As filed with the Securities and Exchange Commission on August 4, 1999 Registration No. 333-79407 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ______________________________ AMENDMENT NO. 2 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ______________________________ WESTELL TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) ______________________________ DELAWARE 3661 36-3154957 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or classification Code Number) Identification No.) organization) ______________________________ 750 NORTH COMMONS DRIVE AURORA, ILLINOIS 60504 (630) 898-2500 (Address, including zip code, and telephone number, including area code, of registrant's executive offices) ROBERT H. GAYNOR CHIEF EXECUTIVE OFFICER WESTELL TECHNOLOGIES, INC. 750 NORTH COMMONS DRIVE AURORA, ILLINOIS 60504 (630) 898-2500 (Name, address, including zip code, and telephone number, including area code, of agent for service) ______________________________ Copies To: NEAL J. WHITE, P.C. McDermott, Will & Emery 227 West Monroe Street, Suite 3100 Chicago, Illinois 60606-5096 (312) 372-2000 ______________________________ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this registration statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box./X/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering./ / _________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. Information contained in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities under this prospectus until the registration statement filed with the SEC is effective. This prospectus is not an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED AUGUST 4, 1999 PROSPECTUS 8,500,000 SHARES WESTELL TECHNOLOGIES, INC. CLASS A COMMON STOCK We have prepared this prospectus to allow the selling stockholders identified in this prospectus to sell up to 8,500,000 shares of our class A common stock. Our class A common stock is quoted on the Nasdaq National Market under the symbol "WSTL." On August _____, 1999, the closing sale price of the class A common stock on the Nasdaq National Market was $_______ per share. INVESTING IN OUR CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 3 OF THIS PROSPECTUS BEFORE MAKING A DECISION TO PURCHASE OUR CLASS A COMMON STOCK. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR ANY SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE ELSE TO PROVIDE YOU WITH ADDITIONAL OR DIFFERENT INFORMATION. THE CLASS A COMMON STOCK IS NOT BEING OFFERED IN ANY STATE OR JURISDICTION WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR ANY SUPPLEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF SUCH DOCUMENTS. YOU SHOULD READ CAREFULLY THE ENTIRE PROSPECTUS, AS WELL AS THE DOCUMENTS INCORPORATED BY REFERENCE IN THE PROSPECTUS, BEFORE MAKING AN INVESTMENT DECISION. ______________________________ The date of this Prospectus is August __, 1999 TABLE OF CONTENTS The Company..................................................................2 Risk Factors.................................................................2 Use of Proceeds.............................................................14 The Selling Stockholders....................................................14 Plan of Distribution........................................................17 About This Prospectus.......................................................19 Where You Can Find More Information.........................................19 Experts.....................................................................19 THE COMPANY Because this is a summary, it does not contain all the information about us that may be important to you. You should read the more detailed information and the financial statements and related notes which are incorporated by reference in this prospectus. Since 1980, Westell has developed telecommunications products that address the needs of telephone companies to upgrade their existing network infrastructures in order to deliver advanced data and voice services to their customers. We design, manufacture, market and service a broad range of digital and analog products used by telephone companies to deliver services primarily over existing copper telephone wires that connect end users to a telephone company's central office. The copper wires that connect users to these central offices are part of the telephone companies' networks and are commonly referred to as the local loop or the local access network. We also market our products and services to other telecommunications and information service providers seeking direct access to end-user customers. We offer a broad range of products that facilitate the transmission of high speed digital and analog data between a telephone company's central office and end-user customers. These products can be categorized into three groups: o DSL products: products based on digital subscriber line or DSL technologies. The DSL technology permits even greater digital transmission capacity over copper wire than is possible with other products. DSL technology allows the simultaneous transmission of data at speeds up to 8.0 Mega bits per second in one direction and up to 1 Mega bits per second in the reverse direction, while also providing standard analog telephone service over a single pair of copper wires at distances of up to 18,000 feet, depending on the transmission rate. With DSL technology, a user can talk and have high speed data transmissions at the same time over a regular phone line. thus offering a more cost-effective and faster deployment alternative to fiber optic cable. DSL systems support advanced data applications such as high speed Internet access, local area network extension, telecommuting, and virtual libraries; o T-1 products: products used by telephone companies to enable high speed digital T-1 transmission at approximately 1.5 megabits per second and E-1 transmission at approximately 2.0 megabits per second, which is approximately 24 times faster than standard telephone service; and o Traditional products: products used by telephone companies to deliver digital services at speeds ranging from approximately 2.4 to 64 kilobits per second and traditional analog services with 4 kilohertz bandwidth which are relatively slower speeds than T-1 and DSL products. Conference Plus, Inc., our 88% owned subsidiary, provides audio, video, and data conferencing services. Businesses and individuals use these services to hold voice, video or data conferences with many people at the same time. Conference Plus sells its services directly to large customers, including Fortune 100 companies and serves customers indirectly through its private reseller program. Conference Plus is one of the largest providers of conferencing services that is not directly affiliated with or owned by telephone carriers such as AT&T. RISK FACTORS You