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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 SEPTEMBER 30, 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 29,303,014 shares of Common Stock, par value $.01 per share,
outstanding on November 13, 1998.
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PAGE
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PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company
at September 30, 1998 (unaudited) and December 31, 1997 2
Consolidated Statements of Operations of the Company (unaudited)
for the three months and nine months ended September 30, 1998 and
1997 4
Consolidated Statements of Cash Flows of the Company
(unaudited) for the nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 16
ITEM 2 CHANGES IN SECURITIES 16
ITEM 5 OTHER INFORMATION 17
ITEM 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 18
SIGNATURES 19
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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)
September 30, December 31,
1998 1997
---------- ----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ -- $ 2,094
Investments in marketable securities 729 942
Accounts receivable net of allowances of $4,560 in 1998 and
$541 in 1997 5,902 15,569
Inventories 8,146 6,289
Prepaid expenses 621 658
---------- ----------
Total current assets 15,398 25,552
Property and equipment, net 6,686 6,041
Goodwill, net 4,955 13,249
Software development costs, net 3,334 2,229
Other intangible assets, net 976 1,168
Other assets 1,127 992
---------- ----------
$ 32,476 $ 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)
September 30, December 31,
1998 1997
---------- ----------
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable, net of unamortized discount of $1,240 in 1998 and
$578 in 1997 $ 11,500 $ 9,132
Current maturities of long-term debt 423 2,527
Accounts payable 4,023 7,568
Accrued liabilities 3,276 3,173
Net liabilities of discontinued operations 400 400
Deferred income taxes 49 49
Current installments of obligations under capital leases 41 89
---------- ----------
Total current liabilities 19,712 22,938
Long-term obligations under capital leases, net of current installments 35 55
Deferred income taxes 89 89
---------- ----------
19,836 23,082
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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; 0 and 914,286 shares outstanding in 1998 and 1997 -- 9
Series C convertible preferred stock, $.01 par value (aggregate
involuntary liquidation preference $10,000,000). Authorized
12,500 shares; 10,000 shares issued; 4,826 outstanding in 1998 -- --
Series D convertible preferred stock, $.01 par value (aggregate
involuntary liquidation preference $10,000,000). Authorized,
issued, and outstanding 10,000 shares in 1998 -- --
Common Stock, $.01 par value. Authorized 50,000,000 shares;
28,221,931 and 23,954,978 shares issued and outstanding in 1998
and 1997; 282 240
Additional paid-in capital 99,518 75,940
Unrealized gain on marketable securities -- 2
Retained earnings (accumulated deficit) (86,105) (50,084)
---------- ----------
13,737 26,149
Less 191,435 shares in treasury (1,097) --
Total stockholders' equity 12,640 26,149
---------- ----------
$ 32,476 $ 49,231
========== ==========
See accompanying notes to consolidated financing statements
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Thousands of dollars, except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(unaudited)
Net revenues $ 2,460 $ 11,076 $ 13,130 $ 24,620
Cost of revenue 4,114 7,141 12,949 16,954
---------- ---------- ---------- ----------
Gross Profit (1,654) 3,935 181 7,666
---------- ---------- ---------- ----------
Expenses:
Engineering and development 2,740 3,438 7,139 8,430
Selling and administrative 4,357 4,554 12,389 13,403
Asset write downs 12,208 -- 12,208
Amortization of goodwill 317 331 957 992
---------- ---------- ---------- ----------
19,622 8,323 32,693 22,825
---------- ---------- ---------- ----------
Operating Loss (21,276) (4,388) (32,512) (15,159)
---------- ---------- ---------- ----------
Other income (expense):
Interest expense (1,097) (96) (3,209) (1,999)
Interest income and other 62 224 232 36
---------- ---------- ---------- ----------
(1,035) 128 (2,977) (1,963)
---------- ---------- ---------- ----------
Loss from continuing operations before income taxes (22,311) (4,260) (35,489) (17,122)
Income tax expense 22 40 36 117
---------- ---------- ---------- ----------
Loss from continuing operations (22,333) (4,300) (35,525) (17,239)
Loss on disposal of discontinued operations, net of tax 77 178 262 290
---------- ---------- ---------- ----------
Net loss $ (22,410) $ (4,478) $ (35,787) $ (17,529)
========== ========== ========== ==========
Dividends on preferred stock 530 64 1,814 64
---------- ---------- ---------- ----------
Loss available to Common Stockholders $ (22,940) $ (5,701) $ (37,601) $ (17,593)
========== ========== ========== ==========
Basic and diluted loss per share:
Continuing operations $ (0.89) $ (0.19) $ (1.51) $ (0.89)
Discontinued operations -- (0.01) (0.01) (0.01)
---------- ---------- ---------- ----------
Net loss per share $ (0.89) $ (0.20) $ (1.52) $ (0.90)
========== ========== ========== ==========
Weighted average number of common shares outstanding $ 25,751 $ 21,905 $ 24,712 $ 19,455
========== ========== ========== ==========
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)
Nine Months Ended
September 30,
-------------------------
1998 1997
---------- ----------
(unaudited)
Cash flows from operating activities:
Net loss $ (35,787) $ (17,529)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,782 2,448
Amortization of loan discount 2,391 1,377
Goodwill writedown 6,888 --
Loss on disposal of discontinued operations 262 290
Stock option compensation 75 183
Noncash operating expenses (708) 180
Other 161 123
Change in operating assets and liabilities,
net of effects of acquired companies:
Accounts receivable 9,667 (9,971)
Inventories (1,857) (1,120)
Other assets 299 (167)
Accounts payable and accrued liabilities (3,411) 3,462
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Net cash used in operating activities (19,238) (20,724)
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Cash flows from investing activities:
Payments for disposal of discontinued operations (183) (290)
Purchase of other intangible assets (51) (94)
Capital expenditures (1,815) (2,480)
Purchase of marketable securities -- (78)
Software development costs (1,432) (1,317)
Proceeds from sale of marketable securities 211 --
---------- ----------
Net cash used in investing activities (3,270) (4,259)
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Cash flows from financing activities:
Debt issuance costs (73) (255)
Proceeds from issuance of notes payable 14,851 14,200
Principal payments on notes payable (11,807) (1,875)
Payments under capital lease obligations (68) (43)
Principal payments on long-term debt (1,603) --
Proceeds from exercise of employee stock options and warrants 262 1,983
Proceeds from issuance of preferred shares 18,815 4,911
Proceeds from issuance of common shares 37 3,307
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Net cash provided by financing activities 20,414 22,228
---------- ----------
Net increase (decrease) in cash and cash equivalents (2,094) (2,755)
Cash and cash equivalents, beginning of period 2,094 4,863
---------- ----------
Cash and cash equivalents, end of period $ -- $ 2,108
========== ==========
See accompanying notes to consolidated financial statements
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INTELECT COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 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)
September 30, December 31,
1998 1997
---------- ----------
Raw materials $ 6,496 $ 5,209
Work in progress 1,362 630
Finished goods 2,879 2,050
---------- ----------
10,737 7,889
Less: allowance for obsolescence (2,591) (1,600)
---------- ----------
$ 8,146 $ 6,289
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FINANCING MATTERS
There have been no new developments from those described in the 1997
Annual Report on Form 10-K or the 1998 First and Second Quarter Reports on Form
10-Q with regard to Financing Matters, except as described below.
