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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10 - K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 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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Securities Registered Pursuant to Section 12 (b) of the Act
NONE
Securities Registered Pursuant to Section 12 (g) of the Act
COMMON STOCK PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $530,000,000 as of March 24, 2000 (based upon the
average of the highest bid and lowest asked prices on such date as reported on
the Nasdaq SmallCap Market).
There were 84,359,207 shares of Common Stock outstanding as of March 24, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 31, 1999) are incorporated by reference in items 10, 11, 12 and 13 of
PART III hereof.
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PART I
ITEM 1 - BUSINESS
FORWARD LOOKING STATEMENT
This Form 10-K contains certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. The forward looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those expressed in, or implied by, the forward looking
statements. Factors that might cause such a difference include, but are not
limited to, those relating to: general economic conditions in the markets in
which the Company operates, 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
Intelect Communications, Inc. (the "Company") was incorporated in
Delaware on May 23, 1995. The Company's predecessor, Intelect Communications
Systems Limited ("Intelect (Bermuda)") was incorporated under the laws of
Bermuda in April 1980 and operated under the name Coastal International, Ltd.
until September 1985 and as Challenger International Ltd. until December 1995.
On December 4, 1997, the shareholders of Intelect (Bermuda) approved a merger
proposal, the principal effect of which was to change the domicile of Intelect
(Bermuda) so that it became a publicly traded United States-domiciled, Delaware
corporation. The effect of the merger was that the shareholders of Intelect
(Bermuda) became shareholders of the Company with the Company becoming the
publicly traded company. In addition, the Company became the holding company for
Intelect (Bermuda) and replaced Intelect (Bermuda) as the holding company for
its subsidiaries. The merger was effected on December 4, 1997.
OVERVIEW
The Company is primarily engaged in the business of designing,
developing, manufacturing, marketing and selling optical networking equipment.
In addition, the Company provides engineering design services to other
telecommunications companies and designs and sells digital signal processing
products. The Company's current operations were established through a series of
mergers in 1995 and 1996. The Company's operations are conducted primarily
through two wholly-owned subsidiaries, Intelect Network Technologies Company
("INT") and DNA Enterprises, Inc. ("DNA").
The Company is strategically focusing its product lines and services to
take advantage of the convergence of voice, data and video telecommunications
services. This convergence is being driven by the explosive growth of Internet
applications such as E-commerce, which is accelerating the expansion of network
capacities. These industry trends create requirements for today's network
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 designed to meet 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
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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
Optical Networking Products
The Company's optical networking business is conducted by INT. Marketed
under the name OMNILYNX, formerly SONETLYNX and FIBRETRAX, the Company believes
it has developed 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 OMNILYNX 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 OMNILYNX
products, in addition to providing add-drop multiplexing, provide 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 when OC-1, OC-3, OC-12 or OC-48 bandwidth is required. The OMNILYNX
expands into markets horizontally by increasing the types of protocols
(applications) it can transport, and vertically by increasing its capacity
(transmission speed). Currently, the OMNILYNX 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-12 rate (622 Mbps). The OMNILYNX line is currently
comprised of five different models as follows:
OL-10 - Copper based HDSL/SDSL, T-1, Ethernet customer premises
device.
OL-100 - Fiber optic OC-1 controller based premises access device
OL-300 - Fiber optic OC-3 controller based network infrastructure
device
OC-600 - Fiber optic OC-3/12 controller based CLEC central office
system.
OC-1200 - (Under development). Fiber optic OC-12/48 controller based
co-location system.
Engineering Services
Through DNA, the Company provides advanced product and system design
and development services for a variety of clients in the communications
industry. The Company believes DNA 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.
Digital Signal Processing
DNA also 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 Company 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 activities center around the Texas Instruments ("TI") line of
digital signal processors and Power PC processors produced by Motorola. The
primary market faces for these products are military applications, including
commercial off-the-shelf (or "COTS") components.
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Visual Communications
During 1999 the company made the decision to de-emphasize its LANscape
video conferencing product in order to focus on its optical networking products
Certain engineering and development activities were completed during 1999 in
order to offer the underlying technology in connection with the Company's
optical networking products.
CS4 Intelligent Services Platform
During 1999 the Company completed initial stage engineering and
development activities related to the CS4 Intelligent Services Platform and
successfully completed a beta test of the product. Upon completion of this beta
test, the Company determined to cease further development activities related to
the CS4 in order to focus its efforts and resources on its optical networking
products. The Company has been exploring options for the further development of
this product in cooperation with other entities. However, no such agreements
have been reached to date.
MARKETS AND CUSTOMERS
Optical Networking Products
Historically, the primary markets for the Company's optical networking
products have been purpose-built, or private, networks such as intelligent
highway systems ("ITS"), utility systems and other transportation facilities.
These markets are served primarily through system integrators and other value
added resellers. These integrators and resellers are in turn served through the
Company's direct sales force and through a limited number of representatives.
During 1999 three customers accounted for 19%, 14% and 11%, respectively, of
sales.
While the Company expects such purpose-built networks to remain an
important market for it, it is beginning to focus more of its sales and
marketing efforts on public network customers such as competitive local exchange
carriers (CLECs), shared tenant service providers sand other providers of public
network services These markets are currently being addressed primarily by the
Company's direct sales force; however, in the future the Company might utilize
third party marketing channels such as OEM arrangements.
Engineering Services
The Company's engineering services are employed by clients that span
the spectrum from start-up ventures seeking to launch new products to large
multi-national corporations looking to access key know-how for extending current
product lines or introducing new products/services. The products the Company
develops range from compact circuit boards to multi-board systems that address
the consumer, commercial, industrial, and defense market sectors. The Company
markets its services directly to prospects worldwide. Principal customers for
the Company's services include board manufacturers, telecommunications equipment
vendors, semiconductor suppliers, and communications service providers.
Digital Signal Processing
The digital signal processing are marketed primarily through sales
channel partners to customers in North America, Europe, and Asia. Customers for
these products have a common need for high-performance DSP capabilities for
integration into their products, which include commercial telecommunications
systems, industrial control products, video processing and image enhancement
systems, and military communication systems, with a focus on the growing COTS
markets. No single customer accounts for more than 10% of sales.
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COMPETITION
The market for the Company's products and services is intensely
competitive and rapidly changing. The Company competes, or may in the future
compete, directly or indirectly for customers in the following categories of
products and companies network transmission product manufacturers such as Lucent
Technologies Corp., Northern Telecom, Ltd., Cisco Systems, and Alcatel.
The Company believes that the principal competitive factors affecting
the markets for its products and services include effectiveness, scope of
product offerings, technical features, ease of use, reliability, customer
service and support, distribution channels and price. Most competitors are
better capitalized and have greater resources than the Company and, accordingly,
may have a competitive advantage in product development and selling.
MANUFACTURING
The Company's optical networking products, OmniLYNX, are currently
manufactured, assembled and tested in the Company's own manufacturing facility.
Such manufacturing facilities have been ISO 9002 certified. The Company believes
that these facilities have adequately capacity to meet the Company's current and
near-term product requirements. However, the Company is considering the use of
third parties to perform certain of these functions in order to increase
capacity and to potentially increase manufacturing efficiencies. The Company's
digital signal processing products are manufactured by third parties and
delivered to the Company for testing and delivery to customers.
Raw materials are primarily electronic components available from
multiple sources. Certain sole source components are not generally considered a
vulnerability because they are reliably supplied by large companies. The Company
sources a fiber optic interface card, for the OC-3 product, from a third party
which is the sole source for the component. The Company also buys a video codec
card, used in OmniLYNX video applications from a sole source. Delays in delivery
of either component would restrict the Company's ability to increase sales. In
the event either vendor fails to meet commitments, the Company intends to rely
on its in-house manufacturing capabilities. However, the conversion to in-house
backup supply would not be without some interruption and may increase cost. The
Company has an ongoing program to reduce its exposure to limited source
components where possible.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company believes it has a substantial base of intellectual
property, in the form of software and hardware, some of which is embodied in its
products and applied in its ongoing development programs. The Company believes
that factors such as technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition, and
reliable product manufacturing are essential to establishing and maintaining a
technology leadership position.
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, and confidentiality procedures to protect its proprietary
rights. The Company currently has five United States patents relating to video,
audio and switching technology and has 14 currently pending patents relating to
DSP, electronic design, internet, operating systems, voice switching, video
distribution and communications. "SONETLYNX(R)," "INTELECT(R)," "VUBRIDGE(R),"
"S4(R)," and "Special Services Switching System(R)" are registered trademarks of
the Company. "FIBRETRAX(TM)" and "PANORAMA(TM)" are trademarks of the Company.
According to federal and state law, the Company's trademark protection will
continue for as long as the Company continues to use its trademarks in
connection with the products and services of the Company.
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The Company seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection.
In connection with the acquisition of DNA Enterprises and Intelect
Visual Communications and transactions with certain individuals, licenses were
acquired to support the development of OmniLYNX, video conferencing and DSP
products. The Company also incorporates third-party licenses into its products.
The Company owns the rights to the following internet domain names:
intelectcom.com, intelectinc.com, videoconferencing.com, and dnaent.com.
Litigation may be necessary to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, financial condition or results of
operations.
In common with many companies in the telecommunications industry, the
Company has received notices that it may be infringing on certain intellectual
property rights of others. These claims have been defended with advice of
counsel and certain defenses are ongoing. In connection with such claims or
actions asserted against the Company, the Company may seek to obtain a license
under a third party's intellectual property rights, if necessary. There can be
no assurance, however, that a license will be available under reasonable terms
or at all. In addition, the Company could decide to litigate such claims, which
could be expensive and time consuming and which could have materially adverse
effects on the Company's business, financial condition or results of operations.
EMPLOYEES
The Company had 208 full-time employees at December 31, 1999, of which
87 were engaged in engineering and development, 38 were engaged in sales,
marketing, and customer support, 64 were engaged in manufacturing operations,
and 19 were engaged in administration and finance. None of the Company's
employees is represented by a labor union. The Company has experienced no
material work stoppages and believes its relations with its employees to be
good. At December 31, 1998, the Company had 307 full-time employees.
GOVERNMENT REGULATION
The telecommunications industry, including many of the Company's
customers, is subject to regulation from federal and state agencies, including
the Federal Communications Commission ("FCC") and various state public utility
and service commissions. Similar regulatory structures exist in most countries
outside the United States. While such regulation does not affect the Company
directly, the effects of such regulations on the Company's customers may, in
turn, adversely impact the Company's business and results of operations. For
example, FCC regulatory policies, affecting the availability of services and
other terms on which telecommunications service providers ("Telcos") conduct
their business, may impede the Company's penetration of certain markets. Current
FCC regulations restrict Telcos' ability to charge their customers based on
access cost to local subscribers and may affect the timing of Telcos' investment
in the Company's technology. These FCC regulations and policies are under
continuous review by the federal government and the courts and are subject to
change. Although many FCC restrictions on providing services in previously
restricted markets have been eliminated or modified, the failure to change, or a
substantial delay in changing, the existing restrictions on Telcos may
materially adversely affect their demand for products based upon the Company's
technology.
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The Telecommunications Act of 1996 removed certain restrictions
relating to the Regional Bell Operating Companies. The Company believes that
this has created and will continue to create increased competition in the
markets served by the Company's products.
In addition, the Company's business and operating results may also be
adversely affected by the imposition of certain tariffs, duties and other import
restrictions on components that the Company obtains from non-domestic suppliers
or by the imposition of export restrictions on products that the Company sells
internationally. The governments of many other countries actively promote and
create competition in the telecommunications industry. Changes in current or
future laws or regulations, in the United States or elsewhere, could materially
and adversely affect the Company's business and results of operations.
ITEM 2 - PROPERTIES
All of the Company's facilities are leased. The facilities are in
Richardson, Texas. The Company's principal operations are serviced from three
leased facilities in Richardson, Texas, (comprising approximately 83,000 square
feet), which the Company believes to be suitable for its operations as currently
conducted. These facilities include manufacturing, engineering, sales,
marketing, and administrative offices. All of the Company's manufacturing
operations are located in a 28,000 square foot Richardson, Texas facility.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in various legal proceedings and claims arising
in the ordinary course of business.
On October 28, 1998, in the 192nd Judicial District Court for Dallas
County, Texas, 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 January, 2000 the Company and the plaintiff entered
into an agreement in settlement of all claims pursuant to the litigation and the
underlying agreements Pursuant to this agreement, the Company paid the plaintiff
$35,000 in cash and issued 350,000 shares of its common stock. In addition the
Company agreed to pay the plaintiff a royalty on future sales of certain optical
networking equipment equal to 2% of such sales through March 2001, but not to
exceed $1 million in total.
Intelect (Bermuda) is contingently liable for certain potential
liabilities related to its discontinued operations. Specifically, under a stock
purchase agreement dated October 3, 1995 ("1995 Agreement"), Intelect (Bermuda)
agreed to indemnify Savage Sports Corporation, the purchaser of Savage Arms,
Inc. (a manufacturer of sporting bolt action rifles), for certain product
liability, environmental clean-up costs and other contractual liabilities,
including certain asserted successor liability claims. One of the liabilities
assumed involves a firearms product liability lawsuit filed by Jack Taylor
individually and as father of Kevin Taylor in Alaska Superior Court (the "Taylor
litigation"). Intelect (Bermuda) is informed that a defendant in the Taylor
litigation, Western Auto Supply Co., settled the lawsuit for $5 million and, in
turn, has asserted a third-party claim against Savage Arms, Inc. for
indemnification in the amount of the settlement plus attorneys' fees and related
costs. Savage Arms has asserted defenses to the claims and Intelect (Bermuda)
believes additional defenses may be available. Based on the information
available to date, it is impossible to predict the outcome of this litigation or
to assess the probability of any verdict.
Intelect (Bermuda) also has been notified that Savage Sports
Corporation seeks indemnification under the 1995 Agreement in connection with
certain other product liability claims. Most notably, Intelect (Bermuda) has
undertaken the defense of a lawsuit filed against Savage Arms, Inc. by Emhart
Industries, Inc. ("Emhart") in the United States District Court for the District
of Massachusetts (the "Emhart litigation"). In
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the lawsuit, Emhart requests indemnification from Savage Arms, Inc. under an
agreement Emhart allegedly executed in 1981 with Savage Industries, Inc.,
claiming that Savage Arms, Inc. is a successor to Savage Industries, Inc. To
date, Emhart has claimed indemnification of approximately $2.2 million for five
lawsuits it has defended or settled and also seeks a declaratory judgment that
it is entitled to indemnification for losses and expenses related to firearms
product liability actions which may be filed against Emhart in the future.
Intelect (Bermuda) intends to assert additional defenses. The parties are in
discovery and Intelect (Bermuda) cannot at this time predict the outcome of the
litigation.
In the event the Taylor litigation and/or Emhart litigation were to be
resolved adversely to Intelect (Bermuda), there would be a material adverse
effect on the Company's financial condition and results of operations. See Note
13 to the Consolidated Financial Statements.
