Hayes Corporation

views updated

Hayes Corporation

5835 Peachtree Corners East
Norcross, Georgia 30092
U.S.A.
(770) 840-9200
Fax:(770) 441-1213
Website:http://www.hayes.com

Public Company
Incorporated: 1997
Employees: 1,100
Sales: $199.6 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: HAYZ

SICs: 3577 Computer Peripheral Equipment, Not Elsewhere Classified; 3661 Telephone & Telegraph Apparatus

Hayes Corporation is a leading manufacturer in the personal computer (PC) modem industry. Just as IBM set the standard by which all other PCs are judged, Hayes did the same for modems. The company, however, has endured a less than glorious history, marked during the 1990s by fierce infighting at the executive level and a Chapter 11 bankruptcy, from which the company eventually emerged and reorganized itself through consolidation with Access Beyond Inc.

Beginnings, 1977-85

One of two boys of G. C. (a Southern Bell cable repairman) and Sadie (a telephone operator), Dennis Carl Hayes was described by Sadie as a “bookish boy ... drawn to high-technology” and won a school science fair award with a laser-operated device.

In the 1970s, Hayes worked at Financial Data Sciences (FDS), a Florida-based producer of savings and loans automated teller machines (ATMs), modified from bank ATMs. “They had a targeted market and a very specific product for that market,” Hayes said in a February 1990 interview. The strategy appealed to Hayes because FDS competed with larger corporations by targeting a niche market. Hayes adopted the strategy.

Hayes, then 27, left Georgia Tech after five years to start Hayes Microcomputer Products with Dale Heatherington. As the first microcomputers and PCs were introduced, they capitalized on simultaneous business opportunities. Feeling the market would be ignored long enough to get started, they were among the first to develop modems (modulator/demodulators, devices which translate analog telephone signals into digital signals computers can understand), as their company’s product. Less investment capital was required, too, compared to diskdrives or printers. They literally invented the modem industry and created the standards for PC modems.

Hayes and Heatherington built their first product, the 80-103A, operating at 300 baud (bits per second) and connecting to the MITS Altair’s S-100 bus, on Hayes’s dining room table in Spartanburg, South Carolina. With friends, they built a handful of modems daily, releasing the product in April 1977. Hayes subcontracted assembly work from larger computer companies to pay his group and raise equity. They peddled modems from their cars to hobby computer dealers, persuading them to carry the product as kit-computer enhancements, selling $125,000 their first year, and attracting 20 competitors.

A second product shipped in 1978. The Micromodem II for the Apple II was the first modem to directly connect into the telephone network. Demand skyrocketed, and modems were requested for Commodore, DEC, and Radio Shack computers. A standard interface was required, so they created the Hayes AT command set in June 1981. By 1982, they were selling 140,000 modems annually, with $12 million in revenue.

As companies discovered the benefits of on-line databases, electronic mail, micro-to-mainframe links, and local-area networks (LANs), the appeal of computer communications spread. Competition grew. Novation introduced “Hayes-compatible” (a term which stuck) modems; Racal-Vadic, known for industrial modems, jumped in; and U.S. Robotics added memory to its internal modem boards. Others enhanced modems by supporting diagnostics inside to trace bad phone lines and producing encryption and other data security features.

In May 1984, market leader Hayes used its success as a cash cow, expanding into general software with its “Please” database-management software, with a menu-based command structure. Dennis Hayes indicated that his company had intended to create software since the start. Hayes bought SoftCom in September. The company automated its Norcross, Georgia factory with six production lines producing over 10,000 finished boards daily, and the product development staff moved into new facilities. By July 1984, Hayes was a leading modem manufacturer, gaining household-name status and holding nearly 60 percent of the 300-baud and 1200-baud markets. Estimates put Hayes’s revenue near $25 million, double the 1982 figure, but Hayes announced revenues of $120 million for the year, and Dennis Hayes was already predicting modems would “get smaller, faster and cheaper.” By 1985, Hayes held nearly half the PC modem market.

