UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/ x / Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended March 31, 2000 or
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________
___________ to ___________________.
Commission file number: 0-27266
---------
WESTELL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3154957
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
750 N. COMMONS DRIVE
AURORA, ILLINOIS 60504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 898-2500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $.01 PAR VALUE
------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
The registrant estimates that the aggregate market value of the registrant's
Class A Common Stock (including Class B Common Stock which automatically
converts into Class A Common Stock upon a transfer of such stock except
transfers to certain permitted transferees) held by non-affiliates (within the
meaning of the term under the applicable regulations of the Securities and
Exchange Commission) on June 21, 2000 (based upon an estimate that 67% of the
shares are so owned by non-affiliates and upon the average of the closing bid
and asked prices for the Class A Common Stock on the NASDAQ National Market on
that date) was approximately $595,919,287. Determination of stock ownership by
non-affiliates was made solely for the purpose of responding to this requirement
and registrant is not bound by this determination for any other purpose.
As of June 21, 2000, 41,495,382 shares of the registrant's Class A Common Stock
were outstanding and 19,051,369 shares of registrant's Class B Common Stock
(which automatically converts into Class A Common Stock upon a transfer of such
stock except transfers to certain permitted transferees) were outstanding.
The following documents are incorporated into this Form 10-K by reference:
Proxy Statement for 2000 Annual Meeting of Stockholders (Part III).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained under "Management's Discussion and Analysis
of Financial Condition and Results of Operations," such as those concerning
future product sales and gross margins, certain statements contained under
"Business," such as statements concerning the development and introduction of
new products and the development of Digital Subscriber Line ("DSL") technology,
and other statements contained in this Annual Report on Form 10-K for the fiscal
year ended March 31, 2000 (the "Form 10-K") regarding matters that are not
historical facts are forward-looking statements (as such term is defined in the
rules promulgated pursuant to the Securities Act of 1933, as amended (the
"Securities Act"). Because such forward-looking statements include risks and
uncertainties, actual results may differ materially from those expressed in or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
herein under "Risk Factors" set forth herein. Westell Technologies, Inc.
("Westell" or the "Company") undertakes no obligation to release publicly the
result of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
PART I
ITEM 1. BUSINESS
The Company designs, manufactures, markets and services a broad range
of digital and analog products used by telephone companies to deliver services
primarily over existing copper telephone wires that connect end users to a
telephone company's central office. The copper wires that connect users to these
central offices are part of the telephone companies' networks and are commonly
referred to as the local loop or the local access network.
Westell is a leading provider of Digital Subscriber Line (DSL)
technology that allows the transport of high-speed data over the local loop and
enables telecommunications companies to provide cost-effective, high-speed
service over existing copper infrastructure. The Company also designs, develops
and sells Telco Access Products (TAP) that monitor and maintain special service
circuits in telephone companies' local loops. These special service circuits,
such as ISDN or T-1 are higher speed lines that voice and/or data services.
On March 17, 2000 Westell completed the acquisition of Teltrend, Inc.
Teltrend manufactured and marketed products to provide data and voice services
over the existing telephone network, primarily in the Local Loop. Teltrend's
products allowed telephone companies to provide new and better services to their
customers without the need for costly infrastructure replacement. Teltrend also
manufactured a wide range of products that convert, change and amplify
transmission protocols and are used worldwide in public and private
communications networks.
Westell's 88.2% owned service subsidiary, Conference Plus, Inc.
provides audio, video, and data conferencing services. Businesses and
individuals use these services to hold voice, video or data conferences with
many people at the same time. Conference Plus sells its services directly to
large customers, including Fortune 100 companies and serves customers indirectly
through its private reseller program.
TELECOMMUNICATIONS INDUSTRY OVERVIEW
Since the early 1980s, the telecommunications industry has experienced
an increased demand for the number of services provided to end-users.
Traditional telephone voice traffic has grown, and the demand for data services
that are carried over the Internet and private communications networks continues
to increase.
The growth in the Internet is being fueled by the expanding range of
uses of the Internet such as e-mail, video broadcasts, e-commerce, commercial
services, transaction processing, independent bulletin boards and voice
transmissions.
Both business and residential users are increasing their use of the
Internet and data networks. Businesses are using the Internet for electronic
commerce, Web hosting, supply chain management, customer support, inventory
control and for creating secure data networks known as virtual private networks.
Residential based demand for telecommunications and data services is growing as
service providers increase their offerings of new interactive multimedia
services, including data and video applications such as high speed Internet
access, local area network extension, telecommuting and video conferencing.
The size and rate of the content being transmitted demands more
bandwidth, or greater speed and capacity, on the telephone wires that connect a
telephone company's central office to the end user. To handle the growing volume
of data communications traffic and to provide faster and higher quality
transmission, telephone companies and service providers must continually upgrade
the capacity and speed of their networks by increasing their bandwidth
capabilities.
To meet the growing demand for high-speed services, providers have
invested and installed high-speed switches and routers and fiber optic equipment
into the core or central parts of their communication networks. Although these
investments promote high-speed capabilities, there are still bottlenecks at the
ends of the network or the local loop. Deployment of fiber in the local access
network to connect end users to a telephone company's central office, however,
has proven labor intensive, complicated, time consuming and expensive.
Consequently, these connections to end users still predominantly consist of low
speed analog transmission over copper wire.
Given the challenges of widespread replacement of copper wire in the
local access network, telephone companies have turned to equipment suppliers for
cost-effective technology that can expand the ability of the existing copper
wire infrastructure to accommodate high speed digital transmission. Digital
conversion of the analog network has been built on the aggregating or
multiplexing format known as T-1 in the U.S. and E-1 in most countries outside
of the U.S. T-1/E-1 transmission utilizes a data rate of 1.544 and 2.048 million
bits (megabits) per second, respectively, and the transmission can be aggregated
or subdivided into channels to deliver data communication services tailored to
specific end user requirements. For example, a T-1 line can be up to 24 times
faster than a traditional phone line. Products enabling T-1 and E-1
transmission, however, have typically required extensive engineering and
installation, which make them cost prohibitive for residential and small
business use.
Until recently, the incumbent local exchange carriers (ILECs) such as
SBC, Bell Atlantic, Bell South and US West were the sole providers of
communications services and the exclusive operators of the local loop. The
Federal Communications Commission (FCC) Act of 1996 opened an era of
deregulation, creating competition in this space. Deregulation allows telephone
carriers, information service providers and cable operators to deploy
competitive services in the local access network leading to a new class of
service providers known as a competitive local exchange carriers. Deregulation
also increased competition across industries. Cable operators are competing with
telephone companies in the delivery of high-speed digital transmission and seek
to compete in the delivery of traditional local telephone service as well.
Currently available high-speed cable modems enable cable operators to provide
data transmission services to customers in addition to standard television
services. Alternative telephone access providers have deployed fiber and
wireless systems for high volume data transmission to business centers and other
high-density metropolitan areas. The FCC is also requiring traditional carriers
to invest heavily in the deployment of broadband services as one of the
conditions for merging.
In response to this competitive environment, in an effort to satisfy
regulatory conditions for mergers and in an attempt to retain customers and
increase revenues, the ILECs are investing resources to develop and deploy
high-speed data services over their existing asset base, the copper wires that
connect users to central offices. One of the primary technologies to provide
these services is DSL or digital subscriber line.
Digital subscriber line or DSL technology uses complex modulation
methods to enable high-speed services over copper phone lines. DSL allows the
simultaneous transmission of data at speeds up to 8.0 Megabits per second in one
direction, or 140 times faster than standard 56k modem service, and up to 1
Megabits per second in the reverse direction, or 17 times faster than standard
56k modem service, while also providing standard analog
telephone service over a single pair of copper wires at distances of up to
18,000 feet. With DSL technology, a user can talk and have high-speed data
transmissions at the same time over a regular phone line. DSL products enable
telephone companies to provide interactive multimedia services over copper wire
while simultaneously carrying traditional telephone services, thus mitigating
the need for the telephone companies to install second lines to support these
services. DSL technology is also known as ADSL when it refers to products that
provide bi-directional transmission capacity at varying speeds.
The DSL connection or link is comprised of a DSL Access Multiplexer
(DSLAM) and equipment at the users location referred to as customer premise
equipment (CPE). The DSLAM is a piece of equipment that typically resides in the
telephone companies' central offices. It aggregates, or multiplexes, multiple
DSL access lines into a telephone company's high-speed line back to its core or
central network. As network service providers begin deploying DSL based services
the need for DSL line concentration at the central offices increases. The CPE is
typically a small device that sits on a desktop next to a personal computer.
WESTELL STRATEGY
Westell Technologies is comprised of a products subsidiary, Westell,
Inc. and a service subsidiary, Conference Plus, Inc. Westell, Inc., the products
subsidiary, contains three business units: Customer Premise Equipment (CPE),
Transport Systems (Transport) and Telco Access Products (TAP). Westell's CPE
business unit and Transport System business unit provide DSL solutions.
In the CPE business unit, the Company provides DSL products designed
for end-users at the end of the communications network. In the Transport
business unit, the Company provides products and solutions for the service
providers' network, primarily on an indirect basis with a limited set of
partners.
A very important part of the Transport System business unit strategy is
to partner rather than directly compete with very large, global equipment
providers. The Transport System business unit currently focuses on supplying
equipment indirectly, through partners such as Fujitsu Telecom Europe, Limited
(FTEL) or by directly providing products that address very specific markets or
niches. FTEL is currently supplying approximately 50% of the equipment
associated with British Telecom's DSL deployment in the United Kingdom.
Westell and FTEL are involved in a strategic alliance in which Westell
provides DSL engineering support and DSL products as part of FTEL's DSL
developments and offering. This multi-year arrangement includes manufacturing
agreements, royalty payments and funding by FTEL, for portions of Westell's
research and development. The alliance was expanded in March 2000 to include
next-generation DSL equipment.
The Transport Systems business unit also develops niche network
products for the DSL marketplace. Its LinkReach(TM) product is designed to
deliver DSL service to the installed base of digital loop carrier (DLC) Systems
already in service providers' networks. The DLC systems are remote mini-switches
extending central office functionality that acts as a hubbing point for copper
lines in the local access network and are deployed throughout telephone
companies' networks. The mDSLAM is another niche product that provides full ADSL
network access platform in a very compact package.
Westell's Telco Access Products business unit (TAP) provides products
that monitor and maintain transmission of high speed digital and analog data
between a service provider's central office and end-user customers. Products
such as the Network Interface Unit (NIU) products allow customers to monitor
transmission conditions and to detect performance problems in T1 circuits from
remote locations. All of the Regional Bell Operating Companies have purchased
the Company's NIUs. The recently developed MegaJack DS-3 system provides similar
monitoring capability for DS-3 circuits that are over 40 times faster than T1
lines.
On March 17, 2000 the Company completed the acquisition of Teltrend,
Inc. The acquisition added new products to the TAP business unit's offering such
as the Advanced Span Termination System (ASTS(TM)) and
FastPort DDS transport system, that allows carriers to deliver digital services
without the costly removal of circuit enhancers such as load coils.
THE COMPANY'S PRODUCTS
Through its three products business units, the Company offers a broad range
of products that facilitate the transmission of high-speed digital and analog
data between a telephone company's central office and end-user customers. These
products can be categorized into two groups:
o DSL products: products based on DSL technologies offered by the CPE and
Transport business units;
o Telco Access Products (TAP): Products used by telephone companies to
optimize high speed transmissions, for example T-1 transmission at
approximately 1.5 megabits per second.
The prices for the products within each of the product groups of the
Company vary based upon volume, customer specifications and other criteria and
are subject to change due to competition among telecommunications manufacturers.
Increasing competition, in terms of the number of entrants and their size, and
increasing size of the Company's customers because of mergers, continues to
exert downward pressure on prices for the Company's products. The following
table sets forth the revenues from Westell's two product groups for the periods
indicated (for more information also see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in this Annual Report
on Form 10-K):
1998 1999 2000
---- ---- ----
(In thousands)
DSL products.............................. $ 12,448 $12,099 $37,740
TAP products.............................. 57,716 56,939 51,915
Westell's CPE business unit develops and manufactures the
WireSpeed(TM) and WebShare(TM) line of DSL products as part of a complete
solution to provide high-speed access to residential and small business (1-10
employees) users. WireSpeed products are designed to provide reliable service
for single users who wish to access the Internet or potentially their office
network.
The WebShare products are targeted at more sophisticated home users or
small businesses that desire to link multiple PCs together in a small network or
wish to access multiple sites simultaneously through their computers. WebShare
products are based on the same high levels of reliability and ease of
installation and feature value added services that provide additional security
and capabilities.
All of Westell's modems are equipped with additional memory that gives
users the capability to upgrade their devices by downloading software and not
purchasing additional hardware. These upgrades can convert a single user modem
into a multi-user device, often called a gateway.
The following table sets forth a representative list of the Company's current
DSL products and their applications.
Product Description Applications
- ------- ----------- ------------
WireSpeed(TM)DSL Modems and Digital Subscriber Line (DSL) customer premise Enables end-users to receive DSL
Routers equipment that is connected to a corresponding services to enable applications such
...................... DSL device in the service providers' central as high-speed Internet access,
...................... office. Users can achieve speeds of up to 8 remote local area network access,
...................... megabits per second downstream and up to 1 and work at home, while providing
...................... megabit per second upstream. Can enable simultaneous standard telephone
...................... multiple users to share a single Internet service over copper telephone
...................... connection as well as dynamically select wires. Also enables multiple users
...................... between multiple service providers or to access multiple Internet or
corporate networks. corporate network locations
simultaneously.
SuperVision(R)DSLAM Consolidates DSL lines into a single network Enables multiple services and
...................... interface at the central office. Users can applications such as high-speed
...................... achieve speeds of up to 8 megabits per second Internet access, remote local area
...................... downstream and up to 1 megabit per second network access, and work at home,
...................... upstream. Facilitates the connection between while providing simultaneous
...................... copper wire digital transmission used in the standard telephone service over
...................... local access network and the optical fiber copper telephone wires.
...................... transmission in the telephone network.
LinkReach(TM) Provides DSL services from a digital loop Enables multiple services and
...................... carrier (a remote mini-switch extending applications such as high-speed
...................... central office functionality) environment. Internet access, remote local area
...................... Users can achieve speeds of up to 8 megabits network access, and work at home
...................... per second downstream and up to 1 megabit per solutions to users who receive
...................... second upstream. service from a digital loop carrier
...................... rather than from a telephone
...................... company's central office.
In the last five years, over 100 customers have purchased the Company's
ADSL systems to conduct technical and marketing trials for interactive
multimedia applications. Westell is currently involved in Bell Atlantic's
initial deployment of DSL systems as well as several other carriers including
Century Telephone and SaskTel. Through its partnership with Fujitsu Telecom
Europe, Ltd. (FTEL), Westell is involved in the initial deployment of DSL
products by British Telecom.
Customers using the Company's DSL systems for initial service
deployments are not contractually bound for future deployments or product sales.
The Company's growth is dependent upon whether DSL technology gains widespread
commercial acceptance by telephone companies. The Company's ability to achieve
profitability or revenue growth in the future will be associated with market
acceptance of the Company's DSL systems and the development and market
acceptance of other DSL products introduced by the Company. See "Risk Factors."
TAP Products. Westell's TAP products provide telephone companies with
cost-effective solutions to transport, maintain and improve the reliability of
high speed services over copper and fiber lines in the local access network. The
following table sets forth a representative list of the Company's TAP products
and their applications:
Product Description Applications
- ------- ----------- ------------
NIU (Network Interface Network Interface Unit. An electronic Facilitates the maintenance of T-1
Unit) module generally located in the phone transmission.
...................... companies' central office that provides
...................... maintenance capabilities for telephone lines
...................... providing T-1 transmission.
......................
NIU-PM Network Interface Unit with Performance Facilitates the maintenance and provides
...................... Monitoring that stores maintenance performance monitoring of T-1 facilities.
...................... information for seven days.
MegaJack(TM)(Network Network Interface Unit. An electronic Facilitates the maintenance and
Interface Unit) module generally located in the phone monitoring of DS3 transmission.
...................... companies' central office that provides
...................... maintenance capabilities for telephone lines
...................... providing DS3 transmission.
......................
Advance Span Termination Integrated mechanical shelves and electronic Delivers multiple high capacity services
System (ASTS(TM)) modules located in the phone companies' over local telephone lines in one
...................... central office that access, test, monitor chassis.
and control multiple high speed circuits.
Mountings Mechanical shelves used to house Westell's Provides easy installation of end user
...................... and other companies' traditional and higher electronics.
...................... speed modules.
SmartLink(TM) Automatic protection system for up to 8 Increases the reliability of T-1 and
...................... customer telephone lines providing T-1 other high-speed digital transmission.
...................... transmission. Used for critical circuits such as those
used to provide service to cellular
telephone sites.
RESEARCH AND DEVELOPMENT CAPABILITIES AND ENGINEERING BASE:
The Company believes that its future success depends, in part, on its
ability to maintain its technological leadership through enhancements of its
existing products and development of new products that meet customer needs.
Westell works closely with its current and potential customers as part of the
product development process.
In Fiscal 2000 the Company received $6.7 million from customers to fund
on-going engineering projects, which was offset against research and development
expenses. The Company did not receive any funding from customers for on-going
engineering projects, which was offset against research and development expenses
in Fiscal 1998 or Fiscal 1999.
The Company's engineering is conducted in accordance with ISO 9001,
which is the international standard for quality management systems for design,
manufacturing and service. The Company's research and development personnel are
organized into product development teams. Each product development team is
generally responsible for sustaining technical support of existing products,
decreasing manufacturing costs, conceiving new products in cooperation with
other groups within the Company and adapting standard products or technology to
meet new customer needs. In particular, each product development team is charged
with implementing the Company's engineering strategy of reducing product costs
for each succeeding generation of the Company's products in an effort to be a
low cost, high quality provider, without compromising functionality or
serviceability.
The Company believes that the key to this strategy is choosing an
initial architecture for each product that enables engineering innovations to
result in future cost reductions. Westell's products are designed in conjunction
with input from procurement and manufacturing disciplines to optimize the
opportunity to achieve the lowest cost positions. The Company's outstanding
quality record is grounded in a solid interface and transference of knowledge
between design and manufacturing teams. Successful execution of this strategy
also requires that the Company continue to attract and recruit highly qualified
engineers.
The Company and products under development are subject to industry wide
standardization organizations which include, the American National Standards
Institute ("ANSI") in the United States and the European Telecommunications
Standards Institute ("ETSI") which are responsible for specifying transmission
standards for telecommunications technologies. The industry transmission
standard for ADSL adopted by ANSI and ETSI is based upon DMT technology. Westell
incorporates DMT technology into its DSL products. The Company has not developed
a DMT transceiver technology for its product offerings and it is dependent on
transceiver technologies sourced from third parties. The Company has established
multiple strategic relationships with transceiver technology vendors for DSL
chipsets to be used in ADSL systems by the Company. Absent the proper
relationships with key silicon chipset vendors, the Company's products may not
comply with standards set forth by ANSI and ETSI. Should customers require
standards based products that require transceiver technology not available to
the Company under reasonable terms and conditions, the Company's business and
results of operations would be materially and adversely affected.
CUSTOMERS
The Company's principal customers historically have been U.S. telcos.
In addition, Westell sells products to several other entities, including public
telephone administrations located outside the U.S., independent domestic local
exchange carriers, competitive local exchange carriers, inter-exchange carriers
and the U.S. federal government. Revenues to international customers represented
approximately $8.5 million, $8.5 million and $10.9 million of the Company's
revenues in fiscal 1998, 1999 and 2000, respectively, accounting for 9.9%, 9.1%
and 8.9% of the Company's revenues in such periods.
The Company depends, and will continue to depend, on the Regional Bell
Operating Companies (RBOCs) and other independent local exchange carriers for
substantially all of its revenues. Sales to the RBOCs accounted for 51.1%, 46.6%
and 51.4% of the Company's revenues in fiscal 1998, 1999 and 2000, respectively.
