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SCO's "Already Filed" Missing MORs Get Filed in Real Life - Updated 2Xs: June MORs, 2nd Letter & Novell Answer
Monday, August 03 2009 @ 03:54 PM EDT

SCO's missing monthly operating reports for April and May have suddenly shown up, right after the devastating hearing on July 27th where it was pointed out to the judge that not filing necessary reports from March onward was one indication of the need for a neutral to take over management of the company.

IBM's lawyer reportedly argued that SCO should not remain debtors in possession because there was no excuse for not filing any MORs since March, among other reasons, to which SCO's attorney claimed that April and May had already been filed.

It seems not, my dear Watson. The docket says these MORs were filed and entered today, thus by my simple calendar, they were not already filed on July 27.

Here they are:

08/03/2009 - 882 - Debtor-In-Possession Monthly Operating Report for Filing Period April 2009 for The SCO Group, Inc. Filed by The SCO Group, Inc.. (Attachments: # 1 Certificate of Service and Service List) (Makowski, Kathleen) (Entered: 08/03/2009)

08/03/2009 - 883 - Debtor-In-Possession Monthly Operating Report for Filing Period April 2009 for SCO Operations, Inc. Filed by The SCO Group, Inc.. (Attachments: # 1 Certificate of Service and Service List) (Makowski, Kathleen) (Entered: 08/03/2009)

08/03/2009 - 884 - Debtor-In-Possession Monthly Operating Report for Filing Period May 2009 for The SCO Group, Inc. Filed by The SCO Group, Inc.. (Attachments: # 1 Certificate of Service and Service List) (Makowski, Kathleen) (Entered: 08/03/2009)

08/03/2009 - 885 - Debtor-In-Possession Monthly Operating Report for Filing Period May 2009 for SCO Operations, Inc. Filed by The SCO Group, Inc.. (Attachments: # 1 Certificate of Service and Service List) (Makowski, Kathleen) (Entered: 08/03/2009)

Groklaw's nsomos was the first to notice that page 7 of #884 is illegible. That's the page that lists the book value of assets of the subsidiaries on the day SCO filed for bankruptcy in September, 2007, compared to May 31, 2009. But if you zoom in, you can at least make out that the book value of SCO China was nearly a half a million on the day SCO filed, and it's zero now. I guess they'll need to refile a legible copy. April's comparable page 7 on #882 is clearer. On page 4 of #883, I see a notation for April that reads like this:
Other Receipts:
China Investment - Royalty from Japan - 4/1/09-4/30/09: $0 - Cumulative Filing to Date: 802,644
Then on page 3 of #883, it lists under disbursements, $267,075 as "Funding of Subsidiaries". That's April. In May, as you can see on page 3 of #885, the same "Funding of Subsidiaries" was $175,710. The cumulative funding of the subs since SCO filed for bankruptcy is $6,447,113. The cumulative amount spent on salaries, net payroll, is $6,786,402. They could have paid Novell instead, I can't help but reflect. They have spent another $4,870,166 on "Administrative & Selling". Selling what? To whom? And they've spent a cumulative total of $1,513,097 on "Non-Bankruptcy Professional Fees". Maybe you can understand why the creditors are now asking the court to please step in. Cash at the end of May? $2,164,874.

And as long as we're talking about the subsidiaries and SCO's MORs, can anyone explain to me something we've been puzzling over since the February MOR [PDF] was filed?1 Why would Japan, as shown on page 12, be holding the restricted Novell money?

Update: The MORs for June are filed now. And another letter from SCO to the judge:

08/03/2009 - 886 - Debtor-In-Possession Monthly Operating Report for Filing Period June 2009 of The SCO Group, Inc. Filed by The SCO Group, Inc.. (Attachments: # 1 Certificate of Service and Service List) (O'Neill, James) (Entered: 08/03/2009)

08/03/2009 - 887 - Debtor-In-Possession Monthly Operating Report for Filing Period June 2009 of SCO Operations, Inc. Filed by The SCO Group, Inc.. (Attachments: # 1 Certificate of Service and Service List) (O'Neill, James) (Entered: 08/03/2009)

08/03/2009 - 888 - Letter (follow-up) to The Honorable Kevin Gross (related document(s) 879 , 880 ) Filed by The SCO Group, Inc.. (O'Neill, James) (Entered: 08/03/2009)

