<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------------
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________
COMMISSION FILE NUMBER 0-11630
INTELECT COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 76-0471342
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
1100 EXECUTIVE DRIVE, RICHARDSON, TEXAS
75081
(Address of Principal Executive Offices, Zip Code)
972-367-2100
(Registrant's Telephone Number, Including Area Code)
-----------------------------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
There were 25,437,865 shares of Common Stock, par value $.01 per share,
outstanding on August 10, 1998.
================================================================================
<PAGE> 2
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company
at June 30, 1998 (unaudited) and December 31, 1997 2
Consolidated Statements of Operations of the Company (unaudited)
for the three months and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows of the Company
(unaudited) for the six months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II OTHER INFORMATION
ITEM 3 CHANGES IN SECURITIES 13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 5 OTHER INFORMATION 14
ITEM 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 14
SIGNATURES 16
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------- -------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,590 $ 2,094
Investments in marketable securities 888 942
Accounts receivable net of allowances of $513 in 1998 and $541 in 1997 14,702 15,569
Inventories 7,828 6,289
Prepaid expenses 905 658
------- -------
Total current assets 29,913 25,552
Property and equipment, net 6,684 6,041
Goodwill, net 12,159 13,249
Software development costs, net 3,046 2,229
Other intangible assets, net 1,018 1,168
Other assets 1,481 992
======= =======
$54,301 $49,231
======= =======
</TABLE>
See accompanying notes to consolidated financial statements (Continued)
2
<PAGE> 4
INTELECT COMMUNICATIONS INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ------------
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable, net of unamortized discount of $2,091 in 1998 and
$578 in 1997 $ 8,349 $ 9,132
Current maturities of long-term debt 862 2,527
Accounts payable 4,246 7,568
Accrued liabilities 2,572 3,173
Net liabilities of discontinued operations 400 400
Deferred income taxes 49 49
Current installments of obligations under capital leases 86 89
--------- ---------
Total current liabilities 16,564 22,938
Long-term obligations under capital leases, net of current installments 11 55
Deferred income taxes 89 89
--------- ---------
16,664 23,082
--------- ---------
Commitments and contingencies
Stockholders' equity:
$2.0145, 10% cumulative convertible preferred stock, series A,
$.01 par value (aggregate involuntary liquidation preference
$20,145,000). Authorized 10,000,000 shares; 4,219,409 shares
issued and outstanding 42 42
$4.375, 10% cumulative convertible preferred stock, series B,
$.01 par value (aggregate involuntary liquidation preference
$4,000,000). Authorized 914,286 shares; 914,286 shares
issued and outstanding 9 9
Series C convertible preferred stock, $.01 par value (aggregate
involuntary liquidation preference $10,000,000). Authorized
12,500 shares; 10,000 shares issued and outstanding in 1998 1 --
Series D convertible preferred stock, $.01 par value (aggregate
involuntary liquidation preference $10,000,000). Authorized,
issued, and outstanding 10,000 shares in 1998 1 --
Common stock, $.01 par value. Authorized 50,000,000 shares;
24,316,317 and 23,954,978 shares issued and outstanding in 1998
and 1997 243 240
Additional paid-in capital 100,171 75,940
Unrealized gain on marketable securities -- 2
Retained earnings (accumulated deficit) (62,830) (50,084)
--------- ---------
Total stockholders' equity 37,637 26,149
--------- ---------
$ 54,301 $ 49,231
========= =========
</TABLE>
See accompanying notes to consolidated financing statements.
3
<PAGE> 5
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 7,071 $ 9,007 $ 12,585 $ 13,544
Cost of revenue 4,827 6,042 8,835 9,812
-------- -------- -------- --------
Gross Profit 2,244 2,965 3,750 3,732
-------- -------- -------- --------
Expenses:
Engineering and development 1,554 2,522 4,399 4,992
Selling and administrative 4,402 4,427 8,031 8,692
Amortization of goodwill 310 327 641 661
-------- -------- -------- --------
6,266 7,276 13,071 14,345
-------- -------- -------- --------
Operating Loss (4,022) (4,311) (9,321) (10,613)
-------- -------- -------- --------
Other income (expense):
Interest expense (1,088) (958) (2,111) (1,903)
Interest income and other 62 (309) 170 (346)
-------- -------- -------- --------
(1,026) (1,267) (1,941) (2,249)
-------- -------- -------- --------
Loss from continuing operations before income taxes (5,048) (5,578) (11,262) (12,862)
Income tax expense (14) (39) (14) (77)
-------- -------- -------- --------
Loss from continuing operations (5,062) (5,617) (11,276) (12,939)
Loss on disposal of discontinued operations, net of tax (97) (20) (185) (113)
======== ======== ======== ========
Net loss $ (5,159) $ (5,637) $(11,461) $(13,052)
======== ======== ======== ========
Dividends on preferred stock 538 64 1,285 64
======== ======== ======== ========
Loss available to common stockholders $ (5,697) $ (5,701) $(12,746) $(13,116)
======== ======== ======== ========
Basic and diluted loss per share:
Continuing operations $ (0.23) $ (0.28) $ (0.52) $ (0.71)
Discontinued operations -- -- (0.01) (0.01)
======== ======== ======== ========
Net loss per share $ (0.23) $ (0.28) $ (0.53) $ (0.72)
======== ======== ======== ========
Weighted average number of common shares outstanding $ 24,271 19,810 24,190 18,210
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
--------- ----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(11,461) $(13,052)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,833 1,498
Amortization of loan discount 1,540 1,427
Deferred income taxes -- 77
Loss on disposal of discontinued operations 186 113
Stock option compensation 50 121
Noncash operating expenses 93 282
Other -- (8)
Change in operating assets and liabilities,
Net of effects of acquired companies:
Accounts receivable 867 (6,230)
Inventories (1,539) (620)
Other assets (123) (177)
Accounts payable and accrued liabilities (3,924) 2,407
-------- --------
Net cash used in operating activities (12,478) (14,162)
-------- --------
Cash flows from investing activities:
Payments for disposal of discontinued operations (133) (113)
Purchase of other intangible assets (12) (83)
Capital expenditures (1,402) (1,925)
Purchase of marketable securities -- (78)
Software development costs (1,032) (1,021)
Proceeds from sale of marketable securities 52 --
-------- --------
Net cash used in investing activities (2,527) (3,220)
-------- --------
Cash flows from financing activities:
Debt issuance costs (73) (309)
Proceeds from issuance of notes payable 10,020 11,200
Principal payments on notes payable (9,290) --
Payments under capital lease obligations (47) (29)
Principal payments on long-term debt (1,215) (682)
Proceeds from exercise of employee stock options 282 348
Proceeds from issuance of preferred shares 18,824 5,000
-------- --------
Net cash provided by financing activities 18,501 15,528
-------- --------
Net increase (decrease) in cash and cash equivalents 3,496 (1,854)
Cash and cash equivalents, beginning of period 2,094 4,863
-------- --------
Cash and cash equivalents, end of period $ 5,590 $ 3,009
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
INTELECT COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1998
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
by the Company without audit in accordance with generally accepted accounting
principles for interim financial statements and with instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included.
The accompanying consolidated financial statements do not include
certain footnotes and financial presentations normally required under generally
accepted accounting principles and, therefore, should be read in conjunction
with the audited financial statements included in the Company's Annual Report on
Form 10-K as at December 31, 1997.
