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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - K
Annual Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 For the Year Ended December 31, 1997
Commission file number 0-11630
INTELECT COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0471342
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 EXECUTIVE DRIVE, RICHARDSON, TEXAS 75081
(Address of Principal Executive Offices) (Zip Code)
972-367-2100
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of the Act
NONE
Securities registered pursuant to Section 12 (g) of the Act
COMMON STOCK PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $151,235,000 as of March 27, 1998 (based upon the
average of the highest bid and lowest asked prices on such date as reported on
the Nasdaq National Market).
There were 24,177,190 shares of Common Stock outstanding as of March 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 31, 1997) are incorporated by reference in items 10, 11, 12 and 13 of
PART III hereof.
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PART I
ITEM 1 - BUSINESS
INTRODUCTION
Intelect Communications, Inc. ("Intelect" or the "Company"), is a
communications technology company providing innovative and cost-effective
products, services and solutions to integrate voice, data, and video networks.
Applications for the Company's products and services range from the network
infrastructure to the desktop. The Company's products are designed to anticipate
and meet the demands for increasing speed, capacity, and complexity of
electronic and photonic communications. Principal markets for the Company's
products are: fiber optic network transmission, digital signal processing (DSP),
and video communications. The Company also provides high-value engineering
services to the communications industry. The Company currently has under
development an intelligent programmable telecommunications switching platform.
The Company is primarily focused on multimedia delivery and bandwidth
efficiency as principal drivers for its markets. The Company's core competency
in DSP design and application contributes cost and efficiency advantages to its
products. The Company has pursued a strategy of acquisitions and internal
development over the past three years that provides a current resource base
with:
o Seven years experience in fiber optic transmission systems
o Seventeen years experience in telecommunications hardware
and software design
o Twenty-one years experience in DSP design and application
development
o Eighteen years experience in the mission critical air
traffic control environment.
The Company's SONETLYNX(R) fiber optic, SONET-based multiplexing
network transmission product simultaneously supports voice, data, video, and
local or wide area networking connectivity. The Company's LANscape(TM) video
conferencing systems provide near television quality video and audio, and
support both traditional video conferences and PC file sharing. The Company's
S4(R) Special Services Switching System(R) is a digital voice/data switch used
for air traffic control and other mission critical applications. The Company
also provides a full range of support for the design, development, testing, and
evaluation of advanced telecommunications software, hardware, and products to
customers in the telecommunications industry and for the Company's own product
development activities.
The Company is developing an intelligent, programmable switch, CS4, to
meet the demand for a distributed reliable network architecture and to provide
advanced intelligent call and service applications for public and private
wireline and wireless communications networks. The Company currently intends to
complete the CS4 development program and market introductions of CS4 service
applications in the context of a joint-venture arrangement with investment,
distribution and/or marketing partners. The Company is pursuing the possibility
of such arrangements with potential partnership candidates.
The Company was incorporated in Delaware on May 23, 1995. The Company's
predecessor, Intelect Communications Systems Limited ("Intelect (Bermuda)") was
incorporated under the laws of Bermuda in April 1980 and operated under the name
Coastal International, Ltd. until September 1985 and as Challenger International
Ltd. until December 1995. On December 4, 1997, the shareholders of Intelect
(Bermuda) approved a merger proposal, the principal effect of which was to
change the domicile of Intelect (Bermuda) so that it became a publicly traded
U.S.-domiciled, Delaware corporation. The effect of the merger was that the
shareholders of Intelect (Bermuda) became shareholders of the Company with the
Company becoming the publicly traded company. In addition, the Company became
the holding company for Intelect (Bermuda) and replaced Intelect (Bermuda) as
the holding company for its subsidiaries. The merger was effected on December 4,
1997. See ITEM 4 -- Submission of Matters to a Vote of Security Holders.
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INDUSTRY BACKGROUND
Continuing deregulation of worldwide telecommunications markets,
highlighted by the U.S. 1996 Telecommunication Reform Act, is driving
competitive access providers to offer more consumer services as they battle for
market share and to develop new services to differentiate themselves. In
addition, enterprise and special purpose private networks are being upgraded and
expanded to meet the needs of growing communications-based PC capabilities and
of other network services. Telecommunication and private networks are upgrading
and expanding with fiber optics to take advantage of its bandwidth, cost
savings, reliability, and multimedia capability. Fiber optic transmission is
chosen because of its ability to carry large volumes of information at high
speeds, insensitivity to electromagnetic interference, and high transmission
quality. As a result of these trends, the Company identifies the following
factors which are driving demand for its products:
o worldwide growth of telecommunications infrastructures
o increased competition among telephone companies
o proliferation of wireless communications
o the Internet
o outsourcing development of telecommunications products
o voice and video conferencing
o advanced intelligent networks
o telecommuting
o virtual offices.
These factors create demand for increased deployment of fiber optic networks and
for greater IP-based network capacity, both of which are central to the
Company's product and technology strategies.
PRODUCTS
Fiber Optic Network Transmission Products
In the first quarter of 1996, the Company introduced its fiber optic,
SONET-based multiplexing network transmission products, known as SONETLYNX,
which combine transmission, multiplexing and protocol conversion in a single
unit. SONETLYNX technology allows customers to converge a variety of protocols,
such as voice, low-speed data, T1 or E1 and full-spectrum video communications,
into wireless communication systems, intelligent transportation arteries, and
multimedia corporate networks over fiber optic cable.
SONETLYNX is a SONET-based OC-1 or OC-3 bandwidth digital multiplexer
that simultaneously supports voice, data, video, and local or wide area
networking connectivity. SONETLYNX complements the reliability of fiber with the
redundancy built into its critical components, including the backplane and
control modules. In the event of transmission difficulties, such as a cut in a
fiber cable, protection switching occurs in under 50 milliseconds and is
virtually transparent to network traffic. A SONETLYNX network can be as basic as
two nodes or expand to a theoretically unlimited number of nodes at different
geographic locations. A node consists of a chassis containing two controller
cards and up to fifteen protocol interface cards. Node design incorporates
universal module slots so that any protocol or auxiliary module fits in any
slot, minimizing the investment in hardware. Modular design facilitates the
expansion of any SONETLYNX network by installing a small, cost-effective and
extremely adaptable module into the node. The SONETLYNX Network Management
System ("NMS") provides configuration, monitoring, and maintenance control from
a central location. The NMS operates in the Microsoft Windows or Windows for
Workgroups environments using Hewlett-Packard's OpenView. The strategic
objectives for SONETLYNX in 1997 were the addition of new communication
protocols and broadening distribution. During the past year, an integrated video
codec, multipoint ethernet, bytesync T-1 allowing for DS0 grooming without
channel banks, and a module combining precision timing sources with a single
voice channel were added to the growing array of SONETLYNX protocols. In
addition, strategic distribution arrangements were formed with domestic and
international companies. For 1998, planned product advancements include SDH
compliance and protocols for Fast Ethernet, ATM, and DS3. These improvements are
expected to strengthen the product line's position in international and public
network access markets.
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Video Communication Products
The Company's principal video communication product is LANscape(TM), a
superior TV-quality IP-based system for desktop and small group applications.
Other products include VuBridge, a network gateway that provides communications
between LANscape and Legacy H.320 systems, and Panorama, an H.320
standards-based desktop system for ISDN communications.
LANscape
LANscape offers sharp, vivid picture quality, a simple user interface,
and bandwidth economy that corporate network managers demand for large-scale
enterprise implementation of desktop visual communications. LANscape's video
compression technology is suitable for telemedicine, distance learning,
video-on-demand, one-to-many broadcasts, and other multimedia applications. In
addition, LANscape offers multiple windows and IP Multicast to support
collaborative operations with multiple users and multiple inputs.
LANscape provides high quality video with low network impact using
wavelet video compression to provide a smooth high-quality picture with fully
synchronized CD-quality sound. Wavelet technology radically reduces the network
load by selectively transmitting and reconstructing only those wavelengths of
light that are most significant to the human eye, thus achieving compression
ratios (1:1 to 350:1) that cannot be achieved by other technologies. LANscape
runs over existing local area networks using IP as the transmission protocol.
This means it will run on any network that will transport IP including Ethernet,
Fast Ethernet, T1/E1, Frame Relay, ATM, and Sonet. Consequently, LANscape is an
ideal integrated video application over SONETLYNX. With LANscape, there is no
need for a Multipoint Conferencing Unit (MCU) to videoconference with more than
one person. Multipoint conferencing is inherent in the LANscape software.
VuBridge
The VuBridge gateway and conference manager is a hardware and software
product that allows LANscape users to communicate with H.320 ISDN systems.
VuBridge provides the translation between compression algorithms and the network
bridging that is needed to convert the LAN IP packets to an H.320 encoded ISDN
stream and vice versa.
Panorama
Panorama is a desktop video communications product that communicates
over ISDN telephone lines and uses the standard H.320 protocol to communicate
with other users whose hardware supports the same standard.
Digital Signal Processing (DSP) Products and Design Center
The DSP Design Center at DNA Enterprises, Inc. ("DNA"), a wholly owned
subsidiary, specializes in the design and development of state-of-the-art
products that span the spectrum from the most demanding multiprocessor signal
processing applications to low cost telecommunications applications. Based on
industry-leading devices such as the Texas Instruments `C80, and `C6x, DNA
provides product designs to meet specific customer needs and incorporate
standard bus architectures such as PCI, VME, and ISA, as well as embedded
designs. The major focus of the DSP Design Center is creating custom DSP
solutions. By leveraging DNA's broad technology experience, product development
effort is reduced, which, in turn, reduces development risk.
In 1996, the Design Center unveiled powerful PCI and VME multiprocessor
boards based on the Texas Instruments TMS320C80. These products run at speeds up
to 60 MHz which makes them industry leaders in terms of performance and
flexibility. In October 1997, the Company announced its agreement with Texas
Instruments ("TI") to design key products using TI's revolutionary TMS320C6x
digital signal processor circuits. Under terms of the agreement, the DSP Design
Center will design two `C6x based evaluation modules (EVM's) for TI and TI will
license software from DNA. These products are targeted for general release by TI
in 1998 and are designed to showcase the capabilities of TI's flagship DSP line
for applications that include telecommunications, industrial control, medical
instrumentation, radar, and imaging. DNA retains rights to manufacture and
market the products, and derivative products, worldwide. The Design Center is
also developing products incorporating 'C6x DSPs for third party customers.
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CS4 Intelligent Programmable Telecommunication Switching Platform
The Company is developing an intelligent, programmable switching
platform, known as the CS4, for applications in public and private
telecommunications networks as an adjunct processor, intelligent peripheral,
enhanced services platform or as a combination of these elements in a single
switch. The CS4 is intended to enable service providers to create and offer
enhanced services faster and at lower cost than current alternative methods.
Examples of enhanced services are: voice messaging, conferencing on demand,
international call back, pager notification, single number services, and
Internet telephony gateway.
The CS4 platform employs fully distributed multichannel DSP technology
and processors in order to provide an exceptionally high processing power per
port. The CS4 eliminates traditional switch blocking by using separate redundant
packet buses and the assignment of discrete time slots. The scalable
architecture is targeted to expand from an initial 2,000 ports to 64,000 ports.
Unique to the CS4, all ports support unrestricted, simultaneous activity, such
as common signaling protocols, call progress tone detection, Signaling System 7,
and ISDN. Additional non-traditional capabilities include processing every call
as a conference and voice record and play-back at the port level without
peripheral equipment. Incorporating a powerful service creation environment, the
CS4 is intended to reduce development, testing, and deployment time for new and
enhanced services.
The currently planned initial application for the CS4 platform is a
network based, multi-party conferencing service designed to be internet
activated and managed by subscribers without requiring network operator
assistance. Completion of the CS4 development program and the definition and
introduction of CS4 applications is expected to be a function of the Company's
activity to put in place a joint venture arrangement for such purposes with
potential investment, distribution, and/or marketing partners.
S4 Air Traffic Control Switches
The Company designs, manufactures, and sells the S4 Special Services
Switching System, a digital voice/data switch used primarily for mission
critical applications such as air traffic control, air defense, and
teleconferencing. The S4 system offers a unique peer-to-peer multiple processor
architecture allowing all subscriber channels to be conferenced together
simultaneously connecting a wide range of devices including telephones, radios,
and communications consoles.
ENGINEERING SERVICES
DNA Enterprises, Inc. (DNA) provides clients worldwide with consulting
engineering services and turnkey product development in signal processing,
communications, and multimedia (voice, data, and video). DNA's staff of
engineers has extensive expertise in hardware, software, systems architecture,
and digital signal processing. DNA combines these core technological
capabilities with a rigorous project management process to deliver high quality
results on-time and on-budget. The customer base ranges from start-ups to
Fortune 500 technology companies. DNA's areas of established expertise include:
o Digital Signal Processing Technology
o Switching and Transport Systems
o Computer Telephony Integration (CTI)
o Embedded Systems
o Telecom Management Network (TMN)
o Intelligent Network Architectures
o Video/Image Processing
o Service Creation Environments (SCE)
o Wireless Systems
o International Product Localization
o Data Communications
o Advanced Voice Processing
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MARKETS AND CUSTOMERS
Fiber Optic Network Transmission Products
The Company markets its SONETLYNX network transmission product directly
and through representatives and distributors. The current sales structure
includes 25 distributors, system integrators, and resellers, up from seven at
the beginning of 1997. During 1997, the Company's largest distributor, reselling
to customers in the Republic of Korea, was responsible for 85% of SONETLYNX
sales. SONETLYNX is targeted for markets and applications where multiple
protocol communication mandates the capacity and reliability of fiber, further
strengthened by redundancy of critical components and architecture. Target
markets include corporate/enterprise networks, utilities, airports,
transportation, security services, prisons, health services, academia, and local
and state government, as well as public and private bypass networks.
Video Communication Products
The Company generally markets its video communication products through Value
Added Resellers that specialize in IP-based products that expand network
bandwidth. The Company believes that the key target markets for its
videoconferencing products are businesses that are geographically dispersed,
particularly Fortune 1000 companies and educational and government institutions.
In the last two months of 1997, over 200 desktop systems were shipped to a
variety of customers worldwide. LANscape has attracted over 30 partners and
resellers worldwide including Cabletron Systems, Thomson Network Enterprises,
Newbridge Networks and Hughes Data Networks. With an applications-based
approach, the Company is working with each partner to develop business plans for
marketing LANscape to multi-national customers. Initial installations include
major federal agencies, university telemedicine sites and large corporate
customers.
DSP Products and Services
The Company generally markets its advanced information technology
products and services through direct selling to existing customers and new
prospects, enhanced by participation in trade shows. Markets for advanced
technology products and services include internationally known
telecommunications switching companies, telecommunications network providers,
and hardware and software companies desiring to develop or enhance products for
telecommunications markets.
CS4 Intelligent Programmable Telecommunications Switches
The initial target markets and customers for the CS4 are expected to
include Interexchange Carriers, Local Exchange Carriers, and Wireless/PCS
providers. A network conferencing product (using an Internet-activated and
managed user interface) is planned as the initial application.
S4 Air Traffic Control Switches
The Company generally markets its S4 switching products through system
integrators and directly through its own sales force.
COMPETITION
The market for the Company's products and services is intensely
competitive and rapidly changing. The Company competes, or may in the future
compete, directly or indirectly for customers in the following categories of
products and companies: (i) network transmission product manufacturers such as
Lucent Technologies Corp., Northern Telecom, Ltd., and Positron Fiber Systems;
(ii) video conferencing H.320/323-based product manufacturers such as VCON
Corp., First Virtual Corp., VTEL Corp., PictureTel Corp., and Intel's ProShare
Video System; (iii) programmable switch manufacturers such as Excel Switching
Corp. and Summa Four, Inc., and (iv) voice-data switch manufacturers such as
Thomson CSF, Inc., Denro, Inc., and Frequentis., Ltd. The Company believes that
the principal competitive factors affecting the markets for its products and
services include effectiveness, scope of product offerings,
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technical features, ease of use, reliability, customer service and support,
distribution channels and price. Certain competitors have greater resources than
the Company and, accordingly, may have a competitive advantage in selling and in
product development.
MANUFACTURING
The basis of the Company's manufacturing strategy is to identify and
use the appropriate technology to obtain the most favorable combination of
quality and end product cost.
The Company's manufactured products consist largely of assembled
printed circuit boards. These are sold either as stand-alone products (such as
LANscape) or as larger assembled systems (such as SONETLYNX).
As the Company's product lines expand and mature, the Company expects
to increase manufacturing capacity by means that could include adding employees,
expanding current facilities, leasing or purchasing additional facilities or
equipment, and expanding and adding outsourcing relationships. Some or all of
the space and equipment needs in 1998 may be satisfied in conjunction with joint
venture arrangements. See ITEM 2 - Properties.
The Company buys a fiber optic interface card, for the SONETLYNX OC-3
product, from a small company which is the sole source for the component. The
Company also buys a video codec card, used in SONETLYNX video applications, from
another small company which is the sole source. Delays in delivery of either
component would restrict the Company's ability to increase sales. In the event
either vendor fails to meet commitments, the Company intends to rely on its
in-house manufacturing capabilities. However, the conversion to in-house backup
supply would not be without some interruption and may increase cost.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
While the Company relies on a combination of patent, copyright,
trademark and trade secret laws, and confidentiality procedures to protect its
proprietary rights, the Company believes that factors such as technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition, and reliable product manufacturing are more
essential to establishing and maintaining a technology leadership position. The
Company currently has two United States patents relating to audio conferencing
technology and has currently pending patents relating to the CS4 product, video
communications, Internet communications, and a system to handle simultaneous
voice and data communications. "SONETLYNX(R)," "INTELECT(R)," "S4(R)," and
"Special Services Switching System(R)" are registered trademarks of the Company
and "LANSCAPE(TM)," "VISIONARY(TM)," "VUBRIDGE(TM)," and "PANORAMA(TM)" are
trademarks of the Company in the United States. According to federal and state
law, the Company's trademark protection will continue for as long as the Company
continues to use its trademarks in connection with the products and services of
the Company. The Company seeks to protect its software, documentation, and other
written materials under trade secret and copyright laws, which afford only
limited protection.
In connection with the acquisition of DNA Enterprises and Intelect
Visual Communications (IVC), and transactions with certain individuals, licenses
were acquired to support the development of SONETLYNX, video conferencing, and
DSP products. The Company also incorporates third-party licenses into its
products. In connection with the acquisition of IVC, certain assets and
licenses, which constituted the design of a video conferencing product, were
purchased from a major computer company. The design proved to be flawed. In
November 1997, the Company executed an amended technology license agreement with
the computer company, pursuant to which future royalty payments, if any, will be
contingent on sales of defined products. The defined products do not include the
LANscape 2.0 product line.
Litigation may be necessary to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, financial condition, or results of
operations.
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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. In connection with such claims or actions asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights, if necessary. There can be no assurance, however,
that a license will be available under reasonable terms or at all. In addition,
the Company could decide to litigate such claims, which could be expensive and
time consuming and which could have materially adverse effects on the Company's
business, financial condition, or results of operations.
EMPLOYEES
The Company had 365 full-time employees at December 31, 1997, of which
162 were engaged in engineering and development, 71 were engaged in sales,
marketing, and customer support, 99 were engaged in manufacturing operations,
and 33 were engaged in administration and finance. None of the Company's
employees is represented by a labor union. The Company has experienced no
material work stoppages and believes its relations with its employees to be
good.
GOVERNMENT REGULATION
The telecommunications industry, including many of the Company's
customers, is subject to regulation from Federal and state agencies, including
the FCC and various state public utility and service commissions. Similar
regulatory structures exist in most countries outside the USA. While such
regulation does not affect the Company directly, the effects of such regulations
on the Company's customers may, in turn, adversely impact the Company's business
and results of operations. For example, FCC regulatory policies, affecting the
availability of services and other terms on which telecommunications service
providers ("Telcos") conduct their business, may impede the Company's
penetration of certain markets. Current FCC regulations restrict Telcos' ability
to charge their customers based on access cost to local subscribers and may
affect the timing of Telcos' investment in the Company's technology. These FCC
regulations and policies are under continuous review by the federal government
and the courts and are subject to change. Although many FCC restrictions on
providing services in previously restricted markets have been eliminated or
modified, the failure to change, or a substantial delay in changing, the
existing restrictions on Telcos may materially adversely affect their demand for
products based upon the Company's technology.
The Telecommunications Act of 1996 removed certain restrictions
relating to the Regional Bell Operating Companies. The Company believes that
this has created and will continue to create increased competition in the
markets served by the Company's products.
In addition, the Company's business and operating results may also be
adversely affected by the imposition of certain tariffs, duties and other import
restrictions on components that the Company obtains from non-domestic suppliers
or by the imposition of export restrictions on products that the Company sells
internationally. The governments of many other countries actively promote and
create competition in the telecommunications industry. Changes in current or
future laws or regulations, in the United States or elsewhere, could materially
and adversely affect the Company's business and results of operations.
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ITEM 2 - PROPERTIES
All of the Company's facilities are leased. The facilities are in
Richardson, Texas, New York, New York, and London, England. The Company's
principal operations are serviced from four leased facilities in Richardson,
Texas, (comprising 103,000 square feet) and one in New York (comprising 20,000
square feet). These facilities include manufacturing, engineering, sales,
marketing, and administrative offices. All of the Company's manufacturing
operations are located in a 28,000 square foot Richardson, Texas facility. The
Company moved its headquarters from Hamilton, Bermuda to Richardson, Texas in
March 1997.
The Company believes these facilities, which total 124,000 square feet,
are adequate for its present needs. However, the Company expects it will require
additional space in 1998 and beyond for sales, manufacturing, and assembly
activities. Some or all of the additional space needs in 1998 may be satisfied
in conjunction with joint venture arrangements.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in various legal proceedings and claims arising
in the ordinary course of business.
Intelect (Bermuda) is contingently liable for certain potential
liabilities related to its discontinued operations. Specifically, under a stock
purchase agreement dated October 3, 1995 ("1995 Agreement"), Intelect (Bermuda)
agreed to indemnify Savage Sports Corporation, the purchaser of Savage Arms,
Inc. (a manufacturer of fire arms), for certain product liability, environmental
clean-up costs and other contractual liabilities, including certain asserted
successor liability claims. One of the liabilities assumed involves a firearms
product liability lawsuit filed by Jack Taylor individually and as father of
Kevin Taylor in Alaska Superior Court (the "Taylor litigation"). Intelect
(Bermuda) is informed that a defendant in the Taylor litigation, Western Auto
Supply Co., settled the lawsuit for $5 million and, in turn, has asserted a
third-party claim against Savage Arms, Inc. for indemnification in the amount of
the settlement plus attorneys' fees and related costs. Savage Arms has asserted
defenses to the claims and Intelect (Bermuda) believes additional defenses may
be available. Based on the information available to date, it is impossible to
predict the outcome of this litigation or to assess the probability of any
verdict.
Intelect (Bermuda) also has been notified that Savage Sports
Corporation seeks indemnification under the 1995 Agreement in connection with
certain other product liability claims. Most notably, Intelect (Bermuda) has
undertaken the defense of a lawsuit filed against Savage Arms, Inc. by Emhart
Industries, Inc. ("Emhart") in the United States District Court for the District
of Massachusetts (the "Emhart litigation"). In the lawsuit, Emhart requests
indemnification from Savage Arms, Inc. under an agreement Emhart allegedly
executed in 1981 with Savage Industries, Inc., claiming that Savage Arms, Inc.
is a successor to Savage Industries, Inc. To date, Emhart has claimed
indemnification of approximately $2.2 million for five lawsuits it has defended
or settled and also seeks a declaratory judgment that it is entitled to
indemnification for losses and expenses related to firearms product liability
actions which may be filed against Emhart in the future. Intelect (Bermuda)
intends to assert additional defenses. The parties are in discovery and Intelect
(Bermuda) cannot at this time predict the outcome of the litigation.
In the event the Taylor litigation and/or Emhart litigation were to be
resolved adversely to Intelect (Bermuda), there would be a material adverse
effect on the Company's financial condition and results of operations. See Note
20 to the Consolidated Financial Statements.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 4, 1997, Intelect (Bermuda) held a Special Meeting of
Shareholders. At the special meeting, the shareholders approved a merger
proposal, the principal effect of which was to change the domicile of Intelect
(Bermuda) so that it became a publicly traded U.S.-domiciled, Delaware
corporation (the "Reorganization"). The Reorganization was effected pursuant to
an Agreement and Plan of Merger by and among Intelect (Bermuda), the Company
(which was wholly owned by Intelect (Bermuda) prior to the merger), and Intelect
Merger Co., a Delaware corporation which was wholly owned by the Company prior
to the merger ("Intelect Merger Co."). As a result of the merger, Intelect
Merger Co. was merged into Intelect (Bermuda), and each share of Intelect
(Bermuda) was automatically converted into the right to receive one share of the
Company. Further, any outstanding options issued pursuant to stock option plans
of Intelect (Bermuda) became options to purchase common stock of the Company,
and outstanding warrants of Intelect (Bermuda) became warrants to purchase
common stock of the Company. The effect of the Reorganization was that the
shareholders of Intelect (Bermuda) became shareholders of the Company with the
Company becoming the publicly traded company. In addition, the Company became
the holding company for Intelect (Bermuda) and replaced Intelect (Bermuda) as
the holding company for its subsidiaries.
The Reorganization and the transaction consummated in connection
therewith were approved by the vote of common stock holders of 10,176,258 for,
429,751 against, and 25,416 abstentions and by the vote of preferred stock
holders of 100% for.
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PART II
ITEM 5 - MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded in the over-the-counter
market and is listed on the Nasdaq National Market under the symbol "ICOM." The
high and low bid prices for the Company's common stock for each full quarter of
the last two fiscal years, as reported on Nasdaq, are as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1st quarter 1996 - period ended March 31, 1996 5.625 4.50
2nd quarter 1996 - period ended June 30, 1996 15.375 5.3125
3rd quarter 1996 - period ended September 30, 1996 11.75 6.625
4th quarter 1996 - period ended December 31, 1996 8.125 4.25
1st quarter 1997 - period ended March 31, 1997 5.125 1.875
2nd quarter 1997 - period ended June 30, 1997 4.625 1.375
3rd quarter 1997 - period ended September 30, 1997 11.50 4.25
4th quarter 1997 - period ended December 31, 1997 11.313 3.1875
</TABLE>
The Company believes that as of March 13, 1998, its outstanding shares
of common stock are held by approximately 8,200 owners of record.
The closing bid price of the common stock on the Nasdaq National Market
on March 27, 1998, was $7.0625.
DIVIDEND POLICY
No cash dividends were paid by the Company during fiscal 1995, 1996, or
1997. The Company does not currently plan to pay any dividends on common stock
in the foreseeable future. The Company is restricted by its agreements with
lenders and the holders of certain of its preferred stock from any payment of
dividends on common stock and from the payment of dividends on preferred stock
except dividends payable with common stock. These restrictions remain in effect
for so long as any balance remains payable on the debt or such preferred stock
remains outstanding. See Note 25 to the Consolidated Financial Statements.
RECENT SALES OF UNREGISTERED SECURITIES
On December 17, 1997, the Company completed the sale of $4 million of
10% Cumulative Convertible Preferred Stock, Series B to the Navesink Equity
Derivative Fund LDC ("Navesink"). Navesink purchased 914,286 shares of the
preferred stock at a price of $4 3/8 per share for an aggregate offering price
of $4 million. The Company received net proceeds from the sale of $3,877,000,
after deducting $123,000 of issuance costs. The offering was not underwritten
and was made in reliance on the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended. The preferred stock has a 10%
annual dividend rate on the $4 3/8 per share liquidation preference, payable
quarterly beginning on March 31, 1998. The Company has the choice of paying
dividends in cash or in shares of common stock based on the current market value
of the common stock at the time the dividends are payable. Beginning on May 31,
1998, 50% of the preferred stock is convertible by Navesink into common stock of
the Company with the remaining 50% being convertible on June 30, 1998. The
number of conversion shares issuable upon conversion is equal to the greater of
(i)the number of shares of preferred stock being converted multiplied by 1.10,
or (ii) the number of shares of preferred stock multiplied by a number, the
numerator of which is $4.375 and the denominator of 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
11
<PAGE> 12
the previous five consecutive trading days from the date of the notice of
election of conversion. The common stock issuable on conversion will be
restricted and not transferable except pursuant to an effective registration
statement or pursuant to an applicable exemption under the Securities Act of
1933. The Company has granted to Navesink the right to demand registration of
the common stock issued upon conversion of the preferred stock, in certain
circumstances. The preferred stock is not transferable by Navesink, has no
voting rights except in the event of three quarters arrearage on quarterly
dividends, and has no preemptive rights. Navesink has the right, subject to the
rights of the other holders of preferred shares ranking on parity with the
preferred stock, to participate in certain other private equity and debt issues
of the Company. The Company may redeem the preferred stock at any time at the
greater of $5.25 per share or the average closing market bid price of Company
common stock for five consecutive trading days prior to the date of redemption.
In December 1997, a group of directors, officers and employees of the
Company loaned up to $710,000 to the Company. Interest accrues on such loans at
the prime rate plus 3%. The loans are due on demand and may be paid, at the
option of the holder, in the form of common stock of the Company. The conversion
price for such common stock is $5.25 per share. See Note 10 to the Consolidated
Financial Statements.
Effective January 27, 1998, the Company issued to Amerix Electronics,
Inc. ("Amerix") 150,000 shares of common stock of the Company as prepayment for
certain commissions payable to Amerix by Intelect Network Technologies Company
("INT"), a wholly owned subsidiary of the Company pursuant to the terms of a
Sales Representative Agreement ("Agreement") dated as of January 27, 1998,
between INT and Amerix. The Agreement provides that the shares are issued in
full and final payment of all commissions due to Amerix earned from the period
beginning on January 1, 1998, in anticipation of $30 million of sales of
products of the Company by Amerix. The securities were issued to Amerix by the
Company pursuant to an exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended.
As disclosed in the Form 8-K of the Company filed February 17, 1998,
the Company completed $25 million of financings by closing on February 9, 1998,
a $10 million private placement of its Series C convertible preferred stock and
by closing on February 12, 1998, a $15 million credit facility. See Note 25 to
the Consolidated Financial Statements and ITEM 7 - Management's Discussion and
Analysis.
12
<PAGE> 13
ITEM 6 - SELECTED FINANCIAL DATA
The following tables set forth certain historical consolidated financial
data for the Company.
<TABLE>
<CAPTION>
Two months
YEARS ENDED DECEMBER 31, ended Years ended October 31,
------------------------ December 31, -----------------------
1997 1996 1995 1995 1994 1993
---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS: ($ Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 37,777 $ 9,352 $ 734 $ 2,030 $ -- $ --
-------- -------- -------- -------- -------- --------
Operating loss (17,642) (33,638) (2,943) (4,652) (558) (572)
-------- -------- -------- -------- -------- --------
Loss from continuing operations (19,743) (42,983) (2,776) (5,194) (538) (446)
Income from discontinued
operations (1) -- -- -- 3,546 3,410 1,517
Income (loss) on disposal of
discontinued operations (1) (498) (56) (236) 13,824 -- --
Income (loss) before
extraordinary item $(20,241) $(43,039) $ (3,012) $ 12,176 $ 2,872 $ 1,071
-------- -------- -------- -------- -------- --------
Income (loss) available to common
stockholders $(20,798) $(43,039) $ (3,012) $ 12,822 $ 2,872 $ 1,071
======== ======== ======== ======== ======== ========
BASIC AND DILUTED INCOME (LOSS) PER
SHARE:
Continuing operations $ (0.99) $ (3.32) $ (0.24) $ (0.47) $ (0.05) $ (0.05)
======== ======== ======== ======== ======== ========
Discontinued operations $ (0.02) $ (0.01) $ (0.02) $ 1.57 $ 0.34 $ 0.16
======== ======== ======== ======== ======== ========
Extraordinary item -- -- -- $ 0.06 -- --
======== ======== ======== ======== ======== ========
Net income (loss) for period $ (1.01) $ (3.33) $ (0.26) $ 1.16 $ 0.29 $ 0.11
======== ======== ======== ======== ======== ========
Weighted average shares (thousands) 20,558 12,943 11,385 11,024 9,942 9,539
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 October 31
------------------------- --------------------------------------------
1997 1996 1995 1995 1994 1993
---- ---- ---- ---- ---- ----
BALANCE SHEET: ($ Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets $25,552 $11,594 $19,957 $24,587 $ 2,599 $ 1,049
Excess of cost over assets of
companies acquired 13,249 14,573 8,685 9,349 -- --
Net assets of discontinued operations -- -- -- -- 9,573 7,207
Other long-term assets 10,430 9,269 2,597 1,786 -- --
======= ======= ======= ======= ======= =======
Total assets $49,231 $35,436 $31,239 $35,722 $12,172 $ 8,256
======= ======= ======= ======= ======= =======
LIABILITIES & SHAREHOLDERS' EQUITY:
Current liabilities including
current maturities of long-term debt $22,939 $ 9,810 $ 5,331 $ 7,091 $ 269 $ 175
Long-term liabilities 143 17,895 368 365 -- --
Shareholders' equity 26,149 7,731 25,540 28,266 11,903 8,081
======= ======= ======= ======= ======= =======
$49,231 $35,436 $31,239 $35,722 $12,172 $ 8,256
======= ======= ======= ======= ======= =======
</TABLE>
(1) See Note 9 to the Consolidated Financial Statements under ITEM 8
13
<PAGE> 14
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Results of continuing operations in 1997 and 1996 consist of:
o the fiber optic multiplexer and special services switch
businesses of Intelect Network Technologies Company ("INT") from
its April 24, 1995 acquisition,
o the engineering services business of DNA Enterprises, Inc.
