Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - K
Annual Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 For the Year Ended December 31, 1997
Commission file number 0-11630
INTELECT COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0471342
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 EXECUTIVE DRIVE, RICHARDSON, TEXAS 75081
(Address of Principal Executive Offices) (Zip Code)
972-367-2100
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of the Act
NONE
Securities registered pursuant to Section 12 (g) of the Act
COMMON STOCK PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $151,235,000 as of March 27, 1998 (based upon the
average of the highest bid and lowest asked prices on such date as reported on
the Nasdaq National Market).
There were 24,177,190 shares of Common Stock outstanding as of March 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 31, 1997) are incorporated by reference in items 10, 11, 12 and 13 of
PART III hereof.
2
PART I
ITEM 1 - BUSINESS
INTRODUCTION
Intelect Communications, Inc. ("Intelect" or the "Company"), is a
communications technology company providing innovative and cost-effective
products, services and solutions to integrate voice, data, and video networks.
Applications for the Company's products and services range from the network
infrastructure to the desktop. The Company's products are designed to anticipate
and meet the demands for increasing speed, capacity, and complexity of
electronic and photonic communications. Principal markets for the Company's
products are: fiber optic network transmission, digital signal processing (DSP),
and video communications. The Company also provides high-value engineering
services to the communications industry. The Company currently has under
development an intelligent programmable telecommunications switching platform.
The Company is primarily focused on multimedia delivery and bandwidth
efficiency as principal drivers for its markets. The Company's core competency
in DSP design and application contributes cost and efficiency advantages to its
products. The Company has pursued a strategy of acquisitions and internal
development over the past three years that provides a current resource base
with:
o Seven years experience in fiber optic transmission systems
o Seventeen years experience in telecommunications hardware
and software design
o Twenty-one years experience in DSP design and application
development
o Eighteen years experience in the mission critical air
traffic control environment.
The Company's SONETLYNX(R) fiber optic, SONET-based multiplexing
network transmission product simultaneously supports voice, data, video, and
local or wide area networking connectivity. The Company's LANscape(TM) video
conferencing systems provide near television quality video and audio, and
support both traditional video conferences and PC file sharing. The Company's
S4(R) Special Services Switching System(R) is a digital voice/data switch used
for air traffic control and other mission critical applications. The Company
also provides a full range of support for the design, development, testing, and
evaluation of advanced telecommunications software, hardware, and products to
customers in the telecommunications industry and for the Company's own product
development activities.
The Company is developing an intelligent, programmable switch, CS4, to
meet the demand for a distributed reliable network architecture and to provide
advanced intelligent call and service applications for public and private
wireline and wireless communications networks. The Company currently intends to
complete the CS4 development program and market introductions of CS4 service
applications in the context of a joint-venture arrangement with investment,
distribution and/or marketing partners. The Company is pursuing the possibility
of such arrangements with potential partnership candidates.
The Company was incorporated in Delaware on May 23, 1995. The Company's
predecessor, Intelect Communications Systems Limited ("Intelect (Bermuda)") was
incorporated under the laws of Bermuda in April 1980 and operated under the name
Coastal International, Ltd. until September 1985 and as Challenger International
Ltd. until December 1995. On December 4, 1997, the shareholders of Intelect
(Bermuda) approved a merger proposal, the principal effect of which was to
change the domicile of Intelect (Bermuda) so that it became a publicly traded
U.S.-domiciled, Delaware corporation. The effect of the merger was that the
shareholders of Intelect (Bermuda) became shareholders of the Company with the
Company becoming the publicly traded company. In addition, the Company became
the holding company for Intelect (Bermuda) and replaced Intelect (Bermuda) as
the holding company for its subsidiaries. The merger was effected on December 4,
1997. See ITEM 4 -- Submission of Matters to a Vote of Security Holders.
2
3
INDUSTRY BACKGROUND
Continuing deregulation of worldwide telecommunications markets,
highlighted by the U.S. 1996 Telecommunication Reform Act, is driving
competitive access providers to offer more consumer services as they battle for
market share and to develop new services to differentiate themselves. In
addition, enterprise and special purpose private networks are being upgraded and
expanded to meet the needs of growing communications-based PC capabilities and
of other network services. Telecommunication and private networks are upgrading
and expanding with fiber optics to take advantage of its bandwidth, cost
savings, reliability, and multimedia capability. Fiber optic transmission is
chosen because of its ability to carry large volumes of information at high
speeds, insensitivity to electromagnetic interference, and high transmission
quality. As a result of these trends, the Company identifies the following
factors which are driving demand for its products:
o worldwide growth of telecommunications infrastructures
o increased competition among telephone companies
o proliferation of wireless communications
o the Internet
o outsourcing development of telecommunications products
o voice and video conferencing
o advanced intelligent networks
o telecommuting
o virtual offices.
These factors create demand for increased deployment of fiber optic networks and
for greater IP-based network capacity, both of which are central to the
Company's product and technology strategies.
PRODUCTS
Fiber Optic Network Transmission Products
In the first quarter of 1996, the Company introduced its fiber optic,
SONET-based multiplexing network transmission products, known as SONETLYNX,
which combine transmission, multiplexing and protocol conversion in a single
unit. SONETLYNX technology allows customers to converge a variety of protocols,
such as voice, low-speed data, T1 or E1 and full-spectrum video communications,
into wireless communication systems, intelligent transportation arteries, and
multimedia corporate networks over fiber optic cable.
SONETLYNX is a SONET-based OC-1 or OC-3 bandwidth digital multiplexer
that simultaneously supports voice, data, video, and local or wide area
networking connectivity. SONETLYNX complements the reliability of fiber with the
redundancy built into its critical components, including the backplane and
control modules. In the event of transmission difficulties, such as a cut in a
fiber cable, protection switching occurs in under 50 milliseconds and is
virtually transparent to network traffic. A SONETLYNX network can be as basic as
two nodes or expand to a theoretically unlimited number of nodes at different
geographic locations. A node consists of a chassis containing two controller
cards and up to fifteen protocol interface cards. Node design incorporates
universal module slots so that any protocol or auxiliary module fits in any
slot, minimizing the investment in hardware. Modular design facilitates the
expansion of any SONETLYNX network by installing a small, cost-effective and
extremely adaptable module into the node. The SONETLYNX Network Management
System ("NMS") provides configuration, monitoring, and maintenance control from
a central location. The NMS operates in the Microsoft Windows or Windows for
Workgroups environments using Hewlett-Packard's OpenView. The strategic
objectives for SONETLYNX in 1997 were the addition of new communication
protocols and broadening distribution. During the past year, an integrated video
codec, multipoint ethernet, bytesync T-1 allowing for DS0 grooming without
channel banks, and a module combining precision timing sources with a single
voice channel were added to the growing array of SONETLYNX protocols. In
addition, strategic distribution arrangements were formed with domestic and
international companies. For 1998, planned product advancements include SDH
compliance and protocols for Fast Ethernet, ATM, and DS3. These improvements are
expected to strengthen the product line's position in international and public
network access markets.
3
4
Video Communication Products
The Company's principal video communication product is LANscape(TM), a
superior TV-quality IP-based system for desktop and small group applications.
Other products include VuBridge, a network gateway that provides communications
between LANscape and Legacy H.320 systems, and Panorama, an H.320
standards-based desktop system for ISDN communications.
LANscape
LANscape offers sharp, vivid picture quality, a simple user interface,
and bandwidth economy that corporate network managers demand for large-scale
enterprise implementation of desktop visual communications. LANscape's video
compression technology is suitable for telemedicine, distance learning,
video-on-demand, one-to-many broadcasts, and other multimedia applications. In
addition, LANscape offers multiple windows and IP Multicast to support
collaborative operations with multiple users and multiple inputs.
LANscape provides high quality video with low network impact using
wavelet video compression to provide a smooth high-quality picture with fully
synchronized CD-quality sound. Wavelet technology radically reduces the network
load by selectively transmitting and reconstructing only those wavelengths of
light that are most significant to the human eye, thus achieving compression
ratios (1:1 to 350:1) that cannot be achieved by other technologies. LANscape
runs over existing local area networks using IP as the transmission protocol.
This means it will run on any network that will transport IP including Ethernet,
Fast Ethernet, T1/E1, Frame Relay, ATM, and Sonet. Consequently, LANscape is an
ideal integrated video application over SONETLYNX. With LANscape, there is no
need for a Multipoint Conferencing Unit (MCU) to videoconference with more than
one person. Multipoint conferencing is inherent in the LANscape software.
VuBridge
The VuBridge gateway and conference manager is a hardware and software
product that allows LANscape users to communicate with H.320 ISDN systems.
