SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSACTION 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 60543
(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 documents
and reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or period 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 -- 15,078,700 shares at July 31, 1997
Class B Common Stock, $0.01 Par Value -- 21,245,913 shares at July 31, 1997
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, 1997 and June 30, 1997 (unaudited)
Condensed Consolidated Statements of Operations (unaudited) 4
- Three months ended June 30, 1996 and 1997
Condensed Consolidated Statements of Cash Flows (unaudited) 5
- Three months ended June 30, 1996 and 1997
Notes to the Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II OTHER INFORMATION
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SAFE HARBOR STATEMENT
Certain statements contained under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this 10-Q, and other risks
detailed in the Company's Securities and Exchange Commission filings, including
its Annual Report on Form 10-K under the "Risk Factors" section for the fiscal
year ended March 31, 1997, which are not historical facts (including, without
limitation, statements about our confidence and strategies and our expectations
about new and existing products, 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 modem) 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, 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).
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
1997 1997
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 28,437 $ 24,953
Short term investments . . . . . . . . . . . . . . . . . . . . 10,850 7,834
Accounts receivable (net of allowance of $521,000 and $581,000, 12,119 10,068
respectively)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 10,416 9,559
Prepaid expenses and deposits . . . . . . . . . . . . . . . . . 1,177 556
Refundable income taxes . . . . . . . . . . . . . . . . . . . . 320 320
Deferred income tax asset . . . . . . . . . . . . . . . . . . . 2,410 2,410
Land and building construction held for sale . . . . . . . . . 16,203 16,197
Total current assets . . . . . . . . . . . . . . . . . . . . 81,932 71,897
Property and equipment:
Machinery and equipment . . . . . . . . . . . . . . . . . . . . 10,703 10,934
Office, computer and research equipment . . . . . . . . . . . . 17,951 18,815
Leasehold improvements . . . . . . . . . . . . . . . . . . . . 1,277 1,460
29,931 31,209
Less accumulated depreciation and amortization . . . . . . . . 15,293 17,014
Property and equipment, net . . . . . . . . . . . . . . . . . 14,638 14,195
Deferred income tax asset and other assets . . . . . . . . . . . 11,479 14,569
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 108,049 $ 100,661
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 7,111 $ 5,029
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 4,049 4,181
Accrued compensation . . . . . . . . . . . . . . . . . . . . . 3,133 2,124
Current portion of long-term debt . . . . . . . . . . . . . . . 2,121 1,937
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . -- 550
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 413 413
Total current liabilities . . . . . . . . . . . . . . . . . 16,827 14,234
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 4,366 4,048
Other long-term liabilities . . . . . . . . . . . . . . . . . . . 706 668
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . -- --
Commitments and contingencies
Stockholders' equity:
Class A common stock, par $0.01 . . . . . . . . . . . . . . . . . 150 150
Authorized - 43,500,000 shares
Issued and outstanding - 14,984,811 shares at March 31, 1997 and
15,078,700 shares at June 30, 1997
Class B common stock, par $0.01 . . . . . . . . . . . . . . . . . 213 213
Authorized - 25,000,000 shares
Issued and outstanding - 21,335,913 shares at March 31, 1997 and
21,245,913 shares at June 30, 1997
Preferred stock, par $0.01 . . . . . . . . . . . . . . . . . . . -- --
Authorized - 1,000,000 shares
Issued and outstanding - none
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 96,285 96,378
Cumulative translation adjustment . . . . . . . . . . . . . . . . (167) (255)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . (10,293) (14,813)
Total stockholders' equity . . . . . . . . . . . . . . . . . 86,188 81,673
Total liabilities and stockholders' equity . . . . . . . . $ 108,049 $ 100,661
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
June 30,
1996 1997
(unaudited)
(in thousands, except per share data)
Equipment sales . . . . . . . . . . . . . . $ 17,413 $ 16,336
Service revenue . . . . . . . . . . . . . . 2,846 3,001
Total revenues . . . . . . . . . . . . . 20,258 19,337
Cost of equipment sales . . . . . . . . . . 11,220 11,367
