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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 for the fiscal year ended March
31, 1999 or
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from _____________________ to ____________________.
Commission file number: 0-27266
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WESTELL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3154957
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
750 N. COMMONS DRIVE
AURORA, ILLINOIS 60504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 898-2500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $.01 PAR VALUE
------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
The registrant estimates that the aggregate market value of the registrant's
Class A Common Stock (including Class B Common Stock which automatically
converts into Class A Common Stock upon a transfer of such stock except
transfers to certain permitted transferees) held by non-affiliates (within the
meaning of the term under the applicable regulations of the Securities and
Exchange Commission) on June 24, 1999 (based upon an estimate that 45.0% 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 $103,366,344. 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, 1999, 16,945,030 shares of the registrant's Class A Common Stock
were outstanding and 19,511,189 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 1999 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, 2000 (the "Form 10-K") regarding matters
that are not historical facts are forward-looking statements (as such term is
defined in the rules promulgated pursuant to the Securities Act of 1933, as
amended (the "Securities Act")). Because such forward-looking statements include
risks and uncertainties, actual results may differ materially from those
expressed in or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to, those
discussed herein under "Risk Factors" set forth herein. Westell Technologies,
Inc. ("Westell" or the "Company") undertakes no obligation to release publicly
the result of any revisions to these forward-looking statements that may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
PART I
ITEM 1. BUSINESS
Since 1980, Westell has developed telecommunications products that
address the needs of telephone companies ("telcos") to upgrade their existing
network infrastructures 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 customers
include all the Regional Bell Operating Companies (the "RBOCs") as well as GTE
and other carriers. 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,
inter exchange carriers, Internet service providers and the U.S. federal
government.
Conference Plus, Inc. (CPI), an 88% owned subsidiary, provides audio,
video, and IP multicasting conferencing services. CPI sells its services
directly to large customers, typically Fortune 100 companies and serves
customers, indirectly, through its private re-seller program. CPI is one of the
largest providers of conferencing services that is not directly affiliated with
or owned by a carrier such as AT&T or MCI/WorldCom.
TELECOMMUNICATIONS 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 Local Area
Networks ("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 broadcasts, e-commerce 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. These applications require
individuals to remain on the line longer than the telephone switches were
originally designed to handle. Also, the size and rate of the content demands
more bandwidth on both the backbone and access circuits. 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 typically by installing more trunk
ports on the switches and adding additional bandwidth to their backbones. In
addition, the telephone companies are installing enormous numbers of second
lines at end-user sites to support this demand for access.
Deregulation. Deregulation of the telecommunications industry has
increased the number of competitors in the local access network and has further
placed pressure on telcos 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. Deregulation 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 competing with telcos in the delivery of high-speed digital
transmission and seek to compete in the delivery of traditional local telephone
service as well. Currently available high-speed cable modems enable cable
operators to provide data transmission services to customers in addition to
standard television services. In addition, this trend toward continued
deregulation of the telecommunications industry may further decrease the current
restrictions and regulations affecting telcos' ability to provide high bandwidth
services such as high speed Internet access and corporate LAN extensions.
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. However
products enabling T-1/E-1 transmission have typically required extensive
engineering and provisioning, which make them cost prohibitive for residential
and small business use.
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 high 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), 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 6,000 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. The 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 up to
8.0 Mbps in one direction and up to 1 Mbps in the reverse direction,
while also providing standard analog telephone service (plain old
telephone service or "POTS") 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, and corporate LAN
access, while simultaneously carrying traditional telephone services,
thus mitigating the need for the telephone companies to provision
second lines to support these services.
VDSL. Very High Speed Digital Subscriber Line ("VDSL") is currently
being developed which will increase the data transmission capacity to
up to 52.0 Mbps.
DSLAM. A Subscriber Line Access Multiplexer ("DSLAM") is an ATM based
multiplexer that consolidates multiple DSL access lines into a higher
speed line back to the switching network interfaces (typically OC-3c,
STM-1, DS-3 or E3), reducing cost and operational complexity at the
central site. As network service providers begin deploying DSL based
services the need for DSL line concentration at copper hub points
increases. ATM allows DSLAM access platforms to provide support for
current services as well as future services that require even greater
levels of bandwidth management and quality of service.
Integrated DLC DSL. Digital loop carrier ("DLC"), a remote mini switch
extending central office functionality, is a hubbing point for copper
lines in the local access network. DSL and DSLAM technology can be
integrated into the DLC (with narrowband functions) to provide a cost
effective mechanism for delivering integrated services in a more
incremental manner than deployment directly from the telco central
office site where DLC's are already deployed in the local access
network.
G.Lite. This technology is a version of ADSL that supports a lower set
of speeds and can be deployed (in some instances) without a Plain Old
Telephone Service ("POTS") splitter at the premises, thus facilitating
"plug-and-play" access for consumers, thereby allowing the consumers to
install the technology themselves, and potentially lowering the telcos'
initial installation costs. G.Lite is designed to eliminate the need
for a master splitter and its associated rewiring at the customer's
premises.
DSL Routers (or DSL LAN modems). Similar to ISDN routers (or LAN
modems), these devices allow multiple computers to be networked
together on a LAN (local area network) and share access to the wide
area network (WAN) DSL line.
PPP over ATM. Through the use of network protocols such as
point-to-point protocol (PPP) over ATM, DSL can deliver data much like
traditional dial-up and ISDN products today, but at much faster speeds.
Unlike with dial-up or ISDN systems, DSL products permit telcos to
avoid managing Internet Protocol ("IP") addresses, end users to work
with existing operating systems and protocol stacks on their PCs, and
service providers to continue to provide security through
authentication with the same billing support.
TELECOMMUNICATIONS 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 ("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.
Increasing competition, in terms of the number of entrants and their size,
continues to exert downward pressure on prices for the Company's products. The
following table sets forth the revenues from Westell's three product groups for
the periods indicated (see Management's Discussion and Analysis of Financial
Condition and Results of Operations):
Fiscal Year Ended March 31,
-------------------------------
1997 1998 1999
---- ---- ----
(in thousands)
DSL products............................ $ 8,665 $12,448 $12,099
DS1 products............................ 49,353 52,481 53,232
DS0 products............................ 8,963 5,235 3,707
DSL Products. The Company is a developer and provider of DSL products
and transmission systems that utilize ADSL technology. ADSL systems 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 supporting advanced data
applications including high speed Internet access, local area network ("LAN")
extension, telecommuting virtual libraries, news and information distribution,
etc.
ADSL technology permits the transmission of multiple communication
streams of varying speeds over existing copper wire. The non-repeater
transmission distances of current ADSL systems vary based upon the data rate and
line condition, with a maximum distance of 18,000 feet.
The following table sets forth a representative list of the Company's current
DSL products and their applications.
Product Description Applications
------- ----------- ------------
InterAccess 2 HDSL system (replaces InterAccess introduced T-1 or E-1 services
...................... in 1994) that supports 1.5 or 2.0 Mbps provisioning. Increases
...................... bi-directional services over two pairs of repeaterless distance to up
...................... copper wires. to 12,000 feet over two pairs
of copper wires
SuperVision(R)DSLAM Broadband platform that consolidates DSL Multiple services and
...................... access lines into a single network interface. applications including
...................... SuperVision currently supports using OC-3c (or high-speed Internet access,
...................... STM-1) and DS-3 interfaces back to the remote LAN access, work at
...................... switching network. The access line cards home, corporate training and
...................... operate at rates up to 8 Mbps downstream and distance learning, while
...................... up to 1 Mbps upstream. providing simultaneous
standard telephone service.
