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

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

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

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

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

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

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

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

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

There is an odd sentence in the filing:

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

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

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

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

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

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


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