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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported) March 21, 1997
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INTELECT COMMUNICATIONS SYSTEMS LIMITED
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(Exact Name of Registrant as Specified in Its Charter)
0-11630 N/A
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(Commission File Number) (I.R.S. Employer Identification No.)
1100 Executive Drive, Richardson, Texas 75081
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(Address of Principal Executive Offices) (Zip Code)
(972) 437-1888
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(Registrant's Telephone Number, Including Area Code)
Reid House, 31 Church St., P. O. Box HM 1437, Hamilton, HMFX Bermuda
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(Former Address, if Changed Since Last Report)
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ITEM 6. RESIGNATION OF REGISTRANT'S DIRECTOR.
Effective March 5, 1997, Peter G. Leighton resigned as a director of the
Company. By letter dated March 21, 1997, Mr. Leighton requested that the Company
disclose his letter of resignation which he furnished to the Board of Directors
of the Company and which describes Mr. Leighton's disagreements with the
Company's operations, policies or practices. The Company has attached as an
exhibit to this Form 8-K Mr. Leighton's letter of resignation dated March 5,
1997 and his letter dated May 21, 1997 requesting disclosure of the matters
covered in his March 5, 1997 letter. The following is a summary of Mr.
Leighton's description of his disagreement with the Company's operations,
policies or practices, and such summary is qualified in its entirety by Mr.
Leighton's letter of resignation:
Mr. Leighton states in his March 5, 1997 letter of resignation that he
disagrees with the Company's entering into a $15,000,000 Credit Facility (the
"Facility") with St. James Capital Corporation ("St. James"). Mr. Leighton
states in his letter: "Because of my complete objection to the Facility, and the
course on which ICSL has been set in motion by a majority of its Board members,
it is impossible for me to continue as a Director of this Company." Mr. Leighton
expresses concern in his letter that the Company will reach a point where it
cannot repay the Facility without the injection of further capital. Mr. Leighton
also states that if the Company is unable to raise capital through an equity
offering, the Company will be required to negotiate with St. James for
additional financing before it can seek financing from other sources. Mr.
Leighton also mentions in his letter certain financing sources that the Board
had considered in addition to St. James and Mr. Leighton disagrees with certain
actions taken by Mr. Herman Frietsch, as Chairman of the Board, which had the
result of preventing Mr. Leighton from binding the Company to such other
financing sources and requiring Board of Directors approval of such other
financing sources. Mr. Leighton also believes that the Board of Directors failed
in its duty of care to the Company regarding the proper consideration of
available financing proposals and that the Facility is contrary to the interests
of the Company and its stockholders.
The Company believes Mr. Leighton's description of certain events as
stated in his letter of resignation are incorrect and incomplete, and includes
the following brief statement presenting its views on such matters:
The Board of Directors of the Company gave careful and thorough
consideration to all available financing proposals, including those brought
forth by Mr. Leighton. The Board of Directors believes that Mr. Leighton's
proposals (namely, discounted subordinated convertible debt financings) are not
in the best interests of the Company or its stockholders and, among other
things, present significant dilution to stockholders at prices discounted to
market. In addition, the Board believes that such financings fail to provide a
long-term source of stable financing on which to build future growth. The Board
recognized the Company's need for short- and long-term financing, on the best
possible terms available, and gave due consideration to every available
alternative. Notwithstanding the assertions in Mr. Leighton's letter, the Board
does not believe Mr. Leighton's proposals would have presented the best
available financing for the Company. The Board also does not agree with Mr.
Leighton's assertion that the Facility creates "fiscal uncertainty". The
Facility is designed to provide the Company with the ability to meet existing
short-term debt obligations and to provide the necessary short-term working
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capital to enable the Company to obtain more favorable, long-term capital
financing. Further, the Facility is not "exclusive," but merely provides St.
James with the first opportunity to provide the Company with additional
financing.
The Company disputes Mr. Leighton's assertion that he was in "complete
objection" to the Facility. Contrary to Mr. Leighton's characterization that he
was in "complete objection" to the Facility, Mr. Leighton in fact voted in
favor of the Facility on three (3) separate occasions: at a Board of Directors
meeting in Dallas, Texas on February 14, 1997; at a Board of Directors meeting
in Hamilton, Bermuda on February 18, 1997; and by a Unanimous Written Consent
of the Board of Directors of the Company dated February 18, 1997. Furthermore,
Mr. Leighton, as President of the Company, himself executed the Letter of
Intent dated February 14, 1997 with St. James for the Facility.