should carefully consider the following risk factors in addition to the other information contained and incorporated by reference into this prospectus before purchasing our stock. WE MAY FACE OTHER RISKS NOT DESCRIBED IN THE FOREGOING RISK FACTORS WHICH MAY IMPAIR OUR BUSINESS OPERATIONS. The risks and uncertainties described in the foregoing risk factors may not be the only ones facing us. Additional risks and uncertainties not presently known to us may also impair our business operations. If any of the following risks actually occur, our business, financial condition and results of operations could be materially adversely affected. In this case, the trading price of our common stock could decline, and you may lose all or part of your investment. WE HAVE INCURRED AND CONTINUE TO EXPECT LOSSES. Due to our significant ongoing investment in DSL technology, which can be used by telephone companies and other service providers to increase the transmission speed and capacity of copper telephone wires, we have incurred and anticipate that our losses may extend at least through each of our fiscal 2000 quarters. To date, we have incurred operating losses, net losses and negative cash flow on both an annual and quarterly basis. For the year ended March 31, 1999, we had net losses of $35.0 million. We believe that our future revenue growth and profitability will depend on: o creating sustainable DSL sales opportunities; o developing new and enhanced T-1 products; o developing other niche products for both DSL and T-1 markets; and o growing our teleconference service revenues. In addition, we expect to continue to evaluate new product opportunities and engage in extensive research and development activities. As a result, we will continue to invest heavily in research and development and sales and marketing, which will adversely affect our short-term operating results. We can offer no assurances that we will achieve profitability in the future. WE DEPEND ON DSL MARKET ACCEPTANCE AND GROWTH FOR FUTURE SUCCESS. We expect to continue to invest significant resources in the development of DSL products. Because the DSL market is in its early stages, our DSL revenues have been difficult to forecast. If the DSL market fails to grow or grow more slowly than anticipated, then our business, revenues and operating results would be materially adversely affected. Our analog-based and T-1 based products such as our Network Interface Units, which provide maintenance capabilities for telephone lines providing T-1 transmission, are not expected to generate sufficient revenues or profits to offset any losses that we may experience due to a lack of sales of DSL systems. If we fail to generate significant revenues from DSL sales, then we would not be able to implement our business goals and our business and operating results would suffer significantly. Customers have only recently begun to consider implementing DSL products in their networks. We have shipped most of our DSL products for trials and early deployment. Most of our customers are in initial service deployments and are not contractually bound to purchase our DSL systems in the future. We are unable to predict whether these initial service deployments or other technical or marketing trials will be successful and when significant commercial deployment of our DSL products will begin, if at all. The timing of DSL orders and shipments can significantly impact our revenues and operating results. Even if our customers adopt policies favoring full-scale implementation of DSL technology, our DSL-based sales may not become significant. There is no guaranty that our customers will select our DSL products instead of competitive products. If we fail to significantly increase our DSL sales, then our business, operating results and financial condition will suffer. PRICING PRESSURES ON OUR PRODUCTS MAY AFFECT OUR ABILITY TO BECOME PROFITABLE. Due to competition in the DSL market, bids for recent field trials of DSL products reflect: o the forward pricing of DSL products below production costs to take into account the expectation of large future volumes and corresponding reductions in manufacturing costs; or o suppliers providing DSL products at a lower price as part of a sale of a package of products and/or services. We are offering DSL products based upon forward pricing. For example, in the September and December 1998 quarters, we shipped ADSL products to customers that were priced below our current production costs. As a result, we recognized forward pricing losses of approximately $1.7 million and $800,000, respectively, for DSL orders received during those quarters. Such pricing will cause us to incur losses on a substantial portion of our DSL product sales unless and until we can reduce manufacturing costs. We believe that manufacturing costs may decrease when: o more cost-effective transceiver technologies are available; o product design efficiencies are obtained; and o economies of scale are obtained related to increased volume. There is no guaranty that we will be able to secure significant additional orders and reduce per unit manufacturing costs that we have factored into our forward pricing of DSL products. We could continue to incur losses in connection with sales of DSL products even if our DSL unit volume increases. Losses from our sales of DSL products would materially and adversely affect our ability to achieve profitability and implement our business goals. Moreover, the International Telecommunication Union is expected to announce a standard in late 1999 for a DSL product called G.Lite, which will allow consumers to install DSL technology on their computers themselves. We believe this announcement will increase competition in the DSL market and result in greater pricing pressures with respect to all DSL products. OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY, CAUSING OUR STOCK PRICE TO BE VOLATILE OR DECLINE. We expect to continue to experience significant fluctuations in quarterly operating results. Factors that have had and may continue to influence our quarterly operating results include: o the size and timing of customer orders and subsequent shipments, including customer order deferrals in anticipation of new products or anticipated sale or merger of the customer's business or other reasons; o the impact of changes in the customer mix or product mix sold; o long and unpredictable sales cycles and customer purchasing programs; o the absence of unconditional minimum purchase commitments from any customer; o timing of product introductions or enhancements by us or our competitors; o acceptance of new products by our customers; o technological changes in the telecommunications industry; o competitive pricing pressures; o accuracy of customer forecasts of end-user demand; o write-offs for obsolete inventory; o changes in