UNITED STATES
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 December 31, 2001
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)
(630) 898-2500
Registrant's telephone number, including area code
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 - 45,859,397 shares at February 4, 2002
Class B Common Stock, $0.01 Par Value - 19,014,867 shares at February 4, 2002
1
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, 2001 and December 31, 2001 (unaudited)
Condensed Consolidated Statements of Operations (unaudited) 4
- Three months ended December 31, 2000 and 2001
- Nine months ended December 31, 2000 and 2001
Condensed Consolidated Statements of Cash Flows (unaudited) 5
- Nine months ended December 31, 2000 and 2001
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 13
PART II OTHER INFORMATION
Item 1. Litigation 14
Item 4. Other events 15
Item 5. Exhibits and Reports on Form 8-K 15
SAFE HARBOR STATEMENT
Certain statements contained in this Quarterly Report of Form 10-Q regarding
matters that are not historical facts or that contain the words "believe",
"expect", "intend", "anticipate" or derivatives thereof, are forward looking
statements. Because such forward-looking statements include risks and
uncertainties, actual results may differ materially from those expressed in or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
under "Risk Factors" set forth in Westell Technologies, Inc.'s Annual Report on
Form 10-K for the fiscal year ended March 31, 2001. Westell Technologies, Inc.
("Westell" or the "Company") undertakes no obligation to publicly update these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
2
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2001 2001
---------------- ----------------
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents........................................... $405 $6,228
Accounts receivable (net of allowance of $1,363,000 and $1,727,000,
respectively)....................................................... 34,906 33,239
Inventories......................................................... 73,068 34,654
Prepaid expenses and other current assets........................... 2,124 2,194
Deferred income tax asset........................................... 10,500 10,150
Land and building held for sale..................................... 2,980 2,087
---------------- ----------------
Total current assets............................................ 123,983 88,552
---------------- ----------------
Property and equipment:
Machinery and equipment............................................. 42,077 46,184
Office, computer and research equipment............................. 29,847 31,134
Leasehold improvements.............................................. 6,032 7,815
---------------- ----------------
77,956 85,133
Less accumulated depreciation and amortization...................... 41,726 52,710
---------------- ----------------
Property and equipment, net........................................ 36,230 32,423
---------------- ----------------
Goodwill and intangibles, net......................................... 139,373 25,014
Deferred income tax asset and other assets............................ 15,553 15,725
---------------- ----------------
Total assets.................................................... $ 315,139 $161,714
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $57,577 $36,526
Accrued expenses.................................................... 22,838 21,184
Notes payable....................................................... - 26,226
Accrued compensation................................................ 4,687 4,417
Current portion of long-term debt................................... 103 508
---------------- ----------------
Total current liabilities.......................................... 85,205 88,861
---------------- ----------------
Long-term debt........................................................ 28,451 821
---------------- ----------------
Other long-term liabilities........................................... 3,658 3,939
---------------- ----------------
Stockholders' equity:
Class A common stock, par $0.01....................................... 425 459
Authorized - 85,000,000 shares
Issued and outstanding - 42,472,781 shares at March 31, 2001 and 45,877,397
shares at December 31, 2001
Class B common stock, par $0.01....................................... 190 190
Authorized - 25,000,000 shares
Issued and outstanding - 19,014,869 shares at March 31, 2001 and December 31,
2001 including treasury shares of 8,100 at December
31, 2001
Preferred stock, par $0.01............................................ -- --
Authorized - 1,000,000 shares
Issued and outstanding - none
Deferred compensation................................................. 854 877
Additional paid-in capital............................................ 357,684 363,642
Accumulated other comprehensive loss.................................. (34) (12)
Accumulated deficit................................................... (161,294) (297,063)
---------------- ----------------
Total stockholders' equity...................................... 197,825 68,093
---------------- ----------------
Total liabilities and stockholders' equity.................... $ 315,139 $ 161,714
================ ================
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------------- -----------------------------
2000 2001 2000 2001
------------ ------------- ------------ -------------
(unaudited)
(in thousands, except per share data)
Equipment sales............................... $ 69,465 $ 55,207 $ 259,460 $ 151,734
Services...................................... 10,406 11,805 29,756 37,998
