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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 [Fee Required] for the fiscal year ended March 31, 1997 or
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] 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 (section229.405 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 24, 1997 (based upon an estimate that 35.7%
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 $295,677,786. 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 24, 1997, 15,074,811 shares of the registrant's Class A Common
Stock were outstanding and 21,245,913 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 1997 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 alternative Digital Subscriber Line
("DSL") technology, and other statements contained in this Annual Report on
Form 10-K for the fiscal year ended March 31, 1997 (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" beginning on page 31. 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
Since 1980, Westell has developed telecommunications products that
address the needs of telephone companies ("telcos") to upgrade their existing
network infrastructures continually in order to deliver advanced data and
voice services to their customers. The Company designs, manufactures, markets
and services a broad range of digital and analog products used by telcos to
deliver services primarily over existing copper telephone wires that connect
end users to a telco's central office (the "local access network"). The
Company also markets its products and services to other telecommunications
and information service providers seeking direct access to end-user
customers. The Company's principal customers include all seven Regional Bell
Operating Companies (the "RBOCs") as well as GTE. In addition, Westell sells
products to several other entities, including public telephone
administrations located outside the U.S., independent domestic local exchange
carriers, competitive access providers, interexchange carriers, internet
service providers and the U.S. federal government.
Westell is a leading worldwide innovator and developer of broadband
telecommunications access systems using an emerging technology known as
Asymmetric Digital Subscriber Line ("ADSL"). ADSL systems will allow telcos
and other local access providers to provide interactive multimedia services
over existing copper wire, thus offering a more cost-effective and faster
deployment alternative to fiber optic cable in the "last mile" of the local
access network. ADSL systems enable interactive multimedia services such as
advanced data applications, including high speed Internet access, local area
network ("LAN") extension, telecommuting and medical imaging, as well as
emerging video applications, including video-on-demand, distance learning,
video conferencing and work at home. Currently, over 100 domestic and
international customers, including Ameritech, Bell Atlantic, Bell Canada,
British Telecom, GTE, MCI, US West !nterprise Telecom Italia and leading
Internet service providers are conducting technical or marketing trials for
new interactive multimedia services that rely on the Company's ADSL systems.
These ADSL trials primarily began in 1995 and 1996, except for the Bell
Atlantic trial which commenced in 1993. Early trials focused on video
applications such as video on demand and distance learning. Currently the
focus is on more intense data applications such as high speed internet access
LAN extension and telecommuting. The Company is unable to predict the outcome
of such trials or when such trials will be completed. See "-- Marketing,
Sales and Distribution."
INDUSTRY OVERVIEW
Since the early 1980s, the telecommunications industry has experienced an
increased demand for the number of services provided to end users. Not only
has traditional telephone voice traffic increased, but the growth of personal
computers and modems has created significant data traffic from a wide variety
of services such as fax, e-mail and on-line access. For example, businesses
with multiple locations increasingly require geographically dispersed LANs to
be linked in sophisticated wide area networks ("WANs") that must handle large
volumes of telecommunications traffic. In addition, the Internet continues
to expand beyond its traditional data transmission and file-sharing functions
to offer e-mail, video and graphically rich content over the World Wide Web,
commercial services, transaction processing, independent bulletin boards, and
voice transmission. Business and residential based end-user demand for
telecommunications services is expected to continue to grow as telcos and
information service providers increase their offerings of new interactive
multimedia services, including data applications such as high speed Internet
access, LAN extension, medical imaging and telecommuting, and video
applications such as video-on-demand, distance learning, video conferencing
and work at home. To handle the growing volume of data communications traffic
and to provide faster and higher quality transmission, telcos and information
service providers have continually upgraded the capacity and speed of their
networks.
Deregulation. Deregulation of the telecommunications industry has
increased the number of competitors in the local access network and has
further accelerated telcos' needs to upgrade their networks and increase
their telecommunications service offerings. For example, alternative access
providers have deployed fiber and wireless systems for high volume data
transmission to business centers and other high density metropolitan areas.
As alternative access providers' costs decline and deregulation continues,
alternative access providers are likely to create additional competition for
telcos by developing new products and services for end users. Recent
deregulation also allows interexchange 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 Carrier or "CLEC." Cable operators are seeking to
compete with telcos in the delivery of high speed digital transmission as
well as traditional local telephone service. Currently available high speed
cable modems enable cable operators to provide data transmission services to
customers in addition to standard television services. In addition, this
trend toward continued deregulation of the telecommunications industry may
further decrease the current restrictions and regulations affecting telcos'
ability to provide nontraditional telco services such as video-on-demand.
Existing Telco Infrastructure. Traditionally, telcos have provided local
access services using analog technology, which does not have the bandwidth or
functionality to support the growing demand for new services over telephone
wires. In contrast, digital technology permits high speed, high volume and
more reliable data transmission by reducing all forms of images, sounds and
data to digital signals, thereby increasing the variety and bandwidth of
services that can be provided in the local access network. To handle the
growing demand for digital traffic, telcos have deployed broadband optical
fiber in their network "backbone" interconnecting their geographically
dispersed central offices. Telcos have also used fiber to interconnect their
central offices to high density telecommunications traffic areas. Deployment
of fiber in the local access network connecting end users to a telco's
central office, however, has proven labor intensive, complicated, time
consuming and expensive. Consequently, this "last mile" of the telco's
network still predominantly consists of low speed analog transmission over
copper wire.
Given the challenges of widespread replacement of copper wire in the
local access network, telcos have turned to systems 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 multiplexing format
known as T-1 (E-1 in most countries outside of the U.S.). T-1/E-1
transmission utilizes a data rate of 1.544 (2.048 outside the U.S.) Megabits
per second ("Mbps"), which can be aggregated or subdivided into channels to
deliver data communication services tailored to specific end-user
requirements.
Existing and Emerging Technologies. Systems suppliers have developed, and
are currently developing, numerous products that have increased the quality,
speed and cost-effectiveness of digital transmission over copper wire. These
products include:
ISDN. In the early 1980s, telcos introduced basic rate Integrated Service
Digital Network ("ISDN") technology, which provides digital transmission
at rates up to 144 Kilobits per second ("Kbps") as well as a means to
aggregate multiple channels into a single higher speed link over copper
wire. Telcos have only recently begun to deploy basic rate ISDN
technology widely with the emergence of nationwide standards and a
decline in costs for basic rate ISDN service. The market penetration of
existing basic rate ISDN technology, however, may be constrained due to
its limited bandwidth (which does not allow telcos to offer advanced
data and video services which are generally more bandwidth intensive),
its inability to provide existing telephone service over the same wire
and its relatively high installation costs. In addition, as a switched
service, ISDN deployment will place greater demands on central office
switches, thereby requiring telcos to increase their central office
switch capacity to maintain network reliability.
HDSL. In 1992, telcos introduced High bit-rate Digital Subscriber Line
("HDSL") technology, which reduces the costs of installing and upgrading
T-1/E-1 service. Traditional T-1/E-1 service requires the installation
of one or more mid-span repeaters for line lengths greater than 3,000
feet and the expensive and time consuming "conditioning" of copper wire.
HDSL increases the non-repeater distance of T-1/E-1 transmission
(1.544/2.048 Mbps) over two pairs of copper wires to approximately
12,000 feet, which reduces the need for repeaters and conditioning. As a
result, telcos are deploying HDSL technology in their local access
networks where the end user requires a high-speed symmetrical digital
communication stream and does not require a telephone channel to run on
the same wire.
ADSL. An emerging DSL technology known as Asymmetric Digital Subscriber
Line ("ADSL") permits even greater digital transmission capacity over
copper wire than is possible with existing HDSL and ISDN products. ADSL
technology allows the simultaneous transmission of data at speeds from
32 Kbps to 8.0 Mbps in one direction and from 32 Kpbs to 1 Mbps in the
reverse direction, while also providing standard analog telephone
service over a single pair of copper wires at distances of up to 18,000
feet, depending on the transmission rate. ADSL products enable telcos to
provide interactive multimedia services over copper wire, such as high
speed Internet access, video-on-demand, telemedicine, video conferencing
and telecommuting, while simultaneously carrying traditional telephone
services.
To increase utilization of broadband copper wire transmission,
manufacturers have introduced a new ADSL technology, Rate Adaptive DSL
("RADSL"). This new technology will automatically adjust the digital
transmission rate based upon the quality of the copper telephone wire
and the distance transmitted in order to maximize the digital capacity
of the wire and to facilitate the installation of ADSL systems.
Symmetric Digital Subscriber Line ("SDSL") technology is being offered
by configuring RADSL to a symmetrical service offering which, in
contrast to current HDSL and ISDN systems, can provide both a
symmetrical digital and an analog channel over a single pair of copper
wires.
A new ADSL technology called Very High Speed Digital Subscriber Line
("VDSL") is currently being developed that will increase both the
downstream and upstream data transmission capacity over copper wires to
up to 52.0 Mbps and 2.0 Mbps, respectively.
