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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________________ TO ___________________
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)
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
There were 24,235,187 shares of Common Stock, par value $.01 per share,
outstanding on May 14, 1998.
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company 3
at March 31, 1998 (unaudited) and December 31, 1997
Consolidated Statements of Operations of the Company 5
(unaudited) for the three months ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows of the Company 6
(unaudited) for the three months ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10
CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 3 CHANGES IN SECURITIES 15
ITEM 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 15
SIGNATURES
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousands of dollars, except share data)
March 31, December 31,
1998 1997
---- ----
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 4,858 $ 2,094
Investments in marketable securities 888 942
Accounts receivable net of allowances of $541 in 1998 and 1997 12,711 15,569
Inventories 7,092 6,289
Prepaid expenses 1,145 658
--------- ---------
Total current assets 26,694 25,552
Property and equipment, net 6,432 6,041
Goodwill, net 12,469 13,249
Software development costs, net 2,190 2,229
Other intangible assets, net 1,096 1,168
Other assets 1,562 992
========= =========
$ 50,443 $ 49,231
========= =========
See accompanying notes to consolidated financial statements (Continued)
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
(Thousands of dollars, except share data)
March 31, December 31,
1998 1997
---- ----
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable, net of unamortized discount of $874 in 1998
and $578 in 1997 $ 11,566 $ 9,132
Current maturities of long-term debt 1,398 2,527
Accounts payable 2,883 7,569
Accrued liabilities 3,076 3,173
Net liabilities of discontinued operations 400 400
Deferred income taxes 49 49
Current installments of obligations under capital leases 89 89
---------- ----------
Total current liabilities 19,461 22,939
Long-term obligations under capital leases, net of current installments 31 55
Deferred income taxes 88 88
---------- ----------
19,580 23,082
---------- ----------
Commitments and contingencies
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. 42 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 9 9
Series C convertible preferred stock, $.01 par value (aggregate
involuntary liquidation preference $10,000,000). Authorized 12,500
shares; 10,000 shares issued and outstanding in 1998 -- --
Common stock, $.01 par value. Authorized 50,000,000 shares;
24,177,190 and 23,954,978 shares issued and outstanding in 1998 and
1997 242 240
Additional paid-in capital 87,702 75,940
Unrealized gain on marketable securities - 2
Retained earnings (accumulated deficit) (57,132) (50,084)
---------- ----------
Total stockholders' equity 30,863 26,149
---------- ----------
$ 50,443 $ 49,231
========== ==========
See accompanying notes to consolidated financial statements.
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Thousands of dollars, except per share)
Three Months Ended March 31,
--------------------------------
1998 1997
---- ----
(unaudited)
Net revenue $ 5,514 $ 4,537
Cost of revenue 4,008 3,714
---------- ----------
Gross profit 1,506 823
---------- ----------
Expenses:
Engineering and development 2,845 2,470
Selling and administrative 3,630 4,332
Amortization of goodwill 331 396
---------- ----------
6,806 7,198
---------- ----------
Operating loss (5,300) (6,375)
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Other income (expense):
Interest expense (1,023) (945)
Interest income and other 109 36
---------- ----------
(914) (909)
---------- ----------
Loss from continuing operations before income taxes (6,214) (7,284)
Income tax expense - 38
---------- ----------
Loss from continuing operations (6,214) (7,322)
Loss on disposal of discontinued operations, net of tax (88) (93)
---------- ----------
Net loss $ (6,302) $ (7,415)
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Dividends on preferred stock (746) -
---------- ----------
Loss available to common stockholders $ (7,048) $ (7,415)
========== ==========
Basic and diluted loss per share:
Continuing operations $ (0.29) $ (0.44)
Discontinued operations - (0.01)
---------- ----------
Net loss per share $ (0.29) $ (0.45)
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Weighted average number of common shares outstanding 24,109 16,594
========== ==========
See accompanying notes to consolidated financial statements.