VuBridge provides the translation between compression algorithms and the network
bridging that is needed to convert the LAN IP packets to an H.320 encoded ISDN
stream and vice versa.
Panorama
Panorama is a desktop video communications product that communicates
over ISDN telephone lines and uses the standard H.320 protocol to communicate
with other users whose hardware supports the same standard.
Digital Signal Processing (DSP) Products and Design Center
The DSP Design Center at DNA Enterprises, Inc. ("DNA"), a wholly owned
subsidiary, specializes in the design and development of state-of-the-art
products that span the spectrum from the most demanding multiprocessor signal
processing applications to low cost telecommunications applications. Based on
industry-leading devices such as the Texas Instruments `C80, and `C6x, DNA
provides product designs to meet specific customer needs and incorporate
standard bus architectures such as PCI, VME, and ISA, as well as embedded
designs. The major focus of the DSP Design Center is creating custom DSP
solutions. By leveraging DNA's broad technology experience, product development
effort is reduced, which, in turn, reduces development risk.
In 1996, the Design Center unveiled powerful PCI and VME multiprocessor
boards based on the Texas Instruments TMS320C80. These products run at speeds up
to 60 MHz which makes them industry leaders in terms of performance and
flexibility. In October 1997, the Company announced its agreement with Texas
Instruments ("TI") to design key products using TI's revolutionary TMS320C6x
digital signal processor circuits. Under terms of the agreement, the DSP Design
Center will design two `C6x based evaluation modules (EVM's) for TI and TI will
license software from DNA. These products are targeted for general release by TI
in 1998 and are designed to showcase the capabilities of TI's flagship DSP line
for applications that include telecommunications, industrial control, medical
instrumentation, radar, and imaging. DNA retains rights to manufacture and
market the products, and derivative products, worldwide. The Design Center is
also developing products incorporating 'C6x DSPs for third party customers.
4
5
CS4 Intelligent Programmable Telecommunication Switching Platform
The Company is developing an intelligent, programmable switching
platform, known as the CS4, for applications in public and private
telecommunications networks as an adjunct processor, intelligent peripheral,
enhanced services platform or as a combination of these elements in a single
switch. The CS4 is intended to enable service providers to create and offer
enhanced services faster and at lower cost than current alternative methods.
Examples of enhanced services are: voice messaging, conferencing on demand,
international call back, pager notification, single number services, and
Internet telephony gateway.
The CS4 platform employs fully distributed multichannel DSP technology
and processors in order to provide an exceptionally high processing power per
port. The CS4 eliminates traditional switch blocking by using separate redundant
packet buses and the assignment of discrete time slots. The scalable
architecture is targeted to expand from an initial 2,000 ports to 64,000 ports.
Unique to the CS4, all ports support unrestricted, simultaneous activity, such
as common signaling protocols, call progress tone detection, Signaling System 7,
and ISDN. Additional non-traditional capabilities include processing every call
as a conference and voice record and play-back at the port level without
peripheral equipment. Incorporating a powerful service creation environment, the
CS4 is intended to reduce development, testing, and deployment time for new and
enhanced services.
The currently planned initial application for the CS4 platform is a
network based, multi-party conferencing service designed to be internet
activated and managed by subscribers without requiring network operator
assistance. Completion of the CS4 development program and the definition and
introduction of CS4 applications is expected to be a function of the Company's
activity to put in place a joint venture arrangement for such purposes with
potential investment, distribution, and/or marketing partners.
S4 Air Traffic Control Switches
The Company designs, manufactures, and sells the S4 Special Services
Switching System, a digital voice/data switch used primarily for mission
critical applications such as air traffic control, air defense, and
teleconferencing. The S4 system offers a unique peer-to-peer multiple processor
architecture allowing all subscriber channels to be conferenced together
simultaneously connecting a wide range of devices including telephones, radios,
and communications consoles.
ENGINEERING SERVICES
DNA Enterprises, Inc. (DNA) provides clients worldwide with consulting
engineering services and turnkey product development in signal processing,
communications, and multimedia (voice, data, and video). DNA's staff of
engineers has extensive expertise in hardware, software, systems architecture,
and digital signal processing. DNA combines these core technological
capabilities with a rigorous project management process to deliver high quality
results on-time and on-budget. The customer base ranges from start-ups to
Fortune 500 technology companies. DNA's areas of established expertise include:
o Digital Signal Processing Technology
o Switching and Transport Systems
o Computer Telephony Integration (CTI)
o Embedded Systems
o Telecom Management Network (TMN)
o Intelligent Network Architectures
o Video/Image Processing
o Service Creation Environments (SCE)
o Wireless Systems
o International Product Localization
o Data Communications
o Advanced Voice Processing
5
6
MARKETS AND CUSTOMERS
Fiber Optic Network Transmission Products
The Company markets its SONETLYNX network transmission product directly
and through representatives and distributors. The current sales structure
includes 25 distributors, system integrators, and resellers, up from seven at
the beginning of 1997. During 1997, the Company's largest distributor, reselling
to customers in the Republic of Korea, was responsible for 85% of SONETLYNX
sales. SONETLYNX is targeted for markets and applications where multiple
protocol communication mandates the capacity and reliability of fiber, further
strengthened by redundancy of critical components and architecture. Target
markets include corporate/enterprise networks, utilities, airports,
transportation, security services, prisons, health services, academia, and local
and state government, as well as public and private bypass networks.
Video Communication Products
The Company generally markets its video communication products through Value
Added Resellers that specialize in IP-based products that expand network
bandwidth. The Company believes that the key target markets for its
videoconferencing products are businesses that are geographically dispersed,
particularly Fortune 1000 companies and educational and government institutions.
In the last two months of 1997, over 200 desktop systems were shipped to a
variety of customers worldwide. LANscape has attracted over 30 partners and
resellers worldwide including Cabletron Systems, Thomson Network Enterprises,
Newbridge Networks and Hughes Data Networks. With an applications-based
approach, the Company is working with each partner to develop business plans for
marketing LANscape to multi-national customers. Initial installations include
major federal agencies, university telemedicine sites and large corporate
customers.
DSP Products and Services
The Company generally markets its advanced information technology
products and services through direct selling to existing customers and new
prospects, enhanced by participation in trade shows. Markets for advanced
technology products and services include internationally known
telecommunications switching companies, telecommunications network providers,
and hardware and software companies desiring to develop or enhance products for
telecommunications markets.
CS4 Intelligent Programmable Telecommunications Switches
The initial target markets and customers for the CS4 are expected to
include Interexchange Carriers, Local Exchange Carriers, and Wireless/PCS
providers. A network conferencing product (using an Internet-activated and
managed user interface) is planned as the initial application.
S4 Air Traffic Control Switches
The Company generally markets its S4 switching products through system
integrators and directly through its own sales force.
COMPETITION
The market for the Company's products and services is intensely
competitive and rapidly changing. The Company competes, or may in the future
compete, directly or indirectly for customers in the following categories of
products and companies: (i) network transmission product manufacturers such as
Lucent Technologies Corp., Northern Telecom, Ltd., and Positron Fiber Systems;
(ii) video conferencing H.320/323-based product manufacturers such as VCON
Corp., First Virtual Corp., VTEL Corp., PictureTel Corp., and Intel's ProShare
Video System; (iii) programmable switch manufacturers such as Excel Switching
Corp. and Summa Four, Inc., and (iv) voice-data switch manufacturers such as
Thomson CSF, Inc., Denro, Inc., and Frequentis., Ltd. The Company believes that
the principal competitive factors affecting the markets for its products and
services include effectiveness, scope of product offerings,
6
7
technical features, ease of use, reliability, customer service and support,
distribution channels and price. Certain competitors have greater resources than
the Company and, accordingly, may have a competitive advantage in selling and in
product development.
MANUFACTURING
The basis of the Company's manufacturing strategy is to identify and
use the appropriate technology to obtain the most favorable combination of
quality and end product cost.
The Company's manufactured products consist largely of assembled
printed circuit boards. These are sold either as stand-alone products (such as
LANscape) or as larger assembled systems (such as SONETLYNX).
As the Company's product lines expand and mature, the Company expects
to increase manufacturing capacity by means that could include adding employees,
expanding current facilities, leasing or purchasing additional facilities or
equipment, and expanding and adding outsourcing relationships. Some or all of
the space and equipment needs in 1998 may be satisfied in conjunction with joint
venture arrangements. See ITEM 2 - Properties.
