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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] for the fiscal year ended March
31, 1996 or
Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
______________________ to _______________________.
Commission file number: 0-27266
WESTELL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3154957
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Kendall Point Drive
Oswego, Illinois 60643
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (708) 820-1919
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 (Section 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 held by non-affiliates on June 27, 1996 (based upon an
estimate that 36.2% 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 $469,840,925.
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 27, 1996, 14,687,848 shares of the registrant's Class A Common Stock
were outstanding and 21,617,134 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 1996 Annual Meeting of Stockholders (Part III).
2
Unless otherwise indicated, the information presented in this Annual
Report on Form 10-K for the fiscal year ended March 31, 1996 (the "Form 10-K"),
has been adjusted to reflect the two-for-one stock split in the form of a 100%
dividend of both classes of Common Stock of Westell Technologies, Inc.
("Westell" or the "Company") paid on June 7, 1996 to holders of record on May
20, 1996.
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
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. The Company undertakes
no obligation to release publicly the result of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
PART I
ITEM 1. BUSINESS
Since 1980, Westell has developed telecommunications products that
address the needs of telephone companies ("telcos") to upgrade their existing
network infrastructures continually in order to deliver advanced data and voice
services to their customers. The Company designs, manufactures, markets and
services a broad range of digital and analog products used by telcos to deliver
services primarily over existing copper telephone wires that connect end users
to a telco's central office (the "local access network"). The Company also
markets its products and services to other telecommunications and information
service providers seeking direct access to end-user customers. The Company's
principal customers include all seven Regional Bell Operating Companies (the
"RBOCs") as well as GTE, British Telecom and Telecom Italia. In addition,
Westell sells products to several other entities, including public telephone
administrations located outside the U.S., independent domestic local exchange
carriers, competitive access providers, interexchange carriers and the U.S.
federal government.
Westell is a leading developer and provider of broadband
telecommunications access systems using an emerging technology known as
Asymmetric Digital Subscriber Line ("ADSL"). ADSL systems will allow telcos to
provide interactive multimedia services over existing copper wire, thus
offering a more cost-effective and faster deployment alternative to fiber optic
cable in the "last mile" of the local access network. ADSL systems enable
interactive multimedia services such as advanced data dialtone applications,
including high speed Internet access, local area network ("LAN") extension,
telecommuting and medical imaging, as well as emerging video dialtone
applications, including video-on-demand, distance learning, video conferencing
and work at home. Currently, over 30 domestic and international telcos,
including Bell Atlantic, GTE, US West !nterprise, British Telecom and Telecom
Italia, are conducting technical or marketing trials for new interactive
multimedia services that rely on the Company's ADSL systems. All of these ADSL
trials began in 1995 and 1996, except for the Bell Atlantic trial which
commenced in 1993. The Company is unable to predict the outcome of such trials
or when such trials will be completed. See "-- Marketing, Sales and
Distribution."
INDUSTRY OVERVIEW
Since the early 1980s, the telecommunications industry has experienced
an increased demand for and growth in the number of services provided to end
users. Not only has traditional telephone voice traffic
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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 online access. For example, businesses with multiple locations increasingly
require geographically dispersed LANs to be linked in sophisticated wide area
networks ("WANs") that must handle large volumes of telecommunications traffic.
In addition, the Internet has expanded beyond its traditional data transmission
and file-sharing functions to offer e-mail, new data sources, commercial
services, transaction processing, independent bulletin boards, the World Wide
Web 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 dialtone applications such as high speed
Internet access, LAN extension, medical imaging and telecommuting, and video
dialtone applications such as video-on-demand, distance learning, video
conferencing and work at home. To handle the growing volume of data
communications traffic and to provide faster and higher quality transmission,
telcos and information service providers have continually upgraded the capacity
and speed of their networks.
Deregulation. Deregulation of the telecommunications industry has
increased the number of competitors in the local access network and has further
accelerated telcos' needs to upgrade their networks and increase their
telecommunications service offerings. For example, alternative access providers
have deployed fiber and wireless systems for high volume data transmission to
business centers and other high density metropolitan areas. As alternative
access providers' costs decline and deregulation continues, alternative access
providers are likely to create additional competition for telcos by developing
new products and services for end users. Recent deregulation also allows
interexchange carriers, information service providers and cable operators to
deploy competitive services in the local access network. Currently available
high speed cable modems will enable cable operators to provide data
transmission services to customers in addition to standard television services.
Cable operators are seeking to compete with telcos in the delivery of high
speed digital transmission as well as traditional local telephone service. In
addition, this trend toward continued deregulation of the telecommunications
industry may further decrease the current restrictions and regulations
affecting telcos' ability to provide nontraditional telco services such as
video-on-demand.
Existing Telco Infrastructure. Traditionally, telcos have provided
local access services using analog technology, which does not have the
bandwidth or functionality to support the growing demand for new services over
telephone wires. In contrast, digital technology permits high speed, high
volume and reliable data transmission by reducing all forms of images, sounds
and data to digital signals, thereby increasing the variety and bandwidth of
services that can be provided in the local access network. To handle the
growing demand for digital traffic, telcos have deployed broadband optical
fiber in their network "backbone" interconnecting their geographically
dispersed central offices. Telcos have also used fiber to interconnect their
central offices to high density telecommunications traffic areas. Deployment of
fiber in the local access network connecting end users to a telco's central
office, however, has proven labor intensive, complicated, time consuming and
expensive. Consequently, this "last mile" of the telco's network still
predominantly consists of low speed analog transmission over copper wire.
Given the challenges of widespread replacement of copper wire in the
local access network, telcos have turned to systems suppliers for
cost-effective technology that can expand the ability of the existing copper
wire infrastructure to accommodate high speed digital transmission. Digital
conversion of the analog network has been built on the multiplexing format
known as T-1 (E-1 in most countries outside of the U.S.). T-1/E-1 transmission
utilizes a data rate of 1.544 (2.048 outside the U.S.) Megabits per second
("Mbps"), which can be aggregated or subdivided into channels to deliver data
communication services tailored to specific end-user requirements.
Existing and Emerging Technologies. Systems suppliers have developed,
and are currently developing, numerous products that have increased the
quality, speed and cost-effectiveness of digital transmission over copper wire.
These products include:
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ISDN. In the early 1980s, telcos introduced basic rate Integrated
Service Digital Network ("ISDN") technology, which provides digital
transmission at rates up to 144 Kilobits per second ("Kbps") as well
as a means to aggregate multiple channels into a single higher speed
link over copper wire. Telcos have only recently begun to widely
deploy basic rate ISDN technology 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 dialtone services, its
inability to provide existing telephone service over the same wire and
its relatively high installation costs.
HDSL. In 1992, telcos introduced High bit-rate Digital Subscriber Line
("HDSL") technology, which reduces the costs of installing and
upgrading T-1/E-1 service. Traditional T-1/E-1 service requires the
installation of one or more mid-span repeaters for line lengths
greater than 3,000 feet and the expensive and time consuming
"conditioning" of copper wire. HDSL increases the non-repeatered
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
only one digital communication stream and does not require a telephone
channel to run on the same wire.
ADSL. An emerging technology known as ADSL permits even greater
digital transmission capacity over copper wire than is possible with
existing HDSL and ISDN products. ADSL technology allows the
simultaneous transmission of data at speeds from 1.5 to 8.0 Mbps in
one direction and from 64 to 640 Kbps in the reverse direction, while
also providing standard analog telephone service over a single pair of
copper wires at distances of up to 18,000 feet, depending on the
transmission rate. ADSL products enable telcos to provide interactive
multimedia services over copper wire, such as high speed Internet
access, video-on-demand, medical imaging, video conferencing and
telecommuting, while simultaneously carrying traditional telephone
services. A new ADSL technology called Very High Speed Digital
Subscriber Line ("VDSL") is currently being developed that will
increase both the downstream and upstream data transmission capacity
to up to 52.0 Mbps and 2.0 Mbps, respectively.
RADSL and SDSL. Products and technologies continue to be developed to
expand the local access network's capability to transmit high speed
digital data as well as reduce telcos' costs in providing traditional
analog services. To increase utilization of broadband copper wire
transmission, manufacturers are currently developing Rate Adaptive DSL
("RADSL") systems that will automatically adjust the digital
transmission rate based upon the quality of the copper telephone wire
and the distance transmitted in order to maximize the digital capacity
of the wire and to facilitate the installation of ADSL systems.
Symmetric Digital Subscriber Line ("SDSL") technology is being
designed and developed which, in contrast to current HDSL and ISDN
systems, can provide both a digital and an analog channel over a
single pair of copper wires.
THE WESTELL SOLUTION
Westell designs, manufactures and markets a broad range of
telecommunications products that provide its telco customers with dependable,
high quality transmission systems in the local access network. The Company
believes that its extensive experience in the local access network
strategically positions it to identify product applications that will enhance
existing telco services as well as expand telco service offerings to end users.
Westell is a leading provider of ADSL systems, which allow telcos to provide
high speed interactive multimedia services over existing copper wire, thus
offering a cost-effective alternative to the deployment of fiber optic cable in
the "last mile" of the local access network. Westell's ADSL systems also enable
telcos to use their existing infrastructures to respond to competition from
cable operators that may offer these services using cable modems. The Company
continues to aggressively develop products based
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upon new technologies, such as ADSL and SDSL, as well as enhance its existing
product offerings in the analog, digital and DSL markets. In the last decade,
Westell has introduced a number of intelligent products that enable telcos to
increase productivity and transmission quality over their local access networks
through self-diagnostic and performance monitoring applications. For example,
in 1986, Westell introduced NIUs, which provide maintenance and performance
monitoring capabilities to aid telcos in the provisioning and maintenance of
T-1 lines. Westell also continues to focus on the relationships that it has
built with its customers during its 16-year history. Rapid technological
evolution has provided the Company with an opportunity to forge strategic
alliances with customers and technology suppliers in order to accelerate the
time to market for new products. In addition, the Company continues to redefine
its products to increase their functionality and interface capacity with other
products while decreasing product costs in order to achieve mass deployment of
ADSL systems and to facilitate the numerous applications of high speed digital
transmission required by telcos' consumers.
STRATEGY
Westell's objective is to be a global leader in providing low cost and
high quality local access network products that enable telcos to meet the
growing demand for digital service offerings. Key elements of the Company's
strategy include:
Leverage Global Leadership in ADSL Market. The Company seeks to
leverage its leadership position in the ADSL market to capture
emerging global market opportunities as telcos expand their
interactive multimedia, data and video dialtone services. Currently
over 30 domestic and international telcos, including Bell Atlantic,
GTE, US West !nterprise, British Telecom and Telecom Italia, are
conducting technical or marketing trials for new services that rely on
the Company's ADSL systems. The Company is currently defining
broadband access systems based on RADSL and SDSL technology, which are
expected to complement the Company's ADSL systems and the Company
believes will have performance advantages over alternative ISDN and
HDSL systems.
Deliver Mass Market Solutions for High Speed Online and Internet
Access Services. Due to the rapid emergence and end-user interest in
online information services, the Internet and the World Wide Web, the
Company intends to work with telcos and information service providers
to deliver advanced, high speed data dialtone solutions for these
applications as well as additional services, such as video dialtone
applications, as they become available. To facilitate mass market
deployment of its ADSL systems, the Company is undertaking a program
to increase the level of integration among its products and improve
economies of scale. The Company seeks to expand the development of
ADSL systems in the consumer market by creating ADSL software and
hardware interfaces that support multiple consumer applications.
Continue to Create Strategic Relationships and Alliances. The Company
intends to continue to forge strategic relationships and alliances
with key customers and suppliers. The Company has established
strategic relationships to facilitate the Company's ability to develop
products that anticipate customers' product needs. For example,
Westell has entered into an alliance with Microsoft Corporation
whereby Westell's FlexCAP ADSL modems will be compatible with
Microsoft Corporation's Windows NT(R) Server Network. In addition,
Westell's relationships with technology leaders such as AT&T Paradyne
and Analog Devices, Inc. enable the Company to obtain emerging
technologies required in its product development. These relationships
allow the Company to focus on product applications and to develop
products using multiple emerging technologies.
Maintain Core Business Strength and Develop New Products. The Company
has extensive experience in developing and marketing products for the
local access network and has achieved a leading position in T-1
network interface and performance monitoring units. The Company
intends to
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continue to capitalize upon its DS0 and DS1 product development
experience and customer relationships to develop cost-effective and
implementable intelligent products for the local access network. The
Company is committed to developing products that are compatible with
existing equipment and technologies, thereby enabling open
architecture network infrastructures. Westell intends to continue to
develop products in its core business, such as SmartLink, which
enhance the efficiency of high speed transmission over copper wire,
and QuadJack, which is one of the Company's first fiber optic
products.
Expand International Presence. The Company devotes significant
resources to expanding its international business. Many of Westell's
products, including its ADSL and HDSL systems, support E-1 standards,
the predominant standard for digital transmission outside of North
America. Westell has offices in Canada, England and Hong Kong and a
distribution and service network that supports customers in more than
40 countries. The Company intends to continue to expand its
international distribution arrangements and strategic relationships in
an effort to increase its international presence.
Commitment to Product Quality, Customer Service and Low-Cost
Manufacturing. The Company benefits from a strong reputation for
providing quality products and responsive service. Westell works
closely with customers to provide technical consulting, maintenance
and research assistance. Westell's continuous quality improvement is
demonstrated by the achievement of the British Approvals Board for
Telecommunications production quality assurance approval, Bellcore's
Customer Supplier Quality Program ("CSQP") registration and the ISO
9001 registration of its domestic operations. The Company believes
that its commitment to product quality and customer service will
enhance its efforts to reduce production cycle times and product
costs.
PRODUCTS
The Company offers a broad range of products that facilitate the
transmission of high speed digital and analog data between a telco's central
office and end-user customers. These products can be categorized into three
groups: (i) products based on DSL technologies, including ADSL and HDSL systems
("DSL products"), (ii) Digital Signal Hierarchy Level 1 based products, which
are used by telcos to enable high speed digital T-1 transmission at
approximately 1.5 Mbps and E-1 transmission at approximately 2.0 Mbps ("DS1
products"), and (iii) Digital Signal Hierarchy Level 0 based products, which
are used by telcos to deliver digital services at speeds ranging from
approximately 2.4 to 64 Kbps and analog services over a 4 Kilohertz bandwidth
("DS0 products").
The prices for the products within each of the product groups of the
Company vary based upon volume, customer specifications and other criteria and
are subject to change due to competition among telecommunications
manufacturers. The Company's DSL products command higher average sales prices
than its DS0 and DS1 products but represent fewer of the units sold by the
Company. The following table sets forth the revenues from Westell's three
product groups for the periods indicated:
Fiscal Year Ended March 31,
------------------------------
1994 1995 1996
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(in thousands)
DSL products . . . . . . . . . . . . . . $ 1,706 $15,235 $20,299
DS1 products . . . . . . . . . . . . . . 31,980 40,754 44,027
DS0 products . . . . . . . . . . . . . . 10,251 8,979 9,332
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DSL Products. The Company is a leading developer and provider of DSL
products and transmission systems that utilize emerging ADSL technology. DSL
technology is also used for HDSL and SDSL products. Products based upon ADSL
technology can be used by telcos to provide interactive multimedia services,
including data and video dialtone applications, while simultaneously providing
traditional telephone services over existing copper wire. Products based upon
ADSL technology enable telcos to deliver these interactive multimedia services
more quickly and cost-effectively than deploying broadband fiber networks in
the "last mile" of the local access network. The Company's revenues from HDSL
products to date have not been significant.
The following table sets forth a representative list of the Company's
current DSL products and their applications:
Year
Product Description Applications Introduced
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FlexCAP ADSL . . . . ADSL transport system that Interactive multimedia, video-on- 1993
delivers 1.5 or 2.0 Mbps of demand, live broadcast, high speed
digital bandwidth to end users. Internet access and LAN
Uses carrierless amplitude/phase interconnect, while providing
modulation ("CAP") technology. simultaneous standard telephone
service.
InterAccess HDSL . . HDSL system that supports 1.5 or T-1 or E-1 service provisioning. 1994
2.0 Mbps bi-directional services Increases repeaterless distance to
over two pairs of copper wires. up to 12,000 feet over two pairs
of copper wires.
AccessVision . . . . Network management system for DSL Management and control of DSL 1995
transport systems. transport systems.
ADSL technology permits the transmission of three communication
streams of varying speeds over existing copper wire. The non-repeatered
transmission distances of current ADSL systems vary based upon the data rate,
with a maximum distance of 18,000 feet. The first communication stream provides
a one way high speed digital data transmission from a server, such as may be
found on the Internet or in a stored video program network, to an end user. The
second communication stream provides medium speed bi-directional digital data
transmission to and from the end user which enables the end user to respond and
interact with the incoming high speed data stream. The third communication
stream provides traditional analog voice transmission capabilities permitting
simultaneous telephone service.
Westell's FlexCAP ADSL system currently consists of (i) a high speed
uni-directional digital data communication stream at rates up to 1.5 or 2.0
Mbps, (ii) a bi-directional control and digital data communication stream at
rates up to 64 Kbps and (iii) a traditional analog telephone service line.
This ADSL system can support high speed data applications, such as high speed
Internet access and remote LAN access, and video-on-demand services over
existing telephone lines. In late calendar year 1996, Westell plans to
introduce rate adaptive FlexCAP ADSL systems using RADSL technology which will
increase the bi-directional capacity to up to 384 Kbps.
The Company also markets other products that facilitate telcos'
incorporation of ADSL technology into their network infrastructures. Westell
has worldwide distribution rights to market AccessVision, an open systems
standards-based software management system that monitors and controls ADSL
equipment and the
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interactive services transmitted through ADSL technology, which was developed
by Atlantech Technologies, Ltd. Westell's distribution rights to AccessVision
expire in December 2001.
Currently over 30 telcos have purchased the Company's ADSL systems to
conduct technical and marketing trials for new interactive multimedia
applications. Bell Atlantic and British Telecom are in the process of
connecting over 2,000 customers to Westell's FlexCAP ADSL systems. Telecom
Italia has connected a total of 1,000 customers to Westell's FlexCAP ADSL
systems in Rome and Milan. ADSL applications in these trials include
interactive video-on-demand, music-on-demand, catalog shopping, financial
services, games-on-demand, television-on-demand and long distance learning
services. Internationally, Westell's ADSL systems have been purchased by
telephone administrations in Australia, Belgium, Canada, Hong Kong, Italy,
Norway, Singapore, South Korea, Spain, Switzerland and the United Kingdom.