Patent Battles, 1985-91

But troubles were brewing for Hayes. A court battle began in 1985, shortly after the company received the Heatherington U.S. Patent 4,549,302—which, named for its inventor, covered a modem-escape sequence defining how modems switch from interpreting commands to safely sending data over telephone lines—and sent letters to approximately 170 modem makers allegedly using the technology, asking that they license it.

In November 1986, competitors Prometheus Products Inc. and U.S. Robotics filed suit in San Francisco’s U.S. District Court of Northern California against Hayes, maintaining escape-sequence technology predated Heatherington’s patent, invalidating it and citing another modem-escape patent lawsuit between Business Computer Corp. (Bizcomp) and U.S. Robotics in 1984. Hayes filed a counterclaim against the two and Bizcomp, part of “The Modem Patent Defense Group,” beginning a legal offensive in April 1987, claiming they had violated the 302 patent.

The industry watched with interest from the sidelines. Hayes sued Microcom Inc. in December 1987 and Micom Systems Inc. in February 1988. Ven-Tel Inc., in December 1987, joined the group suing Hayes. The industry war began in earnest in mid-1988 when Hayes sued Everex Systems Inc. and OmniTel Inc. Other companies began suing Hayes, including, in December 1988 and February 1991, Multi-Tech Systems Inc., whose president, Raghu Sharma said, “I know it’s an invalid patent so I’m going to fight it to the end ... We were making Bell 212 modems back in 1978... when Dennis Hayes was fiddling around with 300-baud modem chips at his kitchen table.” Hayes also sued, in May 1991, Zoom Telephonies Inc., Zenith Data Systems, Cardinal Technologies Inc., Packard Bell, and Ven-Tel again. Because the lawsuits were similar, if not identical, to the first, federal judge Samuel Conti consolidated them into one action.

Most companies settled out of court before the trial began. U.S. Robotics settled in September 1987, agreeing to pay Hayes’s attorney fees and to license the patent, for a total nearing $500,000. Bizcomp followed in February 1988, agreeing to pay two percent royalties on sales of modems using the patented sequence and obtaining a licensing contract. That September, Microcom settled, paying a one-time licensing fee for the technology and signing a five-year cross-licensing agreement covering all patents developed by either company. Prometheus admitted infringement against the patent in January 1991, agreeing to pay royalties for the technology. By then, Hayes had dropped to 9.6 percent marketshare behind Codex Corp., Racal-Milgo, and Universal Data Systems Inc.

Some fought on ... and lost. In February 1991, Hayes won a $3.5 million jury award against Everex, Ven-Tel, and OmniTel, as Conti found them guilty of willfully infringing the Heatherington patent. They appealed, but the court ordered payments of $1.01 million, $1.6 million, and $884,854 plus interest, respectively. OmniTel filed for Chapter 11.

Hayes was back in court in 1992 with Multi-Tech in a dispute over modem reliability, unfair competition, and libel. Hayes claimed the Time Independent Escape Sequence (TIES) coding scheme used by Multi-Tech and others was unreliable and could destroy data. Sierra Semiconductor Corp., which manufactured TIES chipsets, had already won two preliminary injunctions in Minnesota and California U.S. District Courts barring Hayes from running ads titled “Tick, Tick, Tick. Boom! You’re Dead.” Before it ended, The Federal Trade Commission informally investigated whether Hayes engaged in false and misleading advertising. In May 1994, Hayes, admitting no wrongdoing, agreed to halt escape-sequence advertising unless it was backed up with “competent and reliable evidence.”

While his company often occupied headlines, Dennis Hayes kept a low profile personally, until he met and married former Atlanta Journal-Constitution reporter Melita Easters, who funded the arts, making the two a fixture in Atlanta’s society pages. Then the couple underwent a messy, public, and bitter divorce in 1988-89.

