SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number 0-27266
WESTELL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3154957
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
750 N. COMMONS DRIVE, AURORA, IL 60504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (630) 898-2500
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check or mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock, $0.01 Par Value - 16,914,573 shares at January 31, 1999
Class B Common Stock, $0.01 Par Value - 19,527,069 shares at January 31, 1999
<PAGE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION: Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
- As of March 31, 1998 and December 31, 1998 (unaudited)
Condensed Consolidated Statements of Operations (unaudited) 4
- Three months ended December 31, 1997 and 1998
- Nine months ended December 31, 1997 and 1998
Condensed Consolidated Statements of Cash Flows (unaudited) 5
- Nine months ended December 31, 1997 and 1998
Notes to the Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II OTHER INFORMATION
Item 5. Other events 13
Item 6. Exhibits and Reports on Form 8-K 13
SAFE HARBOR STATEMENT
Certain statements contained under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this form 10-Q, which are not
historical facts (including, without limitation, statements about future ADSL
pricing and sales volume levels, liquidity, the decrease in ADSL manufacturing
costs, the Company's continued investment in research and development and sales
and marketing, the impact of year 2000 on the Company and its customers and
vendors, our confidence and strategies and our expectations about new and
existing products, technologies, opportunities, the emerging DSL market, demand
and acceptance of new and existing products and future commercial deployment of
the Company's products such as its DSL systems) are forward looking statements
that involve risks and uncertainties. These risks include, but are not limited
to, product demand and market acceptance risks (including the future commercial
acceptance of the Company's ADSL systems by telephone companies and other
customers), the impact of competitive products and technologies (such as cable
modems and fiber optic cable), competitive pricing pressures, forward pricing of
ADSL systems, product development, excess and obsolete inventory due to new
product development, commercialization and technological delays or difficulties
(including delays or difficulties in developing, producing, testing and selling
new products and technologies, such as ADSL systems), the effect of the
Company's accounting policies, 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 the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998 under the section
"Risk Factors". The Company undertakes no obligation to release publicly the
result of any revisions to these forward looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
<PAGE>
<TABLE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
March 31, December 31,
1998 1998
---------------- ----------------
(unaudited)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 43,515 $ 9,587
Short term investments.............................................. 684 5,450
Accounts receivable (net of allowance of $730,000 and $781,000,
respectively)....................................................... 12,399 13,016
Inventories......................................................... 9,428 10,905
Prepaid expenses and other current assets........................... 100 449
Refundable income taxes............................................. 110 101
Deferred income tax asset........................................... 2,498 1,625
---------------- ----------------
Total current assets............................................ 68,734 41,133
---------------- ----------------
Property and equipment:
Machinery and equipment............................................. 15,630 18,301
Office, computer and research equipment............................. 17,090 17,204
Leasehold improvements.............................................. 1,584 2,284
---------------- ----------------
34,304 37,789
Less accumulated depreciation and amortization...................... 20,816 24,222
----------------
----------------
Property and equipment, net........................................ 13,488 13,567
---------------- ----------------
Deferred income tax asset and other assets............................ 16,183 17,069
---------------- ----------------
Total assets.................................................... $ 98,405 $ 71,769
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 7,472 $ 8,272
Accrued expenses.................................................... 6,296 5,734
Accrued compensation................................................ 5,664 4,589
Current portion of long-term debt................................... 1,407 1,854
Deferred revenue.................................................... 414 413
---------------- ----------------
Total current liabilities.......................................... 21,253 20,862
---------------- ----------------
Long-term debt........................................................ 3,013 2,760
---------------- ----------------
Other long-term liabilities........................................... 998 1,131
---------------- ----------------
Commitments and contingencies
Stockholders' equity:
Class A common stock, par $0.01....................................... 154 169
Authorized - 43,500,000 shares
Issued and outstanding - 15,371,900 shares at March 31, 1998 and 16,904,073
shares at December 31, 1998
Class B common stock, par $0.01....................................... 210 195
Authorized - 25,000,000 shares
