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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________ Commission File Number 0-27266 ------- WESTELL TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-3154957 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 750 N. COMMONS DRIVE, AURORA, IL 60504 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (630) 898-2500 NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check or mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Common Stock, $0.01 Par Value - 17,489,521 shares at October 31, 1999 Class B Common Stock, $0.01 Par Value - 19,124,869 shares at October 31, 1999 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, 1999 and September 30, 1999 (unaudited) Condensed Consolidated Statements of Operations (unaudited) 4 - Three months ended September 30, 1998 and 1999 - Six months ended September 30, 1998 and 1999 Condensed Consolidated Statements of Cash Flows (unaudited) 5 - Six months ended September 30, 1998 and 1999 Notes to the Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative disclosures about market risks PART II OTHER INFORMATION Item 4. Submission of matters to vote of security holders 14 Item 5. Other events 16 Item 6. Exhibits and Reports on Form 8-K 16 SAFE HARBOR STATEMENT Certain statements contained under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this 10-Q, which are not historical facts (including, without limitation, statements about future DSL pricing, our expected cost savings, our confidence and strategies and our expectations about new and existing products, our ability to meet our cash requirements for the next twelve months, technologies, opportunities, market growth, demand and acceptance of new and existing products and future commercial deployment of the Company's products such as its DSL systems) are forward looking statements that involve risks and uncertainties. These risks include, but are not limited to, product demand and market acceptance risks (including the future commercial acceptance of the Company's DSL systems by telephone companies and other customers), the impact of competitive products and technologies (such as cable modems and fiber optic cable), competitive pricing pressures, product development, excess and obsolete inventory due to new product development, commercialization and technological delays or difficulties (including delays or difficulties in developing, producing, testing and selling new products and technologies), the effect of the Company's accounting policies, the effect of economic conditions and trade, legal, social, and economic risks (such as import, licensing and trade restrictions) and other risks more fully described in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999 under the section "Risk Factors". The Company undertakes no obligation to release publicly the result of any revisions to these forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS March 31, September 30, 1999 1999 ---------------- --------------- (unaudited) (in thousands) Current assets: Cash and cash equivalents.............................................. $ 6,715 $ 13,605 Short term investments................................................. - - Accounts receivable (net of allowance of $703,000 and $759,000, 14,132 17,952 respectively).......................................................... Inventories............................................................ 10,376 11,453 Prepaid expenses and other current assets.............................. 1,108 641 Refundable income taxes................................................ 60 55 Deferred income tax asset.............................................. 1,000 1,000 ---------------- --------------- Total current assets............................................... 33,391 44,706 ---------------- --------------- Property and equipment: Machinery and equipment................................................ 18,561 19,183 Office, computer and research equipment................................ 18,230 18,296 Leasehold improvements................................................. 2,091 2,153 ---------------- --------------- 38,882 39,632 Less accumulated depreciation and amortization......................... 25,531 27,978 ---------------- --------------- Property and equipment, net........................................... 13,351 11,654 ---------------- --------------- Deferred income tax asset and other assets............................... 17,665 18,995 --------------- ================ Total assets....................................................... $ 64,407 $ 75,355 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable....................................................... $ 7,616 $ 5,456 Accrued expenses....................................................... 6,655 6,327 Accrued compensation................................................... 4,305 4,000 Current portion of long-term debt...................................... 2,189 1,627 Deferred revenue....................................................... 413 413 ---------------- --------------- Total current liabilities............................................. 21,178 17,823 ---------------- --------------- Long-term debt........................................................... 2,625 1,958 ---------------- --------------- Other long-term liabilities.............................................. 1,480 1,709 ---------------- --------------- ---------------- --------------- Commitments and contingencies Convertible debt (net of debt discount of $1,000,000 as of September 30, - 19,000 1999).................................................................... Stockholders' equity: Class A common stock, par $0.01.......................................... 