SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
INTELECT COMMUNICATIONS, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: ____________
(2) Aggregate number of securities to which transaction applies: _______________
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined: ________________________________
(4) Proposed maximum aggregate value of transaction: ___________________________
(5) Total fee paid: ____________________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ____________________________________________________
(2) Form, Schedule or Registration Statement No.: ______________________________
(3) Filing Party: ______________________________________________________________
(4) Date Filed: ________________________________________________________________
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INTELECT COMMUNICATIONS, INC.
To the Stockholders of Intelect Communications, Inc.:
You are requested to vote on the matters being presented for action at a
Special Meeting of Stockholders of Intelect Communications, Inc. These matters
are important and critical to the Company's capability to sustain its capital
and financial flexibility and meet its obligations. We urge your affirmative
vote in support of the Company's continuing progress. We appreciate your
interest and consideration.
Our meeting is called for March 3, 1999 at the Company's offices located at
1100 Executive Drive, Richardson, Texas 75081. The attached Notice of Special
Meeting and Proxy Statement describe the business of the meeting. Directors and
officers of the Company will also be present to address the items for actions
and respond to stockholder inquiries.
We cordially invite you to attend the meeting. Whether or not you plan to
attend the meeting, please sign, date, and return the enclosed proxy promptly in
the envelope provided. If you attend the meeting, you may, at your discretion,
withdraw the proxy and vote in person.
Thank you for your time and consideration to respond to this request.
Sincerely,
For the Board of Directors
and Management
/s/ HERMAN M. FRIETSCH
HERMAN M. FRIETSCH
CHAIRMAN
Enclosures
January 29, 1999
<PAGE>
INTELECT COMMUNICATIONS, INC.
NOTICE OF THE
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 3, 1999
To the Stockholders of Intelect Communications, Inc.
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Intelect
Communications, Inc. (the "Company") will be held on March 3, 1999, at 3:00
p.m. local time at the Company's offices located at 1100 Executive Drive,
Richardson, Texas 75081 (the "Meeting") for the purpose of considering and
voting upon the following matters:
1. To consider and vote upon a proposal to amend the Company's
Amended and Restated Certificate of Incorporation to increase the number of
shares of the Company's common stock, par value $0.01 (the "Common
Stock") authorized for issuance from 50,000,000 to 100,000,000 shares;
2. To consider and vote upon a proposal to approve the issuance of
the Common Stock issuable upon conversion of the Company's Series C
Convertible Preferred Stock, $0.01 par value per share (the "Series C
Preferred Stock") and the Company's Series D Convertible Preferred Stock,
$0.01 par value per share (the "Series D Preferred Stock"); and
3. To transact such other business as may properly come before the
Meeting or any adjournment thereof.
The Board of Directors of the Company has fixed the close of business on
January 14, 1999 as the record date for the meeting, and only holders of Common
Stock of record at such time will be entitled to vote at the meeting or any
adjournment thereof.
BY ORDER OF THE BOARD OF DIRECTORS
EDWIN J. DUCAYET, JR., ASSISTANT
SECRETARY
Richardson, Texas
January 29, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY COMPLETE, DATE,
SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. NO POSTAGE NEED
BE AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES.
<PAGE>
INTELECT COMMUNICATIONS, INC.
1100 EXECUTIVE DRIVE
RICHARDSON, TEXAS 75081
PROXY STATEMENT
FOR A
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON
MARCH 3, 1999
This Proxy Statement accompanies the Notice (the "Notice") of a Special
Meeting of Stockholders of Intelect Communications, Inc. (the "Company") and
is furnished in connection with the solicitation by the Board of Directors of
the Company (the "Board") of proxies to be voted at the Special Meeting of
Stockholders of the Company (the "Meeting") and at any and all adjournments of
such Meeting. The Meeting is to be held on March 3, 1999, at the Company's
offices located at 1100 Executive Drive, Richardson, Texas 75081 at 3:00 p.m.
local time.
The Notice of Meeting, this Proxy Statement, and the enclosed proxy are
being first mailed to stockholders on or about January 29, 1999.
PURPOSES OF THE SPECIAL MEETING
At the Meeting, holders of record of the Company's outstanding shares of
common stock, par value $0.01 per share ("Common Stock"), will be asked (i) to
consider and vote upon a proposal (the "Charter Amendment Proposal") to amend
the Company's Amended and Restated Certificate of Incorporation (the
"Certificate") to increase the number of shares of Common Stock authorized for
issuance from 50,000,000 to 100,000,000 shares, and (ii) to consider and vote
upon a proposal (the "Preferred Stock Proposal") to approve the issuance of
Common Stock issuable upon conversion of the Company's Series C Convertible
Preferred Stock, par value $0.01 per share (the "Series C Preferred Stock")
and the Company's Series D Convertible Preferred Stock, par value $0.01 per
share (the "Series D Preferred Stock") (the Series C Preferred Stock and the
Series D Preferred Stock collectively the "Preferred Stock"), (the Charter
Amendment Proposal and the Preferred Stock Proposal collectively the
"Proposals").
The Board unanimously recommends that stockholders vote FOR the Proposals.
As of the date of this Proxy Statement, the Board knows of no other business to
come before the Meeting.
EXERCISE OF DISCRETION BY PROXIES
Each properly executed proxy received at or before the Meeting on March 3,
1999 or any adjournments thereof will be voted at the meeting as specified
therein. A proxy may be revoked at any time prior to its exercise by delivering
written notice of its revocation to the Secretary of the Company, by a later
dated proxy, or by attending the Meeting and voting in person. If a stockholder
does not specify otherwise, the shares represented by proxy will be voted as
recommended by the Board. Thus, if no directions are given, the proxy will be
voted FOR the Proposals.
The enclosed form of proxy confers discretionary authority upon the persons
named therein with respect to amendments or variations to matters identified in
the Notice and with respect to other matters which are appropriately brought
before the Meeting. Except as disclosed herein, at the date hereof, the
management of the Company knows of no such amendments, variations or other
matters.
The expense of this proxy solicitation, including the cost of preparing and
mailing the Proxy Statement and the proxy, will be paid by the Company. Such
expense may also include the charges and expenses of banks, brokerage firms and
other custodians, nominees or fiduciaries for forwarding proxies and proxy
material to beneficial owners of the Company's Common Stock. The Company expects
to solicit proxies primarily by mail, but directors, officers, employees, and
agents of the Company may also solicit proxies in person or by telephone or by
other electronic means. In addition, the Company has retained Regan &
Associates, Inc. to assist in the solicitation of proxies for which the Company
will pay an estimated $10,000 in fees, plus expenses and disbursements. The
Proxy Statement and the accompanying proxy were first mailed to stockholders on
or about January 29, 1999.
<PAGE>
VOTING SHARES, QUORUM AND VOTES REQUIRED
The presence, in person or by proxy, of a majority of the outstanding
shares of Common Stock entitled to vote at the Meeting shall constitute a quorum
for the transaction of business. The Charter Amendment Proposal requires the
affirmative vote of a majority of the outstanding shares of Common Stock, while
the Preferred Stock Proposal requires the affirmative vote of a majority of the
voting power present and entitled to vote at the Meeting. Votes cast by proxy or
in person at the Meeting will be tabulated by the election inspectors appointed
for the meeting. Abstentions and broker non-votes (as hereafter defined) will be
counted as present by the election inspectors for the purpose of determining the
presence of a quorum. For the purpose of computing the vote required for
approval of matters to be voted on at the Meeting, the election inspectors will
treat shares held by a stockholder who abstains from voting as being "present"
and "entitled to vote"on the matter and, thus, an abstention has the same
legal effect as a vote against the matter. However, in the case of a broker
non-vote or where a stockholder withholds authority from his proxy to vote the
proxy as to a particular matter, such shares will not be treated as "present"
and "entitled to vote" on the matter, and, thus, a broker non-vote or the
withholding of a proxy's authority will have no effect on the outcome of the
vote on the matter. A "broker non-vote" refers to shares of the Company's
Common Stock represented at the Meeting in person or by proxy by a broker or
nominee, where such broker or nominee does not vote on a particular proposal
because the nominee does not have discretionary voting power with respect to
such proposal and has not received voting instructions on a particular matter
from the beneficial owners or persons entitled to vote. Under the rules of the
National Association of Securities Dealers, generally, brokers holding stock for
the accounts of their clients who have not been given specific voting
instructions as to a matter by their clients may vote their clients' proxies in
their own discretion on routine matters.