Cost of services . . . . . . . . . . . . . 1,779 1,558
Cost of goods sold . . . . . . . . . . . 12,999 12,925
Gross margin . . . . . . . . . . . . . . 7,259 6,412
Operating expenses:
Sales and marketing . . . . . . . . . . . 3,922 5,419
Research and development . . . . . . . . 4,222 6,087
General and administrative . . . . . . . 2,224 2,947
Total operating expenses . . . . . . . 10,368 14,453
Operating loss from continuing
operations . . . . . . . . . . . . . . . (3,109) (8,041)
Other income , net . . . . . . . . . . . . 228 494
Interest expense . . . . . . . . . . . . . 97 63
Loss from continuing operations before taxes (2,978) (7,610)
Benefit for income taxes . . . . . . . . . (1,290) (3,090)
Loss from continuing operations . . . . . . (1,688) (4,520)
Loss from discontinued operations
(net of tax benefits of $ 5,000 and $ 0,
respectively) (7) -
Net loss . . . . . . . . . . . . . . . . . $(1,695) $(4,520)
Loss per share:
Continuing operations . . . . . . . . . . . $ (0.05) $ (0.12)
Discontinued operations . . . . . . . . . . (0.00) (0.00)
Net loss per share . . . . . . . . . . . . $ (0.05) $ (0.12)
Average number of common shares
outstanding . . . . . . . . . . . . . . . 34,825 36,321
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
June 30,
1996 1997
(unaudited)
(in thousands)
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,695) $ (4,520)
Reconciliation of net income to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 1,269 1,797
Stock awards . . . . . . . . . . . . . . . . . . . . . . . 17 12
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . (1,298) (3,090)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable . . . . . . . . (1,941) 1,999
(Increase) decrease in inventory . . . . . . . . . . . . . (607) 809
Decrease in prepaid expenses and deposits . . . . . . . . . 631 621
Decrease in accounts payable and accrued expenses . . . . . (2,124) (1,412)
Decrease in accrued compensation . . . . . . . . . . . . . (1,140) (1,009)
Increase (decrease) in deferred revenues . . . . . . . . . (1,865) 0
Net cash used in operating activities . . . . . . . . . . (8,753) (4,793)
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . . (1,271) (1,354)
Decrease in other assets . . . . . . . . . . . . . . . . . 3 --
Decrease in short term investments . . . . . . . . . . . . 1,864 3,016
Land and building construction held for sale . . . . . . . -- 6
Net cash provided by investing activities . . . . . . . . 596 1,668
Cash flows from financing activities:
Net borrowing (repayment) under revolving promissory notes -- 550
Repayment of long-term debt and leases payable . . . . . . (473) (502)
Cash distributed to Meridian LLC partner . . . . . . . . . -- (500)
Proceeds from the issuance of common stock . . . . . . . . 61,712 80
Net cash provided by (used in) financing activities . . . 61,239 (372)
Effect of exchange rate changes on cash . . . . . . . . . . . . 7 13
Net increase (decrease) in cash . . . . . . . . . . . . . 53,089 (3,484)
Cash and cash equivalents, beginning of period . . . . . . . . 18,602 28,437
Cash and cash equivalents, end of period . . . . . . . . . . . $ 71,691 $ 24,953
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 financial statements and
notes thereto included in the Company's Annual Report on Form 10-K dated March
31, 1997.
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 June 30, 1997, and for
all periods presented. The results of operations for the three month period
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 1998.
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 telecommunication products that enable
telecommunication services over copper telephone wires. The Company's
telecommunication products 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, 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 (Mbps) and E-1 transmission at approximately 2.0 Mbps 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 (Kbps) and analog services
over a 4 kilohertz bandwidth. Westell's net revenues decreased 4.5% in the three
months ended June 30, 1997 when compared to the same period of the prior year.
This decrease in revenue was primarily a result of decreased DS0 and DSL product
revenues. The DSO decrease was due primarily to a decline in analog equipment
sales as network providers transition to digital based products while the
decrease in DSL revenue was due to lower average sale prices resulting from
system integration efforts and the Company's aggressive marketing strategy to
maintain its leading trial market share. The decreases in DS0 and DSL revenues
were partially off set by increases in DS1 and teleconferencing service revenue
of 7.3% and 5.4%, respectively, when compared to the corresponding prior year
period. Historically, revenues from DS1 and DS0 products provided most of the
Company's revenues.