169 175 Authorized - 43,500,000 shares Issued and outstanding - 16,928,650 shares at March 31, 1999 and 17,489,521 shares at September 30, 1999 Class B common stock, par $0.01.......................................... 195 191 Authorized - 25,000,000 shares Issued and outstanding - 19,527,569 shares at March 31, 1999 and 19,124,869 shares at September 30, 1999 Preferred stock, par $0.01............................................... - - Authorized - 1,000,000 shares Issued and outstanding - none Additional paid-in capital............................................... 97,561 99,543 Cumulative translation adjustment........................................ 455 703 Accumulated deficit...................................................... (59,256) (65,747) ---------------- --------------- Total stockholders' equity......................................... 39,124 34,865 ================ =============== Total liabilities and stockholders' equity....................... $ 64,407 $ 75,355 ================ =============== 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, ---------------------------- ---------------------------- 1998 1999 1998 1999 ------------ ------------ ------------ ------------ (unaudited) (in thousands, except per share data) Equipment sales............................... $ 17,942 $ 17,326 $ 36,328 $ 34,514 Services...................................... 4,718 7,678 9,345 14,649 ------------ ------------ ------------ ------------ Total revenues.............................. 22,660 25,004 45,673 49,163 Cost of equipment sales....................... 15,210 14,358 28,818 26,246 Cost of services.............................. 2,852 5,021 5,343 9,786 ------------ ------------ ------------ ------------ Total cost of goods sold.................... 18,062 19,379 34,161 36,032 ------------ ------------ ------------ ------------ Gross margin............................... 4,598 5,625 11,512 13,131 Operating expenses: Sales and marketing......................... 5,261 3,414 10,030 7,112 Research and development.................... 6,578 1,619 12,708 5,216 General and administrative.................. 3,282 3,377 6,273 6,617 ------------ ------------ ------------ ------------ Total operating expenses.................. 15,121 8,410 29,011 18,945 ------------ ------------ ------------ ------------ Operating loss................................ (10,523) (2,785) (17,499) (5,814) Other (income) expense, net................... (348) (74) (783) (51) Interest expense.............................. 66 348 156 728 ------------ ------------ ------------ ------------ Loss before taxes............................. (10,241) (3,059) (16,872) (6,491) Benefit for income taxes...................... -- -- -- -- ------------ ------------ ------------ ------------ Net loss...................................... $ (10,241) $ (3,059) $ (16,872) $ (6,491) ============ ============ ============ ============ Net loss per basic and diluted common share... $ (0.28) $ (0.08) $ (0.46) $ (0.18) ============ ============ ============ ============ Average number of basic and diluted common shares outstanding................... 36,422 36,570 36,417 36,519 ============ ============ ============ ============ 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, ---------------------------------------- 1998 1999 ----------------- ---------------- (unaudited) (in thousands) Cash flows from operating activities: Net loss........................................................... $ (16,872) $ (6,491) Reconciliation of net income to net cash provided by (used in) operating activities: Depreciation and amortization.................................... 3,670 3,562 Stock awards..................................................... -- -- Deferred taxes................................................... -- -- Changes in assets and liabilities: Increase in accounts receivable.................................. (1,082) (3,783) Decrease (increase) in inventory................................. 936 (854) (Increase) decrease in prepaid expenses and deposits............. (385) 466 Decrease in refundable income taxes.............................. 9 5 Increase (decrease) in accounts payable and accrued expenses..... 1,079 (2,258) Decrease in accrued compensation................................. (1,232) (305) Decrease in deferred revenues.................................... (1) -- ----------------- ---------------- Net cash used in operating activities......................... (13,878) (9,658) ----------------- ---------------- Cash flows from investing activities: Purchases of property and equipment.............................. (4,344) (2,151) Proceeds from sale of equipment.................................. -- 431 Increase in other assets......................................... (13) (1,474) Increase in short term investments............................... (3,366) - Land and building construction held for resale................... -- - ----------------- ---------------- Net cash used in investing activities......................... (7,723) (3,194) ----------------- ---------------- Cash flows from financing activities: Repayment of long-term debt and leases payable................... (837) (1,229) Proceeds from issuance of convertible debt....................... -- 19,000 Proceeds from the issuance of common stock....................... 215 1,983 ----------------- ---------------- Net cash (used in) provided by financing activities........... (622) 19,754 ----------------- ---------------- Effect of exchange rate changes on cash............................ 11 (12) Net (decrease) increase in cash............................... (22,212) 6,890 Cash and cash equivalents, beginning of period..................... 