September 20, 1999 9:50 PM PDT

Bad news for Emachines in court, on Wall Street

Emachines suffered a double blow today with a legal defeat and a scathing analyst report that raises doubts about the success of its planned initial public offering.

The cheap-PC maker has charged into the low-end of the computer market in the past ten months, rising from obscurity to take market share away from more established rivals such as Packard Bell. But not all of its moves have been met with praise.

After introducing the eOne computer, with its iMac-inspired design, Apple Computer hit Emachines with a lawsuit, alleging trademark infringement. The company is also defending itself against a suit from Compaq Computer, which alleges intellectual property infringement regarding components.

Today, Apple won a preliminary injunction from a Tokyo District Court barring K.K. Sotec, a Japanese distributor of the eOne, from manufacturing or distributing the PC, indicating that Apple's lawsuit may have a good chance for success in the United States.

Adding to Emachines' troubles, a blistering report from investment bank U.S. Bancorp Piper Jaffray questioned the prospects of the company's long-term viability, as well as its expected IPO.

Fighting two lawsuits is extremely costly for a firm attempting to impress potential investors, especially if either case goes to trial, the report said.

The company's legal problems are just one indicator of Emachines' uncertain future, according the Piper Jaffray report. The company's shaky financial foundation will likely be toppled when it is out-maneuvered by larger PC manufacturers offering sub-$600 computers and free Internet service, according to the report.

"While the company has sold over a million units since its inception last November, it has not even remotely created a business model that is sustainable," the report said.

The company faces far more competition in the low end of the market than it did back in the spring, when it achieved much of its growth. Since that time, almost every major PC maker has introduced some type of rebate offer for customers who sign up for an Internet service contract.

The company's strategy for diversifying by launching an Internet service, dubbed Emachines.net, faces stiff competition from Microsoft, which is expected to begin offering extremely discounted--or even free--Internet access.

"The landscape has changed since Emachines' alliance with AOL, much of it to the company's disadvantage," the report said. "In such an environment, Emachines' reliance on the introduction of Emachines.net service as a source of future revenue is highly suspect."

Emachines declined to comment on the ruling by the Tokyo court and on the Piper Jaffray report, citing the "quiet period" mandated by the Securities and Exchange Commission for companies that have filed to go public.

"K.K. Sotec is an unaffiliated company," a company spokesperson said. "We can't comment on anything that they are doing."

 

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