As filed with the Securities and Exchange Commission on August 10, 1998.
Registration No. 333 - ________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM S-3
--------------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
INTELECT COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
---------------------------
DELAWARE 76-0471342
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1100 EXECUTIVE DRIVE
RICHARDSON, TEXAS 75081
(972) 367-2100
(Address, including zip code, and
telephone number, including area code,
of registrant's principal
executive offices)
---------------------------
HERMAN M. FRIETSCH
Chairman and Chief Executive Officer INTELECT
COMMUNICATIONS, INC.
1100 Executive Drive
Richardson, Texas 75081
(972) 367-2100 (Name, address, including zip
code, and telephone number, including area code, of agent for
service)
--------------------
with a copy to:
ROBERT C. BEASLEY
RYAN & SUDAN, L.L.P.
909 Fannin, Suite 3900
Houston, Texas 77010
(713) 652-0501
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Approximate date of commencement of proposed sale to the public: FROM TIME
TO TIME AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
<PAGE>
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
- ------------------------------------------------------------------------------
Calculation of Registration Fee (See following page)
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
<PAGE>
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF SECURITIES AMOUNT TO PRICE OFFERING REGISTRATION
TO BE REGISTERED BE REGISTERED PER SHARE(2) PRICE FEE
- ------------------- ------------- ------------ --------- ------------
Common Stock, (1)3,402,678 $3.86 $13,134,338 $3,875
$.01 par value
(1) Represents (i) 831,169 shares of Common Stock (the "Series B Shares")
issuable to Navesink Equity Derivative Fund LDC ("Navesink") upon
conversion by Navesink (assuming conversion at a fixed conversion price of
$4.8125 per share at a stated value of $4.375 per share) of 914,286 shares
of the Company's 10% Cumulative Convertible Preferred Stock, Series B (the
"Series B Preferred") issued in a private placement on December 16, 1997
and 33,920 shares of Common Stock issued as dividends on the Series B
Preferred; all such shares of Common Stock are registered pursuant to
those certain Registration Rights Agreements dated December 16, 1997, as
amended; (ii) 30,000 shares of Common Stock issuable to Lifeline
Industries, Inc. ("Lifeline") upon exercise of warrants issued on June 29,
1998 to Lifeline, having a conversion price of $5.00 per share; all such
shares of Common Stock issuable to Lifeline being registerable pursuant to
that certain Registration Rights Agreement dated June 29, 1998 (" Lifeline
Registration Rights Agreement"); (iii) 150,000 shares of Common Stock
issued to Amerix Electronics; and (iv) 2,357,590 shares, which is 1.75
times the 1,347,194 shares issuable upon conversion (the "Conversion
Shares") of 5,000 shares of the Company's Series D Convertible Preferred
Stock (the "Series D Preferred Stock") issued in a private placement on
June 26, 1998. The number of Conversion Shares is calculated as of August
7, 1998, pursuant to the Registration Rights Agreement dated as of June
26, 1998 between the Company and the purchasers of the Series D Preferred
Stock. In accordance with Rule 416 under the Securities Act of 1933, as
amended (the "Act"), this Registration Statement also covers such
indeterminate number of shares of Common Stock that may be offered or
issued pursuant to terms which provide for a change in the amount of
shares of Common Stock being offered or issued (a) to prevent dilution
resulting from stock splits, stock dividends or similar transactions, or
(b) as a result of decreases in the conversion price of the Series D
Preferred Stock.
(2) Pursuant to Rule 457(c), the registration fee for the above shares is
calculated based upon the average of the high and low prices of the
Company's Common Stock as reported on the NASDAQ National Market on August
6, 1998.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, DATED AUGUST 10, 1998
INTELECT COMMUNICATIONS, INC.
3,402,678 SHARES OF COMMON STOCK
-----------
The prospectus relates to the offer and sale by certain persons listed
under "Selling Stockholders" (collectively, the "Selling Stockholders"), of
shares of common stock, par value $0.01 (the "Common Stock") of Intelect
Communications, Inc. (the "Company"), of up to: (i) 831,169 shares of Common
Stock (the "Series B Shares") issuable to Navesink Equity Derivative Fund LDC
("Navesink") upon conversion by Navesink (assuming conversion at a fixed
conversion price of $4.8125 per share at a stated value of $4.375 per share) of
914,286 shares of the Company's 10% Cumulative Convertible Preferred Stock,
Series B (the "Series B Preferred") issued in a private placement on December
16, 1997 and 33,920 shares of Common Stock issued as dividends on the Series B
Preferred; all such shares of Common Stock are registered pursuant to those
certain Registration Rights Agreements dated December 16, 1997, as amended (the
"Navesink Registration Rights Agreement"); (ii) 30,000 shares of Common Stock
issuable to Lifeline Industries, Inc. ("Lifeline") upon exercise of a warrant
issued in a private placement on June 29, 1998 to Lifeline, having a conversion
price of $5.00 per share (the "Lifeline Warrant"); all such shares of Common
Stock issuable to Lifeline being registerable pursuant to that certain
Registration Rights Agreement dated June 29, 1998 ("Lifeline Registration Rights
Agreement"); (iii) 150,000 shares of Common Stock issued in a private placement
to Amerix Electronics, Inc. ("Amerix"); and (iv) 2,357,590 shares, which is 1.75
times the 1,347,194 shares issuable upon conversion (the "Conversion Shares") of
5,000 shares of the Company's Series D Convertible Preferred Stock (the "Series
D Preferred Stock") issued in a private placement to certain purchasers on June
26, 1998 and, in accordance with Rule 416 under the Act, such presently
indeterminate number of additional shares as may be issuable upon conversion of
the Series D Preferred Stock as may become issuable as a result of stock splits,
stock dividends and antidilution provisions (including decreases in the
conversion price of the Series D Preferred Stock). The Conversion Shares do not
include fractional shares of Common Stock that the Company is not required to
issue upon conversion of the Series D Preferred Stock. The number of shares
registered hereunder on behalf of the holders of the Series D Preferred Stock is
determined pursuant to the Registration Rights Agreement dated as of June 26,
1998 between the Company and the purchasers of the Series D Preferred Stock and
is equal to 1.75 multiplied by the number of Conversion Shares issuable as of
August 7, 1998. In accordance with the Certificate of Designations of Series D
Preferred Stock, the number of Conversion Shares is determined by dividing the
aggregate stated value of the shares of Series D Preferred Stock together with
any accrued and unpaid premium of 4.00% per annum by the Conversion Price. The
Conversion Price is the lesser of (a) $9.082, which price may be reset to the
five day average volume weighted average trading price of the common stock for
the five trading days following the filing of the Company's Form 10-Q for the
quarter ending June 30, 1998 if such price is less than $9.082 (the "Reset
Price"), or (b) 97% of the average of the three lowest closing bid prices for
the Common Stock as reported on NASDAQ for the ten consecutive trading days
preceding the date of determination, subject to adjustment for certain dilutive
transactions and other events. If for any 20 of 30 consecutive trading days the
daily volume weighted average trading price (as reported by Bloomberg) equals or
exceeds $12.00, the Company may elect for the Conversion Price to equal the
lesser of $9.082 or the Reset Price. On August 7, 1998 the Conversion Price was
$3.7285 (based on 97% of the average of the three lowest closing bid prices of
the Common Stock for the ten consecutive trading days ending August 6, 1998).
For further information on the Selling Stockholders and each of the relevant
transactions see "Selling Stockholders" in this Prospectus. The Company will not
receive any of the proceeds from the sale of the shares by the Selling
Stockholders, except to the extent of an exercise by the holder of the Lifeline
Warrant as more fully described in "Use of Proceeds" in this Prospectus. The
shares of Common Stock 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 Stockholders.
The Selling Stockholders 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 Stock is traded on the Nasdaq National Market under the symbol ICOM.
- -------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN PURCHASING THE SHARES OF
COMMON STOCK OFFERED HEREBY.
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 August ____, 1998.
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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
Stock of the Company is 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 Stock 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 Stock 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, copies of which may be obtained from the Commission at prescribed
rates, or electronically by means of the Commission's home page on the Internet
at HTTP://WWW.SEC.GOV.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
1. Annual Report on Form 10-K filed on March 31, 1998;
2. Quarterly Report on Form 10-Q filed on May 15, 1998;
3. Current Report on Form 8-K filed on May 11, 1998;
4. Current Report on Form 8-K filed on June 26, 1998; and
5. The description of the Company's Common Stock contained in
the Registration Statement on Form S-4 declared effective on
October 30, 1997 (File No. 333-39063) and the Form 8-K of the
Company filed on December 5, 1997.
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 Stock
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.
The consolidated balance sheet of the Company as of December 31, 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1997 have been incorporated by reference
herein together with the related notes and the report of Arthur Andersen LLP
dated March 27, 1998.
The consolidated balance sheet of the Company and its subsidiaries as of
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996, the
two month period ended December 31, 1995 and the year ended October 31, 1995,
together with the related notes and the report of KPMG Peat Marwick, independent
chartered accountants, all contained in the Company's 1997 annual report, are
incorporated herein by reference. The report of KPMG Peat Marwick on the
aforementioned
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consolidated financial statements 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 operates
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.
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, including any
beneficial owner, 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., CHIEF FINANCIAL OFFICER, 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.
THE COMPANY
The Company, through its operating subsidiaries, is currently engaged in
the business of designing, producing, and marketing products, technologies, and
services for multimedia applications in telecommunications and networking.
Unless the context otherwise indicates, the "Company" refers to Intelect
Communications, Inc. 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 STOCK 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 STOCK.