The letter is a follow-up to IBM's and Novell's points they raised in their letters responding to SCO's letter, all of which you'll find here. SCO draws the judge's attention to pages 51 and 52 of SCO's Response to the three motions to convert filed by IBM, Novell and the U.S. Trustee's Office. I think this is to try to persuade the judge that there is no need for a separate motion to suggest an examiner, because SCO mentioned that as a possibility in its Response. Or so SCO seems to be saying. Here's the exact wording, in case I'm misreading:
As a brief follow-up to IBM's and Novell's points raised last week concerning the basis for an examiner in the absence of a specific motion, the Debtors wanted to direct the Court's attention to pages 51 and 52 of Debtors' Response to those parties' and the U.S. Trustee's Motion to Dismiss or Convert, where an examiner was suggested as one option for the court.
No one suggested an examiner just for an auction, though, with the SCO Board still in control while the examiner just advises, which was SCO's new brainstorm. However, this letter, while fairly subtle, seems to be agreeing to an independent examiner.

SCO's lawyers must be reading some handwriting on the wall. Like mene mene tekel and parsin, which roughly translates to mean: You have been weighed in the balance and found wanting. Your kingdom will be divided and given to others. Joke. But I do read these two letters as indicating real anxiety in the SCO camp, and an effort at damage control.

Update 2: Novell has filed a response already to what it calls SCO's "inappropriate post-trial briefing":

08/03/2009 - 889 - Letter Regarding Post-Trial Filed by Novell, Inc.. (Greecher, Sean) (Entered: 08/03/2009)

A taste:
In any event, whether or not the Debtors properly raised the issue previously, the appointment of an examiner is not, for the reasons Novell, IBM and the United States Trustee have previously discussed, a solution for the problems of these chapter cases.

With that, we hope the post-trial communications with the Court are at an end.

BAM!! What he means by inappropriate is this: normally you can't communicate with a judge any time you feel like it. If, after a hearing or a trial, new information comes to light, then it's appropriate. But if you just think you could do a better job, or the judge said your time was up and meant it, so you didn't get to mention your last two points, you can't just send them in an email later, or a letter, to His Honor. If a missing witness suddenly reappears from a Rip Van Winkle coma or recants utterly what he said at trial, you can surely let him know there are new issues in the matter he might like to know about. But you don't normally get to grab extra time to finish what you didn't get said at the trial.

As for what SCO said on pages 51 and 52, here it is:

Of these two alternatives - trustee or examiner - an examiner would be the Debtors' preferred choice. The examiner's report can inform the Court, the United States trustee and creditors of an unbiased and professional opinion of the value of the Debtors' assets, including SCO's claims against Novell, IBM, AutoZone and UNIX infringers generally. Concomitant with that evaluation, of course, would be an opinion about the strength of the reciprocal claims of IBM, Novell and Red Hat. The examiner could also look into the Debtors' unsuccessful efforts at selling their assets and report on these issues as well.

A Chapter 11 trustee, who like a Chapter 7 trustee, owes fiduciary duties to the shareholders in a solvent case, has the ability to continue the business without fear of running a deficit in the Chapter 7 estate. This trustee would be able to take the time necessary to do the evaluations that an examiner would do. But the trustee option would be more expensive. First, the trustee would receive a commission based on 11 U.S.C. 326(a) as opposed to the hourly fee or flat fee charged by an examiner. Second, notwithstanding the commission, the trustee might opt to retain professionals who would then charge an hourly fee on top of the trustee's commission. By the time the trustee and his or her professionals have completed their evaluations, the Tenth Circuit would likely have already ruled. That fact itself would go a long way in resolving most doubts about the future of the Debtors, and render the report, be it from an examiner or a Chapter 11 trustee somewhat anticlimactic.

Accordingly, in order of preference, it is the Debtors' view that if cause is established and the Court is moved to take some action, that the Court consider either dismissing the cases or appointing an examiner, as either alternative would be far preferable to conversion of the cases to Chapter 7. And, if the Court believes that a trustee is required, then a Chapter 11 trustee, who will likely continue to operate the business for the benefit of all constituents of the estates, would clearly be the better option.

