<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
Commission File Number 0-11630
---------------------
INTELECT COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0471342
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 EXECUTIVE DRIVE, RICHARDSON, TEXAS 75081
(Address of Principal Executive Offices) (Zip Code)
972-367-2100
(Registrant's Telephone Number, Including Area Code)
---------------------
Securities Registered Pursuant to Section 12(b) of the Act
None
Securities Registered Pursuant to Section 12(g) of the Act
Common Stock par value $0.01 per share
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
There were 38,257,965 shares of Common Stock outstanding as of May 14, 1999.
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company 2
at March 31, 1999 (unaudited) and December 31, 1998
Consolidated Statements of Operations of the Company 4
(unaudited) for the three months ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows of the Company 5
(unaudited) for the three months ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8
CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 3 CHANGES IN SECURITIES 15
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 15
SIGNATURES
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
(unaudited)
<S> <C> <C>
Assets
Current assets: $
Cash and cash equivalents -- 991
Investments 681 681
Accounts receivable net of allowances of $900 and
$870 in 1999 and 1998 5,705 7,232
Inventories 6,856 6,854
Prepaid expenses 478 655
---------- ----------
Total current assets 13,720 16,413
Property and equipment, net 6,131 6,386
Goodwill, net 4,619 4,787
Software development costs, net 2,909 3,134
Other intangible assets, net 835 916
Other assets 631 446
---------- ----------
28,845 32,082
---------- ----------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 883 1,173
Current maturities of long-term debt, net of unamortized discount
of $157 in 1999 15,283 440
Accounts payable 4,117 4,293
Accrued liabilities 3,444 3,375
Net liabilities of discontinued operations 400 400
Deferred income taxes 45 45
Current installments of obligations under capital leases 102 126
---------- ----------
Total current liabilities 24,274 9,852
Long-term debt, net of unamortized discount of $388 -- 14,612
Long-term obligations under capital leases, net of current installments 40 42
Deferred income taxes 44 44
---------- ----------
24,358 24,550
---------- ----------
Commitments and contingencies
Stockholders' equity:
$2.0145, 10% cumulative convertible preferred stock, series A, $.01 par
value (aggregate involuntary liquidation preference $7,687,000).
Authorized 10,000,000 shares; 3,719,409 and 4,219,409 issued and
outstanding in 1999 and 1998, respectively 37 42
Series C convertible preferred stock, $.01 par value (aggregate
involuntary liquidation preference $704,000). Authorized
12,500 shares; 673 and 1,843 issued and outstanding in 1999
and 1998, respectively 1 1
Series D convertible preferred stock, $.01 par value (aggregate
involuntary liquidation preference $7,559,000). Authorized
10,000 shares; 7,310 and 8,250 issued and outstanding in 1999
and 1998, respectively 1 1
Series E convertible preferred stock, $.01 par value (aggregate
involuntary liquidation preference $3,017,000). Authorized
9,600 shares; 3,000 issued and outstanding in 1999 1 --
Common stock, $.01 par value. Authorized 100,000,000 shares;
36,959,665 and 32,333,085 shares issued in 1999 and 1998,
respectively 369 323
Additional paid-in capital 109,739 104,451
Accumulated deficit (104,564) (96,189)
---------- ----------
5,584 8,629
Less 191,435 shares of common stock in treasury (1,097) (1,097)
---------- ----------
Total stockholders' equity 4,487 7,532
---------- ----------
$ 28,845 32,082
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------
1999 1998
---------- ----------
(unaudited)
<S> <C> <C>
Net revenue $ 3,123 5,514
Cost of revenue 4,068 4,008
---------- ----------
Gross profit (loss) (945) 1,506
---------- ----------
Expenses:
Engineering and development 2,433 2,845
Selling and administrative 3,482 3,630
Amortization of goodwill 168 331
---------- ----------
6,083 6,806
---------- ----------
Operating loss (7,028) (5,300)
---------- ----------
Other income (expense):
Interest expense (807) (1,023)
Interest income and other (63) 109
---------- ----------
(870) (914)
---------- ----------
Loss from continuing operations before income taxes (7,898) (6,214)
Income tax expense 6 --
---------- ----------
Loss from continuing operations (7,904) (6,214)
Loss on disposal of discontinued operations, net of tax -- (88)
---------- ----------
Net loss $ (7,904) (6,302)
========== ==========
Dividends on preferred stock (471) (746)
---------- ----------
Loss allocable to common stockholders $ (8,375) (7,048)
========== ==========
Basic and diluted loss per share:
Continuing operations $ (0.24) (0.29)