EFFECT OF SALES ON MARKET PRICE OF STOCK
Because it is possible that a significant number of shares of Common Stock
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
Common Stock.
3
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RECENT OPERATING LOSSES AND LIQUIDITY
The Company has incurred significant operating losses and negative cash
flows from operations in 1998, 1997, 1996, and 1995. Losses were funded by
proceeds from issuance of notes payable and the sale of preferred and common
stock in 1998, and 1997, net proceeds from issuance of convertible debentures in
1996, and proceeds from the sale of the Savage Arms subsidiary in October 1995.
The Company expects operating losses and negative cash flow from operations to
continue.
Approximately 59% of 1997 revenues resulted from product sales to one
distributor for multiple installations in the Republic of Korea. The Company is
continuing to implement engineering, marketing and distribution programs begun
during 1997 to significantly increase sales to non-Korean customers, especially
in the U.S. The company is also working with its Korean distributor to develop
significant sales in that market during 1998. However, the outlook for
increasing revenues, including the level and timing of renewed Korean sales, is
uncertain. Also, the Company's progress toward improved cash flow may be delayed
beyond current expectations. Accordingly, the Company has made contingency plans
to reduce costs and preserve cash resources at lower levels of revenue.
In order to finance both the expected operating losses and expected growth
in production and revenue, the Company obtained financing in February, April,
May and June 1998, through sales of preferred stock and establishment of a
secured credit facility. The Company believes these financial resources will be
adequate to fund operations until profitability and positive operating cash flow
are achieved. The company cannot assure that profitability and positive cash
flow will be achieved when expected. If the aforementioned sales plans are not
achieved, operating losses and negative cash flows exceed the Company's
estimates, or capital requirements in connection with the design, development,
and commercialization of its principal products are higher than estimated, the
Company will need to raise additional capital. Although the Company believes it
could raise additional capital through public or private equity or debt
financings, if necessary, the Company cannot assure that such financings would
be available, or available on acceptable terms. If such financing were not
available, the Company has determined that a significant reduction of
engineering, development, selling, and administrative costs would allow the
Company to continue as a going concern through 1998; however, after such time,
revenues will need to increase over current levels for the Company to continue
to operate in its current form.
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.
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. None of
the
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Company's significant customers have entered into a long-term supply agreement
requiring them to purchase a minimum amount of product from the Company.
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. There can be no assurances that the Company's
principal customers will continue to purchase product from the Company at
current levels, if at all, or that the Company will be able to replace such
purchases with sales to other customers. 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.
During 1997, 59% of the Company's sales were to one distributor in Korea.
In light of the difficulties which developed in general in Korean and other
Asian markets during 1997, the outlook for continuation of sales in those areas
has become uncertain.
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
Stock 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 may require additional 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
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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 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; however, the conversion 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
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connecting to the 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.
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"), 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.
In common with many companies in the telecommunications industry, the
Company has received notice that it may be infringing on certain intellectual
property rights of others. These claims have been referred to counsel for
evaluation. 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,
7
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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
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's subsidiary Intelect Communications Systems Limited agreed to certain
customary obligations to indemnify the purchasers 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
Intelect Communications Systems Limited 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.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CHARTER AND BY-LAW PROVISIONS
Certain provisions of the Company's certificate of incorporation, by-laws
and Delaware law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of the Company and limit the
price that certain investors might be willing to pay in the future for shares of
the Common Stock. These provisions include a classified Board of Directors,
provisions that the Board of Directors have exclusive authority to amend or
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<PAGE>
change the By-laws of the Company, the ability of the Board of Directors to
authorize the issuance, without further stockholder approval, of preferred stock
with rights and privileges which could be senior to the Common Stock,
eliminating the stockholders' ability to take any action without a meeting,
eliminating the ability of stockholders to call special meetings without the
required consent of the Board of Directors, and establishment of certain advance
notice procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings. The Company is
also subject to Section 203 of the Delaware General Corporation Laws which,
subject to certain exceptions, prohibits a Delaware corporation from engaging in
any of a broad range of business combinations with any "interested stockholder"
for a period of three years following the date that such stockholder became an
"interested stockholder."
VALUE OF SHARES OF STOCK; MARKET FOR COMMON STOCK; STOCK PRICE VOLATILITY
The Company's Common Stock is 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 of
the Common Stock.
USE OF PROCEEDS
Except for the circumstances herein, the Company will not receive any
proceeds from the sale of Common Stock offered hereby. Under the Lifeline
Warrant, assuming full exercise of the warrant at its stated exercise price of
$5.00 per share, the Company will receive cash proceeds of $150,000. The Company
will use the proceeds from the exercise of the Lifeline Warrant for general
corporate purposes.
SELLING STOCKHOLDERS
The Selling Stockholders were issued the Common Stock covered by this
Prospectus in a series of unrelated private placements as summarized below:
Of the 3,402,678 shares of Common Stock being registered:
(i) Effective December 16, 1997, the Company issued 914,286 shares of
the Series B Preferred to Navesink. The Series B Preferred has a
stated value of $4.375 per share, a 10% annual dividend payable in
Common Stock or cash, and is convertible into Common Stock at a fixed
conversion price of $4.8125 (the "Fixed Conversion Price") or a
variable conversion price of 85% of the average closing bid price of
the Common Stock as reported on the Nasdaq Stock Market for the five
(5) trading days before the date of conversion (the "Variable
Conversion Price"). Pursuant to the Navesink Registration Rights
Agreement, the Company has agreed to register 831,169 shares of
Common Stock, which amount represents the number of shares of Series
B Preferred which would be issuable at the Fixed Conversion Price
assuming the conversion of 914,286 shares of Series B Preferred, and
an additional 33,290 shares of Common Stock which were issued as
dividends on the Series B Preferred for the periods ended March 31,
1998 and June 30, 1998 respectively; all such shares of Common Stock
are registered pursuant to the Navesink Registration Rights
Agreement.
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<PAGE>
(ii) 30,000 shares of Common Stock are issuable to Lifeline upon
exercise of the Lifeline Warrant; all such shares of Common Stock
issuable to Lifeline being registerable pursuant to the Lifeline
Registration Rights Agreement.
(iii) 150,000 shares of Common Stock were issued to Amerix in
connection with the prepayment of certain commissions owed under that
certain Sales Representative Agreement dated January 12, 1998 between
Intelect Network Technologies Company (a wholly owned subsidiary of
the Company) and Amerix.
(iv) 2,357,590 shares, which is 1.75 times the 1,347,194 Conversion
Shares issuable upon conversion of 5,000 shares of the Series D
Preferred Stock. The shares of Common Stock which are issuable to CCG
Capital Ltd., CCG Investment Fund Ltd.,Wingate Capital Ltd., Fisher
Capital, Ltd., and Midway Capital Ltd. (collectively, the "Citadel
Entities") upon conversion of the Company's Series D Convertible
Preferred Stock (the "Series D Preferred Stock"), which were issued
pursuant to that certain Securities Purchase Agreement and are
registerable pursuant to that certain Registration Rights Agreement,
each of such agreements being among the Company and the Citadel
Entities and dated June 26, 1998. The Company has agreed to register
a specific number of Conversion Shares for resale by the Selling
Stockholders holding the Series D Preferred Stock. The number of
Conversion Shares shown in the following table as being offered by
the Selling Stockholders which hold Series D Preferred Stock does not
included such presently indeterminate number of shares of Common
Stock as may be issuable upon conversion of the Series D Preferred
Stock pursuant to the provisions thereof regarding determination of
the applicable conversion price but which shares of Common Stock are,
in accordance with Rule 416 under the Securities Act, included in the
Registration Statement of which this Prospectus forms a part.
In each case, the issuance of Common Stock to the Selling Stockholders was
undertaken pursuant to Section 4(2) of the Securities Act.
Except as otherwise indicated, the table below sets forth the number of
shares of Common Stock beneficially owned by each of the Selling Stockholders as
of August 3, 1998, the number of shares of Common Stock to be offered by each of
the Selling Stockholders pursuant to this Prospectus, and the number of shares
of Common Stock to be beneficially owned by each of the Selling Stockholders if
all of the shares of Common Stock offered hereby are sold as described herein.
<TABLE>
<CAPTION>
Number of Shares Number of Shares
of Common Stock of Common Stock
Beneficially Owned Number of Shares Beneficially
as of August 3, of Common Stock Owned After
Name of Selling Stockholder 1998 (1) Offered Hereby Offering (5)
- --------------------------------- --------------- - -------------- ---------------
<S> <C> <C> <C>
Amerix Electronics, Inc. ............. 150,000 150,000 0
Lifeline Industries, Inc. ............ 50,000 30,000 0
Navesink Equity Derivative Fund LDC .. 1,074,303(2) 865,089 227,651
Midway Capital Ltd. (6) .............. 37,644(3) 70,726(4) 0
CCG Capital Ltd. (6) ................. 126,123(3) 94,304(4) 0
CCG Investment Fund, Ltd. (6) ........ 132,491(3) 94,304(4) 0
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Wingate Capital Ltd. (6).............. 796,950(3) 734,153(4) 0
Fisher Capital Ltd. (6)............... 1,480,406(3) 1,364,102(4) 0
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes voting
or investment power with respect to securities and includes any
securities which the person has the right to acquire within 60 days
of August 3, 1998 through the conversion or exercise of any security
or other right.
