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EXHIBIT 17(i)
March 5, 1997
The Board of Directors
Intelect Communications Systems Limited
Reid House
31 Church Street
Hamilton HM 11
Dear Sirs,
RE: ST. JAMES CAPITAL CORPORATION
US $15,000,000 CREDIT FACILITY (THE "FACILITY")
This letter is addressed to you, the members of the Board of Directors
of Intelect Communications Systems Limited ("ICSL"), and documents my grave
reservations regarding ICSL's entry into the Facility captioned above as well
as my strong disagreement with ICSL's policies and practices, particularly as
they relate to the improper actions of Mr. Herman Frietsch and the seeming
condonation of these actions by members of the Board of Directors other than
Jeremy Posner and myself.
My comments in this letter repeat arguments against the Facility which
I have made to you on several occasions, culminating in the Board meeting which
I called for 28th February, 1997. I called the February 28th meeting to give
the Board a final opportunity to reconsider entry into the Facility, and to
receive my detailed objections.
This letter also conveys my resignation as a Director of ICSL. Because
of my complete objection to the Facility, and the course on which ICSL has been
set by a majority of its Board members, it is impossible for me to continue as
a Director of this Company.
As a Director and Officer of ICSL, I regard it as essential that I now
record my reservations over the manner in which ICSL has been brought to
acceptance of the Facility. This letter will also place on the record my
analysis of the Facility's provisions PER SE, with a view to documenting my
objections to it and my disagreement as to the policies and practices relating
to the acceptance of the Facility.
Attached to this letter are the following exhibits (the "Exhibits"):
o Letter dated February 25, 1997 to the Board of Directors Re:
St. James Capital Corporation - US $ 15,000,000 Credit Facility
(the "Facility").
o Memorandum to the Board of Directors dated March 5, 1997 - Re:
Board Process.
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The 'baseline' for understanding ICSL's financial requirements, and for
analyzing what the Facility offers in respect of these needs, is the Business
Plan 1997 ("Plan"). this Plan was approved by the ICSL Board of Directors on
February 4, 1997.
As the first Exhibit indicates, Mr. Herman Frietsch, a Director and
ICSL's Chairman of the Board, was in possession of the Plan by January 17,
1997. no comments were received from Mr. Frietsch regarding his review of the
Plan prior to the Board meeting on February 4, 1997, nor indeed were any
questions raised by him at that meeting.
The Plan clearly indicates that ICSL's capital requirement was forecast
to be as high as $20 million. the greater part of the capital requirement would
fall in the first two quarters of 1997. this was clearly evidenced by:
a) The forecast of operating losses in the first two quarters of
$11 million.
b) the rapid run up of revenues in the first two quarters created a
need for additional capital to support inventory and accounts
receivable builds.
The critical issue is that the Plan as presented was based upon on the
assumption that ICSL required, and would have, a solid capital base. However,
the facility is not capital. ICSL will accordingly reach a point where it
cannot repay the loan which the Facility incorporates without the injection of
further capital. the Facility thus creates fiscal uncertainty - in that ICSL's
own projections acknowledge a requirement for fresh capital by mid-year with
no basis for determining the source of that capital.
The fact that the Facility is an exclusive one further reduces ICSL's
options. Assuming that it cannot acquire funding via a public offering of its
securities (see arguments against this indicated in the Exhibits), ICSL will be
placed in the position where its negotiating ability with the lender for the
Facility is entirely compromised.
The second Exhibit to this letter presents a chronology of events and,
in particular, describes certain actions of Mr. Frietsch following his receipt
of the Plan.
The financing proposals presented to the Board on February 4 showed
that, of the three mentioned options (i.e. $10 million of convertible le
debentures, a $10 million term loan and the $10 million equity investment by
the H.W. Finance Group and $10 million equity placement by the Dawson-Samberg
Group), the Board selected two for further examination (namely, H.W. Finance
Group option and Dawson-Samberg), as offering viable financing in line with
requirements indicated in the Plan.
Negotiation of both these options were defeated, due to the release of
letters by Mr. Frietsch to the representatives of the financing parties. these
letters were sent without reference to the Board or the Executive Committee and
had the effect of destroying completely any confidence the financing parties'
representatives had in my authority to negotiate on ICSL's behalf, as it
presented them with evidence of divided management. Not unreasonably, the
financing parties changed their negotiating position - H.W. Partners to include
a condition
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requiring unanimous vote of ICSL Board and Dawson-Samberg to include a
condition that they be satisfied with the composition of senior management and
the Board on closing. This condition was the direct and predictable result of
Mr. Frietsch's unilateral and unauthorized communications. These communications
were, in my opinion, calculated by Mr. Frietsch to enable him to advance his
alternative financing proposal, in the form of the Facility.
That Mr. Frietsch did indeed calculate the foregoing as the intended
result of his communications is made clear by his statement to me and Wendell
Hollis (then also an ICSL Director) that he had avoided the Executive Committee
meeting called for Wednesday, February 12, 1997 because he knew that he would
be outvoted. Immediately thereafter, the proposals introducing the Facility
were advanced by Mr. Frietsch.