("DNA") from its February 13, 1996 acquisition,
o the video conferencing system business of Intelect Visual
Communications Corp. ("IVC") from its March 29, 1996 acquisition,
and
o the information security business of Intelect Europe Limited
("IEL") from its August 31, 1995 acquisition until its
liquidation in January 1997.
During the year ended October 31, 1995, the Company was engaged in the
manufacturing and marketing of sporting arms, through its subsidiary Savage
Arms, Inc. ("Savage"). The results of operations of Savage are accounted for as
discontinued operations due to the sale of Savage on October 31, 1995. The
Company's fiscal year was changed to December 31 in 1995.
Accordingly, due to the disposition of Savage, the change in fiscal
year, and the schedule of acquisitions above, any comparison of financial
results of 1996 to 1995 would not be meaningful to determine a trend.
The following table shows the revenue and gross profits for the
Company's products:
<TABLE>
<CAPTION>
Years Ended Two Months Ended Year Ended
December 31 December 31 October 31
------------------------------------------------------------------------------
1997 1996 1995 1995
------------------------------------------------------------------------------
($ Thousands)
<S> <C> <C> <C> <C>
Revenue:
Fiber optic multiplexers $ 26,250 430 -- --
Engineering services and DSP 8,909 4,413 -- --
Video conferencing 636 172 -- --
Voice switching and other 1,982 4,337 734 2,030
------------------------------------------------------------------------------
$ 37,777 9,352 734 2,030
------------------------------------------------------------------------------
Gross profit (loss):
Fiber optic multiplexers $ 12,035 (625) -- --
Engineering services and DSP 2,287 964 -- --
Video conferencing 41 (826) -- --
Voice switching and other (112) (2,134) (643) (538)
------------------------------------------------------------------------------
$ 14,251 (2,621) (643) (538)
------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
REVENUES
Revenues in 1997 increased 304% over 1996 due to large scale
installation of SONETLYNX products in foreign and domestic markets and due to
the near doubling of the DNA engineering services business.
The SONETLYNX fiber optic multiplexer was delivered to five end-user
customers in Korea, to a private network project on the Alyeska pipeline, and to
other applications such as "smart" highways and municipal networks for video
arraignment. Due to a low base of sales in 1996, the percentage increase is not
a reasonable indicator of the future. Sales in 1997 included $22,380,000 of
multiplexer products delivered for installation in Korean networks for
telecommunications, banking, and other applications. See Note 23 to Consolidated
Financial Statements. In light of the difficulties which developed in general in
Korean and other Asian financial markets at year end, the outlook for
continuation of sales in those areas has become uncertain. The Company has
shipped $122,000 of product to Korean customers between December 31, 1997 and
March 20, 1998. The Company's outlook for sales to non-Korean customers,
especially in the U.S., is based on outstanding proposals and prospects of the
Company and its distribution partners. There can be no assurance that such
proposals and prospects will result in orders and revenues.
Engineering service revenues of DNA increased 99% in 1997 over 1996.
DSP product in the amount of $277,000 was shipped in 1997 compared to $81,000 in
1996. The Company does not expect the growth of services revenue to continue at
the same rate. DSP product shipments may increase significantly, depending on
customer reception to the Company's designs and proposals and the funding of
projects into which the products are specified.
Video conferencing product revenues increased from a sampling level in
1996 to $636,000 in 1997. The growth of the product was delayed by a decision to
discontinue the original licensed technology in favor of a new proprietary
design based on wavelet technology. The resultant new product was launched in
November 1997.
Sales of S4 and predecessor products were $1,575,000 in 1997, compared
to $2,200,000 in 1996. Since the S4 serves a limited market, prospects are
uncertain for future sales increases. Other revenues in 1996 and late 1995
include information security products sold primarily to the UK military market.
These products were phased out in 1996.
GROSS PROFIT (LOSS)
Gross profit increased to $14,251,000 from a loss of ($2,621,000) in
the years ended December 31, 1997 and 1996, respectively. The largest
contribution to the improvement came from SONETLYNX fiber optic multiplexer
products which achieved design stability and economic production levels in the
second half of 1997. Due to the interruption or delay of substantial shipments
to Korean customers at the beginning of 1998, the level of margin contribution
by the fiber optic products is uncertain in the near future. The potential for
sales to non-Korean customers could offset the effect of lower sales to Korean
customers. However, there can be no assurance that such revenue and margin will
materialize.
Gross profit contribution by the engineering services business
increased in 1997, due primarily to the increase in revenue.
Video conferencing products made a minor contribution to the total
gross profit in both 1997 and 1996 due to the low sales level in both years,
reflecting new product introductions in each year.
The loss on S4 switching products was reduced in 1997 due to the
completion of certain loss contracts initiated in prior years.
Approximately $675,000 of under-absorbed manufacturing overhead costs,
substantially all attributable to SONETLYNX, were incurred to prepare for the
large manufacturing growth rate during the year.
15
<PAGE> 16
ENGINEERING AND DEVELOPMENT (E&D) EXPENSES
E&D expense increased to $11,899,000 in 1997 from $8,719,000 in 1996.
As a percentage of revenues, the expense declined to 31% from 93%. Spending in
1997 on CS4 and approximately $2,000,000 of other E&D spending was dedicated to
product development for which revenues were not realized during the year. In
both years, certain amounts of software development costs were capitalized.
Including those amounts, gross spending on E&D increased to $13,216,000 from
$10,114,000. Gross spending by product line was distributed as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1997 1996
---- ----
($ Thousands)
<S> <C> <C>
Fiber optic multiplexer 6,400 2,857
CS4 3,816 5,565
Video conferencing 1,443 954
DSP, S4, and other 1,557 738
13,216 10,114
---------- ----------
</TABLE>
The SONETLYNX fiber optic multiplexer product line was developed in
1996 with the following core components: an OC-1 controller, 8 channel voice
modules with FXS, FXO, and 4 wire E&M, 4 channel T1 async, 2 channel low speed
data supporting four protocols, and a ring generator. The product line was
enhanced during 1997 by the addition of: an OC-3 controller, 8 channel voice, 4
channel T1, and low speed data modules that can be configured for OC-3 or OC-1
operation, 4 channel E1 async, 7 channel T1 byte sync, video module with
encoder/decoder, a module combining precision timing sources with a single voice
channel, and an OC-1 multipoint ethernet module. As a consequence of these
developments, the SONETLYNX product line has become a powerful and cost
effective solution to the customer problem of access to fiber networks where
many protocols are required.
The CS4 product was developed to a working prototype stage in 1996 and
further developed and upgraded in 1997 to support the call capacity requirements
of targeted market segments and anticipated applications.
Spending on the video conferencing product in 1996 led to the emergence
of a viable product built on purchased technology. In 1997, the product was
redesigned around wavelet technology in order to deliver key performance
features not otherwise achievable, namely, superior picture quality, application
flexibility, and selectable bandwidth requirements.
In 1996, two standard DSP board-level products were developed using the
Texas Instruments TMS320C80. In 1997, two DSP board-level products based on the
Texas Instruments TMS320C6201 were developed. Spending on the S4 product line in
both years led to the completion of an improved console for air traffic control
applications.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses were $18,671,000 and $14,601,000 in
the years ended December 31, 1997 and 1996. Selling expense increased to
$11,213,000 from $6,412,000. The increase in 1997 was attributable to market
development activity for SONETLYNX and LANscape products and higher revenues for
SONETLYNX. As a percentage of revenues, selling expense declined to 30% from
69%. Administrative expenses declined to $7,458,000 from $8,189,000 partly due
to the removal of corporate headquarters from Bermuda.
16
<PAGE> 17
ASSET WRITE DOWNS
In connection with the acquisition of IVC, certain assets and licenses,
which constituted the design of a videoconferencing product, were purchased from
a major computer company. The design proved to be flawed and market introduction
was delayed approximately nine months. In 1996, the Company deemed the
recoverability of IVC goodwill to be significantly impaired by the delay in
introduction of the product to a rapidly changing market and accordingly reduced
the carrying value of IVC goodwill by $4,175,000 (its remaining unamortized net
book value at the time) and wrote off $51,000 of fixed assets deemed of no
value.
The Company's assessment of the future prospects for the information
security products business in the United Kingdom led to a complete shut down of
those operations in Chesterfield, England at the end of 1996. In January 1997,
liquidation proceedings began. The Company was an unsecured creditor of IEL and
wrote off all net assets related to those operations in England in the amount of
$1,807,000.
INTEREST EXPENSE
Interest expense of $2,863,000 and $9,911,000 in the years ended
December 31, 1997 and 1996 consist of:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1997 1996
---- ----
($Thousands)
<S> <C> <C>
Interest on debt instruments 930 704
Non-cash financing costs 1,721 7,534
Other costs of financing 199 1,571
Other interest 13 102
----- -----
2,863 9,911
</TABLE>
Interest on debt instruments in 1997 was primarily attributable to amounts
borrowed from St. James Capital Corp., two series of convertible debentures, and
the Coastal Trust. In 1996, the interest was attributable to three series of
convertible debentures.
Non-cash financing costs in 1997 were the result of warrants to purchase common
stock issued in connection with various financings. The reported expense amount
is the value of the warrants determined by using the Black-Scholes pricing
model. In 1996, in addition to $2,942,000 of warrant values, $4,592,000 of
reportable expense was attributable to a beneficial conversion feature of the
convertible debentures.
Other costs of financing consist primarily of legal and placement fees.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
The Company sold Savage Corporation (and its subsidiaries, including
Savage Arms, Inc.) ("Savage") on October 31, 1995. The results of Savage are
accounted for as discontinued operations and, accordingly, comparative
presentations reflect the Company's equity in the earnings of Savage for the
relevant periods. The gain on the disposition of Savage occurred in the fourth
quarter of 1995. Losses since October 1995 represent legal expenses in
connection with the indemnity agreement with Savage Sports Corporation. See ITEM
3, Legal Proceedings.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems to identify
the systems that could be affected by the "Year 2000 Problem," the result of
computer programs using two digits rather than four to define the year portion
of dates. The Company has determined that no significant systems fail to comply
with the ability to distinguish the year 2000 from the year 1900. The financial
impact of Year 2000 compliance has not been and is not anticipated to be
material to the Company's financial position or results of operations in any
given year.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
In the year ended December 31, 1997, cash used in operations,
($24,852,000), and by investing activities, ($5,343,000), were funded by using
$2,769,000 of available cash balances and by securing new financing, net of
repayments, of $27,426,000.
Operating Activities
Net cash used in operations consisted of the $20,241,000 net loss and
the $10,843,000 net increase in current assets, offset by $6,232,000 of non-cash
charges. As previously discussed, the net loss primarily reflects commitments to
support new product development and to fund selling and manufacturing
infrastructure development.
o Accounts receivable increased $13,242,000 as required by the much
higher level of sales and due to the length of payment schedules
tied to major project installations and customer acceptance
procedures.
o Inventory increased $3,311,000 generally in line with the
increased rate of product shipments.
o Use of cash for accounts receivable and inventory growth was
offset by the $5,875,000 increase in payables and accruals which
grew in concert with the current assets.
o The cash effect of the net losses was mitigated by inclusion of
$3,412,000 of depreciation and amortization of intangible assets
and $1,920,000 of amortization of deferred financing costs.
Investing Activities
Investment spending included capital expenditures of $2,993,000 for
fixed asset additions, primarily equipment for product testing and
manufacturing, leasehold improvements, and computer equipment and software to
support engineering and administrative activities. Software development costs of
$1,317,000 were capitalized following establishment of feasibility of certain
SONETLYNX modules. No software cost was capitalized after September 1997.
Financing Activities
Cash used in operating and investing activities in 1997 were primarily
financed by the following:
o $6,000,000 borrowed from St. James Capital Corp., due March 27,
1998
o $5,000,000 borrowed from The Coastal Corporation Second Pension
Trust ("Coastal Trust"), later converted to Series A preferred
stock
o $4,911,000 from the sale of Series A preferred stock to Coastal
Trust
o $1,455,000 from the exercise by Coastal Trust of a warrant to
purchase 750,000 shares of common stock
o $3,000,000 borrowed from Coastal Trust, due March 27, 1998
o $135,000 from the exercise by Lifeline Industries, Inc. of a
warrant to purchase 30,000 shares of common stock
o $300,000 from the exercise by St. James Capital Corp. of a
warrant to purchase 150,000 shares of common stock
o $3,330,000 from the sale of 696,400 shares of common stock in
private placements
o $1,575,000 from the exercise of employee stock options
o $3,877,000 from the sale of Series B preferred stock to Navesink
Equity Derivative Fund, LDC
o $910,000 borrowed from employees and affiliates of the Company.
Recent Developments, Outlook, and Financial Strategy
In February 1998, two additional financings were arranged. $10,000,000
of Series C preferred stock was sold to Citadel Investment Group, LLC and a
$15,000,000 credit facility was arranged with St. James Capital, L.P. See Note
25 to Consolidated Financial Statements. $3,000,000 has been advanced under the
credit facility. The obligation to advance up to $15,000,000 expires after July
31, 1998. Although advances under the $15,000,000 facility may be used
18
<PAGE> 19
to pay off the currently outstanding $6,000,000 and $3,000,000 notes due to St.
James Capital Corp. and Coastal Trust, respectively, so long as any of the
current obligations to St. James Capital Corp. and Coastal Trust are
outstanding, St. James Capital L.P. must approve additional advances for any
other purpose, which consent may not be unreasonably withheld. The Company's
ability to incur debt, pay dividends on its common and preferred stock and to
make certain investments and enter into certain transactions is governed by
covenants and provisions in its various debt instruments and by the terms of its
outstanding preferred stock, as described in Notes 10, 16, and 25 to
Consolidated Financial Statements. In addition to the external financings, the
Company has enhanced future cash flows by negotiating deferred payment
arrangements with former owners of DNA so that $2,050,000 formerly due on
February 13, 1998 is payable in various monthly amounts through December 1998.
The Company currently believes that the prudent approach to cash
planning should be predicated on a revenue pattern which declines in the first
quarter of 1998 and increases thereafter. Under such a scenario, the need for
inventory and receivable investment is moderated at the beginning of the year.
The credit facility with St. James Capital, L.P. is in place to pay the two debt
obligations maturing on March 27, 1998, if required. In order to offset the
impact of further investment in CS4 product development, the Company continues
to seek an investment, distribution, and/or marketing partner. Should the
difficulties in Korean markets continue, the Company believes that, considering
the number of prospects and the level of proposal activity, the opportunities
are good for replacing SONETLYNX sales concentrated with Korean customers. If,
nevertheless, revenues do not recover in the near term, then cost reduction
contingency plans are in place to preserve cash resources at lower levels of
sales. In the event the outlook for liquidity is stressed by production and
sales growth in excess of current plans, the Company believes the corporate
financial environment will support new financing needs.
Conclusion
Considering the financial resources available and potentially
available, the outlook for cash available from customer collections, the outlook
for cash uses in operations and investing, and the options available to control
spending, the Company believes it has, or reasonably has access to, the
financial resources to meet its business requirements through the current year.
The Company cannot assure, however, that the business results assumed in this
outlook will be realized, especially considering the near term impact of reduced
revenues from Korea. The Company cannot assure that profitability and positive
cash flow will be achieved when expected. If the Company's 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, there can be no assurance 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.
CONTINGENT LIABILITIES
As discussed in ITEM 3, Legal Proceedings, the Company is exposed to
certain contingent liabilities, which, if resolved adversely to the Company,
would adversely affect its liquidity, its results of operations and/or its
financial position.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE LIQUIDITY AND OPERATING RESULTS
This Form 10-K contains certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. The forward looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those expressed in, or implied by, the forward looking
statements. Factors that might cause such a difference include, but are not
limited to, those relating to: general economic conditions in the markets in
which the Company operates, including, in particular, the financial condition of
the Republic of Korea; success in the development and market acceptance of new
and existing products (particularly SONETLYNX, LANscape, and CS4); dependence on
suppliers, third party manufacturers and channels of distribution; customer and
product concentration; fluctuations in customer demand; maintaining access to
external sources of capital; ability to execute management's margin improvement
and cost control plans; overall management of the Company's expansion; and other
risk factors detailed from time to time in the Company's filings with the
Securities and Exchange Commission, including without limitation those set forth
in the Section entitled "Risk factors" in the Form S-4 of the Company filed on
October 30, 1997 and the Form S-3 of the Company filed on September 23, 1997.
19
<PAGE> 20
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTELECT COMMUNICATIONS, INC, AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Reports of Independent Accountants................................................................ 21
Consolidated Balance Sheets....................................................................... 23
Consolidated Statements of Operations............................................................. 24
Consolidated Statements of Stockholders' Equity................................................... 26
Consolidated Statements of Cash Flows............................................................. 29
Notes to Consolidated Financial Statements........................................................ 31
Schedule II - Valuation and Qualifying Accounts................................................... 62
</TABLE>
20
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: The Board of Directors and Shareholders of
Intelect Communications, Inc.
We have audited the accompanying consolidated balance sheet of Intelect
Communications, Inc. (a Delaware corporation) as of December 31, 1997, and the
related statements of operations in stockholders' equity and cash flows for the
year ended December 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Intelect
Communications, Inc. as of December 31, 1997, and the results of their
operations and their cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Dallas, Texas
March 27, 1998
21
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Intelect Communications Systems Limited
We have audited the accompanying consolidated balance sheet of Intelect
Communications Systems Limited 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. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedule for the year ended December 31, 1996. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Intelect
Communications Systems Limited and its subsidiaries as of December 31, 1996 and
the results of their operations and their cash flows for the year ended
December 31, 1996, the two month period ended December 31, 1995 and the year
ended October 31, 1995, in conformity with United States generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements, taken as a whole, presents fairly, in all material respects, the
information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the
Company has suffered recurring losses from continuing operations and is
dependent upon the successful development and commercialization of its products
and its ability to secure adequate sources of capital until the Company is
operating profitably. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with regard to these
matters are also described in Note 1. The consolidated financial statements and
financial statement schedule do not include any adjustments that might result
from the outcome of this uncertainty.
/S/ KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
April 9, 1997
22
<PAGE> 23
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Assets 1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,094 $ 4,863
Investments in marketable securities 942 854
Accounts receivable net of allowances of $541 and $542 in 1997 and 1996 15,569 2,427
Inventories 6,289 2,978
Prepaid expenses 658 472
-------- --------
Total current assets 25,552 11,594
Property and equipment, net 6,041 4,285
Goodwill, net 13,249 14,573
Software development costs, net 2,229 1,389
Other intangible assets, net 1,168 2,879
Other assets 992 716
-------- --------
$ 49,231 $ 35,436
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable, net of unamortized discount of $578 $ 9,132 $ --
Current maturities of long-term debt 2,527 4,125
Accounts payable 7,569 1,878
Accrued liabilities 3,173 3,302
Net liabilities of discontinued operations 400 400
Deferred income taxes 49 48
Current installments of obligations under capital leases 89 57
-------- --------
Total current liabilities 22,939 9,810
Long-term obligations under capital leases, net of current installments 55 59
Deferred income taxes 88 267
Long-term debt, net of current maturities -- 3,238
Convertible debentures, net of unamortized discount of $582 -- 14,331
-------- --------
23,082 27,705
-------- --------
Commitments and contingencies (notes 13, 14 and 20)
Stockholders' equity:
$2.0145, 10% cumulative convertible preferred stock, series A, $.01 par
value (aggregate involuntary liquidation preference $20,145,000)
Authorized 10,000,000 shares; 4,219,409 shares issued and
outstanding in 1997 42 --
$4.375, 10% cumulative convertible preferred stock, series B, $.01 par
value (aggregate involuntary liquidation preference $4,000,000)
Authorized 914,286 shares; 914,286 shares issued and outstanding in 1997. 9 --
Common stock, $.01 par value, 50,000,000 and 80,000,000 shares authorized
in 1997 and 1996. 23,954,978 and 15,027,728 shares issued and
outstanding in 1997 and 1996 240 150
Additional paid-in capital 75,940 36,849
Unrealized gain on marketable securities 2 18
Retained earnings (accumulated deficit) (50,084) (29,286)
-------- --------
Total stockholders' equity 26,149 7,731
$ 49,231 $ 35,436
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1997 and 1996, two months ended December 31, 1995 and
year ended October 31, 1995
Consolidated Statements of Operations
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Two months
Years ended ended Year ended
December 31, December 31, October 31,
1997 1996 1995 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 37,777 $ 9,352 $ 734 $ 2,030
Cost of revenue 23,526 11,973 1,377 2,568
-------- -------- -------- --------
Gross profit (loss) 14,251 (2,621) (643) (538)
Expenses:
Engineering and development 11,899 8,719 732 1,653
Selling and administrative 18,671 14,601 1,166 2,149
Amortization of goodwill 1,323 1,664 64 312
Asset writedowns -- 6,033 338 --
-------- -------- -------- --------
31,893 31,017 2,300 4,114
-------- -------- -------- --------
Operating loss (17,642) (33,638) (2,943) (4,652)
-------- -------- -------- --------
Other income (expense):
Equity in loss of investee -- -- -- (280)
Interest expense (2,863) (9,911) (23) (430)
Interest income and other 636 653 190 168
-------- -------- -------- --------
(2,227) (9,258) 167 (542)
-------- -------- -------- --------
Loss from continuing operations
before income taxes and extra-
ordinary item (19,869) (42,896) (2,776) (5,194)
Income tax expense (benefit) (126) 87 -- --
-------- -------- -------- --------
Loss from continuing operations (19,743) (42,983) (2,776) (5,194)
Discontinued operations
Income from discontinued operations,
net of tax -- -- -- 3,546
Income (loss) on disposal of discontinued
operations, net of tax (498) (56) (236) 13,824
-------- -------- -------- --------
Income (loss) before extraordinary
item (20,241) (43,039) (3,012) 12,176
Equity in extraordinary gain of investee -- -- -- 646
-------- -------- -------- --------
Net income (loss) $(20,241) $(43,039) $ (3,012) $ 12,822
======== ======== ======== ========
Dividends on preferred stock $ (557) -- -- --
======== ======== ======== ========
Income (loss) available to common stockholders $(20,798) $(43,039) $ (3,012) $ 12,822
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements. (Continued)
24
<PAGE> 25
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1997 and 1996, two months ended December 31, 1995 and
year ended October 31, 1995, Continued
Consolidated Statements of Operations
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Years ended Two months
December 31, ended Year ended
------------ December 31, October 31,
1997 1996 1995 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic and diluted income (loss) per share:
Continuing operations $ (0.99) $ (3.32) $ (0.24) $ (0.47)
Discontinued operations (0.02) (0.01) (0.02) 1.57
Extraordinary item -- -- -- 0.06
---------- ---------- ---------- ----------
Net income (loss) per share $ (1.01) $ (3.33) $ (0.26) $ 1.16
---------- ---------- ---------- ----------
Weighted average number of common shares outstanding
20,558 12,943 11,385 11,024
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997 and 1996, two months ended
December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Preferred stock
---------------
Series A Series B Common stock
-------- -------- ------------
Shares Par Shares Par Shares Par
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Balances at October 31, 1994 -- $ -- -- $ -- 10,583,142 $ 106
Acquisition of Lakefield
Arms Limited (note 9) -- -- -- -- 416,666 4
Exercise of convertible
preferred shares of Savage
Corporation -- -- -- -- 160,991 2
Private placement -- -- -- -- 150,000 1
Exercise of employee
stock options -- -- -- -- 74,318 1
Quasi reorganization -- -- -- -- -- --
Net income -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at October 31, 1995 -- -- -- -- 11,385,117 114
Stock option
compensation -- -- -- -- --
Net loss -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1995 -- -- -- -- 11,385,117 114
Conversion of debentures -- -- -- -- 1,837,205 18
Acquisition of Intelect Visual
Communications Corp. -- -- -- -- 545,420 5
Exercise of employee stock
options -- -- -- -- 530,000 5
Exercise of warrants from
acquisition of Savage
Corporation -- -- -- -- 360,000 4
<CAPTION>
Unrealized Total
Additional gain on stock-
paid-in Retained marketable holders'
capital earnings securities equity
------- -------- ---------- ------
<S> <C> <C> <C> <C>
Balances at October 31, 1994 $ 7,854 $ 3,943 $ -- $ 11,903
Acquisition of Lakefield
Arms Limited (note 9) 925 -- -- 929
Exercise of convertible
preferred shares of Savage
Corporation 400 -- -- 402
Private placement 524 -- -- 525
Exercise of employee
stock options 139 -- -- 140
Quasi reorganization 1,545 -- -- 1,545
Net income -- 12,822 -- 12,822
---------- ---------- ---------- ----------
Balances at October 31, 1995 11,387 16,765 -- 28,266
Stock option
compensation 286 -- -- 286
----------
Net loss -- (3,012) -- (3,012)
---------- ---------- ---------- ----------
----------
Balances at December 31, 1995 11,673 13,753 -- 25,540
Conversion of debentures 10,069 -- -- 10,087
Acquisition of Intelect Visual
Communications Corp. 2,747 -- -- 2,752
Exercise of employee stock
options 1,012 -- -- 1,017
Exercise of warrants from
acquisition of Savage
Corporation 1,076 -- -- 1,080
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
26
<PAGE> 27
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, Continued
Years ended December 31, 1997 and 1996, two months
ended December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Preferred stock
---------------
Series A Series B Common stock
-------- -------- ------------
Shares Par Shares Par Shares Par
Settlement of subordinated
debt and contingent
purchase consideration of
INT -- -- -- -- 169,986 $ 2
Purchase of other assets -- -- -- -- 100,000 1
Employee compensation -
IVC -- -- -- -- 100,000 1
Allocation of proceeds to
beneficial conversion
features of convertible
debentures -- -- -- -- -- --
Detachable warrants issued
with convertible debentures -- -- -- -- -- --
Stock option compensation -- -- -- -- -- --
Unrealized gain on
marketable securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1996 -- -- -- -- 15,027,728 150
Private placements
Preferred, Series A 2,482,005 25 -- -- -- --
Preferred, Series B -- -- 914,286 9 -- --
Common -- -- -- -- 696,400 7
<CAPTION>
Unrealized Total
Additional gain on stock-
paid-in Retained marketable holders'
capital earnings securities equity
------- -------- ---------- ------
<S> <C> <C> <C> <C>
Settlement of subordinated
debt and contingent
purchase consideration of
INT $ 848 $ -- $ -- $ 850
Purchase of other assets 374 -- -- 375
Employee compensation -
IVC 499 -- -- 500
Allocation of proceeds to
beneficial conversion
features of convertible
debentures 4,947 -- -- 4,947
Detachable warrants issued
with convertible debentures 3,117 -- -- 3,117
Stock option compensation 487 -- -- 487
Unrealized gain on
marketable securities -- -- 18 18
Net loss -- (43,039) -- (43,039)
---------- ---------- ---------- ----------
Balances at December 31, 1996 36,849 (29,286) 18 7,731
Private placements
Preferred, Series A 4,886 -- -- 4,911
Preferred, Series B 3,868 -- -- 3,877
Common 3,323 -- -- 3,330
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
27
<PAGE> 28
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, Continued
Years ended December 31, 1997 and 1996, two months ended
December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Preferred stock
---------------
Series A Series B Common stock
-------- -------- ------------
Shares Par Shares Par Shares Par
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Conversion of debentures -- -- -- -- 5,376,864 54
Conversion of notes payable 2,482,006 25 -- -- -- --
Conversion of preferred stock (780,583) (8) -- -- 780,583 8
Detachable warrants issued
with notes -- -- -- -- -- --
Warrants issued for services -- -- -- -- -- --
Exercise of warrants -- -- -- -- 930,000 9
Exercise of employee stock option -- -- -- -- 561,666 6
Stock option compensation -- -- -- -- -- --
Settlement of royalty agreement -- -- -- -- 542,182 6
Interest expense paid with stock:
Preferred, Series A 35,981 -- -- -- -- --
Common -- -- -- -- 11,407 --
Preferred dividends paid with stock -- -- -- -- 28,148 --
Preferred dividends accrued
Series A -- -- -- -- -- --
Series B -- -- -- -- -- --
Amortization of beneficial conversion
features of preferred stock, Series B -- -- -- -- -- --
Unrecognized loss on marketable
securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1997 4,219,409 $ 42 914,286 $ 9 23,954,978 $ 240
========== ========== ========== ========== ========== ==========
<CAPTION>
Unrealized Total
Additional gain on stock-
paid-in Retained marketable holders'
capital earnings securities equity
------- -------- ---------- ------
<S> <C> <C>
Conversion of debentures 14,796 -- -- 14,850
Conversion of notes payable 4,975 -- -- 5,000
Conversion of preferred stock -- -- -- --
Detachable warrants issued
with notes 1,661 -- -- 1,661
Warrants issued for services 250 -- -- 250
Exercise of warrants 1,881 -- -- 1,890
Exercise of employee stock option 1,569 -- -- 1,575
Stock option compensation 354 -- -- 354
Settlement of royalty agreement 841 -- -- 847
Interest expense paid with stock:
Preferred, Series A 72 -- -- 72
Common 58 -- -- 58
Preferred dividends paid with stock 296 (296) -- --
Preferred dividends accrued
Series A 215 (215) -- --
Series B 15 (15) -- --
Amortization of beneficial conversion
features of preferred stock, Series B 31 (31) -- --
Unrecognized loss on marketable
securities -- -- (16) (16)
Net loss -- (20,241) -- (20,241)
---------- ---------- ---------- ----------
Balances at December 31, 1997 $ 75,940 $ (50,084) $ 2 $ 26,149
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
28
<PAGE> 29
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996, two months
ended December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Two months
Years ended ended Year ended
December 31, December 31, December 31,
1997 1996 1995 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(20,241) $(43,039) $(3,012) $ 12,822
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 3,412 3,581 106 486
Deferred income taxes (177) 87 -- --
(Income) loss on discontinued
operations 498 56 236 (13,824)
(Income) loss from discontinued operations -- -- -- (3,546)
Noncash compensation -- 500 -- --
Assets writedowns -- 6,033 338 --
Stock option compensation 354 487 50 --
Noncash operating expenses 191 -- -- --
Amortization of deferred financing costs 1,920 9,105 -- --
Equity in income of investee -- -- -- (366)
Other 34 (44) -- 9
Change in operating assets and liabilities,
net of effects of acquired companies:
Accounts receivable (13,242) (898) (662) 136
Inventories (3,311) (350) 277 196
Other assets (165) (95) (282) (102)
Accounts payable and accrued liabilities 5,875 1,603 (926) (1,472)
Net liabilities of discontinued operations -- (76) (795) 1,271
-------- -------- -------- --------
Net cash used in operating activities (24,852) (23,050) (4,670) (4,390)
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sale of discontinued operations -- -- -- 33,000
Investment in discontinued operations -- -- -- (3,249)
Payments for disposal of discontinued operations (498) (56) -- --
Purchase of other intangible assets (94) (1,075) -- --
Capital expenditures (2,993) (3,660) (293) (238)
Purchase of marketable securities (103) (836) -- --
Purchase of other assets (338) (110) (240) (518)
Software development costs (1,317) (1,395) -- --
Proceeds on sale of fixed assets -- 200 -- 12
</TABLE>
See accompanying notes to consolidated financial statements. (Continued)
29
<PAGE> 30
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1997 and 1996, two months
ended December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Two months
Years ended ended Year ended
December 31, December 31, December 31,
1997 1996 1995 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from investing activities (continued)
Payment for acquisition of DNA, net of cash
acquired -- (3,009) -- --
Loan to IVC, prior to acquisition -- (700) (600) --
Payment for acquisition of IVC, net of cash
acquired -- (668) -- --
Payment for acquisition of INT, net of cash
acquired -- -- -- (632)
Payment for acquisition of IEL, net of cash
acquired -- -- -- (391)
-------- -------- -------- --------
Net cash provided by (used in)
investing activities (5,343) (11,309) (1,133) 27,984
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible
debentures -- 25,000 -- --
Debt issuance costs (255) (1,623) -- --
Proceeds from issuance of notes payable 14,910 -- -- 9,880
Principal payments on notes payable (200) (880) (70) (15,530)
Principal payments under capital lease obligations (76) (311) (24) (18)
Principal payments on long-term debt (2,473) (100) -- (271)
Proceeds from issuance of common shares 3,266 -- -- 665
Proceeds from exercise of common stock warrants 1,890 1,080 -- --
Proceeds from exercise of employee stock options 1,575 1,017 -- --
Proceeds from issuance of preferred shares 8,789 -- -- --
Quasi-reorganization -- -- -- 45
-------- -------- -------- --------
Net cash provided by (used in)
financing activities 27,426 24,183 (94) (5,229)
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents (2,769) (10,176) (5,897) 18,365
Cash and cash equivalents, beginning of period 4,863 15,039 20,936 2,571
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 2,094 $ 4,863 $ 15,039 $ 20,936
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Description of Business
Intelect Communications, Inc. (the "Company") was incorporated in
Delaware on May 23, 1995, and is the successor company of a
reorganization, effective December 4, 1997, whereby the Company became a
U. S. domiciled public company. The previous public company, Intelect
Communications Systems Limited ("Intelect (Bermuda)"), a Bermuda company,
became a subsidiary of Intelect Communications, Inc. Intelect (Bermuda)
had operated under the name of Coastal International, Ltd. until
September 1985 and as Challenger International, Ltd. until December 1995.
The Company operates in one industry segment and is an international
communications technology and products company that develops,
manufactures and markets multimedia transport and switching systems for
telecommunications and networking applications. The Company's products
include fiber optic multiplexing, video conferencing equipment, digital
switching, and telecommunications system design and development services.