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Thousands of dollars, except share data)
Three Months Ended March 31,
---------------------------------
1998 1997
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(unaudited)
Cash flows from operating activities:
Net loss $ (6,302) $ (7,415)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 854 666
Amortization of loan discount 703 725
Deferred income taxes - 38
Loss on disposal of discontinued
operations 88 93
Stock option compensation 25 60
Noncash operating expenses 31 -
Other - 6
Change in operating assets and liabilities,
net of effects of acquired companies:
Accounts receivable 2,859 (1,309)
Inventories (803) (560)
Other assets (302) (273)
Accounts payable and accrued liabilities (4,783) 1,654
--------- ---------
Net cash used in operating activities (7,630) (6,315)
--------- ---------
Cash flows from investing activities:
Payments for disposal of discontinued operations (88) (93)
Purchase of other intangible assets (9) (16)
Capital expenditures (766) (970)
Purchase of marketable securities - (78)
Software development costs - (489)
Proceeds from sale of marketable securities 52 -
--------- ---------
Net cash used in investing activities (811) (1,646)
--------- ---------
Cash flows from financing activities:
Debt issuance costs (90) (160)
Proceeds from issuance of notes payable 3,020 3,833
Principal payments on notes payable (290) -
Payments under capital lease obligations (24) (15)
Principal payments on long-term debt (679) (200)
Proceeds from exercise of employee stock options 89 73
Proceeds from issuance of preferred shares 9,179 -
--------- ---------
Net cash provided by financing activities 11,205 3,531
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Net increase (decrease) in cash and cash equivalents 2,764 (4,430)
Cash and cash equivalents, beginning of period 2,094 4,863
--------- ---------
Cash and cash equivalents, end of period $ 4,858 $ 433
========= =========
See accompanying notes to consolidated financial statements.
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INTELECT COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 1998
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
by the Company without audit in accordance with generally accepted accounting
principles for interim financial statements and with instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included.
The accompanying consolidated financial statements do not include
certain footnotes and financial presentations normally required under generally
accepted accounting principles and, therefore, should be read in conjunction
with the audited financial statements included in the Company's Annual Report on
Form 10-K as at December 31, 1997.
INVENTORIES
The components of inventories are as follows (thousands of dollars)
March 31, December 31,
1998 1997
---- ----
Raw materials $ 5,716 $ 5,209
Work in progress 289 630
Finished goods 2,717 2,050
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8,722 7,889
Less: allowance for obsolescence (1,630) (1,600)
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$ 7,092 $ 6,289
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FINANCING MATTERS
Effective as of January 1, 1998, the Company authorized the issuance of
42,546 shares of common stock in lieu of a $212,000 cash dividend on Class A
preferred stock for the quarter ended December 31, 1997. The share price was the
average closing market bid price for the five consecutive trading days ending
December 31, 1997.
On January 27, 1998, in conjunction with a sales representative
agreement, the Company issued 150,000 shares of common stock in payment of
commissions on anticipated sales of $30,000,000 after January 1, 1998. The value
of the stock, totaling $816,000 was recorded as a prepayment and is being
charged to expense ratably as the sales are realized.
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 weighted 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, and prohibit the Company from redeeming any common stock, or
declaring any dividends on common stock. Proceeds of the sale were used for
working capital and general corporate purposes.
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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. On April 2, 1998, the Company received an additional advance of
$7,000,000. 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
received warrants to purchase 1,500,000 shares of common stock, exercisable at
any time for a three year period at an exercise price of $7.50 per share. In
conjunction with future advances, the lender is to receive additional 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
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.
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 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 future advances. 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. Such
advances are subject to certain conditions including satisfactory due diligence
review of the Company. 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 were used for working
capital and general corporate purposes. Proceeds of the second advance were used
primarily to retire outstanding loans and accrued interest, totaling $6,630,000
from the previous Credit Facility. The fair value of the warrants at dates of
issue, totaling $909,000 and $2,071,000, evaluated using the Black-Scholes
option pricing model, were credited to additional paid-in capital and are being
charged to interest expense using the effective interest method over the loan
period.
On February 17, 1998, the Company renegotiated and settled the
remaining $2,100,000 of debt associated with the purchase of DNA for $1,650,000.
Note agreements were established with two former shareholders which provide for
initial payments, including imputed interest, of $125,000 followed by ten
monthly payments of $75,000 to each former shareholder. The $450,000 difference
between the carrying value and the settlement was recorded as a reduction of
goodwill associated with the acquisition of DNA.
