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 September 30, 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 - 16,434,714 shares at October 31, 1998
Class B Common Stock, $0.01 Par Value - 19,996,857 shares at October 31, 1998
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 September 30, 1998 (unaudited)
Condensed Consolidated Statements of Operations (unaudited) 4
- Three months ended September 30, 1997 and 199
- Six months ended September 30, 1997 and 1998
Condensed Consolidated Statements of Cash Flows (unaudited) 5
- Six months ended September 30, 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, the decrease in ADSL manufacturing costs, 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.
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, September 30,
1998 1998
---------- ----------
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents..................... $ 43,515 $ 21,303
Short term investments........................ 684 4,050
Accounts receivable (net of allowance of
$730,000 and $786,000, respectively).......... 12,399 13,329
Inventories................................... 9,428 8,427
Prepaid expenses and other current assets..... 100 485
Refundable income taxes....................... 110 101
Deferred income tax asset..................... 2,498 1,900
---------- ----------
Total current assets...................... 68,734 49,595
---------- ----------
Property and equipment:
Machinery and equipment....................... 15,630 17,567
Office, computer and research equipment....... 17,090 16,723
Leasehold improvements........................ 1,584 2,262
---------- ----------
34,304 36,552
Less accumulated depreciation and amortization 20,816 22,390
---------- ---------
Property and equipment, net.................. 13,488 14,162
---------- ----------
Deferred income tax asset and other assets...... 16,183 16,794
--------- ----------
Total assets.............................. $ 98,405 $ 80,551
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 7,472 $ 8,196
Accrued expenses.............................. 6,296 6,566
Accrued compensation.......................... 5,664 4,432
Current portion of long-term debt............. 1,407 1,407
Deferred revenue.............................. 414 413
---------- ----------
Total current liabilities.................... 21,253 21,014
---------- ----------
Long-term debt.................................. 3,013 2,177
---------- ----------
Other long-term liabilities..................... 998 1,083
---------- ----------
Commitments and contingencies Stockholders' equity:
Class A common stock, par $0.01................. 154 163
Authorized - 43,500,000 shares
Issued and outstanding - 15,371,900 shares at
March 31, 1998 and
16,317,214 shares at September 30, 1998
Class B common stock, par $0.01................. 210 201
Authorized - 25,000,000 shares
Issued and outstanding - 21,030,857 shares at
March 31, 1998 and
20,114,357 shares at September 30, 1998
Preferred stock, par $0.01...................... - -
Authorized - 1,000,000 shares
Issued and outstanding - none
Additional paid-in capital...................... 97,254 97,468
Cumulative translation adjustment............... (213) (418)
Accumulated deficit............................. (24,264) (41,137)
---------- ----------
Total stockholders' equity................ 73,141 56,277
========== ==========
Total liabilities and stockholders' $ 98,405 $ 80,551
equity.......................................... ========== ==========
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
September 30, September 30,
------------------- ------------------
1997 1998 1997 1998
-------- -------- ------- --------
(unaudited)
(in thousands, except per share data)
Equipment sales................. $18,439 $17,942 $34,774 $ 36,328
Services........................ 3,251 4,718 6,253 9,345
-------- -------- ------- --------
Total revenues................ 21,690 22,660 41,027 45,673
Cost of equipment sales......... 13,418 15,210 24,786 28,818
Cost of services................ 1,436 2,852 2,994 5,343
-------- -------- ------- --------
Total cost of goods sold...... 14,854 18,062 27,780 34,161
-------- -------- ------- --------
Gross margin................. 6,836 4,598 13,247 11,512
Operating expenses:
Sales and marketing........... 4,703 5,261 10,122 10,030
Research and development...... 6,680 6,578 12,766 12,708
General and administrative.... 3,099 3,282 6,046 6,273
-------- -------- ------- --------
Total operating expenses..... 14,482 15,121 28,934 29,011
-------- -------- ------- --------
Operating loss from continuing
operations...................... (7,646) (10,523) (15,687) (17,499)
Other income, net............... 362 348 855 783
Interest expense................ 62 66 125 156
-------- -------- ------- --------
Loss from continuing operations (7,346) (10,241) (14,957) (16,872)
before taxes....................
Benefit for income taxes........ (2,830) -- (5,920) --
-------- -------- ------- --------
======== ======== ======= ========
Net loss........................ $(4,516) $(10,241) $(9,037) $(16,872)
======== ======== ======= ========
Net loss per basic and diluted
common share.................... $ (0.12) $ (0.28) $ 0.25) $ (0.46)
======== ======== ======= ========
Average number of basic and
diluted 36,337 36,422 36,329 36,417
common shares outstanding.....
