SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
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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 .
The number of shares outstanding of each of the issuer's classes of common stock
are:
Class A Common Stock, $0.01 Par Value - 41,642,768 shares at August 1, 2000
Class B Common Stock, $0.01 Par Value - 19,033,869 shares at August 1, 2000
<PAGE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION: Page No.
--------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
- As of March 31, 2000 and June 30, 2000 (unaudited)
Condensed Consolidated Statements of Operations (unaudited) 4
- Three months ended June 30, 1999 and 2000
Condensed Consolidated Statements of Cash Flows (unaudited) 5
- Three months ended June 30, 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 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks 12
PART II OTHER INFORMATION
Item 4. Changes in Securities and Use of Proceeds 12
Item 5. Other events 12
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
SAFE HARBOR STATEMENT
Certain statements contained under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this 10-Q, which are not
historical facts are forward looking statements that involve risks and
uncertainties. These risks include, but are not limited to, product demand and
market acceptance risks (including the future commercial acceptance of the
Company's ADSL systems by telephone companies and other customers), the impact
of competitive products and technologies (such as cable modems and fiber optic
cable), competitive pricing pressures, product development, excess and obsolete
inventory due to new product development, commercialization and technological
delays or difficulties (including delays or difficulties in developing,
producing, testing and selling new products and technologies, such as ADSL
systems), the effect of the Company's accounting policies, the effect of
economic conditions and trade, legal, social, and economic risks (such as
import, licensing and trade restrictions) and other risks more fully described
on page 11 and 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
<PAGE>
<TABLE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
March 31, June 30,
2000 2000
---------------- ----------------
(unaudited)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $27,258 $12,959
Short term investments.............................................. 1,951 -
Accounts receivable (net of allowance of $855,000 and $1,311,000,
respectively)....................................................... 42,025 79,878
Inventories......................................................... 30,741 43,398
Prepaid expenses and other current assets........................... 2,200 2,597
Refundable income taxes............................................. 6,222 6,222
Deferred income tax asset........................................... 3,319 3,319
Land and building held for sale..................................... 3,309 3,309
---------------- ----------------
Total current assets............................................ 117,025 151,682
---------------- ----------------
Property and equipment:
Machinery and equipment............................................. 34,686 36,290
Office, computer and research equipment............................. 18,682 24,479
Leasehold improvements.............................................. 3,436 2,444
---------------- ----------------
56,804 63,213
Less accumulated depreciation and amortization...................... 30,435 32,455
---------------- ----------------
Property and equipment, net........................................ 26,369 30,758
---------------- ----------------
Goodwill and intangibles, net......................................... 175,482 167,245
Deferred income tax asset and other assets............................ 23,694 22,618
---------------- ----------------
Total assets.................................................... $ 342,570 $372,303
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $21,528 $53,556
Accrued expenses.................................................... 22,591 12,963
Notes payable....................................................... - 8,000
Accrued compensation................................................ 6,938 6,275
Current portion of long-term debt................................... 1,633 1,633
---------------- ----------------
Total current liabilities.......................................... 52,690 82,427
---------------- ----------------
Long-term debt........................................................ 1,117 4,809
---------------- ----------------
Other long-term liabilities........................................... 2,489 3,007
---------------- ----------------
Commitments and contingencies
Convertible debt (net of debt discount of $669,000 and $0, respectively) 6,611 -
---------------- ----------------
Stockholders' equity:
Class A common stock, par $0.01....................................... 402 442
Authorized - 85,000,000 shares
Issued and outstanding - 40,179,110 shares at March 31, 2000 and 41,627,554
shares at June 30, 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
June 30, 2000
Preferred stock, par $0.01............................................ - -
Authorized - 1,000,000 shares
Issued and outstanding - none
Deferred compensation................................................. 840 840
Additional paid-in capital............................................ 345,485 352,872
Accumulated other comprehensive income................................ 184 386
Accumulated deficit................................................... (67,438) (72,670)
---------------- ----------------
Total stockholders' equity...................................... 279,663 282,060
---------------- ----------------
Total liabilities and stockholders' equity.................... $ 342,570 $ 372,303
================ ================
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended
June 30,
---------------------------------------
1999 2000
---------------- ---------------
(unaudited)
(in thousands, except per share data)
---------------------------------------
<S> <C> <C>
Equipment revenue............................. $ 17,188 $ 98,118
Service revenue............................... 6,971 9,758
---------------- ---------------
Total revenues.............................. 24,159 107,876
Cost of equipment sales....................... 11,890 78,611
Cost of services.............................. 4,764 6,108
---------------- ---------------
Cost of goods sold.......................... 16,654 84,719
---------------- ---------------
Gross margin............................... 7,505 23,157
