|SCO's MORs for September in the Bankruptcy - The Subsidiaries - Updated
Tuesday, October 28 2008 @ 01:49 PM EDT
SCO Group and SCO Operations have filed the monthly operating reports for September. Also Pachulski Stang filed its 11th monthly bill, which covers July, meaning there are more bills to come.
I find page 15 of SCO Operations' filing [PDF] fascinating. Am I going nuts or is SCO sending money to the foreign subsidiaries? Take a look.
I see that in September 14, 2007, when SCO first filed for bankruptcy protection, there was nothing listed under "Intercompany Payables" for any of the subs. A year later, you see this:
Intercompany Payables - UK -- 143,720 In Darl McBride's Declaration in Support of First Day Pleading in the bankruptcy, from a year ago, however, he said this about the subsidiaries:
Intercompany Payables - SCO Germany -- 375,253
Intercompany Payables - SCO France -- 145,898
Intercompany Payables - SCO Canada -- 33,507
Intercompany Payables - SCO India -- 479,999
54. In the ordinary course of its business, SCO funds the payroll of foreign affiliates/subsidiaries on a monthly basis. SCO also funds the payroll for the foreign subsidiaries, which Employees are paid current, on a monthly basis on the 25th of each month. SCO's payroll obligations are transferred approximately three days before the upcoming payday from Operations' payroll account. The next foreign payroll obligation is due September 25, 2007. While these payroll amounts do not need to be funded until after the filing of the petitions for relief, I have been informed by counsel that the Debtors cannot, absent Court authorization, transfer funds representing payment of wages earned prior to the Petition Date. Accordingly, the Debtors seek permission by the Prepetition Wage Motion to pay such amounts (or have the appropriate foreign payroll processing entity pay such amounts on their behalf) in the ordinary course of business. The aggregate amount to be paid to the U.S. Commissioned Employees and Foreign Employees, including foreign Commissioned Employees, on account of the September 21, 2007 and September 25, 2007 foreign payroll, for the month of September 2007 is approximately $467,160. Unless I am misreading this, SCO seems now to be sending more than that to SCO India alone. With SCO shrinking before our eyes, why are the subsidiaries needing more money now? I have no explanation. There may be one, including that I am misunderstanding. Accounting isn't my field.
SCO Operations seems to be coming to the fore, and SCO Group fading off some.
I recall the interchange about the subsidiaries between the US Trustee's Joe McMahon and Jean Acheson at the
341 Creditors' Meeting in November of 2007:
You...you report to the federal government on an annual basis for
income tax purposes?
Then those, I guess, those returns are consolidated, correct?
Correct. It's The SCO Group and Subsidiaries, is the filing name.
Okay. Then you do not break out Group's revenue, distinct from the
No. I do not believe we do. I believe it all rolls together and that's
we report on in our federal taxes, as The SCO Group and Subsidiaries.
Okay. You were telling me your accounting system, you do not have
coding or an ability to...run a cash flow statement for SCO Group?
No. Because ninety percent of our transactions go under the entity
that we basically consider is the U.S. entity, which is...
Which is Operations?
Which is basically equals Operations. Yes.
Okay. But what about the other ten percent of the stuff, is my
Mostly what that is is some of the... is Japan, which is a separate
subsidiary, and some of the small amounts of revenue that do go through
the other subsidiaries for professional services, and just the
intercompany revenues that come back and forth on that. So it's
probably even less than ten percent. I would say it's more like five
Your answer is interesting just from the standpoint that the Group is
the public entity. Group is the entity that's receiving equity
infusions and the like, and from an accounting perspective, I can't
imagine that there wouldn't be some, say, ability to record and
recognize relationships between Group and Operations such that you
would be able to account for what's going on with, between the two
entities as a business matter but also with equity holders' cash.
Not that I know about. Not to re-review, but I believe everything
goes through the operational company, and that Group is used as a
So, SCO Group was the public company. SCO Operations was a wholly owned subsidiary.
You can see that in their press release announcing the bankruptcy a year or so ago:
The SCO Group, Inc. ("SCO") (Nasdaq: SCOX), a leading provider of UNIX(R) software technology and mobile services, today announced that it filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. SCO's subsidiary, SCO Operations, Inc., has also filed a petition for reorganization. Here are all the subsidiaries SCO listed in October of 2007 that it attached to its 10K that SCO Group filed with the SEC. SCO Operations is listed as a wholly owned subsidiary of SCO Group. Yet, nowadays SCO Operations is becoming the public name, and SCO Group seems to be fading, and this is harmonious with what SCO revealed at TecForum about splitting up SCO Group, which would remain the litigation vehicle, and SCO Operations, which would be where most of the assets and business would go.
