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Darl McBride Out; SCO Looking to Sell "Non-Core Assets"
Monday, October 19 2009 @ 12:01 PM EDT

The SEC has some news in SCO's latest 8K:
Item 5.02 Departure of Directors or Certain Officers

On October 14, 2009, The SCO Group, Inc., (“SCO”, “us”, “we”or the “Company”) announced that the Company has eliminated the Chief Executive Officer and President positions and consequently terminated Darl McBride. The current management team comprised of Chief Operating Officer, Jeff Hunsaker, Chief Financial Officer, Ken Nielsen and General Counsel, Ryan Tibbitts, along with the rest of the management team will continue to work closely with the Chapter 11 Trustee and his advisors.

Item 8.01 Other Material Events

SCO also announced a restructuring plan following an analysis of the company's operations and cost structure undertaken by Chapter 11 Trustee, Edward Cahn and his advisors. The Company is also looking to raise additional funding and sell non-core assets to bolster working capital.

I wonder how the Chapter 11 Trustee defines "non-core"? Other than Darl, I mean.

ars technica says the litigation will continue:
In a statement issued by SCO's new leadership, the company indicates that it plans to continue its litigation efforts and will move forward with the appeals process. The company also says that it plans to continue supporting its UNIX products. This potentially indicates that SCO has given up on trying to unload its UnixWare assets, a plan that has fallen through several times now as various proposed deals have evaporated.

"These actions, while difficult, are essential to SCO becoming a more agile and efficient company, not just for this year, but for years to come," said Hunsaker in a statement. "This restructuring plan reinforces SCO's ability to continue to sell and support its products while servicing the needs of our customers and partners on a worldwide basis through the stabilization of our financial situation."

Sad when getting rid of you is deemed essential for a company's survival. But I doubt this is the end of the Cowboy. He has reportedly said that there could be a shareholder revolt and litigation against the Chapter 11 Trustee. And none of the above tells us what the folks who have backed SCO from day one will do. If you recall, in the Pelican Equity complaint, other defendants with McBride allegedly called him their puppet. So... who is the puppet master?

There is another allegation in footnote 2 on page 12 of the First Amended Complaint [PDF]:

2 McBride met Norris while he was working for AIP. The conclusion of the venture to take control of SCO Group bore similarities to that of the stock loan business. Norris, McBride, and Brazell took the opportunity for themselves to the exclusion of Robbins. After Norris and Robbins established a joint venture to purchase SCO out of bankruptcy with McBride's assistance, Norris and Brazell excluded Robbins' company from that entity and replaced it with Brazell's company, Gulf Capital Partners, LLC. Not coincidentally, Bryan Cave also represented Gulf Capital Partners. In connection with that endeavor, McBride unlawfully made a $100,000 payment to Norris, which he obtained through a home equity loan that he bragged was fraudulent, to make up for fees that the bankruptcy judge had forbidden SCO to pay Norris.
Now, this is an allegation, not evidence. You can say whatever you want in a complaint, and it's only later in litigation that you find out who is telling the truth or who is in the right. Both McBride and Bryan Cave have filed motions to dismiss the complaint, which are pending. But while it's important to caution about not jumping to conclusions, the fact that such incendiary allegations are out there now in public could be at least part of what may be happening behind the scenes, I would imagine.

I find it hard, I guess, to understand the reasoning behind firing McBride and then continuing the litigation unless there is some other factor. Litigation is his best skill, in my view. But then, SCO never did take my advice. Think how much trouble they could have saved themselves, and the rest of us, if they only had.

P.S. SCO's litigation will eventually fail, in my view, because of the GPL. They released their Linux products under the GPL. It's the fundamental flaw that will sink that ship no matter what else they are able to do. I've been saying that since Groklaw began, and it's still my opinion.

Here's the SCO statement in full, attached to the 8K as Exhibit 99-1:

THE SCO GROUP ANNOUNCES STRATEGIC PLAN AND MANAGEMENT CHANGE

Lindon, Utah, October 16, 2009 – The SCO Group, Inc., (Pink Sheets: SCOXQ) a leading provider of UNIX® software technology, today announced a restructuring plan following an analysis of the company's operations and cost structure undertaken by Chapter 11 Trustee, Edward Cahn and his advisors.

The company expects to finalize details of the restructuring and to reach cash flow breakeven for core operations within the next month. The savings are a combination of non-workforce related changes and a modest reduction in SCO’s workforce. As part of the restructuring, the company has eliminated the Chief Executive Officer and President positions and consequently terminated Darl McBride. The current management team comprised of Chief Operating Officer, Jeff Hunsaker, Chief Financial Officer, Ken Nielsen and General Counsel, Ryan Tibbitts, will continue to work closely with the Chapter 11 Trustee and his advisors to implement the restructuring plan, move the intellectual property litigation forward with Boies, Schiller & Flexner, LLP and emerge from Chapter 11 bankruptcy.