Sales to the Company's largest two customers accounted for 19.2% and 14.7% of
the Company's revenues in fiscal 2000. Consequently, the Company's future
success will depend upon the timeliness and size of future purchase orders from
the RBOCs, the product requirements of the RBOCs, the financial and operating
success of the RBOCs, and the success of the RBOCs' services that use the
Company's products. Any attempt by an RBOC or other telco access providers to
seek out additional or alternative suppliers or to undertake, as permitted under
applicable regulations, the internal production of products would have a
material adverse effect on the Company's business and results of operations. In
addition, the Company's sales to its largest customers have in the past
fluctuated and in the future are expected to fluctuate significantly from
quarter to quarter and year to year. The loss of such customers or the
occurrence of such sales fluctuations would materially adversely affect the
Company's business and results of operations.
The Company's other principal customer is FTEL. Currently, the Company
is involved in the DSL deployment of British Telecom, selling its products to
FTEL, who then acts as a system integrator for British Telecom.
The RBOCs and the Company's other customers are significantly larger
than, and are able to exert a high degree of influence over, the Company. Prior
to selling its products to telcos, the Company must undergo lengthy approval and
purchase processes. See Marketing, Sales and Distribution
MARKETING, SALES AND DISTRIBUTION
The Company sells its products in the U.S. through its domestic field
sales organization and selected distributors. The Company has had an established
sales force and channel to domestic service providers since its founding in
1980. As of March 31, 2000, the Company's equipment marketing, sales and
distribution programs were conducted by 184 employees.
The Company markets its products internationally in over 40 countries
under various distribution arrangements that include strategic partnerships,
technology licenses and distributors. For large telephone companies, outside of
North America, the Company sells its DSL products indirectly through its
partners, principally FTEL. These large telephone companies purchase their DSL
products in a portfolio with other telecommunications products. Westell provides
DSL equipment and services for the central office and telephone company networks
to its strategic partners who then sell those products along with other related
products to the telephone companies.
In North America, TAP products are sold directly to the service
providers or in some cases to distributors who service these carriers. Products
from the CPE business unit are sold directly to telephone carriers, to Internet
Service Providers who provide DSL services, and directly to end-users through
the Company's website, www.dsl-modems.com. The Company believes that the DSL
sales channels are very dynamic and continually looks to adapt and configure its
sales force and processes to meet these changes.
The CPE business unit sells its products through multiple channels. The
majority of products are currently sold directly to major service providers who
provide the modems to end-users as part of their service offering. The Company
also sells to Internet Service Providers (ISP's) who also offer Westell products
to their customers. Finally, through its on-line store, the Company also offers
modems and software to users on a direct basis.
The Regional Bell Operating Companies and the Company's other customers
are significantly larger than, and are able to exert a high degree of influence
over, the Company. Prior to selling its products to telephone companies, the
Company must undergo lengthy approval and purchase processes. Evaluation can
take as little as a few months for products that vary slightly from existing
products in the local access network and a year or more for products based on
new technologies. Accordingly, the Company is continually submitting successive
generations of its current products as well as new products to its customers for
approval.
Although the telephone company approval processes may vary to some
extent depending on the customer and the product being evaluated, they generally
are conducted as follows:
Laboratory Evaluation. The product's function and performance are
tested against all relevant industry standards.
Technical Trial. A number of telephone lines are equipped with the
product for simulated operation in a field trial. The field trial is
used to evaluate performance, assess ease of installation and establish
troubleshooting procedures.
Marketing Trial. Emerging products such as DSL are tested for market
acceptance of new services. Marketing trials usually involve a greater
number of systems than technical trials because systems are
deployed at several locations in the telephone company's network. This
stage gives telephone companies an opportunity to establish
procedures, train employees to install and maintain the new product
and to obtain more feedback on the product from a wider range of
operations personnel.
Commercial Deployment. Commercial deployment usually involves
substantially greater numbers of systems and locations than the
marketing trial stage. In the first phase of commercial deployment, a
telephone company initially installs the equipment in select locations
for select applications. This phase is followed by general deployment
involving greater numbers of systems and locations. Commercial
deployment does not usually mean that one supplier's product is
purchased for all of the telephone companies' needs throughout the
system as telephone companies often rely upon multiple suppliers to
ensure that their needs can be met. Subsequent orders, if any, are
generally placed under single or multi-year supply agreements that are
generally not subject to minimum volume commitments.
The relationships that the Company establishes in this extensive
process are critical in almost every case. The Company has a history of working
closely with the service providers in this fashion and the Company has won
numerous quality awards from suppliers such as SBC and GTE.
TECHNICAL SUPPORT
Westell maintains 24-hour, 7-day-a-week telephone support and provides
on-site support. The Company also provides technical consulting, research
assistance and training to its customers with respect to the installation,
operation and maintenance of its products.
The Company has general purchase agreements with most of its major
customers. These agreements may require the Company to accept returns of
products or indemnify such customers against certain liabilities arising out of
the use of the Company's products. Although, to date, the Company has not
experienced any significant product returns or indemnification claims under
these contracts, any such claims or returns could have a material adverse effect
on the Company's business and results of operations.
The Company's products are required to meet rigorous standards imposed
by its customers. Most of the Company's products carry a limited warranty
ranging from one to seven years, which generally covers defects in materials or
workmanship and failure to meet published specifications, but excludes damages
caused by improper use and all other warranties. In the event there are material
deficiencies or defects in the design or manufacture of the Company's products,
the affected products could be subject to recall. For the past five fiscal
years, the Company's warranty expenses have been insignificant. The Company's
standard limited warranty for its DSL products ranges from one to five years.
Since the Company's is continually introducing new products, it can not predict
the level of future warranty claims on its products. See Risk Factors.
MANUFACTURING
The Company utilizes a combination of internal manufacturing capability
and a set of turnkey contract manufacturers to satisfy our customers'
requirements. As part of its strategic plan to meet the potential worldwide
demand, primarily for its DSL systems, the Company currently is outsourcing some
its manufacturing requirements. Reliance on third-party subcontractors involves
several risks, including the potential absence of adequate capacity and reduced
control over product quality, delivery schedules, manufacturing yields and
costs. The use of subcontractors could result in material delays or interruption
of supply as a consequence of required re-tooling, retraining and other
activities related to establishing a new subcontractor relationship.
With the acquisition of Teltrend, Inc., the Company also gained
additional manufacturing capability and equipment that will be integrated into
its Aurora facility. The Company plans to handle most of its production of TAP
products its Company's Aurora facility while the majority of DSL products will
be produced by contract manufacturers.
A substantial portion of the Company's shipments in any fiscal period
can relate to orders for products received in that period. Further, a
significant percentage of orders, such as Network Interface Units, or NIUs,
require delivery within 48 hours. To meet this demand, the Company maintains raw
materials inventory and limited finished goods inventory at its manufacturing
facilities. In addition, the Company maintains some finished goods inventory at
the customers' sites pursuant to an agreement that the customer will eventually
purchase such inventory. The Company's domestic facilities are certified
pursuant to ISO 9001.
COMPETITION
The markets for the Company's products are intensely competitive and
the Company expects competition to increase in the future, especially in the
emerging DSL market. Westell's primary competitors vary by business unit. The
Company's principal competitors with respect to its TAP business unit are
Adtran, Inc., ADC, HyperEdge, and Applied Digital Access Inc. The Company's
current competitors in the CPE business unit are primarily Alcatel Network
Systems, Efficient Networks, Cisco Systems, Intel and 3Com. Although the
Transport Systems business unit provides equipment in partnership with FTEL,
direct competitors in these markets include Alcatel, Nortel, Lucent, Cisco, and
Siemens.
Many of the Company's competitors and potential competitors have
greater financial, technological, manufacturing, marketing and human resources
than the Company. Some of competitors include full network level system
suppliers who are much larger than the Company and can offer all elements of a
network solution. The Company has addressed this competition by entering into
strategic alliances, such as with FTEL, in which the network level system
supplier offers complete systems to telephone companies of which our DSL product
offering is a part. The Company's ability to compete with these larger system
suppliers will depend on the success of the alliances we form and the system
solutions created to meet customers needs. The inability to form successful
alliances and develop systems that meet customers' requirements will materially
adversely affect the Company's business and results of operations.
The Company expects competition in the DSL market in the near future
from numerous other companies. Any increase in competition could reduce the
Company's gross margin, require increased spending by the Company on research
and development and sales and marketing, and otherwise materially adversely
affect the Company's business and results of operations.
Products that increase the efficiency of digital transmission over
copper wire face competition from fiber, wireless, cable modems and other
products delivering broadband digital transmission. Telephone companies face
competition from cable operators, new local access providers and wireless
service providers that are capable of providing high speed digital transmission
to end users. To the extent telephone companies decide not to aggressively
respond to this competition and fail to offer high speed digital transmission,
the overall demand for DSL products could decline. In addition, the deployment
of products and technologies for copper wire may also reduce the demand for the
types of products currently manufactured by the Company. The deployment of HDSL
systems in the U.S., which reduces telephone companies' need for T-1 repeaters,
may result in a decrease in demand for Westell's T-1 products such as its
Network Interface Units. The Company believes that the domestic market for many
of its TAP products is decreasing, and will likely continue to decrease, as high
capacity digital transmission becomes less expensive and more widely deployed.
To continue to be successful with its TAP products, the Company must develop new
products and markets. See Risk Factors.
TELECONFERENCE SERVICES
Conference Plus, Inc (CPI), founded in 1988, is an Application Service
Provider (ASP) or company that manages and hosts specific software and
applications, in this case relating to conferencing and meeting services.
Conference Plus is an 88.2% owned subsidiary of Westell and manages its
teleconferencing and meeting services through its operations center in
Schaumburg, Illinois and facilities in Lombard, Illinois and Dublin, Ireland.
Conference Plus services generated $14.1 million, $21.3 million and $32.4
million in revenues in fiscal 1998, 1999 and 2000, respectively.
Conference Plus allows multiple individuals and/or businesses to
conduct conference calls using a combination of voice, video or data such as
graphs or spreadsheets. Unlike a conference call of several years ago, where
participants dialed in on phones, today's meeting can include a blend of audio,
graphics, spreadsheets or other documents that can be carried over and archived
on the Internet to enhance the traditional voice conference call. By enabling
its customers to share this blend of information, Conference Plus can increase
productivity and save money by reducing travel time, bringing down travel costs,
and making it easier for people in remote locations to work together.
Teleconferencing and meeting services technologies also allow organizations and
individuals to collect and disseminate information faster, more accurately and
without the associated costs of face-to-face meetings.
CPI is distinguished by three strategies:
Re-seller Approach
Carrier Neutral/Network Independent Strategy
International Expansion
Re-seller Approach
Conference Plus acts primarily as a re-seller of conferencing
and meeting services, managing and hosting applications for major
carrier and Fortune 100 companies. A majority of Conference Plus'
revenues come from private label commercial teleconferencing services
to customers who market or use Conference Plus services under their own
brand name. Such companies choose to outsource and private label audio
and video teleconferencing services to maintain continuity and save
costs. Audio and video teleconferencing is a people intensive service,
requiring high levels of concentration on the execution of each and
every call.
As a reseller, Conference Plus has developed back-office
capabilities, providing reservation, confirmation, billing, accounting
and quality functions for its customers that use their own brand name
and sales and distribution channels and rely on Conference Plus to
manage operations. The reseller approach also demands very high quality
standards and Conference Plus has received the first ISO 9002
certification in the audio and video conferencing services industry.
Carrier Neutral/Network Independent Strategy
A critical part of Conference Plus' approach is its carrier
neutral/network independent strategy. CPI is not aligned with any major
carrier and can therefore serve as an application service provider,
reselling its services to each of the major carriers as well as Fortune
100 companies. Each customer can be assured that the voice and data
traffic that is generated by their conferencing and meeting services
stays on its own respective network and does not overflow to a
competitor's network. CPI's unique architecture ensures that customers
have access to all of CPI's capacity during any of their conference
calls or meetings.
International Expansion
Conference Plus currently serves its teleconferencing needs of
customers headquartered in the United States from its Schaumburg,
Illinois and Lombard, Illinois facilities. As these customers globalize
their telecommunications services, Conference Plus will be required to
expand its operational presence internationally to meet these needs.
The CPI's facility in Dublin, Ireland was established to help meet this
growing demand. In addition, the international market for
teleconferencing is expected to grow substantially as a result of
deregulation and improved networks with associated reductions in end
user costs.
Conference Plus' private label customers and many of its other
customers are significantly larger than, and are able to exert a high degree of
influence over, Conference Plus. Prior to selling its services, the Company must
undergo lengthy approval and purchase processes. Evaluation can take as little
as a few months for services that vary slightly from existing services used by
the prospective customer to a year or more for services based on technologies
such as video or data teleconferencing or which represent a new strategic
direction for the customer, as in the case with private labeling teleconference
services for a Regional Bell Operating Company.
Conference Plus maintains 24 hour, 7 day a week telephone support and
provides on-site support for larger, more complex teleconferences. The
Conference Plus also provides technical consulting, call planning assistance and
usage analysis to its customers with respect to the introduction, enhancement
and expanded utilization of its services.
Competition in the teleconferencing business is intense and the Company
expects that competition will increase due to low barriers to entry and recent
entrants into the audio teleconferencing service market. Many of Conference
Plus' competitors, including AT&T, MCI Communications and Sprint Communications,
have much greater name recognition, more extensive customer service and
marketing capabilities and substantially greater financial, technological and
personnel resources than the Company. There can be no assurance that the Company
will be able to successfully compete in this market in the future or that
competitive pressures will not result in price reductions that would materially
adversely affect its business and results of operations.
GOVERNMENT REGULATION
The telecommunications industry, including most of the Company's
customers, is subject to regulation from federal and state agencies, including
the FCC and various state public utility and service commissions. While such
regulation does not affect the Company directly, the effects of such regulations
on the Company's customers may, in turn, adversely impact the Company's business
and results of operations. For example, FCC regulatory policies affecting the
availability of telephone and communications services and other terms on which
service providers conduct their business may impede the Company's penetration of
certain markets. The Telecommunications Act lifted certain restrictions on the
carriers' ability to provide interactive multimedia services including video on
demand. Under the Telecommunications Act, new regulations have been established
whereby carriers may provide various types of services beyond traditional voice
offerings.
In addition, the Telecommunications Act permits the carriers to engage
in manufacturing activities after the FCC authorizes a carrier to provide long
distance services within its service territory. A carrier must first meet
specific statutory and regulatory tests demonstrating that its monopoly market
for local exchange services is open to competition before it will be permitted
to enter the long distance market. When these tests are met, a carrier will be
permitted to engage in manufacturing activities, and the carriers, which are the
Company's largest customers, may become the Company's competitors as well. See
Risk Factors
PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY
The Company's success and future revenue growth will depend, in part,
on its ability to protect trade secrets, obtain or license patents and operate
without infringing on the rights of others. The Company relies on a combination
of technical leadership, copyright, patent, trademark, trade secret and other
intellectual property laws, nondisclosure agreements and other protective
measures to protect our unpatented proprietary know-how. Although the Company
regards some of its technology as proprietary, to date the Company has been
granted 21 patents and have an additional 30 U.S. patents pending relating to
its TAP and DSL products. The Company expects to seek additional patents from
time to time related to its research and development activities. See Risk
Factors
Many of the Company's products incorporate technology developed and
owned by third parties. Consequently, the Company must rely upon third parties
to develop and to introduce technologies which enhance
the Company's current products and enable the Company, in turn, to develop its
own products on a timely and cost-effective basis to meet changing customer
needs and technological trends in the telecommunications industry. Without a
third party transceiver technology, such as DMT technology, the Company would
not be able to produce any of its DSL systems. Consequently, if the Company's
third party transceiver suppliers fail to deliver implementable or standards
compliant transceiver solutions to the Company and other alternative sources of
DSL transceiver technology are not available to the Company at commercially
acceptable terms, then the Company's business and results of operations would be
materially and adversely affected.
Rapid technological evolution has resulted in the need to implement
strategic alliances with customers and technology suppliers in order to
accelerate the time to market for new products. Without such relationships and
due to the lengthy carrier product approval and purchase cycles, the technology
may be obsolete by the time it is implemented.
EMPLOYEES
As of March 31, 2000, the Company had 1,210 full-time employees.
Westell's equipment manufacturing business had a total of 910 full-time
employees, consisting of 184 in sales, marketing, distribution and service, 216
in research and development, 458 in manufacturing and 52 in administration.
Conference Plus had a total of 300 full-time employees. None of the Company's
employees are represented by a collective bargaining agreement nor has the
Company ever experienced any work stoppage. The Company believes its
relationship with its employees is good.
RISK FACTORS
You should carefully consider the risks described below in addition to the
other information contained and incorporated by reference in this prospectus
before purchasing our securities. If any of the following risks occurs, our
business, operating results or financial condition would likely suffer, and
the market price for our securities could decline and you could lose your
investment.
WE HAVE INCURRED AND CONTINUE TO EXPECT LOSSES.
Due to our significant ongoing investment in DSL technology, which can
be used by telephone companies and other service providers to increase the
transmission speed and capacity of copper telephone wires, we have incurred and
anticipate that our losses may extend at least through fiscal 2001. To date, we
have incurred operating losses, net losses and negative cash flow on both an
annual and quarterly basis. For the year ended March 31, 2000, we had net losses
of $8.2 million.
We believe that our future revenue growth and profitability will depend
on:
o creating sustainable DSL sales opportunities;
o lowering our DSL product costs through design and manufacturing
enhancements and volume reductions,
o developing new and enhanced T-1 products;
o developing other niche products for both DSL and T-1 markets; and
o growing our teleconference service revenues.
In addition, we expect to continue to evaluate new product opportunities. As a
result, we will continue to invest heavily in research and development and sales
and marketing, which will adversely affect our short-term operating results. We
can offer no assurances that we will achieve profitability in the future.
OUR STOCK PRICE IS VOLATILE AND COULD DROP UNEXPECTEDLY.
Like many technology stocks, our stock has demonstrated and likely will
continue to demonstrate extreme volatility as valuations, trading volume and
prices move significantly. This volatility may result in a material decline
in the market price of our securities, and may have little relationship to
our financial results or prospects.
Our class A common stock price has experienced substantial volatility in the
past and is likely to remain volatile in the future due to factors such as:
o Our actual and anticipated quarterly and annual operating
results;
o Variations between our actual results and analyst and investor
expectations;
o Announcements by us or others and developments affecting our
business;
o Investor and analyst perceptions of our company and comparable
public companies;
o Future sales of debt or equity securities;
o The activities of short sellers and risk arbitrageurs regardless
of our performance; and
o Conditions and trends in the data communications and
Internet-related industries.
Many of the factors listed above are not within our control. In the past,
companies that have experienced volatility in the market price of their
stock have been the subject of securities class litigation. If we were
involved in securities class litigation, we could incur substantial costs
and our management's attention could be diverted.
IF DSL PRODUCTS FAIL TO GAIN WIDESPREAD COMMERCIAL ACCEPTANCE, WE WILL NOT
BE SUCCESSFUL AND OUR STOCK PRICE WOULD LIKELY DECLINE.
We expect to continue to invest significant resources in the development of
DSL products. The DSL market is still in the early stages of development. If
the DSL market fails to grow or grows more slowly than anticipated, then our
business and operating results would be materially adversely affected.
Commercial acceptance of DSL products depends on many factors, including the
following:
o Commercial viability and success of high speed transmission
services enabled by DSL technology;
o The continued growth and use of the Internet;
o Significant improvements in the interoperability among vendors'
equipment used in the delivery of high speed data transmission;
o The ability continually improve DSL products to satisfy demands
for increasing bandwidth over telephone wires; and
Even if DSL technology gains commercial acceptance, our business will
suffer if our DSL sales do not increase. Our DSL revenues have been
difficult to forecast as our customers have only recently begun to consider
implementing DSL products in their networks. We have shipped most of our DSL
products for trials and early deployment. Even if our customers elect to
commercially deploy DSL products, our customers are not contractually bound
to purchase our DSL systems for commercial deployment. Our non-DSL products
and services, such as our Network Interface Units and our teleconferencing
services, are not expected to generate sufficient revenues or profits to
offset any losses that we may experience due to a lack of DSL product sales.