INVENTORIES
The components of inventories are as follows (thousands of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Raw materials $ 4,503 $ 5,209
Work in progress 2,283 630
Finished goods 2,703 2,050
------- -------
9,489 7,889
Less: allowance for obsolescence (1,661) (1,600)
------- -------
$ 7,828 $ 6,289
======= =======
</TABLE>
FINANCING MATTERS
Effective as of April 1, 1998, the Company authorized the issuance of
31,308 shares of common stock in lieu of a $212,000 cash dividend on Series A
preferred stock for the quarter ended March 31, 1998 and 17,025 shares in lieu
of a $116,000 cash dividend on Series B preferred stock for the period from date
of issue through March 31, 1998. The share price was the average closing market
bid price for the five consecutive trading days ending March 31, 1998.
On February 12, 1998, the Company established a $15,000,000 credit
facility (the "Facility") with a private lender, and received an initial advance
of $3,000,000. On April 2, 1998, the Company received an additional advance of
$7,000,000. The Facility is due February 12, 1999, is secured by all outstanding
shares of the Company's wholly owned U.S. subsidiaries, and bears interest at
the rate of 7% per annum, payable at maturity. In conjunction with advances
under the Facility, the lender received warrants to purchase 1,500,000 shares of
common stock, exercisable at any time for a three year period at an exercise
price of $7.50 per share. Outstanding advances and accrued interest are
convertible into shares of common stock at a price of $9.082, at the lender's
option, provided the market price of the common stock is less than $13.50, and
at the Company's option if the market price of the common stock is $13.50 or
greater. Market price is defined as the closing bid price for 15 of the 17
consecutive days immediately prior to the conversion date. The Facility may be
extended for an additional year in exchange for warrants to purchase common
stock, exercisable at any time for a three year period, at the rate of 5,000
warrant shares for each $100,000 advanced, at a price equal to $1.50 greater
than the average closing bid price of the common stock for the ten day period
immediately prior to February 12,
6
<PAGE> 8
1999. All warrants are subject to certain repricing and anti-dilution
adjustments. The Facility, among other things, prohibits any additional
indebtedness. The obligation to make future advances expired on July 31, 1998.
The Company is prohibited from redeeming any capital stock, declaring any
dividends on common stock or making certain other distributions, as defined.
Proceeds of the initial advance were used for working capital and general
corporate purposes. Proceeds of the second advance were used primarily to retire
outstanding loans and accrued interest, totaling $6,630,000 from the previous
Credit Facility. The fair value of the warrants at dates of issue, totaling
$909,000 and $2,071,000, evaluated using the Black-Scholes option pricing model,
were credited to additional paid-in capital and are being charged to interest
expense using the effective interest method over the loan period.
On April 2, 1998, the credit facility was retired as described above,
and on May 12, 1998, the Coastal Trust Revolving Loan, outstanding advances and
accrued interest, totaling $3,223,000, was retired.
On May 8 and June 26, 1998, the Company sold 5,000 shares of Series D
Convertible Preferred Stock, in private placements to holders of the Series C
preferred stock, realizing a total of $9,645,000, after issuance costs. A
premium on the Series D preferred stock accumulates at the rate of 4% per annum,
is payable upon conversion, and may be paid in cash or common stock, at the
Company's option. The preferred stock will automatically convert into common
stock on May 8, 2000, and June 26, 2000, respectively, and may be converted
prior to that date, at the holder's option, at the lesser of $9.082 (or the
"reset price," the 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 less) per share of common stock or at 97% of
the market price. Market price is defined as the average of the three lowest
closing bid prices for the common stock within the ten trading days immediately
preceding the conversion date. The Company may fix the conversion price at
$9.082 (or the reset price, if less) if, for any 20 of 30 consecutive trading
days, the daily volume-weighted price of the common stock is $12.00 or greater.
The preferred stock may be redeemed, at the Company's option, at 110% of the
stated value if the daily volume-weighted average trading price is below $3.00
per share for ten consecutive trading days. Terms of the series, among other
things, limit the rate of conversion and the rate of sale of common stock
acquired upon conversion, prohibit the Company from redeeming any common stock,
or from declaring any dividends on common stock, and allow the holders to
purchase additional shares of preferred stock in lieu of anticipated advances
under the Facility, provided at least 25% of the preferred stock is outstanding
and required waivers are obtained from the Series A and Series B preferred
stockholders. Proceeds from the offering were used for working capital and
general corporate purposes. The series ranks in pari passu with the Series A,
Series B and Series C preferred stock.
CONCENTRATION OF CREDIT RISK
The Company continues to be subject to credit risk through trade
receivables. The Company's distributor for Korea accounted for $6,522,000 (44%)
and $9,879,000 (63%) of the accounts receivable at June 30, 1998, and December
31, 1997, respectively. Of the most recent amount, $3,100,000 dates from
December 1997. In connection with such receivables, the Company also holds from
the distributor a promissory note and pledge of security interests in certain
collateral, including the distributor's accounts receivable. The Company has
continued to receive payments from the distributor; however, in view of the
economic conditions and monetary environment in Korea, there is continuing
uncertainty about future sales to the distributor and the corresponding risk of
collecting amounts due. After assessing the payment intentions and performance
of the distributor, and the financial condition of the distributor, the Company
continues to believe the balance of the note will be collected in full and
accordingly has made no provision for loss on such receivables.
7
<PAGE> 9
SUBSEQUENT EVENTS
Effective as of July 1, 1998, the Company authorized the issuance of
35,903 shares of common stock in lieu of a $212,000 cash dividend on its Series
A preferred stock and 16,895 shares in lieu of a $100,000 cash dividend on its
Series B preferred stock for the quarter ended June 30, 1998. The share price
was the average closing market bid price for the five consecutive trading days
ending June 30, 1998.
RECENT PRONOUNCEMENTS
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income",
as of January 1, 1998. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is defined as the total of
net income and all other non-owner changes in equity. The Company does not
believe that SFAS No. 130 will have a significant impact on the Company's
financial statements.
8
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
COMPARISON OF SECOND QUARTER AND FIRST HALF 1998 TO 1997
- --------------------------------------------------------------------------------
The following table shows the revenue and gross profit for the
Company's products:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
($ Thousands)
<S> <C> <C> <C> <C>
Revenue:
Fiber optic multiplexers $ 3,495 $ 6,128 $ 5,657 $ 8,152
Engineering services and DSP 3,006 2,223 5,857 3,766
Video conferencing 530 107 839 212
Voice switching and other 40 549 232 1,414
-------- -------- -------- --------
$ 7,071 $ 9,007 $ 12,585 $ 13,544
-------- -------- -------- --------
Gross profit:
Fiber optic multiplexers 1,382 2,410 1,937 2,644
Engineering services and DSP 678 597 1,549 894
Video conferencing 220 46 356 78
Voice switching and other (36) (88) (92) 116
-------- -------- -------- --------
$ 2,244 $ 2,965 $ 3,750 $ 3,732
-------- -------- -------- --------
</TABLE>
NET REVENUE
The Company's technology, marketing, distribution and sales efforts
have been focused on developing and accelerating product applications and
revenues in the United States, Europe, China, Australia and South America to
replace sales in Korea which have been materially lower since the beginning of
1998. During the second quarter, SONETLYNX sales to non-Korean customers
increased 203% and revenues from LANscape video conferencing products grew 395%.
Engineering services revenues grew 4%. For the first half, corresponding
percentages were 70% for non-Korean SONETLYNX, 296% for LANscape and 33% for
engineering services The overall decrease of net revenue by 22% and 7% mainly
reflects reduced sales in Korea. All revenue differences reflect differences in
product volumes, not prices.
GROSS PROFIT
SONETLYNX margins were adversely affected by decreased volume levels
reflecting the falloff in sales to Korea. Alternatively, engineering services,
DSP and video product margins improved as a result of increasing revenues.
Overall gross profit was lower by 24% and increased 1%, respectively, over the
prior year periods from this combination of factors.