As of September 30, 1998, the Company has principal and interest
outstanding under its credit facility ("Credit Facility") with a private lender
of $10,377,000. In connection with the establishment of the Credit Facility in
February 1998 and as modified on April 2, 1998, the Company issued to the
lenders warrants to purchase 1,500,000 shares of the Company's Common Stock, par
value $0.01 ("Common Stock") at an exercise price of $7.50. Certain repricing
and antidilution provisions of the warrants were triggered by a reset of the
conversion price of the Company's Series D Convertible Preferred Stock, par
value $0.01 per share (the "Series D Preferred Stock") effective on November 10,
1998 to $2.998 per share relative to an aggregate of approximately 3,753,000
shares of Common Stock.
As disclosed in the Company's current Report on Form 8-K filed on
September 16, 1998, on September 14, 1998, the Company entered into a Loan
Agreement for Receivables Backed Borrowing ("Receivables Facility") with the
holder of the Series A Preferred Stock. The agreement provides for borrowings up
to $5,000,000 determined on the basis of 80% of domestic accounts receivables
within 120 days of invoice date. At September 30, 1998, $4,387,000 was eligible
and $2,300,000 was borrowed under the Receivables Facility. Interest is at the
prime rate plus 3.5% and is payable quarterly beginning on December 31, 1998.
The
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Receivables Facility is secured by a first lien on all accounts receivable of
the Company and its material subsidiaries and further secured by a second lien
on the Common Stock of such subsidiaries. The Receivables Facility includes
provisions restricting the ability of the Company to incur indebtedness and
certain other restrictions, all as more fully described in the Form 8-K. In
connection with the consent of the Credit Facility lender to the terms of the
Receivables Facility, the Company agreed not to extend the Credit Facility
beyond the maturity date of the Receivables Facility, the Company retains the
ability to extend the terms of the existing Credit Facility for a period of one
year after February 12, 1999, so long as it obtains an extension of the maturity
date of the Receivables Facility (presently August 31, 1999) to a maturity date
on or after the maturity date of the Credit Facility. The Company also agreed,
in the event of its election to extend the Credit Facility, to issue any
accompanying warrants at a price the lesser of (i) $3.50 or (ii) $1.50 plus the
volume weighted average closing market price of the Company's Common Stock for
the ten trading days prior to the date of the election to extend.
ASSET WRITE DOWNS AND RESERVES
In accordance with the evolving focus of the Company's primary
technologies, products and markets and forward growth plans, and in accordance
with the Company's accounting policies, including reviews of realizability of
its long-term assets, including goodwill, the company wrote off at September
30, 1998, the balance of $6,888,000 of goodwill from the acquisition in 1995 of
Intelect Inc., which at that time was primarily engaged in the supply of
communications systems for air traffic control and air defense installations,
and is presently operating as Intelect Network Technologies, emphasizing the
SONETLYNX and FibreTrax product lines. This decision was influenced by a review
of recent revenue results and prospects in the air traffic control equipment
market, by the loss attributable to Korean business, and by the prospects for
significantly improving cash flows in these business areas. Goodwill
amortization charges in the amount of $149,000 per quarter also will be
eliminated following the writeoff of goodwill. In this connection, $900,000 has
been added at September 30, 1998 to the Company's inventory reserve for
obsolescence in order to provide for slow moving items specific to air traffic
control communications systems.
Accounts and notes receivable from the Company's Korean distributor,
and relating to the sales of the Company's products in Korea, totaled
$4,696,000 at the end of September 1998, compared to $9,879,000 at December 31,
1997, from which $6,731,000 has been collected and to which $1,548,000 of
billings have been added during 1998. Upon review and consideration of factors
affecting collectibility during the third quarter and currently expected
through year-end 1998, the Company determined that it would be prudent and
timely to write off $605,000 of such receivables and to provide a $4,135,000
increase in the allowance for doubtful accounts primarily attributable to such
receivables. However, the Company also believes future recoveries may be
possible and is continuing to work with its distributor and its customers in
Korea to collect balances due.
In connection with the support of two major installations of
SONETLYNX products and to reflect costs for start-up and first year of
operation, $580,000 has been added to the reserve for warranty expense.
SUBSEQUENT EVENTS
The Company will be filing an amendment to the previously filed
Form 10Q for the period ending June 30, 1998 (Form 10Q-A) to restate operating
results for the quarter ended June 30, 1998 to reflect the elimination of
$1,915,000 of revenues on shipments to Korea. Based on current facts and
circumstances, including collectibility of receivables from the Korea
distributor, the Company concluded that such shipments did not meet revenues
recognition criteria. The impact of such restatement is reflected in this
Form 10Q filing as of September 30, 1998, and for the nine months then ended.
