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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - K
Annual Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the Year Ended December 31, 1996
Commission file number 0-11630
INTELECT COMMUNICATIONS SYSTEMS LIMITED
(Exact Name of Registrant as Specified in Its Charter)
BERMUDA N/A
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 EXECUTIVE DRIVE, RICHARDSON, TEXAS 75081
(Address of Principal Executive Offices) (Zip Code)
972-437-1888
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of the Act
NONE
Securities registered pursuant to Section 12 (g) of the Act
COMMON SHARES PAR VALUE US$0.01 PER SHARE
(Title of Class)
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
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $40,726,569 as of March 31, 1997 (based upon the
average of the highest bid and lowest asked prices on such date as reported on
the Nasdaq National Market).
There were 17,148,029 shares of Common Stock outstanding as of March 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 31, 1996) are incorporated by reference in items 10, 11, 12 and 13 of
PART III hereof.
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PART I
ITEM 1 - BUSINESS
INTRODUCTION
Intelect Communications Systems Limited, a Bermuda company ("Intelect"
or the "Company"), designs, manufactures and sells information technology
products and services focusing on (i) switching products, (ii) network
transmission products and (iii) videoconferencing products. Through its
product lines, the Company believes that it can enable its customers -- public
and private network operators -- to provide enhanced services at reduced costs.
The Company's fiber optic, SONET-based multiplexing network
transmission product, known as SONETLYNX, which the Company began shipping in
July 1996, simultaneously supports voice, data, video and local or wide area
networking connectivity with one centralized network management system. The
Company's LANscape videoconferencing systems provide near television quality
video and audio and support both traditional video and audio conferences as
well as PC software functionality. Commercial shipments of these systems in
sample quantities began in June 1996. The Company's S4 Special Services
Switching System ("S4") is a multimedia, digital voice/data switch used
primarily for air traffic control, air defense, teleconferencing and other
mission critical applications. The S4 has been commercially marketed by the
Company since September 1995. The Company also provides a full range of
support for the design, development, testing and evaluation of advanced
telecommunications software, hardware, and products to customers in the
telecommunications industry and for the Company's ongoing product development
activities.
The Company is developing an intelligent, programmable switch,
designated CS4, to meet the demand for a distributed reliable network
architecture and to provide advanced intelligent call and service applications
for public and private wireline and wireless communications networks. This
switch is based on the architecture of the S4. The Company currently expects
the development program to lead to commercial availability in 1998, subject to
availability of financing and/or a development partner.
PRODUCTS AND SERVICES
Network Transmission Products
In the first quarter of 1996, the Company introduced its fiber optic,
SONET-based multiplexing network transmission products, known as SONETLYNX,
which combine transmission, multiplexing and protocol conversion in a single
unit. SONETLYNX is a SONET/SDH-based OC-1 or OC-3 bandwidth digital
multiplexer that simultaneously supports voice, data, video and local or wide
area networking connectivity with one robust centralized network management
system. SONETLYNX seeks to complement the reliability of fiber with the
redundancy built into its critical components, including the backplane and
control modules. A SONETLYNX network can be as basic as two nodes or expand to
a virtually unlimited number of nodes at different geographic locations. A
node consists of a 14 or 17 module chassis, containing one or more protocol
interface cards. Node design incorporates universal module slots so that any
protocol or auxiliary module fits in any slot, minimizing the investment in
hardware. Configuration, monitoring and maintenance of every SONETLYNX module
in every SONETLYNX node is managed from one central location. SONETLYNX's
modular design facilitates the expansion of any SONETLYNX network by installing
a small, cost-effective and extremely adaptable module into the node. In the
event of transmission
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difficulties, protection switching occurs in under 50 milliseconds and is
virtually transparent to network traffic. The SONETLYNX Network Management
System ("NMS") provides comprehensive network control over networks using
SONETLYNX. The NMS operates in the Microsoft Windows or Windows for Workgroups
environments over Hewlett-Packard's OpenView. The Company plans to expand the
NMS in 1997 to accommodate the Interexchange and Competitive Access
environments on a UNIX platform.
SONETLYNX complies with the OC-1 and OC-3 SONET/SDH standards as
defined by the American National Standards Institute ("ANSI") and the
International Telecommunications Union ("ITU"). SONET/SDH are the current
fiber optic standards, which the Company believes will continue as standards
for the foreseeable future. The Company believes that products adhering to
these specifications provide the open connectivity and data rates that network
managers require.
The Company released OC-1 SONETLYNX products during 1996, including
T1, Voice, 2 wire and 4 wire FXO, FXS and low speed data (RS232, RS422, RS449,
V.35). The Company intends to add ethernet and video interfaces and OC-3
versions of the products in 1997 as well as options permitting interoperability
with the public switched network. Ethernet will enable LANscape to operate
with SONETLYNX.
Videoconferencing Products
The Company designs, manufactures, markets and sells its LANscape
videoconferencing systems for use in the boardroom, roll about and desktop
environments. Sales of the Company's videoconferencing systems commenced in
sample quantities in June of 1996. The Company believes that its proprietary
video transmission and compression/decompression techniques provide exceptional
picture and audio quality. The Company has designed its videoconferencing
systems to include (i) standard interfaces in order to permit compatibility
with "legacy" videoconferencing systems of other providers and (ii) features
that allow operation on various operating systems.
The Company's videoconferencing products support both traditional
video and audio conferences and PC software functionality, such as the
transmission of data, text, and graphics. The products are the LANscape(TM)
and Panorama(TM) desktop communications product and the VuBridge(TM) gateway
product.
LANscape(TM) is a desktop video communications product that combines
boards that fit into the customer's computer with software. It uses the TCP/IP
protocol and M-JPEG video compression to allow users within a local-area
network ("LAN") to communicate using real-time video and audio. The key
feature of this product is superior quality video over the LAN, especially when
compared to the ISDN H.320 standard now prevalent on the desktop.
Panorama(TM) is a desktop video communications product that
communicates over specialized (ISDN) telephone lines and uses the standard
H.320 protocol to communicate with other users whose hardware supports the same
standard. The key feature of this product is its ability to interchange
information with a wide range of other products.
The VuBridge(TM) gateway and conference manager is a hardware and
software product that allows the LANscape user to communicate with H.320 ISDN
systems. VuBridge(TM) provides the translation between compression algorithms
and the network signaling bridging that is needed to convert the LAN TCP/IP
packets to an H.320 encoded ISDN stream.
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Switching Products
Voice/Data Switches
The Company designs, manufactures, markets and sells the S4
Special Services Switching System, a digital voice/data switch used primarily
for special service applications such as air traffic control, air defense,
teleconferencing and other mission critical applications. Commercial sales of
the S4 commenced in September 1995. The Company believes that the S4
represents the next generation of digital switches to be used to provide
reliable voice, data and video switching and conferencing capabilities in
private or public networks. The S4 incorporates extensive administration and
configuration control, diagnostics, statistical data gathering and alarm
facilities. Both direct access and indirect access modes interface with
intercom, interphone and radio circuits. Consequently, the S4 can interface
with other telephone switches or with any type of telephone or radio circuit,
and is designed to conference together hundreds of outside parties, including
radio circuits, simultaneously at the push of a button. The S4 provides (i)
advanced processing power, (ii) fault-tolerance, (iii) a peer-to-peer multiple
processor architecture allowing simultaneous communications between a large
number of parties, and (iv) switch architecture allowing conferencing of a wide
range of devices, including telephones, radios and communications consoles.
The Company also supports predecessor analog products in the
air traffic control and air defense markets served by the digital S4.
Intelligent Programmable Switches
The Company has previously played a key architectural role in
the development of highly sophisticated public network switching equipment,
including DSC Communications Corporation's Class IV and Class V switches, and
has been retained to assist a major interexchange carrier in the development of
specifications for its future network needs.
The Company is developing an intelligent, programmable switch,
known as the CS4, that is being designed to provide Advanced Intelligent
Network ("AIN") applications for public and private telephone networks and
wireless communications systems. The Company believes that the CS4 switch will
form the foundation for an AIN that will allow network operators to implement
new features and services much more rapidly than with traditional switch
products. The CS4 is being designed to operate individually as an adjunct
processor, intelligent peripheral and service switching point or as a
combination of all of these elements in a single switch. In 1996, the Company
brought the development project to the prototype stage. The first beta site
models of the CS4 are currently planned for late 1997 and commercial production
is currently anticipated in 1998. Scheduling of CS4 development and
achievement of these milestones are contingent on the availability of
additional financing and/or a development partner that can bring marketing
support as well as funding to the project.
The CS4 is based on a revolutionary architecture to meet an
aggressive cost goal, but the Company believes it can leverage the strengths of
the existing S4 to assist in the development of the CS4. Control configuration
information is sent among parts by separate redundant packet buses and each
part is assigned its own discrete time slot on a bus, thereby eliminating
traditional blocking between switches. The Company's currently projected
hardware architecture goals for the CS4 include 2,000 ports per node,
expandable to 32,000 ports, and Enhanced Digital Signal Processor ("DSP")
design and multiple redundancy options. Currently projected software
architecture goals for the CS4 include Signalling System 7 (SS7
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advanced network protocol built on distributed architecture), integrated voice
prompt and playback, a service creation environment ("SCE") and maintenance
capabilities.
The Company anticipates that the CS4 pricing will be competitive and
will be based on the number of ports supported by the switch.
Advanced Information Technology Products and Services
The Company provides a full-range of support for the design,
development, testing, and evaluation of advanced telecommunications products to
customers in the telecommunications industry, such as DSC Communications and
many smaller companies. The Company offers a broad array of products and
services to the telecommunications industry, ranging from concept evaluation to
full system development. The Company's products include software technology,
hardware technology, systems architecture and custom DSP product design
services for clients who wish to use the Company's experience to reduce their
time-to-market for DSP-based systems.
Digital Signal Processing Products
The Company's DSP product group design center seeks to develop
state-of-the-art DSP computing products for off- the-shelf sale through
distribution channel partners. DSP microprocessors have progressed to the
point where multimedia processing is now possible with DSP processors such as
the Texas Instruments TMS320C80. The Company's standard DSP products are based
on the TMS320C80, which enables users to effect complex processing functions
involving voice, data, image, and video signals in a flexible, programmable
environment. This multimedia processing capability is provided within standard
PCI and VME bus architectures in the Company's DSP board products, which serve
a wide range of functions such as videoconferencing, image enhancement, machine
vision, medical imaging, and digital wireless communications.
ENGINEERING AND DEVELOPMENT
The Company seeks to maintain the capability to design leading edge
telecommunications equipment for switching, transmission, and videoconferencing
applications.
The present portfolio of SONETLYNX capabilities was achieved by
spending $2,857,000 on product development in 1996. The OC-3, video, and
Public Switched Telephone Network ("PSTN") interoperability improvements
scheduled for 1997 are expected to cost an additional $3,700,000. This
spending will also support path switching, interface to OC-12 and other
features which will not impact sales until after 1997.
The S4 switching product was sustained by development spending of
$300,000 in 1996.
CS4 development described above ("Intelligent Programmable Switches")
was brought to the prototype stage at the end of 1996 at an expense to date of
$5,804,000. The Company plans during 1997 to spend at least an additional
$6,000,000 to bring the product into beta test with one or more customers in
"live" applications. Achievement of this development schedule is contingent on
the participation of a partner or alliance that can bring marketing support as
well as funding to the project.
LANscape and VuBridge videoconferencing systems were materially
modified and improved, at a cost of $1,875,000, from technology acquired during
1996. Present versions of the products operate in the
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Microsoft Windows 3.X and 95 environments. The Company is extending that
compatibility to the Windows NT operating system to capitalize on the full
range of private network opportunities.
The DSP product line was initiated at a cost of $239,000 in 1996. The
Company plans to add industry-leading designs, including a quad, C80 processor
board and one of the first products to use the Texas Instruments TMS320C6X.
MARKETS AND CUSTOMERS
Switching Products
The Company generally markets its S4 switching products through system
integrators and directly through its own sales force, enhanced by attendance at
trade shows and by advertising.
Voice/Data Switches (S4)
The Company's S4 customers generally are large systems
integrators, distributors and end users. They include GTE, Westinghouse,
Hughes Aircraft Company, Lockheed Missiles & Space Company, the United States
Government and numerous international customers, including the Iceland CAA,
Siemens, Newcastle UK Airport, the Indonesian Air Force, the Aruba CAA, and US
West.
Commercial Programmable Switch Systems (CS4)
The initial target markets and customers for the CS4 are
expected to include IXCs, LECs and Wireless/PCS providers. Although the
primary application is designed to be a Computer Telephony Integration ("CTI")
system, specific feature development will vary depending on specific customers
and markets.
Network Transmission Products
The Company markets its network transmission product (SONETLYNX)
directly and through VARs. SONETLYNX is targeted for markets and applications
where multiple protocol communication mandates the capacity and reliability of
fiber, further strengthened by the critical component and architectural
redundancy of SONETLYNX. Target markets for SONETLYNX include utilities,
airports, transportation, security services, prisons, health services,
academia, local and state government, as well as public and private bypass
networks.
Videoconferencing Products
The Company generally markets its videoconferencing products (IVC
product line) through VARs. The Company believes that the key target markets
for its videoconferencing products are businesses that are geographically
dispersed (particularly Fortune 1000 companies and educational and government
institutions).
Advanced Information Technology Products and Services
The Company generally markets its advanced information technology
products and services through direct marketing to existing customers and new
prospects, enhanced by participation in tradeshows. Markets for advanced
technology products and services include internationally known
telecommunications switching
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companies, telecommunications network providers, and hardware and software
companies desiring to develop or enhance products for the telecommunications
market.
COMPETITION
The market for the Company's products and services is intensely
competitive and rapidly changing. The Company competes, or may in the future
compete, directly or indirectly for customers in the following categories of
companies: (i) voice-data switch manufacturers such as Thomson CSF, Inc., Denro
Inc. and Frequentis; (ii) intelligent programmable switch manufacturers such as
Summa Four, Inc. and Excel; (iii) network transmission product manufacturers
such as AT&T Network Systems, Prism Systems, Inc. and Positron Fiber Systems;
(iv) videoconferencing product manufacturers such as PictureTel, Compression
Laboratories, Inc., VTEL Corporation, and Intel's ProShare Video System; and
(v) advanced information technology products manufacturers and service
providers such as DGM&S. The Company believes that the principal competitive
factors affecting the market for its products and services include
effectiveness, scope of product offerings, technical features, ease of use,
reliability, customer service and support, distribution channels and price.
Certain competitors have greater resources than the Company and, accordingly,
may have a competitive advantage in selling and in product development.
MANUFACTURING
The basis of the Company's manufacturing strategy is to identify and
use the appropriate technology to obtain the most favorable combination of
quality and end product cost.
The Company's products consist largely of assembled printed circuit
boards. These are sold either as stand- alone products (such as LANscape) or
as larger assembled systems (such as S4 switches or SONETLYNX multiplexers).
The cost of printed circuit board assembly varies significantly by
technology. With the introduction of Surface-Mount Technology ("SMT"), printed
circuit boards are now robotically assembled. The low cost and low labor
content of SMT manufacture are changing the economics of electronic assembly,
making onshore SMT assembly cost- competitive with offshore assembly.
In early 1996, the Company determined that prices of equipment
designed for the low-volume, intermittent production market had reached a point
where it was economically beneficial to install in-house SMT manufacturing
capacity.
Savings from the installation of this equipment are realized in direct
improvements in board assembly cost, in the avoidance of markup on the purchase
of production tooling, in a reduction in the amount of inventory required to
support production, in an improvement in the cycle time of both production and
prototype material, and in an improvement in product quality.
During 1996, the Company started to implement the process of automated
in-circuit testing ("ICT") as an integral part of the manufacture of the
assembly of printed circuit boards. In this process, the boards are
electrically tested as an integral part of assembly. Since ICT is an automated
test methodology, the cost per board tested is significantly lower than if a
similar test is manually performed. During 1997, the Company plans to continue
this effort. In-circuit test is expected to be developed as a matter of course
for all new products and tests are expected to be developed retroactively for
all older products where the volume of production warrants the investment.
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As the Company's product lines expand and mature, the Company expects
to increase manufacturing capacity by means that could include adding
employees, expanding its current facilities or leasing or purchasing additional
facilities and expanding and adding outsourcing relationships (See
"Properties").
The Company buys a fiber optic interface card, for the SONETLYNX OC-3
product, from a small company which is the sole source for the component. The
Company also buys a video codec card, used in SONETLYNX video applications,
from another small company which is the sole source. Delays in delivery of
either component would restrict the Company's ability to increase sales. In
the event either vendor fails to meet commitments, the Company intends to rely
on its in- house manufacturing capabilities. However, the conversion to
in-house backup supply would not be without some interruption.
The Company uses fiber optic connectors made by a single vendor in the
SONETLYNX OC-3 product. Equivalent components are available from other vendors
but their use would require a redesign of the method of connecting to fiber.
Such a redesign would cause significant delays in delivery of the product.
Accordingly, the Company's strategy is to forecast requirements and build
inventories which comprehend vendor lead times.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
While the Company relies on a combination of patent, copyright,
trademark and trade secret laws and confidentiality procedures to protect its
proprietary rights, the Company believes that factors such as technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position. In
connection with the acquisition of DNA Enterprises and Intelect Visual
Communications, and transactions with certain individuals, licenses were
acquired to support the development of SONETLYNX, videoconferencing, and DSP
products. The Company currently has two United States patents pending relating
to the S4 product, has filed a patent application dealing with the SONETLYNX
product, and anticipates filing patent applications relating to the CS4
technology. "INTELECT(R)", "S4(R)," and "Special Services Switching System(R)"
are registered trademarks of the Company and "SONETLYNX(TM)," "LANSCAPE(TM),"
"VISIONARY(TM)," "VUBRIDGE(TM)," and "PANORAMA(TM)" are trademarks of the
Company in the United States. According to federal and state law, the
Company's trademark protection will continue for as long as the Company
continues to use its trademarks in connection with the products and services of
the Company. The Company seeks to protect its software, documentation and
other written materials under trade secret and copyright laws, which only
afford limited protection.
Litigation may be necessary to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, financial condition or
results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that a
license will be available under reasonable terms or at all. In addition, the
Company could decide to litigate such claims, which could be extremely
expensive and time consuming and could materially adversely affect the
Company's business, financial condition or results of operations.
The Company incorporates third-party licenses into its products.
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In connection with the acquisition of IVC, certain assets and
licenses, which constituted the design of a videoconferencing product, were
purchased from a major computer company. The design proved to be flawed and
market introduction was delayed approximately nine months. The Company has not
made any payment under the technology license since September 1996 and the
license agreement is in dispute. The Company is seeking to renegotiate the
technology license agreement and believes it has meritorious claims against the
licensor. The ultimate resolution of this matter cannot be predicted but could
result in the loss of the license. See Note 8 to the Consolidated Financial
Statements.
EMPLOYEES
The Company had 273 full-time employees at December 31, 1996, of which
141 were engaged in engineering and development, 49 were engaged in sales,
marketing and customer support, 51 were engaged in manufacturing operations and
32 were engaged in administration and finance. None of the Company's employees
is represented by a labor union. The Company has experienced no material work
stoppages and believes its relations with its employees to be good.
GOVERNMENT REGULATION
The telecommunications industry, including many of the Company's
customers, is subject to regulation from Federal and state agencies, including
the FCC and various state public utility and service commissions. While such
regulation does not affect the Company directly, the effects of such
regulations on the Company's customers may, in turn, adversely impact the
Company's business and results of operations. For example, FCC regulatory
policies affecting the availability of services and other terms on which
telecommunications service providers ("Telcos") conduct their business may
impede the Company's penetration of certain markets. Current FCC regulations
restrict Telcos' ability to charge their customers based on access cost to
local subscribers and may affect the timing of Telcos' investment in the
Company's technology. These FCC regulations and policies are under continuous
review by the federal government and the courts and are subject to change.
Although many FCC restrictions on providing services in previously restricted
markets have been eliminated or modified, the failure to change, or a
substantial delay in changing, the existing restrictions on telcos may
materially adversely affect Telcos' demand for products based upon the
Company's technology.
The Telecommunications Act of 1996 removed certain restrictions
relating to the RBOCs. The Company believes that this has created and will
continue to create increased competition in the markets served by the Company's
products.
In addition, the Company's business and operating results may also be
adversely affected by the imposition of certain tariffs, duties and other
import restrictions on components that the Company obtains from non-domestic
suppliers or by the imposition of export restrictions on products that the
Company sells internationally. Internationally, governments of the United
Kingdom, Canada, Australia, and numerous other countries actively promote and
create competition in the telecommunications industry. Changes in current or
future laws or regulations, in the United States or elsewhere, could materially
and adversely affect the Company's business and results of operations.
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ITEM 2 - PROPERTIES
All of the Company's facilities are leased. The facilities are in
Richardson, Texas, New York, New York, and London, England. The Company's
principal operations are serviced from three leased facilities in Richardson,
Texas (comprising 75,000 square feet) and one in New York (comprising 20,000
square feet). These facilities include manufacturing, engineering, sales,
marketing, and administrative offices. All of the Company's manufacturing
operations are relocating to a 28,000 square foot Richardson, Texas facility.
Recently, the Company moved its headquarters from Hamilton, Bermuda to
Richardson, Texas.
The Company believes these facilities, which total 125,000 square
feet, are adequate for its present needs. However, the Company expects it will
require additional space in 1998 and beyond for sales, manufacturing, and
assembly activities.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in various legal proceedings and claims
arising in the ordinary course of business.
In March 1997, Peter G. Leighton, former president, and Rhianon M.
Pedro, former vice president finance, initiated actions against the Company,
seeking damages of $2,130,000 and $150,000, respectively, related to their
separations from the Company. The Company will vigorously contest these
actions. Due to the recent initiation of these actions, the Company cannot
predict their outcome.
The Company is contingently liable for certain potential liabilities
related to its discontinued operations. Specifically, under a stock purchase
agreement dated October 3, 1995 ("1995 Agreement"), the Company agreed to
indemnify Savage Sports Corporation, the purchaser of Savage Arms, Inc. (a
manufacturer of fire arms), for certain product liability, environmental
clean-up costs and other contractual liabilities, including certain asserted
successor liability claims. One of the liabilities assumed involves a firearms
product liability lawsuit filed by Jack Taylor individually and as father of
Kevin Taylor in Alaska Superior Court (the "Taylor litigation"). The Company
is informed that a defendant in the Taylor litigation, Western Auto Supply Co.,
settled the lawsuit for $5 million and, in turn, has asserted a third-party
claim against Savage Arms, Inc. for indemnification in the amount of the
settlement plus attorneys' fees and related costs. Savage Arms has asserted
defenses to the claims and the Company believes additional defenses may be
available. Based on the information available to date, it is impossible to
predict the outcome of this litigation or to assess the probability of any
verdict.
The Company also has been notified that Savage Sports Corporation
seeks indemnification under the 1995 Agreement in connection with certain other
product liability claims. Most notably, the Company has undertaken the defense
of a lawsuit filed against Savage Arms, Inc. by Emhart Industries, Inc.
("Emhart") in the United States District Court for the District of
Massachusetts (the "Emhart litigation"). In the lawsuit, Emhart requests
indemnification under an agreement it allegedly executed in 1981 with Savage
Industries, Inc., an entity Emhart alleges is a predecessor to Savage Arms,
Inc. In particular, to date, Emhart has claimed indemnification of
approximately $2.2 million for five lawsuits it has defended or settled and
also seeks a declaratory judgment that it is entitled to indemnification for
losses and expenses related to firearms product liability actions which may be
filed against Emhart in the future. Savage Arms has asserted the
responsibility of a third party to the 1981 agreement but remains a defendant.
The Company intends to assert additional
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defenses. The parties are in the early stages of discovery and the Company
cannot at this time predict the outcome of the litigation.
In the event the former employee actions, the Taylor litigation and/or
Emhart litigation were to be resolved adversely to the Company, there would be
a material adverse effect on the Company's financial condition and results of
operations. See Note 19 to the Consolidated Financial Statements.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1996.
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PART II
ITEM 5 - MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Shares of the Company are traded over-the-counter in the
United States on the Nasdaq National Market under the symbol "ICOMF." The high
and low bid prices for the Common Shares for the Transition Period and each
full quarter of the last two fiscal years, as reported on Nasdaq, are as
follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1ST quarter 1995 - period ended January 31, 1995 $2.500 $1.75
2nd quarter 1995 - period ended April 30, 1995 2.625 2.00
3rd quarter 1995 - period ended July 31, 1995 4.1875 2.00
4th quarter 1995 - period ended October 31, 1995 6.625 3.50
Two month period 1995 - period ended December 31, 1995 5.5625 3.8125
1st quarter 1996 - period ended March 31, 1996 5.625 4.50
2nd quarter 1996 - period ended June 30, 1996 15.375 5.3125
3rd quarter 1996 - period ended September 30, 1996 11.75 6.625
4th quarter 1996 - period ended December 31, 1996 8.125 4.25
Period from January 1, 1997 to March 31, 1997 5.25 1.875
</TABLE>
The Company's shares were also listed on the Toronto Stock Exchange
from April 1, 1981 to November 9, 1995.
The Company believes that as of March 31, 1997, its outstanding shares
of Common Shares are held by approximately 8,600 owners of record.
The closing price of the Common Shares on the Nasdaq National Market
on March 31, 1997 was $2.25.
There are presently no limitations imposed by Bermuda law on the
rights of foreign owners of the Company's Common Shares, including those who
are non-residents of Bermuda, to hold or vote such shares. Foreign owners and
Bermuda residents are subject to the same limitations on voting provided by the
Company's Bye-laws.
Although organized in Bermuda, the Company has been classified as a
non-resident by the Bermuda Monetary Authority Foreign Exchange Control.
Accordingly, currencies held for the account of the Company are freely
convertible to other currencies and there are no Bermuda exchange control
restrictions or other Bermuda laws, decrees or regulations affecting the
remittance by the Company of dividends or other payments to the holders of
Common Shares who are non- residents of Bermuda.
Bermuda currently imposes no corporate or personal income taxes.
Therefore, U.S. citizens or residents who own the Company's Common Shares will
not be subject to any Bermuda income tax on dividends or other payments by the
Company with respect to its Common Shares or on dispositions of such shares.
There are no other Bermuda taxes, including withholding taxes, imposed on U.S.
citizens or residents
12
<PAGE> 13
by virtue of ownership of the Company's Common Shares. No reciprocal tax
treaty exists between the United States and Bermuda with respect to withholding
of taxes on payments by the Company to the holders of the Common Shares.
DIVIDEND POLICY
No dividends were paid by the Company during fiscal 1993, 1994, 1995
or 1996. The Company does not currently plan to pay any dividends in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On October 15, 1996, the Registrant issued and sold an aggregate of
$10,000,000 of 7% Convertible Debentures, due October 15, 1998 (the "Debenture
Placement"), to Infinity Investors Limited and Seacrest Capital Limited, each a
Nevis, West Indies corporation (the "Investors"), in exchange for gross
proceeds of $10,000,000 (less issuance costs). The Debenture Placement was not
underwritten and was made in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended. In
connection with its evaluation of the availability of this exemption, the
Registrant relied on a series of factual representations made by each of the
Investors relating to, among other things, the nature of each Investor's
investment and the sophisticated nature and accredited status of each Investor.
The debentures issued in the Debenture Placement are convertible by the holder
in whole or in part at the option of the holder into common shares of the
Registrant by dividing the principal amount of each such debenture to be
converted by the then applicable conversion price. The conversion price in
effect from time to time is equal to the lesser of (i) $12.00 per common share
or (ii) the product of (x) the market price of the common shares on the date of
conversion multiplied by (y) 82.5%. The Registrant may redeem the debentures
at any time by paying an amount equal to the remaining unpaid principal amount
of the debenture multiplied by 117.5% plus accrued and unpaid interest thereon.
13
<PAGE> 14
ITEM 6 - SELECTED FINANCIAL DATA
The following tables set forth certain historical consolidated financial
data for the Company.
<TABLE>
<CAPTION>
Two months
Year ended ended
December 31 December 31 Years ended October 31
----------- ----------- --------------------------------------------
1996 1995 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS: (Thousands of U.S. Dollars Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Product, service and contract revenue $ 9,352 $ 734 $ 2,030 $ -- $ -- $ --
Other income 653 190 168 20 126 289
-------- -------- -------- -------- -------- --------
Total revenues 10,005 924 2,198 20 126 289
-------- -------- -------- -------- -------- --------
Loss from continuing operations (42,983) (2,776) (5,194) (538) (446) (248)
Income from discontinued operations (1) -- -- 3,546 3,410 1,517 1,564
Income (loss) on disposal of
discontinued operations (1) (56) (236) 3,546 -- -- --
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item $(43,039) $ (3,012) $ 12,176 $ 2,872 $ 1,071 $ 1,316
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Two months
Year ended ended
December 31 December 31 Years ended October 31
------------ ------------ ---------------------------------------------------------
1996 1995 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS (LOSS) PER SHARE DATA:
Continuing operations $ (3.32) $ (0.24) $ (0.46) $ (0.05) $ (0.04) $ (0.05)
============ ============ ============ ============ ============ ============
Discontinued operations
$ (0.01) $ (0.02) $ 1.52 $ 0.31 $ 0.14 $ 0.32
============ ============ ============ ============ ============ ============
Net income (loss) for period $ (3.33) $ (0.26) $ 1.12 $ 0.26 $ 0.10 $ 0.27
============ ============ ============ ============ ============ ============
Weighted average shares (thousands) 12,943 11,385 11,451 11,061 10,715 4,942
============ ============ ============ ============ ============ ============
Cash dividends per share $ -- $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31 October 31
----------------------- -------------------------------------------------
1996 1995 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET: (Thousands of U.S. Dollars)
ASSETS:
Current assets $ 11,594 $ 19,957 $ 24,587 $ 2,599 $ 1,049 $ 3,655
Excess of cost over assets of
companies acquired 14,573 8,685 9,349 -- -- --
Net assets of discontinued operations -- -- -- 9,573 7,207 1,178
Other long-term assets 9,851 2,597 1,786 -- -- --
---------- ---------- ----------
Total assets $ 36,018 $ 31,239 $ 35,722 $ 12,172 $ 8,256 $ 4,833
========== ========== ========== ========== ========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY:
Current liabilities including
current maturities of long-term debt $ 9,810 $ 5,331 $ 7,091 $ 269 $ 175 $ 491
Long-term liabilities 18,477 368 365 -- -- --
Shareholders' equity 7,731 25,540 28,266 11,903 8,081 4,342
---------- ---------- ---------- ---------- ---------- ----------
$ 36,018 $ 31,239 $ 35,722 $ 12,172 $ 8,256 $ 4,833
========== ========== ========== ========== ========== ==========
</TABLE>
(1) See Note 9 to the Consolidated Financial Statements under Item 8
14
<PAGE> 15
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Results of continuing operations in 1995 and 1996 consist of:
o the fiber optic multiplexer and special services switch businesses
of Intelect Network Technologies Company ("INT") from its April
24, 1995 acquisition,
o the information security business of Intelect Europe Limited
("IEL") from its August 31, 1995 acquisition,
o the engineering services business of DNA Enterprises, Inc. ("DNA")
from its February 13, 1996 acquisition, and
o the videoconferencing system business of Intelect Visual
Communications Corp. ("IVC") from its March 29, 1996 acquisition.
During the years ended October 31, 1994 and 1995, the Company was
engaged in the manufacturing and marketing of sporting arms, through its
subsidiary Savage Arms, Inc. ("Savage"). The results of operations of Savage
are accounted for as discontinued operations due to the sale of Savage on
October 31, 1995. The Company's fiscal year was changed to December 31 in
1995.
Accordingly, due to the disposition of Savage, the change in fiscal
year, and the schedule of acquisitions above, any comparison of financial
results to prior year periods would not be meaningful to determine a trend.
The following table shows the revenue and gross profits for the
Company's products:
<TABLE>
<CAPTION>
Two Months
Year Ended Ended Years Ended
December 31 December 31 October 31
------------------------ ------------------------
1996 1995 1995 1994
---------- ---------- ---------- ----------
(Thousands of U.S. Dollars)
<S> <C> <C> <C> <C>
Revenue:
Product sales $ 2,116 $ 676 $ 949 $ --
Services 5,563 -- -- --
Contract revenue 1,673 58 1,081 --
Interest and other income 653 190 168 20
---------- ---------- ----------
$ 10,005 $ 924 $ 2,198 $ 20
---------- ---------- ---------- ----------
Gross profit (loss):
Products (662) 129 267
Services 1,323 -- -- --
Contracts (2,263) (772) (805) --
---------- ---------- ---------- ----------
(1,602) (643) (538) --
---------- ---------- ---------- ----------
</TABLE>
NET SALES AND SERVICES
Revenues in the year ended December 31, 1996 consisted primarily of
engineering services revenues from the newly acquired DNA and product sales at
INT.
15
<PAGE> 16
Sales of the S4 digital switch were the principal component of product
sales in 1996 and in 1995. During the second half of 1996, sales of SONETLYNX
fiber optic multiplexers made a significant contribution to the total for the
first time since the product's introduction in the second quarter.
While not relevant to the year-to-year comparison, sales of DNA
services to external customers were up 12% from the prior year when DNA was not
owned by the Company.
The LANscape videoconferencing product was introduced in October 1996
after material and extensive improvements were made to the purchased
technology. The VuBridge product was introduced in March 1996. LANscape made
a small contribution to 1996 sales as initial shipments were primarily for
demonstration and testing purposes.
Contract revenues (from longer term contracts for Special Services
Switches) represent the completion of projects for Iceland and Greece. Sales
increased in 1996 over 1995 due to the inclusion of the entire project for
Greece in 1996 (see Gross Profit (Loss) below).
Information security products sold primarily to the UK military market
were phased out as those operations in England were closed and submitted to
liquidation at year end.
GROSS PROFIT (LOSS)
Inclusion of the DNA engineering services business in 1996 made a
positive contribution to gross profit. However, the margin was restrained
because more than half the engineering services staff was dedicated to
development of the CS4, a project on which intercompany sales and profit are
eliminated.
Losses on contract revenues were primarily attributable to the Iceland
project which was completed in 1996 and experienced a greater loss in 1996 than
in 1995. In addition, the losses and costs on product sales were increased by
maintaining or increasing costs of operations and engineering infrastructure in
order to prepare for the expected growth in sales and production of SONETLYNX
and LANscape. The Company believed these costs were prudently incurred because
of the imminent receipt of significant orders. That belief was confirmed by
orders received in January and February 1997 for SONETLYNX.
SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSES
SG&A expenses were $14,601,000 in the year ended December 31, 1996,
$854,000 in the two month ended December 31, 1995, and $2,461,000 in the year
ended October 31, 1995. The increased spending in 1996 is attributable to (1)
increased sales and marketing spending to launch new products and (2)
acquisition of new businesses.
The Company spent $6,412,000 on sales and marketing in 1996 to develop
markets and provide promotional support for all product lines. Spending,
primarily in advance of sales, was approximately $1,300,000 for SONETLYNX and
$1,000,000 for LANscape. At the same time, sales and marketing activities
resulted in a $3,632,000 backlog of unfilled orders at December 31, 1996, up
from $2,469,000 at the prior year end. By March 1997, the backlog had grown
substantially.
G&A expenses were $8,189,000 in 1996 due primarily to the inclusion of
newly acquired businesses. INT expenses of $1,589,000 were in line with the
prior year. DNA contributed $1,370,000 to the total, IEL $1,758,000 and IVC
$1,417,000. Corporate expenses were $2,055,000, including legal and other
costs related to external financing.
16
<PAGE> 17
ENGINEERING AND DEVELOPMENT (E&D) EXPENSES
E&D expenses in the three months ending December 31, 1996 include a
one time charge in December of $2,442,000 to expense CS4 software development
costs previously capitalized. The evolution of the CS4 project led to a
reassessment of the product definition in December 1996. A necessary
consequence of the redefined product was to cause the expensing of previously
capitalized costs because technological feasibility had not been attained for
all the inter- related modules of the product.
E&D expenses for the year were $8,719,000 and an additional $1,395,000
(representing SONETLYNX software development cost) was capitalized. Total
costs of major projects in 1996 were (including E&D expense, software
capitalized, and additional amounts charged to cost of sales or to technology
amortization):
o $5,496,000 for development of the CS4 smart programmable switch to
the prototype stage,
o $2,857,000 for development of the initial components of SONETLYNX,
o $1,875,000 for development of a viable LANscape product from
purchased technology, and
o $239,000 for development of two standard DSP products.
ASSET WRITE DOWNS
In connection with the acquisition of IVC, certain assets and
licenses, which constituted the design of a videoconferencing product, were
purchased from a major computer company. The design proved to be flawed and
market introduction was delayed approximately nine months. (See Note 8 to the
Consolidated Financial Statements regarding the technology purchase.) The
Company deemed the recoverability of IVC goodwill to be significantly impaired
by the delay in introduction of the product to a rapidly changing market and
accordingly reduced the carrying value of IVC goodwill by $4,175,000 (its
remaining unamortized net book value at the time) and wrote off $51,000 of
fixed assets deemed of no value.
The Company's assessment of the future prospects for the information
security products business in the United Kingdom led to a complete shut down of
those operations in Chesterfield, England at the end of 1996. In January 1997,
liquidation proceedings began. The Company was an unsecured creditor of IEL
and wrote off all net assets related to those operations in England in the
amount of $1,807,000.
AMORTIZATION AND DEPRECIATION
Amortization and depreciation expenses were:
<TABLE>
<CAPTION>
Two Months
Year Ended Ended Years Ended
December 31 December 31 October 31
------------------------- -------------------------
1996 1995 1995 1994
----------- ----------- ----------- -----------
(Thousands of U. S. Dollars)
<S> <C> <C> <C> <C>
Depreciation of Property and Equipment $ 898 $ 42 $ 174 $ --
Amortization of Goodwill 1,664 64 312 --
Technology Amortization 1,019 -- -- --
----------- ----------- ----------- -----------
$ 3,581 $ 106 $ 486 $ --
=========== =========== =========== ===========
</TABLE>
Depreciation is included in cost of sales and selling, general and
administration expense in the Consolidated Financial Statements.
17
<PAGE> 18
Depreciation of property and equipment has increased due to
acquisitions and due to purchases of new manufacturing, engineering, and office
equipment. Goodwill is amortized over periods from 10 to 15 years. The
increase in 1996 is due to the purchase of DNA and IVC. In December 1996,
goodwill related to the acquisition of INT was increased $660,000 due to the
payment of certain contingent consideration due to former INT shareholders (see
Note 7(a) to Consolidated Financial Statements). Technology amortization
relates to intellectual properties purchased in 1995 and 1996. The amounts of
amortization and depreciation expenses in 1996 are not indicative of the
continuing rates because (1) capital purchases are planned to exceed
depreciation and cause some increase in the current rate, (2) goodwill of IVC
and IEL will not be available for amortization, and (3) license payments to the
vendor of technology used by IVC are being curtailed. (See Note 8 to the
Consolidated Financial Statements.)
INTEREST EXPENSE
Interest expense of $9,911,000 in the year ended December 31, 1996
consists of (1) interest on the face value of the June, August and October
Debentures of $501,000, (2) non-cash financing costs associated with the
issuance of the Debentures of $9,105,000, and (3) other interest of $305,000.
On March 28, 1997, the Securities and Exchange Commission first issued
a Staff Announcement entitled "Debt or Preferred Stock Convertible at Discount
to the Market" which requires (1) recognition as interest expense an amount
which measures the "beneficial conversion feature" of certain convertible
debentures, and (2) accounting treatment which accelerates the recognition as
interest expense of deferred financing costs. The Staff Announcement also
required immediate implementation necessitating the retroactive restatement of
financial statements. Accordingly, the Company retroactively conformed its
accounting for the June, August, and October Debentures to the requirements of
the Staff Announcement. This had the effects of (1) recognizing as interest
expense a $4,592,000 amount allocated to the beneficial conversion feature, and
(2) changing the accounting for and accelerating the recognition of deferred
financing costs in the amount of $3,862,000. These non-cash expenses, together
with $651,000 deferred financing costs recognized as interest expense prior to
the Staff Announcement, constitute the $9,105,000 total Debenture-related
interest expense.
Cash financing costs attributable to the issuance of the June, August,
and October Debentures were $328,000, $986,000, and $309,000, respectively.
Non-cash costs in the form of warrants for common stock valued using the Black-
Scholes pricing model were $1,058,000, $1,014,000, and $1,045,000,
respectively. Additionally, allocations of proceeds to the beneficial
conversion features of the Debentures were $1,061,000, $1,765,000, and
$2,121,000, respectively. The Debentures were considered to be "in the money"
on the date of issue due to the conversion discount. Therefore, all financing
costs are being amortized over the periods bounded by the issuance dates and
the earliest conversion dates, resulting in total amortization of $2,447,000,
$3,765,000, and $2,893,000, respectively, in 1996. An additional amount of
$582,000 of deferred financing costs will be recognized as interest expense in
the first quarter of 1997 due to the exercisability of the balance of the
October Debentures.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
The Company sold Savage Corporation (and its subsidiaries, including
Savage Arms, Inc.) ("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. The gain on the disposition of Savage occurred in the fourth
quarter of 1995.
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
In the year ended December 31, 1996, cash used in operations
($23,106,000) and by investing activities ($11,253,000) was funded by using
$10,176,000 of available cash balances and by securing new financing, net of
repayments, of $24,183,000. As a result, working capital decreased from
$14,626,000 to $1,784,000 at December 31, 1996.
Operating Activities
Net cash used in operations was $23,106,000 for 1996, consisting
primarily of operating losses partly attributable to the following costs:
o $3,223,000 of E&D to bring new products to market in 1996 and 1997
o $5,496,000 of E&D to develop the CS4 smart programmable switch
with no product sales currently expected to be derived until 1998
o Approximately $2,300,000 of sales and marketing expenses for
market development in advance of sales based on expected increases
for SONETLYNX and LANscape products in 1997
o Approximately $1,100,000 of manufacturing overhead costs
maintained at a higher level than required by 1996 sales in order
to prepare an operations infrastructure, including a computer
system startup to support the higher levels of production
currently expected in 1997.
Of these four sources of spending, the discretionary portions were
approximately:
o 50% of new product development for air traffic control features
and early SONETLYNX
o 100% of CS4 development
o 100% of advance sales and marketing
o 100% of advance infrastructure building
The Company committed these discretionary amounts because (1) the
product developments were directed at markets believed to have very large
growth potential, and (2) near term sales and production growth opportunities
appeared to justify some investment to stimulate the sales and prepare for
production. The anticipated near-term growth is expected to be realized in
1997, especially for SONETLYNX products.
Investing Activities
Investment spending included $3,660,000 for fixed assets, primarily
equipment for product design and for manufacturing. As much as 20% of this
spending may have been discretionary. $4,377,000 was spent on the acquisitions
of DNA and IVC including working capital advances prior to acquisition.
Financing Activities
In addition to cash balances at the beginning of the year, operations
and investments in 1996 were funded by the issuance of three series of
convertible debentures in the amount of $25,000,000. By the end of the year,
$10,087,000 of the debentures were converted to common shares and by March 31,
1997, an additional $8,539,000 of the debentures were converted (See Note 11 to
Consolidated Financial Statements).
19
<PAGE> 20
Outlook and Financial Strategy
The Company currently expects ongoing product sales and production
activity to increase significantly over the levels of 1996. These increases
are expected to create increased working capital requirements. In addition,
the Company intends to continue investing in certain product development
activities. The financial plan which results from these expectations currently
indicates a peak cash requirement from external sources of approximately
$12,000,000 in 1997. This plan assumes that the $2,300,000 balance of
obligations to pay former owners of DNA can be extended (See Note 24 to
Consolidated Financial Statements) and that no payments will be made to the
licensor of video conferencing technology pursuant to a license agreement which
is in dispute (see Note 8 to Consolidated Financial Statements and
"Intellectual Property" in ITEM 1). In the event that working capital
requirements exceed sources, the Company has contingency plans to curtail
spending on product development and marketing activities, with priority given
to spending that is not in pursuit of near term benefits.
The Company currently plans to fund its external requirements by
completing a $15,000,000 credit facility of which it has executed binding
agreements for up to $5,000,000 as of March 31, 1997. (See Note 24 to the
Consolidated Financial Statements.) The Company considers it prudent to pursue
financing of amounts greater than its most likely expected cash requirements in
order to have the flexibility to respond to additional product development and
growth opportunities or to respond to other cash needs. For those reasons, the
Company is pursuing additional funding through private or public financings and
through collaborative arrangements with existing and potential customers.
Financial plans do not anticipate any significant payments for maturing
Convertible Debentures in August or October 1998. Due to the experience of
$10,087,000 converted in 1996 and $8,539,000 converted in the first quarter of
1997, the Company expects the debenture holders to convert the balance of
$6,374,000 before maturity.
A collaborative approach is being pursued with respect to the CS4
product development. The Company has begun discussions with several major
telecommunications companies regarding the possibility of forming an alliance
or partnering for the combined purposes of (a) endorsing or branding the CS4
product with a major trade name, (b) permitting some preferred access to the
product by one or more large customers, and (c) funding a substantial portion
of continuing development expenses. Any funding from such sources would likely
be accompanied by an upward revision in planned expenses so that market entry
could be accelerated. Funding by the proposed partnering process would be in
addition to traditional financing previously discussed.
Conclusion
Considering the financing resources available and potentially
available, the outlook for cash available from customer collections, the
outlook for cash uses in operations and investing, and the options available to
reduce spending, the Company believes it has the financial resources to meet
its business requirements through the current year. There can be no assurance,
however, that the proposed financings or the business results assumed in the
financial plan will be realized. The financial statements have been prepared
assuming the Company will continue as a going concern and do not include any
adjustments that might result from the unfavorable outcome of such an
uncertainty.
20
<PAGE> 21
CONTINGENT LIABILITIES
As discussed in ITEM 3, Legal Proceedings, the Company is exposed to
certain contingent liabilities, which, if resolved adversely to the Company,
would adversely affect its liquidity, its results of operations and/or its
financial position.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE LIQUIDITY AND OPERATING RESULTS
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934 as amended. Actual events and
results could differ materially from those set forth in the forward-looking
statements. In particular, the recent growth in production and sales may not be
sustained if production is interrupted by a planned facility relocation,
materials (including those supplied from sole sources) are not available, the
sales force does not identify new customers, the Company's credit condition
inhibits major customers, or new SONETLYNX and videoconferencing product
developments are delayed. The financial plan includes commitments to
significant amounts of spending for product development, sales and marketing
activity, and manufacturing capacity predicated on a high rate of sales growth
each quarter. If the rate of sales growth is not sustained, certain of the
expenses will not be sufficiently controllable in the short term to avoid a
negative cash flow impact. There can be no assurance that the currently high
level of credit quality among the Company's customers can be sustained.
Accordingly, customer collections may not achieve the assumptions of the plan.
In order to meet increasing levels of demand for manufactured products the
Company must make estimates of future orders with enough precision to insure
the availability of certain components with long lead times. Any inaccuracy in
such estimates could affect the expected operating results. In general, there
can be no assurance that component parts will be available in sufficient
quantity and on suitable credit terms to support the planned growth in
production rates. Adequacy of the financial plan is partly dependent on the
Company's ability to renegotiate payment obligations to former owners of DNA
and to renegotiate a technology license with a major computer company. There
can be no assurance that either of these assumed negotiations will be
accomplished with the cash flow consequences assumed in the plan. External
business conditions may also contribute risk to achieving the plan, especially
the rate at which telecommunications companies adopt certain new products and
the demand for engineering design services which are contingent on the
development budgets of others. Funding plans include uncertainties, namely,
the balance of the Credit Facility may not become available, alternative
external sources of financing may not be secured in a timely manner or on terms
acceptable to the Company or at all, availability of external sources may be
affected by general market price volatility, holders of Convertible Debentures
may not convert remaining balances to equity, and/or partner funding of CS4
development may not be secured soon enough to avoid development delays. The
Company's ability to raise funds from external sources may be restricted by
adverse resolution of legal proceedings discussed in Contingent Liabilities.
21
<PAGE> 22
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Chartered Accountants .......... 23
Consolidated Balance Sheets .......................... 24
Consolidated Statements of Operations ................ 25
Consolidated Statements of Shareholders' Equity ...... 27
Consolidated Statements of Cash Flows ................ 29
Notes to Consolidated Financial Statements ........... 31
Schedule II - Valuation and Qualifying Accounts ...... 60
</TABLE>
22
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Intelect Communications Systems Limited
We have audited the accompanying consolidated financial statements of Intelect
Communications Systems Limited and its subsidiaries as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Intelect
Communications Systems Limited and its subsidiaries as of December 31, 1996 and
1995 and the results of their operations and their cash flows for the year
ended December 31, 1996, the two month period ended December 31, 1995 and the
years ended October 31, 1995 and 1994, in conformity with United States
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements, taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the
Company has suffered recurring losses from continuing operations and is
dependent upon the successful development and commercialization of its products
and its ability to secure adequate sources of capital until the Company is
operating profitably. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with regard to these
matters are also described in note 1. The consolidated financial statements and
financial statement schedule do not include any adjustments that might result
from the outcome of this uncertainty.