If we fail to generate significant revenues from DSL product sales, we will
not be able to implement our business goals and our business and operating
results would suffer significantly.
PRICING PRESSURES ON OUR PRODUCTS MAY AFFECT OUR ABILITY TO BECOME
PROFITABLE.
Due to competition in the DSL market, many bids for recent trials and
deployments of DSL products reflect:
o the forward pricing of DSL products below production costs to
take into account the expectation of large future volumes and
corresponding reductions in manufacturing costs; and/or
o suppliers that provide DSL products at a lower price as part of a
sale of a package of products and/or services.
We have and may in the future offer DSL products based upon forward pricing.
Forward pricing will cause us to incur losses on DSL products sales unless
we can reduce manufacturing costs. We believe that manufacturing costs may
decrease if:
o more cost-effective transceiver technologies become available,
o product design efficiencies and component integration are
obtained, and
o we achieve economies of scale related to increased volume.
There is no guaranty that we will be able to secure significant additional
DSL orders and reduce per unit manufacturing costs that we have factored
into our forward pricing of DSL products. As a result, we could continue to
incur losses in connection with sales of DSL products even if our DSL unit
volume increases. Losses from our sales of DSL products could result in
fluctuations in our quarterly operating results and would materially and
adversely affect our ability to achieve profitability and implement our
business goals.
OUR PRODUCTS FACE COMPETITION FROM OTHER EXISTING PRODUCTS, PRODUCTS UNDER
DEVELOPMENT AND CHANGING TECHNOLOGY, AND IF WE DO NOT REMAIN COMPETITIVE,
OUR BUSINESS WILL SUFFER AND WE WILL NOT BECOME PROFITABLE.
The markets for our products are characterized by:
o intense competition within the DSL market and from other
industries such as cable and wireless industries;
o rapid technological advances;
o evolving industry standards;
o changes in end-user requirements;
o frequent new product introductions and enhancements; and
o evolving customer requirements and service offerings.
New products introductions or changes in services offered by telephone
companies or over the Internet could render our existing products and
products under development obsolete and unmarketable. For example High
Bit-Rate DSL, a product that enhances the signal quality of the transmission
over copper telephone wire, may reduce the demand for our Network Interface
Units which provide performance monitoring of copper telephone wires. Our
Network Interface Units accounted for at least 50% of our revenues in fiscal
1998 and 1999 and approximately 35% in fiscal 2000. Further, we believe that
the domestic market for many of our traditional analog products is
decreasing, and will likely continue to decrease, as high capacity digital
transmission becomes less expensive and more widely deployed. Our future
success will largely depend upon our ability to continue to enhance and
upgrade our existing products and to successfully develop and market new
products on a cost-effective and timely basis.
In addition, our current product offerings primarily enable telephone
companies to deliver digital communications over copper telephone wires in
the local access network. Telephone companies also face competition in the
delivery of digital communications from cable operators, new telephone
companies, and wireless service providers. If end users obtain their high
speed data transmission services from these alternative providers, then the
overall demand for DSL products will decline.
To remain competitive we must develop new products to meet the demands of
these emerging transmission media and new local access network providers.
Our business would be severely harmed if our products become obsolete or
fail to gain widespread commercial acceptance due to competing products and
technologies.
EVOLVING INDUSTRY STANDARDS MAY ADVERSELY AFFECT OUR ABILITY TO SELL OUR
PRODUCTS AND CONSEQUENTLY HARM OUR BUSINESS.
Industry wide standardization organizations such as the American National
Standards Institute and the European Telecommunications Standards Institute
are responsible for setting transceiver technology standards for DSL
products. We are dependent on transceiver technologies from third parties to
manufacture our products. If transceiver technologies needed for
standards-based products are not available to us in a timely manner and
under reasonable terms, then our DSL revenues would significantly decrease
and our business and operating results would suffer significantly.
In addition, the introduction of competing standards or implementation
specifications could result in confusion in the market and delay any
decisions regarding deployment of DSL systems. Delay in the announcement of
standards would materially and adversely impact our DSL sales and would
severely harm our business.
Due to the rapid technological changes in our industry, our products may
become obsolete before we can realize significant revenues for our products,
which would harm our business.
The telecommunications industry is subject to rapid technological change,
which results in a short product commercial life before a product becomes
obsolete. As a result, we have in the past and may in the future devote
disproportionate resources to a product that has an unexpected short
commercial life and/or have to write off excess and obsolete inventory, each
of which would harm our operating results and financial condition and harm
our business.
Any unexpected increase in demand for DSL products could adversely impact
our ability to manufacture sufficient quantities of DSL products, which
would affect our ability to attract and retain customers.
Any unexpected increase in demand for DSL products could adversely impact
our ability to supply DSL products in a timely manner, which would harm our
business. Without proper lead times, we may not have the ability to, or may
have to pay a premium to, acquire and develop the necessary capabilities to
satisfy an unexpected increase in demand for our products. We depend upon
subcontractors to manufacture a portion of our DSL products and expect that
our reliance on these subcontractors will increase if demand for our DSL
products increases. Reliance on subcontractors involves several risks,
including the potential lack of adequate capacity and reduced control over
product quality, delivery schedules, manufacturing yields and costs. The use
of subcontractors could result in material delays or interruption of supply
as a consequence of required re-tooling, retraining and other activities
related to establishing and developing subcontractor relationships. Any
manufacturing disruption would impair our ability to fulfill orders, and if
this occurs, our revenues and customer relationships would be materially
adversely affected. Any material delays or difficulties in connection with
increased manufacturing production or the use of subcontractors could
severely harm our business. Our failure to effectively manage any increase
in demand for our products would harm our business.
THE FAILURE TO MAINTAIN AND FURTHER DEVELOP PARTNERS AND ALLIANCES WOULD
ADVERSELY AFFECT OUR BUSINESS.
Instead of directly competing with large telecommunications equipment
suppliers, we have begun to develop and maintain partnerships and alliances
with other companies in order to secure complementary technologies, to lower
costs, and to better market and sell our products. These partnerships and
alliances provide
important resources and channels for us to compete
successfully. Some of our partnerships provide us with third party
technology that we rely on to manufacture our products. In addition, instead
of directly competing with large suppliers such as Fujitsu in the DSL
market, we have entered into alliances with these companies to offer our
products within a package of products sold by these companies to telephone
companies. We cannot provide any assurances that these partnerships will
continue in the future. As competition increases in the DSL market, these
alliances will become even more important to us. A loss of one or more
partnerships and alliances could affect our ability to sell our products and
therefore could materially adversely affect our business and operating
results.
WE ARE DEPENDENT ON THIRD PARTY TECHNOLOGY, THE LOSS OF WHICH WOULD HARM OUR
BUSINESS.
We rely on third parties to gain access to technologies that are used in our
current products and in products under development. For example, our ability
to produce DSL products is dependent upon third party transceiver
technologies. Our licenses for DSL transceiver technology are nonexclusive
and the transceiver technologies have been licensed to numerous other
manufacturers. If our DSL transceiver licensors fail to deliver commercially
ready or standards compliant transceiver solutions to us and other
alternative sources of DSL transceiver technologies are not available to us
at commercially acceptable terms, then our business and operating results
would be materially and adversely affected.
Any impairment in our relationships with the licensors of technologies used
in our products would force us to find other developers on a timely basis or
develop our own technology. There is no guaranty that we will be able to
obtain the third-party technology necessary to continue to develop and
introduce new and enhanced products, that we will obtain third-party
technology on commercially reasonable terms or that we will be able to
replace third-party technology in the event such technology becomes
unavailable, obsolete or incompatible with future versions of our products.
We would have severe difficulty competing if we cannot obtain or replace
much of the third-party technology used in our products. Any absence or
delay would materially adversely affect our business and operating results.
WE ARE DEPENDENT ON SOLE OR LIMITED SOURCE SUPPLIERS, THE LOSS OF WHICH
WOULD HARM OUR BUSINESS.
Integrated circuits and other electronic components used in our products are
currently available from only one source or a limited number of suppliers.
For example, we currently depend on Alcatel, Microelectronics and Virata to
provide critical integrated transceiver circuits used in our DSL products.
Our inability to obtain sufficient key components or to develop alternative
sources for key components as required, could result in delays or reductions
in product deliveries, and consequently severely harm our customer
relationships and our business and operating results. Furthermore,
additional sole-source components may be incorporated into our future
products, thereby increasing our supplier risks. If any of our sole-source
manufacturers delay or halt production of any of their components, or fail
to supply their components on commercially reasonable terms, then our
business and operating results would be harmed.
Some of the electronic components used in our products are currently in
short supply and are provided on an allocation basis to us and other users
based upon past usage. For example, integrated transceiver circuits and
electronic components are key components in all of our products and are
fundamental to our business strategy of developing new and succeeding
generations of products at reduced unit costs without compromising
functionality or serviceability.
In the past we have experienced delays in the receipt of key components
which have resulted in delays in related product deliveries. We anticipate
that integrated circuit production capacity and availability of some
electronic components may be insufficient to meet the demand for such
components in the future. There is no guaranty that we will be able to
continue to obtain sufficient quantities of key components as required, or
that such components, if obtained, will be available to us on commercially
reasonable terms.
WE HAVE NO LONG TERM CONTRACTS OR ARRANGEMENT WITH SUPPLIERS WHICH COULD
ADVERSELY AFFECT OUR ABILITY TO PURCHASE COMPONENTS AND TECHNOLOGIES USED IN
OUR PRODUCTS.
We have no long-term contracts or arrangements with any of our suppliers. We
may not be able to obtain components at competitive prices, in sufficient
quantities or under other commercially reasonable terms. If we enter into a
high-volume or long-term supply arrangement and subsequently decide that we
cannot use the products or services provided for in the supply arrangement,
then our business would also be harmed.
WE WILL NOT BE ABLE TO SUCCESSFULLY COMPETE, DEVELOP AND SELL NEW PRODUCTS
IF WE FAIL TO RETAIN KEY PERSONNEL AND HIRE ADDITIONAL KEY PERSONNEL.
Because of our need to continually evolve our business with new product
developments and strategies, our success is dependent on our ability to
attract and retain qualified technical, marketing, sales and management
personnel. To remain competitive we must maintain top management talent,
employees who are involved in product development and testing and employees
who have developed strong customer relationships. Because of the high demand
to these types of employees, it is difficult to retain existing key
employees and attract new key employees. While most of our executive
officers, have severance agreements in which the officers agreed not to
compete with us and not to solicit any of our employees for a period of one
year after termination of the officer's employment in most circumstances, we
do not have similar noncompetition and nonsolicitation agreements for other
employees who are important in our product development and sales. Our
inability to attract and retain additional key employees could harm our
ability to successfully sell existing products and develop new products and
implement our business goals.
OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND
SHOULD NOT BE RELIED UPON AS INDICATIONS OF FUTURE PERFORMANCE.
We expect to continue to experience significant fluctuations in quarterly
operating results. Due to the risks identified below and elsewhere in "Risk
Factors," sales to our largest customers have fluctuated and are expected to
fluctuate significantly between quarters. Sales to our customers typically
involve large purchase commitments, and customers purchasing our products
may generally reschedule or cancel orders without penalty. As a result, our
quarterly operating results have fluctuated significantly in the past. Other
factors that have had and may continue to influence our quarterly operating
results include:
o the impact of changes in the DSL customer mix or product mix
sold;
o timing of product introductions or enhancements by us or our
competitors;
o changes in operating expenses which can occur because of product
development costs, timing of customer reimbursements for research
and development, pricing pressures; availability and pricing of
key components;
o write-offs for obsolete inventory; and
o the other risks that are contained in this "Risk Factors"
section.
Due to our fluctuations in quarterly results, we believe that
period-to-period comparisons of our quarterly operating results are not
necessarily meaningful. Our quarterly fluctuations make it more difficult to
forecast our revenues. It is likely that in some future quarters our
operating results will be below the expectations of securities analysts and
investors, which may adversely affect our stock price. As long as we
continue to depend on DSL products and new products, there is substantial
risk of widely varying quarterly results, including the so-called "missed
quarter" relative to investor expectations.
WE MAY EXPERIENCE DELAYS IN THE DEPLOYMENT OF NEW PRODUCTS.
Our past sales have resulted from our ability to anticipate changes in
technology, industry standards and telephone company service offerings, and
to develop and introduce new and enhanced products and services. Our
continued ability to adapt to such changes will be a significant factor in
maintaining or improving our competitive position and our prospects for
growth. Factors resulting in delays in product development include:
o rapid technological changes in the telecommunications industry;
o our customers' lengthy product approval and purchase processes;
and
o our reliance on third-party technology for the development of new
products.
There can be no assurance that we will successfully introduce new products
on a timely basis or achieve sales of new products in the future. In
addition, there can be no assurance that we will have the financial and
manufacturing resources necessary to continue to successfully develop new
products or to otherwise successfully respond to changing technology
standards and telephone company service offerings. If we fail to deploy new
products on a timely basis, then our product sales will decrease, our
quarterly operating results could fluctuate, and our competitive position
and financial condition would be materially and adversely affected.
THE TELECOMMUNICATIONS INDUSTRY IS A HIGHLY COMPETITIVE MARKET AND THIS
COMPETITION MAY RESULT IN OPERATING LOSSES, A DECREASE IN OUR MARKET SHARE
AND FLUCTUATIONS IN OUR REVENUE.
We expect competition to increase in the future especially as the DSL market
develops. Because we are significantly smaller than most of our competitors,
we may lack the financial resources needed to increase our market share.
Many of our competitors are much larger than us and can offer a wide array
of different products and services that are required for all of a telephone
company's business. Conversely, our products are used to enhance
transmission from the telephone company's central office to the end user,
which is just one element of a telephone company's network. Our inability to
form successful alliances through which we can market our products, and
develop systems that meet customer requirements, will affect our ability to
successfully compete in the DSL market which would materially adversely
affect our business and operating results.
We expect continued aggressive tactics from many of our competitors such as:
o Forward pricing of products;
o Early announcements of competing products;
o Bids that bundle DSL products with other product offerings;
o Customer financing assistance; and
o Intellectual property disputes.
OUR LACK OF BACKLOG MAY AFFECT OUR ABILITY TO ADJUST TO AN UNEXPECTED
SHORTFALL IN ORDERS.
Because we generally ship products within a short period after receipt of an
order, we typically do not have a material backlog (or known quantity) of
unfilled orders, and our revenues in any quarter are substantially dependent
on orders booked in that quarter. Our expense levels are based on
anticipated future revenues and are relatively fixed in the short-term.
Therefore, we may be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall of orders. Accordingly, any
significant shortfall of demand in relation to our expectations or any
material delay of customer orders would have an immediate adverse impact on
our business and operating results.
INDUSTRY CONSOLIDATION COULD MAKE COMPETING MORE DIFFICULT.
Consolidation of companies offering high-speed telecommunications products
is occurring through acquisitions, joint ventures and licensing arrangements
involving our competitors, our customers and our customers' competitors. We
cannot provide any assurances that we will be able to compete successfully
in an increasingly consolidated telecommunications industry. Any heightened
competitive pressures that we may face may have a material adverse effect on
our business, prospects, financial condition and result of operations.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS WHO ARE ABLE TO EXERT A HIGH
DEGREE OF INFLUENCE OVER US.
We have and will continue to depend on the large Regional Bell Operating
Companies, those companies emerging from the break-up of AT&T, as well as
and other telephone carriers including smaller local telephone carriers and
new alternative telephone carriers such as Qwest, for substantially all of
our revenues. Sales to the Regional Bell Operating Companies accounted for
51.1%, 46.6% and 51.4% of our revenues in fiscal 1998, 1999 and 2000,
respectively. Consequently, our future success will depend upon:
o the timeliness and size of future purchase orders from the
Regional Bell Operating Companies;
o the product requirements of the Regional Bell Operating
Companies;
o the financial and operating success of the Regional Bell
Operating Companies; and
o the success of the Regional Bell Operating Companies' services
that use our products.
The Regional Bell Operating Companies and our other customers are
significantly larger than we are and are able to exert a high degree of
influence over us. Customers purchasing our products may generally
reschedule orders without penalty to the customer. Even if demand for our
products is high, the Regional Bell Operating Companies have sufficient
bargaining power to demand low prices and other terms and conditions that
may materially adversely affect our business and operating results.
Any attempt by a Regional Bell Operating Company or our other customers to
seek out additional or alternative suppliers or to undertake the internal
production of products would have a material adverse effect on our business
and operating results. The loss of any or our customer could result in an
immediate decrease in product sales and materially and adversely affect our
business.
Conference Plus's customer base is very concentrated as its top ten
customers represent a large portion of revenue. Customers of Conference Plus
have expanded their requirements for our services, but there can be no
assurance that such expansion will increase in the future. Additionally,
Conference Plus's customers continually undergo review and evaluation of
their conferencing and meeting services to evaluate the merits of bringing
those services in-house rather than outsourcing those services. There can be
no assurance in the future that Conference Plus's customers will bring some
portion or all of their conferencing and meeting services in-house.
Conference Plus must continually provide higher quality, lower cost services
to provide maintain and grow its customer base. Any loss of a major account,
would have a material adverse effect on Conference Plus. In addition, any
merger or acquisition of a major customer could have a material adverse
effect on Conference Plus.
OUR CUSTOMERS HAVE LENGTHY PURCHASE CYCLES THAT AFFECT OUR ABILITY TO SELL
OUR PRODUCTS.
Prior to selling products to telephone companies, we must undergo lengthy
approval and purchase processes. Evaluation can take as little as a few
months for products that vary slightly from existing products or up to a
year or more for products based on new technologies such as DSL products.
Accordingly, we are continually submitting successive generations of our
current products as well as new products to our customers for approval. The
length of the approval process can vary and is affected by a number of
factors, including:
o the complexity of the product involved;
o priorities of telephone companies;
o telephone companies' budgets; and
o regulatory issues affecting telephone companies.
The requirement that telephone companies obtain FCC approval for most new
telephone company services prior to their implementation has in the past
delayed the approval process. Such delays in the future could have a
material adverse affect on our business and operating results. While we have
been successful in the past in obtaining product approvals from our
customers, there is no guaranty that such approvals or that ensuing sales of
such products will continue to occur.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO THE RISKS OF CONDUCTING BUSINESS
OUTSIDE THE UNITED STATES.
International revenues represented 9.9%, 9.1% and 8.9% of our revenues in
fiscal 1998, 1999 and 2000, respectively. The Company also has a
relationship with Fujitsu Telecom Europe, Ltd. for the supply of DSL
equipment to British Telecom. Because Conference Plus has expanded its
conference call business in Europe by opening offices in Dublin, Ireland, we
believe that our exposure to international risks may increase in the future.
These risks include:
o foreign currency fluctuations;
o tariffs, taxes and trade barriers;
o difficulty in accounts receivable collection;
o political unrest; and
o burdens of complying with a variety of foreign laws and
telecommunications standards.
The occurrence of any of these risks would impact our ability to increase
our revenue and become profitable, or could require us to modify
significantly our current business practices.
OUR SERVICES ARE AFFECTED BY UNCERTAIN GOVERNMENT REGULATION AND CHANGES IN
CURRENT OR FUTURE LAWS OR REGULATIONS COULD RESTRICT THE WAY WE OPERATE OUR
BUSINESS.
Many of our customers are subject to regulation from federal and state
agencies, including the FCC and various state public utility and service
commissions. While these regulations do not affect us directly, the effects
of regulations on our customers may adversely impact our business and
operating results. For example, FCC regulatory policies affecting the
availability of telephone company services and other terms on which
telephone companies conduct their business may impede our penetration of
local access markets.
In addition, our business and operating results may also be adversely
affected by the imposition of tariffs, duties and other import restrictions
on components that we obtain from non-domestic suppliers or by the
imposition of export restrictions on products that we sell internationally.
Internationally, governments of the United Kingdom, Canada, Australia and
numerous other countries actively promote and create competition in the
telecommunications industry. Changes in current or future laws or
regulations, in the U.S. or elsewhere, could materially and adversely affect
our business and operating results.
