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SCO's Postpetition Liabilities = $6 Million+ -- Tanner's Bills & SCO's Operating Reports
Tuesday, December 25 2007 @ 04:09 PM EST

More bankruptcy filings from the 21st of December, including two bills from the accountants, Tanner LC, and SCO's most recent operating reports for SCO Group and SCO Operations.

Could you spreadsheet gurus take a look? I'm not so sure they have any dollars in the bank any more that aren't already spoken for. SCO seems to my inexpert eyes to be saying they have $4 million left in unrestricted cash and another $2 million restricted. But on pages 11, of SCO Operations' Report [PDF], I see SCO listing $6,602,271 as Total Postpetition Liabilities and page 13 lists them as unpaid. There's a little over $2 million in pre-petition liabilities also. (The same page lists $13 million or so in current assets, but that's counting things like furniture.)

So, does that mean they've managed to pretty much blow it all just on the eve of the resumption of the Utah litigation? That's quite an achievement. Of course, they had quite a bit of help.

Wait, so ... what can Novell possibly get from the Utah court? SCO's furniture? Actually, if the res of any constructive trust is restricted, as SCO hopes, to the exact dollars Sun Microsystems and Microsoft paid for their licenses in 2003, might SCO now argue that every last farthing is gone? Poof. Well, I declare. Genius.

Here's a clue. Tanner has entries like this one on Exhibit A [PDF] to the 1st Interim Application [PDF]:

Tracing - Audit - SEC - SEC Audit - George - 10/26/2007 - 6.0 - $840.00

This isn't the regular SEC filing preparations, because there is a separate category for that, SEC Reviews listed under the category of Accounting, not Audit. No, this is tracing for the Novell litigation as the Application explains:

B. Tracing Analysis

14. During the Application Period, Tanner also assisted the Debtors' with respect to tracing cash receipts from Sun Microsystems and Microsoft to support the Debtors' litigation against Novell, Inc. relating to SVRX royalties that are part of the dispute between the parties. Fees: $7,000; Hours: 50

So that's how SCO has been using the time it gained from the automatic stay, working to prove that the dollars they have in hand now are not the same dollars they got from Sun Microsystems and Microsoft in 2003. Well, I guess I should say the dollars they don't have in hand.

Tanner isn't asking for half a million dollars, like Mesirow Financial Consulting. The fees are actually under the cap allowed, and in fact Tanner believes its rates for this are below market rates, and in the Second Interim Application, it tells the court it isn't charging for faxes or in-house copying. Then again, they already know about the Total Postpetition Liabilities figure. Accountants know better than most that one can't get blood from a stone.

The filings:

282 - Filed & Entered: 12/21/2007
Operating Report
Docket Text: Debtor-In-Possession Monthly Operating Report for Filing Period November 2007 for The SCO Group, Inc. Filed by The SCO Group, Inc.. (Attachments: # (1) Affidavit of Service and Service List) (Werkheiser, Rachel)

283 - Filed & Entered: 12/21/2007
Operating Report
Docket Text: Debtor-In-Possession Monthly Operating Report for Filing Period November 2007 for SCO Operations, Inc. Filed by The SCO Group, Inc.. (Attachments: # (1) Affidavit of Service and Service List) (Werkheiser, Rachel)

284 - Filed & Entered: 12/21/2007
Affidavit/Declaration of Service
Docket Text: Affidavit/Declaration of Service of Certificate of No Objection Regarding First Interim Application of Dorsey & Whitney LLP (related document(s)[238] ) Filed by Dorsey & Whitney LLP. (Schnabel, Eric)

285 - Filed & Entered: 12/21/2007
Application for Compensation
Docket Text: First Application for Compensation for Services and Reimbursement of Expenses as Accountants to the Debtors for the Period from October 5, 2007 through November 5, 2007 Filed by Tanner LC. Objections due by 1/10/2008. (Attachments: # (1) Notice # (2) Exhibit A # (3) Certificate of Service and Service List) (Jones, Laura Davis)

286 - Filed & Entered: 12/21/2007
Application for Compensation
Docket Text: Interim Application for Compensation [Second] for Services and Reimbursement of Expenses, as Accountants to the Debtors for the Period from November 6, 2007 through December 5, 2007 Filed by Tanner LC. Objections due by 1/10/2008. (Attachments: # (1) Notice # (2) Exhibit A # (3) Certificate of Service and Service List) (Jones, Laura Davis)

If you look at SCO Operations' Report, by the way, you see Kevin McBride was paid for the period 9/15/07 to 9/30/07 the sum of $3,860. I see nothing for him after that.

