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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 SEPTEMBER 30, 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 and Zip Code)
972-367-2100
(Registrant's Telephone Number, Including Area Code)
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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 86,089,050 shares of Common Stock outstanding as of October 31, 2000.
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PAGE
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PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets of the Company
at September 30, 2000 (unaudited) and December 31, 1999 2
Consolidated Condensed Statements of Operations of the Company
(unaudited) for the three months and nine months ended
September 30, 2000 and 1999 3
Consolidated Condensed Statements of Cash Flows of the Company
(unaudited) for the nine months ended September 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 13
ITEM 5 OTHER INFORMATION 14
ITEM 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 14
SIGNATURES 15
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Thousands of dollars, except share data)
September 30, December 31,
2000 1999
------------ -----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 11,717 $ --
Investments 252 195
Accounts receivable net of allowances of $489 and $1,307 in 2000
and 1999, respectively 5,654 5,316
Inventories 11,439 5,972
Prepaid expenses 288 378
--------- ---------
Total current assets 29,350 11,861
Property and equipment, net 4,926 5,094
Goodwill, net 3,611 4,115
Software development costs, net 1,653 2,093
Other intangible assets, net 331 561
Other assets 641 618
--------- ---------
$ 40,512 $ 24,342
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 100 $ 2,340
Accounts payable 2,658 3,203
Accrued liabilities 2,992 3,131
--------- ---------
Total current liabilities 5,750 8,674
Notes Payable -- 15,264
--------- ---------
Total liabilities 5,750 23,938
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 200,000,000 shares;
86,098,050 and 65,936,573 shares issued in 2000 and 1999, respectively 861 659
Additional paid-in capital 181,381 131,511
Accumulated deficit (145,541) (130,706)
--------- ---------
36,701 1,501
Less shares of common stock in treasury, 550,474 and 191,435 shares
in 2000 and 1999, respectively (1,939) (1,097)
--------- ---------
Total stockholders' equity 34,762 404
--------- ---------
$ 40,512 $ 24,342
========= =========
See accompanying notes to consolidated financial statements
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(Thousands of dollars, except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999* 2000 1999*
-------- -------- -------- --------
(unaudited)
Net revenues $ 4,162 $ 1,662 $ 13,776 $ 11,978
Cost of revenue 4,196 3,130 13,785 12,205
-------- -------- -------- --------
Gross loss (34) (1,468) (9) (227)
-------- -------- -------- --------
Expenses:
Engineering and development 1,590 2,707 4,165 8,210
Selling and administrative 3,376 3,459 9,513 10,012
Amortization of goodwill 168 168 504 504
-------- -------- -------- --------
5,134 6,334 14,182 18,726
-------- -------- -------- --------
Operating loss (5,168) (7,802) (14,191) (18,953)
-------- -------- -------- --------
Other income (expense):
Interest expense (13) (512) (786) (1,760)
Interest income and other 554 111 1,108 (75)
-------- -------- -------- --------
541 (401) 322 (1,835)
-------- -------- -------- --------
Loss before income taxes (4,627) (8,203) (13,869) (20,788)
Income tax benefit -- 6 -- --
-------- -------- -------- --------
Loss before extraordinary loss (4,627) (8,197) (13,869) (20,788)
Extraordinary loss (net of tax):
Loss on debt retirement -- 1,054 -- 1,054
-------- -------- -------- --------
Net loss (4,627) (9,251) (13,869) (21,842)
Dividends on preferred stock -- 2,913 966 4,741
-------- -------- -------- --------
Loss allocable to common stockholders $ (4,627) $(12,164) $(14,835) $(26,583)
======== ======== ======== ========
Basic and diluted loss per share $ (.05) $ (0.23) $ (.18) $ (0.64)
======== ======== ======== ========
Weighted average number of common shares
outstanding (thousands) 85,615 52,535 82,358 41,776
======== ======== ======== ========
*Certain amounts have been reclassified to conform to current classifications
See accompanying notes to consolidated financial statements
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Thousands of dollars)
Nine Months Ended
September 30,
---------------------
2000 1999
-------- --------
(unaudited)
Cash flows from operating activities:
Net loss $(13,869) $(21,842)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,130 3,356
Amortization of loan discount 426 641
Loss on disposal of equipment 18 --
Loss on disposal of discontinued operations -- 111
Loss on debt retirement -- 1,054
Noncash operating expenses 628 (136)
Other (656) --
Change in operating assets and liabilities:
Accounts receivable (339) 1,783
Inventories (5,468) (1,553)