On March 27, 1998, the Credit Facility was extended to April 2, 1998,
at which time it was retired as described above, and the Coastal Trust Revolving
Loan was extended to May 12, 1998, at which time all outstanding advances and
accrued interest, totaling $3,223,000, were retired.
On May 8, 1998, the Company sold 5,000 shares of Series D Convertible
Preferred Stock, in a private placement for $5,000,000. 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 May 8, 2000, and may be converted prior to that
date, at the holder's option, at the lesser of $9.082 (or reset to the five day
average volume-weighted average trading price of the common stock for the five
trading days following the filing of the Company's Form 10-Q for the quarter
ending June 30, 1998, if less) per common share or at 97% of the market price.
Market price is defined as the average of the three lowest closing bid prices
for the common stock within the ten trading days immediately preceding the
conversion date. The Company may fix the conversion price at $9.082 (or the
reset amount, if less) 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 volume-weighted 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 issuable common stock is registered, from
redeeming any common stock, or from declaring any dividends on common stock, and
allow the holders to purchase additional shares of preferred stock in lieu of
anticipated advances under the Facility, provided at least 25% of the preferred
stock is outstanding and required waivers are obtained from the Series A and
Series B preferred stockholders. Proceeds from the offering were used for
working capital and general corporate purposes. The series ranks in pari passu
with the Series A, Series B and Series C preferred stock.
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CONCENTRATION OF CREDIT RISK
The Company continues to be subject to credit risk through trade receivables.
The Company's distributor for Korea accounted for $6,100,000 (48%) and
$9,879,000 (63%) of the accounts receivable at March 31, 1998, and December 31,
1997, respectively. In connection with such receivables, the Company holds from
the distributor a promissory note and pledge of security interests in certain
collateral, including the distributor's accounts receivable. To date the Company
has collected amounts due as agreed with the distributor; however, in view of
the economic conditions and monetary environment in Korea, there is continuing
uncertainty of future sales to the distributor and corresponding risk of
collectability of the receivable. After assessing the financial condition of the
distributor, and with the experience of collections to date, the Company
believes the balance of the note will be collected in full.
SUBSEQUENT EVENTS
Effective as of April 1, 1998, the Company authorized the issuance of 31,308
shares of common stock in lieu of a $212,000 cash dividend on Class A preferred
stock for the quarter ended March 31, 1998, and 17,025 shares in lieu of a
$116,000 cash dividend on Class B preferred stock from issue date through March
31, 1998. The share price was the average closing market bid price for the five
consecutive trading days ending March 31, 1998.
RECENT PRONOUNCEMENTS
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", as of
January 1, 1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the total of net income
and all other non-owner changes in equity. The Company does not believe that
SFAS No. 130 will have a significant impact on the Company's financial
statements.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 1998
Comparison of First Quarter 1998 to First Quarter 1997
The following table shows the revenue and gross profit for the
Company's products:
Three Months Ended March 31,
--------------------------------
1998 1997
---- ----
($ Thousands)
Revenue:
Fiber optic multiplexers $ 2,162 $ 2,023
Engineering services and DSP 2,851 1,543
Video conferencing 309 105
Voice switching and other 192 866
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$ 5,514 $ 4,537
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Gross profit:
Fiber optic multiplexers 556 274
Engineering services and DSP 871 317
Video conferencing 136 32
Voice switching and other (57) 200
--------- ----------
$ 1,506 $ 823
--------- ----------
NET REVENUE
Net revenue for the three months ended March 31, 1998, increased 22%
over the prior year period. Revenue from engineering services grew 72%.
SONETLYNX(TM), LANscape(TM), and Digital Signal Processing (DSP) product lines
also contributed to the increase.
GROSS PROFIT
Gross profit increased 83% over the prior year period. SONETLYNX margin
was improved by direct cost reductions but constrained by $422,000 of
underabsorbed manufacturing overhead. (See Comparison to Fourth Quarter 1997.)
Engineering service margins improved as a result of the increased level of
revenue.