/S/ KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
April 9, 1997
23
<PAGE> 24
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Assets 1996 1995
------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 3) $ 4,863 15,039
Investments in marketable securities (note 4) 854 --
Receivables:
Accounts, net of allowance of $542 and $25 in 1996 and 1995 2,427 1,375
Loan -- 600
Inventories (note 5) 2,978 2,537
Prepaid expenses 472 406
-------- --------
Total current assets 11,594 19,957
Property and equipment, net (note 6) 4,285 1,839
Goodwill, net (note 7) 14,573 8,685
Software development costs, net (note 2(g)) 1,389 --
Deferred financing costs, net (note 11) 582 --
Other intangible assets, net (note 8) 2,879 500
Other assets 716 258
-------- --------
$ 36,018 31,239
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,878 1,685
Accrued liabilities 3,302 1,989
Net liabilities of discontinued operations (note 9) 400 476
Deferred income taxes (note 14) 48 --
Current maturities of long-term debt (note 10) 4,125 1,036
Current installments of obligations under capital leases (note 12) 57 145
-------- --------
Total current liabilities 9,810 5,331
Long-term obligations under capital leases,
net of current installments (note 12) 59 200
Deferred income taxes (note 14) 267 --
Long-term debt, net of current maturities (note 10) 3,238 168
Convertible debentures (note 11) 14,913 --
-------- --------
28,287 5,699
-------- --------
Shareholders' equity:
Common shares, $.01 par value, 80,000,000 shares authorized
15,027,728 and 11,385,117 shares issued and outstanding
in 1996 and 1995 (note 15) 150 114
Additional paid-in capital (note 15) 36,849 11,673
Unrealized gain on marketable securities (note 4) 18 --
Retained earnings (accumulated deficit) (note 18) (29,286) 13,753
-------- --------
Total shareholders' equity 7,731 25,540
Commitments and contingencies (notes 12, 13 and 19)
-------- --------
$ 36,018 31,239
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Consolidated Statements of Operations
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Year Two months Years ended
ended ended October 31
December 31, December 31, --------------------
1996 1995 1995 1994
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Net revenues:
Product sales $ 2,116 676 949 --
Services 5,563 -- -- --
Contract revenue 1,673 58 1,081 --
Interest and other income 653 190 168 20
------------ ------------ -------- --------
Net revenues 10,005 924 2,198 20
------------ ------------ -------- --------
Costs and expenses:
Cost of product sales 2,778 547 682 --
Cost of services 4,240 -- -- --
Cost of contracts 3,936 830 1,886 --
Selling, general and administrative 14,601 854 2,461 558
Engineering and development 8,719 732 1,653 --
Asset writedowns (notes 2(l), 6 and 7(b)) 6,033 338 -- --
Amortization of intangible assets (notes 2(l)
and 8) 2,683 376 -- --
Equity in loss of investee -- -- 280 --
Interest (notes 10 and 11) 9,911 23 430 --
------------ ------------ -------- --------
52,901 3,700 7,392 558
------------ ------------ -------- --------
Loss from continuing operations
before income taxes and extra-
ordinary item (42,896) (2,776) (5,194) (538)
Income taxes (note 14) 87 -- -- --
------------ ------------ -------- --------
Loss from continuing operations (42,983) (2,776) (5,194) (538)
Discontinued operations (note 9):
Income from discontinued operations -- -- 3,546 3,410
Income (loss) on disposal of discontinued
operations (56) (236) 13,824 --
------------ ------------ -------- --------
Income (loss) before
extraordinary item (43,039) (3,012) 12,176 2,872
Equity in extraordinary gain of investee -- -- 646 --
------------ ------------ -------- --------
Net income (loss) $ (43,039) (3,012) 12,822 2,872
============ ============ ======== ========
</TABLE>
(Continued)
25
<PAGE> 26
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Year Two months Years ended
ended ended October 31
December 31, December 31, ----------------
1996 1995 1995 1994
------------ ------------ ------ ------
<S> <C> <C> <C> <C>
Earnings (loss) per share:
Primary and fully diluted earnings:
Income (loss) per share:
Continuing operations $ (3.32) (0.24) (0.46) (0.05)
Discontinued operations (.01) (0.02) 1.52 0.31
------------ ------------ ------ ------
Income (loss) before
extraordinary item (3.33) (0.26) 1.06 0.26
Extraordinary item -- -- 0.06 --
------------ ------------ ------ ------
Net income (loss) $ (3.33) (0.26) 1.12 0.26
============ ============ ====== ======
Weighted average number of shares and common
stock equivalents outstanding (in thousands)
(note 17) 12,943 11,385 11,451 11,061
============ ============ ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 27
INTELECT COMMUNICATIONS SYSTEMS LIMITED and SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Year ended December 31, 1996, two months ended December 31, 1995 and
years ended October 31, 1995 and 1994
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Unrealized
Additional gain on Total
Common stock paid-in Retained marketable shareholders'
Shares Par capital earnings securities equity
----------- -------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balances at October 31, 1993 9,863,142 $ 99 6,911 1,071 -- 8,081
Conversion of Savage
Corporation preferred stock
(note 15) 600,000 6 419 -- -- 425
Financing costs (note 15) 110,000 1 87 -- -- 88
Exercise of employee stock
options (note 16) 10,000 -- 10 -- -- 10
Quasi reorganization
(note 18) -- -- 427 -- -- 427
Net income -- -- -- 2,872 -- 2,872
----------- -------- -------- -------- ---------- ----------
Balance at October 31, 1994 10,583,142 106 7,854 3,943 -- 11,903
Acquisition of Lakefield
Arms Limited (note 9) 416,666 4 925 -- -- 929
Exercise of convertible
preferred shares of Savage
Corporation (note 9) 160,991 2 400 -- -- 402
Private placement (note 21) 150,000 1 524 -- -- 525
Exercise of employee
stock options (note 16) 74,318 1 139 -- -- 140
Quasi reorganization
(note 18) -- -- 1,545 -- -- 1,545
Net income -- -- -- 12,822 -- 12,822
----------- -------- -------- -------- ---------- ----------
Balances at October 31, 1995 11,385,117 114 11,387 16,765 -- 28,266
Stock option
compensation (note 16) -- -- 286 -- -- 286
Net loss -- -- -- (3,012) -- (3,012)
----------- -------- -------- -------- ---------- ----------
Balances at December 31, 1995 11,385,117 114 11,673 13,753 -- 25,540
</TABLE>
(Continued)
27
<PAGE> 28
INTELECT COMMUNICATIONS SYSTEMS LIMITED and SUBSIDIARIES
Consolidated Statements of Shareholders' Equity, Continued
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Unrealized
Common stock Additional gain on Total
------------------------ paid-in Retained marketable shareholders'
Shares Par capital earnings securities equity
----------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Conversion of debentures
(note 11) 1,837,205 $ 18 10,069 -- -- 10,087
Acquisition of Intelect Visual
Communications Corp.
(note 7(d)) 545,420 5 2,747 -- -- 2,752
Exercise of employee stock
options (note 16) 530,000 5 1,012 -- -- 1,017
Exercise of warrants from
acquisition of Savage
Corporation (note 15) 360,000 4 1,076 -- -- 1,080
Settlement of subordinated
debt and contingent
purchase consideration of
Intelect, Inc. (note 7(a)) 169,986 2 848 -- -- 850
Purchase of other assets
(note 15) 100,000 1 374 -- -- 375
Employee compensation -
Intelect Visual
Communications Corp.
(note 7(d)) 100,000 1 499 -- -- 500
Allocation of proceeds to
beneficial conversion
features of convertible
debentures (note 11) -- -- 4,947 -- -- 4,947
Detachable warrants issued
with convertible debentures
(notes 11 and 15) -- -- 3,117 -- -- 3,117
Stock option compensation
(note 16) -- -- 487 -- -- 487
Unrealized gain on
marketable securities -- -- -- -- 18 18
Net loss -- -- -- (43,039) -- (43,039)
----------- -------- -------- -------- ---------- ----------
Balances at December 31, 1996 15,027,728 $ 150 36,849 (29,286) 18 7,731
=========== ======== ======== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 29
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Year Two months Years ended
ended ended October 31
December 31, December 31, --------------------
1996 1995 1995 1994
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (43,039) (3,012) 12,822 2,872
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Equity in income of investee -- -- (366) --
Depreciation and amortization of intangible
assets 3,581 106 486 --
Deferred income taxes 87 -- -- --
(Income) loss on disposal of discontinued
operations -- 236 (13,824) --
(Income) loss from discontinued operations 56 -- (3,546) (3,410)
Noncash compensation 500 -- -- --
Assets writedowns 6,033 338 -- --
Stock option compensation 487 50 -- --
Amortization of deferred financing costs 9,105 -- -- --
Other (100) -- 9 --
Change in operating assets and liabilities,
net of effects of acquired companies:
Accounts receivable (898) (662) 136 --
Inventories (350) 277 196 --
Other assets (95) (282) (102) 24
Accounts payable and accrued liabilities 1,603 (926) (1,472) 94
Net liabilities of discontinued operations (76) (795) 1,271 --
------------ ------------ -------- --------
Net cash used in operating activities (23,106) (4,670) (4,390) (420)
------------ ------------ -------- --------
Cash flows from investing activities:
Proceeds from sale of discontinued operations -- -- 33,000 --
Investment in discontinued operations -- -- (3,249) 1,878
Purchase of other intangible assets (1,075) -- -- --
Capital expenditures (3,660) (293) (238) --
Purchase of marketable securities (836) -- -- --
Payments for other assets (110) (240) (518) --
Software development costs (1,395) -- -- --
Proceeds on sale of fixed assets 200 -- 12 --
Payment for acquisition of DNA, net of cash
acquired (3,009) -- -- --
Loan to IVC, prior to acquisition (700) (600) -- --
Payment for acquisition of IVC, net of cash
acquired (668) -- -- --
Payment for acquisition of Intelect, net of cash
acquired -- -- (632) --
Payment for acquisition of IEL, net of cash
acquired -- -- (391) --
------------ ------------ -------- --------
Net cash provided by (used in) investing
activities (11,253) (1,133) 27,984 1,878
------------ ------------ -------- --------
</TABLE>
(Continued)
29
<PAGE> 30
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Year Two months Years ended
ended ended October 31
December 31, December 31, --------------------
1996 1995 1995 1994
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Cash flows form financing activities:
Proceeds from issuance of convertible debentures $ 25,000 -- -- --
Debt issuance costs (1,623) -- -- --
Proceeds from issuance of notes payable -- -- 9,880 --
Payments on notes payable (880) (70) (15,530) --
Payments of principal on capital lease obligations (311) (24) (18) --
Payments of long-term debt (100) -- (271) --
Proceeds from issuance of common shares -- -- 665 103
Exercise of warrants 1,080 -- -- --
Exercise of employee stock options 1,017 -- -- --
Quasi-reorganization -- -- 45 13
------------ ------------ -------- --------
Net cash provided by (used in)
financing activities 24,183 (94) (5,229) 116
------------ ------------ -------- --------
Net increase (decrease) in cash and cash equivalents (10,176) (5,897) 18,365 1,574
Cash and cash equivalents, beginning of period 15,039 20,936 2,571 997
------------ ------------ -------- --------
Cash and cash equivalents, end of period $ 4,863 15,039 20,936 2,571
============ ============ ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Description of Business
Intelect Communications Systems Limited (the "Company") was incorporated
under the laws of Bermuda on April 1, 1980 and operated under the name of
Coastal International, Ltd. until September 1985 and as Challenger
International, Ltd. until December 1995. The Company operates in one
industry segment and is an international communications technology and
products company that develops, manufactures and markets multimedia
transport and switching systems for telecommunications and networking
applications. The Company's products include digital switching, fiber
optic multiplexing, video conferencing equipment, and telecommunications
system design and development services.
Former subsidiaries of the Company were engaged in the manufacture and
marketing of sporting arms (from 1989 to 1995) and in various energy
related activities (from 1981 to 1988). These subsidiaries were sold or
liquidated as of October 31, 1995 (see note 9 below).
The Company's year end was changed in 1995 from October 31 to December 31
in order to coincide with the year ends of its newly-acquired operating
subsidiaries. The two-month period from November 1, 1995 to December 31,
1995 is hereinafter referred to as the "Transition Period".
The Company has incurred losses from continuing operations of $42,983,000,
$2,776,000 and $5,194,000 during the year ended December 31, 1996, the two
months ended December 31, 1995, and the year ended October 31, 1995,
respectively. During these same periods, the Company's operating
activities have used net cash of $23,106,000, $4,670,000 and $4,390,000,
respectively.
The Company currently expects ongoing product sales and production
activity to increase significantly over the levels of 1996. These
increases are expected to create increased working capital requirements.
In addition, the Company intends to continue investing in certain product
development activities. The financial plan which results from these
expectations currently indicates a peak cash requirement from external
sources of approximately $12,000,000 in 1997. This plan assumes that the
$2,300,000 balance of obligations to pay former owners of DNA can be
extended (note 24) and that no payments will be made to the licensor of
video conferencing technology pursuant to a license agreement which is in
dispute (note 8). In the event that working capital requirements exceed
sources, the Company has contingency plans to curtail spending on product
development and marketing activities, with priority given to spending that
is not in pursuit of near term benefits.
The Company currently plans to fund its external requirements by
completing a $15,000,000 credit facility of which it has executed binding
agreements for up to $5,000,000 as of March 31, 1997 (note 24). The
Company considers it prudent to pursue financing of amounts greater than
its most likely expected cash requirements in order to have the
flexibility to respond to additional product development and growth
opportunities or to respond to other cash needs. For those reasons, the
Company is pursuing additional funding through private or public
financings and through collaborative arrangements with existing and
potential customers. Financial plans do not anticipate any significant
payments for maturing Convertible Debentures in August or October 1998.
Due to
31
(Continued)
<PAGE> 32
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the experience of $10,087,000 converted in 1996 and $8,539,000 converted
in the first quarter of 1997, the Company expects the debenture holders to
convert the balance of $6,374,000 before maturity.
Considering the financing resources available and potentially available,
the outlook for cash available from customer collections, the outlook for
cash uses in operations and investing, and the options available to reduce
spending, the Company believes it has the financial resources to meet its
business requirements through the current year. There can be no assurance,
however, that the proposed financings or the business results assumed in
the financial plan will be realized.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern and do not include any
adjustments that might result from the unfavorable outcome of such an
uncertainty.
(2) Significant Accounting Policies and Practices
The accompanying consolidated financial statements have been prepared in
accordance with United States generally accepted accounting principles.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(a) Principles of Consolidation
The consolidated financial statements include the financial
statements of the Company and its subsidiaries, all of which are
wholly owned, since their dates of acquisition. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" requires disclosure of the
fair value of certain financial instruments for which it is
practicable to estimate fair value. For purposes of the disclosure
requirements, the fair value of a financial instrument is the amount
at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liquidation.
The carrying values of cash, accounts receivable, marketable
securities and accounts payable are reasonable estimates of their
fair value due to the short-term maturity of their financial
instruments. It was not practical to estimate the fair value of the
Company's long-term debt and convertible debentures because quoted
market prices do not exist and comparable securities are not
available.
32
(Continued)
<PAGE> 33
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) Revenue and Expense Recognition
Revenue from product sales is recognized upon shipment of products.
Reserves for estimated sales returns and allowances are recorded in
the same accounting period as the related revenues.
Revenue from services for engineering is recognized as the services
are provided to the customers.
Contracts that are expected to be completed within three months are
generally considered short-term contracts and revenue is recognized
upon shipment to the customer. Revenue on longer-term contracts is
generally recognized using the percentage-of-completion method. Under
the percentage-of-completion method, revenue recognition is measured
by the proportion of the contract costs incurred to date to estimated
total costs for each contract. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools and repair
costs. General, administrative and engineering and development costs
are charged to expense as incurred. Changes in estimated profit on
contracts are recognized in the period in which the revisions are
determined. Provisions for estimated losses on uncompleted contracts
are charged to earnings in the period in which such losses first
become apparent.
(d) Inventories
Inventories consist of raw materials, work in progress and finished
goods, and are stated at the lower of standard cost (which
approximates cost determined on a first-in, first-out basis) or
market.
(e) Property and Equipment
Property and equipment are stated at cost. Equipment under capital
leases are stated at the present value of minimum lease payments.
Depreciation on equipment is calculated on the straight-line method
over the estimated useful lives of the assets. Equipment held under
capital leases and leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or estimated
useful life of the assets. The Company's useful lives are as follows:
<TABLE>
<CAPTION>
Estimated useful
life (years)
----------------
<S> <C>
Machinery and equipment 5 to 7
Computer equipment and software 3 to 5
Furniture and fixtures 5 to 7
Motor vehicles 3
</TABLE>
33
(Continued)
<PAGE> 34
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(f) Deferred Financing Costs
A portion of the proceeds from the issuance of convertible debt
securities with beneficial conversion features is recognized as
additional paid-in capital and as a deferred finance cost and
amortized to interest expense ratably from the date of issuance to
the date the related debt first becomes convertible. Other costs in
connection with the issuance of the same securities are also deferred
and amortized in the same manner (note 11). Deferred financing costs
in connection with the issuance of other debt are amortized to
interest expense using the interest method over the term of the
related debt instrument.
(g) Engineering and Development and Software Development Costs
Engineering and development costs, as well as advertising costs, are
expensed as incurred. Capitalization of software 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
judgments by management with respect to certain external factors,
including, but not limited to, anticipated future revenues, estimated
economic life and possible developments in software and hardware
technologies. The Company has not capitalized any costs in prior
periods because eligible amounts were immaterial for those periods.
The Company believes that technological feasibility and future
revenue potential has now been established for the Company's
SONETLYNX product line. During the year ended December 31, 1996, the
Company capitalized $1,395,000 of software development costs and
charged operations for $6,000 of amortization. Amortization is taken
based on estimated related revenues over the next five years.
During the first three quarters of 1996, the Company capitalized
software development costs associated with the development of the CS4
programmable switch, having established technological feasibility
early in 1996. In December 1996, a reassessment of the product
definition rendered invalid the establishment of technological
feasibility because feasibility had not been attained for all the
inter-related modules of the product. Accordingly, all costs that had
been capitalized in previous quarters, totaling $2,442,000, were
charged to engineering and development expense in the fourth quarter.
During the year ended December 31, 1996, the Company advanced
$396,000 to a software developer in connection with the development
of certain software and related technology. Such amounts were charged
to 1996 engineering and development expense.
(h) Earnings (Loss) Per Common Share
The calculation of earnings (loss) per share in the consolidated
statements of operations is based on the weighted average number of
common shares outstanding during the period,
34
(Continued)
<PAGE> 35
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
adjusted for the effects of the weighted average number of common
share equivalents outstanding during the period if their inclusion is
dilutive.
(i) Foreign Currency Translation
The Company's United Kingdom subsidiary, Intelect Europe Limited
("IEL"), uses the local currency as the functional currency and
translates net assets at the exchange rates in effect on the balance
sheet date, while income and expense accounts are translated at
average rates. Foreign transaction exchange gains and losses are
recognized as income or expense. Foreign currency translation
adjustments and transaction amounts were not significant.
(j) Income Taxes
The Company accounts for income taxes under the liability method as
required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under this method,
deferred tax assets and liabilities are determined based on
differences between the financial reporting and income tax bases of
assets and liabilities and are measured using the enacted tax rates
and laws expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
(k) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and
cash equivalents include cash held in banks and time deposits having
maturity within three months of the date of purchase by the Company.
(l) Goodwill
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line basis
over 10 to 15 years. Accumulated amortization at December 31, 1996
and 1995 is $1,968,000 and $376,000, respectively.
The Company assesses the recoverability of goodwill by determining
whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of the goodwill
impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash flows
are not achieved.
During the year ended December 31, 1996, the Company charged
$4,175,000 to operations for the writedown of goodwill in connection
with the 1996 acquisition of Intelect Visual Communications (see note
7(d)). The goodwill was considered impaired due to design flaws in
35
(Continued)
<PAGE> 36
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the products acquired, which required design changes and enhancements
and delayed market introduction. In addition, because of management's
intention to liquidate the IEL operation, as described in note 7(b),
goodwill of $740,000 associated with the 1995 acquisition of IEL was
charged to 1996 operations. The aforementioned writedowns were
measured in accordance with the policy described above.
At this time, the Company believes that no significant impairment of
the remaining goodwill has occurred and that no reduction of the
estimated useful lives is warranted.
(m) Other Intangible Assets
Other intangible assets consist of a software license from a vendor
and purchased product technology. These assets are being amortized by
the straight-line method over periods ranging from three to five
years.
(n) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Company adopted the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell. The initial adoption of this Statement as of January 1, 1996
did not have a material impact on the Company's financial position,
results of operations, or liquidity.
(o) Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date
of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
36
(Continued)
<PAGE> 37
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(p) Reclassification
Certain prior period balances have been reclassified to conform to
the current year presentation.
(3) Cash and Cash Equivalents
Cash and cash equivalents are comprised of the following (thousands of
U.S. dollars):
<TABLE>
<CAPTION>
December 31
---------------
1996 1995
------ ------
<S> <C> <C>
Cash $1,304 104
Interest-bearing deposits 3,559 14,935
------ ------
Total $4,863 15,039
====== ======
</TABLE>
(4) Investments in Marketable Securities
Marketable securities are considered available-for-sale and are stated at
fair value as of December 31, 1996. Unrealized holding gains and losses,
net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of
shareholders' equity until realized. Realized gains and losses from the
sale of such securities are determined on a specific identification basis.
There were no sales of securities during any of the periods presented.
Certificates of deposit are interest-bearing and are pledged in the course
of contractual performance and for the purpose of obtaining operating
leases. A summary of such securities at December 31, 1996 (1995: $ nil)
follows (thousands of U.S. dollars):
<TABLE>
<CAPTION>
Gross
unrealized Fair
Cost holding gains value
------ ------------- -----
<S> <C> <C> <C>
Equity securities $ 52 18 70
Certificates of deposit 784 -- 784
---- ---- ----
Total $836 18 854
==== ==== ====
</TABLE>
37
(Continued)
<PAGE> 38
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Inventories
The components of inventories are as follows (thousands of U.S. dollars):
<TABLE>
<CAPTION>
December 31
---------------
1996 1995
------ ------
<S> <C> <C>
Raw materials $2,727 1,878
Work in progress 292 682
Finished goods 1,213 707
------ ------
4,232 3,267
Less allowance for obsolescence 1,254 730
------ ------
Total $2,978 2,537
====== ======
</TABLE>
(6) Property and Equipment
Property and equipment is summarized as follows (thousands of U.S.
Dollars):
<TABLE>
<CAPTION>
December 31
--------------------
1996 1995
-------- --------
<S> <C> <C>
Machinery and equipment $ 2,816 1,106
Computer equipment and software 2,537 525
Furniture and fixtures 711 188
Motor vehicles 76 209
-------- --------
6,140 2,028
Less:
Accumulated depreciation and amortization (1,094) (189)
Provision for loss on liquidation (note 7(b)) (761) --
-------- --------
Total $ 4,285 1,839
======== ========
</TABLE>
In 1996, the Company wrote-off $51,000 in technologically obsolete
equipment.
(7) Acquisitions
During 1995, the Company purchased Intelect, Inc. ("INT") and Intelect
Europe Limited ("IEL"), and during 1996, the Company purchased DNA
Enterprises, Inc. ("DNA") and Intelect Visual Communications Corp.
("IVC"). A summary of these acquisitions is as follows:
(a) Intelect, Inc.
On January 13, 1995, the Company acquired 16% of the capital stock of
INT for $400,000. On March 31, 1995, the Company entered into an
agreement to purchase the remaining 84% of
38
(Continued)
<PAGE> 39
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the capital stock of INT (the "Option Agreement"). Under the terms of
the Option Agreement the Purchase Price was payable as follows:
(i) $2,500,000 payable in debentures (the "Debentures") of INT plus
the amount by which certain of INT's debts to two major
customers (the "Debts") were settled for less than $6,000,000.
The Debts were settled by the Company for $5,180,000 and,
accordingly, the face value of the Debentures was increased to
$3,320,000 ($2,500,000 plus $6,000,000 minus $5,180,000). The
face value of the Debentures was reduced by the amount that
defined net assets at the acquisition date (April 24, 1995) was
less than $1,268,000. The amount of this reduction was
$3,013,000 and, accordingly, the face value of the Debentures at
December 31, 1995 was $307,000.
(ii) $4,000,000 in "Contingent Purchase Consideration" calculated on
the future profitability of INT over the four year period from
January 1, 1995. The Additional Payments were payable in cash or
Common Shares, at the Company's option. The Contingent Purchase
Consideration will be reflected in the cost of acquisition and
resulting goodwill at the time the profitability contingencies
are resolved.
The first step of the acquisition of INT involved the purchase of a
minority interest (16%) for cash. The Company's equity in the
earnings of INT prior to acquisition of the remaining 84%, the second
step, amounted to a loss of $280,000 and equity in the extraordinary
gain arising from the restructuring of certain notes payable of
$646,000, which have been stated separately in the accompanying 1995
Consolidated Statements of Operations.
On October 7, 1996, the Company reached an agreement with the holders
of the Debentures (the "Vendors"), under which the Vendors exchanged
their remaining rights to the Debentures and Contingent Purchase
Consideration in exchange for 169,986 shares of common shares. The
transaction increased Goodwill by $660,000.
(b) Intelect Europe Limited
On August 31, 1995, the Company acquired 100% of the capital stock of
IEL for $391,000 in cash and up to 300,000 of the Company's common
shares in additional payments based on the future profitability of
IEL over the five year period commencing August 31, 1995.
In December 1996 management made the decision to close the operations
of IEL, which was subsequently placed in voluntary liquidation. The
liquidation represents a disposal of a part of a line of business.
Asset impairments have been recorded and estimated liabilities to be
incurred as a result of the liquidation have been accrued, resulting
in a charge to expense of $1,807,000 in 1996, including a writedown
of $740,000 of unamortized goodwill.
39
(Continued)
<PAGE> 40
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) DNA Enterprises. Inc.
On February 13, 1996, the Company acquired 100% of the capital stock
of DNA for $8,000,000, plus costs, payable as follows:
1. $3,000,000 cash at closing.
2. $1,000,000 cash on the first anniversary of closing.
3. $400,000 cash on the second anniversary of closing.
4. Warrants to purchase 300,000 common shares at $5.00 per share on
the first anniversary of closing.
5. Warrants to purchase 300,000 common shares at $7.00 per share on
the second anniversary of closing.
The Company has agreed to redeem the $5.00 warrants at prices of
$5.00, $5.50 and $6.00 per warrant share on the first, second, and
third anniversaries of closing, respectively, and redeem the $7.00
warrants at prices of $5.50 and $6.00 per warrant share on the second
and third anniversaries of closing, respectively, in each such case
at the option of the warrant holders. The warrants are classified
similar to redeemable preferred stock and included in long-term debt
at their highest redemption price, totaling $3,600,000 (note 10). On
the first anniversary, the warrant holders elected to redeem all
300,000 common share warrants available on that date.
(d) Intelect Visual Communications Corporation
On March 29, 1996, the Company acquired 100% of the capital stock of
IVC (formerly known as Mosaic Information Technologies, Inc.) for
479,370 common shares valued at $5.00 per share. The Company also
paid $695,000 cash, and issued 66,050 common shares, valued at $5.375
per share, as payment of certain other acquisition costs. The total
cost of the acquisition, including working capital advances prior to
acquisition, was $4,747,000. An additional 50,000 common shares,
valued at $5.00 per share, were issued to each of two selling
shareholders pursuant to employment agreements, and charged to
compensation expense. In addition, 1,100,000 common shares of
"Additional Purchase Consideration" may be earned by the selling
shareholders if certain performance achievements are met during the
three years after the closing. The Additional Purchase Consideration
will be reflected in the cost of acquisition and resulting goodwill
at the time the performance contingencies are resolved.
All acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase prices have been allocated to
the assets acquired and the liabilities assumed based on the estimated
fair values at the dates of acquisition. 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 15 years for INT and 10 years for
DNA. As discussed in note 2, all goodwill in connection with the
acquisitions of IVC and IEL was written off in 1996.
40
(Continued)
<PAGE> 41
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The estimated fair values of assets acquired and liabilities assumed are
summarized as follows (thousands of U.S. dollars):
<TABLE>
<CAPTION>
DNA IVC INT IEL
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash $ 3 27 40 --
Accounts receivable 621 19 454 388
Inventory -- 245 2,683 278
Property and equipment 502 81 700 492
Goodwill 7,280 4,514 8,260 812
Accounts payable and accruals (166) (123) (4,721) (1,293)
Deferred taxes (228) -- -- --
Debt -- (16) (6,530) (286)
------- ------- ------- -------
$ 8,012 4,747 886 391
======= ======= ======= =======
</TABLE>
Purchase prices include legal and other costs associated with the
acquisitions.
Operating results of the acquisitions are included in the Company's
consolidated results of operations from the effective dates of the
acquisitions. The following unaudited pro-forma summary presents the
consolidated results of operations as if the acquisitions had occurred at
January 1, 1996 and November 1, 1994, after giving effect to certain
adjustments, including amortization of goodwill, additional interest
expense on the acquisition debt and related income tax effects. These
pro-forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the
acquisitions been made as of those dates or of results which may occur in
the future (thousands of U.S. dollars, except per share amounts).
<TABLE>
<CAPTION>
Years ended
----------------------------
December 31, October 31,
1996 1995
------------ ------------
<S> <C> <C>
Net revenues $ 10,320 9,330
============ ============
Loss from continuing operations $ (43,251) (4,580)
============ ============
Net loss per common share $ (3.34) (0.40)
============ ============
</TABLE>
Unaudited pro forma amounts have not been presented for the two-month
period ended December 31, 1995 because presentation of such information is
not considered meaningful.
41
(Continued)
<PAGE> 42
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Other Intangible Assets
Other intangible assets is summarized as follows (thousands of U.S.
Dollars):
<TABLE>
<CAPTION>
December 31
----------------
1996 1995
------ ------
<S> <C> <C>
Investment in technology associated with
SONETLYNX products $ 500 500
Technology license fees associated with video-
conferencing products, acquired via debt 3,267 --
Other intellectual property 125 --
------ ------
3,892 500
Less accumulated amortization 1,013 --
------ ------
$2,879 500
====== ======
</TABLE>
At December 31, 1996, the Company's remaining technology license asset
associated with its videoconferencing product and related liability were
in dispute. The Company has not made any payment under the applicable
license agreement since September 1996. The Company has notified the
licensor that due to significant design flaws in the technology delivered,
the resulting nine month delay in market introduction, and the significant
costs incurred to modify and improve the purchased technology, it is
seeking to renegotiate the agreement. Management believes it will be
successful in its negotiations, and once finalized, any future payments
will result in an equivalent asset to the Company, which will be
recoverable based upon future sales. Although the Company believes it has
meritorious claims against the licenser, the ultimate resolution of this
matter could result in a loss of up to $2,550,000, representing the
remaining payments under the existing technology license agreement through
September 1998 (note 10).
(9) Discontinued Operations - Sale of Savage Corporation
On October 3, 1995 the Company signed a Stock Purchase Agreement (the
"Agreement") to sell its wholly-owned subsidiary Savage Corporation
("Savage") to Savage Sports Corporation (the "Buyer"), a newly-formed
company owned by Ronald Coburn, the President of Savage Arms, Inc. (a
wholly-owned subsidiary of Savage) and Fleet Equity Partners of
Providence, Rhode Island. The Agreement reflected a base purchase price of
$33,000,000 and the assumption by the buyer of up to $6,000,000 of defined
debt. The Company was required to retire certain convertible preferred
shares of Savage which required a cash payment of $500,000 and the
issuance of 160,991 shares ($425,000 fair value at date) of the Company
and to retire a specific debt of Savage aggregating $9,447,000 of
principal and interest.
On October 31, 1995, the Closing Date of the sale of Savage (the
"Closing"), Savage's debts, as defined above, were less than $6,000,000
and, accordingly, the net cash proceeds to the Company on the sale of
Savage amounted to $23,053,000 (being the gross proceeds of $33,000,000
less
42
(Continued)
<PAGE> 43
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
$9,447,000 used to retire a specific debt and $500,000 to retire 160,991
convertible preferred shares).
The Company recorded a gain on the sale of Savage, for the year ended
October 31, 1995, as follows (thousands of U.S. Dollars):
<TABLE>
<S> <C>
Base sale price $ 33,000
Investment in and advances to Savage (17,605)
--------
Gross gain 15,395
Less:
Product liability and environmental costs (675)
Legal, financing and other costs (896)
--------
Net gain on sale $ 13,824
========
</TABLE>
In connection with the sale of Savage, the Company has retained customary
environmental and product liability contingent liabilities relating to
Savage's operations prior to the Closing. The Company has purchased tail
insurance to cover certain of these contingent liabilities. There are no
assurances that the insurance coverage will be sufficient to settle all
claims (note 19). The net liabilities of discontinued operations represent
provisions for costs associated with the sale of Savage related
principally to product and environmental liabilities of $400,000 and
$476,000 at December 31, 1996 and 1995, respectively.
Operating results of discontinued operations have been reclassified from
amounts previously reported in the consolidated statement of operations
and have been reported separately in the consolidated statements of
operations. During the year ended December 31, 1996, the Company recorded
an adjustment of $56,000 to the gain on disposal representing legal fees
(note 19).
During the year ended October 31, 1995, the Company acquired Lakefield
Arms Limited for $1,923,000, comprised of $998,000 cash and 416,666 common
shares, valued at $2.22 per share. Lakefield Arms Limited was sold along
with the other assets of Savage Corporation in October 1995.
During the Transition Period ended December 31, 1995, the Company recorded
an adjustment to the gain of $236,000 representing non-cash compensation.
43
(Continued)
<PAGE> 44
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The results of discontinued operations are as follows (thousands of U.S.
Dollars):
<TABLE>
<CAPTION>
Years ended
October 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Net sales and other revenues $ 35,009 26,556
Costs and expenses 28,857 22,035
-------- --------
Income before income taxes 6,152 4,521
Income taxes 2,606 1,111
-------- --------
Income from discontinued operations $ 3,546 3,410
======== ========
Net cash provided by (used in) discontinued operations $ (1,349) 1,282
======== ========
</TABLE>
(10) Long-term Debt
Long-term debt is comprised of (thousands of U.S. Dollars):
<TABLE>
<CAPTION>
December 31
------------------
1996 1995
------- -------
<S> <C> <C>
Subordinated debentures with a face value of $307,000 payable in
annual installments of $72,916, including interest at 6%, issued
to previous shareholders of Intelect, Inc. (note 7(a)) $ -- 224
Due to customer - bearing interest at 6% and payable in April 1996 -- 880
Due to customer - bearing interest at 8% and payable on demand
which was paid in January 1996 -- 100
Contract for acquisition of technology license with original face
value of $3,500,000, payable in quarterly installments of
$325,000 through June 1998 and a final payment in September 1998
of $275,000 (note 8) 2,363 --
Repurchase agreements for common stock warrants held by former
shareholders of DNA Enterprises, Inc. payable in two installments
- $1,500,000 in February 1997 and $2,100,000 in February 1998
(notes 7(c) and 24) 3,600 --
Partial purchase price of DNA Enterprises, Inc. payable in two
installments - $1,000,000 in February 1997 and $400,000 in
February 1998 (notes 7(c) and 24) 1,400 --
------- -------
7,363 1,204
Less current installments (4,125) (1,036)
------- -------
$ 3,238 168
======= =======
</TABLE>
44
(Continued)
<PAGE> 45
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The subordinated debentures have been discounted in the accompanying
consolidated financial statements to an effective interest rate of 15% and
the technology contract has been discounted to an effective interest rate
of 7%. Accordingly, the carrying amounts approximate fair value at
December 31, 1996 and 1995.
(11) Convertible Debentures
During the year ended December 31, 1996, the Company had three issues of
convertible debentures: "June Debentures" in the aggregate principal
amount of $5,000,000 bearing interest at 7.5%, "August Debentures" in the
aggregate principal amount of $10,000,000 bearing interest at 7.5%, and
"October Debentures" in the aggregate principal amount of $10,000,000
bearing interest at 7%. At December 31, 1996, the June Debentures were
fully converted into 773,514 shares of common stock, the August Debentures
were partially converted into 883,691 shares of common stock, and the
October Debentures were partially converted into 180,000 shares of common
stock.
Convertible debentures were comprised of the following at December 31,
1996 (thousands of U.S. dollars):
<TABLE>
<S> <C>
7.5% debentures, due August 8, 1998, interest payable quarterly,
redeemable at the Company's option after August 8, 1997, at 125% of
the face amount for six months and 120% thereafter, or at the Nasdaq
market price of the common stock if the stock price falls below the
fixed conversion price of $11.0825, and convertible into common
shares, at the holder's option, at the lesser of 85% of the Nasdaq
five day average closing bid prior to the notice of conversion date,
or $11.0825, subject to a maximum of 2,582,107 shares $ 5,723
7% debentures, due October 15, 1998, interest payable quarterly,
redeemable at any time at the Company's option at 117.5% of the face
amount, and convertible into common shares, at the holder's option,
in equal one-third amounts of principal sixty, ninety and one
hundred twenty days after October 15, 1996, at the lesser of 82.5%
of the Nasdaq five day average closing bid prior to the notice of
conversion date, or $12.00 9,190
-------
Total $14,913
=======
</TABLE>
Financing costs incurred in 1996 in connection with the issuance of
debentures were $9,687,000, including $4,947,000 allocated to beneficial
conversion features, $3,117,000 in the fair value of detachable warrants
(note 15) to purchase 420,063 shares of common stock, valued using the
Black-Scholes model, and $1,623,000 in cash. In 1996, $9,105,000 was
charged to interest expense.
A further $8,539,000 of debentures were converted into 2,398,210 shares of
common stock through March 31, 1997.
45
(Continued)
<PAGE> 46
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Lease Commitments
The Company is obligated under various capital leases, for equipment and
vehicles, that expire during the next two years. At December 31, 1996 and
1995, the gross amount of equipment and vehicles and related accumulated
amortization recorded under capital leases were as follows (thousands of
U.S. dollars):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Equipment $160 261
Vehicles -- 224
---- ----
160 485
Less accumulated amortization 39 118
---- ----
$121 367
==== ====
</TABLE>
Amortization of assets held under capital leases is included with
depreciation and amortization expense.
The Company leases office space and certain office equipment under leases
expiring at various dates through 2004. Rental expense under operating
leases was approximately $1,032,000 for the year ended December 31, 1996,
$48,000 for the two months ended December 31, 1995 and $107,000 for the
year ended October 31, 1995 ($ nil in 1994).
Future calendar year minimum commitments as of December 31, 1996 under
capital and operating leases are as follows (thousand of U.S. dollars):
<TABLE>
<CAPTION>
December 31, 1996
-------------------
Capital Operating
Years ending December 31, leases leases
-------- ---------
<S> <C> <C>
1997 $ 57 1,045
1998 59 1,059
1999 - 1,044
2000 - 329
2001 and thereafter - 658
-------- ---------
Total minimum lease payments $ 116 4,135
======== =========
</TABLE>
Imputed interest included in future minimum commitments on capital leases
is not material.
(13) Employee Benefit Plans
The Company sponsors defined contribution 401(k) plans for substantially
all employees. Pursuant to the plans, employees may request the Company to
deduct and contribute amounts from their salary on a pre-tax basis.
Employee contributions are subject to certain limitations and the Company
may
46
(Continued)
<PAGE> 47
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
make matching contributions, at its discretion. The Company may also make
discretionary contributions in addition to matching contributions. Company
contributions vest ratably over periods of four to five years, beginning
in the second or first year of employment, respectively. Company
contributions to the plans were $459,000 for the year ended December 31,
1996, $16,000 for the two month period ended December 31, 1995 and $26,000
for the year ended October 31, 1995 (nil in 1994).
(14) Income Taxes
Bermuda currently imposes no corporate income taxes. Under the provisions
of the exempted Undertaking Tax Protection Act, 1966 of Bermuda, the
Company, in the event that Bermuda legislation imposes corporate income
taxes, is exempted from such tax until March, 2016.
The Company does not consider itself to be engaged in trade or business in
the United States. As such, the Company does not expect to be subject to
direct United States taxation.
Beginning with the year ended December 31, 1995, the United States
subsidiaries of the Company began filing a consolidated United States
Federal income tax return.
In prior years, the benefit from the utilization of the net operating
losses from discontinued operations in existence as of the date of the
quasi-reorganization was recorded as a component of shareholders' equity.
Total income tax expense for the year ended December 31, 1996, the two
month period ended December 31. 1995, and for the years ended October 31,
1995 and 1994 was allocated as follows (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
Two months Year ended
Year ended ended October 31
December 31, December 31, ---------------
1996 1995 1995 1994
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Loss from continuing operations $ 87 -- -- --
Income from discontinued
operations -- -- 2,606 1,111
Goodwill, for initial recognition
of acquired tax liabilities 228 -- -- --
Shareholder's equity (use of net
operating loss carryforwards in
existence at date of quasi-
reorganization -- -- (1,472) (726)
------------ ------------ -------- --------
$ 315 -- 1,134 385
============ ============ ======== ========
</TABLE>
47
(Continued)
<PAGE> 48
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income tax expense for the year ended December 31, 1996 attributable to
loss from continuing operations was $87,000. All components of income tax
expense (current, deferred, and other) attributable to loss from
continuing operations were $ nil for the two months ended December 31,
1995, and the years ended October 31, 1995 and 1994. The difference
between the actual income tax expense (benefit) and the expense (benefit)
computed by applying the statutory corporate income tax rate of 34% to
pretax loss from continuing operations is attributable to the following
(in thousands of U.S. dollars):
<TABLE>
<CAPTION> Two months Year ended
Year ended ended October 31
December 31, December 31, -----------
1996 1995 1995 1994
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Computed expected tax benefit $ (14,585) (1,024) (1,766) (183)
Increase in net operating loss
carryforwards not providing
current benefit 7,530 880 1,292 --
Permanent items 1,776 -- 390 --
Tax effect of loss not subject to
U.S. taxation 4,517 144 117 183
Other 849 -- (33) --
------------ ------------ -------- --------
Tax expense $ 87 -- -- --
============ ============ ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are as follows (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Preacquisition net operating loss carryforwards $ 4,831 3,788
Postacquisition net operating loss carryforwards 8,762 2,632
Inventories - due to reserves and additional costs
capitalized for tax 374 248
Accrued contract completion costs 110 143
Goodwill 71 --
License fees and intelectual property 257 --
Other expenses 423 307
Alternative minimum tax and other credit carryforwards 298 299
-------- --------
Gross deferred tax assets 15,126 7,417
Less valuation allowance (15,126) (7,417)
-------- --------
Deferred tax assets $ -- --
======== ========
</TABLE>
48
(Continued)
<PAGE> 49
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 87 --
Other 228 --
---- ----
Deferred tax liabilities $315 --
==== ====
Net deferred tax liability $315 --
==== ====
</TABLE>
The valuation allowance for deferred tax assets was $6,282,000 at October
31, 1995 and it was established in that year. During the two month period
ended December 31, 1995 and the year ended December 31, 1996, the
valuation reserve was increased $1,135,000 and $7,709,000, respectively.
At December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $39,980,000, and tax credit carryforwards
of $298,000. The future utilization of $14,210,000 of these net operating
losses and the credit carryforwards will be limited under Internal Revenue
Code sections 382 and 383 as a result of the acquisition of Intelect, Inc.
and Intelect Visual Communications Corp. The tax benefits from the
utilization of the preacquisition operating loss carryforwards and the tax
credits will be credited to goodwill when they are realized. The following
is a summary of the carryforwards and the expiration dates as of December
31, 1996 (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
December 31, 1996
---------------------
Expiration
Amounts dates
------- ----------
<S> <C> <C>
Postacquisition net operating loss carryforwards $25,770 2011
Preacquisition net operating loss carryforwards 14,210 2008-2009
Alternative minimum tax credit 38 --
General business credit 260 1997-2000
</TABLE>
(15) Share Capital
Authorized share capital of $0.01 par value, for all periods presented,
was as follows:
<TABLE>
<S> <C>
Serial Preference Shares 15,000,000
Common Shares 80,000,000
</TABLE>
During the year ended December 31, 1996, the Company issued 180,000 common
shares at $2.50 per share and 180,000 common shares at $3.50 per share
upon the exercise of warrants issued to the previous owners of Savage
Corporation. The warrants had been issued in connection with the
acquisition of Savage Corporation. The Company also issued 100,000 common
shares at $3.75 per share in consideration for an investment of $375,000
in debentures with a CDN $500,000 face value,
49
(Continued)
<PAGE> 50
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
previously issued by Lakefield Arms Limited. The debentures are unsecured,
bear interest at 8% per annum, and mature August 4, 1999.
In 1996, in conjunction with the issuance of convertible debentures, and
in conjunction with the acquisition of DNA Enterprises, Inc., the Company
issued warrants exercisable for common shares. At December 31, 1996,
outstanding warrants were as follows:
<TABLE>
<CAPTION>
Exercise
Grant Date Warrants Prices Exercise Periods
----------------- --------- -------- -------------------------------
<S> <C> <C> <C>
February 13, 1996 300,000 $ 5.00 February 1997 - February 1999
February 13, 1996 300,000 7.00 February 1998 - February 1999
June 7, 1996 125,000 13.1875 June 1996 - June 2001
August 8, 1996 70,063 8.56375 August 1996 - August 2001
September 9, 1996 125,000 9.5625 September 1996 - September 2001
October 15, 1996 225,000 7.50 October 1996 - October 2001
---------
Total 1,145,063
=========
</TABLE>
The fair value of warrants issued in conjunction with the convertible
debentures was determined using the Black-Scholes option pricing model
with the following assumptions:
<TABLE>
<CAPTION>
Stock Exercise Interest Fair
Issue price price Term Volatility rate value
- - ----------------- ------- -------- ---- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
June 7, 1996 13.1875 13.1875 5.0 70.5% 7.05% $1,058,000
August 8, 1996 9.5625 8.56375 5.0 73.1 7.05% 453,000
September 9, 1996 7.50 9.5625 5.0 71.6 7.05% 561,000
October 15, 1996 7.50 7.50 5.0 68.3 6.00% 1,045,000
-----------
Total $3,117,000
===========
</TABLE>
Pursuant to the acquisition agreement of Intelect Visual Communications
Corp., 1,100,000 shares of common stock may be issued based on performance
achievements to be met during a three year post closing period (see note
7(d)).
During the year ended October 31, 1994, the Company issued 110,000 common
shares at $0.80 per share as a result of a commitment to the underwriters
of a public offering on October 31, 1992, and 600,000 common shares in
connection with certain conversion rights of preferred shares of Savage
Corporation.
There have been no dividends declared for any of the periods reported.
50
(Continued)
<PAGE> 51
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Employee Stock Option Plan
In 1995, the Company adopted a stock option plan (the "Plan") pursuant to
which the Company's Board of Directors may grant stock options to
directors, officers and key employees. The Plan authorizes grants of
options to purchase up to 3,000,000 shares of authorized common stock. The
exercise price for stock options granted may range from 25% to 110% of the
fair market value of the shares at the date of grant. All stock options
have 10-year terms and vest and become fully exercisable ratably on each
of the first, second and third anniversaries of the date of the grant. At
December 31, 1996, there were 928,500 additional shares available for
grant under the Plan. The Plan replaced a predecessor plan which continues
only to the extent that there are 505,000 unexercised options outstanding
at December 31, 1996.
The per share weighted-average fair value of stock options granted during
1996 and the transition period ended December 31, 1995, was $4.66 and
$7.07, respectively, on the dates of grants. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option
pricing model, with the following weighted-average assumptions:
<TABLE>
<CAPTION>
Two months
Year ended ended
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Expected dividend yield 0% 0%
Stock price volatility 68% 68%
Risk free interest rate 6.1% 6.7%
Expected option term 3 years 3 years
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, has recognized compensation expense with respect to certain
options granted at exercise prices less than the stock's market value at
the date of grant. During the year ended December 31, 1996, and the two
months ended December 31, 1995, the Company recognized compensation
expense of $487,000 and $286,000, respectively, of which $236,000 in the
transition period was allocated to the gain on sale of discontinued
operations. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's
51
(Continued)
<PAGE> 52
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
net losses would have been increased to the pro forma amounts indicated
below (thousands of U.S. dollars, except for per share data):
<TABLE>
<CAPTION>
Two months
Year ended ended
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Net loss:
As reported $ (43,039) (3,012)
Pro forma (51,787) (6,420)
Loss per share:
As reported $ (3.33) (0.26)
Pro forma (4.00) (0.56)
</TABLE>
Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
option's vesting period of three years and compensation cost for options
granted prior to November 1, 1995, is not considered. Furthermore, the
effects of applying SFAS No. 123 may not be representative of the effects
on reported net income for future years.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Two months
Year ended ended Years ended
December 31, December 31, October 31
------------------------
1996 1995 1995 1994
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Number of options:
Outstanding, beginning of period 1,917,800 987,800 1,044,018 881,818
Granted 1,260,000 970,000 172,000 177,200
Exercised (530,000) - (74,318) (10,000)
Canceled (121,300) (40,000) (153,900) (5,000)
Outstanding, end of period 2,526,500 1,917,800 987,800 1,044,018
Weighted average exercise price:
Outstanding, beginning of period $ 2.56 1.94 1.86 1.75
Granted $ 6.85 3.22 4.16 2.42
Exercised $ 1.93 - 1.93 1.50
Canceled $ 7.77 3.00 3.93 2.55
Outstanding, end of period $ 4.58 2.56 1.94 1.86
</TABLE>
At December 31, 1996 and 1995, the number of options exercisable was
734,332 and 806,867, respectively, and the weighted-average exercise price
of those options was $2.79 and $1.72, respectively.
52
(Continued)
<PAGE> 53
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.00 - $12.125 and
8.57 years, respectively, as shown in the following table:
<TABLE>
<CAPTION>
Vested option
Option shares shares Exercise prices Expiration
outstanding outstanding per share dates
------------- ------------- --------------- ----------
<S> <C> <C> <C>
175,000 175,000 $ 1.00 1999-2000
95,000 63,334 $ 2.375 2004
5,000 5,000 $ 2.55 2003
165,000 165,000 $ 2.66 2003
825,000 228,332 $ 3.00 2005
25,000 25,000 $ 3.08 2003-2005
23,200 7,733 $ 3.32 2005
20,000 -- $4.3125 2005
100,000 -- $ 4.375 2005
100,000 -- $ 5.35 2005
129,000 -- $ 5.375 2006
16,800 5,600 $ 5.40 2005
25,000 8,333 $ 5.625 2005
317,000 -- $ 6.50 2006
18,500 18,500 $ 7.25 2006
105,000 -- $ 7.50 2006
290,000 2,500 $7.8125 2006
30,000 30,000 $ 8.375 2006
35,000 -- $ 9.25 2006
22,000 -- $ 10.50 2006
5,000 -- $12.125 2006
------------- -------------
2,526,500 734,332
============= =============
</TABLE>
53(Continued)
<PAGE> 54
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) Earnings (Loss) Per Share
The weighted average number of shares outstanding during the period is
calculated as follows:
<TABLE>
<CAPTION>
Two months
Year ended ended Years ended
December 31, December 31, October 31
------------------------
1996 1995 1995 1994
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Shares in issue beginning of
period 11,385,117 11,385,117 10,583,142 9,863,142
Shares issued (weighted average) 1,558,319 -- 441,360 78,815
------------ ------------ ---------- ----------
Weighted average shares in issue
end of period 12,943,436 11,385,117 11,024,502 9,941,957
Dilutive common stock
equivalents (weighted average):
Savage Arms Series A
convertible redeemable
preferred stock -- -- -- 591,781
Savage Arms Series AC
convertible redeemable
preferred stock -- -- -- 160,991
Other stock options using
treasury stock method -- -- 426,820 366,161
------------ ------------ ---------- ----------
Total weighted average common
shares and common stock
equivalents 12,943,436 11,385,117 11,451,322 11,060,890
============ ============ ========== ==========
</TABLE>
For the year ended December 31, 1996, and the two-month period ended
December 31, 1995, the computation of both primary and fully diluted
earnings per share was based on the weighted average number of common
shares outstanding for the period. Common share equivalents relating to
the exercise of stock options and stock warrants or conversion of
convertible debt were excluded from the computation as the effects would
have been anti-dilutive.
For the years ended October 31, 1995 and 1994, the computation of primary
earnings per share was based upon the weighted average number of common
share and common share equivalents (stock options and convertible
redeemable preferred stock) outstanding during the period.
Contingent shares, which are part of the Intelect, Inc. and IVC
acquisitions were excluded from the calculations because it was considered
unlikely that the underlying performance criteria would be met.
Fully diluted earnings per share is considered to be the same as primary
earnings per share for all periods presented since the effect of certain
potentially dilutive securities would be anti-dilutive.
54
(Continued)
<PAGE> 55
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) Quasi-Reorganization
A quasi-reorganization is an elective accounting procedure that permits a
company which has emerged from previous financial difficulty to establish
a fresh start in an accounting sense. The Company made such an election on
October 31, 1992. Assets and liabilities were established at fair values
at October 31, 1992 and a deficit of $16,132,000 was eliminated against
share premium. Quasi-reorganization adjustments in the years ended October
31, 1995 of $1,545,000 (1994: $427,000; 1993: $1,072,000) were the result
of the realization of deferred tax benefits on discontinued operations
(note 14) and valuation adjustments to liabilities existing prior to
October 31, 1992.
(19) Contingencies
The Company is contingently liable for certain potential liabilities
related to its discontinued operations. Specifically, under a stock
purchase agreement dated October 3, 1995 ("1995 Agreement"), the Company
agreed to indemnify Savage Sports Corporation, the purchaser of Savage
Arms, Inc. (a manufacturer of firearms), for certain product liability,
environmental clean-up costs and other contractual liabilities, including
certain asserted successor liability claims. One of the liabilities
assumed involves a firearms product liability lawsuit filed by Jack Taylor
individually and as father of Kevin Taylor in Alaska Superior Court (the
"Taylor litigation"). The Company is informed that a defendant in the
Taylor litigation, Western Auto Supply Co., settled the lawsuit for $5
million and, in turn, has asserted a third-party claim against Savage
Arms, Inc. for indemnification in the amount of the settlement plus
attorneys' fees and related costs. Savage Arms has asserted defenses to
the claims and the Company believes additional defenses may be available.
Based on the information available to date it is impossible to predict the
outcome of this litigation or to assess the probability of any verdict.
The Company also has been notified that Savage Sports Corporation seeks
indemnification under the 1995 Agreement in connection with certain other
product liability claims. Most notably, the Company has undertaken the
defense of a lawsuit filed against Savage Arms, Inc. by Emhart Industries,
Inc. ("Emhart") in the United States District Court for the District of
Massachusetts (the "Emhart litigation"). In the lawsuit, Emhart requests
indemnification under an agreement it allegedly executed in 1981 with
Savage Industries, Inc., an entity Emhart alleges is a predecessor to
Savage Arms, Inc. In particular, to date Emhart has claimed
indemnification of approximately $2.2 million for five lawsuits it has
defended or settled and also seeks a declaratory judgment that it is
entitled to indemnification for losses and expenses related to firearms
product liability actions which may be filed against Emhart in the future.