Discontinued operations -- --
---------- ----------
Net loss per share $ (0.24) (0.29)
========== ==========
Weighted average number of common shares outstanding (thousands) 34,732 24,109
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------
1999 1998
---------- ----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,904) (6,302)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,199 854
Amortization of loan discount 421 703
Loss on disposal of discontinued operations 55 88
Stock option compensation -- 25
Noncash operating expenses 33 31
Change in operating assets and liabilities, net of effects of acquired
companies:
Accounts receivable 1,527 2,859
Inventories (2) (803)
Other assets (49) (302)
Accounts payable and accrued liabilities 296 (4,783)
---------- ----------
Net cash used in operating activities (4,424) (7,630)
---------- ----------
Cash flows from investing activities:
Payments for disposal of discontinued operations (55) (88)
Purchase of other intangible assets 33 (9)
Capital expenditures (183) (766)
Software development costs (324) --
Proceeds from sale of marketable securities -- 52
---------- ----------
Net cash used in investing activities (529) (811)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes payable -- 3,020
Debt issuance costs -- (90)
Principal payments on notes payable (290) (290)
Principal payments under capital lease obligations (66) (24)
Principal payments on long-term debt -- (679)
Proceeds from issuance of preferred shares 2,518 9,179
Proceeds from issuance of common shares 1,800 --
Proceeds from exercise of employee stock options -- 89
---------- ----------
Net cash provided by financing activities 3,962 11,205
---------- ----------
Net decrease in cash and cash equivalents (991) 2,764
Cash and cash equivalents, beginning of period 991 2,094
---------- ----------
Cash and cash equivalents, end of period $ -- 4,858
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
INTELECT COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 1999
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
by the Company without audit in accordance with generally accepted accounting
principles for interim financial statements and with instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included.
The accompanying consolidated financial statements do not include
certain footnotes and financial presentations normally required under generally
accepted accounting principles and, therefore, should be read in conjunction
with the audited financial statements included in the Company's Annual Report on
Form 10-K as at December 31, 1998.
INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
---------- ----------
1999 1998
---------- ----------
($ Thousands)
<S> <C> <C>
Raw materials $ 3,235 5,038
Work in progress 914 888
Finished goods 4,821 3,472
---------- ----------
8,971 9,398
Less: allowance for obsolescence (2,115) (2,544)
---------- ----------
$ 6,856 6,854
========== ==========
</TABLE>
SEGMENTS OF BUSINESS
Revenue by business segment:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---------- ----------
($ Thousands)
<S> <C> <C>
Fiber optic multiplexer $ 1,047 2,162
Engineering services 1,551 2,649
Digital signal processor 106 202
Video communication 393 309
Switching and other 26 192
---------- ----------
$ 3,123 5,514
========== ==========
</TABLE>
6
<PAGE> 8
Segment-specific margins (Gross profit less total engineering and
development costs, including capitalized software, and asset write downs for the
segment):
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------
1999 1998
---------- ----------
($ Thousands)
<S> <C> <C>
Fiber optic multiplexer $ (1,841) (865)
Engineering services 83 1,064
Digital signal processor (331) (356)
Video communication (226) (187)
Other (1,220) (995)
---------- ----------
Subtotal segment specific (3,535) (1,339)
Capitalized software 157 --
All other expenses (3,650) (3,961)
---------- ----------
Operating loss $ (7,028) (5,300)
========== ==========
</TABLE>
Assets identifiable only by combined segments:
<TABLE>
<CAPTION>
At March 31, At December 31,
1999 1998
---------- ----------
($ Thousands)
<S> <C> <C>
Fiber optic multiplexer, visual communication
and other $ 19,069 20,906
Engineering services and DSP 8,047 8,200
Not allocable to a segment 1,729 2,976
---------- ----------
Total $ 28,845 32,082
========== ==========
</TABLE>
SUBSEQUENT EVENTS
On April 20, 1999, the Company sold $3,000,000 of Series E convertible
preferred stock in a private placement. Purchasers of the preferred stock
received warrants to purchase 300,000 shares of common stock at a price of 110%
of the "Market Price" (as defined) on the first issuance date of Series E
preferred stock. Accumulated premium, conversion, redemption and other terms and
conditions of the Series E preferred stock are more fully described in the Form
8-K filed March 2, 1999.