ENGINEERING AND DEVELOPMENT (E&D) EXPENSE
Combining E&D expense with capitalized software, total development
costs were reduced by 15% and 10% in the three months and six months,
respectively. E&D expense for the three months and six months ended June 30,
1998, decreased to $1,554,000 and $4,399,000, respectively, compared to
$2,522,000 and $4,982,000 in the prior year periods. In the three months,
software development costs of $1,032,000 and $532,000, respectively, were
capitalized. In the six month period, capitalized SONETLYNX software
9
<PAGE> 11
development cost decreased to $644,000 from $1,021,000 and video software
development of $388,000 was capitalized. The total costs of development were
distributed by product line as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1998 1997 1998 1997
------- ------- ------ ------
($ Thousands)
<S> <C> <C> <C> <C>
Fiber optic multiplexers $1,276 $1,496 $2,697 $2,573
CS4 925 997 1,863 2,275
Video conferencing 287 200 610 438
DSP and other 98 361 261 727
------ ------ ------ ------
$2,586 $3,054 $5,431 $6,013
</TABLE>
During the second quarter of 1998, the SONETLYNX product line was
expanded to include the international standard SDH, Synchronous Digital
Hierarchy. Branded "FibreTrax," the SDH version serves the approximately 70% of
global markets for fiber optic transmission outside North America. Also, an
interface was developed to enable communication between multiple filter rings,
including rings of different speeds. The LANscape product line was enhanced to
support Release 4.0 of Windows NT. Also, the software foundation for connecting
LANscape with other protocols was established.
E&D for the CS4 program was $938,000 and $925,000 in the first two
quarters of 1998. CS4 developments included feature enhancements, scheduling and
staffing for fabrication, and preparation for commercial product launch in 1999.
In addition to the E&D expense, fixed assets of $1,120,000 are specific to the
CS4 project.
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses in the three months and six months
ended June 30, 1998, were lower by 1% and 8%, respectively, compared to the
prior year. The expense reduction year-to-year also reflects the removal of
corporate headquarters from Bermuda during 1997, and the non-recurrence of
related extraordinary expenses.
INTEREST EXPENSE
Cash interest expense in the three months ended June 30, 1997 and 1998
was $251,000 and $256,000, respectively. For the six months ended June 30, 1997
and 1998, cash interest expense was $571,000 and $476,000, respectively.
Remaining amounts reportable as interest are non-cash expenses due to
amortization of debt discount and deferred financing costs attributable to
valuation of warrants using the Black-Scholes pricing model except that in the
first half of 1997, $582,000 of the non-cash cost was attributable to a
beneficial conversion feature of certain convertible debentures issued in 1996.
DIVIDENDS ON PREFERRED STOCK
Preferred dividends include $442,000 and $811,000 in the three months
and six months ended June 30, 1998, which the Company has elected to pay in
common stock or which accrue to be paid in common stock only upon conversion.
Also included in the reported amount are additional preferred dividends of
$96,000 and $474,000, respectively, attributable to the value of beneficial
conversion features of Series B, C and D preferred stock at date of issue.
10
<PAGE> 12
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems to identify
the systems that could be affected by the "Year 2000 Problem," the result of
computer programs using two digits rather than four to define the year portion
of dates. The Company has determined that none of its significant systems fail
to comply with the ability to distinguish the year 2000 from the year 1900. The
review continues, in an ongoing process, to examine the risk, if any, to the
Company, of vendor or customer exposure to the Problem. To date, no exposure has
been discovered which would have a material adverse effect on the Company.
Certain purchased software, resold or used in company products, has been
certified by the vendors to be compliant. The financial impact of Year 2000
compliance has not been and is not anticipated to be material to the Company's
financial position or results of operations in any given year.
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
For the six months ended June 30, 1998, cash balances increased by
$3,496,000. During the six-month period, the increased cash balances, cash used
in operations, ($12,478,000), and in investing activities, ($2,527,000), were
funded by securing new financing of $18,501,000 (net of $9,853,000 of debt
repayments).
OPERATING ACTIVITIES
Net cash used in operations consisted primarily of the $11,461,000 net
loss and the $4,719,000 net increase in working capital, offset by $3,702,000 of
non-cash charges. As previously discussed, the net loss primarily reflects the
costs of developing new technologies and products and the costs of operations
during a period of sharply reduced revenues following the sudden and virtual
discontinuance of sales in Korea at the beginning of 1998.
Additionally, in this context:
o Accounts receivable were a source of funding due to collections
from customers $867,000 in excess of new shipments and billings.
o Inventory increased $1,539,000 due to restocking, longer term
purchase commitments, and production for orders received near the
end of June.
o Accounts payable were reduced $3,924,000 due to payments of
accumulated obligations in line with prior operating levels.
o The non-cash charges were primarily $1,833,000 depreciation and
amortization of intangible assets and $1,540,000 amortization of
deferred financing costs.
INVESTING ACTIVITIES
Investment accounts were increased primarily by $1,402,000 for fixed
asset additions and $1,032,000 of capitalized SONETLYNX and LANscape product
enhancements. The fixed asset additions were concentrated in computers,
software, and test equipment to support engineering activities, leasehold
improvements, and manufacturing equipment to support new products.
11
<PAGE> 13
FINANCING ACTIVITIES
Cash uses were financed by the following transactions during the six
month period ended June 30, 1998:
o $10,000,000 from the sale of Series C preferred stock in
February.
o $3,000,000 borrowed in February.
o A deferred payment arrangement converting $2,100,000 originally
due in February to monthly payments through December 1998.
o $7,000,000 borrowed in April.
o $5,000,000 from the sale of Series D preferred stock in May.
o $5,000,000 from the sale of Series D preferred stock in June.
Proceeds from these financings were used to retire maturing obligations
of $6,630,000 and $3,223,000 and for additional working capital.
OUTLOOK
The materially reduced level of sales in Korea during the first half
fell within the range of the Company's expectations. Should future sales in
Korean markets not increase to previous levels, the Company believes that
prospects are good and expanding for achieving similar and higher levels of
sales in markets other than Korea. In the alternate, should working capital
additions be required by production and sales growth in excess of current plans,
although there can be no assurance of a successful undertaking, the Company
believes it has the experience, relationships and capability to obtain necessary
financing from external sources.
The Company has continued to fund its program to complete development
and bring to market its CS4 intelligent, programmable, enhanced services
platform. The Company is also continuing its efforts to bring a third party
participant or participants into the CS4 program to provide funding, to
contribute to specification and development of selected applications, or to
augment marketing and distribution resources. The current focus of the CS4
program is to complete an initial application for a defined customer service
demonstration in beta form in the time frame of late 1998 or early 1999 and to
position a commercial version of the product for marketing in 1999. The results
of the Company's efforts to involve third party participants may be expected to
impact directly the level of expenditure, the technical and manufacturing scope
of focus, and the ultimate realization of value to the Company from the CS4
program.
Considering the financial resources available and potentially
available, the outlook for cash available from customer collections, the outlook
for cash uses in operations and investing, and the options available to control
spending, the Company believes it has, or reasonably has access to, the
financial resources to meet its business requirements through the current year.
The Company cannot assure, however, that the business results assumed in this
outlook will be realized, especially considering the near term impact of reduced
revenues from Korea. The Company cannot assure that profitability and positive
cash flow will be achieved when expected. If the Company's sales plans are not
achieved, operating losses and negative cash flows exceed the Company's
estimates, or capital requirements in connection with the design, development,
and commercialization of its principal products are higher than estimated, the
Company will need to raise additional capital. The Company's ability to receive
additional advances under its credit facility expired per terms, July 31, 1998.
If additional financing is in the form of debt, the prior approval of the credit
facility is required. Although the Company believes it could raise additional
capital through public or private equity or debt financings, if necessary, there
can be no assurance that such financings would be available, or available on
acceptable terms. If such financing were not available, the Company has
determined that a significant reduction of engineering, development, selling,
and administrative costs would allow the Company to continue as a going concern
through 1998. Over the longer term, sales would have to increase from current
levels for the Company to operate in its current form with its current product
portfolio.