Other assets 90 297
Accounts payable and accrued liabilities (672) 2,586
-------- --------
Net cash used in operating activities (16,712) (13,703)
Cash flows from investing activities:
Capital expenditures (1,332) (999)
Software development costs (713) (459)
Investment and other (574) 475
-------- --------
Net cash used in investing activities (2,619) (983)
Cash flows from financing activities:
Proceeds from issuance of notes payable 400 5,300
Proceeds from issuance of common stock 42,642 3,550
Proceeds from issuance of preferred stock -- 5,518
Principal payments on notes payable (9,654) (583)
Redemption of preferred stock (7,493) --
Principal payments under capital lease obligations (11) (90)
Proceeds from exercise of common stock warrants 5,180 --
Proceeds from exercise of employee stock options 950 --
Preferred stock dividends paid (966) --
-------- --------
Net cash provided from financing activities 31,048 13,695
Net increase (decrease) in cash and cash equivalents 11,717 (991)
Cash and cash equivalents, beginning of period -- 991
-------- --------
Cash and cash equivalents, end of period $ 11,717 $ --
======== ========
See accompanying notes to consolidated financial statements
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INTELECT COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
by the Company without audit in accordance with accounting principles generally
accepted in the United States of America 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 accounting
principles generally accepted in the United States of America 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:
September 30, December 31,
2000 1999
------------- ------------
($ Thousands)
Raw materials $ 6,426 $ 2,896
Work in progress 1,716 1,010
Finished goods 3,297 2,066
------- -------
$11,439 $ 5,972
======= =======
SEGMENTS OF BUSINESS
Net revenue by business segment:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
($ Thousands)
Optical networking equipment $ 746 $ 590 $ 5,214 $ 6,397
Design services 2,050 838 5,238 3,561
DSP products 1,276 178 2,676 1,089
Video network products and other 90 56 648 931
------- ------- ------- -------
$ 4,162 $ 1,662 $13,776 $11,978
------- ------- ------- -------
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INTELECT COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
Segment-specific margins (Gross profit less total engineering and
development costs, including capitalized software for the segment):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
($ Thousands)
Optical networking equipment $ (1,776) $ (2,269) $ (4,427) $ (4,060)
Design services 334 (338) 459 (102)
DSP products (324) (259) (643) (478)
Video network products and other (35) (1,437) (276) (4,255)
-------- -------- -------- --------
Subtotal segment specific (1,801) (4,303) (4,887) (8,895)
Capitalized software 178 127 713 459
All other expenses (3,545) (3,626) (10,017) (10,517)
-------- -------- -------- --------
Operating loss $ (5,168) $ (7,802) $(14,191) $(18,953)
======== ======== ======== ========
Assets identifiable only by combined segments:
At September 30, At December 31,
2000 1999
--------------- ----------------
($ Thousands)
Optical networking equipment,
video network products and other $30,628 $15,638
Design services and DSP products 8,670 6,790
Not allocable to a segment 1,214 1,914
------- -------
Total $40,512 $24,342
======= =======
RECLASSIFICATIONS
Certain engineering costs which were previously classified as cost of
sales are now classified as engineering and development costs. For the three and
nine months ended September 30, 1999 $539,000 and $1,428,000, respectively, of
such costs have been reclassified from cost of sales to engineering and
development costs.
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INTELECT COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
RECENT DEVELOPMENTS
On November 10, 2000 the Company announced a new corporate strategy and
certain new business initiatives. The Company also announced the sale of its
Intelect Network Technologies Company subsidiary ("INT"), whose primary current
business involves its OmniLynx product line. With respect to INT, the Company
has entered into a non-binding letter of intent with Eurotelecom Communication,
Inc. ("Eurotelecom") pursuant to which Eurotelecom would acquire all of the
capital stock of INT in exchange for $30 million of Eurotelecom convertible
preferred stock. The preferred stock would have a coupon of 6% and would be
convertible into 10 million shares of Eurotelecom common stock. Eurotelecom
would also cause INT to repay to the Company certain inter-company indebtedness
not to exceed $10 million. The transaction is subject to various conditions
precedent, including completion of due diligence, negotiation and execution of
definitive documentation, completion of certain financing by Eurotelecom,
regulatory approvals and boards of directors approval. No assurance can be given
that the transaction will be completed.