A stockholder may, with respect to the Proposals: (i) vote for the matter;
(ii) vote against the matter; or (iii) abstain from voting on the matter.
Only holders of the Company's Common Stock of record at the close of
business on January 14, 1999, will be entitled to receive notice of and to vote
at the Meeting. The Company had approximately 33,036,331 shares of Common Stock
outstanding on the record date which are entitled to vote, and each such share
is entitled to one vote.
PROPOSAL 1: TO APPROVE THE AMENDMENT TO THE AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE
PROPOSED AMENDMENT
The Company presently has authorized for issuance 50,000,000 shares of
Common Stock. The Company's Board has unanimously adopted a resolution proposing
and declaring advisable the Charter Amendment Proposal which would increase the
authorized number of shares of Common Stock from 50,000,000 shares to
100,000,000 shares. The increased shares will be designated for general
corporate purposes. The number of authorized shares of the Company's Preferred
Stock would remain unchanged. The proposed increase in the authorized shares of
Common Stock would be accomplished by amending Section 4.1 of Article IV of the
Company's Certificate to read as follows:
Section 4.1. TOTAL NUMBER OF SHARES OF CAPITAL STOCK. The total
number of shares of capital stock of all classes which the Company shall
have authority to issue is 150,000,000 shares, consisting of 100,000,000
shares of Common Stock, par value $0.01 per share (the "Common Stock"),
and 50,000,000 shares of Preferred Stock, par value $0.01 per share (the
"Preferred Stock").
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BACKGROUND
The following table sets forth certain information and forward assumptions
relating to the number of shares of Common Stock outstanding, as well as the
number of shares reserved for issuance as of December 31, 1998.
COMMON STOCK
REQUIRED TO
BE
RESERVED FOR
COMMON STOCK SERIES C AND
RESERVED FOR D
COMMON STOCK COMMON STOCK OTHER PREFERRED
AUTHORIZED OUTSTANDING SECURITIES STOCK TOTAL
- ------------ ------------ ------------ ------------- ------------
50,000,000 32,141,650 10,421,691 10,970,792 53,534,133
With respect to the Preferred Stock, the Company is required to reserve at least
150% of the shares of Common Stock that may be issuable upon conversion. For
example, as presented in the above table, assuming a variable conversion price
of $1.414583 per share as of December 31, 1998 (which is 97% of the average of
the three lowest closing bid prices of the Common Stock for the ten consecutive
trading days ended December 30, 1998), the Company would be required to reserve
for issuance 10,970,792 shares even though an aggregate of only 7,313,861 shares
would be issuable at such prices. When these amounts are combined with the other
shares reserved for issuance, together with the shares presently outstanding,
the Company would have no additional shares of Common Stock available for future
issuance. Because of the inadequate number of shares authorized for issuance,
the Company is not reserving the full amount of Common Stock it is required to
reserve under the terms of the Series C and Series D Preferred Stock. In
addition, the Company is not reserving the full amount of shares required since
the Company desires to maintain financial flexibility by having available a
sufficient amount of shares for issuance in possible financing transactions. The
holders of the Preferred Stock have agreed to waive any requirement that the
Company have a sufficient number of shares authorized and reserved for issuance
in connection with the Preferred Stock until March 3, 1999. In addition, the
Company cannot make any additional conversions of the Preferred Stock due to
limitations imposed by rules of the Nasdaq Stock Market ("Nasdaq") which
prohibit the issuance or sale by the Company of Common Stock (or securities
convertible into Common Stock) by the Company equal to 20% or more of the Common
Stock before issuance at a price less than the greater of book or market value
absent stockholder approval. See Proposal No. 2 -- "Nasdaq Rules and
Stockholder Approval." In Proposal No. 2, the stockholders are being asked to
approve the issuance of the Common Stock underlying the remaining shares of
Preferred Stock in order to comply with Nasdaq rules. Stockholders should read
that proposal carefully for the benefits of such Proposal as well as associated
risks.
CONSEQUENCES IF APPROVED
The Charter Amendment will allow the Company to reserve and issue such
shares of Common Stock as may be required under the terms of its securities,
including the Preferred Stock, and will provide the Company with the capability
and flexibility in its capital structure for investments and acquisitions, stock
splits or stock dividends, stock plans, financings, for shares issuable upon
conversion of the Preferred Stock and other securities convertible or
exercisable into Common Stock, and for other general corporate purposes.
Authorized but unissued shares of the Common Stock may be issued at such
times, for such purposes and for such consideration as the Board may determine
to be appropriate. Such action can be taken without further authorization from
the stockholders unless otherwise required by applicable laws or rules of Nasdaq
or on such other stock exchange on which the Common Stock may be listed. Nasdaq
requires stockholder approval in certain instances, including (i) the issuance
of Common Stock in acquisitions where the potential issuance of stock could
result in an increase in the number of shares of Common Stock outstanding by 20%
or more, (ii) a transaction or series of related transactions that would result
in the original issuance of additional shares of Common Stock, other than in a
public offering for cash, if the Common Stock (including securities convertible
into or exercisable for Common Stock) has, or will have upon issuance, voting
power equal to or in excess of 20% of the voting power outstanding before the
issuance of the Common Stock, or if the number of shares of Common Stock to be
issued is or will be equal to or in excess
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<PAGE>
of 20% of the number of shares outstanding before the issuance of the Common
Stock; or (iii) a transaction or series of transactions whereby the issuance
would result in a change in control of the Company. The additional shares of
Common Stock to be authorized will have the same status as presently authorized
Common Stock. Holders of the Common Stock do not have preemptive purchase rights
with respect to any newly issued shares. To the extent that the additional
authorized shares are issued in the future, they could decrease the existing
stockholders' relative percentage ownership in the Company.
The proposed increase in authorized shares is not intended to impede a
change in control of the Company, and the Company is not aware of any current
efforts to acquire control of the Company. However, it is possible that the
additional shares could be issued as a means of preventing or discouraging an
unsolicited change in control of the Company. The issuance of additional shares
could be used to dilute the ownership of anyone seeking to gain control of the
Company or could be placed with an entity opposed to change in control.
Management has no present intention to propose any anti-takeover measures in
future proxy solicitations.
CONSEQUENCES IF APPROVAL NOT OBTAINED
If stockholder approval of the Charter Amendment is not obtained, the
Company would be in breach of certain of its existing agreements (including with
the holders of the Preferred Stock), unless otherwise waived, and would be
prohibited from issuing any additional shares of Common Stock.
Assuming that all of the securities which might be exercised or converted
into Common Stock are in fact exercised or converted, the Company could be in
the position of not being able to issue the full number of shares of Common
Stock, as required under the terms of the applicable warrants, options or
convertible securities. The Company does not believe that such an event is
reasonably likely to occur due to the exercise and conversion prices of certain
of the securities being significantly in excess of the current market price of
the Common Stock, as well as the fact that the holders of the Preferred Stock
have required that the Company reserve for issuance a number of shares which is
significantly in excess over what could presently become issuable upon
conversion. However, if certain events were to occur and the Company was not
able to issue such shares of Common Stock as required, it could be in breach of
the terms of such securities.
