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Westell Technologies 10-K 2008

                                                                                                

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended March 31, 2008

or

 o

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to   .

 

Commission file number: 0-27266

 

WESTELL TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Delaware

36-3154957

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

750 N. Commons Drive, Aurora, Illinois 60504

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (630) 898-2500

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Name of each exchange on which registered:

Class A Common Stock, $.01 par value

 

NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Act.

Yes  o  No 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.

Yes  o  No 

 

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   No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” ‘large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large Accelerated Filer o

 

Accelerated Filer

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

 

 

 

 



 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Yes  o  No 

 

The estimated aggregate market value of voting and non-voting Class A Common Stock held by non-affiliates (within the meaning of the term under the applicable regulations of the Securities and Exchange Commission) as of September 30, 2007 (based upon an estimate that 71% of the shares are so owned by non-affiliates and upon the average of the high and low prices for the Class A Common Stock on the NASDAQ Global Select Market on that date) was approximately $96 million. 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 May 30, 2008, 56,773,288 shares of the registrant's Class A Common Stock were outstanding and 14,693,619 shares of registrant's Class B Common Stock (which automatically converts on a one-for-one basis into shares of Class A Common Stock upon a transfer of such stock except transfers to certain permitted transferees) were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement for the 2008 annual shareholders’ meeting are incorporated by reference into Part III hereof.

 

 



 

 

 

WESTELL TECHNOLOGIES, INC.

2008 ANNUAL REPORT ON FORM 10-K CONTENTS

 

 

Item

PART I

Page

1.

Business

1

1A.

Risk Factors

13

1B.

Unresolved Staff Comments

22

2.

Properties

22

3.

Legal Proceedings

22

4.

Submission of Matters to a Vote of Security Holders

22

 

 

 

 

PART II

 

5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

23

6.

Selected Financial Data

26

7.

Management’s Discussion and Analysis of Financial Condition
and Results of Operations

27

7A.

Quantitative and Qualitative Disclosures About Market Risk

36

8.

Financial Statements and Supplementary Data

37

9.

Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

37

9A.

Controls and Procedures

37

9B.

Other Information

38

 

 

 

 

PART III

 

10.

Directors, Executive Officers and Corporate Governance

39

11.

Executive Compensation

39

12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

39

13.

Certain Relationships and Related Transactions, and Director Independence

39

14.

Principal Accounting Fees and Services

39

 

 

 

 

PART IV

 

15.

Exhibits and Financial Statement Schedules

40

 

Signatures

43

 

 

 

 

 

 

 

 



 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

Certain statements contained herein that are not historical facts or that contain the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “may”, “will”, “should”, or derivatives thereof and other words of similar meaning are forward-looking statements that involve 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, product demand and market acceptance risks, need for financing, an economic downturn in the United States (“U.S.”) economy and telecom market, the impact of competitive products or technologies, competitive pricing pressures, new product development, excess and obsolete inventory, commercialization and technological delays or difficulties (including delays or difficulties in developing, producing, testing and selling new products and technologies), the effect of Westell’s accounting policies, the need for additional capital, the effect of economic conditions and trade, legal social and economic risks (such as import, licensing and trade restrictions) and other risks more fully described in this Form 10-K for the fiscal year ended March 31, 2008 under Item 1A - Risk Factors. The Company undertakes no obligation to publicly update these forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or otherwise.

 

PART I

 

ITEM 1. BUSINESS

 

Westell Technologies, Inc., (the “Company”) was incorporated in Delaware in 1980 and its headquarters are located at 750 North Commons Drive, Aurora, Illinois. The Company is comprised of two segments: telecom equipment and telecom services. In the telecom equipment segment, the Company designs, distributes, markets and services a broad range of digital and legacy analog products used by telephone companies and other telecommunications service providers such as mobile network operators (“wireless”), multi service operators (“MSOs”), integrated carriers, and utility providers (all known as “service providers”) to deliver broadband services over existing copper telephone wires, fiber optic networks, hybrid fiber-coax networks, and wireless infrastructures.

 

The telecom equipment segment consists of two product lines: Customer Networking Equipment (“CNE”) products and Outside Plant Systems (“OSPlant Systems”) products. The CNE product line includes networking and high-speed transmissions products that allow service providers to deliver broadband services over existing copper, fiber, coax, or wireless infrastructures. The Company’s OSPlant Systems, formerly known as Network Service Access (“NSA”), is a leading provider of next generation outdoor cabinets, enclosures, power distribution, edge connectors, remote monitoring and ancillary network protection solutions. The power distribution and remote monitoring solutions are provided through the Company’s Noran Tel subsidiary, which was acquired on January 2, 2007, and marketed and sold through the OSPlant Systems product line.

 

The Company’s telecom service segment is comprised of a 91.5% owned subsidiary, ConferencePlus, Inc. (“ConferencePlus”). ConferencePlus provides audio, video, and web conferencing services. Businesses and individuals use these services to hold voice, video or web conferences with multiple participants. ConferencePlus sells its services directly to large customers, including Fortune 1000 companies, and serves other customers indirectly through its private reseller program.

 

 

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Revenue and total assets from the Company's two reportable segments and product groups for the fiscal years ended March 31 are as follows (for more information also see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto included in this Annual Report on Form 10-K):

 

(in thousands, except percentages)

Fiscal year ended March 31,

Revenue:

2008

%

2007

%

2006

%

CNE products

$ 98,095

47%

$ 153,844

59%

$ 194,782

69%

OSPlant Systems products

56,618

27%

57,702

22%

43,319

15%

Total telecom equipment

154,713

74%

211,546

81%

238,101

84%

Telecom services

53,698

26%

48,544

19%

45,070

16%

Total revenue

$ 208,411

 

$ 260,090

 

$ 283,171

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

Telecom equipment

$ 116,999

87%

$ 190,088

92%

$ 174,131

91%

Telecom services

17,229

13%

17,262

8%

17,682

9%

Total assets

$ 134,228

 

$ 207,350

 

$ 191,813

 

 

Financial information for each of the Company’s segments and operations by geographic area are located in Note 11 of the Consolidated Financial Statements included in this Annual Report.

 

The Company’s stock is divided into two classes. Class A common stock is entitled to one vote per share while Class B common stock is entitled to four votes per share. The Company’s largest stockholder is a voting trust that owned 47.5% of the voting control of the Company as of May 30, 2008. The trust was formed for the benefit of Robert C. Penny III and Melvin J. Simon and their respective families. Certain Penny family members also own or are beneficiaries of trusts that own shares outside of the voting trust. As trustees of the Voting Trust and other trusts, Messrs. Penny and Simon control 52.3% of the voting stock and therefore effectively control the Company.

 

The Company’s Products

 

The telecom equipment segment of the Company’s business consists of two product lines, offering a broad range of products that facilitate the broadband transmission of high-speed digital and analog services between a service provider and end-user customers. These two product lines are:

 

CNE: The Company’s CNE family of broadband products enables high-speed transport and networking of voice, data, video, and other advanced services. The products allow service providers to deliver services, content, and applications over existing copper, fiber, coax, and wireless infrastructures. Westell CNE products are typically installed in consumer residences or small businesses as a key component of a broadband service package.

OSPlant Systems: The Company’s OSPlant Systems product family consists of next generation outdoor cabinets, enclosures, power distribution, edge connectors, remote monitoring and ancillary network protection solutions. These solutions are ideal for wireless backhaul and service delivery to enterprise markets as well as wireless carrier, MSO and utility markets worldwide. The power distribution and remote monitoring solutions are provided through the Company’s Noran Tel subsidiary.

 

The prices for the products within each market group vary based upon volume, customer specifications and other criteria and are subject to change due to competition among telecommunications equipment manufacturers. Increasing competition, in terms of the number of entrants and their size, and the increasing size of the Company’s customers because of past mergers, continue to exert downward pressure on prices for some of the Company's products. At some point, the Company may elect to eliminate some products and exit some markets based on an analysis of current and future prospects, and/or enter new, more attractive markets.

 

The Company’s CNE products enable residential customers, small businesses, and small office/home office (“SOHO”) users to access and share broadband services on networked computers, telephones, cell phones, televisions, media players, and other networked devices. A broad offering of networking products and technologies allows the Company to address several segments of the service provider market, distinguished by the methods used

 

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to deliver their services – wireline operators (copper and fiber), mobile network operators (wireless), cable multi-service operators (hybrid fiber-coax), and integrated carriers that operate as combinations of the other three.

 

The following table sets forth a list of the Company's principal CNE products and their applications:

 

Product

Description

Applications

LiteLineTM ADSL2+ Modem

 

Customer premises equipment that is connected to a telephone line that has been configured to provide Asymmetrical Digital Subscriber Line (ADSL and ADSL2+) service from the telephone company. The LiteLineTM is a plug-and-play device that connects to the end customer through a single Ethernet or USB port.

 

Enables residential and SOHO customers of ADSL service to connect one or more PC’s and other computer networking equipment to the ADSL service for high speed Internet access with routing and security protection all in one box.

 

ProLineTM ADSL2+ manageable Modem/NAT Router

 

Similar in all ways to the LiteLineTM, the ProLineTM provides the added benefit of allowing remote diagnostics, maintenance, software upgrades and other remotely managed services.

 

In addition to providing the same applications as the LiteLineTM, the ProLineTM offers service providers the ability to provide customers a higher level of service and performance.

 

VersaLinkTM Gateway

A compact, versatile gateway device that combines an ADSL2+ modem along with wired Ethernet and WiFi networking features. Versions are also available without the ADSL2+ modem, for wireless and other service providers.

 

Enables residential, SOHO, and small businesses to network their broadband service to multiple PCs and other networked devices with wired and wireless access.

 

TriLinkTM IMS Gateway

Multi-service gateway that combines the ADSL2+ modem and networking capabilities of VersaLink with Voice over Internet Protocol (“VoIP”) ports for connecting standard home phones and WiFi-enabled cell phones to the broadband network. Versions are also available without the ADSL2+ modem, for wireless and other service providers.

 

In addition to VoIP and networking features including IMS support, the TriLinkTM IMS Gateway supports Fixed Mobile Convergence (“FMC”), and Fixed-to Mobile Substitution (“FMS”) applications that blend wired and wireless phone services.

 

UltraLineTM Series3

Wireless Broadband

Home Router

Ultra high-speed gateways that deliver secure, high-quality, data, voice, IP video services, and advanced services and applications over a variety of network access methods and home networking technologies, including fiber optic, copper, coax, WiFi and Ethernet.

UltraLineTM supports a wide variety of wired and wireless broadband applications, particularly high-speed IP data video services delivered over fiber optic networks.

 

OSPlant Systems Products. The Company’s OSPlant Systems products provide service providers with products to transport, maintain and improve the reliability of services delivered over copper and fiber lines in the local access network.

 

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The following table sets forth a list of the Company's principal OSPlant Systems products and their applications:

 

Product

Description

Applications

 

T1 NIU-PM (Network Interface Unit with Performance Monitoring)

T1Network Interface Unit with Performance Monitoring that stores circuit performance and maintenance information for a single T1 circuit.

Provides a “demarcation point” or hand-off between the telephone company equipment and customer’s equipment on T1 circuits. The NIU PM units provide enhanced maintenance and remote performance monitoring of T1 circuits. This functionality provides troubleshooting capability that helps the telephone company reduce maintenance costs and customer down-time. Additionally, it creates an opportunity for preventive maintenance activities by the telephone company to improve their customer satisfaction.

 

NIU Mountings

NIU Mountings are electronic enclosures with connectorized backplanes that house NIUs, NIU PM units, and HDSL Remote Terminal cards, including those from other manufacturers such as Adtran.

 

Deployed by telephone company at their customer’s premises locations to terminate their T1 circuits.

DS3 products

DS3 Network Interface Units with and without Performance Monitoring capability along with the Mountings to house these plug-in cards.

Facilitates the maintenance, monitoring, extension, and demarcation of DS3 facilities. Can be deployed in central offices for a DS3 hand-off to alternate carriers, and also customer premises locations.


 

T1 Repeaters

T1 Intelligent Office and Line Repeaters.

Facilitates the extension of T1 service to subscribers that are more than 3000 feet* from the central office and those that are served beyond a fiber multiplexer. (*Distance will vary based on gauge of copper wire)

 

VirtualEdgeTM

A flexible mix and match architecture panel for Ethernet (Cat5E), fiber or coax cable. These panels are available in either standard 19” or 23” relay rack mount as well as wall mount.

 

Provides a physical demarcation for services at the customer premises. Mounting and connector flexibility provides customers multiple applications, and minimizes space required in equipment rooms.

 

SwingRack

A unique hinged wall mounted housing to hold a standard 1 or 2 RU rack mount device to the wall, eliminating the need for floor mount relay racks.

Provides a solution in tight equipment closets rooms to mount in a standard 1 or 2 RU (19” or 23”) rack mount devise in a vertical “upright” position hugging the wall that nicely swings down to a horizontal position for installation and maintenance purposes.

 

 

- 4 -

 



 

 

(Continued from prior page)

 

Product

Description

Applications

 

Shade™

A GR-487 Issue 2 compliant universal environmental equipment cabinet supporting up to 225W of internal heat dissipation using the Company’s patent pending Dynamic Cooling System.

 

Provides an actively cooled outdoor equipment Cabinet designed to reduce the effects of solar loading and internal equipment heat generation to help ensure maintenance free equipment operation in conditions ranging from -40°C to +65°C.

 

CellPak®

Outdoor passively cooled equipment enclosures

Provides a sealed “passively” cooled equipment enclosure ideally suited for demarcation hand-offs from a Wireline Carrier (Telco or MSO) to Wireless Carriers.

 

Power Distribution Products

Fuse Panels and Battery Distribution.

Point of secondary DC power distribution to operate equipment. Safely protecting operating equipment in the event of fault current. Providing fault current alarms through visual and remote indicators.

 

SiteVu Remote Monitoring Systems

A powerful compact and flexible monitoring system that provides visibility to remote site environmental and equipment status issues.

A remote monitoring product that provides complete real time visibility to remote sites from the user’s desk top. Applications include environmental information such as temperature, air flow, humidity and smoke, battery condition, and equipment operating status.

 

 

Research and Development Capabilities and Engineering Base

 

The Company believes that its future success depends, in part, on its ability to maintain its technological leadership through enhancements of its existing products and development of new products that meet customer needs. The Company is focusing on expanding its product offerings in the equipment segment from basic high speed broadband Internet access to more sophisticated applications such as home wireless networking, voice, video and information service delivery converged services and IPTV/Video. The Company works closely with its current and potential customers as part of the product development process.

 

In fiscal years 2008, 2007 and 2006, the Company spent approximately $22.7 million, $24.4 million and $20.3 million on research and development (“R&D”) activities, respectively.

 

The Company's quality systems, including product development processes, are registered to TL9000, which is the Telecommunication Industry's sector-specific version of the ISO9001:2000 International Quality System Standard. These processes are also registered to ISO9001:2000.

 

The Company's R&D personnel are organized into product development teams. Each product development team is generally responsible for sustaining technical support of existing products, 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 highly valued, superior quality long-term supplier, without compromising functionality or serviceability. The Company also

 

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leverages its relationships with its manufacturing partners to produce new cost-reduced versions of existing products. Also, the Company performs some product development, focusing on software development and system testing via contacts with outsourcing firms in India.

