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The 341 Creditors Meeting: A Transcript
Saturday, November 10 2007 @ 02:51 AM EST

You asked for it, and here it is, a transcript of the audio [MP3; Ogg] of SCO's October 18th 341 Creditors meeting.

Do keep in mind that this is not an official transcript. It's a Groklaw transcript from a CD we obtained from the US Trustee's Office, so it's for general informational purposes only. Any errors are entirely ours. You can obtain a CD yourself, if you wish, from the US Trustee's Office. If you'd like a simple explanation of what a 341 meeting is, here you go.

This was a lot of work. Our thanks go to Groklaw's brooker and Randy for this huge contribution, which they've been working on for days and days and days. My job was to check for accuracy and try to figure out the voices. I've just spent three days doing just that. It's quite hard if you were not in the room and don't know all of the speakers. I did my best. Some of Groklaw's members are deaf, and a comment pointed out that without a transcript, they couldn't know what was on the CD. So here it is, and I hope everyone enjoys it.

Errors are most likely to be in my area, particularly in distinguishing when the US Trustee, Joseph McMahon, was speaking and if or when the Bankruptcy Analyst Michael Panacio is. I'm not positive Mr. Panacio spoke at all until the very end, but it seemed to my ears that both asked questions. I'm highlighting that as the biggest question mark as to accuracy.

I'm pretty sure the groupings are correct. By that I mean there were essentially three groups speaking, the US Trustee's Office (represented by McMahon and Panacio), the lawyers for SCO (Arthur Spector and Jamie O'Neill), and SCO (represented by Darl McBride and Jean Acheson). The last were easy to distinguish, as I'd know Darl's voice anywhere, and Ms. Acheson was the only female. The SCO lawyers were the next easiest, because their voices were very different. But the two attorneys from the Trustee's office were hard to figure out.

If by any chance the court wishes to use our transcript as a base, and then improve on it, please feel free to do so. And if anyone wishes to send me corrections, I'm happy to improve ours. We want to be as accurate as possible.

Speaking of accuracy, I thought there were some items not mentioned, like Bert Young having been involved in a prior bankruptcy and Michael Olson being the CEO of SCO Germany. You may notice others. Some of you might remember that he was terminated from Ikon, as recounted in the account about McBride in Wired years ago, "The Linux Killer". Because that litigation settled, there is no way to know what really happened, and no doubt he would argue it was unjust and was not "for cause". But one thing is very clear from this transcript: McBride is effective at dealing with lawyers. He answers, but he volunteers nothing that isn't asked, unless it's to be folksy. That is what your lawyer would tell you to do. Just answer the question asked. And you'll see his lawyers leap into the middle whenever he might go off the rails. It's fascinating to see what worries them.

Just one more thing I couldn't help noticing. I could be way off on this, but I got the impression from listening over and over and over to the audio that someone, I think Mr. McMahon, has a kind of habit of clearing his throat when he thinks an answer is significant. For example, at one point McBride says this:

After our August 10th ruling we came under severe pressure of people exiting the company, and a lot of people had opportunities that started to come up, and these two particular individuals had opportunities to leave.

Then near the end, Mr. McMahon asks how many employees there are and whether there was a change since the filing of the bankruptcy, and Mr. McBride says no big change. You hear that little cough.

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

The SCO Group Inc., et al
Case #07-11337
Transcript of the 341 Creditors Meeting, October 18, 2007

Joseph McMahon: Good morning. We're here for the scheduled meeting of creditors in the jointly administered cases The SCO Group Inc., et. al., Case # 07-11337, and the judge assigned to the case is Judge Gross of the Bankruptcy Court. My name is Joseph McMahon. I'm a trial attorney with the Office of the United States Trustee, and I'm the Trial Attorney assigned to these cases, and I will be leading the meeting this morning. With me from the U.S. Trustee's Office in the meeting room is Michael Panacio, who's the Bankruptcy Analyst working with me on the cases.

Jamie O'Neill, Debtors' counsel is here from the law firm of Pachulski, Stang, Ziehl, & Jones, and I will ask him to introduce his co-counsel that are present here today, and also the witness for the record.

Jamie O'Neill: Thank you, Joe. I am here with Rachel Werkheiser, also from my firm, and with our co-counsel, Arthur Spector, and from the company we have Darl McBride, who is the Chief Executive Officer, and Jean Acheson, who is the Comptroller.

(1:09)

McMahon: Can you give me the spelling Jean's name?

Jean Acheson: Jean is J-e-a-n, Acheson A-c-h-e-s-o-n.

(1:30)

McMahon: Mr. McBride, will you please raise your right hand, sir?

Darl McBride: Yes.

McMahon: Do you swear the testimony you will give today will be the truth and the whole truth under penalty of perjury?

McBride: Yes.

McMahon: Thank you. You can put your hand down, sir...

(1:41)

Arthur Spector: Would you want to swear in Jean Acheson too because she's the one, the Comptroller, with the schedules?

McMahon: Well,...I...I appreciate that. I guess the question is, is comptroller a director or officer position with SCO, because if it is not, then that person is, is not an authorized representative of the company.

Spector: Would you have any problem with questions link to financials if he turned to Jean, since probably she knows the answers?

McMahon: To the extent that the company's willing to consent to Ms. Acheson being sworn in and testifying on the record today for that purpose, I have no problem taking her testimony, but my expectation is that Mr. McBride will be the primary witness.

O'Neill: I think that's fine. Ms. Acheson as Comptroller of the company has the most detailed view of the information on payments and schedules and statements. They were prepared at Mr. McBride's direction and under his supervision, so he's knowledgeable as well, but she should be able to assist with information on the schedules and statements.

McMahon: I will direct my questions first to Mr. McBride, and to the extent that he can't answer questions, we'll look to Ms. Acheson for those responses.

O'Neill: Fine.

(3:00)

McMahon: Mr. McBride, what's your title with SCO?

McBride: Right. I'm Chief Executive Officer and President of The SCO Group.

McMahon: And how long have you held both of those titles?

McBride: I've held both of them since I joined the company in June of 2002, I think it was June 26th.

McMahon: Prior to becoming employed with SCO, where were you employed?

McBride: [audible sigh] I had a few different jobs. I, out of graduate school, went and worked at Texas Instruments in Dallas. Went to Utah, worked at Novell for eight years. After that, worked for a company back this way, Icon Office Solutions for a few years. Did a few technology startups and then got recruited to come and be CEO here. Most recently, before coming to S.C.O. I was the President of the Franklin Planner dot com, as vice-president, senior vice-president role at Franklin Covey.

[Long silence]

(4:40)

McMahon: You referenced tech startups as a group...

McBride: Yeah.

McMahon: Were you an officer or director with any of those startups?

McBride: Yes. There was a company called SBI Inc., that I was Chairman and Chief Executive of for a period of time, later moved in to just a shareholder role. In the Franklin Covey role, I was also an officer.

McMahon: At any point in your employment background were you ever terminated for cause?

McBride: No.

McMahon: Have any of the companies, before arriving at SCO, that you were a director or officer of, ever file for bankruptcy protection?

McBride: No.

(5:47)

[Long silence]

(5:58)

McMahon: I'm going to start with some specific questions regarding the schedules and statements which the Debtor has filed. If we can take a look at the schedules for Operations. Now, take a look at the cash line for Schedule B. It indicates there's about a two point six eight (2.68) million dollars in cash as of the petition date. Do you have an understanding as to what the current figure is?

McBride: Yes, we went through this this morning. Jean, maybe you could educate me as what that [inaudible]

McMahon: Ms. Acheson, if you would, just raise your right hand. Do you swear that the testimony you will give today will be the truth and the whole truth under penalty of perjury?

Acheson: : Yes, I do.

McMahon: You can put your hand down.

Acheson: Um...I'm sorry I don't have the exact number at this point.

McMahon: Do you know whether it's north of two million or less?

Acheson: I... I honestly don't know at the moment. I'd have to check that.

McMahon: Okay. Well, if I were to back up and ask you, as of last Friday, or the last date you saw a report on that figure.

Acheson: I usually look at the accounts in the individual. I'm sorry, I just haven't seen it, a complete total. We were in the point of reconciling our books when I left the company...or just, you know, to go on this trip.

McMahon: Okay.

Acheson: We've had several people leaving the company and it's...we're a little behind...

McMahon: I understand. Any idea of what the figure was as of the end of September?

Acheson: Um...at the moment, I don't, I'm sorry,

McMahon: OK.

O'Neill: Can you give me a call when you find that out later today?