Savage Arms has asserted the responsibility of a third party to the 1981
agreement but remains a defendant. The Company intends to assert
additional defenses. The parties are in the early stages of discovery and
the Company cannot at this time predict the outcome of the litigation.
In March 1997, Peter G. Leighton, former president and Rhianon M. Pedro,
former vice president finance, initiated actions against the Company
seeking damages of $2,130,000 and $150,000, respectively, related to their
separations from the Company. The Company will vigorously contest
55
(Continued)
<PAGE> 56
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
these actions. Due to the recent initiation of these actions, the Company
cannot predict their outcome.
At December 31, 1996, the Company has not made any specific provision for
these claims. In the event the Taylor litigation, the Emhart litigation,
and/or the former employee actions were to be resolved adversely to the
Company, there would be a material adverse effect on the Company's
financial condition and results of operations.
(20) Domestic and Foreign Operations
The Company operates in predominantly one business segment, which consists
of the design, manufacture and sale of telecommunications and related
equipment.
Revenue transfers between geographic areas are not material. Operating
profit is total revenue less operating expenses, excluding interest,
income taxes and engineering and development expenses which are considered
by management to be corporate expenses.
In the periods ended December 31, 1995 and October 31, 1995 and 1994,
substantially all the Company's revenues and assets were in the United
States. Discontinued operations were substantially in the United States.
Information about the company's operations in different geographic
locations as of and for the year ended December 31, 1996 follows
(thousands of U.S. dollars):
<TABLE>
<CAPTION>
United Other
States Europe foreign Consolidated
--------- ------- ------- ------------
<S> <C> <C> <C> <C>
Net revenues $ 5,681 3,556 768 10,005
======== ====== ====== ===========
Operating losses $(13,095) (7,347) (1,347) (21,789)
======== ====== ======
General corporate expenses (11,196)
Interest expense (9,911)
-----------
Loss from continuing
operations before
income taxes $(42,896)
===========
Identifiable assets 30,308 221 -- 30,529
Corporate assets 5,489
-----------
Total assets $ 36,018
===========
</TABLE>
Identifiable assets are those assets of the Company that are identified
with the operations in each geographic area. Identifiable assets for
Europe are disproportionately low due to the voluntary liquidation of IEL
(note 7(b)). The identifiable assets in Europe at December 31, 1996, are
those of Intelect Network Systems Limited, a sales and service company
chartered in November 1996. Corporate assets are principally cash and
deferred financing costs.
56
(Continued)
<PAGE> 57
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Direct export sales of $1,402,000 for the year ended December 31, 1996,
are included in the United States net sales.
(21) Related Party Transactions
During the year ended December 31, 1996, the following related party
transactions were recorded:
(a) Purchased patents, intellectual property and related proprietary
information from a company owned by an officer for $125,000 and
entered into a royalty agreement with respect to products sold by the
Company which are covered by the patents.
(b) Loaned an officer $135,000, of which $91,000, including accrued
interest, remains outstanding at December 31, 1996. The 5% note is
secured by a stock pledge agreement.
(c) Borrowed $500,000 from a company controlled by a director who was
also the Company's president in July, and repaid the loan in
September, including interest of $13,000.
(d) Paid $120,000 for management fees and rented facilities from a
company controlled by a director who was also the Company's president.
(e) Amended employment agreements with the now former president and
the present chairman which, generally upon termination, provide for
continuation of salaries for three years following the current year of
employment.
During the period ended December 31, 1995, there were no related party
transactions.
During the year ended October 31, 1995, a nonsalaried director was paid
$150,000 for services rendered in connection with the acquisitions of
Intelect, Inc. and Intelect Europe Limited.
The Company received a short-term loan from a company controlled by a
director who was also the Company's president, in the amount of $2,000,000
for a period of two months pending the sale of Savage. The loan was repaid
on October 31, 1995 with interest (calculated at 15%) of $22,000.
The Company also received short-term loans from three directors
aggregating $600,000 during the months of April through June 1995. These
loans were repaid by July 1995 with interest (calculated at 10%) of
$8,000.
In August 1995, the Company issued 150,000 shares to a director, who was
also the Company's president, at $3.50 per share which was the market
value of the Company's shares at the time.
(22) Significant Customers and Concentration of Credit Risk
In 1996, one customer represented 25% of the consolidated net revenue.
Three customers represented 49%, 24% and 11% of the consolidated net
revenues for the two month period ended December 31, 1995.
57
(Continued)
<PAGE> 58
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Four customers represented 27%, 15%, 13% and 13% of consolidated net
revenues for the year ended October 31, 1995.
None of these customers are expected to generate significant revenues in
fiscal 1997.
The Company is subject to credit risk through trade receivables. Credit
risk is minimized through advance and milestone payments on large
contracts, which are generally with large, well-established companies or
governmental units. The Company has never experienced significant credit
losses. At December 31, 1996, one customer accounted for 25% of the
accounts receivable.
(23) Supplemental Disclosure of Cash Flow Information (thousands of U.S.
dollars)
<TABLE>
<CAPTION>
Two months
Year ended ended Years ended
December 31, December 31, October 31
------------------------
1996 1995 1995 1994
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Cash paid during the period for:
Interest $ 509 23 408 443
Taxes relating to continuing
operations -- -- -- 303
</TABLE>
Noncash Items
During the year ended December 31, 1996, the Company recorded the
following noncash transactions:
(a) Converted convertible debentures into stock - $10,087,000 (note
11).
(b) Allocation of proceeds from convertible debentures to beneficial
conversion features - $4,947,000 (note 11).
(c) Issued common stock warrants in conjunction with convertible
debentures - $3,117,000 (notes 11 and 15).
(d) Obtained a technology license in exchange for a note - $3,267,000
(note 8).
(e) Issued stock in final settlement of the Intelect, Inc.
acquisition - $850,000 (note 7(a)).
(f) Issued stock as part of employment agreements - $500,000 (note
7(d)).
(g) Recognized compensation expense on stock options granted at less
than market price - $487,000 (note 16).
(h) Acquired an other asset with stock - $375,000 (note 15).
(i) Acquired equipment under capital leases - $111,000 (note 12).
During the Transition Period ended December 31, 1995, the Company acquired
equipment under capital leases of $330,000 and made an adjustment to the
purchase price of Intelect Europe of $75,000.
58
(Continued)
<PAGE> 59
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the year ended October 31, 1995, the Company issued debentures with
a discounted fair value of $224,000 and $477,000 at December 31 and
October 31, 1995, respectively, to the sellers of Intelect, Inc. (see note
7 above). The Company issued 160,991 shares at October 31, 1995, to retire
certain preferred shares of Savage Arms (with a carrying value of
$402,478) (see note 9 above).
(24) Subsequent Events
(a) On February 18, 1997, the Company signed a letter of intent with a
private lender to provide a credit facility (the "Credit Facility"),
of up to $15,000,000. The initial portion of the Credit Facility has
been finalized, and permits the Company to borrow up to $5,000,000,
secured by all outstanding shares of DNA Enterprises, Inc. ("DNA"), a
wholly owned subsidiary of the Company. In conjunction with the
initial portion of the Credit Facility, the Company has issued
warrants to purchase 300,000 common shares at $5.00, at any time
until February 26, 2002, and warrants to purchase 300,000 common
shares at $3.25, at any time until March 28, 2002.
The subsequent portion of the Credit Facility, subject to completion
of the lender's due diligence and negotiation of certain terms and
conditions, provides for up to $10,000,000 subject to a formula based
on accounts receivable, inventory and fixed assets. The Credit
Facility is to be secured by the assets and by guarantees of
subsidiaries. In conjunction with the subsequent portion of the
Credit Facility, the Company will issue warrants to purchase 150,000
common shares for each $1,000,000 or portion thereof drawn against
the note, all exercisable at a price to be negotiated, at any time
for a five year period from the date of issuance.
The entire Credit Facility is due March 27, 1998, including principal
and interest at the rate of 2% over prime. Proceeds of the Credit
Facility will be used for general corporate purposes, including the
settlement of contractual obligations related to the acquisition of
DNA.
(b) The $2,500,000 of contractual obligations related to the DNA
acquisition, due in February 1997, were not paid in full. The Company
paid $200,000 and is negotiating revised terms to pay the remaining
$2,300,000 during 1997 (note 10).
59
<PAGE> 60
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company will file with the Securities and Exchange Commission a
definitive Proxy Statement no later than 120 days after the close of its fiscal
year ended December 31, 1996 (the "Proxy Statement"). The information required
by this Item is incorporated by reference from the Proxy Statement.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
from the Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference
from the Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference
from the Proxy Statement.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. The Financial Statements and Financial Statement Schedules
filed as part of this report are listed and indexed on Page 22. Schedules
other than those listed in the index have been omitted because they are not
applicable or the required information has been included elsewhere in this
report.
B. Listed below are all Exhibits filed as part of this report.
Certain Exhibits are incorporated by reference to documents previously filed by
the Registrant with the Securities and Exchange Commission pursuant to Rule
12b-32 under the Securities Exchange Act of 1934, as amended.
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
3.1 Memorandum of Association of the Company, as amended (9)
3.2 Certificate of Incorporation of the Company, as amended (9)
3.3 Bye-laws of the Company (9)
4.1 Specimen common share certificate (1)
4.2 Form of 7.5% Convertible Debenture due June 7, 1998 of the Company (8)
4.3 Form of 7.5% Convertible Debenture due August 8, 1998 of the Company (10)
4.4 Form of 7% Series A Convertible Debenture due October 15, 1998 of Intelect Communications systems
Limited (10)
4.5 Form of 7% Series B Convertible Debenture due October 15, 1998 of Intelect Communications Systems
Limited (10)
10.1 Option Rights Agreement for Outstanding Shares of Intelect, Inc. and Stock Purchase Agreement dated
January 13, 1995 (11) (Note - this Agreement was replaced by the March 31, 1995 Option agreement)
10.2 Option Agreement dated March 31, 1995 by and among the Company, Sellers and Intelect, Inc. (3)
10.3 Stock Purchase Agreement dated October 3, 1995 by and among the Company, Savage Corporation and
Savage Sports Corporation (3)
10.4 Management Agreement dated as of October 1, 1995 between Intelect Systems Corp. and Herman
Frietsch* (7)
</TABLE>
61
<PAGE> 61
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
10.5 Amendment No. One dated January 1, 1996 between Intelect Systems Corp. and Herman Frietsch to
Management Agreement referred to in Exhibit 10.4*
10.6 General Employment Agreement dated as of November 1, 1994 between the Company and Peter G.
Leighton* (8)
10.7 Amendment No. One dated as of January 2, 1996 between the Company and Peter G. Leighton to the
General Employment Agreement referred to in Exhibit 10.6*
10.8 Employment Agreement dated as of April 1, 1996 between the Company and Eugene Helms* (10)
10.9 Employment Agreement dated as of April 24, 1995 between the Company and Peter Ianace* (7)
10.10 Stock Purchase Agreement dated January 13, 1996 by and between Intelect Systems Corp., the Company,
Robert E. Nimon, Kim F. Nimon, Edgar L. Read, Gregory L. Mayhan and DNA Enterprises, Inc. (4)
10.11 Warrants dated February 13, 1996 issued to Edgar L. Read and Gregory L. Mayhan delivered at Closing
(4)
10.12 Warrants dated February 13, 1996 issued to Edgar L. Read and Gregory L. Mayhan to be delivered one
year after Closing (2)
10.13 Consulting Agreement dated as of February 13, 1996 between DNA Enterprises, Inc. and Nimon
Consulting, Inc. (4)
10.14 Employment Agreement dated as of February 13, 1996 between Edgar L. Read and DNA Enterprises, Inc.*
(4)
10.15 Employment Agreement dated as of February 13, 1996 between Gregory L. Mayhan and DNA Enterprises,
Inc.* (4)
10.16 Agreement and Plan of Merger dated March 19, 1996 among the Company, Mid-Ocean, Inc. and Mosaic
Information Technologies, Inc. (6)
10.17 Registration Rights Agreement dated as of March 29, 1996 among the Company and certain purchasers
(6)
10.18 Employment Agreement dated March 29, 1996 among Matthew Feldman, the Company and Mosaic Information
Technologies Inc.* (6)
10.19 Convertible Securities Agreement dated June 7, 1996 among the Company, Infinity Investors, Ltd. and
Seacrest Capital Limited (8)
10.20 Registration Rights Agreement dated June 7, 1996 among the Company, Infinity Investors, Ltd. and
Seacrest Capital Limited (8)
10.21 Letter Agreement dated July 31, 1996 among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (8)
10.22 Convertible Securities Agreement dated August 8, 1996 among the Company and certain Investors (10)
10.23 Registration Rights Agreement dated August 8, 1996 among the Company and certain Investors (10)
10.24 Convertible Securities Agreement dated October 15, 1996 among the Company, Infinity Investors, Ltd.
and Seacrest Capital Limited (10)
10.25 Registration Rights Agreement dated October 15, 1996 among the Company, Infinity Investors, Ltd.
and Seacrest Capital Limited (10)
10.26 Book Entry Transfer Agent Agreement dated October 15, 1996 by and among the Company, Infinity
Investors, Ltd., Seacrest Capital Limited and American Stock Transfer & Trust Company (10)
10.27 Offer to Purchase the Five Year Six Percent (6%) Subordinated Debentures of Intelect, Inc. for an
Aggregate of 170,000 Shares of Common Stock, $0.01 Par Value, of the Company and the payment of
Certain Amounts in Lieu of Issuing Fractional Shares, Dated September 6, 1996 (10)
10.28 Letter of Transmittal to Accompany Five Year Six Percent (6%) Subordinated Debentures of Intelect,
Inc. (10)
10.29 Form of Release in Consideration of Exchange of Property (10)
10.30 Promissory Note dated as of February 26, 1997 to St. James Capital Corp. from the Company
10.31 Pledge Agreement dated as of February 26, 1997 between the Company and St. James Capital Corp.
10.32 Warrant to Purchase Common Stock of the Company Expiring February 26, 2002
10.33 Registration Rights Agreement dated February 26, 1997 between the Company and St. James Capital
Corp.
10.34 Amended and Restated Promissory Note dated as of February 26, 1997 to St. James Capital Corp. from
the Company
10.35 First Amendment to Pledge Agreement dated as of March 27, 1997 between the Company and St. James
Capital Corp.
10.36 Warrant to Purchase Common Stock of the Company Expiring March 27, 2002
10.37 Amendment No. 1 to Registration Rights Agreement dated as of March 27, 1997 between the Company and
St. James Capital Corp.
10.38 Employee Stock Option Plan adopted April 24, 1986*
10.39 Stock Incentive Plan adopted December 13, 1995*
</TABLE>
62
<PAGE> 62
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
10.40 License Agreement between Digital Equipment Corp. and Mosaic Information Technologies dated June
13, 1996
21.0 Subsidiaries of the Company
23.0 Consent of Independent Auditors
27.0 Financial Data Schedule
</TABLE>
*Management contract or other compensatory plan or arrangement.
(1) Incorporated herein by reference to the Registrant's Form 10-K for the
fiscal year ended October 31, 1995
(2) Incorporated herein by reference to the Registrant's Transition Report
on Form 10-K for the transition period ended December 31, 1995
(3) Incorporated herein by reference to the Registrant's Form 8-K dated
November 10, 1995
(4) Incorporated herein by reference to the Registrant's Form 8-K dated
February 20, 1996
(5) Incorporated herein by reference to the Registrant's Form 10-Q for the
fiscal quarter ended March 31, 1996
(6) Incorporated herein by reference to the Registrant's Form 8-K dated
April 12, 1996
(7) Incorporated herein by reference to the Registrant's Form 8-K/A dated
April 12, 1996
(8) Incorporated herein by reference to the Registrant's Form 10-Q for the
fiscal quarter ended June 30, 1996
(9) Incorporated herein by reference to the Registrant's Form S-3
(#333-9049)
(10) Incorporated herein by reference to the Registrant's Form 10-Q for the
fiscal quarter ended September 30, 1996
(11) Incorporated herein by reference to the Registrants Form 20-F for the
fiscal year ended October 31, 1994
C. The Registrant has not filed any reports on Form 8-K during the
last quarter of the period covered by this Report.
63
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 15, 1997 By: /s/ HERMAN M. FRIETSCH
-------------------------------
Herman M. Frietsch
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ HERMAN M. FRIETSCH /s/ ANTON VON AND ZU LIECHENSTEIN
- - ------------------------------------------- ----------------------------------
Herman M. Frietsch Anton von and zu Liechenstein,
Chief Executive Officer and Director Director
(Principal Executive Officer)
/s/ EDWIN J. DUCAYET, JR. /s/ PHILIP P. SUDAN, JR.
- - ------------------------------------------- ----------------------------------
Edwin J. Ducayet, Jr. Philip P. Sudan, Jr., Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
64
<PAGE> 64
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
3.1 Memorandum of Association of the Company, as amended (9)
3.2 Certificate of Incorporation of the Company, as amended (9)
3.3 Bye-laws of the Company (9)
4.1 Specimen common share certificate (1)
4.2 Form of 7.5% Convertible Debenture due June 7, 1998 of the Company (8)
4.3 Form of 7.5% Convertible Debenture due August 8, 1998 of the Company (10)
4.4 Form of 7% Series A Convertible Debenture due October 15, 1998 of Intelect Communications systems
Limited (10)
4.5 Form of 7% Series B Convertible Debenture due October 15, 1998 of Intelect Communications Systems
Limited (10)
10.1 Option Rights Agreement for Outstanding Shares of Intelect, Inc. and Stock Purchase Agreement dated
January 13, 1995 (11) (Note - this Agreement was replaced by the March 31, 1995 Option agreement)
10.2 Option Agreement dated March 31, 1995 by and among the Company, Sellers and Intelect, Inc. (3)
10.3 Stock Purchase Agreement dated October 3, 1995 by and among the Company, Savage Corporation and
Savage Sports Corporation (3)
10.4 Management Agreement dated as of October 1, 1995 between Intelect Systems Corp. and Herman
Frietsch* (7)
10.5 Amendment No. One dated January 1, 1996 between Intelect Systems Corp. and Herman Frietsch to
Management Agreement referred to in Exhibit 10.4*
10.6 General Employment Agreement dated as of November 1, 1994 between the Company and Peter G.
Leighton* (8)
10.7 Amendment No. One dated as of January 2, 1996 between the Company and Peter G. Leighton to the
General Employment Agreement referred to in Exhibit 10.6*
10.8 Employment Agreement dated as of April 1, 1996 between the Company and Eugene Helms* (10)
10.9 Employment Agreement dated as of April 24, 1995 between the Company and Peter Ianace* (7)
10.10 Stock Purchase Agreement dated January 13, 1996 by and between Intelect Systems Corp., the Company,
Robert E. Nimon, Kim F. Nimon, Edgar L. Read, Gregory L. Mayhan and DNA Enterprises, Inc. (4)
10.11 Warrants dated February 13, 1996 issued to Edgar L. Read and Gregory L. Mayhan delivered at Closing
(4)
10.12 Warrants dated February 13, 1996 issued to Edgar L. Read and Gregory L. Mayhan to be delivered one
year after Closing (2)
10.13 Consulting Agreement dated as of February 13, 1996 between DNA Enterprises, Inc. and Nimon
Consulting, Inc. (4)
10.14 Employment Agreement dated as of February 13, 1996 between Edgar L. Read and DNA Enterprises, Inc.*
(4)
10.15 Employment Agreement dated as of February 13, 1996 between Gregory L. Mayhan and DNA Enterprises,
Inc.* (4)
10.16 Agreement and Plan of Merger dated March 19, 1996 among the Company, Mid-Ocean, Inc. and Mosaic
Information Technologies, Inc. (6)
10.17 Registration Rights Agreement dated as of March 29, 1996 among the Company and certain purchasers
(6)
10.18 Employment Agreement dated March 29, 1996 among Matthew Feldman, the Company and Mosaic Information
Technologies Inc.* (6)
10.19 Convertible Securities Agreement dated June 7, 1996 among the Company, Infinity Investors, Ltd. and
Seacrest Capital Limited (8)
10.20 Registration Rights Agreement dated June 7, 1996 among the Company, Infinity Investors, Ltd. and
Seacrest Capital Limited (8)
10.21 Letter Agreement dated July 31, 1996 among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (8)
10.22 Convertible Securities Agreement dated August 8, 1996 among the Company and certain Investors (10)
10.23 Registration Rights Agreement dated August 8, 1996 among the Company and certain Investors (10)
10.24 Convertible Securities Agreement dated October 15, 1996 among the Company, Infinity Investors, Ltd.
and Seacrest Capital Limited (10)
10.25 Registration Rights Agreement dated October 15, 1996 among the Company, Infinity Investors, Ltd.
and Seacrest Capital Limited (10)
10.26 Book Entry Transfer Agent Agreement dated October 15, 1996 by and among the Company, Infinity
Investors, Ltd., Seacrest Capital Limited and American Stock Transfer & Trust Company (10)
10.27 Offer to Purchase the Five Year Six Percent (6%) Subordinated Debentures of Intelect, Inc. for an
Aggregate of 170,000 Shares of Common Stock, $0.01 Par Value, of the Company and the payment of
Certain Amounts in Lieu of Issuing Fractional Shares, Dated September 6, 1996 (10)
10.28 Letter of Transmittal to Accompany Five Year Six Percent (6%) Subordinated Debentures of Intelect,
Inc. (10)
10.29 Form of Release in Consideration of Exchange of Property (10)
10.30 Promissory Note dated as of February 26, 1997 to St. James Capital Corp. from the Company
10.31 Pledge Agreement dated as of February 26, 1997 between the Company and St. James Capital Corp.
10.32 Warrant to Purchase Common Stock of the Company Expiring February 26, 2002
10.33 Registration Rights Agreement dated February 26, 1997 between the Company and St. James Capital
Corp.
10.34 Amended and Restated Promissory Note dated as of February 26, 1997 to St. James Capital Corp. from
the Company
10.35 First Amendment to Pledge Agreement dated as of March 27, 1997 between the Company and St. James
Capital Corp.
10.36 Warrant to Purchase Common Stock of the Company Expiring March 27, 2002
10.37 Amendment No. 1 to Registration Rights Agreement dated as of March 27, 1997 between the Company and
St. James Capital Corp.
10.38 Employee Stock Option Plan adopted April 24, 1986*
10.39 Stock Incentive Plan adopted December 13, 1995*
</TABLE>
<PAGE> 65
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
10.40 License Agreement between Digital Equipment Corp. and Mosaic Information Technologies dated June
13, 1996
21.0 Subsidiaries of the Company
23.0 Consent of Independent Auditors
27.0 Financial Data Schedule
</TABLE>
*Management contract or other compensatory plan or arrangement.
(1) Incorporated herein by reference to the Registrant's Form 10-K for the
fiscal year ended October 31, 1995
(2) Incorporated herein by reference to the Registrant's Transition Report
on Form 10-K for the transition period ended December 31, 1995
(3) Incorporated herein by reference to the Registrant's Form 8-K dated
November 10, 1995
(4) Incorporated herein by reference to the Registrant's Form 8-K dated
February 20, 1996
(5) Incorporated herein by reference to the Registrant's Form 10-Q for the
fiscal quarter ended March 31, 1996
(6) Incorporated herein by reference to the Registrant's Form 8-K dated
April 12, 1996
(7) Incorporated herein by reference to the Registrant's Form 8-K/A dated
April 12, 1996
(8) Incorporated herein by reference to the Registrant's Form 10-Q for the
fiscal quarter ended June 30, 1996
(9) Incorporated herein by reference to the Registrant's Form S-3
(#333-9049)
(10) Incorporated herein by reference to the Registrant's Form 10-Q for the
fiscal quarter ended September 30, 1996
(11) Incorporated herein by reference to the Registrants Form 20-F for the
fiscal year ended October 31, 1994
<PAGE> 1
EXHIBIT 10.5
AMENDMENT NO. ONE
TO MANAGEMENT AGREEMENT
THIS AMENDMENT NO. ONE dated this 1st day of January, 1996, is made by
and between Intelect Systems Corp., a Delaware corporation (the "(Company") and
Herman Frietsch (the "Manager"), and is entered into to amend, as set forth
herein, the terms and provisions of that certain Management Agreement dated
October 1, 1995 by and between the Company and Manager.
For and in consideration of the mutual covenants and agreements set
forth herein, the Company and Manager hereby amend the Management Agreement as
set forth herein:
1. Term. Section II of the Management Agreement is hereby amended
to be and read as follows:
II. TERM. Subject to the provisions for termination as hereinafter
provided, the term of this Agreement, as amended from time to
time, shall be for an initial term from October 1, 1995 to
December 31, 1997. Thereafter, the term shall be continuous,
provided, however, that this Agreement may be terminated by
Manager or the Company in the following manner: if either
party so desires to terminate this Agreement, it shall provide
written notice to the other party, and the effective date of
such termination shall be on the next December 31 following
three (3) years from the other party's receipt of such notice
of termination. For example, if a party sends notice of
termination and it is received by the other party on July 1,
1998, then the effective date of termination shall be December
31, 2001.
2. Position. Section III of the Management Agreement is hereby
amended to be and read as follows:
III. POSITION. Manager has extensive experience in general
management direction and oversight, strategic planning,
mergers, ventures, acquisitions and divestitures which is
deemed beneficial to the Company and which the Company wishes
to apply to its activities and plans. Manager will hold the
executive position of Executive Chairman of the Board of
Directors of the Company and will be the Company's designee
for similar or related positions on the boards of directors of
the Company's subsidiaries and affiliates, which may also
provide for compensation for such additional responsibilities
and obligations. Manager will be responsible for advising and
making recommendations to the Board of Directors with respect
to the best interest of the Company. He will operate within
the Company's bylaws, goals, guidelines, budgets, directives,
policies and procedures.
3. Compensation. The first sentence of Section IV is hereby
amended to be and read as follows:
<PAGE> 2
IV. COMPENSATION. Manager's basic compensation ("Basic
Compensation") shall be $250,000 for each yearly period of the
Term of this Agreement payable in equal monthly installments
on the last day of each month or as otherwise agreed upon
between the parties.
4. Miscellaneous. A new Section XIV shall be added, and such
Section XIV as added shall be and read as follows:
XIV. MISCELLANEOUS. It is expressly agreed between the Company and
Manager that with respect to any options granted by the
Company or its parent corporation, Intelect Communications
Systems Limited ("Intelect") to the Manager which are
outstanding as of the effective date of termination of this
Agreement. the expiration date of such options shall be the
effective date of termination of this Agreement. In addition,
in the event the Company terminates Manager's employment
pursuant to the second sentence of Section X of this
Agreement, all unvested options issued and outstanding to
Manager as of the date of such termination shall vest upon
such termination. The parties agree that all currently issued
and outstanding options and all options to be granted in the
future to Manager shall reflect the agreements set forth in
this Section XIV.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"COMPANY"
INTELECT SYSTEMS CORP.
/s/ PETER G. LEIGHTON
----------------------------------------
Peter G. Leighton, President
"MANAGER"
/s/ HERMAN M. FRIETSCH
----------------------------------------
Herman M. Frietsch
<PAGE> 1
EXHIBIT 10.7
AMENDMENT NO. ONE
TO GENERAL EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. ONE dated this 2nd day of January, 1996 is made by
and between Intelect Communications Systems Limited, a Bermuda Company (the
"Company") and Peter Leighton (the "Employee"), and is entered into to amend as
set forth herein, the terms and provisions of that certain General Employment
Agreement dated November 1, 1994 by and between the Company and Employee.
For and in consideration of the mutual covenants and agreements set
forth herein, the Company and Employee hereby amend the General Employment
Agreement as set forth herein:
1. Term. Section II of the General Employment Agreement is hereby
amended to be and read as follows:
II. TERM. Subject to the provisions for termination as
hereinafter provided, the term of this Agreement, as
amended from time to time, shall be for an initial
term from November 1, 1994 to December 31, 1996.
Thereafter, the term shall be continuous provided,
however, that this Agreement may be terminated by
Employee or the company in the following manner: if
either party so desires to terminate this Agreement,
it shall provide written notice to the other party,
and the effective date of such termination shall be
on the next December 31 following three (3) years
from the other party's receipt of such notice of
termination. For example, if a party sends notice of
termination and it is received by the other party on
July 1, 1998, then the effective date of termination
shall be December 31, 2001.
2. Position. Section III of the General Employment Agreement is
hereby amended to be and read as follows:
III. POSITION. Employee has extensive experience in
management, debt and equity financing, mergers and
acquisitions, administration and public reporting of
international corporate groups which is deemed
beneficial to the Company and which the Company
wishes to apply to its activities and plans. Employee
will hold the executive position of President and
will be the Company's designee for similar or related
positions on the boards of directors of the Company's
subsidiaries and affiliates, which may also provide
for compensation for such additional responsibilities
and obligations. Employee will be responsible for
advising and making recommendations to the Board of
Directors of the Company with respect to the best
interests of the Company. He will operate within the
Company's bylaws, goals, guidelines, budgets,
directives, policies and procedures.
<PAGE> 2
3. Compensation, The first sentence of Section IV is hereby
amended to be and read as follows:
IV. COMPENSATION. Employee's basic compensation
("Basic Compensation") shall be $250,000 for each
yearly period of the Term of this Agreement payable
in equal monthly installments on the last day of each
month or as otherwise agreed upon between the
parties.
4. Miscellaneous. A new Section XIV shall be added, and such
Section XIV as added shall be and read as follows:
XIV. MISCELLANEOUS. It is expressly agreed between the
Company and Employee that with respect to any options
granted by the Company to the Employee which are
outstanding as of the effective date of termination
of this Agreement, the expiration date of such
options shall be the effective date of termination of
this Agreement. In addition, in the event the Company
terminates Employee's employment pursuant to the
second sentence of Section X of this Agreement, all
unvested options issued and outstanding to Employee
as of the date of such termination shall vest upon
such termination. The parties agree that all
currently issued and outstanding options and all
options to be granted in the future to Employee shall
reflect the agreements set forth in this Section XIV.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"COMPANY"
INTELECT COMMUNICATIONS
SYSTEMS LIMITED
/s/ HERMAN FRIETSCH
-----------------------------------
Herman Frietsch, Executive Chairman
"EMPLOYEE"
/s/ PETER G. LEIGHTON
-----------------------------------
Peter G. Leighton
<PAGE> 1
EXHIBIT 10.30
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") OR ANY OTHER APPLICABLE SECURITIES LAWS AND,
ACCORDINGLY, THIS NOTE MAY NOT BE RESOLD, PLEDGED, OR OTHERWISE TRANSFERRED,
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN
ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS.
FLOATING RATE PROMISSORY NOTE
$2,500,000 February 26, 1997
For value received, INTELECT SYSTEMS CORP., a Delaware corporation
("ISC"), and INTELECT COMMUNICATIONS SYSTEMS LIMITED, a corporation organized
under the laws of Bermuda ("ICSL" and together with ISC called the "Makers,"),
jointly and severally promise and agree to pay on or before February 26, 1998
(the "Maturity Date") to the order of ST. JAMES CAPITAL CORP., a Delaware
corporation (hereinafter called "Holder"), or its registered transferees and
assigns, at the office of First Bank National Association, Minneapolis,
Minnesota, in coin or currency of the United States of America which at the
time of payment is legal tender for the payment of public and private debts,
the principal sum of TWO MILLION FIVE HUNDRED THOUSAND AND NO/DOLLARS
($2,500,000), or so much as is advanced pursuant to this Note.
The Makers further agree to pay interest, in like money, on the unpaid
principal amount owing hereunder from time to time from the date hereof at the
Floating Rate, as hereinafter defined. Such accrued interest shall be due and
payable on the Maturity Date.
Any holder of this Note is entitled to all of the rights, remedies,
benefits and privileges provided for herein and in the other Transaction
Documents, as hereinafter defined. The Obligations (as herein defined) of the
Makers contained in this Note are secured by the Pledge Agreement.
Each Maker and any and each co-maker, endorsers, guarantors and
sureties or each other Person liable for payment or collection of this Note
expressly and severally waives grace, demand, presentment for payment, notice
of nonpayment, notice of dishonor, notice of intent to accelerate the maturity,
notice of acceleration of the maturity, notice of default, protest and notice
of protest, bringing of suit, and diligence in taking any action to collect
amounts called for hereunder and in the handling of property at any time
existing as security in connection herewith, and shall be directly and
primarily liable for the payment of all sums owing and to be owing hereon,
regardless of and without any notice, diligence, act or omission as or with
respect to the collection of any amount called for hereunder or in connection
with any Lien at any time had or existing as security for any amount called for
hereunder, and agrees to all renewals, extensions or partial payments hereon
and to any release or substitution of security hereof, in whole or in part,
with or without notice, before or after maturity.
In the event Default (as hereinafter defined) is made in the payment
of this Note in whatever manner its maturity may be brought about and if this
Note is thereupon placed in the hands of attorneys for collection, or if the
same is collected through probate, bankruptcy or other similar proceedings, the
Makers, jointly and severally, promise to pay all reasonable attorneys' fees
and expenses incurred by the Holder in connection with such default or
collection proceedings.
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
1.1 Certain Defined Terms. As used in this Note, the following
terms shall have the
<PAGE> 2
following meanings:
"Advances" shall have the meaning assigned to that term in Section 2.1
hereof.
"Bankruptcy Code" shall mean the Bankruptcy Reform Act of 1978 as
codified under 11 U.S.C. Section 101, et seq.
"Business Day" means any day (other than a day which is a Saturday,
Sunday or legal holiday) in the State of Texas on which banks are open for
business in Houston, Texas.
"Commitment" means, at the time any determination thereof is to be
made, the commitment of the Holder to extend credit to the Makers by means of
Advances, which subject to Section 5.1, shall be an amount equal to $2,500,000.
"Debt" means, for any Person, (a) all obligations required by GAAP to
be classified upon a balance sheet as liabilities, (b) liabilities secured by
any Lien existing on property owned or acquired by that Person, (c) obligations
that have been (or under GAAP should be) capitalized for financial reporting
purposes, (d) all accrued obligations of such Person in respect of any
contract, agreement or instrument imposing an obligation upon such Person to
pay over funds; (e) for all trade debt of such Person; (g) all guaranties,
endorsements and other contingent obligations with respect to Debt of others,
and (h) for all deferrals, renewals, extensions and refundings of, and
amendments, modifications and supplements to, any of the indebtedness referred
to in (a) through (e) above.
"Debtor Relief Laws" shall mean the Bankruptcy Code and all other
applicable dissolution, liquidation, conservatorship, bankruptcy, moratorium,
readjustment of debt, compromise, rearrangement, receivership, insolvency,
reorganization, or similar debtor relief laws from time to time in effect
affecting the rights of creditors generally.
"Default" means any event which is, or after notice or passage of time
would be, an Event of Default.
"Default Rate" means a rate per annum equal to the greater of (a) the
Prime Rate in effect on such day plus five percent (5%) and (b) the Highest
Lawful Rate.
"DNA" means DNA Enterprises, Inc., a Texas corporation and a wholly
owned Subsidiary of ISC.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Event of Default" has the meaning specified in Section 5.1.
"Floating Rate" means a rate per annum equal to the lesser of (a) the
Prime Rate in effect on such day plus two percent (2%) and (b) the Highest
Lawful Rate.
"GAAP" means generally accepted accounting principles of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and the Financial Accounting Standards Board.
"Highest Lawful Rate" means, as of a particular date, the maximum
nonusurious interest rate that may under applicable law then be contracted for,
charged or received by the Holder in connection with this Note.
"Lien" shall mean, with respect to any asset, (a) any mortgage, deed
of trust, production
-2-
<PAGE> 3
payment, deposit, lien, charge, pledge, security interest, claim or encumbrance
of any kind (whether voluntary or involuntary, affirmative or negative, and
whether imposed or created by operation of law or otherwise) upon such asset,
(b) the interest of a vendor or a lessor under any conditional sale agreement,
capital lease or other title retention agreement relating to such asset and (c)
in the case of securities, any purchase option, call or similar right of a
third party with respect to such securities but excluding any right of offset
which arises without agreement in the ordinary course of business.
"Material Adverse Effect" means (i) a material adverse effect on the
business, Properties, operations or condition (financial or otherwise) or
prospects of ISC and its Subsidiaries taken as a whole, (ii) a material adverse
effect on the business, Properties, operations or condition (financial or
otherwise) or prospects of ICSL and its Subsidiaries taken as a whole, (iii)
material impairment of the ability of any Maker to perform timely any of its
respective Obligations under this Note, (iv) material impairment of the ability
of ISC to perform timely any of its Obligations under any of the Transaction
Documents to which such Maker is a party, or (v) material impairment of the
rights of or benefits available to the Holder under this Note or any of the
other Transaction Documents.
"Maturity Date" means February 26, 1998, or the earlier termination in
whole of the Commitment pursuant to Section 5.1.
"Note" means this Floating Rate Promissory Note, as hereafter amended,
modified, substituted or replaced.
"Obligations" means all obligations, liabilities and indebtedness of
every nature of the Makers and their respective Subsidiaries from time to time
owing to the Holder under this Note and/or any of the other Transaction
Documents, including, without limitation, (i) the due and punctual payment of
(x) the principal of and interest on the Advances, when and as due, whether at
maturity, by acceleration, upon one or more dates set for prepayment or
otherwise, including, to the extent permitted by applicable law, interest that
accrues after the commencement of any proceeding by or against any Maker or any
Subsidiary of a Maker under the Bankruptcy Code and all other applicable Debtor
Relief Laws, (y) all other monetary obligations of the Makers and their
respective Subsidiaries to the Holder under this Note and/or any other
Transaction Document, including any and all fees, costs, expenses and
indemnities, and (ii) the due and punctual performance of all other obligations
of the Makers and their respective Subsidiaries under this Note and/or any
other Transaction Document. "Obligation" shall mean any part of the
Obligations.
"Outside Financing" means any transactions where any Maker or any
Subsidiary of any Maker, now or hereafter acquired, sells its equity or debt
securities for cash whether in public or private offerings or bond financings,
provided, however, that an Outside Financing shall not include any transactions
involving (i) purchase money debt incurred to finance equipment and inventory
in the ordinary course of business, (ii) the sale of any securities for the
sole purpose of financing acquisitions, (iii) the issuance of shares of Common
Stock pursuant to existing stock options to employees, officers and directors
or existing plans covering such persons and (iv) the sale of any securities
between ICSL and any of its Subsidiaries or between Subsidiaries of ICSL.
"Permitted Liens" means (a) Liens now or hereafter securing the
Obligations; (b) pledges or deposits made to secure payment of workers'
compensation, unemployment insurance, or other forms of governmental insurance
or benefits or to participate in any fund in connection with workers'
compensation, unemployment insurance, pensions, or other social security
programs; (c) good-faith pledges or deposits made to secure performance of
bids, tenders, contracts (other than for the repayment of borrowed money), or
leases, or to secure statutory obligations, surety or appeal bonds, or
indemnity, performance, or other similar bonds in the ordinary course of
business; (d) Liens for taxes and liens imposed by operation of law (including
Liens of mechanics, materialmen, warehousemen, carriers and landlords), if (i)
no amounts are due and payable and no Lien has been
-3-
<PAGE> 4
filed (or agreed to), or (ii) the validity or amount secured thereof is being
contested in good faith by lawful proceedings diligently conducted, reserves
required by GAAP have been made, and levy and execution thereon have been (and
continue to be) stayed or payment thereof is covered in full (subject to the
customary deductible) by insurance; (e) liens currently in existence; and (f)
liens covering purchase money debt incurred to finance equipment or inventory
in the ordinary course of business.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization
or government or any agency or political subdivision thereof.
"Pledge Agreement" means that certain Pledge Agreement dated of even
date herewith executed by ISC in favor of the Holder pursuant to which ISC
grants to the Holder a Lien on all of the issued and outstanding shares of
capital stock of DNA, as originally executed or as it may from time to time be
supplemented, modified or amended.
"Prime Rate" means, as of a particular date, the prime rate of
interest per annum most recently announced by First Bank National Association,
automatically fluctuating upward or downward with and at the time specified in
each such announcement without notice to the Makers or any other Person; each
change in the Prime Rate shall be effective on the date such change is
announced.
"Property" means any asset, whether real, personal or mixed, or
tangible or intangible, or any interest therein.
"Registration Rights Agreement" means that certain Registration Rights
Agreement dated of even date herewith executed by ICSL in favor of the Holder,
covering registration rights in respect to the shares of ICSL's common stock
that may be acquired on the exercise of the Warrant, as originally executed or
as it may from time to time be supplemented, modified or amended.
"SEC" means the U.S. Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary" means, with respect to any Person, any entity of which
more than 50% (in number of votes) of the stock (or equivalent interests) is
owned of record or beneficially, directly or indirectly, by such Person,
provided however, such term shall not include Intelect Europe Limited.
"Transaction Documents" means this Note, the Pledge Agreement, the
Warrant and the Registration Rights Agreement.
"Warrant" means that certain Warrant to purchase shares of ICSL's
common stock, par value $.01 per share, issued pursuant to the terms of that
certain Warrant dated as of the date hereof, executed by ICSL in favor of
Holder.
1.2. Accounting Terms. All terms of an accounting or financial
nature shall be construed in accordance with GAAP, as in effect from time to
time; provided, however, that, for purposes of determining compliance with any
covenant set forth in Article IV, such terms shall be construed in accordance
with GAAP as in effect on the date of this Note, consistently applied.
1.3. Interpretation.
(a) In this Note, unless a clear contrary intention appears:
-4-
<PAGE> 5
(i) the singular number includes the plural number and vice
versa;
(ii) reference to any gender includes each other gender;
(iii) the words "herein," "hereof" and "hereunder" and other
words of similar import refer to this Note as a whole and not to any
particular Article, Section or other subdivision;
(iv) reference to any Person includes such Person's
successors and assigns but, if applicable, only if such successors and
assigns are permitted by this Note, and reference to a Person in a
particular capacity excludes such Person in any other capacity or
individually, provided that nothing in this subclause (iv) is intended
to authorize any assignment not otherwise permitted by this Note;
(v) reference to any agreement, document or instrument means
such agreement, document or instrument as amended, supplemented or
modified and in effect from time to time in accordance with the terms
thereof and, if applicable, the terms hereof, and reference to the
Note includes any Note issued pursuant hereto in extension or renewal
hereof and in substitution or replacement herefor;
(vi) unless the context indicates otherwise, reference to any
Article, Section, Schedule or Exhibit means such Article or Section
hereof or such Schedule or Exhibit hereto;
(vii) the words "including" (and with correlative meaning
"include") means including, without limiting the generality of any
description preceding such term;
(viii) with respect to the determination of any period of
time, the word "from" means "from and including" and the word "to"
means "to but excluding;"
(ix) reference to any law means such as amended, modified,
codified or reenacted, in whole or in part, and in effect from time to
time; and
(b) No provision of this Note shall be interpreted or construed
against any Person solely because that Person or its legal representative
drafted such provision.
ARTICLE II
COMMITMENT AND ADVANCES
2.1 Advances. Subject to the terms and conditions and
relying on the representations and warranties set forth herein and in the other
Transaction Documents, the Holder agrees to make advances (collectively, the
"Advances") to the Makers, at any time and from time to time on and after the
date of this Note to, but excluding, the Maturity Date up to a principal amount
not to exceed $2,500,000. All Advances shall mature and be due and payable in
full on the Maturity Date. Once repaid, Advances may not be reborrowed. Each
Advance shall be made in accordance with the procedures set forth in Section
2.2.
2.2 Borrowing Procedures of Advances. In order to effect an
Advance, the Makers shall submit a Request for Advance in writing or by
telecopy (or telephone notice promptly confirmed in writing or by telecopy) to
the Holder not later than 10:00 a.m., Houston, Texas time, on the borrowing
date specified in the Request for Advance for such proposed Advance. Such
Request for Advance shall refer to this Note and specify (x) in sufficient
detail, the corporate use of the proceeds of such proposed Advance, (y) the
Business Day upon which the proceeds of such proposed Advance are to be made
available to the Makers, and (z) the principal amount of such proposed Advance.
The
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obligation of the Holder to make any Advance pursuant to a Request for Advance
is subject to the satisfaction that on the date such Advance is to be made no
Default or Event of Default then exists (both before and after giving effect to
the making of such proposed Advance).
2.3 Interest on Advances and Payment Dates.
(a) Subject to the provisions of Section 2.4, the Advances shall
bear interest at the Floating Rate, computed on the basis of the actual number
of days elapsed over a year of 365 or 366 days, as the case may be.
(b) Interest on each Advance shall be payable by the Makers (i) in
respect of each Advance accruing interest at the Floating Rate, on the Maturity
Date, (ii) in respect of each Advance accruing interest at the Default Rate, on
demand, and (iii) in respect of all Advances, on any prepayment (on the amount
prepaid), at maturity (whether by acceleration or otherwise) and, after
maturity, on demand.
2.4 Interest on Overdue Amounts. If Makers shall fail to pay the
principal of or interest on any Advance or any other amount when due hereunder,
Makers shall on demand from time to time pay interest, to the extent permitted
by law, on such defaulted amount from the date of such Event of Default up to
(but not including) the date of actual payment (after as well as before
judgment) at a rate per annum equal to the Default Rate, computed on the basis
of the actual number of days elapsed over a year of 365 or 366 days, as the
case may be.
2.5 Voluntary Prepayment of Advances. Makers shall have the right at
any time and from time to time to prepay the Advances, in whole or in part,
without penalty or premium, upon at least five (5) Business Day's prior written
or telecopy notice or telephone notice promptly confirmed in writing to the
Holder.
2.6 Mandatory Payment of Advances.
(a) Makers shall repay all outstanding Advances on the
Maturity Date; and
(b) Makers shall prepay this Note in full on or before
the close of business (Houston, Texas time) on the second Business Day
following the occurrence of an Outside Financing, such prepayment to
be in an amount equal to the net proceeds received by such Maker or
any Subsidiary of the Makers from such Outside Financing, but not to
exceed the then outstanding principal and accrued and unpaid interest
on this Note. All payments made under this Note shall be applied first
to accrued interest, and the balance, if any, to principal; provided,
however, that interest shall accrue on any remaining principal balance
and shall be payable at the rate provided above.
2.7 Manner of Payment. Both principal and interest are payable in
immediately available funds in lawful money in the United States of America (in
freely transferable Dollars) to the Holder at the office of First Bank National
Association, Minneapolis, Minnesota. If the date upon which the payment of
principal and interest is required to be made pursuant to this Note occurs
other than on a Business Day, then such payment of principal and interest shall
be made on the next occurring Business Day following said payment date and
shall include interest through said next occurring Business Day.
2.8 Use of Proceeds. (a) The proceeds of all Advances be used to
redeem warrants issued to certain former shareholders of DNA and to fund
certain obligations incurred by the Makers in connection with the acquisition
of DNA; and other proper corporate requirements of the Makers.
(b) No portion of the proceeds of any Advance under this Note
shall be used by the
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Makers, or any one of them, in any manner that might cause the borrowing or the
application of such proceeds to violate Regulation G, Regulation U, Regulation
T, or Regulation X or any other regulation of the Board or to violate the
Exchange Act, in each case as in effect on the date or dates of such borrowing
and such use of proceeds.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MAKERS
Each of the Makers, as to itself and its Subsidiaries, hereby warrants
and represents to the Holder that:
3.1 Organization, Standing and Qualification. (a) ISC is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as it is now being conducted. ISC is licensed and qualified to do business as
a foreign corporation in each jurisdiction in which the character of ISC's
properties, owned or leased, or the nature of its activities makes such
qualification or license necessary, except where failure to be so licensed and
qualified would not result in a Material Adverse Effect.
(b) ICSL is a corporation duly organized, validly existing and in good
standing under the laws of Bermuda and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as it is now being conducted. ICSL is licensed and qualified to do business as
a foreign corporation in each jurisdiction in which the character of the ICSL's
properties, owned or leased, or the nature of its activities makes such
qualification or license necessary, except where failure to be so licensed and
qualified would not result in a Material Adverse Effect.
3.2 Authority; No Defaults. Each Maker has all requisite corporate
power and authority to enter into this Note and to consummate the transactions
contemplated hereby. ISC has all requisite corporate power and authority to
enter into the Pledge Agreement and to consummate the transactions contemplated
thereby. ICSL has all requisite corporate power and authority to issue the
Warrant and to enter into the Registration Rights Agreement and to consummate
the transactions contemplated thereby. The execution and delivery of this Note
by the Makers (and with respect to ISC, the Pledge Agreement by ISC; and with
respect to ICSL, the Warrant and the Registration Rights Agreement) the
consummation of the transactions contemplated hereby or thereby have been duly
authorized by all necessary corporate action on the part of such Maker. This
Note has been duly executed and delivered by each Maker and constitutes the
valid and binding obligation of such Maker, enforceable in accordance with its
terms, except as enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, fraudulent transfer, moratorium or other similar
laws relating to creditors' rights generally and by general principles of
equity which may limit the right to obtain equitable remedies (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The execution and delivery of this Note by the Makers do not, and the
consummation of the transactions contemplated hereby will not, conflict with or
result in a breach of or the acceleration of any obligation under, or
constitute a default or event of default (or event which, with notice or lapse
of time or both, would constitute a default) under, any provision of any
charter, bylaw, indenture, mortgage, lien, lease, agreement, contract,
instrument, order, judgment, decree, ordinance or regulation, or any
restriction to which any property of such Maker or any of its Subsidiaries is
subject or by which such Maker or any of its Subsidiaries is bound, which could
reasonably be expected to result in a Material Adverse Effect.
3.3 Approvals. There is no legal impediment to the valid offer,
issue, sale, delivery and performance by each of the Makers of this Note.
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ARTICLE IV
COVENANTS
Each of the Makers covenants and agrees with the Holder, so long as
this Note is outstanding or any fee, expense, compensation or any other amount
payable by the Makers shall remain unpaid or outstanding, as follows:
4.1. Negative Pledge. No Maker shall, nor shall ICSL permit any of
its Subsidiaries to, create, incur, assume or suffer to exist, any Lien on any
asset of such Person other than Permitted Liens. No Maker will enter into or
become subject to, and no Maker will permit any of its Subsidiaries to enter
into or become subject to, any agreement (other than this Agreement) that
prohibits or otherwise restricts the right of such Maker or its Subsidiaries to
create, incur, assume or suffer to exist any Lien in favor of the Holder on any
of such Maker's or any of its Subsidiaries' assets.
4.2 Margin Regulation. No Maker shall use or permit any other
Person to use any portion of the proceeds of this Note in any manner which
might cause the extension of credit or the application of such proceeds to
violate the Securities Act or the Exchange Act or to violate Regulation G,
Regulation U, or Regulation X, or any other regulation of the Federal Reserve
Board.
4.3 Compliance with Laws. Each Maker shall use its best
efforts to, and shall cause each of its Subsidiaries to use its best efforts,
to conduct its business and affairs and maintain its Properties in compliance
with all applicable laws, rules, regulations, judgments, orders and decrees.
4.4 Payment and Performance. Each Maker will pay all amounts due
under this Note and the other Transaction Documents in accordance with the
terms thereof and will observe, perform and comply with every covenant, term
and condition expressed or implied therein.
(a) ICSL will furnish to the Holder within 20 days after the
Holder requests, copies of all information, documents, and other reports (or
copies of such portions of any of the foregoing as the SEC may by rules and
regulations prescribe) which ICSL is required to file with the SEC pursuant to
Section 13 or 15(d) of the Exchange Act. ICSL will use its best efforts to
timely comply with its reporting and filing obligations under the applicable
federal securities laws.
(b) ICSL will promptly furnish upon request, any information which
the Holder may from time to time reasonably request concerning any covenant,
provision or condition of this Note or the other Transaction Documents or any
matter in connection with such Persons' businesses and operations.