The Company's new business strategy includes focuses on the expertise
and infrastructure that the Company's wholly-owned subsidiary, DNA Enterprises,
Inc. ("DNA") provides to established and early-stage companies in the
telecommunications industry. The Company plans to leverage these attributes and
its patent portfolio and bank of technology to develop and commercialize new,
advanced products. The Company will pursue its existing DSP products business,
currently conducted by DNA, through a new business unit, DNA Computing
Solutions, Inc. As a part of this new strategy the Company will, subject to
shareholder approval, change its name to TeraForce Technology Corporation.
In July 2000 the Company was served with a lawsuit in a case styled St.
James Capital Partners, L.P. and SJMB, L.P. v. Intelect Communications, Inc.
filed in state district court in Harris County, Texas. As has been previously
disclosed, the Company and St. James Capital Partners, L.P. ("SJCP") and SJMB,
L.P. ("SJMB")(SJCP and SJMB collectively "St. James") are in disagreement as to
the operation of the anti-dilution provisions in warrants which the Company
issued to St. James. The dispute in question relates to warrants originally
issued to St. James in April 1998 at an exercise price of $7.50 per share to
purchase an aggregate of 1.5 million shares, and an additional 535,000 shares
issued to them in January 1999 at an exercise price of $3.20 per share. St.
James has petitioned the court for declaratory relief, among other claims, to
require the Company to acknowledge that St. James is entitled to a re-set of the
exercise price on each of the warrants to a price of $0.561 per share and would
be entitled to an aggregate of approximately 25 million shares to be issued upon
exercise of such warrants.
In September 2000 the Company filed suit against St. James in state
district court in Dallas County, Texas for breach of contract and seeking the
return of the stock of the Company's material subsidiaries which was being held
as collateral by St. James. Also in 2000 the Company filed suit against St.
James and certain individuals in U.S. District Court for the Northern District
of Texas seeking the disgorgement of short-swing profits pursuant to section
16(b) of the Securities Exchange Act of 1934.
The Company and St. James have entered into an agreement, the closing
of which is subject to certain conditions, which will fully resolve the above
disputes with St. James. Upon the closing, St. James and the Company will
release one another from all obligations and liabilities related to financing
previously entered into by the parties and St. James will deliver to the Company
certain collateral and all warrants currently held by it. The Company will
deliver to St. James redeemable warrants in recognition of the anti-dilution
provisions of the warrants currently held by St. James. Warrants for 4,300,000
shares will be exercisable immediately, have an exercise price of $0.75 per
share and expire June 30, 2002. Warrants for an additional 7,600,000 shares will
be exercisable beginning April 15, 2001, have an exercise price of $0.75 per
share and expire September 30, 2002. Warrants for a further 7,600,000 shares
will be exercisable beginning October 15, 2001, have an exercise price of $0.75
per share and expire September 30, 2002. All of the warrants will be redeemable
by the Company at a rate of $6.75 per share. The Company and St. James are
negotiating definitive documentation and releases in connection with the
agreement. No assurances can be given as to the timing of the closing.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 2000
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.
RECENT DEVELOPMENTS
On November 10, 2000 the Company announced a new corporate strategy,
certain new business initiatives and the sale of its Intelect Network
Technologies Company ("INT") subsidiary. To reflect these developments the
Company plans, subject to shareholder approval to change its name to TeraForce
Technology Corporation.
In such regard, the Company has entered into a non-binding letter of
intent with Eurotelecom Communications, Inc. ("Eurotelecom") whereby, upon the
closing of the transaction Eurotelecom would acquire all of the capital stock of
INT for $30 million of Eurotelecom convertible preferred stock. Essentially all
of INT's current business relates to the OmniLynx product line. The preferred
stock would have a 6% coupon and would be convertible into 10 million shares of
Eurotelecom common stock. Eurotelecom would cause INT to repay to the Company
certain inter-company indebtedness in an amount not to exceed $10 million. The
transaction is subject to various conditions precedent, including completion of
due diligence, negotiation and execution of definitive documentation, completion
of certain financing by Eurotelecom, regulatory approvals and boards of
directors approval. No assurance can be given that the transaction will be
completed.
Other aspects of the Company's strategy include focus on the expertise
and infrastructure that the Company's wholly-owned subsidiary, DNA Enterprises,
Inc. provides to established and early-stage companies in the telecommunications
industry. The Company plans to leverage these attributes and its patent
portfolio and bank of technology to develop and commercialize new, advanced
products.