Acheson: Yeah, I can just find it out. I can probably have it online. I just haven't...

McMahon: That's fine. You're the comptroller. How big is the company's accounting department?

Acheson: Well, it used to be...two...four, about seven people, and then we went down to three due to attrition, and we've gotten back in two people to help.

McMahon: Did...they're temporary hires?

Acheson: Uh, we...they were immediate hires. One is a temporary, and one we hired permanently. The temporary will probably become permanent.

(8:43)

McMahon: Who do you report to?

Acheson: I report to the CFO. [whispers:... is just escaping me at the moment. Sorry.]

McMahon: Taking a look at line B(16)(a)? There is reference to the SCO trade accounts receivable in the amount of three point six four million. Do you see that?

Acheson: Yes.

McMahon: Do you have an understanding as to what percentage of those are SCOSource? Are they receivables as opposed to...other...?

Acheson: Um. The receivables in that statement now are all receivables for the main core business for Unix, or for our mobility products. I do not believe there is any SCOSource open at this time on our aging.

McMahon: Okay. Do you have a view as to the collectability of that amount, as a general matter?

Acheson: Probably about ninety-five percent (95%). We have a very tight core of customers, which are mostly distributors and resellers.

McMahon: Okay. In terms of the aging, do you have any idea as to what percentage of that is...has been due for more than 90 days?

Acheson: There's approximately...I think, at the moment, there's approximately four hundred thousand that is over 90 days, and that is mainly due to either noncash offsets, like for withholding certificates which we're waiting on, or collections in from countries that it's harder to get cash through, such as India.

(10:49)

[long pause]

(10:57)

McMahon: I noted that your 10Q for the period ending July 31st indicating about an 87 thousand dollar allowance for doubtful accounts receivable, so I gather that your testimony today is that that, that figure is...would be about...about accurate?

Acheson: It would be accurate, or it might be even a little high at this moment since it's a carry forward. Our revenue has dipped a little bit. It would be reevaluated again at the end of fourth quarter, which is October 31st.

McMahon: Okay. Now, the intercompany receivables line, if we could take a look at that exhibit. The exhibit indicates that Group owes Operations one point seven five (1.75) million, roughly. Could you explain the nature, the basis of that obligation?

Acheson: Basically, it's...I believe the investments. I'm just kind of learning some of this myself -- the investments through, and the funding from, all of the intercompany accounts. We fund back and forth, and then the entire intercompany line, between the receivables and the payables zeroes out on those set of books.

McMahon: Okay. So...

(12:40)

[long silence]

(12:52)

McMahon: SCO Operations, do I understand that to be the Operating Debtor? Would that be...?

Acheson: Yes.

McMahon: OK.

Acheson: Most everything goes through SCO Operations and then rolls up into SCO Group.

McMahon: Given that, the Group is the holding company, I gather -- I'm just trying to get a sense of what's wrapped into that one point seven five million dollar figure. Why? Why would SCO Group owe Operations that amount?

Acheson: I can find that out for you.

McMahon: You don't know off hand?

Acheson: No, I don't. These are transactions that took place prior...to my taking this position, and I'm still learning a lot of this.

McMahon: When did you become a comptroller, did you say, please?

Acheson: Within the past month.

McMahon: Okay. Are you affiliated with a temporary agency, or...

Acheson: No. I did work for the company before, but as the Director of Revenue.

McMahon: Okay.

(14:05)

McBride: She's been with the company for...12...?

Acheson: [laughs] I started with AT&T, so...

McMahon: OK.

McBride: A lot of years.

Acheson: I followed the product line.

(14:20)

McMahon: If we take a look at Schedule B that lists your priority claims. Now, all the tax obligations are listed as having an unknown amount.

Acheson: These are mainly sales tax.

McMahon: I guess my question is, what period or periods do these various taxes cover? We're just talking about 2007?

Acheson: It depends on the particular state. We're current in all of our filings with the states...

McMahon: OK.

Acheson: ... so it's only the month or a couple of months that may be due since their last filing rotation.

McMahon: So to the extent that a state would have a quarterly...

Acheson: Right. Or a six month or whatever obligation.

(15:20)

McMahon: The balance of that amount would be due and owing?

Acheson: Correct.

McMahon: Just to give me an idea on an annual basis, do you have any idea what SCO pays out in, first, in terms of state income tax, and then in terms of sales tax?

Acheson: Uh, state income tax I do not know. I do know that we have an accrual currently for state taxes for about eighteen thousand ($18,000). Once again, we sell through distribution, so our obligation is usually quite low. I can find the income taxes for you.

(16:09)

McMahon: With respect to the next exhibit to it...which it identifies a... a certain, I guess a certain employee stock purchase plan, and my question there is... I don't know if counsel wants to...are those trust funds? Claims for trust fund amounts?

O'Neill: Which are you talking about?

McMahon: The Employee Stock Purchase Plan amount.

O'Neill: I don't know whether...I don't know whether we're in a position to really respond to that. I don't know that we've examined it. This is amounts voluntarily withheld?

Acheson: Right. It's a...It's just a stock purchase plan. We hold the funds and then at the end of every six month period in the plan rotation, we purchase stock for the employees at a 15% discount.

McBride: I don't think it's subject to a trust, is it?

Acheson: No, I don't think so. I think we just hold it.

McBride: We just hold it...we hold it, and then we purchase it.

Acheson: Yeah.

McMahon: The plan defines the rest of the obligations?

Acheson: Yes.

(17:27)

McBride: Yes, there is a plan that sees that the cash stays there until you purchase the stock.

(17:37)

McMahon: I'd like to make a request to see just a copy of the purchase plan.

Acheson: Okay. Sure.

Spector: Is that something that's an exhibit to your filings with the SEC?

McBride: It would be with the Proxy Statement.

McMahon: Okay. I can take a look at that, grab it.

McBride: Okay.

(17:55)

McMahon: The...The other question I have, this is directed to counsel is, just for noticing purposes... I query whether it, it would be appropriate to list employees who had these various listed claims in this category, on an individual basis, with zero amount? Just for notice purposes? In other words...

Spector: Give them notice...

McMahon: Exactly. The Debtors, that they don't owe them anything, because in this circumstance, I don't think they can...you know, the Debtors made that blanket statement, but I wonder whether the people whose pre-petition claims were part of the Debtors' position paid, would be getting a notice and a claims bar date.

O'Neill?: Well, they would, because I believe they're on our matrix, and I can confirm that. I think what you are also thinking about is whether they should be listed as part of a schedule with a zero amount owed, so that if they dispute that, they could file some kind of a claim, and we can talk about whether it's appropriate to make that kind of amendment.

McMahon: Fine. If I could just get your response to that, say, within...15 days?

O'Neill: That's fine.

(19:17)

McMahon: Now, we'll take a look at Schedule F. This is just a footnote on the last page, page 3 of 3 of the schedule. It references fringe benefits that are due as of the filing date.

(19:40)

Acheson: Mm Hmm (affirmative response)

McMahon: Any idea as to what the amount of those fringe benefits were?

(19:57)

Acheson: I think it was rolled into here just as, it was a group number. I'm going to have to look that up here for that... I just can't remember exactly how they put it in here. Yeah, fringe...on the first page.

McMahon: Yes?

Acheson: There's a...there's, under Name, Fringe Benefits...

McMahon: Okay.

(20:22)

Acheson: ...and it's basically...

McMahon: That two hundred and seventy three thousand?

Acheson: Yes. What they do is they accrue fringe, based on a percentage of salary.

McMahon: So, I...that...that amount is all inclusive of the various operations that are listed?

Acheson: Correct. Correct.

McMahon: I guess my next question is why that's not broken out for the purposes of the schedule?

Acheson: I think it's just the...the way the accounting was done on it. As I said, we accrue on a percentage of salary, and then as the invoicing comes in we just negate against it, and we just didn't have a specific break-out on it at the point in time that we were doing this. I can work on getting one though.

McMahon: Point for counsel, same question, as to notice now, whether the letters can be sent to fringe benefits at whatever address... I guess my concern is that the individual companies...

O'Neill: Well, we can discuss that also, and also discuss how the number was generated, because it could be that the...it sounds like the number was generated for accrual purposes to get a number, and then as actuals come in...

Acheson: Right.

O'Neill: ...they're booked. And so this is probably some kind of an accrual estimate, rather than an actual liability.

McMahon: Understood. The Debtors can inquire as to what the actual amount is. That's not so much my concern in asking questions as making sure that the individual entities are getting a ...

