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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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, 2000
Commission File Number 0-11630
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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)
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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
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There were 85,589,195 shares of Common Stock outstanding as of May 2, 2000.
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company
at March 31, 2000 (unaudited) and December 31, 1999 2
Consolidated Statements of Operations of the Company
(unaudited) for the three months ended March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows of the Company
(unaudited) for the three months ended March 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES 11
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 11
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousands of dollars, except share data)
March 31, December 31,
2000 1999
--------- -----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 25,842 $ --
Investments 195 195
Accounts receivable net of allowances of $1,152 in 2000
and $1,228 in 1999 4,824 5,316
Inventories 6,595 5,972
Prepaid expenses 209 378
--------- ---------
Total current assets 37,665 11,861
Property and equipment, net 5,124 5,094
Goodwill, net 3,947 4,115
Software development costs, net 1,966 2,093
Other intangible assets, net 475 561
Other assets 663 618
--------- ---------
$ 49,840 $ 24,342
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 1,052 $ 2,340
Accounts payable 2,427 3,203
Accrued liabilities 2,248 3,131
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Total current liabilities 5,727 8,674
Notes payable 1,500 15,264
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7,227 23,938
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Stockholders' equity:
$2.0145, 10% cumulative convertible preferred stock, Series A,
$.01 par value, (aggregate involuntary liquidation preference
$7,438,818 in 1999). Authorized 10,000,000 shares; 3,719,409
issued and outstanding in 1999 -- 37
Common Stock, $.01 par value. Authorized 100,000,000 shares;
84,821,622 and 65,936,573 shares issued in 2000 and 1999,
respectively 848 659
Additional paid-in capital 179,086 131,511
Accumulated deficit (136,224) (130,706)
--------- ---------
43,710 1,501
Less 191,435 shares of common stock in treasury (1,097) (1,097)
--------- ---------
Total stockholders' equity 42,613 404
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$ 49,840 $ 24,342
========= =========
See accompanying notes to consolidated financial statements
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Thousands of dollars, except per share data)
Three Months Ended March 31,
----------------------------
2000 1999
-------- ---------
(unaudited)
Net revenue $ 4,584 $ 3,123
Cost of revenue 4,408 4,068
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Gross profit (loss) 176 (945)
-------- --------
Expenses:
Engineering and development 1,066 2,433
Selling and administrative 2,931 3,482
Amortization of goodwill 168 168
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4,165 6,083
-------- --------
Operating loss (3,989) (7,028)
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Other income (expense):
Interest expense (738) (807)
Interest income and other 175 (63)
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(563) (870)
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Loss before income taxes (4,552) (7,898)
Income tax expense -- 6
-------- --------
Net loss $ (4,552) $ (7,904)
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Dividends on preferred stock (966) (471)
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Loss allocable to common stockholders $ (5,518) $ (8,375)
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Basic and diluted loss per share:
Net loss per share $ (0.07) $ (0.24)
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Weighted average number of common shares outstanding 76,141 34,732
======== ========
See accompanying notes to consolidated financial statements.
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Thousands of dollars, except share data)
Three Months Ended March 31,
---------------------------
2000 1999
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(unaudited)
Cash flows from operating activities:
Net loss $ (4,552) $ (7,904)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,081 1,199
Amortization of loan discount 426 421
Loss on disposal of discontinued operations -- 55
Other 115 --
Noncash operating expenses 579 33
Change in operating assets and liabilities:
Accounts receivable 492 1,527
Inventories (623) (2)
Other assets 103 (49)
Accounts payable and accrued liabilities (1,587) 296
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Net cash used in operating activities (3,966) (4,424)
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Cash flows from investing activities:
Capital expenditures (508) (183)
Software development costs (308) (324)
Investment and other (500) (22)
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Net cash used in investing activities (1,316) (529)
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Cash flows from financing activities:
Proceeds from issuance of notes payable 400 --
Proceeds from issuance of common shares 42,713 1,800
Principal payments on notes payable (9,654) (290)
Redemption of preferred shares (7,493) 2,518
Principal payments under capital lease obligations (6) (66)
Proceeds from exercise of common stock warrants 5,180 --
Proceeds from exercise of employee stock options 950 --
Dividends paid (966) --
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Net cash provided by financing activities 31,124 3,962
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Net increase (decrease) in cash and cash equivalents 25,842 (991)
Cash and cash equivalents, beginning of period -- 991
-------- --------
Cash and cash equivalents, end of period $ 25,842 $ --
======== ========
See accompanying notes to consolidated financial statements.
