Eagle Computer, Recovering From Clipped Wings, Tries to Soar Again
Gary Kappenman was so angry his hands shook and his voice quavered at least an octave above its usual range. A speaker at a high-tech conference had just named Eagle Computer as one of the casualties of the computer industry’s shakeout and Kappenman, Eagle’s co-founder and president, had stormed the microphone demanding a retraction and apology.
“I get so mad. We get put on these lists and then people all think we’re dead” explained Kappenman, a dapper, 40-year-old bachelor who wears an eagle pin on his lapel and his feelings for Eagle on his sleeve.
A less involved listener might have overlooked the speaker’s error entirely. After all, even if Eagle didn’t actually file for bankruptcy late last year, it came dangerously close. Indeed, for many the Garden Grove-based company still serves as a textbook example of how unforgiving the overcrowded personal computer market can be.
Never Closed Doors
But the fact is, as Kappenman is ever anxious to impress, Eagle, unlike Osborne, Gavilan, Franklin and Columbia computer companies, never closed its doors and never filed for bankruptcy. In fact, Eagle, through a combination of fancy financial footwork and sheer scrappiness, has earned a rare second chance to prove itself in the computer industry.
“They used to say that we were a Cinderella story in the beginning. Then, it was a reverse Cinderella,” says Richard Sergo, Eagle’s chief operating officer. “Now we’re saying we’re going to be like Rocky.”
Despite Sergo’s upbeat scenario, it is still unclear whether the Herculean efforts that rescued Eagle over the past year were worth the trouble. Many analysts, noting the still crowded market as well as the persistent industry-wide sales slump, hold a pessimistic view of the company’s future.
“It isn’t that they can’t make it,” says Jan Lewis, president of the Palo Alto Research Group, a computer market analysis company in the Silicon Valley. “But there’s still a lot of competition and they’re not perceived as a stable company. . . . Businesses aren’t going to want to buy a system and entrust their entire operations to it if they fear the company might not be around.”
Room for Survivors
Adds Joseph Kapka, a computer company analyst for Bateman Eichler, Hill Richards: “There’s always room for a few other survivors besides the big guys like IBM, Apple and AT&T.; And maybe Eagle can find a niche. But the odds are against it. For the small players in this industry the party is basically over.”
Not if Kappenman, who spent the last year restructuring Eagle’s operations and negotiating with creditors that were owed nearly $20 million, can help it.
In mid-November, the company plans to unveil its latest machine, a high-performance, multiuser business system that could take the company out of its direct, and dangerous, head-to-head competition with IBM’s popular personal computer and into a market where the opportunity for success is greater. If the company’s marketing strategy for the new system works as planned, company officials say there is no reason why Eagle can’t enjoy annual sales of $150 million to $200 million within two years.
Projections Revised
Nevertheless, Kappenman admits that early projections that the company would be profitable by late 1985 have been revised. The current timetable calls for Eagle, which lost $26.4 million in its 1984 fiscal year, to continue in the red until next year. Results for the 1985 fiscal year, which ended June 30, are scheduled for release later this month. Losses in the first nine months totaled $5.7 million on sales of $12.3 million.
“But at least we’re still around,” Kappenman says.
Although rescuing a company during a severe industry-wide sales slump is a sure-fire confidence booster, Kappenman is relying on more than Eagle’s renewed morale to make it this time around. An ample source of help, he says, is the company’s previous mistakes.
Founded in 1978 in a Santa Ana garage as the West Coast arm of a New Jersey company owned by Kappenman’s older brother, the company floated along for a few years looking for a precise direction while it dabbled in computer making. The direction came in mid-1981, when IBM’s introduction of its personal computer officially blessed the fledgling desk-top computer industry and spurred dozens of companies to introduce similar machines specifically designed to operate on IBM software programs.
Although Eagle was just one of a pack of companies making what the industry rather derisively dubbed “IBM clones,” the company did well. By June, 1983 it had moved to high-visibility headquarters in the Silicon Valley and was ready to make its first public stock offering.
However, on the day the stock was issued, the company suffered what was to be the first of a string of misfortunes. Within hours of becoming an instant millionaire, Eagle President Dennis Barnhart crashed his red Ferrari off a winding road and was instantly killed. Although stunned, the company was able to regain its momentum quickly and, with the help of a strong personal computer market, continued its steep ascent.
