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First Reports From the SCO Bankruptcy Hearing - Updated 10Xs - To the End of the Day
Monday, July 27 2009 @ 11:27 AM EDT

Here's our first taste of what is happening in the SCO bankruptcy hearing. Mr. Spector is dancing up a storm. IBM and Novell are just trying to kill SCO off, he says. This is a great deal and the sale should go forward. Everyone will get paid. Ralph Yarro has apparently offered $200,000 of his own funds to underwrite any losses in the next month. There is a proposed amendment just signed last night.

Of course.

IBM calmly says they only opposed because of what they learned in discovery. It sounds from the notes I'm getting that Cravath's David Marriott is there. Novell is more blunt: you should not trust this management. The U.S. Trustee's Office suggests either Ch. 7 or a trustee to handle things in 11 instead of this management. I think that's a clue they don't trust management either.

They are in recess so everyone can read the amendment and the declarations of the witnesses about to take the stand. Then will come the three SCO witnesses, SCO General Counsel Ryan Tibbits, COO Jeff Hunsaker, and the temp CFO, Ken Nielson.

And here's the amendment, which says it was dated and effective as of July 24, which would be last Friday, not last night:

07/26/2009 - 870 - Notice of Service Regarding Notice of Filing Agreement and Amendment to Purchase and Sale Agreement Regarding Debtors' Motion for Authority to Sell Property Outside the Ordinary Course of Business Free and Clear of Interests and for Approval of Assumption and Assignment of Executory Contracts and Unexpired Leases in Conjunction With Sale (related document(s) 815 ) Filed by The SCO Group, Inc.. (Attachments: # 1 Exhibit) (O'Neill, James) (Entered: 07/26/2009)

For fun, you might like to review the hearing transcript from the November 16, 2007 bankruptcy hearing when SCO proposed to sell directly to York, who claimed they'd walk away from the deal if it didn't happen fast. They were still working on the paperwork on that deal and had been up all night trying to be done for the hearing. Remember all that? SCO then dropped the deal, "without prejudice".

And here's the transcript from the March 30th hearing, where SCO first showed up asking for more time in Ch. 11 and had another not quite finished plan in hand.

And here are the rules that Judge Gross set out for discovery, and the sanctions at trial if they were not followed. Hardy har. SCO still showed up with a last-minute amendment. I know. They can't help it. They need procrastination therapy. Here's the proposed sales agreement the amendment amends.

First Witness:

Wilmington, DE

9:20 An earlier hearing has concluded, and about 20 people are gathered in the courtroom.

9:40 Hearing opens, introductions.

9:42 Mr. Spector opens. IBM and Novell are abusing the bankruptcy process by trying to kill SCO. Attacking motives seems to be the strategy. Mr. Yarro is committed to put up $200k of his personal funds to underwrite any losses in the next 30 days.

10:03 Mr. Levin for IBM: IBM did not originally intend to oppose the sale, but based on what they found in discovery, the felt they had to.

10:07 Mr. Lewis for Novell: Current management should not be trusted. A neutral party should conduct the an auction.

10:13 A Mr. Doshi makes an appearance by phone. [PJ: Amish Doshi. Re Oracle's Limited Objection [PDF].] Mr. Lewis received a proposed amendment late last night. Mr. Spector explains that it was just signed. Mr. Lewis protests that Mr. Spector is resuming his opening argument instead.

10:22 Mr. Harrington, US Trustee's Office: Structured dismissal is also a possibility.

10:25 Mr. Marriott moves that unopposed exhibits be admitted. Witnesses will be sequestered. Mr. Tibbits will be called first. Witnesses will submit declaration (Mr . Neilson, Mr. Tibbits, Mr. Hunsaker.)

10:32 Recess while IBM, Novell, and US Trustee review declarations.

Here's who Mr. Harrington most likely is, Michael Harrington, the Assistant US Trustee. Joseph McMahon is a trial attorney, so presumably Mr. Harrington would be higher up in the chain of command. Mention of an auction is a strong hint there may be a second buyer. Time will tell.

2nd Witness:

Judge Gross joked at the end of the very short hearing about how the next proceeding will not be quite so simple.

A brief synopsis so far....

SCO wants to proceed with the sale. It's a good deal and everyone will get paid. The 10th Circuit Court will have a judgment on the appeal before 8/31 so we need to wait for that before considering conversion. They keep reminding the judge about the discretion he can use.

IBM objects that they just got the amended sale proposal at 11:30 last night (Stephen Norris just got into town last night to sign it). Also, they got another sale proposal from LMS Acquisitions they still need to evaluate, but it shows sale should be an auction, not private.

Trustee thinks it should either be converted to Ch 7 or a trustee appointed to overseeing the sale in Ch 11.

Witnesses are going to be sequestered during testimony so they can't be influenced by what is said, so half the gallery is out in the hall now. The recess was called so creditors could all read the new agreement and also read the declarations of Tibbits, Neilsen and Hunsaker, which SCO wants to submit instead of having them testify.

There have been lots of joking about the time this hearing is going to take and it is being borne out.... More to follow.

Reading the amendment quickly while we wait for more reports, I see it is between SCO Group, SCO Operations, SCO Global, and UnXis. SCO Global is services. McBride signs for all three, not Jeff Hunsaker. Stephen Norris signs for UnXis. You probably want to have handy SCO's reply to IBM and Novell's Objections to the sale, because that's when SCO first mentioned that they'd raised some valid objections, and SCO was working on an amendment to address them. That document said the termination date would be extended from September 13, 2009 to September 30. However the amendment says the termination date is September 15, not September 30.

Another change is the "scrivener's error" that Novell's lawyer, Adam Lewis, brought to SCO's attention, and here is the change:

4. Scrivener's Error. Sellers noted and have advised Purchaser that the Cure Amounts identified Sellers' Motion to Assume and Assign Executory Contracts erroneously included a $13,129.51 sum that ostensibly pertained to the Novell APA. The parties hereby confirm that the Novell APA is not a Purchased Asset or Assumed Liability, and the inclusion of the erroneous $13,129.51 sum referenced in the preceding sentence was a scrivener's error. Sellers have amended the Sale Motion to eliminate that scrivener's error.
What do you think the story might have been if Novell had not noticed that "error" in time? Me, too. Here's the exhibit [PDF] with the emails back and forth between Novell and SCO about whether or not SCO was going to assume the APA. Scroll down to the bottom of this article for a text version. The lowest email is the beginning:
From: Lewis, Adam A. [mailto:[mail]]
Sent: Thursday, july 09, 2009 8:04 PM
To: Arthur j. Spector
Subject: Assumption of Contracts

Arthur:

We find the referece to the Novell APA in the first part of Exhibit A (Packaged Product Related) to be ambiguous regarding whether the debtors are proposing to assume the entire APA or only some part of it somehow relating to the "UNXI SVRX Royaly collecitons Due July 15, 2009". Can you clarify, and if the latter, tell just just what?