(2) Effective July 16, 1998, Navesink converted 731,285 shares of Series
B Preferred into 812,732 shares of Common Stock at the Variable
Conversion Price then in effect. An additional 227,651 shares of
Common Stock are issuable in connection with the 183,001 shares of
Series B Preferred which have not yet been converted to Common Stock
by Navesink, based on a Variable Conversion Price equal to $3.516909
(which is 85% of the average of the closing bid prices of the Common
Stock for the five consecutive trading days ended July 31, 1998).
The actual number of shares of Common Stock issuable upon conversion
of the Series B Preferred is that number of shares of Common Stock
equal to the quotient of (i) the aggregate stated value of the
shares of Series B Preferred being converted ($4.375 per share),
divided by (ii) the conversion price. The conversion price is the
lesser of the Fixed Conversion Price (i.e., $4.8125) or the Variable
Conversion Price (i.e., 85% of the average of the closing bid price
as reported on the Nasdaq Stock Market for the 5 trading days before
the date of determination). Also includes an aggregate of 33,920
shares issued as dividends on the Series B Preferred for the
quarters ended March 31, 1998 and June 30, 1998.
(3) Beneficial ownership is determined as of August 3, 1998 and is based
on a Conversion Price of the Series D Preferred Stock equal to
$4.0013 (which is 97% of the average of the three lowest closing bid
prices of the Common Stock for the ten consecutive trading days
ended July 31, 1998). The number of shares of Series D Preferred
Stock issued to each member of the Citadel Entities is as follows:
CCG Capital Ltd. 200 shares, CCG Investment Fund Ltd. 200 shares,
Wingate Capital Ltd 1,557 shares, Fisher Capital Ltd. 2,893 shares
and Midway Capital Ltd. 150 shares. The actual number of shares of
Common Stock issuable upon conversion of the Series D Convertible
Preferred Stock is that number of shares of Common Stock equal to
the quotient of (i) the aggregate stated value of the Conversion
Shares ($1,000 per share), plus any accrued and unpaid premium of
4.00% per annum divided by (ii) the Conversion Price. The Conversion
Price is the lesser of (a) $9.082 per share, which price may be
reset to the five day average volume weighted average trading price
of the common stock for the five trading days following the filing
of the Company's Form 10-Q for the quarter ending June 30, 1998, if
such price is less than $9.082 (the "Reset Price"), or (b) 97% of
the market price of the Common Stock, where the market price is the
average of the three lowest closing bid prices for the Common Stock
for the 10 consecutive trading days immediately preceding such date
of determination (the "Determination Date"). If for any 20 of 30
consecutive trading days the daily volume weighted average trading
price (as reported by Bloomberg) of the Common Stock equals or
exceeds twelve dollars ($12), then the Company may elect for the
Conversion Price to equal $9.082 (or the Reset Price if lower). No
holder of shares of the Series D Preferred Stock is entitled to
convert or exercise such securities to the extent that the shares to
be received by such holders upon such conversion or exercise would
cause such holders in the aggregate to beneficially own more than 5%
of the Common Stock of the Company (other than shares deemed to be
beneficially owned through ownership of the Company's Series C
Convertible Preferred Stock or the Series D Preferred Stock), except
upon 61 days prior notice to the Company. In no event can such
holders in the aggregate own 15% or more of the Common Stock of the
Company without the prior written consent of the Company. In
addition, pursuant to the rules of the NASDAQ Stock Market, in the
absence of shareholder approval, the aggregate number of shares
issuable to the Citadel Entities at a discount from market price
upon the conversion of the Series D Preferred Stock,
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<PAGE>
and any other issuances of Common Stock which the NASDAQ Stock
Market may determine to be integrated with the Series D Preferred
Stock transaction, may not exceed 19.99% of the outstanding Common
Stock as of February 9, 1998. Unless such shareholder approval is
obtained, none of the Citadel Entities will be able to acquire more
than its proportionate share of such maximum amount. The Company may
be required to redeem any Series D Preferred Stock which may not be
converted because of such limitation. Beneficial ownership for CCG
Capital Ltd. and CCG Investment Fund Ltd. includes 25,471 and 31,839
shares of Common Stock, respectively, issuable as of August 3, 1998
upon conversion of holdings by each of the Company's Series C
Convertible Preferred Stock (the "Series C Stock") which were issued
by the Company on February 9, 1998, and 50,460 shares of Common
Stock for each of CCG Capital Ltd. and CCG Investment Fund Ltd.,
issuable as of August 3, 1998 upon conversion of holdings by each of
the Company's Series D Convertible Preferred Stock which were issued
by the Company on May 8, 1998. With respect to each of Wingate
Capital Ltd. and Fisher Capital Ltd. includes 406,206 and 754,382
shares of Common Stock issuable upon conversion of holdings by each
of the Company's Series D Convertible Preferred Stock which were
issued by the Company on May 8, 1998.
(4) Represents the allocation among the Citadel Entities of 175% of the
number of shares of Common Stock potentially issuable as of August
7, 1998, upon conversion of the 5,000 shares of the Series D
Convertible Preferred Stock held by the Citadel Entities which the
Company is registering pursuant to the Registration Rights Agreement
between the Company and the Citadel Entities. The number of shares
of Common Stock registered pursuant to the Registration Statement on
behalf of the Selling Stockholders holding Series D Preferred Stock
and the number of Conversion Shares offered hereby by such holders
have been determined by agreement between the Company and such
Selling Stockholders. Because the number of shares that will
ultimately be issued upon conversion of the Series D Preferred Stock
is dependent, subject to certain limitations, upon the average of
certain closing bid prices of the Common Stock prior to conversion,
as described in footnote (2) above, and certain antidilution
adjustments, such number of shares (and therefore the number of
Shares offered hereby) cannot be determined at this time. The number
of Shares being offered by the Selling Stockholders holding Series D
Preferred Stock, in accordance with Rule 416 under the Securities
Act, also includes such presently indeterminate number of additional
Shares as may be issuable upon conversion of the Series D Preferred
Stock, based upon fluctuations in the conversion price of the Series
D Preferred Stock and future antidilution adjustments in accordance
with the terms of the Series D Preferred Stock. Furthermore,
pursuant to the Registration Rights Agreement, because market price
of the Common Stock is subject to fluctuation, the Company has
agreed to register 175% of each purchaser's allocation of the
Conversion Shares and agreed to amend this registration statement if
this amount falls below 150% of the shares of Common Stock issuable
upon conversion of the Series D Preferred Stock under the above
formula.
(5) Gives effect to the conversion of the Series B Preferred Stock, the
sale of the shares of Common Stock issued as dividends on the Series
B Preferred, the conversion of all shares of Series D Preferred
Stock, the sale of the Amerix Shares, and the exercise of the
Lifeline Warrant in its entirety, and sale of such shares upon
conversion or exercise as the case may be, of each. Also with
respect to CCG Capital, Ltd. and CCG Investment Fund, Ltd. assumes
the conversion and sale of the shares of Common Stock issuable upon
conversion of the Series C Stock included in that certain
registration statement of the Company on Form S-3 filed on May 22,
1998 (File No. 333-49379), and with respect to each of CCG Capital
Ltd., CCG Investment Fund, Ltd., Wingate Capital, Ltd. and Fisher
Capital, Ltd. assumes the conversion and sale of the shares of
Common Stock issuable upon conversion of the Series D Preferred
Stock included in that certain registration statement of the Company
on Form S-3 filed on June 10, 1998 (File No. 333-53451). With
respect to Lifeline, assumes sale of its shares of Common Stock upon
the exercise of that certain warrant included in that certain
registration statement of the Company on Form S-3 filed on December
23, 1997 (File No. 333-
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<PAGE>
35841). Upon completion of the offering, each Selling Stockholder
will own less than one percent of the Common Stock of the Company.
(6) Citadel Limited Partnership is the trading manager of each of the
Citadel Entities and consequently has voting control and investment
discretion over securities held by the Citadel Entities. The
ownership for each of the Citadel Entities does not include the
ownership information for the other Citadel Entities. Also does not
include 789,875 and 1,496,941 shares of Common Stock beneficially
owned as of August 3, 1998, by NP Partners, formerly known as Nelson
Partners, ("Nelson") and Olympus Securities, Ltd. ("Olympus"),
respectively, including shares of Common Stock issuable as of August
3, 1998, upon conversion of holdings by each of the Series C Stock.
Citadel Limited Partnership is the managing general partner of
Nelson and the trading manager of Olympus and consequently has
voting control and investment discretion over securities held by
each. Citadel Limited Partnership and each of the Citadel Entities
disclaims beneficial ownership of the shares of Common Stock held by
the other Citadel Entities, Nelson or Olympus.
The Selling Stockholders identified above may have sold, transferred or
otherwise disposed of all or a portion of their Common Stock since the date on
which they provided the information regarding their Common Stock in transactions
exempt from the registration requirements of the Securities Act. Additional
information concerning the above listed Selling Stockholders may be set forth
from time to time in prospectus supplements to this Prospectus. See "Plan of
Distribution."
PLAN OF DISTRIBUTION
The Common Stock is being offered on behalf of the Selling Stockholders.
The Common Stock may be sold or distributed from time to time by the Selling
Stockholders, or by donees or transferees of, or other successors in interests
to, the Selling Stockholders, directly to one or more purchasers or through
brokers, dealers or underwriters who may act solely as agents or may acquire
Common Stock as principals, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at negotiated prices, or at
fixed prices, which may be changed. The sale of the Common Stock may be effected
in one or more of the following methods: (i) ordinary brokers' transactions;
(ii) transactions involving cross or block trades or otherwise on the Nasdaq
National Market; (iii) purchases by brokers, dealers or underwriters as
principal and resale by such purchasers for their own accounts pursuant to this
Prospectus; (iv) "at the market" to or through market makers or into an existing
market for the Common Stock; (v) in other ways not involving market makers or
established trading markets, including direct sales to purchases or sales
effected through agents; (vi) through transactions in options, swaps or other
derivatives (whether exchange-listed or otherwise); (vii) in privately
negotiated transactions; (viii) to cover short sales; or (ix) any combination of
the foregoing.