------------ ------------- ------------ -------------
Total revenues.............................. 79,871 67,012 289,216 189,732
Cost of equipment sales....................... 61,237 47,971 216,069 131,714
Cost of services.............................. 6,321 5,655 18,071 22,109
------------ ------------- ------------ -------------
Total cost of goods sold.................... 67,558 53,626 234,140 153,823
------------ ------------- ------------ -------------
Gross margin............................... 12,313 13,386 55,076 35,909
Operating expenses:
Sales and marketing......................... 8,381 4,740 22,942 15,460
Research and development.................... 8,655 3,543 23,602 17,469
General and administrative.................. 5,928 5,555 18,131 17,441
Restructuring............................... -- -- -- 2,200
Goodwill write-down......................... -- 90,500 -- 90,500
Goodwill amortization....................... 7,958 7,953 23,874 23,859
------------ ------------- ------------ -------------
Total operating expenses.................. 30,922 112,291 88,549 166,929
------------ ------------- ------------ -------------
Operating loss................................ (18,609) (98,905) (33,473) (131,020)
Other (income) expense, net................... (104) 259 (168) 532
Interest expense.............................. 1,073 1,650 1,523 4,217
------------ ------------- ------------ -------------
Loss before tax benefit....................... (19,578) (100,814) (34,828) (135,769)
Benefit for income taxes...................... -- -- -- --
------------ ------------- ------------ -------------
Loss before cumulative effect of change in
accounting principle.......................... (19,578) (100,814) (34,828) (135,769)
Cumulative effect of change in accounting
principle..................................... -- -- 400 --
------------ ------------- ------------ -------------
Net loss...................................... $ (19,578) $ (100,814) $ (35,228) $ (135,769)
============ ============= ============ =============
Net loss per basic and diluted common share... $ (0.32) $ (1.55) $ (0.58) $ (2.12)
============ ============= ============ =============
Weighted average number of basic and diluted
common shares outstanding................... 61,427 64,887 60,697 64,125
============ ============= ============ =============
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
4
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
December 31,
-----------------------------------------
2000 2001
----------------- -----------------
(unaudited)
(in thousands)
Cash flows from operating activities:
Net loss........................................................... $ (35,228) $ (135,769)
Reconciliation of net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.................................... 32,757 34,910
Goodwill write down.............................................. -- 90,500
Deferred compensation............................................ 99 24
Non-cash interest expense on debentures.......................... 135 --
Loss on sale of fixed assets..................................... -- 204
Changes in assets and liabilities:
Accounts receivable.............................................. (10,584) 1,688
Inventory........................................................ (68,263) 38,413
Prepaid expenses and deposits.................................... (1,833) (69)
Accounts payable and accrued expenses............................ 44,425 (20,777)
Restructuring accrual............................................ (1,378) (1,648)
Refundable and deferred income taxes............................. 187 350
Accrued compensation............................................. 545 (269)
----------------- -----------------
Net cash (used in) provided by operating activities........... (39,138) 7,557
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment.............................. (18,015) (7,503)
Proceeds from sale of land, building and equipment............... 172 948
Decrease (increase) in other assets.............................. 439 (172)
Decrease in short term investments............................... 1,951 --
----------------- -----------------
Net cash used in investing activities......................... (15,453) (6,727)
----------------- -----------------
Cash flows from financing activities:
Net borrowing (repayment) under revolving promissory notes....... 44,598 (2,174)
(Repayment) borrowing of long-term debt and leases payable....... (2,750) 1,175
Purchase of treasury stock....................................... -- (8)
Proceeds from the issuance of common stock....................... 5,860 6,000
----------------- -----------------
Net cash provided by financing activities.................... 47,708 4,993
----------------- -----------------
Effect of exchange rate changes on cash............................ (29) --
Net (decrease) increase in cash............................... (6,912) 5,823
Cash and cash equivalents, beginning of period..................... 27,258 405
----------------- -----------------
Cash and cash equivalents, end of period........................... $ 20,346 $ 6,228
================= =================
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
5
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, 2001.
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 December 31,
2001, and for all periods presented. The results of operations for the three
month period ended December 31, 2001 are not necessarily indicative of the
results that may be expected for the fiscal year ending March 31, 2002 ("fiscal
year 2002").
