SCO Grp v. Novell Inc

Filing 510

DECLARATION of David E. Melaugh re 509 Memorandum in Opposition to Motion for Judgment on the Pleadings on Novell's Claims for Money or Claim for Declaratory Relief filed by Novell, Inc.. (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3)(Sneddon, Heather)

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SCO Grp v. Novell Inc Doc. 510 Att. 1 IN THE UNITD STATES BANUPCY COURT FOR THE DISTRICT OF DELAWARE In re: The SCO GROUP, INC., et al.,l Debtors. ) ) ) ) ) ) Chapter 11 Case No. 07-11337 (KG) (Jointly Administered) Hearing Date: April 2, 2008 at 2:00 p.m. prevailng Eastern time Objection Deadline: March 26, 2008 at 4:00 p.m. prevailing Eastern time NOTICE OF DEBTORS' MOTION TO APPROVE SETTLEMENT COMPENSA TION OR SALE COMPENSATION AND EXPENSE REIMBURSEMENT TO PLAN SPONSOR TO: (1) the Office of the United States trustee for the District of Delaware; and (2) all paries who have timely filed requests for Notice under Bankrptcy Rule 2002 The captioned debtors and debtors in possession (collectively, the "Debtors") filed the attached Debtors' Motion to Approve Settlement Compensation or Sale Compensation and Expense Reimbursement to Plan Sponsor (the "Motion") with the United States Bankrptcy Court for the District of Delaware, 824 Market Street, Wilmington, Delaware 19801 (the "Bankrptcy Court,,).2 The Motion requests entry of an order approving the Plan Sponsor Protections, including the payment of Settlement Compensation or Sale Compensation, as defined and provided for in the MOU, as and if applicable, as well as the Expense Reimbursement. 1 The Debtors and the last four digits of each of the Debtors' federal tax identification numbers are as follows: (a) The SCO Group, Inc., a Delaware corporation, Fed. Tax Id. #2823; and (b) SCO Operations, Inc., a Delaware corporation, Fed. Tax il. #7393. 2 Capitalized terms not defined herein shall have the meaning ascribed to them in the Motion. 77477-00IIDOC_DE: 135345.1 Dockets.Justia.com OBJECTIONS AND RESPONSES TO THE MOTION, IF ANY, MUST BE IN WRITING AND FILED WITH THE BANKUPCY COURT NO LATER THAN 4:00 P.M. PREVAILING EASTERN TIME ON APRIL 26, 2008. Objections or other responses to the Motion, if any, must also be served so that they are received not later than April 26, 2008,4:00 p.m., prevailing Eastern time, by (i) counsel to the Debtors: (a) Pachulski Stang Ziehl & Jones LLP, 919 North Market Street, 17th Floor, P.O. Box 8705, Wilmington, DE 19899-8705 (Courier 19801), Attn: Laura Davis Jones, Esquire; and (b) Berger Singerman, P.A., 350 East Las Olas Blvd., Ste. 1000, Fort Lauderdale, FL 33301, Attn: Arhur J. Spector, Esquire; and (ii) the Office of the United States Trustee, J. Caleb Boggs Federal Building, 844 N. King Street, Suite 2207, Lock Box 35, Wilmington, Delaware 19801, Attn: Joseph McMahon, Esquire. IF OBJECTIONS OR RESPONSES ARE TIMLY FILED AND SERVED IN ACCORDANCE WITH THIS NOTICE, A HEARING ON THE MOTION WILL BE HELD BEFORE THE HONORABLE KEVIN GROSS, UNTED STATES BANKRUPCY COURT, 824 MARKET STREET, SIXTH FLOOR, COURTROOM 3, WILMIGTON, DELAWAR 19801 ON APRIL 2, 2008 AT 2:00 P.M. PREVAILING EASTERN TIME. 77477-001 \DOCS_DE: 135345.1 2 IF YOU FAIL TO RESPOND IN ACCORDANCE WITH THIS NOTICE, THE COURT MAY GRANT THE RELIEF REQUESTED IN THE MOTION WITHOUT FUTHER NOTICE OR HEARING. Dated: Febrar -l, 2008 PACHUSKI STANG ZIEHL & JONES LLP avis Jones (Bar No. 2436) Ja e E. O'Neil (Bar No. 4042) Rachel Lowy Werkheiser (Bar No. 3753) 919 North Market Street, 17th Floor P.O. Box 8705 Wilmington, DE 19899-8705 (Courier No. 19801) Telephone: (302) 652-4100 Facsimile: (302) 652-4400 Email: ljones(gpszjlaw.com joneil (g pszj law .com rwerkheiser(gpszjlaw.com and BERGER SINGERMAN, P.A. Paul Steven Singerman Arhur J. Spector Grace E. Robson 200 South Biscayne Blvd., Suite 1000 Miami, FL 33131 Telephone: (305) 755-9500 Facsimile: (305) 714-4340 and 350 E. Las Olas Boulevard, Suite 1000 Fort Lauderdale, FL 33301 Telephone: (954) 525-9900 Facsimile: (954) 523-2872 Email: singerman(gbergersingerman.com aspector(g bergersingerman.com grobson (g bergersingerman.com Co-Counsel for the Debtors and Debtors-in-Possession 77477-00 1 \DOC_DE: 135345.1 3 IN THE UNITD STATES BANKUPCY COURT FOR THE DISTRICT OF DELAWAR In re: The SCO GROUP, INC., et aI.,l Debtors. ) ) ) ) Chapter 11 Case No. 07-11337 (KG) (Jointly Administered) ) Hearing Date: April 2, 2008 at 2:00 p.m. prevailing Eastern time Objection Deadline: March 26, 2008 at 4:00 p.m. prevailng Eastern time DEBTORS' MOTION TO APPROVE SETTLEMENT COMPENSATION OR SALE COMPENSATION AND EXPENSE REIMBURSEMENT TO PLAN SPONSOR The SCO Group, Inc. ("SCO") and SCO Operations, Inc. ("Operations") (SCO and Operations, collectively, the "Debtors") seek the approval of certain protections to Stephen Norrs Capital Parners, LLC ("SNCP") on the terms provided in the Memorandum of Understanding ("MOU") attached as Exhibit A hereto, in consideration for SNCP's commtment to finance the Debtors' Joint Plan of Reorganization (the "Plan"), and pursuant to the definitive agreements contemplated thereby (the "Definitive Documents"). The Debtors wil fie the Plan and related Disclosure Statement by February 29,2008, and seek a hearing on this Motion at the same time as the hearng to approve the Disclosure Statement. The Debtors wil file the forms of the Definitive Documents (including those to be executed at the Effective Date of the Plan), at least 5 business days before the hearng on approval of the Disclosure Statement. In support of this motion (the "Motion"), the Debtors state: 1 The Debtors and the last four digits of each of the Debtors' federal tax identification numbers are as follows: (a) The SCO Group, Inc., a Delaware corporation, Fed. Tax Id. #2823; and (b) SCO Operations, Inc., a Delaware corporation, Fed. Tax il. #7393. 77477-001 \DOCS_DE: 135345.1 Jurisdiction and Back2round 1. This Court has jurisdiction over these cases pursuant to 28 U.S.C. 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. 157(b)(2)(A). 2. The statutory predicates for the relief sought herein include: 11 U.S.c. 105(a), 363(b), 364 and 503, implemented by Rules 2002(a)(2), 3017,4001, 6004 and 9014 of the Federal Rules of Bankrptcy Procedure. 3. On September 14, 2007, the Debtors fied voluntary petitions for relief under Chapter 11 of the Bankrptcy Code, 11 U.S.C. 101-1532. 4. For greater detail regarding the background of the Debtors' business and events leading up to the filng of these cases, the Debtors refer the Court and paries to the Declaration of Darl C. McBride, Chief Executive Offcer of the Debtors, in Support of First Day Motions (the "McBride Declaration") (Docket No.3) fied on the Petition Date and incorporated herein. 5. Within no more than 15 days of the filng of this Motion, the Debtors wil fie the Plan and Disclosure Statement in Connection with Debtors' Joint Plan of Reorganization (the "Disclosure Statement"). On February 13,2008, in contemplation of the Plan, the Debtors executed the MOU with SNCP. A copy of the MOU is attached as Exhibit A. 6. The MOU commts SNCP to finance up to $100 millon for a plan of reorganization that provides for, among other things: (a) payment in full of all creditors, including all trade and other unsecured creditors and the contingent, unliquidated and disputed claims of Novell and IBM, each on the earlier of the effective date of the Plan or the date when such claim becomes an allowed claim; 77477-001 \DOCS_DE: 135345.1 2 (b) extinguishment of the existing equity securities (including common stock equivalents) of SCO; On the Effective Date of the Plan, SNCP to pay $5,000,000 (in cash or via wire transfer) to the reorganized SCO in consideration of a new class of preferred stock to be issued by SCO ("Series A Preferred") which shall have the liquidation, voting and distribution preferences described in the MOU. At its option, the holder of the Series A Preferred wil be able to convert the Series A Preferred into between 51 % and 85% of SCO's equity, depending on the amount drawn under the Debt Financing as defined and described below; (c) (d) The reorganized Debtors to retain all