4.5. Maintenance of Existence, Qualifications and Assets. Each Maker
shall use its best efforts to, and shall cause each of its Subsidiaries to use
its best efforts, to (i) maintain its corporate existence and good standing and
its authority to transact business in all states where necessary; and (ii)
maintain all licenses, permits and franchises necessary for its business.
4.6 Costs, Expenses and Taxes. (a) Each Maker, jointly and
severally, agrees to pay within thirty (30) Business Days after presentation of
an invoice: all reasonable out-of-pocket costs and expenses of the Holder in
connection with (i) the negotiation, preparation, distribution, execution and
delivery of this Note, the Pledge Agreement, the Warrant, the Registration
Rights Agreement and the other documents and instruments referred to therein,
(ii) the management and monitoring of the Advances, (iii) the Holder's review
and due diligence and (iv) the negotiation, preparation, distribution,
execution and delivery of any amendment, supplement, modification, waiver or
consent relating to this Note or the other Transaction Documents (including,
without limitation, as to each of the foregoing, the reasonable fees and
disbursements of legal counsel).
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<PAGE> 9
(b) Each Maker, jointly and severally, agrees to pay all
reasonable out-of-pocket costs and expenses of the Holder in connection with
(i) the preservation of its rights under, and enforcement of, this Note and the
other Transaction Documents and the documents and instruments referred to
therein (including, without limitation, all filing fees and the reasonable fees
and disbursements of legal counsel), and (ii) any workout, restructuring or
rescheduling of the Obligations or any proceeding under any Debtor Relief Law
with respect to any Maker or any Subsidiary of a Maker (including, without
limitation, the reasonable fees and disbursements of counsel for the Holder).
(c) Each Maker, jointly and severally, shall pay, and hold the
Holder harmless from and against, any and all present and future stamp, excise,
and other similar taxes and fees with respect to the foregoing matters and hold
the Holder harmless from and against any and all liabilities with respect to or
resulting from any delay or omission (other than to the extent attributable to
the Holder) to pay such taxes.
(d) Without prejudice to the survival of any other Obligations of
the Makers hereunder or under the other Transaction Documents, the obligations
of Borrower under this Section 4.6(d) shall survive the termination of this
Note and the payment in full of the Obligations for a period of six (6) months.
ARTICLE V
EVENTS OF DEFAULT; REMEDIES
5.1 Events of Default. Each of the following events, acts,
occurrences or conditions constitutes an "Event of Default" under this Note:
(a) the Makers default in the payment of the principal or
interest on this Note when such principal or interest becomes due and
payable and such default remains uncured for a period of five days; or
(b) any Maker defaults in the performance of any covenant
in this Note, the default of which may have a Material Adverse Effect,
and such default remains uncured for a period of 30 days following
receipt of written notice of such default from Holder, contained in
this Note or any of the other Transaction Documents (other than a
default in the performance of a covenant specifically addressed
elsewhere in this Section 5.1); or
(c) any representation or warranty made by any Maker in
this Note or any of the other Transaction Documents or in any
certificate furnished by such Maker in connection with the
consummation of the transaction contemplated thereby or hereby, is
untrue as of the date of making thereof and such untruth may
constitute a Material Adverse Effect; or
(d) Any Maker, or any of such Maker's Subsidiaries,
defaults in the payment when due (whether by lapse of time, by
declaration, by call for redemption or otherwise) of the principal of
or interest on any Debt of such Person secured by a Lien (other than
the Debt evidenced by this Note and the obligations incurred by the
Makers in connection with the acquisition of DNA) having an aggregate
principal amount in excess of $100,000 and such default remains
uncured for a period of 30 days; or
(e) a court of competent jurisdiction enters a judgment
or judgments against any Maker or any Subsidiary of a Maker, or any
property or assets of such Maker or such Subsidiary of a Maker, for
the payment of money aggregating in excess of $500,000 in excess of
applicable insurance coverage and such judgment is not discharged or
stayed within 30 days; or
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(f) a court of competent jurisdiction enters (i) a decree
or order for relief in respect of any Maker or any Subsidiary of a
Maker in an involuntary case or proceeding under any applicable
federal or state bankruptcy, insolvency, reorganization or other
similar law or (ii) a decree or order adjudging any Maker or any
Subsidiary of a Maker a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement,
adjustment or
composition of or in respect of such Maker or such Subsidiary of a Maker under
any applicable federal or state law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official of any
Maker or a Subsidiary of any Maker or of any substantial part of the property
of such Maker or such Subsidiary of a Maker or ordering the winding up or
liquidation of the affairs of any Maker or a Subsidiary of any Maker and any
such decree or order of relief or any such other decree or order remains
unstayed for a period of 60 days from its date of entry; or
(g) A Maker or any Subsidiary of a Maker commences a
voluntary case or proceeding under any applicable federal or state
bankruptcy, insolvency, reorganization or other similar law or any
other case or proceeding to be adjudicated a bankrupt or insolvent, or
a Maker or any Subsidiary of a Maker files a petition, answer or
consent seeking reorganization or relief under any applicable federal
or state law, or a Maker or any Subsidiary of a Maker makes an
assignment for the benefit of creditors, or admits in writing its
inability to pay its debts generally as they become due; or
(h) (1) any person or group (within the meaning of
Section 13(d) of the Exchange Act) becomes the beneficial owner of 40%
or more of the total voting power of ICSL; (2) any Maker, or any of
such Maker's Subsidiaries, merges or consolidates with or into any
other Person (unless the Maker or it's Subsidiary is the surviving
entity), (3) any Maker, or any of such Maker's Subsidiaries, sells all
or substantially all of its assets (unless the purchaser is a
Subsidiary of a Maker) or (4) any Maker, or any of such Maker's
Subsidiaries, dissolves or liquidates.
5.2 Acceleration of Maturity. Upon the occurrence of any Event of
Default described in Sections 5.1(f), 5.1(g) or 5.1(h) above, then (a) the
Commitment shall automatically terminate and (b) the entire unpaid amount of
all Obligations shall automatically become immediately due and payable, without
presentment for payment, demand, protest, notice of intent to accelerate,
notice of acceleration or further notice of any kind, all of which are hereby
expressly waived by each Maker and each of its Subsidiaries and the obligation
of the Holder to make any Advance hereunder shall thereupon terminate. Upon the
occurrence of any other Event of Default, the Holder may (i) declare the
Commitment to be terminated, whereupon the Commitment and the obligations of
the Holder to make any Advance hereunder shall forthwith terminate, and (ii)
declare the entire unpaid amount of all Obligations to be forthwith due and
payable, whereupon all Obligations shall become and be forthwith due and
payable, without presentment for payment, demand, protest, notice of intent to
accelerate, notice of acceleration or further notice of any kind, all of which
are hereby expressly waived by each Maker and each of its Subsidiaries.
5.3 Remedies. If any Event of Default shall occur, the Holder may
protect and enforce the Holder's rights and remedies under this Note and any of
the other Transaction Documents by any appropriate proceedings, including
proceedings for specific performance of any covenant or agreement contained in
this Note or any of the other Transaction Documents and the Holder may enforce
the payment of any Obligations due or enforce any other legal or equitable
right. All rights and remedies and powers conferred upon the Holder under this
Note and any of the other Transaction Documents shall be deemed cumulative and
not exclusive of any other rights, remedies or powers available under this
Note, any of the other Transaction Documents or at law or in equity.
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ARTICLE VI
MISCELLANEOUS
6.1 Consent to Amendments. This Note may be amended, and the
Makers may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, if and only if the Makers shall obtain the
written consent to such amendment, action or omission to act from the Holder.
6.2 Benefits of Note. Nothing in this Note, express or implied,
shall give to any Person, other than the Makers, Holder, and their successors
any benefit or any legal or equitable right, remedy or claim under or in
respect of this Note.
6.3 Successors and Assigns. Neither Maker nor the Holder may
transfer or assign this Note or their respective rights, titles and interests
in this Note without the prior written consent of the other parties hereto. All
covenants and agreements in this Note contained by or on behalf of the Makers
and the Holder shall bind and inure to the benefit of the respective successors
and assigns of the Makers and the Holder.
6.4 Restrictions on Transfer. Subject to the provisions of Section
6.3 requiring prior written consent, this Note is transferable in the same
manner and with the same effect as in the case of a negotiable instrument
payable to a specified person. Prior to any transfer as provided herein, the
transferor shall provide written notice to the Makers. The Makers, however, may
treat Holder as the owner hereof for all purposes until this Note shall have
been surrendered for transfer as hereinafter provided. Upon surrender of this
Note duly executed by Holder or his agent or attorney, the Makers shall execute
and deliver a new Note in the name of the assignee or assignees and in the
denominations specified in such instrument of assignment, and this Note shall
promptly be canceled.
6.5 Notice; Address of Parties. Except as otherwise provided, all
communications to the Makers or Holder provided for herein or with reference to
this Note shall be deemed to have been sufficiently given or served for all
purposes on the third business day after being sent as certified or registered
mail, postage and charges prepaid, to the following addresses: if to ICSL: Reid
House, 31 Church Street, Hamilton, Bermuda HM12 or at any other address
designated by the ICSL in writing to Holder with a copy to Philip P. Sudan,
Jr., Ryan & Sudan, L.L.P., 909 Fannin, 39th Floor, Houston, Texas 77010; if to
ISC: ISC, 1100 Executive Drive, Richardson, Texas 75081, or at any other
address designated by ISC to the Holder in writing with a copy to Philip P.
Sudan, Jr., Ryan & Sudan, L.L.P., 909 Fannin, 39th Floor, Houston, Texas 77010;
if to Holder: St. James Capital Corp., 1980 Post Oak Boulevard, Suite 2030,
Houston, Texas 77056, Attn: John L. Thompson, or at any other address
designated by Holder to the Makers in writing.
6.6 Separability Clause. In case any provision in this Note shall
be invalid, illegal or unenforceable in any jurisdiction, the validity,
legality and enforceability of the remaining provisions in such jurisdiction
shall not in any way be affected or impaired thereby; provided, however, such
construction does not destroy the essence of the bargain provided for
hereunder.
6.7 Governing Law. This Note shall be governed by, and construed
in accordance with, the internal laws of the State of Texas (without regard to
principles of choice of law) and the laws of the United States and for all
purposes shall be construed in accordance with, and governed by, the laws of
said State and of the United States. The Makers and the Holder further agree
that the provisions of Article 1.04, Subtitle 1, Title 79, of the Revised Civil
Statutes of Texas, 1925, as amended, are applicable to the determination of the
Highest Lawful Rate with respect to this Not, the indicated rate ceiling
computed from time to time pursuant to Section (a) of such Article shall apply
to this Note; provided, however, that to the extent permitted by such Article,
the Holder may from time to time by notice from the Holder revise the election
of such interest rate ceiling as such ceiling affects then current or future
balances of the Advances outstanding under this Note. The provisions of
Chapter 15 of Subtitle 3 of the said Title 79 do not apply to this Note issued
hereunder.
6.8 Interest. Each provision in this Note and the other
Transaction Documents is expressly limited so that in no event whatsoever shall
the amount paid, or otherwise agreed to be paid, to the
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Holder for the use, forbearance or detention of the money to be loaned under
this Note or any Transaction Document or otherwise (including any sums paid as
required by any covenant or obligation contained herein or in any other
Transaction Document which is for the use, forbearance or detention of such
money), exceed that amount of money which would cause the effective rate of
interest to exceed the Highest Lawful Rate, and all amounts owed under this
Note and each other Transaction Document shall be held to be subject to
reduction to the effect that such amounts so paid or agreed to be paid which
are for the use, forbearance or detention of money under this Note or such
Transaction Document shall in no event exceed that amount of money which would
cause the effective rate of interest to exceed the Highest Lawful Rate.
Anything in this Note or any other Transaction Document to the contrary
notwithstanding, the Makers shall never be required to pay unearned interest on
this Note or ever be required to pay interest on this Note at a rate in excess
of the Highest Lawful Rate, and if the effective rate of interest which would
otherwise be payable with respect to this Note would exceed the Highest Lawful
Rate, or if the Holder shall receive any unearned interest or shall receive
monies that are deemed to constitute interest which would increase the
effective rate of interest payable by the Makers with respect to this Note to a
rate in excess of the Highest Lawful Rate, then (i) the amount of interest
which would otherwise be payable by the Makers with respect to this Note shall
be reduced to the amount allowed under applicable law and (ii) any unearned
interest paid by the Makers or any interest paid by the Makers in excess of the
Highest Lawful Rate shall be in the first instance credited on the principal of
this Note with the excess thereof, if any, refunded to the Makers. It is
further agreed that, without limitation of the foregoing, all calculations of
the rate of interest contracted for, charged or received by the Holder under
this Note or the other Transaction Documents, are made for the purpose of
determining whether such rate exceeds the Highest Lawful Rate applicable to the
Holder (such Highest Lawful Rate being the Holder's "Maximum Permissible
Rate"), shall be made, to the extent permitted by usury laws applicable to the
Holder (now or hereafter enacted), by (a) characterizing any non-principal
payment as an expense, fee or premium rather than as interest and (b)
amortizing, prorating and spreading in equal parts during the period of the
full stated term of the Advances evidenced by the Note all interest at any time
contracted for, charged or received by the Holder in connection therewith.
6.9 Acknowledgement of Letter of Intent. The parties hereby
acknowledge that they have heretofore entered into that certain Letter of
Intent dated as of February 14, 1997, which Letter of Intent contemplates that
the parties will enter into a credit facility in favor of the Makers, or
certain of them, in an aggregate principal amount of up to $15,000,000, the
proceeds of which will be used, in part, to refinance the indebtedness
evidenced by this Note. The obligations of the Holder to enter into said credit
facility are subject to the satisfaction, among other things, of the items and
requirements set forth in Section 3 of the Letter of Intent and the execution
and delivery by the Makers of definitive loan documents satisfactory in form
and substance to the Holder, including legal opinions from independent legal
counsel to the Makers. Notwithstanding anything contained in the Letter of
Intent, all outstanding principal together with all accrued and unpaid interest
shall be due and payable in full on the Maturity Date.
6.10. FINAL AGREEMENT OF THE PARTIES. THIS NOTE AND THE OTHER
TRANSACTION DOCUMENTS TO WHICH ANY OF MAKERS OR ANY OF THEIR RESPECTIVE
SUBSIDIARIES IS A PARTY CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION
26.02(A) OF THE TEXAS BUSINESS AND COMMERCE CODE, AND REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
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IN WITNESS WHEREOF, each Maker has caused this instrument to be duly
executed on the date first above written.
INTELECT COMMUNICATIONS SYSTEMS
LIMITED
By:____________________________________
Name:__________________________________
Title:_________________________________
INTELECT SYSTEMS CORP.
By:____________________________________
Name:__________________________________
Title:_________________________________
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EXHIBIT 10.31
BORROWER PLEDGE AGREEMENT
THIS BORROWER PLEDGE AGREEMENT (this "Pledge Agreement",) is entered
into as of February 26, 1997 (the "Effective Date",), by and between INTELECT
SYSTEMS CORP., a Delaware corporation ("Pledgor"), and ST. JAMES CAPITAL CORP.,
a Delaware corporation, ("Secured Party").
RECITALS
Pursuant to the terms, and subject to the conditions, set forth in
that certain Floating Rate Promissory Note (the "Note",) dated the Effective
Date issued by Pledgor and Intelect Communications Systems Limited, a
corporation organized under the laws of Bermuda ("ICSL" and together with
Pledgor, the "Makers") payable to the order of Secured Party in the original
principal sum of $2,500,000, Secured Party has agreed to advance funds to the
Makers.
ICSL owns one hundred percent (100%) of the issued and outstanding
capital stock of Pledgor and will derive both direct and indirect benefit from
the issuance and sale of the Note to the Purchaser.
It is a condition to the agreement of Secured Party to advance such
funds and to consummate the transactions contemplated by the Note that this
Pledge Agreement shall have been executed and delivered by Pledgor and shall be
in full force and effect.
NOW, THEREFORE, in order to induce, and in consideration of, the
execution and delivery of the Note, the advancement of funds under the Note by
Secured Party and the consummation of the transactions contemplated by the
Note, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by Pledgor, Pledgor hereby
covenants and agrees with Secured Party as follows:
SECTION 1. DEFINITIONS
1.1 Certain Defined Terms. As used in this Pledge Agreement, the
following terms or phrases have the respective meanings set forth below or in
the Section following such term:
"Collateral" means the aggregate of:
(a) 1,100 shares of the common capital stock of DNA, evidenced
by Certificate Number 8, and any other shares of the common capital
stock of DNA now owned or hereafter acquired by Pledgor (such shares
of stock referred to in this subsection 1.1(a) are hereinafter
sometimes referred to as the "DNA Shares").
(b) (i) the certificates or instruments, if any, representing
the DNA Shares, (ii) all dividends (cash, stock or otherwise), cash,
instruments, rights to subscribe, purchase or sell and all other
rights and property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of
such securities, (iii) all replacements, additions to and
substitutions for any of the property referred to in this definition,
including, without limitation, claims against third parties, (iv) the
proceeds, interest, profits and other income of or on any of the
property referred to in this definition, and (v) all books and records
relating to any of the property referred to in this definition.
"DNA" means DNA Enterprises, Inc., a Texas corporation and a
wholly-owned Subsidiary of Pledgor.
"DNA Shares" has the meaning assigned that term in the definition of
Collateral above.
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"Effective Date" has the meaning given that term in the introduction
to this Pledge Agreement.
"ICSL" has the meaning given that term in the first Recital to this
Pledge Agreement.
"Makers" has the meaning given that term in the first Recital to this
Pledge Agreement.
"Note" has the meaning given that term in the first Recital to this
Pledge Agreement.
"Obligations" means the aggregate of:
(1) the indebtedness evidenced by the Note;
(2) all sums advanced and costs and expenses incurred by
Secured Party in accordance with the Note, this Pledge Agreement and
the other Transaction Documents, including, without limitation, all
reasonable legal, accounting, consulting or like fees, made and
incurred in connection with the Obligations described in clause (1)
above or any part thereof, any renewal, extension, or modification of,
or substitution for, the foregoing Obligations or any part thereof, or
the acquisition, perfection or maintenance and preservation of the
security for the Obligations, whether such advances, costs, or
expenses shall have been made and incurred at the request of Pledgor
or Secured Party,
(3) all other obligations of Pledgor or ICSL pursuant to
the Note and the other Transaction Documents; and
(4) any and all extensions and renewals of, substitutions
for, or modifications or amendments of any of the foregoing
Obligations or any part thereof.
"Pledge Agreement" means this Borrower Pledge Agreement dated as of
the Effective Date, between Pledgor and Secured Party, as said agreement may be
amended, modified, supplemented, and/or extended from time to time.
"Pledged Securities" means all of the securities and other property
(whether or not the same constitutes a "security" under the UCC) referred to in
the definition of "Collateral" above, and all additional securities (as that
term is defined in the UCC), if any, constituting Collateral under this Pledge
Agreement.
"Pledgor" has the meaning given that term in the introduction to this
Pledge Agreement.
"Proceeds" means whatever is received upon the sale, exchange,
collection, or other disposition of the Collateral and insurance payable or
damages or other payments by reason of loss or damage to the Collateral.
"Secured Party" has the meaning given that term in the introduction to
this Pledge Agreement.
"Security Interest" has the meaning assigned to that term in
Section 2.1.
"UCC" means the Uniform Commercial Code as in effect in any
jurisdiction applicable.
1.2 Other Definitions. Other capitalized terms used herein have
the meanings given them herein or in the Note.
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SECTION 2. CREATION OF SECURITY INTEREST
2.1 Creation of Security Interest. In consideration of Secured
Party's advancing or extending the funds or credit constituting the Obligations
(including the indebtedness evidenced by the Note), as a condition to such
advances and extensions, in consideration of the mutual covenants contained
herein, and for the purpose of securing the payment and performance of the
Obligations, Pledgor hereby grants to Secured Party a continuing security
interest in and to all Collateral, including in all Proceeds (the "Security
Interest").
2.2 Proceeds. Except as otherwise permitted herein, the security
interest of Secured Party hereunder in the Proceeds shall not be construed to
mean that Secured Party consents to the sale or other disposition of any part
of the Collateral.
2.3 Transfer of Collateral. All certificates or instruments
representing or evidencing the Pledged Securities shall be delivered to and
held pursuant hereto by Secured Party or a person or entity designated by
Secured Party and shall be in suitable form for transfer by delivery, or shall
be accompanied by duly executed instruments of transfer or assignment in blank.
Notwithstanding the preceding sentence, at Secured Party's discretion all
Pledged Securities must be delivered or transferred as set forth in Section
8-301(a) of the UCC.
SECTION 3. PLEDGOR'S REPRESENTATIONS, WARRANTIES, AND COVENANTS
3.1 Recording and Filing. Pledgor shall pay all costs of filing,
registering, and recording this and every other instrument in addition or
supplemental hereto and all financing statements Secured Party may reasonably
require, in such offices and places and at such times and as often as may be,
in the judgment of Secured Party, necessary to create, perfect, preserve,
protect, and renew the Lien hereof on and in the Collateral, and otherwise do
and perform all matters or things necessary or expedient to be done or observed
by reason of any law or regulation of any applicable jurisdiction or any other
competent authority for the purpose of effectively creating, perfecting,
preserving, protecting, maintaining, and renewing the Lien hereof in and on the
Collateral and the priority thereof. Pledgor shall also pay the costs of
obtaining reports from appropriate filing offices concerning Lien filings in
respect of any of the Collateral. A carbon, photographic, or other
reproduction of this Pledge Agreement or of any financing statement relating
hereto shall be sufficient as a financing statement.
3.2 Secured Party's Right to Perform Pledgor's Obligations;
Further Assurances. Pledgor agrees that, if Pledgor fails to perform any act
that Pledgor is required to perform under this instrument, Secured Party may,
but shall not be obligated to, perform or cause to be performed such act.
Accordingly, to the extent permitted by law, Pledgor hereby authorizes Secured
Party to execute and file financing statements and continuation statements
without Pledgor's signature thereon. Any expense incurred by Secured Party in
taking action in accordance with the preceding two sentences shall be a demand
obligation owing by Pledgor to Secured Party, shall bear interest in accordance
with Section 6.14, and shall be a part of the Obligations, and Secured Party
shall be subrogated to all of the rights of the party receiving the benefit of
such performance. The undertaking of such performance by Secured Party as
aforesaid shall not obligate such Person to continue such performance or to
engage in such performance or performance of any other act in the future, shall
not relieve Pledgor from the observance or performance of any covenant,
warranty, or agreement contained in this instrument or constitute a waiver of
default hereunder, and shall not affect the right of Secured Party to
accelerate the payment of all indebtedness and other sums secured hereby or to
resort to any other of its rights, powers, or remedies hereunder or under
applicable law. In the event Secured Party undertakes any such action, it
shall have liability to Pledgor only upon a showing of its bad faith, gross
negligence or willful misconduct (BUT SPECIFICALLY EXCLUDING ITS ORDINARY OR
PARTIAL NEGLIGENCE), and in all events no party other than the acting party
shall be liable to Pledgor. Pledgor will from time to time (a) sign, execute,
deliver, and file, alone or with Secured Party, all
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<PAGE> 4
further financing statements, security agreements, or other documents that are
reasonably necessary; (b) procure any instruments or documents as may be
reasonably requested by Secured Party, and (c) take all further action that may
be reasonably necessary, or that Secured Party may reasonably request, to
confirm, perfect, preserve, and protect the security interests intended to be
granted hereby.
3.3 Defense of Claims. Pledgor will preserve, warrant, and defend
the Security Interest created hereby in the Collateral against the claims of
all Persons whomsoever; will maintain and preserve such Security Interest at
all times as contemplated by the Transaction Documents; and will not do or
suffer any matter or thing whereby such Security Interest might or could be
impaired. Pledgor shall promptly notify Secured Party in writing of the
commencement of any legal proceedings affecting Secured Party's interest in the
Collateral, or any part thereof, and shall take such action, employing
attorneys reasonably acceptable to Secured Party, as may be necessary to
preserve Pledgor's and Secured Party's rights affected thereby, and should
Pledgor fail or refuse to take any such action, Secured Party may take the
action on behalf of and in the name of Pledgor and at Pledgor's expense.
Moreover, Secured Party may take independent action in connection therewith as
it may in its sole discretion deem proper, and Pledgor hereby agrees to make
reimbursement for all reasonable sums advanced and all reasonable expenses
incurred in such actions plus interest in accordance with Section 6.14.
3.4 Corporate Identity. (a) Pledgor will maintain (i) the
location of its places of business and its primary corporate office and (ii)
the locations where it keeps or holds records relating to the Collateral at the
locations at which the same are located as of the date of this Pledge Agreement
or at locations other than those specified above if, prior to such relocation,
Secured Party shall have given Pledgor written notice thereof. Pledgor shall
not in any event change the location of any Collateral if such change would
cause the Security Interest in such Collateral to lapse or cease to be
perfected.
(b) Pledgor, to the extent not otherwise restricted in the Note, will
not change its name, identity or form of organization in any manner unless it
shall have given prior written notice to Secured Party. On any such change,
Pledgor will execute and file such financing statements or other documents as
may be reasonably requested by Secured Party to maintain the perfection of its
Security Interest in the Collateral.
3.5 Pledged Securities. The Pledged Securities have been duly
authorized and validly issued, and are fully paid and non-assessable. The
Pledged Securities constitute 100% of the issued and outstanding common stock
of DNA. No other person or entity has any interest in or rights to acquire any
interest in DNA.
3.6 First Priority Security Interest. The pledge of Pledged
Securities pursuant to this Pledge Agreement creates a valid and perfected
first priority security interest in the Collateral, enforceable against Pledgor
and all third parties and securing the payment and performance of the
Obligations.
3.7 Sale, Disposition or Encumbrance of Collateral. Pledgor will
not in any way encumber any of the Collateral (or permit or suffer any of the
Collateral to be encumbered) or sell, pledge, assign, lend or otherwise dispose
of or transfer any of the Collateral to or in favor of any person or entity
other than Secured Party.
3.8 Dividends or Distributions. Any and all:
(a) dividends and other distributions paid or payable in cash
in respect of any Collateral in connection with a partial or total
liquidation or dissolution or in connection with a reduction of
capital, capital surplus or paid-in surplus, or reclassification, and
(b) cash paid, payable or otherwise distributed in redemption
of, or in exchange for,
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<PAGE> 5
any Collateral,
shall be, and shall be forthwith delivered to Secured Party to hold as,
Collateral and shall, if received by Pledgor, be received in trust for the
benefit of Secured Party, be segregated from the other property or funds of
Pledgor, and be forthwith delivered to Secured Party as Collateral in the same
form as so received (with any necessary indorsement); provided, however, that
Secured Party shall have no duty to receive and hold such dividends and
interest payments and shall not be responsible for any failure to do so or
delay in so doing.
3.9 Stock Powers. Pledgor shall furnish to Secured Party such
stock powers and other instruments as may be required by Secured Party to
assure the transferability of the Collateral when and as often as may be
requested by Secured Party.
3.10 Voting and Other Consensual Rights. Except to the extent
otherwise provided in Section 4.6(c), Pledgor shall be entitled to exercise any
and all voting and other consensual rights pertaining to the Collateral or any
part thereof for any purpose not inconsistent with the terms of this Pledge
Agreement, the Note or any other Transaction Document; provided however, that
Pledgor shall not exercise or refrain from exercising any such right if such
action would have a material adverse effect on the value of the Collateral or
any part thereof, and, provided, further, that upon request of Secured Party at
any time or from time to time, Pledgor shall give Secured Party prompt written
notice of the manner in which Pledgor has exercised, or the reasons for
refraining from exercising, any such right.
3.11 Attorney-in-Fact. Pledgor hereby irrevocably appoints Secured
Party as Pledgor's attorney-in-fact, with full authority in the place and stead
of Pledgor and in the name of Pledgor or otherwise, from time to time in
Secured Party's discretion, but at Pledgor's cost and expense and without
notice to Pledgor, to take any action and to execute any assignment,
certificate, financing statement, stock power, notification, document or
instrument which Secured Party may deem necessary or advisable to accomplish
the purposes of this Pledge Agreement, including, without limitation, to
receive, endorse and collect all instruments made payable to Pledgor
representing any dividend, interest payment or other distribution in respect of
the Collateral or any part thereof and to give full discharge for the same.
3.12 Custody and Preservation of the Collateral. Secured Party
shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if the Collateral is accorded
treatment substantially equal to that which comparable secured parties accord
comparable collateral, it being understood and agreed, however, that Secured
Party shall not have responsibility for (i) ascertaining or taking action with
respect to calls, conversions, exchanges, maturities, tenders or other matters
relative to any Collateral, whether or not Secured Party has or is deemed to
have knowledge of such matters, or (ii) taking any necessary steps to preserve
rights against persons or entities with respect to any Collateral.
SECTION 4. DEFAULT
4.1 Events of Default. Upon the occurrence and continuation of an
Event of Default beyond any applicable cure periods, as provided in the Note,
Secured Party may declare all Obligations immediately due and payable.
4.2 Rights in Respect of Collateral. Upon the occurrence and
continuation of any Event of Default, in addition to all other rights of
Secured Party, Secured Party will have the right and power, but will not be
obligated, to enter upon and take possession of all or any part of the
Collateral, exclude Pledgor therefrom, and to hold, use, administer, manage,
and operate the same to the extent that Pledgor could do so. After a Default
under the Note, Secured Party may exercise every power, right, and privilege of
Pledgor with respect to the Collateral (including, without limitation, the
right of
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collection) without any liability (SPECIFICALLY INCLUDING LIABILITY FOR
ORDINARY OR PARTIAL NEGLIGENCE) to Pledgor in connection therewith except with
respect to bad faith, gross negligence or willful misconduct; provided,
however, that Secured Party may notify account debtors of Pledgor to make
payments directly to Secured Party only after all cure periods, as provided in
the Note, applicable to such Default have lapsed. Provided there has been no
foreclosure sale, when and if such expenses of operation have been paid and the
Obligations paid in full, the remaining Collateral shall be returned to
Pledgor.
4.3 Ancillary Rights. Upon the occurrence and continuation of an
Event of Default, in addition to all other rights of Secured Party hereunder,
without notice, demand, or declaration of default, all of which are hereby
expressly waived by Pledgor, Secured Party may proceed by a suit or suits in
equity or at law (a) for the seizure and sale of the Collateral or any part
thereof, (b) for the specific performance of any covenant or agreement
contained in this Pledge Agreement, the Note or any of the other Transaction
Documents or in aid of the execution of any power herein granted, (c) for the
foreclosure or sale of the Collateral or any part thereof under the judgment or
decree of any court of competent jurisdiction, or (d) for the enforcement of
any other appropriate legal or equitable remedy.
4.4 Receivership. Upon the occurrence and continuation of an
Event of Default, in addition to all other rights of Secured Party, Secured
Party from time to time may apply to a court of competent jurisdiction for the
appointment of one or more receivers to take possession of and to manage and
administer the Collateral or any portion thereof and to collect the Proceeds,
all without demand or declaration of default, which are hereby waived by
Pledgor. Secured Party shall be entitled to the appointment of such
receiver(s) as a matter of right, without regard to the value of the Collateral
as security for the Obligations or the solvency of Pledgor or any Person liable
for the payment or performance of all or any part of the Obligations. Such
receiver(s) shall serve without bond and shall have all usual and customary
powers and authorities in addition to all other powers and authorities
permitted by the law of the jurisdiction where the Collateral is situated and
all powers and authorities granted to Secured Party herein.
4.5 Expenses. Pledgor will pay to Secured Party all reasonable
expenses, including, without limitation, fees and expenses of any receiver(s),
reasonable attorneys' and consultants' fees and expenses, advanced by Secured
Party and incurred pursuant to the provisions contained in this Section 4, and
all such unpaid expenses shall be (a) a Lien against the Collateral; (b) added
to the Obligations, and (c) payable upon demand, with interest in accordance
with Section 6.14; provided, however, that the existence of said Lien shall in
no way waive, diminish, or prejudice any other rights, remedies, powers, and
privileges that Secured Party or any receiver(s) may have under the applicable
laws in the collection of such funds as loans or otherwise.
4.6 Pledged Securities. Upon the occurrence and during the
continuance of an Event of Default:
(a) All dividends and interest payments that are received by
Pledgor contrary to the provisions of this Pledge Agreement shall be
received in trust for the benefit of Secured Party, shall be
segregated from other funds of Pledgor and shall be forthwith paid
over to Secured Party as Collateral in the same form as so received
(with any necessary indorsement).
(b) Secured Party may exercise any and all rights of
conversion, exchange, subscription or any other rights, privileges or
options pertaining to any of the Pledged Securities as if it were the
absolute owner thereof, including without limitation, the right to
exchange at its discretion, any and all of the Pledged Securities upon
the merger, consolidation, reorganization, recapitalization or other
readjustment of any issuer of such Pledged Securities or upon the
exercise by any such issuer or Secured Party of any right, privilege
or option pertaining to any of the Pledged Securities, and in
connection therewith, to
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deposit and deliver any and all of the Pledged Securities with any
committee, depository, transfer agent, registrar or other designated
agency upon such terms and conditions as it may determine, all without
liability except to account for property actually received by it, but
Secured Party shall have no duty to exercise any of the aforesaid
rights, privileges or options and shall not be responsible for any
failure to do so or delay in so doing.
(c) at the option of Secured Party and upon written
notification thereof to Pledgor, all rights of Pledgor to exercise the
voting and other consensual rights which Pledgor would otherwise be
entitled to exercise pursuant to Section 3.10 with respect to the
Pledged Securities shall cease, and all such rights shall thereupon
become vested in Secured Party who shall thereupon have the sole right
to exercise such voting and other consensual rights, but Secured Party
shall have no duty to exercise any such voting or other consensual
rights and shall not be responsible for any failure to do so or delay
in so doing.
SECTION 5. FORECLOSURE ON COLLATERAL
5.1 Sale. Upon the occurrence and continuation of an Event of
Default, Secured Party will have all rights and remedies granted by law, and
particularly by the UCC, including, without limitation, the right to take
possession of the Collateral, and for this purpose Secured Party may enter upon
any premises on which any or all of the Collateral is situated and take
possession of and manage the Collateral or remove it therefrom. Secured Party
may require Pledgor to assemble the Collateral and make it available to Secured
Party at a place to be designated by Secured Party that is reasonably
convenient to all parties. Unless the Collateral is perishable or threatens to
decline speedily in value or is of a type customarily sold on a recognized
market, Secured Party will give Pledgor reasonable notice of the time and place
of any public sale or of the time after which any private sale or other
disposition of the Collateral is to be made. This requirement of sending
reasonable notice will be met if the notice is sent to Pledgor as provided in
the Note at least ten days before the time of the sale or disposition.
5.2 Private Sale. If Secured Party in good faith believes that
the Securities Act of 1933 or any other state or federal law prohibits or
restricts the customary manner of sale or distribution of any of the
Collateral, or if Secured Party determines that there is any other restraint or
restriction limiting the timely sale or distribution of any such property in
accordance with the customary manner of sale or distribution, Secured Party may
sell such property privately or in any other manner it deems, in good faith,
advisable at such price or prices as it determines in good faith, but otherwise
without any liability whatsoever to Pledgor in connection therewith. Pledgor
recognizes and agrees that such prohibition or restriction may cause such
property to have less value than it otherwise would have and that,
consequently, such sale or disposition by Secured Party may result in a lower
sales price than if the sale were otherwise held.
5.3 Secured Party as Purchaser. Secured Party will have the right
to become the purchaser at any foreclosure sale, and it will have the right to
credit upon the amount of the bid the amount payable to it out of the net
proceeds of sale.
5.4 Recitals Conclusive; Warranty; Ratification. Recitals
contained in any assignment or bill of sale to any purchaser at any sale made
hereunder will conclusively establish, as between the parties to such
assignment or bill of sale, the truth and accuracy of the matters therein
stated, including, without limitation, nonpayment of the unpaid principal sum
of, and the interest accrued on, the written instruments constituting part or
all of the Obligations after the same have become due and payable, nonpayment
of any other of the Obligations, or advertisement and conduct of the sale in
the manner provided herein. Secured Party will have authority to appoint an
attorney-in-fact to act in conducting any foreclosure sale and executing
assignments and bills of sale. All assignments and bills of sale may contain a
general warranty of title from the grantor. Pledgor ratifies and confirms all
legal acts that Secured Party may do in accordance with this Pledge Agreement.
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5.5 Effect of Sale. Any sale or sales of the Collateral or any
part thereof will operate to divest all right, title, interest, claim, and
demand whatsoever, either at law or in equity, of Pledgor in and to the
property sold, and will be a perpetual bar, both at law and in equity, against
Pledgor, Pledgor's successors or assigns and against any and all persons
claiming or who shall thereafter claim all or any of the property sold from,
through, or under Pledgor, or Pledgor's successors or assigns. The purchaser
or purchasers at the foreclosure sale will receive immediate possession of the
property purchased.
5.6 Application of Proceeds. Secured Party shall apply the
proceeds of any sale or other disposition of the Collateral as follows: First,
to the payment of all its expenses incurred in retaking, holding, and preparing
any of the Collateral for sale(s) or other disposition, in arranging for such
sale(s) or other disposition, and in actually selling or disposing of the same
(all of which are part of the Obligations); second, toward repayment of amounts
reasonably expended by Secured Party under Section 5 hereof; and third, toward
payment of the balance of the Obligations in the order and manner determined by
Secured Party in its sole discretion. Any surplus remaining shall be delivered
to Pledgor or as a court of competent jurisdiction may direct.
5.7 Deficiency. Pledgor shall remain liable for any deficiency
owing to Secured Party after application of the net proceeds of any foreclosure
sale. Nothing herein contained shall be construed as limiting Secured Party to
the collection of any Obligations only out of the income, revenue, rents,
issues, and profits from the Collateral or as obligating Secured Party to delay
or withhold action upon any default that may be occasioned by failure of such
income or revenue to be sufficient to retire the principal or interest when due
on the indebtedness secured hereby. It is expressly understood between Secured
Party and Pledgor that any Obligations shall constitute an absolute,
unconditional obligation of Pledgor to pay as provided herein or in the Note in
accordance with the terms of the instrument evidencing such Obligations in the
amount therein specified at the maturity date or at the respective maturity
dates of the installments thereof, whether by acceleration or otherwise.
5.8 Pledgor's Waiver of Appraisement, Marshalling, Etc. To the
extent permitted by applicable law, Pledgor agrees that Pledgor will not at any
time insist upon or plead or in any manner whatsoever claim the benefit of any
appraisement, valuation, stay, extension, or redemption law, if any, now or
hereafter in force, to prevent or hinder the enforcement or foreclosure of this
instrument, the absolute sale of the Collateral or the possession thereof by
any purchaser at any sale made pursuant to this instrument or pursuant to the
decree of any court having jurisdiction. To the extent permitted by applicable
law, Pledgor, for Pledgor and all who may claim by, through, or under Pledgor,
hereby waives the benefit of all such laws, if any, and to the extent that
Pledgor may lawfully do so under applicable law, waives any and all right to
have any Collateral marshalled upon any foreclosure of the Lien hereof or sold
in inverse order of alienation, and Pledgor agrees that Secured Party may sell
the Collateral as an entirety.
5.9 Discharge of Purchaser. Upon any sale made under the powers
of sale herein granted and conferred, the sales receipt issued by Secured Party
will be sufficient discharge to the purchaser or purchasers at any sale for the
purchase money, and such purchaser or purchasers and the heirs, devisees,
personal representatives, successors, and assigns thereof will not, after
paying such purchase money and receiving such receipt of Secured Party, be
obliged to see to the application thereof or be in anywise answerable for any
loss, misapplication, or nonapplication thereof.
SECTION 6. MISCELLANEOUS
6.1 Termination. If all the Obligations are paid and performed in
full and the covenants herein contained are performed in all respects, then
Secured Party shall, upon the request of Pledgor and at Pledgor's cost and
expense, deliver to Pledgor proper instruments executed by Secured Party
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evidencing the release of this instrument. Until such delivery, this
instrument shall remain and continue in full force and effect.
6.2 Remedies Cumulative. No failure on the part of Secured Party
or any holder of the Note to exercise, and no delay in exercising, any right,
power or privilege hereunder, under the Note or under any other Transaction
Document and no course of dealing between Pledgor and Secured Party or any
holder of the Note shall operate as a waiver thereof; nor shall any single or
partial exercise of any such right, power or privilege, or any abandonment or
discontinuance of any steps to enforce such right, power or privilege, preclude
any other or further exercise thereof or the exercise of any other right, power
or privilege. No notice to or demand on Pledgor in any case shall entitle
Pledgor to any other or further notice or demand in similar or other
circumstances. The remedies herein provided are cumulative and not exclusive
of any remedies provided by law.
6.3 Partial Release. Except as expressly set forth therein, no
release from the Lien of this instrument of any part of the Collateral by
Secured Party shall in any way alter, vary, or diminish the force, effect or
lien of this instrument on the balance or remainder of the Collateral.
6.4 Subrogation. This Pledge Agreement is made with full
substitution and subrogation of Secured Party in and to all covenants and
warranties by others heretofore given or made in respect of the Collateral or
any part thereof.
6.5 Successor Lender. Any Person that succeeds to St. James
Capital Corp. as Holder pursuant to, and as permitted by, the terms of the Note
automatically shall become Secured Party hereunder.
6.6 Notices. Subject to the provisions of Section 5.1, all
communications under this Pledge Agreement shall be given as provided in the
Note and shall be effective as therein provided.
6.7 Successors and Assigns. Neither party may assign its rights
or delegate its duties hereunder to any Person without prior written consent of
of the other party, which consent will not be unreasonably withheld. This
Pledge Agreement shall be binding upon the successors and permitted assigns of
each of the parties, and, except as expressly set forth in the Note and this
Section 6.7, shall inure to the benefit of the successors and permitted assigns
of each of the parties. The provisions of this Pledge Agreement are intended
to be for the benefit of all Persons constituting Secured Party.
6.8 Amendment and Waiver. (a) This Pledge Agreement may be
amended, and the observance of any term of this Pledge Agreement may be waived,
with (and only with) the written consent of Pledgor and Secured Party.
(b) Pledgor shall not solicit, request, or negotiate for or with
respect to any proposed waiver or amendment hereof except in accordance with
the provisions of this Agreement and the Note.
(c) Any such amendment or waiver shall apply equally to all persons
constituting Secured Party or Pledgor and shall be binding upon each future
Secured Party and upon each person constituting Pledgor regardless of whether
this Pledge Agreement, the Note or any other document shall have been marked to
indicate such amendment or waiver. No such amendment or waiver shall extend to
or affect any obligation not expressly amended or waived or impair any right
consequent thereon.
6.9 Governing Law. THIS PLEDGE AGREEMENT, THE LEGAL RELATIONS
AMONG THE PARTIES HERETO, AND ALL RIGHTS AND OBLIGATIONS HEREUNDER, INCLUDING
MATTERS OF CONSTRUCTION, VALIDITY, AND PERFORMANCE, SHALL BE GOVERNED BY AND
INTERPRETED, CONSTRUED, APPLIED, AND ENFORCED IN ACCORDANCE WITH THE LAW OF THE
STATE OF TEXAS WITHOUT REFERENCE TO
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THE LAW OF ANOTHER JURISDICTION AND THE LAWS OF THE UNITED STATES OF AMERICA;
PROVIDED, HOWEVER, THAT MATTERS RELATING TO THE PERFECTION OF SECURITY
INTERESTS UPON ANY PERSONAL PROPERTY SHALL BE GOVERNED BY THE LAW OF ANOTHER
JURISDICTION TO THE EXTENT REQUIRED BY THE NONWAIVABLE PROVISIONS OF SUCH LAW
OR THE LAW OF THE STATE OF TEXAS.
6.10 Severability. If any provision in this Pledge Agreement is
rendered or declared illegal, invalid, or unenforceable by reason of any rule
of law, public policy, or final judicial decision, all other terms and
provisions of this Pledge Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the transactions
contemplated hereby are not affected in any manner adverse to Pledgor or
Secured Party. Upon such determination that any term or other provision is
invalid, illegal, or incapable of being enforced, Pledgor and Secured Party
shall negotiate in good faith to modify this Pledge Agreement so as to effect
the original intent of the parties hereto as closely as possible to the end
that the transactions contemplated hereby are fulfilled to the extent possible.
6.11 Entire Agreement. This Pledge Agreement constitutes the
entire agreement of the parties hereto with respect to the matters contained
herein and supersede all prior contracts and agreements with respect thereto,
whether written or oral.
6.12 Multiple Counterparts. The parties may execute more than one
counterpart of this Pledge Agreement, each of which shall be an original but
all of which together shall constitute one and the same instrument.
6.13 References. All references herein to one gender shall include
the other. Unless otherwise expressly provided, all references to "Sections"
are to Sections of this Pledge Agreement and all references to "Exhibits" are
to the exhibits attached hereto, each of which is made a part hereof for all
purposes.
6.14 Interest. The Obligations of Pledgor pursuant to Sections 3.2
and 4.5 shall bear interest at an annual rate equal to the default rate set
forth in the Note from the date that is ten days after the date Secured Party
notifies Pledgor that Secured Party has paid amounts required to be paid by
Pledgor hereunder until such amounts are reimbursed to Secured Party. Secured
Party agrees to use all reasonable efforts to forward expense invoices to
Pledgor for direct payment by Pledgor before Secured Party advances amounts to
be reimbursed by Pledgor, and no interest shall accrue on amounts directly paid
by Pledgor.
6.15. FINAL AGREEMENT OF THE PARTIES. THIS PLEDGE AGREEMENT
(INCLUDING THE EXHIBITS HERETO), THE NOTE AND THE OTHER TRANSACTION DOCUMENTS
TO WHICH PLEDGOR OR ANY OF ITS SUBSIDIARIES IS A PARTY CONSTITUTE A "LOAN
AGREEMENT" AS DEFINED IN SECTION 26.02(A) OF THE TEXAS BUSINESS AND COMMERCE
CODE, AND REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
-10-
<PAGE> 11
EXECUTED as of the Effective Date.
Pledgor: INTELECT SYSTEMS CORPORATION
Address: By:__________________________________
1100 Executive Drive Name:________________________________
Richardson, Texas 75081 Title: ______________________________
SECURED PARTY: ST. JAMES CAPITAL CORP.
Address: By:__________________________________
1980 Post Oak Blvd Name:________________________________
Suite 2030 Title: ______________________________
Houston, Texas 77056
-11-
<PAGE> 12
IRREVOCABLE STOCK POWER
For Value Received, the undersigned hereby sells, assigns and
transfers to ____________________________________ ______________, One Thousand
One Hundred (1,100) shares of the common stock of DNA Enterprises, Inc., a
corporation organized under the laws of the State of Texas, standing in the
undersigned's name on the books of the corporation, represented by Certificate
No. 8, and the undersigned does hereby irrevocably constitute and appoint
_______________________________________________ my true and lawful
attorney-in-fact, with full power of substitution, to transfer this stock on
the books of the corporation.
Dated: ___________________________
INTELECT SYSTEMS CORPORATION
By:
Name:
Title:
In the presence of:
___________________________________________________
-12-
<PAGE> 1
EXHIBIT 10.32
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK ISSUABLE
THEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW AND,
ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS WARRANT MAY NOT BE RESOLD,
PLEDGED, OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER, OR IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE
SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS.
WARRANT
to Purchase Common Stock of
INTELECT COMMUNICATIONS SYSTEMS LIMITED
Expiring on February 26, 2002
This Common Stock Purchase Warrant (the "Warrant") certifies that for
value received, St. James Capital Corp., a Delaware corporation (the "Holder")
or its assigns, is entitled to subscribe for and purchase from the Company (as
hereinafter defined), in whole or in part, 300,000 shares of duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock (as
hereinafter defined) at an initial Exercise Price (as hereinafter defined) per
share of $5.00, subject, however, to the provisions and upon the terms and
conditions hereinafter set forth. The number of Warrants (as hereinafter
defined), the number of shares of Common Stock purchasable hereunder, and the
Exercise Price therefor are subject to adjustment as hereinafter set forth.
This Warrant and all rights hereunder shall expire at 5:00 p.m., Houston, Texas
time, on February 26, 2002.
As used herein, the following terms shall have the meanings set forth
below:
"Company" shall mean Intelect Communications Systems Limited, a
Bermuda corporation, and shall also include any successor thereto with respect
to the obligations hereunder, by merger, consolidation or otherwise.
"Common Stock" shall mean and include the Company's Common Stock, par
value $0.01 per share, authorized on the date of the original issue of this
Warrant and shall also include (i) in case of any reorganization,
reclassification, consolidation, merger, share exchange or sale, transfer or
other disposition of assets of the character referred to in Section 3.5 hereof,
the stock, securities provided for in such Section 3.5, and (ii) any other
shares of common stock of the Company into which such shares of Common Stock
may be converted.
"Exercise Price" shall mean the initial purchase price of $5.00 per
share of Common Stock payable upon exercise of the Warrants, as adjusted from
time to time pursuant to the provisions hereof.
"Market Price" for any day, when used with reference to Common Stock,
shall mean the price of said Common Stock determined as follows: (x) the last
reported sale price for the Common Stock on such day on the principal
securities exchange on which the Common Stock is listed or admitted to trading
or if no such sale takes place on such date, the average of the closing bid and
asked prices thereof as officially reported, or, if not so listed or admitted
to trading on any securities exchange, the
<PAGE> 2
last sale price for the Common Stock on the National Association of Securities
Dealers National Market on such date, or, if there shall have been no trading
on such date or if the Common Stock shall not be listed on such system, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by any NASD member firm selected from time to time by the Company for
such purpose, in each such case, unless otherwise provided herein, averaged
over a period of ten (10) consecutive Trading Days prior to the date as of
which the determination is to be made; or (y) if the Common Stock shall not be
listed or admitted to trading as provided in clause (x) above, the fair market
value of the Common Stock as determined in good faith by the Board of Directors
of the Company.
"Note" shall mean the Promissory Note of the Company issued to St.
James Capital Corp. as of the date hereof in the original principal amount of
$2,500,000.
"Outstanding," when used with reference to Common Stock, shall mean
(except as otherwise expressly provided herein) at any date as of which the
number of shares thereof is to be determined, all issued shares of Common
Stock, except shares then owned or held by or for the account of the Company.
"Trading Days" shall mean any days during the course of which the
principal securities exchange on which the Common Stock is listed or admitted
to trading is open for the exchange of securities.
"Warrant" shall mean the right upon exercise to purchase one Warrant
Share.
"Warrant Shares" shall mean the shares of Common Stock purchased or
purchasable by the holder hereof upon the exercise of the Warrants.
ARTICLE I.
EXERCISE OF WARRANTS
I.1 Method of Exercise. The Warrants represented hereby may be exercised
by the holder hereof, in whole or in part, at any time and from time to time on
or after the date hereof until 5:00 p.m., Houston, Texas time, on February 26,
2002. To exercise the Warrants, the holder hereof shall deliver to the
Company, at the Warrant Office designated in Section 2.1 hereof, (i) a written
notice in the form of the Subscription Notice attached as an exhibit hereto,
stating therein the election of such holder to exercise the Warrants in the
manner provided in the Subscription Notice; (ii) payment in full of the
Exercise Price (A) in cash or by bank check for all Warrant Shares purchased
hereunder, or (B) if the Company and the holder mutually elect, through a
"cashless" or "net-issue" exercise of each such Warrant ("Cashless Exercise");
the holder shall exchange each Warrant subject to a Cashless Exercise for that
number of Warrant Shares determined by multiplying the number of Warrant Shares
issuable hereunder by a fraction, the numerator of which shall be the
difference between (x) the Market Price and (y) the Exercise Price for each
such Warrant, and the denominator of which shall be the Market Price; the
Subscription Notice shall set forth the calculation upon which the Cashless
Exercise is based, or (C) a combination of (A) and (B) above; and (iii) this
Warrant. The Warrants shall be deemed to be exercised on the date of receipt
by the Company of the Subscription Notice, accompanied by payment for the
Warrant Shares and surrender of this Warrant, as aforesaid, and such date is
referred to herein as the "Exercise Date". Upon such exercise, the Company
shall, as promptly as practicable and in any event within ten (10) business
days, issue and deliver to such holder a certificate or certificates for the
full number of the Warrant Shares purchased by such holder hereunder, and
shall, unless the Warrants have expired, deliver to the holder hereof a new
Warrant representing the number of Warrants, if any, that shall not have been
exercised, in all other respects identical to this
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<PAGE> 3
Warrant. As permitted by applicable law, the Person in whose name the
certificates for Common Stock are to be issued shall be deemed to have become a
holder of record of such Common Stock on the Exercise Date and shall be
entitled to all of the benefits of such holder on the Exercise Date, including
without limitation the right to receive dividends and other distributions for
which the record date falls on or after the Exercise Date and to exercise
voting rights.
