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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number 0-27266
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 - 17,605,561 shares at February 08, 2000
Class B Common Stock, $0.01 Par Value - 19,124,869 shares at February 08, 2000
<PAGE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION: Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
- As of March 31, 1999 and December 31, 1999 (unaudited)
Condensed Consolidated Statements of Operations (unaudited) 4
- Three months ended December 31, 1998 and 1999
- Nine months ended December 31, 1998 and 1999
Condensed Consolidated Statements of Cash Flows (unaudited) 5
- Nine months ended December 31, 1998 and 1999
Notes to the Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative disclosures about market risks 14
PART II OTHER INFORMATION
Item 5. Other events 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
SAFE HARBOR STATEMENT
Certain statements contained under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this 10-Q, which are not
historical facts (including, without limitation, statements about future DSL
pricing, our expected cost savings, our confidence and strategies and our
expectations about new and existing products, our ability to meet our cash
requirements for the next twelve months, technologies, opportunities, market
growth, 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 DSL 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, 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), 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, 1999 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,
1999 1999
---------------- ---------------
(unaudited)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 6,715 $ 10,621
Accounts receivable (net of allowance of $703,000 and $945,000, 14,132 18,886
respectively)..........................................................
Inventories............................................................ 10,376 13,912
Prepaid expenses and other current assets.............................. 1,108 1,773
Refundable income taxes................................................ 60 55
Deferred income tax asset.............................................. 1,000 700
---------------- ---------------
Total current assets............................................... 33,391 45,947
---------------- ---------------
Property and equipment:
Machinery and equipment................................................ 18,561 21,718
Office, computer and research equipment................................ 18,230 18,499
Leasehold improvements................................................. 2,091 2,162
---------------- ---------------
38,882 42,379
Less accumulated depreciation and amortization......................... 25,531 29,577
----------------
---------------
Property and equipment, net........................................... 13,351 12,802
---------------- ---------------
Deferred income tax asset and other assets............................... 17,665 19,175
---------------
================
Total assets....................................................... $ 64,407 $ 77,924
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 7,616 $ 9,168
Accrued expenses....................................................... 6,655 6,844
Accrued compensation................................................... 4,305 4,042
Current portion of long-term debt...................................... 2,189 1,619
Deferred revenue....................................................... 413 413
---------------- ---------------
Total current liabilities............................................. 21,178 22,086
---------------- ---------------
Long-term debt........................................................... 2,625 1,549
---------------- ---------------
Other long-term liabilities.............................................. 1,480 1,732
---------------- ---------------
---------------- ---------------
Commitments and contingencies
Convertible debt (net of debt discount of $1,696,000 as of December 31, - 18,304
1999)....................................................................
Stockholders' equity:
Class A common stock, par $0.01.......................................... 169 176
Authorized - 43,500,000 shares
Issued and outstanding - 16,928,650 shares at March 31, 1999 and 17,561,221
shares at December 31, 1999
Class B common stock, par $0.01.......................................... 195 191
Authorized - 25,000,000 shares
Issued and outstanding - 19,527,569 shares at March 31, 1999 and 19,124,869
shares at December 31, 1999
Preferred stock, par $0.01............................................... - -
Authorized - 1,000,000 shares
Issued and outstanding - none
Additional paid-in capital............................................... 97,561 100,850
Cumulative translation adjustment........................................ 455 78
Accumulated deficit...................................................... (59,256) (67,042)
---------------- ---------------
Total stockholders' equity......................................... 39,124 34,253
================ ===============
Total liabilities and stockholders' equity....................... $ 64,407 $ 77,924
================ ===============
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,
---------------------------- ----------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Equipment sales............................... $ 18,140 $ 21,964 $ 54,468 $ 56,478
Services...................................... 5,245 8,053 14,590 22,702
------------ ------------ ------------ ------------
Total revenues.............................. 23,385 30,017 69,058 79,180
Cost of equipment sales....................... 13,922 16,755 42,740 43,002