NOTE 2. COMPUTATION OF NET LOSS 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 December 31, 2000, and 2001, and therefore
the net loss per basic and diluted earnings per share are the same.
NOTE 3. RESTRUCTURING CHARGE
The Company recognized restructuring charges of $1.7 million and $2.2
million in the three months ended March 31, 2001 and September 30, 2001,
respectively. These charges were for personnel, legal, and other related costs.
The March 31, 2001 restructuring was to achieve cost reductions and was focused
primarily on the sales and marketing functions. The September 30, 2001
restructuring was to refocus the Company's business strategy and streamline the
organization and was focused primarily on engineering and marketing functions.
Included in the accrued restructuring balance as of March 31, 2001, is $1.3
million of restructuring charges related to the Teltrend acquisition. As of
December 31, 2001, the Company has paid approximately $3.8 million of these
accrued costs.
The Company's restructuring balances and their utilization are
presented in the following table:
Utilized
Balance Charged thru Balance
(in thousands) March 31, September December 31, December 31,
2001 2001 2001 2001
- --------------------------------------------------------------------------------
Employee Costs........... $ 2,602 $2,000 $3,705 $ 897
Outplacement & Other Costs 395 200 143 452
- --------------------------------------------------------------------------------
Total.................... $ 2,997 $2,200 $3,848 $ 1,349
================================================================================
6
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. INTERIM SEGMENT INFORMATION
Westell's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and market strategy. They consist of:
1) A telecommunications equipment manufacturer of local loop access
products, and
2) A multi-point telecommunications service bureau specializing in
audio teleconferencing, multi-point video conferencing, broadcast
fax and multimedia teleconference services.
Performance of these segments is evaluated utilizing, revenue,
operating income and total asset measurements. The accounting policies of the
segments are the same as those for Westell Technologies, Inc. Segment
information for the three and nine-month periods ended December 31, 2000 and
2001, are as follows:
Telecom Telecom
(In thousands) Equipment Services Total
------------ ------------ --------
Three months ended December 31, 2000
Revenues.......................... $69,465 $ 10,406 $ 79,871
Operating income (loss) .......... (20,526) 1,917 (18,609)
Depreciation and amortization..... 10,846 905 11,751
Total assets...................... 377,489 21,210 398,699
Three months ended December 31, 2001
Revenues.......................... $55,207 $ 11,805 $ 67,012
Operating income (loss) (1)....... (101,858) 2,953 (98,905)
Depreciation and amortization..... 10,534 1,159 11,693
Total assets...................... 138,541 23,173 161,714
Nine months ended December 31, 2000
Revenues.......................... $259,460 $29,756 $ 289,216
Operating income (loss)........... (38,880) 5,407 (33,473)
Depreciation and amortization..... 30,633 2,468 33,101
Total assets...................... 377,489 21,210 398,699
Nine months ended December 31, 2001
Revenues.......................... 151,734 37,998 189,732
Operating income (loss) (1)....... (138,269) 7,249 (131,020)
Depreciation and amortization..... 31,656 3,254 34,910
Total assets...................... 138,541 23,173 161,714
(1) Operating income includes a $1.2 million benefit was recorded in the
period that related to resolution of a disputed expense in the telecom
services segment.
Reconciliation of Operating loss from continuing operations for the reportable
segments to Loss from continuing operations before tax benefit or cumulative
effect of accounting change:
Three months ended Nine months ended
December 31, December 31,
2000 2001 2000 2001
---------- --------- ---------- ---------
(In thousands)
Operating loss ................ $ (18,609) $ (98,905) $ (33,473) $ (131,020)
Other (income) expense, net.... (104) 259 (168) 532
Interest expense............... 1,073 1,650 1,523 4,217
--------- ---------- ---------- -----------
Loss before tax benefit........ $ (19,578) $ (100,814) $ (34,828) $ (135,769)
======== ========= ========== ===========
7
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and No. 142, Goodwill and other Intangible Assets, effective for
fiscal years beginning after December 15, 2001. Under the new rules, goodwill
will no longer be amortized but will be subject to annual impairment tests.
Other intangible assets will continue to be amortized over their useful lives.
