As filed with the Securities and Exchange Commission on April 2, 1998.
Registration No. 333 - ________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM S-3
--------------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
INTELECT COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
---------------------------
DELAWARE 76-0471342
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1100 EXECUTIVE DRIVE
RICHARDSON, TEXAS 75081
(972) 367-2100
(Address, including zip code, and
telephone number, including area code,
of registrant's principal
executive offices)
---------------------------
HERMAN M. FRIETSCH
Chairman and Chief Executive Officer
INTELECT COMMUNICATIONS, INC.
1100 Executive Drive
Richardson, Texas 75081
(972) 367-2100 (Name, address, including
zip code, and telephone number, including area code, of
agent for service)
--------------------
with a copy to:
ROBERT C. BEASLEY
RYAN & SUDAN, L.L.P.
909 Fannin, Suite 3900
Houston, Texas 77010
(713) 652-0501
---------------------------------------------------------------------------
Approximate date of commencement of proposed sale to the public: FROM
TIME TO TIME AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
<PAGE>
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
- --------------------------------------------------------------------------------
Calculation of Registration Fee (See following page)
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<PAGE>
================================================================================
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF SECURITIES AMOUNT TO PRICE OFFERING REGISTRATION
TO BE REGISTERED BE REGISTERED PER SHARE (2) PRICE FEE
- ---------------- ------------- ------------- ----- ---
Common Stock, (1) 3,082,171 $6.813 $20,998,832 $6,364
$.01 par value
================================================================================
(1) Represents (i) 300,000 shares issuable upon the exercise of a Warrant
(the "AJC Warrant") issued by Intelect Communications, Inc. (the
"Company") to AJC, Inc. ("AJC") in connection with that certain Advisory
Services Agreement dated May 1, 1997 between the Company and AJC,
exercisable beginning on December 31, 1997 and expiring on December 31,
2002, at the following exercise prices: 100,000 shares at $3.00, 100,000
shares at $5.00, and 100,000 shares at $7.00; and (ii) 2,782,171 shares,
which is 1.75 times the 1,589,802 shares issuable upon conversion of
10,000 shares of Series C Convertible Preferred Stock (the "Series C
Preferred Stock") issued in a private placement on February 9, 1998 (the
"Conversion Shares"). The number of Conversion Shares registered
hereunder is determined by multiplying 1.75 times the number of
Conversion Shares issuable as of April 2, 1998, pursuant to the
Registration Rights Agreement dated as of February 6, 1998 between the
Company and the purchasers of the Series C Preferred Stock. In
accordance with Rule 416 under the Securities Act of 1933, as amended
(the "Act"), this Registration Statement also covers such indeterminate
number of shares of Common Stock that may be offered or issued pursuant
to terms which provide for a change in the amount of shares of Common
Stock being offered or issued (a) to prevent dilution resulting from
stock splits, stock dividends or similar transactions, or (b) as a
result of decreases in the conversion price of the Company's Series C
Preferred Stock.
(2) Pursuant to Rule 457, the registration fee for the above shares is based
on a price of $6.813 per share, which is calculated based upon the
average of the high and low sales prices of the Company's Common Stock
as reported on the NASDAQ National Market on March 31, 1998.
================================================================================
<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
PROSPECTUS
SUBJECT TO COMPLETION, DATED APRIL 2, 1998
INTELECT COMMUNICATIONS, INC.
3,082,171 Shares of Common Stock
-----------
The prospectus relates to the offer and sale by certain persons listed
under "Selling Stockholders" (collectively, the "Selling Stockholders"), of
shares of common stock, par value $0.01 (the "Common Stock") of Intelect
Communications, Inc. (the "Company"), of up to (i) 300,000 shares of Common
Stock issuable upon the exercise of a Warrant (the "AJC Warrant") issued by the
Company to AJC, Inc. ("AJC") in connection with that certain Advisory Services
Agreement dated May 1, 1997 between the Company and AJC, exercisable beginning
on December 31, 1997 and expiring on December 31, 2002, at the following
exercise prices: 100,000 shares at $3.00, 100,000 shares at $5.00, and $100,000
shares at $7.00; and (ii) 2,782,171 shares, which is 1.75 times the 1,589,802
shares issuable upon conversion of 10,000 shares of Series C Convertible
Preferred Stock (the "Series C Preferred Stock") issued in a private placement
to certain purchasers on February 9, 1998 (the "Conversion Shares") and in
accordance with Rule 416 under the Act, such presently indeterminate number of
additional shares as may be issuable upon conversion of the Company's Series C
Preferred Stock as may become issuable as a result of stock splits, stock
dividends and antidilution provisions (including decreases in the conversion
price of the Series C Preferred Stock). The Conversion Shares do not include
fractional shares of Common Stock that the Company is not required to issue upon
conversion of the Series C Preferred Stock. The number of Conversion Shares
registered hereunder is determined pursuant to the Registration Rights Agreement
dated as of February 6, 1998 between the Company and the purchasers of the
Series C Preferred Stock and is equal to 1.75 multiplied by the number of
Conversion Shares issuable as of April 2, 1998. In accordance with the
Certificate of Designations of Series C Preferred Stock, the number of
Conversion Shares is determined by dividing the aggregate stated value of the
shares of Series C Preferred Stock together with any accrued and unpaid premium
of 4.00% per annum by the Conversion Price. The Conversion Price is the lesser
of $9.082 or 97% of the average of the three lowest closing bid prices for the
Common Stock as reported on NASDAQ for the ten consecutive trading days
preceding the date of determination, subject to adjustment for certain dilutive
transactions and other events. If for any 20 of 30 consecutive trading days the
daily volume weighted average trading price (as reported by Bloomberg) equals or
exceeds $12.00, the Company may elect for the Conversion Price to equal $9.082.
On April 2, 1998 the Conversion Price was $6.3252 (based on 97% of the average
of the three lowest closing bid prices of the Common Stock for the ten
consecutive trading days ending April 1, 1998). The Company will not receive any
of the proceeds from the sale of the shares by the Selling Stockholders, other
than for proceeds from the exercise of the AJC Warrant in the amount of $1.5
million assuming the exercise by AJC of all of its warrant shares. The proceeds
from the exercise of the AJC Warrant will be computed by multiplying the
applicable exercise price of the warrant by the number of warrant shares issued,
and any such proceeds will be used for general corporate purposes. The shares of
Common Stock covered by this Prospectus are issuable in connection with certain
financings and in satisfaction of certain registration rights obligations of the
Company to the Selling Stockholders.