Now, in contrast, here's what SCO asked for in the first letter it sent to the judge:
The Debtors have now had a chance to consult with their board of directors and wanted to inform the Court that the Debtors would consent to an auction of the subject assets (i.e., those offered for sale in the current motion), and the appointment of an examiner to oversee the sale should the Court so direct. The Debtors agree to the involvement of an examiner under 11 U.S.C. 1104 to advise the Debtors' board and to report to the Court on the sale process and the outcome of any auction. The appointment of an examiner should alleviate the concerns expressed at the hearing that a third party would need to be involved in the process to make sure it is fair to all bidders.
Does that look identical to you? No? Me either.

Here's SCO's letter, as text, followed by Novell's:

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

[Pachulski Stang Letterhead]

[contact information]

August 3, 2009

The Honorable Kevin Gross
United States Bankruptcy Court
District of Delaware
[address]

Re: The SCO Group, Inc., et al.
Chapter 11 Case No. 07-11337 (KG)

Dear Judge Gross:

As a brief follow-up to IBM's and Novell's points raised last week concerning the basis for an examiner in the absence of a specific motion, the Debtors wanted to direct the Court's attention to pages 51 and 52 of Debtors' Response to those parties' and the U.S. Trustee's Motion to Dismiss or Convert, where an examiner was suggested as an option for the court. An examiner was also discussed during the July 27th hearing as a potential alternative to a chapter 11 trustee. The Debtors contended at the hearing that a trustee is unwarranted. On the other hand, we think an examiner would meet the objectives of all constituents of these cases, if the Court decrees an auction with third-party involvement.

The Debtors also believe that the Court has the inherent power under Section 105 of the Bankruptcy Code to appoint an examiner if independent third-party oversight is deemed warranted under the circumstances. Our suggestion of an examiner was prompted by IBM's and Novell's assertion that the Debtors could not assess objectively a competing bid submitted by LNS Acquisition. We disagree with that proposition and suggest that the auction process and stalking horse protections provided for in the unXis contract would effectively serve all interests with verifiable integrity. Nevertheless, an independent examiner would allay any concerns on this point and Debtors support this approach for assured objectivity and transparency.


[Pachulski Stang Letterhead]

The Hon. Kevin Gross
August 3, 2009
Page 2

The Debtors are available to address this issue with the Court or provide any additional information which maybe helpful to the Court.

Respectfully,

[signature]
James E. O'Neill

cc: William K. Harrington, Esquire (via email)
Joseph J. McMahon, Jr., Esquire (via email)
Adam A. Lewis, Esquire (via email)
Richard Levin, Esquire (via email)
Ryan E. Tibbitts, Esquire (via email)
Arthur J. Spector, Esquire (via email)

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

[Morrison & Foerster Letterhead]
[contact information]

August 3, 2009

Honorable Kevin Gross
United States Bankruptcy Court
District of Delaware
[address]

Re: In re SCO Group, Inc. et al.
United States Bankruptcy Court
District of Delaware
Case No. 07-11337 (KG)

Dear Judge Gross:

We write in response to the Debtors' further letter of today regarding the issues raised and submitted to the Court by the parties after briefing, trial and argument on July 27, 2009.

Our first comment is that this second letter, along with the Debtors' letter of last Friday, is, we believe, inappropriate post-trial briefing, for which neither the Court nor the parties asked at the conclusion of trial on July 27. We believe that the record was closed then and should not be, in essence, re-opened a week later for afterthoughts by the Debtors, especially on an issue for which the Debtors had ample opportunity to present their position both in the weeks leading up to the trial, during the trial and upon final argument at the close of trial.

In any event, whether or not the Debtors properly raised the issue previously, the appointment of an examiner is not, for the reasons Novell, IBM and the United States Trustee have previously discussed, a solution for the problems of these chapter cases.


Morrison | Foerster

Honorable Kevin Gross
August 3, 2009
Page Two

With that, we hope the post-trial communications with the Court are at an end.

Sincerely,

[signature]
Adam A. Lewis

cc: William K. Harrington, Esq. (via email)
Richard Levin, Esq. (via email)
Joseph J. McMahon, Jr., Esq. (via email)
Arthur J. Spector, Esq. (via email)
Ryan E. Tibbitts, Esq. (via email)


1PJ: We've been trying to figure out the China syndrome since February's MOR too. Here's what we noticed back then:

SCO Group's MOR for February [PDF] lists a book value for SCO China as of February 28, 2009 at zero. That's on page 7 of the PDF. It was valued at $497,858 as of September 2007, when SCO filed for bankruptcy protection.