Some footnotes on page 12 of the SCO Operations filing are interesting too. SCO lists as "Professional Fees (Non-Bankruptcy) 34,502, with a footnote explaining that this is "Reclassification of September Accrued Professional Fees associated with the Bankruptcy that have been reclassed to Reorganization Items - Professional Fees.
Then, as "Other (attach schedule) - -" you find this footnote 2: "Adjustment to allocate legal expenses surrounding the IBM and Novell litigation to Cost of Goods Sold at Fiscal Quarter Closes (October, January, April & July)". The next page, 13, gives the breakdown. The main items are "Foreign Exchange Gain (Loss) and Interest Income/Expense".
Maybe one of you brainiacs can explain to me why SCO Group has almost nothing, everything seemingly already in SCO Operations, but on page 5 of SCO Group's filing [PDF], I see the following:
OTHER INCOME AND EXPENSES Then when listing the book value of all the subsidiaries, on SCO Group's filing, the only change in a year is for SCO China, which is listed now at $368,640, while a year ago it was $497,858.
Other Income - China Investment Income - $(4,421)
Interest Expense -
Other Expense (attach schedule) -
Intercompany Transfers -
Net Profit (Loss) Before Reorganization Items - $(4,421)
Meanwhile, SCO Operations lists a gross profit of $888,625. Operating expenses are heavy on salaries, employee benefits, office expenses, and insurance. Oh, and advertising ($30,969). In a month. $30,969 for advertising. And $20,972 in "Travel and Entertainment". Hopefully no spas with happy-go-lucky AIG guys. Add it all up and you end up with a net loss before reorganization items for SCO Group of $(282,271) and a net loss of $(276,671).
Here are the filings:
Filed & Entered: 10/28/2008
Interestingly, that 10K I referenced earlier states:
Application for Compensation
Docket Text: Monthly Application for Compensation [Eleventh] and Reimbursement of Expenses as Co-Counsel to the Debtors and Debtors in Possession, for the Period from July 1, 2008 through July 31, 2008 Filed by Pachulski Stang Ziehl & Jones LLP. Objections due by 11/17/2008. (Attachments: # (1) Notice # (2) Exhibit A # (3) Certificate of Service and Service List) (Makowski, Kathleen)
Filed & Entered: 10/28/2008
Docket Text: Debtor-In-Possession Monthly Operating Report for Filing Period September 2008 for The SCO Group Filed by The SCO Group, Inc.. (Attachments: # (1) Certificate of Service and Service List) (Makowski, Kathleen)
Filed & Entered: 10/28/2008
Docket Text: Debtor-In-Possession Monthly Operating Report for Filing Period September 2008 for SCO Operations, Inc. Filed by The SCO Group, Inc.. (Attachments: # (1) Certificate of Service and Service List) (Makowski, Kathleen)
As of October 31, 2007, we had a total of $5,554,000 in cash and cash equivalents and an additional $3,099,000 of restricted cash of which $1,833,000 to be used to pursue the SCO Litigation. Since October 31, 2004, we have spent a total of $13,167,000 for expert, consulting and other costs and fees as agreed to in the Engagement Agreement with our legal counsel in the SCO Litigation. I suspect that even if I was good at bookkeeping, I'd still find this all a bit pea soupy.
SCO Group lists under book value as of September 30 assets of $1,197,075 and total prepetition liabilities of $1,630,899 and Retained Earnings PrePetition of (418,961) and Postpetition of (14,823) for a total net owner equity of $(433,764).
SCO Operations lists Total Assets of $10,286,378, with a little over $3 million being furniture and equipment. Unrestricted cash is listed as 820,917. Restricted cash is listed as 1,790,584. Total prepetition liabilities are listed at $6,990,608; total liabilities at $12,328,166. Footnote 1 tells us that the total pre-petition liabilities don't reconcile with the amount on the Schedule of Assets and Liabilities filed in October of 2007 "due to timing differences and allocation of accruals."
