As filed with the Securities and Exchange Commission on May 22, 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.
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.
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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,
$.01 par value 9,006,809(1) $ 6.4375 $ 57,981,333 $ 17,571
(1) Represents (i) 450,000 shares of Common Stock (the "Coastal Warrant
Shares") issuable to The Coastal Corporation Second Pension Trust
("Coastal") upon exercise of a warrant dated August 27, 1997 having an
exercise price of $6.00 (the "Coastal Warrant"), (ii) 4,219,409 shares
of Common Stock issuable to Coastal upon the conversion of the
Company's Series A Preferred Stock, on a share per share basis and
102,002 shares of Common Stock issued to Coastal as dividends on the
Series A Preferred Stock; all such shares of Common Stock are
registered pursuant to those certain Registration Rights Agreements
dated May 8 and May 30, 1997; (iii) 300,000 shares of Common Stock
issuable to St. James Capital Partners, L.P. ("St. James Partners")
upon exercise of warrants issued on April 2, 1998 to St. James Partners
("Initial St. James Partners Warrants"), 1,200,000 shares of Common
Stock issuable to its affiliate SJMB, L.P. upon exercise of warrants
issued on April 2, 1998 to SJMB ("Initial SJMB Warrants"), under a
credit facility placed into effect with St. James Partners on February
12, 1998 and as modified April 2, 1998 ("St. James Credit Facility"),
251,046 shares of Common Stock issuable to St. James Partners upon
conversion of that certain Convertible Promissory Note dated April 2,
1998 in the original principal amount of $2,000,000 ("St. James
Partners Note"), and 1,004,184 shares of Common Stock issuable to SJMB
upon conversion of that certain Convertible Promissory dated April 2,
1998 in the original principal amount of $13,000,000 ("SJMB Note"),
each with an annual interest rate of 7% and having a conversion price
of $9.082 per share; all such shares of Common Stock issuable to St.
James Partners and SJMB being registerable pursuant to that certain
Registration Rights Agreement dated February 12, 1998, as amended on
April 2, 1998 (" St. James Registration Rights Agreement"); (iv) 93,383
shares issuable upon the conversion of certain loans made by certain
officers, directors, employees and other persons to the Company, which
loans are convertible into common stock at the rate of $5.25 per share
of the amount of principal and interest outstanding; and (v) 1,521,420
shares, which is 1.75 times the 869,383 shares issuable upon conversion
(the "Conversion Shares") of 5,000 shares of the Company's Series D
Convertible Preferred Stock (the "Series D Preferred Stock") issued in
a private placement on May 8, 1998. The number of Conversion Shares is
calculated as of May 21, 1998, pursuant to the Registration Rights
Agreement dated as of May 8, 1998 between the Company and the
purchasers of the Series D Preferred Stock. In accordance with Rule 416
under the Securities Act of 1933, as amended (the "Act"), this
Registration Statement also covers such indeterminate number of shares
of Common Stock that may be offered or issued pursuant to terms which
provide for a change in the amount of shares of Common Stock being
offered or issued (a) to prevent dilution resulting from stock splits,
stock dividends or similar transactions, or (b) as a result of
decreases in the conversion price of the Series D Preferred Stock.
(2) Pursuant to Rule 457(c), the registration fee for the above shares is
based on a price of $6.4375 per share, which is calculated based upon
the average of the high and low prices of the Company's Common Stock as
reported on the NASDAQ National Market on May 20, 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 MAY 22, 1998
INTELECT COMMUNICATIONS, INC.
9,006,809 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) 450,000 shares of Common
Stock (the "Coastal Warrant Shares") issuable to The Coastal Corporation Second
Pension Trust ("Coastal") upon exercise of a warrant dated August 27, 1997
having an exercise price of $6.00 (the "Coastal Warrant"), 4,219,409 shares of
Common Stock issuable to Coastal upon the conversion of the Company's Series A
Preferred Stock, on a share per share basis and 102,002 shares of Common Stock
issued as dividends on the Series A Preferred Stock; all such shares of Common
Stock are registered pursuant to those certain Registration Rights Agreements
dated May 8 and May 30, 1997; (ii) 300,000 shares of Common Stock issuable to
St. James Capital Partners, L.P. ("St. James Partners") upon exercise of
warrants having an initial exercise price of $7.50 per share issued on April 2,
1998 to St. James Partners ("Initial St. James Partners Warrants") and 1,200,000
shares of Common Stock issuable to its affiliate SJMB, L.P. upon exercise of
warrants having an initial exercise price of $7.50 per share issued on April 2,
1998 to SJMB ("Initial SJMB Warrants"), under a credit facility placed into
effect with St. James Partners on February 12, 1998 and as modified April 2,
1998 ("St. James Credit Facility"), 251,046 shares of Common Stock issuable to
St. James Partners upon conversion of that certain Convertible Promissory dated
April 2, 1998 in the original principal amount of $2,000,000 ("St. James
Partners Note"), and 1,004,184 shares of Common Stock issuable to SJMB upon
conversion of that certain Convertible Promissory dated April 2, 1998 in the
original principal amount of $13,000,000 ("SJMB Note"), each with an annual
interest rate of 7% and having a conversion price of $9.082 per share; all such
shares of Common Stock issuable to St. James Partners and SJMB being
registerable pursuant to that certain Registration Rights Agreement dated
February 12, 1998, as amended on April 2, 1998 (" St. James Registration Rights
Agreement"); (iii) 93,383 shares issuable upon the conversion of certain loans
made by certain officer, directors, employees and other persons to the Company,
which loans are convertible into common stock at the rate of $5.25 per share of
the amount of principal and interest outstanding; and (iv) 1,521,420 shares,
which is 1.75 times the 869,383 shares issuable upon conversion (the "Conversion
Shares") of 5,000 shares of the Company's Series D Convertible Preferred Stock
(the "Series D Preferred Stock") issued in a private placement to certain
purchasers on May 8, 1998 and, in accordance with Rule 416 under the Act, such
presently indeterminate number of additional shares as may be issuable upon
conversion of the Series D Preferred Stock as may become issuable as a result of
stock splits, stock dividends and antidilution provisions (including decreases
in the conversion price of the Series D Preferred Stock). The Conversion Shares
do not include fractional shares of Common Stock that the Company is not
required to issue upon conversion of the Series D Preferred Stock. The number of