 

The Company believes that the key to this R&D strategy is choosing an initial architecture for each product that enables engineering innovations to result in performance enhancements and future cost reductions. The Company’s products are designed in conjunction with input from procurement and outsource manufacturers and an analysis of feasibility to reduce costs. The Company believes it has a quality record that is grounded in a solid interface and transference of knowledge between design and outsource manufacturing teams.

 

The Company is also growing the software content of its products, and the majority of the Company's design engineers, including those at the contracted outsourcing firms, are software engineers.  Greater software content in the Company's products is not only necessary to deliver the more sophisticated applications listed above, but is also a key element of the Company's strategy to focus on differentiated, value-added products and solutions.  In some cases the Company sources software technology from outside suppliers through licensing agreements, which typically but not always give the Company the ability to modify the licensed software to meet the needs of the Company's customers.  Some software technology is obtained from the open source community.  The Company also develops its own proprietary software where needed to provide the desired functionality.  Software from all of these sources is typically integrated into the final product releases, and tested by the Company's system test engineers, by outside test labs, by industry certification groups, and by the Company's customers before going into volume production and deployment.

 

In some cases, the Company utilizes technology, whether hardware, silicon chip, software or other, that is only available from a single source.  In these cases, the Company will typically obtain a contractual agreement with the technology supplier that gives the Company access to the technology for the intended lifecycle of the products which incorporate that technology.  However, it is not always possible to obtain such an agreement.  Additionally, technology suppliers to the Company may go out of business or may be subject to injunctions or natural disasters which prevent them from being able to supply that technology to the Company in the future.  Additionally, the technology may evolve due to changes in industry standards or changes in the market, and the Company's contractual agreement may not necessarily give the Company rights to that evolved technology in the future.  Were the Company to lose the ability to obtain needed technology from a supplier, or were that technology no longer available to the Company under reasonable terms and conditions, the Company’s business and results of operations would be materially and adversely affected.

 

The Company’s products are subject to industry wide standardization organizations which include the Internet Engineering Task Force, the MoCA Alliance, the DSL Forum, CableLabs, the American National Standards Institute (“ANSI”) in the United States and the International Telecommunications Union ("ITU"). 

 

The following table lists the principal products currently under development along with their description and expected application:

 

Product

Description

Applications

UMA Terminal Adapter

Residential device that converts standard analog phone signals to Unlicensed Mobile Access (“UMA”) format for communication over a broadband connection.

 

Allows connection of wired home phones to UMA services offered by mobile network operators.

Application Gateways & Devices

Family of products that combine networking, remote control, and remote access capabilities for IP-based home devices and appliances.

 

Enables a broad variety of services for media sharing, monitoring, and security in a broadband connected home.

 

                 The Company anticipates that it will generate revenue from the products listed in the above table in fiscal year 2009 and fiscal year 2010. However, there can be no assurance that the Company will be able to introduce such products as planned.

 

 

 

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Customers

 

The Company's principal customers historically have been major U. S. telecommunications service providers (“telephone companies”). In addition, the Company sells products to several other entities, including public telephone administrations located outside the U.S., independent domestic local exchange carriers, competitive local exchange carriers, inter-exchange carriers, wireless service providers, Internet service providers, and business enterprises. Revenues from international customers represented approximately $11.6 million, $7.3 million and $7.5 million of the Company's revenues in fiscal 2008, 2007 and 2006, respectively, accounting for 5.6%, 2.8% and 2.7% of the Company's revenues in such periods.

 

The Company depends, and will continue to depend, on the telephone companies and other independent local exchange carriers for the majority of its revenues. Sales to the Company’s largest two customers, Verizon and AT&T accounted for 34.0% and 19.8% of the Company's revenues in fiscal 2008, respectively. Consequently, the Company's future success will depend upon the timing and size of future purchase orders from telephone companies, the product requirements of the telephone companies, the financial and operating success of telephone companies the success of the telephone companies' services that use the Company's products, and the Company’s level of success in diversifying its revenue stream beyond the telephone companies. Any attempt by a telephone company to seek out additional or alternative suppliers or to undertake the internal development of products could 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 could fluctuate significantly from quarter to quarter and year to year. The loss of such customers or the occurrence of such sales fluctuations would materially adversely affect the Company's business and results of operations.

 

The Company’s contracts with its major customers are primarily pricing and product specification agreements that do not require a specific level of quantities to be purchased. Each customer provides the Company with purchase orders for units on an as-needed basis.

 

Telephone companies and the Company's other customers are significantly larger than, and are able to exert a high degree of influence over, the Company. As a result, our larger customers may be able to reschedule or cancel orders without significant penalty. Prior to selling its products to service providers, the Company must undergo lengthy approval and purchase processes, which are discussed in the section, titled “Marketing, Sales and Distribution.”

 

Marketing, Sales and Distribution

 

The Company sells its products in the U.S. through its domestic field sales organization and selected distributors. The Company has maintained an established sales force and channel to domestic service providers since its founding in 1980.

 

The Company markets its products domestically within the United States, as well as in Canada and Europe. In North America, the Company’s OSPlant Systems products are sold directly to the service providers or in some cases to distributors who service these carriers. The Company’s CNE products are sold directly to service providers, or in some cases to distributors who service these carriers. Additionally, the CNE products are sometimes recommended to servicer providers by other companies with whom the Company has a partnership in place. The Company believes that the service providers’ sales channels are very dynamic and continually looks to adapt and configure its sales force and processes to meet these changes.

 

Prior to selling its products to service providers, 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 and often longer for products based on new technologies and/or new service offerings. Accordingly, the Company is continually submitting successive generations of its current products, as well as new products to its customers for approval.

 

Although the service provider approval processes may vary to some extent depending on the customer and the product being evaluated, they generally are conducted as follows:

 

 

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Laboratory Evaluation. The product's function and performance are tested against all relevant industry standards and the customer’s written requirements, usually provided to the Company in the form of a Request for Proposal.

 

Technical Trial. Small quantities of the product are installed in the field 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 are tested for market acceptance of new applications and services. Marketing trials usually involve a greater number of products than technical trials because products are typically deployed in several distinct markets in the service provider’s network. This stage gives service providers an opportunity to establish procedures, train employees to install and maintain the new product and to obtain more feedback on the product and the new applications and services from a wider range of operations personnel and consumers.

 

Commercial Deployment. Commercial deployment usually involves substantially greater numbers of products and locations than the marketing trial stage. In the first phase of commercial deployment, a service provider initially installs the equipment in select locations for select applications and services, and will typically start billing for those services. This phase is followed by general deployment involving greater numbers of products and locations across the service provider’s serving area. Commercial deployment does not usually mean that one supplier's product is purchased for all of the service provider’s needs throughout their serving area as service providers often rely upon multiple suppliers to ensure that their needs can be met. Subsequent orders, if any, are generally placed under single or multi-year supply agreements that are generally not subject to minimum volume commitments.

 

The relationships that the Company establishes in this extensive process are critical in almost every case. The Company has a history of working closely with the service providers in this fashion and the Company has won numerous quality awards from a variety of customers over the past twenty years.

 

The Company is focusing on new channels, markets and partners for its newer products. The deployment of emerging fixed mobile convergence (“FMC”), IPTV/video and advanced in-home services all represent opportunities for the Company’s TriLinkTM and UltraLineTM Series3 products at customers beyond its traditional base of customers.

 

Technical Support

 

The Company 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 some of its customers with respect to the installation, operation and maintenance of its products.

 

The Company has general purchase agreements with most of its major customers. These agreements may require the Company to accept returns of products within certain time limits, or indemnify such customers against certain liabilities arising out of the use of the Company's products. Although, to date, the Company has not experienced any significant product returns or indemnification claims under these contracts, any such claims or returns could have a material adverse effect on the Company's business and results of operations.

 

The Company's products are required to meet rigorous standards imposed by its customers. Most of the Company's products carry a limited warranty ranging from one to two years for CNE products and up to seven years for OSPlant Systems products, which generally covers defects in materials or workmanship and failure to meet published specifications, but excludes damages caused by improper use and all other warranties. In the event there are material deficiencies or defects in the design or manufacture of the Company's products, the affected products could be subject to recall.

 

 

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Outsourced Manufacturing

 

The Company outsourced its manufacturing operations from Aurora, Illinois, to offshore suppliers during fiscal year 2008. The manufacturing facility in the Aurora building is now being used for distribution. Reliance on third-party offshore subcontractors involves several risks. (See Risk Factors)

 

Standard commercial components available from multiple suppliers are procured by the offshore suppliers. There are also single-sourced components needed to produce products. The Company has direct relationships and purchase contracts with suppliers for these items. One of the single-sourced items in some of the CNE products consists of a license to run a proprietary operating system. There are a number of other suppliers in the market that could supply the Company with similar technology, however, it would take the Company at least nine months to reengineer the product and subsequently get product approval from customers. This delay would materially adversely affect the Company’s business. All purchase contracts are short term in nature.

 

A substantial portion of the Company's shipments in any fiscal period can relate to orders for products received in that period. Further, a significant percentage of orders, such as NIUs may require delivery within 48 hours. To meet this demand, the Company maintains inventory at its facilities or outsource suppliers. In addition, the Company maintains some inventory at the customers’ sites pursuant to agreements that the customers will eventually purchase such inventory. Because of the rapid technological changes to our products, the Company faces a recurring risk that the inventory it holds may become obsolete.

 

Competition

 

The markets for the Company's products are intensely competitive and the Company has no reason to believe that this competitive environment will ease in the future, especially in the rapidly changing markets for broadband products. The Company’s primary competitors vary by market. The Company’s principal competitors with respect to its OSPlant Systems products are Adtran, ADC Telecommunications Emerson, Purcell and Telect. The Company's principal competitors with respect to its CNE broadband products are primarily Siemens Information and Communication Network Inc., Motorola (Netopia), 2Wire Inc., Cisco Systems Inc. (Linksys), D-Link Systems Inc., Actiontec Electronics Inc., Thomson and ZyXEL Communications Co. The Company believes that it is currently one of the leading sellers of DSL products in North America. However, many of the Company’s competitors are significantly larger, with broader product lines, and have more financial resources than the Company. To compete against these competitors, the Company focuses on quality, time to market and the ability to react quickly to market changes leveraging its U.S. based product management and product development teams. The Company expects that continuing competitive pressure from Asian based manufacturers will continue to exert downward pressure on pricing.

 

Since the Company currently derives the majority of its revenues from the sale of products to telephone companies, the Company faces competition from alternative products optimized for other broadband networks. Telephone companies face competition from MSOs, new local access providers and broadband wireless service providers that are capable of providing high speed digital transmission to end users. At the end of 2007, 40 million customers used cable broadband in North America in contrast to 34 million DSL subscribers. By 2009, Infonetics, a service that provides industry trend data, is forecasting approximately 49 million cable broadband users in North America versus 40 million DSL users resulting in approximately 45% market share for DSL. In addition, the Company believes that the deployment of DSL, HDSL and fiber networks are reducing the demand for the Company OSPlant Systems traditional transmissions products including T1 office and line repeaters and T1 NIU’s with and without performance monitoring. (See Risk Factors)

 

Telecom Services

 

ConferencePlus, Inc., founded in 1988, is a full service conferencing company that manages and hosts specific software and applications relating to conferencing and meeting services. ConferencePlus is a 91.5% owned subsidiary of the Company and manages its teleconferencing and meeting services through its main operations center in Schaumburg, Illinois, and a facility in Dublin, Ireland. ConferencePlus services generated $53.7 million, $48.5 million and $45.1 million in revenues in fiscal 2008, 2007 and 2006, respectively.

 

 

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ConferencePlus allows multiple individuals, organizations and/or businesses to conduct conference calls using a combination of voice, video or web such as graphs or spreadsheets. ConferencePlus offers conference call services that can include a blend of audio, graphics, spreadsheets or other documents that can be carried over and archived on the Internet to enhance the traditional voice conference call. By enabling the sharing of this blend of information, ConferencePlus can help organizations increase productivity and save money by reducing travel time, bringing down travel costs, and making it easier for people in remote locations to work together. Teleconference and meeting service technologies also allow organizations and individuals to collect and disseminate information faster, more accurately and without the associated costs of face-to-face meetings.

 

ConferencePlus is distinguished by three strategies:


 

 

Diverse Distribution Channels

 

 

State-of-the-Art Network and Integrated Systems

 

International Reach

 

 

Diverse Distribution Channels

ConferencePlus has historically acted as a provider of conferencing and meeting services on a wholesale basis, managing and hosting applications for major carriers and telecommunications resellers. About 40% of ConferencePlus’ revenues come from indirect commercial teleconferencing services to customers who market or use ConferencePlus services under their own brand name. Such companies choose to outsource and private label audio, web and video teleconferencing services to maintain continuity, save costs and focus on their core competencies. By selling into indirect or resale customers, ConferencePlus effectively increases the size of their sales organization without incurring the expense necessary with a direct sales force.

 

ConferencePlus also sells its services directly to companies through its national accounts sales force. This area continues to be a strong part of ConferencePlus’ business and the Company expects to continue to invest resources in this area in order to maintain a diverse mix of revenue distribution. The deployment of this strategy is designed to improve the recognition of the ConferencePlus brand, which has strategic long term benefits to the Company.

 

State-of-the-Art Network and Integrated Systems

A critical part of ConferencePlus’ approach is its state-of-the-art network and integrated systems. ConferencePlus has a state-of-the-art network infrastructure that enables it to take advantage of the relationships it has with major telecommunications providers to provide quality service. ConferencePlus has deployed equipment in carrier Points-of-Presence to take advantage of the higher capacity and the lower cost structure available with such deployments.

 

ConferencePlus has built an integrated reservation, scheduling and billing system called Conferencing and Reservation Billing System (“CRBS”) that is a significant differentiator in the conferencing market. CRBS allows ConferencePlus to leverage its operations on a global basis. This reliable and scalable system is seamlessly integrated in the operational environment from the point of reservation through the billing process. This integration allows ConferencePlus to enjoy scale advantages and to be able to provide transparent branded services to its customers. This system is built and maintained by an in-house team of engineers, developers and technicians who continually work to improve and enhance the system based on industry trends, customer requests and strategic direction.

 

ConferencePlus has extended certain capabilities of CRBS to a publicly available web portal where customers can sign up for service, manage their accounts and control their conferences. ConferencePlus has also tightly integrated with third party suppliers of web conferencing services to enhance our audio and video services. In addition to making these services available to customers, ConferencePlus has the ability to privately brand the entire web experience to match any other brand visualization that may be required. This capability is beneficial for both indirect customers where this helps support the indirect brand as well as for large enterprise customers where branding can help drive corporate adoption.

 

ConferencePlus has also begun leveraging the capabilities of CRBS for certain large scale conferencing deployments where the technology can simplify and streamline the usage, billing and cost accounting services for select customers.

 

 

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International Reach

As customers globalize their telecommunications services, ConferencePlus has expanded its operational presence internationally to meet these needs. In addition to its main operational centers in Schaumburg, Illinois, and Dublin, Ireland, ConferencePlus has teleconferencing bridges located in Chicago, Illinois, Broadview, Illinois, Oakbrook, Illinois, and London, England. ConferencePlus is able to serve the teleconferencing needs of customers headquartered anywhere in the world through these facilities. The ConferencePlus facility in Dublin, Ireland, was established in 1998 to help meet the growing demand for global conferencing service. The international market for teleconferencing is expected to grow as a result of deregulation and improved networks with associated reductions in end user costs.