The Company plans to pursue its DSP products business through a new
business unit named DNA Computing Solutions. This unit will carry forward the
DSP products business that was initiated within DNA Enterprises and that has
grown to include an established board-level product line based on Texas
Instruments DSP components as well as a new line of PowerPC products based on
the Motorola G4 RISC processor. These products are now selling into the
high-growth commercial-off-the-shelf (COTS) market for a wide range of
applications in telecommunications, imaging, remote sensing and intelligence
gathering.
To advance its involvement in optical networking solutions, the Company
plans to pursue opportunities in the public network arena through a new product
initiative, the Aegean product line. This product line is intended to surpass
the Multi-Services Provisioning Platform (MSPP) industry with a new architecture
that addresses the needs of both metro and access networks. The Aegean product
is aimed at the
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service delivery needs of ILECs, IXCs and the new class of network operators now
emerging from the energy sector and elsewhere.
The Company's strategy includes introducing strategic partners into new
product development activities at an early stage. These proposed participants
include early adopters, providers of unique technologies, market channels and
financial sources. The Company plans to bring such partners into the Aegean
development activities and thereby defray a portion of the cost of development,
although the Company currently has no commitments from any such partners. The
current product plan for Aegean calls for initial versions of the product to be
available in early 2002.
COMPARISON OF THIRD QUARTER AND NINE MONTHS 2000 TO 1999
The following table shows the revenue and gross profit for the
Company's products:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
($ Thousands)
Net revenue:
Optical networking equipment $ 746 $ 590 $ 5,214 $ 6,397
Design services 2,050 838 5,238 3,561
DSP products 1,276 178 2,676 1,089
Video network products and other 90 56 648 931
-------- -------- -------- --------
$ 4,162 $ 1,662 $ 13,776 $ 11,978
-------- -------- -------- --------
Gross profit (loss):
Optical networking equipment $ (567) $ (901) $ (782) $ (242)
Design services 335 (338) 460 (102)
DSP products 226 (41) 563 186
Video network products and other (28) (188) (250) (69)
-------- -------- -------- --------
$ (34) $ (1,468) $ (9) $ (227)
-------- -------- -------- --------
NET REVENUE
Net revenue for the three months ended September 30, 2000 increased by
$2,500,000, or 150% as compared to the same three-month period of 1999. For the
nine months ended September 30, 2000 net revenue increased by $1,798,000, or
15%, as compared to the same period of 1999. These increases are due primarily
to improvements in the Company's design services business and increased sales of
DSP products.
Net revenue from the sale of optical networking equipment increased by
$156,000, or 26%, between the third quarter of 2000 and the third quarter of
1999, but declined by $1,183,000, or 18 % year-to-date 2000 as compared to the
same nine-month period of 1999. Third quarter 2000 revenues were negatively
impacted by customer requested delays in the shipment of certain completed
orders. In addition, net revenue for the nine months ended September 30, 1999
includes approximately $4,300,000 related to two large orders which were
completed and shipped in the second quarter of 1999. Difficulties in obtaining
component parts, which have had a negative impact on the Company's ability to
complete orders in the past, did not materially impact net revenues for the
third quarter of 2000. While the availability of certain components continues to
be an issue for the Company and the industry in general, the Company continues
to take action to mitigate the effect of this situation.
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The rate of orders received by the Company for optical networking
equipment and therefore the level of net revenues achieved during 2000 has been
less than management had anticipated. This is due in part, in the opinion of
management, to unanticipated delays in the award of certain contracts related to
purpose-built, or private, networks. In addition, many prospective new public
network customers, specifically competitive local exchange carriers, or "CLECs,"
have recently experienced financial difficulties. As a result the Company
believes that many of these prospective customers have delayed or curtailed
their equipment acquisition programs. Notwithstanding these difficulties, the
Company expects net revenues related to optical networking equipment to increase
in the fourth quarter of 2000. Based on the current backlog of orders and
scheduled shipment dates net revenues related to such sales is expected to be
approximately $4,000,000 in the fourth quarter of 2000; however, there can be no
assurance that unanticipated factors will not affect these expected sales.
Net revenue for design services increased $1,212,000, or 145% in the
third quarter of 2000 as compared to the third quarter of 1999 and increased
$1,677,000, or 47% between the first nine months of 2000 and 1999. This
significant improvement reflects the continued recovery from the effects of the
aborted sale of such operations to Cadence Design Systems, Inc. in 1999. The
Company expects net revenue from this business to be relatively consistent over
the next several months, with normal seasonal fluctuations.