The Company is prohibited from issuing shares of Common Stock or new
securities exercisable or convertible into Common Stock in excess of the number
of shares which are presently authorized. Accordingly, the Company's
capitalization and financial flexibility are severely limited. Due to the
Company's cash flow position and results of operations, the Company expects to
issue shares of Common Stock or securities excisable or convertible into Common
Stock to persons in connection with financial transactions or financial
obligations. In addition, in order to attract and retain qualified employees,
the Company is frequently required to issue stock options or Common Stock to
such persons. Until stockholder approval is obtained, the Company could be in
the position of not being able to issue any additional shares of Common Stock or
securities (including options) exercisable or convertible into Common Stock to
such persons and employees. This could have a material adverse effect on the
Company. Accordingly, the Board believes that approval of the amendment to the
Certificate to increase the number of authorized shares should be approved.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of the Company's Common Stock is required to approve the Charter Amendment
Proposal. THE COMPANY'S BOARD RECOMMENDS A VOTE FOR THE CHARTER AMENDMENT
PROPOSAL.
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PROPOSAL 2: TO APPROVE THE ISSUANCE OF THE SHARES OF COMMON
STOCK ISSUABLE UPON CONVERSION OF THE SERIES C PREFERRED STOCK
AND THE SERIES D PREFERRED STOCK
BOARD APPROVAL OF THE PRIVATE PLACEMENTS
During the later part of 1997, the Company was intending and planning to
undertake an underwritten public offering of its Common Stock for cash proceeds
in the range of $20 to $30 million. Due to unforseen adverse changes in the
Korean market which accounted for a majority of the Company's revenues in 1997,
the Company was advised by its financial adviser at that time, Hambrecht &
Quist, L.L.C. ("H&Q"), to delay such an offering. Subsequently, because of
continuing negative market factors, primarily in relation to Asian markets, H&Q
advised the Company that it did not believe the Company's situation could be
resolved in time for the Company to proceed with a successful public offering
during the first half of 1998. Due to the Company's continuing need for working
capital, H&Q suggested a private placement of convertible securities with the
initial objective of raising approximately $10-15 million for the Company. This
activity commenced in the later part of December 1997.
The Company explored a variety of transactions. Due to market conditions at
the time, the Company was advised by H&Q that it should not expect to be able to
raise a meaningful amount of funds with a private placement of its Common Stock.
Furthermore, the Company was contemporaneously negotiating with St. James
Capital Partners, L.P. for the establishment of a new secured credit facility.
Accordingly, the Board believed, with the advice and concurrence of H&Q, that
the issuance of a convertible equity security would be the only security the
Company could expect to issue in order to raise the working capital it required.
Among other things, the Board considered the economic terms of the proposed
transaction; namely, the amount of funds which could be raised, whether the
security was a debt or equity instrument, any required dividends, whether or not
the securities were convertible and if so, the conversion provisions as well as
the quality and reputation of the investor. The Board also considered the risk
factors associated with a variable conversion formula, registration obligations,
Nasdaq requirements and the possible triggering of penalty and redemption
obligations in certain circumstances. In the final analysis, the Board decided
that the risk factors did not outweigh the benefits from the Preferred Stock,
such as the amount of money that could be raised through the Preferred Stock,
that such money could be raised without having to incur additional
collateralized debt that the Company would have to repay, and that the Company's
assets would not have to be pledged as collateral in connection with the
Preferred Stock as it would with additional debt financing. After considering
these factors, and within the advice of H&Q, the Board, using its business
judgment, believed that the most favorable terms to the Company were those
proposed by Citadel Investment Group, L.L.C. and that could be concluded with a
series of investment funds managed by the Citadel Investment Group, L.L.C.
(collectively "Citadel"). The Company then decided to issue to Citadel the
Series C Preferred Stock in a private placement transaction in February 1998
(the "Series C Private Placement"). Due to a continued need for additional
working capital, as well as for the above considerations, the Board decided to
approve the issuance of the Series D Preferred Stock in private placements to
Citadel in May and June of 1998 (the "Series D Private Placements"). The
Citadel entities which participated in each of the Private Placements are
identified in table in "Summary of Transaction Terms -- Purchasers; Conversion
Shares".
NASDAQ RULES AND STOCKHOLDER APPROVAL
Under Nasdaq rules, as a condition of listing, the Company is required to
obtain stockholder approval of the sale or issuance of Common Stock (or
securities convertible into Common Stock) by the Company equal to 20% or more of
the Common Stock before the issuance at a price less than the greater of book or
market value (the "Nasdaq 20% Rule"). In addition, stockholder approval is
also required in connection with transactions which are deemed to be a "change
in control" under Nasdaq rules. The Company does not believe that the issuance
of the Preferred Stock in the Private Placements constitute a "change in
control" since the holders are prohibited from converting the Preferred Stock
into Common Stock if such conversion were to cause them to "beneficially own"
(as defined under Rule 13d-3 as promulgated under
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<PAGE>
the Securities Exchange Act of 1934) more than 5% of the Company except on 61
days prior notice. However, if the transaction were to be construed as a
"change in control", the approval being sought would also be effective to
satisfy the Nasdaq requirement. In addition, as noted, the Company has agreed
with Citadel that it will use its best efforts to obtain stockholder approval
under the Nasdaq requirement within 60 days of the receipt of notice from
Citadel that the number of shares of Common Stock issued or may be issued in
connection with conversions of the Preferred Stock would exceed 15% or more of
the number of shares of Common Stock outstanding as of February 9, 1998 (i.e.,
approximately 3,593,247 shares). The Company has received such notice from
Citadel and accordingly has agreed to obtain such stockholder approval.
The exact number of shares of Common Stock issuable upon conversion of each
of the shares of Preferred Stock issued in the Private Placement cannot
currently be determined for the future because the Preferred Stock is also
subject to adjustment mechanisms in the applicable Conversion Price which cause
the number of shares issuable to be dependent on future events, namely the
future trading prices of the Common Stock and the decisions on conversions made
by the holders of the Preferred Stock. The operation of the variable conversion
price formulas will cause the number of shares of Common Stock to be issued to
increase with declines in the market price of the Common Stock. Due to the
decline in the market price of the Common Stock since the Private Placements and
because the Preferred Stock is convertible into Common Stock at rates or prices
that vary or move by formulas which are tied to the market price of the Common
Stock, the Company may be required to issue shares of Common Stock, subject to
the Nasdaq 20% Rule, equal to 20% or more of the shares of Common Stock
outstanding on the date of the Series C Private Placement (i.e., February 9,
1998) and at prices less than the greater of book or market value at the time of
the Series C Private Placement (i.e., $7.0625 per share on February 9, 1998). In
order to assure continued compliance with the Nasdaq requirements, the terms of
the Private Placements provide that shares of Common Stock issuable upon
conversion of the Preferred Stock may not be issued if such issuance would
violate Nasdaq rules (i.e., issuances of Common Stock in excess of approximately
4,790,994 shares without stockholder approval). Thus, upon approval of the
Proposal, the Company may be required to issue shares of Common Stock equal to
20% or more of the shares of Common Stock outstanding on the date of the Series
C Private Placement. If the approval sought is not obtained, the Company may be
required to redeem the Preferred Stock. See "Summary of Transaction Terms" and
"Consequences if Stockholder Approval Not Obtained".