I.2 Expenses and Taxes. The Company shall pay all expenses, and taxes
(including, without limitation, all documentary, stamp, transfer or other
transactional taxes) other than income taxes attributable to the preparation,
issuance or delivery of the Warrants and of the shares of Common Stock issuable
upon exercise of the Warrants.
I.3 Reservation of Shares. The Company shall reserve at all times so
long as the Warrants remain outstanding, free from preemptive rights, out of
its treasury Common Stock or its authorized but unissued shares of Common
Stock, or both, solely for the purpose of effecting the exercise of the
Warrants, a sufficient number of shares of Common Stock to provide for the
exercise of the Warrants.
I.4 Valid Issuance. All shares of Common Stock that may be issued upon
exercise of the Warrants will, upon issuance by the Company, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof and, without limiting the
generality of the foregoing, the Company shall take no action or fail to take
any action which will cause a contrary result (including, without limitation,
any action that would cause the Exercise Price to be less than the par value,
if any, of the Common Stock).
I.5 Purchase Agreement. The Warrants represented hereby are part of a
duly authorized issuance and sale of warrants to purchase Common Stock issued
and sold pursuant to that certain Letter of Intent dated as of February 14,
1997 (the "Agreement"), between the Company and the holder hereof. The holder
hereof shall be entitled to registration under the Securities Act and any
applicable state securities or blue sky laws to the extent set forth in the
Registration Rights Agreement, as amended. The terms of the Agreement are
hereby incorporated herein for all purposes and shall be considered a part of
this Warrant as if they had been fully set forth herein. Notwithstanding the
previous sentence, in the event of any conflict between the provisions of the
Agreement and of this Warrant, the provisions of this Warrant shall control.
I.6 Acknowledgment of Rights. At the time of the exercise of the
Warrants in accordance with the terms hereof and upon the written request of
the holder hereof, the Company will acknowledge in writing its continuing
obligation to afford to such holder any rights (including, without limitation,
any right to registration of the Warrant Shares) to which such holder shall
continue to be entitled after such exercise in accordance with the provisions
of this Warrant; provided, however, that if the holder hereof shall fail to
make any such request, such failure shall not affect the continuing obligation
of the Company to afford to such holder any such rights.
I.7 No Fractional Shares. The Company shall not be required to issue
fractional shares of Common Stock on the exercise of this Warrant. If more
than one Warrant shall be presented for exercise at the same time by the same
holder, the number of full shares of Common Stock which shall be issuable upon
such exercise shall be computed on the basis of the aggregate number of whole
shares of Common Stock purchasable on exercise of the Warrants so presented.
If any fraction of a share of Common Stock would, except for the provisions of
this Section 1.7, be issuable on the exercise of this Warrant, the Company
shall pay an amount in cash calculated by it to be equal to the Market Price of
one share of Common Stock at the time of such exercise multiplied by such
fraction computed to the nearest whole cent.
3
<PAGE> 4
ARTICLE II.
TRANSFER
II.1 Warrant Office. The Company shall maintain an office for certain
purposes specified herein (the "Warrant Office"), which office shall initially
be the Company's offices at Reid House, 31 Church Street, Hamilton, Bermuda
HM12, and may subsequently be such other office of the Company or of any
transfer agent of the Common Stock in the continental United States as to which
written notice has previously been given to the holder hereof. The Company
shall maintain, at the Warrant Office, a register for the Warrants in which the
Company shall record the name and address of the Person in whose name this
Warrant has been issued, as well as the name and address of each permitted
assignee of the rights of the registered owner hereof.
II.2 Ownership of Warrants. The Company may deem and treat the Person in
whose name the Warrants are registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any
notice to the contrary until presentation of this Warrant for registration of
transfer as provided in this Article II. Notwithstanding the foregoing, the
Warrants represented hereby, if properly assigned in compliance with this
Article II, may be exercised by an assignee for the purchase of Warrant Shares
without having a new Warrant issued.
II.3 Restrictions on Transfer of Warrants. The Company agrees to maintain
at the Warrant Office books for the registration and transfer of the Warrants.
Subject to the restrictions on transfer of the Warrants in this Section 2.3,
the Company, from time to time, shall register the transfer of the Warrants in
such books upon surrender of this Warrant at the Warrant Office properly
endorsed or accompanied by appropriate instruments of transfer and written
instructions for transfer satisfactory to the Company. Upon any such transfer
and upon payment by the holder or its transferee of any applicable transfer
taxes, new Warrants shall be issued to the transferee and the transferor (as
their respective interests may appear) and the surrendered Warrants shall be
cancelled by the Company. The Company shall pay all taxes (other than
securities transfer taxes or income taxes) and all other expenses and charges
payable in connection with the transfer of the Warrants pursuant to this
Section 2.3.
II.3.1 Restrictions in General. The holder of the Warrants agrees
that it will neither (i) transfer the Warrants prior to delivery to the Company
of written notice of such transfer, nor (ii) transfer such Warrant Shares prior
to delivery to the Company of written notice of such transfer, or until
registration of such Warrant Shares under the Securities Act and any applicable
state securities or blue sky laws has become effective.
II.4 Compliance with Securities Laws. Subject to the terms of the
Registration Rights Agreement between the Holder and the Company dated as of
the date hereof and notwithstanding any other provisions contained in this
Warrant, the holder hereof understands and agrees that the following
restrictions and limitations shall be applicable to all Warrant Shares and to
all resales or other transfers thereof pursuant to the Securities Act:
II.4.1 The holder hereof agrees that the Warrant Shares shall not
be sold or otherwise transferred unless the Warrant Shares are registered under
the Securities Act and applicable state securities or blue sky laws or are
exempt therefrom.
II.4.2 A legend in substantially the following form will be placed
on the certificate(s) evidencing the Warrant Shares:
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<PAGE> 5
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW AND,
ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT
BE RESOLD, PLEDGED, OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH
ANY OTHER APPLICABLE SECURITIES LAWS."
II.4.3 Stop transfer instructions will be imposed with respect to
the Warrant Shares so as to restrict resale or other transfer thereof, subject
to this Section 2.4.
II.4.4 The holder understands that it must bear the economic risk
of the investment for an indefinite period of time because the Warrant Shares
have not been registered under the Securities Act and therefore cannot be sold
unless they are subsequently registered under the Securities Act or an
exemption from such registration is available. The holder acknowledges that
the holder or the holder's representative is familiar with the condition,
financial and otherwise, of the Company. The holder or the holder's
representative has such knowledge and experience in financial and business
matters that the holder or the holder's representative is able to weigh the
information so received and to evaluate the merits and risks of the holder's
investment in the Warrant Shares.
ARTICLE III.
ANTI-DILUTION
III.1 Anti-Dilution Provisions. The Exercise Price shall be subject
to1. adjustment from time to time as hereinafter provided. Upon each
adjustment of the Exercise Price, the holder of this Warrant shall thereafter
be entitled to purchase, at the Exercise Price resulting from such adjustment,
the number of shares of Common Stock obtained by multiplying the Exercise Price
in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the Exercise Price resulting from such adjustment.
III.2 Adjustment of Exercise Price Upon Issuance of Common Stock.
III.2.1 (A) If and whenever after the date hereof the Company
shall issue or sell any Common Stock for no consideration or for a
consideration per share less than the Exercise Price, then, forthwith upon such
issue or sale, the Exercise Price shall be reduced (but not increased, except
as otherwise specifically provided in Section 3.2.2(C) hereof), to the price
(calculated to the nearest one-ten thousandth of a cent) determined by dividing
(x) an amount equal to the sum of (i) the aggregate number of shares of Common
Stock outstanding immediately prior to such issue or sale multiplied by the
consideration received by the Company upon such issuance or sale on a per share
basis plus (ii) the consideration received by the Company upon such issue or
sale by (y) the aggregate number of shares of Common Stock outstanding
immediately after such issue or sale.
(B) Notwithstanding the provisions of this Section 3.2, no
adjustment shall be made in the Exercise Price in the event that the Company
issues, in one or more transactions,
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<PAGE> 6
(i) Common Stock or convertible securities upon exercise of any options issued
to officers, directors or employees of the Company pursuant to a stock option
plan or an employment, severance or consulting agreement as now or hereafter in
effect, in each case approved by the Board of Directors (provided that the
aggregate number of shares of Common Stock which may be issuable, including
options issued prior to the date hereof, under all such employee plans and
agreements shall at no time exceed the number of such shares of Common Stock
that are issuable under currently effective employee plans and agreements);
(ii) Common Stock upon exercise of the Warrants or any other warrant issued
pursuant to the terms of the Agreement or otherwise issued to the Holder; (iii)
Common Stock upon exercise of any stock purchase warrant or option (other than
the options referred to in clause (i) above) or other convertible security
outstanding on the date hereof; (iv) Common Stock upon conversion of the Note;
or (v) Common Stock issued as consideration in acquisitions. In addition, for
purposes of calculating any adjustment of the Exercise Price as provided in
this Section 3.2, all of the shares of Common Stock issuable pursuant to any of
the foregoing shall be assumed to be outstanding prior to the event causing
such adjustment to be made.
III.2.2 For purposes of this Section 3.2, the following Sections
3.2.2(A) to 3.2.2(E) inclusive, shall be applicable:
(A) Issuance of Rights or Options. In case at any time after the
date hereof the Company shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
securities convertible into or exchangeable for Common Stock (such
convertible or exchangeable stock or securities being herein called
"Convertible Securities"), whether or not such rights or options or the
right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which shares of
Common Stock are issuable upon the exercise of such rights or options or
upon conversion or exchange of such Convertible Securities (determined by
dividing (i) the total amount, if any, received or receivable by the
Company as consideration for the granting of such rights or options, plus
the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the exercise of such rights or options, or plus, in
the case of such rights or options that relate to Convertible Securities,
the minimum aggregate amount of additional consideration, if any, payable
upon the issue or sale of such Convertible Securities and upon the
conversion or exchange thereof, by (ii) the total maximum number of shares
of Common Stock issuable upon the exercise of such rights or options or
upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such rights or options) shall be less than
the Exercise Price in effect as of the date of granting such rights or
options, then the total maximum number of shares of Common Stock issuable
upon the exercise of such rights or options or upon conversion or exchange
of all such Convertible Securities issuable upon the exercise of such
rights or options shall be deemed to be outstanding as of the date of the
granting of such rights or options and to have been issued for such price
per share, with the effect on the Exercise Price specified in Section
3.2.1 hereof. Except as provided in Section 3.2.2 hereof, no further
adjustment of the Exercise Price shall be made upon the actual issuance of
such Common Stock or of such Convertible Securities upon exercise of such
rights or options or upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities.
(B) Change in Option Price or Conversion Rate. Upon the happening
of any of the following events, namely, if the purchase price provided for
in any right or option referred to in Section 3.2.2, the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in Section 3.2.2, or the rate at which
any Convertible Securities referred to in Section 3.2.2, are convertible
into or exchangeable for Common Stock shall change (other than under or by
reason of provisions designed to protect against dilution),
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<PAGE> 7
the Exercise Price then in effect hereunder shall forthwith be readjusted
(increased or decreased, as the case may be) to the Exercise Price that
would have been in effect at such time had such rights, options or
Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate, as the case
may be, at the time initially granted, issued or sold. On the expiration
of any such option or right referred to in Section 3.2.2, or on the
termination of any such right to convert or exchange any such Convertible
Securities referred to in Section 3.2.2, the Exercise Price then in effect
hereunder shall forthwith be readjusted (increased or decreased, as the
case may be) to the Exercise Price that would have been in effect at the
time of such expiration or termination had such right, option or
Convertible Securities, to the extent outstanding immediately prior to
such expiration or termination, never been granted, issued or sold, and
the Common Stock issuable thereunder shall no longer be deemed to be
outstanding. If the purchase price provided for in Section 3.2.2 or the
rate at which any Convertible Securities referred to in Section 3.2.2
reduced at any time under or by reason of provisions with respect thereto
designed to protect against dilution, then in case of the delivery of
Common Stock upon the exercise of any such right or option or upon
conversion or exchange of any such Convertible Securities, the Exercise
Price then in effect hereunder shall, if not already adjusted, forthwith
be adjusted to such amount as would have obtained had such right, option
or Convertible Securities never been issued as to such Common Stock and
had adjustments been made upon the issuance of the Common Stock delivered
as aforesaid, but only if as a result of such adjustment the Exercise
Price then in effect hereunder is thereby reduced.
(C) Consideration for Stock. In case at any time Common Stock or
Convertible Securities or any rights or options to purchase any such
Common Stock or Convertible Securities shall be issued or sold for cash,
the consideration therefor shall be deemed to be the amount received by
the Company therefor. In case at any time any Common Stock, Convertible
Securities or any rights or options to purchase any such Common Stock or
Convertible Securities shall be issued or sold for consideration other
than cash, the amount of the consideration other than cash received by the
Company shall be deemed to be the fair value of such consideration, as
determined reasonably and in good faith by the Board of Directors of the
Company. In case at any time any Common Stock, Convertible Securities or
any rights or options to purchase any Common Stock or Convertible
Securities shall be issued in connection with any merger or consolidation
in which the Company is the surviving corporation, the amount of
consideration received therefor shall be deemed to be the fair value, as
determined reasonably and in good faith by the Board of Directors of the
Company, of such portion of the assets and business of the nonsurviving
corporation as such Board of Directors may determine to be attributable to
such Common Stock, Convertible Securities, rights or options as the case
may be. In case at any time any rights or options to purchase any shares
of Common Stock or Convertible Securities shall be issued in connection
with the issuance and sale of other securities of the Company, together
consisting of one integral transaction in which no consideration is
allocated to such rights or options by the parties, such rights or options
shall be deemed to have been issued with consideration.
(D) Record Date. In the case the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock or
Convertible Securities, or (ii) to subscribe for or purchase Common Stock
or Convertible Securities, then such record date shall be deemed to be the
date of the issuance or sale of the Common Stock or Convertible Securities
deemed to have been issued or sold as a result of the declaration of such
dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be.
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<PAGE> 8
(E) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned directly by
the Company in treasury, and the disposition of any such shares shall be
considered an issuance or sale of Common Stock for the purpose of this
Section 3.2.
III.3 Stock Dividends. In case the Company shall declare a dividend
or make any other distribution upon any shares of the Company, payable in
Common Stock or Convertible Securities, any Common Stock or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without consideration.
III.4 Stock Splits and Reverse Splits. In the event that the Company
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to
such subdivision shall be proportionately reduced and the number of Warrant
Shares purchasable pursuant to this Warrant immediately prior to such
subdivision shall be proportionately increased, and conversely, in the event
that the outstanding shares of Common stock shall at any time be combined into
a smaller number of shares, the Exercise Price in effect immediately prior to
such combination shall be proportionately increased and the number of Warrant
Shares purchasable upon the exercise of this Warrant immediately prior to such
combination shall be proportionately reduced. Except as provided in this
Section 3.4, no adjustment in the Exercise Price and no change in the number of
Warrant Shares purchasable shall be made under this Article III as a result of
or by reason of any such subdivision or combination.
III.5 Reorganizations and Asset Sales. If any capital reorganization
or reclassification of the capital stock of the Company, or any consolidation,
merger or share exchange of the Company with another Person, or the sale,
transfer or other disposition of all or substantially all of its assets to
another Person shall be effected in such a way that a holder of Common Stock of
the Company shall be entitled to receive capital stock, securities or assets
with respect to or in exchange for their shares, then the following provisions
shall apply:
III.5.1 As a condition of such reorganization,
reclassification, consolidation, merger, share exchange, sale, transfer or
other disposition (except as otherwise provided below in this Section 3.5),
lawful and adequate provisions shall be made whereby the holder of Warrants
shall thereafter have the right to purchase and receive upon the terms and
conditions specified in this Warrant and in lieu of the Warrant Shares
immediately theretofore receivable upon the exercise of the rights represented
hereby, such shares of capital stock, securities or assets as may be issued or
payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of Warrant Shares immediately theretofore
so receivable had such reorganization, reclassification, consolidation, merger,
share exchange or sale not taken place, and in any such case appropriate
provision reasonably satisfactory to such holder shall be made with respect to
the rights and interests of such holder to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Exercise
Price and of the number of Warrant Shares receivable upon the exercise) shall
thereafter be applicable, as nearly as possible, in relation to any shares of
capital stock, securities or assets thereafter deliverable upon the exercise of
Warrants.
III.5.2 In the event of a merger, share exchange or consolidation
of the Company with or into another Person as a result of which a number of
shares of common stock or its equivalent of the successor Person greater or
lesser than the number of shares of Common Stock outstanding immediately prior
to such merger, share exchange or consolidation are issuable to holders of
Common Stock, then the Exercise Price in effect immediately prior to such
merger, share exchange or consolidation shall be adjusted in the same manner as
though there were a subdivision or combination of the outstanding shares of
Common Stock.
8
<PAGE> 9
III.5.3 The Company shall not effect any such consolidation,
merger, share exchange, sale, transfer or other disposition unless prior to or
simultaneously with the consummation thereof the successor Person (if other
than the Company) resulting from such consolidation, share exchange or merger
or the Person purchasing or otherwise acquiring such assets shall have assumed
by written instrument executed and mailed or delivered to the holder hereof at
the last address of such holder appearing on the books of the Company the
obligation to deliver to such holder such shares of capital stock, securities
or assets as, in accordance with the foregoing provisions, such holder may be
entitled to receive, and all other liabilities and obligations of the Company
hereunder. Upon written request by the holder hereof, such successor Person
will issue a new Warrant revised to reflect the modifications in this Warrant
effected pursuant to this Section 3.5.
III.5.4 If a purchase, tender or exchange offer is made to and
accepted by the holders of 50% or more of the outstanding shares of Common
Stock, the Company shall not effect any consolidation, merger, share exchange
or sale, transfer or other disposition of all or substantially all of the
Company's assets with the Person having made such offer or with any affiliate
of such Person, unless prior to the consummation of such consolidation, merger,
share exchange, sale, transfer or other disposition the holder hereof shall
have been given a reasonable opportunity to then elect to receive upon the
exercise of the Warrants either the capital stock, securities or assets then
issuable with respect to the Common Stock or the capital stock, securities or
assets, or the equivalent, issued to previous holders of the Common Stock in
accordance with such offer.
III.6 Adjustment for Asset Distribution. If the Company declares a
dividend or other distribution payable to all holders of shares of Common Stock
in evidences of indebtedness of the Company or other assets of the Company
(including, cash (other than regular cash dividends declared by the Board of
Directors), capital stock (other than Common Stock, Convertible Securities or
options or rights thereto) or other property), the Exercise Price in effect
immediately prior to such declaration of such dividend or other distribution
shall be reduced by an amount equal to the amount of such dividend or
distribution payable per share of Common Stock, in the case of a cash dividend
or distribution, or by the fair value of such dividend or distribution per
share of Common Stock (as reasonably determined in good faith by the Board of
Directors of the Company), in the case of any other dividend or distribution.
Such reduction shall be made whenever any such dividend or distribution is made
and shall be effective as of the date as of which a record is taken for purpose
of such dividend or distribution or, if a record is not taken, the date as of
which holders of record of Common Stock entitled to such dividend or
distribution are determined.
III.7 De Minimis Adjustments. No adjustment in the number of shares
of Common Stock purchasable hereunder shall be required unless such adjustment
would require an increase or decrease of at least one share of Common Stock
purchasable upon an exercise of each Warrant and no adjustment in the Exercise
Price shall be required unless such adjustment would require an increase or
decrease of at least $0.01 in the Exercise Price; provided, however, that any
adjustments which by reason of this Section 3.7 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest full share or nearest one
hundredth of a dollar, as applicable.
III.8 Notice of Adjustment. Whenever the Exercise Price or the number
of Warrant Shares issuable upon the exercise of the Warrants shall be adjusted
as herein provided, or the rights of the holder hereof shall change by reason
of other events specified herein, the Company shall compute the adjusted
Exercise Price and the adjusted number of Warrant Shares in accordance with the
provisions hereof and shall prepare an Officer's Certificate setting forth the
adjusted Exercise Price and the adjusted number of Warrant Shares issuable upon
the exercise of the Warrants or specifying the other shares of stock,
securities or assets receivable as a result of such change in rights, and
showing in reasonable detail the facts and calculations upon which such
adjustments or other changes are based.
9
<PAGE> 10
The Company shall cause to be mailed to the holder hereof copies of such
Officer's Certificate together with a notice stating that the Exercise Price
and the number of Warrant Shares purchasable upon exercise of the Warrants have
been adjusted and setting forth the adjusted Exercise Price and the adjusted
number of Warrant Shares purchasable upon the exercise of the Warrants.
III.9 Notifications to Holders. In case at any time the Company
proposes:
(i) to declare any dividend upon its Common Stock payable in capital
stock or make any special dividend or other distribution (other than cash
dividends) to the holders of its Common Stock;
(ii) to offer for subscription pro rata to all of the holders of its
Common Stock any additional shares of capital stock of any class or other
rights;
(iii) to effect any capital reorganization, or reclassification
of the capital stock of the Company, or consolidation, merger or share
exchange of the Company with another Person, or sale, transfer or other
disposition of all or substantially all of its assets; or
(iv) to effect a voluntary or involuntary dissolution, liquidation or
winding up of the Company,
then, in any one or more of such cases, the Company shall give the holder
hereof (a) at least 10 days' (but not more than 90 days') prior written notice
of the date of which the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights or for determining
rights to vote in respect of such issuance, reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, disposition,
dissolution, liquidation or winding up, and (b) in the case of any such
issuance, reorganization, reclassification, consolidation, merger, share
exchange, sale, transfer, disposition, dissolution, liquidation or winding up,
at least 10 days' (but not more than 90 days') prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause (a) shall also specify, in the case of any such dividend, distribution
or subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause (b)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock, as the case may be, for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, disposition,
dissolution, liquidation or winding up, as the case may be.
III.10 Company to Prevent Dilution. If any event or condition occurs
as to which other provisions of this Article III are not strictly applicable or
if strictly applicable would not fairly protect the exercise or purchase rights
of the Warrants evidenced hereby in accordance with the essential intent and
principles of such provisions, or that might materially and adversely affect
the exercise or purchase rights of the holder hereof under any provisions of
this Warrant, then the Company shall make such adjustments in the application
of such provisions, in accordance with such essential intent and principles, so
as to protect such exercise and purchase rights as aforesaid, and any
adjustments necessary with respect to the Exercise Price and the number of
Warrant Shares purchasable hereunder so as to preserve the rights of the holder
hereunder. In no event shall any such adjustment have the effect of increasing
the Exercise Price as otherwise determined pursuant to this Article III except
in the event of a combination of shares of the type contemplated in Section 3.4
hereof, and then in no event to an amount greater than the Exercise Price as
adjusted pursuant to Section 3.4 hereof.
10
<PAGE> 11
ARTICLE IV.
MISCELLANEOUS
IV.1 Entire Agreement. This Warrant, together with the Agreement, contain
the entire agreement between the holder hereof and the Company with respect to
the Warrant Shares purchasable upon exercise hereof and the related
transactions and supersedes all prior arrangements or understandings with
respect thereto.
IV.2 Governing Law. This warrant shall be governed by and construed in
accordance with the laws of the State of Texas.
IV.3 Waiver and Amendment. Any term or provision of this Warrant may be
waived at any time by the party which is entitled to the benefits thereof and
any term or provision of this Warrant may be amended or supplemented at any
time by agreement of the holder hereof and the Company, except that any waiver
of any term or condition, or any amendment or supplementation, of this Warrant
shall be in writing. A waiver of any breach or failure to enforce any of the
terms or conditions of this Warrant shall not in any way effect, limit or waive
a party's rights hereunder at any time to enforce strict compliance thereafter
with every term or condition of this Warrant.
IV.4 Illegality. In the event that any one or more of the provisions
contained in this Warrant shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the remaining
provisions of this Warrant shall not, at the election of the party for whom the
benefit of the provision exists, be in any way impaired.
IV.5 Copy of Warrant. A copy of this Warrant shall be filed among the
records of the Company.
IV.6 Notice. Any notice or other document required or permitted to be
given or delivered to the holder hereof shall be in writing and delivered at,
or sent by certified or registered mail to such holder at, the last address
shown on the books of the Company maintained at the Warrant Office for the
registration of this Warrant or at any more recent address of which the holder
hereof shall have notified the Company in writing. Any notice or other
document required or permitted to be given or delivered to the Company, other
than such notice or documents required to be delivered to the Warrant Office,
shall be delivered at, or sent by certified or registered mail to, the offices
of the Company at Reid House, 31 Church Street, Hamilton, Bermuda HM12 or such
other address within the continental United States of America as shall have
been furnished by the Company to the holder of this Warrant, with a copy to
Philip P. Sudan, Jr., Ryan & Sudan, L.L.P., 909 Fannin, 39th Floor, Houston,
Texas 77010.
IV.7 Limitation of Liability; Not Stockholders. No provision of this
Warrant shall be construed as conferring upon the holder hereof the right to
vote, consent, receive dividends or receive notices (other than as herein
expressly provided) in respect of meetings of stockholders for the election of
directors of the Company or any other matter whatsoever as a stockholder of the
Company. No provision hereof, in the absence of affirmative action by the
holder hereof to purchase shares of Common Stock, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the purchase price of any shares of Common Stock
or as a stockholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.
IV.8 Exchange, Loss, Destruction, etc. of Warrant. Upon receipt of
evidence satisfactory
11
<PAGE> 12
to the Company of the loss, theft, mutilation or destruction of this
Warrant, and in the case of any such loss, theft or destruction upon
delivery of a bond of indemnity or such other security in such form and amount
as shall be reasonably satisfactory to the Company, or in the event of such
mutilation upon surrender and cancellation of this Warrant, the Company will
make and deliver a new Warrant of like tenor, in lieu of such lost, stolen,
destroyed or mutilated Warrant. Any Warrant issued under the provisions of
this Section 4.8 in lieu of any Warrant alleged to be lost, destroyed or
stolen, or in lieu of any mutilated Warrant, shall constitute an original
contractual obligation on the part of the Company. This Warrant shall be
promptly canceled by the Company upon the surrender hereof in connection with
any exchange or replacement. The Company shall pay all taxes (other than
securities transfer taxes or income taxes) and all other expenses and charges
payable in connection with the preparation, execution and delivery of Warrants
pursuant to this Section 4.8.
IV.9 Registration Rights. The Warrant Shares shall be entitled to such
registration rights under the Securities Act and under applicable state
securities laws as are specified in the Registration Rights Agreement.
IV.10 Headings. The Article and Section and other headings herein are
for convenience only and are not a part of this Warrant and shall not affect
the interpretation thereof.
12
<PAGE> 13
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name.
Dated: February 26, 1997
INTELECT COMMUNICATIONS SYSTEMS
LIMITED
By:
Name:
Title:
13
<PAGE> 14
SUBSCRIPTION NOTICE
The undersigned, the holder of the foregoing Warrant, hereby elects to
exercise purchase rights represented thereby for and to purchase thereunder,
________ shares of the Common Stock covered by such Warrant, and herewith makes
payment in full for such shares pursuant to Section 1.1 of such Warrant, and
requests (a) that certificates for such shares (and any other securities or
other property issuable upon such exercise) be issued in the name of, and
delivered to _____________________________________ and (b), if such shares
shall not include all of the shares issuable as provided in such Warrant, that
a new Warrant of like tenor and date for the balance of the shares issuable
thereunder be delivered to the undersigned.
--------------------------------
Date:
-------------------------------
14
<PAGE> 15
ASSIGNMENT
For value received, _______________________, hereby sells, assigns, and
transfers unto _________________________ the within Warrant, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint ________________________ attorney, to transfer such Warrant on the
books of the Company, with full power of substitution.
--------------------------------
Date:
-------------------------------
15
<PAGE> 1
EXHIBIT 10.33
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Registration Rights
Agreement") is made as of February 26, 1997, by and between Intelect
Communications Systems Limited, a Bermuda corporation (the"Company"), and St.
James Capital Corp., a Delaware corporation ("Purchaser").
WHEREAS, on the date hereof, Purchaser acquired from the Intelect
Systems Corporation, a Delaware corporation and wholly-owned subsidiary of the
Company, a Promissory Note (the "Note") in the original principal amount of
$2,500,000;
WHEREAS, on the date hereof, Purchaser received from the Company
warrants to purchase shares of the Company's common stock, $.01 par value (the
"Common Stock") Common Stock which may be exercised to acquire a certain number
of shares of Common Stock, subject to adjustment (the "Shares");
WHEREAS, the Company wishes to grant Purchaser certain registration
rights in respect of the Shares, as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
set forth below:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Purchaser" shall mean St. James Capital Corp., a Delaware
corporation.
"Registrable Securities" shall mean (i) the Shares; and (ii) any
Common Stock issued or issuable at any time or from time to time in respect of
the Shares upon a stock split, stock dividend, recapitalization or other
similar event involving the Company.
The terms "register", "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering by the
Commission of the effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses, other than Selling
Expenses (as defined below), incurred by the Company in complying with this
Registration Rights Agreement, including, without limitation, all registration,
qualification and filing fees, exchange listing fees, printing expenses, escrow
fees, fees and disbursements of counsel for the Company, blue sky fees and
expenses, the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Company which shall be paid in any event by the Company).
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock
<PAGE> 2
transfer taxes applicable to the securities registered by the holders of the
Registrable Securities and, except as set forth above, all fees and
disbursements of counsel for such holders.
"Underwritten Public Offering" shall mean a public offering in which
the Common Stock is offered and sold on a firm commitment basis through one or
more underwriters, all pursuant to (i) an effective registration statement
under the Securities Act and (ii) an underwriting agreement between the Company
and such underwriters.
ARTICLE II
REGISTRATION RIGHTS
2. 1 Demand Registration.
2.1.1 At any time and from time to time (but in no event
before August 31, 1997), a holder or holders of Registrable Securities holding
in the aggregate at least 10% of the then existing Registrable Securities may
make a one-time written demand upon the Company, to file, within 60 days after
such written demand is made, with the Securities and Exchange Commission a
shelf registration statement covering the resale of all of the Registrable
Securities on Form S-1, S-2 or S-3 (the "Registration Statement"). The Company
shall use its reasonable best efforts to cause such Registration Statement to
become effective as soon as practicable and to cause all of the Registrable
Securities to be qualified in such state jurisdictions as the holders may
request.
2.1.2 Except as set forth herein, the Company shall take all
reasonable steps necessary to keep the Registration Statement current and
effective until the lesser of: (i) two years and (ii) until the Registrable
Securities are transferable pursuant to Rule 144 under the Securities Act
without the volume limitations set forth in such rule.
2.1.3 The Company shall be entitled to require that a holder
or holders of Registrable Securities refrain from effecting any public sales or
distributions of the Registrable Securities pursuant to a Registration
Statement that has been declared effective by the Commission or otherwise, if
the board of directors of the Company reasonably determines that such public
sales or distributions would interfere in any material respect with any
transaction involving the Company that the board of directors reasonably
determines to be material to the Company. The board of directors shall, as
promptly as practicable, give the holders of the Registrable Securities written
notice of any such development. In the event of a request by the board of
directors of the Company that the holders of Registrable Securities refrain
from effecting any public sales or distributions of the Registrable Securities,
the Company shall be required to lift such restrictions regarding effecting
public sales or distributions of the Registrable Securities as soon as
reasonably practicable after the board of directors shall reasonably determine
public sales or distributions by the holders of the Registrable Securities
shall not interfere with such transaction, provided, that in no event shall any
requirement that the holders of Registrable Securities refrain from effecting
public sales or distributions in the Registrable Securities extend for more
than 90 days.
2.1.4 Notwithstanding the foregoing, the one-time demand
registration rights provided in this Section 2.1 shall be subject to the
following additional limitations:
(i) Company shall not be obligated to file such
Registration Statement on a Form S-2 or S-3 if it
does not then meet the requirements (including the
financial statement requirements) of such Form, and
if the Company is required to file a Form S-1, it
should not be obligated to file the Form S-1 until it
shall have prepared current financial statements as
required by Form S-1;
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<PAGE> 3
(ii) If, upon receipt of any request for registration of
Registrable Securities pursuant to this Section 2.1,
the Company is then engaged by a reputable and
nationally or regionally recognized investment
banking firm regarding a good faith proposed
registered public offering of shares of Common Stock,
then the Company shall give notice of such
negotiations to all holders of Registrable Securities
within 15 days of the date upon which the Company
received such holder's request and the Company shall
not, for 60 days after giving such notice to such
holders, be required to undertake a required
registration of the Registrable Securities pursuant
to this Section 2.1 in response to such holder's
request; provided, however, that if such registration
statement of such proposed public offering is not
filed within 60 days after the Company gives such
notice to holders of the Registrable Securities, the
Company shall respond to the holder's request for
registration of Registrable Securities and, unless
otherwise required by the provisions of this Section
2.1, register such Registrable Securities, no later
than 20 days after the expiration of such 60 day
period and as provided herein.
2.2 Piggyback Registration.
2.2.1 Subject to the terms hereof, if at any time or from time
to time the Company or any shareholder of the Company shall determine to
register any of its securities (except for registration statements relating to
employee benefit plans or exchange offers), either for its own account or the
account of a security holder, the Company will promptly give to the holders of
Registrable Securities written notice thereof no less the 30 days prior to the
filing of any registration statement; and include in such registration (and any
related qualification under blue sky laws or other compliance), and in the
underwriting involved therein, if any, such Registrable Securities as such
holders may request in a writing delivered to the Company within 20 days after
the holders' receipt of Company's written notice.
2.2.2 The holders of Registrable Securities may participate in
any number of registrations until all of the Shares held by holders of
Registrable Securities have been distributed pursuant to a registration or
until the Shares are transferable pursuant to Rule 144 under the Securities
Act.
2.2.3 If any registration statement is an Underwritten Public
Offering, the right of holders of Registrable Securities to registration
pursuant to this Section shall be conditioned upon each such holder's
participation in such reasonable underwriting arrangements as the Company shall
make regarding the offering, and the inclusion of Registrable Securities in the
underwriting shall be limited to the extent provided herein. Holders of
Registrable Securities and all other shareholders proposing to distribute their
securities through such underwriting shall (together with the Company and the
other holders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section, if the managing underwriter concludes in its
reasonable judgment that the number of shares to be registered for selling
shareholders (including the holders of Registrable Securities) would materially
adversely effect such offering, the number of Shares to be registered, together
with the number of shares of Common Stock or other securities held by other
shareholders proposed to be registered in such offering, shall be reduced on a
pro rata basis based on the number of Shares proposed to be sold by the holders
of Registrable Securities as compared to the number of shares proposed to be
sold by all shareholders, except to the extent there may be a conflict with the
rights set forth in that certain Registration Rights Agreement dated March 29,
1996, between the Company and those certain Purchasers therein. If any holder
of Registrable
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<PAGE> 4
Securities disapproves of the terms of any such underwriting, it may elect to
withdraw therefrom by written notice to the Company and the managing
underwriter, delivered not less than 10 days before the effective date. The
Registrable Securities excluded by the managing underwriter or withdrawn from
such underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to 120 days after the effective date
of the registration statement relating thereto, or such other shorter period of
time as the underwriters may require.
2.2.4 The Company shall have the right to terminate or
withdraw any registration initiated by it under this Section prior to the
effectiveness of such registration whether or not the holders of Registrable
Securities have elected to include securities in such registration.
2.3 Expenses of Registration. All Registration Expenses shall be
borne by the Company. Unless otherwise stated herein, all Selling Expenses
relating to securities registered on behalf of the holders of Registrable
Securities shall be borne by the holders of Registrable Securities.
2.4 [Intentionally left blank]
2.5 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this
Registration Rights Agreement, the Company will keep the holders of Registrable
Securities advised in writing as to the initiation of each registration,
qualification and compliance and as to the completion thereof. At its expense,
the Company will:
2.5.1 Prepare and file with the Commission a registration
statement with respect to such securities and use its commercially reasonable
efforts to cause such registration statement to become and remain effective
until the distribution described in such registration statement has been
completed;
2.5.2 Furnish to each underwriter such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as such
underwriter may reasonably request in order to facilitate the public sale of
the shares by such underwriter, and promptly furnish to each underwriter and
the holders of Registrable Securities notice of any stop-order or similar
notice issued by the Commission or any state agency charged with the regulation
of securities, and notice of any Nasdaq or securities exchange listing; and
2.5.3 Cause the Shares to be listed on the Nasdaq small-cap
market or a securities exchange on which the Common Stock is approved for
listing.
2.6 Indemnification.
2.6.1 To the extent permitted by law, the Company will
indemnify each holder of Registrable Securities, each of its officers and
directors and partners, and each person controlling such holder within the
meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, to the extent such expenses, claims,
losses, damages or liabilities arise out of or are based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other similar
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of the
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<PAGE> 5
Securities Act or any rule or regulation promulgated under the Securities Act
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse each holder of
Registrable Securities, each of its officers and directors and partners, and
each person controlling each holder of Registrable Securities, each such
underwriter and each person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action;
provided, however, that the indemnity contained herein shall not apply to
amounts paid in settlement of any claim, loss, damage, liability or expense if
settlement is effected without the consent of the Company (which consent shall
not unreasonably be withheld); provided, further, that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Company by a holder of
Registrable Securities, such controlling person or such underwriter
specifically for use therein; provided, however, that the indemnity contained
herein shall not apply to amounts paid in settlement of any claim, loss,
damage, liability, or expense if settlement is effected without the consent of
such holder of Registrable Securities (which consent shall not be unreasonably
withheld). Notwithstanding the foregoing, insofar as the foregoing indemnity
relates to any such untrue statement (or alleged untrue statement) or omission
(or alleged omission) made in the preliminary prospectus but eliminated or
remedied in the amended prospectus on file with the Commission at the time the
registration statement becomes effective or in the final prospectus filed with
the Commission pursuant to the applicable rules of the Commission or in any
supplement or addendum thereto, the indemnity agreement herein shall not inure
to the benefit of any underwriter if a copy of the final prospectus filed
pursuant to such rules, together with all supplements and addenda thereto, was
not furnished to the person or entity asserting the loss, liability, claim or
damage at or prior to the time such furnishing is required by the Securities
Act.
2.6.2 To the extent permitted by law, each holder of
Registrable Securities will, if securities held by such holder are included in
the securities as to which such registration, qualification or compliance is
being effected pursuant to terms hereof, indemnify the Company, each of its
directors and officers, each underwriter, if any, of the Company's securities
covered by such a registration statement, each person who controls the Company
or such underwriter within the meaning of Section 15 of the Securities Act, and
each other person selling the Company's securities covered by such registration
statement, each of such person's officers and directors and each person
controlling such persons within the meaning of Section 15 of the Securities
Act, against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by a
holder of Registrable Securities of any rule or regulation promulgated under
the Securities Act applicable to holders of Registrable Securities and relating
to action or inaction required of holders of Registrable Securities in
connection with any such registration, qualification or compliance, and will
reimburse the Company, such other persons, such directors, officers, persons,
underwriters or control persons for any legal or other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by such holder of Registrable
Securities specifically for use therein; provided, however, that the indemnity
contained herein shall not apply to amounts paid in settlement of any claim,
loss, damage, liability or expense if settlement is effected without the
consent of such holder of Registrable Securities (which consent shall not be
unreasonably withheld). Notwithstanding the foregoing, the liability of such
holder of Registrable Securities under this subsection (b) shall be limited in
an amount equal to the net proceeds from the sale of the shares sold by such
holder of Registrable Securities, unless such liability arises out
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of or is based on willful conduct by such holder of Registrable Securities. In
addition, insofar as the foregoing indemnity relates to any such untrue
statement (or alleged untrue statement) or omission (or alleged omission) made
in the preliminary prospectus but eliminated or remedied in the amended
prospectus on file with the Commission at the time the registration statement
becomes effective or in the final prospectus filed pursuant to applicable rules
of the Commission or in any supplement or addendum thereto, the indemnity
agreement herein shall not inure to the benefit of the Company or any
underwriter, if a copy of the final prospectus filed pursuant to such rules,
together with all supplements and addenda thereto, was not furnished to the
person or entity asserting the loss, liability, claim or damage at or prior to
the time such furnishing is required by the Securities Act.
2.6.3 Notwithstanding the foregoing paragraphs (a) and (b) of
this Section, each party entitled to indemnification under this Section (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such claim
or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement unless the failure
to give such notice is materially prejudicial to an Indemnifying Party's
ability to defend such action and provided further, that the Indemnifying Party
shall not assume the defense for matters as to which there is a conflict of
interest or as to which the Indemnifying Party is asserting separate or
different defenses, which defenses are inconsistent with the defenses of the
Indemnified Party. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. No Indemnified Party shall consent to entry of any judgment or
enter into any settlement without the consent of each Indemnifying Party.
2.6.4 If the indemnification provided for in this Section is
unavailable to an Indemnified Party in respect of any losses, claims, damages
or liabilities referred to therein, then each Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages
or liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and all shareholders offering
securities in the offering (the "Selling Security Holders") on the other from
the offering of the Company's securities, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and the
Selling Security Holders on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Selling Security Holders on the
other shall be the net proceeds from the offering (before deducting expenses)
received by the Company on the one hand and the Selling Security Holders on the
other. The relative fault of the Company on the one hand and the Selling
Security Holders on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Selling Security Holders and the parties'
relevant intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Selling Security
Holders agree that it would not be just and equitable if contribution pursuant
to this Section were based solely upon the number of entities from whom
contribution was requested or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section.
The amount paid or payable by an Indemnified Party as a result of the losses,
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<PAGE> 7
claims, damages and liabilities referred to above in this Section shall be
deemed to include any legal or other expenses reasonably incurred by such
Indemnified Party in connection with investigating or defending any such action
or claim, subject to the provisions hereof. Notwithstanding the provisions of
this Section, no Selling Shareholder shall be required to contribute any amount
or make any other payments under this Agreement which in the aggregate exceed
the proceeds received by such Selling Shareholder. No person guilty of
fraudulent misrepresentation (within the meaning of the Securities Act) shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
2.7 Certain Information.
2.7.1 The holders of Registrable Securities agree, with
respect to any Registrable Securities included in any registration, to furnish
to the Company such information regarding such holder, the Registrable
Securities and the distribution proposed by the such holder as the Company may
reasonably request in writing and as shall be required in connection with any
registration, qualification or compliance referred to herein.
2.7.2 The failure of the holder of Registrable Securities to
furnish the information requested pursuant to Section 2.7.1 shall not affect
the obligation of the Company to the other Selling Security Holders who furnish
such information unless, in the reasonable opinion of counsel to the Company or
the underwriters, such failure impairs or may impair the legality of the
Registration Statement or the underlying offering.
2.8 Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of Restricted Securities (used herein as defined in Rule 144 under the
Securities Act) to the public without registration, the Company agrees to use
its best lawful efforts to:
2.8.1 Make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times during which the Company is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act");
2.8.2 File with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Exchange Act (at all times during which the Company is subject to such
reporting requirements); and
2.8.3 So long as any holder of Registrable Securities owns any
Restricted Securities (as defined in Rule 144 promulgated under the Securities
Act), to furnish to such holder forthwith upon request a written statement by
the Company as to its compliance with the reporting requirements of said Rule
144 and with regard to the Securities Act and the Exchange Act (at all times
during which the Company is subject to such reporting requirements), a copy of
the most recent annual or quarterly report of the Company, and such other
reports and documents of the Company and other information in the possession of
or reasonably obtainable by the Company as such holder of Registrable
Securities may reasonably request in availing itself of any rule or regulation
of the Commission allowing such holder to sell any such securities without
registration.
2.9 Transferability. The rights conferred by this Agreement shall be
freely transferable to a recipient of Registrable Securities.
2.10 Governing Law. This Agreement shall be governed in all respects
by the laws of the State of Texas.
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2.11 Entire Agreement; Amendment. This Agreement constitutes the full
and entire understanding and agreement between the parties with regard to the
subject hereof. This Agreement, or any provision hereof, may be amended,
waived, discharged or terminated upon the written consent of the Company and
the Purchaser.
2.12 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger
including Federal Express or similar courier service, addressed (a) if to the
Purchaser: St. James Capital Partners, L.P., c/o St. James Capital Corp., 1980
Post Oak Boulevard, Suite 2030, Houston, Texas 77056, or at such other address
as the Purchaser shall have furnished to the Company in writing, or (b) if to
the Company: to Intelect Communications Systems Limited, 31 Church Street,
Hamilton, Bermuda HM12, or at such other address as the Company shall have
furnished to the Purchaser with a copy to Philip P. Sudan, Jr., Ryan & Sudan,
L.L.P., 909 Fannin, 39th Floor, Houston, Texas 77010. Each such notice or
other communication shall for all purposes of this Agreement be treated as
effective upon receipt.
2.13 Delays or Omissions. Except as expressly provided herein, no
delay or omission to exercise any right, power or remedy accruing to any party
to this Agreement shall impair any such right, power or remedy of such party
nor shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Agreement, or any waiver on the part
of any party of any provisions or conditions of this agreement, must be in
writing and shall be effective only to the extent specifically set forth in
such writing. All remedies, either under this Agreement or by law or otherwise
afforded to any party to this Agreement, shall be cumulative and not
alternative.
2.14 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
2.15 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
2.16 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not considered in construing or
interpreting this Agreement.
-8-
<PAGE> 9
THE COMPANY'S SIGNATURE PAGE
IN WITNESS WHEREOF, the Company has executed this agreement effective
upon the date first set forth above.
INTELECT COMMUNICATIONS SYSTEMS LIMITED
By:
Name: __________________________________
Title: _________________________________
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THE PURCHASER'S SIGNATURE PAGE
IN WITNESS WHEREOF, the Purchaser has signed this Agreement as of the
date first written above.
ST. JAMES CAPITAL CORP.
By:
Name: __________________________________
Title: _________________________________
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<PAGE> 1
EXHIBIT 10.34
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") OR ANY OTHER APPLICABLE SECURITIES LAWS AND,
ACCORDINGLY, THIS NOTE MAY NOT BE RESOLD, PLEDGED, OR OTHERWISE TRANSFERRED,
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN
ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS.
AMENDED AND RESTATED FLOATING RATE PROMISSORY NOTE
$5,000,000 February 26, 1997
For value received, INTELECT SYSTEMS CORP., a Delaware corporation
("ISC"), and INTELECT COMMUNICATIONS SYSTEMS LIMITED, a corporation organized
under the laws of Bermuda ("ICSL" and together with ISC called the "Makers,"),
jointly and severally promise and agree to pay on or before March 27, 1998 (the
"Maturity Date") to the order of ST. JAMES CAPITAL CORP., a Delaware
corporation (hereinafter called "Holder"), or its registered transferees and
assigns, at the office of First Bank National Association, Minneapolis,
Minnesota, in coin or currency of the United States of America which at the
time of payment is legal tender for the payment of public and private debts,
the principal sum of FIVE MILLION AND NO/DOLLARS ($5,000,000), or so much as is
advanced pursuant to this Note.
The Makers further agree to pay interest, in like money, on the unpaid
principal amount owing hereunder from time to time from the date hereof at the
Floating Rate, as hereinafter defined. Such accrued interest shall be due and
payable on the Maturity Date.
Any holder of this Note is entitled to all of the rights, remedies,
benefits and privileges provided for herein and in the other Transaction
Documents, as hereinafter defined. The Obligations (as herein defined) of the
Makers contained in this Note are secured by the Pledge Agreement.
Each Maker and any and each co-maker, endorsers, guarantors and
sureties or each other Person liable for payment or collection of this Note
expressly and severally waives grace, demand, presentment for payment, notice
of nonpayment, notice of dishonor, notice of intent to accelerate the maturity,
notice of acceleration of the maturity, notice of default, protest and notice
of protest, bringing of suit, and diligence in taking any action to collect
amounts called for hereunder and in the handling of property at any time
existing as security in connection herewith, and shall be directly and
primarily liable for the payment of all sums owing and to be owing hereon,
regardless of and without any notice, diligence, act or omission as or with
respect to the collection of any amount called for hereunder or in connection
with any Lien at any time had or existing as security for any amount called for
hereunder, and agrees to all renewals, extensions or partial payments hereon
and to any release or substitution of security hereof, in whole or in part,
with or without notice, before or after maturity.
In the event Default (as hereinafter defined) is made in the payment
of this Note in whatever manner its maturity may be brought about and if this
Note is thereupon placed in the hands of attorneys for collection, or if the
same is collected through probate, bankruptcy or other similar proceedings, the
Makers, jointly and severally, promise to pay all reasonable attorneys' fees
and expenses incurred by the Holder in connection with such default or
collection proceedings.
<PAGE> 2
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
1.1 Certain Defined Terms. As used in this Note, the following
terms shall have the following meanings:
"Advances" shall have the meaning assigned to that term in Section 2.1
hereof.
"Bankruptcy Code" shall mean the Bankruptcy Reform Act of 1978 as
codified under 11 U.S.C. Section 101, et seq.
"Business Day" means any day (other than a day which is a Saturday,
Sunday or legal holiday) in the State of Texas on which banks are open for
business in Houston, Texas.
"Commitment" means, at the time any determination thereof is to be
made, the commitment of the Holder to extend credit to the Makers by means of
Advances, which subject to Section 5.1, shall be an amount equal to $5,000,000.
"Debt" means, for any Person, (a) all obligations required by GAAP to
be classified upon a balance sheet as liabilities, (b) liabilities secured by
any Lien existing on property owned or acquired by that Person, (c) obligations
that have been (or under GAAP should be) capitalized for financial reporting
purposes, (d) all accrued obligations of such Person in respect of any
contract, agreement or instrument imposing an obligation upon such Person to
pay over funds; (e) for all trade debt of such Person; (g) all guaranties,
endorsements and other contingent obligations with respect to Debt of others,
and (h) for all deferrals, renewals, extensions and refundings of, and
amendments, modifications and supplements to, any of the indebtedness referred
to in (a) through (e) above.
"Debtor Relief Laws" shall mean the Bankruptcy Code and all other
applicable dissolution, liquidation, conservatorship, bankruptcy, moratorium,
readjustment of debt, compromise, rearrangement, receivership, insolvency,
reorganization, or similar debtor relief laws from time to time in effect
affecting the rights of creditors generally.
"Default" means any event which is, or after notice or passage of time
would be, an Event of Default.
"Default Rate" means a rate per annum equal to the greater of (a) the
Prime Rate in effect on such day plus five percent (5%) and (b) the Highest
Lawful Rate.
"DNA" means DNA Enterprises, Inc., a Texas corporation and a wholly
owned Subsidiary of ISC.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Event of Default" has the meaning specified in Section 5.1.
"Floating Rate" means a rate per annum equal to the lesser of (a) the
Prime Rate in effect on such
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day plus two percent (2%) and (b) the Highest Lawful Rate.
"GAAP" means generally accepted accounting principles of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and the Financial Accounting Standards Board.
"Highest Lawful Rate" means, as of a particular date, the maximum
nonusurious interest rate that may under applicable law then be contracted for,
charged or received by the Holder in connection with this Note.
"Lien" shall mean, with respect to any asset, (a) any mortgage, deed
of trust, production payment, deposit, lien, charge, pledge, security interest,
claim or encumbrance of any kind (whether voluntary or involuntary, affirmative
or negative, and whether imposed or created by operation of law or otherwise)
upon such asset, (b) the interest of a vendor or a lessor under any conditional
sale agreement, capital lease or other title retention agreement relating to
such asset and (c) in the case of securities, any purchase option, call or
similar right of a third party with respect to such securities but excluding
any right of offset which arises without agreement in the ordinary course of
business.
