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SCO's 341 Creditors Meeting -- McBride, Acheson Answer the US Trustees' Questions - Audio
Wednesday, October 31 2007 @ 10:42 AM EDT

This is almost as good as being there, the audio ( MP3 and Ogg) from the October 18 creditors' meeting with SCO's Darl McBride as witness of record, and Jean Acheson by his side providing details he can't recall. I gather she's recently had a promotion to comptroller. But she still would not be an authorized representative for a 341 meeting, not being an executive or member of the board. So she is there merely to assist, under oath also, but because she's new in the job, she doesn't know all the answers herself. She says very early that she's still learning.

It's sad. And funny. And troubling.

Sad in that any bankruptcy is sad and embarrassing, and you can't help but feel for them, or at least I can't, as I listen to them having to be grilled about their filing. At least McBride shoulders his own load and doesn't make someone else show up to handle the hard bits.

But it is also funny in parts, like when the US Trustee, Joseph J. McMahon, Jr., is asking about the $60,000 SCO paid to both then-CFO Bert Young and then-Comptroller Michael Olson as contractor fees while they were still on salary, pretty much simultaneously with SCO filing for bankruptcy. As he struggles to find the exact words to phrase one of his questions, another attorney, I think SCO's Arthur Spector of Berger Singerman, who seems to have a pleasant sense of humor, translates his meaning as, "What's up?" Indeed. What's up with that?

The Trustee notes that the SEC filing says that Young didn't announce to the board he was resigning until September 25, with his last day in early October. Yet the contractor fee was paid September 14, and signed before he resigned. "The dynamic I find to be interesting," the US Trustee comments, and he'd like to have an answer within 15 days as to SCO's position on those contracts, whether they represent a debtor obligation going forward, and whether the company will assume or reject the contracts. That's one of the troubling parts. My question would be, if they are now on contractor contract, why couldn't Young and/or Olson come with Darl to the meeting, since they'd know more than Acheson, presumably?

But the best part is that you can see that the US Trustee is on the job, taking his role seriously, and is very aware that he has a debtor before him who is, as he puts it, "under a cloud" thanks to the devastating August 10th ruling in US District Court in Utah, regardless of whether SCO believes that cloud should be there. He's not adversarial, but he's persistent, and you can feel that if it were an adversarial situation, and you had been bad, you wouldn't want this quiet, but dogged, attorney asking the questions. How, he seems to be wanting to figure out, will SCO reorganize under Chapter 11 successfully? Doing what? With what assets? Where is the viable business? Outside of the litigation lottery, that is. I might add the questions, Why exactly do they persist? Who benefits? His puzzlement is understandable. But I do not think he will find the answers on the bankruptcy schedules. If the proposed auction goes through, that question -- can SCO reorganize successfully -- seems to loom larger somehow, since SCO wants to use a fair chunk of the money to continue the litigation, and that's exactly how SCO ended up in bankruptcy in the first place.

Here, again, is the minute sheet [PDF] from the meeting, so you can see who was in attendance. The bankruptcy analyst with the US Trustee, Michael Panocio, is there too and asks some questions also. McMahon is the Trial Attorney. There appear to have been others there, at least one lawyer for "a litigant", Novell I'm guessing, not listed on the minute sheet, because at one point Mr. McMahon asks about what will happen to SCO as a business if the August 10 ruling stands. SCO's attorneys leap forward, Jamie O'Neill first, I think, to point out that counsel for one of the litigants is in the room, and so he doesn't want Darl to answer on the record in the 341, for fear it will become part of the November 6 hearing arguments. It's ongoing litigation. They don't mind discussing it privately with the Trustee. Is there a viable business, the US Trustee, asks, with that cloud? He needs answers. There is an impasse, and the Trustee says he'll think it over, but "frankly," he says, "it's, it is the critical issue so far as the Debtors' having a viable chance to emerge from bankruptcy." Spector, I think, eventually admits that if it's all lose, lose, lose, obviously it's bad for SCO. I have formed a very good impression of Mr. Spector.

Now, if only they'd just put a period there and face reality, we could all move on to happier days.

You can follow along, not that it's easy, with the various schedules and financial statements they discuss if you get them from this page, Docket numbers 130-133.

What we learn:

  • SCO has hired two people to fill the shoes of the employees who left the Finance Department, one a temp and one just a straight hire. The temp will "probably" be hired permanently.
  • SCO is up-to-date with its various states' tax filings.
  • Kevin McBride is working now more as "legal support" handling the documents, and he started doing work for SCO in 2002, Darl testifies, but what the Trustee didn't ask is why, then, they also need Amici, which also handles documents.
  • Darl barely recalls who Christine Botosan is, thinks she's either a lawyer or an expert in either SCO v. Novell or SCO v. IBM. I begin to suspect I am the world's expert on SCO stuff.
  • SCO paid a PR firm, Coltrin Associates, a lot of money around the time of the bankruptcy, $50,000 on September 13, after they were also paid $15,000 just a few weeks prior. Darl says he didn't realize there were two payments. The firm is also on the professionals' list to be paid around $15,000 a month going forward, a rate already approved by the court.
  • There are now around 120 employees.
  • The trustee has read the August 10 ruling.