12
<PAGE> 14
CONTINGENT LIABILITIES
As discussed in "ITEM 3 - Legal Proceedings" in the Company's Annual
Report on Form 10-K, the Company is exposed to certain contingent liabilities
which, if resolved adversely to the Company, would adversely affect its
liquidity, its results of operations, and/or its financial position.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE LIQUIDITY AND OPERATING RESULTS
This Form 10-Q contains certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. The forward looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those expressed in, or implied by, the forward looking
statements. Factors that might cause such a difference include, but are not
limited to, those relating to: general economic conditions in the markets in
which the Company operates, including, in particular, the financial condition of
the Republic of Korea; success in the development and market acceptance of new
and existing products (particularly SONETLYNX, FibreTrax, LANscape, and CS4);
dependence on suppliers, third party manufacturers and channels of distribution;
customer and product concentration; fluctuations in customer demand; maintaining
access to external sources of capital; ability to execute management's margin
improvement and cost control plans; overall management of the Company's
expansion; and other risk factors detailed from time to time in the Company's
filings with the Securities and Exchange Commission, including without
limitation those set forth in the Section entitled "Risk Factors" in the Form
S-3 of the Company filed on May 22, 1998.
PART II - OTHER INFORMATION
ITEM 3 - CHANGES IN SECURITIES
(c) Recent sales of unregistered securities
As more fully described in the Form 8-K's of the Company filed May 11,
1998 and June 29, 1998, respectively, the Company sold an aggregate of
$10,000,000 of Series D convertible preferred stock in a private placement to
certain purchasers affiliated with the Citadel Investment Group, LLC.
Effective May 20, 1998, pursuant to a transaction exempt from
registration under Section 4(2) of the Securities Act of 1933, the Company
issued to Hambrecht & Quist LLC an immediately exercisable warrant to purchase
up to 33,036 shares of Common Stock at an exercise price of $10.292 per share
with an expiration date of May 20, 2003. The warrant contains a provision for
the holder to make a cashless exercise at the holder's option. The warrant was
issued in consideration for certain placement services rendered in connection
with the issuance of the Series C Convertible Preferred Stock.
Effective June 29 1998, pursuant to a transaction exempt from
registration under Section 4(2) of the Securities Act of 1933, the company
issued to Lifeline Industries, Inc. an immediately exercisable warrant to
purchase 30,000 shares of Common Stock at an exercise price of $5.00 per share
with an expiration date of April 30, 2005. The warrant was issued in
consideration for certain services rendered in connection with the issuance of
the Series D convertible Preferred Stock.
Effective as of July 1, 1998, the Company authorized the issuance of
35,903 shares of common stock in lieu of a $212,000 cash dividend in its Series
A preferred stock and 16,895 shares in lieu of a $100,000 cash dividend on its
Series B preferred stock for the quarter ended June 30, 1998.
In a transaction exempt from registration pursuant to Schedule 3(a)(9)
under the Securities Act, on July 16, 1998, the holder of Series B Preferred
Stock converted 731,285 shares into 812,732 shares of Common Stock
13
<PAGE> 15
of the Company. Conversion was based on 85% of the average closing bid price on
the five trading days preceding the conversion date.
In a transaction exempt from registration pursuant to Schedule 3(a)(9)
under the Securities Act, on July 22, 1998 and July 23, 1998, the holder of
Series C Preferred Stock converted 775 and 200 shares, respectively, into
185,884 and 46,969 shares of Common Stock, respectively. Conversion was based on
97% of the average of the three lowest bid prices on the ten trading days
preceding the conversion dates.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on June 18,
1998. At the Annual Meeting, Robert H. Garrison, II was elected as a director of
the company. Herman M. Frietsch, Anton von Liechtenstein, and Philip P. Sudan,
Jr. continue to serve as directors pursuant to their prior election. In
addition, stockholders approved a proposal to increase the number of shares of
Common Stock reserved for issuance under the Company's Stock Incentive Plan from
4,000,000 to 5,000,000 and approved the appointment of Arthur Andersen LLP as
the independent auditor of the Company.
The Director was elected by a vote of 21,944,509 for and 252,415
withheld. The proposal to increase shares reserved for the Stock Incentive Plan
was approved by a vote of 20,859,024 for, 1,198,620 against and 139,280
abstentions. The selection of independent auditor was approved by a vote of
22,061,602 for, 66,432 against, and 68,890 abstentions.
ITEM 5 - OTHER INFORMATION
As disclosed in the Company's annual report on Form 10-K for the fiscal
year 1997, in December 1997, the Company entered into loan transactions with the
following persons in the indicated original principal amounts: Edwin J. Ducayet,
Jr., Chief Financial Officer and Treasurer, $200,000; Herman M. Frietsch,
Chairman and Chief Executive Officer, $100,000; a partnership of which Philip P.
Sudan, Jr., a director of the Company, is a general partner, $200,000; and
certain other employees and other persons, $210,000. The partnership of which
Mr. Sudan is a general partner then transferred $133,000 of the original
principal amount to a professional corporation controlled by Mr. Sudan and the
remainder to the other partner. The terms of each of the promissory notes which
evidence the transactions provide for the Company to pay to each payee on demand
the aggregate principal amount loaned to the Company, together with accrued
interest. The notes provided that the payee can elect to have the promissory
note paid in cash or shares of Common Stock at the rate of $5.25 per share for
each dollar of principal and interest outstanding. Interest on the promissory
notes accrues at the prime rate (as defined in the promissory note) plus three
percent. As of February 10, 1998, the loan by Mr. Ducayet to the Company was
paid in full. As of the date hereof, the loans by Messrs. Frietsch and Sudan
remain outstanding. The aggregate principal amount outstanding for the loans to
Messers. Frietsch, Sudan, and the other employees and persons is $440,000 as of
August 13, 1998. In forebearance for demanding cash repayment of the loans, the
Company has agreed to amend and restate the outstanding promissory notes as of
August 14, 1997 and to reduce the conversion price on such loans to the rate of
$4.00 for each dollar of principal and interest outstanding. All other terms and
provisions of such amended and restated notes shall remain the same as those
originally issued.
ITEM 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. The Financial Statements and Financial Statement Schedules filed as
part of this report are listed and indexed on Page 1. Schedules other than those
listed in the index have been omitted because they are not applicable or the
required information has been included elsewhere in this report.
14
<PAGE> 16
B. Listed below are all Exhibits filed as part of this report. Certain
Exhibits are incorporated by reference to documents previously filed by the
Registrant with the Securities and Exchange Commission pursuant to Rule 12b-32
under the Securities Exchange Act of 1934, as amended.
