SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 to FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 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 - 42,445,235 shares at February 9, 2001 Class B Common Stock, $0.01 Par Value - 19,019,369 shares at February 9, 2001 THIS AMENDMENT TO THE FORM 10-Q REFLECTS A CHANGE TO THE PAID-IN-CAPITAL LINE ITEM OF THE REGISTRANT'S BALANCE SHEET AS OF DECEMBER 31, 2000. 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, 2000 and December 31, 2000 (unaudited) Condensed Consolidated Statements of Operations (unaudited) 4 - Three months ended December 31, 1999 and 2000 - Nine months ended December 31, 1999 and 2000 Condensed Consolidated Statements of Cash Flows (unaudited) 5 - Nine months ended December 31, 1999 and 2000 Notes to the Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative disclosures about market risks 14 PART II OTHER INFORMATION Item 1. Legal Proceedings 15 Item 4. Submission of matters to vote of security holders 16 Item 5. Other events 16 Item 6. Exhibits and Reports on Form 8-K 16
SAFE HARBOR STATEMENT Certain statements contained in this Form 10-Q, which are not historical facts are forward looking statements that involve risks and uncertainties, including, without limitation, statements containing the words "anticipate," "believe," "expect," "intend" and statements relating to margin increases of DSL CPE products and DSL Transport products and other statements set forth on Note 8 to the unaudited financial statements contained in the Form 10-Q. 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 Westell's merger with Teltrend, the impact of competitive products and technologies (such as cable modems and fiber optic cable), competitive pricing pressures, product development, excess and obsolete inventory due to new product development, commercialization and technological delays or difficulties (including delays or difficulties in developing, producing, testing and selling new products and technologies, such as DSL systems), the effect of the Company's accounting policies, the effect of economic conditions and trade, legal, social, and economic risks (such as import, licensing and trade restrictions) and other risks more fully described in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2000 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. 2 WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
March 31, December 31, 2000 2000 ---------------- --------------- (unaudited) (in thousands) Current assets: Cash and cash equivalents.............................................. $27,258 $20,346 Short term investments................................................. 1,951 - Accounts receivable (net of allowance of $855,000 and $1,372,000, respectively)............................................ 42,025 57,505 Inventories............................................................ 30,741 94,489 Prepaid expenses and other current assets.............................. 2,200 4,034 Refundable income taxes................................................ 6,222 6,035 Deferred income tax asset.............................................. 3,319 3,319 Land and building held for sale........................................ 3,309 3,309 ---------------- --------------- Total current assets............................................... 117,025 189,037 ---------------- --------------- Property and equipment: Machinery and equipment................................................ 34,686 41,495 Office, computer and research equipment................................ 18,682 28,677 Leasehold improvements................................................. 3,436 4,324 ---------------- --------------- 56,804 74,496 Less accumulated depreciation and amortization......................... 30,435 38,888 ---------------- --------------- Property and equipment, net............................................ 26,369 35,608 Goodwill and intangibles, net............................................ 175,482 151,329 Deferred income tax asset and other assets............................... 23,694 22,725 ---------------- --------------- Total assets....................................................... $342,570 $398,699 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable....................................................... $21,528 $73,469 Accrued expenses....................................................... 22,591 13,193 Accrued compensation................................................... 6,938 7,483 Current portion of long-term debt...................................... 1,633 44,598 ---------------- ---------------- Total current liabilities............................................. 52,690 138,743 ---------------- ---------------- Long-term debt........................................................... 1,117 - Other long-term liabilities.............................................. 2,489 2,993 Commitments and contingencies Convertible debt (net of debt discount of $669,000)...................... 6,611 - Stockholders' equity: Class A common stock, par $0.01.......................................... 402 424 Authorized - 85,000,000 shares Issued and outstanding - 40,179,110 shares at March 31, 2000 and 42,441,535 shares at December 31, 2000 Class B common stock, par $0.01.......................................... 