shares registered hereunder on behalf of the holders of the Series D Preferred
Stock is determined pursuant to the Registration Rights Agreement dated as of
May 8, 1998 between the Company and the purchasers of the Series D Preferred
Stock and is equal to 1.75 multiplied by the number of Conversion Shares
issuable as of May 21, 1998. In accordance with the Certificate of Designations
of Series D Preferred Stock, the number of Conversion Shares is determined by
dividing the aggregate stated value of the shares of Series D Preferred Stock
together with any accrued and unpaid premium of 4.00% per annum by the
Conversion Price. The Conversion Price is the lesser of (a) $9.082, which price
may be reset to the five day average volume weighted average trading price of
the common stock for the five trading days following the filing of the Company's
Form 10-Q for the quarter ending June 30, 1998 if such price is less than $9.082
(the "Reset Price"), or (b) 97% of the average of the three lowest closing bid
prices for the Common Stock as reported on NASDAQ for the ten consecutive
trading days preceding the date of determination, subject to adjustment for
certain dilutive transactions and other events. If for any 20 of 30 consecutive
trading days the daily volume weighted average trading price (as reported by
Bloomberg) equals or exceeds $12.00, the Company may elect for the Conversion
Price to equal the lesser of $9.082 or the Reset Price. On May 21, 1998 the
Conversion Price was $5.7594 (based on 97% of the average of the three lowest
closing bid prices of the Common Stock for the ten consecutive trading days
ending May 20, 1998). The Company will not receive any of the proceeds from the
sale of the shares by the Selling Stockholders, except to the extent of a cash
exercise by the holders of the Coastal Warrant, the Initial St. James Partners
Warrant, or the SJMB Warrant as more fully described in "Use of Proceeds" in
this Prospectus. The shares of Common Stock covered by this Prospectus are
issuable in connection with certain financings and in satisfaction of certain
registration rights obligations of the Company to the Selling Stockholders.
The Selling Stockholders may from time to time sell the shares covered
by this Prospectus on the Nasdaq National Market in ordinary brokerage
transactions, in negotiated transactions, or otherwise, at market prices
prevailing at time of sale or at negotiated prices. See "Plan of Distribution."
The Common Stock is traded on the Nasdaq National Market under the symbol ICOM.
- -------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN PURCHASING THE
SHARES OF COMMON STOCK OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION (OR ANY STATE SECURITIES COMMISSION) PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this prospectus is May ____, 1998.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements, information
statements, and other information filed by the Company with the Commission
pursuant to the informational requirements of the Exchange Act may be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices located at 7 World Trade Center, Suite 1300, New York, New York 10048,
and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials also may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such materials may also be accessed electronically by means of
the Commission's home page on the Internet at HTTP://WWW.SEC.GOV. The Common
Stock of the Company is traded on the Nasdaq National Market.
The Company has filed with the Commission a Registration Statement on
Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Common Stock offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, as certain items are omitted in accordance with
the rules and regulations of the Commission. For further information pertaining
to the Company and the Common Stock offered hereby, reference is made to such
Registration Statement and the exhibits and schedules thereto, which may be
inspected without charge at the office of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, copies of which may be obtained from the
Commission at prescribed rates, or electronically by means of the Commission's
home page on the Internet at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
1. Annual Report on Form 10-K filed on March 31, 1998;
2. Quarterly Report on Form 10-Q filed on May 15, 1998; and
3. Current Report on Form 8-K filed on May 11, 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 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.
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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.
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EFFECT OF SALES ON MARKET PRICE OF STOCK
Because it is possible that a significant number of shares of Common
Stock could be sold at the same time hereunder, such sales, or the possibility
thereof, could have a significant depressive effect on the market price of the
Common Stock.
RECENT OPERATING LOSSES AND LIQUIDITY
The Company has incurred significant operating losses and negative cash
flows from operations in 1998, 1997, 1996, and 1995. Losses were funded by
proceeds from issuance of notes payable and the sale of preferred and common
stock in 1998, and 1997, net proceeds from issuance of convertible debentures in
1996, and proceeds from the sale of the Savage Arms subsidiary in October 1995.
The Company expects operating losses and negative cash flow from operations to
continue.
Approximately 59% of 1997 revenues resulted from product sales to one
distributor for multiple installations in the Republic of Korea. Following the
financial and economic difficulties which developed in Korea and other Asian
markets in late 1997, only $1,157,000 of product was released for shipment to
the distributor in the three month period ended March 31, 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,
April, and May 1998, through sales of preferred stock and establishment of a
secured credit facility. The Company believes these financial resources will be
adequate to fund operations until profitability and positive operating cash flow
are achieved. The company cannot assure that profitability and positive cash
flow will be achieved when expected. If the aforementioned sales plans are not
achieved, operating losses and negative cash flows exceed the Company's
estimates, or capital requirements in connection with the design, development,
and commercialization of its principal products are higher than estimated, the
Company will need to raise additional capital. Although the Company believes it
could raise additional capital through public or private equity or debt
financings, if necessary, the Company cannot assure that such financings would
be available, or available on acceptable terms. If such financing were not
available, the Company has determined that a significant reduction of
engineering, development, selling, and administrative costs would allow the
Company to continue as a going concern through 1998.
