Comdial Corporation

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Comdial Corporation

1180 Seminóle Trail
P.O. Box 7266
Charlottesville, Virginia 22901
U.S.A.
(804) 978-2200
Fax: (804) 978-2293
Web site: http://www.comdial.com

Public Company
Incorporated: 1977
Employees: 886
Sales: $102.2 million (1996)
Stock Exchanges: NASDAQ
SICs: 3661 Telephone & Telegraph Apparatus; 3643 Current-Carrying Wiring Devices

As of 1997, Comdial Corporation was the second largest U.S. manufacturer of business telecommunication systems (after AT&T Corporation). It had an installed based of approximately 250,000 telephone systems and three million telephones. Focusing on small and medium-sized companies as clients, it supplied a range of modern telephone systems through a national network of approximately 1,700 dealers. Comdial Enterprise Systems, Inc. (CES), a wholly-owned subsidiary, provided communications solutions involving Computer Telephony Integration (CTI), which merges the power of modern telephone systems with that of computers, allowing users to control their telephones through networked or stand-alone computers.

1970s Founding and Earlier Roots

Incorporated in Oregon in 1977, Comdial was formed as a telecommunications research firm. When it acquired the telephone manufacturing division of General Dynamics for $53.7 million on October 1, 1982, however, the company gained a major product design and manufacturing operation located in Charlottesville, Virginia, the history of which may be traced to 1894. This telephone manufacturing operation was formed when the patents expired on Alexander Graham Bell’s telephone. About 30 independent companies then entered the market, among them the one that Comdial would later acquire, formed by Alfred Stromberg and Androv Carlson. The two Swedish immigrants, former employees of Chicago’s Bell Telephone Company, each contributed $500 to form a partnership. In 1896 they moved into Chicago’s Springer building. Carlson worked in the plant and Stromberg was out selling the company’s product, the Stromberg-Carlson telephone.

By the turn of the century, Stromberg-Carlson Telephone Systems, Inc., was a leading independent telephone manufacturer. The company’s telephone became known as the “farmer’s telephone,” connecting farmers and other rural inhabitants with towns and cities. The company had a reputation for stable prices, integrity, and quality.

Having been purchased in the early 1990s by the Home Telephone Company of Rochester, New York, Stromberg-Carlson closed its original Chicago plant and moved its operations to Rochester. This provided Stromberg-Carlson with a larger facility in which to increase production.

During World War I, Stromberg-Carlson had to stop all of its civilian business and devote itself to producing portable telephones and camp switchboards for use in Europe. Again during World War II, Stromberg-Carlson supplied switchboards, telephone instruments, field radio sets, and sound-powered systems to the U.S. Navy.

The company continued to grow during the late 1940s and early 1950s. It demonstrated its scientific skills as it expanded into the electronics industry. Attracted by Stromberg-Carlson’s scientific excellence and developments in electronics, General Dynamics, a major defense supplier, purchased it in 1955.

As a division of General Dynamics, Stromberg-Carlson Telephone Systems Inc. continued to expand its product line, but later refocused on its traditional market, that of the U.S. independent telephone industry. In the mid-1960s it acquired the Charlottesville, Virginia-based United States Instrument Corporation, which manufactured telephone components. By 1975, Stromberg-Carlson, now known as General Dynamics Telephone System Center, Inc., had moved its telephone manufacturing operations to U.S. Instrument’s facilities in Charlottesville.

Effects of AT&T Break-Up in the 1980s

In 1982, Comdial Corporation acquired all of the assets and liabilities of General Dynamics Telephone System Center, Inc. In January of the following year, Comdial went public, offering 1.8 million shares of common stock at $20½7s per share. Its stock would trade as high as $33 per share. Comdial made three more acquisitions in 1983 to increase its telephone manufacturing capacity: 1) Tele-Service, consisting of R&G Communications, Inc., and Southern Telecom Supply, Inc., of Texarkana, Texas, for more than $5 million worth of stock; 2) American Phone Centers, Inc., for 30,000 shares of common stock; and 3) Scott Technologies Corporation for $250,000.

