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Petrofsky's Objection to SCO's Yarro "Loan" Motion - Update: November MORs
Monday, March 01 2010 @ 12:43 PM EST

Novell objected vigorously to SCO's Motion for PostPetition Financing, the proposed Ralph Yarro "loan" to SCO which also involves granting "security interests and superpriority administrative expense status", and now there's a second objection, from Al Petrofsky. This will not surprise us. What would surprise us would be the court granting the motion. To give you a taste of the flavor of this filing, here's the first paragraph of the introduction:
2. The trustee, carrying on the tradition of the debtors-in-possession before him, has submitted another half-baked proposal to obtain funding from a non-existent counterparty. Should this party soon come into existence and execute the agreement, but never produce a dime of funds, the trustee wishes to provide it with a parting gift of up to $50,000.
I can't defend the proposed loan terms, but I think Mr. Petrofsky has overstated them. I read the contract as saying that if the deal doesn't, for listed reasons, happen, then SCO has to pay Yarro's legal fees associated with trying to set up the loan, up to $50,000, with any unpaid expenses over that to come from litigation winnings, if any. That isn't really the same as saying SCO wants to provide Yarro with a parting gift. And when you overstate in a court of law, you greatly increase your odds of losing, because you may lead the judge to defend the very entity you hoped he would not rule for by making it seem your complaints are over the top. I also think the objection wasn't timely filed.

Here's the filing:
1068 - Filed & Entered: 02/28/2010
Objection
Docket Text: Objection of Petrofsky to Motion of Chapter 11 Trustee For Order (I) Authorizing Debtors' Estates to Obtain Postpetition Financing and to Grant Security Interests and Superpriority Administrative Expense Status Pursuant to 11 U.S.C. secs. 105, 363(c), 364(c), 364(e) and 507(b); (II) Modifying the Automatic Stay Pursuant to 11 U.S.C. sec. 362; and (III) Granting Other Relief (related document(s)[1051]) Filed by Alan P. Petrofsky (Attachments: # (1) Exhibit A: Electronically searchable text PDF of the Secured Super-Priority Credit Agreement# (2) Exhibit B: Pages from the website of the Delaware secretary of state regarding the status of "Seung Ni Capital Partners, L.L.C." as of February 26, 2010) (Petrofsky, Alan)
He filed on the 28th, which thanks to the dance that the Trustee and the judge went through may be too late, in that the final order filed on February 23rd said objections were due on the 26th, not in March. Novell's objection was timely filed.

The alleged LLC, he says, isn't even a legal entity in Delaware, but Novell already pointed that out. Petrofsky's main point is that if the loaned money is used to "continue to operate the business", it is actually a threat to the estate, in that operating *this* business means losing yet more money at a steady pace, judging from its behavior so far, because that is all that has happened since SCO entered Chapter 11. That's likely true, but to the judge it will be more hyperbole that I doubt he'll care much about. He knows they are losing money.

No MORs have been filed, Petrofsky points out, for November, December or January, despite representations from the Trustee that they would be filed by now, and again, Novell has already told the court about that.

The proposal certainly earns some scorn. Novell expresses what I think can only be described as righteous indignation, in fact, saying in effect that this is a plan to stiff the creditors for the benefit of Yarro and whoever the other lenders may be. In fact, I notice some wording about the other lenders that worries me:

SECTION 8.04.

Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower and the Lender that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns.

(b) The Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and its portion of the Loan at the time owing to it).

(c) The Lender may without the consent of the Borrower sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loan owing to it); provided, however, that: (i) the Lender' s obligations under this Agreement shall remain unchanged; (ii) the Lender shall remain solely responsible to the other parties hereto for the performance of such obligations; (iii) the participating banks or other entities shall be entitled to the benefit of the protections given to the Lender hereunder and shall be bound by the confidentiality provisions contained in Section 8.16 hereof to the same extent as if they were the Lender; and (iv) the Borrower shall continue to deal solely and directly with the Lender in connection with the Lender' s rights and obligations under this Agreement, and the Lender shall retain the sole right to enforce the obligations of the Borrower relating to the Loan and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable to such participating bank or Person hereunder or the amount of principal of or the rate at which interest is payable on the Loan in which such participating bank or Person has an interest, extending any scheduled principal payment date or date fixed for the payment of interest on the Loan in which such participating bank or Person has an interest, increasing or extending the Commitment of such participating bank or Person or releasing all or substantially all of the Collateral). All amounts payable by the Borrower to the Lender hereunder in respect of any Loan and the applicability of the protection provisions contained herein shall be determined as if the Lender had not sold or agreed to sell any participation in the Loan, and as if the Lender were funding the participated portion of the Loan the same way that it is funding the portion of the Loan in which no participation has been sold.

(d) The Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.04, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrower furnished to the Lender by or on behalf of the Borrower; provided that, prior to any such disclosure of information designated by the Borrower as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information on terms no less restrictive than those applicable to the Lender pursuant to Section 8.15.

(e) The Lender may at any time assign all or any portion of its rights under this Agreement to secure extensions of credit to the Lender or in support of obligations owed by the Lender; provided that no such assignment shall release the Lender from any of its obligations hereunder or substitute any such assignee for the Lender as a party hereto. If the Lender is a fund that invests in bank loans it may (without the consent of the Borrower) pledge all or any portion of its rights in connection with this Agreement to the trustee for holders of obligations owed, or securities issued, by such fund as security for such obligations or securities, provided that any foreclosure or other exercise of remedies by such trustee shall be subject to the provisions of this Section 8.04 regarding assignments in all respects. No pledge described in the immediately preceding sentence shall release such Lender from its obligations hereunder.

(f) The Borrower shall not assign or delegate any of its rights or duties hereunder without the prior written consent of the Lender, which the Lender may grant or withhold in its sole discretion, and any attempted assignment without such consent shall be null and void.

Does this indicate that we never find out who these shadowy lenders are? They benefit equally with Yarro, but only Yarro deals directly with the borrower and he alone is responsible? How weird is that? I mean, if there is no control over who gets to be the beneficiary of this loan's terms, can Yarro sell to the Mob, just to pick the most extreme example I can think of? And yet, despite any interest or benefits going to the lenders, SCO can't sue them or hold them accountable in any way? Anyone see some light around the edges of this clause, some gaming possibilities?

And what does this definition mean?

" Loan Termination Date" means the earlier to occur of: (a) the date on which the Commitment is permanently reduced to zero pursuant to Section 2.06; and (b) the date that is five (5) days after the Closing Date.
Five days after the closing? Later there is this wording:
The Lender' s portion of the Commitment shall: (a) reduce to zero immediately after the borrowing of the Loan pursuant to this Section 2.01; and (b) terminate immediately and without further action on the Loan Termination Date. Amounts paid or prepaid in respect of Loan may not be re-borrowed.
Put those two together, and factor in that at first the lender, as I read the document, only has to put up some of the proposed monies immediately, and I have no idea what it's saying except that it feels like a back door. Do you know what it means? What exactly happens five days after the closing? Here's the wording in the Promissory Note:
2. Loan. The Lender shall make a portion of the Loan set forth on Exhibit " A" hereto in accordance, subject to, and in the manner set forth in terms and conditions of the Credit Agreement, the aggregate amount of which Loan shall not exceed Two Million and 00/100 Dollars ($2,000,000.00).
OK, but what's the minimum? What exactly is the Lender obligated to do?