Former subsidiaries of the Company were engaged in information security
product sales and services (from 1995 to 1997), in the manufacture and
marketing of sporting arms (from 1989 to 1995), and in various energy
related activities (from 1981 to 1988). These subsidiaries have been sold
or liquidated as of December 31, 1997 (note 9).
The Company's year end was changed in 1995 from October 31 to December 31
to coincide with the year ends of its then newly-acquired operating
subsidiaries. The two-month period from November 1, 1995 to December 31,
1995 is hereinafter referred to as the "Transition Period."
These financial statements have been prepared assuming the Company will
continue as a going concern. The Company has incurred significant
operating losses and negative cash flows from operations in 1997, 1996,
and 1995. Losses were funded by proceeds from issuance of notes payable
and the sale of preferred and common stock in 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.
Following the financial and economic difficulties which developed in
Korea and other Asian markets in late 1997, only $122,000 of product was
released for shipment to the distributor between December 31, 1997 and
March 27, 1998. 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 1998, through a sale of preferred stock and establishment of a
secured credit facility (note 25). 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.
31
<PAGE> 32
(2) Significant Accounting Policies and Practices
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The preparation
of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(a) Principles of Consolidation
The consolidated financial statements include the financial
statements of the Company and its subsidiaries, all of which are
wholly owned, since their dates of acquisition. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" requires disclosure of
the fair value of certain financial instruments for which it is
practicable to estimate fair value. For purposes of the disclosure
requirements, the fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale
or liquidation. The carrying values of cash, accounts receivable,
marketable securities, notes payable and accounts payable are
reasonable estimates of their fair value due to the short-term
maturity of underlying financial instruments. It was not practical
to estimate the fair value of the Company's long-term debt because
quoted market prices do not exist and comparable securities were
not available.
(c) Revenue and Expense Recognition
Revenue from product sales is recognized upon shipment of
products. Reserves for estimated sales returns and allowances are
recorded in the same accounting period as the related revenues.
Revenue from engineering services is recognized as the services
are provided to the customers.
Contracts that are expected to be completed within three months
are generally considered short-term contracts and revenue is
recognized upon shipment to the customer. Revenue on longer-term
contracts is generally recognized using the
percentage-of-completion method. Under the
percentage-of-completion method, revenue recognition is measured
by the proportion of the contract costs incurred to date to
estimated total costs for each contract. Contract costs include
all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies,
tools and repair costs. General, administrative and engineering
and development costs are charged to expense as incurred. Changes
in estimated profit on contracts are recognized in the period in
which the revisions are determined. Provisions for estimated
losses on uncompleted contracts are charged to earnings in the
period in which such losses first become apparent.
32
<PAGE> 33
(d) Inventories
Inventories consist of raw materials, work in progress and
finished goods, and are stated at the lower of standard cost
(which approximates cost determined on a first-in, first-out
basis) or market.
(e) Property and Equipment
Property and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments.
Depreciation on equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Equipment
held under capital leases and leasehold improvements are amortized
on a straight-line basis over the shorter of the lease term or
estimated useful life of the assets. The estimated useful lives
are as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Machinery and equipment 5 to 7
Computer equipment and software 3 to 5
Furniture and fixtures 5 to 7
Motor vehicles 3
</TABLE>
(f) Deferred Financing Costs
A portion of the proceeds from the issuance of convertible debt
securities with beneficial conversion features and/or detachable
stock purchase warrants is recognized as additional paid-in
capital and as a discount to its related debt instrument and
amortized to interest expense ratably from the date of issuance to
the date the related debt first becomes convertible. Other costs
in connection with the issuance of the same securities are also
deferred and amortized in the same manner (notes 11 and 12).
Deferred financing costs in connection with the issuance of other
debt are amortized to interest expense using the interest method
over the term of the related debt instrument (note 10).
(g) Engineering and Development and Software Development Costs
Engineering and development costs are expensed as incurred.
Capitalization of software development costs commences upon the
establishment of technological feasibility and ceases when the
product is generally available for sale. Both the establishment of
technological feasibility and the ongoing assessment of
recoverability of capitalized development costs involve judgments
by management with respect to certain external factors, including,
but not limited to, anticipated future revenues, estimated
economic life and possible developments in software and hardware
technologies. In 1996, the Company determined that technological
feasibility and future revenue potential had been established for
the SONETLYNX product line. During the years ended December 31,
1997 and 1996, the Company capitalized $1,317,000 and $1,395,000
of software development costs and charged operations for $477,000
and $6,000 of amortization, respectively. Amortization is based on
estimated product revenues over the next five years.
33
<PAGE> 34
During the first three quarters of 1996, the Company capitalized
software development costs associated with the development of the
CS4 programmable switch, having established technological
feasibility early in 1996. In December 1996, a reassessment of the
product definition rendered invalid the establishment of
technological feasibility because feasibility had not been
attained for all the inter-related modules of the product.
Accordingly, all costs that had been capitalized in previous
quarters, totaling $2,442,000, were charged to engineering and
development expense in the fourth quarter of 1996.
During the year ended December 31, 1996, the Company advanced
$396,000 to a software developer in connection with the
development of certain software and related technology. Such
amounts were charged to 1996 engineering and development expense.
(h) Earnings (Loss) Per Common Share
Earnings Per Share - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share." Statement 128 established
standards for computing and presenting earnings per share (EPS)
and is effective for financial statements issued for periods
ending after December 15, 1997. This statement requires
presentation of basic and dilutive EPS. Basic EPS excludes the
effect of common stock equivalents while diluted EPS gives effect
to all dilutive potential common shares outstanding during the
period.
(i) Foreign Currency Translation
The Company's United Kingdom subsidiaries, Intelect Europe Limited
("IEL") and Intelect Network Systems Limited ("INSL"), used the
local currency as the functional currency and translated net
assets at the exchange rates in effect on the balance sheet dates,
while income and expense accounts were translated at average
rates. Foreign transaction exchange gains and losses were
recognized as income or expense. Foreign currency translation
adjustments and transaction amounts were not significant.
(j) Income Taxes
The Company accounts for income taxes under the liability method
as required by Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). Under this
method, deferred tax assets and liabilities are determined based
on differences between the financial reporting and income tax
bases of assets and liabilities and are measured using the enacted
tax rates and laws expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
34
<PAGE> 35
(k) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash
and cash equivalents include cash held in banks and time deposits
having maturity within three months of the date of purchase by the
Company.
(l) Goodwill
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line
basis over 10 to 15 years. Accumulated amortization at December
31, 1997, and 1996, was $2,951,00, and $1,627,000, respectively.
The Company assesses the recoverability of goodwill by determining
whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of the
goodwill impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of
the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
During the year ended December 31, 1996, the Company charged
$4,175,000 to operations for the writedown of goodwill in
connection with the 1996 acquisition of Intelect Visual
Communications (see note 7(d)). The goodwill was considered
impaired due to design flaws in the products acquired, which
required design changes and enhancements and delayed market
introduction. In addition, due to the liquidation of IEL, as
described in note 7(b), goodwill of $740,000 associated with the
1995 acquisition of IEL was charged to 1996 operations. The
aforementioned writedowns were measured in accordance with the
policy described above.
At December 31, 1997, the Company believes that no significant
impairment of the remaining goodwill has occurred and that no
reduction of the estimated useful lives is warranted.
(m) Other Intangible Assets
Other intangible assets consist of a software license from a
vendor (1996 only) and purchased product technology (note 8).
Product technology assets are being amortized by the straight-line
method over periods ranging from three to five years.
(n) Stock Option Plan
The Company accounts for its stock option plan in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense is recorded on the
date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company
adopted SFAS No. 123, Accounting for Stock-Based Compensation,
which permits pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1995
and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied.
35
<PAGE> 36
(o) Use of Estimates
The Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from these
estimates.
(p) Reclassification
Certain prior period balances have been reclassified to conform to
the current year presentation.
(3) Cash and Cash Equivalents
Cash and cash equivalents are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Cash $ 2,094 $ 1,304
Interest-bearing deposits -- 3,559
--------------- ---------------
Total $ 2,094 $ 4,863
=============== ===============
</TABLE>
(4) Investments in Marketable Securities
Marketable securities are considered available-for-sale and are stated at
fair value. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and
are reported as a separate component of shareholders' equity until
realized. Realized gains and losses from the sale of such securities are
determined on a specific identification basis. There were no sales of
securities during any of the periods presented. Certificates of deposit
are interest-bearing and are pledged in the course of contractual
performance and for the purpose of obtaining operating leases. A summary
of such securities follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
Gross Gross
unrealized unrealized
holding Fair holding Fair
Cost gains value Cost gains value
---- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Equity securities $ 52 2 54 $ 52 18 70
Certificates of deposit 888 -- 888 784 -- 784
-------- -------- -------- -------- -------- --------
Total $ 940 2 942 $ 836 18 854
======== ======== ======== ======== ======== ========
</TABLE>
36
<PAGE> 37
(5) Inventories
The components of inventories are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 5,209 $ 2,727
Work in progress 630 292
Finished goods 2,050 1,213
------------ ------------
7,889 4,232
Less allowance for obsolescence (1,600) (1,254)
------------ ------------
Total $ 6,289 $ 2,978
============ ============
</TABLE>
(6) Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Machinery and equipment $ 3,883 2,785
Computer equipment and software 3,026 2,537
Furniture and fixtures 1,138 711
Leasehold improvement 223 31
Motor vehicles -- 76
--------------- ---------------
8,270 6,140
Less:
Accumulated depreciation and amortization (2,229) (1,094)
Provision for loss on liquidation (note 7(b)) -- (761)
--------------- ---------------
Total $ 6,041 4,285
=============== ===============
</TABLE>
(7) Acquisitions
During 1995, the Company purchased Intelect Network Technologies Company
("INT") and Intelect Europe Limited ("IEL"), and during 1996, the Company
purchased DNA Enterprises, Inc. ("DNA") and Intelect Visual
Communications Corp. ("IVC"). A summary of these acquisitions is as
follows:
(a) Intelect Network Technologies Company
On January 13, 1995, the Company acquired 16% of the capital stock
of INT (formerly known as Intelect, Inc.) for $400,000. On March
31, 1995, the Company entered into an agreement to purchase the
remaining 84% of the capital stock of INT (the "Option
Agreement"). Under the terms of the Option Agreement, the Purchase
Price was payable as follows:
(i) $2,500,000 payable in debentures (the "Debentures") of INT
plus the amount by which certain of INT's debts to two major
customers (the "Debts") were settled for less than
$6,000,000. The Debts were settled by the Company for
$5,180,000 and, accordingly,
37
<PAGE> 38
the face value of the Debentures was increased to $3,320,000
($2,500,000 plus $6,000,000 minus $5,180,000). The face
value of the Debentures was reduced by the amount that
defined net assets at the acquisition date (April 24, 1995)
was less than $1,268,000. The amount of this reduction was
$3,013,000 and, accordingly, the face value of the
Debentures at December 31, 1995 was $307,000.
(ii) $4,000,000 in "Contingent Purchase Consideration" calculated
on the future profitability of INT over the four year period
from January 1, 1995. The Additional Payments were payable
in cash or common stock, at the Company's option.
The first step of the acquisition of INT involved the purchase of
a minority interest (16%) for cash. The Company's equity in the
earnings of INT prior to acquisition of the remaining 84%, the
second step, amounted to a loss of $280,000 and equity in the
extraordinary gain arising from the restructuring of certain notes
payable of $646,000, which have been stated separately in the
accompanying 1995 Consolidated Statements of Operations.
On October 7, 1996, the Company reached an agreement with the
holders of the Debentures (the "Vendors"), under which the Vendors
exchanged their remaining rights to the Debentures and Contingent
Purchase Consideration in exchange for 169,986 shares of common
stock. The transaction increased Goodwill by $660,000.
(b) Intelect Europe Limited
On August 31, 1995, the Company acquired 100% of the capital stock
of IEL for $391,000 in cash and up to 300,000 of the Company's
common shares in additional payments based on the future
profitability of IEL over the five year period beginning August
31, 1995.
In December, 1996, management made the decision to close the
operations of IEL, which was subsequently placed in voluntary
liquidation. The liquidation represented a disposal of a part of a
line of business. Asset impairments were recorded and estimated
liabilities to be incurred as a result of the liquidation were
accrued, resulting in a charge to expense of $1,807,000 in 1996,
including a writedown of $740,000 of unamortized goodwill.
(c) DNA Enterprises. Inc.
On February 13, 1996, the Company acquired 100% of the capital
stock of DNA for $8,000,000, plus costs, payable as follows:
1. $3,000,000 cash at closing.
2. $1,000,000 cash on the first anniversary of closing.
3. $400,000 cash on the second anniversary of closing.
4. Warrants to purchase 300,000 common shares at $5.00 per
share on the first anniversary of closing.
5. Warrants to purchase 300,000 common shares at $7.00 per
share on the second anniversary of closing.
38
<PAGE> 39
The Company agreed to redeem the $5.00 warrants at prices of
$5.00, $5.50 and $6.00 per warrant share on the first, second, and
third anniversaries of closing, respectively, and redeem the $7.00
warrants at prices of $5.50 and $6.00 per warrant share on the
second and third anniversaries of closing, respectively, in each
such case at the option of the warrant holders. The warrants were
classified similar to redeemable preferred stock and included in
long-term debt at their highest redemption price, totaling
$3,600,000 at December 31, 1996 (note 11).
The Company has renegotiated terms of payment of its redemption
obligations (notes 11 and 25). On the first and second
anniversaries, the warrant holders elected to redeem all 300,000
common share warrants available on each date.
(d) Intelect Visual Communications Corporation
On March 29, 1996, the Company acquired 100% of the capital stock
of IVC (formerly known as Mosaic Information Technologies, Inc.)
for 479,370 common shares valued at $5.00 per share. The Company
also paid $695,000 cash, and issued 66,050 common shares, valued
at $5.375 per share, as payment of certain other acquisition
costs. The total cost of the acquisition, including working
capital advances prior to acquisition, was $4,747,000. An
additional 50,000 common shares, valued at $5.00 per share, were
issued to each of two selling shareholders pursuant to employment
agreements, and charged to compensation expense.
All acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase prices have been allocated to
the assets acquired and the liabilities assumed based on the estimated
fair values at the dates of acquisition. The excess of purchase price
over the estimated fair values of the net assets acquired has been
recorded as goodwill, which is being amortized over 15 years for INT and
10 years for DNA. As discussed in note 2, all goodwill in connection with
the acquisitions of IVC and IEL was written off in 1996.
The estimated fair values of assets acquired and liabilities assumed on
the respective transaction dates are summarized as follows:
<TABLE>
<CAPTION>
DNA IVC INT IEL
--- --- --- ---
<S> <C> <C> <C> <C>
Cash $ 3 27 40 --
Accounts receivable 621 19 454 388
Inventory -- 245 2,683 278
Property and equipment 502 81 700 492
Goodwill 7,280 4,514 8,260 812
Accounts payable and accruals (166) (123) (4,721) (1,293)
Deferred taxes (228) -- -- --
Debt -- (16) (6,530) (286)
------------ ------------ ------------ ------------
$ 8,012 4,747 886 391
============ ============ ============ ============
</TABLE>
Purchase prices include legal and other costs associated with the
acquisitions.
39
<PAGE> 40
Operating results of the acquisitions are included in the Company's
consolidated results of operations from the effective dates of the
acquisitions. The following unaudited pro-forma summary presents the
consolidated results of operations as if the acquisitions had occurred at
January 1, 1996 and November 1, 1994, after giving effect to certain
adjustments, including amortization of goodwill, additional interest
expense on the acquisition debt and related income tax effects. These
pro-forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the
acquisitions been made as of those dates or of results which may occur in
the future:
<TABLE>
<CAPTION>
Years ended
-----------
December 31, October 31,
1996 1995
---- ----
<S> <C> <C>
Net revenues $ 10,320 $ 9,330
============ ============
Loss from continuing operations $ (43,251) $ (4,580)
============ ============
Net loss per common share $ (3.34) $ (0.42)
============ ============
</TABLE>
Unaudited pro forma amounts have not been presented for the two-month
period ended December 31, 1995 because presentation of such information
is not considered meaningful.
(8) Other Intangible Assets
Other intangible assets summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Investment in technology associated with SONETLYNX
products (note 16) $ 1,407 500
Technology license fees associated with video-
conferencing products -- 3,267
Other intellectual property 159 125
---------- ----------
1,566 3,892
Less accumulated amortization (398) (1,013)
---------- ----------
$ 1,168 2,879
========== ==========
</TABLE>
At December 31, 1996, the Company's technology license asset associated
with its videoconferencing product and related liability were in dispute.
The Company had not made any payments under the applicable license
agreement after September 1996. The Company executed an amended
technology license agreement with the licensor in settlement of the
dispute. As a result of such settlement, the Company was released from
paying a disputed obligation of $2,550,000 under the original license
agreement and was required to pay $150,000 to the licensor for accrued
and future minimum royalties. Further royalty payments, if any, will be
contingent on sales of certain defined products, which products do not
include the LANscape 2.0 wavelet-based video communications product line.
In concert with the extinguishment of the $2,550,000 liability, an
intangible asset of identical value was written off.
40
<PAGE> 41
(9) Discontinued Operations - Sale of Savage Corporation
On October 3, 1995, the Company signed a Stock Purchase Agreement (the
"Agreement") to sell its wholly-owned subsidiary Savage Corporation
("Savage") to Savage Sports Corporation (the "Buyer"), a newly-formed
company owned by Ronald Coburn, the President of Savage Arms, Inc. (a
wholly-owned subsidiary of Savage) and Fleet Equity Partners of
Providence, Rhode Island. The Agreement reflected a base purchase price
of $33,000,000 and the assumption by the buyer of up to $6,000,000 of
defined debt. The Company was required to retire certain convertible
preferred shares of Savage which required a cash payment of $500,000 and
the issuance of 160,991 shares ($425,000 fair value at date) of the
Company and to retire a specific debt of Savage aggregating $9,447,000 of
principal and interest.
On October 31, 1995, the Closing Date of the sale of Savage (the
"Closing"), Savage's debts, as defined above, were less than $6,000,000
and, accordingly, the net cash proceeds to the Company on the sale of
Savage amounted to $23,053,000 (being the gross proceeds of $33,000,000
less $9,447,000 used to retire a specific debt and $500,000 to retire
160,991 convertible preferred shares).
The Company recorded a gain on the sale of Savage, for the year ended
October 31, 1995, as follows:
<TABLE>
<S> <C>
Base sale price $ 33,000
Investment in and advances to Savage (17,605)
-----------
Gross gain 15,395
Less:
Product liability and environmental costs (675)
Legal, financing and other costs (896)
-----------
Net gain on sale $ 13,824
===========
</TABLE>
In connection with the sale of Savage, the Company has retained customary
environmental and product liability contingent liabilities relating to
Savage's operations prior to the Closing. The Company purchased insurance
to cover certain of these contingent liabilities. There are no assurances
that the insurance coverage will be sufficient to settle all claims (note
20). The net liabilities of discontinued operations represent provisions
for costs associated with the sale of Savage related principally to
product and environmental liabilities of $400,000 at December 31, 1997
and 1996, respectively.
Operating results of discontinued operations have been reclassified from
amounts previously reported in the consolidated statement of operations
and have been reported separately in the consolidated statements of
operations. During the years ended December 31, 1997 and 1996, the
Company recorded charges of $498,000 and $56,000 to the gain on disposal,
representing legal fees (note 20).
During the year ended October 31, 1995, the Company acquired Lakefield
Arms Limited for $1,923,000, comprised of $998,000 cash and 416,666
common shares, valued at $2.22 per share. Lakefield Arms Limited was sold
along with the other assets of Savage Corporation in October 1995.
41
<PAGE> 42
During the Transition Period ended December 31, 1995, the Company
recorded an adjustment to the gain of $236,000 representing non-cash
compensation.
The results of discontinued operations for the year ended October 31,
1995 are as follows:
<TABLE>
<S> <C>
Net sales and other revenues $ 35,009
Costs and expenses 28,857
--------------
Income before income taxes 6,152
Income taxes 2,606
--------------
Income from discontinued operations $ 3,546
==============
</TABLE>
(10) Notes payable
In February 1997, the Company obtained a $15,000,000 credit facility from
a private lender (the "Credit Facility"). Concurrent with the execution
of the Coastal Note (defined below) and after having drawn down
$6,000,000, the Credit Facility was terminated, in exchange for warrants
to purchase 50,000 shares of common stock (note 16).
In May 1997, the Company executed a loan agreement with The Coastal
Corporation Second Pension Trust (the "Coastal Trust") whereby the
Company borrowed $5,000,000 (the "Coastal Note") and the Coastal Trust
purchased $5,000,000 of Series A preferred stock. The Coastal Note,
together with accrued interest of $72,000 was subsequently converted into
2,517,986 shares of Series A preferred stock.
In August 1997, after having converted the Coastal Note into preferred
stock, the Company and the Coastal Trust amended and restated the loan
agreement to provide for new borrowing, on a revolving basis, of up to
$5,000,000 (the "Revolving Loan").
42
<PAGE> 43
Notes payable at December 31, 1997, are as follows:
<TABLE>
<S> <C>
Credit Facility with a private lender, due March 27, 1998, including
interest at the rate of 2% over prime (10.5% at December 31, 1997),
secured by all outstanding shares of the Company's wholly owned U.S.
subsidiaries (less unamortized discount of $176,000) $ 5,824
Revolving Loan with the Coastal Trust, due March 27, 1998, including
interest at the rate of 2% over prime (10.5% at December 31, 1997)
secured by all outstanding shares of the Company's wholly owned U.S.
subsidiaries. Advances are convertible into convertible preferred
stock, at any time, at the holder's option, at $6.18375 per share
(less unamortized discount of $402,000) 2,598
Promissory notes, unsecured, due on demand, bearing interest at 3%
over prime (11.5% at December 31, 1997), payable to a group of
individuals, including $233,000 to directors, $200,000 from an
officer and $210,000 from employees of the Company, convertible at
any time by the holders into common stock at a price of $5.25 per
share 710
--------
Total $ 9,132
========
</TABLE>
The Credit Facility, among other things, requires repayment in the event
of certain cash sales of equity or placement of debt. Financing costs in
connection with the issuance of the Credit Facility were $777,000,
including $546,000 in the fair value of warrants to purchase 750,000
shares of common stock (note 16), valued using the Black-Scholes model,
and $231,000 in cash. In 1997, $601,000 was charged to interest expense
using the effective interest method over the loan period.
The Revolving Loan, among other things, prohibits any additional
indebtedness without the consent of the Coastal Trust, restricts payment
of dividends on capital stock other than for dividends payable in capital
stock, limits any purchase or redemption of any capital stock, and
requires repayment in the event of certain cash sales of equity.
Financing costs in connection with advances under the revolving loan were
$995,000, including $987,000 in the fair value of warrants to purchase
450,000 shares of common stock (note 16), valued using the Black-Scholes
model, and $8,000 in cash. In 1997, $593,000 was charged to interest
expense using the effective interest method over the loan period. Future
advances, if any, will result in the issuance of warrants to purchase
150,000 shares for every $1,000,000, or portion thereof, advanced.
Financing costs in connection with the Coastal Note and the sale of
preferred stock were $908,000, including $457,000 in the fair value of
warrants to purchase 750,000 shares of common stock (note 16), $345,000
in the fair value of an option to purchase the $5,000,000 of preferred
stock and $106,000 in cash. In 1997, $144,000 was charged to interest
expense and $764,000 was charged to additional paid-in capital upon sale
of the preferred stock.
43
<PAGE> 44
(11) Long-term debt
Components of long-term debt are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Contract for acquisition of technology license with original face
value of $3,500,000, payable in quarterly installments of
$325,000 through June 1998 and a final payment in September 1998
of $275,000, renegotiated and settled in
November 1997 (note 8) $ -- $ 2,363
Repurchase agreements for common stock warrants held by former
shareholders of DNA, payable in two installments - $1,500,000 in
February 1997, renegotiated and paid in monthly installments of
$200,000, including interest at 6%, through December 1997, and
$2,100,000 in February 1998
(notes 7(c) and 25) 2,100 3,600
Partial purchase price of DNA, payable in two installments -
$1,000,000 in February 1997 and $400,000 in February 1998,
renegotiated into notes payable in monthly installments of
$100,000, including interest of 6% through December 1997, and 8%
after February 1998, through May 1998 (notes 7(c)
and 25) 427 1,400
----------- --------
2,527 7,363
Less current installments (2,527) (4,125)
----------- --------
$ -- $ 3,238
=========== ========
</TABLE>
The technology contract was discounted in the accompanying 1996
consolidated financial statements to an effective interest rate of 7%.
Accordingly, the carrying amounts approximate fair value.
(12) Convertible Debentures
During the year ended December 31, 1996, the Company issued three series
of convertible debentures: "June Debentures" in the aggregate principal
amount of $5,000,000 bearing interest at 7.5%, "August Debentures" in the
aggregate principal amount of $10,000,000 bearing interest at 7.5%, and
"October Debentures" in the aggregate principal amount of $10,000,000
bearing interest at 7%.
At December 31, 1996, the June Debentures were fully converted into
773,514 shares of common stock, the August Debentures were partially
converted into 883,691 shares of common stock, and the October Debentures
were partially converted into 180,000 shares of common stock.
At December 31,1997, the August Debentures were fully converted into
2,582,106 shares of common stock and the October debentures were fully
converted into 3,868,449 shares of common stock.
44
<PAGE> 45
Convertible debentures were comprised of the following at December 31,
1996:
<TABLE>
<S> <C>
7.5% debentures, due August 8, 1998, interest payable quarterly,
redeemable at the Company's option after August 8, 1997, at 125%
of the face amount for six months and 120% thereafter, or at the
Nasdaq market price of the common stock if the stock price falls
below the fixed conversion price of $11.0825, and convertible
into common shares, at the holder's option, at the lesser of 85%
of the Nasdaq five day average closing bid prior to the notice
of conversion date, or $11.0825, subject to a maximum of
2,582,107 shares
$ 5,723
7% debentures, due October 15, 1998, interest payable quarterly,
redeemable at any time at the Company's option at 117.5% of the
face amount, and convertible into common shares, at the holder's
option, in equal one-third amounts of principal sixty, ninety
and one hundred twenty days after October 15, 1996, at the
lesser of 82.5% of the Nasdaq five day average closing bid prior
to the notice of conversion date, or $12.00 (less unamortized
discount of $582,000)
8,608
--------
Total $ 14,331
========
</TABLE>
Financing costs incurred in 1996 in connection with the issuance of
debentures were $9,687,000, including $4,947,000 allocated to beneficial
conversion features, $3,117,000 in the fair value of warrants to purchase
420,063 shares of common stock (note 16), valued using the Black-Scholes
model, and $1,623,000 in cash. Interest expense included $582,000 and
$9,105,000 in 1997 and 1996, respectively.
(13) Lease Commitments
The Company is obligated under various capital equipment leases that
expire during the next three years. The gross amounts of equipment and
vehicles and related accumulated amortization recorded under capital
leases were as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Equipment $ 257 160
Less accumulated amortization 69 39
---------- ----------
$ 188 $ 121
========== ==========
</TABLE>
Amortization of assets held under capital leases is included with
depreciation and amortization expense.
The Company leases office space and certain equipment under leases
expiring at various dates through 2004. Rental expense under operating
leases was approximately $1,528,000 and $1,032,000 for the years ended
December 31, 1997 and 1996, respectively, $48,000 for the two months
ended December 31, 1995 and $107,000 for the year ended October 31, 1995.
45
<PAGE> 46
Future annual year minimum commitments as of December 31, 1997 under
capital and operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Years ending December 31, leases leases
------ ------
<S> <C> <C>
1998 $ 89 1,501
1999 43 1,457
2000 12 772
2001 -- 693
2002 and thereafter -- 1,107
--------------- ---------------
Total minimum lease payments $ 144 5,530
=============== ===============
</TABLE>
Imputed interest included in future minimum commitments on capital leases
is not material.
(14) Employee Benefit Plans
The Company sponsors defined contribution 401(k) plans for substantially
all employees. Pursuant to the plans, employees may request the Company
to deduct and contribute amounts from their salary on a pre-tax basis.
Employee contributions are subject to certain limitations and the Company
may make matching contributions, at its discretion. The Company may also
make discretionary contributions in addition to matching contributions.
Company contributions vest ratably over periods of four to five years,
beginning in the second or first year of employment, respectively.
Company contributions to the plans were $345,000 and $459,000 for the
years ended December 31, 1997, and 1996, respectively, $16,000 for the
two month period ended December 31, 1995 and $26,500 for the year ended
October 31, 1995.
(15) Income Taxes
Total income tax expense was allocated as follows:
<TABLE>
<CAPTION>
Years ended Two months
December 31, ended Year ended
------------ December 31, October 31,
1997 1996 1995 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss from continuing operations $ (126) 87 -- --
Income from discontinued
operations -- -- -- 2,606
Goodwill, for initial recognition
of acquired tax liabilities -- 228 -- --
Shareholder's equity (use of net
operating loss carryforwards in
existence at date of quasi-
reorganization) -- -- -- (1,472)
---------- ---------- ---------- ----------
$ (126) 315 -- 1,134
========== ========== ========== ==========
</TABLE>
In 1995, the benefit from the utilization of net operating losses from
discontinued operations, in existence as of the date of the
quasi-reorganization, was recorded as a component of shareholders'
equity.
46
<PAGE> 47
Significant components of the provision for income taxes attributable to
continuing operations for the years ended December 31,1997 and 1996 (two
months ended December 31, 1995, and year ended October 31, 1995: nil) are
as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Current
Federal $ -- --
State 51 --
---------- ----------
Total current 51 --
---------- ----------
Deferred:
Federal (171) 84
State (6) 3
---------- ----------
Total deferred (177) 87
---------- ----------
Total current and deferred $ (126) 87
========== ==========
</TABLE>
The difference between the actual income tax benefit and the benefit
computed by applying the statutory corporate income tax rate of 34% to
pretax losses from continuing operations is attributable to the
following:
<TABLE>
<CAPTION>
Years ended Two months
December 31, ended Year ended
------------ December 31, October 31,
1997 1996 1995 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Computed expected tax benefit $(6,755) (14,585) (1,024) (1,766)
Increase in net operating loss
carryforwards not providing
current benefit 5,394 7,530 880 1,292
Permanent items 407 1,776 -- 390
Tax effect of loss not subject to
U.S. taxation 856 4,517 144 117
Other (28) 849 -- (33)
------- ------- ------- -------
Tax expense (benefit) $ (126) 87 -- --
======= ======= ======= =======
</TABLE>
47
<PAGE> 48
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Preacquisition net operating loss carryforwards $ 4,831 4,831
Postacquisition net operating loss carryforwards 14,156 8,762
Inventories - due to reserves and additional costs
capitalized for tax 544 374
Accrued contract completion costs 34 110
Goodwill 71 71
License fees and intellectual property 11 257
Other expenses 836 423
Alternative minimum tax and other credit carryforwards 298 298
---------- ----------
Gross deferred tax assets 20,781 15,126
Less valuation allowance (20,781) (15,126)
---------- ----------
Deferred tax assets $ -- --
========== ==========
Deferred tax liabilities:
Depreciation $ -- 87
Other 137 228
---------- ----------
Deferred tax liabilities $ 137 315
========== ==========
Net deferred tax liability $ 137 315
========== ==========
</TABLE>
At December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $55,845,000, and tax credit carryforwards
of $298,000. The future utilization of $14,210,000 of the preacquisition
net operating losses and the credit carryforwards related to the
acquisition of INT and IVC will be limited under Internal Revenue Code
sections 382 and 383. The tax benefits from the utilization of the
preacquisition operating loss carryforwards and the tax credits will be
credited to goodwill when realized.
Following is a summary of the carryforwards and the expiration dates as
of December 31, 1997:
<TABLE>
<CAPTION>
Expiration
Amounts dates
------- -----
<S> <C> <C>
Postacquisition net operating loss carryforwards $ 41,635 2012
Preacquisition net operating loss carryforwards 14,210 2008-2009
Alternative minimum tax credit 38 -
General business credit 260 1998-2000
</TABLE>
In 1996, Intelect (Bermuda) was not subject to income tax in Bermuda and
did not consider itself to be engaged in trade or business in the U.S. As
such, Intelect (Bermuda) does not expect to be subject to direct United
States taxation.
48
<PAGE> 49
(16) Stockholders' Equity
Authorized share capital of $0.01 par value was as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Preferred Stock 50,000,000 15,000,000
Common Stock 50,000,000 80,000,000
</TABLE>
Share transactions during the year ended December 31, 1997, were as
follows:
a. Authorized 10,000,000 shares and sold 2,482,005 shares of
$2.0145, 10% Cumulative Convertible Preferred Stock, Series A,
for $5,000,000, in conjunction with a loan agreement with the
Coastal Trust, resulting in net proceeds of $4,911,000, after
issuance costs of $89,000. Dividends are payable quarterly, in
cash or common stock, at the Company's option. The Company
elected to pay dividends payable at September 30 and December 31,
1997, in common stock. The series may be redeemed, at the
Company's option, at 110%, 105% and 100% of face value after June
1, 1999, 2000, and 2001, respectively, and is convertible into
shares of common stock on a share for share basis, subject to
anti-dilution provisions. The holders have the right of first
refusal to participate in certain private equity or debt
offerings. The series ranks in pari passu with the Series B and
Series C preferred stock.
b. Authorized and sold 914,286 shares of $4.375, 10% Cumulative
Convertible Preferred Stock, Series B, for $4,000,000, in a
private placement, resulting in net proceeds of $3,877,000, after
issuance costs of $123,000. Dividends are payable quarterly, in
cash or common stock, at the Company's option, beginning March
31, 1998. The series may be redeemed, at the Company's option, at
the greater of $5.25 per share or the average closing market bid
price for the five consecutive trading days prior to the date of
redemption. Beginning after May 31, 1998, 50% of the preferred
stock is convertible into common stock and the remaining 50% is
convertible into common stock on June 30, 1998. The number of
common shares the holder is entitled to receive on conversion is
the greater of (i) the number of shares of preferred stock
multiplied by 1.10, or (ii) the number of shares of preferred
stock multiplied by a number, the numerator of which is $4.375
and the denominator if which is 0.85 multiplied by the average
daily closing market bid price for the common stock, as quoted on
the Nasdaq National Market system, for the five trading days
immediately preceding the date of the notice of election of
conversion. The holders have the right of first refusal to
participate in certain private equity or debt offerings. The
series ranks in pari passu with the Series A and Series C
preferred stock.
c. Sold 675,000 shares of common stock in private placements of
60,000 shares at $5.00 per share and 615,000 shares at $5.25 per
share, to accredited investors, resulting in net proceeds of
$3,330,000, after issuance costs of $199,000. An additional
21,400 shares were issued in payment for placement services
related to the 615,000 shares.
d. Issued 780,583 shares of common stock upon the conversion of
Series A preferred stock by the Coastal Trust.