The Company buys a fiber optic interface card, for the SONETLYNX OC-3
product, from a small company which is the sole source for the component. The
Company also buys a video codec card, used in SONETLYNX video applications, from
another small company which is the sole source. Delays in delivery of either
component would restrict the Company's ability to increase sales. In the event
either vendor fails to meet commitments, the Company intends to rely on its
in-house manufacturing capabilities. However, the conversion to in-house backup
supply would not be without some interruption and may increase cost.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
While the Company relies on a combination of patent, copyright,
trademark and trade secret laws, and confidentiality procedures to protect its
proprietary rights, the Company believes that factors such as technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition, and reliable product manufacturing are more
essential to establishing and maintaining a technology leadership position. The
Company currently has two United States patents relating to audio conferencing
technology and has currently pending patents relating to the CS4 product, video
communications, Internet communications, and a system to handle simultaneous
voice and data communications. "SONETLYNX(R)," "INTELECT(R)," "S4(R)," and
"Special Services Switching System(R)" are registered trademarks of the Company
and "LANSCAPE(TM)," "VISIONARY(TM)," "VUBRIDGE(TM)," and "PANORAMA(TM)" are
trademarks of the Company in the United States. According to federal and state
law, the Company's trademark protection will continue for as long as the Company
continues to use its trademarks in connection with the products and services of
the Company. The Company seeks to protect its software, documentation, and other
written materials under trade secret and copyright laws, which afford only
limited protection.
In connection with the acquisition of DNA Enterprises and Intelect
Visual Communications (IVC), and transactions with certain individuals, licenses
were acquired to support the development of SONETLYNX, video conferencing, and
DSP products. The Company also incorporates third-party licenses into its
products. In connection with the acquisition of IVC, certain assets and
licenses, which constituted the design of a video conferencing product, were
purchased from a major computer company. The design proved to be flawed. In
November 1997, the Company executed an amended technology license agreement with
the computer company, pursuant to which future royalty payments, if any, will be
contingent on sales of defined products. The defined products do not include the
LANscape 2.0 product line.
Litigation may be necessary to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, financial condition, or results of
operations.
7
8
In common with many companies in the telecommunications industry, the
Company has received notice that it may be infringing on certain intellectual
property rights of others. These claims have been referred to counsel for
evaluation. In connection with such claims or actions asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights, if necessary. There can be no assurance, however,
that a license will be available under reasonable terms or at all. In addition,
the Company could decide to litigate such claims, which could be expensive and
time consuming and which could have materially adverse effects on the Company's
business, financial condition, or results of operations.
EMPLOYEES
The Company had 365 full-time employees at December 31, 1997, of which
162 were engaged in engineering and development, 71 were engaged in sales,
marketing, and customer support, 99 were engaged in manufacturing operations,
and 33 were engaged in administration and finance. None of the Company's
employees is represented by a labor union. The Company has experienced no
material work stoppages and believes its relations with its employees to be
good.
GOVERNMENT REGULATION
The telecommunications industry, including many of the Company's
customers, is subject to regulation from Federal and state agencies, including
the FCC and various state public utility and service commissions. Similar
regulatory structures exist in most countries outside the USA. While such
regulation does not affect the Company directly, the effects of such regulations
on the Company's customers may, in turn, adversely impact the Company's business
and results of operations. For example, FCC regulatory policies, affecting the
availability of services and other terms on which telecommunications service
providers ("Telcos") conduct their business, may impede the Company's
penetration of certain markets. Current FCC regulations restrict Telcos' ability
to charge their customers based on access cost to local subscribers and may
affect the timing of Telcos' investment in the Company's technology. These FCC
regulations and policies are under continuous review by the federal government
and the courts and are subject to change. Although many FCC restrictions on
providing services in previously restricted markets have been eliminated or
modified, the failure to change, or a substantial delay in changing, the
existing restrictions on Telcos may materially adversely affect their demand for
products based upon the Company's technology.
The Telecommunications Act of 1996 removed certain restrictions
relating to the Regional Bell Operating Companies. The Company believes that
this has created and will continue to create increased competition in the
markets served by the Company's products.
In addition, the Company's business and operating results may also be
adversely affected by the imposition of certain tariffs, duties and other import
restrictions on components that the Company obtains from non-domestic suppliers
or by the imposition of export restrictions on products that the Company sells
internationally. The governments of many other countries actively promote and
create competition in the telecommunications industry. Changes in current or
future laws or regulations, in the United States or elsewhere, could materially
and adversely affect the Company's business and results of operations.
8
9
ITEM 2 - PROPERTIES
All of the Company's facilities are leased. The facilities are in
Richardson, Texas, New York, New York, and London, England. The Company's
principal operations are serviced from four leased facilities in Richardson,
Texas, (comprising 103,000 square feet) and one in New York (comprising 20,000
square feet). These facilities include manufacturing, engineering, sales,
marketing, and administrative offices. All of the Company's manufacturing
operations are located in a 28,000 square foot Richardson, Texas facility. The
Company moved its headquarters from Hamilton, Bermuda to Richardson, Texas in
March 1997.
The Company believes these facilities, which total 124,000 square feet,
are adequate for its present needs. However, the Company expects it will require
additional space in 1998 and beyond for sales, manufacturing, and assembly
activities. Some or all of the additional space needs in 1998 may be satisfied
in conjunction with joint venture arrangements.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in various legal proceedings and claims arising
in the ordinary course of business.
Intelect (Bermuda) is contingently liable for certain potential
liabilities related to its discontinued operations. Specifically, under a stock
purchase agreement dated October 3, 1995 ("1995 Agreement"), Intelect (Bermuda)
agreed to indemnify Savage Sports Corporation, the purchaser of Savage Arms,
Inc. (a manufacturer of fire arms), for certain product liability, environmental
clean-up costs and other contractual liabilities, including certain asserted
successor liability claims. One of the liabilities assumed involves a firearms
product liability lawsuit filed by Jack Taylor individually and as father of
Kevin Taylor in Alaska Superior Court (the "Taylor litigation"). Intelect
(Bermuda) is informed that a defendant in the Taylor litigation, Western Auto
Supply Co., settled the lawsuit for $5 million and, in turn, has asserted a
third-party claim against Savage Arms, Inc. for indemnification in the amount of
the settlement plus attorneys' fees and related costs. Savage Arms has asserted
defenses to the claims and Intelect (Bermuda) believes additional defenses may
be available. Based on the information available to date, it is impossible to
predict the outcome of this litigation or to assess the probability of any
verdict.
Intelect (Bermuda) also has been notified that Savage Sports
Corporation seeks indemnification under the 1995 Agreement in connection with
certain other product liability claims. Most notably, Intelect (Bermuda) has
undertaken the defense of a lawsuit filed against Savage Arms, Inc. by Emhart
Industries, Inc. ("Emhart") in the United States District Court for the District
of Massachusetts (the "Emhart litigation"). In the lawsuit, Emhart requests
indemnification from Savage Arms, Inc. under an agreement Emhart allegedly
executed in 1981 with Savage Industries, Inc., claiming that Savage Arms, Inc.
is a successor to Savage Industries, Inc. To date, Emhart has claimed
indemnification of approximately $2.2 million for five lawsuits it has defended
or settled and also seeks a declaratory judgment that it is entitled to
indemnification for losses and expenses related to firearms product liability
actions which may be filed against Emhart in the future. Intelect (Bermuda)
intends to assert additional defenses. The parties are in discovery and Intelect
(Bermuda) cannot at this time predict the outcome of the litigation.
In the event the Taylor litigation and/or Emhart litigation were to be
resolved adversely to Intelect (Bermuda), there would be a material adverse
effect on the Company's financial condition and results of operations. See Note
20 to the Consolidated Financial Statements.
9
10
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 4, 1997, Intelect (Bermuda) held a Special Meeting of
Shareholders. At the special meeting, the shareholders approved a merger
proposal, the principal effect of which was to change the domicile of Intelect
(Bermuda) so that it became a publicly traded U.S.-domiciled, Delaware
corporation (the "Reorganization"). The Reorganization was effected pursuant to
an Agreement and Plan of Merger by and among Intelect (Bermuda), the Company
(which was wholly owned by Intelect (Bermuda) prior to the merger), and Intelect
Merger Co., a Delaware corporation which was wholly owned by the Company prior
to the merger ("Intelect Merger Co."). As a result of the merger, Intelect
Merger Co. was merged into Intelect (Bermuda), and each share of Intelect
(Bermuda) was automatically converted into the right to receive one share of the
Company. Further, any outstanding options issued pursuant to stock option plans
of Intelect (Bermuda) became options to purchase common stock of the Company,
and outstanding warrants of Intelect (Bermuda) became warrants to purchase
common stock of the Company. The effect of the Reorganization was that the
shareholders of Intelect (Bermuda) became shareholders of the Company with the
Company becoming the publicly traded company. In addition, the Company became
the holding company for Intelect (Bermuda) and replaced Intelect (Bermuda) as
the holding company for its subsidiaries.