FlexCap2(TM) Rate Adaptive DSL (replaces fixed rate Provides similar applications
...................... generation FlexCap(TM)system introduced in 1993) as DSLAM in non ATM
...................... modem to modem system that operates at up to environment. In addition,
...................... 2.24 Mbps downstream and up to 1 Mbps FlexCap(TM)can be configured to
...................... upstream. The rate adaptive capability enables near symmetrical rates.
...................... the operating speed to be automatically
...................... provisioned based on signal quality. Uses CAP
...................... technology.
......................
Westell's FlexCap2(TM) ADSL systems use rate adaptive DSL ("RADSL")
technology and provide bi-directional capacity of up to 1 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.
Westell's SuperVision access multiplexer facilitates 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's SuperVision line cards provide up to 8.0 Mbps of bandwidth supporting
multiple simultaneous video-on-demand channels of information as well as
traditional telephone service. Westell's SuperVision line card can use either
CAP and DMT technology.
In the last five years, over 100 customers have purchased the Company's
ADSL systems to conduct technical and marketing trials for interactive
multimedia applications. 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 40 countries including Australia, Belgium, Canada, Hong Kong,
Italy, Japan, Norway, Singapore, South Korea, Spain, Switzerland, Taiwan and the
United Kingdom for trials and early deployments. Westell continues to be active
in market and field trials as well as initial service deployments including Bell
Atlantic's initial deployment. Through its partnership with Fujitsu Telecom
Europe, Ltd. (FTEL), Westell is involved in the initial deployment of DSL
products by British Telecom. Customers using the Company's ADSL systems for
initial service deployments are not contractually bound for future deployments
or product sales. The Company is unable to predict whether customer initial
service deployments or other technical or marketing trials will be successful or
when significant commercial deployment will begin, if at all.
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 primarily outside the U.S. and to U.S.
federal government agencies.
The Company's growth is dependent upon whether DSL technology gains
widespread commercial acceptance by telcos. Due to the Company's significant
ongoing investment in DSL technology, the Company anticipates losses in each of
the fiscal 2000 quarters. The Company's ability to achieve profitability or
revenue growth in the future will be associated with market acceptance of the
Company's ADSL systems and the development and market acceptance of other DSL
products introduced by the Company. See Risk Factors.
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. 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
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 or the
Company's products. See Risk Factors.
The market for ADSL-based products is intensely competitive. Bids for
recent field trials and initial commercial deployments of ADSL-based products
implicitly assume "forward pricing," that is, pricing ADSL products currently to
reflect the expectation of large future volumes and anticipated reductions in
manufacturing costs. The Company has offered its ADSL-based product to telcos at
prices below current production costs. Such pricing has and could in the future
cause the Company to incur losses on a substantial portion of its ADSL product
sales unless and until it can reduce manufacturing costs. The Company's ability
to reduce its manufacturing costs is dependent upon (i) more cost-effective
chipset and product design, some of which is dependent upon the Company's
strategic partners, and (ii) the achievement of economies of scale. The Company
believes that, following the pronouncement of the International
Telecommunication Union ("ITU") standard for G.Lite, competition among DSL
vendors will also result in pricing pressure and "forward pricing" with respect
to G.Lite ADSL products. There can be no assurance that the Company will be able
to secure significant additional orders and reduce per unit manufacturing costs.
Accordingly, the Company could incur losses in connection with sales of ADSL
products that could have a material adverse effect on the Company's business and
operating results.
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:
Product Description Applications
------- ----------- ------------
NIU Network Interface Unit providing for Facilitates the maintenance of
...................... maintenance of T-1 facilities. T-1 facilities to access
...................... services such as frame relay
...................... and primary rate ISDN.
NIU-PM Network Interface Unit with Performance Facilitates the maintenance
...................... Monitoring that stores information for seven and provides performance
...................... days. monitoring of T-1 facilities
...................... to access services such as
...................... frame relay and primary rate
ISDN.
Mountings Mechanical shelves used to house modules for Provides easy installation of
...................... Westell and other companies DS1, DS0 and DSL end user electronics.
...................... modules.
QuadJack(TM) Transport system that provides transmission Provides transport and
...................... medium for one to four DS1 signals over facilitates maintenance for
...................... fiber. high-speed digital facilities.
SmartLink Automatic Protection System ("APS") for up Increases the reliability of
...................... to 8 T-1 customer lines. T-1 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, intelligent line
repeaters, office repeaters and SmartLink automatic protection 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 sells a third
generation real time performance monitoring NIU (PROACT(TM) NIU) which monitors
the T1 line and returns status messages once a second towards the central office
NIU products represented 52.5%, 51.2% and 52.2% of the Company's revenues in
fiscal 1997, 1998 and 1999, respectively.
The Company's SmartLink(TM) Automatic Protection Switch system monitors
up to eight customer T-1 channels and allows telcos to provide uninterrupted
service in the event of a fault on any channel. Once the SmartLink 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.
The Company has also developed a system controller card that monitors the
SmartLinkTM system and can be connected to the Telco's high level operating
systems as well as a span powered version of the system that does not require
local power.
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:
Product Description Applications
------- ----------- ------------
DST................... Data Station Termination unit providing Point of sale, lottery and
...................... maintenance and equalization of data other analog data.
...................... transmission.
Tandem................ Provides DSO and analog channel cross Special services inter-office
...................... connections in tandem D4 environment cross connections.
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.
Revenues from DS0 products have declined in recent years as telcos
continue to move from lower speed analog and digital transmission services to
networks that deliver higher speed services. The Company expects revenues in the
DS0 product category to continue to decline as a result of this migration.
- ---------------------------
FlexCap, FlexCap2, FlexPak, QuadJack, SlimJack, SmartLink and PROACT are
trademarks of Westell Technologies, Inc. AccessVision and SuperVision are
registered trademarks of Westell Technologies, Inc. All other names indicated by
(R) or (TM) are registered trademarks or trademarks of their respective owners.
- ---------------------------
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. Research and development expenses for fiscal 1997, 1998 and
1999 were $22.0 million $26.6 million and $26.6 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.
There can be no assurance that the Company will be able to introduce
products under development 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 or new
product announcements by competitors. See Risk Factors
The Company and products under development are subject to industry wide
standardization organizations which include, the American National standards
Institute ("ANSI"), the International Telecommunications Union ("ITU") and the
European Telecommunications Standards Institute ("ETSI") which are responsible
for specifying transmission standards for telecommunications technologies. The
industry transmission standard for ADSL adopted by ANSI and ETSI is based upon
DMT transceiver technology. Westell incorporates DMT technology into its DSL
products. The Company has not developed a transceiver technology for its product
offerings and it is dependent transceiver technologies sourced from third
parties. The Company has established multiple strategic relationships with
transceiver technology vendors for transceiver technologies to be used in ADSL
systems by the Company. Absent the proper relationships with key transceiver
technology vendors, the Company's products may not comply with standards set
forth by ANSI and ETSI. Should customers require standards based products that
require transceiver technologies not available to the Company under reasonable
terms and conditions, the Company's business and results of operations would be
materially and adversely affected.
The ITU is expected to complete a final determination of G.Lite in
September 1999. The effect of a G.Lite spliterless specifications on the
Company's products is unclear. The Universal ADSL Working Group (UAWG), formed
in January 1998 by leading companies in the personal computer,
telecommunications and networking industries, is in the process of establishing
splitterless ADSL specifications ("G.Lite") based upon an open, interoperable,
ITU standard. Although products based upon the expected G.Lite standard would
essentially eliminate the telephone wiring modifications at the customer
premises that is required by full DSL products, trials of the G.Lite products
indicate that multiple distributed splitters may be required at the customer
premises for G.Lite products instead of the single, master splitter required by
full rate DSL products. This makes customer premises installations of the G.Lite
products potentially more expensive than full rate ADSL product installations.