 

ConferencePlus’ indirect or private label customers and many of its other customers are significantly larger than, and are thus able to exert a high degree of influence over, ConferencePlus. ConferencePlus depends on large customers to provide a significant percent of its revenues. A loss of one of these customers would have a material adverse effect on ConferencePlus’ business. The Company has a strategy in place to mitigate the loss of a major customer. Prior to selling its services, ConferencePlus must undergo lengthy approval and purchase processes. Evaluation can take a few months for services that vary slightly from existing services used by the prospective customer to a year or more for services based on technologies such as video or data teleconferencing or which represent a new strategic direction for the customer, as in the case with private labeling teleconference services for a large reseller.

 

Competition in the teleconferencing business is intense and ConferencePlus expects that competition will increase due to low barriers of entry and recent entrants into the audio teleconferencing service market. Many of ConferencePlus' competitors, including InterCall, AT&T, Verizon, Premiere and British Telecom, have much greater name recognition, more extensive customer service and marketing capabilities and substantially greater financial, technological and personnel resources than ConferencePlus. There can be no assurance that ConferencePlus will be able to successfully compete in this market in the future or that competitive pressures will not result in price reductions that would materially adversely affect its business and results of operations.

 

Government Regulation

 

The telecommunications industry, including most of the Company's customers, is subject to regulation from federal and state agencies, including the FCC and various state public utility and service commissions. While such regulation does not affect the Company directly, the effects of such regulations on the Company's customers may, in turn, adversely impact the Company's business and results of operations. For example, FCC regulatory policies affecting the availability of telephone and communications services and other terms on which service providers conduct their business may impede the Company's penetration of certain markets, and/or make the markets less financially attractive. The Telecommunications Act of 1996 lifted certain restrictions on carriers’ ability to provide interactive multimedia services including video on demand. Under the Telecommunications Act of 1996, new regulations have been established whereby carriers may provide various types of services beyond traditional voice offerings.

 

In addition, the Telecommunications Act of 1996 permits the carriers to engage in manufacturing activities after the FCC authorizes a carrier to provide long distance services within its service territory. A carrier must first meet specific statutory and regulatory tests demonstrating that its monopoly market for local exchange services is open to competition before it will be permitted to enter the long distance market. When these tests are met, a carrier will be permitted to engage in manufacturing activities, and the carriers, which are the Company's largest customers, may become the Company's competitors as well. (See Risk Factors)

 

 

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Proprietary Rights and Intellectual Property

 

The Company's success and future revenue growth will depend, in part, on its ability to protect trade secrets, obtain or license patents and operate without infringing on the rights of others. The Company relies on a combination of technical leadership, copyrights, patents, trademarks, trade secrets and other intellectual property laws, nondisclosure agreements and other protective measures to protect our unpatented proprietary know-how. The Company regards some of its technology as proprietary and the Company has been granted 30 patents and has an additional 25 U.S. patents pending relating to its OSPlant Systems and CNE products. The expiration of any of the patents held by the Company would not have a material impact on the Company. The Company expects to seek additional patents from time to time related to its research and development activities.

 

Many of the Company's products incorporate technology developed and owned by third parties, and instantiated in hardware, silicon chips, software, and/or other forms. Consequently, the Company must rely upon third parties to develop and to introduce technologies which enhance the Company's current products and enable the Company, in turn, to develop its own products on a timely and cost-effective basis to meet changing customer needs and technological trends in the telecommunications industry. In these cases, the Company will typically obtain a contractual agreement with the technology supplier that gives the Company access to the technology for the intended lifecycle of the products which incorporate that technology.  However, it is not always possible to obtain such an agreement.  Additionally, technology suppliers to the Company may go out of business or may be subject to injunctions or natural disasters which prevent them from being able to supply that technology to the Company in the future.  Additionally, the technology may evolve due to changes in industry standards or changes in the market, and the Company's contractual agreement may not necessarily give the Company rights to that evolved technology in the future.  Were the Company to lose the ability to obtain needed technology from a supplier, or were that technology no longer available to the Company under reasonable terms and conditions, the Company’s business and results of operations would be materially and adversely affected. The Company’s reliance on certain third party technology is also discussed above in “Research and Development Capabilities and Engineering Base”.

 

Rapid technological evolution has resulted in the need to implement strategic alliances with technology suppliers in order to accelerate the time to market for new products. Without such relationships, due to the lengthy service provider product approval and purchase cycles, the technology may be obsolete by the time the Company completes the product approval and purchase cycles.

 

Employees

 

As of March 31, 2008, the Company had nearly 540 full-time employees. The Company’s domestic equipment business had a total of 175 full-time employees, consisting of 69 in sales, marketing, distribution and service, 66 in research and development, 19 in operations and 21 in administration. ConferencePlus had a total of 295 full-time employees. Noran Tel had a total of 55 full-time employees. Westell Limited had a total of 8 full-time employees. Contineo had a total of 5 full-time employees. The Company believes its relationship with its employees is strong.

 

Available Information

 

The SEC maintains an internet site, www.sec.gov, through which you may access the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and other information statements, as well as amendments to these reports. In addition, the Company makes these reports available free of charge on the Company’s internet website, www.westell.com. The Company maintains a corporate governance page on the Company’s website. This website includes, among other items, the Code of Business Conduct, Audit Committee Charter and Nominating Committee Charter. The corporate governance information can be found at www.westell.com under Investor Relations.

 

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ITEM 1A. RISK FACTORS

 

You should carefully consider the risks described below in addition to the other information contained and incorporated by reference in this Form 10-K. If any of the following risks occurs, our business, operating results or financial condition would likely suffer, and the market price for our securities could decline.

 

We have incurred losses in the past and may incur losses in the future.

 

We incurred losses in the fiscal year ended March 31, 2008 and historically in fiscal years through 2002. The Company had an accumulated deficit of $302.8 million as of March 31, 2008.

 

We believe that our future revenue growth and profitability will depend on:

 

creating sustainable product and service sales opportunities;

lowering our CNE and OSPlant Systems product costs through design and manufacturing enhancements and volume efficiencies;

developing new and enhanced products and services;

diversifying the Company’s base of service providers by landing additional customers in markets such as wireless, MSO and integrated service providers.

 

In addition, we expect to continue to evaluate new product opportunities. As a result, we will continue to invest in research and development and sales and marketing, which could adversely affect our short-term operating results. We can offer no assurances that we will become profitable again in the future.

 

Our stock price is volatile and could drop unexpectedly.

 

Like many technology stocks, our stock has demonstrated and likely will continue to demonstrate extreme volatility as valuations, trading volume and prices move significantly. This volatility may result in a material decline in the market price of our securities, and may have little relationship to our financial results or prospects.

 

Our class A common stock price has experienced substantial volatility in the past and is likely to remain volatile in the future due to factors such as:

 

our actual and anticipated quarterly and annual operating results;

 

variations between our actual results and analyst and investor expectations;

 

announcements by us or others on developments affecting our business;

 

lack of success on winning new customers or the loss of an existing customer;

 

investor and analyst perceptions of our company and comparable public companies;

future sales of debt or equity securities;

 

the activities of short sellers and risk arbitrageurs regardless of our performance;

 

conditions and trends in the data communications and Internet-related industries.

 

 

Many of the factors listed above are not within our control. In the past, companies that have experienced volatility in the market price of their stock have been the subject of securities class litigation.

 

We are the subject of an investigation by the SEC that could adversely affect our financial condition, results of operations and the price of our common stock.

 

The SEC is conducting an investigation regarding events and circumstances surrounding trading in our securities. We have cooperated fully and intend to continue to cooperate fully with the SEC on its investigation. We cannot predict the outcome of the investigation. In the event that the investigation leads to SEC action against any current or former officer or director, our financial condition, results of operations and the price of our common stock may be adversely impacted. If the SEC investigation continues for a prolonged period of time, it may have an adverse impact on our financial condition, results of operations and the price of our common stock regardless of the ultimate outcome of the investigation. In addition, the SEC investigation has resulted in the incurrence of significant legal expenses and the diversion of management’s attention from our business, and this may continue, or increase, until the

 

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investigation is concluded.

 

We have and could face securities class litigation, which could significantly harm our business.

 

In fiscal 2000, Westell Technologies, Inc. and certain of its officers and directors were named in consolidated class actions. Although these class actions were settled, we could face securities litigation in the future that could result in the payment of substantial damages or settlement costs in excess of our insurance coverage. Any adverse outcome could harm our business. Even if we were to prevail in any such litigation, we could incur substantial legal costs and management's attention and resources could be diverted from our business which could cause our business to suffer.

 

Due to the rapid technological changes in our industry, our products may become obsolete before we can realize significant revenues from our products, which could cause us to incur charges for excess and obsolete inventory and materially harm our business.

 

The broadband communications industry is subject to rapid technological change and volatile customer demands, which results in a short product commercial life before a product becomes obsolete. As a result, we have in the past and may in the future devote disproportionate resources to a product that has an unexpected short commercial life and/or have to write off excess and obsolete inventory, each of which would harm our operating results and financial condition and harm our business. From time to time, we may need to write off inventory as excess or obsolete. In the past, we have experienced such write-offs. If we incur substantial inventory expenses that we are not able to recover because of changing market conditions, it could have a material adverse effect on our business, financial condition and results of operations.

 

Pricing pressures on our products may affect our ability to be profitable in the future.

 

We have and may in the future offer products and services based upon forward pricing, which is the pricing of products below production costs to take into account the expectation of large future volumes and corresponding reduction of manufacturing costs. Forward pricing would cause us to incur lower margins on product or service sales unless we can reduce the associated costs. We believe that costs may decrease if:

 

more cost-effective technologies become available;

 

product design efficiencies and component integration are obtained;

we achieve economies of scale related to increased volume.

 

 

There is no guarantee that we will be able to secure significant additional business and reduce per unit costs that we have factored into our forward priced products. As a result, we could incur low or negative margins in connection with sales of forward priced products even if our unit volume increases. Low margins from our sales of products and services could result in fluctuations in our quarterly operating results and would materially and adversely affect our profitability and ability to implement our business goals.

 

Our products face competition from other existing products, products under development and changing technology, and if we do not remain competitive, our business will suffer and we will not be profitable.

 

The markets for our products are characterized by:

 

intense competition within the broadband products industry;

increasing competition among broadband service providers, including wireline telephone companies, cable multi-service operators, and wireless network operators;

rapid technological advances;

 

evolving industry standards;

 

changes in end-user requirements;

 

frequent new product introductions and enhancements;

evolving customer requirements and service offerings.

 

 

New products introductions or changes in services offered by service providers could render our existing products and products under development obsolete and unmarketable. Specifically, the focus by service carriers to offer new

 

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VoIP, IPTV, Video and FMC services will cause the current products they use from the Company to be replaced with newer, more compatible technology. Although the Company has product offerings which address these new services, the service providers may choose to obtain competitive products from suppliers other than the Company Further, we believe that the domestic market for many of our traditional OSPlant Systems products is decreasing, and will likely continue to decrease, as high capacity digital transmission becomes less expensive and more widely deployed. Our future OSPlant Systems success will largely depend upon our ability to successfully market our outside plant products not only into its existing accounts but also into MSOs, wireless service providers, OEM equipment manufacturers, and utility markets, in addition to developing new products that compliment these market segments.

 

In addition, a large majority of our CNE revenue comes from product offerings which enable telephone companies to deliver broadband services over copper telephone wires in the local access network utilizing DSL technology. Telephone companies also face competition in the delivery of DSL-based broadband services from cable operators and wireless service providers. Although the Company is also developing products for wireline fiber optic network operators, MSOs, and wireless service providers, if end users increasingly obtain their high-speed data transmission services from these alternative providers, then the overall demand for our current DSL and other broadband products will be impaired. New products have been developed that can be used by all broadband delivery mechanisms, but there are no assurances that the products will be successful.

 

To remain competitive, we must develop new products to meet the demands of these emerging transmission media and new local access network providers. Our business would be severely harmed if our products become obsolete or fail to gain widespread commercial acceptance due to competing products and technologies.

 

Evolving industry standards may adversely affect our ability to sell our products and consequently harm our business.

 

Industry wide standardization organizations such as the International Telecommunications Union, the American National Standards Institute and the European Telecommunications Standards Institute, and the Internet Engineering Task Force and other standards bodies are responsible for determining much of the protocols, functionality and interoperability that our products must meet. Delay in the announcement or completion of industry standards would materially and adversely impact our product sales and would severely harm our business. Additionally, changes in those standards through subsequent revisions, and the introduction of competing standards or implementation specifications could result in confusion in the market and delay decisions regarding deployment of our products.

 

In addition, the introduction of competing standards or implementation specifications could result in confusion in the market and delay decisions regarding deployment of our products. Delay in the announcement of standards would materially and adversely impact our product sales and would severely harm our business.

 

We are dependent on third-party technology, the loss of which would harm our business.

 

We rely on third parties to gain access to technologies that are used in our current products and in products under development. These technologies are instantiated in hardware, silicon chips, software, and/or other forms. Consequently, the Company must rely upon third parties to develop and to introduce technologies which enhance the Company's current products and enable the Company, in turn, to develop its own products on a timely and cost-effective basis to meet changing customer needs and technological trends in the telecommunications industry. In these cases, the company will typically obtain a contractual agreement with the technology supplier that gives the Company access to the technology for the intended lifecycle of the products which incorporate that technology.  However, it is not always possible to obtain such an agreement.  Additionally, technology suppliers to the Company may go out of business or may be subject to injunctions or natural disasters which prevent them from being able to supply that technology to the Company in the future.  Additionally, the technology may evolve due to changes in industry standards or changes in the market, and the Company's contractual agreement may not necessarily give the Company rights to that evolved technology in the future.  Were the Company to lose the ability to obtain needed technology from a supplier, or were that technology no longer available to the Company under reasonable terms and conditions, the Company’s business and results of operations would be materially and adversely affected.

 

Any impairment in our relationships with the licensors of technologies used in our products would force us to find other developers on a timely basis or develop our own technology. For example, it would take us approximately nine

 

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months to reengineer the product and subsequently get product approval from customers if the Company lost its existing licenses to certain technologies and the proprietary operating platform used in some of its CNE products. There is no guarantee that we will be able to obtain the third-party technology necessary to continue to develop and introduce new and enhanced products, that we will obtain third-party technology on commercially reasonable terms or that we will be able to replace third-party technology in the event such technology becomes unavailable, obsolete or incompatible with future versions of our products. We would have severe difficulty competing if we cannot obtain or replace much of the third-party technology used in our products. Any absence or delay in obtaining third-party technology necessary for our products would materially adversely affect our business and operating results.

 

We are dependent on sole or limited source suppliers, the loss of which would harm our business.

 

Integrated circuits and other electronic components used in our products may only be currently available from only one source or a limited number of suppliers. Our inabilities to obtain sufficient key components or to develop alternative sources for key components as required, could result in delays or reductions in product deliveries, and consequently severely harm our customer relationships and our business. Furthermore, additional sole-source components may be incorporated into our future products, thereby increasing our supplier risks. If any of our sole-source suppliers delay or halt production of any of their components, or fail to supply their components on commercially reasonable terms, then our business and operating results would be harmed. For example, it would take the Company approximately nine months to reengineer the product and subsequently get product approval from customers if the Company lost its existing licenses to the DSL technology and operating system used in its DSL products.