But eight months later, as revenues and profits were at record levels and the company was approaching a $100 million annual sales pace the crashing blow came. The price of being an IBM clone was an IBM copyright infringement lawsuit.
The suit contended that the key program used to operate Eagle’s machine--the program that made it compatible with IBM machines and software--was identical to that used in the IBM machine.
Although admitting nothing, the day the suit was filed Eagle agreed to withdraw its machines from the market until the offending program was changed.
Eagle machines were back on the shelves of computer stores within a month, but the company’s problems were just beginning. Distributors, retail dealers and customers, already bombarded by seemingly dozens of look-alike, do-alike personal computers, shifted their allegiance to other manufactures rather than risk dealing with a company with troubles. Sales skidded.
In September, 1984, just seven months after the IBM suit, Eagle announced that it had reduced its staff from 330 to 65 and would move its scaled-down operations back to Orange County where manufacturing facilities were located and where the company could regroup out of the intense Silicon Valley scrutiny.
Partial Payments
In the ensuing year, Kappenman managed to fend off Eagle’s creditors through a combination of assuring sweet talk, partial payments (often just 10 cents on the dollar) and a debt-for-equity stock swap that saw about 35% of the company wind up in the creditors’ hands.
However, insiders say the pivotal deal involved the sale of the company’s inventory to Aceco Electronics in South Korea for $5.4 million in May. The company used the cash, its first sizable bit of money in more than a year, to repay its principal creditors and finance work on its new business computer system.
“Everything hinged on that deal,” says the insider. “Without it we would have been hard pressed to come up with any cash from our sales.” Indeed, revenues from computer sales have been running at about $1 million per month as the company continues to sell its machines at, or below, cost to call attention to its continued market presence, according to company officials.
New Market Segment
The deal with Aceco also calls for the Korean company to manufacture Eagle’s computers, a move Kappenman says will allow Eagle to take advantage of the lower labor costs in the Far East. “That’s something we should have done sooner when the company was booming in 1983,” Kappenman says. “But we were growing and moving so fast then that we never seemed to have the time to think about where we were going or what we could do better.”
Kappenman is also counting on the SST, the company’s fanciest and, at prices ranging from $20,000 to $125,000, its most expensive machine, to take Eagle into a segment of the business computer market where it no longer must fight the big guns of IBM.
The machine, scheduled for unveiling in November at an industry trade show in Las Vegas, is designed to pit Eagle directly against the likes of such companies as Altos, Fortune and Convergent, the so-called second-tier among the makers of mini- and super-micro business computers.
Potential Candidates
Eagle’s strategy calls for it to target small, but growing, businesses which are more interested in price and machine performance than in a name brands. The company also intends to target existing users of Eagle computers--there are about 45,000 users nationwide--as potential candidates for a system upgrading. Additionally, the company is counting on so-called value-added re-sellers, the folks who package a computer with a software system and sell them for specific business applications such as legal word processing and medical insurance account recording, to be attracted to the new system.
Marketing strategy for the new system departs significantly from the company’s earlier penchant for slugging it out with the big players, such as IBM. Instead, the company is conceding wide swathes of market turf to such big companies as Digital Equipment Corp., Wang, and, even, IBM while pursuing customers that might be considered too small and specialized for the others.
Although Kappenman says the strategy could generate annual sales of at least $100 million in a few years, some analysts aren’t so sure.
“The customers they’re targeting are a hard sell,” says Liz Levy of Dataquest, a market analysis firm in San Jose. “They buy in onesies and twosies, not in big lots. And you have to spend a lot of time explaining computers to companies like that. It takes just as much time as if you were selling hundreds of machines.”
Market Wide Open
Nevertheless, Levy and other analysts agree that the market Eagle has identified is wide open and loaded with potential for the right manufacturer.
And Kappenman argues that Eagle can make its year of rescue efforts worth the trouble if it concentrates now on the future, not past glories and errors. “Survival doesn’t do anyone any good unless we do well,” he says. “We want to talk about the future. Everyone is tired of the past. About the only thing useful about the past is if you learn from your mistakes. And I sure hope we do.”
