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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
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 NO. 0-11630
INTELECT COMMUNICATIONS SYSTEMS LIMITED
(Exact name of registrant as specified in its charter)
BERMUDA N/A
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
REID HOUSE, 31 CHURCH STREET
HAMILTON, BERMUDA
HM12
(Address of principal executive offices, zip code)
(441) 295-8639
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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 __
There were 14,132,617 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on October 31, 1996.
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INTELECT COMMUNICATIONS SYSTEMS LIMITED
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company 2
at September 30, 1996 (unaudited) and December 31, 1995
Consolidated Statements of Operations of the Company 3
(unaudited) for the three and nine months ended September 30, 1996 and 1995
Consolidated Statements of Cash Flows of the Company 4
(unaudited) for the nine months ended September 30, 1996 and 1995
Notes to the Consolidated Financial Statements 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8
CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 12
</TABLE>
PART I - FINANCIALINFORMATION
<TABLE>
<CAPTION>
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of U.S. Dollars)
(Unaudited)
SEPTEMBER 30 December 31
1996 1995
------------------- ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,079 $ 15,039
Marketable securities 93 -
Accounts receivable 2,260 1,375
Inventories 3,052 2,537
Prepaid expenses 394 406
Other current assets 429 -
Loan receivable - 600
------------------- ------------------
10,307 19,957
PROPERTY AND EQUIPMENT - NET 5,151 1,839
EXCESS OF COST OVER NET ASSETS OF COMPANIES ACQUIRED 18,720 8,685
SOFTWARE DEVELOPMENT COSTS 3,386 -
DEFERRED FINANCING COSTS 1,854 -
DEFERRED INCOME TAXES 818 -
OTHER INTANGIBLE ASSETS 4,603 758
------------------- ------------------
$ 44,839 $ 31,239
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,482 $ 1,680
Accrued liabilities 1,639 1,989
Net liabilities of discontinued operations 400 476
Current installments of obligations under capital leases 126 145
Current maturities of long-term debt 3,848 1,041
------------------- ------------------
8,495 5,331
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES,
net of current maturities 195 200
LONG-TERM DEBT, net of current maturities 3,730 168
CONVERTIBLE DEBENTURES 10,128 -
------------------- ------------------
22,548 5,699
------------------- ------------------
SHAREHOLDERS' EQUITY:
Common shares, $0.01 par value,
80,000,000 shares authorized.
13,794,055 issued and outstanding at September 30,
1996; (December 31,1995 - 11,385,117) 138 114
Share premium 23,724 11,673
Unrealized gain on marketable securities 39 -
Retained earnings (deficit) - since November 1, 1992 (1,610) 13,753
------------------- ------------------
22,291 25,540
------------------- ------------------
$ 44,839 $ 31,239
=================== ==================
</TABLE>
2
<TABLE>
<CAPTION>
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of U.S. Dollars, except share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
REVENUES:
Net sales $ 445 $ 1,176 $ 3,670 $ 1,789
Services 1,470 - 3,533 -
Interest and other income 126 52 417 99
------------- ----------- ------------- -----------
2,041 1,228 7,620 1,888
------------- ----------- ------------- -----------
COSTS AND EXPENSES:
Cost of sales 2,616 846 7,616 1,350
Selling, general and administrative 5,131 1,183 12,662 1,786
Engineering and development 1,114 821 3,107 1,311
Interest 459 39 626 41
Equity in loss of investee - - - 280
------------- ----------- ------------- -----------
9,320 2,889 24,011 4,768
------------- ----------- ------------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (7,279) (1,661) (16,391) (2,880)
INCOME TAX BENEFIT (VALUATION ALLOWANCE) (1,215) - 1,046 -
------------- ----------- ------------- -----------
LOSS FROM CONTINUING OPERATIONS (8,494) (1,661) (15,345) (2,880)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations (9) 1,233 (18) 2,307
------------- ----------- ------------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (8,503) (428) (15,363) (573)
EQUITY IN EXTRAORDINARY GAIN OF INVESTEE - - - 646
------------- ----------- ------------- -----------
NET INCOME (LOSS) FOR PERIOD $ (8,503) $ (428) $ (15,363) $ 73
============= =========== ============= ===========
EARNINGS PER SHARE
PRIMARY AND FULLY DILUTED EARNINGS
INCOME (LOSS) PER SHARE
Continuing operations $ (0.63) $ (0.14) $ (1.14) $ (0.25)
Discontinued operations $ - $ 0.10 $ - $ 0.20
------------- ----------- ------------- -----------
Loss before extraordinary item $ (0.63) $ (0.04) $ (1.14) $ (0.05)
------------- ----------- ------------- -----------
Extraordinary item $ - $ - $ - $ 0.06
------------- ----------- ------------- -----------
Net income (loss) for period $ (0.63) $ (0.04) $ (1.14) $ 0.01
============= =========== ============= ===========
WEIGHTED AVERAGE NUMBER OF SHARES AND COMMON STOCK
EQUIVALENTS OUTSTANDING (IN THOUSANDS) 13,547 11,939 13,499 11,616
============= =========== ============= ===========
</TABLE>
3
<TABLE>
<CAPTION>
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of U.S. Dollars, except share data)
(Unaudited)
Nine Months Ended September 30
-------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for period $ (15,363) $ 73
Adjustments to reconcile net income to net cash used in operating activities:
Equity in income of investee - net - (366)
Depreciation and amortization 2,525 367
Deferred tax benefit (1,046) -
(Income) loss from discontinued operations 18 (2,722)
Foreign exchange translation 14 -
Noncash compensation 380 -
Noncash financing costs 207 -
Noncash compensation on acquisition of Mosaic Information Technologies Inc. 500 -
Noncash interest 251 (35)
Changes in operating assets and liabilities:
Accounts receivable (251) (208)
Inventories (208) (678)
Other assets (362) (106)
Software development costs (3,392) -
Deferred financing costs (1,201) -
Accounts payable and accrued liabilities (24) 387
Net liabilities of discontinued operations (76) 9
Noncash adjustment to goodwill (41) 294
------------------- -------------------
Net cash used in operating activities (16,869) (2,985)
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in discontinued operation - (678)
Capital expenditures (3,338) (230)
Purchase of marketable securities (55) -
Investment in and advances to Intelect - (499)
Investment in other assets (1,582) (406)
Loan receivable 600 -
Proceeds on sale of fixed assets 57 2
Acquisition of Intelect, Inc. - (632)
Acquisition of Intelect Europe Limited. - (391)
Acquisition of DNA Enterprises, Inc. (3,010) -
Acquisition of Mosaic Information Technologies Inc. (2,004) -
------------------- -------------------
Net cash used in investing activities (9,332) (2,834)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures, net of deferred financing
costs 13,799 -
Proceeds from issuance of notes payable - 9,880
Payments on notes payable (880) (6,430)
Proceeds from issuance of capital leases 55 10
Payments on capital lease obligations (84) (44)
Payment of long-term debt (122) -
Proceeds from issuance of common shares 2,473 665
Quasi-reorganization - 45
------------------- -------------------
Net cash provided by financing activities 15,241 4,126
------------------- -------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,960) (1,693)
CASH AND CASH EQUIVALENTS, beginning of period 15,039 2,555
------------------- -------------------
CASH AND CASH EQUIVALENTS, end of period $ 4,079 $ 862
=================== ===================
</TABLE>
4
INTELECT COMMUNICATIONS SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1996
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
the Company without audit in accordance with generally accepted accounting
principles for interim financial statements and with instructions to Form 10-Q
and Article 10 of Regulation S-X. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included.
The accompanying consolidated financial statements do not include certain
footnotes and financial presentations normally required under generally accepted
accounting principles and, therefore, should be read in conjunction with the
audited financial statements included in the Company's Transition Report on Form
10-K as at December 31, 1995.
RESTATEMENTS
During 1995, the Company changed its fiscal year end to December 31 from
October 31. Accordingly, the Company has filed a Transition Report on Form 10-K
for the transition period from November 1, 1995 to December 31, 1995 (the
"Transition Period"). Going forward, the Company will report results for the
quarters ending March 31, June 30, September 30 and December 31.
On October 31, 1995 the Company sold its prior principal operating
subsidiary, Savage Corporation ("Savage"). Accordingly, Savage's results are
accounted for as discontinued operations in the accompanying financial
statements.
INCOME TAXES
The Company provides for income taxes in interim periods based on the
estimated effective income tax rate of the complete fiscal year. An income tax
benefit is computed on the pre-tax loss of consolidated entities according to
applicable taxing jurisdictions based on current tax law. Deferred taxes result
from the future tax consequences associated with temporary differences between
the amount of assets and liabilities recorded for tax and financial accounting
purposes. A valuation allowance for deferred tax assets is recorded to the
extent the Company cannot determine, in accordance with the provision of
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes", that the ultimate realization of net deferred tax assets against income
is more likely than not.
OTHER INTANGIBLE ASSETS
Other Intangible Assets include licensed technology of $3,500,000 which is
carried at its present value with an imputed interest rate of 7% on the deferred
balance and will be amortized over a three year period to cost of goods sold
based on anticipated revenue generation.
ACQUISITIONS
The Company concluded the acquisitions of DNA Enterprises, Inc. ("DNA") on
February 13, 1996 and Mosaic Information Technologies Inc. ("Mosaic") on March
29, 1996. Both acquisitions have been accounted for as purchases and accordingly
the accompanying financial statements include the results of DNA and Mosaic from
their respective acquisition dates. The excess of purchase price over the
estimated fair values of the net assets acquired has been recorded as goodwill,
which is being amortized over ten years.
5
The estimated fair values of assets and liabilities of Mosaic and DNA
acquired are summarized below. Adjustments made during the second quarter to
certain Mosaic assets and Goodwill are included (thousands of U.S. Dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------------------------
MOSAIC DNA
------ ---
<S> <C> <C>
Cash $ 27 $ 3
Accounts receivable
55 621
Inventory
245 -
Property and equipment
81 502
Goodwill
4,640 7,280
Accounts payable and accruals
(285) (214)
Debt
(16) (180)
---------------- ----------------
$ 4,747 $ 8,012
================ ================
LONG-TERM DEBT (thousands of U.S. Dollars)
SEPTEMBER 30 December 31
---------------- ----------------
1996 1995
---- ----
Subordinated debentures - at 6% due in five equal
annual installments commencing June 1996 $ 215 $ 224
Deferred purchase price payment due in
installments on February 1997 and 1998 (i) 5,000 -
Present value of license technology installment
payments due in quarterly amounts of $325,000 (ii) 2,363 -
Other - 985
---------------- ----------------
7,578 1,209
Less: current installments
(3,848) (1,041)
---------------- ----------------
$ 3,730 $ 168
================ ================
</TABLE>
Notes:
(i) Deferred purchase price payments relate to the acquisition
of DNA Enterprises, Inc., as follows: (a) $1,000,000 in
cash on February 13, 1997; (b) $400,000 in cash on
February 13, 1998; (c) Warrants issued to certain
shareholders of DNA to purchase 300,000 Common Shares at
$5.00 per share February 13, 1996; and (d) Warrants to be
issued to certain shareholders of DNA to purchase an
additional 300,000 Common Shares at $7.00 per share on
February 13, 1998. The Company has agreed to repurchase
the Common Shares issued pursuant to the warrants under
(c) and (d) above at prices of $5.00, $5.50 and $6.00 per
share on the first, second and third anniversary of
Closing, respectively, at the option of the selling
shareholders and a liability of $3,600,000 has been
accrued in anticipation of this put option.
(ii) $3,500,000 of which $325,000 and $625,000 was paid in
September and June, 1996, respectively. The balance is
payable quarterly, in arrears, in installments of $325,000
and has been recorded at present value based on an imputed
interest rate of 7%.
CONVERTIBLE DEBENTURES
During the second quarter ended June 30, 1996, the Company issued
Convertible Debentures (the "June Debentures") in the aggregate principal amount
of $5,000,000. The June Debentures were fully converted into 773,515 Common
Shares as at September 30, 1996.
During the third quarter ended September 30, 1996, the Company issued
Convertible Debentures (the "August Debentures") in the aggregate principal
amount of $10,000,000 bearing interest at 7.5%, payable quarterly in arrears.
The August Debentures mature on August 8, 1998, are redeemable for cash at the
Company's option after August 8, 1997 at 125% of par value for six months and
thereafter at 120% of par value or if the Nasdaq trading price of the Company's
Common Shares falls below the fixed conversion price of $11.0825, the Company
can redeem at any time for the sum of the product of the number of common shares
of the Company's U.S.$0.01 par value per share (the "Common Shares") issuable
upon conversion at the current Nasdaq trading price. The August Debentures are
convertible at the holder's option into the Common Shares of the Company at the
lower of (i) 85% of the Nasdaq five day closing bid trailing average price of
the Common Shares prior to the Notice of Conversion date or (ii) the fixed
conversion price of $11.0825. The August Debentures are convertible into Common
Shares at the rate of one-third after October 7, 1996, one-third after November
6, 1996, and one-third after December 6, 1996.
6
SOFTWARE DEVELOPMENT COSTS
Capitalization of software development cost commences upon the
establishment of technological feasibility. Both the establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized development costs involve judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
revenues, estimated economic life and possible developments in software and
hardware technologies. The Company has not capitalized any costs in prior
periods because eligible amounts were immaterial for those periods. The Company
believes that technological feasibility and future revenue potential has now
been established for the Company's SONETLYNX(TM) and CS4 product lines.
Accordingly, relevant and eligible expenditures for these products have been
capitalized in the accompanying financial statements.
INVENTORIES
The components of inventories are as follows (thousands of U.S. dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30 December 31
---------------- ----------------
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 2,187 $ 1,554
Work in progress 232 544
Finished goods 1,298 1,169
---------------- ----------------
3,717 3,267
Less: allowance for obsolescence 665 730
---------------- ----------------
$ 3,052 $ 2,537
================ ================
</TABLE>
ACCOUNTING FOR WARRANTS
In October, 1995 the Financial Accounting Standards Board issued Statement
123 ("FAS 123") "Accounting for Stock-Based Compensation", which requires
companies to value all options and warrants issued for compensation at their
"fair value" at the date of issuance. FAS 123 affects all companies whose
financial years begin after December 15, 1995. FAS 123 establishes financial
accounting and reporting standards for stock based employee compensation plans
and encourages, but does not require, all entities to adopt a fair value based
method of accounting for employee stock option plans. The Company has elected to
continue accounting for its stock-based employee compensation plans in
accordance with the intrinsic value based method of accounting.
The effect of this new accounting standard is twofold (i) all employee
stock options must be valued and disclosed on a pro-forma basis in note form in
the year end financial statements and (ii) all warrants and options granted for
services must be valued on a call option basis and expensed accordingly. The
pricing model used in this calculation, the Black-Scholes Model, makes certain
assumptions about the underlying stock-based primarily on its past performance
in order to determine future performance.
During the third quarter of 1996, the Company issued certain warrants to
third parties as partial payment of financial advisory fees in connection with
the issuance of the August Debentures. These warrants were issued as part
payment of a finders fee and entitle the holders to purchase a total of 70,063
and 125,000 of the Common Shares at a price of $8.56375 per share and $9.5625
per share, respectively. Using the prescribed Black-Scholes Model the value
placed on these warrants is $453,000 and $561,000, respectively. These amounts,
together with other debt issue costs of $985,000, are being amortized to
financing expense over the life of the August Debentures or until conversion
takes place at which time these costs will be debited to paid-in capital.
SUBSEQUENT EVENTS
On October 7, 1996, the Company reached an agreement with the previous
owners of Intelect, Inc. (the "Vendors"), under which the Vendors exchanged
their rights to future "earn-out" payments of up to $4,000,000 and Debentures
with a remaining value of $215,000 in exchange for 169,986 Common Shares plus
$140 cash in lieu of fractional shares. This transaction will be accounted for
in the fourth quarter and will result in an increase in Goodwill of
approximately $1,039,000.
On October 15, 1996 (the "Issuance Date") the Company issued an additional
$10,000,000 in Convertible Debentures (the "October Debentures") to the holders
of the June Debentures. The October Debentures are due on October 15, 1998,
bearing interest at 7%, are redeemable for cash at the Company's option at
117.5% of their face value and are convertible at the holder's option into
common shares in equal one-third amounts of principal sixty, ninety and one
hundred twenty days after the Issuance Date at 82.5% of the average five day
closing bid price on Nasdaq prior to the notice of conversion date.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 1996
RESULTS OF OPERATIONS
The Company is transitioning through a period of consolidating and
integrating newly acquired operations, bringing to market innovative new
products, implementing extensive development and engineering of advanced new
products, and expanding Company wide marketing and sales efforts. The costs and
other effects of these programs and activities are adversely impacting current
results for the intended purpose of improving revenues, operating performance
and financial results in future reporting periods.
During the period ended September 30, 1995, the Company completed its
purchase of Intelect, Inc. and included the results of Intelect, Inc. from the
date of acquisition (April 24, 1995), but had not yet acquired DNA Enterprises,
Inc. ("DNA") or Mosaic Information Technologies Inc., which was renamed Intelect
Visual Communications Corp. ("IVC") in October 1996. Accordingly, management
does not believe that comparisons of the current period to the same period in
1995 would be meaningful in determining a trend.
The following table shows the results of operations for the periods
indicated as a percentage of net sales, services and other revenues:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------- ------------------------------------
1996 1995 1996 1995
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Net sales, services and other revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 128.2% 68.9% 99.9% 71.2%
------------------ ------------------ ----------------- -----------------
Gross profit (loss) (28.2%) 31.1% .1% 28.8%
Selling, general and administrative 180.6% 77.4% 133.1% 75.3%
Engineering and development 54.6% 66.8% 40.8% 69.0%
Interest expense 22.5% 3.2% 8.2% 2.2%
Amortization and depreciation 70.9% 19.0% 33.0% 19.3%
Equity in loss of investee .0% .0% .0% 14.8%
------------------ ------------------ ----------------- -----------------
Operating loss before income taxes (356.8%) (135.3%) (215.2%) (151.8%)
Income (loss) from discontinued operations (.4%) 100.4% (.2%) 121.6%
------------------ ------------------ ----------------- -----------------
Loss before extraordinary item (357.2%) (34.9%) (215.4%) (30.2%)
Equity in extraordinary gain of investee .0% .0% .0% 34.0%
------------------ ------------------ ----------------- -----------------
Income (loss) before income taxes (357.2%) (34.9%) (215.4%) 3.8%
------------------ ------------------ ----------------- -----------------
</TABLE>
NET SALES AND SERVICES
Net sales and services revenue for the three months ended September 30,
1996 increased 62.8% to $1,915,000 from $1,176,000 in the three month period
ended September 30, 1995. For the three months ended September 30, 1996 and 1995
respectively, these sales were comprised of (i) SONETLYNX(TM) fiber optic
multiplexer product 11.8% and 0%, (ii) S4(TM) product of 5.3% and 39.5%, (iii)
videoconferencing sales of 2.2% and 0% through IVC from the date of acquisition
(March 29, 1996); (iv) engineering service fees of 76.8% and 0%, for services
provided by DNA; (v) information security products 2.5% and 7.1%, distributed by
the Company's U.K. based value added reseller, and (vi) other products 1.5% and
53.4%, consisting primarily of analog air traffic control communications
switching systems.
Initial releases of the Company's new SONETLYNX(TM) product line were
introduced during the second quarter of 1996. Customer demonstrations, tests and
initial orders of the OC-1 version are underway into the second half of 1996.
Primary emphasis is being placed upon establishing distribution arrangements and
sales channels. Increased sales are currently expected during the fourth quarter
of 1996 and upon completion of the OC-3 version targeted for release during the
fourth quarter of 1996.
The sales cycle for the Company's new digital switch product line, S4(TM),
effectively commenced with customer acceptance for its first major commercial
installation in Iceland. This installation went "live" during the third week of
July and is functioning on a stand alone basis, controlling North Atlantic air
traffic in a 4.2 million square mile air space.
8
The Company released its LANScape(TM) videoconferencing product on October
17, 1996. Installations are being made at client locations in the fourth
quarter, initially as Beta sites. Reseller agreements have been signed with a
number of large and experienced network systems integrators and value added
re-sellers to distribute and install this product line. The Company expects to
release its second product, named Vubridge(TM), in the fourth quarter of 1996.
Engineering services continued at a level similar to the second quarter.
DNA announced its first hardware products, two board level digital signal
processing (DSP) systems. In October a global OEM agreement was announced with a
leading company in the DSP accelerator board market in order to provide an
immediate sales channel for the products.
Information security products are sold primarily to the military market,
which is influenced by unpredictable events and budgetary constraints that can
cause significant variances in sales from quarter to quarter. Due to the
unpredictability of these product sales, the Company has decided to curtail
selling activity in this area and, accordingly, the Company has refocused its UK
operation to be a support organization for its core products for European
markets.
GROSS PROFIT
The Company's gross loss of $575,000 or (28.2%) for the three months ended
September 30, 1996 was a decrease of $957,000 compared to a gross margin of
$382,000 or 31.1% for the three months ended September 30, 1995. The third
quarter 1996 result was below normal operating margins due to under-absorption
of operating costs and the initial placement or sale of new products as test
modules with low or negative margins. In addition, the anticipation of
increasing sales in the short-term and the development of scheduled product
releases has necessitated the hiring and maintenance of core personnel in both
operations (manufacturing) and sustaining engineering. Management currently
expects that higher sales volumes in future quarters should result in higher
margins.
The Company's hardware and software design and development subsidiary DNA
has currently committed over one-half of its personnel resources to the
Company's CS4 project in order to expedite the completion of a demonstration
prototype of the CS4, scheduled for November, 1996. DNA's profit on the CS4
project is eliminated on consolidation.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
For the three months ended September 30, 1996 SG&A expenses, not including
Amortization and Depreciation (below) were up $2,735,000 at $3,685,000 or 180.6%
from $950,000 or 77.4% compared with the three months ended September 30, 1995.
This increase is due in part to the acquisitions of new business, financing
costs and ramp up in staffing for the selling, marketing and manufacturing of
the Company's products. Selling and marketing expenses for the three months
ended September 30, 1996 increased 284.4% to $1,795,000 compared with $467,000
for the same period in 1995. G&A expenses were up 163.96% at $1,890,000 compared
with $716,000 for the same period 1995.
Marketing and selling expenses relating to the rollout of the SONETLYNX(TM)
product line and initial marketing for the CS4 in advance of sales amounted to
$957,000. Marketing and selling expenses relating to the Company's
videoconferencing product line in advance of sales amounted to $673,000.
Marketing and selling expenses relating to the market development of the
Company's products into the European market amounted to $165,000. Included in
the marketing and selling expenses above, are $86,000 and $262,000 for
advertising and trade shows, respectively.
Prior year administrative expenses reflect traditional costs primarily
associated with the Company's status as a publicly traded company and related
reporting requirements. However, legal and audit expenses have increased
substantially from prior years and are expected to continue at a similar level.
Deferred financing costs associated with the Company's issuance of the June
Debentures and August Debentures amounted to $328,000 and $985,000, respectively
in cash expenditures, and $1,058,000 and $1,014,000 in non-cash costs related to
the issuance of warrants pursuant to FAS 123, which are being amortized over the
life of the June Debentures and August Debentures. The June Debentures were
fully converted by September 30, 1996 and all un-amortized finance and warrant
costs totaling $1,211,000 have been debited to paid-in capital.
INTEREST EXPENSE
Interest expense increased to $459,000 or 22.5% from $39,000 or 3.2% for
the three months ended September 30, 1996 and 1995 respectively. The amount of
interest expense in the current quarter represents interest on (i) a line of
credit of $300,000 to finance receivables which bears interest at 12% generating
$4,000; (ii) Debentures owed to the previous owners of Intelect, Inc., which
bear interest at 6% generating $9,000, (iii) Convertible Debentures issued by
the Company in June and August, 1996, which bear interest at 7.5% generating
$183,000; (iv) licensed technology at a net present value of 7% generating
$46,000; (v) non-cash interest of $83,000 being the 17.5% redemption premium on
the balance of the June Debentures, which were converted in full by September
30, 1996 with the redemption amount credited to paid-in capital; (vi) non-cash
interest of $128,000 (the redemption premium of the
9
August Debentures), which is the sum of the product of the number of common
shares issuable upon conversion at the quarter end Nasdaq trading price, which
is being amortized over the life of the August Debentures pursuant to APB 21;
and (vii) capital leases of $6,000.
AMORTIZATION AND DEPRECIATION
Amortization and depreciation is included in SG&A and is comprised of the
following (thousands of U.S. Dollars):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Depreciation of Property & Equipment $ 199 $ 79 $ 539 $ 106
Amortization of Goodwill 1,212 154 1,901 261
Technology Amortization
35 - 85 -
-------------- --------------- -------------- --------------
$ 1,446 $ 223 $ 2,525 $ 367
============== =============== ============== ==============
</TABLE>
Depreciation of property and equipment has increased in part due to the
recent acquisitions. Goodwill is amortized over periods from 10 - 15 years and
has also increased due to the acquisitions of DNA and IVC. Technology
amortization relates to intellectual properties purchased in 1995 and 1996.