 

We may experience delays in the receipt of key components that could result in delays in related product deliveries. There is no guarantee that we will be able to continue to obtain sufficient quantities of key components as required, or that such components, if obtained, will be available to us on commercially reasonable terms.

 

We have few long-term contracts or arrangements with suppliers which could adversely affect our ability to purchase components and technologies used in our products.

 

We have few long-term contracts or arrangements with our suppliers. We may not be able to obtain components at competitive prices, in sufficient quantities or under other commercially reasonable terms. If we enter into a high-volume or long-term supply arrangement and subsequently decide that we cannot use the products or services provided for in the supply arrangement, then our business would also be harmed. We enter into short-term contracts with our suppliers in the form of purchase orders. Purchase orders are often non-cancelable within contractual time periods. These purchase orders are issued to vendors based on forecasted demand. If the forecasted demand is materially incorrect, we may find that we cannot use the products ordered, and then our business would also be harmed.

 

We are dependent on our third-party offshore outsource manufacturing partners to produce and deliver our products timely which could adversely impact our ability to meet the delivery requirements of our customers.

 

In fiscal year 2008, the Company moved substantially all of the manufacturing of CNE and OSPlant Systems products from Aurora, Illinois, to offshore suppliers in China. Reliance on third-party offshore outsource manufacturing partners involves a number of risks, including:

 

over reliance on a limited number of vendors;

 

increased transportation time, costs and possible port closures;

political instability;

 

increased exposure to currency fluctuations;

 

compromising of intellectual property;

 

inadequate control over production capacity and

 

reduced control over product quality.

 

 

 

 

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We may be adversely impacted by the rising cost of product material components such as copper, petroleum, gold, platinum and silver.

 

The costs of commodities such as copper and petroleum, and to a lesser extent, gold, platinum and silver, all components of the Company’s products, could increase the cost of the Company’s products thereby adversely impacting our business and operating results.

 

We will not be able to successfully compete, develop and sell new products if we fail to retain key personnel and hire additional key personnel.

 

Because of our need to continually evolve our business with new product developments and strategies, our success is dependent on our ability to attract and retain qualified technical, marketing, sales and management personnel. To remain competitive, we must maintain top management talent, employees who are involved in product development and testing and employees who have developed strong customer relationships. Because of the high demand for these types of employees, it may be difficult to retain existing key employees and attract new key employees. In addition we do not have non-compete contracts with most of our employees. Our inability to attract and retain additional key employees could harm our ability to successfully sell existing products and develop new products and implement our business goals.

 

Our quarterly operating results are likely to fluctuate significantly and should not be relied upon as indications of future performance.

 

We may experience significant fluctuations in quarterly operating results. Due to the risks identified below and elsewhere in "Risk Factors," sales to our largest customers have fluctuated and could fluctuate significantly between quarters. Sales to our customers typically involve large purchase commitments, and customers purchasing our products may generally reschedule purchases without penalty. As a result, our quarterly operating results have fluctuated significantly in the past. Other factors that have influenced and may continue to influence our quarterly operating results include:

 

the impact of changes in the customer mix or product mix sold;

 

timing of product introductions or enhancements by us or our competitors;

changes in operating expenses which can occur because of product development costs, timing of customer reimbursements for research and development, pricing pressures and availability and pricing of key components;

write-offs for obsolete inventory;

 

other risks that are contained in this “Risk Factors” section.

 

Due to fluctuations in quarterly results, we believe that period-to-period comparisons of our quarterly operating results are not necessarily meaningful. Our quarterly fluctuations make it more difficult to forecast our manufacturing and purchasing needs and revenues. It is possible that in some future quarters our operating results will be below the expectations of securities analysts and investors, which may adversely affect our stock price. As long as we continue to depend on CNE products and new products, there is substantial risk of widely varying quarterly results compared to investor expectations.

 

We may experience delays in the deployment of new products.

 

Our past sales have resulted from our ability to anticipate changes in technology, industry standards and service provider service offerings, and to develop and introduce new and enhanced products and services. Our continued ability to adapt to such changes will be a significant factor in maintaining or improving our competitive position and our prospects for growth. Factors resulting in delays in product development include:

 

rapid technological changes in the broadband communications industry;

 

our customers’ lengthy product approval and purchase processes;

 

our reliance on third-party technology for the development of new products.

 

There can be no assurance that we will successfully introduce new products on a timely basis or achieve sales of new products in the future. In addition, there can be no assurance that we will have the financial and product design

 

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resources necessary to continue to successfully develop new products or to otherwise successfully respond to changing technology standards and service provider service offerings. If we fail to deploy new products on a timely basis, then our product sales will decrease, our quarterly operating results could fluctuate, and our competitive position and financial condition would be materially and adversely affected.

 

The broadband communications and telecommunications industry is a highly competitive market and this competition may result in operating losses, a decrease in our market share and fluctuations in our revenue.

 

We expect continuing competition as the broadband communications and telecommunications market in general continues to evolve. Because we are significantly smaller than many of our competitors, we may lack the financial resources needed to increase our market share. Many of our competitors are much larger than us and can offer a wider array of different products and services required for a service provider’s business than we do.

 

We expect continued aggressive tactics from many of our competitors such as:

 

forward pricing of products;

 

early announcements of competing products;

bids that bundle customer premises products (which compete with the Company’s CNE products) with other product and service offerings where the Company does not have products to offer;

intellectual property disputes.

 

Our lack of backlog may affect our ability to adjust to an unexpected shortfall in orders.

 

Because of customer ordering demands we generally ship products within a short period after receipt of an order. We typically do not have a material backlog (or known quantity) of unfilled orders, and our revenues in any quarter are substantially dependent on orders booked in that quarter. Our expense levels are based on anticipated future revenues and are relatively fixed in the short term. Therefore, we may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall of orders. Accordingly, any significant shortfall of demand in relation to our expectations or any material delay of customer orders would have an immediate adverse impact on our business and operating results.

 

Industry consolidation could make competing more difficult.

 

Consolidation of companies offering high-speed telecommunications products and conferencing services is occurring through acquisitions, joint ventures and licensing arrangements involving our competitors, our customers and our customers’ competitors. We cannot provide any assurances that we will be able to compete successfully in an increasingly consolidated telecommunications industry. Any heightened competitive pressures that we may face may have a material adverse effect on our business, prospects, financial condition and result of operations.

 

We depend on a limited number of customers who are able to exert a high degree of influence over us and loss of a major customer could adversely impact our business.

 

We have and will continue to depend on the telephone companies for the majority of our revenues. Sales to the two largest telephone company customers accounted for approximately 53.8%, 65.9% and 76.5% of our revenues in fiscal 2008, 2007 and 2006, respectively. Consequently, our future success will depend upon:

 

the timeliness and size of future purchase orders from the telephone companies;

the product requirements of the telephone companies;

 

the financial and operating success of the telephone companies;

 

the success of the telephone companies' services that use our products;

 

and the Company’s level of success in diversifying its revenue streams beyond the telephone companies.

 

The telephone companies and our other customers are significantly larger than we are and are able to exert a high degree of influence over us. These customers may generally reschedule orders without penalty to the customer.

 

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Even if demand for our products is high, the telephone companies have sufficient bargaining power to demand low prices and other terms and conditions that may materially adversely affect our business and operating results.

 

Any attempt by our customers to seek out additional or alternative suppliers would have a material adverse effect on our business and operating results. The loss of any of our customers could result in an immediate decrease in sales and materially and adversely affect our business.

 

ConferencePlus’ customer base is very concentrated as its top ten customers represent a large portion of total revenue. Customers of ConferencePlus have expanded their requirements for our services, but there can be no assurance that such expansion will increase in the future. Additionally, ConferencePlus’ customers continually undergo review and evaluation of their conferencing and meeting services to evaluate the merits of bringing those services in-house rather than outsourcing those services. There can be no assurance in the future that ConferencePlus’ customers will not develop their own internal conferencing and meeting services. ConferencePlus must continually provide higher quality, lower cost services to maintain and grow its customer base. Any loss of a major account would have a material adverse effect on ConferencePlus. In addition, any merger or acquisition of a major customer could have a material adverse effect on ConferencePlus.

 

Our customers have lengthy purchase cycles that affect our ability to sell our products.

 

Prior to selling products to service providers, we must undergo lengthy approval and purchase processes. Evaluation can take as little as a few months for products that vary slightly from existing products or up to a year or more for products based on new technologies or utilized for new service offerings. Accordingly, we are continually submitting successive generations of our current products as well as new products to our customers for approval. The length of the approval process can vary and is affected by a number of factors, including:

 

the complexity of the product involved;

 

market acceptance of the service provider’s service offering;

service providers priorities;

 

service providers budgets;

 

regulatory issues affecting our service providers.

 

 

The requirement that service providers obtain FCC or state regulatory approval for most new telecommunications and broadband services prior to their implementation has in the past delayed the approval process. Such delays in the future could have a material adverse affect on our business and operating results. While we have been successful in the past in obtaining product approvals from our customers, there is no guarantee that such approvals or that ensuing sales of such products will continue to occur.

 

Our services are affected by uncertain government regulation and changes in current or future laws or regulations could restrict the way we operate our business.

 

The telecommunications industry, including most of our customers, is subject to regulation from federal and state agencies, including the FCC and various state public utility and service commissions. While these regulations do not affect us directly, the effects of regulations on our customers may adversely impact our business and operating results. For example, FCC regulatory policies affecting the availability of telephone company services and other terms on which telephone companies conduct their business may impede our penetration of local access markets, and/or make the markets less financially attractive.

 

In addition, our business and operating results may also be adversely affected by the imposition of tariffs, duties and other import restrictions on components that we obtain from non-domestic suppliers or by the imposition of export restrictions on products that we sell internationally. Internationally, some governments actively promote and create competition in the telecommunications industry. Changes in current or future laws or regulations, in the U.S. or elsewhere, could materially and adversely affect our business and operating results.

 

Potential product recalls and warranty expenses could adversely affect our ability to remain profitable.

 

Our products are required to meet rigorous standards imposed by our customers. Most of our products carry a limited warranty ranging from one to two years for CNE products and up to seven years for OSPlant Systems

 

- 19 -

 



 

products. In addition, our supply contracts with our major customers typically require us to accept returns of products within certain time frames or indemnify such customers against certain liabilities arising out of the use of our products. Complex products such as those offered by us may contain undetected defects or failures when first introduced or as new versions are released. Despite our testing of products and our comprehensive quality control program, there is no guarantee that our products will not suffer from defects or other deficiencies. Historically, we have not experienced material problems with product defects, recalls, returns or indemnification claims, however, if such claims exceed our reserves for such claims, our business could be harmed. Such recalls, returns or claims and the associated negative publicity could result in the loss of or delay in market acceptance of our products, affect our product sales, our customer relationships, and our ability to generate a profit.

 

Investors could be adversely affected by future issuances and sales of our securities.

 

Sales of substantial amounts of our common stock in the public market could adversely affect the market price of our securities. The Company had 56,773,288 shares of common stock outstanding as of May 30, 2008. Options to purchase 8,834,986 shares of class A common stock, 5,120,591 of which were exercisable, were also outstanding on May 30, 2008. These obligations could result in substantial future dilution with respect to our common stock.

 

We rely on our intellectual property that we may be unable to protect, or we may be found to infringe the rights of others.

 

Our success will depend, in part, on our ability to protect trade secrets, obtain or license patents and operate without infringing on the rights of others. We rely on a combination of technical leadership, trade secrets, copyright and trademark law and nondisclosure agreements to protect our non-patented proprietary expertise. These measures, however, may not provide meaningful protection for our trade secrets or other proprietary information. Moreover, our business and operating results may be materially adversely affected by competitors who independently develop substantially equivalent technology.

 

In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as U.S. law. The telecommunications industry is also characterized by the existence of an increasing number of patents and frequent litigation based on allegations of patent and other intellectual property infringement. From time to time we receive communications from third parties alleging infringement of exclusive patent, copyright and other intellectual property rights to technologies that are important to us.

 

There is no guarantee:

 

that third parties will not assert infringement claims against us in the future, and that such assertions will not result in costly litigation;

that we would prevail in any such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms.

 

Further, such litigation, regardless of its outcome, could result in substantial costs to and diversion of our efforts. Any infringement claim or other litigation against or by us could have a material adverse effect on our business and operating results.

 

Business interruption could prevent our ability to deliver product and services to our customers and could adversely affect our business.

 

We rely on subcontractors in Asia for assembly and testing of and to purchase some of the raw materials used in such assemblies. The reliance on third-party subcontractors for the assembly of our products involves several risks, including the unavailability of, or interruptions in access to, certain process technologies and reduced control over product quality, delivery schedules, transportation, manufacturing yields, and costs. These risks may be exacerbated by economic or political uncertainties, terrorist actions, or by natural pandemics in foreign countries in which our subcontractors are located. We contract with our outsource manufacturing partners in U.S. dollars.

 

 

- 20 -

 



 

 

We may engage in future acquisitions or fund raising activity that could dilute our current stockholders.

 

We expect to continue to review potential acquisitions and we may acquire businesses, products or technologies in the future. In addition, the Company may decide to raise additional capital to fund its operations. In order to accomplish these activities, acquisitions and fund raising, we could:

 

issue equity securities that could dilute our current stockholders' percentage ownership;

incur substantial debt; or

 

assume contingent liabilities.

 

 

These events could harm our business and/or the price of our common stock. Acquisitions also entail numerous integration risks that could adversely affect our business.

 

ConferencePlus’ large competitors could adversely affect ConferencePlus’ ability to maintain or increase its market share.

 

ConferencePlus participates in the highly competitive industry of voice, video, and multimedia conferencing and meeting services. Competitors include stand-alone conferencing companies and major telecommunications providers. ConferencePlus’ ability to sustain growth and performance is dependent on:

 

maintenance of high quality standards and low cost position;

international expansion;

 

marketing and sales effectiveness;

 

evolving technological capability.

 

 

Any increase in competition could reduce our gross margin, require increased spending on sales and marketing, and otherwise materially adversely affect our business and operating results.

 

Our principal stockholders can exercise significant influence that could discourage transactions involving a change of control and may affect your ability to receive a premium for Class A Common Stock that you purchase.

 

As of May 30, 2008, as trustees of a voting trust containing common stock held for the benefit of the Penny family and the Simon family, Robert C. Penny III and Melvin J. Simon have the exclusive power to vote over 47.5% of the votes entitled to be cast by the holders of our common stock. In addition, members of the Penny family who are beneficiaries under this voting trust are parties to a stock transfer restriction agreement which prohibits the beneficiaries from transferring any class B common stock or their beneficial interests in the voting trust without first offering such class B common stock to the other Penny family members. Certain Penny family members also own or are beneficiaries of trusts that own shares outside of the voting trust. As trustees of the Voting Trust and other trusts, Messrs. Penny and Simon control 52.3% of the voting stock. Consequently, we are effectively under the control of Messrs. Penny and Simon, as trustees, who can effectively control the election of all of the directors and determine the outcome of most corporate transactions or other matters submitted to the stockholders for approval. Such control may have the effect of discouraging transactions involving an actual or potential change of control, including transactions in which the holders of Class A Common Stock might otherwise receive a premium for their shares over the then-current market price.