The Company plans to adopt these new standards on April 1, 2002. Application of
the non-amortization provisions of SFAS 142 is expected to result in an increase
of net income of approximately $25.5 million ($0.40 per share). During fiscal
2003 the Company will perform the first of the required impairment tests as of
April 1, 2002 and has not yet determined the effect that these tests will have
on the earnings and financial position of the Company.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. In August 2001, the FASB issued SFAS 144, Accounting for
the Impairment - Disposal of Long Lived Assets. The Company will adopt these
standards on April 1, 2002. The Company doesn't expect that the adoption of
these statements will have a material effect on the Company's financial
statements.
NOTE 6. COMPREHENSIVE INCOME:
The disclosure of comprehensive loss, which encompasses net loss and
foreign currency translation adjustments, is as follows:
Three months ended Nine months ended
December 31, December 31,
----------------------------- -----------------------------
(in thousands) 2000 2001 2000 2001
------------ ------------- ------------ ------------
Net loss...................................... $(19,578) $(100,814) $(35,228) $(135,769)
Other comprehensive income (loss)
Foreign currency translation adjustment.... (45) 17 (207) 22
------------ ------------- ------------ ------------
Comprehensive loss........................... $(19,623) $(100,797) $(35,435) $(135,747)
NOTE 7. INVENTORIES:
The components of inventories are as follows:
March 31, December 31,
(in thousands) 2001 2001
-------------- ------------
Raw material ................................. $ 47,989 $ 29,319
Work in process............................... 26 147
Finished goods................................ 51,153 20,233
Reserve for excess and obsolete inventory
and net realizable value...................... (26,100) (15,045)
-------------- ------------
$ 73,068 $ 34,654
============== ============
NOTE 8. GOODWILL WRITE DOWN:
Due to the restructuring the Company implemented, along with current
and expected market conditions in the T-1 line repeater and low speed digital
data products portion of the business acquired from Teltrend, it became apparent
that the goodwill acquired with the Teltrend acquisition was impaired. In
accordance with its policies, the Company completed an evaluation of the fair
value of the Teltrend long-lived assets (including goodwill) during the quarter
ended December 31, 2001 and reported a $90.5 million non-cash charge to reduce
the carrying value of these assets to their estimated fair value.
8
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 enables
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 its end-user
customers. These products can be categorized into two business units presented
below. In previous quarters, the Company divided Broadband product revenue by
business unit for quarterly reporting purposes. Transport Systems and Customer
Premise Equipment business units have been combined to simplify the reporting of
revenue related to DSL products.
o TELCO ACCESS PRODUCTS ("TAP"): Products that maintain, repair and monitor
special service circuits used over copper telephone wires in the portion of
the telephone companies' network connecting the central office with the
customers' locations (the "Local Loop"). Products include all of Westell's
analog products and products that support digital T-1 transmission such as
its Network Interface Units ("NIU") products.
o BROADBAND: Products that facilitate high speed voice and data access
originating at copper lines and terminating to copper or fiber. Products
include equipment located in the telco's central offices and equipment on
the customer premises. Broadband products include ADSL, HDSL and DS3.
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.
Below is a table that compares equipment and service revenues for the
three and nine month periods ended December 31, 2000 with the three and
nine-month periods ended December 31, 2001 by business unit.
Three Months ended Nine months ended
December 31, December 31,
-------------------------- -------------------------
(in thousands) 2000 2001 2000 2001
------------ ------------ ----------- ------------
TAP.................... $30,117 $ 20,198 $88,835 $70,370
Broadband.............. 39,348 35,009 170,625 81,364
------------ ------------ ----------- ------------
Total equipment........ 69,465 55,207 259,460 151,734
Services............... 10,406 11,805 29,756 37,998
------------ ------------ ----------- ------------
Total revenues......... $ 79,871 $ 67,012 $289,216 $189,732
============ ============ =========== ============
Westell's net revenues decreased 16% and 34% in the three and
nine-month periods ended December 31, 2001, respectively, when compared to the
comparable prior year periods. The decreased revenue was due to a decrease in
equipment revenue offset in part by increased service revenue for the three and
nine month periods. The reduction in equipment revenue was primarily due to the
decreased sales of the Company's products. The increased service revenue is 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.
The Company believes that its future revenue growth and profitability will
principally depend on its success in increasing sales of Broadband products and
developing new and enhanced TAP products. In view of the Company's reliance on
the DSL market for growth and the unpredictability of DSL 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 TAP products such as NIU's
have declined in recent years as telcos continue to move to networks that
deliver higher speed digital transmission services. 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.