our operating expenses which can occur because of product development costs, pricing pressures and other factors; o personnel changes; o quality control of products sold; o disruption in supplies of key components of our products; o regulatory changes; and o delays of payments by customers. Sales to our largest customers have fluctuated and are expected to fluctuate significantly between financial periods. Sales to our customers typically involve long approval and procurement cycles and can involve large purchase commitments. Customers purchasing DSL products may generally reschedule orders without penalty to the customer. Cancellation or deferral of one or a small number of orders could cause significant fluctuations in our quarterly operating results. Due to our fluctuations in quarterly results, we believe that period-to-period comparisons of our quarterly operating results are not necessarily meaningful and should not be relied upon as indications of future performance. In addition, these quarterly fluctuations make it more difficult to forecast our revenues. It is likely that in some future quarters our operating results will be below the expectations of securities analysts and investors, which may adversely affect our stock price. This occurred in fiscal 1999. We attempt to address this possible divergence through our public announcements and reports. The degree of specificity we can offer in such announcements, however, and the likelihood that any forward-looking statements we make will prove correct, can and will vary. As long as we continue to depend on DSL and new products, there is substantial risk of widely varying quarterly results, including the so-called "missed quarter" relative to investor expectations. EVOLVING INDUSTRY STANDARDS MAY ADVERSELY AFFECT OUR DSL SALES Industry wide standardization organizations such as the American National Standards Institute and the European Telecommunications Standards Institute are responsible for setting transceiver technology standards for DSL products. Because we have not internally developed a transceiver technology for our products, we are dependent on transceiver technologies from third parties. Absent the proper relationships with key transceiver technology vendors, our products may not comply with the developing standards for DSL. If customers require standards-based products that require transceiver technologies not available to us under reasonable terms, then our DSL revenues would significantly decrease and our business and operating results would materially suffer. We will continue to rely on third party suppliers for access to transceiver technologies for new DSL products such as the DSL product under development called G.Lite, which will allow consumers to install DSL technology on their computers themselves. Since standards have not been established for G.Lite products, there can be no assurance that standards-compliant transceiver technologies will be available to us in a timely manner for the purpose of product development. In addition, the introduction of competing standards or implementation specifications could result in confusion in the market and delay any decisions regarding deployment of DSL systems. For example, the anticipated announcement of G.Lite standard could also delay our customer's deployment of other DSL products. Delay in the announcement of standards would materially and adversely impact sales of our DSL product offerings and could have a material adverse effect on our business and operating results. OUR PRODUCTS FACE COMPETITION FROM OTHER EXISTING PRODUCTS, PRODUCTS UNDER DEVELOPMENT AND CHANGING TECHNOLOGY, AND WE MUST DEVELOP NEW COMMERCIALLY SUCCESSFUL PRODUCTS TO ACHIEVE OUR BUSINESS GOALS AND GENERAL REVENUE. The markets for our products are characterized by: o intense competition, o rapid technological advances, o evolving industry standards, o changes in end-user requirements, o frequent new product introductions and enhancements, and o evolving telephone company service offerings. New products introductions or changes in telephone company services could render our existing products and products under development obsolete and unmarketable. For example, HDSL, product that enhances the signal quality of the transmission over copper wire, may reduce the demand for the types of products that we currently manufacture such as our Network Interface Units product, which provide performance monitoring of copper telephone wires. Our Network Interface Units accounted for at least 50% of our revenues in each of the last three fiscal years. Further, we believe that the domestic market for many of our traditional analog products is decreasing, and will likely continue to decrease, as high capacity digital transmission becomes less expensive and more widely deployed. Our future success will largely depend upon our ability to continue to enhance our existing products and to successfully develop and market new products on a cost-effective and timely basis. Our current product offerings apply primarily to the delivery of digital communications over copper wire in the local access network. We expect that the increasing deployment of fiber and wireless broadband transmission in the local access network will reduce the demand for our existing products. Telephone companies also face competition from cable operators, new local access providers and wireless service providers that are capable of providing high speed digital transmission to end-users. If telephone companies decide not to aggressively respond to this competition and fail to offer high speed digital transmission, then the overall demand for DSL products will decline. Consequently, to remain competitive we must develop new products to meet the demands of these emerging transmission media and new local access network providers. If our products become obsolete or fail to gain widespread commercial acceptance due to competing products and technologies, then our product revenues would significantly decrease and business and operating results will be materially adversely affected. WE MAY EXPERIENCE DELAYS IN THE DEPLOYMENT OF NEW PRODUCTS. Our past sales have resulted from our ability to anticipate changes in technology, industry standards and telephone company service offerings, and to develop and introduce new and enhanced products and services. Our continued ability to adapt to such changes will be a significant factor in maintaining or improving our competitive position and our prospects for growth. Factors resulting in delays in product development include: o rapid technological changes in the telecommunications industry; o the Regional Bell Operating Companies' lengthy product approval and purchase processes; and o our reliance on third-party technology for the development of new products. There can be no assurance that