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More Details from Bills in the SCO Bankruptcy - Hong Kong? - Updated
Friday, March 21 2008 @ 07:54 AM EDT

SCO told the truth for sure in at least one respect in its recent 10Q, namely that it expected its legal and other professional fees going forward in the bankruptcy would be substantial:
Furthermore, so long as the Chapter 11 cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the cases. A prolonged continuation of the Chapter 11 cases may also require us to seek financing. If we require financing during the Chapter 11 cases and we are unable to obtain the financing on favorable terms or at all, our chances of successfully reorganizing our businesses may be seriously jeopardized.

I take this and other such wording in the 10Q as SCO suggesting that some entity out there might like to settle the litigation, so it can get something instead of nothing. And indeed here comes Dorsey & Whitney filing for their legal services for January, a total of $22,799.25. Mesirow filed its third monthly bill also for financial advice in January and February, and it comes to a total of $82,847.70. It was supposed to be $92,053.00, Mesirow says, but it voluntarily reduced by 10% as a rate reduction. What's it all for? The breakdown in both bills is fascinating.

$14,583 of the new Mesirow bill is for time spent on the plan of reorganization and $30,060, representing 62 hours out of a total of 192.3 hours, for "Liquidation Analysis". Hmm. That doesn't sound promising for SCO. Another $27,685, representing 48 hours, went to "Merger/Acquisition/Divestiture Analysis".

Here are all the filings:

402 - Filed & Entered: 03/17/2008
Certificate of Service
Docket Text: Certificate of Service of Fourth Monthly Fee Application of Dorsey & Whitney LLP special Counsel to Debtors and Debtors-In-Possession, for Compensation and Reimbursement of Expenses for the Period January 1, 2008 through January 31, 2008 Filed by Dorsey & Whitney LLP. (Schnabel, Eric)

403 - Filed & Entered: 03/18/2008
Certificate of Publication
Docket Text: Certificate of Publication re: Order Granting Debtors' Motion for Order Establishing a Bar Date for Filing Proofs of Claim and Approving the Form and Manner of Notice Thereof. (related document(s)[380] ) Filed by The SCO Group, Inc.. (O'Neill, James)

404 - Filed & Entered: 03/18/2008
Certificate of Publication
Docket Text: Certificate of Publication re: Order Granting Debtors' Motion for Order Establishing a Bar Date for Filing Proofs of Claim and Approving the Form and Manner of Notice Thereof. (related document(s)[380] ) Filed by The SCO Group, Inc.. (O'Neill, James)

405 - Filed & Entered: 03/19/2008
Application for Compensation
Docket Text: Monthly Application for Compensation (Third) as Financial Advisors to the Debtors for Compensation and Reimbursement of Expenses for the Period from January 1, 2008 through February 29, 2008 Filed by Mesirow Financial Consulting, LLC. Objections due by 4/8/2008. (Attachments: # (1) Notice # (2) Exhibit A # (3) Exhibit B # (4) Exhibit C # (5) Certificate of Service and Service List) (Werkheiser, Rachel)

406 - Filed & Entered: 03/20/2008
Transfer/Assignment of Claim
Docket Text: Transfer/Assignment of Claim. Transfer Agreement 3001 (e) 1 Transferor: Shenyang Neusoft Co. Ltd To Riverside Claims LLC. Filed by Riverside Claims LLC. (Herskowitz, Neil)

As you see, there is also another transfer of claim filed by Shenyang Neusoft in China to Riverside Claims in New York.

Any objections to Dorsey & Whitney's bill must be filed by March 31. The bill is actually quite modest, just $22,799.25, plus $276.15 in expenses. That represents 87.55 hours. That's less than November's bill, but more than December's, as you can see on page 5 of the fee application. But what grabs me is on page 21, where Dorsey & Whitney lists the various chores it worked on. Top of the list:

Hong Kong Corporate Formation

Now? SCO is incorporating something in Hong Kong now? In the immortal words of Berger Singerman's Arthur Spector, What's up with that?

I recall at that same 341 Creditors' Meeting where he said that, Jean Acheson mentioned SCO China, saying that SCO had only 30% equity in SCO China, a non-debtor affiliate, but no one asked who owned the rest. And Darl McBride testified that if SCO went under, so would SCO China. I am wondering about that now. The testimony went like this, with Joe McMahon, the trial attorney from the US Trustee's Office asking the questions about the Schedules SCO filed in the bankruptcy:

McMahon: Just out of curiosity, 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 pursuant 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.

McMahon: Okay. It's not going to be reflected on the schedules but, if I wanted 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]

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

[paper shuffling]

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.

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.