Thanks

Adam

Adam A. Lewis, Esq.
Morrison & Foerster LLP
[address]
San Francisco, California [zip]
[phones]

Another significant change is an amendment to Section 3.1 of the sales agreement to the effect that the Purchaser can decide to just transfer $2,150,000 to "an account designated by Sellers" at closing, instead of providing a Letter of Credit-Balance to the escrow agent. Huh? Here's how 3.1 reads:
3.1. Purchase Price. The aggregate purchase price for the Purchased Assets is (i) $5,250,000 (the “Purchase Price”), payable by delivery of (a) the Cash Deposit, (b) the Letter of Credit-Balance and (c) the Letter of Credit-Sun, and (ii) assumption of the Assumed Liabilities. Prior to the date hereof, an affiliate of Purchaser delivered $250,000 to Escrow Agent to be held pursuant to an escrow agreement, dated as of June 9, 2009, among such affiliate, Sellers and Escrow Agent, and (1) concurrently with the execution and delivery of this Agreement, such affiliate has directed Escrow Agent to continue to hold such $250,000, which shall be deemed to be the Cash Deposit hereunder, and (2) on or before the fifth Business Day after the entry by the Bankruptcy Court of the Sale Order Purchaser will deliver to Escrow Agent the Letter of Credit-Balance, which Cash Deposit and Letter of Credit-Balance shall be held and released as provided in Section 3.2. At the Closing, Purchaser shall deliver to Escrow Agent the Letter of Credit-Sun, which shall be held and released as provided in Section 3.3.
And here's the amendment language:
(b) Section 3.1 of the Initial Agreement is hereby amended by adding the following at the end thereof: "Notwithstanding anything in this Agreement to the contrary, at the option of Purchaser, exercisable by written notice to Sellers on or before the LOC-Balance Due Date, Purchaser may elect to deliver by wire transfer of immediately available funds to an account or account designated by Sellers, $2,150,000 (the "Cash Balance"). In such event, Purchaser shall have no obligation to deliver the Letter of Credit-Balance, and this Agreement (including, without limitation, Section 3.2 and 4.3) shall be deemed amended in all respects necessary to reflect that Purchaser (i) shall not deliver to Escrow Agent the Letter of Credit-Balance and (ii) shall deliver to Sellers the Cash Balance at Closing.
So, let me try to capture what they mean. I think they mean that instead of the lawyers holding on to the money, it will go instead to SCO management, with no oversight. Hmm. I wonder how the creditors will feel about that?

The next part, about the Sun letter of credit, UnXis says it will control the litigation and not give Novell anything until there is a final, nonappealable judgment. But it has to arrive prior to June 30, 2010 or UnXis has no obligation to pay anything on it. And at the same time, it gets the right to tell SCO to keep appealing, presumably to the Supreme Court, so this is the escape hole, I guess.

And I notice that while the drop dead date has changed, the money to Novell clause is still written in disappearing ink.

Update 1: During the lunch break, we got another two reports. Here's the first one:

Quick note from the lunch break.

About 10 lawyers from each side showed up. Each had 10 or more boxes of documents. We have gotten through 2 of the 7 witnesses.

The first was Mr. Tibbits.I have notes, but he did not have much to say. The second witness was Mr. Nielson from SCO. He was pounded on the numbers. He admitted the numbers from the June 15 hearing needed changes. He was at that hearing to testify to that but never got the chance. I don't think anyone knows what the real numbers are at this point.

There has been some discussion about the Norris payments. They are just getting into that.

SCO talked about how their customers and employees would be harmed.

The Trustee, represented by Mr. Harrington, asked Mr. Nielson if he knew that a Trustee can run the company in Chapter 7.

Much more to come. Up to 13 pages of notes so far.

And a second eyewitness:
11:13 Mr. Tibbits takes the stand.

11:15 Mr Marriott. Objects to several paragraphs. Speculative and based on hearsay.

11:19 Mr. Norman responds that they are relevant.

11:22 Judge Gross overrules objection except as to his view as to effect on stock price.

11:24 Mr.Marriott asks one question.

11:25 Mr. Jacobs asked about belief that Tenth Circuit will rule by end of August. No big surprises.

11:31 Mr. Norman re direct.

11:35 Mr. Nielson takes the stand. Adopts his Declaration.

11:36 Mr. Reynolds(sp) objects to part of his declaration that was not disclosed in discovery. Mr. Spector defends.

11:49 Judge Gross overules objection.

11:50 Mr. Reynolds cross examines. Questions numbers in MOR's, accounting with foreign subsidiaries, costs for laying off foreign employees. No analysis of valuation of various businesses has been made. $100k payment to Mr. Norris was in June 2008.

12:18 Mr. Lewis cross examines.

12:28 Mr. Harrington (US Trustee) cross examines. Makes the point that a business can operate under Ch. 7.

12:30 Mr. Spector redirect, much banter.

12:50 Recess for lunch.

Update 2: I got a quick email that Darl McBride has taken the stand and is painting a rosy picture of SCO's business hopes:
2:08 Darl McBride sworn in. Mr. Spector on direct. Extoling SCO's bright prospects. Objection over scope of testemony--overruled. More objections--sustained. Mr. McBride may not speculate about the impacts of the results of the appeal. Mr. Mcbride goes over the history of the attempts to reach a deal--York, SNCP, Merchants Bridge, others.

3:48 Recess

Meanwhile, they are trying to sell the Java patent:
872 - Filed & Entered: 07/27/2009
Application to Employ (B)
Docket Text: Application to Employ -Application for Approval of Employment of Global IP Law Group, LLC As Marketing Consultant In Connection With The Sale Of Debtors' Patent- Global IP Law Group, LLC as Exclusive Marketing Consultant Filed by Pachulski Stang Ziehl & Jones LLP. (Attachments: # (1) Exhibit A # (2) Exhibit B # (3) Exhibit C -Affidavit of David Berten# (4) Proposed Form of Order # (5) Affidavit of Service) (Makowski, Kathleen)

873 - Filed & Entered: 07/27/2009
Motion to Shorten (B)
Docket Text: Motion to Shorten Notice Regarding Debtors' Application for Approval of Employment of Global IP Law Group, LLC As Marketing Consultant In Connection With The Sale Of Debtors' Patent- Requested Hearing Date - August 5, 2009 at 3:00 p.m. - Requested Objection Deadline of August 4, 2009 at 12:00 noon- (related document(s)[872]) Filed by Pachulski Stang Ziehl & Jones LLP. (Attachments: # (1) Proposed Form of Order # (2) Affidavit of Service) (Makowski, Kathleen)

Global IP Law Group is in Chicago, where Bryan Cave is located, but the affidavit, Exhibit C, says there's no connection to any of the parties, any creditors, or any lawyers or other interested parties. SCO asks for expedited treatment of this motion. If Global IP does the marketing and finds a buyer, they get a success fee. 20% of the aggregate value of the transaction.

Update 3: Now the session is over for the day. Our eyewitnesses will send us longer reports after they get home, but here's a quick look at the late afternoon session:

4:05 Mr. McBride, Mr Mariott on cross.

4:26 Recess for Judge to take a conference call with another judge.

4:45 Mr. Mariott resumes--Hans Bayer told Steve Norris that: "Mobility Products" is a "weird dream" of Mr. McBride; that the only thing of value in SCO is the "Unix Business"; and that he hopes Mr. McBride gets "in touch with reality" about the litigation. Darl testified in his deposition that the Unix business is the only part of SCO that has at or near a profit. Lots of tough questions. Asks about payments to Steve Norris and Mr. Robbins--$400k. Mr. McBride said he has a judgment against Mr. (or Mrs.) Robbins of $109k.

5:33 Mr. Lewis on cross. Asks about margins on iPhone application. He and Mr. Mariott seem to be making the point that the mobility business is no big deal. Asks about the "moral obligation" SCO had to pay York $50k. Novell/Santa Cruz APA--what obligation does SCO have, and have there been any discussions about what can or cannot be assigned without Novell's approval? Darl is not sure.

6:00 Mr. Harrington on cross. Asked about contacting previous potential buyers to let them know about the potential new deal.

6:08 Mr. Spector on re direct. Tries to defend mobility products and discredit Hans Bayer. Moves to strike all the testimony about Mr. Bayer's emails. Objections sustained--emails struck. Mr. Norris and Mr. Robbins--Met Mr. Robbins several years ago on a personal basis.

6:46 Break.