 

- 21 -

 



 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.

PROPERTIES

 

The Company leases the following real property:

 

 

Location

 

Purpose

Square footage

Termination year

Aurora, IL

Office and distribution

185,000

2017

Basingstoke, England

Office

4,100

2008

Schaumburg, IL

Office, Conferencing Services

41,860

2011

Dublin, Ireland

Office, Conferencing Services

2,000

2024

Regina, Saskatchewan

Office and manufacturing

24,000

2012

 

The Company elected an early termination clause in the Basingstoke lease that allows the Company to exit the lease at June 2008 with a 6 month lease penalty. In fiscal year 2008, the Company moved substantially all of the manufacturing of CNE and OSPlant Systems products in Aurora to offshore suppliers. A portion of the Aurora facility is now used as a product distribution operation and alternative uses are currently being explored for the remaining portion of the Aurora facility impacted by the outsourcing.

 

The Company does not own any real property.

 

ITEM 3.

LEGAL PROCEEDINGS

 

The Company is involved in various legal proceedings incidental to the Company’s business. In the ordinary course of our business, we are routinely audited and subject to inquiries by governmental and regulatory agencies.

Management believes that the outcome of such proceedings will not have a material adverse effect on our consolidated operations or financial condition.

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

- 22 -

 



 

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

The Company's Class A Common Stock is quoted on the NASDAQ Global Select Market under the symbol "WSTL." The following table sets forth for the periods indicated the high and low sale prices for the Class A Common Stock as reported on the NASDAQ Global Select Market.

 

 

High

Low

Fiscal Year 2007

 

 

First Quarter ended June 30, 2006

$ 4.15

$ 1.95

Second Quarter ended September 30, 2006

2.93

1.84

Third Quarter ended December 31, 2006

2.71

2.04

Fourth Quarter ended March 31, 2007

3.16

2.09

 

 

 

Fiscal Year 2008

 

 

First Quarter ended June 30, 2007

$ 2.89

$ 2.19

Second Quarter ended September 30, 2007

2.97

2.00

Third Quarter ended December 31, 2007

2.78

1.33

Fourth Quarter ended March 31, 2008

2.00

1.38

 

 

 

Fiscal Year 2009

 

 

First Quarter through May 30, 2008

$ 1.83

$ 1.20

 

As of May 30, 2008, there were approximately 840 holders of record of the outstanding shares of Class A Common Stock and five holders of record of Class B Common Stock.

 

During the fiscal year ended March 31, 2008, no equity securities of the Company were sold by the Company that were not registered under the Securities Act of 1933, as amended.

 

The information required under the heading “Equity Compensation Plan Information” is provided under Item 12 herein.

 

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. In addition, the Company’s credit facility restricts the Company’s ability to pay dividends without bank approval.

 

- 23 -

 



 

 

Issuer Purchases of Equity Securities

 

The following table provides information about the Company’s repurchase activity for its Class A Common Stock. during the three months ended March 31, 2008.

Period

 

Total

Number of

Shares Purchased

 

Average

Price

Paid per

Share (a)

 

Total Number of

Shares

Purchased as Part

of Publicly

Announced

Program(b)

 

Maximum Number

(or Approximate Dollar 

Value)

that May Yet Be

Purchased Under the

Program(b)

 









January 1, 2008 – January 31, 2008

 

N/A

 

$

N/A

 

N/A

 

$

N/A

February 1, 2008 – February 29, 2008

 

N/A

 

 

N/A

 

N/A

 

 

N/A

March 1, 2008 – March 31, 2008

 

29,800

 

 

1.76

 

29,800

 

 

9,947,678

 

 










 

 

 

 

 

 

 

 

 

 

 

Total

 

29,800

 

$

1.76

 

29,800

 

$

9,947,678

 

 

(a)

Average price paid per share excludes commissions.

 

(b)

In March 2008, the Board of Directors authorized a share repurchase program whereby the Company may repurchase up to an aggregate of $10 million of its outstanding common shares through March 3, 2010.

 

 

- 24 -

 



 

 

Performance Graph

 

The following performance graph compares the change in the Company's cumulative total stockholder return on its Class A Common Stock with the cumulative total return of the NASDAQ Composite Index and the NASDAQ Telecommunications Index for the period commencing March 31, 2003 and ending March 31, 2008. The stock price performance shown in the performance graph is not indicative of future stock price performance.

Total returns data summary

 

3/03

3/04

3/05

3/06

3/07

3/08









Westell Technologies, Inc.

 

100.00

180.69

136.39

100.74

53.71

37.13

NASDAQ Composite

 

100.00

151.01

152.38

181.06

189.63

177.49

NASDAQ Telecommunications

 

100.00

200.32

177.07

231.87

243.70

223.89

 

- 25 -

 



 

 

ITEM 6.

SELECTED FINANCIAL DATA.

 

The following selected consolidated financial data as of March 31, 2008, 2007, 2006, 2005 and 2004 and for each of the five fiscal years in the period ended fiscal year 2008 have been derived from the Company's Consolidated Financial Statements, which have been audited by Ernst & Young LLP. 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 Annual Report on Form 10-K.

 

 

 

Fiscal Year Ended March 31,

 

(in thousands, except per share data)

Statement of Operations Data:

2008

2007

2006

2005

2004

Revenues

$ 208,411 

$ 260,090 

$ 283,171 

$ 270,263 

$ 235,739 

Cost of goods sold

146,382 

174,166 

197,372 

189,063 

155,998 

Gross margin

62,029 

85,924 

85,799 

81,200 

79,741 

Operating expenses:

 

 

 

 

 

Sales and marketing

25,053 

29,786 

24,852 

22,211 

20,242 

Research and development

22,705 

24,387 

20,274 

15,911 

17,385 

General and administrative

22,688 

18,064 

16,543 

17,368 

17,506 

Goodwill impairment

9,651 

-- 

-- 

-- 

-- 

Intangible amortization

1,834 

1,699 

1,386 

1,335 

1,455 

Restructuring

6,221 

343 

443 

(793)

698 

Total operating expenses

88,152 

74,279 

63,498 

56,032 

57,286 

Gain on sale of product line

-- 

-- 

-- 

1,453 

-- 

Operating income/(loss)

(26,123)

11,645 

22,301 

26,621 

22,455 

Other income, net

3,868 

3,183 

974 

896 

615 

Interest expense

(12)

(7)

(12)

(60)

(743)

Income/(loss) before minority interest and income taxes

(22,267)

14,821 

23,263 

27,457 

22,327 

Income tax expense (benefit)

53,703 

5,892 

10,112 

(12,757)

(12,923)

Minority Interest

260 

235 

304 

520 

373 

Net income/(loss)

$ (76,230)

$ 8,694 

$ 12,847 

$ 39,694 

$ 34,877 

 

 

 

 

 

 

Net income/(loss) per basic share

$ (1.08)

$ 0.12

$ 0.18

$ 0.58

$ 0.52

Average number of basic common shares outstanding

70,376

69,946

69,440

68,321

66,765

Net income/(loss) per diluted share

$ (1.08)

$ 0.12

$ 0.18

$ 0.56

$ 0.49

Average number of diluted common shares outstanding

70,376

71,144

71,529

70,949

70,574

 

 

 

 

 

 

Balance Sheet Data (at end of period):

 

 

 

 

 

Working capital

$ 79,064

$ 88,431

$ 76,542

$ 53,249

$ 26,171

Total assets

134,228

207,350

191,813

180,090

129,781

Current debt

--

5

51

318

3,416

Total debt

--

5

61

318

3,742

Total stockholders' equity

$ 93,495

$ 167,339

$ 157,276

$ 139,658

$ 91,765

 

 

- 26 -

 



 

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Overview

 

The following discussion should be read together with the Consolidated Financial Statements and the related Notes thereto and other financial information appearing elsewhere in this Form 10-K. All references herein to the term “fiscal year” shall mean a year ended March 31 of the year specified.

 

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 OSPlant Systems product lines, particularly the sale of NIU products and related products. NIU products accounted for approximately 19%, 18% and 10% of revenues in fiscal years 2008, 2007 and 2006, respectively. The Company introduced its first CNE products in fiscal 1993 and these products accounted for approximately 47%, 59% and 69% of revenues in fiscal 2008, 2007 and 2006, respectively. NIU products and CNE products are the two major products within the Company’s telecom equipment business. Telecom equipment constituted approximately 74%, 81% and 84% of revenues in fiscal 2008, 2007 and 2006, respectively. The Company has also provided audio teleconferencing services since fiscal 1989, which constituted approximately 26%, 19% and 16% of revenues in fiscal 2008, 2007 and 2006, respectively. The Company realizes the majority of its revenues from the North American market.

 

The Company is comprised of two segments: telecom equipment and telecom service.

 

The telecom equipment segment of the Company’s business consists of two product lines, offering a broad range of products that facilitate the broadband transmission of high-speed digital and analog data between a telephone company's central office and end-user customers. These two product lines are:

 

CNE: The Company’s family of broadband products enables high-speed transport and networking of voice, data and video services. The products allow service providers to deliver services, content, and applications over existing copper, fiber, and wireless infrastructures. Westell CNE is typically installed in consumer residences as a key component of a broadband service package.

OSPlant Systems: The Company’s OSPlant Systems product family consists of next generation outdoor cabinets, enclosures, power distribution, edge connectors, remote monitoring and ancillary network protection solutions. These solutions are ideal for wireless backhaul and service delivery to enterprise markets as well as wireless carrier, MSO and utility markets worldwide. The power distribution and remote monitoring solutions are provided through the Company’s Noran Tel subsidiary.

 

The Company’s telecom service segment is comprised of a 91.5% owned subsidiary, ConferencePlus, Inc. ConferencePlus provides audio, video, and web conferencing services. Businesses and individuals use these services to hold voice, video or web conferences with multiple participants. ConferencePlus sells its services directly to large customers, including Fortune 1000 companies, and serves other customers indirectly through its private label reseller program.

 

The prices for the products within each market group vary based upon volume, customer specifications and other criteria and are subject to change due to competition among telecommunications manufacturers and service providers. Increasing competition, in terms of the number of entrants and their size, and increasing size of the Company’s customers because of past mergers, continues to exert downward pressure on prices for the Company's products.

 

The Company's customer base is highly concentrated and comprised primarily of major U.S. telecommunications service providers (“telephone companies”), independent domestic local exchange carriers and public telephone administrations located outside the U.S. Due to the stringent quality specifications of its customers and the regulated environment in which its customers operate, the Company must undergo lengthy approval and procurement processes prior to selling its products. Accordingly, the Company must make significant up front investments in product and market development prior to actual commencement of sales of new products.

 

To remain competitive, the Company must continue to invest in new product development and invest in targeted

 

- 27 -

 



 

sales and marketing efforts to launch new product lines. 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. The Company expects to continue to evaluate new product opportunities and engage in extensive research and development activities.

 

The Company is focusing on expanding its product offerings in the equipment segment from basic high speed broadband to more sophisticated applications such as VoIP, in-premises networking; wireless/wireline convergence, IP Multimedia Subsystem (“IMS”) and FMC; video / IPTV and multifunctional broadband appliances. This will require the Company to continue to invest in research and development and sales and marketing, which could adversely affect short-term results of operations. The Company expects to increase spending in research and development and sales and marketing in fiscal year 2009 in an attempt to take advantage of these market opportunities. In view of the Company’s current reliance on the telecommunications market for revenues and the unpredictability of orders and pricing pressures, 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.

 

In the CNE equipment segment, the Company is focusing on the evolving broadband demand, which includes increased bandwidth, richer application sets and converged capabilities. The Company has introduced products for both the existing local telephone and fiber network including the UltraLine™, ProLine™, VersaLink™, and TriLink™, which are targeted at the home networking, SOHO and small business markets The Company has multiple evaluations and is entering trials for TriLink™, TriLink™ IMS and UltraLine™ Series 3. The Company has increased its focus and marketing efforts on new customers such as MSOs and wireless carriers and is currently participating in field trials at one of the largest MSOs in North America.

 

The Company expects the overall OSPlant Systems market to increase due to the introduction of new products and new sales channels. The Company acquired 100% of the common stock of Noran Tel, Inc. on January 2, 2007. With the addition of Noran Tel, the Company has obtained a Canadian market channel for some of its existing products, has added additional transmission products to offer in its existing sales channels and has gained new products in the areas of power distribution and remote monitoring. The Company also plans to invest in new product areas to compliment wireless and fiber applications.

 

Recent Developments Regarding ConferencePlus

 

The Company previously disclosed that it was pursuing strategic alternatives for its ConferencePlus business unit. On June 16, 2008, the Company announced that it has decided not to pursue a divestiture of ConferencePlus at this time.

 

ConferencePlus was informed by its second largest customer that the customer intends to transfer all business to another conferencing provider.  The transition by this customer occurred in the first fiscal quarter of 2009 and is substantially complete. The revenue from this customer was $9.6 million in fiscal year 2008. ConferencePlus may need to consider potential acquisition or restructuring activities to continue to meet expected operating results as a result of this customer loss.

 

Critical Accounting Policies

 

The Company uses estimates and judgments in applying its accounting policies that have a significant impact on the results reported in the Consolidated Financial Statements. The following are the Company’s most critical accounting policies.

 

Accounts Receivable

The Company sells products primarily to various telecommunications providers and distributors. Sales to these customers have varying degrees of collection risk associated with them. Judgment is required in assessing the realization of these receivables based on aging, historical experience and customer’s financial condition. Historically, we have not had significant losses due to the inability for the Company to collect delinquent accounts. However, bankruptcy by a significant customer would have a material impact on our results of operations.

 

 

- 28 -

 



 

 

Inventory Reserves

The Company reviews inventory for excess quantities and obsolescence based on its best estimates of future demand, product lifecycle status and product development plans. The Company uses historical information along with these future estimates to reserve for obsolete and potential obsolete inventory. The Company also evaluates inventory valuation for lower of cost or market concerns. Prices related to future inventory demand are compared to current and committed inventory values.

 

Inventory Purchase Commitments

In the normal course of business, the Company enters into commitments for the purchase of inventory and long-distance telephone services. The commitments are at market rates. Should there be a dramatic decline in revenues the Company may incur excess inventory and subsequent losses as a result of these commitments. The Company has established reserves for potential losses on such commitments.

 

Income Taxes

Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the tax differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Goodwill and Intangibles

Pursuant to the requirements of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), the Company evaluates its goodwill for impairment on an annual basis during the fourth quarter of each fiscal year or whenever indicators of impairment exist. The goodwill impairment test compares the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, goodwill of the reporting unit would be considered impaired. To measure the amount of the impairment loss, the impaired fair value of a reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The implied fair value of goodwill shall be determined in the same manner as the amount of goodwill recognized in a business combination is determined. The fair value of each of the Company’s reporting units was determined using a discounted cash flow methodology. An impairment charge of approximately $9.7 million was taken in the fourth quarter of fiscal year 2008 at the Westell Inc. reporting unit.

 

On an ongoing basis, the Company reviews intangible assets and other long-lived assets other than goodwill for impairment whenever events and circumstances indicate that carrying amounts may not be recoverable. If such events or changes in circumstances occur, the Company will recognize an impairment loss if the undiscounted future cash flows expected to be generated by the asset is less than the carrying value of the related asset. The impairment loss would adjust the asset to its fair value.