Exhibit No. Exhibit
4.1 Certificate of Designations establishing the rights and
preferences of the Series D Preferred Stock(1)
4.2 Registration Rights Agreements between the Company and the
Buyers, dated May 8, 1998(1)
4.3 Registration Rights Agreement between the Company and the
Buyers dated June 26, 1998(3)
4.4 Registration Rights Agreement dated June 29, 1998 between the
Company and Lifeline Industries, Inc.(4)
4.5 Certification of Correction dated December 17, 1997 relating
to the Series B Preferred Stock(4)
4.6 Amendment to Registration Rights Agreement dated July 16, 1998
between the company and Navesink Equity Derivative Fund LDC(4)
10.1 Securities Purchase Agreement among the Company and the
Buyers, dated May 8, 1998(1)
10.2 Assignment and Acceptance executed by St. James Partners and
SJMB, L.P. ("SJMB") as to Agreement for Purchase and Sale
dated February 12, 1998 by the Company and St. James Capital
Partners(2)
10.3 $2,000,000 Convertible Promissory Note issued to St. James
Partners by the Company dated April 2, 1998(2)
10.4 $13,000,000 Convertible Promissory Note issued to SJMB by the
Company dated April 2, 1998(2)
10.5 Warrant issued to St. James Partners by the Company dated
April 2, 1998, exercisable as to 300,000 shares of Common
Stock(2)
10.6 Warrant issued to SJMB by the Company dated April 2, 1998,
exercisable as to 1,200,000 shares of Common Stock(2)
10.7 Amendment No. 1 to Registration Rights Agreement dated as of
April 2, 1998 between the Company and St. James Partners(2)
10.8 Securities Purchase Agreement dated June 26, 1998 between the
Company and the Buyers(3)
10.9 Warrant issued to Lifeline Industries, Inc. dated June 29,
1998, exercisable as to 30,000 shares of Common Stock(4)
10.10 Warrant issued to Hambrecht & Quist LLC exercisable to
purchase up to 33,036 shares of Common Stock at an exercise
price of $10.292 per share, expiring May 20, 2003.
10.11 Letter Agreement dated July 15, 1998 between the Company and
Navesink Equity Derivative Fund LDC(4)
10.12 Form of Amended and Restated Promissory Notes held by various
employees, directors, and related individuals of the Company
with face values totaling $440,000, convertible into Common
Stock of the Company at a rate of $4.00 per share
27.1 Financial Data Schedule
(1) Incorporated herein by reference to the Form 8-K dated May 8, 1998
(2) Incorporated herein by reference to the Form 10-Q for the quarter ended
March 31, 1998
(3) Incorporated herein by reference to the Form 8-K dated June 29, 1998
(4) Incorporated herein by reference to the Form S-3 filed August 10, 1998
C. The Company has not filed any report on Form 8-K during the period
covered by this Report, except as follows:
Form 8-K filed May 11, 1998
Form 8-K filed June 29, 1998
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTELECT COMMUNICATIONS, INC.
(Registrant)
<TABLE>
<S> <C>
Date: August 13, 1998 By: /s/ EDWIN J. DUCAYET, JR.
--------------- --------------------------------------------
Edwin J. Ducayet, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 13, 1998 By: /s/ HERMAN M. FRIETSCH
--------------- -------------------------------------------------
Herman M. .Frietsch
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
</TABLE>
16
<PAGE> 18
INDEX TO EXHIBITS
Exhibit No. Exhibit
4.1 Certificate of Designations establishing the rights and
preferences of the Series D Preferred Stock(1)
4.2 Registration Rights Agreements between the Company and the
Buyers, dated May 8, 1998(1)
4.3 Registration Rights Agreement between the Company and the
Buyers dated June 26, 1998(3)
4.4 Registration Rights Agreement dated June 29, 1998 between the
Company and Lifeline Industries, Inc.(4)
4.5 Certification of Correction dated December 17, 1997 relating
to the Series B Preferred Stock(4)
4.6 Amendment to Registration Rights Agreement dated July 16, 1998
between the company and Navesink Equity Derivative Fund LDC(4)
10.1 Securities Purchase Agreement among the Company and the
Buyers, dated May 8, 1998(1)
10.2 Assignment and Acceptance executed by St. James Partners and
SJMB, L.P. ("SJMB") as to Agreement for Purchase and Sale
dated February 12, 1998 by the Company and St. James Capital
Partners(2)
10.3 $2,000,000 Convertible Promissory Note issued to St. James
Partners by the Company dated April 2, 1998(2)
10.4 $13,000,000 Convertible Promissory Note issued to SJMB by the
Company dated April 2, 1998(2)
10.5 Warrant issued to St. James Partners by the Company dated
April 2, 1998, exercisable as to 300,000 shares of Common
Stock(2)
10.6 Warrant issued to SJMB by the Company dated April 2, 1998,
exercisable as to 1,200,000 shares of Common Stock(2)
10.7 Amendment No. 1 to Registration Rights Agreement dated as of
April 2, 1998 between the Company and St. James Partners(2)
10.8 Securities Purchase Agreement dated June 26, 1998 between the
Company and the Buyers(3)
10.9 Warrant issued to Lifeline Industries, Inc. dated June 29,
1998, exercisable as to 30,000 shares of Common Stock(4)
10.10 Warrant issued to Hambrecht & Quist LLC exercisable to
purchase up to 33,036 shares of Common Stock at an exercise
price of $10.292 per share, expiring May 20, 2003.
10.11 Letter Agreement dated July 15, 1998 between the Company and
Navesink Equity Derivative Fund LDC(4)
10.12 Form of Amended and Restated Promissory Notes held by various
employees, directors, and related individuals of the Company
with face values totaling $440,000, convertible into Common
Stock of the Company at a rate of $4.00 per share
27.1 Financial Data Schedule
(1) Incorporated herein by reference to the Form 8-K dated May 8, 1998
(2) Incorporated herein by reference to the Form 10-Q for the quarter ended
March 31, 1998
(3) Incorporated herein by reference to the Form 8-K dated June 29, 1998
(4) Incorporated herein by reference to the Form S-3 filed August 10, 1998
<PAGE> 1
EXHIBIT 10.10
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ARE
"RESTRICTED" SECURITIES" WITHIN THE MEANING OF RULE 144 PROMULGATED UNDER THE
SECURITIES ACT. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD OR TRANSFERRED WITHOUT COMPLYING WITH RULE 144 IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION OR OTHER COMPLIANCE UNDER THE SECURITIES ACT.
WARRANT TO PURCHASE
Up to 33,036 SHARES
INTELECT COMMUNICATIONS, INC.
(a Delaware corporation)
WARRANT FOR THE PURCHASE OF
Common Stock, $.01 Par Value per Share
THIS WARRANT MAY NOT BE EXERCISED
AND WILL BE VOID
AFTER 6:00 P.M. CENTRAL STANDARD TIME ON MAY 20, 2003
This warrant (the "Warrant") certifies that, for value received,
Hambrecht & Quist LLC ("H&Q"), is entitled, at any time prior to 6:00 p.m.
Central Standard Time on May 20, 2003 (the "Expiration Time"), to purchase from
Intelect Communications, Inc., a Delaware corporation (the "Company"), up to
the number of shares shown above (the "Warrant Shares") of common stock, par
value $.01, of the Company (the "Common Stock") by surrendering this Warrant
with the purchase form attached hereto, duly executed, at the principal office
of the Company at 1100 Executive Drive, Richardson, Texas 75081, and by paying
in full and in lawful money of the United States of America, by cash or
cashiers' check, the purchase price of the Warrant Shares as to which this
Warrant is exercised, on all the terms and conditions hereinafter set forth.
1. The Warrant Shares are purchasable at an exercise price of $10.292
per share (the "Warrant Price"). To exercise the Warrant, the holder hereof
shall deliver to the Company (i) a written notice in the form of the
Subscription Notice attached as an exhibit hereto, stating therein the election
of such holder to exercise the Warrant in the manner provided in the
Subscription Notice; (ii) payment in full of the Warrant Price (A) in cash or
by bank check for all Warrant Shares purchased hereunder, or (B) through a
"cashless" or "net-issue" exercise of each such Warrant ("Cashless Exercise");
the holder shall exchange each Warrant subject to a Cashless Exercise for that
number of Warrant Shares determined by multiplying the number of Warrant Shares
issuable hereunder by a fraction, the numerator of which shall be the
difference between (x) the Market Price (as hereinafter defined) and (y) the
Warrant Price for each such Warrant, and the denominator of which shall be the
Market Price; the Subscription Notice shall set forth the calculation upon
which the Cashless Exercise is based, or (C) a combination of (A) and (B)
above; and (iii) delivery of this Warrant.