The Selling Stockholders may from time to time sell the shares covered
by this Prospectus on the Nasdaq National Market in ordinary brokerage
transactions, in negotiated transactions, or otherwise, at market prices
prevailing at time of sale or at negotiated prices. See "Plan of Distribution."
The Common Stock is traded on the Nasdaq National Market under the symbol ICOM.
- -------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN PURCHASING THE
SHARES OF COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION (OR ANY STATE SECURITIES COMMISSION) PASSED UPON THE ACCURACY OR
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ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------------
The date of this prospectus is April __, 1998.
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements, information
statements, and other information filed by the Company with the Commission
pursuant to the informational requirements of the Exchange Act may be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices located at 7 World Trade Center, Suite 1300, New York, New York 10048,
and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials also may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such materials may also be accessed electronically by means of
the Commission's home page on the Internet at HTTP://WWW.SEC.GOV. The Common
Stock of the Company is traded on the Nasdaq National Market.
The Company has filed with the Commission a Registration Statement on
Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Common Stock offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, as certain items are omitted in accordance with
the rules and regulations of the Commission. For further information pertaining
to the Company and the Common Stock offered hereby, reference is made to such
Registration Statement and the exhibits and schedules thereto, which may be
inspected without charge at the office of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, copies of which may be obtained from the
Commission at prescribed rates, or electronically by means of the Commission's
home page on the Internet at HTTP://WWW.SEC.GOV.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
1. Annual Report on Form 10-K filed on March 31, 1998; and
2. Current Report on Form 8-K filed on February 17, 1998
The consolidated balance sheet of the Company as of December 31, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 1997 have been incorporated by
reference herein together with the related notes and the report of Arthur
Andersen LLP dated March 27, 1998.
The consolidated balance sheet of the Company and its subsidiaries as of
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996, the
two month period ended December 31, 1995 and the year ended October 31, 1995,
together with the related notes and the report of KPMG Peat Marwick, independent
chartered accountants, all contained in the Company's 1997 annual report, are
incorporated herein by reference. The report of KPMG Peat Marwick on the
aforementioned consolidated financial statements contains an explanatory
paragraph that states that the Company has suffered recurring losses from
continuing operations and is dependent upon the successful development and
commercialization of its products and its ability to secure adequate sources of
capital until the Company operates profitably. These matters raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the termination of the offering of the Common Stock
registered hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated
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<PAGE>
by reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE
CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. AS A RESULT OF ONE OR
MORE OF THE RISK FACTORS DESCRIBED IN THE "RISK FACTORS" SECTION OF THIS
PROSPECTUS, ACTUAL EVENTS AND RESULTS COULD DIFFER MATERIALLY FROM THOSE SET
FORTH IN THE FORWARD-LOOKING STATEMENTS.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request of such person, a copy of any or all of the foregoing documents
incorporated by reference into this Prospectus (without exhibits to such
documents other than exhibits specifically incorporated by reference into such
documents). Requests for such copies should be directed to THE ATTENTION OF
EDWIN J. DUCAYET, JR., CHIEF FINANCIAL OFFICER, 1100 EXECUTIVE DRIVE,
RICHARDSON, TEXAS 75081, (972) 367-2100. Statements in documents incorporated by
reference shall be deemed modified by statements herein. Statements so modified
shall constitute part of this Prospectus only as so modified.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
THE COMPANY
The Company, through its operating subsidiaries, is currently engaged in
the business of designing, producing, and marketing products, technologies, and
services for multimedia applications in telecommunications and networking.
Unless the context otherwise indicates, the "Company" refers to Intelect
Communications, Inc. and its subsidiaries.
The Company's executive offices are located at 1100 Executive Drive,
Richardson, Texas 75081; telephone (972) 367-2100.
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK. THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED
IN THIS PROSPECTUS AND IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE, SHOULD
BE CAREFULLY CONSIDERED BY AN INVESTOR CONSIDERING A PURCHASE OF THE COMMON
STOCK.
EFFECT OF SALES ON MARKET PRICE OF STOCK
4
<PAGE>
Because it is possible that a significant number of shares of Common
Stock could be sold at the same time hereunder, such sales, or the possibility
thereof, could have a significant depressive effect on the market price of the
Common Stock.
RECENT OPERATING LOSSES AND LIQUIDITY
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. 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.
FLUCTUATIONS IN OPERATING RESULTS; CUSTOMER CONCENTRATION
The Company expects that its quarterly operating results are likely to
vary significantly depending on factors such as the market acceptance of the
Company's recently introduced products, the size, timing and recognition of
revenue from significant orders, increased competition, the proportion of
revenues derived from distributors, Original Equipment Manufacturers ("OEMs")
and other channels, changes in the Company's pricing policies or those of its
competitors, the financial stability of major customers, new product
introductions or enhancements by competitors, delays in the introduction of
products or product enhancements by the Company or by competitors, customer
order deferrals in anticipation of upgrades and new products, market acceptance
of new products, customer concerns about the Company's financial condition, the
timing and nature of expenses, and general economic conditions. The Company's
expense levels are based, in part, on its expectations as to future orders and
sales, and the Company may be unable to adjust spending in a timely manner to
compensate for any sales shortfall. If sales are below expectations, operating
results are likely to be materially adversely affected. Net income may be
disproportionately affected by a reduction in sales because a significant
portion of the Company's expenses do not vary with revenues. The Company may
also choose to reduce price or increase spending in response to competition or
to pursue new market opportunities. In particular, if new competitors,
technological advances by existing competitors or other competitive
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factors require the Company to invest significantly greater resources in
research and development efforts, the Company's operating margins in the future
may be materially adversely affected.
The Company anticipates that, because its marketing strategy targets
relatively large potential customers, a small number of large orders may
comprise a significant portion of the Company's future product sales. None of
the Company's significant customers have entered into a long-term supply
agreement requiring them to purchase a minimum amount of product from the
Company. Historically, sales to a relatively small number of customers have
accounted for a significant portion of the Company's total revenues,
particularly with respect to its S4 and SONETLYNX products. There can be no
assurances that the Company's principal customers will continue to purchase
product from the Company at current levels, if at all, or that the Company will
be able to replace such purchases with sales to other customers. Any significant
deferral of purchases of the Company's products or the reduction, delay or
cancellation of orders from one or more significant customers could materially
and adversely affect the Company's business, results of operations, and
financial condition.