From time to time, one or more of the Selling Stockholders may pledge,
hypothecate or grant a security interest in some or all of the Conversion Shares
owned by them, and the pledgees, secured parties or persons to whom such
securities have been hypothecated shall, upon foreclosure in the event of
default, be deemed to be Selling Stockholders hereunder. In addition, a Selling
Stockholder may, from time to time, sell short the Common Stock of the Company,
and in such instances, this Prospectus may be delivered in connection with such
short sales and the Conversion Shares offered hereby may be used to cover such
short sales.
From time to time one or more of the Selling Stockholders may transfer,
pledge, donate or assign such Selling Stockholders' Conversion Shares to lenders
or others and each of such persons will be deemed to be a Selling Stockholder
for purposes of this Prospectus. The number of Selling Stockholders' Conversion
Shares beneficially owned by those Selling Stockholders who so transfer, pledge,
donate or assign Selling Stockholders' Conversion Shares will decrease as and
when they take such actions. The plan of distribution for Selling Stockholders'
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<PAGE>
Conversion Shares sold hereunder will otherwise remain unchanged, except that
the transferees, pledgees, donees or other successors will be Selling
Stockholders hereunder.
A Selling Stockholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the Common
Stock in the course of hedging the positions they assume with such Selling
Stockholder, including, without limitation, in connection with distributions of
the Common Stock by such broker-dealers. A Selling Stockholder may also enter
into option or other transactions with broker-dealers that involve the delivery
of the Common Stock to the broker-dealers, who may then resell or otherwise
transfer such Common Stock. A Selling Stockholder may also loan or pledge the
Common Stock to a broker-dealer and the broker-dealer may sell the Common Stock
so loaned or upon a default may sell or otherwise transfer the pledged Common
Stock.
Brokers, dealers, underwriters or agents participating in the distribution
of the Common Stock as agents may receive compensation in the form of
commissions, discounts or concessions from the Selling Stockholders and/or
purchasers of the Common Stock for whom such broker-dealers may act as agent, or
to whom they may sell as principal, or both (which compensation as to a
particular broker-dealer may be less than or in excess of customary
commissions). The Selling Stockholders and any broker-dealers who act in
connection with the sale of Common Stock hereunder may be deemed to be
"Underwriters" within the meaning of the Securities Act, and any commissions
they receive and proceeds of any sale of Common Stock may be deemed to be
underwriting discounts and commissions under the Securities Act. Neither the
Company nor any Selling Stockholders can presently estimate the amount of such
compensation. The Company knows of no existing arrangements between any Selling
Stockholders, any other stockholder, broker, dealer, underwriter or agent
relating to the sale or distribution of the Common Stock.
The Company will pay substantially all of the expenses incident to the
registration, offering and sale of the Common Stock to the public other than
commissions or discounts of underwriters, broker-dealers or agents. The Company
has also agreed to indemnify certain of the Selling Stockholders and certain
related persons against certain liabilities, including liabilities under the
Securities Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company, the Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
With respect to the Citadel Entities, each purchaser of the Series D
Preferred Stock has agreed to refrain from selling on any trading day a number
of shares of Common Stock issued pursuant to the conversion of the Series D
Preferred Stock in excess of that number of shares of Common Stock equal to 20%
of the daily trading volume of the Common Stock on such date of determination,
except that this limitation does not apply if the daily trading volume is in
excess of 200% of the average daily trading volume for the prior 6 month period
and further does not apply in the event of certain Extraordinary Events, a Major
Transaction, or a Triggering Event (each as defined in the Certificate of
Designation). In addition, each purchaser of the Series D Preferred Stock agreed
to not engage in any "short sales" (as defined in Rule 3b-3 of the Securities
Exchange Act of 1934, as amended) of the Common Stock of the Company, other than
for short sales which such purchaser makes and submits a conversion notice
entitling such purchaser to receive a number of shares of Common Stock at least
equal to the number of shares so sold.
The Company has advised the Selling Stockholders that during such time as
they may be engaged in a distribution of the Common Stock included herein they
are required to comply with Regulation M promulgated under the Exchange Act.
With certain exceptions, Regulation M precludes any Selling Stockholder, 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 Stock.
14
<PAGE>
Because it is possible that a significant number of shares of the Common
Stock 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 Stock.
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 Stockholders.
LEGAL MATTERS
The validity of the Common Stock offered by the Selling Stockholders
hereby will be passed upon by Ryan & Sudan, L.L.P., Houston, Texas. Philip P.
Sudan, Jr. is a partner of Ryan & Sudan, L.L.P and a director of the Company.
Mr. Sudan beneficially owns 246,688 shares of Common Stock. Mr. James W. Ryan, a
partner in Ryan & Sudan, L.L.P., beneficially owns 63,342 shares of Common
Stock.
EXPERTS
The financial statements and schedules of the Company as of December 31,
1997, and for the year then ended, incorporated by reference in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
The consolidated balance sheet of the Company and its subsidiaries as of
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996, the
two month period ended December 31, 1995 and the year ended October 31, 1995,
together with the related notes and the report of KPMG Peat Marwick, independent
chartered accountants, all contained in the Company's 1997 annual report, are
incorporated herein by reference. The report of KPMG Peat Marwick on the
aforementioned consolidated financial statements 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 operates 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.
15
<PAGE>
PROSPECTUS
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER 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 INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. 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 OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
Available Information......................................................2
Incorporation of Certain Documents by Reference ...........................2
The Company ...............................................................3
Risk Factors ..............................................................3
Use of Proceeds ...........................................................9
Selling Stockholders ......................................................9
Plan of Distribution .....................................................13
Legal Matters ............................................................15
Experts ..................................................................15
16
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Nature of Expense
SEC Registration Fee $ 3,875
Legal (including Blue Sky), Printing, and Accounting Fees
and Expenses $ 30,000*
Miscellaneous $ 2,000*
*Estimated TOTAL $ 35,875*
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII of the Registrant's Certificate of Incorporation provides that
if Delaware law is amended hereafter to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by Delaware law as so amended. Any amendment, repeal or
modification of Article VII of the Registrant's Certificate of Incorporation
shall not adversely affect any right or protection of a director of the
Corporation existing hereunder with respect to any act or omission occurring
prior to such amendment, repeal or modification.
Article XI of the Registrant's By-Laws provides that the Registrant (i)
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Registrant) by reason of the fact that he or she is or
was a director or an officer of the Registrant, or is or was serving at the
request of the Registrant as a director or an officer of another corporation,
partnership, joint venture, trust or other enterprise, to the full extent
authorized or permitted by law, as now or hereafter in effect, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful, and (ii) may
indemnify, if the Board of Directors determines such indemnification is
appropriate, any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Registrant) by reason of the fact that he or she is or
was an employee or agent of the Registrant, or is or was serving at the request
of the Registrant as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, to the full extent authorized or
permitted by law, as now or hereafter in effect, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Registrant, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement or conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the Registrant, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his or her conduct was unlawful. To the extent that (i) a director
or an officer of the Registrant or (ii) any other employee or agent of the
Registrant who the Board of Directors has authorized the Registrant to
indemnify, has been successful on the merits or otherwise in defense of any
action, suit or proceeding or in defense of any claim, issue or matter therein,
he or she shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection therewith.
Notwithstanding the foregoing, except for proceedings to enforce
II-1
<PAGE>
rights to indemnification, the Registrant shall not be obligated to indemnify
any person in connection with a proceeding (or part thereof) initiated by such
person unless such proceeding (or part thereof) was authorized in advance, or
unanimously consented to, by the Board of Directors.
Article XI of the Registrant's By-Laws also provides that any
indemnification provided therein (unless ordered by a court) shall be made by
the Registrant only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because such person has met the applicable standard of conduct set
forth in sections 1 and 2 of Article XI of the Registrant's By-Laws. Such
determination shall be made (i) by a majority vote of the directors who are not
parties to such action, suit or proceeding even though less than a quorum, or
(ii) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (iii) by the Stockholders.
Expenses (including attorneys fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action, suit or
proceeding shall be paid by the Registrant in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that such person is not entitled to be indemnified by the
Registrant or as otherwise authorized by law. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate.
Article XI of the Registrant's By-Laws further provides that the
indemnification and advancement of expenses shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any by-law, agreement, vote of Stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative, by reason
of the fact that he or she is or was a director, officer, employee or agent of
the corporation or is or was serving at its request in such capacity in another
corporation or business association against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interest of the corporation and, with respect to any
criminal action or proceeding, if he or she had no reasonable cause to believe
his conduct was unlawful; provided that, in the case of actions brought by or in
the right of the corporation, no indemnification will be made with respect to
any matter as to which such person will have been adjudged to be liable to the
corporation unless and only to the extent that the adjudicating court determines
that such indemnification is proper under the circumstances.
ITEM 16. EXHIBITS.
See Exhibit Index included immediately preceding the Exhibits to this
Registration Statement, which is incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
II-2
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
provided, however, that paragraphs (1)(i) and (1) (ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Company pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") that are incorporated by reference in this
Registration Statement.