7
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 1999
FORWARD LOOKING STATEMENT
This Form 10-Q contains certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. The forward looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those expressed in, or implied by, the forward looking
statements. Factors that might cause such a difference include, but are not
limited to, those relating to: general economic conditions in the markets in
which the Company operates, success in the development and market acceptance of
new and existing products (particularly SONETLYNX, FIBRETRAX, LANSCAPE, and
CS4); dependence on suppliers, third party manufacturers and channels of
distribution; customer and product concentration; fluctuations in customer
demand; maintaining access to external sources of capital; ability to execute
management's margin improvement and cost control plans; overall management of
the Company's expansion; and other risk factors detailed from time to time in
the Company's filings with the Securities and Exchange Commission, including
without limitation those set forth in the Section entitled "Risk factors" in the
form S-3 of the Company filed in April 2, 1999.
THE COMPANY
The Company is engaged in the business of designing, developing,
manufacturing, marketing and selling products and services for managing digital
signals and converging voice, data and video networks. The Company's current
operations were established through a series of mergers in 1995 and 1996, at
which time four communications product platforms were defined to respond to the
increasing demands of speed and complexity in communications.
The Company is strategically focusing its product lines and services to
take advantage of the convergence of telecommunications (telecom) and data
communications (datacom). This convergence is being driven by the explosive
growth of Internet applications such as E-commerce, which is accelerating the
expansion of network capacities. These industry trends create requirements for
today's network integrators and directors to manage multiple applications, at
multiple locations, within bandwidth resources and while balancing the need for
network reliability. The Company's product lines are designed to meet these
evolving markets, applications and requirements.
The Company's objective is to develop and bring to market a new
generation of intelligent, flexible, and scalable communications products
designed to combine current voice, data and video networks (for example,
telephones, computers, surveillance) into a single communications network, which
would also upgrade communications into the latest generation of high-speed
technologies, while using a single network management system.
PRODUCTS, TECHNOLOGIES AND SERVICES
Multi-service Access Platform (MAP)
This Integrated Access Device (IAD), marketed under the names SONETLYNX
and FIBRETRAX, the Company believes is a revolutionary networking infrastructure
product for public and private networks to cost-effectively create voice, data
and/or video networks of virtually any size and application. It is defined as a
platform because, from its basic architecture, it can be configured into many
separate products for a variety of functions and applications. Through the use
of different protocol cards, the MAP can simultaneously combine multiple
communication transmissions such as video and graphics communications, data
files, voice and any IP-based service over a single network. The products are
compatible with Synchronous Optical Network (SONET) and Synchronous Digital
Hierarchy (SDH) standards in order to provide fail-safe networks. The SONETLYNX
and FIBRETRAX, in addition to providing add-drop multiplexing, provide the
functions of traditional networking equipment such as bridges, channel banks,
routers and video matrix switches, thus offering significant savings in cost and
time for the user when OC-1 or OC-3 bandwidth is required. The MAP expands into
markets horizontally by increasing the types of protocols (applications) it can
transport, and vertically by increasing its capacity (transmission speed).