"Material Adverse Effect" means (i) a material adverse effect on the
business, Properties, operations or condition (financial or otherwise) or
prospects of ISC and its Subsidiaries taken as a whole, (ii) a material adverse
effect on the business, Properties, operations or condition (financial or
otherwise) or prospects of ICSL and its Subsidiaries taken as a whole, (iii)
material impairment of the ability of any Maker to perform timely any of its
respective Obligations under this Note, (iv) material impairment of the ability
of ISC to perform timely any of its Obligations under any of the Transaction
Documents to which such Maker is a party, or (v) material impairment of the
rights of or benefits available to the Holder under this Note or any of the
other Transaction Documents.
"Maturity Date" means March 27, 1998, or the earlier termination in
whole of the Commitment pursuant to Section 5.1.
"Note" means this Floating Rate Promissory Note, as hereafter amended,
modified, substituted or replaced.
"Obligations" means all obligations, liabilities and indebtedness of
every nature of the Makers and their respective Subsidiaries from time to time
owing to the Holder under this Note and/or any of the other Transaction
Documents, including, without limitation, (i) the due and punctual payment of
(x) the principal of and interest on the Advances, when and as due, whether at
maturity, by acceleration, upon one or more dates set for prepayment or
otherwise, including, to the extent permitted by applicable law, interest that
accrues after the commencement of any proceeding by or against any Maker or any
Subsidiary of a Maker under the Bankruptcy Code and all other applicable Debtor
Relief Laws, (y) all other monetary obligations of the Makers and their
respective Subsidiaries to the Holder under this Note and/or any other
Transaction Document, including any and all fees, costs, expenses and
indemnities, and (ii) the due and punctual performance of all other obligations
of the Makers and their respective Subsidiaries under this Note and/or any
other Transaction Document. "Obligation" shall mean any part of the
Obligations.
"Outside Financing" means any transactions where any Maker or any
Subsidiary of any Maker, now or hereafter acquired, sells its equity or debt
securities for cash whether in public or private offerings
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or bond financings, provided, however, that an Outside Financing shall not
include any transactions involving (i) purchase money debt incurred to finance
equipment and inventory in the ordinary course of business, (ii) the sale of
any securities for the sole purpose of financing acquisitions, (iii) the
issuance of shares of common stock of Maker or any Subsidiary of Maker pursuant
to existing stock options to employees, officers and directors or existing
plans covering such persons and (iv) the sale of any securities between ICSL
and any of its Subsidiaries or between Subsidiaries of ICSL.
"Permitted Liens" means (a) Liens now or hereafter securing the
Obligations; (b) pledges or deposits made to secure payment of workers'
compensation, unemployment insurance, or other forms of governmental insurance
or benefits or to participate in any fund in connection with workers'
compensation, unemployment insurance, pensions, or other social security
programs; (c) good-faith pledges or deposits made to secure performance of
bids, tenders, contracts (other than for the repayment of borrowed money), or
leases, or to secure statutory obligations, surety or appeal bonds, or
indemnity, performance, or other similar bonds in the ordinary course of
business; (d) Liens for taxes and liens imposed by operation of law (including
Liens of mechanics, materialmen, warehousemen, carriers and landlords), if (i)
no amounts are due and payable and no Lien has been filed (or agreed to), or
(ii) the validity or amount secured thereof is being contested in good faith by
lawful proceedings diligently conducted, reserves required by GAAP have been
made, and levy and execution thereon have been (and continue to be) stayed or
payment thereof is covered in full (subject to the customary deductible) by
insurance; (e) liens currently in existence; and (f) liens covering purchase
money debt incurred to finance equipment or inventory in the ordinary course of
business.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization
or government or any agency or political subdivision thereof.
"Pledge Agreement" means that certain Pledge Agreement dated of even
date herewith executed by ISC in favor of the Holder pursuant to which ISC
grants to the Holder a Lien on all of the issued and outstanding shares of
capital stock of DNA, as originally executed or as it may from time to time be
supplemented, modified or amended.
"Prime Rate" means, as of a particular date, the prime rate of
interest per annum most recently announced by First Bank National Association,
automatically fluctuating upward or downward with and at the time specified in
each such announcement without notice to the Makers or any other Person; each
change in the Prime Rate shall be effective on the date such change is
announced.
"Property" means any asset, whether real, personal or mixed, or
tangible or intangible, or any interest therein.
"Registration Rights Agreement" means that certain Registration Rights
Agreement dated of even date herewith executed by ICSL in favor of the Holder,
covering registration rights in respect to the shares of ICSL's common stock
that may be acquired on the exercise of the Warrants, as originally executed or
as it may from time to time be supplemented, modified or amended.
"SEC" means the U.S. Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
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"Subsidiary" means, with respect to any Person, any entity of which
more than 50% (in number of votes) of the stock (or equivalent interests) is
owned of record or beneficially, directly or indirectly, by such Person,
provided however, such term shall not include Intelect Europe Limited.
"Transaction Documents" means this Note, the Pledge Agreement, the
Warrants and the Registration Rights Agreement.
"Warrants" means (i) that certain Warrant to purchase shares of ICSL's
common stock, par value $.01 per share, issued pursuant to the terms of that
certain Warrant dated as of the date hereof, executed by ICSL in favor of
Holder, as hereafter amended, modified, substituted or replaced and (ii) that
certain Warrant to purchase shares of ICSL's common stock, par value $.01 per
share, issued pursuant to the terms of that certain Warrant dated as of March
27, 1997, executed by ICSL in favor of Holder, as hereafter amended, modified,
substituted or replaced.
1.2. Accounting Terms. All terms of an accounting or financial
nature shall be construed in accordance with GAAP, as in effect from time to
time; provided, however, that, for purposes of determining compliance with any
covenant set forth in Article IV, such terms shall be construed in accordance
with GAAP as in effect on the date of this Note, consistently applied.
1.3. Interpretation.
(a) In this Note, unless a clear contrary intention appears:
(i) the singular number includes the plural number and vice
versa;
(ii) reference to any gender includes each other gender;
(iii) the words "herein," "hereof" and "hereunder" and other
words of similar import refer to this Note as a whole and not to any
particular Article, Section or other subdivision;
(iv) reference to any Person includes such Person's
successors and assigns but, if applicable, only if such successors and
assigns are permitted by this Note, and reference to a Person in a
particular capacity excludes such Person in any other capacity or
individually, provided that nothing in this subclause (iv) is intended
to authorize any assignment not otherwise permitted by this Note;
(v) reference to any agreement, document or instrument means
such agreement, document or instrument as amended, supplemented or
modified and in effect from time to time in accordance with the terms
thereof and, if applicable, the terms hereof, and reference to the
Note includes any Note issued pursuant hereto in extension or renewal
hereof and in substitution or replacement herefor;
(vi) unless the context indicates otherwise, reference to any
Article, Section, Schedule or Exhibit means such Article or Section
hereof or such Schedule or Exhibit hereto;
(vii) the words "including" (and with correlative meaning
"include") means including, without limiting the generality of any
description preceding such term;
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<PAGE> 6
(viii) with respect to the determination of any period of
time, the word "from" means "from and including" and the word "to"
means "to but excluding;"
(ix) reference to any law means such as amended, modified,
codified or reenacted, in whole or in part, and in effect from time to
time; and
(b) No provision of this Note shall be interpreted or construed
against any Person solely because that Person or its legal representative
drafted such provision.
ARTICLE II
COMMITMENT AND ADVANCES
2.1 Advances. Subject to the terms and conditions and
relying on the representations and warranties set forth herein and in the other
Transaction Documents, the Holder agrees to make advances (collectively, the
"Advances") to the Makers, at any time and from time to time on and after the
date of this Note to, but excluding, the Maturity Date up to a principal amount
not to exceed $5,000,000. All Advances shall mature and be due and payable in
full on the Maturity Date. Once repaid, Advances may not be reborrowed. Each
Advance shall be made in accordance with the procedures set forth in Section
2.2.
2.2 Borrowing Procedures of Advances. In order to effect an
Advance, the Makers shall submit a Request for Advance in writing or by
telecopy (or telephone notice promptly confirmed in writing or by telecopy) to
the Holder not later than 10:00 a.m., Houston, Texas time, on the borrowing
date specified in the Request for Advance for such proposed Advance. Such
Request for Advance shall refer to this Note and specify (x) in sufficient
detail, the corporate use of the proceeds of such proposed Advance, (y) the
Business Day upon which the proceeds of such proposed Advance are to be made
available to the Makers, and (z) the principal amount of such proposed Advance.
The obligation of the Holder to make any Advance pursuant to a Request for
Advance is subject to the satisfaction that on the date such Advance is to be
made no Default or Event of Default then exists (both before and after giving
effect to the making of such proposed Advance).
2.3 Interest on Advances and Payment Dates.
(a) Subject to the provisions of Section 2.4, the Advances shall
bear interest at the Floating Rate, computed on the basis of the actual number
of days elapsed over a year of 365 or 366 days, as the case may be.
(b) Interest on each Advance shall be payable by the Makers (i) in
respect of each Advance accruing interest at the Floating Rate, on the Maturity
Date, (ii) in respect of each Advance accruing interest at the Default Rate, on
demand, and (iii) in respect of all Advances, on any prepayment (on the amount
prepaid), at maturity (whether by acceleration or otherwise) and, after
maturity, on demand.
2.4 Interest on Overdue Amounts. If Makers shall fail to pay the
principal of or interest on any Advance or any other amount when due hereunder,
Makers shall on demand from time to time pay interest, to the extent permitted
by law, on such defaulted amount from the date of such Event of Default up to
(but not including) the date of actual payment (after as well as before
judgment) at a rate per annum equal to the Default Rate, computed on the basis
of the actual number of days elapsed over a year of 365
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or 366 days, as the case may be.
2.5 Voluntary Prepayment of Advances. Makers shall have the right at
any time and from time to time to prepay the Advances, in whole or in part,
without penalty or premium, upon at least five (5) Business Day's prior written
or telecopy notice or telephone notice promptly confirmed in writing to the
Holder.
2.6 Mandatory Payment of Advances.
(a) Makers shall repay all outstanding Advances on the
Maturity Date; and
(b) Makers shall prepay this Note in full on or before
the close of business (Houston, Texas time) on the second Business Day
following the occurrence of an Outside Financing, such prepayment to
be in an amount equal to the net proceeds received by such Maker or
any Subsidiary of the Makers from such Outside Financing, but not to
exceed the then outstanding principal and accrued and unpaid interest
on this Note. All payments made under this Note shall be applied first
to accrued interest, and the balance, if any, to principal; provided,
however, that interest shall accrue on any remaining principal balance
and shall be payable at the rate provided above.
2.7 Manner of Payment. Both principal and interest are payable in
immediately available funds in lawful money in the United States of America (in
freely transferable Dollars) to the Holder at the office of First Bank National
Association, Minneapolis, Minnesota. If the date upon which the payment of
principal and interest is required to be made pursuant to this Note occurs
other than on a Business Day, then such payment of principal and interest shall
be made on the next occurring Business Day following said payment date and
shall include interest through said next occurring Business Day.
2.8 Use of Proceeds. (a) The proceeds of all Advances be used to
redeem warrants issued to certain former shareholders of DNA and to fund
certain obligations incurred by the Makers in connection with the acquisition
of DNA; and other proper corporate requirements of the Makers.
(b) No portion of the proceeds of any Advance under this Note
shall be used by the Makers, or any one of them, in any manner that might cause
the borrowing or the application of such proceeds to violate Regulation G,
Regulation U, Regulation T, or Regulation X or any other regulation of the
Board or to violate the Exchange Act, in each case as in effect on the date or
dates of such borrowing and such use of proceeds.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MAKERS
Each of the Makers, as to itself and its Subsidiaries, hereby warrants
and represents to the Holder that:
3.1 Organization, Standing and Qualification. (a) ISC is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as it is now
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<PAGE> 8
being conducted. ISC is licensed and qualified to do business as a foreign
corporation in each jurisdiction in which the character of ISC's properties,
owned or leased, or the nature of its activities makes such qualification or
license necessary, except where failure to be so licensed and qualified would
not result in a Material Adverse Effect.
(b) ICSL is a corporation duly organized, validly existing and in good
standing under the laws of Bermuda and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as it is now being conducted. ICSL is licensed and qualified to do business as
a foreign corporation in each jurisdiction in which the character of the ICSL's
properties, owned or leased, or the nature of its activities makes such
qualification or license necessary, except where failure to be so licensed and
qualified would not result in a Material Adverse Effect.
3.2 Authority; No Defaults. Each Maker has all requisite corporate
power and authority to enter into this Note and to consummate the transactions
contemplated hereby. ISC has all requisite corporate power and authority to
enter into the Pledge Agreement and to consummate the transactions contemplated
thereby. ICSL has all requisite corporate power and authority to issue the
Warrants and to enter into the Registration Rights Agreement and to consummate
the transactions contemplated thereby. The execution and delivery of this Note
by the Makers (and with respect to ISC, the Pledge Agreement by ISC; and with
respect to ICSL, the Warrants and the Registration Rights Agreement) the
consummation of the transactions contemplated hereby or thereby have been duly
authorized by all necessary corporate action on the part of such Maker. This
Note has been duly executed and delivered by each Maker and constitutes the
valid and binding obligation of such Maker, enforceable in accordance with its
terms, except as enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, fraudulent transfer, moratorium or other similar
laws relating to creditors' rights generally and by general principles of
equity which may limit the right to obtain equitable remedies (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The execution and delivery of this Note by the Makers do not, and the
consummation of the transactions contemplated hereby will not, conflict with or
result in a breach of or the acceleration of any obligation under, or
constitute a default or event of default (or event which, with notice or lapse
of time or both, would constitute a default) under, any provision of any
charter, bylaw, indenture, mortgage, lien, lease, agreement, contract,
instrument, order, judgment, decree, ordinance or regulation, or any
restriction to which any property of such Maker or any of its Subsidiaries is
subject or by which such Maker or any of its Subsidiaries is bound, which could
reasonably be expected to result in a Material Adverse Effect.
3.3 Approvals. There is no legal impediment to the valid offer,
issue, sale, delivery and performance by each of the Makers of this Note.
ARTICLE IV
COVENANTS
Each of the Makers covenants and agrees with the Holder, so long as
this Note is outstanding or any fee, expense, compensation or any other amount
payable by the Makers shall remain unpaid or outstanding, as follows:
4.1. Negative Pledge. No Maker shall, nor shall ICSL permit any of
its Subsidiaries to, create, incur, assume or suffer to exist, any Lien on any
asset of such Person other than Permitted Liens. No Maker will enter into or
become subject to, and no Maker will permit any of its Subsidiaries to enter
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<PAGE> 9
into or become subject to, any agreement (other than this Agreement) that
prohibits or otherwise restricts the right of such Maker or its Subsidiaries to
create, incur, assume or suffer to exist any Lien in favor of the Holder on any
of such Maker's or any of its Subsidiaries' assets.
4.2 Margin Regulation. No Maker shall use or permit any other
Person to use any portion of the proceeds of this Note in any manner which
might cause the extension of credit or the application of such proceeds to
violate the Securities Act or the Exchange Act or to violate Regulation G,
Regulation U, or Regulation X, or any other regulation of the Federal Reserve
Board.
4.3 Compliance with Laws. Each Maker shall use its best
efforts to, and shall cause each of its Subsidiaries to use its best efforts,
to conduct its business and affairs and maintain its Properties in compliance
with all applicable laws, rules, regulations, judgments, orders and decrees.
4.4 Payment and Performance. Each Maker will pay all amounts due
under this Note and the other Transaction Documents in accordance with the
terms thereof and will observe, perform and comply with every covenant, term
and condition expressed or implied therein.
(a) ICSL will furnish to the Holder within 20 days after the
Holder requests, copies of all information, documents, and other reports (or
copies of such portions of any of the foregoing as the SEC may by rules and
regulations prescribe) which ICSL is required to file with the SEC pursuant to
Section 13 or 15(d) of the Exchange Act. ICSL will use its best efforts to
timely comply with its reporting and filing obligations under the applicable
federal securities laws.
(b) ICSL will promptly furnish upon request, any information which
the Holder may from time to time reasonably request concerning any covenant,
provision or condition of this Note or the other Transaction Documents or any
matter in connection with such Persons' businesses and operations.
4.5. Maintenance of Existence, Qualifications and Assets. Each Maker
shall use its best efforts to, and shall cause each of its Subsidiaries to use
its best efforts, to (i) maintain its corporate existence and good standing and
its authority to transact business in all states where necessary; and (ii)
maintain all licenses, permits and franchises necessary for its business.
4.6 Costs, Expenses and Taxes. (a) Each Maker, jointly and
severally, agrees to pay within thirty (30) Business Days after presentation of
an invoice: all reasonable out-of-pocket costs and expenses of the Holder in
connection with (i) the negotiation, preparation, distribution, execution and
delivery of this Note, the Pledge Agreement, the Warrants, the Registration
Rights Agreement and the other documents and instruments referred to therein,
(ii) the management and monitoring of the Advances, (iii) the Holder's review
and due diligence and (iv) the negotiation, preparation, distribution,
execution and delivery of any amendment, supplement, modification, waiver or
consent relating to this Note or the other Transaction Documents (including,
without limitation, as to each of the foregoing, the reasonable fees and
disbursements of legal counsel).
(b) Each Maker, jointly and severally, agrees to pay all
reasonable out-of-pocket costs and expenses of the Holder in connection with
(i) the preservation of its rights under, and enforcement of, this Note and the
other Transaction Documents and the documents and instruments referred to
therein (including, without limitation, all filing fees and the reasonable fees
and disbursements of legal counsel), and (ii) any workout, restructuring or
rescheduling of the Obligations or any proceeding under any Debtor Relief Law
with respect to any Maker or any Subsidiary of a Maker (including, without
limitation, the
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<PAGE> 10
reasonable fees and disbursements of counsel for the Holder).
(c) Each Maker, jointly and severally, shall pay, and hold the
Holder harmless from and against, any and all present and future stamp, excise,
and other similar taxes and fees with respect to the foregoing matters and hold
the Holder harmless from and against any and all liabilities with respect to or
resulting from any delay or omission (other than to the extent attributable to
the Holder) to pay such taxes.
(d) Without prejudice to the survival of any other Obligations of
the Makers hereunder or under the other Transaction Documents, the obligations
of Borrower under this Section 4.6(d) shall survive the termination of this
Note and the payment in full of the Obligations for a period of six (6) months.
ARTICLE V
EVENTS OF DEFAULT; REMEDIES
5.1 Events of Default. Each of the following events, acts,
occurrences or conditions constitutes an "Event of Default" under this Note:
(a) the Makers default in the payment of the principal or
interest on this Note when such principal or interest becomes due and
payable and such default remains uncured for a period of five days; or
(b) any Maker defaults in the performance of any covenant
in this Note, the default of which may have a Material Adverse Effect,
and such default remains uncured for a period of 30 days following
receipt of written notice of such default from Holder, contained in
this Note or any of the other Transaction Documents (other than a
default in the performance of a covenant specifically addressed
elsewhere in this Section 5.1); or
(c) any representation or warranty made by any Maker in
this Note or any of the other Transaction Documents or in any
certificate furnished by such Maker in connection with the
consummation of the transaction contemplated thereby or hereby, is
untrue as of the date of making thereof and such untruth may
constitute a Material Adverse Effect; or
(d) Any Maker, or any of such Maker's Subsidiaries,
defaults in the payment when due (whether by lapse of time, by
declaration, by call for redemption or otherwise) of the principal of
or interest on any Debt of such Person secured by a Lien (other than
the Debt evidenced by this Note and the obligations incurred by the
Makers in connection with the acquisition of DNA) having an aggregate
principal amount in excess of $100,000 and such default remains
uncured for a period of 30 days; or
(e) a court of competent jurisdiction enters a judgment
or judgments against any Maker or any Subsidiary of a Maker, or any
property or assets of such Maker or such Subsidiary of a Maker, for
the payment of money aggregating in excess of $500,000 in excess of
applicable insurance coverage and such judgment is not discharged or
stayed within 30 days; or
(f) a court of competent jurisdiction enters (i) a decree
or order for relief in respect
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<PAGE> 11
of any Maker or any Subsidiary of a Maker in an involuntary case or
proceeding under any applicable federal or state bankruptcy,
insolvency, reorganization or other similar law or (ii) a decree or
order adjudging any Maker or any Subsidiary of a Maker a bankrupt or
insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in
respect of such Maker or such Subsidiary of a Maker under any
applicable federal or state law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official
of any Maker or a Subsidiary of any Maker or of any substantial part
of the property of such Maker or such Subsidiary of a Maker or
ordering the winding up or liquidation of the affairs of any Maker or
a Subsidiary of any Maker and any such decree or order of relief or
any such other decree or order remains unstayed for a period of 60
days from its date of entry; or
(g) A Maker or any Subsidiary of a Maker commences a
voluntary case or proceeding under any applicable federal or state
bankruptcy, insolvency, reorganization or other similar law or any
other case or proceeding to be adjudicated a bankrupt or insolvent, or
a Maker or any Subsidiary of a Maker files a petition, answer or
consent seeking reorganization or relief under any applicable federal
or state law, or a Maker or any Subsidiary of a Maker makes an
assignment for the benefit of creditors, or admits in writing its
inability to pay its debts generally as they become due; or
(h) (1) any person or group (within the meaning of
Section 13(d) of the Exchange Act) becomes the beneficial owner of 40%
or more of the total voting power of ICSL; (2) any Maker, or any of
such Maker's Subsidiaries, merges or consolidates with or into any
other Person (unless the Maker or it's Subsidiary is the surviving
entity), (3) any Maker, or any of such Maker's Subsidiaries, sells all
or substantially all of its assets (unless the purchaser is a
Subsidiary of a Maker) or (4) any Maker, or any of such Maker's
Subsidiaries, dissolves or liquidates.
5.2 Acceleration of Maturity. Upon the occurrence of any Event of
Default described in Sections 5.1(f), 5.1(g) or 5.1(h) above, then (a) the
Commitment shall automatically terminate and (b) the entire unpaid amount of
all Obligations shall automatically become immediately due and payable, without
presentment for payment, demand, protest, notice of intent to accelerate,
notice of acceleration or further notice of any kind, all of which are hereby
expressly waived by each Maker and each of its Subsidiaries and the obligation
of the Holder to make any Advance hereunder shall thereupon terminate. Upon the
occurrence of any other Event of Default, the Holder may (i) declare the
Commitment to be terminated, whereupon the Commitment and the obligations of
the Holder to make any Advance hereunder shall forthwith terminate, and (ii)
declare the entire unpaid amount of all Obligations to be forthwith due and
payable, whereupon all Obligations shall become and be forthwith due and
payable, without presentment for payment, demand, protest, notice of intent to
accelerate, notice of acceleration or further notice of any kind, all of which
are hereby expressly waived by each Maker and each of its Subsidiaries.
5.3 Remedies. If any Event of Default shall occur, the Holder may
protect and enforce the Holder's rights and remedies under this Note and any of
the other Transaction Documents by any appropriate proceedings, including
proceedings for specific performance of any covenant or agreement contained in
this Note or any of the other Transaction Documents and the Holder may enforce
the payment of any Obligations due or enforce any other legal or equitable
right. All rights and remedies and powers conferred upon the Holder under this
Note and any of the other Transaction Documents shall be deemed cumulative and
not exclusive of any other rights, remedies or powers available under this
Note, any of the other Transaction Documents or at law or in equity.
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ARTICLE VI
MISCELLANEOUS
6.1 Consent to Amendments. This Note may be amended, and the
Makers may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, if and only if the Makers shall obtain the
written consent to such amendment, action or omission to act from the Holder.
6.2 Benefits of Note. Nothing in this Note, express or implied,
shall give to any Person, other than the Makers, Holder, and their successors
any benefit or any legal or equitable right, remedy or claim under or in
respect of this Note.
6.3 Successors and Assigns. Neither Maker nor the Holder may
transfer or assign this Note or their respective rights, titles and interests
in this Note without the prior written consent of the other parties hereto. All
covenants and agreements in this Note contained by or on behalf of the Makers
and the Holder shall bind and inure to the benefit of the respective successors
and assigns of the Makers and the Holder.
6.4 Restrictions on Transfer. Subject to the provisions of Section
6.3 requiring prior written consent, this Note is transferable in the same
manner and with the same effect as in the case of a negotiable instrument
payable to a specified person. Prior to any transfer as provided herein, the
transferor shall provide written notice to the Makers. The Makers, however, may
treat Holder as the owner hereof for all purposes until this Note shall have
been surrendered for transfer as hereinafter provided. Upon surrender of this
Note duly executed by Holder or his agent or attorney, the Makers shall execute
and deliver a new Note in the name of the assignee or assignees and in the
denominations specified in such instrument of assignment, and this Note shall
promptly be canceled.
6.5 Notice; Address of Parties. Except as otherwise provided, all
communications to the Makers or Holder provided for herein or with reference to
this Note shall be deemed to have been sufficiently given or served for all
purposes on the third business day after being sent as certified or registered
mail, postage and charges prepaid, to the following addresses: if to ICSL: Reid
House, 31 Church Street, Hamilton, Bermuda HM12 or at any other address
designated by the ICSL in writing to Holder with a copy to Philip P. Sudan,
Jr., Ryan & Sudan, L.L.P., 909 Fannin, 39th Floor, Houston, Texas 77010; if to
ISC: ISC, 1100 Executive Drive, Richardson, Texas 75081, or at any other
address designated by ISC to the Holder in writing with a copy to Philip P.
Sudan, Jr., Ryan & Sudan, L.L.P., 909 Fannin, 39th Floor, Houston, Texas 77010;
if to Holder: St. James Capital Corp., 1980 Post Oak Boulevard, Suite 2030,
Houston, Texas 77056, Attn: John L. Thompson, or at any other address
designated by Holder to the Makers in writing.
6.6 Separability Clause. In case any provision in this Note shall
be invalid, illegal or unenforceable in any jurisdiction, the validity,
legality and enforceability of the remaining provisions in such jurisdiction
shall not in any way be affected or impaired thereby; provided, however, such
construction does not destroy the essence of the bargain provided for
hereunder.
6.7 Governing Law. This Note shall be governed by, and construed
in accordance with, the internal laws of the State of Texas (without regard to
principles of choice of law) and the laws of the United States and for all
purposes shall be construed in accordance with, and governed by, the laws of
said State and of the United States. The Makers and the Holder further agree
that the provisions of
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Article 1.04, Subtitle 1, Title 79, of the Revised Civil Statutes of Texas,
1925, as amended, are applicable to the determination of the Highest Lawful
Rate with respect to this Not, the indicated rate ceiling computed from time to
time pursuant to Section (a) of such Article shall apply to this Note;
provided, however, that to the extent permitted by such Article, the Holder may
from time to time by notice from the Holder revise the election of such
interest rate ceiling as such ceiling affects then current or future balances
of the Advances outstanding under this Note. The provisions of Chapter 15 of
Subtitle 3 of the said Title 79 do not apply to this Note issued hereunder.
6.8 Interest. Each provision in this Note and the other
Transaction Documents is expressly limited so that in no event whatsoever shall
the amount paid, or otherwise agreed to be paid, to the Holder for the use,
forbearance or detention of the money to be loaned under this Note or any
Transaction Document or otherwise (including any sums paid as required by any
covenant or obligation contained herein or in any other Transaction Document
which is for the use, forbearance or detention of such money), exceed that
amount of money which would cause the effective rate of interest to exceed the
Highest Lawful Rate, and all amounts owed under this Note and each other
Transaction Document shall be held to be subject to reduction to the effect
that such amounts so paid or agreed to be paid which are for the use,
forbearance or detention of money under this Note or such Transaction Document
shall in no event exceed that amount of money which would cause the effective
rate of interest to exceed the Highest Lawful Rate. Anything in this Note or
any other Transaction Document to the contrary notwithstanding, the Makers
shall never be required to pay unearned interest on this Note or ever be
required to pay interest on this Note at a rate in excess of the Highest Lawful
Rate, and if the effective rate of interest which would otherwise be payable
with respect to this Note would exceed the Highest Lawful Rate, or if the
Holder shall receive any unearned interest or shall receive monies that are
deemed to constitute interest which would increase the effective rate of
interest payable by the Makers with respect to this Note to a rate in excess of
the Highest Lawful Rate, then (i) the amount of interest which would otherwise
be payable by the Makers with respect to this Note shall be reduced to the
amount allowed under applicable law and (ii) any unearned interest paid by the
Makers or any interest paid by the Makers in excess of the Highest Lawful Rate
shall be in the first instance credited on the principal of this Note with the
excess thereof, if any, refunded to the Makers. It is further agreed that,
without limitation of the foregoing, all calculations of the rate of interest
contracted for, charged or received by the Holder under this Note or the other
Transaction Documents, are made for the purpose of determining whether such
rate exceeds the Highest Lawful Rate applicable to the Holder (such Highest
Lawful Rate being the Holder's "Maximum Permissible Rate"), shall be made, to
the extent permitted by usury laws applicable to the Holder (now or hereafter
enacted), by (a) characterizing any non-principal payment as an expense, fee or
premium rather than as interest and (b) amortizing, prorating and spreading in
equal parts during the period of the full stated term of the Advances evidenced
by the Note all interest at any time contracted for, charged or received by the
Holder in connection therewith.
6.9 Acknowledgement of Letter of Intent. The parties hereby
acknowledge that they have heretofore entered into that certain Letter of
Intent dated as of February 14, 1997, as may be amended from time to time (the
"Letter of Intent"), which Letter of Intent contemplates that the parties will
enter into a credit facility in favor of the Makers, or certain of them, in an
aggregate principal amount of up to $15,000,000, the proceeds of which will be
used, in part, to refinance the indebtedness evidenced by this Note. The
obligations of the Holder to enter into said credit facility are subject to the
satisfaction, among other things, of the items and requirements set forth in
Section 3 of the Letter of Intent and the execution and delivery by the Makers
of definitive loan documents satisfactory in form and substance to the Holder,
including legal opinions from independent legal counsel to the Makers.
Notwithstanding anything contained in the Letter of Intent, all outstanding
principal together with all accrued and unpaid interest shall be due and
payable in full on the Maturity Date.
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<PAGE> 14
6.10. Restatement of Prior Note. This Note is issued in part in
substitution for, and in exchange, replacement, modification, and restatement
of, but not in extinguishment of $2,500,000 principal indebtedness evidenced by
that certain promissory note of the Makers dated February 26, 1997, in the
original principal sum of $2,500,000 payable to the order of the Lender (the
"Prior Note"), it being acknowledged that the indebtedness evidenced by this
Note in part constitutes a modification and rearrangement of the $2,500,000
outstanding principal indebtedness evidenced by the Prior Note.
6.11. FINAL AGREEMENT OF THE PARTIES. THIS NOTE AND THE OTHER
TRANSACTION DOCUMENTS TO WHICH ANY OF MAKERS OR ANY OF THEIR RESPECTIVE
SUBSIDIARIES IS A PARTY CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION
26.02(A) OF THE TEXAS BUSINESS AND COMMERCE CODE, AND REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
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IN WITNESS WHEREOF, each Maker has caused this instrument to be duly
executed on the date first above written.
INTELECT COMMUNICATIONS SYSTEMS
LIMITED
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
INTELECT SYSTEMS CORP.
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
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<PAGE> 1
EXHIBIT 10.35
FIRST AMENDMENT TO BORROWER PLEDGE AGREEMENT
This First Amendment to Borrower Pledge Agreement (this
"Amendment") dated as of March 27, 1997, is made and entered into by and
between INTELECT SYSTEMS CORP., a Delaware corporation ("Pledgor"), and ST.
JAMES CAPITAL CORP., a Delaware corporation, ("Secured Party").
W I T N E S S E T H:
WHEREAS, the Pledgor and the Secured Party executed that certain
Floating Rate Promissory Note dated as of February 26, 1997, issued by Pledgor
and Intelect Communications Systems Limited, a corporation organized under the
laws of Bermuda ("ICSL" and together with Pledgor, the "Makers") payable to the
order of Secured Party in the original principal sum of $2,500,000 (the
"Original Note"); and
WHEREAS, as collateral for the indebtedness evidenced by the Original
Note, the Pledgor entered into that certain Borrower Pledge Agreement dated as
of February 26, 1997, in favor of the Secured Party (the "Pledge Agreement"),
wherein the Pledgor granted to the Secured Party a security interest in, inter
alia, 1,100 shares of the common capital stock of DNA Enterprises, Inc., a
Texas corporation and a wholly-owned Subsidiary of Pledgor ("DNA"), evidenced
by Certificate Number 8, and any other shares of the common capital stock of
DNA now owned or hereafter acquired by Pledgor (the "DNA Shares"), and all
proceeds of any and all of the foregoing (as such terms are defined therein);
WHEREAS, contemporaneously herewith, the Pledgor, ICSL and the Secured
Party have entered that certain Amended and Restated Floating Rate Promissory
Note dated as of February 26, 1997, amending and, as so amended, restating the
Original Note to increase the Commitment from $2,500,000 to $5,000,000 (the
"Amended and Restated Note"); and
WHEREAS, in connection with the entering into of the Amended and
Restated Note, the parties hereto wish to effect certain amendments to the
Pledge Agreement;
WHEREAS, it is a condition precedent to the effectiveness of the
Amended and Restated Note that this Amendment be executed and delivered by the
parties hereto; and
WHEREAS, the parties hereto desire to execute and deliver this
Amendment for the reasons described above and to satisfy the condition
precedent referenced in the immediately preceding paragraph.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, and of the representations and warranties herein set forth and for
other good and valuable consideration, the parties hereto do hereby agree as
follows:
SECTION 1. Capitalized terms used herein and not defined herein
which are defined in the Amended and Restated Note shall have the meanings
therein ascribed to them. The term "Note" as used in the Pledge Agreement or
any other documents executed in connection therewith or any other instrument,
document or writing furnished to the Secured Party in connection therewith
shall mean the Amended and Restated Note. From and after the date hereof, all
references in the Amended and Restated Note or in any other Transaction
Document to the Pledge Agreement shall be deemed to be references to the Pledge
Agreement as effected and amended hereby. The term "Obligations" as used in
the Pledge
<PAGE> 2
Agreement or in any other Transaction Document shall include, without
limitation, all obligations, liabilities and indebtedness of every nature of
the Pledgor and ICSL from time to time owing to the Secured Party under the
$5,000,000 Amended and Restated Note and any other Transaction Document.
SECTION 2. In order to secure the prompt and unconditional
payment and performance of the Obligations, including without limitation, all
obligations, liabilities and indebtedness of every nature of the Pledgor and
ICSL from time to time owing to the Secured Party under the $5,000,000 Amended
and Restated Note, the Pledgor hereby grants to the Secured Party a continuing
security interest in and to all of the following properties (the "Collateral"):
(a) 1,100 shares of the common capital stock of DNA, evidenced
by Certificate Number 8, and any other shares of the common capital
stock of DNA now owned or hereafter acquired by Pledgor (such shares
of stock referred to in this subsection 1.1(a) are hereinafter
sometimes referred to as the "DNA Shares");
(b) (i) the certificates or instruments, if any, representing
the DNA Shares, (ii) all dividends (cash, stock or otherwise), cash,
instruments, rights to subscribe, purchase or sell and all other
rights and property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of
such securities, (iii) all replacements, additions to and
substitutions for any of the property referred to in this definition,
including, without limitation, claims against third parties, (iv) the
proceeds, interest, profits and other income of or on any of the
property referred to in this definition, and (v) all books and records
relating to any of the property referred to in this definition; and
(c) all proceeds as such term is defined in Section 9.306(a)
of the Uniform Commercial Code and, in any event, shall include,
without limitation, all dividends or other income from the Collateral,
collections thereon or distributions, liquidation payments or
redemption payments with respect thereto, and any and all rights,
titles, interests, privileges, benefits and preferences appertaining
or incidental to the Collateral.
SECTION 3. The representations and warranties of the Pledgor
contained in Section 3 of the Pledge Agreement are true and correct in all
respects and as of the date hereof as though made on and as of the date hereof.
SECTION 4. Each party hereto represents and warrants that this
Amendment has been duly authorized by it and has been duly executed and
delivered on its behalf, and the Pledge Agreement, after giving effect to this
Amendment, constitutes a valid and legally binding agreement of such party
enforceable against such party in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency or other similar laws
of general application relating to or affecting the enforcement of creditors'
rights.
SECTION 5. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provisions, of the
Pledge Agreement, except as expressly amended. The Pledge Agreement, as
amended hereby, and all rights and powers created thereby or thereunder are in
all respects ratified and confirmed and shall remain in full force and effect.
SECTION 6. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered
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<PAGE> 3
shall be an original, but all of which shall constitute one and the same
instrument. A complete set of counterparts shall be lodged with the Pledgor
and the Secured Party.
Section 8. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
Section 9. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
-3-
<PAGE> 4
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
Pledgor: INTELECT SYSTEMS CORPORATION
Address:
1100 Executive Drive By:
Richardson, Texas 75081 ------------------------------------
Name:
----------------------------------
Title:
---------------------------------
SECURED PARTY: ST. JAMES CAPITAL CORP.
Address:
1980 Post Oak Blvd By:
Suite 2030 -----------------------------------
Houston, Texas 77056 Name:
---------------------------------
Title:
--------------------------------
-4-
<PAGE> 1
EXHIBIT 10.36
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK ISSUABLE
THEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW AND,
ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS WARRANT MAY NOT BE RESOLD,
PLEDGED, OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER, OR IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE
SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS.
WARRANT
to Purchase Common Stock of
INTELECT COMMUNICATIONS SYSTEMS LIMITED
Expiring on March 27, 2002
This Common Stock Purchase Warrant (the "Warrant") certifies that for
value received, St. James Capital Corp., a Delaware corporation (the "Holder")
or its assigns, is entitled to subscribe for and purchase from the Company (as
hereinafter defined), in whole or in part, 300,000 shares of duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock (as
hereinafter defined) at an initial Exercise Price (as hereinafter defined) per
share of $3.25, subject, however, to the provisions and upon the terms and
conditions hereinafter set forth. The number of Warrants (as hereinafter
defined), the number of shares of Common Stock purchasable hereunder, and the
Exercise Price therefor are subject to adjustment as hereinafter set forth.
This Warrant and all rights hereunder shall expire at 5:00 p.m., Houston, Texas
time, on March 27, 2002.
As used herein, the following terms shall have the meanings set forth
below:
"Company" shall mean Intelect Communications Systems Limited, a
Bermuda corporation, and shall also include any successor thereto with respect
to the obligations hereunder, by merger, consolidation or otherwise.
"Common Stock" shall mean and include the Company's Common Stock, par
value $0.01 per share, authorized on the date of the original issue of this
Warrant and shall also include (i) in case of any reorganization,
reclassification, consolidation, merger, share exchange or sale, transfer or
other disposition of assets of the character referred to in Section 3.5 hereof,
the stock, securities provided for in such Section 3.5, and (ii) any other
shares of common stock of the Company into which such shares of Common Stock
may be converted.
"Exercise Price" shall mean the initial purchase price of $3.25 per
share of Common Stock payable upon exercise of the Warrants, as adjusted from
time to time pursuant to the provisions hereof.
"Market Price" for any day, when used with reference to Common Stock,
shall mean the price of said Common Stock determined as follows: (x) the last
reported sale price for the Common Stock on such day on the principal
securities exchange on which the Common Stock is listed or admitted to trading
<PAGE> 2
or if no such sale takes place on such date, the average of the closing bid and
asked prices thereof as officially reported, or, if not so listed or admitted
to trading on any securities exchange, the last sale price for the Common Stock
on the National Association of Securities Dealers National Market on such date,
or, if there shall have been no trading on such date or if the Common Stock
shall not be listed on such system, the average of the closing bid and asked
prices in the over-the-counter market as furnished by any NASD member firm
selected from time to time by the Company for such purpose, in each such case,
unless otherwise provided herein, averaged over a period of ten (10)
consecutive Trading Days prior to the date as of which the determination is to
be made; or (y) if the Common Stock shall not be listed or admitted to trading
as provided in clause (x) above, the fair market value of the Common Stock as
determined in good faith by the Board of Directors of the Company.
"Note" shall mean the Amended and Restated Floating Rate Promissory
Note of the Company issued to St. James Capital Corp. as of February 26, 1997
in the principal amount of $5,000,000.
"Outstanding," when used with reference to Common Stock, shall mean
(except as otherwise expressly provided herein) at any date as of which the
number of shares thereof is to be determined, all issued shares of Common
Stock, except shares then owned or held by or for the account of the Company.
"Trading Days" shall mean any days during the course of which the
principal securities exchange on which the Common Stock is listed or admitted
to trading is open for the exchange of securities.
"Warrant" shall mean the right upon exercise to purchase one Warrant
Share.
"Warrant Shares" shall mean the shares of Common Stock purchased or
purchasable by the holder hereof upon the exercise of the Warrants.
ARTICLE I
EXERCISE OF WARRANTS
1.1 Method of Exercise. The Warrants represented hereby may be
exercised by the holder hereof, in whole or in part, at any time and from time
to time on or after the date hereof until 5:00 p.m., Houston, Texas time, on
March 27, 2002. To exercise the Warrants, the holder hereof shall deliver to
the Company, at the Warrant Office designated in Section 2.1 hereof, (i) a
written notice in the form of the Subscription Notice attached as an exhibit
hereto, stating therein the election of such holder to exercise the Warrants in
the manner provided in the Subscription Notice; (ii) payment in full of the
Exercise Price (A) in cash or by bank check for all Warrant Shares purchased
hereunder, or (B) if the Company and the holder mutually elect, through a
"cashless" or "net-issue" exercise of each such Warrant ("Cashless Exercise");
the holder shall exchange each Warrant subject to a Cashless Exercise for that
number of Warrant Shares determined by multiplying the number of Warrant Shares
issuable hereunder by a fraction, the numerator of which shall be the
difference between (x) the Market Price and (y) the Exercise Price for each
such Warrant, and the denominator of which shall be the Market Price; the
Subscription Notice shall set forth the calculation upon which the Cashless
Exercise is based, or (C) a combination of (A) and (B) above; and (iii) this
Warrant. The Warrants shall be deemed to be exercised on the date of receipt
by the Company of the Subscription Notice, accompanied by payment for the
Warrant Shares and surrender of this Warrant, as aforesaid, and such date is
referred to herein as the "Exercise Date". Upon such exercise, the Company
shall, as promptly as practicable and in any event within ten (10) business
days, issue and deliver to such holder a certificate or certificates for the
full
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<PAGE> 3
number of the Warrant Shares purchased by such holder hereunder, and shall,
unless the Warrants have expired, deliver to the holder hereof a new Warrant
representing the number of Warrants, if any, that shall not have been
exercised, in all other respects identical to this Warrant. As permitted by
applicable law, the Person in whose name the certificates for Common Stock are
to be issued shall be deemed to have become a holder of record of such Common
Stock on the Exercise Date and shall be entitled to all of the benefits of such
holder on the Exercise Date, including without limitation the right to receive
dividends and other distributions for which the record date falls on or after
the Exercise Date and to exercise voting rights.
1.2 Expenses and Taxes. The Company shall pay all expenses, and
taxes (including, without limitation, all documentary, stamp, transfer or other
transactional taxes) other than income taxes attributable to the preparation,
issuance or delivery of the Warrants and of the shares of Common Stock issuable
upon exercise of the Warrants.
1.3 Reservation of Shares. The Company shall reserve at all times
so long as the Warrants remain outstanding, free from preemptive rights, out of
its treasury Common Stock or its authorized but unissued shares of Common
Stock, or both, solely for the purpose of effecting the exercise of the
Warrants, a sufficient number of shares of Common Stock to provide for the
exercise of the Warrants.
1.4 Valid Issuance. All shares of Common Stock that may be issued
upon exercise of the Warrants will, upon issuance by the Company, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof and, without limiting the
generality of the foregoing, the Company shall take no action or fail to take
any action which will cause a contrary result (including, without limitation,
any action that would cause the Exercise Price to be less than the par value,
if any, of the Common Stock).
1.5 Purchase Agreement. The Warrants represented hereby are part
of a duly authorized issuance and sale of warrants to purchase Common Stock
issued and sold pursuant to that certain Letter of Intent dated as of February
14, 1997, as amended on March 27, 1997 (the "Agreement"), between the Company
and the holder hereof. The holder hereof shall be entitled to registration
under the Securities Act and any applicable state securities or blue sky laws
to the extent set forth in the Registration Rights Agreement, as amended. The
terms of the Agreement are hereby incorporated herein for all purposes and
shall be considered a part of this Warrant as if they had been fully set forth
herein. Notwithstanding the previous sentence, in the event of any conflict
between the provisions of the Agreement and of this Warrant, the provisions of
this Warrant shall control.
1.6 Acknowledgment of Rights. At the time of the exercise of the
Warrants in accordance with the terms hereof and upon the written request of
the holder hereof, the Company will acknowledge in writing its continuing
obligation to afford to such holder any rights (including, without limitation,
any right to registration of the Warrant Shares) to which such holder shall
continue to be entitled after such exercise in accordance with the provisions
of this Warrant; provided, however, that if the holder hereof shall fail to
make any such request, such failure shall not affect the continuing obligation
of the Company to afford to such holder any such rights.
1.7 No Fractional Shares. The Company shall not be required to
issue fractional shares of Common Stock on the exercise of this Warrant. If
more than one Warrant shall be presented for exercise at the same time by the
same holder, the number of full shares of Common Stock which shall be issuable
upon such exercise shall be computed on the basis of the aggregate number of
whole shares of Common
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<PAGE> 4
Stock purchasable on exercise of the Warrants so presented. If any fraction of
a share of Common Stock would, except for the provisions of this Section 1.7,
be issuable on the exercise of this Warrant, the Company shall pay an amount in
cash calculated by it to be equal to the Market Price of one share of Common
Stock at the time of such exercise multiplied by such fraction computed to the
nearest whole cent.
ARTICLE II
TRANSFER
2.1 Warrant Office. The Company shall maintain an office for
certain purposes specified herein (the "Warrant Office"), which office shall
initially be the Company's offices at Reid House, 31 Church Street, Hamilton,
Bermuda HM12, and may subsequently be such other office of the Company or of
any transfer agent of the Common Stock in the continental United States as to
which written notice has previously been given to the holder hereof. The
Company shall maintain, at the Warrant Office, a register for the Warrants in
which the Company shall record the name and address of the Person in whose name
this Warrant has been issued, as well as the name and address of each permitted
assignee of the rights of the registered owner hereof.
2.2 Ownership of Warrants. The Company may deem and treat the
Person in whose name the Warrants are registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any
notice to the contrary until presentation of this Warrant for registration of
transfer as provided in this Article II. Notwithstanding the foregoing, the
Warrants represented hereby, if properly assigned in compliance with this
Article II, may be exercised by an assignee for the purchase of Warrant Shares
without having a new Warrant issued.
2.3 Restrictions on Transfer of Warrants. The Company agrees to
maintain at the Warrant Office books for the registration and transfer of the
Warrants. Subject to the restrictions on transfer of the Warrants in this
Section 2.3, the Company, from time to time, shall register the transfer of the
Warrants in such books upon surrender of this Warrant at the Warrant Office
properly endorsed or accompanied by appropriate instruments of transfer and
written instructions for transfer satisfactory to the Company. Upon any such
transfer and upon payment by the holder or its transferee of any applicable
transfer taxes, new Warrants shall be issued to the transferee and the
transferor (as their respective interests may appear) and the surrendered
Warrants shall be cancelled by the Company. The Company shall pay all taxes
(other than securities transfer taxes or income taxes) and all other expenses
and charges payable in connection with the transfer of the Warrants pursuant to
this Section 2.3.
2.3.1 Restrictions in General. The holder of the Warrants
agrees that it will neither (i) transfer the Warrants prior to delivery to the
Company of written notice of such transfer, nor (ii) transfer such Warrant
Shares prior to delivery to the Company of written notice of such transfer, or
until registration of such Warrant Shares under the Securities Act and any
applicable state securities or blue sky laws has become effective.
2.4 Compliance with Securities Laws. Subject to the terms of the
Registration Rights Agreement between the Holder and the Company dated as of
the date hereof and notwithstanding any other provisions contained in this
Warrant, the holder hereof understands and agrees that the following
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<PAGE> 5
restrictions and limitations shall be applicable to all Warrant Shares and to
all resales or other transfers thereof pursuant to the Securities Act:
2.4.1 The holder hereof agrees that the Warrant Shares
shall not be sold or otherwise transferred unless the Warrant Shares are
registered under the Securities Act and applicable state securities or blue sky
laws or are exempt therefrom.
2.4.2 A legend in substantially the following form will be
placed on the certificate(s) evidencing the Warrant Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE
SECURITIES LAW AND, ACCORDINGLY, THE SECURITIES REPRESENTED BY
THIS CERTIFICATE MAY NOT BE RESOLD, PLEDGED, OR OTHERWISE
TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER, OR IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER
APPLICABLE SECURITIES LAWS."
2.4.3 Stop transfer instructions will be imposed with
respect to the Warrant Shares so as to restrict resale or other transfer
thereof, subject to this Section 2.4.
2.4.4 The holder understands that it must bear the economic
risk of the investment for an indefinite period of time because the Warrant
Shares have not been registered under the Securities Act and therefore cannot
be sold unless they are subsequently registered under the Securities Act or an
exemption from such registration is available. The holder acknowledges that
the holder or the holder's representative is familiar with the condition,
financial and otherwise, of the Company. The holder or the holder's
representative has such knowledge and experience in financial and business
matters that the holder or the holder's representative is able to weigh the
information so received and to evaluate the merits and risks of the holder's
investment in the Warrant Shares.
ARTICLE III
ANTI-DILUTION
3.1 Anti-Dilution Provisions. The Exercise Price shall be subject
to adjustment from time to time as hereinafter provided. Upon each adjustment
of the Exercise Price, the holder of this Warrant shall thereafter be entitled
to purchase, at the Exercise Price resulting from such adjustment, the number
of shares of Common Stock obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment.
3.2 Adjustment of Exercise Price Upon Issuance of Common Stock.
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<PAGE> 6
3.2.1 (A) If and whenever after the date hereof the
Company shall issue or sell any Common Stock for no consideration or for a
consideration per share less than the Exercise Price, then, forthwith upon such
issue or sale, the Exercise Price shall be reduced (but not increased, except
as otherwise specifically provided in Section 3.2.2(C) hereof), to the price
(calculated to the nearest one-ten thousandth of a cent) determined by dividing
(x) an amount equal to the sum of (i) the aggregate number of shares of Common
Stock outstanding immediately prior to such issue or sale multiplied by the
consideration received by the Company upon such issuance or sale on a per share
basis plus (ii) the consideration received by the Company upon such issue or
sale by (y) the aggregate number of shares of Common Stock outstanding
immediately after such issue or sale.
(B) Notwithstanding the provisions of this
Section 3.2, no adjustment shall be made in the Exercise Price in the event
that the Company issues, in one or more transactions, (i) Common Stock or
convertible securities upon exercise of any options issued to officers,
directors or employees of the Company pursuant to a stock option plan or an
employment, severance or consulting agreement as now or hereafter in effect, in
each case approved by the Board of Directors (provided that the aggregate
number of shares of Common Stock which may be issuable, including options
issued prior to the date hereof, under all such employee plans and agreements
shall at no time exceed the number of such shares of Common Stock that are
issuable under currently effective employee plans and agreements); (ii) Common
Stock upon exercise of the Warrants or any other warrant issued pursuant to the
terms of the Agreement or otherwise issued to the Holder; (iii) Common Stock
upon exercise of any stock purchase warrant or option (other than the options
referred to in clause (i) above) or other convertible security outstanding on
the date hereof; (iv) Common Stock upon conversion of the Note; or (v) Common
Stock issued as consideration in acquisitions. In addition, for purposes of
calculating any adjustment of the Exercise Price as provided in this Section
3.2, all of the shares of Common Stock issuable pursuant to any of the
foregoing shall be assumed to be outstanding prior to the event causing such
adjustment to be made.