Cost of services.............................. 3,372 4,998 8,715 14,783
------------ ------------ ------------ ------------
Total cost of goods sold.................... 17,294 21,753 51,455 57,785
------------ ------------ ------------ ------------
Gross margin............................... 6,091 8,264 17,603 21,395
Operating expenses:
Sales and marketing......................... 5,376 3,854 15,406 10,966
Research and development.................... 6,975 2,967 19,683 8,183
General and administrative.................. 3,420 2,902 9,693 9,519
------------ ------------ ------------ ------------
Total operating expenses.................. 15,771 9,723 44,782 28,668
------------ ------------ ------------ ------------
Operating loss................................ (9,680) (1,459) (27,179) (7,273)
Other (income) expense, net................... (142) (854) (925) (905)
Interest expense.............................. 115 690 271 1,418
------------ ------------ ------------ ------------
Loss before taxes............................. (9,653) (1,295) (26,525) (7,786)
Benefit for income taxes...................... -- -- -- --
------------ ------------ ------------ ------------
============ ============ ============ ============
Net loss...................................... $ (9,653) $ (1,295) $ (26,525) $ (7,786)
============ ============ ============ ============
Net loss per basic and diluted common share... $ (0.26) $ (0.04) $ (0.73) $ (0.21)
============ ============ ============ ============
Average number of basic and diluted
common shares outstanding................... 36,432 36,643 36,422 36,561
============ ============ ============ ============
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,
----------------------------------------
1998 1999
----------------- ----------------
(unaudited)
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $ (26,525) $ (7,786)
Reconciliation of net income to net cash
used in operating activities:
Depreciation and amortization.................................... 5,501 5,480
Foreign currency gain on liquidation of Westell Europe, Ltd...... -- (426)
Changes in assets and liabilities:
Increase in accounts receivable.................................. (565) (4,707)
Decrease (increase) in inventory................................. (1,392) (3,536)
(Increase) decrease in prepaid expenses and deposits............. (349) (666)
Decrease in refundable income taxes.............................. 9 5
Increase (decrease) in accounts payable and accrued expenses..... 371 1,993
Decrease in accrued compensation................................. (1,075) (263)
Decrease in deferred revenues.................................... (1) --
----------------- ----------------
Net cash used in operating activities......................... (24,026) (9,906)
----------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment.............................. (5,580) (4,980)
Proceeds from sale of equipment.................................. -- 432
(Increase) decrease in other assets.............................. (13) 32
Increase in short term investments............................... (4,766) -
----------------- ----------------
Net cash used in investing activities......................... (10,359) (4,516)
----------------- ----------------
Cash flows from financing activities:
Repayment of long-term debt and leases payable................... 194 (1,645)
Proceeds from issuance of convertible debt....................... -- 18,542
Proceeds from the issuance of common stock....................... 254 1,428
----------------- ----------------
Net cash provided by financing activities..................... 448 18,325
----------------- ----------------
Effect of exchange rate changes on cash............................ 9 3
Net (decrease) increase in cash............................... (33,928) 3,906
Cash and cash equivalents, beginning of period..................... 43,515 6,715
================= ================
Cash and cash equivalents, end of period........................... $ 9,587 $ 10,621
================= ================
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, 1999.
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,
1999, and for all periods presented. The results of operations for the three and
nine month periods ended December 31, 1999 are not necessarily indicative of the
results that may be expected for the fiscal year ending March 31, 2000.
Effective April 1, 1999, in an effort to associate the transfer of
title of forward priced DSL products to the customer with the recognition of the
loss, the Company began recording losses due to forward pricing upon shipment to
the customer. Prior to March 31, 1999, the Company recorded losses due to
forward pricing of DSL products based upon orders received. As of April 1, 1999,
the Company did not record any cumulative effect of this change in accounting
method, as the effects were immaterial.
As of December 31, 1999, the Company has committed to binding purchase
orders for ADSL products from customers priced below current production costs.
The Company anticipates that it may incur losses upon delivery of these forward
priced DSL products during subsequent periods. The amount of these losses during
subsequent periods will be dependent upon various items including actual
production volumes and the Company's ability to achieve reductions in the cost
of DSL components and efficiencies in the production of DSL products.
NOTE 2. COMPUTATION OF NET LOSS PER SHARE
The Company follows the provisions of SFAS No. 128, which requires
companies to present basic and diluted earnings per share. 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 periods ended
December 31, 1998, and 1999, and therefore the net loss per basic and diluted
earnings per share are the same.