A shareholders class action lawsuit was filed in the U. S. District
Court for the Northern District of Texas purported to have been filed on behalf
of all persons and entities who purchased Intelect common stock during the
period between February 24, 1998 and November 17, 1998. The named defendants
include Intelect Network Technologies Company and certain former and present
officers and directors of the Company, and Arthur Andersen, LLP. The complaint
alleges that the defendants violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making false and
misleading statements concerning Intelect's reported financial results during
the period, primarily relating to revenue recognition, asset impairment and
capitalization issues. The plaintiffs seek monetary damages, interest, costs and
expenses. The Company intends to defend the suit vigorously in all aspects.
In July, 1999 the Company had negotiated the sale of a portion of its
engineering design services operations conducted by DNA. The agreement with
Cadence Design Systems, Inc. ("Cadence") provided for a purchase price of $15.0
million in cash. The Company and counsel believe Cadence and the Company signed
and delivered an asset purchase agreement to consummate the transaction. The
transaction was scheduled to close on July 23, 1999. Despite the Company having,
to the best of its knowledge, met all conditions to closing, Cadence failed to
close the transaction. Therefore, the Company believes Cadence breached the
agreement which had reached between the parties. The company has filed suit in
District Court of Dallas County, Texas to recover damages. The ultimate outcome
of this matter cannot be determined at this time.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5 - MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded in the over-the-counter
market and is listed on the Nasdaq Stock Market under the symbol "ICOM." The
high and low bid prices for the Company's common stock for each full quarter of
the last two fiscal years, as reported on Nasdaq, are as follows:
High Low
---- ---
1st quarter 1998 - period ended March 31, 1998 7.625 4.438
2nd quarter 1998 - period ended June 30, 1998 7.250 5.432
3rd quarter 1998 - period ended September 30, 1998 5.625 1.656
4th quarter 1997 - period ended December 31, 1998 3.563 1.438
1st quarter 1999 - period ended March 31, 1999 2.469 1.000
2nd quarter 1999 - period ended June 30, 1999 1.906 0.719
3rd quarter 1999 - period ended September 30, 1999 1.969 0.750
4th quarter 1999 - period ended December 31, 1999 1.938 0.625
The Company believes that as of March 24, 2000, its outstanding shares
of common stock were held by approximately 6,000 owners of record.
The closing bid price of the common stock on the Nasdaq Small Cap
Market on March 24, 2000, was $7.125.
DIVIDEND POLICY
No cash dividends were paid by the Company during 1997, 1998 or 1999.
The Company does not currently plan to pay any dividends on common stock in the
foreseeable future. The Company is restricted by certain of its agreements with
lenders from any payment of dividends on common stock and from the payment of
dividends on preferred stock except dividends payable with common stock. These
restrictions remain in effect for so long as any balance remains payable on the
debt. See Note 7 to the Consolidated Financial Statements.
RECENT SALES OF UNREGISTERED SECURITIES; RECENT DEVELOPMENTS
In January 2000, the Company issued 142,791 shares of common stock in
lieu of a $187,300 cash dividend on its Series A Preferred Stock for the quarter
ended December 31, 1999.
As previously disclosed, in January, 2000, the Company, in a
transaction exempt from registration under Section 4(2) of the Securities Act,
issued 7,200,000 shares of its $.01 par value common stock and warrants to
purchase an additional 3,600,000 shares of common stock. In March, 2000 the
Company, in a transaction exempt from registration under Section 4(2) of the
Securities Act issued 4,600,000 million shares of its $.01 par value common
stock. Each of those transactions were undertaken with accredited investors.
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ITEM 6 - SELECTED FINANCIAL DATA
The following tables set forth certain historical consolidated
financial data for the Company.
Two months
ended Year ended
Years ended December 31, December 31, October 31,
--------------------------------------------------------- ------------ ------------
1999 1998* 1997* 1996 1995 1995
----------- ----------- ----------- ----------- ------------ ------------
($ Thousands Except Per Share Data)
STATEMENT OF OPERATIONS:
Net revenues $ 16,699 19,341 37,777 9,352 734 2,030
=========== =========== =========== =========== ============ ============
Operating loss $ (25,498) (38,787) (17,642) (33,638) (2,943) (4,652)
=========== =========== =========== =========== ============ ============
Loss from continuing operations $ (28,535) (42,735) (19,743) (42,983) (2,776) (5,194)
Income from discontinued
operations -- -- -- -- -- 3,546
Income (loss) on disposal of
discontinued operations -- (403) (498) (56) (236) 13,824
Extraordinary item (1,054) -- -- -- -- 646
----------- ----------- ----------- ----------- ------------ ------------
Net Income (Loss) $ (29,589) (43,138) (20,241) (43,039) (3,012) 12,822
=========== =========== =========== =========== ============ ============
Income (loss) allocable to common
stockholders $ (34,517) (46,105) (20,798) (43,039) (3,012) 12,822
=========== =========== =========== =========== ============ ============
Basic and diluted income (loss) per share:
Continuing operations $ (0.72) (1.76) (0.99) (3.32) (0.24) (0.47)
Discontinued operations -- (0.02) (0.02) (0.01) (0.02) 1.57
Extraordinary item (0.02) -- -- -- -- 0.06
----------- ----------- ----------- ----------- ------------ ------------
Net Income (loss) for period $ (0.74) (1.78) (1.01) (3.33) (0.26) 1.16
=========== =========== =========== =========== ============ ============
Weighted average shares (thousands) 46,762 25,939 20,558 12,943 11,385 11,024
BALANCE SHEET:
ASSETS:
Current assets $ 11,861 16,413 25,552 11,594 19,957 24,587
Excess of cost over assets of
companies acquired 4,115 4,787 13,249 14,573 8,685 9,349
Other long-term assets 8,366 11,270 11,008 9,851 2,597 1,786
----------- ----------- ----------- ----------- ------------ ------------
Total assets $ 24,342 32,470 49,809 36,018 31,239 35,772
=========== =========== =========== =========== ============ ============
LIABILITIES & SHAREHOLDERS' EQUITY:
Current liabilities including current
maturities of long-term debt $ 8,674 9,938 23,517 9,810 5,331 7,091
Long-term liabilities 15,264 15,000 143 18,477 368 365
Shareholders' equity 404 7,532 26,149 7,731 25,540 28,266
----------- ----------- ----------- ----------- ------------ ------------
$ 24,342 32,470 49,809 36,018 31,239 35,722
=========== =========== =========== =========== ============ ============
*Certain amounts have been reclassified to conform to current classifications.
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following table shows the revenue and gross profits (loss) for the
Company's products:
Years ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
($ Thousands)
Revenue:
Optical networking equipment $ 9,479 $ 6,410 $ 26,250
Design services 4,596 8,147 8,632
Digital signal processors (DSP) 1,411 2,690 277
Video network products 704 1,448 636
Other 509 646 1,982
-------- -------- --------
$ 16,699 $ 19,341 $ 37,777
-------- -------- --------
Gross profit (loss):
Optical networking equipment (3,400) $ (1,903) $ 12,035
Design services (544) 2,002 2,375
Digital signal processors (DSP) 245 1,390 (88)
Video network products (175) 497 41
Other 63 (1,078) (112)
-------- -------- --------
$ (3,811) $ 908 $ 14,251
-------- -------- --------
REVENUES
Although sales of optical networking equipment in 1999 increased 48%
from 1998 levels, sales in both 1999 and 1998, as compared to 1997, reflect the
Company's refocusing on non-Far East markets and the extension of its technology
and products into telecommunications markets for public network access
equipment. In addition, the Company's financial condition resulted in
difficulties in obtaining necessary component parts and created uncertainty as
to the Company's ability to meet delivery requirements. Therefore, existing and
potential customers became reluctant to place new orders with the Company.
Revenues from optical networking equipment in 1998 declined dramatically from
1997 sales, which had been largely related to sales to Korean customers. The
decline in 1998 revenues was due to the decline in sales to the Korean market
reflecting the financial condition of the Asian region.
Revenues from design services declined 44% in 1999 as compared to 1998.
During the negotiation of the sale of certain engineering services operations to
Cadence and preparation for closing the transaction, the Company was limited in
its ability to engage in new design services projects. Therefore, as existing
projects were completed, the Company experienced a decline in revenues from such
services. Engineering service revenues in 1998 approximated the level of 1997.
Growth of the services business in 1998 was also constrained somewhat by the
concentration of resources on DSP product development.
DSP products, primarily those based on Texas Instruments components,
decreased 47% in 1999 as compared to 1998 after having increased 871%.
Unavailability of components and customer uncertainty over future availability
were the primary causes of the 1999 decline in these revenues. The 1998 year
included the launch of development tools for the Texas Instruments components
and end products with powerful computing and signal processing capabilities.
11
12
Revenues from video network products declined 51% in 1999 as compared
to 1998 as a result of management's decision to de-emphasize this product line.
Video network product revenues in 1998 increased 127% over 1997 due to the first
full year of availability of a redesigned product.
Other revenues consist primarily of the voice and data switching
products used in air traffic control applications, which have declined in
strategic significance to the Company and which are no longer actively promoted
or pursued.
GROSS PROFIT (LOSS)
Gross loss from optical networking equipment in 1999 reflects the
effect of low production levels for the Company's manufacturing operations due
to lower sales in 1999. The lower production levels resulted in unabsorbed
overhead of approximately $3.8 million in 1999. In the fourth quarter of 1999
the Company reduced the carrying value of its inventory by approximately $2.2
million. This adjustment was based on cost variances and a periodic review of
the components of inventory in relation to anticipated sales and production and
product design changes, as well as current market prices for components and
completed products. In addition, 1999 gross profit reflects the effect of
pricing concessions amounting to approximately $650,000. These concessions were
granted to a particular customer due to significant past and potential business
with that customer. Gross profit decreased in 1998 from 1997 due to the
significant decline in optical networking equipment sales.
The high level optical networking equipment shipments in 1997 supported
an economic production rate in manufacturing operations, a rate which was not
sustained in 1999 or 1998. The negative gross profit on these products in 1998
included $1,820,000 of under-absorbed overhead. At the production levels of
1997, under-absorbed overhead for these products was $613,000, all attributable
to the first half year when production volume had not yet increased.
Due to the Cadence transaction discussed above, the Company was
required to maintain certain minimum staffing levels within its design services
operations, irrespective of the amount of billable activity. Accordingly,
certain costs were incurred without the revenues normally associated with such
costs. The failure of the Cadence transaction to close also required the Company
to reduce staffing levels within the Design Services operation, which resulted
in certain severance and termination costs. Additionally, in order to stabilize
and retain the remaining staff, the Company was required to incur additional
costs in the form of salary adjustments and retention bonuses. Costs related to
these items amounted to approximately $254,000 during 1999. Engineering services
gross profit maintained a similar percentage of sales in 1998 and 1997 (25% and
27% respectively).
DSP products contributed positive gross profit for the first time in
1998 as revenues grew to a level which allowed for a characteristic margin. This
gross profit declined in 1999 as a result of lower sales levels.
12
13
ENGINEERING & DEVELOPMENT (E&D) EXPENSES
E&D expense decreased to $7,967,000 in 1999, as compared to $10,218,000
in 1998 and $11,899,000 in 1997. In all three years, certain amounts of software
development costs were capitalized. Including those amounts, the total E&D
expenditures were $8,573,000, $12,205,000 and $13,216,000, respectively, in the
years 1999, 1998 and 1997. Total E&D expenditures by product line were
distributed as follows:
Years ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
($ Thousands)
Optical networking products $ 3,234 $ 5,148 $ 6,400
CS4 3,565 4,798 3,816
Digital signal processor (DSP) 886 1,002 488
Video network products 889 1,168 1,443
Other -- -- 1,069
-------- -------- --------
8,574 12,116 13,216
Capitalized software development costs (607) (1,898) (1,317)
-------- -------- --------
E&D expense $ 7,967 $ 10,218 $ 11,899
-------- -------- --------
During 1999, the Company incurred engineering and development costs of
approximately $3,565,000 related to its CS4 Intelligent Switching Platform. The
Company has completed or suspended all development activities related to this
project and accordingly does not currently plan to incur engineering and
development costs related to it subsequent to the third quarter of 1999. All E&D
costs related to this project have been expensed. In addition, engineering and
development activities related to DSP and video network products have been
reduced so as to focus on near-term sales opportunities related to the Company's
optical networking products.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased $4,676,000, or 26%,
between 1999 and 1998 and $947,000, or 5%, between 1998 and 1997. These
reductions are the result of lower sales levels and the Company's efforts to
reduce selling and administrative expense, including the closing of certain
offices and staff reductions. Such expenses in 1999 include approximately
$550,000 from an increase in the allowance for doubtful accounts, estimated
costs of $200,000 related to a certain shareholder suit (see Legal Proceedings),
legal costs of approximately $200,000 related to the Cadence transaction and
financing transactions during the third quarter of 1999, and approximately
$233,000 related to the adjustment of the carrying value of certain assets
previously utilized in the Company's video network products business.
Selling and administrative expenses in 1998 include $1,148,000 of
warranty expense, primarily the extra costs of start up and first year
operations of two major installations of the SONETLYNX product in Korea and on
the Alyeska pipeline. The Company estimates that the usual level of warranty
expenses would have been approximately $200,000 but for special startup
difficulties caused by distance, cultural differences and unusual technical
characteristics.
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 reviews of realizability of
its long-term assets, including goodwill, the Company wrote off the September
30, 1998 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.
13
14
The writeoff decision was determined by the recent loss of three major
identified business opportunities, the absence of significant identified future
opportunities and business combinations which strengthened competitors, all
leading the Company to reassess the outlook for the air traffic control business
segment. The Company concluded that the outlook for future business would not
support a forecast of revenue and contribution margin adequate to liquidate
inventories and support amortization of the goodwill asset.
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 was collected and to which $1,730,000 of shipments were added
during 1998. The Company was advised, at a meeting in October, 1998, of the
distributor's illiquidity and inability to maintain any certain schedule of
payments of receivables. Accordingly, the Company determined that it would be
prudent and timely to write off or reserve substantially all the distributor's
receivables adjusted for a collection of $1,000,000 received in February 1999.
In connection with this collection, and contingent on certain future payments,
the Company agreed not to pursue any further collections of the receivable.
INTEREST EXPENSE
Interest expense, including non-cash financing charges, was $2,673,000,
$4,385,000 and $2,863,000 in the years ended December 31, 1999, 1998 and 1997
consisting of:
Years ended December 31,
------------------------
($ Thousands)
1999 1998 1997
------ ------ ------
Interest on debt instruments $1,603 $1,109 $ 930
Non-cash financing costs 1,019 3,242 1,721
Other costs of financing 8 28 199
Other interest 43 6 13
------ ------ ------
$2,673 $4,385 $2,863
------ ------ ------
Interest on debt instruments in 1999 and 1998 was primarily
attributable to amounts borrowed from St. James Capital Corp., SJMB, L.P., and
the Coastal Trust. In 1997, the interest was attributable to St. James Capital
Corp. and Coastal Trust borrowings and to two series of convertible debentures.
Non-cash financing costs in all three years were the result of warrants
to purchase common stock issued in connection with various financings. The
reported expense amount is the value of the warrants determined by using the
Black-Scholes pricing model.
Other costs of financing consist primarily of legal and placement fees.