3.2.2 For purposes of this Section 3.2, the following
Sections 3.2.2(A) to 3.2.2(E) inclusive, shall be applicable:
(A) Issuance of Rights or Options. In case at any time
after the date hereof the Company shall in any manner grant (whether
directly or by assumption in a merger or otherwise) any rights to
subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or securities convertible into or
exchangeable for Common Stock (such convertible or exchangeable stock
or securities being herein called "Convertible Securities"), whether
or not such rights or options or the right to convert or exchange any
such Convertible Securities are immediately exercisable, and the price
per share for which shares of Common Stock are issuable upon the
exercise of such rights or options or upon conversion or exchange of
such Convertible Securities (determined by dividing (i) the total
amount, if any, received or receivable by the Company as consideration
for the granting of such rights or options, plus the minimum aggregate
amount of additional consideration, if any, payable to the Company
upon the exercise of such rights or options, or plus, in the case of
such rights or options that relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable
upon the issue or sale of such Convertible Securities and upon the
conversion or exchange thereof, by (ii) the total maximum number of
shares of Common Stock issuable upon the exercise of such rights or
options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such rights or options) shall
be less than the Exercise Price in effect as of the date of granting
such rights or options, then the total maximum number of shares of
Common
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<PAGE> 7
Stock issuable upon the exercise of such rights or options or upon
conversion or exchange of all such Convertible Securities issuable
upon the exercise of such rights or options shall be deemed to be
outstanding as of the date of the granting of such rights or options
and to have been issued for such price per share, with the effect on
the Exercise Price specified in Section 3.2.1 hereof. Except as
provided in Section 3.2.2 hereof, no further adjustment of the
Exercise Price shall be made upon the actual issuance of such Common
Stock or of such Convertible Securities upon exercise of such rights
or options or upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities.
(B) Change in Option Price or Conversion Rate. Upon the
happening of any of the following events, namely, if the purchase
price provided for in any right or option referred to in Section
3.2.2, the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
Section 3.2.2, or the rate at which any Convertible Securities
referred to in Section 3.2.2, are convertible into or exchangeable for
Common Stock shall change (other than under or by reason of provisions
designed to protect against dilution), the Exercise Price then in
effect hereunder shall forthwith be readjusted (increased or
decreased, as the case may be) to the Exercise Price that would have
been in effect at such time had such rights, options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at
the time initially granted, issued or sold. On the expiration of any
such option or right referred to in Section 3.2.2, or on the
termination of any such right to convert or exchange any such
Convertible Securities referred to in Section 3.2.2, the Exercise
Price then in effect hereunder shall forthwith be readjusted
(increased or decreased, as the case may be) to the Exercise Price
that would have been in effect at the time of such expiration or
termination had such right, option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or
termination, never been granted, issued or sold, and the Common Stock
issuable thereunder shall no longer be deemed to be outstanding. If
the purchase price provided for in Section 3.2.2 or the rate at which
any Convertible Securities referred to in Section 3.2.2 reduced at any
time under or by reason of provisions with respect thereto designed to
protect against dilution, then in case of the delivery of Common Stock
upon the exercise of any such right or option or upon conversion or
exchange of any such Convertible Securities, the Exercise Price then
in effect hereunder shall, if not already adjusted, forthwith be
adjusted to such amount as would have obtained had such right, option
or Convertible Securities never been issued as to such Common Stock
and had adjustments been made upon the issuance of the Common Stock
delivered as aforesaid, but only if as a result of such adjustment the
Exercise Price then in effect hereunder is thereby reduced.
(C) Consideration for Stock. In case at any time Common
Stock or Convertible Securities or any rights or options to purchase
any such Common Stock or Convertible Securities shall be issued or
sold for cash, the consideration therefor shall be deemed to be the
amount received by the Company therefor. In case at any time any
Common Stock, Convertible Securities or any rights or options to
purchase any such Common Stock or Convertible Securities shall be
issued or sold for consideration other than cash, the amount of the
consideration other than cash received by the Company shall be deemed
to be the fair value of such consideration, as determined reasonably
and in good faith by the Board of Directors of the Company. In case
at any time any Common Stock, Convertible Securities or any rights or
options to purchase any Common Stock or Convertible Securities shall
be issued in connection with any merger or consolidation in which the
Company is the surviving corporation, the amount of consideration
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<PAGE> 8
received therefor shall be deemed to be the fair value, as determined
reasonably and in good faith by the Board of Directors of the Company,
of such portion of the assets and business of the nonsurviving
corporation as such Board of Directors may determine to be
attributable to such Common Stock, Convertible Securities, rights or
options as the case may be. In case at any time any rights or options
to purchase any shares of Common Stock or Convertible Securities shall
be issued in connection with the issuance and sale of other securities
of the Company, together consisting of one integral transaction in
which no consideration is allocated to such rights or options by the
parties, such rights or options shall be deemed to have been issued
with consideration.
(D) Record Date. In the case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling
them (i) to receive a dividend or other distribution payable in Common
Stock or Convertible Securities, or (ii) to subscribe for or purchase
Common Stock or Convertible Securities, then such record date shall be
deemed to be the date of the issuance or sale of the Common Stock or
Convertible Securities deemed to have been issued or sold as a result
of the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription
or purchase, as the case may be.
(E) Treasury Shares. The number of shares of Common
Stock outstanding at any given time shall not include shares owned
directly by the Company in treasury, and the disposition of any such
shares shall be considered an issuance or sale of Common Stock for the
purpose of this Section 3.2.
3.3 Stock Dividends. In case the Company shall declare a dividend
or make any other distribution upon any shares of the Company, payable in
Common Stock or Convertible Securities, any Common Stock or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without consideration.
3.4 Stock Splits and Reverse Splits. In the event that the
Company shall at any time subdivide its outstanding shares of Common Stock into
a greater number of shares, the Exercise Price in effect immediately prior to
such subdivision shall be proportionately reduced and the number of Warrant
Shares purchasable pursuant to this Warrant immediately prior to such
subdivision shall be proportionately increased, and conversely, in the event
that the outstanding shares of Common stock shall at any time be combined into
a smaller number of shares, the Exercise Price in effect immediately prior to
such combination shall be proportionately increased and the number of Warrant
Shares purchasable upon the exercise of this Warrant immediately prior to such
combination shall be proportionately reduced. Except as provided in this
Section 3.4, no adjustment in the Exercise Price and no change in the number of
Warrant Shares purchasable shall be made under this Article III as a result of
or by reason of any such subdivision or combination.
3.5 Reorganizations and Asset Sales. If any capital
reorganization or reclassification of the capital stock of the Company, or any
consolidation, merger or share exchange of the Company with another Person, or
the sale, transfer or other disposition of all or substantially all of its
assets to another Person shall be effected in such a way that a holder of
Common Stock of the Company shall be entitled to receive capital stock,
securities or assets with respect to or in exchange for their shares, then the
following provisions shall apply:
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<PAGE> 9
3.5.1 As a condition of such reorganization,
reclassification, consolidation, merger, share exchange, sale, transfer or
other disposition (except as otherwise provided below in this Section 3.5),
lawful and adequate provisions shall be made whereby the holder of Warrants
shall thereafter have the right to purchase and receive upon the terms and
conditions specified in this Warrant and in lieu of the Warrant Shares
immediately theretofore receivable upon the exercise of the rights represented
hereby, such shares of capital stock, securities or assets as may be issued or
payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of Warrant Shares immediately theretofore
so receivable had such reorganization, reclassification, consolidation, merger,
share exchange or sale not taken place, and in any such case appropriate
provision reasonably satisfactory to such holder shall be made with respect to
the rights and interests of such holder to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Exercise
Price and of the number of Warrant Shares receivable upon the exercise) shall
thereafter be applicable, as nearly as possible, in relation to any shares of
capital stock, securities or assets thereafter deliverable upon the exercise of
Warrants.
3.5.2 In the event of a merger, share exchange or
consolidation of the Company with or into another Person as a result of which a
number of shares of common stock or its equivalent of the successor Person
greater or lesser than the number of shares of Common Stock outstanding
immediately prior to such merger, share exchange or consolidation are issuable
to holders of Common Stock, then the Exercise Price in effect immediately prior
to such merger, share exchange or consolidation shall be adjusted in the same
manner as though there were a subdivision or combination of the outstanding
shares of Common Stock.
3.5.3 The Company shall not effect any such consolidation,
merger, share exchange, sale, transfer or other disposition unless prior to or
simultaneously with the consummation thereof the successor Person (if other
than the Company) resulting from such consolidation, share exchange or merger
or the Person purchasing or otherwise acquiring such assets shall have assumed
by written instrument executed and mailed or delivered to the holder hereof at
the last address of such holder appearing on the books of the Company the
obligation to deliver to such holder such shares of capital stock, securities
or assets as, in accordance with the foregoing provisions, such holder may be
entitled to receive, and all other liabilities and obligations of the Company
hereunder. Upon written request by the holder hereof, such successor Person
will issue a new Warrant revised to reflect the modifications in this Warrant
effected pursuant to this Section 3.5.
3.5.4 If a purchase, tender or exchange offer is made to
and accepted by the holders of 50% or more of the outstanding shares of Common
Stock, the Company shall not effect any consolidation, merger, share exchange
or sale, transfer or other disposition of all or substantially all of the
Company's assets with the Person having made such offer or with any affiliate
of such Person, unless prior to the consummation of such consolidation, merger,
share exchange, sale, transfer or other disposition the holder hereof shall
have been given a reasonable opportunity to then elect to receive upon the
exercise of the Warrants either the capital stock, securities or assets then
issuable with respect to the Common Stock or the capital stock, securities or
assets, or the equivalent, issued to previous holders of the Common Stock in
accordance with such offer.
3.6 Adjustment for Asset Distribution. If the Company declares a
dividend or other distribution payable to all holders of shares of Common Stock
in evidences of indebtedness of the Company or other assets of the Company
(including, cash (other than regular cash dividends declared by the Board of
Directors), capital stock (other than Common Stock, Convertible Securities or
options or
9
<PAGE> 10
rights thereto) or other property), the Exercise Price in effect immediately
prior to such declaration of such dividend or other distribution shall be
reduced by an amount equal to the amount of such dividend or distribution
payable per share of Common Stock, in the case of a cash dividend or
distribution, or by the fair value of such dividend or distribution per share
of Common Stock (as reasonably determined in good faith by the Board of
Directors of the Company), in the case of any other dividend or distribution.
Such reduction shall be made whenever any such dividend or distribution is made
and shall be effective as of the date as of which a record is taken for purpose
of such dividend or distribution or, if a record is not taken, the date as of
which holders of record of Common Stock entitled to such dividend or
distribution are determined.
3.7 De Minimis Adjustments. No adjustment in the number of shares
of Common Stock purchasable hereunder shall be required unless such adjustment
would require an increase or decrease of at least one share of Common Stock
purchasable upon an exercise of each Warrant and no adjustment in the Exercise
Price shall be required unless such adjustment would require an increase or
decrease of at least $0.01 in the Exercise Price; provided, however, that any
adjustments which by reason of this Section 3.7 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest full share or nearest one
hundredth of a dollar, as applicable.
3.8 Notice of Adjustment. Whenever the Exercise Price or the
number of Warrant Shares issuable upon the exercise of the Warrants shall be
adjusted as herein provided, or the rights of the holder hereof shall change by
reason of other events specified herein, the Company shall compute the adjusted
Exercise Price and the adjusted number of Warrant Shares in accordance with the
provisions hereof and shall prepare an Officer's Certificate setting forth the
adjusted Exercise Price and the adjusted number of Warrant Shares issuable upon
the exercise of the Warrants or specifying the other shares of stock,
securities or assets receivable as a result of such change in rights, and
showing in reasonable detail the facts and calculations upon which such
adjustments or other changes are based. The Company shall cause to be mailed
to the holder hereof copies of such Officer's Certificate together with a
notice stating that the Exercise Price and the number of Warrant Shares
purchasable upon exercise of the Warrants have been adjusted and setting forth
the adjusted Exercise Price and the adjusted number of Warrant Shares
purchasable upon the exercise of the Warrants.
3.9 Notifications to Holders. In case at any time the Company
proposes:
(i) to declare any dividend upon its Common Stock payable
in capital stock or make any special dividend or other distribution
(other than cash dividends) to the holders of its Common Stock;
(ii) to offer for subscription pro rata to all of the
holders of its Common Stock any additional shares of capital stock of
any class or other rights;
(iii) to effect any capital reorganization, or
reclassification of the capital stock of the Company, or
consolidation, merger or share exchange of the Company with another
Person, or sale, transfer or other disposition of all or substantially
all of its assets; or
(iv) to effect a voluntary or involuntary dissolution,
liquidation or winding up of the Company,
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<PAGE> 11
then, in any one or more of such cases, the Company shall give the holder
hereof (a) at least 10 days' (but not more than 90 days') prior written notice
of the date of which the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights or for determining
rights to vote in respect of such issuance, reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, disposition,
dissolution, liquidation or winding up, and (b) in the case of any such
issuance, reorganization, reclassification, consolidation, merger, share
exchange, sale, transfer, disposition, dissolution, liquidation or winding up,
at least 10 days' (but not more than 90 days') prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause (a) shall also specify, in the case of any such dividend, distribution
or subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause (b)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock, as the case may be, for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, disposition,
dissolution, liquidation or winding up, as the case may be.
3.10 Company to Prevent Dilution. If any event or condition occurs
as to which other provisions of this Article III are not strictly applicable or
if strictly applicable would not fairly protect the exercise or purchase rights
of the Warrants evidenced hereby in accordance with the essential intent and
principles of such provisions, or that might materially and adversely affect
the exercise or purchase rights of the holder hereof under any provisions of
this Warrant, then the Company shall make such adjustments in the application
of such provisions, in accordance with such essential intent and principles, so
as to protect such exercise and purchase rights as aforesaid, and any
adjustments necessary with respect to the Exercise Price and the number of
Warrant Shares purchasable hereunder so as to preserve the rights of the holder
hereunder. In no event shall any such adjustment have the effect of increasing
the Exercise Price as otherwise determined pursuant to this Article III except
in the event of a combination of shares of the type contemplated in Section 3.4
hereof, and then in no event to an amount greater than the Exercise Price as
adjusted pursuant to Section 3.4 hereof.
ARTICLE IV
MISCELLANEOUS
4.1 Entire Agreement. This Warrant, together with the Agreement,
contain the entire agreement between the holder hereof and the Company with
respect to the Warrant Shares purchasable upon exercise hereof and the related
transactions and supersedes all prior arrangements or understandings with
respect thereto.
4.2 Governing Law. This warrant shall be governed by and
construed in accordance with the laws of the State of Texas.
4.3 Waiver and Amendment. Any term or provision of this Warrant
may be waived at any time by the party which is entitled to the benefits
thereof and any term or provision of this Warrant may be amended or
supplemented at any time by agreement of the holder hereof and the Company,
except that any waiver of any term or condition, or any amendment or
supplementation, of this Warrant shall be in writing. A waiver of any breach
or failure to enforce any of the terms or conditions of this Warrant shall not
in any way effect, limit or waive a party's rights hereunder at any time to
enforce strict compliance thereafter with every term or condition of this
Warrant.
11
<PAGE> 12
4.4 Illegality. In the event that any one or more of the
provisions contained in this Warrant shall be determined to be invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the remaining
provisions of this Warrant shall not, at the election of the party for whom the
benefit of the provision exists, be in any way impaired.
4.5 Copy of Warrant. A copy of this Warrant shall be filed among
the records of the Company.
4.6 Notice. Any notice or other document required or permitted to
be given or delivered to the holder hereof shall be in writing and delivered
at, or sent by certified or registered mail to such holder at, the last address
shown on the books of the Company maintained at the Warrant Office for the
registration of this Warrant or at any more recent address of which the holder
hereof shall have notified the Company in writing. Any notice or other
document required or permitted to be given or delivered to the Company, other
than such notice or documents required to be delivered to the Warrant Office,
shall be delivered at, or sent by certified or registered mail to, the offices
of the Company at Reid House, 31 Church Street, Hamilton, Bermuda HM12 or such
other address within the continental United States of America as shall have
been furnished by the Company to the holder of this Warrant, with a copy to
Philip P. Sudan, Jr., Ryan & Sudan, L.L.P., 909 Fannin, 39th Floor, Houston,
Texas 77010.
4.7 Limitation of Liability; Not Stockholders. No provision of
this Warrant shall be construed as conferring upon the holder hereof the right
to vote, consent, receive dividends or receive notices (other than as herein
expressly provided) in respect of meetings of stockholders for the election of
directors of the Company or any other matter whatsoever as a stockholder of the
Company. No provision hereof, in the absence of affirmative action by the
holder hereof to purchase shares of Common Stock, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the purchase price of any shares of Common Stock
or as a stockholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.
4.8 Exchange, Loss, Destruction, etc. of Warrant. Upon receipt of
evidence satisfactory to the Company of the loss, theft, mutilation or
destruction of this Warrant, and in the case of any such loss, theft or
destruction upon delivery of a bond of indemnity or such other security in such
form and amount as shall be reasonably satisfactory to the Company, or in the
event of such mutilation upon surrender and cancellation of this Warrant, the
Company will make and deliver a new Warrant of like tenor, in lieu of such
lost, stolen, destroyed or mutilated Warrant. Any Warrant issued under the
provisions of this Section 4.8 in lieu of any Warrant alleged to be lost,
destroyed or stolen, or in lieu of any mutilated Warrant, shall constitute an
original contractual obligation on the part of the Company. This Warrant shall
be promptly canceled by the Company upon the surrender hereof in connection
with any exchange or replacement. The Company shall pay all taxes (other than
securities transfer taxes or income taxes) and all other expenses and charges
payable in connection with the preparation, execution and delivery of Warrants
pursuant to this Section 4.8.
4.9 Registration Rights. The Warrant Shares shall be entitled to
such registration rights under the Securities Act and under applicable state
securities laws as are specified in the Registration Rights Agreement.
4.10 Headings. The Article and Section and other headings herein
are for convenience only and are not a part of this Warrant and shall not
affect the interpretation thereof.
12
<PAGE> 13
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
in its name.
Dated: March 27, 1997
INTELECT COMMUNICATIONS SYSTEMS
LIMITED
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
13
<PAGE> 14
SUBSCRIPTION NOTICE
The undersigned, the holder of the foregoing Warrant, hereby elects to
exercise purchase rights represented thereby for and to purchase thereunder,
________ shares of the Common Stock covered by such Warrant, and herewith makes
payment in full for such shares pursuant to Section 1.1 of such Warrant, and
requests (a) that certificates for such shares (and any other securities or
other property issuable upon such exercise) be issued in the name of, and
delivered to _____________________________________ and (b), if such shares
shall not include all of the shares issuable as provided in such Warrant, that
a new Warrant of like tenor and date for the balance of the shares issuable
thereunder be delivered to the undersigned.
--------------------------------------
Date:
----------------------------------
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<PAGE> 15
ASSIGNMENT
For value received, _______________________, hereby sells, assigns,
and transfers unto _________________________ the within Warrant, together with
all right, title and interest therein, and does hereby irrevocably constitute
and appoint ________________________ attorney, to transfer such Warrant on the
books of the Company, with full power of substitution.
---------------------------------
Date:
--------------------------------
15
<PAGE> 1
EXHIBIT 10.37
AMENDMENT NO. 1
TO
REGISTRATION RIGHTS AGREEMENT
THIS AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT (this
"Amendment") is made as of March 27, 1997, by and between Intelect
Communications Systems Limited, a Bermuda corporation (the "Company"), and St.
James Capital Corp., a Delaware corporation (the "Purchaser").
WHEREAS, on February 26, 1997, the Company and the Purchaser entered
into a Registration Rights Agreement (the "Original Registration Rights
Agreement"), pursuant to which the Company granted the Purchaser certain
registration rights in respect of the Shares (as such term is defined in the
Original Registration Rights Agreement);
WHEREAS, effective as of February 26, 19976, the Purchaser agreed to
amend and restate the Floating Rate Promissory Note from the Company to
Purchaser dated as of February 26,1997, in the original principal amount of
$2,500,000 (the "Note"), such that, among other matters, the principal amount
that may be advanced under the Note was increased from $2,500,000 to up to
$5,000,000;
WHEREAS, as of the date hereof and in connection with the amendment
and restatement of the Note, the Company issued the Purchaser a Warrant ("New
Warrant") which may be exercised to purchase shares of the Company's Common
Stock, par value $0.01 per share (the "Common Stock"), at $3.25 per share,
subject to adjustment (the "New Warrant Shares");
WHEREAS, the Company wishes to grant the Purchaser certain
registration rights in respect of the New Warrant Shares, as set forth herein;
WHEREAS, the Company wishes to amend the Original Registration Rights
Agreement as set forth herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereby agree as follows:
SECTION 1. The definition of "Registrable Securities" in the
Original Registration Rights Agreement is hereby amended to read in its
entirety as follows:
Registrable Securities shall mean (i) the Shares; (ii) the New
Warrant Shares; and (iii) any Common Stock issued or issuable at any
time or from time to time in respect of the securities in (i) or (ii)
of this sentence upon a stock split, stock dividend, recapitalization
or other similar event involving the Company.
SECTION 2. All references to the term "Shares" in the Original
Registration Rights Agreement shall be amended and replaced by the term
"Registrable Securities", except as set forth in Section 1 of this Amendment.
SECTION 3. By their execution of this Amendment, both the
Company and the Purchaser agree to be a party to, and bound by, the terms of
the Original Registration Rights Agreement, as amended by this Amendment.
<PAGE> 2
SECTION 4. This Amendment shall be governed in all respects by
the laws of the State of Texas.
SECTION 5. All other terms and conditions of the Original
Registration Rights Agreement shall be and remain the same and in full force
and effect.
SECTION 6. Each party hereto represents and warrants that this
Amendment has been duly authorized by it and has been duly executed and
delivered on its behalf, and the Original Registration Rights Agreement, after
giving effect to this Amendment, constitutes a valid and legally binding
agreement of such party enforceable against such party in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency or
similar laws of general application relating to or effecting the enforcement of
creditors' rights.
SECTION 7. This Amendment may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
2
<PAGE> 3
THE COMPANY'S SIGNATURE PAGE
IN WITNESS WHEREOF, the Company has executed this Amendment effective
upon the date first set forth above.
INTELECT COMMUNICATIONS SYSTEMS LIMITED
By:____________________________________
Name:__________________________________
Title:_________________________________
3
<PAGE> 4
THE PURCHASER'S SIGNATURE PAGE
IN WITNESS WHEREOF, the Purchaser has signed this Amendment as of the
date first written above.
ST. JAMES CAPITAL CORP.
By:____________________________________
Name:__________________________________
Title:_________________________________
4
<PAGE> 1
EXHIBIT 10.38
CHALLENGER INTERNATIONAL, LTD.
EMPLOYEE STOCK OPTION PLAN
1. Purposes
There are two primary purposes of the Challenger International, Ltd.
Employee Stock Option Plan (the "Plan"). The first is to offer to those
employees who contribute materially to the successful operation of CHALLENGER
INTERNATIONAL, LTD. (the "Corporation") additional incentive and encouragement
to remain in the employ of the Corporation by increasing their personal
participation in the corporation through stock ownership. The second purpose is
to provide an alternative means of compensating key employees whose
performances contribute significantly to the success of the Corporation. The
Plan provides a means whereby such employees may purchase shares of the $.01
par value Common Stock of the Corporation if the employee is either a U.S.
citizen or resident, or Class A Common Stock of the Corporation if the employee
is other than a U.S. citizen or resident (the Common Stock and Class A Common
Stock are sometimes referred to herein individually or collectively, as the
context requires, as the "Stock") pursuant to options or to surrender such
options and exercise certain stock appreciation rights specified in Section 7
and to receive Stock, cash or a combination of the two. The options may be
either one of two types, (1) "incentive stock options" which will qualify as
such under Section 422A of the United States Internal Revenue Code of 1954, as
amended (the "Code"), or (2) "nonqualified stock options," that is, options
<PAGE> 2
which are not intended to qualify as incentive stock options under Section 422A
of the Code.
2. Administration
The Plan shall be implemented and administered by the Board of
Directors (the "Board").
The Board may appoint a Stock Option Committee (the "Committee") of
two or more directors of the Corporation which may act on behalf of the Board
in administering the Plan. The Committee may be delegated the authority and
discretion to adopt and revise such rules and regulations as it shall deem
necessary for the administration of the Plan and to determine, consistent with
the provisions of the Plan, the employees to be granted options, whether such
options shall be nonqualified stock options or incentive stock options, the
times at which options shall be granted, the option price of the shares subject
to each option (subject to paragraph C of Section 6), the number of shares
subject to each option, and the form of consideration which will be paid by the
Corporation to an employee who exercises a stock appreciation right. Acts of a
majority of the members of the committee at a meeting at which a quorum is
present, or acts approved in writing by a majority of the members of the
Committee, shall be the valid acts of the Committee. The Committee's actions,
including any interpretation or construction of any provisions of the Plan or
any option granted hereunder, shall be
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<PAGE> 3
final, conclusive and binding unless otherwise determined by the Board at its
next regularly scheduled meeting. No member of the Board or the Committee shall
be liable for any action or determination made in good faith with respect to
the Plan or any option granted under it.
3. Eligibility; Participation; Special Limitations
All key full-time employees (including officers) of the Corporation,
or any corporation designated by the Board in which the Corporation owns stock
possessing more than 50 percent of the voting power (a "Subsidiary"), who meet
minimum salary and other requirements established by the Board, shall be
eligible to receive options and stock appreciation rights under the Plan. An
employee who has been granted an option and stock appreciation right may be
granted an additional option or options and stock appreciation right or rights
under the Plan if the Committee or the Board shall so determine. The granting
of an option and stock appreciation right under the Plan shall not affect any
outstanding stock option and stock appreciation right previously granted to an
employee under the Plan or any other plan of the Corporation. Persons may be
granted nonqualified and incentive stock options, as well as stock
appreciation rights.
Nothing contained in the Plan, or in any option and stock appreciation
right granted pursuant to the Plan, shall confer upon any employee the right to
continued employment, or shall
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<PAGE> 4
interfere in any way with the right of the Corporation or a Subsidiary to
terminate the employment of such employee at any time.
In no event, however, shall an incentive stock option be granted to
(i) any person who then owns (as that term is defined in Section 425 of the
Code) Stock possessing more than 10% of the total combined voting power of all
classes of Stock of the Corporation or of any of its Subsidiaries, unless the
exercise price as determined under paragraph C of Section 6 hereof is equal to
110% of the fair market value of the Stock subject to the incentive stock
option as of the date of grant and unless the term during which such incentive
stock option may be exercised does not exceed five years from the date of the
grant thereof; or (ii) any person, during any year, if the fair market value of
the Stock with respect to which such incentive stock option may be exercised,
when considered together with the fair market value of the Stock subject to all
other incentive stock options which have been granted to such person during the
year under all incentive stock option plans of the Corporation or its
Subsidiaries (said value to be determined in each case as of the date any such
incentive stock option is granted), would exceed the sum of (A) $100,000, and
(B) the "unused limit carryover" applicable to such year. For purposes of this
Section 3, the "unused limit carryover" shall be an amount equal to the sum of
one-half of the amount, if any, for each of the three preceding calendar years
by which $100,000 exceeds the aggregate fair market value
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<PAGE> 5
(determined as of the time an incentive stock option is granted) of the Stock
for which an employee was granted incentive stock options in each such calendar
year (under all incentive stock option plans of the corporation or any of its
Subsidiaries), reduced as provided in the following sentence. The amount of
incentive stock options granted during any calendar year shall be treated as
first using up the $100,000 limitation for that year and as thereafter using up
any available unused limit carryover from a prior year, in the order of the
calendar years to which such carryovers are attributable.
4. Basis of Grant
Options and stock appreciation rights shall be granted as the Board of
Directors or the Committee may determine from time to time.
5. Number of Shares and Options
A. Shares of Stock Subject to the Plan. The number of shares
which may be issued pursuant to all options granted under the Plan shall not
exceed 400,000 shares of Stock, subject to adjustment in accordance with the
provisions of paragraph F of Section 6 hereof. Such shares may be authorized
and unissued shares or shares previously acquired or to be acquired by the
Corporation and forming part of its authorized share capital but unissued
(i.e., held in treasury). Any shares subject to an
-5-
<PAGE> 6
option which expires for any reason or is terminated unexercised as to such
shares may again be subject to an option under the Plan. Shares of Stock
covered by options granted under the Plan which have been surrendered in
connection with the exercise of a stock appreciation right pursuant to Section
7 hereof may not again be subject to options granted under the Plan.
B. Maximum Number of Options. The number of shares of
Stock which may be subject to options granted under the Plan to each employee
shall not exceed 50,000 shares of Stock, subject to adjustment in accordance
with paragraph F of Section 6 hereof.
6. Terms and Conditions of Options
A. Option Agreement. Each option and stock appreciation
right granted pursuant to the Plan shall be evidenced by an agreement ("Option
Agreement") between the Corporation and the employee receiving the option and
stock appreciation right. Options for the Corporation's Stock may also be
granted by any subsidiary of the Corporation or by those persons (currently
Peter G. Leighton and Anton D. Liechtenstein) appointed by the Corporation to
act as trustees for the benefit of those employees entitled to the benefits of
the Plan, who from time to time purchase shares of Class A Common Stock on the
open market for the granting of options and stock appreciation rights to
employees upon the request of the Committee.
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<PAGE> 7
Option Agreements (which need not be identical) shall state whether the
option is an incentive stock option or a nonqualified stock option and shall
designate the number of shares and the exercise price of the options to which
they pertain. The Option Agreements shall be in writing, dated as of the date
the option and stock appreciation right is granted, and shall be executed on
behalf of the Corporation (if the Corporation is the grantor of the option and
stock appreciation right) by such officers as the Board or the Committee shall
authorize. Option Agreements generally shall be in such form and contain such
additional provisions as the Board or the Committee, as the case may be, shall
prescribe, but in no event shall they contain provisions inconsistent with the
provisions of the Plan.
B. Exercise of Options. Options are exercisable only to the
extent they are vested. Stock appreciation rights shall be exercisable, if and
to the extent the option with which it is coupled is exercisable. Options and
stock appreciation rights shall vest at a cumulative rate of 33 1/3% of the
option shares on each annual anniversary of the date the option is granted.
The Board or the Committee may elect at any time to advance the date(s) on
which options shall vest.
Employees may exercise at any time or from time to time all or any
portion of a vested option and stock appreciation right; provided, however,
that no incentive stock option and stock
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<PAGE> 8
appreciation right coupled therewith may be exercised while there is
outstanding any incentive stock option and stock appreciation right coupled
therewith which was granted before the date of the incentive stock option and
stock appreciation right coupled therewith to be exercised and which relates to
Stock in the Corporation, in a corporation which at the time of granting the
earlier incentive stock option and stock appreciation right coupled therewith
was a parent or subsidiary of the Corporation, or in a predecessor corporation
of any of such corporations. An incentive stock option and stock appreciation
right coupled therewith is considered to be outstanding until such incentive
stock option and stock appreciation right coupled therewith is exercised in
full or expires by reason of lapse of time. Payment for shares acquired
pursuant to the exercise of an option shall be in cash.
C. Exercise price. The price at which options and stock
appreciation rights coupled therewith granted pursuant to the Plan may be
exercised shall be determined by the Committee or the Board, which price shall
be at least equal to the fair market value of the underlying Stock at the date
the options and stock appreciation rights are granted. In the case of
incentive stock options granted to a person who owns, immediately after the
grant of such incentive stock option, stock possessing more than 10% of the
total combined voting power of all classes of Stock of the Corporation (as more
fully set forth in Section 3 hereof), the purchase price of the Stock covered
by such incentive stock
-8-
<PAGE> 9
option shall not be less than 110% of the fair market value of such Stock on
the date of grant.
For purposes of the Plan the term "fair market value" shall be defined
as the highest closing price of the Common Stock or Class A Common Stock, as
the case may be, on the National Association of Securities Dealers Automatic
Quotation System ("NASDAQ") in the national market or on an established stock
exchange, as applicable, on the date of grant of the option or if there is no
trade on such date, the highest closing price on the most recent date upon
which such stock was traded. In the event that the Common Stock or the Class A
Common Stock, as the case may be, is not traded over NASDAQ or listed on an
established stock exchange, the term fair market value shall be defined as the
closing bid price of the Stock published in the National Daily Stock Quotation
Summary on the date of grant of the option, or if there are no quotations
published on such date, on the most recent date upon which such Stock was
quoted. In default of all of the foregoing, the fair market value of the Stock
shall be determined by the Board of Directors, taking into account all relevant
facts and circumstances.
The Corporation will pay any original issue taxes with respect to
shares issued under the Plan and all other fees and expenses incurred by the
Corporation in connection with the administration of the Plan.
-9-
<PAGE> 10
D. Termination of Options. Subject to earlier termination as provided in
the following sentence, all options and stock appreciation rights coupled
therewith shall expire, and all rights granted under Option Agreements shall
become null and void, ten years after such options are granted. Upon
termination of an employee's employment with the Corporation or a Subsidiary
(excluding intercompany transfers) for any reason whatsoever, including death,
disability or retirement, all options and stock appreciation rights coupled
therewith held by such employee which are not exercisable on the date of such
termination shall expire. All vested and unexercised options and stock
appreciation rights coupled therewith shall expire and all rights granted under
Option Agreements shall become null and void thirty days after the date of
termination of employment (in the case of termination for any reason other than
death or disability within the meaning of Section 37(e)(3) of the Code
("Disability")), or six months after the date of termination (in the case of
death or Disability); provided, however, that in the case of death, if there is
outstanding one or more vested incentive stock options and stock appreciation
rights coupled therewith granted on a date earlier than another outstanding
vested incentive stock option and stock appreciation right coupled therewith,
then the period during which shares subject to a vested incentive stock option
and stock appreciation right coupled therewith may be purchased shall be
automatically extended by two business days beyond the expiration
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<PAGE> 11
date (as extended) of the next earlier granted and outstanding incentive stock
option and stock appreciation right coupled therewith. In no event will any
granted and outstanding incentive stock option and stock appreciation right
coupled therewith expire more than one year after the date of the employee's
termination of employment. For example, if an employee has several vested and
outstanding incentive stock options and stock appreciation rights coupled
therewith, the first would expire six months from the date of the employee's
termination (i.e., date of death); the second would expire six months and two
business days from the date of the employee's termination, and the third would
expire six months and four business days from the date of the employee's
termination; and so on for up to one year after the date of the termination of
the employee's employment. One year after the date of the termination of the
the employee's employment, any addition granted and outstanding incentive stock
options and stock appreciation rights coupled therewith expire and all rights
granted under incentive stock Option Agreements shall become null and void.
E. Non-Transferability of Options. Options and stock
appreciation rights granted pursuant to the Plan are not transferable by the
employee otherwise than by will or the laws of descent and distribution, and
each option and stock appreciation right shall be exercisable during the
employee's lifetime only by him. Except as permitted by the preceding sentence,
no option
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<PAGE> 12
and stock appreciation right nor any right granted under an Option Agreement
shall be transferred, assigned, pledged, hypothecated or disposed of in any
other way (whether by operation of law or otherwise), or be subject to
execution, attachment or similar process. Upon any attempt to transfer, assign,
pledge, hypothecate or otherwise dispose of such options, such stock
appreciation rights, or other such rights contrary to the provisions hereof, or
to subject such options, such stock appreciation rights, or such other rights
to execution, attachment or similar process, such options, such stock
appreciation rights and such other rights shall immediately terminate and
become null and void.
F. Adjustment Provisions. In the event of changes in the Stock
by reason of any stock split, combination of shares, stock dividend,
reclassification, merger, consolidation, reorganization, recapitalization or
similar adjustment, or by reason of the dissolution or liquidation of the
Corporation, appropriate adjustments may be made in (i) the aggregate number
and class of shares available under the Plan, and (ii) the number, class and
exercise price of shares or stock appreciation rights remaining subject to all
outstanding options or stock appreciation rights. Whether any adjustment or
modification is to be made as a result of the occurrence of any of the events
specified in this section, and the extent thereof, shall be determined by the
Board, whose determination shall be binding and conclusive. Existence of the
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Plan or of Option Agreements pursuant to the Plan shall in no way impair the
right of the Corporation or its stockholders to make or effect any adjustments,
recapitalization, reorganizations or other changes in the Corporation's capital
structure or its business, or any merger, consolidation, dissolution or
liquidation of the Corporation, or any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Stock of the Corporation, or
any grant of options on its Stock not pursuant to the Plan.
7. Stock Appreciation Rights
Each option granted under this Plan shall be coupled with a stock
appreciation right. The terms of the stock appreciation right shall be as
follows:
A. Terms of Stock Appreciation Right. The stock appreciation
right shall be exercisable during the period and to the extent, and only during
the period and to the extent, the option with which it is coupled is
exercisable. The stock appreciation right shall expire and all rights
thereunder shall terminate upon the exercise of the option with which it is
coupled. Similarly, the exercise of a stock appreciation right with respect to
any portion of an unexercised option shall cause a pro rata reduction in the
number of shares subject to the option with which the stock appreciation right
is coupled. A stock appreciation right coupled with an incentive stock option
shall be exercisable only
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<PAGE> 14
when the fair market value of one share of the Common Stock or Class A Common
Stock subject to the Option exceeds the per share exercise price of the Common
Stock or Class A Common Stock covered by the Option.
B. Settlement of Stock Appreciation Right. The stock
appreciation right shall entitle the employee to surrender to the Corporation,
upon its exercise, the option or any portion of the option with which the stock
appreciation right was coupled and to receive from the Corporation in
settlement thereof one of the following: (i) the number of shares having an
aggregate fair market value equal in amount to an amount determined by
multiplying the excess of the fair market value of one share over the exercise
price per share (as fixed pursuant to paragraph C of Section 6 hereof) by the
number of shares subject to the option or the portion thereof which is to be so
surrendered; or (ii) cash in an amount equal to the aggregate fair market value
of the shares it would have been otherwise obligated to deliver under (i); or
(iii) any combination of (i) or (ii). The choice of method of settlement shall
be within the complete discretion of the Board or Committee.
8. Rights as a Shareholder
Employees shall not have any of the rights and privileges of
shareholders of the Corporation in respect of any of the shares subject to any
option and stock appreciation right granted
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<PAGE> 15
pursuant to the Plan unless and until such shares shall have been registered in
his name and a certificate representing such shares shall have been issued and
delivered.
9. Receipt of Prospectus
Prior to the execution of an Option Agreement, each employee who is a
U.S. citizen or resident receiving options or stock appreciation rights
pursuant to the Plan shall be given a Prospectus, as filed by the Corporation
under the Securities Act of 1933, including any exhibits thereto, describing
the Plan. Each Option Agreement shall contain an acknowledgment by the employee
that the requirements of this Section have been met.
10. Successors
The provisions of the Plan shall be binding upon, and inure to the
benefit of, all successors and assigns of the Corporation, and all successors
and assigns of any employee, including, without limitation, his estate and the
executors, administrators or trustees thereof, his heirs and legatees, and any
receiver, trustee in bankruptcy or representative of creditors of such
employee.
11. Termination and Amendment of the Plan
Unless sooner terminated as hereinafter provided, the Plan shall
remain in effect until January 1, 1996. The Board shall
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<PAGE> 16
have complete power and authority at any time to terminate the Plan or to make
such modification or amendment thereof as it deems advisable and may from time
to time suspend, discontinue or abandon the Plan, provided that no such action
by the Board shall adversely affect any right or obligation with respect to any
grant theretofore made, and, further provided that without approval by vote of
the shareholders, the Board shall not adopt any amendment that would (i)
materially increase the benefits accruing to participants under the Plan, (ii)
increase the number of shares which may be issued under the Plan (except as
provided in paragraph F of Section 6 hereof), or (iii) materially modify the
requirements as to eligibility for participation in the Plan.
12. Merger of the Corporation
Unless options and stock appreciation rights issued pursuant to the
Plan are assumed in a transaction to which Section 425(a) of the Code applies,
if the Corporation shall (i) merge or consolidate with another corporation
under circumstances where the Corporation is not the surviving corporation,
(ii) sell all, or substantially all, of its assets, or (iii) liquidate or
dissolve, then options and stock appreciation rights coupled therewith shall
terminate on the date and immediately prior to the time such merger,
consolidation, sale, liquidation or dissolution becomes effective or is
consummated, provided that an employee shall have the right, immediately prior
to the effectiveness or
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<PAGE> 17
consummation of such merger, consolidation, sale, liquidation or dissolution,
to exercise any or all of the vested portion of an option and stock
appreciation right coupled therewith, unless such option and stock appreciation
right coupled therewith have otherwise expired or been terminated pursuant to
their terms or the terms of this Plan. In the event of such merger,
consolidation, sale, liquidation or dissolution, any portion of an outstanding
option and stock appreciation right coupled therewith which would have vested
within one year of the date on which such merger, consolidation, sale,
liquidation or dissolution becomes effective or is consummated shall vest
immediately prior to the effectiveness or consummation of such merger,
consolidation, sale, liquidation or dissolution and shall be part of the vested
portion of the option and stock appreciation right coupled therewith which the
employee may exercise.
13. Approval of Plan; Effective Date
The Plan was adopted by the Board of Directors on April 24, 1986,
effective as of that date.
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<PAGE> 1
EXHIBIT 10.39
INTELECT COMMUNICATIONS SYSTEMS LIMITED
STOCK INCENTIVE PLAN
1. PURPOSE.
The purposes of the Stock Incentive Plan (the "Plan") are to enable
Intellect Communications Systems Limited (the "Company") and its Subsidiaries,
if any, to attract and retain directors and key employees and to provide them
with additional incentive to advance the interests of the Company. For the
purposes of the Plan, the term "Subsidiary" means any corporation or other
entity in which the Company has, directly or indirectly, an equity interest
representing 50% or more of the capital stock thereof or equity interests
therein.
2. ADMINISTRATION.
(a) The Plan shall be administered by a committee (the
"Committee") appointed by the Board of Directors of the Company (the
"Board") and consisting of not less than two members of the Board,
each of whom at the time of appointment to the Committee and at all
times during service as a member of the Committee shall be a
"disinterested person" as then defined under Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), or any
successor rule.
(b) The Committee shall interpret the Plan and prescribe
such rules, regulations and procedures in connection with the Plan as
it shall deem to be necessary and advisable for the administration of
the Plan.
3. ELIGIBILITY.
(a) Officers and other key employees of the Company or
any Subsidiary shall be eligible to be granted stock options and to
receive restricted shares, restricted share units, performance units
or bonus share awards as described herein.
(b) Non-employee directors shall be eligible to receive
under the Plan only non-qualified options (i.e., options that do not
qualify under Section 422 or 423 of the Internal Revenue Code of 1986
(the "Code") ) in accordance with the provisions of Section 5(b)
hereof.
4. SHARES AVAILABLE.
The aggregate number of shares of the Company's Common Stock, $.01 par
value ("Common Stock"), which may be issued and as to which grants or awards of
stock options, restricted shares, restricted share units, performance units or
bonus shares may be made under the Plan is 3,000,000 shares (of which no more
than 1,000,000 shares shall be available for the grant of restricted shares or
restricted share units), subject to adjustment and substitution as set
<PAGE> 2
forth in Section 8. If any stock option granted under the Plan is cancelled by
mutual consent or terminates or expires for any reason without having been
exercised in full, the number of shares subject thereto shall again be
available for purposes of the Plan. If Common Shares or the right to receive
shares of Common Shares are forfeited to the Company pursuant to the
restrictions applicable to restricted shares or restricted share units awarded
under the Plan, the shares so forfeited or covered by such right shall not
again be available for the purposes of the Plan. To the extent any award of
performance units is not earned or is paid in cash rather than shares, the
number of shares covered thereby shall again be available for purposes of the
Plan. The shares which may be issued under the Plan may be either authorized
but unissued shares or treasury shares or partly each, as shall be determined
from time to time by the Board.
5. GRANTS AND AWARDS.
(a) With respect to officers and other key employees, the
Committee shall have authority, in its discretion, to grant incentive
stock options pursuant to Section 422 of the Code and non-qualified
stock options, and to award restricted shares, restricted share units,
performance units and bonus shares.
Notwithstanding any other provision contained in the Plan or
in any stock option agreement, the aggregate fair market value,
determined on the date of grant, of the shares with respect to which
incentive stock options are exercisable for the first time by an
employee during any calendar year under all plans of the corporation
employing such employee, any parent or subsidiary corporation of such
corporation and any predecessor corporation of any such corporation
shall not exceed $100,000; provided, however, that all or any portion
of a stock option which cannot be exercised because of such limitation
shall be treated as a nonqualified option.
The maximum number of shares covered by all grants or awards
in any fiscal year of the Company to any participant shall not exceed
350,000 (subject to adjustment and substitution as set forth in
Section 8).
(b) On the date on which the Board appoints, or the
shareholders of the Company elect, a person who is not an employee of
the Company as a member of the Board for the first time, such director
shall be awarded a non-qualified option under this Plan to purchase
5,000 Common Shares. Immediately after the completion of each annual
meeting of the shareholders of the Company, each such director shall
be awarded a non-qualified option to purchase 1,000 Common Shares.
Such options shall have an exercise price per share equal to the fair
market value of the shares of the Company on the date of such award.
Except as otherwise specifically provided in this Section 5 (b), the
terms of this Plan, including the vesting provisions of Section 6(e),
shall apply to all options granted pursuant to this Section 5(b).
This Section 5(b) shall not be amended more than once every six
months, other than to comport with changes in the Code, the Employee
Retirement Income Security Act, or the rules thereunder.
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<PAGE> 3
(c) If a grantee of a stock option, restricted share or
performance unit engages in the operation or management of a business
(whether as owner, partner, officer, director, employee or otherwise
and whether during or after termination of employment) which is in
competition with the Company or any of its Subsidiaries, the Committee
may immediately terminate all outstanding stock options held by the
grantee, declare forfeited all restricted shares or restricted share
units held by the grantee as to which the restrictions have not yet
lapsed and terminate all outstanding performance unit awards held by
the grantee for which the applicable Performance Period has not been
completed; provided, however, that this sentence shall not apply if
the exercise period of a stock option following termination of
employment has been extended as provided in Section 9(c), if the lapse
of the restrictions applicable to restricted shares or restricted
share units has been accelerated as provided in Section 9(d), or if a
performance unit has been deemed to have been earned as provided in
Section 9 (e). Whether a grantee has engaged in the operation or
management of a business which is in competition with the Company or
any of its Subsidiaries shall be determined by the Committee in its
discretion, and any such determination shall be final and binding.
6. TERMS AND CONDITIONS OF STOCK OPTIONS.
Stock options granted under the Plan shall be subject to the following
terms and conditions:
(a) The purchase price at which each stock option may be
exercised (the "option price") shall not be less than one hundred
percent (100%) of the fair market value per share of the Common Shares
covered by the stock option on the date of grant; provided, however,
that in the case of an incentive stock option granted to an employee
who, immediately prior to such grant, owns stock possessing more than
ten percent (10%) of the total combined voting power of all classes of
stock of the Company or a Subsidiary (a "Ten Percent Employee"), the
option price shall not be less than one hundred ten percent (110%) of
such fair market value on the date of grant. For purposes of this
Section 6(a), an individual (i) shall be considered as owning not only
shares of stock owned individually but also all shares of stock that
are at the time owned, directly or indirectly. by or for the spouse,
ancestors, lineal descendants and brothers and sisters (whether by the
whole or half blood) of such individual and (ii) shall be considered
as owning proportionately any shares owned, directly or indirectly, by
or for any company, partnership, estate or trust in which such
individual is a shareholder, partner or beneficiary.
(b) The option price for each non-qualified stock option
shall be determined by the Committee but may not be less than 25%
(twenty-five percent) of the fair market value of the Common Shares on
the date the stock option is granted.
(c) The option price for each stock option shall be paid
in full upon exercise and shall be payable in cash in United States
dollars (including check, bank draft or
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<PAGE> 4
money order), which may include cash forwarded through a broker or
other agent-sponsored exercise or financing program; provided,
however, that in lieu of such cash the person exercising the stock
option may pay the option price in whole or in part by delivering to
the Company Common Shares having a fair market value on the date of
exercise of the stock option equal to the option price for the shares
being purchased; except that (i) any portion of the option price
representing a fraction of a share shall in any event be paid in cash
and (ii) no Common Shares which have been held for less than six
months may be delivered in payment of the option price of a stock
option. Notwithstanding any procedure of a broker or other
agent-sponsored exercise or financing program, if the option price is
paid in cash, the exercise of the stock option shall not be deemed to
occur and no Common Shares will be issued until the Company has
received full payment in cash (including check, bank draft or money
order) for the option price from the broker or other agent. The date
of exercise of a stock option shall be determined under procedures
established by the Committee, and as of the date of exercise the
person exercising the stock option shall be considered for all
purposes to be the owner of the shares with respect to which the stock
option has been exercised. Payment of the option price with shares
shall not increase the number of Common Shares available for issuance
under the Plan.
(d) No stock option shall be exercisable during the first
six months of its term, except that this limitation on exercise shall
not apply if Section 9(b) becomes applicable. No stock option shall be
exercisable after the expiration of ten years (five years in the case
of an incentive stock option granted to a Ten Percent Employee) from
the date of grant. To the extent it is exercisable, a stock option may
be exercised at any time in whole or in part.
(e) The Committee shall have the power to set the time or
times within which each option shall be exercisable, and to accelerate
the time or times of exercise. Unless the stock option agreement
otherwise provides, the option shall become exercisable on a
cumulative basis as to 33-1/3% of the total number of shares covered
thereby on each of the first, second, and third anniversary dates of
the date of grant of the option.
(f) No stock option shall be transferable by the grantee
otherwise than by will, or if the grantee dies intestate, by the laws
of descent and distribution of the state of domicile of the grantee at
the time of death. All stock options shall be exercisable during the
lifetime of the grantee only by the grantee.
(g) Unless the Committee, in its discretion, shall
otherwise determine:
(i) If the employment or directorship of a
grantee who is not disabled within the meaning of Section 422
(c) (6) of the Code (a "Disabled Grantee") is voluntarily
terminated with the consent of the Company or a Subsidiary or
a grantee retires under any retirement plan of the Company or
a Subsidiary, any then outstanding incentive stock option held
by such grantee shall be exercisable
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<PAGE> 5
by the grantee (but only to the extent exercisable by the
grantee immediately prior to such termination) at any time
prior to the expiration date of such incentive stock option or
within three months after the date of such termination,
whichever is the shorter period;
(ii) If the employment or directorship of a
grantee who is not a Disabled Grantee is voluntarily
terminated with the consent of the Company or a Subsidiary or
a grantee retires under any retirement plan of the Company or
a Subsidiary, any then outstanding non-qualified stock option
held by such grantee shall be exercisable by the grantee (but
only to the extent exercisable by the grantee immediately
prior to such termination) at any time prior to the expiration
date of such nonstatutory stock option or within one year
after the date of termination of employment, whichever is the
shorter period;
(iii) If the employment or directorship of a
grantee who is a Disabled Grantee is voluntarily terminated
with the consent of the Company or a Subsidiary, any then
outstanding stock option held by such grantee shall be
exercisable by the grantee in full (whether or not so
exercisable by the grantee immediately prior to such
termination) by the grantee at any time prior to the
expiration date of such stock option or within one year after
the date of such termination, whichever is the shorter period;
(iv) Following the death of a grantee during
employment or while serving as a director, any outstanding
stock option held by the grantee at the time of death shall be
exercisable in full (whether or not so exercisable by the
grantee immediately prior to the death of the grantee) by the
person entitled to do so under the will of the grantee, or, if
the grantee shall fail to make testamentary disposition of the
stock option or shall die intestate, by the legal
representative of the grantee at any time prior to the
expiration date of such stock option or within one year after
the date of death, whichever is the shorter period;
(v) Following the death of a grantee after
termination of employment or his or her directorship during a
period within which a stock option is exercisable, any
outstanding stock option held by the grantee at the time of
death shall be exercisable by such person entitled to do so
under the will of the grantee or by such legal representative
(but only to the extent the stock option was exercisable by
the grantee immediately prior to the death of the grantee) at
any time prior to the expiration date of such stock option or
within one year after the date of death, whichever is the
shorter period; and
(vi) Unless the exercise period of a stock option
following termination of employment or directorship has been
extended as provided in Section 9(c), if the employment or
directorship of a grantee terminates for any reason other than
voluntary termination with the consent of the Company or a
Subsidiary,
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<PAGE> 6
retirement under any retirement plan of the Company or a
Subsidiary or death, all outstanding stock options held by the
grantee at the time of such termination shall automatically
terminate.