Then page 16 lists unpaid postpetition debts and under "Other Postpetition Liabilities" of 3,368,588, but there is no explanation. It's not professional fees, wages, accounts payable or taxes. They are listed separately. It's a puzzlement to me. Perhaps you can figure it out.
A year ago, when SCO filed that 10K referenced above, it seems to have accurately predicted much of what has ensued, and here are some warnings SCO gave:
A long period of operating under Chapter 11 may harm our business.
In SCO's more recent 10Q, for 7/31/08, SCO bleakly notes:
A long period of operating under Chapter 11 could adversely affect our business and operations. So long as the Chapter 11 cases continue, our senior management will be required to spend a significant amount of time and effort dealing with the bankruptcy reorganization instead of focusing exclusively on business operations. A prolonged period of operating under Chapter 11 may also make it more difficult to attract and retain management and other key personnel necessary to the success and growth of our business. In addition, the longer the Chapter 11 cases continue, the more likely it is that our customers and suppliers will lose confidence in our ability to successfully reorganize our businesses and seek to establish alternative commercial relationships.
Furthermore, so long as the Chapter 11 cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the cases. A prolonged continuation of the Chapter 11 cases may also require us to seek financing. If we require financing during the Chapter 11 cases and we are unable to obtain the financing on favorable terms or at all, our chances of successfully reorganizing our businesses may be seriously jeopardized.
We may not be able to obtain confirmation of our Chapter 11 plan.
In order to successfully emerge from Chapter 11 bankruptcy protection as a viable entity, we believe that we must develop, and obtain requisite court and creditor approval of a viable Chapter 11 plan of reorganization (the “Plan”). This process requires us to meet certain statutory requirements with respect to adequacy of disclosure with respect to the Plan, soliciting and obtaining creditor acceptances of the Plan, and fulfilling other statutory conditions for confirmation. We may not receive the requisite acceptances to confirm the Plan. Even if the requisite acceptances of the Plan are received, the Bankruptcy Court may not confirm the Plan.
If our Plan is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our businesses and what, if anything, holders of claims against us would ultimately receive with respect to their claims. If an alternative reorganization could not be agreed upon, it is possible that we would have to liquidate our assets, in which case it is likely that holders of claims would receive substantially less favorable treatment than they would receive if we were to emerge as a viable, reorganized entity.
A plan of reorganization may result in holders of our common stock receiving no distribution on account of their interests and cancellation of their common stock.
Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, post-petition liabilities and prepetition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies or what types or amounts of distributions, if any, they would receive. A plan of reorganization could result in holders of our common stock receiving no distribution on account of their
interests and cancellation of their existing stock. If certain requirements of the Bankruptcy Code are met, a plan of reorganization can be confirmed notwithstanding its rejection by our equity security holders and notwithstanding the fact that such equity security holders do not receive or retain any property on account of their equity interests under the Plan. Therefore, an investment in our common stock is highly speculative.
The Debtors are operating pursuant to Chapter 11 of the Bankruptcy Code and continuation of the Company as a going concern is contingent upon, among other things, the Debtors’ ability to (i) construct and obtain confirmation of a plan of reorganization under the Bankruptcy Code; (ii) reduce payroll and benefits costs and liabilities under the bankruptcy process; (iii) achieve profitability; (iv) achieve sufficient cash flows from operating activities; and (v) obtain financing sources to meet the Company’s future obligations. These matters as well as the aforementioned ruling in favor of Novell create substantial doubt about the Company’s ability to continue as a going concern. Looking at the monthly operating reports, what do you think? Were they able to reduce payroll and benefits costs and liabilities, achieve profitability, achieve sufficient cash flows from operating activities? If not, then that leaves "obtain financing sources to meet the Company's future obligations."
Update: I checked something about SCO UK. Do you remember that in 2003, SCO told us that it had decided to close down the UK office? Here's what it said in its 10Q for the period ending April of 2003:
In March 2003, in connection with management’s decision to establish strategic European headquarters in Dublin, Ireland, and the Company’s United Kingdom (“UK”) subsidiary, SCO Group, Ltd, not performing at expected levels, the Company determined that SCO Group, Ltd would be wound up. On March 26, 2003, the board of directors of SCO Group, Ltd., obtained administrative relief in accordance with Rule 2.2 of the Insolvency Rules 1986 of the UK. In connection with the approved administrative relief, the operations of SCO Group, Ltd. were transferred to an administrator that was appointed by the court to complete the winding-up process. As of April 30, 2003, the operations of SCO Group, Ltd were no longer under the control of the Company and the Company had been released of any liabilities in exchange for the net assets of SCO Group, Ltd. The Company has included in its statement of operations for the three and six months ended April 30, 2003, the operations for SCO Group, Ltd., for the entire periods.