During the third quarter 1996, the Company wrote off its goodwill in
Intelect Europe Limited ("IEL") totaling $779,000. A significant contraction in
the market for military electronic equipment in the UK dramatically reduced the
viability of the Company's information security product lines. Accordingly, the
Company has downsized its operations (based in Chesterfield, Derbyshire,
England) and is exploring several disposition strategies including the sale of
the product lines to third parties. The net assets of IEL at September 30, 1996
amounted to $1,420,000 and the final disposition of either the product lines
and/or the net assets may result in an adjustment to this carrying value.
ENGINEERING AND DEVELOPMENT (E&D)
E&D expenses for the three months ended September 30, 1996 were $1,114,000
or 54.6% up from $821,000 or 66.9% for the three months ended September 30,
1995. The current quarter expense is comprised primarily of labor costs for
hardware development and software design not capitalizable under FAS 86 for the
CS4 ($475,000) and SONETLYNX(TM) ($388,000) products in accordance with the
Company's policies. The balance of $251,000 relates to further development of
the Company's videoconferencing ($207,000) and S4(TM), ($44,000) products. This
compares with E&D expenses for the same period in 1995 of $553,000 and $268,000
on the S4(TM) and SONETLYNX(TM) products, respectively.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
The Company sold Savage Corporation ("Savage") on October 31, 1995. The
results of Savage are accounted for as discontinued operations and, accordingly,
comparative presentations reflect the Company's equity in the earnings of Savage
for the relevant periods. This disposition accounts for the decrease in income
in the three months ended September 30, 1996 to $9,000 from $1,233,000 for the
same period in 1995.
INCOME TAX BENEFIT
The Company recorded a valuation allowance during the quarter ended
September 30, 1996 of $1,215,000 on the U.S. based operations due to sales
activity falling below prior anticipated levels. In light of recent sales
results, the Company has determined that a valuation allowance is appropriate.
The remaining tax benefit reflects a tax rate of 34% and the Company's
current belief that future taxable income will be realizable from reversals of
existing taxable temporary differences and sales of new and existing products.
The timing and amount of such future taxable income may be impacted by a number
of factors, including those discussed below under "Additional Factors That May
Affect Future Results". To the extent that estimates of future taxable income
are reduced or not realized, the amount of such deferred tax assets and the
Company's effective tax rate may be adversely affected.
10
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased $12,814,000 at September 30, 1996
to $1,812,000 compared with $14,626,000 at December 31, 1995 due primarily to
the Company's acquisitions of DNA and Mosaic and to the funding of E&D programs
and operating losses. The Company regularly reviews its cash funding
requirements on a consolidated basis and attempts to meet those requirements
through a combination of cash on hand, cash provided by operations and possible
future public or private debt and/or equity offerings. The Company utilizes a
centralized corporate strategy for its cash management activities and invests
its excess cash in investment grade, short-term, money market instruments.
The Company believes that the cash proceeds from the issuance of the August
Debentures and October Debentures will be sufficient to meet its operating
capital requirements for the next six months. However, the Company is dependent
on the sales of its products at normal profit margins (projected to commence in
the first quarter of fiscal 1997) to produce positive cash flow from operations
and to fund its future cash requirements. Until such sales are achieved, the
Company is dependent on the continued sale of its Common Shares (or convertible
debentures which can be converted into Common Shares) to fund its short-term
cash needs. Sales of substantial amounts of Common Shares, or the perception
that these sales could occur, could adversely affect prevailing market prices
for the Common Shares and could impair the ability of the Company to raise
additional capital through the sale of its equity securities or through debt
financing and may lead to additional dilution of current shareholder interests,
particularly in the area of earnings per share.
CONTINGENT LIABILITIES
The Company is contingently liable for certain potential liabilities
relating to its discontinued operations. Specifically, the Company has
indemnified the purchaser of Savage against certain product liability,
environmental clean up costs and other contractual liabilities, including
certain asserted successor liability claims, customarily assumed on the sale of
a business. In particular, the Company has been notified that the purchaser of
Savage seeks indemnification in connection with certain product liability
claims. Although the Company believes that it has several defenses available to
it in such a claim, the outcome of such claim cannot be predicted with certainty
at this time. The Company has reserved for all known liabilities and has insured
itself against certain of the product liability claims. However, should
indemnified claims exceed the related insurance coverage and/or the existing
reserves, the Company's results of operations and/or its financial position
could be adversely affected.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains certain forward looking-statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934 as amended. Actual events and results
could differ materially from those set forth in the forward-looking statements.
Certain factors that may cause such differences include worldwide economic and
political conditions, industry specific factors, the Company's ability to
maintain access to external financing sources and its financial liquidity, the
Company's ability to timely develop and produce commercially viable products at
competitive prices, the availability and cost of components, the Company's
ability to manage expense levels, the Company's ability to manage growth, the
continued financial strength of the Company's dealers and distributors, and the
Company's ability to accurately anticipate customer demand.
The Company's future success is highly dependent upon its ability to
develop, produce and market products that incorporate new technology, are priced
competitively and achieve significant market acceptance. There can be no
assurance that the Company's products will be commercially successful or
technically advanced due to the rapid improvements in information technology and
resulting product obsolescence. There is also no assurance that the Company will
be able to deliver commercial quantities of new products in a timely manner. The
success of new product introductions is dependent on a number of factors,
including market acceptance, the Company's ability to manage risks associated
with product transitions, the effective management of inventory levels in line
with anticipated product demand and the timely manufacturing of products in
appropriate quantities to meet anticipated demand. Specifically, the Company has
committed approximately $10 million to the development of an advanced generation
of its S4(TM) product for application in public telecommunications networks (the
"CS4"). The Company currently estimates that the CS4 will be available for
shipment in the third quarter of 1997. The Company believes that the expected
potential customers for the CS4 include InterExchange Carriers, Local Exchange
Carriers, Wireless, Personal Communications Service, Competitive Access
Providers and, in general, operators of Advanced Intelligent Networks. The
Company will be competing with established equipment manufacturers with greater
financial resources and more developed channels of distribution. No assurances
can be given that the Company will be successful in completing the CS4 on
schedule, that the Company will be successful in competing in this environment
or that it will be able to sell sufficient quantities of the CS4 to recover its
investment or to realize profits. In addition, no prediction can be made as to
the affect, if any, that future sales of common shares issued pursuant to the
June and August Debentures will have on the market price of the common shares
prevailing from time to time.
11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
4(i) Form of 7.5% Convertible Debenture due August 8, 1998 of Intelect
Communications Systems Limited
4(ii) Form of 7%, Series A, Convertible Debenture due October 15, 1998
of Intelect Communications Systems Limited
4(iii) Form of 7%, Series B, Convertible Debenture due October 15, 1998
of Intelect Communications Systems Limited
10(i) Convertible Securities Agreement dated August 8, 1996 among
Intelect Communications Systems Limited and certain
Investors
10(ii) Registration Rights Agreement among Intelect Communications
Systems Limited and certain Investors
10(iii) Convertible Securities Agreement dated October 15, 1996 among
Intelect Communications Systems Limited and Infinity Investors,
Ltd. and Seacrest Capital Limited
10(iv) Registration Rights Agreement dated October 15, 1996 among
Intelect Communications Systems Limited and Infinity Investors,
Ltd. and Seacrest Capital Limited
10(v) Book Entry Transfer Agent Agreement by and among the Company,
Infinity Investors, Ltd., Seacrest Capital Limited and American
Stock Transfer & Trust Company
10(vi) Offer to Purchase the Five Year Six Percent (6%) Subordinated
Debentures of Intelect, Inc. for an Aggregate of 170,000 Shares of
Common Stock, $0.01 Par Value, of Intelect Communications Systems
Limited and the payment of Certain Amounts in Lieu of Issuing
Fractional Shares, Dated September 6, 1996
10(vii) Letter of Transmittal to Accompany Five Year Six Percent (6%)
Subordinated Debentures of Intelect, Inc.
10(viii) Form of Release in Consideration of Exchange of Property
11 Calculation of Earnings Per Share
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTELECT COMMUNICATIONS SYSTEMS LIMITED
(Registrant)
Date: November 13, 1996 /s/ RHIANON M. PEDRO
----------------- -------------------------
Rhianon M. Pedro
Chief Financial Officer
(principal financial officer)
Date: November 13, 1996 /s/ PETER G. LEIGHTON
----------------- --------------------------
Peter G. Leighton
President
12
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED
THEREUNDER (THE "1933 ACT"), AND MAY ONLY BE OFFERED OR SOLD PURSUANT TO
REGISTRATION UNDER OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
1933 ACT.
7.5% CONVERTIBLE DEBENTURE DUE AUGUST 8, 1998
$___________ August 8, 1996
FOR VALUE RECEIVED, INTELECT COMMUNICATIONS SYSTEMS LIMITED, a Bermuda
company (the "Company"), hereby promises to pay to the order of ______________,
a __________ corporation, or registered assigns (the "Holder") on August 8, 1998
(the "Maturity Date"), the principal amount of ____________ ($____________) and
to pay interest on the principal amount hereof, in such amounts, at such times
and on such terms and conditions as are specified herein. This Debenture (the
"Debenture") has been issued pursuant to that certain Convertible Securities
Subscription Agreement executed among the Holder, the Company and certain other
parties named therein, dated August 8, 1996 (the "Agreement").
ARTICLE 1. INTEREST.
The Company shall pay interest on the unpaid principal amount of this
Debenture at the rate equal to Seven and One-Half Percent (7.5%) per year,
compounded annually, payable as set forth below, quarterly in arrears on August
8, November 8, February 8 and May 8 of each year until the principal hereof is
paid in full or has been converted. Interest shall be payable, at the option of
the Company, in cash or by issuing such number of additional common shares of
the Company, U.S. $.01 par value per share (the "Common Shares"), as is
determined by dividing the total dollar amount of interest due and payable by
the average current market price of the Common Shares for the five (5)
consecutive trading days ending on the second day prior to the date of such
interest payment in lieu of interest not paid in cash, and the issuance of such
additional Common Shares shall constitute full payment of such interest. All
Common Shares issued as interest in respect of the Debentures will be, when so
issued, duly authorized, validly issued, fully paid and non-assessable and free
of all liens and charges. Interest on this Debenture shall accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from August 8, 1996. Interest shall be computed on the basis of a 360-day year
of twelve 30-day months.
ARTICLE 2. METHOD OF PAYMENT.
This Debenture must be surrendered to the Company in order for the
Holder to receive payment of the principal amount hereof. The Company shall pay
the principal of and interest on this Debenture in United States dollars.
Interest and
-1-
principal payments shall be subject to withholding (if any) under applicable
United States Federal Internal Revenue Service Regulations.
ARTICLE 3. CONVERSION.
SECTION 3.1. CONVERSION PRIVILEGE
(a) The Holder of this Debenture shall have the right, exercisable at
one or more times, at its option, to convert all or a portion of this Debenture
into Common Shares at the times hereafter specified. The number of Common Shares
issuable upon the conversion of this Debenture is determined by dividing the
principal amount hereof to be converted by the Conversion Price (as defined in
paragraph (b) of this Section 3.1 below) in effect on the conversion date and
rounding the result to the nearest 1/100th of a share. Upon conversion, all
accrued and unpaid interest will be paid to the Holder in cash or Common Shares,
as specified in Article 1 above.
(b) Less than all of the principal amount of this Debenture may be
converted into Common Shares if the portion converted is $10,000 or a whole
multiple of $10,000 and the provisions of this Article 3 that apply to the
conversion of this Debenture also apply to the conversion of a portion of it.
All or any portion of this Debenture is convertible at any time, and from time
to time as follows: One-third (1/3) of the principal balance of all Debentures
issued to Holder as described in Section 7.1 hereafter shall be convertible
beginning sixty (60) days after the date of the original issuance of this
Debenture; an additional one-third (1/3) of the principal balance of this
Debenture issued to the Holder shall be convertible beginning 90 days after the
date of the original issuance of this Debenture; and the final one-third (1/3)
of the principal balance of this Debenture issued to the Holder shall be
convertible beginning 120 days after the date of the original issuance of this
Debenture. Subject to Articles 3.1(c) and 4 below, the Conversion Price (defined
below) shall be the lesser of (A) $11.0825 (the "Fixed Conversion Price") or (B)
the product of (i) the average current market price of the Common Shares with
respect to the applicable conversion date (the "Formula Price") multiplied by
(ii) eighty five percent (85%) (such applicable price being referred to as the
"Conversion Price").
(c) Notwithstanding anything contained herein to the contrary, the
Company shall not be obligated to issue more than an aggregate number of Common
Shares to be calculated by multiplying 2,582,107 (being 20% of the Company's
outstanding Common Shares as of August 6, 1996) by a fraction, the numerator of
which shall be the total dollar amount of the Debentures subscribed by each such
investor and the denominator of which shall be the total dollar amount of the
Debentures issued and subscribed, in respect of the Debentures, subject to
adjustment as provided in Article 4 (as so adjusted, the "Maximum Number of
Common Shares"). In the event that, upon conversion of the Debentures, the
Company would be required to issue in excess of the Maximum Number of Common
Shares (a "Dilution Event"), the Company shall provide notice of such event to
the registered holder of this Debenture (a "Dilution Notice"). Thereupon, the
Company may, at its election and in its sole discretion, take any one or more of
the following actions:
-2-
(i) As promptly as possible following the provision of the
Dilution Notice, use its best efforts to obtain a waiver of any then applicable
Nasdaq National Market maintenance requirements (the "Nasdaq Rule") which would
require shareholder approval for the issuance of Common Shares upon conversion
of the Debentures in excess of the Maximum Number of Common Shares.
(ii) As promptly as possible following the provision of the
Dilution Notice, the Company may use its best efforts (A) prepare and file with
the Securities and Exchange Commission a proxy statement and form of proxy
meeting the requirements of the Securities Exchange Act of 1934 and the rules
and regulations promulgated thereunder; (B) call and hold a Special Meeting of
the Company's Shareholders for purposes of approving the issuance by the Company
of Common Shares in excess of the Maximum Number of Common Shares (the "Special
Meeting"); and (c) use its best efforts to solicit from shareholders of the
Company proxies in favor of such issuance (the "Requisite Shareholder
Approval").
(iii) As promptly as possible following the provision of the
Dilution Notice, the Company may redeem out of funds legally available therefor
such aggregate amount of the Debentures (pro rata among the Holders thereof),
for an amount equal to the product of (x) the principal amount of the Debentures
to be so redeemed multiplied by 115% plus all accrued and unpaid interest
thereon, until the number of Common Shares issuable upon conversion of the
Debentures is equal to the Maximum Number of Common Shares (the "Dilution
Redemption").
In the event that the Company is unsuccessful in obtaining either a
waiver of the Nasdaq Rule or the Requisite Shareholder Approval or effecting the
Dilution Redemption and such failure continues for a period of 60 days following
of the date of the Dilution Notice, then such failure shall be a breach of the
Debentures entitling the Holder to be paid by the Company such Holder's pro rata
portion of the "Liquidity Damage Amount", as liquidated damages and not as a
penalty. The Liquidity Damage Amount shall mean $500 for each $1 million of the
principal amount of then outstanding Debentures after giving effect to the
issuance of the Maximum Number of Common Shares for each calendar day following
the 60th day after the date of the Dilution Notice. The Liquidated Damages
Amount shall be payable monthly in arrears on the last day of each month. In the
event that the Company is unsuccessful in obtaining either a waiver of the
Nasdaq Rule or the Requisite Shareholder Approval or effecting the Dilution
Redemption for a period of twelve months following the Dilution notice, then
such failure shall constitute an Event of Default (as defined in 6.1). Subject
to the first two sentences of this paragraph, the parties expressly acknowledge
and agree that neither the existence of a Dilution Event nor any failure on the
part of the Company to: (A) obtain a waiver of the Nasdaq Rule under Section
3.1(c)(i), (B) obtain the affirmative vote of the requisite percentage of the
Company's Shareholders at the Special Meeting under Section 3.1(c)(ii) or (C)
legally redeem certain of
-3-
the Debentures under Section 3.1(c)(iii), as the case may be, shall constitute
an Event of Default, provided, however, that failure to pay the Liquidated
Damages Amount when due shall constitute an Event of Default in the manner
prescribed in Section 6.1 hereof.
(d) Subject to the provisions of Section 3.1(c), in the event any
Debenture remains outstanding on the second anniversary of the date hereof, the
unconverted portion of such Debenture will automatically be converted into
Common Shares on such date in the manner set forth in this Section 3.1; provided
(i) an Event of Default does not then exist under this Debenture and (ii) a
registration statement as contemplated by Section 4 of the Agreement is
effective with respect to the sale by the Holder of shares of Common Stock
issuable upon conversion of this Debenture.
(e)
(i) At any time prior to the receipt by the Company of a
Notice of Conversion, if the current market price per share (as defined herein
in Section 3.7) of the Company's Common Shares is less than $11.0825, the
Company may redeem such portion of this Debenture as shall have been requested
to be converted by paying Holder the sum of: (A) the product of (x) the number
of Common Shares issuable upon conversion of the principal amount to be so
converted multiplied by (y) the current market price per share of the Common
Shares, plus (B) all accrued and unpaid interest on this Debenture (a "Section
3.1(e) Redemption"). In the event that the Company desires to effect a Section
3.1(e) Redemption, the Company shall provide notice of such event to the
registered holder of this Debenture (a "Section 3.1(e) Notice"), and any such
redemption shall occur not later than seven calendar days following the date of
the Section 3.1(e) Notice (the "Section 3.1(e) Redemption Date). In the event
that the Company fails to effect the Section 3.1(e) Redemption on or prior to
the Section 3.1(e) Redemption Date, the Section 3.1(e) Notice shall be null and
void, and the Company shall not be entitled to effect a Section 3.1(e)
Redemption until 30 calendar days following the Section 3.1(e) Redemption Date.
Notwithstanding the foregoing, upon receipt of a Notice of Conversion, the
Company's right to redeem the Debentures covered by such notice shall terminate.
(ii) Notwithstanding Section 3.1(e)(i), the Company may, at
its option, redeem this Debenture, in whole or in part, at any time or from time
to time after the first anniversary of the date hereof, for an amount equal to
the product of (x) the principal amount so to be redeemed multiplied by (y) 125%
if such redemption takes place within eighteen (18) months of the date hereof or
(z) 120% if such redemption takes place after such date, plus, in either case,
all accrued and unpaid interest thereon.
(iii) Any notice of exercise of the Company's redemption
option shall be delivered in writing to Holder and shall be irrevocable when
delivered. The Company shall pay in full the applicable redemption amount within
seven (7) business days of the delivery of such redemption notice. Until such
payment, the Company shall comply with all terms, conditions and covenants of
this debenture, including without limitation, timely payment of accrued and
unpaid interest. If the Company fails to pay in full such applicable redemption
amount within such seven (7) business day period, the Company's redemption
notice with respect to such redemption shall be deemed void and the Company
shall no longer be entitled to redeem the Debentures prior to
-4-
their maturity. Subject to the foregoing, Holder's right to convert this
Debenture (or such portion hereof as the Company shall have elected to redeem)
shall be suspended with respect to the pro rata portion of the Debentures to be
redeemed after delivery of the Section 3.1(e) Notice.
SECTION 3.2. CONVERSION PROCEDURE. To convert this Debenture into
Common Shares the Holder must (a) complete and sign the Notice of Conversion
attached hereto and (b) surrender the Debenture to the Company. Except as
otherwise provided herein, the date upon which the Company receives the
completed Notice of Conversion (by recognized overnight courier, hand-delivery,
facsimile or otherwise) is the conversion date, provided that the Company shall
not be required to deliver a certificate for Common Shares unless and until the
Company receives the Debenture. Within five (5) business days after receipt of
the Notice of Conversion as aforesaid, provided the Company has received the
Debenture from the Holder, the Company shall deliver a certificate without
restrictive legend (unless no effective registration statement relating to the
Shares is in place or no exemption from such registration is available) as
specified in the Agreement for the number of full Common Shares issuable upon
the conversion and a check for any fraction of a share. The person in whose name
the certificate representing Common Shares is to be registered shall be treated
as a shareholder of record on and after the conversion date. Upon conversion,
unpaid interest on the converted portion of the Debenture shall be paid in cash
or Common Shares by the Company. If one person converts more than one Debenture
at the same time, the number of full shares issuable upon the conversion shall
be based on the total principal amount of Debentures converted. Upon surrender
of a Debenture that is to be converted in part, the Company shall issue to the
Holder a new Debenture equal in principal amount to the unconverted portion of
the Debenture surrendered. Notwithstanding the foregoing, the conversion right
of the Holder set forth herein shall be limited, solely to the extent required,
from time to time, such that in no instance shall the maximum number of Common
Shares into which the Holder may convert this Debenture exceed, at any one time,
an amount equal to the remainder of (i) 4.99% of the then issued and outstanding
shares of Common Stock of the Company following such conversion, minus (ii) the
number of shares of Common Stock of the Company then held by the Holder.
SECTION 3.3. FRACTIONAL SHARES. The Company shall not issue a
fractional share of Common Stock upon the conversion of this Debenture. Instead,
the Company shall pay in lieu of any fractional share the cash value thereof at
the then current market price of the Common Shares as determined under Section
3.7 below.
SECTION 3.4. TAXES ON CONVERSION. The Company shall pay any
documentary, stamp or similar issue or transfer tax due on the issue of Common
Shares upon the conversion of this Debenture. However, the Holder shall pay any
such tax which is due because such shares are issued in a name other than its
name.
SECTION 3.5. COMPANY TO RESERVE STOCK. The Company shall reserve out of
its authorized but unissued Common Shares enough Common Shares to permit the
-5-
conversion in full of this Debenture. All Common Shares which may be issued upon
the conversion hereof shall be fully paid and nonassessable.
SECTION 3.6. RESTRICTIONS ON TRANSFER. This Debenture and the Common
Shares issuable upon the conversion hereof have not been registered under the
Securities Act of 1933, as amended (the "Act") and have been sold pursuant to an
exemption under the Act. The Debenture may not be transferred or resold except
pursuant to registration under or an exemption from the Act.
SECTION 3.7. CURRENT MARKET PRICE.
(a) As used herein, the current market price per share of Common Shares
on any date is the average of the quoted bid prices of the Common Shares for the
five (5) consecutive trading days ending on the second trading day prior to the
date in question.
(b) As used in this Section 3.7, the term quoted bid price shall mean
(i) the closing bid prices thereof on any such trading date, as reported by the
Nasdaq Stock Market or (ii) in the event the Common Shares is not reported on
such system, the fair market value of the Common Stock as determined by the
Board of Directors of the Company in its good faith judgment.
ARTICLE 4. RECAPITALIZATIONS, MERGERS, ETC.
4.1 RECAPITALIZATIONS GENERALLY. In case the Company shall (i)
subdivide its outstanding Common Shares (including by means of a dividend or
distribution on the Common Shares payable in Common Shares), (ii) combine its
outstanding Common Shares into a smaller number of shares, or (iii) issue by
capital reorganization or reclassification of its Common Shares or otherwise
(other than a subdivision or combination of its shares provided for above, or a
reorganization, merger, consolidation or sale of assets provided for elsewhere
in this Article 4) any shares of capital stock of the Company, the Fixed
Conversion Price and the Maximum Number of Common Shares in effect immediately
prior to such action, shall be adjusted so that the Holder of this Debenture
thereafter surrendered for conversion shall be entitled to receive the number of
shares of capital stock of the Company which such holder would have owned
immediately following such action had this Debenture been converted immediately
prior thereto. An adjustment made pursuant to this subsection shall become
effective retroactively immediately after the effective date in the case of a
subdivision, combination or reclassification.
4.2 CERTAIN OTHER RECAPITALIZATIONS. In case the Company shall, during
the five consecutive trading-day period applicable (pursuant to Section 3.7(a))
in determining the current market price per share of Common Shares with respect
to any conversion date, (i) subdivide its outstanding Common Shares (including
by means of a dividend or distribution on the Common Shares payable in Common
Shares), (ii) combine its outstanding Common Shares into a smaller number of
shares or, (iii) issue by capital reorganization or reclassification of its
Common Shares or otherwise (other than a subdivision or combination of its
shares provided for above, or a reorganization, merger, consolidation or sale of
assets provided for elsewhere in
-6-
this Article 4) any shares of capital stock of the Company, then, for purposes
of calculating the Formula Price applicable to such conversion, the closing bid
price for the Company's Common Shares as reported by the Nasdaq Stock Market for
any day prior to such action which falls within such five trading-day period
applicable to such conversion shall be adjusted to a price per share giving
effect to such action.