NOTE 3. RESTRUCTURING CHARGE
The Company recognized a restructuring charge of $1.4 million in the
three months ended December 31, 1997 and $800,000 in the three months ended
March 31, 1999. These charges included personnel, facility, and certain
development contract costs related to restructuring global operations. As of
December 31, 1999, the Company has paid approximately $1.2 million of the
restructuring costs charged in fiscal 1998 and $839,000 related to the
restructuring costs charged in fiscal 1999. During the three months ending
December 31, 1999, management determined that essentially all restructuring
payments have been completed therefore the remaining restructuring accrual
balance of approximately $170,000 was reversed into income.
The fiscal 1998 restructuring plan was to decrease costs and streamline
operations related to DSL products. The fiscal 1999 restructuring plan was to
further decrease costs, primarily by reducing the workforce by approximately
11%, and focus DSL sales efforts on indirect sales to the major phone companies
through licensing and OEM arrangements with strategic partners. The Company has
realized approximately $3.7 million in the first three quarters of fiscal 2000
and expects cost savings of approximately $1.3 million in the fourth quarter of
fiscal 2000 related to this restructuring.
<PAGE>
<TABLE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<CAPTION>
The restructuring charges and their utilization are summarized as follows:
Charge Utilized Balance Charge Utilized Balance Utilized Balance
fiscal fiscal March 31, fiscal fiscal March 31, fiscal Dec. 31,
(in thousands) 1998 1998 1998 1999 1999 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Employee costs........... $ 561 $ 287 $ 274 $ 690 $ 363 $ 601 $ 547 $ 54
Contract costs........... 736 647 89 -- -- 89 -- 89
Legal & other costs...... 86 23 63 110 17 156 130 26
Charge reversal 169 (169)
- ---------------------------------------------------------------------------------------------------------------
Total.................... $ 1,383 $ 957 $ 426 $ 800 $ 380 $ 846 $ 846 $ --
===============================================================================================================
</TABLE>
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, and
2) A multi-point telecommunications service bureau specializing
in audio teleconferencing, multi-point video conferencing,
broadcast fax and multimedia teleconference 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, 1998 and
1999, are as follows:
<TABLE>
Telecom Telecom
Equipment Services Total
--------- -------- -----
<S> <C> <C> <C>
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
Three months ended December 31, 1999
Revenues.......................... $ 21,964 $ 8,053 $ 30,017
Operating income (loss)........... (2,907) 1,448 (1,459)
Depreciation and amortization..... 1,308 610 1,918
Total assets...................... 59,477 18,447 77,924
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
Nine months ended December 31, 1999
Revenues.......................... $ 56,478 $ 22,702 $ 79,180
Operating income (loss)........... (10,556) 3,283 (7,273)
Depreciation and amortization..... 3,777 1,703 5,480
Total assets...................... 59,477 18,447 77,924
</TABLE>
<PAGE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Reconciliation of Operating loss from continuing operations for the reportable
segments to Loss from continuing operations before income taxes:
<TABLE>
Three months ended Nine months ended
December 31, December 31,
1998 1999 1998 1999
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Operating loss ........................................ $ (9,680) $ (1,459) $ (27,179) $ (7,273)
Other (income) expense, net............................ (142) (854) (925) (905)
Interest expense....................................... 115 690 271 1,418
--------- --------- ----------- ---------
Loss before income taxes............................... $ (9,653) $ (1,295) $ (26,525) $ (7,786)
======= ======= ======== =======
</TABLE>
NOTE 5. MERGER AGREEMENT
On December 13, 1999 the Company announced the proposed merger with Teltrend,
Inc. whereby the Company will acquire all of the outstanding shares of common
stock of Teltrend, Inc. The merger is subject to closing conditions which are
customary for transactions similar in nature including, without limitation,
approval of the Merger Agreement by Teltrend's stockholders; the approval and
related transactions by the Company's shareholders; and the receipt of antitrust
clearances. On February 3, 2000 the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act applicable to Westell's offer to acquire all of the
outstanding shares of Common Stock of Teltrend, Inc expired. The Company expects
to have a shareholder vote on the matter during March 2000.
NOTE 6. SUBSEQUENT EVENT
During February 2000, under the terms of the Company's convertible debentures,
the debenture holders converted an aggregate $6.0 million principal amount of
convertible debentures into 947,785 Class A Common Shares.