The Company's HDSL systems eliminate the need for telcos to condition
the copper wire and to install line repeaters for distances of up to 12,000
feet. Westell's HDSL systems also contain performance and monitoring functions
with remote accessibility that may supplant the need for repeaters and NIUs.
Westell currently sells its HDSL systems to the federal government and markets
its InterAccess HDSL systems outside the U.S.
The Company's future growth is substantially dependent upon whether
DSL technology, particularly as it relates to ADSL systems, gains widespread
commercial acceptance by telcos. Since 1992, the Company has invested, and
expects to continue to invest, significant resources in the development of ADSL
technology. However, the market for products using ADSL technology is only now
emerging as telcos have recently begun to consider implementing ADSL technology
in their networks. As a result, revenues from ADSL systems have been difficult
for the Company to forecast, and the Company's overall results of operations
have experienced substantial fluctuations in recent periods. The timing of
orders and shipments of ADSL systems can have a significant impact on the
Company's revenues and results of operations. For example, the Company's
revenues increased by $10.4 million in the fourth quarter of fiscal 1995
compared to the third quarter of fiscal 1995 due primarily to a large shipment
of ADSL systems to one customer. The Company has continued to ship ADSL systems
but at a reduced level from that of the fourth quarter of fiscal 1995, which
has resulted in a reduction in quarterly revenues when compared to the
preceding quarter in three of the four quarters in fiscal 1996. Due to the
Company's significant ongoing investment in ADSL technology, the Company
anticipates losses in at least the first and second quarters of fiscal 1997.
The Company's ability to achieve profitability or revenue growth in the future
will depend upon market acceptance of the Company's ADSL systems and the
development and market acceptance of other DSL products introduced by the
Company. To date, telcos have deployed the Company's ADSL systems solely for
technical and marketing trials and have not yet begun commercial deployment.
The Company is unable to predict whether such technical and marketing trials
will be successful and when commercial deployment will begin, if at all.
The RBOCs and the Company's other customers are significantly larger
than, and are able to exert a high degree of influence over, the Company. Prior
to selling its products to telcos, the Company must undergo lengthy approval
and purchase processes. Evaluation can take a year or more for complex products
based on new technologies such as ADSL. Historically, telcos have been cautious
in implementing new technologies. Telcos' deployment of ADSL technology may be
prevented or delayed by a number of factors, including telcos' lengthy product
approval and purchase processes, telcos' decisions to defer product orders in
anticipation of new product developments, cost, regulatory barriers that
prevent or restrict telcos from providing interactive multimedia services, the
lack of demand for interactive multimedia services, the lack of sufficient
programming for interactive multimedia services, the availability of
alternative technologies, such as ISDN, cable modems and optical fiber, and
telco policies that favor the use of such alternative technologies over ADSL
technology. As a result of these factors, there can be no assurance that telcos
will pursue the deployment of products using ADSL technology. Even if telcos
adopt policies favoring full-scale implementation of ADSL technology, there is
no assurance that sales of the Company's ADSL systems will
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become significant or that the Company will be able to successfully introduce
on a timely basis or achieve sales of ADSL systems and other products based
upon DSL technology planned for future introduction. Due to increased
competition, low barriers to entry, product pricing pressures and new product
introductions in the Company's core DS0 and DS1 markets, these DS0 and DS1
product groups are not expected to generate sufficient revenues or profits to
offset any losses that the Company may experience due to a lack of sales of
ADSL systems and other DSL products currently under development. As a result,
if telcos fail to deploy the Company's ADSL systems, and the Company therefore
does not receive significant revenues from ADSL sales, then the Company's
business and results of operations will be materially adversely affected and
there can be no assurance that the Company will achieve profitability in the
future.
DS1 Products. Westell's DS1 products provide telcos with
cost-effective solutions to transport, maintain and improve the reliability of
T-1 services over copper and fiber lines in the local access network.
The following table sets forth a representative list of the Company's
DS1 products and their applications:
Year
Product Description Applications Introduced
- ---------------------- ------------------------------------ ----------------------------------- -------------
NIU . . . . . . . . . Network Interface Unit providing Facilitates the maintenance of T-1 1986
for maintenance of T-1 facilities. facilities to access services such
as frame relay and primary rate
ISDN.
NIU-PM . . . . . . . Network Interface Unit with Facilitates the maintenance and 1992
Performance Monitoring that stores provides performance monitoring of
information for seven days. T-1 facilities to access services
such as frame relay and primary
rate ISDN.
QuadJack . . . . . . Transport system that provides Provides transport and facilitates 1994
transmission medium for one to maintenance for high speed digital
four DS1 signals over fiber. circuits over fiber optic
facilities.
SmartLink . . . . . . Automatic Protection System for up Increases the reliability of T-1 1995
to 8 T-1 customer lines. and other high speed digital
facilities. Used for critical circuits
such as those used to provide
service to cellular telephone sites.
Many of the Company's DS1 products, such as its NIUs, smart line
repeaters, office repeaters and T-1 maintenance service switches, function to
monitor and control the quality of digital transmission over copper wire. The
Company's NIU products allow telcos to monitor transmission conditions and to
detect performance problems in circuits from remote locations. All of the RBOCs
and GTE have purchased the Company's NIUs. Westell also developed and
co-patented with Ameritech a second generation NIU known as NIU-PM which
monitors and stores information for seven days so that telcos can study and
detect any irregular operations and performance of a line over time. The
Company customizes its NIU products to meet customers' particular needs. Sales
of NIU products represented 45.5% of the Company's revenues in fiscal 1996.
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The Company's SmartLink Automatic Protection Switch system ("APS")
monitors up to eight customer T-1 channels and allows telcos to provide
uninterrupted service in the event of a fault of any channel. Once the APS
detects a fault in one channel, it automatically places that signal on a
protection channel and generates a notification alarm at the telco's central
office, thereby significantly reducing network downtime and costly data
interruption. APS is currently being deployed by two RBOCs and is in field
trials with an additional RBOC.
Westell's QuadJack product is specifically designed to provide
transmission for one to four customer T-1 signals over fiber lines, which
results in a cost-effective means of providing T-1 services to small business
customers who typically do not require the standard 28 or more T-1 lines that
fiber-based transmission delivers to an end user.
DS0 Products. Westell's DS0 products are used by telcos to deliver
digital and analog service across copper wire in the local access network at
speeds ranging from approximately 2.4 to 64 Kbps for digital transmission or 4
Kilohertz for analog transmission.
The following table sets forth a representative list of the Company's
DS0 products and their applications:
Year
Product Description Applications Introduced
- --------------------- ------------------------------------ ---------------------------------- ------------
DST . . . . . . . . . Data Station Termination unit Point of sale, lottery and other 1983
providing maintenance and analog data.
equalization of data transmission.
Tandem . . . . . . . Provides DS0 and analog channel Special services inter-office 1987
cross connections in tandem D4 cross connections.
environment.
TwinLine . . . . . . Allows second channel to be added Business and second lines. 1994
to a single pair of copper wires.
SSTP . . . . . . . . Special Services Transport Pipe Analog data, video conferencing 1994
employs ISDN technology to deliver and digital data service.
multiple special services over a
single pair of copper wires.
Campus Loopback
Unit . . . . . . . . Maintenance loopback for analog Private data networks. 1995
data.
In some circumstances, analog data lines are the only practical way to
add a terminal to an existing analog data network. Consequently, analog
transmission is often the most economical, most easily installed or the only
service available in certain locations. Westell's DST unit provides the
interface between analog transmission and an end user's modem. The Company's
other DS0 products include voice frequency channel units and mountings, which
are used to provide dedicated analog data lines, smart repeaters, which boost
analog signals, and other products which incorporate performance testing and
monitoring functions designed to improve the quality of analog transmission
over copper wire.
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11
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that its future success depends on its ability to
maintain its technological leadership through enhancements of its existing
products and development of new products that meet customer needs. Westell
works closely with its current and potential customers as part of the product
development process. The Company regularly customizes products to address
particular customer product needs. For the fiscal years ended March 31, 1995
and 1996, the Company recognized income of $800,000 and $2.6 million,
respectively, for customer sponsored research and development. Research and
development expenses for fiscal 1994, 1995 and 1996 were $7.7 million, $10.8
million and $12.6 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.
The following table sets forth some of the products under development
by the Company:
Product Description Applications
- -------------------- -------------------------------------- ---------------------------------------
SuperVision . . . . Broadband access and routing platform Aggregates many DSL facilities providing
for DSL services with ATM multiplexing. efficient network backbone transport.
FlexVision ADSL . . An ADSL transport system that delivers Interactive multimedia, video-on-demand,
1.5, 2.0 or 6.0 Mbps of digital live broadcast, high speed Internet
bandwidth downstream to end users and up access and LAN interconnect, while
to 640 Kbps of bi-directional digital providing simultaneous standard
bandwidth. Uses CAP technology. Used in telephone service.
connection with SuperVision
multiplexers.
EnVision ADSL . . . An ADSL transport system that delivers Interactive multimedia, video-on-demand,
1.5, 2.0, 6.0 or 8.0 Mbps of digital live broadcast, high speed Internet
bandwidth downstream to end users and up access and LAN interconnect, while
to 640 Kbps of bi-directional digital providing simultaneous standard
bandwidth. Uses discrete multi-tone telephone service.
("DMT") technology. Used in connection
with SuperVision multiplexers.
RADSL . . . . . . . Rate Adaptive DSL system that delivers Data dialtone services. Adapts
1.0 to 6.0 Mbps downstream to end users transmission speed to quality of copper
and up to 1.0 Mbps of bi-directional wire and the transmission distance.
digital bandwidth. Uses CAP technology.
Used in connection with SuperVision
multiplexers or FlexCAP platforms.
SDSL . . . . . . . Symmetric Digital Subscriber Line. Used Data dialtone services over a single
in connection with SuperVision pair of copper wires.
multiplexers or FlexCAP platforms.
FlexCAP PC Modem
Card . . . . . . . ADSL PC modem card which can be High speed Internet access and data
installed by an end user in a dialtone services while providing
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12
compatible PC. Delivers 1.5 Mbps simultaneous standard telephone service.
of digital bandwidth to end users Complies with the Intel and Microsoft
and up to 64 Kbps of bi-directional "Plug and Play" standard, so that the
digital bandwidth. Requires FlexCAP PC modem card will be
compatible ADSL systems at telco or automatically configured on
Internet service provider, compatible PCs.
To provide a more efficient transport of individual DSL facilities
over telephone networks, Westell is developing its SuperVision access
multiplexer. This SuperVision system will aggregate many DSL systems into a
single high speed optical link thereby facilitating the connection between
copper wire digital transmission used in the local access network and the
optical fiber transmission in the network "backbone." In addition, the Company
announced the development of its FlexVision ADSL system that is expected to
provide up to 6.0 Mbps of uni-directional bandwidth supporting multiple
simultaneous video-on-demand channels of information. Westell's current ADSL
systems and its FlexVision system under development are based on CAP
technology. Westell is also developing its EnVision system, which will utilize
DMT technology instead of CAP technology and is expected to provide up to 8.0
Mbps of downstream data and 640 Kbps of bi-directional data transmission as
well as traditional telephone service.
Westell is also focusing on defining products using next generation
DSL technologies such as RADSL and SDSL. RADSL will allow 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. Unlike HDSL, SDSL will enable the transmission of
both a high speed bi-directional digital data communication stream as well as
analog telephone service over a single pair of copper wires. SDSL is expected
to reduce telcos' costs and allow high speed bi-directional services to be
introduced to end users.
The Company currently anticipates that it will introduce the products
listed in the above table in late calendar year 1996 and calendar year 1997.
However, there can be no assurance that the Company will be able to introduce
such products as planned, and the failure of the Company to do so would have a
material adverse effect on the Company's business and results of operations.
In addition, there can be no assurance that the Company's future development
efforts will result in commercially successful products or that the Company's
products will not be rendered obsolete by changing technology, new industry
standards or new product announcements by competitors. The markets for the
Company's products are characterized by intense competition, rapid
technological advances, evolving industry standards, changes in end-user
requirements, frequent new product introductions and enhancements, and evolving
telco service offerings. If technologies or standards applicable to the
Company's products (or telco service offerings based on the Company's products)
become obsolete or fail to gain widespread commercial acceptance, then the
Company's business and results of operations will be materially adversely
affected. Moreover, the introduction of products embodying new technology, the
emergence of new industry standards or changes in telco services could render
the Company's existing products, as well as products under development,
obsolete and unmarketable. The Company believes that the continued deployment
of new technologies in the U.S., such as HDSL, in the local access network will
adversely affect demand for certain of its existing products such as NIUs,
which accounted for 45.5% of the Company's revenues in fiscal 1996, and that
its future success will largely depend upon its ability to continue to enhance
its existing products and to successfully develop and market new products on a
cost-effective and timely basis. In this regard, most of the Company's current
product offerings apply primarily to the delivery of digital communications
over copper wire in the local access network. While the Company has competed
successfully to date by developing high performance products for transmission
over copper wire, it expects that the increasing deployment of fiber and
wireless broadband transmission in the local access network (each of which uses
a significantly different process of
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13
delivery) will require the Company to develop new products to meet the demands
of these emerging transmission media.
The Company's past sales and profitability have resulted, to a
significant extent, from its ability to anticipate changes in technology,
industry standards and telco service offerings, and to develop and introduce
new and enhanced products. The Company's continued ability to adapt to such
changes will be a significant factor in maintaining or improving its
competitive position and its prospects for growth. Due to rapid technological
changes in the telecommunications industry, the RBOCs' lengthy product approval
and purchase processes and the Company's reliance on third-party technology for
the development of new products, however, there can be no assurance that the
Company will successfully introduce new products on a timely basis or achieve
sales of new products in the future. In addition, there can be no assurance
that the Company will have the financial and manufacturing resources necessary
to continue to successfully develop new products based on emerging technology
or to otherwise successfully respond to changing technology, industry standards
and telco service offerings.
The Company's product development programs are carried out by
engineers and engineering support personnel based in Aurora, Illinois and
Cambridge, England. The Company's domestic engineering is conducted in
accordance with ISO 9001, which is the international standard for quality
management systems for design, manufacturing and service. The Company's
research and development personnel are organized into product development
teams. Each product development team is generally responsible for sustaining
technical support of existing products, decreasing manufacturing costs,
conceiving new products in cooperation with other groups within the Company and
adapting standard products or technology to meet new customer needs. In
particular, each product development team is charged with implementing the
Company's engineering strategy of reducing product costs for each succeeding
generation of the Company's products in an effort to be a low cost, high
quality provider, without compromising functionality or serviceability. The
Company believes that the key to this strategy is choosing an initial
architecture for each product that enables engineering innovations to result in
future cost reductions. Successful execution of this strategy also requires
that the Company continue to attract and recruit highly qualified engineers.
CUSTOMERS
The Company's principal customers historically have been U.S. telcos.
Since fiscal 1993, the Company has also marketed its products internationally.
The Company's customers include all seven RBOCs, GTE, British Telecom and
Telecom Italia. In addition, Westell sells products to several other entities,
including public telephone administrations located outside the U.S.,
independent domestic local exchange carriers, competitive access providers,
interexchange carriers and the U.S. federal government. International revenues
represented approximately $226,000, $3.7 million and $19.8 million of the
Company's revenues in fiscal 1994, 1995 and 1996, respectively, accounting for
0.4%, 5.0% and 23.8% of the Company's revenues in such periods.
- 12 -
14
The following table lists certain customers of the Company and end
users of the Company's products:
Domestic International
------------------- ---------------------
Ameritech Belgacom
Bell Atlantic Bell Canada
Bell South British Telecom
GTE Entel Chile
NYNEX Hong Kong Telecom
Pacific Telesis Korea Telecom
SBC Communications Singapore Telecom
Sprint Swiss Telecom
US West Telecom Italia
Telecom Malaysia
Telefonica Spain
Telenor
Telecom Australia
Sales to the RBOCs and British Telecom accounted for 72.6%, 74.3% and
64.9% of the Company's revenues in fiscal 1994, 1995 and 1996, respectively.
The Company's future success will depend significantly upon the timeliness and
size of future purchase orders from the RBOCs, the product requirements of the
RBOCs, the success of the RBOCs' services that use the Company's products and
the financial and operating success of these providers. Sales to Ameritech,
British Telecom and U.S. West accounted for 12.0%, 11.1% and 10.4% of the
Company's revenues in fiscal 1996, respectively.
The Company depends, and will continue to depend, on the RBOCs and
other independent local exchange carriers for substantially all of its
revenues. Sales to the RBOCs accounted for 72.6%, 74.3% and 53.8% of the
Company's revenues in fiscal 1994, 1995 and 1996, respectively. Consequently,
the Company's future success will depend significantly upon the timeliness and
size of future purchase orders from the RBOCs, the product requirements of the
RBOCs, the financial and operating success of the RBOCs, and the success of the
RBOCs' services that use the Company's products. Any attempt by an RBOC or
other telco to seek out additional or alternative suppliers or to undertake, as
permitted under applicable regulations, the internal production of products
would have a material adverse effect on the Company's business and results of
operations. In addition, the Company's sales to its largest customers have in
the past fluctuated and in the future are expected to fluctuate significantly
from quarter to quarter and year to year. The loss of such customers or the
occurrence of such sales fluctuations would materially adversely affect the
Company's business and results of operations. Bell Atlantic and NYNEX and
Pacific Telesis and SBC Communications, respectively, have recently announced
their intent to merge. The Company is unable to predict what effect either of
these mergers, if completed, would have on the demand for the Company's ADSL
systems or other products.
The RBOCs and the Company's other customers are significantly larger
than, and are able to exert a high degree of influence over, the Company. Prior
to selling its products to telcos, the Company must undergo lengthy approval
and purchase processes. Evaluation can take as little as a few months for
products that vary slightly from existing products or up to a year or more for
products based on new technologies such as ADSL. Accordingly, the Company is
continually submitting successive generations of its current products as well
as new products to its customers for approval. The length of the approval
process can vary and is affected by a number of factors, including the
complexity of the product involved, priorities of telcos, telcos' budgets and
regulatory issues affecting telcos. The requirement that telcos obtain FCC
approval for certain new telco services prior to their implementation has in
the past delayed the approval process. There can be
- 13 -
15
no assurance that such delays, if experienced in the future, will not have a
material adverse affect on the Company's business and results of operations.
While the Company has been successful in the past in obtaining product
approvals from its customers, there can be no assurance that such approvals or
that ensuing sales of such products will continue to occur. Even if demand for
the Company's products is high, the RBOCs have sufficient bargaining power to
demand low prices and other terms and conditions that may materially adversely
affect the Company's business and results of operations.