43,515 6,715 ================= ================ Cash and cash equivalents, end of period........................... $ 21,303 $ 13,605 ================= ================ 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, 1999. In the opinion of management, the unaudited interim financial statements included herein reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company's consolidated financial position and the results of operations and cash flows at September 30, 1999, and for all periods presented. The results of operations for the three and six month periods ended September 30, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2000. Effective April 1, 1999, in an effort to associate the transfer of title of forward priced DSL product to the customer with the recognition of the loss, the Company began recording losses due to forward pricing upon shipment to the customer. Prior to March 31, 1999, the Company recorded losses due to forward pricing of DSL products based upon orders received. As of April 1, 1999, the Company did not record any cumulative effect of this change in accounting method, as the effects were immaterial. NOTE 2. COMPUTATION OF NET LOSS PER SHARE The Company follows the provisions of SFAS No. 128, which requires companies to present basic and diluted earnings per share. The computation of basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The effect of this computation on the number of outstanding shares is antidilutive for the periods ended September 30, 1998, and 1999, and therefore the net loss per basic and diluted earnings per share are the same. NOTE 3. RESTRUCTURING CHARGE The Company recognized a restructuring charge of $1.4 million in the three months ended December 31, 1997 and $800,000 in the three months ended March 31, 1999. These charges included personnel, facility, and certain development contract costs related to restructuring global operations. As of September 30, 1999, the Company has paid approximately $1.2 million of the restructuring costs charged in fiscal 1998 and $832,000 related to the restructuring costs charged in fiscal 1999. During the three months ending December 31, 1999, management anticipates making final restructuring cost payments of approximately $70,000. At that time, management estimates that the total remaining restructuring charge accrual balance will be approximately $100,000. This amount will be reversed into income during the three months ending December 31, 1999, since the final payments will be known and completed. The fiscal 1998 restructuring plan was to decrease costs and streamline operations related to DSL products. The fiscal 1999 restructuring plan was to further decrease costs, primarily by reducing the workforce by approximately 11%, and focus DSL sales efforts on indirect sales to the major phone companies through licensing and OEM arrangements with strategic partners. The Company anticipates the remaining expenditures related to this restructuring reserve to occur by March 31, 2000. The Company expects cost savings of approximately $5.0 million in fiscal 2000 related to this restructuring. WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The restructuring charges and their utilization are summarized as follows: Charge Utilized Balance Charge Utilized Balance Utilized Balance fiscal fiscal March 31, fiscal fiscal March 31, fiscal Sept. 30, (in thousands) 1998 1998 1998 1999 1999 1999 2000 1999 - --------------------------------------------------------------------------------------------------------------- Employee costs........... $ 561 $ 287 $ 274 $ 690 $ 363 $ 601 $ 547 $ 54 Contract costs........... 736 647 89 -- -- 89 -- 89 Legal & other costs...... 86 23 63 110 17 156 123 33 - --------------------------------------------------------------------------------------------------------------- Total.................... $ 1,383 $ 957 $ 426 $ 800 $ 380 $ 846 $ 670 $ 176 ===============================================================================================================
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, 1998 and 1999, are as follows: Telecom Telecom Equipment Services Total --------- -------- ----- 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 Three months ended September 30, 1999 Revenues.......................... $17,326 $ 7,678 $ 25,004 Operating income (loss)........... (3,912) 1,127 (2,785) Depreciation and amortization..... 1,139 564 1,703 Total assets...................... 59,823 15,532 75,355 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 Six months ended September 30, 1999 Revenues.......................... 34,514 14,649 49,163 Operating income (loss)........... (7,596) 1,782 (5,814) Depreciation and amortization..... 2,469 1,093 3,562 Total assets...................... 59,823 15,532 75,355
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Reconciliation of Operating loss from continuing operations for the reportable segments to Loss from continuing operations before income taxes: Three months ended Six months ended September 30, September 30, 1998 1999 1998 1999 ---------- ---------- ---------- ------- Operating loss ........................................ $ (10,523) $ (2,785) $ (17,499) $ (5,814) Other (income) expense, net............................ (348) (74) (783) (51) Interest expense....................................... 