Rich,
Figured I would post this here, did'nt read through it yet.
SEC 10-Q: Quarterly Report
(Management's Discussion)
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 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. Westell's net revenues increased 3.0% in the three months ended September 30, 1997, and decreased by 0.7% in the six months ended September 30, 1997 when compared to the same periods of the prior year. The revenue increase in the three month period was primarily a result of increased DSL product shipments, as well as increased teleconferencing service revenues which were partially offset by decreases in DS0 and DS1 sales. The decrease in DS0 sales was anticipated as network providers transition to digital based products while the decrease in DS1 sales was primarily due to a change in sales mix. The decrease in revenue for the six month period was primarily due to a decrease in DS0 revenue which was partially offset by increases in DS1, DSL, and teleconferencing revenues. Historically, revenue from DS1 and DS0 products provided most of the Company's revenue.
The Company expects to continue to evaluate new product opportunities and engage in extensive research and development activities. This will require the Company to continue to invest heavily in research and development and sales and marketing, which could adversely affect short-term results of operations. Due to the company's significant ongoing investment in DSL technology, the Company anticipates losses in each of the fiscal 1998 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. 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 etc.) 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 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 - Periods ended September 30, 1997 compared to periods ended September 30, 1996
Revenues. The Company's revenues increased 3.0% from $21.1 million in the three months ended September 30, 1996 to $21.7 million in the three months ended September 30, 1997. This revenue increase was primarily due to increases in DSL revenue of $754,000 and teleconferencing revenue from the Company's Conference Plus subsidiary of $876,000. 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. This increase was partially offset by a $547,000 decrease in DS0 revenue. The decrease in DS0 revenue was due to lower average unit sale prices as a result of changes in product mix and continued competitive pricing pressures on unit sales prices offset in part by slightly higher unit sales. DS1 revenue also decreased by 4.7% from $13.0 million in the three months ended September 30, 1996 to $12.4 million in the three months ended September 30, 1997. This decrease in DS1 revenue was due to lower average unit sales prices and lower unit sales brought about by changes in product sales mix and continued competitive pricing pressures.
The Company's revenues decreased 0.7% in the six months ended September 30, 1997, from $41.3 million to $41.0 million in the six month periods ended September 30, 1996 and 1997, respectively. The revenue decrease was principally due to a decrease in DS0 revenue of $1.9 million for the six months ended September 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 and lower average unit sale prices as a result of changes in product mix and continued competitive pricing pressures. This decrease was offset by increases in DS1 product revenue of $267,000, DSL product revenue of $116,000, and teleconferencing service revenue of $1.7 million. The increase in DS1 revenue was caused by higher average unit sales prices as a result of changes in product 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 DSL sales was caused by an increase in DSL unit shipments which was partly offset by decreases in average system sales prices resulting from product integration efforts and the Company aggressively marketing its systems to maintain market share. 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.
Gross Margin. Gross margin as a percentage of revenue decreased from 33.1% in the three months ended September 30, 1996 to 31.5% in the three months ended September 30, 1997 and decreased from 34.4% in the six months ended September 30, 1996 to 32.3% for the six months ended September 30, 1997. These decreases in gross profit margin were 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.
Sales and Marketing. Sales and marketing expenses increased 29.7% from $3.6 million in the three months ended September 30, 1996 to $4.7 million in the three months ended September 30, 1997, and increased 34.1% from $7.5 million in the six months ended September 30, 1996 to $10.1 million in the six months ended September 30, 1997. Sales and marketing expenses increased as a percentage of revenues from 17.2% in the three months ended September 30, 1996 to 21.7% in the three months ended September 30, 1997 and increased as a percentage of revenues from 18.3% in the six month period ended September 30, 1996 to 24.7% for the six month period ended September 30, 1997. The increases in sales and marketing expenses during the periods were 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 41.0%, from $4.7 million in the three months ended September 30, 1996 to $6.7 million in the three months ended September 30, 1997 and increased 42.5%, from $9.0 million in the six months ended September 30, 1996 to $12.8 million in the six months ended September 30, 1997. Research and development expenses increased as a percentage of revenues from 22.5% in the three months ended September 30, 1996 to 30.8% in the three months ended September 30, 1997 and increased as a percentage of revenues from 21.7% in the six months ended September 30, 1996 to 31.1% in the six months ended September 30, 1997. The increase in research and development expenses for the three and six month periods were primarily due 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 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 46.5%, from $2.1 million in the three months ended September 30, 1996 to $3.1 million in the three months ended September 30, 1997 and increased 39.3% from $4.3 million in the six months ended September 30, 1996 to $6.0 million in the six months ended September 30, 1997. General and administrative expenses increased as a percentage of revenues from 10.0% in the three months ended September 30, 1996 to 14.3% in the three months ended September 30, 1997 and increased from 10.5% in the six months ended September 30, 1996 to 14.7% in the six months ended September 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 the Company's 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 decreased from $473,000 in the three months ended September 30, 1996 to $362,000 in the three months ended September 30, 1997 and increased from $702,000 in the six months ended September 30, 1996 to $855,000 in the six months ended September 30, 1997. The income for the three and six month periods ended September 30, 1996 and September 30, 1997 was due to interest income earned on temporary cash investments made as a result of investing available funds generated in the Company's Class A Common Stock offering made in late June 1996.
Interest expense. Interest expense decreased from $100,000 in the three months ended September 30, 1996 to $62,000 in the three months ended September 30, 1997 and decreased from $197,000 in the six months ended September 30, 1996 to $125,000 in the six months ended September 30, 1997. Interest expense decreased as a result of reduced net obligations outstanding during the first and second quarters of fiscal 1998 when compared to those outstanding during the first and second quarters of fiscal 1997 under 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 September 30, 1997 the Company had $44.7 million in cash and short term investments which is being invested in short term cash investments consisting of federal government agency instruments and the highest rated grade corporate commercial paper.
The Company's operating activities used cash of approximately $7.5 million in the six months ended September 30, 1997, which resulted primarily from a loss from continuing operations before income taxes of $11.5 million (net of depreciation) and an increase in prepaid expenses and deposits. These uses were partially offset by working capital generated by decreases in accounts receivable and inventories and increases in accounts payable, accrued expenses and accrued compensation.
Capital expenditures for the six month period ended September 30, 1997 were $2.7 million, all of which was funded by available cash. The Company expects to spend approximately $4.0 million in the remainder of fiscal year 1998 for capital equipment expenditures.
On September 29,1997, the Company realized $16.2 million upon the sale and leaseback of the Aurora facility it now occupies. The Company advanced construction funding for the Aurora facility which was shown in prior period Balance Sheets as "Land and building construction held for sale" which was repaid during the second quarter of fiscal 1998 upon completing the sale of the facility to a third party. The Aurora facility was leased back in a related transaction with the same third party, whereby, the Company entered into a 20 year lease of the facility that runs through 2017. This action was anticipated and in line with management's intent as previously stated.
At September 30, 1997 the Company's principle sources of liquidity were $44.7 million of cash and short term investments, and $10.8 million and $4.8 million available under its secured revolving promissory notes and equipment borrowing facilities, respectively. 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 $19.7 million at September 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 $14.8 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
To raise additional capital, The Company filed a S-3 "shelf" registration statement on October 31, 1997 with the Securities and Exchange Commission which, when effective with the Securities and Exchange Commission, will permit the Company to sell up to $300 million of debt, equity or securities convertible in to Class A Common Stock. As of the date hereof, the Company has not decided when or if it will commence any offering of securities pursuant to this S-3 "shelf" registration statement. |