MARKETING, SALES AND DISTRIBUTION
The Company sells its products in the U.S. principally through its
domestic field sales organization. The Company markets its products
internationally in over 40 countries under various distribution arrangements
that include OEM agreements, technology licenses and distributors supported by
partners and internationally based sales personnel. The Company's field sales
organizations and distributors receive support from internal marketing, sales
and customer support groups. As of March 31, 1996, the Company's marketing,
sales and distribution programs were conducted by 141 employees.
International revenues represented 5.0% and 23.8% of the Company's
revenues in fiscal 1995 and 1996, respectively. The Company's international
operations are based in Tampa, Florida and are also conducted through business
operations in Ottawa, Canada, Cambridge, England, Hong Kong and Singapore, and
a distribution and service network that supports customers in more than 40
countries. The Company expects to continue to pursue international market
opportunities by focusing primarily on sales of DSL products in international
markets. The Company believes that there is a greater demand for DSL products
in international markets compared to DS0 and DS1 products due to a growing
demand in foreign countries for services such as data dialtone that require
high speed digital transmission.
The Company believes that international revenues will represent a
significant percentage of revenues in the future. Due to its export sales, the
Company is subject to the risks of conducting business internationally,
including unexpected changes in regulatory requirements, foreign currency
fluctuations which could result in reduced revenues or increased operating
expenses, tariffs and trade barriers, potentially longer payment cycles,
difficulty in accounts receivable collection, foreign taxes, and the burdens of
complying with a variety of foreign laws and telecommunications standards. The
Company's contracts with its international customers are typically denominated
in foreign currency and any decline in the value of such currency could have a
significant impact on the Company's business and results of operations. For
example, in fiscal 1996, the Company incurred a $270,000 transaction loss on
receivables due to foreign currency fluctuations. To date, the Company has not
engaged in hedging with respect to its foreign currency exposure but may do so
in the future. The Company also is subject to general geopolitical risks, such
as political and economic instability and changes in diplomatic and trade
relationships, in connection with its international operations. In addition,
the laws of certain foreign countries may not protect the Company's proprietary
technology to the same extent as do the laws of the U.S. There can be no
assurance that the risks associated with the Company's international operations
will not materially adversely affect the Company's business and results of
operations in the future or require the Company to modify significantly its
current business practices.
The RBOCs and the Company's other customers are significantly larger
than, and are able to exert a high degree of influence over, the Company.
Prior to selling its products to telcos, the Company must undergo lengthy
approval and purchase processes. Evaluation can take as little as a few months
for products that vary slightly from existing products in the local access
network and a year or more for products based on new technologies such as ADSL.
Accordingly, the Company is continually submitting successive generations of
its current products as well as new products to its customers for approval. The
length of the approval processes is affected by a number of factors, including
the complexity of the product involved, the priorities of the telcos, telcos'
budgets and regulatory issues affecting telcos. In addition, the requirement
that telcos
- 14 -
16
obtain FCC approval for certain services prior to their implementation has in
the past delayed the approval processes.
Although the telco approval processes may vary to some extent
depending on the customer and the product being evaluated, they generally are
conducted as follows:
Laboratory Evaluation. The product's function and performance are
tested against all relevant industry standards, including those
established by Bellcore.
Technical Trial. A number of telephone lines are equipped with the
product for simulated operation in a field trial. The field trial is
used to evaluate performance, assess ease of installation and
establish troubleshooting procedures.
Marketing Trial. Emerging products such as ADSL are tested for market
acceptance of new services. Marketing trials usually involve a greater
number of systems than technical trials because systems are deployed
at several locations in the telco's network. This stage gives telcos
an opportunity to establish procedures, train employees to install and
maintain the new product and to obtain more feedback on the product
from a wider range of operations personnel.
Commercial Deployment. Commercial deployment usually involves
substantially greater numbers of systems and locations than the
marketing trial stage. In the first phase of commercial deployment, a
telco initially installs the equipment in select locations for select
applications. This phase is followed by general deployment involving
greater numbers of systems and locations. General deployment does not
usually mean that one supplier's product is purchased for all of the
telcos' needs throughout the system as telcos often rely upon multiple
suppliers to ensure that their needs can be met. Subsequent orders, if
any, are generally placed under single or multi-year supply agreements
that are generally not subject to minimum volume commitments.
In most international markets, there is one major telco per country
with limited or few alternate carriers or independent telcos. Typically, these
telcos are highly regulated, government-owned agencies that have approval and
purchase processes similar to those followed by the RBOCs.
CUSTOMER SERVICE AND SUPPORT
Westell maintains 24-hour, 7-day-a-week telephone support and provides
on-site support. The Company also provides technical consulting, research
assistance and training to its customers with respect to the installation,
operation and maintenance of its products.
The Company has supply contracts with most of its major customers.
These contracts typically do not establish minimum purchase commitments, and
they may require the Company to accept returns of products or indemnify such
customers against certain liabilities arising out of the use of the Company's
products. Although, to date, the Company has not experienced any significant
product returns or indemnification claims under these contracts, any such
claims or returns could have a material adverse effect on the Company's
business and results of operations. While the Company maintains a comprehensive
quality control program, there can be no assurance that the Company's products
will not suffer from defects or other deficiencies or that the Company will not
experience a material product recall in the future. Complex products such as
those offered by the Company may contain undetected errors or failures when
first introduced or as new versions are released. Any product recall as a
result of such errors or failures, and the associated negative publicity, could
result in the loss of or delay in market acceptance of the Company's products
and have a material adverse effect on the Company's business and results of
operations.
- 15 -
17
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 two to seven years, which generally covers defects in materials or
workmanship and failure to meet published specifications, but excludes damages
caused by improper use and all other express or implied warranties. In the
event there are material deficiencies or defects in the design or manufacture
of the Company's products, the affected products could be subject to recall.
For the past five fiscal years, the Company's warranty expenses have been
relatively insignificant. Although the Company maintains a comprehensive
quality control program, there can be no assurance that the Company's products
will not suffer from defects or other deficiencies or that the Company will not
experience a material product recall in the future. Complex products such as
those offered by the Company may contain undetected errors or failures when
first introduced or as new versions are released. Any product recall as a
result of such errors or failures, and the associated negative publicity, could
result in the loss of or delay in market acceptance of the Company's products
and have a material adverse effect on the Company's business and results of
operations. The Company's standard limited warranty for its ADSL products
ranges from two to five years. Since the Company's ADSL products are new, with
limited time in service, the Company cannot predict the level of warranty
claims that it will experience for these products. Despite testing by the
Company and its customers, there can be no assurance that existing or future
products based on ADSL or other technology will not contain undetected errors
or failures when first introduced or as new versions are released. Such errors
or failures could result in warranty returns in excess of those historically
experienced by the Company and have a material adverse effect on the Company's
business and results of operations.
MANUFACTURING
The Company purchases parts and components for its products from a
number of suppliers through a worldwide sourcing program. Certain key
components, such as integrated circuits and other electronic components, used
in the Company's products are currently available from only one source or a
limited number of suppliers. For instance, the Company currently depends on a
division of Lucent Technologies (formerly known as AT&T Microelectronics) to
provide critical integrated circuits used in the Company's ADSL products. In
addition, certain electronic components are currently in short supply and are
provided on an allocation basis to the Company and other users, based upon past
usage. There can be no assurance that the Company will be able to continue to
obtain sufficient quantities of integrated circuits or other electronic
components as required, or that such components, if obtained, will be available
to the Company on commercially reasonable terms. The Company purchases
integrated circuits from Lucent Technologies on a purchase order basis and does
not have any formal supply arrangements with Lucent Technologies. The Company
anticipates that integrated circuit production capacity and availability of
certain electronic components of its suppliers may be insufficient to meet
demand for such components in the future. Integrated circuits and electronic
components are key components in all of the Company's products and are
fundamental to the Company's business strategy of developing new and succeeding
generations of products at reduced unit costs without compromising
functionality or serviceability. In the past, however, the Company has
experienced delays in the receipt of certain of its key components, such as
integrated circuits, which have resulted in delays in related product
deliveries. There can be no assurance that delays in key components or product
deliveries will not occur in the future due to shortages resulting from the
limited number of suppliers, the financial or other difficulties of such
suppliers or the possible limitations in integrated circuit production capacity
or electronic component availability because of significant worldwide demand
for these components. The inability to obtain sufficient key components or to
develop alternative sources for such components, if and as required in the
future, could result in delays or reductions in product shipments, which in
turn could have a material adverse effect on the Company's customer
relationships and 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
- 16 -
18
meet the potential worldwide demand for its ADSL systems, however, the Company
currently is in the process of developing the manufacturing capabilities
necessary to supply and support large volumes of ADSL systems and in the future
may become increasingly dependent on subcontractors. The Company has entered
into discussions to establish subcontracting relationships for the assembly of
its ADSL systems. A reliance on third-party subcontractors involves several
risks, including the potential absence of adequate capacity and reduced control
over product quality, delivery schedules, manufacturing yields and costs.
Although the Company believes that alternative subcontractors or sources could
be developed if necessary, the use of subcontractors could result in material
delays or interruption of supply as a consequence of required re-tooling,
retraining and other activities related to establishing and developing a new
subcontractor or supplier relationship. Any material delays or difficulties in
connection with increased manufacturing production or the use of subcontractors
could have a material adverse effect on the Company's business and results of
operations. There can be no assurance that the Company will be successful in
increasing its manufacturing capacity in a timely and cost-effective manner or
that the possible transition to subcontracting will not materially adversely
affect the Company's business and results of operations. The Company's failure
to effectively manage its growth would have a material adverse effect on the
Company's business and results of operations.
A substantial portion of the Company's shipments in any fiscal period
relate to orders for certain products received in that period. Further, a
significant percentage of orders, such as NIUs, require delivery within 48
hours. To meet this demand, the Company maintains raw materials inventory and
limited finished goods inventory at its manufacturing facility. In addition,
the Company maintains some finished goods inventory at the customer's site
pursuant to an agreement that the customer will eventually purchase such
inventory. Final testing and shipment of products to customers occurs in the
Company's Oswego, Illinois facilities. The Company's domestic facilities are
certified pursuant to ISO 9001.
The Company's backlog for its DS1 and DS0 products at March 31, 1996
was $1.9 million. The Company believes that because a substantial portion of
customer orders for DS1 and DS0 products are filled within the quarter of
receipt, the Company's backlog is not a meaningful indicator of actual revenues
for these products for any succeeding period. In general, customers purchasing
DSL products may reschedule orders without penalty to the customer. As a
result, the quantities of the Company's products to be delivered and their
delivery schedules may be revised by customers to reflect changes in their DSL
product needs. Since backlog of DSL products can be rescheduled without
penalty, the Company does not believe that its backlog of DSL products is a
meaningful indicator of future revenues from DSL products.
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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., Tellabs, Inc. and Teltrend, Inc. Westell's principal competitors
in the DS1 market are ADC Telecommunications Inc., PairGain Technologies, Inc.
and Teltrend, Inc. The Company's current competitors in the ADSL market include
Alcatel Network Systems, Amati Communications Corp., AT&T Paradyne, ECI
Telecom, Inc., Ericsson, LG Information and Communications, Ltd., Lucent
Technologies, PairGain Technologies, Inc., Orckit Communications, Ltd. and
Performance Telecom Corp. The Company expects competition in the ADSL market in
the near future from numerous other companies. In addition, the
Telecommunications Act which was signed into law on February 8, 1996, permits
the RBOCs to engage in manufacturing activities after the FCC authorizes an
RBOC to provide long distance services within its service territory. An RBOC
must first meet specific statutory and regulatory tests demonstrating that its
monopoly market for local exchange services is open to competition before it
will be permitted to enter the long distance market. When these tests are met,
an RBOC will be permitted to engage in manufacturing activities. Therefore,
RBOCs, which are the Company's largest customers, may potentially become the
Company's competitors as well. Many of the Company's competitors and potential
competitors have greater financial, technological, manufacturing, marketing and
human resources than the Company. Any increase in competition could reduce the
Company's gross margin, require increased spending by the Company on research
and development and sales and marketing, and otherwise materially adversely
affect the Company's business and results of operations.
Products that increase the efficiency of digital transmission over
copper wire face competition from fiber, wireless, cable modems and other
products delivering broadband digital transmission. Many telcos have adopted
policies that favor the deployment of fiber. To the extent that telcos choose
to install fiber and other transmission media between the central office and
the end user, the Company expects that demand for its copper wire-based
products will decline. Telcos face competition from cable operators, new local
access providers and wireless service providers that are capable of providing
high speed digital transmission to end users. To the extent telcos decide not
to aggressively respond to this competition and fail to offer high speed
digital transmission, the overall demand for ADSL products could decline. In
addition, the deployment of certain products and technologies for copper wire
may also reduce the demand for the types of products currently manufactured by
the Company. Specifically, the deployment of HDSL in the U.S., which reduces
telcos' need for T-1 repeaters and NIUs, may result in a decrease in demand for
Westell's DS1-based products. Further, the Company believes that the domestic
market for many of its DS0-based products is decreasing, and will likely
continue to decrease, as high capacity digital transmission becomes less
expensive and more widely deployed.
TELECONFERENCE SERVICES
Conference Plus provides operator-assisted and automatic
teleconferencing services to customers throughout the U.S. The Company manages
its teleconferencing services through its operations center located in
Schaumburg, Illinois. Teleconferencing services allow organizations and
individuals to collect and disseminate information faster, more accurately and
without the associated costs of face-to-face meetings. The Company's strategy
in this market is to apply its expertise as a telecommunications products
manufacturer to provide cost-effective and quality teleconferencing services to
satisfy the growing customer demand for these services. Conference Plus was
started by the Company in October 1988, and generated $5.4 million, $6.8
million and $7.7 million in revenues in fiscal 1994, 1995 and 1996,
respectively.
Competition in the teleconferencing business is intense and the
Company expects that competition will increase due to low barriers to entry and
recent entrants into the audio teleconferencing service market.
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Many of Conference Plus' competitors, including AT&T, MCI Communications and
Sprint Communications, have much greater name recognition, more extensive
customer service and marketing capabilities and substantially greater
financial, technological and personnel resources than the Company. There can be
no assurance that the Company will be able to successfully compete in this
market in the future or that competitive pressures will not result in price
reductions that would materially adversely affect the Company's business and
results of operations.
GOVERNMENT REGULATION
The telecommunications industry, including most of the Company's
customers, is subject to regulation from federal and state agencies, including
the FCC and various state public utility and service commissions. While such
regulation does not affect the Company directly, the effects of such
regulations on the Company's customers may, in turn, adversely impact the
Company's business and results of operations. For example, FCC regulatory
policies affecting the availability of telco services and other terms on which
telcos conduct their business may impede the Company's penetration of certain
markets. The Telecommunications Act lifted certain restrictions on telcos'
ability to provide interactive multimedia services including video on demand.
The Telecommunications Act establishes new regulations whereby telcos may
provide various types of video services. Rules to implement these new statutory
provisions are now being considered by the FCC. While the statutory and
regulatory framework for telcos providing video products has become more
favorable, it is uncertain at this time how this will affect telcos' demand for
products based upon ADSL technology.
In addition, the Telecommunications Act permits the RBOCs to engage in
manufacturing activities after the FCC authorizes an RBOC to provide long
distance services within its service territory. An RBOC must first meet
specific statutory and regulatory tests demonstrating that its monopoly market
for local exchange services is open to competition before it will be permitted
to enter the long distance market. When these tests are met, an RBOC will be
permitted to engage in manufacturing activities and the RBOCs, which are the
Company's largest customers, may become the Company's competitors as well.
The Company's business and operating results may also be adversely
affected by the imposition of certain tariffs, duties and other import
restrictions on components that the Company obtains from non-domestic suppliers
or by the imposition of export restrictions on products that the Company sells
internationally. Internationally, governments of the United Kingdom, Canada,
Australia and numerous other countries actively promote and create competition
in the telecommunications industry. Changes in current or future laws or
regulations, in the U.S. or elsewhere, could materially and adversely affect
the Company's business and results of operations.
PROPRIETARY RIGHTS
The Company's success and future revenue growth will depend, in part,
on its ability to protect trade secrets, obtain or license patents and operate
without infringing on the rights of others. Although the Company regards its
technology as proprietary, it has only one patent on such technology. The
Company expects to seek additional patents from time to time related to its
research and development activities. The Company relies on a combination of
technical leadership, trade secrets, copyright and trademark law and
nondisclosure agreements to protect its unpatented proprietary know-how. There
can be no assurance, however, that these measures will provide meaningful
protection for the Company's trade secrets or other proprietary information.
Moreover, the Company's business and results of operations may be materially
adversely affected by competitors who independently develop substantially
equivalent technology. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as U.S. law. The
telecommunications industry is also characterized by the existence of an
increasing number of patents and frequent litigation based on allegations of
patent and other intellectual property infringement.
- 19 -
21
From time to time, the Company receives communications from third parties
alleging infringement of exclusive patent, copyright and other intellectual
property rights to technologies that are important to the Company. There can be
no assurance that third parties will not assert infringement claims against the
Company in the future, that assertions by such parties will not result in
costly litigation, or that the Company would prevail in any such litigation or
be able to license any valid and infringed patents from third parties on
commercially reasonable terms. Further, such litigation, regardless of its
outcome, could result in substantial costs to and diversion of effort by the
Company. Any infringement claim or other litigation against or by the Company
could have a material adverse effect on the Company's business and results of
operations.
Many of the Company's products incorporate technology developed and
owned by third parties. Consequently, the Company must rely upon third parties
to develop and introduce technologies which enhance the Company's current
products and enable the Company, in turn, to develop its own products on a
timely and cost-effective basis to meet changing customer needs and
technological trends in the telecommunications industry. Any impairment or
termination of the Company's relationship with any 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 ADSL products are dependent upon a CAP DSL technology
known as GlobeSpan(TM) that the Company licenses from AT&T Paradyne. AT&T
Paradyne is currently the sole provider of this CAP DSL technology and the
Company currently would not be able to produce any of its ADSL systems without
using this technology. The AT&T License, which expires in December 2002, is
nonexclusive and this technology has been licensed to numerous manufacturers.
The Company has entered into cooperation and development agreements with other
technology suppliers who are developing alternative DSL technologies, such as
DMT DSL technology. Under one such arrangement, the Company is currently
testing prototypes of an alternative DSL technology. Consequently, in the event
AT&T Paradyne fails to renew the AT&T License, the Company believes that it
will have sufficient access to alternative sources of DSL technology prior to
December 2002 so that it will be able to continue to produce ADSL systems.