On the last page, there's an interesting footnote regarding an entry of $1,144,640:

(1) Adjustment to allocate legal expenses surrounding the IBM and Novell litigation to Cost of Goods Sold at Fiscal Quarter Closes (October, January, April & July)

That is where so much of the money went, of course, to the law firms. I wonder if Novell will try to get them to cough some of that back up again?


SCO's Postpetition Liabilities = $6 Million+ -- Tanner's Bills & SCO's Operating Reports | 253 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
OFF TOPIC - here
Authored by: Anonymous on Tuesday, December 25 2007 @ 04:14 PM EST
OFF TOPIC - here

[ Reply to This | # ]

Corrections - go here
Authored by: hopbine on Tuesday, December 25 2007 @ 04:57 PM EST
Not in the report , just the article.

[ Reply to This | # ]

[NP] News Picks discussion
Authored by: Aladdin Sane on Tuesday, December 25 2007 @ 05:12 PM EST
Discuss Groklaw News Picks here.


One test is worth 1000 expert opinions.

[ Reply to This | # ]

[OT] Off Topic discussion thread
Authored by: Aladdin Sane on Tuesday, December 25 2007 @ 05:15 PM EST
Please place 'Off Topic' comments here.

Note: This thread can be seen by those who block anonymous comments on Groklaw.

It's also best to post in non-shouting mode.


One test is worth 1000 expert opinions.

[ Reply to This | # ]

Finally the proof.....
Authored by: tiger99 on Tuesday, December 25 2007 @ 05:34 PM EST
... that PJ never sleeps or takes a day off, even at Christmas, therefore she really must be a committee of IBM lawyers, who work shifts to provide continuous coverage.

PJ, although you know I am only kidding about that, in all seriousness you do need a break, so please take one, and have a really nice, relaxing Christmas, or the few hours that are left, at least. Groklaw will not disappear, just because you take a day or two off, and I don't imagine that the courts will be doing any significant business right now, so there should be little or nothing to report.

Save your energy for when the BK and Judge Kimball's PSJs all start to move, as I am sure you will be very busy then!

I do hope that everyone here is nice and warm, despite the temperature outside. In particular, I do hope that those in the part of the US where there has been severe winter weather are all comfortable at home, not out driving in thick snow, which is best left to the man in the red coat with the sleigh. Just about freezing here in London, but still no snow. Turkey at my friends' in Hemel Hempstead was very nice, and I had to pass the recently discussed Magic Roundabout twice, which was very quiet for once.

[ Reply to This | # ]

Someone tell me why it matters that they spent the "MS & Sun" money
Authored by: Anonymous on Tuesday, December 25 2007 @ 05:46 PM EST
Ok, being from UK I (and hence being used to our legal system) I fail to see why
it matters that the money is gone, end of the day the money came in - they spent
it illegaly instead of paying to Novell, so they are still liable for the money

[ Reply to This | # ]

David Boies had to have read the APA
Authored by: kawabago on Tuesday, December 25 2007 @ 06:03 PM EST
The Judge ruled SCO knew or should have known they didn't own the copyrights
from a plain reading of the APA. That also means Boies must have also known SCO
didn't own the copyrights but Boies agreed to take on the litigation anyway and
also to fund it once SCO ran out of money. To my eyes that looks like Boies is
an active partner in this litigation and should be liable for their part of the
victims costs at the very least if not for the money stolen by SCO from Novell.
I guess it's a good thing for Boies I'm not Judge Kimball.

[ Reply to This | # ]

Are they clevering themselves into a risk of criminal charges? (n/t)
Authored by: tce on Tuesday, December 25 2007 @ 06:05 PM EST

[ Reply to This | # ]

Will Kimball just invalidate the Sun, MS licenses?
Authored by: Anonymous on Tuesday, December 25 2007 @ 06:25 PM EST

If I have read Lew Mettler correctly, if Kimball rules that SCO
never had the authority to issue the licenses, the licenses
can just be ruled invalid -- Novell never should have gotten
any money, anyway. That disposes of the constructive trust.
An easy way to clear a docket.

That means the license debt is owed to Sun, Microsoft, EV1
and who knows who else -- not Novell. Do you really think
any of them will show up in Gross's court?

With the copyrights decided and the constructive trust
moot, is there anything left for Novell to fight about in
this scenario?

That would clear the way for IBM to get Gross to lift the stay
for that case and get judgments clearing IBM of wrongdoing.

(Well, I can dream.)

