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Changes and Additional Documents to the Yarro Deal Filed
Thursday, March 04 2010 @ 01:40 PM EST

There are more filings in the bankruptcy, related to the proposed Yarro deal, and because that hearing is coming up soon, on Friday, I'm posting them quickly, before even reading them myself. Specifically, there are proposed changes to the deal, so take a look. Exhibit A is the redlined draft. Exhibit F is "proof" that Seung Ni Capital, LLC actually exists, or at least that it has written up Articles of Organization. It's a Utah LLC. Or at least the page we get to see has a stamp "Received - Mar 01 2010 - Utah Tax Commission [address]." However, the Collateral Agent Agreement says it's a Delaware LLC, and it calls it Seung Ni Capital Partners, L.L.C. Is that the sound of wings I hear?

I'm starting to get the impression that they don't want us to have time to actually read and think about this super-fast proposed deal.

Here it all is:

03/04/2010 - 1077 - Exhibit // Notice of Filing of Additional Documents Related to Financing Motion (related document(s) 1051 ) Filed by Edward N. Cahn, Chapter 11 Trustee for The SCO Group, Inc., et al.. (Attachments: # 1 Exhibit A # 2 Exhibit B # 3 Exhibit C # 4 Exhibit D # 5 Exhibit E # 6 Exhibit F) (Fatell, Bonnie) (Entered: 03/04/2010)

Exhibit B is the redlined Order, reflecting the changes to the deal.

Exhibit C is the Stock Pledge Agreement.

Exhibit D is the Security and Pledge Agreement.

Exhibit E is the Collateral Agent Agreement. You have the list of where the money is coming from on the last page:

Ralph Yarro ---$400,000
Jan Loeb ---$400,000
Rex Lewis--- $600,000
Hank Beinstein--- $350,000
Dan Campbell ---$100,000
Darcy Mott--- $10,000

Exhibit F is the top page of the Articles of Organization of Seung Ni Capital, LLC.

The individuals listed "may be a 'Lender' either individually or through an entity in which they own or control an interest. Additional 'Lenders' may be added, or the foregoing amounts may change." You'll remember Hank Beinstein from the mention of a Hank Beinstein deal at the bankruptcy hearing in June 15, 2009 and our finding someone with that name at Gagnon Securities. The Hank deal was one of four SCO allegedly considered, and in the end SCO walked in to the hearing about conversion to Chapter 7 with the Stephen Norris deal, threw it on the table for consideration without notice in what the judge himself called a "Perry Mason situation" or as close to one as a bankruptcy judge gets, and then Berger Singerman's Arthur Spector put Frank Caplan, described as their "deal partner" on the stand and he said the Hank Beinstein deal "involved a subscription for warrants in SCO and a funding of SCO of approximately -- to be determined but the range was I think between two and a half million dollars and up. And the consideration for that, in addition to warrants, would be a share of litigation proceeds if there are any." So I gather Hank no longer wishes to go quite that high, all by himself. You know board member Dan Campbell and Darcy Mott, mentioned in the Canopy-Noorda litigation.

Jan Loeb is a name I recall seeing back in 2005, as one of a long list of people Bert Young wrote an email to about a favorable development as SCO saw it in the SCO v. IBM case. Al Petrofsky was also on the list of those favored with a copy of the email, and he shared the news. One of the other names was "Jan Loeb" [...]@chespartners.com and we next saw a Jan Loeb sending a Objection [PDF] in the SCO bankruptcy in 2009, and by then he was President and Portfolio Manager, Leap Tide Capital Management, Inc. and the purpose of the Objection was to argue against Chapter 7. Loeb told the court that Leap Tide's various entities along with "a portfolio for AmTrust International Insurance," had been shareholders of SCO since February of 2005. I don't know if it's the same Jan Loeb, I can't help but notice. His objection said they'd investigated SCO's claims and found them to have merit, that they were "important to SCO and the shaping of the industry" and thought they could result in "significant returns for investors". He told the court that "under certain circumstances and terms" they'd "be interested in providing additional capital to SCO to pursue its claims against IBM and Novell and continue to develop its products and services." Ah, some dreams die hard and slow. My point is, these are longtimers, with money in the company's shares, and they want their "significant returns" or something, anyway. Or is this about "shaping the industry"? Why would they care this much, this long? That is the ultimate mystery, and if this loan deal goes through, I suspect we'll never know, because these guys will likely get all the papers and computers that would tell the complete story as collateral. Poof?

And to refresh our memories, here's Novell's Objection to this deal, and Al Petrofsky's, if they allow it in.

The changes are mainly fixing typos, a changed definition of GAAP, plugging in the right Exhibit letter, now that the missing documents are being provided, and things like that. But on page 28, there's something that is more than that. They add this phrase, marked in blue, to this sentence in Section 6.13, on the right of first refusal for additional indebtedness: "In connection with and as result of obtaining such additional Indebtedness and in connection with any other covenant or agreement of the Borrower with any third party or parties, Lender's right to receive the Loan Fee from the Litigation Proceeds shall not be diluted or otherwise reduced or diminished."