Currently, the MAP can transport voice, T1/E1, Ethernet (10/100baseT), JPEG
video and low speed data protocols such as RS-232 and RS-422 at speeds up to the
OC-3/STM-1 rate (155 Mbps). Product advancements scheduled during 1999 include
8
<PAGE> 10
adding the protocol cards for ISDN, digital modem pool and Frame Relay as well
as increasing the MAP's transmission speed to the OC-12/STM-4 rate (622 Mbps).
Video and high speed data modules are planned with higher port density. Network
management systems are under development in the Windows NT version. The cost
effectiveness and competition advantage of the MAP are expected to increase with
the addition of each major protocol and increase in transmission speed.
Engineering Services
DNA Enterprises, Inc. ("DNA"), the Company's engineering services
operation, provides advanced product and system design and development services
for a variety of clients in the communications industry. The Company believes
DNA Enterprises is a leading contract and outsource development resource for the
communications industry. DNA provides expertise in digital signal processing
(DSP), switching and transport systems, computer telephony integration (CTI),
embedded systems, data communications, intelligent networks, video processing,
and wireless communications technologies.
Digital Signal Processing
The DSP Design Center is a Center of Excellence within DNA that
provides state-of-the-art digital signal processing technology to systems
developers around the world to afford them leading-edge solutions, faster
time-to-market, and reduced technical risk for their product development
programs. The DSP Design Center has developed a product line consisting of
standard designs for high performance circuit boards, and offers custom designed
hardware, application support software, real-time operating systems, and
consulting services to product manufacturers and application developers in the
multimedia, image processing, communications, and remote sensing systems arenas.
The bulk of the Design Center's activities center around the Texas Instruments
("TI") line of Digital Signal Processors, with emphasis on TI's high performance
C5x and C8x devices and a particular focus on the new TI C6000 processor line.
Visual Communications
The LANSCAPE product is designed to provide full motion, collaborative
video communications in a cost effective solution for desktop PCs. The product
has the capability to conduct up to a three-way conference call without a costly
multiconferencing unit (MCU), transmit video broadcasts using IP multicast, and
use its integrated software to switch between two incoming video sources. Each
incoming video is contained in an individual window which the user can control
as to size and volume. In addition to video conferencing, LANSCAPE features
video record and playback controls for applications such as education/training
and recorded event distribution. LANSCAPE support of IP multicast allows for
transmission of live or pre-recorded video from one to many.
CS4 Intelligent Services Platform
The Company believes the CS4 represents a revolutionary new class of
product. It is an integrated enhanced network server. Its array of integrated
capabilities transcends traditional product categories to introduce a flexible
system that can host a wide range of intelligent services in a variety of
network configurations. The design of the CS4 positions it to impact the
proliferation and profitability of intelligent services in the network, as well
as to improve the cost paradigm now in place for service nodes, intelligent
peripherals, enhanced service platforms, and programmable switches. Key
technological innovations reflected in the CS4 include highly distributed
processing power to the port level, scalable port capacity that extends up to
64k ports, an advanced call processing structure, a powerful service creation
facility, and an architecture that readily supports integration into low speed,
high speed, and broadband networks, all designed for a fault-tolerant, NEBS
compliant structure.
9
<PAGE> 11
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COMPARISON OF FIRST QUARTER 1999 TO FIRST QUARTER 1998
- -------------------------------------------------------------------------------
The Company believes the financial results for the first quarter of
1999 are not indicative of expected results for the year. The Company is
implementing a new strategy of focusing resources and activities on high growth
markets in networking equipment and digital signal processing. The Company is
concentrating on private and public network access applications involving the
integration, transport and convergence of voice, data and video services.