(2) That, for the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable,
each filing of any employer benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the indemnification provisions described herein, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceedings) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing this Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Richardson, Texas on the 10th day of August 1998.
INTELECT COMMUNICATIONS, INC.
By: /s/ HERMAN M. FRIETSCH
Herman M. Frietsch
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ HERMAN M. FRIETSCH Chief Executive Officer and August 10, 1998
Herman M. Frietsch Director (Principal Executive Officer)
/s/ EDWIN J. DUCAYET, JR. Vice President, Chief Financial August 10, 1998
Edwin J. Ducayet, Jr. Officer, Treasurer, and Assistant
Secretary (Principal Financial Officer
and Principal Accounting Officer)
/s/ PHILIP P. SUDAN, JR. Director August 10, 1998
Philip P. Sudan, Jr.
/s/ ANTON LIECHTENSTEIN Director August 10, 1998
Anton Liechtenstein
/s/ ROBERT E. GARRISON II Director August 10, 1998
Robert E. Garrison II
II-4
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
4.1 Amended and Restated Certificate of Incorporation of the Company (1)
4.2 Amended and Restated By-Laws of the Company (1)
4.3 Certificate of Designations of the Series B Preferred Stock dated
December 17, 1997 (2)
4.4 Certificate of Correction of the Series B Preferred Stock dated as
of December 17, 1997
4.4 Certificate of Designations of the Series D Preferred Stock dated
May 7, 1998 (3)
5.1 Opinion of Ryan & Sudan, L.L.P., Houston, Texas
10.1 Securities Purchase Agreement among the Company and the Citadel
Group, dated June 26, 1998 (4)
10.2 Registration Rights Agreement among the Company and the Citadel
Group, dated June 26, 1998 (4)
10.3 Sales Representative Agreement dated January 12, 1998 between
Intelect Network Technologies Company and Amerix (2)
10.5 Warrant issued to Lifeline Industries, Inc. dated June 29, 1998
10.6 Registration Rights Agreement between the Company and Lifeline
Industries, Inc. dated June 29, 1998
10.7 Registration Rights Agreement dated December 16, 1997 between the
Company and Navesink (2)
10.8 Amendment to Registration Rights Agreement dated July 16, 1998
between the Company and Navesink
10.9 Purchase Agreement dated December 16, 1997 between the Company
and Navesink(2)
10.10 Letter Agreement dated July 15, 1998 between the Company and
Navesink
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG Peat Marwick
23.3 Consent of Ryan & Sudan, L.L.P. (included in Exhibit 5.1)
- ------------
(1) Incorporated herein by reference to Form S-4 of Intelect
Communications, Inc. (File No. 333- 39063)
(2) Incorporated herein by reference to Form 10-K of Intelect
Communications, Inc. filed March 31, 1998
(3) Incorporated herein by reference to Form 8-K of Intelect
Communications, Inc. filed May 11, 1998.
(4) Incorporated herein by reference to Form 8-K of Intelect
Communications, Inc. filed June 29, 1998
II-5
CERTIFICATE OF CORRECTION
FILED TO CORRECT A CERTAIN INACCURACY OR DEFECT
IN THE CERTIFICATE OF THE DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF THE $4.375, 10%
CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B, PAR VALUE $.01 PER
SHARE, OF INTELECT COMMUNICATIONS, INC. AND THE QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS THEREOF,
FILED IN THE OFFICE OF THE SECRETARY OF STATE OF DELAWARE
ON DECEMBER 17, 1997
INTELECT COMMUNICATIONS, INC., a corporation organized and existing and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That the name of the corporation is Intelect Communications, Inc.
(the "Corporation")
SECOND: That a Certificate of the Designations, Preferences and Relative,
Participating, Optional or Other Special Rights of the $4.375, 10% Cumulative
Convertible Preferred Stock, Series B, par value $.01 per share, of Intelect
Communications, Inc. and the Qualifications, Limitations or Restrictions
thereof, of said Corporation was filed with the Secretary of State of Delaware
on December 17, 1997 (the "Certificate") and that said Certificate requires
correction as permitted by Section 103 of the General Corporation Law of the
State of Delaware.
THIRD: The Certificate is an inaccurate record of the corporate action
referred to therein, insofar as it relates to the conversion of the $4.375, 10%
Cumulative Convertible Preferred Stock, Series B, par value $.01 per share, of
the Corporation as set forth in Section 6.01 thereof.
FOURTH: Section 6.01 of the Certificate is corrected in its entirety to
read as follows:
Holders of shares of Series B Preferred Stock will have the right,
exercisable at any time after May 31, 1998, except in the case of shares
of Series B Preferred Stock called for redemption as provided above, to
convert 50% of the shares of Series B Preferred Stock into shares of
Common Stock, and on or after June 30, 1998 any remaining shares of Series
B Preferred Stock not previously converted into shares of Common Stock
(calculated as to each conversion to the nearest 1/100th of a share) at a
conversion price per share (the "Conversion Price") equal to (i) $4.8125,
or (ii) 0.85 multiplied by the average daily closing market bid price for
the
<PAGE>
Common Stock of the Company as quoted on the NASDAQ National Market System
for the previous five consecutive trading days from the date of the notice
of election of conversion (subject to adjustment as described below). The
number of shares of Common Stock to be delivered by the Company pursuant
to a conversion shall be determined by dividing the aggregate Stated Value
(as hereinafter defined) of the Series B Preferred Stock converted by the
Conversion Price. The "Stated Value" per share for the Series B Preferred
Stock for purposes hereof shall be $4.375. In the case of shares of Series
B Preferred Stock called for redemption, conversion rights will expire at
the close of business on the tenth day preceding the redemption date. No
payment or adjustment for accrued dividends on the Series B Preferred
Stock is to be made on conversion. However, if a share of Series B
Preferred Stock (other than a share of Series B Preferred Stock called for
redemption within such period) is converted between the record date with
respect to any dividend payment and the next succeeding dividend payment
date, such share of Series B Preferred Stock must be accompanied by funds
equal to the dividend payable on such dividend payment date on the Series
B Preferred Stock so converted.
IN WITNESS WHEREOF, said INTELECT COMMUNICATIONS, INC. has caused this
certificate to be signed by Herman M. Frietsch, its Chairman and Chief Executive
Officer and attested by Edwin J. Ducayet, its Assistant Secretary, this 20th day
of July, 1998.
INTELECT COMMUNICATIONS, INC.
By:___________________________________
Herman M. Frietsch, Chairman and
Chief Executive Officer
ATTEST:
By:_______________________________________
Edwin J. Ducayet, Assistant Secretary
- 2 -
EXHIBIT 5.1
[RYAN & SUDAN, L.L.P. LETTERHEAD]
August 10, 1998
Intelect Communications, Inc.
1100 Executive Drive
Richardson, Texas 75081
Re: Registration Statement on Form S-3 of Intelect Communications, Inc.
(the "Company")
Ladies and Gentlemen:
We have acted as counsel to Intelect Communications, Inc., a Delaware
corporation (the "Company"), with respect to the offering by certain selling
stockholders of up to 3,402,678 shares (the "Shares") of the Common Stock of the
Company, par value $.01 per share (the "Common Stock") under the Registration
Statement, filed by the Company under the Securities Act of 1933, as amended.
As such counsel, we have examined such corporate records, certificates and
other documents and have made such other factual and legal investigations as we
have deemed relevant and necessary as the basis for the opinions hereinafter
expressed. In such examinations, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals
and the conformity to original documents of all documents submitted to us as
conformed or photostatic copies. Unless otherwise defined herein, capitalized
terms shall have the meanings assigned to them in the Registration Statement.
Based on the foregoing, we are of the opinion that:
1. The shares of Common Stock initially issuable upon the exercise of
the Lifeline Warrant have been duly authorized, and following the
exercise of such Lifeline Warrant and when paid for in accordance
with the terms of the Lifeline Warrant such shares of Common Stock
will be validly issued, fully paid and non-assessable by the
Company.
2. The shares of Common Stock initially issuable upon the conversion of
each of the Series B Preferred and the Series D Preferred Stock of
the Company have been duly authorized and reserved for issuance, and
upon the conversion of each of the Series B Preferred and the Series
D Preferred Stock in accordance with its respective Certificate of
Designations, each will be validly issued, fully paid, and
non-assessable by the Company.
4. The shares of Common Stock which have been issued to Amerix have
been duly authorized, validly issued, and are fully paid and
non-assesable by the Company and the shares of Common Stock
previously issued to Navesink upon conversion of the Series B
Preferred, and to Navesink as dividends on the Series B Preferred,
have been duly authorized, validly issued and are fully paid and
non-assessable by the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
RYAN & SUDAN, L.L.P.
EXHIBIT 10.5
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 AND THE COMMON STOCK ISSUABLE THEREBY 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, INC.
Expiring on April 30, 2005
This Common Stock Purchase Warrant (the "Warrant") certifies that for
value received, Lifeline Industries, Inc. (the "Holder") is entitled to
subscribe for and purchase from the Company (as hereinafter defined), in whole
or in part, 30,000 shares of duly authorized, validly issued, fully paid and
nonassessable shares of Common Stock (as hereinafter defined) at an Exercise
Price (as hereinafter defined) per share of $5.00, subject, however, to the
provisions and upon the terms and conditions hereinafter set forth. This Warrant
and all rights hereunder shall expire at 5:00 p.m., Houston, Texas time, on
April 30, 2005.
As used herein, the following terms shall have the meanings set forth
below:
"COMPANY" shall mean Intelect Communications, Inc., a Delaware
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.