Issued and outstanding - 21,030,857 shares at March 31, 1998 and 19,537,569
shares at December 31, 1998
Preferred stock, par $0.01............................................ - -
Authorized - 1,000,000 shares
Issued and outstanding - none
Additional paid-in capital............................................ 97,254 97,508
Cumulative translation adjustment..................................... (213) (66)
Accumulated deficit................................................... (24,264) (50,790)
---------------- ----------------
Total stockholders' equity...................................... 73,141 47,016
================ ================
Total liabilities and stockholders' equity.................... $ 98,405 $ 71,769
================ ================
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------------- --------------------------
1997 1998 1997 1998
------------ ------------ ---------- -----------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Equipment sales............................... $ 18,082 $ 18,140 $ 52,858 $ 54,468
Services...................................... 3,540 5,245 9,792 14,590
------------ ------------ ---------- -----------
Total revenues.............................. 21,622 23,385 62,650 69,058
Cost of equipment sales....................... 13,154 13,922 37,940 42,740
Cost of services.............................. 2,004 3,372 4,999 8,715
------------ ------------ ---------- -----------
Total cost of goods sold.................... 15,158 17,294 42,939 51,455
------------ ------------ ---------- -----------
Gross margin............................... 6,464 6,091 19,711 17,603
Operating expenses:
Sales and marketing......................... 5,052 5,376 15,174 15,406
Research and development.................... 7,111 6,975 19,878 19,683
General and administrative.................. 3,294 3,420 9,340 9,693
Restructuring charge........................ 1,383 -- 1,383 --
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
Total operating expenses................... 16,840 15,771 45,775 44,782
------------ ------------ ---------- -----------
Operating loss................................ (10,376) (9,680) (26,064) (27,179)
Other income, net............................. 12,714 142 13,570 925
Interest expense.............................. 122 115 247 271
------------ ------------ ---------- -----------
Income (loss) before taxes.................... 2,216 (9,653) (12,741) (26,525)
Provision (benefit) for income taxes.......... 783 -- (5,137) --
------------ ------------ ---------- -----------
============ ============ ========== ===========
Net income (loss)............................. $ 1,433 $ (9,653) $ (7,604) $ (26,525)
============ ============ ========== ===========
Net income (loss) per basic and diluted
common share................................ $ 0.04 $ (0.26) $ (0.21) $ (0.73)
============ ============ ========== ===========
Average number of common shares outstanding:
Basic: 36,358 36,432 36,339 36,422
Diluted: 36,745 36,432 36,339 36,422
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended
December 31,
-------------------------------------
1997 1998
----------------- ----------------
(unaudited)
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................... $ (7,604) $(26,525)
Reconciliation of net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................ 5,273 5,501
Stock awards ............................................. 36 --
Deferred taxes ........................................... (5,137) --
Changes in assets and liabilities:
Increase in accounts receivable .......................... (1,369) (565)
Decrease (increase) in inventory ......................... 1,653 (1,392)
Decrease (increase) in prepaid expenses and deposits ..... 995 (349)
Decrease in refundable income taxes ...................... -- 9
Increase in accounts payable and accrued expenses ........ 1,882 371
Increase (decrease) in accrued compensation .............. 609 (1,075)
Increase (decrease) in deferred revenues ................. 16 (1)
-------- --------
Net cash used in operating activities ................. (3,646) (24,026)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ...................... (3,719) (5,580)
Decrease (increase) in other assets ...................... 97 (13)
Decrease (increase) in short term investments ............ 541 (4,766)
Land and building construction held for resale ........... 16,203 --
-------- --------
Net cash provided by (used in) investing activities ... 13,122 (10,359)
-------- --------
Cash flows from financing activities:
Net borrowing under revolving promissory notes ........... 550 --
Borrowing (repayment) of long-term debt and leases payable (1,678) 194
Cash distributed to Meridian LLC partner ................. (500) --
Proceeds from the issuance of common stock ............... 506 254
-------- --------
Net cash provided by (used in) financing activities ... (1,122) 448
-------- --------
Effect of exchange rate changes on cash .................... 4 9
Net increase (decrease) in cash ....................... 8,358 (33,928)
Cash and cash equivalents, beginning of period ............. 28,437 43,515
======== ========
Cash and cash equivalents, end of period ................... $ 36,795 $ 9,587
======== ========
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended March 31, 1998.
In the opinion of management, the unaudited interim financial
statements included herein reflect all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the Company's consolidated
financial position and the results of operations and cash flows at December 31,
1998, and for all periods presented. The results of operations for the three and
nine month periods ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending March 31, 1999.