Wow. Bayer's emails struck? On what basis? It's central, I would have thought. We're not there, though, and there may be a reason that will find in the later reports or the transcript eventually. But if there is no viable business, the whole deal would seem to be a sham. On the other hand, SCO raised questions about hearsay within hearsay, so it could very well be that the materials are viewed as not admissible, due to the nature of the contents, who Bayer is viewed to be (that is, an agent of the company doing his job or a rogue agent off on his own, etc.). Let's wait and see.

Meanwhile, it sounds like the judge got an earful today. He already told us that he won't rule today. So we will get the reports later tonight, and then his decision should arrive in two days.

Update 4: Wrong! It's still going on! OMG. A night session. What a day. Stay tuned.

Update 5: Well, it's finally over at 10:10 PM Delaware time. Or 10:05, depending on whose watch is correct. Can you believe it? Here are some final brief reports, with promises for more lengthy reports after the guys get some sleep and write up their notes. They still have to travel home, and it's a long way for some. I know you join me in saying a huge thank you to all our eyewitnesses, for the incredible dedication and endurance.

Here's the first report on the evening session:

7:00 Mr. Norris. Direct by Mr. Spector. Developed background of Mr. Norris as well as the background of the proposed deal. He [Norris] sounds convincing.

7:25 Cross by Mr. Mariott. $100K from Mr.McBride was for services for SCO (conflicts with Darl McBride's testimony).

7:40 Redirect by Mr. Spector.

7:48 Mr. Hucksacker adopts his declarations No cross. Mr. Hucksacker is excused.

7:50 Mr. Marriott objects to entire declaration as hearsay.

7:52 Mr. Spector defends and cites precedent.

8:00 Mr. Levin--Testimony irrelevant.

8:05 Judge Gross reserves judgment on objection.

8:06 Mr. Spector moves to admit deposition of Mr. Beltran. Mr. Mariott and Mr. Lewis object.

8:13 Judge Gross sustains objection.

8:30 Mr. Donnahue makes a statement about another bid, LNS?

8:23 Judge Gross indicates that he will reserve judgment an all motions.

Recess.

8:30 Mr. Doshi agrees to proposed cure objection resolution.

8:35 Mr. Levin. Summary supporting conversation. Continuing losses $240k/month. Gross mismanagement. Little likelihood of rehabilitation. Debtor should not be left in possession.

8:46 Mr. Lewis. Debtors have not shown that they have a viable plan.

8:49 Mr. Harrington. IBM and Novell have been very patient. It is time to appoint a trustee (ch 7 or ch 11).

8:51 Mr. Spector opposes conversion motions--supports sale motion. He drones on and on. Standard of proof for a conversion motion should be "clear and convincing" evidence.

9:22 Mr. Levin opposes sale motions--reviews proposed sale plan. Where is the money and where does it go under the plan? It doesn't add up.

9:38 Mr. Lewis recites SCO's failed sales attempts. BOD minutes of June 11 meeting indicate that this sale was put together to defeat the conversion motions. SCO wants the benefits of of bankruptcy protection without the burdens of bankruptcy--that is abuse of the bankruptcy system.

9:48 Mr. Harrington. Plan is not complete.

9:50 Mr. Spector rebuts--I am not sure what he said.

10:04 Mr. Lewis.

10:06 Judge Gross takes under advisement.

And the second:
Hearing ended about 10:10 pm. Just got home. It's done and over. Judge Gross will make his decision on the two motions - the sale and the conversion, "in about a week". He'll need it to go through the testimony today.

Have 30 pages of notes to type up. To be honest, after 14 hours there today, I'm not going to get that done tonight.

Will send a summary after I get something to eat. .

And a third:
I'm home and going over my notes. Since it is so late I only have time to provide a synopsis of what went on... I mean this hearing would JUST NOT END. It wasn't over until 10:05. They just wouldn't stop talking and arguing.... If you think a detailed account would be nice tomorrow, I used almost half a pen's worth of ink taking notes so I can write a tome on 10 hours of court proceedings if you want it....

Notes to follow semi-shortly.

Update 6: More about the day from another reporter, with lots of wonderfully interesting details:
So much to cover and so little time this late in the day. Here is an abbreviated version of what transpired after the lunch break...

Everyone is coming back from the lunch break and it looks to be a long day. It's 2pm and we have only heard from Ryan Tibbitts and Kenneth Neilsen. There were a few objections to some of the content of their declarations - mostly about what was called speculative content. Judge Gross overruled most of them except he disallowed Tibbitts to testify about stock prices.

Tibbitts testified as to where he got his info about appeal being decided before 8/31 (info from courthouse clerk about Judge McConnell retiring then). Also that judge who asked most of the questions during the appeal hearing. He didn't know if the panel could continue deliberations if only 2 judges remained. There were other questions asked but they didn't seem to be very informative (Swiss arbitration continuing, causing costs; post-judgment interest not allowed for Novell, causing value to slowly decline; agrees litigation could continue for years).

The rest of this part of the hearing was testimony from Mr. Neilsen, the SCO CFO. Objections to parts of his declaration "reluctantly" overruled. Mr. Reynolds gets him to admit to numerous errors in his deposition given last week where SCO's figures were more bleak than he reported then. Cash burn ($184K/month vs $281k/month actual) and monthly loss ($150K/month vs $244/month actual) are much greater than reported. He approved $100K to Stephen Norris (invoice sent to SCO in Utah, but paid by SCO-Japan). Did not check into SNCP before paying. Said SCO has enough cash to operate until 7/31, but would not say they wouldn't have enough *after* 7/31 and in fact, new numbers were recently received that says revenues are up about $300K this month. Trustee reminded him that SCO's business could continue under a Chapter 7 trustee, despite his saying the business would end if chapter 7 occurred.

LUNCH BREAK

Darl took the stand. He testified about SCO expanding into the mobility market as well as Unix virtualization. Mobile apps generated over $10K in revenues. They developed apps during BK, so they are still moving forward with business. We then spent almost 2 hours with him describing in too much detail all the deals that came and went since they first started shopping the UNIX business, why they failed, who was involved, etc. When the testimony came to speculation about appeal outcomes, both sides went into about 15-20 minutes of objections and discussion about admissibility, with SCO finally losing on that issue. Darl says this current deal is the best they've had because it makes everyone whole. It's ready to be closed and only needs court approval.

BREAK 4:05

Mr. Marriott continues questioning Darl, this time about previously-disclosed monetary figures being false (Darl says incorrect - not false), but agrees they needed correction. They discuss people involved in mobility marketing and who would transfer after sale, along with revenue splits with Franklin-Covey (60% SCO, 40% FC).

SHORT BREAK 4:25 for judge conference call

Darl was questioned about Hans Bayer's title (listed as VP on web site) but was somewhat combative and didn't want to admit to anything. This continued throughout much of this cross-exam. Purchase price was reduced $500K because SCO wanted to keep mobile apps business. It only accounts for 0.53% of revenue ($82K in 1 yr). Server side of business projected to lose $1M-$1.3M per year for next 3 years.

Then came questioning about $100K payment to Stephen Norris which Darl said was a loan, but there was no paper agreement to go along with it. Invoice sent to SCO Utah but paid by SCO Japan. Approved by CFO then SCO Japan billed 3x$25K payments back to SCO Utah as accounting measure. $200K went to Robbins but he never paid back. Darl sued and got $109K back. Darl is also being sued by Robbins but Darl says he's not fully aware of complaint. Counsel goes over parts of it but didn't really make specifics clear. There was a bunch of testimony about Hans Bayer's emails but I'll omit that here because the judge later allowed it to be stricken from the record.