POTENTIAL PRODUCT RECALLS AND WARRANTY EXPENSES COULD ADVERSELY AFFECT OUR
ABILITY TO BECOME PROFITABLE.
Our products are required to meet rigorous standards imposed by our
customers. Most of our products carry a limited warranty ranging from one to
seven years. In addition, our supply contracts with our major customers
typically require us to accept returns of products or indemnify such
customers against certain liabilities arising out of the use of our
products. Complex products such as those offered by us may contain
undetected errors or failures when first introduced or as new versions are
released. Because we rely on new product development to
remain competitive, we cannot predict the level of these types of claims
that we will experience in the future. Despite our testing of products and
our comprehensive quality control program, there is no guaranty that our
products will not suffer from defects or other deficiencies or that we will
not experience material product recalls, product returns, warranty claims
or indemnification claims in the future. Such recalls, returns or claims
and the associated negative publicity could result in the loss of or delay
in market acceptance of our products, affect our product sales, our
customer relationships, and our ability to generate a profit
INVESTORS COULD BE ADVERSELY AFFECTED BY FUTURE ISSUANCES AND SALES OF OUR
SECURITIES.
Sales of substantial amounts of our common stock in the public market could
adversely affect the market price of our securities. Westell has 60,546,751
shares of common stock outstanding as of June 21, 2000, and has the
following obligations to issue additional class A common stock as of March
31,2000:
o options to purchase 5,837,212 shares of class A common stock,
2,693,323 of which are currently exercisable;
o 6,509,482 shares reserved for issuance under its employee stock
purchase plan;
o warrants to purchase 909,000 shares of class A common stock for
$5.92 per shares; and
These obligations could result in substantial future dilution with respect
to our common stock.
WE RELY ON OUR INTELLECTUAL PROPERTY THAT WE MAY BE UNABLE TO PROTECT, OR WE
MAY BE FOUND TO INFRINGE THE RIGHTS OF OTHERS.
Our success will depend, in part, on our ability to protect trade secrets,
obtain or license patents and operate without infringing on the rights of
others. We rely on a combination of technical leadership, trade secrets,
copyright and trademark law and nondisclosure agreements to protect our
non-patented proprietary expertise. These measures, however, may not provide
meaningful protection for our trade secrets or other proprietary
information. Moreover, our business and operating results may be materially
adversely affected by competitors who independently develop substantially
equivalent technology.
In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as U.S. law. The telecommunications
industry is also characterized by the existence of an increasing number of
patents and frequent litigation based on allegations of patent and other
intellectual property infringement. From time to time we receive
communications from third parties alleging infringement of exclusive patent,
copyright and other intellectual property rights to technologies that are
important to us.
There is no guaranty that third parties will not:
o assert infringement claims against us in the future, and that
such assertions will not result in costly litigation; or
o that we would prevail in any such litigation or be able to
license any valid and infringed patents from third parties on
commercially reasonable terms.
Further, such litigation, regardless of its outcome, could result in
substantial costs to and diversion of our efforts. Any infringement claim or
other litigation against or by us could have a material adverse effect on
our business and operating results.
WE WILL NEED ADDITIONAL FINANCING IF WE DO NOT MEET OUR BUSINESS PLAN OR WE
WILL NOT BE ABLE TO FUND OUR OPERATIONS.
We must continue to enhance and expand our product and service offerings in
order to maintain our competitive position and to increase our market share.
As a result and due to our net losses, the continuing operations of our
business may require substantial capital infusions. Whether or when we can
achieve cash flow levels sufficient to support our operations cannot be
accurately predicted. Unless such cash flow levels are achieved, we may
require additional borrowings or the sale of debt or equity securities, or
some combination thereof, to provide funding for our operations. If we
cannot generate sufficient cash flow from our operations, or are unable to
borrow or otherwise obtain additional funds to finance our operations when
needed, our financial condition and operating results would be materially
adversely affected and we would not be able to operate our business.
WE WILL BE UNABLE TO SUCCESSFULLY INTEGRATE OUR ACQUISITION OF TELTREND,
INC.
In March 2000, we completed the acquisition of Teltrend Corporation.
Although we performed extensive due diligence, this transaction is
accompanied by a number of risks, any of which could adversely affect our
business or stock price, including:
o the difficulty of our integrating the operations, facilities and
personnel of Teltrend;
o the potential disruption of each company's business;
o distraction of our management team;
o possible unanticipated expenses related to the integration;
o potential impairment of customer and employee relationships; and
o potential liabilities associated with Teltrend.
In addition, the market price of our common stock could decline as a result
of the acquisition if we do not achieve the perceived benefits of the
acquisition as rapidly or to the extent anticipated by financial analysts or
the combined financial results is not consistent with the expectations of
financial analysts.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DILUTE OUR CURRENT
STOCKHOLDERS
We expect to continue to review potential acquisitions and we may acquire
businesses, products or technologies in the future. In order to fund such
acquisitions, we could:
o issue equity securities that could dilute our current
stockholders' percentage ownership;
o incur substantial debt; or
o assume contingent liabilities.
These events could harm our business and/or the price of our common stock.
Acquisitions also entail numerous integration risks that could adversely
affect our business, such as those listed as risks associated with the
acquisition of Teltrend.
CONFERENCE PLUS'S LARGE COMPETITORS COULD ADVERSELY AFFECT CONFERENCE PLUS'S
ABILITY TO MAINTAIN OR INCREASE ITS MARKET SHARE.
Conference Plus participates in the highly competitive industry of voice,
video, and multimedia conferencing and meeting services. Competitors include
stand-alone conferencing companies and major telecommunications providers.
Conference Plus's ability to sustain growth and performance is dependent on
its:
o maintenance of high quality standards and low cost position;
o international expansion; and
o evolving technological capability.
Any increase in competition could reduce our gross margin, require increased
spending on research and development and sales and marketing, and otherwise
materially adversely affect our business and operating results.
OUR PRINCIPAL STOCKHOLDERS CAN EXERCISE SIGNIFICANT INFLUENCE THAT COULD
DISCOURAGE TRANSACTIONS INVOLVING A CHANGE OF CONTROL AND MAY AFFECT YOUR
ABILITY TO RECEIVE A PREMIUM FOR CLASS A COMMON STOCK THAT YOU PURCHASE.
As of March 31, 2000, as trustees of a voting trust containing common stock
held for the benefit of the Penny family and the Simon family, Robert C.
Penny III and Melvin J. Simon have the exclusive power to vote over 75% of
the votes entitled to be cast by the holders of our common stock. In
addition, all members of the Penny family who are beneficiaries under this
voting trust are parties to a stock transfer restriction agreement which
prohibits the beneficiaries from transferring any class B common stock or
their beneficial interests in the voting trust without first offering such
class B common stock to the other Penny family members. Consequently, we are
effectively under the control of Messrs. Penny and Simon, as trustees, who
have sufficient voting power to elect all of the directors and to determine
the outcome of most corporate transactions or other matters submitted to the
stockholders for approval. Such control may have the effect of discouraging
transactions involving an actual or potential change of control, including
transactions in which the holders of class B common stock might otherwise
receive a premium for their shares over the then-current market price.
ITEM 2. PROPERTIES
The Company leases approximately 185,000 square feet of office,
development and manufacturing space in Aurora, Illinois, a suburb of Chicago. As
of March 31, 2000 the Company also leases facilities in Schaumburg, Illinois and
Lombard, Illinois for Conference Plus, and Dublin Ireland for Conference Plus'
international operations. The Aurora facility lease expires in 2017.
As of March 31, 2000, the Company also leases and owns facilities in
St. Charles, Illinois which were obtained as part of the Teltrend acquisition.
The Company expects to combine operations and close the St. Charles facilities
by October 1, 2000 at which time the St. Charles lease will expire. The Company
expects to sell the owned properties in St. Charles during fiscal year 2001. The
Company also leases a facility in Basingstoke, England for Westell Limited
(formerly Teltrend Limited).
The Company estimates that its manufacturing facilities are operating
at a utilization rate of nearly 100%. The Company is utilizing third-party
subcontractors to help fulfill customer demand beyond the manufacturing capacity
of the Aurora facility. The Company currently does not plan to expand the
manufacturing capacity of its Aurora facility.
ITEM 3. LEGAL PROCEEDINGS
The Company has been involved from time to time in litigation in the
normal course of business. The Company is not presently involved in any legal
proceedings that the Company believes are material to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 16, 2000, at a special meeting of stockholders, the
stockholders approved: (i) issuance of Class A Common Stock in accordance with
the Agreement and Plan of Merger with Teltrend, Inc. and (ii) an amendment to
the Company's Amended and Restated Certificate of Incorporation to increase the
number of shares of Class A Common Stock, authorized for issuance from
65,500,000 to 85,000,000.
The following table outlines the results of the shareholders' vote.
Total Votes Cast Votes For Votes Against Abstentions
---------------- --------- ------------- -----------
Issuance of Class A Common 88,338,510 88,165,066 151,973 21,471
Stock in accordance with the
Agreement and Plan of
Merger with Teltrend, Inc.
Amendment to Westell's 88,338,520 87,825,285 488,102 25,133
Amended and Restated
Certificate of
Incorporation
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock is quoted on the NASDAQ National
Market under the symbol "WSTL." The following table sets forth for the periods
indicated the high and low closing sale prices for the Class A Common Stock as
reported on the NASDAQ National Market.
High Low
---- ---
Fiscal Year 1999
First Quarter ended June 30, 1998.................... $ 13 7/8 $ 8 7/8
Second Quarter ended September 30, 1998.............. 10 3 3/4
Third Quarter ended December 31, 1998................ 8 1/4 2 3/4
Fourth Quarter ended March 31, 1999.................. 9 3 3/16
Fiscal Year 2000
First Quarter ended June 30, 1999.................... 11 3/16 3 7/8
Second Quarter ended September 30, 1999.............. 9 1/2 6 7/8
Third Quarter ended December 31, 1999................ 13 6 7/16
Fourth Quarter ended March 31, 2000.................. 40 3/4 9
Fiscal Year 2001
First Quarter (through June 23, 2000).................. 15 7/16 14 7/16
As of June 21, 2000, there were approximately 649 holders of record of
the outstanding shares of Class A Common Stock.
Dividends
The Company has never declared or paid any cash dividends on its common
stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain any future earnings to finance
the growth and development of its business.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data as of March 31,
1996, 1997, 1998, 1999 and 2000 and for each of the five fiscal years in the
period ended March 31, 2000 have been derived from the Company's consolidated
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants. The data set forth below is qualified by
reference to, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements and the related Notes thereto and other financial
information appearing elsewhere in this Form 10-K.
Fiscal Year Ended March 31,
----------------------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------ -----
(in thousands, except per share data)
Statement of Operations Data:
Revenues............................................. $83,236 $79,385 $86,351 $93,180 $122,033
Cost of goods sold................................... 50,779 57,832 58,859 68,316 91,539
-------- -------- -------- ------- -------
Gross margin.................................... 32,457 21,553 27,492 24,864 30,494
-------- -------- -------- ------- -------
Operating expenses:
Sales and marketing................................ 13,744 16,214 19,296 19,442 14,808
Research and development........................... 12,603 21,994 26,558 26,605 10,789
General and administrative......................... 8,364 9,757 13,151 13,117 14,003
Goodwill amortization ............................. -- -- -- -- 1,326
Restructuring charge .............................. -- -- 1,383 800 550
---------- ---------- ---------- -------- --------
Total operating expenses........................ 34,711 47,965 60,388 59,964 41,476
-------- ------- ------- ------- -------
Operating loss from continuing
operations......................................... (2,254) (26,412) (32,896) (35,100) (10,982)
Other income (expense), net.......................... (226) 2,221 14,290 404 1,056
Interest expense..................................... 859 330 502 296 1,856
------ -------- -------- ---------- ---------
Loss from continuing operations before
income taxes....................................... (3,339) (24,521) (19,108) (34,992) (11,782)
Benefit for income taxes............................. (1,886) (9,820) (5,137) -- (3,600)
------- ---------- -------- -------------------------
Loss from continuing operations...................... (1,453) (14,701) (13,971) (34,992) (8,182)
Discontinued operations (loss)....................... (622) (5) -- -- --
-------- --------------------- -----------------------
Net loss............................................. $ (2,075) $ (14,706) $ (13,971) $ (34,992) $ (8,182)
========== ========== ========== =========== ==========
Net loss per basic and diluted share: (1)
Continuing operations.............................. $ ( 0.05) $ (0.41) $ (0.38) $ (0.96) $ (0.22)
Discontinued operations............................ (0.02) (0.00) (0.00) (0.00) (0.00)
------ -------- -------- --------- --------
Net loss per basic and diluted share................. $ ( 0.07) $ (0.41) $ (0.38) $ (0.96) $ (0.22)
=========== ======== ======== ======== ========
Dividends declared per share......................... $ -- $ -- $ -- $ -- $ --
Average number of basic and diluted
common shares outstanding (1)..................... 30,846 35,940 36,348 36,427 37,760
March 31,
------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital...................................... $ 28,741 $ 65,105 $ 47,481 $ 12,213 $ 64,335
Total assets......................................... 64,448 108,049 98,405 64,407 342,570
Revolving promissory notes........................... -- -- -- 500 --
Long-term debt, including current portion............ 4,427 6,487 4,420 4,814 2,750
Total stockholders' equity........................... 38,985 86,188 73,141 39,124 279,663
(1) Adjusted to reflect the two for one stock split of the Company's Class A Common Stock effected June 7,
1996. See Notes 1 and 7 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion should be read together with the Consolidated
Financial Statements and the related Notes thereto and other financial
information appearing elsewhere in this Form 10-K.
The Company commenced operations in 1980 as a provider of
telecommunications network transmission products that enable advanced
telecommunications services over copper telephone wires. Until fiscal 1994, the
Company derived substantially all of its revenues from its Telco Access Products
(TAP) product lines, particularly the sale of Network Interface Units and
related products. NIU products accounted for at least 50% of revenues in fiscal
years 1998 and 1999 and accounted for approximately 35% of revenues in fiscal
2000. The Company introduced its first DSL products in fiscal 1993 and these
products represented approximately 14.4%, 13.0% and 26.9% of revenues in fiscal
1998, 1999 and 2000, respectively. The Company has also provided audio
teleconferencing services since fiscal 1989 which constituted 16.4%, 22.9% and
26.6% of the Company's revenues in fiscal 1998, 1999 and 2000, respectively.
On March 17, 2000, the Company acquired 100% of the outstanding shares
of Teltrend Inc., a designer, manufacturer and marketer of transmission products
used by telephone companies to provide voice and data service over the telephone
network. Each outstanding share of Teltrend Inc. was converted into 3.3 shares
of the Company's class A common stock. Total consideration included the issuance
of 20,196,427 shares of class A common shares valued at $213.6 million and $10.5
million in transaction costs. The Company also assumed 605,000 options to
purchase Teltrend common stock and converted such options to Company options to
purchase approximately 2.0 million shares of class A common stock, which are
included in the stock option activity table illustrated in Note 8. The exercise
prices of the options assumed range from $3.7121 to $15.5303 and have an average
exercise price of $5.6989. The fair value of the options assumed was $14.2
million and is included in the purchase price and as a component of stockholders
equity in the consolidated financial statements. The fair value of the options
assumed was estimated using the Black-Scholes option pricing model. Due to the
goodwill amortization as a result of the Teltrend, Inc. acquisition, the company
expects to recognize net losses at least for the next fiscal year.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business requires different technology and market strategy. They consist of:
1) A telecommunications equipment manufacturer of local loop access products,
which includes the Telco Access Products, Transport Systems products and
CPE products, and
2) A multi-point telecommunications service bureau, Conference Plus, Inc,
specializing in audio teleconferencing, multi-point video conferencing,
broadcast fax and multimedia teleconference services.
The Company's customer base is comprised primarily of the Regional Bell
Operating Companies, independent domestic local exchange carriers and public
telephone administrations located outside the U.S. Due to the stringent quality
specifications of its customers and the regulated environment in which its
customers operate, the Company must undergo lengthy approval and procurement
processes prior to selling its products. Accordingly, the Company must make
significant up front investments in product and market development prior to
actual commencement of sales of new products. In addition, to remain
competitive, the Company must continue to invest in new product development and
expand its sales and marketing efforts to cover new product lines. As a result
of the significant increases in research and development and sales and marketing
expenses related to new product and market development, the Company's results of
operations were adversely impacted in fiscal 1998, 1999 and 2000.
The Company expects to continue to evaluate new product opportunities
and engage in extensive research and development activities and expects to
receive funding from certain partners to offset a portion of these
development costs. This will require the Company to continue to invest in
research and development and sales and marketing, which is expected to adversely
affect short-term results of operations. The Company believes that its future
revenue growth and profitability will principally depend on its success in
increasing sales of DSL products and developing new and enhanced TAP and other
DSL products. In view of the Company's reliance on the emerging DSL market for
growth and the unpredictability of orders and subsequent revenues, the Company
believes that period to period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance. Revenues from TAP products such as NIU's have declined in recent
years as telcos continue to move to networks that deliver higher speed digital
transmission services. Failure to increase revenues from new products, whether
due to lack of market acceptance, competition, technological change or
otherwise, would have a material adverse effect on the Company's business and
results of operations.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented
by certain items in the Company's statements of operations for the periods
indicated:
Fiscal Year Ended March 31,
1998 1999 2000
---- ---- ----
Equipment .................................... 83.6% 77.1% 73.5%
Services...................................... 16.4 22.9 26.5
-------- ------ ------
Total revenues.............................. 100.0 100.0 100.0
Cost of equipment............................. 59.9 59.5 58.1
Cost of services.............................. 8.3 13.8 16.9
----- ------ ------
Total cost of goods sold.................... 68.2 73.3 75.0
----- ----- -----
Gross margin.............................. 31.8 26.7 25.0
---- ----- -----
Operating expenses:
Sales and marketing......................... 22.3 20.9 12.1
Research and development.................... 30.8 28.5 8.8
General and administrative.................. 15.2 14.1 11.5
Goodwill amortization....................... -- -- 1.1
Restructuring charge........................ 1.6 0.9 0.5
-------- ------ -------
Total operating expenses................. 69.9 64.4 34.0
---- ----- -----
Operating loss ............................... (38.1) (37.7) (9.0)
Other income, net............................. 16.6 0.4 0.9
Interest expense.............................. 0.6 0.3 1.5
----- ----- -----
Loss before income tax benefit................ (22.1) (37.6) (9.6)
Benefit for income taxes...................... (5.9) (0.0) (2.9)
----- ------ ------
Net loss...................................... (16.2)% (37.6)% (6.7)%
======== ======== =======
FISCAL YEARS ENDED MARCH 31, 1998, 1999 AND 2000
Revenues. Revenues were $86.4 million, $93.2 million and $122.0 million
in fiscal 1998, 1999 and 2000 respectively. Revenues increased 7.9% and 30.9% in
fiscal 1999 and 2000, respectively, from the preceding years. The fiscal 1999
increase of $6.8 million was primarily due to increased Conference Plus, Inc
service revenue of $7.2 million, or a 50.7% increase from the previous year,
resulting from increased audio conference calling volume. This increase was
offset in part by decreases of approximately $750,000 and $349,000 from the
Telco Access Product (TAP) and DSL products, respectively. The decrease in TAP
revenue was primarily due to lower unit shipments as network providers continue
their transition to digital products. Competitive pricing pressures and product
mix also negatively affected Telco Access Product revenues. The decrease in DSL
product revenue was due to lower average unit selling prices offset in part by
increased unit volume. The fiscal 2000 increase of $28.8 million was primarily
due to increases of $20.8 million and $2.5 million from the Company's CPE and
Transport systems business units, respectively, resulting from increased
shipments of DSL products. These increases were offset in part by a decrease of
$5.5 million from the TAP business unit due to primarily to competitive
pressures and product mix. Conference Plus, Inc. revenue increased $11.1
million, or 51.9%, over fiscal 1999 resulting from increased audio conference
calling volume.