The company is also looking to raise additional funding and sell non-core assets to bolster working capital. These actions will allow the Trustee to preserve cash and the value of the business while enabling the Company to proceed with asset sales, pursue litigation against, among others, IBM and Novell, and to continue supporting SCO’s loyal UNIX customer base.

“These actions, while difficult, are essential to SCO becoming a more agile and efficient company, not just for this year, but for years to come,” said Mr. Hunsaker. “This restructuring plan reinforces SCO’s ability to continue to sell and support its products while servicing the needs of our customers and partners on a worldwide basis through the stabilization of our financial situation.”

Forward Looking Statements

The statements contained in this press release regarding (1) the Company’s plan of reorganization and (2) the Company’s financing efforts are forward-looking statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to risks and uncertainties. We wish to advise readers that a number of important factors could cause actual results to differ materially from historical results or those anticipated in such forward-looking statements. These factors include, but are not limited to, outcomes and developments of our restructuring plan,outcomes and developments of our Chapter 11 case, court rulings in our bankruptcy proceedings, the impact of the bankruptcy proceedings on our other pending litigation, and our cash balances and available cash. These and other factors that could cause actual results to differ materially from those anticipated are discussed in more detail in the Company’s periodic and current filings with the Securities and Exchange Commission, including the Company’s Form 10-K for the fiscal year ended October 31, 2008, as amended, and future filings with the SEC. These forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update such statements to reflect events or circumstances arising after such date.

I gather the Chapter 11 Trustee thinks there is a way to keep the company in business. And he also thinks, so far, that the litigation is worth pursuing. Or he'd like IBM to think so. I see he is looking for money, and SCO has always had the fantasy that at some point IBM would pay them to go away. But then, he's new. Perhaps, more rationally, he just hopes to attract investors who might be more attracted if McBride wasn't part of the investment. And firing McBride indicates to me that while the litigation will continue, it won't be pursued in the same manner as under McBride's leadership. What about SCOsource? That, according to Heise, is what caused SCO's financial troubles in the first place. An English translation by computer:
Under the direction of McBride ensured the company with an aggressive Unix campaign for attention, which culminated in the unjustified demand that all companies, which use Linux would have to buy intellectual protection licenses of SCO. This campaign was accompanied by a high-altitude flight of the SCO share.
I love that. High-altitude flight. Like Icarus. Too bad the SEC wasn't wire tapping back then. Here it is in German:
Unter der Leitung von McBride sorgte die Firma mit einer aggressiven Unix-Kampagne für Aufsehen, die in dem Ansinnen gipfelte, dass alle Firmen, die Linux einsetzen, intellektuelle Schutz-Lizenzen von der SCO kaufen müssten. Diese Kampagne wurde von einem Höhenflug der SCO-Aktie begleitet.
Update: Heise has done its own English translation now:
Under McBride's stewardship, the company made headlines for its aggressive UNIX campaign which culminated in the demand that every company using Linux should purchase an IP license from SCO. The campaign was accompanied by a soaring SCO share price. The boom was short-lived. SCO shares are now worth one penny, and the company has been forced to file for protection from its creditors under Chapter 11 of US insolvency legislation. In a hearing before the bankruptcy court McBride recently claimed that he was in negotiations with four potential purchasers over the future of the SCO Group.
Steven J. Vaughan-Nichols realizes that this is not The End:
Does this mean that we can finally make funeral arrangements for SCO? I wish!

But I do think this means that SCO's anti-Linux lawsuits are dead. Yet the question of who actually owns Unix's intellectual property — SCO or Novell — was recently reopened. Since that's the only thing SCO might own that would have real value, I can see Cahn keeping SCO's doors cracked open long enough for that issue to be resolved.

That all this means is that I think SCO will stagger on into 2010.

Sigh. The right to license is SCO's already. So what would they need copyrights for, if not to sue folks? Some may not have noticed what the original SCOsource plan ultimately entailed, a SCOsource license to run AIX. Note this testimony from Chris Sontag in the SCO v. Novell trial last year:
Q. Now, if you could take a look at that e-mail on the second page, in the middle of the page, it's an e-mail from Jeff Hunsaker at SCO to yourself, Mr. McBride and others at SCO. And it's sent on July 31, 2003, correct?