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
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may also choose to reduce price or increase spending in response to competition
or to pursue new market opportunities. In particular, if new competitors,
technological advances by existing competitors or other competitive factors
require the Company to invest significantly greater resources in research and
development efforts, the Company's operating margins in the future may be
materially adversely affected.
The Company anticipates that, because its marketing strategy targets
relatively large potential customers, a small number of large orders may
comprise a significant portion of the Company's future product sales. None of
the 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.
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COMPETITION
Competition in the multimedia communications industry is intense, and
the Company believes that competition will increase substantially with the
development of multimedia communications products, rapid technological changes,
industry consolidations, new industry entrants, and potential regulatory
changes. Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition, and a larger installed customer base than
the Company. In addition, many of these competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements,
and to devote greater resources to the development, promotion and sale of their
products than the Company. There can be no assurance that the Company's current
or potential competitors will not develop products and services comparable or
superior to those developed by the Company or adapt more quickly than the
Company to new technologies, evolving industry trends, or changing customer
requirements. Increased competition could result in price reductions, reduced
margins, or loss of market share, any of which would materially and adversely
affect the Company's business, results of operations, or financial condition.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors, or that competitive pressures faced by
the Company will not have a material adverse effect on its business, results of
operations, and financial 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
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restrict the Company's ability to increase sales. In the event either vendor
fails to meet commitments, the Company intends to rely on its in-house
manufacturing capabilities; however, the conversion to in-house backup supply
would not be without some interruption and could have a material adverse effect
upon the Company's business, results of operations, and financial condition.
The Company uses fiber optic connectors made by a single vendor in the
SONETLYNX OC-3 product. Equivalent components are available from other vendors,
but their use would require a redesign of the method of 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
8
<PAGE>
be able to obtain injunctive or other equitable relief which could effectively
block the Company's ability to sell its products in the United States and
abroad, and could obtain an award of substantial damage either of which could
have a material adverse effect upon the Company's business, results of
operations, and financial condition
Much of the Company's know-how and technology may not be patentable. To
protect its rights, the Company requires many employees, consultants, advisors
and collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets, know-how or other proprietary information in the
event of any unauthorized use or disclosure. Furthermore, the Company's business
may be adversely affected by competitors who independently develop competing
technologies, especially if the Company obtains no, or only narrow, patent
protection.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
While most of the Company's operations are not directly regulated, the
telecommunications service providers that constitute certain of the Company's
customers (particularly for the CS4) are heavily regulated at both the federal
and state levels. Such regulation may limit the number of potential customers
for the Company's services or impede the Company's ability to offer competitive
services to the market, or otherwise have a material adverse effect on the
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.
9
<PAGE>
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 stockholder approval, of
preferred stock with rights and privileges which could be senior to the Common
Stock, eliminating the stockholders' ability to take any action without a
meeting, eliminating the ability of stockholders to call special meetings
without the required consent of the Board of Directors, and establishment of
certain advance notice procedures for nomination of candidates for election as
directors and for stockholder proposals to be considered at stockholders'
meetings. The Company is also subject to Section 203 of the Delaware General
Corporation Laws which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with
any "interested stockholder" for a period of three years following the date that
such stockholder became an "interested stockholder."
VALUE OF SHARES OF STOCK; MARKET FOR COMMON STOCK; STOCK PRICE VOLATILITY
The Company's Common Stock is quoted on the Nasdaq National Market.
Based upon historical trends in the market for the Company's stock and for other
similar technology company stocks, the Company anticipates that the trading
price of its Common Stock may be subject to wide fluctuations in response to
quarterly variations in operating results, changes in actual earnings or in
earnings estimates by analysts, announcements of technological developments by
the Company or its competitors, general market conditions or other events
largely outside the Company's control. In addition, the stock market has
experienced extreme price and volume fluctuations which have particularly
affected the market prices of "high technology" stocks. These fluctuations have
often been disproportionate or unrelated to the operating performance of these
companies. These broad market fluctuations, general economic conditions or other
factors outside the Company's control may adversely affect the market price of
the Common Stock.
USE OF PROCEEDS
Except for the circumstances herein, the Company will not receive any
proceeds from the sale of Common Stock offered hereby. Under each of the Initial
St. James Partners Warrant, the Initial SJMB Warrant and the Coastal Warrant,
the exercise price of such warrants may be paid, at the option of the holder, in
cash or in the form of an exchange of shares under a cashless exercise
provision. The Initial St. James Partners Warrant and the Initial SJMB Warrant
have a provision for a cash exercise price of $7.50 per share. The Coastal
Warrant has a provision for a cash exercise price of $6.00 per share. If St.
James Partners and SJMB elect to pay the exercise price in cash, assuming full
exercise of the warrants at their stated exercise price, the Company will
receive cash proceeds of $2,250,000 and $9,000,000, respectively, under each
warrant. If Coastal elects to pay the exercise price in cash, assuming full
exercise of the warrant at its stated exercise price, the Company will receive
cash proceeds of $2,700,000. If the holders of the warrants elect to pay the
exercise price in cash, the Company will use the proceeds for general corporate
purposes. The Company will receive no cash proceeds if the holders elect the
cashless exercise provision.
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 9,006,809 shares of Common Stock being registered:
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<PAGE>
(i) With respect to each of David C. Conner, Herman M. Frietsch,
Todd Grassi, Nancy Miracle, James W. Ryan, P.C., and Philip P.