Darl said 6/15 he had approval for sale but Board minutes on 6/11 just said to continue to pursue deals. Darl says approval was implicit and was granted in 6/22 board meeting. Darl doesn't believe it is SCO's duty to collect and pass 95% of license revenues to Novell. If Novell wants them, they can go after 100%. APA and amendment issues have not come up in negotiations with UnXis. They are selling everything needed to continue the business.

Trustee wants to know if previous suitors were notified of sale agreement so they could compete with it. Darl says yes, but none were still interested. Darl likes this deal because it protects customers, employees, creditors and stockholders. Some deals only wanted to pay creditors 5-10% on the dollar instead of full restitution and that is not acceptable to SCO. (Jeff Hunsaker chided us to be fair in reporting!)

Mr. Spector asks about role of Shawn Cutler and where he'd go post-sale (UnXis). He wouldn't be replaced right away (mobile sales) until increased business warranted it. Hans Bayer has no authority to speak for SCO and misrepresented his authority/role. Much arguing back and forth about his emails and here is where the evidence is stricken from the record.

There was discussion about Mr. Robbins and how he met Darl, the ensuing friendship and how he misled Darl about the $200K he lent him without an agreement. Darl has absolutely no love lost for Robbins as he has caused him no small amount of grief in both business and personal life.

BREAK 6:45

Stephen Norris is next on the stand. Gives his college credentials. Says Unxis was formed by Gulf Capital Partners and Merchant Bridge to acquire UNIX business from SCO. Very well capitalized. Wants to push UNIX in emerging markets (bricmea? - Brazil, India, China, Middle East, Africa). Wants to separate UNIX business from litigation. Says they've invested about $500K in deal so far. Was hard to find familiar lawyers to help them that didn't have conflict of interest with litigation. He said he has also suffered at the hands of unnamed bloggers and suffered 9 hours of waiting in the courtroom halls (chuckles all around).

He has two investors committed to $500K each so far. Wants to invest in marketing and development. There were other little things discussed but they didn't seem to cover any new ground.

Mr. Norris seemed to be a very good witness. He came across as a serious businessman who is intent on making a good investment and not a shady shill. (Another Groklaw'er remarked to me that this guy is the "real deal").

At 8:48 Jeff Hunsaker is finally called to the stand and is summarily dismissed because no counsel has any questions for him. This provided a much-needed moment of levity as he waited almost 12 hours to testify and was not asked a single question. His declaration was admitted into evidence.

Mr. Spector wants to have Rene Beltran's deposition admitted but after arguing back and forth with opposition counsel, it was ruled out as evidence.

Mr. Donahue of LMS Acquisitions says he is interested in also closing a deal and wants to be included in any competitive bidding process.

BREAK 8:30

Closing Arguments

(Yeah we thought the end was near but we were wrong)

A Mr. Douchy (sp?) was still on the phone representing Oracle. He is told that SCO's counsel agrees to Oracle's proposed language changes if deal goes through. Al Petrofsky is still listening too...

Mr. Levin for IBM on conversion: SCO has continuing loss and no reasonable hope of rehabilitation. $5.3M lost in last 19 months. Cash is almost gone and debtors haven't addressed it. SCO could press big customers for more $$, could "skinny down" to improve balance sheet, but they haven't. Says SCO has given false and conflicting testimony regarding payments, cash flow, board meetings and lawyers fees - breached fiduciary duty and didn't follow court's orders.

Mr. Lewis for Novell says SCO has no operating plan - they want to sell but not rehabilitate. This is an abuse of Chap 11. He wants an impartial Chap 7/11 trustee to take over.

Mr. Harrington for US Trustee's Office says we've waited almost 2 years for conversion. Now is the time. They have no plan. Chap 7/11 trustee could continue business and work on a sale.

Mr. Spector disagrees that revenue could be increased through pricing pressures because the licenses have already been sold. Also, "skinnying down" not an option now because they are trying to keep business intact to sell. Also pooh-pooh on website saying Bayer is VP - simple mistake.

On sale motion: Many employees would move to UnXis after sale and they have expertise to run the business. There is no clear and convincing evidence that conversion should take place. Argues about what the standard of proof should be for conversion and says it should be high.

Litigation has potential for big $$ so cannot be ignored. Lots of unusual circumstances in this case. Debtor has ability to pay all creditors in a matter of days. If case is converted, everyone loses - if sale proceeds, everyone wins.

Mr. Levin on sale motion: His problem with poison pill provision, solar eclipse (LC-Sun disappearing). SCO needs to show sound business purpose, fair notice, good faith and fair price. Produces a table with his revised funding estimates that show SCO still will not have enough $$ with this deal. Includes costs SCO has omitted (IBM possible awards). Litigation is not a sound business purpose. Not a fair price because it goes down if Novell is reversed - doesn't make sense. Also no valuation has been performed. Questions about good faith as well. Thinks a trustee appointment is appropriate in this case. Doesn't want any bidder to be excluded (LMS) just because SCO doesn't like them.

Mr. Lewis: This deal has been going on forever. Lots of half-baked deals that seem to be concocted to suit a legal end (extend exclusivity, prevent conversion, etc). They have no plans on reassigning APA provisions. Even if appeal is granted, this is going to continue for a long time and their cash isn't going to last that long.

Mr. Harrington says the creditors will not be paid in full with this agreement and the judge needs to consider what is best for the creditors and not the customers.

Mr. Spector posits that Mr. Levin's reworking of the financials is wrong. They don't need to reassign SVRX licenses because they are exclusive licenses. They wanted to pay York the $150K so others wouldn't think that they'd get shafted for costs if their deal went bad.

My note taking tailed off near the end from sheer exhaustion.

The judge said he'd make a decision within a week.

During the summations he seemed to be nodding in agreement more with Mr. Levin, Lewis and Harrington rather than Mr. Spector. Mr. Spector may have gone a bit long-winded because the judge twice told him he was cutting his time off (firmly). Much of the time it was hard to read the judge because he was spending so much time trying to keep up with reading the (many) exhibits and his head would disappear behind his bench. He gave no indication on how he might be leaning, so I guess we need to keep our eyes out for a ruling.

I was glad to see the hearing end because there was much bickering between counsel throughout, and it really dragged the proceeding out. Everyone was glad to leave after almost 12 1/2 hours....

So, a couple of things flood my mind. First, who is LMS Acquisitions? Is it the same as LNS or not? And how in the world could SCO deny Hans Bayer's position? So, two research projects.

THE NEXT DAY'S REPORTS

Update 7: Here, after a good night's sleep, is part 1 of MikeD's notes, the 30 pages of notes he took at the July 27 hearing:
This is part one. This is through page 16 (of 30) of my notes.

Disclaimer. I am a civilian. I do not claim complete accuracy. My notes become less detailed as hearing went on. There was so much ....

Went with 17-yr-old son again.

Armies of lawyers. I ran out of there with everyone else well after 10 pm and neglected to ask for a copy of the sign in sheet.

Before the hearing began, close to 20 boxes of papers was delivered between the two sides.

I believe there were 9 or 10 lawyers for each side there. There were lots of suits in the gallery. Not sure the role of many of them. There were so many lawyers at the IBM/Novell table at the beginning that they were discussing where to get more chairs.

The judges mentioned his 2.5 hours per side. He said he would be flexible. Indeed he was.

Opening statements:

Mr. Spector: IBM/Novell claims in motion to convert were baseless. Their goal was to put SCO out of business. They are using the court to subvert the court into putting them into chapter 7. Their goal is to kill SCO's lawsuits against them. IBM/Novell want to crush SCO. The sale is complex, but simple in terms of the bankruptcy. The buyer is ready to close within days. There have been non-stop efforts to sell the company. There are legitimate reasons to sell under section 363. Mr. Norris will testify about their willingness and ability to close the deal. IBM/Novell will subvert the hearing and try and divert court to a "red herring". The only losers will be IBM/Novell, but not as creditors. SCO has said that they will continue to lose money in bankruptcy.