LOSS ON DEBT RETIREMENT
Pursuant to a restructuring of its debt obligations in August, 1999,
the Company repaid $3,000,000 of note payable to St. James through the issuance
of 3,864,271 shares of common stock. This resulted in a beneficial conversion
feature in the amount of $1,054,000 which has been accounted for as a loss on
debt retirement.
INCOME (LOSS) FROM DISPOSAL OF DISCONTINUED OPERATIONS
Losses in 1998 and 1997 represent legal expenses in connection with the
indemnity agreement with Savage Sports Corporation. See ITEM 3, Legal
Proceedings.
14
15
DIVIDENDS ON PREFERRED STOCK
Dividends on preferred stock include the effect of beneficial
conversion features granted to the holders of the preferred stock in the amounts
of $3,910,000 for the year ended December 31, 1999 and $618,000 for the year
ended December 31, 1998.
YEAR 2000 COMPLIANCE
The Company 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 determined that none of its significant systems or
products fail to distinguish the year 2000 from the year 1900. No exposure was
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. To date, the Company has experienced no significant
problems or difficulties related to the Year 2000 problem. The financial impact
of Year 2000 compliance has not been material to the Company's financial
position or results of operations in any given year.
LIQUIDITY AND CAPITAL RESOURCES
Subsequent to December 31, 1999 the Company completed a series of
transactions which materially improved its liquidity and financial position. As
a result of these transactions, the Company's working capital increased by
approximately $31.0 million and Stockholders' Equity increased by approximately
$46.0 million.
In January, 2000 the Company completed a private placement of 7.2
million shares of common stock and warrants to purchase an additional 3.6
million shares at an exercise price of $2.50 per share. Net proceeds to the
Company, after selling commissions and costs amounted to approximately $16.9
million.
In January, 2000 outstanding debt was reduced as SJMP, L.P. converted
$6.0 million due under its note payable from the Company into approximately
3,645,000 shares of the Company's common stock, pursuant to the terms of the
loan agreement.
In March, 2000 the Company completed a private placement of 4.6 million
shares of common stock. Net proceeds to the Company, after selling commissions
and costs, amounted to approximately $25.9 million. Of these proceeds,
approximately $9.6 million was used to repay indebtedness to the Coastal
Corporation Second Pension Trust ("Coastal") and approximately $8.5 million has
been deposited in trust to redeem the Series A Preferred Stock, all of which is
held by Coastal.
15
16
Between December 31, 1999 and March 24, 2000, the Company issued
approximately 2.4 million shares of Common Stock pursuant to the exercise of
various warrants and employee stock options. Proceeds to the Company from these
transactions amounted to approximately $5.1 million.
The pro forma effect of these transactions is as follows:
(in thousands)
---------------------------------------------------
December 31, 1999 Pro forma December 31, 1999
Actual Adjustments Pro Forma
----------------- ----------- -----------------
Working capital $ 3,187 31,022 34,209
Notes payable $ 17,604 (15,214) 2,390
Stockholders' equity $ 404 46,236 46,640
Subsequent to these transactions the Company has outstanding
approximately 84.4 million shares of common stock, as well as warrants and
employee stock options for the purchase of approximately 20.6 million additional
shares of common stock.
OPERATING ACTIVITIES
Net cash applied in operations primarily reflects the $29,589,000 net
loss offset by $7,094,000 of non-cash charges, and the $3,350,000 net decrease
in working capital. The reduction of net cash used in operating activities of
$3,784,000 between 1999 and 1998 results primarily from the reduced net loss in
1999, net of non-cash items.
o Accounts receivable were a source of funding due to $1,780,000
collections from customers in excess of new shipments and
billings.
o Inventory decreased $882,000.
o Accounts payable and accrued liabilities increased $242,000.
o Other assets, consisting primarily of deferred financing
costs, decreased $446,000.
o The non-cash charges consist primarily of $4,721,000 of
depreciation and amortization of intangible assets, $1,054,000
of non-cash losses from retirement of debt and $1,013,000 of
amortization of deferred financing costs.
INVESTING ACTIVITIES
Investments during 1999 were primarily $1,045,000 of fixed asset
additions and $607,000 of capitalized product enhancements and advancements
related to optical networking products, offset by proceeds from the sale of
marketable securities. The fixed asset additions were concentrated in computers,
software, and test equipment to support engineering activities, and
manufacturing equipment for new products.
FINANCING ACTIVITIES
Prior to the completion of the series of financing transactions
discussed above, the Company experienced difficulties through-out 1999 in
obtaining adequate financing to support its operations, especially beginning in
the third quarter of 1999. Because of these difficulties the Company did not
have access to working capital in the amounts or within the timeframes it had
anticipated. Accordingly, the Company was unable to complete and ship certain
orders in its backlog within time frames originally anticipated and was impaired
in its ability to pursue new orders due to the uncertainty regarding scheduled
delivery dates.
16
17
In March and April of 1999 the Company issued Series E Convertible
Preferred Stock for proceeds of $6 million. Shortly after the completion of
these transactions, the Company and the holders of the Series E Preferred Stock
as well as holders of Series C and D Convertible Preferred Stock, became
involved in a dispute regarding alleged violations of certain representations
and covenants by the holders of the preferred stock and the Company's refusal to
effect conversions of the preferred stock into common stock. Subsequently, all
such disputes were resolved and settled. Pursuant to these settlements the
Company issued approximately 13.4 million shares of common stock in exchange for
all of the Series C, D, and E Preferred Stock. As of December 31, 1999 no such
series of preferred stock are outstanding.
While these disputes were outstanding the Company was, for all
practical purposes, precluded from raising other forms of equity capital.
Accordingly, in order to raise additional capital the Company had arranged the
sale of a portion of its engineering design services conducted by its
wholly-owned subsidiary, DNA Enterprises, Inc. The Company had negotiated the
sale of these operations to Cadence Design Systems, Inc. ("Cadence") for $15
million in cash. The Company and counsel believe Cadence and the Company signed
and delivered an asset purchase agreement to consummate the transaction.
Concurrently with this transaction, the Company had negotiated a restructuring
of its debts with its primary lenders. The transaction was scheduled to close on
July 23, 1999. Despite the Company having met all conditions to closing, Cadence
failed to close the transaction and, therefore, the Company believes breached
the agreement which had been reached between the parties. The Company has filed
suit against Cadence to recover damages from these actions.
Subsequent to the failure of the Cadence transaction to close the
Company negotiated a restructuring of its debt obligations with St. James
Capital L P. and SJMB L. P. (collectively "St. James") and with Coastal.
Pursuant to the restructuring, the Company exchanged an aggregate of $3.0
million of accrued interest and principal due under notes payable to St. James
for approximately 3.9 million shares of common stock. St. James also received
the right to convert any or all remaining balances under the note into common
stock at a rate equal to the greater of $1.08 and 66-2/3% of the market price of
the common stock at the time of the conversion. In the restructuring the Company
also exchanged an aggregate of $3.0 million of accrued interest and principal
due to Coastal for approximately 2.8 million shares of common stock.
All remaining amounts outstanding to Coastal were converted into an
amended and restated revolving credit facility. The facility provides for total
borrowings of up to $12.0 million, subject to a borrowing base as defined in the
agreement. In December, 1999 the Company and Coastal agreed to convert $5.0
million outstanding under the agreement into 5.0 million shares of common stock
and warrants to purchase 5.0 million additional shares at an exercise price of
$0.75 per share. Subsequent to this transaction the total amount available under
the agreement remained at $12.0 million.
In January and June 1999 the Company issued, in a private placement,
approximately 3.9 million shares of common stock for aggregate proceeds of
approximately $3.5 million.
CONCLUSION
Although the Company has not yet produced positive cash flow from
operations, it has made significant process during 1999 in reducing recurring
expenditures. Actions which have contributed to this include the focus of
operations on the Company's optical networking products and the resulting
reduction in efforts related to the CS4 development program and the video
conferencing product line. As a part of these reduced efforts engineering and
development costs related to these projects have been eliminated or greatly
reduced. In addition general and administrative expenditures have been reduced,
including the closing of offices in New York and California.
As of March 24, 2000 the Company has outstanding obligations for funded
debt amounting to approximately $2.3 million and has cash and temporary
investments of approximately $25.6 million.
17
18
Accordingly, management believes the Company has adequate financial resources
and liquidity to meet its ongoing obligations and to execute its business plan.
Should the demand for the Company's products increase significantly,
the Company could need additional working capital to finance the resulting
growth in accounts receivable and inventories. Management believes that the
Company could obtain such additional working capital through bank credit
agreements, other lending agreements, the issuance of debt or equity securities,
or a combination of these sources. There can be, however, no assurance that such
resources would be available to the Company or would be available in sufficient
amounts or under terms which the Company found acceptable.
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.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk with regard to financial
instruments because a loan from The Coastal Trust bears interest based on the
prime rate.
At December 31, 1999, a hypothetical 100 basis point increase in
interest rates would result in an additional pre-tax loss of approximately
$96,000. The estimated additional expense is based upon the increased interest
expense of the Company's variable rate debt and assumes no change in the volume
or composition of debt at December 31, 1999. As of March 24, 2000 the Company
has repaid all variable rate debt; therefore a change in interest rate will not
impact interest expense.
18
19
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants................ 20
Consolidated Balance Sheets....................................... 21
Consolidated Statements of Operations............................. 23
Consolidated Statements of Stockholders' Equity................... 24
Consolidated Statements of Cash Flows............................. 27
Notes to Consolidated Financial Statements........................ 29
19
20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Intelect Communications, Inc.
We have audited the accompanying consolidated balance sheets of Intelect
Communications, Inc., and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Intelect
Communications, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
/s/ Grant Thornton LLP
Dallas, Texas
March 17, 2000
20
21
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(Thousands of dollars, except share data)
1999 1998
------- -------
Assets
Current assets:
Cash and cash equivalents $ -- $ 991
Investments 195 681
Accounts receivable net of allowances of $1,228 in 1999
and $870 in 1998 5,316 7,232
Inventories 5,972 6,854
Prepaid expenses 378 655
------- -------
Total current assets 11,861 16,413
Property and equipment, net 5,094 6,386
Goodwill, net 4,115 4,787
Software development costs, net 2,093 3,134
Other intangible assets, net 561 916
Other assets 618 834
------- -------
$24,342 $32,470
======= =======
(continued)
21
22
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
December 31, 1999 and 1998
(Thousands of dollars, except share data)
1999 1998
--------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 2,340 $ 1,613
Accounts payable 3,203 4,293
Accrued liabilities 2,868 3,632
Net liabilities of discontinued operations 263 400
--------- ---------
Total current liabilities 8,674 9,938
Notes payable 15,264 15,000
--------- ---------
23,938 24,938
--------- ---------
Stockholders' equity:
$2.0145, 10% cumulative convertible preferred stock, Series A, $.01 par value,
(aggregate involuntary liquidation preference $7,438,818 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. Authorized
12,500 shares; 1,843 issued and outstanding in 1998 -- 1
Series D convertible preferred stock, $.01 par value. Authorized
100,000 shares; 8,250 issued, and outstanding in 1998 -- 1
Common Stock, $.01 par value. Authorized 100,000,000 shares;
65,936,573 and 32,333,085 shares issued in 1999 and 1998,
respectively 659 323
Additional paid-in capital 131,511 104,451
Accumulated deficit (130,706) (96,189)
--------- ---------
1,501 8,629
Less 191,435 shares of common stock in treasury (1,097) (1,097)
--------- ---------
Total stockholders' equity 404 7,532
--------- ---------
$ 24,342 $ 32,470
========= =========
See accompanying notes to consolidated financial statements
22
23
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Operations
(Thousands of dollars, except share data)
Years ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Net revenue $ 16,699 $ 19,341 $ 37,777
Cost of revenue 20,510 18,433 23,526
-------- -------- --------
Gross profit (loss) (3,811) 908 14,251
-------- -------- --------
Expenses:
Engineering and development 7,967 10,218 11,899
Selling and administrative 13,048 17,724 18,671
Asset writedowns -- 10,628 --
Amortization of goodwill 672 1,125 1,323
-------- -------- --------
21,687 39,695 31,893
-------- -------- --------
Operating loss (25,498) (38,787) (17,642)
-------- -------- --------
Other income (expense):
Interest expense (2,673) (4,385) (2,863)
Interest income and other, net (364) 483 636
-------- -------- --------
(3,037) (3,902) (2,227)
-------- -------- --------
Loss from continuing operations
before income taxes (28,535) (42,689) (19,869)
Income tax expense (benefit) -- 46 (126)
-------- -------- --------
Loss from continuing operations (28,535) (42,735) (19,743)
Extraordinary items:
Loss on debt retirement 1,054 -- --
Loss on disposal of discontinued
operations, net of tax -- 403 498
-------- -------- --------
Net loss (29,589) (43,138) (20,241)
Dividends on preferred stock 4,928 2,967 557
-------- -------- --------
Loss allocable to common stockholders $(34,517) $(46,105) $(20,798)
======== ======== ========
Basic and diluted loss per share:
Continuing operations $ (0.72) $ (1.76) $ (0.99)
Extraordinary items (0.02) -- --
Discontinued operations -- (0.02) (0.02)
-------- -------- --------
Net loss per share $ (0.74) $ (1.78) $ (1.01)
======== ======== ========
Weighted average number of common
shares outstanding (thousands) 46,762 25,939 20,558
======== ======== ========
See accompanying notes to consolidated financial statements.