======== ======== ======= ========
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
September 30,
----------------------------
1997 1998
------------ ------------
(unaudited)
(in thousands)
Cash flows from operating activities:
Net loss...................................... $ (9,037) $ (16,872)
Reconciliation of net income to net cash
provided by
(used in) operating activities:
Depreciation and amortization............... 3,477 3,670
Stock awards................................ 24 --
Deferred taxes.............................. (5,920) --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable.. 184 (1,082)
Decrease in inventory....................... 2,738 936
Increase in prepaid expenses and deposits... (15) (385)
Decrease in refundable income taxes......... - 9
Increase in accounts payable and accrued 787 1,079
expenses....................................
Increase (decrease) in accrued compensation. 295 (1,232)
Decrease in deferred revenues............... - (1)
------------ ------------
Net cash used in operating activities...... (7,467) (13,878)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment......... (2,678) (4,344)
Increase in other assets.................... (24) (13)
Decrease (increase) in short term investments 5,445 (3,366)
Land and building construction held for resale 16,203 -
------------ ------------
Net cash provided by (used in) investing 18,946 (7,723)
activities.................................
------------ ------------
Cash flows from financing activities:
Net borrowing under revolving promissory notes 550 -
Repayment of long-term debt and leases payable (1,087) (837)
Cash distributed to Meridian LLC partner.... (500) -
Proceeds from the issuance of common stock.. 430 215
------------ ------------
Net cash used in financing activities...... (607) (622)
------------ ------------
Effect of exchange rate changes on cash....... (3) 11
Net increase (decrease) in cash............ 10,869 (22,212)
Cash and cash equivalents, beginning of period 28,436 43,515
============ ============
Cash and cash equivalents, end of period...... $ 39,305 $ 21,303
============ ============
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements
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 September 30, 1998, and
for all periods presented. The results of operations for the three and six month
periods ended September 30, 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 periods ended September 30, 1997, and 1998, and therefore
the net loss per basic and diluted earnings per share are the same.
NOTE 3. COMMITMENTS AND CONTINGENCIES:
During the quarter ended September 30, 1998, the Company received ADSL
orders from customers priced below current production costs, which caused the
Company to recognize a loss of $1.7 million for orders received. 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.
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, 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 six month periods ended September 30, 1997 and 1998, are as follows:
Telecom Telecom
Equipment Services Total
--------- -------- -----
Three months ended September 30, 1997
Revenues ............................... $ 18,439 $ 3,251 $ 21,690
Operating income (loss) ................ (8,674) 1,028 (7,646)
Depreciation and amortization .......... 1,438 242 1,680
Total assets ........................... 93,069 6,656 99,725
Three months ended September 30, 1998
Revenues ............................... $ 17,942 $ 4,718 $ 22,660
Operating income (loss) ................ (11,177) 654 (10,523)
Depreciation and amortization .......... 1,483 431 1,914
Total assets ........................... 70,735 9,816 80,551
Six months ended September 30, 1997
Revenues ............................... $ 34,774 $ 6,253 $ 41,027
Operating income (loss) ................ (17,434) 1,747 (15,687)
Depreciation and amortization .......... 2,892 585 3,477
Total assets ........................... 93,069 6,656 99,725
Six months ended September 30, 1998
Revenues ............................... 36,328 9,345 45,673
Operating income (loss) ................ (19,174) 1,675 (17,499)
Depreciation and amortization .......... 2,784 886 3,670
Total assets ........................... 70,735 9,816 80,551
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 4.5% and 11.3% in
the three month and six month periods ended September 30, 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 six month period primarily as a result of
increased DSL and DS1 unit shipments. For the three months ended September 30,
1998 equipment revenue decreased due to lower DSL shipments attributable to
uneven demand for DSL products. Equipment revenue was also affected by an
anticipated decrease in DS0 sales as network providers continue to 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 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 each of the remaining two fiscal 1999 quarters and losses
may extend into fiscal 2000. The Company believes that its future revenue growth
and profitability will principally depend on its success in increasing sales of
ADSL products and developing new and enhanced DS1 and other DSL products. 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 1998
quarter, the Company received ADSL orders from customers priced below current
production costs, which caused the Company to recognize a loss of $1.7 million.
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 could 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.