Effective as of October 1, 1998, the Company authorized the issuance of
71,882 shares of Common Stock in lieu of a $212,000 cash dividend on its Series
A Preferred Stock for the quarter ended September 30, 1998. The share price was
the average closing market bid price for the five consecutive trading days
ending September 30, 1998.
During October and November, an additional $2,700,000 was borrowed
under the terms of the Receivables Facility.
Effective November 10, 1998, the Fixed Conversion Price on the Series D
Preferred Stock was reset to $2.998 per share.
The Company has received a notice of acceleration of a note in the
amount of $230,000 payable to a former shareholder of an acquired company.
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 SEPTEMBER 30, 1998
This Form 10-Q contains certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. The forward looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those expressed in, or implied by, the forward looking
statements. Factors that might cause such a difference include, but are not
limited to, those relating to: general economic conditions in the markets in
which the Company operates, success in the development and market acceptance of
new and existing products (particularly SONETLYNX, FibreTrax, 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.
OVERVIEW
The Company is engaged in the business of design, development,
manufacturing, marketing and sales of products and services for the seamless
integration of voice, data and video networks. The Company's current operations
were established through a series of mergers in 1995 and 1996, at which time
four communication product platforms were defined to respond to the increasing
demands of speed and complexity in communications.
The Company is strategically focusing all of its product lines and
services to take advantage of the explosive growth of the Internet which is
driving bandwidth demand to support the convergence of voice, data, and video
into single and integrated networks. These widely documented industry trends
create a major dilemma for today's network integrators and managers in finding
solutions to manage multiple applications, at multiple locations, within
bandwidth resources and while balancing the need for network reliability. The
Company's product lines are designed to meet these evolving needs, including
intelligent transport and access; collaborative video and data integration; and
programmable IP and circuit switching.
The Company's objective is to provide a new generation of intelligent
and flexible communications platforms designed to allow customers to combine
their current voice, data and video networks (TI, H.320, H.323, DS3, RS.232,
V.35, Ethernet, etc.) into a single communications network, which would also
enable them to upgrade their communications into the latest generation of
high-speed communication technologies (SONET/SDH, ATM, Fast Ethernet, IP
switching, etc.) while using a single network management system.
PRODUCTS, TECHNOLOGIES AND SERVICES
Management believes that an awareness of the Company's products,
technologies and services and its related beliefs, intentions and plans is
relevant to consideration of the Company's results of operations, financing
conditions, liquidity and outlook. There can be no assurance, however, that the
Company is correct in its beliefs or can execute its plans or that markets and
customers will respond as anticipated.
Multi-service Access Platform (MAP)
Marketed under the names SONETLYNX and FibreTrax, the Company believes
MAP is a revolutionary communications product for public and private networks to
cost-effectively create voice, data and/or video networks of virtually any size
and application. Through the use of different protocol cards, the Company
believes MAP can simultaneously combines multiple communication transmissions
such as Internet access, video communications, data files, graphics, interactive
multimedia, voice and voice-over-the-Internet into a single fiber-optic signal.
By connecting multiple MAPs together via fiber-optic cable or high-speed
wireless transmissions, the Company believes local, or even global networks can
be created with each MAP having the ability to seamlessly communicate with every
other MAP on the network. Additionally, the Company believes communications
quality and performance is ensured through the use of Synchronous Optical
Network (SONET) and Synchronous Digital Hierarchy (SDH) technologies. The MAP is
an "intelligent multiplexer", designed to provide internally the functions of
traditional networking equipment such as bridges, channel banks, routers and
video matrix switches, thus offering significant savings in cost and time for
the user. Due to its unique design, the Company believes MAP can be expanded
into both horizontal and vertical markets. The Company believes MAP expands into
horizontal markets by increasing the types of protocols (applications) it can
transport, and vertically by increasing the capacity (transmission speed) the
MAP communicates. Currently, the MAP can transport voice, Fast Ethernet
(10/100baseT), JPEG video and low speed data protocols such as RS-232 and RS-422
at speeds up to the OC-3/STM-1 rate (155 Mbps). Major product advancements are
scheduled during 1999, which include adding the protocol cards for Asynchronous
Transfer Mode (ATM) and Frame Relay as well as increasing the MAPs transmission
speed to the OC-12/STM-3 rate (622 Mbps). In latter 1999, the Company plans to
increase the MAPs transmission speed to the OC-48/STM-16 rate (2,488 Mbps). With
the addition of each major protocol and increase in transmission speed, the
Company intends that the value of the MAP exponentially increases for the end
customer using those multiple protocols.
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Engineering Services
DNA Enterprises, the Company's engineering services division, provides
high-end design and development services for a variety of clients in the
communications industry. The Company believes DNA Enterprises is a leading
resource for the communications industry with network-wide design and
development expertise. DNA Enterprises provides key technologies to customers
for applications such as digital signal processing (DSP), computer telephony
integration (CTI), digital imaging, Digital Subscriber Line technologies (xDSL)
and wireless communications.
Digital Signal Processing
The DSP Design Center provides leading digital signal processing (DSP)
software and hardware designs. The Company believes the DSP Design Center's
products and services offer state-of-the-art performance, faster time to market
and reduced technical risk for developers. The DSP Design Center provides board
designs, software, operating systems and development services to high-technology
product manufacturers, application developers and designers for embedded
applications such as multimedia communications, image processing, remote sensing
and environmental testing. During the first three quarters of 1998, as a new
business generating activity of the Company, the DSP Design Center achieved two
major multiyear contracts to provide DSP designs in secure communications as
well as a strategic partnership with one of the worlds leading electronic
contract manufacturers to jointly pursue OEM opportunities. The majority of the
DSP Design Centers activity and focus is on products and services applying and
incorporating Texas Instrument's new C6000 line of high-speed DSPs, scheduled
for volume production during 1999.