Then, in 1984, the divestiture of AT&T changed the field of telecommunications. Up to this time, Comdial was one of the major manufacturers of standard black telephones, primarily for residential use. But, in order to keep pace with the industry, the company soon changed its focus to business telephones and began to streamline operations with a series of divestitures. In April 1985 it sold Comdial Ltd., its European subsidiary, for $8 million, to a Swiss company, Autophon A.G. In October 1985 it sold Comdial Technology Corporation, a wholly-owned subsidiary, to Orbit Technology Corporation for $1.8 million. In June 1986 it sold Comdial TeleServices to Florida Data Corporation for $4.5 million. In January 1987 it sold American Phone Centers, Inc., to WRAPC, Inc., for $571,000.

Still, by the late 1980s, Comdial was struggling. The company’s stock was trading in the $1 per share range, and for fiscal year 1987 Comdial posted a net loss of $7.5 million on sales of $86.6 million. The company would continue to be unprofitable for the next several years, posting net losses of $989,000 on sales of $88.6 million in 1988 and a net loss of $2.0 million on sales of $81.4 million in 1989. Its independent auditor, Deloitte & Touche stated in the company’s annual report for 1989, “The company’s recurring losses from operations raise substantial doubts about its ability to continue as a going concern.”

Turnaround in the 1990s

Management problems had been plaguing the company and new leadership came in the form of William G. Mustain, who took over as president and CEO in May 1989. Under Mustain’s leadership, Comdial formed American Telecommunications, Inc., a wholly-owned subsidiary, to provide telephone systems for small businesses. That year the company rallied, showing a profit with net income of $1.0 million on sales of $80.1 million.

In 1991 Comdial began a strategic initiative aimed at computer telephony integration (CTI). An emerging industry, CTI allows businesses to combine voice and data networks—personal computers with telephone systems—thereby improving operating efficiencies and customer satisfaction. Comdial was among the first telecommunications manufacturers to support the CTI standards being set by Novell, Inc. (TSAPI) for networked computer systems and Microsoft Corporation (TAPI) for stand-alone personal computers. Over the next several years Comdial would continue to develop computer telephony applications to become a leader in CTI solutions.

Despite company retrenchment, innovation, and new management, in its 1991 fiscal year Comdial posted a net loss of $871,000 on sales of $63.1 million. At this time the company was saddled with long-term debt of $23 million and heavy interest payments negatively impacted its net income. In order to become profitable, it would have to improve its debt-to-equity ratio somehow. After reducing its long-term debt to $21 million in 1992 and $19 million in 1993, it was able to successfully reduce it to only $5 million in 1994 and $3 million in 1995 through a recapitalization program. In its 1992 fiscal year the company began to show consistent profitability. It had net income of $884,000 on sales of $65.5 million. Comdial’s growth over the next five years, and quite possibly beyond that, would be the result mainly of sales of digital telephone systems introduced since 1992 and CTI products introduced since 1993. Over the coming years it positioned itself to take advantage of two major trends in telecommunications: 1) the shift from analog- to digital-based networks, and 2) the integration of computer and telephone systems (CTI).

Analog systems transmit voice information in a continuous wave form that is “analogous” to the original voice signal. While acceptable for most voice transmissions, it is not as efficient for data or video transmissions. As the distance between sender and receiver increases, the transmission quality is degraded. Until the early 1990s, most telephone systems were analog.

Digital telephone systems became available for commercial use in the late 1980s. In a digital system, voice, data, and video transmissions are converted into binary pulses (0 and 1) that may be stored or transmitted. With the many advantages of digital systems, it quickly became a general trend in the telecommunications industry and allowed businesses to take full advantage of new CTI application features being developed.

Comdial’s niche became the small business market, where it competed against approximately 20 companies, including some such larger concerns as Lucent/AT&T Technologies, Inc., Nortel, Inc., and Toshiba Corporation. Comdial’s products would eventually be sold to organizations requiring up to approximately 500 telephones.

Company Perspectives:

We will strive to provide world-class telecommunications products and services that meet the expectations of our customers; create value through the alliance of our fellow employees, customers, and suppliers; assure an understanding throughout the organization that quality is critical in all areas; consistently provide our customers with high-quality products and services; make it right the first time.

In 1992 Comdial introduced its DXP digital switch. The switch was compatible with virtually all of the company’s analog and digital telephones. Capable of being expanded to 224 ports, the DXP allowed Comdial to target larger end-users. It could also be linked to various CTI applications and was directly compatible with T-l service lines transmitting data at 1.5 megabits per second. In the fall of 1995 Comdial introduced the DXP Plus, a larger version of the DXP that could accommodate 560 ports or combinations of outside lines and terminal connections. Sales of DXP systems increased by 100 percent from 1993 to 1994, then by another 64 percent from 1994 to 1995. By 1995 it was generating more than $20 million in sales annually. Its success was attributed to its “open” design, which was compatible with third-party software.