23
24
Engineering Plan
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
(Thousands of dollars, except share data)
Preferred Stock
---------------------------------- Accumula- Total
Series A Series B Common Stock Additional Accumu- ted Other Stock-
------------------ ------------ ---------------- Paid-in lated Comprehen- holders
Shares Par Shares Par Shares Par Capital Deficit sive Income Equity
----------- --- ------- --- ---------- --- ------ ------- ----------- -------
Balances at December 31, 1996 $ -- -- -- -- 15,027,728 150 36,849 (29,286) 18 7,731
Comprehensive income:
Net loss -- -- -- -- -- -- -- (20,241) -- (20,241)
Change in unrealized gain on --
marketable securities -- -- -- -- -- -- -- -- (16) (16)
--------
Total (20,257)
Private placements
Preferred, Series A 2,482,005 25 -- -- -- -- 4,886 -- -- 4,911
Preferred, Series B -- -- 914,286 9 -- -- 3,868 -- -- 3,877
Common -- -- -- -- 696,400 7 3,323 -- -- 3,330
Conversion of debentures -- -- -- -- 5,376,864 54 14,796 -- -- 14,850
Conversion of notes payable 2,482,006 25 -- -- -- -- 4,975 -- -- 5,000
Conversion of preferred stock (780,583) (8) -- -- 780,583 8 -- -- -- --
Warrants issued --
with notes -- -- -- -- -- -- 1,661 -- -- 1,661
Warrants issued for services -- -- -- -- -- -- 250 -- -- 250
Exercise of warrants -- -- -- -- 930,000 9 1,881 -- -- 1,890
Exercise of employee stock
options -- -- -- -- 561,666 6 1,569 -- 1,575
Stock option compensation -- -- -- -- -- -- 354 -- -- 354
Settlement of royalty agreement -- -- -- -- 542,182 6 841 -- -- 847
Interest expense paid with stock:
Preferred, Series A 35,981 -- -- -- -- -- 72 -- -- 72
Common -- -- -- -- 11,407 -- 58 -- -- 58
Preferred dividends paid with stock -- -- -- -- 28,148 -- 296 (296) -- --
Preferred dividends accrued
Series A -- -- -- -- -- -- 215 (215) -- --
Series B -- -- -- -- -- -- 15 (15) -- --
Amortization of beneficial con-
version features of preferred
stock, Series B -- -- -- -- -- -- 31 (31) -- --
----------- --- ------- -- ---------- --- ------ ------- ------ -------
Balances at December 31, 1997 $ 4,219,409 42 914,286 9 23,954,978 240 75,940 (50,084) 2 26,149
=========== === ======= == ========== === ====== ======= ====== =======
See accompanying notes to consolidated financial statements
(continued)
24
25
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
(Thousands of dollars, except share data)
Preferred Stock
-----------------------------------------------------------------------------------
Series A Series B Series C Series D
-------------------- ------------------- ------------------- ------------------
Shares Par Shares Par Shares Par Shares Par
---------- -------- -------- -------- -------- -------- -------- --------
Balances at December 31, 1997 $4,219,409 42 914,286 9 -- -- -- --
Comprehensive income:
Net loss -- -- -- -- -- -- -- --
Change in unrealized gain on
Marketable securities -- -- -- -- -- -- -- --
Total -- -- -- -- -- -- -- --
Private placements:
Series C Preferred -- -- -- -- 10,000 1 -- --
Series D Preferred -- -- -- -- -- -- 10,000 1
Common -- -- -- -- -- -- -- --
Conversion of notes payable -- -- -- -- -- -- -- --
Conversion of preferred stock -- -- (914,286) (9) (8,157) -- (1,750) --
Warrants issued with notes -- -- -- -- -- -- -- --
Warrants issued for services -- -- -- -- -- -- -- --
Exercise of warrants -- -- -- -- -- -- -- --
Exercise of employee stock
Options -- -- -- -- -- -- -- --
Settlement of dispute -- -- -- -- -- -- -- --
Stock option compensation -- -- -- -- -- -- -- --
Preferred dividends paid
With stock -- -- -- -- -- -- -- --
Preferred dividends accrued -- -- -- -- -- -- -- --
Beneficial conversion features
of preferred stock issued -- -- -- -- -- -- -- --
Issue and subsequent acquisition
of common stock -- -- -- -- -- -- -- --
---------- -------- -------- -------- -------- -------- -------- --------
Balances at December 31, 1998 $4,219,409 42 -- -- 1,843 1 8,250 1
========== ======== ======== ======== ======== ======== ======== ========
Accumu-
lated
Addi- other Total
Common Stock tional Accumu- compre- Treasury Stock Stock-
-------------------- Paid-in lated hensive ------------------ holders
Shares Par Capital Deficit Income Shares Cost Equity
---------- -------- -------- -------- -------- -------- -------- --------
Balances at December 31, 1997 23,954,978 240 75,940 (50,084) 2 -- -- 26,149
Comprehensive income:
Net loss -- -- -- (43,138) -- -- -- (43,138)
Change in unrealized gain on
Marketable securities -- -- -- -- (2) -- -- (2)
--------
Total -- -- -- -- -- -- -- (43,140)
Private placements:
Series C Preferred -- -- 9,116 -- -- -- -- 9,117
Series D Preferred -- -- 9,443 -- -- -- -- 9,444
Common 1,000,000 10 990 -- -- -- -- 1,000
Conversion of notes payable 10,600 -- 21 -- -- -- -- 21
Conversion of preferred stock 5,997,819 60 (51) -- -- -- -- --
Warrants issued with notes -- -- 2,980 -- -- -- -- 2,980
Warrants issued for services -- -- 155 -- -- -- -- 155
Exercise of warrants 600,000 6 1,194 -- -- -- -- 1,200
Exercise of employee stock
Options 226,458 2 396 -- -- -- -- 398
Settlement of dispute 18,000 -- 101 -- -- -- -- 101
Stock option compensation -- -- 105 -- -- -- -- 105
Preferred dividends paid
With stock 333,795 3 1,306 (1,309) -- -- -- --
Preferred dividends accrued -- -- 1,040 (1,040) -- -- -- --
Beneficial conversion features
of preferred stock issued -- -- 618 (618) -- -- -- --
Issue and subsequent acquisition
of common stock 191,435 2 1,097 -- -- 191,435 (1,097) 2
---------- -------- -------- -------- -------- -------- -------- --------
Balances at December 31, 1998 32,333,085 323 104,451 (96,189) -- 191,435 (1,097) 7,532
========== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements
25
26
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
(Thousands of dollars, except share data)
Preferred Stock
----------------------------------------------------------------------------------------
Series A Series C Series D Series E
---------------------- ------------------- ------------------- -------------------
Shares Par Shares Par Shares Par Shares Par
----------- -------- -------- -------- -------- -------- -------- --------
Balances at December 31, 1998 $ 4,219,409 42 1,843 1 8,250 1 -- --
Net Loss -- -- -- -- -- -- -- --
Warrants issued in connection
with debt retirement -- -- -- -- -- -- -- --
Private placements
Preferred, Series E -- -- -- -- -- -- 6,000 --
Common -- -- -- -- -- -- -- --
Conversion of notes payable -- -- -- -- -- -- -- --
Conversion of preferred stock (500,000) (5) (1,843) (1) (8,250) (1) (6,000) --
Warrants issued with notes
and preferred stock -- -- -- -- -- -- -- --
Warrants issued for services -- -- -- -- -- -- -- --
Stock option compensation -- -- -- -- -- -- --
Preferred dividends paid
with stock -- -- -- -- -- -- -- --
Directors' fees paid in stock -- -- -- -- -- -- --
Preferred dividends accrued -- -- -- -- -- -- -- --
Amortization of beneficial
conversion features of preferred
stock -- -- -- -- -- -- -- --
----------- -------- -------- -------- -------- -------- -------- --------
Balances at December 31, 1999 $ 3,719,409 37 -- -- -- -- -- --
=========== ======== ======== ======== ======== ======== ======== ========
Addi- Total
Common Stock tional Accumu- Treasury Stock Stock-
-------------------- Paid-in lated ------------------- holders
Shares Par Capital Deficit Shares Cost Equity
---------- -------- -------- -------- -------- -------- ---------
Balances at December 31, 1998 32,333,085 323 104,451 (96,189) 191,435 (1,097) 7,532
Net Loss -- -- -- (29,589) -- -- (29,589)
Warrants issued in connection
with debt retirement -- -- 1,054 -- -- -- 1,054
Private placements
Preferred, Series E -- -- 5,690 -- -- -- 5,690
Common 3,860,659 39 3,270 -- -- -- 3,309
Conversion of notes payable 11,642,049 116 10,884 -- -- -- 11,000
Conversion of preferred stock 17,001,757 170 (163) -- -- -- --
Warrants issued with notes
and preferred stock -- -- 1,692 (636) -- -- 1,056
Warrants issued for services -- -- 73 -- -- -- 73
Stock option compensation -- -- 51 -- -- -- 51
Preferred dividends paid
with stock 933,204 9 821 (830) -- -- --
Directors' fees paid in stock 165,819 2 226 -- -- 228
Preferred dividends accrued -- -- 187 (187) -- -- --
Amortization of beneficial
conversion features of preferred
stock -- -- 3,275 (3,275) -- -- --
---------- -------- -------- -------- -------- -------- --------
Balances at December 31, 1999 65,936,573 659 131,511 (130,706) 191,435 (1,097) 404
========== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements
26
27
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(Thousands of dollars)
Years ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net loss $(29,589) $(43,138) $(20,241)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 4,721 4,357 3,412
Amortization of loan discount 1,013 3,242 1,920
Asset writedowns -- 10,628 --
Loss on disposal of discontinued
operations -- 403 498
Loss on debt retirement 1,054 -- --
Stock option compensation 51 100 354
Noncash operating expenses (income) (136) (217) 191
Warrants issued for services 73 155 250
Other 318 130 (393)
Change in operating assets and liabilities:
Accounts receivable 1,780 4,597 (13,242)
Inventories 882 (565) (3,311)
Other assets 446 599 (165)
Accounts payable and accrued liabilities 242 (3,220) 5,875
-------- -------- --------
Net cash used in operating activities (19,145) (22,929) (24,852)
-------- -------- --------
Cash flows from investing activities:
Payments for disposal of discontinued operations (137) (403) (498)
Purchase of other intangible assets 7 (69) (94)
Capital expenditures (1,045) (2,035) (2,993)
Purchase of marketable securities -- -- (103)
Purchase of other assets -- -- (338)
Software development costs (607) (1,898) (1,317)
Proceeds from sale of marketable securities 486 261 --
-------- -------- --------
Net cash used in investing activities (1,296) (4,144) (5,343)
-------- -------- --------
See accompanying notes to consolidated financial statements (Continued)
27
28
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Years ended December 31, 1999, 1998 and 1997
(Thousands of dollars)
Years ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes payable 11,300 19,657 14,910
Debt issuance costs -- (155) (255)
Principal payments on notes payable (738) (12,557) (200)
Principal payments under capital lease obligations (111) (25) (76)
Principal payments on long-term debt -- (2,274) (2,473)
Proceeds from issuance of preferred shares 5,690 18,815 8,789
Proceeds from issuance of common shares 3,309 1,000 3,266
Proceeds from exercise of common stock warrants -- 1,200 1,890
Proceeds from exercise of employee stock options -- 309 1,575
---------- ---------- ----------
Net cash provided by financing
activities 19,450 25,970 27,426
---------- ---------- ----------
Net decrease in cash and cash
equivalents (991) (1,103) (2,769)
Cash and cash equivalents, beginning of year 991 2,094 4,863
---------- ---------- ----------
Cash and cash equivalents, end of year $ -- 991 2,094
========== ========== ==========
See accompanying notes to consolidated financial statements.
28
29
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Description of Business
Intelect Communications, Inc. (the "Company") was incorporated in
Delaware on May 23, 1995, and is the successor company of a
reorganization, effective December 4, 1997, whereby the Company became a
U. S. domiciled public company. The previous public company, Intelect
Communications Systems Limited ("Intelect (Bermuda)"), a Bermuda company,
became a subsidiary of Intelect Communications, Inc. Intelect (Bermuda)
had operated under the name of Coastal International, Ltd. until
September 1985 and as Challenger International, Ltd. until December 1995.
The Company is an international communications technology and products
company that designs, develops, manufactures, markets, and sells products
and services for the integration of voice, data, and video networks. The
Company's products include a multi-service access platform for fiber
optic networks, digital signal processing system components, video
communications equipment, and telecommunications system design and
development services.
Former subsidiaries of the Company were engaged in information security
product sales and services (from 1995 to 1997), in the manufacture and
marketing of sporting arms (from 1989 to 1995), and in various energy
related activities (from 1981 to 1988). These subsidiaries were sold or
liquidated before December 31, 1997.
(2) Significant Accounting Policies and Practices
Estimates
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States. The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the financial statements
of the Company and its subsidiaries, all of which are wholly owned, since
their dates of acquisition. All significant intercompany balances and
transactions have been eliminated in consolidation.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of the fair
value of certain financial instruments for which it is practicable to
estimate fair value. For purposes of the disclosure requirements, the
fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. The carrying values
of cash, accounts receivable, marketable securities, notes payable and
accounts payable are reasonable estimates of their fair value due to the
short-term maturity of underlying financial instruments. It is not
practical to estimate the fair value of the Company's long-term debt
because quoted market prices do not exist and comparable securities were
not available.
29
30
Revenue and Expense Recognition
Revenue from product sales is recognized upon shipment of products.
Reserves for estimated sales returns and allowances are recorded in the
same accounting period as the related revenues.
Revenue from engineering services is recognized as the services are
provided to the customers.
Inventories
Inventories consist of raw materials, work in progress and finished
goods, and are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
is stated at the present value of minimum lease payments.
Depreciation on equipment is calculated on the straight-line method over
the estimated useful lives of the assets. Equipment held under capital
leases and leasehold improvements are amortized on a straight-line basis
over the shorter of the lease term or estimated useful life of the assets
and included in depreciation expense. The estimated useful lives are as
follows:
Years
-----
Machinery and equipment 5 to 7
Computer equipment and software 3 to 5
Furniture and fixtures 5 to 7
Motor vehicles 3
Deferred Financing Costs
Deferred financing costs in connection with the issuance of debt are
amortized to interest expense using the effective interest method over
the term of the related debt instrument (note 7). A portion of the
proceeds from the issuance of convertible debt securities with beneficial
conversion features and/or detachable stock purchase warrants is
recognized as additional paid-in capital and as a discount to its related
debt instrument and amortized to interest expense ratably from the date
of issuance to the date the related debt first becomes convertible. Other
costs in connection with the issuance of the same securities are also
deferred and amortized in the same manner.
Engineering and Development and Software Development Costs
Engineering and development costs are expensed as incurred.
Capitalization of software development costs commences upon the
establishment of technological feasibility and ceases when the product is
generally available for sale. Both the establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized
development costs involve judgments by management with respect to certain
external factors, including, but not limited to, anticipated future
revenues, estimated economic life and possible developments in software
and hardware technologies. During the years ended December 31, 1999, 1998
and 1997, the Company capitalized $606,000, $1,988,000 and $1,317,000 of
software development costs and charged operations for $1,646,000,
$1,083,000 and $477,000 of amortization, respectively. Amortization prior
to 1998 is based on estimated product revenues over the next five years
or straight line, whichever is greater. After 1997, amortization is based
on the greater of estimated product revenues or two years.
30
31
Earnings (Loss) Per Common Share
The Company uses the weighted average number of shares outstanding to
comute basic loss per share. Diluted loss per share is computed using the
weighted average number of common shares and dilutive potential common
shares outstanding. In 1999, 1998 and 1997 all potential common shares
were anti-dilutive.
Income Taxes
The Company accounts for income taxes under the liability method as
required by Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between the financial
reporting and income tax bases of assets and liabilities and are measured
using the enacted tax rates and laws expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash held in banks and time deposits having
maturities within three months of the date of purchase by the Company.
Goodwill
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over 10 to
15 years. As of December 31, 1998, the goodwill associated with
acquisitions, excluding the acquisition of DNA Enterprises, Inc., was
either fully amortized or written off. The remaining accumulated
amortization at December 31, 1999 and 1998 was $2,716,000 and $2,044,000,
respectively.
The Company assesses the recoverability of goodwill by determining
whether the amortization of the goodwill balance over its remaining life
can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of the goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using
a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
During the year ended December 31, 1998, the Company charged $6,888,000
to operations for the writedown of goodwill in connection with the 1995
acquisition of Intelect Network Technology Company (INT). The goodwill
was considered impaired due to the loss of three significant bids for air
traffic control (ATC) projects, the absence of any significant future
prospects for the ATC products of INT, and the industry trend toward
consolidation, all combining to diminish the outlook for the ATC
business.
The aforementioned writedowns were measured in accordance with the policy
described above. At December 31, 1999, the Company believes that no
significant impairment of the remaining goodwill has occurred and that no
reduction of the estimated useful lives is warranted.
Other Intangible Assets
Other intangible assets consist of purchased product technology.
Product technology assets are being amortized by the straight-line method
over periods ranging from three to five years.