4.3 MERGERS. Until the Debentures are paid in full or have converted
into Common Shares, the Company shall not consolidate or merge into, or transfer
all or substantially all of its assets to, any person, unless such person
assumes the obligations of the Company under this Debenture and immediately
after such transaction no Event of Default exists. Any reference herein to the
Company shall refer to such surviving or transferee corporation and the
obligations of the Company shall terminate upon such assumption. If the Company
merges or consolidates with another corporation or sells or transfers all or
substantially all of its assets to another person and the holders of the Common
Shares are entitled to receive stock, securities or property in respect of or in
exchange for Common Shares, then as a condition of such merger, consolidation,
sale or transfer, either (i) the Company and any such successor, purchaser or
transferee shall amend this Debenture to provide that it may thereafter be
converted on the terms and subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation, sale or transfer by a holder of the number of shares of Common
Stock into which this Debenture might have been converted immediately before
such merger, consolidation, sale or transfer, or (ii) if the Company is not the
surviving entity in such merger, consolidation, sale or transfer, the Company
shall give the Holder at least 30 days prior written notice of the expected
closing date of such transaction, and if any portion of this Debenture has not
been converted into Common Stock at the election of the Holder prior to such
closing, then the remaining principal amount of this Debenture may, at the
option of the Purchaser, be converted into shares of Common Stock at the closing
of such transaction. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Article 4 with respect to the rights
of the Holder after such merger, consolidation, sale or transfer to the end that
the provisions of this Article 4 (including adjustment of the Conversion Price
then in effect and the number of shares issuable upon conversion of this
Debenture) shall be applicable after that event as nearly equivalently as may be
practicable. Except as otherwise provided herein, the Conversion Price shall be
the same as the applicable Conversion Price defined in Section 3 above.
ARTICLE 5. REPORTS.
The Company will mail to the Holder hereof at its address as shown on
the Register a copy of any annual, quarterly or current report that it files
with the Securities and Exchange Commission promptly after the filing thereof
and a copy of any annual, quarterly or other report or proxy statement that it
gives to its shareholders generally at the time such report or statement is sent
to shareholders.
-7-
ARTICLE 6. DEFAULTS AND REMEDIES.
SECTION 6.1. EVENTS OF DEFAULT. An "Event of Default" occurs if (a) the
Company does not make the payment of the principal of this Debenture when the
same becomes due and payable at maturity, upon redemption or otherwise, (b) the
Company does not make a payment of interest or Liquidated Damages Amount when
such interest becomes due and payable and such default continues for a period of
seven (7) days thereafter, (c) the Company fails to issue Common Shares upon
conversion, within the time period specified in Section 3.2, (d) the Company
fails to comply with any of its other agreements in this Debenture and such
failure continues for the period and after the notice specified below, (e) the
Company's Common Shares cease to be quoted on any of the New York Stock
Exchange, American Stock Exchange, the Nasdaq National Market or Nasdaq Small
Cap for a period in excess of 60 calendar days, (f) any of the representations
or warranties made by the Company herein, in the Agreement, or in any historical
financial statements heretofore furnished by the Company in connection with the
execution and delivery of this Debenture or the Agreement shall be false or
misleading in any material respect as of the date made (it being understood that
this Section 6.1(f) shall not apply to any financial projections or other
forward-looking information), (g) the Company shall default on the payment of
any debts in excess of $250,000 beyond any applicable grace period, (h) any
judgments, levies or attachments shall be rendered against the Company or any of
its assets or properties in an aggregate amount in excess of $250,000 and such
judgments, levies or attachments shall not be dismissed, stayed, bonded or
discharged within thirty (30) days of the date of entry thereof, or (i) the
Company pursuant to or within the meaning of any Bankruptcy Law (as hereinafter
defined): (i) commences a voluntary case; (ii) consents to the entry of an order
for relief against it in an involuntary case; (iii) consents to the appointment
of a Custodian (as hereinafter defined) of it or for all or substantially all of
its property; (iv) makes a general assignment for the benefit of its creditors;
or (v) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that: (A) is for relief against the Company in an involuntary
case; (B) appoints a Custodian of the Company or for all or substantially all of
its property or (C) orders the liquidation of the Company, and the order or
decree remains unstayed and in effect for 60 days. As used in this Section 6.1,
the term "Bankruptcy Law" means Title 11 of the United States Code or any
similar Federal or State law for the relief of debtors or such other applicable
laws. The term "Custodian" means any receiver, trustee, assignee, liquidator or
similar official under any Bankruptcy Law.
SECTION 6.2. ACCELERATION. If an Event of Default occurs and is
continuing, the Holder hereof by notice to the Company may declare the principal
of and accrued interest on this Debenture to be due and payable. Upon such
declaration, the principal and interest hereof shall be due and payable
immediately without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived, anything herein or in any note or other
instruments contained to the contrary notwithstanding, and the Holder may
immediately, and without expiration of any period of grace, enforce any and all
of the Holder's rights or remedies afforded by law. The Company expressly waives
demand and presentment for payment, notice of nonpayment, protest, notice of
protest, notice of dishonor, notice of acceleration or intent to accelerate,
bringing of suit and diligence in taking any action to collect
-8-
amounts called for hereunder and shall be directly and primarily liable for the
payment of all sums owing and to be owing hereon, regardless of and without any
notice, diligence, act or omission as or with respect to the collection of any
amount called for hereunder.
ARTICLE 7. REGISTERED DEBENTURES.
SECTION 7.1. SERIES. This Debenture is one of a numbered series of
Debentures issued to the Holder and certain other parties and designated as
"7.5% Convertible Debentures Dated August 8, 1998". Such Debentures are referred
to herein collectively as the "Debentures."
SECTION 7.2. RECORD OWNERSHIP. The Company shall maintain a register of
the holders of the Debentures (the "Register") showing their names and addresses
and the serial numbers and principal amounts of Debentures issued to or
transferred of record by them from time to time. The Register may be maintained
in electronic, magnetic or other computerized form. The Company may treat the
person named as the Holder of this Debenture in the Register as the sole owner
of this Debenture. The Holder of this Debenture is the person exclusively
entitled to receive payments of interest on this Debenture, receive
notifications with respect to this Debenture, convert it into Common Stock and
otherwise exercise all of the rights and powers as the absolute owner hereof.
SECTION 7.3. REGISTRATION OF TRANSFER. Transfers of this Debenture may
be registered on the books of the Company maintained for such purpose pursuant
to Section 7.2 above (i.e., the Register). Transfers shall be registered when
this Debenture is presented to the Company with a request to register the
transfer hereof and the Debenture is duly endorsed by the appropriate person,
reasonable assurances are given that the endorsements are genuine and effective,
and the Company has received evidence satisfactory to it that such transfer is
rightful and in compliance with all applicable laws, including tax laws and
State and Federal securities laws. When this Debenture is presented for transfer
and duly transferred hereunder, it shall be canceled and a new Debenture showing
the name of the transferee as the record holder thereof shall be issued in lieu
hereof. When this Debenture is presented to the Company with a reasonable
request to exchange it for an equal principal amount of Debentures of other
denominations, the Company shall make such exchange and shall cancel this
Debenture and issue in lieu thereof Debentures having a total principal amount
equal to this Debenture in the denominations requested by the Holder.
SECTION 7.4. WORN AND LOST DEBENTURES. If this Debenture becomes worn,
defaced or mutilated but is still substantially intact and recognizable, the
Company or its agent may issue a new Debenture in lieu hereof upon its
surrender. Where the Holder of this Debenture claims that the Debenture has been
lost, destroyed or wrongfully taken, the Company shall issue a new Debenture in
place of the original Debenture if the Holder so requests by written notice to
the Company actually
-9-
received by the Company before it is notified that the Debenture has been
acquired by a bona fide purchaser and the Holder has delivered to the Company an
indemnity bond in such amount and issued by such surety as the Company deems
satisfactory together with an affidavit of the Holder setting forth the facts
concerning such loss, destruction or wrongful taking and such other information
in such form with such proof or verification as the Company may request.
ARTICLE 8. NOTICES.
Any notice which is required or convenient under the terms of this
Debenture shall be duly given if it is in writing and delivered in person, by
telecopy, by recognized overnight courier or mailed by first class mail, postage
prepaid and directed to the Holder of the Debenture at its address as it appears
on the Register or if to the Company to its principal executive offices. The
time when such notice is sent shall be the time of the giving of the notice.
All notices to Holders are to be mailed to each holder at such address
as is listed for such Holder on the signature pages to the Agreement:
All notices to the Company are to be mailed to:
Intelect Communications Systems Limited
Reid House 31 Church Street
Hamilton, Bermuda
Attn: Chief Executive Officer
Telephone: 441/295-8639
Fax: 441/292-5560
ARTICLE 9. TIMES.
Where this Debenture authorizes or requires the payment of money or the
performance of a condition or obligation on a Saturday or Sunday or a public
holiday, or authorizes or requires the payment of money or the performance of a
condition or obligation within, before or after a period of time computed from a
certain date, and such period of time ends on a Saturday or a Sunday or a public
holiday, such payment may be made or condition or obligation performed on the
next succeeding business day, and if the period ends at a specified hour, such
payment may be made or condition performed, at or before the same hour of such
next succeeding business day, with the same force and effect as if made or
performed in accordance with the terms of this Debenture. Where time is extended
by virtue of the provisions of this Article 9, such extended time shall not be
included in the computation of interest.
ARTICLE 10. RULES OF CONSTRUCTION.
In this Debenture, unless the context otherwise requires, words in the
singular number include the plural, and in the plural include the singular, and
words of the masculine gender include the feminine and the neuter, and when the
sense so indicates, words of the neuter gender may refer to any gender. The
numbers and
-10-
titles of sections contained in this Debenture are inserted for convenience of
reference only, and they neither form a part of this Debenture nor are they to
be used in the construction or interpretation hereof. Wherever, in this
Debenture, a determination of the Company is required or allowed, such
determination shall be made by a majority of the Board of Directors of the
Company and if it is made in good faith, it shall be conclusive and binding upon
the Company and the Holder of this Debenture.
ARTICLE 11. NATURE OF OBLIGATION; RANK.
No provision of this Debenture shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal of, and
interest on, this Debenture at the time, place, and rate, and in the coin or
currency, herein prescribed. This Debenture and all other Debentures now or
hereafter issued of similar terms are direct obligations of the Company. This
Debenture ranks equally with all other Debentures now or hereafter issued under
the terms set forth herein.
ARTICLE 12. GOVERNING LAW.
The validity, terms, performance and enforcement of this Debenture
shall be governed and construed by the provisions hereof and in accordance with
the laws of Bermuda.
IN WITNESS WHEREOF, the Company has duly executed this Debenture as of
the date first written above.
INTELECT COMMUNICATIONS SYSTEMS
LIMITED
By:_____________________________
Name:___________________________
Title:__________________________
[Corporate Seal]
-11-
NOTICE OF CONVERSION
[To be completed and signed only upon conversion of Debenture]
The undersigned, the Holder of this Debenture, hereby irrevocably
elects to exercise the right to convert it into common shares, par value $.01
per share, of Intelect Communications Systems Limited as follows:
[Complete if less Dollars ($ )*
than all of ------------------------------------------
principal amount ($10,000 or integral multiples of $10,000)
is to be converted]
[Signature must be ------------------------------------------
guaranteed if (Name of Holder of shares if different than
registered holder registered Holder of Debenture)
of stock differs
from registered ------------------------------------------
Holder of (Address of Holder if different than address
Debenture] of registered Holder of Debenture)
------------------------------------------
(Social Security or EIN of Holder of shares
if different than Holder of Debenture)
*If the principal amount of the Debenture to be converted is less than
the entire principal amount thereof, a new Debenture for the balance of
the principal amount shall be returned to the Holder of the Debenture.
All notices to be transmitted by hand delivery, facsimile or overnight
courier.
Date:________ Sign: ------------------------------------------
(Signature must conform in all respects to
name of Holder shown on face of this
Debenture)
-12-
ASSIGNMENT OF NOTE
The undersigned hereby sell(s) and assign(s) and transfer(s) unto
-----------------------------------------------------------------
(name, address and SSN or EIN of assignee)
Dollars ($ )
-----------------------------------------------------------------------
(principal amount of Debenture, $10,000 or integral multiples of $10,000)
of principal amount of this Debenture together with all accrued interest hereon.
Date:______________ Sign:
-----------------------------------------
(Signature must conform in all respects to
name of Holder shown on face of Debenture)
-13-
SERIES A DEBENTURE
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED
THEREUNDER (THE "1933 ACT"), AND MAY ONLY BE OFFERED OR SOLD PURSUANT TO
REGISTRATION UNDER OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
1933 ACT.
7% CONVERTIBLE DEBENTURE DUE OCTOBER 15, 1998
$________________ October 15, 1996
FOR VALUE RECEIVED, INTELECT COMMUNICATIONS SYSTEMS LIMITED, a Bermuda
company (the "Company"), hereby promises to pay to _____________________ , or
registered assigns (the "Holder") on October 15, 1998 (the "Maturity Date"), the
principal amount of ________________________ (______________) and to pay
interest in cash on the principal amount hereof, in such amounts, at such times
and on such terms and conditions as are specified herein. This Debenture (this
"Debenture") is one of two Series A Debentures issued in an aggregate principal
amount of $5,000,000 pursuant to that certain Convertible Securities Agreement
executed by the Holder, the Company and _____________________ dated October 15,
1996 (the "Agreement").
ARTICLE 1. INTEREST.
The Company shall pay interest on the unpaid principal amount of this
Debenture at the rate of Seven Percent (7%) per year, payable in cash, payable
quarterly in arrears on each December 31, March 31, June 30 and September 30,
commencing December 31, 1996 until the principal hereof is paid in full or has
been converted. Interest on this Debenture shall accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from the
date hereof. Interest shall be computed on the basis of the actual number of
days elapsed during any interest calculation period in a 360-day year of twelve
30-day months.
ARTICLE 2. METHOD OF PAYMENT.
The Company shall pay the principal of and interest on this Debenture
in United States dollars. Interest shall be paid to the holder at
________________________. Principal shall be paid in the manner described in
that certain Book Entry Transfer
7% CONVERTIBLE DEBENTURE - SERIES A - PAGE 1
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
Agent Agreement (the "Transfer Agent Agreement") among the Company, the Holder,
______________________ and American Stock Transfer & Trust Company, the
Company's stock transfer agent (the "Transfer Agent"). Interest and principal
payments shall be subject to withholding (if any) under applicable United States
Federal Internal Revenue Service Regulations.
ARTICLE 3. CONVERSION.
SECTION 3.1. CONVERSION PRIVILEGE
(a) The Holder of this Debenture shall have the right, exercisable at
one or more times, at its option, to convert all or a portion of this Debenture
into common shares, par value $.01 per share (U.S.), of the Company ("Common
Shares" or "Common Stock") at the times hereafter specified. The number of
Common Shares issuable upon the conversion of this Debenture is determined by
dividing the principal amount hereof to be converted by the Conversion Price (as
defined in paragraph (b) of this Section 3.1 below) in effect on the conversion
date and rounding the result to the nearest 1/100th of a share. Upon conversion,
all accrued and unpaid interest will be paid to the Holder in cash.
(b) All or any portion of this Debenture is convertible at any time,
and from time to time as follows: One-third (1/3) of the principal balance of
all Debentures issued to Holders as described in Section 7.1 hereafter shall be
convertible beginning sixty (60) days after the date of this Debenture; an
additional one-third (1/3) of the principal balance of all such Debentures
issued to the Holders shall be convertible beginning 90 days after the date of
such Debentures; and the final one-third (1/3) of the principal balance of all
such Debentures issued to the Holders shall be convertible beginning 120 days
after the date of such Debentures; provided, that if the Company has not
effected the registration of the Common Shares into which this Debenture is
convertible on or before the expiration of the sixty (60) day period referenced
above, one-half (1/2) of the principal balance of all the Debentures shall be
convertible at such time and the remaining principal balance shall be
convertible ninety (90) days after the date hereof. The conversion price shall
be the lesser of (A) Twelve and No/100 Dollars ($12.00) per share of Common
Stock or (B) the product of (i) the current market price of the Common Stock on
the conversion date multiplied by (ii) eighty two and one-half percent (82.5%)
(the "Formula Price"); provided, if the conversion date is a date on or before
the 90th day following the date of this Debenture, the Conversion Price shall be
the greater of the Formula Price of the Common Stock on the conversion date or
Four and 50/00 Dollars ($4.50) per share of Common Stock (such applicable price
being hereafter referred to as the "Conversion Price").
(c) In the event any Debenture remains outstanding on the second
anniversary of the date hereof, the unconverted portion of such Debenture will
automatically be
7% CONVERTIBLE DEBENTURE - SERIES A - PAGE 2
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
converted into Common Shares on such date in the manner set forth in this
Section 3.1; provided (i) an Event of Default does not then exist under this
Debenture and (ii) a registration statement as contemplated by Section 4 of the
Agreement is effective with respect to the sale by the Holders of shares of
Common Stock issuable upon conversion of this Debenture.
(d) At any time, and from time to time, the Company, at its option (the
"Redemption Option"), may redeem this Debenture at the Agreed Redemption Amount
(which shall mean the product of the remaining principal amount of the Debenture
multiplied by 117.5%, plus accrued and unpaid interest thereon). Any notice of
exercise of the Redemption Option (a "Redemption Notice") shall be delivered in
writing to Holder and shall be irrevocable when delivered. The Company shall
not, however, be entitled to issue a Redemption Notice with respect to any
portion of the Debenture for which Holder has previously delivered a Notice of
Conversion as contemplated by this Debenture, and any such Notice of Conversion
delivered after the Company issues a Redemption Notice shall be invalid. The
Company shall pay the Agreed Redemption Amount in the manner contemplated in the
Transfer Agent Agreement upon exercise of the Redemption Option within thirty
(30) days of the delivery of such Redemption Notice. During the Redemption
Period, the Company shall comply with all terms, conditions and covenants of
this Debenture (including, without limitation timely payment of accrued and
unpaid interest). Subject to the foregoing, Holder's option to convert this
Debenture into shares of Common Stock shall be abated during the Redemption
Period.
SECTION 3.2. CONVERSION PROCEDURE. To convert this Debenture into
Common Shares, the Holder must complete and sign the Notice of Conversion
attached hereto and deliver the same (including delivery via facsimile) to the
Transfer Agent. The date upon which the Transfer Agent receives the completed
Notice of Conversion (by recognized overnight courier, hand-delivery, facsimile
or otherwise) is the conversion date. Within two (2) business days after receipt
of the Notice of Conversion as aforesaid, the Company shall cause the Transfer
Agent to deliver a certificate for the number of full Common Shares issuable
upon the conversion and a check for any fraction of a share. The person in whose
name the certificate representing Common Shares is to be registered shall be
treated as a shareholder of record on and after the conversion date. Upon
conversion, unpaid interest on the converted portion of the Debenture shall be
paid in cash by the Company. If one person converts more than one Debenture at
the same time, the number of full shares issuable upon the conversion shall be
based on the total principal amount of Debentures converted. Notwithstanding the
foregoing, the conversion right of the Holder set forth herein shall be limited,
solely to the extent required, from time to time, such that in no instance shall
the maximum number of Common Shares into which the Holder may convert this
Debenture exceed, at any one time, an amount equal to the remainder of (i) 4.99%
of the then issued and outstanding
7% CONVERTIBLE DEBENTURE - SERIES A - PAGE 3
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
shares of Common Stock of the Company following such conversion, minus (ii) the
number of shares of Common Stock of the Company then held by the Holder.
SECTION 3.3. FRACTIONAL SHARES. The Company shall not issue a
fractional share of Common Stock upon the conversion of this Debenture. Instead,
the Company shall pay in lieu of any fractional share the cash value thereof at
the then current market price of the Common Shares as determined under Section
3.7 below.
SECTION 3.4. TAXES ON CONVERSION. The Company shall pay any
documentary, stamp or similar issue or transfer tax due on the issue of Common
Shares upon the conversion of this Debenture. However, the Holder shall pay any
such tax which is due because such shares are issued in a name other than its
name.
SECTION 3.5. COMPANY TO RESERVE STOCK. The Company shall reserve out of
its authorized but unissued Common Shares enough Common Shares to permit the
conversion in full of this Debenture. All Common Shares which may be issued upon
the conversion hereof shall be fully paid and nonassessable.
SECTION 3.6. RESTRICTIONS ON TRANSFER. This Debenture and the Common
Shares issuable upon the conversion hereof have not been registered under the
Securities Act of 1933 (the "Act") and have been sold pursuant to an exemption
under the Act. The Debenture may not be transferred or resold except pursuant to
registration under or an exemption from the Act.
SECTION 3.7. CURRENT MARKET PRICE.
(a) As used herein, the current market price per share of Common Shares
on any date is the average of the closing bid price of the Common Shares on
NASDAQ (or on such exchange as the Common Shares are then listed) for five (5)
consecutive trading days ending on the trading day before the date in question.
(b) As used in this Section 3.7, the term closing bid price shall mean
(i) the closing bid price thereof on any such trading date, as reported by
Bloomberg, L.P. or (ii) in the event the Common Shares are not reported on such
system, the fair market value of the Common Stock as determined by the Board of
Directors of the Company in its good faith judgment.
ARTICLE 4. MERGERS.
The Company shall not consolidate or merge into, or transfer all or
substantially all of its assets to, any person, unless such person assumes the
obligations of the Company under this Debenture and immediately after such
transaction no Event of Default exists. Any reference herein to the Company
shall refer to such surviving or
7% CONVERTIBLE DEBENTURE - SERIES A - PAGE 4
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
transferee corporation and the obligations of the Company shall terminate upon
such assumption. If the Company merges or consolidates with another corporation
or sells or transfers all or substantially all of its assets to another person
and the holders of the Common Shares are entitled to receive stock, securities
or property in respect of or in exchange for Common Shares, then as a condition
of such merger, consolidation, sale or transfer, either (i) the Company and any
such successor, purchaser or transferee shall amend this Debenture to provide
that it may thereafter be converted on the terms and subject to the conditions
set forth above into the kind and amount of stock, securities or property
receivable upon such merger, consolidation, sale or transfer by a holder of the
number of shares of Common Stock into which this Debenture might have been
converted immediately before such merger, consolidation, sale or transfer, or
(ii) if the Company is not the surviving entity in such merger, consolidation,
sale or transfer, the Company shall give the Holder at least 30 days prior
written notice of the expected closing date of such transaction, and if any
portion of this Debenture has not been converted into Common Stock at the
election of the Holder prior to such closing, then the remaining principal
amount of this Debenture may, at the option of the Purchaser, be converted into
shares of Common Stock at the closing of such transaction. The Conversion Price
shall be the same as the applicable Conversion Price defined in Section 3 above.
ARTICLE 5. REPORTS.
The Company will mail to the Holder hereof at its address as shown on
the Register a copy of any annual, quarterly or current report that it files
with the Securities and Exchange Commission promptly after the filing thereof
and a copy of any annual, quarterly or other report or proxy statement that it
gives to its shareholders generally at the time such report or statement is sent
to shareholders.
ARTICLE 6. DEFAULTS AND REMEDIES.
SECTION 6.1. EVENTS OF DEFAULT. An "Event of Default" occurs if (a) the
Company does not make the payment of the principal of this Debenture when the
same becomes due and payable at maturity, upon redemption or otherwise, (b) the
Company does not make a payment of interest when such interest becomes due and
payable and such default continues for a period of 10 days thereafter, (c) the
Company fails to issue Common Shares upon conversion, within the time period
specified in Section 3.2, (d) the Company fails to comply with any of its other
agreements in this Debenture the Company ceases to be eligible with respect to
the use of Form S-3 for the filing of a resale registration statement with the
Securities and Exchange Commission, (f) the Company's Common Shares cease to be
quoted on any of the New York Stock Exchange, American Stock Exchange, the
NASDAQ-National Market or NASDAQ-Small Cap for a period in excess of 60 calendar
days, (g) an "Event of Default" occurs in any of the other Debentures issued in
connection with the Agreement, (h) the Company defaults
7% CONVERTIBLE DEBENTURE - SERIES A - PAGE 5
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
under the terms of any existing or "funded indebtedness" in excess of $500,000,
and such default is not remedied within the cure period associated therewith, or
(i) the Company pursuant to or within the meaning of any Bankruptcy Law (as
hereinafter defined): (a) commences a voluntary case; (b) consents to the entry
of an order for relief against it in an involuntary case; (c) consents to the
appointment of a Custodian (as hereinafter defined) of it or for all or
substantially all of its property; (d) makes a general assignment for the
benefit of its creditors; or (e) a court of competent jurisdiction enters an
order or decree under any Bankruptcy Law that: (A) is for relief against the
Company in an involuntary case; (B) appoints a Custodian of the Company or for
all or substantially all of its property or (C) orders the liquidation of the
Company, and the order or decree remains unstayed and in effect for 60 days. As
used in this Section 6.1, the term "Bankruptcy Law" means Title 11 of the United
States Code or any similar Federal or State law for the relief of debtors or
such other applicable laws. The term "Custodian" means any receiver, trustee,
assignee, liquidator or similar official under any Bankruptcy Law. The term
"funded indebtedness" means indebtedness for borrowed money of Seller,
indebtedness evidenced by securities, debentures, bonds, notes or other similar
instruments issued by Seller, all obligations of Seller issued or assumed as the
deferred purchase price of property, all liabilities secured by any lien on any
property or asset of Seller and all obligations of the type referred to herein
of other persons for the payment of which Seller is responsible or liable as
obligor, guarantor, or otherwise.