Visual Communications
The Company believes LANscape is a unique, standards-based video group
of products providing full motion collaborative video communications in a
single cost effective solution for desktop PCs to large room systems. With one
product, the user can conduct up to a three-way conference call without a costly
multiconferencing unit (MCU), transmit video broadcasts using IP multicast,
offer data collaboration through file sharing and use the integrated software to
switch between two incoming video sources. Each incoming video is contained in
an individual window which the user can control as to size and volume. LANscape
is conversant with all major video standards and provides reliable video
communications across existing standard LAN/WAN networks (including native ATM).
In addition to video conferencing, LANscape features video record and playback
controls for applications such as education/training and recorded event
distribution. LANscape supports IP multicast for transmission of live or
pre-recorded video from one-to-many. Markets for LANscape include Fortune 1000
corporate networks, financial trading networks, Internet deployment over xDSL
and UUNet, Educational/Distance learning networks, medical networks and
government networks. During 1998, LANscape completed several strategic
agreements progressing the technology into a complete turnkey customer solution,
including factory installation agreements with Gateway and Dell Computers in the
third quarter of 1998. During 1999, the Company expects to continue to expand
its channels to market with product development plans to continue to offer VHS
quality video communications at increasingly lower transmission speeds, although
no assurances can be given that such efforts will be successful.
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The CS4 Intelligent, Programmable Enhanced Services Platform in
development since 1995 is expected to reach beta test and commercial
availability in 1999. The CS4 product line is designed for a broad range of
intelligent network and telecommunications services and applications. The
Company is seeking to arrange third party participation in funding, development,
and marketing of initial products.
1998 PERSPECTIVE
During 1998, the Company has been concurrently (A) recovering from an
unexpected and abrupt cessation of revenues, gross profit contribution and
collections from sales in Korean markets, and (B) transitioning core product
lines into expanded performance capabilities, market launch, new distribution
and initial sales. Management has been undertaking actions to reduce costs,
apply resources more effectively and accelerate results.
Financially, through the first nine months of 1998, management
believes results of operations have been disappointing. While revenues have been
lower, substantial costs have been incurred for continuing key development
programs, establishing new and broader distribution capabilities, bidding and
pursuing new sales opportunities and supporting strategic test projects for new
applications with prospective customers.
Over the same time period, management also believes material progress
has been achieved in technical and market positioning. In this regard,
management believes that advances in Company products are enhancing value and
performance for applications in Internet-driven enterprise and telco markets
for network multimedia communications equipment and services. New U.S.-based
distributors with extensive network integration experience are being engaged
and supported for proposing, trialing and bidding Company products into
customer relationships.
For purposes of reflecting closure on Korea-related matters and
recognizing the current and planned focus of Company activities and
expenditures, there were a combination of material asset write downs and
additions to accounts receivable and inventory reserves effective September 30,
1998, and results for the second quarter of 1998 will be restated to eliminate
certain revenues on shipments to Korea. These actions are described more
specifically in sections of the subsequent "Comparison of Third Quarter and Nine
Months 1998 to 1997".
OPERATING RISK FACTORS
The Company has a limited operating history, and its prospects are
subject to the risks, expenses, and difficulties frequently encountered by
companies in the new and rapidly evolving markets for Internet and computer
networking products and services. The limited operating history of the Company
makes the prediction of future results of operations difficult or impossible
and, therefore, the revenue increases and decreases experienced by the Company
should not be taken as indicative of the rate of revenue growth or decline, as
the case may be, that can be expected in the future. The Company believes that
period to period comparisons of its operating results are not necessarily
indicative of a trend and the results for any period should not be relied upon
as an indication of future performance. Due to the significant costs incident to
sales and marketing operations, to fund greater levels of product development,
and to develop its products, there can be no assurance that the Company will not
incur significant losses on a quarterly and annual basis for the foreseeable
future.
- - --------------------------------------------------------------------------------
COMPARISON OF THIRD QUARTER AND NINE MONTHS 1998 TO 1997
- - --------------------------------------------------------------------------------
The following table shows the revenue and gross profit for the
Company's products:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
($ Thousands)
Revenue:
Fiber optic multiplexers $ (116)(A) $ 8,269 $ 3,625(A) $ 16,421
Engineering services and DSP 1,915 2,669 7,772 6,435
Video conferencing 384 77 1,223 290
Voice switching and other 277 61 510 1,474
-------- -------- -------- --------
$ 2,460 $ 11,076 $ 13,130 $ 24,620
-------- -------- -------- --------
Gross profit:
Fiber optic multiplexers (1,517)(A) 3,220 (1,496)(A) 5,864
Engineering services and DSP 629 758 2,178 1,651
Video conferencing 114 33 470 111
Voice switching and other (880) (76) (973) 40
-------- -------- -------- --------
$ (1,654) $ 3,935 $ 181 $ 7,666
-------- -------- -------- --------
(A) Excludes $2,335 of sales values and $1,106 of attributable gross profit for
two completed SONETLYNX orders awaiting customer pickup and acceptance
(concluded on October 5, 1998), respectively. These orders will be treated as
fourth quarter 1998 shipments for revenue recognition.
NET REVENUE
Material progress continues in the Company's engineering, marketing and
distribution programs to generate non-Korean revenues from networking,
multimedia and internet-related applications in private networks, enterprise
systems and telco markets. Comparing 1998 to 1997, had the above footnoted
orders been included in third quarter revenues, revenues from fiber optic
product sales to non-Korean customers would have increased 18% and 39% in the
three-month and nine-month periods. Engineering services revenues declined 35%
and increased 4% in the corresponding periods due to normal fluctuations in
customer project activity levels. Revenues from LANscape videoconferencing
products increased 398% and 321%, respectively, following market launch of the
most recent version of the product. The overall decrease of net revenue by 78%
and 47% mainly reflects reduced sales in Korea. All revenue differences reflect
differences in product or service volumes, not prices.