NOTE 7. EBITDA INFORMATION
The following is the Company's income from operations before interest expense,
income taxes, depreciation and amortization ("EBITDA") for the three and nine
month periods ended December 31, 1998 and 1999:
<TABLE>
Three months ended Nine months ended
December 31, December 31,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
EBITDA ................................. $(7,707) $1,313 $(20,753) $(888)
</TABLE>
EBITDA represents income from operations before interest expense, income taxes,
depreciation and amortization. EBITDA is not a calculation based upon generally
accepted accounting principles. The amounts included in the EBITDA calculation,
however, are derived from amounts included in the consolidated historical
statements of income data. EBITDA should not be construed as an alternative for
operating income or net income (as determined in accordance with generally
accepted accounting principles) as an indicator of operating performance, or as
an alternative for cash flows generated by operating, investing and financing
activities as an indicator of cash flow or a measure of liquidity. Management
believes EBITDA assists investors in comparing a company's performance on a
consistent basis without regard to depreciation and amortization, which can vary
significantly depending upon accounting methods or nonoperating factors.
However, the EBITDA measure presented in this document may not always be
comparable to similarly titled measures reported by other companies due to
differences in the components of the calculation.
<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 equipment revenue from the sale of telecommunications equipment that enable
telecommunications services over copper telephone wires. The Company offers a
broad range of products that facilitate the transmission of high-speed digital
and analog data between a telephone company's central office and end-user
customers. The Company's service revenues are derived from audio, multi port
video and multi media teleconferencing services by the Company's Conference
Plus, Inc.
subsidiary.
The Company has historically used the following three product
categories in its discussion of equipment revenue:
o DSL PRODUCTS: products based on DSL technologies;
o T-1 OR DS1 PRODUCTS: products used by telephone companies to enable
digital T-1 transmission at approximately 1.5 megabits per second and E-1
transmission at approximately 2.0 megabits per second; and
o TRADITIONAL OR DS0 PRODUCTS: products used by telephone companies to
deliver digital services at speeds ranging from approximately 2.4 to 64
kilobits per second and traditional analog services with 4 kilohertz
bandwidth.
Below is a table that compares equipment revenue for the three and nine month
periods ended December 31, 1998 with the three and nine-month periods ended
December 31, 1999 by product type:
<TABLE>
Three months ended: Nine months ended:
---------------------------------- ------------------------------------
December 31, December 31, December 31, December 31,
(in thousands) 1998 1999 1998 1999
---------------- ------------------------------------ -----------------
<S> <C> <C> <C> <C>
DSL products.................... $ 2,763 $ 9,033 $ 9,095 $ 14,406
T-1 or DS1 products............. 13,477 10,861 40,216 37,034
Traditional or DS0 products..... 1,216 1,211 3,043 2,656
Other equipment................. 684 859 2,114 2,382
================ ================ ================= =================
Total equipment................. 18,140 $ 21,964 $ 54,468 $ 56,478
================ ================ ================= =================
</TABLE>
To better reflect the current business model, beginning with the quarter ended
June 30, 1999, management has decided to use the following new product groupings
in its discussion of its equipment revenue:
o HIGH CAPACITY ("HiCAP"): Products that maintain, repair and monitor
circuits used over copper telephone wires in the portion of the phone
companies' network connecting the central office with the customers'
locations (the "Local Loop"). Products include all of Westell's traditional
or DS0 products such as its analog products and a portion of Westell's
products that enable digital T-1 transmission such as its Network Interface
Units ("NIU") products.
o TRANSPORT SYSTEMS: Products that contain components that are located both
in the phone companies' central offices and customers' locations, creating
integrated systems. Products include Westell's DSL product called
Supervision, a system comprised of modems and central office shelves and
electronics that enable high-speed transmission over copper telephone
lines. The Transport Systems business unit also provides SmartLink(TM), a
back-up system for wireless or cellular providers, and LinkReach(TM), a
joint effort with Lucent to enable high-speed transmission over certain
Lucent products.
o CUSTOMER PREMISE EQUIPMENT ("CPE"): High-speed DSL modems that are located
at the customers' premises. These products include Westell's WireSpeed(TM)
modems which are designed to hook up to single or multiple personal
computers and to provide high-speed access.