I have a question. If the Trustee and Yarro meant for this proposal to be taken seriously as what it purports to be for, wouldn't someone at least file to register as a legal entity in Delaware? If it's true they have not, how serious are they? This isn't the first bogus sounding deal, Petrofsky points out, as Novell has as well. So, if it's not about the loan, what is this all about? Lets try to figure out what it might be about.

In the past examples, I viewed the various proposals as useful mainly for delay or to head off Chapter 7. SCO has to file the MORs some time or other, and they probably know that as soon as they do, there will be calls to send SCO to Chapter 7. They'd like to stay ambulatory until the SCO v. Novell trial is done in March. Filing a motion like this might be their last hope to keep standing long enough to try to win in court. I'm not saying I approve of such tactics, just saying that I wonder if this is what it's really about.

Could it be something worse? I mean, the Trustee has hinted that there is something odd about the subsidiaries. In all the MORs they are filing they have the disclaimer:

Historically, the Company may not have distinguished between direct liabilities of debtor and non-debtor companies. The Trustee with its financial advisors is conducting a thorough analysis of the intercompany arrangement among the debtors and the non-debtor subsidiaries and reserves the right to modify these MOR's upon completion of its review.
We noticed too that suddenly Japan and Germany seemed to be mighty flush. Something is holding back filing the MORs, I think, beyond being too busy, since it's a situation they said they thought would be resolved by now. I don't know what the X factor is, but I am kind of waiting for that shoe to drop.

If it's just a money crunch, if the loan were to happen, then they could file the MORs and tell the court that the problems revealed are now solved, or if it's denied, then they at least bought enough time arguing about it that the trial will have begun.

But what if the motion is granted? My, what terms! This is like in a movie borrowing from a loan shark, to me. You wouldn't do it unless you were, say, a gambling addict, and you were desperate to keep gambling at any cost.

Petrofsky quotes the Trustee's motion:

The Trustee is advised that Seung Ni Capital Partners, L.L.C. is a newly formed entity formed by Ralph J. Yarro III (“Yarro”) and was created for the purpose of providing postpetition financing to the Debtors.
He says it isn't formed in Delaware, which Novell said too, but I want to focus elsewhere. Remember I told you that if someone writes that they are advised that such and such is so, it means they can't put their hand on a Bible and swear to the truth of such and so? It means someone told them that and they are telling the court what they were told. This is the second time we've seen this Trustee use that language. It's possible that the trustee put forward this plan without even checking, in which case one has to ask why that could ever happen. Or, from that language, it is possible they did check, and they can't find any such entity either. And yet Cahn submitted this motion *anyway*!??! So what might that tell us, if Cahn knows or at least has reason to suspect that there may be no such legal entity?

It makes me wonder if there is some X factor we don't know, beyond the MORs, that has the Trustee worried enough that he'd like an exit strategy for himself, passing the football, so to speak, to Yarro and whoever the other possible lenders may be, and he's done. Then the litigation can proceed with no consequences to the estate and less to all the enablers.

Or, they anticipate various outcomes from the litigation, and the insiders would like to either benefit hugely, at the expense of creditors, by pushing, so to speak, to the head of the line, or get away with what SCO tried to pull. I wondered if the loan idea sprang from what they viewed as a chance to get money from Novell from the resurrected slander of title claim, perhaps.

Or, various shadowy figures in the background wish to fund SCO's litigation follies, or see some way to make money by interesting other investors in the litigation, or future litigation, but for some reason feel they must stay in the background, so Yarro is fronting for them and angling for what he needs to keep the game rolling. I mean, between this "loan" offer and Darl McBride's attempt to buy the mobility "business", what is the end result, if both motions were to be approved? To me, we are back at square one with the same old folks, same old dream, only with them getting off with no real consequences for the SCO litigation follies, in that they morphed into supposedly new entities, not responsible for what SCO Group did, with SCO left a bloodless corpse on the ground with no money for creditors or Novell or IBM or Maureen O'Gara or the pizza restaurant or anybody. All the assets are either moved elsewhere or under the lender's thumb. Here's the list of collateral for the loan:

EXHIBIT " B"

LIST OF COLLATERAL

1. Cash, checking, savings, and other accounts.

2. Security deposits paid by the Borrower, as tenant, under various leases.

3. Ownership interests in partnerships or joint ventures.

4. Accounts receivable.

5. Inventory.

6. Equipment, furnishings, and supplies.

7. Intellectual Property, as defined in the attached Credit Agreement.

8. Contract and similar rights.

See what I mean? Between them, the IP could end up in the hands of Misters Yarro and McBride. The creditors get nothing from this deal, in that the loan must be used only for the following things:
SECTION 3.06. Use of Proceeds. The Borrower will use the proceeds of the Loan solely: to pay fees and expenses related to the administration of the Bankruptcy Case, the operation of the Debtors and the costs related to the Litigation and the consummation of the Transactions contemplated by and subject to the terms of this Agreement. The Borrower shall use the entire amount of the proceeds of each Loan solely in accordance with this Section 3.06; provided, however, that nothing herein shall in any way prejudice or prevent the Lender from objecting, for any reason, to any requests, motions or applications made in the Bankruptcy Court, including any applications for interim or final allowances of compensation for services rendered or reimbursement of expenses incurred under clause (a) of Section 105, or Section 330 or 331 of the Bankruptcy Code, by any party in interest. For avoidance of doubt, no proceeds of the Loan or any cash collateral shall be available for any fees or expenses incurred in connection with the initiation or prosecution of any claims, causes of action, adversary proceedings or other litigation against the Lender.
So if SCO goes belly up, the creditors don't even get the fork lift, let along the intellectual property? They get nothing? Here's how the credit agreement defines Intellectual Property:
" Intellectual Property" means: (a) all right, title and interest of Borrower in and to patent applications and patents, including, without limitation, all proceeds thereof (such as, by way of example, license royalties and proceeds of infringement suits), the right to sue for past, present and future infringements, all rights corresponding thereto throughout the world, and all reissues, divisions, continuations, renewals, extensions, and continuations-in-part thereof (collectively, the " Patents" ); (b) all right, title and interest of Borrower in and to trademark applications and trademarks, including, without limitation, all renewals thereof, all proceeds thereof (such as, by way of example, license royalties and proceeds of infringement suits), the right to sue for past, present and future infringements, and all rights corresponding thereto throughout the world (collectively, the " Trademarks" ), and the good will of the business to which each of the Trademarks relates; (c) all copyrights of Borrower and all rights and interests of every kind of Borrower in copyrights and works protectible by copyright, and all renewals and extensions thereof, and in and to the copyrights and rights and interests of every kind or nature in and to all works based upon, incorporated in, derived from, incorporating or relating to any of the foregoing or from which any of the foregoing is derived, and all proceeds thereof (such as, by way of example, license royalties and proceeds of infringement suits), the right to sue for past, present and future infringements, and all rights corresponding thereto throughout the world (collectively, the " Copyrights" ); (d) all of Borrower' s trade secrets and other proprietary information, and all proceeds thereof (collectively, the " Trade Secrets" ); (e) all right, title, and interest of Borrower in, to and under license agreements and contracts concerning Patents, Trademarks, Copyrights, and Trade Secrets, all amendments, modifications, and replacements thereof, all royalties and other amounts owing thereunder, and all proceeds thereof (collectively, the " Licenses" ); and (e) All internet domain names and addresses of Borrower and all proceeds thereof.
My understanding was that SCO couldn't sell the IP, because so far, the only court decision is that the copyrights belong to Novell. Unless or until that changes, I was under the impression SCO couldn't sell, even to a willing entity who knew about the encumbrance. Can they use it as collateral? Are they?