Under Nasdaq rules, in order to continue to have its Common Stock listed on
Nasdaq, the Company is required to maintain a minimum bid price of at least $1,
together with certain other requirements relating to minimum tangible net
assets, public float, market value, number of round lot shareholders, and market
makers. If the Company is not able to satisfy these requirements, Nasdaq could
suspend the Company's listing. Although the Company does not believe that it is
likely to violate any of the Nasdaq maintenance requirements, it could violate
the requirement of maintaining a minimum bid price if the price of its Common
Stock were to drop below $1. Stockholders should carefully review the risks
associated with the Preferred Stock in Proposal No. 2, including the possibility
that conversions of the Preferred Stock could cause a decrease in the market
price of the Common Stock to a price below the $1 minimum bid price requirement.
SEE "Summary of Transaction Terms -- Risk Factors Associated with Preferred
Stock Conversions."
GENERAL
In the Series C Private Placement, pursuant to the terms of a Securities
Purchase Agreement dated February 6, 1998, the Company issued and sold an
aggregate of 10,000 shares of Series C Preferred Stock, resulting in aggregate
gross proceeds to the Company of $10,000,000. In addition, in the Series D
Private Placements, pursuant to the terms of a Securities Purchase Agreement
dated May 8, 1998 and a Securities Purchase Agreement dated June 26, 1998, the
Company issued and sold an aggregate of 10,000 shares of Series D Preferred
Stock, resulting in aggregate gross proceeds to the Company of $10,000,000 (the
Series C Private Placement and the Series D Private Placements collectively the
"Private Placements"). The Company used the proceeds from the Private
Placements for working capital and general corporate
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purposes. See "Use of Proceeds". All of the securities sold in the above
transactions were sold in separate private placements to the Citadel entities.
The Citadel entities have represented to the Company that each are "accredited
investors". None of the Citadel entities are affiliates of the Company or any
of its officers or directors.
SUMMARY OF TRANSACTION TERMS
The following is a summary of the material terms of the Private Placements,
which terms are qualified by reference to the full text of the underlying
documents which have been filed previously as exhibits to the Company's current
reports on Form 8-K filed on February 17, May 11, and June 29, 1998. The
underlying documents for each series of Preferred Stock are a Securities
Purchase Agreement, Registration Rights Agreement and a Certificate of
Designations, Preferences and Rights, all filed as exhibits to the applicable
Form 8-K. See "Available Information".
PURCHASERS; CONVERSION SHARES
The following table sets forth certain information relating to the holders
of the Preferred Stock as of December 31, 1998. The Common Stock assumed
issuable upon the conversion of the remaining Preferred Stock is computed based
on a conversion price of $1.414583 as of December 31, 1998 (which is 97% of the
average of the three lowest closing bid prices of the Common Stock for the ten
consecutive trading days ended December 30, 1998). The aggregate number of
shares thus deemed issuable upon conversion is computed by dividing the
aggregate stated value of the Series C and Series D Preferred Stock (i.e.,
$1,000 per share multiplied by the applicable number of shares of Series C and
Series D Stock) plus accrued premium of 4% per year, by the conversion price
being applied.
<TABLE>
<CAPTION>
COMMON STOCK
SERIES C SERIES D COMMON STOCK ISSUABLE ON
PREFERRED STOCK PREFERRED STOCK ISSUED REMAINING
------------------- ------------------- ON PRIOR PREFERRED
PURCHASER ISSUED REMAINING ISSUED REMAINING CONVERSIONS(1) STOCK(2)
- ------------------------------------- ------ --------- ------ --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Olympus Securities Ltd............... 6,354 1,181 0 2,528,884 864,610
NP Partners.......................... 3,421 652 0 1,351,843 484,650
CCG Capital Ltd...................... 100 0 400 292 103,808 211,023
CCG Investment Fund Ltd.............. 125 0 400 292 118,787 211,023
Fisher Capital Ltd................... 0 5,883 4,963 412,257 3,588,595
Wingate Capital Ltd.................. 0 3,167 2,553 275,137 1,845,736
Midway Capital Ltd................... 0 150 150 0 108,223
------ --------- ------ --------- -------------- ------------
TOTALS........................... 10,000 1,750 10,000 8,250 4,790,716 7,313,861
====== ========= ====== ========= ============== ============
<CAPTION>
COMMON STOCK
ISSUABLE ON
REMAINING
PREFERRED
STOCK --
PERCENTAGE
OF SHARES
PURCHASER OUTSTANDING(2)
- ------------------------------------- ----------------
Olympus Securities Ltd............... 2.2%
NP Partners.......................... 1.2%
CCG Capital Ltd...................... 0.5%
CCG Investment Fund Ltd.............. 0.5%
Fisher Capital Ltd................... 9.1%
Wingate Capital Ltd.................. 4.7%
Midway Capital Ltd................... 0.3%
---
TOTALS........................... 18.5%
===
</TABLE>
- ------------
(1) Does not necessarily represent the number of shares presently beneficially
owned by the holders of the Preferred Stock, since the Certificate of
Designations prohibits the holders from being the "beneficial owner", as
defined under Rule 13d-3 as promulgated under the Securities Exchange Act of
1934, of more than 5% of the Common Stock of the Company except on 61 days
prior notice to the Company. As of the date hereof, the Company has not
received any such notice.
(2) As of December 31, 1998, represents shares which are potentially issuable
upon conversion without regard to any limitations on conversion and without
regard to the timing of such conversions. Does not represent the number of
shares which the holder of the Preferred Stock "beneficially owns" for
purposes of Rule 13d-3 since pursuant to the Certificate of Designations for
the Preferred Stock the holders may not beneficially own more than 5% of the
Common Stock of the Company except on 61 days prior notice to the Company.
As of the date hereof, the Company has not received any such notice.
As of December 31, 1998, the holders of the Series C and Series D Preferred
Stock have previously converted an aggregate of 9,907 shares of Preferred Stock
into a total of 4,790,716 shares of Common Stock, or approximately 19.9% of the
Company's shares outstanding on February 9, 1998, the closing date of the Series
C Preferred Stock.
7
<PAGE>
With respect to the Preferred Stock, as the price of the Common Stock
decreases, the number of shares of Common Stock underlying the Preferred Stock
continues to increase which could result in no ceiling on the number of shares
which may ultimately be issued upon approval of the Proposal. For instance,
assuming a hypothetical conversion price of $0.707292 (which is 50% of the
conversion price of $1.414583 as of December 31, 1998), the total number of
shares of Common Stock which would underlie the remaining shares of Preferred
Stock would be approximately 14,627,722 shares, or approximately 30.7% of the
total number of shares of Common Stock deemed outstanding as of such date
assuming conversion of all such shares Preferred Stock at such price.
CONVERSION. The conversion price of the Preferred Stock is the lesser of a
fixed conversion price or a variable conversion price. Thus, each share of
Preferred Stock is convertible into that number of shares of Common Stock equal
to (i) $1,000 (the "Stated Value"), plus any accrued premium of 4% per annum,
divided by (ii) the applicable conversion price. The applicable conversion price
is the lesser of (i) a fixed conversion price of $9.082 per share for the Series
C Preferred Stock, and $2.998 per share for the Series D Preferred Stock (which
price was originally $9.082 per share and which was reset to $2.998 effective
November 10, 1998 which price represents the average of the trading price of the
Common Stock for the five trading days following the Company's filing of the
Form 10-Q for the period ended June 30, 1998), or (ii) a variable conversion
price which is 97% of the average of the three lowest closing bid prices of the
Common Stock as reported on Bloomberg for the ten consecutive trading days
before the date of conversion (the "Variable Conversion Price"). Thus, as the
price of the Common Stock declines, the number of shares underlying the
Preferred Stock continues to increase. In addition, the Company can elect for
the conversion price on the Preferred Stock to equal the applicable fixed
conversion price if for any 20 of 30 consecutive trading days the daily volume
weighted average trading price (as reported on Bloomberg) of the Common Stock
equals or exceeds 150% of the applicable fixed conversion price. In the event
that the Company or the transfer agent do not effect a conversion or reissuance
of the remaining shares of Preferred Stock within ten (10) business days
following the receipt by the transfer agent of the shares submitted for
conversion, the Company is subject to potential obligation to redeem the
remaining Preferred Stock, adjust the applicable conversion price and certain
other penalties as more fully described in the applicable Certificate of
Designations. See "Summary of Transaction Terms -- Redemption" and "Available
Information".