A. Yes.

Q. And what was Mr. Hunsaker's position -- his position at SCO was Senior Vice President of Worldwide Sales and Marketing, right?

A. I believe that to be the case.

Q. And Mr. Hunsaker currently is the president and CEO of SCO, right?

A. I think at least the president of SCO Operations or something like that. I'm not sure what his exact title is now.

Q. And what he said in the middle of 2003, this e-mail followed a conference call about this SCOsource licensing program, right?

A. Yes.

Q. And the subject line there is: SCOsource issues and buyoff, correct?

A. Yes.

Q. And he wrote Darl, Chris, Kim and Kevin, correct?

A. Yes.

Q. And then he wrote:

During our SCOsource con call today, we discussed and would like to propose the following. The official name of this program will be the SCO UNIX IP Compliance License Program.
Correct?

A. Yes.

Q. And that's the name that was eventually used for this program of these contracts that we have just been through, right?

A. Yes, at least for a period of time.

Q. And then he wrote ... This is not a Unixware 7.13 SKU, right?

A. Yes.

Q. And then he wrote:

The license is called a SCO UNIX IP license for Linux. The only rights that this license provide is for Linux binary runtime copies. When we are ready to issue a similar license for AIX, it will be called the SCO UNIX license for AIX.
That was the dream, and I believe it still is. It would explain being willing to keep trying to get those copyrights. IBM has deep pockets, and that tends to inspire litigation. But if you bother to sue one, why not Linux too, if you have the copyrights and can prove infringement, neither of which I consider possible. But if they do, they may decide it's worth continuing to reach for the brass ring. And I notice Mr. Hunsaker, who composed that email, isn't terminated. So anyone who thinks this is over probably hasn't been paying close enough attention to the background stories. Darl is now, I would opine, the fall guy.

So... I wonder what McBride will put on his resume?

Update: I just noticed the date of the termination was October 14. So when Maureen O'Gara wrote, in an article dated October 16, that Darl "expects to get fired any minute"...? Well, what can I say? The perfect ending. [ http://in.sys-con.com/node/1147274]

Update 2: Not so fast, m'hearties. According to the Salt Lake Tribune, McBride didn't find out until today:

McBride, who learned of his ouster on the Internet Monday morning, also said in an interview it appears to him that the trustee is looking to lay off employees or cut pay as part of an attempt to wind down the company and settle the lawsuits.

"I think what they are heading for is either the business gets wound down and sold off and then what's left is the litigation," McBride said. "At that point, what it appears they are angling for is to settle the litigation for what I think are pennies-on-the-dollar type of numbers."

This may be why he isn't the CEO any more, talking still about IBM and Novell paying SCO instead of the other way around. Anyway, McBride says he is rustling up some money, maybe from Cerberus Capital Management of New York, and that he and 50% of the shareholders will present a different plan, while Cahn sticks with Norris. Say, what? Yes. That is what it says:
McBride said his status as a shareholder gives him the ability to act in bankruptcy court. He said he has the backing of around 50 percent of shareholders for what might turn out to be an alternative plan to exit bankruptcy that could include new investment, perhaps from Cerberus or others.

"I'm putting together an alternative plan ... that will ultimately get SCO its day in court," he said.

Novell and IBM also declined to comment.

The SCO statement indicates that Cahn might follow a previously proposed plan that would sell the Unix business to a company formed by Stephen Norris, the head of a private equity firm, Gulf Cap Partners, and a London-based entity.

So Norris dumped McBride too? What is going on? Surely it can't be believed that the bankruptcy judge, having appointed the Chapter 11 Trustee, seeing that he has ousted McBride, would then go with McBride's plan over the Trustee's? Ah, but this is the SCO soap opera, and you have to tune in tomorrow.

Update: An 8K on Hunsaker leaving:

On November 13, 2009, Jeff F. Hunsaker, President and Chief Operating Officer, SCO Operations, Inc. (“SCO”) announced that he will be transitioning out of the company, effective immediately, to pursue other opportunities. Mr. Hunsaker will act as a consultant, subject to bankruptcy court approval, to SCO over the next several months in order to assist the company with its UNIX business opportunities. Senior management personnel of SCO, including Ken Nielsen, Chief Financial Officer, Alan Raymond, Vice President of Worldwide Sales, Andy Nagle, Senior Director of Engineering and Hans Bayer, Vice President of International Operations will collectively assume Mr. Hunsaker’s duties and will continue to manage the business and to serve SCO’s UNIX customers in conjunction with the Chapter 11 Trustee, Edward Cahn, and his advisors. Ryan Tibbitts, General Counsel, will continue to work with Mr. Cahn in directing and pursuing the company’s legal claims.

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