190 190 Authorized - 25,000,000 shares Issued and outstanding - 19,051,369 shares at March 31, 2000 and 19,019,369 shares at December 31, 2000 Preferred stock, par $0.01............................................... - - Authorized - 1,000,000 shares Issued and outstanding - none Deferred compensation.................................................... 840 939 Additional paid-in capital............................................... 345,485 357,539 Accumulated other comprehensive income (loss)............................ 184 (23) Accumulated deficit...................................................... (67,438) (102,106) ---------------- ---------------- Total stockholders' equity......................................... 279,663 256,963 ---------------- ---------------- Total liabilities and stockholders' equity....................... $342,570 $398,699 ================ ================ 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, ---------------------- ---------------------- 1999 2000 1999 2000 --------- --------- --------- --------- (unaudited) (in thousands, except per share data) Equipment sales ........................... $ 21,964 $ 68,695 $ 56,478 $ 260,730 Services .................................. 7,673 10,406 21,525 29,756 --------- --------- --------- --------- Total revenues .......................... 29,637 79,101 78,003 290,486 Cost of equipment sales ................... 16,755 61,137 43,002 218,379 Cost of services .......................... 4,618 6,321 13,606 18,101 --------- --------- --------- --------- Total cost of goods sold ................ 21,373 67,458 56,608 236,480 --------- --------- --------- --------- Gross margin ........................... 8,264 11,643 21,395 54,006 Operating expenses: Sales and marketing ..................... 3,854 8,111 10,966 21,712 Research and development ................ 2,967 8,655 8,183 23,602 General and administrative .............. 2,902 5,928 9,519 18,131 Amortization of intangibles ............. -- 7,958 -- 23,875 --------- --------- --------- --------- Total operating expenses .............. 9,723 30,652 28,668 87,320 --------- --------- --------- --------- Operating loss ............................ (1,459) (19,009) (7,273) (33,314) Other (income) expense, net ............... (854) (104) (905) (169) Interest expense .......................... 690 1,073 1,418 1,523 --------- --------- --------- --------- Loss before taxes ......................... (1,295) (19,978) (7,786) (34,668) Benefit for income taxes .................. -- -- -- -- --------- --------- --------- --------- Net loss .................................. $ (1,295) $ (19,978) $ (7,786) $ (34,668) ========= ========= ========= ========= Net loss per basic and diluted common share $ (0.04) $ (0.33) $ (0.21) $ (0.57) ========= ========= ========= ========= Average number of basic and diluted common shares outstanding ............... 36,643 61,427 36,561 60,697 ========= ========= ========= ========= 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, -------------------- 1999 2000 -------- -------- (unaudited) (in thousands) Cash flows from operating activities: Net loss ..................................................... $ (7,786) $(34,668) Reconciliation of net loss to net cash provided by (used in) operating activities: Depreciation and amortization .............................. 5,480 33,101 Deferred compensation ...................................... -- 99 Non-cash interest on debentures ............................ -- 135 Foreign currency gain on liquidation of Westell Europe, Ltd. (426) -- Changes in assets and liabilities: Increase in accounts receivable ............................ (4,707) (15,584) Increase in inventory ...................................... (3,536) (63,823) Increase in prepaid expenses and deposits .................. (666) (1,833) Decrease in refundable income taxes ........................ 5 187 Increase in accounts payable and accrued expenses .......... 1,993 43,047 (Decrease) increase in accrued compensation ................ (263) 545 -------- -------- Net cash used in operating activities ................... (9,906) (38,794) -------- -------- Cash flows from investing activities: Purchases of property and equipment ........................ (4,980) (18,015) Proceeds from sale of equipment ............................ 432 (172) Decrease in other assets ................................... 32 439 Decrease in short term investments ......................... -- 1,951 -------- -------- Net cash used in investing activities ................... (4,516) (15,797) -------- -------- Cash flows from financing activities: (Repayment) borrowing of long-term debt and leases payable . (1,645) 44,598 Proceeds from issuance of convertible debt ................. 18,542 (2,750) Proceeds from the issuance of common stock ................. 1,428 5,860 -------- -------- Net cash provided by financing activities ............... 18,325 47,708 -------- -------- Effect of exchange rate changes on cash ...................... 3 (29) Net (decrease) increase in cash ......................... 3,906 (6,912) Cash and cash equivalents, beginning of period ............... 6,715 27,258 -------- -------- Cash and cash equivalents, end of period ..................... $ 10,621 $ 20,346 ======== ======== 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, 2000. 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, 2000, and for all periods presented. The results of operations for the three and nine month periods ended December 31, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2001. 