I'm not clear how there is still a SCO UK, getting funded from Utah, but I'll keep looking to see what happened since 2003.
In connection with the winding-up of SCO Group, Ltd.’s operations, the Company incurred charges for severance and related payments for employees totaling $972,000. As a result of the administrative relief and transfer of SCO Group, Ltd to the administrator, the Company reversed $836,000 of previously recorded accruals related to the leased facilities in the UK, of which $415,000 was recorded in connection with the Tarantella Acquisition. The winding-up of SCO Group Ltd resulted in a net restructuring charge during the quarter ended April 30, 2003 of $136,000.
|Authored by: The_Pirate on Tuesday, October 28 2008 @ 02:01 PM EDT|
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|Authored by: The_Pirate on Tuesday, October 28 2008 @ 02:02 PM EDT|
|I'm sure there will be plenty...|
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|Authored by: Anonymous on Tuesday, October 28 2008 @ 02:31 PM EDT|
|Could it be that the "Other Postpetition Liabilities" of 3,368,588|
might be the money owed to Novell from the Utah court decision, plus interest so
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|Authored by: SpaceLifeForm on Tuesday, October 28 2008 @ 02:59 PM EDT|
|I was waiting for The_Pirate, but she apparently walked the
You are being MICROattacked, from various angles, in a SOFT manner.
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|Authored by: tiger99 on Tuesday, October 28 2008 @ 03:04 PM EDT|
|It seems to me that SCO are merely dispersing the remaining cash as quickly as
possible. As they have made many people rudundant already, it seems odd that
they are still spending significant amounts of money in the foreign
I even wonder if SCO (US) will attempt to disappear, having
transferred most of their assets to SCO (China, or wherever). I am sure that
should not be legal, but IANAL.
But they have already been spending what
should still be shareholders assets (as they are not yet in Chapter 7, and
theoretically still solvent) at a reckless rate, for the last year, on
mainfestly bogus cash infusion or takeover schemes such as SNCP. I can imagine
class action by the shareholders against the directors at some stage.
it amazing that Chapter 11 has not moderated their behaviour in the
Hopefully they will be in Chapter 7 soon, to bring this fiaSCO to
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|Authored by: Anonymous on Tuesday, October 28 2008 @ 03:07 PM EDT|
|Kevin McBride [supposedly] gets paid $20,000 a month to maintain legal documents|
in a database.
He billed for June and was paid in August, and was paid for "August"
on September 3rd. Looks like he messed up the invoice and forgot to bill for
July. The other odd feature is the check number (15161) is out of sequence
with other bills paid from this account. (August 8th checks were past the
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|Authored by: Anonymous on Tuesday, October 28 2008 @ 05:56 PM EDT|
As always the important number is unrestricted cash in SCO Operations;
that's what's available to meet current obligations. When it runs out, SCO's
DIP romp comes to an end. At the end of the period it was (if I don't misread
the lousy scan) $820,937, down from $976,302 the prior month.
cash outlay for funding of subsidiaries ($242,270) was much less
August ($379,544), and less than projected ($260,073). All in all, this
was a typical month for cash burn, i.e., horrendous. August was unusually
because of the lease deposit on SCO's new office space in New Jersey.
eagerly waiting to see the stipulation with Novell for a constructive
promised on August 29 but not yet delivered. The agreed amount is
$625 K. If that were taken out of the pot all at once, SCO would be
a month or two of going truly broke.
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|Authored by: bezz on Tuesday, October 28 2008 @ 08:51 PM EDT|
Maybe one of you brainiacs can explain to me why SCO Group has
almost nothing, everything seemingly already in SCO
You hit the nail on the head as to the cash flow
through SCO Group as Mr. McMahon could not get and answer to that question at
the 341 Meeting. But it does appear to be minimal. It comes down to internal
accounting practices and public reporting ones. But again, we never got a good
answer for that. Let's look at both Group and Operations and try to figure out
how it consolidated into SEC reporting.
