The Linux Beacon--SCO and New Sugar Daddy File Bankruptcy Reorganization Plan

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Volume 5, Number 10 -- March 11, 2008

SCO and New Sugar Daddy File Bankruptcy Reorganization Plan

Published: March 11, 2008

by Timothy Prickett Morgan

Commercial X86 and X64 Unix operating system supplier The SCO Group and the prospective sugar daddy firm that is proposing to invest up to $100 million to take the company private and pursue its legal claims, Stephen Norris & Co Capital Partners, last week delivered a reorganization plan to the U.S. Bankruptcy Court for the District of Delaware to show how the deal will work.

In short, according to the reorganization plan filed by SCO and SNCP on February 29, SNCP is proposing to pay all of SCO's outstanding secured creditors in cash plus interest, if it is applicable, and distribute cash for SCO's shares to current shareholders. The filing indicates that SCO has $3.1 million in secured claims against it right now and approximately $5 million in unsecured claims--meaning, essentially, that the bankruptcy court is likely to pay only a percentage of these latter costs because they are not at the front of the line.

After bringing SCO out of bankruptcy, SNCP says it will pay $5 million to buy up newly issued Series A preferred stock, which will give SCO the funds to pay off its debts and to put $2 million in a trust that will be used to soak up the old SCO's stock. SNCP will then bring in a new board of directors and chief executive officer and proceed with its business of selling UnixWare and OpenServer operating systems and other software gadgets and pursuing its litigation against IBM, Novell, and Red Hat. As part of the deal, SCNP is making available to the newly constituted SCO, which will almost certainly not be called SCO, a $95 million line of credit. SNCP can convert its preferred stock back to regular stock and have the new SCO pay for it after five years, or the company can go public with at least a $40 million take under the agreement. The $95 million line of credit expires after five years, and is meant to cover litigation costs.

There are a lot of really weird things the deals does to stock under certain conditions relating to the settlement of any of the lawsuits. SNCP, as the holder of the Series A stock, gets to pick four out of the seven seats on the new SCO board of directors directly, and will vote with other shareholders to pick the other three. Darl McBride, the company's current CEO, has been terminated by this bankruptcy reorganization. It is unclear what other employees are slated for removal, or who SNCP has in mind to run the new SCO.

The bankruptcy court is expected to hold a hearing to approve or deny the reorganization plan on April 2.

SNCP is a private equity firm based in New York, and a set of unnamed Middle Eastern backers are providing the $100 million to take over SCO. Norris is one of the founders of private equity giant The Carlyle Group, who was forced out of the company in 1995. Norris has done investments at Carlyle for various Middle Eastern investors, including Prince Alwaleed bin Talal of Saudi Arabia.

In addition to the reorganization plan, SNCP gave an indication of how it would be running the company after it emerges from bankruptcy in discussing its future user conference, SCO Forum. "At this year's event, SNCP will be announcing the new private company strategy that will be implemented upon SCO Group's exit from Chapter 11," the company's statement said. "The go-forward strategy announcements will include new management, new partners, and new products aimed at making SCO the leading platform software provider to the emerging global growth markets (Middle East, Africa, Brazil, Russia, India, and China); and to the SCO Group installed base of millions of servers. This year's event will be exclusive to SCO partners, customers, and employees and will not be open to the public as in years past."

Private company, none of your business. Get it?