Net revenue from the sale of DSP products increased $1,098,000, or
617%, in the third quarter of 2000 as compared to the third quarter of 1999.
Year-to-date in 2000 such net revenue increased $1,587,000, or 146%, as compared
to the same period in 1999. This increase reflects the growing demand for DSP
products in military and aerospace applications, as well as in
telecommunications. The Company expects the demand for these products to
continue to increase, especially in light of the Company's new line of DSP
products based on the PowerPC processor. Initial shipments of these new products
have recently begun and are currently expected to continue to increase.
GROSS PROFIT (LOSS)
Sales of optical networking equipment produced gross losses during the
third quarter of 2000 as well as during the first nine months of 2000. These
gross losses are due in large part to relatively low sales levels and the
resulting under-utilization of fixed and semi-fixed overhead cost. Beginning in
2000 the Company has been implementing a program to reduce such costs by
outsourcing certain manufacturing functions. As a result of these outsourcing
activities the Company has been able to reduce employee headcount and other
fixed costs related to its manufacturing operations. The effect of these
reductions is partially reflected in operating results for the third quarter of
2000 and the Company expects them to be further reflected in the fourth quarter
of 2000 and beyond.
The gross profit from design services operations has increased
significantly in 2000 as compared to comparable periods in 1999, as well as
during the course of 2000. These improvements relate to the increased net
revenue from these operations and increased utilization efficiencies.
Gross profit from the sale of DSP products also increased in the three
and nine month periods ended September 30, 2000 as compared to those same
periods in 1999. The increases are the result of significantly higher revenue
levels as well as the shipment of higher margin products during the 2000
periods. The increased level of revenues is allowing the Company to begin to
more effectively utilize certain infrastructure and overhead costs which have
been put in place in anticipation of higher sales activity.
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ENGINEERING AND DEVELOPMENT (E&D) EXPENSE
E&D expense in the third quarter 2000 decreased $1,117,000, or 41% from
the same period last year, to $1,590,000. For the nine months ended September
30, 2000, E&D expense was $4,165,000, representing a 49% decrease from the
$8,210,000 of E&D expense recorded in the comparable period last year. These
costs by product line are summarized in the following table.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
($ Thousands)
Optical networking equipment $ 1,032 $ 1,240 $ 2,932 $ 3,359
CS4 -- 1,440 -- 3,421
DSP products 551 218 1,207 664
Video network products and other 7 (191) 26 766
------- ------- ------- -------
E & D expense $ 1,590 $ 2,707 $ 4,165 $ 8,210
======= ======= ======= =======
The decision in 1999 to suspend all development activities related to
the CS4 product has resulted in a significant decline in total engineering and
development cost during 2000 as compared to 1999. The decline in costs related
to optical networking equipment reflects the completion of certain development
activities related to that product line. Costs related to DSP products have
increased in the 2000 periods due to activities related to the Company's new
line of DSP products based on the PowerPC processor.
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses were relatively stable between the
third quarter of 2000 and the third quarter of 1999, declining $83,000, or 2%.
Likewise for the first nine months of 2000 such expenses declined $499,000 or
5%, as compared to the same period during 1999. The slight declines reflect
efforts to reduce administrative and legal expenses, offset by increased sales
and marketing costs. Selling and administrative expenses in the third quarter of
1999 include $583,000 related to an increase in the allowance for uncollectible
accounts receivable and $200,000 related to the Cadence transaction and
financing activities during that period.
OTHER INCOME AND EXPENSE
Interest expense during the 2000 periods was significantly less than in
the same periods of 1999 due to the elimination of essentially all interest
bearing debt during the first quarter of 2000. Other income during the 2000
periods includes interest income from the temporary investment of proceeds of
the Company's issuance of common stock which occurred in the first quarter of
2000. Also included in the third quarter of 2000 is income of $322,000 which
represents the estimated net effect of the settlement of various litigation and
claims.
LOSS ON DEBT RETIREMENT
Pursuant to a restructuring of its debt obligations in August 1999, the
Company retired $3,000,000 of notes payable to St. James by issuance of
3,864,271 shares of common stock. This resulted in a beneficial conversion
feature in the amount of $1,054,000 which has been accounted for as a loss on
debt retirement.