Commencing in the second quarter, the Company expects a turnaround in
operations, based on the substantial backlog of orders received so far this
year. The current period marks the fifth quarter impacted by the loss of
substantial business formerly concentrated in Korea. Expenses have been reduced.
Product development spending has been maintained to position the Company for
participation in non-Korean and new growth markets.
The following table shows the revenue and gross profit for the
Company's products:
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------
1999 1998
---------- ----------
($ Thousands)
<S> <C> <C>
Revenue:
Fiber optic multiplexer $ 1,047 2,162
Engineering services 1,551 2,649
Digital signal processor 106 202
Video communication 393 309
Switching and other 26 192
---------- ----------
$ 3,123 5,514
---------- ----------
Gross profit (loss):
Fiber optic multiplexer $ (1,001) 556
Engineering services 83 1,064
Digital signal processor (90) (193)
Video communication 47 136
Switching and other 16 (57)
---------- ----------
$ (945) 1,506
---------- ----------
</TABLE>
NET REVENUE
The decrease in revenue from fiber optic multiplexer products is mainly
attributable to the loss of shipments to Korea. Non-Korean revenue increased 4%
in 1999 compared to 1998. The Company expects this product line to benefit
materially from new orders and improving operations in following quarters. The
decrease in engineering services revenue reflects a transition to new projects
upon the completion of several large customer programs. Digital signal processor
revenue was delayed and restricted by a temporary shortage of integrated circuit
components from Texas Instruments. Shipments resumed in March 1999, and the
components are expected to be supplied on an allocation basis through June.
GROSS PROFIT
Gross profit on fiber optic multiplexer products declined as a result
of the lower volume of shipments. Engineering services gross profit declined due
to the lower revenue level. The Company expects the gross profit to increase in
subsequent quarters as a result of higher levels of operations based on the
production and shipment of new orders in backlog.
10
<PAGE> 12
ENGINEERING AND DEVELOPMENT (E&D) EXPENSE
Engineering and development expense decreased 14% to $2,433,000 from
$2,845,000 in the prior year period. In addition, $157,000 of software
development costs were capitalized in 1999. The combined totals of these
development costs were distributed by product line as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------
1999 1998
---------- ----------
($ Thousands)
<S> <C> <C>
Fiber optic multiplexer $ 840 1,421
CS4 1,236 938
Digital signal processor 241 163
Video communication 273 323
---------- ----------
$ 2,590 2,845
========== ==========
</TABLE>
During the first quarter of 1999, the architecture of the SONETLYNX and
FIBRETRAX fiber optic multiplexer product lines were advanced to improve
functionality and cost-effectiveness in support of migration into public carrier
access markets.
The higher level of CS4 development spending reflects primarily
subsystem testing, systems integration, load testing and performance analysis to
complete beta systems. The field trial phase commenced at the end of the quarter
with delivery of the beta system to the customer site and the initial
implementation of the customer's application.
Digital signal processing product development included the design of
two new lines of ruggedized VME circuit boards, one based on Texas Instruments'
C6000 DSP processors and the other on PowerPC RISC processors. The Company
believes these next generation products are the centerpiece for the Company's
standard product offering for the harsh environment market.
Video communication product development continued in the areas of PCI
compliant hardware, H.323 interoperability, and specialized application
interfaces. The Company expects future spending on this product line to be
reduced substantially after the second quarter.
AMORTIZATION OF GOODWILL
The amount of amortization of goodwill has been reduced $163,000 per
quarter due to the writeoff in September 1998 of goodwill in connection with the
acquisition of Intelect, Inc., which in 1995 was concentrated in the air traffic
control business, no longer a principal line of business for the Company.
SELLING AND ADMINISTRATIVE EXPENSE
Compared to the prior year period, selling and administrative expenses
were reduced 4% to $3,482,000 from $3,630,000. On March 25, 1999, the Company
announced the closing of three offices dedicated to the video conferencing
product line and consolidated selling operations in order to reduce spending.
See "Expense Reductions" page 14.