ENGINEERING AND DEVELOPMENT (E&D) EXPENSE
E&D expense for the three months ended March 31, 1998, increased to
$2,845,000 from $2,470,000 in the prior year period. In the prior year, $489,000
of SONETLYNX software development cost was capitalized. Overall total
development costs declined 4%. The total costs of development were distributed
by product line as follows:
Three Months Ended March 31,
--------------------------------
1998 1997
---- ----
($ Thousands)
Fiber optic multiplexers $ 1,421 $ 1,078
CS4 938 1,352
Video conferencing 323 238
DSP and other 163 291
--------- ---------
$ 2,845 $ 2,959
========= =========
E&D results during the first quarter of 1998 included the following:
The SONETLYNX product line was enhanced and expanded by the release of a
multi-point voice module, an ethernet protocol for OC-3, a 100 watt internal
power supply, and release 3.0 of the network element management software. The
CS4 development activity included performance optimization, stress testing of
hardware components, and redesign for material cost reduction. The Windows NT
version of the LANscape product was completed. To enable interoperability with
existing video
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conferencing systems, an H.320 Gateway product was released. Including work
funded by a customer, the Company completed the development of these DSP
products: an evaluation platform for Texas Instruments' C6x products (EVM
module), PCI boards under a private label arrangement, and a proprietary
operating system for the C6x being offered for sale to third party C6x
developers.
SELLING AND ADMINISTRATIVE EXPENSE
Compared to the prior year, selling and administrative expenses in the
three months ended March 31, 1998, were lowered 16% to $3,630,000 from
$4,332,000 in the prior year period. The expense reduction was primarily
attributable to the removal of corporate headquarters from Bermuda, avoiding
extraordinary expenses incurred in 1997.
INTEREST EXPENSE
Interest expense increased to $1,023,000 from $945,000 in the prior
year period. Cash interest increased to $320,000 from $220,000. Non-cash costs
of various financings, reportable as interest, account for the remaining
amounts, as follows. In the three months ended March 31, 1998, the $703,000 of
non-cash interest expense was due to amortization of debt discount and deferred
financing costs attributable to valuation of warrants using the Black-Scholes
pricing model. In the prior year period the majority of the $725,000 non-cash
costs were attributed to a beneficial conversion feature of certain convertible
debentures issued in 1996.
DIVIDENDS ON PREFERRED STOCK
Preferred dividends include $369,000 which the Company has elected to
pay in common stock. Also included in the reported amount are non-cash financing
costs of $377,000 attributable to the value of beneficial conversion features of
Series B and C preferred stock.
Comparison of First Quarter 1998 to Fourth Quarter 1997
NOTE
References to financial results for the fourth quarter of 1997 are
unaudited and do not refer to financial statements contained elsewhere in this
report.
REVENUE AND GROSS PROFIT
The Company's distributor of SONETLYNX product in Korea was responsible
for revenue of $1,157,000 in the three months ended March 31, 1998, and
$9,046,000 in the fourth quarter of 1997. The reduction of almost $8,000,000 had
the effect of reducing overhead absorption and Gross Profit as a percentage of
Revenue (to 27% from 50%). Excluding the effects of volume, the margins derived
from direct costs of products improved in the first quarter compared to the
fourth quarter of 1997.
EXPENSES
E&D expense declined 18% to $2,845,000 from $3,469,000. Selling and
administrative expense declined 31% to $3,630,000 from $5,268,000.
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Liquidity and Capital Resources
For the three months ended March 31, 1998, cash balances were increased
by $2,764,000. During the three month period, cash used in operations,
($7,630,000), and in investing activities, ($811,000), was funded by securing
new financing, net of repayments, of $11,205,000.
OPERATING ACTIVITIES
Net cash used in operations consisted of the $6,301,000 net loss and
the $3,030,000 net decrease in current liabilities, offset by $1,701,000 of
non-cash charges. As previously discussed, the net loss primarily reflects the
effect of fixed costs in a period of lower revenue and the continuation of new
product development.
* Accounts receivable were a source of funding due to collections
from customers $2,858,000 in excess of new shipments and billings.
* Inventory increased $803,000 due to restocking and longer term
purchase commitments which could not be scaled back to coincide
with the production requirements of revenue in the period.