During 1997, 59% of the Company's sales were to one distributor in
Korea. In light of the difficulties which developed in general in Korean and
other Asian markets during 1997, the outlook for continuation of sales in those
areas has become uncertain.
Because of all of the foregoing factors, it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.
RAPID TECHNOLOGICAL CHANGE AND IMPORTANCE OF NEW PRODUCTS
The markets for the Company's current and planned products are
characterized by rapid technological change, evolving industry standards,
changing market conditions and frequent new product introductions and
enhancements. The introduction of products embodying new technologies or the
emergence of new industry standards can render existing products or products
under development obsolete or unmarketable. The Company's ability to anticipate
changes in such markets and to successfully develop and introduce new products
on a timely basis will be a significant factor in the Company's ability to grow
and remain competitive. New product development often requires long-term
forecasting of market trends, development and implementation of new technologies
and processes and a substantial capital commitment. In particular, the Company
has recently invested substantial resources toward the development of new
products such as its SONETLYNX product line and the CS4. The Company has not yet
completed the development of the CS4 or of planned future enhancements to the
SONETLYNX product line and may require additional testing of the LANscape 2.0
product. Development and customer acceptance of new products is inherently
uncertain, and there can be no assurance that the Company will successfully
complete developments on a timely basis or that products will be commercially
successful. The Company competes or will be competing with established companies
with greater financial resources and more developed channels of distribution. No
assurances can be given that the Company will be successful in completing the
CS4 on schedule, that the Company will be successful in competing in this
environment or that it will be able to sell sufficient quantities of the CS4 to
recover its investment or to realize profits. No assurance can be given that
SONETLYNX enhancements will be accepted by customers or that the LANscape 2.0
product will meet standards and expectations of the videoconferencing industry.
Any failure by the Company to anticipate or respond on a cost-effective and
timely basis to technological developments, changes in industry standards or
customer requirements, or any significant delays in product development or
introduction, could have a material adverse effect on the Company's business,
operating results and financial condition.
COMPETITION
Competition in the multimedia communications industry is intense, and
the Company believes that competition will increase substantially with the
development of multimedia communications products, rapid technological changes,
industry consolidations, new industry entrants, and potential regulatory
changes. Many of the
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Company's current and potential competitors have longer operating histories,
significantly greater financial, technical and marketing resources, greater name
recognition, and a larger installed customer base than the Company. In addition,
many of these competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, and to devote greater
resources to the development, promotion and sale of their products than the
Company. There can be no assurance that the Company's current or potential
competitors will not develop products and services comparable or superior to
those developed by the Company or adapt more quickly than the Company to new
technologies, evolving industry trends, or changing customer requirements.
Increased competition could result in price reductions, reduced margins, or loss
of market share, any of which would materially and adversely affect the
Company's business, results of operations, or financial condition. There can be
no assurance that the Company will be able to compete successfully against
current and future competitors, or that competitive pressures faced by the
Company will not have a material adverse effect on its business, results of
operations, and financial condition. If the Company is unable to compete
successfully against current and future competitors, the Company's business,
results of operations, and financial condition will be materially adversely
affected.
The Company believes that the videoconferencing market may present lower
barriers to entry than its other markets and may therefore be subject to greater
competition in the future. Increased competition could result in price
reductions, reduced margins, and loss of market share by the Company. There can
be no assurance that the Company will be able to compete successfully with its
existing or new competitors or that competitive pressures faced by the Company
will not materially and adversely affect its business, results of operations,
and financial condition.
MANAGEMENT OF GROWTH
The Company is faced with the risks typically associated with rapid
expansion. It has experienced growth in its corporate structure, in the number
of its employees, and the scope of its operating and financial systems. This
expansion has resulted in the need to hire a significant number of new
personnel. As a result of the level of technical and marketing expertise
necessary to support its existing and new customers, the Company must attract
and retain highly qualified and well-trained personnel. There may be only a
limited number of persons with the requisite skills to serve in these positions
and it may become increasingly difficult for the Company to attract and retain
such personnel. Failure to manage the Company's growth properly could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
DEPENDENCE ON PRODUCT COMPONENTS; SINGLE SOURCES OF SUPPLY; DEPENDENCE ON A
SINGLE FACILITY
The manufacture of the Company's products requires the assembly of a
number of components, the majority of which the Company sources from
substantial, and sometimes multiple, vendors. However, the supply level of and
the lead time in delivering certain key components is dynamic and difficult to
predict with any certainty. Sporadic shortages of or significant increases in
the price of such components could materially and adversely affect the Company's
business, results of operations, and financial condition. Certain key components
are available from only one source. The Company has no supply commitments
relating to such components. While the Company has generally been able to obtain
an adequate supply of such components in a timely manner, the Company believes
that alternate sources of supply could be difficult to develop over a short
period of time. The Company buys components from vendors who extend credit. Any
failure to receive suitable credit terms from vendors could have a material
adverse effect upon the Company's business, results of operations, and financial
condition.
The Company buys a fiber optic interface card, for the SONETLYNX OC-3
product, from a small company which is the sole source for the component. The
Company also buys a video codec card, used in SONETLYNX video applications, from
another small company which is the sole source. Delays in delivery of either
component would restrict the Company's ability to increase sales. In the event
either vendor fails to meet commitments, the Company intends to rely on its
in-house manufacturing capabilities; however, the conversion to in-house backup
supply would not be without some interruption and could have a material adverse
effect upon the Company's business, results of operations, and financial
condition.
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The Company uses fiber optic connectors made by a single vendor in the
SONETLYNX OC-3 product. Equivalent components are available from other vendors,
but their use would require a redesign of the method of connecting to the fiber.
Such a redesign would cause significant delays in delivery of the product and
could have a material adverse effect upon the Company's business, results of
operations, and financial condition. Accordingly, the Company's strategy is to
forecast requirements and build inventories which comprehend vendor lead times.