of their intellectual property and all of their pending litigation rights and claims, including without limitation the potential liabilty or recoveries under the pending cases titled The SCO Group, Inc. v. Novell, Inc., pending in the United States District Court for the District of Utah, Civil No. 2:04 CV-00139, and the related pending litigation, The SCO Group, Inc. v. International Business Machines, pending in the United States District Court for the District of Utah, Case No. 2:03CV0294DAK (the "Novell/M Litigation"). The MOU provides that the reorganized SCO wil pursue the Novell/M Litigation and other pending litigation claims aggressively; (e) SNCP to also provide reorganized SCO with financing up to US $95 million (the "Debt Financing"), available for, among other purposes, supporting appellate bonds (and, although SCO expects to prevail in the pending litigation claims, providing for full payment of allowed claims, if so required by final judgment adverse to reorganized SCO) in the Novell/M Litigation and other pending litigation claims. The Debt Financing wil provide a five year non-revolving credit line and bear a high but appropriate rate of return (LIBOR plus 17%), reflecting the risks of this investment commitment and an commensurate rate of return. The Debt Financing shall be secured by all of the assets of SCO, including all of its present and future litigation claims; (f) The conversion percentage of the Series A Preferred to vary depending on the amount drawn on the facilty after the Novell/IM litigation claims resolve. Should the amount drawn be $0, then the Series A Preferred wil convert into 51 % of reorganized SCO's equity. Should the amount drawn be $30 millon or more, then the Series A Preferred wil convert into 85% of reorganized SCO's equity. Should the amount drawn be between $0 and $30 millon, then the Series A Preferred wil 77477-00 1 \DOCS_DE: 135345.1 3 convert into a percentage of the then-outstanding common stock of SCO proportionally; (g) Equity holders (and holders of common stock equivalents, including stock options) of SCO existing as of confirmation of the Plan to receive a pro-rata interest in a grantor trust (the "Trust"). The Trust shall be the holder of the new common stock (and new common stock equivalents) of SCO ("New Common Stock"), representing between 49% and 15% of SCO's fully diluted equity after conversion of the Series A Preferred, the precise amount of which shall be determned based upon the conversion rights of the Series A Preferred. The beneficial interests in the Trust to be issued to SCO's equity holders shall represent apro rata interest in the outstanding New Common Stock held by the Trust, which wil correspond to the percentage interests of SCO's equity holders (and common stock equivalent holders) at the time of the organization of the Trust. The Trust wil receive $2 millon on the Effective Date of the Plan (from the $5 millon proceeds of the Series A Preferred), which wil be distributed to Trust beneficiaries (in respect of holdings of common stock and excluding holders of common stock equivalents) after reserving for reasonable Trust expenses. Within one year after the pending litigation claims in the Novell/M Litigation are finally resolved (by final order, not subject to further appeal, or settlement), reorganized SCO wil make a final payment to redeem all New Common Stock held by the Trust in an amount equal to the sum of (a) a percentage of any net recovery reorganized SCO realizes from the final resolution of the Novell/M litigation (net of any recovery on or settlement of counterclaims and cross claims against SCO, and net of all taxes, and legal and other professional fees and expenses incurred by SCO in connection therewith), such percentage to vary between 15% and 49% depending on the conversion percentage of the Series A Preferred, and (b) the product obtained by multiplying (i) SCO's earings (excluding any earings arsing from a Novell/M litigation recovery) before interest, taxes, depreciation and amortization (over the four full fiscal quarers immediately preceding the resolution of the Novell/M litigation), by (ii) the product of four times the percentage (between 15% and 49%) determned under (a), above; and (h) Interests in the Trust shall not be transferrable, and the reorganized SCO wil no longer be a public company and shall not be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. 77477-001 \DOCS_DE: 135345.1 4 7. A primary purpose and intended results of the Plan, and the financing commtments provided under the MOU, is to encourage and promote an early and favorable resolution of the Novell/M Litigation. Notwithstanding the August 2007 interim ruling by the Utah District Court in the Novell Litigation, SCO believes it has an excellent chance to prevail in the Novell/M Litigation, including potential for an award of substantial damages in its favor should SCO prevaiL. The financing commtments provided under the MOU increase SCO's ability to succeed in the NovellIBM Litigation from a practical perspective, and therefore SNCP has required the inclusion of the Plan Sponsor Protections (as defined below) in the MOU. 8. SNCP requires the following in the MOU (the "Plan Sponsor Protections"): (a) the right to paricipate directly in any settlement discussions relating to the Novell/M Litigation, and (b) the right to share equally with SCO in any net proceeds of a favorable resolution of the Novell/IM Litigation prior to the Effective Date of the Plan (whether structured as a settlement, a purchase of SCO, or an exclusive licensing arangement) as an administrative expense. The MOU provides that SNCP has no obligation to proceed with its financing commtments or the Plan unless the Court approves the Plan Sponsor Protections. 9. The Debtors concede that the Plan Sponsor Protections seek extraordinary relief from the Court. The Debtors' support for that relief, and the benefits that the SNCP financing commtments and the Plan offer this estate, are at least as extraordinary. SCO's litigation position in the Novell/M Litigation wil benefit immediately and substantially by SNCP's $100 millon financing commtments. 77477-001 \DOC_DE: 135345.1 5 10. The Debtors' creditors wil benefit from SNCP's financing under the Plan as they wil be paid in full, with interest, on the earlier of the Effective Date of the Plan or the date their claims are allowed. 11. The benefits of the Plan and financing to SCO's equity interest holders are extraordinary. The Plan allows SCO's equity holders to receive not only payment in full of the present value of their common stock, on or about the Effective Date of the Plan, but also preserves for equity holders the benefit of a potential subsequent distrbution to retire their interests in SCO, in cash equal to up to almost half of: (i) the net proceeds from the resolution of the Novell/M Litigation, plus (ii) 4 times SCO's 12-month trailng EBITDA value. 12. The Plan Sponsor Protections grant SNCP an extraordinary share in the potential Novell/M Litigation net settlement proceeds generated before the Effective Date of the Plan because of: (a) the possibilty that the SNCP financing commtments and Plan could be the cause creating Novell/IM Litigation net settlement proceeds, in substantial amounts, before the Effective Date of the Plan, (b) the entire certainty that if there are no Novell/M Litigation net settlement proceeds generated before the Effective Date of the Plan, the Plan Sponsor Protections are, and were always, entirely moot, and never cost the Debtors a penny, and (c) the extraordinary benefits the Plan offers all paries in interest in these cases. 