What the Trustee wants to know more about:

  • SCO stock purchase plans - whether it's a trust fund or exactly how it works.
  • Why SCO Group owes SCO Operations. He's interested in the intercompany interactions. Acheson says they fund back and forth. Long silence. Then he asks a question and she says she can find out. She doesn't know. She's just learning still. He asks if she's a temp. Obviously not, since she started with AT&T. But there are many questions she will get back to him on.
  • The names of employees and what they are due in fringe benefits broken out.
  • The Statement of Financial Affairs showing when payments were made in the time period just before SCO filed for bankruptcy, not when the checks cleared.
  • What the payment to cash on 9/13 (the day before the bankruptcy filing) was for that is on the SCO Exhibit 3b. Acheson doesn't know.
  • Whether Kevin McBride will be getting paid ongoing and for what. Darl mentions the "legal support" like document handling and that the money owed him on the creditors list is for "legal services". Darl says that the SEC filings have listed Kevin, but I don't see him listed by name in this 10K from 2003, although it does say "On February 26, 2003, we entered into an arrangement with Boies, Schiller & Flexner LLP and other firms to investigate and review our UNIX intellectual property rights." It mentions both the IBM and the Novell litigation. And it lists as an exhibit, "10.20 - Engagement Agreement dated February 26, 2003 among the Registrant, Boies Schiller & Flexner LLP, Angelo, Barry & Boldt, P.A. and Berger Singerman (incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed on December 9, 2003 (000-29911))." If you follow up on that lead, you learn that this was Kevin's firm back then, as you can see in this Exhibit 99-1 attached to the 12/5/03 8K. So it was disclosed, but not so easy to track down. If you just read the annual report, you wouldn't have a clue.

    Angelo, Barry & Boldt had stopped providing legal services to SCO by the following year, as you see in this 8K, which provides the new agreement. At that point, he was hired for legal services, not document handling, as far as I can see. But from then on, when he formed his own business, it's accurate that SCO lists him by name, as in this 10K from 2005. But this 10K for 2006 mentions that he was paid the final installment due him for legal work as of the end of SCO's fiscal year in October 2006. So after that, why are they still paying? Here's what it says: "As part of the Engagement Agreement entered into on October 31, 2004, the Company started paying directly to Kevin McBride reimbursable expenses associated with the SCO Litigation, which primarily included document management, outsourced technical and litigation assistance, and travel expenses. During the years ended October 31, 2006 and 2005, the Company incurred expenses of approximately $562,000 and $323,000, respectively, to reimburse the expenses to Kevin McBride." So document handling is an expense, paid to his brother on top of the legal fees? That is a lot of money for expenses. I can't make this out. Nor do I see document handling listed in the October 31, 2004 engagement letter. Maybe you can find it. I can't help but wonder if this document handling role is a workaround after the legal cap was put in place and the payments to the law firms ended.

  • The Coltrin compensation breakdown.
  • The compensation committee - how often it meets and where the minutes are kept. Dorsey & Whitney keeps all those corporate records for SCO.