Operating expenses:
Sales and marketing......................... 3,697 7,379
Research and development.................... 3,597 7,438
General and administrative.................. 3,240 5,664
Goodwill amortization....................... - 7,958
---------------- ---------------
Total operating expenses.................. 10,534 28,439
---------------- ---------------
Operating loss.............................. (3,029) (5,282)
Other expense(income), net.................... 24 (169)
Interest expense.............................. 379 119
---------------- ---------------
Loss before tax benefit....................... (3,432) (5,232)
Benefit for income taxes...................... - -
---------------- ---------------
---------------
Net loss...................................... $(3,432) $(5,232)
================ ===============
Net loss per basic and diluted common share... $ (0.09) $ (0.08)
================ ===============
Weighted average number of basic and diluted
common shares outstanding..................... 36,468 62,652
================ ===============
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
</TABLE>
4
<PAGE>
<TABLE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Three Months Ended
June 30,
-----------------------------------------
1999 2000
----------------- -----------------
(unaudited)
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $ (3,432) $ (5,232)
Reconciliation of net loss to net cash
used in operating activities:
Depreciation and amortization.................................... 1,857 10,530
Interest expenses related to conversion of debentures............ - 135
Changes in assets and liabilities:
Increase in accounts receivable.................................. (2,136) (37,911)
Increase in inventory............................................ (1,252) (12,734)
Decrease (increase) in prepaid expenses and deposits............. 286 (397)
Decrease in refundable income taxes.............................. 5 -
(Increase) decrease in other assets.............................. (1,425) 546
(Decrease) increase in accounts payable and accrued expenses..... (2,678) 22,918
Decrease in accrued compensation................................. (1,656) (663)
----------------- -----------------
Net cash used in operating activities......................... (10,431) (22,808)
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment.............................. (940) (6,682)
Decrease in short term investments............................... - 1,951
----------------- -----------------
Net cash used in investing activities......................... (940) (4,731)
----------------- -----------------
Cash flows from financing activities:
(Repayment) borrowing of long-term debt and leases payable....... (669) 3,692
Net borrowing under revolving promissory notes................... - 8,000
Proceeds from issuance of convertible debt....................... 19,000 -
Proceeds from the issuance of common stock....................... 1,132 1,574
----------------- -----------------
Net cash provided in financing activities.................... 19,463 13,266
----------------- -----------------
Effect of exchange rate changes on cash............................ 4 (26)
Net increase (decrease) in cash............................... 8,096 (14,299)
Cash and cash equivalents, beginning of period..................... 6,715 27,258
----------------- -----------------
Cash and cash equivalents, end of period........................... $ 14,811 $ 12,959
================= =================
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
</TABLE>
5
<PAGE>
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 June 30,
2000, and for all periods presented. The results of operations for the three
month period ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 2001 ("fiscal year
2001").
NOTE 2. COMPUTATION OF NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128 which requires companies to present basic and diluted
earnings per share effective for financial statements issued for periods ending
after December 15, 1997. The computation of basic earnings per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per share includes the number of additional common
shares that would have been outstanding if the dilutive potential common shares
had been issued. The effect of this computation on the number of outstanding
shares is antidilutive for the periods ended June 30, 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 June 30, 2000, the Company has paid approximately
$615,000 of these costs.
The Company's restructuring balances and their utilization are
presented in the following table:
Utilized
Balance thru Balance
(in thousands) March 31, June 30, June 30,
2000 2000 2000
-------------------------------------------------------------------
Employee Costs........... $ 2,604 $543 $ 2,061
Contract Costs........... -- -- --
Legal & Other Costs...... 300 72 228
Charge reversal.......... -- -- --
-------------------------------------------------------------------
Total.................... $ 2,904 $615 $ 2,289
===================================================================
6
<PAGE>
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-month periods ended June 30, 1999 and 2000, are as
follows:
<TABLE>
<CAPTION>
Telecom Telecom Consolidated
(in thousands) Equipment Services Total
------------ ------------ -------
<S> <C> <C> <C>
Three months ended June 30, 1999
Revenues........................ $ 17,188 $ 6,971 $ 24,159
Operating income (loss) ........ (3,705) 676 (3,029)
Depreciation and amortization... 1,328 529 1,857
Total assets.................... 61,682 14,511 76,193
Three months ended June 30, 2000
Revenues........................ 98,118 9,758 107,876
Operating income (loss)......... (6,826) 1,544 (5,282)
Depreciation and amortization... 9,757 773 10,530
Total assets.................... 351,885 20,418 372,303
</TABLE>
Reconciliation of Operating loss from continuing operations for the
reportable segments to Loss from continuing operations before income taxes:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------------------
(in thousands) 1999 2000
---------------- ---------------
<S> <C> <C>
Operating loss ............................... $(3,029) $(5,282)
Other expense (income), net................... 24 (169)
Interest expense.............................. 379 119
---------------- ---------------
Loss before income taxes...................... $(3,432) $(5,232)
</TABLE>
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 financial statements for
the Company's fiscal year ended March 31, 2001. The Company does not expect that
SFAS No. 133 will have a significant effect on its current financial reporting.