The differences in the initial costs, premises wiring requirements, and data
rates between G.Lite products and full rate ADSL products could confuse the
marketplace and delay a mass market adoption of either approach. Additionally,
some of the Company's products will require design changes to achieve compliance
with the expected G.Lite standard. Further, as the Company is dependent on its
strategic silicon partners for providing G.Lite versions of transceiver
technology and these standards are still not finalized, there can be no
assurance that the Company will have a G.Lite trasceiver technology in a timely
manner for product development.
During the last fiscal year, the DSL industry has focused on achieving
interoperability between different vendors. The expectation is that widespread
availability of interoperable equipment from different vendors would speed
market deployment by eliminating dependencies between customer equipment and the
equipment used by the service provider. Although Westell participates in
interoperability tests and programs, there is no assurance that widespread
equipment interoperability would increase unit sales volumes as interoperability
has not been an issue in the market to date. Additionally, improved equipment
interoperability could also increase price pressure on the Company's ADSL
products.
The Company's engineering is conducted in accordance with ISO 9001,
which is the international standard for quality management systems for design,
manufacturing and service. The Company's research and development personnel are
organized into product development teams. Each product development team is
generally responsible for sustaining technical support of existing products,
decreasing manufacturing costs, conceiving new products in cooperation with
other groups within the Company and adapting standard products or technology to
meet new customer needs. In particular, each product development team is charged
with implementing the Company's engineering strategy of reducing product costs
for each succeeding generation of the Company's products in an effort to be a
low cost, high quality provider, without compromising functionality or
serviceability. The Company believes that the key to this strategy is choosing
an initial architecture for each product that enables engineering innovations to
result in future cost reductions. Successful execution of this strategy also
requires that the Company continue to attract and recruit highly qualified
engineers.
STRATEGIC ALLIANCES
The Company's business strategy involves entering into selected
strategic alliances with other companies that are intended to secure
complementary technologies, insure access to transceiver technology chipsets at
the lowest possible cost and to better market its products. These relationships
are expected to enable the Company to more quickly develop products and
penetrate markets and to be able to price its products competitively. The
success of the Company is, and will be, dependent on the efforts of its
strategic partners. The Company's strategic alliances primarily relate to the
development, manufacture and marketing of DSL systems. Examples of the Company's
alliances include the following:
Fujitsu Telecom Europe Limited - Effective April 1998, the Company
entered into a partner agreement to design and manufacture ADSL products for
Fujitsu Telecom. Fujitsu Telecom will distribute the product in Europe and other
worldwide opportunities. The Company is subject to receive royalty payments in
the event that Fujitsu chooses to manufacture the products.
Adtran - Effective March 1998, the Company entered into an agreement
with Adtran, Inc. to develop and market certain products as a member of Adtran's
Total Access partner program. Total Access is a multi-service access system that
can provide services from 56 Kbps to over 6 Mbps via T-1, HDSL or fiber optic
media. The Total Access partner program provides for different vendors to supply
components of the Total Access System.
Alcatel (formerly DSC) - In January 1997, the Company and DSC Telecom
L.P. entered into an agreement for the design and development of an ADSL line
card and the licensing of the Company's ADSL technology for incorporation in
DSC's Litespan(R) 2000 digital loop carrier system. In May 1997, the Company and
DSC entered into an agreement for DSC to distribute the Company's ADSL Remote
Terminal Unit ("ATU-R") modem, to its own customers to complement the Litespan
ADSL line card. In fiscal 1999, Alcatel, a competitor, acquired DSC. The Company
is unable to predict what effect this acquisition, if completed, will have on
this alliance.
See Risk Factors.
Alcatel USA - In March 1999, the Company signed an agreement with
Alcatel USA, a Division of Alcatel Networks. The Company gained the right to use
Alcatel USA's DSLAM product to assist the Company in its development of Customer
Premise Equipment that successfully interoperates with Alcatel equipment.
Lucent - In September 1997, the Company and Lucent Technologies, Inc.
entered into an agreement for the design and development of a dual ADSL line
card and a ATM multiplexer card incorporating the Company's ADSL technology for
use in Lucent's SLC(R) Series 5 and SLC-2000 digital loop carrier systems. In
November 1997, the Company and Lucent entered into a nonexclusive agreement to
integrate the Company's SuperVision(R) DSLAM broadband capabilities with
Lucents' 5ESS(R) switch product. Under this agreement, Lucent will market and
sell the ADSL enabled SLC and SuperVision solutions.
CUSTOMERS
The Company's principal customers historically have been U.S. telcos.
Since fiscal 1993, the Company has also marketed its products internationally.
In addition, Westell sells products to several other entities, including public
telephone administrations located outside the U.S., independent domestic local
exchange carriers, competitive local exchange carriers, inter exchange carriers
and the U.S. federal government. International revenues represented
approximately $4.4 million, $8.5 million and $8.5 million of the Company's
revenues in fiscal 1997, 1998 and 1999, respectively, accounting for 5.5%, 9.9%
and 9.1% of the Company's revenues in such periods.
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 61.9%, 51.1% and 46.6% of the Company's
revenues in fiscal 1997, 1998 and 1999, respectively and sales to Ameritech
accounted for 16.2% of the Company's revenues in fiscal 1999. Consequently, the
Company's future success will depend upon the timeliness and size of future
purchase orders from the RBOCs, the product requirements of the RBOCs, the
financial and operating success of the RBOCs, and the success of the RBOCs'
services that use the Company's products. Any attempt by an RBOC or other telco
access providers to seek out additional or alternative suppliers or to
undertake, as permitted under applicable regulations, the internal production of
products would have a material adverse effect on the Company's business and
results of operations. In addition, the Company's sales to its largest customers
have in the past fluctuated and in the future are expected to fluctuate
significantly from quarter to quarter and year to year. The loss of such
customers or the occurrence of such sales fluctuations would materially
adversely affect the Company's business and results of operations.
The 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. The Company has supply contracts with most of its major
customers, but these contracts typically do not establish minimum purchase
commitments.
MARKETING, SALES AND DISTRIBUTION
The Company sells its products in the U.S. through its domestic field
sales organization and selected distributors. The Company markets its products
internationally in over 40 countries under various distribution arrangements
that include strategic partnerships, OEM agreements, technology licenses,
distributors, and internationally based sales personnel. As of March 31, 1999,
the Company's equipment marketing, sales and distribution programs were
conducted by 118 employees.
For large telephone companies, such as the RBOCs and Post Telephone and
Telegraphs (PTTs)], the Company sells its DSL products indirectly through its
strategic partners. See "--StrategicAlliances." These large telcos purchase
their DSL products in a portfolio with other telecommunications products.
Westell provides DSL equipment and services for the central office and telco
networks to its strategic partners who then sell those products along with other
related products to the telcos. The Company sells its DSL modems, for use by
residential and business customers on their premises, directly to small and
medium-sized providers.
International revenues represented 5.5%, 9.9% and 9.1% of the Company's
revenues in fiscal 1997, 1998 and 1999, respectively. The Company's
international operations are based in Aurora, Illinois and a distribution and
service network that supports customers in more than 40 countries.
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 RADSL or DSLAM.
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. See Risk Factors.
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 may require the Company to accept returns of products or
indemnify such customers against certain liabilities arising out of the use of
the Company's products. Although, to date, the Company has not experienced any
significant product returns or indemnification claims under these contracts, any
such claims or returns could have a material adverse effect on the Company's
business and results of operations.