  • The makeup of the board, who holds stock, who has rights to name members to the board, etc.
  • The bonus plan for employees and the payments on Schedule 3C, whether they are all payments made under the "40/40/20" bonus plan - All but Ryan Tibbitts, who was paid outside of that plan, Darl tells the Trustee. The SCO lawyer breaks in, and seems to have a different view about something, but the Trustee blocks. "Just out of curiosity, what prompts your question," he asks the SCO lawyer. The lawyer tries to make clear McBride is answering based on his knowledge, which I gather might not be correct.
  • The contracts with Young and Olson - when they were signed and what the compensation terms were. Young got his $60,000 draw on the very day SCO filed for Chapter 11 on September 14. The SEC filing indicated he announced he was leaving on September 25th, with his last day scheduled for early October. This is the whaddup part.
  • If there are any other bonus or retention plans besides the 40/40/20 plan, and Darl says it'd be in the Proxy, the acceleration of stock options on a change of control in a stock plan, a severance plan, and anything SCO may have implemented or plans to implement even if it thinks it's ordinary course
  • More clarity on the $2 million paid to nondebtor affiliate UK, a bit less to the German and other affiliates in the year -- what that would be for (salary, rent, travel, Acheson states) - he asks for a breakdown of cash flows of historical performance.
  • SCO's investments in joint ventures and partnerships (like SCO China). Darl admits that if SCO goes down, they will too.
  • The impact of the litigation: "I appreciate the Debtors disagree with Judge Kimball's ruling in the Utah litigation, but let's assume that it remains... Judge Kimball was correct," the Trustee asks. "What... what would be the impact on SCO's business?" That question, after a discussion with the lawyers as mentioned, is put on the back burner until the end of the meeting, as you'll see.
  • The independent contractor contracts on Schedule G - They're programmers SCO hired to help them with things like bug fixes and development and things like translation into Chinese.
  • A break out of revenue by groups - they file taxes as "SCO Group and subsidiaries" (SCO Operations is US) and the Trustee wonders how they could not have it broken down. Acheson says there is no way to separate it out.
  • Cattleback Holdings - on July 18 it was formed and a patent transferred to it on that same date. Acrylis had the patent and when SCO bought them years ago, it got the patent. It issued in 2003, but it wasn't until this year they decided it had some value. So it retained a broker to sell it. The broker suggested selling it under a different "brand" than SCO, to be able to market it better. The gestank of SCO, I gather.
  • Me Inc. "What is its business purpose?" the Trustee asks. To date, the mobility product line assets haven't yet been moved there, Darl explains, because not much money is forthcoming. It's a plan. So the assets and liabilities are booked under SCO Operations, which is kind of the same books as SCO Group, if I've understood what they said. Darl says that they'd want to place more emphasis on Me Inc. going forward, but Me Inc. is part of what they later asked the court to let SCO sell off or license or share or whatever to York or whomever. In SCO's motion to do that, it describes Me Inc. as "a non-debtor affiliate of the Debtors" and they propose to sell off the "Me Inc. Mobile intellectual property owned by Me, Inc."
  • The Bylaws. He would like to see the Bylaws. Who appoints officers? Was Olson one? Darl thinks so. So was there a board resolution? He doesn't know. The Trustee wants both documents "by Monday", assuming the latter exists. Are vice presidents officers? Darl says no.
  • What day the new CFO started. "He was there before Bert left, of course," Acheson helpfully interjects. The Trustee wants to see that contract. At that point, assuming Acheson is correct, SCO would have been paying for two CFOs and for one of them as a contractor too.
  • The Tibbitts raise. "The board asked for your input as to whether it was warranted?" the Trustee asks Darl. There follows a confidentiality discussion with the SCO lawyers. "Do you have an understanding as to the reasons why Mr. Tibbitts was given the salary and bonus?" the Trustee rephrases it. Darl says as his boss that he felt Tibbitts had been underpaid for some time. He planned to give him the raise on what they expected to be success in the courtroom in Utah, but when they lost instead, he decided to pay him the raise anyway. The board agreed it was warranted. It isn't mentioned, but the most recent 10K lists Tibbitts as an Officer.
  • The Trustee asks "has SCO turned a profit in the last five years?" Other than the Sun and Microsoft payments time period, no. It all went to lawyers, Darl explains, despite positive cash flow from the business of selling Unix. That business has "generated profits" the majority of the quarters in the last couple of years, he says. Profits? Or positive cash flow? He says profits. Over 50 million has already been spent in the legal fights. But SCO thinks the damage done to SCO is a lot more. Meaning, I guess, he's still hoping to strike it rich in the litigation and make it all worthwhile. And the mobility business is ready to take off, he claims. If you take away the legal and the mobililty investment, you would have seen revenues, he says, but then he admits, declining revenues. "If we don't get our day in court," Darl says, SCO will be in trouble. Which court? When? They had their day in court in Utah already, so I assume he means appeals court, but he doesn't say.
  • On SCO's 10Q for 7/31 this year, the Trustee wanted to know where the legal costs were located, and he is told they are in SCOsource, not in administrative. I seem to recall the SEC noticed that too some time back.

The Trustee also asks who are on the board of directors. Darl reads the following names: Dan Campbell, Darcy Mott, Darl McBride, Kent Millington, Omar Leeman, Duff Thompson, Ralph Yarro.

After mulling it over, the Trustee decides at the end to set up a teleconference to walk through some of the questions on Schedule 3b with SCO regarding the impact of the litigation, but he reserves all his rights to do so openly in the future in a 2004 meeting. You'll find Rule 2004 here. I had never heard of it, but it sounds sort of like a kind of mini-trial or examination of the debtor, brought by motion by any party in interest, on the particular subject of whether the debtor qualifies for bankruptcy protection from a financial perspective and whether there is a viable business going forward as planned and whether there is the "desirability of its continuance". As a first step, though, he wants to do the teleconference to get to understand what the ruling means to SCO. And with that, the meeting ended.

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