Hard Times, 1989-94

Following the divorce, things began going badly for the company. It was not evident initially as Hayes acquired JT Fax and competitor Thousand Oaks, California-based Practical Peripherals Inc. (PPI) in August 1989. But, in October, Hayes cut its workforce nearly 10 percent. Hayes denied allegations of financial woes, releasing the Ultra 9600 modem. Other manufacturers, including Codex, also reduced staff.

In 1990, Hayes began working with AT&T developing boards for integrated services digital networks (ISDN), a communications standard for an entirely digitized telephone system which carried more data than previously was possible. But, in April, Hayes cut staff again by 150, closed sales offices in New York, Los Angeles, Washington, D.C., and Toronto, and moved ISDN development activities to San Francisco. Hayes also accepted resignations from John Reinking, vice-president of sales; Lucy Evans, vice-president of finance; and Neal Coyne, senior vice-president and general manager, and Dennis Hayes’s number-two man, who joined Hayes in June 1988.

Business got tighter as over 300 competitors worldwide, including Microcom, U.S. Robotics, Multi-Tech, Motorola, Racal-Milgo, and IBM pressed Hayes for marketshare and Pacific Rim manufacturers flooded the market with lower-priced, cheaper-to-produce clone products.

In January 1991, Hayes, holding approximately 12 percent of the U.S. market, bought the assets of Waterloo Microsystems, a Canadian software firm, and had regional headquarters in London and Hong Kong. The company established a joint venture with Siemens AG for ISDN technology and expanded its authorized distributor network in Australia, Mexico, Sweden, Denmark, Taiwan, and the United Kingdom.

The most ambitious undertaking for 1991 was penetrating the Chinese market. The company opened a technical service station in Beijing in September, supplying modem know-how and technical support to the China National Post and Telecommunications Appliances Corp., an import/export trading arm of the Chinese Ministry of Postal and Telecommunications. The Chinese Ministry of Health in Tienjin, southeast of Beijing, began using Hayes modems to link medical specialists with patients in far-flung facilities, and Hayes modems were also used by the Chinese metallurgy industry, which operated mines, refineries, metal-fabrication factories and plants that made cloisonne.

Hayes entered the operating system (OS) market in June with LANstep, a network OS for small offices, abandoned in 1994 in the face of Novell and other products. In July, Hayes released the V-series Ultra Smartmodem 14400, playing catchup with competitors like Digicom Systems Inc., who had 14.4Kbps products on the market for over a year.

Although Hayes kept its finances hush-hush, court records showed in 1991 an operating loss of $1.3 million, profits in 1992, and losses of over $47 million the next year. Hayes was not alone though; other manufacturers also felt the pinch: Intel Corp. sold most of its modem business, and Megahertz Corp. reported losses early in 1994, eventually being purchased by U.S. Robotics.

Chapter 11, 1994-96

Although Hayes reportedly had $270 million total sales in 1994, cash-flow problems forced them, with approximately 62 percent of the market, to file for Chapter 11 bankruptcy protection in November 1994 during the industry’s largest trade show, COMDEX. The timing was unfortunate and speculation ran rampant as vendors like Digicom and Zoom hoped uneasiness about Hayes’s financial situation would have customers switching to their products. Some used Hayes’s financial woes to promote their own products. Support came from an unexpected source when one of Hayes’s fiercest competitors, U.S. Robotics, publicly hoped Hayes pulled through.

While this gave Hayes breathing room from creditors, it did not spare Dennis Hayes from more turmoil. Boca Research, a smaller modem manufacturer, wanted a merger with Hayes in June 1995, retaining the Hayes name, but putting its own leader in charge. By August, Boca canceled the deal, claiming Dennis Hayes had opposed being second and was negotiating with other investors after they asked him to stop, allegations Hayes denied.