The Company's products are required to meet rigorous standards imposed
by its customers. Most of the Company's products carry a limited warranty
ranging from one to seven years, which generally covers defects in materials or
workmanship and failure to meet published specifications, but excludes damages
caused by improper use and all other 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. 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. See Risk Factors
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. 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. 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, 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 DSL systems, 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. Reliance on third-party subcontractors involves several risks,
including the potential absence of adequate capacity and reduced control over
product quality, delivery schedules, manufacturing yields and costs. The use of
subcontractors could result in material delays or interruption of supply as a
consequence of required re-tooling, retraining and other activities related to
establishing a new subcontractor relationship. 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.
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 NIU's, 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 believes that because a substantial portion of customer
orders for of DS0 and DS1 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,
Nokia,ECI Telecom, Ltd., Ericsson, Cisco Systems, Nortel, Orckit Communications,
Ltd. PairGain Technologies, Inc., Paradyne, 3Com, and Siemens. Many of the
Company's competitors and potential competitors have greater financial,
technological, manufacturing, marketing and human resources than the Company.
Certain of our competitors are large network level system suppliers who are much
larger than the Company and can offer all elements of a network solution. The
Company has addressed this competition by entering into strategic alliances to
offer integrated solutions in addition to our ADSL product offering. The
Company's ability to compete with these larger system suppliers will depend on
the success of the alliances we form and the system solutions created to meet
customers needs. The inability to form successful alliances and develop systems
that meet customers' requirements will materially adversely affect the Company's
business and results of operations.
The Company expects competition in the ADSL market in the near future
from numerous other companies. In addition, the Telecommunications Act permits
the RBOCs to engage in manufacturing activities. Therefore, RBOCs, which are the
Company's largest customers, may potentially become the Company's competitors as
well. 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 development of G.Lite products
may reduce the demand for the Company's existing ADSL products. 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. 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. See Risk Factors
TELECONFERENCE SERVICES
Conference Plus, Inc. ("CPI"), founded in 1988, is a leading provider
of fully managed, multi-point electronic meeting services utilizing
teleconferencing technologies. The Company is an 88.2% owned subsidiary of
Westell Technologies, Inc. and manages its teleconferencing services through its
operations center located in Schaumburg, Illinois and facilities in Lombard,
Illinois and Dublin, Ireland. CPI enables its customers to share information via
the telecommunications based mediums of audio, video, document and data
conferencing, thus allowing customers to increase productivity and save money by
reducing travel time, bringing down travel costs, and making it easier for
people in remote locations to work together. Teleconferencing technologies also
allow organizations and individuals to collect and disseminate information
faster, more accurately and without the associated costs of face-to-face
meetings.
CPI services generated $10.3 million, $14.1 million and $21.3 million
in revenues in fiscal 1997, 1998 and 1999, respectively. A majority of CPI's
revenues are derived from private label commercial teleconferencing services
where customers market CPI services under their own brand name. Such companies
choose to private label audio and video teleconferencing because it provides a
complete outsource of internal and commercial services. The outsourcing of
private label conference services is also desired by network carriers and RBOCs
because it fundamentally differs from the core products of these providers.
Audio and video teleconferencing is a people-intensive service, requiring high
levels of concentration on the execution of each and every call. In addition to
privately branded teleconferencing services, CPI offers a wide range of direct
commercial teleconferencing services and multi point video conference bridging.
The audio conferencing services include; 1) operator initiated calls where the
CPI operator calls the participants, 2) operator assisted calls where the
customer dials in on their own network ("meet-me") or the customers call into a
toll free network ("800 meet-me") and, 3) fully automated services ("pass code")
where the customers use a pre-assigned code to access the conference call
without the assistance of an operator. Expanded capabilities also provide for
advanced meeting service optioning which include, call polling, questions &
answer queuing, broadcast/listen only, integrated voice response digital
playback, conference call tape recording and playback, transcription and
reservation/resource management services.
Conference Plus has been distinguished by receiving the first ISO 9002
certification in the audio and video conferencing services industry. Receiving
ISO 9002 certification means that Conference Plus meets the standards set by the
International Organization for Standardization to define world class service and
has set the benchmark for quality in the teleconferencing service industry.
CPI's strategic focus includes the following key objectives:
Private Label Services - Leverage leadership in private label services
through offering flexibility in network carrier arrangements,
superior tailored reservations, confirmation, billing and customer
service optioning and extensive experience in the design,
implementation and ongoing management of private label programs.
Automated Conferencing - Deliver solutions for automated conferencing
through promoting, electronic and Internet access to reservation
and billing systems, and improved, convenient and cost effective
use of automated (pass code) teleconferencing systems.
International Expansion - CPI currently serves its teleconferencing
needs of customers headquartered in the United States from its
Schaumburg, Illinois facility. As these customers globalize their
telecommunications services, CPI will be required to expand its
operational presence internationally to meet these needs. In
addition, the international market for teleconferencing is
expected to grow substantially as a result of deregulation and
improved networks with associated reductions in end user costs
which will allow for increased opportunity to service foreign
based companies in need of teleconferencing technologies and
services.
Multimedia and IP Capability- Offer customers the ability to conduct
multi-point conferencing services using a variety of media
including voice, video and Internet Protocol applications.
Commitment to Service Quality, Customer Service and Low-Cost Operations
- CPI recognizes that providing high quality service is an
important aspect affecting CPI's ability to compete in both the
domestic and international teleconferencing markets. The Company's
commitment to continuous improvement and total customer
satisfaction is evidenced by its use of a total quality management
program which has resulted in CPI becoming ISO 9002 certified in
November 1997. CPI will continue to focus on total quality
management and continuous improvement to meet and exceed customer
expectations. In addition, CPI's focus will also include
implementation of cost improvements to allow CPI to offer world
class services at low cost to remain competitive in its
teleconference service offerings.
CPI sells its services in the U.S. principally through its domestic
in-house sales organization, through agents under contract to CPI and through
the efforts of the Company's Private Label customers. As of March 31, 1999,
CPI's sales, service representative and agent support programs were conducted by
35 employees.
The private label customers and many of the Company's other customers
are significantly larger than, and are able to exert a high degree of influence
over CPI. Prior to selling its services, the Company must undergo lengthy
approval and purchase processes. Evaluation can take as little as a few months
for services that vary slightly from existing services used by the prospective
customer to a year or more for services based on technologies such as video or
data teleconferencing or which represent a new strategic direction for the
customer, as in the case with private labeling teleconference services for a
RBOC.
Conference Plus maintains 24 hour, 7 day a week telephone support and
provides on-site support for larger, more complex teleconferences. The Company
also provides technical consulting, call planning assistance and usage analysis
to its customers with respect to the introduction, enhancement and expanded
utilization of its services.
Competition in the teleconferencing business is intense and the Company
expects that competition will increase due to low barriers to entry and recent
entrants into the audio teleconferencing service market. Many of Conference
Plus' competitors, including AT&T, MCI Communications and Sprint Communications,
have much greater name recognition, more extensive customer service and
marketing capabilities and substantially greater financial, technological and
personnel resources than the Company. There can be no assurance that the Company
will be able to successfully compete in this market in the future or that
competitive pressures will not result in price reductions that would materially
adversely affect 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. Under the
Telecommunications Act, new regulations have been established whereby telcos may
provide various types of video services. Rules to implement these new
regulations have been established whereas statutory provisions are now being
considered by the FCC.
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. See Risk
Factors - "Government Regulation."
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 related to
NIU's. 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. See
Risk Factors - "Proprietary Technology; Risk of Third-Party Claims of
Infringement."