 

Share–based Compensation

Effective April 1, 2006, the Company adopted the provisions of SFAS No. 123R, “Share-Based Payments” (“SFAS No. 123R”) using the modified prospective method, and therefore did not restate prior periods. SFAS 123R requires the grant date fair value recognition of expense related to employee stock-based compensations awards over the requisite service period. In addition, the Company eliminated the balance of deferred compensation expense in stockholders equity against Additional Paid-in Capital (“APIC”) as required by this statement. The Company elected to use the short-cut methods as prescribed by FASB Staff Position (“FSP”) No. FAS 123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, to calculate the beginning APIC tax pool. Additionally, SFAS No. 123R requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow instead of as an operating cash flow as required under previous accounting literature.

 

Translation of Foreign Currencies

The translation of financial statements into U.S. dollars has been performed in accordance with SFAS No. 52, Foreign Currency Translation. The local currency for all subsidiaries has been designated as the functional currency. Assets and liabilities have been translated into U. S. dollars at the current rate of exchange prevailing at

 

- 29 -

 



 

the balance sheet date. Revenue and expenses have been translated at a monthly average exchange rate for the period. Translation adjustments are reported as a component of accumulated other comprehensive income.

 

New Accounting Pronouncements

 

In June 2006, the FASB issued FASB Interpretation No 48, Accounting for Uncertainty in Income taxes - an interpretation of FASB Statement No. 109 (“FIN No. 48”), which prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. There was no cumulative effect adjustment to retained earnings as a result of this adoption effective April 1, 2007.

 

Effective April 1, 2007, the Company adopted Emerging Issues Task Force (“EITF”) No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement, (“EITF No. 06-3”). EITF No. 06-3 requires companies to disclose the presentation of any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer (e.g., sales and use tax) as either gross or net in the accounting principles included in the notes to the financial statements. See Note 2 for the Company’s policy on the net presentation of taxes.

 

Results of Operations

 

The following table sets forth the percentage of revenues represented by items in the Company's Consolidated Statements of Operations for the periods indicated:

 

 

 

Fiscal Year Ended March 31,

 

2008

2007

2006

Telecom equipment

74.2%

81.3%

84.1%

Telecom services

25.8

18.7

15.9

 




Total revenue

100.0

100.0

100.0

 

 

 

 

Cost of telecom equipment

56.8

57.6

61.7

Cost of telecom services

13.4

9.4

8.0

 




Total cost of goods sold

70.2

67.0

69.7

 

 

 

 

Gross margin

29.8

33.0

30.3

 

 

 

 

Operating expenses:

 

 

 

Sales and marketing

12.0

11.5

8.8

Research and development

10.9

9.4

7.2

General and administrative

10.9

6.9

5.8

Goodwill impairment

4.6

0.0

0.0

Intangible amortization

0.9

0.7

0.5

Restructuring

3.0

0.1

0.1

 




Total operating expenses

42.3

28.6

22.4

 

 

 

 

Operating income/(loss)

(12.5)

4.5

7.9

Other income, net

1.8

1.2

0.3

Interest expense

(0.0)

(0.0)

(0.0)

 




 

 

 

 

Income/(loss) before income taxes and minority interest

(10.7)

5.7

8.2

Income tax expense

25.8

2.3

3.6

Minority interest

0.1

0.1

0.1

 




 

 

 

 

Net income/(loss)

(36.6)%

3.3%

4.5%

 




 

 

- 30 -

 



 

 

Fiscal Years Ended March 31, 2008, 2007 and 2006

 

Revenue

Fiscal Year Ended March 31,

Increase/(Decrease)

 

(in thousands)

 

2008

 

2007

 

2006

2008 vs. 2007

2007 vs. 2006

 

Consolidated revenue

$ 208,411

$ 260,090

$ 283,171

$ (51,679)

$ (23,081)

 

Telecom equipment revenue:

 

 

 

 

 

 

CNE

98,095

153,844

194,782

(55,749)

(40,938)

 

OSPlant Systems

56,618

57,702

43,319

(1,084)

14,383 

 

 






 

Total telecom equipment revenue

 

154,713

 

211,546

 

238,101

 

(56,833)

 

(26,555)

 

Telecom service revenue

53,698

48,544

45,070

5,154 

3,474 

 

 

In fiscal year 2008 consolidated revenue decreased by 20%. Revenue in the telecom equipment segment decreased by 27% consisting of a 36% decrease in CNE product revenue and 2% decrease in OSPlant revenue. The decrease in CNE product revenue was due primarily to a 30% decrease in unit volume along with a 15% decrease in average sales price. The decrease in unit volume was primarily due to the completion in October 2007 of providing product under a BellSouth contract. The decrease in OSPlant Systems was due to lower sales volumes off set in part by the inclusion of a full year of revenue from the acquisition of Noran Tel. Services revenue increased by 10.6% in fiscal year 2008 due to an increase in minutes billed. In fiscal year 2007, consolidated revenue decreased 8.2%. Revenue in the telecom equipment segment decreased 11.2% consisting of a 21.0% decrease in CNE product revenue and 33.2% increase in OSPlant Systems product revenues. The decrease in CNE product revenue was due primarily to a 22.0% decrease in unit volume. The increase in OSPlant Systems was due to the inclusion of a full year of revenue in fiscal 2007 versus a partial year of revenue in fiscal year 2006 resulting from the acquisitions of HyperEdge and Noran Tel. Services revenue increased by 7.7% in fiscal year 2007 due to an increase in minutes billed.

 

 

Gross Margin

Fiscal Year Ended March 31,

Increase/(Decrease)

 

 

 

2008

 

2007

 

2006

2008 vs. 2007

2007 vs. 2006

Consolidated Margin

29.8%

33.0%

30.3%

(3.2)%

2.7%

Telecom equipment Margin

23.4

29.2

26.6

(5.8)

2.6

Telecom service Margin

48.1

49.7

49.9

(1.6)

(0.2)

 

In fiscal 2008, consolidated margin decreased by 3.2%. Margin in the telecom equipment segment decreased by 5.8% due to pricing pressures in the CNE product line and charges for excess and obsolete inventory of $2.4 million and other period costs related to the shut down of the Aurora manufacturing facility. The fiscal 2008 telecom service segment margins decreased by 1.6% due to pricing pressures in the conferencing industry. The improved gross margin in the telecom equipment segment in fiscal year 2007 was due primarily to the sales mix which included fewer lower margin broadband products and the increased mix of sales of higher margin OSPlant Systems products. The Company believes continued pricing pressures affecting its equipment segment could continue to adversely impact margins in the future. The Company’s strategy to offset the effects of these anticipated price reductions is to continue cost reductions and introduce new products that have higher sales prices and margins. The reduction in margins in the telecom service segment is due to pricing pressures in the conferencing industry.

 

 

Sales and Marketing

Fiscal Year Ended March 31,

Increase/(Decrease)

 

(in thousands)

2008

2007

2006

2008 vs. 2007

2007 vs. 2006

Consolidated sales and marketing expense

$ 25,053

$ 29,786

$ 24,852

$ (4,733)

$ 4,934

Telecom equipment sales and marketing expense

 

13,270

 

19,984

 

16,453

 

(6,714)

 

3,531

Telecom service sales and marketing expense

11,783

9,802

8,399

1,981 

1,403

 

Sales and marketing expenses were 12.0%, 11.5% and 8.8% of revenues, in fiscal year 2008, 2007 and 2006 respectively. In fiscal 2008, sales and marketing expense decreased by $4.7 million. In the telecom equipment

 

- 31 -

 



 

segment, the decrease is primarily due to a $3.3 million gain related to the recovery of product warranty costs, third party costs and internal costs for non-conforming products from a vendor during fiscal year 2008, offset by $600,000 of warranty expense. The Company recorded warranty expense of $1.1 million in fiscal year 2007 related to this issue. Employee related expenses also decreased by $609,000 due to reorganization actions taken during fiscal 2008. Sales and marketing headcount decreased by 35% from March 31, 2007 to March 31, 2008. These decreases were off set in part by a $410,000 increase due to the Noran Tel acquisition. Sales and marketing expense in the equipment segment increased in fiscal year 2007 due primarily to the acquisition expenses of HyperEdge as well as the $1.1 million of additional warranty expense noted earlier. The telecom service segment sales and marketing expense increase in fiscal years 2008 and 2007 was due primarily to more employees hired to increase sales made directly to end users. Sales and marketing expense is expected to increase in fiscal year 2009, primarily in the equipment segment. The Company believes that sales and marketing expense in the future will continue to be a significant percent of revenue and will be required to expand its product lines, bring new products to market and service customers.

 

 

Research and Development

Year Ended March 31,

Increase/(Decrease)

 

(in thousands)

2008

2007

2006

2008 vs. 2007

2007 vs. 2006

Consolidated research and development expense

$ 22,705

$ 24,387

$ 20,274

$ (1,682)

$ 4,113

Telecom equipment R&D expense

20,301

22,356

18,467

(2,055)

3,889

Telecom service R&D expense

2,404

2,031

1,807

373 

224

 

Research and development expenses in fiscal 2008, 2007 and 2006 were 10.9%, 9.4% and 7.2% of revenues, respectively. Research and development expenses are incurred primarily in the equipment segment of the business. The fiscal year 2008 decrease was primarily due to a $1.8 million decrease in employee related expense. Headcount was reduced by 41% when comparing March 2008 to March 2007. Additionally, outside consulting services decreased by $1.4 million in fiscal 2008. This decrease in R&D was offset in part by a $530,000 increase in research and development expense due to the investment in Contineo and a $423,000 increase due to the acquisition of Noran Tel. The fiscal year 2007 increase was due primarily to an increase in engineering headcount from the HyperEdge acquisition. In addition, the Company spent an additional $1.5 million on outside engineering services and there were approximately 15% more engineering employees in fiscal 2007 compared to 2006 that resulted in a $2.6 million increase in salary expense for the year. The increase in engineering services and employees was primarily to support the development of the video transport products as well as fixed mobile convergence products. The Company believes that research and development expenses will increase in fiscal year 2009 as the Company continues to focus on VoIP, in-premises wireless networking, wireless/wireline convergence including IMS and FMC, video / IPTV and multifunctional broadband appliances, user interfaces and other broadband applications. The Company anticipates increasing spending in consulting services provided on product development, focusing on software development and system testing via contacts with outsourcing firms in India.

 

 

General and Administrative

Year Ended March 31,

Increase

 

(in thousands)

2008

2007

2006

2008 vs. 2007

2007 vs. 2006

Consolidated general and administrative expense

$ 22,688

$ 18,064

$ 16,543

$ 4,624

$ 1,521

Telecom equipment general and administrative expense

 

14,873

 

10,825

 

10,401

 

4,048

 

424

Telecom service general and administrative expense

 

7,815

 

7,239

 

6,142

 

576

 

1,097

 

General and administrative expenses in fiscal 2008, 2007 and 2006, respectively, were 10.9%, 6.9% and 5.8% of revenues, respectively. The fiscal year 2008 increase in the equipment segment was due primarily to a $2.3 million increase in consulting expenses, of which $1.6 million was related to consulting for the outsource project, a $1.2 million increase in legal expenses, and $550,000 increase from the acquisition of Noran Tel. Employee related expense decreased by $444,000 in fiscal 2008 as headcount decreased by 30% when comparing March 2008 headcount with March 2007. The fiscal year 2007 increase in general and administrative expenses in the equipment

 

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segment was due primarily to higher salary related expense. The fiscal year 2008 and 2007 increase in general and administrative expenses in the services segment was due primarily to increase in salary related expenses and professional services expenses. The fiscal year 2007 increase was also due to increased bad debt expense and increased franchise and other taxes.

 

Restructuring In fiscal 2008, the Company moved substantially all of its equipment manufacturing operations in the telecom equipment segment from Aurora, Illinois, to offshore suppliers in China. The Company recognized restructuring expenses of $5.7 million related primarily to severance costs of 443 employees. Approximately $504,000 of restructuring expense was recognized at the Company’s Westell Limited facility located in the United Kingdom, related to the termination of 6 employees and cancellation cost to terminate the lease for the facility.

 

Goodwill impairment The Company recognized a goodwill impairment of $9.7 million in fiscal year 2008. The goodwill impairment was the result of the Company’s annual impairment testing as required under SFAS No. 142. The goodwill recorded in the Westell Inc. reporting unit relating to the fiscal 2000 acquisition of Teltrend, Inc. and the fiscal 2006 acquisition of HyperEdge, Inc. were determined to be impaired. As of March 31, 2008, there was $3.3 million of goodwill remaining on the Company’s Consolidated Balance Sheet.

 

Intangible amortization Intangible amortization was $1.8 million, $1.7 million and $1.4 million in fiscal 2008, 2007 and 2006, respectively. The intangible assets consist of product technology related to the March 17, 2000 acquisition of Teltrend Inc., product technology and customer relationships related to the December 29, 2005 HyperEdge Inc. acquisition and product technology and customer relationships related to the January 2, 2007 Noran Tel acquisition.

 

Other income, net Other income, net was $3.9 million, $3.2 million and $1.0 million for fiscal years 2008, 2007, and 2006, respectively. Other income, net was primarily comprised of interest income earned on short-term cash investments and unrealized gains or losses on intercompany balances denominated in foreign currency. The increases in fiscal year 2007 over 2006 was due to higher levels of cash invested at higher interest rates offset in part by an unrealized loss recorded on intercompany balances denominated in British Pounds.

 

Income Taxes In fiscal 2008, the Company recorded an income tax expense of $53.7 million primarily due to increasing the valuation allowance to fully reserve for the Company’s deferred tax assets. Income tax expense was $5.9 million in fiscal year 2007, a 39.8% effective tax rate compared to tax expense of $10.1 million, a 43.5% effective tax rate in fiscal 2006. The decrease in expense in fiscal 2007 is due to lower pre-tax earnings as well as the reduction of a portion of the Company’s valuation allowance.

 

Minority Interest Minority interest expense was $260,000, $235,000 and $304,000 in fiscal years 2008, 2007 and 2006, respectively. Minority interest expense is the minority shareholders’ share of income at 91.5% owned subsidiary, ConferencePlus, Inc.

 

- 33 -

 



 

 

Quarterly Results of Operations

 

The following tables present certain financial information for each of the last eight fiscal quarters. The Company believes that the unaudited 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 2008

Fiscal 2007

 

June 30, 2007

Sept. 30, 2007

Dec. 31, 2007

Mar. 31, 2008

June 30, 2006

Sept. 30, 2006

Dec. 31, 2006

Mar. 31, 2007

(in thousands, except per share amounts)

 

 

 

 

 

Revenue

$58,904 

$60,363 

$44,396 

$44,748 

$65,376

$71,799

$63,262

$59,653

Gross margin

18,235 

16,894 

14,634 

12,266 

21,732

23,739

20,839

19,614

Net income/(loss)

(916)

(668)

(2,502)

(72,144)

2,677

3,607

1,837

572

Net income/(loss) per common share:

 

 

 

 

 

 

Basic

$ (0.01)

$ (0.01)

$ (0.04)

$ (1.02)

$ 0.04

$ 0.05

$ 0.03

$ 0.01

Diluted

$ (0.01)

$ (0.01)

$ (0.04)

$ (1.02)

$ 0.04

$ 0.05

$ 0.03

$ 0.01

 

The quarterly fluctuations in revenue are due primarily to fluctuations in the CNE product line of the equipment segment.  These fluctuations are due to product mix between the modem and Versalink products within CNE, quantity shipped and generally declining sales prices.  The decrease in revenue in the December 31, 2007 quarter was due primarily to the Company concluding shipping of CNE products under a BellSouth agreement in October of 2007.  Quarterly gross margin was impacted primarily by price repression in the CNE product line of the equipment segment. The margin in the fourth quarter of fiscal 2008 was negatively impacted by $1.1 million of excess and obsolete inventory expense recorded.  Net income in the June 30, 2008 quarter was positively impacted by a $3.3 million gain related to the recovery of  product warranty costs from a vendor and negatively impacted by $3.9 million in restructuring cost recorded relating to the Company’s outsourcing plan.  Net income in the March 31, 2008 quarter was impacted by an additional restructuring charge of $1.9 million.  In addition, the Company recorded tax expense of $55.5 million relating primarily to valuation allowance all deferred tax assets in that quarter.