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INTELECT COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
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, 1999.
INVENTORIES
The components of inventories are as follows:
March 31, December 31,
2000 1999
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($ Thousands)
Raw materials $ 3,587 $ 2,896
Work in progress 1,486 1,010
Finished goods 1,522 2,066
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Total $ 6,595 $ 5,972
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SEGMENTS OF BUSINESS
Revenue by business segment:
Three Months Ended March 31,
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2000 1999
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($ Thousands)
Optical networking equipment $ 2,074 $ 1,047
Design services 1,509 1,551
Digital signal processor (DSP) 840 106
Video network products and other 161 419
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$ 4,584 $ 3,123
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Segment-specific margins (gross profit less total engineering and
development costs, including capitalized software for the segment):
Three Months Ended March 31,
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2000 1999
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($ Thousands)
Optical networking equipment $ (1,238) $ (1,841)
Design services 82 83
Digital signal processor (DSP) 61 (331)
Video network products and other (104) (1,446)
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Subtotal segment specific (1,199) (3,535)
Capitalized software 308 157
All other expenses (3,098) (3,650)
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Operating loss $ (3,989) $ (7,028)
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Assets identifiable only by combined segments:
At March 31, At December 31,
2000 1999
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($ Thousands)
Optical networking equipment, video
network products and other $ 14,650 $ 15,638
Engineering services and DSP 7,936 6,790
Not allocable to a segment 27,254 1,914
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Total $ 49,840 $ 24,342
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SUBSEQUENT EVENTS
As of March 31, 2000 the Company had deposited approximately
$8,450,000 in an escrow account to effect the redemption of all of the Company's
outstanding Series A Preferred Stock, all of which was held by The Coastal
Corporation Second Pension Trust ("Coastal"). Pursuant to the Certificate of
Designation for such preferred stock, all rights of the preferred stock
terminated upon the deposit of the redemption proceeds and notice to Coastal.
Accordingly, the Series A Preferred Stock is deemed to be not outstanding as of
March 31, 2000. In April, 2000 Coastal delivered the preferred stock
certificates to the escrow agent and received the redemption proceeds.
In April, 2000 SJMB, L. P. converted $1,500,000 due under its note
payable from the Company into 767,573 shares of the Company's common stock,
pursuant to the terms of the loan agreement. Accordingly, this amount has been
reflected as a non-current liability as of March 31, 2000.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2000
FORWARD LOOKING STATEMENT
This Form 10-Q contains certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. The forward looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those expressed in, or implied by, the forward looking
statements. Factors that might cause such a difference include, but are not
limited to, those relating to: general economic conditions in the markets in
which the Company operates, success in the development and market acceptance of
new and existing products, dependence on suppliers, third party manufacturers
and channels of distribution; customer and product concentration; fluctuations
in customer demand; maintaining access to external sources of capital; ability
to execute management's margin improvement and cost control plans; overall
management of the Company's expansion; and other risk factors detailed from time
to time in the Company's filings with the Securities and Exchange Commission.
COMPARISON OF FIRST QUARTER 2000 TO FIRST QUARTER 1999
The following table shows the revenue and gross profit for the
Company's products:
Three Months Ended March 31,
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2000 1999
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($ Thousands)
Net revenue:
Optical networking equipment $ 2,074 $ 1,047
Design services 1,509 1,551
Digital signal processor (DSP) 840 106
Video network products and other 161 419
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$ 4,584 $ 3,123
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Gross profit (loss):
Optical networking equipment $ (184) $ (1,001)
Design services 82 83
Digital signal processor (DSP) 371 (90)
Video network products and other (93) 63
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$ 176 $ (945)
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NET REVENUE
Revenue from sales of optical networking equipment increased
$1,027,000, or 50%, in the first quarter of 2000 as compared to the first
quarter of 1999. This increase reflects increasing activity in the market for
the Company's OmniLYNX product line. Sales in the 2000 quarter were less than
would have otherwise been recorded due to the carry-over effect of the Company's
difficulties experienced during most of 1999 in obtaining parts and components
on a timely basis. One project in particular, with a sales value of
approximately $1,500,000, originally scheduled to be completed and shipped in
the first quarter of 1999, was not actually shipped until the second week of
April, 2000. The Company's ability to obtain parts and components has improved
materially with its improved financial condition as discussed below. However, it
has taken some period of time for the Company to reestablish itself in the
supply queue for certain long lead-time items.
