5,813,633 Shares
INTELECT COMMUNICATIONS SYSTEMS LIMITED
Common Shares
-----------
Of the 5,813,633 common shares, par value US $0.01 per share (the "Common
Shares"), of Intelect Communications Systems Limited ("Intelect Communications
Systems Limited" or the "Company") covered by this Prospectus for the account of
certain shareholders of the Company (the "Selling Shareholders"), 2,821,721
shares were issued to certain of the Selling Shareholders in private placements,
750,000 shares were issued upon exercise of warrants or conversion of
convertible preferred stock, 1,910,583 shares are issuable upon exercise of
warrants or conversion of convertible preferred stock, and 331,329 shares were
issued to the certain of the Selling Shareholders in connection with the
acquisition by the Company of Mosaic Information Technologies Inc. on March 29,
1996, all of which may be offered and sold from time to time for the account of
certain of the selling shareholders of the Company. See "Selling Shareholders."
The Common Shares covered by this Prospectus are issuable in connection with
certain financings and in satisfaction of certain registration rights
obligations of the Company to the Selling Shareholders. All of the shares
offered hereunder are to be sold by the Selling Shareholders. The Company will
not receive any of the proceeds from the sale of the shares by the Selling
Shareholders.
The Selling Shareholders may from time to time sell the shares covered by
this Prospectus on the Nasdaq National Market in ordinary brokerage
transactions, in negotiated transactions, or otherwise, at market prices
prevailing at time of sale or at negotiated prices. See "Plan of Distribution."
The Common Shares are traded on the Nasdaq National Market under the symbol
ICOMF.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION (OR ANY STATE SECURITIES COMMISSION) PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------------
The date of this Prospectus is September 22, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements, information
statements, and other information filed by the Company with the Commission
pursuant to the informational requirements of the Exchange Act may be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices located at 7 World Trade Center, Suite 1300, New York, New York 10048,
and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials also may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such materials may also be accessed electronically by means of
the Commission's home page on the Internet at HTTP://WWW.SEC.GOV. The Common
Shares of the Company are traded on the Nasdaq National Market.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Common Shares offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits and
schedules thereto, as certain items are omitted in accordance with the rules and
regulations of the Commission. For further information pertaining to the Company
and the Common Shares offered hereby, reference is made to such Registration
Statement and the exhibits and schedules thereto, which may be inspected without
charge at the office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of which may be obtained from the Commission at
prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
1. The Company's Annual Report on Form 10-K filed on April 15, 1997 and
the Form 10-K/A filed on April 30, 1997;
2. The Company's Quarterly Reports on Forms 10-Q filed on May 15, 1997
and August 14, 1997;
3. The Company's Current Report on Form 8-K filed on March 27, 1997;
4. The Company's Current Report on Form 8-K filed on May 8, 1997;
5. The Company's Current Report on Form 8-K filed on August 20, 1997;
and
6. The description of the Common Shares set forth in the Company's
Registration Statement filed pursuant to Section 12 of the Exchange
Act on Form 8-A on February 24, 1984, and any amendment or report
filed for the purpose of updating any such description.
The report of KPMG Peat Marwick on the aforementioned consolidated
financial statements contained in the Company's Annual Report on form 10-K filed
on April 15, 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 Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the termination of the offering of the Common Shares
registered hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
2
<PAGE>
THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE CONTAIN
CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. AS A RESULT OF ONE OR MORE
OF THE RISK FACTORS DESCRIBED IN THE "RISK FACTORS" SECTION OF THIS PROSPECTUS,
ACTUAL EVENTS AND RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE
FORWARD-LOOKING STATEMENTS.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the foregoing documents incorporated by reference into this
Prospectus (without exhibits to such documents other than exhibits specifically
incorporated by reference into such documents). Requests for such copies should
be directed to THE ATTENTION OF EDWIN J. DUCAYET, JR., 1100 EXECUTIVE DRIVE,
RICHARDSON, TEXAS 75081, (972) 367-2100. Statements in documents incorporated by
reference shall be deemed modified by statements herein. Statements so modified
shall constitute part of this Prospectus only as so modified.
ENFORCEABILITY OF CIVIL LIABILITIES
UNDER UNITED STATES FEDERAL SECURITIES LAWS
The Company conducts its business operations through direct and indirect
subsidiaries. The parent company is a Bermuda company. A majority of the
Company's directors and officers are residents of the United States. Certain of
the Company's assets and some of the assets of its directors and officers are
located outside the United States. As a result, it may be difficult for
investors in the Common Shares to (i) effect service of process within the
United States upon the Company or such persons, or (ii) realize in the United
States upon the judgments of courts of the United States against the Company or
such persons predicated upon the civil liability provisions of the United States
federal securities laws. The Company has been advised by Conyers Dill & Pearman,
its Bermuda counsel, that there is doubt as to whether the courts of Bermuda
would enforce (i) judgments of United States courts obtained in actions against
such persons or the Company predicated upon the civil liability provisions of
the United States federal securities laws and (ii) original actions brought in
Bermuda against such persons or the Company predicated solely upon United States
federal securities laws. There is no treaty in effect between the United States
and Bermuda providing for such enforcement, and there are grounds upon which
Bermuda courts may not enforce judgments of United States courts. Certain
remedies available under the laws of U.S. jurisdictions, including certain
remedies available under the U.S. federal securities laws, would not be allowed
in Bermuda courts as contrary to that nation's public policy.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
THE COMPANY
Intelect Communications Systems Limited ("Intelect Communications Systems
Limited" or the "Company") was incorporated under the laws of Bermuda in April
1980 and operated under the name of Coastal International, Ltd.
