PROSPECTUS
INTELECT COMMUNICATIONS, INC.
SHARES OF COMMON STOCK
------------------------
The Selling Stockholders listed on page 13 and 14 may offer and resell up
to 33,597,363 shares of Intelect Communications, Inc. ("Intelect" or the
"Company") common stock under this Prospectus, for each of their own accounts.
The number of shares the Selling Stockholders may sell includes
o shares of common stock that currently are issued and outstanding;
o shares of common stock that they may receive if they convert their
Series D Convertible Preferred Stock ("Series D Preferred Shares");
o shares of common stock that they may receive if they convert their
Series E Convertible Preferred Stock ("Series E Preferred Shares");
o shares of common stock issued to them as dividends;
o shares of common stock that they may receive upon conversion of loans
to the company; or
o shares of common stock they may purchase upon the exercise of warrants
to purchase shares of common stock.
We will not receive any proceeds from the sales covered by this Prospectus.
We issued the Series D Preferred Shares in a private placement transaction
on June 26, 1998. We issued the Series E Preferred Shares and warrants to
purchase common stock in a private placement transaction on March 5, 1999. We
intend to issue more Series E Preferred Shares and warrants to purchase common
stock in a private placement upon the effectiveness of the registration
statement covering this Prospectus and certain other conditions. We issued
common stock, warrants to purchase common stock and debt securities which are
convertible into common stock in a series of unrelated private placements. For
further information on the Selling Stockholders and each of these transactions
see "Selling Stockholders" in this Prospectus.
Our common stock is quoted on the Nasdaq National Market under the symbol
"ICOM." On April 15, 1999, the last sale price of our common stock was $0.88.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. PLEASE SEE
"RISK FACTORS" BEGINNING ON PAGE 2.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY
STATE SECURITIES COMMISSION, NOR HAVE THESE ORGANIZATIONS DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS APRIL 15, 1999.
<PAGE>
ABOUT INTELECT
We design, develop, manufacture, market and sell products and services for
converging voice, data and video networks. We established our current operations
through a series of mergers in 1995 and 1996, at which time we defined four
communications product platforms to respond to the increasing demands of speed
and complexity in communications networks.
We strategically focus our product lines and services to take advantage of
the convergence of telecommunications and data communications. This convergence
arises from the explosive growth of Internet applications such as E-commerce,
which is driving the demand for expansion of network capacities. These industry
trends require today's network integrators and managers to manage multiple
applications at multiple locations within available bandwidth resources while
balancing the need for network reliability. We designed our product lines to
meet these evolving markets and applications.
We intend to develop and bring to market a new generation of intelligent
flexible and scalable communications platform to allow customers to combine
their current voice, data and video networks (telephone, computers,
surveillance, etc.) into a single communications network, which would also
upgrade their communications into the latest generation of high-speed
technologies under a single network management system. More information about
our products, markets and operations may be found in our Form 10-K annual
report, filed on April 2, 1999.
The Company's executive offices are located at 1100 Executive Drive,
Richardson, Texas 75081; telephone (972) 367-2100.
RISK FACTORS
This Prospectus and the documents it incorporates by reference contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements accurately reflect our current view with respect to future events and
financial performance. The future events we describe in these risk factors
involve risks and uncertainties related to:
o general economic conditions in our product markets;
o our continuing development of our products;
o the market acceptance of our products;
o dependence on our suppliers;
o dependence on channels of distribution;
o competition;
o fluctuations in customer demand for our products;
o access to external sources of capital;
o execution of our margin improvement and cost control plans; and
o management of our corporate expansion.
In this Prospectus, the words "anticipate," "believe," "expect,"
"intend," "plan," "future," and similar expressions identify
forward-looking statements. Our actual results could differ materially from
those that we project in the forward-looking statements as a result of factors
that we have set forth throughout this document as well as factors of which we
are currently not aware.
Your investment in the shares offered by the Selling Stockholders in this
Prospectus involves a high degree of risk and should not be made by you if you
cannot afford the loss of your entire investment. In addition to the other
information in this Prospectus, or incorporated in this Prospectus by reference,
you
2
<PAGE>
should consider carefully the following risk factors before investing in the
common stock offered by the Prospectus:
OUR STOCK PRICE MAY DROP DUE TO MARKET FLUCTUATIONS AND SALES OF LARGE NUMBERS
OF OUR SHARES
Intelect stock is quoted on the Nasdaq National Market. Based on historical
trends in the market for our stock and for other similar technology company
stocks, we anticipate that the trading price of our common stock may be subject
to wide fluctuations in response to:
o quarterly variations in operating results;
o changes in actual earnings or in earnings estimates by analysts;
o our announcements of technological developments
o our competitors' announcements of technological developments
o general market conditions; or
o other events largely outside our control.
In addition, extreme price and volume fluctuations in the stock market have
particularly affected the market prices of "high technology" stocks. These
fluctuations were often disproportionate to or unrelated to the operating
performance of these companies. These broad market fluctuations, general
economic conditions or other factors outside our control may adversely affect
the market price of our common stock.
The exact number of shares of common stock issuable upon the conversion of
the Company's Series C Convertible Preferred Stock (the "Series C Preferred
Shares"), Series D Preferred Shares, and the Series E Preferred Shares
(collectively the "Preferred Shares") depends on the conversion price in
effect on the date of conversion, which price is the lower of either a fixed or
a variable conversion price. The variable conversion price for each of the
Preferred Shares is determined as 83.5% of the average of the two lowest closing
bid prices of the common stock for the forty (40) trading days prior to the date
of conversion. Accordingly, if the market price of our common stock falls, the
variable conversion price for the Preferred Shares will also decrease. If the
holder of preferred shares converts at the lower price, the holder will receive
more shares of common stock than it would receive in the case of a higher stock
price. In connection with the conversions of the Preferred Shares, the following
risks should be considered:
o because the variable conversion price of each of the Preferred Shares
is a function of the market price of the common stock upon conversion,
the lower the price of the common stock at the time the holder
converts, the greater the number of shares of common stock received
upon conversion;
o to the extent that common stock received upon conversion is sold into
the market, and disregarding the manner in which such shares are sold
as well as any other factors such as reactions to our operating
results and general market conditions which may be operative in the
market at such time, such sales may cause a decrease in the market
price of the common stock, which in turn relative to additional
conversions of the Preferred Shares would reduce the variable
conversion price and increase the number of shares of common stock
issued upon conversion and available for sale into the market for the
common stock;
o short sales of the common stock may be attracted by the Preferred
Shares or accompany conversions and sales of common stock from
conversions, which sales in the aggregate could cause downward
pressure upon the price of the common stock, excluding the effect of
other market factors possibly operative at the time; and
o conversions of the Preferred Shares may result in substantial dilution
of the interests of the other holders of common stock. In this regard,
ownership limitations which prohibit the purchasers from owning more
than 5% of the Intelect common stock only apply to shares of common
stock held at one time and do not prevent purchasers from converting
and selling some of their holdings and then later converting the rest
of the holdings.