Finally, the Board of Directors believes that certain concerns of Mr.
Leighton may be related to personal differences existing between Mr. Leighton
and certain members of the Board and the Company's management. Mr. Leighton's
resignation came only 5 days after the Board of Directors voted on February 28,
1997 to redomicile the Company from Bermuda (Mr. Leighton's place of residence)
to the United States, and transfer all of the Company's accounting and
financial functions and reporting controls from Bermuda to the United States.
The Company also notes that Mr. Leighton's term as a director was set to expire
at this year's Annual General Meeting of Shareholders.
Item 7. Financial Statements and Exhibits
(c) Exhibits:
17(i) - Letter of resignation of Peter Leighton as Director dated
March 5, 1997.
17(ii)- Letter from Peter Leighton to the Company dated March 21, 1997,
requesting disclosure of March 5, 1997 letter of resignation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTELECT COMMUNICATIONS SYSTEMS LIMITED
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(Registrant)
March 27, 1997 By: /s/ Herman M. Frietsch
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Date (Signature)
Herman M. Frietsch
Chairman of the Board
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INDEX TO EXHIBITS
17(i) - Letter of resignation of Peter Leighton as Director dated
March 5, 1997.
17(ii)- Letter from Peter Leighton to the Company dated March 21, 1997,
requesting disclosure of March 5, 1997 letter of resignation.
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EXHIBIT 17(i)
March 5, 1997
The Board of Directors
Intelect Communications Systems Limited
Reid House
31 Church Street
Hamilton HM 11
Dear Sirs,
RE: ST. JAMES CAPITAL CORPORATION
US $15,000,000 CREDIT FACILITY (THE "FACILITY")
This letter is addressed to you, the members of the Board of Directors
of Intelect Communications Systems Limited ("ICSL"), and documents my grave
reservations regarding ICSL's entry into the Facility captioned above as well
as my strong disagreement with ICSL's policies and practices, particularly as
they relate to the improper actions of Mr. Herman Frietsch and the seeming
condonation of these actions by members of the Board of Directors other than
Jeremy Posner and myself.
My comments in this letter repeat arguments against the Facility which
I have made to you on several occasions, culminating in the Board meeting which
I called for 28th February, 1997. I called the February 28th meeting to give
the Board a final opportunity to reconsider entry into the Facility, and to
receive my detailed objections.
This letter also conveys my resignation as a Director of ICSL. Because
of my complete objection to the Facility, and the course on which ICSL has been
set by a majority of its Board members, it is impossible for me to continue as
a Director of this Company.
As a Director and Officer of ICSL, I regard it as essential that I now
record my reservations over the manner in which ICSL has been brought to
acceptance of the Facility. This letter will also place on the record my
analysis of the Facility's provisions PER SE, with a view to documenting my
objections to it and my disagreement as to the policies and practices relating
to the acceptance of the Facility.
Attached to this letter are the following exhibits (the "Exhibits"):
o Letter dated February 25, 1997 to the Board of Directors Re:
St. James Capital Corporation - US $ 15,000,000 Credit Facility
(the "Facility").
o Memorandum to the Board of Directors dated March 5, 1997 - Re:
Board Process.
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The 'baseline' for understanding ICSL's financial requirements, and for
analyzing what the Facility offers in respect of these needs, is the Business
Plan 1997 ("Plan"). this Plan was approved by the ICSL Board of Directors on
February 4, 1997.
As the first Exhibit indicates, Mr. Herman Frietsch, a Director and
ICSL's Chairman of the Board, was in possession of the Plan by January 17,
1997. no comments were received from Mr. Frietsch regarding his review of the
Plan prior to the Board meeting on February 4, 1997, nor indeed were any
questions raised by him at that meeting.
The Plan clearly indicates that ICSL's capital requirement was forecast
to be as high as $20 million. the greater part of the capital requirement would
fall in the first two quarters of 1997. this was clearly evidenced by:
a) The forecast of operating losses in the first two quarters of
$11 million.
b) the rapid run up of revenues in the first two quarters created a
need for additional capital to support inventory and accounts
receivable builds.