Whether termination of employment or directorship is a voluntary
termination with the consent of the Company or a Subsidiary and whether a
grantee is a Disabled Grantee shall be determined in each case by the Committee
in its discretion and any such determination by the Committee shall be final
and binding.
(h) All stock options shall be confirmed by an agreement,
which shall be executed on behalf of the Company by an executive
officer authorized by the Committee and by the grantee.
(i) The term "fair market value" for all purposes of the
Plan shall mean the market price of the Common Shares, determined by
the Committee as follows:
(i) If the Common Shares are traded on a stock
exchange, then the Fair Market Value shall be equal to the
closing price reported by the applicable
composite-transactions report for such date;
(ii) If the Common Shares are traded in the Nasdaq
Stock Market and is classified as a national market issue,
then the Fair Market Value shall be equal to the
last-transaction price quoted by the Nasdaq National Market
system for such date;
(iii) If the Common Shares are traded in the Nasdaq
Stock Market, but is not classified as a national market
issue, then the Fair Market Value shall be equal to the mean
between the last reported representative bid and asked prices
quoted by the Nasdaq system for such date; and
(iv) If none of the foregoing provisions is
applicable, then the Fair Market Value shall be determined by
the Committee in good faith on such basis as it deems
appropriate.
(j) The obligation of the Company to issue Common Shares
under the Plan shall be subject to (i) the effectiveness of a
registration statement under the Securities Act of 1933, as amended,
with respect to such shares, if deemed necessary or appropriate by
counsel for the Company, (ii) the condition that the shares shall have
been listed (or authorized for listing upon official notice of
issuance) upon each stock exchange, if any, on which the Common Shares
may then be listed and (iii) all other applicable laws, regulations,
rules and orders which may then be in effect.
Subject to the foregoing provisions of this Section and the other
provisions of the Plan, any stock option granted under the Plan may be
exercised at such times and in such amounts and
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<PAGE> 7
be subject to such restrictions and other terms and conditions, if any, as
shall be determined, in its discretion, by the Committee and set forth in the
agreement referred to in Section 6(j), or an amendment thereto.
7. TERMS AND CONDITIONS OF RESTRICTED SHARE, RESTRICTED SHARE UNIT,
PERFORMANCE UNIT AND BONUS SHARE AWARDS.
(a) Restricted Shares and Units. Restricted share or
restricted share unit awards shall be evidenced by a written agreement
in the form prescribed by the Committee in its discretion, which shall
set forth the number of restricted Common Shares or restricted share
units entitling the holder to receive Common Shares awarded, the
restrictions imposed thereon (including, without limitation,
restrictions on the right of the grantee to sell, assign, transfer or
encumber such shares or units while such shares or units are subject
to other restrictions imposed under this Section 7), the duration of
such restrictions, events (which may, in the discretion of the
Committee, include performance-based events) the occurrence of which
would cause a forfeiture of restricted shares or restricted share
units and such other terms and conditions as the Committee in its
discretion deems appropriate. Restricted share or restricted share
unit awards shall be effective only upon execution of the applicable
restricted share or restricted share unit agreement on behalf of the
Company by the Chief Executive Officer (if other than the President),
the President or any Vice President, and by the grantee.
Restricted shares or restricted share units may be issued for
no consideration other than for services to be rendered or for such
consideration as shall be determined at the time of award by the
Committee.
Except as otherwise specified by the Committee at the time of
award of restricted shares or restricted share units, restricted
shares or restricted share units issued shall vest (i.e., become
non-forfeitable,) as follows: 33 1/3% on the date of the first
anniversary of the date of issuance of the restricted shares or
restricted share units and an additional 33 1/3% on each anniversary
date thereafter. If prior to full vesting of the restricted shares or
restricted share units the employment of the holder thereof is
voluntarily terminated with the consent of the Company or Subsidiary
or the holder retires under any retirement plan of the Company or a
Subsidiary or dies during employment, the Committee may in its
absolute discretion determine to vest all or any part of the
restricted shares or restricted share units except as otherwise
provided in Section 9(e). If the employment of the holder of
restricted shares or
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<PAGE> 8
restricted share units terminates for any reason other than voluntary
termination with the consent of the Company or a Subsidiary,
retirement under any retirement plan of the Company or a Subsidiary or
death, all unvested restricted shares or restricted share units shall
be forfeited. Whether the termination of employment is a voluntary
termination with the consent of the Company or a Subsidiary shall be
determined by the Committee in its discretion, and a determination by
the Committee on any matter with respect to restricted shares or
restricted share units shall be final and binding on both the Company
and the holder of restricted shares or restricted share units.
Following a restricted share award and prior to the lapse or
termination of the applicable restrictions, the Committee shall
deposit share certificates for such restricted shares in escrow (which
may be an escrow in the custody of an officer of the Company). Upon
the lapse or termination of the applicable restrictions (and not
before such time), the grantee shall be issued or transferred share
certificates for such restricted shares. From the date a restricted
share award is effective, the grantee shall be a shareholder with
respect to all the shares represented by such certificates and shall
have all the rights of a shareholder with respect to all such shares,
including the right to vote such shares and to receive all dividends
and other distributions paid with respect to such shares, subject only
to the restrictions imposed by the Committee. The grantee of
restricted share units shall not have any rights as a shareholder
until the delivery to the grantee of shares on lapse of the
restrictions imposed.
(b) Performance Units. The Committee may award
performance units which shall be earned by an awardee based on the
level of performance over a specified period of time by the Company, a
Subsidiary or Subsidiaries, any branch, department or other portion
thereof or the awardee individually, as determined by the Committee.
For the purposes of the grant of performance units, the following
definitions shall apply:
(i) "Performance unit" shall mean an award,
expressed in dollars or Common Shares, granted to an awardee
with respect to a Performance Period. Awards expressed in
dollars may be established as fixed dollar amounts, as a
percentage of salary, as a percentage of a pool based on
earnings of the Company, a Subsidiary or Subsidiaries or any
branch, department or other portion thereof or in any other
manner determined by the Committee in its discretion, provided
that the amount thereof shall be capable of being determined
as a fixed dollar amount as of the close of the Performance
Period.
(ii) "Performance Period" shall mean an accounting
period of the Company or a Subsidiary of not less than one
year, as determined by the Committee in its discretion.
(iii) "Performance Target" shall mean that level of
performance established by the Committee which must be met in
order for the performance unit to be fully earned. The
Performance Target may be expressed in terms of earnings per
share, return on assets, asset growth, ratio of capital to
assets or such other level or levels of accomplishment by the
Company, a Subsidiary or Subsidiaries, any branch, department
or other portion thereof or the awardee individually as may be
established or revised from time to time by the Committee.
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(iv) "Minimum Target" shall mean a minimal level
of performance established by the Committee which must be met
before any part of the performance unit is earned. The
Minimum Target may be the same as or less than the Performance
Target in the discretion of the Committee.
An awardee shall earn the performance unit in full by meeting
the Performance Target for the Performance Period. If the Minimum
Target has not been attained at the end of the Performance Period, no
part of the performance unit shall have been earned by the awardee.
If the Minimum Target is attained but the Performance Target is not
attained, the portion of the performance unit earned by the awardee
shall be determined on the basis of a formula established by the
Committee.
Payment of earned performance units shall be made to awardees
following the close of the Performance Period as soon as practicable
after the time the amount payable is determined by the Committee.
Payment in respect of earned performance units, whether expressed in
dollars or shares, may be made in cash, in Common Shares, or partly in
cash and partly in Common Shares, as determined by the Committee at
the time of payment. For this purpose, performance units expressed in
dollars shall be converted to shares, and performance units expressed
in shares shall be converted to dollars, based on the fair market
value of the Common Shares, as of the date the amount payable is
determined by the Committee.
If prior to the close of the Performance Period the awardee of
performance units is voluntarily terminated with the consent of the
Company or a Subsidiary or the awardee retires under any retirement
plan of the Company or a Subsidiary or the awardee dies during
employment, the Committee may in its absolute discretion determine to
pay all or any part of the performance unit based upon the extent to
which the Committee determines the Performance Target or Minimum
Target has been achieved as of the date of termination of employment,
retirement or death, the period of time remaining until the close of
the Performance Period and/or such other factors as the Committee may
deem relevant. If the Committee in its discretion determines that all
or any part of the performance unit shall be paid, payment shall be
made to the awardee or his or her estate as promptly as practicable
following such determination and may be made in cash, in Common
Shares, or partly in cash and partly in Common Shares, as determined
by the Committee at the time of payment. For this purpose,
performance units expressed in dollars shall be converted to shares,
and performance units expressed in shares shall be converted to
dollars, based on the fair market value of the Common Shares as of the
date the amount payable is determined by the Committee.
Except as otherwise provided in Section 9(e), if the
employment of an awardee of performance units terminates prior to the
close of a Performance Period for any reason other than voluntary
termination with the consent of the Company or a Subsidiary or
retirement under any retirement plan of the Company or a Subsidiary or
death, the performance units of the awardee shall be deemed not to
have been earned, and no
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<PAGE> 10
portion of such performance units may be paid. Whether termination of
employment is a voluntary termination with the consent of the Company
or a Subsidiary shall be determined, in its discretion, by the
Committee. Any determination by the Committee on any matter with
respect to performance units shall be final and binding on both the
Company and the awardee.
Performance unit awards shall be evidenced by a written
agreement in the form prescribed by the Committee which shall set
forth the amount or manner of determining the amount of the
performance unit, the Performance Period, the Performance Target and
any Minimum Target and such other terms and conditions as the
Committee in its discretion deems appropriate. Performance unit
awards shall be effective only upon execution of the applicable
performance unit agreement on behalf of the Company by the Chief
Executive Officer (if other than the President), the President or any
Vice President, and by the awardee.
(c) Bonus Shares. The Committee shall have the authority
in its discretion to award bonus Common Shares to eligible employees
from time to time in recognition of the contribution of the awardee to
the performance of the Company, a Subsidiary or Subsidiaries, or any
branch, department or other portion thereof, in recognition of the
awardee's individual performance or on the basis of such other factors
as the Committee may deem relevant.
8. ADJUSTMENT AND SUBSTITUTION OF SHARES.
If a dividend or other distribution shall be declared upon the Common
Shares payable in Common Shares, the number of Common Shares then subject to
any outstanding stock options, restricted share units or performance unit
awards and the number of Common Shares which may be issued under the Plan but
are not then subject to outstanding stock options or awards shall be adjusted
by adding thereto the number of Common Shares which would have been
distributable thereon if such shares had been outstanding on the date fixed for
determining the shareholders entitled to receive such stock dividend or
distribution. Common Shares so distributed with respect to any restricted
shares held in escrow shall be held by the Company in escrow and shall be
subject to the same restrictions as are applicable to the restricted shares on
which they were distributed.
If the outstanding Common Shares shall be changed into or exchangeable
for a different number or kind of shares of stock or other securities of the
Company or another company, whether through reorganization, reclassification,
recapitalization, stock split-up, combination of shares, merger or
consolidation, then there shall be substituted for each share of the Common
Shares subject to any then outstanding stock option, restricted share unit or
performance unit award, and for each share of the Common Shares which may be
issued under the Plan but which is not then subject to any outstanding stock
option or award, the number and kind of shares of stock or other securities
into which each outstanding share of the Common Shares shall be so changed or
for which each such share shall be exchangeable. Unless otherwise determined
by
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<PAGE> 11
the Committee in its discretion, any such stock or securities, as well as any
cash or other property, into or for which any restricted shares held in escrow
shall be changed or exchangeable in any such transaction shall also be held by
the Company in escrow and shall be subject to the same restrictions as are
applicable to the restricted shares in respect of which such stock, securities,
cash or other property was issued or distributed.
In case of any adjustment or substitution as provided for in this
Section 8, the aggregate option price for all shares subject to each then
outstanding stock option prior to such adjustment or substitution shall be the
aggregate option price for all shares of stock or other securities (including
any fraction) to which such shares shall have been adjusted or which shall have
been substituted for such shares. Any new option price per share shall be
carried to at least three decimal places with the last decimal place rounded
upwards to the nearest whole number.
No adjustment or substitution provided for in this Section 8 shall
require the Company to issue or sell a fraction of a share or other security.
Accordingly, all fractional shares or other securities which result from any
such adjustment or substitution shall be eliminated and not carried forward to
any subsequent adjustment or substitution. Owners of restricted shares held in
escrow shall be treated in the same manner as owners of Common Shares not held
in escrow with respect to fractional shares created by an adjustment or
substitution of shares, except that, unless otherwise determined by the
Committee in its discretion, any cash or other property paid in lieu of a
fractional share shall be subject to restrictions similar to those applicable
to the restricted shares exchanged therefor.
If any such adjustment or substitution provided for in this Section 8
requires the approval of shareholders in order to enable the Company to grant
incentive stock options, then no such adjustment or substitution shall be made
without the required shareholder approval. Notwithstanding the foregoing, in
the case of incentive stock options, if the effect of any such adjustment or
substitution would be to cause the stock option to fail to continue to qualify
as an incentive stock option or to cause a modification, extension or renewal
of such stock option within the meaning of Section 424 of the Code, the
Committee may elect that such adjustment or substitution not be made but rather
shall use reasonable efforts to effect such other adjustment of each then
outstanding stock option as the Committee, in its discretion, shall deem
equitable and which will not result in any disqualification, modification,
extension or renewal (within the meaning of Section 424 of the Code) of such
incentive stock option.
9. ADDITIONAL RIGHTS IN CERTAIN EVENTS.
(a) Definitions. For purposes of this Section 9, the
following terms shall have the following meanings:
(i) The term "Person" shall be used as that term
is used in Sections 13(d) and 14(d) of the 1934 Act.
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<PAGE> 12
(ii) Beneficial ownership shall be determined as
provided in Rule 13d-3 under the 1934 Act as in effect on the
effective date of the Plan.
(iii) "Voting Shares" shall mean all securities of
a company entitling the holders thereof to vote in an annual
election of Directors (without consideration of the rights of
any class of stock other than the Common Shares to elect
Directors by a separate class vote); and a specified
percentage of "Voting Power" of a company shall mean such
number of the Voting Shares as shall enable the holders
thereof to cast such percentage of all the votes which could
be cast in an annual election of directors (without
consideration of the rights of any class of stock other than
the Common Shares to elect Directors by a separate class
vote).
(iv) "Tender Offer" shall mean a tender offer or
exchange offer to acquire securities of the Company (other
than such an offer made by the Company or any Subsidiary),
whether or not such offer is approved or opposed by the Board.
(v) "Section 9 Event" shall mean the date upon
which any of the following events occurs:
(A) The Company acquires actual
knowledge that any Person has acquired the Beneficial
Ownership, directly or indirectly, of securities of
the Company entitling such Person to 20% or more of
the Voting Power of the Company, other than the
Company, a Subsidiary or any employee benefit plan(s)
sponsored by the Company, or a Person approved by the
Board that has acquired 20% or more but less than 50%
of the Voting Power of the Company; or
(B) A Tender Offer is made to acquire
securities of the Company entitling the holders
thereof to 20% or more of the Voting Power of the
Company; or
(C) A solicitation subject to Rule
14a-11 under the 1934 Act (or any successor Rule)
relating to the election or removal of 50% or more of
the members of any class of the Board shall be made
by any person other than the Company; or
(D) The shareholders of the Company
shall approve a merger, consolidation, share
exchange, division or sale or other disposition of
assets of the Company as a result of which the
shareholders of the Company immediately prior to such
transaction shall not hold, directly or indirectly,
immediately following such transaction a majority of
the Voting Power of (i) in the case of a merger or
consolidation, the surviving or resulting
corporation, (ii) in the case of a share exchange,
the acquiring
12
<PAGE> 13
corporation or (iii) in the case of a division or a
sale or other disposition of assets, each surviving,
resulting or acquiring corporation which, immediately
following the transaction, holds more than 20% of the
consolidated assets of the Company immediately prior
to the transaction;
provided, however, that (i) if securities beneficially owned
by a grantee are included in determining the Beneficial
Ownership of a Person referred to in Section 9(a)(v)(A), (ii)
a grantee is required to be named pursuant to Item 2 of the
Schedule 14D-I (or any similar successor filing requirement)
required to be filed by the bidder making a Tender Offer
referred to in Section 9(a)(v)(B), or (iii) if a grantee is a
"participant" as defined in 14a-11 under the 1934 Act (or any
successor Rule) in a solicitation (other than a solicitation
by the Company) referred to in Section 9(a)(v)(C), then no
Section 9 Event with respect to such grantee shall be deemed
to have occurred by reason of such event.
(b) Acceleration of the Exercise Date of Stock Options.
Unless the agreement referred to in Section 6 (g), or an amendment
thereto, shall otherwise provide, notwithstanding any other provision
contained in the Plan, in case any "Section 9 Event" occurs all
outstanding stock options (other than those held by a person referred
to in the proviso to Section 9(a) (v) ) shall become immediately and
fully exercisable whether or not otherwise exercisable by their terms.
(c) Extension of the Expiration Date of Stock Options.
Unless the agreement referred to in Section 6(h), or an amendment
thereto, shall otherwise provide, notwithstanding any other provision
contained in the Plan, all stock options held by a grantee (other than
a grantee referred to in the proviso to Section 9(a)(v)) whose
employment with the Company or a Subsidiary terminates within one year
of any Section 9 Event for any reason other than voluntary termination
with the consent of the Company or a Subsidiary, retirement under any
retirement plan of the Company or a Subsidiary or death shall be
exercisable for a period of three months from the date of such
termination of employment, but in no event after the expiration date
of the stock option.
(d) Lapse of Restrictions on Restricted Share or
Restricted Share Unit Awards. If any "Section 9 Event" occurs prior to
the scheduled lapse of all restrictions applicable to restricted share
or restricted share unit awards under the Plan (other than those held
by a person referred to in the proviso to Section 9(a) (v)), all such
restrictions shall lapse upon the occurrence of any such "Section 9
Event" regardless of the scheduled lapse of such restrictions.
(e) Payment of Performance Units. If any "Section 9
Event" occurs prior to the end of any Performance Period, all
performance units awarded with respect to such Performance Period
(other than those held by a person referred to in the proviso to
Section 9(a)(v)) shall be deemed to have been fully earned as of the
date of such Section 9 Event, regardless of the attainment or
nonattainment of the Performance Target or any
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<PAGE> 14
Minimum Target, and shall be paid to the awardees thereof as promptly
as practicable thereafter. If the performance unit is not expressed
as a fixed amount in dollars or shares, the Committee may provide in
the performance unit agreement for the amount to be paid in the case
of a Section 9 Event.
10. EFFECT OF THE PLAN ON THE RIGHTS OF EMPLOYEES AND EMPLOYER.
Neither the adoption of the Plan nor any action of the Board or the
Committee pursuant to the Plan shall be deemed to give any employee any right
to be granted a stock option or to be awarded restricted shares, restricted
share units, performance units or bonus shares under the Plan. Nothing in the
Plan, in any stock option, in any restricted share, restricted share unit,
performance unit or bonus share award under the Plan or in any agreement
providing for any of the foregoing shall confer any right to any employee to
continue in the employ of the Company or any Subsidiary or interfere in any way
with the rights of the Company or any Subsidiary to terminate the employment of
any employee at any time.
11. AMENDMENT.
The right to alter and amend the Plan at any time and from time to
time and the right to revoke or terminate the Plan are hereby specifically
reserved to the Board; provided that no such alteration or amendment of the
Plan shall, without shareholder approval (i) increase by more than 10% the
total number of shares which may be issued under the Plan to persons subject to
Section 16 under the 1934 Act ("Section 16 Persons"), (ii) materially increase
the benefits accruing under the Plan to Section 16 Persons, (iii) materially
modify the requirements as to eligibility for participation in the Plan by
Section 16 Persons, (iv) make any changes in the class of employees eligible to
receive incentive stock options under the Plan, or (v) increase the number of
shares with respect to which incentive stock options may be granted under the
Plan; approval of the Plan by the shareholders of the Company pursuant to
Section 12 shall also be deemed to constitute approval of any amendments to
Section 6(f) that are designed to take advantage of changes in income tax or
securities laws or regulations adopted for the purpose of reducing or
eliminating restrictions on transferability of options. No alteration,
amendment, revocation or termination of the Plan shall, without the written
consent of the holder of a stock option, restricted shares, restricted share
units, performance units or bonus shares theretofore awarded under the Plan,
adversely affect the rights of such holder with respect thereto.
12. EFFECTIVE DATE AND DURATION OF PLAN.
The effective date and date of adoption of the Plan shall be December
13, 1995, the date of approval of the Plan by the Shareholders. No stock
option may be granted, and no restricted shares, restricted share units, bonus
shares or performance units payable in performance shares may be awarded under
the Plan subsequent to December 13, 2005.
14
<PAGE> 15
13. INDEMNIFICATION.
In addition to such other rights of indemnification as they may have
as directors, the members of the Committee administering the Plan shall be
indemnified by the Company against the reasonable expenses, including
attorneys' fees actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any rights
granted thereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding that such member is liable for negligence or misconduct in
the performance of such member's duties; provided that within 60 days after
institution of any such action, suit or proceeding, the member shall in writing
offer the Company the opportunity, at its own expense, to handle and defend the
same.
14. APPROVAL OF PLAN; EFFECTIVE DATE.
The Plan was adopted by the Board of Directors on October 18, 1995 and
approved by the Shareholders and became effective on December 13, 1995.
15
<PAGE> 1
EXHIBIT 10.40
LICENSE AGREEMENT BETWEEN
DIGITAL EQUIPMENT CORPORATION
and
MOSAIC INFORMATION TECHNOLOGIES
for
VIDEO CONFERENCING TECHNOLOGY
AGREEMENT #: QR-CLDD2-22
EFFECTIVE DATE: June 13, 1996
<PAGE> 2
TABLE OF CONTENTS
INTRODUCTION
ARTICLE 1: DEFINITIONS
ARTICLE 2: TITLE AND LICENSE GRANTS
ARTICLE 3: CONFIDENTIALITY
ARTICLE 4: TECHNICAL ASSISTANCE
ARTICLE 5: LICENSE FEE PAYMENT
ARTICLE 6: WARRANTIES AND LIMITATION OF LIABILITY
ARTICLE 7: INDEMNITY
ARTICLE 8: TERM AND TERMINATION
ARTICLE 9: PUBLICITY
ARTICLE 10: GENERAL
APPENDIX A: DESCRIPTION OF LICENSED TECHNOLOGY
APPENDIX B: DESCRIPTION OF MOSAIC PRODUCT(S)
APPENDIX C: LEGAL REQUIREMENTS FOR END USER AGREEMENTS
<PAGE> 3
License Agreement
between
DIGITAL EQUIPMENT CORPORATION
and
MOSAIC INFORMATION TECHNOLOGIES
This Agreement, dated June 13, 1996 (the "Effective Date") is entered into by
and between Digital Equipment Corporation, a Massachusetts corporation with
principal offices at 111 Powdermill Road, Maynard, Massachusetts, 01754
("DIGITAL"), and Mosaic Information Technologies, with principal offices at 645
Fifth Avenue, 17th Floor, New York, NY 10022 ("MOSAIC").
WHEREAS, DIGITAL has developed a proprietary video conferencing technology, and
is prepared to grant a license to such technology;
WHEREAS, MOSAIC desires to obtain from DIGITAL a license to develop products
incorporating such technology or derivatives thereof.
NOW THEREFORE, in consideration of the mutual promises and covenants contained
herein, DIGITAL and MOSAIC agree as follows:
ARTICLE 1 - DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set
forth below:
1.01 DIGITAL'S INTELLECTUAL PROPERTY RIGHTS shall mean DIGITAL's rights in
its Spinblaster board design and DECSpin software including:
1.01.01 All rights, title interests in all Letters Patent, including
any re-issue, division, continuation or continuation-in-part
applications throughout the world now or hereafter filed;
1.01.02 All rights, title and interests in all trade secrets, and all
trade secret rights arising under this common law, state law,
federal law and laws of foreign countries;
1.01.03 All rights, title and interests in all mask work rights, all
copyrights and all other literary property and author rights,
whether or not copyrightable, throughout the world; and,
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<PAGE> 4
1.01.04 All rights, title and interests in all know-how and show-how
whether or not protected by patent, copyright or trade
secret.
1.02 DECSpin SOFTWARE shall mean the computer program defined in Appendix A.
1.03 OBJECT FILES shall mean the object code version of the DECSpin SOFTWARE.
1.04 SOURCE FILES shall mean the source code version of the DECSpin SOFTWARE.
1.05 SPECIFICATION shall mean the specification of the DECSpin SOFTWARE
defined in Appendix A.
1.06 SPINBLASTER BOARD DESIGN shall mean the DIGITAL design (DIGITAL drawing
number AV320), all other existing drawings, specifications, circuit
schematics, logic diagrams, parts lists and process outlines relating
thereto and all board products, such as a PCMCIA board, derived
therefrom.
1.07 LICENSED TECHNOLOGY shall mean the DECSpin SOFTWARE, any derivations
thereof, SPECIFICATION, and SPINBLASTER BOARD DESIGN, taken in whole or
in part.
1.08 SOFTWARE shall mean all software and documentation developed by MOSAIC
that incorporates information or any code copied or derived from the
LICENSED TECHNOLOGY.
1.09 HARDWARE shall mean all hardware products developed by MOSAIC that
incorporate any SPINBLASTER BOARD DESIGN technology.
1.10 MOSAIC PRODUCT(S) shall mean video conferencing products developed by
MOSAIC incorporating, in whole or in part, SOFTWARE in executable form
only and/or HARDWARE, including but not limited to the products
specifically identified in APPENDIX B.
1.11 END USER AGREEMENT shall mean an agreement between MOSAIC and an end
user, which shall incorporate all of the requirements listed in Appendix
C. An end user is a third party authorized by MOSAIC to use MOSAIC
PRODUCTS for its internal business, with no right to further distribute
MOSAIC products.
1.12 MOSAIC INTELLECTUAL PROPERTY RIGHTS shall mean MOSAIC's rights in
SOFTWARE and HARDWARE, including:
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<PAGE> 5
1.12.01 All rights, title interests in all Letters Patent, including
any re-issue, division continuation or continuation-in-part
applications throughout the world now or hereafter filed;
1.12.02 All rights, title and interests in all trade secrets, and all
trade secret rights arising under this common law, state law,
federal law and laws of foreign countries;
1.12.03 All rights, title and interests in all mask work rights, all
copyrights and all other literary property and author rights,
whether or not copyrightable, throughout the world; and,
1.12.04 All rights, title and interests in all know-how and show-how
whether or not protected by patent, copyright or trade
secret.
ARTICLE 2 - TITLE AND LICENSE GRANTS
2.01 Subject to the license granted to MOSAIC as expressly set forth in this
Article 2, DIGITAL owns and shall retain all rights, title and interests
in DIGITAL's INTELLECTUAL PROPERTY RIGHTS, and the LICENSED TECHNOLOGY.
2.02 Subject to the payment of the fees set forth in Article 5, DIGITAL
grants to MOSAIC a non-exclusive, non-transferable, license under
DIGITAL's INTELLECTUAL PROPERTY RIGHTS, to:
2.02.01 modify SOURCE FILES for the sole purpose of developing
SOFTWARE for use on or with MOSAIC PRODUCT(S);
2.02.02 merge the modified or unmodified SOURCE FILES into other
software for the sole purpose of developing SOFTWARE for use
on or with MOSAIC PRODUCTS.
2.02.03 use and copy the OBJECT FILES for the sole purpose of
developing SOFTWARE for use on or with MOSAIC PRODUCT(S);
2.02.04 copy SOFTWARE in executable code form only, solely to
manufacture MOSAIC PRODUCT(S);
2.02.05 copy into MOSAIC's end user documentation only those parts of
SPECIFICATION that are necessary for the end user to
effectively
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<PAGE> 6
use MOSAIC PRODUCTS and to distribute such user
documentation.
2.03 Subject to the payment of the fees set forth in Article 5, DIGITAL
grants to MOSAIC an exclusive, non-transferable license under DIGITAL'S
copyright, trade secret and know-how rights only to:
2.03.01 use, adapt and modify SPINBLASTER BOARD DESIGN for the sole
purpose of developing HARDWARE for use with MOSAIC PRODUCTS.
2.03.02 manufacture, directly or through contractors, HARDWARE solely
for use with MOSAIC PRODUCTS worldwide;
2.03.03 sell, rent, and/or lease HARDWARE solely for use with MOSAIC
PRODUCTS worldwide.
The license granted in this Article 2.03 of this License Agreement is
subject to a reserved nonexclusive license in DIGITAL to use SPINBLASTER
BOARD DESIGN for DIGITAL's own internal use.
2.04 Subject to the payment of the fees set forth in Article 5, DIGITAL
grants to MOSAIC a non-exclusive, non-transferable, license under
DIGITAL's patent rights to:
2.4.01 use, SPINBLASTER BOARD DESIGN for the sole purpose of
developing HARDWARE;
2.4.02 make, directly or through contractors, HARDWARE worldwide;
2.4.03 sell, HARDWARE worldwide.
2.05 Subject to the payment of the fees set forth in Article 5, DIGITAL
grants to MOSAIC a non-exclusive, non-transferable, license under
DIGITAL's INTELLECTUAL PROPERTY RIGHTS only to:
2.05.01 distribute MOSAIC PRODUCT(S) worldwide directly to end users;
2.05.02 distribute MOSAIC PRODUCT(S) worldwide indirectly through
distributors, provided each of such distributors has entered
into a Distribution Agreement with MOSAIC.
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<PAGE> 7
2.06 MOSAIC grants DIGITAL a non-exclusive, worldwide, royalty free license,
under all MOSAIC's INTELLECTUAL PROPERTY RIGHTS to make, have made, and
use for DIGITAL's own internal use all improvements, modifications and
enhancements of SOFTWARE and all products derived from the SOFTWARE.
MOSAIC shall provide to DIGITAL, on a mutually agreed upon medium, all
improvements, modifications and enhancements of SOFTWARE within fifteen
(15) days after the time such improvements, modifications and
enhancements are incorporated into MOSAIC PRODUCT(S) or are otherwise
available for transfer to DIGITAL.
2.07 Mosaic shall notify DIGITAL of every new MOSAIC PRODUCTS at least thirty
(30) days prior to first customer shipment, so it can be added to
Exhibit B.
ARTICLE 3 - CONFIDENTIALITY
3.01 MOSAIC agrees to maintain the LICENSED TECHNOLOGY confidential and not
to disclose the LICENSED TECHNOLOGY to any third party, except as
provided herein, without the prior written consent of DIGITAL, nor use
the LICENSED TECHNOLOGY for any purposes other than as authorized
herein.
3.02 MOSAIC shall not be obligated to maintain confidential that part of the
LICENSED TECHNOLOGY which:
3.02.01 is or becomes known to the public, other than by breach of an
agreement;
3.02.02 is communicated by DIGITAL to a third party free of any
obligation of confidence;
3.02.03 is information which MOSAIC can demonstrate was developed by
it independently; or
3.02.04 is information that was in MOSAIC's possession without
confidentiality restriction prior to disclosure by DIGITAL.
3.03 MOSAIC shall provide access to LICENSED TECHNOLOGY to its employees or
contractors only on a need-to-know basis in order to exercise its
license hereunder, and shall require such employees or contractors to
comply with the confidentiality provisions of this Article.
3.04 MOSAIC shall keep clear and accurate records with respect to the type,
serial number and location of each designated computer on which a
complete or
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<PAGE> 8
partial copy of the SOURCE FILES are installed and shall make such
records available to DIGITAL upon request.
3.05 MOSAIC shall only make ten (10) archival copies of the LICENSED
TECHNOLOGY without the written authorization of DIGITAL.
3.06 Except as provided herein or as permitted by the terms of Agreement
between the parties, MOSAIC may not otherwise copy, duplicate, or
reproduce the LICENSED TECHNOLOGY, or permit others to copy, duplicate
or reproduce the LICENSED TECHNOLOGY.
ARTICLE 4 - TECHNICAL ASSISTANCE
4.01 DIGITAL will provide MOSAIC free of charge a total of ten (10) days of
training to MOSAIC personnel on the processes for building DECSpin
software and for manufacturing the SPINBLASTER BOARD DESIGN. Such ten
(10) days' training will be allocated between the DECSpin software and
the SPINBLASTER BOARD DESIGN in accordance with MOSAIC's desire. All
ten (10) days' training will be conducted at DIGITAL's Marlboro facility
and all expenses for MOSAIC personnel will be borne by MOSAIC. MOSAIC
must complete this training by June 30, 1996, or its rights to such
training will be forfeited.
4.02 Upon MOSAIC's written request to DIGITAL for additional technical
assistance, DIGITAL may, in its sole discretion, provide MOSAIC the
requested technical assistance at DIGITAL's commercial rates then in
effect under a separate agreement.
ARTICLE 5 - LICENSE FEE PAYMENT
5.01 In consideration of the rights granted to MOSAIC under this Agreement,
MOSAIC agrees to pay DIGITAL a non-refundable license fee of which fees
shall be paid as follows:
(a) a non-refundable payment of six hundred twenty-five thousand
U.S. dollars on the Effective Date of this License Agreement
(U.S.$625,000.00);
(b) every ninety (90) days thereafter, a guaranteed,
non-refundable, minimum payment of three hundred twenty-five
thousand U.S. dollars (U.S.$325,000.00) until a total of
eight such quarterly payments have been made;
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<PAGE> 9
(c) ninety (90) days after the eighth quarterly payment is made,
a single guaranteed, non-refundable, minimum payment of two
hundred and seventy-five thousand U.S. dollars
(U.S.$275,000.00);
(d) thereafter, the license granted to MOSAIC herein shall be
fully paid.
5.02 All license fee payments shall be mailed by MOSAIC to:
U.S. Cash Applications
Digital Equipment Corporation
Digital Drive, MKO1-1/E25
Merrimack, NH 03054
ATTN.: A/R Accounting Manager
with copies of the payments sent to DIGITAL's contact person at the
address identified in Article 10.04.
5.03 All payments due hereunder shall be made in the United States dollars
and without deduction for taxes, assessments, or other charges of any
kind including withholding taxes attributable to either party which may
be imposed on either party by any government in any country.
5.04 MOSAIC shall pay interest to DIGITAL from the payment due date to the
actual date of payment upon any and all amounts of payments that are
overdue, at the rate of one percent (1%) over the prime interest rate of
the Bank of Boston, Boston, Massachusetts in effect on the due date.
ARTICLE 6 - DISCLAIMER OF WARRANTIES AND LIMITATION OF LIABILITY
6.01 Nothing contained in this Agreement shall be construed as a warranty or
representation by DIGITAL as to:
(i) the validity or scope of DIGITAL'S INTELLECTUAL PROPERTY
RIGHTS;
(ii) the quality or accuracy of the LICENSED TECHNOLOGY;
(iii) the usefulness of the LICENSED TECHNOLOGY;
(iv) a requirement that DIGITAL shall file any patent
application, secure any patent, or maintain any patent in
force;
(v) an obligation to bring or prosecute actions or suits
against third parties for infringement;
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<PAGE> 10
(vi) a grant by implication, estoppel, or otherwise, of any of
DIGITAL'S INTELLECTUAL PROPERTY RIGHTS beyond those
covered by the LICENSED TECHNOLOGY; and,
(vii) a grant by implication, estoppel, or otherwise, of the
right to sublicense the LICENSED TECHNOLOGY and all
products derived from LICENSED TECHNOLOGY.
6.02 The LICENSED TECHNOLOGY is provided by DIGITAL on an "AS IS" basis and
without warranty or representation of the quality, characteristics or
functionality of the LICENSED TECHNOLOGY including but not limited to
whether it is error-free or will operate in accordance with the
performance requirements of MOSAIC or any of its licensees or
transferees. The Licensed Technology is the same technology as Digital
has offered or has planned to offer commercially. DIGITAL HEREBY
DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES, INCLUDING ANY WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
6.03 DIGITAL makes no warranty or representation that any making, using,
licensing or other disposition of MOSAIC PRODUCT(S) by MOSAIC will be
free from infringement of any intellectual property rights owned by any
third party, and DIGITAL shall have no obligation to defend, indemnify,
or hold harmless MOSAIC from any suit, action or claim alleging
infringement of any third party's property rights. DIGITAL represents
that it is not aware of any claim of intellectual property infringement
against the LICENSED TECHNOLOGY.
6.04 In no event shall DIGITAL be liable to MOSAIC or its distributors or end
users for any lost data, lost profits, incidental, consequential,
special, or indirect damages arising from the use of the LICENSED
TECHNOLOGY. DIGITAL's total liability arising out of the licensing of
the LICENSED TECHNOLOGY for breach of this Agreement or for any other
claim shall not exceed in total the amount of payments paid by MOSAIC
under this Agreement. This limitation of liability shall apply
regardless of the form of action, whether in contract or tort. Any
action against DIGITAL must be brought within eighteen (18) months after
such cause of action arises, or MOSAIC first becomes aware of such cause
of action.
6.05 MOSAIC shall not be liable to DIGITAL for any breach of the terms of any
END USER AGREEMENT unless MOSAIC has willfully or negligently
contributed to, or cooperated in the breach.
6.06 MOSAIC shall fully cooperate with DIGITAL in any action DIGITAL may
bring or defend involving any third party alleged to have breached the
terms
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<PAGE> 11
of an END USER AGREEMENT or Distribution Agreement, or alleged to have
infringed upon DIGITAL's rights in the LICENSED TECHNOLOGY.
ARTICLE 7 - INDEMNITY
7.01 MOSAIC will hold DIGITAL harmless against all liabilities, demands,
damages, expenses or losses arising (i) out of use by MOSAIC or its
distributors of LICENSED TECHNOLOGY or information furnished under this
agreement or (ii) out of any use, license, or other disposition by
MOSAIC or its distributors of MOSAIC PRODUCT(S).
ARTICLE 8 - TERM AND TERMINATION
8.01 The term of this Agreement shall commence on the Effective Date and
continue thereafter unless sooner terminated in accordance with this
Article.
8.02 This Agreement may be terminated by the non-defaulting party only upon
the other party's default and by sending a Notice of Termination in
accordance with Article 11. Any of the following constitutes a default:
8.02.01 A party defaults in the performance or observation of any
material provision or material condition on its part to be
performed or observed, including a failure to make any
payment due hereunder, and if such defaulting party fails to
cure the default within thirty (30) days after receipt of
written notice of the default from the other party;
8.02.02 A party files a voluntary petition in bankruptcy or is
adjudicated a bankrupt or insolvent or files any petition or
answer seeking any arrangement, composition, liquidation or
dissolution under any present or future federal, state or
other statute, law or regulation relating to bankruptcy,
insolvency or other relief for debtors, or seeks or consents
or acquiesces in the appointment of any trustee, receiver, or
liquidator of all or any substantial part of its properties,
or makes any general assignment for the benefit of creditors,
or admits in writing its inability to pay its debts generally
as they become due;
8.02.03 A court enters an order, judgment, or decree approving a
petition filed against either party seeking any arrangement,
composition, liquidation, dissolution or similar relief under
any present or future federal, state or other statute, law,
or regulation relating to bankruptcy, insolvency, or other
relief for debtors, and such
-9-
<PAGE> 12
order, judgment or decree remains unvacated or unstayed for
an aggregate of thirty (30) days; or,
8.03 The termination rights provided herein shall be in addition to and not
in substitution for any right to damages or injunctive relief that may
be available to or exercisable by the party terminating or having the
right to terminate this Agreement, nor shall such termination rights
relieve either party from liability or damage to the other party for
breach of this Agreement.
8.04 Upon termination of this Agreement by DIGITAL, MOSAIC shall immediately
cease to use LICENSED TECHNOLOGY, HARDWARE, and SOFTWARE and shall at
DIGITAL's option, (a) either return to DIGITAL within sixty (60) days of
termination all drawings, specifications, other documents, software,
updates and improvements provided hereunder and all complete and partial
copies and derivations thereof, in its possession or, (b) certify the
destruction of all of such materials.
8.05 Upon expiration of this Agreement or upon termination by MOSAIC, MOSAIC
may retain the documents and software required by MOSAIC to maintain and
repair the MOSAIC PRODUCT(S) that have been marketed to third parties,
but only for this purpose. MOSAIC shall at DIGITAL's option return to
DIGITAL all other documents and software not required for maintenance
and repair within sixty (60) days after such expiration or termination,
or certify the destruction of such material.
8.06 Termination or expiration of this Agreement shall not affect licenses to
use MOSAIC PRODUCT(S) granted by MOSAIC under this Agreement in good
faith and for consideration prior to receiving or giving Notice of
Termination.
8.07 Upon expiration or termination of this Agreement, DIGITAL may request
and MOSAIC shall promptly provide a certificate in writing that it has
not provided the MOSAIC PRODUCT(S) to any third party except in
accordance with this Agreement.
ARTICLE 9 - PUBLICITY
9.01 The existence of this Agreement is not considered to be confidential.
However, the terms of this Agreement are considered to be the
confidential information of the parties. Except as expressly provided
in this Agreement, a party shall not disclose the terms of this
Agreement (including its Appendices), or use or refer to this Agreement
or any provision of or rights granted under this Agreement in any
publicity, advertising, or promotional activity, without
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<PAGE> 13
the written approval of the other party, except as may be required by
law, or regulation, or by the order of any governmental or judicial
authority.
ARTICLE 10 - GENERAL
10.01 Neither this Agreement nor any rights or benefits accruing hereunder
shall be assigned, in whole or in part, by either party and no duty or
obligation arising hereunder shall be delegated without the written
consent of the other, and any such purported assignment or delegation
shall be null and void, provided, however, that neither party shall
unreasonably withhold its consent to such assignment or delegation by
the other.
10.02 Nothing in this Agreement shall be construed as making either party the
agent of the other.
10.03 The failure of either party to give notice to the other party of the
breach or non-fulfillment of any term, clause, provision or condition of
this Agreement shall not constitute a waiver thereof, nor shall the
waiver of any breach or non-fulfillment of any term, clause, provision
or condition of this Agreement constitute a waiver of any other breach
or non-fulfillment of that or any other term, clause, provision or
condition of this Agreement.
10.04 Notice to a party hereto shall be in writing and deemed to have been
sufficiently given or served for all purposes hereof if personally
delivered or mailed by first class certified or registered mail,
returned receipt requested, postage prepaid, or commercial overnight
delivery service, at the respective addresses set forth below, or at
such other address as the party to whom such notice is directed may
designate from time to time by like notice in writing to the other party
hereto. A notice shall be deemed to have been given on the date on
which it was received. Notices shall be directed to DIGITAL at:
Director
Corporate Licensing Office
Digital Equipment Corporation
111 Powdermill Road, MSO2-3/H25
Maynard, MA 01754
USA
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<PAGE> 14
Notices shall be directed to MOSAIC at:
President
Mosaic Information Technologies, Inc.
645 Fifth Avenue, 17th Floor
New York, New York 10022
10.05 If any provision of this Agreement is held invalid by any law, rule,
order, or by the final determination of any State or Federal court, it
shall not affect any provisions of this Agreement which can be given
effect without such invalid provision and to this extent the parties
agree that the provisions of this Agreement are and shall be severable.
10.06 MOSAIC recognizes that the transfer of the HARDWARE, SOFTWARE, or MOSAIC
PRODUCT(S) from one country to another if authorized under Article 2,
may be subject to the approval of the government of the United States of
America and/or other countries that MOSAIC might operate in, or various
agencies thereof, and international control organizations in which such
governments participate. MOSAIC shall obtain all such approvals as are
required by such governments or bodies before any such transfer of the
LICENSED TECHNOLOGY is effected.
10.07 MOSAIC shall only distribute MOSAIC PRODUCT(S) and related materials
with proper inclusion of any copyright and proprietary notices, legends,
and markings. Related materials and applicable initialization and
configuration screens of the MOSAIC PRODUCT(S) software component shall
also include such notices, legends and markings. With respect to any
document or software containing a copyright notice and/or a
confidential, proprietary, restricted, or similar legend, provided by
DIGITAL under this agreement, MOSAIC shall agree to include or shall
have its distributors include the copyright notice and/or such legend on
all authorized reproductions it makes of such document or software in
the same manner and location that such notice and/or legend appears in
the document or software provided.
10.08 This Agreement is governed by the laws of the Commonwealth of
Massachusetts, United States of America.
10.09 This Agreement sets forth the entire agreement and understanding between
he parties as to the subject matter hereof and merges all prior
discussions and agreement between them, and neither of the parties shall
be bound by any conditions, definitions, warranties, understandings or
representations with respect to such subject matter other than as
expressly provided herein. This Agreement may not be modified, amended,
or supplemented except by a
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<PAGE> 15
document executed by a proper and duly authorized officer or
representative of the party to be bound thereby.
IN WITNESS WHEREOF, the parties hereto have as of the Effective Date first
written above caused this Agreement, which includes Appendices to be signed in
duplicate by their duly authorized representatives.
DIGITAL EQUIPMENT CORPORATION MOSAIC INFORMATION TECHNOLOGIES
/s/ Patricia C. Faye /s/ Robert Bolder
---------------------------------- ----------------------------------
Signed Signed
PATRICIA C. FAYE ROBERT BOLDER
---------------------------------- ----------------------------------
Printed Printed
VICE PRESIDENT PRESIDENT
---------------------------------- ----------------------------------
Title Title
Date: 6/12/96 Date: 6/13/96
----------------------------- -----------------------------
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<PAGE> 16
APPENDIX A - DESCRIPTION OF LICENSED TECHNOLOGY
DECspin Software is the latest version of the software marketed by Digital
under the name DECspin for Windows. DECspin (Digital Equipment Corporation's
Sound Picture Information Network) software is a desk-to-desk, live audio and
video conferencing application, providing real time communications between
personal computers equipped with multimedia and networking options. One of the
options required is the AV320 SPINblaster video conferencing board.
The AV320 SPINblaster board is the latest version of the board marketed by
Digital under the name AV320. The AV320 card is a multi-functional, ISA bus-
based card that provides full-duplex audio/video capture/playback with JPEG
compression/decompression.
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<PAGE> 17
APPENDIX B - DESCRIPTION OF MOSAIC PRODUCTS
The purpose of this Appendix is to provide DIGITAL with a description of the
products in which DIGITAL's video server software technology will be used.
Please complete the following and attach additional information, if required,
to completely describe the products which will use the LICENSED TECHNOLOGY.
Information disclosed in this Appendix B should describe the products in which
the LICENSED TECHNOLOGY will be used without revealing confidential material.
DIGITAL ACCEPTS NO RESPONSIBILITY FOR SAFEGUARDING UNSOLICITED CONFIDENTIAL
MATERIAL.
B.1 Specifically identify, by product name and model number, the product
which shall use the LICENSED TECHNOLOGY, and the hardware/software
system that it will be part of:
Product Description: DV100-Desktop PC videoconferencing board set plus
accessories for the LAN
DV200-Desktop Multi-platform videoconferencing
self-contained Codec for the LAN
GV200-Group/rollabout system for conference room
connection to the LAN
GW200-Videoconferencing Gateway, real-time LAN to WAN
converter
Manufacturer: MOSAIC
Model Number(s): DV100
DV200
GV200
GW200
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<PAGE> 18
APPENDIX C - LEGAL REQUIREMENTS FOR END USER AGREEMENTS
END USER AGREEMENTS shall, among other things, provide the following:
1. Include a clearly visible END USER AGREEMENT with each of the MOSAIC
PRODUCT(S). End user(s) shall acquire the right to use the MOSAIC
PRODUCT(S) only if the END USER AGREEMENT with each of the MOSAIC
PRODUCT(S) shall be visible to, and readable by, each end user prior to
the end user's use of the MOSAIC PRODUCT(S).
2. Specify that DIGITAL has intellectual property rights in portions of the
HARDWARE, SOFTWARE and MOSAIC PRODUCT(S).
3. Restrict the use of the HARDWARE and SOFTWARE solely to MOSAIC
PRODUCT(S).
4. Prohibit use of the HARDWARE or SOFTWARE for any purpose outside the
scope of MOSAIC PRODUCT(S).
5. Prohibit the reverse engineering, reverse compilation, disassembly or
decomposition of the SOFTWARE.
6. Specify that title of the SOFTWARE does not pass to the end user.
7. Disclaim DIGITAL's liability for any damages, whether direct, indirect,
incidental or consequential arising from the use of the MOSAIC
PRODUCT(S).
8. Require the end user, at the termination or expiration of the END USER
AGREEMENT, to discontinue use and destroy or return to MOSAIC all
associated LICENSED TECHNOLOGY and all archival or other copies of the
SOFTWARE.
-16-
<PAGE> 1
EXHIBIT 21.0
SUBSIDIARIES OF THE COMPANY
Following is a list of the Company's subsidiaries:
<TABLE>
<CAPTION>
Organized Percent of
Under Voting Securities
Name the Laws of Owned by Registrant
- - ---- ----------- -------------------
<S> <C> <C>
Intelect Finance Limited Bermuda 100%
Intelect Systems Corp. Delaware 100%
Intelect Network Systems Limited England 100%
<CAPTION>
Organized Percent of Voting
Under Securities Owned by
Name the Laws of Intelect Systems Corp.
- - ---- ----------- ----------------------
<S> <C> <C>
Intelect Network Technologies Company Nevada 100%
Intelect Visual Communications Corp. Delaware 100%
DNA Enterprises, Inc. Texas 100%
Intelect Europe Limited England 100%
</TABLE>
<PAGE> 1
Exhibit 23.0
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors
Intelect Communications Systems Limited
We consent to incorporation by reference in the registration statement on Form
S-3 (Nos. 333-15243, 333-14287, 333-10103 and 333-09049) and on Form S-8 (Nos.
33-03246, 33-96908, and 33-05918) of Intelect Communications Systems Limited of
our report dated April 9, 1997, relating to the consolidated balance sheets of
Intelect Communications Systems Limited and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
shareholders equity and cash flows for the year ended December 31, 1996, the
two months ended December 31, 1995 and the years ended October 31, 1995 and
1994, and the related schedule, which report appears in the December 31, 1996
annual report on Form 10-K of Intelect Communications Systems Limited.
Our report dated April 9, 1997, contains an explanatory paragraph that states
that the Company has suffered recurring losses from continuing operations and
is dependent upon the successful development and commercialization of its
products and its ability to secure adequate sources of capital until the
Company is operating profitably. These matters raise substantial doubt about
the Companys ability to continue as a going concern. Managements plans with
regard to these matters are described in note 1 to the consolidated financial
statements. The consolidated financial statements and financial statement
schedule do not include any adjustments that might result from the outcome of
this uncertainty.
/S/ KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
April 9, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,863
<SECURITIES> 854
<RECEIVABLES> 2,969
<ALLOWANCES> 542
<INVENTORY> 2,978
<CURRENT-ASSETS> 11,594
<PP&E> 5,379
<DEPRECIATION> 1,094
<TOTAL-ASSETS> 36,018
<CURRENT-LIABILITIES> 9,810
<BONDS> 14,913
0
0
<COMMON> 150
<OTHER-SE> 7,581
<TOTAL-LIABILITY-AND-EQUITY> 36,018
<SALES> 9,352
<TOTAL-REVENUES> 10,005
<CGS> 16,714
<TOTAL-COSTS> 10,954
<OTHER-EXPENSES> 31,523
<LOSS-PROVISION> 513
<INTEREST-EXPENSE> 9,911
<INCOME-PRETAX> (42,896)
<INCOME-TAX> 87
<INCOME-CONTINUING> (42,983)
<DISCONTINUED> (56)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,039)
<EPS-PRIMARY> (3.33)
<EPS-DILUTED> (3.33)
</TABLE>