"EXERCISE PRICE" shall mean the initial purchase price of $5.00 per share
of Common Stock payable upon exercise of the Warrant, 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 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; or (y) if the Common Stock
<PAGE>
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.
"WARRANT SHARES" shall mean the shares of Common Stock purchased or
purchasable by the holder hereof upon the exercise of the Warrant.
ARTICLE I
EXERCISE OF WARRANT
1.1 METHOD OF EXERCISE. The Warrant 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 April 30, 2005.
To exercise the Warrant, the Holder hereof shall deliver to the Company (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 Warrant in
the manner provided in the Subscription Notice; and (ii) payment in full of the
Exercise Price in cash or by bank check for all Warrant Shares purchased
hereunder. The Warrant 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
Warrant has expired or has been redeemed, deliver to the Holder hereof a new
Warrant representing the portion, 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 RESERVATION OF SHARES. The Company shall reserve at all times so long
as the Warrant remains 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 Warrant, a
sufficient number of shares of Common Stock to provide for the exercise of the
Warrant.
1.3 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.
1.4 NO FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares of Common Stock on the exercise of this Warrant. If any
fraction of a share of Common Stock would 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.
2
<PAGE>
ARTICLE II
TRANSFER
2.1 OWNERSHIP OF WARRANT. The Company may deem and treat the person in
whose name the Warrant is 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 unless agreed to in writing by the Company.
2.2 RESTRICTIONS ON TRANSFER OF WARRANTS. The Holder of the Warrant agrees
that the Warrant is not transferrable without the prior written consent of the
Company and any such transfer without such consent shall be void and without
effect. Subject to the restrictions on transfer of the Warrant in this Section
2.2, the Company, from time to time, shall register the transfer of the Warrant
in such books upon surrender of this Warrant at the Company's principal 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, a new Warrant shall be issued to the transferee and the
transferor (as their respective interests may appear) and the surrendered
Warrant shall be canceled by the Company. The Holder shall pay all taxes and all
other expenses and charges payable in connection with the transfer of the
Warrant pursuant to this Section 2.2.
2.3 COMPLIANCE WITH SECURITIES LAWS. 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,
and that as a condition to the exercise of such warrant that the following are
and will be true and correct:
(A) 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.
(B) 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."
(C) 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 2.3.
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(D) The Holder is an "accredited investor" within the meaning of
Rule 501 of Regulation D as promulgated under the Securities Act of 1933,
and will be so as a condition of purchasing any of the Warrant Shares. The
Holder will acquire the Warrant Shares for its own account for investment
purposes and not with a view towards distribution. The Holder 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 has received and carefully reviewed copies of all
documents filed by the Company as of the time of each exercise with the
Securities and Exchange Commission. No representations or warranties have
been made to the Holder by the Company, the officers or directors of the
Company, or any agent, employee or affiliate of any of them. The Holder is
aware that the purchase of the Warrant Shares involves a high degree of
risk and that it may sustain, and has the financial ability to sustain,
the loss of its entire investment. The Holder has had the opportunity to
ask questions of, and receive answers, satisfactory to it from the
Company's management regarding the Company. The Holder understands that no
Federal or State governmental authority has made any finding or
determination relating to the fairness of an investment in the Warrant
Shares and that no Federal or State governmental authority has recommended
or endorsed, or will recommend or endorse, the investment herein. The
Holder, in making the decision to purchase the Warrant Shares subscribed
for, has relied upon independent investigations made by it and has not
relied on any information or representations made by third parties. The
Holder has significant assets, and upon consummation of the purchase of
the Warrant Shares, will continue to have significant assets exclusive of
the Warrant Shares. The Holder understands that the Warrant Shares are
being offered and sold to it in reliance on specific provisions of Federal
and State securities laws and that the Company is relying upon the truth
and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of the Holder set forth herein in order
to determine the applicability of such provisions. The Holder, in making
the decision to purchase the Warrant Shares subscribed for, has relied
upon independent investigations made by it and has not relied on any
information or representations made by third parties.
ARTICLE III
ANTI-DILUTION
3.1 ANTI-DILUTION PROVISIONS. If the outstanding shares of the Company's
Common Stock shall be subdivided into a greater number of shares or a dividend
in Common Stock shall be paid in respect of Common Stock, the Exercise Price in
effect immediately prior to such subdivision or at the record date of such
dividend shall simultaneously with the effectiveness of such subdivision or
immediately after the record date of such dividend be proportionately reduced.
If outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Exercise Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased. When any adjustment is required to be made in the
Exercise Price, the number of Warrant Shares purchasable upon the exercise of
this Warrant shall be changed to the number determined by dividing (i) an amount
equal to the number of shares issuable upon the exercise of this Warrant
immediately prior to such adjustment, multiplied by the Exercise Price in effect
immediately in effect prior to such adjustment, by (ii) the Exercise Price in
effect immediately after such adjustment.
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3.2 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 as part of any such
reorganization, reclassification, consolidation, merger or sale, as the case may
be, lawful provision shall be made so that the Holder of this Warrant shall have
the right thereafter to receive upon exercise hereof the kind and amount of
share of stock or other securities or property which such holder would have been
entitled to receive if, immediately prior to any such reorganization,
reclassification, consolidation, merger or sale, as the case may be, such holder
had held the number of shares of Common Stock which were the purchasable upon
the exercise of this Warrant. In any such case, appropriate adjustment (as
reasonably determined in good faith by the Board of Directors of the Company)
shall be made in the application of the provisions set forth herein with respect
to the rights and interests thereafter of the Holder of this Warrant, such that
the provisions set forth herein (including provisions with respect to adjustment
of the Exercise Price) shall thereafter be applicable, as nearly as is
reasonably practicable, in relation to any shares of stock or other securities
or property thereafter deliverable upon the exercise of this Warrant.
3.3 NOTICE OF ADJUSTMENT. Whenever the Exercise Price or the number of
Warrant Shares issuable upon the exercise of the Warrant 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 a notice setting forth the adjusted Exercise
Price and the adjusted number of Warrant Shares issuable upon the exercise of
the Warrant 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 notice stating that the Exercise Price and the number of Warrant Shares
purchasable upon exercise of the Warrant have been adjusted and setting forth
the adjusted Exercise Price and the adjusted number of Warrant Shares
purchasable upon the exercise of the Warrant.
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; VENUE. This warrant shall be governed by and construed
in accordance with the laws of the State of Texas. Venue for any dispute arising
under this Warrant shall lie in the state or federal courts of Harris County,
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
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<PAGE>
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.
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 or the Company hereof shall be in writing and will
deemed to have been delivered: (i) upon receipt, when delivered personally; (ii)
upon receipt, when sent by facsimile (provided a confirmation of transmission is
mechanically generated and kept on file by the sending party); or (iii) one (1)
day after deposit with a nationally recognized overnight delivery service, in
each case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be: any notice or other document
required or permitted to be given or delivered to the Company shall be sent to
the offices of the Company at 1100 Executive Drive, Richardson, Texas 75081,
Attn: Chief Executive Officer, Telecopy No. (972) 367-2271 or such other address
as shall have been furnished in writing by the Company to the Holder of this
Warrant, with a copy to Philip P. Sudan, Jr., Esq., Sudan, L.L.P., 909 Fannin,
39th Floor, Houston, Texas 77010, Telecopy No. (713) 652-0503. Any notice sent
or required to be sent hereunder to the Holder shall be sent to Lifeline
Industries, Inc., 160 Overlook Ave., Suite 24E, Hackensack, New Jersey 07601,
Attn: Robb Knie, Telecopy No. (201) 488-6988 or such other address as shall have
been furnished in writing by the Holder to the Company.
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
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all other expenses and charges payable in connection with the preparation,
execution and delivery of Warrants pursuant to this Section 4.8.
4.9 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.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name.
Dated: June 29, 1998
INTELECT COMMUNICATIONS, INC.
By:_________________________________________
Name: Herman M. Frietsch
Title: Chairman and Chief Executive Officer
8
<PAGE>
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:______________________________
9
<PAGE>
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:______________________________
10
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT ("Agreement") dated as of this 29th day of
June 1998 between Intelect Communications, Inc., a Delaware corporation (the
"Company") and Lifeline Industries, Inc., a New Jersey corporation ("Lifeline").
WHEREAS, the Company recently completed the private placement of 5,000
shares of its Convertible Preferred Stock, Series D (the "Series D Preferred
Shares") to certain investment funds controlled by the Citadel Investment Group,
L.L.C.;
WHEREAS, in connection with the private placement of the Series D
Preferred Shares, Lifeline served as a placement agent for such Series D
Preferred Shares;
WHEREAS, in connection with such services, the Company agreed to pay
certain placement fees to Lifeline, which included the issuance to Lifeline of a
warrant expiring April 30, 2005 with an exercise price of $5.00 per share to
purchase 30,000 shares of common stock, par value $0.01 of the Company, (the
"Warrant");
WHEREAS, in connection with the issuance of such Warrant, the Company
desires to provide to Lifeline certain registration rights relating to the
resale of the 30,000 shares of common stock issuable upon exercise of the
Warrant (the "Warrant Shares");
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. REGISTRATION RIGHTS. The Company hereby agrees to file a registration
statement on Form S-3 or such other form as the Company is then eligible to use
(the "Registration Statement") with the Securities and Exchange Commission (the
"SEC") registering the resale of the Warrant Shares, on or before August 10,
1998. The Company will use its commercially reasonable best efforts to have such
registration statement declared effective by the SEC within 45 days of the
filing of such Registration Statement. Subject to the provisions of Section 2
hereof, the Company will use its commercially reasonable best efforts to have
the Registration Statement remain effective for a period of 2 years following
the date it is declared effective by the SEC, unless the Warrant Shares may be
resold earlier under Rule 144 of the Securities Act of 1933 (the "Securities
Act"). Lifeline shall not be entitled to any other registration rights for the
Warrant Shares other than as expressly provided for in this Section.