49
<PAGE> 50
e. Issued 930,000 shares of common stock upon the exercise of
warrants. 750,000 common shares at $2.00 were issued to the
Coastal Trust; 150,000 shares at $2.00 were issued to the Credit
Facility private lender; and 30,000 shares at $4.50 were issued
pursuant to a consulting agreement, resulting in net proceeds of
$1,890,000 after issuance costs of $45,000.
f. Issued 542,182 shares of common stock at $1.5625, totaling
$847,000, together with $60,000 cash in settlement of all future
royalties under a technology purchase agreement. The royalty
agreement had been initially executed in conjunction with certain
technology purchased by the Company.
g. Issued 11,407 shares of common stock in payment for $58,000 of
interest on Convertible Debentures, due June 30, 1997.
h. Issued 28,148 shares of common stock in payment for $296,000 of
dividends on Series A preferred stock.
i. Issued warrants exercisable for common shares as follows:
<TABLE>
<CAPTION>
Warrant Exercise
Grant date shares price Exercise period
---------- ------ ----- ---------------
<S> <C> <C> <C>
February 26, 1997(*) 300,000 $5.00 February 1997 - February 2002
March 27, 1997(*) 300,000 3.25 March 1997 - March 2002
April 24, 1997(*) 150,000 3.25 April 1997 - April 2002
May 1, 1997 100,000 3.00 January 1998 - December 2002
May 1, 1997 100,000 5.00 January 1998 - December 2002
May 1, 1997 100,000 7.00 January 1998 - December 2002
May 8, 1997 300,000 2.00 May 1997 - February 2002
May 8, 1997 300,000 2.00 May 1997 - March 2002
May 8, 1997 150,000 2.00 May 1997 - April 2002
May 8, 1997 50,000 2.00 May 1997 - May 2002
May 8, 1997 750,000 2.00 May 1997 - May 2002
June 19, 1997 6,750 3.6313 June 1997 - June 2004
July 2,1997 30,000 4.50 August 1997 - December 2001
July 25, 1997 6,750 3.6313 July 1997 - June 2004
August 15, 1997 6,750 3.6313 August 1997 - June 2004
August 27, 1997 450,000 6.00 August 1997 - August 2002
August 29, 1997 6,750 3.6313 August 1997 - June 2004
September 17, 1997 13,500 3.6313 September 1997 - June 2004
</TABLE>
(*) Replaced on May 8, 1997.
50
<PAGE> 51
The fair value of warrants issued was determined using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
Stock Exercise Term Interest Fair
Issue price price (yrs) Volatility rate value
----- ----- ----- ----- ---------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Credit Facility with private lender:
February 26, 1997(*) $4.675 $5.00 1.00 70.06% 6.19% $381,000
March 27, 1997(*) 2.325 3.25 1.00 74.07 6.67 139,000
April 24, 1997(*) 1.619 3.25 1.00 74.36 6.77 26,000
--------
Total 546,000
--------
</TABLE>
(*) Replaced on May 8, 1997. The fair value of the
replacement warrants was less than the unamortized value of
the original warrants on date of replacement.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
May 8, 1997 1.975 2.00 1.00 74.30 6.62 183,000
May 8, 1997 1.975 2.00 1.00 74.30 6.62 183,000
May 8, 1997 1.975 2.00 1.00 74.30 6.61 91,000
May 8, 1997 1.975 2.00 1.00 74.30 6.59 30,000
Advisory Services Agreement:
May 1, 1997 1.55 3.00 1.67 74.71 6.60 33,000
May 1, 1997 1.55 5.00 1.67 74.71 6.60 16,000
May 1, 1997 1.55 7.00 1.67 74.71 6.60 9,000
-------
Total 58,000
Loan Agreements with Coastal Trust:
May 8, 1997 1.975 2.00 1.00 74.30 6.59 457,000
August 27, 1997 6.444 6.00 1.00 75.00 6.24 987,000
Distributor Agreement:
June 19, 1997 3.581 3.6313 1.00 75.00 6.38 8,000
July 25, 1997 6.344 3.6313 1.00 75.00 6.11 22,000
August 15, 1997 6.475 3.6313 1.00 75.00 6.20 23,000
August 29, 1997 6.731 3.6313 1.00 75.00 6.24 25,000
September 17, 1997 9.438 3.6313 1.00 75.00 6.24 84,000
--------
Total 162,000
Equity Placement Services:
July 2, 1997 Not valued because services were for placement of equity.
</TABLE>
51
<PAGE> 52
At December 31, 1997, outstanding warrants were as follows:
<TABLE>
<CAPTION>
Warrant Exercise
Grant date shares price Exercise period
---------- ------ ----- ---------------
<S> <C> <C> <C> <C>
February 13, 1996 300,000 7.00 February 1998 - February 1999
June 7, 1996 125,000 13.1875 June 1996 - June 2001
August 8, 1996 70,063 8.56375 August 1996 - August 2001
September 9, 1996 125,000 9.5625 September 1996 -September 2001
October 15, 1996 225,000 7.50 October 1996 - October 2001
May 1, 1997 100,000 3.00 January 1998 - December 2002
May 1, 1997 100,000 5.00 January 1998 - December 2002
May 1, 1997 100,000 7.00 January 1998 - December 2002
May 8, 1997 300,000 2.00 May 1997 - February 2002
May 8, 1997 300,000 2.00 May 1997 - March 2002
May 8, 1997 50,000 2.00 May 1997 - May 2002
June 19, 1997 6,750 3.6313 June 1997 - June 2001
July 25, 1997 6,750 3.6313 July 1997 - June 2001
August 15, 1997 6,750 3.6313 August 1997 - June 2001
August 27, 1997 450,000 6.00 August 1997 - August 2002
August 29, 1997 6,750 3.6313 August 1997 - June 2001
September 17, 1997 13,500 3.6313 September 1997 - June 2001
----------
Total 1,985,563
</TABLE>
Share transactions during the year ended December 31, 1996, were as
follows:
a. Issued 180,000 common shares at $2.50 per share and 180,000
common shares at $3.50 per share upon the exercise of warrants
issued to the previous owners of Savage Corporation. The
warrants had been issued in connection with the acquisition of
Savage Corporation.
b. Issued 100,000 common shares at $3.75 per share in consideration
for an investment of $375,000 in debentures with a CDN $500,000
face value, previously issued by Lakefield Arms Limited. The
debentures are unsecured, bear interest at 8% per annum, and
mature August 4, 1999.
c. Issued warrants exercisable for common shares in conjunction
with the issuance of convertible debentures, and in conjunction
with the acquisition of DNA Enterprises, Inc., as follows:
<TABLE>
<CAPTION>
Warrant Exercise
Grant Date shares price Exercise period
---------- ------- ----- ---------------
<S> <C> <C> <C> <C>
February 13, 1996 300,000 $ 5.00 February 1997 - February 1999
February 13, 1996 300,000 7.00 February 1998 - February 1999
June 7, 1996 125,000 13.1875 June 1996 - June 2001
August 8, 1996 70,063 8.56375 August 1996 - August 2001
September 9, 1996 125,000 9.5625 September 1996 - September 2001
October 15, 1996 225,000 7.50 October 1996 - October 2001
</TABLE>
52
<PAGE> 53
d. The fair value of warrants issued in conjunction with the
convertible debentures was determined using the Black-Scholes
option pricing model with the following assumptions:
<TABLE>
<CAPTION>
Stock Exercise Term Interest Fair
Issue price price (yrs) Volatility rate value
----- ----- ----- ----- ---------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
June 7, 1996 13.1875 13.1875 5.0 70.5% 7.05% $ 1,058,000
August 8, 1996 9.5625 8.56375 5.0 73.1 7.05 453,000
September 9, 1996 7.50 9.5625 5.0 71.6 7.05 561,000
October 15, 1996 7.50 7.50 5.0 68.3 6.00 1,045,000
-----------
Total $ 3,117,000
===========
</TABLE>
There have been no dividends declared on common shares for any of the
periods reported.
(17) Employee Stock Option Plan
In 1995, Intelect (Bermuda) adopted a stock option plan (the "Plan")
pursuant to which the Company's Board of Directors may grant stock
options to directors, officers and key employees. The Plan, adopted by
the Company as part of the redomiciling process, authorizes grants of
options to purchase up to 4,000,000 shares of authorized common stock.
The exercise price for stock options granted may range from 25% to 110%
of the fair market value of the shares on the date of grant. All stock
options have 10-year terms and vest and become fully exercisable
according to schedules determined by the Board of Directors, generally
one-third on each of the first three anniversaries of the date of grant.
At December 31, 1997, there were 548,834 shares available for grant under
the Plan. The Plan replaced a predecessor plan which continues only to
the extent that there are 240,000 unexercised options outstanding at
December 31, 1997.
The per share weighted-average fair value of stock options granted during
1997, 1996, and the Transition Period was $2.04, $4.66, and $7.07,
respectively, on the dates of grants. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing
model, with the following weighted-average assumptions:
<TABLE>
<CAPTION>
Two months
Years Ended December 31, ended
------------------------ December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Stock price volatility 75% 68% 68%
Risk free interest rate 5.7% 6.1% 6.7%
Expected option term 3 years 3 years 3 years
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, has recognized compensation expense with respect to certain
options granted at exercise prices less than the stock's market value on
the date of grant. During the years ended December 31, 1997 and 1996, and
the Transition Period, the Company recognized compensation expense of
$354,000, $487,000, and $286,000, respectively.
53
<PAGE> 54
Had the Company determined compensation cost based on the fair value on
the grant date for its stock options under SFAS No. 123, the Company's
net losses would have been increased to pro forma amounts as follows:
<TABLE>
<CAPTION>
Two months
Years ended December 31, ended
------------------------ December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported $(20,798) (43,039) (3,012)
Pro forma (25,208) (51,787) (6,420)
Loss per share:
As reported $(1.01) (3.33) (0.26)
Pro forma (1.23) (4.00) (0.56)
</TABLE>
Pro forma net losses reflect only options granted in 1997, 1996, and
1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
loss amounts presented above because compensation cost is reflected over
the option's vesting period of three years and compensation cost for
options granted prior to November 1, 1995, is not considered.
Furthermore, the effects of applying SFAS No. 123 may not be
representative of the effects on reported net income for future years.
Stock option activity during the periods indicated was as follows:
<TABLE>
<CAPTION>
Two months
Years ended ended
December 31, December Year ended
------------ 31, October 31,
1997 1996 1995 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of options:
Outstanding, beginning of
period 2,526,500 1,917,800 987,800 1,044,018
Granted 2,208,500 1,260,000 970,000 172,000
Exercised (561,666) (530,000) -- (74,318)
Canceled (902,334) (121,300) (40,000) (153,900)
Outstanding, end of period 3,271,000 2,526,500 1,917,800 987,800
Weighted average exercise price:
Outstanding, beginning of
period $ 4.58 2.56 1.94 1.86
Granted 3.87 6.85 3.22 4.16
Exercised 3.03 1.93 -- 1.93
Canceled 6.32 7.77 3.00 3.93
Outstanding, end of period $ 3.93 4.58 2.56 1.94
</TABLE>
54
<PAGE> 55
At December 31, 1997 and 1996, the number of options exercisable was
1,056,659 and 734,332, respectively, and the weighted-average exercise
price of those options was $3.78 and $2.79, respectively.
At December 31, 1997, the range of exercise prices and the
weighted-average remaining contractual life of outstanding options, was
$1.00 to $10.375 and 8.7 years, respectively, as shown in the following
table:
<TABLE>
<CAPTION>
Vested option
Option shares shares Exercise prices Expiration
outstanding outstanding per share dates
----------- ----------- --------- -----
<S> <C> <C> <C>
100,000 100,000 1.00 1999-2002
826,000 10,000 2.00 2007
40,000 40,000 2.375 2004
100,000 100,000 2.66 2003
760,000 336,663 3.00 2005-7
300,000 100,000 4.00 2007
29,500 -- 4.25 2007
75,000 24,999 4.375 2006
13,000 -- 4.50 2007
168,500 100,000 5.00 2007
100,000 100,000 5.35 2006
25,000 8,333 5.375 2006
20,000 -- 5.94 2007
366,500 75,000 6.25 2007
100,000 33,332 6.50 2006
65,000 21,666 7.50 2006
142,500 -- 8.50 2007
20,000 6,666 9.25 2006
30,000 -- 10.375 2007
</TABLE>
(18) Income (Loss) Per Share
The weighted average number of shares outstanding during the period is
calculated as follows:
<TABLE>
<CAPTION>
Two months
Years ended December 31 ended Year ended
----------------------- December 31, October 31
1997 1996 1995 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common shares outstanding,
beginning of period 15,027,728 11,385,117 11,385,117 10,583,142
Shares issued (weighted average) 5,530,716 1,558,319 -- 441,360
---------- ---------- ---------- ----------
Weighted average common shares
outstanding 20,558,444 12,943,436 11,385,117 11,024,502
========== ========== ========== ==========
</TABLE>
Basic and diluted income (loss) per share is based on the weighted
average number of common shares outstanding for the period. Common share
equivalents relating to the exercise of stock options
55
<PAGE> 56
and stock warrants, conversion of preferred stock, or conversion of
convertible debt have been excluded from the computation as the effects
would have been anti-dilutive.
Contingent shares, which were part of the INT and IVC acquisitions have
been excluded from the calculations because it was considered unlikely
that the underlying performance criteria would be met.
(19) Quasi-Reorganization
Quasi-reorganization adjustments in the year ended October 31, 1995 of
$1,545,000 were the result of the realization of deferred tax benefits on
discontinued operations (note 15) and valuation adjustments to
liabilities existing prior to October 31, 1992, date of the
quasi-reorganization.
(20) Contingencies
Intelect (Bermuda) is contingently liable for certain potential
liabilities related to its discontinued operations. Specifically, under a
stock purchase agreement dated October 3, 1995 ("1995 Agreement"),
Intelect (Bermuda) agreed to indemnify Savage Sports Corporation, the
purchaser of Savage Arms, Inc. (a manufacturer of fire arms), for certain
product liability, environmental clean-up costs and other contractual
liabilities, including certain asserted successor liability claims. One
of the liabilities assumed involves a firearms product liability lawsuit
filed by Jack Taylor individually and as father of Kevin Taylor in Alaska
Superior Court (the "Taylor litigation"). Intelect (Bermuda) is informed
that a defendant in the Taylor litigation, Western Auto Supply Co.,
settled the lawsuit for $5 million and, in turn, has asserted a
third-party claim against Savage Arms, Inc. for indemnification in the
amount of the settlement plus attorneys' fees and related costs. Savage
Arms has asserted defenses to the claims and Intelect (Bermuda) believes
additional defenses may be available. Based on the information available
to date, it is impossible to predict the outcome of this litigation or to
assess the probability of any verdict.
Intelect (Bermuda) also has been notified that Savage Sports Corporation
seeks indemnification under the 1995 Agreement in connection with certain
other product liability claims. Most notably, Intelect (Bermuda) has
undertaken the defense of a lawsuit filed against Savage Arms, Inc. by
Emhart Industries, Inc. ("Emhart") in the United States District Court
for the District of Massachusetts (the "Emhart litigation"). In the
lawsuit, Emhart requests indemnification from Savage Arms, Inc. under an
agreement Emhart allegedly executed in 1981 with Savage Industries, Inc.,
claiming that Savage Arms, Inc. is a successor to Savage Industries, Inc.
To date, Emhart has claimed indemnification of approximately $2.2 million
for five lawsuits it has defended or settled and also seeks a declaratory
judgment that it is entitled to indemnification for losses and expenses
related to firearms product liability actions which may be filed against
Emhart in the future. Intelect (Bermuda) intends to assert additional
defenses. The parties are in discovery and Intelect (Bermuda) cannot at
this time predict the outcome of the litigation.
In the event the Taylor litigation and/or Emhart litigation were to be
resolved adversely to Intelect (Bermuda) there would be a material
adverse effect on the Company's financial condition and results of
operations.
56
<PAGE> 57
(21) Domestic and Foreign Operations
The Company operates in predominantly one business segment, which
consists of the design, manufacture and sale of telecommunications and
related equipment.
In the periods ended December 31, 1997 and 1995 and October 31, 1995,
substantially all the Company's revenues and assets were in the United
States. Operations discontinued in 1995 were substantially in the United
States. Information about the company's operations in different
geographic locations as of and for the year ended December 31, 1996
follows:
<TABLE>
<CAPTION>
United States Europe Consolidated
------------- ------ ------------
<S> <C> <C> <C>
Net revenues $ 6,907 2,445 9,352
======= ===== ========
Operating losses $(13,072) (2,365) (15,437)
====== =====
General corporate expenses (17,548)
Interest expense (9,911)
--------
Loss from continuing
operations before
income taxes $(42,896)
Identifiable assets $ 30,308 221 30,529
Corporate assets 5,489
--------
Total assets $ 36,018
========
</TABLE>
Revenue transfers between geographic areas are not material. Operating
profit is total revenue less operating expenses, excluding interest,
income taxes and engineering and development expenses and asset
writedowns which are considered by management to be corporate expenses.
Identifiable assets are those assets of the Company that are identified
with the operations in each geographic area. Identifiable assets for
Europe at December 31, 1996, were disproportionately low due to the
voluntary liquidation of IEL (note 7(b)). Identifiable assets in Europe
at December 31, 1996, were those of Intelect Network Systems Limited, a
sales and service company chartered in November 1996, and sold in May
1997. Corporate assets were principally cash and deferred financing
costs.
Direct and indirect export sales were $25,071,000 (66%) of revenues in
the year ended December 31, 1997. Of the export sales, $22,677,000 were
to Asia, substantially all to the Republic of Korea (note 23).
Direct export sales of $1,402,000 for the year ended December 31, 1996,
are included in the United States net sales.
(22) Related Party Transactions
During the year ended December 31, 1997, the following related party
transactions were recorded:
(a) Borrowed $200,000 from a director in May, and repaid the loan in
September, including interest of $8,000.
(b) Renewed a loan to an officer in the amount of $95,000, including
accrued interest, which was outstanding at December 31, 1997. The 5%
note is secured by a stock pledge agreement.
(c) Borrowed $643,000 from a group of individuals, including $233,000
from directors, $200,000 from an officer and $210,000 from
employees.
57
<PAGE> 58
During the year ended December 31, 1996, the following related party
transactions were recorded:
(a) Purchased patents, intellectual property and related proprietary
information from a company owned by an officer for $125,000 and
entered into a royalty agreement with respect to products sold by
the Company which are covered by the patents.
(b) Loaned an officer $135,000, of which $91,000, including accrued
interest, remains outstanding at December 31, 1996. The 5% note is
secured by a stock pledge agreement.
(c) Borrowed $500,000 from a company controlled by a director who was
also the Company's president in July, and repaid the loan in
September, including interest of $13,000.
(d) Paid $120,000 for management fees and rented facilities from a
company controlled by a director who was also the Company's
president.
(e) Amended employment agreements with the now former president and the
present chairman which, generally upon termination, provide for
continuation of salaries for three years following the current year
of employment.
During the period ended December 31, 1995, there were no related party
transactions.
During the year ended October 31, 1995, a nonsalaried director was paid
$150,000 for services rendered in connection with the acquisitions of
Intelect, Inc. and Intelect Europe Limited.
The Company received a short-term loan from a company controlled by a
director who was also the Company's president, in the amount of
$2,000,000 for a period of two months pending the sale of Savage. The
loan was repaid on October 31, 1995 with interest (calculated at 15%) of
$22,000.
The Company also received short-term loans from three directors
aggregating $600,000 during the months of April through June 1995. These
loans were repaid by July 1995 with interest (calculated at 10%) of
$8,000.
In August 1995, the Company issued 150,000 shares to a director, who was
also the Company's president, at $3.50 per share which was the market
value of the Company's shares at the time.
(23) Significant Customers and Concentration of Credit Risk
In 1997, a distributor and one customer represented 59% and 11% of
consolidated net revenues. The distributor sells to at least five end
users in the Republic of Korea.
In 1996, one customer represented 25% of the consolidated net revenue.
Three customers represented 49%, 24% and 11% of the consolidated net
revenues for the two month period ended December 31, 1995.
Four customers represented 27%, 15%, 13% and 13% of consolidated net
revenues for the year ended October 31, 1995.
The Company is subject to credit risk through trade receivables. At
December 31, 1997 the distributor responsible for all revenue from Korea,
accounted for $9,879,000 (63%) of the accounts receivable. The Company
has received from the distributor a promissory note and pledge of
security interests in certain collateral, including the distributor's
accounts receivable. In view of the economic
58
<PAGE> 59
conditions and monetary environment in Korea, there is increased
uncertainty of future sales to the distributor and corresponding risk of
collectability of the receivable. However, the distributor has, since
December 31, 1997, paid $4,875,000 of the principal and $63,000 interest
on the note. The Company has assessed the financial condition of the
distributor and believes the balance of the note will be collected in
full.
(24) Supplemental Disclosure of Cash Flow Information (thousands of U.S.
dollars)
<TABLE>
<CAPTION>
Years ended Two months
December 31, ended Year ended
------------ December 31, October 31,
1997 1996 1995 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash paid during the period for:
Interest $ 704 509 23 408
</TABLE>
Noncash Items
During the year ended December 31, 1997, the Company recorded the
following noncash transactions:
(a) Converted convertible debentures into common stock - $14,913,000.
(b) Converted notes payable into preferred stock - $5,000,000.
(c) Converted preferred stock into common stock(par value only) -
$8,000.
(d) Applied a note payable against a technology license asset upon
settlement of a contractual dispute - $2,363,000.
(e) Issued common stock in conjunction with termination of a royalty
agreement - $847,000.
(f) Issued common stock in payment of preferred stock dividends -
$296,000.
(g) Issued preferred stock in payment of interest on notes payable -
$72,000.
(h) Issued common stock in payment of interest on convertible debentures
- $58,000.
(i) Issued common stock warrants in conjunction with notes payable -
$1,661,000.
(j) Issued common stock warrants in conjunction with a distributor
agreement - $162,000.
(k) Issued common stock warrants in conjunction with an advisory
services agreement - $58,000.
(l) Issued common stock warrants upon termination of credit facility -
$30,000.
(m) Allocation of retained earnings to beneficial conversion feature of
preferred stock issued - $31,000.
(n) Acquired equipment under capital leases - $117,000.
During the year ended December 31, 1996, the Company recorded the
following noncash transactions:
(a) Converted convertible debentures into stock - $10,087,000 (note 11).
(b) Allocation of proceeds from convertible debentures to beneficial
conversion features - $4,947,000 (note 11).
(c) Issued common stock warrants in conjunction with convertible
debentures - $3,117,000 (notes 11 and 15).
(d) Obtained a technology license in exchange for a note - $3,267,000
(note 8).
(e) Issued stock in final settlement of the Intelect, Inc. acquisition -
$850,000 (note 7(a)).
(f) Issued stock as part of employment agreements - $500,000 (note
7(d)).
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<PAGE> 60
(g) Recognized compensation expense on stock options granted at less
than market price - $487,000 (note 16).
(h) Acquired an other asset with stock - $375,000 (note 15).
(i) Acquired equipment under capital leases - $111,000 (note 12).
During the Transition Period ended December 31, 1995, the Company
acquired equipment under capital leases of $330,000 and made an
adjustment to the purchase price of Intelect Europe of $75,000.
During the year ended October 31, 1995, the Company issued debentures
with a discounted fair value of $224,000 and $477,000 at December 31 and
October 31, 1995, respectively, to the sellers of Intelect, Inc. (see
note 7 above). The Company issued 160,991 shares at October 31, 1995, to
retire certain preferred shares of Savage Arms (with a carrying value of
$402,478) (see note 9 above).
(25) Subsequent Events
(a) On February 9, 1998, the Company sold 10,000 shares of Series C
Convertible Preferred Stock, in a private placement, for $10,000,000.
Dividends accumulate at the rate of 4% per annum, are payable upon
conversion, and may be paid in cash or common stock, at the Company's
option. The preferred stock will automatically convert into common
stock on February 9, 2000, and may be converted prior to that date,
at the holder's option, at the lesser of $9.082 per common share or
at 97% of the market price. Market price is defined as the arithmetic
average of the three lowest closing bid prices in the ten consecutive
trading days immediately preceding the conversion date. The Company
may fix the conversion price at $9.082 if, for any 20 of 30
consecutive trading days, the daily volume-weighted price of the
common stock is $12.00 or greater. The preferred stock may be
redeemed, at the Company's option, at 110% of the stated value if the
daily weighed average trading price is below $3.00 per share for ten
consecutive trading days. Terms of the series, among other things,
limit the rate of conversion and the rate of sale of common stock
acquired upon conversion, prohibit the Company from entering into
certain public or private offerings of securities until the series is
registered and prohibit redeeming any common stock, or declaring any
dividends on common stock. Proceeds of the sale will be used for
working capital and general corporate purposes.
(b) On February 12, 1998, the Company established a $15,000,000 credit
facility (the "Facility") with a private lender, and received an
initial advance of $3,000,000. The Facility is due February 12, 1999,
is secured by all outstanding shares of the Company's wholly owned
U.S. subsidiaries, which are shared in pari passu with two existing
lenders, and bears interest at the rate of 7% per annum, payable at
maturity. In conjunction with advances under the Facility, the lender
is to receive warrants to purchase common stock, exercisable at any
time for a three year period, at the rate of 15,000 warrant shares
for each $100,000 advanced at an exercise price of $7.50 per share
for the first $10,000,000 advanced, and at an exercise price equal to
$1.50 greater than the average closing bid price of the common stock
for the ten day period immediately prior to the date of each advance
for advances over $10,000,000. Outstanding advances and accrued
interest are convertible into shares of common stock at a price of
$9.082, at the lender's option provided the market price of the
common stock is less than $13.50, and at the Company's option if the
market price of the common stock is $13.50 or greater. Market price
is defined as the closing bid price for 15 of the 17 consecutive days
immediately prior to the conversion date. The Facility may be
extended for an additional year in exchange for
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<PAGE> 61
warrants to purchase common stock, exercisable at any time for a
three year period, at the rate of 5,000 warrant shares for each
$100,000 advanced, at the same price as for advances over
$10,000,000. All warrants are subject to certain anti-dilution
adjustments. The Facility, among other things, prohibits any
additional indebtedness and reserves the right to require that any
future advances be used to repay other indebtedness which shares the
security in pari passu. The obligation to make future advances
expires on July 31, 1998. The Company is prohibited from redeeming
any capital stock, declaring any dividends on common stock or making
certain other distributions, as defined. Proceeds of the initial
advance will be used for working capital and general corporate
purposes. Subsequent advances must be applied first to retiring any
then outstanding loans under the previous Credit Facility or advances
under the Coastal Trust Revolving Loan.
(c) On February 17, 1998, the Company renegotiated the terms of payment
on the remaining debt associated with the purchase of DNA. Note
agreements were established with two former shareholders which
provide for initial payments of $125,000 followed by ten monthly
payments of $75,000 to each former shareholder.
(26) Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions Additions
Balance at charged to charged to Balances
beginning costs and other at end
of period expenses accounts Deductions of period
--------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1997:
Allowances deducted from assets:
Accounts and notes receivable $ 542 632 -- 633(a)(c) 541
Inventories 1,254 590 -- 244(b)(c) 1,600
------ ------ ------ ------ ------
Total allowances
deducted from assets $1,796 1,222 -- 877 2,141
====== ====== ====== ====== ======
For the year ended December 31, 1996:
Allowances deducted from assets:
Accounts and notes receivable $ 25 521 -- 4(a) 542
Inventories 730 1,058 -- 534(b) 1,254
------ ------ ------ ------ ------
Total allowances
deducted from assets $ 755 1,579 -- 538 1,796
====== ====== ====== ====== ======
</TABLE>
Notes:
(a) Accounts written off
(b) Scrapped, sold or other disposition
(c) Includes liquidation of subsidiary.
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<PAGE> 62
Schedule II
INTELECT COMMUNICATIONS, INC.
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions Additions
Balance at charged to charged to Balances
beginning costs and other at end
of period expenses accounts Deductions of period
--------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1997:
Allowances deducted from assets:
Accounts and notes receivable $ 542 632 -- 633(a)(c) 541
Inventories 1,254 590 -- 244(b)(c) 1,600
------ ------ ------ ------ ------
Total allowances
deducted from assets $1,796 1,222 -- 877 2,141
====== ====== ====== ====== ======
For the year ended December 31, 1996:
Allowances deducted from assets:
Accounts and notes receivable $ 25 521 -- 4(a) 542
Inventories 730 1,058 -- 534(b) 1,254
------ ------ ------ ------ ------
Total allowances
deducted from assets $ 755 1,579 -- 538 1,796
====== ====== ====== ====== ======
</TABLE>
Notes:
(a) Accounts written off
(b) Scrapped, sold or other disposition
(c) Includes liquidation of subsidiary.
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<PAGE> 63
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Registrant's Board of Directors, in accordance with the recommendation of
its audit Committee, which is composed of non-employees of the Registrant, has
requested Arthur Anderson LLP ("Arthur Andersen") to act as independent auditors
of the Registrant for the 1997 fiscal year, subject to shareholder approval, in
replacement of KPMG Peat Marwick, Chartered Accountants, Hamilton, Bermuda
("KPMG").
During the two years ended December 31, 1995 and December 31, 1996, and the
subsequent interim period through the date of the appointment of Arthur Andersen
as the company's new outside auditors, there were no "disagreements" between the
Registrant and KPMG as described in Item 304(a)(1)(iv) of Regulation S-K. The
Registrant requested KPMG to furnish it with a letter addressed to the SEC
stating whether or not it agreed with the above statements. A copy of such
letter, dated August 14, 1997, was filed as an Exhibit to the Form 8-K of the
Company filed on August 18, 1997.
The Registrant engaged Arthur Andersen as its new independent accountants, and
such appointment was approved by the Registrant's shareholders at the August 13,
1997 annual meeting.
As disclosed in the Form 8-K of the Company filed on August 18, 1997, the term
of the Company's previous independent auditors, KPMG, expired at the Company's
annual general meeting of its stockholders held August 13, 1997. The KPMG report
dated April 9, 1997 on the consolidated financial statements of the Company for
the year ended December 31, 1996, noted that the Company has suffered recurring
losses from continuing operations and is dependent upon the successful
development and commercialization of its products and its ability to secure
adequate sources of capital until the Company is operating profitably and noted
that these matters raise substantial doubt about the Company's ability to
continue as a going concern, and that management's plans with regard to these
matters were described in Note 1 to the consolidated financial statements.
KPMG has consented to the Company's inclusion of KPMG's report on the Company's
financial statements for certain prior periods. See Exhibit 23.1 to this Form
10-K. In connection with the consent, KPMG asked the Company to indemnify KPMG
for any loss incurred as a result of the consent to the inclusion of KPMG's
report, unless such loss results from KPMG's professional malpractice. The
Company agreed to such request for indemnification.
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<PAGE> 64
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company will file with the Securities and Exchange Commission a
definitive Proxy Statement no later than 120 days after the close of its fiscal
year ended December 31, 1997 (the "Proxy Statement"). The information required
by this Item is incorporated by reference from the Proxy Statement.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from
the Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the Proxy Statement.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. The Financial Statements and Financial Statement Schedules filed as
part of this report are listed and indexed on Page 20. Schedules other than
those listed in the index have been omitted because they are not applicable or
the required information has been included elsewhere in this report.
B. Listed below are all Exhibits filed as part of this report. Certain
Exhibits are incorporated by reference to documents previously filed by the
Registrant with the Securities and Exchange Commission pursuant to Rule 12b-32
under the Securities Exchange Act of 1934, as amended. Exhibits which are
incorporated by reference are indicated by the information in the parenthetical
following such exhibit.