<PAGE> 2
"Market Price" for any day, when used with reference to Common Stock,
shall mean the price of said Common Stock determined as follows: (x) the volume
weighted per share average price as reported by Bloomberg L.P. for the Common
Stock on such day on the principal securities exchange on which the Common
Stock is listed or admitted to trading or if no such sale takes place on such
date, the average of the closing bid and asked prices thereof as officially
reported, or, if not so listed or admitted to trading on any securities
exchange, for the Common Stock on the National Association of Securities
Dealers National Market on such date, or, if there shall have been no trading
on such date or if the Common Stock shall not be listed on such system, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by any NASD member firm selected from time to time by the Company for
such purpose, in each such case, unless otherwise provided herein, averaged
over a period of ten (10) consecutive trading days prior to the date as of
which the determination is to be made; or (y) if the Common Stock shall not be
listed or admitted to trading as provided in clause (x) above, the fair market
value of the Common Stock as determined in good faith by the Board of Directors
of the Company.
2. On the exercise of all or any portion of this Warrant in the manner
provided above, the person exercising the same shall be deemed to have become a
holder of record of Common Stock (or of the other securities or properties to
which he or it is entitled on such exercise) for all purposes, and certificates
for the securities so purchased shall be delivered to the purchaser within a
reasonable time after the Warrant shall have been exercised as set forth above.
If this Warrant shall be exercised with respect to only a portion of the
Warrant Shares covered hereby, the holder shall be entitled to receive a
similar warrant of like tenor and date covering the number of Warrant Shares
with respect to which this Warrant shall not have been exercised.
3. The Company covenants and agrees that the Warrant Shares which may
be issued on the exercise of the rights represented by this Warrant will, upon
receipt of the Warrant Price, be fully paid and nonassessable, and free from
all taxes, liens, and charges with respect to the issue thereof. The Company
further covenants and agrees that, during the period within which the rights
represented by this Warrant may be exercised, the Company will have authorized
and reserved a sufficient number of shares of Common Stock to provide for the
exercise of the rights represented by this Warrant.
4. The Warrant Price and number of Warrant Shares purchasable pursuant
to this Warrant may be subject to adjustment from time to time as follows:
(a) If the Company issues any stock dividends, the Warrant
Price in effect immediately prior to the record date for such stock
dividend shall be proportionately decreased or, at the holder's
option, the number of Warrant Shares exercisable hereunder shall be
proportionately increased, such adjustment to become effective
immediately after the opening of business on the day following such
record date.
(b) If the Company shall subdivide the outstanding shares of
Common Stock into a greater number of shares, combine the outstanding
shares of Common Stock into a
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<PAGE> 3
smaller number of shares, or issue by reclassification any of its
shares, the Warrant Price and the number of Warrant Shares in effect
immediately prior thereto shall be adjusted so that the holder of this
Warrant shall be entitled to receive, after the occurrence of any of
the events described, the number of Warrant Shares to which the holder
would have been entitled had this Warrant been exercised immediately
prior to the occurrence of such event. Such adjustment shall become
effective immediately after the opening of business on the day
following the date on which such subdivision, combination, or
reclassification, as the case may be, becomes effective.
(c) If any capital reorganization or reclassification of
Common Stock, or consolidation or merger of the Company with another
corporation or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities, or assets
with respect to or in exchange for Common Stock, then, as a condition
of such reorganization, reclassification, consolidation, merger or
sale, lawful adequate provisions shall be made whereby the holder of
this Warrant shall thereafter have the right to acquire and receive on
exercise hereof such shares of stock, securities, or assets as would
have been issuable or payable (as part of such reorganization,
reclassification, consolidation, merger or sale) with respect to or in
exchange for such number of outstanding shares of Common Stock as
would have been received on exercise of this Warrant immediately
before such reorganization, reclassification, consolidation, merger or
sale. In any such case, appropriate provision shall be made with
respect to the rights and interests of the holder of this Warrant to
the end that the provisions hereof shall thereafter be applicable in
relation to any shares of stock, securities, or assets thereafter
deliverable on the exercise of this Warrant. In the event of a merger
or consolidation of the Company with or into another corporation or
the sale of all or substantially all of its assets as a result of
which a number of shares of common stock of the surviving or
purchasing corporation greater or less than the number of shares of
Common Stock outstanding immediately prior to such merger,
consolidation, or purchase are issuable to holders of Common Stock,
then the Warrant Price in effect immediately prior to such merger,
consolidation, or purchase shall be adjusted in the same manner as
though there were a subdivision or combination of the outstanding
shares of Common Stock. The Company will not effect any such
consolidation, merger, or sale unless prior to the consummation
thereof the successor corporation resulting from such consolidation or
merger or the corporation purchasing such assets shall assume, by
written instrument mailed or delivered to the holder hereof at its
last address appearing on the books of the Company, the obligation to
deliver to such holder such shares of stock, securities, or assets as,
in accordance with the foregoing provisions, such holder may be
entitled to acquire on exercise of this Warrant.
(d) No fraction of a share shall be issued on exercise
hereof, but, in lieu thereof, the Company, notwithstanding any other
provision hereof, may pay therefor in cash at the fair value of any
such fractional share at the time of exercise.
-3-
<PAGE> 4
(e) Neither the purchase or other acquisition by the Company
of any shares of Common Stock nor the sale or other disposition by the
Company of any shares of Common Stock shall affect any adjustment of
the Warrant Price or be taken into account in computing any subsequent
adjustment of the Warrant Price.
5. This Warrant shall not be transferable or assignable.
6. The shares issuable on exercise of this Warrant shall be restricted
securities within the meaning of Rule 144 promulgated under the Securities Act,
and all certificates for such shares shall contain a legend in substantially
the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND ARE "RESTRICTED SECURITIES" WITHIN THE MEANING
OF RULE 144 PROMULGATED UNDER THE SECURITIES ACT. THE SECURITIES HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED
WITHOUT COMPLYING WITH RULE 144 IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION OR OTHER COMPLIANCE UNDER THE SECURITIES ACT."
7. The Company agrees to register or qualify the Warrant Shares (but
not this Warrant) for sale as follows:
(a) If, at any time after October 31, 1997 and during the
period in which the rights represented by this Warrant are exercisable
or the holder hereof owns the Warrant Shares, the Company proposes to
file a registration statement or notification under the Securities Act
for the primary or secondary sale of any debt or equity security, it
will give written notice at least 30 days prior to the filing of such
registration statement or notification to the holders of this Warrant
and the Warrant Shares of its intention to do so. The Company agrees
that, after receiving written notice from the warrant holder of his
desire to include his Warrant Shares in such proposed registration
statement or notification, the Company shall afford the holders of
this Warrant and the Warrant Shares the opportunity to have their
Warrant Shares included therein. Notwithstanding the provisions of
this paragraph 7(a), the Company shall have the right, at any time
after it shall have given written notice pursuant to this paragraph
(whether or not a written request for inclusion of the Warrant Shares
shall be made) to elect not to file any such proposed registration
statement or notification or to withdraw the same after the filing but
prior to the effective date thereof. In no event shall the Company be
obligated to include the Warrant Shares in any registration statement
or notification under this paragraph 7(a) if: (i) in the written
opinion of the underwriter, the inclusion of the Warrant Shares in
such registration statement or notification would be materially
detrimental to the proposed offering of debt or equity securities
pursuant to which the Company gave notice to the holders under this
paragraph; (ii) in the opinion of counsel for the Company, concurred
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<PAGE> 5
in by counsel for the holder hereof, that the Warrant Shares are not
considered "restricted securities" within the meaning of Rule 144
promulgated under the Securities Act and that registration under the
Securities Act is therefore not required; or (iii) the Warrant Shares
have already been registered under the Securities Act.