The other change that matters is this addition to the collateral on page 50:

9. Collateral expressly listed and identified in each of the Security Documents.

Notwithstanding the foregoing list, the "Collateral" shall expressly exclude the following: (a) all "Employee Carve-Out Amounts" referred to in that certain Security and Pledge Agreement that constitutes one of the Security Documents; (b) all causes of action under Chapter 5 of the Bankruptcy Code; and (c) any voting stock (or other voting equity interests) in excess of 65% of the outstanding voting stock (or other voting equity interests) of any foreign Subsidiary.

Ah, those creepy subsidiaries. I told you something seems to be up about them.

In other words, then, other than making it worse in my eyes, this Frankenstein deal is just right for filing in Cahn's eyes, even after reading the objections. Exhibit D is where you find the breakdown of what Ralph gets a first lien and security interest in as collateral, (subject to defined permitted encumbrances) for loaning whatever it is he ends up loaning:

  • Inventory
  • Accounts and Rights (leases, contracts, deeds of trust, collateral assignments (PJ: what?), etc.)
  • Equipment and Fixtures
  • General Intangibles, which is defined as bank accounts, causes of action, business records (PJ: uh oh), customer lists, tax refunds, intellectual property, inventions, patents, copyrights, trademarks, etc. Oh. And "manure spreading licenses." Perfect. They definitely have some of those. You can't run a business if you don't get those.
  • Investment Property. Like securities. All voting rights associated with the shares.
  • Bank Accounts. I thought those were "general intangibles". Anyway, he gets them and all investment accounts, by hook or by crook, as collateral.
  • Insurance. All right, title and interest in any policies.
  • Books and Records. Ah, of course. They even ask for the cabinets and drawers that hold them, and "computer records, lists, and software programs, wherever located".
  • Commercial Tort Claims. That would be IBM and Novell.
  • Litigation Proceeds.
  • Payment Intangibles. This seems to mean any settlement money or judgments where money flows to SCO.
  • Products and Proceeds. "All products and proceeds of any and all of the foregoing, including, but not limited to, proceeds which constitute property of the types described in the foregoing paragraphs of this Section 2 and, to the extent not otherwise included, all payments under insurance... or any indemnity, warranty or guaranty..."

In short for a loan up to but not guaranteed to be $2M, he wants it all, everything SCO owns, including all evidence of wrongdoing should any exists in those drawers and cabinets and computers. I notice that if SCO changes its offices, or any property location, it has to tell Ralph 30 days prior, in writing, and "furnishing Secured Party with such documents" if Ralph asks. Like he wouldn't. He can also inspect his collateral any old time he wants to, upon reasonable notice, and copy stuff and "discuss Debtor's affairs, finances, operations, and accounts with its respective officers, directors, employees, and independent certified public accountants". So he wants to kind of run the show still, keep his hand in, so to speak?

If there is a default, here's what happens: if there is loss or damage to any insured collateral, Ralph can get the insurance proceeds and apply it "to the payment of any of the Secured Obligations" or can use it to fix the damaged collateral. If there's no default, the insurance goes to SCO. And how do you like this paragraph?

b. General. Upon the occurence and during the continuance of an Event of Default and at any time thereafter, Secured Party may declare the Secured Obligations immediately due and payable...
So, he gets the entire company's assets and all the IP for a song, conceivably. Nice work if you can get it. In fact, it goes on to say he can enter the premises and just take stuff without notice, sell it off, use it, whatever. Why, though, would Cahn agree to a deal like this? If SCO loses at trial, there will almost certainly be a default, and then whiz bang, Ralph gets it all for very little, in a perfect playout of this deal in Ralph's favor. If you notice on page 8, if there is a Continuing Default, the "Secured Party" has the right "to operate, manage and control the Collateral and to carry on Debtor's business and to exercise all rights and powers of Debtor in respect of the Collateral as Secured Party sees fit..." And on the next page, without notice to SCO, he can "transfer to or register in its name or the name of its nominee any stock certificates or any other evidence of the Securities Collateral"... and then use the rights to vote, call shareholders' meetings, and to "remove or elect directors/managing partners/managers, as applicable" or sell them off privately, or to himself. And the "Secured Party" is "hereby appointed Debtor's attorney-in-fact, with full powers of substitution, at Secured Party's option and Debtor's expense, to do all acts and things which Secured Party may reasonably deem necessary..." OMG.

May I ask an "Emperor's New Clothes" question? How does SCO plan to pay off a loan if it loses later this month in SCO v. Novell? Wouldn't it be prudent to wait and see what happens, instead of giving away the farm if there's no brass ring? Which reminds me, if Ralph agrees, SCO can still sell off the Collateral, in which case all liens are released. So he gets control of who SCO can sell to with encumbrances too? Is this just another strategy to make sure Novell gets absolutely nothing? I do note that the Trustee has the foresight to contract that he has no personal liability.

Finally, here's what Martindale has to say about Yarro's law firm, Holland & Hart. Interestingly, they do graphics for lawyers to use at trial, and if you recall, Yarro began as a graphics artist. Martindale says they are the "largest law firm based in the Mountain West".


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