However, the cancellation or failure of AT&T Paradyne to renew the AT&T License
would materially adversely affect the Company's business and results of
operations if other sources of DSL technology do not become readily available
on similar terms or telcos elect not to deploy ADSL systems utilizing
alternative DSL technologies, such as DMT DSL technology.
In addition, AT&T Paradyne has formed a business unit that develops
and markets products competitive with the Company's products, such as ADSL.
Although this newly-formed business unit does not affect the Company's AT&T
License and is an independent unit from the business unit licensing CAP DSL
technology, there can be no assurance that the formation of this business unit
will not affect the Company's ability to license CAP DSL technology from AT&T
Paradyne after the AT&T License expires. In addition, Lucent Technologies
recently announced that it has signed a definitive agreement to sell AT&T
Paradyne to Texax Pacific Group, an investment group. The Company's licensing
rights of CAP DSL technology under the existing AT&T License will not be
affected by that sale. The Company is unable to predict, however, what effect,
if any, the sale will have on the Company's relationship with AT&T Paradyne or
on AT&T Paradyne's licensing of its CAP DSL technology or future technology to
the Company or others.
Rapid technological evolution has resulted in the need to implement
strategic alliances with customers and technology suppliers in order to
accelerate the time to market for new products. Without such
- 20 -
22
relationships and due to the lengthy telco product approval and purchase
cycles, the technology may be obsolete by the time it is implemented.
Relationships in place with companies such as AT&T Paradyne, Analog Devices,
Inc., Motorola and certain customers enable the Company to develop products at
the same time that the Company undergoes the product approval and purchase
processes for products in development. This can result in much quicker
introduction of new products while the technology is still in demand. Westell
has cooperation and development relationships with Atlantech Technologies Ltd.,
a software development company based in Scotland, Scientific Generics, an
innovative technology development company based in Cambridge, England, and
Sungmi Electronics, an industry leader in the supply of high speed switching,
transmission and local access systems based in Seoul, Korea.
EMPLOYEES
As of March 31, 1996, the Company had 737 full-time employees in
continuing operations and 62 full-time employees in KPINS which the Company
plans to discontinue. Westell's telecommunications business had a total of 652
full-time employees, consisting of 141 in sales, marketing, distribution and
service, 138 in research and development, 343 in manufacturing and 30 in
administration. Conference Plus had a total of 85 full-time employees. None
of the Company's employees are represented by a collective bargaining agreement
nor has the Company ever experienced any work stoppage. The Company believes
its relationship with its employees is good.
ITEM 2. PROPERTIES
The Company leases approximately 108,000 square feet of office,
development and manufacturing space in facilities in Oswego, Illinois
(approximately 75,000 square feet) and Aurora, Illinois (approximately 33,000
square feet), both suburbs of Chicago. The current lease for the Oswego
facility expires in August 2002 but may be terminated by the Company at any
time after August 1997 upon 12 months notice. The current lease for the Aurora
facility expires in February 1998 but may be extended by the Company for up to
two additional two-year periods. The Company also leases facilities in
Schaumburg, Illinois for Conference Plus, and in Tampa, Florida and Cambridge,
England for its international operations.
While the Company believes its current facilities are adequate to
support its present level of operations, it believes that it will require
additional space in the next two years to accommodate additional expansion of
its business operations. The Company estimates that its manufacturing
facilities are operating at a utilization rate of approximately 50%. In
September 1995, the Company entered into an agreement with a real estate
developer forming a limited liability company (the "LLC") that is constructing
a 173,000 square foot facility in Aurora, Illinois. The Company has entered
into a 15-year lease of this facility with the LLC, which term will commence
upon the substantial completion of this facility. The Company expects to move a
portion of its operations to this new facility by the third quarter of fiscal
1997. The Company will have the option to purchase the facility being developed
by the LLC or sell its interest in the LLC. It is the Company's current intent
to sell this property when construction is completed, repay any financing and
lease the facility from a third party.
ITEM 3. LEGAL PROCEEDINGS
The Company has been involved from time to time in litigation in the
normal course of its business. In January 1995, a former officer of a Westell
subsidiary filed suit against the Company in the Superior Court of the State of
California alleging monetary damages suffered as a result of wrongful
termination and breach of contract. The Company believes the suit is without
merit and intends to contest the suit vigorously. While the outcome of this
lawsuit cannot be determined with certainty, the Company does not believe that
the resolution of this lawsuit will have a material adverse effect on the
Company or its business and results of operations. However, a judgment against
the Company of a significant amount could have a material
- 21 -
23
adverse effect on the Company's liquidity and results of operations. The
Company is not a party to any other litigation that would have a material
adverse effect on the Company or its business and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company effected its initial public offering on November 30, 1995
at a price to the public of $6.50 per share. The Company's Class A Common Stock
is quoted on the Nasdaq National Market under the symbol "WSTL." The following
table sets forth for the periods indicated the high and low closing sale prices
for the Class A Common Stock as reported on the Nasdaq National Market, which
prices reflect the two-for-one Stock Split of the Company's Class A and Class B
Common Stock to holders of record on May 20, 1996 and was paid on June 7, 1996
(the "Stock Split").
High Low
--------------- -------
Fiscal Year 1996
Third Quarter (from December 1, 1995) . . . . . . . . . . . . . . . . . $13 13/16 $ 9 3/4
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 9 5/8
Fiscal Year 1997
First Quarter (through June 28, 1996) . . . . . . . . . . . . . . . . . 56 18 5/8
As of June 27, 1996, there were approximately 114 holders of record of
the outstanding shares of Class A Common Stock.
Issuance of Class A Common Stock
On June 26, 1996, the Company completed a public offering in which
1,665,000 shares of Class A Common Stock were sold by the Company and 335,000
shares of Class A Common Stock were sold by certain stockholders of the Company
for a price to the public of $39.00 per share. Net proceeds to the Company
from the sale of the Class A Common Stock were approximately $61.6 million and
will be used to fund capital equipment purchases and for general corporate
purposes including working capital funding.
Dividends
The Company has never declared or paid any cash dividends on its
Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain any future earnings
to finance the growth and development of its business.
- 22 -
24
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data as of March 31,
1992, 1993, 1994, 1995 and 1996 and for each of the five fiscal years in the
period ended March 31, 1996 have been derived from the Company's consolidated
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants. The data set forth below is qualified by
reference to, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements and the related Notes thereto and other
financial information appearing elsewhere in this Form 10-K
Fiscal Year Ended March 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(in thousands, except per share data)
Statement of Operations Data:
Revenues . . . . . . . . . . . . . . . . . . . . $33,621 $43,221 $51,051 $74,029 $83,236
Cost of goods sold . . . . . . . . . . . . . . . 18,974 25,358 30,250 44,494 50,779
---------- ---------- ---------- ---------- ----------
Gross margin . . . . . . . . . . . . . . . . . 14,647 17,863 20,801 29,535 32,457
---------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . 3,839 5,688 8,068 12,169 13,744
Research and development . . . . . . . . . . . 2,778 5,284 7,695 10,843 12,603
General and administrative . . . . . . . . . . 3,123 4,092 5,502 6,701 8,364
---------- ---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . . . 9,740 15,064 21,265 29,713 34,711
---------- ---------- ---------- ---------- ----------
Operating income (loss) from continuing
operations . . . . . . . . . . . . . . . . . . 4,907 2,799 (464) (178) (2,254)
Other income (expense), net . . . . . . . . . . . (5) (14) (36) 34 (226)
Interest expense . . . . . . . . . . . . . . . . 144 137 176 769 859
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations before
income taxes . . . . . . . . . . . . . . . . . 4,758 2,648 (676) (913) (3,339)
Provision (benefit) for income taxes . . . . . . 1,729 913 (989) (788) (1,886)
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations . . . . 3,029 1,735 313 (125) (1,453)
Discontinued operations (loss) . . . . . . . . . -- (37) (100) (383) (622)
---------- ---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . $ 3,029 $ 1,698 $ 213 $ (508) $(2,075)
------- ------- ------- ------- -------
Net income (loss) per share: (1)
Continuing operations . . . . . . . . . . . . . $ 0.11 $ 0.06 $ 0.01 $ (0.01) $ (0.05)
Discontinued operations . . . . . . . . . . . . -- -- (0.00) (0.01) (0.02)
---------- ---------- ---------- ---------- ----------
Net income (loss) per share . . . . . . . . . . . $ 0.11 $ 0.06 $ 0.01 $ (0.02) $ (0.07)
------- ------- ------- ------- -------
Dividends declared per share . . . . . . . . . . $ -- $ -- $ -- $ -- $ --
Average number of common shares outstanding
(1) . . . . . . . . . . . . . . . . . . . . . . 26,560 27,620 28,486 28,952 30,846
- 23 -
25
March 31,
------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
Balance Sheet Data:
Working capital . . . . . . . . . . . . . . . . . $ 3,971 $ 5,137 $ 3,053 $ 1,280 $28,741
Total assets . . . . . . . . . . . . . . . . . . 11,662 15,777 29,327 40,276 64,448
Revolving promissory notes . . . . . . . . . . . 1,500 1,700 1,700 11,089 --
Long-term debt, including current portion . . . . 936 704 3,339 4,129 4,427
Total stockholders' equity . . . . . . . . . . . 5,586 7,719 8,002 7,558 38,985
- ------------------------------
(1) Adjusted to reflect the Stock Split. See Notes 1 and 11 of Notes to
Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company commenced operations in 1980 as a provider of
telecommunications network transmission products that enable advanced
telecommunications services over copper telephone wires. Until fiscal 1994, the
Company derived substantially all of its revenues from its DS0 and DS1 product
lines, particularly the sale of NIUs and related products, which accounted for
at least 45% of revenues in each of the last three fiscal years. The Company
introduced its first DSL products in fiscal 1993 and these products represented
3.9%, 20.6% and 24.4% of revenues in fiscal 1994, 1995 and 1996, respectively.
The Company has also provided audio teleconferencing services since fiscal 1989
and consumer products claims processing services since fiscal 1994. Revenues
from audio teleconferencing services constituted 9.2% of the Company's revenues
in both fiscal 1995 and 1996. In August 1995, the Company approved a plan for
the disposition of KPINS, its consumer products claims processing subsidiary,
which is presented in the results of operations as a discontinued operation.
The Company's customer base is comprised primarily of the RBOCs,
independent domestic local exchange carriers and public telephone
administrations located outside the U.S. Due to the stringent quality
specifications of its customers and the regulated environment in which its
customers operate, the Company must undergo lengthy approval and procurement
processes prior to selling its products. Accordingly, the Company must make
significant upfront investments in product and market development prior to
actual commencement of sales of new products. In late fiscal 1992, the Company
significantly increased its investment in new product development based on
emerging technologies, particularly ADSL, and began expanding its sales and
marketing efforts to cover new product lines and planned expansion into
international markets. International operations accounted for 5.0% and 23.8%
of the Company's revenues in fiscal 1995 and 1996, respectively. As a result of
the significant increases in research and development and sales and marketing
expenses related to new product and market development, the Company's results
of operations were adversely impacted in fiscal 1994, 1995 and 1996.
The Company expects to continue to evaluate new product opportunities
and engage in extensive research and development activities. This will require
the Company to continue to invest heavily in research and development and sales
and marketing, which is expected to adversely affect short-term results of
operations. Due to the Company's significant ongoing investment in ADSL
technology, the Company anticipates losses in at least the first and second
quarters of fiscal 1997. The Company believes that its future revenue growth
and profitability will principally depend on its success in increasing sales of
ADSL products
- 24 -
26
and developing new and enhanced DS1 and other DSL products. In view of the
Company's reliance on the emerging ADSL market for growth and the
unpredictability of orders and subsequent revenues, the Company believes that
period to period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future
performance. Revenues from DS0 products have declined in recent years as telcos
continue to move from analog to digital transmission services. The Company also
expects that revenues from NIU products in its DS1 product group may decline as
telcos increase the use of alternative technologies such as HDSL. Failure to
increase revenues from new products, whether due to lack of market acceptance,
competition, technological change or otherwise, would have a material adverse
effect on the Company's business and results of operations.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented
by certain items in the Company's statements of operations for the periods
indicated:
Fiscal Year Ended March 31,
---------------------------------
1994 1995 1996
----- ----- -----
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . 59.3 60.1 61.0
----- ----- -----
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.7 39.9 39.0
----- ----- -----
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . 15.8 16.4 16.5
Research and development . . . . . . . . . . . . . . . . . . . . . 15.1 14.6 15.2
General and administrative . . . . . . . . . . . . . . . . . . . . 10.8 9.1 10.0
----- ----- -----
Total operating expenses . . . . . . . . . . . . . . . . . . . . 41.7 40.1 41.7
----- ----- -----
Operating income (loss) from continuing operations . . . . . . . . . (1.0) (0.2) (2.7)
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . 0.0 0.0 (0.3)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 1.0 1.0
----- ----- -----
Income (loss) from continuing operations before income taxes . . . . (1.3) (1.2) (4.0)
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . (1.9) (1.0) (2.3)
----- ----- -----
Income (loss) from continuing operations . . . . . . . . . . . . . . 0.6 (0.2) (1.7)
Discontinued operations (loss) . . . . . . . . . . . . . . . . . . . (0.2) (0.5) (0.8)
----- ----- -----
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4% (0.7)% (2.5)%
---- ---- ----
FISCAL YEARS ENDED MARCH 31, 1994, 1995 AND 1996
Revenues. Revenues were $51.1 million, $74.0 million and $83.2 million
in fiscal 1994, 1995 and 1996, respectively. Revenues increased 45.0% from
fiscal 1994 to 1995 and 12.4% from fiscal 1995 to 1996. The fiscal 1995
increase was primarily a result of a $13.5 million increase in sales of DSL
products, a $8.8 million increase in sales of DS1 products and a $1.4 million
increase in teleconferencing revenues, which was offset in part by a $1.3
million decline in revenues from DS0 products. The fiscal 1996 increase was
primarily due
- 25 -
27
to a $5.1 million increase in DSL products reflecting shipments to two
international customers and a $3.3 million increase in DS1 product revenues.
Gross Margin. Gross margin decreased as a percentage of revenues from
40.7% in fiscal 1994 to 39.9% in fiscal 1995 and to 39.0% in fiscal 1996. These
decreases were due to product pricing pressures and changes in product mix
within the Company's DS1 and DS0 product lines. These decreases were offset in
part by sales of higher margin ADSL products and an increase in
teleconferencing revenues in fiscal 1995 and 1996.
Sales and Marketing. Sales and marketing expenses were $8.1 million,
$12.2 million and $13.7 million in fiscal 1994, 1995 and 1996, respectively,
constituting 15.8%, 16.4% and 16.5% of revenues, respectively. These increases
in sales and marketing expenses were primarily due to staff additions, in both
domestic and international markets, to support and promote the Company's
product lines, particularly ADSL products. The Company believes that continued
investment in sales and marketing will be required to expand its product lines,
bring new products to market and service customers. The Company anticipates
that sales and marketing expenses will continue to increase in absolute
dollars.
Research and Development. Research and development expenses were $7.7
million, $10.8 million and $12.6 million in fiscal 1994, 1995 and 1996,
respectively, constituting 15.1%, 14.6% and 15.2% of revenues, respectively.
These increases in research and development expenses were due primarily to new
and existing product development for ADSL and other emerging technology
products and were offset in part by customer nonrecurring engineering funding
of $800,000 and $2.6 million in fiscal 1995 and 1996, respectively. The Company
believes that a continued commitment to research and development will be
required for the Company to remain competitive and anticipates that research
and development costs will increase in absolute dollars.
General and Administrative. General and administrative expenses were
$5.5 million, $6.7 million and $8.4 million in fiscal 1994, 1995, and 1996
respectively, constituting 10.8%, 9.1% and 10.0% of revenues, respectively. The
fiscal 1995 and fiscal 1996 increases were due primarily to continued expansion
of operations in domestic and international markets. The Company anticipates
that general and administrative costs will continue to increase in absolute
dollars as the Company hires additional personnel.
Interest Expense. Interest expense was $176,000, $769,000 and $859,000
for fiscal 1994, 1995 and 1996, respectively. Interest expense increased,
particularly in fiscal 1995 and 1996, as a result of interest expense incurred
by the Company in connection with borrowings under its revolving promissory
notes to fund expanded working capital requirements and, to a lesser extent,
interest incurred under capital lease obligations.
Benefit for Income Taxes. Benefit for income taxes were $989,000,
$788,000 and $1.9 million in fiscal 1994, 1995, and 1996, respectively. In each
of these fiscal years, in addition to the tax benefit generated by the loss
before income taxes, the Company was able to utilize $724,000, $632,000 and
$790,000, respectively, in tax credits primarily generated by increasing
research and development activities. The Company has approximately $1.8
million in income tax credit carryforwards and a $1.9 million net operating
loss carryforward that are available to offset future taxable income. The tax
credit carryforwards begin to expire in 2009 and the net operating loss
carryforward expires in 2011.
- 26 -
28
QUARTERLY RESULTS OF OPERATIONS
The following tables present the Company's results of operations for
each of the last eight fiscal quarters and the percentage relationship of
certain items to revenues for the respective periods. The Company believes that
the information regarding each of these quarters is prepared on the same basis
as the audited Consolidated Financial Statements of the Company appearing
elsewhere in this Form 10-K. In the opinion of management, all necessary
adjustments (consisting only of normal recurring adjustments) have been
included to present fairly the unaudited quarterly results when read in
conjunction with the audited Consolidated Financial Statements of the Company
and the Notes thereto appearing elsewhere in this Form 10-K. These quarterly
results of operations are not necessarily indicative of the results for any
future period.