31
32
Stock Option Plan
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
On January 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits pro forma net income and pro
forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied.
Warranty Reserve
The Company accrues a reserve for warranty expense based on estimated
future costs of startup and first year operations at customer sites.
Reclassification
Certain prior period balances have been reclassified to conform to the
current year presentation.
(3) Investments
Equity securities are considered available-for-sale and are stated at
fair value. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and
are reported as a separate component of shareholders' equity until
realized. Realized gains and losses from the sale of such securities are
determined on a specific identification basis. Holdings of equity
securities were sold in 1998. Certificates of deposit are
interest-bearing and are pledged in the course of contractual performance
and for the purpose of obtaining operating leases.
(4) Inventories
The components of inventories are as follows:
December 31,
---------------------------
1999 1998
------------ ------------
Raw materials $ 2,896 $ 3,872
Work in progress 1,010 888
Finished goods 2,066 2,094
------------ ------------
Total $ 5,972 $ 6,854
============ ============
In the fourth quarter of 1999, the Company wrote inventories down by
$1,600,000 to provide for obsolete items.
32
33
(5) Property and Equipment
Property and equipment are summarized as follows:
December 31,
---------------------------------
1999 1998
--------------- -------------
Machinery and equipment $ 7,396 $ 6,826
Computer equipment and software 2,341 2,386
Furniture and fixtures 662 763
Leasehold improvement 295 343
--------------- -------------
10,694 10,318
Less:
Accumulated depreciation and amortization (5,600) (3,932)
--------------- -------------
Total $ 5,094 $ 6,386
=============== =============
(6) Other Intangible Assets
Other intangible assets are summarized as follows:
December 31,
---------------------------------
1999 1998
-------------- ------------
Investment in technology associated with
optical networking products $ 1,407 $ 1,407
Other intellectual property 105 230
-------------- ------------
1,512 1,637
Less accumulated amortization (951) (721)
-------------- ------------
$ 561 $ 916
============== ============
(7) Notes Payable
Notes payable consist of the following:
December 31,
----------------------------------------------
1999 1998
---------------------- ----------------------
Current Long Term Current Long-Term
---------- ---------- ---------- ----------
Payable to The Coastal
Corporation Second Pension
Trust ("Coastal") (A) $ -- $ 9,214 $ 750 $ 5,000
Payable to St. James Capital
Partners, L.P. and SJMP, L.P.
(collectively "St. James") (B) 2,000 6,000 -- 10,000
Other (C) 340 50 863 --
---------- ---------- ---------- ----------
$ 2,340 15,264 1,613 $ 15,000
(A) Payable under a series of notes and credit agreements. In August 1999
all amounts were combined under an Amended and Restated Revolving Credit
Facility. This facility provides for borrowings of up to $12.0 million,
subject to a borrowing base, as defined, and subject to the discretion of
Coastal. Interest is payable quarterly at prime plus 3.5% (12.0% at
December 31, 1999). The facility is secured by a first lien on the
Company's accounts receivable, inventory and related assets and a pledge
of the stock of the Company's subsidiaries, subject to an inter-creditor
agreement with St. James. Amounts outstanding under the facility are due
July 31, 2000; however, in March, 2000 all amounts outstanding were
repaid from the proceeds from the sale of common stock. Therefore, the
balance outstanding at December 31, 1999 has been classified as a
non-current liability.
33
34
(B) Payable pursuant to a credit facility due July 31, 2000. Interest is
payable at maturity at a fixed rate of 7%. Borrowings are secured by a
second lien on the Company's accounts receivable, inventory and related
assets and by a pledge of the stock of the Company's subsidiaries,
subject to an inter-creditor agreement with Coastal. In August, 1999 this
facility was amended and $3,000,000 of the then outstanding balance was
repaid by the issuance of 3,864,271 shares of common stock. In addition,
St. James was granted the right to exchange any or all remaining balance
for common stock at a rate per share equal to the greater of $1.08 and 66
2/3% of the market price of the Company's common stock at the time of the
exchange. This amendment resulted in a beneficial conversion feature in
the amount of $1,054,000 which amount has been reflected as a loss on
retirement of debt in the accompanying statements of operations. In
January, 2000 St. James converted $6,000,000 outstanding under the
Facility into 3,645,182 shares of common stock, pursuant to the terms of
the amended agreement. Therefore, such amount has been reflected as a
non-current liability as of December 31, 1999.
(C) Includes $233,000 payable to certain officers and directors under
demand notes bearing interest of prime plus 3% and which may be converted
into common stock at the option of the holders at the rate of $1.00 per
share; includes $50,000 payable to an employee under a demand rate
bearing interest of prime plus 3% and which may be converted into common
stock at the option of the holder at the rate of $2.00 per share (this
amount was converted into common stock in March, 2000 and therefore is
reflected as a non-current liability); includes $107,000 of other notes
payable.
(8) Lease Commitments
The Company leases office space and certain equipment under leases
expiring at various dates through 2004. Rental expense under operating
leases was approximately $1,345,000, $1,607,000 and $1,528,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
Future minimum commitments as of December 31, 1999 under operating
leases are as follows:
Operating
Years ending December 31, Leases
-----------
2000 731
2001 698
2002 538
2003 434
2004 135
-----------
Total minimum lease payments $ 2,536
===========
34
35
(9) Employee Benefit Plans
The Company sponsors defined contribution 401(k) plans for substantially
all employees. Pursuant to the plans, employees may request the Company
to deduct and contribute amounts from their salary on a pre-tax basis.
Employee contributions are subject to certain limitations and the Company
may make matching contributions, at its discretion. The Company may also
make discretionary contributions in addition to matching contributions.
Company contributions vest ratably over periods of four to five years,
beginning in the second or first year of employment, respectively.
Company contributions to the plans were $326,000, $406,000 and $345,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
(10) Income Taxes
Significant components of the provision for income taxes attributable to
continuing operations for the years ended December 31, 1999, 1998 and
1997 are as follows:
1999 1998 1997
-------------- -------------- --------------
Current
Federal $ -- -- --
State -- 94 51
-------------- -------------- --------------
Total current 94 51
-------------- -------------- --------------
Deferred:
Federal -- (48) (171)
State -- (6)
-------------- -------------- --------------
Total deferred -- (48) (177)
-------------- -------------- --------------
Total current and deferred $ -- 46 (126)
============== ============== ==============
The difference between the actual income tax benefit and the benefit
computed by applying the statutory corporate income tax rate of 34% to
pretax losses from continuing operations is attributable to the
following:
Years ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
Computed expected tax benefit $(10,060) $(14,667) $ (6,755)
Increase in valuation allowance 9,837 11,349 5,394
Permanent items 394 315 407
Writeoff of goodwill -- 2,494 --
Tax effect of loss not subject to
U.S. taxation -- -- 856
Other (171) 555 (28)
-------- -------- --------
Tax expense (benefit) $ -- $ 46 $ (126)
======== ======== ========
35
36
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are as follows:
December 31,
---------------------
1999 1998
-------- --------
Deferred tax assets:
Preacquisition net operating loss carryforwards $ 4,831 4,831
Postacquisition net operating loss carryforwards 34,988 25,505
Accounts receivable 372 296
Inventories 1,152 939
Accrued liabilities 657 517
Alternative minimum tax and other credit
carryforwards 298 298
Other 16 46
-------- --------
42,314 32,432
Less valuation allowance (42,269) (32,432)
-------- --------
Deferred tax assets $ 45 --
Deferred tax liabilities (45) (89)
-------- --------
$ -- (89)
======== ========
At December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $117,115,000 and tax credit carryforwards
of $298,000. The future utilization of $14,210,000 of the preacquisition
net operating losses and the credit carryforwards related to the
acquisition of companies will be limited under Internal Revenue Code
Sections 382 and 383. The tax benefits from the utilization of the
preacquisition operating loss carryforwards and the tax credits will be
credited to goodwill when realized.
Following is a summary of the carryforwards and the expiration dates as
of December 31, 1999:
Expiration
Amounts Dates
---------------- ----------------
Postacquisition net operating loss carryforwards $102,905 2012-2019
Preacquisition net operating loss carryforwards 14,210 2008-2009
Alternative minimum tax credit 38 --
General business credit 260 2000
(11) Warrant Issuances
The Company has issued various series of warrants in connection with debt
and equity financings, and as compensation for investment banking and
other services. As of December 31, 1999 there are outstanding warrants to
purchase 14,052,909 shares of the Company's $0.01 par value common stock
as follows:
Shares Subject to Warrants Exercise Price Expiration Date
------------------------------------ -------------------------- --------------------------
6,517,308 $0.75 8-26-02 to 8-12-04
2,515,000 $1.00 to $2.00 2-12-01 to 1-27-05
4,592,502 $2.01 to $3.00 2-12-01 to 12-31-03
578,099 Greater than 3.00 6-7-01 to 5-20-03
All of the warrants outstanding above are exercisable except for
5,000,000 which are not exercisable until such time the Company's total
authorized common stock is increased by not less than 5,000,000 shares.
In February and March of 2000, warrants for purchase of 2,355,000 shares
of common stock were exercised, resulting in net proceeds to the Company
of approximately $5,070,000.
36
37
The issuance of warrants during the three year period ended December 31,
1999 is a follows:
1999
In August, 1999 and December, 1999 the Company issued to Coastal warrants
for the purchase of 1,067,308 and 5,000,000 shares of common stock ,
respectively. These warrants were issued in connection with restructuring
of the Company's capital structure and the purchase of the Company's
common stock. As a part of the December, 1999 transaction the August
warrants and warrants for the purchase of 450,000 share of common stock
previously issued to Coastal were amended to adjust the exercise price to
$0.75. The value of the warrants issued in August, which was attributable
to the refinancing of debt of approximately $707,000 based on a
Black-Scholes pricing model has been treated as deferred financing costs
and is being amortized over the remaining term of the debt.
In February, 1999 in connection with the issuance of Series E preferred
stock the Company issued warrants for the purchase of an aggregate of
600,000 shares of common stock . In connection with the issuance of
common stock in January of 1999 the Company issued warrants for the
purchase of 690,000 shares of common stock. The value of those warrants
was approximately $636,000 using a Black Scholes pricing model.
In January, 1999 in connection with the extension of debt obligations to
St. James, the Company issued warrants for the purchase of 535,000 shares
of common stock. The value of these warrants, approximately $349,000
using a Black-Scholes pricing model, has been treated as deferred
financing costs and is being amortized over the term of the remaining
debt.
In December, 1999 the Company issued warrants for the purchase of 250,000
shares of common stock for investment banking services related to the
private placement of common stock which was completed in January, 2000.
1998
During 1998 the Company issued warrants for the purchase of 963,036
shares of common stock in connection with the private placement of equity
securities.
In April and May of 1998 the Company issued warrants for the purchase of
1,500,000 shares of common stock in connection with the arrangement of a
credit agreement with a private lender. The value of these warrants,
approximately $2,980,000 using a Black-Scholes pricing model, has been
treated as deferred financing costs and is being amortized over the term
of the related debt.
1997
During 1997 the Company issued warrants for the purchase of a total of
2,370,500 shares of common stock in connection with the arrangement of
credit facilities, for advisory services and pursuant to a distributor
agreement. The value of the warrants related to the credit agreements,
approximately $1,990,000 using a Black-Scholes pricing model, has been
treated as deferred financing costs and is being amortized over the term
of the related debt.
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(12) Employee Stock Option Plan
In 1995, Intelect (Bermuda) adopted a stock option plan (the "Plan")
pursuant to which the Company's Board of Directors may grant stock
options to directors, officers and key employees. The Plan, adopted by
the Company as part of the redomiciling process, authorizes grants of
options to purchase up to 6,000,000 shares of authorized common stock.
The exercise price for stock options granted may range from 25% to 110%
of the fair market value of the shares on the date of grant. All stock
options have 10-year terms and vest and become fully exercisable
according to schedules determined by the Board of Directors, generally
one-third on each of the first three anniversaries of the date of grant.
At December 31, 1999, there were 1,219,680 shares available for grant
under the Plan. The Plan replaced a predecessor plan which continues only
to the extent that there are 140,000 unexercised options outstanding at
December 31, 1999.
The per share weighted-average fair value of stock options granted during
1999, 1998 and 1997 was $0.64, $1.91, and $2.04, respectively, on the
dates of grants. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model, with the
following weighted-average assumptions:
Years ended December 31,
---------------------------------------------------------------
1999 1998 1997
------------------ ------------------- ------------------
Expected dividend yield 0% 0% 0%
Stock price volatility 100% 75% 68%
Risk free interest rate 4.6% 5.7% 6.1%
Expected option term 3 years 3 years 3 years
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, has recognized compensation expense with respect to certain
options granted at exercise prices less than the stock's market value on
the date of grant. During the years ended December 31, 1998, and 1997,
the Company recognized compensation expense of $101,000 and $354,000,
respectively.
Had the Company determined compensation cost based on the fair value on
the grant date for its stock options under SFAS No. 123, the Company's
net losses would have been increased to pro forma amounts as follows:
Years ended December 31,
-----------------------------------------------------------
1999 1998 1997
-------------- ------------- --------------
Net loss allocable to
common shareholders:
As reported $ (34,517) $ (46,105) $ (20,798)
Pro forma (37,693) (52,107) (25,217)
Loss per share:
As reported $ (0.74) $ (1.78) $ (1.01)
Pro forma (0.81) (2.01) (1.23)
Pro forma net losses reflect only options granted in 1999, 1998 and 1997.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
option's vesting period of three years and compensation cost for options
granted prior to November 1, 1995 is not considered. Furthermore, the
effects of applying SFAS No. 123 may not be representative of the effects
on reported net income for future years.
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Stock option activity during the periods indicated was as follows:
Years ended December 31,
-------------------------------------------------
1999 1998 1997
------------- ------------- -------------
Number of options:
Outstanding, beginning of
period 4,031,044 3,271,000 2,526,500
Granted 1,913,000 3,488,000 2,208,500
Exercised -- (226,450) (561,666)
Canceled (1,571,847) (2,501,506) (902,334)
------------- ------------- -------------
Outstanding, end of period 4,372,197 4,031,044 3,271,000
Weighted average exercise price:
Outstanding, beginning of
period $ 2.23 3.93 4.58
Granted 1.13 2.98 3.87
Exercised -- 1.76 3.03
Canceled 2.14 5.54 6.32
Outstanding, end of period $ 1.39 2.23 3.93
In October 1999 the exercise price of 1,535,000 options was reduced to
$1.00 per share from approximately $2.00 per share.
At December 31, 1999, 1998 and 1997, the number of options exercisable
was 2,066,675, 1,316,341, and 1,056,659, respectively, and the
weighted-average exercise price of those options was $1.92, $2.49 and
$3.78, respectively.