The Reorganization and the transaction consummated in connection
therewith were approved by the vote of common stock holders of 10,176,258 for,
429,751 against, and 25,416 abstentions and by the vote of preferred stock
holders of 100% for.
10
11
PART II
ITEM 5 - MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded in the over-the-counter
market and is listed on the Nasdaq National Market under the symbol "ICOM." The
high and low bid prices for the Company's common stock for each full quarter of
the last two fiscal years, as reported on Nasdaq, are as follows:
High Low
---- ---
1st quarter 1996 - period ended March 31, 1996 5.625 4.50
2nd quarter 1996 - period ended June 30, 1996 15.375 5.3125
3rd quarter 1996 - period ended September 30, 1996 11.75 6.625
4th quarter 1996 - period ended December 31, 1996 8.125 4.25
1st quarter 1997 - period ended March 31, 1997 5.125 1.875
2nd quarter 1997 - period ended June 30, 1997 4.625 1.375
3rd quarter 1997 - period ended September 30, 1997 11.50 4.25
4th quarter 1997 - period ended December 31, 1997 11.313 3.1875
The Company believes that as of March 13, 1998, its outstanding shares
of common stock are held by approximately 8,200 owners of record.
The closing bid price of the common stock on the Nasdaq National Market
on March 27, 1998, was $7.0625.
DIVIDEND POLICY
No cash dividends were paid by the Company during fiscal 1995, 1996, or
1997. The Company does not currently plan to pay any dividends on common stock
in the foreseeable future. The Company is restricted by its agreements with
lenders and the holders of certain of its preferred stock from any payment of
dividends on common stock and from the payment of dividends on preferred stock
except dividends payable with common stock. These restrictions remain in effect
for so long as any balance remains payable on the debt or such preferred stock
remains outstanding. See Note 25 to the Consolidated Financial Statements.
RECENT SALES OF UNREGISTERED SECURITIES
On December 17, 1997, the Company completed the sale of $4 million of
10% Cumulative Convertible Preferred Stock, Series B to the Navesink Equity
Derivative Fund LDC ("Navesink"). Navesink purchased 914,286 shares of the
preferred stock at a price of $4 3/8 per share for an aggregate offering price
of $4 million. The Company received net proceeds from the sale of $3,877,000,
after deducting $123,000 of issuance costs. The offering was not underwritten
and was made in reliance on the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended. The preferred stock has a 10%
annual dividend rate on the $4 3/8 per share liquidation preference, payable
quarterly beginning on March 31, 1998. The Company has the choice of paying
dividends in cash or in shares of common stock based on the current market value
of the common stock at the time the dividends are payable. Beginning on May 31,
1998, 50% of the preferred stock is convertible by Navesink into common stock of
the Company with the remaining 50% being convertible on June 30, 1998. The
number of conversion shares issuable upon conversion is equal to the greater of
(i)the number of shares of preferred stock being converted multiplied by 1.10,
or (ii) the number of shares of preferred stock multiplied by a number, the
numerator of which is $4.375 and the denominator of which is 0.85 multiplied by
the average daily closing market bid price for the common stock of the Company
as quoted on the Nasdaq National Market System for
11
12
the previous five consecutive trading days from the date of the notice of
election of conversion. The common stock issuable on conversion will be
restricted and not transferable except pursuant to an effective registration
statement or pursuant to an applicable exemption under the Securities Act of
1933. The Company has granted to Navesink the right to demand registration of
the common stock issued upon conversion of the preferred stock, in certain
circumstances. The preferred stock is not transferable by Navesink, has no
voting rights except in the event of three quarters arrearage on quarterly
dividends, and has no preemptive rights. Navesink has the right, subject to the
rights of the other holders of preferred shares ranking on parity with the
preferred stock, to participate in certain other private equity and debt issues
of the Company. The Company may redeem the preferred stock at any time at the
greater of $5.25 per share or the average closing market bid price of Company
common stock for five consecutive trading days prior to the date of redemption.
In December 1997, a group of directors, officers and employees of the
Company loaned up to $710,000 to the Company. Interest accrues on such loans at
the prime rate plus 3%. The loans are due on demand and may be paid, at the
option of the holder, in the form of common stock of the Company. The conversion
price for such common stock is $5.25 per share. See Note 10 to the Consolidated
Financial Statements.
Effective January 27, 1998, the Company issued to Amerix Electronics,
Inc. ("Amerix") 150,000 shares of common stock of the Company as prepayment for
certain commissions payable to Amerix by Intelect Network Technologies Company
("INT"), a wholly owned subsidiary of the Company pursuant to the terms of a
Sales Representative Agreement ("Agreement") dated as of January 27, 1998,
between INT and Amerix. The Agreement provides that the shares are issued in
full and final payment of all commissions due to Amerix earned from the period
beginning on January 1, 1998, in anticipation of $30 million of sales of
products of the Company by Amerix. The securities were issued to Amerix by the
Company pursuant to an exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended.
As disclosed in the Form 8-K of the Company filed February 17, 1998,
the Company completed $25 million of financings by closing on February 9, 1998,
a $10 million private placement of its Series C convertible preferred stock and
by closing on February 12, 1998, a $15 million credit facility. See Note 25 to
the Consolidated Financial Statements and ITEM 7 - Management's Discussion and
Analysis.
12
13
ITEM 6 - SELECTED FINANCIAL DATA
The following tables set forth certain historical consolidated financial
data for the Company.
Two months
YEARS ENDED DECEMBER 31, ended Years ended October 31,
------------------------ December 31, -----------------------
1997 1996 1995 1995 1994 1993
---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS: ($ Thousands Except Per Share Data)
Net revenues $ 37,777 $ 9,352 $ 734 $ 2,030 $ -- $ --
-------- -------- -------- -------- -------- --------
Operating loss (17,642) (33,638) (2,943) (4,652) (558) (572)
-------- -------- -------- -------- -------- --------
Loss from continuing operations (19,743) (42,983) (2,776) (5,194) (538) (446)
Income from discontinued
operations (1) -- -- -- 3,546 3,410 1,517
Income (loss) on disposal of
discontinued operations (1) (498) (56) (236) 13,824 -- --
Income (loss) before
extraordinary item $(20,241) $(43,039) $ (3,012) $ 12,176 $ 2,872 $ 1,071
-------- -------- -------- -------- -------- --------
Income (loss) available to common
stockholders $(20,798) $(43,039) $ (3,012) $ 12,822 $ 2,872 $ 1,071
======== ======== ======== ======== ======== ========
BASIC AND DILUTED INCOME (LOSS) PER
SHARE:
Continuing operations $ (0.99) $ (3.32) $ (0.24) $ (0.47) $ (0.05) $ (0.05)
======== ======== ======== ======== ======== ========
Discontinued operations $ (0.02) $ (0.01) $ (0.02) $ 1.57 $ 0.34 $ 0.16
======== ======== ======== ======== ======== ========
Extraordinary item -- -- -- $ 0.06 -- --
======== ======== ======== ======== ======== ========
Net income (loss) for period $ (1.01) $ (3.33) $ (0.26) $ 1.16 $ 0.29 $ 0.11
======== ======== ======== ======== ======== ========
Weighted average shares (thousands) 20,558 12,943 11,385 11,024 9,942 9,539
======== ======== ======== ======== ======== ========
DECEMBER 31 October 31
------------------------- --------------------------------------------
1997 1996 1995 1995 1994 1993
---- ---- ---- ---- ---- ----
BALANCE SHEET: ($ Thousands)
ASSETS:
Current assets $25,552 $11,594 $19,957 $24,587 $ 2,599 $ 1,049
Excess of cost over assets of
companies acquired 13,249 14,573 8,685 9,349 -- --
Net assets of discontinued operations -- -- -- -- 9,573 7,207
Other long-term assets 10,430 9,269 2,597 1,786 -- --
======= ======= ======= ======= ======= =======
Total assets $49,231 $35,436 $31,239 $35,722 $12,172 $ 8,256
======= ======= ======= ======= ======= =======
LIABILITIES & SHAREHOLDERS' EQUITY:
Current liabilities including
current maturities of long-term debt $22,939 $ 9,810 $ 5,331 $ 7,091 $ 269 $ 175
Long-term liabilities 143 17,895 368 365 -- --
Shareholders' equity 26,149 7,731 25,540 28,266 11,903 8,081
======= ======= ======= ======= ======= =======
$49,231 $35,436 $31,239 $35,722 $12,172 $ 8,256
======= ======= ======= ======= ======= =======
(1) See Note 9 to the Consolidated Financial Statements under ITEM 8
13
14
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Results of continuing operations in 1997 and 1996 consist of:
o the fiber optic multiplexer and special services switch
businesses of Intelect Network Technologies Company ("INT") from
its April 24, 1995 acquisition,
o the engineering services business of DNA Enterprises, Inc.