In 1992 Comdial also introduced Impact, its digital telephone system that could support up to 24 lines and 48 telephones. The system included a digital switch and Impact digital telephones. Features included an interactive liquid crystal display (LCD), programmable feature keys, three color lighted status indicators, and a subdued off-hook voice announce for receiving intercom calls while on a telephone call.

By reducing its cost of goods sold, the company increased its net income to $2.4 million on sales of $65.1 million in 1993. (This was later restated to net income of $2.4 million on sales of $69.1 million.) It was the most profitable year in the company’s history. In 1993 Comdial sold 566 DXP systems, up 42 percent over 1992, and had received orders for 364 DXP systems in the first four months of 1994. It also shipped 109,000 Impact telephones against total orders for 126,000 units.

Then, in a major development, the company formed Comdial Enterprise Systems, Inc. (CES), a wholly-owned subsidiary, to focus on the design, marketing, and distribution of CTI applications and software. CTI was a rapidly growing market, and Comdial addressed this lucrative market in several ways. It delivered “open” telephone systems, such as the DXP, that could respond to a variety of software programs. Open telephone systems are those which allow users to customize their telephone system by adding appropriate application packages. The company also designed communication links between telephone systems and computers or computer networks. For users in specific markets, such as hotel/motel, real estate, legal, and retail, it developed special integrated products addressing their communication needs. Finally, it distributed a variety of applications software through its CT catalog. William C. Grover was appointed president of CES; he was formerly an executive at Sperry Computer Systems, Sequoia Systems, and a software database company.

CES formed strategic marketing and technology partnerships to serve the CTI market, including ones with Novell, Inc., for networking; Microsoft Corporation for desktop applications; and Motorola, Inc., for site-connect paging. CES was also working with a number of independent software developers to create applications for use with Comdial’s “open architecture” DXP digital switch. These applications would be used to serve specific markets, such as real estate, emergency 911 systems, and mobile service and dispatch operators.

In November 1993 Comdial entered into an agreement with 911 Systems Inc. of Perry, Florida, to be the exclusive marketer of their Enhanced 911 (E911) system. The E911 system provided an automatic display of the 911 caller’s name, telephone number, and location, as well as other information about the location, to assist responding emergency service personnel. The system was designed to meet the needs of cities and towns of all sizes, from small rural areas to large urban cities. The system included optional modules that could integrate computer-aided dispatching, map display, and other functions on the same color monitor. Most of the E911 systems were installed on the East Coast prior to the agreement.

Details of Comdial’s three-part strategic plan were announced at an annual meeting in May 1994. First, the company would continue to supply business telephone systems to small and medium-sized companies through a national network of approximately 1,200 dealers. Second, it planned to increase international business through agreements with distributors in different countries. It expected to focus especially on the Middle East, Latin America, and South Africa. International sales for 1993 were $1.2 million. The company had agreements in place with 13 distributors covering 23 countries. It received orders for $1.1 million in the first quarter of 1994.

Continuing to expand its international business, in January 1994 Comdial signed a distribution agreement with Teleboss, a South African manufacturer of telephone management systems, that was expected to generate $1 million worth of orders in the first year. In May 1996 it entered into a marketing and manufacturing alliance with Arvind for India. This was the first international agreement covering the PATI 3000 (a compact, low-cost CTI product for small and home offices introduced in September 1995 that linked analog telephones to personal computers running Microsoft Windows or Windows 95 operating systems). In July 1996 Comdial signed Telbit Telecommunications as a distributor for Israel. In April 1997 it appointed an independent distributor for Argentina and Uruguay.

Attracting investor attention in 1994

Comdial had net income of $3.2 million on sales of $77.1 million in 1994 and such growing financial strength began attracting the attention of investors. Comdial stock moved up to the two-to-three-dollar range before reaching $5 in mid-1995. A new recapitalization plan contributed greatly to the company’s improving financial condition.