IBM/Novell have destroyed SCO's business. The $3.5 million owed to Novell is really only $2.5 million because of improper addition of interest cost. These costs are not allowed in bankruptcy. SCO will dispute those interest charges.

The 10th circuit is aware of the time-critical nature of their case. SCO fully expects them to rule before 8/31 when one of the judges retires. 8/31 is only 34 days away. Any losses during the 34 days will not affect the business. If the Utah ruling is reversed, then SCO will have $625,000 plus millions from the sale to further pursue litigation. IBM/Novell cannot prove SCO inability at rehabilitation. We don't need a plan. We can show rehabilitation without having a formal plan.

The CEO will testify on finances. Will show how we have reduced litigation costs and other costs. When we win the reversal in Utah, this will reconfigure the marketplace and unleash millions in revenue. The debtors have insurance. Mr. Yarro will backstop any losses up until the sale closes up to $200,000. If SCO wins in the 10th Circuit, litigation will continue. Converting to Chapter 7 is not the right solution. The trustee could sell, and is unlikely not to sell a company losing $100,000/month.

Mr. Levin (IBM): It's not IBM's intention to oppose the sale. They object to the poison pill provisions. Norris is an unknown. There is no committed buyer at this time. There were new developments as of last Thursday. There is at least one other potential buyer - LMS. They are represented here in the courtroom. A private sale is not a good idea. An auction will maximize creditor value. Court should appoint a trustee to conduct an auction. The current management is too close to the proposed buyers. The court should appoint a chapter 11 trustee if it does not covert to chapter 7.

Mr. Lewis (Novell): This case is all about litigation. Who should decide what is the best course for the company? A trustee should be approved. There needs to be a neutral party. Novell has not tried to end litigation by killing SCO. They have waited 2 years in bankruptcy before asking for conversion to chapter 7. The company should be in the hand of a neutral and unbiased party. Current management cannot be trusted. We ARE creditors.

SCO speaks of reversal. Unclear what would be the outcome even if SCO is successful. Will they then get Novell's $625,000 in escrow to "put in the maw" of continuing litigation and the money-losing mobile business?

If this sale is approved, how is Novell protected?

The sale does not assign the APA. The Unix business cannot be sold without it.

Mr. Doshi (Oracle) - via telephone: Had things he wanted to say and would wait his turn.

Mr. Levin: We received Amendment to sale agreement at 11:30 pm last night. We received a hard copy this morning. There has been no real opportunity to review it. Asks Judge for guidance.

Judge Gross: Asks Mr. Spector why another last-minute change.

Mr. Spector: We had to make poison pill wording changes. Mr. Norris flew in last night. He had to approve the changes. Everything has been fast and furious. Given to IBM/Novell as fast as possible. They were addressing issues brought up by IBM/Novell. An auction is not needed. He will show marketing efforts. Beware the "red herring" from IBM/Novell.

Mr. Levin: Only asked how to handle amendments.

Judge: Focuses on Mr. Levin question. He understands how changes can happen in the frenzy to get it done. Suggests an adjournment.

Mr. Harrington (US Trustee's Office):
[MikeD Comment: Mr. Harrington took over for Mr. McMahon for today. Mr. McMahon had another commitment. The Judge offered his condolences for being dumped into this case at some point.]
Trustee says they should go to Chapter 7, then file a plan. They have had plenty of time and opportunities up to this point. There appears to be no chance at rehabilitation. Has grave concerns over the proposed structured dismissal. There is no plan for rehabilitation, and that is the way it is supposed to work. Recommends conversion to chapter 7, followed by a real reorganization plan through the trustee.

Mr. Marriott (IBM): Wants to discuss process. Only 3 of 5 proposed exhibits are disputed. Wants to do ??? with 11, 36, 49, 37, 39, 40
[MikeD: My bad - not sure what he meant.]
There was some back and forth between Marriott and Spector on what should be allowed or not allowed. Judge decides to allow exhibits and questioning. He will decide on what to do as testimony and questioning proceeds. Suggests 30-minute break to review amendment.

Break

Upon return 4 witnesses are excused from courtroom. Nielson, McBride, Hunsaker, and Mr. Norris.

There is discussion about what to do during reading of sealed material. Courtroom will be cleared if the need arises.

Trial begins.

First witness is Ryan Tibbitts. He was chosen to go first since he is general counsel for SCO and needs to be in the courtroom after his testimony.

Mr. Marriott (Cravath, for IBM): Brings up procedural issues. Objects to paragraphs 7, 8, 9, 10, 11, 12, 16, 17 as hearsay and speculation.

Mr. Normand (Boies Schiller for SCO): Speculation in this instance is relevant and should be allowed. Mr. Tibbitts is general counsel and his views are relevant.

Mr. Marriott: Speculation should not be admitted.

Mr. Normand: Tibbitts views' are forward-looking and pertain to the current and future value of the company.

[MikeD: back and forth. This was about stock prices and what will happen if Utah ruling is reversed. Note - this was first skirmish on SCO trying to get in the "value of their claims".]

Judge: Overrules Normand. Testimony will be allowed except for effects on stock price.

Mr. Marriott: You note SCO claims in your declaration. You did not address any counterclaims.

Mr. Jacobs: You speak about the timing of the 10th Circuit ruling, and you say that the ruling will be made my Aug 31. Who told you that?

Mr. Tibbitts: I called the clerk at the 10th Circuit. Asked them what is the effect of the judge's pending retirement. Clerk said judge is wrapping up his cases and plans to have them all done before he leaves. Was only a general call to the court. Did not ask about this specific case.

Mr. Jacobs: Are you aware some circuits can rule with only two judges if there is an absence on the bench? Noted that the stayed SUSE arbitration is not shown in Tibbitts declaration. Arbitration will certainly incur more expenses for SCO. Addresses Spector comment on interest not being allowed in bankruptcy. The longer this goes on, the less value goes to Novell. [MikeD: This was Q and A - summarized.]

Mr. Normand: Asks Tibbitts about IBM counterclaims.

Mr. Tibbitts: There is NO dollar value to their claims - only attorney fees.

IBM/Novell table leaps to feet with objections. After discussion, judge allows Tibbitts' comments.

Mr. Marriott: Do you know what value IBM's experts put on our counterclaims?

Mr. Tibbitts: No.

Mr. Normand: Asks about stock price before and after ruling.

Mr. Tibbitts: $1.56 before / .44 cents after.

Witness excused.

Next Witness - Ken Nielsen of SCO.

[MikeD: Note - Ken Nielson is from SCO. Michael Nelson doing questioning is an IBM lawyer.]

Mr. Nelson (IBM): Objects to paragraphs 28 to 36 of Nielsen declaration pertaining to his views of what will happen to SCO if it is converted to chapter 7.

Spector: Begins dance routine. We were not trying to address every single detail. There is nothing mind-blowing in this. We were up until midnight last night writing up this declaration. Witness should not be locked out of offering his opinion on the financial impact of chapter 7.

Judge: Overrules IBM. Witness may testify. Declaration allowed.

Mr. Nelson (IBM):

[MikeD: Note. It got very confusing here. Mr. Nielson was questioned at length about his projected numbers. He was pounded on them. He admitted his numbers were wrong. Cash burn is $100,000 higher per month than his submitted numbers. Admitted that SCO will only have $69,000 left at the end of August. But then says they will be more money in September. Confuses everyone. There is more below. He did lot look good at the end.]