Pursuant to the terms of the Series D Preferred Stock issued on June 26,
1998, the Company was required to register the resale of the shares of Common
Stock issuable upon conversion of such Series D Preferred Stock by December 23,
1998. Since such registration had not occurred by the required date, a
"Triggering Event" occurred, and the holders of the Series D Preferred Stock
could have sent a notice to the Company and attempted to require the Company to
redeem such shares. The holders of the Preferred Stock have agreed to waive any
requirement that the Company redeem any of the Preferred Stock, including the
Series D Preferred Stock, as a result of the Company's failure to timely file
the registration statement, provided that the waiver will be null and void if
the registration statement is not declared effective by the Commission within 75
days of March 3, 1999. If the Company is not successful in having such
registration statement declared effective, and if the holders were to require a
redemption of the Series D Preferred Stock, the redemption price for the Series
D Preferred Stock would be approximately $9,900,000 based on a redemption price
of 120% of the Stated Value of the 8,250 remaining shares of Series D Preferred
Stock. If the Company were unable to redeem all of such shares, the holders
could demand that the Company redeem the shares it is able to redeem, and pay
interest at the rate of 2.5% per month on the shares it is unable to redeem. The
Company presently does not have funds available to redeem all or any significant
portion of the Series D Preferred Stock or any required interest payments.
Accordingly, if Citadel were to enforce its rights in connection with the
Triggering Event, there could be material adverse financial consequences to the
Company which could severely impair the ability of the Company to continue as a
going concern. See "Summary of Transaction Terms -- Occurrence of Triggering
Event."
In addition, if the holders of the Preferred Stock submit a conversion
request and the Company is not able to issue the required amount of shares of
Common Stock due to the Company's inability to comply with the Nasdaq 20% Rule,
under the Certificate of Designations, a Triggering Event would occur. In such
event, the Company could be required by the holders to redeem all of the
remaining shares of Preferred
8
<PAGE>
Stock at a price equal to 120% of the Stated Value, or approximately $12,111,600
based on the 10,093 shares of Preferred Stock which remain outstanding as of
December 31, 1998. In addition, upon the Triggering Event, the holders of the
Preferred Stock could attempt to require the Company to delist its Common Stock
from Nasdaq and begin trading on the electronic bulletin board or pink sheets.
The holders of the Preferred Stock have agreed to waive any requirement that the
Company redeem any of the Preferred Stock in connection with any such Triggering
Event until March 3, 1999. Accordingly, should the Company obtain stockholder
approval of the Proposal on or before March 3, 1999, the holders will not be
able to require the Company to redeem any of the Preferred Stock. See "Summary
of Transaction Terms -- Redemption -- Occurrence of Triggering Event" and
"Consequences if Stockholder Approval Not Obtained."
The shares of Preferred Stock are presently convertible. Pursuant to
contractual agreements between the Company and the purchasers of the Preferred
Stock, such purchasers have agreed to limit their conversions of the Preferred
Stock to no more than 1,200,000 shares of Common Stock per continuing 30 day
period. However, these conversion restrictions do not apply in the event of
certain "Extraordinary Events", as defined, which generally include certain
mergers, business combinations, or change in control transactions, certain
private placements of equity securities, the suspension or delisting of the
Company's Common Stock, or an announcement of a bankruptcy or other similar
event. The holders of the Preferred Stock are prohibited in the Certificate of
Designations from converting their respective holdings of the Preferred Stock if
after giving effect to such conversion the holder would beneficially own in
excess of 5% of the outstanding shares of Common Stock of the Company following
such conversion, except on 61 days prior notice to the Company. The holders may
not convert their respective holdings of Preferred Stock unless their conversion
notice contains at least 200 shares, or all of such lesser amount of shares of
Preferred Stock then held. The Preferred Stock will convert automatically into
Common Stock at the applicable Conversion Price then in effect on the second
anniversary date of issuance, to the extent any shares of the applicable
issuance of Preferred Stock remain outstanding.
Due to declines in the market price of the Company's Common Stock, upon the
effectiveness of the re-set of the fixed conversion price on the Series D
Preferred Stock on November 10, 1998, certain anti-dilution provisions were
triggered in warrants to purchase up to 1,500,000 shares of Common Stock at an
exercise price of $7.50 issued by the Company to SJMB, L.P. and St. James
Capital Partners, L.P. In connection with such anti-dilution provisions, the
holders of such warrants are entitled to a replacement warrant to purchase up to
approximately 3,753,000 shares of Common Stock at an exercise price of $2.998
per share, subject to anti-dilution provisions.
Risks Factors Associated With Preferred Stock Conversions.
In connection with the Preferred Stock, the following risks are associated
with Preferred Stock conversions:
o because the Variable Conversion Price of the Preferred Stock 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 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 the Company's
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 Stock 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 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
9
<PAGE>
o conversions of the Preferred Stock may result in substantial dilution
of the interests of the other holders of Common Stock. In this regard,
the ownership limitation which prohibits the purchasers from owning
more than 5% of the Common Stock of the Company only applies to shares
of Common Stock held at one time and does not prevent purchasers from
converting and selling some of their holdings and then later
converting the rest of the holdings.
In addition to the foregoing, stockholders should also consider the
possibility that the Company's Common Stock could be delisted by Nasdaq in the
event the Company's stock price decreases below the $1 minimum bid price as
required by Nasdaq. See "Nasdaq Rules and Stockholder Approval."
DIVIDENDS. The holders of the Preferred Stock are not entitled to receive
dividends. The holders are entitled to receive upon conversion, payable in cash
or Common Stock at the election of the Company, an annual premium of 4% on the
aggregate "Stated Value" (i.e., $1,000 per share) of the applicable series of
Preferred Stock (the "Additional Amount"). The Company does not presently
intend to pay such Additional Amount in cash.
VOTING RIGHTS. The holders of the Preferred Stock have no voting rights
except as provided by law and have no right to vote on the proposal in this
Proxy Statement, except to the extent such holders own shares of Common Stock.
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of the
Preferred Stock shall be entitled to receive in cash out of the assets of the
Company, whether from capital or from earnings available for distribution to its
stockholders ("Liquidation Funds") before any amount shall be paid to any
class junior in rank to the Preferred Stock an amount per share of Preferred
Stock equal to $1,000 plus any Additional Amount (the "Liquidation
Preference"). In addition to the Liquidation Preference, in the event of any
involuntary liquidation, dissolution or winding up, the holders will also be
entitled to receive any Liquidation Funds distributed to the holders of the
Common Stock, after the Liquidation Preference has been paid, to the same extent
as if such holders of the Preferred Stock has converted their shares into Common
Stock (without regard to any limitations on conversion) and had held such shares
of Common Stock on the record date for the distribution of the remaining
Liquidation Funds.
REDEMPTION. The holders of the Preferred Stock may require the Company to
redeem the Preferred Stock upon the consummation of a "Major Transaction" or a
"Triggering Event".
Major Transactions
o certain mergers, consolidations, tender offers, or the sale of
substantially all the assets of the Company
Triggering Events
o failure of registration statement covering the resale of the conversion
shares to be declared effective within 180 days;
o the effectiveness of the registration statements lapses for seven or more
consecutive days (subject to applicable grace periods);
o the registration statement is unavailable for the sale of all of the
"Registrable Securities" (as defined) for seven or more consecutive days
in accordance with the terms of the applicable registration rights
agreement;
o the delisting of the Company's Common Stock for seven consecutive days;
o certain failures to comply with conversions of the Preferred Stock for 10
or more consecutive days;
o the inability of the Company to issue conversion shares due to limitations
imposed by the Nasdaq 20% Rule; and
o certain breaches of representations, warranties, covenants or terms of the
transaction documents which would have a Material Adverse Effect (as
defined).
