday, September 18 2007 @ 07:17 PM EDT
When the final (at last!!!) story of 'SCO vs. Linux' is published, it will (in all likelyhood) occupy more hard-bound volumes, and consume more pages, than Will and (his wife) Ariel Durant's "The Story of Civilization".

At that point, hopefully, Reader's Digest Condensed Books will print an abridged edition (that's right; singular).

[ Reply to This | # ]

The Company’s foreign subsidiaries were not included in the filings ...
Authored by: Anonymous on Tuesday, September 18 2007 @ 07:55 PM EDT
So the rest of the money was siphoned off to their foreign subsidiaries and
those in the finance department that knew of the deal are now gone!!!!

No wonder they need BK court help in paying the electric!

[ Reply to This | # ]

Foriegn subsidiaries - SCO 10Q: Doubts It Can Remain a "Going Concern" If It Has to Pay ...
Authored by: Anonymous on Wednesday, September 19 2007 @ 07:21 PM EDT
I don't know if they can get away with that. If any of those subsidiaries are
collecting SVRX royalties, (as opposed to being sent directly to corporate),
then they can't be independent of the proceedings.

An accounting *MUST* be made!

[ Reply to This | # ]

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