O'Neill: Notice.

McMahon: ...a claims notice.

O'Neill: Okay.

Spector: Here's two other thoughts. Number one is, if these are employee fringe benefits why aren't they on schedule E, and that's something they will probably have to ask Mesirow because Mesirow helped do the schedules with Ms. Acheson, that, it would seem to me fringe benefits are something that should have been on E, not on F, but I'll check into that.

McMahon: Okay.

(22:20)

Spector: And the second thing is, was...it might even be that these benefits were already paid as part of the Court's Order allowing the payment of the fringe benefits and the like in the First Day orders.

McMahon: That was going to be another question. But good point. It's well taken, and just for the record, that was Mr. Spector speaking, in the event that this meeting is transcribed. So...

Spector: We'll look into that, because if those questions aren't answerable. We are all for checking into them.

(22:52)

O'Neill: So we have three questions -- this is Jaimie O'Neill talking. On accounting on a fringe benefit item, we're going to provide some further details, consider notice requirement, evaluate whether they should be Schedule E or Schedule F and then also, I guess we could footnote whether they were in fact, or a portion of that, was paid in connection with orders of the court on the First Day.

(23:18)

McMahon: Those are my questions for the schedules with respect to Operations. We'll turn to the Statement of Financial Affairs for Operations.

(23:39)

(Pause)

(23:54)

McMahon: The attachments, Exhibit 3B. Did...I guess, just in terms of how the Debtors' accounting system works, I have a question. Would they be able to run a payment list that showed the date that the checks were issued as opposed to cleared?

Acheson: Yes. Actually, it would be easier than this was.

McMahon: If it were done that way?

Acheson: Yeah.

McMahon: OK. So...

(24:46)

(pause)

(24:52)

Acheson: For what period of time, 90 days also? I think it was?

McMahon: That...where are they at? That's my question. I don't know, necessarily, whether the date the check...the day the check was drawn would be dispositive.

O'Neill: A clear date, usually, for a preference I think.

McMahon: Yeah. That's...I...I just want to get an understanding as to what records would be available in that regard. The question...another question I have about this exhibit is Kevin McBride is listed as one of the people who, can you explain. Does he have a relationship?

McBride: Yes, I do.

McMahon: He's your brother? What is his employment?

McBride: He is an outside attorney working on the case. It started off as an attorney, and then he rolled into more of a...a legal support that does basically the technology, I mean, sorry, the document management systems, supports on all the litigation.

McMahon: How long has he been doing work for SCO?

McBride: Since 2002.

McMahon: Is he employed with the firm, or is he a private practitioner, solo practitioner?

McBride: He's a solo practitioner. He has a small company that he runs there and does all the stock and management.

McMahon: What's the name of that company?

McBride: I believe he goes under McBride Law.

McMahon: Okay.

McBride: And he is listed on all of our SEC filings, has been since probably 2003.

McMahon: And when he's paid in connection with the payments to creditors...is he just being paid for legal services? Is that ...?

McBride: Yes.

McMahon: Okay.

(27:02)

McMahon: Now, if we take a look at Schedule 3C if you could...

McMahon: Actually, I'm sorry, if we could go back to 3B, I just have some questions regarding some specific entities.

(27:21)

McMahon: First the...the payment to cash for thirteen weeks on ...on 9/13. What...Can you explain that transaction for me?

Acheson: Not...at the moment, I can't. I have to look into that.

O'Neill: We discussed this briefly at the IBI as well.

McBride: We're all over this.

O'Neill: We agreed we'd provide information regarding that to your office.

(27:53)

(27:56)

McMahon: Christine Botosan, any idea who she is? Mr. McBride? That should be Schedule C.

McBride: Let's see. I believe she is on the expert...She's part of the legal...the litigation fees that go out. I'm not quite sure...I think she's an expert witness.

Panacio: With respect to the Novell

(28:30)

McBride: Mm hm (affirmative sound) At Novell, slash, IBM, I'm not sure which one...I think it's one of those two. She's either an expert or an attorney in support of the litigation is my recollection.

McMahon: Thank you. Same question as to Coltrin and Associates?

McBride: Coltrin and Associates is our PR firm.

(29:08)

McMahon: Do you know what the terms of their retention are? Are they paid an hourly, monthly, flat-fee basis?

McBride: They are paid on a retention basis and...I can't remember exactly the terms. I recall it's...it's X amount per month. I want to say...

(29:37)

O'Neill: Just for your purposes, and this is Jamie O'Neill again. We recently filed our Ordinary Course Professionals motion and listed them as one of the professionals with a expected monthly cap of fifteen thousand per month for their services, based on, I believe, prior expense. And we could provide some, a little more detail for you in terms of what...how...what the nature of the compensation is.

McMahon: Do you have an understanding as to why...It looks like they were paid fifty thousand dollars on September 13, 2007, after being paid 15 grand three weeks earlier?

McBride: I know that when...I know that when the Novell litigation came out the way it did on the August tenth ruling, there was, originally there was a plan to go to market with our mobility products, and as we got into September it was basically expected that there was going to be huge amounts of PR load once we made our bankruptcy filing, and so the idea was that the retention would...it would be more hours packed into a compressed period of time to cover all of the PR needs that were going to go on.

(31:07)

McMahon: OK. Do you know if those two payments that are listed on this exhibit are current services needs, in other words payments for services rendered within two months of the bankruptcy filing? Any idea?

McBride: My understanding was that...I didn't know that there were two payments...my understanding was that there was a compression of the payments we would make, so we pulled their services in from the end of October what we'd normally pay to cover the PR needs we were going to have during this period of time. I don't remember exactly the dates or how that played out, per se; but, I'm not sure where we stand on them right now. I know we have, I think Jamie just mentioned on a go-forward basis.

McMahon: Gary Pisano...

McBride: Ah...expert slash legal professional in the IBM slash Novell litigation.

McBride: GRE Mountain Heights?

McBride: ... Mountain Heights...

Acheson: I believe...I believe that's the landlord for our New Jersey facility. I will verify that.

Mcbride: That's right, because that's the mountain.

Acheson: Uh huh.

(32:30)

(low volume comments and paper shuffling)

(33:08)

McMahon: I'd like to take a look at ... Before turning to the schedule, I'm sorry...to 3C issues, payments to insiders. Was it your company's intention to employ your brother, going forward, as an attorney?

McBride: When I...I believe the intention is to continue with the services he's providing on the litigation support side which is the document management systems, so...I think whether it's as an attorney, or as doc management, I'm not sure how that might go. He is an attorney, but I'm not sure. I know that they have strong needs for, you know, the millions of documents that are in the system that he has, that he manages, so I would expect that will be a go-forward case.

McMahon: OK. Exhibit 3C, payments to insiders prior to the bankruptcy case. A couple of questions. First, is there a reason why the schedule was prepared with kind of like aggregate amounts listed as opposed to specific payments and the dates upon which those checks were drawn?

Acheson: This is the way Mesirow understood it needed to be prepared.

McMahon: OK. That may be...

O'Neill: Would it be helpful to list those out?

Panacio: I think it would be.

Acheson: Okay. I'll give you details.

Panacio: Because from this you can't get a sense of timing ...

O'Neill: OK.

McMahon: You know, to the extent that someone would want to file an action challenging, saying what it was they were going after. Now, to back out and get a big picture here, Mr. McBride, the Debtors' Board of Directors as of the petition date...

McBride: Yes.

McMahon: We will go to Group's Statement of Financial Affairs, number twenty one. If we could take a look at the Debtors' response to that. Could you confirm for me that, who the Debtors were...who are the members of the Debtors Board of Directors as of the petition date?

McBride: Sure. As of the petition date, it would be...well, I can just read them off...so, Dan Campbell, Darcy Mott, Darl McBride, Kent Millington, Omar Leeman, Duff Thompson, and Ralph Yarro.

McMahon: Moving forward from the petition date to today, have there been any changes in the composition?

McBride: No, sir.

McMahon: If we can take a look at that schedule of...there are a couple, one or two shareholders listed as having more than a five percent (5%)...

McBride: Right.

McMahon: ...holdings. And then for the remainder of them there's a N/A listed?

McBride: Right.

(37:22)

McMahon: I just want to get this clarified for the record. Does that N/A mean that none of those persons that are listed hold five percent of the company's equity? Is that correct?

McBride: Yes. Yes. That's what it's saying.

(37:39)

McMahon: Now, as of the petition date, did SCO Group ... had...the Board of Directors have a compensation committee?

