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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - K
Annual Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 For the Year Ended December 31, 1997
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $151,235,000 as of March 27, 1998 (based upon the
average of the highest bid and lowest asked prices on such date as reported on
the Nasdaq National Market).
There were 24,177,190 shares of Common Stock outstanding as of March 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 31, 1997) are incorporated by reference in items 10, 11, 12 and 13 of
PART III hereof.
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PART I
ITEM 1 - BUSINESS
INTRODUCTION
Intelect Communications, Inc. ("Intelect" or the "Company"), is a
communications technology company providing innovative and cost-effective
products, services and solutions to integrate voice, data, and video networks.
Applications for the Company's products and services range from the network
infrastructure to the desktop. The Company's products are designed to anticipate
and meet the demands for increasing speed, capacity, and complexity of
electronic and photonic communications. Principal markets for the Company's
products are: fiber optic network transmission, digital signal processing (DSP),
and video communications. The Company also provides high-value engineering
services to the communications industry. The Company currently has under
development an intelligent programmable telecommunications switching platform.
The Company is primarily focused on multimedia delivery and bandwidth
efficiency as principal drivers for its markets. The Company's core competency
in DSP design and application contributes cost and efficiency advantages to its
products. The Company has pursued a strategy of acquisitions and internal
development over the past three years that provides a current resource base
with:
o Seven years experience in fiber optic transmission systems
o Seventeen years experience in telecommunications hardware
and software design
o Twenty-one years experience in DSP design and application
development
o Eighteen years experience in the mission critical air
traffic control environment.
The Company's SONETLYNX(R) fiber optic, SONET-based multiplexing
network transmission product simultaneously supports voice, data, video, and
local or wide area networking connectivity. The Company's LANscape(TM) video
conferencing systems provide near television quality video and audio, and
support both traditional video conferences and PC file sharing. The Company's
S4(R) Special Services Switching System(R) is a digital voice/data switch used
for air traffic control and other mission critical applications. The Company
also provides a full range of support for the design, development, testing, and
evaluation of advanced telecommunications software, hardware, and products to
customers in the telecommunications industry and for the Company's own product
development activities.
The Company is developing an intelligent, programmable switch, CS4, to
meet the demand for a distributed reliable network architecture and to provide
advanced intelligent call and service applications for public and private
wireline and wireless communications networks. The Company currently intends to
complete the CS4 development program and market introductions of CS4 service
applications in the context of a joint-venture arrangement with investment,
distribution and/or marketing partners. The Company is pursuing the possibility
of such arrangements with potential partnership candidates.
The Company was incorporated in Delaware on May 23, 1995. The Company's
predecessor, Intelect Communications Systems Limited ("Intelect (Bermuda)") was
incorporated under the laws of Bermuda in April 1980 and operated under the name
Coastal International, Ltd. until September 1985 and as Challenger International
Ltd. until December 1995. On December 4, 1997, the shareholders of Intelect
(Bermuda) approved a merger proposal, the principal effect of which was to
change the domicile of Intelect (Bermuda) so that it became a publicly traded
U.S.-domiciled, Delaware corporation. The effect of the merger was that the
shareholders of Intelect (Bermuda) became shareholders of the Company with the
Company becoming the publicly traded company. In addition, the Company became
the holding company for Intelect (Bermuda) and replaced Intelect (Bermuda) as
the holding company for its subsidiaries. The merger was effected on December 4,
1997. See ITEM 4 -- Submission of Matters to a Vote of Security Holders.
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INDUSTRY BACKGROUND
Continuing deregulation of worldwide telecommunications markets,
highlighted by the U.S. 1996 Telecommunication Reform Act, is driving
competitive access providers to offer more consumer services as they battle for
market share and to develop new services to differentiate themselves. In
addition, enterprise and special purpose private networks are being upgraded and
expanded to meet the needs of growing communications-based PC capabilities and
of other network services. Telecommunication and private networks are upgrading
and expanding with fiber optics to take advantage of its bandwidth, cost
savings, reliability, and multimedia capability. Fiber optic transmission is
chosen because of its ability to carry large volumes of information at high
speeds, insensitivity to electromagnetic interference, and high transmission
quality. As a result of these trends, the Company identifies the following
factors which are driving demand for its products:
o worldwide growth of telecommunications infrastructures
o increased competition among telephone companies
o proliferation of wireless communications
o the Internet
o outsourcing development of telecommunications products
o voice and video conferencing
o advanced intelligent networks
o telecommuting
o virtual offices.
These factors create demand for increased deployment of fiber optic networks and
for greater IP-based network capacity, both of which are central to the
Company's product and technology strategies.
PRODUCTS
Fiber Optic Network Transmission Products
In the first quarter of 1996, the Company introduced its fiber optic,
SONET-based multiplexing network transmission products, known as SONETLYNX,
which combine transmission, multiplexing and protocol conversion in a single
unit. SONETLYNX technology allows customers to converge a variety of protocols,
such as voice, low-speed data, T1 or E1 and full-spectrum video communications,
into wireless communication systems, intelligent transportation arteries, and
multimedia corporate networks over fiber optic cable.
SONETLYNX is a SONET-based OC-1 or OC-3 bandwidth digital multiplexer
that simultaneously supports voice, data, video, and local or wide area
networking connectivity. SONETLYNX complements the reliability of fiber with the
redundancy built into its critical components, including the backplane and
control modules. In the event of transmission difficulties, such as a cut in a
fiber cable, protection switching occurs in under 50 milliseconds and is
virtually transparent to network traffic. A SONETLYNX network can be as basic as
two nodes or expand to a theoretically unlimited number of nodes at different
geographic locations. A node consists of a chassis containing two controller
cards and up to fifteen protocol interface cards. Node design incorporates
universal module slots so that any protocol or auxiliary module fits in any
slot, minimizing the investment in hardware. Modular design facilitates the
expansion of any SONETLYNX network by installing a small, cost-effective and
extremely adaptable module into the node. The SONETLYNX Network Management
System ("NMS") provides configuration, monitoring, and maintenance control from
a central location. The NMS operates in the Microsoft Windows or Windows for
Workgroups environments using Hewlett-Packard's OpenView. The strategic
objectives for SONETLYNX in 1997 were the addition of new communication
protocols and broadening distribution. During the past year, an integrated video
codec, multipoint ethernet, bytesync T-1 allowing for DS0 grooming without
channel banks, and a module combining precision timing sources with a single
voice channel were added to the growing array of SONETLYNX protocols. In
addition, strategic distribution arrangements were formed with domestic and
international companies. For 1998, planned product advancements include SDH
compliance and protocols for Fast Ethernet, ATM, and DS3. These improvements are
expected to strengthen the product line's position in international and public
network access markets.
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Video Communication Products
The Company's principal video communication product is LANscape(TM), a
superior TV-quality IP-based system for desktop and small group applications.
Other products include VuBridge, a network gateway that provides communications
between LANscape and Legacy H.320 systems, and Panorama, an H.320
standards-based desktop system for ISDN communications.
LANscape
LANscape offers sharp, vivid picture quality, a simple user interface,
and bandwidth economy that corporate network managers demand for large-scale
enterprise implementation of desktop visual communications. LANscape's video
compression technology is suitable for telemedicine, distance learning,
video-on-demand, one-to-many broadcasts, and other multimedia applications. In
addition, LANscape offers multiple windows and IP Multicast to support
collaborative operations with multiple users and multiple inputs.
LANscape provides high quality video with low network impact using
wavelet video compression to provide a smooth high-quality picture with fully
synchronized CD-quality sound. Wavelet technology radically reduces the network
load by selectively transmitting and reconstructing only those wavelengths of
light that are most significant to the human eye, thus achieving compression
ratios (1:1 to 350:1) that cannot be achieved by other technologies. LANscape
runs over existing local area networks using IP as the transmission protocol.
This means it will run on any network that will transport IP including Ethernet,
Fast Ethernet, T1/E1, Frame Relay, ATM, and Sonet. Consequently, LANscape is an
ideal integrated video application over SONETLYNX. With LANscape, there is no
need for a Multipoint Conferencing Unit (MCU) to videoconference with more than
one person. Multipoint conferencing is inherent in the LANscape software.
VuBridge
The VuBridge gateway and conference manager is a hardware and software
product that allows LANscape users to communicate with H.320 ISDN systems.
VuBridge provides the translation between compression algorithms and the network
bridging that is needed to convert the LAN IP packets to an H.320 encoded ISDN
stream and vice versa.
Panorama
Panorama is a desktop video communications product that communicates
over ISDN telephone lines and uses the standard H.320 protocol to communicate
with other users whose hardware supports the same standard.
Digital Signal Processing (DSP) Products and Design Center
The DSP Design Center at DNA Enterprises, Inc. ("DNA"), a wholly owned
subsidiary, specializes in the design and development of state-of-the-art
products that span the spectrum from the most demanding multiprocessor signal
processing applications to low cost telecommunications applications. Based on
industry-leading devices such as the Texas Instruments `C80, and `C6x, DNA
provides product designs to meet specific customer needs and incorporate
standard bus architectures such as PCI, VME, and ISA, as well as embedded
designs. The major focus of the DSP Design Center is creating custom DSP
solutions. By leveraging DNA's broad technology experience, product development
effort is reduced, which, in turn, reduces development risk.
In 1996, the Design Center unveiled powerful PCI and VME multiprocessor
boards based on the Texas Instruments TMS320C80. These products run at speeds up
to 60 MHz which makes them industry leaders in terms of performance and
flexibility. In October 1997, the Company announced its agreement with Texas
Instruments ("TI") to design key products using TI's revolutionary TMS320C6x
digital signal processor circuits. Under terms of the agreement, the DSP Design
Center will design two `C6x based evaluation modules (EVM's) for TI and TI will
license software from DNA. These products are targeted for general release by TI
in 1998 and are designed to showcase the capabilities of TI's flagship DSP line
for applications that include telecommunications, industrial control, medical
instrumentation, radar, and imaging. DNA retains rights to manufacture and
market the products, and derivative products, worldwide. The Design Center is
also developing products incorporating 'C6x DSPs for third party customers.
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CS4 Intelligent Programmable Telecommunication Switching Platform
The Company is developing an intelligent, programmable switching
platform, known as the CS4, for applications in public and private
telecommunications networks as an adjunct processor, intelligent peripheral,
enhanced services platform or as a combination of these elements in a single
switch. The CS4 is intended to enable service providers to create and offer
enhanced services faster and at lower cost than current alternative methods.
Examples of enhanced services are: voice messaging, conferencing on demand,
international call back, pager notification, single number services, and
Internet telephony gateway.
The CS4 platform employs fully distributed multichannel DSP technology
and processors in order to provide an exceptionally high processing power per
port. The CS4 eliminates traditional switch blocking by using separate redundant
packet buses and the assignment of discrete time slots. The scalable
architecture is targeted to expand from an initial 2,000 ports to 64,000 ports.
Unique to the CS4, all ports support unrestricted, simultaneous activity, such
as common signaling protocols, call progress tone detection, Signaling System 7,
and ISDN. Additional non-traditional capabilities include processing every call
as a conference and voice record and play-back at the port level without
peripheral equipment. Incorporating a powerful service creation environment, the
CS4 is intended to reduce development, testing, and deployment time for new and
enhanced services.
The currently planned initial application for the CS4 platform is a
network based, multi-party conferencing service designed to be internet
activated and managed by subscribers without requiring network operator
assistance. Completion of the CS4 development program and the definition and
introduction of CS4 applications is expected to be a function of the Company's
activity to put in place a joint venture arrangement for such purposes with
potential investment, distribution, and/or marketing partners.
S4 Air Traffic Control Switches
The Company designs, manufactures, and sells the S4 Special Services
Switching System, a digital voice/data switch used primarily for mission
critical applications such as air traffic control, air defense, and
teleconferencing. The S4 system offers a unique peer-to-peer multiple processor
architecture allowing all subscriber channels to be conferenced together
simultaneously connecting a wide range of devices including telephones, radios,
and communications consoles.
ENGINEERING SERVICES
DNA Enterprises, Inc. (DNA) provides clients worldwide with consulting
engineering services and turnkey product development in signal processing,
communications, and multimedia (voice, data, and video). DNA's staff of
engineers has extensive expertise in hardware, software, systems architecture,
and digital signal processing. DNA combines these core technological
capabilities with a rigorous project management process to deliver high quality
results on-time and on-budget. The customer base ranges from start-ups to
Fortune 500 technology companies. DNA's areas of established expertise include:
o Digital Signal Processing Technology
o Switching and Transport Systems
o Computer Telephony Integration (CTI)
o Embedded Systems
o Telecom Management Network (TMN)
o Intelligent Network Architectures
o Video/Image Processing
o Service Creation Environments (SCE)
o Wireless Systems
o International Product Localization
o Data Communications
o Advanced Voice Processing
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MARKETS AND CUSTOMERS
Fiber Optic Network Transmission Products
The Company markets its SONETLYNX network transmission product directly
and through representatives and distributors. The current sales structure
includes 25 distributors, system integrators, and resellers, up from seven at
the beginning of 1997. During 1997, the Company's largest distributor, reselling
to customers in the Republic of Korea, was responsible for 85% of SONETLYNX
sales. SONETLYNX is targeted for markets and applications where multiple
protocol communication mandates the capacity and reliability of fiber, further
strengthened by redundancy of critical components and architecture. Target
markets include corporate/enterprise networks, utilities, airports,
transportation, security services, prisons, health services, academia, and local
and state government, as well as public and private bypass networks.
Video Communication Products
The Company generally markets its video communication products through Value
Added Resellers that specialize in IP-based products that expand network
bandwidth. The Company believes that the key target markets for its
videoconferencing products are businesses that are geographically dispersed,
particularly Fortune 1000 companies and educational and government institutions.
In the last two months of 1997, over 200 desktop systems were shipped to a
variety of customers worldwide. LANscape has attracted over 30 partners and
resellers worldwide including Cabletron Systems, Thomson Network Enterprises,
Newbridge Networks and Hughes Data Networks. With an applications-based
approach, the Company is working with each partner to develop business plans for
marketing LANscape to multi-national customers. Initial installations include
major federal agencies, university telemedicine sites and large corporate
customers.
DSP Products and Services
The Company generally markets its advanced information technology
products and services through direct selling to existing customers and new
prospects, enhanced by participation in trade shows. Markets for advanced
technology products and services include internationally known
telecommunications switching companies, telecommunications network providers,
and hardware and software companies desiring to develop or enhance products for
telecommunications markets.
CS4 Intelligent Programmable Telecommunications Switches
The initial target markets and customers for the CS4 are expected to
include Interexchange Carriers, Local Exchange Carriers, and Wireless/PCS
providers. A network conferencing product (using an Internet-activated and
managed user interface) is planned as the initial application.
S4 Air Traffic Control Switches
The Company generally markets its S4 switching products through system
integrators and directly through its own sales force.
COMPETITION
The market for the Company's products and services is intensely
competitive and rapidly changing. The Company competes, or may in the future
compete, directly or indirectly for customers in the following categories of
products and companies: (i) network transmission product manufacturers such as
Lucent Technologies Corp., Northern Telecom, Ltd., and Positron Fiber Systems;
(ii) video conferencing H.320/323-based product manufacturers such as VCON
Corp., First Virtual Corp., VTEL Corp., PictureTel Corp., and Intel's ProShare
Video System; (iii) programmable switch manufacturers such as Excel Switching
Corp. and Summa Four, Inc., and (iv) voice-data switch manufacturers such as
Thomson CSF, Inc., Denro, Inc., and Frequentis., Ltd. The Company believes that
the principal competitive factors affecting the markets for its products and
services include effectiveness, scope of product offerings,
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technical features, ease of use, reliability, customer service and support,
distribution channels and price. Certain competitors have greater resources than
the Company and, accordingly, may have a competitive advantage in selling and in
product development.
MANUFACTURING
The basis of the Company's manufacturing strategy is to identify and
use the appropriate technology to obtain the most favorable combination of
quality and end product cost.
The Company's manufactured products consist largely of assembled
printed circuit boards. These are sold either as stand-alone products (such as
LANscape) or as larger assembled systems (such as SONETLYNX).
As the Company's product lines expand and mature, the Company expects
to increase manufacturing capacity by means that could include adding employees,
expanding current facilities, leasing or purchasing additional facilities or
equipment, and expanding and adding outsourcing relationships. Some or all of
the space and equipment needs in 1998 may be satisfied in conjunction with joint
venture arrangements. See ITEM 2 - Properties.
The Company buys a fiber optic interface card, for the SONETLYNX OC-3
product, from a small company which is the sole source for the component. The
Company also buys a video codec card, used in SONETLYNX video applications, from
another small company which is the sole source. Delays in delivery of either
component would restrict the Company's ability to increase sales. In the event
either vendor fails to meet commitments, the Company intends to rely on its
in-house manufacturing capabilities. However, the conversion to in-house backup
supply would not be without some interruption and may increase cost.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
While the Company relies on a combination of patent, copyright,
trademark and trade secret laws, and confidentiality procedures to protect its
proprietary rights, the Company believes that factors such as technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition, and reliable product manufacturing are more
essential to establishing and maintaining a technology leadership position. The
Company currently has two United States patents relating to audio conferencing
technology and has currently pending patents relating to the CS4 product, video
communications, Internet communications, and a system to handle simultaneous
voice and data communications. "SONETLYNX(R)," "INTELECT(R)," "S4(R)," and
"Special Services Switching System(R)" are registered trademarks of the Company
and "LANSCAPE(TM)," "VISIONARY(TM)," "VUBRIDGE(TM)," and "PANORAMA(TM)" are
trademarks of the Company in the United States. According to federal and state
law, the Company's trademark protection will continue for as long as the Company
continues to use its trademarks in connection with the products and services of
the Company. The Company seeks to protect its software, documentation, and other
written materials under trade secret and copyright laws, which afford only
limited protection.
In connection with the acquisition of DNA Enterprises and Intelect
Visual Communications (IVC), and transactions with certain individuals, licenses
were acquired to support the development of SONETLYNX, video conferencing, and
DSP products. The Company also incorporates third-party licenses into its
products. In connection with the acquisition of IVC, certain assets and
licenses, which constituted the design of a video conferencing product, were
purchased from a major computer company. The design proved to be flawed. In
November 1997, the Company executed an amended technology license agreement with
the computer company, pursuant to which future royalty payments, if any, will be
contingent on sales of defined products. The defined products do not include the
LANscape 2.0 product line.
Litigation may be necessary to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, financial condition, or results of
operations.
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In common with many companies in the telecommunications industry, the
Company has received notice that it may be infringing on certain intellectual
property rights of others. These claims have been referred to counsel for
evaluation. In connection with such claims or actions asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights, if necessary. There can be no assurance, however,
that a license will be available under reasonable terms or at all. In addition,
the Company could decide to litigate such claims, which could be expensive and
time consuming and which could have materially adverse effects on the Company's
business, financial condition, or results of operations.
EMPLOYEES
The Company had 365 full-time employees at December 31, 1997, of which
162 were engaged in engineering and development, 71 were engaged in sales,
marketing, and customer support, 99 were engaged in manufacturing operations,
and 33 were engaged in administration and finance. None of the Company's
employees is represented by a labor union. The Company has experienced no
material work stoppages and believes its relations with its employees to be
good.
GOVERNMENT REGULATION
The telecommunications industry, including many of the Company's
customers, is subject to regulation from Federal and state agencies, including
the FCC and various state public utility and service commissions. Similar
regulatory structures exist in most countries outside the USA. While such
regulation does not affect the Company directly, the effects of such regulations
on the Company's customers may, in turn, adversely impact the Company's business
and results of operations. For example, FCC regulatory policies, affecting the
availability of services and other terms on which telecommunications service
providers ("Telcos") conduct their business, may impede the Company's
penetration of certain markets. Current FCC regulations restrict Telcos' ability
to charge their customers based on access cost to local subscribers and may
affect the timing of Telcos' investment in the Company's technology. These FCC
regulations and policies are under continuous review by the federal government
and the courts and are subject to change. Although many FCC restrictions on
providing services in previously restricted markets have been eliminated or
modified, the failure to change, or a substantial delay in changing, the
existing restrictions on Telcos may materially adversely affect their demand for
products based upon the Company's technology.
The Telecommunications Act of 1996 removed certain restrictions
relating to the Regional Bell Operating Companies. The Company believes that
this has created and will continue to create increased competition in the
markets served by the Company's products.