At December 31, 1999, the weighted-average remaining contractual life of
outstanding options was 9.12 years and the range of exercise prices is
shown in the following table:
Weighted Average
Remaining Option
Exercise prices Contractual Option shares shares
per share Life outstanding exercisable
------------------------- ------------------------ ------------------------ -----------------------
$1.000 10.0 years 2,773,667 795,000
2.000 8.6 954,864 621,343
2.375 5.0 40,000 40,000
2.660 4.0 100,000 100,000
3.000 6.38 527,000 493,666
4.250 8.0 6,666 6,666
5.375 7.0 10,000 10,000
(13) Contingencies
On October 28, 1998, in the 192nd Judicial District Court for Dallas
County, Texas, 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 January,
2000 the Company and the plaintiff entered into an agreement in
settlement of all claims pursuant to the litigation and the underlying
agreements Pursuant to this agreement, the Company paid the plaintiff
$35,000 in cash and issued 350,000 shares of its common stock. In
addition the Company agreed to pay the plaintiff a royalty on
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future sales of certain optical networking equipment equal to 2% of such
sales through March 2001, but not to exceed $1 million in total.
Intelect (Bermuda) is contingently liable for certain potential
liabilities related to its discontinued operations. Specifically, under a
stock purchase agreement dated October 3, 1995 ("1995 Agreement"),
Intelect (Bermuda) agreed to indemnify Savage Sports Corporation, the
purchaser of Savage Arms, Inc. (a manufacturer of firearms), for certain
product liability, environmental clean-up costs and other contractual
liabilities, including certain asserted successor liability claims. One
of the liabilities assumed involves a firearms product liability lawsuit
filed by Jack Taylor individually and as father of Kevin Taylor in Alaska
Superior Court (the "Taylor litigation"). Intelect (Bermuda) is informed
that a defendant in the Taylor litigation, Western Auto Supply Co.,
settled the lawsuit for $5 million and, in turn, has asserted a
third-party claim against Savage Arms, Inc. for indemnification in the
amount of the settlement plus attorneys' fees and related costs. Savage
Arms has asserted defenses to the claims and Intelect (Bermuda) believes
additional defenses may be available. Based on the information available
to date, it is impossible to predict the outcome of this litigation or to
assess the probability of any verdict.
Intelect (Bermuda) also has been notified that Savage Sports Corporation
seeks indemnification under the 1995 Agreement in connection with certain
other product liability claims. Most notably, Intelect (Bermuda) has
undertaken the defense of a lawsuit filed against Savage Arms, Inc. by
Emhart Industries, Inc. ("Emhart") in the United States District Court
for the District of Massachusetts (the "Emhart litigation"). In the
lawsuit, Emhart requests indemnification from Savage Arms, Inc. under an
agreement Emhart allegedly executed in 1981 with Savage Industries, Inc.,
claiming that Savage Arms, Inc. is a successor to Savage Industries, Inc.
To date, Emhart has claimed indemnification of approximately $2.2 million
for five lawsuits it has defended or settled and also seeks a declaratory
judgment that it is entitled to indemnification for losses and expenses
related to firearms product liability actions which may be filed against
Emhart in the future. Intelect (Bermuda) intends to assert additional
defenses. The parties are in discovery and Intelect (Bermuda) cannot at
this time predict the outcome of the litigation.
In the event the Taylor litigation and/or Emhart litigation were to be
resolved adversely to Intelect (Bermuda), there would be a material
adverse effect on the Company's financial condition and results of
operations.
A shareholders class action lawsuit was filed in the U. S. District Court
for the Northern District of Texas purported to have been filed on behalf
of all persons and entities who purchased Intelect common stock during
the period between February 24, 1998 and November 17, 1998. The named
defendants include Intelect Network Technologies Company, certain former
and present officers and directors of the Company, and Arthur Andersen,
LLP. The complaint alleges that the defendants violated Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder by making false and misleading statements
concerning Intelect's reported financial results during the period,
primarily relating to revenue recognition, asset impairment and
capitalization issues. The plaintiffs seek monetary damages, interest,
costs and expenses. The Company intends to defend the suit vigorously in
all aspects.
Certain of the Company's outstanding warrants contain anti-dilution
provisions which can, in some circumstances, result in a change in the
conversion price or the number of common shares subject to the warrant. A
holder of warrants to purchase common stock has indicated to the Company
that it believes it has the right to acquire up to approximately 19
million additional shares of common stock pursuant to anti-dilution
provisions of the warrant agreements; however, no formal demand for the
issuance of additional warrants has been made. The Company believes that
the holder is entitled only to those warrants which have been issued and
as are reflected in Note 11.
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(14) Segments of Business and Geographic Areas
The Company's primary business segments consist of (a) optical networking
equipment in which the Company designs, develops, manufactures and
markets optical networking equipment used in the telecommunications
industry; (b) design services in which the Company provides advanced
product and system design services to other companies in the
telecommunications industry; (c) digital signal processor (DSP) in which
the Company provides state-of-the-art digital processing products to
product manufacturers and application developers; and (d) video network
products in which the Company designs, develops, manufactures and markets
video conferencing products.
The accounting policies of the segments are the same as those described
in the significant accounting policies and practices (Note 2).
Sales to external customers:
Years ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
Optical networking equipment $ 9,479 6,410 26,250
Design services 4,596 8,147 8,632
Digital signal processor (DSP) 1,411 2,690 277
Video network products 704 1,448 636
Other 509 646 1,982
------- ------- -------
Worldwide total $16,699 19,341 37,777
======= ======= =======
Included in the above were direct
and indirect export sales of:
------- ------- -------
Worldwide total $ 748 4,068 25,071
======= ======= =======
Segment-specific margins (Gross Profit less total engineering and
development costs, including capitalized software, and asset write downs
for the segment):
Years ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
Optical networking equipment $ (6,634) (10,792) $ 5,635
Design services (544) 2,002 2,375
Digital signal processor (DSP) (641) 402 (576)
Video network products (1,063) (671) (1,402)
Other (3,502) (12,747) (4,997)
-------- -------- --------
Subtotal segment specific (12,384) (21,806) 1,035
Capitalized software 606 1,988 1,317
All other expenses (13,720) (18,969) (19,994)
-------- -------- --------
Operating loss $(25,498) (38,787) (17,642)
======== ======== ========
Assets, capital expenditures and depreciation are identifiable only by
combined segments, as grouped below:
At December 31,
--------------------------------------
ASSETS 1999 1998 1997
---------- ---------- ----------
Optical networking equipment, video
video network products and other $ 15,638 20,906 35,554
Engineering services and DSP 6,790 8,200 8,840
Not allocable to a segment 1,914 3,364 5,415
---------- ---------- ----------
Worldwide total $ 24,342 32,470 49,809
========== ========== ==========
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Years ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
CAPITAL EXPENDITURES
Optical networking equipment, video
video network products and other $ 876 1,662 2,539
Engineering services and DSP 99 354 454
Not allocable to a segment 70 19 --
---------- ---------- ----------
Worldwide total $ 1,045 2,035 2,993
========== ========== ==========
DEPRECIATION
Optical networking equipment, video
video network products and other $ 1,545 1,161 836
Engineering services and DSP 471 396 354
Not allocable to a segment 31 145 --
---------- ---------- ----------
Worldwide total $ 2,047 1,702 1,190
========== ========== ==========
(15) Related Party Transactions
During the years ended December 31, 1999, 1998 and 1997 the Company paid
legal fees in the amounts of $1,503,000, $869,000 and $342,000
respectively for legal services from a law firm affiliated with a
director.
During the year ended December 31, 1998, the following related party
transactions were also recorded:
(a) Renewed a loan to an officer in the amount of $171,000, including
accrued interest and additional advances, which was outstanding at
December 31, 1998. The 5% note is secured by a stock pledge
agreement.
(b) Repaid a loan of $200,000 from an officer, including interest of
$4,000.
During the year ended December 31, 1997, the following related party
transactions were also recorded:
(a) Borrowed $200,000 from a director in May and repaid the loan in
September, including interest of $8,000.
(b) Renewed a loan to an officer in the amount of $95,000, including
accrued interest, which was outstanding at December 31, 1997. The
5% note is secured by a stock pledge agreement.
(c) Borrowed $643,000 from a group of individuals, including $233,000
from directors, $200,000 from an officer and $210,000 from
employees.
(16) Significant Customers and Concentration of Credit Risk
In 1999 three customers accounted for 19%, 14% and 11%, respectively, of
consolidated net revenue.
In 1998, no customer accounted for more than 10% of consolidated net
revenues.
In 1997, a distributor and one customer represented 59% and 11%,
respectively, of consolidated net revenues. The distributor sold to at
least five end users in the Republic of Korea.
The Company is subject to credit risk through trade receivables. At
December 31, 1997, the distributor responsible for all revenue from Korea
accounted for $9,879,000 (63%) of the accounts receivable. In October
1998, the Company was advised of the illiquidity of the distributor and
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wrote off or reserved substantially all of the $4,696,000 receivables
remaining unpaid at the end of September 1998, adjusted, effective in
December 1998, for a payment of $1,000,000 in February 1999.
(17) Supplemental Disclosure of Cash Flow Information
Years ended December 31,
------------------------------------
1999 1998 1997
---------- --------- ---------
Cash paid during the period for:
Interest $ 622 1,126 704
Noncash Items
During the year ended December 31, 1999 the Company recorded the
following non cash financing transactions:
o Issued common stock in repayment of $11,000,000 of interest and
principal on notes payable
o Issued common stock in exchange for all outstanding Series C, D
and E Preferred Stock
o Issued common stock in payment of preferred stock dividends of
$830,000.
o Issued common stock in payment of directors' fees of $228,000.
During the year ended December 31, 1998, the Company recorded the
following noncash financing transactions:
o Converted notes payable into common stock -$21,000.
o Converted 914,286 shares of Series B preferred stock and 8,157
shares of Series C preferred stock and 1,750 shares of Series D
preferred stock into 5,997,819 shares of common stock.
o Issued common stock in payment of preferred stock dividends -
$1,309,000
o Issued common stock warrants in conjunction with notes payable
-$2,980,000.
o Issued common stock warrants in conjunction with an advisory
services agreement -$155,000.
During the year ended December 31, 1997, the Company recorded the
following noncash financing transactions:
o Converted convertible debentures into common stock - $14,913,000.
o Converted notes payable into preferred stock - $5,000,000.
o Converted preferred stock into common stock (par value only) -
$8,000.
o Applied a note payable against a technology license asset upon
settlement of a contractual dispute - $2,363,000.
o Issued common stock in conjunction with termination of a royalty
agreement - $847,000.
o Issued common stock in payment of preferred stock dividends -
$296,000.
o Issued preferred stock in payment of interest on notes payable -
$72,000.
o Issued common stock in payment of interest on convertible
debentures - $58,000.
o Issued common stock warrants in conjunction with notes payable -
$1,661,000.
o Issued common stock warrants in conjunction with a distributor
agreement - $162,000.
o Issued common stock warrants in conjunction with an advisory
services agreement - $58,000.
o Issued common stock warrants upon termination of credit facility -
$30,000.
o Acquired equipment under capital leases - $117,000.
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(18) Valuation and Qualifying Accounts
Balance Additions Additions
at charged to charged to Balances
beginning costs and other at end
of period expenses accounts Deductions of period
---------- ---------- ---------- ---------- ----------
Allowance for doubtful accounts:
For the year ended December 31, 1999 $ 870 810 -- 452(a) 1,228
For the year ended December 31, 1998 $ 541 4,206 -- 3,877(a) 870
For the year ended December 31, 1997 $ 542 632 -- 633(b) 541
Notes:
(a) Accounts written off
(b) Includes liquidation of subsidiary
(19) Subsequent Events (unaudited)
Subsequent to December 31, 1999 the Company completed a series of
transactions which materially improved its liquidity and financial
position. In January, 2000 the Company completed a private placement of
7.2 million shares of common stock and warrants to purchase an additional
3.6 million shares at an exercise price of $2.50 per share. Net proceeds
to the Company, after selling commissions and costs amounted to
approximately $16.9 million.
In January, 2000 SJMB, L.P. converted $6,000,000 due under its note
payable from the Company into approximately 3,645,000 shares of the
Company's common stock, pursuant to the terms of the loan agreement.
In March, 2000 the Company completed a private placement of 4,600,000
shares of common stock. Net proceeds to the Company, after selling
commissions and costs, amounted to approximately $25,900,000 million. Of
these proceeds, approximately $9,600,000 million was used to repay
indebtedness to the Coastal Corporation Second Pension Trust (Coastal)
and approximately $8,450,000 million is being used to redeem all of the
Company's outstanding Series A Preferred Stock, all of which was held by
Coastal.
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Between December 31, 1999 and March 24, 2000, the Company issued
approximately 2.4 million shares of Common Stock pursuant to the exercise
of various warrants and employee stock options. Proceeds to the Company
from these transactions amounted to approximately $5.1 million.
As a result of the above transactions, the Company's working capital
increased by approximately $31.0 million and Stockholders' Equity
increased by approximately $46.0 million. The pro forma effect of these
transactions is as follows:
(In thousands)
-------------------------------------
December 31, December 31,
1999 Pro Forma 1999
Actual Adjustments Pro Forma
------------ ----------- ------------
Working capital $ 3,187 $ 31,022 $ 34,209
Notes payable $ 17,604 $(15,214) $ 2,390
Stockholders' equity $ 404 $ 46,236 $ 46,640
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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As disclosed in the Form 10-Q of the Company filed on November 16,
1998, the Company's previous independent auditors, Arthur Andersen, LLP (Arthur
Andersen) resigned on November 13, 1998. The report by Arthur Andersen 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
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 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 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)
Arthur 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)
Arthur Andersen 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. Arthur 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 Arthur Andersen's audit
procedures for the year-end December 31, 1998 financial statements had the
client/auditor relationship not terminated. Arthur 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. Arthur 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 an exhibit to the Form 10-Q filed on November 16, 1998.
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PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company will file with the Securities and Exchange Commission a
definitive Proxy Statement no later than 120 days after the close of its fiscal
year ended December 31, 1999 (the "Proxy Statement"). The information required
by this Item is incorporated by reference from the Proxy Statement.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from
the Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the Proxy Statement.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The Financial Statements filed as part of this report are listed and
indexed on Page 21. Schedules other than those listed in the index have been
omitted because they are not applicable or the required information has been
included elsewhere in this report.
B. Listed below are all Exhibits filed as part of this report. Certain
Exhibits are incorporated by reference to documents previously filed by the
Registrant with the Securities and Exchange Commission pursuant to Rule 12b-32
under the Securities Exchange Act of 1934, as amended. Exhibits which are
incorporated by reference are indicated by the information in the parenthetical
following such exhibit.
ITEM 14 - 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 21. Schedules other than those listed in the index have been
omitted because they are not applicable or the required information has been
included elsewhere in this report.
B. Listed below are all Exhibits filed as part of this report. Certain
Exhibits are incorporated by reference to documents previously filed by the
Registrant with the Securities and Exchange Commission pursuant to Rule 12b-32
under the Securities Exchange Act of 1934, as amended. Exhibits which are
incorporated by reference are indicated by the information in the parenthetical
following such exhibit.
Exhibit Description of Exhibit
2.1 Plan and Agreement of Merger dated as of October 29, 1997 by and among
Intelect Communications Systems Limited ("Intelect (Bermuda)"),
Intelect Communications, Inc. (the "Company"), and Intelect Merger Co.