2. SUSPENSION OF EFFECTIVENESS. Notwithstanding anything to the contrary in
Section 1, at any time after the Registration Statement has been declared
effective, the Company may delay the disclosure of material non-public
information concerning the Company the disclosure of which at the time is not,
in the good faith opinion of the Board of Directors of the Company and its
counsel, in the best interest of the Company and, in the opinion of counsel to
the Company, otherwise required, and may upon written notice to Lifeline suspend
any sales of Warrant Shares under the
<PAGE>
Registration Statement (a "Grace Period"); provided, that the Company shall
promptly (i) notify Lifeline in writing of the existence of material non-public
information giving rise to a Grace Period and the date on which the Grace Period
will begin, and (ii) notify Lifeline in writing of the date on which the Grace
Period ends; and, provided further, that during any consecutive 365 day period,
there shall be only one Grace Period, such Grace Period not to exceed 30 days
(an "Allowable Grace Period"). For purposes of determining the length of a Grace
Period above, the Grace Period shall begin on and include the date Lifeline
receives the notice referred to in clause (i) and shall end on and include the
date Lifeline receives the notice referred to in clause (ii).
3. EXPENSES. In connection with the filing of a registration statement,
notification, or post-effective amendment under this section, the Company
covenants and agrees:
(A) to pay all expenses of such Registration Statement,
notification, or post-effective amendment, including, without
limitation, printing charges, legal fees and disbursements of
counsel for the Company, blue sky expenses, accounting fees and
filing fees, but not including legal fees and disbursements of
counsel to the holders and any sales commissions on Warrant Shares
offered and sold; and
(B) to take all necessary action which may reasonably be
required in qualifying or registering the Warrant Shares included in
the Registration Statement, notification or post-effective amendment
for the offer and sale under the securities or blue sky laws of such
states as requested by Lifeline; PROVIDED that the Company shall not
be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under
the laws of any such jurisdiction.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
warrants to Lifeline that (i) the Company is a corporation, validly existing and
in good standing under the laws of the State of Delaware and has the requisite
corporate power and authority to enter into this Agreement, and (ii) this
Agreement is a valid and binding obligation of the Company and is enforceable
against the Company in accordance with its terms, subject to applicable
bankruptcy and insolvency laws and general principals of equity.
5. REPRESENTATIONS AND WARRANTIES OF LIFELINE. Lifeline represents and warrants
to the Company that (i) Lifeline is a corporation, validly existing and in good
standing under the laws of the State of New Jersey and that its has the
requisite corporate power and authority to enter into this Agreement, and (ii)
this Agreement is a valid and binding obligation of Lifeline and is enforceable
against Lifeline in accordance with its terms, subject to applicable bankruptcy
and insolvency laws and general principals of equity.
6. INDEMNIFICATION. In the event that such Warrant Shares are registered, the
following indemnification provisions shall apply:
2
<PAGE>
(A) INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify
and hold harmless Lifeline from and against any and all losses, claims,
damages, liabilities and expenses (including reasonable costs of
investigation) attributable to any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or
prospectus contained therein or in any amendment or supplement thereto or
in any preliminary prospectus, or attributable to 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, except insofar as
such losses, claims, damages, liabilities or expenses arise out of, or are
based upon, any such untrue statement or omission or allegation thereof
based upon information furnished in writing to the Company by Lifeline or
on Lifeline's behalf expressly for use therein.
(B) INDEMNIFICATION BY HOLDERS. Lifeline agrees to indemnify and
hold harmless, severally and not jointly, the Company, its directors and
officers and each person, if any, who controls the Company within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the
Company to Lifeline, but only with respect to information furnished in
writing by Lifeline or on Lifeline's behalf expressly for use in any such
Registration Statement or prospectus relating to the Warrant Shares, any
amendment or supplement thereto or any preliminary prospectus, and only in
an amount not to exceed the proceeds of any Warrant Shares sold by
Lifeline. In case any action or proceeding shall be brought against the
Company or its directors or officers, or any such controlling person, in
respect of which indemnity may be sought against Lifeline, Lifeline shall
have the rights and duties given to the Company, and the Company or its
directors or officers or such controlling person shall have the rights and
duties given to the holder, by the preceding subsection hereof.
(C) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any action or
proceeding (including any governmental investigation) shall be brought or
asserted against any person entitled to indemnification under subsections
(i) or (ii) above (an "Indemnified Party") in respect of which indemnity
may be sought from any party who has agreed to provide such
indemnification (an "Indemnifying Party"), the Indemnifying Party shall
assume the defense thereof, including the employment of counsel reasonably
satisfactory to such Indemnified Party, and shall assume the payment of
all expenses. Such Indemnified Party shall have the right to employ
separate counsel in any such action and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense
of such Indemnified Party unless (A) the Indemnifying Party has agreed to
pay such fees and expenses or (B) the named parties to any such action or
proceeding (including any impleaded parties) include both such Indemnified
Party and the Indemnifying Party, and such Indemnified Party shall have
been advised by counsel that there is a conflict of interest on the part
of counsel employed by the Indemnifying Party to represent such
Indemnified Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not
have the right to assume the defense of such action
3
<PAGE>
or proceeding on behalf of such Indemnified Party; it being understood,
however, that the Indemnifying Party shall not, in connection with any one
such action or proceeding or separate but substantially similar or related
actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses
of more than one separate firm of attorneys (together with appropriate
local counsel) at any time for all such Indemnified Parties, which firm
shall be designated in writing by such Indemnified Parties). The
Indemnifying Party shall not be liable for any settlement of any such
action or proceeding effected without its written consent, but if settled
with its written consent, or if there be a final judgment for the
plaintiff in any such action or proceeding, the Indemnifying Party shall
indemnify and hold harmless such Indemnified Parties from and against any
loss or liability (to the extent stated above) by reason of such
settlement or judgment.
(D) CONTRIBUTION. If the indemnification provided for in this
Section 6 is unavailable to the Indemnified Parties in respect of any
losses, claims, damages, liabilities or judgments referred to herein, 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, liabilities and judgments in
the following manner as between the Company on the one hand and each
holder on the other, in such proportion as is appropriate to reflect the
relative fault of the Company on the one hand and each holder on the other
in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative fault of the Company on
the one hand and of the holder on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by such party, and the
party's relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. No person guilty of
fraudulent misrepresentation (within the meaning of subsection 11(f) of
the Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
(E) SURVIVAL. The indemnity and contribution agreements contained in
this Section 6 shall remain operative and in full force and effect
regardless of (A) any termination of the Agreement or the Warrant, (B) any
investigation made by or on behalf of any Indemnified Party or by or on
behalf of the Company and (C) the consummation of the sale or successive
resale of the Warrant Shares.
7. RULE 144 INFORMATION. The Company agrees to:
a. make and keep public information available, as those terms are
defined in Rule 144; and
b. file with the SEC in a timely manner all reports and other
documents
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<PAGE>
required of the Company under the 1933 Act and the 1934 Act so long as the
Company remains subject to such requirements and the filing of such reports and
other documents is required for the applicable provisions of Rule 144.
8. ASSIGNMENT. The rights under this Agreement shall not be assignable by the
Lifeline without the prior written consent of the Company. Subject to the
foregoing, this Agreement is binding on each party's successors and assigns.
9. MISCELLANEOUS.
(A) Any notices consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided a confirmation
of transmission is mechanically generated and kept on file by the sending
party); or (iii) one (1) day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:
If to the Company:
Intelect Communications, Inc.
1100 Executive Drive
Richardson, Texas 75081
Facsimile: (972) 376-2271
Attention: Chief Executive Officer
With a copy to:
Ryan & Sudan, L.L.P.
Two Houston Center
909 Fannin Street, 39th Floor
Houston, Texas 77010
Facsimile: (713) 652-0503
Attention: Philip P. Sudan, Jr., Esq.
If to Lifeline:
Lifeline Industries, Inc.
160 Overlook Ave.
Suite 24E
Hackensack, NJ 07601
Facsimile: (201) 488-6988
Attention: Robb Knie
5
<PAGE>
The notices may be provided at such other address as may be designated in
writing by a party to the other party at least five business days prior to the
effectiveness of such change.
(B) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(C) This Agreement shall be governed by the laws of the State of
Texas. Venue for any dispute arising hereunder shall lie in the state or federal
courts of Harris County, Texas.
(D) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(E) This Agreement may be executed in identical counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
(F) Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
(G) This Agreement is intended for the benefit of the parties hereto
and their respective permitted successors and assigns, and is not for the
benefit of, nor may any provision hereof be enforced by, any other person.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement this 30th day
of July, 1998, but effective for all purposes as of the date first written
above.
INTELECT COMMUNICATIONS, INC.
By:___________________________________
Herman M. Frietsch, Chairman and CEO
LIFELINE INDUSTRIES, INC.
By:___________________________________
Robb Knie, President
7
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
This Amendment (the "Amendment") to the Registration Rights Agreement
between Intelect Communications, Inc., a Delaware corporation (the "Company")
and Navesink Equity Derivative Fund LDC, a Cayman Islands limited duration
company ("Navesink") dated December 16, 1997 (the "Agreement") is entered into
by and between the Company and Navesink, and hereby amends the Agreement as set
forth below. All capitalized terms used herein which are not otherwise defined
herein shall have the meanings assigned to such terms in the Agreement.