9
RESULTS OF OPERATIONS - Periods ended December 31, 2001 compared to periods
ended December 31, 2000
Revenues. The Company's revenues decreased 16.1% from $79.9 million in the three
months ended December 31, 2000 to $67.0 million in the three months ended
December 31, 2001. This revenue decrease was primarily due to decreased
equipment revenue from the Company's TAP products of $9.9 million when compared
with the same period of the prior year. Equipment revenue from the Company's
Broadband products also decreased by $4.3 million when compared with the same
three-month period of the prior year. The decreased equipment revenue was due to
overall unit volume decreases and lower unit selling prices. Service revenue
increased in the three month period by $1.4 million when compared with the same
period of the prior year due to an increase in call minutes at the Company's
Conference Plus, Inc. subsidiary.
The Company's revenues decreased 34.4% from $289.2 million in the nine months
ended December 31, 2000 to $189.7 million in the nine months ended December 31,
2001. This revenue decrease was primarily due to decreased equipment revenue
from the Company's Broadband products of $89.3 million when compared with the
same period of the prior year. Equipment revenue from the Company's TAP products
also decreased by $18.5 million when compared with the same nine-month period of
the prior year. The decreased equipment revenue was due to overall unit volume
decreases and lower unit selling prices. Service revenue increased in the nine
month period by $8.2 million when compared with the same period of the prior
year due to an increase in call minutes at the Company's Conference Plus, Inc.
subsidiary.
Gross Margin. Gross margin as a percentage of revenue increased from 15.4% in
the three months ended December 31, 2000 to 20.0% in the three months ended
December 31, 2001 and decreased from 19.0% in the nine months ended December 31,
2000 to 18.9% in the nine months ended December 31, 2001. The increased margins
in the three month period ended December 31, 2001 was primarily due to improved
material costs on Broadband products as well as a $1.2 million benefit recorded
in the period that related to resolution of a disputed expense in the Conference
Plus Inc subsidiary. The decreased margin in the nine month period ended
December 31, 2001 was primarily due to an excess and obsolete inventory charge
recorded in the three months ended September 30, 2001. The excess and obsolete
inventory charge was related to products and projects that were discontinued as
part of the August 2001 realignment of the Company. These decreases were offset
in part by increased margin dollars generated by the Company's Conference Plus,
Inc. subsidiary.
Sales and Marketing. Sales and marketing expenses decreased 43.4%, or $3.6
million, to $4.7 million in the three months ended December 31, 2001 and
decreased 32.6%, or $7.5 million, to $15.5 million in the nine months ended
December 31, 2001 when compared to the same periods last year. The decrease in
sales and marketing expenses during the three and nine month periods was
primarily due to staff reductions and spending cuts during fiscal year 2002 and
decreased shipping charges to customers associated with the decrease in sales.
Sales and marketing expenses decreased as a percentage of revenues from 10.5% in
the three months ended December 31, 2000 to 7.1% in the three months ended
December 31, 2001. Sales and marketing expenses increased as a percentage of
revenues from 7.9% in the nine months ended December 31, 2000 to 8.1% in the
nine months ended December 31, 2001. The reduced revenue in the fiscal 2002
period was the primary cause of this percentage increase. 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.
Research and Development. Research and development expenses decreased 59.1%, or
$5.1 million, to $3.5 million in the three months ended December 31, 2001 and
decreased 26.0%, or $6.1 million, to $17.5 million in the nine months ended
December 31, 2001 when compared to the same period last year. The decrease in
research and development expenses during the three and nine month periods was
primarily due to $750,000 and $1 million received from customers to fund
engineering projects as well as staff reductions and spending cuts during fiscal
year 2002. Research and development expenses decreased as a percentage of
revenues from 10.8% in the three months ended December 31, 2000 to 5.3% in the
three months ended December 31, 2001. Research and development expenses
increased as a percentage of revenues from 8.2% in the nine months ended
December 31, 2000 to 9.2% in the nine months ended December 31, 2001. The
reduced revenue and customer funding offset in the fiscal 2002 period was the
primary cause of this percentage increase. The Company believes that a continued
commitment to research and development will be required for the Company to
remain competitive.