Digital Subscriber Line Access Multiplexer (DSLAM). As network service
providers begin deploying DSL based services, the need for DSL line
concentration at central sites arises. DSL access multiplexers, or
"DSLAMs," are ATM based multiplexers that consolidate multiple DSL
access lines into a higher speed line back to the switching network
(typically OC-3c, STM-1, DS-3 or E3 electrical interfaces), thereby
reducing costs and operational complexity at the central site.
THE WESTELL SOLUTION
Westell designs, manufactures and markets a broad range of
telecommunications products that provide its telco customers and other local
access providers with dependable, high quality transmission systems in the
local access network. The Company believes that its extensive experience in
the local access network strategically positions it to identify product
applications that will enhance existing telco services as well as expand
telco service offerings to end users. Westell is a leading provider of ADSL
systems, which allow telcos to provide high speed interactive multimedia
services over existing copper wire, thus offering a cost-effective
alternative to the deployment of fiber optic cable in the "last mile" of the
local access network. Westell's ADSL systems also enable telcos to use their
existing infrastructures to respond to competition from cable operators that
may offer these services using cable modems. The Company continues to develop
products aggressively based upon new technologies, such as RADSL, as well as
enhance its existing product offerings in the analog, digital and DSL
markets. In the last decade, Westell has introduced a number of intelligent
products that enable telcos to increase productivity and transmission quality
over their local access networks through self-diagnostic and performance
monitoring applications. For example, in 1986, Westell introduced NIUs,
which provide maintenance and performance monitoring capabilities to aid
telcos in the provisioning and maintenance of T-1 lines. Westell also
continues to focus on the relationships that it has built with its customers
during its 16-year history. Rapid technological evolution has provided the
Company with an opportunity to forge strategic alliances with customers and
technology suppliers in order to accelerate the time to market for new
products. In addition, the Company continues to redefine its products to
increase their functionality and interface capacity with other products while
decreasing product costs in order to meet market demand pricing, to achieve
mass deployment of ADSL systems and to facilitate the numerous applications
of high speed digital transmission required by telcos' and other local access
providers.
STRATEGY
Westell's objective is to be a global leader in providing low cost and
high quality local access network products that enable telcos(both Incumbent
Local Exchange Carriers ("ILECs") and CLECs), to meet the growing demand for
digital service offerings. Key elements of the Company's strategy include:
Leverage Global Leadership in ADSL Market. The Company seeks to leverage
its leadership position in the ADSL market to capture emerging global
market opportunities as telcos and other local access providers expand
their interactive multimedia, data and video services. Currently over
100 domestic and international customers, including Ameritech, Bell
Atlantic, Bell Canada, British Telecom, GTE, US West !nterprise, Telecom
Italia and leading Internet service providers, are conducting technical
or marketing trials for new services that rely on the Company's ADSL
systems. In addition, the Company is currently shipping broadband access
systems based on RADSL technology, which complements the Company's ADSL
systems and the Company believes will have performance advantages over
alternative ISDN and HDSL systems.
Deliver Mass Market Solutions for High Speed Online and Internet Access
Services. Due to the rapid emergence and end-user interest in online
information services, the Internet and the World Wide Web, the Company
intends to work with telcos and information service providers to deliver
advanced, high speed data solutions for these applications as well as
additional services, such as interactive video applications, as they
become available. To facilitate mass market deployment of its ADSL
systems, the Company is undertaking a program to increase the level of
integration among its products and improve economies of scale. The
Company seeks to expand the development of DSL systems in the consumer
market by creating DSL software and hardware interfaces that support
multiple consumer applications.
Continue to Create Strategic Relationships and Alliances. The Company
intends to continue to forge strategic relationships and alliances with
key customers and suppliers. The Company has established strategic
relationships to facilitate the Company's ability to develop products
that anticipate customers' product needs. For example, Westell has
entered into an alliance with Microsoft Corporation whereby Westell's
FlexCap ADSL modems will be compatible with Microsoft Corporation's
Windows NT(R) Server Network. In addition, Westell's relationships with
technology and transmission system leaders such as GlobeSpan
Technologies Inc., Nortel, Digital Switch Corporation and Motorola
enable the Company to obtain emerging technologies required in its
product development. These relationships allow the Company to focus on
product applications and to develop products using multiple emerging
technologies.
Maintain Telco Access Products Business Strength and Continue Development
of New Products. The Company has extensive experience in developing and
marketing products for the local access network and has achieved a
leading position in T-1 network interface and performance monitoring
units. The Company intends to continue to capitalize upon its DS0 and
DS1 product development experience and customer relationships to develop
cost-effective and intelligent products for the local access network.
The Company is committed to developing products that are compatible with
existing equipment and technologies, thereby enabling open architecture
network infrastructures. Westell intends to continue to develop products
in its telco access product business, such as SmartLink, which enhance
the efficiency of high speed transmission over copper wire, and
QuadJack, which is one of the Company's first fiber optic products.
Expand International Presence. The Company devotes significant resources
to expanding its international business. Many of Westell's products,
including its ADSL and HDSL systems, support E-1 standards, the
predominant standard for digital transmission outside of North America.
Westell has offices in Canada and England and a distribution and
service network that supports customers in more than 40 countries. The
Company intends to continue to expand its international distribution
arrangements and strategic relationships in an effort to increase its
international presence.
Commitment to Product Quality, Customer Service and Low-Cost
Manufacturing. The Company benefits from a strong reputation for
providing quality products and responsive service. Westell works closely
with customers to provide technical consulting, maintenance and research
assistance. Westell's continuous quality improvement is demonstrated by
the achievement of the British Approvals Board for Telecommunications
("BABT") production quality assurance approval, Bellcore's Customer
Supplier Quality Program ("CSQP") registration and the ISO 9001
registration of its domestic operations. The Company believes that its
commitment to product quality and customer service will enhance its
efforts to reduce production cycle times and product costs.
PRODUCTS
The Company offers a broad range of products that facilitate the
transmission of high speed digital and analog data between a telco's central
office and end-user customers. These products can be categorized into three
groups: (i) products based on DSL technologies, including ADSL, RADSL, SDSL
and HDSL systems ("DSL products"), (ii) Digital Signal Hierarchy Level 1
based products, which are used by telcos to enable high speed digital T-1
transmission at approximately 1.5 Mbps and E-1 transmission at approximately
2.0 Mbps ("DS1 products"), and (iii) Digital Signal Hierarchy Level 0 based
products, which are used by telcos to deliver digital services at speeds
ranging from approximately 2.4 to 64 Kbps and analog services over a 4
Kilohertz bandwidth ("DS0 products").
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. The Company's DSL products typically command higher average
sales prices than its DS0 and DS1 products but represent fewer of the units
sold by the Company. The following table sets forth the revenues from
Westell's three product groups for the periods indicated:
Fiscal Year Ended March 31,
1995 1996 1997
(in thousands)
DSL products . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,235 $20,299 $ 8,665
DS1 products . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,754 44,027 49,353
DS0 products . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,979 9,332 8,963
DSL Products. The Company is a leading developer and provider of DSL
products and transmission systems that utilize emerging ADSL technology. DSL
technology is also used for RADSL, SDSL and HDSL products. Products based upon
DSL technology can be used by telcos and other local access providers to provide
interactive multimedia services, including data and video applications, while
simultaneously providing traditional telephone services over existing copper
wire. Products based upon DSL technology enable customers to deliver these
interactive multimedia services more quickly and cost-effectively than deploying
broadband fiber networks in the "last mile" of the local access network. The
Company's revenues from RADSL, SDSL and HDSL products to date have not been
significant.
The following table sets forth a representative list of the Company's
current DSL products and their applications:
Year
Product Description Applications Introduced
FlexCap ADSL ADSL transport system that Interactive multimedia, video-on- 1993
delivers 1.5 or 2.0 Mbps of demand, live broadcast, high speed
digital bandwidth to end users. Internet access and LAN
Uses carrierless amplitude/phase interconnect, while providing
modulation ("CAP") technology. simultaneous standard telephone
service.
InterAccess HDSL HDSL system that supports 1.5 or T-1 or E-1 service provisioning. 1994
2.0 Mbps bi-directional services Increases repeaterless distance to
over two pairs of copper wires. up to 12,000 feet over two pairs
of copper wires.
AccessVision Network management system for DSL Management and control of DSL 1995
transport systems. transport systems.
SuperVision DSLAM Broadband platform that consolidates High-speed Internet access, remote 1996
. . . . multiple DSL access lines into a single LAN extension, work at home,
. . . . ATM interface. SuperVision currently corporate training and distance
. . . . supports using a OC-3c or STM-1 learning, while providing
. . . . interfaces back to the switching net simultaneous standard telephone
. . . . work. RADSL access line modules, service.
. . . . which will operate at rates from 640
. . . . Kbps to 7 Mbps downstream and
. . . . from 272 Kbps to 1.088 Mbps
. . . . upstream.