13. The Plan Sponsor Protections first focus on allowing SNCP to paricipate in negotiations to resolve the Novell/M Litigation. Pursuant to the MOU, if SCO receives either: (a) a written or oral offer or counteroffer to settle the Novell/M Litigation, Autozone Litigation or any other pending litigation (collectively, the "Pending Litigation") prior to the Effective Date of the Plan; or (b) a written or oral offer or counteroffer to acquire the Debtors by, 77477-00 1 \DOCS_DE: 135345.1 6 or for the account of, a defendant in the Pending Litigation, the Debtors shall promptly notify SNCP of the offer and all material terms thereof. Similarly, the Debtors shall promptly advise SNCP of all offers (including counteroffers) it makes to settle or resolve the Pending Litigation. At its option, one or more representatives of SNCP may attend settlement conferences or conference calls between the paries to the Pending Litigation, whether the same are directed at settling the Pending Litigation or acquiring the Debtors. At the request of the Debtors, each representative of the SNCP who shall attend settlement conferences or conference calls between the paries to the Pending Litigation shall execute a confidentiality agreement reasonably acceptable to the Debtors and SNCP. 14. The Plan Sponsor Protections also implement the intent of the MOU for the Debtors and SNCP to share equally the Novell/IM Litigation net settlement proceeds that may be realized before the Effective Date of the Plan, despite the form that resolution the pending litigation may take, including a sale or exclusive licensing arangement. If the Novell/IM Litigation is not resolved before the Effective Date, these Plan Sponsor Protections cost the Debtors' estates nothing. 15. The Debtors believe that absent the SNCP financing commtments provided for under the Plan, the Debtors' chances to reach a favorable resolution of the Novell/IM Litigation by the proposed Effective Date of the Plan (i.e., not later than August 15, 2008) would be more difficult. In all events, it is certain that SNCP's $100 millon financing commtment to support the Novell/M Litigation wil immediately and substantially enhance SCO's litigation position. 77477-001 \DOCS_DE: 135345.1 7 16. If the Novell/M Litigation is resolved in reorganized SCO's favor after the Effective Date of the Plan, the MOU gives the equity security holders of SCO essentially as much as SNCP requests in the Plan Sponsor Protections. Specifically, under the MOU and Plan, within one year after the Novell/M Litigation resolves, reorganized SCO wil redeem the Trust's common stock interests for up to 49% of the net settlement proceeds (vs. 50% required by the Plan Sponsor Protections) plus an equal share of SCO's value at 4 times EBITDA. 17. In the extraordinary event that the Novell/M Litigation is resolved in SCO's favor before the Effective Date of the Plan, and the Court nonetheless does not confirm the Plan, the Plan Sponsor Protections grant SNCP an equal share of such net proceeds as an administrative expense, payable promptly after the Debtors' receipt of such net settlement (or sales proceeds) and subsequent Bankrptcy Court order refusing to permt confirmation or consummation of the Plan. 18. In addition to the Settlement Compensation, SNCP shall be entitled in the circumstances in which the Settlement Compensation becomes payable, to complete its acquisition of the Series A Preferred upon payment of the $5 millon purchase price therefor, before, at the time of, or immediately after the Reorganized Debtor emerges from bankrptcy. In connection with the payment of the Settlement Compensation or the Sale Compensation or if the MOU is termnated by SNCP for any of the reasons set forth under the "Termnation of the Transaction" section of the MOU that are not directly attributable to the act or omission of the SNCP, then SNCP shall also be entitled to an administrative claim for reimbursement from the Debtors of its out of pocket fees, costs and expenses (up to $500,000) incurred in connection therewith (the "Expense Reimbursement"). Significantly, SNCP shall not be entitled to any 77477-00I\DOC_DE: 135345. i 8 Expense Reimbursement if it termnates the Plan as a result of its due dilgence investigations regarding the Debtor, and SNCP's rights to so termnate the Plan expire at the hearng on approval of the Disclosure Statement. Relief Requested 19. By this Motion, the Debtors request entry of an order, in the form attached hereto approving the Plan Sponsor Protections, including the payment of Settlement Compensation or Sale Compensation, as defined and provided for in the MOU, as and if applicable, as well as the Expense Reimbursement. The MOU requires that the Plan Sponsor Protections be allowed as an administrative expense, payable promptly after the Debtors' receipt of net settlement or sale proceeds and after the Court enters an order denying confirmation of the Plan. 20. The MOU provides that SNCP may termnate its financing and other commtments to SCO unless the Court approves the Plan Sponsor Protections. The Court should approve the Plan Sponsor Protections because the Plan it sponsors provides for full payment of all claims and interests on the Effective Date (or the date the claim or interest becomes allowed), and essentially up to an almost equal sharng of Novell/M Litigation net proceeds plus SCO's equity value, payable to holders of equity interests by a distribution after the Effective Date. The Plan proposes to pay all creditors in full plus interest, gives holders of common stock an immediate distribution about equal to their present market value, and substantial additional potential upside in a distribution after the Effective Date. 21. The Debtors acknowledge the lack of precedent for the Settlement Compensation and Sale Compensation components of the Plan Sponsor Protections. However, 77477-00 1 \DOC_DE: 135345.1 9 the Debtors believe that the Plan Sponsor Protections are necessary and wil benefit the Debtors' estates, their creditors and equity security holders because: (i) approval of the Plan Sponsor Protections by the Court is a condition to the effectiveness ofthe MOU; (ii) the MOU provides the funding and financing necessary for the Plan; (iii) any scenaro under which the Debtors would settle the Pending Litigation or sell substantially all of their assets would be premised upon: (a) creditors of the estates being treated as they would under the Plan, and (b) holders of equity interests getting greater value than proposed under the Plan even after the payment of the Plan Sponsor Protections. 22. The Bankrptcy Code authorizes the Court to issue "any order, process, or judgment that is necessary or appropriate to cary out the provisions of (the Bankrptcy Code)." 11 U.S.C. 105. One purpose of the Bankrptcy Code, and chapter 11 in paricular, is to allow the reorganization of a company. Here, the Plan Sponsor Protections are part and parcel of the Debtors' Plan and wil allow the Debtors to reorganize and emerge successfully from their chapter 11 cases. The Third Circuit has interpreted section 105 on numerous occasions: In In re Continental Airlines, 203 F.3d 203 (3d Cir.2000), we (a) "supplements courts' specifically observed that 105 enumerated bankrptcy powers by authorizing orders necessary or appropriate to cary out provisions of the Bankrptcy Code." Id. at 211. We cautioned that 105(a) "has a limited scope. It does not 'create substantive rights that would otherwise be unavailable under the Bankrptcy Code.'" !d. (quoting United States v. Pepperman, 976 F.2d 123, 131 (3d Cir.1992)). This instruction was consistent with our earlier observation in In re Morristown & Erie Railroad Co., 885 F.2d 98 (3d Cir.1990), that 105 authorizers) the bankrptcy court, or the district court sitting in bankrptcy, to fashion such orders as are required to further the substantive provisions of the Code. Section 105(a) gives the court (a) general equitable powers, but only insofar as those powers are applied in a manner consistent with the Code. Nor does section 105(a) give the court the power to create substantive rights that 77477-00 1 \DOCS_DE: 135345.1 10 would otherwise be unavailable under the Code. Id. at 100 (citations omitted). Morristown reveals this Court's considered view that 105(a) is a powerful, versatile tool, but that it operates only within the context of bankrptcy proceedings. Section 105(a) empowers bankrptcy courts and district courts sitting in bankrptcy to fashion orders in furtherance of Bankrptcy Code provisions. In re Joubert, 411 F.3d 452, 455 (3d Cir. 2005). 