Gross Margin. Gross margin as a percentage of revenues was 31.8%, 26.7%
and 25.0% in fiscal 1998, 1999 and 2000, respectively. The year over year
decreases in gross margin as a percent of revenue are primarily the result of
aggressive pricing of DSL products in the CPE and Transport Systems business
units and continued competitive pricing pressures and product mix changes in the
TAP business unit.
Sales and Marketing. Sales and marketing expenses were $19.3 million,
$19.4 million and $14.8 million in fiscal 1998, 1999 and 2000, respectively,
constituting 22.3%, 20.9% and 12.1% of revenues, respectively. Sales and
marketing was up slightly in fiscal 1999 due to increases at Conference Plus to
support growth in the teleconference service revenue. This increase was
partially offset by decreases resulting from management initiatives undertaken
late fiscal 1998 to streamline DSL sales and marketing. In fiscal 2000, sales
and marketing decreased $4.6 million. This decrease is primarily due to cost
reductions resulting from management initiatives undertaken late fiscal 1999 to
streamline DSL sales efforts. The Company believes that continued investment in
sales and marketing will be required to expand its product lines, bring new
products to market and service customers.
Research and Development. Research and development expenses were $26.6
million, $26.6 million and $10.8 million in fiscal 1998, 1999 and 2000,
respectively, constituting 30.8%, 28.6% and 8.8% of revenues, respectively.
Research and development expenses were essentially unchanged in fiscal 1999
reflecting positive results from management initiatives undertaken late fiscal
1998 to streamline DSL research and development. In fiscal 2000, research and
development expenses decreased $15.8 million or 59.4% from the previous year.
This decrease was due primarily to receiving $6.7 million in fiscal 2000 from
customers to fund on-going engineering projects, which was offset against
research and development expenses. Additionally, cost savings have resulted from
the absence of costs related to the Company's European operation, Westell Europe
Limited, which was eliminated early in fiscal 2000. The Company believes that a
continued investment in research and development will be required for the
Company to remain competitive.
General and Administrative. General and administrative expenses were
$13.2 million, $13.1 million and $14.0 million in fiscal 1998, 1999 and 2000,
respectively, constituting 15.2%, 14.1% and 11.5% of revenues, respectively. The
fiscal 1999 decrease was primarily due to decreases resulting from management
initiatives undertaken late fiscal 1998 to streamline DSL general and
administrative functions. These decreases were offset in part by infrastructure
increases at Conference Plus to support growing teleconference service revenues.
General and administrative expenses increased $900,000 in fiscal 2000 due
primarily to increases related to information systems enhancements and
non-employee stock option grants which were offset in part by cost reductions
resulting from management initiatives undertaken late fiscal 1999 to streamline
DSL efforts.
Restructuring charge. The Company recognized a restructuring charge of
$1.4 million in the three months ended December 31, 1997 (fiscal 1998
restructuring plan) and $800,000 in the three months ended March 31, 1999
(fiscal 1999 restructuring plan). These charges included personnel, facility,
and certain development contract costs related to restructuring global
operations. As of March 31, 2000, the Company has paid $1.2 million and $839,000
of the restructuring costs charged in fiscal 1998 and 1999, respectively. During
the three months ending December 31, 1999, management determined that
essentially all restructuring payments have been completed for fiscal 1998 and
1999 and therefore the remaining restructuring accrual balances for those
periods of approximately $169,000 was reversed into income.
The fiscal 1998 restructuring plan was to decrease costs and streamline
operations related to DSL products. The fiscal 1999 restructuring plan was to
further decrease costs, primarily by reducing the workforce by approximately
11%, and focus DSL sales efforts on indirect sales to the major phone companies
through licensing and OEM arrangements with strategic partners.
The Company recognized a restructuring charge of $550,000 in the three
months ended March 31, 2000. This charge was for personnel, legal, and other
related costs to eliminate redundant employees due to the acquisition of
Teltrend, Inc. The restructuring plan was to combine and streamline the
operations of the two companies and to
achieve synergies related to the manufacture and distribution of common product
lines. The Company estimates the costs of these activities will be $2.9 million.
Approximately $2.4 million of the total cost has been capitalized as part of the
purchase price of Teltrend Inc. primarily related to Teltrend Inc. employees
involuntarily terminated The remaining $550,000 has been charged to operations
and relates to Westell employees involuntarily terminated and other costs. As of
March 31, 2000, none of these costs have been paid.
A table which summarizes the restructuring charges and their
utilization can be found in Note 10 to the Consolidated Financial Statements of
the Company.
Other income, net. Other income, net was $14.2 million, $404,000 and
$1.1 million for fiscal years 1998, 1999 and 2000, respectively. In fiscal 1998,
the Company recognized other income of $12.0 million, net of expenses, related
to a one-time fee received from Texas Instruments for the break-up of the
proposed Westell/Amati merger. In fiscal 2000, the Company recognized other
income of $650,000 for a foreign currency gain from the liquidation of Westell
Europe Ltd. Excluding the effects of these one time benefits, Other income, net
would have been $2.3 million and $426,000 for fiscal years ended March 31, 1998
and 2000, respectively. Excluding these one time items, Other income, net for
the years ended March 31, 1998, 1999 and 2000 was primarily due to interest
income earned on temporary cash investments made as a result of investing
available funds.
Interest Expense. Interest expense was $502,000, $296,000 and
$1,856,000 for fiscal 1998, 1999 and 2000, respectively. The fiscal 1999
decrease in interest expense was a result of reduced borrowings. The fiscal 2000
increase in interest expense was a result of interest from the Company's
subordinated secured convertible debentures, warrants to purchase Class A common
stock and net obligations outstanding during the year under promissory notes and
equipment borrowings.
Benefit for Income Taxes. Benefit for income taxes was $5.1 million,
$0.0 and $3.6 million in fiscal 1998, 1999 and 2000, respectively. In each of
these fiscal years, in addition to the tax benefit generated by the loss before
income taxes, the Company was able to generate $700,000, $750,000 and $662,000,
respectively, in tax credits primarily generated by increasing research and
development activities. The Company recorded valuation allowances of $2.9
million in the fourth quarter of fiscal 1998, $12.3 million in fiscal 1999, and
$900,000 in fiscal 2000 which represents the amount that the deferred tax
benefit exceeded the value of the tax planning strategy available to the
Company. The Company has approximately $7.5 million in income tax credit carry
forwards and a tax benefit of $30.5 million related to a net operating loss
carryforward that is available to offset future taxable income. The tax credit
carryforwards begin to expire in 2008 and the net operating loss carryforward
begins to expire in 2012.
QUARTERLY RESULTS OF OPERATIONS
The following tables present the Company's results of operations for
each of the last eight fiscal quarters and the percentage relationship of
certain items to revenues for the respective periods. The Company believes that
the information regarding each of these quarters is prepared on the same basis
as the audited Consolidated Financial Statements of the Company appearing
elsewhere in this Form 10-K. In the opinion of management, all necessary
adjustments (consisting only of normal recurring adjustments) have been included
to present fairly the unaudited quarterly results when read in conjunction with
the audited Consolidated Financial Statements of the Company and the Notes
thereto appearing elsewhere in this Form 10-K. These quarterly results of
operations are not necessarily indicative of the results for any future period.
Quarter Ended
Fiscal 1999 Fiscal 2000
----------------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1999 1999 1999 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
Equipment ................. $18,386 $17,942 $18,140 $17,395 $17,188 $17,326 $21,964 $33,132
Services................... 4,627 4,718 5,245 6,727 6,971 7,678 8,053 9,722
------- ------- ------- ------- ------- ------- ------- -------
Total revenues.......... 23,013 22,660 23,385 24,122 24,159 25,004 30,017 42,854
Cost of equipment.......... 13,608 15,210 13,922 12,699 11,890 14,358 16,755 27,963
Cost of services........... 2,491 2,852 3,372 4,162 4,764 5,021 4,998 5,792
------- ------- ------- ------- ------- ------- ------- -------
Total cost of goods sold 16,099 18,062 17,294 16,861 16,654 19,379 21,753 33,755
------- ------- ------- ------ ------- ------- ------ ------
Gross margin.......... 6,914 4,598 6,091 7,261 7,505 5,625 8,264 9,099
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing...... 4,768 5,261 5,376 4,037 3,697 3,414 3,854 3,843
Research and
development............ 6,132 6,578 6,975 6,920 3,597 1,619 2,967 2,605
General and
administrative......... 2,991 3,282 3,420 3,424 3,240 3,377 2,902 4,484
Goodwill amortization..... -- -- -- -- -- -- --- 1,326
Restructuring charge..... -- -- -- 800 -- -- -- 550
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 13,891 15,121 15,771 15,181 10,534 8,410 9,723 12,808
------- ------- ------- ------- ------- ------- ------- -------
Operating loss ............ (6,977) (10,523) (9,680) (7,920) (3,029) (2,785) (1,459) (3,709)
------- ------- ------- ------- ------- ------- ------- -------
Other income (expense), net 435 348 142 (521) (24) 74 854 151
Interest expense........... 89 66 115 26 379 348 690 438
------- ------- ------- ------- ------- ------- ------- -------
Loss before
income taxes............. (6,631) (10,241) (9,653) (8,467) (3,432) (3,059) (1,295) (3,996)
Benefit for
income taxes............. -- -- -- -- -- -- -- (3,600)
------- ------- ------- ------- ------- ------- ------- -------
Net loss................... $ (6,631)$ (10,241) $ (9,653) $ (8,467) $ (3,432) $ (3,059) $ (1,295) $ (396)
======== ========= ========= ======== ======== ======== ======== =======
Quarter Ended
----------------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000
------------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1999 1999 1999 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
Equipment.................... 79.9% 79.2% 77.6% 72.1% 71.1% 69.3% 73.2% 77.3%
Service.................... 20.1 20.8 22.4 27.9 28.9 30.7 26.8 22.7
------ ------ ------ ------ ------ ------ ------ ------
Total revenues........... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of equipment sales.... 59.1 67.1 59.5 52.6 49.2 57.4 55.8 65.3
Cost of services........... 10.8 12.6 14.4 17.3 19.7 20.1 16.7 13.5
Total cost of goods sold... 69.9 79.7 73.9 69.9 68.9 77.5 72.5 78.8
---- ----- ----- ----- ----- ----- ----- -----
Gross margin............. 30.1 20.3 26.1 30.1 31.1 22.5 27.5 21.2
---- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing...... 20.7 23.2 23.0 16.7 15.3 13.6 12.8 9.0
Research and
development............ 26.6 29.0 29.8 28.7 14.9 6.5 9.9 6.1
General and
administrative......... 13.0 14.5 14.6 14.2 13.4 13.5 9.7 10.5
Goodwill amortization.... (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (3.0)
Restructuring charge..... 0.0 0.0 0.0 3.3 0.0 0.0 0.0 1.3
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............. 60.4 66.7 67.4 62.9 43.6 33.6 32.4 29.9
------ ----- ----- ------ ----- ----- ----- -----
Operating loss............. (30.3) (46.4) (41.4) (32.8) (12.5) (11.1) (4.9) (8.7)
------ ------- ------- ------- ------- ------- ------ ------
Other income (expense), net 1.9 1.5 0.6 (2.2) (0.1) 0.3 2.8 0.3
Interest expense........... 0.4 0.3 0.5 0.1 1.6 1.4 2.3 0.9
----- ----- ----- ------- ----- ----- ----- -----
Loss before
income taxes............. (28.8) (45.2) (41.3) (35.1) (14.2) (12.2) (4.4) (9.3)
Benefit for
income taxes............. (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (8.4)
-------- ------ --------- ------ ------- ------- --------- --------
Net loss..................... (28.8)% (45.2)% (41.3)% (35.1)% (14.2)% (12.2)% (4.4)% (0.9)%
========= ======== ======== ======= ======= ======= ======= ======
The Company's quarterly equipment revenues have varied from quarter to
quarter due to quarterly fluctuations in DSL revenues. A majority of DSL
shipments made in fiscal 1999 and 2000 were for initial service deployments and
therefore have not yet created steady or predictable demand for these products
on a quarter to quarter basis. CPE and Transport Systems product revenues have
increased fairly steadily in fiscal 1999 and 2000 due to increased demand for
DSL products. Revenues from Telco Access Products have declined steadily in
fiscal 1999 and 2000 due to a combination of changes in product mix and
continued competitive pricing pressures. Conference Plus service revenues have
seen steady growth throughout the eight quarters presented due primarily to
increased audio conference calling traffic volume.
Gross margin as a percentage of revenue has also varied from quarter to
quarter. The decreases in gross margins are primarily due to competitive pricing
pressures and product mix changes in each of the Company's equipment product
lines as well as investments in manufacturing infrastructure. The decreased
gross margins in the second, third and fourth quarters of fiscal 1999 were
primarily the result of recording forward pricing losses of $1.7 million,
$800,000 and $200,000, respectively, for DSL orders received. The lower margins
in the fiscal 2000 quarters are primarily a result of the increased volume in
DSL products that have relatively low margins. Additionally, the Company's
Conference Plus, Inc. subsidiary made additional infrastructure enhancements to
handle increased call minutes which also impacted margins in fiscal 1999 and
2000. The Company believes that its gross margin in future periods will depend
on a number of factors, including market demand for the Company's DSL products,
pricing pressures, competitive technologies and manufacturing expenses. There
can be no assurance that the Company will be able to increase gross margins in
future periods due to these factors, even if its DSL products achieve market
acceptance.
Operating expenses increased in each of the first three quarters of
fiscal 1999 and decreased in the fourth quarter of fiscal 1999. Operating
expenses decreased in fiscal 2000 quarters compared to fiscal 1999 primarily due
to cost reductions resulting from management initiatives undertaken late fiscal
1999 to streamline DSL sales efforts and due to receiving payments from
customers to fund on-going engineering projects, which were offset against
research and development expenses. As a percentage of revenue, operating
expenses decreased in each quarter of fiscal 2000 when compared to the same
quarter in the previous year.
The Company expects to continue to experience significant fluctuations
in quarterly results of operations. The Company believes that fluctuations in
quarterly results may cause the market price of the Class A Common Stock to
fluctuate, perhaps substantially. Factors which have had an influence on and may
continue to influence the Company's results of operations in a particular
quarter include the size and timing of customer orders and subsequent shipments,
customer order deferrals in anticipation of new products, timing of product
introductions or enhancements by the Company or its competitors, market
acceptance of new products, technological changes in the telecommunications
industry, competitive pricing pressures, accuracy of customer forecasts of
end-user demand, write-offs for obsolete inventory, changes in the Company's
operating expenses, personnel changes, foreign currency fluctuations, changes in
the mix of products sold, quality control of products sold, disruption in
sources of supply, regulatory changes, capital spending, delays of payments by
customers and general economic conditions. Sales to the Company's customers
typically involve long approval and procurement cycles and can involve large
purchase commitments. Accordingly, cancellation or deferral of one or a small
number of orders could cause significant fluctuations in the Company's quarterly
results of operations. As a result, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.
Because the Company generally ships products within a short period
after receipt of an order, the Company typically does not have a material
backlog of unfilled orders, and revenues in any quarter are substantially
dependent on orders booked in that quarter. The Company's expense levels are
based in large part on anticipated future revenues and are relatively fixed in
the short-term. Therefore, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall of orders. Accordingly,
any significant shortfall of demand in relation to the Company's expectations or
any material delay of customer orders would have an almost immediate adverse
impact on the Company's business and results of operations and on its ability to
achieve profitability.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had $27.3 million in cash and cash
equivalents consisting primarily of federal government agency instruments and
the highest rated grade corporate commercial paper. As of March 31, 2000, the
Company had no outstanding balance under its secured revolving promissory note
facility and $2.8 million outstanding under its equipment borrowing facility. As
of March 31, 2000, the Company had approximately $16.0 million available under
the secured revolving promissory note facility. The revolving promissory notes
and the equipment borrowing facility required the maintenance of a minimum cash
to current maturity ratio, a current ratio and a maximum debt to net worth
ratio. The Company is currently in compliance with all such covenants.
The Company's operating activities used cash of $4.2 million, $31.3
million and $22.3 million in fiscal 1998, 1999 and 2000, respectively. Cash used
by operations in fiscal 1998 resulted primarily from a loss from continuing
operations before income tax of $12.1 million (net of depreciation) offset by
increases in accounts payable and accrued compensation and a decrease in prepaid
expenses. Cash used by operations in fiscal 1999 resulted primarily from a loss
from continuing operations of $28.0 million (net of depreciation) and working
capital required by increases in prepaid expenses and receivables, and a
decrease in accrued compensation offset by an increase in accounts payable. Cash
used by operations in fiscal 2000 resulted primarily from a pre-tax loss from
continuing operations of $3.3 million (net of depreciation and amortization) and
working capital requirements. Working capital was affected primarily by
increases in receivables, inventory and offset by an increase in accounts
payable and accrued compensation.
The Company received $29.8 million in cash from the acquisition of
Teltrend Inc. Merger related expenditures of $7.4 million are expected in the
first quarter of fiscal 2001 for investment banking, legal, accounting and other
related fees. Restructuring expenditures of $2.9 million are anticipated
primarily relating to involuntary termination expenses, of which $1.7 million is
expected to be paid in fiscal 2001 with the remainder paid by fiscal 2003.
Capital expenditures in fiscal 1998, 1999 and 2000 were $5.8 million,
$6.9 million and $11.4 million, respectively. These expenditures were
principally for machinery, computer and research equipment purchases. The
Company expects to spend approximately $30.0 million in fiscal 2001 for capital
equipment.
At March 31, 2000, the Company's principal sources of liquidity were
$27.3 million of cash and cash equivalents and $16.0 million under its secured
revolving promissory notes facility and $4.1 million available under the
equipment borrowing facility. Borrowings under the secured revolving promissory
notes facility (which had $500,000 outstanding at March 31, 1999 and was unused
at March 31, 2000) and the equipment borrowing facility bear interest at the
bank's prime rate of 7.5% and 9.0% at March 31, 1999 and 2000, respectively.
The Company recorded forward pricing losses of $2.7 million during
fiscal 1999 for DSL orders received. These losses effected results of operations
in the quarters in which the orders were received. Substantially all of this
loss, $2.3 million of the recorded loss, was shipped prior to March 31, 1999.
All of the orders remaining in the reserve were shipped in fiscal 2000. At March
31, 2000, no reserves existed. There are no open orders where the costs to
produce exceed the Company's selling price
The Company had a deferred tax asset of approximately $44.3 million at
March 31, 2000. This deferred tax asset relates to (i) tax credit carryforwards
of approximately $4.6 million, (ii) a net operating loss carryforward tax
benefit of approximately $30.5 million and (iii) temporary differences between
the amount of assets and liabilities for financial reporting purposes and such
amounts measured by tax laws. Of such tax credit carryforwards, the first
$243,000 of credits expire in 2008 and $722,000 of credits may be carried
forward indefinitely. The net operating loss carryforward begins to expire in
2012. Realization of deferred tax assets
associated with the Company's future deductible temporary differences, net
operating loss carryforwards and tax credit carryforwards is dependent upon
generating sufficient taxable income prior to their expiration.
Realization of deferred tax assets associated with the Company's future
deductible temporary differences, net operating loss carryforwards and tax
credit carryforwards is dependent upon generating sufficient taxable income
prior to their expiration. Although realization of the deferred tax asset is not
assured, the Company has incurred operating losses for the 1998, 1999 and 2000
fiscal years, management believes that it is more likely than not that it will
generate taxable income sufficient to realize the majority of the tax benefit. A
majority of these deferred tax assets are expected to be utilized, prior to
their expiration, through a tax planning strategy available to the Company. At
March 31, 1998 and March 31, 1999, management determined that the strategy was
no longer sufficient to realize the amount deferred tax assets recorded and as
such the Company recorded a valuation allowance of $2.9 million and $12.3
million respectively. At March 31, 2000, management re-assessed the valuation of
the Company's deferred tax asset and determined that the tax planning strategy
was sufficient to record additional tax assets of $3.6 million. Management will
continue to periodically assess whether it remains more likely than not that the
deferred tax asset will be realized. If the tax planning strategy is not
sufficient to generate taxable income to recover the deferred tax benefit
recorded, an increase in the valuation allowance will be required through a
charge to the income tax provision. However, if the Company achieves sufficient
profitability or has available additional tax planning strategies to utilize a
greater portion of the deferred tax asset, an income tax benefit would be
recorded to decrease the valuation allowance.