The Company has one manufacturing facility, and its revenues are
dependent upon the continued operation of the facility. There can be no
assurance that the occurrence of operational problems at the Company's facility
would not materially adversely affect the Company's business, results of
operations, and financial condition.
DEPENDENCE UPON THIRD PARTIES TO MARKET AND SERVICE THE PRODUCTS
Although the Company expects to continue to market its products directly
to certain accounts, the Company intends to establish a network of resellers,
consisting primarily of value-added resellers ("VARs"), systems integrators and
OEMs with established distribution channels for multimedia communications
products, to market the Company's products and to educate potential end-users
and service providers with respect to the Company's products. The Company's
future prospects depend in large part on its ability to successfully develop
relationships with third parties and upon the marketing and product service
efforts of such third parties. There can be no assurance that the Company will
be able, for financial or other reasons, to finalize third-party distribution or
marketing agreements or that such arrangements, if finalized, will result in the
successful commercialization of any of the Company's products. In such event,
the Company's business, operating results and financial condition could be
materially affected.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's success will depend, in part, on its ability to obtain
patents, maintain trade secret protection and operate without infringing the
proprietary rights of third parties or having third parties circumvent the
Company's intellectual property rights. The Company has three issued U.S.
patents. Two relate to key technologies in the S4 communications switch product
and one relates to an interactive voice communication terminal not presently
incorporated in any product. Three additional patents are pending. They relate
to (i) video distribution within the SONETLYNX product line, (ii) certain
features of the CS4 programmable digital switch, and (iii) architecture and
features of the LANscape 2.0 videoconferencing product. There can be no
assurance that any patents issued to the Company will provide the Company with
any competitive advantages or will not be challenged by any third parties, that
the patents of others will not impede the ability of the Company to do business
or that third parties will not be able to circumvent the Company's patents, that
any of the Company's patent applications will result in the issuance of patents
or that the Company will develop additional proprietary products that are
patentable. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate any of the Company's products,
or, if patents are issued to the Company, design around the patented products
developed by the Company.
In common with many companies in the telecommunications industry, the
Company has received notice that it may be infringing on certain intellectual
property rights of others. These claims have been referred to counsel for
evaluation. The Company may be required to obtain licenses from third parties to
avoid infringing patents or other proprietary rights. No assurance can be given
that any licenses required under any such patents or proprietary rights would be
made available, if at all, on terms acceptable to the Company. If the Company
does not obtain such licenses, it could encounter delays in product
introductions, or could find that the development, manufacture or sale of
products requiring such licenses could be prohibited. In addition, the Company
could incur substantial costs in defending itself in suits brought against the
Company on patents or other proprietary rights it might infringe or in filing
suits against others to have such patents or other proprietary rights declared
invalid. Parties making such claims may be able to obtain injunctive or other
equitable relief which could effectively block the Company's ability to sell its
products in the United States and abroad, and could obtain an award of
substantial damage either of which could have a material adverse effect upon the
Company's business, results of operations, and financial condition
8
<PAGE>
Much of the Company's know-how and technology may not be patentable. To
protect its rights, the Company requires many employees, consultants, advisors
and collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets, know-how or other proprietary information in the
event of any unauthorized use or disclosure. Furthermore, the Company's business
may be adversely affected by competitors who independently develop competing
technologies, especially if the Company obtains no, or only narrow, patent
protection.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
While most of the Company's operations are not directly regulated, the
telecommunications service providers that constitute certain of the Company's
customers (particularly for the CS4) are heavily regulated at both the federal
and state levels. Such regulation may limit the number of potential customers
for the Company's services or impede the Company's ability to offer competitive
services to the market, or otherwise have a material adverse effect on the
Company's business, results of operations, and financial condition. At the same
time, recently enacted legislation deregulating the telecommunications industry
may cause changes in the industry, which are difficult to predict at this time,
including entrance of new competitors and industry consolidation, which could in
turn subject the Company to additional competitors, increased pricing pressures,
decrease the demand for the Company's products or services, increase the
Company's cost of doing business or otherwise materially adversely affect the
Company's business, results of operations, and financial condition.
CONTINGENT LIABILITIES
In connection with the sale of its former operations in November 1995,
the Company's subsidiary Intelect Communications Systems Limited agreed to
certain customary obligations to indemnify the purchasers in such sale for
potential losses associated with product liability, environmental matters,
employee matters and other similar items. Certain of these indemnity obligations
survive indefinitely. In the event that a loss associated with the former
operations of Intelect Communications Systems Limited is determined to be
subject to such indemnity obligations, the Company's business, results of
operations, and financial condition could be materially adversely affected.
Furthermore, the Company could incur substantial costs (including the diversion
of the attention of management) in defending itself in lawsuits relating to such
indemnity obligations.
DEPENDENCE ON KEY PERSONNEL; RETENTION OF EMPLOYEES
The Company's success depends in large part on the continued service of
its key creative, technical, marketing, sales and management personnel and its
ability to continue to attract, motivate and retain highly qualified employees.
Because of the multifaceted nature of interactive media, key personnel often
require a unique combination of creative and technical talents. Such personnel
are in short supply, and the competition for their services is intense. The
process of recruiting key creative, technical and management personnel with the
requisite combination of skills and other attributes necessary to execute the
Company's strategy is often lengthy. The Company has at-will employment
arrangements with its management and other personnel, who may generally
terminate their employment at any time. The loss of the services of key
personnel or the Company's failure to attract additional qualified employees
could have a material adverse effect on the Company's results of operations and
new product development efforts.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CHARTER AND BY-LAW PROVISIONS
Certain provisions of the Company's certificate of incorporation,
by-laws and Delaware law could, together or separately, discourage potential
acquisition proposals, delay or prevent a change in control of the Company and
limit the price that certain investors might be willing to pay in the future for
shares of the Common Stock. These provisions include a classified Board of
Directors, provisions that the Board of Directors have exclusive authority to
amend or change the By-laws of the Company, the ability of the Board of
Directors to authorize the issuance, without further
9
<PAGE>
stockholder approval, of preferred stock with rights and privileges which could
be senior to the Common Stock, eliminating the stockholders' ability to take any
action without a meeting, eliminating the ability of stockholders to call
special meetings without the required consent of the Board of Directors, and
establishment of certain advance notice procedures for nomination of candidates
for election as directors and for stockholder proposals to be considered at
stockholders' meetings. The Company is also subject to Section 203 of the
Delaware General Corporation Laws which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that such stockholder became an "interested
stockholder."