FlexCap2 RADSL Rate Adaptive DSL system that High speed internet access, remote 1997
. . . . operates at rates from 640 Kbps to LAN extension, work at home,
. . . . 2.24 Mbps downstream and 272 Kpbs corporate training and distance learning
. . . . to 1.088 Mbps upstream. The while providing simultaneous standard
. . . . rate adaptive capability enables the telephone service. In addition, RADSL
. . . . operating speed to be automatically system can be configured to near
. . . . provisioned based on signal quality. symmetrical rates to support SDSL
. . . . Uses CAP technology. applications.
ADSL technology permits the transmission of three communication streams of
varying speeds over existing copper wire. The non-repeater transmission
distances of current ADSL systems vary based upon the data rate, with a maximum
distance of 18,000 feet. The first communication stream provides a one way high
speed digital data transmission from a server, such as may be found on the
Internet or in a stored video program network, to an end user. The second
communication stream provides medium speed bi-directional digital data
transmission to and from the end user which enables the end user to respond and
interact with the incoming high speed data stream. The third communication
stream provides traditional analog voice transmission capabilities permitting
simultaneous telephone service.
Westell's FlexCap ADSL system currently consists of (i) a high speed
uni-directional digital data communication stream at rates up to 1.5 or 2.0
Mbps, (ii) a bi-directional control channel (iii) unidirectional and digital
data communication stream at rates up to 64 Kbps and (iv) a traditional analog
telephone service line. This ADSL system can support high speed data
applications, such as high speed Internet access and remote LAN access, and
video-on-demand services over existing telephone lines.
In early calendar year 1997, Westell introduced rate adaptive FlexCap ADSL
systems using RADSL technology which increased the bi-directional transmission
capacity to up to 1.08 Mbps with maximum uni-directional rate of 2.24 Mbps.
RADSL allows telcos to automatically adjust the digital transmission rate based
upon the quality of the copper telephone wire and the transmission distance.
This rate adaptability allows telcos to maximize the digital capacity of copper
wire and facilitates installation of ADSL systems, thereby increasing the
utilization of poor quality copper telephone wires which traditionally have
required extensive installation and monitoring.
The Company also markets other products that the facilitate incorporation
of DSL technology into their network infrastructures. Westell has worldwide
distribution rights to market AccessVision, an open systems standards-based
software management system that monitors and controls DSL equipment and the
interactive services transmitted through DSL technology. AccessVision was
developed by Atlantech Technologies, Ltd. Westell's distribution rights to
AccessVision expire in December 2001.
Currently over 100 customers have purchased the Company's ADSL systems to
conduct technical and marketing trials for interactive multimedia applications.
Bell Atlantic and British Telecom have connected over 2,000 customers to
Westell's FlexCAP ADSL systems. Telecom Italia has connected a total of 1,000
customers to Westell's FlexCAP ADSL systems, 500 each in Rome and Milan. ADSL
applications in these trials include interactive video-on-demand,
music-on-demand, catalog shopping, financial services, games-on-demand,
television-on-demand and long distance learning services. Internationally,
Westell's DSL systems have been purchased by telephone administrations in
Australia, Belgium, Canada, Hong Kong, Italy, Japan, Norway, Singapore, South
Korea, Spain, Switzerland, Taiwan and the United Kingdom.
The Company's HDSL systems eliminate the need for telcos to condition the
copper wire and to install line repeaters for distances of up to 12,000 feet.
Westell's HDSL systems also contain performance and monitoring functions with
remote accessibility that may supplant the need for repeaters and NIUs. Westell
currently sells its HDSL systems to the federal government and primarily markets
its InterAccess HDSL systems outside the U.S.
The Company's future growth is substantially dependent upon whether DSL
technology, particularly as it relates to ADSL systems, gains widespread
commercial acceptance by telcos. Since 1992, the Company has invested, and
expects to continue to invest, significant resources in the development of DSL
technology. However, the market for products using ADSL technology is only now
emerging as customers have recently begun to consider implementing ADSL
technology in their networks. As a result, revenues from DSL systems have been
difficult for the Company to forecast, and the Company's overall results of
operations have experienced substantial fluctuations in recent periods. The
timing of orders and shipments of DSL systems can have a significant impact on
the Company's revenues and results of operations. For example, during each of
the quarters during fiscal 1997 the Company has generated DSL revenue but at
varying levels. This variability related to DSL revenue has resulted in a
reduction in quarterly revenue when compared to the preceding quarter in four of
the past eight quarters contained in fiscal 1996 and 1997. In addition, during
the third quarter of fiscal 1997 the Company reserved for $5 million in piece
part inventory primarily as a result of a new generation RADSL product reducing
demand for prior generation FlexCap Phase III ADSL products. Due to the
Company's significant ongoing investment in DSL technology, the Company
anticipates losses in each of the fiscal 1998 quarters. The Company's ability to
achieve profitability or revenue growth in the future will depend upon market
acceptance of the Company's ADSL systems and the development and market
acceptance of other DSL products introduced by the Company. Customers have
deployed the Company's DSL systems primarily for technical and marketing trials.
In November 1996, Sasktel, a Canadian Telephone service provider, began offering
service utilizing ADSL in certain areas of its service territory on a commercial
basis. The Company is unable to predict whether other technical and marketing
trials will be successful and when significant commercial deployment will begin,
if at all.
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. Evaluation can take a year or more for complex products
based on new technologies such as ADSL. Historically, telcos have been cautious
in implementing new technologies. Telcos' and other customers' deployment of
DSL technology may be prevented or delayed by a number of factors, including
lengthy product approval and purchase processes, decisions to defer product
orders in anticipation of new product developments, cost, regulatory barriers
that prevent or restrict telcos from providing interactive multimedia services,
the lack of demand for interactive multimedia services, the lack of sufficient
programming for interactive multimedia services, the availability of alternative
technologies, such as ISDN, cable modems, optical fiber, wireless local loop and
policies that favor the use of such alternative technologies over ADSL
technology. As a result of these factors, there can be no assurance that
customers will pursue the deployment of products using ADSL technology. Even if
customers adopt policies favoring full-scale implementation of DSL technology,
there is no assurance that sales of the Company's DSL systems will become
significant or that the Company will be able to successfully introduce on a
timely basis or achieve sales of ADSL systems and other products based upon DSL
technology planned for future introduction. Due to increased competition, low
barriers to entry, product pricing pressures and new product introductions in
the Company's core DS0 and DS1 markets, these DS0 and DS1 product groups are not
expected to generate sufficient revenues or profits to offset any losses that
the Company may experience due to a lack of sales of ADSL systems and other DSL
products currently under development. As a result, if telcos fail to deploy the
Company's DSL systems, and the Company therefore does not receive significant
revenues from DSL sales, then the Company's business and results of operations
will be materially adversely affected and there can be no assurance that the
Company will achieve profitability in the future.
DS1 Products. Westell's DS1 products provide telcos with cost-effective
solutions to transport, maintain and improve the reliability of T-1 services
over copper and fiber lines in the local access network.
The following table sets forth a representative list of the Company's DS1
products and their applications:
Year
Product Description Applications Introduced
NIU Network Interface Unit providing Facilitates the maintenance of T-1 1986
for maintenance of T-1 facilities. facilities to access services such
as frame relay and primary rate
ISDN.
NIU-PM Network Interface Unit with Facilitates the maintenance and 1992
Performance Monitoring that stores provides performance monitoring of
information for seven days. T-1 facilities to access services
such as frame relay and primary
rate ISDN.
QuadJack Transport system that provides Provides transport and facilitates 1994
transmission medium for one to maintenance for high speed digital
four DS1 signals over fiber. circuits over fiber optic
facilities.
SmartLink Automatic Protection System for up Increases the reliability of T-1 1995
to 8 T-1 customer lines. and other high speed digital
. . . . . . . . . . . facilities. Used for critical circuits
. . . . . . . . . . . such as those used to provide
. . . . . . . . . . . service to cellular telephone sites.
Many of the Company's DS1 products, such as its NIUs, smart line repeaters,
office repeaters and T-1 maintenance service switches, function to monitor and
control the quality of digital transmission over copper wire. The Company's NIU
products allow telcos to monitor transmission conditions and to detect
performance problems in circuits from remote locations. All of the RBOC's and
GTE have purchased the Company's NIUs. Westell also developed and co-patented
with Ameritech a second generation NIU known as NIU-PM which monitors and stores
information for seven days so that telcos can study and detect any irregular
operations and performance of a line over time. The Company customizes its NIU
products to meet customers' particular needs. Sales of NIU products represented
45.5% and 52.5% of the Company's revenues in fiscal 1996 and 1997, respectively.
In fiscal year 1997, the Company began volume shipments of its newest NIU
platform coined "SlimJack." These new units are half the size of previous NIU
units and make extensive use of Surface-mount Manufacturing Technology ("SMT").
In addition, the Company also introduced its Multiplexer Termination System
("MTS") to the market in fiscal 1997. The MTS system is used as an adjunct to
lightwave fiber optic multiplexers that are providing DS1 service to the
customer premise. The MTS system employs application optimized NIUs to provide
maintenance loopback and testing.
To address growing wireless and Personal Computer System ("PCS") markets,
Westell introduced its FlexPack line of outside plant environmental enclosures.