* Accounts payable were reduced $4,783,000 due to payments of
accumulated obligations in line with prior operating levels.
* The non-cash charges were primarily $854,000 depreciation and
amortization of intangible assets and $703,000 of amortization of
deferred financing costs.
INVESTING ACTIVITIES
Investment spending consisted primarily of capital expenditures of
$766,000 for fixed asset additions. These additions were concentrated in
computers, software, and test equipment to support engineering activities,
leasehold improvements, and manufacturing equipment to support new products.
FINANCING ACTIVITIES
Cash uses were financed by the following transactions during the three
month period ended March 31, 1998:
* $10,000,000 from the sale of Series C preferred stock to Citadel
Investment Group LLP
* $3,000,000 borrowed from St. James Capital LP
* A deferred payment arrangement converting $2,100,000 originally
due in February to monthly payments through December 1998
SUBSEQUENT FINANCING ACTIVITIES
Since March 31, 1998, the Company has secured financing from the
following transactions:
* $7,000,000 borrowed from St. James Capital LP on April 2, 1998
* $5,000,000 from the sale of Series D preferred stock to Citadel
Investment Group LLP on May 8, 1998
Proceeds from these financings were used to retire maturing obligations
of $6,630,000 and $3,223,000 to St. James Capital Corp. and the Coastal Trust,
respectively, and for additional working capital.
OUTLOOK
The St. James Capital LP credit facility may be available for
additional advances of up to $5,000,000 until July 31, 1998. Such advances are
subject to certain conditions including a due diligence review. Borrowings under
the facility are due February 12, 1999, but may be extended for one year at the
Company's option. In connection with the May 8 financing, the Company granted
the holders of Series D Preferred Stock the right to purchase additional shares
in lieu of anticipated advances under the facility.(See Notes to Consolidated
Financial Statements).
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The Company has continued to fund its program to complete development
and bring to market its CS4 intelligent, programmable, enhanced services
platform. The Company is also continuing its efforts to bring a third party
participant or participants into the CS4 program to provide funding, to
contribute to specification and development of selected applications, or to
augment marketing and distribution resources. The current focus of the CS4
program is to complete an initial application for a defined customer service
demonstration in beta form in the time frame of late 1998 or early 1999 and to
position the product for marketing in 1999. The results of the Company's efforts
to involve third party participants may be expected to impact directly the level
of expenditure, the technical and manufacturing scope of focus, and the ultimate
realization of value to the Company from the CS4 program.
The Company has begun to expand the scope of its contract manufacturing
and related services to new customers for the combined purposes of expanding its
core manufacturing competence and providing a new revenue source to support its
operations infrastructure.
The low level of first quarter sales included $1,157,000 or 21% to
Korea. Should sales in Korean markets not increase to previous levels, the
Company believes that prospects are good for achieving similar levels of sales
in markets other than Korea. If revenues do not recover in the near term, then
cost and expense reduction plans already undertaken can be continued to preserve
cash resources at lower levels of sales. In the contrary scenario, should
working capital additions be required by production and sales growth in excess
of current plans, the Company believes it has the experience and capability to
obtain necessary financing from external sources. There can be no assurance that
such financing would be available, or available on acceptable terms.
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" in the Company's Annual Report on
Form 10-K, the Company is exposed to certain contingent liabilities which, if
resolved adversely to the Company, would adversely affect its liquidity, its
results of operations, and/or its financial position.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE LIQUIDITY AND OPERATING RESULTS
This Form 10-Q contains certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. The forward looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those expressed in, or implied by, the forward looking
statements. Factors that might cause such a difference include, but are not
limited to, those relating to: general economic conditions in the markets in
which the Company operates, 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-3 of the Company filed on
April 3, 1998.
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PART II - OTHER INFORMATION
ITEM 3 - CHANGES IN SECURITIES
(c) Recent sales of unregistered securities
Effective as of January 1, 1998, the Company authorized the issuance of
42,546 shares of common stock in lieu of a $212,000 cash dividend on its Class A
preferred stock for the quarter ended December 31, 1997.