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DIVIDENDS ON PREFERRED STOCK
All of the Company's remaining preferred stock was redeemed as of March
31, 2000. Preferred dividends of $966,000 paid in the first quarter of 2000
represent accrued dividends and a 10% redemption premium on the Company's Series
A Preferred Stock. Dividends in the 1999 periods represent dividends on the
Company's then outstanding preferred stock, as well as a non-cash amount
attributable to the value of beneficial conversion features granted to the
holders of certain of that preferred stock. These beneficial conversion features
were granted in connection with the settlement of certain disputes with the
holders of such preferred stock, which resulted in all preferred stock held by
those parties being converted into common stock.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000 the Company had cash and temporary investments
of $11,969,000 and working capital of $23,600,000. For the nine months ended
September 30, 2000 earnings before interest, taxes, depreciation and
amortization ("EBITDA") was negative $10,635,000. As of September 30, 2000 the
Company has no material amounts of funded indebtedness.
Over the past 12 to 18 months the Company has significantly reduced and
stabilized its cost structure. In recent months the Company has taken further
steps to reduce its fixed overhead structure by beginning to outsource certain
manufacturing and engineering functions. These actions have resulted in a
reduction in the Company's personnel headcount by more than 30 full-time
employees. While the absolute level of expenditures may vary in the future based
on production levels and product development activities, these recent steps,
management believes, will result in greater efficiency and more effective
utilization of available resources.
Net cash used in operating activities for the nine months ended
September 30, 2000 amounted to $16,712,000. This consisted primarily of the net
loss of $13,869,000 offset by depreciation and amortization of $3,556,000, a
reduction of accounts payable and accrued liabilities by $672,000 and an
increase in inventories of $5,468,000. The increase in inventory was undertaken
in order to stockpile certain long lead-time component parts and to begin to
accumulate a supply of completed products in order to meet customer demands. In
addition, certain customer orders were substantially completed during the third
quarter of 2000 but had not been shipped as of September 30, 2000. These orders
are expected to ship during the fourth quarter of 2000, which will result in a
decrease in inventory balances.
Investing activities during the nine months ended September 30, 2000
utilized $2,619,000 of cash flow related primarily to capital expenditures for
office and engineering test equipment and certain software development costs.
During this same period financing activities produced $31,048,000 of cash flow.
This positive cash flow resulted from proceeds of $42,642,000 from two private
placements of common stock, as well as $6,130,000 of proceeds from the exercise
of various stock options and warrants during the period. A portion of these
proceeds was utilized to repay $9,654,000 of notes payable and $7,493,000 was
used to redeem preferred stock.
Under the new strategy discussed above, the Company plans to fund the
majority of new product development costs with contributions from strategic
partners in those products. There can be no assurance that the Company will be
successful in attracting such partners or that the amounts contributed will be
sufficient to commercially develop such products. In addition the conditions
under which such potential partners are willing to participate in these new
projects may be on terms which the Company finds unacceptable. If the Company is
unable to attract sufficient capital from potential partners, or if capital is
available only under terms the Company finds unacceptable, the Company may be
required to expend its own capital or to delay or curtail the planned
development activities.
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Should the proposed sale of INT not occur or should the Company be
required to expend its own funds for product development activities, the Company
could need additional capital. Potential sources of such capital include the
issuance of debt or equity securities or borrowings from commercial lenders.
There can be no assurance, however, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March, 2000 the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and is effective July 1, 2000
but certain conclusions in FIN 44 cover specific events if they had occurred
after December 15, 1998. FIN 44 provides, in part, that should the terms of an
employee stock option be modified after December 15, 1998 in a way which reduces
the exercise price of the options, then those options shall be accounted for as
variable. In October, 1999 the Company reduced the exercise price of certain
outstanding employee stock options to $1.00 per share, from $2.00 per share, and
revised the vesting schedule such that the options would vest over a three year
period from the date of the re-pricing. Accordingly, beginning July 1, 2000, the
effective date of FIN 44, these options will be accounted for as variable on a
prospective basis. To the extent the market price of the Company's common stock
is greater than $2.31 per share, the market price of the stock at July 1, 2000,
such excess times the number of shares subject to such accounting treatment
shall be accounted for as compensation expense over the remaining vesting period
of the options. As of July 1, 2000 options for approximately 1,300,000 shares
are subject to such treatment. On September 30, 2000 the price of the Company's
common stock was less than $2.31 per share. Accordingly, there is no effect from
this accounting treatment.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in a professionally managed
institutional money market fund. The primary investments of this fund are high
quality, short-term money market instruments such as commercial paper, bank
obligations and deposit notes. All investments are denominated in U.S. dollars.