In addition, the Company's business and operating results may also be
adversely affected by the imposition of certain tariffs, duties and other import
restrictions on components that the Company obtains from non-domestic suppliers
or by the imposition of export restrictions on products that the Company sells
internationally. The governments of many other countries actively promote and
create competition in the telecommunications industry. Changes in current or
future laws or regulations, in the United States or elsewhere, could materially
and adversely affect the Company's business and results of operations.
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ITEM 2 - PROPERTIES
All of the Company's facilities are leased. The facilities are in
Richardson, Texas, New York, New York, and London, England. The Company's
principal operations are serviced from four leased facilities in Richardson,
Texas, (comprising 103,000 square feet) and one in New York (comprising 20,000
square feet). These facilities include manufacturing, engineering, sales,
marketing, and administrative offices. All of the Company's manufacturing
operations are located in a 28,000 square foot Richardson, Texas facility. The
Company moved its headquarters from Hamilton, Bermuda to Richardson, Texas in
March 1997.
The Company believes these facilities, which total 124,000 square feet,
are adequate for its present needs. However, the Company expects it will require
additional space in 1998 and beyond for sales, manufacturing, and assembly
activities. Some or all of the additional space needs in 1998 may be satisfied
in conjunction with joint venture arrangements.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in various legal proceedings and claims arising
in the ordinary course of business.
Intelect (Bermuda) is contingently liable for certain potential
liabilities related to its discontinued operations. Specifically, under a stock
purchase agreement dated October 3, 1995 ("1995 Agreement"), Intelect (Bermuda)
agreed to indemnify Savage Sports Corporation, the purchaser of Savage Arms,
Inc. (a manufacturer of fire arms), for certain product liability, environmental
clean-up costs and other contractual liabilities, including certain asserted
successor liability claims. One of the liabilities assumed involves a firearms
product liability lawsuit filed by Jack Taylor individually and as father of
Kevin Taylor in Alaska Superior Court (the "Taylor litigation"). Intelect
(Bermuda) is informed that a defendant in the Taylor litigation, Western Auto
Supply Co., settled the lawsuit for $5 million and, in turn, has asserted a
third-party claim against Savage Arms, Inc. for indemnification in the amount of
the settlement plus attorneys' fees and related costs. Savage Arms has asserted
defenses to the claims and Intelect (Bermuda) believes additional defenses may
be available. Based on the information available to date, it is impossible to
predict the outcome of this litigation or to assess the probability of any
verdict.
Intelect (Bermuda) also has been notified that Savage Sports
Corporation seeks indemnification under the 1995 Agreement in connection with
certain other product liability claims. Most notably, Intelect (Bermuda) has
undertaken the defense of a lawsuit filed against Savage Arms, Inc. by Emhart
Industries, Inc. ("Emhart") in the United States District Court for the District
of Massachusetts (the "Emhart litigation"). In the lawsuit, Emhart requests
indemnification from Savage Arms, Inc. under an agreement Emhart allegedly
executed in 1981 with Savage Industries, Inc., claiming that Savage Arms, Inc.
is a successor to Savage Industries, Inc. To date, Emhart has claimed
indemnification of approximately $2.2 million for five lawsuits it has defended
or settled and also seeks a declaratory judgment that it is entitled to
indemnification for losses and expenses related to firearms product liability
actions which may be filed against Emhart in the future. Intelect (Bermuda)
intends to assert additional defenses. The parties are in discovery and Intelect
(Bermuda) cannot at this time predict the outcome of the litigation.
In the event the Taylor litigation and/or Emhart litigation were to be
resolved adversely to Intelect (Bermuda), there would be a material adverse
effect on the Company's financial condition and results of operations. See Note
20 to the Consolidated Financial Statements.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 4, 1997, Intelect (Bermuda) held a Special Meeting of
Shareholders. At the special meeting, the shareholders approved a merger
proposal, the principal effect of which was to change the domicile of Intelect
(Bermuda) so that it became a publicly traded U.S.-domiciled, Delaware
corporation (the "Reorganization"). The Reorganization was effected pursuant to
an Agreement and Plan of Merger by and among Intelect (Bermuda), the Company
(which was wholly owned by Intelect (Bermuda) prior to the merger), and Intelect
Merger Co., a Delaware corporation which was wholly owned by the Company prior
to the merger ("Intelect Merger Co."). As a result of the merger, Intelect
Merger Co. was merged into Intelect (Bermuda), and each share of Intelect
(Bermuda) was automatically converted into the right to receive one share of the
Company. Further, any outstanding options issued pursuant to stock option plans
of Intelect (Bermuda) became options to purchase common stock of the Company,
and outstanding warrants of Intelect (Bermuda) became warrants to purchase
common stock of the Company. The effect of the Reorganization was that the
shareholders of Intelect (Bermuda) became shareholders of the Company with the
Company becoming the publicly traded company. In addition, the Company became
the holding company for Intelect (Bermuda) and replaced Intelect (Bermuda) as
the holding company for its subsidiaries.
The Reorganization and the transaction consummated in connection
therewith were approved by the vote of common stock holders of 10,176,258 for,
429,751 against, and 25,416 abstentions and by the vote of preferred stock
holders of 100% for.
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PART II
ITEM 5 - MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded in the over-the-counter
market and is listed on the Nasdaq National Market under the symbol "ICOM." The
high and low bid prices for the Company's common stock for each full quarter of
the last two fiscal years, as reported on Nasdaq, are as follows:
High Low
---- ---
1st quarter 1996 - period ended March 31, 1996 5.625 4.50
2nd quarter 1996 - period ended June 30, 1996 15.375 5.3125
3rd quarter 1996 - period ended September 30, 1996 11.75 6.625
4th quarter 1996 - period ended December 31, 1996 8.125 4.25
1st quarter 1997 - period ended March 31, 1997 5.125 1.875
2nd quarter 1997 - period ended June 30, 1997 4.625 1.375
3rd quarter 1997 - period ended September 30, 1997 11.50 4.25
4th quarter 1997 - period ended December 31, 1997 11.313 3.1875
The Company believes that as of March 13, 1998, its outstanding shares
of common stock are held by approximately 8,200 owners of record.
The closing bid price of the common stock on the Nasdaq National Market
on March 27, 1998, was $7.0625.
DIVIDEND POLICY
No cash dividends were paid by the Company during fiscal 1995, 1996, or
1997. The Company does not currently plan to pay any dividends on common stock
in the foreseeable future. The Company is restricted by its agreements with
lenders and the holders of certain of its preferred stock from any payment of
dividends on common stock and from the payment of dividends on preferred stock
except dividends payable with common stock. These restrictions remain in effect
for so long as any balance remains payable on the debt or such preferred stock
remains outstanding. See Note 25 to the Consolidated Financial Statements.
RECENT SALES OF UNREGISTERED SECURITIES
On December 17, 1997, the Company completed the sale of $4 million of
10% Cumulative Convertible Preferred Stock, Series B to the Navesink Equity
Derivative Fund LDC ("Navesink"). Navesink purchased 914,286 shares of the
preferred stock at a price of $4 3/8 per share for an aggregate offering price
of $4 million. The Company received net proceeds from the sale of $3,877,000,
after deducting $123,000 of issuance costs. The offering was not underwritten
and was made in reliance on the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended. The preferred stock has a 10%
annual dividend rate on the $4 3/8 per share liquidation preference, payable
quarterly beginning on March 31, 1998. The Company has the choice of paying
dividends in cash or in shares of common stock based on the current market value
of the common stock at the time the dividends are payable. Beginning on May 31,
1998, 50% of the preferred stock is convertible by Navesink into common stock of
the Company with the remaining 50% being convertible on June 30, 1998. The
number of conversion shares issuable upon conversion is equal to the greater of
(i)the number of shares of preferred stock being converted multiplied by 1.10,
or (ii) the number of shares of preferred stock multiplied by a number, the
numerator of which is $4.375 and the denominator of which is 0.85 multiplied by
the average daily closing market bid price for the common stock of the Company
as quoted on the Nasdaq National Market System for
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12
the previous five consecutive trading days from the date of the notice of
election of conversion. The common stock issuable on conversion will be
restricted and not transferable except pursuant to an effective registration
statement or pursuant to an applicable exemption under the Securities Act of
1933. The Company has granted to Navesink the right to demand registration of
the common stock issued upon conversion of the preferred stock, in certain
circumstances. The preferred stock is not transferable by Navesink, has no
voting rights except in the event of three quarters arrearage on quarterly
dividends, and has no preemptive rights. Navesink has the right, subject to the
rights of the other holders of preferred shares ranking on parity with the
preferred stock, to participate in certain other private equity and debt issues
of the Company. The Company may redeem the preferred stock at any time at the
greater of $5.25 per share or the average closing market bid price of Company
common stock for five consecutive trading days prior to the date of redemption.
In December 1997, a group of directors, officers and employees of the
Company loaned up to $710,000 to the Company. Interest accrues on such loans at
the prime rate plus 3%. The loans are due on demand and may be paid, at the
option of the holder, in the form of common stock of the Company. The conversion
price for such common stock is $5.25 per share. See Note 10 to the Consolidated
Financial Statements.
Effective January 27, 1998, the Company issued to Amerix Electronics,
Inc. ("Amerix") 150,000 shares of common stock of the Company as prepayment for
certain commissions payable to Amerix by Intelect Network Technologies Company
("INT"), a wholly owned subsidiary of the Company pursuant to the terms of a
Sales Representative Agreement ("Agreement") dated as of January 27, 1998,
between INT and Amerix. The Agreement provides that the shares are issued in
full and final payment of all commissions due to Amerix earned from the period
beginning on January 1, 1998, in anticipation of $30 million of sales of
products of the Company by Amerix. The securities were issued to Amerix by the
Company pursuant to an exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended.
As disclosed in the Form 8-K of the Company filed February 17, 1998,
the Company completed $25 million of financings by closing on February 9, 1998,
a $10 million private placement of its Series C convertible preferred stock and
by closing on February 12, 1998, a $15 million credit facility. See Note 25 to
the Consolidated Financial Statements and ITEM 7 - Management's Discussion and
Analysis.
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ITEM 6 - SELECTED FINANCIAL DATA
The following tables set forth certain historical consolidated financial
data for the Company.
Two months
YEARS ENDED DECEMBER 31, ended Years ended October 31,
------------------------ December 31, -----------------------
1997 1996 1995 1995 1994 1993
---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS: ($ Thousands Except Per Share Data)
Net revenues $ 37,777 $ 9,352 $ 734 $ 2,030 $ -- $ --
-------- -------- -------- -------- -------- --------
Operating loss (17,642) (33,638) (2,943) (4,652) (558) (572)
-------- -------- -------- -------- -------- --------
Loss from continuing operations (19,743) (42,983) (2,776) (5,194) (538) (446)
Income from discontinued
operations (1) -- -- -- 3,546 3,410 1,517
Income (loss) on disposal of
discontinued operations (1) (498) (56) (236) 13,824 -- --
Income (loss) before
extraordinary item $(20,241) $(43,039) $ (3,012) $ 12,176 $ 2,872 $ 1,071
-------- -------- -------- -------- -------- --------
Income (loss) available to common
stockholders $(20,798) $(43,039) $ (3,012) $ 12,822 $ 2,872 $ 1,071
======== ======== ======== ======== ======== ========
BASIC AND DILUTED INCOME (LOSS) PER
SHARE:
Continuing operations $ (0.99) $ (3.32) $ (0.24) $ (0.47) $ (0.05) $ (0.05)
======== ======== ======== ======== ======== ========
Discontinued operations $ (0.02) $ (0.01) $ (0.02) $ 1.57 $ 0.34 $ 0.16
======== ======== ======== ======== ======== ========
Extraordinary item -- -- -- $ 0.06 -- --
======== ======== ======== ======== ======== ========
Net income (loss) for period $ (1.01) $ (3.33) $ (0.26) $ 1.16 $ 0.29 $ 0.11
======== ======== ======== ======== ======== ========
Weighted average shares (thousands) 20,558 12,943 11,385 11,024 9,942 9,539
======== ======== ======== ======== ======== ========
DECEMBER 31 October 31
------------------------- --------------------------------------------
1997 1996 1995 1995 1994 1993
---- ---- ---- ---- ---- ----
BALANCE SHEET: ($ Thousands)
ASSETS:
Current assets $25,552 $11,594 $19,957 $24,587 $ 2,599 $ 1,049
Excess of cost over assets of
companies acquired 13,249 14,573 8,685 9,349 -- --
Net assets of discontinued operations -- -- -- -- 9,573 7,207
Other long-term assets 10,430 9,269 2,597 1,786 -- --
======= ======= ======= ======= ======= =======
Total assets $49,231 $35,436 $31,239 $35,722 $12,172 $ 8,256
======= ======= ======= ======= ======= =======
LIABILITIES & SHAREHOLDERS' EQUITY:
Current liabilities including
current maturities of long-term debt $22,939 $ 9,810 $ 5,331 $ 7,091 $ 269 $ 175
Long-term liabilities 143 17,895 368 365 -- --
Shareholders' equity 26,149 7,731 25,540 28,266 11,903 8,081
======= ======= ======= ======= ======= =======
$49,231 $35,436 $31,239 $35,722 $12,172 $ 8,256
======= ======= ======= ======= ======= =======
(1) See Note 9 to the Consolidated Financial Statements under ITEM 8
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Results of continuing operations in 1997 and 1996 consist of:
o the fiber optic multiplexer and special services switch
businesses of Intelect Network Technologies Company ("INT") from
its April 24, 1995 acquisition,
o the engineering services business of DNA Enterprises, Inc.
("DNA") from its February 13, 1996 acquisition,
o the video conferencing system business of Intelect Visual
Communications Corp. ("IVC") from its March 29, 1996 acquisition,
and
o the information security business of Intelect Europe Limited
("IEL") from its August 31, 1995 acquisition until its
liquidation in January 1997.
During the year ended October 31, 1995, the Company was engaged in the
manufacturing and marketing of sporting arms, through its subsidiary Savage
Arms, Inc. ("Savage"). The results of operations of Savage are accounted for as
discontinued operations due to the sale of Savage on October 31, 1995. The
Company's fiscal year was changed to December 31 in 1995.
Accordingly, due to the disposition of Savage, the change in fiscal
year, and the schedule of acquisitions above, any comparison of financial
results of 1996 to 1995 would not be meaningful to determine a trend.
The following table shows the revenue and gross profits for the
Company's products:
Years Ended Two Months Ended Year Ended
December 31 December 31 October 31
------------------------------------------------------------------------------
1997 1996 1995 1995
------------------------------------------------------------------------------
($ Thousands)
Revenue:
Fiber optic multiplexers $ 26,250 430 -- --
Engineering services and DSP 8,909 4,413 -- --
Video conferencing 636 172 -- --
Voice switching and other 1,982 4,337 734 2,030
------------------------------------------------------------------------------
$ 37,777 9,352 734 2,030
------------------------------------------------------------------------------
Gross profit (loss):
Fiber optic multiplexers $ 12,035 (625) -- --
Engineering services and DSP 2,287 964 -- --
Video conferencing 41 (826) -- --
Voice switching and other (112) (2,134) (643) (538)
------------------------------------------------------------------------------
$ 14,251 (2,621) (643) (538)
------------------------------------------------------------------------------
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REVENUES
Revenues in 1997 increased 304% over 1996 due to large scale
installation of SONETLYNX products in foreign and domestic markets and due to
the near doubling of the DNA engineering services business.
The SONETLYNX fiber optic multiplexer was delivered to five end-user
customers in Korea, to a private network project on the Alyeska pipeline, and to
other applications such as "smart" highways and municipal networks for video
arraignment. Due to a low base of sales in 1996, the percentage increase is not
a reasonable indicator of the future. Sales in 1997 included $22,380,000 of
multiplexer products delivered for installation in Korean networks for
telecommunications, banking, and other applications. See Note 23 to Consolidated
Financial Statements. In light of the difficulties which developed in general in
Korean and other Asian financial markets at year end, the outlook for
continuation of sales in those areas has become uncertain. The Company has
shipped $122,000 of product to Korean customers between December 31, 1997 and
March 20, 1998. The Company's outlook for sales to non-Korean customers,
especially in the U.S., is based on outstanding proposals and prospects of the
Company and its distribution partners. There can be no assurance that such
proposals and prospects will result in orders and revenues.
Engineering service revenues of DNA increased 99% in 1997 over 1996.
DSP product in the amount of $277,000 was shipped in 1997 compared to $81,000 in
1996. The Company does not expect the growth of services revenue to continue at
the same rate. DSP product shipments may increase significantly, depending on
customer reception to the Company's designs and proposals and the funding of
projects into which the products are specified.
Video conferencing product revenues increased from a sampling level in
1996 to $636,000 in 1997. The growth of the product was delayed by a decision to
discontinue the original licensed technology in favor of a new proprietary
design based on wavelet technology. The resultant new product was launched in
November 1997.
Sales of S4 and predecessor products were $1,575,000 in 1997, compared
to $2,200,000 in 1996. Since the S4 serves a limited market, prospects are
uncertain for future sales increases. Other revenues in 1996 and late 1995
include information security products sold primarily to the UK military market.
These products were phased out in 1996.
GROSS PROFIT (LOSS)
Gross profit increased to $14,251,000 from a loss of ($2,621,000) in
the years ended December 31, 1997 and 1996, respectively. The largest
contribution to the improvement came from SONETLYNX fiber optic multiplexer
products which achieved design stability and economic production levels in the
second half of 1997. Due to the interruption or delay of substantial shipments
to Korean customers at the beginning of 1998, the level of margin contribution
by the fiber optic products is uncertain in the near future. The potential for
sales to non-Korean customers could offset the effect of lower sales to Korean
customers. However, there can be no assurance that such revenue and margin will
materialize.
Gross profit contribution by the engineering services business
increased in 1997, due primarily to the increase in revenue.
Video conferencing products made a minor contribution to the total
gross profit in both 1997 and 1996 due to the low sales level in both years,
reflecting new product introductions in each year.
The loss on S4 switching products was reduced in 1997 due to the
completion of certain loss contracts initiated in prior years.
Approximately $675,000 of under-absorbed manufacturing overhead costs,
substantially all attributable to SONETLYNX, were incurred to prepare for the
large manufacturing growth rate during the year.
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ENGINEERING AND DEVELOPMENT (E&D) EXPENSES
E&D expense increased to $11,899,000 in 1997 from $8,719,000 in 1996.
As a percentage of revenues, the expense declined to 31% from 93%. Spending in
1997 on CS4 and approximately $2,000,000 of other E&D spending was dedicated to
product development for which revenues were not realized during the year. In
both years, certain amounts of software development costs were capitalized.
Including those amounts, gross spending on E&D increased to $13,216,000 from
$10,114,000. Gross spending by product line was distributed as follows:
Years Ended December 31
-----------------------
1997 1996
---- ----
($ Thousands)
Fiber optic multiplexer 6,400 2,857
CS4 3,816 5,565
Video conferencing 1,443 954
DSP, S4, and other 1,557 738
13,216 10,114
---------- ----------
The SONETLYNX fiber optic multiplexer product line was developed in
1996 with the following core components: an OC-1 controller, 8 channel voice
modules with FXS, FXO, and 4 wire E&M, 4 channel T1 async, 2 channel low speed
data supporting four protocols, and a ring generator. The product line was
enhanced during 1997 by the addition of: an OC-3 controller, 8 channel voice, 4
channel T1, and low speed data modules that can be configured for OC-3 or OC-1
operation, 4 channel E1 async, 7 channel T1 byte sync, video module with
encoder/decoder, a module combining precision timing sources with a single voice
channel, and an OC-1 multipoint ethernet module. As a consequence of these
developments, the SONETLYNX product line has become a powerful and cost
effective solution to the customer problem of access to fiber networks where
many protocols are required.
The CS4 product was developed to a working prototype stage in 1996 and
further developed and upgraded in 1997 to support the call capacity requirements
of targeted market segments and anticipated applications.
Spending on the video conferencing product in 1996 led to the emergence
of a viable product built on purchased technology. In 1997, the product was
redesigned around wavelet technology in order to deliver key performance
features not otherwise achievable, namely, superior picture quality, application
flexibility, and selectable bandwidth requirements.