we will successfully introduce new products on a timely basis or achieve sales of new products in the future. In addition, there can be no assurance that we will have the financial and manufacturing resources necessary to continue to successfully develop new products or to otherwise successfully respond to changing technology standards and telephone company service offerings. If we fail to deploy new products on a timely basis, then our product sales will decrease and our competitive position and financial condition would be materially and adversely affected. THE HIGHLY COMPETITIVE MARKET IN WHICH WE OPERATE MAY RESULT IN OPERATING LOSSES, A DECREASE IN OUR MARKET SHARE, AND FLUCTUATIONS IN OUR REVENUE. We expect competition to increase in the future especially in the emerging DSL market. Because we are significantly smaller than most of our competitors, we may lack the financial resources needed to increase our market share. Our principal competitors are as follows: o DSL products: Alcatel Network Systems, AGCS, Cabletron, ECI Telecom, Ltd., Nokia, Copper Mountain, Cabletron, Ltd., Ericsson, Cisco Systems, Lucent Technologies, Inc., Nortel, Orckit Communications, Ltd. PairGain Technologies, Inc., Paradyne, 3Com, and Siemens; o T-1 products: ADC Telecommunications Inc., Applied Digital Access Inc., PairGain Technologies, Inc. and Teltrend, Inc.; and o Traditional products: Adtran, Inc., Pulsecom, Tellabs, Inc. and Teltrend, Inc. In addition, under the Telecommunications Act , the Regional Bell Operating Companies may engage in manufacturing activities. So our largest customers may potentially become our competitors as well. We expect continued aggressive tactics from many of our competitors such as: o Forward pricing of products; o Early announcements of competing products; o Bids that bundle DSL products with other product offerings; o Customer financing assistance; and o Intellectual property disputes. These tactics can be particularly effective in a highly concentrated customer base such as ours. Many of our competitors are much larger than us and can a wide array of different products and services that are required for all of the telephone companies' business. Conversely, our products are used in the local access network which is just one element of a telephone companies' network. Instead of directly competing with these large suppliers, we have entered into strategic alliances with companies such as Lucent and Fujitsu Telecom Europe, Ltd. to offer our products within a package of products sold by these companies. Our ability to sell our DSL products will depend on the success of our alliances with large suppliers and our system solutions. Our inability to form successful alliances and develop systems that meet customer requirements will affect our ability to sell our DSL Products which would materially adversely affect our business and operating results. In addition, the development of the G.Lite DSL product could enable other companies with less technological expertise than us to more readily enter the DSL market and could place additional pricing pressures on our other DSL products. Conference Plus participates in the highly competitive industry of voice, video, and multimedia conferencing services. Competitors include stand-alone conferencing companies and major telecommunications providers. In addition, internet service providers may attempt to expand their revenue base by providing conferencing services. Conference Plus's ability to sustain growth and performance is dependent on its: o maintenance of high quality standards and low cost position; o continued operational excellence; o strong alliances and partnerships; o international expansion; and o evolving technological capability. Any increase in competition could reduce our gross margin, require increased spending on research and development and sales and marketing, and otherwise materially adversely affect our business and operating results. OUR LACK OF BACKLOG MAY AFFECT OUR ABILITY TO ADJUST TO AN UNEXPECTED SHORTFALL IN ORDERS. Because we generally ship products within a short period after receipt of an order, we typically do not have a material backlog of unfilled orders, and our revenues in any quarter are substantially dependent on orders booked in that quarter. Our expense levels are based in large part on anticipated future revenues and are relatively fixed in the short-term. Therefore, we may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall of orders. Accordingly, any significant shortfall of demand in relation to our expectations or any material delay of customer orders would have immediate adverse impact on our business and operating results. INDUSTRY CONSOLIDATION COULD MAKE COMPETING MORE DIFFICULT. Consolidation of companies offering high speed telecommunications products is occurring through acquisitions, joint ventures and licensing arrangements involving our competitors, our customers and our customers' competitors. We cannot provide any assurances that we will be able to compete successfully in an increasingly consolidated telecommunications industry. Any heightened competitive pressures that we may face may have a material adverse effect on our business, prospects, financial condition and result of operations. WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS WHO ARE ABLE TO EXERT A HIGH DEGREE OF INFLUENCE OVER US. We have and will continue to depend on the large Regional Bell Operating Companies, those companies emerging from the break-up of AT&T, as well as and other telephone carriers including smaller local telephone carriers and new alternative telephone carriers such as Qwest, for substantially all of our revenues. Sales to the Regional Bell Operating Companies accounted for 61.9%, 51.1% and 46.6% of our revenues in fiscal 1997, 1998 and 1999, respectively. Consequently, our future success will depend significantly upon: o the timeliness and size of future purchase orders from the Regional Bell Operating Companies; o the product requirements of the Regional Bell Operating Companies; o the financial and operating success of the Regional Bell Operating Companies; and o the success of the Regional Bell Operating Companies' services that use our products. The Regional Bell Operating Companies and our other customers are significantly larger than we are and are able to exert a high degree of influence over us. Customers purchasing our products may generally reschedule orders without penalty to the customer. Even if demand for our products is high, the Regional Bell Operating Companies have sufficient bargaining power to demand low prices and other terms and conditions that may materially adversely affect our business and operating results. Any attempt by a Regional Bell Operating Company or our other customers to seek out additional or alternative suppliers or