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 December 31, 1999, and 2000, 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 $550,000 in the three months ended March 31, 2000. This charge was for personnel, legal, and other related cost to eliminate redundant employees due to the acquisition of Teltrend Inc. The restructuring plan was to combine and streamline the operations of the two companies and to achieve synergies related to the manufacture and distribution of common product lines. The Company estimates that the costs of these activities will be $2.9 million. Approximately $2.4 million of the total cost has been capitalized as part of the purchase price of Teltrend Inc., primarily related to Teltrend Inc. employees terminated. The remaining cost of $550,000 was charged to operations and relates to Westell employees terminated and other costs. As of December 31, 2000, the Company has paid approximately $1.4 million of these costs. The restructuring charges and their utilization are summarized as follows:
Utilized Balance through Balance (in thousands) March 31, December 31, December 31, 2000 2000 2000 --------------------------------------------------------------------------------------- Employee Costs........... $ 2,604 $ 1,323 $ 1,281 Legal & Other Costs...... 300 55 245 --------------------------------------------------------------------------------------- Total.................... $ 2,904 $ 1,378 $ 1,526 =======================================================================================
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, 1999 and 2000, are as follows: Telecom Telecom Equipment Services Total ---------- --------- ---------- Three months ended December 31, 1999 Revenues ..................... $ 21,964 $ 7,673 $ 29,637 Operating income (loss) ...... (2,907) 1,448 (1,459) Depreciation and amortization 1,308 610 1,918 Total assets ................. 59,477 18,447 77,924 Three months ended December 31, 2000 Revenues ..................... $ 68,695 $ 10,406 79,101 Operating income (loss) ...... (20,926) 1,917 (19,009) Depreciation and amortization 10,846 905 11,751 Total assets ................. 377,489 21,210 398,699 Nine months ended December 31, 1999 Revenues ..................... $ 56,478 $ 21,525 $ 78,003 Operating income (loss) ...... (10,556) 3,283 (7,273) Depreciation and amortization 3,777 1,703 5,480 Total assets ................. 59,477 18,447 77,924 Nine months ended December 31, 2000 Revenues ..................... $ 260,730 $ 29,756 $ 290,486 Operating income (loss) ...... (38,721) 5,407 (33,314) Depreciation and amortization 30,633 2,468 33,101 Total assets ................. 377,489 21,210 398,699 Reconciliation of Operating loss from continuing operations for the reportable segments to Loss from continuing operations before income taxes: Three months ended Nine months ended December 31, December 31, 1999 2000 1999 2000 -------- -------- -------- -------- Operating loss ............ $ (1,459) $(19,009) $ (7,273) $(33,314) Other (income) expense, net (854) (104) (905) (169) Interest expense .......... 690 1,073 1,418 1,523 -------- -------- -------- -------- Loss before income taxes .. $ (1,295) $(19,978) $ (7,786) $(34,668) ======== ======== ======== ======== 7 WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 5. NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivation Instruments and Hedging Activities", which addresses the accounting for derivative instruments. SFAS No. 133 is effective for quarterly financial statements for the Company's fiscal year ended March 31, 2002. The Company does not expect that SFAS No. 133 will have a significant effect on its current financial reporting. 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) 1999 2000 1999 2000 -------- -------- -------- -------- Net loss ..................................... $ (1,295) $(19,978) $ (7,786) $(34,668) Other comprehensive loss Foreign currency translation adjustment . 625 45 377 207 -------- -------- -------- -------- Comprehensive loss .......................... $ (1,920) $(20,023) $ (7,409) $(34,461)
NOTE 7. BUSINESS ACQUISITION: On March 17, 2000, the Company acquired 100% of the outstanding shares of Teltrend Inc., a designer, manufacturer and marketer of transmission products used by telephone companies to provide voice and data service over the telephone network. The acquisition was accounted for as a purchase and, accordingly, the acquired assets and assumed liabilities have been recorded at their estimated fair market values at the date of the acquisition. The results of operations have been included in the consolidated financial statements since the date of acquisition. The estimated fair market values of certain assets are based upon preliminary appraisal reports. The purchase price of approximately $238,241,873 exceeded the fair market value of net assets acquired, resulting in goodwill of $64,207,801 and synergistic goodwill of $57,000,000 which will be amortized on a straight-line basis over an average of approximately ten years. The following unaudited pro forma consolidated results of operations data assumes the business acquisition described above occurred on April 1, 1999. The pro forma results below are based on historical results of operations including adjustments for interest, depreciation and amortization and do not necessarily reflect actual results that would have occurred.