3
<PAGE>
until September 1985 and as Challenger International, Ltd. until December 1995.
The Company has several operating subsidiaries. Unless the context otherwise
indicates, the "Company" refers to Intelect Communications Systems Limited and
its subsidiaries.
The Company's executive offices are located at 1100 Executive Drive,
Richardson, Texas 75081; telephone (972) 367-2100.
RISK FACTORS
AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK. THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED
IN THIS PROSPECTUS AND IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE, SHOULD
BE CAREFULLY CONSIDERED BY AN INVESTOR CONSIDERING A PURCHASE OF THE COMMON
SHARES.
EFFECT OF SALES ON MARKET PRICE OF STOCK
Because it is possible that a significant number of Common Shares could be
sold at the same time hereunder, such sales, or the possibility thereof, could
have a significant depressive effect on the market price of the Company's Common
Shares.
RECENT OPERATING LOSSES
The Company had operating losses and net losses for the year ending
December 31, 1996 and for each of the first two quarters of 1997, as well as in
earlier periods. The losses in 1997 were due to below standard margins on new
products (which constituted the majority of sales) and proportionately high
costs and expenses to support near-term production and sales growth. The
Company's capital requirements in connection with the design, development, and
commercialization of its principal products have been and will continue to be
significant. Depending on the success of the Company's product development and
marketing efforts, substantial additional capital may be required. Any
additional funding the Company may require would be sought through public or
private equity or debt financings, collaborative arrangements, or from other
sources. There can be no assurance that additional financing will be available
on acceptable terms, if at all. If adequate funds are not available, the Company
will have to reduce certain areas of product development, manufacturing or
marketing activity, or otherwise modify its business strategy, and its business,
results of operations, and financial condition will be materially adversely
affected.
FLUCTUATIONS IN OPERATING RESULTS; CUSTOMER CONCENTRATION
The Company expects that its quarterly operating results are likely to
vary significantly depending on factors such as the market acceptance of the
Company's recently introduced products, the size, timing and recognition of
revenue from significant orders, increased competition, the proportion of
revenues derived from distributors, Original Equipment Manufacturers ("OEMs")
and other channels, changes in the Company's pricing policies or those of its
competitors, the financial stability of major customers, new product
introductions or enhancements by competitors, delays in the introduction of
products or product enhancements by the Company or by competitors, customer
order deferrals in anticipation of upgrades and new products, market acceptance
of new products, customer concerns about the Company's financial condition, the
timing and nature of expenses, and general economic conditions. The Company's
expense levels are based, in part, on its expectations as to future orders and
sales, and the Company may be unable to adjust spending in a timely manner to
compensate for any sales shortfall. If sales are below expectations, operating
results are likely to be materially adversely affected. Net income may be
disproportionately affected by a reduction in sales because a significant
portion of the Company's expenses do not vary with revenues. The Company may
also choose to reduce price or increase spending in response to competition or
to pursue new market opportunities. In particular, if new competitors,
technological advances by existing competitors or other competitive factors
require the Company to invest significantly greater resources in research and
development efforts, the Company's operating margins in the future may be
materially adversely affected.
4
<PAGE>
The Company anticipates that, because its marketing strategy targets
relatively large potential customers, a small number of large orders may
comprise a significant portion of the Company's future product sales.
Historically, sales to a relatively small number of customers have accounted for
a significant portion of the Company's total revenues, particularly with respect
to its S4 and SONETLYNX products. Any significant deferral of purchases of the
Company's products or the reduction, delay or cancellation of orders from one or
more significant customers could materially and adversely affect the Company's
business, results of operations, and financial condition.
Because of all of the foregoing factors, it is likely that in some future
quarter the Company's operating results will be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Shares would likely be materially adversely affected.
RAPID TECHNOLOGICAL CHANGE AND IMPORTANCE OF NEW PRODUCTS
The markets for the Company's current and planned products are
characterized by rapid technological change, evolving industry standards,
changing market conditions and frequent new product introductions and
enhancements. The introduction of products embodying new technologies or the
emergence of new industry standards can render existing products or products
under development obsolete or unmarketable. The Company's ability to anticipate
changes in such markets and to successfully develop and introduce new products
on a timely basis will be a significant factor in the Company's ability to grow
and remain competitive. New product development often requires long-term
forecasting of market trends, development and implementation of new technologies
and processes and a substantial capital commitment. In particular, the Company
has recently invested substantial resources toward the development of new
products such as its SONETLYNX product line and the CS4. The Company has not yet
completed the development of the CS4 or of planned future enhancements to the
SONETLYNX product line and has not completed beta testing of the LANscape 2.0
product. Development and customer acceptance of new products is inherently
uncertain, and there can be no assurance that the Company will successfully
complete developments on a timely basis or that products will be commercially
successful. The Company competes or will be competing with established companies
with greater financial resources and more developed channels of distribution. No
assurances can be given that the Company will be successful in completing the
CS4 on schedule, that the Company will be successful in competing in this
environment or that it will be able to sell sufficient quantities of the CS4 to
recover its investment or to realize profits. No assurance can be given that
SONETLYNX enhancements will be accepted by customers or that the LANscape 2.0
product will meet standards and expectations of the videoconferencing industry.