Why would Cahn go along with any of this? Maybe my joke about the mob is true, and Cahn is strapped to his chair in the office, and they're threatening to kneecap him if he doesn't file this motion.

To be serious for a moment, I don't know. Maybe he's realized who he's dealing with, and doesn't want them to sue him? Maybe he just wants an exit strategy for himself, and he tried to find other solutions, but no one wants to buy or fund this company but the same folks who brought it to the dance to begin with? But it's all very disturbing.

Whatever this is about, it doesn't seem possible to me that they think this will fly. I mean, if they tried to make the terms any more egregiously unacceptable, what could they possibly add?

Update: The MORs for November and another bill from Ocean Park:

03/01/2010 - 1069 - Debtor-In-Possession Monthly Operating Report for Filing Period November 2009 (Debtor: The SCO Group, Inc.) Filed by Edward N. Cahn, Chapter 11 Trustee for The SCO Group, Inc., et al.. (Fatell, Bonnie) (Entered: 03/01/2010)

03/01/2010 - 1070 - Debtor-In-Possession Monthly Operating Report for Filing Period November 2009 (Debtor: SCO Operations, Inc.) Filed by Edward N. Cahn, Chapter 11 Trustee for The SCO Group, Inc., et al.. (Fatell, Bonnie) (Entered: 03/01/2010)

03/01/2010 - 1071 - Monthly Application for Compensation / Fourth Monthly Fee Application of Ocean Park Advisors, LLC, Financial Advisor to the Chapter 11 Trustee of the SCO Group, Inc., et al., for Compensation and Reimbursement of Expenses for the Period of January 1, 2010 through January 31, 2010 Filed by Ocean Park Advisors, LLC. Objections due by 3/22/2010. (Attachments: # 1 Notice # 2 Exhibit A # 3 Exhibit B # 4 Certificate of Service) (Fatell, Bonnie) (Entered: 03/01/2010)

**************************

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

__________

In re: The SCO GROUP, INC., et al.,

Debtors.

____________

Chapter 11

Case No. 07-11337 (KG)
(Jointly Administered)

Hearing: March 5, 2010 at 11:00 a.m.
Related Docket No.: 1051

_________________________

OBJECTION OF PETROFSKY TO MOTION OF CHAPTER 11 TRUSTEE FOR ORDER (I) AUTHORIZING DEBTORS’ ESTATES TO OBTAIN POSTPETITION FINANCING AND TO GRANT SECURITY INTERESTS AND SUPERPRIORITY ADMINISTRATIVE EXPENSE STATUS PURSUANT TO 11 U.S.C. SECS. 105, 363(c), 364(c), 364(e) AND 507(b); (II) MODIFYING THE AUTOMATIC STAY PURSUANT TO 11 U.S.C. SEC. 362; AND (III) GRANTING OTHER RELIEF

1. I, Alan P. Petrofsky, an equity security holder of Debtor The SCO Group, Inc., hereby object to the Motion of Chapter 11 Trustee For Order (I) Authorizing Debtors’ Estates to Obtain Postpetition Financing and to Grant Security Interests and Superpriority Administrative Expense Status Pursuant to 11 U.S.C. secs. 105, 363(c), 364(c), 364(e) and 507(b); (II) Modifying the Automatic Stay Pursuant to 11 U.S.C. sec. 362; and (III) Granting Other Relief, docket no. 1051, filed February 19, 2010 (the “Motion”).

INTRODUCTION

2. The trustee, carrying on the tradition of the debtors-in-possession before him, has submitted another half-baked proposal to obtain funding from a non-existent counterparty. Should this party soon come into existence and execute the agreement, but never produce a dime of funds, the trustee wishes to provide it with a parting gift of up to $50,000.

3. The trustee also asks for approval to use the funding, should it actually be obtained, “to operate the Debtors’ businesses as a going concern”, despite his failure to provide any current information about the profitability of those businesses, and despite the fact that the most recent reports that he has filed report that the operation of those businesses continues to damage the estates in the amount of hundreds of thousands of dollars per month.

4. Creditor Novell, Inc. states in its opposition to the motion that “If the litigation thrives, equity stands to profit” (docket no. 1065 at para. 9). However, all parties, including equity holders (other than Ralph Yarro), will be harmed if the estates pay a $50,000 fee for nothing, or if they receive some financing but spend it on continuing the debtors’ money-losing operations.

THE MOTION’S PREMATURITY AND THE TRUSTEE’S LACK OF DILIGENCE

5. The motion has attached to it an incomplete and unexecuted proposed “Secured Super-Priority Credit Agreement” with “Seung Ni Capital Partners, L.L.C., a Delaware limited liability company” (the “Credit Agreement”)1, and in the motion it states:

2

The Trustee is advised that Seung Ni Capital Partners, L.L.C. is a newly formed entity formed by Ralph J. Yarro III (“Yarro”) and was created for the purpose of providing postpetition financing to the Debtors.
(motion at para. 8)

6. Whoever provided the trustee with this advice appears to have been unwilling to perform even one minute of diligence. Seung Ni Capital Partners, L.L.C., was not a “formed entity” that had been “formed” or “created” for any purpose. More than a week later, it still isn’t. In fact, Yarro hasn’t even bothered to spend two minutes and seventy-five dollars on filing a name reservation with the Delaware secretary of state. Therefore, some unrelated person could use or reserve the name at any moment, which would then necessitate choosing a different name and revising the proposed order and the loan documents to reflect it. See the pages from the website of the Delaware secretary of state regarding the status of “Seung Ni Capital Partners, L.L.C.” as of February 26, 2010, attached hereto as Exhibit B; and 6 Del. C. 18-201(b) (a Delaware LLC is not a legal person until after the certificate of formation has been filed) and 18-102(3) (an LLC may not use a name that has already been used or reserved).

7. This is not the first time in these cases that the Court has been asked to approve a deal with a party that did not legally exist. See the “Memorandum of Understanding” with “Stephen Norris Capital Partners, LLC, a Delaware limited liability company”, dated February 13, 2008, Ex. A to docket no. 346; and my objection, docket no. 414 at paras. 7-15.

8. Furthermore, there is a long and consistent history in these cases of purported financiers offering the estates funding that never materializes. See the offer in October 2007 of $20,000,000 in cash and financing from JGD Management Corp. d/b/a York Capital Management (motion to approve in docket no. 149, withdrawn in docket no. 225); the offer in February 2008 of $105,000,000 in cash and financing

3

from Stephen Norris Capital Partners, LLC (motion to approve in docket no. 346, permanently taken off calendar in docket no. 421); and the offer in June 2009 of $5,000,000 from Unxis, Inc. (motion to approve in docket no. 815, denied in docket no. 891, after Unxis’s president, Stephen Norris, testified that Unxis had only $10,000 to its name (see July 27, 2009 transcript, docket no. 892, at 354:3-6)).

9. To prevent wasting the Court’s and the parties’ resources on examining such stillborn proposals, the trustee should refrain from making any motion to approve a funding deal until after: (1) the proposed counterparty entity actually exists; (2) the entity has actually executed an agreement that is binding if the court approves it; and (3) there is evidence that the entity is capable of actually producing the funding that it has promised. Before filing the current motion, the trustee didn’t even make it to step one.