In 1996, two standard DSP board-level products were developed using the
Texas Instruments TMS320C80. In 1997, two DSP board-level products based on the
Texas Instruments TMS320C6201 were developed. Spending on the S4 product line in
both years led to the completion of an improved console for air traffic control
applications.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses were $18,671,000 and $14,601,000 in
the years ended December 31, 1997 and 1996. Selling expense increased to
$11,213,000 from $6,412,000. The increase in 1997 was attributable to market
development activity for SONETLYNX and LANscape products and higher revenues for
SONETLYNX. As a percentage of revenues, selling expense declined to 30% from
69%. Administrative expenses declined to $7,458,000 from $8,189,000 partly due
to the removal of corporate headquarters from Bermuda.
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ASSET WRITE DOWNS
In connection with the acquisition of IVC, certain assets and licenses,
which constituted the design of a videoconferencing product, were purchased from
a major computer company. The design proved to be flawed and market introduction
was delayed approximately nine months. In 1996, the Company deemed the
recoverability of IVC goodwill to be significantly impaired by the delay in
introduction of the product to a rapidly changing market and accordingly reduced
the carrying value of IVC goodwill by $4,175,000 (its remaining unamortized net
book value at the time) and wrote off $51,000 of fixed assets deemed of no
value.
The Company's assessment of the future prospects for the information
security products business in the United Kingdom led to a complete shut down of
those operations in Chesterfield, England at the end of 1996. In January 1997,
liquidation proceedings began. The Company was an unsecured creditor of IEL and
wrote off all net assets related to those operations in England in the amount of
$1,807,000.
INTEREST EXPENSE
Interest expense of $2,863,000 and $9,911,000 in the years ended
December 31, 1997 and 1996 consist of:
Years Ended December 31
-----------------------
1997 1996
---- ----
($Thousands)
Interest on debt instruments 930 704
Non-cash financing costs 1,721 7,534
Other costs of financing 199 1,571
Other interest 13 102
----- -----
2,863 9,911
Interest on debt instruments in 1997 was primarily attributable to amounts
borrowed from St. James Capital Corp., two series of convertible debentures, and
the Coastal Trust. In 1996, the interest was attributable to three series of
convertible debentures.
Non-cash financing costs in 1997 were the result of warrants to purchase common
stock issued in connection with various financings. The reported expense amount
is the value of the warrants determined by using the Black-Scholes pricing
model. In 1996, in addition to $2,942,000 of warrant values, $4,592,000 of
reportable expense was attributable to a beneficial conversion feature of the
convertible debentures.
Other costs of financing consist primarily of legal and placement fees.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
The Company sold Savage Corporation (and its subsidiaries, including
Savage Arms, Inc.) ("Savage") on October 31, 1995. The results of Savage are
accounted for as discontinued operations and, accordingly, comparative
presentations reflect the Company's equity in the earnings of Savage for the
relevant periods. The gain on the disposition of Savage occurred in the fourth
quarter of 1995. Losses since October 1995 represent legal expenses in
connection with the indemnity agreement with Savage Sports Corporation. See ITEM
3, Legal Proceedings.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems to identify
the systems 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 no significant systems fail to comply
with the ability to distinguish the year 2000 from the year 1900. 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.
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LIQUIDITY AND CAPITAL RESOURCES
In the year ended December 31, 1997, cash used in operations,
($24,852,000), and by investing activities, ($5,343,000), were funded by using
$2,769,000 of available cash balances and by securing new financing, net of
repayments, of $27,426,000.
Operating Activities
Net cash used in operations consisted of the $20,241,000 net loss and
the $10,843,000 net increase in current assets, offset by $6,232,000 of non-cash
charges. As previously discussed, the net loss primarily reflects commitments to
support new product development and to fund selling and manufacturing
infrastructure development.
o Accounts receivable increased $13,242,000 as required by the much
higher level of sales and due to the length of payment schedules
tied to major project installations and customer acceptance
procedures.
o Inventory increased $3,311,000 generally in line with the
increased rate of product shipments.
o Use of cash for accounts receivable and inventory growth was
offset by the $5,875,000 increase in payables and accruals which
grew in concert with the current assets.
o The cash effect of the net losses was mitigated by inclusion of
$3,412,000 of depreciation and amortization of intangible assets
and $1,920,000 of amortization of deferred financing costs.
Investing Activities
Investment spending included capital expenditures of $2,993,000 for
fixed asset additions, primarily equipment for product testing and
manufacturing, leasehold improvements, and computer equipment and software to
support engineering and administrative activities. Software development costs of
$1,317,000 were capitalized following establishment of feasibility of certain
SONETLYNX modules. No software cost was capitalized after September 1997.
Financing Activities
Cash used in operating and investing activities in 1997 were primarily
financed by the following:
o $6,000,000 borrowed from St. James Capital Corp., due March 27,
1998
o $5,000,000 borrowed from The Coastal Corporation Second Pension
Trust ("Coastal Trust"), later converted to Series A preferred
stock
o $4,911,000 from the sale of Series A preferred stock to Coastal
Trust
o $1,455,000 from the exercise by Coastal Trust of a warrant to
purchase 750,000 shares of common stock
o $3,000,000 borrowed from Coastal Trust, due March 27, 1998
o $135,000 from the exercise by Lifeline Industries, Inc. of a
warrant to purchase 30,000 shares of common stock
o $300,000 from the exercise by St. James Capital Corp. of a
warrant to purchase 150,000 shares of common stock
o $3,330,000 from the sale of 696,400 shares of common stock in
private placements
o $1,575,000 from the exercise of employee stock options
o $3,877,000 from the sale of Series B preferred stock to Navesink
Equity Derivative Fund, LDC
o $910,000 borrowed from employees and affiliates of the Company.
Recent Developments, Outlook, and Financial Strategy
In February 1998, two additional financings were arranged. $10,000,000
of Series C preferred stock was sold to Citadel Investment Group, LLC and a
$15,000,000 credit facility was arranged with St. James Capital, L.P. See Note
25 to Consolidated Financial Statements. $3,000,000 has been advanced under the
credit facility. The obligation to advance up to $15,000,000 expires after July
31, 1998. Although advances under the $15,000,000 facility may be used
18
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to pay off the currently outstanding $6,000,000 and $3,000,000 notes due to St.
James Capital Corp. and Coastal Trust, respectively, so long as any of the
current obligations to St. James Capital Corp. and Coastal Trust are
outstanding, St. James Capital L.P. must approve additional advances for any
other purpose, which consent may not be unreasonably withheld. The Company's
ability to incur debt, pay dividends on its common and preferred stock and to
make certain investments and enter into certain transactions is governed by
covenants and provisions in its various debt instruments and by the terms of its
outstanding preferred stock, as described in Notes 10, 16, and 25 to
Consolidated Financial Statements. In addition to the external financings, the
Company has enhanced future cash flows by negotiating deferred payment
arrangements with former owners of DNA so that $2,050,000 formerly due on
February 13, 1998 is payable in various monthly amounts through December 1998.
The Company currently believes that the prudent approach to cash
planning should be predicated on a revenue pattern which declines in the first
quarter of 1998 and increases thereafter. Under such a scenario, the need for
inventory and receivable investment is moderated at the beginning of the year.
The credit facility with St. James Capital, L.P. is in place to pay the two debt
obligations maturing on March 27, 1998, if required. In order to offset the
impact of further investment in CS4 product development, the Company continues
to seek an investment, distribution, and/or marketing partner. Should the
difficulties in Korean markets continue, the Company believes that, considering
the number of prospects and the level of proposal activity, the opportunities
are good for replacing SONETLYNX sales concentrated with Korean customers. If,
nevertheless, revenues do not recover in the near term, then cost reduction
contingency plans are in place to preserve cash resources at lower levels of
sales. In the event the outlook for liquidity is stressed by production and
sales growth in excess of current plans, the Company believes the corporate
financial environment will support new financing needs.
Conclusion
Considering the financial resources available and potentially
available, the outlook for cash available from customer collections, the outlook
for cash uses in operations and investing, and the options available to control
spending, the Company believes it has, or reasonably has access to, the
financial resources to meet its business requirements through the current year.
The Company cannot assure, however, that the business results assumed in this
outlook will be realized, especially considering the near term impact of reduced
revenues from Korea. The Company cannot assure that profitability and positive
cash flow will be achieved when expected. If the Company's sales plans are not
achieved, operating losses and negative cash flows exceed the Company's
estimates, or capital requirements in connection with the design, development,
and commercialization of its principal products are higher than estimated, the
Company will need to raise additional capital. Although the Company believes it
could raise additional capital through public or private equity or debt
financings, if necessary, there can be no assurance that such financings would
be available, or available on acceptable terms. If such financing were not
available, the Company has determined that a significant reduction of
engineering, development, selling, and administrative costs would allow the
Company to continue as a going concern through 1998.
CONTINGENT LIABILITIES
As discussed in ITEM 3, Legal Proceedings, 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.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE LIQUIDITY AND OPERATING RESULTS
This Form 10-K 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, including, in particular, the financial condition of
the Republic of Korea; success in the development and market acceptance of new
and existing products (particularly SONETLYNX, 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-4 of the Company filed on
October 30, 1997 and the Form S-3 of the Company filed on September 23, 1997.
19
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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTELECT COMMUNICATIONS, INC, AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants................................................................ 21
Consolidated Balance Sheets....................................................................... 23
Consolidated Statements of Operations............................................................. 24
Consolidated Statements of Stockholders' Equity................................................... 26
Consolidated Statements of Cash Flows............................................................. 29
Notes to Consolidated Financial Statements........................................................ 31
Schedule II - Valuation and Qualifying Accounts................................................... 62
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: The Board of Directors and Shareholders of
Intelect Communications, Inc.
We have audited the accompanying consolidated balance sheet of Intelect
Communications, Inc. (a Delaware corporation) as of December 31, 1997, and the
related statements of operations in stockholders' equity and cash flows for the
year ended December 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Intelect
Communications, Inc. as of December 31, 1997, and the results of their
operations and their cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Dallas, Texas
March 27, 1998
21
22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Intelect Communications Systems Limited
We have audited the accompanying consolidated balance sheet of Intelect
Communications Systems Limited and its subsidiaries as of December 31, 1996 and
the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 1996, the two month period ended
December 31, 1995 and the year ended October 31, 1995. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedule for the year ended December 31, 1996. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Intelect
Communications Systems Limited and its subsidiaries as of December 31, 1996 and
the results of their operations and their cash flows for the year ended
December 31, 1996, the two month period ended December 31, 1995 and the year
ended October 31, 1995, in conformity with United States generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements, taken as a whole, presents fairly, in all material respects, the
information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the
Company has suffered recurring losses from continuing operations and is
dependent upon the successful development and commercialization of its products
and its ability to secure adequate sources of capital until the Company is
operating profitably. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with regard to these
matters are also described in Note 1. The consolidated financial statements and
financial statement schedule do not include any adjustments that might result
from the outcome of this uncertainty.
/S/ KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
April 9, 1997
22
23
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(Thousands of dollars, except share data)
Assets 1997 1996
-------- --------
Current assets:
Cash and cash equivalents $ 2,094 $ 4,863
Investments in marketable securities 942 854
Accounts receivable net of allowances of $541 and $542 in 1997 and 1996 15,569 2,427
Inventories 6,289 2,978
Prepaid expenses 658 472
-------- --------
Total current assets 25,552 11,594
Property and equipment, net 6,041 4,285
Goodwill, net 13,249 14,573
Software development costs, net 2,229 1,389
Other intangible assets, net 1,168 2,879
Other assets 992 716
-------- --------
$ 49,231 $ 35,436
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable, net of unamortized discount of $578 $ 9,132 $ --
Current maturities of long-term debt 2,527 4,125
Accounts payable 7,569 1,878
Accrued liabilities 3,173 3,302
Net liabilities of discontinued operations 400 400
Deferred income taxes 49 48
Current installments of obligations under capital leases 89 57
-------- --------
Total current liabilities 22,939 9,810
Long-term obligations under capital leases, net of current installments 55 59
Deferred income taxes 88 267
Long-term debt, net of current maturities -- 3,238
Convertible debentures, net of unamortized discount of $582 -- 14,331
-------- --------
23,082 27,705
-------- --------
Commitments and contingencies (notes 13, 14 and 20)
Stockholders' equity:
$2.0145, 10% cumulative convertible preferred stock, series A, $.01 par
value (aggregate involuntary liquidation preference $20,145,000)
Authorized 10,000,000 shares; 4,219,409 shares issued and
outstanding in 1997 42 --
$4.375, 10% cumulative convertible preferred stock, series B, $.01 par
value (aggregate involuntary liquidation preference $4,000,000)
Authorized 914,286 shares; 914,286 shares issued and outstanding in 1997. 9 --
Common stock, $.01 par value, 50,000,000 and 80,000,000 shares authorized
in 1997 and 1996. 23,954,978 and 15,027,728 shares issued and
outstanding in 1997 and 1996 240 150
Additional paid-in capital 75,940 36,849
Unrealized gain on marketable securities 2 18
Retained earnings (accumulated deficit) (50,084) (29,286)
-------- --------
Total stockholders' equity 26,149 7,731
$ 49,231 $ 35,436
======== ========
See accompanying notes to consolidated financial statements.
23
24
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1997 and 1996, two months ended December 31, 1995 and
year ended October 31, 1995
Consolidated Statements of Operations
(Thousands of dollars, except share data)
Two months
Years ended ended Year ended
December 31, December 31, October 31,
1997 1996 1995 1995
-------- -------- -------- --------
Net revenue $ 37,777 $ 9,352 $ 734 $ 2,030
Cost of revenue 23,526 11,973 1,377 2,568
-------- -------- -------- --------
Gross profit (loss) 14,251 (2,621) (643) (538)
Expenses:
Engineering and development 11,899 8,719 732 1,653
Selling and administrative 18,671 14,601 1,166 2,149
Amortization of goodwill 1,323 1,664 64 312
Asset writedowns -- 6,033 338 --
-------- -------- -------- --------
31,893 31,017 2,300 4,114
-------- -------- -------- --------
Operating loss (17,642) (33,638) (2,943) (4,652)
-------- -------- -------- --------
Other income (expense):
Equity in loss of investee -- -- -- (280)
Interest expense (2,863) (9,911) (23) (430)
Interest income and other 636 653 190 168
-------- -------- -------- --------
(2,227) (9,258) 167 (542)
-------- -------- -------- --------
Loss from continuing operations
before income taxes and extra-
ordinary item (19,869) (42,896) (2,776) (5,194)
Income tax expense (benefit) (126) 87 -- --
-------- -------- -------- --------
Loss from continuing operations (19,743) (42,983) (2,776) (5,194)
Discontinued operations
Income from discontinued operations,
net of tax -- -- -- 3,546
Income (loss) on disposal of discontinued
operations, net of tax (498) (56) (236) 13,824
-------- -------- -------- --------
Income (loss) before extraordinary
item (20,241) (43,039) (3,012) 12,176
Equity in extraordinary gain of investee -- -- -- 646
-------- -------- -------- --------
Net income (loss) $(20,241) $(43,039) $ (3,012) $ 12,822
======== ======== ======== ========
Dividends on preferred stock $ (557) -- -- --
======== ======== ======== ========
Income (loss) available to common stockholders $(20,798) $(43,039) $ (3,012) $ 12,822
======== ======== ======== ========
See accompanying notes to consolidated financial statements. (Continued)
24
25
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1997 and 1996, two months ended December 31, 1995 and
year ended October 31, 1995, Continued
Consolidated Statements of Operations
(Thousands of dollars, except share data)
Years ended Two months
December 31, ended Year ended
------------ December 31, October 31,
1997 1996 1995 1995
---------- ---------- ---------- ----------
Basic and diluted income (loss) per share:
Continuing operations $ (0.99) $ (3.32) $ (0.24) $ (0.47)
Discontinued operations (0.02) (0.01) (0.02) 1.57
Extraordinary item -- -- -- 0.06
---------- ---------- ---------- ----------
Net income (loss) per share $ (1.01) $ (3.33) $ (0.26) $ 1.16
---------- ---------- ---------- ----------
Weighted average number of common shares outstanding
20,558 12,943 11,385 11,024
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
25
26
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997 and 1996, two months ended
December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
Preferred stock
---------------
Series A Series B Common stock
-------- -------- ------------
Shares Par Shares Par Shares Par
------ --- ------ --- ------ ---
Balances at October 31, 1994 -- $ -- -- $ -- 10,583,142 $ 106
Acquisition of Lakefield
Arms Limited (note 9) -- -- -- -- 416,666 4
Exercise of convertible
preferred shares of Savage
Corporation -- -- -- -- 160,991 2
Private placement -- -- -- -- 150,000 1
Exercise of employee
stock options -- -- -- -- 74,318 1
Quasi reorganization -- -- -- -- -- --
Net income -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at October 31, 1995 -- -- -- -- 11,385,117 114
Stock option
compensation -- -- -- -- --
Net loss -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1995 -- -- -- -- 11,385,117 114
Conversion of debentures -- -- -- -- 1,837,205 18
Acquisition of Intelect Visual
Communications Corp. -- -- -- -- 545,420 5
Exercise of employee stock
options -- -- -- -- 530,000 5
Exercise of warrants from
acquisition of Savage
Corporation -- -- -- -- 360,000 4
Unrealized Total
Additional gain on stock-
paid-in Retained marketable holders'
capital earnings securities equity
------- -------- ---------- ------
Balances at October 31, 1994 $ 7,854 $ 3,943 $ -- $ 11,903
Acquisition of Lakefield
Arms Limited (note 9) 925 -- -- 929
Exercise of convertible
preferred shares of Savage
Corporation 400 -- -- 402
Private placement 524 -- -- 525
Exercise of employee
stock options 139 -- -- 140
Quasi reorganization 1,545 -- -- 1,545
Net income -- 12,822 -- 12,822
---------- ---------- ---------- ----------
Balances at October 31, 1995 11,387 16,765 -- 28,266
Stock option
compensation 286 -- -- 286
----------
Net loss -- (3,012) -- (3,012)
---------- ---------- ---------- ----------
----------
Balances at December 31, 1995 11,673 13,753 -- 25,540
Conversion of debentures 10,069 -- -- 10,087
Acquisition of Intelect Visual
Communications Corp. 2,747 -- -- 2,752
Exercise of employee stock
options 1,012 -- -- 1,017
Exercise of warrants from
acquisition of Savage
Corporation 1,076 -- -- 1,080
(Continued)
See accompanying notes to consolidated financial statements.
26
27
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, Continued
Years ended December 31, 1997 and 1996, two months
ended December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
Preferred stock
---------------
Series A Series B Common stock
-------- -------- ------------
Shares Par Shares Par Shares Par
Settlement of subordinated
debt and contingent
purchase consideration of
INT -- -- -- -- 169,986 $ 2
Purchase of other assets -- -- -- -- 100,000 1
Employee compensation -
IVC -- -- -- -- 100,000 1
Allocation of proceeds to
beneficial conversion
features of convertible
debentures -- -- -- -- -- --
Detachable warrants issued
with convertible debentures -- -- -- -- -- --
Stock option compensation -- -- -- -- -- --
Unrealized gain on
marketable securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1996 -- -- -- -- 15,027,728 150
Private placements
Preferred, Series A 2,482,005 25 -- -- -- --
Preferred, Series B -- -- 914,286 9 -- --
Common -- -- -- -- 696,400 7
Unrealized Total
Additional gain on stock-
paid-in Retained marketable holders'
capital earnings securities equity
------- -------- ---------- ------
Settlement of subordinated
debt and contingent
purchase consideration of
INT $ 848 $ -- $ -- $ 850
Purchase of other assets 374 -- -- 375
Employee compensation -
IVC 499 -- -- 500
Allocation of proceeds to
beneficial conversion
features of convertible
debentures 4,947 -- -- 4,947
Detachable warrants issued
with convertible debentures 3,117 -- -- 3,117
Stock option compensation 487 -- -- 487
Unrealized gain on
marketable securities -- -- 18 18
Net loss -- (43,039) -- (43,039)
---------- ---------- ---------- ----------
Balances at December 31, 1996 36,849 (29,286) 18 7,731
Private placements
Preferred, Series A 4,886 -- -- 4,911
Preferred, Series B 3,868 -- -- 3,877
Common 3,323 -- -- 3,330
(Continued)
See accompanying notes to consolidated financial statements.