Any failure by the Company to anticipate or respond on a cost-effective and
timely basis to technological developments, changes in industry standards or
customer requirements, or any significant delays in product development or
introduction, could have a material adverse effect on the Company's business,
operating results and financial condition.
COMPETITION
Competition in the multimedia communications industry is intense, and the
Company believes that competition will increase substantially with the
development of multimedia communications products, rapid technological changes,
industry consolidations, new industry entrants, and potential regulatory
changes. Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition, and a larger installed customer base than
the Company. In addition, many of these competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements,
and to devote greater resources to the development, promotion and sale of their
products than the Company. There can be no assurance that the Company's current
or potential competitors will not develop products and services comparable or
superior to those developed by the Company or adapt more quickly than the
Company to new technologies, evolving industry trends or changing customer
requirements. Increased competition could result in price reductions, reduced
margins, or loss of market share, any of which would materially and adversely
affect the Company's business, results of operations, or financial condition.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors, or that competitive pressures faced by
the Company will not have a material adverse effect on its business, results of
operations, and financial
5
<PAGE>
condition. If the Company is unable to compete successfully against current and
future competitors, the Company's business, results of operations, and financial
condition will be materially adversely affected.
The Company believes that the videoconferencing market may present lower
barriers to entry than its other markets and may therefore be subject to greater
competition in the future. Increased competition could result in price
reductions, reduced margins and loss of market share by the Company. There can
be no assurance that the Company will be able to compete successfully with its
existing or new competitors or that competitive pressures faced by the Company
will not materially and adversely affect its business, results of operations,
and financial condition.
MANAGEMENT OF GROWTH
The Company is faced with the risks typically associated with rapid
expansion. It has experienced growth in its corporate structure, in the number
of its employees, and the scope of its operating and financial systems. This
expansion has resulted in the need to hire a significant number of new
personnel. As a result of the level of technical and marketing expertise
necessary to support its existing and new customers, the Company must attract
and retain highly qualified and well-trained personnel. There may be only a
limited number of persons with the requisite skills to serve in these positions
and it may become increasingly difficult for the Company to attract and retain
such personnel. Failure to manage the Company's growth properly could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
DEPENDENCE ON PRODUCT COMPONENTS; SINGLE SOURCES OF SUPPLY; DEPENDENCE ON A
SINGLE FACILITY
The manufacture of the Company's products requires the assembly of a
number of components, the majority of which the Company sources from
substantial, and sometimes multiple, vendors. However, the supply level of and
the lead time in delivering certain key components is dynamic and difficult to
predict with any certainty. Sporadic shortages of or significant increases in
the price of such components could materially and adversely affect the Company's
business, results of operations, and financial condition. Certain key components
are available from only one source. The Company has no supply commitments
relating to such components. While the Company has generally been able to obtain
an adequate supply of such components in a timely manner, the Company believes
that alternate sources of supply could be difficult to develop over a short
period of time. The Company buys components from vendors who extend credit. Any
failure to receive suitable credit terms from vendors could have a material
adverse effect upon the Company's business, results of operations, and financial
condition.
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, the conversion, however, to in-house backup
supply would not be without some interruption and could have a material adverse
effect upon the Company's business, results of operations, and financial
condition.
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 and
could have a material adverse effect upon the Company's business, results of
operations, and financial condition. Accordingly, the Company's strategy is to
forecast requirements and build inventories which comprehend vendor lead times.
The Company has one manufacturing facility, and its revenues are dependent
upon the continued operation of the facility. There can be no assurance that the
occurrence of operational problems at the Company's facility would not
materially adversely affect the Company's business, results of operations, and
financial condition.
6
<PAGE>
DEPENDENCE UPON THIRD PARTIES TO MARKET AND SERVICE THE PRODUCTS
Although the Company expects to continue to market its products directly
to certain accounts, the Company intends to establish a network of resellers,
consisting primarily of value-added resellers ("VARs") and systems integrators
and OEMs with established distribution channels for multimedia communications
products, to market the Company's products and to educate potential end-users
and service providers with respect to the Company's products. The Company's
future prospects depend in large part on its ability to successfully develop
relationships with third parties and upon the marketing and product service
efforts of such third parties. There can be no assurance that the Company will
be able, for financial or other reasons, to finalize third-party distribution or
marketing agreements or that such arrangements, if finalized, will result in the
successful commercialization of any of the Company's products. In such event,
the Company's business, operating results and financial condition could be
materially affected.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's success will depend, in part, on its ability to obtain
patents, maintain trade secret protection and operate without infringing the
proprietary rights of third parties or having third parties circumvent the
Company's intellectual property rights. The Company has three issued U.S.
patents. Two relate to key technologies in the S4 communications switch product
and one relates to an interactive voice communication terminal not presently
incorporated in any product. Three additional patents are pending. They relate
to (i) video distribution within the SONETLYNX product line, (ii) certain
features of the CS4 programmable digital switch, and (iii) architecture and
features of the LANscape 2.0 videoconferencing product. There can be no
assurance that any patents issued to the Company will provide the Company with
any competitive advantages or will not be challenged by any third parties, that
the patents of others will not impede the ability of the Company to do business
or that third parties will not be able to circumvent the Company's patents, that
any of the Company's patent applications will result in the issuance of patents
or that the Company will develop additional proprietary products that are
patentable. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate any of the Company's products,
or, if patents are issued to the Company, design around the patented products
developed by the Company.