("DNA") from its February 13, 1996 acquisition,
o the video conferencing system business of Intelect Visual
Communications Corp. ("IVC") from its March 29, 1996 acquisition,
and
o the information security business of Intelect Europe Limited
("IEL") from its August 31, 1995 acquisition until its
liquidation in January 1997.
During the year ended October 31, 1995, the Company was engaged in the
manufacturing and marketing of sporting arms, through its subsidiary Savage
Arms, Inc. ("Savage"). The results of operations of Savage are accounted for as
discontinued operations due to the sale of Savage on October 31, 1995. The
Company's fiscal year was changed to December 31 in 1995.
Accordingly, due to the disposition of Savage, the change in fiscal
year, and the schedule of acquisitions above, any comparison of financial
results of 1996 to 1995 would not be meaningful to determine a trend.
The following table shows the revenue and gross profits for the
Company's products:
Years Ended Two Months Ended Year Ended
December 31 December 31 October 31
------------------------------------------------------------------------------
1997 1996 1995 1995
------------------------------------------------------------------------------
($ Thousands)
Revenue:
Fiber optic multiplexers $ 26,250 430 -- --
Engineering services and DSP 8,909 4,413 -- --
Video conferencing 636 172 -- --
Voice switching and other 1,982 4,337 734 2,030
------------------------------------------------------------------------------
$ 37,777 9,352 734 2,030
------------------------------------------------------------------------------
Gross profit (loss):
Fiber optic multiplexers $ 12,035 (625) -- --
Engineering services and DSP 2,287 964 -- --
Video conferencing 41 (826) -- --
Voice switching and other (112) (2,134) (643) (538)
------------------------------------------------------------------------------
$ 14,251 (2,621) (643) (538)
------------------------------------------------------------------------------
14
15
REVENUES
Revenues in 1997 increased 304% over 1996 due to large scale
installation of SONETLYNX products in foreign and domestic markets and due to
the near doubling of the DNA engineering services business.
The SONETLYNX fiber optic multiplexer was delivered to five end-user
customers in Korea, to a private network project on the Alyeska pipeline, and to
other applications such as "smart" highways and municipal networks for video
arraignment. Due to a low base of sales in 1996, the percentage increase is not
a reasonable indicator of the future. Sales in 1997 included $22,380,000 of
multiplexer products delivered for installation in Korean networks for
telecommunications, banking, and other applications. See Note 23 to Consolidated
Financial Statements. In light of the difficulties which developed in general in
Korean and other Asian financial markets at year end, the outlook for
continuation of sales in those areas has become uncertain. The Company has
shipped $122,000 of product to Korean customers between December 31, 1997 and
March 20, 1998. The Company's outlook for sales to non-Korean customers,
especially in the U.S., is based on outstanding proposals and prospects of the
Company and its distribution partners. There can be no assurance that such
proposals and prospects will result in orders and revenues.
Engineering service revenues of DNA increased 99% in 1997 over 1996.
DSP product in the amount of $277,000 was shipped in 1997 compared to $81,000 in
1996. The Company does not expect the growth of services revenue to continue at
the same rate. DSP product shipments may increase significantly, depending on
customer reception to the Company's designs and proposals and the funding of
projects into which the products are specified.
Video conferencing product revenues increased from a sampling level in
1996 to $636,000 in 1997. The growth of the product was delayed by a decision to
discontinue the original licensed technology in favor of a new proprietary
design based on wavelet technology. The resultant new product was launched in
November 1997.
Sales of S4 and predecessor products were $1,575,000 in 1997, compared
to $2,200,000 in 1996. Since the S4 serves a limited market, prospects are
uncertain for future sales increases. Other revenues in 1996 and late 1995
include information security products sold primarily to the UK military market.
These products were phased out in 1996.
GROSS PROFIT (LOSS)
Gross profit increased to $14,251,000 from a loss of ($2,621,000) in
the years ended December 31, 1997 and 1996, respectively. The largest
contribution to the improvement came from SONETLYNX fiber optic multiplexer
products which achieved design stability and economic production levels in the
second half of 1997. Due to the interruption or delay of substantial shipments
to Korean customers at the beginning of 1998, the level of margin contribution
by the fiber optic products is uncertain in the near future. The potential for
sales to non-Korean customers could offset the effect of lower sales to Korean
customers. However, there can be no assurance that such revenue and margin will
materialize.
Gross profit contribution by the engineering services business
increased in 1997, due primarily to the increase in revenue.
Video conferencing products made a minor contribution to the total
gross profit in both 1997 and 1996 due to the low sales level in both years,
reflecting new product introductions in each year.
The loss on S4 switching products was reduced in 1997 due to the
completion of certain loss contracts initiated in prior years.
Approximately $675,000 of under-absorbed manufacturing overhead costs,
substantially all attributable to SONETLYNX, were incurred to prepare for the
large manufacturing growth rate during the year.
15
16
ENGINEERING AND DEVELOPMENT (E&D) EXPENSES
E&D expense increased to $11,899,000 in 1997 from $8,719,000 in 1996.
As a percentage of revenues, the expense declined to 31% from 93%. Spending in
1997 on CS4 and approximately $2,000,000 of other E&D spending was dedicated to
product development for which revenues were not realized during the year. In
both years, certain amounts of software development costs were capitalized.
Including those amounts, gross spending on E&D increased to $13,216,000 from
$10,114,000. Gross spending by product line was distributed as follows:
Years Ended December 31
-----------------------
1997 1996
---- ----
($ Thousands)
Fiber optic multiplexer 6,400 2,857
CS4 3,816 5,565
Video conferencing 1,443 954
DSP, S4, and other 1,557 738
13,216 10,114
---------- ----------
The SONETLYNX fiber optic multiplexer product line was developed in
1996 with the following core components: an OC-1 controller, 8 channel voice
modules with FXS, FXO, and 4 wire E&M, 4 channel T1 async, 2 channel low speed
data supporting four protocols, and a ring generator. The product line was
enhanced during 1997 by the addition of: an OC-3 controller, 8 channel voice, 4
channel T1, and low speed data modules that can be configured for OC-3 or OC-1
operation, 4 channel E1 async, 7 channel T1 byte sync, video module with
encoder/decoder, a module combining precision timing sources with a single voice
channel, and an OC-1 multipoint ethernet module. As a consequence of these
developments, the SONETLYNX product line has become a powerful and cost
effective solution to the customer problem of access to fiber networks where
many protocols are required.
The CS4 product was developed to a working prototype stage in 1996 and
further developed and upgraded in 1997 to support the call capacity requirements
of targeted market segments and anticipated applications.
Spending on the video conferencing product in 1996 led to the emergence
of a viable product built on purchased technology. In 1997, the product was
redesigned around wavelet technology in order to deliver key performance
features not otherwise achievable, namely, superior picture quality, application
flexibility, and selectable bandwidth requirements.
In 1996, two standard DSP board-level products were developed using the
Texas Instruments TMS320C80. In 1997, two DSP board-level products based on the
Texas Instruments TMS320C6201 were developed. Spending on the S4 product line in
both years led to the completion of an improved console for air traffic control
applications.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses were $18,671,000 and $14,601,000 in
the years ended December 31, 1997 and 1996. Selling expense increased to
$11,213,000 from $6,412,000. The increase in 1997 was attributable to market
development activity for SONETLYNX and LANscape products and higher revenues for
SONETLYNX. As a percentage of revenues, selling expense declined to 30% from
69%. Administrative expenses declined to $7,458,000 from $8,189,000 partly due
to the removal of corporate headquarters from Bermuda.
16
17
ASSET WRITE DOWNS
In connection with the acquisition of IVC, certain assets and licenses,
which constituted the design of a videoconferencing product, were purchased from
a major computer company. The design proved to be flawed and market introduction
was delayed approximately nine months. In 1996, the Company deemed the
recoverability of IVC goodwill to be significantly impaired by the delay in
introduction of the product to a rapidly changing market and accordingly reduced
the carrying value of IVC goodwill by $4,175,000 (its remaining unamortized net
book value at the time) and wrote off $51,000 of fixed assets deemed of no
value.