10
<PAGE>
Redemption and Other Remedies
o The holders can send a notice of redemption upon the occurrence of such a
Triggering Event or Major Transaction, and require the Company to redeem
the Preferred Stock at (a) 120% of the Stated Value of the Preferred Stock,
or (b) the product of the applicable conversion rate in effect on the date
of the "Major Transaction" or the date a notice of redemption is
delivered in the case of a "Triggering Event", and the closing sales
price of the Common Stock on the trading date immediately preceding such
date on which the "Major Transaction" or "Triggering Event" occurred.
o If the Company is unable to effect a redemption, interest will accumulate
on the value of the shares the Company is unable to redeem at the rate of
2.5% per month.
o If the Company is unable to effect a redemption, the holders are also
entitled to void their redemption notices and receive a reset of their
applicable Conversion Price. The Fixed Conversion Price on the Preferred
Stock would be reset to the LESSER of (A) the Fixed Conversion Price as in
effect on the date the void optional redemption notice is sent to the
Company (i.e., $9.082 for the Series C Preferred Stock and $2.998 for the
Series D Preferred Stock) and (B) the lowest Closing Bid Price (as defined)
during the period beginning on the date on which the date of notice of
redemption is sent and the date on which the void optional redemption
notice is received. In addition, the holders would also be entitled to have
the formula for the Variable Conversion Price to be reduced by a number of
percentage points equal to the product of (A) .25 and (B) the number of
days in the period beginning on the date which is five business days after
the date on which the notice of redemption is delivered to the Company and
ending on the date on which the void option redemption notice is received.
Occurrence of Triggering Event
Certain events have caused a Triggering Event or are likely to occur which
could cause a Triggering Event, unless otherwise waived by Citadel. First, since
the Company was not able to have a registration statement covering the resale of
the Series D Preferred Stock issued on June 26, 1998 declared effective on or
before December 23, 1998, a Triggering Event is deemed to have occurred.
However, the holders of the Preferred Stock have agreed to waive any requirement
that the Company redeem any of the Preferred Stock, including the Series D
Preferred Stock, as a result of the Company's failure to timely file the
registration statement, provided that the waiver will be null and void if the
registration statement is not declared effective by the Commission within 75
days of March 3, 1999. If the Company is not successful in having such
registration statement declared effective, and if the holder were to require a
redemption of the Series D Preferred Stock, the redemption price for the Series
D Preferred Stock would be approximately $9,900,000 based on a redemption price
of 120% of the Stated Value of the 8,250 remaining shares of Series D Preferred
Stock. See "Summary of Transaction Terms -- Conversion". Finally, as noted, upon
receipt of a valid notice of conversion from the holders of the Preferred Stock
if the Company is unable to convert the remaining shares of the Preferred Stock
due to limitations imposed by the Nasdaq 20% Rule (which will occur if the
Proposal is not approved and the holders submit a conversion notice to convert
any additional shares of Preferred Stock), a Triggering Event would occur. The
Company can convert the remaining Preferred Stock into only approximately an
additional 278 shares of Common Stock as of December 31, 1998. Since the holders
of the Preferred Stock may convert such Preferred Stock into Common Stock at the
rate of 1,200,000 shares of Common Stock per continuing 30 day period, the
holders could attempt to make a conversion which the Company would have to
refuse to make due to the Nasdaq 20% Rule. In such an event, a Triggering Event
would occur and the holders could demand redemption of the Preferred Stock if
the Company is unable to fully redeem the Preferred Stock, the holders could
attempt to require the Company to delist from Nasdaq. In the event of a
redemption, the Company could be obligated by the holders to redeem the
remaining shares of Preferred Stock at 120% of the Stated Value per share, or an
aggregate redemption price of approximately $12,111,600 based on the 10,093
shares of Preferred Stock which remain as of December 31, 1998. However, the
holders of the Preferred Stock have agreed to waive any requirement that the
Company redeem any of the Preferred Stock in connection with any such Triggering
Event until March 3, 1999. Accordingly, should the Company obtain stockholder
11
<PAGE>
approval of the Proposal on or before March 3, 1999, the holders will not be
able to require the Company to redeem any of the Preferred Stock.
If the Company is unable to redeem all of the shares in the event of a
notice of redemption, the holders could also demand that the Company redeem all
of the shares of Preferred Stock which it is able to redeem, and pay interest to
the holders on any shares not redeemed at the rate of 2.5% per month. The
Company presently does not have the funds available to pay the redemption price
for all or any significant portion of the Preferred Stock or any required
interest payments. Accordingly, if Citadel were to enforce its rights in
connection with a Triggering Event, there could be material adverse financial
consequences to the Company which could severely impair the Company's ability to
continue as a going concern. See "Summary of Transaction Terms -- Conversion".
REGISTRATION OF SHARES; LIQUIDATED DAMAGES. The Company is required by
agreement to initially register with the Securities and Exchange Commission (the
"Commission") the resale of at least 175% of the number of shares of Common
Stock issuable upon conversion of the Preferred Stock, which is based on the
conversion price of the Preferred Stock at the time of the filing. In addition,
after the registration statement is filed and during the period the registration
statement is effective, the Company has agreed that the resale of at least 150%
of the shares issuable upon conversion of the remaining shares of Preferred
Stock will be registered, which is based on the conversion price of the
Preferred Stock at that time. Thus, in the event of a decrease in the market
price of the Common Stock after the initial filing (and thus a decrease in the
Variable Conversion Price of the Preferred Stock), the Company could be required
by Citadel to register additional shares of Common Stock to the extent that the
required amount of shares were not covered by the registration statement. As of
December 31, 1998, the Company has an effective registration statement on Form
S-3 covering the resale of shares of Common Stock issuable upon conversion of
the Series C Preferred Stock (Registration No. 333-49379) (the "Series C
Registration Statement"), and with respect to 5,000 shares of the Series D
Preferred Stock issued on May 8, 1998 (Registration No. 333-53451) (the "Series
D1 Registration Statement"). Since the Series C Registration Statement and the
Series D1 Registration Statement did not cover at least 150% of the shares
issuable upon conversion of the applicable Preferred Stock, Citadel has alleged
that the Company is obligated to pay the holders $825,000 in liquidated damages
under the terms of the applicable Registration Rights Agreement. The Company has
agreed to pay this amount in additional shares of Common Stock. The Company has
no obligation to pay this amount until the holders of the Preferred Stock have
converted all of the Preferred Stock into Common Stock. The shares of Common
Stock will be issued to the holders at such time in an amount based on the
Variable Conversion Price as in effect on such date. Citadel has agreed to waive
any right to future liquidated damage amounts in connection with the Series C
Registration Statement and the Series D1 Registration Statement, so long as such
registration statements are sufficient to cover 100% of the shares issuable upon
conversion of the Preferred Stock.