7
<PAGE>
WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. COMPREHENSIVE INCOME:
The disclosure of comprehensive loss, which encompasses net loss and foreign
currency translation adjustments, is as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------------------
(in thousands) 1999 2000
---------------- ---------------
<S> <C> <C>
Net Loss...................................... $(3,432) $(5,232)
Other comprehensive loss
Foreign currency translation adjustment.. 90 202
---------------- ---------------
Comprehensive loss........................... $(3,342) $(5,030)
</TABLE>
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
June 30, 1999
----------------------------
Revenue....................................... $ 49,785
Net Loss...................................... (9,294)
Net loss per basic and diluted common share... $(.16)
8
<PAGE>
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
quarter ended June 30, 1999 with the quarter ended June 30, 2000 by business
unit.
June 30, June 30,
(in thousands) 1999 2000
------------ ------------
TAP.......................... $ 13,824 $ 30,221
Transport Systems............ 2,189 6,017
CPE.......................... 1,175 61,880
------------ ------------
Total equipment.............. 17,188 98,118
Services..................... 6,971 9,758
Total revenues............... $24,159 $ 107,876
============ ============
Westell's net revenues increased 346.5% in the three months ended June
30, 2000 when compared to the same period last year due to a 470.9% increase in
equipment revenue combined with a 40.0% increase in service revenue. The
increase in equipment revenue is due primarily to the increased sales of the
Company's CPE products along with the impact of the Teltrend acquisition. The
increase in 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.
9
<PAGE>
RESULTS OF OPERATIONS - Period ended June 30, 2000 compared to period ended June
30, 1999.
Revenues. The Company's revenues increased 346.5% from $24.2 million in the
three months ended June 30, 1999 to $107.9 million in the three months ended
June 30, 2000. This revenue increase was due to increased equipment revenue of
$80.9 million and teleconference service revenue of $2.8 million. The increased
equipment revenue was due primarily to increased sales of the Company's
products. Revenue from the CPE products climbed 5,166.4%, to $61.9 million for
the three months ended June 30, 2000 compared to $1.2 million for the quarter
ending June 30, 1999 due to higher unit volume offset in part by lower unit
selling price. Revenues from the Company's TAP and Transport Systems business
units, in the quarter ended June 30, 2000, increased to $30.2 million and $6.0
million, respectively, compared to $13.8 million and $2.2 million in the same
quarter one year ago. The increase in revenues from the TAP business unit is
primarily reflective of the acquisition of Teltrend Inc. which occurred in
March, 2000. The increase in revenues from the Transport System's products is
primarily due to higher unit sales volume. The Company's teleconference service
revenue of $9.8 million for the quarter ended June 30, 2000 increased $2.8
million from $7.0 million in the same quarter one year ago. This increase in
revenue is attributable to continued growth in call minutes at the Company's
subsidiary Conference Plus, Inc.
Gross Margin. Gross margin as a percentage of revenue decreased from 31.1% in
the three months ended June 30, 1999 to 21.5% in the three months ended June 30,
2000. This decrease in gross margin was primarily due to higher material costs,
resulting from increased demand in the overall market for semi-conductor
components used in our DSL products and increased freight costs. Margins were
also affected by the additional costs related to the inventory step-up resulting
from the Teltrend Inc. acquisition. This decrease in gross margin was somewhat
offset by product mix changes and product cost integration in the TAP and
Transport Systems business units and increased service revenues in the three
months ended June 30, 2000.
Sales and Marketing. Sales and marketing expenses increased 99.6%, from $3.7
million in the three months ended June 30, 1999 to $7.4 million in the three
months ended June 30, 2000. Sales and marketing expenses decreased as a
percentage of revenues from 15.3% in the three months ended June 30, 1999 to
6.8% in the three months ended June 30, 2000. The increase in sales and
marketing expenses 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.