The Company may be required to obtain licenses from third parties to avoid
infringing patents or other proprietary rights. No assurance can be given that
any licenses required under any such patents or proprietary rights would be made
available, if at all, on terms acceptable to the Company. If the Company does
not obtain such licenses, it could encounter delays in product introductions, or
could find that the development, manufacture or sale of products requiring such
licenses could be prohibited. In addition, the Company could incur substantial
costs in defending itself in suits brought against the Company on patents or
other proprietary rights it might infringe or in filing suits against others to
have such patents or other proprietary rights declared invalid. Parties making
such claims may be able to obtain injunctive or other equitable relief which
could effectively block the Company's ability to sell its products in the United
States and abroad, and could obtain an award of substantial damage either of
which could have a material adverse effect upon the Company's business, results
of operations, and financial condition
Much of the Company's know-how and technology may not be patentable. To
protect its rights, the Company requires many employees, consultants, advisors
and collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets, know-how or other proprietary information in the
event of any unauthorized use or disclosure. Furthermore, the Company's business
may be adversely affected by competitors who independently develop competing
technologies, especially if the Company obtains no, or only narrow, patent
protection.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
While most of the Company's operations are not directly regulated, the
telecommunications service providers that constitute certain of the Company's
customers (particularly for the CS4) are heavily regulated at both the federal
and state levels. Such regulation may limit the number of potential customers
for the Company's services or impede the Company's ability to offer competitive
services to the market, or otherwise have a material adverse effect on the
7
<PAGE>
Company's business, results of operations, and financial condition. At the same
time, recently enacted legislation deregulating the telecommunications industry
may cause changes in the industry, which are difficult to predict at this time,
including entrance of new competitors and industry consolidation, which could in
turn subject the Company to additional competitors, increased pricing pressures,
decrease the demand for the Company's products or services, increase the
Company's cost of doing business or otherwise materially adversely affect the
Company's business, results of operations, and financial condition.
CONTINGENT LIABILITIES
In connection with the sale of its former operations in November 1995, the
Company agreed to certain customary obligations to indemnify the purchases in
such sale for potential losses associated with product liability, environmental
matters, employee matters and other similar items. Certain of these indemnity
obligations survive indefinitely. In the event that a loss associated with the
former operations of the Company is determined to be subject to such indemnity
obligations, the Company's business, results of operations, and financial
condition could be materially adversely affected. Furthermore, the Company could
incur substantial costs (including the diversion of the attention of management)
in defending itself in lawsuits relating to such indemnity obligations.
DEPENDENCE ON KEY PERSONNEL; RETENTION OF EMPLOYEES
The Company's success depends in large part on the continued service of
its key creative, technical, marketing, sales and management personnel and its
ability to continue to attract, motivate and retain highly qualified employees.
Because of the multifaceted nature of interactive media, key personnel often
require a unique combination of creative and technical talents. Such personnel
are in short supply, and the competition for their services is intense. The
process of recruiting key creative, technical and management personnel with the
requisite combination of skills and other attributes necessary to execute the
Company's strategy is often lengthy. The Company has at-will employment
arrangements with its management and other personnel, who may generally
terminate their employment at any time. The loss of the services of key
personnel or the Company's failure to attract additional qualified employees
could have a material adverse effect on the Company's results of operations and
new product development efforts.
VALUE OF SHARES OF STOCK; MARKET FOR COMMON STOCK; STOCK PRICE VOLATILITY
The Company's Common Shares are quoted on the Nasdaq National Market.
Based upon historical trends in the market for the Company's stock and for other
similar technology company stocks, the Company anticipates that the trading
price of its Common Stock may be subject to wide fluctuations in response to
quarterly variations in operating results, changes in actual earnings or in
earnings estimates by analysts, announcements of technological developments by
the Company or its competitors, general market conditions or other events
largely outside the Company's control. In addition, the stock market has
experienced extreme price and volume fluctuations which have particularly
affected the market prices of "high technology" stocks. These fluctuations have
often been disproportionate or unrelated to the operating performance of these
companies. These broad market fluctuations, general economic conditions or other
factors outside the Company's control may adversely affect the market price for
the Company's stock.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Shares
offered hereby. However, with respect to those Common Shares registered hereby
that are issuable upon the exercise of warrants, the Company will receive
$3,235,000, assuming the full exercise of all of such warrants at their stated
exercise prices.