VALUE OF SHARES OF STOCK; MARKET FOR COMMON STOCK; STOCK PRICE VOLATILITY
The Company's Common Stock is quoted on the Nasdaq National Market.
Based upon historical trends in the market for the Company's stock and for other
similar technology company stocks, the Company anticipates that the trading
price of its Common Stock may be subject to wide fluctuations in response to
quarterly variations in operating results, changes in actual earnings or in
earnings estimates by analysts, announcements of technological developments by
the Company or its competitors, general market conditions or other events
largely outside the Company's control. In addition, the stock market has
experienced extreme price and volume fluctuations which have particularly
affected the market prices of "high technology" stocks. These fluctuations have
often been disproportionate or unrelated to the operating performance of these
companies. These broad market fluctuations, general economic conditions or other
factors outside the Company's control may adversely affect the market price of
the Common Stock.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock
offered hereby. However, with respect to those shares of Common Stock that are
issuable upon the exercise of AJC Warrant, the Company will receive $1,500,000,
assuming the full exercise of such AJC Warrant at its stated exercise prices.
The Company will use such proceeds for general corporate purposes.
SELLING STOCKHOLDERS
The Selling Stockholders were issued the Common Stock covered by this
Prospectus in a series of unrelated private placements as summarized below:
Of the shares of Common Stock being registered:
(i) 300,000 shares are issuable upon the exercise of a Warrant (the
"AJC Warrant") issued by the Company to AJC, Inc. ("AJC") in
connection with that certain Advisory Services Agreement dated May
1, 1997 between the Company and AJC, exercisable beginning on
December 31, 1997 and expiring on December 31, 2002, at the
following exercise prices: 100,000 shares at $3.00, 100,000 shares
at $5.00, and $100,000 shares at $7.00; and
(ii) The shares of Common Stock which are issuable to CCG Capital
Ltd., CCG Investment Fund Ltd., Nelson Partners, and Olympus
Securities, Ltd. (collectively, the "Citadel Entities") upon
conversion of the Company's Series C Convertible Preferred Stock,
which were issued pursuant to that certain Securities Purchase
Agreement and are registerable pursuant to that certain
Registration Rights Agreement, each of such agreements being among
the Company and the Citadel Entities and dated February 6, 1998.
The Company has agreed to register a specific number of Conversion
Shares for resale by the Selling Stockholders holding the Series C
Preferred Stock. The number of Conversion Shares shown in the
following table as being offered by the Selling Stockholders which
hold Series C Preferred Stock does not included such presently
indeterminate number of shares of
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<PAGE>
Common Stock as may be issuable upon conversion of the Series C
Preferred Stock pursuant to the provisions thereof regarding
determination of the applicable conversion price but which shares
of Common Stock are, in accordance with Rule 416 under the
Securities Act, included in the Registration Statement of which
this Prospectus forms a part.
In each case, the issuance of Common Stock to the Selling Stockholders
was undertaken pursuant to Section 4(2) of the Securities Act and the Company
has relied upon certain representations of the Selling Stockholders as to their
"accredited investor" status.
The table below sets forth the number of shares of Common Stock
beneficially owned by each of the Selling Stockholders as of March 25, 1998, the
number of shares of Common Stock to be offered by each of the Selling
Stockholders pursuant to this Prospectus, and the number of shares of Common
Stock to be beneficially owned by each of the Selling Stockholders if all of the
shares of Common Stock offered hereby are sold as described herein. The Selling
Stockholders have not held any positions or offices with, been employed by, or
otherwise had a material relationship with, the Company or any of its
predecessors or affiliates within the past three years.
<TABLE>
<CAPTION>
Number of Shares Number of Shares
of Common Stock of Common Stock
Beneficially Owned Number of Shares Beneficially
as of March 25, of Common Stock Owned After
Name of Selling Stockholder 1998 (1) Offered Hereby Offering (4)
- --------------------------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
AJC, Inc. 300,000 300,000 0
CCG Capital Ltd. (5) 15,587 (2) 27,822 (3) 0
CCG Investment Fund Ltd. 19,484 (2) 34,777 (3) 0
Nelson Partners (5) 533,238 (2) 951,781 (3) 0
Olympus Securities, Ltd. (5) 990,410 (2) 1,767,791 (3) 0
- --------------------------------------- ------------------- ------------------ ------------------
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities and includes
any securities which the person has the right to acquire within 60
days of March 25, 1998 through the conversion or exercise of any
security or other right.
(2) Beneficial ownership is determined as of March 25, 1998 and is
based on a Conversion Price of the Series C Preferred Stock equal
to $6.4465 (which is 97% of the average of the three lowest closing
bid prices of the Common Stock for the ten consecutive trading days
ended March 24, 1998). The number of shares of Series C Preferred
Stock issued to each member of the Citadel Entities is as follows:
CCG Capital Ltd. 100 shares, CCG Investment Fund Ltd. 125 shares,
Nelson Partners 3,421 shares, and Olympus Securities, Ltd. 6,354
shares. The actual number of shares of Common Stock issuable upon
conversion of the Series C Convertible Preferred Stock is that
number of shares of Common Stock equal to the quotient of (i) the
aggregate stated value of the Conversion Shares (i.e., $1,000 per
share), plus any accrued and unpaid premium of 4.00% per annum
divided by (ii) the Conversion Price. The Conversion Price is the
lesser of (a) $9.082 per share, or (ii) 97% of the market price of
the Common Stock, where the market price is the average of the
three lowest closing bid prices for the Common Stock for the 10
consecutive trading days immediately preceding such date
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<PAGE>
of determination (the "Determination Date"). If for any 20 of 30
consecutive trading days the daily volume weighted average trading
price (as reported by Bloomberg) of the Common Stock equals or
exceeds twelve dollars ($12), then the Company may elect for the
Conversion Price to equal $9.082. No holder of shares of the Series
C Preferred Stock is entitled to convert or exercise such
securities to the extent that the shares to be received by such
holders upon such conversion or exercise would cause such holders
in the aggregate to beneficially own more than 5% of the Common
Stock of the Company (other than shares deemed to be beneficially
owned through ownership of the Series C Preferred Stock), except
upon 61 days prior notice to the Company. In no event can such
holders in the aggregate own 15% or more of the Common Stock of the
Company without the prior written consent of the Company. In
addition, pursuant to the rules of the NASDAQ Stock Market, in the
absence of shareholder approval, the aggregate number of share
issuable to the Citadel Entities at a discount from market price
upon the conversion of the Series C Preferred Stock may not exceed
19.99% of the outstanding Common Stock as of February 9, 1998
(i.e., approximately 4,780,000 shares). Unless such shareholder
approval is obtained, none of the Citadel Entities will be able to
acquire more than its proportionate share of such maximum amount.