These enclosures are used by Telcos to facilitate the provisioning of wireless
or fiber optic entrance links to PCS and other wireless communication sites. The
FlexPack enclosures can be equipped with T-1 NIUs, HDSL remote units or
Westell's QuadJack fiber optic multiplexers.
The Company's SmartLink Automatic Protection Switch system ("APS") monitors
up to eight customer T-1 channels and allows telcos to provide uninterrupted
service in the event of a fault of any channel. Once the APS detects a fault in
one channel, it automatically places that signal on a protection channel and
generates a notification alarm at the telco's central office, thereby
significantly reducing network downtime and costly data interruption. APS is
currently being deployed by three RBOCs and is in field trials with two
additional RBOCs.
Westell's QuadJack product is specifically designed to provide transmission
for one to four customer T-1 signals over fiber lines, which results in a
cost-effective means of providing T-1 services to small business customers who
typically do not require the standard 28 or more T-1 lines that fiber-based
transmission delivers to an end user.
DS0 Products. Westell's DS0 products are used by telcos to deliver digital
and analog service across copper wire in the local access network at speeds
ranging from approximately 2.4 to 64 Kbps for digital transmission or 4
Kilohertz for analog transmission.
The following table sets forth a representative list of the Company's DS0
products and their applications:
Year
Product Description Applications Introduced
DST Data Station Termination unit Point of sale, lottery and other 1983
providing maintenance and analog data.
equalization of data transmission.
Tandem Provides DS0 and analog channel Special services inter-office 1987
cross connections in tandem D4 cross connections.
environment.
TwinLine Allows second channel to be added Business and second lines. 1994
to a single pair of copper wires.
Campus Loopback
Unit Maintenance loopback for analog Private data networks. 1995
data.
In some circumstances, analog data lines are the only practical way to
add a terminal to an existing analog data network. Consequently, analog
transmission is often the most economical, most easily installed or the only
service available in certain locations. Westell's DST unit provides the
interface between analog transmission and an end user's modem. The Company's
other DS0 products include voice frequency channel units and mountings, which
are used to provide dedicated analog data lines, smart repeaters, which boost
analog signals, and other products which incorporate performance testing and
monitoring functions designed to improve the quality of analog transmission
over copper wire.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that its future success depends 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. The Company regularly customizes products to address
particular customer product needs. For the fiscal years ended March 31, 1995
and 1996, the Company recognized income of $800,000 and $2.6 million,
respectively, for customer sponsored research and development. Research and
development expenses for fiscal 1995, 1996 and 1997 were $10.8 million, $12.6
million, and $22.0 million, respectively. To date, all research and
development costs have been charged to operating expense as incurred. From
time to time, development programs are conducted by other firms under
contract with the Company, and related costs are also charged to operations
as incurred.
The following table sets forth some of the products under development by
the Company:
Product Description Applications
SuperVision DSLAM . Broadband platform that consolidates Aggregates many DSL facilities providing
. . . . . . . . . . multiple DSL lines into a single ATM efficient network backbone transport.
. . . . . . . . . . interface using DS-3 or E3 interface.
SuperVision CAP . . An ADSL transport system that delivers Interactive multimedia, video-on-demand,
RADSL Line Cards . up to 7.0 Mbps of digital bandwidth live broadcast, high speed Internet
downstream to end users and up to 1 Mbps access and LAN interconnect, while
upstream of rate adaptive digital bandwidth. providing simultaneous standard
Uses CAP technology. Used in connection telephone service.
with SuperVision multiplexers.
SuperVision DMT . . An ADSL transport system that delivers Interactive multimedia, video-on-demand,
ADSL Line Cards . . up to 8.0 Mbps of digital bandwidth live broadcast, high speed Internet
downstream to end users and up access and LAN interconnect, while
to 1 Mbps upstream of rate adaptive digital providing simultaneous standard
bandwidth. Uses discrete multi-tone telephone service.
("DMT") technology. Used in connection
with SuperVision multiplexers.
To provide a more efficient transport of individual DSL facilities over
telephone networks, Westell is developing its SuperVision access multiplexer.
This SuperVision system will aggregate many DSL systems into a single high
speed optical link thereby facilitating the connection between copper wire
digital transmission used in the local access network and the optical fiber
transmission in the network "backbone." In addition, the Company announced
the development of the associated SuperVision line card to provide up to 8.0
Mbps of bandwidth supporting multiple simultaneous video-on-demand channels
of information. Westell's current FlexCap and SuperVision systems are based
on CAP technology. Westell is also developing a similar SuperVision line card
which will utilize DMT technology instead of CAP technology and which is
expected to provide up to 8.0 Mbps of downstream data and 1 Mbps upstream as
well as traditional telephone service.
The Company currently anticipates that it will introduce the products
listed in the above table in fiscal year 1998. However, there can be no
assurance that the Company will be able to introduce such products as
planned, and the failure of the Company to do so would have a material
adverse effect on the Company's business and results of operations. In
addition, there can be no assurance that the Company's future development
efforts will result in commercially successful products or that the Company's
products will not be rendered obsolete by changing technology, new industry
standards or new product announcements by competitors. The markets for the
Company's products are characterized by intense competition, rapid
technological advances, evolving industry standards, changes in end-user
requirements, frequent new product introductions and enhancements, and
evolving telco service offerings. If technologies or standards applicable to
the Company's products (or telco service offerings based on the Company's
products) become obsolete or fail to gain widespread commercial acceptance,
then the Company's business and results of operations will be materially
adversely affected. Moreover, the introduction of products embodying new
technology, the emergence of new industry standards or changes in telco
services could render the Company's existing products, as well as products
under development, obsolete and unmarketable. For instance, during the third
quarter of fiscal 1997, the Company reserved for $5 million in piece part
inventory primarily as a the result of a new generation RADSL product
reducing demand for prior generation FlexCap Phase III ADSL products. In
addition, the Company believes that the continued deployment of new
technologies in the U.S., such as HDSL, in the local access network will
adversely affect demand for certain of its existing products such as NIUs,
which accounted for 45.5% and 52.5% of the Company's revenues in fiscal 1996
and 1997, respectively, and that its future success will largely depend upon
its ability to continue to enhance its existing products and to successfully
develop and market new products on a cost-effective and timely basis. In this
regard, most of the Company's current product offerings apply primarily to
the delivery of digital communications over copper wire in the local access
network. While the Company has competed successfully to date by developing
high performance products for transmission over copper wire, it expects that
the increasing deployment of fiber and wireless broadband transmission in the
local access network (each of which uses a significantly different process of
delivery) will require the Company to develop new products to meet the
demands of these emerging transmission media.
The Company's past sales and profitability have resulted, to a
significant extent, from its ability to anticipate changes in technology,
industry standards and telco service offerings, and to develop and introduce
new and enhanced products. The Company's continued ability to adapt to such
changes will be a significant factor in maintaining or improving its
competitive position and its prospects for growth. Due to rapid technological
changes in the telecommunications industry, the RBOCs' lengthy product
approval and purchase processes and the Company's reliance on third-party
technology for the development of new products, there can be no assurance
that the Company 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 the Company will have the financial and manufacturing
resources necessary to continue to successfully develop new products based on
emerging technology or to otherwise successfully respond to changing
technology, industry standards and telco service offerings.
The Company's product development programs are carried out by engineers
and engineering support personnel based in Aurora, Illinois and Cambridge,
England. The Company's domestic 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. Successful execution of this strategy also requires that the
Company continue to attract and recruit highly qualified engineers.
CUSTOMERS
The Company's principal customers historically have been U.S. telcos.
Since fiscal 1993, the Company has also marketed its products
internationally. The Company's customers include all seven RBOCs, GTE,
British Telecom and Telecom Italia. In addition, Westell sells products to
several other entities, including public telephone administrations located
outside the U.S., independent domestic local exchange carriers, competitive
access providers, interexchange carriers and the U.S. federal government.
International revenues represented approximately $3.7 million, $19.8 million
and $4.4 million of the Company's revenues in fiscal 1995, 1996 and 1997,
respectively, accounting for 5.0%, 23.8% and 5.5% of the Company's revenues
in such periods.
The following table lists certain customers of the Company and end users
of the Company's products:
Domestic International
Ameritech Belgacom
Bell Atlantic BC Tel Canada
Bell South Bell Canada
GTE British Telecom
MCI Entel Chile
NYNEX Hong Kong Telecom
Pacific Telesis Korea Telecom
SBC Communications Singapore Telecom
Sprint Swiss Telecom
US West Sask Tel Canada
Telecom Finland LTD
Telecom Italia
Telecom Malaysia
Telefonica Spain
Telenor
Telecom Australia
Sales to the RBOCs and British Telecom accounted for 74.3%, 64.9% and
62.7% of the Company's revenues in fiscal 1995, 1996 and 1997, respectively.
The Company's future success will depend significantly upon the timeliness
and size of future purchase orders from the RBOCs, the product requirements
of the RBOCs, the success of the RBOCs' services that use the Company's
products and the financial and operating success of these providers. Sales to
Ameritech and U.S. West accounted for 18.3% and 11.1% of the Company's
revenues in fiscal 1997, respectively.