McBride: Yes.

Panacio: Who's on it?

McBride: The compensation committee would be ... consisted of Kent Millington, Omar Leeman, and Duff Thompson, at the point we filed. It's been that way for a while.

(38:28)

McMahon: Now...does Mr. Yarro have the right to designate a certain number of directors? Do you know?

McBride: I don't know for certain, but I believe he has two. I know that in the previous incarnation of where the stock came from, I believe that's what the relationship was. When they moved the stock from the Canopy Group to Ralph personally, I don't know if that continued on or not. It may not have.

McMahon: With respect to the two, is it himself and another person?

McBride: Yes.

[Unidentified speaker]: In your belief who was that other person?

McBride: The other person historically went back to the original ownership group with the Canopy Group. It would have been Darcy Mott.

(39:23)

O'Neill: Shall we check the Bylaws, or whatever, to confirm all of that, or...?

McBride: It's probably worth following up on, I don't know that that's...I don't think it does survive, actually, because he's not part of the entity, or, he just owns stock at this point, so I...I think that's how it started, but I don't think that's... I think right now they're just independent directors, I assume.

(39:45)

McMahon: OK. Going back to ...

McBride: ...minus the stock ownership, so right now it's Yarro that holds the, so the other guy would be Darcy, would be independent.

(40:05)

McMahon: Do you have an understanding as to how often the compensation committee of the Board meets?

McBride: Hmm. It's, it's not a regularly scheduled thing, per se, I mean it's on a quarterly basis, or I... guess they meet every other month. There is...there are meetings that happen pretty regularly. I'd say they meet once or twice a quarter.

McMahon: Are minutes kept of those meetings? Do you know?

McBride: I believe so.

McMahon: And where are those minutes stored?

McBride: They would be held by our corporate counsel who is actually outside counsel with Dorsey & Whitney; his name is Noland Taylor.

McMahon: And is he at the Salt Lake office?

McBride: Yes.

McMahon: And is that the case for the Board of Directors, I mean the minutes, generally?

McBride: Yes...Yes. And then he consolidates those to back up to through our filings and, well they don't all get filed, but he basically is responsible for working with our team here on the filings and keep track of all those minutes.

(41:17)

McMahon: OK. The Board of Directors sets officers' salaries, correct?

McBride: Yes.

McMahon: And did so during the year prior to the bankruptcy filings, is that correct?

McBride: Yes.

(41:28)

McMahon: OK. So, if we take a look at Exhibit 3C, it lists payments to...to insiders, the bonus column.

McBride: Right.

McMahon: Are you familiar with the terms on which bonuses are paid to officers?

McBride: Yes.

McMahon: OK. The payments that are made in that column, the bonus column?

McBride: Yes.

McMahon: Right here in the exhibit. Do you understand the, I guess, the basis for the payments or the triggering events, the reasons why the payments were made?

(42:11)

McBride: Yes.

McMahon: Can you explain that to me?

(42:43)

McBride: The...the general bonus plan we're on is what we call a 40/40/20 plan.

McMahon: OK.

McBride: And forty percent is triggered by revenue attainment, forty percent by net income attainment, and twenty percent by MBO attainment, Management by Objective, so basically sort of the qualitative set of objectives. And so what happens is at the beginning of each fiscal year we set targets and then we measure them quarterly and depending on the attainment of those targets, you'll get a bonus or not, depending where it comes in, so the...there's the revenue threshold, and then it goes to the net income, and then to the MBOs.

(43:18)

McMahon: So, is it your testimony then that ALL the payments under the bonus column in that Exhibit 3C are the product of your forty-forty-twenty plan?

McBride: As I'm looking at this right now, I can see, I can see one exception that I'm familiar with, in the case of Mr. Tibbitts...he was paid a bonus that was outside of that plan. I think that's the only one I can target on here right now.

(43:56)

McMahon: And, to be clear...

O'Neill: May I just ask one question? You're not on the compensation committee though? Or are you on the compensation committee?

McBride: No, I'm not on the committee.

O'Neill: Okay. So, if you don't know the answer, if you don't know all the answers to these questions, we can find out.

McMahon: There's two separate things going on here. I'm asking...I'm asking the witness questions based upon his knowledge. Okay? Now whether he believes that he has the personal knowledge to answer a question he needs to answer whether or not the witness' testimony was in fact accurate, I guess would be a different question, but we're here to get the witness's testimony. If Mr. McBride thinks he can answer the question that's fine. If Debtors' counsel hears the testimony and disagrees with it or has a different view, I'd be glad to hear you after I ask the question, but just out of curiosity, what prompts your response?

O'Neill: Because I think Mr. McBride is trying to be helpful and to respond to your questions. And they are obviously directed in a particular area of inquiry. And this testimony is being given to provide information based on HIS knowledge...and I...and so, and he can answer that question, and he's trying to be helpful, so I just want to make it clear that it's based on HIS knowledge, and...you know, I just didn't want to see it at some other time saying, the Debtors' testimony is it's on the forty-forty-twenty and therefore...

McMahon: Listen, I don't think that there's any misapprehension here amongst lawyers that the witness can only testify to what he knows about. If he doesn't know, or he can't understand the question, I'm sure Mr. McBride will tell me that. C'est la vie.

(45:50)

McMahon: And he also runs the company.

O'Neill: No, that's very true. These are areas of inquiry and parties may be interested in them so the witness can certainly testify based on his knowledge.

McMahon: The payments to...and just to circle back to the point you made about Mr. Tibbitts. Is that the recent bonus that was referenced in the...there was an SEC 8K filed within the last month?

McBride: That was it, exactly what it was. But, I mean, whatever's in that SEC filing would be the delta spread between this forty-forty-twenty plan and what this number here is.

McMahon: Okay. Now, for Mr. Olson and Mr. Young...

McBride: Yes.

McMahon: There were, were sixty-thousand dollars apiece paid for independent contractors fees that are referenced on that Schedule?

McBride: Correct.

McMahon: Right...and if I were to go back to...I think the...the document list and payments to creditors, those checks were drawn on 9/14, the petition date?

McBride: Correct.

(47:04)

McMahon: What...what services do the, were those or are those individuals providing as independent contractors?

McBride: Sure. I'd be glad to take that on. After our August 10th ruling we came under severe pressure of people exiting the company, and a lot of people had opportunities that started to come up, and these two particular individuals had opportunities to leave. And you know, losing your CFO and Comptroller simultaneously when you're getting ready to file bankruptcy isn't exactly the best news for a CEO when you wake up in the morning. So we tried to look at what our options were, you know, being an SEC reporting company, having requirements to have a CFO in place, a 10K that's coming up within the next few months. There were just a number of things crashing down on us at once.

(48:05)

McBride: We had, we looked at a couple of options. One was to sort of outsource this whole thing to an agency. And we looked at the price tag that went with that, and it was extremely high. I can't remember the numbers right now, but it was in the hundreds of thousands of dollars over the next few months. We then came up with a second plan which was to, basically, contract with these two individuals to insure that we get through our year-end close, and then to go to a third person to come in and...and become the CFO immediately, at a much reduced price than what this outsourced firm was going to charge. So from a [sigh]...a standpoint of how we moved forward against, you know, the issues we had with this, we believed this to be the best option. So that, I guess that was a long-winded answer to get to the simple question you've asked, which is what service they're providing. It is to allow us to finish this year off, get through the end of the year, get our 10K filed in a timely fashion, and to go through our year-end audits, all of those things are big deals for us as a public company.

(49:34)

McMahon: The independent contractor agreements, are they in writing?

McBride: I'm sure they are.

McMahon: OK.

McBride: Yes. Yes.

McMahon: Were they approved by the Board of Directors, do you know?

McBride: Yes they were. The Board...this...I am representing to you what the Board approved, and again, this is to Jamie's point, fair, to go back and you know nit-pick a little bit what I said, I believe I tried to give you the best representation of what happened there, but that's just my understanding of it...

(50:06)

McMahon: Do you know when the contracts were signed up?

McBride: I know they were approved somewhere in that early part of September, prior to the 14th. I don't know exactly the...it would have been that week, I suspect.

McMahon: And what did the compensation terms provide to these individuals? Is it a hourly, flat monthly fee?

McBride: I believe we calculated out from an hourly fee that ran through the end of the year, and...but I'm not certain on that one. I think that was...

McMahon: OK.

McBride: I think it was an hourly fee, calculated over X number of hours that added up to the amounts...

(51:02)

McMahon: Well, the company filed for bankruptcy protection on September 14th, correct?