Effective as of April 1, 1998, the Company authorized the issuance of
31,308 shares of common stock in lieu of a $212,000 cash dividend on its Class A
preferred stock for the quarter ended March 31, 1997, and 17,025 shares in lieu
of a $116,000 cash dividend on Class B preferred stock from issue date through
March 31, 1998.
As disclosed in the Form 8-K of the Company filed May 8, 1998, the
Company sold $5 million of Series D convertible preferred stock in a private
placement.
ITEM 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. The Financial Statements and Financial Statement Schedules filed as
part of this report are listed and indexed on Page 1. Schedules other than those
listed in the index have been omitted because they are not applicable or the
required information has been included elsewhere in this report.
B. Listed below are all Exhibits filed as part of this report. 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.
Exhibit
No. Exhibit
- ------- -------
3.1 Certificate of Designations establishing the rights and
preferences of the Series C Preferred Stock(1)
3.2 Certificate of Designations establishing the rights and
preferences of the Series D Preferred Stock(2)
4.1 Registration Rights Agreement between the Company and Citadel,
dated February 6, 1998(1)
4.2 Registration Rights Agreement dated February 12, 1998 between
the Company and St. James Partners, L.P(1)
4.3 Warrant to Purchase Common Stock of the Company dated February
12, 1998 issued to St. James Partners, L.P. expiring on February
12, 2001(1)
4.4 Registration Rights Agreements between the Company and the
Buyers, dated May 8, 1998(2)
10.1 Securities Purchase Agreement between the Company and Citadel,
dated February 6, 1998(1)
10.2 Agreement for Purchase and Sale dated February 12, 1998 between
the Company and St. James Partners L.P.(1)
10.3 Convertible Promissory Note dated February 12, 1998 by the
Company in favor of St. James Partners, L.P.(1)
10.4 Pledge Agreement dated February 12, 1998 between the Company and
St. James Partners L.P.(1)
10.5 Securities Purchase Agreement among the Company and the Buyers,
dated May 8, 1998(2)
10.6 Assignment and Acceptance executed by St. James Partners and
SJMB, L.P. ("SJMB") as to Agreement for Purchase and Sale dated
February 12, 1998 by the Company and St. James Capital Partners
10.7 $2,000,000 Convertible Promissory Note issued to St. James
Partners by the Company dated April 2, 1998
10.8 $13,000,000 Convertible Promissory Note issued to SJMB by the
Company dated April 2, 1998
10.9 Warrant issued to St. James Partners by the Company dated April
2, 1998, exercisable as to 300,000 shares of Common Stock
10.10 Warrant issued to SJMB by the Company dated April 2, 1998,
exercisable as to 1,200,000 shares of Common Stock
10.11 Amendment No. 1 to Registration Rights Agreement dated as of
April 2, 1998 between the Company and St. James Partners
27.0 Financial Data Schedule
(1) Incorporated herein by reference to the Form 10-K for the fiscal year
ended December 31, 1997
(2) Incorporated herein by reference to the Registrant's Form 8-K dated May 8,
1998
C. The Company has not filed any report on Form 8-K during the period
covered by this Report, except as follows:
Form 8-K filed February 17, 1998
Form 8-K filed May 11, 1998
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTELECT COMMUNICATIONS, INC.
(Registrant)
Date: May 14, 1998
By: /s/ EDWIN J. DUCAYET, JR.
--------------------------------------------
Edwin J. Ducayet, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 14, 1998 /s/ HERMAN M. FRIETSCH
--------------------------------------------
Herman M. Frietsch
Chief Executive Officer and Director
(Principal Executive Officer)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.6 $2,000,000 Convertible Promissory Note issued to St.
James Partners by the Company dated April 2, 1998
10.7 $13,000,000 Convertible Promissory Note issued to SJMB
by the Company dated April 2, 1998
10.8 Warrant issued to St. James Partners by the Company
dated April 2, 1998, exercisable as to 300,000 shares
of Common Stock
10.9 Warrant issued to SJMB by the Company dated April 2,
1998, exercisable as to 1,200,000 shares of Common
Stock
10.10 Amendment No. 1 to Registration Rights Agreement dated
as of April 2, 1998 between the Company and St. James
Partners
27 Financial Data Schedule