23. In U.S. v. Energy Resources Co., Inc., the bankrptcy court confirmed a plan of reorganization that designated tax payments as trust funds. The Supreme Court held that: The Bankrptcy Code does not explicitly authorize the bankrptcy courts to approve reorganization plans designating tax payments as either trst fund or nontrust fund. The Code, however, grants the bankrptcy courts residual authority to approve reorganization plans including "any... appropriate provision not inconsistent with the applicable provisions of this title." 11 U.S.C. 1123(b)(5); see also 1129. The Code also states that bankrptcy courts may "issue any order, process, or judgment that is necessary or appropriate to cary out the provisions" of the Code. 105(a). These statutory directives are consistent with the traditional understanding that bankrptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships. See Pepper v. Litton, 308 U.S. 295, 303-304, 60 S.Ct. 238, 243-244, 84 L.Ed. 281 (1939); United States National Bank v. Chase National Bank, 331 U.S. 28, 36, 67 S.Ct. 1041, 1045, 91 L.Ed. 1320 (1947); Katchen v. Landy, 382 U.S. 323, 327, 86 S.Ct. 467, 471, 15 L.Ed.2d 391 (1966). 495 U.S. 545, 549 (1990). Here, the Debtors are asking the Court to supplement rights for purposes that exist under the Bankrptcy Code. The Debtors are seeking approval of a transaction that wil enable them to reorganize and emerge from these cases pursuant to terms that would be enforceable under state contract law. The Debtors submit that there wil not be any modification of the creditor-debtor relationship and holders of equity interests of SCO wil not be in any worse position as a result of the requested relief. 77477-001 \DOC_DE: 135345.1 11 24. The Debtors further submit that the Plan Sponsor Protections should be allowed as an administrative expense because, as discussed hereinabove, the Debtors believe that if the Novell/M Litigation is resolved favorably or if a third pary makes an offer to purchase substantially all of the Debtors' assets, the cause for such settlement or sale wil have been the fact that SNCP commtted to provide the financing necessary for the Debtors to emerge from bankrptcy, continue the research, development and growth of their businesses and continue the Novell/M Litigation and other pending litigation. The Debtors submit that the Plan Sponsor Protections can be analogized to the allowance of an administrative expense to a creditor that provided a "substantial contribution." Substantial contribution has been interpreted as a contribution that '''foster(s) and enhancers), rather than retard(s) or interrpt(s) the progress of reorganization.''' Speights & Runyan v. Celotex Corp., (In re Celotex Corp.), 227 F.3d 1336, 1338 (11th Cir. 2000) (quoting In re Consolidated Bancshares, Inc., 785 F.2d 1248, 1253 (5th Cir. 1986) (quoting In re Richton Intl Corp., 15 B.R. 854, 856 (Bankr. S.D.N.Y. 1981)). A creditor can be reimbursed for providing a substantial contribution where it "directly and materially" contributes to a reorganization. Id. (citing In re Lebron, 27 F.3d 937,943 (3rd Cir. 1994)). See also In re Best Products Co., Inc., 173 B.R. 862, 865 (Bankr. S.D.N.Y. 1994) (substantial contribution require applicants to prove that they provided "actual and demonstrable benefit to the debtor's estate, its creditors and to the extent relevant, the debtor's shareholders") (emphasis added) (citations omitted)); In re Big Rivers Elec. Corp., 233 B.R. 739, 746 (W.D. Kentucky 1998) ("the court must determne whether the pary's action conferred a direct, substantial, or meaningful benefit to the bankrptcy estate"). Such involvement "takes the form of constructive contributions in key reorganizational aspects, when butfor the role of the creditor, the movement 77477-00 1 \DOCS_DE: i 35345.1 12 towards final reorganization would have been substantially diminished." In re 9085 E. Mineral Offce Bldg., Ltd., 119 B.R. 246, 250 (Bankr. D. Colo. 1990) (emphasis added). 25. While the Debtors admit that SNCP is not a creditor, the Debtors believe that "but for" SNCP's commtments under the MOU, the Debtors' chances for achieving a favorable settlement of the Novell/M Litigation or sale of substantially all of their assets would be more difficult. 26. Further, the Debtors believe that the Plan Sponsor Protections encourage a potential plan sponsor who invests time, money and effort to negotiate with a debtor to take the risks and uncertainties that come with the Chapter 11 banptcy process. 27. In consideration of the benefits of the Plan Sponsor Protections, and the value of the Debtors as a going concern, the Debtors submit that the Plan Sponsor Protections are reasonable and appropriate and wil serve to maximize the value that the Debtors' creditors and equity holders wil recover under the Plan. Notice 28. Notice of this Motion has been or wil be given to the following parties or, in lieu thereof, to their counsel, if known: (i) the Office of the United States Trustee; (ii) all creditors; (iii) all holders of equity interests in SCO; and (iv) any pary which has fied a request for notices with this Court prior to the date of this Motion. The Debtors submit that, in light of the nature of the relief requested, no other or further notice need be given. 77477-00 1 \DOCS_DE: 135345.1 13 WHREFORE, the Debtors respectfully request entry of an order in the form attached granting the relief requested herein, as well as granting any other and further relief the Court deems just and proper. Dated: February 14, 2008 PACHUSKI STANG ZIEHL & JONES LLP Davis Jones (Bar No. 2436) J s E. O'Neil (Bar No. 4042) Rachel Lowy Werkheiser (Bar No. 3753) 919 North Market Street, 17th Floor P.O. Box 8705 Wilmington, DE 19899-8705 (Courier No. 19801) Telephone: (302) 652-4100 Facsimile: (302) 652-4400 Email: ljones(gpszjlaw.com joneil (g rwerkheiser(g pszj law .com pszj law .com and BERGER SINGERMAN, P.A. Arhur J. Spector Grace E. Robson 350 E. Las Olas Boulevard, Suite 1000 Fort Lauderdale, FL 33301 Telephone: (954) 525-9900 Facsimile: (954) 523-2872 Email: aspector(gbergersingerman.com grobson (g bergersingerman.com Co-Counsel for the Debtors and Debtors-in-Possession 77477-00I\DOCS_DE: 135345.1 14 EXHIBIT A MEMORANDUM OF UNDERSTANDING ("MOU") Investment Team: Debtor: Stephen Norrs Capital Parers, LLC, a Delaware limited liabilty company ("SNCP"). The SCO Group, Inc., and its direct or indirect subsidiares, both prior to and after emerging from banptcy (collectively, "SCO," "Debtor" or the "Comt)anv," and after the effective date of the Proposed Plan of Reorganization sometimes "Reorganized SCO" or "Reorganized Debtor," and together with SNCP, the "Paries"). Overview: SNCP proposes to finance a plan of reorganization (the "Proposed Plan of Reorganization") of SCO to be fied in its Chapter 11 bankptcy case presently pending in the United States Bankptcy Cour for the Distrct of Delaware, In Re: The sea Group, Inc., Case No. 07-11337 (KG) (the "Bankptcy Case"), all on the term provided for in this Memorandum of Understanding ("MOU") and the definitive agreements and documents contemplated hereby (the "Definitive Documents"). Under the Proposed Plan of Reorganization, SCO wil emerge from the Bankrptcy Case and attempt to implement the business plan described in a private placement memorandum to be prepared by SCO, a copy of which shall be provided to SNCP. To fund the Proposed Plan of Reorganization and finance the business of SCO after it emerges from the Banptcy Case, SNCP wil provide up to US$100 millon of financing. In consideration of the US$100 millon of financing to be provided as described below, SNCP requires that the Reorganized Debtor issue the following securities: US$5 millon for the purchase of a new class of Preferred Stock (the "Series A Preferred") to be issued by SCO which shall have the liquidation, voting and distribution preferences described hereafter. At its option, the holder of the Series A Preferred wil be able to convert the Series A Preferred into between 51 % and 85% of the then-outstanding shares of common stock of SCO, as described in the next bullet. SCO expects