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
------- ----------------------
<S> <C>
2.1 Plan and Agreement of Merger dated as of October 29,
1997 by and among Intelect Communications Systems
Limited ("Intelect (Bermuda)"), Intelect Communications,
Inc. (the "Company"), and Intelect Merger Co. (1)
3.1 Amended and Restated Certificate of Incorporation of the
Company (1)
3.2 Amended and Restated By-Laws of the Company (1)
4.1 Specimen Stock Certificate of the Company (2)
4.2 Certificate of Designations of the Series A Preferred
Stock dated December 2, 1997 (1)
4.3 Certificate of Designations of the Series B Preferred
Stock dated December 17, 1997
4.4 Certificate of Designations of the Series C Preferred
Stock dated February 6, 1998 (3)
4.5 Form of 7.5% Convertible Debenture due June 7, 1998 of
the Company (Terminated) (4)
4.6 Form of 7.5% Convertible Debenture due August 8, 1998 of
the Company (Terminated) (5)
4.7 Form of 7% Series A Convertible Debenture due October
15, 1998 of the Company (Terminated) (5)
4.8 Form of 7% Series B Convertible Debenture due October
15, 1998 of the Company (Terminated) (5)
10.1 Option Rights Agreement for Outstanding Shares of
Intelect, Inc. and Stock Purchase Agreement dated
January 13, 1995 (6) (Note - this Agreement was replaced
by the March 31, 1995 Option agreement)
</TABLE>
64
<PAGE> 65
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
------- ----------------------
<S> <C>
10.2 Option Agreement dated March 31, 1995 by and among the
Company, certain sellers and Intelect, Inc. (7)
10.3 Stock Purchase Agreement dated October 3, 1995 by and
among Intelect (Bermuda), Savage Corporation and Savage
Sports Corporation (7)
10.4 Management Agreement dated as of October 1, 1995 between
the Company and Herman Frietsch* (8)
10.5 Amendment No. One dated January 1, 1996 to Management
Agreement between the Company and Herman Frietsch
referred to in Exhibit 10.4* (9)
10.6 General Employment Agreement dated as of November 1,
1994 between the Company and Peter G. Leighton* (4)
10.7 Amendment No. One dated as of January 2, 1996 to the
General Employment Agreement between the Company and
Peter G. Leighton referred to in Exhibit 10.6* (9)
10.8 Employment Agreement dated as of April 1, 1996 between
the Company and Eugene Helms*(5)
10.9 Employment Agreement dated as of April 24, 1995 between
the Company and Peter Ianace* (8)
10.10 Stock Purchase Agreement dated January 13, 1996 by and
between Intelect (Bermuda), Intelect systems Corp.,
Robert E. Nimon, Kim F. Nimon, Edgar L. Read, Gregory L.
Mayhan and DNA Enterprises, Inc. (10)
10.11 Warrants dated February 13, 1996 issued to Edgar L. Read
and Gregory L. Mayhan delivered at Closing (10)
10.12 Warrants dated February 13, 1996 issued to Edgar L. Read
and Gregory L. Mayhan to be delivered one year after
Closing (11)
10.13 Consulting Agreement dated as of February 13, 1996
between DNA Enterprises, Inc. and Nimon Consulting, Inc.
(10)
10.14 Employment Agreement dated as of February 13, 1996
between Edgar L. Read and DNA Enterprises, Inc.* (10)
10.15 Employment Agreement dated as of February 13, 1996
between Gregory L. Mayhan and DNA Enterprises, Inc.*
(10)
10.16 Agreement and Plan of Merger dated March 19, 1996 among
the Company, Mid-Ocean, Inc. and Mosaic Information
Technologies, Inc. (12)
10.17 Registration Rights Agreement dated as of March 29, 1996
among the Company and certain purchasers (12)
10.18 Employment Agreement dated March 29, 1996 among Matthew
Feldman, the Company and Mosaic Information Technologies
Inc.* (12)
10.19 Convertible Securities Agreement dated June 7, 1996
among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (4)
10.20 Registration Rights Agreement dated June 7, 1996 among
the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (4)
10.21 Letter Agreement dated July 31, 1996 among the Company,
Infinity Investors, Ltd. and Seacrest Capital Limited
(4)
10.22 Convertible Securities Agreement dated August 8, 1996
among the Company and certain Investors (5)
10.23 Registration Rights Agreement dated August 8, 1996 among
the Company and certain Investors (5)
10.24 Convertible Securities Agreement dated October 15, 1996
among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (5)
10.25 Registration Rights Agreement dated October 15, 1996
among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (5)
10.26 Book Entry Transfer Agent Agreement dated October 15,
1996 by and among the Company, Infinity Investors, Ltd.,
Seacrest Capital Limited and American Stock Transfer &
Trust Company (5)
10.27 Offer to Purchase the Five Year Six Percent (6%)
Subordinated Debentures of Intelect, Inc. for an
Aggregate of 170,000 Shares of Common Stock, $0.01 Par
Value, of the Company and the payment of Certain Amounts
in Lieu of Issuing Fractional Shares, Dated September 6,
1996 (5)
</TABLE>
65
<PAGE> 66
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
------- ----------------------
<S> <C>
10.28 Letter of Transmittal to Accompany Five Year Six Percent
(6%) Subordinated Debentures of Intelect, Inc. (5)
10.29 Form of Release in Consideration of Exchange of Property
(5)
10.30 Promissory Note dated as of February 26, 1997 to St.
James Capital Corp. from the Company (9)
10.31 Pledge Agreement dated as of February 26, 1997 between
the Company and St. James Capital Corp. (9)
10.32 Warrant to Purchase Common Stock of the Company Expiring
February 26, 2002 (9)
10.33 Registration Rights Agreement dated February 26, 1997
between the Company and St. James Capital Corp. (9)
10.34 Amended and Restated Promissory Note dated as of
February 26, 1997 to St. James Capital Corp. from the
Company (9)
10.35 First Amendment to Pledge Agreement dated as of March
27, 1997 between the Company and St. James Capital Corp.
(9)
10.36 Warrant to Purchase Common Stock of the Company Expiring
March 27, 2002 (9)
10.37 Amendment No. 1 to Registration Rights Agreement dated
as of March 27, 1997 between the Company and St. James
Capital Corp. (9)
10.38 Employee Stock Option Plan adopted April 24, 1986* (9)
10.39 Stock Incentive Plan adopted December 13, 1995* (9)
10.40 License Agreement between Digital Equipment Corp. and
Mosaic Information Technologies dated June 13, 1996 (9)
10.41 Lease Agreement between TCIT Dallas Industrial and
Intelect Network Technologies, dated February 25, 1997
(13)
10.42 Lease Agreement between Campbell Place One Joint Venture
and DNA Enterprises, dated February 1, 1997 (13)
10.43 Advisory Services Agreement with Renaissance Financial
Securities Corporation dated July 8, 1997 (14)
10.44 Warrant issued to AJC, Inc. to Purchase Common Stock of
the Company expiring on December 31, 2002 (14)
10.45 Warrant issued to Amerix Electronics, Inc. to Purchase
Common Stock of the Company expiring on June 19, 2004
(14)
10.46 Loan Agreement dated as of May 8, 1997 between the
Company and The Coastal Corporation Second Pension Trust
(14)
10.47 Warrant issued to The Coastal Corporation Second Pension
Trust to Purchase Common Stock of the Company expiring
on May 7, 2002 (14)
10.48 Registration Rights Agreement dated as of May 8, 1997
between the Company and The Coastal Corporation Second
Pension Trust (14)
10.49 Subscription Agreement for Series A Cumulative Preferred
Stock dated as of May 30, 1997 between the Company and
The Coastal Corporation Second Pension Trust (14)
10.50 Registration Rights Agreement dated as of May 30, 1997
between the Company and The Coastal Corporation Second
Pension Trust (14)
10.51 Agreement dated April 25, 1997 between the Company and
the beneficiary of a royalty agreement (14)
10.52 Irrevocable Option Agreement dated October 1, 1995
between the Company and owners of certain intellectual
property rights* (14)
10.53 Agreement dated July 7, 1997 among Robert E. Nimon, Kim
F. Nimon, Nimon Consulting, Inc., Intelect Systems Corp.
and the Company (14)
10.54 Promissory note dated July 7, 1997 to Robert E. Nimon
and Kim F. Nimon from the Company (14)
10.55 Promissory note dated July 7, 1997 to Robert E. Nimon
and Kim F. Nimon from the Company (14)
10.56 Term Sheet dated June 30, 1997, between the Company and
Infinity Investors Ltd. and Seacrest Capital Limited
(14)
10.57 Settlement Agreement dated August 22, 1997 among the
Company, Infinity Investors Ltd., and Seacrest Capital
Limited (15)
</TABLE>
66
<PAGE> 67
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
------- ----------------------
<S> <C>
10.58 Subscription Agreements dated August 22, 1997 among the
Company and Isaac Arnold, Jr., Arnold Corporation, and
Meridian Fund, Ltd. (15)
10.59 Amended and Restated Loan Agreement dated August 27,
1997 among the Company, Intelect Systems Corp., and The
Coastal Corporation Second Pension Trust (15)
10.60 Warrant to purchase Company Common Stock expiring August
26, 2002 issued to The Coastal Corporation Second
Pension Trust (15)
10.61 Amendments Nos. 2 and 3 to Registration Rights
Agreements dated April 24 and May 8, 1997 among the
Company and St. James Capital Corp. (15)
10.62 Warrants to purchase Company Common Stock dated April 24
and May 8, 1997 issued to St. James Capital Corp. (15)
10.63 Second Amended and Restated Floating Rate Promissory
Note dated effective February 26, 1997 to St. James
Capital Corp. from the Company (15)
10.64 Second and Third Amendments to Borrower's Pledge
Agreement dated April 24 and May 8, 1997 among Intelect
Systems Corp. and St. James Capital Corp. (15)
10.65 Subscription Agreements dated August 1997 among the
Company and Blake C. Davenport, Fernhill Partners,
Fiftieth & Grover Shopping Center, Carol Filler (James),
Douglas Floren, Richard A. Gray, Alexander Greenberg,
Philip Hempleman, David May, Timothy McCollum, Frank
Lyon Polk III, Sanford Prater, Privet Row, Inc., Leonard
Rauner, Marcus R. Rowan, TCM Partners, L.P., and Wayne
Wilkey (15)
10.66 Warrant expiring December 31, 2001 issued to Lifeline
Industries, Inc. (15)
10.67 Amended License Agreement among Digital Equipment
Corporation and Intelect Visual Communications Corp.,
dated effective November 5, 1997 (16)
10.68 Registration Rights Agreement among the Company and
Citadel, dated February 6, 1998 (3)
10.69 Registration Rights Agreement dated February 12, 1998
between the Company and St. James Partners, L.P. (3)
10.70 Warrant to Purchase Common Stock of the Company dated
February 12, 1998 issued to St. James Partners, L.P.
expiring on February 12, 2001 (3)
10.71 Securities Purchase Agreement among the Company and
Citadel, dated February 6, 1998 (3)
10.72 Agreement for Purchase and Sale dated February 12, 1998
between the Company and St. James Partners, L.P. (3)
10.73 Convertible Promissory Note dated February 12, 1998 by
the Company in favor of St. James Partners, L.P. (3)
10.74 Pledge Agreement dated February 12, 1998 between the
Company and St. James Partners, L.P. (3)
10.75 Purchase Agreement among the Company and Navesink dated
December 16, 1997
10.76 Registration Rights Agreement among the Company and
Navesink dated December 16, 1997
10.77 Sales Representative Agreement between Intelect Network
Technologies Company and Amerix Electronics, Inc. dated
January 12, 1998
10.78 Exchange Agreement between Intelect Network Technologies
Company and Amerix Electronics dated February 20, 1998
10.79 Warrant issued to Amerix Electronics, Inc. to Purchase
Common Stock of the Company expiring on June 19, 2001
10.80 Form of Unsecured Convertible Promissory Notes held by
various employees, directors, and related individuals of
the Company with face values totaling $710,00, at a
conversion rate of $5.25 per share of Common Stock,
dated December 5, 18, and 31, 1997
10.81 Company Stock Incentive Plan Amendment adopted December
4, 1997* (1)
16.1 Letter regarding change in certifying accountants (17)
21.1 Subsidiaries of the Company
23.1 Consents of KPMG Peat Marwick
23.2 Consents of Arthur Andersen LLP
27.1 Financial data schedule
</TABLE>
- ---------------------------------------------
*Management contract or other compensatory plan or arrangement.
67
<PAGE> 68
(1) Incorporated herein by reference to the Company's Form S-4 File No.
333-39063
(2) Incorporated herein by reference to the Company's Form 8-K filed
December 5, 1997
(3) Incorporated herein by reference to the Company's Form 8-K filed
February 17, 1998
(4) Incorporated herein by reference to the Company's Form 10-Q filed
August 14, 1996
(5) Incorporated herein by reference to the Company's Form 10-Q filed
November 13, 1996
(6) Incorporated herein by reference to the Company's Form 20-F for the
fiscal year ended October 31, 1994
(7) Incorporated herein by reference to the Company's Form 8-K dated
November 10, 1995
(8) Incorporated herein by reference to the Company's Form 8-K/A dated
April 12, 1996
(9) Incorporated herein by reference to the Company's Form 10-K filed April
15, 1997
(10) Incorporated herein by reference to the Company's Form 8-K dated
February 20, 1996
(11) Incorporated herein by reference to the Company's Form 10-K for the
year ending December 31, 1995
(12) Incorporated herein by reference to the Company's Form 8-K dated April
12, 1996
(13) Incorporated herein by reference to the Company's Form 10-Q filed May
15, 1997
(14) Incorporated herein by reference to the Company's Form 10-Q filed
August 14, 1997
(15) Incorporated herein by reference to the Company's Form S-3 filed
September 17, 1997
(16) Incorporated herein by reference to the Company's Form 10-Q filed
November 13, 1997
(17) Incorporated herein by reference to the Company's Form 8-K filed August
18, 1997
C. The Registrant has not filed any reports on Form 8-K during the last
quarter of the period covered by this Report, except as follows:
Form 8-K filed December 4, 1997.
68
<PAGE> 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTELECT COMMUNICATIONS, INC.
(Registrant)
Date: March 30, 1998 By: /s/ HERMAN M. FRIETSCH
-------------------------------------
Herman M. Frietsch
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/s/ HERMAN M. FRIETSCH /s/ ANTON VON AND ZU LIECHTENSTEIN
- ------------------------------------------ ----------------------------------
Herman M. Frietsch Anton von and zu Liechtenstein,
Chief Executive Officer and Director Director
(Principal Executive Officer)
/s/ EDWIN J. DUCAYET, JR. /s/ PHILIP P. SUDAN, JR.
- ------------------------------------------ ----------------------------------
Edwin J. Ducayet, Jr. Philip P. Sudan, Jr., Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ ROBERT E. GARRISON, II
----------------------------------
Robert E. Garrison, II, Director
69
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
------- ----------------------
<S> <C>
2.1 Plan and Agreement of Merger dated as of October 29,
1997 by and among Intelect Communications Systems
Limited ("Intelect (Bermuda)"), Intelect Communications,
Inc. (the "Company"), and Intelect Merger Co. (1)
3.1 Amended and Restated Certificate of Incorporation of the
Company (1)
3.2 Amended and Restated By-Laws of the Company (1)
4.1 Specimen Stock Certificate of the Company (2)
4.2 Certificate of Designations of the Series A Preferred
Stock dated December 2, 1997 (1)
4.3 Certificate of Designations of the Series B Preferred
Stock dated December 17, 1997
4.4 Certificate of Designations of the Series C Preferred
Stock dated February 6, 1998 (3)
4.5 Form of 7.5% Convertible Debenture due June 7, 1998 of
the Company (Terminated) (4)
4.6 Form of 7.5% Convertible Debenture due August 8, 1998 of
the Company (Terminated) (5)
4.7 Form of 7% Series A Convertible Debenture due October
15, 1998 of the Company (Terminated) (5)
4.8 Form of 7% Series B Convertible Debenture due October
15, 1998 of the Company (Terminated) (5)
10.1 Option Rights Agreement for Outstanding Shares of
Intelect, Inc. and Stock Purchase Agreement dated
January 13, 1995 (6) (Note - this Agreement was replaced
by the March 31, 1995 Option agreement)
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
------- ----------------------
<S> <C>
10.2 Option Agreement dated March 31, 1995 by and among the
Company, certain sellers and Intelect, Inc. (7)
10.3 Stock Purchase Agreement dated October 3, 1995 by and
among Intelect (Bermuda), Savage Corporation and Savage
Sports Corporation (7)
10.4 Management Agreement dated as of October 1, 1995 between
the Company and Herman Frietsch* (8)
10.5 Amendment No. One dated January 1, 1996 to Management
Agreement between the Company and Herman Frietsch
referred to in Exhibit 10.4* (9)
10.6 General Employment Agreement dated as of November 1,
1994 between the Company and Peter G. Leighton* (4)
10.7 Amendment No. One dated as of January 2, 1996 to the
General Employment Agreement between the Company and
Peter G. Leighton referred to in Exhibit 10.6* (9)
10.8 Employment Agreement dated as of April 1, 1996 between
the Company and Eugene Helms*(5)
10.9 Employment Agreement dated as of April 24, 1995 between
the Company and Peter Ianace* (8)
10.10 Stock Purchase Agreement dated January 13, 1996 by and
between Intelect (Bermuda), Intelect systems Corp.,
Robert E. Nimon, Kim F. Nimon, Edgar L. Read, Gregory L.
Mayhan and DNA Enterprises, Inc. (10)
10.11 Warrants dated February 13, 1996 issued to Edgar L. Read
and Gregory L. Mayhan delivered at Closing (10)
10.12 Warrants dated February 13, 1996 issued to Edgar L. Read
and Gregory L. Mayhan to be delivered one year after
Closing (11)
10.13 Consulting Agreement dated as of February 13, 1996
between DNA Enterprises, Inc. and Nimon Consulting, Inc.
(10)
10.14 Employment Agreement dated as of February 13, 1996
between Edgar L. Read and DNA Enterprises, Inc.* (10)
10.15 Employment Agreement dated as of February 13, 1996
between Gregory L. Mayhan and DNA Enterprises, Inc.*
(10)
10.16 Agreement and Plan of Merger dated March 19, 1996 among
the Company, Mid-Ocean, Inc. and Mosaic Information
Technologies, Inc. (12)
10.17 Registration Rights Agreement dated as of March 29, 1996
among the Company and certain purchasers (12)
10.18 Employment Agreement dated March 29, 1996 among Matthew
Feldman, the Company and Mosaic Information Technologies
Inc.* (12)
10.19 Convertible Securities Agreement dated June 7, 1996
among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (4)
10.20 Registration Rights Agreement dated June 7, 1996 among
the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (4)
10.21 Letter Agreement dated July 31, 1996 among the Company,
Infinity Investors, Ltd. and Seacrest Capital Limited
(4)
10.22 Convertible Securities Agreement dated August 8, 1996
among the Company and certain Investors (5)
10.23 Registration Rights Agreement dated August 8, 1996 among
the Company and certain Investors (5)
10.24 Convertible Securities Agreement dated October 15, 1996
among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (5)
10.25 Registration Rights Agreement dated October 15, 1996
among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (5)
10.26 Book Entry Transfer Agent Agreement dated October 15,
1996 by and among the Company, Infinity Investors, Ltd.,
Seacrest Capital Limited and American Stock Transfer &
Trust Company (5)
10.27 Offer to Purchase the Five Year Six Percent (6%)
Subordinated Debentures of Intelect, Inc. for an
Aggregate of 170,000 Shares of Common Stock, $0.01 Par
Value, of the Company and the payment of Certain Amounts
in Lieu of Issuing Fractional Shares, Dated September 6,
1996 (5)
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
------- ----------------------
<S> <C>
10.28 Letter of Transmittal to Accompany Five Year Six Percent
(6%) Subordinated Debentures of Intelect, Inc. (5)
10.29 Form of Release in Consideration of Exchange of Property
(5)
10.30 Promissory Note dated as of February 26, 1997 to St.
James Capital Corp. from the Company (9)
10.31 Pledge Agreement dated as of February 26, 1997 between
the Company and St. James Capital Corp. (9)
10.32 Warrant to Purchase Common Stock of the Company Expiring
February 26, 2002 (9)
10.33 Registration Rights Agreement dated February 26, 1997
between the Company and St. James Capital Corp. (9)
10.34 Amended and Restated Promissory Note dated as of
February 26, 1997 to St. James Capital Corp. from the
Company (9)
10.35 First Amendment to Pledge Agreement dated as of March
27, 1997 between the Company and St. James Capital Corp.
(9)
10.36 Warrant to Purchase Common Stock of the Company Expiring
March 27, 2002 (9)
10.37 Amendment No. 1 to Registration Rights Agreement dated
as of March 27, 1997 between the Company and St. James
Capital Corp. (9)
10.38 Employee Stock Option Plan adopted April 24, 1986* (9)
10.39 Stock Incentive Plan adopted December 13, 1995* (9)
10.40 License Agreement between Digital Equipment Corp. and
Mosaic Information Technologies dated June 13, 1996 (9)
10.41 Lease Agreement between TCIT Dallas Industrial and
Intelect Network Technologies, dated February 25, 1997
(13)
10.42 Lease Agreement between Campbell Place One Joint Venture
and DNA Enterprises, dated February 1, 1997 (13)
10.43 Advisory Services Agreement with Renaissance Financial
Securities Corporation dated July 8, 1997 (14)
10.44 Warrant issued to AJC, Inc. to Purchase Common Stock of
the Company expiring on December 31, 2002 (14)
10.45 Warrant issued to Amerix Electronics, Inc. to Purchase
Common Stock of the Company expiring on June 19, 2004
(14)
10.46 Loan Agreement dated as of May 8, 1997 between the
Company and The Coastal Corporation Second Pension Trust
(14)
10.47 Warrant issued to The Coastal Corporation Second Pension
Trust to Purchase Common Stock of the Company expiring
on May 7, 2002 (14)
10.48 Registration Rights Agreement dated as of May 8, 1997
between the Company and The Coastal Corporation Second
Pension Trust (14)
10.49 Subscription Agreement for Series A Cumulative Preferred
Stock dated as of May 30, 1997 between the Company and
The Coastal Corporation Second Pension Trust (14)
10.50 Registration Rights Agreement dated as of May 30, 1997
between the Company and The Coastal Corporation Second
Pension Trust (14)
10.51 Agreement dated April 25, 1997 between the Company and
the beneficiary of a royalty agreement (14)
10.52 Irrevocable Option Agreement dated October 1, 1995
between the Company and owners of certain intellectual
property rights* (14)
10.53 Agreement dated July 7, 1997 among Robert E. Nimon, Kim
F. Nimon, Nimon Consulting, Inc., Intelect Systems Corp.
and the Company (14)
10.54 Promissory note dated July 7, 1997 to Robert E. Nimon
and Kim F. Nimon from the Company (14)
10.55 Promissory note dated July 7, 1997 to Robert E. Nimon
and Kim F. Nimon from the Company (14)
10.56 Term Sheet dated June 30, 1997, between the Company and
Infinity Investors Ltd. and Seacrest Capital Limited
(14)
10.57 Settlement Agreement dated August 22, 1997 among the
Company, Infinity Investors Ltd., and Seacrest Capital
Limited (15)
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
------- ----------------------
<S> <C>
10.58 Subscription Agreements dated August 22, 1997 among the
Company and Isaac Arnold, Jr., Arnold Corporation, and
Meridian Fund, Ltd. (15)
10.59 Amended and Restated Loan Agreement dated August 27,
1997 among the Company, Intelect Systems Corp., and The
Coastal Corporation Second Pension Trust (15)
10.60 Warrant to purchase Company Common Stock expiring August
26, 2002 issued to The Coastal Corporation Second
Pension Trust (15)
10.61 Amendments Nos. 2 and 3 to Registration Rights
Agreements dated April 24 and May 8, 1997 among the
Company and St. James Capital Corp. (15)
10.62 Warrants to purchase Company Common Stock dated April 24
and May 8, 1997 issued to St. James Capital Corp. (15)
10.63 Second Amended and Restated Floating Rate Promissory
Note dated effective February 26, 1997 to St. James
Capital Corp. from the Company (15)
10.64 Second and Third Amendments to Borrower's Pledge
Agreement dated April 24 and May 8, 1997 among Intelect
Systems Corp. and St. James Capital Corp. (15)
10.65 Subscription Agreements dated August 1997 among the
Company and Blake C. Davenport, Fernhill Partners,
Fiftieth & Grover Shopping Center, Carol Filler (James),
Douglas Floren, Richard A. Gray, Alexander Greenberg,
Philip Hempleman, David May, Timothy McCollum, Frank
Lyon Polk III, Sanford Prater, Privet Row, Inc., Leonard
Rauner, Marcus R. Rowan, TCM Partners, L.P., and Wayne
Wilkey (15)
10.66 Warrant expiring December 31, 2001 issued to Lifeline
Industries, Inc. (15)
10.67 Amended License Agreement among Digital Equipment
Corporation and Intelect Visual Communications Corp.,
dated effective November 5, 1997 (16)
10.68 Registration Rights Agreement among the Company and
Citadel, dated February 6, 1998 (3)
10.69 Registration Rights Agreement dated February 12, 1998
between the Company and St. James Partners, L.P. (3)
10.70 Warrant to Purchase Common Stock of the Company dated
February 12, 1998 issued to St. James Partners, L.P.
expiring on February 12, 2001 (3)
10.71 Securities Purchase Agreement among the Company and
Citadel, dated February 6, 1998 (3)
10.72 Agreement for Purchase and Sale dated February 12, 1998
between the Company and St. James Partners, L.P. (3)
10.73 Convertible Promissory Note dated February 12, 1998 by
the Company in favor of St. James Partners, L.P. (3)
10.74 Pledge Agreement dated February 12, 1998 between the
Company and St. James Partners, L.P. (3)
10.75 Purchase Agreement among the Company and Navesink dated
December 16, 1997
10.76 Registration Rights Agreement among the Company and
Navesink dated December 16, 1997
10.77 Sales Representative Agreement between Intelect Network
Technologies Company and Amerix Electronics, Inc. dated
January 12, 1998
10.78 Exchange Agreement between Intelect Network Technologies
Company and Amerix Electronics dated February 20, 1998
10.79 Warrant issued to Amerix Electronics, Inc. to Purchase
Common Stock of the Company expiring on June 19, 2001
10.80 Form of Unsecured Convertible Promissory Notes held by
various employees, directors, and related individuals of
the Company with face values totaling $710,00, at a
conversion rate of $5.25 per share of Common Stock,
dated December 5, 18, and 31, 1997
10.81 Company Stock Incentive Plan Amendment adopted December
4, 1997* (1)
16.1 Letter regarding change in certifying accountants (17)
21.1 Subsidiaries of the Company
23.1 Consents of KPMG Peat Marwick
23.2 Consents of Arthur Andersen LLP
27.1 Financial data schedule
</TABLE>
- ---------------------------------------------
*Management contract or other compensatory plan or arrangement.
<PAGE> 74
(1) Incorporated herein by reference to the Company's Form S-4 File No.
333-39063
(2) Incorporated herein by reference to the Company's Form 8-K filed
December 5, 1997
(3) Incorporated herein by reference to the Company's Form 8-K filed
February 17, 1998
(4) Incorporated herein by reference to the Company's Form 10-Q filed
August 14, 1996
(5) Incorporated herein by reference to the Company's Form 10-Q filed
November 13, 1996
(6) Incorporated herein by reference to the Company's Form 20-F for the
fiscal year ended October 31, 1994
(7) Incorporated herein by reference to the Company's Form 8-K dated
November 10, 1995
(8) Incorporated herein by reference to the Company's Form 8-K/A dated
April 12, 1996
(9) Incorporated herein by reference to the Company's Form 10-K filed April
15, 1997
(10) Incorporated herein by reference to the Company's Form 8-K dated
February 20, 1996
(11) Incorporated herein by reference to the Company's Form 10-K for the
year ending December 31, 1995
(12) Incorporated herein by reference to the Company's Form 8-K dated April
12, 1996
(13) Incorporated herein by reference to the Company's Form 10-Q filed May
15, 1997
(14) Incorporated herein by reference to the Company's Form 10-Q filed
August 14, 1997
(15) Incorporated herein by reference to the Company's Form S-3 filed
September 17, 1997
(16) Incorporated herein by reference to the Company's Form 10-Q filed
November 13, 1997
(17) Incorporated herein by reference to the Company's Form 8-K filed August
18, 1997
<PAGE> 1
EXHIBIT 4.3
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.
Pursuant to Section 151(g) of the General Corporation Law of
Delaware, the undersigned, Herman M. Frietsch, Chief Executive Officer of
INTELECT COMMUNICATIONS, INC. a corporation organized and existing under the
laws of the State of Delaware (hereinafter called the "Corporation"), DOES
HEREBY CERTIFY that the Board of Directors of the Corporation duly adopted the
following resolution on December 16, 1997, providing for the issuance of a
series of shares of the Corporation's Preferred Stock, $.01 par value:
RESOLVED, that pursuant to the authority expressly
granted to and vested in the Board of Directors of the Corporation in
accordance with the provisions of the Amended and Restated Certificate
of Incorporation, this Board of Directors hereby creates a series of
Preferred Stock, par value $.01 per share, of the Corporation, to
consist of 914,286 shares of such Preferred Stock, and this Board of
Directors hereby fixes the designations, preferences and relative,
participating, optional or other special rights of the shares of such
series, and the qualifications, limitations, or restrictions thereof
(in addition to the designations, preferences and relative,
participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation of the Corporation which are applicable
to Preferred Stock of all series) as follows (the "Designation"):
I. DESIGNATION
1.01 The Designation of the series of Preferred Stock
created by this resolution shall be "$4.375, 10% Cumulative Convertible
Preferred Stock, Series B" (hereinafter called the "Series B Preferred Stock").
The Series B Preferred Stock shall rank pari passu with the $2.0145 10%
Cumulative Convertible Preferred Stock, Series A (the "Series A Preferred
Stock").
II. CASH DIVIDENDS ON SERIES B PREFERRED STOCK
2.01 The holders of shares of the Series B Preferred Stock
will be entitled to receive, when, as and if declared by the Corporation's
Board of Directors out of funds of the Corporation legally available therefor,
cumulative cash dividends on the shares of the Series B Preferred Stock at the
rate of $0.4375 per annum per share, payable quarterly on December 31, March
31, June 30 and September 30, in each year, commencing March 31, 1998 (accrued
from the date of original issue). Such dividends shall be cumulative from the
date of original issue of such shares. Each such dividend shall be paid to the
holders of record of shares of the Series B Preferred Stock as they appear on
the stock register of the Corporation on such record date, not more than 30
days nor less than 10 days preceding the dividend payment date thereof, as
shall be fixed by the Board of Directors of the Corporation or a duly
authorized committee thereof. Dividends in arrears on the Series B Preferred
Stock shall accrue interest at the dividend rate payable on the Preferred
Stock.
2.02 If dividends are not paid in full or declared in full
and sums set apart for the payment thereof upon the Series B Preferred Stock
and any other Preferred Stock ranking on a parity as to dividends with the
Series B Preferred Stock, all dividends declared upon shares of Series B
Preferred Stock and any other Preferred Stock ranking on a parity as to
dividends shall be declared pro rata so that in all cases the amount of
dividends declared per share on the Series B Preferred Stock and such other
Preferred Stock shall bear to each other the same ratio that accumulated
dividends per share, including dividends accrued or in arrears, if any, on the
shares of Series B Preferred Stock and such other Preferred Stock bear to each
other. Except as provided in the preceding sentence, unless full
cumulative dividends on the Series B Preferred Stock have been paid or declared
in full and sums set aside for the payment thereof, no
<PAGE> 2
dividends shall be declared or paid or set aside for payment or other
distribution made upon the common stock, par value $.01 per share, of the
Corporation (the "Common Stock"), or any other capital stock of the Corporation
ranking junior to or except with respect to the Series A Preferred Stock on a
parity with the Series B Preferred Stock as to dividends or liquidation rights,
nor shall any Common Stock, or any other capital stock of the Corporation
ranking junior to or except with respect to the Series A Preferred Stock on a
parity with the Series B Preferred Stock as to dividends or upon liquidation be
redeemed, purchased or otherwise acquired for any consideration (or any payment
made to or available for a sinking fund for the redemption of any shares of
such stock) by the Corporation or any subsidiary of the Corporation (except by
conversion into stock of the Corporation ranking junior to the Series B
Preferred Stock as to dividends and liquidation rights).
2.03 The terms "dividends accrued" or "dividends in
arrears" whenever used herein with reference to the Preferred Stock shall be
deemed to mean an amount which shall be equal to dividends thereon at the
annual dividend rates per share for the respective series from the date or
dates on which such dividends commence to accrue to the end of the then current
quarterly dividend period for such Preferred Stock (or, in the case of
redemption, to the date of redemption), less the amount of all dividends paid,
or declared in full and sums set aside for the payment thereof, upon such
Preferred Stock.
2.04 Dividends payable on the Series B Preferred Stock for
any period less than a full quarterly dividend period shall be computed on the
basis of a 360-day year of twelve 30-day months and the actual number of days
elapsed in the period for which payable.
2.05 At the option of the Corporation, dividends payable
on the Series B Preferred Stock may be paid in Common Stock in an amount
equivalent to the accrued dividend, converted into shares of Common Stock at
the average closing market bid price for the five (5) consecutive trading days
prior to the date the dividend is otherwise payable, provided that the Common
Stock is, at the dividend payment date, be listed with a national exchange,
including the NASDAQ National Market System.
III. OPTIONAL REDEMPTION OF SERIES B PREFERRED STOCK
3.01 The Series B Preferred Stock will be redeemable at
the option of the Corporation by a duly adopted resolution of its Board of
Directors, at any time in whole or from time to time in part, subject to the
limitations set forth below, at the following redemption prices per share plus,
in each case, all dividends accrued and unpaid on the Series B Preferred Stock
up to the date fixed for redemption, upon giving notice as provided
hereinbelow, as follows: the redemption price shall be the greater of (i)
$5.25 per share or (ii) the average closing market bid price for the five (5)
consecutive trading days prior to the date of the redemption, on national
exchange, including the NASDAQ National Market System, on which the Common
Stock is listed.
3.02 If less than all of the outstanding shares of Series
B Preferred Stock are to be redeemed, the shares to be redeemed shall be
determined pro rata.