Many of the Company's products incorporate technology developed and
owned by third parties. For example, the Company is dependent upon third party
suppliers for DSL transceiver technology. 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 licensors 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 DSL products are dependent upon transceiver technology
licensed or sourced from third party suppliers. These licenses or sourcing
alliances are nonexclusive and have been licensed to numerous other
manufacturers or will not require a license to acquire. Without a third party
transceiver technology the Company would not be able to produce any of its DSL
systems. Consequently, if the Company's third party transceiver suppliers fail
to deliver implementable or standards compliant transceiver solutions to the
Company and other alternative sources of ADSL transceiver technology are not
available to the Company at commercially acceptable terms, the Company's
business and results of operations would be materially and adversely affected.
EMPLOYEES
As of March 31, 1999, the Company had 740 full-time employees.
Westell's equipment manufacturing business had a total of 533 full-time
employees, consisting of 118 in sales, marketing, distribution and service, 161
in research and development, 219 in manufacturing and 35 in administration.
Conference Plus had a total of 207 full-time employees. None of the Company's
employees are represented by a collective bargaining agreement nor has the
Company ever experienced any work stoppage. The Company believes its
relationship with its employees is good.
----------------------
RISK FACTORS
You should carefully consider the following risk factors in addition to
the other information contained and incorporated by reference in this prospectus
before purchasing our Class A Common Stock. You should also consider the other
information in this prospectus and the additional information in our other
reports filed with the SEC and incorporated by reference into this prospectus.
The risks and uncertainties described below are not the only ones that we face.
Additional risks and uncertainties not presently known to us or that we
currently believe immaterial may also impair our business operations.
WE HAVE INCURRED AND CONTINUE TO EXPECT LOSSES
Due to our significant ongoing investment in DSL technology, we have
incurred and anticipate that our losses may extend through each of the fiscal
2000 quarters. To date, we have incurred operating losses, net losses and
negative cash flow on both an annual and quarterly basis. For the year ended
March 31, 1999, we had operating losses of approximately $35.1 million, net
losses of $ 35.0 million.
Our core DS0 and DS1 products are not expected to generate sufficient
revenues or profits to offset any losses that we may experience due to a lack of
sales of DSL systems. As a result, if telephone companies fail to deploy our DSL
systems, and we therefore do not receive significant revenues from DSL sales,
then our business and operating results may be materially adversely affected in
the future.
We believe that our future revenue growth and profitability will depend
on:
o creating sustainable DSL sales opportunities either directly or in
conjunction with strategic partners;
o developing new and enhanced DS1 products;
o developing other niche products for both DSL and DS1 markets;
and
o growing our teleconference service revenues.
We can offer no assurances that we will achieve profitability in the future.
WE DEPEND ON ADSL MARKET ACCEPTANCE AND GROWTH FOR FUTURE SUCCESS
We expect to continue to invest significant resources in the
development of DSL products. Because the DSL market is in its early stages, our
DSL revenues have been difficult to forecast. If the DSL market fails to grow or
grow more slowly than anticipated, then our business, revenues and operating
results would be materially adversely affected.
Customers have only recently begun to consider implementing ADSL
products in their networks. we have shipped most of our ADSL products for trials
and early deployment. Our customers are in initial service deployments and are
not contractually bound to purchase our DSL systems in the future. We are unable
to predict whether these initial service deployments or other technical or
marketing trials will be successful and when significant commercial deployment
of our products will begin, if at all. The timing of DSL orders and shipments
can significantly impact our revenues and operating results.
Even if our customers adopt policies favoring full-scale implementation
of DSL technology, our DSL-based sales may not become significant. There is no
guaranty that our customers will select our DSL products instead of competitive
products. If we fail to significantly increase our ADSL sales, then our
business, operating results and financial condition will be materially adversely
affected.
PRICING PRESSURES ON PRODUCTS MAY AFFECT OUR ABILITY TO BECOME PROFITABLE
Competition in the DSL market continues to grow. Bids for recent field
trials of ADSL-based products implicitly assume "forward pricing," (that is,
pricing ADSL products to reflect the expectation of large future volumes and
corresponding reductions in manufacturing costs) or "portfolio pricing" (that is
providing ADSL at a lower price as part of a bundle of other equipment and/or
services. We are offering DSL products based upon forward pricing. For instance
in the September and December 1998 quarters, we shipped ADSL products to
customers that were priced below our current production costs. As a result, we
recognized forward pricing losses of approximately $1.7 million and $800,000,
respectively, for DSL orders received during those quarters. Such pricing will
cause us to incur losses on a substantial portion of our ADSL product sales
unless and until we can reduce manufacturing costs. We believe that
manufacturing costs may decrease when (i) more cost-effective transceiver
technologies are available, (ii) product design efficiencies are obtained, and
(iii) economies of scale are obtained related to increased volume. There is no
guaranty that we will be able to secure significant additional orders and reduce
per unit manufacturing costs that we have factored into our forward pricing of
ADSL products.
We also believe that, following the expected pronouncement of the International
Telecommunication Union standard for G.Lite in late 1999, competition will
result in pricing pressure and "forward pricing" with respect to splitterless
ADSL products.
Accordingly, we could continue to incur losses in connection with sales of DSL
products even if our DSL unit volume increases, which would have material
adverse effect on us.
OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY, CAUSING
OUR STOCK PRICE TO BE VOLATILE OR DECLINE
We expect to continue to experience significant fluctuations in
quarterly operating results. Factors that have had and may continue to influence
our quarterly operating results include:
o the size and timing of customer orders and subsequent
shipments;
o customer order deferrals in anticipation of new products;
o cancellation or deferral of one or a small number of our
customer orders;
o timing of product introductions or enhancements by us or our
competitors;
o market acceptance of new products;
o technological changes in the telecommunications industry;
o competitive pricing pressures;
o accuracy of customer forecasts of end-user demand;
o write-offs for obsolete inventory;
o changes in our operating expenses;
o personnel changes;
o foreign currency fluctuations;
o changes in the mix of products sold;
o quality control of products sold;
o disruption in sources of supply;
o regulatory changes;
o capital spending;
o delays of payments by customers; and
o general economic conditions.
Sales to our customers typically involve long approval and procurement
cycles and can involve large purchase commitments. Cancellation or deferral of
one or a small number of orders could cause significant fluctuations in our
quarterly operating results. As a result, we believe that period-to-period
comparisons of our quarterly operating results are not necessarily meaningful
and should not be relied upon as indications of future performance. In addition,
these quarterly fluctuations make it more difficult to forecast our revenues.
Therefore, it is likely that in some future quarters our operating results will
be below the expectations of securities analysts and investors.
In addition, we expect to continue to evaluate new product
opportunities and engage in extensive research and development activities. As a
result, we will continue to invest heavily in research and development and sales
and marketing, which will adversely affect short-term operating results. Due to
our significant ongoing investment in research and development and sales and
market development, we anticipate that our losses may extend through each of the
fiscal 2000 quarters. In view of our reliance on the emerging DSL market for
growth and the unpredictability of orders and subsequent revenues, we believe
that period to period comparisons of our operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
OUR LACK OF BACKLOG MAY AFFECT OUR ABILITY TO ADJUST TO AN UNEXPECTED SHORTFALL
IN ORDERS
Because we generally ship products within a short period after receipt
of an order, we typically do not have a material backlog of unfilled orders, and
our revenues in any quarter are substantially dependent on orders booked in that
quarter. Our expense levels are based in large part on anticipated future
revenues and are relatively fixed in the short-term. Therefore, we may be unable
to adjust spending in a timely manner to compensate for any unexpected shortfall
of orders. Accordingly, any significant shortfall of demand in relation to our
expectations or any material delay of customer orders would have immediate
adverse impact on our business and operating results.