to prevail in the matter of The sea Group, Inc. v. Novell, Inc., pending in the United States Distrct Cour for the District of Uta, Civil No. 2:04 CV-00139, and the related pending litigation, The sea Group, Inc. v. International Business Machines, pending in the United States Distrct Court for the District of Utah, Case No. 2:03CV0294DAK (the "Novel1/M Litigation"), so that the final award in the Novel1/M Litigation wil be made in favor of SCO. However, if an award were entered against SCO in the Novel1/M Litigation or other pending litigation matters, including proceedings involving Red Hat (the "Litigation Claims"), SNCP anticipates that the damages awarded against SCO could range from US$O to more than US$30 millon, and would be paid by draw under the Debt Financing. Should the amount drawn under the Debt Financing solely to effect payment (a "Novel1/M Pavment") of a final, non-appealable judgment in the Novel1/M Litigation (or to settle the Novel1/M Litigation in a settlement transaction that requires a net payment to Novel1/M) be $0, then the Series A Preferred shall convert into 51 % of the then-outstanding common stock of SCO, on a fully diluted basis. Should the amount drawn under the Debt Financing to effect a Novel1/M Payment be $30 millon or more, then the Series A Preferred shall convert into 85% of the then-outstanding common 948303-19 DOCS_DE:135355.1 stock of SCO, on a fully diluted basis. Should the amount drawn under the Debt Financing to effect a NovellJM Payment be between $0 and $30 millon, then the Series A Preferred shall convert into a percentage of the then-outstanding common stock of SCO proportionally. For the avoidance of doubt, the conversion percentage of the Senes A Preferred shall not adjust by reason of any draws under the Debt Financing other than draws to effect a NovellJM Payment, and without limiting the generality of the foregoing, the conversion percentage of the Senes A Preferred shall not adjust by reason of draws under the Debt Financing to fund litigation costs or working capital requirements of SCO or the provision of letters of credit or other credit support (including cash payments) in connection with appealing (and posting bonds to stay judgments or rulings pending appeal) a Distrct Court or other judgment in the NovellJM Litigation that is subject to fuher appeaL. The Preferred Stock financing descnbed in this and the preceding bullet points and in more detail below is sometimes hereinafter referred to as the "Equity Financing." US$95 millon under the term of a five year non-revolving credit line. The credit line shall be secured by all of the assets of SCO, including all of its present and future litigation claims. The term wil be as set forth hereafter. The credit facilty described in this bullet point and in more detail below is sometimes herein referred to as the "Debt Financing." Upon the effective date of the Proposed Plan of Reorganization, SNCP wil pay $5,000,000 to the Reorganized Debtor in consideration of the issuance of the Senes A Preferred. The Reorganized Debtor wil retain all of the pending litigation claims, including the potential liabilty in respect of the Litigation Claims or recovenes under the Pending Litigation. Also upon the effective date of the Proposed Plan of Reorganization, the existing common stock and common stock equivalents of the Debtor shall be extinguished, and in exchange therefor the then-curent equity holders (and holders of common stock equivalents, including stock options) of SCO shall receive a pro-rata interest in a grantor trst (the "Trust"). The Trust shall be the holder of shares of new common stock (and new common stock equivalents) of SCO ("New Common Stock"), representing between 49% and 15% of SCO's fully diluted equity after conversion of the Senes A Preferred, the precise conversion percentage of which shall be determned based upon the conversion rights of the Senes A Preferred as descnbed herein. Interests in the Trust shall not be transferable, and the Reorganized Debtor wil no longer be a public company and shall not be subject to the reporting requirements of the Securties Exchange Act of 1934, as amended. Also upon the effective date of the Plan of Reorganization, the Trust wil enter into a Shareholders' Agreement with the Company and the holders of the Senes A Preferred which shall provide, among other things, that; (i) the Trust wil not sell or transfer its New Common Stock, except to the Company and on the term provided for in this MOU and the Definitive Agreements, and (ii) the Trust, Company and the holders of Senes A Preferred shall have "tag along, drag along" nghts and obligations to paricipate in a sale of all or substantially all of the Company's outstanding equity secunties (or a merger or other corporate reorganization relating to the Company that has the same effect as such a sale of all or substantially all of the Company's outstanding equity securities). Any such sale transaction shall provide the Trust with immediately available funds at least equal to 948303-17 DOCS_DE:135355.1 2 the Redemption Prce. Also upon the effective date of the Proposed Plan of Reorganization, the existing CEO of the Company, Dad McBride, wil resign immediately. The newly reorganized company wil have seven members on its Board of Directors, four of which wil be named by the holders of the Series A Preferred. Also upon the effective date of the Proposed Plan of Reorganization, SCO wil continue to pursue aggressively the Company's claims in the NovellJM Litigation and other pending litigation, including The sea Group, Inc. v. Autozone, Inc., pending in the United States District Cour for the District of Nevada, Case No. CV-S-04-0237-RCJLRL (the "Autozone Litigation"). Stephen Norrs Capital Parners, LLC shall have the right to assign and delegate its rights and obligations hereunder to a special purose entity created for the purose of engaging in this transaction and in which Stephen L. Norrs is a manager or executive officer. Availabilty of Funds: SNCP has a financing commtment suffcient to provide the Equity Financing and the Debt Financing. SNCP wil provide the Debtor with a copy of a firm fmancing commtment suffcient to provide the Equity Financing and the Debt Financing at least five (5) business days prior to the commencement of the Bankrptcy Cour hearng on the approval of the Disclosure Statement relating to the Proposed Plan of Reorganization. Creation of Trust: Upon the effective date of the Proposed Plan of Reorganization, the then-curent equity (and common stock equivalents) of SCO shall be extinguished and the equity holders of SCO shall receive a pro-rata interest in the Trust based upon their percentage ownership of the Company's then outstanding Common Stock and common stock equivalents. The beneficial interests in the Trust to be issued to the Company's equity holders shall represent a pro rata interest in the outstanding New Common Stock held by the Trust, which wil correspond to the percentage interests of the Company's equity holders (and common stock equivalent holders) at the time of the organization of the Trust. Interests in the Trust shall be non-transferable, except pursuant to the laws of descent and distribution. The trstee of the Trust shall be a national bank or trust company selected by SCO. The Trust wil receive $2 millon at the effective date of the Plan (from the proceeds of the Series A Preferred), which wil be distributed to Trust beneficiares (in respect of the holdings of New Common Stock and excluding common stock equivalents) after reserving for reasonable Trust expenses. Within one year after the pending litigation claims in the NovellJM Litigation are finally resolved (by final judgment or order, not subject to fuher appeal, or settlement), the Reorganized Debtor wil make a final payment to redeem all New Common Stock held by the Trust in an amount (the "Redemption Price") equal to the sum of (a) a percentage of any net recovery the Reorganized Debtor realizes from the final resolution of the NovellJM Litigation (net of any recovery on or settlement of counterclaims and cross claims