In March 1994 another step in the integration of computer and telephony was taken when Comdial and Voice Technologies Group, Inc., announced the development of new software and hardware compatible with Microsoft’s TAPI standard. The new personal computer telephony card, designed to support Microsoft’s Windows telephony software, would allow users to control their Comdial telephone and line through a desktop PC that had TAPI-compatible software. This was an important development in Comdial’s pursuit of the small to medium-sized market and opened up Comdial’s installed base of telephone systems. The product was demonstrated at the 1994 Computer Telephony Conference and Exposition in Dallas, Texas.

In November 1994 Comdial introduced Scout, a digital wireless multiline telephone. It was designed to provide the convenience of wireless communication to Comdial’s Impact and DXP system users. It could operate from its base station on a desk or from almost any place within a large facility. It was small enough (6.5 inches long and weighed about eight ounces) to be carried by hand. It had the ability to put calls on hold, transfer calls, conference calls, as well as to be used as an intercom device. It alerted users to incoming calls either through an audio signal or vibration and also identified the calling party. Shipments would begin in the first quarter of 1995.

With net income of $9.9 million on sales of $94.8 million, Comdial reported record results showing net sales were up 23 percent over 1994. Net income increased by 89 percent. Much of the recent growth in sales was accounted for by the DXP digital switch and the Impact terminal product line. DXP shipments increased by 68 percent in dollar value over 1994 and now exceeded $20 million in sales.

While CTI products accounted for only seven percent of sales, CTI products were seen as the company’s major growth opportunity for the rest of the decade and into the next century. Through Comdial Enterprise Systems, the company planned to offer more communication solutions targeted to specific segments such as car dealers or doctor’s offices.

In July 1995 Comdial’s shareholders approved a reverse one-for-three stock split, which was combined with a secondary offering of stock. The stock sale provided Comdial with funds to repurchase its outstanding preferred stock from PacifiCorp Credit, Inc., a major investor in the company. PacifiCorp then reduced its stake in the company from 47.4 percent to 11.2 percent by selling some of its shares of Comdial common stock.

Subsequently, Comdial’s stock price rose to a level where it attracted more institutional buyers, and more analysts began following the company’s stock performance. Being able to redeem all of its outstanding preferred stock, on which it had been paying dividends, enabled the company to free up more funds to invest in the business.

Two acquisitions in 1996 strengthened Comdial’s leadership position in CTI applications. It acquired Aurora Systems, Inc., of Acton, Massachusetts, for $2.8 million. Aurora specialized in computer telephony applications software. It also acquired Key Voice Technologies, Inc. (KVT), of Sarasota, Florida, for $19.0 million. KVT developed and marketed voice processing systems known for their competitive prices and numerous features.

In January 1996 Comdial announced it would expand its sales force by more than half over the next three months from 20 to 30 people. Two separate field sales forces were established. One would improve Comdial sales through traditional supply-house channels. The other was set up to serve the CTI market as well as to expand Comdial’s value-added-reseller (VAR) channels and national accounts efforts. This sales force would be specially trained on the company’s newly introduced CTI telephone platforms and multi-vendor CTI software packages to work with software developers, network specialists, and resellers.

In August 1996 Comdial introduced Voyager, an integrated voice mail and PBX telephone system, as a low-cost alternative for small offices and home businesses. Its suggested retail price of $3,200 was about half the cost of competing separate-component systems. It was the result of a strategic alliance between Comdial and Voysys Corporation of Fremont, California.

For fiscal year 1996 sales topped the $100 million mark for the first time, reaching $102.2 million. However, net income dropped to $1.8 million, due largely to a 33 percent increase in selling, general, and administrative expenses. These increased expenses were attributed in part to an increase in sales personnel. The acquisition of Aurora and KVT also contributed to higher expenses, as did higher promotional allowances associated with increased sales through preferred dealers.

New Products and Customers in the Mid-1990s

In April 1997 the company was named “Computer Telephony Solutions Provider of the Year” by Computer Telephony magazine. Earlier in the year the same magazine selected Comdial’s new wideopen.group CTI applications software for workgroups as Product of the Year. This software package allowed workgroup members to perform all call processing tasks from their PC screens, determine the phone status of other workgroup members, and integrate databases with caller ID to produce screen pops. Other Comdial products also earned Product of the Year honors from Teleconnect magazine. With such accolades highlighting Comdial’s continued emphases on cutting-edge technology, the company seemed well-positioned for a bright future in a new century.

Principal Subsidiaries

American Phone Centers, Inc.; Aurora Systems, Inc.; Comdial Enterprise Systems; Comdial Telecommunications International, Inc.; Key Voice Technologies.