27
28
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, Continued
Years ended December 31, 1997 and 1996, two months ended
December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
Preferred stock
---------------
Series A Series B Common stock
-------- -------- ------------
Shares Par Shares Par Shares Par
------ --- ------ --- ------ ---
Conversion of debentures -- -- -- -- 5,376,864 54
Conversion of notes payable 2,482,006 25 -- -- -- --
Conversion of preferred stock (780,583) (8) -- -- 780,583 8
Detachable warrants issued
with notes -- -- -- -- -- --
Warrants issued for services -- -- -- -- -- --
Exercise of warrants -- -- -- -- 930,000 9
Exercise of employee stock option -- -- -- -- 561,666 6
Stock option compensation -- -- -- -- -- --
Settlement of royalty agreement -- -- -- -- 542,182 6
Interest expense paid with stock:
Preferred, Series A 35,981 -- -- -- -- --
Common -- -- -- -- 11,407 --
Preferred dividends paid with stock -- -- -- -- 28,148 --
Preferred dividends accrued
Series A -- -- -- -- -- --
Series B -- -- -- -- -- --
Amortization of beneficial conversion
features of preferred stock, Series B -- -- -- -- -- --
Unrecognized loss on marketable
securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1997 4,219,409 $ 42 914,286 $ 9 23,954,978 $ 240
========== ========== ========== ========== ========== ==========
Unrealized Total
Additional gain on stock-
paid-in Retained marketable holders'
capital earnings securities equity
------- -------- ---------- ------
Conversion of debentures 14,796 -- -- 14,850
Conversion of notes payable 4,975 -- -- 5,000
Conversion of preferred stock -- -- -- --
Detachable warrants issued
with notes 1,661 -- -- 1,661
Warrants issued for services 250 -- -- 250
Exercise of warrants 1,881 -- -- 1,890
Exercise of employee stock option 1,569 -- -- 1,575
Stock option compensation 354 -- -- 354
Settlement of royalty agreement 841 -- -- 847
Interest expense paid with stock:
Preferred, Series A 72 -- -- 72
Common 58 -- -- 58
Preferred dividends paid with stock 296 (296) -- --
Preferred dividends accrued
Series A 215 (215) -- --
Series B 15 (15) -- --
Amortization of beneficial conversion
features of preferred stock, Series B 31 (31) -- --
Unrecognized loss on marketable
securities -- -- (16) (16)
Net loss -- (20,241) -- (20,241)
---------- ---------- ---------- ----------
Balances at December 31, 1997 $ 75,940 $ (50,084) $ 2 $ 26,149
========== ========== ========== ==========
See accompanying notes to consolidated financial statements
28
29
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996, two months
ended December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
Two months
Years ended ended Year ended
December 31, December 31, December 31,
1997 1996 1995 1995
-------- -------- -------- --------
Cash flows from operating activities:
Net income (loss) $(20,241) $(43,039) $(3,012) $ 12,822
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 3,412 3,581 106 486
Deferred income taxes (177) 87 -- --
(Income) loss on discontinued
operations 498 56 236 (13,824)
(Income) loss from discontinued operations -- -- -- (3,546)
Noncash compensation -- 500 -- --
Assets writedowns -- 6,033 338 --
Stock option compensation 354 487 50 --
Noncash operating expenses 191 -- -- --
Amortization of deferred financing costs 1,920 9,105 -- --
Equity in income of investee -- -- -- (366)
Other 34 (44) -- 9
Change in operating assets and liabilities,
net of effects of acquired companies:
Accounts receivable (13,242) (898) (662) 136
Inventories (3,311) (350) 277 196
Other assets (165) (95) (282) (102)
Accounts payable and accrued liabilities 5,875 1,603 (926) (1,472)
Net liabilities of discontinued operations -- (76) (795) 1,271
-------- -------- -------- --------
Net cash used in operating activities (24,852) (23,050) (4,670) (4,390)
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sale of discontinued operations -- -- -- 33,000
Investment in discontinued operations -- -- -- (3,249)
Payments for disposal of discontinued operations (498) (56) -- --
Purchase of other intangible assets (94) (1,075) -- --
Capital expenditures (2,993) (3,660) (293) (238)
Purchase of marketable securities (103) (836) -- --
Purchase of other assets (338) (110) (240) (518)
Software development costs (1,317) (1,395) -- --
Proceeds on sale of fixed assets -- 200 -- 12
See accompanying notes to consolidated financial statements. (Continued)
29
30
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1997 and 1996, two months
ended December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
Two months
Years ended ended Year ended
December 31, December 31, December 31,
1997 1996 1995 1995
-------- -------- -------- --------
Cash flows from investing activities (continued)
Payment for acquisition of DNA, net of cash
acquired -- (3,009) -- --
Loan to IVC, prior to acquisition -- (700) (600) --
Payment for acquisition of IVC, net of cash
acquired -- (668) -- --
Payment for acquisition of INT, net of cash
acquired -- -- -- (632)
Payment for acquisition of IEL, net of cash
acquired -- -- -- (391)
-------- -------- -------- --------
Net cash provided by (used in)
investing activities (5,343) (11,309) (1,133) 27,984
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible
debentures -- 25,000 -- --
Debt issuance costs (255) (1,623) -- --
Proceeds from issuance of notes payable 14,910 -- -- 9,880
Principal payments on notes payable (200) (880) (70) (15,530)
Principal payments under capital lease obligations (76) (311) (24) (18)
Principal payments on long-term debt (2,473) (100) -- (271)
Proceeds from issuance of common shares 3,266 -- -- 665
Proceeds from exercise of common stock warrants 1,890 1,080 -- --
Proceeds from exercise of employee stock options 1,575 1,017 -- --
Proceeds from issuance of preferred shares 8,789 -- -- --
Quasi-reorganization -- -- -- 45
-------- -------- -------- --------
Net cash provided by (used in)
financing activities 27,426 24,183 (94) (5,229)
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents (2,769) (10,176) (5,897) 18,365
Cash and cash equivalents, beginning of period 4,863 15,039 20,936 2,571
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 2,094 $ 4,863 $ 15,039 $ 20,936
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
30
31
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Description of Business
Intelect Communications, Inc. (the "Company") was incorporated in
Delaware on May 23, 1995, and is the successor company of a
reorganization, effective December 4, 1997, whereby the Company became a
U. S. domiciled public company. The previous public company, Intelect
Communications Systems Limited ("Intelect (Bermuda)"), a Bermuda company,
became a subsidiary of Intelect Communications, Inc. Intelect (Bermuda)
had operated under the name of Coastal International, Ltd. until
September 1985 and as Challenger International, Ltd. until December 1995.
The Company operates in one industry segment and is an international
communications technology and products company that develops,
manufactures and markets multimedia transport and switching systems for
telecommunications and networking applications. The Company's products
include fiber optic multiplexing, video conferencing equipment, digital
switching, and telecommunications system design and development services.
Former subsidiaries of the Company were engaged in information security
product sales and services (from 1995 to 1997), in the manufacture and
marketing of sporting arms (from 1989 to 1995), and in various energy
related activities (from 1981 to 1988). These subsidiaries have been sold
or liquidated as of December 31, 1997 (note 9).
The Company's year end was changed in 1995 from October 31 to December 31
to coincide with the year ends of its then newly-acquired operating
subsidiaries. The two-month period from November 1, 1995 to December 31,
1995 is hereinafter referred to as the "Transition Period."
These financial statements have been prepared assuming the Company will
continue as a going concern. The Company has incurred significant
operating losses and negative cash flows from operations in 1997, 1996,
and 1995. Losses were funded by proceeds from issuance of notes payable
and the sale of preferred and common stock in 1997, net proceeds from
issuance of convertible debentures in 1996, and proceeds from the sale of
the Savage Arms subsidiary in October 1995. The Company expects operating
losses and negative cash flow from operations to continue.
Approximately 59% of 1997 revenues resulted from product sales to one
distributor for multiple installations in the Republic of Korea.
Following the financial and economic difficulties which developed in
Korea and other Asian markets in late 1997, only $122,000 of product was
released for shipment to the distributor between December 31, 1997 and
March 27, 1998. The Company is continuing to implement engineering,
marketing and distribution programs begun during 1997 to significantly
increase sales to non-Korean customers, especially in the U.S. The
company is also working with its Korean distributor to develop
significant sales in that market during 1998. However, the outlook for
increasing revenues, including the level and timing of renewed Korean
sales, is uncertain. Also, the Company's progress toward improved cash
flow may be delayed beyond current expectations. Accordingly, the Company
has made contingency plans to reduce costs and preserve cash resources at
lower levels of revenue.
In order to finance both the expected operating losses and expected
growth in production and revenue, the Company obtained financing in
February 1998, through a sale of preferred stock and establishment of a
secured credit facility (note 25). The Company believes these financial
resources will be adequate to fund operations until profitability and
positive operating cash flow are achieved. The Company cannot assure that
profitability and positive cash flow will be achieved when expected. If
the aforementioned sales plans are not achieved, operating losses and
negative cash flows exceed the Company's estimates, or capital
requirements in connection with the design, development, and
commercialization of its principal products are higher than estimated,
the Company will need to raise additional capital. Although the Company
believes it could raise additional capital through public or private
equity or debt financings, if necessary, the Company cannot assure that
such financings would be available, or available on acceptable terms. If
such financing were not available, the Company has determined that a
significant reduction of engineering, development, selling, and
administrative costs would allow the Company to continue as a going
concern through 1998.
31
32
(2) Significant Accounting Policies and Practices
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The preparation
of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(a) Principles of Consolidation
The consolidated financial statements include the financial
statements of the Company and its subsidiaries, all of which are
wholly owned, since their dates of acquisition. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" requires disclosure of
the fair value of certain financial instruments for which it is
practicable to estimate fair value. For purposes of the disclosure
requirements, the fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale
or liquidation. The carrying values of cash, accounts receivable,
marketable securities, notes payable and accounts payable are
reasonable estimates of their fair value due to the short-term
maturity of underlying financial instruments. It was not practical
to estimate the fair value of the Company's long-term debt because
quoted market prices do not exist and comparable securities were
not available.
(c) Revenue and Expense Recognition
Revenue from product sales is recognized upon shipment of
products. Reserves for estimated sales returns and allowances are
recorded in the same accounting period as the related revenues.
Revenue from engineering services is recognized as the services
are provided to the customers.
Contracts that are expected to be completed within three months
are generally considered short-term contracts and revenue is
recognized upon shipment to the customer. Revenue on longer-term
contracts is generally recognized using the
percentage-of-completion method. Under the
percentage-of-completion method, revenue recognition is measured
by the proportion of the contract costs incurred to date to
estimated total costs for each contract. Contract costs include
all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies,
tools and repair costs. General, administrative and engineering
and development costs are charged to expense as incurred. Changes
in estimated profit on contracts are recognized in the period in
which the revisions are determined. Provisions for estimated
losses on uncompleted contracts are charged to earnings in the
period in which such losses first become apparent.
32
33
(d) Inventories
Inventories consist of raw materials, work in progress and
finished goods, and are stated at the lower of standard cost
(which approximates cost determined on a first-in, first-out
basis) or market.
(e) Property and Equipment
Property and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments.
Depreciation on equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Equipment
held under capital leases and leasehold improvements are amortized
on a straight-line basis over the shorter of the lease term or
estimated useful life of the assets. The estimated useful lives
are as follows:
Years
-----
Machinery and equipment 5 to 7
Computer equipment and software 3 to 5
Furniture and fixtures 5 to 7
Motor vehicles 3
(f) Deferred Financing Costs
A portion of the proceeds from the issuance of convertible debt
securities with beneficial conversion features and/or detachable
stock purchase warrants is recognized as additional paid-in
capital and as a discount to its related debt instrument and
amortized to interest expense ratably from the date of issuance to
the date the related debt first becomes convertible. Other costs
in connection with the issuance of the same securities are also
deferred and amortized in the same manner (notes 11 and 12).
Deferred financing costs in connection with the issuance of other
debt are amortized to interest expense using the interest method
over the term of the related debt instrument (note 10).
(g) Engineering and Development and Software Development Costs
Engineering and development costs are expensed as incurred.
Capitalization of software development costs commences upon the
establishment of technological feasibility and ceases when the
product is generally available for sale. Both the establishment of
technological feasibility and the ongoing assessment of
recoverability of capitalized development costs involve judgments
by management with respect to certain external factors, including,
but not limited to, anticipated future revenues, estimated
economic life and possible developments in software and hardware
technologies. In 1996, the Company determined that technological
feasibility and future revenue potential had been established for
the SONETLYNX product line. During the years ended December 31,
1997 and 1996, the Company capitalized $1,317,000 and $1,395,000
of software development costs and charged operations for $477,000
and $6,000 of amortization, respectively. Amortization is based on
estimated product revenues over the next five years.
33
34
During the first three quarters of 1996, the Company capitalized
software development costs associated with the development of the
CS4 programmable switch, having established technological
feasibility early in 1996. In December 1996, a reassessment of the
product definition rendered invalid the establishment of
technological feasibility because feasibility had not been
attained for all the inter-related modules of the product.
Accordingly, all costs that had been capitalized in previous
quarters, totaling $2,442,000, were charged to engineering and
development expense in the fourth quarter of 1996.
During the year ended December 31, 1996, the Company advanced
$396,000 to a software developer in connection with the
development of certain software and related technology. Such
amounts were charged to 1996 engineering and development expense.
(h) Earnings (Loss) Per Common Share
Earnings Per Share - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share." Statement 128 established
standards for computing and presenting earnings per share (EPS)
and is effective for financial statements issued for periods
ending after December 15, 1997. This statement requires
presentation of basic and dilutive EPS. Basic EPS excludes the
effect of common stock equivalents while diluted EPS gives effect
to all dilutive potential common shares outstanding during the
period.
(i) Foreign Currency Translation
The Company's United Kingdom subsidiaries, Intelect Europe Limited
("IEL") and Intelect Network Systems Limited ("INSL"), used the
local currency as the functional currency and translated net
assets at the exchange rates in effect on the balance sheet dates,
while income and expense accounts were translated at average
rates. Foreign transaction exchange gains and losses were
recognized as income or expense. Foreign currency translation
adjustments and transaction amounts were not significant.
(j) Income Taxes
The Company accounts for income taxes under the liability method
as required by Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). Under this
method, deferred tax assets and liabilities are determined based
on differences between the financial reporting and income tax
bases of assets and liabilities and are measured using the enacted
tax rates and laws expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
34
35
(k) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash
and cash equivalents include cash held in banks and time deposits
having maturity within three months of the date of purchase by the
Company.
(l) Goodwill
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line
basis over 10 to 15 years. Accumulated amortization at December
31, 1997, and 1996, was $2,951,00, and $1,627,000, respectively.
The Company assesses the recoverability of goodwill by determining
whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of the
goodwill impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of
the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
During the year ended December 31, 1996, the Company charged
$4,175,000 to operations for the writedown of goodwill in
connection with the 1996 acquisition of Intelect Visual
Communications (see note 7(d)). The goodwill was considered
impaired due to design flaws in the products acquired, which
required design changes and enhancements and delayed market
introduction. In addition, due to the liquidation of IEL, as
described in note 7(b), goodwill of $740,000 associated with the
1995 acquisition of IEL was charged to 1996 operations. The
aforementioned writedowns were measured in accordance with the
policy described above.
At December 31, 1997, the Company believes that no significant
impairment of the remaining goodwill has occurred and that no
reduction of the estimated useful lives is warranted.
(m) Other Intangible Assets
Other intangible assets consist of a software license from a
vendor (1996 only) and purchased product technology (note 8).
Product technology assets are being amortized by the straight-line
method over periods ranging from three to five years.
(n) Stock Option Plan
The Company accounts for its stock option plan in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense is recorded on the
date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company
adopted SFAS No. 123, Accounting for Stock-Based Compensation,
which permits pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1995
and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied.
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36
(o) Use of Estimates
The Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from these
estimates.
(p) Reclassification
Certain prior period balances have been reclassified to conform to
the current year presentation.
(3) Cash and Cash Equivalents
Cash and cash equivalents are comprised of the following:
December 31,
------------
1997 1996
---- ----
Cash $ 2,094 $ 1,304
Interest-bearing deposits -- 3,559
--------------- ---------------
Total $ 2,094 $ 4,863
=============== ===============
(4) Investments in Marketable Securities
Marketable securities are considered available-for-sale and are stated at
fair value. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and
are reported as a separate component of shareholders' equity until
realized. Realized gains and losses from the sale of such securities are
determined on a specific identification basis. There were no sales of
securities during any of the periods presented. Certificates of deposit
are interest-bearing and are pledged in the course of contractual
performance and for the purpose of obtaining operating leases. A summary
of such securities follows:
December 31,
------------
1997 1996
---- ----
Gross Gross
unrealized unrealized
holding Fair holding Fair
Cost gains value Cost gains value
---- ----- ----- ---- ----- -----
Equity securities $ 52 2 54 $ 52 18 70
Certificates of deposit 888 -- 888 784 -- 784
-------- -------- -------- -------- -------- --------
Total $ 940 2 942 $ 836 18 854
======== ======== ======== ======== ======== ========
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37
(5) Inventories
The components of inventories are as follows:
December 31,
------------
1997 1996
---- ----
Raw materials $ 5,209 $ 2,727
Work in progress 630 292
Finished goods 2,050 1,213
------------ ------------
7,889 4,232
Less allowance for obsolescence (1,600) (1,254)
------------ ------------
Total $ 6,289 $ 2,978
============ ============
(6) Property and Equipment
Property and equipment are summarized as follows:
December 31,
------------
1997 1996
---- ----
Machinery and equipment $ 3,883 2,785
Computer equipment and software 3,026 2,537
Furniture and fixtures 1,138 711
Leasehold improvement 223 31
Motor vehicles -- 76
--------------- ---------------
8,270 6,140
Less:
Accumulated depreciation and amortization (2,229) (1,094)
Provision for loss on liquidation (note 7(b)) -- (761)
--------------- ---------------
Total $ 6,041 4,285
=============== ===============
(7) Acquisitions
During 1995, the Company purchased Intelect Network Technologies Company
("INT") and Intelect Europe Limited ("IEL"), and during 1996, the Company
purchased DNA Enterprises, Inc. ("DNA") and Intelect Visual
Communications Corp. ("IVC"). A summary of these acquisitions is as
follows:
(a) Intelect Network Technologies Company
On January 13, 1995, the Company acquired 16% of the capital stock
of INT (formerly known as Intelect, Inc.) for $400,000. On March
31, 1995, the Company entered into an agreement to purchase the
remaining 84% of the capital stock of INT (the "Option
Agreement"). Under the terms of the Option Agreement, the Purchase
Price was payable as follows:
(i) $2,500,000 payable in debentures (the "Debentures") of INT
plus the amount by which certain of INT's debts to two major
customers (the "Debts") were settled for less than
$6,000,000. The Debts were settled by the Company for
$5,180,000 and, accordingly,
37
38
the face value of the Debentures was increased to $3,320,000
($2,500,000 plus $6,000,000 minus $5,180,000). The face
value of the Debentures was reduced by the amount that
defined net assets at the acquisition date (April 24, 1995)
was less than $1,268,000. The amount of this reduction was
$3,013,000 and, accordingly, the face value of the
Debentures at December 31, 1995 was $307,000.
(ii) $4,000,000 in "Contingent Purchase Consideration" calculated
on the future profitability of INT over the four year period
from January 1, 1995. The Additional Payments were payable
in cash or common stock, at the Company's option.
The first step of the acquisition of INT involved the purchase of
a minority interest (16%) for cash. The Company's equity in the
earnings of INT prior to acquisition of the remaining 84%, the
second step, amounted to a loss of $280,000 and equity in the
extraordinary gain arising from the restructuring of certain notes
payable of $646,000, which have been stated separately in the
accompanying 1995 Consolidated Statements of Operations.
On October 7, 1996, the Company reached an agreement with the
holders of the Debentures (the "Vendors"), under which the Vendors
exchanged their remaining rights to the Debentures and Contingent
Purchase Consideration in exchange for 169,986 shares of common
stock. The transaction increased Goodwill by $660,000.
(b) Intelect Europe Limited
On August 31, 1995, the Company acquired 100% of the capital stock
of IEL for $391,000 in cash and up to 300,000 of the Company's
common shares in additional payments based on the future
profitability of IEL over the five year period beginning August
31, 1995.
In December, 1996, management made the decision to close the
operations of IEL, which was subsequently placed in voluntary
liquidation. The liquidation represented a disposal of a part of a
line of business. Asset impairments were recorded and estimated
liabilities to be incurred as a result of the liquidation were
accrued, resulting in a charge to expense of $1,807,000 in 1996,
including a writedown of $740,000 of unamortized goodwill.
(c) DNA Enterprises. Inc.
On February 13, 1996, the Company acquired 100% of the capital
stock of DNA for $8,000,000, plus costs, payable as follows:
1. $3,000,000 cash at closing.