3.03 At least 10 days but not more than 60 days prior to
the date fixed for the redemption of shares of the Series B Preferred Stock, a
written notice shall be mailed to each holder of record of shares of Series B
Preferred Stock to be redeemed in a postage prepaid envelope addressed to such
holder at his post office address as shown on the records of the Corporation,
notifying such holder of the election of the Corporation to redeem such shares,
stating the date fixed for redemption thereof (hereinafter referred to as the
"Redemption Date"), and calling upon such holder to surrender to the
Corporation on the Redemption Date at the place designated in such notice his
certificate or certificates representing the number of shares specified in such
notice of redemption. On or after the Redemption Date each holder of shares of
Series B Preferred Stock to be redeemed shall present and surrender his
certificate or certificates for such shares to the Corporation at the place
designated in such notice and thereupon the redemption price of such shares
shall be paid to or on the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. In case less than all the shares represented by
any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares. From and after the Redemption Date (unless
default shall be made by the Corporation in payment of the redemption price)
all dividends on the shares of Series B Preferred Stock designated for
redemption in such notice shall cease to accrue, and all rights of the holders
thereof as stockholders of the Corporation, except the right to receive the
redemption price thereof (including all accrued and unpaid dividends up to the
Redemption Date) upon the surrender of certificates representing the same,
shall cease
- 2 -
<PAGE> 3
and terminate and such shares shall not thereafter be transferred (except with
the consent of the Corporation) on the books of the Corporation, and such
shares shall not be deemed to be outstanding for any purpose whatsoever. At
its election the Corporation, prior to the Redemption Date, may deposit the
redemption price (including all accrued and unpaid dividends up to the
Redemption Date) of the shares of Series B Preferred Stock so called for
redemption in trust for the holders thereof with a bank or trust company
(having a capital, surplus and undivided profits aggregating not less than
$50,000,000) in the Borough of Manhattan, City and State of New York, the City
of Dallas, State of Texas, or in any other city in which the Corporation at the
time shall maintain a transfer agency with respect to such stock, in which case
such notice to holders of the Series B Preferred Stock to be redeemed shall
state the date of such deposit, shall specify the office of such bank or trust
company as the place of payment of the redemption price, and shall call upon
such holders to surrender the certificates representing such shares at such
price on or after the date fixed in such redemption notice (which shall not be
later than the Redemption Date) against payment of the redemption price
(including all accrued and unpaid dividends up to the Redemption Date). From
and after the making of such deposit, the shares of Series B Preferred Stock so
designated for redemption shall not be deemed to be outstanding for any purpose
whatsoever, and the rights of the holders of such shares shall be limited to
the right to receive the redemption price of such shares (including all accrued
and unpaid dividends up to the redemption date), without interest, upon
surrender of the certificates representing the same to the Corporation at said
office of such bank or trust company. Any interest accrued on such funds shall
be paid to the Corporation from time to time. Any moneys so deposited which
shall remain unclaimed by the holders of such Series B Preferred Stock at the
end of two years after the Redemption Date shall be returned by such bank or
trust company to the Corporation, after which the holders of the Series B
Preferred Stock shall have no further interest in such moneys.
3.04 Shares of the Series B Preferred Stock retired
pursuant to the provisions of this Article III shall not be reissued.
IV. VOTING RIGHTS
4.01 The holders of the Series B Preferred Stock shall
not, except as required by law or as set forth herein, have any right or power
to vote on any question or in any proceeding at any meeting of stockholders.
On any matters on which the holders of the Series B Preferred Stock shall be
entitled to vote, they shall be entitled to one vote for each share held.
4.02 In case at any time the equivalent of three (3) or
more full quarterly dividends (whether consecutive or not) on any series of
Preferred Stock shall be in arrears, then during the period (hereinafter in
this Section 4.02 called the "Class Voting Period") commencing with such time
and ending with the time when all arrears in dividends on all Preferred Stock
shall have been paid and the full dividend on all Preferred Stock for the then
current quarterly dividend period shall have been paid or declared and set
apart for payment, at a meeting called by the holders of the Series B Preferred
Stock Corporation held for the election of directors during the Class Voting
Period, the holders of a majority of the outstanding shares of Series B
Preferred Stock represented in person or by proxy at said meeting shall be
entitled, as a class, to the exclusion of the holders of all other classes of
stock of the Corporation other than the Series A Preferred Stock, to elect one
director of the Corporation, each share of Series B Preferred Stock entitling
the holder thereof to one vote for each Director.
4.03 Any director who shall have been elected by holders
of Series B Preferred Stock or by any director so elected as herein
contemplated, may be removed at any time during a Class Voting Period, either
for or without cause, by, and only by, the affirmative votes of the holders of
record of a majority of the outstanding shares of Series B Preferred Stock
given at a special meeting of such stockholders called for the purpose, and any
vacancy thereby created may be filled during such Class Voting Period by the
holders of Series B Preferred Stock, present in person or represented by proxy
at such meeting. Any director to be elected by the Board of Directors of the
Corporation to replace a director elected by holders of Series B Preferred
Stock, or elected by a director as in this sentence provided, and who dies,
resigns, or otherwise ceases to be a director shall, except as otherwise
provided in the preceding sentence, be elected by the remaining director
theretofore elected by the holders of Series B Preferred Stock. At the end of
the Class Voting Period the holders of Series B Preferred Stock shall be
automatically divested of all voting power vested in them under this Section
4.03 but subject always to the subsequent vesting hereunder of voting power in
the holders of Series B Preferred Stock in the event of any similar cumulated
arrearage in payment of quarterly dividends occurring or
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<PAGE> 4
defaults thereafter. The term of all directors elected pursuant to the
provisions of this Section 4.03 shall in all events expire at the end of the
Class Voting Period.
4.04 The holders of the Series B Preferred Stock shall
not, except as required by law or as set forth herein, have any right or power
to vote on any question or in any proceeding at any meeting of stockholders,
to:
(i) "solicit" proxies with respect to Voting
Securities under any circumstances or become a "participant" in any "election
contest" relating to the election of directors of the Corporation, as such
terms are defined in Regulation 14A under the 1934 Act, as amended or induce or
attempt to induce any other person to do any of the foregoing; or
(ii) assist any other person to acquire or affect
control of the Corporation.
V. PRIORITY OF SERIES B PREFERRED STOCK IN EVENT OF DISSOLUTION
5.01 In the event of any liquidation, dissolution, or
winding up of the affairs of the Corporation, whether voluntary or otherwise,
after payment or provision for payment of the debts and other liabilities of
the Corporation, the holders of the Series B Preferred Stock shall be entitled
to receive, out of the remaining net assets of the Corporation, the amount of
Four and 37.5/100 dollars ($4.375) in cash for each share of Series B Preferred
Stock, plus an amount equal to all dividends accrued and unpaid on each such
share up to the date fixed for distribution, before any distribution shall be
made to the holders of the Common Stock, or any other capital stock of the
Corporation ranking (as to any such distribution) junior to the Series B
Preferred Stock. If upon any liquidation, dissolution or winding up of the
Corporation, the assets distributable among the holders of any series of
Preferred Stock ranking (as to any such distribution) on a parity with the
Series B Preferred Stock shall be insufficient to permit the payment in full to
the holders of all such series of Preferred Stock of all preferential amounts
payable to all such holders, then the entire assets of the Corporation thus
distributable shall be distributed ratably among the holders of all series of
the Preferred Stock ranking (as to any such distribution) on a parity with the
Series B Preferred Stock in proportion to the respective amounts that would be
payable per share if such assets were sufficient to permit payment in full.
5.02 For purposes of this Article V, a distribution of
assets in any dissolution, winding up or liquidation shall not include (i) any
consolidation or merger of the Corporation with or into any other corporation,
(ii) any dissolution, liquidation, winding up, or reorganization of the
Corporation immediately followed by reincorporation of another successor
corporation or (iii) a sale or other disposition of all or substantially all of
the Corporation's assets to another corporation; provided, that in each case,
effective provision is made in the certificate of incorporation, memorandum of
association or by-laws of the resulting and surviving corporation or otherwise
for the protection and continuation of the rights of the holders of Series B
Preferred Stock.
VI. CONVERSION OF SERIES B PREFERRED STOCK
6.01 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 Preferred Stock into shares of Common Stock,
and on or after June 30, 1998 any remaining shares of Preferred Stock not
previously converted into shares of Common Stock (calculated as to each
conversion to the nearest 1/100th of a share) into a number of shares of Common
Stock equal to the greater of (i) the number of shares of Preferred Stock
being converted multiplied by 1.10, or (ii) the number of shares of Preferred
Stock multiplied by a number, the numerator of which is $4.375 and the
denominator of 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 5 consecutive trading days from the date of the
notice of election of conversion (subject to adjustment as described below).
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
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<PAGE> 5
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.
6.02 Any holder of shares of the Series B Preferred Stock
electing to convert such shares or any portion thereof shall deliver the
certificates therefor to the principal office of any transfer agent for the
Common Stock, with the form of notice of election to convert endorsed on such
certificates fully completed and duly executed. The conversion right with
respect to any such shares of the Series B Preferred Stock shall be deemed to
have been exercised at the date upon which the certificates therefor with such
notice of election duly executed shall have been so delivered, and the person
or persons entitled to receive the Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such
Common Stock upon said date.
6.03 No fractional shares of Common Stock or scrip
representing fractional shares shall be issued upon conversion of shares of the
Series B Preferred Stock. If more than one share of the Series B Preferred
Stock shall be surrendered for conversion at one time by the same holder the
number of full shares of Common Stock which shall be issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of the
Series B Preferred Stock so surrendered. Instead of any fractional share of
Common Stock which would otherwise be issuable upon conversion of any share or
shares of the Series B Preferred Stock, the Corporation shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction
of the last sales price (or the quoted closing bid price if there were no
sales) per share of Common Stock on the principal exchange on which the Common
Stock is listed on the business day next preceding the date of conversion, or,
if the Common Stock is not then listed on an exchange, the closing sales price
(or the quoted closing bid price if there were no sales) as reported by the
National Association of Securities Dealers Automated Quotation System on the
business day next preceding the date of conversion. In the absence of one or
more such quotations, the Board of Directors shall in good faith determine the
current market price on the basis of such quotation as it considers
appropriate.
6.04 If a holder converts shares of Series B Preferred
Stock, the Corporation shall pay any documentary, stamp or similar issue or
transfer tax due on the issue of shares of Common Stock upon the conversion.
The holder, however, shall pay any such tax which is due because the shares are
issued in a name other than the name of such holder.
6.05 The Corporation shall reserve out of its authorized
but unissued Common Stock or its Common Stock held in treasury enough shares of
Common Stock to permit the conversion of all of the shares of Series B
Preferred Stock, and shall increase from time to time, the authorized amount of
its Common Stock if at any time the authorized amount of its Common Stock
remaining unissued shall not be sufficient to permit the conversion of all
Series B Preferred Stock at the time outstanding. All shares of Common Stock
which may be issued upon conversion of the shares of Series B Preferred Stock
shall be validly issued, fully paid and nonassessable. In order that the
Corporation may issue shares of Common Stock upon conversion of the shares of
Series B Preferred Stock, the Corporation will comply with all applicable
Federal and State securities laws and will list such shares on each securities
exchange on which the Common Stock is listed.
6.06 The conversion rate in effect at any time shall be
subject to adjustment as follows (no consent to the actions underlying such
adjustment, intended or implied):
(i) In case the Corporation shall (i) pay a
dividend on Common Stock in Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock into a greater number of shares, or (iii)
combine or reclassify its outstanding shares of Common Stock into a smaller
number of shares, the conversion rate in effect immediately prior thereto shall
be adjusted retroactively as provided below so that the number of shares of
Common Stock into which each share of Series B Preferred Stock shall thereafter
be convertible shall be determined by multiplying the number of shares of
Common Stock into which such share of Series B Preferred Stock was theretofore
convertible by a fraction of which the numerator shall be the number of shares
of Common Stock outstanding immediately following such action and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately prior thereto. Such adjustment shall be made whenever any event
listed above shall occur and shall become effective retroactively immediately
after the record date in the case of a dividend and shall become effective
immediately after the effective date in the case of a subdivision, combination
or reclassification.
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<PAGE> 6
(ii) In case the Corporation shall issue rights or
warrants to all holders of its Common Stock entitling them (for a period
expiring within 45 days after the record date therefor) to subscribe for or
purchase shares of Common Stock at a price per share less than the current
market price per share of Common Stock (as determined in accordance with the
provisions of sub-paragraph (iv) below) at the record date therefor the number
of shares of Common Stock into which each share of Series B Preferred Stock
shall thereafter be convertible shall be determined by multiplying the number
of shares of Common Stock into which such share of Series B Preferred Stock was
theretofore convertible by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding on the date of issuance of such
rights or warrants plus the number of additional shares of Common Stock offered
for subscription or purchase and of which the denominator shall be the number
of shares of Common Stock outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of Common Stock which the
aggregate offering price of the number of shares of Common Stock so offered
would purchase at the current market price per share of Common Stock (as
determined in accordance with the provisions of sub-paragraph (iv) below).
Such adjustment shall be made whenever such rights or warrants are issued, and
shall become effective retroactively immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants.
(iii) In case the Corporation shall distribute to
all holders of its Common Stock (including any such distribution made in
connection with a consolidation or merger in which the Corporation is the
continuing corporation) shares of capital stock (other then Common Stock),
evidences of its indebtedness or assets (excluding cash dividends) or rights to
subscribe (excluding those referred to in paragraph (ii) above), then in each
such case the number of shares of Common Stock into which each share of Series
B Preferred Stock shall thereafter be convertible shall be determined by
multiplying the number of shares of Common Stock into which such share of
Series B Preferred Stock was theretofore convertible by a fraction of which the
numerator shall be the number of outstanding shares of Common Stock multiplied
by the current market price per share of Common Stock (as determined in
accordance with the provisions of sub-paragraph (iv) below) on the date of such
distribution and of which the denominator shall be the number of outstanding
shares of Common Stock multiplied by such current market price per share of
Common Stock, less the fair market value (as determined by the independent
auditors of the Corporation, whose determination shall be conclusive, and
described in a statement filed with the transfer agent for the Series B
Preferred Stock) of the capital stock, assets or evidences of indebtedness so
distributed or of such subscription rights. Such adjustment shall be made
whenever any such distribution is made, and shall become effective
retroactively immediately after the record date for the determination of
stockholders entitled to receive such distribution.
(iv) For the purpose of any computation under
sub-paragraphs (ii) and (iii) above, the current market price per share of
Common Stock at any date shall be deemed to be the average of the daily closing
prices for the 30 consecutive trading days commencing 45 trading days before
the day in question. The closing price for each day shall be the reported last
sale price or, in case no such reported sale takes place on such day, the
reported closing bid price, in either case, on the principal United States
securities exchange registered under the Securities Exchange Act of 1934 on
which the shares are listed or admitted to trading, or if they are not listed
or admitted to trading on any such exchange, the closing bid price as furnished
by any member of the National Association of Securities Dealers, Inc. or any
comparable organization selected from time to time by the Corporation for that
purpose.
(v) No adjustment in the conversion rate shall
be required unless such adjustment would require an increase or decrease of at
least 1% in the rate then in effect; provided, however, that any adjustments
which by reason of this sub-paragraph (v) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment.
(vi) In the event that, at any time as a result of
an adjustment made pursuant to subparagraph (i) or (iii) above, the holder of
any share of Series B Preferred Stock thereafter surrendered for conversion
shall become entitled to receive any shares of the Corporation other than
shares of the Common Stock, thereafter the number of such other shares so
receivable upon conversion of any share of Series B Preferred Stock shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in paragraphs (i) through (v) of this paragraph, and the other
provisions of this Article VI with respect to the Common Stock shall apply on
like terms to any such other shares.
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<PAGE> 7
(vii) Whenever the conversion rate is adjusted, as
herein provided, the Board of Directors of the Corporation shall certify the
conversion rate after such adjustment and setting forth a brief statement of
the facts requiring such adjustment and a computation thereof. The Corporation
shall promptly cause a notice of the adjusted conversion rate to be mailed to
each registered holder of Series B Preferred Stock. In the event any holders
of the Series B Preferred Stock challenge the determination of fair market
price, such value shall be determined by a firm of independent certified public
accountants selected by the Board of Directors of the Corporation (who may be
the regular accountants employed by the Corporation) for which the costs shall
be divided between the Corporation and such holders.)
6.07 If any of the following events occur, namely (i) any
reclassification or change of outstanding shares of Common Stock issuable upon
conversion of the Series B Preferred Stock (other than a change in par value,
or from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), (ii) any consolidation or merger to
which the Corporation is a party (other than a consolidation or merger in which
the Company is the continuing corporation and which does not result in any
reclassification of, or change (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination) in, outstanding shares of Common Stock) or (iii)
any sale or conveyance of the properties and assets of the Corporation as, or
substantially as, an entirety to any other corporation; then the Corporation or
such successor or purchasing corporation, as the case may be, shall provide in
its Certificate of Incorporation (or analogous document) that each share of
Series B Preferred Stock shall be convertible into the kind and amount of
shares of stock and other securities or property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of shares of Common Stock issuable upon conversion of each such
share of Series A Preferred Stock immediately prior to such reclassification,
change, consolidation, merger, sale or conveyance. Such Certificate of
Incorporation (or analogous document) shall provide for adjustments which shall
be as nearly equivalent as may be practicable to the adjustments provided for
in this Article. The Corporation shall cause notice of the execution of any
such event contemplated by this paragraph to be mailed to each holder of Series
A Preferred Stock as soon as practicable. The above provisions of this
paragraph shall similarly apply to successive reclassifications,
consolidations, mergers and sales.
6.08 The Corporation at any time may reduce the conversion
price (or increase the conversion rate), temporarily or otherwise, by any
amount but in no event shall such conversion price be less than the par value
of the Common Stock at the time such reduction is made. Whenever the
conversion price is reduced pursuant to this paragraph, the Corporation shall
mail to the holders a notice of the reduction. The Corporation shall mail the
notice at least 15 days before the date the reduced conversion price (or
increased conversion rate) takes effect. The notice shall state the reduced
conversion price (or increased conversion rate) and the period it will be in
effect. A reduction of the conversion price (or increase in conversion rate)
does not change or adjust the conversion price otherwise in effect for purposes
of Section 6.06 paragraph (vi) and (vii).
6.09 Nothing in this Agreement may be read or construed to
violate the rules of the Securities and Exchange Commission or any market in
which the Common Stock or any other securities of the Corporation are traded,
nor violate the maintenance criteria of the NASDAQ Rule 4460(i)(1)(D)(iii), as
applied to all shares of the Corporation's Common Stock, preferred stock, and
the Preferred Shares deemed to be aggregated under said Rule, and the parties
hereto agree that in the event such violation would otherwise occur, this
Agreement shall not be enforceable against either party to the extent of such
occurrence, and further, the parties agree that in the event such violation
would otherwise occur, they shall amend this Agreement and the Certificate of
Designations to reflect such adjustment to price or quantity as may be
necessary to avoid the occurrence of such violation.
VII. RANKING OF SERIES B PREFERRED STOCK
7.01 With regard to rights to receive dividends and
distributions upon dissolution of the Corporation, the Series B Preferred Stock
shall rank on parity with the Series A Preferred Stock and senior in rank and
prior to all other stock of the Corporation outstanding at the time of issuance
of the Series B Preferred Stock.
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<PAGE> 8
VIII. LIMITATIONS
8.01 So long as any shares of Series B Preferred Stock are
outstanding, the Corporation shall not, without the affirmative vote or the
written consent as provided by law, of the holders of at least two-thirds (2/3)
of the outstanding shares of Series B Preferred Stock, voting as a class, (a)
create, authorize or issue any class or series of stock ranking either as to
payment of dividends or distribution of assets prior to the Series B Preferred
Stock; or (b) change the preferences, rights or powers with respect to the
Series B Preferred Stock so as to affect such stock adversely; but nothing
herein contained shall require such a class vote or consent (i) in connection
with any increase in the total number of authorized shares of common stock, or
(ii) in connection with the authorization or increase of any class or series of
stock ranking junior to or on a parity with the Series B Preferred Stock;
provided, however, that no such vote or written consent of the holders of the
Series B Preferred Stock shall be required if, at or prior to the time when the
issuance of any such stock ranking prior to the Series B Preferred Stock is to
be made or any such change is to take effect, as the case may be, provision is
made for the redemption of all shares of Series B Preferred Stock at the time
outstanding, and further provided, that the provisions of this Article VIII
shall not in any way limit the right and power of the Corporation to issue the
presently authorized but unissued shares of its capital stock, or bonds, notes,
mortgages, debentures, and other obligations, and to incur indebtedness to
banks and to other lenders.
IN WITNESS WHEREOF, INTELECT COMMUNICATIONS , INC. has
caused this certificate to be made under the seal of the Corporation, signed by
its Chairman and attested by its Assistant Secretary this 16 day of December
1997.
INTELECT COMMUNICATIONS, INC.
(Corporate Seal)
By: /s/ HERMAN M. FRIETSCH
-------------------------------------
Herman M. Frietsch
Chairman and Chief Executive Officer
Attest:
/s/ ROBERT C. BEASLEY
- --------------------------
Robert C. Beasley
Assistant Secretary
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<PAGE> 1
EXHIBIT 10.75
PURCHASE AGREEMENT
dated as of December 16, 1997
among
INTELECT COMMUNICATIONS, INC.
and
NAVESINK EQUITY DERIVATIVE FUND LDC
___________________________
$4,000,000 Preferred Stock
<PAGE> 2
PURCHASE AGREEMENT
This Purchase Agreement dated as of December 16, 1997 (the "Agreement"),
among Intelect Communications, Inc., a Delaware corporation (the "Company"),
and Navesink Equity Derivative Fund LDC, a Cayman Island limited duration
company (the "Purchaser");
WITNESSETH:
WHEREAS, the Purchaser has agreed to purchase, and the Company has
agreed to issue, 914,286 shares of the Company's $4.375 10% Cumulative
Convertible Preferred Stock, Series B, $.01 par value (the "Preferred Shares"),
for the consideration and under the terms and conditions set forth herein;
WHEREAS, the parties desire to set forth in this Agreement certain other
and related agreements between them;
NOW, THEREFORE, the parties agree that:
I.
DEFINITIONS
1.1 Definitions. For purposes hereof, the following terms shall have
the following definitions or shall be subject to the following rules of
construction:
(a) "Affiliate" of any person shall mean (i) any member of the
immediate family of such person, including parents, siblings, spouse and
lineal descendants (including those by adoption); the parents, siblings,
spouse, or lineal descendants (including those by adoption) of such
immediate family member; and in any such case any trust whose primary
beneficiary is such person or one or more members of such immediate
family and/or such person's lineal descendants; (ii) the legal
representative or guardian of such person or of any such immediate
family members in the event such person or any such immediate family
members becomes mentally incompetent; and (iii) any person, corporation
or other entity controlling, controlled by or under common control with
such person. As used in this definition, the term "control", including
the correlative terms "controlling", "controlled by" and "under common
control with" shall mean possession, directly or indirectly, of the
power to direct or cause the direction of management or policies
(whether through ownership of securities or any partnership or other
ownership interest, by contract or otherwise) of a person, corporation
or other entity.
(b) "Board of Directors" means the Board of Directors of the
Company.
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<PAGE> 3
(c) "Business Day" shall mean a day (other than a Saturday,
Sunday or legal holiday).
(d) "Certificate of Designations" shall mean the Certificate
of the Designations, Preference and Relative, Participating, Optional or
Other Special Rights of the Preferred Shares, attached hereto as Exhibit
A.
(e) "Common Stock" means shares of the Company's Common Stock,
$.01 par value per share.
(f) "Company" shall mean Intelect Communications, Inc.,
including all successors thereto, and whether merged, consolidated,
reincorporated or as its name, domicile or jurisdiction may change from
time to time.
(g) "Face Amount" shall mean $4.375 per share of the Preferred
Shares.
(h) "Purchaser" means Navesink Equity Derivative Fund LDC
including all successors thereto, and whether merged, consolidated,
reincorporated or as its name, domicile or jurisdiction may change from
time to time.
(i) "Market Price" means the average Trading Price of a share
of Common Stock for the five (5) consecutive trading days of the Common
Stock preceding the date in question.
(j) "Material Adverse Effect" shall mean a material and
adverse effect on the operations or financial condition of the Company
or its Subsidiaries.
(k) "Preferred Shares" means the Company's $4.375 10%
Cumulative Convertible Preferred Stock, Series B, $.01 par value per
share.
(l) "Registration Rights Agreement" shall mean that certain
Registration Rights Agreement by and between the Company and the
Purchaser attached hereto as Exhibit B.
(m) "Securities" means the Preferred Shares and all shares of
Common Stock into which the Preferred Shares are convertible, and all
other shares of capital stock received on account of such Preferred
Shares or Common Stock in respect of any stock split, stock dividend,
recapitalization, reorganization or other similar corporate events.
(n) "Securities Act" means the Securities Act of 1933, as
amended.
(o) "Trading Price" means, on any trading day for the Common
Stock, (i) if the Common Stock is traded on a national securities
exchange on such trading day, then the closing price on such trading day
as reflected in the consolidated trading tables of the
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<PAGE> 4
Wall Street Journal or any other appropriate publication, (ii) if the
Common Stock is traded over-the-counter and reported on the NASDAQ
National Market System, then the closing market bid price on such
trading day as reported in such publication or, if not so published,
then as reported by the NASDAQ National Market System, or (iii) if the
Common Stock is not traded on a national securities exchange or in the
NASDAQ National Market System on such trading day, then the closing
market bid price at the end of such trading day in such market as
reported by NASDAQ.
(p) "Underlying Stock" means all shares of Common Stock into
which the Preferred Shares are convertible, and all other shares of
capital stock received on account of such Preferred Shares or Common
Stock in respect of any stock split, stock dividend, recapitalization,
reorganization or other similar corporate events.
(q) All accounting terms used herein and not expressly defined
herein shall have the meanings given to them in accordance with
generally accepted accounting principles consistently applied and in
effect as of the date of the relevant calculation.
II.
SALE OF SHARES; INITIAL CLOSING; AND RELATED TRANSACTIONS
2.1 Sale and Purchase of Preferred Shares. On the terms and subject
to the conditions of this Agreement, the Company agrees to issue and sell to
the Purchaser, and the Purchaser agrees to purchase, 914,286 Preferred Shares,
for a purchase price of $4.375 per share, for an aggregate purchase price of
$4,000,000, payable in cash at the Closing.
2.2 The Closing. The sale and purchase of the Preferred Shares (the
"Closing") shall take place on or before the date hereof (the "Closing Date")
at the offices of Ryan & Sudan, L.L.P., 909 Fannin, Suite 3900, Houston, Texas.
At the Closing the Company shall deliver to the Purchaser certificate(s)
evidencing the Preferred Shares, registered in its name, against payment for
the Preferred Shares.
Payment for the Preferred Shares shall be made in cash by wire transfer
to an account designated by the Company of funds immediately payable in
Houston, Texas.
2.3 Related Transactions. In addition to the sale and purchase of
the Preferred Shares, the Company and the Purchaser shall execute and deliver
the Registration Rights Agreement at the Closing and shall execute and promptly
file the Certificate of Designations with the Secretary of State of Delaware.
4
<PAGE> 5
III.
TERMS OF PREFERRED SHARES
2.1 General. The Preferred Shares shall have the designations,
preferences, rights and limitations as set forth herein and in the Certificate
of Designations attached hereto as Exhibit A.
2.2 Costs. The Company shall pay all documentary, stamp, transfer or
other transactional taxes attributable to the issuance or delivery of shares of
Common Stock of the Company or other securities or property upon conversion of
the Preferred Shares; provided, however, that the Company shall not be required
to pay any taxes which may be payable in respect of any transfer involved in
the issuance or delivery of any certificate for such shares or securities in
the name other than that of the holder of the Preferred Shares in respect of
which such shares are being issued.
2.3 Reservation of Shares. The Company shall reserve at all times so
long as any Preferred Shares remain outstanding, free from preemptive rights,
out of its treasury stock or its authorized but unissued shares of Common
Stock, or both, solely for the purpose of effecting the conversion of Preferred
Shares, sufficient shares of Common Stock to provide for the conversion of all
outstanding Preferred Shares and set aside and keep available any other
property deliverable upon conversion of all outstanding Preferred Shares.
2.4 Valid Issuance. All shares of Common Stock or other securities
which may be issued upon conversion of the Preferred Shares will upon issuance
by the Company be duly and validly issued, fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issuance thereof and
the Company shall take no action which will cause a contrary result.
IV.
REPRESENTATIONS OF THE COMPANY
4.1 Company Representations and Covenants. The Company represents,
warrants and covenants to the Purchaser as follows:
(a) The Company has been duly incorporated and is validly
existing and in good standing under the laws of Delaware, with full
corporate power and authority to own, lease and operate its properties
and to conduct its business as currently conducted, and is duly
registered and qualified to conduct its business and is in good standing
in each jurisdiction or place where the nature of its properties or the
conduct of its business requires such registration or qualification,
except where the failure so to register or qualify
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<PAGE> 6
does not have a material adverse effect on the condition (financial or
other), business, properties, net worth or results of operations of the
Company. The Company has registered its Common Stock pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), is in full compliance with all reporting requirements
of the Exchange Act, and the Company's common shares are quoted on the
Nasdaq National Market (trading symbol ICOM);
(b) The Securities, when issued upon full payment therefor or
upon conversion therein, and delivered pursuant to this Agreement, will
be duly and validly authorized and issued, fully paid and nonassessable,
free from all encumbrances and restrictions other than restrictions on
transfer imposed by applicable securities laws and/or this Agreement,
and will not subject the Purchaser to personal liability by reason of
being such Purchaser; and
(c) This Agreement has been duly authorized, validly executed
and delivered on behalf of the Company and is a valid and binding
agreement of the Company in accordance with its terms, subject to
bankruptcy, insolvency or other laws affecting the enforcement of
creditors' rights generally and general principles of equity, and the
Company has full power and authority to execute and deliver this
Agreement and the other agreements and documents contemplated hereby and
to perform its obligations hereunder and thereunder.
V.
REPRESENTATIONS OF THE PURCHASER
The Purchaser hereby acknowledges, represents, warrants, and covenants
to, and agrees with, the Company, as follows:
5.1 General.
(a) This Agreement has been duly authorized, validly executed
and delivered on behalf of the Purchaser and is a valid and binding
agreement of the Purchaser in accordance with its terms, subject to
general principles of equity and of bankruptcy or other laws affecting
the enforcement of creditors' rights;
(b) The Purchaser is acquiring the Securities for his own
account as principal, for investment purposes only, and not with a view
to, or for, resale, distribution or fractionalization thereof, in whole
or in part and no other person has a direct or indirect beneficial
interest in such Securities;
(c) The Purchaser acknowledges his understanding that the
offering and sale of the Securities is intended to be exempt from
registration under the Securities Act and,
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<PAGE> 7
in furtherance thereof, the Purchaser represents and warrants to and
agrees with the Company as follows:
(i) The Purchaser has the financial ability to bear the
economic risk of his investment, has adequate means for providing
for his current needs and personal contingencies and has no need
for liquidity with respect to his investment in the Company; and
(ii) The Purchaser has such knowledge and experience in
financial and business matters as to be capable of evaluating the
merits and risks of the prospective investment.
5.2 Information Concerning the Company.
The Purchaser:
(a) Acknowledges that it has access to copies of (and
acknowledges that the Company has offered to provide, upon its request,
copies of) the most recent Annual Report on Form 10-K filed with the
Securities and Exchange Commission ("SEC") of Intelect Communications
Systems Limited, a company organized under the laws of Bermuda ("ICSL"),
all Forms 10-Q of ICSL and the 8-K's of ICSL and the Company filed
thereafter, the Proxy Statement for ICSL's 1997 Annual General Meeting
and for its Special Meeting of Shareholders on December 4, 1997, the
description of the Company's Common Shares set forth in the Company's
Registration Statement on Form 8-A together with and amendments thereto,
the Registration Statement of the Company on Form S- 4 as filed with the
SEC on October 30, 1997, any other registration statements, reports or
forms filed of the Company filed pursuant to the Securities Act of 1933
since December 4, 1997, and any other subsequently filed documents of
the Company or ICSL filed pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, each as filed with the SEC (the
"Public Documents"), and the Purchaser has carefully read the Public
Documents and understands and has evaluated the risks of a purchase of
the Securities and the considerations described in the Public Documents;
and has relied solely (except as indicated in subsections (b) and (c)
below) on the information contained in the Public Documents;
(b) Is familiar with the business and financial condition,
properties, operations, and prospects of the Company and ICSL, all as
generally described in the Public Documents; has been given the
opportunity to ask questions of, and receive answers from, the
appropriate officers of the Company concerning the terms and conditions
of the Offering and other matters pertaining to this investment and has
asked such questions as it desires to ask and all such questions have
been answered to the full satisfaction of the Purchaser; has been given
the opportunity to obtain such additional information (to the extent the
Company possesses such information or can acquire it without
unreasonable
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<PAGE> 8
effort or expense) necessary to verify the accuracy of the information
contained in the Public Documents in order for it to evaluate the merits
and risks of purchase of the Securities;
(c) Has not been furnished with any oral representation or
warranty in connection with the offering of the Securities by the
Company or any officer, employee, agent, affiliate or subsidiary, which
is not contained in this Agreement, and is relying solely on the
information contained in this Agreement and in the Public Documents;
(d) Understands that the purchase of the Securities involves
various risks including, but not limited to, those outlined in the
Public Documents and in this Agreement, and has determined that the
Securities are a suitable investment and that at this time it could bear
a complete loss of its investment;
(e) Is not relying on the Company with respect to the economic
considerations of the Purchaser related to this investment. The
Purchaser has relied on the advice of, or has consulted with, in regard
to the economic considerations related to this investment, only its own
advisors;
(f) The Purchaser, a limited liability company, is authorized
and qualified to become a stockholder in, and authorized to make its
capital contributions to, the Company, and the person signing this
Agreement on behalf of such entity has been duly authorized by such
entity to do so;
(g) Any information which the Purchaser has heretofore
represented or furnished to the Company with respect to its financial
position and business experience is correct and complete as of the date
of this Agreement and if there should be any material change in such
information it will immediately furnish such revised or corrected
information to the Company; and
(h) The Purchaser understands that, unless the Purchaser
notifies the Company in writing to the contrary before the Closing, all
the representations and warranties contained in this Agreement will be
deemed to have been reaffirmed and confirmed as of the Closing, taking
into account all information received by the Purchaser.