McBride: Yes, that's correct.

McMahon: And Mr., both Mr., well let's just talk about Mr. Young. He got his first payment draw of sixty thousand dollars on that date, correct?

McBride: I don't know for sure, but that would not surprise me. That sounds right? OK.

(51:29)

McMahon: He...the 8K that the company filed ...

McBride: Yes.

McMahon: ... indicated that on September *25th* he informed the Board that he would be resigning, effective as of October 9th. I guess my question is...well, first, what is the, how do you separate the services that he's providing as independent contractor from the regular salary that he's receiving as an employee up until the point of his termination?

(52:33)

McBride: The compensation committee that basically agreed on this have the details of... I'm trying to give you the recollection I have, which is to the year-end. The actual Board call, or the Comp committee call where they approved this, I was actually on a plane and I was not privy to the exact discussion of the details you're asking for, so I can't be totally specific, but it's generally my understanding that it goes through the end of the year.

(53:08)

O'Neill: Maybe what we could do is provide that information to you after we find out some more.

McMahon: But I... but the dynamic I find to be interesting as well though. Did you...did the compensation committee ask for your input on whether these independent contractor agreements with these two individuals were necessary or appropriate?

(53:35)

McBride: The...the review on the financial side of this... again, as I recall that was not a committee call that I was on when they made those decisions.

McMahon: OK.

McBride: I was aware that these discussions were going on, because I was shocked at the amount that the other, you know, independent consultant thing was going to cost us. So I was aware that it was going on, but again, down to the detail level of how they set the amounts and the agreements, per se, I wasn't involved directly in setting those.

(54:17)

McMahon: There's a couple of things there. First, the answer to my question is, No, they didn't, they didn't ask. Is that correct?

McBride: Right.

McMahon: Right. Second, you said you were shocked at the amount that they were paying the other independent contractor.

(54:31)

McBride: That, that we WOULD have had to pay...

McMahon: Oh. The...had you not done that?

(54:36)

McBride: ...had we NOT done this...

McMahon: OK.

McBride: I mean the order of magnitude of these two sixty-thousand payments, plus what we ended up paying the CFO, are much lower than what the alternative was.

McMahon: Okay, but you can't tell me, sitting here, whether the sixty-thou...what that sixty-thousand dollars covers. Is it the month of September? Is it all through the end of that...through the end of the reporting period? Do you have an understanding Ms. Acheson?

Acheson: I don't have the exact, but I do know that in the case of Mike Olson, his...in our discussions I know that he's going to aid us in preparing all the way through the 10K, which is in January...so...

McMahon: My question is, as company comptroller, obviously you're involved in making projections and stuff like that. Any ideas as to what this is costing the company?

(55:27)

Acheson: I believe it's maybe around ten thousand a month. I mean, we've already paid it from a cash flow perspective, so I believe it's, you know, for the...as I said, the next several months, I'll check exactly. I have not projected any further payments.

Spector: They've already stated that they believe it's in writing...

McBride: I'm pretty sure it's ...

Spector: That might be the best, best evidence rule.

(55:53)

McMahon: Okay, we'll do that, but...

Spector: Well, that was our perspective...[inaudible]

McMahon: Do...do the...while we have counsel commenting on that, do the Debtors have a view as to whether they'll be seeking approval of those contracts?

Spector: Well, those con... first, we're going to inquire on dates and the details. I haven't seen the contracts, but the contract may be pre-petition contracts. The question then is, are they executory contracts and if they're executory contracts, maybe they should be on Schedule G. I'm catching on to this now myself. So, if the answers to those questions is, Oh these are pre-petition contracts, and it's still, are these outstanding by the Debtor, then they would be executory, do we need to amend to include those executory contracts? On the other hand, I just picked up what you just picked up when Ms. Acheson said they were already paid. If they were prepaid for that period of time, they may NOT be an executory contract. It may be that there's nothing owing by the Debtor at all. And, even if, even if they didn't pay, if the only obligation of the Debtor is to pay cash, the question whether that's an executory contract also. But all those questions are legal questions for, once I have the facts.

McMahon: Okay. I'd just like to get an answer to whatever your position is within a fifteen day...

O'Neill: What is the question that you are asking?

Spector: What's up with this? [laughter in the room]

McMahon: I couldn't have said it better than the way counsel just put it...

O'Neill: Okay, I didn't know what...

McMahon: Just what your position is with respect to whether, whether the contracts are executory and whether court approval of those contracts is necessary. All right? Those two questions.

(57:43)

O'Neill: Court approval of a pre-petition ...

McMahon: I'm sorry, whether ... I'm sorry. There's two seperate lines of inquiry here, I guess. First the, the question is whether or not the contract is in fact executory, whether that would be any continuing obligations imposed on the Debtor. I'd like to know whether or not, after I've been provided with a copy of the contract, whether the Debtor believes the contract is executory.

O'Neill: Okay.

(58:16)

McMahon: If it is, then I guess the question is, the second question I would have is whether they intend to assume the contracts.

(58:33)

Spector: We're arguing on the level of an academic, is what we are, because we don't have the facts. The next question is, even if it's executory, a Debtor doesn't have to assume or reject.

O'Neill: Yeah, we don't. Let's just find out what the facts are first. I mean obviously executory contracts don't have to be assumed for quite some time, so ... or whether they even CAN be.

McMahon: I understand that...

Spector: So the answer is, "What's up" is a better question. Let's just get the facts, and the questions will arise as we have the facts...

McMahon: That's fine.

(59:13)

McMahon: The subsidiary funding that's listed there on that schedule...

McBride: Yes.

McMahon: Are there any current or former employees of the Debtors that are deriving, or did derive, any income from a connection or relationship with one of the Debtors' non-debtor affiliates, is my question. In other words, you are an employee of The SCO Group. There are other, you know, hundreds of them ...

McBride: And the answer would be no, not that I'm aware of.

(60:19)

McMahon: OK.... Take a look at Exhibit 3C. Did you know which employees listed there have employment contracts?

(60:41)

McBride: The answer to that would be zero.

McMahon: None?

McBride: Yes.

McMahon: Aside from the...the forty-forty-twenty program that you described to me, do the Debtors have any other bonus or retention plans in place?

(61:08)

McMahon: Could we just go off the record for a second? ... We're back on the record, I'm sorry. I just had to go off to answer an inquiry from my office. I'm sorry, I asked a question as to whether, aside from the forty-forty-twenty plan, there are any bonus plans or programs presently in place, to your knowledge?

(61:29)

McBride: Anything that we have would be in our latest proxy. There...there is a plan, not just for executives but for employees, that relates to the stock owner... the stock option plan, whereby if ... I believe under a change of control, there's acceleration of some of the stock options. The details of that plan would be in the proxy. I can't think of anything else offhand. Can you think of anything?

Acheson: No, just we have commissioned sales representatives.

McBride: Yeah, commission sales plans.

Acheson: There are none outside of that.

McBride: Those get reviewed quarterly [whispered conversation]

Spector: If there are any others, we'll get back to you. These people may not be the only ones that were on the list...

(62:30)

McBride: Yes. If there is a plan, it will be in the Proxy.

Spector: Yes, that's public.

McBride: If it was an approved bonus plan, it would be in the Proxy. Outside of what is in the Proxy, what I can state is, there isn't anything.

McMahon: What I would appreciate knowing, going forward, is if there was an incentive or a retention plan that was implemented by the Debtors, even if the Debtors believe that it was "ordinary course" -- within the ordinary course...

Spector: We'll get you that.

McMahon: I'd just like to have some notice of its...

Spector: It's part of, it's part of the motion that's pending ...

McBride: We have a motion pending where we're looking for that, but that...

Spector: But we'll look into that, and if there's something in writing, we'll give it to you.

[Crosstalk]

McBride: I think we started with...

Acheson: There's a severance plan.

McBride: That's right. The severance plan is what it was. The other one.. I think we came back and said we're just going with the 40/40/20 plan.

Spector: I think the severance is what they're talking about.

McMahon: So I guess the request is, going forward is retention, incentive plans regardless of whether the Debtors intend to seek court approval. I'd like the office to receive notice so we can evaluate that issue. And that's acceptable to the Debtors?

Spector: Sure.

O'Neill: I'm not sure.. can you just tell me, I want to be sure that I understand the question.

McMahon: Sure.

O'Neill: I mean obviously to the extent you *would* receive notice if we seek to approve some kind of an incentive plan because we'd file a motion. Are you asking for...?