[ Reply to This | # ]

SCO is still solvent
Authored by: Anonymous on Tuesday, December 25 2007 @ 06:36 PM EST

So, does that mean they've managed to pretty much blow it all just on the eve of the resumption of the Utah litigation?

No, the balance sheet shows other current assets, mostly in the form of receivables and prepaid expenses. They still have about $6.5 million in equity. I doubt they can spend it all before Novell gets to it.

[ Reply to This | # ]

Robbing in progress. Stay clear.
Authored by: Anonymous on Tuesday, December 25 2007 @ 07:44 PM EST
Boy, all Kimball has to do is to hold SCOX down while Novell empties its
pockets. And takes its watch. And its shoes.

[ Reply to This | # ]

Novell money won't pay postpetition liabilities?
Authored by: darkonc on Tuesday, December 25 2007 @ 08:49 PM EST
I'm thinking that 'Novell's money' shouldn't be going into the pool that pays postpetition liabilities because 'it wasn't part of the original estate'.
(at least, one can hope so..).

Powerful, committed communication. Touching the jewel within each person and bringing it to life..

[ Reply to This | # ]

SCO's Postpetition Liabilities = $6 Million+ -- Tanner's Bills & SCO's Operating Reports
Authored by: Anonymous on Wednesday, December 26 2007 @ 12:42 AM EST
I think the confusion arises from cash vs. accrual accounting. In the income
statement, the company is showing a profit after accounting for the sales post
petition. However, on the balance sheet they are showing a liability for wages.
I think they may need court approval to pay wages etc (I am not a lawyer), and
hence are showing them as liabilities. Also, you will note on page 12 that many
of the liabilities are related to deferred items. This occurs when a service
contract is sold and under GAAP needs to be accounted for as it matures. The
balance of the contract is shown as a deferred liability.

The only net new liabilities I see are related to professional fees, to the
extent they get approved by the court.

Last comment, is that I could see the court invalidating the deals SCO signed,
negating Novell's claim to the funds and setting up a unsecured claim from Sun
and MS against SCO. I suppose someone would have to make a motion or something
to this effect, but given SCO's track record, wouldn't they. MS and Sun would
be forced to start from scratch and the Novell litigation would be terminated.

[ Reply to This | # ]

  • What court? - Authored by: Anonymous on Wednesday, December 26 2007 @ 09:55 AM EST
A Bigger Picture
Authored by: sproggit on Wednesday, December 26 2007 @ 05:22 AM EST
Although we don't yet know whether or not this latest financial statement from
TSG renders them bankrupt in the Chapter 7 sense, perhaps we can agree that it
looks pretty close. If anything remotely resembling a going concern were to
emerge after all this, it would be a small handful of people under the "Me,
Inc" banner. But in a sense this is besides the point.

When we take a step back and look at this history in a larger context, what we
see is a textbook example of how to game the US Legal System.

Firstly, you need a puppet, your patsy company or individual who are going to be
the aggressor in a scheme that can be used against a larger and cash-rich target
or targets. Next you need a lever, preferably something like a patent or some
other copyrighted intellectual property that the cash-rich target can be accused
of using improperly. It's important to note that you don't need to worry about
being too specific in the early stages. Third, you need a legal firm who are
either dumb enough or greedy enough to take on your case. Finally, you need the
US Legal System.

I have the utmost respect for Judges Kimball and Wells and the fair and
even-handed way that they have both presided over aspects of these cases. Yes,
there have been decisions with which we've disagreed, but many more of which
we've approved. Being honest with ourselves, we can say that they have applied
the law in a scrupulously fair way.

But what of the law itself? A system that allows one company to throw up wild
and unsubstantiated claims (i.e. claiming more than one million lines of UNIX
code were to be found in Linux), then insisting on a vastly expensive and
inconvenient discovery process that lasted years and was designed as nothing
more than a harassment tactic. A system that allows a company to send what
amounted to threatening letters to the top 1500 US companies and "get away
with it". A system that allows the antagonist to file for bankruptcy on
the eve of trial. [ And let's not forget their attempts to hustle the likes of
Autozone ]. A system that allows a company to spend illegally withheld funds
whilst simultaneously thumbing a corporate nose at the legitimate owner of the

What kinds of messages are these?

Thanks to the very public statements made by Darl McBride in the beginning of
this case, SCO's litigation has had a very high profile. As a result there are
lot of companies out there who have been watching this case to understand the
ramifications for their own businesses. It is true to say that those who
distribute, support or use the GNU/Linux operating system are now probably more
confident of the platform they have chosen. But there is also a good chance that
less scrupulous companies have seen the techniques employed by SCO and have
learned from them. Already we have more "Patent Troll" companies out
there, sharpening their knives.