10
RESULTS OF OPERATIONS - continued
General and Administrative. General and administrative expenses decreased 6.3%,
from $5.9 million in the three months ended December 31, 2000 to $5.6 million in
the three months ended December 31, 2001. General and administrative expenses
decreased 3.9%, from $18.1 million in the nine months ended December 31, 2000 to
$17.4 million in the nine months ended December 31, 2001. General and
administrative expenses increased as a percentage of revenues from 7.4% in the
three months ended December 31, 2000 to 8.3% in the three months ended December
31, 2001. General and administrative expenses increased as a percentage of
revenues from 6.3% in the nine months ended December 31, 2000 to 9.2% in the
nine months ended December 31, 2001. The reduced revenue in the fiscal 2002
periods was the primary cause of these percentage increases.
Goodwill Amortization. Intangible assets include goodwill, synergistic goodwill
and product technology related to the Teltrend acquisition. The purchase price
of approximately $238.2 million exceeded the fair market value of net assets
acquired, resulting in goodwill of $59.9 million, synergistic goodwill of $57.0
million, and product technology of $55.6 million which will be amortized on a
straight-line basis over an average of approximately ten years.
Goodwill write down. Due to the restructuring the Company implemented, along
with current and expected market conditions in the T-1 line repeater and low
speed digital data products portion of the business acquired from Teltrend, it
became apparent that the goodwill acquired with the Teltrend acquisition was
impaired. In accordance with its policies, the Company completed an evaluation
of the fair value of the Teltrend long-lived assets (including goodwill) during
the quarter ended December 31, 2001 and reported a $90.5 million non-cash charge
to reduce the carrying value of these assets to their estimated fair value.
Other (income) expense, net. Other (income) expense, net was income of $104,000
in the three months ended December 31, 2000 compared to a loss of $259,000 in
the three months ended December 31, 2001 and was income of $168,000 in the nine
months ended December 31, 2000 compared to a loss of $532,000 in the nine months
ended December 31, 2001. Other income is primarily comprised of interest income
earned on temporary cash investments, the elimination of minority interest and
unrealized gains or losses on intercompany balances denominated in foreign
currency. The expense for the fiscal 2002 periods was primarily due to the
recognition of foreign currency gains/loss on intercompany balances.
Interest expense. Interest expense increased from $1.1 million in the three
months ended December 31, 2000 to $1.7 million in the three months ended
December 31, 2001 and increased from $1.5 million in the nine months ended
December 31, 2000 to $4.2 million in the nine months ended December 31, 2001.
Interest expense during the current period is a result of interest incurred on
net obligations outstanding during the period under promissory notes, capital
leases, and vendor debt. The increase is due to larger outstanding debt
obligations.
Income taxes. There was no benefit for income taxes recorded for either the
three or the nine month periods ended December 31, 2000 and 2001. The Company
provided valuation reserves for the entire benefit generated during the three
and nine month periods ended December 31, 2001 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.
11
RESULTS OF OPERATIONS - continued
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company had $6.2 million in cash and $26.2
million outstanding under its secured revolving credit facility and
approximately $8.8 million available under the secured revolving credit
facility.
On June 29, 2001, the Company amended the revolving credit facility,
resulting in an asset-based, revolving lending facility providing for total
borrowing based upon 85% of eligible accounts receivable and 30% of eligible
inventory not to exceed $9.0 million and 70% of the guarantee described below.
The $9.0 million inventory limitation is reduced by $100,000 on August 1, 2001,
and shall be reduced by an additional $100,000 on the first day of each month
thereafter. The Company was eligible to borrow an additional $8.8 million under
this facility as of December 31, 2001. The facility is collateralized by
substantially all assets of the Company and will remain available until June 30,
2002. The facility provides for maximum borrowings of up to $35.0 million. The
facility is guaranteed by trusts for the benefit of Robert C. Penny III and
other Penny family members and is supported by their brokerage account totaling
approximately $10.0 million. In consideration of the guarantee, the Company has
granted these stockholders warrants to purchase 512,820 shares of Class A Common
Stock for a period of five years at an exercise price of $1.95 per share. Any
future equity financing will also reduce dollar for dollar the amount of the
guaranty. Borrowings under this revolving credit facility provide for the
interest to be paid by the Company at prime plus 1%.