Below is a table that compares equipment and service revenues for the three and
nine month periods ended December 31, 1998 with the three and nine month periods
ended December 31, 1999 by new product groupings:
<PAGE>
<TABLE>
Three months ended: Nine months ended:
---------------------------------- ------------------------------------
December 31, December 31, December 31, December 31,
(in thousands) 1998 1999 1998 1999
------------------------------------ -----------------
----------------
<S> <C> <C> <C> <C>
HiCAP........................... $ 14,668 $ 11,865 $ 43,611 $ 38,369
Transport Systems............... 2,225 3,748 7,222 8,573
CPE............................. 1,247 6,351 3,635 9,536
---------------- ---------------- ----------------- -----------------
Total equipment................. 18,140 21,964 54,468 56,478
---------------- ---------------- ----------------- -----------------
Services........................ 5,245 8,053 14,590 22,702
================ ================ ================= =================
Total revenues.................. $ 23,385 $ 30,017 $ 69,058 $ 79,180
================ ================ ================= =================
</TABLE>
Westell's net revenues increased 28.4% in the three months ended
December 31, 1999 when compared to the same period last year due to increases in
equipment revenue of 409.3% and 68.4% from the CPE and Transport Systems
business units, respectively, and a 53.5% increase in services revenue. These
increases were partially offset by a 19.1% decrease in revenue from the HiCAP
business unit.
The Company's net revenues increased 14.7% in the nine months ended
December 31, 1999 when compared to the same period last year due to increases in
equipment revenue of 162.3% and 18.7% from the CPE and Transport Systems
business units, respectively, and a 55.6% increase in services revenue. These
increases were partially offset by a decrease of 12.0% from the HiCAP business
unit.
The Company expects to continue to evaluate new product opportunities
and engage in extensive research and development activities. This will require
the Company to continue to invest heavily in research and development and sales
and marketing, which could adversely affect short-term results of operations.
Due to the Company's significant ongoing investment in DSL technology, the
Company anticipates losses in at least the remaining fiscal 2000 quarter. The
Company believes that its future revenue growth and profitability will
principally depend on its success in increasing sales of DSL products and
developing new and enhanced products enabling T-1 transmission and other DSL
products. The market for DSL products continues to be increasingly competitive.
This has caused the Company to offer its DSL products at prices below current
production costs (i.e., forward pricing of DSL products). Prior to March 31,
1999, the Company recorded losses due to forward pricing of DSL products based
upon orders received. Subsequent to March 31, 1999, in an effort to associate
the transfer of title of the DSL product to the customer with the recognition of
the loss, the Company began recording losses due to forward pricing on DSL
products upon shipment to the customer. As of April 1, 1999, the Company did not
record any cumulative effect of this change in accounting method, as the effects
were immaterial. During July 1999, the Company received DSL orders from an
international customer and a domestic customer priced below anticipated
production costs. The Company recognized a loss with respect to these forward
priced orders of $855,000 in the quarter ended September 30, 1999 and
approximately $140,000 in the quarter ended December 31, 1999. 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 DSL product sales prior to achieving cost-effective
chipsets, product design efficiencies and economies related to volume production
that 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 DSL systems used in trials 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 the Company's analog products, traditional or DSO
products have declined in recent years as telephone companies continue to move
from analog to digital transmission services. The Company also expects that
revenues from Network Interface Unit ("NIU") products, a T-1 product, in its
HiCAP product group may decline as telephone companies 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, 1999 compared to periods
ended December 31, 1998
Revenues. The Company's revenues increased 28.4% from $23.4 million in the three
months ended December 31, 1998 to $30.0 million in the three months ended
December 31, 1999. The revenue increase in the three month period was primarily
due to increased equipment revenue from the Company's CPE business unit of $5.1
million and increased service revenue from the Company's Conference Plus, Inc.
subsidiary of $2.8 million when compared with the same period of the prior year.
Equipment revenue from the Company's Transport Systems business unit also
increased by $1.5 million when compared with the same three month period of the
prior year. The increased teleconference service revenue reflects an increase in
call minutes at the Company's Conference Plus, Inc. subsidiary. The increased
CPE and Transport Systems equipment revenue was 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 offset in part by a decrease
of $2.8 million from the HiCAP business unit. The decrease in HiCAP revenue was
due primarily to lower unit shipments of products enabling T-1 transmission as
local service providers transition to high speed digital based products for
providing service.