5.3 Restrictions on Transfer or Sale of the Securities:
(a) The Purchaser is acquiring the Securities solely for the
Purchaser's own beneficial account, for investment purposes, and not
with a view to, or for resale in connection with, any distribution of
the Securities. The Purchaser understands that the offer and sale of the
Securities has not been registered under the Securities Act or any state
securities laws by reason of specific exemptions under the provisions
thereof which depend in part upon the investment intent of the Purchaser
and of the other representations made
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<PAGE> 9
by the Purchaser in this Agreement. The Purchaser understands that the
Company is relying upon the representations, covenants and agreements
contained in this Agreement (and any supplemental information) for the
purpose of determining whether this transaction meets the requirements
for such exemptions.
(b) Without limiting the restrictions governing the transfer
of the Preferred Shares as set forth in the Article and in Article IX
hereof, the Purchaser understands that the Securities are restricted
securities under applicable federal securities laws and that the
Securities Act and the rules of the SEC provide in substance that the
Purchaser may dispose of the Securities only pursuant to an effective
registration statement under the Securities Act or an exemption
therefrom.
(c) The Purchaser agrees (i) that the Purchaser will not sell,
assign, pledge, give, transfer or otherwise dispose of the Preferred
Shares or any interest therein, or make any offer or attempt to do any
of the foregoing, either pursuant to Rule 144 of the Securities Act or
otherwise; (ii) that the Company and any transfer agent for the
Preferred Shares shall not be required to give effect to any purported
transfer of any of the Preferred Stock; and (iii) that a legend in
substantially the following form will be placed on the certificates
representing the Preferred Shares:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
TERMS OF A PURCHASE AGREEMENT BETWEEN THE HOLDER AND THE COMPANY
WHICH RESTRICT THE TRANSFER OF SUCH SHARES. FURTHER, THESE SHARES
HAVE BEEN TAKEN WITHOUT A VIEW TO THE DISTRIBUTION THEREOF WITHIN
THE MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF.
(d) The Purchaser agrees further: (i) that the Purchaser will
not sell, assign, pledge, give, transfer or otherwise dispose of the
Common Stock issued either upon conversion of the Preferred Shares or as
dividends on the Preferred Shares, or any interest therein, or make any
offer or attempt to do any of the foregoing; except pursuant to a
registration of the Common Stock under the Securities Act and all
applicable state securities laws or based on a written opinion of
counsel reasonably satisfactory to the Company to the effect that the
transaction is exempt from the registration provisions of the Securities
Act and all applicable state securities laws; (ii) that the Company and
any transfer agent for the Common Stock shall not be required to give
effect to any purported transfer of any of the Common Stock except upon
compliance with the foregoing restrictions; and (iii) that a legend in
substantially the following form will be placed on the certificates
representing the Common Stock:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN TAKEN
WITHOUT A VIEW TO THE DISTRIBUTION THEREOF WITHIN THE
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<PAGE> 10
MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN
ACCORDANCE WITH SUCH ACT AND THE RULES AND REGULATIONS THEREUNDER
AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THE
COMPANY WILL NOT TRANSFER SUCH SHARES EXCEPT UPON RECEIPT OF A
FAVORABLE OPINION OF ITS COUNSEL AND/OR EVIDENCE SATISFACTORY TO
THE COMPANY THAT THE REGISTRATION PROVISIONS OF SUCH ACT HAVE
BEEN COMPLIED WITH OR THAT SUCH REGISTRATION IS NOT REQUIRED AND
THAT SUCH TRANSFER WILL NOT VIOLATE ANY APPLICABLE STATE
SECURITIES LAWS.
(e) The Purchaser has not offered or sold any portion of the
Securities and has no present intention of dividing such Securities with
others or of reselling or otherwise disposing of any portion of such
Securities either currently or after the passage of a fixed or
determinable period of time or upon the occurrence or nonoccurrence of
any predetermined event or circumstance.
IX.
RELATED AGREEMENTS
9.1 Right of First Refusal. Subject to the existing right of first
refusal in favor of the holders of the 10% Cumulative Convertible Preferred
Stock of the Company, Series A (the "Series A Preferred"), the Company hereby
grants to Purchaser the right of first refusal to participate in any offering
of an equity interest, including common stock, preferred stock, warrants or
convertible debentures, to be offered by the Company or brought to the Company,
but excluding (i) underwritten public offerings of Common Stock, (ii) project
financings, (iii) bank financings, (iv) any capital stock of the Company issued
pursuant to warrants, conversion of the Series A Preferred, or other rights
issued prior to the date hereof, (v) the issuance, sale, exercise or conversion
or grant of options to purchase Common Stock pursuant to any of the Company's
employee stock option, compensation, bonus or incentive plans or otherwise, and
(vi) the issuance or sale of any equity or debt securities used for
acquisitions by the Company of operating assets or stock of entities to be
owned and operated by the Company or a subsidiary of the Company. In the event
that the Company offers, seeks to offer, or receives a proposal to offer, an
equity interest, including preferred stock, warrants, or convertible
debentures, the Company shall first offer the right to participate in such
offering to the Purchaser, subject to the rights of the holder of the Series A
Preferred. The Company shall deliver a true copy of such proposal, term sheet,
information memorandum or other offering description (the "Proposal") to the
Purchaser. The Purchaser shall have thirty (30) days thereafter to indicate
its intent to participate at the price and otherwise on the terms and
conditions contained in such Proposal by giving written notice to the Company
to such effect within said period and stating therein the quantity of
securities to be purchased. All other terms and conditions of Purchaser's
participation in such offering shall be
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on a commercially reasonable basis, and in compliance with all applicable laws
and regulations. Purchaser may conduct such due diligence as is reasonably
necessary and appropriate under the circumstances. If Purchaser fails to
exercise in full the right of first refusal within such thirty (30) day period,
then the Company shall have one hundred twenty (120) days thereafter to sell
the securities with respect to which Purchaser's rights were not exercised, at
a price and upon general terms no more favorable to the purchasers thereof than
specified in the Company's notice. In the event that the Company has not sold
the securities within such one hundred twenty (120) day period, the Company
shall not thereafter issue or sell any such securities without first offering
such securities to Purchaser in the manner provided above. The right of first
refusal granted under this Section shall terminate the date upon which
Purchaser ceases to own at least one-half (1/2) of the Preferred Shares and is
subject in all cases to the rights of the holders of the Series A Preferred
Shares.
9.2 Registration Rights. The Company hereby grants to Purchaser
registration rights for the Underlying Stock as set forth in the Registration
Rights Agreement, dated the date hereof among the Company and the Purchaser,
attached hereto as Exhibit B.
9.3 Certain Additional Restrictions on the Securities.
(a) The Purchaser agrees that the Purchaser will not sell,
assign, pledge, give, transfer, or otherwise dispose of the Preferred
Shares or any interest therein, or make any offer or attempt to do any
of the foregoing.
(b) The Purchaser further agrees that it will not, nor will it
permit any of its affiliates, directly or indirectly, without the prior
written consent of the Company duly authorized by a majority of its
Board of Directors, to:
(i) except for investment purposes only, acquire,
directly or indirectly, by purchase or otherwise, any securities
of the Company entitled to vote generally for the election of
directors or securities convertible into such securities (any
such securities, including the Common Stock, are hereinafter
sometimes referred to as the "Voting Securities");
(ii) "solicit" proxies with respect to Voting Securities
under any circumstances or become a "participant" in any
"election contest" relating to the election of directors of the
Company, as such terms are defined in Regulation 14A under the
1934 Act, as amended;
(iii) initiate, propose or otherwise solicit shareholders
for the approval of one or more shareholder proposals at any
time, or induce or attempt to induce any other person to initiate
any shareholder proposal; or
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(iv) except as contemplated by this Agreement,
take any action to acquire or affect control of the Company or
to encourage or assist any other person to do so.
X.
MISCELLANEOUS
10.1 Interpretation. Nothing in this Agreement may be read or
construed to violate the rules of the SEC or any market in which the Common
Stock or any other securities of the Company are traded, nor violate the
maintenance criteria of the NASDAQ Rule 4460(i)(1)(D)(iii), as applied to all
shares of the Company's Common Stock, preferred stock, and the Preferred Shares
deemed to be aggregated under said Rule, and the parties hereto agree that in
the event such violation would otherwise occur, this Agreement shall not be
enforceable against either party to the extent of such occurrence, and further,
the parties agree that in the event such violation would otherwise occur, they
shall amend this Agreement and the Certificate of Designations to reflect such
adjustment to price or quantity as may be necessary to avoid the occurrence of
such violation.
10.2 Placement Fee. For its services in connection with the Offering,
the Company is paying a placement fee to Lifeline Industries, Inc. ("Lifeline")
in the amount of 2.5% of the aggregate dollar amount of the Preferred Shares
sold under this Offering all of which is payable to Lifeline in the form of
cash from the Offering.
10.3 Notices. Except as otherwise specified herein, all notices,
requests, demands or other communications to or upon the respective parties
hereto shall be deemed to have been duly given or made when delivered to the
party to which such notice, request, demand or other communication is required
or permitted to be given or made under this Agreement, addressed to such party
at its address set forth below or at such other address as either of the
parties hereby may hereafter notify the other in writing.
To Company: INTELECT COMMUNICATIONS, INC.
1100 Executive Drive
Richardson, Texas 75081
Telephone: 972-367-2100
Telecopy: 972-367-2271
Attention: Herman Frietsch, Chairman and CEO
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with a copy to: Philip P. Sudan, Jr.
Ryan & Sudan, L.L.P.
909 Fannin, 39th Floor
Houston, Texas 77010
Telephone: 713-652-0501
Telecopy: 713-652-0503
To Purchaser: 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
Attn: Mr. John Burke
Telephone: 732-747-7716
Telecopy: 732-747-3687
10.4 Benefit of Agreement. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided, however, the Company may not assign or
transfer any of its interest hereunder without the prior written consent of the
Purchaser and provided further that the Purchaser may not assign this Agreement
or its interest hereunder without the prior written consent of the Company,
which consent of either party shall not be withheld unreasonably.
10.5 Survival of Agreements. All representations and warranties of
the Company and Purchaser herein shall survive the effective date of this
Agreement.
10.6 Invalidity. In the event that any one or more of the provisions
contained in this Agreement shall, for any reason, be held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement.
10.7 Amendment or Waiver. This Agreement may not be amended, changed,
waived, discharged or terminated without the written consent of the Company and
the Purchaser.
10.8 No Waiver; Remedies Cumulative. No failure or delay on the part
of the Company or the Purchaser in exercising any right, power or privilege
hereunder and no course of dealing between the Company and the Purchaser shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder. The
rights and remedies herein expressly provided are cumulative and not exclusive
of any rights or remedies which the Company or the Purchaser would otherwise
have.
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10.9 Headings. The descriptive headings of this Agreement are
inserted for convenience only and shall not in any way affect the meaning or
construction of any provision of this Agreement.
10.10 Counterparts. This Agreement may be executed in any number of
counterparts and by the different Parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Company and the Purchaser.
10.11 Governing Law. THIS AGREEMENT, AND THE APPLICATION OR
INTERPRETATION THEREOF, SHALL BE GOVERNED EXCLUSIVELY BY ITS TERMS AND BY THE
LOCAL, INTERNAL LAW OF THE STATE OF TEXAS, U.S.A., EXCEPT TO THE EXTENT THE
CONFLICTS OF LAWS RULES OF THE STATE OF TEXAS WOULD REQUIRE THE APPLICATION OF
THE LAW OF ANOTHER JURISDICTION IN WHICH CASE THE LAWS OF THE STATE OF TEXAS
SHALL NONETHELESS APPLY. THE PARTIES CONSENT TO JURISDICTION IN THE STATE AND
FEDERAL COURTS LOCATED IN THE COUNTY OF HARRIS, STATE OF TEXAS, U.S.A.
10.12 Entire Agreement. This Agreement, including the Exhibits
attached hereto and the documents delivered pursuant hereto, constitutes the
entire agreement between the parties with respect to the subject matter of this
Agreement and supersedes all previous communications, representations,
understandings, and agreements, either oral or written, between the parties
with respect to the subject matter.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
duly executed as of the date first above written.
INTELECT COMMUNICATIONS, INC. NAVESINK EQUITY DERIVATIVE
FUND LDC
By: RUMSON CAPITAL, L.L.C.
By: /s/ HERMAN M. FREITSCH By: /s/ JOHN BURKE
----------------------------- ----------------------------
Herman M. Frietsch, Chairman John Burke, Managing Member
and Chief Executive Officer
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<PAGE> 1
EXHIBIT 10.76
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Registration Rights
Agreement") is made as of December 16, 1997, by and between Intelect
Communications, Inc., a Delaware corporation (the"Company"), and Navesink
Equity Derivative Fund LDC, a Cayman Island limited duration company
("Purchaser").
WHEREAS, on the date hereof, Purchaser acquired from the Company
914,286 shares of the Company's $4.375 10% Cumulative Convertible Preferred
Stock, Series B, $.01 par value (the "Preferred Shares"), pursuant to that
certain Purchase Agreement dated of even date herewith by and between the
parties (the "Purchase Agreement");
WHEREAS, the Company wishes to grant Purchaser certain registration
rights in respect of the shares of the Company's Common Stock, $.01 par value
issuable upon conversion of or as dividends on the Preferred Stock (the
"Shares"), as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
set forth below:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Company's Common Stock, $.01 par value.
"Company" shall have the meaning given in the Preamble.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Indemnified Party" shall have the meaning given in Section 2.5.3.
"Indemnifying Party" shall have the meaning given in Section 2.5.3.
"Preferred Shares" shall have the meaning given in the first recital.
"Purchase Agreement" shall have the meaning set forth in the first
recital.
"Purchaser" shall have the meaning given in the Preamble.
The terms "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering by the
Commission of the effectiveness of such registration statement.
<PAGE> 2
"Registration Expenses" shall mean all expenses, other than Selling
Expenses (as defined below), incurred by the Company in complying with this
Registration Rights Agreement, including, without limitation, all registration,
qualification and filing fees, exchange listing fees, printing expenses, escrow
fees, fees and disbursements of counsel for the Company, blue sky fees and
expenses, and the expense of any special audits incident to or required by any
such registration (but excluding the compensation of regular employees of the
Company which shall be paid in any event by the Company).
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the holders of the Registrable Securities and, except as set forth above, all
fees and disbursements of counsel for such holders.
"Selling Security Holder" shall have the meaning given in Section
2.4.4.
"Shares" shall mean all Common Stock issued upon conversion of the
Preferred Stock and any Common Stock issued as dividends on the Preferred
Stock.
"Underwritten Public Offering" shall mean a public offering in which
the Common Stock is offered and sold on a firm commitment basis through one or
more underwriters, all pursuant to (i) an effective registration statement
under the Securities Act and (ii) an underwriting agreement between the Company
and such underwriters.
ARTICLE II
REGISTRATION RIGHTS
2.1 Demand Registration.
2.1.1 Demand Rights Only. The Purchaser shall be entitled to
a one time written demand of the Company to file with the Commission within 60
days after such demand is made a registration statement on Form S-1, Form S-2,
or Form S-3, as appropriate (the "Registration Statement") providing for the
resale of those Shares which have been issued upon conversion of the Preferred
Shares, but in no event can such demand be made until the first to occur of (a)
90 days following the closing (including the closing of any over-allotment
options exercised by the underwriters) of a firm commitment underwritten public
offering by the Company of its Common Stock or (b) May 31, 1998.
Notwithstanding the foregoing, no such demand shall be made until 30 days after
the Purchaser shall have first exercised its conversion rights of such
Preferred Shares under the Purchase Agreement. The Company will use its
reasonable best efforts to cause such Registration Statement to be declared
effective and will take all reasonable steps necessary to keep the Registration
Statement effective until the earlier of (i) two years after the date hereof,
(ii) until the Shares registered thereby are transferrable pursuant to Rule 144
under the Securities Act, or (iii) until all of the Shares registered thereby
have been sold under such Registration Statement.
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<PAGE> 3
2.1.2 Limitations and Restrictions.
2.1.2.1 The Company may suspend or restrict any
transfer of Shares under the Registration Statement if it determines in good
faith that it is required to amend the Registration Statement in order to
comply with the Securities Act and in such case, if requested, the Purchaser
will immediately cease making offers of such Shares and promptly return all
prospectuses to the Company. In such a case, the Company will take all
reasonable steps to amend such Registration Statement and will promptly provide
the Purchaser with revised prospectuses and, following receipt of the revised
prospectuses, the Purchaser shall be free to resume making offers of the
Shares.
2.1.2.2 The Company shall be entitled to require
that the Purchaser refrain from making any public sales or distributions of the
Shares if the board of directors of the Company reasonably determines that such
sales or distributions would interfere with any proposed or pending material
transaction involving the Company or any of its subsidiaries or would require
premature disclosure thereof or would require the Company to disclose
information that the Company has not otherwise made public and the Company
reasonably determines that is in the best interests of the Company to not
disclose at such time, or the Company is engaged in any other activity which
the Board of Directors of the Company determines in good faith may be adversely
affected by the required registration or the registration and distribution of
the Shares, provided in no event shall any requirement that the Purchaser
refrain from effecting sales or distributions of the Shares extend for more
than 180 days.
2.1.2.3 Notwithstanding the provisions of this
Section 2.1, the one-time demand registration rights provided in Section 2.1.1
shall be subject to the following additional limitations: (a) the Company shall
not be obligated to file a Form S-3 or Form S-2 Registration Statement on such
Form if it does not meet the requirements of such Form, and if the Company is
required to file a Form S-1, it shall not be obligated to file the Form S-1
until it shall have prepared current financial statements as required by Form
S-1, or (b) if, upon receipt of any request for registration of Shares pursuant
to Section 2.1.1, the Company is then engaged by a reputable and nationally or
regionally recognized investment banking firm regarding a good faith proposed
Underwritten Public Offering (other than for the underwritten offering
referred to in Section 2.1.1 hereof), then the Company shall give notice of
such negotiations to the Purchaser within 15 days of the date upon which the
Company receives such request and the Company shall not, for 90 days after
giving such notice, be required to undertake a required registration of the
Shares pursuant to Section 2.1.1 in response to the Purchaser's request;
provided, however, that if such registration statement of such proposed
Underwritten Public Offering is not filed within 90 days after the Company
gives such notice to the Purchaser, the Company shall respond to the
Purchaser's request for registration of the Shares and, unless otherwise
required by the provisions of this Section 2.1, register such Shares, no later
than 30 days after the expiration of such 90 days period. In no event shall
the Company be obligated to include the Shares in any registration statement or
notification under Section 2.1.1 if: (i) in the written opinion of the
underwriter, the inclusion of the Shares in such registration statement or
notification would be materially detrimental to the proposed offering of debt
or equity securities pursuant to which the Company gave notice to the Purchaser
under this paragraph; or (ii) in the opinion of counsel for the Company that
the Shares are not considered "restricted securities" within the meaning of
Rule 144 promulgated under the Securities Act and that registration under the
Securities Act is therefore not required.
2.1.2.4 Notwithstanding anything herein to the
contrary, the Company shall not be required to effect more than one
registration statement pursuant to this Section 2.1.
2.1.3 Additional Covenants. In connection with the filing of
a Registration Statement, notification, or post-effective amendment under this
section, the Company covenants and agrees:
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<PAGE> 4
2.1.3.1 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 Purchaser and any sales
commissions on Shares offered and sold; and
2.1.3.2 to take all necessary action which may
reasonably be required in qualifying or registering the Shares included in a
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
the Purchaser; 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.
2.2 Expenses of Registration. All Registration Expenses shall be
borne by the Company. Unless otherwise stated herein, all Selling Expenses
relating to the Shares registered on behalf of the Purchases shall be borne by
the Purchaser.
2.3 Registration Procedures. In the case of registration,
qualification or compliance effected by the Company pursuant to this
Registration Rights Agreement, the Company will keep the Purchaser advised as
to the initiation of the registration, qualification and compliance and as to
the completion thereof. At its expense, the Company will furnish to the
Purchaser such number of copies of the prospectus and such other documents as
the Purchaser may reasonably request in order to facilitate the public sale of
the Shares, and promptly furnish to the Purchaser notice of any stop- order or
similar notice issued by the Commission or any state agency charged with the
regulation of securities, and notice of any Nasdaq or securities exchange
listing. Further, the Company shall use its best efforts to cause the Shares
to be listed on the Nasdaq Stock Market or a securities exchange on which the
Common Stock is approved for listing.
2.4 Indemnification.
2.4.1 To the extent permitted by law, the Company will
indemnify the Purchaser, each of its officers and directors and partners, and
each person controlling the Purchaser within the meaning of Section 15 of the
Securities Act, with respect to which registration, qualification or compliance
has been effected pursuant to this Agreement, and each underwriter, if any, and
each person who controls any underwriter within the meaning of Section 15 of
the Securities Act, against all expenses, claims, losses, damages or
liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, to the
extent such expenses, claims, losses, damages or liabilities arise out of or
are based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other similar document, or any amendment or supplement thereto, incident to any
such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or any violation by the
Company of the Securities Act or any rule or regulation promulgated under the
Securities Act applicable to the Company in connection with any such
registration, qualification or compliance, and the Company will reimburse the
Purchaser, each of its officers and directors and partners, and each person
controlling the Purchaser, each such underwriter and each person who controls
any such underwriter, for any legal and any other expenses reasonably incurred
in connection with
4
<PAGE> 5
investigating, preparing or defending any such claim, loss, damage, liability
or action; provided, however, that the indemnity contained herein shall not
apply to amounts paid in settlement of any claim, loss, damage, liability or
expense if settlement is effected without the consent of the Company (which
consent shall not unreasonably be withheld); provided, further, that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by the
Purchaser, such controlling person or such underwriter specifically for use
therein; provided, however, that the indemnity contained herein shall not apply
to amounts paid in settlement of any claim, loss, damage, liability, or expense
if settlement is effected without the consent of the Purchaser (which consent
shall not be unreasonably withheld). Notwithstanding the foregoing, insofar as
the foregoing indemnity relates to any such untrue statement (or alleged untrue
statement) or omission (or alleged omission) made in the preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the
Commission at the time the registration statement becomes effective or in the
final prospectus filed with the Commission pursuant to the applicable rules of
the Commission or in any supplement or addendum thereto, the indemnity
agreement herein shall not inure to the benefit of any underwriter if a copy of
the final prospectus filed pursuant to such rules, together with all
supplements and addenda thereto, was not furnished to the person or entity
asserting the loss, liability, claim or damage at or prior to the time such
furnishing is required by the Securities Act.
2.4.2 To the extent permitted by law, the Purchaser will, if
securities held by the Purchaser are included in the securities as to which
such registration, qualification or compliance is being effected pursuant to
terms hereof, indemnify the Company, each of its directors and officers, each
underwriter, if any, of the Company's securities covered by such a registration
statement, each person who controls the Company or such underwriter within the
meaning of Section 15 of the Securities Act, and each other person selling the
Company's securities covered by such registration statement, each of such
person's officers and directors and each person controlling such persons within
the meaning of Section 15 of the Securities Act, against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus, offering circular or
other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Purchaser of any rule or
regulation promulgated under the Securities Act applicable to the Purchaser and
relating to action or inaction required of the Purchaser in connection with any
such registration, qualification or compliance, and will reimburse the Company,
such other persons, such directors, officers, persons, underwriters or control
persons for any legal or other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action,
in each case to the extent, but only to the extent, that such untrue statement
(or alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by the Purchaser specifically for use therein; provided, however, that
the indemnity contained herein shall not apply to amounts paid in settlement of
any claim, loss, damage, liability or expense if settlement is effected without
the consent of such holder of Registrable Securities (which consent shall not
be unreasonably withheld). Notwithstanding the foregoing, the liability of the
Purchaser under this Section 2.4.2 shall be limited in an amount equal to the
net proceeds from the sale of the Shares sold by the Purchaser, unless such
liability arises out of or is based on willful conduct by the Purchaser. In
addition, insofar as the foregoing indemnity relates to any such untrue
statement (or alleged untrue statement) or omission (or alleged omission) made
in the preliminary prospectus but eliminated or remedied in the amended
prospectus on file with the Commission at the time the registration statement
becomes
5
<PAGE> 6
effective or in the final prospectus filed pursuant to applicable rules of the
Commission or in any supplement or addendum thereto, the indemnity agreement
herein shall not inure to the benefit of the Company or any underwriter, if a
copy of the final prospectus filed pursuant to such rules, together with all
supplements and addenda thereto, was not furnished to the person or entity
asserting the loss, liability, claim or damage at or prior to the time such
furnishing is required by the Securities Act.
2.4.3 Notwithstanding the foregoing paragraphs 2.4.1 and
2.4.2, each party entitled to indemnification under this Section (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such claim
or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement unless the failure
to give such notice is materially prejudicial to an Indemnifying Party's
ability to defend such action and provided further, that the Indemnifying Party
shall not assume the defense for matters as to which there is a conflict of
interest or as to which the Indemnifying Party is asserting separate or
different defenses, which defenses are inconsistent with the defenses of the
Indemnified Party. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. No Indemnified Party shall consent to entry of any judgment or
enter into any settlement without the consent of each Indemnifying Party.
2.4.4 If the indemnification provided for in this Section is
unavailable to the Indemnified Party in respect of any losses, claims, damages
or liabilities referred to therein, then the Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages
or liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and all shareholders offering
securities in the offering (the "Selling Security Holders") on the other from
the offering of the Company's securities, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and the
Selling Security Holders on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Selling Security Holders on the
other shall be the net proceeds from the offering (before deducting expenses)
received by the Company on the one hand and the Selling Security Holders on the
other. The relative fault of the Company on the one hand and the Selling
Security Holders on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Selling Security Holders and the parties'
relevant intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Selling Security
Holders agree that it would not be just and equitable if contribution pursuant
to this Section were based solely upon the number of entities from whom
contribution was requested or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section.
The amount paid or payable by an Indemnified Party as a result of the losses,
claims,
6
<PAGE> 7
damages and liabilities referred to above in this Section shall be deemed to
include any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any such action or claim,
subject to the provisions hereof. Notwithstanding the provisions of this
Section, no Selling Shareholder shall be required to contribute any amount or
make any other payments under this Agreement which in the aggregate exceed the
proceeds received by such Selling Shareholder. No person guilty of fraudulent
misrepresentation (within the meaning of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation.
2.5 Certain Information. The Purchaser agrees, with respect to any
Shares included in any registration, to furnish to the Company such information
regarding the Purchaser, the Shares and the distribution proposed by the
Purchaser as the Company may reasonably request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to herein.
2.6 Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of Restricted Securities (used herein as defined in Rule 144 under the
Securities Act) to the public without registration, the Company agrees to use
its best lawful efforts to:
2.6.1 Make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times during which the Company is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act");
2.6.2 File with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Exchange Act (at all times during which the Company is subject to such
reporting requirements); and
2.6.3 So long as the Purchaser owns any Shares constituting
Restricted Securities (as defined in Rule 144 promulgated under the Securities
Act), to furnish to the Purchaser forthwith upon request a written statement by
the Company as to its compliance with the reporting requirements of said Rule
144 and with regard to the Securities Act and the Exchange Act (at all times
during which the Company is subject to such reporting requirements), a copy of
the most recent annual or quarterly report of the Company, and such other
reports and documents of the Company and other information in the possession of
or reasonably obtainable by the Company as the Purchaser may reasonably request
in availing itself of any rule or regulation of the Commission allowing the
Purchaser to sell any such securities without registration.
2.7 Transferability. The rights conferred by this Agreement shall be
freely transferable to a recipient of Shares.
2.8 Governing Law. This Registration Rights Agreement shall be
governed in all respects by the laws of the State of Texas.
2.9 Entire Agreement; Amendment. This Registration Rights Agreement
constitutes the full and entire understanding and agreement between the parties
with regard to the subject hereof. This Registration Rights Agreement, or any
provision hereof, may be amended, waived, discharged or terminated upon the
written consent of the Company and the Purchaser.
7
<PAGE> 8
2.10 Notices, etc. Except as otherwise specified herein, all notices,
requests, demands or other communications to or upon the respective parties
hereto shall be deemed to have been duly given or made when delivered or within
three (3) days after having been sent via U.S. certified or registered mail,
postage prepaid, return receipt requested, addressed to the party to which such
notice, request, demand or other communication is required or permitted to be
given or made under this Registration Rights Agreement, as set forth below or
at such other address as either of the parties hereby may hereafter notify the
other in writing in accordance with the provision hereof.
To Company: INTELECT COMMUNICATIONS, INC.
1100 Executive Drive
Richardson, Texas 75081
Telephone: 972-367-2100
Telecopy: 972-367-2271
Attention: Herman M. Frietsch, Chairman and CEO
with a copy to: Philip P. Sudan, Jr.
Ryan & Sudan, L.L.P.
909 Fannin, 39th Floor
Houston, Texas 77010
Telephone: 713-652-0501
Telecopy: 713-652-0503
To Purchaser: NAVESINK EQUITY DERIVATIVE FUND LDC
c/o RUMSON CAPITAL, L.L.C.
The Galleria Building One
3rd Floor
2 Bridge Ave.
Red Bank, New Jersey 07001-1106
Telephone: (732) 747-7716
Telecopy: (732) 747-3687
Attn: Mr. John Burke
2.11 Delays or Omissions. Except as expressly provided herein, no
delay or omission to exercise any right, power or remedy accruing to any party
to this Registration Rights Agreement shall impair any such right, power or
remedy of such party nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach
or default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Registration Rights Agreement, or any waiver on the part of any party of any
provisions or conditions of this Registration Rights Agreement, must be in
writing and shall be effective only to the extent specifically set forth in
such writing. All remedies, either under this Registration Rights Agreement or
by law or otherwise afforded to any party to this Registration Rights
Agreement, shall be cumulative and not alternative.
8
<PAGE> 9
2.12 Counterparts. This Registration Rights Agreement may be executed
in any number of counterparts, each of which shall be enforceable against the
parties actually executing such counterparts, and all of which together shall
constitute one instrument.
2.13 Severability. In the event that any provision of this
Registration Rights Agreement becomes or is declared by a court of competent
jurisdiction to be illegal, unenforceable or void, this Registration Rights
Agreement shall continue in full force and effect without said provision.
2.14 Titles and Subtitles. The titles and subtitles used in this
Registration Rights Agreement are used for convenience only and are not
considered in construing or interpreting this Registration Rights Agreement.
9
<PAGE> 10
THE COMPANY'S SIGNATURE PAGE
IN WITNESS WHEREOF, the Company has executed this agreement effective
upon the date first set forth above.
INTELECT COMMUNICATIONS, INC.
/s/ HERMAN M. FRIETSCH
-------------------------------------------
Herman M. Frietsch
Chairman and Chief Executive Officer
10
<PAGE> 11
THE PURCHASER'S SIGNATURE PAGE
IN WITNESS WHEREOF, the Purchaser has signed this Agreement as of the
date first written above.
NAVESINK EQUITY DERIVATIVE
FUND LDC
By: RUMSON CAPITAL, L.L.C.
By: /s/ JOHN BURKE
-----------------------------------
John Burke, Managing Member
11
<PAGE> 1
EXHIBIT 10.77
INTELECT NETWORK TECHNOLOGIES COMPANY
SALES REPRESENTATIVE AGREEMENT
This Agreement is made as of January 27, 1998, by and between Intelect Network
Technologies Company, a Nevada corporation, (hereinafter referred to as
"INTELECT") and Amerix Electronics, Inc. (hereinafter referred to as
"REPRESENTATIVE").
INTELECT and REPRESENTATIVE agree as follows:
1. DEFINITIONS
In this Agreement, unless the context otherwise requires, each of the
terms set forth in this clause shall have the meaning indicated:
1.1 PRODUCTS
All products manufactured by INTELECT or products that
INTELECT sells via original equipment manufacturer (OEM)
arrangements with other manufacturers.
1.2 TERRITORY
Republic of Korea.
2. GRANT OF TERRITORY RIGHT
INTELECT hereby grants to REPRESENTATIVE the exclusive right to market
and promote sales of Products of INTELECT in the Territory.
REPRESENTATIVE hereby accepts the right to market Products and agrees
to make all sales in accordance with this Agreement.
Nothing in this Agreement shall authorize REPRESENTATIVE to sell
Products in a territory not listed in the section titled Territory
above except as specified in this section, Grant of Territory Right.
Any sales activity reported to INTELECT outside REPRESENTATIVE's
Territory will be credited to the REPRESENTATIVE of record in the
territory. If no REPRESENTATIVE is assigned outside REPRESENTATIVE's
Territory, then written approval from INTELECT must be obtained by
REPRESENTATIVE to receive credit for the sale.
Nothing in this Agreement shall authorize REPRESENTATIVE to sell
Products to a country for which an export license will not be issued
by the United States Government.