In April 1999, the Company completed a subordinated secured convertible
debenture private placement totaling $20 million. As of May 16, 2000, holders of
these debentures fully converted all principle and the accrued interest thereon
of approximately $245,000 into 3,177,168 Class A common shares at a conversion
price of $6.372 per share.
In connection with the financing, the Company issued five-year warrants
for approximately 909,000 shares of Class A common stock at an exercise price
equal to $8.921 per share, which is approximately 140% of the initial conversion
price of the debentures and were determined to have a fair market value of $1
million. Subsequently, in December 1999, the Company repriced the warrants from
$8.921 to $5.92 per share and, due to this debt modification, increased the
value of the warrants by approximately $838,000. The total value of the
warrants, approximately $1.8 million, was recorded as a debt discount in the
accompanying March 31, 2000 consolidated balance sheet and is being amortized
over the life of the convertible debentures of five years.
In June 1999, the Company entered into a strategic agreement with
Fujitsu Telecommunications Europe Limited ("FTEL") on DSL and HDSL product
development, manufacturing, and global marketing. As part of this agreement,
FTEL will assist the Company in the funding of certain future developments of
DSL products. Additionally, employees of Westell Europe Limited ("WEL"), the
Company's United Kingdom operations, headquartered in Cambridge, England, became
employees of FTEL. Furthermore, FTEL assumed WEL's lease of office space,
purchased certain fixed assets and inventories of WEL and earned manufacturing
rights.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Westell is subject to certain market risks, including foreign currency
and interest rates. The Company has foreign subsidiaries in the United Kingdom
and Ireland that develop and sell products and services in those respective
countries. The Company is exposed to potential gains and losses from foreign
currency fluctuation affecting net investments and earnings denominated in
foreign currencies. The Company's future primary exposure is to changes in
exchange rates for the U.S. dollar versus the Great British pound and the Irish
pound. The Company also has a sales order and accounts receivable denominated in
Great British pounds. The Company at times uses foreign currency hedging to
manage the exposure to changes in the exchange rate on accounts receivable.
As of March 31, 2000, the net change in the cumulative foreign currency
translation adjustment account, which is a component of stockholders' equity,
was an unrealized gain of $184,000. The Company also recorded a
$650,000 foreign currency gain from the liquidation of Westell Europe Ltd. in
Other (income) expense in the three months ended December 31, 1999. This was
recorded as cumulative foreign currency translation adjustment, as part of
retained earnings, until Westell Europe, Ltd. was substantially liquidated.
The Company does not have significant exposure to interest rate risk
related to its debt obligations, primarily U.S. dollar denominated. The
Company's market risk is the potential loss arising from adverse changes in
interest rates. As further described in Note 2 to the Consolidated Financial
Statements included herein at Part II, Item 8 of this Annual Report on Form 10k,
the Company's debt consists primarily of a floating-rate bank line-of credit.
Market risk is estimated as the potential decrease in pretax earnings resulting
from a hypothetical increase in interest rates of 10% (i.e., from approximately
9% to approximately 19%) average interest rate on the Company's debt. If such an
increase occurred, the Company would incur approximately $380,000 per annum in
additional interest expense based on the average debt borrowed during the twelve
months ended March 31, 2000. The Company does not feel such additional expense
is significant.
The Company does not currently use any derivative financial instruments relating
to the risk associated with changes in interest rates.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements required by Item 8,
together with the report thereon of the independent accountants dated May 10,
2000 are set forth on pages 46 - 64 of this report. The Consolidated Financial
Statement schedules listed under Item 14(a)2, together with the report thereon
of the independent accountants dated May 10, 2000 are set forth on pages 65 and
66 of this report and should be read in conjunction with the financial
statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Company
The information required by this Item is set forth in registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held in
September 2000 under the caption "Election of Directors," which
information is herein by reference.
(b) Executive officers of the Company
The information required by this Item is set forth in registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held in
September 2000 under the caption "Executive Officers," which
information is herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held in
September 2000 under the caption "Compensation of Directors and
Executive
Officers," and "Report of the Compensation of the Board of
Directors," which information is herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held in
September 2000 under the caption "Ownership of the Capital Stock of the
Company," which information is herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required by this Item is set forth in registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held in
September 2000 under the caption "Certain Relationships and Related
Transactions," which information is herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
--------------------
The consolidated financial statements of Westell
Technologies, Inc. for the fiscal year ended March
31, 2000, together with the Report of Independent
Public Accountants, are set forth on pages 46 through
50 of this Report.
The supplemental financial information listed and
appearing hereafter should be read in conjunction
with the consolidated financial statements included
in the report.
(2) Financial Statement Schedules
-----------------------------
The following are included in Part IV of this Report
for each of the years ended March 31, 1998, 1999 and
2000 as applicable:
Report of Independent Public Accountants - page 65
Schedule II - Valuation and Qualifying Accounts -
page 66
Financial statement schedules not included in this
report have been omitted either because they are not
applicable or because the required information is
shown in the consolidated financial statements or
notes thereto, included in this report.
(3) Exhibits
--------
2.1 Agreement and Plan of Merger, dated December
13, 1999, among Teltrend Inc., Westell
Technologies Inc. and Theta Acquisition
Corp. (incorporated herein by reference to
Exhibit 99.2 to Westell Technologies, Inc.'s
Report on Form 8-K filed December 17, 1999)
3.1 Amended and Restated Certificate of
Incorporation, as amended.
3.2 Amended and Restated Bylaws (incorporated
herein by reference to Exhibit 3.2 to
Westell Technologies, Inc.'s Registration
Statement on Form S-4, as amended,
Registration No. 333-95539).
4.1 Form of Stock Purchase Warrant dated April
15, 1999 by and among Westell Technologies,
Inc., Castle Creek Technology Partners LLC
(409,091 shares), Marshall Capital
Management, Inc. (272,727 shares), and
Capital Ventures International (227,273
shares) (incorporated herein by reference to
Westell Technologies, Inc.'s Report on Form
8-K dated April 20, 1999).
4.2 Amended and Restated Certificate of
Incorporation, as amended (see Exhibit 3.1).
4.3 Amended and Restated By-laws (see Exhibit
3.2).
9.1 Voting Trust Agreement dated February 23,
1994, as amended (incorporated herein by
reference to Exhibit 9.1 to Westell
Technologies, Inc.'s Registration Statement
on Form S-1, as amended, Registration No.
33-98024).
10.1 Loan and Security agreement dated as of
October 13, 1998 among LaSalle National
Bank, Westell Technologies, Inc., Westell,
Inc., Westell International, Inc., and
Conference Plus, Inc. (incorporated herein
by reference to Exhibit 10.1 to the
Company's form 10-Q for period ended
September 30, 1998).
10.2 Stock Transfer Restriction Agreement entered
into by members of the Penny family, as
amended, (incorporated herein by reference
to Exhibits 10.4 and 10.16 to Westell
Technologies, Inc.'s Registration Statement
on Form S-1, as amended, Registration No.
33-98024).
10.3 Form of Registration Rights Agreement among
the Company and Robert C. Penny III and
Melvin J. Simon, as trustees of the Voting
Trust dated February 23, 1994 (incorporated
herein by reference to Exhibit 10.5 to
Westell Technologies, Inc.'s Registration
Statement on Form S-1, as amended,
Registration No. 33-98024).
*10.4 1995 Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.6 to
Westell Technologies, Inc.'s Registration
Statement on Form S-1, as amended,
Registration No. 33-98024).
*10.5 Employee Stock Purchase Plan (incorporated
herein by reference to Exhibit 10.7 to
Westell Technologies, Inc.'s Registration
Statement on Form S-1, as amended,
Registration No. 33-98024).
*10.6 Teltrend Inc. 1995 Stock Option Plan.(2)
(Incorporated by reference to the Teltrend,
Inc.'s Registration Statement on Form S-1,
as amended (Registration No. 33-91104),
originally filed with the Securities and
Exchange Commission April 11, 1995)
*10.7 Teltrend Inc. 1996 Stock Option Pla
(Incorporated by reference to the Teltrend
Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended April 26, 1997).
*10.8 Teltrend Inc. 1997 Non-Employee Director
Stock Option Plan (Incorporated by reference
to the Teltrend Inc.'s Definitive Proxy
Statement for the Annual Meeting of
Stockholders held on December 11, 1997).
10.9 Lease Agreement dated July 15, 1986 between
Kendall Point Associates, Ltd. and Westell,
Inc., as amended on August 26, 1991
(incorporated herein by reference to Exhibit
10.9 to Westell Technologies, Inc.'s
Registration Statement on Form S-1, as
amended, Registration No. 33-98024).
10.10 Limited Liability Company Operating
Agreement dated as of September 23, 1995 by
Westell, Inc. and Kingsland Properties, Ltd.
(incorporated herein by reference to Exhibit
10.10 to Westell Technologies, Inc.'s
Registration Statement on Form S-1, as
amended, Registration No. 33-98024).
10.11 Lease dated September 25, 1995 between
Westell-Meridian LLC and Westell, Inc.
(incorporated herein by reference to Exhibit
10.11 to Westell Technologies, Inc.'s
Registration Statement on Form S-1, as
amended, Registration No.
33-98024).
10.12 Term Note dated as of October 13, 1998
payable to LaSalle National Bank and made by
Westell Technologies, Inc., Westell, Inc.,
Westell International, Inc., and Conference
Plus, Inc. (incorporated herein by reference
to Exhibit 10.2 to the Company's form 10-Q
for period ended September 30, 1998).
*10.13 Agreement dated September 13, 1988 between
Richard Riviere and Westell Technologies,
Inc., as amended (incorporated herein by
reference to Exhibit 10.14 to Westell
Technologies, Inc.'s Registration Statement
on Form S-1, as amended, Registration No.
33-98024).
10.14 Revolving Note dated as of October 13, 1998
payable to LaSalle National Bank and made by
Westell Technologies, Inc., Westell, Inc.,
Westell International, Inc., and Conference
Plus, Inc. (incorporated herein by reference
to Exhibit 10.2 to the Company's form 10-Q
for period ended September 30, 1998).
10.15 Equipment Loan Note dated as of October 13,
1998 payable to LaSalle National Bank and
made by Westell Technologies, Inc., Westell,
Inc., Westell International, Inc., and
Conference Plus, Inc. (incorporated herein
by reference to Exhibit 10.3 to the
Company's form 10-Q for period ended
September 30, 1998).
10.16 Lease for Three National Plaza at Woodfield
dated December 24, 1991 by and between the
First National Bank of Boston, as Trustee
pursuant to that certain Pooling and
Security Agreement dated April 1, 1988, and
Conference Plus, Inc., as amended and
modified. (incorporated herein by reference
to the Exhibit No. 10.17 to the
Company's form 10-K for fiscal year ended
March 21, 1996).
10.17 Lease dated December 10, 1993 between
LaSalle National Trust, N.A., as Trustee
under Trust Agreement dated August 1, 1979,
known as Trust No. 101293, and Westell
Incorporated, as amended and modified
(incorporated herein by reference to
Exhibit No. 10.18 to the Company's
Form 10-K for fiscal year ended March 21,
1996).
21.1 Subsidiaries of the Registrant (incorporated
herein by reference to Exhibit 21.1 to
Westell Technologies, Inc.'s Registration
Statement on Form S-1, as amended,
Registration No. 33-98024).
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
*Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
-------------------
There following reports were filed on Form 8-K filed for the three
months ended March 31, 2000:
1. Form 8-K filed on February 2, 2000 relating to the expiration
of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act applicable to Westell's offer, pursuant to a
proposed merger, to acquire all of the outstanding shares of
common stock of Teltrend Inc.
2. Form 8-k filed on March 30, 2000 relating to the closing of the
Company's acquisition of Teltrend, Inc.
Subsequent to year-end, on May 22, 2000, an amended Form 8-K was
filed which included certain financial and pro forma information
relating to the Company's acquisition of Teltrend, Inc.
.
(c) Exhibits
--------
The exhibits filed as part of this Annual Report on Form 10-K are
as specified in Item 14(a)(3) herein.
(d) Financial Statement Schedules
-----------------------------
The financial statement schedules filed as part of this
Annual Report on Form 10-K are as specified in Item 14(a)(2)
herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on June 28, 2000.
WESTELL TECHNOLOGIES, INC.
By /s/ Marc Zionts
--------------------------
Marc Zionts, Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on June 28, 2000.
Signature Title
--------- -----
/s/ Marc Zionts Chief Executive Officer and Director
- -------------------------------------
Marc Zionts
/s/ John W. Seazholtz Chairman of the Board of Directors
- -------------------------------------
John W. Seazholtz
/s/ Melvin J. Simon Assistant Secretary and Treasurer and
- -------------------------------------
Melvin J. Simon Director
/s/ Nicholas C. Hindman Chief Financial Officer and Vice
- ------------------------------------- President (Principal Financial Officer
Nicholas C. Hindman and Principal Accounting Officer)
/s/ Robert C. Penny III Director
- -------------------------------------
Robert C. Penny III
/s/ Paul A. Dwyer
- -------------------------------------
Paul A. Dwyer Director
/s/ Thomas A. Reynolds, III
- -------------------------------------
Thomas A. Reynolds, III Director
/s/ Howard L. Kirby, Jr. Director
- -------------------------------------
Howard L. Kirby, Jr.
/s/ J. W. Nelson Director
- -------------------------------------
J. W. Nelson
/s/ Bernard F. Segesketter Director
- -------------------------------------
Bernard F. Sergesketter
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
Item Page
- ---- ----
Consolidated Financial Statements:
Report of Independent Public Accountants................................................................ 45
Consolidated Balance Sheets -- March 31, 1999 and 2000.................................................. 46
Consolidated Statements of Operations for the years ended March 31, 1998, 1999 and 2000................. 48
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1998, 1999 and 2000....... 49
Consolidated Statements of Cash Flows for the years ended March 31, 1998, 1999 and 2000................. 50
Notes to Consolidated Financial Statements.............................................................. 51
Financial Statement Schedules:
Report of Independent Public Accountant................................................................. 65
Schedule II -- Valuation and Qualifying Accounts........................................................ 66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Westell Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Westell
Technologies, Inc. (a Delaware corporation) and Subsidiaries as of March 31,
1999 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Westell
Technologies, Inc. and Subsidiaries as of March 31, 1999 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 2000 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Chicago, Illinois
May 10, 2000
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
---------
1999 2000
---- ----
(in thousands)
Current assets:
Cash and cash equivalents.............................................................. $6,715 $27,258
Short-term investments................................................................. -- 1,951
Accounts receivable (net of allowance of $703,000 and $855,000, respectively).......... 14,132 42,025
Inventories............................................................................ 10,376 30,741
Prepaid expenses and other current assets.............................................. 1,108 2,200
Refundable income taxes................................................................ 60 6,222
Deferred income tax asset.............................................................. 1,000 3,319
Land and building held for sale........................................................ -- 3,309
---------- -------
Total current assets.......................................................... 33,391 117,025
--------- --------
Property and equipment:
Machinery and equipment................................................................ 18,561 34,686
Office, computer and research equipment................................................ 18,230 18,682
Leasehold improvements................................................................. 2,091 3,436
--------- ---------
38,882 56,804
Less accumulated depreciation and amortization......................................... 25,531 30,435
--------- ---------
Property and equipment, net.......................................................... 13,351 26,369
--------- ---------
Goodwill and intangibles, net............................................................ -- 175,482
-----------------------
Deferred income tax asset and other assets............................................... 17,665 23,694
---------- ----------
Total assets.................................................................. $ 64,407 $ 342,570
========= =========
The accompanying notes are an integral part of these
Consolidated Balance Sheets.
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
---------
1999 2000
---- ----
(in thousands)
Current liabilities:
Accounts payable....................................................................... $ 7,616 $21,528
Accrued expenses....................................................................... 7,068 22,591
Accrued compensation................................................................... 4,305 6,938
Current portion of long-term debt...................................................... 2,189 1,633
-------- --------
Total current liabilities..................................................... 21,178 52,690
--------- ---------
Long-term debt........................................................................... 2,625 1,117
---------- ---------
Convertible debt, net of debt discount of $669,000....................................... -- 6,611
-------------- --------
Other long-term liabilities.............................................................. 1,480 2,489
---------- ---------
Commitments
Stockholders' equity:
Class A common stock, par $0.01.......................................................... 169 402
Authorized -- 85,000,000 shares
Issued and outstanding - 16,928,650 at March 31, 1999 and 40,179,110 at March 31,
2000
Class B common stock, par $0.01.......................................................... 195 190
Authorized -- 25,000,000 shares
Issued and outstanding -- 19,527,569 at March 31, 1999 and 19,051,369 at March 31,
2000
Preferred stock, par $0.01............................................................... -- --
Authorized -- 1,000,000 shares
Issued and outstanding -- none
Deferred compensation.................................................................... -- 840
Additional paid-in capital............................................................... 97,561 345,485
Cumulative translation adjustment........................................................ 455 184
Accumulated deficit...................................................................... (59,256) (67,438)
----------- ---------
Total stockholders' equity......................................................... 39,124 279,663
---------- ---------
Total liabilities and stockholders' equity.................................... $ 64,407 $ 342,570
========== =========
The accompanying notes are an integral part of these
Consolidated Balance Sheets.
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended March 31,
------------------------------
1998 1999 2000
---- ---- ----
(in thousands,
except per share data)
Equipment revenue............................................................. $72,206 $71,863 $89,655
Service revenue............................................................... 14,145 21,317 32,378
-------- -------- --------
Total revenues............................................................. 86,351 93,180 122,033
-------- -------- -------
Cost of equipment sales....................................................... 51,743 55,439 70,965
Cost of services.............................................................. 7,116 12,877 20,574
-------- --------- ---------
Total cost of goods sold................................................... 58,859 68,316 91,539
-------- -------- -------
Gross margin.............................................................. 27,492 24,864 30,494
------ ------ ------
Operating expenses:
Sales and marketing......................................................... 19,296 19,442 14,808
Research and development.................................................... 26,558 26,605 10,789
General and administrative.................................................. 13,151 13,117 14,003
Goodwill amortization....................................................... -- -- 1,326
Restructuring charge........................................................ 1,383 800 550
-------- ------- ------
Total operating expenses................................................. 60,388 59,964 41,476
-------- -------- -------
Operating loss................................................................ (32,896) (35,100) (10,982)
Other income, net............................................................. 14,290 404 1,056
Interest expense.............................................................. 502 296 1,856
-------- -------- ---------
Loss before income tax benefit................................................ (19,108) (34,992) (11,782)
Benefit for income taxes...................................................... (5,137) -- (3,600)
--------------------- --------
Net loss...................................................................... $(13,971) $(34,992) $(8,182)
========= ========= ========
Net loss per basic and diluted common share................................... $ (0.38) $ (0.96) $ (0.22)
======== ======== ========
Average number of basic and diluted common shares outstanding ................ 36,348 36,427 37,760
======== ======== =======
The accompanying notes are an integral part of these Consolidated
Financial Statements.