The Company's revenues increased 14.7% from $69.1 million in the nine months
ended December 31, 1998 to $79.2 million in the nine months ended December 31,
1999. The revenue increase in the nine month period was primarily due to
increased equipment revenue from the Company's CPE business unit of $5.9 million
and increased service revenue from the Company's Conference Plus, Inc.
subsidiary of $8.1 million when compared with the same period of the prior year.
Equipment revenue from the Company's Transport Systems business unit increased
by $1.4 million when compared with the same nine month period of the prior year.
The increased teleconference service revenue reflects an increase in call
minutes at the Company's Conference Plus, Inc. subsidiary. The increased CPE and
Transport systems equipment revenue was 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 offset in part by a decrease of
$5.2 million from the HiCAP business unit. The decrease in HiCAP revenue was due
primarily to lower unit shipments of products enabling T-1 transmission as local
service providers transition to high speed digital based products for providing
service.
Gross Margin. Gross margin as a percentage of revenue increased from
26.0% in the three months ended December 31, 1998 to 27.5% in the three months
ended December 31, 1999 and increased from 25.5% in the nine months ended
December 31, 1998 to 27.0% in the nine months ended December 31, 1999. Gross
profit margin for the three and nine month periods ended December 31, 1998 was
effected by recording losses due to forward pricing on DSL orders of $800,000
and $2.5 million, respectively. Gross profit margin for the three and nine month
periods ended December 31, 1999 was effected by recording losses due to forward
pricing on DSL shipments during the periods of $140,000 and $1.0 million,
respectively. To a lesser extent continued pricing pressures and product mix
changes for products enabling T-1 and analog transmission also contributed
downward pressure on gross profit margin. During the quarter, the Company's
Conference Plus, Inc. subsidiary invested in additional infrastructure
enhancements to handle increased call minutes which also impacted gross margins.
Sales and Marketing. Sales and marketing expenses decreased 28.3%, or $1.5
million, to $3.9 million in the three months ended December 31, 1999 and
decreased 28.8%, or $4.4 million, to $11.0 million in the nine months ended
December 31, 1999 when compared to the same period last year. Sales and
marketing expenses decreased as a percentage of revenues from 23.0% in the three
months ended December 31, 1998 to 12.8% in the three months ended December 31,
1999 and decreased as a percentage of revenues from 22.3% in the nine months
ended December 31, 1998 to 13.8% in the nine months ended December 31, 1999. The
decrease in sales and marketing expenses during the three and nine month periods
was primarily due to cost reductions resulting from management's initiatives
undertaken late last fiscal year 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.
<PAGE>
RESULTS OF OPERATIONS - continued
Research and Development. Research and development expenses decreased 57.5%, or
$4.0 million, to $3.0 million in the three months ended December 31, 1999 and
decreased 58.4%, or $11.5 million, to $8.2 million in the nine months ended
December 31, 1999 when compared to the same period last year. Research and
development expenses decreased as a percentage of revenues from 29.8% in the
three months ended December 31, 1998 to 9.9% in the three months ended December
31, 1999 and decreased as a percentage of revenues from 28.5% in the nine months
ended December 31, 1998 to 10.3% in the nine months ended December 31, 1999.
This decrease in research and development expenses was primarily due to the
Company receiving $1.5 million and $4.6 million during the three and nine month
periods ended December 31, 1999, respectively, from customers to fund on-going
engineering projects, which was offset against research and development
expenses. Additional cost savings in the current fiscal year are due to cost
reductions resulting from management's restructuring initiatives undertaken late
last fiscal year. Additionally, cost savings have resulted from the absence of
costs related to the Company's European operation, Westell Europe Limited, which
was eliminated earlier in the current fiscal 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 decreased 15.1%,
from $3.4 million in the three months ended December 31, 1998 to $2.9 million in
the three months ended December 31, 1999 and decreased 1.8%, from $9.7 million
in the nine months ended December 31, 1998 to $9.5 million in the nine months
ended December 31, 1999. General and administrative expenses decreased as a
percentage of revenues from 14.6% in the three months ended December 31, 1998 to
9.7% in the three months ended December 31, 1999 and decreased as a percentage
of revenues from 14.0% in the nine months ended December 31, 1998 to 12.0% in
the nine months ended December 31, 1999. The general and administrative expense
decrease in the three month period ended December 31, 1999 was primarily due to
a change in estimate of previously established restructuring accruals and other
accruals in the amount of approximately $400,000. This decrease was partially
offset by increases due to information systems enhancements during the three and
nine month periods.