EVOLVING INDUSTRY STANDARDS MAY ADVERSELY AFFECT OUR DSL SALES
Industry wide standardization organizations, such as the American
National Standards Institute in the United States and the European
Telecommunications Standards Institute, are responsible for specifying
transmission standards for telecommunications technologies. DMT technology is
the industry transmission ADSL standard adopted by these organizations. We have
not internally developed a transceiver technology for our product and are
dependent on transceiver technologies sourced from third parties. We have
established multiple strategic relationships with transceiver technology vendors
for DSL transceiver technologies to be used in our DSL systems. Absent the
proper relationships with key transceiver technology vendors, our products may
not comply with the developing standards for DSL. If customers require
standards-based products that require transceiver technology not available to us
under reasonable terms and conditions, then our business and operating results.
Various competitors and industry groups continue to introduce several
variations of DSL. The Universal ADSL Working Group has worked to establish
splitterless ADSL specifications (known as G.Lite) leading to an open,
interoperable standard. G.Lite is designed to enable simple "plug and play"
access by consumers, thereby significantly lowering telephone companies' initial
installation costs. We are dependent on our strategic transceiver technology
vendors for providing a "G.Lite" transceiver technology. Since standards have
not been established for these G.Lite versions, there can be no assurance that
these versions will be available to us in a timely manner for the purpose of
product development. Although we expect that the G.Lite specifications will be
announced by the end of 1999, there can be no assurance that the Universal ADSL
Working Group will agree upon such specifications in a timely fashion if at all.
The G.Lite standard could delay deployment of our full rate ADSL offerings by
customers.
The attempted introduction of competing standards or alternate
implementation specifications could result in confusion in the market and delay
any decisions regarding deployment of DSL systems until various specifications
are determined by the various standards bodies. The inability to meet customer
requirements or the continual introduction of new DSL offerings could delay the
decision process of DSL system deployment. Any delay would materially adversely
impact sales of our DSL product offerings and could have a material adverse
effect on our business and operating results.
THERE CAN BE NO ASSURANCE THAT WE WILL DEVELOP COMMERCIALLY SUCCESSFUL PRODUCTS
OR THAT OUR PRODUCTS WILL NOT BECOME OBSOLETE BY CHANGING TECHNOLOGY OR NEW
PRODUCTS.
The markets for our 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
telephone company service offerings. If technologies applicable to our products
(or telephone company service offerings based on our products) become obsolete
or fail to gain widespread commercial acceptance, then our business and
operating results will be materially adversely affected.
Moreover, the introduction of products embodying new technology or
changes in telephone company services could render our existing products, as
well as products under development, obsolete and unmarketable. For example, we
believe 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
our existing products such as our Network Interface Units, which accounted for
at least 50% of our revenues in each of the last three fiscal years. Further, we
believe that the domestic market for many of our DS0-based products is
decreasing, and will likely continue to decrease, as high capacity digital
transmission becomes less expensive and more widely deployed.
Our future success will largely depend upon our ability to continue to
enhance our existing products and to successfully develop and market new
products on a cost-effective and timely basis. In this regard, most of our
current product offerings apply primarily to the delivery of digital
communications over copper wire in the local access network. While we have
competed successfully to date by developing high performance products for
transmission over copper wire, we expect 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 us to develop
new products to meet the demands of these emerging transmission media.
WE MAY EXPERIENCE DELAYS IN THE DEPLOYMENT OF NEW PRODUCTS
If we fail to deploy new and improved products, our competitive
position and financial condition would be materially and adversely affected. Our
past sales have resulted from our ability to anticipate changes in technology,
industry standards and telephone company service offerings, and to develop and
introduce new and enhanced products and services. Our continued ability to adapt
to such changes will be a significant factor in maintaining or improving our
competitive position and our prospects for growth. Delays in product development
are affected by rapid technological changes in the telecommunications industry,
the Regional Bell Operating Companies' lengthy product approval and purchase
processes and our reliance on third-party technology for the development of new
products. There can be no assurance that we will successfully introduce new
products on a timely basis or achieve sales of new products in the future. In
addition, there can be no assurance that we will have the financial and
manufacturing resources necessary to continue to successfully develop new
products based on emerging technology or to otherwise successfully respond to
changing technology and industry standards and telephone company service
offerings.
THE MARKET IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY, ESPECIALLY AGAINST ESTABLISHED INDUSTRY COMPETITORS WITH
SIGNIFICANTLY GREATER FINANCIAL RESOURCES
We expect competition to increase in the future especially in the
emerging ADSL market. Because we are significantly smaller than most of our
competitors, we may lack the financial resources needed to capture increased
market share. Our principal competitors in the DS0 market are Adtran, Inc.,
Pulsecom, Tellabs, Inc. and Teltrend, Inc. Our principal competitors in the DS1
market are ADC Telecommunications Inc., Applied Digital Access Inc., PairGain
Technologies, Inc. and Teltrend, Inc. Our current competitors in the ADSL market
include Alcatel Network Systems, AGCS, Cabletron, ECI Telecom, Ltd., Nokia,
Copper Mountain, Cabletron, Ltd., Ericsson, Cisco Systems, Lucent Technologies,
Inc., Nortel, Orckit Communications, Ltd. PairGain Technologies, Inc., Paradyne,
3Com, and Siemens. In addition, the Telecommunications Act permits the Regional
Bell Operating Companies to engage in manufacturing activities. Therefore,
Regional Bell Operating Companies, which are our largest customers, may
potentially become our competitors as well. We expect continued aggressive
tactics from many of these competitors such as:
o Forward pricing of products;
o Early announcements of competing products;
o "One-stop shopping" appeals;
o Customer financing assistance; and
o Intellectual property disputes.
These tactics can be particularly effective in a highly concentrated customer
base such as ours.
Many of our competitors are large network level system suppliers who
are much larger than us and can offer all elements of a network solution.
In addition, the development of G.Lite products could enable other
companies with less technological expertise than us to more readily enter the
DSL market and could place additional pricing pressures on our other ADSL
products.
We have addressed our competition by entering into strategic alliances
to offer integrated solutions in addition to our overlay ADSL product offering.
Our ability to compete with these larger system suppliers will depend on the
success of our alliances and system solutions. Our inability to form successful
alliances and develop systems that meet customer requirements will materially
adversely affect our business and operating results.
Any increase in competition could reduce our gross margin, require
increased spending on research and development and sales and marketing, and
otherwise materially adversely affect our business and operating results.
Our products also face competition from fiber, wireless, cable modems
and other products delivering broadband digital transmission. Rockwell
International and Nortel are collaborating on development of consumer digital
subscriber line, known as CDSL, a 1 Mbps digital modem technology. The companies
anticipate that CDSL modems will be priced, sold, and installed similarly to the
way 56 Kbps modems are handled today. Further, many telephone companies and
other local access providers have adopted policies that favor the deployment of
fiber. To the extent that telephone companies choose to install fiber and other
transmission media between the central office and the end user, we expect that
demand for our copper wire-based products will decline. Telephone companies also
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. If telephone companies decide not to aggressively respond to this
competition and fail to offer high speed digital transmission, then the overall
demand for ADSL products will 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 us such as our Network Interface
Units.
Our subsidiary Conference Plus, Inc. also participates in the highly
competitive industry of voice, video, and multimedia conferencing services.
Competitors include stand-alone conferencing companies and major
telecommunications providers. In addition, Internet Service Providers may
attempt to expand their revenue base by providing conferencing services.
Conference Plus's ability to sustain growth and performance is dependent on its:
o maintenance of high quality standards and low cost position;
o continued operational excellence;
o strong alliances and partnerships;
o international expansion; and
o evolving technological capability.