As of September 30, 2000 approximately $12,300,000 was invested in this fund.
The return on these investments is dependent in large part on general interest
rate conditions in the United States. Based on the investment level as of
September 30, 2000, a 100 basis point change in the average return from this
fund would result in a change in the Company's interest income in the amount of
approximately $31,000 per quarter.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In June 2000 Savage Arms Inc. ("Savage") filed suit against the Company
in Superior Court in Hampton County, Massachusetts seeking reimbursement from
the Company of approximately $1,100,000 related to a settlement of various
product liability claims between Savage and Emhart Industries, Inc. These
matters have previously been referred to by the Company as the "Emhart
litigation." The Company is currently negotiating a settlement of this matter.
The Company believes that it has recorded a provision in its financial
statements sufficient to cover any such settlement.
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In July 2000 the Company was served with a lawsuit in a case styled St.
James Capital Partners, L.P. and SJMB, L.P. v. Intelect Communications, Inc.
filed in state district court in Harris County, Texas. As has been previously
disclosed, the Company and St. James Capital Partners, L.P. ("SJCP") and SJMB,
L.P. ("SJMB")(SJCP and SJMB collectively "St. James") are in disagreement as to
the operation of the anti-dilution provisions in warrants which the Company
issued to St. James. The dispute in question relates to warrants originally
issued to St. James in April 1998 at an exercise price of $7.50 per share to
purchase an aggregate of 1.5 million shares, and an additional 535,000 shares
issued to them in January 1999 at an exercise price of $3.20 per share. St.
James has petitioned the court for declaratory relief, among other claims, to
require the Company to acknowledge that St. James is entitled to a re-set of the
exercise price on each of the warrants to a price of $0.561 per share and would
be entitled to an aggregate of approximately 25 million shares to be issued upon
exercise of such warrants.
In September 2000 the Company filed suit against St. James in state
district court in Dallas County, Texas for breach of contract and seeking the
return of the stock of the Company's material subsidiaries which was being held
as collateral by St. James. Also in 2000 the Company filed suit against St.
James and certain individuals in U.S. District Court for the Northern District
of Texas seeking the disgorgement of short-swing profits pursuant to section
16(b) of the Securities Exchange Act of 1934.
The Company and St. James have entered into an agreement, the closing
of which is subject to certain conditions, which will fully resolve the above
disputes with St. James. Upon the closing, St. James and the Company will
release one another from all obligations and liabilities related to financing
previously entered into by the parties and St. James will deliver to the Company
certain collateral and all warrants currently held by it. The Company will
deliver to St. James redeemable warrants in recognition of the anti-dilution
provisions of the warrants currently held by St. James. Warrants for 4,300,000
shares will be exercisable immediately, have an exercise price of $0.75 per
share and expire June 30, 2002. Warrants for an additional 7,600,000 shares will
be exercisable beginning April 15, 2001, have an exercise price of $0.75 per
share and expire September 30, 2002. Warrants for a further 7,600,000 shares
will be exercisable beginning October 15, 2001, have an exercise price of $0.75
per share and expire September 30, 2002. All of the warrants will be redeemable
by the Company at a rate of $6.75 per share. The Company and St. James are
negotiating definitive documentation and releases in connection with the
agreement. No assurances can be given as to the timing of the closing.
ITEM 5 - OTHER INFORMATION
See Part 1 - Item 2 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations for the Period Ended September 30,
2000" for a discussion of the proposed sale of the Company's subsidiary, INT,
and a strategic repositioning of the Company's business focus.
ITEM 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. The Financial Statements and Financial Statement Schedules filed as
part of this report are listed and indexed on Page 1. Schedules other than those
listed in the index have been omitted because they are not applicable or the
required information has been included elsewhere in this report.
B. Listed below are all Exhibits filed as part of this report.
Exhibit No. Exhibit
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27 Financial Data Schedule
C. The Company has not filed any report on Form 8-K during the period
covered by this Report.
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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: November 14, 2000 By: /s/ ROBERT P. CAPPS
--------------------------------------------
Robert P. Capps
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 14, 2000 By: /s/ HERMAN M. FRIETSCH
--------------------------------------------
Herman M. Frietsch
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule