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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 June 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 12,910,537 shares of the registrant's Common Stock, par value $.01
per share, outstanding on July 31, 1996.
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INTELECT COMMUNICATIONS SYSTEMS LIMITED
INDEX
<TABLE>
<CAPTION>
<S> <C>
PAGE
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company 2
(unaudited) at June 30, 1996 and December 31, 1995
Consolidated Statements of Operations of the Company 3
(unaudited) for the three and six months ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows of the Company 4
(unaudited) for the three and six months ended June 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 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES
</TABLE>
PART I - FINANCIAL INFORMATION
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Thousands of U.S. Dollars)
(Unaudited)
June 30 December 31
1996 1995
------------------- ------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,083 $ 15,039
Marketable securities 85 -
Accounts receivable 2,603 1,375
Inventories 2,759 2,537
Prepaid expenses 439 406
Other current assets 117 -
Loan receivable - 600
------------------- ------------------
9,086 19,957
Property and equipment - net 4,150 1,839
Excess of cost over net assets of companies acquired 19,967 8,685
Software development costs 1,765 -
Deferred financing costs 1,318 -
Deferred income taxes 2,033 -
Other intangible assets 4,611 758
------------------- ------------------
$ 42,930 $ 31,239
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,498 $ 1,680
Accrued liabilities 1,701 1,989
Net liabilities of discontinued operations 401 476
Current installments of obligations under capital leases 177 145
Current maturities of long-term debt 3,848 1,041
------------------- ------------------
8,625 5,331
Long-term obligations under capital leases,
net of current maturities 195 200
Long-term debt, net of current maturities 4,010 168
Convertible Debentures 5,028 -
------------------- ------------------
17,858 5,699
------------------- ------------------
SHAREHOLDERS' EQUITY:
Common shares, $0.01 par value,
80,000,000 shares authorized.
12,885,537 issued and outstanding at June 30, 1996
(December 31,1995 - 11,385,117) 129 114
Share premium 18,020 11,673
Unrealized gain on marketable securities 31 -
Retained earnings - since November 1, 1992 6,892 13,753
------------------- ------------------
25,072 25,540
------------------- ------------------
$ 42,930 $ 31,239
=================== ==================
</TABLE>
2
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Thousands of U.S. Dollars, except share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
STATEMENT OF OPERATIONS
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 1,147 $ 613 $ 3,225 $ 613
Services 769 -- 2,063 --
Interest and other income 128 30 291 56
-------- -------- -------- --------
2,044 643 5,579 669
-------- -------- -------- --------
Costs and expenses:
Cost of sales 2,561 504 5,000 504
Interest 110 2 167 2
Selling, general and administrative 4,130 646 7,531 612
Engineering and development 1,816 490 1,993 490
Equity in loss of investee -- 280 -- 280
-------- -------- -------- --------
8,617 1,922 14,691 1,888
-------- -------- -------- --------
Loss from continuing operations
before income taxes (6,573) (1,279) (9,112) (1,219)
Income tax benefit 1,708 -- 2,261 --
-------- -------- -------- --------
Loss from continuing operations (4,865) (1,279) (6,851) (1,219)
Discontinued operations:
Income (loss) from discontinued operations -- 832 (9) 1,074
-------- -------- -------- --------
Loss before extraordinary item (4,865) (447) (6,860) (145)
Equity in extraordinary gain of investee -- 646 -- 646
-------- -------- -------- --------
Net income (loss) for period $ (4,865) $ 199 $ (6,860) $ 501
======== ======== ======== ========
EARNINGS PER SHARE
Primary and fully diluted earnings
Income (loss) per share
Continuing operations $ (0.36) $ (0.11) $ (0.52) $ (0.11)
Discontinued operations $ -- $ 0.07 $ -- $ 0.09
-------- -------- -------- --------
Loss before extraordinary item $ (0.36) $ (0.04) $ (0.52) $ (0.02)
-------- -------- -------- --------
Extraordinary item $ -- $ 0.06 $ -- $ 0.06
-------- -------- -------- --------
Net income (loss) for period $ (0.36) $ 0.02 $ (0.52) $ 0.04
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES AND
COMMON STOCK EQUIVALENTS OUTSTANDING
(IN THOUSANDS) 13,317 11,415 13,162 11,402
======== ======== ======== ========
</TABLE>
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Thousands of U.S. Dollars, except share data)
(Unaudited)
Six Months Ended June 30
------------------------------------------------
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) for period $ (6,860) $ 501
Adjustments to reconcile net income to net cash used in operating activities:
Equity in income of investee - net -- (366)
Depreciation and amortization 1,079 134
(Income) loss from discontinued operations 9 (1,074)
Foreign exchange translation 14 --
Noncash compensation 239 --
Noncash financing costs 61 --
Noncash compensation on acquisition of Mosaic Technologies Inc. 500 --
Noncash interest 9 --
Changes in operating assets and liabilities:
Accounts receivable (595) (257)
Inventories 85 351
Other assets (95) (116)
Deferred tax benefit (2,261) --
Deferred charges (1,764) --
Deferred financing costs (294) --
Accounts payable and accrued liabilities 61 (1,913)
Net liabilities of discontinued operations (75) 114
Noncash adjustment to goodwill (77) 306
-------- --------
Net cash used in operating activities (9,964) (2,320)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in discontinued operation -- (1,560)
Capital expenditures (2,138) (36)
Purchase of marketable securities (55) --
Investment in and advances to Intelect -- --
Investment in other assets (1,276) (406)
Loan receivable 600 --
Proceeds on sale of fixed assets 57 --
Acquisition of Intelect, Inc. -- (632)
Acquisition of DNA Enterprises, Inc. (3,010) --
Acquisition of Mosaic Information Technologies Inc. (2,004) --
-------- --------
Net cash used in investing activities (7,826) (2,634)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures 5,000 --
Proceeds from issuance of notes payable -- 10,502
Payments on notes payable (880) (6,032)
Proceeds from issuance of capital leases 79 10
Payments on capital lease obligations (59) (42)
Payment of long-term debt (119) --
Proceeds from issuance of common shares 1,813 193
Quasi-reorganization -- 499
-------- --------
Net cash provided by financing activities 5,834 5,130
-------- --------
Net increase (decrease) in cash and cash equivalents (11,956) 176
Cash and cash equivalents, beginning of period 15,039 2,555
-------- --------
Cash and cash equivalents, end of period $ 3,083 $ 2,731
======== ========
</TABLE>
INTELECT COMMUNICATIONS SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 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 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 entries 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 of which
$625,000 was paid in June, 1996 with the balance due in quarterly installments,
in arrears, from September, 1996. The licensed technology 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 costs of good 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>
June 30
-------------------------------------
Mosaic DNA
------ ---
<S> <C> <C>
Cash $ (6) $ 3
Accounts receivable 55 621
Inventory 245 -
Property and equipment 81 502
Goodwill 4,675 7,280
Accounts payable and accruals (285) (214)
Debt (16) (180)
---------------- ----------------
$ 4,749 $ 8,012
================ ================
</TABLE>
Long-term Debt (thousands of U.S. Dollars)
<TABLE>
<CAPTION>
June 30 December 31
---------------- ----------------
1996 1995
---- ----
<S> <C> <C>
Subordinated debentures - at 6% due in five equal
annual installments starting June 1996 $ 216 $ 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
commencing September, 1996 (ii) 2,642 -
Other
- 985
---------------- ----------------
7,858 1,209
Less: current installments (3,848) (1,041)
---------------- ----------------
$ 4,010 $ 168
================ ================
</TABLE>
Notes:
(i) Deferred purchase price payments relate to the
acquisition of DNA Enterprises, Inc. (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 a
further 300,000 Common Shares at $7.00 per share on the
second anniversary of Closing. 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 for in anticipation of this Put option.
(ii) $3,500,000 of which $625,000 was paid in June, 1996. The
balance is payable quarterly, in arrears, in installments
of $325,000 from September, 1996.
CONVERTIBLE DEBENTURES
During the quarter ended June 30, 1996, the Company issued Convertible
Debentures (the "June Debentures") in the aggregate principal amount of
$5,000,000 bearing interest at 7.5% payable quarterly in arrears. The June
Debentures mature on June 7, 1998, 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 at 82.5% of the NASDAQ trading price on conversion. One half
of the aggregate principal amount of the June Debentures are currently
convertible into Common Shares with the balance convertible after September 5,
1996.
The Company may require the holders of the June Debentures to purchase an
additional $5,000,000 on substantially the same terms as the June Debentures and
the holders have the right to require the Company to issue such additional
debentures, however, the Company will not be required to issue such debentures
if the Company has filed a registration statement with the SEC on or before
October 1, 1996 for the issuance of common shares and, in the opinion of
investment bankers engaged for that purpose, the issuance of debentures would
materially adversely affect the proposed offering.
6
SOFTWARE DEVELOPMENT COSTS
Capitalization of development costs 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. Technological feasibility and future revenue
potential has now been established for the Company's SONETLYNX, S4o and Mosaic
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>
June 30 December 31
---------------- ----------------
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 2,113 $ 1,554
Work in progress 322 544
Finished goods 974 1,169
---------------- ----------------
3,409 3,267
Less: allowance for obsolescence 650 730
---------------- ----------------
$ 2,759 $ 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. The Statement 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, Black-Scholes Model, makes certain
assumptions about the underlying stock based primarily on its past performance
to determine future performance.
During the second quarter 1996, the Company issued certain warrants to
third parties as partial payment of financial advisory fees in connection with
the June Debentures. These warrants were issued to third parties as part payment
of a finders fee and entitle the holders to purchase a total of 125,000 of the
Company's common shares at a price of $13.1875 per share. Using the prescribed
Black-Scholes Model the value placed on these warrants is $1,058,000. This
amount , together with other debt issue costs of $303,000 are being amortized to
financing expense over the life of the June Debentures or until conversion takes
place at which time these costs will be debited to paid in capital.
SUBSEQUENT EVENTS
On August 8, 1996 (the "Issuance Date") the Company issued an additional
$10,000,000 in Convertible Debentures (the "August Debentures") due on August 8,
1998, bearing interest at 7.5% and the principal amount of which is convertible
into common shares in equal one-third amounts sixty, ninety and one hundred
twenty days after the Issuance Date at the lower of (i) 15% discount to the
average five day closing bid price on NASDAQ prior to the Notice of Conversion
date and (ii) the fixed price conversion of $11.0825, subject to a maximum of
2,602,107 shares. In the event that the conversion price would result in a
higher number of shares the Company would be required to seek shareholder
approval to issue additional shares or to redeem the unconverted debentures for
cash in an amount equal to 125% of their face value. If shareholder approval is
not obtained and the Company is unable to redeem the debenture balance, the
Company is subject to a penalty of $500 per day, per million, of the remaining
principal amount of the August Debentures.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE PERIOD ENDED JUNE 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 intended benefits of improving revenues, operating performance and
financial results in future reporting periods.
During the period ended June 30, 1995, the Company completed its purchase
of Intelect, Inc. and included the results of Intelect, Inc. from date of
acquisition April 24, 1995, but had not yet acquired DNA Enterprises, Inc.
("DNA") or Mosaic Information Technologies Inc.("Mosaic"). Management does not
consider 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 and other revenue:
<TABLE>
<CAPTION>
(Thousands of U.S. Dollars)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 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 125.3% 78.4% 89.6% 75.3%
------------------ ------------------ ----------------- -----------------
Gross profit (25.3%) 21.6% 10.4% 24.7%
Selling, general and administrative 168.3% 79.6% 115.7% 71.5%
Engineering and development 88.9% 76.0% 35.7% 73.1%
Interest expense 5.4% .5% 3.0% .5%
Amortization and depreciation 33.8% 20.8% 19.3% 20.0%
Equity in loss of investee .0% 43.6% .0% 41.9%
------------------ ------------------ ----------------- -----------------
Operating (loss) income before income taxes (321.7%) (198.9%) (163.3%) (182.3%)
Income (loss) from discontinued operations .0% 129.5% (.2%) 160.5%
------------------ ------------------ ----------------- -----------------
Income (loss) before extraordinary item (321.7%) (69.5%) (163.5%) (21.7%)
Equity in extraordinary gain of investee .0% 100.5% .0% 96.6%
------------------ ------------------ ----------------- -----------------
Income (loss) before income taxes (321.7%) (31.0%) (163.5%) (74.9%)
------------------ ------------------ ----------------- -----------------
</TABLE>
NET SALES AND SERVICES
Net sales and services revenue for the three months ended June 30, 1996
increased 213% to $1,916,000 from $613,000 in the three month period ended June
30, 1995. For the three months ended June 30 1996 and 1995 respectively, these
sales were comprised of (i) S4o product of 7.2% and 27.1%, manufactured by
Intelect, Inc., (ii) information security products 6.8% and 0%, distributed by
the Company's U.K. based value added reseller, (iii) engineering service fees of
40.1% and 0% , for services provided by DNA, (iv) videoconferencing sales of
1.5% and 0% through Mosaic from the date of acquisition (March 29, 1996) and (v)
other products 44.4% and 72.9%, consisting primarily of analog air traffic
control communications switching systems.
The sales cycle for the Company's new digital switch product line, S4o,
effectively commenced with customer acceptance for its first major commercial
installation in Iceland in February 1996. This installation went "live" during
the third week of July and is functioning on a stand alone basis. The Company
currently expects increased sales of this product during the second half of 1996
and thereafter.
Initial releases of the Company's new SONETLYNX 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 expected during the second half of 1996 and
upon completion of the OC-3 version targeted for release during the fourth
quarter of 1996.
8
The Company also expects to realize increased revenues from its sales of
videoconferencing products during the second half of 1996. These products became
commercially available during the second quarter of 1996. Marketing, sales and
service organizations were hired and focused concurrently. Material sales
possibilities are being developed through demonstrations, tests and pilot
programs with customers in the principal category of "Fortune 2000" companies
with established networks and defined applications. Initial sales may vary
materially from quarter to quarter.
Information security products are sold primarily to the military market
which is influenced by unpredictable events and budgetary constraints which
cause significant variances in sales from quarter to quarter. The operation that
has marketed these products in the past is being restructured to emphasize sales
of the Company's newly developed SONETLYNX and video-conferencing product lines.
GROSS PROFIT
The Company's gross loss of $517,000 or (25.3%) for the three months ended
June 30, 1996 was a decrease of $656,000 compared to a gross margin of $139,000
or 21.6% for the three months ended June 30, 1995. The second 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 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 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 June 30, 1996 SG&A expenses were up $2,928,000
at $3,440,000 or 168.3% from $512,000 or 79.6% compared with the three months
ended June 30, 1995. This increase is due in part to the acquisitions of new
business 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 June 30, 1996 increased 509% to $1,479,000 compared with $243,000 for the
same period 1995. G&A expenses were up 629% at $1,961,000 compared with $269,000
for the same period 1995.
Marketing expenses relating to the rollout of the SONETLYNX product line
and initial marketing for the CS4 in advance of sales amounted to $372,000.
Marketing expenses relating to the Company's videoconferencing product line in
advance of sales amounted to $247,000. Marketing expenses relating to the market
development of the Company's product into the European market amounted to
$278,000. In addition, the Company expensed $157,000 and $202,000 on demo units
and trade shows, respectively.
Prior year administrative expenses reflect traditional costs primarily
associated with the Company's public status and related reporting requirements.
However, legal and audit have increased substantially from prior years and are
expected to continue in a similar trend. Deferred financing costs associated
with the Company's issuance of the June Debentures amounted to $303,000 in cash
expenditures and $1,058,000 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.
INTEREST EXPENSE
Interest expense increased to $110,000 or 5.4% from $3,000 or .5% for the
three months ended June 30, 1996 and 1995 respectively. The current quarter
amount represents interest on (i) debt at a fixed rate of 6% generating $13,000
for the three months ended June 30, 1996, incurred to finance the Company's
acquisitions, which was retired on June 27, 1996, (ii) a line of credit of
$300,000 to finance receivables which bears interest at 12% generating $19,000;
(iii) Debentures owed to the previous owners of Intelect, Inc., which bears
interest at 7.5% generating $22,000, (iv) Convertible Debentures issued by the
Company in June, 1996, which bears interest at 7.5% generating $18,000; (v)
non-cash interest of $28,000 being the 17.5% redemption premium of the June
Debentures, which is being amortized over the life of the June Debentures
pursuant to APB 21; and (vi) capital leases of $12,000.
9
AMORTIZATION AND DEPRECIATION
Amortization and depreciation is comprised of the following (thousands of
U.S. Dollars):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Depreciation of Property & Equipment $ 219 $ 27 $ 340 $ 27
Amortization of Goodwill 446 107 689 107
Technology Amortization 25 - 50 -
-------------- -------------- -------------- --------------
$ 690 $ 134 $ 1,079 $ 134
============== ============== ============== ==============
</TABLE>
Depreciation of property and equipment has increased in part to the recent
acquisitions. Goodwill is amortized over periods from 10 - 15 years and has also
increased due to the acquisitions of DNA and Mosaic. Technology amortization is
for intellectual property purchased in 1995.