2. $1,000,000 cash on the first anniversary of closing.
3. $400,000 cash on the second anniversary of closing.
4. Warrants to purchase 300,000 common shares at $5.00 per
share on the first anniversary of closing.
5. Warrants to purchase 300,000 common shares at $7.00 per
share on the second anniversary of closing.
38
39
The Company agreed to redeem the $5.00 warrants at prices of
$5.00, $5.50 and $6.00 per warrant share on the first, second, and
third anniversaries of closing, respectively, and redeem the $7.00
warrants at prices of $5.50 and $6.00 per warrant share on the
second and third anniversaries of closing, respectively, in each
such case at the option of the warrant holders. The warrants were
classified similar to redeemable preferred stock and included in
long-term debt at their highest redemption price, totaling
$3,600,000 at December 31, 1996 (note 11).
The Company has renegotiated terms of payment of its redemption
obligations (notes 11 and 25). On the first and second
anniversaries, the warrant holders elected to redeem all 300,000
common share warrants available on each date.
(d) Intelect Visual Communications Corporation
On March 29, 1996, the Company acquired 100% of the capital stock
of IVC (formerly known as Mosaic Information Technologies, Inc.)
for 479,370 common shares valued at $5.00 per share. The Company
also paid $695,000 cash, and issued 66,050 common shares, valued
at $5.375 per share, as payment of certain other acquisition
costs. The total cost of the acquisition, including working
capital advances prior to acquisition, was $4,747,000. An
additional 50,000 common shares, valued at $5.00 per share, were
issued to each of two selling shareholders pursuant to employment
agreements, and charged to compensation expense.
All acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase prices have been allocated to
the assets acquired and the liabilities assumed based on the estimated
fair values at the dates of acquisition. The excess of purchase price
over the estimated fair values of the net assets acquired has been
recorded as goodwill, which is being amortized over 15 years for INT and
10 years for DNA. As discussed in note 2, all goodwill in connection with
the acquisitions of IVC and IEL was written off in 1996.
The estimated fair values of assets acquired and liabilities assumed on
the respective transaction dates are summarized as follows:
DNA IVC INT IEL
--- --- --- ---
Cash $ 3 27 40 --
Accounts receivable 621 19 454 388
Inventory -- 245 2,683 278
Property and equipment 502 81 700 492
Goodwill 7,280 4,514 8,260 812
Accounts payable and accruals (166) (123) (4,721) (1,293)
Deferred taxes (228) -- -- --
Debt -- (16) (6,530) (286)
------------ ------------ ------------ ------------
$ 8,012 4,747 886 391
============ ============ ============ ============
Purchase prices include legal and other costs associated with the
acquisitions.
39
40
Operating results of the acquisitions are included in the Company's
consolidated results of operations from the effective dates of the
acquisitions. The following unaudited pro-forma summary presents the
consolidated results of operations as if the acquisitions had occurred at
January 1, 1996 and November 1, 1994, after giving effect to certain
adjustments, including amortization of goodwill, additional interest
expense on the acquisition debt and related income tax effects. These
pro-forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the
acquisitions been made as of those dates or of results which may occur in
the future:
Years ended
-----------
December 31, October 31,
1996 1995
---- ----
Net revenues $ 10,320 $ 9,330
============ ============
Loss from continuing operations $ (43,251) $ (4,580)
============ ============
Net loss per common share $ (3.34) $ (0.42)
============ ============
Unaudited pro forma amounts have not been presented for the two-month
period ended December 31, 1995 because presentation of such information
is not considered meaningful.
(8) Other Intangible Assets
Other intangible assets summarized as follows:
December 31,
------------
1997 1996
---- ----
Investment in technology associated with SONETLYNX
products (note 16) $ 1,407 500
Technology license fees associated with video-
conferencing products -- 3,267
Other intellectual property 159 125
---------- ----------
1,566 3,892
Less accumulated amortization (398) (1,013)
---------- ----------
$ 1,168 2,879
========== ==========
At December 31, 1996, the Company's technology license asset associated
with its videoconferencing product and related liability were in dispute.
The Company had not made any payments under the applicable license
agreement after September 1996. The Company executed an amended
technology license agreement with the licensor in settlement of the
dispute. As a result of such settlement, the Company was released from
paying a disputed obligation of $2,550,000 under the original license
agreement and was required to pay $150,000 to the licensor for accrued
and future minimum royalties. Further royalty payments, if any, will be
contingent on sales of certain defined products, which products do not
include the LANscape 2.0 wavelet-based video communications product line.
In concert with the extinguishment of the $2,550,000 liability, an
intangible asset of identical value was written off.
40
41
(9) Discontinued Operations - Sale of Savage Corporation
On October 3, 1995, the Company signed a Stock Purchase Agreement (the
"Agreement") to sell its wholly-owned subsidiary Savage Corporation
("Savage") to Savage Sports Corporation (the "Buyer"), a newly-formed
company owned by Ronald Coburn, the President of Savage Arms, Inc. (a
wholly-owned subsidiary of Savage) and Fleet Equity Partners of
Providence, Rhode Island. The Agreement reflected a base purchase price
of $33,000,000 and the assumption by the buyer of up to $6,000,000 of
defined debt. The Company was required to retire certain convertible
preferred shares of Savage which required a cash payment of $500,000 and
the issuance of 160,991 shares ($425,000 fair value at date) of the
Company and to retire a specific debt of Savage aggregating $9,447,000 of
principal and interest.
On October 31, 1995, the Closing Date of the sale of Savage (the
"Closing"), Savage's debts, as defined above, were less than $6,000,000
and, accordingly, the net cash proceeds to the Company on the sale of
Savage amounted to $23,053,000 (being the gross proceeds of $33,000,000
less $9,447,000 used to retire a specific debt and $500,000 to retire
160,991 convertible preferred shares).
The Company recorded a gain on the sale of Savage, for the year ended
October 31, 1995, as follows:
Base sale price $ 33,000
Investment in and advances to Savage (17,605)
-----------
Gross gain 15,395
Less:
Product liability and environmental costs (675)
Legal, financing and other costs (896)
-----------
Net gain on sale $ 13,824
===========
In connection with the sale of Savage, the Company has retained customary
environmental and product liability contingent liabilities relating to
Savage's operations prior to the Closing. The Company purchased insurance
to cover certain of these contingent liabilities. There are no assurances
that the insurance coverage will be sufficient to settle all claims (note
20). The net liabilities of discontinued operations represent provisions
for costs associated with the sale of Savage related principally to
product and environmental liabilities of $400,000 at December 31, 1997
and 1996, respectively.
Operating results of discontinued operations have been reclassified from
amounts previously reported in the consolidated statement of operations
and have been reported separately in the consolidated statements of
operations. During the years ended December 31, 1997 and 1996, the
Company recorded charges of $498,000 and $56,000 to the gain on disposal,
representing legal fees (note 20).
During the year ended October 31, 1995, the Company acquired Lakefield
Arms Limited for $1,923,000, comprised of $998,000 cash and 416,666
common shares, valued at $2.22 per share. Lakefield Arms Limited was sold
along with the other assets of Savage Corporation in October 1995.
41
42
During the Transition Period ended December 31, 1995, the Company
recorded an adjustment to the gain of $236,000 representing non-cash
compensation.
The results of discontinued operations for the year ended October 31,
1995 are as follows:
Net sales and other revenues $ 35,009
Costs and expenses 28,857
--------------
Income before income taxes 6,152
Income taxes 2,606
--------------
Income from discontinued operations $ 3,546
==============
(10) Notes payable
In February 1997, the Company obtained a $15,000,000 credit facility from
a private lender (the "Credit Facility"). Concurrent with the execution
of the Coastal Note (defined below) and after having drawn down
$6,000,000, the Credit Facility was terminated, in exchange for warrants
to purchase 50,000 shares of common stock (note 16).
In May 1997, the Company executed a loan agreement with The Coastal
Corporation Second Pension Trust (the "Coastal Trust") whereby the
Company borrowed $5,000,000 (the "Coastal Note") and the Coastal Trust
purchased $5,000,000 of Series A preferred stock. The Coastal Note,
together with accrued interest of $72,000 was subsequently converted into
2,517,986 shares of Series A preferred stock.
In August 1997, after having converted the Coastal Note into preferred
stock, the Company and the Coastal Trust amended and restated the loan
agreement to provide for new borrowing, on a revolving basis, of up to
$5,000,000 (the "Revolving Loan").
42
43
Notes payable at December 31, 1997, are as follows:
Credit Facility with a private lender, due March 27, 1998, including
interest at the rate of 2% over prime (10.5% at December 31, 1997),
secured by all outstanding shares of the Company's wholly owned U.S.
subsidiaries (less unamortized discount of $176,000) $ 5,824
Revolving Loan with the Coastal Trust, due March 27, 1998, including
interest at the rate of 2% over prime (10.5% at December 31, 1997)
secured by all outstanding shares of the Company's wholly owned U.S.
subsidiaries. Advances are convertible into convertible preferred
stock, at any time, at the holder's option, at $6.18375 per share
(less unamortized discount of $402,000) 2,598
Promissory notes, unsecured, due on demand, bearing interest at 3%
over prime (11.5% at December 31, 1997), payable to a group of
individuals, including $233,000 to directors, $200,000 from an
officer and $210,000 from employees of the Company, convertible at
any time by the holders into common stock at a price of $5.25 per
share 710
--------
Total $ 9,132
========
The Credit Facility, among other things, requires repayment in the event
of certain cash sales of equity or placement of debt. Financing costs in
connection with the issuance of the Credit Facility were $777,000,
including $546,000 in the fair value of warrants to purchase 750,000
shares of common stock (note 16), valued using the Black-Scholes model,
and $231,000 in cash. In 1997, $601,000 was charged to interest expense
using the effective interest method over the loan period.
The Revolving Loan, among other things, prohibits any additional
indebtedness without the consent of the Coastal Trust, restricts payment
of dividends on capital stock other than for dividends payable in capital
stock, limits any purchase or redemption of any capital stock, and
requires repayment in the event of certain cash sales of equity.
Financing costs in connection with advances under the revolving loan were
$995,000, including $987,000 in the fair value of warrants to purchase
450,000 shares of common stock (note 16), valued using the Black-Scholes
model, and $8,000 in cash. In 1997, $593,000 was charged to interest
expense using the effective interest method over the loan period. Future
advances, if any, will result in the issuance of warrants to purchase
150,000 shares for every $1,000,000, or portion thereof, advanced.
Financing costs in connection with the Coastal Note and the sale of
preferred stock were $908,000, including $457,000 in the fair value of
warrants to purchase 750,000 shares of common stock (note 16), $345,000
in the fair value of an option to purchase the $5,000,000 of preferred
stock and $106,000 in cash. In 1997, $144,000 was charged to interest
expense and $764,000 was charged to additional paid-in capital upon sale
of the preferred stock.
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44
(11) Long-term debt
Components of long-term debt are as follows:
December 31,
------------
1997 1996
---- ----
Contract for acquisition of technology license with original face
value of $3,500,000, payable in quarterly installments of
$325,000 through June 1998 and a final payment in September 1998
of $275,000, renegotiated and settled in
November 1997 (note 8) $ -- $ 2,363
Repurchase agreements for common stock warrants held by former
shareholders of DNA, payable in two installments - $1,500,000 in
February 1997, renegotiated and paid in monthly installments of
$200,000, including interest at 6%, through December 1997, and
$2,100,000 in February 1998
(notes 7(c) and 25) 2,100 3,600
Partial purchase price of DNA, payable in two installments -
$1,000,000 in February 1997 and $400,000 in February 1998,
renegotiated into notes payable in monthly installments of
$100,000, including interest of 6% through December 1997, and 8%
after February 1998, through May 1998 (notes 7(c)
and 25) 427 1,400
----------- --------
2,527 7,363
Less current installments (2,527) (4,125)
----------- --------
$ -- $ 3,238
=========== ========
The technology contract was discounted in the accompanying 1996
consolidated financial statements to an effective interest rate of 7%.
Accordingly, the carrying amounts approximate fair value.
(12) Convertible Debentures
During the year ended December 31, 1996, the Company issued three series
of convertible debentures: "June Debentures" in the aggregate principal
amount of $5,000,000 bearing interest at 7.5%, "August Debentures" in the
aggregate principal amount of $10,000,000 bearing interest at 7.5%, and
"October Debentures" in the aggregate principal amount of $10,000,000
bearing interest at 7%.
At December 31, 1996, the June Debentures were fully converted into
773,514 shares of common stock, the August Debentures were partially
converted into 883,691 shares of common stock, and the October Debentures
were partially converted into 180,000 shares of common stock.
At December 31,1997, the August Debentures were fully converted into
2,582,106 shares of common stock and the October debentures were fully
converted into 3,868,449 shares of common stock.
44
45
Convertible debentures were comprised of the following at December 31,
1996:
7.5% debentures, due August 8, 1998, interest payable quarterly,
redeemable at the Company's option after August 8, 1997, at 125%
of the face amount for six months and 120% thereafter, or at the
Nasdaq market price of the common stock if the stock price falls
below the fixed conversion price of $11.0825, and convertible
into common shares, at the holder's option, at the lesser of 85%
of the Nasdaq five day average closing bid prior to the notice
of conversion date, or $11.0825, subject to a maximum of
2,582,107 shares
$ 5,723
7% debentures, due October 15, 1998, interest payable quarterly,
redeemable at any time at the Company's option at 117.5% of the
face amount, and convertible into common shares, at the holder's
option, in equal one-third amounts of principal sixty, ninety
and one hundred twenty days after October 15, 1996, at the
lesser of 82.5% of the Nasdaq five day average closing bid prior
to the notice of conversion date, or $12.00 (less unamortized
discount of $582,000)
8,608
--------
Total $ 14,331
========
Financing costs incurred in 1996 in connection with the issuance of
debentures were $9,687,000, including $4,947,000 allocated to beneficial
conversion features, $3,117,000 in the fair value of warrants to purchase
420,063 shares of common stock (note 16), valued using the Black-Scholes
model, and $1,623,000 in cash. Interest expense included $582,000 and
$9,105,000 in 1997 and 1996, respectively.
(13) Lease Commitments
The Company is obligated under various capital equipment leases that
expire during the next three years. The gross amounts of equipment and
vehicles and related accumulated amortization recorded under capital
leases were as follows:
December 31,
------------
1997 1996
---- ----
Equipment $ 257 160
Less accumulated amortization 69 39
---------- ----------
$ 188 $ 121
========== ==========
Amortization of assets held under capital leases is included with
depreciation and amortization expense.
The Company leases office space and certain equipment under leases
expiring at various dates through 2004. Rental expense under operating
leases was approximately $1,528,000 and $1,032,000 for the years ended
December 31, 1997 and 1996, respectively, $48,000 for the two months
ended December 31, 1995 and $107,000 for the year ended October 31, 1995.
45
46
Future annual year minimum commitments as of December 31, 1997 under
capital and operating leases are as follows:
Capital Operating
Years ending December 31, leases leases
------ ------
1998 $ 89 1,501
1999 43 1,457
2000 12 772
2001 -- 693
2002 and thereafter -- 1,107
--------------- ---------------
Total minimum lease payments $ 144 5,530
=============== ===============
Imputed interest included in future minimum commitments on capital leases
is not material.
(14) Employee Benefit Plans
The Company sponsors defined contribution 401(k) plans for substantially
all employees. Pursuant to the plans, employees may request the Company
to deduct and contribute amounts from their salary on a pre-tax basis.
Employee contributions are subject to certain limitations and the Company
may make matching contributions, at its discretion. The Company may also
make discretionary contributions in addition to matching contributions.
Company contributions vest ratably over periods of four to five years,
beginning in the second or first year of employment, respectively.
Company contributions to the plans were $345,000 and $459,000 for the
years ended December 31, 1997, and 1996, respectively, $16,000 for the
two month period ended December 31, 1995 and $26,500 for the year ended
October 31, 1995.
(15) Income Taxes
Total income tax expense was allocated as follows:
Years ended Two months
December 31, ended Year ended
------------ December 31, October 31,
1997 1996 1995 1995
---- ---- ---- ----
Loss from continuing operations $ (126) 87 -- --
Income from discontinued
operations -- -- -- 2,606
Goodwill, for initial recognition
of acquired tax liabilities -- 228 -- --
Shareholder's equity (use of net
operating loss carryforwards in
existence at date of quasi-
reorganization) -- -- -- (1,472)
---------- ---------- ---------- ----------
$ (126) 315 -- 1,134
========== ========== ========== ==========
In 1995, the benefit from the utilization of net operating losses from
discontinued operations, in existence as of the date of the
quasi-reorganization, was recorded as a component of shareholders'
equity.
46
47
Significant components of the provision for income taxes attributable to
continuing operations for the years ended December 31,1997 and 1996 (two
months ended December 31, 1995, and year ended October 31, 1995: nil) are
as follows:
1997 1996
---------- ----------
Current
Federal $ -- --
State 51 --
---------- ----------
Total current 51 --
---------- ----------
Deferred:
Federal (171) 84
State (6) 3
---------- ----------
Total deferred (177) 87
---------- ----------
Total current and deferred $ (126) 87
========== ==========
The difference between the actual income tax benefit and the benefit
computed by applying the statutory corporate income tax rate of 34% to
pretax losses from continuing operations is attributable to the
following:
Years ended Two months
December 31, ended Year ended
------------ December 31, October 31,
1997 1996 1995 1995
------- ------- ------- -------
Computed expected tax benefit $(6,755) (14,585) (1,024) (1,766)
Increase in net operating loss
carryforwards not providing
current benefit 5,394 7,530 880 1,292
Permanent items 407 1,776 -- 390
Tax effect of loss not subject to
U.S. taxation 856 4,517 144 117
Other (28) 849 -- (33)
------- ------- ------- -------
Tax expense (benefit) $ (126) 87 -- --
======= ======= ======= =======
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48
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are as follows:
December 31,
------------
1997 1996
---- ----
Deferred tax assets:
Preacquisition net operating loss carryforwards $ 4,831 4,831
Postacquisition net operating loss carryforwards 14,156 8,762
Inventories - due to reserves and additional costs
capitalized for tax 544 374
Accrued contract completion costs 34 110
Goodwill 71 71
License fees and intellectual property 11 257
Other expenses 836 423
Alternative minimum tax and other credit carryforwards 298 298
---------- ----------
Gross deferred tax assets 20,781 15,126
Less valuation allowance (20,781) (15,126)
---------- ----------
Deferred tax assets $ -- --
========== ==========
Deferred tax liabilities:
Depreciation $ -- 87
Other 137 228
---------- ----------
Deferred tax liabilities $ 137 315
========== ==========
Net deferred tax liability $ 137 315
========== ==========
At December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $55,845,000, and tax credit carryforwards
of $298,000. The future utilization of $14,210,000 of the preacquisition
net operating losses and the credit carryforwards related to the
acquisition of INT and IVC will be limited under Internal Revenue Code
sections 382 and 383. The tax benefits from the utilization of the
preacquisition operating loss carryforwards and the tax credits will be
credited to goodwill when realized.
Following is a summary of the carryforwards and the expiration dates as
of December 31, 1997:
Expiration
Amounts dates
------- -----
Postacquisition net operating loss carryforwards $ 41,635 2012
Preacquisition net operating loss carryforwards 14,210 2008-2009
Alternative minimum tax credit 38 -
General business credit 260 1998-2000
In 1996, Intelect (Bermuda) was not subject to income tax in Bermuda and
did not consider itself to be engaged in trade or business in the U.S. As
such, Intelect (Bermuda) does not expect to be subject to direct United
States taxation.