Other (income) expense, net. Other (income) expense, net increased from $142,000
in the three months ended December 31, 1998 to $854,000 in the three months
ended December 31, 1999 and decreased from $925,000 in the nine months ended
December 31, 1998 to $905,000 in the nine months ended December 31, 1999. The
increase in the three month period ended December 31, 1999 is primarily due to a
$650,000 foreign currency gain from the liquidation of Westell Europe, Ltd.
Other income is primarily comprised of interest income earned on temporary cash
investments, the elimination of minority interest and unrealized gains of losses
on intercompany balances denominated in foreign currency.
Interest expense. Interest expense increased from $115,000 in the three months
ended December 31, 1998 to $690,000 in the three months ended December 31, 1999
and increased from $271,000 in the nine months ended December 31, 1998 to $1.4
million in the nine months ended December 31, 1999. Interest expense during the
current period is a result of interest incurred on the Company's subordinated
secured convertible debentures, warrants to purchase Class A Common Stock and
net obligations outstanding during the period under promissory notes and
equipment borrowings.
Benefit for income taxes. There was no benefit for income taxes recorded for
both three and nine month periods ended December 31, 1998 and 1999. As in each
quarter of fiscal 1999, the Company provided valuation reserves for the entire
benefit generated during the three and nine month periods of $600,000 and $3.3
million, respectively, 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 based
upon the resulting gross deferred asset.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had $10.6 million in cash and cash
equivalents, which is being invested in the highest rated grade corporate
commercial paper. The Company's operating activities used cash of approximately
$9.9 million in the nine months ended December 31, 1999. This use resulted
primarily from a loss from continuing operations before income taxes of $2.3
million (net of depreciation), increases in accounts receivable, inventory and
prepaid expenses and a decrease in accrued compensation offset partially by an
increase in accounts payable and accrued expenses.
<PAGE>
RESULTS OF OPERATIONS - continued
Capital expenditures for the nine month period ended December 31, 1999 were $5.0
million, all of which was funded by available cash. The Company expects to spend
approximately $8.0 million for the remainder of fiscal year 2000 related to
capital equipment expenditures.
At December 31, 1999, the Company's principle sources of liquidity were $10.6
million of cash and cash equivalents and a secured credit facility, which allows
the Company to borrow up to $16.0 million based upon receivables and inventory
levels and up to an additional $4.1 million under a secured equipment line of
credit. Cash and cash equivalents, anticipated funds from operations, along with
available credit lines and other resources, are expected to be sufficient to
meet cash requirements for the next twelve 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 committed to binding purchase orders for ADSL products from
customers priced below current production costs. The Company anticipates that it
may incur losses upon delivery of these forward priced DSL products during
subsequent periods. The Company could continue to record losses on DSL product
sales if management enters into similar sales arrangements prior to achieving
manufacturing cost reductions of DSL products through (i) obtaining more cost
effective DSL chipsets, (ii) product design efficiencies and (iii) economies
related to volume production. The Company can not estimate the amounts of
possible future forward priced orders or their subsequent effect on liquidity.
The Company has approximately $4.7 million in income tax credit carryforwards
and a tax benefit of $30.3 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 net operating loss carryforwards begin
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, 1998,
and 1999 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 is not
sufficient to realize all of the deferred tax assets available to the Company
and as such, has recorded a valuation allowance of $18.5 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
Prior to December 31, 1999 the Company determined that portions of its
software systems needed to be modified and/or replaced so to properly utilize
dates beyond December 31, 1999 ("year 2000 compliance"). The implementation of
the plan to remediate the Company's Information Technology ("IT") systems, which
included efforts to mitigate the impact that the year 2000 could have on the
Company, was substantially completed as of March 31, 1999 (the "Project").
The Project included upgrading system software, hardware and processes
that are not exclusively related to year 2000 compliance. The Company utilized
both internal and external resources and had a full-time manager dedicated to
the Project as well as addressing other year 2000 compliance issues. The Project
cost for the Company was approximately $1.8 million. These costs were expensed
as incurred, except for approximately $800,000 that was capitalized unrelated to
year 2000 compliance. The Company had expensed approximately $300,000 related
this Project, as of March 31, 1999 with the remaining $700,000 to be expensed
over the next two years as operating lease payments come due. The upgrading of
system software, hardware and processes was essentially completed as of March
31, 1999, as planned and within previous cost estimates.