to undertake the internal production of products would have a material adverse effect on our business and operating results. The loss of any or our customer could result in an immediate decrease in product sales and materially and adversely affect our business. Conference Plus's customer base is very concentrated as its top ten customers represent a large portion of revenue. Customers of Conference Plus have expanded their requirements for our services, but there can be no assurance that such expansion will increase in the future. Additionally, Conference Plus's customers continually undergo review and evaluation of their conferencing services to evaluate the merits of bringing those services in-house rather than outsourcing those services. There can be no assurance in the future that Conference Plus's customers will bring some portion or all of their conferencing services in-house. Conference Plus must continually provide higher quality, lower cost services to provide maintain and grow their customer base. Any loss of a major account, would have a material adverse effect on Conference Plus. In addition, any merger or acquisition of a major customer could have a material adverse effect on Conference Plus. OUR CUSTOMERS HAVE LENGTHY PURCHASE CYCLES WHICH AFFECT OUR ABILITY TO SELL OUR PRODUCTS. Prior to selling products to telephone companies, we must undergo lengthy approval and purchase processes. Evaluation can take as little as a few months for products that vary slightly from existing products or up to a year or more for products based on new technologies such as DSL products. Accordingly, we are continually submitting successive generations of our current products as well as new products to our customers for approval. The length of the approval process can vary and is affected by a number of factors, including: o the complexity of the product involved, o priorities of telephone companies, o telephone companies' budgets, and o regulatory issues affecting telephone companies. The requirement that telephone companies obtain FCC approval for most new telephone company services prior to their implementation has in the past delayed the approval process. Such delays in the future could have a material adverse affect on our business and operating results. While we have been successful in the past in obtaining product approvals from our customers, there is no guaranty that such approvals or that ensuing sales of such products will continue to occur. THE FAILURE TO MAINTAIN AND FURTHER DEVELOP PARTNERS AND ALLIANCES WOULD ADVERSELY AFFECT OUR BUSINESS. We have developed and maintain partnerships and alliances with other companies in order to secure complementary technologies, to lower costs, and to better market and sell our products. These partnerships and alliances provide important resources and channels for us to compete successfully. For example, our partnership with Lucent Technologies for the development of an ADSL product that may be integrated in a product sold by Lucent enables us to access to a significant number of potential customers. We cannot provide any assurances that these partnerships will continue in the future. ADSL is a DSL technology that allows for bi-directional high speed digital transmission as well as analog telephone service along a copper telephone wire. As competition increases in the DSL market, our alliances will become even more important to us. A loss of one or more partnerships and alliances could affect our ability to sell our products and therefore could materially adversely affect our business and operating results. WE ARE DEPENDENT ON THIRD PARTY TECHNOLOGY AND WE WOULD NOT BE ABLE TO COMPETE WITHOUT THIRD PARTY TECHNOLOGY. Many of our products incorporate technology developed and owned by third parties. Consequently, we must rely upon third parties to develop and introduce technologies which enhance our current products and to develop new products. Any impairment or termination of our relationship with any licensors of technology would force us to find other developers on a timely basis or develop our own technology. There is no guaranty that we will be able to obtain the third-party technology necessary to continue to develop and introduce new and enhanced products, that we will obtain third-party technology on commercially reasonable terms or that we will be able to replace third-party technology in the event such technology becomes unavailable, obsolete or incompatible with future versions of our products. We would have severe difficulty competing if we cannot obtain or replace the third-party technology used in our products. Any absence or delay would materially adversely affect our business and operating results. For example, our ability to produce DSL products is dependent upon third party transceiver technologies. Our licenses for DSL transceiver technology are nonexclusive and the transceiver technologies either have been licensed to numerous other manufacturers or do not require a license to acquire. If our DSL transceiver licensors fail to deliver implementable or standards compliant transceiver solutions to us and other alternative sources of DSL transceiver technologies are not available to us at commercially acceptable terms, then our business and operating results would be materially and adversely affected. WE ARE DEPENDENT ON SOLE OR LIMITED SOURCE SUPPLIERS AND COULD NOT SELL OUR PRODUCTS WITHOUT THESE SUPPLIERS. Integrated circuits and other electronic components used in our products are currently available from only one source or a limited number of suppliers. For example, we currently depend on GlobeSpan Technologies, Alcatel and Analog Devices, Inc. to provide critical integrated transceiver circuits used in the Company's DSL products. In addition, some of the electronic components used in our products are currently in short supply and are provided on an allocation basis to us and other users based upon past usage. There is no guaranty that we will be able to continue to obtain sufficient quantities of integrated circuits or other electronic components as required, or that such components, if obtained, will be available to us on commercially reasonable terms. Integrated transceiver circuits and electronic components are key components in all of our products and are fundamental to our business strategy of developing new and succeeding generations of products at reduced unit costs without compromising functionality or serviceability. In the past we have experienced delays in the receipt of key components which have resulted in delays in related product deliveries. We anticipate that integrated circuit production capacity and availability of some electronic components may be insufficient to meet the demand for such components in the future. The inability to obtain sufficient key components or to develop