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(16) Stockholders' Equity
Authorized share capital of $0.01 par value was as follows:
December 31,
------------
1997 1996
---- ----
Preferred Stock 50,000,000 15,000,000
Common Stock 50,000,000 80,000,000
Share transactions during the year ended December 31, 1997, were as
follows:
a. Authorized 10,000,000 shares and sold 2,482,005 shares of
$2.0145, 10% Cumulative Convertible Preferred Stock, Series A,
for $5,000,000, in conjunction with a loan agreement with the
Coastal Trust, resulting in net proceeds of $4,911,000, after
issuance costs of $89,000. Dividends are payable quarterly, in
cash or common stock, at the Company's option. The Company
elected to pay dividends payable at September 30 and December 31,
1997, in common stock. The series may be redeemed, at the
Company's option, at 110%, 105% and 100% of face value after June
1, 1999, 2000, and 2001, respectively, and is convertible into
shares of common stock on a share for share basis, subject to
anti-dilution provisions. The holders have the right of first
refusal to participate in certain private equity or debt
offerings. The series ranks in pari passu with the Series B and
Series C preferred stock.
b. Authorized and sold 914,286 shares of $4.375, 10% Cumulative
Convertible Preferred Stock, Series B, for $4,000,000, in a
private placement, resulting in net proceeds of $3,877,000, after
issuance costs of $123,000. Dividends are payable quarterly, in
cash or common stock, at the Company's option, beginning March
31, 1998. The series may be redeemed, at the Company's option, at
the greater of $5.25 per share or the average closing market bid
price for the five consecutive trading days prior to the date of
redemption. Beginning after May 31, 1998, 50% of the preferred
stock is convertible into common stock and the remaining 50% is
convertible into common stock on June 30, 1998. The number of
common shares the holder is entitled to receive on conversion is
the greater of (i) the number of shares of preferred stock
multiplied by 1.10, or (ii) the number of shares of preferred
stock multiplied by a number, the numerator of which is $4.375
and the denominator if which is 0.85 multiplied by the average
daily closing market bid price for the common stock, as quoted on
the Nasdaq National Market system, for the five trading days
immediately preceding the date of the notice of election of
conversion. The holders have the right of first refusal to
participate in certain private equity or debt offerings. The
series ranks in pari passu with the Series A and Series C
preferred stock.
c. Sold 675,000 shares of common stock in private placements of
60,000 shares at $5.00 per share and 615,000 shares at $5.25 per
share, to accredited investors, resulting in net proceeds of
$3,330,000, after issuance costs of $199,000. An additional
21,400 shares were issued in payment for placement services
related to the 615,000 shares.
d. Issued 780,583 shares of common stock upon the conversion of
Series A preferred stock by the Coastal Trust.
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e. Issued 930,000 shares of common stock upon the exercise of
warrants. 750,000 common shares at $2.00 were issued to the
Coastal Trust; 150,000 shares at $2.00 were issued to the Credit
Facility private lender; and 30,000 shares at $4.50 were issued
pursuant to a consulting agreement, resulting in net proceeds of
$1,890,000 after issuance costs of $45,000.
f. Issued 542,182 shares of common stock at $1.5625, totaling
$847,000, together with $60,000 cash in settlement of all future
royalties under a technology purchase agreement. The royalty
agreement had been initially executed in conjunction with certain
technology purchased by the Company.
g. Issued 11,407 shares of common stock in payment for $58,000 of
interest on Convertible Debentures, due June 30, 1997.
h. Issued 28,148 shares of common stock in payment for $296,000 of
dividends on Series A preferred stock.
i. Issued warrants exercisable for common shares as follows:
Warrant Exercise
Grant date shares price Exercise period
---------- ------ ----- ---------------
February 26, 1997(*) 300,000 $5.00 February 1997 - February 2002
March 27, 1997(*) 300,000 3.25 March 1997 - March 2002
April 24, 1997(*) 150,000 3.25 April 1997 - April 2002
May 1, 1997 100,000 3.00 January 1998 - December 2002
May 1, 1997 100,000 5.00 January 1998 - December 2002
May 1, 1997 100,000 7.00 January 1998 - December 2002
May 8, 1997 300,000 2.00 May 1997 - February 2002
May 8, 1997 300,000 2.00 May 1997 - March 2002
May 8, 1997 150,000 2.00 May 1997 - April 2002
May 8, 1997 50,000 2.00 May 1997 - May 2002
May 8, 1997 750,000 2.00 May 1997 - May 2002
June 19, 1997 6,750 3.6313 June 1997 - June 2004
July 2,1997 30,000 4.50 August 1997 - December 2001
July 25, 1997 6,750 3.6313 July 1997 - June 2004
August 15, 1997 6,750 3.6313 August 1997 - June 2004
August 27, 1997 450,000 6.00 August 1997 - August 2002
August 29, 1997 6,750 3.6313 August 1997 - June 2004
September 17, 1997 13,500 3.6313 September 1997 - June 2004
(*) Replaced on May 8, 1997.
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The fair value of warrants issued was determined using the
Black-Scholes option pricing model with the following assumptions:
Stock Exercise Term Interest Fair
Issue price price (yrs) Volatility rate value
----- ----- ----- ----- ---------- ---- -----
Credit Facility with private lender:
February 26, 1997(*) $4.675 $5.00 1.00 70.06% 6.19% $381,000
March 27, 1997(*) 2.325 3.25 1.00 74.07 6.67 139,000
April 24, 1997(*) 1.619 3.25 1.00 74.36 6.77 26,000
--------
Total 546,000
--------
(*) Replaced on May 8, 1997. The fair value of the
replacement warrants was less than the unamortized value of
the original warrants on date of replacement.
May 8, 1997 1.975 2.00 1.00 74.30 6.62 183,000
May 8, 1997 1.975 2.00 1.00 74.30 6.62 183,000
May 8, 1997 1.975 2.00 1.00 74.30 6.61 91,000
May 8, 1997 1.975 2.00 1.00 74.30 6.59 30,000
Advisory Services Agreement:
May 1, 1997 1.55 3.00 1.67 74.71 6.60 33,000
May 1, 1997 1.55 5.00 1.67 74.71 6.60 16,000
May 1, 1997 1.55 7.00 1.67 74.71 6.60 9,000
-------
Total 58,000
Loan Agreements with Coastal Trust:
May 8, 1997 1.975 2.00 1.00 74.30 6.59 457,000
August 27, 1997 6.444 6.00 1.00 75.00 6.24 987,000
Distributor Agreement:
June 19, 1997 3.581 3.6313 1.00 75.00 6.38 8,000
July 25, 1997 6.344 3.6313 1.00 75.00 6.11 22,000
August 15, 1997 6.475 3.6313 1.00 75.00 6.20 23,000
August 29, 1997 6.731 3.6313 1.00 75.00 6.24 25,000
September 17, 1997 9.438 3.6313 1.00 75.00 6.24 84,000
--------
Total 162,000
Equity Placement Services:
July 2, 1997 Not valued because services were for placement of equity.
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At December 31, 1997, outstanding warrants were as follows:
Warrant Exercise
Grant date shares price Exercise period
---------- ------ ----- ---------------
February 13, 1996 300,000 7.00 February 1998 - February 1999
June 7, 1996 125,000 13.1875 June 1996 - June 2001
August 8, 1996 70,063 8.56375 August 1996 - August 2001
September 9, 1996 125,000 9.5625 September 1996 -September 2001
October 15, 1996 225,000 7.50 October 1996 - October 2001
May 1, 1997 100,000 3.00 January 1998 - December 2002
May 1, 1997 100,000 5.00 January 1998 - December 2002
May 1, 1997 100,000 7.00 January 1998 - December 2002
May 8, 1997 300,000 2.00 May 1997 - February 2002
May 8, 1997 300,000 2.00 May 1997 - March 2002
May 8, 1997 50,000 2.00 May 1997 - May 2002
June 19, 1997 6,750 3.6313 June 1997 - June 2001
July 25, 1997 6,750 3.6313 July 1997 - June 2001
August 15, 1997 6,750 3.6313 August 1997 - June 2001
August 27, 1997 450,000 6.00 August 1997 - August 2002
August 29, 1997 6,750 3.6313 August 1997 - June 2001
September 17, 1997 13,500 3.6313 September 1997 - June 2001
----------
Total 1,985,563
Share transactions during the year ended December 31, 1996, were as
follows:
a. Issued 180,000 common shares at $2.50 per share and 180,000
common shares at $3.50 per share upon the exercise of warrants
issued to the previous owners of Savage Corporation. The
warrants had been issued in connection with the acquisition of
Savage Corporation.
b. Issued 100,000 common shares at $3.75 per share in consideration
for an investment of $375,000 in debentures with a CDN $500,000
face value, previously issued by Lakefield Arms Limited. The
debentures are unsecured, bear interest at 8% per annum, and
mature August 4, 1999.
c. Issued warrants exercisable for common shares in conjunction
with the issuance of convertible debentures, and in conjunction
with the acquisition of DNA Enterprises, Inc., as follows:
Warrant Exercise
Grant Date shares price Exercise period
---------- ------- ----- ---------------
February 13, 1996 300,000 $ 5.00 February 1997 - February 1999
February 13, 1996 300,000 7.00 February 1998 - February 1999
June 7, 1996 125,000 13.1875 June 1996 - June 2001
August 8, 1996 70,063 8.56375 August 1996 - August 2001
September 9, 1996 125,000 9.5625 September 1996 - September 2001
October 15, 1996 225,000 7.50 October 1996 - October 2001
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d. The fair value of warrants issued in conjunction with the
convertible debentures was determined using the Black-Scholes
option pricing model with the following assumptions:
Stock Exercise Term Interest Fair
Issue price price (yrs) Volatility rate value
----- ----- ----- ----- ---------- ---- -----
June 7, 1996 13.1875 13.1875 5.0 70.5% 7.05% $ 1,058,000
August 8, 1996 9.5625 8.56375 5.0 73.1 7.05 453,000
September 9, 1996 7.50 9.5625 5.0 71.6 7.05 561,000
October 15, 1996 7.50 7.50 5.0 68.3 6.00 1,045,000
-----------
Total $ 3,117,000
===========
There have been no dividends declared on common shares for any of the
periods reported.
(17) Employee Stock Option Plan
In 1995, Intelect (Bermuda) adopted a stock option plan (the "Plan")
pursuant to which the Company's Board of Directors may grant stock
options to directors, officers and key employees. The Plan, adopted by
the Company as part of the redomiciling process, authorizes grants of
options to purchase up to 4,000,000 shares of authorized common stock.
The exercise price for stock options granted may range from 25% to 110%
of the fair market value of the shares on the date of grant. All stock
options have 10-year terms and vest and become fully exercisable
according to schedules determined by the Board of Directors, generally
one-third on each of the first three anniversaries of the date of grant.
At December 31, 1997, there were 548,834 shares available for grant under
the Plan. The Plan replaced a predecessor plan which continues only to
the extent that there are 240,000 unexercised options outstanding at
December 31, 1997.
The per share weighted-average fair value of stock options granted during
1997, 1996, and the Transition Period was $2.04, $4.66, and $7.07,
respectively, on the dates of grants. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing
model, with the following weighted-average assumptions:
Two months
Years Ended December 31, ended
------------------------ December 31,
1997 1996 1995
---- ---- ----
Expected dividend yield 0% 0% 0%
Stock price volatility 75% 68% 68%
Risk free interest rate 5.7% 6.1% 6.7%
Expected option term 3 years 3 years 3 years
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, has recognized compensation expense with respect to certain
options granted at exercise prices less than the stock's market value on
the date of grant. During the years ended December 31, 1997 and 1996, and
the Transition Period, the Company recognized compensation expense of
$354,000, $487,000, and $286,000, respectively.
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Had the Company determined compensation cost based on the fair value on
the grant date for its stock options under SFAS No. 123, the Company's
net losses would have been increased to pro forma amounts as follows:
Two months
Years ended December 31, ended
------------------------ December 31,
1997 1996 1995
---- ---- ----
Net loss:
As reported $(20,798) (43,039) (3,012)
Pro forma (25,208) (51,787) (6,420)
Loss per share:
As reported $(1.01) (3.33) (0.26)
Pro forma (1.23) (4.00) (0.56)
Pro forma net losses reflect only options granted in 1997, 1996, and
1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
loss amounts presented above because compensation cost is reflected over
the option's vesting period of three years and compensation cost for
options granted prior to November 1, 1995, is not considered.
Furthermore, the effects of applying SFAS No. 123 may not be
representative of the effects on reported net income for future years.
Stock option activity during the periods indicated was as follows:
Two months
Years ended ended
December 31, December Year ended
------------ 31, October 31,
1997 1996 1995 1995
---- ---- ---- ----
Number of options:
Outstanding, beginning of
period 2,526,500 1,917,800 987,800 1,044,018
Granted 2,208,500 1,260,000 970,000 172,000
Exercised (561,666) (530,000) -- (74,318)
Canceled (902,334) (121,300) (40,000) (153,900)
Outstanding, end of period 3,271,000 2,526,500 1,917,800 987,800
Weighted average exercise price:
Outstanding, beginning of
period $ 4.58 2.56 1.94 1.86
Granted 3.87 6.85 3.22 4.16
Exercised 3.03 1.93 -- 1.93
Canceled 6.32 7.77 3.00 3.93
Outstanding, end of period $ 3.93 4.58 2.56 1.94
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At December 31, 1997 and 1996, the number of options exercisable was
1,056,659 and 734,332, respectively, and the weighted-average exercise
price of those options was $3.78 and $2.79, respectively.
At December 31, 1997, the range of exercise prices and the
weighted-average remaining contractual life of outstanding options, was
$1.00 to $10.375 and 8.7 years, respectively, as shown in the following
table:
Vested option
Option shares shares Exercise prices Expiration
outstanding outstanding per share dates
----------- ----------- --------- -----
100,000 100,000 1.00 1999-2002
826,000 10,000 2.00 2007
40,000 40,000 2.375 2004
100,000 100,000 2.66 2003
760,000 336,663 3.00 2005-7
300,000 100,000 4.00 2007
29,500 -- 4.25 2007
75,000 24,999 4.375 2006
13,000 -- 4.50 2007
168,500 100,000 5.00 2007
100,000 100,000 5.35 2006
25,000 8,333 5.375 2006
20,000 -- 5.94 2007
366,500 75,000 6.25 2007
100,000 33,332 6.50 2006
65,000 21,666 7.50 2006
142,500 -- 8.50 2007
20,000 6,666 9.25 2006
30,000 -- 10.375 2007
(18) Income (Loss) Per Share
The weighted average number of shares outstanding during the period is
calculated as follows:
Two months
Years ended December 31 ended Year ended
----------------------- December 31, October 31
1997 1996 1995 1995
---- ---- ---- ----
Common shares outstanding,
beginning of period 15,027,728 11,385,117 11,385,117 10,583,142
Shares issued (weighted average) 5,530,716 1,558,319 -- 441,360
---------- ---------- ---------- ----------
Weighted average common shares
outstanding 20,558,444 12,943,436 11,385,117 11,024,502
========== ========== ========== ==========
Basic and diluted income (loss) per share is based on the weighted
average number of common shares outstanding for the period. Common share
equivalents relating to the exercise of stock options
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and stock warrants, conversion of preferred stock, or conversion of
convertible debt have been excluded from the computation as the effects
would have been anti-dilutive.
Contingent shares, which were part of the INT and IVC acquisitions have
been excluded from the calculations because it was considered unlikely
that the underlying performance criteria would be met.
(19) Quasi-Reorganization
Quasi-reorganization adjustments in the year ended October 31, 1995 of
$1,545,000 were the result of the realization of deferred tax benefits on
discontinued operations (note 15) and valuation adjustments to
liabilities existing prior to October 31, 1992, date of the
quasi-reorganization.
(20) Contingencies
Intelect (Bermuda) is contingently liable for certain potential
liabilities related to its discontinued operations. Specifically, under a
stock purchase agreement dated October 3, 1995 ("1995 Agreement"),
Intelect (Bermuda) agreed to indemnify Savage Sports Corporation, the
purchaser of Savage Arms, Inc. (a manufacturer of fire arms), for certain
product liability, environmental clean-up costs and other contractual
liabilities, including certain asserted successor liability claims. One
of the liabilities assumed involves a firearms product liability lawsuit
filed by Jack Taylor individually and as father of Kevin Taylor in Alaska
Superior Court (the "Taylor litigation"). Intelect (Bermuda) is informed
that a defendant in the Taylor litigation, Western Auto Supply Co.,
settled the lawsuit for $5 million and, in turn, has asserted a
third-party claim against Savage Arms, Inc. for indemnification in the
amount of the settlement plus attorneys' fees and related costs. Savage
Arms has asserted defenses to the claims and Intelect (Bermuda) believes
additional defenses may be available. Based on the information available
to date, it is impossible to predict the outcome of this litigation or to
assess the probability of any verdict.
Intelect (Bermuda) also has been notified that Savage Sports Corporation
seeks indemnification under the 1995 Agreement in connection with certain
other product liability claims. Most notably, Intelect (Bermuda) has
undertaken the defense of a lawsuit filed against Savage Arms, Inc. by
Emhart Industries, Inc. ("Emhart") in the United States District Court
for the District of Massachusetts (the "Emhart litigation"). In the
lawsuit, Emhart requests indemnification from Savage Arms, Inc. under an
agreement Emhart allegedly executed in 1981 with Savage Industries, Inc.,
claiming that Savage Arms, Inc. is a successor to Savage Industries, Inc.
To date, Emhart has claimed indemnification of approximately $2.2 million
for five lawsuits it has defended or settled and also seeks a declaratory
judgment that it is entitled to indemnification for losses and expenses
related to firearms product liability actions which may be filed against
Emhart in the future. Intelect (Bermuda) intends to assert additional
defenses. The parties are in discovery and Intelect (Bermuda) cannot at
this time predict the outcome of the litigation.
In the event the Taylor litigation and/or Emhart litigation were to be
resolved adversely to Intelect (Bermuda) there would be a material
adverse effect on the Company's financial condition and results of
operations.
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(21) Domestic and Foreign Operations
The Company operates in predominantly one business segment, which
consists of the design, manufacture and sale of telecommunications and
related equipment.
In the periods ended December 31, 1997 and 1995 and October 31, 1995,
substantially all the Company's revenues and assets were in the United
States. Operations discontinued in 1995 were substantially in the United
States. Information about the company's operations in different
geographic locations as of and for the year ended December 31, 1996
follows:
United States Europe Consolidated
------------- ------ ------------
Net revenues $ 6,907 2,445 9,352
======= ===== ========
Operating losses $(13,072) (2,365) (15,437)
====== =====
General corporate expenses (17,548)
Interest expense (9,911)
--------
Loss from continuing
operations before
income taxes $(42,896)
Identifiable assets $ 30,308 221 30,529
Corporate assets 5,489
--------
Total assets $ 36,018
========
Revenue transfers between geographic areas are not material. Operating
profit is total revenue less operating expenses, excluding interest,
income taxes and engineering and development expenses and asset
writedowns which are considered by management to be corporate expenses.
Identifiable assets are those assets of the Company that are identified
with the operations in each geographic area. Identifiable assets for
Europe at December 31, 1996, were disproportionately low due to the
voluntary liquidation of IEL (note 7(b)). Identifiable assets in Europe
at December 31, 1996, were those of Intelect Network Systems Limited, a
sales and service company chartered in November 1996, and sold in May
1997. Corporate assets were principally cash and deferred financing
costs.
Direct and indirect export sales were $25,071,000 (66%) of revenues in
the year ended December 31, 1997. Of the export sales, $22,677,000 were
to Asia, substantially all to the Republic of Korea (note 23).
Direct export sales of $1,402,000 for the year ended December 31, 1996,
are included in the United States net sales.
(22) Related Party Transactions
During the year ended December 31, 1997, the following related party
transactions were recorded:
(a) Borrowed $200,000 from a director in May, and repaid the loan in
September, including interest of $8,000.
(b) Renewed a loan to an officer in the amount of $95,000, including
accrued interest, which was outstanding at December 31, 1997. The 5%
note is secured by a stock pledge agreement.
(c) Borrowed $643,000 from a group of individuals, including $233,000
from directors, $200,000 from an officer and $210,000 from
employees.
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During the year ended December 31, 1996, the following related party
transactions were recorded:
(a) Purchased patents, intellectual property and related proprietary
information from a company owned by an officer for $125,000 and
entered into a royalty agreement with respect to products sold by
the Company which are covered by the patents.
(b) Loaned an officer $135,000, of which $91,000, including accrued
interest, remains outstanding at December 31, 1996. The 5% note is
secured by a stock pledge agreement.
(c) Borrowed $500,000 from a company controlled by a director who was
also the Company's president in July, and repaid the loan in
September, including interest of $13,000.
(d) Paid $120,000 for management fees and rented facilities from a
company controlled by a director who was also the Company's
president.
(e) Amended employment agreements with the now former president and the
present chairman which, generally upon termination, provide for
continuation of salaries for three years following the current year
of employment.
During the period ended December 31, 1995, there were no related party
transactions.
During the year ended October 31, 1995, a nonsalaried director was paid
$150,000 for services rendered in connection with the acquisitions of
Intelect, Inc. and Intelect Europe Limited.
