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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
Commission File Number 0-11630
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INTELECT COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0471342
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 EXECUTIVE DRIVE, RICHARDSON, TEXAS
75081
(Address of Principal Executive Offices and Zip Code)
972-367-2100
(Registrant's Telephone Number, Including Area Code)
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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There were 48,885,278 shares of Common Stock outstanding as of August 10, 1999.
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Page
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PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets of the Company
at June 30, 1999 (unaudited) and December 31, 1998 2
Consolidated Condensed Statements of Operations of the
Company (unaudited) for the three months and six months
ended June 30, 1999 and 1998
4
Consolidated Condensed Statements of Cash Flows of the Company
(unaudited) for the six months ended June 30, 1999 and 1998 5
Notes to Consolidated Condensed Financial Statements 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II OTHER INFORMATION
ITEM 3 CHANGES IN SECURITIES 13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 14
SIGNATURES 16
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Thousands of dollars, except share data)
June 30, December 31,
1999 1998
--------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 577 991
Investments 195 681
Accounts receivable net of allowances of $858 and $870 in 1999 and 1998 8,580 7,232
Inventories 7,061 6,854
Prepaid expenses -- 655
------- -------
Total current assets 16,413 16,413
Property and equipment, net 5,970 6,386
Goodwill, net 4,451 4,787
Software development costs, net 2,680 3,134
Other intangible assets, net 733 916
Other assets 539 446
------- -------
30,786 32,082
======= =======
(Continued)
See accompanying notes to consolidated condensed financial statements
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets (Continued)
(Thousands of dollars, except share data)
June 30, December 31,
1999 1998
----------- ------------
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 864 1,173
Current maturities of long-term debt, net of unamortized discount
of $65 in 1999 15,155 440
Accounts payable 5,744 4,293
Accrued liabilities 4,044 3,375
Net liabilities of discontinued operations 400 400
Deferred income taxes 45 45
Current installments of obligations under capital leases 70 126
--------- ---------
Total current liabilities 26,322 9,852
Long-term debt, net of unamortized discount of $388 -- 14,612
Long-term obligations under capital leases, net of current installments 38 42
Deferred income taxes 44 44
--------- ---------
26,404 24,550
--------- ---------
Stockholders' equity:
$2.0145, 10% cumulative convertible preferred stock, series A,
$.01 par value (aggregate involuntary liquidation preference
$7,687,000 in 1999). Authorized 10,000,000 shares; 3,719,409 and
4,219,409 issued and outstanding in 1999 and 1998, respectively 37 42
Series C convertible preferred stock, $.01 par value (aggregate involuntary
liquidation preference $424,000 in 1999). Authorized 12,500 shares; 402
and 1,843 issued and outstanding in 1999
and 1998, respectively 1 1
Series D convertible preferred stock, $.01 par value (aggregate
involuntary liquidation preference $7,045,000 in 1999). Authorized
10,000 shares; 6,764 and 8,250 issued and outstanding in 1999
and 1998, respectively 1 1
Series E convertible preferred stock, $.01 par value (aggregate
involuntary liquidation preference $6,124,000 in 1999). Authorized
9,600 shares; 6,000 issued and outstanding in 1999 1 --
Common stock, $.01 par value. Authorized 100,000,000 shares;
40,216,162 and 32,333,085 shares issued in 1999 and 1998,
respectively 402 323
Additional paid-in capital 115,697 104,451
Accumulated deficit (110,660) (96,189)
--------- ---------
5,479 8,629
Less 191,435 shares of common stock in treasury (1,097) (1,097)
--------- ---------
Total stockholders' equity 4,382 7,532
--------- ---------
$ 30,786 32,082
========= =========
See accompanying notes to consolidated condensed financial statements.
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(Thousands of dollars, except share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(unaudited)
Net revenues $ 7,193 5,156 10,316 10,670
Cost of revenue 5,896 4,827 9,964 8,835
-------- -------- -------- --------
Gross Profit 1,297 329 352 1,835
-------- -------- -------- --------
Expenses:
Engineering and development 2,181 1,554 4,614 4,399
Selling and administrative 3,071 4,402 6,553 8,031
Amortization of goodwill 168 310 336 641
-------- -------- -------- --------
5,420 6,266 11,503 13,071
-------- -------- -------- --------
Operating Loss (4,123) (5,937) (11,151) (11,236)
-------- -------- -------- --------
Other income (expense):
Interest expense (441) (1,088) (1,248) (2,111)
Interest income and other (123) 62 (186) 170
-------- -------- -------- --------
(564) (1,026) (1,434) (1,941)
-------- -------- -------- --------
Loss from continuing operations before income taxes (4,687) (6,963) (12,585) (13,177)
Income tax (expense) benefit -- (14) 6 (14)
-------- -------- -------- --------
Loss from continuing operations (4,687) (6,977) (12,591) (13,191)
Loss on disposal of discontinued operations, net of tax -- (97) -- (185)
-------- -------- -------- --------
Net loss $ (4,687) (7,074) (12,591) (13,376)
======== ======== ======== ========
Dividends on preferred stock 1,357 538 1,828 1,285
-------- -------- -------- --------
Loss allocable to common stockholders $ (6,044) (7,612) (14,419) (14,661)
======== ======== ======== ========
Basic and diluted loss per share:
Continuing operations $ (0.16) (0.31) (0.40) (0.60)
Discontinued operations -- -- -- (0.01)
-------- -------- -------- --------
Net loss per share $ (0.16) (0.31) (0.40) (0.61)
======== ======== ======== ========
Weighted average number of common shares outstanding
(thousands) 38,081 24,271 36,307 24,190
======== ======== ======== ========
See accompanying notes to consolidated condensed financial statements.
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INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Thousands of dollars, except share data)
Six Months Ended June 30,
---------------------------
1999 1998
-------- -------
(unaudited)
Cash flows from operating activities:
Net loss $(12,591) (13,376)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,160 1,833
Amortization of loan discount 512 1,540
Loss on disposal of discontinued operations 66 186
Stock option compensation -- 50
Noncash operating expenses (136) 93
Change in operating assets and liabilities, [net of effects of acquired
companies]:
Accounts receivable (1,347) 2,782
Inventories (208) (1,539)
Other assets 519 (123)
Accounts payable and accrued liabilities 2,477 (3,924)
-------- -------
Net cash used in operating activities (8,548) (12,478)
-------- -------
Cash flows from investing activities:
Payments for disposal of discontinued operations (66) (133)
Purchase of other intangible assets 7 (12)
Capital expenditures (441) (1,402)
Software development costs (331) (1,032)
Proceeds from sale of marketable securities 486 52
-------- -------
Net cash used in investing activities (345) (2,527)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of notes payable -- 10,020
Debt issuance costs -- (73)
Principal payments on notes payable (529) (9,290)
Principal payments under capital lease obligations (60) (47)
Principal payments on long-term debt -- (1,215)
Proceeds from issuance of preferred shares 5,518 18,824
Proceeds from issuance of common shares 3,550 --
Proceeds from exercise of employee stock options -- 282
-------- -------
Net cash provided by financing activities 8,479 18,501
-------- -------
Net increase (decrease) in cash and cash equivalents (414) 3,496
Cash and cash equivalents, beginning of period 991 2,094
-------- -------
Cash and cash equivalents, end of period $ 577 5,590
======== ========
See accompanying notes to consolidated condensed financial statements.
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INTELECT COMMUNICATIONS, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
June 30, 1999
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 of December 31, 1998.
INVENTORIES
The components of inventories are as follows:
June 30, December 31,
------------ ------------
1999 1998
------------ ------------
($ Thousands)
Raw materials $ 3,325 5,038
Work in progress 789 888
Finished goods 5,115 3,472
------------ ------------
9,229 9,398
Less: allowance for obsolescence (2,137) (2,544)
------------ ------------
$ 7,061 6,854
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SEGMENTS OF BUSINESS
Revenue by business segment:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
($ Thousands)
Revenue:
Multi-services access platform (MAP) $ 4,760 1,580 5,807 3,742
Design services 1,172 2,154 2,723 4,803
Digital signal processors (DSP) 805 852 911 1,054
Video network products 187 530 580 839
Other 269 40 295 232
-------- -------- -------- --------
$ 7,193 5,156 10,316 10,670
-------- -------- -------- --------
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Segment-specific margins (Gross profit less total engineering and
development costs, including capitalized software, and asset write-downs for the
segment):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
($ Thousands)
Multi-services access platform (MAP) $ 20 (1,809) (1,821) (2,674)
Design services 153 521 236 1,585
Digital signal processors (DSP) 112 59 (219) (297)
Video network products (735) (67) (961) (254)
Other (607) (961) (1,827) (1,956)
-------- -------- -------- --------
Subtotal segment specific (1,057) (2,257) (4,592) (3,596)
Capitalized software 174 1,032 331 1,032
All other expenses (3,240) (4,712) (6,890) (8,672)
-------- -------- -------- --------
Operating loss $ (4,123) (5,937) (11,151) (11,236)
======== ======== ======== ========
Assets identifiable only by combined segments:
At December 31,
At June 30, 1999 1998
---------------- ---------------
($ Thousands)
MAP, video and other $ 20,333 20,906
Design services and DSP 7,850 8,200
Not allocable to a segment 2,603 2,976
--------------- ---------------
Total $ 30,786 32,082
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FINANCING MATTERS
On April 20, 1999, the Company sold $3,000,000 of Series E convertible
preferred stock in a private placement. The Series E preferred stock had a five
year term, an accrued premium of 8% per annum payable in common stock, and is
convertible into common stock at the lesser of a fixed or variable conversion
price. The fixed conversion price was $0.90625 and the variable conversion price
was 83.5% of the average of the two lowest closing bid prices in the forty
trading days prior to the date of conversion. Purchasers of the preferred stock
received warrants to purchase 300,000 shares of common stock at a price of 110%
of the "Market Price" (as defined) on the first issuance date of Series E
preferred stock. The warrants have a five-year term, and the exercise price
shall be set to 110% of the Market Price on the last day of July and January of
each year if such price is less than the previous exercise price.
During June 1999, the Company sold in a private placement transaction,
exempt from registration under Section 4(2) of the Exchange Act of 1933,
1,762,500 shares of common stock at a price of $0.95 per share. The offering was
made solely to accredited investors. The Company granted to the purchasers
registration rights covering the resale of the common stock. A placement agent
was paid a fee of 106,263 shares of common stock in connection with the sale of
1,062,316 of the shares.
In July 1999, the Company and holders of its Series C, D and E
preferred stock settled certain disputes regarding the conversion of such
preferred stock into common stock. As a result of this settlement, all shares of
preferred stock will be converted into an aggregate of approximately 13,354,000
shares of common stock. As a part of these settlement agreements, the holders of
the preferred stock agreed to certain restrictions including volume limitation
on the sale of common stock received pursuant to the settlements and
prohibitions on short sales of common stock and selected types of transactions.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 1999
FORWARD LOOKING STATEMENT
This Form 10-Q contains certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. The forward looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those expressed in, or implied by, the forward looking
statements. Factors that might cause such a difference include, but are not
limited to, those relating to: general economic conditions in the markets in
which the Company operates, success in the development and market acceptance of
new and existing products; dependence on suppliers, third party manufacturers
and channels of distribution; customer and product concentration; fluctuations
in customer demand; maintaining access to external sources of capital; ability
to execute management's margin improvement and cost control plans; overall
management of the Company's expansion; and other risk factors detailed from time
to time in the Company's filings with the Securities and Exchange Commission.
THE COMPANY
The Company is engaged in the business of designing, developing,
manufacturing, marketing and selling products and services for managing digital
signals and converging 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 communications product platforms were defined to respond to the
increasing demands of speed and complexity in communications networks.
The Company is strategically focusing its product lines and services to
take advantage of the convergence of telecommunications (telecom) and data
communications (datacom). This convergence is being driven by the explosive
growth of network capacities (i.e. bandwidth) and Internet applications such as
E-commerce, which is accelerating the expansion of network capabilities. These
industry trends create requirements for today's network designers, integrators
and directors to manage multiple applications, at multiple locations, within
bandwidth resources and while balancing the need for network reliability. The
Company's product lines are for these evolving markets, applications and
requirements.
The Company's objective is to develop and bring to market a new
generation of intelligent, flexible and scalable communications products
designed to combine current voice, data and video networks (for example,
telephones, computers, surveillance) into a single communications network, which
would also upgrade communications into the latest generation of high-speed
technologies, while using a single network management system.
PRODUCTS, TECHNOLOGIES AND SERVICES
Multi-service Access Platform (MAP)
This Integrated Access Device (IAD), marketed under the names SONETLYNX
and FIBRETRAX, the Company believes is a revolutionary networking infrastructure
product for public and private networks to cost-effectively create voice, data
and/or video networks of virtually any size and application. It is defined as a
platform because, from its basic architecture, it can be configured into many
separate products for a variety of functions and applications. Through the use
of different protocol cards, the MAP can simultaneously combine multiple
communication transmissions such as video and graphics communications, data
files, voice and any IP-based service over a single network. The products are
compatible with Synchronous Optical Network (SONET) and Synchronous Digital
Hierarchy (SDH) standards in order to provide fail-safe networks. The SONETLYNX
and FIBRETRAX, in addition to providing add-drop multiplexing, provide the
functions of traditional networking equipment such as bridges, channel banks,
and video matrix switches, thus offering significant savings in cost and time
for the user when OC-1 or OC-3 bandwidth is required. The MAP expands into
markets horizontally by increasing the types of protocols (applications) it can
transport, and vertically by increasing its capacity (transmission speed).
Currently, the MAP can transport voice, T1/E1, Ethernet (10/100baseT), JPEG
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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). Product advancements scheduled during 1999 include
increasing the MAP's transmission speed to the OC-12/STM-4 rate (622 Mbps).
Video and high speed data modules are planned with higher port density. Network
management systems are under development in the Windows NT version. The cost
effectiveness and competition advantage of the MAP are expected to increase with
the addition of each major protocol and increase in transmission speed.
Design Services
DNA Enterprises, Inc. ("DNA"), the Company's engineering services
operation, provides advanced product and system design and development services
for a variety of clients in the communications industry. The Company believes
DNA Enterprises is a leading contract and outsource development resource for the
communications industry. DNA provides expertise in digital signal processing
(DSP), switching and transport systems, computer telephony integration (CTI),
embedded systems, data communications, intelligent networks, video processing
and wireless communications technologies. In addition, the skills and experience
of DNA personnel have been utilized in developing the Company's own products
such as the CS4 platform described below.
Digital Signal Processing (DSP)
The DSP Design Center is a Center of Excellence within DNA that
provides state-of-the-art digital signal processing technology to systems
developers around the world to afford them leading-edge solutions, faster
time-to-market and reduced technical risk for their product development
programs. The DSP Design Center has developed a product line consisting of
standard designs for high performance circuit boards, and offers custom designed
hardware, application support software, real-time operating systems and
consulting services to product manufacturers and application developers in the
multimedia, image processing, communications and remote sensing systems arenas.
The bulk of the Design Center's activities center around the Texas Instruments
("TI") line of Digital Signal Processors, with emphasis on TI's high performance
C5x and C8x devices and a particular focus on the new TI C6000 processor line.
Video Network Products
The LANSCAPE product is designed to provide full motion, collaborative
video communications in a cost effective solution for desktop PCs. The product
has the capability to conduct up to a three-way conference call without a costly
multiconferencing unit (MCU), transmit video broadcasts using IP multicast and
use its 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. In addition to video conferencing, LANSCAPE features
video record and playback controls for applications such as education/training
and recorded event distribution. LANSCAPE support of IP multicast allows for
transmission of live or pre-recorded video from one to many.
CS4 Intelligent Services Platform
The Company believes the CS4 represents a revolutionary new class of
product. It is an integrated enhanced network server. Its array of integrated
capabilities transcends traditional product categories to introduce a flexible
system that can host a wide range of intelligent services in a variety of
network configurations. The design of the CS4 positions it to impact the
proliferation and profitability of intelligent services in the network, as well
as to improve the cost paradigm now in place for service nodes, intelligent
peripherals, enhanced service platforms and programmable switches. Key
technological innovations reflected in the CS4 include highly distributed
processing power to the port level, scalable port capacity that extends up to
64k ports, an advanced call processing structure, a powerful service creation
facility and an architecture that readily supports integration into low speed,
high speed and broadband networks, all designed for a fault-tolerant, NEBS
compliant structure. The CS4 is currently in beta test within a customer
facility. The Company is actively exploring various options for the marketing
and deployment of this product, as well as means to proceed with development of
enhancements and additional applications of the product.
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COMPARISON OF SECOND QUARTER AND FIRST HALF 1999 TO 1998
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The following table shows the revenue and gross profit for the
Company's products:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
------- ------- ------- -------
($ Thousands)
Revenue:
Multi-services access platform (MAP) $ 4,760 1,580 5,807 3,742
Design services 1,172 2,154 2,723 4,803
Digital signal processors (DSP) 805 852 911 1,054
Video network products 187 530 580 839
Other 269 40 295 232
------- ------- ------- -------
$ 7,193 5,156 10,316 10,670
------- ------- ------- -------
Gross profit (loss):
Multi-services access platform (MAP) 740 (533) (261) 22
Design services 153 521 236 1,585
Digital signal processors (DSP) 317 157 227 (36)
Video network products (51) 220 (4) 356
Other 138 (36) 154 (92)
------- ------- ------- -------
$ 1,297 329 352 1,835
------- ------- ------- -------
NET REVENUE
Revenues increased $2,037,000 or 39.5% between the second quarters of
1999 and 1998. This increase relates primarily to sales of the Company's "MAP"
products. Second quarter 1999 revenues for these products increased $3,700,000
from the first quarter of 1999. The increase in sales of MAP products was offset
by lower revenues from design services. This resulted from a wind-up of certain
projects and a delay in the start up of new customer projects and the allocation
of some staff to the Company's own engineering and development projects. The
Company also experienced a decline in revenues from its "DSP" products, due
primarily to a major component supplier's production start-up delays and
allocations.
For the six months ended June 30, 1999, revenues declined $354,000, or
3.3%, as compared to the comparable period in 1998. The decline in the 1999
period relates to the first quarter of 1999. Early in the 1998 period, the
Company continued to have sales to Korean customers which did not reoccur in
the 1999 period.
GROSS PROFIT
Gross profit for the second quarter of 1999 increased $968,000, or
294%, compared to the second quarter of 1998. This also represents an increase
of $2,237,000 in gross profit from the first quarter of 1999. The increased
gross profit relates primarily to increased sales and improved margin related to
the MAP product line. Gross profit from design services declined due to the
decline in related revenues discussed above and lower utilization of certain
staff due to the transition in projects discussed above. Gross profit from DSP
products increased, despite lower revenues, due to improved pricing and lower
costs of production and operations.
For the six months ended June 30, 1999, gross profit declined
$1,483,000 as compared to the comparable period of 1998. This was primarily due
to lower revenue and cost absorption levels in the first quarter of 1999.
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ENGINEERING AND DEVELOPMENT (E&D) EXPENSE
E&D expense increased to $2,181,000 in the second quarter of 1999 from
$1,554,000 in the prior year quarter primarily due to activities related to
video network products and reduced levels of activities related to software
development, which are capitalized and therefore not expensed in the period
incurred. For the six months ended June 30, 1999, E&D expense increased slightly
to $4,614,000 as compared to $4,399,000 during the comparable period of 1998.
These costs by product line are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
------- ------- ------- -------
($ Thousands)
Multi-services access platform (MAP) $ 720 1,276 1,560 2,697
CS4 745 925 1,981 1,863
Digital signal processor (DSP) 205 98 446 261
Video network products 684 287 957 610
------- ------- ------- -------
$ 2,354 2,586 4,944 5,431
Capitalized software development
costs (173) (1,032) (380) (1,032)
------- ------- ------- -------
E & D expense $ 2,181 1,554 4,614 4,399
======= ======= ======= =======
During the first six months of 1999 the Company completed its "ROADMAP"
architecture with the delivery of the 10/100 ethernet module. Significant
progress was also made on the OC-12 product, with the first prototypes being
tested, and T1 byte sync and voice modules were introduced. Numerous
enhancements were made to the video module increasing its value to public and
private network providers. Additionally, interoperability with Harris Radios for
our OC-3 product was achieved. Finally, significant progress was made with the
CS4 product which is now in beta testing at a customer facility.
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses declined by $1,331,000, or 30%, in
the second quarter of 1999 as compared to the second quarter of 1998 and by
$1,478,000, or 18%, during the first six months of 1999 versus the comparable
period of 1998. This also represents a decline of $411,000 between the first and
second quarter of 1999. These reductions are a result of the Company's on-going
efforts to reduce selling and administrative expense.
AMORTIZATION OF GOODWILL
The amount of amortization of goodwill has been reduced by
approximately $163,000 per quarter due to the write-off in September 1998 of
goodwill related to the Company's air traffic control business which is no
longer a principal line of business for the Company.
INTEREST EXPENSE
Compared to the prior year interest expense decreased to $441,000 in
the second quarter of 1999 from $1,088,000 in the second quarter of 1998 and to
$1,248,000 in the first six months of 1999 from $2,111,000 in the same period
one year ago. Cash interest expense increased to $342,000 in the second quarter
of 1999 from $256,000 in the second quarter of 1998 and to $727,000 in the first
six months of 1999 from $476,000 in the same period one year ago due to the
addition of lines of credit secured by accounts receivable and inventory. The
remainder of interest expense consists of non-cash costs of financings, namely,
amortization of debt discount and deferred financing costs attributable to
valuation of warrants using the Black-Scholes pricing model, a portion of which
was fully amortized in the second quarter of 1999.
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DIVIDENDS ON PREFERRED STOCK
Preferred dividends consist of the following:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ----------------
1999 1998 1999 1998
------ ----- ----- -----
($ Thousands)
Series A, B paid in common stock $ 187 312 381 630
Series C, D, E upon conversion
paid in common stock 133 130 262 181
Beneficial conversion features 1,037 96 1,185 474
------ ----- ----- -----
$1,357 538 1,828 1,285
The Company has elected to pay Series A and B preferred dividends with
common stock. The Series B preferred stock was not outstanding subsequent to
December 31, 1998. Dividends on all other series of preferred stock are accrued
but not payable until conversion and then payable in common stock. Non-cash
financing costs attributable to the value of beneficial conversion features of
the preferred stock are reportable as additional dividends over the period from
date of issue to the earliest conversion date. After June 1999, there are no
amounts attributable to such conversion features.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems and products
to identify those 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 or products fail 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.
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LIQUIDITY AND CAPITAL RESOURCES
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OPERATING ACTIVITIES
Net cash used in operations during the six months ended June 30, 1999
amounted to $8,548,000 and consisted of the $12,591,000 net loss offset by the
$1,441,000 decrease in working capital and by $2,769,000 of non-cash charges.
The net loss primarily reflects the effect of fixed costs in a period of lower
revenue and the continuation of new product development mitigated by expense
reductions in all product lines and operating areas.
o Accounts payable and accruals were a source of funding to the
extent of $2,477,000.
o Accounts receivable used $1,347,000 of funds due to a
concentration of shipments in June to meet customer deadlines.
o The non-cash charges were primarily $2,327,000 depreciation and
amortization of intangible assets and $512,000 of amortization of
deferred financing costs.
INVESTING ACTIVITIES
Investments consisted primarily of capitalized software development
costs of $498,000 and capital expenditures of $441,000 for fixed asset
additions. Both elements of investment spending were primarily in support of
SONETLYNX and FIBRETRAX product line enhancements.
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FINANCING ACTIVITIES
Cash uses were financed by the following transactions during the
six-month period ended June 30, 1999:
o $1,800,000 from the sale of common stock in January
o $3,000,000 from the sale of Series E preferred stock in March
o $3,000,000 from the sale of Series E preferred stock in April
o $1,674,000 from the sale of common stock in June
In January 1999, the Company exercised its right to extend the term of
the Credit Facility to February 12, 2000 and the term of the Receivables Loan
was extended to February 12, 2000.
LIQUIDITY OUTLOOK
CONVERSIONS OF ALL SERIES C, D, AND E PREFERRED STOCK
As disclosed in the Forms 8-K filed on July 2, 1999 and July 8, 1999,
the Company settled disputes with the holders of all the Series C, D, and E
preferred stock. The discontinuance of conversions announced in the Form 8-K
filed on April 26, 1999, has been replaced by agreements which:
o fix the number of shares of common stock into which the preferred
may be converted,
o restrict the reselling of common stock to no more than 5% to 7% of
market volumes, as defined, and
o prohibit short selling and related types of stock market
transactions by the holders.
The agreements with three investment groups have the combined effect of
converting all Series C, D, and E preferred stock outstanding at April 26, 1999
to common stock at a weighted average price of $1.08 per share of common. As a
result of those settlements, the Company will issue approximately 13,354,000
shares of common stock. At June 30, 1999, none of the preferred stock
conversions had been effected.
DEBT MATURITIES
Current maturities of long-term debt consist of the following items:
o The Credit Facility and Receivables Loan, which have an aggregate
principal amount outstanding of $15,000,000, become due on
February 12, 2000. The Company intends to refinance or extend
these debts at the maturity date, but no assurance can be given
that such extension or refinancing can be arranged.
o The Inventory Loan with a principal balance of $500,000 and
accumulated interest of $19,000 was due in installments on April 1
and May 1, 1999. The Company is in negotiation with the lender to
extend the maturity of this obligation.
o The obligation to a former owner of DNA, having an aggregate
principal and interest amount of $261,000, is scheduled for
repayment in August, 1999.
CONCLUSION
Recently the Company has made significant progress in the development
and marketing of its products, as evidenced by increasing sales and the backlog
of firm and prospective orders. In addition, in July, 1999, the Company
successfully negotiated the conversion to common stock of its variable rate
convertible preferred stock; thereby reducing the complexity of its capital
structure. Management believes that these developments will enhance the
Company's ability to raise additional capital.
In order to fully and timely exploit the Company's current and
projected growth, management believes that the Company will require additional
capital from external sources in order to a) fund the completion of engineering
and design projects related to the company's products, b) fund increased
marketing and promotional activities; c) provide working capital for the
manufacture of the Company's products and d) fund operating losses until such
time as cash flow from operations becomes positive.
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Management believes that the Company will be able to continue to obtain
capital necessary to fund ongoing operations and future growth from various
sources including (a) the sale of equity securities, (b) additional debt
financing from its current lenders and others, (c) the sale of non-strategic
assets and (d) ventures with other industry partners. There can be no assurance,
however, that these efforts will be successful.
The Company has incurred significant operating losses and negative cash
flows from operations in the last three years. The cash flows were funded by
proceeds from borrowings under credit facilities and by sales of convertible
debentures, preferred stock, and common stock. The Company expects operating
losses and negative operating cash flow to continue into the immediate future.
It is uncertain when, if ever, the Company will report operating income or
positive cash flow from operations. 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. The financial statements have been
prepared assuming the Company will continue as a going concern and do not
include any adjustments that might result from the unfavorable outcome of such
an uncertainty.
NASDAQ LISTING STATUS
The Company has been informed that it currently does not meet certain
requirements (relating to minimum net tangible assets) for continued listing on
the Nasdaq National Market System. Nasdaq advised non-compliance based on
financial information contained in the Form 10-K for the period ended December
31, 1998 and the Form 10-Q for the period ended March 31, 1999. The Company
advised Nasdaq of the Company's expectation of compliance based upon subsequent
events and developments during the year. On July 9, 1999, the Company met with
the Nasdaq Qualification Hearing Panel to present its plan for compliance. The
Company expects to submit additional information to the Panel in the near
future. There can be no assurance that the hearing and subsequent processes will
result in a determination favorable to the Company and the Company's common
stock will continue to be listed on the Nasdaq National Market. The inability to
maintain the listing could adversely affect the liquidity of the Company's
common stock.
PART II - OTHER INFORMATION
ITEM 3 - CHANGES IN SECURITIES
(c) Recent sales of unregistered securities
Effective June 30, 1999, the Company closed the offering of an
aggregate of 1,762,499 shares of common stock issued to accredited investors for
gross proceeds of $1,674,375, issued pursuant to an exemption from registration
pursuant to Section 4(2) of the Securities Act of 1933 and Regulation D as
promulgated thereunder. In addition, the Company issued an aggregate of 106,231
shares of common stock in a private placement transaction to AJC Equities, Inc.
("AJC"), the placement agent for certain of the accredited investors, in payment
of a placement fee owed to AJC.
Effective as of July 1, 1999, the Company authorized the issuance of
142,719 shares of common stock in lieu of a $187,000 cash dividend on its Series
A Preferred Stock.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on June 18, 1999. At the
Annual Meeting, Anton von Liechtenstein was re-elected as a director of the
Company. Herman M. Frietsch, Robert H. Garrison, II and Philip P. Sudan, Jr.
continue to serve as directors pursuant to their prior election. In addition,
stockholders approved a proposal to increase the number of shares of Common
Stock reserved for issuance under the Company's Stock Incentive Plan from
5,000,000 to 6,000,000, approved a Non-Employee Directors' Stock Plan, approved
the appointment of Grant Thornton LLP as the independent auditor of the Company,
and approved issuance of shares of Common Stock issuable upon conversion of
Series E Preferred Stock and exercise of related warrants.
The Director was elected by a vote of 34,108,050 for and 660,790
withheld. The proposal to increase shares reserved for the Stock Incentive Plan
was approved by a vote of 11,499,405 for, 2,050,646 against and 168,662
abstained. The proposal to approve a Non-Employee Directors' Stock Plan was
approved by a vote of 11,181,350 for, 2,273,404 against and 261,969 abstained.
The appointment of Grant Thornton as independent auditors was approved by a vote
of 34,226,716 for, 351,771 against and 190,353 abstained. The proposal to issue
shares of Common Stock upon conversion of Series E preferred stock was approved
by a vote of 11,798,405 for, 1,601,329 against and 318,979 abstained.
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ITEM 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. The Financial Statements filed as part of this report are listed and
indexed on Page 1. Schedules other than those listed in the index have been
omitted because they are not applicable or the required information has been
included elsewhere in this report.
B. Listed below are all Exhibits filed as part of this report.
Exhibit No. Exhibit
27.1 Financial Data Schedule
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 April 26, 1999
Form 8-K filed June 27, 1999
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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: August 16, 1999 By: /s/ ROBERT P. CAPPS
---------------------------- ---------------------------------
Robert P. Capps
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 16, 1999 By: /s/ HERMAN M. FRIETSCH
---------------------------- ---------------------------------
Herman M. Frietsch
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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27.1 Financial Data Schedule