Chapter 3
Data Communications: Market Competition 1969-1972
Modems and Multiplexers

3.12   Codex Passes a Milestone: 1972

For Codex, 1972 couldn’t have been more different. Early in the year, they received the news they had been hoping to hear for four years: they had won the channel packing contract. First proposed to the Defense Communications Agency (DCA) in 1968, and the occasion of Carr’s trip to Hawaii in 1970, the DCA had bureaucratically decided to ask for competitive bids for the contract, soliciting bids from forty-four firms. Two firms, Harris Corporation and Codex submitted bids, and Codex won the $7.5 million contract by a margin of less than one percent of the total price. Before the joy of victory could be savored, however, there remained one small problem: Codex did not have the money to buy the parts, build the units or finance the receivables. The contract, three times their previous year’s sales, totally dwarfed Codex’s dwindling resources. Cash at fiscal year end 1971 totaled but $20,000. With a history of raising money under the most dire of circumstances, management presumed the channel packing contract could make a financing a slam-dunk. So Carr promptly contacted their investment bankers, Kuhn Loeb, who agreed, and began writing a prospectus for a public equity financing.

As Carr’s back began aching, he soon guessed financing problems were imminent, for every past financial crisis had precipitated back problems. Sure enough, Kuhn Loeb called requesting a meeting. In the course of their due diligence, they had discovered a report by the prestigious consulting firm of Arthur D. Little (ADL) The modem according to ADL would soon be made obsolete by the all digital data networks announced by AT&T and competitors such as Datran. Clearly, Kuhn Loeb could not sell stock to the public given such a bleak prognostication. Carr and Codex management, in shock, argued vainly as the bankers simply pleaded ignorance and left the meeting suggesting Carr write a report refuting the ADL conclusions, which they could review.

With their heads for far-too-long buried in the day-to-day struggle for survival, Carr and the rest of management were forced to pause and examine their industry’s prospects. In doing so, they came to two conclusions, one comforting and one startling. First, they persuasively argued that the threat posed by all digital data networks was overstated and the future was promising for modems. The conclusion was eagerly accepted by Kuhn Loeb who wanted to do the financing -- for no financing meant no fees or trading profits. The second conclusion remained private and came as a cold shower to management. If they, Codex, did not act quickly to engineer LSI-based modems their QAM-modems would soon be uncompetitive because LSI semiconductor technology promised to transform dramatically the size, power requirements, performance and pricing of all integrated circuit products. [41] In mulling over this conclusion, Carr remembered his recent meeting with Norred who was trying to sell the assets of ADS. [42] Carr decided that maybe after he had put this financing to bed, he ought to contact Rockwell, the owner of ADS, to learn of their interest in modems. Certainly Rockwell had the requisite semiconductor technology and if Codex was going to engineer LSI-modems, they xxxxxxxxx

Kuhn Loeb, satisfied as to a future - or at least the reasonable possibility of a future - for modems, completed the prospectus and filed it with the Securities and Exchange Commission (SEC). Proving the adage: “Never count a financing done until the cash is in the bank, “in 1972 the SEC informed Kuhn Loeb and Codex that since they had raised money in a private placement within the last twelve months, they could not now do a public financing. It violated a rule outlawing private placements in anticipation of a public offering. Since Codex traded over-the-counter, the whole matter was referred to a NASDAQ appeals board for resolution. Carr remembers pleading their case:

"Basically, all BS aside, we have to do this public offering to finance that contract.  There is no conceivable way on God's earth that we could have known we were going to be given this award, therefore we couldn't have known we were going to do a public offering when we did the private placement."

The appeals board adjourned after hearing Carr’s testimony and returned in a matter of minutes with the decision allowing Codex to proceed with the offering. On October 4, 1972, Codex raised $2,432,000 with a post-money valuation of $22.8 million. For fiscal year 1972, revenues totaled $4.0 million with a profit of $561,000.

Codex had achieved another important milestone. [43]