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 June 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 15,760,744 shares at July 31, 1998
Class B Common Stock, $0.01 Par Value 20,661,357 shares at July 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 June 30, 1998 (unaudited)
Condensed Consolidated Statements of Operations (unaudited) 4
- Three months ended June 30, 1997 and 1998
Condensed Consolidated Statements of Cash Flows (unaudited) 5
- Three months ended June 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 6. Exhibits and Reports on Form 8-K 12
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 ADSL
pricing, 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 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, 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 Ractors". 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, June 30,
1998 1998
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 43,515 $ 31,353
Short term investments . . . . . . . . . . . . . . . . . . . . . 684 895
Accounts receivable (net of allowance of $730,000 and $764,000,
respectively). . . . . . . . . . . . . . . . . . . . . . . . . . 12,399 13,496
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,428 9,516
Prepaid expenses and other current assets . . . . . . . . . . . . 100 96
Refundable income taxes . . . . . . . . . . . . . . . . . . . . . 110 80
Deferred income tax asset . . . . . . . . . . . . . . . . . . . . 2,498 2,316
Total current assets . . . . . . . . . . . . . . . . . . . . 68,734 57,752
Property and equipment:
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . 11,631 13,061
Office, computer and research equipment . . . . . . . . . . . . . 21,097 22,010
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . 1,576 1,921
34,304 36,992
Less accumulated depreciation and amortization . . . . . . . . . 20,816 22,302
Property and equipment, net . . . . . . . . . . . . . . . . . . 13,488 14,690
Deferred income tax asset and other assets . . . . . . . . . . . . 16,183 16,371
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 88,813 $ 98,405
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,472 $ 7,886
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 6,296 5,580
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . 5,664 3,270
Current portion of long-term debt . . . . . . . . . . . . . . . . 1,407 1,407
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . 414 413
Total current liabilities . . . . . . . . . . . . . . . . . . . 21,253 18,556
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 3,013 2,473
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . 998 1,046
Commitments and contingencies
Stockholders' equity:
Class A common stock, par $0.01 . . . . . . . . . . . . . . . . . . 154 157
Authorized - 43,500,000 shares
Issued and outstanding - 15,371,900 shares at March 31, 1998 and
15,715,744 shares at June 30, 1998
Class B common stock, par $0.01 . . . . . . . . . . . . . . . . . . 210 207
Authorized - 25,000,000 shares
Issued and outstanding - 21,030,857 shares at March 31, 1998 and
20,706,357 shares at June 30, 1998
Preferred stock, par $0.01 . . . . . . . . . . . . . . . . . . . . - -
Authorized - 1,000,000 shares
Issued and outstanding - none
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 97,254 97,426
Cumulative translation adjustment . . . . . . . . . . . . . . . . . (213) (156)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (24,264) (30,896)
Total stockholders' equity . . . . . . . . . . . . . . . . . 73,141 66,738
Total liabilities and stockholders' equity . . . . . . . . $ 98,405 $ 88,813
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,
1997 1998
(unaudited)
(in thousands, except per share data)
Equipment revenue . . . . . . . . . . . . . $ 16,336 $ 18,386
Service revenue . . . . . . . . . . . . . . 3,001 4,627
Total revenues . . . . . . . . . . . . . 19,337 23,013
Cost of equipment sales . . . . . . . . . . 11,367 13,608
Cost of services . . . . . . . . . . . . . 1,558 2,491
Cost of goods sold . . . . . . . . . . . 12,925 16,099
Gross margin . . . . . . . . . . . . . . 6,412 6,914
Operating expenses:
Sales and marketing . . . . . . . . . . . 5,419 4,768
Research and development . . . . . . . . 6,087 6,132
General and administrative . . . . . . . 2,947 2,991
Total operating expenses . . . . . . . 14,453 13,891
Operating loss . . . . . . . . . . . . . (8,041) (6,977)
Other income, net . . . . . . . . . . . . . 494 435
Interest expense . . . . . . . . . . . . . 63 89
Loss before tax benefit . . . . . . . . . . (7,610) (6,631)
Benefit for income taxes . . . . . . . . . (3,090) -
Net loss . . . . . . . . . . . . . . . . . $(4,520) $(6,631)
Net loss per basic and diluted common share $ (0.12) $ (0.18)
Average number of basic and diluted
common shares outstanding . . . . . . . 36,321 36,412
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,
1997 1998
(unaudited)
(in thousands)
Cash flows from operating activities:
Net loss $(4,520) $(6,631)
Reconciliation of net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,797 1,756
Stock awards 12 -
Deferred taxes (3,090) -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 1,999 (1,055)
Decrease (increase)in inventory 809 (70)
Decrease in prepaid expenses and deposits 621 4
Decrease in refundable income taxes - 30
(Decrease) in accounts payable and accrued expenses (1,412) (254)
(Decrease) in accrued compensation (1,009) (2,394)
(Decrease) in deferred revenues - (1)
Net cash used in operating activities . . . . . . . . . . .