The Company will be filing an amendment to the previously filed Form
10Q for the period ending June 30, 1998 (Form 10Q-A) to restate operating
results for the quarter ended June 30, 1998 to reflect the elimination of
$1,915,000 of revenues on shipments to Korea. Based on current facts and
circumstances, including collectibility of receivables from the Korean
distributor, the Company concluded that such shipments did not meet revenue
recognition criteria. The impact of such restatement is reflected in this Form
10Q filing as of September 30, 1998, and for the nine months then ended.
GROSS PROFIT
SONETLYNX margins were adversely affected by lower volume levels
reflecting primarily the year-to-year reduction in sales to Korea.
Alternatively, engineering services, DSP and video product margins improved as a
10
12
result of increasing revenues and cost improvements. Voice switching (air
traffic control) product margins were reduced by a $900,000 addition to the
allowance for excess and obsolete inventory. Overall gross profit was lower by
142% and 98%, respectively, over the prior year periods from this combination of
factors.
ENGINEERING AND DEVELOPMENT (E&D) EXPENSE
Combining E&D expense with capitalized software, total development
costs were reduced by 17% and 12% in the three months and nine months,
respectively. E&D expense for the three months and nine months ended September
30, 1998, decreased to $2,740,000 and $7,139,000, respectively, compared to
$3,438,000 and $8,430,000 in the prior year periods. In the three months,
software development costs of $362,000 and $296,000, respectively, were
capitalized. In the nine month period, capitalized SONETLYNX software
development cost decreased to $940,000 from $1,317,000 and video software
development of $454,000 was capitalized. The total costs of development were
distributed by product line as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
($ Thousands)
Fiber optic multiplexers $ 1,226 $ 1,697 $ 3,924 $ 4,271
CS4 1,120 848 2,983 3,197
Video conferencing 290 571 899 1,009
DSP and other 466 618 727 1,270
-------- -------- -------- --------
$ 3,102 $ 3,734 $ 8,533 $ 9,747
During the third quarter of 1998, new network management features were
added to the SONETLYNX product line. The new system is capable of serving
large networks, both SONET-only and mixed mode. A DS3 transport interface was
introduced to provide the higher capacity typical of Internet Service Providers
and enterprise access connections. To better serve Internet frame relay
connections, an efficient T1/E1 redundancy was developed so that one interface
can serve as backup for up to seven others.
The LANscape product was further integrated into the Windows NT
environment and progress was made on development of PCI-compliant hardware.
CS4 product development, modeling and testing continued on a pace to
provide beta deliveries in a first quarter 1999 timeframe and commercial product
in the second half of 1999. Development included advanced hardware components
and software for customer network applications.
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses were reduced 4% and 8% compared to
the prior year periods. The expense reduction year-to-year was partly caused by
the removal of corporate headquarters from Bermuda during 1997, and the
non-recurrence of related extraordinary expenses.
ASSET WRITE DOWNS
In accordance with the evolving focus of the Company's primary
technologies, products and markets and forward growth plans, and in accordance
with the Company's accounting policies, including review of realizability of
its long-term assets, including goodwill, the company wrote off at September
30, 1998, the balance of $6,888,000 of goodwill from the acquisition in 1995 of
Intelect Inc., which at that time was primarily engaged in the supply of
communications systems for air traffic control and air defense installations,
and is presently operating as Intelect Network Technologies, emphasizing the
SONETLYNX and FibreTrax product lines. This decision was influenced by a review
of recent revenue results and prospects in the air traffic control equipment
market, by the loss attributable to Korean business, and by the prospects for
significantly improving cash flows in these business areas. Goodwill
amortization charges in the amount of $149,000 per quarter also will be
eliminated following the writeoff of goodwill. In this connection, $900,000 has
been added at September 30, 1998 to the Company's inventory reserve for
obsolescence in order to provide for slow moving items specific to air traffic
control communications systems.
Accounts and notes receivable from the Company's Korean distributor,
and relating to the sales of the Company's products in Korea, totaled $4,696,000
at the end of September 1998, compared to $9,879,000 at December 31, 1997, from
which $6,731,000 has been collected and to which $1,548,000 of billings have
been added during 1998. Upon review and consideration of factors affecting
collectibility during the third quarter and currently expected through year-end
1998, the Company determined that it would be prudent and timely to write off
$605,000 of such receivables and to provide a $4,135,000 increase in the
allowance for doubtful accounts primarily attributable to such receivables.
However, the Company also believes future recoveries may be possible and is
continuing to work with its distributor and its customers in Korea to collect
balances due.
In connection with the support of two major installations of
SONETLYNX products and to reflect costs for start-up and first year of
operation, $580,000 has been added to the reserve for warranty expense.
11
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INTEREST EXPENSE
Cash interest expense in the three months ended September 30, 1998 and
1997 was $240,000 and $290,000, respectively. For the nine months ended
September 30, 1998 and 1997, cash interest expense was $812,000 and $695,000,
respectively. Remaining amounts reportable as interest are non-cash expenses due
to amortization of debt discount and deferred financing costs attributable to
valuation of warrants using the Black-Scholes pricing model except that in the
first half of 1997, $582,000 of the non-cash cost was attributable to a
beneficial conversion feature of certain convertible debentures issued in 1996.
DIVIDENDS ON PREFERRED STOCK
Preferred dividends include $379,000 and $1,189,000 in the three months
and nine months ended September 30, 1998, which the Company has elected to pay
in Common Stock or which accrue to be paid in Common Stock only upon conversion.
Also included in the reported amount are additional preferred dividends of
$151,000 and $625,000, respectively, attributable to the value of beneficial
conversion features of Series B, C and D Preferred Stock at date of issue.
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 none of its significant systems fail
to comply with the ability to distinguish the year 2000 from the year 1900. The
review continues, in an ongoing process, to examine the risk, if any, to the
Company, of vendor or customer exposure to the Year 2000 Problem. To date, no
exposure has been discovered which would have a material adverse effect on the
Company. Certain purchased software, resold or used in company products, has
been certified by the vendors to be compliant. 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.