The Company depends, and will continue to depend, on the RBOCs and other
independent local exchange carriers for substantially all of its revenues.
Sales to the RBOCs accounted for 74.3%, 53.8% and 61.9% of the Company's
revenues in fiscal 1995, 1996 and 1997, respectively. Consequently, the
Company's future success will depend significantly 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. Bell Atlantic and NYNEX has recently completed a merger and
Pacific Telesis and SBC Communications have announced their intent to merge.
The Company is unable to predict what effect either of these mergers will
have on the demand for the Company's ADSL systems or other products.
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. 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 ADSL. Accordingly, the
Company is continually submitting successive generations of its current
products as well as new products to its customers for approval. The length of
the approval process can vary and is affected by a number of factors,
including the complexity of the product involved, priorities of telcos,
telcos' budgets and regulatory issues affecting telcos. The requirement that
telcos obtain FCC approval for certain new telco services prior to their
implementation has in the past delayed the approval process. There can be no
assurance that such delays, if experienced in the future, will not have a
material adverse affect on the Company's business and results of operations.
While the Company has been successful in the past in obtaining product
approvals from its customers, there can be no assurance that such approvals
or that ensuing sales of such products will continue to occur. Even if demand
for the Company's products is high, the RBOCs have sufficient bargaining
power to demand low prices and other terms and conditions that may materially
adversely affect the Company's business and results of operations.
MARKETING, SALES AND DISTRIBUTION
The Company sells its products in the U.S. principally through its
domestic field sales organization. The Company markets its products
internationally in over 40 countries under various distribution arrangements
that include OEM agreements, technology licenses and distributors supported
by partners and internationally based sales personnel. The Company's field
sales organizations and distributors receive support from internal marketing,
sales and customer support groups. As of March 31, 1997, the Company's
marketing, sales and distribution programs were conducted by 154 employees.
International revenues represented 23.8% and 5.5% of the Company's
revenues in fiscal 1996 and 1997, respectively. The Company's international
operations are based in Aurora, Illinois and are also conducted through
business operations in Ottawa, Canada, Cambridge, England, Hong Kong and
Singapore, and a distribution and service network that supports customers in
more than 40 countries. The Company expects to continue to pursue
international market opportunities by focusing primarily on sales of DSL
products in international markets. The Company believes that there is a
greater demand for DSL products in international markets compared to DS0 and
DS1 products due to a growing demand in foreign countries for services that
require high speed digital transmission.
The Company believes that international revenues will represent a
significant percentage of revenues in the future. Due to its export sales,
the Company is subject to the risks of conducting business internationally,
including unexpected changes in regulatory requirements, foreign currency
fluctuations which could result in reduced revenues or increased operating
expenses, tariffs and trade barriers, potentially longer payment cycles,
difficulty in accounts receivable collection, foreign taxes, and the burdens
of complying with a variety of foreign laws and telecommunications standards.
The Company's contracts with its international customers are typically
denominated in foreign currency and any decline in the value of such currency
could have a significant impact on the Company's business and results of
operations. For example, in fiscal 1996, the Company incurred a $270,000
transaction loss on receivable due to foreign currency fluctuations. To date,
the Company has not engaged in hedging with respect to its foreign currency
exposure but may do so in the future. The Company also is subject to general
geopolitical risks, such as political and economic instability and changes in
diplomatic and trade relationships, in connection with its international
operations. In addition, the laws of certain foreign countries may not
protect the Company's proprietary technology to the same extent as do the
laws of the U.S. There can be no assurance that the risks associated with the
Company's international operations will not materially adversely affect the
Company's business and results of operations in the future or require the
Company to modify significantly its current business practices.
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. 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 such
as ADSL Accordingly, the Company is continually submitting successive
generations of its current products as well as new products to its customers
for approval. The length of the approval processes is affected by a number of
factors, including the complexity of the product involved, the priorities of
the telcos, telcos' budgets and regulatory issues affecting telcos and other
local access service providers. In addition, the requirement that telcos
obtain FCC approval for certain services prior to their implementation has in
the past delayed the approval processes.
Although the telco 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, including those established by
Bellcore.
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 ADSL 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 telco's network. This stage gives telcos 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
telco initially installs the equipment in select locations for select
applications. This phase is followed by general deployment involving
greater numbers of systems and locations. General deployment does not
usually mean that one supplier's product is purchased for all of the
telcos' needs throughout the system as telcos 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.
In most international markets, there is one major telco per country with
limited or few alternate carriers or independent telcos. Typically, these
telcos are highly regulated, government-owned agencies that have approval and
purchase processes similar to those followed by the RBOCs.
CUSTOMER SERVICE AND 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 supply contracts with most of its major customers. These
contracts typically do not establish minimum purchase commitments, and they
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. While the Company maintains a
comprehensive quality control program, there can be no assurance that the
Company's products will not suffer from defects or other deficiencies or that
the Company will not experience a material product recall in the future.
Complex products such as those offered by the Company may contain undetected
errors or failures when first introduced or as new versions are released. Any
product recall as a result of such errors or failures, and the associated
negative publicity, could result in the loss of or delay in market acceptance
of the Company's products and 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 express or implied 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 relatively insignificant. Although the Company maintains a
comprehensive quality control program, there can be no assurance that the
Company's products will not suffer from defects or other deficiencies or that
the Company will not experience a material product recall in the future.
Complex products such as those offered by the Company may contain undetected
errors or failures when first introduced or as new versions are released. Any
product recall as a result of such errors or failures, and the associated
negative publicity, could result in the loss of or delay in market acceptance
of the Company's products and have a material adverse effect on the Company's
business and results of operations. The Company's standard limited warranty
for its ADSL products ranges from one to five years. Since the Company's DSL
products are new, with limited time in service, the Company cannot predict
the level of warranty claims that it will experience for these products.
Despite testing by the Company and its customers, there can be no assurance
that existing or future products based on DSL or other technology will not
contain undetected errors or failures when first introduced or as new
versions are released. Such errors or failures could result in warranty
returns in excess of those historically experienced by the Company and have a
material adverse effect on the Company's business and results of operations.
MANUFACTURING
The Company purchases parts and components for its products from a
number of suppliers through a worldwide sourcing program. Certain key
components, such as integrated circuits and other electronic components, used
in the Company's products are currently available from only one source or a
limited number of suppliers. For instance, the Company currently depends on
GlobeSpan Technologies to provide critical integrated circuits used in the
Company's ADSL products. In addition, certain electronic components are
currently in short supply and are provided on an allocation basis to the
Company and other users, based upon past usage. There can be no assurance
that the Company will be able to continue to obtain sufficient quantities of
integrated circuits or other electronic components as required, or that such
components, if obtained, will be available to the Company on commercially
reasonable terms. The Company purchases integrated circuits from GlobeSpan
Technologies on a purchase order basis under a formal supply arrangement.
GlobeSpan Technologies in turn sources these integrated circuits from Lucent
Technologies. The Company anticipates that integrated circuit production
capacity and availability of certain electronic components of its suppliers
may be insufficient to meet demand for such components in the future.
Integrated circuits and electronic components are key components in all of
the Company's products and are fundamental to the Company's business strategy
of developing new and succeeding generations of products at reduced unit
costs without compromising functionality or serviceability. In the past,
however, the Company has experienced delays in the receipt of certain of its
key components, such as integrated circuits, which have resulted in delays in
related product deliveries. There can be no assurance that delays in key
components or product deliveries will not occur in the future due to
shortages resulting from the limited number of suppliers, the financial or
other difficulties of such suppliers or the possible limitations in
integrated circuit production capacity or electronic component availability
because of significant worldwide demand for these components. The inability
to obtain sufficient key components or to develop alternative sources for
such components, if and as required in the future, could result in delays or
reductions in product shipments, which in turn could have a material adverse
effect on the Company's customer relationships, its business and results of
operations.
The Company currently manufactures most of its products internally while
relying on a few subcontractors in the U.S. and the United Kingdom for
various assemblies. As part of its strategic plan to meet the potential
worldwide demand for its ADSL systems, however, the Company currently is in
the process of developing the manufacturing capabilities necessary to supply
and support large volumes of ADSL systems and in the future may become
increasingly dependent on subcontractors. The Company has entered into
discussions to establish subcontracting relationships for the assembly of its
ADSL systems. A 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. Although the Company believes that alternative subcontractors or
sources could be developed if necessary, 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 a new subcontractor or supplier relationship. Any material
delays or difficulties in connection with increased manufacturing production
or the use of subcontractors could have a material adverse effect on the
Company's business and results of operations. There can be no assurance that
the Company will be successful in increasing its manufacturing capacity in a
timely and cost-effective manner or that the possible transition to
subcontracting will not materially adversely affect the Company's business
and results of operations. The Company's failure to effectively manage its
growth would have a material adverse effect on the Company's business and
results of operations.