1. Section 2.1 of the Agreement is hereby amended by deleting such section
in its entirety and substituting the following new Section 2.1 in its place:
"2.1. REGISTRATION.
2.1.1 REQUIRED REGISTRATION. The Company shall file with
the Commission on or before August 10, 1998 (the "Filing Date") a
registration statement on Form S-1, Form S-2, or Form S-3, as appropriate
(the "Required Registration Statement") providing for the registration of
the shares of Common Stock issuable upon the conversion of the Preferred
Stock at the conversion price of $4.8125 per share, together with any
Common Stock issued as dividends on the Preferred Stock as of the date
hereof (collectively the "Registrable Securities") and will use its
reasonable best efforts to have such Required Registration Statement
declared effective by the Commission within 45 days of such Filing Date.
The Company will take all reasonable steps to have such Required
Registration Statement remain effective until the earlier of (i) December
15, 1999, (ii) until the Registrable Securities registered hereby are
transferrable pursuant to Rule 144 under the Securities Act, or (iii)
until all of the Registrable Securities have been sold under such
Registration Statement. The Purchaser will notify the Company of the
number of the Registrable Securities to be included in such Registration
Statement."
2. A new section 2.1.1.1 is added to read as follows:
"2.1.1.1 PIGGY-BACK REGISTRATIONS. During the period
after the registration of the Registrable Securities pursuant to Section
2.1.1, then if at any time prior to the expiration of the Registration
Period (as hereinafter defined), the Company proposes to file with the
Commission a registration statement (the "Piggyback Registration
Statement") relating to an offering for its own account or the account of
others under the Securities Act of any of its securities (other than on
Form S-4 or Form S-8 (or their equivalents at such time) relating to
securities to be issued solely in connection with any acquisition of any
entity or business or equity securities issuable in connection with stock
option or other employee benefit plans) the Company shall promptly send to
the Purchaser written notice of the Company's intention to file a
Piggyback Registration Statement and of such Purchaser's rights under this
Section 2.1.1.1 and, if within five (5) days after receipt of such notice,
such Purchaser shall so request in writing, the Company shall
<PAGE>
include in such Piggyback Registration Statement all or any part of the
Shares not includes in the Required Registration Statement such investor
requests to be registered, subject to the priorities and limitations set
forth in Section 2.1.1.1 below. If an offering in connection with which an
investor is entitled to registration under this Section 2.1.1.1 is an
underwritten offering, then each investor whose Shares are included in
such Piggyback Registration Statement shall, unless otherwise agreed by
the Company, offer and sell such Shares in an underwritten offering using
the same underwriter or underwriters and, subject to the provisions of
this Agreement, on the same terms and conditions as other shares of Common
Stock included in such underwritten offering. If a registration pursuant
to this Section 2.1.1.1 is to be an underwritten public offering and the
managing underwriter(s) advise the Company in writing, that in their
reasonable good faith opinion, marketing or other factors dictate that a
limitation on the number of shares of Common Stock which may be included
in the Piggyback Registration Statement is necessary to facilitate and not
adversely affect the proposed offering, then the Company shall include in
such registration: (1) first, all securities the Company proposes to sell
for its own account, (2) second, up to the full number of securities
proposed to be registered for the account of the holders of securities
entitled to inclusion of their securities in the Registration Statement by
reason of demand registration rights, and (3) third, the securities
requested to be registered by the investors and other holders of
securities entitled to participate in the registration, as of the date
hereof, drawn from them pro rata based on the number each has requested to
be included in such registration. The piggyback registration rights of the
Purchaser under this Section 2.1.1.1 include only shares of Common Stock
which (a) are attributable to dividends payable in Common Stock of the
Company but which were not yet been declared by the Company or paid to the
Purchaser as of the date hereof, or (b) represent additional shares of
Common Stock issuable to the Purchaser upon conversion of the Preferred
Shares attributable to the Purchaser using the conversion price which is
0.85 multiplied by the average daily closing market bid price for the
Common Stock of the Company as quoted on the NASDAQ National Market System
for the previous five consecutive trading days from the date of the notice
of election of conversion, as set forth in Section 6.01 of the Certificate
of Designations, Preferences and Relative, Participating, Optional or
Other Special Rights of the $4.375, 10% Cumulative Convertible Preferred
Stock, Series B, par value $0.01 per share of the Company, as corrected by
that certain Certificate of Correction. The "Registration Period" for
purposes of this Section 2.1.1.1 shall mean (i) until the Shares
registered hereby are transferrable pursuant to Rule 144 under the
Securities Act, or (ii) until all of such Shares have been sold under such
Registration Statement."
3. Section 2.1.2.3 of the Agreement is hereby amended by deleting in
the first line the phrase "one time demand."
4. Section 2.1.2.4 is hereby deleted in its entirety.
2
<PAGE>
5. Section 2.7 of the Agreement is hereby amended by deleting such
section in its entirety and substituting the following new section
2.7 in its place:
"2.7 ASSIGNMENT OF REGISTRATION RIGHTS. The rights
conferred by this Agreement may not be assigned or transferred by the
Purchaser to any other person or entity except with the prior written
consent of the Company. Any such assignment or transfer without such
consent shall be void and of no force and effect."
6. Except as amended by this Amendment, the Agreement shall remain in full
force and effect.
* * * SIGNATURES ON FOLLOWING PAGE * * *
3
<PAGE>
IN WITNESS WHEREOF, the Buyers and the Company have caused this Amendment
to Registration Rights Agreement to be duly executed in this __ day of July
1998.
COMPANY: NAVESINK:
INTELECT COMMUNICATIONS, INC. NAVESINK EQUITY DERIVATIVE
FUND LDC
BY: RUMSON CAPITAL, L.L.C., ITS
INVESTMENT MANAGER
By:______________________________ By:_____________________________
Name: Herman Frietsch Name: John Burke
Its: Chief Executive Officer Its: Managing Member
INTELECT COMMUNICATIONS, INC.
July 15, 1998
BY TELECOPIER NO. (732) 747-3687
Mr. John Burke
Navesink Equity Derivative Fund LDC
c/o Rumson Capital, L.L.C.
The Galleria Building One, 3rd Floor
2 Bridge Avenue
Red Bank, New Jersey 07001
Re: Intelect Communications, Inc. (the "Company") -- 10% Cumulative
Convertible Preferred Stock, Series B of the Company ("Series B
Preferred Stock")
Dear Mr. Burke:
The Company agrees that it will not redeem from Navesink Equity Derivative
Fund LDC, a Cayman Islands limited duration company ("Navesink") the Series B
Preferred Stock for a period of six (6) months following the date hereof, and
following such 6 month period the Company will provide Navesink thirty (30) days
advance written notice of its intention to redeem such shares (the "notice of
intent to redeem"). In the event of a redemption, it is understood that the
redemption price will be the greater of (i) $5.25 per share, or (ii) the average
closing market bid price of the Common Stock of the Company for the five
consecutive trading days prior to the date of the notice of intent to redeem, as
quoted on the NASDAQ Stock Market or such other exchange on which the Common
Stock is then listed, notwithstanding anything to the contrary in Section 3.01
of the Certificate of Designations, Preferences and Rights for the Series B
Preferred Stock. Navesink represents to the Company that it is the holder of all
of the outstanding shares of the Series B Preferred Stock and that you have full
power and authority to enter into this letter agreement on behalf of Navesink.
This letter agreement is made by the Company in favor of Navesink and may not be
assigned or transferred by Navesink to any other person or entity. Further, this
letter agreement is intended for the benefit of the Company and Navesink and is
not for the benefit of, nor may any provision in this agreement, be enforced by
any other person. The agreement of the Company to not redeem the Series B
Preferred Stock shall be effective only upon the filing and acceptance of the
Certificate of Correction by the Secretary of State of Delaware relating to the
Series B Preferred Stock, and in the event that such Certificate of Correction
is not so filed and accepted, this letter shall be void and be of no effect.
<PAGE>
If this is agreement is acceptable to you, please sign below where
indicated.
Very truly yours,
Herman M. Frietsch
Chairman and Chief
Executive Officer
Agreed and Accepted this
___ day of July, 1998
Navesink Equity Derivative Fund, LDC
By: Rumson Capital, L.L.C., its investment
manager
By:___________________________
John Burke, Managing Member
2
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Intelect Communications, Inc.
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement on Form S-3 (Registration No.
333-______) of our report dated March 27, 1998, included in Intelect
Communications, Inc.'s Form 10-K for the year ended December 31, 1997, and to
all references to our firm included in this registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
August 10, 1998
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK
The Board of Directors
Intelect Communications, Inc.
We consent to the incorporation by reference in the registration statement on
Form S-3 dated August 10, 1998 of our report dated April 9, 1997, relating to
the consolidated balance sheet of Intelect Communications Systems Limited and
subsidiaries as of December 31, 1996, and the related consolidated statements of
operations, stockholder's equity and cash flows for the year ended December 31,
1996, the two months ended December 31, 1995 and the year ended October 31,
1995, and the related schedule, which report appears in the December 31, 1997
annual report on Form 10-K of Intelect Communications, Inc.
Our report dated April 9, 1997, contains an explanatory paragraph that states
that Intelect Communications Systems Limited has suffered recurring losses from
continuing operations and is dependent upon the successful development and
commercialization of its products and is 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 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.
We consent to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
August 10, 1998