3
<PAGE>
In addition, under the terms of the registration rights agreements for the
Series D and Series E Preferred Shares we may be required to register additional
shares of common stock to provide for conversions of the Series D and Series E
Preferred Shares.
Large numbers of the shares offered under this Prospectus could be sold at
the same time. Such sales, or the possibility of such sales, could significantly
depress the market price of the common stock. Under rules governing the
eligibility for inclusion on the Nasdaq National Market, Intelect stock could be
delisted from Nasdaq if its bid price falls below $1 or we otherwise fail to
satisfy the minimum listing requirements of Nasdaq. This could further depress
the market price of the shares by reducing the marketability of the shares. In
addition, should a delisting extend for five or more consecutive trading days, a
"triggering event" would occur and the holders of the Preferred Shares could
require us to redeem the outstanding Preferred Shares.
Each of the holders of the Series C and D Preferred Shares are prohibited
under the applicable Certificate of Designations (together with their
affiliates) from converting such shares into common stock if such conversion
would cause it to own more than 15% of Intelect common stock. This limitation
does not apply in the event of certain "triggering events" (i.e., generally,
failure to have the Registration Statement covering the shares issuable upon
conversion of the Preferred Shares declared effective by certain dates,
suspension of effectiveness of the Registration Statement, delisting of Intelect
stock from NASDAQ, failure or refusal to comply with conversion notices of the
preferred stock, failure to issue conversion shares due to NASDAQ limitations,
and certain breaches of the agreements, representations and warranties in the
transaction documents relating to the Series D and Series E Preferred Shares).
The holders are also prohibited (together with their affiliates) from converting
preferred shares into common stock if the conversion would result in control of
more than 5% of Intelect common stock, unless, in the case of the Series C and D
Preferred Shares, such holder or holders provide Intelect at least 61 days prior
notice. Because the variable conversion price of the Series C and D Preferred
Shares varies with the market price of the common stock, the conversion of all
of the Series C and D Preferred Shares without the above restrictions could
result in a change in control of Intelect.
WE ARE NOT PROFITABLE; ABILITY TO CONTINUE AS GOING CONCERN
We have incurred operating losses in 1998, 1997, and 1996 of $45,878,000,
$20,241,000 and $43,039,000. Negative cash flows from operations in the same
periods were, respectively, $23,129,000, $24,852,000 and $23,050,000. We funded
the negative cash flows with proceeds from borrowings under credit facilities
and sales of preferred stock and common stock in 1998 and 1997 and with proceeds
from issuance of convertible debentures in 1996. It is uncertain when, if ever,
the Company will report operating income or positive cash flow from operations.
If cash needs exceed available resources, there also can be no assurance that
additional capital will be available through public or private equity or debt
financings.
The reports of Grant Thornton LLP and KPMG Peat Marwick on the consolidated
financial statements which are incorporated by reference into this Prospectus
contain an explanatory paragraph that states that we have suffered recurring
losses from continuing operations and are dependent upon the successful
development and commercialization of our products and our ability to secure
adequate sources of capital until we operate profitably. These matters raise
substantial doubt about our 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.
4
<PAGE>
OUR ABILITY TO BECOME PROFITABLE DEPENDS ON INCREASED SALES OF OUR PRODUCTS
Our ability to become profitable will depend, in part, on the sales volume
of our products. Increasing the sales volume will depend on our ability to:
o continue to develop our products;
o increase our sales and marketing activities;
o increase our manufacturing activities; and
o effectively compete against current and future competitors.
We cannot assure you that we will be able to successfully increase the
sales volumes of our products to achieve profitability. We also cannot assure
that profitability and positive cash flow will be achieved when expected. If our
sales plans are not achieved, operating losses and negative cash flows exceed
our estimates, or capital requirements in connection with the design,
development, and commercialization of our principal products are higher than
estimated, we will need to raise additional capital. See page 6 regarding
additional funding.
WE ARE NOT ABLE TO PREDICT SALES IN THE FUTURE AND A NUMBER OF FACTORS MAY CAUSE
OUR PERIODIC RESULTS TO FLUCTUATE
We are not able to accurately predict our sales in future quarters. In any
quarter, a number of factors could affect our sales volumes and our ability to
fill orders. Our periodic results have varied in the past. In the future, we
expect our periodic operating results to vary significantly depending on, but
not limited to, a number of factors, including:
o the market acceptance of our current and new products;
o engineering and development requirements;
o the size, timing and recognition of revenue from significant orders;
o increased competition;
o new product introductions or enhancements by competitors;
o the proportion of revenues derived from distributors, value added
resellers and other sales channels;
o changes in our pricing policies or those of our competitors;
o the financial stability of major customers;
o delays in the introduction of our products or product enhancements;
o customer order deferrals in anticipation of upgrades and new products;
o customer concerns about our financial condition;
o the costs and possible supply constraints of components we use to build
our products;
o changes in regulation of our product markets;
o the timing and nature of expenses; and
o general economic conditions.
Our expense levels are based, in part, on our expectations of future orders
and sales, and we 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 our expenses do not vary with revenues. We may also choose to reduce
price or increase spending in response to competition or to pursue new market
opportunities. If new competitors, technological advances by existing
competitors or other competitive factors require us to invest significantly
greater resources in engineering and development efforts, the spending could
materially adversely affect our operating results and financial condition.