Quarter Ended
--------------------------------------------------------------------------------
Fiscal 1995 Fiscal 1996
--------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1994 1994 1994 1995 1995 1995 1995 1996
-------- --------- -------- -------- -------- --------- -------- --------
(in thousands)
Revenues . . . . . . . $15,721 $15,837 $16,059 $26,412 $22,487 $20,460 $21,346 $18,943
Cost of goods sold . . 8,951 9,391 9,994 16,159 12,822 12,611 13,225 12,121
------- ------- ------- ------- ------- ------- ------- -------
Gross margin . . . . 6,770 6,446 6,065 10,253 9,665 7,849 8,121 6,822
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing . 2,525 2,866 3,169 3,609 3,685 3,428 3,671 2,960
Research and
development . . . . 2,437 2,621 2,768 3,018 3,024 3,358 3,252 2,969
General and
administrative . . 1,407 1,574 1,707 2,015 2,021 2,065 2,236 2,042
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses . . . . 6,369 7,061 7,644 8,642 8,730 8,851 9,159 7,971
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)
from continuing
operations . . . . . 401 (615) (1,579) 1,611 935 (1,002) (1,038) (1,149)
------- ------- ------- ------- ------- ------- ------- -------
Other income (expense),
net . . . . . . . . . 9 9 9 9 (258) 55 82 (105)
Interest expense . . . 105 152 227 285 260 261 290 48
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes . 305 (758) (1,797) 1,335 417 (1,208) (1,246) (1,302)
Provision (benefit) for
income taxes . . . . 10 (403) (805) 408 28 (586) (617) (711)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
continuing
operations . . . . . 295 (355) (992) 927 389 (622) (629) (591)
- 27 -
29
Discontinued operations
(loss) . . . . . . . (82) (151) (84) (65) (65) (529) (24) (4)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) . . . $ 213 $ (506) $(1,076) $ 862 $ 324 $(1,151) $ (653) $ (595)
======= ======= ======= ======= ======= ======= ======= =======
- 28 -
30
Quarter Ended
-----------------------------------------------------------------------------------
Fiscal 1995 Fiscal 1996
-----------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1994 1994 1994 1995 1995 1995 1995 1996
-------- --------- -------- -------- -------- --------- -------- --------
Revenues . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold . . 56.9 59.3 62.2 61.2 57.0 61.6 62.0 64.0
-------- --------- -------- -------- -------- --------- -------- --------
Gross margin . . . . 43.1 40.7 37.8 38.8 43.0 38.4 38.0 36.0
-------- --------- -------- -------- -------- --------- -------- --------
Operating expenses:
Sales and marketing . 16.1 18.1 19.7 13.7 16.4 16.8 17.2 15.6
Research and
development . . . . 15.5 16.6 17.3 11.4 13.4 16.4 15.2 15.7
General and
administrative . . 8.9 9.9 10.6 7.6 9.0 10.1 10.5 10.8
-------- --------- -------- -------- -------- --------- -------- --------
Total operating
expenses . . . . 40.5 44.6 47.6 32.7 38.8 43.3 42.9 42.1
-------- --------- -------- -------- -------- --------- -------- --------
Operating income (loss)
from continuing
operations . . . . . 2.6 (3.9) (9.8) 6.1 4.2 (4.9) (4.9) (6.1)
-------- --------- -------- -------- -------- --------- -------- --------
Other income (expense),
net . . . . . . . . . 0.1 0.1 0.1 0.0 (1.2) 0.3 0.4 (0.6)
Interest expense . . . 0.7 1.0 1.5 1.0 1.2 1.3 1.3 0.2
-------- --------- -------- -------- -------- --------- -------- --------
Income (loss) from
continuing operations
before income taxes . 2.0 (4.8) (11.2) 5.1 1.8 (5.9) (5.8) (6.9)
Provision (benefit) for
income taxes . . . . 0.1 (2.6) (5.0) 1.6 0.1 (2.9) (2.9) (3.8)
-------- --------- -------- -------- -------- --------- -------- --------
Income (loss) from
continuing
operations . . . . . 1.9 (2.2) (6.2) 3.5 1.7 (3.0) (2.9) (3.1)
Discontinued operations
(loss) . . . . . . . (0.5) (1.0) (0.5) (0.2) (0.3) (2.6) (0.1) 0.0
-------- --------- -------- -------- -------- --------- -------- --------
Net income (loss) . . . 1.4 % (3.2)% (6.7)% 3.3% 1.4% (5.6)% (3.0)% (3.1)%
======== ========= ======== ======== ======== ========= ======== ========
The Company's revenues increased by $10.4 million in the fourth
quarter of fiscal 1995 compared to the third quarter of fiscal 1995 due
primarily to a large shipment of ADSL systems to one customer when this
customer received regulatory approval for market trial deployment of ADSL
systems. The Company has continued to ship ADSL systems but at a reduced level
from that of the fourth quarter of fiscal 1995, which has resulted in a
reduction in quarterly revenues compared to the preceding quarter in three of
the four
- 29 -
31
quarters in fiscal 1996. Gross margin as a percentage of revenues increased
from 38.8% in the fourth quarter of fiscal 1995 to 43.0% in the first quarter
of fiscal 1996 due to higher margins received on ADSL products. Gross margin as
a percentage of revenues declined to 38.4%, 38.0% and 36.0% in the second,
third and fourth quarters of fiscal 1996, respectively, as a result of product
pricing pressures in the DS1 and DS0 product lines as well as investments in
manufacturing infrastructure for anticipated ADSL production. The Company
believes that its gross margin in future periods will depend on a number of
factors, including market demand for the Company's ADSL products, pricing
pressures, competitive technologies and manufacturing expenses. There can be no
assurance that the Company will be able to increase gross margins in future
periods even if its ADSL products achieve market acceptance.
Operating expenses increased during each quarter of fiscal 1995 and
the first three quarters of fiscal 1996 as the Company continued to make
significant investments to support anticipated revenue growth. Operating
expenses decreased in the fourth quarter of fiscal 1996 primarily as a result
of nonrecurring engineering funding from third parties in the amount of $1.1
million which offset research and development expenses. The Company expects to
continue to increase operating expenses to support the development,
introduction and promotion of ADSL systems and other new products. As a result
of fluctuations in the timing of revenues of ADSL products and increased
research and development and sales and marketing expenses, the Company
currently anticipates net losses in at least the first and second quarters of
fiscal 1997. In addition, the Company recorded approximately $237,000 of
compensation expense in the third quarter of fiscal 1996 as a result of the
issuance of 24,624 shares of Class A Common Stock to employees of the Company.
The Company also recorded a charge of approximately $520,000, net of tax, in
the second quarter of fiscal 1996 in connection with the planned disposition of
KPINS.
The Company expects to continue to experience significant fluctuations
in quarterly results of operations. The Company believes that fluctuations in
quarterly results may cause the market price of the Class A Common Stock to
fluctuate, perhaps substantially. Factors which have had an influence on and
may continue to influence the Company's results of operations in a particular
quarter include the size and timing of customer orders and subsequent
shipments, customer order deferrals in anticipation of new products, timing of
product introductions or enhancements by the Company or its competitors, market
acceptance of new products, technological changes in the telecommunications
industry, competitive pricing pressures, accuracy of customer forecasts of
end-user demand, changes in the Company's operating expenses, personnel
changes, foreign currency fluctuations, changes in the mix of products sold,
quality control of products sold, disruption in sources of supply, regulatory
changes, capital spending, delays of payments by customers and general economic
conditions. Sales to the Company's customers typically involve long approval
and procurement cycles and can involve large purchase commitments. Accordingly,
cancellation or deferral of one or a small number of orders could cause
significant fluctuations in the Company's quarterly results of operations. As a
result, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
Because the Company generally ships products within a short period
after receipt of an order, the Company typically does not have a material
backlog of unfilled orders, and revenues in any quarter are substantially
dependent on orders booked in that quarter. The Company's expense levels are
based in large part on anticipated future revenues and are relatively fixed in
the short-term. Therefore, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall of orders.
Accordingly, any significant shortfall of demand in relation to the Company's
expectations or any material delay of customer orders would have an almost
immediate adverse impact on the Company's business and results of operations
and on its ability to achieve profitability.
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32
LIQUIDITY AND CAPITAL RESOURCES
In November 1995, the Company effected the initial public offering of
its Class A Common Stock which generated approximately $33.3 million in
corporate funding. The Company used the proceeds from the offering to repay
revolving promissory bank notes of approximately $11.1 million which primarily
financed working capital. The remainder of the proceeds were invested in short
term investments comprised principally of the highest grade commercial paper
and government backed securities with 90-day or less maturity. As of March 31,
1996, the Company had no amounts outstanding under its secured revolving
promissory notes and $3.8 million outstanding under its equipment financing
facility. As of March 31, 1996, the Company had approximately $15.4 million
available under these facilities. The revolving promissory notes and the
equipment financing facility require the maintenance of a minimum cash to
current maturities ratio, a current ratio and a maximum debt to net worth
ratio. The Company is currently in compliance with all such covenants.
The Company's operating activities generated cash of $3.6 million and
$6.5 million in fiscal 1994 and 1996, respectively, and used cash of $5.3
million in fiscal 1995. Cash generated from operating activities in fiscal 1994
resulted principally from increases in customer deposits and accounts payable
offset in part by increases in accounts receivable, inventory and prepaid
expenses. Cash used by operations in fiscal 1995 resulted primarily from
decreases in customer deposits and increases in receivables and inventory,
offset in part by increases in accounts payable. Cash generated from operating
activities in fiscal 1996 was a result of decreases in receivables and
inventory and an increase in customer deposits offset in part by a decrease in
accounts payable.
Capital expenditures in fiscal 1994, 1995 and 1996 were $6.1 million,
$5.2 million, and $6.3 million, respectively. These expenditures were
principally for machinery, computer and research equipment purchases. The
Company expects to spend approximately $6.0 million in fiscal 1997 for capital
equipment.
In September 1995, the Company formed an LLC with a real estate
developer for the purpose of developing a 16.4 acre site in Aurora, Illinois
into a 173,000 square foot corporate facility to house manufacturing,
engineering, sales, marketing and administration. In connection therewith, the
Company currently has a 98% ownership interest in the LLC, which will gradually
decrease to a 60% ownership interest as the other LLC member increases its
capital contribution to the LLC by contributing its development fee for the new
facility, as earned. In addition, the Company has a reimbursement obligation
with respect to an irrevocable letter of credit issued for the Company's
account in the amount of $952,000, due on or before September 30, 1996, which
represents the Company's capital contribution to the LLC. On September 25,
1995, the Company advanced the LLC $1.4 million for the purchase of land. The
advance is in the form of a short-term note which bears interest at the prime
rate (8.25% at March 31, 1996). The note and accrued interest become due from
the proceeds of the construction financing. During fiscal 1996, the LLC began
construction of the new facility and as of March 31, 1996, $3.0 million of
construction costs were incurred. In September 1995, the Company also entered
into a 15-year lease for the facility being developed by the LLC. Pursuant to
the terms of the LLC, the Company will have the option to buy out the other
investor in the LLC and thereby purchase the facility being developed by the
LLC or sell its interest in the LLC.
At March 31, 1996, the Company's principal sources of liquidity were
$21.8 million of cash and cash equivalents, and $12.8 million and $2.6 million
available under its secured revolving promissory notes and equipment borrowing
facility, respectively. Borrowings under the secured revolving promissory notes
and equipment borrowing facility currently bear interest at the bank's prime
rate (8.25% at March 31, 1996). These revolving promissory notes are due on,
and the equipment borrowing facility expires in, September 1996 and the Company
anticipates that such revolving promissory notes and equipment borrowing
facility will be renewed on no less favorable terms.
- 31 -
33
The Company had a deferred tax asset of approximately $4.4 million at
March 31, 1996. This deferred tax asset relates to (i) tax credit carryforwards
of approximately $1.8 million, (ii) a net operating loss carryforward of
approximately $740,000 and (iii) temporary differences between the amount of
assets and liabilities for financial reporting purposes and such amounts
measured by tax laws. Of such tax credit carryforwards, the first $500,000 of
credits expire in 2009 and $321,000 of credits may be carried forward
indefinitely. The net operating loss carryforward expires in 2011. The
remainder of the deferred tax asset relates to items deductible for financial
income reporting purposes which were taxable in accordance with tax
regulations. Management has not recorded a valuation allowance and believes
that the deferred tax asset will be fully realized based on current estimates
of future taxable income, future reversals of existing taxable temporary
differences or available tax planning strategies.
On June 26, 1996, the Company completed its public offering of
1,665,000 shares of Class A Common Stock, pursuant to which the Company
received approximately $61.6 million in net proceeds (the "Public Offering").
The Company believes that the net proceeds from this Public Offering, cash and
cash equivalents at March 31, 1996, its banks lines of credit and funds
generated from operations, if any, will provide adequate liquidity to meet the
Company's capital and operating requirements during the fiscal year ended March
31, 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
During March 1995 and October 1995, respectively, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" and SFAS No. 123, "Accounting for
Stock-Based Compensation." The Company is required to adopt these standards in
fiscal 1997. The Company does not anticipate that adoption of SFAS No. 121 will
have a material effect on its financial statements. The Company anticipates
that it will provide expanded disclosure in the footnotes to its financial
statements, as prescribed by SFAS No. 123, for activity related to its stock
plans.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements required by Item 8, together with
the report thereon of the independent accountants dated May 21, 1996 are set
forth on pages 47-63 of this report. The financial statement schedules listed
under Item 14(a)2, together with the report thereon of the independent
accountants dated May 21, 1996 are set forth on pages 64 and 65 of this report
and should be read in conjunction with the financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
- 32 -
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
a. Directors
The directors of the Company are as follows:
Name Age Principal Occupation and Other Information
- --------------------------------- --- -----------------------------------------------------
Gary F. Seamans (1) . . . . . . . 47 Gary F. Seamans has served as Chairman of the Board of
Directors of the Company since February 1991, as a
director of the Company since February 1988 and as
President and Chief Executive Officer of the Company
since January 1988. Prior to joining the Company, Mr. Seamans
served as Vice President of Sales and Marketing -- Midwest
Division at MCI Communications, Inc. from 1984 to 1987.
From 1971 to 1984, Mr. Seamans held a variety of management
positions in the operations, engineering, sales, marketing,
strategic planning, finance and personnel departments of AT&T.
Robert H. Gaynor (1)(2) . . . . . 72 Robert H. Gaynor has served as Vice Chairman of the Board of
Directors of the Company since December 1991 and as a director
of the Company since October 1990. Mr. Gaynor presently serves as
Chairman of the Rockhill Workshop, an executive conference at the
University of Missouri, Kansas City. From 1958 to 1986, Mr. Gaynor
held a variety of executive officer positions at AT&T.
Melvin J. Simon (1)(2) . . . . . 51 Melvin J. Simon has served as Assistant Secretary and Assistant
Treasurer of the Company since July 1995 and as a Director of the
Company since August 1992. From August 1992 to July 1995, Mr. Simon
served as Secretary and Treasurer of the Company. A Certified Public
Accountant, Mr. Simon founded and has served as President of Melvin J.
Simon & Associates, Ltd., a public accounting firm, since May 1980.
Stefan D. Abrams (3) . . . . . . 57 Stefan D. Abrams has served as a director of the Company since
February 1994. Mr. Abrams has been a Managing Director of The TCW Group,
Inc., an investment management firm, since October 1992. From September
1989 to September 1992, Mr. Abrams was a Managing Director of Kidder,
Peabody & Company, an investment banking firm.
Michael A. Brunner (3) . . . . . 62 Michael A. Brunner has served as a director of the Company since December
1994. From May 1985 to February 1992, Mr. Brunner served as President of
AT&T Federal Systems, a division of AT&T. Mr. Brunner currently serves
as a director of Concurrent Computer Corporation, a computer manufacturer,
and as a director and past Chairman of the Leonard Center for Excellence
in Engineering of Penn State University.
Paul A. Dwyer (3) . . . . . . . . 62 Paul A. Dwyer has served as a director of the Company since January 1996
and as a director of Westell, Inc., a subsidiary of the Company, since
November 1995. Mr. Dwyer has served as
- 33 -
35
Vice President -- Finance of Henry Crown and Company, a private
investment firm, since February 1981.
Ormand J. Wade (2) . . . . . . . 57 Ormand J. Wade has served as a director of the Company since
December 1994. From February 1987 to December 1992, Mr. Wade
served as Vice Chairman of Ameritech Corp. and from January 1982 to
February 1987, as President and Chief Executive Officer of Illinois
Bell Telephone Company. Mr. Wade currently serves as a director of
ITW Corporation, a manufacturer of precision engineered products,
Andrew Corporation, a manufacturer of microwave and peripheral
equipment, NBD Bank Corp., a commercial bank, and Northwestern
Memorial Hospital, and as a trustee of the University of Chicago.
- ------------------------------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
b. Executive officers
The following sets forth certain information with respect to the
current executive officers of the Company. Please refer to the information
contained above under the heading "Directors" for biographical information of
executive officers who are also directors of the Company.
Name Age Position
- --------------------------------- --- -----------------------------------------------------
Gary F. Seamans . . . . . . . . . 47 Chairman of the Board of Directors, President and Chief
Executive Officer
Robert H. Gaynor . . . . . . . . 72 Vice Chairman of the Board of Directors
Curtis L. Benton . . . . . . . . 56 Executive Vice President and Chief Administration Officer
J. William Nelson . . . . . . . . 43 President of U.S. Operations
Michael F. Lathrope . . . . . . . 49 Senior Vice President of Product Development and Chief
Technology Officer
Stephen J. Hawrysz . . . . . . . 37 Vice President, Secretary, Treasurer and Chief Financial
Officer
Melvin J. Simon . . . . . . . . . 51 Assistant Secretary, Assistant Treasurer and Director
Robert D. Faw . . . . . . . . . . 42 President of Global Operations
Marcus H. Hafner, Sr. . . . . . . 38 Vice President of Business Development
Richard P. Riviere . . . . . . . 41 Vice President of Transaction Services and President of
Conference Plus
Neil J. Kreitman . . . . . . . . 39 Senior Vice President of Global Manufacturing and Sourcing
Curtis L. Benton has served as Executive Vice President since July
1993 and as Chief Administration Officer since April 1996. Mr. Benton has also
served as Executive Vice President of the Operating Company since August 1992
and as Chief Operating Officer of the Company from January 1990 to April 1996.
J. William Nelson has served as President of U.S. Operations since
April 1996 and as Executive Vice President and Chief Customer Satisfaction
Officer of Westell, Inc. since July 1993. Mr. Nelson served as Senior Vice
President and Chief Customer Satisfaction Officer of the Company from May 1991
to June 1993. Prior to joining the Company, Mr. Nelson held a variety of
management positions, including Director of Large Account Sales and Director of
Customer Service at MCI Communications, Inc. from April 1986 to May 1991.
- 34 -
36
Michael F. Lathrope has served as Senior Vice President of Product
Development and Chief Technology Officer of the Company since April 1996, Mr.
Lathrope served as Vice President of Engineering and Chief Technology Officer
of the Company from June 1993 to April 1996 and as Vice President of
Engineering of the Company from April 1989 to June 1993 .
Stephen J. Hawrysz has served as Vice President and Chief Financial
Officer of the Company since July 1993, as Secretary and Treasurer of the
Company since July 1995 and as Vice President and Chief Financial Officer of
Westell, Inc. since August 1990. A Certified Public Accountant, Mr. Hawrysz
served in the Audit Division of Arthur Andersen LLP, a public accounting firm,
from June 1980 to November 1989, and as Assistant Controller for Wisconsin
Central Transportation Corporation, a regional railroad company, from November
1989 to August 1990.