 

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. Some factors which have had an influence on and may continue to influence the Company’s results of operations in a particular quarter include, but are note limited to, the size and timing of customer orders and subsequent shipments, customer order deferrals in anticipation of new products, timing of product introductions or enhancements by the Company or its competitors, market acceptance of new products, technological changes in the telecommunications industry, competitive pricing pressures, accuracy of customer forecasts of end-user demand, write-offs for obsolete inventory, changes in the Company’s operating expenses, personnel changes, foreign currency fluctuations, changes in the mix of products sold, quality control of products sold, disruption in sources of supply, regulatory changes, capital spending, delays of payments by customers, working capital deficits 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

 

- 34 -

 



 

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 profitability.

 

Liquidity and Capital Resources

 

At March 31, 2008, the Company had $64.1 million in cash and cash equivalents, excluding the $1.6 million of Contineo cash, consisting primarily of the highest rated grade corporate commercial paper. At March 31, 2008, the Company had no amounts outstanding and $40.0 million available under its secured revolving credit facility.

 

The Company entered into a Second Amended and Restated Credit Agreement dated as of June 30, 2006 (the “Credit Agreement”). The Credit Agreement is a three-year revolving credit facility in an amount up to $40 million that expires on June 30, 2009. The obligations of the Company under the Credit Agreement are secured by a guaranty from certain direct and indirect domestic subsidiaries of the Company, and substantially all of the assets of the Company. Any proceeds from the revolving loans would be used for working capital purposes, acquisitions and for other general corporate purposes. The interest rate spread in the case of LIBOR and Base Rate loans and the payment of the non-use fees is dependent on the Company’s leverage ratio. Currently the revolving loans under the Credit Agreement bear interest, at the Company’s option, at the London Interbank Offered Rate (“LIBOR”) plus 1.5% or an alternative base rate. The alternative base rate is the greater of the LaSalle Bank National Association prime rate or the Federal Funds rate plus 0.50%. The Company is also required to pay a non-use fee of 0.2% per annum on the unused portion of the revolving loans.

 

The Credit Agreement contains financial covenants that include a minimum Fixed Charge Coverage Ratio, a minimum tangible net worth test, a total leverage ratio test (consolidated total debt to EBITDA), and a limitation on capital expenditures for any fiscal year. Other covenants include limitations on lines of business, additional indebtedness, liens and negative pledge agreements, incorporation of other debt covenants, guarantees, investments and advances, cancellation of indebtedness, restricted payments, modification of certain agreements and instruments, inconsistent agreements, leases, consolidations, mergers and acquisitions, sale of assets, subsidiary dividends, and transactions with affiliates. The Company was in compliance with these covenants on March 31, 2008. The Company anticipates future credit agreement amendments in order to comply with these covenants for the term of the Credit Agreement.

The Company’s operating activities used cash of $1.9 million in fiscal 2008, and generated cash of $39.5 million and $31.7 million in fiscal 2007, and 2006, respectively. Cash used in fiscal 2008 resulted primarily from a net loss and decreases in accounts payable and accrued expenses off set in part by non-cash depreciation and amortization, goodwill impairment and decreases in deferred tax assets and accounts receivable. Cash generated by operations in fiscal 2007 and 2006 resulted primarily from net income, non-cash depreciation and amortization, decreases in deferred tax assets, accounts receivable and inventory and was offset in 2006, in part by the decrease in accounts payable.

 

The Company’s investing activities used $3.1 million, $10.7 million and $19.0 million in fiscal 2008, 2007 and 2006 respectively. In fiscal 2008, the Company made a $2.5 million cash investment in Contineo Systems, Inc., a Plano, Texas, based software development company, to advance the Company’s research and development efforts. In fiscal 2007, the Company used cash of $5.9 million to acquire Noran Tel, Inc. In fiscal 2006, the Company used cash of $14.0 million to acquire HyperEdge Corporation.      Capital expenditures in fiscal 2008, 2007 and 2006 were $4.7 million, $3.8 million and $4.5 million, respectively. The equipment segment capital expenditures in fiscal 2008, 2007, and 2006 were $2.1 million, $2.9 million and $3.1 million, respectively. The capital expenditures in the equipment segment were primarily for machinery and research and development equipment purchases. The services segment capital expenditures in fiscal 2008, 2007 and 2006 were $2.6 million, $0.9 million and $1.4 million, respectively. These expenditures were primarily for teleconference bridge equipment.

 

At March 31, 2008, the Company’s principle sources of liquidity were $64.1 million of cash, which excludes the $1.6 million of Contineo cash, and the secured revolving credit facility under which the Company was eligible to borrow up to an additional $40.0 million. Cash in excess of operating requirements, if any, will be invested on a short-term basis primarily in the highest rated grade commercial paper. The Company believes cash on hand and generated from operations will satisfy its future cash requirements for the next twelve months.

 

 

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Future obligations and commitments as of March 31, 2008 consisted of the following:

 

 

Payments due by fiscal year

(in thousands)

2009

2010

2011

2012

2013

Thereafter

Total

Purchase obligations

35,263

5,494

3,300

--

--

--

44,057

Future minimum lease payments for operating leases

3,394

3,201

3,195

2,342

2,114

10,342

24,588

Future obligations and commitments

$ 38,657

$ 8,695

$ 6,495

$ 2,342

$ 2,114

$ 10,342

$ 68,645

 

Purchase obligations consist of raw materials in the equipment segment and local and long distance telephone service commitments in the service segment that arise in the normal course of business operations.

 

The Company had deferred tax assets of approximately $65.8 million at March 31, 2008. The Company has recorded a valuation allowance reserve of $59.3 million to reduce the recorded net deferred tax asset to $6.4 million. The remaining deferred tax asset is fully reserved under FIN 48.

 

The net operating loss carryforwards begin to expire in 2020. Realization of deferred tax assets associated with the Company’s future deductible temporary differences, net operating loss carryforwards and tax credit carryforwards is dependent upon generating sufficient taxable income prior to their expiration. The Company uses estimates of future taxable income to access the valuation allowance required against deferred tax assets. Management periodically evaluates the recoverability of the deferred tax assets and will adjust the valuation allowance against deferred tax assets accordingly.

 

Off-Balance Sheet Arrangements

 

In fiscal year 2005, the Company sold its Data Station Termination product lines and specified fixed assets to Enginuity Communications Corporation (“Enginuity”). The Company provided an unconditional guarantee relating to a 10 year term note payable by Enginuity to the third party lender that financed the transaction (“the “Enginuity Note”). The Enginuity Note has an unpaid balance of $1.2 million as of March 31, 2008. Certain owners of Enginuity personally guaranteed the note and pledged assets with a fair market value of approximately $925,000 as of March 31, 2008 as collateral. These personal guarantees will stay in place until the note is paid in full as will the Company’s guarantee. Under the Company’s guarantee, the Company must pay all amounts due under the note payable upon demand from the lender.

 

The Company evaluated FIN No. 46R and concluded that Enginuity was a VIE as a result of the debt guarantee. The Company is not considered the primary beneficiary of the VIE therefore consolidation is not required.

 

At the time of the product sale, the Company assessed its obligation under this guarantee pursuant to the provisions of FIN No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others and recorded a $300,000 liability for the value of the guarantee. The Company evaluates the liability each quarter based on Enginuity’s operating performance and current status of the guaranteed debt obligation. The balance of the liability is $125,000 and $200,000 as of March 31, 2008 and March 31, 2007, respectively. The liability is shown as a current liability in the accrued expenses line on the Consolidated Balance Sheet.

 

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is subject to certain market risks, including foreign currency rates. The Company has foreign subsidiaries in the United Kingdom, Ireland and Canada that develop and sell products and services in those respective countries and in other countries. The Company is exposed to potential gains and losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. Market risk is estimated as the potential decrease in pretax earnings resulting from a hypothetical decrease in the ending exchange rate of 10%. If such a decrease occurred, the Company would incur approximately $125,000 in additional other expense based on the ending intercompany balance outstanding at March 31, 2008. The Company’s future primary

 

- 36 -

 



 

exposure is to changes in exchange rates for the U.S. dollar versus the British Pound Sterling, Euro and Canadian dollar. Approximately 4% of the Company fiscal 2008 revenue was denominated in foreign currencies.

 

As of March 31, 2008, the balance in the cumulative foreign currency translation adjustment account, which is a component of stockholders’ equity, was an unrealized gain of $926,000.

 

The Company does not have significant exposure to exchange rate risk related to its debt obligations, which are primarily U.S. Dollar denominated.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The Company's Consolidated Financial Statements required by Item 8, together with the reports thereon of the Independent Registered Public Accounting Firm set forth on pages 45 - 73 of this report. The Consolidated Financial Statement schedule listed under Item 15(a)2, is set forth on page 74 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.

 

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As of March 31, 2008, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2008 using criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and concluded that the Company maintained effective internal controls over financial reporting as of March 31, 2008.

 

Because of its inherent limitations, although designed and operated to provide reasonable assurance that the objectives of the control system are met, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies may deteriorate.

 

 

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The Company’s independent registered public accounting firm has issued an audit report on its assessment of the Company’s internal control over financial reporting as of March 31, 2008. This report is included on page 46.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

(a)

Directors of the Company

The information required by this Item is set forth in registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in September 2008 under the caption “Election of Directors and Section 16(a). Beneficial Ownership Reporting Compliance” which information is incorporated herein by reference.

 

(b)

Executive Officers of the Company

The information required by this Item is set forth in registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in September 2008 under the caption “Executive Officers,” which information is incorporated herein by reference.

 

CODE OF BUSINESS CONDUCT

 

We have adopted a Code of Business Conduct within the meaning of Item 406(b) of Regulation S-K. This Code of Business Conduct applies to all of our officers (including the principal executive officer and principal financial officer and any person performing similar functions) and employees. The Company filed a copy of this Code of Business Conduct as Exhibit 14.1 to this Form 10-K. This Code of Business Conduct is also publicly available on our website at http://www.westell.com. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K by posting on its website any amendments to, or waivers from its Code of Business Conduct applicable to these senior executives. Copies of the Code of Business Conduct will be provided free of charge upon written request directed to the Secretary of the Company at the address of the principal executive offices.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The information required by this Item is set forth in registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in September 2008 under the caption “Compensation of Directors and Executive Officers,” and “Report of the Compensation Committee of the Board of Directors,” which information is incorporated herein by reference.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by this Item is set forth in registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in September 2008 under the caption “Ownership of the Capital Stock of the Company,” and “Equity Compensation Plan Information” which information is incorporated herein by reference.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this Item is set forth in registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in September 2008 under the caption “Certain Relationships and Related Transactions,” which information is incorporated herein by reference.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information required by this item is incorporated herein by reference to the section entitled “Fees to the Company’s Auditors” in our Proxy Statement for the annual meeting to be held in September 2008.

 

- 39 -

 



 

 

PART IV

 

ITEM 15.

EXHIBITS AND, FINANCIAL STATEMENT SCHEDULE

 

(a)

(1)

Financial Statements  

 

The following documents are filed as part of this report:

 

The Consolidated Financial Statements of Westell Technologies, Inc. at March 31, 2008 and 2007 and for each of the three fiscal years in the period ended March 31, 2008, together with the Report of Independent Registered Public Accounting Firm, are set forth on pages 45 through 73 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 Schedule

 

The following are included in Part IV of this Report for each of the years ended March 31, 2008, 2007 and 2006 as applicable:

 

Schedule II - Valuation and Qualifying Accounts - page 74

 

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 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).

3.2

Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).

9.1

Voting Trust Agreement dated February 23, 1994, as amended (incorporated herein by reference to Exhibit 9.1 to Westell Technologies, Inc.'s Registration Statement on Form S-1, as amended, Registration No. 33-98024).

10.2

Stock Transfer Restriction Agreement entered into by members of the Penny family, as amended, (incorporated herein by reference to Exhibits 10.4 and 10.16 to Westell Technologies, Inc.'s Registration Statement on Form S-1, as amended, Registration No. 33-98024).

10.3

Form of Registration Rights Agreement among the Company and Robert C. Penny III and Melvin J. Simon, as trustees of the Voting Trust dated February 23, 1994 (incorporated herein by reference to Exhibit 10.5 to Westell Technologies, Inc.'s Registration Statement on Form S-1, as amended, Registration No. 33-98024).

*10.4

1995 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.6 to Westell Technologies, Inc.'s Registration Statement on Form S-1, as amended, Registration No. 33-98024).

*10.5

Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.7 to Westell Technologies, Inc.'s Registration Statement on Form S-1, as amended, Registration No. 33-98024).

*10.6

Teltrend Inc. 1995 Stock Option Plan.(incorporated by reference to the Teltrend, Inc.'s Registration Statement on Form S-1, as amended (Registration No. 33-91104), originally filed with the Securities and Exchange Commission April 11, 1995)

 

 

- 40 -

 



 

 

*10.7

Teltrend Inc. 1996 Stock Option Plan (incorporated by reference to the Teltrend Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended April 26, 1997).

*10.8

Teltrend Inc. 1997 Non-Employee Director Stock Option Plan (incorporated by reference to the Teltrend Inc.'s Definitive Proxy Statement for the Annual Meeting of Stockholders held on December 11, 1997).

*10.9

Deferred Compensation Arrangement between Westell Technologies, Inc. and E. Van Cullens (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2003).

*10.10

Severance Agreement between ConferencePlus, Inc. and Tim Reedy. (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on May 19, 2008).

10.11

Lease dated September 29, 1997 between WTI, Inc. and Westell, Inc. (incorporated herein by reference to Exhibit 99.3 to the Form 8-K filed on October 2, 1997)

10.12

Settlement agreement dated November 30, 2002 with respect to the lease dated September 29, 1997.

10.13

Second Amended and Restated Credit Agreement dated as of June 30, 2006 among Westell Technologies, Inc., Westell, Inc., Teltrend LLC and ConferencePlus, Inc., the various financial institutions party thereto, as lenders, and LaSalle Bank National Association, as the administrative agent (incorporated by reference to Exhibit 10.1 to be the Company’s Quarterly Report on From 10-Q for the quarter ended June 30, 2006)

10.14

First Amendment to Second Amended and Restated Credit Agreement, dated December 28, 2007, by and among Westell Technologies, Inc., Westell, Inc., Teltrend, LLC, ConferencePlus, Inc. and LaSalle Bank National Association. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 4, 2008.)