12
14
- - --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- - --------------------------------------------------------------------------------
For the nine months ended September 30, 1998, cash balances decreased
by $2,094,000. During the nine-month period, cash used in operations
($19,238,000) and in investing activities ($3,270,000) was funded by the
reduction of cash balances and by securing new financing of $20,414,000 (net of
$13,410,000 of debt repayments).
OPERATING ACTIVITIES
Net cash used in operations primarily reflects the $26,089,000 net loss
offset by $4,472,000 of non-cash charges and the $1,881,000 net decrease in
working capital. The net cash requirement for operations is basically
attributable to the combined effect of a reduced gross profit contribution
compared to 1997 and a continuation of expenditures related to the Company's
technology and product development programs and marketing, selling and
distribution support activities. The lower level of gross profit reflects mainly
the abrupt discontinuance of sales in Korea and the lead times to develop sales
in other markets and to launch new products into distribution and sales.
Additionally, in this context:
o Accounts receivable were a source of funding due to collections
from customers $171,000 in excess of new shipments and billings.
o Inventory increased $1,528,000 due to restocking, longer term
purchase commitments, and production for orders received near the
end of September.
o Accounts payable were reduced $3,716,000 due to payments of
accumulated obligations in line with prior operating levels.
o The non-cash charges were primarily $2,789,000 of depreciation
and amortization of intangible assets and $2,391,000 of
amortization of deferred financing costs.
INVESTING ACTIVITIES
Investment accounts were increased primarily by $1,815,000 of fixed
asset additions and $1,432,000 of capitalized SONETLYNX and LANscape product
advances and enhancements. The fixed asset additions were concentrated in
computers, software, and test equipment to support engineering activities,
leasehold improvements, and manufacturing equipment for new products.
FINANCING ACTIVITIES
Cash uses were financed by the following transactions during the nine
month period ended September 30, 1998:
o $10,000,000 from the sale of Series C Preferred Stock in
February.
o $3,000,000 borrowed in February.
o A deferred payment arrangement converting $2,100,000 originally
due in February to monthly payments through December 1998, of
which $230,000 has been accelerated to November 13, 1998.
o $7,000,000 borrowed in April.
o $5,000,000 from the sale of Series D Preferred Stock in May.
o $5,000,000 from the sale of Series D Preferred Stock in June.
o $2,300,000 borrowed in September.
Proceeds from these financings were used to retire maturing obligations
of $13,410,000 and for additional working capital.
13
15
SUBSEQUENT FINANCING ACTIVITIES
During October and November, an additional $2,700,000 was borrowed under the
terms of the Receivables Facility.
The Company intends to call a special meeting of stockholders for the
purposes of (1) approving a proposal to issue Common Stock upon conversion of
the Series C and D Convertible Preferred Stock and (2) approving a proposal to
amend the Amended and Restated Certificate of Incorporation to increase the
number of shares of Common Stock authorized for issuance from 50,000,000 to
100,000,000 shares. The special meeting and proposals were made necessary by (1)
a Nasdaq listing rule requiring stockholder approval of a sale of Common Stock
or securities convertible into Common Stock equal to 20% or more of the number
of shares outstanding at the time of the sale, and by (2) the lack of available
Common Stock for future issuances. If stockholder approval of the proposals is
not received, the Company may be required by the holders of Preferred Stock to
redeem the outstanding balance at a redemption price equal to the greater of (1)
120 % of the stated value, or (2) the product of the conversion rate in effect
on the date of notice of redemption and the closing sales price of the Common
Stock on the trading day immediately preceding the date of notice. Further, the
Company may not have a sufficient number of shares of Common Stock available for
future issuances. The Company has been notified by the holders of Preferred
Stock that the Company has incurred certain liquidated damages and furthermore
could be obligated to redeem the Preferred Stock at the redemption price in
connection with the absence of an effective registration statement covering all
of the shares of Common Stock issuable upon conversion of the Preferred Stock.
The Company is attempting to secure from the holders of Preferred Stock a waiver
of enforcement of the remedies of redemption and liquidated damages. If
stockholder approval is not received and the enforcement of the redemption and
liquidated damages provisions against the Company are not waived, there would be
a material adverse effect on the Company's results of operations and financial
position as well as its ability to continue as a going concern.
OUTLOOK
During the last three years, the Company has continued various programs
and activities to design, develop, bring to market and establish distribution
and sales for four product lines targeting multiple markets internationally.
For the network access market, the SONETLYNX product line was introduced in
1996. The line was expanded in 1998 by the addition of the FibreTrax (SDH)
international version. The Company has developed the CS4 intelligent Enhanced
Services Platform for beta testing and commercial availability in 1999. The DSP
Design Center in the Company's engineering services group continues to develop
products using advanced DSP circuits and design skills applicable to a variety
of companies in the networking and telecommunications industry. For the video
communication industry, the Company has developed LANscape, a standards-based
video system offering full-motion collaborative communications for desktop and
room applications. These four product lines are each expected to have
significant potential revenue and profit opportunities for the Company and have
been the focus of considerable development and marketing expense during the
last three years. The product lines and their applications are more fully
described in the "PRODUCTS" section above. The Company has incurred operating
losses and negative operating cash flows of $26,970,000 and $19,238,000 for the
first nine months of 1998, $20,241,000 and $24,852,000 for 1997, and
$43,039,000 and $25,060,000 for 1996. The cash flows were funded by proceeds
from borrowings under credit facilities and sales of preferred stock and common
stock in 1998 and 1997 and by proceeds from issuance of convertible debentures
in 1996. The Company expects operating losses and negative operating cash flow
to continue. It is uncertain when, if ever, the Company will report operating
income or positive cash flow from operations.