alternative sources for such components as required, could result in delays or reductions in product shipments, and consequently have a material adverse effect on our customer relationships and our business and operating results. OUR SERVICES ARE AFFECTED BY UNCERTAIN GOVERNMENT REGULATION AND CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS COULD RESTRICT THE WAY WE OPERATE OUR BUSINESS. Many of our customers are subject to regulation from federal and state agencies, including the FCC and various state public utility and service commissions. While such regulation does not affect us directly, the effects of such regulations on our customers may adversely impact our business and operating results. For example, FCC regulatory policies affecting the availability of telephone company services and other terms on which telephone companies conduct their business may impede our penetration of local access markets. The Telecommunications Act lifted certain restrictions on telephone companies' ability to provide interactive multimedia services including video on demand. The Telecommunications Act establishes new regulations whereby telephone companies may provide various types of video services. Rules to implement these new statutory provisions are now being considered by the FCC. While the statutory and regulatory framework for telephone companies providing video products has become more favorable, it is uncertain at this time how this will affect telephone companies' demand for products based upon DSL technology. In addition, our business and operating results may also be adversely affected by the imposition of tariffs, duties and other import restrictions on components that we obtain from non-domestic suppliers or by the imposition of export restrictions on products that we sell internationally. Internationally, governments of the United Kingdom, Canada, Australia and numerous other countries actively promote and create competition in the telecommunications industry. Changes in current or future laws or regulations, in the U.S. or elsewhere, could materially and adversely affect our business and operating results. In addition, the Telecommunications Act permits the Regional Bell Operating Companies to engage in manufacturing activities after the FCC authorizes a Regional Bell Operating Company to provide long distance services within its service territory. A Regional Bell Operating Company must first meet specific statutory and regulatory tests demonstrating that its monopoly market for local telephone services is open to competition before it will be permitted to enter the long distance market. When these tests are met, a Regional Bell Operating Company will be permitted to engage in manufacturing activities and the Regional Bell Operating Companies, which are our largest customers, may become our competitors as well. POTENTIAL PRODUCT RECALLS AND WARRANTY EXPENSES COULD ADVERSELY AFFECT OUR ABILITY TO BECOME PROFITABLE. Our products are required to meet rigorous standards imposed by our customers. Most of our products carry a limited warranty ranging from one to seven years. In addition, our supply contracts with our major customers typically require us to accept returns of products or indemnify such customers against certain liabilities arising out of the use of our products. Complex products such as those offered by us may contain undetected errors or failures when first introduced or as new versions are released. Because we rely on new product development to remain competitive, we cannot predict the level of these type of claims that we will experience in the future. Despite our testing of products and our comprehensive quality control program, there is no guaranty that our products will not suffer from defects or other deficiencies or that we will not experience material product recalls, product returns, warranty claims or indemnification claims in the future. Such recalls, returns or claims and the associated negative publicity could result in the loss of or delay in market acceptance of our products, affect our product sales, our relationships with customers, and our ability to generate a profit OUR INTERNATIONAL OPERATIONS EXPOSE US TO THE RISKS OF CONDUCTING BUSINESS OUTSIDE THE UNITED STATES. International revenues represented 5.5%, 9.9% and 9.1% of our revenues in fiscal 1997, 1998 and 1999, respectively. The Company also has a relationship with Fujitsu Telecom Europe, Ltd. for the supply of ADSL equipment to British Telecom. Our international revenues are subject to the risks of conducting business internationally, which include: o unexpected changes in regulatory requirements, o foreign currency fluctuations o tariffs and trade barriers, o potentially longer payment cycles, o difficulty in accounts receivable collection, o foreign taxes, o burdens of complying with a variety of foreign laws and telecommunications standards, and o the failure of the laws of foreign countries to protect our proprietary technology. There can be no assurance that the risks associated with our international operations will not materially adversely affect our business and operating results in the future or require us to modify significantly our current business practices. OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD IMPAIR OUR ABILITY TO SUPPLY AND SUPPORT THE MANUFACTURE OF LARGE VOLUMES OF DSL PRODUCTS. We are in the process of planning for the manufacturing capabilities necessary to supply and support large volumes of DSL products and in the future may become increasingly dependent on subcontractors. Reliance on third-party subcontractors involves several risks, including the potential absence of adequate capacity and reduced control over product quality, delivery schedules, manufacturing yields and costs. Although we believe that alternative subcontractors or sources could be developed if necessary, the use of subcontractors could result in material delays or interruption of supply as a consequence of required re-tooling, retraining and other activities related to establishing and developing a new subcontractor or supplier relationship. Any material delays or difficulties in connection with increased manufacturing production or the use of subcontractors could have a material adverse effect on our business and operating results. If we are not successful in increasing our manufacturing capacity in a timely and cost-effective manner, then the possible transition to subcontracting will materially adversely affect our business and operating results. Our failure to effectively manage our growth would have a material adverse effect on our business and operating results. THE CLASS A COMMON STOCK ISSUABLE UPON CONVERSION OF OUR CONVERTIBLE DEBENTURES MAY SIGNIFICANTLY INCREASE THE SUPPLY OF OUR CLASS A COMMON STOCK IN THE PUBLIC