Sudan, Jr., P.C. (collectively the "Company Stockholders"), such
shares are issuable upon conversion to Common Stock of the
aggregate amount of principal and interest outstanding under
separate Promissory Notes made by the Company on December 5,
1997 in favor of each of the Company Stockholders. The
Promissory Notes have an annual interest rate of 3% over the
prime rate (or approximately 11.5%) and are payable on demand in
cash or in Common Stock. If a holder elects to convert his or
her Promissory Note into Common Stock, the number of shares
which the holder would be entitled is equal to the aggregate
principal and interest outstanding under the Promissory Note
divided by $5.25. As of May 15, 1998, the aggregate principal
and interest outstanding for each the Company Stockholders, and
the number of shares which each would be entitled to receive
assuming conversion on such date is as follows: Mr. Conner
$52,536.30 and 10,007 shares, Mr. Frietsch $105,072.60 and
20,014 shares, Mr. Grassi $41,701.37 and 7,943 shares, Ms.
Miracle $52,536 and 10,007 shares, James W. Ryan, P.C.
$70,048.75 and 13,343 shares and Philip P. Sudan, Jr., P.C.
$140,096.45 and 26,685 shares. In this registration statement,
the Company has agreed to register for the Company Stockholders
an additional amount of shares to cover an estimated amount
which would accrue based on interest on each of the Promissory
Notes at 11.5% accruing until December 5, 1998.
(ii) With respect to The Coastal Corporation Second Pension
Trust ("Coastal"), 4,219,409 shares of Common Stock are issuable
upon the conversion of the Company's Series A Preferred Stock,
on a share per share basis and 102,002 shares of Common Stock
have been issued to Coastal as dividends on the Series A
Preferred Stock; and 450,000 shares of Common Stock are issuable
upon exercise of that certain warrant issued to Coastal,
assuming exercise in full of such warrant and payment of the
cash exercise price to the Company; all such shares of Common
Stock are registered pursuant to those certain Registration
Rights Agreements dated May 8 and May 30, 1997.
(iii) 300,000 shares of Common Stock are issuable to St. James
Capital Partners, L.P. ("St. James Partners") upon exercise of
warrants having an exercise price of $7.50 per share issued on
April 2, 1998 to St. James Partners ("Initial St. James Partners
Warrants") under a credit facility placed into effect with St.
James Partners on February 12, 1998 and as modified April 2,
1998 ("St. James Credit Facility"), pursuant to the terms of an
Agreement for Purchase and Sale of $15 Million Promissory Note
between the Company and St. James Partners dated February 12,
1998, and as assigned to SJMB, L.P. ("SJMB"), an affiliate of
St. James Partners, pursuant to the terms of an Assignment and
Acceptance executed among St. James Partners, SJMB and the
Company on April 2, 1998, (such Agreement, as modified by such
Assignment and Acceptance, the "St. James Credit Agreement"),
251,046 shares of Common Stock are issuable to St. James
Partners upon conversion of that certain Convertible Promissory
dated April 2, 1998 in the original principal amount of
$2,000,000 ("St. James Partners Note"), specifying interest at
the fixed per annum rate of 7%, due on a maturity date of
February 12, 1999 (which maturity date may be extended for one
additional year at the option of the Company) and providing for
conversion of all principal and interest due thereunder to
shares of Common Stock at the election of St. James Partners at
a conversion price of $9.082 per share of Common Stock and at
the election of the Company upon the market price of the shares
of Common Stock exceeding $13.50 per share; all such shares of
Common Stock issuable to St. James Partners being registerable
pursuant to that certain Registration Rights Agreement dated
February 12, 1998, as amended on April 2, 1998 ("St. James
Registration Rights Agreement"). The number of shares of Common
Stock which St. James Partners is entitled to upon conversion of
the St. James Partners Note, as of May 13, 1998, is
approximately 224,119. The number of conversion shares
registered hereunder assumes interest accruing on the current
unpaid principal balance of the St. James Partners Note until
one year following the February 9, 1998 maturity date.
(iv) 1,200,000 shares of Common Stock are issuable to SJMB upon
exercise of warrants having an exercise price of $7.50 per share
issued on April 2, 1998 to SJMB ("Initial SJMB Warrants") under
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<PAGE>
the St. James Credit Facility, 1,004,184 shares of Common Stock
are issuable to SJMB upon conversion of that certain Convertible
Promissory dated April 2, 1998 in the original principal amount
of $13,000,000 ("SJMB Promissory Note"), specifying interest at
the fixed per annum rate of 7%, due on a maturity date of
February 12, 1999 (which maturity date may be extended for one
additional year at the option of the Company) and providing for
conversion of all principal and interest due thereunder to
shares of Common Stock at the election of SJMB at a conversion
price of $9.082 per share of Common Stock and at the election of
the Company upon the market price of the shares of Common Stock
exceeding $13.50 per share; all such shares of Common Stock
issuable to SJMB being registerable pursuant to the St. James
Registration Rights Agreement. The number of shares of Common
Stock which SJMB is entitled to upon conversion of the SJMB
Note, as of May 13, 1998, is approximately 896,478. The number
of conversion shares registered hereunder assumes interest
accruing on the current unpaid principal balance of the SJMB
Note until one year following the February 9, 1998 maturity
date.
(v) The shares of Common Stock which are issuable to CCG Capital
Ltd., CCG Investment Fund Ltd.,Wingate Capital Ltd., and Fisher
Capital, Ltd. (collectively, the "Citadel Entities") upon
conversion of the Company's Series D Convertible Preferred Stock
(the "Series D Preferred Stock"), which were issued pursuant to
that certain Securities Purchase Agreement and are registerable
pursuant to that certain Registration Rights Agreement, each of
such agreements being among the Company and the Citadel Entities
and dated May 8, 1998. The Company has agreed to register a
specific number of Conversion Shares for resale by the Selling
Stockholders holding the Series D Preferred Stock. The number of
Conversion Shares shown in the following table as being offered
by the Selling Stockholders which hold Series D Preferred Stock
does not included such presently indeterminate number of shares
of Common Stock as may be issuable upon conversion of the Series
D Preferred Stock pursuant to the provisions thereof regarding
determination of the applicable conversion price but which
shares of Common Stock are, in accordance with Rule 416 under
the Securities Act, included in the Registration Statement of
which this Prospectus forms a part.