SECTION 6.2. ACCELERATION. If an Event of Default occurs and is
continuing, the Holder hereof by notice to the Company, may declare the
principal of and accrued interest on this Debenture to be due and payable. Upon
such declaration, the principal and interest hereof shall be due and payable
immediately.
ARTICLE 7. REGISTERED DEBENTURES.
SECTION 7.1. SERIES. This Debenture is one of two Series A Debentures
issued to the Holder and Seacrest Capital Limited pursuant to the Agreement
having an aggregate principal amount of Five Million and No/100 Dollars
($5,000,000), which are identical. Such Debentures are referred to herein
collectively as the "Debentures."
SECTION 7.2. RECORD OWNERSHIP. The Company, pursuant to the mechanisms
established under the Transfer Agent Agreement, shall maintain a register of the
holders of the Debentures (the "Register") showing their names and addresses and
the serial numbers and principal amounts of Debentures issues to or transferred
of record by them from time to time. The Register may be maintained in
electronic, magnetic or other computerized form. The Company may treat the
person named as the Holder of this Debenture in the Register as the sole owner
of this Debenture. The registered Holder of this Debenture is the person
exclusively entitled to receive payments of interest on this Debenture, receive
notifications with respect to this Debenture, convert it into
7% CONVERTIBLE DEBENTURE - SERIES A - PAGE 6
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
Common Stock and otherwise exercise all of the rights and powers as the absolute
owner hereof.
SECTION 7.3. REGISTRATION OF TRANSFER. Transfers of this Debenture may
be registered on the books of the Company maintained for such purpose pursuant
to Section 7.2 above (i.e., the Register). Transfers shall be registered when
the Transfer Agent is presented with a request to register the transfer hereof
pursuant to the terms of the Transfer Agent Agreement and the Company has
received evidence satisfactory to it that such transfer is rightful and in
compliance with all applicable laws, including tax laws and State and Federal
securities laws.
ARTICLE 8. NOTICES.
Any notice which is required by the Company under the terms of this
Debentures shall be duly given if it is in writing and delivered in person, by
telecopy, by recognized overnight courier or mailed by first class mail, postage
prepaid and directed to the Holder of the Debenture at its address as it appears
on the Register or if to the Company to its principal executive offices. The
time when such notice is sent shall be the time of the giving of the notice.
All notices to Holders are to be mailed to:
--------------------------
--------------------------
--------------------------
--------------------------
Telephone: _______________
Fax: _____________________
All notices to the Company are to be mailed to:
Intelect Communications Systems Limited
Reid House 31 Church Street
Hamilton, Bermuda
Attn: President
Telephone: 441/295-8639
Fax: 441/292-5560
7% CONVERTIBLE DEBENTURE - SERIES A - PAGE 7
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
With copy to:
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Telephone: 617/526-6000
Fax: 617/526-5000
Attn: Philip P. Rossetti
ARTICLE 9. TIMES.
Where this Debenture authorizes or requires the payment of money or the
performance of a condition or obligation on a Saturday or Sunday or a public
holiday, or authorizes or requires the payment of money or the performance of a
condition or obligation within, before or after a period of time computed from a
certain date, and such period of time ends on a Saturday or a Sunday or a public
holiday, such payment may be made or condition or obligation performed on the
next succeeding business day, and if the period ends at a specified hour, such
payment may be made or condition performed, at or before the same hour of such
next succeeding business day, with the same force and effect as if made or
performed in accordance with the terms of this Debenture. Where time is extended
by virtue of the provisions of this Article 9, such extended time shall not be
included in the computation of interest.
ARTICLE 10. RULES OF CONSTRUCTION.
In this Debenture, unless the context otherwise requires, words in the
singular number include the plural, and in the plural include the singular, and
words of the masculine gender include the feminine and the neuter, and when the
sense so indicates, words of the neuter gender may refer to any gender. The
numbers and titles of sections contained in this Debenture are inserted for
convenience of reference only, and they neither form a part of this Debenture
nor are they to be used in the construction or interpretation hereof. Wherever,
in this Debenture, a determination of the Company is required or allowed, such
determination shall be made by a majority of the Board of Directors of the
Company and if it is made in good faith, it shall be conclusive and binding upon
the Company and the Holder of this Debenture.
ARTICLE 11. GOVERNING LAW.
The validity, terms, performance and enforcement of this Debenture
shall be governed and construed by the provisions hereof and in accordance with
the laws of Bermuda.
[Signature page follows]
7% CONVERTIBLE DEBENTURE - SERIES A - PAGE 8
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
IN WITNESS WHEREOF, the Company has duly executed this Debenture as of
the date first written above.
INTELECT COMMUNICATIONS SYSTEMS
LIMITED
By:
------------------------------
Name PETER G. LEIGHTON
-----------------------------
Title PRESIDENT
----------------------------
7% CONVERTIBLE DEBENTURE - SERIES A - PAGE 9
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
NOTICE OF CONVERSION
[To be completed and signed only upon conversion of Debenture]
The undersigned, the Holder of this Debenture, hereby irrevocably
elects to exercise the right to convert it into common shares, par value $10 per
share, of Intelect Communications Systems Limited as follows:
[Complete if less than all Dollars ($ )
of principal amount is to ---------------------------------------------
be converted ($10,000 or integral multiples of $10,000)
[Signature must be ---------------------------------------------
guaranteed if registered (Name of Holder of shares if different than
holder of stock differs registered Holder of Debenture)
from registered Holder of
Debenture)
---------------------------------------------
(Address of Holder if different than address
of registered Holder of Debenture)
---------------------------------------------
(Social Security of EIN of Holder of shares
if different than Holder of Debenture)
Date:_________ Sign: _____________________________________________
(Signature must conform in all respects to
name of Holder shown on face of this
Debenture)
NOTICE OF CONVERSION
SERIES B DEBENTURE
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED
THEREUNDER (THE "1933 ACT"), AND MAY ONLY BE OFFERED OR SOLD PURSUANT TO
REGISTRATION UNDER OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
1933 ACT.
7% CONVERTIBLE DEBENTURE DUE OCTOBER 15, 1998
$_________________ October 15, 1996
FOR VALUE RECEIVED, INTELECT COMMUNICATIONS SYSTEMS LIMITED, a Bermuda
company (the "Company"), hereby promises to pay to
_____________________________, or registered assigns (the "Holder") on October
15, 1998 (the "Maturity Date"), the principal amount of ___________________
($______________) and to pay interest in cash on the principal amount hereof, in
such amounts, at such times and on such terms and conditions as are specified
herein. This Debenture (this "Debenture") is one of two Series B Debentures
issued in an aggregate principal amount of $5,000,000 pursuant to that certain
Convertible Securities Agreement executed by the Holder, the Company and
__________________ dated October 15, 1996 (the "Agreement").
ARTICLE 1. INTEREST.
The Company shall pay interest on the unpaid principal amount of this
Debenture at the rate of Seven Percent (7%) per year, payable in cash, payable
quarterly in arrears on each March 31, June 30, September 30 and December 31,
commencing March 31, 1997 (which initial payment shall be due April 15, 1997)
until the principal hereof is paid in full or has been converted. Interest on
this Debenture shall accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from the date hereof. Interest shall be
computed on the basis of the actual number of days elapsed during any interest
calculation period in a 360-day year of twelve 30-day months.
ARTICLE 2. METHOD OF PAYMENT.
The Company shall pay the principal of and interest on this Debenture
in United States dollars. Interest shall be paid to the holder at
__________________________. Principal shall be paid in the manner described in
that certain Book Entry Transfer Agent Agreement (the "Transfer Agent
Agreement") among the Company, the Holder, __________________ and American Stock
Transfer & Trust Company, the Company's stock transfer agent (the "Transfer
Agent"). Interest and principal payments shall be subject to withholding (if
any) under applicable United States Federal Internal Revenue
7% CONVERTIBLE DEBENTURE - SERIES B - PAGE 1
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
Service Regulations.
ARTICLE 3. CONVERSION.
SECTION 3.1. CONVERSION PRIVILEGE
(a) The Holder of this Debenture shall have the right, exercisable at
one or more times, at its option, to convert all or a portion of this Debenture
into common shares, par value $.01 per share (U.S.), of the Company ("Common
Shares" or "Common Stock") at the times hereafter specified. The number of
Common Shares issuable upon the conversion of this Debenture is determined by
dividing the principal amount hereof to be converted by the Conversion Price (as
defined in paragraph (b) of this Section 3.1 below) in effect on the conversion
date and rounding the result to the nearest 1/100th of a share. Upon conversion,
all accrued and unpaid interest will be paid to the Holder in cash.
(b) All or any portion of this Debenture is convertible at any time,
and from time to time as follows: One-third (1/3) of the principal balance of
all Debentures issued to Holders as described in Section 7.1 hereafter shall be
convertible beginning sixty (60) days after the date of this Debenture; an
additional one-third (1/3) of the principal balance of all such Debentures
issued to the Holders shall be convertible beginning 90 days after the date of
such Debentures; and the final one-third (1/3) of the principal balance of all
such Debentures issued to the Holders shall be convertible beginning 120 days
after the date of such Debentures; provided, that if the Company has not
effected the registration of the Common Shares into which this Debenture is
convertible on or before the expiration of the sixty (60) day period referenced
above, one-half (1/2) of the principal balance of all the Debentures shall be
convertible at such time and the remaining principal balance shall be
convertible ninety (90) days after the date hereof. The conversion price shall
be the lesser of (A) Twelve and No/100 Dollars ($12.00) per share of Common
Stock or (B) the product of (i) the current market price of the Common Stock on
the conversion date multiplied by (ii) eighty two and one-half percent (82.5%)
(the "Formula Price"); provided, if the conversion date is a date on or before
the 90th day following the date of this Debenture, the Conversion Price shall be
the greater of the Formula Price of the Common Stock on the conversion date or
Four and 50/00 Dollars ($4.50) per share of Common Stock (such applicable price
being hereafter referred to as the "Conversion Price").
(c) In the event any Debenture remains outstanding on the second
anniversary of the date hereof, the unconverted portion of such Debenture will
automatically be converted into Common Shares on such date in the manner set
forth in this Section 3.1; provided (i) an Event of Default does not then exist
under this Debenture and (ii) a registration statement as contemplated by
Section 4 of the Agreement is effective with respect to the sale by the Holders
of shares of Common Stock issuable upon conversion
7% CONVERTIBLE DEBENTURE - SERIES B - PAGE 2
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
of this Debenture.
(d) At any time, and from time to time, the Company, at its option (the
"Redemption Option"), may redeem this Debenture at the Agreed Redemption Amount
(which shall mean the product of the remaining principal amount of the Debenture
multiplied by 117.5%, plus accrued and unpaid interest thereon). Any notice of
exercise of the Redemption Option (a "Redemption Notice") shall be delivered in
writing to Holder and shall be irrevocable when delivered. The Company shall
not, however, be entitled to issue a Redemption Notice with respect to any
portion of the Debenture for which Holder has previously delivered a Notice of
Conversion as contemplated by this Debenture, and any such Notice of Conversion
delivered after the Company issues a Redemption Notice shall be invalid. The
Company shall pay the Agreed Redemption Amount in the manner contemplated in the
Transfer Agent Agreement upon exercise of the Redemption Option within thirty
(30) days of the delivery of such Redemption Notice. During the Redemption
Period, the Company shall comply with all terms, conditions and covenants of
this Debenture (including, without limitation timely payment of accrued and
unpaid interest). Subject to the foregoing, Holder's option to convert this
Debenture into shares of Common Stock shall be abated during the Redemption
Period.
SECTION 3.2. CONVERSION PROCEDURE. To convert this Debenture into
Common Shares, the Holder must complete and sign the Notice of Conversion
attached hereto and deliver the same (including delivery via facsimile) to the
Transfer Agent. The date upon which the Transfer Agent receives the completed
Notice of Conversion (by recognized overnight courier, hand-delivery, facsimile
or otherwise) is the conversion date. Within two (2) business days after receipt
of the Notice of Conversion as aforesaid, the Company shall cause the Transfer
Agent to deliver a certificate for the number of full Common Shares issuable
upon the conversion and a check for any fraction of a share. The person in whose
name the certificate representing Common Shares is to be registered shall be
treated as a shareholder of record on and after the conversion date. Upon
conversion, unpaid interest on the converted portion of the Debenture shall be
paid in cash by the Company. If one person converts more than one Debenture at
the same time, the number of full shares issuable upon the conversion shall be
based on the total principal amount of Debentures converted. Notwithstanding the
foregoing, the conversion right of the Holder set forth herein shall be limited,
solely to the extent required, from time to time, such that in no instance shall
the maximum number of Common Shares into which the Holder may convert this
Debenture exceed, at any one time, an amount equal to the remainder of (i) 4.99%
of the then issued and outstanding shares of Common Stock of the Company
following such conversion, minus (ii) the number of shares of Common Stock of
the Company then held by the Holder.
7% CONVERTIBLE DEBENTURE - SERIES B - PAGE 3
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
SECTION 3.3. FRACTIONAL SHARES. The Company shall not issue a
fractional share of Common Stock upon the conversion of this Debenture. Instead,
the Company shall pay in lieu of any fractional share the cash value thereof at
the then current market price of the Common Shares as determined under Section
3.7 below.
SECTION 3.4. TAXES ON CONVERSION. The Company shall pay any
documentary, stamp or similar issue or transfer tax due on the issue of Common
Shares upon the conversion of this Debenture. However, the Holder shall pay any
such tax which is due because such shares are issued in a name other than its
name.
SECTION 3.5. COMPANY TO RESERVE STOCK. The Company shall reserve out of
its authorized but unissued Common Shares enough Common Shares to permit the
conversion in full of this Debenture. All Common Shares which may be issued upon
the conversion hereof shall be fully paid and nonassessable.
SECTION 3.6. RESTRICTIONS ON TRANSFER. This Debenture and the Common
Shares issuable upon the conversion hereof have not been registered under the
Securities Act of 1933 (the "Act") and have been sold pursuant to an exemption
under the Act. The Debenture may not be transferred or resold except pursuant to
registration under or an exemption from the Act.
SECTION 3.7. CURRENT MARKET PRICE.
(a) As used herein, the current market price per share of Common Shares
on any date is the average of the closing bid price of the Common Shares on
NASDAQ (or on such exchange as the Common Shares are then listed) for five (5)
consecutive trading days ending on the trading day before the date in question.
(b) As used in this Section 3.7, the term closing bid price shall mean
(i) the closing bid price thereof on any such trading date, as reported by
Bloomberg, L.P. or (ii) in the event the Common Shares are not reported on such
system, the fair market value of the Common Stock as determined by the Board of
Directors of the Company in its good faith judgment.
ARTICLE 4. MERGERS.
The Company shall not consolidate or merge into, or transfer all or
substantially all of its assets to, any person, unless such person assumes the
obligations of the Company under this Debenture and immediately after such
transaction no Event of Default exists. Any reference herein to the Company
shall refer to such surviving or transferee corporation and the obligations of
the Company shall terminate upon such assumption. If the Company merges or
consolidates with another corporation or sells or transfers all or substantially
all of its assets to another person and the holders of the
7% CONVERTIBLE DEBENTURE - SERIES B - PAGE 4
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
Common Shares are entitled to receive stock, securities or property in respect
of or in exchange for Common Shares, then as a condition of such merger,
consolidation, sale or transfer, either (i) the Company and any such successor,
purchaser or transferee shall amend this Debenture to provide that it may
thereafter be converted on the terms and subject to the conditions set forth
above into the kind and amount of stock, securities or property receivable upon
such merger, consolidation, sale or transfer by a holder of the number of shares
of Common Stock into which this Debenture might have been converted immediately
before such merger, consolidation, sale or transfer, or (ii) if the Company is
not the surviving entity in such merger, consolidation, sale or transfer, the
Company shall give the Holder at least 30 days prior written notice of the
expected closing date of such transaction, and if any portion of this Debenture
has not been converted into Common Stock at the election of the Holder prior to
such closing, then the remaining principal amount of this Debenture may, at the
option of the Purchaser, be converted into shares of Common Stock at the closing
of such transaction. The Conversion Price shall be the same as the applicable
Conversion Price defined in Section 3 above.
ARTICLE 5. REPORTS.
The Company will mail to the Holder hereof at its address as shown on
the Register a copy of any annual, quarterly or current report that it files
with the Securities and Exchange Commission promptly after the filing thereof
and a copy of any annual, quarterly or other report or proxy statement that it
gives to its shareholders generally at the time such report or statement is sent
to shareholders.
ARTICLE 6. DEFAULTS AND REMEDIES.
SECTION 6.1. Events of Default. An "Event of Default" occurs if (a) the
Company does not make the payment of the principal of this Debenture when the
same becomes due and payable at maturity, upon redemption or otherwise, (b) the
Company does not make a payment of interest when such interest becomes due and
payable and such default continues for a period of 10 days thereafter, (c) the
Company fails to issue Common Shares upon conversion, within the time period
specified in Section 3.2, (d) the Company fails to comply with any of its other
agreements in this Debenture the Company ceases to be eligible with respect to
the use of Form S-3 for the filing of a resale registration statement with the
Securities and Exchange Commission, (f) the Company's Common Shares cease to be
quoted on any of the New York Stock Exchange, American Stock Exchange, the
NASDAQ-National Market or NASDAQ-Small Cap for a period in excess of 60 calendar
days, (g) an "Event of Default" occurs in any of the other Debentures issued in
connection with the Agreement, (h) the Company defaults under the terms of any
existing or "funded indebtedness" in excess of $500,000, and such default is not
remedied within the cure period associated therewith, or (i) the Company
pursuant to or within the meaning of any Bankruptcy Law (as hereinafter
defined): (a)
7% CONVERTIBLE DEBENTURE - SERIES B - PAGE 5
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
commences a voluntary case; (b) consents to the entry of an order for relief
against it in an involuntary case; (c) consents to the appointment of a
Custodian (as hereinafter defined) of it or for all or substantially all of its
property; (d) makes a general assignment for the benefit of its creditors; or
(e) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that: (A) is for relief against the Company in an involuntary
case; (B) appoints a Custodian of the Company or for all or substantially all of
its property or (C) orders the liquidation of the Company, and the order or
decree remains unstayed and in effect for 60 days. As used in this Section 6.1,
the term "Bankruptcy Law" means Title 11 of the United States Code or any
similar Federal or State law for the relief of debtors or such other applicable
laws. The term "Custodian" means any receiver, trustee, assignee, liquidator or
similar official under any Bankruptcy Law. The term "funded indebtedness" means
indebtedness for borrowed money of Seller, indebtedness evidenced by securities,
debentures, bonds, notes or other similar instruments issued by Seller, all
obligations of Seller issued or assumed as the deferred purchase price of
property, all liabilities secured by any lien on any property or asset of Seller
and all obligations of the type referred to herein of other persons for the
payment of which Seller is responsible or liable as obligor, guarantor, or
otherwise.
SECTION 6.2. ACCELERATION. If an Event of Default occurs and is
continuing, the Holder hereof by notice to the Company, may declare the
principal of and accrued interest on this Debenture to be due and payable. Upon
such declaration, the principal and interest hereof shall be due and payable
immediately.
ARTICLE 7. REGISTERED DEBENTURES.
SECTION 7.1. SERIES. This Debenture is one of two Series B Debentures
issued to the Holder and Infinity Investors Ltd. pursuant to the Agreement
having an aggregate principal amount of Five Million and No/100 Dollars
($5,000,000), which are identical. Such Debentures are referred to herein
collectively as the "Debentures."
SECTION 7.2. RECORD OWNERSHIP. The Company, pursuant to the mechanisms
established under the Transfer Agent Agreement, shall maintain a register of the
holders of the Debentures (the "Register") showing their names and addresses and
the serial numbers and principal amounts of Debentures issues to or transferred
of record by them from time to time. The Register may be maintained in
electronic, magnetic or other computerized form. The Company may treat the
person named as the Holder of this Debenture in the Register as the sole owner
of this Debenture. The registered Holder of this Debenture is the person
exclusively entitled to receive payments of interest on this Debenture, receive
notifications with respect to this Debenture, convert it into Common Stock and
otherwise exercise all of the rights and powers as the absolute owner hereof.
7% CONVERTIBLE DEBENTURE - SERIES B - PAGE 6
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
SECTION 7.3. REGISTRATION OF TRANSFER. Transfers of this Debenture may
be registered on the books of the Company maintained for such purpose pursuant
to Section 7.2 above (i.e., the Register). Transfers shall be registered when
the Transfer Agent is presented with a request to register the transfer hereof
pursuant to the terms of the Transfer Agent Agreement and the Company has
received evidence satisfactory to it that such transfer is rightful and in
compliance with all applicable laws, including tax laws and State and Federal
securities laws.
ARTICLE 8. NOTICES.
Any notice which is required by the Company under the terms of this
Debentures shall be duly given if it is in writing and delivered in person, by
telecopy, by recognized overnight courier or mailed by first class mail, postage
prepaid and directed to the Holder of the Debenture at its address as it appears
on the Register or if to the Company to its principal executive offices. The
time when such notice is sent shall be the time of the giving of the notice.
All notices to Holders are to be mailed to:
-----------------------
-----------------------
-----------------------
-----------------------
Telephone:
Fax:
All notices to the Company are to be mailed to:
Intelect Communications Systems Limited
Reid House 31 Church Street
Hamilton, Bermuda
Attn: President
Telephone: 441/295-8639
Fax: 441/292-5560
With copy to:
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Telephone: 617/526-6000
Fax: 617/526-5000
Attn: Philip P. Rossetti
7% CONVERTIBLE DEBENTURE - SERIES B - PAGE 7
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
ARTICLE 9. TIMES.
Where this Debenture authorizes or requires the payment of money or the
performance of a condition or obligation on a Saturday or Sunday or a public
holiday, or authorizes or requires the payment of money or the performance of a
condition or obligation within, before or after a period of time computed from a
certain date, and such period of time ends on a Saturday or a Sunday or a public
holiday, such payment may be made or condition or obligation performed on the
next succeeding business day, and if the period ends at a specified hour, such
payment may be made or condition performed, at or before the same hour of such
next succeeding business day, with the same force and effect as if made or
performed in accordance with the terms of this Debenture. Where time is extended
by virtue of the provisions of this Article 9, such extended time shall not be
included in the computation of interest.
ARTICLE 10. RULES OF CONSTRUCTION.
In this Debenture, unless the context otherwise requires, words in the
singular number include the plural, and in the plural include the singular, and
words of the masculine gender include the feminine and the neuter, and when the
sense so indicates, words of the neuter gender may refer to any gender. The
numbers and titles of sections contained in this Debenture are inserted for
convenience of reference only, and they neither form a part of this Debenture
nor are they to be used in the construction or interpretation hereof. Wherever,
in this Debenture, a determination of the Company is required or allowed, such
determination shall be made by a majority of the Board of Directors of the
Company and if it is made in good faith, it shall be conclusive and binding upon
the Company and the Holder of this Debenture.
ARTICLE 11. GOVERNING LAW.
The validity, terms, performance and enforcement of this Debenture
shall be governed and construed by the provisions hereof and in accordance with
the laws of Bermuda.
[Signature page follows]
7% CONVERTIBLE DEBENTURE - SERIES B - PAGE 8
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
IN WITNESS WHEREOF, the Company has duly executed this Debenture as of
the date first written above.
INTELECT COMMUNICATIONS SYSTEMS
LIMITED
By:
----------------------------------------
Name PETER G. LEIGHTON
---------------------------------------
Title PRESIDENT
--------------------------------------
7% CONVERTIBLE DEBENTURE - SERIES B - PAGE 9
(INTELECT COMMUNICATIONS SYSTEMS LIMITED)
NOTICE OF CONVERSION
[To be completed and signed only upon conversion of Debenture]
The undersigned, the Holder of this Debenture, hereby irrevocably
elects to exercise the right to convert it into common shares, par value $ 10
per share, of Intelect Communications Systems Limited as follows:
[Complete if less than all Dollars ($ )
of principal amount is to ---------------------------------------------
be converted ($10,000 or integral multiples of $10,000)
[Signature must be ---------------------------------------------
guaranteed if registered (Name of Holder of shares if different than
holder of stock differs from registered Holder of Debenture)
registered Holder of
Debenture)
---------------------------------------------
(Address of Holder if different than address
of registered Holder of Debenture)
---------------------------------------------
(Social Security of EIN of Holder of shares
if different than Holder of Debenture)
Date: Sign:
--------------- ---------------------------------------
(Signature must conform in all respects
to name of Holder shown on face of this
Debenture)
NOTICE OF CONVERSION
CONVERTIBLE SECURITIES AGREEMENT OF
INTELECT COMMUNICATIONS SYSTEMS LIMITED
THIS CONVERTIBLE SECURITIES SUBSCRIPTION AGREEMENT (the "Agreement") is
made and entered into as of this ___day of August, 1996 by and between INTELECT
COMMUNICATIONS SYSTEMS LIMITED, a company organized under the laws of Bermuda
(the "Seller") and_________________________________________(the "Buyer")
providing for the purchase and sale of up to an aggregate of $10 million of
certain debentures (the "Debentures"), convertible into common shares, U.S. $.01
par value per share (the "Shares"), of Seller to the Buyer. The Seller and the
Buyer (collectively the "Parties") hereby represent, warrant and agree as
follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(i) Buyer hereby subscribes for the principal amount of
Dollars ($________________) of Debentures. The Debentures shall be
convertible into Shares in accordance with the terms set forth in the
form of Debenture attached as Exhibit A to this Agreement.
(ii) Buyer shall pay $____________ as the purchase price for
the Debentures by delivering same-day funds in United States dollars
against counter-delivery of Buyer's Debentures by Seller, each in
accordance with the terms of the Escrow Agreement of even date herewith
substantially in the form attached as Exhibit B to this Agreement.
2. BUYER'S REPRESENTATIONS AND COVENANTS.
Buyer represents, warrants and covenants to Seller as follows:
(i) This Agreement has been duly authorized, validly executed
and delivered on behalf of Buyer and is a valid and binding agreement
of Buyer in accordance with its terms, subject to general principles of
equity and of bankruptcy or other laws affecting the enforcement of
creditors' rights;
(ii) Buyer is purchasing the Debentures for its own account
for investment purposes and not with a view towards distribution. Buyer
understands and agrees that it must bear the economic risks of its
investment for an indefinite period of time. Buyer has received and
carefully reviewed copies of the Public Documents (as defined below).
Buyer understands that the offer and sale of the Debentures are being
made only by means of this Agreement. No representations or warranties
have been made to Buyer by the Seller, the officers or directors of the
Seller, or any agent, employee or affiliate
-1-
of any of them except as set forth herein. Buyer is aware that the
purchase of the Debentures involves a high degree of risk and that it
may sustain, and has the financial ability to sustain, the loss of its
entire investment. Buyer has had the opportunity to ask questions of,
and receive answers satisfactory to it from, the Seller's management
regarding the Seller. Buyer understands that no federal or state
governmental authority has made any finding or determination relating
to the fairness of an investment in the Debentures and that no federal
or state governmental authority has recommended or endorsed, or will
recommend or endorse, the investment herein. Buyer, in making the
decision to purchase the Debentures subscribed for, has relied upon
independent investigations made by it and has not relied on any
information or representations made by third parties. Buyer has
significant assets, and upon consummation of the purchase of the
Debentures, will continue to have significant assets exclusive of the
Debentures. Buyer has not been organized for the purpose of acquiring
the Debentures;
(iii) Buyer is an "accredited investor" within the meaning of
Rule 501 of the Securities Act of 1933, as amended (the "Securities
Act");
(iv) Buyer understands that the Debentures are being offered
and sold to it in reliance on specific provisions of federal and state
securities laws and that the Seller is relying upon the truth and
accuracy of the representations, warranties, agreements,
acknowledgments and understandings of Buyer set forth herein in order
to determine the applicability of such provisions;
(v) Buyer, in making the decision to purchase the Debentures
subscribed for, has relied upon independent investigations made by it
and has not relied on any information or representations made by third
parties; and
(vi) Buyer represents and covenants that all of its trading in
the securities of the Seller will be in compliance with all applicable
requirements of federal and state securities laws;
(vii) Buyer understands that neither the Debentures nor the
Shares have been registered under the Securities Act and therefore it
cannot dispose of any or all of the Debentures or the Shares unless
such Debentures or Shares are subsequently registered under the
Securities Act or exemptions from such registration are available.
Buyer acknowledges that, until an effective registration statement
relating to the Shares is in place, a legend substantially as follows
will be placed on the certificates representing the Shares:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN TAKEN WITHOUT A VIEW TO THE
DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF
EXCEPT IN ACCORDANCE WITH SUCH ACT AND THE RULES AND REGULATIONS THEREUNDER AND
IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THE ISSUER OF THESE SHARES
WILL NOT TRANSFER SUCH SHARES EXCEPT UPON RECEIPT OF EVIDENCE SATISFACTORY TO
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THE COMPANY THAT THE REGISTRATION PROVISIONS OF SUCH ACT HAVE BEEN COMPLIED WITH
OR THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT SUCH TRANSFER WILL NOT
VIOLATE ANY APPLICABLE STATE SECURITIES LAWS.
(viii) Neither Buyer nor any of its affiliates shall directly or
indirectly maintain any short position in the Shares of the Seller until after
the ninetieth (90th) day following the Closing.
3. SELLER'S REPRESENTATIONS AND COVENANTS.
Seller represents, warrants and covenants to the Buyer as follows:
(i) Seller has been duly incorporated and is validly existing
and in good standing under the laws of Bermuda, with full corporate
power and authority to own, lease and operate its properties and to
conduct its business as currently conducted, and is duly registered and
qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct
of its business requires such registration or qualification, except
where the failure so to register or qualify does not have a material
adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Seller. Seller
has registered its common shares pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), is in
full compliance with all reporting requirements of the Exchange Act,
and Seller's common shares are quoted on the Nasdaq National Market
(trading symbol ICOMF);
(ii) Seller has furnished Buyer with copies of Seller's most
recent Annual Report on Form 10-K filed with the Securities and
Exchange Commission ("SEC"), all Forms 10-Q and 8-K filed thereafter
and the registration statement on Form S-3 filed with the SEC on July
29, 1996 (collectively, the "Public Documents"). The Public Documents
at the time of their filing do not include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements contained therein, in light of the circumstances
under which they were made, not misleading. Seller currently has
12,910,537 common shares, and no preferred shares, issued and
outstanding;
(iii) Seller has filed all materials required to be filed
pursuant to all applicable reporting obligations under either Section
13(a) or 15(d) of the Exchange Act for a period necessary to meet the
eligibility requirements of the SEC with respect to the use of a
Registration Statement on Form S-3 for the filing of a resale
registration statement with the SEC, and Seller currently meets such
eligibility requirements;
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(iv) The Debentures shall be enforceable in accordance with
their respective terms, and the Shares when issued and delivered upon
conversion thereof, have been and will be duly and validly authorized
and issued, fully paid and nonassessable, free from all encumbrances
and restrictions other than restrictions on transfer imposed by
applicable securities laws and/or this Agreement, and will not subject
the holders thereof to personal liability by reason of being such
holders. Except for preemptive rights as to which Seller has received
effective waivers, there are no preemptive rights of any shareholder of
Seller with respect to the Debentures or the Shares;
(v) This Agreement has been duly authorized, validly executed
and delivered on behalf of Seller and is a valid and binding agreement
of Seller in accordance with its terms, subject to general principles
of equity and to bankruptcy or other laws affecting the enforcement of
creditors' rights generally, and Seller has full power and authority to
execute and deliver this Agreement and the other agreements and
documents contemplated hereby and to perform its obligations hereunder
and thereunder;
(vi) The Company is not, and upon the execution and delivery
of this Agreement, the issuance of the Debentures, the issuance of
Shares upon conversion thereof, and the transactions contemplated by
this Agreement will not be in conflict with or in breach of any of the
terms or provisions of, or in default under, the Seller's Memorandum of
Association or Byelaws, or any indenture, mortgage, deed of trust or
other material agreement or instrument to which Seller is a party or by
which it or any of its properties or assets are bound, any law,
statute, rule, regulation, or any existing applicable decree, judgment
or order of any court, federal or state regulatory body, administrative
agency or other governmental body having jurisdiction over Seller or
any of its properties or assets or will result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Seller or any of its subsidiaries pursuant to the terms
of any agreement or instrument to which any of them is a party or by
which any of them may be bound or to which any of the property or
assets of any of them is subject;
(vii) No authorization, approval, filing with or consent of
any governmental body is required for the issuance and sale of the
Debentures, or the Shares upon conversion thereof, as contemplated by
this Agreement;
(viii) Seller will issue one or more Debentures in the name of
Buyer in the ratios specified in Section 1 above in denominations of
$100,000. Upon conversion of the Debentures, Seller will issue one or
more certificates representing the Shares in the name of Buyer, with a
legend (if applicable) substantially in the form specified by Section
2(vii) above, and in such denominations to be specified by Buyer prior
to conversion;
(ix) Seller will comply with all applicable securities laws
and regulations with respect to the sale and issuance of the Debentures
(and the Shares into which they are convertible) to each Buyer,
including but not limited to the filing of all reports required to be
filed in connection therewith
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with the SEC or any stock exchange or Nasdaq or any other regulatory
authority, and shall maintain its eligibility to use Form S-3 for the
filing of a resale registration statement with respect to the Shares
with the SEC;
(x) Seller shall: (i) maintain the listing of its Shares on
the Nasdaq Stock Market; (ii) reserve immediately prior to the Closing
and shall continue to reserve from its authorized Common Shares a
sufficient number of Common Shares to permit conversion in full of all
outstanding Debentures in accordance with their respective terms; and
(iii) file an Additional Shares Listing Application with Nasdaq
promptly following the Closing;
(xi) Until such time as Buyer has converted one hundred
percent (100%) of this Debenture into Shares, Seller shall not
repurchase its common shares or otherwise enter into any transaction
which would cause a decrease in the number of its common shares issued
and outstanding (other than transactions that similarly decrease the
number of common shares into which the Debentures are convertible);
(xii) Seller agrees that it will not issue a press release to
the public containing Buyer's name or other identifying information
without such Buyer's written consent and in fulfilling its obligations
under the Registration Rights Agreement. Buyer acknowledges that this
Agreement and the related documents may be filed with the SEC; and
(xiii) Subject in part to the truth and accuracy of the
Buyer's representations and warranties in Section 2, the offer, sale
and issuance of the Debentures are exempt from the registration
requirements of the Securities Act and applicable state securities
laws.
4. REGISTRATION.
Immediately following the Closing, Seller shall, at Seller's expense,
effect the registration of the Shares issuable upon conversion of the Debentures
held by Buyer under the Securities Act and relevant Blue Sky laws. Such
registration shall be effected in accordance with the terms of the Registration
Rights Agreement attached hereto as Exhibit C (the "Registration Rights
Agreement"). In the event the registration of the Shares issuable upon
conversion of the Debentures is not declared effective by the SEC within ninety
(90) days of the Closing Date (the "Registration Date"), then such failure shall
be a breach of the Debentures entitling Buyer to be paid by Seller such Buyer's
pro rata portion of the "Damage Amount", as liquidated damages and not as a
penalty. The Damage Amount shall mean $500 for each $1 million of Debentures for
each calendar day following the Registration Date in which the registration of
the Shares is not effective with the SEC. The Damage Amount shall be payable in
cash as of the end of each calendar week following the Delivery
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Date, and shall be payable whether or not an Event of Default (as defined in the
Debenture) has occurred.
5. CLOSING.
(i) Closing Date. The Debentures shall be dated and delivered,
and the Purchase Price shall be paid, on the date that Seller notifies
Buyer in its written acknowledgment of Seller's receipt of Buyer's
executed counterpart of this Agreement (the "Closing Date"). The
Parties anticipate that the Closing Date shall be August 8, 1996.
(ii) Conditions to Closing.
(a) The Seller shall furnish to the Buyers legal opinions
each addressed to the Buyers and dated as of the Closing Date from (i)
Appleby, Spurling & Kempe substantially in the form of Exhibit D
attached hereto, and (ii) Hale and Dorr, substantially in the form of
Exhibit E attached hereto.
(b) Seller shall have delivered a certificate executed by
its President, dated the Closing Date, and certifying that all of
Seller's representations and warranties made in this Agreement are true
and correct as of the Closing Date.
6. MISCELLANEOUS.
(i) This Agreement shall be governed by and interpreted in
accordance with the laws of Bermuda. Facsimile signatures of this
Agreement shall be binding on all parties hereto.
(ii) This Agreement may be executed by facsimile signature and
in counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(iii) Seller shall pay to Freeborn & Peters $5,000 at the
Closing, in payment of attorneys' fees and related costs of
consummating the transactions contemplated herein.
(iv) Notices. All notices and other communications provided
for or permitted hereunder shall be made in writing by hand-delivery,
registered first-class mail, telex, or telecopied, initially to the
address set forth below, and thereafter at such other address, notice
of which is given in accordance with the provisions of this Section 6.
if to the Company:
Intelect Communications Systems Limited
Reid House, 31 Church Street
Hamilton, Bermuda
Attn: Peter G. Leighton
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Fax: 441/292-5560
if to the Buyer, at such address as is listed for
such Buyer on the signature page hereto.
All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; three (3) business days after
being deposited in the mail, postage prepaid, if mailed; when answered back, if
telexed; and when receipt is acknowledged, if telecopied.
IN WITNESS WHEREOF, this Agreement was duly executed on the date first
written above.
Official Signatory of Seller:
INTELECT COMMUNICATIONS SYSTEMS
LIMITED
By:
--------------------------------
Peter G. Leighton, President
Address:
Reid House, 31 Church Street
Hamilton, Bermuda
(Telephone) 441/295-8639
(Fax) 441/292-5560
Attn: Peter G. Leighton
Official Signatory of Buyer:
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
Address:
--------------------------------
--------------------------------
Telephone:
--------------------------------
Fax:
--------------------------------
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REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of August 8, 1996 among INTELECT COMMUNICATIONS SYSTEMS LIMITED,
a company organized under the laws of Bermuda (the "Company"), and each of the
investors listed on Exhibit A hereto (collectively, the "Investors").
W I T N E S S E T H:
WHEREAS, pursuant to that certain Convertible Securities Subscription
Agreement dated the date hereof (the "Subscription Agreement"), the Investors
acquired a series of Debentures, in an aggregate principal amount of up to
$10,000,000 (collectively the "Debentures"), which are convertible into common
shares, par value U.S. $.01 per share (the "Common Shares"), of the Company (the
shares into which the Debentures are convertible are collectively referred to as
the "Shares"); and
WHEREAS, the Company has agreed to register the Shares; and
WHEREAS, as used herein, "Registrable Securities" shall mean the Common
Shares issuable by the Company upon conversion of the Debentures or in payment
of interest pursuant to the terms thereof, which have not been previously sold
pursuant to a registration statement or Rule 144 promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the parties agree as follows:
1. REGISTRATION UPON CLOSING.
(a) Subject to the terms and conditions hereof, within fifteen (15)
days after the closing of the transactions contemplated by the Subscription
Agreement (the "Closing Date"), the Company shall, at the Company's cost and
expense (other than the fees and disbursements of counsel for the Investor and
the underwriting discounts and brokerage commissions, if any, payable in respect
of the Registrable Securities sold by the Investor) prepare and file with the
Securities and Exchange Commission (the "Commission") a registration statement
on Form S-3 (if the same is
-1-
available), with respect to an aggregate of 2,582,107 Registrable Securities and
will use all reasonable efforts to cause such registration statement to become
effective promptly. If Form S-3 is not available to the Company for such
registration statement, the Company shall use its best efforts to promptly file
the registration statement on an appropriate alternative form.
(b) Except as set forth below, the Company shall keep effective the
registration statement contemplated by this Section 1 and shall from time to
time amend or supplement such registration statement, for a period of not less
than two (2) years, as extended by any period of time during which the
registration statement is not effective pursuant to Section 1(c) below, unless
all of the Registrable Securities set forth in such registration statement have
theretofore been sold.
(c) The Company may terminate or suspend the effectiveness of any
registration statement to be filed pursuant to Section 1(a) one time for a
period of not more than 30 days if the Company shall deliver to the Investor a
certificate signed by the President or Chief Financial Officer of the Company
stating that in the good faith judgment of the Board of Directors of the Company
it would (i) be seriously detrimental to the Company for such registration
statement to be effected or remain effective at such time, (ii) interfere with
any proposed or pending material corporate transaction involving the Company or
any of its subsidiaries or (iii) result in any premature disclosure thereof.
2. FUTURE DEMAND REGISTRATION.
(a) If, at any one time following thirty (30) days after the
termination of the effectiveness of the registration statement prepared and
filed in accordance with Section 1, the Company receives a written request from
an Investor, the Company shall, at the Company's sole cost and expense (other
than the fees and disbursements of counsel for such Investor and the
underwriting discounts and commissions, if any, payable in respect of the
Registrable Securities sold by such Investor), prepare and file with the
Commission an additional registration statement sufficient to permit the public
offering and sale of the number of shares of Registrable Securities set forth in
such request. Following receipt of any such request, the Company shall provide,
as promptly as is reasonably practicable, written notice of such request to each
other Investor. Each other Investor shall have the right to have included in
such registration statement such number of such Investor's Registrable
Securities as such Investor specifies in a written notice to the Company
delivered to the Company within 5 calendar days after receipt of such notice. If
such registration is an underwritten public offering and the managing
underwriters advise the Company in writing that in their opinion the inclusion
of the number of Registrable Securities and other securities requested to be
included in such offering creates a substantial risk that the price per share of
Common Stock will be reduced, the Company will include in such registration,
prior to the inclusion of any securities which are not Registrable Securities,
the number of Registrable Securities requested to be included, which in the
opinion of such underwriters can be sold in such offering without creating such
a
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risk, pro rata among the respective holders of Registrable Securities on the
basis of the number of Registrable Securities owned by such holders, with
further successive pro rata allocations among the holders of Registrable
Securities if any such holder of Registrable Securities has requested the
registration of less than all such Registrable Securities it is entitled to
register. The Company shall file such registration statement on Form S-3 (if the
same is available to the Company for such registration statement) within thirty
(30) days of the receipt of the request. If Form S-3 is not available to the
Company for such registration statement, the Company shall use its best efforts
to promptly file the registration statement on an appropriate alternative form.
The Company will use all reasonable efforts to cause such registration statement
to become effective promptly. Notwithstanding anything to the contrary set forth
above, the Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this Section 2(a):(1) if such Investor,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $500,000, provided,
however, that such exception shall not apply in the event the number of
Registrable Securities then held by such Investor exceeds the maximum number of
shares of Common Stock which the Investor could sell pursuant to the provisions
of Rule 144(e)(1) promulgated under the Securities Act; (2) if the Company shall
furnish to the Investor a certificate signed by the President or the Chief
Financial Officer of the Company stating that in the good faith judgment of the
Board of Directors of the Company, it would be seriously detrimental to the
Company and its stockholders for such registration to be effected at such time,
in which event the Company shall have the right to defer the filing of the
registration statement for a period of not more than 30 days after receipt of
the request of the Investor; or (3) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
(b) The Company shall keep effective the registration statement
contemplated by this Section 2 and shall from time to time amend or supplement
such registration statement, for a period of not less than one hundred eighty
(180) days.
(c) The Company shall not be obligated to file more than two (2)
registration statements under this Agreement.
(d) The Company shall furnish to the Investors such numbers of copies
of a prospectus in conformity with the requirements of the Securities Act, and
such other
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documents as may reasonably be requested in order to facilitate the disposition
of the Registrable Shares owned by the Investors.
3. THE COMPANY COVENANTS.
(a) The Company's obligations pursuant to Sections 1 and 2 hereof shall
continue for three years after the Closing Date or until all Registrable
Securities have been sold, whichever event occurs first.
(b) In the event of a registration pursuant to the provisions of
Sections 1 and 2, the Company shall use all reasonable efforts to cause the
Registrable Securities so registered to be registered or qualified for sale
under the securities or blue sky laws of such jurisdictions as the Investor may
reasonably request; provided, however, that the Company shall not be required to
qualify to do business in any state by reason of this Section 3(b) in which it
is not otherwise required to qualify to do business.
(c) The Company shall notify the Investor promptly when such
registration statement has become effective or a supplement to any prospectus
forming a part of such registration statement has been filed.
(d) The Company shall advise the Investor, promptly after it shall
receive notice or obtain knowledge of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement, or the
initiation or threatening of any proceeding for that purpose, and promptly use
all reasonable efforts to prevent the issuance of any stop order or to obtain
its withdrawal if such stop order should be issued.
(e) The Company shall promptly notify each Investor, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event of which it has knowledge as a result of
which the prospectus included in such registration statement, as then in effect,
would include an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing, and at
the reasonable request of each Investor prepare and furnish to them such number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such Registrable
Securities or securities, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances under which they were made.
(f) If requested by the underwriter for any underwritten offering of
Registrable Securities on behalf of the Investor pursuant to a registration
requested under Sections 1 and 2, the Company and each Investor will enter into
an underwriting agreement with such underwriter for such offering, which shall
be
-4-
reasonably satisfactory in substance and form to the Company and the Company's
counsel, each Investor, and the underwriter, and such agreement shall contain
such representations and warranties by the Company and each Investor and such
other terms and provisions as are customarily contained in an underwriting
agreement with respect to secondary distributions solely by selling
stockholders, including, without limitation, indemnities substantially to the
effect and to the extent provided in Section 4.
4. INDEMNIFICATION.
(a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless the Investors, their respective officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") from and against any and all loss, liability, charge, claim, damage, and
expense whatsoever (which shall include, for all purposes of this Section 4, but
not be limited to, reasonable attorneys' fees and any and all reasonable
expenses whatsoever incurred in investigating, preparing, or defending against
any litigation, commenced or threatened, or any claim whatsoever), arising out
of, based upon, or in connection with any untrue statement or alleged untrue
statement of a material fact contained (A) in any registration statement,
preliminary prospectus, or final prospectus (as from time to time amended and
supplemented) or any amendment or supplement thereto, relating to the sale of
any of the Registrable Securities or (B) in any application or other document or
communication (in this Section 4 collectively called an "application") executed
by or on behalf of the Company or based upon written information furnished by or
on behalf of the Company filed in any jurisdiction in order to register or
qualify any of the Registrable Securities under the securities or blue sky laws
thereof or filed with the Commission or any securities exchange; or any omission
or alleged omission to state a material fact required to be stated therein or
necessary to make the statements made therein not misleading, unless (x) such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any of the Investors for
inclusion in any registration statement, preliminary prospectus, or final
prospectus, or any amendment or supplement thereto, or in any application, as
the case may be, or (y) such loss, liability, charge, claim, damage or expense
arises out of any Investor's failure to comply with the terms and provisions of
this Agreement. The foregoing agreement to indemnify shall be in addition to any
liability the Company may otherwise have, including liabilities arising under
this Agreement.
-5-
If any action is brought against the Investors or any of their
respective officers, directors, partners, employees, agents, or counsel, or any
controlling persons of such person (an "indemnified party") in respect of which
indemnity may be sought against the Company pursuant to the foregoing paragraph,
such indemnified party or parties shall promptly notify the Company in writing
of the institution of such action (but the failure so to notify shall not
relieve the Company from any liability other than pursuant to this Section 4(a)
unless, the failure to so notify shall prejudice any rights or defenses with
respect to such claim) and the Company shall promptly assume the defense of such
action, including the employment of counsel (reasonably satisfactory to such
indemnified party or parties) provided that the indemnified party shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless:
(i) the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such action; or
(ii) such indemnified party or parties shall have reasonably concluded,
based on an opinion of counsel reasonably satisfactory to the Company, that
there may be one or more legal defenses available to it or them or to other
indemnified parties which are different from or additional to those available to
the Company, in any material respect, and that as a result thereof a conflict of
interest would arise absent separate representation of the parties.
In the event of clauses (i) or (ii) above, such fees and expenses shall be borne
by the Company and the Company shall not have the right to direct the defense of
such action on behalf of the indemnified party or parties. Anything in this
Section 4 to the contrary notwithstanding, the Company shall not be liable for
any settlement of any such claim or action effected without its written consent,
which shall not be unreasonably withheld. The Company shall not, without the
prior written consent of each indemnified party that is not released as
described in this sentence, settle or compromise any action, or permit a default
or consent to the entry of judgment in or otherwise seek to terminate any
pending or threatened action, in respect of which indemnity may be sought
hereunder (whether or not any indemnified party is a party thereto) unless such
settlement, compromise, consent, or termination includes an unconditional
release of each indemnified party from all liability in respect of such action.
The Company agrees promptly to notify the Investor of the commencement of any
litigation or proceedings against the Company or any of its officers or
directors in connection with the sale of any Registrable Securities or any
preliminary prospectus, prospectus, registration statement, or amendment or
supplement thereto, or any application relating to any sale of any Registrable
Securities.
(b) Each Investor agrees to indemnify and hold harmless the Company,
each director of the Company, each officer of the Company who shall have signed
any registration statement covering Registrable Securities held by the Investor,
each other person, if any, who controls the Company within the meaning of
Section 15 of
-6-
the Securities Act or Section 20(a) of the Exchange Act, and its or their
respective counsel, to the same extent as the foregoing indemnity from the
Company to the Investors in Section 4(a) but only with respect to statements or
omissions, if any, made in any registration statement, preliminary prospectus,
or final prospectus (as from time to time amended and supplemented) or any
amendment or supplement thereto, or in any application, in reliance upon and in
conformity with written information furnished to the Company with respect to the
Investors by or on behalf of the Investors, for inclusion in any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity may be sought against the Investor pursuant to
this Section 4(b) the Investors shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the indemnified parties, by the provisions of Section
4(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 4(a) or
4(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Securities Act, the Exchange Act or otherwise, then
the Company (including for this purpose any contribution made by or on behalf of
any director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company as one entity, and
the Investors, included in such registration in the aggregate (including for
this purpose any contribution by or on behalf of an indemnified party), as a
second entity, shall contribute to the losses, liabilities, claims, damages, and
expenses whatsoever to which any of them may be subject, on the basis of
relevant equitable considerations such as the relative fault of the Company and
the Investors in connection with the facts which resulted in such losses,
liabilities, claims, damages, and expenses. The relative fault, in the case of
an untrue statement, alleged untrue statement, omission, or alleged omission
shall be determined by, among other things, whether such statement, alleged
statement, omission or alleged omission relates to information supplied by the
Company or by the Investors, and the parties' relative intent, knowledge, access
to information, and opportunity to correct or prevent such statement, alleged
statement, omission, or alleged omission. The Company and the Investors agree
that it would be unjust and inequitable if the respective obligations of the
Company and the Investors for
-7-
contribution were determined by pro rata or per capita allocation of the
aggregate losses, liabilities, claims, damages, and expenses (even if the
Investors and the other indemnified parties were treated as one entity for such
purpose) or by any other method of allocation that does not reflect the
equitable considerations referred to in this Section 4(c). In no case shall the
Investors be responsible for a portion of the contribution obligation imposed on
the Investors in excess of each Investor's pro rata share based on the number of
Common Shares owned by each Investor and included in such registration as
compared to the total number of Common Shares owned by the Investors and
included in such registration. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. For purposes of this Section 4(c) each person, if
any, who controls any Investor within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act and each officer, director,
partner, employee, agent, and counsel of any Investor or control person shall
have the same rights to contribution as the Investor or control person and each
person, if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, each officer of the Company
who shall have signed any such registration statement, each director of the
Company, and its or their respective counsel shall have the same rights to
contribution as the Company, subject to each case to the provisions of this
Section 4(c). Anything in this Section 4(c) to the contrary notwithstanding, no
party shall be liable for contribution with respect to the settlement of any
claim or action effected without its written consent. This Section 4(c) is
intended to supersede any right to contribution under the Securities Act, the
Exchange Act or otherwise.
5. MISCELLANEOUS.
(A) REMEDIES. In the event of a breach by any party of its obligations
under this Agreement, the other party, in addition to being entitled to exercise
all rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. Such rights shall be in
addition to, and not in lieu of, the Investors' rights to receive the Damage
Payment as specified in the Subscription Agreement.
(B) AGREEMENTS AND WAIVERS. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
unless such amendment, modification or supplement is in writing and signed by
the parties hereto.
(C) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, or telecopied, initially to the address set forth
below, and thereafter at such other address, notice of which is given in
accordance with the provisions of this Section 5(c).
(i) if to the Company:
-8-
Intelect Communications Systems Limited
Reid House, 31 Church Street
Hamilton, Bermuda
Attn: Peter G. Leighton
Fax: 441/292-5560
(ii) if to the Investors, to each investor and at such address as
is listed for such Investor on Exhibit A hereto.
All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; two business days after being
deposited in the mail, postage prepaid, if mailed; when answered back, if
telexed; and when receipt is acknowledged, if telecopied.
(D) REASONABLE COOPERATION OF THE INVESTOR. The Investors shall
cooperate in all reasonable respects with the filing of the registration
statement contemplated hereby. Without limiting the foregoing, each Investor
shall furnish to the Company (or any regulatory authority) such written
information and representations that the Company may reasonably request in order
to facilitate any registration of the Registrable Securities hereunder.
(E) SUCCESSORS AND ASSIGNS. This Agreement may be assigned by an
Investor to any purchaser or transferee of the Debentures.
(F) COUNTERPARTS. This Agreement may be executed by facsimile signature
and in any number of counterparts and by the parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
(G) HEADINGS. The headings in this Agreement are for convenience of
references only and shall not limit or otherwise affect the meaning hereof.
(H) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of Bermuda without reference to its conflict of laws
provisions.
(I) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application hereof in any circumstance is held invalid,
illegal or unenforceable, the validity, legality and enforceability of any such
provisions in every other respect and of the remaining provisions contained
herein shall not be affected or impaired thereby.
-9-
(J) ENTIRE AGREEMENT. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of this agreement and understanding of the parties hereto in respect
of the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein,
concerning the registration rights granted by the Company pursuant to this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above.
INTELECT COMMUNICATIONS SYSTEMS
LIMITED
By:
Peter G. Leighton, President
--------------------------------
INVESTORS
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
-10-
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
-11-
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
-12-
Exhibit A
List of Names and Addresses of Investors
-13-
CONVERTIBLE SECURITIES AGREEMENT
OF INTELECT COMMUNICATIONS SYSTEMS LIMITED
THIS CONVERTIBLE SECURITIES AGREEMENT (hereinafter the "Agreement") is
made and entered into as of this 15th day of October, 1996 by the undersigned in
connection with the sale by INTELECT COMMUNICATIONS SYSTEMS LIMITED, a company
organized under the laws of Bermuda (hereinafter "Seller") of certain debentures
convertible into common shares (hereinafter the "Shares") of Seller to (i)
INFINITY INVESTORS LTD. a corporation organized under the laws of Nevis, West
Indies, and (ii) SEACREST CAPITAL LIMITED, a corporation organized under the
laws of Nevis, West Indies (singularly a "Buyer" and collectively "Buyers").
Each of the Seller and the Buyers (hereinafter collectively the "Parties")
hereby represent, warrant and agree as follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(i) Buyers hereby subscribe for $5 million principal amount of
Series A Convertible Debentures (the "Series A Debentures") and $5
million principal amount of Series B Debentures (the "Series B
Debentures") (collectively, the "Debentures") convertible into Shares
in accordance with the terms set forth in the form of Debentures
attached as Exhibits A and B to this Agreement.
(ii) Buyers shall pay an aggregate of Ten Million Dollars ($10
million U.S.) (the "Purchase Price") for the Debentures by delivering
same day funds in United States dollars against counter-delivery of the
Debentures by Seller, in each case to American Stock Transfer & Trust
Company (the "Transfer Agent") pursuant to terms of that certain Book
Entry Transfer Agent Agreement in the form attached hereto as Exhibit
C, to be executed contemporaneously herewith (the "Transfer
Agreement").
(iii) Infinity Investors, Ltd. shall subscribe for $9 million
principal amount of the Debentures and Seacrest Capital Limited shall
subscribe for $1 million of the Debentures. Each such party shall pay
100% of the respective principal amount thereof.
2. BUYER'S REPRESENTATIONS AND COVENANTS.
Each Buyer severally represents, warrants and covenants to
Seller as follows:
CONVERTIBLE SECURITIES AGREEMENT - Page 1
(Intelect Communication Systems Limited)
(i) This Agreement has been duly authorized, validly executed
and delivered on behalf of each Buyer and is a valid and binding
agreement of each Buyer in accordance with its terms, subject to
general principles of equity and to the effect of bankruptcy or other
similar laws affecting the enforcement of creditors' rights;
(ii) Each Buyer is purchasing the Debentures for its own
account for investment purposes and not with a view towards
distribution. Each Buyer understands and agrees that it must bear the
economic risks of its investment for an indefinite period of time. Each
Buyer has received and carefully reviewed copies of the Public
Documents (as defined below). Each Buyer understands that the offer and
sale of the Debentures are being made only by means of this Agreement.
No representations or warranties have been made to either Buyer by
Seller, the officers or directors of Seller, or any agent, employee or
affiliate of any of them except as set forth herein. Each Buyer is
aware that the purchase of the Debentures involves a high degree of
risk and that it may sustain, and has the financial ability to sustain,
the loss of its entire investment. Each Buyer has had the opportunity
to ask questions of and receive answers and satisfactory to it from,
Seller's management regarding Seller. Each Buyer understands that no
Federal or state governmental authority has made any finding or
determination relating to the fairness of an investment in the
Debentures and that no Federal or state governmental authority has
recommended or endorsed, or will recommend or endorse, the investment
herein. Each Buyer, in making the decision to purchase the Debentures
subscribed for, has relied upon independent investigations made by it
and has not relied on any information or representations made by third
parties other than pursuant to this Agreement. Each Buyer has
significant assets, and upon consummation of the purchase of the
Debentures, will continue to have significant assets exclusive of the
Debentures. Neither Buyer has been organized for the purpose of
acquiring the Debentures;
(iii) Each Buyer is an "accredited investor" within the
meaning of Rule 501 of the Securities Act of 1933, as amended (the
"Securities Act");
(iv) Each Buyer understands that the Debentures are being
offered and sold to it in reliance on specific provisions of Federal
and state securities laws and that Seller is relying in part upon the
truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of each Buyer set forth herein in
order to determine the applicability of such provisions;
(v) Each Buyer, in making the decision to purchase the
Debentures subscribed for, has relied upon independent investigations
made by it and has not
CONVERTIBLE SECURITIES AGREEMENT - Page 2
(Intelect Communication Systems Limited)
relied on any information or representations made by third parties
other than pursuant to this Agreement; and
(vi) Each Buyer understands that neither the Debentures nor
the Shares have been registered under the Securities Act and therefore
it cannot dispose of any or all of the Debentures or the Shares unless
such Debentures or Shares are subsequently registered under the
Securities Act or exemptions from such registration are available. Each
Buyer acknowledges that a legend substantially as follows will be
placed on the certificates representing the Shares:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED WITHOUT A
VIEW TO THE DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH SUCH ACT AND THE RULES
AND REGULATIONS THEREUNDER AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS. THE ISSUER OF THESE SHARES WILL NOT TRANSFER SUCH
SHARES EXCEPT UPON RECEIPT OF EVIDENCE SATISFACTORY TO THE COMPANY THAT
THE REGISTRATION PROVISIONS OF SUCH ACT HAVE BEEN COMPLIED WITH OR THAT
SUCH REGISTRATION IS NOT REQUIRED AND THAT SUCH TRANSFER WILL NOT
VIOLATE ANY APPLICABLE STATE SECURITIES LAWS.
3. SELLER'S REPRESENTATIONS AND COVENANTS.
Seller represents, warrants and covenants to Buyers as follows:
(i) Seller has been duly incorporated and is validly existing
and in good standing under the laws of Bermuda. Seller has registered
its common shares pursuant to Section 12(G) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), is in full compliance
with all reporting requirements of the Exchange Act, and Seller's
common shares traded on the Nasdaq National Market, Symbol ICOMF;
(ii) Seller has furnished each Buyer with copies of Seller's
most recent Annual Report on Form 10-K filed with the Securities and
Exchange Commission ("SEC") and all Forms 10-Q and 8-K filed thereafter
(the "Public Documents"). The Public Documents at the time of their
filing complied in all material respects with the requirements of the
Exchange Act, and the rules and regulations thereunder, and, as of the
date of filing, did not include an untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements
CONVERTIBLE SECURITIES AGREEMENT - Page 3
(Intelect Communication Systems Limited)
contained therein, in light of the circumstances under which they were
made, not misleading. Since the date of the Public Documents, Seller
has not made, or been required to make, any filings with the SEC in
order to ensure that the Public Documents do not, as of the date
hereof, include an untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements contained
therein, in light of the circumstances in which they were made, not
misleading. The Seller's financial statements contained in the Public
Documents (i) conform in all material respects with the rules and
regulations of the Exchange Act, (ii) were prepared in accordance with
generally accepted accounting principles, consistently applied, and
(iii) fairly state all known liabilities (contingent or otherwise) as
of the date of such financial statements that were required to be
reflected in such financial statements in accordance with generally
accepted accounting principles, consistently applied. Seller currently
has $10,000,000 principal amount of convertible debentures outstanding,
and 13,794,055 common shares, and no preferred shares, issued and
outstanding;
(iii) Seller has filed all materials required to be filed
pursuant to all applicable reporting obligations under either Section
13(a) or 15(d) of the Exchange Act for a period necessary to meet the
eligibility requirements of the SEC with respect to the use of a
Registration Statement on Form S-3 for the filing of a resale
registration statement with the SEC, and Seller currently meets such
eligibility requirements;
(iv) The Debentures, and the Shares when issued and delivered
upon conversion thereof, have been and will be duly and validly
authorized and issued, and with respect to the Shares, fully-paid and
nonassessable, free from all encumbrances and restrictions other than
restrictions on transfer imposed by applicable securities laws and/or
this Agreement, and will not subject the holders thereof to personal
liability by reason of being such holders. Except for preemptive rights
as to which Seller has received effective waivers, there are no
preemptive rights of any shareholder of Seller with respect to the
Debentures or the Shares;
(v) This Agreement has been and, when issued in accordance
with the terms hereof, the Debentures will be duly authorized, validly
executed and delivered on behalf of Seller and is a valid and binding
agreement of Seller in accordance with its respective terms, subject to
general principles of equity and to bankruptcy or other similar laws
affecting the enforcement of creditors' rights generally;
(vi) The execution and delivery of this Agreement and the
consummation of the issuance of the Debentures, and the Shares upon
conversion
CONVERTIBLE SECURITIES AGREEMENT - Page 4
(Intelect Communication Systems Limited)
thereof, and the transactions contemplated by this Agreement do not and
will not conflict with or result in a breach by Seller of any of the
terms or provisions of, or constitute a default under, the articles of
association or By-laws of Seller, or any indenture, mortgage, deed of
trust or other material agreement or instrument to which Seller is a
party or by which it or any of its properties or assets are bound, or
any existing applicable decree, judgment or order of any court, Federal
or State regulatory body, administrative agency or other governmental
body having jurisdiction over Seller or any of its properties or
assets;
(vii) No authorization, approval, filing with or consent of
any governmental body is required for the issuance and sale of the
Debentures, or the Shares upon conversion thereof, as contemplated by
this Agreement;
(viii) Except for a fee which is payable by Seller as
contemplated in the Transfer Agent Agreement to Alpine Capital for
services rendered to Seller not to exceed 3% of the aggregate purchase
price of the Debentures, no other person, firm or corporation will be
entitled to receive any brokerage fee, commission or similar payment
from Seller in connection with the consummation of the transactions
contemplated hereby and Seller shall not make any such payment to any
other person, firm or corporation;
(ix) Seller will comply with all applicable securities laws
and regulations with respect to the sale and issuance of the Debentures
(and the Shares into which they are convertible) to each Buyer,
including but not limited to the filing of all reports required to be
filed in connection therewith with the SEC or any stock exchange or
NASDAQ or any other regulatory authority (with copies thereof provided
to Buyer so long as any of the Debentures are outstanding), and shall
maintain its eligibility to use Form S-3 for the filing of a resale
registration statement with respect to the Shares with the SEC;
(x) Except as disclosed in the Public Documents, there is no
action, suit or proceeding before or by any court or governmental
agency or body, domestic or foreign, now or pending or, to the
knowledge of Seller, threatened, against or affecting Seller, or any of
its properties, which could reasonably be expected to result in any
material adverse change in the business, properties, results of
operations or condition (financial or otherwise) of Seller, or which
could reasonably be expected to materially and adversely affect the
properties or assets of Seller or which could reasonably be expected to
interfere with Seller's ability to consummate the transactions
contemplated by this Agreement;
(xi) Seller is not, and is not an affiliate of, an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended;
CONVERTIBLE SECURITIES AGREEMENT - Page 5
(Intelect Communication Systems Limited)
(xii) Neither Seller nor any person acting on its behalf has
taken or will take any action (including, without limitation, any
offering of any securities of Seller under circumstances which would
require the integration of such offering with the offering of the
Debentures or Shares under the Securities Act) which might subject the
offering described in this Agreement, the issuance or sale of the
Debentures, or the Shares to the registration requirements of Section 5
of the Securities Act;
(xiii) Seller will maintain the listing of its Shares on the
NASDAQ Stock Market, and will reserve from its authorized shares of
common stock a sufficient number of shares to permit conversion in full
of all outstanding Debentures;
(xiv) Until such time as Buyers have converted one hundred
percent (100%) of the Debentures into Shares, Seller shall not
repurchase its common shares or otherwise enter into any transaction
which would cause a decrease in the number of its common shares issued
and outstanding (other than transactions that similarly decrease the
number of common shares into which the Debentures are convertible);
(xv) Seller agrees that it will not issue a press release or
other communication to the public containing either Buyer's name or
other identifying information without said Buyer's written consent,
except as required by law, including the Exchange Act, and in
fulfilling its obligations under the Registration Rights Agreement (as
hereafter defined);
(xvi) Seller will (i) retain the Transfer Agent as the stock
transfer agent of Seller and (ii) if the Transfer Agent voluntarily or
involuntarily fails to so serve, select an independent, unaffiliated
replacement stock transfer agent willing to perform the duties of
Transfer Agent under the Transfer Agent Agreement; and
(xvii) This Agreement, including the Exhibits hereto, does not
contain an untrue statement of material fact, or, when taken as a
whole, omit any material fact necessary in order to make the statements
contained herein or therein not misleading.
4. REGISTRATION. Immediately following the Closing, Seller shall be
required, at Seller's expense, to effect the registration of the Shares issuable
upon conversion of the Debentures held by both Buyers under the Securities Act
and relevant Blue Sky laws. Such registration shall be effected in accordance
with the terms of the Registration Rights Agreement attached hereto as Exhibit C
(the "Registration Rights Agreement"). In the event either the registration of
the Shares issuable upon conversion of the Debentures is not (A) effective with
the SEC within sixty (60) days of the Closing
CONVERTIBLE SECURITIES AGREEMENT - Page 6
(Intelect Communication Systems Limited)
Date (the "Registration Date"), or (B) such effectiveness is not maintained for
a 365 consecutive day period after the SEC has declared effective the
registration of the Shares (such period after the SEC has declared effective the
registration of the Shares being referred to as the "Registration Period"), then
either such failure shall be a breach of the Debentures entitling Buyers to be
paid by Seller the "Damage Amount", as liquidated damages and not as a penalty.
The Damage Amount shall mean (A) $5,000 for each NASDAQ trading day following
the Registration Date in which the registration of the Shares has not been
declared effective by the SEC as provided herein, which amount shall increase to
(i) $6,666 for each NASDAQ trading day commencing thirty (30) days after the
Registration Date and (ii) $8,333 for each NASDAQ trading day commencing sixty
(60) days after the Registration Date, and (iii) $10,000 for each NASDAQ trading
day thereafter, in each case continuing until the registration of the Shares has
been declared effective by the SEC; and (B) without duplication for the amounts
paid pursuant to (A) above, $5,000 for each NASDAQ trading day during the
Registration Period in which the effectiveness of the registration of the Shares
is not maintained with the SEC. The Damage Amount shall be payable in cash as of
the end of each calendar week following the Delivery Date, and shall be payable
whether or not an Event of Default (as defined in the Debenture) has occurred.
5. CLOSING. The Debentures shall be dated and delivered, and the
Purchase Price shall be paid on, October 15, 1996 (the "Closing Date").
6. ADDITIONAL AGREEMENTS.
Right of First Refusal. Seller hereby grants to Buyers the right of
first refusal to purchase all (or any part) of New Securities (as defined in
this Section) that Seller may, from time to time, propose to sell and issue.
"New Securities" shall mean any capital stock of Seller, whether now authorized
or not, and rights, options or warrants to purchase said capital stock, and debt
or equity securities of any type whatsoever that are, or may become, convertible
into said capital stock; provided, however, that the term "New Securities" does
not include securities issued in Excluded Financings. "Excluded Financings" mean
(i) non-convertible debt or non-convertible preferred stock financings of any
type, (ii) underwritten public offerings of the Shares, (iii) private financings
(taking into account all material aspects thereof such as conversion price,
issuance price and any warrants issued in connection therewith) which are
consummated at a price at least equal to the then-current market price of the
Shares (determined as set forth in the Debentures), (iv) project financings, (v)
bank financings and (vi) any capital stock of Seller issued pursuant to the
warrants or other rights set forth in a disclosure letter previously issued by
Seller to Buyers, (vii) the issuance, sale, exercise or conversion or grant of
options to purchase Shares pursuant to any of Seller's employee stock option,
compensation, bonus or incentive plans or otherwise, or pursuant to any existing
options and warrants disclosed in the Public Documents, and (viii) the issuance
or sale of any
CONVERTIBLE SECURITIES AGREEMENT - Page 7
(Intelect Communication Systems Limited)
equity or debt securities used for acquisition by Seller of operating assets or
stock of entities to be owned and operated by Seller or a subsidiary of Seller.
Seller shall not, however, consummate any Excluded Financings, other than
pursuant to (vi), (vii) and (viii) above, on or before December 31, 1996. In the
event that Seller proposes to undertake an issuance of New Securities, it shall
give Buyers written notice of its intention, describing the type of New
Securities, the price and the general terms upon which Seller proposes to issue
the same. Each Subscriber shall have fifteen (15) days from the date of receipt
of any such notice to agree to purchase all or less than all of the New
Securities for the price and upon the general terms specified in the notice by
giving written notice to Seller and stating therein the quantity of New
Securities to be purchased. If Buyers fail to exercise in full the right of
first refusal within such fifteen (15) day period, then Seller shall have sixty
(60) days thereafter to sell the New Securities with respect to which the
Buyers' rights were not exercised, at a price and upon general terms no more
favorable to the purchasers thereof than specified in Seller's notice. In the
event that Seller has not sold the New Securities within such sixty (60) day
period, Seller shall not thereafter issue or sell any New Securities without
first offering such securities to the Buyers in the manner provided above. The
right of first refusal granted under this Section shall terminate upon the
earlier of: (i) 180 days following the Closing Date; or (ii) the date upon which
Buyers cease to own at least one-third of the Debentures or the Shares issuable
upon conversion thereof.
7. MISCELLANEOUS.
(i) This Agreement shall be governed by and interpreted in
accordance with the laws of Bermuda. Facsimile signatures of this
Agreement shall be binding on all parties hereto. All representations,
warranties, covenants and agreements of each party hereto shall survive
the Closing contemplated herein.
(ii) This Agreement may be executed by facsimile signature and
in counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(iii) Seller shall pay to Buyers $4,000 at the Closing, in the
manner described in the Transfer Agent Agreement, to reimburse Buyers
for attorneys' fees and related costs of consummating the transactions
contemplated herein.
CONVERTIBLE SECURITIES AGREEMENT - Page 8
(Intelect Communication Systems Limited)
IT WITNESS WHEREOF, this Agreement was duly executed on the date first
written above.
Official Signatory of Buyer:
INFINITY INVESTORS LTD.
By:/s/ J. A. Loughran
---------------------------
Title: Director
---------------------------
Address:
27 Wellington Road
Cork, Ireland
(Telephone) 011-71-355-2051
(Fax) 011-71-355-4975
Attn: Mr. J.A. Loughran
With copy to:
c/o HW Finance
4000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201
(Telephone) 214/720-1689
(Fax) 214/721-1662
Attn: Stuart J. Chassanoff, Esq.
SEACREST CAPITAL LIMITED
By:/s/ James E. Martin
---------------------------
Title: President
---------------------------
Address:
27 Wellington Road
Cork, Ireland
(Telephone) 011-71-355-2051
(Fax) 011-71-355-4975
Attn: Mr. J.A. Loughran
CONVERTIBLE SECURITIES AGREEMENT - Page 9
(Intelect Communication Systems Limited)
Official Signatory of Seller:
INTELECT COMMUNICATIONS SYSTEMS
LIMITED
By/s/ Peter G. Leighton
---------------------------
Peter G. Leighton, President
Address:
Reid House, 31 Church Street
Hamilton, Bermuda
(Telephone) 441/295-8639
(Fax) 441/292-5560
Attn: Peter G. Leighton
CONVERTIBLE SECURITIES AGREEMENT - Page 10
(Intelect Communication Systems Limited)
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of October 15, 1996 among INTELECT COMMUNICATIONS SYSTEMS
LIMITED, a company organized under the laws of Bermuda (the "Company"), INFINITY
INVESTORS, LTD., a corporation organized under the laws of Nevis, West Indies
and SEACREST CAPITAL LIMITED, a Corporation organized under the laws of Nevis,
West Indies (collectively, the "Investor").
W I T N E S S E T H:
WHEREAS, pursuant to that Certain Convertible Securities Agreement
dated the date hereof (the "Subscription Agreement"), the Investor acquired
Series A Debentures, in an aggregate principal amount of $5,000,000, and Series
B Debentures, in an aggregate principal amount of $5,000,000 (collectively the
"Initial Debentures"), which are convertible into common shares, par value $0.01
(the "Common Shares") of the Company (the shares into which the Debentures are
convertible are herein collectively referred to as the "Shares"); and
WHEREAS, the Company has agreed to register the Shares; and
WHEREAS, as used herein, "Registerable Securities" shall mean the
Common Shares issuable by the Company upon conversion of the Initial Debentures
pursuant to the terms thereof, which have not been previously sold pursuant to a
registration statement or Rule 144 promulgated under the Securities Act of 1933,
as amended (the "Securities Act").
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the parties agree as follows:
1. DEMAND REGISTRATION UPON CLOSING.
(a) Subject to the terms and conditions hereof, within fifteen (15)
days after the closing of the transactions contemplated by the Subscription
Agreement (the "Closing Date"), the Company shall, at the Company's cost and
expense (other than the fees and disbursements of counsel for the Investor and
the underwriting discounts and brokerage commissions, if any, payable in respect
of the Registrable Securities sold by the Investor) prepare and file with the
Securities and Exchange Commission (the "Commission") a registration statement
on Form S-3 (if the same is available), with respect to the Registerable
Securities requested to be registered by the Investor and will use all
reasonable efforts to cause such registration statement to become effective as
promptly as practicable. If Form S-3 is not available to the Company for such
registration
REGISTRATION RIGHTS AGREEMENT - Page 1
statement, the Company shall use all reasonable efforts to promptly file the
registration statement on an appropriate alternative form.