66 348 156 728 -------- --------- --------- ------- Loss before income taxes............................... $ (10,241) $ (3,059) $ (16,872) $ (6,491) ======== ======= ======== =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATION - ------------ OVERVIEW Westell Technologies, Inc. ("Westell" or the "Company") derives most of its equipment revenue from the sale of telecommunications equipment that enable telecommunications services over copper telephone wires. The Company offers a broad range of products that facilitate the transmission of high-speed digital and analog data between a telephone company's central office and end-user customers. The Company's service revenues are derived from audio, multi port video and multi media teleconferencing services from the Company's Conference Plus, Inc. subsidiary. The Company has historically used the following three product categories in its discussion of equipment revenue: o DSL PRODUCTS: products based on DSL technologies; o T-1 OR DS1 PRODUCTS: products used by telephone companies to enable digital T-1 transmission at approximately 1.5 megabits per second and E-1 transmission at approximately 2.0 megabits per second; and o TRADITIONAL OR DS0 PRODUCTS: products used by telephone companies to deliver digital services at speeds ranging from approximately 2.4 to 64 kilobits per second and traditional analog services with 4 kilohertz bandwidth. Below is a table that compares equipment revenue for the three and six month periods ended September 30, 1998 with the three and six-month periods ended September 30, 1999 by product type: Three months ended: Six months ended: ----------------------------------- ------------------------------------- September 30, September 30, September 30, September 30, (in thousands) 1998 1999 1998 1999 ----------------- ------------------------------------ ----------------- DSL products.................... $ 2,936 $ 3,267 $ 6,332 $ 5,255 T-1 or DS1 products............. 13,448 12,475 26,739 26,174 Traditional or DS0 products..... 816 873 1,827 1,563 Other equipment................. 742 711 1,430 1,522 ================= ================ ================== ================= Total equipment................. 17,942 $ 17,326 $ 36,328 $ 34,514 ================= ================ ================== =================
To better reflect the current business model, beginning for the quarter ended June 30, 1999, Westell has decided to use the following new products groupings in its discussion of its equipment revenue: o HIGH CAPACITY ("HiCAP"): Products that maintain, repair and monitor circuits used over copper telephone wires in the portion of the phone companies' network connecting the central office with the customers' locations (the "Local Loop"). Products include all of Westell's traditional or DS0 products such as its analog products and a portion of Westell's T-1 or DS1 products which include Network Interface Unit ("NIU") products. o TRANSPORT SYSTEMS: Products that contain components that are located both in the phone companies' central offices and customers' locations, creating integrated systems. Products include Westell's DSL product called Supervision, a system comprised of modems and central office shelves and electronics that enable high-speed transmission over copper telephone lines. The Transport Systems business unit also provides SmartLink(TM), a back-up system for wireless or cellular providers, and LinkReach(TM), a joint effort with Lucent to enable high-speed transmission over certain Lucent products. o CUSTOMER PREMISE EQUIPMENT ("CPE"): Products that provide high-speed DSL modems that are located at the customers' premises. These products include Westell's WireSpeed(TM) modems that are designed to hook up to single or multiple personal computers and to provide high-speed access. Below is a table that compares equipment and service revenues for the three and six month periods ended September 30, 1998 with the three and six month periods ended September 30, 1999 by new product groupings: Three months ended: Six months ended: ----------------------------------- ------------------------------------- September 30, September 30, September 30, September 30, (in thousands) 1998 1999 1998 1999 ----------------- ------------------------------------ ----------------- HiCAP........................... $ 14,399 $ 12,680 $ 28,943 $ 26,504 Transport Systems............... 2,343 2,636 4,997 4,825 CPE............................. 1,200 2,010 2,388 3,185 ----------------- ---------------- ------------------ ----------------- Total equipment................. 17,942 17,326 36,328 34,514 ----------------- ---------------- ------------------ ----------------- Services........................ 4,718 7,678 9,345 14,649 ================= ================ ================== ================= Total revenues.................. $ 22,660 $ 25,004 $ 45,673 $ 49,163 ================= ================ ================== =================
Westell's net revenues increased 10.3% in the three months ended September 30, 1999 when compared to the same period last year due to a 62.7% increase in services revenue and increases in equipment revenue of 67.5% and 12.5% from the CPE and Transport Systems business units, respectively. These increases were partially offset by an 11.9% decrease in revenue from the HiCAP business unit. The Company's net revenues increased 7.6% in the six months ended September 30, 1999 when compared to the same period last year due to a 56.8% increase in services revenue and a 33.4% increase in equipment revenue from the CPE business unit. These increases were partially offset by decreases of 8.4% and 3.4% from the HiCAP and Transport Systems business units, respectively. The Company expects to continue to evaluate new product opportunities and engage in extensive research and development activities. This will require the Company to continue to invest heavily in research and development and sales and marketing, which could adversely affect short-term results of operations. Due to the