The Company's assessment of the future prospects for the information
security products business in the United Kingdom led to a complete shut down of
those operations in Chesterfield, England at the end of 1996. In January 1997,
liquidation proceedings began. The Company was an unsecured creditor of IEL and
wrote off all net assets related to those operations in England in the amount of
$1,807,000.
INTEREST EXPENSE
Interest expense of $2,863,000 and $9,911,000 in the years ended
December 31, 1997 and 1996 consist of:
Years Ended December 31
-----------------------
1997 1996
---- ----
($Thousands)
Interest on debt instruments 930 704
Non-cash financing costs 1,721 7,534
Other costs of financing 199 1,571
Other interest 13 102
----- -----
2,863 9,911
Interest on debt instruments in 1997 was primarily attributable to amounts
borrowed from St. James Capital Corp., two series of convertible debentures, and
the Coastal Trust. In 1996, the interest was attributable to three series of
convertible debentures.
Non-cash financing costs in 1997 were the result of warrants to purchase common
stock issued in connection with various financings. The reported expense amount
is the value of the warrants determined by using the Black-Scholes pricing
model. In 1996, in addition to $2,942,000 of warrant values, $4,592,000 of
reportable expense was attributable to a beneficial conversion feature of the
convertible debentures.
Other costs of financing consist primarily of legal and placement fees.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
The Company sold Savage Corporation (and its subsidiaries, including
Savage Arms, Inc.) ("Savage") on October 31, 1995. The results of Savage are
accounted for as discontinued operations and, accordingly, comparative
presentations reflect the Company's equity in the earnings of Savage for the
relevant periods. The gain on the disposition of Savage occurred in the fourth
quarter of 1995. Losses since October 1995 represent legal expenses in
connection with the indemnity agreement with Savage Sports Corporation. See ITEM
3, Legal Proceedings.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems to identify
the systems that could be affected by the "Year 2000 Problem," the result of
computer programs using two digits rather than four to define the year portion
of dates. The Company has determined that no significant systems fail to comply
with the ability to distinguish the year 2000 from the year 1900. The financial
impact of Year 2000 compliance has not been and is not anticipated to be
material to the Company's financial position or results of operations in any
given year.
17
18
LIQUIDITY AND CAPITAL RESOURCES
In the year ended December 31, 1997, cash used in operations,
($24,852,000), and by investing activities, ($5,343,000), were funded by using
$2,769,000 of available cash balances and by securing new financing, net of
repayments, of $27,426,000.
Operating Activities
Net cash used in operations consisted of the $20,241,000 net loss and
the $10,843,000 net increase in current assets, offset by $6,232,000 of non-cash
charges. As previously discussed, the net loss primarily reflects commitments to
support new product development and to fund selling and manufacturing
infrastructure development.
o Accounts receivable increased $13,242,000 as required by the much
higher level of sales and due to the length of payment schedules
tied to major project installations and customer acceptance
procedures.
o Inventory increased $3,311,000 generally in line with the
increased rate of product shipments.
o Use of cash for accounts receivable and inventory growth was
offset by the $5,875,000 increase in payables and accruals which
grew in concert with the current assets.
o The cash effect of the net losses was mitigated by inclusion of
$3,412,000 of depreciation and amortization of intangible assets
and $1,920,000 of amortization of deferred financing costs.
Investing Activities
Investment spending included capital expenditures of $2,993,000 for
fixed asset additions, primarily equipment for product testing and
manufacturing, leasehold improvements, and computer equipment and software to
support engineering and administrative activities. Software development costs of
$1,317,000 were capitalized following establishment of feasibility of certain
SONETLYNX modules. No software cost was capitalized after September 1997.
Financing Activities
Cash used in operating and investing activities in 1997 were primarily
financed by the following:
o $6,000,000 borrowed from St. James Capital Corp., due March 27,
1998
o $5,000,000 borrowed from The Coastal Corporation Second Pension
Trust ("Coastal Trust"), later converted to Series A preferred
stock
o $4,911,000 from the sale of Series A preferred stock to Coastal
Trust
o $1,455,000 from the exercise by Coastal Trust of a warrant to
purchase 750,000 shares of common stock
o $3,000,000 borrowed from Coastal Trust, due March 27, 1998
o $135,000 from the exercise by Lifeline Industries, Inc. of a
warrant to purchase 30,000 shares of common stock
o $300,000 from the exercise by St. James Capital Corp. of a
warrant to purchase 150,000 shares of common stock
o $3,330,000 from the sale of 696,400 shares of common stock in
private placements
o $1,575,000 from the exercise of employee stock options
o $3,877,000 from the sale of Series B preferred stock to Navesink
Equity Derivative Fund, LDC
o $910,000 borrowed from employees and affiliates of the Company.
Recent Developments, Outlook, and Financial Strategy
In February 1998, two additional financings were arranged. $10,000,000
of Series C preferred stock was sold to Citadel Investment Group, LLC and a
$15,000,000 credit facility was arranged with St. James Capital, L.P. See Note
25 to Consolidated Financial Statements. $3,000,000 has been advanced under the
credit facility. The obligation to advance up to $15,000,000 expires after July
31, 1998. Although advances under the $15,000,000 facility may be used
18
19
to pay off the currently outstanding $6,000,000 and $3,000,000 notes due to St.
James Capital Corp. and Coastal Trust, respectively, so long as any of the
current obligations to St. James Capital Corp. and Coastal Trust are
outstanding, St. James Capital L.P. must approve additional advances for any
other purpose, which consent may not be unreasonably withheld. The Company's
ability to incur debt, pay dividends on its common and preferred stock and to
make certain investments and enter into certain transactions is governed by
covenants and provisions in its various debt instruments and by the terms of its
outstanding preferred stock, as described in Notes 10, 16, and 25 to
Consolidated Financial Statements. In addition to the external financings, the
Company has enhanced future cash flows by negotiating deferred payment
arrangements with former owners of DNA so that $2,050,000 formerly due on
February 13, 1998 is payable in various monthly amounts through December 1998.
The Company currently believes that the prudent approach to cash
planning should be predicated on a revenue pattern which declines in the first
quarter of 1998 and increases thereafter. Under such a scenario, the need for
inventory and receivable investment is moderated at the beginning of the year.
The credit facility with St. James Capital, L.P. is in place to pay the two debt
obligations maturing on March 27, 1998, if required. In order to offset the
impact of further investment in CS4 product development, the Company continues
to seek an investment, distribution, and/or marketing partner. Should the
difficulties in Korean markets continue, the Company believes that, considering
the number of prospects and the level of proposal activity, the opportunities
are good for replacing SONETLYNX sales concentrated with Korean customers. If,
nevertheless, revenues do not recover in the near term, then cost reduction
contingency plans are in place to preserve cash resources at lower levels of
sales. In the event the outlook for liquidity is stressed by production and
sales growth in excess of current plans, the Company believes the corporate
financial environment will support new financing needs.
Conclusion
Considering the financial resources available and potentially
available, the outlook for cash available from customer collections, the outlook
for cash uses in operations and investing, and the options available to control
spending, the Company believes it has, or reasonably has access to, the
financial resources to meet its business requirements through the current year.
The Company cannot assure, however, that the business results assumed in this
outlook will be realized, especially considering the near term impact of reduced
revenues from Korea. The Company cannot assure that profitability and positive
cash flow will be achieved when expected. If the Company's sales plans are not
achieved, operating losses and negative cash flows exceed the Company's
estimates, or capital requirements in connection with the design, development,
and commercialization of its principal products are higher than estimated, the
Company will need to raise additional capital. Although the Company believes it
could raise additional capital through public or private equity or debt
financings, if necessary, there can be no assurance that such financings would
be available, or available on acceptable terms. If such financing were not
available, the Company has determined that a significant reduction of
engineering, development, selling, and administrative costs would allow the
Company to continue as a going concern through 1998.
CONTINGENT LIABILITIES
As discussed in ITEM 3, Legal Proceedings, the Company is exposed to
certain contingent liabilities, which, if resolved adversely to the Company,
would adversely affect its liquidity, its results of operations and/or its
financial position.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE LIQUIDITY AND OPERATING RESULTS
This Form 10-K contains certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. The forward looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those expressed in, or implied by, the forward looking
statements. Factors that might cause such a difference include, but are not
limited to, those relating to: general economic conditions in the markets in
which the Company operates, including, in particular, the financial condition of
the Republic of Korea; success in the development and market acceptance of new
and existing products (particularly SONETLYNX, LANscape, and CS4); dependence on
suppliers, third party manufacturers and channels of distribution; customer and
product concentration; fluctuations in customer demand; maintaining access to
external sources of capital; ability to execute management's margin improvement
and cost control plans; overall management of the Company's expansion; and other
risk factors detailed from time to time in the Company's filings with the
Securities and Exchange Commission, including without limitation those set forth
in the Section entitled "Risk factors" in the Form S-4 of the Company filed on
October 30, 1997 and the Form S-3 of the Company filed on September 23, 1997.