RESULTS OF OPERATIONS - Periods ended September 30, 1998 compared to periods
ended September 30, 1997
Revenues. The Company's revenues increased 4.5% from $21.7 million in the three
months ended September 30, 1997 to $22.7 million in the three months ended
September 30, 1998. The revenue increase in the three month period was primarily
due to increased DS1 revenue of $1.0 million and increased teleconference
service revenue from the Company's Conference Plus, Inc. subsidiary of $1.5
million when compared with the same period of the prior year. 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 at the
Company's Conference Plus, Inc. subsidiary. These increases were partially
offset by a $988,000 decrease in DSL revenue and a $705,000 decrease in DS0
revenue in the three months ended September 30, 1998 when compared with the same
period of the prior year. The decrease in DSL revenue was due to lower unit
shipments of ADSL products. The Company expects continued order variations to
cause shipment levels to fluctuate from quarter to quarter. The decrease in DS0
revenue was due primarily to lower unit shipments as local service providers
transition to digital based products for providing service.
The Company's revenues increased 11.3% from $41.0 million in the six months
ended September 30, 1997 to $45.7 million in the six months ended September 30,
1998. The revenue increase in the six month period was primarily due to
increased teleconference service revenue from the Company's Conference Plus,
Inc. subsidiary of $3.1 million, increased DS1 revenue of $1.4 million and
increased DSL revenue of $908,000 when compared with the same period last year.
Increased teleconference service revenue reflects an increase in call minutes.
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. The increased DSL revenue was due to overall unit volume. These increases
were partially offset by a $1.1 million decrease in DS0 revenue in the six
months ended September 30, 1998 when compared with the same period of last year.
Gross Margin. Gross margin as a percentage of revenue decreased from 31.5% in
the three months ended September 30, 1997 to 20.3% in the three months ended
September 30, 1998 and decreased from 32.3% in the six months ended September
30, 1997 to 25.2% in the six months ended September 30, 1998. The decrease in
gross profit margin was primarily due to recording $1.7 million loss due to
forward pricing on DSL orders received during the September 1998 quarter. To a
lesser extent continued pricing pressures and product mix changes for the DS0
and DS1 products also attributed to the lower gross profit margin. During the
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 11.9%, from $4.7
million in the three months ended September 30, 1997 to $5.3 million in the
three months ended September 30, 1998 and decreased 1%, from $10.1 million in
the six months ended September 30, 1997 to $10.0 million in the six months ended
September 30, 1998. Sales and marketing expenses increased as a percentage of
revenues from 21.7% in the three months ended September 30, 1997 to 23.2% in the
three months ended September 30, 1998 and decreased as a percentage of revenue
from 24.7% in the six month period ended September 30, 1997 to 22.0% in the six
months ended September 30, 1998. The increase in sales and marketing expenses
during the three month period was primarily due to increased costs related to
DSL and Telco Access marketing program costs incurred during the quarter. The
decrease in sales and marketing expenses for the six month period 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
globally.
RESULTS OF OPERATIONS - continued
Research and Development. Research and development expenses decreased 1.5%, or
$103,000, to $6.6 million in the three months ended September 30, 1998 and
decreased 0.5%, or $57,000, to $12.7 million in the six months ended September
30, 1998. Research and development expenses decreased as a percentage of
revenues from 30.8% in the three months ended September 30, 1997 to 29.0% in the
three months ended September 30, 1998 and decreased as a percentage of revenues
from 31.1% in the six months ended September 30, 1997 to 27.8% in the six months
ended September 30, 1998. Research and development expenses are relatively flat
from the same quarter last year as a result of the Company focusing development
spending on key customer and product developments such as the Access
Multiplexer, RADSL and ADSL functionality for the DSC Lite-Span and the Lucent
SLC-5 and SLC-2000 Digital Loop Carrier systems. 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 5.9%,
from $3.1 million in the three months ended September 30, 1997 to $3.3 million
in the three months ended September 30, 1998 and increased 3.8%, from $6.0
million in the six months ended September 30, 1997 to $6.3 million in the six
months ended September 30, 1998. General and administrative expenses increased
as a percentage of revenues from 14.3% in the three months ended September 30,
1997 to 14.5% in the three months ended September 30, 1998 and decreased as a
percentage of revenues from 14.7% in the six months ended September 30, 1997 to
13.7% in the six months ended September 30, 1998. The general and administrative
expense increase was primarily due to information systems enhancements during
the period partially offset by the results from management initiatives and
restructuring that took place in the March 1998 quarter to streamline
administrative functions both domestically and internationally.
Other income, net. Other income, net decreased from $362,000 in the three months
ended September 30, 1997 to $348,000 in the three months ended September 30,
1998 and decreased from $855,000 in the six months ended September 30, 1997 to
$783,000 in the six months ended September 30, 1998. The income for the period
was due to interest income earned on temporary cash investments made as a result
of investing available funds.