The Company received a short-term loan from a company controlled by a
director who was also the Company's president, in the amount of
$2,000,000 for a period of two months pending the sale of Savage. The
loan was repaid on October 31, 1995 with interest (calculated at 15%) of
$22,000.
The Company also received short-term loans from three directors
aggregating $600,000 during the months of April through June 1995. These
loans were repaid by July 1995 with interest (calculated at 10%) of
$8,000.
In August 1995, the Company issued 150,000 shares to a director, who was
also the Company's president, at $3.50 per share which was the market
value of the Company's shares at the time.
(23) Significant Customers and Concentration of Credit Risk
In 1997, a distributor and one customer represented 59% and 11% of
consolidated net revenues. The distributor sells to at least five end
users in the Republic of Korea.
In 1996, one customer represented 25% of the consolidated net revenue.
Three customers represented 49%, 24% and 11% of the consolidated net
revenues for the two month period ended December 31, 1995.
Four customers represented 27%, 15%, 13% and 13% of consolidated net
revenues for the year ended October 31, 1995.
The Company is subject to credit risk through trade receivables. At
December 31, 1997 the distributor responsible for all revenue from Korea,
accounted for $9,879,000 (63%) of the accounts receivable. The Company
has received from the distributor a promissory note and pledge of
security interests in certain collateral, including the distributor's
accounts receivable. In view of the economic
58
59
conditions and monetary environment in Korea, there is increased
uncertainty of future sales to the distributor and corresponding risk of
collectability of the receivable. However, the distributor has, since
December 31, 1997, paid $4,875,000 of the principal and $63,000 interest
on the note. The Company has assessed the financial condition of the
distributor and believes the balance of the note will be collected in
full.
(24) Supplemental Disclosure of Cash Flow Information (thousands of U.S.
dollars)
Years ended Two months
December 31, ended Year ended
------------ December 31, October 31,
1997 1996 1995 1995
---- ---- ---- ----
Cash paid during the period for:
Interest $ 704 509 23 408
Noncash Items
During the year ended December 31, 1997, the Company recorded the
following noncash transactions:
(a) Converted convertible debentures into common stock - $14,913,000.
(b) Converted notes payable into preferred stock - $5,000,000.
(c) Converted preferred stock into common stock(par value only) -
$8,000.
(d) Applied a note payable against a technology license asset upon
settlement of a contractual dispute - $2,363,000.
(e) Issued common stock in conjunction with termination of a royalty
agreement - $847,000.
(f) Issued common stock in payment of preferred stock dividends -
$296,000.
(g) Issued preferred stock in payment of interest on notes payable -
$72,000.
(h) Issued common stock in payment of interest on convertible debentures
- $58,000.
(i) Issued common stock warrants in conjunction with notes payable -
$1,661,000.
(j) Issued common stock warrants in conjunction with a distributor
agreement - $162,000.
(k) Issued common stock warrants in conjunction with an advisory
services agreement - $58,000.
(l) Issued common stock warrants upon termination of credit facility -
$30,000.
(m) Allocation of retained earnings to beneficial conversion feature of
preferred stock issued - $31,000.
(n) Acquired equipment under capital leases - $117,000.
During the year ended December 31, 1996, the Company recorded the
following noncash transactions:
(a) Converted convertible debentures into stock - $10,087,000 (note 11).
(b) Allocation of proceeds from convertible debentures to beneficial
conversion features - $4,947,000 (note 11).
(c) Issued common stock warrants in conjunction with convertible
debentures - $3,117,000 (notes 11 and 15).
(d) Obtained a technology license in exchange for a note - $3,267,000
(note 8).
(e) Issued stock in final settlement of the Intelect, Inc. acquisition -
$850,000 (note 7(a)).
(f) Issued stock as part of employment agreements - $500,000 (note
7(d)).
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(g) Recognized compensation expense on stock options granted at less
than market price - $487,000 (note 16).
(h) Acquired an other asset with stock - $375,000 (note 15).
(i) Acquired equipment under capital leases - $111,000 (note 12).
During the Transition Period ended December 31, 1995, the Company
acquired equipment under capital leases of $330,000 and made an
adjustment to the purchase price of Intelect Europe of $75,000.
During the year ended October 31, 1995, the Company issued debentures
with a discounted fair value of $224,000 and $477,000 at December 31 and
October 31, 1995, respectively, to the sellers of Intelect, Inc. (see
note 7 above). The Company issued 160,991 shares at October 31, 1995, to
retire certain preferred shares of Savage Arms (with a carrying value of
$402,478) (see note 9 above).
(25) Subsequent Events
(a) On February 9, 1998, the Company sold 10,000 shares of Series C
Convertible Preferred Stock, in a private placement, for $10,000,000.
Dividends accumulate at the rate of 4% per annum, are payable upon
conversion, and may be paid in cash or common stock, at the Company's
option. The preferred stock will automatically convert into common
stock on February 9, 2000, and may be converted prior to that date,
at the holder's option, at the lesser of $9.082 per common share or
at 97% of the market price. Market price is defined as the arithmetic
average of the three lowest closing bid prices in the ten consecutive
trading days immediately preceding the conversion date. The Company
may fix the conversion price at $9.082 if, for any 20 of 30
consecutive trading days, the daily volume-weighted price of the
common stock is $12.00 or greater. The preferred stock may be
redeemed, at the Company's option, at 110% of the stated value if the
daily weighed average trading price is below $3.00 per share for ten
consecutive trading days. Terms of the series, among other things,
limit the rate of conversion and the rate of sale of common stock
acquired upon conversion, prohibit the Company from entering into
certain public or private offerings of securities until the series is
registered and prohibit redeeming any common stock, or declaring any
dividends on common stock. Proceeds of the sale will be used for
working capital and general corporate purposes.
(b) On February 12, 1998, the Company established a $15,000,000 credit
facility (the "Facility") with a private lender, and received an
initial advance of $3,000,000. The Facility is due February 12, 1999,
is secured by all outstanding shares of the Company's wholly owned
U.S. subsidiaries, which are shared in pari passu with two existing
lenders, and bears interest at the rate of 7% per annum, payable at
maturity. In conjunction with advances under the Facility, the lender
is to receive warrants to purchase common stock, exercisable at any
time for a three year period, at the rate of 15,000 warrant shares
for each $100,000 advanced at an exercise price of $7.50 per share
for the first $10,000,000 advanced, and at an exercise price equal to
$1.50 greater than the average closing bid price of the common stock
for the ten day period immediately prior to the date of each advance
for advances over $10,000,000. Outstanding advances and accrued
interest are convertible into shares of common stock at a price of
$9.082, at the lender's option provided the market price of the
common stock is less than $13.50, and at the Company's option if the
market price of the common stock is $13.50 or greater. Market price
is defined as the closing bid price for 15 of the 17 consecutive days
immediately prior to the conversion date. The Facility may be
extended for an additional year in exchange for
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warrants to purchase common stock, exercisable at any time for a
three year period, at the rate of 5,000 warrant shares for each
$100,000 advanced, at the same price as for advances over
$10,000,000. All warrants are subject to certain anti-dilution
adjustments. The Facility, among other things, prohibits any
additional indebtedness and reserves the right to require that any
future advances be used to repay other indebtedness which shares the
security in pari passu. The obligation to make future advances
expires on July 31, 1998. The Company is prohibited from redeeming
any capital stock, declaring any dividends on common stock or making
certain other distributions, as defined. Proceeds of the initial
advance will be used for working capital and general corporate
purposes. Subsequent advances must be applied first to retiring any
then outstanding loans under the previous Credit Facility or advances
under the Coastal Trust Revolving Loan.
(c) On February 17, 1998, the Company renegotiated the terms of payment
on the remaining debt associated with the purchase of DNA. Note
agreements were established with two former shareholders which
provide for initial payments of $125,000 followed by ten monthly
payments of $75,000 to each former shareholder.
(26) Valuation and Qualifying Accounts
Additions Additions
Balance at charged to charged to Balances
beginning costs and other at end
of period expenses accounts Deductions of period
--------- -------- -------- ---------- ---------
For the year ended December 31, 1997:
Allowances deducted from assets:
Accounts and notes receivable $ 542 632 -- 633(a)(c) 541
Inventories 1,254 590 -- 244(b)(c) 1,600
------ ------ ------ ------ ------
Total allowances
deducted from assets $1,796 1,222 -- 877 2,141
====== ====== ====== ====== ======
For the year ended December 31, 1996:
Allowances deducted from assets:
Accounts and notes receivable $ 25 521 -- 4(a) 542
Inventories 730 1,058 -- 534(b) 1,254
------ ------ ------ ------ ------
Total allowances
deducted from assets $ 755 1,579 -- 538 1,796
====== ====== ====== ====== ======
Notes:
(a) Accounts written off
(b) Scrapped, sold or other disposition
(c) Includes liquidation of subsidiary.
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Schedule II
INTELECT COMMUNICATIONS, INC.
Valuation and Qualifying Accounts
Additions Additions
Balance at charged to charged to Balances
beginning costs and other at end
of period expenses accounts Deductions of period
--------- -------- -------- ---------- ---------
For the year ended December 31, 1997:
Allowances deducted from assets:
Accounts and notes receivable $ 542 632 -- 633(a)(c) 541
Inventories 1,254 590 -- 244(b)(c) 1,600
------ ------ ------ ------ ------
Total allowances
deducted from assets $1,796 1,222 -- 877 2,141
====== ====== ====== ====== ======
For the year ended December 31, 1996:
Allowances deducted from assets:
Accounts and notes receivable $ 25 521 -- 4(a) 542
Inventories 730 1,058 -- 534(b) 1,254
------ ------ ------ ------ ------
Total allowances
deducted from assets $ 755 1,579 -- 538 1,796
====== ====== ====== ====== ======
Notes:
(a) Accounts written off
(b) Scrapped, sold or other disposition
(c) Includes liquidation of subsidiary.
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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Registrant's Board of Directors, in accordance with the recommendation of
its audit Committee, which is composed of non-employees of the Registrant, has
requested Arthur Anderson LLP ("Arthur Andersen") to act as independent auditors
of the Registrant for the 1997 fiscal year, subject to shareholder approval, in
replacement of KPMG Peat Marwick, Chartered Accountants, Hamilton, Bermuda
("KPMG").
During the two years ended December 31, 1995 and December 31, 1996, and the
subsequent interim period through the date of the appointment of Arthur Andersen
as the company's new outside auditors, there were no "disagreements" between the
Registrant and KPMG as described in Item 304(a)(1)(iv) of Regulation S-K. The
Registrant requested KPMG to furnish it with a letter addressed to the SEC
stating whether or not it agreed with the above statements. A copy of such
letter, dated August 14, 1997, was filed as an Exhibit to the Form 8-K of the
Company filed on August 18, 1997.
The Registrant engaged Arthur Andersen as its new independent accountants, and
such appointment was approved by the Registrant's shareholders at the August 13,
1997 annual meeting.
As disclosed in the Form 8-K of the Company filed on August 18, 1997, the term
of the Company's previous independent auditors, KPMG, expired at the Company's
annual general meeting of its stockholders held August 13, 1997. The KPMG report
dated April 9, 1997 on the consolidated financial statements of the Company for
the year ended December 31, 1996, noted that the Company has suffered recurring
losses from continuing operations and is dependent upon the successful
development and commercialization of its products and its ability to secure
adequate sources of capital until the Company is operating profitably and noted
that these matters raise substantial doubt about the Company's ability to
continue as a going concern, and that management's plans with regard to these
matters were described in Note 1 to the consolidated financial statements.
KPMG has consented to the Company's inclusion of KPMG's report on the Company's
financial statements for certain prior periods. See Exhibit 23.1 to this Form
10-K. In connection with the consent, KPMG asked the Company to indemnify KPMG
for any loss incurred as a result of the consent to the inclusion of KPMG's
report, unless such loss results from KPMG's professional malpractice. The
Company agreed to such request for indemnification.
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PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company will file with the Securities and Exchange Commission a
definitive Proxy Statement no later than 120 days after the close of its fiscal
year ended December 31, 1997 (the "Proxy Statement"). The information required
by this Item is incorporated by reference from the Proxy Statement.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from
the Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the Proxy Statement.
PART IV
ITEM 14 - 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 20. 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. Certain
Exhibits are incorporated by reference to documents previously filed by the
Registrant with the Securities and Exchange Commission pursuant to Rule 12b-32
under the Securities Exchange Act of 1934, as amended. Exhibits which are
incorporated by reference are indicated by the information in the parenthetical
following such exhibit.
Exhibit Description of Exhibit
------- ----------------------
2.1 Plan and Agreement of Merger dated as of October 29,
1997 by and among Intelect Communications Systems
Limited ("Intelect (Bermuda)"), Intelect Communications,
Inc. (the "Company"), and Intelect Merger Co. (1)
3.1 Amended and Restated Certificate of Incorporation of the
Company (1)
3.2 Amended and Restated By-Laws of the Company (1)
4.1 Specimen Stock Certificate of the Company (2)
4.2 Certificate of Designations of the Series A Preferred
Stock dated December 2, 1997 (1)
4.3 Certificate of Designations of the Series B Preferred
Stock dated December 17, 1997
4.4 Certificate of Designations of the Series C Preferred
Stock dated February 6, 1998 (3)
4.5 Form of 7.5% Convertible Debenture due June 7, 1998 of
the Company (Terminated) (4)
4.6 Form of 7.5% Convertible Debenture due August 8, 1998 of
the Company (Terminated) (5)
4.7 Form of 7% Series A Convertible Debenture due October
15, 1998 of the Company (Terminated) (5)
4.8 Form of 7% Series B Convertible Debenture due October
15, 1998 of the Company (Terminated) (5)
10.1 Option Rights Agreement for Outstanding Shares of
Intelect, Inc. and Stock Purchase Agreement dated
January 13, 1995 (6) (Note - this Agreement was replaced
by the March 31, 1995 Option agreement)
64
65
Exhibit Description of Exhibit
------- ----------------------
10.2 Option Agreement dated March 31, 1995 by and among the
Company, certain sellers and Intelect, Inc. (7)
10.3 Stock Purchase Agreement dated October 3, 1995 by and
among Intelect (Bermuda), Savage Corporation and Savage
Sports Corporation (7)
10.4 Management Agreement dated as of October 1, 1995 between
the Company and Herman Frietsch* (8)
10.5 Amendment No. One dated January 1, 1996 to Management
Agreement between the Company and Herman Frietsch
referred to in Exhibit 10.4* (9)
10.6 General Employment Agreement dated as of November 1,
1994 between the Company and Peter G. Leighton* (4)
10.7 Amendment No. One dated as of January 2, 1996 to the
General Employment Agreement between the Company and
Peter G. Leighton referred to in Exhibit 10.6* (9)
10.8 Employment Agreement dated as of April 1, 1996 between
the Company and Eugene Helms*(5)
10.9 Employment Agreement dated as of April 24, 1995 between
the Company and Peter Ianace* (8)
10.10 Stock Purchase Agreement dated January 13, 1996 by and
between Intelect (Bermuda), Intelect systems Corp.,
Robert E. Nimon, Kim F. Nimon, Edgar L. Read, Gregory L.
Mayhan and DNA Enterprises, Inc. (10)
10.11 Warrants dated February 13, 1996 issued to Edgar L. Read
and Gregory L. Mayhan delivered at Closing (10)
10.12 Warrants dated February 13, 1996 issued to Edgar L. Read
and Gregory L. Mayhan to be delivered one year after
Closing (11)
10.13 Consulting Agreement dated as of February 13, 1996
between DNA Enterprises, Inc. and Nimon Consulting, Inc.
(10)
10.14 Employment Agreement dated as of February 13, 1996
between Edgar L. Read and DNA Enterprises, Inc.* (10)
10.15 Employment Agreement dated as of February 13, 1996
between Gregory L. Mayhan and DNA Enterprises, Inc.*
(10)
10.16 Agreement and Plan of Merger dated March 19, 1996 among
the Company, Mid-Ocean, Inc. and Mosaic Information
Technologies, Inc. (12)
10.17 Registration Rights Agreement dated as of March 29, 1996
among the Company and certain purchasers (12)
10.18 Employment Agreement dated March 29, 1996 among Matthew
Feldman, the Company and Mosaic Information Technologies
Inc.* (12)
10.19 Convertible Securities Agreement dated June 7, 1996
among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (4)
10.20 Registration Rights Agreement dated June 7, 1996 among
the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (4)
10.21 Letter Agreement dated July 31, 1996 among the Company,
Infinity Investors, Ltd. and Seacrest Capital Limited
(4)
10.22 Convertible Securities Agreement dated August 8, 1996
among the Company and certain Investors (5)
10.23 Registration Rights Agreement dated August 8, 1996 among
the Company and certain Investors (5)
10.24 Convertible Securities Agreement dated October 15, 1996
among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (5)
10.25 Registration Rights Agreement dated October 15, 1996
among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (5)
10.26 Book Entry Transfer Agent Agreement dated October 15,
1996 by and among the Company, Infinity Investors, Ltd.,
Seacrest Capital Limited and American Stock Transfer &
Trust Company (5)
10.27 Offer to Purchase the Five Year Six Percent (6%)
Subordinated Debentures of Intelect, Inc. for an
Aggregate of 170,000 Shares of Common Stock, $0.01 Par
Value, of the Company and the payment of Certain Amounts
in Lieu of Issuing Fractional Shares, Dated September 6,
1996 (5)
65
66
Exhibit Description of Exhibit
------- ----------------------
10.28 Letter of Transmittal to Accompany Five Year Six Percent
(6%) Subordinated Debentures of Intelect, Inc. (5)
10.29 Form of Release in Consideration of Exchange of Property
(5)
10.30 Promissory Note dated as of February 26, 1997 to St.
James Capital Corp. from the Company (9)
10.31 Pledge Agreement dated as of February 26, 1997 between
the Company and St. James Capital Corp. (9)
10.32 Warrant to Purchase Common Stock of the Company Expiring
February 26, 2002 (9)
10.33 Registration Rights Agreement dated February 26, 1997
between the Company and St. James Capital Corp. (9)
10.34 Amended and Restated Promissory Note dated as of
February 26, 1997 to St. James Capital Corp. from the
Company (9)
10.35 First Amendment to Pledge Agreement dated as of March
27, 1997 between the Company and St. James Capital Corp.