(in thousands, except per share data) Three months ended Nine months ended December 31, 1999 December 31, 1999 ------------------------ ------------------------ Revenue....................................... $ 45,441 $ 131,570 Net loss...................................... (7,066) (23,663) Net loss per basic and diluted common share... (0.12) (0.42)
8 WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8. GOING CONCERN: The Company has been advised by its Independent accountants that if the matters noted below are not resolved prior to the completion of their audit of the Company's financial statements for the year ended March 31, 2001, their auditors report on those statements may be modified for the outcome of these matters. a) The need to obtain additional financing b) The need to increase volume and margins on both new and some existing products and c) The need to complete the integration of the Teltrend, Inc. acquisition. To resolve the financing issue, the Company is exploring various alternatives including: an increased line of credit from its current bank group and a larger line of credit from new asset based lenders replacing the current bank credit line. Under the amendment and waiver to the Company's credit facility that was made effective as of December 31, 2001, the Company agreed to raise $25 million in equity financing. To increase volume, the Company expects to add key new customer(s) during the quarter ending March 31, 2001. New higher margin DSL CPE products have been recently introduced and margins in the DSL Transport product group are expected to increase due to a new generation of products which will begin to be produced in the March 31, 2001 quarter. Margins in the Telco Access Product group are expected to increase as the integration of the Teltrend, Inc. acquisition is completed gradually over the quarters ending March 31, 2001 through June 30, 2001. 9 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 three business units presented below. 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 TRANSPORT SYSTEMS: DSL products that contain components that are located in the telephone companies' central offices. Products include Westell's Supervision, a system comprised of central office shelves and electronics that enable high-speed transmission over copper telephone lines. o CUSTOMER PREMISE EQUIPMENT ("CPE"): High-speed DSL modems and routers that are located at the customers' premises. These products include Westell's WireSpeed(TM) modems that are designed to provide high-speed access through personal computers. 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, 1999 with the three and nine month periods ended December 31, 2000 by product groupings:
Three months ended: Nine months ended: ---------------------------------- ------------------------------------- December 31, December 31, December 31, December 31, (in thousands) 1999 2000 1999 2000 ---------------- ------------------------------------ ----------------- TAP............................. $11,865 $30,885 $38,369 $90,981 Transport Systems............... 3,748 13,601 8,573 35,296 CPE............................. 6,351 24,209 9,536 134,453 ---------------- ---------------- ------------------ ----------------- Total equipment................. 21,964 68,695 56,478 260,730 ---------------- ---------------- ------------------ ----------------- Services........................ 7,673 10,406 21,525 29,756 ---------------- ---------------- ------------------ ----------------- Total revenues.................. $29,637 $79,101 $78,003 $290,486 ================ ================ ================== =================
Westell's net revenues increased 167% and 272% in the three and nine month periods ended December 31, 2000, respectively, when compared to the comparable prior year periods. The increased revenue was due to increases in both equipment revenue and service revenue for the three and six month periods. The growth in equipment revenue was primarily due to the increased sales of the Company's CPE and Transport Systems products along with increased sales of TAP products due to the Teltrend Inc. acquisition. 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 DSL products and developing new and enhanced TAP and other DSL products. 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 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. 10 RESULTS OF OPERATIONS - Periods ended December 31, 2000 compared to periods ended December 31, 1999 Revenues. The Company's revenues increased 167% from $29.6 million in the three months ended December 31, 1999 to $79.1 million in the three months ended December 31, 2000. This revenue increase was primarily due to increased equipment revenue from the Company's CPE business unit of $17.9 million when compared with the same period of the prior year. Equipment revenue from the Company's TAP and Transport Systems business units also increased by $19.0 million and $9.9 million, respectively, when compared with the same three month period of the prior year. The increased CPE and Transport Systems equipment revenue was due to overall unit volume increases offset in part by lower unit selling prices. The increased revenue from the TAP business unit was primarily