(b) In connection with the filing of a registration
statement, notification, or post-effective amendment under this
section, the Company covenants and agrees:
(i) to pay all expenses of such registration
statement, notification, or post-effective amendment,
including, without limitation, printing charges, legal fees
and disbursements of counsel for the Company, blue sky
expenses, accounting fees and filing fees, but not including
legal fees and disbursements of counsel to the holders and
any sales commissions on Warrant Shares offered and sold;
(ii) to take all necessary action which may
reasonably be required in qualifying or registering the
Warrant Shares included in a registration statement,
notification or post-effective amendment for the offer and
sale under the securities or blue sky laws of such states as
requested by the holders; provided that the Company shall not
be obligated to execute or file any general consent to
service of process or to qualify as a foreign corporation to
do business under the laws of any such jurisdiction; and
(iii) to utilize its best efforts to keep the same
effective for a period of not less than 90 nor more than 120
days.
(c) Indemnification; Contribution.
(i) Indemnification by the Company. The Company
agrees to indemnify and hold harmless the holders from and
against any and all losses, claims, damages, liabilities and
expenses (including reasonable costs of investigation)
arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any such
registration statement or prospectus contained therein or in
any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or based upon any omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading, except insofar as such losses, claims,
damages, liabilities or expenses arise out of, or are based
upon, any such untrue statement or omission or allegation
thereof based upon information furnished in writing to the
Company by the holders or on the holders' behalf expressly
for use therein.
(ii) Indemnification by Holders. Each holder agrees
to indemnify and hold harmless, severally and not jointly,
the Company, its directors and officers
-5-
<PAGE> 6
and each person, if any, who controls the Company within the
meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act to the same extent as the foregoing
indemnity from the Company to the holders, but only with
respect to information furnished in writing by a holder or on
a holder's behalf expressly for use in any such registration
statement or prospectus relating to the Warrant Shares, any
amendment or supplement thereto or any preliminary
prospectus, and only in an amount not to exceed the proceeds
of any Warrant Shares sold by any such holder thereunder. In
case any action or proceeding shall be brought against the
Company or its directors or officers, or any such controlling
person, in respect of which indemnity may be sought against
the holders, the holders shall have the rights and duties
given to the Company, and the Company or its directors or
officers or such controlling person shall have the rights and
duties given to the holders, by the preceding subsection
hereof.
(iii) Conduct of Indemnification Proceedings. If any
action or proceeding (including any governmental
investigation) shall be brought or asserted against any
person entitled to indemnification under subsections (i) or
(ii) above (an "Indemnified Party") in respect of which
indemnity may be sought from any party who has agreed to
provide such indemnification (an "Indemnifying Party"), the
Indemnifying Party shall assume the defense thereof,
including the employment of counsel reasonably satisfactory
to such Indemnified Party, and shall assume the payment of
all expenses. Such Indemnified Party shall have the right to
employ separate counsel in any such action and to participate
in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Indemnified Party
unless (A) the Indemnifying Party has agreed to pay such fees
and expenses or (B) the named parties to any such action or
proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that
there is a conflict of interest on the part of counsel
employed by the Indemnifying Party to represent such
Indemnified Party (in which case, if such Indemnified Party
notifies the Indemnifying Party in writing that it elects to
employ separate counsel at the expense of the Indemnifying
Party, the Indemnifying Party shall not have the right to
assume the defense of such action or proceeding on behalf of
such Indemnified Party; it being understood, however, that
the Indemnifying Party shall not, in connection with any one
such action or proceeding or separate but substantially
similar or related actions or proceedings in the same
jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more
than one separate firm of attorneys (together with
appropriate local counsel) at any time for all such
Indemnified Parties, which firm shall be designated in
writing by such Indemnified Parties). The Indemnifying Party
shall not be liable for any settlement of any such action or
proceeding effected without its written consent, but if
settled with its written consent, or if there be a final
judgment for the plaintiff in any such action or proceeding,
the Indemnifying Party shall
-6-
<PAGE> 7
indemnify and hold harmless such Indemnified Parties from and
against any loss or liability (to the extent stated above) by
reason of such settlement or judgment.
(iv) Contribution. If the indemnification provided
for in this Section 7(c) is unavailable to the Indemnified
Parties in respect of any losses, claims, damages,
liabilities or judgments referred to herein, then each
Indemnifying Party, in lieu of indemnifying such Indemnified
Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims,
damages, liabilities and judgments in the following manner as
between the Company on the one hand and each holder on the
other, in such proportion as is appropriate to reflect the
relative fault of the Company on the one hand and each holder
on the other in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities
or judgments, as well as any other relevant equitable
considerations. The relative fault of the Company on the one
hand and of the holder on the other shall be determined by
reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission
or alleged omission to state a material fact relates to
information supplied by such party, and the party's relative
intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. No person
guilty of fraudulent misrepresentation (within the meaning of
subsection 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such
fraudulent misrepresentation.
(v) Survival. The indemnity and contribution
agreements contained in this 7(c) shall remain operative and
in full force and effect regardless of (A) any termination of
this Agreement, (B) any investigation made by or on behalf of
any Indemnified Party or by or on behalf of the Company and
(C) the consummation of the sale or successive resale of the
Warrant Shares.
8. As used herein, the term "Common Stock" shall mean and include the
Common Stock authorized on the date of the original issue of this Warrant, and
shall also include any capital stock of any class of the Company thereafter
authorized that shall not be limited to a fixed sum or percentage in respect of
the rights of the holders thereof to participate in dividends and in the
distribution of assets on the voluntary or involuntary liquidation,
dissolution, or winding up of the Company; provided that the Warrant Shares
purchasable pursuant to this Warrant shall include only shares of the class
designated in the Company's Charter as Common Stock on the date of the original
issue of this Warrant or, in the case of any reorganization, reclassification,
consolidation, merger, or sale of assets of the character referred to in
paragraph 4(c) hereof, the stocks, securities, or assets provided for in such
paragraph.
9. This agreement shall be construed under and be governed by the laws
of the State of Texas.
-7-
<PAGE> 8
10. Any notices required or permitted hereunder shall be sufficiently
given if delivered by hand or sent by registered or certified mail, postage
prepaid, addressed as follows:
If to H&Q, to:
One Buch Street
San Francisco, CA 94104
If to the Company, to:
Intelect Communications, Inc.
1100 Executive Drive, Richardson, Texas 75081
Attention: Herman M. Frietsch, Chairman and Chief Executive
Officer
With copy to:
Philip P. Sudan, Jr.
Ryan & Sudan, LLP
909 Fannin, Suite 3900
Houston, Texas 77010-1010
or such other address as shall be furnished in writing by any party to the
other, and any such notice or communication shall be deemed to have been given
as of the date delivered by hand or three days after being so deposited in the
mails.
Dated effective this 20th day of May, 1998.
INTELECT COMMUNICATIONS, INC.
By:
---------------------------
Herman M. Frietsch,
Chairman of the
Board, Chief Executive
Officer
-8-
<PAGE> 9
Subscription Notice
Form of Purchase
(to be signed only upon exercise of warrant)
TO: INTELECT COMMUNICATIONS, INC.
The undersigned, the owner of the attached warrant, hereby irrevocable
elects to exercise the purchase rights represented by the warrant for, and to
purchase thereunder, _____ shares of common stock of Intelect Communications,
Inc., and herewith makes payment of $______ therefor, and requests that the
certificate(s) for such shares be delivered to ______________, at
____________________________________________, and if such shall not be all of
the shares purchasable hereunder, that a new warrant of like tenor for the
balance of the shares purchasable under the attached warrant be delivered to
the undersigned.
Dated this day of , .