NOTE 2. COMPUTATION OF NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128 which requires companies to present basic and diluted
earnings per share effective for financial statements issued for periods ending
after December 15, 1997. The computation of basic earnings per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per share includes the number of additional common
shares that would have been outstanding if the dilutive potential common shares
had been issued. The effect of this computation on the number of outstanding
shares is antidilutive for the nine month periods ended December 31, 1997, and
1998, and the three month period ended December 31, 1998, therefore the net loss
per basic and diluted earnings per share are the same.
NOTE 3. COMMITMENTS AND CONTINGENCIES:
During the quarter and year to date periods ended December 31, 1998,
the Company received ADSL orders from customers that were priced below current
production costs, which caused the Company to record a loss of approximately
$800,000 and $2.5 million, respectively, for such orders received in those
periods. The Company could continue to record losses on ADSL product sales if
management enters into similar sales arrangements prior to achieving
manufacturing cost reductions of ADSL products through (i) obtaining more cost
effective DSL chipsets, (ii) product design efficiencies and (iii) economies
related to volume production.
In February 1999, the Company received an ADSL order from a customer
priced below anticipated production costs. The Company anticipates recognizing
an estimated loss of $200,000 in the quarter ended March 31, 1999 related to
this order.
<PAGE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. INTERIM SEGMENT INFORMATION:
Westell's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and market strategy. They consist of:
1) A telecommunications equipment manufacturer of local loop
access products ("Telecom Equipment"), and
2) A multi-point telecommunications service bureau specializing
in audio teleconferencing, multi-point video conferencing,
broadcast fax and multimedia teleconferencing services ("Telecom
Services").
Performance of these segments is evaluated utilizing, revenue,
operating income and total asset measurements. The accounting policies of the
segments are the same as those for Westell Technologies, Inc. Segment
information for the three and nine-month periods ended December 31, 1997 and
1998, are as follows:
<TABLE>
<CAPTION>
Telecom Telecom
Equipment Services Total
<S> <C> <C> <C>
Three months ended December 31, 1997
Revenues.......................... $18,082 $ 3,540 $ 21,622
Operating income (loss)........... (10,975) 599 (10,376)
Depreciation and amortization..... 1,454 342 1,796
Total assets...................... 95,321 6,611 101,932
Three months ended December 31, 1998
Revenues.......................... $18,140 $ 5,245 $ 23,385
Operating income (loss)........... (10,173) 493 (9,680)
Depreciation and amortization..... 1,400 431 1,831
Total assets...................... 61,133 10,636 71,769
Nine months ended December 31, 1997
Revenues.......................... $52,858 $ 9,792 $ 62,650
Operating income (loss)........... (28,410) 2,346 (26,064)
Depreciation and amortization..... 4,347 926 5,273
Total assets...................... 95,321 6,611 101,932
Nine months ended December 31, 1998
Revenues.......................... 54,468 14,590 69,058
Operating income (loss)........... (29,347) 2,168 (27,179)
Depreciation and amortization..... 4,615 886 5,501
Total assets...................... 61,133 10,636 71,769
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
Westell Technologies, Inc. ("Westell" or the "Company") derives most of
its revenues from the sale of telecommunications equipment that enable
telecommunications services over copper telephone wires. The Company's
telecommunications equipment revenues can be categorized in three product
groups: (i) products based on digital subscriber line technologies ("DSL
products"), including Asymmetric Digital Subscriber Line ("ADSL"), Rate adaptive
Digital Subscriber Line ("RADSL") and High bit-rate Digital Subscriber Line
("HDSL") systems, which enable telephone companies to provide interactive
multimedia services over copper telephone wires, such as high speed Internet
access, video on demand, medical imaging and video conferencing and
telecommuting, while simultaneously carrying traditional telephone services,
(ii) Digital Signal Hierarchy Level 1 based products ("DS1 products"), which are
used by telephone companies to enable high speed digital T-1 transmission at
approximately 1.5 mega bits per second and (iii) Digital Signal Hierarchy Level
0 based products ("DS0 products"), which are used by telephone companies to
deliver digital services at speeds ranging from approximately 2.4 to 64 kilo
bits per second and analog services over a 4 kilohertz bandwidth. The Company's
service revenues are derived from audio, multi port video and multi media
teleconferencing services. Westell's net revenues increased 8.2% and 10.2% in
the three month and nine month periods ended December 31, 1998, respectively,
when compared to the same periods last year. The increased revenue was driven by
higher service revenue as a result of increased teleconference call minutes.