against the Debtor, including a NovellJM Payment, if any, and net of all taxes, and Ongoing Legal Fees and Costs incured by the Debtor or the Reorganized SCO in connection therewith), such percentage to var between 15% and 49% depending on the conversion percentage of the Series A Preferred, and subject to the anti-dilution rights of the holders of the Series A Preferred, and (b) the product obtained by multiplying (i) the earings of the Debtor (and the Reorganized SCO) (excluding any earngs arsing from a NovellJM Litigation recovery) before interest, taxes, depreciation and amortization (over the four full fiscal quarers immediately preceding the resolution of the 948303-17 DOCS_DE: 135355.1 3 Novell/M Litigation), by (ii) the product of four times the percentage (between 15% (as may be reduced by the anti-dilution rights of the holders of the Series A Preferred) and 49%) determned under (a), above. The Trust agreement shall provide for liquidating distrbutions if the following events occur before the New Common Stock held by the Trust are redeemed under the foregoing provisions, as follows: (i) if the Company makes an initial public offering of its securties, the shares of New Common Stock held by the Trust shall be distrbuted to the beneficiaries (in compliance with applicable securties laws and regulations); (ii) if all or substantially all of the assets of the Company (or any series of related transactions resulting in the sale or other transfer of all or substantially all of the assets of the Company) are sold or a merger, reorganization or other transaction in which holders of a majority of the outstanding voting control of the Company immediately prior to the transaction do not own a majority of the outstanding voting shares of the suriving corporation occurs, the proceeds of such sale or other transaction which are payable to the Trust shall be distributed to the beneficiares; and (ii) if the Company voluntarly or involuntaly liquidates, dissolves or winds up, the proceeds payable to the trustee in connection therewith shall be distributed to the beneficiares. The Equity Financing: Securities: Closing Date: Series A Preferred Stock ("Series A Preferred"). The closing (and effective date of the Proposed Plan of Reorganization) shall occur within twenty (20) days after the entry of a final order (not stayed pending appeal) confirmng the Proposed Plan of Reorganization. Purchase Price: The Purchase Price for the Series A Preferred shall be US$5,000,000 to be paid on the Closing Date. The Purchase Price wil be payable by cash or wire transfer. The Series A Preferred shall convert into New Common Stock of sca, the amount of Conversion Rights: which wil be determned based on the amount drawn under the Debt Financing to effect a Novell/M Payment following the final resolution of the Novell/M Litigation. Should the amount drawn under the Debt Financing solely to effect a Novell/M Payment be $0, then the Series A Preferred shall convert into 51 % of the thenoutstanding common stock of sca, on a fully diluted basis. Should the amount drawn under the Debt Financing to effect a Novell/M Payment be $30 millon or more, then the Series A Preferred shall convert into 85% of the then-outstanding common stock of sca, on a fully diluted basis. Should the amount drawn under the Debt Financing to effect a Novell/M Payment be between $0 and $30 millon, then the Series A Preferred shall convert into a percentage of the then-outstanding common stock of sca proportionally. For the avoidance of doubt, the conversion percentage of the Series A Preferred shall not adjust by reason of any draws under the Debt Financing other than draws to effect a Novell/M Payment, and without limiting the generality of the foregoing, the conversion percentage of the Series A Preferred shall not adjust by reason of draws under the Debt Financing to fund litigation costs or working capital requirements of sca or the provision of letters of credit or other credit support judgments or rulings pending appeal) a District Cour or other judgment in the Novell/M Litigation that is subject to furher appeaL. The conversion percentage of the Series A Preferred shall not exceed 85% of the fully converted New Common Stock irrespective of whether (or the extent to which) any additional equity securities may be 948303-17 DOCS_DE:135355.1 (including cash payments) in connection with appealing (and posting bonds to stay 4 issued in payment-in-kind of dividends accruing on the outstanding Series A Preferred (i.e., if holders of Series A Preferred receive New Common Stock as paid-in-kind dividends on the Series A Preferred, then their conversion provisions shall contemplate that after giving effect to the conversion, such holders wil not own (including both the New Common Stock issued upon conversion and by paid-in-kind dividends, combined) more than 85% of the fully converted New Common Stock). Use of The proceeds shall be used to fud the Proposed Plan of Reorganization. The holders of Series A Preferred shall be entitled to receive cumulative dividends at the rate of 10% per annum, which shall be payable as and when declared by the Company's Board of Directors and out of retained earngs. Dividends may be payable in cash or in Proceeds Dividends shares of the Company's New Common Stock (valued by the Company's Board of Directors in good faith) at the option of the Company. In the event of an initial public offering, accrued but unpaid dividends shall be payable in cash or New Common Stock at the option of the Company. Liquidation Preference In the event of a voluntar or involuntar liquidation, dissolution or winding up of the Company, the funds available for distrbution shall be paid out as follows: (1) the holders of Series A Preferred shall be entitled to receive, prior and in preference to the holders of the Company's New Common Stock, an amount equal to the result obtained by dividing $5 millon by the number of shares of New Common Stock into which the Series A Preferred is convertible based on the conversion formula described in the section entitled "Conversion Rights" above (the "Original Series A Price"), multiplied by 3; and thereafter, (2) any remaining assets shall be paid out on a pro rata basis to the Trust and the other holders of New Common Stock and share equivalents and Series A Preferred (on an as-converted basis). In the event of a sale of all or substantially all of the assets of the Company (or any series of related transactions resulting in the sale or other transfer of all or substantially all of the assets of the Company) or a merger, reorganization or other transaction in which holders of a majority of the outstanding voting control of the Company immediately prior to the transaction do not own a majority of the outstanding voting shares of the surviving corporation, the funds available for distribution shall be paid out as follows: (1) the holders of Series A Preferred shall be entitled to receive, prior and in preference to the holders of the New Common Stock, an amount equal to three times the Original Series A Price (as adjusted for recapitalizations, stock splits, stock dividends, and the like), plus accrued and unpaid dividends; and thereafter, (2) any remaining assets shall be paid out on a pro rata basis to the Trust and the other holders of New Common Stock and share equivalents and Series A Preferred (on an as-converted basis). Voting Rights The holder of each share of Series A Preferred shall have the right to a number of votes equal to the number of shares of New Common Stock issuable on conversion of the 948303-17 5 DOCS_DE: 135355.1 Series A Preferred. In addition, the holders of the Series A Preferred shall be entitled to vote as a single class to elect four members of the Company's Board of Directors (as set forth below). Except as provided herein or as required by law, the holders of Series A Preferred and New Common Stock shall all vote together as a single class and voting group on all matters. Voting Protections: The Company may not, without the affirtive vote or written consent of the holders of not less than 66 2/3% of the issued