The Company has not experienced significant disruptions related to year
2000 nor does the Company
<PAGE>
RESULTS OF OPERATIONS - continued
expect to incur significant disruptions in the future related to year 2000
compliance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
- ---------------------------------------------------------------------
Westell is subject to certain market risks, including foreign currency
and interest rates. The Company has a foreign subsidiary in Ireland that sells
teleconferencing services. The Company is exposed to potential gains and losses
from foreign currency fluctuation affecting net investments and earnings
denominated in foreign currencies. After the sale of Westell's European
subsidiary in June 1999, the Company's future primary exposure is to changes in
exchange rates for the U.S. Dollar versus the Irish pound. The Company also has
a sales order and accounts receivable denominated in Great British pounds. The
Company uses foreign currency hedging to manage the exposure to changes in the
exchange rate on accounts receivable.
As of December 31, 1999, the net change in the cumulative foreign
currency translation adjustment account, which is a component of stockholders'
equity, was an unrealized gain of $78,000. The Company also recorded a $650,000
foreign currency gain from the liquidation of Westell Europe Ltd. in Other
(income) expense in the three months ended December 31, 1999. This was recorded
as cumulative foreign currency translation adjustment, as part of retained
earnings, until Westell Europe, Ltd. was substantially liquidated.
The Company does not have significant exposure to interest rate risk
related to its debt obligations, which are primarily U.S. Dollar denominated.
The Company's market risk is the potential loss arising from adverse changes in
interest rates. As further described in Note 2 of the Company's 10-K for the
period ended March 31, 1999, the Company's debt includes of a floating-rate bank
line-of credit. Market risk is estimated as the potential decrease in pretax
earnings resulting from a hypothetical increase in interest rates of 10% (i.e.
from approximately 8% to approximately 18%) average interest rate on the
Company's debt. If such an increase occurred, the Company would incur
approximately $315,000 per annum in additional interest expense based on the
average debt borrowed during the twelve months ended March 31, 1999. The Company
does not feel such additional expense is significant.
The Company does not currently use any derivative financial instruments relating
to the risk associated with changes in interest rates.
<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 3.2: Bylaws, as amended (incorporated by reference to Exhibit
4.2 in Westell Technologies, Inc.'s registration statement
on Form S-4 (SEC No. 333-95539).
Exhibit 27: Financial Data Schedule
b) The following Form 8-K's were filed by the Company:
1. On December 13, 1999 the Company announced the proposed merger
with Teltrend, Inc. and an agreement with the holders of its
convertible debentures and related warrant to waive certain
rights which could arise in connection with the proposed
transaction and in connection therewith Westell agreed to amend
the exercise price of the warrants to $5.9208 per share.
2. On February 3, 2000, the Company announced the expiration of the
waiting period unde the Hart-Scott-Rodino Antitrust Improvements
Act applicable to Westell's offer, pursuant to the proposed
merger, to acquire all of the outstanding shares of Common Stock
of Teltrend, Inc.
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 14, 2000
By: MARC J. ZIONTS
------------------
MARC J. ZIONTS
Chief Executive Officer
By: NICHOLAS C. HINDMAN
-----------------------
NICHOLAS C. HINDMAN
Interim Chief Financial Officer
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 10,621
<SECURITIES> 0
<RECEIVABLES> 18,886
<ALLOWANCES> (945)
<INVENTORY> 13,912
<CURRENT-ASSETS> 45,947
<PP&E> 42,379
<DEPRECIATION> (29,577)
<TOTAL-ASSETS> 77,924
<CURRENT-LIABILITIES> 40,390<F1>
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0
0
<COMMON> 367
<OTHER-SE> 33,886
<TOTAL-LIABILITY-AND-EQUITY> 77,924
<SALES> 0
<TOTAL-REVENUES> 79,180
<CGS> 57,785
<TOTAL-COSTS> 28,668
<OTHER-EXPENSES> (905)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,418
<INCOME-PRETAX> (7,786)
<INCOME-TAX> 0
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<FN>
Includes 18,304 convertible debt.
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