(b) Except as set forth below, the Company shall keep effective the
registration statement contemplated by this Section 1 and shall from time to
time amend or supplement such registration statement, for a period of not less
than three hundred sixty (360) days, as extended by any period of time during
which the registration statement is not effective pursuant to Section 1(c)
below, unless all of the Registrable Securities set forth in such registration
statement have thereto been sold.
(c) The Company may terminate or suspend the effectiveness of any
registration statement to be filed pursuant to Section 1(a) one time for a
period of not more than forty five (45) days if the Company shall deliver to the
Investor a certificate signed by a Senior Vice President or Chief Executive
Officer of the Company stating that in the good faith judgment of the Board of
Directors of the Company it would (i) be seriously detrimental to the Company
for such registration statement to be effected or remain effective at such time,
(ii) interfere with any proposed or pending material corporate transaction
involving the Company or any of its subsidiaries or (iii) require any premature
disclosure thereof.
(d) The Company acknowledges that the number of Shares issuable upon
conversion of the Debentures is subject to variation depending upon the market
price of the Common Shares of the Company. The Company shall register at least
2.3 million Common Shares pursuant to subsection (a) above.
2. FUTURE DEMAND REGISTRATION.
(a) If, at any one time following thirty (30) days after the
termination of the effectiveness of the registration statement prepared and
filed in accordance with Section 1, the Company receives a written request from
the Investor, the Company shall, at the Company's sole cost and expense (other
than the fees and disbursements of counsel for the Investor and the underwriting
discounts and commissions, if any, payable in respect of the Registrable
Securities sold by the Investor), prepare and file with the Commission an
additional registration statement sufficient to permit the public offering and
sale of the number of shares of Registrable Securities set forth in such
request. The Company shall file such registration statement on Form S-3 (if the
same is available to the Company for such registration statement) within thirty
(30) days of the receipt of the request. If Form S-3 is not available to the
Company for such registration statement, the Company shall use all reasonable
efforts to promptly file the registration statement on appropriate alternative
form. The Company will use all reasonable efforts to cause such registration
statement to become effective as promptly as practicable. Notwithstanding
anything to the contrary set forth above, the Company shall not be obligated to
effect any such registration, qualification or compliance, pursuant to this
Section 2 (1) if the Investor, together with the holders of any other securities
of the Company entitled to
REGISTRATION RIGHTS AGREEMENT - Page 2
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $500,000, provided,
however, that such exception shall not apply in the event the number of
Registrable Securities then held by the Investor exceeds the maximum number of
shares of Common Stock which the Investor could sell pursuant to the provisions
of Rule 144(e)(1) promulgated under the Securities Act; (2) if the Company shall
furnish to the Investor a certificate signed by a Senior Vice President or the
Chief Executive Officer of the Company stating that in the good faith judgment
of the Board of Directors of the Company, it would be seriously detrimental to
the Company and its stockholders for such registration to be effected at such
time, in which event the Company shall have the right to defer the filing of the
registration statement for a period of not more than 30 days after receipt of
the request of the Investor; or (3) in any particular jurisdiction in which the
Company would be required to quality to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
(b) The Company shall keep effective the registration statement
contemplated by this Section 2 and shall from time to time amend or supplement
such registration statement, for a period of not less than three hundred
sixty-five (365) days.
(c) The Company shall not be obligated to file more than three (3)
registration statements under this Agreement.
3. THE COMPANY COVENANTS.
(a) The Company's obligations pursuant to Sections 1 and 2 hereof shall
continue for two years after the Closing Date or until all Registrable
Securities have been sold, whichever event occurs first.
(b) In the event of a registration pursuant to the provisions of
Sections 1 and 2, the Company shall use all reasonable efforts to cause the
Registrable Securities so registered to be registered or qualified for sale
under the securities or blue sky laws of such jurisdictions as the Investor may
reasonably request; provided, however, that the Company shall not be required to
qualify to do business in any state by reason of this Section 3(b) in which it
is not otherwise required to quality to do business.
(c) The Company shall notify the Investor promptly when such
registration statement has become effective or a supplement to any prospectus
forming a part of such registration statement has been filed.
(d) The Company shall advise the Investor, promptly after it shall
receive notice or obtain knowledge of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement, or the
initiation or threatening of any proceeding for that purpose, and promptly use
all reasonable efforts
REGISTRATION RIGHTS AGREEMENT - Page 3
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued.
(e) The Company shall promptly notify the Investor, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event of which it has knowledge as a result of
which the prospectus included in such registration statement, as then in effect,
would include an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing, and at
the reasonable request of the Investor prepare and furnish to them such number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such Registrable
Securities or securities, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances under which they were made.
(f) If requested by the underwriter for any underwritten offering of
Registrable Securities on behalf of the Investor pursuant to a registration
requested under Sections 1 and 2, the Company and the Investor will enter into
an underwriting agreement with such underwriter for such offering, which shall
be reasonably satisfactory in substance and form to the Company and the
Company's counsel, the Investor, and the underwriter, and such agreement shall
contain such representations and warranties by the Company and the Investor and
such other terms and provisions as are customarily contained in an underwriting
agreement with respect to secondary distributions solely by selling
stockholders, including, without limitation, indemnities substantially to the
effect and to the extent provided in Section 4.
4. INDEMNIFICATION.
(a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless the Investor, its officers, directors, partners,
employees, agents, and counsel, and each person, if any, who controls any such
person within the meaning of Section 15 of the Securities Act or Section 20(a)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") from and
against any and all loss, liability, charge, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 4, but not be
limited to, reasonable attorneys' fees and any and all reasonable expenses
whatsoever incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim whatsoever), arising out of,
based upon, or in connection with any untrue statement or alleged untrue
statement of a material fact contained (A) in any registration statement,
preliminary prospectus, or final prospectus (as from time to time amended and
supplemented) or any amendment or supplement thereto, relating to the sale of
any of the Registrable Securities or (B) in any application or other document or
communication (in this Section 4 collectively called an
REGISTRATION RIGHTS AGREEMENT - Page 4
"application") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to register or qualify any of the Registrable Securities under the
securities or blue sky laws thereof or filed with the Commission or any
securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements made
therein not misleading, unless (x) such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of the Investor for inclusion in any registration
statement, preliminary prospectus, or final prospectus, or any amendment or
supplement thereto, or in any application, as the case may be, or (y) such loss,
liability, charge, claim, damage or expense arises out of the Investor's failure
to comply with the terms and provisions of this Agreement. The foregoing
agreement to indemnify shall be in addition to any liability the Company may
otherwise have, including liabilities arising under this Agreement.
If any action is brought against the Investor or any of its officers,
directors, partners, employees, agents, or counsel, or any controlling persons
of such person (an "indemnified party") in respect of which indemnity may be
sought against the Company pursuant to the foregoing paragraph, such indemnified
party or parties shall promptly notify the Company in writing of the institution
of such action (but the failure so to notify shall not relieve the Company from
any liability other than pursuant to this Section 4 (a) unless, the failure to
so notify shall prejudice any rights or defenses with respect to such claim) and
the Company shall promptly assume the defense of such action, including the
employment of counsel (reasonably satisfactory to such indemnified party or
parties) provided that the indemnified party shall have the right to employ its
or their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless:
(i) the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such action; or
(ii) such indemnified party or parties shall have reasonably concluded,
based on an opinion of counsel reasonably satisfactory to the Company, that
there may be one or more legal defenses available to it or them or to other
indemnified parties which are different from or additional to those available to
the Company, in any material respect, and that as a result thereof a conflict of
interest would arise absent separate representation of the parties.
In the event of clauses (i) or (ii) above, such fees and expenses shall be borne
by the Company and the Company shall not have the right to direct the defense of
such action on behalf of the indemnified party or parties. Anything in this
Section 4 to the contrary notwithstanding, the Company shall not be liable for
any settlement of any such claim or action effected without its written consent,
which shall not be unreasonably withheld, unless such settlement contains an
unconditional release of the Company. The Company
REGISTRATION RIGHTS AGREEMENT - Page 5
shall not, without the prior written consent of each indemnified party that is
not released as described in this sentence, settle or compromise any action, or
permit a default or consent to the entry of judgment in or otherwise seek to
terminate any pending or threatened action, in respect of which indemnity may be
sought hereunder (whether or not any indemnified party is a party thereto)
unless such settlement, compromise, consent, or termination includes an
unconditional release of each indemnified party from all liability in respect of
such action. The Company agrees to promptly notify the Investor of the
commencement of any litigation or proceedings against the Company or any of its
officers or directors in connection with the sale of any Registrable Securities
or any preliminary prospectus, prospectus, registration statement, or amendment
or supplement thereto, or any application relating to any sale of any
Registrable Securities.
(b) Each Investor agrees, severally, and not jointly, to indemnify and
hold harmless the Company, each director of the Company, each officer of the
Company who shall have signed any registration statement covering Registrable
Securities held by the Investor, each other person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20(a)
of the Exchange Act, and its or their respective counsel, to the same extent as
the foregoing indemnity from the Company to the Investor in Section 4 (a) but
only with respect to statements or omissions, if any, made in any registration
statement, preliminary prospectus, or final prospectus (as from time to time
amended and supplemented) or any amendment or supplement thereto, or in any
application, in reliance upon and in conformity with written information
furnished to the Company with respect to the Investor by or on behalf of the
Investor, for inclusion in any such registration statement, preliminary
prospectus, or final prospectus, or any amendment or supplement thereto, or in
any application, as the case may be. If any action shall be brought against the
Company or any other person so indemnified based on any such registration
statement, preliminary prospectus, or final prospectus, or any amendment or
supplement thereto, or in any application, and in respect of which indemnity may
be sought against the Investor pursuant to this Section 4(b) the Investor shall
have the rights and duties given to the Company, and the Company and each other
person so indemnified shall have the rights and duties given to the indemnified
parties, by the provisions of Section 4(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 4(a) or
4(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Securities Act, the Exchange Act or otherwise, then
the Company (including for this purpose any contribution made by or on behalf of
any director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company as one entity, and
the Investor, included in such registration in the aggregate (including for this
purpose any contribution by or on behalf of an indemnified party), as a second
entity, shall
REGISTRATION RIGHTS AGREEMENT - Page 6
contribute to the losses, liabilities, claims, damages, and expenses whatsoever
to which any of them may be subject, on the basis of relevant equitable
considerations such as the relative fault of the Company and the Investor in
connection with the facts which resulted in such losses, liabilities, claims,
damages, and expenses. The relative fault, in the case of an untrue statement,
alleged untrue statement, omission, or alleged omission shall be determined by,
among other things, whether such statement, alleged statement, omission or
alleged omission relates to information supplied by the Company or by the
Investor, and the parties' relative intent, knowledge, access to information,
and opportunity to correct or prevent such statement, alleged statement,
omission, or alleged omission, the Company and the Investor agree that it would
be unjust and inequitable if the respective obligations of the Company and the
Investor for contribution were determined by pro rata or per capita allocation
of the aggregate losses, liabilities, claims, damages, and expenses (even if the
Investor and the other indemnified parties were treated as one entity for such
purpose) or by any other method of allocation that does not reflect the
equitable considerations referred to in this Section 4(c). In no case shall the
Investor be responsible for a portion of the contribution obligation imposed on
the --Investor in excess of its pro rata share based on the number of shares of
Common Stock owned by it and included in such registration as compared to the
total number of Common Shares owned by the Investor and included in such
registration. No person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 4(c) each person, if any, who
controls the Investor within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee,
agent, and counsel of the Investor or control person shall have the same rights
to contribution as the Investor or control person and each person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act, each officer of the Company who shall have
signed any such registration statement, each director of the Company, and its or
their respective counsel shall have the same rights to contribution as the
Company, subject to each case to the provisions of this Section 4(c). Anything
in this Section 4(c) to the contrary notwithstanding, no party shall be liable
for contribution with respect to the settlement of any claim or action effected
without its written consent. This Section 4(c) is intended to supersede any
right to contribution under the Securities Act, the Exchange Act or otherwise.
5. MISCELLANEOUS.
(a) REMEDIES. In the event of a breach by any party of its obligations
under this Agreement, the other party, in addition to being entitled to exercise
all rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. Such rights shall be in
addition to, and not in lieu of, the Investor's rights to receive the Damage
Payment as specified in the Subscription Agreement.
REGISTRATION RIGHTS AGREEMENT - Page 7
(b) AGREEMENTS AND WAIVERS. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
unless such amendment, modification or supplement is in writing and signed by
the parties hereto.
(c) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, or telecopies, initially to the address set forth
below, and thereafter at such other address, notice of which is given in
accordance with the provisions of this Section 5(c).
(i) if to the Company:
Intelect Communications Systems Limited
Reid House, 31 Church Street
Hamilton, Bermuda
Attn: Peter G. Leighton
Fax: 441/292-5560
(ii) with a copy to:
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Telephone: 617/526-6000
Fax: 617/526-5000
Attn: Philip P. Rossetti
(iii) if to the Investor
Infinity Investors, Ltd.
27 Wellington Road
Cork, Ireland
Attn: James G. O'Brien
Fax: 353 21 501 255
Seacrest Capital Limited
27 Wellington Road
Cork, Ireland
Attn: James G. O'Brien
Fax: 353 21 501 255
REGISTRATION RIGHTS AGREEMENT - Page 8
(iv) with a copy to:
c/o HW Finance
4000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201
(Telephone) 214/720-1689
(Fax) 214/721-1662
Attn: Stuart J. Chasanoff, Esq.
All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; two business days after being
deposited in the mail, postage prepaid, if mailed; when answered back, if
telexed; and when receipt is acknowledged, if telecopied.
(d) REASONABLE COOPERATION OF THE INVESTOR. The Investor shall
cooperate in all reasonable respects with the filing of the registration
statement contemplated hereby. Without limiting the foregoing, the Investor
shall furnish to the Company (or any regulatory authority) such written
information and representations that the Company may reasonably request in order
to facilitate any registration of the Registrable Securities hereunder.
(e) SUCCESSORS AND ASSIGNS. This Agreement may be assigned by the
Investor to any purchaser or transferee of the Initial Debentures.
(f) COUNTERPARTS. This Agreement may be executed by facsimile signature
and in any number of counterparts and by the parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
(g) HEADINGS. The headings in this Agreement are for convenience of
references only and shall not limit or otherwise affect the meaning hereof.
(h) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without reference to its
conflict of laws provisions.
(i) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application hereof in any circumstance is held invalid,
illegal or unenforceable, the validity, legality and enforceability of any such
provisions in every other respect and of the remaining provisions contained
herein shall not be affected or impaired thereby.
REGISTRATION RIGHTS AGREEMENT - Page 9
(j) ENTIRE AGREEMENT. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of this agreement and under standing of the parties hereto in respect
of the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein,
concerning the registration rights granted by the Company pursuant to this
Agreement.
[Signature page follows]
REGISTRATION RIGHTS AGREEMENT - Page 10
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above.
INTELECT COMMUNICATIONS SYSTEMS
LIMITED
By:/s/ Peter G. Leighton
---------------------------
Peter G. Leighton, President
INFINITY INVESTORS, LTD.
By: /s/ J. A. Loughran
---------------------------
Name: J. A. Loughran
---------------------------
Title: Director
---------------------------
SEACREST CAPITAL LIMITED
By: /s/ James E. Martin
---------------------------
Name: James E. Martin
---------------------------
Title: President and Treasurer
---------------------------
REGISTRATION RIGHTS AGREEMENT - Page 11
BOOK ENTRY TRANSFER AGENT AGREEMENT
This Book Entry Transfer Agent Agreement (this "Agreement"), dated
October 15, 1996, between INTELECT COMMUNICATIONS SYSTEMS LIMITED, a Bermuda
company (the "Company"), INFINITY INVESTORS LTD., a Nevis West Indies
corporation ("Infinity"), SEACREST CAPITAL LIMITED, a Nevis West Indies
corporation ("Seacrest") (Infinity and Fairway collectively being referred to as
the "Holders") and AMERICAN STOCK TRANSFER & TRUST COMPANY, a New York banking
corporation (the "Transfer Agent").
R E C I T A L S:
WHEREAS, pursuant to that certain Convertible Securities Agreement of
Intelect Communications Systems Limited dated October 15, 1996 (the
"Subscription Agreement") by and among the Company and the Holders, the Company
issued to the Holders an aggregate of $5 million principal amount of Series A
Debentures, and an aggregate of $5 million principal amount of Series B
Debentures, each of which is convertible into common shares of the Company
(collectively, the "Debentures"); and
WHEREAS, the Company and the Holders have agreed to enter into this
Agreement with the Transfer Agent to provide for (i) the closing of the issuance
of the Debentures and (ii) a "book entry" system of accounting for the
Debentures; and
WHEREAS, the Transfer Agent is willing to (i) serve as an escrow agent
to facilitate the closing under the Subscription Agreement, (ii) hold the
Debentures on behalf of the Holder, and (iii) establish a book entry system of
accounting for the Debentures, on the terms hereafter described.
NOW, THEREFORE, in consideration of the foregoing, the parties hereby
agree as follows:
1. CLOSINGS. The Transfer Agent hereby agrees to act as an escrow agent
to facilitate the Closings as follows:
(a) On the date hereof the Holders shall wire transfer to an
account designated by the Transfer Agent $10,000,000 in the aggregate (the
"Purchase Price"), and the Company shall deliver to the Transfer Agent the
Debentures in the names of the Holders and in the amounts as set forth on
Schedule 1 hereto. The Transfer Agent may, at its discretion, confirm the
authenticity of the Debentures by transmitting a copy of the same in the form
received from the Company to the Holders or their counsel for written or oral
verification as to the form thereof.
BOOK ENTRY TRANSFER AGENT AGREEMENT - Page 1
(b) Immediately following the deliveries specified in (a)
above, together with a delivery from the Company to the Transfer Agent of a
fully executed copy of the Subscription Agreement, the Transfer Agent shall wire
transfer the Purchase Price, less the Consulting Fee (as hereafter defined), to
the Company pursuant to wire transfer instructions as provided by the Company.
The Company hereby directs the Transfer Agent to wire transfer $300,000 of the
Purchase Price (the "Consulting Fee") to Alpine Capital Partners, Inc. (the
"Consultant") in consideration of certain services provided by the Consultant to
the Company, pursuant to wire transfer instructions as provided by the
Consultant.
(c) The Transfer Agent shall hold the Debentures for the
benefit of the Holders, as hereafter described.
(d) All interest (if any) earned on the funds placed in escrow
and prior to their distribution to the Company shall be for the account of the
Holders.
2. OWNERSHIP OF DEBENTURES. Record and beneficial ownership of the
Debentures shall remain in the name of the Holders (unless and until transferred
pursuant to the terms of the Debentures, with written notice thereof to the
Transfer Agent). Any transfer or purported transfer of the Debentures (1) not
made pursuant to the terms of the Debentures or (2) not properly noticed to the
Transfer Agent shall be null and void ab initio and shall not be given effect
thereto by the Transfer Agent. The Transfer Agent shall not be required to
acknowledge any transfer of the Debentures unless accompanied by written
confirmation thereof from the Company and the Holders.
3. PAYING AGENT. The Transfer Agent shall act as paying agent for the
Debentures. Accordingly, all payments of principal required of the Company
related to the Debentures shall be made to the Transfer Agent for the account
and benefit of the holders of such Debentures as registered on the books of the
Transfer Agent ("Registered Debentureholder"). Upon the receipt of any such
payment of principal, in cash, the Transfer Agent shall promptly wire transfer
such sum to the account of the Debentureholders as follows:
Infinity Seacrest
- -------- --------
CitiBank New York CitiBank New York
ABA 021 000 089 ABA 021 000 089
Credit: Bear Stearns Credit: Bear Stearns
Account No. 0925-3186 Account No. 0925-3186
Credit: Infinity Investors Ltd. Credit: Seacrest Capital Ltd.
Acct. No. 102-05092 Acct. No. 483-91295
BOOK ENTRY TRANSFER AGENT AGREEMENT - Page 2
ALL OTHER REGISTERED DEBENTUREHOLDERS
-------------------------------------
Such account as is reflected on the books of the Transfer Agent.
All payments of interest shall be made directly to the Registered
Debentureholders by the Company, which shall notify the Transfer Agent of such
payments when made.
4. ACCOUNTING AGENT. The Transfer Agent shall act as the accounting
agent of the Company and the Registered Debentureholders and shall establish and
maintain a book entry system of accounting for the Debentures (the "Accounting
Ledger") crediting (reducing) the outstanding balance owed thereunder by all (i)
payments of principal made by the Company to the Transfer Agent as paying agent
as required pursuant to Section 3 above, (ii) by the appropriate amount upon
delivery of Converted Stock to the applicable Registered Debentureholders
following receipt of a Notice of Conversion (as each such term is defined in
Section 5 below), and (iii) by payments in cash of interest made by the Company
to the Registered Debentureholders of which notice is given to the Transfer
Agent pursuant to Section 3 above. At such time as the remaining sum due and
owing on any Debenture as reflected on the Accounting Ledger is zero following
the procedures described in this Agreement, the Transfer Agent shall return such
Debenture to the Company marked "Paid in Full."
5. ISSUANCE OF CONVERTED SHARES.
(a) Consistent with Section 3.2 of each Debenture, in order to
convert all or a portion of a Debenture into common shares of the Company (the
"Converted Stock"), a Registered Holder shall deliver written notice (each, a
"Notice of Conversion") to the Transfer Agent of the portion of the Debenture it
elects to so convert and a calculation of the number of shares of Converted
Stock to be issued upon such conversion. Upon receipt by the Transfer Agent of
any such Notice of Conversion (including receipt via facsimile) from any
Registered Holder, the Transfer Agent shall immediately deliver a copy thereof
to the Company, via facsimile, requesting the Company to confirm the number of
shares of Converted Stock to be issued to such Registered Holder in connection
therewith. The Company shall, upon receipt thereof, promptly confirm or dispute
the number of shares of Converted Stock to be issued to the Registered Holder,
providing written notice thereof via facsimile to the Transfer Agent and the
Registered Holder (the "Company Notice"). In the event the Company confirms the
number of shares of Converted Stock to be so issued, it shall, as part of the
Company Notice, direct the Transfer Agent to issue such shares of Converted
Stock to the Registered Holder. In the event the Company disputes the number of
shares of Converted Stock to be so issued, the Company and the Registered Holder
shall immediately, in good faith, seek to resolve such dispute. In the event the
Company and the Registered Holder cannot resolve such dispute, each party
reserves all rights and remedies against the other associated with such Notice
of Conversion.
BOOK ENTRY TRANSFER AGENT AGREEMENT - Page 3
(b) The Transfer Agent shall not be required to issue shares
of Converted Stock unless and until receipt (including via facsimile) of written
notice from either (i) the Company, confirming the number of shares of Converted
Stock to be issued or (ii) the Registered Holder and the Company, setting forth
the number of shares of Converted Stock to be issued.
(c) Reference is hereby made to that certain Registration
Rights Agreement appended to the Subscription Agreement. At such time as a
Registration Statement as contemplated therein has been declared effective by
the Securities and Exchange Commission covering the resale of the Converted
Stock, the Company shall cause its legal counsel to deliver to the Transfer
Agent an opinion certifying that the Converted Stock may be sold by the
Registered Holder receiving such shares upon conversion of the Debentures, with
the purchaser thereof receiving certificates without restrictive legend, which
opinion shall remain effective so long as such Registration Statement remains in
full force and effect. In the event that, at any time, the Registration
Statement ceases to be effective, the Company or its legal counsel shall
immediately deliver written notice thereof to the Transfer Agent and the
Registered Holders stating that the opinion of the Company's legal counsel may
no longer be relied upon by the Transfer Agent (unless and until any new
Registration Statement is so declared effective with an accompanying opinion to
that effect of the Company's legal counsel). Upon the receipt of any Notice of
Conversion while a Registration Statement is effective, the Converted Stock
described above may be sold by the Registered Holder receiving such shares upon
conversion of the Debentures, with the purchaser thereof receiving certificates
without restrictive legend.
6. TERMINATION. This Agreement shall terminate promptly upon the
earlier to occur of (1) written demand by all of the Registered Debentureholders
of their respective Debentures or (2) no sum remains due and owing under any of
the Debentures. Notwithstanding the foregoing, the Transfer Agent may terminate
its obligations under this Agreement at such time as the Transfer Agent no
longer serves as the transfer agent for the Company's common stock, by delivery
of written notice thereof to the Registered Holders and the Company. Upon
delivery of such notice, the Transfer Agent shall deliver the original
Debentures to Infinity, on behalf of all Registered Holders, together with a
copy of the Accounting Ledger (with a corresponding copy delivered to the
Company).
7. FEES. The Company hereby agrees to pay the Transfer Agent for all
services rendered hereunder.