McMahon: Well, the debtors may unilaterally make a decision not to seek...

Spector: That it's ordinary course...

McMahon: ... on grounds that it is ordinary course. And all I'm asking for is the courtesy of notice of the fact that you are implementing that ordinary course plan.

McBride: So basically, what you are saying...

McMahon: ... so we can evaluate whether or not we agree with your assessment that it is ordinary course.

(62:48)

McBride: You're basically saying that it's our regular, our forty-forty-twenty plan, that we come back and say, we have a forty forty plan...

McMahon: Correct. And I'm sure that counsel will discuss with you that there are some other types of plans more typical to the bankruptcy scenario, but...

McBride: I see.

McMahon: That's all I'm asking for.

Spector: There is a provision of the Bankruptcy Code, what we call [inaudible] retention plan. It's structured by the code as to what you can do and what you cannot do. And of course, if we were going to implement such a program, we'd have to bear that in mind and so forth. We can discuss that all morning.

McMahon: Just out of curiousity, the amounts that are listed there for the, funding, I guess UK received two million dollars of funding during the year prior to the petition date, Germany about one point one eight (1.18) million, and then there's some lesser amounts for the other, certain of the other non-debtor affiliates. What were those amounts used by those various entities to do?

Acheson: It's basically it's to run an office in each of those locations so it would be rent, expenses, salary for the employees that are there, and we have travel, just the normal course operating expenses.

McMahon: Okay. And persuant to the Debtor's cash management system, the revenues that those non-Debtor affiliates generated would flow back up to...

Acheson: Yes, they actually mostly flow directly through SCO Operations to begin with; all sales and products and the majority of services go through SCO Operations.

(66:40)

McMahon: Okay. It's not going to be reflected on the schedules but, if I wanted to...to get a break-down on a non-Debtor entity by non-Debtor entity basis of cash flows, of historical financial performance, do, are the Debtors in possesion of those records?

Acheson: Oh yes, it all consolidates within our records.

McMahon: OK.

Acheson: So I can run balance sheet [inaudible]

(67:22)

McMahon: Can we take a look at the schedules for Group?

(67:27)

[paper shuffling]

(68:12)

McMahon: Exhibit B, 14, which lists Debtors' investments in partnerships or joint ventures. I'm just trying to get an understanding as to, confirm what my understanding about what's listed there, that's just the Debtors book equity investment?

Acheson: Correct.

McMahon: In those respective entities?

Acheson: Yes.

McBride: Correct.

McMahon: Are...would it be fair to say that the market value of those entities is basically tied to the fortunes of SCO? As SCO goes, so goes their investment in these various entities?

Acheson: I would agree with that on all except for SCO China, which we only have a thirty percent equity in.

(69:02)

McMahon: Okay. What is SCO China's business? Well... What... does SCO China have a business that's seperate and distinct from its relationship with SCO?

McBride: No. I think your original statement's still correct even though we have less of an investment there. As SCO goes, so goes the venture.

McMahon: Okay.

(69:25)

McMahon: With respect to...My next set of questions has to do with the impact of the litigation on ... Let's say...this is what I'm trying to get at, and I think I'll frame it in a way thatI can get a factual answer without getting into a sticky situation.

O'Neill: I will just ... I want to ...

McMahon: Let me try. I'll ask it and then I'll let you...uh...jump on it.

(70:18)

McMahon: Let's just assume, and I appreciate the fact that the Debtors disagree with Judge Kimball's ruling in the Utah litigation, but let's just assume for a second that it remains where it's at.

McBride: Right.

McMahon: In other words, that it would be, it would become a final non-appealable judgment.

McBride: Okay.

McMahon: And that would be it. Judge Kimball was correct.

McBride: Okay.

(71:01)

McMahon: What...what would be the impact on SCO's business? Let me just ask that general question, if you can answer that.

(71:25)

McMahon: I'm not gonna jump too much on the question because I think it was carefully asked. I will just note that obviously this is ongoing litigation. Counsel for one of the litigants is in the room today...

McMahon: I understand that.

O'Neill: We just need to be careful in terms of our responses.

Spector: On top of that, this is a peculiar type, a 341 is a odd situation. It is sworn, under oath, but there's no judicial officer to pass on the relevancy of it, the objectionability of the questions. For what it's worth, I would propose an objection to the line of questioning, even as carefully crafted as it was, because it is ongoing litigation, it is beyond the typical scope of a 341 to talk about ongoing litigation that has, especially when in this case there is a pending motion by one of those litigants, which is crucial to the outcome of this case, a motion to lift stay. Any statement that Mr. McBride makes today in answer to that question or any followup questions can be expected to be seen in court on November 6th or thereafter in the course of, within the bankruptcy litigation, so I hesitate to say I direct him not to answer, because I'm not sure what the consequences of this type of meeting is, but I strongly suggest that we steer to something back to where we've been and away from where we're going.

McMahon: Well, I appreciate counsel's view and I guess concern with where I'm going with my line of questioning. At the same time, like I said, I take the baby in the basket as I find it, meaning that my office has a duty to oversight... to perform its oversight function, and the reality is, is that I'm dealing with a debtor with a cloud over it, regardless of whether or not the Debtors agree that that cloud should be there. And furthermore, the ability of the Debtors to, I guess, comply with their obligations under Chapter 11 and successfully emerge from bankruptcy protection are conditioned upon getting some answers to these questions as to whether or not there is a viable -- for example, whether there is a viable business here, with this cloud hanging over them. And how do I not...I guess, how does our office not read and react to this bankruptcy case, without getting an answer to that question?

(74:14)

O'Neill: Well I think we can answer your question. I don't know whether the 341 meeting is the appropriate venue for that, and I would also state that if the question is, has the Debtor considered the various outcomes of the litigation that is pending, I think the answer to the question would be, yes.

McMahon: So then...so then I can proceed with my questioning of the witness in that vein?

O'Neill: Well, again, I would echo the concern that we have because the litigant is here in the room, so...

McMahon: Well, regardless of whether the litigant were here in the room, they would be able to get a copy of the tape. I mean the reality is that I could take a 2004 exam rightfully and ask the same questions. Frankly, the scope of a 341 and the scope of a 2004 are not that distinct, so, again, I think I'm entitled to some latitude here, and I guess my question is: are you authorizing the witness to answer my question or not?

O'Neill: Well you could, you could request the 2004 examination, which we would have the opportunity to either agree to, or oppose, depending on the nature of the inquiry. I still have the same concern that was expressed regarding the...regarding comments on the litigation that's pending. Do you want to ask, do you want to ask a question?

Spector: Well, the problem really is that, as Jamie's pointed out, not so much...if the general question is, if you lose in the final analysis, and a huge judgment is rendered on behalf of the opponent, our plans are entirely gutted. It's a lose-lose, across the board. What's the impact? Not good... Okay? (laughs). That question doesn't even need to be asked, but if that's the predicate to other questions, exploring those answers... well, how bad would it be? And what about this, and what about that? And that's what we really are sensitive to because first question is innocuous but it's the nose, the camel's nose, and that's why we're being so cautious now, Joe.

(76:44)

McMahon: I'll skip over this for the moment. I just want to chew on it mentally, and then we'll come back to this at the end, but... frankly it's ...

[long pause till 77:03]

McMahon: ... It is the, I think, THE critical issue. I mean insofar as, I mean, the Debtors having a viable chance to emerge from bankruptcy protection, and I'll...I'll come back to that...

Spector: Jamie's point was at the IBI we... I didn't know how it was running. I expected you to be asking us questions like that in private, not on the record. But, on the record, is we're pretty sensitive to this.

(77:32)

McMahon: Oh. Let me come back to that subject in a moment. Schedule F lists for Group, lists a one point seven five (1.75) million dollar obligation owing to Operations.

(77:47)

[paper shuffling]

(78:10)

Acheson: It's the same thing that we were discussing before, isn't it?

McMahon: Do you have an understanding as to what that, what that is?

Acheson: I believe this is the, basically the same issue that we were discussing before, and I would get back to you on.

McMahon: So...so it's roughly, in fact, the amounts are roughly in order, it just looks like it's a complete offset.

Acheson: Yeah. That's why I was mentioning that it all zeros out in the end...of the quarter.

Spector: Well, wait a minute... I've already said more than I wanted to say here, but it wouldn't be an offset, it seems to me. It's a corresponding issue.

(78:45)

[overlapping comments here]

McMahon: I mischaracterized it ... but just using the term to keep it straight in my head...

Acheson: Yeah...

McMahon: Regardless, we have a, a...