10.15

Amended and Restated Guaranty and Collateral Agreement dated as of June 30, 2006 among Westell Technologies, Inc., Westell, Inc., Teltrend LLC and ConferencePlus, Inc., the other parties thereto, as grantors, and LaSalle Bank National Association, as the administrative agent (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).

*10.16

Employment Agreement by and among Westell Technologies, Inc, Westell, Inc. and Thomas E. Mader (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 12, 2007).

*10.17

Restricted Stock Award for Thomas E. Mader (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 12, 2007).

*10.18

Consulting Agreement by and between Westell Technologies, Inc and E. Van Cullens (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2007).

*10.19

Amendment to Deferred Compensation Program for E. Van Cullens (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2007).

*10.20

Employment Letter dated June 28, 2001 between Westell Technologies, Inc. and E. Van Cullens (incorporated herein by reference to Exhibit 10.24 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).

*10.21

Severance Agreement date June 28, 2001, by and between Westell, Inc and E. Van Cullens (incorporated herein by reference to Exhibit 10.23 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).

 

 

- 41 -

 



 

 

10.22

Westell Technologies, Inc. 2004 Stock Incentive Plan (incorporated by reference to Exhibit B to the Company’s Proxy Statement for the 2004 Annual Meeting of Stockholders).

10.23

Form of Restricted Stock Award under the Westell Technologies, Inc. 2004 Stock Incentive Plan (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 3, 2005)

10.24

Form of Stock Option Award under the Westell Technologies, Inc. 2004 Stock Incentive Plan (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on October 12, 2004)

10.24

ConferencePlus, Inc. 2002 Nonqualified Stock Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2007)

10.25

Form of ConferencePlus, Inc. Nonqualified Stock Option (for Management Level Employees) (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2007)

10.26

Form of ConferencePlus, Inc. Nonqualified Stock Option (for Non-Management Level Employees) (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2007)

10.27

Employment Agreement dated August 1, 2007 by and among Westell Technologies, Inc, Westell, Inc. and Timothy R. Pillow (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)

14.1

Code of Business Conduct (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2004)

21.1

Subsidiaries of the Registrant

 

23.1

Consent of Ernst & Young LLP.

31.1

Certification of the Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2

Certification of the Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32.1

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002

 

*

Management contract or compensatory plan or arrangement.

 

 

(b)

Exhibits

 

The exhibits filed as part of this Annual Report on Form 10-K are as specified in Item 15(a)(3) herein.

 

(c)

Financial Statement Schedule

 

The financial statement schedule filed as part of this Annual Report on Form 10-K are as specified in Item 15(a)(2) herein.

 

- 42 -

 



 

 

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 16, 2008.

 

WESTELL TECHNOLOGIES, INC.

 

By /s/ Thomas E. Mader  

 

Thomas E. Mader

 

President, Chief Executive Officer

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on June 16, 2008.

 

Signature

Title

 

 

/s/ Amy T. Forster.

Chief Financial Officer, Treasurer and Senior Vice President

 

Amy T. Forster

(Principal Financial Officer and

 

 

Principal Accounting Officer)

 

 

/s/ Thomas E. Mader

President, Chief Executive Officer and Director

 

Thomas E. Mader

(Principal Executive Officer)

 

 

/s/ John W. Seazholtz

Chairman of the Board of Directors

 

John W. Seazholtz

 

 

/s/ Paul A. Dwyer

Director

 

Paul A. Dwyer

 

 

/s/ Eileen A. Kamerick

Director

 

Eileen A. Kamerick

 

 

/s/ Robert C. Penny III

Director

 

Robert C. Penny III

 

 

/s/ Roger L. Plummer

Director

 

Roger L. Plummer

 

 

/s/ Melvin J. Simon

Director

 

Melvin J. Simon

 

 

 

 

- 43 -

 



 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND SUPPLEMENTARY DATA

 

 

Item

Page

Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm

45

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

46

Consolidated Balance Sheets -- March 31, 2008 and 2007

47

Consolidated Statements of Operations for the years ended March 31, 2008, 2007 and 2006

49

Consolidated Statements of Stockholders' Equity for the years ended March 31, 2008, 2007 and 2006

50

Consolidated Statements of Cash Flows for the years ended March 31, 2008, 2007 and 2006

51

Notes to Consolidated Financial Statements

52

 

 

Financial Statement Schedule:

 

Schedule II -- Valuation and Qualifying Accounts

74

 

- 44 -

 



 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and the Stockholders

Westell Technologies, Inc.

 

We have audited the accompanying Consolidated Balance Sheets of Westell Technologies, Inc. and subsidiaries (the “Company”) as of March 31, 2008 and 2007, and the related Consolidated Statements of Operations, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2008. Our audit also included the financial statement schedule listed in the Index at Item 15a(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Westell Technologies, Inc. and subsidiaries at March 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

As described in Note 2 of the Notes to the Consolidated Financial Statements, effective April 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes. In addition, as described in Note 2 to the Consolidated Financial Statements, effective April 1, 2006, the Company adopted FASB Statement No. 123(R), Share-Based Payments. Also discussed in Note 2 to the Consolidated Financial Statements, effective April 1, 2006, the Company adopted Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Westell Technologies, Inc.’s internal control over financial reporting as of March 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 13, 2008 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

Chicago, Illinois

June 13, 2008

 

 

- 45 -

 



 

 

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders of Westell Technologies, Inc.

 

We have audited Westell Technologies, Inc.’s internal control over financial reporting as of March 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Westell Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Westell Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2008, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of Westell Technologies, Inc. and subsidiaries as of March 31, 2008 and 2007, and the related Consolidated Statements of Operations, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2008 of Westell Technologies, Inc. and our report dated June 13, 2008 expressed an unqualified opinion thereon.

 

 

/s/ Ernst & Young LLP

Chicago, Illinois

June 13, 2008

 

- 46 -

 



 

 

WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

March 31, 2008

March 31, 2007

Current assets:

 

 

Cash and cash equivalents

$ 65,747

$ 70,183

Short-term investments

2,602

1,984

Accounts receivable (net of allowance of $281, and $290, respectively)

19,498

25,986

Inventories

17,897

18,604

Prepaid expenses and other current assets

3,005

3,248

Deferred income tax asset

--

4,580

Total current assets

108,749

124,585

Property and equipment:

 

 

Machinery and equipment

25,581

45,593

Office, computer and research equipment

25,412

28,147

Leasehold improvements

9,471

9,263

 

60,464

83,003

Less accumulated depreciation and amortization

51,712

70,674

Property and equipment, net

8,752

12,329

Goodwill

3,264

12,592

Intangibles, net

6,215

7,791

Deferred income tax asset and other assets

7,248

50,053

Total assets

$ 134,228

$ 207,350

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

- 47 -

 



 

 

WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

March 31, 2008

March 31, 2007

Current liabilities:

 

 

Accounts payable

$ 10,145 

$ 15,287 

Accrued expenses

9,552 

9,377 

Accrued compensation

9,630 

10,518 

Income tax payable

51 

88 

Deferred revenue

307 

879 

Current portion of long-term debt

-- 

Total current liabilities

29,685 

36,154 

Other long-term liabilities

7,738 

807 

Total liabilities

37,423 

36,961 

Minority interest

3,310 

3,050 

Stockholders’ equity:

 

 

Class A common stock, par $0.01

567 

564 

Authorized – 109,000,000 shares

 

 

Issued and outstanding – 56,695,724 shares at March 31, 2008 and 56,437,433 shares at March 31, 2007

 

 

Class B common stock, par $0.01

147 

147 

Authorized – 25,000,000 shares

 

 

Issued and outstanding – 14,693,619 shares at March 31, 2008 and 14,741,872 March 31, 2007

 

 

Preferred stock, par $0.01

-- 

-- 

Authorized – 1,000,000 shares

 

 

Issued and outstanding – none

 

 

Additional paid-in capital

394,930 

393,335 

Treasury stock at cost – 123,128 shares at March 31, 2008 and 93,328 shares at March 31, 2007

(299)

(247)

Cumulative translation adjustment

926 

86 

Accumulated deficit

(302,776)

(226,546)

Total stockholders’ equity

93,495 

167,339 

Total liabilities and stockholders’ equity

$ 134,228 

$ 207,350 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

- 48 -

 



 

 

WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share amounts)

 

 

Year ended March 31,

 

2008

2007

2006

Equipment revenue

$ 154,713 

$ 211,546 

$ 238,101 

Services revenue

53,698 

48,544 

45,070 

Total revenue

208,411 

260,090 

283,171 

 

 

 

 

Cost of equipment

118,505 

149,730 

174,795 

Cost of services

27,877 

24,436 

22,577 

Total cost of goods sold

146,382 

174,166 

197,372 

Gross margin

62,029 

85,924 

85,799 

 

 

 

 

Operating expenses:

 

 

 

Sales and marketing

25,053 

29,786 

24,852 

Research and development

22,705 

24,387 

20,274 

General and administrative

22,688 

18,064 

16,543 

Goodwill impairment

9,651 

--

--

Intangible amortization

1,834 

1,699 

1,386 

Restructuring

6,221 

343 

443 

Total operating expenses

88,152 

74,279 

63,498 

Operating income/(loss)

(26,123)

11,645 

22,301 

 

 

 

 

Other income, net

3,868 

3,183 

974 

Interest expense

(12)

(7)

(12)

Income/(loss) before minority interest and income taxes

(22,267)

14,821 

23,263 

Income taxes

53,703 

5,892 

10,112 

Minority interest

260 

235 

304 

Net income/(loss)

$ (76,230)

$ 8,694 

$ 12,847 

 

 

 

 

Net income/(loss) per common share:

 

 

 

Basic

$ (1.08)

$ 0.12

$ 0.18

Diluted

$ (1.08)

$ 0.12

$ 0.18

Weighted average number of common shares outstanding:

 

 

 

Basic

70,376

69,946

69,440

Diluted

70,376

71,144

71,529

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

- 49 -

 



 

 

WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

AND COMPREMENSIVE INCOME/(LOSS)

(In thousands)

 

 

 

Comprehensive Income

 

Common Stock Class A

 

Common Stock Class B

 

Additional Paid-in Capital

 

Cumulative Translation Adjustment

 

Deferred Compensation

 

Accum. Deficit

 

Treasury Stock

 

Total Stockholders’ Equity

 

 

 


 


 


 


 


 


 


 


 


 

Balance, March 31, 2005

 

 

 

$ 542 

 

$147

 

$ 389,242 

 

$ (672)

 

$ (2,476)

 

$ (246,878)

 

$ (247)

 

$ 139,658

 

Net income

 

$ 12,847 

 

--

 

--

 

--

 

--

 

--

 

12,847

 

--

 

12,847 

 

Translation adjustment

 

431 

 

--

 

--

 

--

 

431 

 

--

 

--

 

--

 

431 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$ 13,278 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options and warrants exercised including tax benefit

 

 

 

13 

 

--

 

3,273 

 

--

 

--

 

--

 

--

 

3,286 

 

Shares sold under Employee Stock Purchase Plan

 

 

 

1 

 

--

 

204 

 

--

 

--

 

--

 

--

 

205 

 

Deferred Compensation..

 

 

 

--

 

--

 

 

 

--

 

849 

 

--

 

--

 

849 

 

Restricted stock grant

 

 

 

0 

 

--

 

124 

 

--

 

(124)

 

--

 

--

 

--

 

 

 

 

 


 


 


 


 


 


 


 


 

Balance, March 31, 2006

 

 

 

$ 556 

 

$ 147

 

$ 392,843 

 

$ (241)

 

$ (1,751)

 

$ (234,031)

 

$ (247)

 

$ 157,276 

 

Adoption of SAB No. 108 cumulative adjustments

 

 

 

 

 

--

 

 

 

--

 

 

 

--

 

 

 

--

 

 

 

--

 

 

 

(1,209)

 

 

 

--

 

 

 

(1,209)

 

Adjusted Balance,
March 31, 2006

 

 

 

 

$ 556 

 

 

$ 147

 

 

$ 392,843 

 

 

$ (241)

 

 

$ (1,751)

 

 

$ (235,240)

 

 

$ (247)

 

 

$ 156,067 

 

Net income

 

$ 8,694 

 

--

 

--

 

--

 

--

 

--

 

8,694

 

--

 

8,694 

 

Translation adjustment

 

327 

 

--

 

--

 

--

 

327 

 

--

 

--

 

--

 

327 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$ 9,021 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

--

 

--

 

198 

 

--

 

--

 

--

 

--

 

198 

 

Shares sold under Employee Stock Purchase Plan

 

 

 

 

 

1 

 

 

 

--

 

 

 

122 

 

 

 

--

 

 

 

 

 

 

 

--

 

 

 

--

 

 

 

123 

 

Restricted stock grant, net of forfeitures

 

 

 

7 

 

--

 

--

 

--

 

--

 

--

 

--

 

7 

 

Adoption of SFAS No. 123R reclass deferred stock-based compensation 123R

 

 

 

 

 

 

--

 

 

 

 

--

 

 

 

 

(1,751)

 

 

 

 

--

 

 

 

 

1,751 

 

 

 

 

--

 

 

 

 

--

 

 

 

 

--

 

Stock-based compensation

 

 

 

--

 

--

 

1,853

 

--

 

--

 

--

 

--

 

1,853 

 

Tax benefits related to stock-option exercises

 

 

 

 

--

 

 

--

 

 

70 

 

 

--

 

 

--

 

 

--

 

 

--

 

 

70 

 

 

 

 

 


 


 


 


 


 


 


 


 

Balance, March 31, 2007

 

 

 

$ 564 

 

$ 147

 

$ 393,335 

 

$ 86 

 

$ 0 

 

$ (226,546)

 

$ (247)

 

$ 167,339 

 

Net loss

 

$ (76,230)

 

--

 

--

 

--

 

--

 

--

 

(76,230)

 

--

 

(76,230)

 

Translation adjustment

 

840 

 

--

 

--

 

--

 

840 

 

--

 

--

 

--

 

840 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss

 

$ (75,390)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

3 

 

--

 

337 

 

--

 

--

 

--

 

--

 

340 

 

Contineo, stock issuance costs

 

 

 

--

 

--

 

9 

 

--

 

--

 

--

 

--

 

9 

 

Shares sold under Employee Stock Purchase Plan

 

 

 

 

1 

 

 

--

 

 

102 

 

 

--

 

 

--

 

 

--

 

 

--

 

 

103 

 

Treasury Stock.............

 

 

 

--

 

--

 

--

 

--

 

--

 

--

 

(52)

 

(52)

 

Restricted stock forfeiture...........

 

 

 

(1)

 

--

 

--

 

--

 

--

 

--

 

--

 

(1)

 

Stock-based compensation.

 

 

 

--

 

--

 

1,217 

 

--

 

--

 

--

 

--

 

1,217 

 

Tax benefits related to stock-option exercises.

 

 

 

--

 

--

 

(70)

 

--

 

--

 

--

 

--

 

(70)

 

 

 

 

 


 


 


 


 


 


 


 


 

Balance, March 31, 2008

 

 

 

$ 567 

 

$ 147

 

$ 394,930 

 

$926 

 

$ 0 

 

$ (302,776)

 

$ (299)

 

$ 93,495 

 

 

 

 

 


 


 


 


 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

- 50 -

 



 

 

WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

Year ended March 31,

 

2008

2007

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