19
20
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTELECT COMMUNICATIONS, INC, AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants................................................................ 21
Consolidated Balance Sheets....................................................................... 23
Consolidated Statements of Operations............................................................. 24
Consolidated Statements of Stockholders' Equity................................................... 26
Consolidated Statements of Cash Flows............................................................. 29
Notes to Consolidated Financial Statements........................................................ 31
Schedule II - Valuation and Qualifying Accounts................................................... 62
20
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: The Board of Directors and Shareholders of
Intelect Communications, Inc.
We have audited the accompanying consolidated balance sheet of Intelect
Communications, Inc. (a Delaware corporation) as of December 31, 1997, and the
related statements of operations in stockholders' equity and cash flows for the
year ended December 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Intelect
Communications, Inc. as of December 31, 1997, and the results of their
operations and their cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Dallas, Texas
March 27, 1998
21
22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Intelect Communications Systems Limited
We have audited the accompanying consolidated balance sheet of Intelect
Communications Systems Limited and its subsidiaries as of December 31, 1996 and
the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 1996, the two month period ended
December 31, 1995 and the year ended October 31, 1995. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedule for the year ended December 31, 1996. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Intelect
Communications Systems Limited and its subsidiaries as of December 31, 1996 and
the results of their operations and their cash flows for the year ended
December 31, 1996, the two month period ended December 31, 1995 and the year
ended October 31, 1995, in conformity with United States generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements, taken as a whole, presents fairly, in all material respects, the
information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the
Company has suffered recurring losses from continuing operations and is
dependent upon the successful development and commercialization of its products
and its ability to secure adequate sources of capital until the Company is
operating profitably. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with regard to these
matters are also described in Note 1. The consolidated financial statements and
financial statement schedule do not include any adjustments that might result
from the outcome of this uncertainty.
/S/ KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
April 9, 1997
22
23
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(Thousands of dollars, except share data)
Assets 1997 1996
-------- --------
Current assets:
Cash and cash equivalents $ 2,094 $ 4,863
Investments in marketable securities 942 854
Accounts receivable net of allowances of $541 and $542 in 1997 and 1996 15,569 2,427
Inventories 6,289 2,978
Prepaid expenses 658 472
-------- --------
Total current assets 25,552 11,594
Property and equipment, net 6,041 4,285
Goodwill, net 13,249 14,573
Software development costs, net 2,229 1,389
Other intangible assets, net 1,168 2,879
Other assets 992 716
-------- --------
$ 49,231 $ 35,436
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable, net of unamortized discount of $578 $ 9,132 $ --
Current maturities of long-term debt 2,527 4,125
Accounts payable 7,569 1,878
Accrued liabilities 3,173 3,302
Net liabilities of discontinued operations 400 400
Deferred income taxes 49 48
Current installments of obligations under capital leases 89 57
-------- --------
Total current liabilities 22,939 9,810
Long-term obligations under capital leases, net of current installments 55 59
Deferred income taxes 88 267
Long-term debt, net of current maturities -- 3,238
Convertible debentures, net of unamortized discount of $582 -- 14,331
-------- --------
23,082 27,705
-------- --------
Commitments and contingencies (notes 13, 14 and 20)
Stockholders' equity:
$2.0145, 10% cumulative convertible preferred stock, series A, $.01 par
value (aggregate involuntary liquidation preference $20,145,000)
Authorized 10,000,000 shares; 4,219,409 shares issued and
outstanding in 1997 42 --
$4.375, 10% cumulative convertible preferred stock, series B, $.01 par
value (aggregate involuntary liquidation preference $4,000,000)
Authorized 914,286 shares; 914,286 shares issued and outstanding in 1997. 9 --
Common stock, $.01 par value, 50,000,000 and 80,000,000 shares authorized
in 1997 and 1996. 23,954,978 and 15,027,728 shares issued and
outstanding in 1997 and 1996 240 150
Additional paid-in capital 75,940 36,849
Unrealized gain on marketable securities 2 18
Retained earnings (accumulated deficit) (50,084) (29,286)
-------- --------
Total stockholders' equity 26,149 7,731
$ 49,231 $ 35,436
======== ========
See accompanying notes to consolidated financial statements.
23
24
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1997 and 1996, two months ended December 31, 1995 and
year ended October 31, 1995
Consolidated Statements of Operations
(Thousands of dollars, except share data)
Two months
Years ended ended Year ended
December 31, December 31, October 31,
1997 1996 1995 1995
-------- -------- -------- --------
Net revenue $ 37,777 $ 9,352 $ 734 $ 2,030
Cost of revenue 23,526 11,973 1,377 2,568
-------- -------- -------- --------
Gross profit (loss) 14,251 (2,621) (643) (538)
Expenses:
Engineering and development 11,899 8,719 732 1,653
Selling and administrative 18,671 14,601 1,166 2,149
Amortization of goodwill 1,323 1,664 64 312
Asset writedowns -- 6,033 338 --
-------- -------- -------- --------
31,893 31,017 2,300 4,114
-------- -------- -------- --------
Operating loss (17,642) (33,638) (2,943) (4,652)
-------- -------- -------- --------
Other income (expense):
Equity in loss of investee -- -- -- (280)
Interest expense (2,863) (9,911) (23) (430)
Interest income and other 636 653 190 168
-------- -------- -------- --------
(2,227) (9,258) 167 (542)
-------- -------- -------- --------
Loss from continuing operations
before income taxes and extra-
ordinary item (19,869) (42,896) (2,776) (5,194)
Income tax expense (benefit) (126) 87 -- --
-------- -------- -------- --------
Loss from continuing operations (19,743) (42,983) (2,776) (5,194)
Discontinued operations
Income from discontinued operations,
net of tax -- -- -- 3,546
Income (loss) on disposal of discontinued
operations, net of tax (498) (56) (236) 13,824
-------- -------- -------- --------
Income (loss) before extraordinary
item (20,241) (43,039) (3,012) 12,176
Equity in extraordinary gain of investee -- -- -- 646
-------- -------- -------- --------
Net income (loss) $(20,241) $(43,039) $ (3,012) $ 12,822
======== ======== ======== ========
Dividends on preferred stock $ (557) -- -- --
======== ======== ======== ========
Income (loss) available to common stockholders $(20,798) $(43,039) $ (3,012) $ 12,822
======== ======== ======== ========
See accompanying notes to consolidated financial statements. (Continued)
24
25
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1997 and 1996, two months ended December 31, 1995 and
year ended October 31, 1995, Continued
Consolidated Statements of Operations
(Thousands of dollars, except share data)
Years ended Two months
December 31, ended Year ended
------------ December 31, October 31,
1997 1996 1995 1995
---------- ---------- ---------- ----------
Basic and diluted income (loss) per share:
Continuing operations $ (0.99) $ (3.32) $ (0.24) $ (0.47)
Discontinued operations (0.02) (0.01) (0.02) 1.57
Extraordinary item -- -- -- 0.06
---------- ---------- ---------- ----------
Net income (loss) per share $ (1.01) $ (3.33) $ (0.26) $ 1.16
---------- ---------- ---------- ----------
Weighted average number of common shares outstanding
20,558 12,943 11,385 11,024
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
25
26
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997 and 1996, two months ended
December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
Preferred stock
---------------
Series A Series B Common stock
-------- -------- ------------
Shares Par Shares Par Shares Par
------ --- ------ --- ------ ---
Balances at October 31, 1994 -- $ -- -- $ -- 10,583,142 $ 106
Acquisition of Lakefield
Arms Limited (note 9) -- -- -- -- 416,666 4
Exercise of convertible
preferred shares of Savage
Corporation -- -- -- -- 160,991 2
Private placement -- -- -- -- 150,000 1
Exercise of employee
stock options -- -- -- -- 74,318 1
Quasi reorganization -- -- -- -- -- --
Net income -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at October 31, 1995 -- -- -- -- 11,385,117 114
Stock option
compensation -- -- -- -- --
Net loss -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1995 -- -- -- -- 11,385,117 114
Conversion of debentures -- -- -- -- 1,837,205 18
Acquisition of Intelect Visual
Communications Corp. -- -- -- -- 545,420 5
Exercise of employee stock
options -- -- -- -- 530,000 5
Exercise of warrants from
acquisition of Savage
Corporation -- -- -- -- 360,000 4
Unrealized Total
Additional gain on stock-
paid-in Retained marketable holders'
capital earnings securities equity
------- -------- ---------- ------
Balances at October 31, 1994 $ 7,854 $ 3,943 $ -- $ 11,903
Acquisition of Lakefield
Arms Limited (note 9) 925 -- -- 929
Exercise of convertible
preferred shares of Savage
Corporation 400 -- -- 402
Private placement 524 -- -- 525
Exercise of employee
stock options 139 -- -- 140
Quasi reorganization 1,545 -- -- 1,545
Net income -- 12,822 -- 12,822
---------- ---------- ---------- ----------
Balances at October 31, 1995 11,387 16,765 -- 28,266
Stock option
compensation 286 -- -- 286
----------
Net loss -- (3,012) -- (3,012)
---------- ---------- ---------- ----------
----------
Balances at December 31, 1995 11,673 13,753 -- 25,540
Conversion of debentures 10,069 -- -- 10,087
Acquisition of Intelect Visual
Communications Corp. 2,747 -- -- 2,752
Exercise of employee stock
options 1,012 -- -- 1,017
Exercise of warrants from
acquisition of Savage
Corporation 1,076 -- -- 1,080
(Continued)
See accompanying notes to consolidated financial statements.