Equipment revenue increased for the three and nine month periods primarily as a
result of increased DS1 sales which was offset by decreased DSL shipments
attributable to uneven demand for DSL products. Equipment revenue for the nine
month period was also affected by an anticipated decrease in DS0 sales as
network providers transition to higher speed digital based products.
Historically, revenue from DS1 and DS0 products provided most of the Company's
revenue.
The Company expects to continue to evaluate new product opportunities
and engage in appropriate research and development activities that represent the
best fit with the Company's product portfolio and market position. This will
require the Company to continue to invest resources in research and development
and sales and marketing, which could adversely affect short-term results of
operations. Due to the Company's ongoing investment in DSL technology, the
Company anticipates losses in the March 1999 quarter and losses may extend into
fiscal 2000. The Company believes that its future revenue growth and
profitability will depend on its success in creating sustainable DSL sales
opportunities either directly, or in conjunction with, its partners; developing
new and enhanced DS1 products; other niche products for both DSL and DS1 markets
and growth in teleconference service revenues. The market for DSL products
continues to be increasingly competitive causing the Company to offer its ADSL
products at prices below current production costs (i.e., forward pricing of DSL
products). For instance, in the September and December 1998 quarters, the
Company received ADSL orders from customers priced below current production
costs. This caused the Company to recognize forward pricing losses of
approximately $1.7 million and $800,000, respectively, for such orders received.
Management believes that manufacturing costs will decrease when (i) more cost
effective chipsets are available, (ii) product design efficiencies are obtained,
and (iii) economies of scale are obtained related to increased volume. The
Company could continue to record losses on ADSL product sales prior to achieving
cost-effective chipsets, product design efficiencies and economies related to
volume production, which would have a material adverse effect on the Company's
business and results of operations.
In the current fiscal year, the majority of the DSL revenue has been
generated by shipments of ADSL systems at varying levels for data applications
(i.e., Internet access and work at home) due to the growth in users accessing
the World Wide Web through the Internet and the need to increase transmission
speed when accessing local area networks and downloading large text graphics and
video files. In view of the Company's reliance on the emerging DSL market for
growth and the unpredictability of orders and subsequent revenues, the Company
believes that period to period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance. Revenues from DS0 products have declined in recent years as telcos
continue to move from analog to digital transmission services. The Company also
expects that revenues from Network Interface Unit ("NIU") products in its DS1
product group may decline as telcos increase the use of alternative technologies
such as HDSL. Failure to increase revenues from new products, whether due to
lack of market acceptance, competition, pricing pressures, technological change
or otherwise, would have a material adverse effect on the Company's business and
results of operations.
<PAGE>
RESULTS OF OPERATIONS - Periods ended December 31, 1998
compared to periods ended December 31, 1997
Revenues. The Company's revenues increased 8.2% from $21.6 million in the three
months ended December 31, 1997 to $23.4 million in the three months ended
December 31, 1998. This revenue increase was primarily due to increased DS1
revenue of $1.1 million and increased teleconference service revenue from the
Company's Conference Plus, Inc. subsidiary of $1.7 million. The increased DS1
revenue was due to overall unit volume increases offset in part by lower average
system sale prices resulting primarily from changes in product mix. Increased
teleconference service revenue reflects an increase in call minutes. These
increases were partially offset by a $1.2 million decrease in DSL revenue in the
three months ended December 31, 1998. The decrease in DSL revenue was due to
lower unit shipments and lower average selling price of ADSL products.
The Company's revenues increased 10.2% from $62.7 million in the nine months
ended December 31, 1997 to $69.1 million in the nine months ended December 31,
1998. The revenue increase in the nine month period was primarily due to
increased teleconference service of $4.8 million and increased DS1 revenue of
$2.5 million when compared with the same period last year. Increased service
revenue reflects an increase in teleconference call minutes. DS1 revenue
increased due to overall unit volume increases offset in part by lower average
system sale prices resulting primarily from changes in product mix. These
increases were partially offset by a $1.0 million decrease in DS0 revenue as
network providers continue to transition to higher speed digital based products
and a $294,000 decrease in DSL revenue resulting from lower average sales prices
due to forward pricing pressures. The Company believes that DS0 revenue will
continue to decline as network providers continue to transition to higher speed
digital based products.
