August 31, 1999 6:15 PM PDT

PC maker Emachines files to go public

Cheap PC maker Emachines, which helped reshape the computer industry with its low-cost systems, has filed to sell its shares in a $200 million initial public offering.

Emachines, which has been credited with bringing already cheap computers to new price lows with its $399 systems, today filed with the Securities and Exchange Commission to raise up to $200 million in the offering. Emachines did not disclose the number of shares up for sale or the target price.

The PC maker will use money raised from the offering to launch a branded Internet service, dubbed E-machines.net, next quarter, it said in its SEC filing. The company will trade under the ticker symbol "EEEE" on the Nasdaq exchange.

Formed as a joint venture between South Korean PC maker TriGem and display maker Korean Data Systems, Emachines has jumped into the upper echelon of PC makers in this, its first year of existence. TriGem and Korean Data Systems are the two largest investors in the company, followed by CEO Stephen Dukker, and America Online, which recently did so.

When first released last year, Emachines's first computers were priced at $599, defining the bottom of the market price-wise. Like a chain reaction, many major PC makers subsequently lowered prices on their computers, and this year Internet service providers began offering computers for free to customers who agreed to three-year service contracts. Currently, Emachines offers computers for as low as $399.

The company, which says it operates on extremely thin operating margins by outsourcing most manufacturing and overhead costs, is looking to boost its profits by adding a more lucrative Internet service to its product mix, a tact already taken by PC companies like Gateway and Dell Computer.

Small gross margin
The firm's gross margin is a mere 3.5 percent for the past six months, according to the filing. That compares with a gross margin of 20.5 percent for Compaq Computer in the first quarter.

Emachines posted a $3.9 million net loss in the six months ended June 30 on net revenue of $351.3 million.

Launching next quarter, E-machines.net will allow the company to offer upgrades and discounts to customers who sign up for the service. The company will also make money from advertising, content, and e-commerce partnerships associated with the Internet service and a customized Netscape portal. Emachines is partnering with MCI Worldcom ISP UUNet to offer the service.

In addition, the company is working on an e-commerce package with investor AOL, consisting of a specially designed keyboard, desktop icons, and AOL service links, with shared revenue, according to the filing.

As a company at the forefront of the evolving PC industry, Emachines is not without exposure to considerable risks to investors. The company is dependent upon a small group of both suppliers and retailers for its business, and losing even a small number of either could have disastrous results, the company warned in the filing. For example, 70 percent of its gross revenues come from four retailers.

Several challenges remain
Also, like many other companies filing for IPOs, the company has yet to turn a profit, and in fact has shown widening losses in the face of diminishing average selling prices for its products, it said. Although it is diversifying its core product line to include Internet-based revenues, the upcoming E-machines.net service is also a potentially risky venture, the company said, because it pre-pays UUNet a non-refundable fee for its subscribers.

In addition, the company faces trademark and intellectual property infringement lawsuits from two established competitors, Compaq and Apple. Apple sued the company over its iMac look-alike computer. Both suits have the potential to be quite expensive and lengthy, even if Emachines prevails.

The company also announced today it has completed a private placement of $119.5 million from America Online, Technology Crossover Ventures, and other groups.

Bloomberg contributed to this report.

 

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