In addition, the Company was required to have declared effective by
September 24, 1998 a registration statement covering the remaining 5,000 shares
of Series D Preferred Stock which were issued on June 26, 1998 (the "Series D2
Registration Statement"). Such registration statement has not been declared
effective by the Commission. Since the Series D2 Registration Statement has not
yet been declared effective, Citadel may allege that the Company is obligated to
pay certain liquidated damages. The amount of such damages would be
approximately $1 per share of Preferred Stock per day and is due within five
days of the date such damages are incurred. Thus, the total amount owed as of
December 31, 1998 would be approximately $490,000. If the Company is unable to
pay such damages, Citadel could require the Company to issue shares of Common
Stock to pay such penalties. With respect to the liquidated damages penalties,
the holders of the Preferred Stock have agreed to waive all of such penalties as
a result of the Company's failure to timely file the Series D2 Registration
Statement, provided that the waiver will be null and void if the registration
statement is not filed with the Commission within 30 days of March 3, 1999 and
declared effective by the Commission within 75 days of March 3, 1999. There can
be no assurance that the Company will be successful in having the Series D2
Registration Statement filed and declared effective by such dates. The
enforcement of the liquidated damages provision against the Company could have a
12
<PAGE>
material adverse effect on the Company's results of operations and financial
position, as well as its ability to continue as a going concern.
REDEMPTION AT COMPANY'S OPTION. As more fully set forth in the applicable
Certificate of Designations, the Company may redeem the Preferred Stock
following 90 days after the issuance date if the Common Stock of the Company has
an average of the volume-weighted average trading price for the prior ten
consecutive trading days of less than $3 per share. In such event, the
redemption price will be equal to 110% of the Stated Value per share plus the
Additional Amount.
OTHER TERMS. The transaction documents relating to the Preferred Stock
also contain certain other representations, warranties, agreements, and
indemnification obligations of the Company. These include, among other things,
the obligation of the Company to obtain approval of the Company's stockholders
within 60 days in the event that the number of shares already issued in
connection with conversions of the Preferred Stock or issuable upon the future
conversion of the Preferred Stock exceeds 15% or more of the number of shares of
Common Stock outstanding as of February 9, 1998. The operative agreements also
contain (i) certain restrictions on the holders of the Preferred Stock from
selling shares of Common Stock on any single trading day in excess of 20% of the
trading volume of the Common Stock on such date of determination except on days
where the trading volume is in excess of 200% of the trading volume for the
prior six months or upon the occurrence of certain Extraordinary Events, Major
Transactions, or Triggering Events (as defined), (ii) prohibit the holders from
engaging in "short sales" as defined in Rule 3b-3 of the Securities Exchange
Act of 1934, (iii) prohibit the Company from redeeming any of its Common Stock
or paying any cash dividends on its Common Stock, (iv) limit the ability of the
Company to issue any senior preferred stock, and (v) prohibit the Company from
entering into certain related party transactions except in accordance with
Delaware law. The shares of Preferred Stock are also subject to antidilution
provisions which are triggered in the event of certain stock splits,
recapitalizations, or other dilutive transactions, as well as issuances of
Common Stock at a price below 95% of the market price in effect, or the issuance
of warrants, options, or other convertible securities which have an exercise
price less than 95% of the market price on the date of issuance, other than for
certain previously outstanding securities. The shares of Preferred Stock are
also subject to certain repricing provisions in the event that the Company
issues any convertible securities which have a variable conversion price which
is at a 5% or greater discount to the market price of the Common Stock on the
conversion date.
PLACEMENT AGENT COMPENSATION
The placement agents for the Series C Private Placement were H&Q and
Lifeline Industries, Inc. ("Lifeline"). H&Q and Lifeline were paid placement
agent fees of $400,000 and $280,000, respectively. H&Q also received an
immediately exercisable warrant to purchase 33,036 shares of Common Stock at an
exercise price of $10.292 per share which expires on May 20, 2003. The placement
agent for the Series D Private Placements was Lifeline. In connection with the
May 8, 1998 Series D Private Placement, Lifeline received a placement fee of
$125,000, and in connection with the June 26, 1998 Series D Private Placement
Lifeline received $62,500 and an immediately exercisable warrant to purchase
30,000 shares of Common Stock at an exercise price of $2.00 per share which
expires on April 30, 2005. The placements agents have already received their
fees and warrants and will be able to retain them whether or not stockholder
approval sought hereby is obtained.
CONSEQUENCES IF STOCKHOLDER APPROVAL NOT OBTAINED
The Company is obligated to obtain stockholder approval of the Proposal by
February 19, 1999. If the stockholder approval sought hereby is not obtained, in
accordance with the Nasdaq 20% Rule, the Company will be prohibited under the
terms of its listing agreement with Nasdaq from issuing more than an aggregate
of approximately 4,790,994 shares of Common Stock in connection with the Private
Placements. If the Company is not able to obtain Stockholder approval of the
Proposal by March 3, 1999 and if the Company would be unable to issue any
additional shares of Common Stock due to the Nasdaq 20% Rule, as noted, the
Company could be required by the holders to redeem the shares at a price per
share equal to the greater of (i) 120% of the Stated Value of such shares and
(ii) the product of the applicable conversion rate
13
<PAGE>
in effect on the date a notice of redemption is delivered by the holders and the
closing sales price of the Common Stock on the trading day immediately preceding
such event. Further, the holder could argue that failure to obtain such
stockholder approval was a breach of the Company's obligations under the
operative transactions documents which had a Material Adverse Effect. If such an
argument were successful, the Company may be obligated to redeem all of the
outstanding shares of Preferred Stock at the Special Redemption Price without
regard to whether or not the Company was able to issue any additional shares of
Common Stock. As noted, if the Company is required to redeem all of the shares
of Preferred Stock submitted for redemption within five business days, the
holders can attempt to require the Company to redeem those shares it is able to
redeem and have the Company pay interest to the holders on any shares which were
not redeemed as required at 2.5% per month. In addition, the holders are also
entitled to void their redemption notices and receive a reset of their
applicable Fixed Conversion Price, as more fully set forth in the applicable
Certificate of Designations. See "Summary of Transaction Terms -- Redemption"
and "Available Information".
The Company does not have and does not expect to have available the cash
resources to fund such required redemptions of the Preferred Stock, and in the
event that it is required to make the required interest payments there would
likely be a material adverse effect on the Company's results of operations and
financial position. Accordingly, if stockholder approval of the proposal is not
obtained, the Company may become subject to actions by Citadel to enforce its
rights, which if enforced by Citadel, could have material adverse financial
consequences to the Company which could severely impair the Company's ability to
continue as a going concern.
USE OF PROCEEDS
The aggregate net proceeds received by the Company from the issuance of
Series C Preferred Stock and the Series D Preferred Stock was approximately
$9,179,000 and $9,645,000, respectively (after cash fees to the placement agents
and estimated transaction expenses). The net proceeds of the Private Placements
were used for working capital and general corporate purposes which included the
funding of programs to develop and advance the Company's products and technology
and the payment of salaries and obligations owed the Company's employees,
vendors, and customers during such development process.
INTERESTS OF CERTAIN PERSONS
None of the investors in the Preferred Stock transactions is a director,
executive officer or five percent shareholder of the Company or an affiliate of
any such person or entity.
VOTE REQUIRED
The proposal requires the approval of a majority of the votes cast at the
Meeting by the holders of Common Stock. THE COMPANY'S BOARD RECOMMENDS THAT YOU
VOTE FOR THE PREFERRED STOCK PROPOSAL.
14
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of December 31, 1998
(except as otherwise indicated), with respect to the beneficial ownership of the
Company's Common Stock by (i) each person known by the Company to own
beneficially more than 5% of the outstanding Common Stock; (ii) each director;
(iii) each executive officer; and (iv) all directors and executive officers of
the Company as a group. Unless otherwise indicated, the information included
below is based upon the Company's stock transfer records as maintained by the
Company's stock transfer agent.
The number of Common Stock beneficially owned by each director or executive
officer is determined under the rules of the Securities and Exchange Commission,
and the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any shares as
to which the individual has sole or shared voting power or investment power and
also any shares which the individual has the right to acquire within 60 days
after December 31, 1998 through the exercise of any stock option or other right.
Unless otherwise indicated, each person has sole investment and voting power (or
shares such power with his or her spouse) with respect to the shares set forth
in the following table. The inclusion herein of any shares deemed beneficially
owned does not constitute admission of beneficial ownership of those shares.