In each case, the issuance of Common Stock to the Selling Stockholders
was undertaken pursuant to Section 4(2) of the Securities Act.
Except as otherwise indicated, the table below sets forth the number of
shares of Common Stock beneficially owned by each of the Selling Stockholders as
of May 13, 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.
Of the Company Stockholders, Mr. Conner and Mr. Grassi are employees of the
Company, Ms. Miracle is an officer of Intelect Network Technologies Company, a
wholly owned subsidiary of the Company. Philip P. Sudan, Jr. is a director of
the Company, a partner in Ryan & Sudan, LLP (outside counsel to the Company) and
a controlling shareholder of Philip P. Sudan, Jr., P.C. James W. Ryan is a
partner in Ryan & Sudan, L.L.P. and a controlling shareholder of James W. Ryan,
P.C.
<TABLE>
<CAPTION>
Number of Shares Number of Shares
of Common Stock of Common Stock
Beneficially Owned Number of Shares Beneficially
as of May 13, 1998 of Common Stock Owned After
Name of Selling Stockholder (1) Offered Hereby Offering (6)
- --------------------------------------------------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
David C. Conner ............................................... 14,006 10,619 3,386
Herman M. Frietsch ............................................ 862,022 21,238 840,784
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<PAGE>
Todd Grassi ................................................... 8,943 8,432 510
Nancy Miracle ................................................. 40,155 10,619 29,536
James W. Ryan, P.C ............................................ 63,342 14,158 49,183
Philip P. Sudan, Jr., P.C ..................................... 246,688 28,317 218,371
The Coastal Corporation Second Pension ........................ 5,701,944 4,771,411 930,533
Trust
St. James Capital Partners, L.P. .............................. 560,319(2) 524,119 36,200
SJMB, L.P. .................................................... 2,132,676(3) 2,096,476 36,200
CCG Capital Ltd.(7) ........................................... 53,124(4) 60,857(5) 0
CCG Investment Fund, Ltd.(7) .................................. 57,580(4) 60,857(5) 0
Wingate Capital Ltd.(7) ....................................... 284,186(4) 489,897(5) 0
Fisher Capital Ltd.(7) ........................................ 527,775(4) 909,809(5) 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 May 13, 1998 through the conversion
or exercise of any security or other right.
(2) Does not include shares beneficially owned by SJMB, L.P.
(3) Does not include shares beneficially owned by St. James
Capital Partners, L.P.
(4) Beneficial ownership is determined as of May 13, 1998 and is
based on a Conversion Price of the Series D Preferred Stock
equal to $5.6684 (which is 97% of the average of the three
lowest closing bid prices of the Common Stock for the ten
consecutive trading days ended May 12, 1998). The number of
shares of Series D Preferred Stock issued to each member of
the Citadel Entities is as follows: CCG Capital Ltd. 200
shares, CCG Investment Fund Ltd. 200 shares, Wingate Capital
Ltd 1,610 shares, and Fisher Capital Ltd. 2,990 shares. The
actual number of shares of Common Stock issuable upon
conversion of the Series D Convertible Preferred Stock is that
number of shares of Common Stock equal to the quotient of (i)
the aggregate stated value of the Conversion Shares ($1,000
per share), plus any accrued and unpaid premium of 4.00% per
annum divided by (ii) the Conversion Price. The Conversion
Price is the lesser of (a) $9.082 per share, which price may
be reset to the five day average volume weighted average
trading price of the common stock for the five trading days
following the filing of the Company's Form 10-Q for the
quarter ending June 30, 1998, if such price is less than
$9.082 (the "Reset Price"), or (b) 97% of the market price of
the Common Stock, where the market price is the average of the
three lowest closing bid prices for the Common Stock for the
10 consecutive trading days immediately preceding such date of
determination (the "Determination Date"). If for any 20 of 30
consecutive trading days the daily volume weighted average
trading price (as reported by Bloomberg) of the Common Stock
equals or exceeds twelve dollars ($12), then the Company may
elect for the Conversion Price to equal $9.082 (or the Reset
Price if lower). No holder of shares of the Series D Preferred
Stock is entitled to convert or exercise such securities to
the extent that the shares to be received by such holders upon
such conversion or exercise would cause such holders in the
aggregate to beneficially own more than 5% of the Common Stock
of the Company
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<PAGE>
(other than shares deemed to be beneficially owned through
ownership of the Series D Preferred Stock), except upon 61
days prior notice to the Company. In no event can such holders
in the aggregate own 15% or more of the Common Stock of the
Company without the prior written consent of the Company. In
addition, pursuant to the rules of the NASDAQ Stock Market, in
the absence of shareholder approval, the aggregate number of
shares issuable to the Citadel Entities at a discount from
market price upon the conversion of the Series D Preferred
Stock, and any other issuances of Common Stock which the
NASDAQ Stock Market may determine to be integrated with the
Series D Preferred Stock transaction, may not exceed 19.99% of
the outstanding Common Stock as of May 8, 1998. Unless such
shareholder approval is obtained, none of the Citadel Entities
will be able to acquire more than its proportionate share of
such maximum amount. The Company may be required to redeem any
Series D Preferred Stock which may not be converted because of
such limitation. Beneficial ownership for CCG Capital Ltd. and
CCG Investment Fund Ltd. includes 17,821 and 22,277 shares of
Common Stock, respectively, issuable as of May 13, 1998 upon
conversion of holdings by each of the Company's Series C
Convertible Preferred Stock (the "Series C Stock").