All this leads me to hope that Judge Kimball is still going to get the last word
here. I would very much like to see the US legal system send a clear and final
message to those companies who would game the legal system: try it and the
consequences will be severe.

Here's hoping...

[ Reply to This | # ]

A question
Authored by: Anonymous on Wednesday, December 26 2007 @ 06:57 AM EST
Please help me understand something:

On the eve of the trial in Utah, SCO enters Chapter 11 and stops the trial from proceeding. What is to stop SCO from going bankrupt before the trial in Utah occurs (and hopefully stopping the trial again)? Sounds like something SCO would be willing to pull off...

I realize this is not a "get out of jail free" card, but it would drag things out once again... "Sorry your Houour. We spent all out money and can no longer proceed with the trial as we cannot pay our lawyers..."

[ Reply to This | # ]

  • A question - Authored by: Anonymous on Wednesday, December 26 2007 @ 12:12 PM EST
  • A question - Authored by: Anonymous on Wednesday, December 26 2007 @ 12:21 PM EST
  • A question - Authored by: Anonymous on Wednesday, December 26 2007 @ 03:33 PM EST
  • And finally... - Authored by: Anonymous on Wednesday, December 26 2007 @ 04:24 PM EST
If they spent Novell's money, when does this turn into a Criminal case?
Authored by: Anonymous on Wednesday, December 26 2007 @ 08:47 AM EST

Although I guess I should start with a slightly different question -

Does the Bankruptcy code truly cover the situation where SCO was spending Novell's money, or is that something that is more appropriately covered under the various criminal codes (i.e. theft)?

At an even more basic level, how does an civil case or a bankruptcy case (since we have both) spawn a criminal case under the U.S. Legal system? Does the judge, U.S. Trustee or opposite side have to do anything?

Where does liability attach? To just the company, itself? Perhaps to the officers of the company? Maybe the pre-bankruptcy petition lawyers?

Is "liability" even the correct word when you shift from civil to criminal cases?

I'm just curious, since I can see this reaching all the way back to Mr. Yarro ... but could it also reach the Noordas?

All along (well, since 2003), I have been thinking about the "we own Linux, pay us" letter should have qualified as extorion and/or racketeering under the state and federal criminal codes - but if it was Novell's money and they spent it, isn't that just as actionable?

[ Reply to This | # ]

Possible 'how Novell get's it's money' plan
Authored by: MDT on Wednesday, December 26 2007 @ 09:13 AM EST
IANAL, nor a financial wizz, but it seems to me that the first step in Novell
getting their money for those licenses is to have it declared that SCO did not
have the authority to enter into them.

Second step? Call Sun and M$ and let them know that Novell has in hand a legal
finding that SCO did not have authority to enter those contracts.

Third step? Offer Sun and M$ a legal license from Novell that covers the same
licenses as the ones they got from SCO. If they don't accept, open a case
against M$ and/or Sun to have the contracts nullified. Sun and M$ would then
have to go after the (corpse of) SCO for their illgotten gains (good luck with

This of course really messes up Sun and M$, but, I think Novell, despite any
friendliness with M$, will not lose a lot of sleep over it.

Just a thought.


[ Reply to This | # ]

Unethical stall tactic
Authored by: Anonymous on Wednesday, December 26 2007 @ 11:06 AM EST
If the judge finds that SCO used bankruptcy as an unethical stall tactic, then
shouldn't the fruits of that tactic be poisoned? IOW, would the judge allow the
tracing that SCO had done using their four-month reprieve?

It would seem to be an unfair advantage ripe for quashing under an equitable

[ Reply to This | # ]

Where's the creditors' committee?
Authored by: Anonymous on Wednesday, December 26 2007 @ 11:29 AM EST

Is there a creditors' committee yet? There should be one by now, pushing the judge to cut back on SCO's legal activities on the grounds that they're bad for the estate. SCO's expenses are way out of line for the size of the remaining company. SCOX has a market cap of only $3.2 million. And they haven't won any of their cases.

[ Reply to This | # ]

Things that stick out in SCO's November Operating Reports
Authored by: Anonymous on Thursday, December 27 2007 @ 03:52 AM EST
I'm no pro, but I was looking at the monthly SCO Operations report ending 30 Nov
2007. Some things that stick out in SCO's November Operating
Report(SCOGBK-283.pdf) are:

Under Disbursements
* Net Payroll 352,785 actual, 813,300 Est.| 1,022,693 Cumul 1,601,700 Est.
* Payroll Taxes 237,819 actual, 63,931 Est.| 543,520 Cumul 135,159 Est.