8
<PAGE>
SELLING SHAREHOLDERS
The Selling Shareholders were issued the Common Shares covered by this
Prospectus in a series of unrelated private placements as summarized below:
Of the 5,813,633 Common Shares being registered:
(i) 993,023 Common Shares were issued to Infinity Investors, Ltd.
("Infinity"), 160,116 Common Shares were issued to Seacrest Capital
Limited ("Seacrest"), and 430,000 Common Shares were issued to Zug
Investments, each in settlement of a dispute arising under and in
conversion of those certain Series A and Series B Convertible
Debentures issued by the Company to Infinity and Seacrest dated
October 15, 1996, such Common Shares being registerable pursuant to
that certain Settlement Agreement dated August 22, 1997;
(ii) 30,000 Common Shares were issued to Isaac Arnold, Jr., 10,000 Common
Shares were issued to Arnold Corporation, and 20,000 Common Shares
were issued Meridian Fund, Ltd., such Common Shares being
registerable pursuant to certain Subscription Agreements dated
August 22, 1997;
(iii) 750,000 Common Shares were issued to The Coastal Corporation Second
Pension Trust (the "Coastal Trust") upon exercise of a warrant dated
May 7, 1997 which was issued pursuant to that certain Loan Agreement
dated May 8, 1997 among the Company, the Coastal Trust, and Intelect
Systems Corp., a wholly-owned subsidiary of the Company (the "Loan
Agreement"); 780,583 Common Share are issuable upon the conversion
of Company Series A Preferred Stock, which was issued to the Coastal
Trust upon conversion of debt to equity pursuant to the Loan
Agreement, all such Common Shares being registerable pursuant to
those certain Registration Rights Agreements dated May 8 and May 30,
1997;
(iv) 800,000 Common Shares are issuable to St. James Capital Corp. ("St.
James") upon exercise of warrants issued to St. James pursuant to
St. James Credit Facility dated February 14, 1997, as amended, among
the Company and St. James, such Common Shares being registerable
pursuant to that certain Registration Rights Agreement dated
February 26, 1997, as amended on March 27, April 24, and May 8,
1997;
(v) 542,182 Common Shares were issued to John Shaunfield as part of a
settlement agreement dated April 25, 1997 in settlement of all
future royalties formerly owed by Intelect Network Technologies
Company, a wholly-owned subsidiary of the Company, under a
technology purchase agreement, such Common Shares being registerable
pursuant to that certain Agreement dated August 25, 1997;
(vi) 331,329 Common Shares were issued to former shareholders of Intelect
Visual Communications Corp. ("IVC"), formerly known as Mosaic
Information Technologies Inc. ("Mosaic") by the Company in a private
placement in connection with its acquisition of Mosaic, such Common
Shares being registerable pursuant to that certain Registration
Rights Agreement dated March 29, 1996;
(vii) 300,000 Common Shares are issuable to Gregory L. Mayhan and Edgar L.
Read as former shareholders of DNA Enterprises, Inc. ("DNA") upon
exercise of those two certain warrants each dated February 13, 1997
issued to Messrs. Mayhan and Read in connection with the Company's
acquisition of DNA, such Common Shares being registerable pursuant
to the terms of such warrants;
(viii) 636,400 Common Shares were issued to certain accredited investors,
615,000 of such Common Shares being registerable pursuant to certain
Subscription Agreements dated August 29, 1997, and 21,400 being
issued to the selling agent in such transaction as part of such
selling agent's fee; and
9
<PAGE>
(ix) 30,000 Common Shares are issuable to Lifeline Industries, Inc. upon
exercise of that certain warrant expiring on December 31, 2001
issued as compensation for consulting services, such Common Shares
being registerable pursuant to the terms of such warrant.
In each case, the issuance of Common Shares to the Selling Shareholders
was undertaken pursuant to Section 4(2) of the Securities Act and, in the case
of the issuances to the accredited investors referred to in item (viii) above,
under Regulation D promulgated thereunder.
The table below sets forth the number of Common Shares beneficially owned
by each of the Selling Shareholders as of September 10, 1997, the number of
shares to be offered by each of the Selling Shareholders pursuant to this
Prospectus, and the number of shares to be beneficially owned by each of the
Selling Shareholders if all of the shares offered hereby are sold as described
herein. Except as provided below, the Selling Shareholders have not held any
positions or offices with, been employed by, or otherwise had a material
relationship with, the Company or any of its predecessors or affiliates since
September 1, 1994.
Of the Selling Shareholders, Robert M. Bolder is the former president of
IVC, a wholly-owned subsidiary of the Company.
Of the Selling Shareholders, the following were employees of Mosaic: Eric
Bolder, Robert Bolder, Robert W. Davis, Matthew Feldman, Nigel Kilpatrick,
Wellner Anderson, Gerald Brangman, Raymond Carbone, and George Eagan. Matthew
Feldman was an officer of IVC. Robert Davis and Nigel Kilpatrick are currently
employees of IVC.
Of the Selling Shareholders, the following extended credit to IVC prior
to IVC's acquisition by the Company and certain of the following received Common
Shares of the Company in partial satisfaction of such obligations of IVC: Robert
Davis and Richard Kalin.
Of the Selling Shareholders, John Shaunfield is an employee of Intelect
Network Technologies Corp., a wholly-owned subsidiary of the Company.