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Revenues from design services were essentially flat in the first
quarter of 2000 as compared to the same period of 1999. This, however, reflects
a significant increase from revenue levels experienced in the second, third and
fourth quarters of 1999. This improvement reflects the on-going recovery of the
Company's design services operations from the effects of the aborted sale of
such operations to Cadence Design Systems, Inc. during 1999. Sales of digital
signal processor (DSP) products improved by $734,000, or almost 700%, as the
demand for these products has been increasing over the past several months.
GROSS PROFIT
The losses reflected in both 2000 and 1999 for optical networking
products are primarily attributable to sales volumes below the Company's
production capacity which restricted overhead cost absorption and necessitated
uneconomic purchasing levels. In addition, the year 2000 was adversely affected
by production delays, caused by the Company's difficulties in obtaining parts
and components. These delays resulted in lower than anticipated gross margins on
certain projects which were bid and obtained in early 1999.
The gross profit from design services is consistent between the 2000
and 1999 periods but does not reflect levels obtained historically due to lower
than desired sales levels and resulting excess overhead costs. Gross profit from
the sales of DSP products improved dramatically in the 2000 period as a result
of the higher sales levels, more aggressive pricing and greater production
efficiency.
ENGINEERING AND DEVELOPMENT (E&D) EXPENSE
Engineering and development expense decreased 56% to $1,066,000 in 2000
from $2,433,000 in the prior year period. The combined totals of these
development costs were distributed by product line as follows:
Three Months Ended March 31,
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2000 1999
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($ Thousands)
Optical networking products $ 746 $ 683
CS4 -- 1,236
Digital signal processor (DSP) 310 241
Video network products and other 10 273
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$ 1,066 $ 2,433
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The decrease in engineering and development activities from 1999 to
2000 is a direct result of the Company's decision during 1999 to suspend or
severely curtail activities related to the CS4 intelligent switching platform
and video networking products. Expenditures in the area of optical networking
products in 2000 relate primarily to continued refinement and enhancements to
the OmniLYNX product line. Engineering and development activities during the
first quarter of 2000 in the DSP area relate primarily to the on-going
development of products based on Power PC processors.
SELLING AND ADMINISTRATIVE EXPENSE
Compared to the prior year period, selling and administrative expenses
were reduced 16% to $2,931,000 in 2000 from $3,482,000 in 1999. This reduction
comes about mainly from the Company's expense reduction efforts which were
implemented beginning in April of 1999. A principal focus of these efforts was
the closing of offices involved in the video networking products business and a
reduction of activities related to that business.
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INTEREST EXPENSE
Interest expense in the first three months of 2000, which included
approximately $257,000 from the write-off of deferred financing costs related to
the Company's revolving credit agreement with Coastal, decreased to $738,000
versus $807,000 in the same period last year. This decrease is primarily due to
the Company's repayment of all amounts due under its revolving credit agreement
with Coastal in March, 2000 which resulted in lower average debt balances in the
first three months of 2000 versus the same period last year. See Liquidity and
Capital Resources.
DIVIDENDS ON PREFERRED STOCK
Preferred stock dividends of $966,000 in the first quarter of 2000
represent accrued dividends and a 10% redemption premium paid to Coastal to
effect the redemption of the Company's Series A Preferred Stock in March of
2000. Subsequent to this redemption the Company has no preferred stock
outstanding. Preferred dividends include $323,000 in 1999 which the Company
elected to pay in common stock. Also reported as dividends in 1999 are non-cash
financing costs of $148,000, attributable to the value of beneficial conversion
features of the preferred stock.
YEAR 2000 COMPLIANCE
The Company 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 determined that none of its significant systems or
products fail to distinguish the year 2000 from the year 1900. No exposure was
discovered which would have had a material adverse effect on the Company. The
financial impact of Year 2000 compliance has not been material to the Company's
financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2000 and in April, 2000 the Company
completed a series of transactions which have materially improved its liquidity
and financial position. As a result of these transactions, the Company's working
capital increased by approximately $32,500,000 and stockholders' equity
increased by approximately $47,000,000. Also as a result of these transactions
the Company currently has funded debt of only approximately $1,000,000 and has
cash and temporary investments of approximately $25,000,000.