ENGINEERING AND DEVELOPMENT (E&D)
E&D expenses for the three months ended June 30, 1996 were $1,816,000 or
88.9% up from $489,000 or 76.0% for the three months ended June 30, 1995. This
expense is comprised primarily of hardware labor costs that are not
capitalizable under FAS 86 for the CS4 ($804,000) and SONETLYNX ($572,000)
products in accordance with the Company's policies. The balance of $440,000
relates to further development of the Company's videoconferencing ($333,000) and
S4o, ($107,000) products. This compares with E&D expense for the same period in
1995 of $369,000 and $120,000 on the S4o and SONETLYNX 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 June 30, 1996 to $nil from $832,000 for the same
period in 1995.
INCOME TAX BENEFIT
The Company recorded a tax benefit for the loss during the quarter ended
June 30, 1996 of $1,708,000 on the U.S. based operations. This benefit reflects
a tax rate of 34% and the Company's current belief that future taxable income
will be generated 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased $13,515,000 at June 30, 1996 to
$1,111,000 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 June
Debentures and August Debentures together with the $5,000,000 from the
additional debentures will be sufficient to meet its capital requirements for
the next twelve months. Sales of substantial amounts of common shares, or the
perception that these sales could occur, could adversely affect prevailing
market prices
10
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.
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 Exchange 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 S4o 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. Potential customers for the CS4 are
expected to 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.
PART 2. OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1996 Annual General Meeting of the Shareholders of the Company, held
on June 26, 1996, the maximum number of six directors was approved, three
directors were elected and the auditors for the ensuing year were appointed. The
tabulation of the vote was as follows:
<TABLE>
<CAPTION>
Shares Shares Shares
Voted For Withheld Against
--------- -------- -------
<S> <C> <C> <C>
Directors
- ---------
Fixing the maximum number of directors at six 8,524,345 3,973,935 27,257
Directors
- ---------
Anton von Liechtenstein 8,566,205 3,945,973 13,359
Jeremy T.G. Posner 8,566,205 3,945,973 13,359
Wendell M. Hollis 8,566,205 3,945,973 13,359
Appointment of Auditors
- -----------------------
Appointment of KPMG Peat Marwick ("KPMG") of
Hamilton, Bermuda as auditors for the ensuing year 8,568,153 3,957,384 -
</TABLE>
11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
4 Form of 7.5% Convertible Debenture due June 7, 1998 of Intelect
Communications Systems Limited
10(i) Convertible Securities Agreement dated June 7, 1996 among the
Company and Infinity Investors, Ltd. ("Infinity") and
Seacrest Capital Limited ("Seacrest")
10(ii) Registration Rights Agreement among Intelect Communications
Systems Limited and Infinity Investors, Ltd. and Secrest
Capital Limited
10(iii) Letter Agreement, dated July 31, 1996 among the Company, Infinity
and Seacrest
11 Calculation of Earnings Per Share
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K:
On June 3, 1996, the Company filed the audited financial statements of
Mosaic Information Technologies, Inc. on Form 8-K/A to Current Report on
Form 8-K filed April 12, 1996.
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 : August 14, 1996 /s/ RHIANON M. PEDRO
------------------- -------------------------
Rhianon M. Pedro
Chief Financial Officer
(principal financial officer)
Date: August 14, 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 JUNE 7, 1998
$1,000,000 June 7, 1996
FOR VALUE RECEIVED, INTELECT COMMUNICATIONS SYSTEMS LIMITED, a Bermuda
company (the "Company"), hereby promises to pay to SECREST CAPITAL LIMITED, a
Nevis, West Indies corporation, or registered assigns (the "Holder") on June 7,
1998 (the "Maturity Date"), the principal amount of ONE MILLION DOLLARS
($1,000,000) 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") has been issued pursuant to that certain
Convertible Securities Agreement executed by the Holder, the Company and
Infinity Investors, Ltd. dated June 7, 1996 (the "Agreement").
ARTICLE 1. INTEREST.
The Company shall pay interest on the unpaid principal amount of this
Debenture at the rate of Seven and One-Half Percent (7.5%) per year, payable in
cash, payable quarterly in arrears 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 June
7, 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 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") at the times hereafter specified. The number of Common Shares issuable
upon the conversion of this Debenture is determined by dividing the
7.5% CONVERTIBLE DEBENTURE - PAGE 1
(SECREST CAPITAL LIMITED)
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, 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 all of the Debenture also apply to the conversion of a portion of
it. All or any portion of the 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 this Debenture; an
additional one-third (1/3) of the principal balance of all such Debentures
issued to the Holder 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 Holder shall be convertible beginning 120 days
after the date of such Debentures. The conversion price shall be the lesser of
(A) $17.50 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 $4.95 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 Holder
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. The Company shall repay in full
the Agreed Redemption Amount 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.
7.5% CONVERTIBLE DEBENTURE - PAGE 2
(SECREST CAPITAL LIMITED)
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. 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
two (2) business days after receipt of the Notice of Conversion as aforesaid,
providing the Company has received the Debenture from the Holder, the Company
shall deliver a certificate with restrictive legend 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 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
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.
7.5% CONVERTIBLE DEBENTURE - PAGE 3
(SECREST CAPITAL LIMITED)
SECTION 3.7 CURRENT MARKET PRICE
(a) As used herin, 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
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 quoted bid price shall mean
(i) the closing bid prices thereof on any such trading date, as reported by
Bloomberg, L.P. 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. 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 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.
7.5% CONVERTIBLE DEBENTURE - PAGE 4
(SECREST CAPITAL LIMITED)
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 become 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 and such failure continues for the period and after
the notice specified below, (e) from and after October 31, 1996, 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 ceases 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, or (g) 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.
ARTICLE 7. REGISTERED DEBENTURES.
SECTION 7.1. SERIES. This Debenture is one of a numbered series of
Debentures issued to the Holder and Infinity Investors, Ltd. pursuant to the
Agreement having an aggregate principal amount of $5,000,000, which are
identical. Such Debentures are referred to herein collectively as the
"Debentures." Holder, at its option, may exchange this Debenture for a series of
Debentures of the Company in denominations of at least $100,000.
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 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
7.5% CONVERTIBLE DEBENTURE - PAGE 5
(SECREST CAPITAL LIMITED)
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 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
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.
7.5% CONVERTIBLE DEBENTURE - PAGE 6
(SECREST CAPITAL LIMITED)
All notices to Holders are to be mailed to:
27 Wellington Road
Cork, Ireland
Attn: James G. O'Brien
Telephone: 353 21 501 109
Fax: 353 21 501 255
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 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.
7.5% CONVERTIBLE DEBENTURE - PAGE 7
(SECREST CAPITAL LIMITED)
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.
IN WITNESS WHEREOF, the Company has duly executed this Debenture as of
the date first written above.
INTELECT COMMUNICATIONS SYSTEMS LIMITED
By: /s/ Peter G. Leighton
---------------------
Name Peter G. Leighton
Title President
[Corporate Seal]
7.5% CONVERTIBLE DEBENTURE - PAGE 8
(SECREST CAPITAL LIMITED)
EXHIBIT A
FORM OF DEBENTURE
(The attached form applies to Secrest)
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 $10 per
share, of Intelect Communications Systems Limited as follows:
[Complete if less than all of Dollars ($ )*
principal amount is to be ---------------------------------------------
converted] ($10,000 or integral multiples of $10,000)
[Signature must be guaranteed ---------------------------------------------
if registered holder of stock (Name of Holder of shares if different than
differs from registered Holder registered Holder of Debenture]
of Debenture)
---------------------------------------------
(Address of Holder if different than address
of registered Holder of Debenture)
---------------------------------------------
(Social Security or EIN of Holder of shares
if different than Holder of Debenture)
*If the principal amount of the Debenture to be converted is less than
the entire principal amount thereof, a new Debenture for the balance of
the principal amount shall be returned to the Holder of the Debenture.
All notices to be transmitted by hand delivery, facsimile or overnight
courier.
Date:_______ Sign:________________________________________________________
(Signature must conform in all respects to name of
Holder shown on face of this Debenture)
NOTICE OF CONVERSION
ASSIGNMENT OF NOTE
The undersigned hereby sell(s) and assign(s) and transfer(s) unto
________________________________________________________________________________
(name, address and SSN or EIN of assignee)
Dollars ($ )
________________________________________________________________________________
(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)
ASSIGNMENT OF NOTE
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 JUNE 7, 1998
$4,000,000 June 7, 1996
FOR VALUE RECEIVED, INTELECT COMMUNICATIONS SYSTEMS LIMITED, a Bermuda
company (the "Company"), hereby promises to pay to INFINITY INVESTORS, LTD., a
Nevis, West Indies corporation, or registered assigns (the "Holder") on June 7,
1998 (the "Maturity Date"), the principal amount of FOUR MILLION DOLLARS
($4,000,000) 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") has been issued pursuant to that certain
Convertible Securities Agreement executed by the Holder, the Company and Secrest
Capital Limited dated June 7, 1996 (the "Agreement").
ARTICLE 1. INTEREST.
The Company shall pay interest on the unpaid principal amount of this
Debenture at the rate of Seven and One-Half Percent (7.5%) per year, payable in
cash, payable quarterly in arrears 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 June
7, 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 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") at the times hereafter specified. The number of Common Shares issuable
upon the conversion of this Debenture is determined by dividing the
NOTICE OF CONVERSION
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, 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 all of the Debenture also apply to the conversion of a portion of
it. All or any portion of the 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 this Debenture; an
additional one-third (1/3) of the principal balance of all such Debentures
issued to the Holder 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 Holder shall be convertible beginning 120 days
after the date of such Debentures. The conversion price shall be the lesser of
(A) $17.50 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 $4.95 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 Holder
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. The Company shall repay in full
the Agreed Redemption Amount 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.
NOTICE OF CONVERSION
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. 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
two (2) business days after receipt of the Notice of Conversion as aforesaid,
providing the Company has received the Debenture from the Holder, the Company
shall deliver a certificate with restrictive legend 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 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
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.
NOTICE OF CONVERSION
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
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 quoted bid price shall mean
(i) the closing bid prices thereof on any such trading date, as reported by
Bloomberg, L.P. 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. 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 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.
NOTICE OF CONVERSION
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 and such failure continues for the period and after
the notice specified below, (e) from and after October 31, 1996, 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 ceases 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, or (g) 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.
ARTICLE 7. REGISTERED DEBENTURES.
SECTION 7.1. SERIES. This Debenture is one of a numbered series of
Debentures issued to the Holder and Secrest Capital Limited pursuant to the
Agreement having an aggregate principal amount of $5,000,000, which are
identical. Such Debentures are referred to herein collectively as the
"Debentures." Holder, at its option, may exchange this Debenture for a series of
Debentures of the Company in denominations of at least $100,000.
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 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
NOTICE OF CONVERSION
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 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
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.
NOTICE OF CONVERSION
All notices to Holders are to be mailed to:
27 Wellington Road
Cork, Ireland
Attn: James G. O'Brien
Telephone: 353 21 501 109
Fax: 353 21 501 255
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 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.
NOTICE OF CONVERSION
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.
IN WITNESS WHEREOF, the Company has duly executed this Debenture as of
the date first written above.
INTELECT COMMUNICATIONS SYSTEMS LIMITED
By: /s/ Peter G. Leighton
------------------------------
Name Peter G. Leighton
Title President
[Corporate Seal]
NOTICE OF CONVERSION
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 $10 per
share, of Intelect Communications Systems Limited as follows:
[Complete if less than all of Dollars ($ )*
principal amount is to be ---------------------------------------------
converted] ($10,000 or integral multiples of $10,000)
[Signature must be guaranteed ---------------------------------------------
if registered holder of stock (Name of Holder of shares if different than
differs from registered Holder registered Holder of Debenture)
of Debenture]
---------------------------------------------
(Address of Holder if different than address
of registered Holder of Debenture)
---------------------------------------------
(Social Security or EIN of Holder of shares
if different than Holder of Debenture)
*If the principal amount of the Debenture to be converted is less than
the entire principal amount thereof, a new Debenture for the balance of
the principal amount shall be returned to the Holder of the Debenture.
All notices to be transmitted by hand delivery, facsimile or overnight
courier.
Date:_________ Sign:__________________________________________________
(Signature must conform in all respects to name of
Holder shown on face of this Debenture)
NOTICE OF CONVERSION
ASSIGNMENT OF NOTE
The undersigned hereby sell(s) and assign(s) and transfer(s) unto
- --------------------------------------------------------------------------------
(name, address and SSN or EIN of assignee)
Dollars ($ )
- --------------------------------------------------------------------------------
(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)
CONVERTIBLE SECURITIES AGREEMENT
OF INTELECT COMMUNICATIONS SYSTEMS LIMITED
THIS CONVERTIBLE SECURITIES AGREEMENT (hereinafter the "Agreement") is
made and entered into as of this 7th day of June, 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
(hereinafter the "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) SECREST 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 an aggregate of Five
Million Dollars ($5 million U.S.) principal amount of Debentures,
convertible into Shares in accordance with the terms set forth in the
form of Debenture attached as Exhibit A to this Agreement.
(ii) Buyers shall pay an aggregate of Five Million Dollars
($5 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, pursuant to the
Instruction Letter in the form attached hereto as Exhibit B, to be
executed contemporaneously herewith (the "Instruction Letter").
(iii) Infinity Investors, Ltd. shall subscribe for $4
million of the Debentures and Secrest Capital Limited shall subscribe
for $1 million of the Debentures.
2. BUYER'S REPRESENTATIONS AND COVENANTS.
Each Buyer severally represents, warrants and covenants to
Seller as follows:
(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 of bankruptcy or other 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
CONVERTIBLE SECURITIES AGREEMENT - PAGE 1
(INTELECT COMMUNICATION SYSTEMS LIMITED)
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. 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 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 relied on any information or representations
made by third parties; 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 TAKEN WITHOUT A
VIEW TO THE DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES
ACT OF 1993, 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
CONVERTIBLE SECURITIES AGREEMENT - PAGE 2
(INTELECT COMMUNICATION SYSTEMS LIMITED)
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 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 its 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 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 12,885,537 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;
(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 duly authorized, validly
executed and delivered on behalf of Seller and is a valid and binding
agreement of Seller in accordance with its terms,
CONVERTIBLE SECURITIES AGREEMENT - PAGE 3
(INTELECT COMMUNICATION SYSTEMS LIMITED)
subject to general principles of equity and to bankruptcy or other 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 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 Byelaws 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) Seller will issue one or more Debentures in the name
of each 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 each Buyer, with a legend substantially in the form specified by
Section 2(vi) above, and in such denominations to be specified by each
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 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 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;
(xi) 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);
(xii) 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
CONVERTIBLE SECURITIES AGREEMENT - PAGE 4
(INTELECT COMMUNICATION SYSTEMS LIMITED)
Buyer's written consent, except as required by law, including the
Exchange Act, and in fulfilling its obligations under the Registration
Rights Agreement; and
(xiii) 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. Buyers hereby notify Seller that they intend to
offer for public sale all or any portion of the Shares into which the Debentures
are convertible (the "Notice"). 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
effective with the SEC within sixty (60) days of the Closing Date (the
"Registration Date"), then such failure shall be a breach of the Debentures
entitling Buyers to paid by Seller 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 NASDAQ trading day following the Registration Date in which
the registration of the Shares is not effective with the SEC as provided herein,
which amount shall increase to (i) $666 for each $1 million of Debentures for
each NASDAQ trading day in which such registration is not effective commencing
thirty (30) days after the Registration Date and (ii) $1,000 for each $1 million
of Debentures for each NASDAQ trading day in which such registration is not
effective commencing sixty (60) days after the Registration Date. 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, June 7, 1996, or at such time to be mutually
agreed in accordance with the Instruction Letter (the "Closing Date").
6. ADDITIONAL AGREEMENTS.
(i) Seller hereby grants to Buyers a right of first
refusal on all private financings offered by Seller within a period of
120 days following the date of this Agreement, except for underwritten
private financings. Such right of first refusal shall authorize Buyers
or any affiliates of Buyers which are accredited investors, at their
option, to participate in all or a portion of such financing. Seller
shall afford Buyers at least 15 days notice to exercise said option
following delivery of the written terms of the proposed financing,
during which period Buyers shall be entitled to obtain all available
information from Seller with respect to the financing and Seller's
current reports as filed with the SEC.
CONVERTIBLE SECURITIES AGREEMENT - PAGE 5
(INTELECT COMMUNICATION SYSTEMS LIMITED)
(ii) Buyers hereby agree to acquire an additional $5
million of debentures from Seller on substantially the same terms as
set forth in this Agreement, with said sum to be advanced 135 days
after the Closing Date (the "Future Transaction"). Consummation of the
Future Transaction shall be subject to the following conditions:
(a) Execution and delivery of documentation
substantially similar to that set forth in this Agreement (and the
Exhibits attached hereto) by each of Seller and Buyers, where
applicable;
(b) There shall have been no material adverse
change in the business, operations, financial condition, properties
or prospects of Seller from the Closing Date until the date of
consummation of the Future Transaction;
(c) The current market price per share of common
shares of Seller (as such phrase is used in the Debenture) shall not,
on average over a 10 trading day period ending on the date of
consummation of the Future Transaction (the "Testing Period") be (I)
less than $6.00, or (II) more than $17.50;
(d) The average trading volume of Seller's
shares of common shares on NASDAQ for the Testing Period shall not be
less than 75,000;
(e) Seller shall have at least 12,885,537 common
shares issued and outstanding on the date of consummation of the Future
Transaction; and
(f) Seller shall have complied in all respects
prior to the date of the Future Transaction with all terms and
conditions of this Agreement and of the Debentures, including, without
limitation, timely satisfying the registration requirement set forth
in Section 4 by the applicable Registration Date (and such
registration statement shall have continuously remained effective
through the date of consummation of the Future Transaction).
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.
(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.
CONVERTIBLE SECURITIES AGREEMENT - PAGE 6
(INTELECT COMMUNICATION SYSTEMS LIMITED)
(iii) Seller shall pay to Buyers $7,500 at the Closing, in
the manner described in the Instruction Letter, to reimburse Buyers for
attorneys' fees and related costs of consummating the transactions
contemplated herein.
[Signature page follows]
CONVERTIBLE SECURITIES AGREEMENT - PAGE 7
(INTELECT COMMUNICATION SYSTEMS LIMITED)
IN WITNESS WHEREOF, this Agreement was duly executed on the date first
written above.
Official Signatory of Buyer:
INFINITY INVESTORS, LTD.
By:___________________________________
Title:________________________________
Address:
27 Wellington Road
Cork, Ireland
(Telephone) 353 21 501 109
(Fax) 353 21 501 255
Attn: Mr. James G. O'Brien
SECREST CAPITAL LIMITED
By:___________________________________
Title:________________________________
Address:
27 Wellington Road
Cork, Ireland
(Telephone) 353 21 501 109
(Fax) 353 21 501 255
Attn: Mr. James G. O'Brien
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
CONVERTIBLE SECURITIES AGREEMENT - PAGE 7
(INTELECT COMMUNICATION SYSTEMS LIMITED)
EXHIBIT A
FORM OF DEBENTURE
(The attached form applies to Infinity)
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made
and entered into as of June 7, 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 SECREST 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 a
series of Debentures, in an 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 statement, the Company shall use all reasonable efforts to promptly
file the registration statement on an appropriate alternative form.
REGISTRATION RIGHTS AGREEMENT - PAGE 1
(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) 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
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 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
$100,000, 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
REGISTRATION RIGHTS AGREEMENT - PAGE 2
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 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 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 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
REGISTRATION RIGHTS AGREEMENT - PAGE 3
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 "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.
REGISTRATION RIGHTS AGREEMENT - PAGE 4
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. 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) The 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 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
REGISTRATION RIGHTS AGREEMENT - PAGE 5
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 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
REGISTRATION RIGHTS AGREEMENT - PAGE 6
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.
(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) if to the Investor
Infinity Investors, Ltd.
27 Wellington Road
Cork, Ireland
REGISTRATION RIGHTS AGREEMENT - PAGE 7
Attn: James G. O'Brien
Fax: 353 21 501 255
Secrest Capital Limited
27 Wellington Road
Cork, Ireland
Attn: James G. O'Brien
Fax: 353 21 501 255
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 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.
(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
REGISTRATION RIGHTS AGREEMENT - PAGE 8
or referred to herein, concerning the registration rights granted by the Company
pursuant to this Agreement.
[Signature page follows]
REGISTRATION RIGHTS AGREEMENT - PAGE 9
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
INFINITY INVESTORS, LTD.
By:____________________________________
Name:__________________________________
Title:_________________________________
SECREST CAPITAL LIMITED
By:____________________________________
Name:__________________________________
Title:_________________________________
REGISTRATION RIGHTS AGREEMENT - PAGE 10
INFINITY INVESTORS, LTD.
SEACREST CAPITAL LIMITED
27 Wellington Road
Cork, Ireland
July 31, 1996
VIA FACSIMILE - 441/292-5560
Intelect Communications Systems Limited
Reid House, 31 Church Street
Hamilton, Bermuda
Attention: Peter G. Leighton
Re: Amendment of Convertible Securities Agreement and
Debentures Issued Thereunder
Gentlemen:
Reference is hereby made to that certain Convertible Securities
Agreement of Intelect Communications Systems Limited dated June 7, 1996 (the
"Subscription Agreement") by and among Intelect Communications Systems Limited
("Intelect"), Infinity Investors, Ltd. ("Infinity") and Seacrest Capital Limited
("Seacrest") (Infinity and Seacrest being collectively referred to as "Buyers"),
pursuant to which Buyers subscribed for an aggregate of $5 million principal
amount of Debentures convertible into shares of common stock of Intelect (the
"Debentures"). Pursuant to Section 6 of the Subscription Agreement, Intelect
granted Buyers a right of first refusal on certain private financings offered by
Intelect. Intelect has disclosed to Buyers its desire to consummate, within
seven (7) business days of the date hereof (the "Termination Date"), a private
placement of up to $10 million aggregate principal amount of convertible
debentures on terms substantially as previously described to Buyers (the
"Disclosed Financing"). Intelect has requested that Buyers waive its right of
first refusal with respect to the Disclosed Financing. Buyers are willing to
provide such waiver on the terms hereafter described. Accordingly, Intelect and
Buyers hereby agree as follows (which agreements, to the extent applicable,
shall represent an amendment to the Subscription Agreements and the Debentures):
1. Buyers hereby waive their right of first refusal as described in
Section 6 of the Subscription Agreement with respect to the Disclosed Financing,
provided the Disclosed Financing is consummated prior to the Termination Date.
Intelect Communications Systems Limited
July 31, 1996
Page 2
2. Buyers and Intelect hereby amend the second sentence of
Section 3.1(b) of each Debenture to be and read in its entirety
as follows:
"All or any portion of the Debenture is convertible at any
time, and from time to time, as follows: (i) One-half (1/2) of
the principal balance of all Debentures issued to Holder as
described in Section 7.1 hereafter shall be convertible
beginning on the earlier to occur of August 9, 1996 or the
date the securities and Exchange Commission declares effective
that certain Registration Statement on Form S-3 of the Company
filed with the Securities and Exchange Commission on or about
July 29, 1996 (such earlier to occur date being referred to as
the "Trigger Date"), and (ii) the final one-half (1/2) of the
principal balance of all such Debentures issued to the Holder
shall be convertible beginning thirty (30) days after the
Trigger Date."
3. Intelect and Buyers agree to amend their agreements concerning the
Future Transaction (as define din Section 6 of the Subscription Agreement) as
follows: commencing October 1 and terminating October 20, 1996 (the "Option
Period"), Intelect shall have the option (the "Call") to cause Buyers to
consummate the Future Transaction, and Buyers shall have the option (the "Put")
to require Intelect to accept consummation of the Future Transaction, in each
case on substantially identical terms as set forth in the Subscription
Agreement; provided, Intelect may refuse to accept a Put exercised by Buyers
during the Option Period if (A) on or before October 1, 1996 Intelect has filed
with the Commission a registration statement for the issuance of debt or equity
securities for at least $10,000,000 in aggregate proceeds to Intelect which has
not been withdrawn and which offering is to be underwritten by a nationally
recognized investment banking firm (the "Underwriter") on customary terms and
conditions, and (B) the Underwriter has delivered written notice to Intelect and
Buyers that the exercise of the Put will materially and adversely affect the
ability of Intelect to consummate such underwritten offering.
4. Intelect and Buyers agree to correct a typographical error such that
all references to "Seacrest" Capital Limited in the Subscription Agreement and
the Debentures are hereby changed to "Seacrest" Capital Limited.
5. Except as described herein, the terms and provisions of the
Subscription Agreement and each Debenture are ratified and confirmed and shall
continue in full force and effect.
Intelect Communications Systems Limited
July 31, 1996
Page 3
6. Intelect and each Buyer agrees that at any time and from time to
time, upon written request, it shall execute and deliver such further documents
and do such further acts and things as the requesting party may reasonably
request in order to fully effect the purchase of this letter agreement.
7. From and after the date that Intelect and the Buyers each have
executed this agreement, references in the Subscription Agreement and the
Debentures to the Subscription Agreements and the Debentures shall refer to such
agreement as amended hereby. Intelect further agrees that each certificate for
Debentures issued on or after the date hereof (whether for exchange or in
connection with a partial conversion of the Debentures) shall be issued with the
provisions of Section 3.1(b) reflecting the amendment to such Section set forth
herein.
To evidence your agreement with the foregoing, please countersign this
letter in the space provided below. This letter may be executed in one or more
counterparts and by facsimile signature.
Yours very truly,
SEACREST CAPITAL LIMITED
By:/s/ James E. Martin
----------------------------
Title: President and Director
-------------------------
INFINITY INVESTORS, LTD.
By:/s/ J.A. Loughran
----------------------------
Title: Director
-------------------------
ACKNOWLEDGED AND AGREED TO:
INTELECT COMMUNICATIONS SYSTEMS LIMITED
By:/s/ Peter G. Leighton
--------------------------
Title: President
-----------------------
EXHIBIT 11
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
---------------------------------- ----------------------------------
1996 1995 1996 1995
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Primary and Fully Diluted Loss Per Share
Shares in issue beginning of period 11,385,117 10,916,475 11,385,117 10,916,475
Shares issued (weighted average) 799,876 45,709 799,876 45,709
---------------- ---------------- ---------------- ----------------
Weighted average shares in issue end of period 12,184,993 10,962,184 12,184,993 10,962,184
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 1,131,592 291,941 977,226 278,715
---------------- ---------------- ---------------- ----------------
Total weighted average common shares and
common stock equivalents 13,316,585 11,415,116 13,162,219 11,401,890
================ ================ ================ ================
Net income (loss) for period (thousand of U.S. Dollars) $ (4,865) $ 199 $ (6,860) $ 501
================ ================ ================ ================
Earnings (loss) per share $ (0.36) $ $ 0.02 $ (0.52) $ 0.04
================ ================ ================ ================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,083
<SECURITIES> 85
<RECEIVABLES> 2,635
<ALLOWANCES> 32
<INVENTORY> 2,759
<CURRENT-ASSETS> 9,086
<PP&E> 4,763
<DEPRECIATION> 613
<TOTAL-ASSETS> 42,930
<CURRENT-LIABILITIES> 7,975
<BONDS> 5,028
0
0
<COMMON> 129
<OTHER-SE> 24,943
<TOTAL-LIABILITY-AND-EQUITY> 42,930
<SALES> 1,916
<TOTAL-REVENUES> 2,044
<CGS> 2,561
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,056
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110
<INCOME-PRETAX> (6,573)
<INCOME-TAX> 1,708
<INCOME-CONTINUING> (4,865)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,865)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