Other investors expressed interest. Hayes presented the court with a plan to emerge as an independent entity, less 49 percent of the company in exchange for a $70-plus million loan from the CIT Group of New York and $17.5 million each from Singapore-based ACMA Ltd. and Canadian telecommunications giant Northern Telecom. The $400-million ACMA, which rescued Paradigm Technology from 1994 Chapter 11 and nurtured the static-RAM maker to a successful initial public offering (IPO) in June 1995, was considered a good partner. Then Northern backed out in March 1996.

Hayes subsequently lined up ACMA subsidiary Rinzai Ltd.; Kaifa Holdings Ltd.; and Wong’s International subsidiary Rolling Profits Holdings Ltd. to replace Northern. The new plan would bring $37.9 million, plus a $6.5 million bridge loan with $7.6 million more available if needed, totaling about $105 million to pay creditors approximately $85 million, buy out minority shareholder Melita, and give Hayes operating cash.

A hostile takeover bid came in October from rival manufacturer Diamond Multimedia Systems and, in May 1995, Belgrave Investment Trust purchased $5 million of unsecured debt from Hayes’s creditors in the first step of a hostile takeover. Dennis Hayes admitted making some poor business decisions, saying inventories were badly managed, that products producing no revenue were kept on the books, costing the company money, acknowledged the company had botched some technology transitions and had been out-gunned in some markets, especially by U.S. Robotics, but emphasized the success of his reorganization efforts and attributing the company’s failure, in part, to his previous management team.

Belgrave dropped its takeover attempt in July 1995. Diamond was not so easily dissuaded, offering $110 million in January 1996, and $128 million in February. Diamond also offered to pay Dennis Hayes $123 million for his stock. He refused. Diamond’s plan suffered when U.S. Bankruptcy Judge Hugh Robinson ruled it would not have the rights to key technology developed by Megahertz (owned by U.S. Robotics), on which Hayes held the only license. Without the patented device, called “The X-Jack,” a pop-out plug connecting laptop computers to telephone lines via modems, Hayes, which marketed it as the “Easy Jack,” would lose sales and drop in value. Diamond President William Schroder was vocal about keeping the Hayes name, but planned to “tighten up” operations. The judge rejected Diamond’s plan in March 1996, not wanting Georgia’s economy to suffer by loss of jobs which would result from the Diamond takeover.

U.S. Robotics, second in the market behind GVC Technologies in February 1996, offered $97.5 million to buy third-ranked Hayes, but withdrew its offer. It did issue a legal challenge which would have prevented a post-Chapter 11 Hayes from using the X-Jack technology, claiming Hayes would be a different entity and would need to renegotiate its contract. Robinson rejected the claim. Other proposed plans included a line of credit from GE Capital for $32 million, which would let Hayes pay off $23.6 million owed NationsBank.

If the bankruptcy struggle, running the company, and avoiding hostile takeovers were not enough, the company was torn by internal dissension. Two highly placed Hayes executives, Gary Franza, vice-president of sales and John Stuckey, vice-president of product management, were fired. Mikhail Drabkin, vice-president of corporate engineering, resigned shortly thereafter. The three, called “The Three Amigos,” testified in court, praising Dennis Hayes for his vision, but suggesting he withdraw from day-to-day operations, becoming chairman. Hayes filed a lawsuit against the three for “mutiny,” and claimed $5 million in damages for insubordination. The three countersued, claiming the company owed them severance pay and performance incentives and that it reneged on promised compensation for working through the bankruptcy proceedings (Hayes had asked the court to approve incentive pay aimed at keeping certain key executives on board, who would have also received bonuses when the reorganization plan was confirmed). Franza and Stuckey also alleged Dennis Hayes damaged their reputation by sending an electronic message to more than 1,000 employees saying the two were terminated “for cause,” and asked $5 million each compensation for libel, plus $10 million each in punitive damages.

Part of the emergence plan included downsizing. Hayes tapped Andersen & Co. in February 1995 to oversee restructuring and consolidation of operations. June followed with Hayes closing research and development centers in San Francisco and Waterloo, Ontario, Canada.

Hayes was cleared to emerge from Chapter 11 in March 1996 under its own plan and to remain a privately held company with Dennis Hayes in control. By April, it announced the two best financial quarters in its history and began reporting quarterly earnings like a public company. But Dennis Hayes followed many of his contemporaries out of day-to-day operations. Just as Kenneth Olsen was removed from Digital Equipment Corp., Steve Jobs was forced from Apple (and later rehired), and An Wang had to leave Wang Laboratories, Hayes, at the insistence of “The Three Amigos,” agreed to a different role after emerging from bankruptcy.

Dennis Hayes named Joseph Formichelli to run Hayes and, in the nine months following Formichelli’s tapping, Hayes cut 25 percent of its costs, which included “tightening up” operations. In September 1996, as prices and profit margins on modems dropped, and U.S. Robotics reportedly dumped months’ worth of products into distribution channels, Hayes laid off approximately 400 employees at its California facility. The PPI product line, manufacturing division, and 100 positions were moved to Georgia, where 700 employees already worked, leaving about 50 people in California.

Operations, 1994-Date

The company continued to operate during the bankruptcy proceedings. Following the V.34 transmission protocol ratification, Hayes, in January 1995, released the Accura 28800 V.34/ V.FC + Fax and the Optima 28800 V.34/V.FC + Fax (ideal for transferring large files and connecting to LANs). Both supported other protocols, and were bundled with an ESP Communications Accelerator, a 16-bit serial card which enhanced throughput and reduced data loss. The Accura also included Smartcom for Windows LE and Smartcom FAX for Windows LE.

Hayes was in court again in May, attempting to make Rockwell International supply Hayes with data-pump devices used in its 14.4 and 28.8Kbps modems. Rockwell had placed the company on allocation during patent-royalty negotiations. Hayes accused Rockwell of “strongarm” tactics, holding the data-pump devices hostage in an attempt to obtain a paid-up license for patents relating to modem compatibility, which were supposed to be paid for six years. Rockwell had not shipped Hayes parts since early April, and they were unobtainable elsewhere.

In June, PPI released the ProClass 288LCD External Modem and the ProClas 288 with EZ-Port PCMCIA Modem. The Optima 288 V.34 +Fax earned top ratings for data-only use, providing the fastest data throughput and handling Telecommunications Industry Association (TIA) compatibility testing better than other modems. The same month, Hayes began manufacturing modems for the Asian market in the Far East to cut freight costs. In July, Hayes cut prices on 144Kbps modems and, in October, began bundling start-up kits for CompuServe, America Online, and its own Smartcom for Windows LE and Smartcom Fax for Windows data and fax communications software, and PPI released the Class 288 MiniTower II V.34.

In November, Hayes announced the Accura 288 DSVD Message Modem, enabling simultaneous voice and data or fax communications over one line. The plug-and-play device featured a full-duplex speakerphone and Radish Voice View, had data-transmission speeds of up to 28.8Kbps and fax speeds of 14.4Kbps. The external version featured built-in microphone and speakers; the internal product had a microphone integra-table with desktop speakers. PPI also released the external Class 288 MiniTower Voice Modem and internal Class 288 Half-Card Voice Modem with external microphone, both of which supported throughput up to 115.2Kbps with compression and 14.4Kbps fax speeds.

In February 1996, Hayes released a 230Kbps Apple Macintosh modem and, in July, joined over 25 other industry leaders from the communications and computer industries, including Ascend Communications Inc., in “The Open 56K Forum,” dedicated to implementing 56Kbps analog modem technology by Rockwell and Lucent Technologies Inc.