(4,793) (8,615)
Cash flows from investing activities:
Purchases of property and equipment (1,354) (2,958)
Decrease in other assets - (7)
Decrease (increase) in short term investments . . . . . . . . 3,016 (211)
Land and building construction held for resale 6 -
Net cash provided by (used in) investing activities 1,668 (3,176)
Cash flows from financing activities:
Net borrowing under revolving promissory notes 550 -
Repayment of long-term debt and leases payable (502) (540)
Cash distributed to Meridian LLC partner (500) -
Proceeds from the issuance of common stock 80 172
Net cash used in financing activities (372) (368)
Effect of exchange rate changes on cash 13 (3)
Net decrease in cash (3,484) (12,162)
Cash and cash equivalents, beginning of period 28,437 43,515
Cash and cash equivalents, end of period $24,953 $31,353
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 June 30, 1998, and for
all periods presented. The results of operations for the three month period
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 1999.
NOTE 2. COMPUTAION 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 June 30, 1997, and 1998, and
therefore the net loss per basic and diluted earnings per share are the same.
NOTE 3. 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 month periods ended June 30, 1997 and 1998, are as follows:
Telecom Telecom
Equipment Services Total
Three months ended June 30, 1997
Revenues . . . . . . . . . . . . . . $16,336 $ 3,001 $ 19,337
Operating income (loss) . . . . . . . (8,760) 719 (8,041)
Depreciation and amortization . . . . 1,444 353 1,797
Total assets . . . . . . . . . . . . 94,938 5,723 100,661
Three months ended June 30, 1998
Revenues . . . . . . . . . . . . . 18,386 4,627 23,013
Operating income (loss) . . . . . (7,999) 1,021 (6,977)
Depreciation and amortization . . 1,301 455 1,756
Total assets . . . . . . . . . . . 78,789 10,024 88,813
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. EVENT SUBSEQUENT TO JUNE 30, 1998:
Commitments and Contingencies
Subsequent to the quarter ended June 30, 1998, the Company received an ADSL
order from an international customer priced below anticipated production costs.
The Company anticipates recognizing an estimated loss of $750,000 in the quarter
ended September 1998 relating to this order. 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.
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, 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 19.0% in the three
months ended June 30, 1998 when compared to the same period last year. The
equipment revenue increase was primarily a result of increased DSL and DS1 unit
shipments, offset in part by lower DSL and DS1 average unit selling prices. The
increase in equipment revenue was partially offset 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 increase in service revenue was a result of
increased teleconference call minutes.
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 fiscal 1999 quarters. 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. This has caused the Company to offer its ADSL products at prices
below current production costs (i.e., forward pricing of DSL products). For
instance, subsequent to June 30, 1998, the Company received an ADSL order from
an international customer priced below anticipated production costs. The Company
anticipates recognizing an estimated loss of $750,000 in the quarter ended
September 1998. 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 that could have an 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 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 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 - Period ended June 30, 1998 compared to period ended June
30, 1997
Revenues. The Company's revenues increased 19.0% from $19.3 million in the three
months ended June 30, 1997 to $23.0 million in the three months ended June 30,
1998. This revenue increase was primarily due to increased DSL revenue of $1.9
million, increased DS1 revenue of $371,000 and increased teleconference service
revenue from the Company's Conference Plus, Inc. subsidiary of $1.6 million when
compared with the same period of the prior year. The increased DSL revenue was
due to overall unit volume increases offset in part by lower average system sale
prices resulting from product integration efforts and aggressively marketing
ADSL systems to maintain market share. 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 $358,000
decrease in DS0 revenue in the three months ended June 30, 1998 when compared
with the same period of the prior year. The decrease in DS0 revenue was due to
lower unit shipments and lower average unit sale prices as a result of changes
in product mix and continued competitive pricing pressures.
Gross Margin. Gross margin as a percentage of revenue decreased from 33.2% in
the three months ended June 30, 1997 to 30.0% in the three months ended June 30,
1998. This decrease in gross profit margin was primarily due to continued
pricing pressures and product mix changes for the DS0 and DS1 products as well
as aggressive pricing of the DSL trial systems to capture and stimulate early
market activity prior to volume orders and further product cost integration. The
gross margin decreases were offset in part by the margins on increased
teleconference service revenue from the Company's Conference Plus, Inc.
subsidiary.