(9)
10.36 Warrant to Purchase Common Stock of the Company Expiring
March 27, 2002 (9)
10.37 Amendment No. 1 to Registration Rights Agreement dated
as of March 27, 1997 between the Company and St. James
Capital Corp. (9)
10.38 Employee Stock Option Plan adopted April 24, 1986* (9)
10.39 Stock Incentive Plan adopted December 13, 1995* (9)
10.40 License Agreement between Digital Equipment Corp. and
Mosaic Information Technologies dated June 13, 1996 (9)
10.41 Lease Agreement between TCIT Dallas Industrial and
Intelect Network Technologies, dated February 25, 1997
(13)
10.42 Lease Agreement between Campbell Place One Joint Venture
and DNA Enterprises, dated February 1, 1997 (13)
10.43 Advisory Services Agreement with Renaissance Financial
Securities Corporation dated July 8, 1997 (14)
10.44 Warrant issued to AJC, Inc. to Purchase Common Stock of
the Company expiring on December 31, 2002 (14)
10.45 Warrant issued to Amerix Electronics, Inc. to Purchase
Common Stock of the Company expiring on June 19, 2004
(14)
10.46 Loan Agreement dated as of May 8, 1997 between the
Company and The Coastal Corporation Second Pension Trust
(14)
10.47 Warrant issued to The Coastal Corporation Second Pension
Trust to Purchase Common Stock of the Company expiring
on May 7, 2002 (14)
10.48 Registration Rights Agreement dated as of May 8, 1997
between the Company and The Coastal Corporation Second
Pension Trust (14)
10.49 Subscription Agreement for Series A Cumulative Preferred
Stock dated as of May 30, 1997 between the Company and
The Coastal Corporation Second Pension Trust (14)
10.50 Registration Rights Agreement dated as of May 30, 1997
between the Company and The Coastal Corporation Second
Pension Trust (14)
10.51 Agreement dated April 25, 1997 between the Company and
the beneficiary of a royalty agreement (14)
10.52 Irrevocable Option Agreement dated October 1, 1995
between the Company and owners of certain intellectual
property rights* (14)
10.53 Agreement dated July 7, 1997 among Robert E. Nimon, Kim
F. Nimon, Nimon Consulting, Inc., Intelect Systems Corp.
and the Company (14)
10.54 Promissory note dated July 7, 1997 to Robert E. Nimon
and Kim F. Nimon from the Company (14)
10.55 Promissory note dated July 7, 1997 to Robert E. Nimon
and Kim F. Nimon from the Company (14)
10.56 Term Sheet dated June 30, 1997, between the Company and
Infinity Investors Ltd. and Seacrest Capital Limited
(14)
10.57 Settlement Agreement dated August 22, 1997 among the
Company, Infinity Investors Ltd., and Seacrest Capital
Limited (15)
66
67
Exhibit Description of Exhibit
------- ----------------------
10.58 Subscription Agreements dated August 22, 1997 among the
Company and Isaac Arnold, Jr., Arnold Corporation, and
Meridian Fund, Ltd. (15)
10.59 Amended and Restated Loan Agreement dated August 27,
1997 among the Company, Intelect Systems Corp., and The
Coastal Corporation Second Pension Trust (15)
10.60 Warrant to purchase Company Common Stock expiring August
26, 2002 issued to The Coastal Corporation Second
Pension Trust (15)
10.61 Amendments Nos. 2 and 3 to Registration Rights
Agreements dated April 24 and May 8, 1997 among the
Company and St. James Capital Corp. (15)
10.62 Warrants to purchase Company Common Stock dated April 24
and May 8, 1997 issued to St. James Capital Corp. (15)
10.63 Second Amended and Restated Floating Rate Promissory
Note dated effective February 26, 1997 to St. James
Capital Corp. from the Company (15)
10.64 Second and Third Amendments to Borrower's Pledge
Agreement dated April 24 and May 8, 1997 among Intelect
Systems Corp. and St. James Capital Corp. (15)
10.65 Subscription Agreements dated August 1997 among the
Company and Blake C. Davenport, Fernhill Partners,
Fiftieth & Grover Shopping Center, Carol Filler (James),
Douglas Floren, Richard A. Gray, Alexander Greenberg,
Philip Hempleman, David May, Timothy McCollum, Frank
Lyon Polk III, Sanford Prater, Privet Row, Inc., Leonard
Rauner, Marcus R. Rowan, TCM Partners, L.P., and Wayne
Wilkey (15)
10.66 Warrant expiring December 31, 2001 issued to Lifeline
Industries, Inc. (15)
10.67 Amended License Agreement among Digital Equipment
Corporation and Intelect Visual Communications Corp.,
dated effective November 5, 1997 (16)
10.68 Registration Rights Agreement among the Company and
Citadel, dated February 6, 1998 (3)
10.69 Registration Rights Agreement dated February 12, 1998
between the Company and St. James Partners, L.P. (3)
10.70 Warrant to Purchase Common Stock of the Company dated
February 12, 1998 issued to St. James Partners, L.P.
expiring on February 12, 2001 (3)
10.71 Securities Purchase Agreement among the Company and
Citadel, dated February 6, 1998 (3)
10.72 Agreement for Purchase and Sale dated February 12, 1998
between the Company and St. James Partners, L.P. (3)
10.73 Convertible Promissory Note dated February 12, 1998 by
the Company in favor of St. James Partners, L.P. (3)
10.74 Pledge Agreement dated February 12, 1998 between the
Company and St. James Partners, L.P. (3)
10.75 Purchase Agreement among the Company and Navesink dated
December 16, 1997
10.76 Registration Rights Agreement among the Company and
Navesink dated December 16, 1997
10.77 Sales Representative Agreement between Intelect Network
Technologies Company and Amerix Electronics, Inc. dated
January 12, 1998
10.78 Exchange Agreement between Intelect Network Technologies
Company and Amerix Electronics dated February 20, 1998
10.79 Warrant issued to Amerix Electronics, Inc. to Purchase
Common Stock of the Company expiring on June 19, 2001
10.80 Form of Unsecured Convertible Promissory Notes held by
various employees, directors, and related individuals of
the Company with face values totaling $710,00, at a
conversion rate of $5.25 per share of Common Stock,
dated December 5, 18, and 31, 1997
10.81 Company Stock Incentive Plan Amendment adopted December
4, 1997* (1)
16.1 Letter regarding change in certifying accountants (17)
21.1 Subsidiaries of the Company
23.1 Consents of KPMG Peat Marwick
23.2 Consents of Arthur Andersen LLP
27.1 Financial data schedule
- ---------------------------------------------
*Management contract or other compensatory plan or arrangement.
67
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(1) Incorporated herein by reference to the Company's Form S-4 File No.
333-39063
(2) Incorporated herein by reference to the Company's Form 8-K filed
December 5, 1997
(3) Incorporated herein by reference to the Company's Form 8-K filed
February 17, 1998
(4) Incorporated herein by reference to the Company's Form 10-Q filed
August 14, 1996
(5) Incorporated herein by reference to the Company's Form 10-Q filed
November 13, 1996
(6) Incorporated herein by reference to the Company's Form 20-F for the
fiscal year ended October 31, 1994
(7) Incorporated herein by reference to the Company's Form 8-K dated
November 10, 1995
(8) Incorporated herein by reference to the Company's Form 8-K/A dated
April 12, 1996
(9) Incorporated herein by reference to the Company's Form 10-K filed April
15, 1997
(10) Incorporated herein by reference to the Company's Form 8-K dated
February 20, 1996
(11) Incorporated herein by reference to the Company's Form 10-K for the
year ending December 31, 1995
(12) Incorporated herein by reference to the Company's Form 8-K dated April
12, 1996
(13) Incorporated herein by reference to the Company's Form 10-Q filed May
15, 1997
(14) Incorporated herein by reference to the Company's Form 10-Q filed
August 14, 1997
(15) Incorporated herein by reference to the Company's Form S-3 filed
September 17, 1997
(16) Incorporated herein by reference to the Company's Form 10-Q filed
November 13, 1997
(17) Incorporated herein by reference to the Company's Form 8-K filed August
18, 1997
C. The Registrant has not filed any reports on Form 8-K during the last
quarter of the period covered by this Report, except as follows:
Form 8-K filed December 4, 1997.
68
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 1998 By: /s/ HERMAN M. FRIETSCH
-------------------------------------
Herman M. Frietsch
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/s/ HERMAN M. FRIETSCH /s/ ANTON VON AND ZU LIECHTENSTEIN
- ------------------------------------------ ----------------------------------
Herman M. Frietsch Anton von and zu Liechtenstein,
Chief Executive Officer and Director Director
(Principal Executive Officer)
/s/ EDWIN J. DUCAYET, JR. /s/ PHILIP P. SUDAN, JR.
- ------------------------------------------ ----------------------------------
Edwin J. Ducayet, Jr. Philip P. Sudan, Jr., Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ ROBERT E. GARRISON, II
----------------------------------
Robert E. Garrison, II, Director
69
70
EXHIBIT INDEX
Exhibit Description of Exhibit
------- ----------------------
2.1 Plan and Agreement of Merger dated as of October 29,
1997 by and among Intelect Communications Systems
Limited ("Intelect (Bermuda)"), Intelect Communications,
Inc. (the "Company"), and Intelect Merger Co. (1)
3.1 Amended and Restated Certificate of Incorporation of the
Company (1)
3.2 Amended and Restated By-Laws of the Company (1)
4.1 Specimen Stock Certificate of the Company (2)
4.2 Certificate of Designations of the Series A Preferred
Stock dated December 2, 1997 (1)
4.3 Certificate of Designations of the Series B Preferred
Stock dated December 17, 1997
4.4 Certificate of Designations of the Series C Preferred
Stock dated February 6, 1998 (3)
4.5 Form of 7.5% Convertible Debenture due June 7, 1998 of
the Company (Terminated) (4)
4.6 Form of 7.5% Convertible Debenture due August 8, 1998 of
the Company (Terminated) (5)
4.7 Form of 7% Series A Convertible Debenture due October
15, 1998 of the Company (Terminated) (5)
4.8 Form of 7% Series B Convertible Debenture due October
15, 1998 of the Company (Terminated) (5)
10.1 Option Rights Agreement for Outstanding Shares of
Intelect, Inc. and Stock Purchase Agreement dated
January 13, 1995 (6) (Note - this Agreement was replaced
by the March 31, 1995 Option agreement)
71
Exhibit Description of Exhibit
------- ----------------------
10.2 Option Agreement dated March 31, 1995 by and among the
Company, certain sellers and Intelect, Inc. (7)
10.3 Stock Purchase Agreement dated October 3, 1995 by and
among Intelect (Bermuda), Savage Corporation and Savage
Sports Corporation (7)
10.4 Management Agreement dated as of October 1, 1995 between
the Company and Herman Frietsch* (8)
10.5 Amendment No. One dated January 1, 1996 to Management
Agreement between the Company and Herman Frietsch
referred to in Exhibit 10.4* (9)
10.6 General Employment Agreement dated as of November 1,
1994 between the Company and Peter G. Leighton* (4)
10.7 Amendment No. One dated as of January 2, 1996 to the
General Employment Agreement between the Company and
Peter G. Leighton referred to in Exhibit 10.6* (9)
10.8 Employment Agreement dated as of April 1, 1996 between
the Company and Eugene Helms*(5)
10.9 Employment Agreement dated as of April 24, 1995 between
the Company and Peter Ianace* (8)
10.10 Stock Purchase Agreement dated January 13, 1996 by and
between Intelect (Bermuda), Intelect systems Corp.,
Robert E. Nimon, Kim F. Nimon, Edgar L. Read, Gregory L.
Mayhan and DNA Enterprises, Inc. (10)
10.11 Warrants dated February 13, 1996 issued to Edgar L. Read
and Gregory L. Mayhan delivered at Closing (10)
10.12 Warrants dated February 13, 1996 issued to Edgar L. Read
and Gregory L. Mayhan to be delivered one year after
Closing (11)
10.13 Consulting Agreement dated as of February 13, 1996
between DNA Enterprises, Inc. and Nimon Consulting, Inc.
(10)
10.14 Employment Agreement dated as of February 13, 1996
between Edgar L. Read and DNA Enterprises, Inc.* (10)
10.15 Employment Agreement dated as of February 13, 1996
between Gregory L. Mayhan and DNA Enterprises, Inc.*
(10)
10.16 Agreement and Plan of Merger dated March 19, 1996 among
the Company, Mid-Ocean, Inc. and Mosaic Information
Technologies, Inc. (12)
10.17 Registration Rights Agreement dated as of March 29, 1996
among the Company and certain purchasers (12)
10.18 Employment Agreement dated March 29, 1996 among Matthew
Feldman, the Company and Mosaic Information Technologies
Inc.* (12)
10.19 Convertible Securities Agreement dated June 7, 1996
among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (4)
10.20 Registration Rights Agreement dated June 7, 1996 among
the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (4)
10.21 Letter Agreement dated July 31, 1996 among the Company,
Infinity Investors, Ltd. and Seacrest Capital Limited
(4)
10.22 Convertible Securities Agreement dated August 8, 1996
among the Company and certain Investors (5)
10.23 Registration Rights Agreement dated August 8, 1996 among
the Company and certain Investors (5)
10.24 Convertible Securities Agreement dated October 15, 1996
among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (5)
10.25 Registration Rights Agreement dated October 15, 1996
among the Company, Infinity Investors, Ltd. and Seacrest
Capital Limited (5)
10.26 Book Entry Transfer Agent Agreement dated October 15,
1996 by and among the Company, Infinity Investors, Ltd.,
Seacrest Capital Limited and American Stock Transfer &
Trust Company (5)
10.27 Offer to Purchase the Five Year Six Percent (6%)
Subordinated Debentures of Intelect, Inc. for an
Aggregate of 170,000 Shares of Common Stock, $0.01 Par
Value, of the Company and the payment of Certain Amounts
in Lieu of Issuing Fractional Shares, Dated September 6,
1996 (5)
72
Exhibit Description of Exhibit
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10.28 Letter of Transmittal to Accompany Five Year Six Percent
(6%) Subordinated Debentures of Intelect, Inc. (5)
10.29 Form of Release in Consideration of Exchange of Property
(5)
10.30 Promissory Note dated as of February 26, 1997 to St.
James Capital Corp. from the Company (9)
10.31 Pledge Agreement dated as of February 26, 1997 between
the Company and St. James Capital Corp. (9)
10.32 Warrant to Purchase Common Stock of the Company Expiring
February 26, 2002 (9)
10.33 Registration Rights Agreement dated February 26, 1997
between the Company and St. James Capital Corp. (9)
10.34 Amended and Restated Promissory Note dated as of
February 26, 1997 to St. James Capital Corp. from the
Company (9)
10.35 First Amendment to Pledge Agreement dated as of March
27, 1997 between the Company and St. James Capital Corp.
(9)
10.36 Warrant to Purchase Common Stock of the Company Expiring
March 27, 2002 (9)
10.37 Amendment No. 1 to Registration Rights Agreement dated
as of March 27, 1997 between the Company and St. James
Capital Corp. (9)
10.38 Employee Stock Option Plan adopted April 24, 1986* (9)
10.39 Stock Incentive Plan adopted December 13, 1995* (9)
10.40 License Agreement between Digital Equipment Corp. and
Mosaic Information Technologies dated June 13, 1996 (9)
10.41 Lease Agreement between TCIT Dallas Industrial and
Intelect Network Technologies, dated February 25, 1997
(13)
10.42 Lease Agreement between Campbell Place One Joint Venture
and DNA Enterprises, dated February 1, 1997 (13)
10.43 Advisory Services Agreement with Renaissance Financial
Securities Corporation dated July 8, 1997 (14)
10.44 Warrant issued to AJC, Inc. to Purchase Common Stock of
the Company expiring on December 31, 2002 (14)
10.45 Warrant issued to Amerix Electronics, Inc. to Purchase
Common Stock of the Company expiring on June 19, 2004
(14)
10.46 Loan Agreement dated as of May 8, 1997 between the
Company and The Coastal Corporation Second Pension Trust
(14)
10.47 Warrant issued to The Coastal Corporation Second Pension
Trust to Purchase Common Stock of the Company expiring
on May 7, 2002 (14)
10.48 Registration Rights Agreement dated as of May 8, 1997
between the Company and The Coastal Corporation Second
Pension Trust (14)
10.49 Subscription Agreement for Series A Cumulative Preferred
Stock dated as of May 30, 1997 between the Company and
The Coastal Corporation Second Pension Trust (14)
10.50 Registration Rights Agreement dated as of May 30, 1997
between the Company and The Coastal Corporation Second
Pension Trust (14)
10.51 Agreement dated April 25, 1997 between the Company and
the beneficiary of a royalty agreement (14)
10.52 Irrevocable Option Agreement dated October 1, 1995
between the Company and owners of certain intellectual
property rights* (14)
10.53 Agreement dated July 7, 1997 among Robert E. Nimon, Kim
F. Nimon, Nimon Consulting, Inc., Intelect Systems Corp.
and the Company (14)
10.54 Promissory note dated July 7, 1997 to Robert E. Nimon
and Kim F. Nimon from the Company (14)
10.55 Promissory note dated July 7, 1997 to Robert E. Nimon
and Kim F. Nimon from the Company (14)
10.56 Term Sheet dated June 30, 1997, between the Company and
Infinity Investors Ltd. and Seacrest Capital Limited
(14)
10.57 Settlement Agreement dated August 22, 1997 among the
Company, Infinity Investors Ltd., and Seacrest Capital
Limited (15)
73
Exhibit Description of Exhibit
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10.58 Subscription Agreements dated August 22, 1997 among the
Company and Isaac Arnold, Jr., Arnold Corporation, and
Meridian Fund, Ltd. (15)
10.59 Amended and Restated Loan Agreement dated August 27,
1997 among the Company, Intelect Systems Corp., and The
Coastal Corporation Second Pension Trust (15)
10.60 Warrant to purchase Company Common Stock expiring August
26, 2002 issued to The Coastal Corporation Second
Pension Trust (15)
10.61 Amendments Nos. 2 and 3 to Registration Rights
Agreements dated April 24 and May 8, 1997 among the
Company and St. James Capital Corp. (15)
10.62 Warrants to purchase Company Common Stock dated April 24
and May 8, 1997 issued to St. James Capital Corp. (15)
10.63 Second Amended and Restated Floating Rate Promissory
Note dated effective February 26, 1997 to St. James
Capital Corp. from the Company (15)
10.64 Second and Third Amendments to Borrower's Pledge
Agreement dated April 24 and May 8, 1997 among Intelect
Systems Corp. and St. James Capital Corp. (15)
10.65 Subscription Agreements dated August 1997 among the
Company and Blake C. Davenport, Fernhill Partners,
Fiftieth & Grover Shopping Center, Carol Filler (James),
Douglas Floren, Richard A. Gray, Alexander Greenberg,
Philip Hempleman, David May, Timothy McCollum, Frank
Lyon Polk III, Sanford Prater, Privet Row, Inc., Leonard
Rauner, Marcus R. Rowan, TCM Partners, L.P., and Wayne
Wilkey (15)
10.66 Warrant expiring December 31, 2001 issued to Lifeline
Industries, Inc. (15)
10.67 Amended License Agreement among Digital Equipment
Corporation and Intelect Visual Communications Corp.,
dated effective November 5, 1997 (16)
10.68 Registration Rights Agreement among the Company and
Citadel, dated February 6, 1998 (3)
10.69 Registration Rights Agreement dated February 12, 1998
between the Company and St. James Partners, L.P. (3)
10.70 Warrant to Purchase Common Stock of the Company dated
February 12, 1998 issued to St. James Partners, L.P.
expiring on February 12, 2001 (3)
10.71 Securities Purchase Agreement among the Company and
Citadel, dated February 6, 1998 (3)
10.72 Agreement for Purchase and Sale dated February 12, 1998
between the Company and St. James Partners, L.P. (3)
10.73 Convertible Promissory Note dated February 12, 1998 by
the Company in favor of St. James Partners, L.P. (3)
10.74 Pledge Agreement dated February 12, 1998 between the
Company and St. James Partners, L.P. (3)
10.75 Purchase Agreement among the Company and Navesink dated
December 16, 1997
10.76 Registration Rights Agreement among the Company and
Navesink dated December 16, 1997
10.77 Sales Representative Agreement between Intelect Network
Technologies Company and Amerix Electronics, Inc. dated
January 12, 1998
10.78 Exchange Agreement between Intelect Network Technologies
Company and Amerix Electronics dated February 20, 1998
10.79 Warrant issued to Amerix Electronics, Inc. to Purchase
Common Stock of the Company expiring on June 19, 2001
10.80 Form of Unsecured Convertible Promissory Notes held by
various employees, directors, and related individuals of
the Company with face values totaling $710,00, at a
conversion rate of $5.25 per share of Common Stock,
dated December 5, 18, and 31, 1997
10.81 Company Stock Incentive Plan Amendment adopted December
4, 1997* (1)
16.1 Letter regarding change in certifying accountants (17)
21.1 Subsidiaries of the Company
23.1 Consents of KPMG Peat Marwick
23.2 Consents of Arthur Andersen LLP
27.1 Financial data schedule
- ---------------------------------------------
*Management contract or other compensatory plan or arrangement.
74
(1) Incorporated herein by reference to the Company's Form S-4 File No.
333-39063
(2) Incorporated herein by reference to the Company's Form 8-K filed
December 5, 1997
(3) Incorporated herein by reference to the Company's Form 8-K filed
February 17, 1998
(4) Incorporated herein by reference to the Company's Form 10-Q filed
August 14, 1996
(5) Incorporated herein by reference to the Company's Form 10-Q filed
November 13, 1996
(6) Incorporated herein by reference to the Company's Form 20-F for the
fiscal year ended October 31, 1994
(7) Incorporated herein by reference to the Company's Form 8-K dated
November 10, 1995
(8) Incorporated herein by reference to the Company's Form 8-K/A dated
April 12, 1996
(9) Incorporated herein by reference to the Company's Form 10-K filed April
15, 1997
(10) Incorporated herein by reference to the Company's Form 8-K dated
February 20, 1996
(11) Incorporated herein by reference to the Company's Form 10-K for the
year ending December 31, 1995
(12) Incorporated herein by reference to the Company's Form 8-K dated April
12, 1996
(13) Incorporated herein by reference to the Company's Form 10-Q filed May
15, 1997
(14) Incorporated herein by reference to the Company's Form 10-Q filed
August 14, 1997
(15) Incorporated herein by reference to the Company's Form S-3 filed
September 17, 1997
(16) Incorporated herein by reference to the Company's Form 10-Q filed
November 13, 1997
(17) Incorporated herein by reference to the Company's Form 8-K filed August
18, 1997