and outstanding shares of Series A Preferred: (1) authorize or issue any securities with any rights that are senior to or on party with Series A Preferred; (2) declare or pay dividends or mae any distributions on any of the Company's equity securities (other than the distribution of $2 millon at the effective date of the Proposed Plan of Reorganization); (3) sell or otherwise transfer all or substantially all of its assets, tangible or intangible, grant any exclusive rights or license to all or substantially all of the Company's products or intangible assets, or merge or consolidate into or with any other entity in a transaction or series of related transactions; (4) purchase, redeem, or otherwise acquire any of the Company's outstanding equity securties (including warants, stock options and other rights to acquire equity securities), other than redemption of the New Common Stock of the Trust as contemplated by this MOD and repurchases pursuant to stock restriction agreements approved by a majority of the Board of Directors that grant to the Company a right of repurchase upon termnation of the service or employment of a consultant, director or employee; (5) make any changes in the rights, preferences, or privileges of the Series A Preferred; (6) amend or repeal or add any provision to the Company's Certificate of Incorporation or Bylaws, if such action would adversely affect the preferences, rights, privileges, or powers of, or restrictions provided for the benefit of, the Series A Preferred; (7) take certain other actions materially affecting the Series A Preferred; (8) change the size or election procedure of the Board of Directors; or (9) authorize any changes in material accounting methods, policies or practices of the Company or change the Company's auditors. Optional Conversion The shares of Series A Preferred are convertible at the option of the holder, and at any time and from time to time, into shares of New Common Stock. The conversion rate of the Series A Preferred wil initially be at the rate corresponding to the convertibilty of all Series A Preferred into 51 % of the fully diluted common stock of tM Reorganized Debtor, and wil be subject to anti-dilution adjustment as described below, as well as adjustments for re-capitalizations, stock splits, stock dividends, and the like. The conversion percentage shall be subject to adjustment based upon the amount(s) drawn on the Debt Financing to effect a NovelllM Payment following the final resolution of the NovelllM Litigation, as described in the section entitled "Conversion Rights," above. Automatic Conversion Each share of Series A Preferred shall automatically convert into the number of shares of New Common Stock determned by dividing (i) the sum of the Original Series A Price plus all accrued and unpaid dividends by (ii) the then-applicable conversion rate, on the earlier to occur of (a) the written consent of holders of at least 66 2/3% of the outstanding Series A Preferred, and (b) a firmy commtted underwritten initial public 948303-17 DOCS_DE: 135355.1 6 offerig of Common Stock with total proceeds to the Company of at least $40 millon (a "Qualified Offering"). Anti-dilution Protection The conversion price of the Series A Preferred shall be subject to adjustment on a proportionate basis, reflecting one-thid (1/3) of the dilution effected from an issuance of New Common Stock to fund working capital requirements of the Company. The remaining two-thirds (2/3) dilution from such issuances of New Common Stock shall proportionately effect the holders of New Common Stock held by the Trust and any other holders. The purose of this adjustment is to provide limted price protection to SNCP in the event that the Company issues additional shares of its capital stock at a price below the Series A Preferred purchase price to fund working capital requirements of the Company. This protection shall be subject to customa exceptions. Redemption If the Series A Preferred has not been converted to New Common Stock prior to the 5th anniversar of the closing (the "Initial Redemption Date"), then the holders of the outstanding shares of Series A Preferred shall have the option, exercisable at any time after such anniversar, to require the Company to redeem the Series A Preferred in two equal and yearly installments beginnng on the annversar of the Closing Date after such option is exercised. If a holder elects to require the Company to redeem its Series A Preferred, it must provide the Company with written notice at least 90 days in advance of the Initial Redemption Date. The redemption amount shall be paid from retained earings and shall be equal to the Original Series A Price, plus any accrued but unpaid dividends plus an additional amount that would result in an additional 12% annual rate of retur compounded annually from the Closing Date. In any simultaneous redemption of the Series A Preferred and any other class or series of stock, the Series A Preferred shall have preference. Right to Maintain Proportionate Interest Each holder of the Series A Preferred shall have a right of paricipation to purchase such holder's pro rata share of any offering of new securties of the Company, subject to customar exceptions. Registration Rights 1. Demand Rights: Holders of at least 30% of the shares of Series A Preferred (or New Common Stock issuable on conversion thereof) may demand registration by the Company of their shares of New Common Stock and the Company wil use its best efforts to cause such shares to be registered. The Company wil not be obligated to effect nor pay for more than 3 registrations pursuant to such demand registration rights provisions. These rights are exercisable only after the earlier of (i) 180 days after a Qualified Offering (as defined under "Automatic Conversion" above), and (ii) the 5th anniversary of the closing of this financing. 2. "Shelf' Registrations on Form S-3: Holders of at least 20% of the shares of Series A Preferred (or New Common Stock issued on conversion thereof) shall have the right to require the Company to fie an unlimited number of and pay for not more than 2 registration statements on Form S-3 registering their shares of New Common Stock per year, provided that the Company is then eligible to use the S-3 registration statement and the anticipated aggregate offering price to the public for any such registration would exceed $1 millon. 3. Piggy-Back Registrations: Holders of Series A Preferred shall be entitled to unlimited "piggy-back" registration rights with respect to the New Common Stock issuable upon conversion of the Series A Preferred on all registrations of the Company (other than S-8's, S-4's or similar registrations of business combination 948303-17 DOCS_DE: 135355.1 7 transactions or employee benefit plans), subject to the right of the Company and its underwriters to reduce the number of shares of the Investor proposed to be registered in view of market conditions. 