5
<PAGE>
Because our marketing strategy targets relatively large potential
customers, we anticipate that a small number of large orders may comprise a
significant portion of our future product sales. None of our significant
customers have entered into a long-term supply agreement requiring them to
purchase a minimum amount of our products. Historically, sales to a relatively
small number of customers have accounted for a significant portion of our total
revenues, particularly with respect to our SONETLYNX products. We cannot assure
that our principal customers will continue to purchase our products at current
levels, if at all. Also, we cannot assure that we will be able to replace such
purchases with sales to other customers. Any significant deferral of purchases
of our products or the reduction, delay or cancellation of orders from one or
more significant customers could materially and adversely affect our business,
results of operations, and financial condition.
WE MAY NEED ADDITIONAL FUNDING IN THE FUTURE AND THESE FUNDS MAY NOT BE
AVAILABLE TO US
If these sales plans are not achieved, if operating losses and negative
cash flows exceed our estimates, or if capital requirements of the design,
development, and commercialization of our principal products are higher than
estimated, we will need to raise additional capital. Although we believe we
could raise additional capital through public or private equity or debt
financings, if necessary, we cannot assure that such financings will be
available, or available on acceptable terms. If such financing is needed but is
not available, we have determined that a significant reduction of engineering,
development, selling, and administrative costs would allow us to continue as a
going concern through the end of 1999. After such time, we will need to increase
revenues over current levels to continue to operate in our current form.
OUR ABILITY TO GROW AND REMAIN COMPETITIVE DEPENDS ON OUR ABILITY TO FORESEE AND
RESPOND TO RAPID TECHNOLOGICAL CHANGE WITH NEW PRODUCTS AND KEY PRODUCT
ENHANCEMENTS
Rapid technological change, evolving industry standards and frequent new
product introductions and enhancements shape and can quickly change our current
and planned product markets. New technologies or the emergence of new industry
standards can render existing products or products under development obsolete or
unmarketable. Our ability to grow and remain competitive depends, in large part,
on our ability to anticipate changes in our product markets and to successfully
develop and introduce new products on a timely basis. 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, we recently invested substantial resources toward the
development of new products such as our SONETLYNX/FIBRETRAX product line and the
CS4. We have not yet completed development of the CS4 or of planned enhancements
to the SONETLYNX/FIBRETRAX product line and may require additional testing of
the LANscape product. Development and customer acceptance of new products is
inherently uncertain, and we cannot assure that we will complete developments on
a timely basis or that products will be commercially successful. We compete or
will be competing with established companies with greater financial resources
and more developed channels of distribution. We cannot assure that we will
complete the CS4 on schedule, that we will be competitive in this environment or
that we will be able to sell sufficient quantities of the CS4 to recover our
investment or realize profits. We cannot assure that customers will accept
SONETLYNX/FIBRETRAX enhancements or that the LANscape product will meet
standards and expectations of the videoconferencing industry. Any failure 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 materially
adversely effect our business, operating results and financial condition.
COMPETITION FROM LARGER, BETTER ESTABLISHED ENTITIES IS INTENSE
Competition in the converging voice and data communications industry is
intense, and we believe 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 our current and potential competitors have longer operating
histories, significantly greater financial, technical and marketing resources,
greater name recognition, and a larger installed customer base
6
<PAGE>
than we have. 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 we can. Our current or potential competitors may develop products
and services comparable or superior to ours or adapt more quickly than we can to
new technologies, evolving industry trends, or changing customer requirements.
The videoconferencing market may present lower barriers to entry than other
markets and may therefore be subject to greater competition in the future.
Increased competition as to any of our products or services could result in
price reductions, reduced margins, and loss of our market share, which could
materially and adversely affect our business, results of operations, and
financial condition.
WE DEPEND ON KEY MEMBERS OF OUR MANAGEMENT AND ENGINEERING STAFF, AND WE MUST
RETAIN AND RECRUIT QUALIFIED INDIVIDUALS TO BE COMPETITIVE
Our success depends in large part on the continued service of key creative,
technical, marketing, sales and management personnel and our ability 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. Recruitment of such personnel can be
a lengthy process. We have at-will employment arrangements with management and
other personnel, meaning they may terminate their employment at any time. The
loss of key personnel or failure to attract additional qualified employees could
materially adversely affect our business, the results of operations and new
product development efforts.
WE DEPEND ON THE SUPPLY OF PRODUCT COMPONENTS FROM OUTSIDE SUPPLIERS AND, IN
SOME CASES, SINGLE SOURCES OF SUPPLY. WE DEPEND ON A SINGLE MANUFACTURING
FACILITY
The majority of the components required to assemble our products come from
outside sources. The supply level of and the lead time in delivering certain key
components changes and is difficult to predict with any certainty. Occasional
unexpected shortages of or significant increases in the price of components
could materially and adversely affect our business, results of operations, and
financial condition.
We rely on a single source for certain key components and do not have
supply commitments for those components. If we lose the ability to obtain these
components from our current suppliers, we will have difficulty replacing this
supply of components in a short time frame. Many of our vendors extend us credit
for the components they supply. Poor credit terms would materially adversely
affect our business, results of operations, and financial condition.
We buy a fiber optic interface card for the SONETLYNX OC-3 product from a
small company which is the sole source for this component. We also buy a video
codec card used in SONETLYNX video applications from another small company which
is the sole source. Delays in delivery of either component would restrict our
ability to increase sales. If either vendor fails to meet commitments, we intend
to rely on our in-house manufacturing capabilities. However, the conversion to
in-house backup supply would involve some interruption in our production and
could materially adversely affect our business, results of operations, and
financial condition.
We use 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. This would
cause significant delays in delivery of the product and could materially
adversely effect our business, results of operations, and financial condition.
Our strategy is to forecast requirements and build inventories that comprehend
vendor lead times.
We have one manufacturing facility for SONETLYNX and LANscape products, and
our revenues depend on its continued operation. Operational problems at the
facility could materially adversely affect our business, results of operations,
and financial condition.
7
<PAGE>
WE DEPEND ON THIRD PARTIES TO MARKET AND SERVICE OUR PRODUCTS
Although we expect to continue to market our products directly to certain
accounts, we intend to maintain a network of resellers, consisting primarily of
distributors, value-added resellers, and systems integrators with established
distribution channels for communications products, to market our products and
educate potential end-users and service providers about our products. Our future
prospects depend in large part on our development of relationships with third
parties and their marketing and product service efforts. We cannot assure that
we will be able, for financial or other reasons, to finalize third-party
distribution or marketing agreements or that such arrangements will result in
the successful commercialization of any of our products. Failure to develop
third party marketing and service arrangements or failure of third parties to
effectively market and service our products could materially adversely affect
our business or our financial condition.