Of the Selling Shareholders, Edgar L. Read and Gregory Mayhan are
employees of DNA Enterprises, Inc., a wholly-owned subsidiary of the Company.
<TABLE>
<CAPTION>
Number of Number of
Common Shares Common Shares
Beneficially Owned Number of Beneficially
as of September 10, Common Shares Owned After
Name of Selling Shareholder 1997 Offered Hereby Offering
- --------------------------------- ------------------- --------------- ---------------
<S> <C> <C> <C>
America First Associates Corp. 21,400 21,400 0
Wellner Anderson 5,593 5,593 0
Kimberly Arcoro 3,835 3,835 0
Robert Arcoro, Jr. 3,835 3,835 0
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Number of Number of
Common Shares Common Shares
Beneficially Owned Number of Beneficially
as of September 10, Common Shares Owned After
Name of Selling Shareholder 1997 Offered Hereby Offering
- --------------------------------- ------------------- --------------- ---------------
<S> <C> <C> <C>
Arnold Corporation 10,000 10,000 0
Isaac Arnold, Jr. 99,000 30,000 69,000
Eric Bolder 7,989 7,989 0
Gwendolyn Bolder 3,196 3,196 0
Robert Bolder 94,102 94,102 0
Gerald Brangman 750 750 0
James and Mary Clay 2,557 2,557 0
The Coastal Corporation 6,685,135 1,530,583(1) 5,154,552(2)
Second Pension Trust
Chris Cutsogeorge 958 958 0
Blake C. Davenport 25,000 25,000 0
Robert W. Davis 15,979 15,979 0
George and Lisa Eagan 9,077 9,077 0
Arnold and Elaine Feldman 3,196 3,196 0
Matthew J. Feldman 98,895 98,895 0
Spencer G. Feldman 799 799 0
Fernhill Partners 40,000 40,000 0
Fiftieth & Grover Shopping Center 29,500 25,000 4,500
</TABLE>
- --------
1 Includes 780,583 Common Shares issuable upon conversion of Series A
Preferred Shares on a share-per- share basis.
2 Includes 450,000 Common Shares issuable upon exercise of a warrant
expiring August 26, 2002 at $6.00 per Common Share; includes 4,219,409 Common
Shares issuable upon conversion of the Company's 10% Cumulative Convertible
Preferred Shares, Series A (the "Series A Preferred Shares") on a
share-per-share basis; includes 485,143 Common Shares issuable upon conversion
of Series A Preferred Shares issuable upon conversion of $3,000,000 of debt to
equity at $6.18375 per share as set forth in that certain Amended and Restated
Loan Agreement dated August 27, 1997 among the Company and The Coastal
Corporation Second Pension Trust.
11
<PAGE>
<TABLE>
<CAPTION>
Number of Number of
Common Shares Common Shares
Beneficially Owned Number of Beneficially
as of September 10, Common Shares Owned After
Name of Selling Shareholder 1997 Offered Hereby Offering
- --------------------------------- ------------------- --------------- ---------------
<S> <C> <C> <C>
Carol Filler 25,000 25,000 0
Douglas Floren 25,000 25,000 0
Edward H. Gomez 5,273 5,273 0
Richard A. Gray 20,000 20,000 0
Alexander Greenberg 25,000 25,000 0
Barbara Hall 1,570 1,278 0
Philip Hempleman 75,000 75,000 0
Kevin T. Hoffman 4,794 4,794 0
Infinity Investors, Ltd.(3) 993,023 993,023 0
Joseph Kaidanow 5,593 5,593 0
Richard S. Kalin 34,967 27,517 7,450
Nigel Kilpatrick 6,392 6,392 0
Emanuel Kramer 29,721 29,721 0
Lifeline Industries, Inc. 30,000(4) 30,000(4) 0
David May 15,000 15,000 0
Gregory L. Mayhan 150,000(5) 150,000(5) 0
Timothy McCollum 40,000 40,000 0
</TABLE>
- --------
3 Party to a Settlement Agreement dated August 22, 1997 which limits the
Common Shares it and Seacrest Capital Limited, collectively, can sell to 125,000
per month until October 31, 1997, and 250,000 each month thereafter.
4 Includes 30,000 Common Shares issuable by the Company upon exercise of
that certain warrant expiring on December 31, 2001 at $4.50 per Common Share.
5 Includes 150,000 Common Shares issuable upon exercise of a warrant
expiring February 13, 1999 at $5.00 per Common Share.
12
<PAGE>
<TABLE>
<CAPTION>
Number of Number of
Common Shares Common Shares
Beneficially Owned Number of Beneficially
as of September 10, Common Shares Owned After
Name of Selling Shareholder 1997 Offered Hereby Offering
- --------------------------------- ------------------- --------------- ---------------
<S> <C> <C> <C>
Meridian Fund, Ltd. 467,000 20,000 447,000
Sanford Prater 40,000 40,000 0
Frank Lyon Polk III 37,500 37,500 0
Privet Row, Inc. 25,000 25,000 0
Leonard Rauner 25,000 25,000 0
Edgar L. Read 150,000(6) 150,000(6) 0
Marcus R. Rowan 15,000 15,000 0
Seacrest Capital Limited(7) 160,116 160,116 0
John Shaunfield 550,515 542,182 8,333
St. James Capital Corp. 800,000(8) 800,000(8) 0
TCM Partners, L.P. 365,000 150,000 215,000
Wayne Wilkey 7,500 7,500 0
Zug Investments 430,000 430,000 0
</TABLE>
The Selling Shareholders identified above may have sold, transferred or
otherwise disposed of all or a portion of their Common Shares since the date on
which they provided the information regarding their Common Shares in
transactions exempt from the registration requirements of the Securities Act.