Interest expense. Interest expense increased from $62,000 in the three months
ended September 30, 1997 to $67,000 in the three months ended September 30, 1998
and increased from $125,000 in the six months ended September 30, 1997 to
$156,000 in the six months ended September 30, 1998. Interest expense during the
current period is a result of interest incurred on net obligations outstanding
during the period under equipment facility borrowings and capital leases.
Benefit for income taxes. Benefit for income taxes decreased from $2.8 million
and $5.9 million in the three and six month periods months ended September 30,
1997 to $0 for the three and six month periods ended September 30, 1998. As in
the quarter ended June 30, 1998, the Company provided a valuation reserve for
the entire benefit generated during the current quarter of $4.1 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 September 30, 1998, the Company had $25.4 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.
The Company's operating activities used cash of approximately $13.9 million in
the six months ended September 30, 1998, which resulted primarily from a loss
from continuing operations before income taxes of $13.2 million (net of
depreciation), increases in accounts receivable and prepaid expenses and a
decrease in accrued compensation offset partially by a decrease in inventory and
increases in accounts payable and accrued expenses.
Capital expenditures for the six month period ended September 30, 1998 were $4.3
million, all of which was funded by available cash. The Company expects to spend
approximately $2.2 million for the remainder of fiscal year 1999 related to
capital equipment expenditures.
At September 30, 1998, the Company's principle sources of liquidity were $25.4
million of cash and short term investments. In October 1998, the Company entered
into a credit facility that replaced the revolving promissory note and equipment
facilities that expired on May 15, 1998 and December 15, 1997, respectively.
Under this credit facility, the Company may borrow up to $16.0 million under a
secured revolving line of credit based upon receivables and inventory levels and
up to an additional $5.0 million under a secured equipment line of credit.
Additionally, a $4.0 million term loan was provided under the credit facility to
refinance existing long term indebtedness with the prior lending institution.
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 approximately $3.7 million in income tax credit carryforwards
and a tax benefit of $22.2 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 $9.7 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 $300,000 related this Project
and has incurred approximately $200,000 in capital expenditures, as of September
30, 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
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 is in the process of assessing the year 2000
compliance of its engineering support systems and automated engineering tools.
The Company is in the initial stages of questioning the vendors of these systems
and tools to determine whether they are year 2000 compliant. Many of these
systems and tools are upgraded annually through license renewals. If the current
upgrades of any of these engineering support systems and automated engineering
tools are not year 2000 compliant, then the Company will have to seek a
replacement for the system or tool prior to such year 2000 noncompliance
affecting the Company's product development schedules. The Company expects that
this evaluation will be completed by December 31, 1998, 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. However, any
replacement of an engineering support system or automated engineering tools
could result in the Company incurring significant initial capital costs which
could materially and adversely affect the Company's operating results. 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 has not developed a contingency plan to address all possible
effects that the year 2000 may have on its operations. Management believes,
however, that its actions, evaluations and processes should provide sufficient
time to address the year 2000 risks as they are revealed. The Company will be
prepared to develop a contingency plan that should mitigate year 2000
noncompliance that is within its control. 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. The Company believes that it will have sufficient time
to mitigate vendor year 2000 noncompliance, however, 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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On September 9, 1998 the Company held its annual shareholders meeting. The only
matter put before vote of the security holders was the election of directors.
The results of the election of directors was as follows based upon total votes
cast of 91,750,198:
For Withheld
--- --------
Robert H. Gaynor 91,537,003 213,195
Melvin J. Simon 91,398,622 200,025
Stefan D. Abrams 91,540,898 209,300
Michael A. Brunner 91,549,273 200,925
Paul A. Dwyer 91,548,893 201,305
Robert C. Penny 91,546,224 203,974
John W. Seazholtz 91,550,173 200,025
Ormand J. Wade 91,550,153 200,045
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 10.1 Loan and Security Agreement dated as of October 13, 1998
among LaSalle National Bank, Westell Technologies, Inc., Westell,
Inc., Westell International, Inc., and Conference Plus, Inc.
Exhibit 10.2 Revolving Note dated as of October 13, 1998 payable to
LaSalle National Bank and made by Westell Technologies, Inc.,
Westell, Inc., Westell International, Inc., and Conference Plus,
Inc.
Exhibit 10.3 Equipment Loan Note dated as of October 13, 1998 payable to
LaSalle National Bank and made by Westell Technologies, Inc.,
Westell, Inc., Westell International, Inc., and Conference Plus,
Inc.
Exhibit 10.4 Term Note dated as of October 13, 1998 payable to LaSalle
National Bank and made by Westell Technologies, Inc., Westell,
Inc., Westell International, Inc., and Conference Plus, Inc.
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: November 13, 1998
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