4. Registration Expenses: All registration expenses (exclusive of selling expenses), shall be borne by the Company. Other term: The registration rights shall include other customar term and conditions, including a customa "maket-standoff' agreement in connection with a Qualified Offering and public offerings conducted by the Company thereafter. Governance: Resignation of the Curent CEO Upon the effective date of the Proposed Plan of Reorganization, the existing CEO of SCO, Darl McBride, shall resign. Board of Directors Upon the effective date of the Proposed Plan of Reorganization, the Company's Board of Directors wil be comprised of seven members. The holders of Series A Preferred shall be entitled to elect four directors. The holders of Series A Preferred and the Trust, in respect of the shares of New Common Stock issued to the Trust on behalf of the holders of New Common Stock prior to the effective date of the Proposed Plan of Reorganization, and any holders of additional New Common Stock issued after such effective date, all voting together as a single voting group, shall be entitled to elect the remaining thee directors, one of whom shall be the Chief Executive Offcer of the Company and one of whom shall be an outside executive with suitable industr expertise who is designated by a majority of the Board. the Board shall enter into indemnification agreements in a form acceptable to SNCP on the The Company and the representatives of Series A Preferred who serve as members of Closing Date. In addition, the Company's Certificate of Incorporation shall provide for indemnification of directors to the maximum extent permtted by law, and the Company wil, within 90 days after the Closing Date, obtain Directors and Offcers insurance in an amount satisfactory to SNCP. The Reorganized Debtor shall purchase "tail" directors and offcers insurance coverage to protect against claims arsing prior to the effective date of the Proposed Plan of Reorganization. Inspection Rights The Series A Preferred holders shall have the right to inspect the Company's premises and books at times convenient to both paries. Information Rights So long as any of the Series A Preferred is outstanding, the Company wil deliver to the holders of Series A Preferred unaudited monthly financial statements within 15 days of the end of each calendar month; unaudited quarerly financial statements within 15 days of the end of each fiscal quarer thereafter; annual audited financial statements within 90 days of the end of each fiscal year; and any other informtion reasonably requested by the holders of Series A Preferred. At least 30 days prior to the beginning of each fiscal year, the Company wil deliver to holders of Series A Preferred the financial budget and business and strategic plan for the next fiscal year that wil be submitted for approval to the Company's Board of Directors no later than 30 days following the beginning of the fiscal year. With respect to monthly, quarerly and annual financial statements, such statements shall be accompanied by a written report of the CEO of the Company identifying operating highlights for the period and a comparson of such financial statements to the Company's budget for the corresponding period. 948303-17 DOCS_DE: 135355.1 8 Debt Financing: Loan Amount and Type: The loan is for the principal amount up to US $95,000,000. The loan is a non-revolving line of credit pursuant to which draws or disbursements may be made from time to time in accordance with the term and conditions contained in the loan documents to be negotiated and fied with the Bankrptcy Cour prior to the hearng on approval of the Disclosure Statement relating to the Proposed Plan of Reorganzation and executed by sca on the Closing Date (the "Loan Documents"). Purpose of Loan: The purpose of the loan is to provide fuds for (i) working capital for sca following its emergence from bankrptcy, (ii) to pay interest when due under the Debt Financing, and (ii) to support the prosecution of the Reorganized Debtor's Litigation Claims, including providing letters of credit or other financial arangements adequate to support any required appellate bonds (in which event the Reorganized sca shall pay the reasonable letter of credit fees and expenses), and to effect payment of any final award against the Reorganized Debtor). Advances to sca under (i) above shall be subject to the achievement of milestones and maintenance of loan covenants to be established by SNCP and sca in the Loan Documents. Loan Term: The term of the loan wil be for a period of five (5) years (the "Loan Term") commencing on the first day of the month following the Closing Date. Interest Rate: Interest wil accrue on the outstanding pricipal balance at a varable or floating rate, expressed as an annual percentage rate, equal to LIBaR plus 1,700 basis points (the "Effective Rate"). Adjustments to the Effective Rate wil be made effective on the first day of each month. Interest wil be calculated on the basis of a 360-day year and charged for the actual number of days elapsed. Payments: The Reorganized Debtor shall pay accrued interest on the outstanding principal balance in arrears monthly on the first day of each month commencing on the first day of the month following the Closing Date. The entire unpaid principal balance, together with any accrued interest and other unpaid charges, shall be due on the first day of the month following the expiration of the Loan Term (which date is sometimes referred to as the "Maturty Date"). Any payment not paid within ten (10) days of its scheduled payment date shall be subject to a late charge equal to the greater of $50.00 or five per cent (5%) of the amount of the Late Charges Default Interest Rate: delinquent payment. Upon the occurence of an event of default, the magin used to compute the Effective Rate wil automatically increase by an additional four percent per annum from the date thereof until the delinquent payment has been fully paid, both before and after judgment. Prepayment Privilege: Collateral: Reorganized sca may prepay principal at any time without penalty or premium; provided, however, Reorganized sca shall not be entitled to re-borrow funds it has prepaid. To secure the Loan, sca shall grant a valid, pedected and enforceable first prior securty interest in favor of SNCP in (or shall cause a securty interest to be granted in), all present and future assets of sca, including litigation recoveries. Preclosing Protections to 948303-17 DOCS_DE: 135355.1 Should the Company receive a written or oral offer or counteroffer to settle the Novell Litigation, the NovelllM Litigation, the Autozone Litigation or any other Litigation 9 SNCP: Claims (collectively, the "Pending Litigation") prior to the effective date ofthe Proposed Plan of Reorganization (or if the Company shall receive a written or oral offer or counteroffer to acquire the shares or assets of the Company, including by or for the account of a defendant in the Pending Litigation), the Company shall promptly notify SNCP of the offer and all material term thereof. Simlarly, the Company shall promptly advise SNCP of all offers (including counteroffers) it makes to settle or resolve the Pending Litigation or relating to any proposed sale of the shares or assets of the Company. At its option, one or more representatives of SNCP may attend merger and acquisition negotiations, settlement conferences or conference calls between the paries to the Pending Litigation, whether the same are directed at settling the Pending Litigation or acquiring the shares or assets of the Company. At the request of the Company, each representative of SNCP who shall attend merger and acquisition negotiations, settlement conferences or conference calls between the paries to the Pending Litigation shall execute a confidentiality agreement reasonably acceptable to the Company and SNCP. The Debtor and SNCP acknowledge and agree that a purpose and intended effect of the Proposed Plan of Reorganization is to maximize the Debtor's litigation recovery under the Pending Litigation. Except as expressly set forth herein, the Debtor and SNCP agree that developments in (including a resolution of) the Pending Litigation shall not constitute a basis to prevent or delay the confirtion or effective date of the Proposed Plan of Reorganization. If the Pending Litigation shall resolve by a sale of the Company to or an exclusive licensing transaction relating to all or substantially all of SCO's intellectual property with or for the account of a defendant in the Pending Litigation), by or in connection with a sale of the Company or an exclusive licensing transaction relating to all or substantially all of SCO's intellectual property to a person which is not a pary (including an affliate of such pary) to the Pending Litigation, or net settlement in Debtor's favor prior to the consummation of the Proposed Plan of Reorganization, then, except as provided below, the Equity Financing and the Debt Financing wil not be consummated and SNCP shall be entitled to an administrative claim, payable promptly after the Debtor's receipt of such net settlement, sales or licensing proceeds, in an amount equal to fifty percent (50%) of either (a) the Debtor's net recovery in suc

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