I note that the Net Payroll is below the projection.
$352,785/$813,300 is about 43% of projected
The Cumulative figures $1,022,693/$1,601,700 = 64%
That makes sense if you lose a number of employees,
especially in the later months.

Then look at payroll taxes, which should also decline,
but instead they go UP!

$237,785/$63,931 is about 372% of projected current taxes.
$543,520/$135,159 = 402% of the projected cumulative taxes.

So what we see is actual payroll goes down to 40-60% of estimates,
at the same time, the taxes paid on payroll soars to 3.7-4 times estimates.
The estimated tax numbers look reasonable, about 16% of wages.
Instead payroll taxes equate to withholding on $3,300,000.

Now I realize there is a simple error here.
Somebody slipped a digit, copied the wrong figures;
or failed to pay a few back quarters worth of taxes.
It just sticks out as WRONG without an accounting note.

If I was a suspicious guy, I'd wonder if SCOG was now over-withholding taxes,
paying 3 or 4 times actual taxes, so that when the 1040s get filed, there will
be huge refunds due. Nah!

Then we look at another Disbursemnt -- Funding of Subsidiaries:
402,657=current No_Estimate | 931,817 Cumulative 483,503 Estimated

That entry seems to indicate that money flowing TO the undocumented subsidiaries
is twice the usual, customary average estimate. I wonder why? Too bad the subs
are not under bankruptcy and have no filing requirements before the court. Too
bad so many SCOG employees also fill hats as executives of those same subs.
It's hard to gauge real salaries when part seems paid through invisible

We also see the employee benefits plan got $203,181, again on wages for the
period of $352,785. More puzzling, is the cumulative amount is $157,886, which
is less than the current payment. Accounting Wonders will never cease.

Buried deep on page 12 of the PDF, under Balance Sheet
We see SCO India has -0- for Intercompany Receivables due SCOG, ditto for
SCO-UK, Germany, France and Canada. Only SCO and SCO-Japan show income.

Later we see Intercompany Payables to UK and Germany are the same $112,575, and
SCO-India gets $256,677. These payments are NOT related to the contract
programming services, listed under professional services.

These are just a few things I'd ask SCOG to explain, if I were auditing them.
Things I'd expect to see footnoted for the Trustee's ease of analysis.

If I were Ms Acheson or Mr Nielsen, I'd hate to have my day disrupted by a phone
call from Wilmington asking me to explain the obvious.

[ Reply to This | # ]

Tactics of desperation
Authored by: Anonymous on Thursday, December 27 2007 @ 06:26 AM EST
I haven't read Groklaw for a few days and I've come by today, and read the
headlines afresh, and what I notice is that it all smells of desparation. Why
otherwise would you be be prepared to blow $0.5m on a transaction that was
likely to be unsuccessful. I'm sure that Darl & co were told that it wasn't
likely to fly. I don't believe that they weren't told how the costs were racking
up. Granted, they'd like to spend any money that they have, to deny anyone else
the chance of having it and it's convenient that this is another way to do that,
but isn't this a case of grasping at straws.

Ditto the 'we've spent it all defence' analysis. And the sale of whatever assets
that they have.


[ Reply to This | # ]

SCO's Postpetition Liabilities = $6 Million+ -- Tanner's Bills & SCO's Operating Reports
Authored by: Anonymous on Thursday, December 27 2007 @ 09:11 AM EST
In accrual accounting an asset is an asset. There is no special distinction
between cash and and any other asset. So if a company lists $4 million in
assets and all of that is property that is perfectly fine. Of course the higher
the percentage of your assets that our physical and not cash makes paying bills
very very difficult. Cash is usually referred to as liquidity. A company
lacking liquidity means it can't pay its bill.

Most companies watch their cash positions very very closely. They create what
is called a cash flow report or statement. If a company starts to run out of
cash they have to look for liquidity. The typical ways to raise money is to
find investors, borrow, or sell assets.

One thing to look for is to see if the assets on the balance sheet truly reflect
the value they have been assigned. On the balance sheet you also have to look
for something called goodwill. This is an asset that has no value other than
representing the fact that a company paid more for an asset or business than
what it was worth. The only thing backing up goodwill is the word of the
company and the fact that they are a going concern.

John Brice

[ Reply to This | # ]

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