Gross Margin. Gross margin as a percentage of revenue decreased from 29.9% in
the three months ended December 31, 1997 to 26.0% in the three months ended
December 31, 1998 and decreased from 31.5% in the nine months ended December 31,
1997 to 25.5% in the nine months ended December 31, 1998. The decrease in gross
profit margin was primarily due to recording forward pricing losses of
approximately $800,000 and $2.5 million in the three and nine month periods
ended December 31, 1998, respectively for ADSL orders received in those periods.
During the September quarter, the Company's Conference Plus, Inc. subsidiary
opened a second facility to handle increased call minutes and invested in
additional infrastructure enhancements which also impacted gross margins.
Sales and Marketing. Sales and marketing expenses increased 6.4%, from $5.1
million in the three months ended December 31, 1997 to $5.4 million in the three
months ended December 31, 1998 and increased 1.5%, from $15.2 million in the
nine months ended December 31, 1997 to $15.4 million in the nine months ended
December 31, 1998. Sales and marketing expenses decreased as a percentage of
revenues from 23.4% in the three months ended December 31, 1997 to 23.0% in the
three months ended December 31, 1998 and decreased as a percentage of revenue
from 24.2% in the nine month period ended December 31, 1997 to 22.3% in the nine
months ended December 31, 1998. The increase in sales and marketing was
primarily due to increased costs related to DSL and DS1/DS0 marketing programs
and increased selling expenses related to supporting additional sales in the
teleconference services business unit for both the three and nine month periods
ended December 31, 1998. The increase in sales and marketing expenses for the
three and nine month periods was partially offset by cost reductions resulting
from management's initiatives that took place in the March 1998 quarter to
streamline DSL sales and marketing efforts. The Company believes that continued
investment in sales and marketing will be required to expand its product lines,
bring new products to market and service customers globally.
<PAGE>
RESULTS OF OPERATIONS - continued
Research and Development. Research and development expenses decreased 1.9%, or
$136,000, to $7.1 million in the three months ended December 31, 1998 and
decreased 1.0%, or $195,000, to $19.7 million in the nine months ended December
31, 1998. Research and development expenses decreased as a percentage of
revenues from 32.9% in the three months ended December 31, 1997 to 29.8% in the
three months ended December 31, 1998 and decreased as a percentage of revenues
from 31.7% in the nine months ended December 31, 1997 to 28.5% in the nine
months ended December 31, 1998. Research and development expenses decreased
slightly due to lower prototyping and engineering consulting costs from the
comparable periods last year. The Company believes that a continued commitment
to research and development will be required for the Company to remain
competitive.
General and Administrative. General and administrative expenses increased 3.8%,
from $3.3 million in the three months ended December 31, 1997 to $3.4 million in
the three months ended December 31, 1998 and increased 3.8%, from $9.3 million
in the nine months ended December 31, 1997 to $9.7 million in the nine months
ended December 31, 1998. General and administrative expenses decreased as a
percentage of revenues from 15.2% in the three months ended December 31, 1997 to
14.6% in the three months ended December 31, 1998 and decreased as a percentage
of revenues from 14.9% in the nine months ended December 31, 1997 to 14.0% in
the nine months ended December 31, 1998. The dollar increase in general and
administrative expense was primarily due to costs associated with information
systems infrastructure enhancements at the Company's teleconference services
business unit. This increase was partially offset by the results of management
initiatives and restructuring that took place in the March 1998 quarter to
streamline administrative functions both domestically and internationally.
Restructuring charge. The Company recognized a non-recurring restructuring
charge of $1.4 million in the three months ended December 1997. This
restructuring charge included personnel, facility and certain development
contract costs related to restructuring global DSL operations.
Other income, net. Other income, net decreased from $12.7 million in the three
months ended December 31, 1997 to $142,000 in the three months ended December
31, 1998 and decreased from $13.6 million in the nine months ended December 31,
1997 to $925,000 in the nine months ended December 31, 1998. The December 1997
quarter and the corresponding year to date period includes a one time benefit of
$12.0 million, net of expenses, for a break-up fee received from Texas
Instruments related to the proposed Westell/Amati merger. Excluding the effect
of this one time benefit, Other income, net would have been $714,000 and $1.6
million in the three and nine month periods ended December 31, 1997. Income for
the periods, absent the one time benefit, was due to interest income earned on
temporary cash investments made as a result of investing available funds.