10. Other problems indicating the general unreadiness of the proposal include:

(a) The Credit Agreement states that a “Collateral Agent Agreement” is “attached hereto” (Credit Agreement at sec. 1.01, p. 7), but no such agreement is attached; and

(b) it also states that a list of “Security Documents” is “attached hereto” (Id. at sec. 1.01, p. 13), but no such list is attached.

THE IMPROPER $50,000 FOR THE LENDER DESPITE THE LACK OF ANY COMMITMENT

11. The Credit Agreement purports to commit the lender to provide at least $800,000 by the closing date, which is to be no later than March 8, 2010 (Credit Agreement at sec. 2.01 and sec. 1.01, p. 8). However, there is no adverse consequence for the lender if it fails to provide the funds. Thus, producing the funds (and thereby obtaining the lien) is simply an option that the lender may or may not decide to take, and the agreement explicitly provides that if the lender opts not to produce the funds, it will nevertheless receive $50,000:

4

If for any reason the amount of the Loan is less than Eight Hundred Thousand and 00/100 Dollars ($800,000.00), Borrower may, in its discretion, either elect to waive such minimum Loan amount requirement and close the Transactions, or Borrower may elect not to close the Transactions, in which event Borrower shall nonetheless pay Lender’s legal fees, subject to the foregoing $50,000.00 cap.
(Credit Agreement at sec. 8.17(c), p. 37-38)

12. This proposal to pay all of an alleged suitor’s expenses even if there is no evidence that it ever even had a dime to its name, let alone any obligation or intention of actually parting with any of its money, is wholly meritless.

13. This aspect of the agreement is reminiscent of the motion made by the debtors in possession (who were controlled by a board of directors chaired by Ralph Yarro) to pay a $150,000 expense reimbursement to former suitor York Capital, as a “moral matter” (docket no. 367, February 29, 2008, at para. 4).

14. As the U.S. trustee and other objectors pointed out, that motion was ridiculous. See docket nos. 411, 440, and 443. The debtors never went through with a hearing on it.

15. The current proposal, to pay the lender $50,000 even if the lender never lends anything, fails for similar reasons. It would be a breakup fee for a lender that is controlled by a long-time insider and was never even contingently obligated to provide any funds. This does not come close to meeting the requirement that breakup fees be “actually necessary to preserve the value of the estate” In re O’Brien Environmental Energy, Inc., 181 F.3d 527 (3rd Cir. 1999).

16. Furthermore, if the agreement is to include the possibility that the lender produces, and the trustee accepts, less than the $800,000 minimum, then the $50,000 legal fee cap should be prorated down according to the size of the funding actually produced (just as the “Loan Fee” is prorated down according to the amount of funding produced; see Credit Agreement at sec. 1.01, p. 11). If, for example, the lender comes

5

up with only $100,000 and the trustee decides to accept it, then paying a full $50,000 of fees would be an unreasonably large surcharge by any standard.

CONTINUING THE BUSINESS OPERATIONS WILL NOT PRESERVE ESTATE ASSETS

17. The trustee acknowledges that one test he must meet to be entitled to financing under sec. 364(c) is that “the credit transaction is necessary to preserve the assets of the estate” (motion at para. 17(b), quoting In re Crouse Group, Inc., 71 B.R. 544, 549 (Bankr. E.D. Pa. 1987)).

18. The proposed agreement provides that up to 50% of the collateral may be used to fund business operations (agreement at sec. 5.10(a)), and the trustee asserts that “Without postpetition financing, the Trustee would be unable to operate the Debtors’ businesses as a going concern, which would significantly impair the value of their assets to the detriment of all stakeholders.” (motion at para. 18)

19. There is no evidence that continuing to operate the businesses will “preserve the assets of the estate”, and there is overwhelming evidence to the contrary.

20. The primary source of information about the state of the businesses should be the monthly operating reports (“MOR”s):

Timely and accurate financial disclosure is the life blood of the Chapter 11 process. Monthly operating reports are much more than busy work imposed upon a Chapter 11 debtor for no reason other than to require it to do something. They are the means by which creditors can monitor a debtor’s post-petition operations. In re Chesmid Park Corp., 45 B.R. 153, 159 (Bankr. E.D.Va. 1984). As such, their filing is very high on the list of fiduciary obligations imposed upon a debtor in possession.
(In re Berryhill, 127 B.R. 427, 433 (Bankr. N.D. Ind. 1991))

21. Unfortunately, the trustee has failed to file any MORs for November 2009, December 2009, or January 2010. This is despite his assurances – given at the December 30 hearing as part of his successful effort to persuade the Court not to take

6

any action regarding his numerous reporting delinquencies – that the November and December reports would be filed by January 31.

22. The most recent month for which the trustee has filed any MORs is October 2009, and the most recent month for which he has filed MORs without an extraordinary disclaimer and reservation of the right to amend is September 2009.2

23. It has now been more than half a year since the trustee’s appointment, and he has yet to report a single month in which the debtors’ continuing operations were not a disaster. In the last three reported months, the debtors’ business operations have resulted in net losses, before reorganization items, of another $1,068,209: $370,984 in August, $132,138 in September, and $565,087 in October. (See docket nos. 1003, 1005, and 1056, each at p. MOR-2)

24. These ongoing losses show that continuing to operate the business is destroying, not preserving, the assets of the estate. Accordingly, any deal to obtain financing for the purpose of operating the business does not meet the requirements of sec. 364(c), per Crouse, 71 B.R. at 549.

25. Also, the diminution of the estates that is attributable to the consistently unprofitable operations has been ongoing for nearly two and a half years now, and it strongly suggests that these cases should be converted to Chapter 7 (and, indeed, should have been converted long ago). Thus, it would be imprudent to enter into any agreement that obligates the estates to stay in chapter 11, as the Credit Agreement does at sec. VII(i) (defining conversion as an Event of Default).

7

THERE IS NO SHOWING THAT THE FINANCING IS CURRENTLY NECESSARY

26. The motion does not provide any information about the estates’ current cash balances and their projected cash needs over the next few months. Thus, regardless of whether the financing is to be used to fund the litigation expenses or to continue the business operations, there has been no showing that the financing is in any way “necessary to preserve the assets of the estate” (Crouse, 71 B.R. at 549.).

CONCLUSION

27. I respectfully request that the Court enter an order denying the motion.

Dated: February 28, 2010

/s/ Alan P. Petrofsky
Alan P. Petrofsky, equity security holder

[address, phone, fax, email]

______________

1 An electronically searchable copy of the proposed agreement is attached hereto as Exhibit A.

2 The July through September MORs originally included a similar reservation, but the trustee elaborated that “[t]he Trustee is mindful of his responsibilities and will file revised MORs, if he determines such re-filing is needed, for July, August and September 2009, before the end of January 2010” (docket no. 1006 at para. 9, fn. 3), and the absence on the docket of any such re-filing before the end of January 2010 shows that he determined that no such re-filing was needed and the reservation has now expired.

8


  


Petrofsky's Objection to SCO's Yarro "Loan" Motion - Update: November MORs | 253 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
Corrections here
Authored by: Erwan on Monday, March 01 2010 @ 12:51 PM EST
If any.

---
Erwan

[ Reply to This | # ]

News Picks discussions.
Authored by: Erwan on Monday, March 01 2010 @ 12:52 PM EST
Please, quote the article's title.

---
Erwan

[ Reply to This | # ]

OT, the Off Topic thread
Authored by: Erwan on Monday, March 01 2010 @ 12:52 PM EST
As usual...