8. NOTICES. Any notice or demand to be given or that may be given under
this Agreement shall be in writing and shall be (a) delivered by hand, or (b)
delivered through or by expedited mail or package service, or (c) transmitted by
telecopy, in each case with personal delivery acknowledged, addressed to the
parties as follows:
BOOK ENTRY TRANSFER AGENT AGREEMENT - Page 4
As to the Company: Intelect Communications Systems Limited
Reid House, Church Street
Hamilton, Bermuda
Telephone: 441/295-8639
Fax: 441-292-5560
Attn: Peter G. Leighton
With copy to: Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Telephone: 617/526-6000
Fax: 617/526-5000
Attn: Philip P. Rossetti
As to either Holder: c/o HW Finance
4000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201
Telephone: 214/720-1689
Fax: 214/720-1662
Attn: Barrett Wissman
With a copy to: c/o HW Finance
4000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201
Telephone: 214/720-1689
Fax: 214/720-1612
Attn: Barrett Wissman
As to the Transfer
Agent: American Stock Transfer
& Trust Company
40 Wall Street
New York, New York 10005
Telephone: 718/921-8200
Fax: 718/236-4588
9. NONCONTRAVENTION. The Company agrees that it will not at any time
take any action or undertake any activity that would in any way impede, restrict
or limit the right and ability of the Registered Debentureholders to convert the
Debentures into shares of Converted Stock pursuant to the terms and provisions
of this Agreement, the Subscription Agreement, as amended from time to time, and
the Debentures. Accordingly, the Company agrees that the instructions and
procedures set forth above
BOOK ENTRY TRANSFER AGENT AGREEMENT - Page 5
in this Agreement constitute irrevocable instructions, directions and
authorizations to the Transfer Agent and that the Transfer Agent is authorized
to disregard any written or oral communication received by it from the Company
or otherwise that could in any way be construed to constitute an authorization
or direction for the Transfer Agent to act contrary to, or to not faithfully
comply with, the irrevocable instruction, direction and authorization set forth
herein. Each of the Registered Debentureholders is an intended third party
beneficiary of these irrevocable instructions.
10. INDEMNIFICATION. The Company agrees to indemnify and hold harmless
the Transfer Agent, each officer, director, employee and agent of the Transfer
Agent, and each person, if any, who controls the Transfer Agent within the
meaning of the Securities Act of 1933, as amended (the "Act") or the Securities
Exchange Act of 1934, as amended (the "Exchange Act") against any losses,
claims, damages, or liabilities, joint or several, to which it, they or any of
them, or such controlling person, may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon the performance by the Transfer
Agent of its duties pursuant to the Agreement; and will reimburse the Transfer
Agent, and each officer, director, employee and agent of the Transfer Agent, and
each such controlling person for any legal or other expenses reasonably incurred
by it or any of them in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
will not be liable in any case if such loss, claim, damage or liability arises
out of or is based upon any action not taken in good faith, or any action or
omission that constitutes gross negligence or willful misconduct.
Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the Company under this Section,
notify in writing the Company of the commencement thereof, and failure so to
notify the Company will relieve the Company from any liability under this
Section as to the particular item for which indemnification is then being sought
but not from any other liability which it may have to any indemnified party
(unless such failure to so notify the Company does not prejudice in any material
respect the rights and defenses of the Company). In case any such action is
brought against any indemnified party, and it notifies the Company of the
commencement thereof, the Company will be entitled to assume the defense
thereof, with counsel who shall be to the reasonable satisfaction of such
indemnified party. The Company shall not be liable to any such indemnified party
on account of any settlement of any claim of action effected without the consent
of the Company.
11. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the state of New York, without giving effect to
conflicts of law rules of such jurisdiction.
BOOK ENTRY TRANSFER AGENT AGREEMENT - Page 6
12. ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the full
and entire understanding of the parties with respect to the subject matter
hereof. Neither this Agreement nor any term hereof may be amended, waived,
discharged, or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
13. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and by facsimile signature.
[Signature page follows]
BOOK ENTRY TRANSFER AGENT AGREEMENT - Page 7
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of
the date first above written.
INTELECT COMMUNICATIONS SYSTEMS
LIMITED
By:/s/ Peter G. Leighton
------------------------------
Title: PRESIDENT
------------------------------
INFINITY INVESTORS LTD.
By: /s/ J. A. Loughran
------------------------------
Title: Director
------------------------------
SEACREST CAPITAL LIMITED
By: /s/ James E. Martin
------------------------------
Title: President and Treasurer
------------------------------
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By: /s/ Herbert J. Lemmar
------------------------------
Title: Vice President
------------------------------
BOOK ENTRY TRANSFER AGENT AGREEMENT - Page 8
SCHEDULE 1
Principal Amount Purchase Price
of Debentures of Debentures
------------- -------------
Infinity Investors Ltd.
Series A Debentures $ 4,500,000.00 $ 4,500,000.00
Series B Debentures $ 4,500,000.00 $ 4,500,000.00
Seacrest Capital Limited
Series A Debentures $ 500,000.00 $ 500,000.00
Series B Debentures $ 500,000.00 $ 500,000.00
Totals
$10,000,000.00 $10,000,000.00
============== ==============
BOOK ENTRY TRANSFER AGENT AGREEMENT - Page 9
INTELECT COMMUNICATIONS SYSTEMS LIMITED
INTELECT, INC.
OFFER TO PURCHASE THE FIVE YEAR SIX PERCENT (6%)
SUBORDINATED DEBENTURES OF INTELECT, INC.
FOR AN AGGREGATE OF 170,000 SHARES OF
COMMON STOCK, $.01 PAR VALUE, OF
INTELECT COMMUNICATIONS SYSTEMS LIMITED
AND THE PAYMENT OF CERTAIN AMOUNTS
IN LIEU OF ISSUING FRACTIONAL SHARES
<TABLE>
<S> <C>
September 6, 1996
TO: The Following Holders of Intelect, Inc. 5 Year Six Percent (6%)
Subordinated Debentures (the "Debenture Holders"):
Thomas R. Moore, Trustee Bharat Kinariwala
Lucille M. Moore, Trustee Rheinhold A. Sundeen, M.D., Inc.
Dole Food Company, Inc. Joe M. Chow and Marian K. Chow
Richard G. Grey Jeannette A. Bullis
National Securities and Investments, Inc. Eleanor Fleming
Franklin Tokioka Jeanne Scott
Philip J. Daunton and Nancy G. Daunton Carolyn Walters
Christopher J. Stevens Willis E. Hoff and Ahila D. Hoff
Dickey Company, Nominee for William H. Barkhurst and Karelyn B. Barkhurst
Richard F. Jobe, M.D., Trustee
Leo Luther Bass William H. Barkhurst
Charles J. Hartman Edwin Ducayet
John J. Jaquette, Trustee Thomas R. Howes
Edmund M. Keating Eric J. Robson
Macario Q. Laygui and Julita A. Laygui Shoeb Javed
Norma Jean Feaster Toni Willems
Kenneth G. Neifert and Ayako Neifert
</TABLE>
Ladies and Gentlemen:
Intelect Communications Systems Limited ("ICSL") and Intelect, Inc.
("Intelect"), hereby offer to purchase, on or before 5:00 P.M., October 7, 1996,
all of those certain 5 Year Six Percent (6%) Subordinated Debentures of Intelect
dated June 29, 1995 (the "Debentures") issued pursuant to that certain Option
Agreement (the "Option Agreement") dated March 31, 1995, by and among the
Debenture Holders, ICSL (formerly known as Challenger International, Ltd.), and
Intelect, in
consideration of the issuance by ICSL of an aggregate of 170,000 Common Shares,
$.01 par value, of ICSL (the "Shares"), and the payment to the Debenture Holders
of certain amounts in lieu of issuing fractional shares (with the aggregate of
all such amounts totaling $156.19 (the "Fractional Share Payments")), such
Shares and Fractional Share Payments to be allocated to the Debenture Holders
pro rata in accordance with their percentage ownership of all of the Debentures
issued pursuant to the Option Agreement, all of which shall be subject to the
terms of this Offer (the "Offer").
This Offer is being made contingent upon all of the Debenture Holders
surrendering to Intelect (as instructed herein) all (100%) of the Debentures and
executing and delivering to Intelect (as instructed herein) the Release and the
Letter of Transmittal enclosed with this Offer (the "Required Amount"). In the
event less than the Required Amount is tendered, Intelect and ICSL reserve the
right to withdraw this Offer.
THE TERMS OF THIS OFFER HAVE NOT BEEN REVIEWED OR APPROVED IN ANY WAY
BY THE SECURITIES COMMISSIONER OF ANY STATE OR THE SECURITIES AND EXCHANGE
COMMISSION. THIS OFFER DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
EXPIRATION DATE
This Offer will expire (the "Expiration Date") at 5:00 P.M., Central
Daylight Savings Time on October 7, 1996, or at that hour on any later date to
which the Offer may be extended by Intelect and ICSL.
PROCEDURES FOR TENDERING DEBENTURES
Proper Tender of Debentures. For Debentures to be validly tendered
pursuant to the Offer you as a Debenture Holder must deliver the following
documents to the person and place set forth below to be held in trust until the
Required Amount is received:
1. The original Debenture issued in your name;
2. The enclosed Letter of Transmittal, duly executed by the
registered owner of the Debenture;
3. The enclosed Release in Consideration of Exchange of Property
(the "Release"), duly executed by the registered owner of the
Debenture. The enclosed Release states the amount of the
Shares to be received by you and the amount of cash to be paid
to you in lieu of issuing fractional
shares;
4. If required, the enclosed Substitute Form W-9 (see the
enclosed Instructions).
These documents must be delivered on or before the Expiration Date to:
Intelect, Inc.
c/o Ryan & Sudan, L.L.P.
Two Houston Center, Suite 3900
909 Fannin
Houston, Texas 77010
Attention: Robert C. Beasley
These documents may be delivered via the enclosed addressed envelope.
These documents will be held in trust by Ryan & Sudan, L.L.P. until
receipt of all (100%) of the Debentures and the executed Releases and Letters of
Transmittal signed by all of the Debenture Holders. In the event the Required
Amount is not received by the Expiration Date (unless the Company and ICSL
otherwise direct Ryan & Sudan, L.L.P. that they elect to proceed with the Offer
in the absence of receiving the tender of 100% of the Debentures, Releases, and
Letters of Transmittal) Ryan & Sudan, L.L.P. will immediately return to you the
Debenture you surrendered, the Letter of Transmittal executed by you, and the
Release executed by you.
ISSUANCE AND REGISTRATION OF SHARES
Upon the terms and subject to the conditions of this Offer, including
receipt of the Required Amount pursuant to the terms of this Offer, ICSL will:
(1) issue to each Debenture Holder the amount of shares of its Common Stock as
is set forth in the Release executed by such Debenture Holder and deliver a
certificate to such Debenture Holder representing such shares; (2) commence
registration of such shares with the Securities and Exchange Commission pursuant
to a Form S-3 Registration Statement; and (3) pay to each Debenture Holder by
check that amount of Fractional Share Payment as is set forth in the Release
executed by such Debenture Holder.
ICSL will pay the expenses incurred by ICSL in connection with the
registration of the Shares, including all registration and filing fees
(including all expenses incident to filing with the National Association of
Securities Dealers, Inc.), printing expenses, fees and disbursements of ICSL's
counsel and independent certified public accountant, and the expense of
qualifying such Shares under state blue sky laws, if any. However, all
underwriting expenses incurred by the Debenture Holders (if any), including
discounts and commissions, shall be borne by such Debenture Holders. The
Debenture Holders may be required to provide information concerning the
Debenture Holders necessary to complete the Registration Statement,
and accordingly, as set forth in the Letter of Transmittal, the Debenture
Holders agree to complete and return any documents (including questionnaires)
necessary to enable ICSL to complete the Registration Statement.
ICSL will pay all stock transfer taxes, if any, payable on the issuance
of the Shares pursuant to the Offer; provided, however, that if issuance of the
Shares is to be made to any person other than the Debenture Holder, the
Debenture Holder will be responsible for such taxes.
FEDERAL INCOME TAX BACKUP WITHHOLDING. To prevent federal income tax
backup withholding equal to 31% of the gross cash payments in lieu of fractional
shares made pursuant to the Offer, each Debenture Holder who does not otherwise
establish an exemption from such withholding must notify ICSL of such
shareholder's correct taxpayer identification number (which in the case of an
individual is their social security number), or certify that such taxpayer is
awaiting a taxpayer identification number, and provide certain other information
by completing the enclosed Substitute Form W-9 (see the enclosed Instruction
Letter).
ICSL MAY BE REQUIRED TO WITHHOLD AND REMIT TO THE INTERNAL REVENUE
SERVICE (THE "IRS"), 31% OF THE GROSS PROCEEDS PAID TO ANY TENDERING DEBENTURE
HOLDER WHO FAILS TO COMPLETE FULLY AND SIGN THE SUBSTITUTE FORM W-9 INCLUDED
WITH THIS LETTER.
CONDITIONS OF THE OFFER
NO PARTIAL PURCHASES. Intelect and ICSL will not accept a tender of a
portion of a Debenture. Therefore, if a Debenture Holder tenders his or her
Debenture, they must tender all of their Debenture in order for there to be a
valid tender and in order for them to receive the Shares.
WITHDRAWAL OF OFFER. The Offer is contingent on Intelect and ICSL
receiving all of the Debentures, together with the Letters of Transmittal and
Releases executed by the Debenture Holders (the "Required Amount"). Intelect and
ICSL reserve the right to withdraw this Offer if less than the Required Amount
is tendered, or if, in Intelect's or ICSL's sole discretion, it would be
inadvisable to proceed with the Offer (including, without limitation, if the
filing of the Registration Statement would materially and adversely affect the
business or prospects of ICSL or Intelect in view of the disclosures that may be
required). In such case, the Debentures, the Letters of Transmittal, and the
Releases will be immediately returned to the respective Debenture Holders.
INTELECT, INC.
/s/ Herman M. Frietsch
-----------------------------------------
Herman M. Frietsch, Chairman of the Board
INTELECT COMMUNICATIONS SYSTEMS
LIMITED
/s/ Herman M. Frietsch
-----------------------------------------
Herman M. Frietsch, Chairman of the Board
LETTER OF TRANSMITTAL
TO ACCOMPANY 5 YEAR SIX PERCENT (6%)
SUBORDINATED DEBENTURES
OF
INTELECT, INC.
TENDERED PURSUANT TO THE OFFER TO PURCHASE
DATED SEPTEMBER 6, 1996
THE OFFER EXPIRES AT 5:00 P.M., CENTRAL DAYLIGHT SAVINGS TIME,
ON OCTOBER 7, 1996, UNLESS THE OFFER IS EXTENDED
TO: INTELECT, INC.
C/O RYAN & SUDAN, L.L.P.
TWO HOUSTON CENTER, SUITE 3900
HOUSTON, TEXAS 77010
ATTENTION: ROBERT C. BEASLEY
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN THAT SHOWN ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY.
To Intelect, Inc.:
The undersigned hereby tenders to Intelect, Inc., a Nevada corporation
(formerly Intelect, Inc., a Hawaii corporation) ("Intelect"), the 5 Year Six
Percent (6%) Subordinated Debenture of Intelect, dated June 29, 1995, issued in
the name of the undersigned (the "Debenture") and surrenders all of its rights
under that certain Option Agreement (the "Option Agreement") dated March 31,
1995, by and among those Sellers whose names appear on the signature page
thereof, Intelect, and Intelect Communications Systems Limited, a Bermuda
corporation (formerly known as Challenger International, Ltd.) ("ICSL"), in
exchange for that amount of Common Shares (the "Shares"), $.01 par value, of
Intelect Communications Systems Limited ("ICSL") registered with the Securities
and Exchange Commission (the "SEC"), and the payment of that certain amount of
cash in lieu of fractional shares, as is set forth in the Release in
Consideration of Exchange of Property accompanying this Letter of Transmittal
(the "Release"), subject to the terms and conditions set forth in the Release,
in the Offer to Purchase of Intelect and ICSL dated September 6, 1996, receipt
of which is hereby acknowledged, and in this Letter of Transmittal (which
together constitute the "Offer").
Subject to and effective on acceptance for payment of the Debenture
tendered
hereby in accordance with the terms of the Offer (including, if the Offer is
extended or amended, the terms or conditions of any such extension or
amendment), the undersigned hereby surrenders, assigns, and transfers to or upon
the order of Intelect all right, title and interest in and to the Debenture
tendered hereby, and surrenders all of its rights under the Option Agreement.
The undersigned hereby represents and warrants to Intelect and ICSL
that:
(a) the undersigned understands that tender of the Debenture
will constitute the undersigned's acceptance of the terms and
conditions of the Offer;
(b) when and to the extent Intelect accepts the Debenture,
Intelect will acquire good, marketable and unencumbered title to it,
free and clear of all security interests, liens, charges, encumbrances,
conditional sales agreements or other obligations relating to their
sale or transfer, and not subject to any adverse claim;
(c) on request, the undersigned will execute and deliver any
additional documents Intelect or ICSL deems necessary or desirable to
complete the surrender, transfer and conveyance of the Debenture
tendered hereby;
(d) on request, the undersigned will execute and deliver any
additional documents (including any information questionnaire)
necessary for ICSL to register the Shares with the SEC; and
(e) the undersigned has read and agrees to all of the terms of
the Offer.
In the event you have lost or misplaced your Debenture, you will need
to present to Intelect, along with the Release and this Letter of Transmittal,
an affidavit stating: the full name and address of the registered owner; that
the registered owner is the legal and beneficial owner of the Debenture; that
the Debenture has been lost or misplaced; that a diligent search has been made
to find such Debenture but it has not been found; that neither the Debenture,
nor any interest therein, has been sold, assigned, endorsed, transferred,
deposited under any agreement, hypothecated, pawned, pledged for any loan, or
disposed of in any manner; that no other person other than the registered owner
thereof has any right, title, claim, equity or interest in such Debenture; an
agreement to indemnify Intelect and ICSL against any claim that may be made
against Intelect and ICSL with respect to lost or misplaced Debenture; and that
if said Debenture comes into the hands, custody, or control of such registered
owner, such person will deliver such Debenture to Intelect in order that it may
be cancelled. Such affidavit must be signed by the registered owner and
acknowledged before a notary public.
The undersigned recognizes that under certain circumstances set forth
in the Offer, Intelect and ICSL may terminate or amend the Offer or may not be
required to purchase any of the Debentures tendered hereby. The undersigned
understands that if the Debenture is not purchased, the Debenture (together with
the Release and this Letter of Transmittal) will be returned to the undersigned.
The undersigned understands that acceptance of the Debenture by
Intelect and ICSL for payment will constitute a binding agreement between the
undersigned and Intelect and ICSL upon the terms and subject to the conditions
of the Offer.
All authority conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned, and any
obligations of the undersigned under this Letter of Transmittal shall be binding
upon the heirs, personal representatives, successors and assigns of the
undersigned. Except as stated in the Offer, this tender is irrevocable.
THE UNDERSIGNED HEREBY CERTIFIES THAT ALL OF THE INFORMATION I HAVE
PROVIDED IN THIS LETTER OF TRANSMITTAL IS TRUE AND CORRECT, AND I AGREE TO THE
TERMS OF THE OFFER AND THIS LETTER OF TRANSMITTAL.
* SIGN HERE:________________________________________________
DATE:_____________________________________________________
TELEPHONE NUMBER (INCLUDING AREA CODE):___________________
* MUST BE SIGNED BY REGISTERED OWNER(S) EXACTLY AS NAME(S) APPEAR(S) ON
DEBENTURE. IF SIGNATURE IS BY ATTORNEY-IN-FACT, EXECUTOR, ADMINISTRATOR,
TRUSTEE, GUARDIAN, OFFICER OF A CORPORATION OR ANOTHER ACTING IN A FIDUCIARY OR
REPRESENTATIVE CAPACITY, PLEASE SET FORTH THE FULL TITLE.
RELEASE IN CONSIDERATION
OF EXCHANGE OF PROPERTY
This Release in Consideration of Exchange of Property (this "Release")
is executed the date stated below by Edwin Ducayet ("Releasor") in favor of
Intelect, Inc., a Nevada corporation (formerly Intelect, Inc., a Hawaii
corporation) ("Intelect"), Intelect Communications Systems Limited, a Bermuda
corporation (formerly known as Challenger International, Ltd.) ("ICSL"), their
affiliated entities, and all of such entities' officers, directors,
shareholders, employees, agents, representatives, successors, assigns, and all
other persons or entities in privity with them (the "Released Parties").
WHEREAS, Releasor is the owner and holder of that certain 5-Year Six
Percent (6%) Subordinated Debenture issued by Intelect, Inc. dated June 29, 1995
(the "Debenture"), issued pursuant to that certain Option Agreement (the "Option
Agreement") dated March 31, 1995, by and among those Sellers whose names appear
on the signature page thereof, ICSL and Intelect, and Releasor is the contingent
beneficiary of certain other rights under the Option Agreement, including rights
to Additional Payments (as defined in the Option Agreement);
WHEREAS, Releasor has agreed to execute this Release, tender Releasor's
Debenture to ICSL and surrender all of its rights under the Option Agreement, in
exchange for the issuance to Releasor by ICSL of 2,338 shares of Common Stock of
ICSL, $.01 par value (the "Shares"), the payment to Releasor of $.51, which
represents an amount paid in lieu of issuing fractional shares (the "Fractional
Share Payment"), and the registration of the Shares by ICSL with the Securities
and Exchange Commission pursuant to a Registration Statement on Form S-3 (the
"Registration Statement");
NOW, THEREFORE, for and in consideration of the issuance to Releasor
and the receipt by Releasor of: (1) the Shares registered pursuant to the
Registration Statement; and (2) the Fractional Interest Payment; Releasor, for
and on behalf of itself, its heirs, administrators, agents, successors, and
assigns, does hereby release and forever discharge the Released Parties, of and
from any and all claims, demands, duties, obligations, payments of any kind, and
any causes of action of whatsoever kind or nature, whether known or not known,
which Releasor has or may have arising under the Debenture and/or the Option
Agreement, including without limitation the right to the Additional Payments, or
arising out of or in any way related to the transactions contemplated by the
Option Agreement or the Debenture, and Releasor hereby delivers and surrenders
the Debenture to Intelect and surrenders and cancels any and all rights that it
might have arising under the Debenture and any and all rights arising under the
Option Agreement, including without limitation the right to the Additional
Payments.
Releasor further agrees to indemnify ICSL and Intelect and each of
their directors and officers against, and to hold ICSL and Intelect and each of
their directors and officers harmless from, any losses, claims, damages,
expenses or liabilities (including reasonable attorney's fees) to which ICSL or
Intelect or such directors or officers may become subject by reason of any
statement or omission in the Registration Statement made in reliance upon, or in
conformity with, a written statement of Releasor.
Releasor acknowledges that no threat, and no promise, statement or
agreement not herein expressed, has been made to or by the parties hereto to
induce its settlement and the execution of this Release, and Releasor has
consulted with legal counsel, has carefully read this document and understands
its meaning and effect and freely executes and delivers the same.
"RELEASOR"
-------------------------------------
Date: _________________________, 1996
EXHIBIT 11
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
---------------------------------- ----------------------------------
1996 1995 1996 1995
---------------- ---------------- ---------------- ----------------
Primary and Fully Diluted Loss Per Share
- ----------------------------------------
<S> <C> <C> <C> <C>
Shares in issue beginning of period 11,385,117 10,916,475 11,385,117 10,916,475
Shares issued (weighted average) 1,112,683 98,577 1,112,683 98,577
---------------- ---------------- ---------------- ----------------
Weighted average shares in issue end of period 12,497,800 11,015,052 12,497,800 11,015,052
Dilutive Common Stock Equivalents (weighted average)
Savage Arms Series C convertible redeemable
preferred stock - 160,991 - 160,991
Other stock options using treasury stock method 1,048,665 763,355 1,001,039 440,262
---------------- --------------- ---------------- ----------------
Total weighted average common shares and
common stock equivalents 13,546,465 11,939,398 13,498,839 11,616,305
================ ================ ================ ================
NET INCOME (LOSS) FOR PERIOD (thousands of U.S. Dollars) $ (8,503) $ (428) $ (15,363) $ 73
================ ================ ================ ================
EARNINGS (LOSS) PER SHARE $ (0.63) $ (0.04) $ (1.14) $ 0.01
================ ================ ================ ================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,079
<SECURITIES> 93
<RECEIVABLES> 2,289
<ALLOWANCES> 29
<INVENTORY> 3,052
<CURRENT-ASSETS> 10,307
<PP&E> 5,963
<DEPRECIATION> 812
<TOTAL-ASSETS> 44,839
<CURRENT-LIABILITIES> 8,505
<BONDS> 10,128
0
0
<COMMON> 138
<OTHER-SE> 22,153
<TOTAL-LIABILITY-AND-EQUITY> 44,839
<SALES> 1,915
<TOTAL-REVENUES> 2,041
<CGS> 2,616
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,245
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 459
<INCOME-PRETAX> (7,279)
<INCOME-TAX> (1,215)
<INCOME-CONTINUING> (8,494)
<DISCONTINUED> (9)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,503)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