Hayes entered the RAS market, against vendors like Cisco Systems Inc., Shiva Corp., 3Com Corp., U.S. Robotics, and Ascend, in 1996, shipping the high-end Century 9000 series of modular RASes for Internet service providers (ISPs) in January 1997. Also, late in 1996, Hayes and Gol, which owned the patent for an interface between smart-card (which store information, like network log-in information, vital-health data, cash balances or private encryption codes, in electrically-erasable programmable ROM) readers and modems, released a smart-card modem featuring the Hayes AT command set. Hayes also began working with Schlumberger Electronic Transactions Inc. and GemPlus, the two largest smart-card manufacturers, and began recruiting companies to join the Smart Card International Electronic Transactions Association, an industry group Hayes created.

In March, as Rockwell awaited Federal Communications Commission approval of their requested waiver for power consumption, required to connect at data rates above 53Kbps, they battled (with Cascade Communications Corp., Cisco and 130 others) against Texas Instruments (TI; with U.S. Robotics and Cardinal, among others) over whether TIA would name Rockwell’s 56Flex or TI’s X2 technology the standard 56Kbps chip. As the titans clashed, Hayes released Accura and Optima PC Card-based 56Kbps modems utilizing Rockwell’s technology.

While U.S. Robotics shocked the industry by announcing its acquisition agreement with networking giant 3Com early in 1997, Hayes, faced with possibly missing the lucrative market for 56Kbps modems, hedged its bets and began manufacturing PPI modems using chief competitor U.S. Robotics’ X2 technology, and, in March, bought Cardinal. In April, Hayes began manufacturing and marketing cable modems, super-fast devices that delivered Internet connections 20 times faster than 56Kbps modems. Marketed to cable television companies, they were “one-way,” designed to have 1 Megabps of data coming “downstream” from the Net. Analysts estimated demand for the cable modem would reach $4.4 million by 2000 and $19.1 million by 2005.

In June, Micronics Computers discussed acquiring Hayes, but no deal emerged. Access Beyond Inc. agreed in July to a “reverse acquisition” in which Access would acquire Hayes and create Hayes Corporation as the new entity. Formichelli stepped down as Hayes CEO and president in September, to be replaced by Vice-President of Operations P. K. Chan. Following the merger, which made Hayes Corporation a publicly traded company, Dennis Hayes became chairman; Ron Howard, Access’s chairman and CEO, became vice-chairman and executive vice-president of business development; and Chan became president and chief operating officer.

In October, the new company, facing competitors like Ascend, Compaq, Bay Networks Inc., Efficient Networks Inc., and RAScom, introduced RASes based on standard OSes, designed to streamline wide-area network communications. Hayes also introduced a NetWare version of the Access Hawk 2290 RAS at NetWorld + Interop-Atlanta, which connected 8-72 modem cards, plugged into standard file servers, and offloaded remote-access processing to dedicated CPUs so servers could support other functions. Hayes also debuted two ADSL modem prototypes based on PCI network interface cards from Alcatel Network Systems and asynchronous transfer mode technology from ATML.

In December, Hayes began working with Analog Devices Inc. on chipsets and cable-modem devices complying with the Multimedia Cable Network System consortium’s data-over-cable service interface specifications, capable of providing faster data rates over hybrid fiber coaxial cable.

Hayes, in January 1998, debuted an ADSL modem, began looking at wireless technology markets, and planned to acquire other companies dealing with RASes and analog, cable and xDSL modems. Hayes also began working with Alcatel on xDSL technology, building on Access’ Hawk RAS, enabling operation as a Windows NT network server and RAS simultaneously.

In February, following long-awaited approval of a 56Kbps modem standard, Hayes joined 3Com, Multi-Tech, and Zoom, releasing the K56flex Optima PC-Card modem, with a more-durable EZjack pop-out connector, sleep/idle mode for lower power consumption, and a cellular phone connector. Hayes embraced the v.90 standard in March with dual-mode internal and external Accura modems, offering software upgrades for modems without enough memory to support both standards. So Hayes, despite enormous challenges during its 20-year history, was still a leader in the modem industry.