Osborne Comptuer Corporation. David H. Ahl.
OSBORNE
COMPUTER CORPORATION
Adam Osborne is one of the most charming, persuasive, egotistical, and supremely confident people in the computing field, indeed, in all industry. Of the failure of his company, he says, "I don't feel any personal embarrassment.'
In one of the most spectacular rises and falls in the personal computing industry, Osborne Computer Corp. went from nothing to the top of the mountain and back to nothing in just three years. Its $10 million financing was one of the hottest deals in 1982. What went right--and what went wrong?
Unbelievable Growth
In 1979, Adam Osborne sold his book publishing company to McGraw-Hill for a rumored $3 million. In September 1979, he founded Brandywine, Inc. with a portion of the proceeds of the book company sale--a very small portion. Company financial statements list his initial outlay as $5000.
Osborne hired Lee Felsenstein, a genius computer designer who had previously designed--the Sol-20 and Expander (an updated Sol which was made in only limited quantities). Osborne planned to produce a low cost portable computer with a bundle of applications software included, a strategy used successfully by IBM for years, but one that was not generally being used in the microcomputer market.
The basic design was finished by late 1980, and in December the company hired Thomas E. Davidson to head up manufacturing. In January 1981, the company incorporated as Osborne Computer Corp. (OCC) with $1 million of seed capital from Jack Melchore, a respected venture capitalist in Silicon Valley, and several private investors.
The winter and spring of 1981 were spent in frantic activity trying to build several prototype units to show at the National Computer Conference in May. The introduction was a wild success. The Osborne 1 had 64K of memory, a pair of 100K floppy disk drives, and a 5''' screen (24 lines of 52 characters), and weighed 26 pounds. But the thing that really made the system fly was the $1500 worth of software included in the $1795 price.
How could Osborne include so much "free' software? It was not done by mirrors--but almost. Much of the software was received by OCC in exchange for equity. MicroPro International, for example, received 75,000 shares of stock (worth around $130,000 at the time) in return for an unlimited distribution license for WordStar. In addition, they received $4.60 for each copy of the program-- peanuts against the normal list price.
First shipments were in July 1981, and in the next eight months, OCC shipped 11,000 units and accumulated an order backlog for some 50,000 more. The first units had some bugs that resulted in a 10% to 15% failure rate that cost OCC some $140,000 to correct. Nevertheless, OCC appeared to be highly successful and had certainly captured the attention of the financial community.
To support the strong marketing campaign Osborne felt was needed, the company went back to their investors for another $1.6 million in late 1981. Although the company lost $1.2 million on sales of $5.8 million in the first year, most investors felt this was to be expected. With sales booming, venture capital firms not in on the original financing were knocking at the door for a piece of the action.
In mid-1982, Adam Osborne was predicting annual sales of $250 million and before tax income of nearly $9 million. In March, the company opened an assembly plant in Monmouth Junction, NJ, capable of producing 250 systems a day. The company also began development work on two new computers, a replacement for the Osborne 1, code named the Vixen, and an upper-end unit, the Osborne Executive.
On the inside, things were rosy. A ninefor-one stock dividend was declared. Stock options were granted for 337,000 shares at prices between $4 and $16 per share, and company officers bought another 45,000 shares for $4 each. The company raised $9.9 million by selling 67,000 shares of preferred stock and borrowed $7.5 million from the bank.
In October 1982, OCC announced a holiday promotion in which purchasers would get Ashton-Tate's dBase II free with the purchase of an Osborne 1. The promotion was so successful that the company went into two and then three shifts to meet the demand. At its peak, production was running 500 systems a day. Unfortunately, quality control broke down, and warranty problems increased enormously.
The Gathering Storm
While all seemed rosy on the inside, storm clouds were gathering on the outside. Almost unnoticed by Osborne was the introduction of the IBM PC in August 1981. Listening to Adam at the West Coast Computer Faire in March 1982, one would have thought that the entry of IBM into the market was a non-event.
Two months later, in May 1982, the Kaypro II was introduced. This was a direct competitor to the Osborne which had corrected many of the deficiencies that Osborne customers found annoying: the small screen, low capacity disk drives, and non-standard printer connections.
Having been relieved of his position as vice president of manufacturing in May, Tom Davidson resigned from OCC in September to join Porter Hurt, whose company was producing PC boards for Osborne. When it became apparent that Hurt's company was planning to introduce a computer in competition with the Osborne (the Access), OCC sued Davidson. The suit was settled a few months later.
By late 1982, the trickle of IBM software had become a flood. Several IBM lookalikes had been announced, and it was well-known in the industry that several IBM-compatible portables were on the way--most notably the Compaq. Yet, OCC was not working in this direction and was having so many problems with the Vixen project that it had to be scrapped in December.
Moreover, the end-of-year financial statements (the FY ended November 27), revealed a $1 million loss on sales of $66.8 million. What happened to the $250 million sales and $9 million profit that Adam was forecasting six months earlier? Adam attributed the shortfall to manufacturing and quality control problems. In December, he refused to discuss any future company plans or projections on the grounds that he had just signed the SEC notification of a public offering.