Additional information concerning the above listed Selling Shareholders may be
set forth from time to time in prospectus supplements to this Prospectus.
See "Plan of Distribution."
PLAN OF DISTRIBUTION
Common Shares covered hereby may be offered and sold from time to time by
the Selling Shareholders. The Selling Shareholders will act independently of the
Company in making decisions with respect, among other things, to the timing,
manner and size of each sale. Such sales may be made in the over-the-counter
market or otherwise, at
- ----------------------
6 Includes 150,000 Common Shares issuable upon exercise of a warrant
expiring February 13, 1999 at $5.00 per Common Share.
7 Party to a Settlement Agreement dated August 22, 1997 which limits the
Common Shares it and Infinity Investors, Ltd., collectively, can sell to 125,000
per month until October 31, 1997, and 250,000 each month thereafter.
8 Includes 800,000 Common Shares issuable upon exercise of warrants
expiring February 26, March 27, April 24, and May 8, 2002 at $2.00 per Common
Share.
13
<PAGE>
prices related to the then current market price or in negotiated transactions,
including pursuant to an underwritten offering or one or more of the following
methods: (a) purchases by the broker-dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; (b) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (c) block trades in which the broker-dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction. In effecting sales, broker-dealers
engaged by the Selling Shareholders may arrange for other broker-dealers to
participate. Broker-dealers will receive commissions or discounts from the
Selling Shareholders in amounts to be negotiated immediately prior to the sale.
In offering the Common Shares covered hereby, the Selling Shareholders and
any broker-dealers and any other participating broker-dealers who execute sales
for the Selling Shareholders may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales, and any profits
realized by the Selling Shareholders and the compensation of such broker-dealer
may be deemed to be underwriting discounts and commissions. In addition, any
shares covered by this Prospectus which qualify for sale pursuant to Rule 144
may be sold under Rule 144 rather than pursuant to this Prospectus.
The Company has advised the Selling Shareholders that during such time as
they may be engaged in a distribution of the Common Shares included herein they
are required to comply with Regulation M promulgated under the Exchange Act.
With certain exceptions, Regulation M precludes any Selling Shareholder, any
affiliated purchasers, and any broker-dealer or other person who participates in
such distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the Common Shares.
Because it is possible that a significant number of Common Shares could be
sold at the same time hereunder, such sales, or the possibility thereof, may
have a significant depressive effect on the market price of the Company's Common
Shares.
This offering will terminate on the earlier of (a) the date on which the
shares are eligible for resale without restriction pursuant to Rule 144(k) under
the Securities Act or (b) the date on which all shares offered hereby have been
sold by the Selling Shareholders.
DESCRIPTION OF CAPITAL STOCK
The authorized share capital of the Company is 80,000,000 Common Shares of
US $0.01 par value each (the "Common Shares") and 15,000,000 Serial Preferred
Shares of US $0.01 par value each (the "Preferred Shares"). As of September 10,
1997, there were 22,097,115 Common Shares and 4,999,992 Preferred Shares issued
and outstanding.
COMMON SHARES
The holders of Common Shares shall each be entitled to rank pari passu in
all respects with each other holder of Common Shares. Any shareholder who is a
holder of Common Shares shall be entitled to one vote for each Common Share held
by such holder. Subject to the payment of preferential amounts to which the
holders of Preferred Shares, which may be issued from time to time, may be
entitled, holders of Common Shares shall be entitled, pro rata to their holding
of Common Shares, to participate in any assets or surplus of the Company
distributable in any liquidation, dissolution or winding-up of the Company.
14
<PAGE>
PREFERRED SHARES
The Preferred Shares may be issued from time to time in one or more series
and in such amount as may be established or designated from time to time by the
Board of Directors in accordance with the Bye-Laws of the Company. The Board of
Directors has the authority to establish and designate any unissued Preferred
Shares as a series of such shares.
10,000,000 of the serial Preferred Shares have been designated as shares
of $2.0145, 10% Cumulative Convertible Preferred Shares, Series A, (the "Series
A Preferred Shares") of which 4,219,409 shares have been issued. The Series A
Preferred Shares may be redeemed, at the Company's option, at 110%, 105%, and
100% of face value after June 1, 1999, 2000, and 2001, respectively. After
August 31, 1997, the Series A Preferred Shares are convertible into Common
Shares on a share-for-share basis, subject to anti-dilution provisions.
The holders of Series A Preferred Shares do not generally have any right
or power to vote on any question or in any proceeding at any meeting of
shareholders, provided that holders of the Series A Preferred Shares shall
receive notice of, and be entitled to representation at any such meeting. On any
matters on which the holders of the Series A Preferred Shares shall be entitled
to vote, they shall be entitled to one vote for each Series A Preferred Share
held.