SCO Group MOR
Group reports the book value of the overseas subsidiaries ($1,197,075). It
also carries a liability payable to SCO Operations ($1,630,859). As for the
line items under Owner Equity (only Retained Earnings in Group's case), call me
cynical, but I tend to ignore them because they just add up to the difference
between Total Assets and Total Liabilities. That is about all SCO Group does,
and it's not much.
SCO Operations MOR
On to SCO Operations.
This is the meat of the domestic cash flow and balance sheet. Note that
the overseas subsidiaries are not in bankruptcy and are not
reported on the Operations MOR cash flow (page 12) or balance sheet (page
Let's look at the cash situation. It's really not that complicated
once you figure out how it is reported. The SCO Operations MOR accounts for
domestic and overseas cash on two pages: the balance sheet (page 14) Restricted
and Unrestricted Cash and the bank account balances (page 11). On page 11, the
line item "Total Cash in SCO Ops BS" line item is reported as Restricted and
Unrestricted Cash on page 14 ($2,613,521). But, SCO also has a balance
overseas reported on page 11 as the line item "Net Foreign" ($1,108,102).
The total of Restricted and Unrestricted Cash reported to the SEC is the total
account balances of all domestic and foreign bank accounts, reported as the
bottom line "Total Cash Per GL Accounts" on page 11. That is the bottom line
for how much cash SCO has, an important number to track.
Now we go to the
balance sheet (page 14). This is where it gets more complicated. We are going
to stick with the Assets first. SCO Operations carries $1,630,859 under
Other Current Assets that is also carried as a liability of the same amount on
the Operations balance sheet. This also came up in the 341 meeting and,
unsurprisingly, there was no good answer available as to why. On the SCO
Operations MOR, it inflates the assets by that amount. The SCO Operations MOR
also carries $2,042,600 as a reported Goodwill asset; that is not
reported to the SEC. Again, this also inflates the SCO Operations Total Assets.
But remember, overseas cash in the amount of $1,108,102 is not
reported on the SCO Operations MOR Balance Sheet, deflating the reported Total
Assets by that amount.
Over time, comparing the SEC reporting to the SCO
Group and Operations MOR's, that seems to be the way assets are rolled up from
the MOR's to the SEC reporting.
As for the SCO Operations Liabilities, I've
never been able to reconcile how that rolls up into the SEC reporting, but
suffice to say the Total Liabilities reported on Page 14 come close to the Total
Liabilities reported to the SEC.
Finally, the SCO Operations Owner Equity.
Same observation as above: call me cynical, but I tend to ignore them because
they just add up to the difference between Total Assets and Total
How do the MOR's roll up into the
SEC reporting? Well, let's take into account the hazy line items on the
Overseas Cash Balance ($1,108,102)
The total Restricted and Unrestricted Cash
reported to the SEC includes overseas account balances as described above. You
have to subtract the other two items from SCO Operations MOR reported assets to
arrive at what they report to the SEC as Total Assets. It is not exact, but
that appears to get very close to how it is all calculated. I'm missing nickels
and dimes, but it is close.
MOR reported Goodwill ($2,042,600)
SCO Group to SCO Operations payables
For the Total Liabilities reported to the SEC,
again, I have never quite figured that out.
What to watch
has become much easier over time. It is the Cash. It's all they have left,
Ladies and Germs, and don't get too hung up trying to watch the other balance
sheet and cash flow items. The important numbers are on pages 11 and 14 of the
Operations MOR. If there are definitive number to watch, they
Total Cash - $3,719,623 (bottom line, "Total Cash Per GL
Accounts", of page 11)
Overseas cash balance - $1,108,102 ("Net Foreign"
on page 11)
Domestic cash balance - $2,613,521 ("Total Cash in SCO Ops
BS" on page 11)
Restricted Cash Novell SVRx - $210,602 and $181,249
(domestic and foreign, respectively, on page 11)
Domestic Restricted and
Unrestricted Cash (page 14)
The overseas cash balance has
declined slightly over time and that is why I strongly doubt SCO is moving money
offshore to keep it out of creditors hands. At this point, I think the Novell
SVRX restricted cash is all they are worried about. Since they are in Chapter
11, that future restricted cash reported to the SEC and Operations MOR may be
spent staying alive rather than worrying about future obligations.
don't forget the Accounts Receivables asset. SCO carries $2,109,887 as an
asset on the Operations MOR. But look at the aging. $633,276 (30%) is over
90 days old and $356,133 (almost 17%) is 61-90 days old.
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