The Company may be required to redeem any Series C Preferred Stock
which may not be converted because of such limitation.
(3) Represents the allocation among the Citadel Entities of 175% of the
number of shares of Common Stock potentially issuable as of April
2, 1998, upon conversion of the 10,000 shares of the Series C
Convertible Preferred Stock held by the Citadel Entities which the
Company is registering pursuant to the Registration Rights
Agreement between the Company and the Citadel Entities. The number
of shares of Common Stock registered pursuant to the Registration
Statement on behalf of the Selling Stockholders holding Series C
Preferred Stock and the number of Conversion Shares offered hereby
by such holders have been determined by agreement between the
Company and such Selling Stockholders. Because the number of shares
that will ultimately be issued upon conversion of the Series C
Preferred Stock is dependent, subject to certain limitations, upon
the average of certain closing bid prices of the Common Stock prior
to conversion, as described in footnote (2) above, and certain
antidilution adjustments, such number of shares (and therefore the
number of Shares offered hereby) cannot be determined at this time.
The number of Shares being offered by the Selling Stockholders
holding Series C Preferred Stock, in accordance with Rule 416 under
the Securities Act, also includes such presently indeterminate
number of additional Shares as may be issuable upon conversion of
the Series C Preferred Stock, based upon fluctuations in the
conversion price of the Series C Preferred Stock and future
antidilution adjustments in accordance with the terms of the Series
C Preferred Stock. Furthermore, pursuant to the Registration Rights
Agreement, because market price of the Common Stock is subject to
fluctuation, the Company has agreed to register 175% of each
purchaser's allocation of the Conversion shares and agreed to amend
this registration statement if this amount falls below 150% of the
shares of Common Stock issuable upon conversion of the Series C
Preferred Stock under the above formula.
(4) Gives effect to the conversion of all shares of Series C Preferred
Stock and sale of the Conversion Shares upon conversion.
(5) Citadel Limited Partnership is the managing general partner of
Nelson Partners and the trading manager of each of Olympus
Securities, Ltd., CCG Capital Ltd. And CCG Investment Fund Ltd.
(collectively, the "Citadel Entities") and consequently has voting
control and investment discretion over securities held by the
Citadel Entities. The ownership for each of the Citadel Entities
does not include the ownership information for the other Citadel
Entities. Citadel Limited Partnership and each of the Citadel
Entities disclaims beneficial ownership of the Shares held by the
other Citadel Entities.
The Selling Stockholders identified above may have sold, transferred or
otherwise disposed of all or a portion of their Common Stock since the date on
which they provided the information regarding their Common Stock in
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<PAGE>
transactions exempt from the registration requirements of the Securities Act.
Additional information concerning the above listed Selling Stockholders may be
set forth from time to time in prospectus supplements to this Prospectus.
See "Plan of Distribution."
PLAN OF DISTRIBUTION
The Common Stock is being offered on behalf of the Selling Stockholders.
The Common Stock may be sold or distributed from time to time by the Selling
Stockholders, or by donees or transferees of, or other successors in interests
to, the Selling Stockholders, directly to one or more purchasers or through
brokers, dealers or underwriters who may act solely as agents or may acquire
Common Stock as principals, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at negotiated prices, or at
fixed prices, which may be changed. The sale of the Common Stock may be effected
in one or more of the following methods: (i) ordinary brokers' transactions;
(ii) transactions involving cross or block trades or otherwise on the Nasdaq
National Market; (iii) purchases by brokers, dealers or underwriters as
principal and resale by such purchasers for their own accounts pursuant to this
Prospectus; (iv) "at the market" to or through market makers or into an existing
market for the Common Stock; (v) in other ways not involving market makers or
established trading markets, including direct sales to purchases or sales
effected through agents; (vi) through transactions in options, swaps or other
derivatives (whether exchange-listed or otherwise); (vii) in privately
negotiated transactions; (viii) to cover short sales; or (ix) any combination of
the foregoing.
From time to time, one or more of the Selling Stockholders may pledge,
hypothecate or grant a security interest in some or all of the Conversion Shares
owned by them, and the pledgees, secured parties or persons to whom such
securities have been hypothecated shall, upon foreclosure in the event of
default, be deemed to be Selling Stockholders hereunder. In addition, a Selling
Stockholder may, from time to time, sell short the Common Stock of the Company,
and in such instances, this Prospectus may be delivered in connection with such
short sales and the Conversion Shares offered hereby may be used to cover such
short sales.
From time to time one or more of the Selling Stockholders may transfer,
pledge, donate or assign such Selling Stockholders' Conversion Shares to lenders
or others and each of such persons will be deemed to be a Selling Stockholder
for purposes of this Prospectus. The number of Selling Stockholders' Conversion
Shares beneficially owned by those Selling Stockholders who so transfer, pledge,
donate or assign Selling Stockholders' Conversion Shares will decrease as and
when they take such actions. The plan of distribution for Selling Stockholders'
Conversion Shares sold hereunder will otherwise remain unchanged, except that
the transferees, pledgees, donees or other successors will be Selling
Stockholders hereunder.
A Selling Stockholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the Common
Stock in the course of hedging the positions they assume with such Selling
Stockholder, including, without limitation, in connection with distributions of
the Common Stock by such broker-dealers. A Selling Stockholder may also enter
into option or other transactions with broker-dealers that involve the delivery
of the Common Stock to the broker-dealers, who may then resell or otherwise
transfer such Common Stock. A Selling Stockholder may also loan or pledge the
Common Stock to a broker-dealer and the broker-dealer may sell the Common Stock
so loaned or upon a default may sell or otherwise transfer the pledged Common
Stock.