WE RELY ON PATENTS AND OTHER PROPRIETARY INFORMATION. THE LOSS OF, OR A DISPUTE
REGARDING, PROPRIETARY INFORMATION OR INTELLECTUAL PROPERTY RIGHTS WOULD
NEGATIVELY AFFECT OUR BUSINESS
Our success depends, in part, on our ability to maintain trade secret
protection, obtain patents and operate without infringing the proprietary rights
of third parties or having third parties circumvent our intellectual property
rights. We have three issued U.S. patents. Fifteen additional patents are
pending. We cannot assure that the patents will provide us with any competitive
advantages or will not be challenged by any third parties. Likewise, the
intellectual property rights of others could impede our ability to do business.
Additionally, third parties may be able to circumvent our patents. Our patent
applications may be denied. Furthermore, it is possible that others could
independently develop similar products, duplicate our products, or design around
our patented products.
We have received notice that we may be infringing on certain intellectual
property rights of others. We have asked legal counsel to evaluate these claims.
We may have to obtain licenses from third parties to avoid infringing patents or
other proprietary rights. We cannot assure that any licenses required under any
such patents or proprietary rights would be made available, if at all, on
acceptable terms. Failure to obtain these licenses could delay product
introductions, or prohibit our development, manufacture or sale of products
requiring such licenses. In addition, we could incur substantial costs in
defending or prosecuting lawsuits to protect our patents or other proprietary
rights. Intellectual property plaintiffs could obtain injunctive or other
equitable relief which could effectively block our ability to sell our products
in the United States and abroad, and could obtain an award of substantial
damages. Either result could materially adversely affect our business, results
of operations, and financial condition.
Much of our know-how and technology may not be patentable. To protect our
rights, we require many employees, consultants, advisors and collaborators to
enter into confidentiality agreements. We cannot assure that these agreements
will provide meaningful protection of our trade secrets, know-how or other
proprietary information in the event of any unauthorized use or disclosure.
Furthermore, independent development by competitors of competing technologies
could materially adversely affect our business, results of operations and
financial condition, especially if we do not obtain patent protection or if our
patent protection is narrowly defined.
NUMEROUS GOVERNMENTAL REGULATIONS AFFECT OUR BUSINESS AND OUR PRODUCTS
While most of our operations are not directly regulated, some of our
customers are telecommunications service providers who are heavily regulated at
both the federal and state levels. Such regulation may limit the number of
potential customers for our services or impede our ability to offer competitive
services to the market, or otherwise materially adversely affect our business,
results of operations, and financial condition. At the same time, recent
deregulation of the telecommunications industry may facilitate the entrance of
new competitors or industry consolidation. This could subject us to additional
competitors, increased pricing pressures, decreased demand for our products or
services, increased cost of doing business or other factors that could
materially adversely affect our business, results of operations, and financial
condition.
8
<PAGE>
WE MAY BE SUBJECT TO SIGNIFICANT CONTINGENT LIABILITIES
In connection with the sale of former operations in November 1995, our
subsidiary Intelect Communications Systems Limited agreed to indemnify Savage
Sports Corporation, the purchaser of Savage Arms, Inc. (a manufacturer of fire
arms) for potential losses associated with product liability, environmental
matters, employee matters and other similar items. Certain of these indemnity
obligations survive indefinitely. A finding of liability against Intelect
Communications Systems Limited could materially adversely affect our business,
results of operations, and financial condition. Furthermore, we could incur
substantial costs (including the diversion of the attention of management) in
defending lawsuits relating to these indemnity obligations.
One of the liabilities assumed in the 1995 sale involves a firearms product
liability lawsuit which one defendant, Western Auto Supply Co., settled for $5
million and, in turn, has asserted a third-party claim against Savage Arms, Inc.
for indemnification in the amount of the settlement plus attorneys' fees and
related costs. Savage Arms has asserted defenses to the claims and we believe
additional defenses may be available. Based on the information available to
date, it is impossible to predict the outcome of this litigation or to assess
the probability of any verdict.
Savage Sports Corporation also seeks indemnification for certain other
products liability claims. Intelect Communications Systems Limited has
undertaken the defense of a lawsuit filed against Savage Arms, Inc. by Emhart
Industries, Inc. in the United States District Court for the District of
Massachusetts, in which Emhart requests indemnification from Savage Arms (to
date, approximately $2.2 million). We have asserted additional defenses. The
parties are in discovery and we cannot at this time predict the outcome of the
litigation.
An adverse outcome in the Taylor or Emhart litigation would materially
adversely affect our financial condition and the results of operations.
OUR CHARTER, BYLAWS AND THE DELAWARE CORPORATE LAWS DISCOURAGE, DELAY OR PREVENT
A CHANGE IN CONTROL OF INTELECT
Certain provisions of our certificate of incorporation, by-laws and
Delaware law could 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 common stock. These
provisions include:
o a classified Board of Directors;
o provisions that the Board of Directors have exclusive authority to
amend or change the By-laws;
o 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;
o elimination of the stockholders' ability to take any action without a
meeting;
o elimination of the ability of stockholders to call special meetings
without the required consent of the Board of Directors; and
o establishment of certain advance notice procedures for nomination of
candidates for election as directors and for stockholder proposals to
be considered at stockholders' meetings.
We are 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."
9
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
public reference facilities of the SEC in Washington, D.C., Chicago, Illinois
and New York, New York. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to
the public from the SEC's web site at http:\\www.sec.gov. Intelect common stock
is traded on the Nasdaq Stock Market.
We filed with the SEC 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. This Prospectus does not contain all the information set
forth in the Registration Statement and the exhibits and schedules, as certain
items are omitted in accordance with the rules and regulations of the SEC. For
further information pertaining to the Company and the common stock offered,
please refer to the Registration Statement and the exhibits and schedules
thereto, which may be inspected without charge at the public reference
facilities referenced above. In addition, you may obtain copies of the
Registration Statment and exhibits electronically by means of the SEC's home
page on the Internet at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we have
filed with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is considered to be part of this Prospectus and any later information that we
file with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any additional documents
we file with the SEC until this offering of common stock is terminated. This
Prospectus is part of a registration statement on Form S-3 that we filed with
the SEC. The documents that we incorporate by reference are:
(1) Our Annual Report on Form 10-K for the fiscal year ended December
31, 1998.