a result of the acquisition of Teltrend Inc., which occurred in March 2000. Service revenue increased in the three month period by $2.7 million when compared with the same period of the prior year due to increased revenue from the Company's Conference Plus, Inc. subsidiary. The increased teleconference service revenue reflects an increase in call minutes. The Company's revenues increased 272% from $78.0 million in the nine months ended December 31, 1999 to $290.5 million in the nine months ended December 31, 2000. The revenue increase in the nine-month period was primarily due to increased equipment revenue from the Company's CPE business unit of $124.9 million when compared with the same period of the prior year. Equipment revenue from the Company's TAP and Transport systems business units also increased by $52.6 million and $26.7 million, respectively, when compared with the same nine month period of the prior year. The increased CPE and Transport Systems equipment revenue was due to overall unit volume increases offset in part by lower unit selling prices. The increase in the TAP business unit was primarily a result of the acquisition of Teltrend Inc., which occurred in March 2000. Service revenue increased in the nine month period by $8.2 million when compared with the same period of the prior year due to increased revenue from the Company's Conference Plus, Inc. subsidiary. The increased teleconference service revenue reflects an increase in call minutes. Gross Margin. Gross margin as a percentage of revenue decreased from 27.9% in the three months ended December 31, 1999 to 14.7% in the three months ended December 31, 2000 and decreased from 27.4% in the nine months ended December 31, 1999 to 18.6% in the nine months ended December 31, 2000. The decreased margin in the three and nine month periods ended December 31, 2000 was primarily due to lower margins on DSL products which made up a higher proportion of the total revenue for the period. The low DSL margins were due to high material cost resulting from increased demand for semiconductor components used in DSL products. Margins were also affected by the down time and manufacturing inefficiencies caused by the consolidation of the St. Charles, Illinois manufacturing facility, which was acquired in the Teltrend acquisition, into the Aurora manufacturing facility. Although the consolidation was completed in September 2000, the manufacturing facility experienced inefficiencies related to learning a new system at the Aurora facility. These decreases were off-set in part by product mix changes and cost integration in the TAP and Transport Systems business units and to a lesser extent increased service revenue which historically earns a higher margin. Sales and Marketing. Sales and marketing expenses increased 110.4%, or $4.3 million, to $8.1 million in the three months ended December 31, 2000 and increased 98.0%, or $10.7 million, to $21.7 million in the nine months ended December 31, 2000 when compared to the same period last year. Sales and marketing expenses decreased as a percentage of revenues from 12.8% in the three months ended December 31, 1999 to 10.2% in the three months ended December 31, 2000 and decreased as a percentage of revenues from 13.8% in the nine months ended December 31, 1999 to 7.4% in the nine months ended December 31, 2000. The increase in sales and marketing expenses during the three and nine month periods was primarily due to the acquisition of Teltrend Inc., increased marketing of the DSL products and increased shipping charges to customers associated with the increase in sales. 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. 11 RESULTS OF OPERATIONS - continued Research and Development. Research and development expenses increased 191.7%, or $5.7 million, to $8.7 million in the three months ended December 31, 2000 and increased 188.4%, or $15.4 million, to $23.6 million in the nine months ended December 31, 2000 when compared to the same period last year. Research and development expenses increased as a percentage of revenues from 9.9% in the three months ended December 31, 1999 to 10.9% in the three months ended December 31, 2000 and decreased as a percentage of revenues from 10.3% in the nine months ended December 31, 1999 to 8.1% in the nine months ended December 31, 2000. This increase in research and development expenses was primarily reflective of the Company's acquisition of Teltrend Inc., which occurred in March 2000. Additionally, the Company received $1.5 million and $4.6 million during the three and nine month periods ended December 31, 1999, respectively, from customers to fund engineering projects, which was offset against research and development expenses. 