Brokers, dealers, underwriters or agents participating in the
distribution of the Common Stock as agents may receive compensation in the form
of commissions, discounts or concessions from the Selling Stockholders and/or
purchasers of the Common Stock for whom such broker-dealers may act as agent, or
to whom they may sell as principal, or both (which compensation as to a
particular broker-dealer may be less than or in excess of customary
commissions). The Selling Stockholders and any broker-dealers who act in
connection with the sale of Common Stock hereunder may be deemed to be
"Underwriters" within the meaning of the Securities Act, and any commissions
they receive and proceeds of any sale of Common Stock may be deemed to be
underwriting discounts and commissions under the Securities Act. Neither the
Company nor any Selling Stockholders can presently estimate the amount of
13
<PAGE>
such compensation. The Company knows of no existing arrangements between any
Selling Stockholders, any other stockholder, broker, dealer, underwriter or
agent relating to the sale or distribution of the Common Stock.
The Company will pay substantially all of the expenses incident to the
registration, offering and sale of the Common Stock to the public other than
commissions or discounts of underwriters, broker-dealers or agents. The Company
has also agreed to indemnify certain of the Selling Stockholders and certain
related persons against certain liabilities, including liabilities under the
Securities Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company, the Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
With respect to the Citadel Entities, each purchaser of the Series C
Preferred Stock has agreed to refrain from selling on any trading day a number
of shares of Common Stock issued pursuant to the conversion of the Series C
Preferred Stock in excess of that number of shares of Common Stock equal to 20%
of the daily trading volume of the Common Stock on such date of determination,
except that this limitation does not apply if the daily trading volume is in
excess of 200% of the average daily trading volume for the prior 6 month period
and further does not apply in the event of certain Extraordinary Events, a Major
Transaction, or a Triggering Event (each as defined in the Certificate of
Designation). In addition, each purchaser of the Series C Preferred Stock agreed
to not engage in any "short sales" (as defined in Rule 3b-3 of the Securities
Exchange Act of 1934, as amended) of the Common Stock of the Company, other than
for short sales which such purchaser makes and submits a conversion notice
entitling such purchaser to receive a number of shares of Common Stock at least
equal to the number of shares so sold.
The Company has advised the Selling Stockholders that during such time
as they may be engaged in a distribution of the Common Stock included herein
they are required to comply with Regulation M promulgated under the Exchange
Act. With certain exceptions, Regulation M precludes any Selling Stockholder,
any affiliated purchasers, and any broker-dealer or other person who
participates in such distribution from bidding for or purchasing, or attempting
to induce any person to bid for or purchase any security which is the subject of
the distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the Common Stock.
Because it is possible that a significant number of shares of the Common
Stock could be sold at the same time hereunder, such sales, or the possibility
thereof, may have a significant depressive effect on the market price of the
Company's Common Stock.
This offering will terminate on the earlier of (a) the date on which the
shares are eligible for resale without restriction pursuant to Rule 144(k) under
the Securities Act or (b) the date on which all shares offered hereby have been
sold by the Selling Stockholders.
LEGAL MATTERS
The validity of the Common Stock offered by the Selling Stockholders
hereby will be passed upon by Ryan & Sudan, L.L.P., Houston, Texas.
EXPERTS
Ryan & Sudan, L.L.P. is legal counsel to the Company; Philip P. Sudan,
Jr. is a partner of Ryan & Sudan, L.L.P and a director of the Company.
The consolidated balance sheet of the Company as of December 31, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 1997 have been
14
<PAGE>
incorporated by reference herein together with the related notes and the report
of Arthur Andersen LLP dated March 27, 1998.
The consolidated balance sheet of the Company and its subsidiaries as of
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996, the
two month period ended December 31, 1995 and the year ended October 31, 1995,
together with the related notes and the report of KPMG Peat Marwick, independent
chartered accountants, all contained in the Company's 1997 annual report, are
incorporated herein by reference. The report of KPMG Peat Marwick on the
aforementioned consolidated financial statements contains an explanatory
paragraph that states that the Company has suffered recurring losses from
continuing operations and is dependent upon the successful development and
commercialization of its products and its ability to secure adequate sources of
capital until the Company operates profitably. These matters raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
15
<PAGE>
PROSPECTUS
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
----
Available Information .....................................................3
Incorporation of Certain Documents by Reference ...........................3
The Company ...............................................................4
Risk Factors ..............................................................4
Use of Proceeds ...........................................................10
Selling Stockholders ......................................................10
Plan of Distribution ......................................................13
Legal Matters .............................................................14
Experts ...................................................................14
16
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Nature of Expense
SEC Registration Fee ........................................ $ 6,364
Nasdaq Listing Fee .......................................... $17,500
Legal (including Blue Sky), Printing,
and Accounting Fees and Expenses .......................... $30,000*
Miscellaneous ............................................... $ 2,000*
TOTAL ......... $55,864*
- -------------
*Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII of the Registrant's Certificate of Incorporation provides that
if Delaware law is amended hereafter to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by Delaware law as so amended. Any amendment, repeal or
modification of Article VII of the Registrant's Certificate of Incorporation
shall not adversely affect any right or protection of a director of the
Corporation existing hereunder with respect to any act or omission occurring
prior to such amendment, repeal or modification.
Article XI of the Registrant's By-Laws provides that the Registrant (i)
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Registrant) by reason of the fact that he or she is or
was a director or an officer of the Registrant, or is or was serving at the
request of the Registrant as a director or an officer of another corporation,
partnership, joint venture, trust or other enterprise, to the full extent
authorized or permitted by law, as now or hereafter in effect, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful, and (ii) may
indemnify, if the Board of Directors determines such indemnification is
appropriate, any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Registrant) by reason of the fact that he or she is or
was an employee or agent of the Registrant, or is or was serving at the request
of the Registrant as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, to the full extent authorized or
permitted by law, as now or hereafter in effect, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Registrant, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement or conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the Registrant, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his or her conduct was unlawful. To the extent that (i) a director
or an officer of the Registrant or (ii) any other employee or agent of the
Registrant who the Board of Directors has authorized the Registrant to
indemnify, has been successful on the merits or otherwise in defense of any
action, suit or proceeding or in defense of any claim, issue or matter therein,
he or she shall be indemnified against expenses (including attorneys' fees)
actually and reasonably
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incurred by him or her in connection therewith. Notwithstanding the foregoing,
except for proceedings to enforce rights to indemnification, the Registrant
shall not be obligated to indemnify any person in connection with a proceeding
(or part thereof) initiated by such person unless such proceeding (or part
thereof) was authorized in advance, or unanimously consented to, by the Board of
Directors.