(2) Our Form 8-K filed on March 8, 1999.
(3) Our Form 8-K filed on March 2, 1999.
(4) Our Form 8-K filed on February 3, 1999.
(5) Our definitive Rule 14A Proxy Statement filed on January 29, 1999.
(6) The description of our common stock contained in our Registration
Statement on Form S-4 declared effective on October 30, 1997 (File
No. 333-39063) and our Form 8-K filed on December 5, 1997.
(7) All documents we file with the SEC under Sections 13(a), 13(c), 14,
or 15(d) of the Exchange Act after the date of this Prospectus and
before to the termination of the offering of the common stock
registered under this registration statement.
To the extent that prior filings listed in numbers (1) - (6) above conflict
with this Prospectus, those prior filings are modified by this Prospectus and
included herein only as modified. To the extent that statements in this
Prospectus or in the prior filings listed in numbers (1) - (6) above conflict
with statements in future filings referenced in number (7) above, this
Prospectus and the prior filings are modified by the future filings listed in
number (7) above.
For information on the consolidated financial statements see "Experts" in
this Prospectus.
10
<PAGE>
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
EDWIN J. DUCAYET, JR.,
CHIEF FINANCIAL OFFICER
INTELECT COMMUNICATIONS, INC.
1100 EXECUTIVE DRIVE
RICHARDSON, TEXAS 75081
(972) 367-2100.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock offered in
this Prospectus.
SELLING STOCKHOLDERS
The Selling Stockholders were issued the common stock covered by this
Prospectus in a series of private placements as summarized below:
Of the 33,597,363 shares of common stock being registered:
(i) Effective June 26, 1998, we issued 5,000 Series D Preferred Shares
to Wingate Capital Ltd., Fisher Capital, Ltd., CCG Investment Fund
Ltd., CCG Capital Ltd., and Midway Capital Ltd. The number of Series
D Preferred Shares issued and held by each Selling Stockholder is as
follows: Fisher Capital Ltd. -- 2893 shares, Wingate Capital
Ltd. -- 1557 shares, CCG Capital Ltd. -- 200 shares, CCG Investment
Fund Ltd. -- 200 shares, Midway Capital Ltd. -- 150 shares. The
Series D Preferred Shares may be converted into a number of common
shares equal to (i) the aggregate stated value of the Series D
Preferred Shares (i.e., $1,000 per share), plus any accrued and
unpaid premium on that amount at a rate of 4.00% per annum from the
June 26, 1998 issuance, divided by (ii) the Conversion Price. The
Conversion Price for the Series D Preferred Shares is the lesser of
(a) $2.998 per share, or (b) as of the date of this Prospectus,
83.5% of the Market Price of the common stock, where the Market
Price is the average of the two lowest closing bid prices for the
common stock for the forty (40) consecutive trading days immediately
preceding such date of determination. Under the antidilution
provisions of the Series D Preferred Shares, if we issue securities
that have a more favorable variable conversion price, the selling
stockholders may elect to substitute the more favorable variable
price when making conversions of the Series D Preferred Shares.
(ii) Effective March 5, 1999, at the Initial Closing under a Securities
Purchase Agreement dated as of February 24, 1999 between us and the
Buyers named therein (the "Securities Purchase Agreement"), we
issued 3,000 shares of Series E Preferred Shares to Olympus
Securities, Ltd., NP Partners, Wingate Capital Ltd., Fisher Capital
Ltd., CCG Investment Fund Ltd., and CCG Capital Ltd. In the same
transaction, we issued to the purchasers warrants to purchase 100
shares of common stock for each Series E Preferred Share issued.
The number of Series E Preferred Shares issued at the Initial
Closing and held by each selling stockholder is as follows: Olympus
Securities, Ltd. -- 1,228 shares, NP Partners -- 688 shares, Fisher
Capital Ltd. -- 664 shares, Wingate Capital Ltd. -- 342 shares, CCG
Capital Ltd. -- 39 shares, CCG Investment Fund Ltd. -- 39 shares.
Upon the satisfaction of certain conditions, including the
effectiveness of the registration statement covered by this
Prospectus, we plan to sell 3,000 more Series E Preferred Shares
and warrants for the purchase of 100 shares of common stock for
each Series E Preferred Share at a "Mandatory Closing" to certain
purchasers under the Securities Purchase Agreement. The number of
Series E Preferred Shares to be issued to the selling stockholders
at the Mandatory Closing is as follows: HFTP Investment
LLC -- 1,500 shares, Leonardo, L.P. -- 1,000 shares, GAM Arbitrage
Investments, Inc. -- 100 shares, AG Super Fund International
Partners, L.P. -- 100 shares, Raphael, L.P. -- 100 shares, Ramius
Fund, Ltd. -- 200 shares. With respect to the Series E Preferred
Shares, this Prospectus relates to those shares of common stock
issuable upon conversion of the Series E Preferred Shares
11
<PAGE>
issued at the Initial Closing and issuable at the Mandatory Closing
and the related warrants issued at such closings. The Series E
Preferred Shares may be converted into a number of shares of common
stock equal to (i) the aggregate stated value of the Series E
Preferred Shares (i.e., $1,000 per share), plus any accrued and
unpaid premium on that amount at a rate of 8.00% per annum from the
date of issuance of such shares, divided by (ii) the Series E
Conversion Price. The Series E Conversion Price for the shares
offered under this Prospectus is the lesser of (a) the "fixed
conversion price" (which is (i) $1.80 for the 3,000 shares issued
at the March 5, 1999 Initial Closing, and (ii) the lesser of $1.80
or the lowest closing bid price of Intelect common stock during the
ten (10) consecutive trading days immediately prior to the date of
the initial filing of the registration statement relating to this
Prospectus for the 3,000 shares to be issued at the Mandatory
Closing), or (b) as of the date of this Prospectus, 83.5% of the
Market Price of the common stock, where the Market Price is the
average of the two lowest closing bid prices for the common stock
for the forty (40) consecutive trading days immediately preceding
such date of determination. Under the antidilution provisions, if
we issue securities that have a more favorable variable conversion
price, the selling stockholders may elect to substitute the more
favorable variable price when making conversions of the Series E
Preferred Shares.