A substantial portion of the Company's shipments in any fiscal period
relate to orders for certain products received in that period. Further, a
significant percentage of orders, such as NIUs, require delivery within 48
hours. To meet this demand, the Company maintains raw materials inventory and
limited finished goods inventory at its manufacturing facility. In addition,
the Company maintains some finished goods inventory at the customer's site
pursuant to an agreement that the customer will eventually purchase such
inventory. Final testing and shipment of products to customers occurs in the
Company's Aurora, Illinois facilities. The Company's domestic facilities are
certified pursuant to ISO 9001.
The Company's backlog for its DS1 and DS0 products at March 31, 1997
was $1.3 million. The Company believes that because a substantial portion of
customer orders for DS1 and DS0 products are filled within the quarter of
receipt, the Company's backlog is not a meaningful indicator of actual
revenues for these products for any succeeding period. In general, customers
purchasing DSL products may reschedule orders without penalty to the
customer. As a result, the quantities of the Company's products to be
delivered and their delivery schedules may be revised by customers to reflect
changes in their DSL product needs. Since backlog of DSL products can be
rescheduled without penalty, the Company does not believe that its backlog of
DSL products is a meaningful indicator of future revenues from DSL products.
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 ADSL market. Westell's principal competitors in the DS0 market are
Adtran, Inc., Pulsecom, Tellabs, Inc. and Teltrend, Inc. Westell's principal
competitors in the DS1 market are ADC Telecommunications Inc., Applied
Digital Access Inc., PairGain Technologies, Inc. and Teltrend, Inc. The
Company's current competitors in the ADSL market include Alcatel Network
Systems, Amati Communications Corp., Paradyne, ECI Telecom, Inc., Ericsson,
Netspeed, AGCS, Diamond Lane, US Robotics, PairGain Technologies, Inc.,
Orckit Communications, Ltd. and Performance Telecom Corp. The Company expects
competition in the ADSL market in the near future from numerous other
companies. In addition, the Telecommunications Act which was signed into law
on February 8, 1996, permits the RBOCs to engage in manufacturing activities
after the FCC authorizes an RBOC to provide long distance services within its
service territory. An RBOC 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, an RBOC will be permitted to engage in
manufacturing activities. Therefore, RBOCs, which are the Company's largest
customers, may potentially become the Company's competitors as well. Many of
the Company's competitors and potential competitors have greater financial,
technological, manufacturing, marketing and human resources than the Company.
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. Many telcos and other
local access providers have adopted policies that favor the deployment of
fiber. To the extent that customers choose to install fiber and other
transmission media between the central office and the end user, the Company
expects that demand for its copper wire-based products will decline. Telcos
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 telcos decide not to aggressively
respond to this competition and fail to offer high speed digital
transmission, the overall demand for ADSL products could decline. In
addition, the deployment of certain products and technologies for copper wire
may also reduce the demand for the types of products currently manufactured
by the Company. Specifically, the deployment of HDSL systems in the U.S.,
which reduces telcos' need for T-1 repeaters and NIUs, may result in a
decrease in demand for Westell's DS1-based products. Further, the Company
believes that the domestic market for many of its DS0-based products is
decreasing, and will likely continue to decrease, as high capacity digital
transmission becomes less expensive and more widely deployed.
TELECONFERENCE SERVICES
Conference Plus provides operator-assisted and automatic
teleconferencing services to customers throughout the U.S. The Company
manages its teleconferencing services through its operations center located
in Schaumburg, Illinois. Teleconferencing services allow organizations and
individuals to collect and disseminate information faster, more accurately
and without the associated costs of face-to-face meetings. The Company's
strategy in this market is to apply its expertise as a telecommunications
products manufacturer to provide cost-effective and quality teleconferencing
services to satisfy the growing customer demand for these services.
Conference Plus was started by the Company in October 1988, and generated
$6.8 million, $7.7 million and $10.3 million in revenues in fiscal 1995, 1996
and 1997, respectively.
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 the Company's 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 telco services and other terms on
which telcos conduct their business may impede the Company's penetration of
certain markets. The Telecommunications Act lifted certain restrictions on
telcos' ability to provide interactive multimedia services including video on
demand. The Telecommunications Act establishes new regulations whereby telcos
may provide various types of video services. Rules to implement these new
statutory provisions are now being considered by the FCC. While the statutory
and regulatory framework for telcos providing video products has become more
favorable, it is uncertain at this time how this will affect telcos' demand
for products based upon ADSL technology.
In addition, the Telecommunications Act permits the RBOCs to engage in
manufacturing activities after the FCC authorizes an RBOC to provide long
distance services within its service territory. An RBOC 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, an
RBOC will be permitted to engage in manufacturing activities and the RBOCs,
which are the Company's largest customers, may become the Company's
competitors as well.
The Company's business and operating results may also be adversely
affected by the imposition of certain tariffs, duties and other import
restrictions on components that the Company obtains from non-domestic
suppliers or by the imposition of export restrictions on products that the
Company sells 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 the Company's business and results of operations.
PROPRIETARY RIGHTS
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. Although the Company regards its
technology as proprietary, it has only one patent on such technology. The
Company expects to seek additional patents from time to time related to its
research and development activities. The Company relies on a combination of
technical leadership, trade secrets, copyright and trademark law and
nondisclosure agreements to protect its unpatented proprietary know-how.
There can be no assurance, however, that these measures will provide
meaningful protection for the Company's trade secrets or other proprietary
information. Moreover, the Company's business and results of operations may
be materially adversely affected by competitors who independently develop
substantially equivalent technology. In addition, the laws of some foreign
countries do not protect the Company's 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, the Company receives communications from third parties alleging
infringement of exclusive patent, copyright and other intellectual property
rights to technologies that are important to the Company. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future, that assertions by such parties will not result in
costly litigation, or that the Company 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 effort by the
Company. Any infringement claim or other litigation against or by the Company
could have a material adverse effect on the Company's business and results of
operations.
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 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. Any impairment or
termination of the Company's relationship with any licensers of third-party
technology would force the Company to find other developers on a timely basis
or develop its own technology. There can be no assurance that the Company
will be able to obtain the third-party technology necessary to continue to
develop and introduce new and enhanced products, that the Company will obtain
third-party technology on commercially reasonable terms or that the Company
will be able to replace third-party technology in the event such technology
becomes unavailable, obsolete or incompatible with future versions of the
Company's products. The absence of or any significant delay in the
replacement of third-party technology would have a material adverse effect on
the Company's business and results of operations.
The Company's ADSL products are dependent upon a CAP transceiver
technology licensed from GlobeSpan Technologies, Inc. GlobeSpan Technologies
is currently the sole provider of this CAP transceiver technology and the
Company currently would not be able to produce any of its ADSL systems
without using this technology. The GlobeSpan license (the "GlobeSpan
License"), which expires in December 2002, is nonexclusive and this
technology has been licensed to numerous manufacturers. The Company has
entered into cooperation and development agreements with other technology
suppliers who are developing alternative DSL transceiver technologies, such
as DMT technology. Consequently, in the event GlobeSpan fails to renew the
GlobeSpan License, the Company believes that it will have sufficient access
to alternative sources of DSL technology prior to December 2002 so that it
will be able to continue to produce ADSL systems. However, the cancellation
or failure of GlobeSpan to renew the GlobeSpan License would materially
adversely affect the Company's business and results of operations if other
sources of DSL technology do not become readily available on similar terms or
telcos elect not to deploy DSL systems utilizing alternative DSL
technologies, such as DMT transceiver technology.
In addition, the owner of GlobeSpan (Texas Pacific Group) has formed a
business unit (Paradyne) that develops and markets products competitive with
the Company's products, such as ADSL. Although this newly-formed business
unit does not affect the GlobeSpan License and is a separate company from
GlobeSpan, there can be no assurance that the formation of this business unit
will not affect the Company's ability to license CAP transceiver technology
from GlobeSpan after the license expires.
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 telco product approval and purchase cycles, the
technology may be obsolete by the time it is implemented. Relationships in
place with companies such as AT&T Paradyne, Analog Devices, Inc., Motorola
and certain customers enable the Company to develop products at the same time
that the Company undergoes the product approval and purchase processes for
products in development. This can result in much quicker introduction of new
products while the technology is still in demand. Westell has cooperation and
development relationships with Atlantech Technologies Ltd., a software
development company based in Scotland, Scientific Generics, an innovative
technology development company based in Cambridge, England, and Sungmi
Electronics, an industry leader in the supply of high speed switching,
transmission and local access systems based in Seoul, Korea.
EMPLOYEES
As of March 31, 1997, the Company had 795 full-time employees. Westell's
telecommunications business had a total of 692 full-time employees,
consisting of 154 in sales, marketing, distribution and service, 154 in
research and development, 348 in manufacturing and 36 in administration.
Conference Plus had a total of 103 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.
ITEM 2. PROPERTIES
During fiscal 1997 the Company moved into approximately 185,000 square
feet of office, development and manufacturing space in Aurora, Illinois, a
suburb of Chicago. The Company also leases facilities in Schaumburg, Illinois
for Conference Plus, and in Tampa, Florida and Cambridge, England for its
international operations. The Aurora facility was constructed through a
Limited Liability Corporation ("LLC") with a real estate developer. The
Company has entered into a 15 year lease of this facility with the LLC. Since
the Company has funded the construction, the lease payments have been abated.