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
Shares Issued
and Additional Cumulative Total Stock-
Comprehensive Outstanding Par Value Paid-in Translation Deferred Accumulated holders'
Loss Class A Class B Class A Class B Capital Adjustment Compensation Deficit Equity
---- ------- ------- --------------- ------- ----------------------- ------- ------
(in thousands)
Balance, March 31, 1997..... 14,985 21,336 $ 150 $ 213 $ 96,285 $ (167) -- $ (10,293) $ 86,188
Net loss.................... $(13,971) -- -- -- -- -- -- -- (13,971) (13,971)
Stock awards.............. -- -- -- -- 48 -- -- -- 48
Translation adjustment.... (46) -- -- -- -- -- (46) -- -- (46)
Total Comprehensive Loss.... (14,017)
========
Class B Stock Converted to
Class A Stock.......... 305 (305) 3 (3) -- -- -- -- --
Options Exercised........ 63 -- 1 -- 649 -- -- -- 650
Shares granted under Stock
Incentive Plan......... 2 -- -- -- 25 -- -- -- 25
Shares sold under Employee
Stock Purchase Plan.... 17 -- -- -- 247 -- -- -- 247
Balance, March 31, 1998..... 15,372 21,031 154 210 97,254 (213) -- (24,264) 73,141
Net loss.................. (34,992) -- -- -- -- -- -- -- (34,992) (34,992)
Translation adjustment.... 668 -- -- -- -- -- 668 -- -- 668
Total Comprehensive Loss.... (34,324)
========
Class B Stock Converted to
Class A Stock.......... 1,503 (1,503) 15 (15) -- -- -- -- --
Options Exercised......... 11 -- -- -- 108 -- -- -- 108
Shares sold under Employee
Stock Purchase Plan.... 42 -- -- -- 199 -- -- -- 199
Balance, March 31, 1999..... 16,928 19,528 169 195 97,561 455 -- (59,256) 39,124
Net loss.................. (8,182) -- -- -- -- -- -- -- (8,182) (8,182)
Translation adjustment.... (271) -- -- -- -- -- (271) -- -- (271)
Total Comprehensive Loss.... $(42,777)
========
Class B Stock Converted to
Class A Stock.......... 477 (477) 5 (5) -- -- -- -- --
Issuance of Class A Common
Stock and Issuance of stock options
for acquistion......... 20,196 -- 202 -- 227,564 -- -- -- 227,766
Options Exercised including tax benefit 551 -- 6 -- 7,385 -- -- -- 7,391
Warrants issued with
Subordinated debentures.. -- -- -- -- 1,838 -- -- -- 1,838
Conversion of Subordinated
Debentures and accrued interest, net
of related debt issuance costs of
$639 and debt discount of $1,169 2,014 -- 20 -- 11,002 -- -- -- 11,022
Shares sold under Employee
Stock Purchase Plan.... 13 -- -- -- 135 -- -- 136
Deferred Compensation....... -- -- -- -- -- -- 840 -- 840
Balance, March 31, 2000..... 40,179 19,051 $ 402 $ 190 $345,485 $ 184 $ 840 $ (67,438) $279,663
The accompanying notes are an integral part of these Consolidated
Financial Statements.
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended March 31,
-------------------------------
1998 1999 2000
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net loss.................................................................... $(13,971) $(34,992) $(8,182)
Reconciliation of net loss to net cash used in
operating activities:
Depreciation and amortization.......................................... 6,953 7,022 8,439
Stock awards........................................................... 73 - -
Deferred taxes......................................................... (4,714) - (7,222)
Gain on liquidation of Westell Europe Ltd.............................. - - (426)
Accrued interest expense on debentures converted..................... - - 110
Deferred compensation................................................. - - 840
Change in assets and liabilities:
Increase in accounts receivable.......................................... (324) (1,441) (16,811)
Decrease (increase) in inventories....................................... 980 (552) (7,271)
Decrease (increase) in prepaid expenses and other current assets......... 1,077 (1,008) 113
Decrease (increase) in refundable income taxes........................... 210 50 (15)
Increase in accounts payable and accrued expenses....................... 2,939 984 7,890
Increase (decrease) in accrued compensation.............................. 2,531 (1,359) 277
-------- -------- -------
Net cash used in operating activities............................... (4,246) (31,296) (22,258)
-------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment......................................... (5,802) (5,985) (11,434)
Proceeds from sale of equipment............................................. - - 432
(Increase) decrease in other assets......................................... (78) 16 (8)
Decrease in short-term investments.......................................... 10,166 684 -
Cash acquired in acquistion................................................. - - 29,805
Sale of land and building held for sale..................................... 16,203 - -
-------- -------- -------
Net cash provided by (used in) investing activities................. 20,489 (5,285) 18,795
-------- -------- -------
Cash flows from financing activities:
Repayment of long-term debt and leases payable.............................. (2,067) (506) (2,064)
Proceeds from issuance of convertible debt.................................. - - 18,542
Proceeds from issuance of Common Stock including tax benefit on options..... 896 307 7,526
-------- -------- -------
Net cash (used in) provided by financing activities................. (1,171) (199) 24,004
-------- -------- -------
Effect of exchange rate changes on cash....................................... 6 (20) 2
Net increase (decrease) in cash and cash equivalents................ 15,078 (36,800) 20,543
Cash and cash equivalents, beginning of period................................ 28,437 43,515 6,715
-------- -------- -------
Cash and cash equivalents, end of period...................................... $ 43,515 $ 6,715 $ 27,258
========== ======== ========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business
Westell Technologies, Inc. (the "Company") is a holding company. Its
wholly owned subsidiaries, Westell, Inc. and Teltrend Inc., design, manufacture
and distribute telecommunications equipment which is sold primarily to major
telephone companies. Teltrend Inc. was acquired on March 17, 2000. Conference
Plus, Inc., an 88.2%-owned subsidiary, provides teleconferencing , multipoint
video conferencing, broadcast fax and multimedia teleconferencing services to
various customers.
Business Acquisition
On March 17, 2000, the Company acquired 100% of the outstanding shares
of Teltrend Inc., a designer, manufacturer and marketer of transmission products
used by telephone companies to provide voice and data service over the telephone
network. Each outstanding share of Teltrend Inc. was converted into 3.3 shares
of the Company's class A common stock. Total consideration included the issuance
of 20,196,427 shares of class A common shares valued at $213,575,312 and
$10,475,940 in transaction costs. The Company also assumed 605,000 options to
purchase Teltrend common stock and converted such options to Company options to
purchase approximately 2.0 million shares of class A common stock, which are
included in the stock option activity table illustrated in Note 8. The exercise
prices of the options assumed range from $3.7121 to $15.5303 and have an average
exercise price of $5.6989. The fair value of the options assumed was $14,190,621
and is included in the purchase price and as a component of stockholders equity
in the consolidated financial statements. The fair value of the options assumed
was estimated using the Black-Scholes option pricing model.
The acquisition was accounted for as a purchase and, accordingly, the
acquired assets and assumed liabilities have been recorded at their estimated
fair market values at the date of the acquisition. The results of operations
have been included in the consolidated financial statements since the date of
acquisition. The estimated fair market values of certain assets are based upon
preliminary appraisal reports. The purchase price of approximately $238,241,873
exceeded the fair market value of net assets acquired, resulting in goodwill of
$64,207,801 and synergistic goodwill of $57,000,000 which will be amortized on a
straight-line basis over an average of approximately ten years.
In connection with the acquisition of Teltrend, the Company will
involuntarily terminate certain employees of Teltrend and recorded approximately
$2.4 million in severance benefits which is included in the $10,475,940
transaction costs described above. See Note 10 for further discussion.
The following unaudited pro forma consolidated results of operations
data (in thousands, except per share data) assumes the business acquisition
described above occurred on April 1, 1998. The pro forma results below are based
on historical results of operations including adjustments for interest,
depreciation and amortization and do not necessarily reflect actual results that
would have occurred.
March 31, March 31,
1999 2000
----------- -------
Revenue $201,214 $215,367
Net income (56,230) (30,676)
Earnings per share (.99) (.50)
Principals of Consolidation
The accompanying Consolidated Financial Statements include the accounts
of the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash, certificates of
deposit, time deposits, commercial paper, short-term government obligations and
other money market instruments. The Company invests its excess cash in deposits
with major financial institutions, in government securities and the highest
grade commercial paper of companies from a variety of industries. These
securities have original maturity dates not exceeding three months. Such
investments are stated at cost, which approximates fair value, and are
considered cash equivalents for purposes of reporting cash flows.
Short-Term Investments
Short-term investments generally consist of certificates of deposit,
time deposits, commercial paper and short-term government obligations. These
securities have original maturity dates exceeding three months and less than one
year. Such investments are stated at cost, which approximates fair value.
Inventories
Inventories are stated at the lower of first-in, first-out (FIFO) cost
or market. The components of inventories are as follows:
March 31,
---------
1999 2000
---- ----
(in thousands)
Raw materials.................................... $ 4,631 $ 19,248
Work in process.................................. 328 1,934
Finished goods................................... 8,109 13,707
Reserve for excess and obsolete inventory........ (2,692) (4,148)
-------- --------
$10,376 $30,741
======= =======
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
over the estimated useful lives of the assets which range from 2 to 10 years
using the straight-line method for financial reporting purposes and accelerated
methods for tax purposes. Leasehold improvements are amortized over the lives of
the respective leases, or the useful life of the asset, whichever is shorter.
Goodwill and Intangibles
Intangible assets include goodwill, synergistic goodwill and product
technology related to the Teltrend acquisition. Intangible assets are being
amortized on a straight-line basis over their estimated useful lives. At March
31, 2000, the cost basis and useful lives of intangible assets consist of the
following:
Cost Basis Life
---------- ----
(in thousands)
Goodwill $64,208 15 years
Synergistic goodwill 57,000 5 years
Product technology 55,600 2-7 years
------------
Total 176,808
Less -- accumulated amortization (1,326)
------------
Net $175,482
============
On an ongoing basis, the Company reviews intangible assets and other long-lived
assets for impairment whenever events and circumstance indicate that carrying
amount may not be recoverable. To date, no such events or changes in
circumstance have occurred. If such events or changes in circumstances occur,
the Company will recognize an impairment loss if the undiscounted future cash
flows expected to be generated by the asset (or acquired business) are less than
the carrying value of the related asset. The impairment loss would adjust the
asset to its fair value.
Revenue Recognition
Revenue is generally recognized upon shipment of product. On certain
sales contracts, revenue is not recognized until specific customer product
acceptance terms have been met.
The Company's product return policy allows customers to return unused
equipment for partial credit if the equipment is currently being manufactured.
Credit is not offered on returned products that are no longer manufactured.
Effective April 1, 1999, in an effort to associate the transfer of
title of forward priced DSL products to the customer with the recognition of the
loss, the Company began recording losses due to forward pricing upon shipment to
the customer. Prior to March 31, 1999, the Company recorded losses due to
forward pricing of DSL products based upon orders received. As of April 1, 1999,
the Company did not record any cumulative effect of this change in accounting
method, as the effects were immaterial. As of March 31, 2000 the Company has not
committed to any binding purchases from customers priced below production costs.
Product Warranties
Most of the Company's products carry a limited warranty ranging from
one to seven years. The Company accrues for estimated warranty costs as products
are shipped.
Deferred Revenue
Deferred revenue represents prepayments for goods or services.
Research and Development Costs
Engineering and product development costs are charged to expense as
incurred.
Supplemental Cash Flow Disclosures
The following represents supplemental disclosures to the consolidated
statements of cash flows:
March 31,
----------------------------
1998 1999 2000
---- ---- ----
(in thousands)
Schedule of noncash investing and financing activities:
Property purchased under equipment notes............................ $-- $900 $ --
Warrants issued with subordinated debentures........................ -- -- 1,838
Conversion of subordinated debentures and accrued interest, net of
related debt issuance costs of $639 and debt discount of $1,169.. 11,022
Acquisition of Teltrend, Inc.
Fair value of assets acquired ................................... $ -- $ -- $252,132
Liabilities assumed.............................................. -- -- (24,366)
Common stock issued and options assumed.......................... -- -- (227,766)
Cash paid (received) for:
Interest............................................................ $ 516 $ 236 $ 1,207
Income taxes........................................................ (633) 5 29
Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument held by the Company:
Cash and cash equivalents, short-term investments, trade
receivables and trade payables: the carrying amounts approximate fair
value because of the short maturity of these items.
Revolving promissory notes and installment notes payable to a
bank: due to the floating interest rate on these obligations, the
carrying amounts approximate fair value.
Convertible debentures: the carrying amount and the fair value
of the convertible debentures at March 31, 2000 were $6.6 million and
$37.1 million, respectively. The fair value was calculated using the
closing price of the Company's class A common stock on March 31,2000.
During April 2000, substantially all of the remaining convertible
debentures were converted into shares of class A common stock. See Note
4.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and revenue and expenses during the period reported.
Actual results could differ from those estimates. Estimates are used when
accounting for allowance for uncollectible accounts receivable, inventory
obsolescence, product warranty, depreciation, employee benefit plans, taxes, and
contingencies, among other things.
Foreign Currency Translation
The financial position and the results of operations of the Company's
foreign subsidiary are measured using local currency as the functional currency.
Assets and liabilities of this subsidiary are translated at the exchange rate in
effect at the end of each period. Income statement accounts are translated at
the average rate of exchange prevailing during the period. Translation
adjustments arising from differences in exchange rates from period to period are
included in the foreign currency translation adjustments account in
stockholders' equity. Gains and losses attributable to intercompany foreign
accounts anticipated by management to be settled in the foreseeable future have
been included with foreign currency transaction gains or losses in other income.
The Company records transaction gains or losses within Other income
(expense) for fluctuations on foreign currency rates on accounts receivable and
cash and for fluctuations on foreign currency rates on intercompany accounts
anticipated by management to be settled in the foreseeable future.
Computation of Net Loss Per Share
The Company follows the provisions of Financial Accounting Standards
Board ("FASB") issued SFAS No. 128 which requires the company to present basic
and diluted earnings per share. The computation of basic earnings per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted earnings per share includes the number of additional common
shares that would have been outstanding if the dilutive potential common shares
had been issued. The effect of this computation on the number of outstanding
shares is antidilutive for the periods ended March 31, 1998, 1999 and 2000, and
therefore the net loss per basic and diluted earnings per share are the same.
New Accounting Pronouncements:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivation
Instruments and Hedging Activities", which addresses the accounting for
derivative instruments. SFAS No. 133 is effective for financial statements for
the Company's fiscal year ended March 31, 2001. The Company does not expect that
SFAS No. 133 will have a significant effect on its current financial reporting.
NOTE 2. REVOLVING PROMISSORY NOTES:
During fiscal 1999 the company had secured a revolving promissory note
and an equipment borrowing facility. The revolver enables the Company to borrow
up to $16.0 million as of March 31, 1999 and 2000 and is due on demand. The
revolver bears interest at the bank's prime rate (9.0% at March 31, 2000) or
Libor rate plus 2.5%, and is secured by substantially all of the assets of the
Company. The equipment borrowing facility allows the Company to borrow up to
$5.0 million and $4.1 million as of March 31, 1999 and 2000, respectively.
The Company had borrowings outstanding of $500,000 under the revolving
notes as of March 31, 1999, and had no borrowings outstanding as of March 31,
2000. Borrowings under equipment borrowing facilities totaled $3.3 million and
$2.8 million at March 31, 1999 and 2000, respectively, and are included as
installment notes payable described in Note 3.
Both borrowing facilities require the maintenance of a minimum cash to
current maturity ratio, a current ratio and a maximum debt to net worth ratio.
The Company was in compliance with all such covenants as of March 31, 1999 and
2000.
Borrowings under the revolving promissory notes facility were limited
to 80% of eligible accounts receivable and 40% of eligible inventory. The
Company was eligible to borrow all of the available revolving promissory note
facility as of March 31, 2000.
NOTE 3. LONG-TERM DEBT:
Long-term debt consists of the following:
March 31,
1999 2000
---- ----
(in thousands)
Revolving Promissory note payable to a bank, interest at prime, secured by
substantially all assets of the Company, due through August 1999............. $ 500 $ --
Equipment Promissory note payable to a bank, interest at prime, secured by
certain assets of the Company, due through August 2002...................... 900 --
Capitalized lease obligations secured by related equipment....................... 81 --
Installment notes payable to a bank, interest LIBOR +2.5% on March 31, 1999
and 2000, secured by substantially all assets of the Company, due through 2002 3,333 2,750
-------- --------
4,814 2,750
Less current portion............................................................. (2,189) (1,633)
-------- --------
$2,625 $1,117
====== ======
Future maturities of long-term debt at March 31, 2000 are as follows
(in thousands):
2001............................................................................. $1,633
2002............................................................................. 1,117
-----
$2,750
======
NOTE 4. CONVERTIBLE DEBENTURES AND WARRANTS:
In April 1999, the Company completed a subordinated secured convertible
debenture private placement totaling $20 million. The conversion price of the
debentures is the lower of (a) a periodically reset fixed price, which is
initially $6.372 per share and which will reset on April 16, 2000 and April 16,
2001 to the ten day average market price then in effect (provided that the fixed
price may not be less than $4.4604 or greater than $6.372 per share), and (b)
the floating market price of our Class A Common Stock at time of conversion
(except that the floating market price may only be imposed under specific
conditions set forth in the securities purchase agreement under which the
debentures were sold). The reset fixed price can not fall below $4.4604. In
addition, under the terms of the debentures, additional shares are issuable due
to anti-dilution price protection provisions and/or if the Company enters into
certain major transactions (such as the sale of substantially all of our assets,
a merger or a change in actual voting control).
In connection with the financing, the Company issued five-year warrants
for approximately 909,000 shares of Class A Common stock at an exercise price
equal to $8.921 per share, which is approximately 140% of the initial conversion
price of the debentures and were determined to have a fair market value of $1
million. Subsequently, in December 1999, the Company repriced the warrants from
$8.921 to $5.92 per share and, due to this debt modification, increased the
value of the warrants by approximately $838,000. The total value of the
warrants, approximately $1.8 million, was recorded as a debt discount in the
accompanying March 31, 2000 consolidated balance sheet and is being amortized
over the life of the convertible debentures of five years.
As of March 31, 2000, holders of these debentures converted an
aggregate principal amount of $12,720,000 and the accrued interest thereon of
approximately $110,000 into 2,013,548 Class A common shares at a conversion
price of $6.372 per shares. The amount converted to equity is net of a pro rata
portion of the total debt discount and debt issuance costs in the amounts of
$1,168,788 and $639,279, respectively.
During April 2000, under the terms of the Company's convertible
debentures, the debenture holders converted an additional $6,280,000 principle
amount of convertible debentures into 1,003,375 class A common shares at a
conversion price of $6.372 per share.
NOTE 5. INCOME TAXES:
The Company follows the provisions of SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 utilizes the liability method and deferred taxes are
determined based on the differences between the financial statements and tax
basis of assets and liabilities given the provisions of the enacted tax laws.
The income tax benefits charged to net income are summarized as follows:
Fiscal Year Ended March 31,
-----------------------------
1998 1999 2000
---- ---- ----
(in thousands)
Federal:
Current.......................... $ (374) $ -- $(284)
Deferred......................... (4,098) -- (2,866)
------- ----------- --------
(4,472) -- (3,150)
------- ----------- -------
State:
Current.......................... (49) -- (40)
Deferred......................... (616) -- (410)
----- ----------- ------
(665) -- (450)
----- ----------- ------
Total......................... $(5,137) $ -- $ (3,600)
======== =========== =========
The Company utilizes the flow-through method to account for tax
credits. In fiscal 1998, 1999 and 2000, the Company generated approximately
$700,000, $750,000 and $662,000, respectively, of tax credits.