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 104.3%, from $2.9 million in the three months ended December 31, 1999 to $5.9 million in the three months ended December 31, 2000 and increased 90.5%, from $9.5 million in the nine months ended December 31, 1999 to $18.1 million in the nine months ended December 31, 2000. General and administrative expenses decreased as a percentage of revenues from 9.7% in the three months ended December 31, 1999 to 7.5% in the three months ended December 31, 2000 and decreased as a percentage of revenues from 12.0% in the nine months ended December 31, 1999 to 6.2% in the nine months ended December 31, 2000. The general and administrative expense increase was primarily due to the Company's acquisition of Teltrend Inc., which occurred in March 2000. Goodwill Amortization. Intangible assets include goodwill, synergistic goodwill and product technology related to the Teltrend acquisition. The purchase price of approximately $238,241,873 exceeded the fair market value of net assets acquired, resulting in goodwill of $64,207,801 and synergistic goodwill of $57,000,000 which will be amortized on a straight-line basis over an average of approximately ten years. Other (income) expense, net. Other (income) expense, net decreased from income of $854,000 in the three months ended December 31, 1999 to income of $104,000 in the three months ended December 31, 2000 and increased from income of $905,000 in the nine months ended December 31, 1999 to income of $169,000 in the nine months ended December 31, 2000. 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 $690,000 in the three months ended December 31, 1999 to $1.1 million in the three months ended December 31, 2000 and increased from $1.4 million in the nine months ended December 31, 1999 to $1.5million in the nine months ended December 31, 2000. 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. Income taxes. There was no Benefit for income taxes recorded for either the three or the nine month periods ended December 31, 1999 and 2000. The Company provided valuation reserves for the entire benefit generated during the three and nine month periods ended December 31, 2000 of $4.0 million and $10.6 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. 12 RESULTS OF OPERATIONS - continued LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Company had $20.3 million in cash. As of December 31, 2000, the Company had $44.6 million outstanding under its secured revolving credit facility. As of December 31, 2000, the Company had approximately $400,000 available under its secured revolving credit facility. The secured revolving credit facility requires, among other things, the maintenance of a minimum interest coverage ratio, a minimum net worth, a maximum capital expenditures 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 was not in compliance with target EBITDA and the interest coverage ratio at December 31, 2000. The Company and its lenders have entered in an amendment and waiver under which the covenant violations discussed above were waived. The amendment and waiver amends covenants regarding EBITDA, capital expenditures and reporting time periods, and increases the interest rate under the credit facility from prime to prime plus 1% and from LIBOR plus 1.75% to LIBOR plus 3.0%. In addition, the amendment and waiver requires the Company to raise $25 million in equity financing by April 15, 2001 and pay such amounts to the lenders. The amounts paid to the lenders will be available for reborrowing under the credit facility subject to the Company's borrowing base. Failure to raise such funds constitutes an event of default and allows the lenders to demand repayment of all amounts outstanding under the credit facility. There can be no assurance that the Company will be able to comply with the amended financial covenants in the amendment and waiver or raise the equity financing required by the amendment and waiver. As a result of the new covenants and other requirements made in the amendment and waiver, outstanding borrowings under the credit facility have been classified as a current liability. The Company's operating activities used cash of approximately $38.8 million in the nine months ended December 31, 2000. This primarily resulted from a net loss from operations along with increases in accounts receivable, inventory, offset by an increase in accounts payable and accrued expenses. Capital expenditures for the nine month period ended December 31, 2000 were approximately $18.0 million. Capital expenditures in the nine months ended December 31, 2000 included computer hardware and software, machinery and equipment and teleconferencing bridges. The Company expects to spend approximately $5.0 million for the remainder of fiscal year 2001 related to capital equipment expenditures. At December 31, 2000, the Company's principle sources of liquidity were $20.3 million of cash and approximately $9 million of income tax refunds. The Company's credit facility has a $45.0 million available line of credit, which was fully utilized on December 31, 2000. To meet the Company's cash needs for the fourth quarter of fiscal year 2001 and fiscal year 2002 the Company is exploring various alternatives including; an increased line of credit from its current bank group, a larger line of credit from new asset based lenders replacing the current bank credit line, and some type of equity or subordinated debt offering. Cash in excess of operating requirements will 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 $53.8 million at December 31, 2000. This deferred tax asset relates to (i) tax credit carryforwards of approximately $4.9 million, (ii) a net operating loss carryforward tax benefit of approximately $39.9 million and (iii) temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts measured by tax laws. Of such tax credit carryforwards, the first $243,000 of credits expire in 2008 and $722,000 of credits may be carried forward indefinitely. The net operating loss carryforward begins to expire in 2012. Realization of deferred tax assets associated with the Company's future deductible temporary differences, net operating loss carryforwards and tax credit carryforwards is dependent upon generating sufficient taxable income prior to their expiration. 