---
Erwan

[ Reply to This | # ]

Anything Comes
Authored by: Erwan on Monday, March 01 2010 @ 12:54 PM EST
Comes transcripts here, please.


---
Erwan

[ Reply to This | # ]

Conservative Estimate: $1.2 Million in unpaid billings to BR, OPA & Cahn
Authored by: Anonymous on Monday, March 01 2010 @ 01:34 PM EST
A Google spreadsheet totals up the unpaid billings to Blank Rome, OPA and Cahn.

Five Bills have been submitted. Three are OPA, Two are Blank Rome, Cahn has not submitted a bill for any of his time (though he represented to the court he spent more than 40 hours in September alone).

Those five submitted bills total $626,656 in payables. (Billing less the 20% reserve).

The latest available MOR (October) shows the then current BR and OPA bills (about $504,000) carried as a liablity on the asset/liability portion of the balance sheet.

Very conservative estimation of the activity since the bills produce an estimate that the Current Billing exceeds $1.2 Million due OPA, Cahn and his Law Firm. The March activity, two scheduled and contested hearings, will push this billing up farther.

The Yarro loan can be understood as a fire-sale to Yarro in exchange for the now overdue lawyer billings.

[ Reply to This | # ]

"He knows they are losing money"
Authored by: ak on Monday, March 01 2010 @ 01:48 PM EST
That's likely true, but to the judge it will be more hyperbole that I doubt he'll care much about. He knows they are losing money.

The judge does not know how much money they are loosing (because the MORs are missing) and it is a real problem that he does to seem to be interested in knowing how much that is. And if he does not care he should be removed from office.

[ Reply to This | # ]

light around the edges
Authored by: Leg on Monday, March 01 2010 @ 01:50 PM EST
Would it make sense if Microsoft were the potential lender? If the lender's
identity were to be kept secret, this might allow Microsoft to fund further
litigation...

[ Reply to This | # ]

Where is the US Trustee in all of this?
Authored by: Anonymous on Monday, March 01 2010 @ 01:51 PM EST
IF there is something seriously stinking behind the scenes,
wouldnt the best course of action to keep Cahn from having
dirty hands be to show up the next business day at the
office of counsel from the US Trustee's office?

"Hey, Joe, look, I was brought in to this SCO thing a while
back. Ive had a few months now and so far Ive been relying
a lot on what the lawyers are telling me because there is so
much paper over there that honestly, I don't think I have
been able to get through even 5% of it.

The only real clarity that I feel that I have feels kind of
messy to me. I had my financial guys go over the statements
and records to try and build the outstanding MORs.

The farther I get into the records, the more it looks like
there are artifacts with monetary transfers between the
debtor and non-debtor subsidiaries. I cant find
authorization from the judge.

And to be honest, even what i can find in the records is
kind of sketchy.

I have to act in the best interest of my client so I want to
negotiate a safe way forward here but I think there might be
some issues here that I need some backup from DoJ on..."

---
Clocks
"Ita erat quando hic adveni."

[ Reply to This | # ]

Loan Termination Date - and (vs.) or
Authored by: MikeA on Monday, March 01 2010 @ 01:55 PM EST
Is there any significance to the use of the word "and" in this
sentence - I would think it should read "or".

"Loan Termination Date" means the earlier to occur of: (a) the
date on which the Commitment is permanently reduced to zero
pursuant to Section 2.06; and (b) the date that is five (5)
days after the Closing Date.

---
“'Unifying UNIX with Linux for Business' are trademarks or registered trademarks
of Caldera International, Inc."

[ Reply to This | # ]

He does have a point, you know
Authored by: barbacana on Monday, March 01 2010 @ 02:05 PM EST

Petrofsky's main point is that if the loaned money is used to "continue to operate the business", it is actually a threat to the estate, in that operating *this* business means losing yet more money at a steady pace, judging from its behavior so far, because that is all that has happened since SCO entered Chapter 11.

Right, as far as we can see. We can't be absolutely sure because SCO hasn't timely filed its MORs. Maybe it has been making wonderful profits for the creditors since October.

That's likely true, but to the judge it will be more hyperbole that I doubt he'll care much about.

Well, just a minute! If it's plain fact, it isn't hyperbole.

Perhaps what you mean is that Gross will let SCO do whatever it wants, and will completely disregard the interests of the creditors. You're probably right, but that is a criticism of Gross, not of Petrofsky.

[ Reply to This | # ]

Is Darl stealing Ralph's IP?
Authored by: s65_sean on Monday, March 01 2010 @ 02:05 PM EST
The Yarro loan proposal was submitted first, and the collateral includes all IP
of the debtor, including all copyrights. Then a couple of days later, the
proposal to sell the mobility business to Darl gets filed, which includes a long
list of copyrights for mobility related software.

Can Cahn sell the mobility copyrights to Darl if he has already promised them as
collateral to Ralph for the loan? Maybe that is why the proposed Darl purchase
had some wording about him not losing any of the assetts as long as he acted in
good faith and the sale isn't stayed pending appeal. At that point the estate
would have defaulted on the terms of its loan from Yarro, so Yarro could then
get the rest of the assets of the estate without having to wait for SCO to spend
any of the loan.

Hopefully someone will object to the Darl APA before the shortened deadline to
object comes to pass.

[ Reply to This | # ]

I will give Al this...
Authored by: Lazarus on Monday, March 01 2010 @ 02:14 PM EST
He got to use the phrase "half-baked".


I bet that most of the non-SCO lawyers in this mess have been wanting to use
that term for years.

---
I have no opinion on things I know nothing about.

This separates me from 90% of the human race, and 100% of politicians.

[ Reply to This | # ]

Jeeeee... I'm sooo surprised...
Authored by: Anonymous on Monday, March 01 2010 @ 02:55 PM EST
Obviously. Petrovsky says white... Groklaw says black ninuh ninuh ninuh...

[ Reply to This | # ]

Say SCO goes chapter 7, what resolution
Authored by: Anonymous on Monday, March 01 2010 @ 02:55 PM EST
What would be the resolution of the lawsuits should SCO disappear in Chapter 7
sized puff of air ?

What would happen to the Novel trial?

What would happen to the stayed arbitration ?

What would happen to the IBM case ?

What would happen to the RedHat case ?

[ Reply to This | # ]

The judge will grant the yarro loan ...
Authored by: Anonymous on Monday, March 01 2010 @ 03:07 PM EST
after all his own guy put it on his desk.

[ Reply to This | # ]

Could it be something worse?
Authored by: Yossarian on Monday, March 01 2010 @ 03:10 PM EST
>Could it be something worse?

IMO yes.
It reminds a description in http://en.wikipedia.org/wiki/Enron
"Enron had created offshore entities, units which may be used for planning
and avoidance of taxes, raising the profitability of a business. This provided
ownership and management with full freedom of currency movement and the
anonymity that allowed the company to hide losses."

My *guess* is that SCO was in a pretty bad shape and it used
the subsidiaries to hide something. As you said:
"the Trustee has hinted that there is something odd about the
subsidiaries".

I assume that SCO is going to run out of real money pretty
soon, and so it will lose the lawsuit lottery. The trustee
will get *nothing* because there will be no cash. Gamblers
in such a situation go to a loan shark hoping against hope
that the loan will let them win big and get rich. As you said:
"This is like in a movie borrowing from a loan shark, to me. You wouldn't
do it unless you were, say, a gambling addict, and you were desperate to keep
gambling at any cost."