The amended secured revolving credit facility requires, among other
things maintenance of a minimum tangible net worth and target EBITDA. The
Company's failure to meet these quarterly financial covenants would allow the
lenders to demand repayment of all amounts outstanding under the credit
facility. The Company is currently in compliance with all such covenants.
The Company's operating activities generated cash of $7.6 million in
the nine months ended December 31, 2001. This resulted primarily from a loss
from continuing operations of $10.4 million (excluding depreciation, goodwill
impairment and amortization) offset by decreased working capital. Working
capital was affected primarily by a decrease in inventory and offset in part by
an increase in accounts payable and accrued expenses.
Capital expenditures for the nine-month period ended December 31, 2001
were approximately $7.5 million, of which $1.4 million was funded by a capital
lease. The Company expects to spend approximately $2.5 million for the remainder
of fiscal year 2002 primarily for machinery, computer and research equipment
purchases.
At December 31, 2001, the Company's principle sources of liquidity were
$6.2 million of cash and the secured revolving credit facility under which the
Company was eligible to borrow up to an additional $8.8 million based upon
receivables and inventory levels. To meet the Company's cash needs for fiscal
year 2003 the Company is exploring various alternatives including equity or
subordinated debt offerings.
The Company had a deferred tax asset of approximately $80.5 million at
December 31, 2001. 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 as the Company has incurred operating losses for the 1999, 2000 and 2001
fiscal years, management believes that it is more likely than not that it will
generate taxable income sufficient to realize a portion of the tax benefit. A
portion of these deferred tax assets are expected to be utilized, prior to their
expiration, through a tax planning strategy available to the Company. Management
will continue to periodically assess whether it remains more likely than not
that the 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
- ---------------------------------------------------------------------
12
RESULTS OF OPERATIONS - continued
Westell is subject to certain market risks, including foreign currency
and interest rates. The Company has foreign subsidiaries in the United Kingdom
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 fluctuations affecting net investments and earnings denominated in
foreign currencies. The Company's future primary exposure is to changes in
exchange rates for the U.S. dollar versus the British pound and the Irish pound.
As of December 31, 2001, the net balance in the cumulative foreign
currency translation adjustment account, which is a component of stockholders'
equity, was an unrealized loss of $12,000.
The Company does not have significant exposure to interest rate risk
related to its debt obligations, which are 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 1 of the Company's 10-K for the
period ended March 31, 2001, 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 6.50% to approximately 7.15%) of the
average interest rate on the Company's debt. If such an increase occurred, the
Company would incur approximately $375,000 per annum in additional interest
expense based on the average debt borrowed during the twelve months ended
December 31, 2001. 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.
13
PART II. OTHER INFORMATION
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ITEM 1. LITIGATION
- ------------------
Westell Technologies, Inc. and certain of its officers and directors
have been named in the following class actions:
1. Bergh v. Westell Technologies, Inc., et al., No. 00 C 6735 (filed
October 27, 2000);
2. Llanes v. Westell Technologies, Inc., et al., No. 00 C 6780 (filed
October 30, 2000);
3. Lefkowitz v. Westell Technologies, Inc., et al., No. 00 C 6881 (filed
November 2, 2000);
4. Seplow v. Westell Technologies, Inc., et al., No. 00 C 7019 (filed
November 7, 2000);
5. Greif v. Westell Technologies, Inc., et al., No. 00 C 7046 (filed
November 8, 2000);
6. Feinstein v. Westell Technologies, Inc., et al., No. 00C7247 (filed
November 16, 2000);
7. Abdelnour v. Westell Technologies, Inc., et al., No. 00C7308 (filed
November 20, 2000);
8. PAS Mgmt. & Consulting Serv., Inc. v. Westell Technologies, Inc.,
et al., No. 00C7605 (filed December 4, 2000);
9. Hoffman v. Westell Technologies, Inc., et al., No. 00C7624 (filed
December 4, 2000);
10. Barton v. Westell Technologies, Inc., et al., No. 00C7765 (filed
December 12, 2000); and
1. Schumaster v. Westell Technologies, Inc., et al., No. 00C7991 (filed
December 26, 2000);
Each of these cases was filed in the United States District Court for the
Northern District of Illinois and alleges generally that the defendants violated
the antifraud provisions of the federal securities laws by allegedly issuing
material false and misleading statements and/or allegedly omitting material
facts necessary to make the statements made not misleading thereby inflating the
price of Westell stock in the second quarter of fiscal 2001. The cases generally
allege that the defendants reassured analysts that Westell's sales were on track
to meet forecasts for the second quarter of fiscal 2001, when they knew that
Westell was experiencing a substantial shortfall in second quarter modem sales
due to decreased orders from a major customer. Each of these cases allegedly
arises from the same set of operative facts and seeks the same relief -- damages
allegedly sustained by plaintiffs and the class by reason of the acts and
transactions alleged in the complaints as well as interest on any damage award,
reasonable attorneys' fees, expert fees, and other costs.