The critical issue is that the Plan as presented was based upon on the
assumption that ICSL required, and would have, a solid capital base. However,
the facility is not capital. ICSL will accordingly reach a point where it
cannot repay the loan which the Facility incorporates without the injection of
further capital. the Facility thus creates fiscal uncertainty - in that ICSL's
own projections acknowledge a requirement for fresh capital by mid-year with
no basis for determining the source of that capital.
The fact that the Facility is an exclusive one further reduces ICSL's
options. Assuming that it cannot acquire funding via a public offering of its
securities (see arguments against this indicated in the Exhibits), ICSL will be
placed in the position where its negotiating ability with the lender for the
Facility is entirely compromised.
The second Exhibit to this letter presents a chronology of events and,
in particular, describes certain actions of Mr. Frietsch following his receipt
of the Plan.
The financing proposals presented to the Board on February 4 showed
that, of the three mentioned options (i.e. $10 million of convertible le
debentures, a $10 million term loan and the $10 million equity investment by
the H.W. Finance Group and $10 million equity placement by the Dawson-Samberg
Group), the Board selected two for further examination (namely, H.W. Finance
Group option and Dawson-Samberg), as offering viable financing in line with
requirements indicated in the Plan.
Negotiation of both these options were defeated, due to the release of
letters by Mr. Frietsch to the representatives of the financing parties. these
letters were sent without reference to the Board or the Executive Committee and
had the effect of destroying completely any confidence the financing parties'
representatives had in my authority to negotiate on ICSL's behalf, as it
presented them with evidence of divided management. Not unreasonably, the
financing parties changed their negotiating position - H.W. Partners to include
a condition
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requiring unanimous vote of ICSL Board and Dawson-Samberg to include a
condition that they be satisfied with the composition of senior management and
the Board on closing. This condition was the direct and predictable result of
Mr. Frietsch's unilateral and unauthorized communications. These communications
were, in my opinion, calculated by Mr. Frietsch to enable him to advance his
alternative financing proposal, in the form of the Facility.
That Mr. Frietsch did indeed calculate the foregoing as the intended
result of his communications is made clear by his statement to me and Wendell
Hollis (then also an ICSL Director) that he had avoided the Executive Committee
meeting called for Wednesday, February 12, 1997 because he knew that he would
be outvoted. Immediately thereafter, the proposals introducing the Facility
were advanced by Mr. Frietsch.
Together with my fellow Director Jeremy Posner, I began an analysis of
the Facility during the period February 15-17, 1997 and prepared a response in
the form of the proposal addressed to the Board (Exhibit IV) on February 18.
This proposal was intended to achieve a workable solution involving
co-operation between funding parties which would cure deadlock between the
Board membership and permit ICSL to achieve its funding requirements for short
and long term needs, under the conditions mandated by the Plan.
CRITICISM
In my opinion:
1. The Chairman, Herman Frietsch, has failed in his duty of care to
ICSL to allow proper consideration of available financing
proposals, and in addition has effectively nullified or
eliminated alternatives to the Facility by his improper
intervention in the negotiation of alternative financing
prospects.
2. Similarly, the Board of Directors (other than Jeremy Posner and
myself) has failed in its duty of care to ICSL in regard to
taking steps to address Mr. Frietsch unilateral and improper
activities with respect to a matter of grave importance to
ICSL's shareholders.
3. Facility itself is contrary to ICSL's interests (and indeed,
all shareholders' interests) in that:
a) ICSL's best projections are that the Facility will be
drawn to its maximum of $10-11 million in the June/July
time frame depending on actual receivables, inventory and
advance rates.
b) The point at a) means that ICSL will be forced to raise
additional capital within the mentioned time frame.
c) The Facility calls for exclusivity for private financings
to be done with St. James Capital. ICSL can only avoid this
by way of public offering - for which a very narrow
opportunity exists, namely, the period of May/June. If the
public offering fails, ICSL will:
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i. be out of funds
ii. have pledged all its assets, and
iii. be forced to negotiate only with one financing source.
I was President and Managing Director of ICSL from 1989 to December
1995 when my title was changed to President. During that period of time, all of
ICSL's M&A activities and financing activities were handled by me alone with
the exception of Intelect, Inc. which was handled by Director Jeremy Posner
under my direction. The specific financing activities concluded in the period
from 1989 to date include the following:
o Public offering of 4,375,000 shares in Canada in
October 1992 ($3,500,000).
o Acquisition of Lakefield Arms Limited ($2,000,000).
o Sale of Savage Corporation ($33,000,000).
o Purchase of Lakefield Debentures (CDN $300,000).
o Acquisition of DNA Enterprises, Inc. ($8,000,000).
o Acquisition of Mosaic Information Technologies, Inc.