The Company expects to continue to evaluate new product opportunities and
engage in extensive research and development activities. This will require the
Company to continue to invest heavily in research and development and sales and
marketing, which is expected to adversely affect short-term results of
operations. Due to the Company's significant ongoing investment in DSL
technology, the Company anticipates losses in each of the fiscal 1998 quarters.
The Company believes that its future revenue growth and profitability will
principally depend on its success on increasing sales of ADSL products and
developing new and enhanced DS1 and other DSL products. In the June 1997
quarter, the majority of the DSL revenue has been generated by shipments of ADSL
systems used in trials for data applications (i.e. Internet access and work at
home ect.) due to the growth in users accessing the World Wide Web through the
Internet and the need to increase the 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 ADSL market for growth and the
unpredictability of orders and subsequent revenues, the Company believes that
period to period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
Revenues from DS0 products have declined in recent years as telcos continue to
move from analog to digital transmission services. The Company also expects that
revenues from 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, technological change or otherwise, would have a
material adverse effect on the Company's business and results of operations.
RESULTS OF OPERATIONS - Period ended June 30, 1997 compared to period ended
June 30, 1996
Revenues. The Company's revenues decreased 4.5%, from $20.3 million in the three
months ended June 30, 1996 to $19.3 million in the three months ended June 30,
1997. The revenue decrease was primarily due to a decrease in DS0 revenue of
$1.4 million for the three months ended June 30, 1997 when compared to the same
period in the prior year. The decrease in DS0 revenue was primarily due to a
decline in analog equipment sales as local service providers transition to
digital based products for providing service. DSL revenues decreased $638,000
when compared to the same prior year period due to lower average system sales
prices resulting from product integration efforts and the Company aggressively
marketing its systems to maintain market share. The DSL revenue decrease was
partially offset by an increase in DSL unit shipments. The decreases in DS0 and
DSL revenues was offset in part by increases in DS1 product revenues of $874,000
and teleconference service revenue of $155,000 in the three month period ended
June 30, 1997 when compared to the same period in the prior year. The increase
in DS1 sales was caused by higher average unit sale prices as a result of
product sales mix which was offset in part by slightly lower overall unit volume
and continued competitive pricing pressures on unit sales prices when compared
to the corresponding period in the preceding year. The increase in
teleconference service revenue by the Company's Conference Plus, Inc. subsidiary
was due primarily to increased audio conferencing volume from the same period of
the prior year the effect of which was offset by a one time videoteleconference
equipment OEM sale in June 1996 of approximately $670,000.
Gross Margin. Gross margin as a percentage of revenues decreased from 35.8% to
33.2% for the three months ended June 30, 1997 when compared to the same period
in the prior year. This decrease was due primarily to continued pricing
pressures and product mix changes for the DS0 and DS1 products as well as
aggressive pricing of DSL trial systems to capture and stimulate early market
activity prior to volume orders and further product cost integration.
Sales and Marketing. Sales and marketing expenses increased 38.2%, from $3.9
million in the three months ended June 30, 1996 to $5.4 million in the three
months ended June 30, 1997. Sales and marketing expenses increased as a
percentage of revenues from 19.4% in the three months ended June 30, 1996 to
28.0% in the three months ended June 30, 1997. The increase in sales and
marketing expenses for the three month period was due to staff additions to
support and promote the Company's product lines, particularly the Company's ADSL
products. The Company believes that continued investment in sales and marketing
will be required to expand its product lines, bring new products to market and
service customers globally. The Company anticipates that sales and marketing
expenses will continue to increase in absolute dollars.
Research and Development. Research and development expenses increased 44.2%,
from $4.2 million in the three months ended June 30, 1996 to $6.1 million in the
three months ended June 30, 1997. Research and development expenses increased as
a percentage of revenues from 20.8% in the three months ended June 30, 1996 to
31.5% in the three months ended June 30, 1997. The increase in research and
development expenses for the three month period was due primarily to costs
associated with additional personnel to support new product developments such as
the Access Multiplexer, RADSL and co-development of ADSL for the DSC Lite-Span
Digital Loop Carrier system and increased prototype material costs to support
these development activities. The Company believes that a continued commitment
to research and development will be required for the Company to remain
competitive and anticipates that research and development costs will continue to
increase in absolute dollars.