In January, 2000 the Company completed a private placement of 7,200,000
shares of common stock and warrants to purchase an additional 3,600,000 shares
at an exercise price of $2.50 per share. Net proceeds to the Company, after
selling commissions and costs, amounted to approximately $16,900,000. In March,
2000 the Company completed another private placement of 4,600,000 shares of
common stock. Net proceeds to the Company, after selling commissions and costs,
amounted to approximately $25,900,000.
In March, 2000 the Company utilized approximately $8,500,000 of the
above proceeds to redeem all of its Series A Preferred Stock. Subsequent to this
redemption the Company has no preferred stock outstanding. Also in March, 2000
the Company repaid all amounts outstanding under its revolving credit agreement
with Coastal which amounted to approximately $9,600,000.
During the first quarter of 2000 the Company issued approximately
2,900,000 shares of common stock pursuant to the exercise of various warrants
and employee stock options. Proceeds to the Company from these transactions
amounted to approximately $6,100,000.
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In January and April, 2000 the Company issued approximately 3,645,000
and 768,000 shares, respectively to SJMB, L. P. These shares were issued
pursuant to the terms of the loan agreement between the Company and SJMB in
repayment of $6,000,000 and $1,500,000, respectively, of amounts due under the
Company's note payable to SJMB. Subsequent to these transactions the balance of
the note payable to SJMB is approximately $800,000 and is due in July, 2000.
SJMB may, at its election convert the balance of the note into the Company's
common stock at the rate of the greater of $1.08 per share and 66-2/3% of the
market price of the common stock at the time of the conversion.
OPERATING ACTIVITIES
Net cash used in operations consisted of the $4,552,000 net loss, a
$1,615,000 decrease in working capital offset by $2,201,000 of non-cash charges.
The non-cash charges were primarily depreciation and amortization of intangible
assets and amortization of deferred financial costs.
INVESTING ACTIVITIES
Investments consisted primarily of capitalized software development
costs of $308,000 and capital expenditures of $508,000 for fixed asset
additions. Both elements of investment spending were primarily in support of
OmniLYNX product line enhancements.
LIQUIDITY OUTLOOK
Although the Company has not yet produced positive cash flow from
operations, it has made significant progress in the past few quarters in
reducing and stabilizing recurring expenditures. Actions which have contributed
to this include the focus of operations on the Company's optical networking
products and the resulting reduction in or elimination of efforts related to
other products. In addition general and administrative expenditures have been
reduced.
As of May 2, 2000 the Company has outstanding obligations for funded
debt of approximately $1,000,000 and has cash and temporary investments of
approximately $25,000,000. Accordingly, management believes the Company has
adequate financial resources and liquidity to meet its ongoing obligations and
to execute its business plan.
Should the demand for the Company's products increase significantly,
the Company could need additional working capital to finance the resulting
growth in accounts receivable and inventories. Management believes that the
Company could obtain such additional working capital through bank credit
agreements, other lending agreements, the issuance of debt or equity securities,
or a combination of these sources. There can be, however, no assurance that such
resources would be available to the Company or would be available in sufficient
amounts or under terms which the Company would find acceptable.
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.
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PART II - OTHER INFORMATION
ITEM 2- CHANGES IN SECURITIES
(c) Recent sales of unregistered securities
In January, 2000 the Company, in a transaction exempt from registration
under Section 4(2) of the Securities Act, issued 7,200,000 shares of its $0.01
par value common stock and warrants to purchase an additional 3,600,000 shares
of common stock at an exercise price of $2.50 per share. Gross proceeds to the
Company were approximately $18,000,000, approximately $16,900,000 after selling
commissions and costs.
In March, 2000 the Company, in a transaction exempt from registration
under Section 4(2) of the Securities Act, issued 4,600,000 shares of its $0.01
par value common stock. Gross proceeds to the Company were approximately
$27,600,000, approximately $25,900,000 after selling commissions and costs.
In January 2000, the Company issued 142,791 shares of common stock in
lieu of a $187,300 dividend on its Series A Preferred Stock for the quarter
ended December 31, 1999.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A. Listed below are all Exhibits filed as part of this report.
Exhibit
No. Exhibit
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27.0 Financial Data Schedule
B. 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 8,2000
Form 8-K filed March 21,2000
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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 5, 2000 By: /s/ ROBERT P. CAPPS
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Robert P. Capps
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 5, 2000 /s/ HERMAN M. FRIETSCH
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Herman M. Frietsch
Chief Executive Officer and Director
(Principal Executive Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description
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27 Financial Data Schedule