14
16
The Company's current outlook for business in Korea has led to the
conclusion that (1) the majority of the $4,696,000 account receivable from the
distributor in Korea is unlikely to be collected in the near future, and (2) the
resumption of large-scale installations of SONETLYNX equipment at major
customers in Korea cannot be predicted with reasonable certainty.
Redeploying and refocusing resources and new activities to replace
Korean with non-Korean business are still in process of producing results to
recover sales levels and gross profit contribution.
In response to lower levels of sales and production, the Company has
contained or reduced costs and expenses in engineering, selected product
development, and sales areas (net of non-recurring expenses recognized primarily
in connection with Korean business). Marketing and selling expenditures were
maintained on the SONETLYNX product line in connection with new distribution
relationships and the related quantity and quality of promising prospects.
Expenses related to video product sales were reduced in alignment with near-term
prospects. Development costs of SONETLYNX and FibreTrax products were reduced as
certain schedules neared completion and lower cost outsourcing became feasible
in some areas. Expense reductions have not been sufficient to fully compensate
for the reduced gross margin contribution on lower sales volumes. Accordingly,
lower production volumes and ongoing costs and expenses have impeded progress
toward profitability and cash equilibrium.
The Company's initiative to arrange third party (partner)
participation(s) in CS4 development, funding and/or marketing led to increases
in spending from the recognition that such potential interest is enhanced by the
accelerated commercialization of marketable product applications.
The Company retains the ability to extend the terms of the existing
Credit Facility for a period of one year after February 12, 1999, so long as it
also obtains an extension of the maturity date of the Receivables Facility
(presently August 31, 1999) to a maturity date on or after the maturity date of
the Credit Facility. Although this arrangement was reviewed and anticipated with
both lenders at the time of the implementation of the Receivables Facility, no
assurances can be given at this time that the Company will be able to obtain the
agreement of the lender under the Receivables Facility to extend the maturity
date of its loan, or if it is able to obtain such agreement, if the terms will
be acceptable to the Company and the lender under the Credit Facility.
CONCLUSION
Considering the available financial resources, current business
prospects, the outlook for cash available from customer collections, the outlook
for cash uses in operations and investing, and actions to control spending, the
Company believes it has the financial resources to meet its business
requirements for the balance of the current year. There can be no assurance,
however, that the assumptions and projections underlying or supporting this
outlook will be realized. If cash needs exceed available resources, there also
can be no assurance that additional capital will be available through public or
private equity or debt financings.
Due to the continuation of operating losses, and current factors
affecting the outlook for cash needs and resources, it is likely at this time
that the auditor's report for the Company's 1998 financial statements would
include a qualification regarding the ability of the Company to continue as a
going concern. However, the actual outcome of such possibility will involve
facts and considerations applicable at the time the auditor's opinion is issued.
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.
15
17
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On October 28, 1998, in the 192nd Judicial District Court for Dallas
County, Texas, (Case No.: DV 98-08366), Richard Dzanski filed suit against
Intelect Network Technologies Company, a wholly owned subsidiary of the Company,
and Intelect Systems Corp., the predecessor of the Company. In the suit, the
plaintiff has claimed a breach of an Irrevocable Option Agreement and that he
has not received payments he claims are due to him in the amount of at least
$386,000. The defendants deny liability to the plaintiff and intend to
vigorously defend the case. It is too early to determine if the outcome of this
case will have a material impact on the Company.
ITEM 2 - CHANGES IN SECURITIES
(c) Recent sales of unregistered securities
Effective as of October 1, 1998, the Company issued 71,882 shares of
Common Stock in lieu of a $212,000 cash dividend in its Series A Preferred Stock
for the quarter ended September 30, 1998.
In a transaction exempt from registration pursuant to Schedule 3(a)(9)
under the Securities Act, on July 16, 1998, the holder of Series B Preferred
Stock converted 731,285 shares into 812,732 shares of Common Stock of the
Company. On September 17, 1998, the holder converted all of the remaining
183,001 shares of Series B Preferred Stock into 512,607 shares of Common Stock.
Conversion was based on 85% of the average closing bid price on the five trading
days preceding the conversion date.
In a transaction exempt from registration pursuant to Schedule 3(a)(9)
under the Securities Act, on July 22, 1998 and July 23, 1998, the holder of
Series C Preferred Stock converted 775 and 200 shares, respectively, into
185,884 and 46,969 shares of Common Stock, respectively. Between August 24, 1998
and September 8, 1998, the holder converted 2,212 shares into 919,760 shares of
Common Stock. On September 24, 1998, the holder converted 1,987 shares into
1,199,664 shares of Common Stock. On October 24, the holder converted 919 shares
into 415,619 shares of Common Stock. On October 26, the holder of Series D
Preferred Stock converted 1,750 shares into 784,184 shares of Common Stock of
the Company. Conversion was based on 97% of the average of the three lowest bid
prices on the ten trading days preceding the conversion dates.
Effective September 1, 1998, the Company issued an amended and restated
warrant to Lifeline Industries, Inc. to purchase 30,000 shares of Common Stock
at an exercise price of $2.00 per share pursuant to a transaction exempt from
registration under Section 4(2) of the Securities Act.
Effective September 1, 1998, the Company issued an amended and restated
warrant to AJC, Inc. to purchase 100,000 shares and 200,000 shares of Common
Stock at exercise prices of $3.00 and $2.00 per share, respectively, pursuant to
a transaction exempt from registration under Section 4(2) of the Securities Act.
Effective September 1, 1998, as disclosed on the Company's current
report on Form 8-K filed September 16, 1998, in a transaction exempt from
registration under Section 4(2) of the Securities Act, the Company amended and
restated the outstanding promissory notes issued to certain officers, directors,
employees and other persons to reduce the conversion price on such loans to
$2.00 per share for each dollar of principal and interest outstanding.
16
18
In a transaction exempt from registration pursuant to Schedule 3(a)(9)
under the Securities Act, on September 18, 1998, an employee converted $21,200
of principal and interest payable on a promissory note of the Company into
10,600 shares of Common Stock of the Company.
ITEM 5 - OTHER INFORMATION
Effective September 1, 1998, the Company amended and restated the
outstanding promissory notes issued to certain officers, directors, employees
and other persons to reduce the conversion price on such loans to $2.00 per
share for each dollar of principal and interest outstanding. The aggregate
principal and interest amount outstanding on such loans as of November 13, 1998
is $462,000.
The Company has received a notice of acceleration of a note in the
amount of $230,000 payable to a former shareholder of an acquired company.
The Company's independent accountant, Arthur Andersen LLP, resigned on
November 13, 1998. The report by Arthur Andersen LLP for the year ended December
31, 1997 contained no adverse opinion or disclaimer of opinion, nor was it
qualified or modified as to audit scope or accounting principles. There have
been no disagreements by the Company with Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedure, which disagreement(s), if not resolved to the satisfaction
of Arthur Andersen LLP would have caused it to make reference to the subject
matter of the disagreement(s) in connection with its report. There are no
"reportable events" as set forth in Regulation S-K, Item 304(a)(1)(v)(A)-(D)
except as follows: (1) Arthur Andersen LLP informed the Company that it appears
likely its auditor's report for 1998 would have contained a qualification as to
the Company's ability to continue as a going concern (2) Andersen informed the
Audit Committee Chairman, the Chairman of the Board and the Chief Financial
Officer that with respect to Capitalized Software Development Costs, compliance
with SFAS #86 had not been evaluated particularly as it relates to current year
additions and realizability of such asset and (3) Anderson informed the Audit
Committee Chairman, the Chairman of the Board and the Chief Financial Officer
that as a result of the revenue restatement for the quarter ended June 30, 1998,
they would have had to expand the scope of the 1998 audit if they had not
resigned. Andersen encouraged the Audit Committee Chairman, the Chairman of the
Board and the Chief Financial Officer to closely monitor these matters.
Substantive audit tests and further investigation into these matters would have
been a necessary part of Andersen's audit procedures for the year-end December
31, 1998 financial statements had the client/auditor relationship not
terminated. Andersen has been authorized by the Company to respond to any and
all inquiries by the successor auditors, without limitation. The Company has
indicated that it will cooperate fully with the new auditors to address these
matters. Andersen has provided to the Company a letter to the Securities and
Exchange Commission stating that it has reviewed the disclosure provided in this
Form 10-Q and has no disagreement with relevant portions of this disclosure,
pursuant to the requirements of Item 304(a)(3) of Regulation S-K. A copy of such
letter, dated November 16, 1998 is filed as Exhibit 16 to this Form 10-Q.
17
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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
- - --- -------
10.1 Amended and Restated Warrant issued to AJC, Inc. exercisable to
purchase up to 300,000 shares of Common Stock
10.2 Amended and Restated Warrant issued to Lifeline Industries, Inc.
exercisable to purchase up to 30,000 shares of Common Stock
10.3 Form of Amended and Restated Promissory Notes held by various
employees, directors, and related individuals of the Company with
face values totaling $419,600, convertible into Common Stock of
the Company at a rate of $2.00 per share(1)
10.4 Loan Agreement for Receivables Backed Borrowing dated as of
September 14, 1998 between the Company and Coastal(1)
10.5 Promissory Note dated September 14, 1998 issued by the Company to
Coastal(1)
10.6 Security Agreement for Receivables Backed Borrowing dated
September 14, 1998 among the Company, Intelect Visual
Communications Corp., Intelect Network Technologies Company, DNA
Enterprises, Inc., and Coastal(1)
10.7 Borrower Pledge Agreement dated September 14, 1998 between the
Company and Coastal(1)
10.8 Security Agreement dated September 14, 1998 between the Company
and St. James(1)
10.9 Letter Agreement dated September 14, 1998 among the Company, St.
James and Falcon Seaboard(1)
16.0 Letter from Arthur Andersen, LLP, regarding its concurrence with
statements in Item 5 of Form 10Q filed November 16, 1998
27.1 Financial Data Schedule
(1) Incorporated herein by reference to the Form 8-K filed September 16, 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 September 16, 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: November 16, 1998 By: /s/ EDWIN J. DUCAYET, JR.
---------------------- ---------------------------------
Edwin J. Ducayet, Jr.
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 16, 1998 By: /s/ HERMAN M. FRIETSCH
--------------------- ----------------------------------
Herman M. .Frietsch
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
19
21
EXHIBIT INDEX
Exhibit
No. Description
- - --- -----------
10.1 Amended and Restated Warrant issued to AJC, Inc. exercisable to
purchase up to 300,000 shares of Common Stock
10.2 Amended and Restated Warrant issued to Lifeline Industries, Inc.
exercisable to purchase up to 30,000 shares of Common Stock
10.3 Form of Amended and Restated Promissory Notes held by various
employees, directors, and related individuals of the Company with
face values totaling $419,600, convertible into Common Stock of
the Company at a rate of $2.00 per share(1)
10.4 Loan Agreement for Receivables Backed Borrowing dated as of
September 14, 1998 between the Company and Coastal(1)
10.5 Promissory Note dated September 14, 1998 issued by the Company to
Coastal(1)
10.6 Security Agreement for Receivables Backed Borrowing dated
September 14, 1998 among the Company, Intelect Visual
Communications Corp., Intelect Network Technologies Company, DNA
Enterprises, Inc., and Coastal(1)
10.7 Borrower Pledge Agreement dated September 14, 1998 between the
Company and Coastal(1)
10.8 Security Agreement dated September 14, 1998 between the Company
and St. James(1)
10.9 Letter Agreement dated September 14, 1998 among the Company, St.
James and Falcon Seaboard(1)
16 Letter from Arthur Andersen, LLP, regarding its concurrence with
statements in Item 5 of Form 10Q filed November 16, 1998
27.1 Financial Data Schedule
(1) Incorporated herein by reference to the Form 8-K filed September 16, 1998