Company's significant ongoing investment in DSL technology, the Company anticipates losses in at least each of the remaining fiscal 2000 quarters. The Company believes that its future revenue growth and profitability will principally depend on its success in increasing sales of DSL products and developing new and enhanced T-1 and other DSL products. The market for DSL products continues to be increasingly competitive. This has caused the Company to offer its DSL products at prices below current production costs (i.e., forward pricing of DSL products). Prior to March 31, 1999, the Company recorded losses due to forward pricing of DSL products based upon orders received. Subsequent to March 31, 1999, in an effort to associate the transfer of title of the DSL product to the customer with the recognition of the loss, the Company began recording losses due to forward pricing on DSL products upon shipment to the customer. As of April 1, 1999, the Company did not record any cumulative effect of this change in accounting method, as the effects were immaterial. During July 1999, the Company received DSL orders from an international and a domestic customer priced below anticipated production costs. The Company recognized a loss with respect to these forward priced orders of $855,000 in the quarter ended September 30, 1999 and anticipates recognizing an estimated loss with respect to these orders of $300,000 in the quarter ended December 31, 1999. Management believes that manufacturing costs will decrease when (i) more cost-effective chipsets are available, (ii) product design efficiencies are obtained, and (iii) economies of scale are obtained related to increased volume. The Company could continue to record losses on DSL product sales prior to achieving cost-effective chipsets, product design efficiencies and economies related to volume production that would have a material adverse effect on the Company's business and results of operations. In the current fiscal year, the majority of the DSL revenue has been generated by shipments of DSL systems used in trials for data applications (i.e., Internet access and work at home) due to the growth in users accessing the World Wide Web through the Internet and the need to increase transmission speed when accessing local area networks and downloading large text graphics and video files. In view of the Company's reliance on the emerging DSL market for growth and the unpredictability of orders and subsequent revenues, the Company believes that period to period comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. Revenues from the Company's analog products (traditional or DSO products) have declined in recent years as telephone companies continue to move from analog to digital transmission services. The Company also expects that revenues from Network Interface Unit ("NIU") products (a T-1/DS1 product) in its new HiCAP product group may decline as telephone companies increase the use of alternative technologies such as HDSL. Failure to increase revenues from new products, whether due to lack of market acceptance, competition, pricing pressures, technological change or otherwise, would have a material adverse effect on the Company's business and results of operations. RESULTS OF OPERATIONS - Periods ended September 30, 1999 compared to periods ended September 30, 1998 Revenues. The Company's revenues increased 10.3% from $22.7 million in the three months ended September 30, 1998 to $25.0 million in the three months ended September 30, 1999. The revenue increase in the three month period was primarily due to increased service revenue from the Company's Conference Plus, Inc. subsidiary of $3.0 million when compared with the same period of the prior year. Equipment revenue from the Company's CPE and Transport systems business units increased by $810,000 and $293,0000, respectively, when compared with the same three month period of the prior year. The increased teleconference service revenue reflects an increase in call minutes at the Company's Conference Plus, Inc. subsidiary. The increased CPE and Transport Systems equipment revenue was due to overall unit volume increases offset in part by lower average system sale prices resulting primarily from changes in product mix. These increases were off set in part by a decrease of $1.7 million from the HiCAP business unit. The decrease in HiCAP revenue was due primarily to lower unit shipments of DS1 products as local service providers transition to high speed digital based products for providing service. The Company's revenues increased 7.6% from $45.7 million in the six months ended September 30, 1998 to $49.2 million in the six months ended September 30, 1999. The revenue increase in the six month period was primarily due to increased service revenue from the Company's Conference Plus, Inc. subsidiary of $5.3 million when compared with the same period of the prior year. Equipment revenue from the Company's CPE business unit increased by $797,000 and when compared with the same six month period of the prior year. The increased teleconference service revenue reflects an increase in call minutes at the Company's Conference Plus, Inc. subsidiary. The increased CPE equipment revenue was due to overall unit volume increases offset in part by lower average system sale prices resulting primarily from changes in product mix. These increases were off set in part by a decrease of $2.4 million from the HiCAP business unit. The decrease in HiCAP revenue was due primarily to lower unit shipments of DS1 products as local service providers transition to high speed digital based products for providing service. Gross Margin. Gross margin as a percentage of revenue increased from 20.3% in