(1)
3.1 Amended and Restated Certificate of Incorporation of the Company (1)
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3.2 Certificate of Amendment to Amended and Restated Certificate of
Incorporation (2)
3.3 Amended and Restated By-Laws of the Company (1)
3.4 Certificate of Designations of the Series A Preferred Stock dated
December 2, 1997(1)
3.5 Certificate of Designations of the Series B Preferred Stock dated
December 17, 1997 (3)
3.6 Certificate of Correction to Series B Preferred Stock dated as of
December 17, 1997 (4)
3.7 Certificate of Designations of the Series C Preferred Stock dated
February 6, 1998 (5)
3.8 Certificate of Designations of the Series D Preferred Stock dated May
8, 1998 (6)
3.9 Certificate of Designations of the Series E Preferred Stock dated March
3, 1999 (7)
4.1 Specimen Stock Certificate of the Company (8)
4.2 Warrant to Purchase Common Stock of the Company Expiring February 26,
2002 (9)
4.3 Registration Rights Agreement dated February 26, 1997 between the
Company and St. James Capital Corp. (9)
4.4 Amendment No. 1 to Registration Rights Agreement dated as of March 27,
1997 between the Company and St. James Capital Corp. (9)
4.6 Amendments Nos. 2 and 3 to Registration Rights Agreements dated April
24 and May 8, 1997 among the Company and St. James Capital Corp. (10)
4.7 Warrant to Purchase Common Stock of the Company Expiring March 27, 2002
(9)
4.8 Warrants to purchase Company Common Stock dated April 24 and May 8,
1997 issued to St. James Capital Corp. (10)
4.9 Registration Rights Agreement dated as of May 8, 1997 between the
Company and The Coastal Corporation Second Pension Trust (11)
4.10 Registration Rights Agreement dated as of May 30, 1997 between the
Company and The Coastal Corporation Second Pension Trust (11)
4.11 Convertible Promissory Note dated February 12, 1998 by the Company in
favor of St. James Partners, L.P. (5)
4.12 Registration Rights Agreement dated February 12, 1998 between the
Company and St. James Partners, L.P. (5)
4.13 Warrant to Purchase Common Stock of the Company dated February 12, 1998
issued to St. James Partners, L.P. expiring on February 12, 2001 (5)
4.14 $2,000,000 Convertible Promissory Note issued to St. James Partners by
the Company dated April 2, 1998 (12)
4.15 $13,000,000 Convertible Promissory Note issued to SJMB by the Company
dated April 2, 1998 (12)
4.16 Warrant issued to St. James Partners by the Company dated April 2,
1998, exercisable as to 300,000 shares of Common Stock (12)
4.17 Warrant issued to SJMB by the Company dated April 2, 1998, exercisable
as to 1,200,000 shares of Common Stock (12)
4.18 Amendment No. 1 to Registration Rights Agreement dated as of April 2,
1998 between the Company and St. James Partners (12)
4.19 Registration Rights Agreements between the Company and the Buyers,
dated May 8, 1998 relating to the Series D Convertible Preferred Stock
(6)
4.20 Registration Rights Agreement between the Company and the Buyers dated
June 26, 1998 relating to the Series D Convertible Preferred Stock (13)
4.21 Registration Rights Agreement dated June 19, 1998 between the Company
and Lifeline Industries, Inc. (4)
4.22 Warrant issued to Lifeline Industries, Inc. dated June 29, 1998,
exercisable as to 30,000 shares of Common Stock (4)
4.23 Amended and Restated Warrant issued to Lifeline Industries, Inc.
exercisable to purchase up to 30,000 shares of Common Stock (14)
4.24 Warrant issued to Hambrecht & Quist LLC exercisable to purchase up to
33,036 shares of Common Stock at an exercise price of $10.292 per
share, expiring May 20, 2003 (12)
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4.25 Amended and Restated Warrant issued to AJC, Inc. exercisable to
purchase up to 300,000 shares of Common Stock (14)
4.26 Form of Registration Rights Agreement between the Company and the
Buyers, dated as of December 22, 1998 (7)
4.27 Form of Warrant to Purchase Common Stock of Intelect Communications,
Inc. at an exercise price of $2.998 (7)
4.28 Form of Warrant to Purchase Common Stock of Intelect Communications,
Inc., issued as of December 2, 1998 (7)
4.29 Promissory Note Amended and Restated as of December 31, 1998 in
original principal amount of $750,000 issued to The Coastal Corporation
Second Pension Trust (7)
4.30 Promissory Note Amended and Restated as of January 13, 1999 in the
original principal amount of $5,000,000 issued to The Coastal
Corporation Second Pension Trust (7)
4.31 Form of Warrant to Purchase Common Stock of Intelect Communications,
Inc. issued to St. James Capital Partners, L.P. and SJMB, L.P., issued
January 13, 1999 (7)
4.32 Registration Rights Agreement between the Company and Coastal (15)
4.33 Registration Rights Agreement between the Company and St. James (15)
4.34 Registration Rights Agreement among the Company and the Buyers, dated
February 24, 1999, relating to the Series E Convertible Preferred Stock
and warrants (7)
4.35 Form of Warrant to Purchase Common Stock of Intelect Communications,
Inc., relating to the Series E Preferred Stock (7)
4.36 Form of Registration Rights Agreement between Intelect Communications,
Inc. and the Buyers, dated as of June 30, 1999 (16)
4.37 Promissory Note as amended and restated as of August 13, 1999 issued by
the Company to Coastal (15)
4.38 Warrant issued to Coastal to purchase 5,000,000 shares of common stock
of Intelect at $0.75 per share (17)
4.39 Warrant issued to Coastal to purchase 450,000 shares of common stock of
Intelect at $0.75 per share (17)
4.40 Warrant issued to Coastal to purchase 1,067,308 shares of common stock
of Intelect at $0.75 per share (17)
4.41 Registration Rights Agreement dated December 21, 1999 between Intelect
and Coastal (17)
4.42 Form of Warrant issued to Stonegate and the Investors to purchase
common stock of Intelect Communications, Inc. at $2.50 per share,
subject to adjustment (18)
4.43 Warrant issued to Stonegate to purchase 250,000 shares of common stock
of Intelect Communications, Inc. at $1.00 per share (18)
4.44 Form of Registration Rights Agreement dated January 27, 2000 between
Intelect Communications, Inc., the Investors names therein, and
Stonegate (18)
4.45 Warrant issued to Alpine Capital Partners, Inc. to purchase 250,000
shares of common stock of Intelect Communications, Inc. at $7.50 per
share (19)
4.46 Warrant issued to Peter Ianace by Intelect Communications, Inc. dated
February 10, 2000 exerciseable as to 115,000 shares of Common Stock
(19)
4.47 Form of Warrant issued to Stonegate affiliates to purchase common stock
of Intelect Communications, Inc. at $6.00 per share, subject to
adjustment (20)
4.48 Form of Registration Rights Agreement dated March 14, 2000 between
Intelect Communications, Inc., the Investors named therein, and
Stonegate (20)
4.49 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 $1.00 per share
10.1 Employment Agreement between the Company and Herman Frietsch and
Amendment thereto*
10.2 Stock Purchase Agreement dated October 3, 1995 by and among Intelect
(Bermuda), Savage Corporation and Savage Sports Corporation (21)
10.3 Employment Agreement dated as of April 1, 1996 between the Company and
Eugene Helms*(22)
49
50
10.4 Employment Agreement dated as of February 13, 1996 between Edgar L.
Read and DNA Enterprises, Inc.*(23)
10.5 Lease Agreement between TCIT Dallas Industrial and Intelect Network
Technologies, dated February 25, 1997 (24)
10.6 Lease Agreement between Campbell Place One Joint Venture and DNA
Enterprises, dated February 1, 1997 (24)
10.7 Subscription Agreement for Series A Cumulative Preferred Stock dated as
of May 30, 1997 between the Company and The Coastal Corporation Second
Pension Trust (11)
10.8 Amended License Agreement among Digital Equipment Corporation and
Intelect Visual Communications Corp., dated effective November 5, 1997
(25)
10.9 Agreement for Purchase and Sale dated February 12, 1998 between the
Company and St. James Partners, L.P. (5)
10.10 Pledge Agreement dated February 12, 1998 between the Company and St.
James Partners, L.P. (5)
10.11 Letter Agreement dated February 9, 1999 among Tehan Oh, Opicom Co.
Ltd., Optronix Inc., Amerix Electronics, Inc., and Intelect Network
Technologies Company (26)
10.12 Securities Purchase Agreement among the Company and the Buyers, dated
May 8, 1998 relating to the Series D Convertible Preferred Stock (6)
10.13 Assignment and Acceptance executed by St. James Partners and SJMB, L.P.
("SJMB") as to Agreement for Purchase and Sale dated February 12, 1998
by the Company and St. James Capital Partners (12)
10.14 Securities Purchase Agreement dated June 26, 1998 between the Company
and the Buyers relating to the Series D Convertible Preferred Stock
(13)
10.15 Letter Agreement dated July 15, 1998 between the Company and Navesink
Equity Derivative Fund LDC (4)
10.16 Loan Agreement for Receivables Backed Borrowing dated as of September
14, 1998 between the Company and Coastal (27)
10.17 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 (27)
10.18 Borrower Pledge Agreement dated September 14, 1998 between the Company
and Coastal (27)
10.19 Security Agreement dated September 14, 1998 between the Company and St.
James (27)
10.20 Letter Agreement dated September 14, 1998 among the Company, St. James
and Falcon Seaboard (27)
10.21 Loan Agreement for Inventory Backed Borrowing dated November 24, 1998
by and between Intelect Communications, Inc. and The Coastal
Corporation Second Pension Trust, as amended by the Addendum to Loan
Agreement for Inventory Backed Borrowing dated December 31, 1998 (7)
10.22 Security Agreement for Inventory Backed Borrowing dated November 24,
1998 by and among Intelect Network Technologies Company, DNA
Enterprises, Inc., and Intelect Visual Communications Corp., Intelect
Communications, Inc., and The Coastal Corporation Second Pension Trust
(7)
10.23 Addendum to Loan Agreement for Receivables Backed Borrowing dated as of
January 13, 1999 between The Coastal Corporation Second Pension Trust
and Intelect Communications, Inc. (7)
10.24 Amended and Restated Stock Incentive Plan *(28)
10.25 Securities Purchase Agreement among the Company and the Buyers, dated
February 24, 1999, relating to the Series E Convertible Preferred Stock
and warrants (7)
10.26 Settlement Agreement and Mutual Release among the Company and the
Citadel Entities, dated June 27, 1999 (29)
10.27 Settlement Agreement and Mutual Release among the Company and the
Promethean Entities, dated July 6, 1999 (30)
10.28 Settlement Agreement and Mutual Release among the Company and the
Angelo Gordon Entities, dated July 8, 1999 (30)
10.29 Repayment and Exchange Agreement between the Company and St. James (15)
10.30 Agreement to Amend Receivables and Inventory Backed Credit Lines (15)
50
51
10.31 Amended and Restated Loan Agreement for Receivables and Inventory
Backed Borrowing dated as of August 13, 1999 between the Company and
Coastal (15)
10.32 Security and Pledge Agreement dated August 13, 1999 among the Company,
Intelect Visual Communications Corp., Intelect Network Technologies
Company, DNA Enterprises, Inc., and Coastal (15)
10.33 Subscription Agreement for Common Stock Units dated December 17, 1999
between Intelect and Coastal (17)
10.34 Settlement Agreement and Mutual Release dated February 2, 2000 between
Intelect Communications, Inc., Intelect Network Technologies Company,
Intelect Communications, Inc. and Richard Dzanski (18)
10.35 Amended and Restated Stock Incentive Plan *(31)
16.1 Letter regarding change in certifying accountants (13)
16.2 Letter from Arthur Andersen, LLP regarding its concurrence with
statements in Item 5 of Form 10Q filed November 16, 1998 (14)
21.1 Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
27.1 Financial data schedule
- ---------------------------------------------
*Management contract or other compensatory plan or arrangement.
(1) Incorporated herein by reference to the Company's Form S-4 filed
October 30, 1997
(2) Incorporated herein by reference to the Company's Form 8-K filed on
March 8, 1999
(3) Incorporated herein by reference to the Company's Form 10-K filed on
March 31, 1998
(4) Incorporated herein by reference to the Company's Form S-3 filed on
August 10, 1998
(5) Incorporated herein by reference to the Company's Form 8-K filed
February 17, 1998
(6) Incorporated herein by reference to the Company's Form 8-K filed on May
11, 1998
(7) Incorporated herein by reference to the Company's Form 8-K filed on
March 2, 1999
(8) Incorporated herein by reference to the Company's Form 8-K filed
December 5, 1997
(9) Incorporated herein by reference to the Company's Form 10-K filed April
15, 1997
(10) Incorporated herein by reference to the Company's Form S-3 filed
September 17, 1997
(11) Incorporated herein by reference to the Company's Form 10-Q filed
August 14, 1997
(12) Incorporated herein by reference to the Company's Form 10-Q filed on
August 14, 1998
(13) Incorporated herein by reference to the Company's Form 8-K filed on
June 29, 1998
(14) Incorporated herein by reference to the Company's Form 10-Q filed on
November 16, 1998
(15) Incorporated herein by reference to the Company's Form 8-K filed on
August 18, 1999
(16) Incorporated herein by reference to the Company's Form S-3 filed on
August 27, 1999
(17) Incorporated herein by reference to the Company's Form 8-K filed on
December 22, 1999
(18) Incorporated herein by reference to the Company's Form 8-K filed on
February 8, 2000
(19) Incorporated herein by reference to the Company's Form S-3 filed on
February 11, 2000
(20) Incorporated herein by reference to the Company's Form 8-K filed on
March 21, 2000
(21) Incorporated herein by reference to the Company's Form 8-K dated
November 10, 1995
(22) Incorporated herein by reference to the Company's Form 10-Q filed
November 13, 1996
(23) Incorporated herein by reference to the Company's Form 8-K dated
February 20, 1996
(24) Incorporated herein by reference to the Company's Form 10-Q filed May
15, 1997
(25) Incorporated herein by reference to the Company's Form 10-Q filed
November 13, 1997
(26) Incorporated herein by reference to the Company's Form 10-K filed on
April 2, 1999
(27) Incorporated herein by reference to the Company's Form 8-K filed on
September 16, 1998
(28) Incorporated herein by reference to the Company's Definitive Proxy
Statement filed on April 28, 1998
(29) Incorporated herein by reference to the Company's Form 8-K filed on
July 2, 1999
(30) Incorporated herein by reference to the Company's Form 8-K filed on
July 8, 1999
51
52
(31) Incorporated herein by reference to the Company's Definitive Proxy
Statement filed on April 30, 1999
C. The Registrant has not filed any reports on Form 8-K during the last
quarter of the period covered by this Report, except as follows:
Form 8-K filed on November 23, 1999
Form 8-K filed on December 22, 1999
C. The Registrant has not filed any reports on Form 8-K during the last
quarter of the period covered by this Report, except as follows:
None
52
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTELECT COMMUNICATIONS, INC.
(Registrant)
Date: March 30, 2000 By: /s/ HERMAN M. FRIETSCH
------------------------------
Herman M. Frietsch
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/s/ HERMAN M. FRIETSCH /s/ ANTON VON AND ZU LIECHTENSTEIN
- ---------------------------------------------------- ---------------------------------------------
Herman M. Frietsch Anton von and zu Liechtenstein, Director
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ ROBERT P. CAPPS /s/ PHILIP P. SUDAN, JR.