In January 1983, Osborne wooed Robert Jaunich II from a top executive post at Consolidated Foods. Adam said of the transition, "We are no longer a start-up company. We are a force in the microcomputer revolution. We are now the fastest growing company in the history of Silicon Valley.' From then on, Jaunich concentrated on the operations end of the company (manufacturing, financial, and distribution) while Adam continued to orchestrate the marketing.
Trouble Everywhere
A move made in early 1983 was to change the fiscal year to end in February 1983 rather than November 1982. Jaunich wrote investors, "The change allows the Company to focus on sales and customer support during the peak holiday period.' He went on, "By making the change before becoming a public company, we make easier communications with analysts and others who normally deal in year-to-year and quarter-to-quarter comparisons.' In a lawsuit filed by OCC investors, they attribute a different motive to the change and charge it was made "to circumvent the explicit disclosure of adverse financial information.'
The alleged circumvention didn't last long. In April, financial statements for the revised FY showed a $1 million loss on sales of $94 million. In early April, Jaunich reported to investors that "preliminary results for the quarter ended February 26, 1983 indicate revenues of approximately $34 million and profits at approximately break even.' But in mid-April, according to financial columnist Dan Dorfman, Donald Waite, OCC chief financial officer informed Jaunich that the company had actually lost $4 million in the previous fiscal year and $1.5 million in the February quarter.
A few days later, Dorfman reports, Waite informed Jaunich of even greater losses; $8 million for the year and $5 million for the quarter. According to Melchore, much of this was as a result of the requirements of company auditors that reserves be set aside to account for losses due to the premature announcement of a new computer. As a result, the officers and investment bankers scrapped plans for the public offering.
A premature announcement? Well, not exactly. To give the jazzy $2495 Osborne Executive a running start, Adam began orchestrating publicity early in 1983. We, along with many other magazines, were shown the machine in locked hotel rooms. We were required not to have anything in print about it until the planned release date in mid-April. As far as we know, nothing did appear in print, but dealers heard about the plans and cancelled orders for the Osborne 1 in droves.
In early April, Osborne told dealers he would be showing them the machine on a one-week tour the week of April 17, and emphasized that the new machine was not a competitor for the Osborne 1. But dealers didn't react the way Osborne expected; said Osborne, "All of them just cancelled their orders for the Osborne 1.'
Osborne reacted by drastically cutting prices on the Osborne 1 in an effort to stimulate cash flow. But nothing seemed to work, and for several months sales were practically non-existent.
Investors, on the other hand were still lined up at the door, although perhaps not as eagerly as a year earlier. Nevertheless, the original venture partners anted up another $9 million in April, and still another $11 million in June. Weeks later, however, the firm was unable to raise yet $20 million more, the amount it considered necessary to speed its IBM-compatible product from drawing board to market.
On July 27, OCC announced it was slashing the suggested retail price of the Osborne 1 from $1995 to $1295; by August, our Street Price Index showed prices in the $900 range. By this time, desperation was the watchword.
On August 2, the New Jersey plant was shut down and 89 workers were laid off. At the time, Osborne was quoted as saying, "What's happening is we're seeing some summer softening.' The two-man Hong Kong office was closed and Osborne commented, "We're looking very, very carefully at manpower loadings.'
The very careful look resulted in the dismissal of 200 workers from the Hayward, CA, facility a few days later. And by the end of the month, Adam Osborne was making personal appearances at one-day sales where the Osborne 1 was selling for $995 and the Executive for $1995.
But it wasn't enough. In early September, banks had seized the company's accounts receivable. On September 9, the company dismissed 270 more workers and closed the Hayward production facility, leaving just 80 employees on the payroll. Three days later, on September 12, Porter Hurt filed suit for the $4.5 million owed his firms for PC boards.
A day later, OCC filed for Chapter 11 protection in Oakland, CA, federal bankruptcy court, listing assets of $40 million, liabilities of $45 million, and 600 creditors.
On September 22, a group of 24 investors filed suit against OCC and several individuals for $8.5 million in damages, accusing OCC and its auditors of masking OCC's true financial condition while the company was seeking private financing earlier in the year. Another allegation made in the suit is that several unidentified OCC directors sold stock "on the basis of inside information.' This seems particularly aimed at Seymour Rubinstein and MicroPro International who sold 7500 shares in March.
Of the allegation, Rubinstein says, "Actually, I didn't know anything.' He revealed that he sold some of his stock to cover his 1982 tax bill--"and just barely enough to cover it,' he says. "I still hold more than half my original purchase.'
He is lucky to have sold half. Jack Melchore and the firms he advises invested $3.25 million in OCC; Thomas Unterberg put in $1.1 million; Sanford Robertson, $1 million; Ben Rosen, $400,000; William Egan, $1.8 million; and so it goes.
How much did Adam Osborne himself lose? Apparently very little. He still lives in a comfortable home in the hills over Berkeley where he is writing a science fiction novel and making plans for a new venture. What venture? He is not saying, but he hinted to a Wall Street Journal reporter, "It's the kind of thing that a year from now, when people look at it, they'll scratch their heads and say, "Why didn't I think of that?''
Photo: Press release photo of Adam Osborne announcing the Osborne 1, April 3, 1981.
Photo: Newspaper photo of Adam shortly after filing under Chapter 11.