Together with my fellow Director Jeremy Posner, I began an analysis of
the Facility during the period February 15-17, 1997 and prepared a response in
the form of the proposal addressed to the Board (Exhibit IV) on February 18.
This proposal was intended to achieve a workable solution involving
co-operation between funding parties which would cure deadlock between the
Board membership and permit ICSL to achieve its funding requirements for short
and long term needs, under the conditions mandated by the Plan.
CRITICISM
In my opinion:
1. The Chairman, Herman Frietsch, has failed in his duty of care to
ICSL to allow proper consideration of available financing
proposals, and in addition has effectively nullified or
eliminated alternatives to the Facility by his improper
intervention in the negotiation of alternative financing
prospects.
2. Similarly, the Board of Directors (other than Jeremy Posner and
myself) has failed in its duty of care to ICSL in regard to
taking steps to address Mr. Frietsch unilateral and improper
activities with respect to a matter of grave importance to
ICSL's shareholders.
3. Facility itself is contrary to ICSL's interests (and indeed,
all shareholders' interests) in that:
a) ICSL's best projections are that the Facility will be
drawn to its maximum of $10-11 million in the June/July
time frame depending on actual receivables, inventory and
advance rates.
b) The point at a) means that ICSL will be forced to raise
additional capital within the mentioned time frame.
c) The Facility calls for exclusivity for private financings
to be done with St. James Capital. ICSL can only avoid this
by way of public offering - for which a very narrow
opportunity exists, namely, the period of May/June. If the
public offering fails, ICSL will:
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i. be out of funds
ii. have pledged all its assets, and
iii. be forced to negotiate only with one financing source.
I was President and Managing Director of ICSL from 1989 to December
1995 when my title was changed to President. During that period of time, all of
ICSL's M&A activities and financing activities were handled by me alone with
the exception of Intelect, Inc. which was handled by Director Jeremy Posner
under my direction. The specific financing activities concluded in the period
from 1989 to date include the following:
o Public offering of 4,375,000 shares in Canada in
October 1992 ($3,500,000).
o Acquisition of Lakefield Arms Limited ($2,000,000).
o Sale of Savage Corporation ($33,000,000).
o Purchase of Lakefield Debentures (CDN $300,000).
o Acquisition of DNA Enterprises, Inc. ($8,000,000).
o Acquisition of Mosaic Information Technologies, Inc.
($13,000,000).
o Convertible Debentures (June 1996) ($5,000,000).
o Convertible Debentures (August 1996) ($10,000,000).
o Convertible Debentures (October 1996) ($10,000,000).
o Negotiation of Dawson-Samberg and H.W. Finance
proposals (presented to the Board in February)
($10,000,000 each).
The foregoing list is put forward as evidence of my ability (and
success) as the Executive Officer of ICSL responsible for management of its
financing activities. Until his unauthorized intervention in these activities
on February 12, 1997, Herman Frietsch had little or no involvement with any of
ICSL's financing matters.
I believe that it was correct and proper for me to consider it to be my
duty and responsibility to negotiate ICSL's financing arrangements, and submit
them for final approval by the Board. My appointment as CEO on February 4, 1997
should have had the result of extending my responsibility for ICSL's financing
arrangements, as the Board specifically resolved in that meeting that Herman
Frietsch should report to the Board on matters relating to the board but on ALL
other matters he was to report to me.
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The Board's Executive Committee was specifically directed by the Board
to conclude the necessary financing, in line with the Plan requirements, on
February 4, 1997. Herman Frietsch's calculated actions entirely frustrated this
directive.
By the aforementioned actions Herman Frietsch, ICSL has been placed in
the position where its financial position is so precarious that the Facility
now represents the Company's final opportunity to stave off collapse. However,
the Facility will not alleviate ICSL's precarious financial position, for
reasons indicated.
In my view and belief, the Facility is not in the interest of ICSL in
its present form. As a Director I disassociate myself from it, as a funding
option. The Facility is being forced upon ICSL by Mr. Frietsch (and certain
other ICSL Directors, namely Anton Liechtenstein and Phillip Sudan) over my
repeated objections. I have repeatedly made clear to Mr. Frietsch that I regard
the Facility as a unilateral and improper initiative. I consider that ICSL's
entry into the Facility has been engineered by Mr. Frietsch, acting completely
in excess of his executive authority as regards the Company's affairs.
In recognition of the foregoing matters and events I called the
emergency Board meeting of ICSL, which was held (as mentioned) on February
28th, 1997, in Dallas. At that meeting, resolutions 1 through 11 of the
numbered resolutions contained in Exhibit X to this letter were proposed by
Director Jeremy Posner, and seconded by me. With the exception of resolution 9
(on which Philip Sudan abstained), all resolutions were voted FOR by Jeremy
Posner and I, and AGAINST by Directors Herman Frietsch, Anton Liechtenstein and
Philip Sudan.
CONCLUSION
My position, for the record, is that the Directors who elect to support
ICSL's entry into the Facility do so at their peril and I wish via this letter
to emphasize my disagreement with their judgment and with the policies and
practices that were followed.
In the circumstances, I am unable to continue as a Director of ICSL and
accordingly tender my resignation as such Director by this letter, effective
immediately.
Yours sincerely,
/s/ PETER G. LEIGHTON
Peter G. Leighton