Interest expense. Interest expense decreased from $122,000 in the three months
ended December 31, 1997 to $115,000 in the three months ended December 31, 1998
and increased from $247,000 in the nine months ended December 31, 1997 to
$271,000 in the nine months ended December 31, 1998. Interest expense during the
periods is a result of interest incurred on net obligations outstanding during
the period under equipment facility borrowings and capital leases.
Provision (benefit) for income taxes. Provision (benefit) for income taxes
decreased from a provision of $783,000 and a benefit of $5.1 million in the
three and nine month periods ended December 31, 1997 to $0 for the three and
nine month periods ended December 31, 1998. As in the quarter ended September
30, 1998, the Company has provided a valuation reserve for the entire benefit
generated during the current quarter of $3.8 million since the resulting gross
deferred tax asset would have exceeded the value of tax planning strategies
available to the Company. The Company will evaluate on a quarterly basis its
ability to record a benefit for income taxes in relation to the value of tax
planning strategies available in relation to the resulting gross deferred asset.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had $15.0 million in cash and short term
investments which is being invested in short term investments consisting of
federal government agency instruments and the highest rated grade corporate
commercial paper.
<PAGE>
RESULTS OF OPERATIONS - continued
The Company's operating activities used cash of approximately $24.0 million in
the nine months ended December 31, 1998, which resulted primarily from a loss
from operations before income taxes of $21.0 million (net of depreciation),
increases in accounts receivable, inventory and prepaid expenses and a decrease
in accrued compensation offset partially by increases in accounts payable and
accrued expenses.
Capital expenditures for the nine month period ended December 31, 1998 were $5.6
million, all of which was funded by available cash. The Company expects to spend
approximately $1.0 million for the remainder of fiscal year 1999 related to
capital equipment expenditures.
At December 31, 1998, the Company's principle sources of liquidity were $15.0
million of cash and short term investments and a secured credit facility that
the Company may borrow up to $12.4 based upon receivables and inventory levels
and up to an additional $5.0 million under a secured equipment line of credit.
The Company is currently considering appropriate actions to address its cash
requirements going forward. These actions include, without limitation, seeking
alternative funding to supplement its current cash position and available credit
lines to meet its cash requirements for the next 12 months. Cash in excess of
operating requirements will continue to be invested on a short term basis in
federal government agency instruments and the highest rated grade commercial
paper.
The Company has approximately $3.8 million in income tax credit carryforwards
and a tax benefit of $25.9 million related to a net operating loss carryforward
that is available to offset taxable income in the future. The tax credit
carryforwards begin to expire in 2008 and the net operating loss carryforward
begins to expire in 2012.
Realization of deferred tax assets associated with the Company's future
deductible temporary differences, net operating loss carryforwards and tax
credit carryforwards is dependent upon generating sufficient taxable income
prior to their expiration. Although realization of the deferred tax asset is not
assured and the Company has incurred operating losses for the 1996, 1997, and
1998 fiscal years, management believes that it is more likely than not that it
will generate taxable income sufficient to realize the recorded tax benefit
associated with future temporary differences, NOL carryforwards and tax credit
carryforwards prior to their expiration through a tax planning strategy
available to the Company. Management has determined that the strategy was no
longer sufficient to realize all of the deferred tax assets available to the
Company and as such, has recorded a valuation allowance of $13.5 million. On a
quarterly basis, management will assess whether it remains more likely than not
that the recorded deferred tax asset will be realized. If the tax planning
strategy is not sufficient to generate taxable income to recover the deferred
tax benefit recorded, an increase in the valuation allowance will be required
through a charge to the income tax provision. However, if the Company achieves
sufficient profitability or has available additional tax planning strategies to
utilize a greater portion of the deferred tax asset, an income tax benefit would
be recorded to decrease the valuation allowance.
YEAR 2000 COMPLIANCE ISSUE
The Company has determined that it is required to modify and/or replace
portions of its software systems so that they will properly utilize dates beyond
December 31, 1999 (the "year 2000 compliance"). The Company believes that, with
software upgrades and modifications and with the conversion to new software, the
impact of the year 2000 on its computer systems can be mitigated. However, if
the upgrades, modifications and conversions are not made, or are not made in a
timely manner, the year 2000 could have a material adverse impact on the
Company's operations. A plan to remediate the Company's Information Technology
("IT") systems, which will include efforts to mitigate the impact that the year
2000 will have on the Company, has begun and is projected to be implemented by
March 31, 1999 (the "Project").