the three months ended September 30, 1998 to 22.5% in the three months ended September 30, 1999 and increased from 25.2% in the six months ended September 30, 1998 to 26.7% in the six months ended September 30, 1999. Gross profit margin for the period ended September 30, 1998 was effected by recording $1.7 million loss due to forward pricing on DSL orders received during the September 1998 quarter. Gross profit margin for the periods ended September 30, 1999 was effected by a $855,000 loss due to forward pricing on DSL shipments during the September 1999 quarter. To a lesser extent continued pricing pressures and product mix changes for the DS0 and DS1 products also contributed downward pressure on gross profit margin. During the quarter, the Company's Conference Plus, Inc. subsidiary invested in additional infrastructure enhancements to handle increased call minutes which also impacted gross margins. Sales and Marketing. Sales and marketing expenses decreased 35.1%, or $1.8 million, to $3.4 million in the three months ended September 30, 1999 and decreased 29.1%, or $2.9 million, to $7.1 million in the six months ended September 30, 1999 when compared to the same period last year. Sales and marketing expenses decreased as a percentage of revenues from 23.2% in the three months ended September 30, 1998 to 13.7% in the three months ended September 30, 1999 and decreased as a percentage of revenues from 22.0% in the six months ended September 30, 1998 to 14.5% in the six months ended September 30, 1999. The decrease in sales and marketing expenses during the three and six month periods was primarily due to cost reductions resulting from management's initiatives undertaken late last fiscal year to streamline DSL sales and marketing efforts. The Company believes that continued investment in sales and marketing will be required to expand its product lines, bring new products to market and service customers. RESULTS OF OPERATIONS - continued Research and Development. Research and development expenses decreased 75.4%, or $5.0 million, to $1.6 million in the three months ended September 30, 1999 and decreased 59.0%, or $7.5 million, to $5.2 million in the six months ended September 30, 1999 when compared to the same period last year. Research and development expenses decreased as a percentage of revenues from 29.0% in the three months ended September 30, 1998 to 6.5% in the three months ended September 30, 1999 and decreased as a percentage of revenues from 27.8% in the six months ended September 30, 1998 to 10.6% in the six months ended September 30, 1999. This decrease in research and development expenses was primarily due to the Company receiving $2.4 million and $3.1 million during the three and six month periods ended September 30, 1999, respectively, from customers to fund on-going engineering projects, which was offset against research and development expenses. Additional cost savings in the current fiscal year are due to cost reductions resulting from management's restructuring initiatives undertaken late last fiscal year. Additionally, cost savings have resulted from the absence of costs related to the Company's European operation, Westell Europe Limited, which was eliminated earlier in the current fiscal year. The Company believes that a continued commitment to research and development will be required for the Company to remain competitive. General and Administrative. General and administrative expenses increased 2.9%, from $3.3 million in the three months ended September 30, 1998 to $3.4 million in the three months ended September 30, 1999 and increased 5.5%, from $6.3 million in the six months ended September 30, 1998 to $6.6 million in the six months ended September 30, 1999. General and administrative expenses decreased as a percentage of revenues from 14.5% in the three months ended September 30, 1998 to 13.5% in the three months ended September 30, 1999 and decreased as a percentage of revenues from 13.7% in the six months ended September 30, 1998 to 13.5% in the six months ended September 30, 1999. The general and administrative expense increase was primarily due to information systems enhancements during the three and six month periods, partially offset by the results from management initiatives and restructuring that took place in the March 1999 quarter to streamline administrative functions both domestically and internationally. Other (income) expense, net. Other (income) expense, net decreased from $348,000 in the three months ended September 30, 1998 to $74,000 in the three months ended September 30, 1999 and decreased from $783,000 in the six months ended September 30, 1998 to $51,000 in the six months ended September 30, 1999. Other income is primarily comprised of interest income earned on temporary cash investments, the elimination of minority interest and unrealized gains of losses on intercompany balances denominated in foreign currency. Interest expense. Interest expense increased from $66,000 in the three months ended September 30, 1998 to $348,000 in the three months ended September 30, 1999 and increased from $156,000 in the six months ended September 30, 1998 to $728,000 in the six months ended September 30, 1999. Interest expense during the current period is a result of interest incurred on the Company's subordinated secured convertible debentures, Warrants to purchase Class A Common Stock and net obligations outstanding during the period under promissory notes and equipment borrowings. Benefit for income taxes. There was no Benefit for income taxes recorded for both three and six month periods ended September 30, 1998 and 1999. As in each quarter of fiscal 1999, the Company provided valuation reserves for the entire