($13,000,000).
o Convertible Debentures (June 1996) ($5,000,000).
o Convertible Debentures (August 1996) ($10,000,000).
o Convertible Debentures (October 1996) ($10,000,000).
o Negotiation of Dawson-Samberg and H.W. Finance
proposals (presented to the Board in February)
($10,000,000 each).
The foregoing list is put forward as evidence of my ability (and
success) as the Executive Officer of ICSL responsible for management of its
financing activities. Until his unauthorized intervention in these activities
on February 12, 1997, Herman Frietsch had little or no involvement with any of
ICSL's financing matters.
I believe that it was correct and proper for me to consider it to be my
duty and responsibility to negotiate ICSL's financing arrangements, and submit
them for final approval by the Board. My appointment as CEO on February 4, 1997
should have had the result of extending my responsibility for ICSL's financing
arrangements, as the Board specifically resolved in that meeting that Herman
Frietsch should report to the Board on matters relating to the board but on ALL
other matters he was to report to me.
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The Board's Executive Committee was specifically directed by the Board
to conclude the necessary financing, in line with the Plan requirements, on
February 4, 1997. Herman Frietsch's calculated actions entirely frustrated this
directive.
By the aforementioned actions Herman Frietsch, ICSL has been placed in
the position where its financial position is so precarious that the Facility
now represents the Company's final opportunity to stave off collapse. However,
the Facility will not alleviate ICSL's precarious financial position, for
reasons indicated.
In my view and belief, the Facility is not in the interest of ICSL in
its present form. As a Director I disassociate myself from it, as a funding
option. The Facility is being forced upon ICSL by Mr. Frietsch (and certain
other ICSL Directors, namely Anton Liechtenstein and Phillip Sudan) over my
repeated objections. I have repeatedly made clear to Mr. Frietsch that I regard
the Facility as a unilateral and improper initiative. I consider that ICSL's
entry into the Facility has been engineered by Mr. Frietsch, acting completely
in excess of his executive authority as regards the Company's affairs.
In recognition of the foregoing matters and events I called the
emergency Board meeting of ICSL, which was held (as mentioned) on February
28th, 1997, in Dallas. At that meeting, resolutions 1 through 11 of the
numbered resolutions contained in Exhibit X to this letter were proposed by
Director Jeremy Posner, and seconded by me. With the exception of resolution 9
(on which Philip Sudan abstained), all resolutions were voted FOR by Jeremy
Posner and I, and AGAINST by Directors Herman Frietsch, Anton Liechtenstein and
Philip Sudan.
CONCLUSION
My position, for the record, is that the Directors who elect to support
ICSL's entry into the Facility do so at their peril and I wish via this letter
to emphasize my disagreement with their judgment and with the policies and
practices that were followed.
In the circumstances, I am unable to continue as a Director of ICSL and
accordingly tender my resignation as such Director by this letter, effective
immediately.
Yours sincerely,
/s/ PETER G. LEIGHTON
Peter G. Leighton
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EXHIBIT 17(ii)
REID HOUSE
31 CHURCH STREET
HAMILTON, BERMUDA HM12
March 21, 1997
Mr. Herman Frietsch
Chairman and Chief Executive Officer
Intelect Communications Systems Limited
1100 Executive Drive
Richardson, Texas, 75081
RE: RESIGNATION DATED MARCH 5, 1997
Dear Mr. Frietsch,
Reference is made to my letter of resignation dated March 5, 1997 (copy
attached), clearly stating that I have resigned as a director of the Company,
because of a disagreement with the Company on matters relating to the Company's
operations, policies and practices.
Please take the necessary steps for these matters to be disclosed.
Yours sincerely,
/s/ PETER LEIGHTON
Peter Leighton
c. Phil Rosetti, Hale & Dorr
John Collis, Conyers, Dill & Pearman
Mark Bridges, KPMG Peat Marwick
Geoffrey Bell, Appleby, Spurling & Kempe
Gus Alexander, Nutter, McClennan & Fish