It is the Company's intent to sell this property, repay any financing and
lease the facility from a third party.
While the Company believes its current facilities are adequate to
support its present level of operations, it believes that it will require
additional space in the next two years to accommodate additional expansion of
its business operations. The Company estimates that its manufacturing
facilities are operating at a utilization rate of approximately 50%.
ITEM 3. LEGAL PROCEEDINGS
The Company has been involved from time to time in litigation in the
normal course of business. In January 1995, a former officer of a subsidiary
of the Company filed a suit against the Company alleging damages suffered as
a result of wrongful termination and breach of contract. During fiscal year
1997, a settlement was reached with the plaintiff and the Company received a
partial reimbursement from their insurance carrier. The net settlement
expense of approximately $400,000 is included in Other Income (Expense) in
the accompanying statements of operations for the year ending March 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company effected its initial public offering on November 30, 1995 at
a price to the public of $6.50 per share. 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, which prices reflect the two-for-one Stock Split of the Company's
Class A and Class B Common Stock to holders of record on May 20, 1996 and
paid on June 7, 1996 (the "Stock Split").
High Low
Fiscal Year 1996
Third Quarter (from December 1, 1995) . . . . . . . . . . . . . . . . . $13 13/16 $ 9 3/4
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 9 5/8
Fiscal Year 1997
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 18 5/8
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 1/4 19 1/4
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 3/8 21
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7/8 8 5/8
Fiscal Year 1998
First Quarter (through June 24, 1997) . . . . . . . . . . . . . . . . . 25 7/8 10 3/4
As of June 24, 1997, there were approximately 352 holders of record of
the outstanding shares of Class A Common Stock.
Issuance of Class A Common Stock
On June 26, 1996, the Company completed a public offering in which
1,665,000 shares of Class A Common Stock were sold by the Company and 335,000
shares of Class A Common Stock were sold by certain stockholders of the
Company for a price to the public of $39.00 per share. Net proceeds to the
Company from the sale of the Class A Common Stock were approximately $61.6
million and will be used to fund capital equipment purchases and for general
corporate purposes including working capital funding.
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, 1993,
1994, 1995, 1996 and 1997 and for each of the five fiscal years in the period
ended March 31, 1997 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,
1993 1994 1995 1996 1997
(in thousands, except per share data)
Statement of Operations Data:
Revenues . . . . . . . . . . . . . . . . . . . . $ 43,221 $ 51,051 $ 74,029 $ 83,236 $ 79,385
Cost of goods sold . . . . . . . . . . . . . . . 25,358 30,250 44,494 50,779 57,832
Gross margin . . . . . . . . . . . . . . . . 17,863 20,801 29,535 32,457 21,553
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . 5,688 8,068 12,169 13,744 16,214
Research and development . . . . . . . . . . . 5,284 7,695 10,843 12,603 21,994
General and administrative . . . . . . . . . . 4,092 5,502 6,701 8,364 9,757
Total operating expenses . . . . . . . . . . 15,064 21,265 29,713 34,711 47,965
Operating income (loss) from continuing
operations . . . . . . . . . . . . . . . . . . 2,799 (464) (178) (2,254) (26,412)
Other income (expense), net . . . . . . . . . . . (14) (36) 34 (226) 2221
Interest expense . . . . . . . . . . . . . . . . 137 176 769 859 330
Income (loss) from continuing operations before
income taxes . . . . . . . . . . . . . . . . . 2,648 (676) (913) (3,339) (24,521)
Provision (benefit) for income taxes . . . . . . 913 (989) (788) (1,886) (9,820)
Income (loss) from continuing operations . . . . 1,735 313 (125) (1,453) (14,701)
Discontinued operations (loss) . . . . . . . . . (37) (100) (383) (622) (5)
Net income (loss) . . . . . . . . . . . . . . . . $ 1,698 $ 213 $ (508) $ (2,075) $(14,706)
Net income (loss) per share:
Continuing operations . . . . . . . . . . . . . $ 0.06 $ 0.01 $ (0.01) $ (0.05) $ (0.41)
Discontinued operations . . . . . . . . . . . . -- (0.00) (0.01) (0.02) (0.00)
Net income (loss) per share . . . . . . . . . . . $ 0.06 $ 0.01 $ (0.02) $ (0.07) $ (0.41)
Dividends declared per share . . . . . . . . . . $ -- $ -- $ -- $ -- $ --
Average number of common shares outstanding . 27,620 28,486 28,952 30,846 35,940
March 31,
1993 1994 1995 1996 1997
Balance Sheet Data:
Working capital . . . . . . . . . . . . . . . . . $ 5,137 $ 3,053 $ 1,280 $ 28,741 $ 65,105
Total assets . . . . . . . . . . . . . . . . . . 15,777 29,327 40,276 64,448 108,049
Revolving promissory notes . . . . . . . . . . . 1,700 1,700 11,089 -- --
Long-term debt, including current portion . . . . 704 3,339 4,129 4,427 6,487
Total stockholders' equity . . . . . . . . . . . 7,719 8,002 7,558 38,985 86,188
Adjusted to reflect the Stock Split. See Notes 1 and 11 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
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 DS0 and DS1
product lines, particularly the sale of NIUs and related products, which
accounted for at least 45% of revenues in each of the last three fiscal
years. The Company introduced its first DSL products in fiscal 1993 and these
products represented 20.6%, 24.4% and 10.9% of revenues in fiscal 1995, 1996
and 1997, respectively. The Company has also provided audio teleconferencing
services since fiscal 1989 and consumer products claims processing services
since fiscal 1994. Revenues from audio teleconferencing services constituted
9.2% of the Company's revenues in both fiscal 1995 and 1996 and 13.0% in
fiscal 1997. In July 1996, the Company completed the disposition of KPINS,
its consumer products claims processing subsidiary, which is presented in the
results of operations as a discontinued operation.
The Company's customer base is comprised primarily of the RBOCs,
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 late fiscal 1992, the
Company significantly increased its investment in new product development
based on emerging technologies, particularly ADSL, and began expanding its
sales and marketing efforts to cover new product lines and planned expansion
into international markets. International operations accounted for 5.0%,
23.8% and 5.5% of the Company's revenues in fiscal 1995, 1996 and 1997,
respectively. 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 1995, 1996 and 1997.
The Company expects to continue to evaluate new product opportunities
and engage in extensive research and development activities. This will
require the Company to continue to invest heavily in research and development
and sales and marketing, which is expected to adversely affect short-term
results of operations. Due to the Company's significant ongoing investment in
DSL technology, the Company anticipates losses in each of the fiscal 1998
quarters. The Company believes that its future revenue growth and
profitability will principally depend on its success in increasing sales of
ADSL products and developing new and enhanced DS1 and other DSL products. For
instance, in the current fiscal year, the majority of the DSL revenue has
been generated by data dial tone ADSL shipments. Customer focus has migrated
from video dial tone applications (i.e., video on demand, distance learning,
etc.) to data dial tone applications (i.e., Internet access, work at home,
etc.) due to the growth in users accessing the World Wide Web through the
Internet and the need to increase the transmission speed when down loading
large text, graphics, and video files. In view of the Company's reliance on
the emerging ADSL 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 DS0
products have declined in recent years as telcos continue to move from analog
to digital transmission services. The Company also expects that revenues from
NIU products in its DS1 product group may decline as telcos increase the use
of alternative technologies such as HDSL. 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,
1995 1996 1997
Equipment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 90.8% 90.7% 87.0%
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 9.3 13.0
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0
Cost of equipment sales . . . . . . . . . . . . . . . . . . . . . . . 55.0 55.5 64.9
Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 5.5 8.0
Total cost of goods sold . . . . . . . . . . . . . . . . . . . . . 60.1 61.0 72.9
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . 39.9 39.0 27.1
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . 16.4 16.5 20.4
Research and development . . . . . . . . . . . . . . . . . . . . . 14.6 15.2 27.7
General and administrative . . . . . . . . . . . . . . . . . . . . 9.1 10.0 12.3
Total operating expenses . . . . . . . . . . . . . . . . . . . . 40.1 41.7 60.4
Operating income (loss) from continuing operations . . . . . . . . . (0.2) (2.7) (33.3)
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . 0.0 (0.3) 2.8
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1.0 0.4
Income (loss) from continuing operations before income taxes . . . . (1.2) (4.0) (30.9)
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . (1.0) (2.3) (12.4)
Income (loss) from continuing operations . . . . . . . . . . . . . . (0.2) (1.7) (18.5)
Discontinued operations (loss) . . . . . . . . . . . . . . . . . . . (0.5) (0.8) (0.0)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . (0.7)% (2.5)% (18.5)%
FISCAL YEARS ENDED MARCH 31, 1995, 1996 AND 1997
Revenues. Revenues were $74.0 million, $83.2 million and $79.4 million
in fiscal 1995, 1996 and 1997 respectively. Revenues increased 12.4% from
fiscal 1995 to 1996 and decreased 4.6% from 1996 to 1997. The fiscal 1996
increase was primarily due to a $5.1 million increase in DSL equipment
revenues reflecting video dial tone trial shipments to two international
customers offset in part by video dial tone trial shipments to one domestic
customer made in fiscal 1995. DS1 product revenues increased $3.3 million
from fiscal 1995 to 1996 due primarily to overall unit volume increases which
were offset in part by lower average unit sales prices due to change in
product sales mix and competitive pricing pressure on unit sales prices. The
fiscal 1997 decrease in equipment revenue of $6.5 million was primarily due
to a $11.6 decrease in DSL equipment revenues offset by an increase in DS1
equipment revenues of $5.3 million. The decrease in DSL revenue was more than
accounted for by the absence of $14.0 million in video dial tone trial
shipments to two foreign telephone operators as telephone operators in
general migrated their focus from video dial tone trial activity (video on
demand) to data trials of DSL equipment. DSL shipments in fiscal 1997
consisted primarily of data dial tone product shipments for field and
marketing trials. Unit shipments of DSL products have increased, but have a
lower average sales price when compared to the DSL product sales made in
fiscal 1996. The lower average sales price of DSL equipment is primarily a
result of product integration efforts. The fiscal 1997 increase in DS1 sales
was caused by overall unit volume increases and slightly higher average unit
sales prices as a result of change in product mix which was offset in part by
continued competitive pricing pressures on unit sales prices when compared to
fiscal 1996. Service revenues increased $900,000 and $2.6 million in fiscal
1996 and 1997, respectively, due primarily to increased audio conference
calling volume from the Company's Conference Plus subsidiary.
