SCO Group Widens Loss, Legal Action

Updated from 12:42 p.m. EST

SCO Group ( SCOX) dropped a widely expected second bomb in its fight against Linux open-source software, suing Linux users AutoZone ( AZO) and DaimlerChrysler ( DCS). The tiny Lindon, Utah-based company also announced Wednesday a wider first-quarter loss vs. a year ago on declining revenue.

Shares of SCO closed down $1.83, or 13.6%, to $11.59, reversing a 9.4% climb Tuesday. Stung by SCO's lawsuit and disappointing same-store sales , AutoZone shares lost $4.76, or 5.4%, to $83.64, while DaimlerChrysler shed 16 cents, or 0.4%, to $44.75.

Under generally accepted accounting principles, SCO reported a net loss of $2.3 million, or 16 cents a share, in the first quarter. That compared to a net loss of $724,000, or 6 cents a share, in the same period a year earlier.

Revenue declined to $11.4 million from $13.5 million a year earlier.

Thomson First Call's lone SCO analyst forecast the company would lose 22 cents a share on $13.2 million in revenue in the first quarter.

In the second quarter, SCO said it expects revenue to range from $10 million to $14 million. The company did not give earnings guidance.

SCO filed suit against AutoZone Tuesday in U.S. District Court in Nevada, charging that the company violated SCO's Unix copyrights through its use of Linux, according to a press release. In a conference call Wednesday morning, CEO Darl McBride said SCO is in the process of filing a similar suit against DaimlerChrysler in Michigan.

But he further explained that SCO does not, in fact, know whether Daimler's use of Linux is violating its Unix software agreement with SCO. Rather, Daimler was among a group of Unix users who failed to respond to SCO's request asking them to certify they are in compliance with their software agreement. Of the more than 3,000 Unix licensees, more than half failed to respond to such requests from SCO mailed in December, McBride said.

The suit against Linux users was widely expected. After suing IBM ( IBM) in March over intellectual property rights to Linux, McBride has repeatedly said the company might pursue a Linux user in court, and indicated Monday in a speech that the suit was imminent.

"We are aggressively moving forward to enforce our rights," McBride said in the conference call Wednesday.

He said the latest steps targeting end users follow a model used by the Recording Industry Association of America in which the association sued end users of music file sharing programs to stop illegal music downloads. Ironically, the attorney that unsuccessfully fought the RIAA on behalf of Napster, high-profile lawyer David Boies, is now working for SCO.

SCO claims that Linux software is improperly using SCO's Unix code. In March, SCO charged Big Blue with misappropriating SCO's Unix code in IBM's Linux business. A trial is scheduled for April 2005.

After filing that suit, SCO launched a campaign to convince users of Linux, an open-source software available free online, to pay SCO for licenses. Only an odd set of bedfellows -- including archrivals Microsoft ( MSFT) and Sun Microsystems ( SUNW), which both stand to gain from slower Linux adoption -- have forked over money to SCO.

More recently, SCO announced Monday that EV1Servers.Net, a dedicated hosting division of Houston-based Everyones Internet, bought a license from SCO to run business operations on Linux servers.

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