3. TERM OF AGREEMENT
Except as otherwise herein provided, this Agreement shall begin on the
date stated above and shall continue in force for one year from that
date. This Agreement shall be automatically renewed for one-year
periods unless written notice of termination is given by either party
thirty (30) days prior to the termination of the Agreement. Any
ongoing project at the time of termination will be completed and not
terminated.
<PAGE> 2
4. TERMINATION
In addition to the termination specified in the section titled Term of
Agreement, either party may terminate the Agreement by sending written
notice to the other party ninety (90) days prior to the proposed date
of termination. Any ongoing project at the time of termination will
be completed and not terminated.
Should the REPRESENTATIVE or INTELECT fail to comply with the terms
and conditions of this Agreement, either party may terminate this
Agreement upon twenty-four (24) hour written notice of its intent to
do so.
5. RESPONSIBILITY OF THE REPRESENTATIVE
5.1 REPRESENTATIVE agrees to market, sell and otherwise promote
INTELECT's Products in the Territory. REPRESENTATIVE agrees
that during the period of this Agreement, it will not market,
sell or promote products of any other manufacturer that are
competitive with INTELECT's. REPRESENTATIVE agrees that
during the period of this Agreement, REPRESENTATIVE shall
provide appropriate engineering support, engineering and
installation services, and other services as required by its
customers and as is common in the trade.
5.2 REPRESENTATIVE will meet with a representative from INTELECT,
at least one time in each year that the contract is in effect,
to discuss status of sales to-date and future sales forecasts
as well as analyze and determine actions, if any, in response
to previously agreed-to metrics to ascertain the success of
the partnership in meeting objectives.
5.3 REPRESENTATIVE agrees that during the period of this
Agreement, it will not design and/or manufacture equipment
competitive with INTELECT's.
5.4 REPRESENTATIVE agrees to abide strictly by the performance,
price and delivery quotations of INTELECT and will not modify
those quotations in any way.
6. RESPONSIBILITY OF INTELECT
6.1 INTELECT's sales force will provide reasonable support for
joint sales calls upon request of REPRESENTATIVE.
6.2 INTELECT shall provide a timely response to REPRESENTATIVE's
requests for quotations and all prices shall be confirmed in
writing by INTELECT. INTELECT agrees to follow up on all
reported customer problems in a timely manner.
6.3 In full and final payment of all commissions due to
REPRESENTATIVE hereunder, INTELECT is hereby paying in advance
to REPRESENTATIVE a 2.65% commission in anticipation of
$30,000,000 of sales generated by REPRESENTATIVE and certain
affiliated entities (as hereinafter described) on Products
sold after January 1, 1998, and such commission is being paid
in the form of the issuance to REPRESENTATIVE of 150,000
shares of Common Stock, $.01 par value, of Intelect
Communications, Inc. ("ICI"), the parent corporation of
INTELECT, provided that the commission rate on the initial
$50,000 of sales of such Products by REPRESENTATIVE shall be
3%. The parties agree that the determination of the
$30,000,000 of sales of Products on which such commission is
based shall be made by taking into account sales of Products
by INTELECT to REPRESENTATIVE or its affiliated entities, or
sales of Products by a
<PAGE> 3
Joint Venture to be formed by INTELECT and Opicom Company,
Ltd. REPRESENTATIVE, for and on behalf of itself, its
affiliated entities, its parent company, and its successors
and assigns, is hereby accepting such shares of ICI as full
and final payment of all compensation or commissions to be
paid to REPRESENTATIVE for any sales made by REPRESENTATIVE of
the Products after January 1, 1998, and hereby acknowledges
that as of the date hereof, REPRESENTATIVE has sold at least
$50,000 of Products.
Any commissions or other compensation to be paid to
REPRESENTATIVE at any time in the future, including without
limitation, for sales of Products in excess of the $30,000,000
of anticipated sales as described herein, shall be mutually
agreed to by a separate written agreement or an amendment
hereto executed by both INTELECT and REPRESENTATIVE.
6.4 INTELECT will inform REPRESENTATIVE in writing via registered
mail of any price changes sixty (60) days prior to the
effectivity date of the change.
7. RESPONSIBILITY OF THE REPRESENTATIVE AND INTELECT
Each party may have heretofore received or will in the future receive
from time to time confidential and proprietary information and data
concerning the Products, research and engineering, developmental
products and projects, business plans and operations of or belonging
to the other party or its associated companies (herein collectively
referred to as "Confidential Information"). Each party agrees to
treat, and to cause its officers and its employees to treat, all such
Confidential Information of the other party as confidential property
and neither divulge it to others at any time, nor use it in any
purpose other than performing its obligations under this Agreement,
except with the prior written authorization of the disclosing party
and then only in a manner and to the extent authorized. Each party's
obligation hereunder shall continue after the termination or
expiration of this Agreement, and at the termination of this
Agreement, or any time that the disclosing party so requests, the
other party shall deliver to the disclosing party all notes,
memoranda, records, drawings or other documents and other information
or materials (including all copies and reproductions thereof)
pertaining to the Confidential Information.
8. STATUS OF BOTH PARTIES
REPRESENTATIVE shall be in the position of an independent contractor
to INTELECT with rights and responsibilities for developing sales
prospects and closing sales contracts in the Territory. Employees of
REPRESENTATIVE shall not be deemed employees of INTELECT. This is not
an agency agreement between INTELECT and REPRESENTATIVE.
REPRESENTATIVE is not empowered to act for INTELECT in any manner that
would commit INTELECT to deliver any Product, to perform any act, or
to do any thing.
9. TRADEMARKS, TRADE NAMES, ETC.
All INTELECT trademarks, trade names, logos, etc., shall remain the
property of INTELECT. However, REPRESENTATIVE shall have the right,
limited to its REPRESENTATIVE capacity, to use the trademarks, trade
names, logos, etc. of INTELECT during the term of this Agreement.
10. WARRANTY
10.1 INTELECT warrants to the end user customer that the Products
will be free from defects in material and workmanship for a
period of 18 months from the date of shipment of the Product
or one (1) year from the date of installation, which ever
comes first.
<PAGE> 4
10.2 The obligation of INTELECT under this warranty is limited to
the repair and/or replacement of any part or parts of the
Products found defective, provided that such defect shall have
been found within the warranty period of the respective
Products and INTELECT shall have been advised of such defect
within 30 days of the date when said defect is found.
Warranty repair/replacement will be performed F.O.B.
INTELECT's factory.
10.3 IN NO EVENT SHALL REPRESENTATIVE OR END USER CUSTOMER BE
ENTITLED TO ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES. ALL
WARRANTIES EXPRESSED, IMPLIED OR STATUTORY, INCLUDING IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE OR USE, ARE HEREBY EXCLUDED AND DISCLAIMED.
11. ASSIGNMENT
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their successors and assigns, provided,
however, that the rights or obligations of REPRESENTATIVE hereunder
shall not be assigned without the written consent of INTELECT.
12. AMENDMENTS TO AGREEMENT
INTELECT reserves the right to amend this Agreement by sending written
notice to REPRESENTATIVE as specified in section titled Notice, thirty
(30) days in advance of effective date of such amendments.
13. NOTICE
Except as otherwise provided in this Agreement, all notices required
or permitted to be given hereunder shall be in writing, by mail or
facsimile transmission, and shall be valid and sufficient upon receipt
by the other party, addressed as follows:
If to INTELECT: Willard F. Barnett
Sr. Vice President, Sales and Marketing
Intelect Network Technologies Company
1100 Executive Drive
Richardson, Texas 75081
Telephone: 972-367-2100
Fax: 972-367-2270
If to REPRESENTATIVE: Amerix Electronics, Inc.
431 E. Grant Avenue
El Segundo, California 90245
Attention: Tehan Oh
<PAGE> 5
14. Legal Interpretation
This Agreement will be governed by the laws of the State of Texas.
INTELECT: REPRESENTATIVE:
Intelect Network Technologies Company Amerix Electronics, Inc.
By: /s/ Willard F. Barnett By: /s/ Tehan Oh
------------------------------------------- ----------------------
Willard F. Barnett Tehan Oh
Senior Vice President, Sales and Marketing President
Date: Date:
----------------------------------------- --------------------
<PAGE> 1
Exhibit 10.78
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT is entered into this 20th day of February,
1998, by and between AMERIX ELECTRONICS, INC. ("Amerix") and INTELECT
COMMUNICATIONS, INC., a Delaware corporation (the "Company").
WHEREAS, Intelect Communications Systems Limited, a Bermuda company
and the predecessor of the Company, issued to Amerix that certain Warrant dated
June 19, 1997 (the "Warrant") whereby Amerix was granted the right to purchase,
in accordance with the terms of such Warrant, up to 270,000 shares of ICSL's
Common Stock;
WHEREAS, the Company assumed the obligations of ICSL under the Warrant
pursuant to the terms of that certain Agreement and Plan of Merger dated as of
October 29, 1997 by and among the Company, ICSL and Intelect Merger Co.;
WHEREAS, Amerix has agreed to cancel the Warrant as of September 30,
1997, in exchange for a new Warrant (the "Replacement Warrant") to purchase
40,500 shares of the Company's Common Stock, which 40,500 shares represents all
of the shares of the Company's Common Stock earned by Amerix as of September
30, 1997 under the terms of the Warrant, and in further exchange of the Company
agreeing to revise the terms for the payment of certain receivables owing to
the Company as set forth herein.
NOW, THEREFORE, for and in consideration of the Company agreeing to
revise the terms for the payment of certain receivables owing by Amerix to the
Company as set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Amerix hereby surrenders all right, title, and interest in and
to the Warrant, together with all executory rights to purchase the Company's
Common Stock and any and all other rights arising under the Warrant, including
without limitation, rights to purchase any shares of the Company's Common Stock
for amounts earned pursuant to the terms of the Warrant from and after
September 30, 1997, and Amerix is hereby delivering to the Company such Warrant
marked "Cancelled." The Company is delivering to Amerix, in complete and full
replacement of the Warrant, the Replacement Warrant, a copy of which is
attached hereto as Exhibit "A" and incorporated herein by reference, pursuant
to which the Company is granting to Amerix the right to purchase 40,500 shares
of the Company's Common Stock at an exercise price of $3.6313 per share.
2. The Company has agreed, and does hereby agree, that it will
accept payment of receivables owing to the Company by Amerix on the books of
the Company as of January 1, 1998 in accordance with the following payment
schedule, and Amerix and the Company agree to the following payment schedule
for certain of such receivables regardless of any changes in
<PAGE> 2
Amerix's installation schedules or receipts from their customers in Korea:
<TABLE>
<S> <C>
January 16, 1998 - $450,000
January 30, 1998 - $800,000
February 6, 1998 - $1,000,000
February 13, 1998 - $1,000,000
</TABLE>
The balance of all receivables after fulfillment of the above payment
schedule shall be paid in accordance with a payment schedule to be mutually
agreed to by the Company and Amerix.
3. This Agreement shall be governed by the laws of the State of
Texas. Any suit, action or proceeding arising out of the transactions related
to this Agreement must be brought in the courts of the State of Texas, Harris
County, or in the United States courts located in the State of Texas, Harris
County.
Executed in multiple counterparts as of the first date written above.
INTELECT COMMUNICATIONS, INC.
By: /s/ Edwin Ducayet
Its: Vice President
AMERIX ELECTRONICS, INC.
By: /s/ Tehan Oh
Its: President
<PAGE> 1
Exhibit 10.79
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ARE
"RESTRICTED" SECURITIES" WITHIN THE MEANING OF RULE 144 PROMULGATED UNDER THE
SECURITIES ACT. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT
BE SOLD OR TRANSFERRED WITHOUT COMPLYING WITH RULE 144 IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION OR OTHER COMPLIANCE UNDER THE SECURITIES ACT.
WARRANT TO PURCHASE
40,500 Shares
INTELECT COMMUNICATIONS, INC.
(a Delaware corporation)
WARRANT FOR THE PURCHASE OF
Common Stock, $.01 Par Value per Share
THIS WARRANT MAY BE EXERCISED ONLY PURSUANT TO ITS TERMS (BUT IN ANY EVENT NOT
BEFORE JUNE 19, 1997) AND WILL BE VOID AFTER 6:00 P.M. CENTRAL DAYLIGHT SAVINGS
TIME ON JUNE 19, 2001
This warrant (the "Warrant") certifies that, for value received,
Amerix Electronics, Inc., ("Purchaser") is entitled, at any time and from time
to time on or after June 19, 1997 (the date hereof) (the "Beginning Date"), and
at any time prior to 6:00 p.m. Central Daylight Savings Time on June 19, 2001
(the "Expiration Time"), to purchase from Intelect Communications, Inc., a
Delaware corporation (the "Company"), but only in accordance with and subject
to the satisfaction of the terms and conditions of this Warrant, 40,500 shares
(the "Warrant Shares") of Common Stock, par value $.01, of the Company (the
"Common Stock"). Purchaser's right to exercise this Warrant shall be subject
to the following terms and conditions:
1. The Purchaser shall have the right to purchase, pursuant to
the terms of this Warrant, 40,500 Warrant Shares at an exercise price of
$3.6313 per share (the "Exercise Price"). If Purchaser is entitled to acquire
Warrant Shares as described above, then Purchaser shall exercise this Warrant
as to the Warrant Shares to which it is entitled by surrendering this Warrant
and paying in full, by cash or cashier's check, in lawful money of the United
States, the Exercise Price.
2. On the exercise of all or any portion of this Warrant in the
manner provided above, the person exercising the same shall be deemed to have
become a holder of record of Common Stock (or of the other securities or
properties to which he or it is entitled on such exercise) for all purposes,
and certificates for the securities so purchased shall be delivered to
<PAGE> 2
the Purchaser within a reasonable time after the Warrant shall have been
exercised as set forth above. If this Warrant shall be exercised with respect
to only a portion of the Warrant Shares covered hereby, the Purchaser shall be
entitled to receive a similar warrant of like tenor and date covering the
number of Warrant Shares with respect to which this Warrant shall not have been
exercised.
3. The Company covenants and agrees that the Warrant Shares which
may be issued on the exercise of the rights represented by this Warrant will,
upon receipt of the Exercise Price, be fully paid and nonassessable, and free
from all taxes, liens, and charges with respect to the issue thereof. The
Company further covenants and agrees that, during the period within which the
rights represented by this Warrant may be exercised, the Company will have
authorized and reserved a sufficient number of shares of Common Stock to
provide for the exercise of the rights represented by this Warrant.
4. The number of Warrant Shares purchasable pursuant to this
Warrant may be subject to adjustment from time to time as follows:
(a) If the Company issues any stock dividends on its
Common Stock and such dividends are made available to all of its
holders of Common Stock, the number of Warrant Shares exercisable
hereunder shall be proportionately increased, such adjustment to
become effective immediately after the opening of business on the day
following such record date.
(b) If the Company shall subdivide the outstanding shares
of Common Stock into a greater number of shares, combine the
outstanding shares of Common Stock into a smaller number of shares, or
issue by reclassification any of its shares, the number of Warrant
Shares in effect immediately prior thereto shall be adjusted so that
the holder of this Warrant shall be entitled to receive, after the
occurrence of any of the events described, the number of Warrant
Shares to which the holder would have been entitled had this Warrant
been exercised immediately prior to the occurrence of such event.
Such adjustment shall become effective immediately after the opening
of business on the day following the date on which such subdivision,
combination, or reclassification, as the case may be, becomes
effective.
(c) If any capital reorganization or reclassification of
Common Stock, or consolidation or merger of the Company with another
corporation or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities, or assets
with respect to or in exchange for Common Stock, then as a condition
of such reorganization, reclassification, consolidation, merger or
sale, lawful adequate provisions shall be made whereby the holder of
this Warrant shall thereafter have the right to acquire and receive on
exercise hereof such shares of stock, securities, or assets as would
have been issuable or payable (as part of such reorganization,
reclassification, consolidation, merger or sale) with respect to or in
exchange for such number of outstanding shares of Common Stock as
would have been received on exercise of this
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<PAGE> 3
Warrant immediately before such reorganization, reclassification,
consolidation, merger or sale. In any such case, appropriate
provision shall be made with respect to the rights and interests of
the holder of this Warrant to the end that the provisions hereof shall
thereafter be applicable in relation to any shares of stock,
securities, or assets thereafter deliverable on the exercise of this
Warrant. The Company will not effect any such consolidation, merger,
or sale unless prior to the consummation thereof the successor
corporation resulting from such consolidation or merger or the
corporation purchasing such assets shall assume, by written instrument
mailed or delivered to the holder hereof at its last address appearing
on the books of the Company, the obligation to deliver to such holder
such shares of stock, securities, or assets as, in accordance with the
foregoing provisions, such holder may be entitled to acquire on
exercise of this Warrant.
(d) No fraction of a share shall be issued on exercise
hereof, but, in lieu thereof, the Company, notwithstanding any other
provision hereof, may pay therefor in cash at the Exercise Price of
any such fractional share at the time of exercise.
(e) Neither the purchase or other acquisition by the
Company of any shares of Common Stock nor the sale or other
disposition by the Company of any shares of Common Stock shall affect
any adjustment of the Exercise Price or be taken into account in
computing any subsequent adjustment of the Exercise Price.
5. This Warrant shall not be transferable or assignable by the
Purchaser.
6. The Purchaser represents, warrants and covenants to the
Company as follows:
(i) The Purchaser will acquire the Warrant Shares for its
own account for investment purposes and not with a view towards
distribution. The Purchaser understands and agrees that it must bear
the economic risks of its investment for an indefinite period of time.
The Purchaser 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. The Purchaser understands
that the offer and sale of the Warrant Shares are being made only by
means of this Warrant. No representations or warranties have been
made to the Purchaser by the Company, the officers or directors of the
Company, or any agent, employee or affiliate of any of them. The
Purchaser 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 Purchaser
has had the opportunity to ask questions of, and receive answers,
satisfactory to it from the Company's management regarding the
Company. The Purchaser 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 Purchaser,
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
-3-
<PAGE> 4
by third parties. The Purchaser 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 Purchase
has not been organized for the purpose of acquiring the Warrant
Shares;
(ii) The Purchaser is an "accredited investor" within the
meaning of Rule 501 of the Securities Act of 1933, as amended (the
"Securities Act");
(iii) The Purchaser 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 Purchaser set forth herein
in order to determine the applicability of such provisions;
(iv) The Purchaser, 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 Purchaser understands that neither this Warrant nor the Warrant
Shares have been registered under the Securities Act and therefore it cannot
dispose of any or all of this Warrant or the Warrant Shares unless or until
such Warrant or Warrant Shares are subsequently registered under the Securities
Act or exemptions from such registration are available. Accordingly, the
shares issuable on exercise of this Warrant shall be restricted securities
within the meaning of Rule 144 promulgated under the Securities Act, and all
certificates for such shares shall contain a legend in substantially the
following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND ARE "RESTRICTED SECURITIES" WITHIN THE MEANING
OF RULE 144 PROMULGATED UNDER THE SECURITIES ACT. THE SECURITIES HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED
WITHOUT COMPLYING WITH RULE 144 IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION OR OTHER COMPLIANCE UNDER THE SECURITIES ACT."
7. The Company agrees to register or qualify the Warrant Shares
(but not this Warrant) for sale as follows:
(a) If, at any time during the period in which the rights
represented by this Warrant are exercisable or the holder hereof owns
the Warrant Shares, the Company proposes to file a registration
statement or notification under the Securities Act for the primary or
secondary sale of any debt or equity security, it will give written
notice at least 30 days prior to the filing of such registration
statement or notification to the holders of this Warrant and the
Warrant Shares of its intention to do so. The Company agrees that,
after receiving written notice from the warrant holder of his desire
to include his Warrant Shares in such proposed registration statement
or notification, the
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<PAGE> 5
Company shall afford the holders of this Warrant and the Warrant
Shares the opportunity to have their Warrant Shares included therein.
Notwithstanding the provisions of this paragraph 7(a), the Company
shall have the right, at any time after it shall have given written
notice pursuant to this paragraph (whether or not a written request
for inclusion of the Warrant Shares shall be made) to elect not to
file any such proposed registration statement or notification or to
withdraw the same after the filing but prior to the effective date
thereof. In no event shall the Company be obligated to include the
Warrant Shares in any registration statement or notification under
this paragraph 7(a) if: (i) in the written opinion of the
underwriter, the inclusion of the Warrant Shares in such registration
statement or notification would be materially detrimental to the
proposed offering of debt or equity securities pursuant to which the
Company gave notice to the holders under this paragraph; or (ii) in
the opinion of counsel for the Company, concurred in by counsel for
the holder hereof, that the Warrant Shares are not considered
"restricted securities" within the meaning of Rule 144 promulgated
under the Securities Act and that registration under the Securities
Act is therefore not required.
(b) In connection with the filing of a registration
statement, notification, or post-effective amendment under this
section, the Company covenants and agrees:
(i) 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;
(ii) to take all necessary action which may
reasonably be required in qualifying or registering the
Warrant Shares included in a 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 the holders; 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; and
(iii) to utilize its best efforts to keep the same
effective for a period of not less than 90 nor more than 120
days.
(c) Indemnification; Contribution.
(i) Indemnification by the Company. The Company
agrees to indemnify and hold harmless the holder of this
Warrant from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact
contained in any such registration
-5-
<PAGE> 6
statement or prospectus contained therein or in any amendment
or supplement thereto or in any preliminary prospectus, or
arising out of or based upon 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 the holder
or on the holder's behalf expressly for use therein.
(ii) Indemnification by Holders. The holder of
this Warrant 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 the holders, but only with
respect to information furnished in writing by a holder or on
a holder'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 any such holder thereunder. 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 the
holder, the holder 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.
(iii) 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
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<PAGE> 7
right to assume the defense of such action 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.
(iv) Contribution. If the indemnification
provided for in this Section 7(c) 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.
(v) Survival. The indemnity and contribution
agreements contained in this Section 7(c) shall remain
operative and in full force and effect regardless of (A) any
termination of this Agreement, (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.
8. As used herein, the term "Common Stock" shall mean and include
the Common Stock authorized on the date of the original issue of this Warrant,
and shall also include any capital stock of any class of the Company thereafter
authorized that shall not be limited to a
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<PAGE> 8
fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends and in the distribution of assets on the voluntary or
involuntary liquidation, dissolution, or winding up of the Company; provided
that the Warrant Shares purchasable pursuant to this Warrant shall include only
shares of the class designated in the Company's Charter as Common Stock on the
date of the original issue of this Warrant or, in the case of any
reorganization, reclassification, consolidation, merger, or sale of assets of
the character referred to in paragraph 4(c) hereof, the stocks, securities, or
assets provided for in such paragraph.
9. This agreement shall be construed under and be governed by the
laws of the State of Texas.
10. Any notices required or permitted hereunder shall be
sufficiently given if delivered by hand or sent by registered or certified
mail, postage prepaid, addressed as follows:
If to the Purchaser, to:
Amerix Electronics, Inc.
431 E. Grand Ave.
El Segundo, Calif. 90245
Attention: Tehan Oh
If to the Company, to:
Intelect Communications, Inc.
1100 Executive Drive
Richardson, Texas 75081
Attention: President
or such other address as shall be furnished in writing by any party to the
other, and any such notice or communication shall be deemed to have been given
as of the date delivered by hand or three days after being so deposited in the
mails.
Dated as of February 20, 1998.
INTELECT COMMUNICATIONS, INC.
By: /s/ Ed Ducayet
Ed Ducayet, Vice President
& CFO
AMERIX ELECTRONICS, INC.
By: /s/ Tehan Oh
Its: President
-8-
<PAGE> 9
Form of Purchase
(to be signed only upon exercise of warrant)
TO: INTELECT COMMUNICATIONS, INC.
The undersigned, the owner of the attached warrant, hereby irrevocable
elects to exercise the purchase rights represented by the warrant for, and to
purchase thereunder, _____ shares of common stock of Intelect Communications,
Inc., and herewith makes payment of $______ therefor, and requests that the
certificate(s) for such shares be delivered to _____ _________, at
____________________________________________, and if such shall not be all of
the shares purchasable hereunder, that a new warrant of like tenor for the
balance of the shares purchasable under the attached warrant be delivered to
the undersigned.
Dated this _____ day of _____________, ______.
----------------------------
Signature
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<PAGE> 1
Exhibit 10.80
PROMISSORY NOTE
$________________ December 5, 1997
FOR VALUE RECEIVED, the undersigned, Intelect Communications, Inc.
("Maker"), a Delaware corporation, unconditionally hereby promises to pay to
the order of Nancy Miracle at its business office in Richardson, Dallas County,
Texas, or at such other place as the holder of this note may hereafter
designate, the principal sum of ______________________ Dollars ($____________)
in lawful money of the United States of America for the payment of private
debts, together with interest (calculated on the basis of the actual number of
days elapsed but computed as if each year consisted of 365 days) on the unpaid
principal balance from time to time owing hereon computed from the date hereof
until maturity at a per annum rate which from day to day shall be, except as
otherwise provided in this note, the lesser of (a) the Loan Rate (as
hereinafter defined) or (b) the Highest Lawful Rate (hereafter defined) in
effect from day to day. The term "Loan Rate" shall mean the sum of three
percent (3%) and the Prime Rate (hereinafter defined) in effect from day to
day. The term "Prime Rate" shall mean as to any day the "Prime Rate" as
published in The Wall Street Journal for that day in the "Money Rates" table.
All past-due principal and interest, whether by acceleration or
otherwise, shall bear interest at the Loan Rate until paid.
The interest on this Note shall be due and payable monthly on the 1st
day of each month. The principal on this Note shall be payable on demand. At
the election of the holder of this Note, at any time prior to the Note being
repaid by the Maker, the holder may send notice to the Maker electing to have
the Note repaid in the form of Common Stock of the Maker, at a price equal to
$5.25 per share for every dollar of principal and interest outstanding on the
Note as of the date of repayment; provided, however, that the holder executes
such documentation as Maker's counsel shall deem necessary for compliance with
federal and state securities laws in the issuance of such Common Stock.
This note may be prepaid at any time, in whole or in part, without
penalty. All payments will be applied first to accrued interest and then to
the reduction of principal.
Notwithstanding anything contained herein to the contrary, if at any
time during the term of this note the Highest Lawful Rate has been charged
Maker in lieu of the Loan Rate because the Loan Rate has exceeded the Highest
Lawful Rate on one or more days during the term of this note, and if, as a
result, on any date during the term of this note the aggregate amount of
interest which has accrued on this note up to, but not including, such date is
less than the aggregate amount of interest which otherwise would
<PAGE> 2
have accrued on this note up to, but not including, such date had the Loan Rate
been charged for every day during the term of this note up to, but not
including, such date, then on such date the unpaid principal balance of this
note shall bear interest at the Highest Lawful Rate even though the Highest
Lawful Rate is in excess of the Loan Rate for such date.
It is expressly provided and stipulated that notwithstanding any
provision of this note or any other instrument evidencing or securing the loan
herein set forth, in no event shall the aggregate of all interest paid or
contracted to be paid to Payee by Maker (or any guarantors or endorsers) ever
exceed the maximum amount of interest which may lawfully be charged the
undersigned by Payee on the principal balance of this note from time to time
advanced and remaining unpaid. In this connection, it is expressly stipulated
and agreed that it is the intent of Payee and Maker in the execution and
delivery of this note to contract in strict compliance with applicable usury
laws. In furtherance thereof, none of the terms of this note or said other
instruments shall ever be construed to create a contract to pay interest at a
rate in excess of the Highest Lawful Rate for the use, forbearance or detention
of money. The term "Highest Lawful Rate" shall mean the maximum non-usurious
rate of interest which may lawfully be charged the undersigned by Payee
according to the indicated rate ceiling as defined in Tex. Rev. Civ. Stat. Ann.
Art. 5069-1.04 in effect at such time and which would be applicable to the
indebtedness evidenced by this note (provided that as permitted by law, Payee
or other holder may, from time to time, implement any applicable ceiling under
such Article and revise the index formula or provision of law used to compute
the rate ceiling by notice to Maker as provided by such Article) or under the
laws of the United States. The parties hereto acknowledge that the effective
date of this instrument is the date on which the indebtedness evidenced hereby
has been contracted for. In determining whether the loan evidenced by this
note is usurious under applicable law, all interest at any time contracted for,
charged, or received from Maker in connection with the loan shall be amortized,
prorated, allocated, and spread in equal parts during the period of the full
stated term of the loan. However, in the event that this note is paid in full
by Maker (or any endorser or guarantor hereof) prior to the end of the full
stated term of this note and in the event the interest received by the holder
of this note for the actual period of the existence of the loan exceeds the
Highest Lawful Rate, the holder of this note shall, at its option, either
refund to Maker the amount of such excess or credit the amount of such excess
against any amounts owing by Maker under this note. In addition, if, from any
circumstances whatsoever, fulfillment of any provision hereof or of any
instrument securing this note or of any other agreement referred to herein or
executed pursuant to or in connection with this note, at the time performance
of such provision shall be due, shall involve transcending the limit of
validity prescribed by applicable law, then, ipso facto, the obligation to
fulfill shall be reduced to the limit of such validity, and if from any
circumstance the holder there of shall ever receive as interest an amount which
would exceed the Highest Lawful Rate, such amount which would be excessive
interest shall, at the option of Payee, be refunded to Maker or be applied to
the reduction of the unpaid principal balance due hereunder and not to the
payment of interest. The provisions of this paragraph shall supersede all
other provisions of this note and all other
2
<PAGE> 3
instruments evidencing or securing this loan, should such provisions be in
apparent conflict herewith.
Maker agrees that Payee's acceptances of partial or delinquent
payments, or failure of Payee to exercise any right or remedy contained herein
or in any instrument given as security for the payment of this note shall not
be a waiver of any obligation of Maker to Payee or constitute waiver of any
similar default subsequently occurring.
The Maker expressly agrees that in the event of default in the payment
of this note or of any installment of principal and/or interest of this note
when due (an "Event of Default"), the holder hereof shall give notice to Maker
and demand payment, and if such payment is not forthcoming within five (5)
business days of Maker's receipt of such notice, Maker may declare the
principal of this note and all interest then accrued thereon at once due and
payable. In the event default is made in the prompt payment of this note when
due or declared due, or the same is placed in the hands of an attorney for
collection, or suit is brought on same, or the same is collected through any
judicial proceeding whatsoever, or if any action of foreclosure be had hereon,
then the undersigned agrees and promises to pay the owner and holder reasonable
attorneys' fees in addition to the other amounts due hereunder.
This note may not be changed orally, but only by an agreement in
writing signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought.
Except to the extent that the laws of the United States may apply to
the terms hereof, this note shall be governed by and construed in accordance
with the laws of the State of Texas. This instrument is made and is
performable in Richardson, Dallas County, Texas and in the event of a dispute
involving this note or any other instruments executed in connection herewith,
Maker irrevocably agrees that venue for such dispute shall be in any court of
competent jurisdiction in Dallas County, Texas.
This note and all the covenants, promises and agreements contained
herein shall be binding upon and inure to the benefit of Payee's and Maker's
heirs, successors, legal representatives and assigns.
IN WITNESS WHEREOF, Maker has executed and delivered this note to
Payee in Richardson, Texas, effective December 5, 1997.
Intelect Communications, Inc.
By:
----------------------------
Its: Vice President
----------------------------
3
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Following is a list of the Company's subsidiaries:
<TABLE>
<CAPTION>
Organized Percent of
Under Voting Securities
Name the Laws of Owned by Registrant
- ---- ----------- -------------------
<S> <C> <C>
Intelect Network Technologies Company Nevada 100%
Intelect Communications Systems Ltd. Bermuda 100%
Intelect Network Systems Limited England 100%
Intelect Visual Communications Corp. Delaware 100%
DNA Enterprises, Inc. Texas 100%
</TABLE>
<TABLE>
<CAPTION>
Percent of
Voting Securities
Organized Owned by Intelect
Under Communications
Name the Laws of Systems Ltd.
- ---- ----------- ------------
<S> <C> <C>
Intelect Finance Limited Bermuda 100%
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Intelect Communications, Inc.
We consent to the incorporation by reference in the registration statements on
Form S-8 (Nos. 33-05918 and 333-3246) 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, stockholders' 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 its ability to secure adequate sources of
capital until the Company is operating profitably. These matters raise
substantial doubt about the company's ability to continue as a going concern.
Management's plans with regard to these matters are described in note 1 to the
consolidated financial statements. The consolidated financial statements and
financial statement schedule do not include any adjustments that might result
from the outcome of this uncertainty.
/S/ KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
March 31, 1998
<PAGE> 2
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Intelect Communications, Inc.
We consent to the incorporation by reference in the registration statement on
Form S-3 (No. 333-35481) 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, stockholders' 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 its ability to secure adequate sources of
capital until the Company is operating profitably. These matters raise
substantial doubt about the company's ability to continue as a going concern.
Management's plans with regard to these matters are described in note 1 to the
consolidated financial statements. The consolidated financial statements and
financial statements schedule do not include any adjustments that might result
from the outcome of this uncertainty.
We consent to the use of our report incorporated in the registration statement
by reference and to the reference to our firm under the heading "Experts" in the
prospectus.
/S/ KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
March 31, 1998
<PAGE> 1
Exhibit 23.2
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 the registration statements on Form S-3 (No. 333-35841) and on Form
S-8 (Nos. 333-03246 and 33-05918) of Intelect Communications, Inc. of our report
dated March 27, 1998, relating to the consolidated balance sheet of Intelect
Communications, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year ended December 31, 1997, and the related schedule, which report appears
in the December 31, 1997, annual report on Form 10-K of Intelect Communications,
Inc..
/S/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Dallas, Texas
March 30, 1998
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