Please compare SCO's MOR for October 2007 [PDF]. On page 7 of the former, it lists the book value of SCO China at $497,051. A year ago, the book value was $482,355 [PDF]. But last month, it was zero [PDF] and this month it is zero. Every other subsidiary's book value is the same. So when did China go poof?

If you look at SCO Group's MOR for December 2008 [PDF], it lists SCO China's book value in such a smudged way, it's impossible to be certain of the figure. But if you work backward from the total, no math I can come up with computes, unless SCO China's book value is a negative number. If we assume the first figure, for SCO Germany, is identical to every other MOR listing, then it's $24,944. SCO Japan is $765,366, SCO Canada is $38,051, SCO France is $70 and SCO UK is $4. On my calculator that adds up to $828,435. The total listed on the MOR in that category is $823,406, as best I can make out. So that means that the figure for SCO China must be a minus, and the smudged figure must be (5,029).

The month before, the MOR for November of 2008 [PDF], the figure for China is $364,971. And on page 4 of SCO Operations' MOR for November [PDF], it lists China Investment at 316,906 and a cumulative figure to date of 432,659.65. And the book value now is zero? Did they sell it off? Are they pouring money down a volcano in China? What? If they sold it, wouldn't it show up somewhere?

The SCO Operations MOR for that same time period [PDF], December 2008, mentions on page 4 under "Other Receipts" an item, "China Investment, Royalty from Japan", $369,984. And on page 14, I see under the category, Breakdown of "Other" Category, it lists "Miscellaneous Exp/Inc (SCO Japan Interco Reclass Req'd) at (619) and (823,067) under Cumulative Filing to Date. Then on page 16 SCO Japan is listed in the category "Other Current Assets" as "Intercompany Receivables - SCO Japan" 297,932. And under "Other Assets" there's 2,203 for "Investment in Affiliates."

Then on that same page 16, under "Liabilities and Owner Equity" I see "Intercompany Payables", to UK 187,351; to Germany 212,772, to France 28,987; to Canada 11,446; and to SCO India 434,226.

Can any of you brainiacs tell me what, if anything, this means?

Here are the filings:

04/06/2009 735 Affidavit/Declaration of Service of Epiq Bankruptcy Solutions Regarding Supplemental Order Granting and Sustaining Debtors' First (Non-Substantive) Omnibus Objection to Claims Pursuant to 11 U.S.C. Section (502(b) and Bankruptcy Rule 3007 (related document(s) 730 ) Filed by The SCO Group, Inc.. (O'Neill, James) (Entered: 04/06/2009)

04/07/2009 736 Debtor-In-Possession Monthly Operating Report for Filing Period February 2009 of The SCO Group, Inc. Filed by The SCO Group, Inc.. (Attachments: # 1 Affidavit of Service and Service List) (Makowski, Kathleen) (Entered: 04/07/2009)

04/07/2009 737 Debtor-In-Possession Monthly Operating Report for Filing Period February 2009 of SCO Operations, Inc. Filed by The SCO Group, Inc.. (Attachments: # 1 Affidavit of Service and Service List) (Makowski, Kathleen) (Entered: 04/07/2009)

There is a footnote on page 3 of #737 that reads: (1) The initial MOR incorrectly consolidated cash balances from subsidiaries. This amount reflects cash only held in SCO Operation, Inc. bank accounts.

And it seems easier to understand the MORs if you compare them to the SEC filings. What we remember is that China appeared to be carried on the books as an investment because they held an equity stake (30% of the whole company). They converted that investment to cash, perhaps, kind of like how you convert an illiquid savings bond to cash when you need the money. Is that the explanation? They did not sell anything, they just converted equity (stock) to cash? But where is it? Shouldn't there be a corresponding entry somewhere? Well, this 10K says: "On November 24, 2008, the Company entered into a Dissolution Agreement and Termination Agreement to dissolve its minority ownership in a Chinese company. Under the Agreement, the Company received a dissolution payment of $370,000 in December 2008. Upon completion of the dissolution of the Chinese company, the majority shareholder in the Chinese company will enter into a distribution agreement with the Company."


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