(5) Represents the allocation among the Citadel Entities of 175%
of the number of shares of Common Stock potentially issuable
as of May 20, 1998, upon conversion of the 5,000 shares of the
Series D Convertible Preferred Stock held by the Citadel
Entities which the Company is registering pursuant to the
Registration Rights Agreement between the Company and the
Citadel Entities. The number of shares of Common Stock
registered pursuant to the Registration Statement on behalf of
the Selling Stockholders holding Series D Preferred Stock and
the number of Conversion Shares offered hereby by such holders
have been determined by agreement between the Company and such
Selling Stockholders. Because the number of shares that will
ultimately be issued upon conversion of the Series D Preferred
Stock is dependent, subject to certain limitations, upon the
average of certain closing bid prices of the Common Stock
prior to conversion, as described in footnote (2) above, and
certain antidilution adjustments, such number of shares (and
therefore the number of Shares offered hereby) cannot be
determined at this time. The number of Shares being offered by
the Selling Stockholders holding Series D Preferred Stock, in
accordance with Rule 416 under the Securities Act, also
includes such presently indeterminate number of additional
Shares as may be issuable upon conversion of the Series D
Preferred Stock, based upon fluctuations in the conversion
price of the Series D Preferred Stock and future antidilution
adjustments in accordance with the terms of the Series D
Preferred Stock. Furthermore, pursuant to the Registration
Rights Agreement, because market price of the Common Stock is
subject to fluctuation, the Company has agreed to register
175% of each purchaser's allocation of the Conversion Shares
and agreed to amend this registration statement if this amount
falls below 150% of the shares of Common Stock issuable upon
conversion of the Series D Preferred Stock under the above
formula.
(6) Gives effect to the conversion of the Series A Preferred
Stock, the Promissory Notes to the Company Stockholders, the
St. James Partners Note, the SJMB Note, the conversion of all
shares of Series D Preferred Stock (and, with respect to each
of CCG Capital Ltd., and CCG Investment Fund Ltd. the
conversion of all shares of Series C Stock), and sale of such
shares upon conversion of each. Upon completion of the
offering, each Selling Stockholder will own less than one
percent of the Common Stock of the Company, except as follows:
Mr. Frietsch, 3.46%, and Coastal, 3.23%.
(7) Citadel Limited Partnership is the trading manager of each of
the Citadel Entities and consequently has voting control and
investment discretion over securities held by the Citadel
Entities. The ownership for each of the Citadel Entities does
not include the ownership information for the other Citadel
Entities. Also does not include 613,522 and 1,139,526 shares
of Common Stock beneficially owned as of May 13, 1998, by
Nelson Partners ("Nelson") and Olympus Securities, Ltd.
("Olympus"), respectively, including shares of Common Stock
issuable as of May 13, 1998, upon conversion of holdings by
each of the Series C Stock. Citadel Limited Partnership is the
managing general partner of Nelson and the trading manager of
Olympus and consequently has voting control
14
<PAGE>
and investment discretion over securities held by each.
Citadel Limited Partnership and each of the Citadel Entities
disclaims beneficial ownership of the shares of Common Stock
held by the other Citadel Entities, Nelson or Olympus.
The Selling Stockholders identified above may have sold, transferred or
otherwise disposed of all or a portion of their Common Stock since the date on
which they provided the information regarding their Common Stock in transactions
exempt from the registration requirements of the Securities Act. Additional
information concerning the above listed Selling Stockholders may be set forth
from time to time in prospectus supplements to this Prospectus.
See "Plan of Distribution."
PLAN OF DISTRIBUTION
The Common Stock is being offered on behalf of the Selling
Stockholders. The Common Stock may be sold or distributed from time to time by
the Selling Stockholders, or by donees or transferees of, or other successors in
interests to, the Selling Stockholders, directly to one or more purchasers or
through brokers, dealers or underwriters who may act solely as agents or may
acquire Common Stock as principals, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices,
or at fixed prices, which may be changed. The sale of the Common Stock may be
effected in one or more of the following methods: (i) ordinary brokers'
transactions; (ii) transactions involving cross or block trades or otherwise on
the Nasdaq National Market; (iii) purchases by brokers, dealers or underwriters
as principal and resale by such purchasers for their own accounts pursuant to
this Prospectus; (iv) "at the market" to or through market makers or into an
existing market for the Common Stock; (v) in other ways not involving market
makers or established trading markets, including direct sales to purchases or
sales effected through agents; (vi) through transactions in options, swaps or
other derivatives (whether exchange-listed or otherwise); (vii) in privately
negotiated transactions; (viii) to cover short sales; or (ix) any combination of
the foregoing.
From time to time, one or more of the Selling Stockholders may pledge,
hypothecate or grant a security interest in some or all of the Conversion Shares
owned by them, and the pledgees, secured parties or persons to whom such
securities have been hypothecated shall, upon foreclosure in the event of
default, be deemed to be Selling Stockholders hereunder. In addition, a Selling
Stockholder may, from time to time, sell short the Common Stock of the Company,
and in such instances, this Prospectus may be delivered in connection with such
short sales and the Conversion Shares offered hereby may be used to cover such
short sales.
From time to time one or more of the Selling Stockholders may transfer,
pledge, donate or assign such Selling Stockholders' Conversion Shares to lenders
or others and each of such persons will be deemed to be a Selling Stockholder
for purposes of this Prospectus. The number of Selling Stockholders' Conversion
Shares beneficially owned by those Selling Stockholders who so transfer, pledge,
donate or assign Selling Stockholders' Conversion Shares will decrease as and
when they take such actions. The plan of distribution for Selling Stockholders'
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
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<PAGE>
principal, or both (which compensation as to a particular broker-dealer may be
less than or in excess of customary commissions). The Selling Stockholders and
any broker-dealers who act in connection with the sale of Common Stock hereunder
may be deemed to be "Underwriters" within the meaning of the Securities Act, and
any commissions they receive and proceeds of any sale of Common Stock may be
deemed to be underwriting discounts and commissions under the Securities Act.