INDUSTRY CONSOLIDATION COULD MAKE COMPETING MORE DIFFICULT
Consolidation of companies offering high speed local data products is
occurring through acquisitions, joint ventures and licensing arrangements
involving our competitors and our customers' competitors. We cannot assure that
we will be able to compete successfully in an increasingly consolidated
industry. Any heightened competitive pressures that we may face may have a
material adverse effect on our business, prospects, financial condition and
result of operations.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS
We have and will continue to depend on the Regional Bell Operating
Companies and other independent local exchange carriers for substantially all of
our revenues. Sales to the Regional Bell Operating Companies accounted for
61.9%, 51.1% and 46.6% of our revenues in fiscal 1997, 1998 and 1999,
respectively. Consequently, our future success will depend significantly upon
the timeliness and size of future purchase orders from the Regional Bell
Operating Companies, the product requirements of the Regional Bell Operating
Companies, the financial and operating success of the Regional Bell Operating
Companies, and the success of the Regional Bell Operating Companies' services
that use our products. Any attempt by an RBOC or other telephone company 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 our business and operating results. In
addition, sales to our largest customers have fluctuated and are expected to
fluctuate significantly from quarter to quarter and year to year. The loss of
customers or the occurrence of sales fluctuations would materially adversely
affect our business and operating results. Even if demand for our products is
high, the Regional Bell Operating Companies have sufficient bargaining power to
demand low prices and other terms and conditions that may materially adversely
affect our business and operating results.
SBC Communications and Pacific Telesis have recently completed a
merger, SBC Communications and Ameritech, and Bell Atlantic and GTE each have
received merger approval from the requisite percentage of their shareholders.
Conference Plus's customer base is very concentrated as its top ten
customers represent a large portion of revenue. Customers of Conference Plus
have expanded their requirements for our services, but there can be no assurance
that such expansion will increase in the future. Any loss of a major account,
would have a material adverse effect on Conference Plus, Inc. In addition, any
merger or acquisition of a major customer could have a material adverse effect
on Conference Plus.
OUR CUSTOMERS HAVE LENGTHY PURCHASE CYCLES AND ARE ABLE TO EXERT A HIGH DEGREE
OF INFLUENCE OVER US
The Regional Bell Operating Companies and our other customers are
significantly larger than we are and are able to exert a high degree of
influence over us. Prior to selling products to telephone companies, we must
undergo lengthy approval and purchase processes. Evaluation can take as little
as a few months for products that vary slightly from existing products or up to
a year or more for products based on new technologies such as DSL products.
Accordingly, we are continually submitting successive generations of our current
products as well as new products to our customers for approval. The length of
the approval process can vary and is affected by a number of factors, including
the complexity of the product involved, priorities of telephone companies,
telephone companies' budgets and regulatory issues affecting telephone
companies. The requirement that telephone companies obtain FCC approval for
certain new telephone company services prior to their implementation has in the
past delayed the approval process. Such delays in the future could have a
material adverse affect on our business and operating results. While we have
been successful in the past in obtaining product approvals from our customers,
there is no guaranty that such approvals or that ensuing sales of such products
will continue to occur.
WE ARE DEPENDENT ON THIRD-PARTY TECHNOLOGY
Many of our products incorporate technology developed and owned by
third parties. Consequently, we must rely upon third parties to develop and
introduce technologies which enhance our current products and to develop new
products. Any impairment or termination of our relationship with any licensers
of third-party technology would force us to find other developers on a timely
basis or develop our own technology. There is no guaranty that we will be able
to obtain the third-party technology necessary to continue to develop and
introduce new and enhanced products, that we will obtain third-party technology
on commercially reasonable terms or that we will be able to replace third-party
technology in the event such technology becomes unavailable, obsolete or
incompatible with future versions of our products. The absence of or any
significant delay in the replacement of third-party technology would have a
material adverse effect on business and operating results.
ADSL products are dependent upon CAP and DMT transceiver technologies
licensed or sourced from third party suppliers. Without a third party
transceiver technology we would not be able to produce any of our ADSL systems.
GlobeSpan Semiconductor, Inc. is currently the sole provider of the CAP
transceiver technology and we currently have entered into alliances with
Alcatel, Analog Devices, Inc (ADI), Motorola and Texas Instruments to source
their DMT transceiver technology. These licenses or sourcing alliances are
nonexclusive and have been licensed to numerous other manufacturers or will not
require a license to acquire. Consequently, if our third party transceiver
suppliers fail to deliver implementable or standards compliant transceiver
solutions to us and other alternative sources of ADSL transceiver technology are
not available to us at commercially acceptable terms, then our business and
operating results would be materially and adversely affected.
WE ARE DEPENDENT ON SOLE OR LIMITED SOURCE SUPPLIERS
Certain key components, such as integrated circuits and other
electronic components, used in our products are currently available from only
one source or a limited number of suppliers. For example, we currently depend on
GlobeSpan Technologies, Alcatel and ADI 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 us and
other users based upon past usage. There is no guaranty that we 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 us on commercially reasonable terms. Integrated circuits and
electronic components are key components in all of our products and are
fundamental to our business strategy of developing new and succeeding
generations of products at reduced unit costs without compromising functionality
or serviceability. In the past, however, we have experienced delays in the
receipt of certain of our key components, such as integrated circuits, which
have resulted in delays in related product deliveries. We anticipate that
integrated circuit production capacity and availability of certain electronic
components of our suppliers may be insufficient to meet demand for such
components in the future. 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 as required,
could result in delays or reductions in product shipments, and consequently have
a material adverse effect on our customer relationships and our business and
operating results.
OUR SUCCESS IS DEPENDENT ON PARTNERS AND ALLIANCES
We have developed and maintain partnerships and alliances with other
companies in order to secure complementary technologies, to lower costs, and to
better market and sell our products. These partnerships and alliances provide
important resources and channels for us to compete successfully. For example,
our partnership with Lucent Technologies for the development of ADSL line cards
enables us to access to a significant number of potential customers. We cannot
provide any assurances that these partnerships will continue in the future. A
loss of one or more partnerships and alliances could materially adversely affect
our business and operating results.
OUR SERVICES ARE AFFECTED BY UNCERTAIN GOVERNMENT REGULATION AND CHANGES IN
CURRENT OR FUTURE LAWS OR REGULATIONS COULD RESTRICT THE WAY WE OPERATE OUR
BUSINESS
Many of our customers are subject to regulation from federal and state
agencies, including the FCC and various state public utility and service
commissions. While such regulation does not affect us directly, the effects of
such regulations on our customers may, in turn, adversely impact our business
and operating results. For example, FCC regulatory policies affecting the
availability of telephone company services and other terms on which telephone
companies conduct their business may impede our penetration of certain markets.
The Telecommunications Act lifted certain restrictions on telephone companies'
ability to provide interactive multimedia services including video on demand.
The Telecommunications Act establishes new regulations whereby telephone
companies 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 telephone companies providing video
products has become more favorable, it is uncertain at this time how this will
affect telephone companies' demand for products based upon ADSL technology. In
addition, our business and operating results may also be adversely affected by
the imposition of certain tariffs, duties and other import restrictions on
components that we obtain from non-domestic suppliers or by the imposition of
export restrictions on products that we sell internationally. Internationally,
governments of the United Kingdom, Canada, Australia and numerous other
countries actively promote and create competition in the telecommunications
industry. Changes in current or future laws or regulations, in the U.S. or
elsewhere, could materially and adversely affect our business and operating
results.
In addition, the Telecommunications Act permits the Regional Bell
Operating Companies 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 Regional Bell Operating Companies, which are our largest
customers, may become our competitors as well.