My guess is one theory that can explain your observations.

[ Reply to This | # ]

Poor Cahn ...
Authored by: Anonymous on Monday, March 01 2010 @ 03:51 PM EST
Since the funds from the loan are limited in what they
can be used for, it may be the case that Cahn himself
will not manage to get paid anything once this is over.

No matter what Cahn may have done previously, as time
goes on, this is looking more and more like a black
mark on the Judges reputation.

Directly or indirectly, a side-effect of this loan
if approved, would be to give Yarro more control over
what Cahn does. All Yarro has to do to force Cahn,
is to threaten to dry up funding if Cahn does not do
as Yarro directs. Not a very good position for Cahn
to be in. It may not be written there in black and
white, but that is the net effect and end result.

PJ asked if there is any way this could be worse.
Sure ... Cahn signs over power of attorney EXPLICITLY
to Yarro in exchange for the loan. That would make
it worse. But there is no reason for them to be that
blatantly obvious. Yarro will control the purse-strings
and in the end that is good enough for Yarro.

[ Reply to This | # ]

Groklaw get's direct mention in TheRegister
Authored by: alisonken1 on Monday, March 01 2010 @ 04:31 PM EST
The Register has done a story based on Groklaw titled "SCO's Linux litigation architect angles for SCO's mobile biz".

The storyline is basically the trustee trying to sell the Mobility assets with a final punt at the Yarro deal.



---
- Ken -
import std_disclaimer.py
Registered Linux user^W^WJohn Doe #296561
Slackin' since 1993
http://www.slackware.com

[ Reply to This | # ]

Yarro gets the records
Authored by: nola on Monday, March 01 2010 @ 04:45 PM EST
I bet the main deal is that the records go with the "loan"

[ Reply to This | # ]

OPA record establishes a Secret Name behind Yarro Loan
Authored by: Anonymous on Monday, March 01 2010 @ 05:12 PM EST
Several Line items in the OPA bill clearly establish there is a Second unnamed partner behind the Yarro Loan. This is no surprise, as early October billing had Yarro walking an individual into DIP meetings. No further detail on the identity, but it is clearly worthwhile to know that Yarro is co-investing with another individual. Below is one of several similar notations to the OPA Docket 1071 bill

1/20/10
Mark Fisler
Managing Director
1.1
$522.50
Call with additional funding partner on the debtor loan and related follow up

[ Reply to This | # ]

egregiously unacceptable...
Authored by: SilverWave on Monday, March 01 2010 @ 06:05 PM EST
so just more of the same?

---
RMS: The 4 Freedoms
0 run the program for any purpose
1 study the source code and change it
2 make copies and distribute them
3 publish modified versions

[ Reply to This | # ]

No Mo Money...
Authored by: Anonymous on Monday, March 01 2010 @ 06:29 PM EST
Everybody is asking why the Trustee would do this deal.

I think the answer is simple. NewSCO is probably busted broke; as in zero
cash.

Based on the pre-October MORs they were going to be out of cash at about
March/April 2010. As another poster has pointed out, they now have unpaid bills
of $1.2 Mil. which would exceed (possibly double) the probable cash as of the
end of December 2009. This implies they are negative(!) cash as of now.

I am now wondering if they have the cash to even get to the trial in the latter
part of March 2010. I think its obvious that they cannot finance the
arbitration which in a mandatory step in creating a viable litigation asset.

There is a report of a November 2009 MOR. Should be interesting.

IANACPA, either
JG

[ Reply to This | # ]

What Cahn should do
Authored by: jheisey on Monday, March 01 2010 @ 07:14 PM EST
If the Yarro purchase proposal is any indication, Cahn must think that SCO is in
a very desperate financial condition. If that is the case, doesn't his position
require that he recommend to Judge Gross that SCO be placed in Chapter 7
bankruptcy, rather than this proposal which would transfer the majority of
company assets to a new entity?

[ Reply to This | # ]

  • Answers - Authored by: Anonymous on Tuesday, March 02 2010 @ 06:04 AM EST
    • Answers - Authored by: jbeadle on Tuesday, March 02 2010 @ 10:17 AM EST
The motion may not be meant to fly.
Authored by: clemenstimpler on Monday, March 01 2010 @ 07:24 PM EST
Whatever this is about, it doesn't seem possible to me that they think this will fly. I mean, if they tried to make the terms any more egregiously unacceptable, what could they possibly add?
Taking into account the inequitable terms of the agreement, this may very well meant to be not to be flying anywhere. To me, this proposal looks like Cahn is dropping SCO like a hot potato. If that should be true, it looks like trying to shift the burden of proof to anyone trying to show in court that the trustee could have done better. If there had not been any attempt to sell assets, it would have been up to the trustee to prove that he could not do any better. Now, if there has been a sale in the making that simply did not come through because of the judge, any opponent in a law suit may have to show that the trustee could and should have done better than this. But, of course, IANAL and all that. ("all that" meaning that I still want to assume that trustees cannot be that easily bent, even in the US.)

[ Reply to This | # ]

The MORs for November
Authored by: Gringo on Monday, March 01 2010 @ 08:36 PM EST

Wow - is this a joke or what? I am so impressed - not! They are still a full Quarter behind. This is an insult to the taxpayer of that wonderful country, the US of A.

[ Reply to This | # ]

November MOR
Authored by: Anonymous on Monday, March 01 2010 @ 08:53 PM EST

The MOR's line-items are nearly all empty, and among the few that are there are entries that jump out as very odd: There are no admitted post-petition liabilities at all, suggesting that all legal bills are being paid (but indications elsewhere are that they are not being paid). The money owed to Novell is not among the pre-petition liabilities, as if SCO has no intention of even acknowledging that debt. SCO UK is listed as worth $4. How can this entity be worth precisely $4? And so on. This is one bizarre document, but one that in general seems to obscure the depth of SCO's troubles.

[ Reply to This | # ]

MOR Highlights
Authored by: Anonymous on Monday, March 01 2010 @ 09:01 PM EST
As of November 30, $1.4 million cash on hand.

NO Professional fees - pre, post, nuthin' were paid in November.

They are no longer going broke. They ARE broke. Broke, busted, disgusted,
agents can't be trusted (not sure how the Mamas and the Papas snuck in here, but
what the heck...)

I hereby and henceforth dub this shambling mess ZombieSCO, for it is the undead
company, lurching incoherently across the landscape, moaning "Code...Fresh
Code"

[ Reply to This | # ]

  • MOR Highlights - Authored by: Anonymous on Tuesday, March 02 2010 @ 08:11 AM EST
  • MOR Highlights - Authored by: Anonymous on Tuesday, March 02 2010 @ 11:17 AM EST
Don't believe a word of it!
Authored by: Gringo on Monday, March 01 2010 @ 10:06 PM EST

I went to read the MOR, and I got as far as the signature line. Guess who prepared the MOR? Yes - the very same Ken Nielson, CFO. I thought this guy was sacked and thrown out of the American Institute of Certified Public Accountants shortly after his testimony at the July 27, 2009 Bankruptcy Hearing, where it was found out that he had grossly mislead the Court about SCO's financial position. He demonstrated that he had no handle on the figures at all, and that he had been shuffling funds through the subsidiaries to hide payment a $100,000 gift to Steve Norris - remember that one? Why was he not fired immediately?