Acheson: A payable.

McMahon: An outstanding inquiry that you'll get back to me with respect to...with respect, counsel is correct. My choice of words were, I would say, less than apt. The Schedule G lists a host of entities with what are described as independent contractor agreements. Who is the purchaser?

Acheson: Yes.

(79:23)

McMahon: Um...I was looking to get an understanding what those are. Do you have an understanding?

Acheson: Do you have a specific one you're interested in? I mean they're different...

McMahon: Well, there's a host of them. They all have the same label and, I guess what my question is...

Acheson: Well, some of them...I can tell you that some of them are just simply past employees, engineers, that we hire to help us with testing and bug fixes. Some of them are...I believe Mike Olson and company are there...um...a lot of these are like little companies like Plumbhall things like that once again, they're helping us in development, there's someone like [a Chinese name] that is helping in translating our mobility products into Chinese... you know, just different, different things like that, that's outside of the scope of our current employees.

McMahon: Okay. So but they all have this common... I guess label, what does the purchaser piece apply to?

(80:35)

Acheson: I'm sorry, purchaser piece?

McMahon: It's in parens...

(80:40)

Acheson: Oh, I think Mesirow was attempting to designate between contracts where we're the purchaser as versus contracts where it's a customer agreement. I think that's what they were doing.

(80:56)

McMahon: Okay. Can we take a look at the Statement of Financial Affairs for, for Group?

(81:23)

McMahon: Response to question number one is: contractual agreements are generally made through the SCO Group?

Acheson: Mm hmm (affirmative response)

McMahon: It says, however, for accounting purposes all revenue is invoiced in the book through SCO Operations, a co-Debtor in this jointly administered bankruptcy case. I guess my question is, do the Debtors have the ability to break out whatever revenue, gross amount of income, SCO Group has, in which...

Acheson: No.

McMahon: They do not?

Acheson: No.

McMahon: You...you report to the federal government on an annual basis for income tax purposes?

Acheson: Yes.

McMahon: Then those, I guess, those returns are consolidated, correct?

Acheson: Correct. It's The SCO Group and Subsidiaries, is the filing name.

McMahon: Okay. Then you do not break out Group's revenue, distinct from the other entities?

Acheson: No. I do not believe we do. I believe it all rolls together and that's we report on in our federal taxes, as The SCO Group and Subsidiaries.

(82:27)

McMahon: Okay. You were telling me your accounting system, you do not have coding or an ability to...run a cash flow statement for SCO Group?

Acheson: No. Because ninety percent of our transactions go under the entity that we basically consider is the U.S. entity, which is...

McMahon: Which is Operations?

Acheson: Which is basically equals Operations. Yes.

McMahon: Okay. But what about the other ten percent of the stuff, is my question?

(83:00)

Acheson: Mostly what that is is some of the... is Japan, which is a separate subsidiary, and some of the small amounts of revenue that do go through the other subsidiaries for professional services, and just the intercompany revenues that come back and forth on that. So it's probably even less than ten percent. I would say it's more like five percent.

(83:38)

McMahon: Your answer is interesting just from the standpoint that the Group is the public entity. Group is the entity that's receiving equity infusions and the like, and from an accounting perspective, I can't imagine that there wouldn't be some, say, ability to record and recognize relationships between Group and Operations such that you would be able to account for what's going on with, between the two entities as a business matter but also with equity holders' cash.

(84:23)

Acheson: Not that I know about. Not to re-review, but I believe everything goes through the operational company, and that Group is used as a holding company.

McMahon: Cattleback Holdings is referenced in number 10...and it references the transfer of a particular patent to that entity on July 18th, and I believe that Cattleback was formed on that date.

McBride: Yes. Correct.

McMahon: Can you explain to me what Cattleback is and what the patent is?

McBride: The patent is a systems management patent that we acquired when we bought a company back in, I believe it was 2001, called Acrylis. We bought it for the technology. It's an online updating technology, and it had this pending patent in 2001 that actually issued in 2003. Even though it issued in 2003, because of all the other things we had going on, there wasn't a lot of attention paid to it until earlier this year, where we started looking at our intellectual property portfolio and figured out this patent was sitting there and we had some initial workup done on it and established that there was some value there. And at that point we decided to try and sell the patent, and we retained an outside company called Ocean Tomo, a broker, if you will, of intellectual property, to go market this and sell it to somebody who would have interest in it. In the process of selling that patent, they recommended we come back and sell it under a different brand than the SCO Group, because of the litigation that was going on over there, they didn't want to cloud the, this issue with all the other things in terms of what the intellectual property was, so we just basically formed this entity, Cattleback Holdings, as a mechanism to allow them to go market that patent.

(86:32)

McMahon: Okay.

McBride: So that's the only asset that's in there, and it's just for that purpose.

McMahon: Exhibit 18A references Me Inc. Was that an entity formed by the Debtors, or is that an aquisition?

McBride: That was formed by us, it's a wholly owned sub.

McMahon: What was its business purpose? What is its business purpose?

McBride: Its business purpose is basically an entity to put our mobility assets into. To date, we haven't actually transferred those in there, but it is set up, it is the, the marketing tag-line, if you will, a marketing moniker for our mobility product line. But, because we don't have substantial amount of revenue flowing there yet, we have not gone through the process yet of moving all the assets in to Me Inc. But that is the, that has been and continues to be the plan. So right now the assets of Me Inc and the liabilities of Me Inc are just booked under Operations.

(87:50)

Spector: May I inquire, booked under Operations or under Group?

Acheson: Well, it's in the same set of books with Operations...

McBride: It rolls up under Operations...

Acheson: It's a U.S. entity.

McBride: But the longer term plan would be to split it off from Operations, and at that point it would report into Group. I mean, the entity reports into Group right now, but I'm just saying the operations and people and the operations of the mobility product lines are still held under Operations. And part of what we'd be trying to do going forward from a reorganization standpoint would be to place more emphasis on this.

[88:31)

Spector: Uh huh. Sorry about that.

McMahon: It's no problem. Off schedules now, I'm just asking some general questions. First, the Debtors have bylaws, correct?

McBride: Correct.

McMahon: And those bylaws provide for the appointment of officers, correct?

McBride: Yes.

McMahon: Does the Board have the exclusive authority to appoint officers, or do you know? Or does the President and Chief Executive Officer have the ability to also have the right to designate officers, in terms of the bylaws?

McBride: This is... My understanding is that it is a board function, subject to shareholder confirmation. You're talking about directors, or directors and officers?

McMahon: Officers, officers alone.

McBride: Oh, officers alone. I'm sorry. I was thinking of directors. Officers alone. I don't know the answer to that.

(89:52)

McMahon: You don't have a specific recollection of ever appointing someone as an officer?

McBride: Not independent of the Board understanding, so that's why I'm not sure what the bylaws actually say.

McMahon: Okay.

McBride: Let's put it this way, I have not appointed an officer without the Board's involvement, so I'd have to track back and think. The simple answer to your question is, I don't know what the bylaws say with respect to the officer in question.

McMahon: Do you know if the Board ever appointed Mr. Olson as an officer?

McBride: Yeah, I believe Mike was an officer...

McMahon: What'd you say?

McBride: Yeah, I'm pretty sure Mike was an officer.

McMahon: So there'd be a Board resolution or something to that effect that memorializes that?

McBride: Yes. Yes.

McMahon: All right. I'd like to make a request for the bylaws, and to the extent that resolution exists, a copy of that document, and for reasons that we're probably all aware of, I'd like to get that, if possible, by Monday. Okay, that's gonna be a bit more, I'm going to put that request on a different track than the others, just because of the fact that the Debtors are seeking various forms of relief from Bankruptcy Court, and I'm going to need to see that documentation.

O'Neill: Specifically, with respect to, Mr. Olson?

McMahon: Correct.

(91:24)

Spector: And the bylaws and the resolution of the Board appointing Mike Olson as officer, director, correct?

McBride: Right.

Spector: Anything else?

McMahon: That's it for right now. Now, coming back to ...

Spector: Oh... [laughter]

McMahon: No, no, you got it right. Yes. Can you tell me whether vice presidents are generally considered, well, are officers under the Debtors' bylaws?

McBride: Generally, the vice president is not an officer.

McMahon: OK. Coming back to some, some of the other topics I wanted to go through. First, you appointed Mr. Neilsen as Chief Financial Officer, correct?

McBride: Yes.

McMahon: Right. And he started work around the end of September, is that correct?

McBride: Do you know what day he started?