Neither the Company nor any Selling Stockholders can presently estimate the
amount of such compensation. The Company knows of no existing arrangements
between any Selling Stockholders, any other stockholder, broker, dealer,
underwriter or agent relating to the sale or distribution of the Common Stock.
The Company will pay substantially all of the expenses incident to the
registration, offering and sale of the Common Stock to the public other than
commissions or discounts of underwriters, broker-dealers or agents. The Company
has also agreed to indemnify certain of the Selling Stockholders and certain
related persons against certain liabilities, including liabilities under the
Securities Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company, the Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
With respect to the Citadel Entities, each purchaser of the Series D
Preferred Stock has agreed to refrain from selling on any trading day a number
of shares of Common Stock issued pursuant to the conversion of the Series D
Preferred Stock in excess of that number of shares of Common Stock equal to 20%
of the daily trading volume of the Common Stock on such date of determination,
except that this limitation does not apply if the daily trading volume is in
excess of 200% of the average daily trading volume for the prior 6 month period
and further does not apply in the event of certain Extraordinary Events, a Major
Transaction, or a Triggering Event (each as defined in the Certificate of
Designation). In addition, each purchaser of the Series D Preferred Stock agreed
to not engage in any "short sales" (as defined in Rule 3b-3 of the Securities
Exchange Act of 1934, as amended) of the Common Stock of the Company, other than
for short sales which such purchaser makes and submits a conversion notice
entitling such purchaser to receive a number of shares of Common Stock at least
equal to the number of shares so sold.
The Company has advised the Selling Stockholders that during such time
as they may be engaged in a distribution of the Common Stock included herein
they are required to comply with Regulation M promulgated under the Exchange
Act. With certain exceptions, Regulation M precludes any Selling Stockholder,
any affiliated purchasers, and any broker-dealer or other person who
participates in such distribution from bidding for or purchasing, or attempting
to induce any person to bid for or purchase any security which is the subject of
the distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the Common Stock.
Because it is possible that a significant number of shares of the
Common Stock could be sold at the same time hereunder, such sales, or the
possibility thereof, may have a significant depressive effect on the market
price of the Company's Common Stock.
This offering will terminate on the earlier of (a) the date on which
the shares are eligible for resale without restriction pursuant to Rule 144(k)
under the Securities Act or (b) the date on which all shares offered hereby have
been sold by the Selling Stockholders.
LEGAL MATTERS
The validity of the Common Stock offered by the Selling Stockholders
hereby will be passed upon by Ryan & Sudan, L.L.P., Houston, Texas. Philip P.
Sudan, Jr. is a partner of Ryan & Sudan, L.L.P and a director of the Company and
Philip P. Sudan, Jr., P.C., a professional corporation controlled by Mr. Sudan,
is a Selling Stockholder. Mr. Sudan beneficially owns 246,688 shares of Common
Stock. Mr. James W. Ryan, a partner in Ryan
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& Sudan, L.L.P. controls James W. Ryan P.C. which is also a Selling Stockholder.
Mr. Ryan beneficially owns 63,342 shares of Common Stock.
EXPERTS
The financial statements and schedules of the Company as of December
31, 1997, and for the year then ended, incorporated by reference in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
The consolidated balance sheet of the Company and its subsidiaries as
of December 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996, the
two month period ended December 31, 1995 and the year ended October 31, 1995,
together with the related notes and the report of KPMG Peat Marwick, independent
chartered accountants, all contained in the Company's 1997 annual report, are
incorporated herein by reference. The report of KPMG Peat Marwick on the
aforementioned consolidated financial statements contains an explanatory
paragraph that states that the Company has suffered recurring losses from
continuing operations and is dependent upon the successful development and
commercialization of its products and its ability to secure adequate sources of
capital until the Company operates profitably. These matters raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
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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 ........................................................ 15
Legal Matters ............................................................... 16
Experts ..................................................................... 17
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Nature of Expense
SEC Registration Fee...................................... $ 17,571
Nasdaq Listing Fee........................................ $ 17,500
Legal (including Blue Sky), Printing, and Accounting
Fees and Expenses....................................... $ 30,000*
Miscellaneous............................................. $ 2,000*
*Estimated TOTAL..... $ *67,071
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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<PAGE>
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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<PAGE>
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this
Registration Statement or any material change to such information
in this Registration Statement;
provided, however, that paragraphs (1)(i) and (1) (ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Company pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") that are incorporated by reference in this
Registration Statement.
(2) That, for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable,
each filing of any employer benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the indemnification provisions described herein, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceedings) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing this Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Richardson, Texas on the 22nd day of May 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ HERMAN M. FRIETSCH Chief Executive Officer and May 22, 1998
Herman M. Frietsch Director (Principal Executive Officer)
/S/ EDWIN J. DUCAYET, JR. Vice President, Chief Financial Officer, May 22, 1998
Edwin J. Ducayet, Jr. Treasurer, and Assistant Secretary
(Principal Financial Officer and Principal
Accounting Officer)
/S/ PHILIP P. SUDAN, JR. Director May 22, 1998
Philip P. Sudan, Jr.