benefit generated during the three and six month periods of $1.4 million and $2.7 million, respectively, since the resulting gross deferred tax asset would have exceeded the value of tax planning strategies available to the Company. The Company will evaluate on a quarterly basis 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 As of September 30, 1999, the Company had $13.6 million in cash and short-term investments which is being invested in short term investments consisting of the highest rated grade corporate commercial paper. The Company's operating activities used cash of approximately $9.7 million in the six months ended September 30, 1999, which resulted primarily from a loss from continuing operations before income taxes of $2.9 million (net of RESULTS OF OPERATIONS - continued depreciation), increases in accounts receivable and inventory and decreases in accrued compensation, accounts payable and accrued expenses offset partially by a decrease in prepaid expenses. Capital expenditures for the six month period ended September 30, 1999 were $2.2 million, all of which was funded by available cash. The Company expects to spend approximately $3.8 million for the remainder of fiscal year 2000 related to capital equipment expenditures. At September 30, 1999, the Company's principle sources of liquidity were $13.6 million of cash and cash equivalents and a secured credit facility that the Company may borrow up to $16.0 million based upon receivables and inventory levels and up to an additional $4.1 million under a secured equipment line of credit. Cash and cash equivalents, anticipated funds from operations, along with available credit lines and other resources, are expected to be sufficient to meet cash requirements for the next twelve months. Cash in excess of operating requirements will continue to be invested on a short term basis in federal government agency instruments and the highest rated grade commercial paper. The Company has committed to binding purchase orders for ADSL products from customers priced below anticipated production costs. The Company expects to ship these products during the third quarter of fiscal 2000. The anticipated loss on these forward priced orders is $400,000. Approximately $100,000 of these losses impacted liquidity during the second quarter of fiscal 2000 for the materials and the manufactured products that were in inventory at September 30, 1999. The Company could continue to record losses on DSL product sales if management enters into similar sales arrangements prior to achieving manufacturing cost reductions of DSL products through (i) obtaining more cost effective DSL chipsets, (ii) product design efficiencies and (iii) economies related to volume production. The Company can not estimate the amounts of possible future forward priced orders or their subsequent effect on liquidity. The Company has approximately $4.6 million in income tax credit carryforwards and a tax benefit of $29.8 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, 1998, and 1999 fiscal years, management believes that it is more likely than not that it will generate taxable income sufficient to realize the recorded tax benefit associated with future temporary differences, NOL carryforwards and tax credit carryforwards prior to their expiration through a tax planning strategy available to the Company. Management has determined that the strategy is not sufficient to realize all of the deferred tax assets available to the Company and as such, has recorded a valuation allowance of $17.9 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 The Company determined that portions of its software systems needed to be modified and/or replaced so to properly utilize dates beyond December 31, 1999 (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 will be mitigated. The implementation of the plan to remediate the Company's Information Technology ("IT") systems, which included efforts to mitigate the impact that the year 2000 will have on the Company, was substantially completed as of March 31, 1999 (the "Project"). The Project included upgrading system software, hardware and processes that are not exclusively related to year 2000 compliance. The Project utilized both internal and external resources. The Company has a full-time manager dedicated to the Project as well as addressing other year 2000 compliance RESULTS OF OPERATIONS - continued issues. The Project cost for the Company is estimated to be $1.8 million. These costs are expensed as incurred, except for approximately $800,000 that was capitalized unrelated to year 2000 compliance. The Company had expensed approximately $300,000 related this Project, as of March 31, 1999 with the remaining $700,000 to be expensed over the next two years as operating lease payments come due. The upgrading of system software, hardware and processes was essentially completed as of March 31, 1999, as planned and within previous cost estimates. The Company has assessed 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 assessment that substantially all products produced by the Company, and systems used by the Company to manufacture products, are year 2000 compliant. The Company is continuing to question customers and vendors to determine whether their systems and products are year 2000 compliant. The Company has received sufficient information from a majority of its customers and vendors that year 2000 compliance of customers or vendors will not materially impact the Company's operations. The Company has completed its testing of year 2000 compliance of the engineering systems and tools. The engineering systems and tools utilized by the Company that are integral to product development schedules are upgraded annually through license renewals. The current upgrades of the engineering support systems and automated engineering tools are year 2000 compliant. Management believes that year 2000 compliance will not have a significant impact on the Company's development schedules. The Company's human resource database and the payroll processing systems have been evaluated for year 2000 compliance and were upgraded in order to be year 2000 compliant. 