Robert D. Faw has served as President of Global Operations since April
1996, as President of Westell International since February 1993 and as Chief
Executive Officer of Westell International since August 1993. Mr. Faw served
as Executive Vice President, International Operations of the Company from July
1995 to April 1996. Prior to joining the Company, Mr. Faw was Director of
International Operations and Business Development Director of Advanced
Technologies at AT&T Paradyne Corporation from October 1981 to January 1993.
Marcus H. Hafner, Sr. has served as Vice President of Business
Development since April 1996. Mr. Hafner served as Business Development Vice
President of the Company from May 1995 to March 1996. Prior to joining the
Company, Mr. Hafner was President and Chief Operating Officer of On-Demand
Technologies, Inc., a broadband network systems provider, from April 1992 to
April 1995, and a Senior Program Manager at E-Systems, Inc., an electronics
company, from November 1990 to April 1992.
Richard P. Riviere has served as Vice President of Transaction
Services for the Company since July 1995 and as President and Chief Executive
Officer of Conference Plus since October 1988.
Neil J. Kreitman has served as Senior Vice President of Global
Manufacturing and Sourcing of the Company since November 1995, and as Vice
President of Operations Science of the Company since January 1995. Prior to
joining the Company, Mr. Kreitman was Director of Material Management at AT&T
Paradyne from May 1984 to January 1995.
- 35 -
37
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for the fiscal years ended
March 31, 1995 and 1996, with respect to all compensation paid or earned for
services rendered to the Company by the Company's Chief Executive Officer and
the Company's four other most highly compensated executive officers who were
serving as executive officers as of March 31, 1996 (together, the "Named
Executive Officers").
Summary Compensation Table
Annual Compensation
Fiscal ---------------------- All Other
Name and Principal Position Year Salary Bonus Compensation (1)(2)
--------------------------- ------ -------- -------- -------------------
Gary F. Seamans
Chairman of the Board, President and
Chief Executive Officer . . . . . . . . . 1996 $275,000 $212,800 $ 5,136
1995 253,000 231,000 3,205
Curtis L. Benton
Executive Vice President and Chief
Administration Officer . . . . . . . . . 1996 153,000 69,600 6,454
1995 139,000 124,382 3,162
J. William Nelson
President of U.S. Operations . . . . . . 1996 152,000 69,600 4,435
1995 138,000 124,790 2,707
Michael F. Lathrope
Senior Vice President of Product
Development and Chief Technology
Officer . . . . . . . . . . . . . . . . . 1996 140,000 42,400 4,366
1995 130,000 71,896 2,395
Robert D. Faw
President of Global Operations . . . . . 1996 120,000 42,000 1,845
1995 105,000 67,500 988
- ------------------------------
(1) All Other Compensation for fiscal 1996 consists of matching contributions
under the Company's 401(k) Profit Sharing Plan and life insurance premiums,
as follows: Mr. Seamans: $3,570 and $1,566, respectively; Mr. Benton:
$4,177 and $2,277, respectively; Mr. Nelson: $3,937 and $498, respectively;
Mr. Lathrope: $3,910 and $456, respectively; and, Mr. Faw: $1,625 and $220,
respectively.
(2) The Company did not issue restricted stock or grant stock options or SARs
to any of the Named Executive Officers in fiscal 1996. At March 31, 1996,
restricted stock, with a fair market value equal to $18.50 per share, was
held by Mr. Seamans (199,636 shares of Class B Common Stock valued at
$3,693,266); Mr. Benton (66,468 shares of Class A Common Stock valued at
$1,229,658); and, Mr. Faw (72,500 shares of Class A Common Stock valued at
$1,341,250). Holders of restricted stock receive all dividends, if any,
paid on such shares.
Director Compensation
Directors who are not employees of the Company each receive $20,000 per
year for services rendered as directors, except Mr. Gaynor who receives $30,000
per year as Vice Chairman. In addition, all directors may be reimbursed for
certain expenses incurred in connection with attendance at Board and committee
- 36 -
38
meetings. Other than with respect to reimbursement of expenses, directors who
are employees of the Company do not receive additional compensation for service
as a director. In connection with his election as a director of the Operating
Company in November 1995, Mr. Dwyer was granted an option to purchase 89,900
shares of Class A Common Stock at an exercise price of $6.50 per share. Mr.
Dwyer's options vest at a rate of 1,872 shares per month commencing January 1,
1996.
Board Committees
The Board of Directors has established three standing committees: the
Audit Committee (comprised of Messrs. Gaynor, Simon and Wade), the Compensation
Committee (comprised of Messrs. Gaynor, Simon and Wade) and the Executive
Committee (comprised of Messrs. Seamans, Gaynor and Simon). The Audit Committee
recommends the appointment of auditors and oversees the accounting and audit
functions of the Company. The Compensation Committee determines executive
officers' salaries and bonuses and administers the Stock Purchase Plan and the
Stock Incentive Plan. The Executive Committee has the authority to take all
actions that the Board of Directors as a whole would be able to take, except as
limited by applicable law.
Compensation Committee Interlocks and Insider Participations
The Compensation Committee is currently composed of Messrs. Gaynor, Wade
and Simon, the Assistant Secretary and Assistant Treasurer of the Company. No
interlocking relationship exists between the Company's Board of Directors or
Compensation Committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
Since 1984, Melvin J. Simon & Associates, Ltd. has provided accounting and
other financial services to the Company. Mr. Simon, a director and the
Assistant Secretary and Assistant Treasurer of the Company and Co-Trustee of
the Voting Trust, is the sole owner of Melvin J. Simon & Associates, Ltd. The
Company paid Melvin J. Simon & Associates, Ltd. approximately $88,000, $88,000
and $64,000 in fiscal 1994, 1995 and 1996, respectively, for its services. The
Company believes that these services are provided on terms no less favorable to
the Company than could be obtained from unaffiliated parties.
Pursuant to a contract that expired on January 31, 1996, Florence R. Penny,
the mother of Robert C. Penny III, a Co-Trustee of the Voting Trust, and the
beneficial owner of shares of Class B Common Stock held in the Voting Trust,
for which Mr. Simon also acts as Co-Trustee, received $63,000 per year for her
services as a consultant to the Company.
The Company has granted Robert C. Penny III and Melvin J. Simon, as
Trustees of the Voting Trust, certain registration rights with respect to the
shares of Common Stock held in the Voting Trust.
Stock Plans
Employee Stock Purchase Plan. The Company has reserved an aggregate of
217,950 shares of Class A Common Stock for issuance under the Company's
Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan is
intended to qualify under Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"), and will permit eligible employees of the Company to
purchase Class A Common Stock through payroll deductions of up to 10% (or such
larger percentage up to 25%, as the Stock Incentive Committee administering the
Purchase Plan may in the future determine) of their compensation, provided that
no employee may purchase more than $10,000 (or such larger amount, up to
$25,000, as the Stock Incentive Committee may, in the future, determine) worth
of stock in any calendar year. The Purchase Plan has four three-month offering
periods, each beginning on January 1, March 1, July 1 and September 1 of each
year, with the first offering period commencing on January 1, 1996. The price
of Class A Common Stock purchased under the Purchase Plan will be not less than
85% of the fair market value of the Class A
- 37 -
39
Common Stock on the date of purchase. The Purchase Plan will be administered by
the Stock Incentive Committee. The Board will be able to amend or terminate the
Purchase Plan at any time. However, the Board will not be able to, without
stockholder approval, materially increase the number of shares of Class A
Common Stock available for issuance or materially modify the eligibility
requirements for participation or the benefits available to participants.
1995 Stock Incentive Plan. The Company has reserved an aggregate of
2,688,050 shares of Class A Common Stock for issuance under the 1995 Stock
Incentive Plan (the "Stock Incentive Plan"), which may be granted to employees,
officers and non-employee directors of the Company. The maximum number of
shares that may be subject to benefits awarded to any participant in any fiscal
year will be 200,000 shares. The Stock Incentive Plan will be administered by
the Stock Incentive Committee. Members of the Committee will waive the right to
participate in the Stock Incentive Plan while serving on the Committee. The
Stock Incentive Plan will provide for awards, which may consist of Class A
Common Stock, restricted shares of Class A Common Stock ("Restricted Shares"),
nonqualified stock options and incentive stock options ("ISOs") to purchase
shares of Class A Common Stock, performance awards and stock appreciation
rights ("SARs").
The exercise price for options will be payable in cash. Alternatively, with
the approval of the Stock Incentive Committee, all or part of the exercise
price may be paid by surrendering shares already owned by the optionee, or by
instructing the Company to withhold shares of Class A Common Stock otherwise
issuable upon exercise of the option. The exercise price per share of Class A
Common Stock for each stock option granted under the Stock Incentive Plan may
not be less than 85% (100% in the case of an ISO) of the closing price for the
Class A Common Stock last reported on the Nasdaq National Market on the date
the stock option is granted. The market value of a share of Class A Common
Stock on the date an SAR is granted will equal the base value of such SAR.
Options and SARs to be granted under the Stock Incentive Plan must be exercised
within ten years from the date of grant and will generally vest in annual
installments as determined by the Stock Incentive Committee. In the case of any
eligible employee who owns or is deemed to own stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company, the
exercise price of any ISOs granted under the Stock Incentive Plan may not be
less than 110% of the fair market value of the Class A Common Stock on the date
of grant, and the exercise period may not exceed five years from the date of
grant.
The Board of Directors will be able to terminate or amend the Stock
Incentive Plan at any time, except that no such action generally will be able
to adversely affect any rights or obligations regarding any awards previously
made under the Stock Incentive Plan without the consent of the recipient. In
addition, no amendment may be effective without the prior approval of
stockholders, if such approval is required for the Stock Incentive Plan to
continue to comply with applicable regulations of the Securities and Exchange
Commission. In the event of any changes in the capital structure of the
Company, such as a stock dividend or split-up, the Board of Directors must make
equitable adjustments to outstanding unexercised awards and to the provisions
of the Stock Incentive Plan as it deems necessary and appropriate. If the
Company becomes a party to a merger, reorganization, liquidation or similar
transaction, the Board of Directors may make such arrangements it deems
advisable regarding outstanding awards, such as substituting new awards for
outstanding awards, assuming outstanding awards or terminating or paying for
outstanding awards.
401(k) Plan
All employees of the Company who are at least 18 years of age and have been
employed by the Company for at least 12 consecutive months (at least 1,000
hours of service) are eligible to participate in the Company's 401(k) Profit
Sharing Plan (the "401(k) Plan"). Participants may contribute up to the lesser
of 15% of their current compensation or the statutorily prescribed annual limit
to the 401(k) Plan. Participant contributions are held and invested by the
401(k) Plan's trustees. The 401(k) Plan currently provides that the Company
will contribute an amount not to exceed 6% of the participant's compensation
for the year. In
- 38 -
40
fiscal 1996, the Company made matching contributions of approximately $229,000.
In addition, the 401(k) Plan allows the Company to make discretionary
profit-sharing contributions to participants. Each participant's deferred
salary contributions vest immediately, and Company contributions vest over a
period of five years. The 401(k) Plan is intended to qualify under Section 401
of the Code so that contributions by participants to the 401(k) Plan, and
income earned on plan contributions, are not taxable to participants until
withdrawn from the 401(k) Plan.
- 39 -
41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 27, 1996
regarding the beneficial ownership of the Company's Class A Common Stock and
Class B Common Stock (collectively, the "Common Stock") by (i) each stockholder
known by the Company to be the beneficial owner of more than five percent of
the outstanding shares of the Company's Common Stock, (ii) each director of the
Company, (iii) each Named Executive Officer, and (iv) all directors and
executive officers of the Company as a group. Except as otherwise indicated,
the Company believes that the beneficial owners of the Common Stock listed
below, based on information provided by such owners, have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable.
Stockholders, Number of Number of Percent of
Named Executive Class A Class B Total Voting
Officers and Directors Shares Shares(1) Power(2)
- ---------------------- --------- --------- ------------
Robert C. Penny III . . . . . . . . . . . . . . . . . . . -- 19,814,368(3) 78.4%
Melvin J. Simon . . . . . . . . . . . . . . . . . . . . . -- 20,063,456(3)(4) 79.3%
Gary F. Seamans . . . . . . . . . . . . . . . . . . . . . 124,544(5) 1,553,678 6.3%
Robert H. Gaynor . . . . . . . . . . . . . . . . . . . . 259,608 -- *
Curtis L. Benton . . . . . . . . . . . . . . . . . . . . 780,974 -- *
Michael F. Lathrope . . . . . . . . . . . . . . . . . . . 645,414 -- *
J. William Nelson . . . . . . . . . . . . . . . . . . . . 313,851 -- *
Robert D. Faw . . . . . . . . . . . . . . . . . . . . . . 124,544 -- *
Stefan D. Abrams . . . . . . . . . . . . . . . . . . . . 261,211 -- *
Michael A. Brunner . . . . . . . . . . . . . . . . . . . 116,241 -- *
Paul A. Dwyer . . . . . . . . . . . . . . . . . . . . . . 14,976(6) -- *
Ormand J. Wade . . . . . . . . . . . . . . . . . . . . . 106,285 -- *
All directors and
executive officers as a
group (15 persons) . . . . . . . . . . . . . . . . . . . 2,987,944 21,617,134 88.4%
- ------------------------------
* Less than 1%
(1) Holders of Class B Common Stock have four votes per share and holders of
Class A Common Stock have one vote per share. Class A Common Stock is
freely transferable and Class B Common Stock is transferable only to
certain transferees but is convertible into Class A Common Stock on a
share-for-share basis.
(2) Percentage of beneficial ownership is based on 14,687,848 shares of Class
A Common Stock and 21,617,134 shares of Class B Common Stock outstanding
as of June 27, 1996.
(3) Includes 19,814,368 shares of Class B Common Stock held by Messrs. Penny
and Simon as Trustees pursuant to a Voting Trust Agreement dated February
23, 1994, as amended (the "Voting Trust"), among Robert C. Penny III and
Melvin J. Simon, as trustees (the "Trustees") and members of the Penny
family (as defined in the Voting Trust Agreement) and Simon family (as
defined in the Voting Trust Agreement). The Trustees have joint voting
and dispositive power over all shares in the Voting Trust. Messrs. Penny
and Simon each disclaim beneficial ownership with respect to all shares
held in the Voting Trust in which they do not have a pecuniary interest.
The Voting Trust contains 6,215,377 shares held for the benefit of Mr.
Penny's immediate family and 902,310 shares held for the benefit of Mr.
- 40 -
42
Simon's immediate family. The address for Messrs. Penny and Simon is
Melvin J. Simon & Associates, Ltd., 4343 Commerce Court, Suite 114, Lisle,
Illinois 60532.
(4) Includes 249,088 shares held in trust for the benefit of Shawn F. Seamans,
Gary F. Seaman's son, for which Mr. Simon is trustee and has sole voting
and dispositive power. Mr. Simon disclaims beneficial ownership of these
shares.
(5) Represents shares held in trusts for the benefit of J. William Nelson's
children for which Mr. Seamans is trustee and has sole voting and
dispositive power. Mr. Seamans disclaims beneficial ownership of these
shares.
(6) Includes options to purchase 14,976 shares that are exercisable within 60
days of May 31, 1996, but does not include options to purchase 78,668
shares which are not presently exercisable.
VOTING TRUST AND STOCK TRANSFER RESTRICTION AGREEMENT
All Common Stock held for the benefit of members of the Penny family
and the Simon family, which represents 54.6% of the outstanding shares of
Common Stock and 78.4% of the voting power of the Company, is held pursuant to
a Voting Trust Agreement dated February 23, 1994, as amended, and is registered
in the names of Robert C. Penny III and Melvin J. Simon, as Trustees. Under the
Voting Trust, the Trustees have all rights of stockholders, including full
voting and investment power. All decisions of the Trustees require joint
approval. The beneficiaries (the "Beneficiaries") of the Voting Trust receive
all cash dividends and distributions paid on the shares held in the Voting
Trust. The Beneficiaries may not withdraw shares held in the Voting Trust
without the consent of the Trustees. In addition, members of the Penny family
may not transfer their beneficial interests in the Voting Trust without
complying with the rights of first refusal described below. Beneficiaries
representing 75% of the voting power of the shares held in the Voting Trust may
amend the Voting Trust or remove the Trustees at any time. The Voting Trust
continues until May 2015 unless earlier terminated or extended.
All members of the Penny family who are Beneficiaries under the Voting
Trust are parties to a Stock Transfer Restriction Agreement with the Company
(the "Stock Transfer Restriction Agreement"). The Stock Transfer Restriction
Agreement prohibits, with limited exceptions, such Beneficiaries from
transferring any Common Stock or their beneficial interests in the Voting Trust
acquired prior to November 30, 1995 without first offering such stock or
beneficial interests to the other members of the Penny family. In addition, the
Company's Amended Certificate of Incorporation provides that shares of Class B
Common Stock are automatically converted into shares of Class A Common Stock if
they are transferred to persons other than "permitted transferees."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a contract that expired on January 31, 1996, Florence R.
Penny, the mother of Robert C. Penny III, a Co-Trustee of the Voting Trust, and
the beneficial owner of shares of Class B Common Stock held in the Voting
Trust, for which Mr. Simon also acts as Co-Trustee, received $63,000 per year
for her services as a consultant to the Company. Mr. Simon is a director and
the Assistant Secretary and Assistant Treasurer of the Company.
Since 1984, Melvin J. Simon & Associates, Ltd. has provided accounting
and other financial services to the Company. Mr. Simon, a Co-Trustee of the
Voting Trust, is the sole owner of Melvin J. Simon & Associates, Ltd. The
Company paid Melvin J. Simon & Associates, Ltd. approximately $88,000,
$88,000 and $64,000 in fiscal 1994, 1995 and 1996, respectively, for its
services. The Company believes that these services are provided on terms no
less favorable to the Company than could be obtained from unaffiliated parties.
- 41 -
43
The Company has granted Robert C. Penny III and Melvin J. Simon, as
Trustees of the Voting Trust, certain registration rights with respect to the
shares of Common Stock held in the Voting Trust.
Pursuant to an agreement dated September 13, 1988 between the Company
and Richard Riviere, the Vice President of Transaction Services of the Company
and President of Conference Plus, Mr. Riviere receives an annual base salary of
not less than $75,000 during his employment with the Company. This agreement
also provides Mr. Riviere with a right of first refusal with respect to the
Company's interest in Conference Plus in the event the Company decides to sell
such interest. In addition, after his employment with the Company terminates,
Mr. Riviere has agreed not to compete with the Company for a period of two
years.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) (1) Financial Statements
The consolidated financial statements of Westell
Technologies, Inc. for the fiscal year ended March
31, 1996, together with the Report of Independent
Accountants, are set forth on pages 47 through 63 of
this Report.