Nielson (SCO): Says chapter 7 causing closure of foreign subs will cost $1.2 million in required employee benefits. Admits no evaluation of assets was ever done.

Mr. Nelson (IBM): Begins questioning on Norris payments. Mr. Nielson admits that Mr. Norris received $100,000. Mr. Norris invoiced them in June 2008. There was nothing on the invoices about foreign subs. Was questioned about three invoices from foreign sub to SCO Utah for about $25k each. These were after the $100k invoice was paid. The three invoices were never paid? Nielson was aware that Darl paid them another $100,000.

Mr. Lewis: Gets Mr. Nielson to admit he knew his numbers were wrong prior to the June 15 hearing. Mr. Nielson says he was there at the June 15 hearing for the specific reason of correcting his numbers on the stand, but never got the chance. [PJ: Like Spector couldn't have done it.]

Mr. Lewis: Asks how he can have any projections since MORs have not been filed.

Mr. Nielson: Says they are complete through May/June.

Mr. Lewis: Asks what Norris $100k payment was for.

Mr. Nielson: "Developing marketing agreements in foreign markets." Mr. Lewis: Shows June 22 Board minutes which show a cash burn of $625k per quarter.

Mr. Nielson: Says they have enough cash to last through July 31. He then confuses everyone by saying they will have $300 to $400k on August 1.

[MikeD: Note - they never nail this down. The witness does not look very credible after admitting his numbers were wrong. He does not appear able to convince people that any numbers he now has are right.]

Mr. Harrington (US Trustee's Office): Have you ever been in chapter 7 before?

Nielsen: No.

Are you aware that the trustee can continue to run a company as an ongoing entity while in chapter 7?

Nielsen: ???

Mr. Spector: Today is 7/27. Will SCO be out of cash on 8/1?

Nielsen: No.

Spector: Is the $375k available for legal fees which is not currently assigned?

Nielsen: Yes.

Spector: Is income increasing?

Nielsen: Yes.

Spector: How?

Nielsen: Mr. McBride says increasing sales pipeline shows income going from $100k to $400k.

Spector: Regarding payment to Norris - who paid this?

Nielsen: SCO Japan.

Spector: What for?

Nielsen: A business and marketing plan.

Spector: Was a product produced?

Nielsen: Yes.

Spector: Is there a plan in case of conversion to chapter 7?

Nielsen: Yes.

Spector: What?

Nielsen: We will go to a services/maintenance model. Will entail reduction in force from 62 FTE's to 25 FTE's.

Spector: This "skinny down" model will allow SCO to be profitable for the first time?

Nielsen: Yes.

[MikeD: Note - there is discussion as to why an investment banker has not been used. They used Mesirow on one of the earlier deals. That cost $690,000. Continued use of an investment banker is just too expensive.]

Mr. Marriott: Wants on record that they are still missing documents.

Mr. Spector: We did the best we could. We worked really hard, late into the night, to be responsive to IBM/Novell.

Lunch break

Next witness - Darl McBride.

Mr. Spector: Describe SCO's original business.

McBride: Service/licensing/products. There a tree with branches. This is our IP. This is our core business. This is the licensing side of the business. We have a product side which is Unixware and OpenServer.

Spector: Is business expanding?

McBride: Yes - mobile products and virtualization.

Spector: Describe mobility business.

McBride: Just getting rolling. Were going to market with Day Timer with mobility products when we went to Chapter 11. Day Timer dropped interest. Then went to Franklin Covey. New customers buying daily. We have FCmobile. iPhone app for tasks. We have 10,000 new customers.

Spector: Is Franklin marketing your products?

McBride: Yes.

Mr. Spector hands out marketing materials.

Spector: How much revenue from mobile products?

McBride: Tens of thousands of dollars. [PJ: Note earlier information from the Board as to cash burn.]

Spector: What was status of these products at beginning of chapter 11?

McBride: Just starting to develop sales.

Spector: What happened to stock price on May 28, 2003?

McBride: $9/share to $5.85/share to 17 cents now.

Spector: What will be effect on stock price on reversal of Utah judgment? Objections! Objections!

Near brawl. Back and forth between Spector, Marriott, and Lewis. Mr. Spector says as CEO his opinion is not speculative and not objectionable. The others disagree.

Judge: Mr. Spector overruled.

Mr. Spector: What would be the effect of a Utah reversal?

Spector: Positive for customers, investors, and employees.

Objections! Objections! "Speculative."

Judge upholds IBM/Novell objections.

Judge: This is against my ruling on not allowing testimony on speculation regarding the Utah ruling.

Spector/Normand just won't give up. Continue to argue why it should be allowed.

Judge: I have a serious problem with speculation.

Mega argument on all sides. Spector simply won't give up. Long battle on this.

Judge (finally): Upholds IBM/Novell objections. Testimony on "what if" in Utah will not be allowed.

[MikeD Comment. At this point Mr. Spector has Darl go through all the deals and backgrounds of all the attempted deals to date. Mr. Spector wants to clear the room since some of them were under NDA. Someone proposes calling them "Company A" etc. They agree and everyone is allowed to stay. They get up to letter "I". Most of this was covered at last hearing, but Spector wants it in the record today. Mind-numbing detail. Took break after "Company A". Came back after visiting Clerk's office. They were up to "Company H". "Company I" was Yarro. This was all to show debtors have been working really, really hard all this time.]

Spector: Why did York deal fall through?

McBride: They kept asking for more. Trust evaporated.

Spector: When did MerchantBridge/Norris/Gulf Capital take lead as buyer?

McBride: When they put down $250,000 deposit.

Spector: When was this company formed?

McBride: Was formed for specific purposes of this deal.

Spector: Why is seller not assuming APA?

McBride: They don't need it. It's not an executory contract.

Objections! Darl not qualified as expert on this.

Judge: Upholds Novell objections.

Judge (not smiling): "Mr. Spector - your time is up."

Mr. Spector - "No, it's not."

Judge: "Yes, it is. Your time is up."

Mr. Spector: Who paid Mr. Norris? McBride: SCO Japan.

Mr. Spector finally sits down.

---end part one

Finally. The judge didn't allow the stock information in, but am I just a big ole cynic, or is it SCO's hope that if the appeals court reverses, suddenly the stock will shoot up and they can make a little coin?

Update 8: Here's MikeD's final notes. It took so long because of me, not MikeD. I fell asleep. This is a major moment in the SCO coverage, and it all just finally hit me. So, I'm to blame for making you wait and I'm sorry. But it's definitely worth the wait:

Continuing questioning of Mr. McBride.

[MikeD Note: Begin machine gun questioning from Mr. Marriott. Mr. Spector had gone well over his time by this point. Mr. Spector was arguing that he still had time. One of the IBM lawyers had a stop watch. Mr. Marriott proceeded into a no-nonsense, rapid-fire, yes/no questioning of Darl. Mr. Spector tried to add comments a couple of times and was brushed aside by Mr. Marriott. This was impressive lawyering.

Mr. Marriott (IBM): Have the Trustee/IBM/Novell proposed conversion to chapter 7?

McBride: Yes.

Marriott: Is the $4.375 million chapter 11 losses shown by SCO a false statement?

McBride: No.

Marriott: Isn't the real number $5.339 million.

McBride: No.

Marriott: Isn't the $29.5k/month loss figure a lie?

Mr. Spector interjects that the figures may be incorrect, but not a lie.

Mr. Marriott responds that he does not see the difference.

McBride: Figures are incorrect.

Marriott: Is SCO retaining the mobile applications?

McBride: Partially.

Marriott: Who is Shawn Cutler?

McBride: Key Marketing Manager - SCO Mobile.

Marriott: Who were the primary negotiators for SCO? McBride: Hunsaker, Tibbetts, Nielsen.