Gross Margin. Gross margin decreased as a percentage of revenues from
39.9% in fiscal 1995 to 39.0% in fiscal 1996 and to 27.1% in fiscal 1997.
These decreases were due to product pricing pressures and changes in product
mix within the Company's DS1 and DS0 product lines. In fiscal 1996 this
decrease was offset in part by higher gross margins received on video dial
tone units shipped to two foreign telephone operators. The 1997 decrease in
gross profit margin was also significantly effected by a reserve taken for
ADSL Phase III piece part inventories in the amount of $5.0 million during
the third quarter of 1997. This inventory reserve was the result of the new
generation RADSL platform reducing demand for the prior generation FlexCap
III ADSL products. Excluding the impact of this inventory reserve, the gross
profit margin would have been 33.4% for fiscal 1997. The gross margin for
fiscal 1997 was additionally impacted by a large video teleconference
equipment OEM sale with a lower margin than the Company's other equipment
sales.
Sales and Marketing. Sales and marketing expenses were $12.2 million,
$13.7 million and $16.2 million in fiscal 1995, 1996 and 1997, respectively,
constituting 16.4%, 16.5% and 20.4% of revenues, respectively. These
increases in sales and marketing expenses were primarily due to staff
additions, in both domestic and international markets, to support and promote
the Company's product lines, particularly ADSL products. 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. The
Company anticipates that sales and marketing expenses will continue to
increase in absolute dollars.
Research and Development. Research and development expenses were $10.8
million, $12.6 million and $22.0 million in fiscal 1995 1996 and 1997,
respectively, constituting 14.6%, 15.2% and 27.7% of revenues, respectively.
These increases in research and development expenses were due primarily to
costs associated to additional hiring and increased prototype material costs
to support new and existing product development for ADSL, RADSL and other
emerging technology products. Furthermore, the Company had received
nonrecurring engineering project funding of $800,000 and $2.6 million in
fiscal 1995 and 1996, respectively, for a customer sponsored research and
development project that was not present in fiscal 1997. The Company believes
that a continued commitment to research and development will be required for
the Company to remain competitive and anticipates that research and
development costs will increase in absolute dollars.
General and Administrative. General and administrative expenses were
$6.7 million, $8.4 million and $9.8 million in fiscal 1995, 1996 and 1997
respectively, constituting 9.1%, 10.0% and 12.3% of revenues, respectively.
The dollar increases in general and administration expenses were due
primarily to additional personnel to handle expanded corporate infrastructure
in domestic and international markets. The Company anticipates that general
and administrative costs will continue to increase in absolute dollars as the
Company hires additional personnel.
Interest Expense. Interest expense was $769,000, $859,000 and $330,000
for fiscal 1995, 1996 and 1997, respectively. Interest expense increased, in
fiscal 1995 and 1996, as a result of interest expense incurred by the Company
in connection with borrowings under its revolving promissory notes to fund
expanded working capital requirements and, to a lesser extent, interest
incurred under capital lease obligations. The 1997 decrease in interest
expense was a result of the Company utilizing approximately $11.1 million of
the proceeds generated in the Company's initial public offering of Class A
Common Stock in November 1995 to repay amounts outstanding under the
Company's revolving promissory notes.
Benefit for Income Taxes. Benefit for income taxes was $788,000, $1.9
million and $9.8 million in fiscal 1995, 1996 and 1997, 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 utilize $632,000, $790,000 and
$398,000, respectively, in tax credits primarily generated by increasing
research and development activities. The Company has approximately $3.1
million in income tax credit carry forwards and a tax benefit of $8.9 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 1996 Fiscal 1997
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1995 1995 1995 1996 1996 1996 1996 1997
(in thousands)
Equipment sales . . . . $20,562 $18,639 $19,429 $16,889 $17,412 $18,677 $15,670 $17,307
Service revenue . . . . 1,925 1,821 1,917 2,054 2,846 2,375 2,387 2,711
Total revenues . . . 22,487 20,460 21,346 18,943 20,258 21,052 18,057 20,018
Cost of equipment sales 11,739 11,479 12,057 10,887 11,220 12,830 15,363 12,130
Cost of services . . . 1,083 1,132 1,168 1,234 1,779 1,251 1,557 1,702
Total cost of goods sold 12,822 12,611 13,225 12,121 12,999 14,081 16,920 13,832
Gross margin . . . 9,665 7,849 8,121 6,822 7,259 6,971 1,137 6,186
Operating expenses:
Sales and marketing . 3,685 3,428 3,671 2,960 3,922 3,627 4,200 4,465
Research and
development . . . . 3,024 3,358 3,252 2,969 4,222 4,737 5,851 7,184
General and
administrative . . 2,021 2,065 2,236 2,042 2,224 2,115 2,730 2,688
Total operating
expenses . . . . 8,730 8,851 9,159 7,971 10,368 10,479 12,781 14,337
Operating income (loss)
from continuing
operations . . . . . 935 (1,002) (1,038) (1,149) (3,109) (3,508) (11,644) (8,151)
Other income (expense),
net . . . . . . . . . (258) 55 82 (105) 228 473 631 889
Interest expense . . . 260 261 290 48 97 100 30 103
Income (loss) from
continuing operations
before income taxes . 417 (1,208) (1,246) (1,302) (2,978) (3,135) (11,043) (7,365)
Provision (benefit) for
income taxes . . . . 28 (586) (617) (711) (1,290) (1,205) (4,295) (3,030)
Income (loss) from
continuing
operations . . . . . 389 (622) (629) (591) (1,688) (1,930) (6,748) (4,335)
Discontinued operations
(loss) . . . . . . . (65) (529) (24) (4) (7) 3 (0) (1)
. . . . . . . . . . . .
Net income (loss) . . . $ 324 $(1,151) $ (653) $ (595) $ (1,695) $ (1,927) $ (6,748) $ (4,336)
Quarter Ended
Fiscal 1996 Fiscal 1997
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1995 1995 1995 1996 1996 1996 1996 1997
Equipment sales 91.4% 91.1% 91.0% 89.2% 86.0% 88.7% 86.8% 86.5%
Service revenue 8.6 8.9 9.0 10.8 14.0 11.3 13.2 13.5
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0% 100.0% 100.0%
Cost of equipment sales 52.2 56.1 56.5 57.5 55.4 60.9 85.1 60.6
Cost of services 4.8 5.5 5.5 6.5 8.8 6.0 8.6 8.5
Total cost of goods sold 57.0 61.6 62.0 64.0 64.2 66.9 93.7 69.1
Gross margin 43.0 38.4 38.0 36.0 35.8 33.1 6.3 30.9
Operating expenses:
Sales and marketing 16.4 16.8 17.2 15.6 19.4 17.2 23.3 22.3
Research and
development 13.4 16.4 15.2 15.7 20.8 22.5 32.4 35.9
General and
administrative 9.0 10.1 10.5 10.8 11.0 10.0 15.1 13.4
Total operating
expenses 38.8 43.3 42.9 42.1 51.2 49.7 70.8 71.6
Operating income (loss)
from continuing
operations 4.2 (4.9) (4.9) (6.1) (15.3) (16.7) (64.5) (40.7)
Other income (expense),
net (1.2) 0.3 0.4 (0.6) 1.1 2.2 3.5 4.4
Interest expense 1.2 1.3 1.3 0.2 0.5 0.5 0.2 0.5
Income (los