Article XI of the Registrant's By-Laws also provides that any
indemnification provided therein (unless ordered by a court) shall be made by
the Registrant only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because such person has met the applicable standard of conduct set
forth in sections 1 and 2 of Article XI of the Registrant's By-Laws. Such
determination shall be made (i) by a majority vote of the directors who are not
parties to such action, suit or proceeding even though less than a quorum, or
(ii) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (iii) by the Stockholders.
Expenses (including attorneys fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action, suit or
proceeding shall be paid by the Registrant in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that such person is not entitled to be indemnified by the
Registrant or as otherwise authorized by law. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate.
Article XI of the Registrant's By-Laws further provides that the
indemnification and advancement of expenses shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any by-law, agreement, vote of Stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative, by reason
of the fact that he or she is or was a director, officer, employee or agent of
the corporation or is or was serving at its request in such capacity in another
corporation or business association against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interest of the corporation and, with respect to any
criminal action or proceeding, if he or she had no reasonable cause to believe
his conduct was unlawful; provided that, in the case of actions brought by or in
the right of the corporation, no indemnification will be made with respect to
any matter as to which such person will have been adjudged to be liable to the
corporation unless and only to the extent that the adjudicating court determines
that such indemnification is proper under the circumstances.
ITEM 16. EXHIBITS.
See Exhibit Index included immediately preceding the Exhibits to this
Registration Statement, which is incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
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(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in this Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that paragraphs (1)(i) and (1) (ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Company pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") that are incorporated by reference in this
Registration Statement.
(2) That, for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable,
each filing of any employer benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the indemnification provisions described herein, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceedings) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing this Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Richardson, Texas on the 2nd day of April 1998.
INTELECT COMMUNICATIONS, INC.
By: /s/ HERMAN M. FRIETSCH
Herman M. Frietsch
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ HERMAN M. FRIETSCH Chief Executive Officer and April 2, 1998
- ----------------------- Director (Principal Executive Officer)
Herman M. Frietsch
/s/ EDWIN J. DUCAYET, JR. Vice President, Chief Financial Offi April 2, 1998
- ------------------------- Treasurer, and Assistant Secretary
Edwin J. Ducayet, Jr. (Principal Financial Officer and Principal
Accounting Officer)
/s/ PHILIP P. SUDAN, JR. Director April 2, 1998
- ------------------------
Philip P. Sudan, Jr.
/s/ ANTON LIECHTENSTEIN Director April 2, 1998
- ------------------------
Anton Liechtenstein
/s/ ROBERT E. GARRISON II Director April 2, 1998
- -------------------------
Robert E. Garrison II
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EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
4.1 Amended and Restated Certificate of Incorporation of the Company
(1)
4.2 Amended and Restated By-Laws of the Company (1)
4.3 Certificate of Designations of the Series C Preferred Stock
dated February 6, 1998 (2)
5.1 Opinion of Ryan & Sudan, L.L.P., Houston, Texas 10.1 Securities
Purchase Agreement among the Company and the Citadel Group,
dated February 6, 1998 (2)
10.2 Registration Rights Agreement among the Company and the Citadel
Group, dated February 6, 1998 (2)
10.3 Warrant issued to AJC, Inc. to purchase Common Stock of the
Company expiring on December 31, 2002 (3)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG Peat Marwick
23.3 Consent of Ryan & Sudan, L.L.P. (included in Exhibit 5.1)
- --------------------
(1) Incorporated herein by reference to Form S-4 of Intelect
Communications, Inc. (File No. 333- 39063)
(2) Incorporated herein by reference to Form 8-K of Intelect
Communications, Inc. filed February 17, 1997
(3) Incorporated herein by reference to the Registrant's Form 10-Q
for the fiscal quarter ended June 30, 1997
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EXHIBIT 5.1
[RYAN & SUDAN, L.L.P. LETTERHEAD]
April 2, 1998
Intelect Communications, Inc.
1100 Executive Drive
Richardson, Texas 75081
Re: Registration Statement on Form S-3 of Intelect Communications,
Inc. (the "Company")
Ladies and Gentlemen:
We have acted as counsel to Intelect Communications, Inc., a Delaware
corporation (the "Company"), with respect to the offering by certain selling
shareholders of up to 3,082,171 shares (the "Shares") of the Common Stock of the
Company, par value $.01 per share (the "Common Stock") under the Registration
Statement, filed by the Company under the Securities Act of 1933, as amended.
As such counsel, we have examined such corporate records, certificates
and other documents and have made such other factual and legal investigations as
we have deemed relevant and necessary as the basis for the opinions hereinafter
expressed. In such examinations, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals
and the conformity to original documents of all documents submitted to us as
conformed or photostatic copies.
Based on the foregoing, we are of the opinion that:
1. The shares of Common Stock initially issuable upon the exercise
of the warrants have been duly authorized and following the
exercise of such warrants and when paid for in accordance with
the terms of the warrants, such shares of Common Stock will be
validly issued, fully paid and non-assessable by the Company.
2. The shares of Common Stock initially issuable upon the conversion
of the Series C Convertible Preferred Stock of the Company have
been duly authorized and reserved for issuance, and upon the
conversion of the Series C Convertible Preferred Stock in
accordance with the Certificate of Designations for the Series C
Convertible Preferred Stock will be validly issued, fully paid,
and non-assessable by the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
RYAN & SUDAN, L.L.P.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Intelect Communications, Inc.
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated March 27, 1998,
included in Intelect Communications, Inc.'s Form 10-K for the year ended
December 31, 1997, and to all references to our firm included in this
registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
April 2, 1998
EXHIBIT 23.2
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 dated April 2, 1998 of our report dated April 9, 1997, relating to the
consolidated balance sheet of Intelect Communications Systems Limited and
subsidiaries as of December 31, 1996, and the related consolidated statements of
operations, 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.
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
April 2, 1998