[MikeD Note - Here is where Mr. Marriott started reading emails from Hans Bayer. To summarize, Hans said that the mobility products being retained by SCO have no value to SCO; that Darl was holding onto a "weird dream" regarding the mobile apps; that Darl is spending millions of dollars on a product that nobody wants or needs; that the mobile apps and litigation is Darl's dream of hitting the jackpot; that employees are fed up with Darl and the litigation; that there only real product was Unix. These were all emails from Hans. I believe they were written to Steve Norris. Mr. Marriott was selectively reading lines from the emails during questioning. Mr. Marriott was so rapid-fire, I could not keep up. Summarizing, there was questioning of Darl about who Hans Bayer was and his position. Hans' title is VP of International Operations and Mobile Applications. There was much back and forth on this point. Mr. Marriott pointed out his title, which Darl disputed. Mr. Marriott pulled up the SCO Germany website on a Blackberry and handed it to Darl and asked him if it showed Hans as a VP - it did. Darl downplayed Hans position and authority. At this point, this line a questioning looked very damaging to Darl and SCO. Mr. Spector had a continuing objection to this whole line of questioning. The emails made it sound like Hans was a key negotiator. Darl insisted he was just a marketing guy or something to that effect. To tie things together, Mr. Norris, who was not in the room, later said that Hans was one of the primary negotiators.

Also note that Mr. Marriott had a stack of documents that he handed Darl one at a time during this questioning. He asked a question and moved on to the next document and question.]

Marriott: Was the total revenue for mobile apps in 2008 $82,000?

McBride: Yes.

Marriott: Was this is .53% of total revenue?

McBride: Yes.

Norris/Robbins payments. I got confused here. Not clear if it was $300k or $400k in total.

I have:

$100k loan to Norris(Robbins?)
$200k personal loan to Robbins
$100k payment to Norris for marketing plan.

The above was during the rapid-fire questioning.

Marriott: Is Mr. Norris an expert in software/hardware?

McBride: No.

Marriott: Did you loan Mr. Robbins $200,000?

McBride: Yes.

Marriott: What for?

McBride: Mr. Robbins would backstop up to $5 million on the Unxis deal.

Marriott: Did you want to pay York $150,000?

McBride: Yes.

Marriott: What do you project the value of the Java patent you propose to sell?

Marriott: If not sold by end of the year it goes to UnXis?

McBride: Yes.

Marriott: If not sold by end of year it has no value?

McBride: Yes.

Marriott: Are employees fed up with your attempts to protect the litigation?

McBride: No.

[MikeD Note - One more gem from Hans' emails - "the ancient battle over Linux is long over".]

Marriott: Did LNS bid $6 million for the Unix business?

McBride: Yes.

Marriott: UnXis bid $5.2 million?

McBride: Yes.

Marriott: If you take out the money owed to Novell (a letter of credit to pay if SCO loses appeal) isn't the real number $2.5 million?

McBride: [unclear if answered ....]

Mr. Lewis (Novell): How long did it take to sell 10,000 copies of the mobile app through Franklin Covey?

McBride: Took off at beginning of this year.

Lewis: What is the profit margin on downloads?

McBride: A couple of bucks up to $20.

Lewis: How much do you make on the iPhone app?

McBride: About $2.40 each.

Lewis: Is there a problem with iTasks?

McBride: Slows down as more tasks are added.

Lewis: What were the problems closing the York deal?

McBride: Charlie Hale was OK. Hard negotiators. They kept asking for more.

Lewis: Did you approve the $150k payment to York? [PJ: What? What? What? They went ahead and secretly paid York after all????]

McBride: Yes.

Lewis: Does the June 22 Board meeting minutes show approval of the Unxis deal?

McBride: Yes.

Lewis: So it was not approved on June 15?

McBride: Yes.

Lewis: The June 11 Board minutes do not show any deal approval?

McBride: No.

[MikeD Note - Here we go again.... Darl says Board gave blanket approval to do a deal. Final ratification of June 22. Mr. Lewis beats this horse for a while.]

Lewis: How can the business be sold without the APA with the 95% / 5% split?

McBride: The company has a duty but not an obligation to collect these royalties.

Mr. Harrington (Trustee): Did you talk to any of the previous bidders prior to accepting this offer? McBride: One.

Harrrington: Why does this deal not show IBM as a creditor?

McBride: Novell is a creditor. IBM is not.

Mr. Spector (SCO): Explain the 95% with regards to the sale.

McBride: Amendment 2 to section 4.16 - If SCO chooses not to collect their 5% commission, we can back off and Novell can go after their 95%.

Spector: Shawn Cutler (mobile apps), if he is going to UnXis for their server apps, who will do his job?

McBride: He will not be replaced at this time.

Mr. Spector tells the judge that the UnXis deal is "up to" $5.4 million.

Spector: Who is Hans Bayer?

McBride: Sales guy in SCO Germany.

Spector: Is he an officer or Board member?

McBride: No.

Spector: Is he authorized to speak on behalf of SCO?

McBride: No.

Spector: Was he reprimanded for his comments in the emails?

McBride: Yes.

Spector: Who reprimanded him?

McBride: I did.

Spector: What was his reaction?

McBride: You'll have to ask him. [laughter in courtroom]

Mr. Spector tells Judge Hans feels Unix is the SCO product and is not qualified to speak on behalf of SCO. Hans does not know the whole story.

Mr. Spector asks Judge to strike all testimony about the Hans Bayer emails as hearsay. Arguments ensue. Judge speaks about speculation and role of Hans.

Judge agrees with SCO and strikes all testimony regarding the Hans Bayer emails.

Spector: How do you know Mr. Robbins?

McBride: Little League.

Spector: Who introduced you to Mr. Norris.

McBride: Mr. Robbins.

Spector: Why did you lend him money?

McBride: He was a friend. He said he was worth millions. I made a mistake trusting him.

Break

Mr. O'Neil (SCO): Tells Judge that SCO notified 20 interested parties prior to this deal in exhibit #821 [not sure if the number is correct].

Mr. Norris takes stand.

[MikeD Note - Mr. Norris gave his bio. Impressive background. Multiple degrees, fellow at Yale. Worked for President of US after congressional approval on Federal Retirement System. He background was taxes and mergers and acquisitions. He was never a CEO, and proud of it. He is a deal maker. He was an extremely credible witness. He was asked at one point if he could name specific investors. He said he could if forced to, but would prefer not to because of "bloggers". Indicated he had gotten nasty communications for a while.

Mr. Spector [MikeD - I did not write down questioner name. I assume this is Mr. Spector still] Who/What is UnXis?

Norris: Gulf Capital Partners - with foreign investors with capital in excess of $10 million; and Merchant Bridge. Merchant Bridge is run by former members of Carlyle. Merchant Bridge is Basil Al Rahim and Eric Le Blan. Eric has expertise in SCO's type of business.

Spector: Why do you want Unix?

Norris: We want the business, not the litigation. There are three main operating system out there - Microsoft, Linux, and Unix. We see a market for an alternative hardened operating system, especially in developing markets.

Spector: What was the big issue in the negotiation?

Norris: We only want the Unix business. Want nothing to do with the litigation. We only want the rights to the Unix Operating System.

Spector: How much has Gulf Partners invested in this deal?

Norris: Approximately $500k plus the $250k deposit.

Spector: What does the deal include?

Norris: $2.15 million letter of credit to buy the business, plus $2.85 million letter of credit to cover Novell costs if they prevail.

Spector: What do you plan to do with the Unix business?

Norris: Raise $10 million. Use $6 million for engineering and marketing development.

Novell Lawyer (Nelson?): What is current capitalization of Gulf Partners?