The supplemental financial information listed and
appearing hereafter should be read in conjunction
with the consolidated financial statements included
in the report.
(2) Financial Statement Schedules
The following are included in Part IV of this Report
for each of the years ended March 31, 1994, 1995 and
1996 as applicable:
Report of Independent Public Accountants - page 64
Schedule II - Valuation and Qualifying Accounts -
page 65
Financial statement schedules not included in this
report have been omitted either because they are not
applicable or because the required information is
shown in the consolidated financial statements or
notes thereto, included in this report.
(3) Exhibits
3.1 Amended and Restated Certificate of
Incorporation, as amended (incorporated
herein by reference to Exhibit 3.2 to Westell
Technologies, Inc.'s Registration Statement
on Form S-1, as amended, Registration No.
33-98024).
3.2 Amended and Restated By-laws (incorporated
herein by reference to Exhibit 3.3 to Westell
Technologies, Inc.'s Registration Statement
on Form S-1, as amended, Registration No.
33-98024).
9.1 Voting Trust Agreement dated February 23,
1994, as amended (incorporated herein by
reference to Exhibit 9.1 to Westell
Technologies,
- 42 -
44
Inc.'s Registration Statement on Form S-1, as amended, Registration
No. 33-98024).
*10.1 Form of Restricted Stock Award granted by the
Company to its officers and directors other
than Gary F. Seamans and Melvin J. Simon
(incorporated herein by reference to Exhibit
10.1 to the Westell Technologies, Inc.'s
Registration Statement on Form S-1, as
amended, Registration No. 33-98024).
*10.2 Restricted Stock Award granted December 17,
1991 by the Company to Gary F. Seamans
(incorporated herein by reference to Exhibit
10.2 to Westell Technologies, Inc.'s
Registration Statement on Form S-1, as
amended, Registration No. 33-98024).
*10.3 Form of Restricted Stock Awards granted by
the Company to Gary F. Seamans and Melvin J.
Simon (incorporated herein by reference to
Exhibit 10.3 to Westell Technologies, Inc.'s
Registration Statement on Form S-1, as
amended, Registration No. 33-98024).
10.4 Stock Transfer Restriction Agreement entered
into by members of the Penny family, as
amended, (incorporated herein by reference to
Exhibits 10.4 and 10.16 to Westell
Technologies, Inc.'s Registration Statement
on Form S-1, as amended, Registration No.
33-98024).
10.5 Form of Registration Rights Agreement among
the Company and Robert C. Penny III and
Melvin J. Simon, as trustees of the Voting
Trust dated February 23, 1994 (incorporated
herein by reference to Exhibit 10.5 to
Westell Technologies, Inc.'s Registration
Statement on Form S-1, as amended,
Registration No. 33-98024).
*10.6 1995 Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.6 to
Westell Technologies, Inc.'s Registration
Statement on Form S-1, as amended,
Registration No. 33-98024).
*10.7 Employee Stock Purchase Plan (incorporated
herein by reference to Exhibit 10.7 to
Westell Technologies, Inc.'s Registration
Statement on Form S-1, as amended,
Registration No. 33-98024).
10.8 Consulting Agreement dated July 28, 1988
between Florence Penny and Westell, Inc.
(incorporated herein by reference to Exhibit
10.8 to Westell Technologies, Inc.'s
Registration Statement on Form S-1, as
amended, Registration No. 33-98024).
10.9 Lease Agreement dated July 15, 1986 between
Kendall Point Associates, Ltd. and Westell,
Inc., as amended on August 26, 1991
(incorporated herein by reference to Exhibit
10.9 to Westell Technologies, Inc.'s
Registration Statement on Form S-1, as
amended, Registration No. 33-98024).
10.10 Limited Liability Company Operating Agreement
dated as of September 23, 1995 by Westell,
Inc. and Kingstand Properties, Ltd.
(incorporated herein by reference to Exhibit
10.10 to Westell Technologies, Inc.'s
Registration Statement on Form S-1, as
amended, Registration No. 33-98024).
10.11 Lease dated September 25, 1995 between
Westell-Meridian L.L.C. and Westell, Inc.
(incorporated herein by reference to Exhibit
10.11 to Westell Technologies, Inc.'s
Registration Statement on Form S-1, as
amended, Registration No. 33-98024).
10.12 Credit Agreement dated March 7, 1995 between
the Company and Bank One Chicago, N.A.
(incorporated herein by reference to Exhibit
10.12 to Westell Technologies, Inc.'s
Registration Statement on Form S-1, as
amended, Registration No. 33-98024).
- 43 -
45
+10.13 Cooperation and Development Agreement between
Westell, Inc. and AT&T Paradyne Corporation,
as amended and supplemented (incorporated
herein by reference to Exhibits 10.13 and
10.15 to Westell Technologies, Inc.'s
Registration Statement on Form S-1, as
amended, Registration No. 33-98024).
10.14 Agreement dated September 13, 1988 between
Richard Riviere and Westell Technologies,
Inc., as amended (incorporated herein by
reference to Exhibit 10.14 to Westell
Technologies, Inc.'s Registration Statement
on Form S-1, as amended, Registration No.
33-98024).
+10.15 Exhibits G and H to Cooperation and
Development Agreement dated March 4, 1996
between Westell Technologies, Inc. and AT&T
Paradyne Corporation (incorporated herein by
reference to the exhibit of equivalent number
to the Company's Registration Statement on
Form S-1, as amended, Registration No.
333-4973).
10.16 Credit Agreement dated April 30, 1996 between
the Company and Bank One Chicago, N.A.
(incorporated herein by reference to the
exhibit of equivalent number to the Company's
Registration Statement on Form S-1, as
amended, Registration No. 333-4973).
10.17 Lease for Three National Plaza at Woodfield
dated December 24, 1991 by and between the
First National Bank of Boston, as Trustee
pursuant to that certain Pooling and Security
Agreement dated April 1, 1988, and Conference
Plus, Inc., as amended and modified.
10.18 Lease dated December 10, 1993 between LaSalle
National Trust, N.A., as Trustee under Trust
Agreement dated August 1, 1979, known as
Trust No. 101293, and Westell Incorporated,
as amended and modified.
21.1 Subsidiaries of the Registrant (incorporated
herein by reference to Exhibit 21.1 to
Westell Technologies, Inc.'s Registration
Statement on Form S-1, as amended,
Registration No. 33-98024).
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
_____________________
+ Confidential treatment granted for certain portions of this document.
Certain portions of this document were filed separately with the
Securities and Exchange Commission.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
March 31, 1996.
(c) Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are
as specified in Item 14(a)(3) herein.
(d) Financial Statement Schedules
The financial statement schedules filed as part of this Annual
Report on Form 10-K are as specified in item 14(a)(2) herein.
- 44 -
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on June 28, 1996.
WESTELL TECHNOLOGIES, INC.
By/s/ GARY F. SEAMANS
----------------------------------
Gary F. Seamans,
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
----------------------------------- ------------------------------------------ -------------
/s/ GARY F. SEAMANS Chairman of the Board of Directors, June 28, 1996
----------------------------------- President and Chief Executive Officer
Gary F. Seamans (Principal Executive Officer)
/s/ ROBERT H. GAYNOR Vice-Chairman of the Board of Directors June 28, 1996
-----------------------------------
Robert H. Gaynor
/s/ MELVIN J. SIMON Assistant Secretary and Treasurer and June 28, 1996
----------------------------------- Director
Melvin J. Simon
/s/ STEPHEN J. HAWRYSZ Chief Financial Officer, Vice President, June 28, 1996
----------------------------------- Secretary and Treasurer (Principal
Stephen J. Hawrysz Financial Officer and Principal Accounting
Officer)
/s/ STEFAN D. ABRAMS Director June 28, 1996
-----------------------------------
Stefan D. Abrams
/s/ MICHAEL A. BRUNNER Director June 28, 1996
-----------------------------------
Michael A. Brunner
/s/ PAUL A. DWYER Director June 28, 1996
-----------------------------------
Paul A. Dwyer
/s/ ORMAND J. WADE Director June 28, 1996
-----------------------------------
Ormand J. Wade
- 45 -
47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
Item Page
- ---- ----
Consolidated Financial Statements:
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Consolidated Balance Sheets -- March 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Consolidated Statements of Operations for the years ended March 31, 1994, 1995 and 1996 . . . . . . . . . . 50
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Consolidated Statements of Cash Flows for the years ended March 31, 1994, 1995 and 1996 . . . . . . . . . . 52
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Financial Statement Schedules:
Report of Independent Public Accountant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Schedule II -- Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
- 46 -
48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Westell Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of
Westell Technologies, Inc. (a Delaware corporation) and Subsidiaries as of
March 31, 1995 and 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Westell
Technologies, Inc. and Subsidiaries as of March 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
May 21, 1996
- 47 -
49
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
------------------
1995 1996
------- -------
(in thousands)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 450 $21,789
Accounts receivable (net of allowance of $364,000 and $462,000, respectively) . . 12,613 10,217
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,209 10,684
Prepaid expenses and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 609 745
Refundable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 444
Deferred income tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400 1,868
Land and building construction held for sale . . . . . . . . . . . . . . . . . . -- 4,431
------- -------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 30,476 50,178
------- -------
Property and equipment:
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,762 9,933
Office, computer and research equipment . . . . . . . . . . . . . . . . . . . . . 7,136 11,520
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,287 1,387
------- -------
17,185 22,840
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . 7,499 11,188
------- -------
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . 9,686 11,652
------- -------
Deferred income tax asset and other assets . . . . . . . . . . . . . . . . . . . . 114 2,618
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,276 $64,448
======= =======
The accompanying notes are an integral part of these
Consolidated Financial Statements.
- 48 -
50
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
------------------
1995 1996
------- -------
(in thousands)
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,383 $ 7,643
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,341 3,899
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,087 2,995
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 1,332 1,591
Revolving promissory notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,089 --
Construction Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 2,968
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 964 2,341
------- -------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 29,196 21,437
------- -------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,797 2,836
------- -------
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 525 1,040
------- -------
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 150
------- -------
Commitments and contingencies
Stockholders' equity:
Class A common stock, par $0.01 . . . . . . . . . . . . . . . . . . . . . . . . . . 289 128
Authorized -- 43,500,000 shares
Issued and outstanding -- 28,928,196 at March 31, 1995 and 12,801,606 at March 31,
1996
Class B common stock, par $0.01 . . . . . . . . . . . . . . . . . . . . . . . . . . -- 218
Authorized -- 25,000,000 shares
Issued and outstanding -- 21,838,376 shares at March 31, 1996
Preferred stock, par $0.01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Authorized -- 1,000,000 shares
Issued and outstanding -- none
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781 34,285
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . -- (59)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,488 4,413
------- -------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 7,558 38,985
------- -------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . $40,276 $64,448
======= =======
The accompanying notes are an integral part these
Consolidated Financial Statements.
- 49 -
51
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended March 31,
-----------------------------
1994 1995 1996
------- ------- -------
(in thousands,
except per share data)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $51,051 $74,029 $83,236
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,250 44,494 50,779
------- ------- -------
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,801 29,535 32,457
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . 8,068 12,169 13,744
Research and development . . . . . . . . . . . . . . . . . . . . . . . 7,695 10,843 12,603
General and administrative . . . . . . . . . . . . . . . . . . . . . . 5,502 6,701 8,364
------- ------- -------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . 21,265 29,713 34,711
------- ------- -------
Operating loss from continuing operations . . . . . . . . . . . . . . . . (464) (178) (2,254)
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . (36) 34 (226)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 769 859
------- ------- -------
Loss from continuing operations before taxes . . . . . . . . . . . . . . (676) (913) (3,339)
Benefit for income taxes . . . . . . . . . . . . . . . . . . . . . . . . (989) (788) (1,886)
------- ------- -------
Income (loss) from continuing operations . . . . . . . . . . . . . . . . 313 (125) (1,453)
Loss from discontinued operations (net of tax benefits of
$63,000, $243,000 and $394,000, respectively) . . . . . . . . . . . . . (100) (383) (622)
------- ------- -------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 213 $ (508) $(2,075)
======= ======= =======
Income (loss) per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.01 $ (0.01) $ (0.05)
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . (0.00) (0.01) (0.02)
------- ------- -------
Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . $ 0.01 $ (0.02) $ (0.07)
======= ======= =======
Average number of common shares outstanding . . . . . . . . . . . . . . . 28,486 28,952 30,846
======= ======= =======
The accompanying notes are an integral part of these
Consolidated Financial Statements.
- 50 -
52
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
Shares Issued
and Outstanding Par Value Additional Cumulative Total
----------------- ----------------- Paid-in Translation Retained Stockholders'
Class A Class B Class A Class B Capital Adjustment Earnings Equity
------- ------- ------- ------- --------- ----------- -------- -------------
(in thousands)
Balance, March 31, 1993
(adjusted for 2 for 1 stock
split effected June 7,
1996) . . . . . . . . . . . 28,304 -- $ 283 $ -- $ 653 $ -- $ 6,783 $ 7,719
Net income . . . . . . . . -- -- -- -- -- -- 213 213
Stock awards . . . . . . . 624 -- 6 -- 64 -- -- 70
------- ------ ------ ------ -------- ------ ------- --------
Balance, March 31, 1994 . . . 28,928 -- 289 -- 717 -- 6,996 8,002
Net loss . . . . . . . . . -- -- -- -- -- -- (508) (508)
Stock awards . . . . . . . -- -- -- -- 64 -- -- 64
------- ------ ------ ------ -------- ------ ------- --------
Balance, March 31, 1995 . . . 28,928 -- 289 -- 781 -- 6,488 7,558
Net loss . . . . . . . . . -- -- -- -- -- -- (2,075) (2,075)
Stock awards . . . . . . . -- -- -- -- 68 -- -- 68
Translation adjustment . . -- -- -- -- -- (59) -- (59)
Class B Stock Converted to
Class A Stock . . . . . 52 (52) 1 (1) -- -- -- --
Issuance of Class A Common
Stock . . . . . . . . . 5,683 -- 57 -- 33,203 -- -- 33,260
Shares granted under Stock
Incentive Plan . . . . . 25 -- -- -- 164 -- -- 164
Shares sold under Employee
Stock Purchase Plan . . 4 -- -- -- 69 -- -- 69
Recapitalization . . . . . (21,890) 21,890 (219) 219 -- -- -- --
------- ------ ------ ------ -------- ------ ------- --------
Balance, March 31, 1996 . . . 12,802 21,838 $ 128 $ 218 $ 34,285 $ (59) $ 4,413 $ 38,985
------- ------ ------ ------ -------- ------ ------- --------
The accompanying notes are an integral part of these
Consolidated Financial Statements.
- 51 -
53
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended March 31,
-----------------------------
1994 1995 1996
------- ------- -------
(in thousands)
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 213 $ (508) $(2,075)
Reconciliation of net income to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 1,732 3,355 4,286
Stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 64 232
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (217) (1,527) (2,080)
Change in assets and liabilities:
(Increase) decrease in accounts receivable . . . . . . . . . . . . . (3,677) (5,642) 2,359
(Increase) decrease in inventories . . . . . . . . . . . . . . . . . (3,883) (3,285) 3,509
(Increase) decrease in prepaid expenses and deposits . . . . . . . . (395) 26 (136)
(Increase) decrease in refundable income taxes . . . . . . . . . . . (868) 823 (249)
Increase (decrease) in accounts payable and accrued expenses . . . . 3,286 6,066 (667)
Increase (decrease) in accrued compensation . . . . . . . . . . . . 133 1,496 (92)
Increase (decrease) in deferred revenues . . . . . . . . . . . . . . 7,179 (6,215) 1,377
------- ------- -------
Net cash provided by (used in) operating activities . . . . . . 3,573 (5,347) 6,464
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . (1,535) (4,913) (4,529)
Proceeds from sale of equipment . . . . . . . . . . . . . . . . . . . . -- 263 --
Long term equipment deposit . . . . . . . . . . . . . . . . . . . . . . (1,396) 1,396 --
(Increase) decrease in other assets . . . . . . . . . . . . . . . . . . (38) (75) 58
Purchase of land held for sale . . . . . . . . . . . . . . . . . . . . -- -- (1,463)
------- ------- -------
Net cash used in investing activities . . . . . . . . . . . . . (2,969) (3,329) (5,934)
------- ------- -------
Cash flows from financing activities:
Net borrowings (repayment) under revolving promissory notes . . . . . . -- 9,389 (11,089)
Repayment of long-term debt and leases payable . . . . . . . . . . . . (528) (897) (1,425)
Proceeds from issuance of Common Stock . . . . . . . . . . . . . . . . -- -- 33,329
------- ------- -------
Net cash provided by (used in) financing activities . . . . . . (528) 8,492 20,815
------- ------- -------
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . -- -- (6)
Net increase (decrease) in cash and cash equivalents . . . . . 76 (184) 21,339
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . 558 634 450
------- ------- -------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . $ 634 $ 450 $21,789
======= ======= =======
The accompanying notes are an integral part of these
Consolidated Financial Statements.
- 52 -
54
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES:
Description of Business
Westell Technologies, Inc. (the "Company") is a holding company. Its
wholly owned subsidiary, Westell, Inc., designs, manufactures and distributes
telecommunications equipment which is sold primarily to major telephone
companies. Westell International, Inc., a wholly owned subsidiary of the
Company established in fiscal 1993, and Westell Europe, Ltd., a wholly owned
subsidiary of Westell International, Inc., market and distribute the Westell,
Inc. product line in international markets. Conference Plus, Inc., an
89.2%-owned subsidiary, provides teleconferencing services to various
customers. Video Conference Plus, Inc., a wholly owned subsidiary of Conference
Plus, Inc., markets video teleconferencing equipment and services to various
customers. KeyPrestige Information Network Systems, Inc., an 88%-owned
subsidiary established in fiscal 1993 ("KPINS"), utilizes electronic networks
to process business transactions for various customers. The Company has a
majority interest in Westell-Meridian LLC, established in fiscal 1996 for the
purpose of developing a new corporate facility site (see Note 5).
Principals of Consolidation
The accompanying Consolidated Financial Statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash, certificates of
deposit, time deposits, commercial paper, short-term government obligations and
other money market instruments. The Company invests its excess cash in deposits
with major financial institutions, in government securities and the highest
grade commercial paper of companies from a variety of industries. These
securities have original maturity dates not exceeding three months. Such
investments are stated at cost, which approximates fair value, and are
considered cash equivalents for purposes of reporting cash flows.