The Project includes upgrading system software, hardware and processes
that are not exclusively related to year 2000 compliance. The Project will
utilize both internal and external resources. The Company has a full-time
manager dedicated to the Project as well as addressing the Company's year 2000
compliance issues. The Project cost for the Company is estimated to be $1.8
million. These costs are expected to be expensed as incurred, except for
approximately $600,000 that will be capitalized unrelated to year 2000
compliance. The Company has expensed approximately $600,000 related this Project
and has incurred approximately $260,000 in capital expenditures, as of December
31, 1998. The Project team is currently meeting its objectives and believes that
this Project will be completed as planned and within cost estimates. The Project
costs and the date on which the Company plans to complete this Project are based
<PAGE>
RESULTS OF OPERATIONS - continued
on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from these estimates and plans.
The Company has begun assessing how the year 2000 will impact both
internal and external non-IT systems, including product compliance, machinery
and equipment, engineering support systems and tools, human resource data bases,
payroll processing, banking systems, benefit plan third party administrators,
and customer systems and vendor compliance. The Company has made an initial
assessment that products produced by the Company, and systems used by the
Company to manufacture products, are year 2000 compliant; however, the Company
will have to undertake a more detailed analysis of its products and
manufacturing systems to assure that year 2000 issues have been entirely
addressed. The Company is in the initial stages of questioning customers and
vendors to determine whether their systems and products are year 2000 compliant.
The Company has not received sufficient information to assess whether the lack
of year 2000 compliance of customers or vendors will materially impact the
Company's operations. The Company expects that it will be able to more fully
assess the impact of vendor and/or customer year 2000 compliance deficiency by
March 31, 1999. The Company has completed its initial assessment of year 2000
compliance of its engineering support systems and automated engineering tools.
The engineering systems and tools utilized by the Company that are integral to
product development schedules are upgraded annually through license renewals.
The current upgrades of the engineering support systems and automated
engineering tools are year 2000 compliant. The Company is in the process of
completing its testing of year 2000 compliance of the engineering systems and
tools and expects that this evaluation will be completed by May 31, 1999, and
believes that it will have sufficient time to mitigate any significant impact
that the year 2000 compliance will have on the Company's development schedules,
if any. The Company's human resource database and the payroll processing systems
have been evaluated for year 2000 compliance and must be upgraded in order to be
year 2000 compliant. The cost of this upgrade will not be significant and the
Company anticipates that this upgrade will be completed by March 31, 1999. The
Company has received confirmation that its primary banks and its benefit plan
third party administrators systems are or will be year 2000 compliant.
The Company believes that it is proactive in assessing the impact that
the year 2000 will have on both its internal and external IT and non-IT systems.
Where material and where feasible, the cost of year 2000 compliance has been
quantified. The Company is at varying stages of evaluating the impacts of the
year 2000 on its business and its results of operations. The Company believes
that its actions, evaluations and processes currently undertaken are sufficient
to assess and mitigate the impacts that the year 2000 will have on the Company.
However, since the evaluations described above are, at this time, not complete,
the Company may discover ways in which the lack of year 2000 compliance, whether
by the Company or by third parties, could materially affect the Company's
operations.
The Company is in the process of developing a contingency plan to
address all possible effects that the year 2000 may have on its operations.
Management believes that its actions, evaluations and processes should provide
sufficient time to address the year 2000 risks as they are revealed. Risks
related to customer year 2000 noncompliance are not within the Company's
control, however, and therefore, the noncompliance of customer systems may
materially adversely impact the Company's operations. Year 2000 compliance of
the Company's vendors is also not within the control of the Company. However,
the Company believes that it will have sufficient time to mitigate vendor year
2000 noncompliance and replace such vendors with vendors that are year 2000
compliant due to the general availability of electrical component material in
the Company's products.
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER EVENTS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following documents are furnished as an exhibit and numbered
pursuant to Item 601 of regulation S-K:
Exhibit 27: Financial Data Schedule
b) The registrant was not required to file any reports on Form 8-K for the
quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
WESTELL TECHNOLOGIES, INC.
(Registrant)
DATE: February 15, 1999
By: ROBERT H. GAYNOR
ROBERT H. GAYNOR
Chairman of the Board of Directors
and Chief Executive Officer
By: STEPHEN J. HAWRYSZ
STEPHEN J. HAWRYSZ
Chief Financial Officer, Vice
President, Secretary and Treasurer
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