(iii) On January 13, 1999, in connection with the extension of the
maturity date of a debt instrument, we issued to St. James Capital
Partners, L.P. a warrant for the purchase of 110,000 shares of
common stock at an exercise price of the lesser of (i) $1.50 over
the volume weighted average of the closing price of the common
stock for the ten (10) day period prior to January 13, 1999 and
(ii) $3.50 (subject to certain antidilution provisions stated in
the warrant).
(iv) On January 13, 1999, in connection with the extension of the
maturity date of a debt instrument, we issued to SJMB, L.P. a
warrant for the purchase of 425,000 shares of common stock at an
exercise price of the lesser of (i) $1.50 over the volume weighted
average of the closing price of the common stock for the ten (10)
day period prior to January 13, 1999 and (ii) $3.50 (subject to
certain antidilution provisions stated in the warrant).
(v) Effective April 1, 1999, in connection with an amendment to an
advisory services agreement between Intelect and AJC, Inc., we
issued to AJC, Inc. an amended and restated warrant for the purchase
of 300,000 shares of Intelect common stock with an exercise price of
$2.00 per share and an additional warrant for the purchase of
150,000 shares at an exercise price of $2.00 per share. The amended
and restated warrant replaced a previous amended and restated
warrant issued to AJC, Inc. on September 1, 1998.
(vi) On September 1, 1998, we issued to Lifeline Industries, Inc. a
warrant for the purchase of 30,000 shares of Intelect common stock
with an exercise price of $2.00 per share.
(vii) We issued an aggregate of 440,683 shares of common stock to the
Coastal Corporation Second Pension Trust ("Coastal") as dividends
on the Company's $2.0145, 10% Cumulative Convertible Preferred
Stock, Series A (the "Series A Preferred Stock") for the
dividends payable for the second through fourth quarters of 1998
and for the first quarter of 1999.
(viii) On December 5, 1997, we obtained debt financing from certain
individuals and in connection with such financing issued
convertible promissory notes to David C. Conner, Herman M.
Frietsch, Todd Grassi, Nancy Miracle, James W. Ryan. P.C., and
Philip P. Sudan, P.C. (collectively the "Company Stockholders").
The principal and interest of these promissory notes are
convertible into shares of common stock at a price of $2.00 per
share. As of April 1, 1999, the aggregate principal and interest
outstanding for each of these promissory notes and the number of
shares issuable if the notes were converted on April 1, 1999 is as
follows: Mr. Conner $57,593 and 28,796 shares, Mr. Frietsch
$115,186 and 59,593 shares, Mr. Grassi $40,416 and 20,207 shares,
Ms. Miracle $35,368.43 and 17,684 shares, James W. Ryan, P.C.
$76,791 and 38,395 shares, and Philip P. Sudan, Jr., P.C. $153,581
and 76,790 shares. In this registration statement, we have agreed
to register an additional amount of shares to cover an estimated
amount which would accrue based on interest on each of these
promissory notes at 11.5% accruing until September 1, 2000.
12
<PAGE>
(ix) 2,800,000 shares of common stock were issued, and 840,000 shares of
common stock are issuable upon exercise of warrants issued to
accredited investors in private placements on December 22, 1998 and
January 4, 1999. 600,000 shares of common stock are issuable upon
exercise of warrants issued to accredited investors in a private
placement on December 2, 1998.
(x) 65,000 shares of common stock were issued to Olympus Securities,
Ltd. and 35,000 shares were issued to NP Partners in a private
placement on March 9, 1999 pursuant to a settlement of certain
penalties and damages in connection with the Series C and D
Preferred Shares.
In each case, the issuance of Intelect common stock to each of 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 Intelect common stock beneficially owned by each of the Selling
Stockholders as of March 30, 1999, the number of shares of common stock to be
offered by each Selling Stockholder under this Prospectus, and the number of
shares of common stock to be beneficially owned by each Selling Stockholder if
all of the shares of common stock offered hereby are sold as described herein.
Of the Selling Stockholders, Mr. Conner and Mr. Grassi are employees of the
Company. Mr. Frietsch is the Chairman and Chief Executive Officer of the
Company. Philip P. Sudan, Jr. is a director of the Company, a partner in Ryan &
Sudan, L.L.P. (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. In addition, Philip P.
Sudan, Jr. and James W. Ryan, P.C. are parties to the promissory notes issued by
the Company as described above.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF SHARES
COMMON STOCK OF COMMON STOCK
BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY
AS OF MARCH 30, OF COMMON STOCK OWNED AFTER
NAME OF SELLING STOCKHOLDER 1999(1) OFFERED HEREBY OFFERING(10)
- ------------------------------------- ------------------- ---------------- ----------------
<S> <C> <C> <C>
Wingate Capital Ltd.(4).............. 1,774,435(2) 1,382,603(3) 0
Fisher Capital Ltd.(4)............... 3,250,258(2) 2,250,537(3) 0
NP Partners(4)....................... 4,389,279(2) 5,475,932(3) 0
Olympus Securities, Ltd.(4).......... 8,102,848(2) 10,038,870(3) 0
CCG Capital Ltd.(4).................. 214,064(2) 105,127(3) 0
CCG Investment Fund, Ltd.(4)......... 229,043(2) 105,127(3) 0
Midway Capital Ltd.(4)............... 197,434(2) 345,510(3) 0
HFTP Investment LLC.................. 3,860,626(2) 4,019,830(8) 0
Leonardo, L.P.(5).................... 2,524,187(2) 2,567,890(3) 0
GAM Arbitrage Investments, Inc.(5)... 264,227(2) 267,990(3) 0
AG Super Fund International Partners,
L.P.(5)............................ 265,552(2) 267,990(3) 0
Raphael, L.P.(5)..................... 257,321(2) 267,990(3) 0
Ramius Fund, Ltd.(5)................. 501,302(2) 535,978(3) 0
AJC, Inc............................. 450,000 450,000 0
Lifeline Industries, Inc............. 30,000 30,000 0
The Coastal Corporation Second
Pension Trust...................... 5,217,677(9) 440,683 0
St. James Capital Partners, L.P...... 1,099,428(6) 110,000 465,309
SJMB, L.P............................ 4,369,867(7) 425,000 1,848,391
Herman M. Frietsch................... 867,188 65,769 801,419
Nancy M. Miracle..................... 17,685 20,408 0
David C. Conner...................... 47,796 32,884 14,912
Todd Grassi.......................... 20,027 20,027 0
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
13
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF SHARES
COMMON STOCK OF COMMON STOCK
BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY
AS OF MARCH 30, OF COMMON STOCK OWNED AFTER
NAME OF SELLING STOCKHOLDER 1999(1) OFFERED HEREBY OFFERING(10)
- ------------------------------------- ------------------- ---------------- ----------------
<S> <C> <C> <C>
James W. Ryan, P.C................... 103,395 43,846 59,549
Philip P. Sudan, Jr., P.C............ 298,029 87,692 210,337
Oscar S. Wyatt, Jr................... 950,000 950,000 0
Fayez Sarofim........................ 1,250,000 950,000 300,000
Morton Cohn.......................... 650,000 650,000 0
Don A. Sanders....................... 325,000 325,000 0
John Drury........................... 260,000 260,000 0
Kaherine U. Sanders.................. 260,000 260,000 0
Donald V. Weir....................... 130,000 130,000 0
Christine M. Sanders................. 130,000 130,000 0
Brad D. Sanders...................... 48,750 48,750 0
Susan Sanders Keller................. 48,750 48,750 0
Bret Sanders......................... 48,750 48,750 0
Laura K. Sanders..................... 48,750 48,750 0
George Ball.......................... 65,000 65,000 0
Steve Scott.......................... 325,000 325,000 0
</TABLE>
- ------------
(1) Beneficial ownership is determined under SEC rules and generally includes
voting or investment power with respect to securities and includes any
securities the person has the right to acquire within 60 days of the date
of determination through the conversion or exercise of any security or
other right.