Norris: $10,000.

Spector: Have you read the contract to be assumed?

Spector: Gulf Capital has no track record?

Norris: No. It was created for this deal.

Spector: Is Mark Robbins a business partner?

Norris: No. He was part of a business entity he had dealings with.

Spector: Did you receive $100k from Mark Robbins?

Norris: Yes.

Spector: Did you know it was from Mr. McBride? Norris: Yes.

Spector: What was this for?

Norris: I told Mr. McBride I would not work on this deal any further without some kind of compensation.

Spector: Mr. McBride knew that?

Norris: Absolutely.

Mr. Spector: Did you get paid $100k for a marketing plan?

Norris: Yes. In the end it was used as a basis to offer to buy the Unix business.

Spector: Who was primary contact during negotiations?

Norris: Hans Bayer.

Spector: What developing markets did you look at in this plan?

Norris: China, Russia, Kutar, Bahrain, Abu Dabi.

Spector: Do you still want to go through with this plan?

Norris: After having to sit outside the courtroom for the last nine hours, yes. [courtroom laughter]

Mr. Hunsaker called to stand. [MikeD Note - he also had been sitting outside for the last nine hours.]

Mr. Marriott: No questions.

[MikeD Note - big courtroom laughter here. After sitting outside for nine hours, no one had any questions for him. He jokingly said something along the lines of "but I want to testify to SOMETHING!"]

Hunsaker excused.

Mr. Marriott: Wants most of Hunsaker declaration tossed as hearsay and speculation. Big battle takes place. Mr. Spector says in his position, Mr. Hunsaker is qualified to offer his opinions.

Judge: Overrules IBM/Novell. Hunsaker declaration accepted.

Mr. Marriott: In view of this decision, asks Judge to reconsider his decision on Hans Bayer.

Judge says no to Hans Bayer. That testimony is still stricken from the record.

> Beltran Deposition.

Apparently, Mr. Beltran is with a small SCO shop on the west coast. After some discussion, everyone agrees as the Judge notes "Much ado about nothing". This deposition/declaration is tossed out without much of a fight.

Mr. Lowell (LNS): Addresses Judge and says they are interested in bidding.

Mr. Doshi (Oracle): Has been on the phone the entire time. Wants to speak about their questions.

Mr. O'Neill (SCO) interjects - Oracle proposed wording will be put in the contract verbatim.

Mr. Doshi accepts this.

Closing Arguments

[MikeD Note - VERY tired at this point. Tried to bullet key points of speakers.]

Mr. Levin:

----On Conversion

-Conversion to chap 7 filing - Is for cause
- Continuing losses to estate
- Debtors agree there are continuing losses
- Debtors lost $5.3 million in 21 months
- Continuing monthly losses of $240k to $280k
- Only $500 to $800k of unrestricted cash left
- Gross mismanagement
- Mobility development requires 10-12 FTE's with $100k a year projected income. Continuing losses.
- SCO got only a $3.5 million judgment (Novell) instead of $40 million. Still, they have not come up with a plan.
- Incorrect financial statements
- Different stories
- Questionable payments
- Website showing incorrect players/titles/responsibilities
- Failures to timely file MOR's

Mr. Lewis:

On Conversion

- Can this company be rehabilitated?
- They have no plan
- No rehabilitation even being discussed.
- Abuse of Chapter 11
- Should be assigned a Chapter 7 or 11 Trustee
- Trustee would be a neutral party.

Mr. Harrington (Trustee):

On Conversion

- 800# gorillas (Novell/IBM) did not come in on first day demanding conversion
- They waited 2 years and $5.3 million in losses before asking for conversion
- What is in best interests of creditors?
- Recommends Chapter 7

Judge asks him about the company continuing operating in Chapter 7

Mr. Harrington:

- Company can be operated in Chapter 7
- If not Chapter 7, then at least a Chapter 11 Trustee should be assigned

Mr. Spector (SCO):

On Conversion

- They have no pricing power to increase their prices
- UnXis gives them $1 million in new capital
- SCO website issues are a red herring.

---- On Sale

Mr. Spector (SCO):

- Engineering team goes. Costs come down
- Argues against Chapter 7. Says if conversion granted, Chapter 11 trustee is appropriate
- Judge will not allow them to talk about strength of claims. However, court should take notice that they must be good considering the amount of effort that has been put into them.
- Unusual circumstances - this case has many
- Court won't hear merits of claims, but since they are big, they should be considered.

Note: I believe at this point Mr. Spector tried to turn over arguments to Mr. Kaplan. The Judge has heard enough.

Judge: You may make one more point and you are done.

Mr. Spector: But I have several more ....

Judge: Pick one. You may make one final point.

Mr. Spector: We chose not to consider deal from LNS because we don't trust them.

Mr. Levin (IBM):

On Sale

- Problems

- Business purpose
- Fair price
- Notice
- Good faith
- Corrected numbers show they will be $300k in the hole after the sale as proposed.
- No valuation of business has been done
- Good faith - there is still a poison pill even after the last minute amendment.
- There is at least one other bidder in the wings (LNS)
- Wants minimum of Chapter 11 trustee
- There should be an auction
- This sales should not be approved

Mr. Lewis (Novell):

On Sale

- Debtors cannot sell the assets without assigning the APA. (Schedule G)
- Promised payment has been extended, but can still disappear.
- SCO wants the benefits of bankruptcy without the burdens.

Mr. Harrington (Trustee):

On Sale

- Questions whether the creditors will really be paid in full.
- Sale should not be approved without a reorganization plan
- Solution should be in best interests of creditors, not customers

Mr. Spector (SCO):

- We know the numbers are wrong. We are working really hard.
- Everyone will get paid except IBM
- SVRX licenses to not have to come through APA

Judge:

Thanks, everyone. In light of the extensive arguments and research that needs to be done, says he will decide on both the motion to sell and the motion to convert in about a week.

Court Adjourns at 10:10 pm

About Hans Bayer

You will find Hans Bayer listed as an officer of SCO Group in the Walker Research Corporate Directory 2007. Right here [PDF], on page 25, where he's listed as a VP.

SCOfolk are a trip and a half.

Here, in the litigation that resulted in a preliminary injunction against SCO in Germany in 2003, which is a wholly owned subsidiary of SCO, he was listed as the Managing Director in our translation. He was the head of it all at the time, the CEO, in German as you can see in the legal document [PDF], the Geschäftsführer. If SCO didn't pay the fine, it was Hans Bayer who was threatened with jail: "Die SCO Group muss die 10.000 Euro jetzt an die Staatskasse zahlen, ansonsten droht Geschäftsführer Hans Bayer eine Ordnungshaft von 10 Tagen." I think we'd call that authorized to represent the company. Later, he was replaced by Michael Olson, and then Jean Acheson, in the skinnying down of employees, but he's no underling.

Update 9: In the course of interacting with our reporters for this hearing, I found out that an earlier report on the June 15th hearing was somehow lost. I never got the email, and the reporter, Groklaw's UD, just thought I didn't think it was interesting, so he never mentioned it. Au contraire!! It's fascinating, and you may wish to check it out, since part of what happened was testimony about all four of the deals SCO said it was working on. In this hearing, the 27th, they mentioned Company A and Company B, but at the 15th hearing, they mentioned names. I can't say if they are identical, but they are relevant in any case. He's going to double check his notes, but what he sent was the name LSC Holdings, which offered a loan of between 5 and 6 million, and from the notes it sounds like DIP financing. So I'm highlighting it, because if any of our eyewitnesses recall any further details about all the deals they talked about at this hearing, I'd be interested and I think we all would.

Update 10: Here's who LMS may be. If so, it would not be the same entity as LNS.


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