MARKET, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE. On April 16, 1999, we issued $20,000,000 aggregate principal amount of convertible debentures. The convertible debentures are convertible into a number of shares of class A common stock as is determined by dividing the principal amount of the convertible debentures by the lesser of: o a variable conversion price which is initially $6.372 per share, but will be increased under the terms of the convertible debentures; and o the floating market price of our class A common stock at the time of conversion, except that the market price can be imposed only under specific conditions. Assuming a conversion price of $6.372 per share, the convertible debentures will be convertible into approximately 3,138,731 shares of class A common stock. If our class A common stock trades at a price less than the variable conversion price, then the convertible debentures will be convertible into shares of our class A common stock at variable rates based on future trading prices of the class A common stock and events that may occur in the future. Therefore, if the conversion price is less than $6.372 per share, then the number of shares of class A common stock issuable upon conversion of the convertible debentures will be inversely proportional to the market price of the class A common stock at the time of conversion. The number of shares of class A common stock that may ultimately be issued upon conversion is therefore presently indeterminable and could fluctuate significantly. Depending on market conditions at the time of conversion, however, the number of shares issuable could prove to be significantly greater if our stock's trading price declines. Purchasers of class A common stock could therefore experience substantial dilution upon conversion of the convertible debentures. Also, the warrants are subject to anti-dilution protection, which may result in the issuance of more shares than originally anticipated if we issue securities at less than market value or the applicable exercise price. These factors may result in substantial future dilution to the holders of our class A common stock. WE WILL NOT BE ABLE TO SUCCESSFULLY COMPETE, DEVELOP AND SELL NEW PRODUCTS IF WE FAIL TO RETAIN KEY PERSONNEL AND HIRE ADDITIONAL KEY PERSONNEL. Because of our need to continually evolve our business with new product developments and strategies, our success is dependent, in part, on our ability to attract and retain qualified technical, marketing, sales and management personnel. To remain competitive in the telecommunications industry, we must maintain top management talent, employees who are involved in the development and testing of new products, and employees who have developed important relationships with key customers. Because of the high demand to these types of key employees, especially in the DSL market, it is difficult to retain existing key employees and attract new key employees. While most of our executive officers, have severance agreements in which the officers agreed not to compete with us and not to solicit any of our employees for a period of one year after termination of the officer's employment in most circumstances, we do not have similar noncompetition and nonsolicitation agreements for other employees who are important in our product development and sales. Our inability to attract and retain additional key employees or the loss of one or more of our current key employees could materially adversely affect our ability to successfully develop new products and implement our strategy. WE RELY ON OUR INTELLECTUAL PROPERTY WHICH WE MAY BE UNABLE TO PROTECT, OR WE MAY BE FOUND TO INFRINGE THE RIGHTS OF OTHERS. Our success will depend, in part, on our ability to protect trade secrets, obtain or license patents and operate without infringing on the rights of others. Although we regard our technology as proprietary, we have only one patent on such technology related to Network Interface Units. We expect to seek additional patents from time to time related to our research and development activities. We rely on a combination of technical leadership, trade secrets, copyright and trademark law and nondisclosure agreements to protect our unpatented proprietary know-how. These measures, however, may not provide meaningful protection for our trade secrets or other proprietary information. Moreover, our business and operating results may be materially adversely affected by competitors who independently develop substantially equivalent technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as U.S. law. The telecommunications industry is also characterized by the existence of an increasing number of patents and frequent litigation based on allegations of patent and other intellectual property infringement. From time to time we receive communications from third parties alleging infringement of exclusive patent, copyright and other intellectual property rights to technologies that are important to us. There is no guaranty that third parties will not assert infringement claims against us in the future, that assertions by such parties will not result in costly litigation, or that we would prevail in any such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Further, such litigation, regardless of its outcome, could result in substantial costs to and diversion of our efforts. Any infringement claim or other litigation against or by us could have a material adverse effect on our business and operating results. OUR STOCK PRICE IS VOLATILE WHICH MAY AFFECT YOUR ABILITY TO REALIZE A PROFIT WHEN PURCHASING OUR STOCK. Our class A common stock price has experienced substantial volatility in the past and is likely to remain volatile in the future due to factors such as: o Our historical and anticipated quarterly and annual operating results; o Variations between our actual results and analyst and investor expectations; o Announcements by us or others and developments affecting our business; o Investor perceptions of our company and comparable public companies; and o Conditions and trends in the data communications and Internet-related industries. In particular, the stock market has from time to time experienced significant price and volume fluctuations affecting the common stocks of technology companies, which may include telecommunications manufacturers like Westell. Volatility can also arise as a result of the activities of short sellers and risk arbitrageurs regardless of our performance. This volatility may result in a material decline in the market price of our class A common stock, and may have little relationship to our financial results or prospects. WE WILL NEED ADDITIONAL FINANCING IF WE DO NOT MEET OUR BUSINESS PLAN OR WE WILL NOT BE ABLE TO FUND OUR OPERATIONS. We must continue to enhance and expand our product and service offerings in order to maintain our