It would be well worth your while to zip over to his testimony where it is all detailed. You will also find the evaluation of the mobile business among all the pages here as well, but that is outside the scope of this comment. I hope the following excerpts only whet your appetite for more. Zip on over to the documents linked to. Groklaw volunteers did a beautiful piece of work with them, and among them you will find many references to things we have been discussing for the past few days.

Excerpts from Ken Nielson's at the July 27, 2009 Hearing




MR. SPECTOR: Now I think they want you behind --
there's a bible.
KENNETH RAY NIELSEN, DEBTORS’ WITNESS, SWORN
DIRECT EXAMINATION
BY MR. SPECTOR (SCO):
Q Do you adopt your declaration, sir?
A Yes.
Q Do you know what that means?
A No, but I assume it means do I -- is this my
declaration.
Q Yes. And you're agreeing that that is accurate?
A Yes.



Cross examination of Ken Nielson, CFO SCO


BY MR. REYNOLDS (IBM):
Q I mean, we got the -- are we still in the morning?
Good morning, Mr. Nielsen again. I would like to ask you
first if you have had a chance to review your declaration
since you signed it?
A Yes.
Q Do you believe it to be true and correct in every way?
A Yes.

...
Q Okay. So if you go to Page 5 of the Exhibit 1 which
contains language from that correspondence to the language
quoted here in Paragraph 18, I would just like to start by
asking you where do you see the first sentence, the monthly
operating reports, MOR's suggest an aggregate operating loss
of $8,652,000 on Page 5 of Exhibit 1.

...
Q Isn't it true, Mr. Nielsen that the number
$8,652,000 does not appear on Page 5 of document -- of
Exhibit 1?
A Correct.
Q Okay. The next part of that first sentence does
appear on Exhibit 1. Is that right? The part that starts
the true aggregate net operating loss over that time period
was actually $4.357 million, approximately
half of what the Movants allege. Is that right?
A Yes.
Q And at the end of that paragraph in Exhibit 1 is there
not a footnote?
A Yes, there is.
Q Is there a footnote in the corresponding part in
Paragraph 18 of your declaration that reflects that
footnote?
A No.
Q And isn't true that the number $4,357,000 that appears
in that sentence is false?
A That's incorrect.
Q What's the correct number?
A If we go to Paragraph 20 of my testimony or my
declarations, that correct number is $5,339,000.
Q So the submission to the Bankruptcy Court that is
Exhibit 1 understated the true aggregate net operating loss
of the Debtors over the time period described. Is that
right?
A Correct.
Q If you look now at the footnote that appears in
Exhibit 1, but not in Paragraph 18 of your declaration, does
it not state the MOR's, the monthly operating reports
include non-cash items. As of the latest MOR, aggregate
non-cash items listed as part of losses total $4.295
million. Is that right?
A On Page 5 of Exhibit 1, right?
Q Yes.
A That's correct.
Q Okay. And that language again does not appear in
Paragraph 18 of your declaration. But if you look at
Paragraph 20 where you were putting forth what you say is
the correct version, there is a footnote at that space at
the end of the first sentence. Is that right?
A Yes.
Q And the first part of that footnote does say the MOR's
include non-cash items. But then it goes on to say that as
of the March 2009 MOR, aggregate non-cash items listed as
part of losses on the statement of operations totaled $8.623
million before net advances to foreign subsidiaries of
$6.004 million. Do you see that?
A Yes.
Q If you look back at Exhibit 1 in Footnote 7, what
should the correct number have been in that sentence where
it said the aggregate non-cash items listed as part of
losses total $4.295 million?
A It would be the net of the $8.623 and the $6.004, so
it would be $2,619,000 if my math works.
Q So the non-cash items reflected in Footnote 7 were
considerably less than the amount that you or the Debtors
rather had submitted in Footnote 7 of Exhibit 1. Is that
right?
A Correct.
Q Okay. Going back to this Paragraph 18, I could go
through the numbers, but it's clear by comparing 18 to
Paragraph 18 and Paragraph 20 that the submission that was
made to the Bankruptcy Court, that is Exhibit 1, understated
the financial liabilities and exposure of the Debtors. Is
that right?
A That's correct.
Q And, in fact, looking into some of the key numbers,
the amount that was listed as the true losses from business
operations in Exhibit 1 that went to the Bankruptcy Court on
June 5 was said to be $561,000, but in fact, what should
that number have read?
A $1,137,000.
Q Which is more than twice $561,000, right?
A Correct.
Q Now if you look then in the next final paragraph of
your Paragraph 18 quoted text, it talks about an erosion in
cash of $3.5 million in the 19 months. And it goes on to
say when averaged over that time, the rate of cash burn is
around $184,000 a month. Do you see that?
A Yes.
Q What is the number that should have appeared there
instead of $184,000?
A $281,000.
Q $100,000 more per month. Is that right?
A Correct.
Q Now if you go to Paragraph 20, Mr. Nielsen, looking at
that same quoted paragraph that begins the erosion in cash
of $3.5 million, isn't it true that here in Paragraph 20
you're supposed to be correcting the numbers that were false
in the previous submission? Isn't that right?
A Yes.
Q But isn't it true that $3.5 million is incorrect?
A No, that's still correct.
Q I thought you told me in deposition if you recall
testifying on July 22, that that number should have been
$5.3 million.
A There's a difference there. And that difference is
the $5.9 is the cash burn, the $3.5 is the change in the
cash balance when that -- so what that means is of the $5.3
that was generating cash operating loss, it was funded by
working capital resulting in a diminution of cash of $3.5
million.
Q So are you telling me that when you said in deposition
that that number should have been $5.3 million you were
wrong?
A Yes.
Q And then when you see in the next sentence it says
when averaged over that time period, the rate of cash and
working capital burn is around $281,000. Is that right?
A That's correct.
Q Okay. And that number is greater than the one that
you previously reported as $184. Correct?
A Correct.
Q $184,000. And then going to the end of this
paragraph, let's look at 18. In Paragraph 18, the brief
that was submitted by counsel states that taking away those
months of cash burn yields a more normal rate of reduction
of $150,000 per month, but in fact, that number was false.
Correct?
A Correct.
Q What is the correct number?
A $244,000.
Q I'd like to refer you now to Paragraph 23 of your
declaration where you state that based on current
assumptions you project that SCO will have between $1.4 and
$1.6 million in total cash on hand as of August 31, 2009.
Do you see that?
A I do.
Q Isn't it true that approximately $1 million of that
stated cash amount is restricted cash?
A Yes.

...
Q Right. Now you're a certified public account, Mr.
Nielsen, right?
A I am.
Q And prior to becoming the CFO of the SCO Group, you
acted first as the Controller of Mrs. Fields Cookies and
then as the CFO of Foreign Foods. Is that right?
A Correct.
Q And you've performed evaluations of businesses before,
have you not?
A Internally for those purposes.
Q And you consider yourself to be competent to perform
evaluation analysis of the business. Is that correct?
A Yes.
Q And isn't true that you've never in the entire time
that you've been either interim or actual CFO of the
Debtors, you've never performed evaluation analysis of the
businesses that are the subject of the Purchase and Sale
Agreement that's before the Court today. Is that right?
A That's correct.
Isn't it true that you've never requested either that
any employee perform an evaluation analysis of any of the
businesses owned by the Debtors. Is that right?
A Correct.
Q And finally, isn't it the case that as CFO you never
requested an outside entity perform evaluation of any of the
assets of the Debtors. Is that correct?
A That's correct for the same reason we didn't engage an
IB.
Q Do you have a sense of the value of the mobility
business of the Debtors?
A No.
Q Okay. I'd like to now ask you, Mr. Nielsen about some
documents that are in our materials. I'll start off by
asking you whether Mr. Steven Norris has received $100,000
from a SCO subsidiary in connection with any work that he
may have done for the Debtors or for the SCO subsidiary.
A Yes.
Q And did you authorize that payment?
A Yes.