INTEREST EXPENSE
Interest expense decreased to $807,000 from $1,023,000 in the prior
year period. Cash interest costs increased to $385,000 from $320,000 due to the
addition of lines of credit secured by accounts receivable and inventory, offset
by reduced obligations to former shareholders of DNA. The remainder of
reportable interest expense consists of non-cash costs of financings, namely,
amortization of debt discount and deferred financing costs attributable to
valuation of warrants using the Black-Scholes pricing model. Amortization of
approximately $400,000 does not continue after March 1999.
11
<PAGE> 13
DIVIDENDS ON PREFERRED STOCK
Preferred dividends include $322,000 and $369,000 in 1999 and 1998,
respectively, which the Company has elected to pay in common stock. Also
reported as dividends are non-cash financing costs of $148,000 and $377,000,
respectively, attributable to the value of beneficial conversion features of the
preferred stock. During the second quarter of 1999, a one-time amount of
$1,037,000 of such non-cash financing costs will be reportable as dividends due
to the issuance of Series E preferred.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems and products
to identify those that could be affected by the "Year 2000 Problem," the result
of computer programs using two digits rather than four to define the year
portion of dates. The Company has determined that none of its significant
systems or products fail to distinguish the year 2000 from the year 1900. The
review continues, in an ongoing process, to examine the risk, if any, to the
Company, of vendor or customer exposure to the Year 2000 Problem. To date, no
exposure has been discovered which would have a material adverse effect on the
Company. Certain purchased software, resold or used in company products, has
been certified by the vendors to be compliant. The financial impact of Year 2000
compliance has not been and is not anticipated to be material to the Company's
financial position or results of operations in any given year.
- -------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------------------------------------------------------
For the three months ended March 31, 1999, cash balances were decreased
by $991,000. During the three month period, cash used in operations,
($4,424,000), and in investing activities, ($829,000), was funded by the
reduction in cash balances and by securing new financing, net of repayments, of
$3,962,000.
OPERATING ACTIVITIES
Net cash used in operations consisted of the $7,904,000 net loss offset
by the $1,827,000 increase in working capital and by $1,653,000 of non-cash
charges. The net loss primarily reflects the effect of fixed costs in a period
of lower revenue and the continuation of new product development mitigated by
expense reductions in all product lines.
o Accounts receivable were a source of funding due to
collections from customers of $1,527,000 in excess of new
shipments and billings.
o The non-cash charges were primarily $1,199,000 depreciation
and amortization of intangible assets and $421,000 of
amortization of deferred financing costs.
INVESTING ACTIVITIES
Investments consisted primarily of capitalized software development
costs of $324,000 and capital expenditures of $183,000 for fixed asset
additions. Both elements of investment spending were primarily in support of
SONETLYNX and FIBRETRAX product line enhancements.
FINANCING ACTIVITIES
Cash uses were financed by the following transactions during the three
month period ended March 31, 1999:
o $1,800,000 from the sale of common stock in January
o $3,000,000 from the sale of Series E preferred stock in March
In January, the Company exercised its right to extend the term of the
Credit Facility to February 12, 2000. In March, the term of the Receivables Loan
was extended to February 12, 2000.
12
<PAGE> 14
LIQUIDITY OUTLOOK
SUBSEQUENT FINANCING ACTIVITIES
On April 20, 1999, the Company sold $3,000,000 of Series E preferred
stock in a private placement. As disclosed in the Form 8-Ks of the Company filed
on March 2 and March 8, 1999, the Series E preferred stock has a five year term,
an accrued premium of 8% per annum payable in common stock, and is convertible
into common stock at the lesser of a fixed or variable conversion price. The
fixed conversion price is $0.90625 and the variable conversion price is 83.5% of
the average of the two lowest closing bid prices in the forty trading days prior
to the date of conversion. On April 26, 1999, the Company notified the holders
that it is suspending indefinitely any further conversion of the Series E
preferred stock. See below.