- ---------------------------------------------------- ---------------------------------------------
Robert P. Capps Philip P. Sudan, Jr., Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ ROBERT E. GARRISON, II
---------------------------------------------
Robert E. Garrison, II, Director
53
54
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Plan and Agreement of Merger dated as of October 29, 1997 by and among
Intelect Communications Systems Limited ("Intelect (Bermuda)"),
Intelect Communications, Inc. (the "Company"), and Intelect Merger Co.
(1)
3.1 Amended and Restated Certificate of Incorporation of the Company (1)
3.2 Certificate of Amendment to Amended and Restated Certificate of
Incorporation (2)
3.3 Amended and Restated By-Laws of the Company (1)
3.4 Certificate of Designations of the Series A Preferred Stock dated
December 2, 1997(1)
3.5 Certificate of Designations of the Series B Preferred Stock dated
December 17, 1997 (3)
3.6 Certificate of Correction to Series B Preferred Stock dated as of
December 17, 1997 (4)
3.7 Certificate of Designations of the Series C Preferred Stock dated
February 6, 1998 (5)
3.8 Certificate of Designations of the Series D Preferred Stock dated May
8, 1998 (6)
3.9 Certificate of Designations of the Series E Preferred Stock dated March
3, 1999 (7)
4.1 Specimen Stock Certificate of the Company (8)
4.2 Warrant to Purchase Common Stock of the Company Expiring February 26,
2002 (9)
4.3 Registration Rights Agreement dated February 26, 1997 between the
Company and St. James Capital Corp. (9)
4.4 Amendment No. 1 to Registration Rights Agreement dated as of March 27,
1997 between the Company and St. James Capital Corp. (9)
4.6 Amendments Nos. 2 and 3 to Registration Rights Agreements dated April
24 and May 8, 1997 among the Company and St. James Capital Corp. (10)
4.7 Warrant to Purchase Common Stock of the Company Expiring March 27, 2002
(9)
4.8 Warrants to purchase Company Common Stock dated April 24 and May 8,
1997 issued to St. James Capital Corp. (10)
4.9 Registration Rights Agreement dated as of May 8, 1997 between the
Company and The Coastal Corporation Second Pension Trust (11)
4.10 Registration Rights Agreement dated as of May 30, 1997 between the
Company and The Coastal Corporation Second Pension Trust (11)
4.11 Convertible Promissory Note dated February 12, 1998 by the Company in
favor of St. James Partners, L.P. (5)
4.12 Registration Rights Agreement dated February 12, 1998 between the
Company and St. James Partners, L.P. (5)
4.13 Warrant to Purchase Common Stock of the Company dated February 12, 1998
issued to St. James Partners, L.P. expiring on February 12, 2001 (5)
4.14 $2,000,000 Convertible Promissory Note issued to St. James Partners by
the Company dated April 2, 1998 (12)
4.15 $13,000,000 Convertible Promissory Note issued to SJMB by the Company
dated April 2, 1998 (12)
4.16 Warrant issued to St. James Partners by the Company dated April 2,
1998, exercisable as to 300,000 shares of Common Stock (12)
4.17 Warrant issued to SJMB by the Company dated April 2, 1998, exercisable
as to 1,200,000 shares of Common Stock (12)
4.18 Amendment No. 1 to Registration Rights Agreement dated as of April 2,
1998 between the Company and St. James Partners (12)
4.19 Registration Rights Agreements between the Company and the Buyers,
dated May 8, 1998 relating to the Series D Convertible Preferred Stock
(6)
4.20 Registration Rights Agreement between the Company and the Buyers dated
June 26, 1998 relating to the Series D Convertible Preferred Stock (13)
4.21 Registration Rights Agreement dated June 19, 1998 between the Company
and Lifeline Industries, Inc. (4)
4.22 Warrant issued to Lifeline Industries, Inc. dated June 29, 1998,
exercisable as to 30,000 shares of Common Stock (4)
4.23 Amended and Restated Warrant issued to Lifeline Industries, Inc.
exercisable to purchase up to 30,000 shares of Common Stock (14)
4.24 Warrant issued to Hambrecht & Quist LLC exercisable to purchase up to
33,036 shares of Common Stock at an exercise price of $10.292 per
share, expiring May 20, 2003 (12)
55
4.25 Amended and Restated Warrant issued to AJC, Inc. exercisable to
purchase up to 300,000 shares of Common Stock (14)
4.26 Form of Registration Rights Agreement between the Company and the
Buyers, dated as of December 22, 1998 (7)
4.27 Form of Warrant to Purchase Common Stock of Intelect Communications,
Inc. at an exercise price of $2.998 (7)
4.28 Form of Warrant to Purchase Common Stock of Intelect Communications,
Inc., issued as of December 2, 1998 (7)
4.29 Promissory Note Amended and Restated as of December 31, 1998 in
original principal amount of $750,000 issued to The Coastal Corporation
Second Pension Trust (7)
4.30 Promissory Note Amended and Restated as of January 13, 1999 in the
original principal amount of $5,000,000 issued to The Coastal
Corporation Second Pension Trust (7)
4.31 Form of Warrant to Purchase Common Stock of Intelect Communications,
Inc. issued to St. James Capital Partners, L.P. and SJMB, L.P., issued
January 13, 1999 (7)
4.32 Registration Rights Agreement between the Company and Coastal (15)
4.33 Registration Rights Agreement between the Company and St. James (15)
4.34 Registration Rights Agreement among the Company and the Buyers, dated
February 24, 1999, relating to the Series E Convertible Preferred Stock
and warrants (7)
4.35 Form of Warrant to Purchase Common Stock of Intelect Communications,
Inc., relating to the Series E Preferred Stock (7)
4.36 Form of Registration Rights Agreement between Intelect Communications,
Inc. and the Buyers, dated as of June 30, 1999 (16)
4.37 Promissory Note as amended and restated as of August 13, 1999 issued by
the Company to Coastal (15)
4.38 Warrant issued to Coastal to purchase 5,000,000 shares of common stock
of Intelect at $0.75 per share (17)
4.39 Warrant issued to Coastal to purchase 450,000 shares of common stock of
Intelect at $0.75 per share (17)
4.40 Warrant issued to Coastal to purchase 1,067,308 shares of common stock
of Intelect at $0.75 per share (17)
4.41 Registration Rights Agreement dated December 21, 1999 between Intelect
and Coastal (17)
4.42 Form of Warrant issued to Stonegate and the Investors to purchase
common stock of Intelect Communications, Inc. at $2.50 per share,
subject to adjustment (18)
4.43 Warrant issued to Stonegate to purchase 250,000 shares of common stock
of Intelect Communications, Inc. at $1.00 per share (18)
4.44 Form of Registration Rights Agreement dated January 27, 2000 between
Intelect Communications, Inc., the Investors names therein, and
Stonegate (18)
4.45 Warrant issued to Alpine Capital Partners, Inc. to purchase 250,000
shares of common stock of Intelect Communications, Inc. at $7.50 per
share (19)
4.46 Warrant issued to Peter Ianace by Intelect Communications, Inc. dated
February 10, 2000 exerciseable as to 115,000 shares of Common Stock
(19)
4.47 Form of Warrant issued to Stonegate affiliates to purchase common stock
of Intelect Communications, Inc. at $6.00 per share, subject to
adjustment (20)
4.48 Form of Registration Rights Agreement dated March 14, 2000 between
Intelect Communications, Inc., the Investors named therein, and
Stonegate (20)
4.49 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 $1.00 per share
10.1 Employment Agreement between the Company and Herman Frietsch and
Amendment thereto*
10.2 Stock Purchase Agreement dated October 3, 1995 by and among Intelect
(Bermuda), Savage Corporation and Savage Sports Corporation (21)
10.3 Employment Agreement dated as of April 1, 1996 between the Company and
Eugene Helms*(22)
56
10.4 Employment Agreement dated as of February 13, 1996 between Edgar L.
Read and DNA Enterprises, Inc.*(23)
10.5 Lease Agreement between TCIT Dallas Industrial and Intelect Network
Technologies, dated February 25, 1997 (24)
10.6 Lease Agreement between Campbell Place One Joint Venture and DNA
Enterprises, dated February 1, 1997 (24)
10.7 Subscription Agreement for Series A Cumulative Preferred Stock dated as
of May 30, 1997 between the Company and The Coastal Corporation Second
Pension Trust (11)
10.8 Amended License Agreement among Digital Equipment Corporation and
Intelect Visual Communications Corp., dated effective November 5, 1997
(25)
10.9 Agreement for Purchase and Sale dated February 12, 1998 between the
Company and St. James Partners, L.P. (5)
10.10 Pledge Agreement dated February 12, 1998 between the Company and St.
James Partners, L.P. (5)
10.11 Letter Agreement dated February 9, 1999 among Tehan Oh, Opicom Co.
Ltd., Optronix Inc., Amerix Electronics, Inc., and Intelect Network
Technologies Company (26)
10.12 Securities Purchase Agreement among the Company and the Buyers, dated
May 8, 1998 relating to the Series D Convertible Preferred Stock (6)
10.13 Assignment and Acceptance executed by St. James Partners and SJMB, L.P.
("SJMB") as to Agreement for Purchase and Sale dated February 12, 1998
by the Company and St. James Capital Partners (12)
10.14 Securities Purchase Agreement dated June 26, 1998 between the Company
and the Buyers relating to the Series D Convertible Preferred Stock
(13)
10.15 Letter Agreement dated July 15, 1998 between the Company and Navesink
Equity Derivative Fund LDC (4)
10.16 Loan Agreement for Receivables Backed Borrowing dated as of September
14, 1998 between the Company and Coastal (27)
10.17 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 (27)
10.18 Borrower Pledge Agreement dated September 14, 1998 between the Company
and Coastal (27)
10.19 Security Agreement dated September 14, 1998 between the Company and St.
James (27)
10.20 Letter Agreement dated September 14, 1998 among the Company, St. James
and Falcon Seaboard (27)
10.21 Loan Agreement for Inventory Backed Borrowing dated November 24, 1998
by and between Intelect Communications, Inc. and The Coastal
Corporation Second Pension Trust, as amended by the Addendum to Loan
Agreement for Inventory Backed Borrowing dated December 31, 1998 (7)
10.22 Security Agreement for Inventory Backed Borrowing dated November 24,
1998 by and among Intelect Network Technologies Company, DNA
Enterprises, Inc., and Intelect Visual Communications Corp., Intelect
Communications, Inc., and The Coastal Corporation Second Pension Trust
(7)
10.23 Addendum to Loan Agreement for Receivables Backed Borrowing dated as of
January 13, 1999 between The Coastal Corporation Second Pension Trust
and Intelect Communications, Inc. (7)
10.24 Amended and Restated Stock Incentive Plan *(28)
10.25 Securities Purchase Agreement among the Company and the Buyers, dated
February 24, 1999, relating to the Series E Convertible Preferred Stock
and warrants (7)
10.26 Settlement Agreement and Mutual Release among the Company and the
Citadel Entities, dated June 27, 1999 (29)
10.27 Settlement Agreement and Mutual Release among the Company and the
Promethean Entities, dated July 6, 1999 (30)
10.28 Settlement Agreement and Mutual Release among the Company and the
Angelo Gordon Entities, dated July 8, 1999 (30)
10.29 Repayment and Exchange Agreement between the Company and St. James (15)
10.30 Agreement to Amend Receivables and Inventory Backed Credit Lines (15)
57
10.31 Amended and Restated Loan Agreement for Receivables and Inventory
Backed Borrowing dated as of August 13, 1999 between the Company and
Coastal (15)
10.32 Security and Pledge Agreement dated August 13, 1999 among the Company,
Intelect Visual Communications Corp., Intelect Network Technologies
Company, DNA Enterprises, Inc., and Coastal (15)
10.33 Subscription Agreement for Common Stock Units dated December 17, 1999
between Intelect and Coastal (17)
10.34 Settlement Agreement and Mutual Release dated February 2, 2000 between
Intelect Communications, Inc., Intelect Network Technologies Company,
Intelect Communications, Inc. and Richard Dzanski (18)
10.35 Amended and Restated Stock Incentive Plan *(31)
16.1 Letter regarding change in certifying accountants (13)
16.2 Letter from Arthur Andersen, LLP regarding its concurrence with
statements in Item 5 of Form 10Q filed November 16, 1998 (14)
21.1 Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
27.1 Financial data schedule
- ---------------------------------------------
*Management contract or other compensatory plan or arrangement.
(1) Incorporated herein by reference to the Company's Form S-4 filed
October 30, 1997
(2) Incorporated herein by reference to the Company's Form 8-K filed on
March 8, 1999
(3) Incorporated herein by reference to the Company's Form 10-K filed on
March 31, 1998
(4) Incorporated herein by reference to the Company's Form S-3 filed on
August 10, 1998
(5) Incorporated herein by reference to the Company's Form 8-K filed
February 17, 1998
(6) Incorporated herein by reference to the Company's Form 8-K filed on May
11, 1998
(7) Incorporated herein by reference to the Company's Form 8-K filed on
March 2, 1999
(8) Incorporated herein by reference to the Company's Form 8-K filed
December 5, 1997
(9) Incorporated herein by reference to the Company's Form 10-K filed April
15, 1997
(10) Incorporated herein by reference to the Company's Form S-3 filed
September 17, 1997
(11) Incorporated herein by reference to the Company's Form 10-Q filed
August 14, 1997
(12) Incorporated herein by reference to the Company's Form 10-Q filed on
August 14, 1998
(13) Incorporated herein by reference to the Company's Form 8-K filed on
June 29, 1998
(14) Incorporated herein by reference to the Company's Form 10-Q filed on
November 16, 1998
(15) Incorporated herein by reference to the Company's Form 8-K filed on
August 18, 1999
(16) Incorporated herein by reference to the Company's Form S-3 filed on
August 27, 1999
(17) Incorporated herein by reference to the Company's Form 8-K filed on
December 22, 1999
(18) Incorporated herein by reference to the Company's Form 8-K filed on
February 8, 2000
(19) Incorporated herein by reference to the Company's Form S-3 filed on
February 11, 2000
(20) Incorporated herein by reference to the Company's Form 8-K filed on
March 21, 2000
(21) Incorporated herein by reference to the Company's Form 8-K dated
November 10, 1995
(22) Incorporated herein by reference to the Company's Form 10-Q filed
November 13, 1996
(23) Incorporated herein by reference to the Company's Form 8-K dated
February 20, 1996
(24) Incorporated herein by reference to the Company's Form 10-Q filed May
15, 1997
(25) Incorporated herein by reference to the Company's Form 10-Q filed
November 13, 1997
(26) Incorporated herein by reference to the Company's Form 10-K filed on
April 2, 1999
(27) Incorporated herein by reference to the Company's Form 8-K filed on
September 16, 1998
(28) Incorporated herein by reference to the Company's Definitive Proxy
Statement filed on April 28, 1998
(29) Incorporated herein by reference to the Company's Form 8-K filed on
July 2, 1999
(30) Incorporated herein by reference to the Company's Form 8-K filed on
July 8, 1999
(31) Incorporated herein by reference to the Company's Definitive Proxy
Statement filed on April 30, 1999