[ Reply to This | # ]

OPA Eats More than 33% of the Mobility Sales Revenue... Already
Authored by: Anonymous on Monday, March 01 2010 @ 10:35 PM EST
Looking at filing 1071 in the bankruptcy, ignoring the
communications charges for emails, phone calls and the like,
the summary of costs for the “sale of non-core assets” as
OPA likes to reference the Darl purchase, is:

Mark Fisher - $8,455
Mike Hakim - $ 147
Vinod Bhat - $2,750

So based SOLELY on the reorganization planning tasks in
Exhibit A, pages 5 and 6, Ocean Park Advisors, alone, spent
$11,352 on just PREPARING the sale of the mobility business!

When you add in the prep/participate in company management
calls and meetings as well, we find another $2,755 line item
from Mark Fisher dealing at least in part of non-core assets
on page 7.

When you look at the legal prep starting on page 9, you find
non-core asset sales as part of a $1,662.50 line item as
well as a $332.50 line item, both billed by Mark Fisher.

I hesitate to make assumptions about what portion of the
additional line items is directly drawn to the sale of non
core assets but I think it not unreasonable to estimate the
total of the above, for the month of January alone, and
excluding any time attributable but not cited to this sale,
around $13,000 on the mobility business sale.


---
Clocks
"Ita erat quando hic adveni."

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November was a good month
Authored by: Anonymous on Monday, March 01 2010 @ 11:26 PM EST
They only lost $44,000 and their cashflow was actually positive (by $300,000 or
so). That's a very impressive month's work for SCO. Do we think Cahn has got
things under control there no so they aren't burning cash and losing lots of
money or is this just a blip?

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What the Loan Termination Date really means
Authored by: bugstomper on Monday, March 01 2010 @ 11:57 PM EST
The phrase "Loan Termination" is confusing and people here have raised questions about it. I think I see what the proposal is actually saying about it.
SECTION 2.06. Termination and Reduction of Commitment.

(a) The Commitment shall automatically terminate on the Loan Termination Date.
(b) Upon at least one (1) Business Day’s prior irrevocable written or fax notice to the Lender, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitment.

SECTION 2.07. Repayment of Loan.

(a) The Note shall require that, to the extent not previously paid, the principal of the Loan, all Basic Interest and all other amounts due under the Note (other than the payment of the Loan Fee), shall be due and payable on the Maturity Date, and that the Loan Fee shall be due and payable in full on the Loan Fee Maturity Date.

There are three dates listed.
  1. The Loan Termination Date is when SNCP has no further commitment to supply any more money that they have not yet loaned out. That commitment ends either when they have disbursed the full $2million or five days after closing if they haven't yet disbursed all of it. And they can reduce the $2million limit on one day's written notice.
  2. The Maturity Date is what they call the day by which the loan and everything else other than the "loan fee" must be repaid.
  3. The Loan Fee Maturity Date is a later date at which the loan fee is due.

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I think that Judge Khan does not expect...
Authored by: GriffMG on Tuesday, March 02 2010 @ 02:57 AM EST
Either motion to be accepted.

I just can't quite bring myself to believe that the Yarro loan could make sense
to anyone who is trying to protect the creditors interests in any way at all -
it just doesn't. I know that PJ isn't impressed with Al Petrofsky's timeliness
etc., and the content is a little florrid, but he has (as did Novell) nailed the
facts pretty well. This is not a 'loan' as you or I would know it.

As for the proposed sale to McB, that doesn't look any better - there has
already been a ruling that the IP is unsellable at the moment - but it's right
in there again.

So, what I have had to do is put myself in Kahn's shoes, and try and work this
out from his perspective. If I was in his position what would I do - if
presented with these two damaging and possibly bogus offers? Simple, give them
to the BK court to decide (perhaps I would even have a chat with the BK Judge at
the same time) and then they are out of my hands and I can't be sued by Yarro
and McB when they are knocked back.

I *think* Judge Kahn is just covering himself and getting them off his desk - he
can see they are rubbish - that's why he hasn't even investigated them and even
dropped the odd hint in with them.

I would go a little further, I think that he, Judge Khan, has really hoped to
get a settlement out of Novell and/or IBM - one which saved a little face and
would to any 'outsider' seem sensible from a simple cash perspective - but he
didn't reckon on how set they both are on seeing this through to a conclusion
and through as many appeals as it takes to get the answer they want.

Good luck JK!

---
Keep B-) ing

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As a potential victim of Sco activities can I sue Cahn
Authored by: Anonymous on Tuesday, March 02 2010 @ 06:55 AM EST
If irregularities are found to have occurred. That enable the trial instead of
Chapter 7.
And Sco somehow wins the Linux lottery.
As a Linux user I will become a victim of Sco's lawsuits.

Can I sue Cahn for his part in this mess.
Could everybody who uses Gnu/Linux sue Cahn?

If irregularities ,that were NOT corrected by the trustee, are discovered?
No MOR's that enable the suit to continue.
A foul sale, or loan to a SCO insider.

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SNCP again - What's Up With That?
Authored by: Anonymous on Tuesday, March 02 2010 @ 08:34 AM EST
IMHO, Novell should vigorously aim Judge Stewart's attention to the fact that
SCO is planning some sort of deception, either on a court or a jury, based on
confusing the identity of 'this' SNCP and the prior version of SNCP.

What is mystifying is that they are doing it brazenly and in plain sight.

Would SCO do that? SCO, who intentionally elected to confuse the public that
they were the Santa Cruz Operation SCO, just before they kicked off the
litigation business ? They seem to know something about this trick, yes.

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is this a "put up or shut up" maneuver?
Authored by: Anonymous on Tuesday, March 02 2010 @ 10:12 AM EST
I think I see a method to Petrofsky's hyperbolic madness.

By wording things the way he did, he has tried to put various SCO parties into a
position where they have to explain themselves (including catching up on MOR's).
If they don't, they risk Petrofsky's assertions being accepted as true.

Petrofsky can make assertions about SCO's behavior, with public record to back
him up. The SCO parties have to demonstrate that things are different now, not
just assert that they are.

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Petrofsky's Objection to SCO's Yarro "Loan" Motion - Update: November MORs
Authored by: Anonymous on Tuesday, March 02 2010 @ 01:25 PM EST
That isn't really the same as saying SCO wants to provide Yarro with a parting gift.

Of course it's not the same as *saying* it. If people actually *said* what their intent was, this case would have been over before it started. But it is largely the same as *doing* it

And when you overstate in a court of law, you greatly increase your odds of losing

And if that were true, this case also would have been over a long time ago. I vaguely remember SCO having, and being able to show to anyone (who wanted to sign an "NDO") "millions of lines of code" in Linux that *clearly* infringed on SCO's IP. Didn't MS Didio (or was it MOG?) assure us that, beyond a shadow of a doubt, that is was true? As I recall, such travesties really did seem to damage SCO much, if at all.

[ Reply to This | # ]

Where is IBM's opposition?
Authored by: turambar386 on Wednesday, March 03 2010 @ 12:26 PM EST
Seems strange that they didn't file one.

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