competitive position and increase our market share. As a result and due to our net losses, the continuing operations of our business may require substantial capital infusions. Whether or when we can achieve cash flow levels sufficient to support our operations cannot be accurately predicted. Unless such cash flow levels are achieved, we may require additional borrowings or the sale of debt or equity securities, or some combination thereof, to provide finding for our operations. In April 1999, we completed a private placement of convertible debentures and warrants for $20 million to fund our operations. If we cannot generate sufficient cash flow from our operations, or are unable to borrow or otherwise obtain additional funds to finance our operations when needed, then our financial condition and operating results would be materially adversely affected and we would not be able to operate our business. Under the terms of the sale of the convertible debentures and warrants, in most circumstances, we are not permitted to issue any equity securities or any equity-like securities until October 11, 1999. OUR PRINCIPAL STOCKHOLDERS CAN EXERCISE SIGNIFICANT INFLUENCE WHICH COULD DISCOURAGE TRANSACTIONS INVOLVING A CHANGE OF CONTROL OF WESTELL AND MAY AFFECT YOUR ABILITY TO RECEIVE A PREMIUM FOR CLASS A COMMON STOCK THAT YOU PURCHASE. At March 31, 1999, as trustees of a voting trust containing common stock held for the benefit of the Penny family and the Simon family, Robert C. Penny III and Melvin J. Simon have the exclusive power to vote over 75% of the votes entitled to be cast by the holders of our common stock. In addition, all members of the Penny family who are beneficiaries under this voting trust are parties to a stock transfer restriction agreement which prohibits the beneficiaries from transferring any class B common stock or their beneficial interests in the voting trust without first offering such class B common stock to the other Penny family members. Consequently, Westell is effectively under the control of Messrs. Penny and Simon, as trustees, who have sufficient voting power to elect all of the directors and to determine the outcome of most corporate transactions or other matters submitted to the stockholders for approval. Such control may have the effect of discouraging transactions involving an actual or potential change of control of Westell, including transactions in which the holders of class B common stock might otherwise receive a premium for their shares over the then-current market price. IF WE DO NOT ADEQUATELY ADDRESS YEAR 2000 ISSUES, WE MAY INCUR SIGNIFICANT COSTS AND OUR BUSINESS COULD SUFFER. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, our computer programs that have date-sensitive software and software of companies into which our network is interconnected may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. If the system of other companies on whose services we depend or with whom our systems interconnect are not year 2000 compliant, it could have a material adverse effect on our business, prospects, financial condition and operating results. The year 2000 issue is discussed at greater length in the SEC documents that are incorporated by reference into this prospectus. USE OF PROCEEDS We will not receive any proceeds from the sale of the class A common stock by the selling stockholders. THE SELLING STOCKHOLDERS The class A common stock covered by this prospectus consists of shares issued or issuable upon conversion of our $20,000,000 aggregate principal amount of 6% Subordinated Secured Convertible Debentures due April 15, 2004 and Warrants to purchase 909,091 shares of our class A common stock. The number of shares that may be actually sold by each selling stockholder will be determined by such selling stockholder. Because each selling stockholder may sell all, some or none of the shares of class A common stock which each holds, and because the offering contemplated by this prospectus is not currently being underwritten, no estimate can be given as to the number of shares of class A common stock that will be held by the selling stockholders upon termination of the offering. Under Rule 416 of the Securities Act of 1933, the selling stockholders may also offer and sell additional shares of class A common stock issued or issuable upon conversion or exercise of the Warrants or the convertible debentures as a result of stock splits, stock dividends and anti-dilution provisions. The following table sets forth certain information regarding the selling stockholders, including: o the name of each selling stockholder, o the beneficial ownership of class A common stock of each selling stockholder as of April 30, 1999, and o the maximum number of shares of class A common stock offered by each selling stockholder. The information presented is based on data furnished to the Company by the selling stockholders. The actual number of shares of class A common stock issuable upon conversion of the convertible debentures is indeterminate, and is subject to adjustment and could be materially less or more than the amounts set forth in the table below depending on factors which we cannot predict at this time, including, among other factors, the future market price of the class A common stock. The shares of class A common stock included in the table below represent a good faith estimate of the number of shares of class A common stock that are issuable upon conversion of the convertible debentures, including shares issuable as a result of payment of premiums in class A common stock or as a result of conversion default or other default payments. Pursuant to their terms, the convertible debentures and warrants are convertible by any holder only to the extent that the number of shares thereby issuable, together with the number of shares of class A common stock owned by such holder, but not including unconverted shares of convertible debentures or warrants, would not exceed 4.99% of the then outstanding class A common stock as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, unless such conversion is approved by the majority of the holders of class A common stock. Accordingly, the number of shares of class A common stock set forth in the third and fourth columns of the table for each selling stockholder exceeds the number of shares of class A common stock that the selling stockholder beneficially owns as of July 31, 1999. This 4.99% limit may not prevent any holder from converting all of its convertible debentures or exercising its warrants, because the holder can convert or exercise into 4.99% of the outstanding class A common stock, then sell all of that stock to permit it to engage in further conversions or exercises. As a result, the 4.99% limit does not prevent any selling stockholder from selling more than 4.99% of our class A common stock.