/S/ ANTON LIECHTENSTEIN Director May 22, 1998
Anton Liechtenstein
/S/ ROBERT E. GARRISON II Director May 22, 1998
Robert E. Garrison II
</TABLE>
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<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
4.1 Amended and Restated Certificate of Incorporation of the Company
(1)
4.2 Amended and Restated By-Laws of the Company (1)
4.3 Certificate of Designations of the Series A Preferred Stock
dated December 2, 1997 (1)
4.4 Certificate of Designations of the Series D Preferred Stock
dated May 7, 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 May 8, 1998 (2)
10.2 Registration Rights Agreement among the Company and the Citadel
Group, dated May 8, 1998 (2)
10.3 Agreement for Purchase and Sale dated February 12, 1998 by the
Company and St. James Capital Partners, L.P. ("St. James
Partners") (3 )
10.4 $15,000,000 Convertible Promissory Note issued to St. James
Partners by the Company dated February 12, 1998 (3);
10.5 Warrant issued to St. James Partners by the Company dated
February 12, 1998(3);
10.6 Registration Rights Agreement between the Company and St. James
Partners dated February 12, 1998 (3);
10.7 Pledge Agreement between the Company and St. James Partners
dated February 12, 1998(3);
10.8 $2,000,000 Convertible Promissory Note issued to St. James
Partners by the Company dated April 2, 1998 (4)
10.9 $13,000,000 Convertible Promissory Note issued to SJMB by the
Company dated April 2, 1998 (4)
10.10 Warrant issued to St. James Partners by the Company dated April
2, 1998, exercisable as to 300,000 shares of Common Stock (4)
10.11 Warrant issued to SJMB by the Company dated April 2, 1998,
exercisable as to 1,200,000 shares of Common Stock (4)
10.12 Amendment No. 1 to Registration Rights Agreement dated as of
April 2, 1998 between the Company and St. James Partners (4)
10.13 Form of Promissory Note dated December 5, 1997 by the Company
(5)
10.14 Registration Rights Agreements dated May 8 and May 30, 1997
among the Company and The Coastal Corporation Second Pension
Trust (6)
10.15 Warrant to purchase Company Common Stock expiring May 7, 2002
issued to The Coastal Corporation Second Pension Trust (6)
10.16 Subscription Agreement dated May 30, 1997 among the Company and
The Coastal Corporation Second Pension Trust (6)
10.17 Warrant to purchase Company Common Stock expiring August 26,
2002 issued to The Coastal Corporation Second Pension Trust (7)
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 May 11, 1998 (3) Incorporated herein
by reference to Form 8-K of Intelect Communications, Inc. filed
February 17, 1998
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<PAGE>
(4) Incorporated herein by reference to Form 10-Q of Intelect
Communications, Inc., filed May 15, 1998
(5) Incorporated herein by reference to Form 10-K of Intelect
Communications, Inc., filed March 31, 1998
(6) Incorporated herein by reference to the Form 10-Q Intelect
Communications Systems Limited for the quarter ended June 30,
1997
(7) Incorporated herein by reference to Form S-3 of Intelect
Communications Systems Limited, filed September 17, 1997.
II-6
EXHIBIT 5.1
[RYAN & SUDAN, L.L.P. LETTERHEAD]
May 22, 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 9,006,809 shares (the "Shares") of the Common Stock of the
Company, par value $.01 per share (the "Common Stock") under the Registration
Statement, filed by the Company under the Securities Act of 1933, as amended.
As such counsel, we have examined such corporate records, certificates
and other documents and have made such other factual and legal investigations as
we have deemed relevant and necessary as the basis for the opinions hereinafter
expressed. In such examinations, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals
and the conformity to original documents of all documents submitted to us as
conformed or photostatic copies. Unless otherwise defined herein, capitalized
terms shall have the meanings assigned to them in the Registration Statement.
Based on the foregoing, we are of the opinion that:
1. The shares of Common Stock initially issuable upon the
exercise of the 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 each of the Series A Preferred Stock and the
Series D Convertible Preferred Stock of the Company have been
duly authorized and reserved for issuance, and upon the
conversion of each of the Series A Preferred Stock and the
Series D Convertible Preferred Stock in accordance with its
respective Certificate of Designations and each will be
validly issued, fully paid, and non-assessable by the Company.
3. The shares of Common Stock issuable upon conversion of the
Promissory Notes issued to the Company Stockholders, the
conversion of the St. James Partners Note, and the conversion
of the SJMB Note have been duly authorized and reserved for
issuance, and upon conversion of such obligations in
accordance with their respective terms, each will be validly
issued, fully paid, and non-assessable by the Company.
4. The shares of Common Stock which have been issued to The
Coastal Corporation Second Pension Trust as dividends on the
Series A Preferred Stock have been validly issued are fully
paid and non-assessable by the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
RYAN & SUDAN, L.L.P.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Intelect Communications, Inc.
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement on Form S-3 (Registration No.
333-______) of our report dated March 27, 1998, included in Intelect
Communications, Inc.'s Form 10-K for the year ended December 31, 1997, and to
all references to our firm included in this registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
May 21, 1998
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK
The Board of Directors
Intelect Communications, Inc.
We consent to the incorporation by reference in the registration statement on
Form S-3 dated May 22, 1998 of our report dated April 9, 1997, relating to the
consolidated balance sheet of Intelect Communications Systems Limited and
subsidiaries as of December 31, 1996, and the related consolidated statements of
operations, stockholder's equity and cash flows for the year ended December 31,
1996, the two months ended December 31, 1995 and the year ended October 31,
1995, and the related schedule, which report appears in the December 31, 1997
annual report on Form 10-K of Intelect Communications, Inc.
Our report dated April 9, 1997, contains an explanatory paragraph that states
that Intelect Communications Systems Limited has suffered recurring losses from
continuing operations and is dependent upon the successful development and
commercialization of its products and is ability to secure adequate sources of
capital until the Company is operating profitably. These matters raise
substantial doubt about the company's ability to continue as a going concern.
Management's plans with regard to these matters are described in note 1 to the
consolidated financial statements. The consolidated financial statements and
financial statement schedule do not include any adjustments that might result
from the outcome of this uncertainty.
We consent to the 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.
KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
May 22, 1998