----- ------------- ------
------------------------------
Signature
-9-
<PAGE> 1
EXHIBIT 10.12
AMENDED AND RESTATED PROMISSORY NOTE
$________________ December 5, 1997
FOR VALUE RECEIVED, the undersigned, Intelect Communications, Inc.
("Maker"), a Delaware corporation, unconditionally hereby promises to pay to the
order of ____________________ ("Payee") at its business office in Richardson,
Dallas County, Texas, or at such other place as the holder of this note may
hereafter designate, the principal sum of ______________________ Dollars
($____________) in lawful money of the United States of America for the payment
of private debts, together with interest (calculated on the basis of the actual
number of days elapsed but computed as if each year consisted of 365 days) on
the unpaid principal balance from time to time owing hereon computed from the
date hereof until maturity at a per annum rate which from day to day shall be,
except as otherwise provided in this note, the lesser of (a) the Loan Rate (as
hereinafter defined) or (b) the Highest Lawful Rate (hereafter defined) in
effect from day to day. The term "Loan Rate" shall mean the sum of three percent
(3%) and the Prime Rate (hereinafter defined) in effect from day to day. The
term "Prime Rate" shall mean as to any day the "Prime Rate" as published in The
Wall Street Journal for that day in the "Money Rates" table.
All past-due principal and interest, whether by acceleration or
otherwise, shall bear interest at the Highest Lawful Rate until paid.
The principal and all interest then accrued on this note shall be
payable on demand. At the election of the Payee of this note, at any time prior
to the note being repaid by the Maker, the Payee may send written notice to the
Maker electing to have the note repaid in the form of Common Stock of the Maker,
upon Payee's demand, at a price equal to $4.00 per share for every dollar of
principal and interest outstanding on the note as of the date of repayment;
provided, however, that the issuance of such Common Stock shall comply with one
or more applicable exemptions from registration under federal and state
securities laws and the Payee contemporaneously with the issuance of such Common
Stock executes such documentation as Maker's counsel shall deem necessary for
compliance with federal and state securities laws in the issuance of such Common
Stock.
This note may be prepaid at any time, in whole or in part, without
penalty. All payments will be applied first to accrued interest and then to the
reduction of principal.
Notwithstanding anything contained herein to the contrary, if at any
time during the term of this note the Highest Lawful Rate has been charged Maker
in lieu of the Loan Rate because the Loan Rate has exceeded the Highest Lawful
Rate on one or more days during the term of this note, and if, as a result, on
any date during the term of this note the aggregate amount of interest which has
accrued on this note up to, but not including, such date is less than the
aggregate amount of interest which otherwise would have accrued on this note up
to, but not including, such date had the Loan Rate
<PAGE> 2
been charged for every day during the term of this note up to, but not
including, such date, then on such date the unpaid principal balance of this
note shall bear interest at the Highest Lawful Rate even though the Highest
Lawful Rate is in excess of the Loan Rate for such date.
It is expressly provided and stipulated that notwithstanding any
provision of this note or any other instrument evidencing or securing the loan
herein set forth, in no event shall the aggregate of all interest paid or
contracted to be paid to Payee by Maker (or any guarantors or endorsers) ever
exceed the maximum amount of interest which may lawfully be charged the
undersigned by Payee on the principal balance of this note from time to time
advanced and remaining unpaid. In this connection, it is expressly stipulated
and agreed that it is the intent of Payee and Maker in the execution and
delivery of this note to contract in strict compliance with applicable usury
laws. In furtherance thereof, none of the terms of this note or said other
instruments shall ever be construed to create a contract to pay interest at a
rate in excess of the Highest Lawful Rate for the use, forbearance or detention
of money. The term "Highest Lawful Rate" shall mean the maximum non-usurious
rate of interest which may lawfully be charged the undersigned by Payee
according to the indicated rate ceiling as defined in Tex. Rev. Civ. Stat. Ann.
Art. 5069-1.04 in effect at such time and which would be applicable to the
indebtedness evidenced by this note (provided that as permitted by law, Payee or
other holder may, from time to time, implement any applicable ceiling under such
Article and revise the index formula or provision of law used to compute the
rate ceiling by notice to Maker as provided by such Article) or under the laws
of the United States. The parties hereto acknowledge that the effective date of
this instrument is the date on which the indebtedness evidenced hereby has been
contracted for. In determining whether the loan evidenced by this note is
usurious under applicable law, all interest at any time contracted for, charged,
or received from Maker in connection with the loan shall be amortized, prorated,
allocated, and spread in equal parts during the period of the full stated term
of the loan. However, in the event that this note is paid in full by Maker (or
any endorser or guarantor hereof) prior to the end of the full stated term of
this note and in the event the interest received by the holder of this note for
the actual period of the existence of the loan exceeds the Highest Lawful Rate,
the holder of this note shall, at its option, either refund to Maker the amount
of such excess or credit the amount of such excess against any amounts owing by
Maker under this note. In addition, if, from any circumstances whatsoever,
fulfillment of any provision hereof or of any instrument securing this note or
of any other agreement referred to herein or executed pursuant to or in
connection with this note, at the time performance of such provision shall be
due, shall involve transcending the limit of validity prescribed by applicable
law, then, ipso facto, the obligation to fulfill shall be reduced to the limit
of such validity, and if from any circumstance the holder there of shall ever
receive as interest an amount which would exceed the Highest Lawful Rate, such
amount which would be excessive interest shall, at the option of Payee, be
refunded to Maker or be applied to the reduction of the unpaid principal balance
due hereunder and not to the payment of interest. The provisions of this
paragraph shall supersede all other provisions of this note and all other
instruments evidencing or securing this loan, should such provisions be in
apparent conflict herewith.
The undersigned Maker and all endorsers, sureties and guarantors
hereof, as well as all persons to become liable on this note, hereby jointly and
severally waive all notices of non-payment, demands for payment, presentments
for payment, notices of
2
<PAGE> 3
intention to accelerate maturity, notices of actual acceleration of maturity,
protests, notices of protest, and any other demands or notices of any kind as to
this note, diligence in collection hereof and in bringing suit hereon, and any
notice of, or defense on account of, the extension of time of payments or change
in the method of payments, and without further notice hereby consent to any and
all renewals and extensions in the time of payment hereof either before or after
maturity and the release of any party primarily or secondarily liable hereon.
Maker agrees that Payee's acceptances of partial or delinquent
payments, or failure of Payee to exercise any right or remedy contained herein
or in any instrument given as security for the payment of this note shall not be
a waiver of any obligation of Maker to Payee or constitute waiver of any similar
default subsequently occurring.
In the event default is made in the prompt payment of this note upon
demand, or the same is placed in the hands of an attorney for collection, or
suit is brought on same, or the same is collected through any judicial
proceeding whatsoever, or if any action of foreclosure be had hereon, then Maker
agrees and promises to pay the Payee reasonable attorneys' fees in addition to
the other amounts due hereunder.
This note may not be changed orally, but only by an agreement in
writing signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought.
Except to the extent that the laws of the United States may apply to
the terms hereof, this note shall be governed by and construed in accordance
with the laws of the State of Texas. This instrument is made and is performable
in Richardson, Dallas County, Texas and in the event of a dispute involving this
note or any other instruments executed in connection herewith, Maker irrevocably
agrees that venue for such dispute shall be in any court of competent
jurisdiction in Dallas County, Texas.
This note and all the covenants, promises and agreements contained
herein shall be binding upon and inure to the benefit of Payee's and Maker's
heirs, successors, legal representatives and assigns.
IN WITNESS WHEREOF, Maker has executed and delivered this note to Payee
in Richardson, Texas, effective December 5, 1997.
Intelect Communications, Inc.
By:
---------------------------------
Edwin J. Ducayet, Jr.
Its: Vice President
---------------------------------
3
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