Research and Development. Research and development expenses increased 106.8%,
from $3.6 million in the three months ended June 30, 1999 to $7.4 million in the
three months ended June 30, 2000. Research and development expenses decreased as
a percentage of revenues from 14.9% in the three months ended June 30, 1999 to
6.9% in the three months ended June 30, 2000. The increase in research and
development expense is reflective of the Company's acquisition of Teltrend Inc.
which occurred in March, 2000. Additionally, the Company received $700,000 from
customers to fund on-going engineering projects during the three months ended
June 30, 1999, 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 74.8%,
from $3.2 million in the three months ended June 30, 1999 to $5.7 million in the
three months ended June 30, 2000. General and administrative expenses decreased
as a percentage of revenues from 13.4% in the three months ended June 30, 1999
to 5.3% in the three months ended June 30, 2000. The increase in general and
administrative expenses is a result of 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 increased from an
expense of $24,000 in the three months ended June 30, 1999 to income of $169,000
in the three months ended June 30, 2000. The income for
10
<PAGE>
RESULTS OF OPERATIONS - continued
the period was primarily due to interest income earned on temporary cash
investments along with the recognition of foreign currency gains/loss.
Interest expense. Interest expense decreased from $379,000 in the three months
ended June 30, 1999 to $119,000 in the three months ended June 30, 2000. The
interest expense during the current period is a result of interest incurred on
net obligations outstanding during the period under promissory notes and
equipment borrowings. The decrease is due to convertible debt being fully
converted during the three months ended June 30, 2000.
Benefit for income taxes. There was no benefit for income taxes recorded for
both three month periods ended June 30, 1999 and 2000. The Company decreased the
valuation reserve for the entire provision generated during the current quarter
of $1.1 million. The Company will evaluate on a quarterly basis it's ability to
record a benefit for income taxes in relation to the value of tax planning
strategies available in relation to the resulting gross deferred asset.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had $13.0 million in cash. As of June 30,
2000, the Company had $8.0 million outstanding under its secured revolving
promissory note facility and $6.4 million outstanding under its equipment
borrowing facility. As of June 30, 2000, the Company had approximately $8.0
million available under its secured revolving credit facility. The secured
revolving credit facility and the equipment borrowing facility required the
maintenance of a minimum cash to current maturity ratio, a current ratio, a
maximum debt to net worth ratio and target EBITDA. The Company is currently in
compliance with all such covenants with exception of the targeted EBITDA, which
has been waived by the bank.
The Company's operating activities used cash of approximately $22.8
million in the three months ended June 30, 2000. This primarily resulted from a
net loss from operations along with increases in accounts receivable, inventory,
accounts payable and accrued expenses.
Capital expenditures for the three month period ended June 30, 2000
were approximately $6.7 million, of which $4.1 million was funded by an
equipment promissory note. The Company expects to spend approximately $23.3
million for the remainder of fiscal year 2001 related to capital equipment
expenditures.
At June 30, 2000, the Company's principle sources of liquidity were
$13.0 million of cash and the secured revolving credit facility under which the
Company may borrow up to $8.0 million based upon receivables and inventory
levels. In July, 2000, the Company received a commitment from the bank to
increase the available line of credit to $30.0 million. Cash and cash
equivalents, anticipated funds from operations, along with available credit
lines and other resources, are expected to be sufficient to meet cash
requirements for the next twelve months. Cash in excess of operating
requirements will 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 $43.3 million at
June 30, 2000. This deferred tax asset relates to (i) tax credit carryforwards
of approximately $4.7 million, (ii) a net operating loss carryforward tax
benefit of approximately $29.4 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.
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 The
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Company generated taxable income for the three month period ending June 30,
2000. The tax provision of approximately $1.1 million was recorded and offset by
a reduction of the valuation allowance. 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 fluctuation 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 June 30, 2000, the net change in the cumulative foreign currency
translation adjustment account, which is a component of stockholders' equity,
was an unrealized gain of $386,000.
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 $380,000 per annum in additional interest expense
based on the average debt borrowed during the twelve months ended March 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.
PART II. OTHER INFORMATION
--------------------------
ITEM 4. CHANGES IN SECURITIES AND USE OF PROCEEDS
--------------------------------------------------
In April 1999, the Company completed a subordinated secured convertible
debenture private placement totaling $20 million. As of May 16, 2000, holders of
these debentures fully converted all principle and the accrued interest thereon
of approximately $245,000 into 3,177,168 Class A common shares at a conversion
price of $6.372 per share.
ITEM 5. OTHER EVENTS
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None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------------
a) The following documents are furnished as an exhibit and numbered
pursuant to Item 601 of regulation S-K:
Exhibit 27: Financial Data Schedule
b) The following Form 8-K was filed by the Company.
1.) On May 22, 2000, an amended Form 8-K was filed which included
certain financial and pro forma information relating to the Company's
acquisition of Teltrend Inc.
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: August 4, 2000 By: MARC ZIONTS
-------------
MARC ZIONTS
Chief Executive Officer
By: NICHOLAS C. HINDMAN
--------------------
NICHOLAS C. HINDMAN
Chief Financial Officer