26
27
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, Continued
Years ended December 31, 1997 and 1996, two months
ended December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
Preferred stock
---------------
Series A Series B Common stock
-------- -------- ------------
Shares Par Shares Par Shares Par
Settlement of subordinated
debt and contingent
purchase consideration of
INT -- -- -- -- 169,986 $ 2
Purchase of other assets -- -- -- -- 100,000 1
Employee compensation -
IVC -- -- -- -- 100,000 1
Allocation of proceeds to
beneficial conversion
features of convertible
debentures -- -- -- -- -- --
Detachable warrants issued
with convertible debentures -- -- -- -- -- --
Stock option compensation -- -- -- -- -- --
Unrealized gain on
marketable securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1996 -- -- -- -- 15,027,728 150
Private placements
Preferred, Series A 2,482,005 25 -- -- -- --
Preferred, Series B -- -- 914,286 9 -- --
Common -- -- -- -- 696,400 7
Unrealized Total
Additional gain on stock-
paid-in Retained marketable holders'
capital earnings securities equity
------- -------- ---------- ------
Settlement of subordinated
debt and contingent
purchase consideration of
INT $ 848 $ -- $ -- $ 850
Purchase of other assets 374 -- -- 375
Employee compensation -
IVC 499 -- -- 500
Allocation of proceeds to
beneficial conversion
features of convertible
debentures 4,947 -- -- 4,947
Detachable warrants issued
with convertible debentures 3,117 -- -- 3,117
Stock option compensation 487 -- -- 487
Unrealized gain on
marketable securities -- -- 18 18
Net loss -- (43,039) -- (43,039)
---------- ---------- ---------- ----------
Balances at December 31, 1996 36,849 (29,286) 18 7,731
Private placements
Preferred, Series A 4,886 -- -- 4,911
Preferred, Series B 3,868 -- -- 3,877
Common 3,323 -- -- 3,330
(Continued)
See accompanying notes to consolidated financial statements.
27
28
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, Continued
Years ended December 31, 1997 and 1996, two months ended
December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
Preferred stock
---------------
Series A Series B Common stock
-------- -------- ------------
Shares Par Shares Par Shares Par
------ --- ------ --- ------ ---
Conversion of debentures -- -- -- -- 5,376,864 54
Conversion of notes payable 2,482,006 25 -- -- -- --
Conversion of preferred stock (780,583) (8) -- -- 780,583 8
Detachable warrants issued
with notes -- -- -- -- -- --
Warrants issued for services -- -- -- -- -- --
Exercise of warrants -- -- -- -- 930,000 9
Exercise of employee stock option -- -- -- -- 561,666 6
Stock option compensation -- -- -- -- -- --
Settlement of royalty agreement -- -- -- -- 542,182 6
Interest expense paid with stock:
Preferred, Series A 35,981 -- -- -- -- --
Common -- -- -- -- 11,407 --
Preferred dividends paid with stock -- -- -- -- 28,148 --
Preferred dividends accrued
Series A -- -- -- -- -- --
Series B -- -- -- -- -- --
Amortization of beneficial conversion
features of preferred stock, Series B -- -- -- -- -- --
Unrecognized loss on marketable
securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1997 4,219,409 $ 42 914,286 $ 9 23,954,978 $ 240
========== ========== ========== ========== ========== ==========
Unrealized Total
Additional gain on stock-
paid-in Retained marketable holders'
capital earnings securities equity
------- -------- ---------- ------
Conversion of debentures 14,796 -- -- 14,850
Conversion of notes payable 4,975 -- -- 5,000
Conversion of preferred stock -- -- -- --
Detachable warrants issued
with notes 1,661 -- -- 1,661
Warrants issued for services 250 -- -- 250
Exercise of warrants 1,881 -- -- 1,890
Exercise of employee stock option 1,569 -- -- 1,575
Stock option compensation 354 -- -- 354
Settlement of royalty agreement 841 -- -- 847
Interest expense paid with stock:
Preferred, Series A 72 -- -- 72
Common 58 -- -- 58
Preferred dividends paid with stock 296 (296) -- --
Preferred dividends accrued
Series A 215 (215) -- --
Series B 15 (15) -- --
Amortization of beneficial conversion
features of preferred stock, Series B 31 (31) -- --
Unrecognized loss on marketable
securities -- -- (16) (16)
Net loss -- (20,241) -- (20,241)
---------- ---------- ---------- ----------
Balances at December 31, 1997 $ 75,940 $ (50,084) $ 2 $ 26,149
========== ========== ========== ==========
See accompanying notes to consolidated financial statements
28
29
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996, two months
ended December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
Two months
Years ended ended Year ended
December 31, December 31, December 31,
1997 1996 1995 1995
-------- -------- -------- --------
Cash flows from operating activities:
Net income (loss) $(20,241) $(43,039) $(3,012) $ 12,822
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 3,412 3,581 106 486
Deferred income taxes (177) 87 -- --
(Income) loss on discontinued
operations 498 56 236 (13,824)
(Income) loss from discontinued operations -- -- -- (3,546)
Noncash compensation -- 500 -- --
Assets writedowns -- 6,033 338 --
Stock option compensation 354 487 50 --
Noncash operating expenses 191 -- -- --
Amortization of deferred financing costs 1,920 9,105 -- --
Equity in income of investee -- -- -- (366)
Other 34 (44) -- 9
Change in operating assets and liabilities,
net of effects of acquired companies:
Accounts receivable (13,242) (898) (662) 136
Inventories (3,311) (350) 277 196
Other assets (165) (95) (282) (102)
Accounts payable and accrued liabilities 5,875 1,603 (926) (1,472)
Net liabilities of discontinued operations -- (76) (795) 1,271
-------- -------- -------- --------
Net cash used in operating activities (24,852) (23,050) (4,670) (4,390)
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sale of discontinued operations -- -- -- 33,000
Investment in discontinued operations -- -- -- (3,249)
Payments for disposal of discontinued operations (498) (56) -- --
Purchase of other intangible assets (94) (1,075) -- --
Capital expenditures (2,993) (3,660) (293) (238)
Purchase of marketable securities (103) (836) -- --
Purchase of other assets (338) (110) (240) (518)
Software development costs (1,317) (1,395) -- --
Proceeds on sale of fixed assets -- 200 -- 12
See accompanying notes to consolidated financial statements. (Continued)
29
30
INTELECT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1997 and 1996, two months
ended December 31, 1995 and year ended October 31, 1995
(Thousands of dollars, except share data)
Two months
Years ended ended Year ended
December 31, December 31, December 31,
1997 1996 1995 1995
-------- -------- -------- --------
Cash flows from investing activities (continued)
Payment for acquisition of DNA, net of cash
acquired -- (3,009) -- --
Loan to IVC, prior to acquisition -- (700) (600) --
Payment for acquisition of IVC, net of cash
acquired -- (668) -- --
Payment for acquisition of INT, net of cash
acquired -- -- -- (632)
Payment for acquisition of IEL, net of cash
acquired -- -- -- (391)
-------- -------- -------- --------
Net cash provided by (used in)
investing activities (5,343) (11,309) (1,133) 27,984
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible
debentures -- 25,000 -- --
Debt issuance costs (255) (1,623) -- --
Proceeds from issuance of notes payable 14,910 -- -- 9,880
Principal payments on notes payable (200) (880) (70) (15,530)
Principal payments under capital lease obligations (76) (3