DISCONTINUANCE OF CONVERSIONS OF PREFERRED STOCK
As disclosed in the Form 8-K filed on April 26, 1999, the Company is
discontinuing indefinitely conversions of its outstanding shares of Series C,
Series D, and Series E Convertible Preferred Stock . The Company believes, among
other things, that purchasers of the Series C and Series D preferred stock
violated representations and warranties regarding investment purpose and intent.
The purchasers of the Series E preferred stock made the same representations
regarding investment purpose and intent as they made in connection with their
purchase of the Series C and D preferred stock. No shares of Series E preferred
stock have been submitted for conversion, but should they be, the Company also
will not effect conversions of such shares for an indefinite period of time.
Although the terms and conditions of the preferred stock provide that,
as a result of the failure to convert, the holders may be entitled to
significant liquidated damages and to require redemption of the preferred stock,
the Company believes there are significant defenses to any claims to enforce
such remedies. In addition, the Company believes there are significant
affirmative claims and remedies available to the Company. However, under present
conditions, if the holders of the preferred stock were ultimately successful in
enforcing a demand for redemption and liquidated damages, the current value of
approximately $16,000,000 would have a material adverse effect on the Company's
financial condition and results of operations.
NASDAQ LISTING STATUS
The Company is in the process of reviewing with Nasdaq, according to
Nasdaq procedures, the Company's plans and expectations for continued compliance
with listing requirements for the Nasdaq National Market, primarily with respect
to net tangible assets. Nasdaq advised non-compliance based on financial
information contained in the Company's Form 10-K for the period ended December
31, 1998. The Company advised Nasdaq of the Company's expectation of compliance
based upon subsequent events and developments during 1999. Within Nasdaq
procedures, the Company has also stayed a Nasdaq delisting determination at the
staff level by requesting a hearing by the Nasdaq Listing Qualifications Hearing
Department to review Company progress, plans and expectations. There can be no
assurance that the hearing and subsequent processes will result in a
determination favorable to the Company and the Company's common stock will
continue to be listed on the Nasdaq National Market. The inability to maintain
the listing could adversely affect the liquidity of the Company's common stock.
If a delisting continues, a Triggering Event with respect to the Series C,
Series D and Series E preferred stock may occur. Such an event would enable the
holders to demand redemption. Under present conditions, redemption would have a
material adverse effect on the Company's financial condition and results of
operation.
DEBT MATURITIES
o The Credit Facility and Receivables Loan, which have an
aggregate principal amounts outstanding of $15,000,000, become
due on February 12, 2000. The Company intends to refinance
those debts at the maturity date, but no assurance can be
given that a refinancing can be arranged.
o The Inventory Loan with a principal balance of $500,000 and
accumulated interest of $9,000 was due in installments on
April 1 and May 1, 1999. The Company is in negotiation with
the lender to extend the maturity of this obligation.
13
<PAGE> 15
o Obligations to two former owners of DNA, having an aggregate
principal and interest amount of $433,000, is scheduled for
repayment in May and June, 1999.
EXPENSE REDUCTIONS
On March 25, 1999, the Company announced the closing of three offices
of its Intelect Visual Communications unit and consolidation of operations in
Richardson, Texas, in order to maximize engineering expertise in E&D, achieve
greater utilization of existing sales, marketing and customer service
infrastructures, and to realize expected reductions in overall cost structure in
excess of $2 million on an annualized basis.
CONCLUSION
The Company has operational, financial and product introduction plans
which, if achieved, will result in profitability and cash equilibrium before the
end of 1999. Considering the available financial resources, current business
prospects, the outlook for cash available from customer collections, the outlook
for cash to be used in operations and investing, and actions to control
spending, the Company believes it has or can obtain the financial resources to
meet its business requirements for the balance of the current year. There can be
no assurance, however, that the assumptions and projections underlying or
supporting this outlook will be realized. The Company has incurred significant
operating losses and negative cash flows from operations in the last three
years. The cash flows were funded by proceeds from borrowings under credit
facilities and by sales of convertible debentures, preferred stock, and common
stock. The Company expects operating losses and negative operating cash flow to
continue at least through mid-year 1999. 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 financial statements have been prepared assuming the Company
will continue as a going concern and do not include any adjustments that might
result from the unfavorable outcome of such an uncertainty.