The statutory federal income tax rate is reconciled to the Company's
effective income tax rates below:
Fiscal Year Ended March 31,
---------------------------
1998 1999 2000
---- ---- ----
Statutory federal income tax rate................... (34.0)% (34.0)% (34.0)%
Meals and entertainment............................. 1.6 0.7 0.6
State income tax, net of federal tax effect......... (4.9) (4.9) (4.9)
Income tax credits recognized....................... (3.7) (2.1) (4.2)
Valuation allowance................................. 15.2 40.5 7.6
Goodwill amortization............................... - - 4.2
Other............................................... (1.1) (0.2) 0.1
------- --------- ----
(26.9)% 0.0% (30.6)%
========= ========= ==========
Components of the net deferred income tax asset are as follows:
March 31,
---------
1999 2000
---- ----
(in thousands)
Deferred income tax assets:
Allowance for doubtful accounts.................. $ 259 $ 226
Alternative minimum tax credit................... 446 605
Research and development credit carryforward..... 3,918 4,580
Capital loss carryforward........................ - 2,345
Compensation accruals............................ 320 562
Inventory reserves............................... 1,101 2,092
Warranty reserve................................. 532 1,077
Net operating loss carryforward.................. 27,276 30,544
Property and equipment........................... 430 322
Group Insurance.................................. 151 462
Non-employee stock options....................... - 326
Other............................................ (660) 1,154
-------- --------
33,773 44,295
Valuation allowance............................. 15,200) (18,500)
------- --------
Net deferred income tax asset................. $18,573 $25,795
======= =======
Realization of deferred tax assets associated with the Company's future
deductible temporary differences, net operating loss carryforwards and tax
credit carryforwards is dependent upon generating sufficient taxable income
prior to their expiration. Although realization of the deferred tax asset is not
assured and the Company has incurred operating losses for the 1998, 1999 and
2000 fiscal years, management believes that it is more likely than not that it
will generate taxable income sufficient to realize the portion of the tax
benefit associated with future temporary differences, NOL carryforwards and tax
credit carryforwards prior to their expiration through a tax planning strategy
available to the Company. At March 31, 1998, management determined that the
strategy was no longer sufficient to realize all of the deferred tax asset and
as such the Company recorded a valuation allowance of $2.9 million and recorded
an additional allowance of $12.3 million in 1999. At March 31, 2000 management
re-assessed the valuation of the Company's deferred tax asset and determined
that the tax planning strategy was sufficient to support the realization of the
net deferred income tax asset. On a quarterly basis, management will assess
whether it remains more likely than not that the deferred tax asset will be
realized. If the tax planning strategy is not sufficient to generate taxable
income to recover the deferred tax benefit recorded, an increase in the
valuation allowance will be required through a charge to the income tax
provision. However, if the Company achieves sufficient profitability or has
available additional tax planning strategies to utilize a greater portion of the
deferred tax asset, an a reduction in the valuation allowance will be recorded.
The Company has approximately $7.5 million in income tax credit
carryforwards and a tax benefit of $30.5 million related to a net operating loss
carryforward that is available to offset taxable income in the future. The tax
credit carryforwards begin to expire in 2008 and the net operating loss
carryforward begins to expire in 2012.
NOTE 6. COMMITMENTS:
In September 1995, the Company entered into an agreement to form a
limited liability company, Westell-Meridian LLC ("LLC"), for the purpose of
developing a 16.4 acre site in Aurora, Illinois into a 185,000 square foot
corporate facility to house manufacturing, engineering, sales, marketing and
administration. In connection therewith, the Company has a majority equity
ownership interest in the LLC. In December 1996, the Company
began occupying the constructed facility owned by the LLC (the "Aurora
facility"). During the construction period, the Company advanced the LLC the
construction funding which as of March 31, 1997, was $14.4 million. In fiscal
1998 the LLC received proceeds of $16.2 million upon the sale of the Aurora
facility at cost. The LLC repaid the Company the advanced construction funding
during the second quarter of fiscal 1998 upon completing the sale of the Aurora
facility to a third party. The Aurora facility was leased back in a related
transaction with the same third party, whereby, the Company entered into a 20
year lease that runs through 2017.
The Company also has lease commitments to lease other office facilities
at various locations. All of the leases require the Company to pay utilities,
insurance and real estate taxes on the facilities.
Total minimum future rental payments at March 31, 2000 are as follows (in
thousands):
2001............................................... $4,538
2002............................................... 3,500
2003............................................... 2,746
2004............................................... 2,701
2005............................................... 2,736
Thereafter......................................... 28,026
---------
$44,247
=======
NOTE 7. CAPITAL STOCK AND STOCK RESTRICTION AGREEMENTS:
Capital Stock Activity:
On March 24, 1998, the Company filed a 14(c) information statement to
amend the Company's Amended and Restated Certificate of Incorporation to
increase the number of shares of Class A Common Stock authorized for issuance
from 43,500,000 to 65,500,000. In the same filing the Company amended the
Westell Technologies, Inc. 1995 Stock Incentive Plan to increase the number of
shares of Class A Common Stock available for grant thereunder by 5,000,000
shares of Class A Common Stock. This was adopted through a consent of the
majority shareholder on April 20, 1998.
On March 16, 2000 at a special meeting of stockholder, the stockholders
approved an amendment to the Company's Amended and Restated Certificate of
Incorporation to increase the number of class A Common Stock authorized for
issuance from 65,500,000 to 85,000,000 and approved the issuance of shares of
Class A Common Stock pursuant to the merger with Teltrend.
The Board of Directors has the authority to issue the newly authorized
Preferred Stock up to 1,000,000 shares in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designation of such series, without any further vote or action by
stockholders.
Prior to the Company's initial public offering in November 1995,
restricted common shares were granted to certain employees. The number of
restricted shares vested in 1998 for these stock awards was 1,706,894 shares.
The Company valued the stock awards at the approximate date of the grants.
Compensation expense of $48,000 was recognized in fiscal 1998 based on the fair
market value of the shares granted. The shares were fully vested as of March 31,
1998, therefore there was no vesting or compensation expense for fiscal 1999 and
2000.
Stock Restriction Agreements:
The members of the Penny family (major stockholders) have a Stock
Transfer Restriction Agreement which prohibits, with limited exceptions, such
members from transferring their Common Stock acquired prior to November 30,
1995, without first offering such stock to the other members of the Penny
family. A total of 18,598,122 shares of Common Stock are subject to this Stock
Transfer Restriction Agreement.
NOTE 8. EMPLOYEE BENEFIT PLANS:
401(k) Benefit Plan:
The Company sponsors a 401(k) benefit plan (the "Plan") which covers
substantially all of its employees. The Plan is a salary reduction plan which
allows employees to defer up to 15% of wages subject to Internal Revenue Service
allowed limits. The Plan also allows for Company discretionary contributions.
The Company provided for discretionary and matching contributions to the Plan
totaling approximately $208,000, $395,000 and $501,000 for fiscal 1998, 1999 and
2000, respectively.
Employee Stock Purchase Plan:
The Company maintains a stock purchase plan that allows participating
employees to purchase, through payroll deductions, shares of the Company's Class
A Common Stock for 85% of the average of the high and low reported sales prices
at specified dates. Under the stock purchase plan, 217,950 shares are
authorized. As of March 31, 1998, 1999 and 2000 there were 182,068, 139,936 and
126,512 shares, respectively, available for future issuance.
Employee Stock Incentive Plan:
In October 1995, the Company adopted a stock incentive plan (SIP plan)
that permits the issuance of Class A Common Stock, restricted shares of Class A
Common Stock, nonqualified stock options and incentive stock options to purchase
Class A Common Stock, performance awards and stock appreciation rights to
selected employees, officers, non-employee directors of the Company. During
fiscal 2000, the SIP plan was amended to allow the issuance of stock options to
advisory board members and consultants. The Company issued 1,561 shares for
stock awards under this plan in fiscal 1998. Compensation expense of $25,000 was
recognized in fiscal 1998 for the stock awards granted. No stock awards were
issued in fiscal 1999 or 2000.
During March 2000, as part of the Teltrend merger (see Note 1), the
Company adopted the following three stock options plans (collectively the "three
adopted option plans"): Teltrend Inc. 1995 Stock Option Plan (the "1995 Stock
Option Plan"), Teltrend Inc. 1996 Stock Option Plan ( the "1996 Stock Option
Plan"), and Teltrend Inc. 1997 Non-Employee Director Stock Option Plan ( the
"1997 Director Option Plan"). Under both the 1995 and 1996 Stock Option Plans
nonqualified stock options were granted to key employees. Nonqualified stock
options were granted to Non-Employee Directors under the 1997 Director Option
Plan.
Under the Company's Stock Incentive Plan, the 1995 Stock Option Plan,
the 1996 Stock Option Plan, and the 1997 Director Option Plan ("all stock
plans"), 13,000,000 shares were authorized and there were 6,509,482 shares
available for further issuance at March 31, 2000. The stock option activity
under all stock plans is as follows:
Outstanding Weighted Average
Options Exercise Price
------- --------------
Outstanding at March 31, 1997......... 1,107,650 $ 9.45
Granted..................... 2,079,450 14.55
Exercised................... (63,480) 10.25
Expired..................... -- --
Canceled.................... (458,200) 12.29
----------- ---------
Outstanding at March 31, 1998......... 2,665,420 12.92
Granted..................... 3,068,876 7.12
Exercised................... (11,330) 9.53
Expired..................... -- --
Canceled.................... (3,079,520) 12.43
------------ ---------
Outstanding at March 31, 1999......... 2,643,446 6.69
Granted..................... 4,287,827 7.11
Exercised................... (551,041) 6.07
Expired..................... -- --
Canceled.................... (543,020) 5.49
----------- --------
Outstanding at March 31, 2000......... 5,837,212 $ 7.17
The exercise price of the stock options granted is generally
established at the market price on the date of the grant. On August 6, 1998,
nonqualified stock options issued to non-board members prior to August 6, 1998
were cancelled and reissued at the then current market price of $6.219. The
Company has reserved Class A Common Stock for issuance upon exercise of these
options granted.
As part of the Teltrend merger on March 17, 2000, the vested options
under the three adopted option plans were exchanged at a ratio of 3.3 shares of
Westell common stock for each share of Teltrend common stock and the option
strike price was adjusted by that same ratio. These options are included in the
granted totals above for the year ended March 31,2000.
During fiscal 2000, the Company granted 30,000 stock options to
non-employee advisory board members. Compensation expense of $840,000 was
recognized for the issuance of these non-employee stock options under Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" FAS 123.
The Company accounts for employee stock options under APB Opinion 25,
as permitted under generally accepted accounting principles. Accordingly, no
compensation cost has been recognized in the accompanying financial statements
related to options granted to "employees" as defined in APB Opinion 25. Had
compensation cost for these options been determined consistent with ("SFAS
123"), which is an accounting alternative that is permitted but not required,
the Company's net loss and net loss per share would have been $(17,742,000),
$(44,349,000) and $(13,530,000) and $(0.49), $(1.22) and $(.36) for fiscal 1998,
1999 and 2000, respectively.
The following table summarizes information about all stock options outstanding
as of March 31, 2000:
Options Outstanding Options Exercisable
------------------- -------------------
Range of Number Weighted- Number Weighted
Exercise Outstanding at Remaining Average Exercisable at Average
Prices 3/31/00 Life Exercise Price 3/31/00 Exercise Price
------------ -------------------------------------- -------------- ------------------- --------------
$3.71 - $4.00 1,314,000 9.01 yrs $ 4.00 57,250 $ 3.96
4.73 - 6.16 1,220,842 7.19 yrs 5.14 1,220,311 5.15
6.22 - 6.22 1,734,210 7.25 yrs 6.22 687,172 6.22
6.36 - 8.00 944,010 9.13 yrs 6.77 655,090 6.77
8.52 - 36.18 624,150 9.03 yrs 21.03 73,500 19.15
----------- ---------- ---------- --------- ----------
$3.71 - 36.18 5,837,212 8.13 yrs $ 7.17 2,693,323 $ 6.18
The fair value of each option is estimated on the date of grant based
on the Black-Scholes option pricing model, with the exception of the options
assumed in the acquisition which are described in Note 1. The estimate assumes,
among other things, a risk-free interest rate of 6.5% and no dividend yield;
expected volatility of 73% and an expected life of 7 years. A majority of the
options granted to employees in fiscal 1998 and 1999 vest ratably over five
years. Options granted in fiscal 2000 related to the Teltrend merger were fully
vested due to the change in control provision in the three adopted plans. A
majority of the remaining options granted to employees in fiscal 2000 vest
ratably over two - five years. Certain options vest upon the earlier of the
achievement of individual goals established or 8 years. The weighted average
fair value of the options granted during the years ended March 31, 1998, 1999
and 2000 were $9.70, $4.72 and $5.52, respectively.
NOTE 9. SEGMENT AND RELATED INFORMATION:
Operating Segments:
-------------------
Westell's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and market strategy. They consist of:
1) A telecommunications equipment manufacturer of local loop access
products, and
2) A multi-point telecommunications service bureau specializing in
audio teleconferencing, multi-point video conferencing, broadcast
fax and multimedia teleconference services.
Performance of these segments is evaluated utilizing, revenue,
operating income and total asset measurements. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. Segment information for the fiscal years ended March 31,
are as follows:
Telecom Telecom Consolidated
Equipment Services Total
--------- -------- -----
1998
Revenues................................. $ 72,206 $ 14,145 $ 86,351
Operating income (loss).................. (36,522) 3,626 (32,896)
Depreciation and amortization............ 5,641 1,312 6,953
Total assets............................. 90,509 7,896 98,405
1999
Revenues................................. 71,863 21,317 93,180
Operating income (loss).................. (38,554) 3,454 (35,100)
Depreciation and amortization............ 5,327 1,695 7,022
Total assets............................. 52,774 11,633 64,407
2000
Revenues................................. 89,655 32,378 122,033
Operating income (loss).................. (16,264) 5,282 (10,982)
Depreciation and amortization............ 6,085 2,354 8,439
Total assets............................. 321,921 20,649 342,570
Reconciliation of Operating loss from continuing operations for the reportable
segments to Loss from continuing operations before income taxes:
Fiscal Year Ended March 31,
------------------------------
1998 1999 2000
---- ---- ----
Operating loss from continuing operations................. $ (32,896) $ (35,100) $ (10,982)
Other income, net......................................... 14,290 404 1,056
Interest expense.......................................... 502 296 1,856
-------- -------- -------
Loss from continuing operations before income taxes....... $ (19,108) $ (34,992) $ (11,782)
======== ======== ==========
Enterprise-wide Information:
----------------------------
The Company's revenues are primarily generated in the United States.
More than 90% of all revenues were generated in the United States for each
period presented.
Significant Customers and Concentration of Credit:
The Company is dependent on certain major telephone companies that
represent more than 10% of the total revenue. Sales to major customers that
exceed 10% of total revenue are as follows:
Fiscal Year Ended
March 31,
-------------------------
1998 1999 2000
---- ---- ----
Customer A.......................... 17.7% 16.2% 19.2%
Customer B.......................... 9.0 10.7 9.5
Customer C.......................... 7.2 7.7 14.7
Major telephone companies comprise a significant portion of the
Company's trade receivables. Receivables from major customers that exceed 10% of
total accounts receivable balance are as follows:
Fiscal Year Ended
March 31,
---------
1999 2000
---- ----
Customer X........................ 14.1% 20.6%
Customer Y........................ 8.7 18.7
Geographic Information
The Company's financial information by geographic area was as follows
for the years ended March 31:
Domestic International Total
-------- ------------- -----
(in thousands)
1998
Revenue................................................ $ 77,802 $ 8,549 $ 86,351
Operating loss from continuing operations.............. (23,968) (9,928) (32,896)
Identifiable assets.................................... 95,849 2,556 98,405
1999
Revenue................................................ $ 84,709 $ 8,471 $ 93,180
Operating loss from continuing operations.............. (26,208) (8,892) (35,100)
Identifiable assets.................................... 60,691 3,716 64,407
2000
Revenue................................................ $ 111,164 $ 10,869 $ 122,033
Operating loss from continuing operations.............. (8,917) (739) (9,656)
Identifiable assets.................................... 334,907 7,663 342,570
International identifiable assets for fiscal year 1998 and 1999 are related to
Westell Europe, Ltd. which was sold during fiscal year 2000 and was located in
the United Kingdom. International identifiable assets for fiscal year 2000 are
related to Westell Ltd. (formerly Teltrend Ltd.) which was acquired as part of
the acquisition of Teltrend, Inc. and is located in the United Kingdom and
Conference Plus Global Services, Ltd., which is located in Dublin Ireland.
NOTE 10. RESTRUCTURING CHARGE:
The Company recognized restructuring charges of $1.4 million in the three months
ended December 31, 1997 and $800,000 in the three months ended March 31, 1999.
These charges included personnel, facility, and certain development contract
costs related to restructuring global operations. As of March 31, 2000, the
Company has paid $1.2 million and $839,000 of the restructuring costs charged in
fiscal 1998 and 1999, respectively. During the three months ending December 31,
1999, management determined that essentially all restructuring payments have
been completed for fiscal year 1998 and 1999 therefore the remaining
restructuring accrual balances for those periods of approximately $169,000 was
reversed into income.
The fiscal 1998 restructuring plan was to decrease costs and streamline
operations related to DSL products. The fiscal 1999 restructuring plan was to
further decrease costs, primarily by reducing the workforce by approximately
11%, and focusing DSL sales efforts on indirect sales to the major phone
companies through licensing and OEM arrangements with strategic partners.
The Company recognized a restructuring charge of $550,000 in the three
months ended March 31, 2000. This charge was for personnel, legal, and other
related costs to eliminate redundant employees due to the acquisition
of Teltrend, Inc. The restructuring plan was to combine and streamline the
operations of the two companies and to achieve synergies related to the
manufacture and distribution of common product lines. The Company estimates the
costs of these activities will be $2.9 million. Approximately $2.4 million of
the total cost has been capitalized as part of the purchase price of Teltrend
Inc primarily related to Teltrend Inc. employees involuntarily terminated. The
remaining cost of $550,000 has been charged to operations and relates to Westell
employees involuntarily terminated and other costs. As of March 31, 2000, none
of these costs have been paid.
The restructuring charges and their utilization are summarized as follows:
1998 1998 Accrued 1999 1999 Accrued at Teltrend 2000 2000 Accrued
(Dollars in Charged Utilized at Charged Utilized March 31 Inc. Charged Utilized at
thousands) March 31 1999 Involuntary March
1998 Termination 31 2000
- ---------------------- -------- -------- --------- -------- -------- ------------ ----------- --------- -------- ---------
Employee Costs............$561 $287 $274 $690 $363 $601 $ 2,356 $250 $547 $2,604
Contract Costs.............736 647 89 -- -- 89 -- -- --
Legal and Other Costs...... 86 23 63 110 19 154 300 130 300
Charge reversal -- -- -- -- -- -- -- 169 --
- ---------------------- -------- -------- --------- -------- -------- ------------ ----------- --------- -------- ---------
Total...................$1,383 $957 $426 $800 $382 $844 $ 2,356 $ 550 $846 $2,904
====================== ======== ======== ========= ======== ======== ============ =========== ========= ======== =========
NOTE 11. OTHER INCOME, NET:
In fiscal 2000, the Company recognized other income of $650,000
resulting from foreign currency gain from the liquidation of Westell Europe Ltd.
In fiscal 1998, the Company recognized other income of $12.0 million, net of
expenses, related to a one-time fee received from Texas Instruments for the
break-up of the proposed Westell/Amati merger. Excluding the effect of these one
time benefits, Other income, net would have been $2.3 million and $426,000 for
fiscal year ended March 31, 1998 and 2000 respectively. Excluding these one time
items, Other income, net for the years ended March 31, 1998, 1999 and 2000 was
primarily due to interest income earned on temporary cash investments made as a
result of investing available funds.
NOTE 12. RECLASSIFICATION OF ACCOUNTS:
Certain 1998 and 1999 amounts have been reclassified in order to
conform to the current-year presentation.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Westell Technologies, Inc.
We have audited, in accordance with generally accepted auditing
standards, the financial statements of Westell Technologies, Inc. and its
Subsidiaries included in this Annual Report on Form 10-K and have issued our
report thereon dated May 10, 2000. Our audit was made for the purpose of forming
an opinion on the basic financial statements taken as a whole. Schedule II,
Valuation and Qualifying Accounts, included herein is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
May 10, 2000
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE ALLOWANCES
(IN THOUSANDS)
1998 1999 2000
---- ---- ----
Balance at beginning of year.................................................. $521 $730 $703
Transfer from acquired company................................................ -- -- 273
Provision for doubtful accounts............................................... 371 168 223
Provision for discounts, allowances and rebates............................... -- -- --
Write-offs of doubtful accounts, net of recoveries............................ (162) (195) (344)
Discounts, allowances and rebates taken....................................... -- -- --
Balance at end of year........................................................ $730 $703 $855
==== ==== ====
RESTRUCTURING RESERVES
(IN THOUSANDS)
1998 1999 2000
---- ---- ----
Balance at beginning of year.................................................. $ -- $426 $844
Purchase price adjustment..................................................... -- -- 2,356
Charges to Operating expenses................................................. 1,400 800 550
Restructuring costs paid...................................................... (974) (382) (677)
Charge reversal............................................................... -- -- (169)
Balance at end of year........................................................ $426 $844 $2,904
==== ==== ======