POTENTIAL PRODUCT RECALLS COULD ADVERSELY AFFECT OUR BUSINESS
We have supply contracts with most of our major customers. These
contracts typically do not establish minimum purchase commitments, and they may
require us to accept returns of products or indemnify such customers against
certain liabilities arising out of the use of our products. Although, to date,
we have not experienced any significant product returns or indemnification
claims under these contracts, any such claims or returns could have a material
adverse effect on our business and operating results. While we maintain a
comprehensive quality control program, there can be no assurance that our
products will not suffer from defects or other deficiencies or that we will not
experience a material product recall in the future. Complex products such as
those offered by us 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 our products.
WE MAY INCUR WARRANTY EXPENSES
Our products are required to meet rigorous standards imposed by our
customers. Most of our products carry a limited warranty ranging from one to
seven years, 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. If there are material
deficiencies or defects in the design or manufacture of our products, then the
affected products could be subject to recall. For the past five fiscal years,
our warranty expenses have been relatively insignificant. Although we maintain a
comprehensive quality control program, there is no guaranty that our products
will not suffer from defects or other deficiencies or that we will not
experience a material product recall in the future. Our standard limited
warranty for its ADSL products ranges from one to five years. Since our DSL
products are new, with limited time in service, we cannot predict the level of
warranty claims that we will experience for these products. Despite testing,
there is no guaranty 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 that we have historically experienced and
have a material adverse effect on our business and operating results.
RISKS DUE TO INTERNATIONAL OPERATIONS
International revenues represented 5.5%, 9.9% and 9.1% of our revenues
in fiscal 1997, 1998 and 1999, respectively. Our international revenues are
subject to the risks of conducting business internationally, which includes
unexpected changes in regulatory requirements, foreign currency fluctuations 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. Our contracts with international customers are typically denominated
in foreign currency and any decline in the value of such currency could have a
significant impact on our business and operating results. To date, we have not
engaged in hedging with respect to its foreign currency exposure but may do so
in the future. We are also 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 our proprietary technology to
the same extent, as do the laws of the U.S. There can be no assurance that the
risks associated with our international operations will not materially adversely
affect our business and operating results in the future or require us to modify
significantly our current business practices.
OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS
We are in the process of planning for the manufacturing capabilities
necessary to supply and support large volumes of DSL products and systems and in
the future may become increasingly dependent on subcontractors. In fiscal 1998,
we have entered into a subcontracting relationship with Dovatron International
for the assembly of its DSL printed circuit boards. 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 we believe 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
our business and operating results. If we are not successful in increasing our
manufacturing capacity in a timely and cost-effective manner, then the possible
transition to subcontracting will not materially adversely affect our business
and operating results. Our failure to effectively manage our growth would have a
material adverse effect on our business and operating results.
ANY LOSS OF A CONFERENCE PLUS CUSTOMER WOULD ADVERSELY AFFECT US
Conference Plus's customers continually undergo review and evaluation of
their conferencing services to evaluate the merits of bringing those services
in-house rather than outsourcing those services. There can be no assurance in
the future that Conference Plus's customers will cease this evaluation or bring
some portion or all of their conferencing services in-house. Conference Plus
must continually provide higher quality, lower cost services to provide maintain
and grow their customer base. Any loss of a major customer could have a material
adverse effect on our business and operating results.
THE CLASS A COMMON STOCK SOLD IN THIS OFFERING MAY SIGNIFICANTLY INCREASE THE
SUPPLY OF OUR CLASS A COMMON STOCK IN THE PUBLIC MARKET, WHICH MAY CAUSE OUR
STOCK PRICE TO DECLINE.
The conversion of the Convertible Debentures and exercise of the
Warrants into the public market could materially adversely affect the market
price of the Class A Common Stock.
On April 16, 1999, we issued $20,000,000 aggregate principal amount of
Convertible Debentures. The Convertible Debentures are convertible into such
number of shares of Class A Common Stock as is determined by dividing the
principal amount of the Convertible Debentures by the lesser of (i) a
periodically reset fixed price which is initially $6.372 per share, but will be
adjusted under the terms of the Convertible Debentures, and (ii) the floating
market price of our Class A Common Stock at the time of conversion (except that
the market price can be imposed only under specific conditions). If our Class A
Common Stock trades at a price less than the reset fixed price, then the
Convertible Debentures will be convertible into shares of our Class A Common
Stock at variable rates based on future trading prices of the Class A Common
Stock and events that may occur in the future. Therefore, if the conversion
price is less than $6.372, then the number of shares of Class A Common Stock
issuable upon conversion of the Convertible Debentures will be inversely
proportional to the market price of the Class A Common Stock at the time of
conversion The number of shares of Class A Common Stock that may ultimately be
issued upon conversion is therefore presently indeterminable and could fluctuate
significantly. Assuming a conversion price of $6.372 per share, the Convertible
Debentures will be convertible into approximately 3,138,731 shares of Class A
Common Stock. Depending on market conditions at the time of conversion, however,
the number of shares issuable could prove to be significantly greater in the
event of a decrease in the trading price of the Class A Common Stock. Purchasers
of Class A Common Stock could therefore experience substantial dilution upon
conversion of the Convertible Debentures. The shares of Class A Common Stock
into which the Convertible Debentures may be converted are being registered
pursuant to this Registration Statement.
Also, the Warrants are subject to anti-dilution protection, which may
result in the issuance of more shares than originally anticipated, if we issue
securities at less than market value or the applicable exercise price. These
factors may result in substantial future dilution to the holders of our Class A
Common Stock.
WE RELY ON OUR INTELLECTUAL PROPERTY WHICH WE MAY BE UNABLE TO PROTECT, OR WE
MAY BE FOUND TO INFRINGE THE RIGHTS OF OTHERS
Our success will depend, in part, on our ability to protect trade
secrets, obtain or license patents and operate without infringing on the rights
of others. Although we regard our technology as proprietary, we have only one
patent on such technology related to Network Interface Units. We expect to seek
additional patents from time to time related to our research and development
activities. We rely on a combination of technical leadership, trade secrets,
copyright and trademark law and nondisclosure agreements to protect our
unpatented proprietary know-how. These measures, however, may not provide
meaningful protection for our trade secrets or other proprietary information.
Moreover, our business and operating results may be materially adversely
affected by competitors who independently develop substantially equivalent
technology. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as U.S. law. The telecommunications
industry is also characterized by the existence of an increasing number of
patents and frequent litigation based on allegations of patent and other
intellectual property infringement. From time to time we receive communications
from third parties alleging infringement of exclusive patent, copyright and
other intellectual property rights to technologies that are important to us.
There is no guaranty that third parties will not assert infringement claims
against us in the future, that assertions by such parties will not result in
costly litigation, or that we would prevail in any such litigation or be able to
license any valid and infringed patents from third parties on commercially
reasonable terms. Further, such litigation, regardless of its outcome, could
result in substantial costs to and diversion of our efforts. Any infringement
claim or other litigation against or by us could have a material adverse effect
on our business and operating results.
OUR SUCCESS DEPENDS ON THE RETENTION OF KEY PERSONNEL AND OUR ABILITY TO HIRE
ADDITIONAL KEY PERSONNEL.
Our success is dependent, in part, on our ability to attract and retain
qualified technical, marketing, sales and management personnel. Competition for
such personnel is intense and our inability to attract and retain additional key
employees or the loss of one or more of our current key employees could
materially adversely affect our business and operating results.
In fiscal 1998, we entered into Severance Agreements with each named
executive officer and certain other executive officers. These severance
agreements provide that in the event such officer is terminated without cause or
such officer resigns for good reason, as more fully described in the Severance
Agreement, we shall pay to such officer severance payments equal to such
officer's salary and bonus for the fiscal year in which the termination occurs,
and the severance agreements also provide for the payment of certain amounts
upon the occurrence of certain events. The executive officers entering into the
severance agreements agreed not to compete with us for one year in the event
that their termination entitles them to severance payments and not to solicit
any of our employees fo