CONTINGENT LIABILITIES
As discussed in "ITEM 3 - Legal Proceedings" in the Company's Annual
Report on Form 10-K, the Company is exposed to certain contingent liabilities
which, if resolved adversely to the Company, would adversely affect its
liquidity, its results of operations, and/or its financial position.
14
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 3 - CHANGES IN SECURITIES
(c) Recent sales of unregistered securities
Effective as of April 1, 1999, the Company authorized the issuance of
188,217 shares of common stock in lieu of a $195,000 cash dividend on its Series
A preferred stock for the quarter ended March 31, 1999.
As disclosed in the Form 8-K filed March 8, 1999, the Company sold
$3,000,000 of Series E convertible preferred stock in a private placement on
March 5, 1999. Pursuant to the terms of a Securities Purchase Agreement, as
disclosed in the Form 8-K filed March 2, 1999, an additional $3,000,000 of
Series E convertible preferred stock was sold in a private placement on April
20, 1999.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of stockholders was held on March 3, 1999, for the
purposes of (1) amending the Company's Amended and Restated Certificate of
Incorporation to increase authorized shares of common stock from 50,000,000 to
100,000,000 and (2) approving the issuance of common stock issuable upon
conversion of Series C and Series D convertible preferred stock. Both matters
were approved by stockholders.
The proposal to increase authorized common shares was approved by a
vote of 29,578,530 for and 752,247 against. The proposal was approved by an
affirmative vote of 89.1% of the total shares outstanding on the record date, a
majority of the shares. The proposal to approve the issuance of common stock
issuable upon conversion of preferred stock was approved by a vote of 12,534,653
for, 747,429 against and 130,791 abstaining. The proposal was approved by an
affirmative vote of 93.5% of shares represented at the meeting, a majority of
such shares.
ITEM 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. The Financial Statements filed as part of this report are listed and
indexed on Page 1. Schedules other than those listed in the index have been
omitted because they are not applicable or the required information has been
included elsewhere in this report.
B. Listed below are all Exhibits filed as part of this report.
Exhibit
No. Exhibit
27.0 Financial Data Schedule
C. The Company has not filed any report on Form 8-K during the period
covered by this Report, except as follows:
Form 8-K filed February 3, 1999
Form 8-K filed March 2, 1999
Form 8-K filed March 8, 1999
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTELECT COMMUNICATIONS, INC.
(Registrant)
Date: May 17, 1999 By: /s/ EDWIN J. DUCAYET, JR.
---------------------------------------------
Edwin J. Ducayet, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 17, 1999 /s/ HERMAN M. FRIETSCH
---------------------------------------------
Herman M. Frietsch
Chief Executive Officer and Director
(Principal Executive Officer)
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 681
<RECEIVABLES> 7,756
<ALLOWANCES> 900
<INVENTORY> 6,856
<CURRENT-ASSETS> 13,720
<PP&E> 10,503
<DEPRECIATION> 4,372
<TOTAL-ASSETS> 28,845
<CURRENT-LIABILITIES> 24,273
<BONDS> 0
0
37
<COMMON> 368
<OTHER-SE> 4,082
<TOTAL-LIABILITY-AND-EQUITY> 28,845
<SALES> 3,123
<TOTAL-REVENUES> 3,123
<CGS> 4,068
<TOTAL-COSTS> 4,068
<OTHER-EXPENSES> 6,083
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (807)
<INCOME-PRETAX> (7,898)
<INCOME-TAX> 6
<INCOME-CONTINUING> (7,904)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,904)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