Sales and Marketing. Sales and marketing expenses decreased 12.0%, from $5.4
million in the three months ended June 30, 1997 to $4.8 million in the three
months ended June 30, 1998. Sales and marketing expenses decreased as a
percentage of revenues from 28.0% in the three months ended June 30, 1997 to
20.7% in the three months ended June 30, 1998. This decrease in sales and
marketing expenses during was primarily due to cost reductions resulting from
management's initiatives undertaken late last fiscal year to streamline DSL
sales and marketing. 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.
Research and Development. Research and development expenses increased 0.7%, or
$44,000, to $6.1 million in the three months ended June 30, 1998. Research and
development expenses decreased as a percentage of revenues from 31.5% in the
three months ended June 30, 1997 to 26.6% in the three months ended June 30,
1998. Research and development expenses are relatively flat from the same
quarter last year as a result of the Company focusing it's 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 1.5%,
from $2.9 million in the three months ended June 30, 1997 to $3.0 million in the
three months ended June 30, 1998. General and administrative expenses decreased
as a percentage of revenues from 15.2% in the three months ended June 30, 1997
to 13.0% in the three months ended June 30, 1998. The general and administrative
expenses were relatively unchanged from the same quarter last year as a result
of management's 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 $494,000 in the three months
ended June 30, 1997 to $435,000 in the three months ended June 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 $63,000 in the three months
ended June 30, 1997 to $89,000 in the three months ended June 30, 1998. Interest
expense during the current period is a result of interest incurred on net
obligations outstanding during the period under promissory notes and equipment
borrowings.
Benefit for income taxes. Benefit for income taxes decreased from $3.1 million
in the three months ended June 30, 1997 to $0 for the three months ended June
30, 1998. As in the fourth quarter of fiscal 1997, the Company provided a
valuation reserve for the entire benefit generated during the current quarter of
$2.7 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 it's 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
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, 1998, the
Company had $32.2 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 $8.6 million in
the three months ended June 30, 1998, which resulted primarily from a loss from
continuing operations before income taxes of $4.9 million (net of depreciation),
increases in accounts receivable and inventory and decreases in accounts
payable, accrued expenses and accrued compensation.
Capital expenditures for the three month period ended June 30, 1998 were $3.0
million, all of which was funded by available cash. The Company expects to spend
approximately $3.5 million for the remainder of fiscal year 1999 related to
capital equipment expenditures.
At June 30, 1998, the Company's principle sources of liquidity were $32.2
million of cash and short term investments. The Company is finalizing a
commitment for obtaining a secured revolving promissory note and equipment
facilities that replace those that expired on May 15, 1998 and December 15,
1997, respectively. These credit facilities would increase the Company's
sources of liquidity by up to $20 million based upon receivables, inventory and
equipment levels. The Company anticipates that these facilities will be in
place by the end of August 1998. 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 $3.6 million in income tax credit
carryforwards and a tax benefit of $18.2 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 $5.6 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 portions of its
software so that its computer systems will properly utilize dates beyond
December 31, 1999. The Company believes that with upgrades or modifications to
existing software and conversion to new software, the impact of the Year 2000
Issue can be mitigated. However, if the upgrades, modifications and conversions
are not made, or are not made in a timely manner, the Year 2000 Issue could have
a material impact on the Company's operations.
The Company will utilize both internal and external resources to reprogram,
or replace, and test software for Year 2000 compliance. The Company has a full-
time manager dedicated to addressing Year 2000 compliance for the Company. The
Company plans to complete the Year 2000 project not later than June 30, 1999.
The total Year 2000 project cost is estimated to be between $1 million and $1.5
million. Amounts incurred are expected to be expensed as incurred, unless new
software is purchased which will be capitalized. The Company has not incurred
significant costs prior to June 30, 1998 other than internal costs to evaluate
the extent of Year 2000 compliance and to develop a remediation plan. The costs
of the Year 2000 project and the date on which the Company plans to complete
Year 2000 modifications 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 those plans.
The Company has undertaken a project to assess vendor year 2000 compliance
and the affect this may have on the Company's operations. Due to commonality of
component material, the Company believes it will have sufficient time to
mitigate vendor risk identified in this process. There can be no assurance the
Company will identify its customer and vendor year 2000 compliance or that the
Company will be able to successfully remedy any problems that are discovered.
PART II. OTHER INFORMATION
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
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, 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