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------- -------------------- ----------------
Herman M. Frietsch................... 849,104(1) 2.61%
Peter E. Ianace...................... 218,095(2) *
R. Eugene Helms...................... 135,000(3) *
Edwin J. Ducayet, Jr................. 80,671(4) *
Anton Liechtenstein.................. 402,400(5) 1.25%
Philip P. Sudan, Jr.................. 296,139(6) *
Robert E. Garrison II................ 150,000(7) *
The Coastal Corporation Second
Pension Trust...................... 5,734,799(8) 16.37%(8)
SJMB, L.P............................ 1,872,777(9) 7.2%(9)
All Directors and Executive Officers
as a group (7 persons)............. 2,131,409(10) 6.63%
- ------------
(1) Includes 290,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by March 1, 1999. Includes
57,104 shares issuable as of March 1, 1999, which assumes the conversion at
a price of $2.00 per dollar of outstanding principal and interest of a loan
made by Mr. Frietsch to the Company. Includes 6,000 shares owned
beneficially by Mr. Frietsch's spouse as to which he disclaims beneficial
ownership. Principal business address is 1100 Executive Drive, Richardson,
Texas 75081.
(2) Includes 210,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by March 1, 1999. Principal
business address is 1100 Executive Drive, Richardson, Texas 75081.
(3) Includes 120,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by March 1, 1999. Principal
business address is 269 W. Renner Pkwy., Richardson, Texas.
(4) Includes 58,333 shares issuable upon exercise of options which are
currently exercisable or become exercisable by March 1, 1999. Principal
business address is 1100 Executive Drive, Richardson, Texas 75081.
(5) Includes 125,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by March 1, 1999. Principal
business address is Administration and Trust Co., Josef Rheinbergerstrasse
6, Vaduz, Liechtenstein.
(6) Includes 120,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by March 1, 1999. Includes
76,139 shares as of March 1, 1999, which assumes the conversion at a price
of $2.00 per dollar of outstanding principal and interest of a loan made by
Mr. Sudan to the Company. Principal business address is Two Houston Center,
Suite 3900, Houston, Texas 77010.
(7) Represents 150,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by March 1, 1999. Principal
business address is 5599 San Felipe, 3rd Floor, Houston, Texas.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
15
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(8) Based solely upon information contained in Schedule 13G of The Coastal
Corporation Second Pension Trust, filed on November 17, 1998. Principal
business address is Nine Greenway Plaza, Houston, Texas 77046-0995.
(9) Based solely on information contained in Schedule 13D of SJMB, L.P., filed
on July 16, 1998. Principal business address is 1980 Post Oak Blvd., Suite
2030, Houston, Texas 77056. The general partner of SJMB, L.P. and the
reporting person is SJMB, L.L.C. The directors of SJMB, L.L.C. are Charles
E. Underbrink, John L. Thompson, Alan D. Feinsilver, Titus H. Harris, Jr.
and Edward R. Naumes and the executive officers are Messers. Underbrink,
Thompson and Feinsilver.
(10) Includes 1,073,333 shares issuable upon exercise of options which are
currently exercisable or become exercisable by March 1, 1999.
* Indicates holdings of less than one percent.
STOCKHOLDER PROPOSALS AND SUBMISSIONS FOR 1999 ANNUAL MEETING
If any Stockholder wishes to present a proposal to be considered for
inclusion in the proxy materials to be solicited by the Company's Board of
Directors with respect to the next Annual Meeting of Stockholders, such proposal
shall have been presented to the Company's management by February 18, 1999. Such
proposals should be directed to the Company at 1100 Executive Drive, Richardson,
Texas 75081, Attention: Chief Financial Officer and Assistant Secretary.
AVAILABLE INFORMATION
The Company files annual, quarterly and current reports, proxy statements,
and other information with the Commission. You may read and copy any reports and
statements or other information the Company files at the Commission's public
reference room in Washington, D.C. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the Commission. Please call the
Commission at 1(800) SEC-0330 for further information on the operation of the
public reference rooms. The Company's SEC filings are also available to the
public on the Commission Internet site (http://www.sec.gov).
The Company filed with the Commission Current Reports on Form 8-K dated
February 17, May 11, and June 29, 1998 (collectively the "Form 8-K's"), which
describe the Private Placements and contain copies of the operative transaction
documents as exhibits. The operative documents for the Series C Preferred Stock
are a Securities Purchase Agreement, a Registration Rights Agreement and a
Certificate of Designations, Preferences and Rights, each of which are dated
February 6, 1998 and are exhibits to the 8-K filed on February 17, 1998. The
operative documents for the Series D Preferred Stock are a Securities Purchase
Agreement and a Registration Rights Agreement dated May 8, and June 26, 1998,
respectively, and a Certificate of Designations, Preferences and Rights dated
May 7, 1998. These documents are exhibits to the 8-K's filed on May 11 and June
29, 1998.The Company will provide without charge to each person to whom a copy
of this proxy statement is delivered, upon the written or oral request of such
persons, a copy of the Form 8-K's. Requests for such copies should be addressed
to Assistant Secretary, Intelect Communications, Inc., 1100 Executive Drive,
Richardson, Texas 77081, telephone (972) 367-2100. Copies of such documents are
also located on the Commission Internet site (http://www.sec.gov).
THE BOARD OF DIRECTORS ENCOURAGES STOCKHOLDERS TO ATTEND THE MEETING.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE FILL IN, DATE,
SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENCLOSED ENVELOPE TO WHICH NO
POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES. YOUR VOTE IS IMPORTANT.
IF YOU ARE A STOCKHOLDER OF RECORD AND ATTEND THE MEETING AND WISH TO VOTE IN
PERSON, YOU MAY WITHDRAW YOUR PROXY AT ANYTIME PRIOR TO THE VOTE.
Dated: January 29, 1999 By Order of the Board of Directors
HERMAN M. FRIETSCH
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
16
<PAGE>
FRONT SIDE OF PROXY
PROXY INTELECT COMMUNICATIONS, INC. PROXY
PROXIES SOLICITED BY DIRECTORS FOR SPECIAL MEETING
MARCH 3, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, having received the notice of the Special Meeting, hereby
appoints Herman M. Frietsch and Edwin J. Ducayet, Jr., and each of them, with
full power of substitution, are hereby authorized as attorneys and proxies of
the undersigned to represent and to vote all shares of the undersigned in
Intelect Communications, Inc. at the special meeting of stockholders of Intelect
Communications, Inc. to be held on March 3, 1999 and at any adjournments
thereof.
1. To approve the amendment to the Amended and Restated Certificate of
Incorporation to increase the number of shares of Common Stock authorized
for issuance.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. To approve the issuance of the shares of Common Stock issuable upon
conversion of the Series C Preferred Stock and the Series D Preferred Stock.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
(PLEASE SIGN ON OTHER SIDE)
BACK SIDE OF PROXY
(CONTINUED FROM FRONT)
In their discretion, the proxies are authorized to vote upon matters not
known to the Board of Directors as of the date of the accompanying proxy
statement, matters incident to the conduct of the meeting and to vote for any
nominee of the Board whose nomination results from the inability of any of the
above named nominees to serve. UNLESS OTHERWISE SPECIFIED IN THE SQUARES
PROVIDED, THE PROXIES SHALL VOTE FOR THE PROPOSAL ABOVE.
_________________________________________
Signature
_________________________________________
Signature if held jointly
Dated: ____________________________, 1999
NOTE: Please sign exactly as name appears
hereon. When shares are held by joint
tenants, both should sign. When signing
as attorney, executor, administrator,
trustee or guardian, please give your
full title. If a corporation, please sign
in full corporate name by president or
other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