General and Administrative. General and administrative expenses increased 32.5%,
from $2.2 million in the three months ended June 30, 1996 to $2.9 million in the
three months ended June 30, 1997. General and administrative expenses increased
as a percentage of revenues from 11.0% in the three months ended June 30, 1996
to 15.2% in the three months ended June 30, 1997. The increase in general and
administrative expenses was due to additional personnel to manage expanded
corporate infrastructure functions in both domestic and international operations
and increased costs related to our new corporate facilities. The Company
anticipates that general and administrative costs will continue to increase in
absolute dollars as the Company hires additional personnel.
Other income, net. Other income, net increased $266,000 from income of $228,000
in the three months ended June 30, 1996 to income of $494,000 in the three
months ended June 30, 1997. The increase in other income, net was due to
investment of additional available cash generated by the Company's Class A
common stock offering made in late June 1996.
Interest expense. Interest expense decreased from $97,000 in the three months
ended June 30, 1996 to $63,000 in the three months ended June 30, 1997. Interest
expense decreased as a result of reduced net obligations outstanding during the
first quarter of fiscal 1998 when compared to those outstanding during the first
quarter of fiscal 1997 under the promissory notes, equipment borrowing and
construction loan facilities available to the Company.
Benefit for income taxes. Benefit for income taxes represents the tax benefit
generated by the loss before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
In June 1996 the Company completed a secondary public offering of Class A Common
Stock which generated $61.6 million in funds. As of June 30, 1997 the Company
had $32.8 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 $4.8 million in
the three months ended June 30, 1997, which resulted primarily from a loss from
continuing operations before income taxes of $5.8 million (net of depreciation)
and a decrease in accounts payable, accrued expenses and accrued compensation.
These uses were offset in part by working capital generated by decreases in
accounts receivable, inventory and prepaid expenses for the three month period
ended June 30, 1997.
Capital expenditures for the three month period ended June 30, 1997 were $1.4
million, all of which was funded by available cash. The Company expects to spend
approximately $5.0 million in the remainder of fiscal year 1998 for capital
equipment expenditures.
At June 30,1996, the Company's principal sources of liquidity were $32.8 million
of cash and short term investments, and $9.6 million and $5.3 million available
under its secured revolving promissory notes and equipment borrowing facilities,
respectively. In addition, the Company expects to realize approximately $16
million upon the sale and leaseback of the Aurora facility it now occupies. The
Company advanced the construction funding for the Aurora facility which is shown
on the accompanying Balance Sheets as "Land and building construction held for
sale" and intends to sell its interest to a third party and have the
construction advances repaid during the current fiscal year. 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 had a deferred tax asset of approximately $16.9 million at June 30,
1997. This deferred tax asset relates to (i) tax credit carryforwards of
approximately $3.2 million, (ii) a net operating loss carryforward tax benefit
of approximately $11.9 million and (iii) temporary differences between the
amount of assets and liabilities for financial reporting purposes and such
amounts measured by tax laws. Of such tax credit carryforwards, the first
$243,000 of credits expire in 2008 and $722,000 of credits may be carried
forward indefinitely. 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 assets is
not assured, management believes it is more likely than not that the deferred
tax assets will be realized through future taxable income or by using a tax
strategy currently available to the Company. On a quarterly basis, management
will assess whether it remains more likely than not that the deferred tax assets
will be realized. This assessment could be impacted by a combination of
continuing operating losses and a determination that the tax strategy is no
longer sufficient to realize some or all of the deferred tax assets. If
management determines that it is no longer more likely than not that the
deferred tax assets will be realized, a valuation allowance will be required
against some or all of the deferred tax assets. This would require a charge to
the income tax provision, and such charge could be material to the Company's
results of operations.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following documents are furnished as an exhibit and numbered
pursuant to Item 601 of regulation S-K:
Exhibit 27: Financial Data Schedule
b) The registrant was not required to file any reports on Form 8-K for
the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
WESTELL TECHNOLOGIES, INC.
(Registrant)
DATE: August 14, 1997
By: /s/ GARY F. SEAMANS
__________________________
GARY F. SEAMANS
Chairman of the Board, President
and Chief Executive Officer
By: /s/ STEPHEN J. HAWRYSZ
____________________________
STEPHEN J. HAWRYSZ
Chief Financial Officer, Vice
President, Secretary and Treasurer