- 53 -
55
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inventories
Inventories are stated at the lower of first-in, first-out (FIFO) cost
or market. The components of inventories consist of the following:
March 31,
--------------------
1995 1996
------- -------
(in thousands)
Raw materials . . . . . . . . . . . . . . . . $ 8,896 $ 6,784
Work in process . . . . . . . . . . . . . . . 1,057 845
Finished goods . . . . . . . . . . . . . . . 5,256 4,205
Reserve for excess and obsolete inventory . . (1,000) (1,150)
------- -------
$14,209 $10,684
======= =======
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
over the estimated useful lives of the assets which range from 3 to 10 years
using the straight-line method for financial reporting purposes and accelerated
methods for tax purposes. Leasehold improvements are amortized over the lives
of the respective leases.
Revenue Recognition
Revenue is generally recognized upon shipment of product. On certain
sales contracts, revenue is not recognized until specific customer product
acceptance terms have been met.
Product Warranties
Most of the Company's products carry a limited warranty ranging from
two to seven years. The Company accrues for estimated warranty costs as
products are shipped.
Deferred Revenue
Deferred revenue represents prepayments for goods or services.
Research and Development Costs
Engineering and product development costs are charged to expense as
incurred.
- 54 -
56
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Supplemental Cash Flow Disclosures
The following represents supplemental disclosures to the consolidated
statements of cash flows:
March 31,
------------------------------
1994 1995 1996
------- ------- -------
(in thousands)
Schedule of noncash investing and financing
activities:
Property purchased under equipment notes . . . . . . . . . . . $3,165 $1,275 $1,581
Construction held for sale financed with
construction loan . . . . . . . . . . . . . . . . . . . . . -- -- 2,968
Property purchased under capital leases . . . . . . . . . . . . -- 412 142
Cash paid for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 850 1,023
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 49 419
===== ===== =====
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument held by the Company:
Cash, trade receivables and trade payables: the carrying
amounts approximate fair value because of the short maturity of these
items.
Revolving promissory notes and installment notes payable to a
bank: due to the floating interest rate on these obligations, the
carrying amounts approximate fair value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
allowance for uncollectible accounts receivable, inventory obsolescence,
product warranty, depreciation, employee benefit plans, taxes, and
contingencies.
Foreign Currency Translation
The financial position and the results of operations of the Company's
foreign subsidiary are measured using local currency as the functional
currency. Assets and liabilities of this subsidiary are translated at the
exchange rate in effect at the end of each period. Income statement accounts
are translated at the average rate of exchange prevailing during the period.
Translation adjustments arising from differences
- 55 -
57
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in exchange rates from period to period are included in the foreign currency
translation adjustments account in stockholders' equity.
The Company recorded a transaction loss of $270,000 in other income
(expense) for fluctuations on foreign currency rates on accounts receivable in
the fiscal year ended March 31, 1996.
Computation of Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. These shares have been
included in the computation of net income (loss) per share. The computations
for net income (loss) per share reflect the retroactive restatement for the
2-for-1 stock split in the form of a dividend to holders of record on May 20,
1996 and to be effected on June 7, 1996.
Geographic Information
The Company's financial information by geographic area was as follows
for the year ended March 31, 1996:
Domestic International Total
-------- ------------- -------
(in thousands)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,445 $19,791 $83,236
Operating income (loss) from continuing
operations . . . . . . . . . . . . . . . . . . . . . . . . . . (6,191) 3,937 (2,254)
Identifiable assets . . . . . . . . . . . . . . . . . . . . . . . 57,623 6,825 64,448
====== ====== ======
NOTE 2. REVOLVING PROMISSORY NOTES:
The Company has secured revolving promissory notes with a bank which
enable the Company to borrow up to $14.6 million and $18.5 million as of March
31, 1995 and 1996, respectively, and are due on demand. The notes bear interest
at the bank's prime rate (9.0% and 8.25% at March 31, 1995 and 1996,
respectively), and are secured by substantially all of the assets of the
Company. At March 31, 1995 and 1996, the Company had $11.1 million and $0
million borrowed under the revolving notes, respectively. The Company also had
an available equipment line of $3.0 and $6.4 million with the same bank as of
March 31, 1995 and 1996, respectively. Borrowings under this line totaled $1.8
million and $3.8 million at March 31, 1995 and 1996, respectively, and are
included as installment notes payable to a bank described in Note 3.
Subsequent to year-end, the above credit facilities were renewed to
allow the Company to borrow up to $25.0 million for working capital and
equipment purchases. Under the renewed credit facilities, the Company is
required to provide a guaranty of up to $3.0 million on the construction
financing procured by Westell-Meridian LLC. See Note 5.
- 56 -
58
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. LONG-TERM DEBT:
Long-term debt consists of the following:
March 31,
-------------------
1995 1996
------- -------
(in thousands)
Note payable to Kendall County, 5%, secured by substantially
all assets of the Company, due through 1998 . . . . . . . . . . . . . . . $ 131 $ 85
Capitalized lease obligations secured by related equipment . . . . . . . . 521 504
Installment notes payable to a bank, interest at prime,
secured by substantially all assets of the Company, due
through November 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,477 3,838
------ ------
4,129 4,427
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,332 1,591
------ ------
$2,797 $2,836
====== ======
Future maturities of long-term debt at March 31, 1996 are as follows
(in thousands):
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,591
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,512
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 728
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
------
$4,427
======
- 57 -
59
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INCOME TAXES:
Income taxes are provided based upon income reported for financial
reporting purposes using the provisions of Financial Accounting Standards Board
Statement No. 109, Accounting for Income Taxes, which requires the liability
method. The income tax provisions (benefits) charged to net income are
summarized as follows:
Fiscal Year Ended March 31,
-----------------------------
1994 1995 1996
------- ------- -------
(in thousands)
Federal:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (669) $ 300 $ --
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . (173) (1,161) (1,965)
------- ------- -------
(842) (861) (1,965)
------- ------- -------
State:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . (167) -- --
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . (43) (171) (315)
------- ------- -------
(210) (171) (315)
------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,052) $(1,032) $(2,280)
======= ======= =======
The Company utilizes the flow-through method to account for tax
credits. In fiscal 1994, 1995 and 1996, the Company utilized approximately
$724,000, $632,000 and $790,000, respectively, of tax credits.
The statutory federal income tax rate is reconciled to the Company's
effective income tax rates below:
Fiscal Year Ended March 31,
-----------------------------
1994 1995 1996
------- ------- ------
Statutory federal income tax rate . . . . . . . . . . . . . . . . (34.0)% (34.0)% (34.0)%
Meals and entertainment . . . . . . . . . . . . . . . . . . . . . 2.9 5.3 1.9
State income tax, net of federal tax effect . . . . . . . . . . . (4.9) (4.9) (4.9)
Income tax credits utilized . . . . . . . . . . . . . . . . . . . (86.3) (41.1) (18.2)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.1) 7.7 2.8
------ ----- -----
(125.4)% (67.0)% (52.4)%
====== ===== =====
- 58 -
60
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Components of the net deferred income tax asset are as follows:
March 31,
-------------------
1995 1996
------- -------
(in thousands)
Deferred income tax assets:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . $ 155 $ 189
Alternative minimum tax credit . . . . . . . . . . . . . . . . . . . . . 486 321
Research and development credit carryforward . . . . . . . . . . . . . . 500 1,501
Compensation accruals . . . . . . . . . . . . . . . . . . . . . . . . . . 260 246
Inventory reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . 486 617
Warranty reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407 419
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . -- 740
Reserve for discontinued operations . . . . . . . . . . . . . . . . . . . -- 330
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 67
------ ------
2,600 4,430
------ ------
Deferred income tax liabilities:
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 112 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 150
------ ------
400 150
------ ------
Net deferred income tax asset . . . . . . . . . . . . . . . . . . . . $2,200 $4,280
====== ======
Management has not recorded a valuation allowance because it believes
that the deferred tax asset will be fully realized based on current estimates
of future taxable income, future reversals of existing taxable temporary
differences or available tax planning strategies.
The Company has approximately $1.8 million in income tax credit
carryforwards and a $1.9 million net operating loss carryforward that are
available to offset taxable income in the future. The tax credit carryforwards
begin to expire in 2009 and the net operating loss carryforward expires in
2011.
NOTE 5. LEASE COMMITMENTS:
The Company has agreements to lease a manufacturing facility and
several office facilities through 2000. In addition, the leases require the
Company to pay utilities, insurance and real estate taxes on the facilities.
The current manufacturing facility lease expires in 2002. The Company has the
option to terminate this lease in 1997 and can purchase the facility at any
time at fair market value.
- 59 -
61
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Total minimum future rental payments at March 31, 1996 are as follows (in
thousands):
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,013
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
------
$2,455
======
In September 1995, the Company entered into an agreement to form a
limited liability company, Westell-Meridian LLC ("LLC"), for the purpose of
developing a 16.4 acre site in Aurora, Illinois into a 173,000 square foot
corporate facility to house manufacturing, engineering, sales, marketing and
administration. In connection therewith, the Company currently has a 98%
ownership interest in the LLC, which will gradually decrease to a 60% ownership
interest as the other LLC member increases its capital contribution to the LLC
by contributing its development fees for the new facility, as earned. In
addition, the Company has a reimbursement obligation with respect to an
irrevocable letter of credit issued for the Company's account in the amount of
$952,000, due on or before September 30, 1996, which represents the Company's
capital contribution to the LLC.
In September 1995, the Company advanced the LLC $1.4 million for the
purchase of land in the form of a short-term note which bears interest at the
prime rate (8.25% at March 31, 1996). The note and accrued interest become due
and payable from proceeds of construction financing. This note has been
eliminated in consolidation as of March 31, 1996. During fiscal 1996 the LLC
began construction of the facility and as of March 31, 1996 $3.0 million of
construction costs and $1.4 million of land are included in Land and building
construction held for sale in the accompanying balance sheet. It is
managements' current intention to sell its interest in this property when
construction is completed, repay any financing and lease the facility from a
third party.
In addition, in September 1995, the Company entered into a 15 year
lease with the LLC for the facility being developed by the LLC. Lease payments
will be based upon construction costs and permanent financing arrangements and
will be determined upon building completion.
NOTE 6. CAPITAL TRANSACTIONS AND STOCK RESTRICTION AGREEMENTS:
The members of the Penny family (major stockholders) have a Stock
Transfer Restriction Agreement which prohibits, with limited exceptions, such
members from transferring their Common Stock acquired prior to November 30,
1995, without first offering such stock to the other members of the Penny
family. A total of 18,998,770 shares of Common Stock are subject to this Stock
Transfer Restriction Agreement.
During fiscal 1994, common stock awards equal to 312,330 shares were
granted by the Company to certain employees. The number of restricted shares
vested at March 31, 1994, 1995 and 1996 for these stock awards and others
previously granted was 397,565; 674,724 and 740,807 shares, respectively. The
Company valued the stock awards granted during fiscal 1994 at $1.03 per share.
This valuation was based on
- 60 -
62
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
independent appraisals done at the approximate date of the grants. Compensation
expense of $70,000, $64,000 and $68,000 was recognized in fiscal 1994, 1995,
1996, respectively, based on the fair market value of the shares granted. The
remaining compensation expense to be recognized is $117,000 which will be
recognized through fiscal 1998 as the stock awards vest. In addition, the
Company granted additional compensation to reimburse certain individuals for
related income taxes on stock awards granted during fiscal 1994 in the amount
of $244,000.
On May 8, 1996, the Board of Directors authorized a two-for-one stock
split in the form of a dividend to be distributed on June 7, 1996, to
stockholders of record on May 20, 1996. All references in the financial
statements to number of shares and per share amounts of the Company's common
stock have been retroactively restated to reflect the two-for-one stock split.
NOTE 7. BENEFIT PLAN:
The Company sponsors a 401(k) benefit plan (the "Plan") which covers
substantially all of its employees. The Plan is a salary reduction plan which
allows employees to defer up to 15% of wages subject to Internal Revenue
Service allowed limits. The Plan also allows for Company discretionary
contributions. The Company provided for discretionary and matching
contributions to the Plan totaling $260,000, $161,000 and $229,000 for fiscal
1994, 1995 and 1996, respectively.
NOTE 8. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT:
The Company's primary business relates to the design, manufacture and
distribution of telecommunications equipment which is sold primarily to major
telephone companies. Sales to the Company's largest customers accounted for the
following percentages of revenue:
Fiscal Year Ended
March 31,
----------------------------
1994 1995 1996
------- ------- -------
Customer A . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.0% 25.0% 5.8%
Customer B . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8 14.4 12.0
Customer C . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7 10.5 9.9
Customer D . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.5 8.9 10.4
Customer E . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.7 7.0 6.8
Customer F . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 11.1
Major telephone companies comprise a significant portion of the
Company's trade receivables. One customer represented 20.0% of the trade
receivables balance at March 31, 1995 and four customers represented 51.6% of
the trade receivables balance at March 31, 1996.
NOTE 9. COMMITMENTS AND CONTINGENCIES:
In January 1995, a former officer of a subsidiary of the Company filed
a suit against the Company alleging damages suffered as a result of wrongful
termination and breach of contract. Management believes the suit is without
merit and intends to contest the suit vigorously. While the final outcome of
this lawsuit
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WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
cannot be determined with certainty, management believes the former officer was
released for cause under the terms of an existing agreement and that the
ultimate outcome will not have a material adverse effect on the Company's
business and results of operations or its financial position.
NOTE 10. DISCONTINUED OPERATIONS:
Effective May 1, 1994, the Company acquired the assets of Key
Prestige, Inc. ("KPI") for approximately $200,000 in cash and assumed
liabilities of approximately $190,000. The purchase price was allocated to the
assets and liabilities of KPI based on their relative fair values.
Approximately $340,000 was allocated to fixed assets and $50,000 to a
non-compete agreement. KPI was merged with Information Network Systems, Inc. to
form KPINS in fiscal 1995. The acquisition, which was accounted for as a
purchase, was funded with proceeds from the revolving promissory notes
described in Note 2.
In August 1995, the Board of Directors approved a plan for the
disposition of KPINS. The net losses of KPINS have been segregated in the
consolidated statements of operations as "discontinued operations." The Company
intends to sell KPINS before August 31, 1996. The components of the loss from
discontinued operations for the year ended March 31, 1996 are as follows:
Loss from operations of KPINS for the year ended March 31, 1996
(net of tax benefits of $65,000) . . . . . . . . . . . . . . . . . . . . . . . . $102,000
Estimated loss of disposal of KPINS (net of tax benefits of
$329,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520,000
--------
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . $622,000
========
As the Company does not expect KPINS to incur operating losses between
March 31, 1996 and the anticipated date of disposal, no provision for operating
losses during the phase-out period has been made.
Summarized financial information of KPINS is as follows:
Fiscal Year Ended March 31,
-----------------------------
1994 1995 1996
------- ------- -------
(in thousands)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $138 $3,765 $3,263
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . 296 992 731
Net property, plant and equipment . . . . . . . . . . . . . . . . 77 497 301
Total liabilities, excluding intercompany
payables . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 664 366
NOTE 11. STOCK RECAPITALIZATION:
In July 1995, the Company recapitalized its common stock to increase
the number of authorized shares from 14,500,000 shares of common stock to
17,400,000 shares of Class A Common Stock and 11,605,858 shares of Class B
Common Stock and created Class A Common Stock with voting rights of one
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64
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
vote per share and Class B Common Stock with voting rights of four votes per
share. On November 30, 1995, the Company filed an Amended and Restated
Certificate of Incorporation that increased the amount of authorized capital
stock to 43,500,000 shares of Class A Common Stock, par value $0.01 per share,
25,000,000 shares of Class B Common Stock, par value $0.01 per share, and
1,000,000 shares of undesignated Preferred Stock, par value $0.01 per share,
and effected a 29-for-1 stock split of the Class A and Class B Common Stock.
The Board of Directors has the authority to issue the newly authorized
Preferred Stock up to 1,000,000 shares in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any
series or the designation of such series, without any further vote or action by
stockholders.
NOTE 12. STOCK PLANS:
In October 1995, the Company adopted a stock purchase plan that allows
participating employees to purchase, through payroll deductions, shares of the
Company's Class A Common Stock for 85% of the average of the high and low
reported sales prices at specified dates. Under the stock purchase plan,
217,950 shares were authorized and 213,532 shares were available for future
issuance at March 31, 1996.
In October 1995, the Company adopted a stock incentive plan that permits
the issuance of Class A Common Stock, restricted shares of Class A Common Stock
and stock options to purchase Class A Common Stock, performance awards and
stock appreciation rights to selected employees, officers, consultants and
non-employee directors of the Company. Under the stock incentive plan 2,688,050
shares were authorized and 2,573,526 shares were available for future issuance
at March 31, 1996. During fiscal 1996, the Company granted options for 89,900
shares of Class A Common Stock, of which 5,616 shares were vested at March 31,
1996 at an exercise price of $6.50 per share which represents fair market value
at date of grant. The Company also issued 24,624 shares for stock awards under
this plan in fiscal 1996. Compensation expense of $164,000 and $73,000 was
recognized in fiscal 1996 for the stock awards and the related taxes,
respectively.
On May 21, 1996, the Compensation Committee of the Board of Directors
authorized the future grant of stock options to employees covering 662,850
shares of Class A Common Stock with an exercise price equal to the fair market
value of the Class A Common Stock on the actual date of grant, which is
expected to occur in June 1996.
EVENT (UNAUDITED) SUBSEQUENT TO DATE OF AUDITORS' REPORT
NOTE 13. COMMON STOCK ISSUANCE:
On June 20, 1996, the Company sold 1,665,000 shares of Class A Common
Stock in a public stock offering. Net proceeds to the Company from the sale of
the Class A Common Stock were approximately $61.6 million and will be used to
fund capital equipment purchases and for general corporate purposes including
working capital funding. Pending such uses, the Company intends to invest the
proceeds in short-term interest-bearing securities.
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65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Westell Technologies, Inc.
We have audited, in accordance with generally accepted auditing
standards, the financial statements of Westell Technologies, Inc. and its
Subsidiaries included in this Annual Report on Form 10-K and have issued our
report thereon dated May 21, 1996. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. Schedule
II, Valuation and Qualifying Accounts, included herein on page 65 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
May 21, 1996
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66
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE ALLOWANCES
(IN THOUSANDS)
1994 1995 1996
---- ---- ----
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . $ 52 $181 $364
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . 129 201 274
Provision for discounts, allowances and rebates . . . . . . . . . . . . . -- -- --
Write-offs of doubtful accounts, net of recoveries . . . . . . . . . . . -- 18 176
Discounts, allowances and rebates taken . . . . . . . . . . . . . . . . . -- -- --
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . $181 $364 $462
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