On January 11, 2001, the federal district court for the Northern
District of Illinois consolidated these cases into one two-count complaint,
captioned In re Westell Technologies, Inc., No 00 C 6735 (filed February 1,
2001). The case is set for trial on November 3, 2003.
Certain of Westell Technologies, Inc.'s officers and directors have
been named in the following derivative actions:
1. The Ceyda Foundation Trust v. Ziontz, et al, No. 01C2826 (filed April
20, 2001);
2. Vukovich v. Zionts, et al., No. 18647 (filed January 26, 2001);
3. Dollens v. Zionts, et al., No. 18533 NC (filed December 4, 2000); and
4. Rothchild v. Zionts, et al., No. 01LK259.
On December 4, 2001, these cases were consolidated in the United District Court
for the Northern District of Illinois. Each case alleges generally that the
defendants issued material false and misleading statements and/or allegedly
omitting material facts necessary to make the statements made not misleading
thereby inflating the price of Westell stock for certain time periods, engaged
in insider trading, misappropriated corporate information, and beached their
fiduciary duties to Westell Technology, Inc.'s shareholders. Each case allegedly
arises from the same set of operative facts and seeks the same relief -- damages
allegedly sustained by Westell by reason of the acts and transactions alleged in
the complaints, a constructive trust for the amount of profits the individual
defendants made on insider sales, reasonable attorneys' fees, expert fees, and
other costs. The Court appointed Dollens and Vukovich as lead plaintiffs. On
January 15, 2002, defendants filed a motion to dismiss the consolidated
derivative action. There has been no ruling yet on the motion to dismiss. The
case is set for trial on November 3, 2003.
14
In the opinion of the Company, although the outcome of any legal
proceedings cannot be predicted with certainty, the liability of the Company in
connection with its legal proceedings could have a material effect on the
Company's financial position.
The Company has been named as a defendant in Celsian Technologies, Inc.
v. Westell, Inc., Case No. 01 CC 03977, Superior Court of the State of
California, County of Orange, which was filed March 23, 2001. The complaint
alleges nonpayment for delivered goods and seeks $13,400,000 in damages. The
Company removed this case to federal court on April 30, 2001, where it is now
pending in the United States District Court for the Central District of
California as Case No. 01-3878 FMC. On May 29, 2001, Westell answered Celsian's
complaint and filed a counterclaim against Celsian for breach of contract and
breach of express and implied warranties. Celsian answered Westell's
counterclaim and filed a third party claim against Pac Tec, a division of La
France Corporation, which was dismissed on January 15, 2002. At a status
conference held on September 10, 2001, the Court set various discovery and
pretrial deadlines and scheduled the trial for December 3, 2002.
We cannot guarantee that we will be meritorious in any of the lawsuits
described above. A verdict against us in any of the lawsuits could materially
adversely affect our business and operating results.
Westell has settled litigation with Alcatel Microelectronics, N.V.
PacTec, a division of La France corporation and Virata Corporation that has been
disclosed in Westell's previous SEC filings. Westell recorded a $700,000
one-time charge to earnings resulting from these settlements.
ITEM 4. OTHER EVENTS
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Exhibit 3.1 Amended and Restated Certificate of Incorporation, as
amended.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
None.
15
SIGNATURES
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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: February 14, 2002
By: E. VAN CULLENS
---------------------
E. VAN CULLENS
Chief Executive Officer
By: NICHOLAS C. HINDMAN
---------------------
NICHOLAS C. HINDMAN
Chief Financial Officer