Acheson: It was...he was there before Bert left, of course...

O'Neill: I think our motion paper said October first.

McBride: The first sounds about right.

Acheson: Right. But he was there just in order to get some training.

(93:06)

McMahon: And that agreement's been teed up before the bankruptcy court. I just want to ...I guess I'll just address my questions to you directly. The Bert Young consultancy agreement. That's referenced in a late September 8K filing. Is that the same independent contractor agreement that we've been discussing? It indicates that Mr. Young is going to have a six-month consultancy?

Acheson: Yes.

(93:35)

McMahon: Okay.

McBride: In fact, I should re-visit the question you asked earlier, with respect to how he was going to be paid. I think I said hourly, and I think I do recollect now as you say that, it was a six month contract.

McMahon: OK. The...the Tibbitts raise that was, I guess, disclosed in a recent 8K filing. Do ... the Board approved that, I assume?

McBride: Yes.

McMahon: Did the Board ask for your input as to whether or not the raise and bonus were warranted?

McBride: Yes.

McMahon: What, what was your...what input did you give the Board in that regard?

O'Neill: Hold on one second. I don't know whether, are records of the compensation committee considered it confidential in some regard? I mean...

Spector: Yeah, that's a good point. I hadn't thought of that. But...a lot of companies do keep that confidential.

(94:36)

McMahon: Well, now... Let me see if I can ask the question in a way that will get an answer that will not draw an objection from counsel. Do you have an understanding as to the reasons why Mr. Tibbitts was given a salary and a bonus?

Spector: Why he was given a salary?

[laughter]

McMahon: I'm sorry.

McBride: A salary *increase*.

McMahon: An increase in salary and a bonus.

McBride: My understanding was, as his boss, that he had been underpaid and undermarket for some period of time, and we were expecting to make some adjustments in the fall time frame and the, you know, the circumstances that we were giving him a raise in were different than what I was hoping they would be, which were going into the courtroom and having a positive, successful outcome, and going back and saying we're going to revisit this issue and [inaudible] for a while, and we are going to take care of it now.

The circumstances that we were under was one more of duress and ... but it didn't change...so what was challenging for me was giving him a raise in the face of everything that we were going through, from a negative standpoint, but on the other hand, it was a situation that I felt like was warranted. The Board felt that way as well.

McMahon: Let me just get a, back out here and ask some general questions regarding the Operations. How many employees do the Debtors have as of today?

(96:45)

McBride: As of today I believe it would be one-twenty-ish.

Acheson: Something like that.

McMahon: Has that changed materially since the Debtors' bankruptcy filing?

McBride: Not materially. Maybe a few have dropped off, but [inaudible]

McMahon: Okay. And ...

(97:26)

McMahon: I believe that I recall reading in Judge Kimball's opinion, and correct me if I'm wrong, that the Debtors have had I believe it's like one profitable quarter over the last, I would say, five or six years? And it's the quarter in which they signed up certain agreements with Microsoft et al relating to its business, is that correct?

McBride: I believe that from a technical standpoint that's probably a true statement.

McMahon: Okay.

Spector: Are you saying that it's true that's what the opinion said, because that's the way he asked it...in other words..?

McBride: Well...

(98:18)

McMahon: Well, in other words, I'm looking at your, your historical filings, and I guess my question is, you've been running, just on an operating basis, have the Debtors, has SCO, turned a profit in the last five years?

McBride: In the last five years, I believe it would be just that one year.

McMahon: OK.

McBride: But can I speak to that a little bit more granular level?

McMahon: Sure.

McBride: We have incurred over fifty million dollars of legal fees during that same time, right? Those fifty million dollars in fees get lumped into this whole negative net income environment, and when I joined the company, just to give you an historical perspective, when I joined the company in 2002, we were sitting on a situation where we had had several years of revenue decline. We right-sized the company, [inaudible] we got in a position where the operating business itself was actually generating cash, and for the last three or four years, if you look at Operations, you will see cash flow coming out of that, on a very consistent basis. What you will see negating that positive cash flow out of Operations...when I say Operations now, I'm talking...I'm talking the business of selling Unix [tapping table for emphasis] because everything's rolled up under Operations. So let's just say the business of selling Unix has generated profits -- over the last three or four years it's the majority of the time it's generated profits, onlyl a few times it hasn't...so why do we have negative income? Two...two reasons. The first one is the fact that we had to make a decision whether we were going to fight for our intellectual property rights, and taking that fight on, which eventually began a fight against the world. It became a very expensive proposition.

McMahon: Sorry again ...[goes off record] Excuse me. We're back on the record, and I apologize for the interruption.

McBride: Yes, no problem. So the, the decision to fight for our intellectual property rights was, has been an expensive one. We've incurred over fifty million dollars in that fight and continue to incur expenses. But we believe the damage that has been done to us is measured in many multiples above that, so that's where the majority of the net, negative net income, has come from.

(101:29)

The second thing we did is we reinvested in the future platform of interoperability to the tune of millions of dollars that is now ready to take off, and so at the same time we're servicing customers that we've had for twenty-plus years, and fighting this other battle, we said it's important that we also have this future business proposition. If you took away the future business proposition investment, and the legal...damages case, that we were trying to protect our rights, we take those out of the picture, then you would have seen positive cash flow coming into the business of selling Unix and UnixWare, but the problem was, it was declining revenues, so that what we had to do was match, every quarter we had to keep laying off and reducing and going down, so there is a picture there that if we don't get our day in court on our intellectual property rights, well then, we'll have a problem going forward.

McMahon: If I were to just take a look at the, the quarterly reports, where it does break out the Unix...?

McBride: Yes.

(102:40)

McMahon: ...revenue and expenses, there's a line for general and administrative. It's right there. I'll just show it to you. We're looking at the 10Q for the period ending 7/31. Would the, would legal costs relating to the Novell litigation be wrapped up into that lineup? Do you know?

(193:06)

Acheson: I do know.

McBride: Let's see, what year was that?

Acheson: It's the 7/31...

McBride: 7/31?

Acheson: No, it that is just Unix, no, it isn't. The legal costs are rolled into what we call the SCOSource product line, as a cost to that...

[voices commenting in an undertone here, including McBride, but inaudible]

(103:29)

McBride: I think that that's accurate.

McMahon: I understand that what the witness is saying about the businss [inaudible] but I just want to make sure numerically, I understand what's going on. With respect to taxes...

McBride: Yes.

McMahon: Are the Debtors current on their, with respect to both their federal and their state filings?

Acheson: Yes.

McMahon: And I gather you've probably discussed your initial Debtor reporting issues including insurance with Mr. Panacio prior to, prior to this meeting. A couple of things...first, the, our offices, the monthly operating reports filed with the Court. Did you have a chance to discuss those with Mr. Panacio?

Acheson: Yes.

McMahon: And, did you...you understand what the obligation is and the form it has to take?

Acheson: Yes, and we've also hired Mesirow Financial to aid us with the first couple of months' reporting.

McMahon: But I guess the question that I have based upon the testimony is whether we're going to be able to get separate breakout for those, for Group and for Operations insofar as your operating results. And I gather that the, at least the Debtors' immediate, answer to that question is no.

Acheson: That's true. We cannot break it out as far as I believe.

McMahon: Well, we'll discuss that point internally and respond.

Acheson: Because most of it goes under Operations.

McMahon: I gather that you'll probably also discussed with Mr. Panacio our office's quarterly fee obligations and I'm not going to get into a calculation of that on [inaudible] but you're just generally aware of the obligations.

Acheson: It was already rolled into our cash forecast.

McMahon: I've had the chance to mull while I've been asking my questions with regard to the line of questioning ...where do we go, and while I think it would be possible to have that discussion on the record, for a few reasons, what I would like to do is just set up a teleconference of some type, where, to walk through some of the questions that I have regarding Schedule B. From a timing perspective of this meeting, it's just not, I guess, as a practical matter, difficult. But we reserve our rights with respect to any future examination we may seek, including a 2004 examination if we believe that it's appropriate. But as a first step, I'd like to try a teleconference to get an understanding from a, just as a ... mechanically what the ruling means to SCO.

O'Neill: I think that would be fine. We appreciate that. And we'd be happy to do that, at your convenience.

McMahon: All right. With that, I'm going to suspend my question and turn it over to counsel. Were there any further questions?

Panacio: No questions.

McMahon: Thank you. There are no further questions, this matter is concluded. Thank you.

O'Neill: Thank you very much.

Acheson: Thank you.

Spector: I've got a 2 o'...


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