13 RESULTS OF OPERATIONS - continued 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 1998, 1999 and 2000 fiscal years, management believes that it is more likely than not that it will generate taxable income sufficient to realize the majority of the tax benefit. A majority 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. - --------------------------------------------------------------------- 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 Great British pound and the Irish pound. The Company also has a sales order and accounts receivable denominated in Great British pounds. The Company at times uses foreign currency hedging to manage the exposure to changes in the exchange rate on accounts receivable. As of December 31, 2000, the net change in the cumulative foreign currency translation adjustment account, which is a component of stockholders' equity, was an unrealized loss of $23,000. 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, 2000, 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 9.5% to approximately 19.5%) average interest rate on the Company's debt. If such an increase occurred, the Company would incur approximately $2.5 million per annum in additional interest expense based on the average debt borrowed during the twelve months ended December 31, 2000. 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. 14 PART II. OTHER INFORMATION - -------------------------- ITEM 1. LITIGATION - ------------------ Westell Technologies, Inc. and certain of its officers and directors have been named in the following class actions: 1. Schumaster v. Westell Technologies, Inc., et al., No. 00C7991 (filed December 26, 2000); 2. Barton v. Westell Technologies, Inc., et al., No. 00C7765 (filed December 12, 2000); 3. Hoffman v. Westell Technologies, Inc., et al., No. 00C7624 (filed December 4, 2000); 4. PAS Mgmt. & Consulting Serv., Inc.v. Westell Technologies, Inc., et al., No. 00C7605 (filed December 4, 2000); 5. Abdelnour v. Westell Technologies, Inc., et al., No. 00C7308 (filed November 20, 2000); 6. Feinstein v. Westell Technologies, Inc., et al., No. 00C7247 (filed November 16, 2000); 7. Lefkowitz v. Westell Technologies, Inc., et al., No. 00 C 6881 (filed November 2, 2000); 8. Greif v. Westell Technologies, Inc., et al., No. 00 C 7046 (filed November 8, 2000); 9. Seplow v. Westell Technologies, Inc., et al., No. 00 C 7019 (filed November 7, 2000); 10. Llanes v. Westell Technologies, Inc., et al., No. 00 C 6780 (filed October 30, 2000); and 11. Bergh v. Westell Technologies, Inc., et al., No. 00 C 6735 (filed October 27, 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 allegedly inflating the price of Westell stock for certain time periods. 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 Judge George W. Lindbergh of the federal district court for the Northern District of Illinois consolidated these cases into one lawsuit, captioned In re Westell Technologies, Inc., No 00 C 6735 (filed February 1, 2001). Certain of its Westell Technologies, Inc.'s officers and directors have been named in the following derivative actions: 1. Vukovich v. Zionts, et al., No. 18647 (filed January 26, 2001); and 2. Dollens v. Zionts, et al., No. 18533 NC (filed December 4, 2000). Each of these cases was filed in the Court of Chancery for the State of Delaware, New Castle County. 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 allegedly 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. 15 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 will not have a material effect on the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS - --------------------------------------------------------- On December 13, 2000 the Company held its annual shareholders meeting. Matters put before vote of the security holders were the election of directors. The results were as follows based upon total votes cast of 75,721,878: For Withheld ---------- --------- Thomas A. Reynolds, III 106,336,905 687,808 Melvin J. Simon 104,709,804 2,314,909 Paul A. Dwyer 106,407,939 616,774 Robert C. Penny 105,033,674 1,991,039 John W. Seazholtz 105,020,761 2,003,952 Howard L. Kirby, Jr. 106,442,980 581,733 Bernard F. Sergesketter 106,483,932 540,781 Marc J. Zionts 106,224,082 706,471 J.W. Nelson 106,300,104 724,609 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 10.1 Amendment to Amended and Restated Loan and Security Agreement b) The registrant was not required to file any reports on Form 8-K for the quarter. 16 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: June 12, 2001 By: MARC J. ZIONTS --------------- MARC J. ZIONTS Chief Executive Officer By: NICHOLAS C. HINDMAN -------------------- NICHOLAS C. HINDMAN Chief Financial Officer 17