(2) Beneficial ownership is determined as of April 2, 1999 and with regard to
the holders of the Series C, D and E Preferred Shares, is based on a
Conversion Price equal to $0.72828 (which is 83.5% of the average of the
two lowest closing bid prices of the common stock for the forty (40)
consecutive trading days ended April 1, 1999). See paragraphs (i) and (ii)
above for further detail of the terms of the Series D and E Preferred
Shares offered under this Prospectus. Includes Series E Preferred Shares
and related warrants issuable at Mandatory Closing as set forth in (ii)
above.
(3) Represents 175% of the number of shares of common stock issuable upon
conversion of the Series D Preferred Shares, 200% of the number of shares
of common stock issuable upon conversion of the Series E Preferred Shares
issued at the Initial Closing and issuable at the Mandatory Closing and
125% of the number of shares of common stock issuable to the Series E
purchasers upon exercise of their warrants to purchase common stock. The
number of shares of common stock registered and offered under this
Prospectus were determined by agreement between Intelect and the Selling
Stockholders. The number of shares of common stock ultimately issuable on
conversion of the Series D and E Preferred Shares cannot be determined at
this time because that number depends on (a) closing bid prices of the
common stock prior to conversion and (b) certain antidilution adjustments,
as described in paragraphs (i) and (ii) above. No holder of Series D or
Series E Preferred Shares covered by this Prospectus can convert them if
the conversion would cause that holder to beneficially own more than 5% of
Intelect's common stock (other than shares deemed to be beneficially owned
through ownership of Series D and E Preferred Shares and warrants or
options to purchase stock, except upon 61 days prior notice to the Company
with respect to the Series D Preferred Shares).
(4) Citadel Limited Partnership is the managing general partner of NP Partners
(formerly known as Nelson Partners), and the trading manager of Wingate
Capital Ltd., Fisher Capital Ltd., Olympus Securities, Ltd., CCG Investment
Fund Ltd., CCG Capital Ltd., and Midway Capital Ltd. (the "Citadel
Entities") and consequently has voting control and investment discretion
over securities held by the Citadel Entities. Citadel Limited Partnership
and each of the Citadel Entities disclaims beneficial ownership of the
shares of common stock held by the other Citadel Entities.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
14
<PAGE>
(5) Angelo, Gordon & Co., L.P. is the trading manager of Leonardo, L.P., GAM
Arbitrage Investments, Inc., AG Super Fund International Partners, L.P.,
Raphael, L.P. and Ramius Fund, L.P. (the "Angelo Gordon Entities") and
consequently has voting control and investment discretion over securities
held by the Angelo Gordon Entities.
(6) Includes (i) 238,928 shares of common stock isuable upon conversion of
convertible debt, (ii) 750,500 shares issuable upon exercise of warrants,
which represents 300,000 shares of common stock issuable upon exercise of
warrants issued on April 2, 1998 and an additional 450,500 shares pursuant
to anti-dilution provisions of such warrants as of November 10, 1998 and
(iii) 110,000 shares issuable upon conversion of that certain warrant dated
January 13, 1999. Except as set forth herein, does not include any
additional shares which may be acquired pursuant to anti-dilution
provisions in the warrants. Does not include shares beneficially owned by
SJMB, L.P.
(7) Includes (i) 942,866 shares of common stock issuable upon conversion of
convertible debt, (ii) 3,002,001 shares issuable upon exercise of warrants,
which represents 1,200,000 shares of common stock issuable upon exercise of
warrants issued on April 2, 1998 and an additional 1,802,001 shares
pursuant to anti-dilution provisions of such warrants as of November 10,
1998 and (iii) 425,000 shares issuable upon conversion of that certain
warrant dated Janaury 13, 1999. Except as set forth herein, does not
include any additional shares which may be acquired pursuant to
anti-dilution provisions in the warrants. Does not include shares
beneficially owned by St. James Capital Partners, L.P.
(8) With respect to CCG Capital, Ltd. and CCG Investment Fund, Ltd., assumes
the conversion and sale of the shares of common stock issuable upon
conversion of the Series C Preferred Shares included in that certain
registration statement of the Company on Form S-3 filed on May 22, 1998
(File No. 333-49379), and with respect to each of CCG Capital Ltd., CCG
Investment Fund, Ltd., Wingate Capital, Ltd. and Fisher Capital, Ltd.
assumes the conversion and sale of the shares of common stock issuable upon
conversion of the Series D Preferred Stock included in that certain
registration statement of the Company on Form S-3 filed on June 10, 1998
(File No. 333-53451).