Dividends are payable quarterly beginning September 30, 1997, in cash or
Common Shares, at the Company's option. Dividends payable in Common Shares shall
be paid in an amount equivalent to the accrued dividend, converted into Common
Shares at the average closing market bid price for the five (5) consecutive
trading days prior to the date the dividend is otherwise payable. In case at any
time the equivalent of three (3) or more full quarterly dividends (whether
consecutive or not) on any series of Preferred Shares shall be in arrears, then
during the period (hereinafter called the "Class Voting Period") commencing with
such time and ending with the time when all arrears in dividends on all
Preferred Shares shall have been paid and the full dividend on all Preferred
Shares for the then current quarterly dividend period shall have been paid or
declared and set apart for payment, at a meeting called by the holders of the
Series A Preferred Shares and held for the election of directors during the
Class Voting Period, the holders of a majority of the outstanding Series A
Preferred Shares represented in person or by proxy at said meeting shall be
entitled, as a class, to the exclusion of the holders of all other classes of
shares of the Company, to elect two directors of the Company (or such greater
number constituting not less than 35% of the number of Directors authorized),
each Series A Preferred Share entitling the holder thereof to one vote for each
Director.
In the event of any liquidation, dissolution, or winding up of the affairs
of the Company, whether voluntary or otherwise, after payment or provision for
payment of the debts and other liabilities of the Company, the holders of the
Series A Preferred Shares shall be entitled to receive, out of the remaining net
assets of the Company, the amount of Two and 1.45/100 dollars ($2.0145) in cash
for each Series A Preferred Share, plus an amount equal to all dividends accrued
and unpaid on each such Series A Preferred Share up to the date fixed for
distribution, before any distribution shall be made to the holders of the Common
Shares, or any other capital stock of the Company ranking (as to any such
distribution) junior to the Series A Preferred Shares.
In the event the Company issues any new securities, the holders of the
Series A Preferred Shares shall have preemption rights entitling such holders to
purchase such new securities from the Company in cash for the same per share
consideration at which such new securities are issued (or the per share price at
which a share of the new securities is acquirable upon exercise or conversion of
options, warrants or other rights to Common Shares), except such preemption
rights shall not be applicable to certain financings.
VARIATION OF RIGHTS
If at any time the share capital is divided into different classes of
shares, the rights attached to any class (unless otherwise provided by the terms
of issue of the shares of that class) may, whether or not the Company is being
wound up, be varied with the consent in writing of the holders of three-fourths
of the issued and outstanding shares
15
<PAGE>
of that class or with the sanction of a resolution passed by a majority of the
votes cast at a separate general meeting of the holders of the shares of the
class in accordance with the relevant provisions of the Companies Act 1981 of
Bermuda. The rights conferred upon the holders of the shares of any class issued
with preferred or other rights shall not, unless otherwise expressly provided by
the terms of issue of the shares of that class, be deemed to be varied by the
creation or issue of further shares ranking pari passu therewith.
LIMITATIONS ON OWNERSHIP OF SHARES BY RESIDENTS OF BERMUDA
Under the Exchange Control Act of 1972 of Bermuda, the issue and transfer
of shares of Bermuda companies such as the Company is subject to the prior
general approval of the Bermuda Monetary Authority (the "Authority"). The
Authority has approved the issue and subsequent unrestricted transfer of the
Common Shares offered by this Prospectus to and between persons and corporations
considered by the Authority to be nonresidents of Bermuda for foreign exchange
purposes for so long as such Common Shares remain listed on the Nasdaq National
Market. The issue or transfer of shares of the Company to persons or
corporations considered by the Authority to be residents of Bermuda for foreign
exchange purposes will require the specific approval of the Authority.
LEGAL MATTERS
The validity of the Common Shares offered by the Selling Shareholders
hereby will be passed upon by Conyers, Dill & Pearman, Hamilton, Bermuda.
EXPERTS
The consolidated financial statements and financial statement schedules of
the Company as of December 31, 1995 and 1996, and the related consolidated
statements of operations, shareholders' equity and 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 have been incorporated by reference herein and
in the registration statement in reliance upon the report of KPMG Peat Marwick,
independent chartered accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing. The report of KPMG
Peat Marwick covering the aforementioned consolidated financial statements and
financial statement schedule 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 Company's
ability to continue as a going concern. The consolidated financial statements
and financial statement schedule do not include any adjustments that might
result from the outcome of this uncertainty.
16
<PAGE>
PROSPECTUS
TABLE OF CONTENTS
PAGE
Available Information .................................................. 2
Incorporation of Certain Documents
by Reference ........................................................ 2
Enforceability of Civil Liabilities
Under United States Federal
Securities Laws ..................................................... 3
The Company ............................................................ 3
Risk Factors ........................................................... 4
Use of Proceeds ........................................................ 8
Selling Shareholders ................................................... 9
Plan of Distribution ................................................... 13
Description of Capital Stock ........................................... 14
Limitations on Ownership of Shares
by Residents of Bermuda ............................................. 16
Legal Matters .......................................................... 16
Experts ................................................................ 16
17