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. The Company has developed a contingency plan for all areas including those that have been determined to be year 2000 compliant to address the effects that the year 2000 may have on its operations. Management believes that its actions, evaluations and processes should provide sufficient time to address the year 2000 risks as they are revealed. Risks related to customer year 2000 noncompliance are not within the Company's control, however, and therefore, the noncompliance of customer systems may materially adversely impact the Company's operations. Year 2000 compliance of the Company's vendors is also not within the control of the Company. However, the Company believes that it will have sufficient time to mitigate vendor year 2000 noncompliance and replace such vendors with vendors that are year 2000 compliant due to the general availability of electrical component material contained in the Company's products. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. - --------------------------------------------------------------------- Westell is subject to certain market risks, including foreign currency and interest rates. The Company has foreign subsidiaries in Canada and Ireland that develop and sell products and services in those respective countries. The Company is exposed to potential gains and losses from foreign currency fluctuation affecting net investments and earnings denominated in foreign currencies. After the sale of Westell's European subsidiary in June 1999, the Company's future primary exposure is to changes in exchange rates for the U.S. Dollar versus the Canadian dollar and the Irish pound. RESULTS OF OPERATIONS - continued In the 1999 fiscal year, the net change in the cumulative foreign currency translation adjustments account, which is a component of stockholders' equity, was an unrealized gain of $455,000. The Company also recorded a transaction gain of $284,000 for fiscal 1998 and a transaction loss of $729,000 for fiscal 1999 in Other income (expense) for fluctuations on foreign currency rates on intercompany accounts anticipated by management to be settled in the foreseeable future. As of September 30, 1999, the net change in the cumulative foreign currency translation adjustments account, which is a component of stockholders' equity, was an unrealized gain of $703,000. The Company also recorded a transaction loss of $24,000 for the quarter ended September 30, 1999 in Other income (expense) for fluctuations on foreign currency rates on intercompany accounts anticipated by management to be settled in the foreseeable future. The Company does not have significant exposure to interest rate risk related to its debt obligations, primarily U.S. Dollar denominated. The Company's market risk is the potential loss arising from adverse changes in interest rates. As further described in Note 2 of the Company's 10-k for the period ended March 31, 1999, the Company's debt consists primarily of a floating-rate bank line-of credit. Market risk is estimated as the potential decrease in pretax earnings resulting from a hypothetical increase in interest rates of 10% (i.e. from approximately 8% to approximately 18%) average interest rate on the Company's debt. If such an increase occurred, the Company would incur approximately $450,000 per annum in additional interest expense based on the average debt borrowed during the twelve months ended March 31, 1999. The Company does not feel such additional expense is significant. The Company does not currently use any derivative financial instruments relating to the risk associated with changes in interest rates. PART II. OTHER INFORMATION - -------------------------- ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS - --------------------------------------------------------- On September 17, 1999 the Company held its annual shareholders meeting. Matters put before vote of the security holders were the election of directors and the approval of the issuance of shares of Class A Common Stock issuable upon conversion of $20,000,000 aggregate principle amount of the Company's 6% Secured Subordinated Convertible debentures Due 2004 and upon the exercise of warrant to purchase 909,091 shares of Class A Common Stock at an exercise price of $8.9208 per share. The results were as follows based upon total votes cast of 75,721,878: For Withheld --- -------- Robert H. Gaynor 75,574,493 213,195 Melvin J. Simon 75,574,493 200,025 Paul A. Dwyer 75,574,512 201,305 Robert C. Penny 75,574,531 203,974 John W. Seazholtz 75,572,655 200,025 Ormand J. Wade 75,574,493 200,045 Issuance of Class A Common Stock: 75,537,797 155,914 ITEM 5. OTHER EVENTS - -------------------- None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ---------------------------------------- a) The following documents are furnished as an exhibit and numbered pursuant to Item 601 of regulation S-K: Exhibit 3.2: (Corrected) Amended And Restated By-laws Of Westell Technologies, 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 12, 1999 By: ROBERT H. GAYNOR -------------------- ROBERT H. GAYNOR Chairman of the Board of Directors and Chief Executive Officer By: NICHOLAS C. HINDMAN ----------------------- NICHOLAS C. HINDMAN Interim Chief Financial Officer