(9) Includes 188,217 shares issued to The Coastal Corporation Second Pension
Trust as a dividend payable for the quarter ended March 31, 1999.
(10) Assumes the sale of all of the shares of common stock issuable upon
conversion of the Series A Preferred Stock, shares of common stock issued
as dividends on the Series A Preferred Stock, and shares of common stock
issuable upon conversion of warrants held by Coastal or previously issued
upon conversion of warrants held by Coastal and covered by those certain
registration statements of the Company on Form S-3 filed on December 30,
1998 (File No. 333-35841) and on May 22, 1998 (File No. 333-53451). With
respect to Leonardo, L.P., GAM Arbitrage Investments, Inc., AG Super Fund
International Partners, L.P., Raphael, L.P., Ramius Fund, Ltd., and HFTP
Investment LLC assumes the conversion and sale of the shares of common
stock issuable upon conversion of the Series C Preferred Shares included in
that certain registration statement filed on April 3, 1998 (File No. 333-
49379) and the shares of common stock issuable upon conversion of the
Series D Preferred Shares and included in that certain registration
statement of the Company on Form S-3 filed on May 22, 1998 (File No.
333-49379). With respect to each of CCG Capital Ltd., CCG Investment Fund,
Ltd., Wingate Capital, Ltd. and Fisher Capital, Ltd., assumes the sale of
the shares of common stock issuable upon conversion of the Series D
Preferred Shares included in that certain registration statement of the
Company on Form S-3 filed on May 22, 1998 (File No. 333-53451). With
respect to St. James Capital Partners, L.P. and SJMB, L.P., assumes the
conversion and sale of all debt convertible into common stock and shares of
common stock issuable upon exercise of warrants included in the certain
registration statement of the Company on Form S-3 filed on May 22, 1998
(File No. 333-49379). 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, 2.19%; SJMB, L.P., 4.93%; and St.
James Capital Partners, L.P., 1.23%.
Since the date on which they provided the information regarding their
common stock, the Selling Stockholders identified above may have sold,
transferred or otherwise disposed of all or a portion of 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."
15
<PAGE>
PLAN OF DISTRIBUTION
The common stock is 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 Intelect common stock may occur
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 their conversion
shares, 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 Intelect common stock. In such instances,
this Prospectus may be delivered in connection with such short sales and the
conversion shares offered hereby may be used to cover such short sales.
From time to time one or more of the Selling Stockholders may transfer,
pledge, donate or assign such Selling Stockholders' conversion shares to lenders
or others and each of such persons will be deemed to be a Selling Stockholder
for purposes of this Prospectus. The number of Selling Stockholders' conversion
shares beneficially owned by those Selling Stockholders who so transfer, pledge,
donate or assign Selling Stockholders' conversion shares will decrease as and
when they take such actions. The plan of distribution for Selling Stockholders'
conversion shares sold hereunder will otherwise remain unchanged, except that
the transferees, pledgees, donees or other successors will be Selling
Stockholders hereunder.
A Selling Stockholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the common
stock in the course of hedging the positions they assume with such Selling
Stockholder, including, without limitation, in connection with distributions of
the common stock by such broker-dealers. A Selling Stockholder may also enter
into option or other transactions with broker-dealers that involve the delivery
of the common stock to the broker-dealers, who may then resell or otherwise
transfer such common stock. A Selling Stockholder may also loan or pledge the
common stock to a broker-dealer and the broker-dealer may sell the common stock
so loaned or upon a default may sell or otherwise transfer the pledged common
stock.
Brokers, dealers, underwriters or agents participating in the distribution
of the common stock as agents may receive compensation in the form of
commissions, discounts or concessions from the Selling Stockholders and/or
purchasers of the common stock for whom such broker-dealers may act as agent, or
to whom they may sell as principal, or both (which compensation as to a
particular broker-dealer may be less than or in excess of customary
commissions). The Selling Stockholders and any broker-dealers who act in
16
<PAGE>
connection with the sale of common stock covered by this Prospectus 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
Intelect nor any Selling Stockholders can presently estimate the amount of such
compensation. We know 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.
We 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. We have 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 Intelect,
Intelect has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Each purchaser of the Series D Preferred Shares 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 Shares 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 for the Series D Preferred Shares).
In addition, each purchaser of the Series D Preferred Shares agreed to not
engage in any "short sales" (as defined in Rule 3b-3 of the Securities
Exchange Act of 1934, as amended) of Intelect common stock, 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.
We have 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
Intelect 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 Intelect. Mr. Sudan
beneficially owns 297,084 shares of common stock. Mr. James W. Ryan, a partner
in Ryan & Sudan, L.L.P., beneficially owns 103,542 shares of common stock. In
addition, Messrs. Ryan and Sudan are parties to certain amended and restated
promissory notes with the Company as described under "Selling Stockholders".
17
<PAGE>
EXPERTS
Our financial statements and schedules as of December 31, 1998, and for the
year then ended, incorporated by reference in this Prospectus and elsewhere in
the registration statement have been audited by Grant Thornton 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 report of Grant Thornton LLP
on the consolidated financial statements contains an explanatory paragraph that
states that we have suffered recurring losses from continuing operations and are
dependent upon the successful development and commercialization of our products
and our ability to secure adequate sources of capital until we operate
profitably. These matters raise substantial doubt about our 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.
Our financial statements and schedules 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.
Our consolidated balance sheet as of December 31, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1996, and the related schedule, together with the
related notes and the report of KPMG Peat Marwick, independent chartered
accountants, all contained in our 1997 annual report, are incorporated herein by
reference. The KPMG Peat Marwick report on the aforementioned consolidated
financial statements contains an explanatory paragraph that states that we have
suffered recurring losses from continuing operations and are dependent upon the
successful development and commercialization of our products and our ability to
secure adequate sources of capital until we operate profitably. These matters
raise substantial doubt about our 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.
18
<PAGE>
PROSPECTUS
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY INTELECT COMMUNICATIONS, INC. (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
----
About Intelect....................... 2
Risk Factors......................... 2
Where You Can Find More Information
About Intelect..................... 10
Incorporation of Certain Documents by
Reference.......................... 10
Use of Proceeds...................... 11
Selling Stockholders................. 11
Plan of Distribution................. 16
Legal Matters........................ 17
Experts.............................. 18