On page 27, you see a breakdown about whatever is happening in Hong Kong, and guess whose name appears? B. Young, presumably SCO's very own Bert Young, who allegedly left SCO for an opportunity elsewhere. Wasn't that the story? Yet here he is being emailed about an annual return that needed to be filed regarding SCO Hong Kong. A draft was reviewed by J. Wong on January 1st, then Wong emailed SCO and there was a conference with "Se. Chan regarding same". (Chan is a Dorsey & Whitney lawyer, an associate, as you can see on pages 30 and 31.) Then on the 7th, Se. Chan reviewed progress and status with B. Young. Does this mean that wherever he is, he's still on the SCO team, shall we say? The next page references discussions and conferences and the draft of the Annual Return was amended, and then we see notes saying "review of resignation letters" and "Review correspondence regarding resignations of B. Yong [sic] and M. Olson". So perhaps it is just about getting the facts right so as to finish up a legal filing.

I probably wouldn't notice all this if it were not for the Hong Kong incorporation, plus the reorganization proposal. My tin foil hat imagines this: SCO sends assets and personnel quietly to the Hong Kong corporation -- remember that SCO China is a non-debtor affiliate, or was -- which spins off, and then all the guys that left SCO, Gupta, soon Darl, Young, etc. show up and run the new corporation, which sells mobile phone software or lawsuits, if you catch my drift. I know. Far-fetched, because it would require some moxie, but let's be real. SCO has nothing but moxie. And we don't yet know what the notation about the Hong Kong incorporation is about. But I have my flashlight pointed right there going forward.

Then, on page 34, changing to another list of chores in connection with Business Operations, I can't help but notice on January 29, an entry for one of Dorsey's paralegals that reads:

Research prior drafts of 6/21/07 board meeting minutes for stock options grants pursuant to question by auditors and telephone conference with S. Robinson to discuss.

S. Robinson? I don't know any S. Robinson but the judge in the Delaware District Court hearing the Red Hat litigation against SCO. I checked the Groklaw Cast page, but I don't see any attorney with that last name. But it's a common last name, and S. could be Sam or Sarah or whatever, so we shouldn't leap to conclusions, but it's worth leaving a paperclip there, so to speak. Then on the next page, another notation:

Telephone conferences with M. Olson to confirm employee options issued in June 2001 and report to N. Taylor

The fact that it's handled by a paralegal indicates it's not a high-level concern, probably just fact checking, but then on page 37 a brokerage named Wilson-Davis appears, I think for the first time in this SCO saga, in a January 11 note. This is in the chore category of "Securities". It's in the context of this notation on January 31:

Research securities law implications of distributing securities while in bankruptcy

Indeed. And they apparently decided to get another legal opinion.

Mesirow's breakdown includes something that puzzles me. What seems odd to me is that it's Mesirow that researches case law on incentive bonuses, according to the bill's Exhibit C. That's #405 Exhibit C, page 1. Wouldn't you think the lawyers would be doing that? That just leaps off the page to me. It probably won't surprise you to see on page 5 that Mesirow used Microsoft software, Excel, to do the liquidation analysis for SCO. It seems fitting somehow. It mentions also waterfall analysis. I had no idea what that was, so I found an article that explains it. I gather it's taking snapshots over time, to see trends. Might I direct Mesirow to Groklaw's archives, which are in fact daily snapshots of this prolonged saga? I believe you'll find the arrow points down, down, down for some years now.

Also filed are copies of the notices being published in the Wall St. Journal and the Salt Lake Tribune and Deseret News about the bar date to file claims against SCO. The one in the SLT and Deseret News, #404 on the docket list, is placed right next to an ad that reads: "Scared of investing? But want more than 4% interest? Stock market shaky?" with a photo of a guy whose pockets have been emptied and turned inside out.

Shout out to the art director at those newspapers. Just a lovely touch.

Update: What do you make of this? On page 7 of #405 Exhibit C-6, I see that there is a notation on January 11 that reads like this:

Review and analyze all due diligence items provided to Potential Bidder 1 and create electronic archives for the Company's use.

Then, the next notation mentions SNCP. Then there are multiple notations regarding the SNCP deal. But then on February 8, it says:

Participate in call with A. Spector (Berger Singerman), K. Nielsen (SCO) and Board regarding Potential Acquisition by Private Equity Group.

The next item mentions SNCP MOU scenarios. And on the next page, we see on February 13, there are two entries:

2/13/08 - Participate in conference calls with Berger Singerman and SCO to discuss current status of discussions with SNCP and "next steps" to move process forward.

2/13/08 - Participate in conference call with D. McBride, R. Tibbitts and K. Nielsen (all SCO), SCO's Board of Directors, D. Lambert, and G. Robson (both Berger Singerman) regarding the Memorandum of Understanding between The SCO Group and Interested Party #2.

Then the final entry, the next day, mentions Stephen Norris Capital Partners, LLC:

Analyze the Memorandum of Understanding between The SCO Group, Inc. and Stephen Norris Capital Partners, LLC.

I don't know about you, but the suspicion grows and grows that SNCP is not the only player in this picture. Could the same folks that York was fronting for be circling around for another attempt?

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