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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NACT TELECOMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
UTAH 4813 87-0378662
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)
<S> <C> <C>
</TABLE>
382 EAST 720 SOUTH
OREM, UTAH 84058
(801) 225-6248
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
A. LINDSAY WALLACE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
382 EAST 720 SOUTH
OREM, UTAH 84058
(801) 225-6248
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT OF SERVICE)
------------------------
COPIES TO:
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<S> <C>
STEPHEN IRWIN, ESQ. WILLIAM L. HUDSON, ESQ.
JEFFREY S. SPINDLER, ESQ. BROBECK, PHLEGER & HARRISON LLP
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP ONE MARKET PLAZA
505 PARK AVENUE SPEAR STREET TOWER
NEW YORK, NEW YORK 10022 SAN FRANCISCO, CALIFORNIA 94105
(212) 753-7200 (415) 442-0900
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, $.01 par value per share (the "Common
Stock")(2)......................................... $41,400,000.00 $12,545.46
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933, as amended.
(2) Includes up to 450,000 shares of Common Stock which the Underwriters have
the option to purchase from the Company to cover over-allotments, if any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 12, 1996
PROSPECTUS
3,000,000 SHARES
LOGO
NACT TELECOMMUNICATIONS, INC.
COMMON STOCK
Of the 3,000,000 shares of Common Stock offered hereby, 2,000,000 are being
sold by NACT Telecommunications, Inc. ("NACT" or the "Company") and 1,000,000
are being sold by GST USA, Inc. ("GST USA" or the "Selling Stockholder"), the
parent corporation of the Company and a wholly-owned subsidiary of GST
Telecommunications, Inc. ("GST"). The Company will not receive any proceeds from
the sale of shares by the Selling Stockholder. Upon completion of this offering,
GST USA will own approximately 63% of the outstanding Common Stock of the
Company (approximately 60% if the Underwriters' over-allotment option is
exercised in full) and will continue to control the Company. See "Principal and
Selling Stockholder."
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $10.00 and $12.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. Application will be made to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol "NACT."
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDER(2)
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<S> <C> <C> <C> <C>
Per Share.............................. $ $ $ $
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Total(3)............................... $ $ $ $
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</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company and the Selling Stockholder
estimated at $ and $ , respectively.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them, and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST MONTGOMERY SECURITIES
, 1997
<PAGE> 3
Diagram of a configuration of four STXs,
two MCUs and an NTS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET,
IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus.
THE COMPANY
The Company provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. As a
single source provider, the Company believes that it is the only company in its
market that designs, develops and manufactures all hardware and software
elements necessary for a fully integrated, turnkey telecommunications switching
solution. Because the Company provides a complete, integrated solution, its
customers do not require the multiple suppliers of hardware and value added
resellers of software that would otherwise be necessary to provide a wide range
of services and applications. The Company's customers include long distance
carriers, prepaid debit (calling) card and prepaid cellular network operators,
international call back/reorigination providers and other specialty
telecommunications service providers.
The Company's products and services include the STX application switching
platform (the "STX"), the NTS telemanagement and billing system (the "NTS") and
facilities management services. In May 1996, the Company introduced the STX, an
integrated digital tandem switching system that currently supports up to 1,024
ports per switch and can be combined with three additional STXs to provide a
total capacity of 4,096 ports per system. The STX includes proprietary systems
software that enables standard applications such as 1+ and optional advanced
applications such as international call back/reorigination, prepaid debit card
and prepaid cellular. The Company has targeted the STX, with its enhanced
features and scaleable capacity, to an expanded group of customers, including
independent telephone companies, CAPs/CLECs, shared tenant service providers,
Fortune 1000 corporations and local telephone companies outside the United
States. The Company believes that the STX offers value added features and
capacity at price points typically lower than those offered by its competitors.
The NTS performs call rating, accounting, switch management, invoicing and
traffic engineering for multiple switches that may either be NACT switches or a
number of other industry switches. In conjunction with the sale of a system, the
Company offers a facilities management service whereby the Company will operate
and maintain a customer's switch for a fee. In providing this service, the
Company enables its customers to direct their attention toward marketing their
products rather than focusing on the technical aspects of operating a switch.
Deregulation of long distance telecommunications as a result of the
divestiture of AT&T in 1984 and increased competition fostered by the
Telecommunications Act of 1996 have materially altered the dynamics of the
telecommunications industry by opening competition in the market to a wide group
of telecommunications companies, including a large number of specialty
telecommunications service providers that constitute a substantial portion of
the Company's targeted market. The Company believes that the STX and NTS are
well-suited to exploit the opportunities being created in this deregulated
market environment.
Certain technical terms and acronyms used in this Prospectus are defined in
the "Glossary of Terms" beginning on page 55.
Upon completion of this offering, GST USA will own approximately 63% of the
outstanding Common Stock of the Company (approximately 60% if the Underwriters'
over-allotment option is exercised in full) and will continue to control the
Company. GST, the parent of GST USA, is a federally chartered Canadian
corporation that provides a broad range of telecommunications products and
services. The Common Shares of GST are traded on the American Stock Exchange
under the symbol "GST."
The Company was incorporated in Utah in January 1982. The Company plans to
reincorporate in Delaware prior to consummation of the offering. The Company's
address is 382 East 720 South, Orem, Utah 84058 and its telephone number is
(801) 225-6248.
3
<PAGE> 5
THE OFFERING
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<S> <C>
Common Stock offered by the Company.............. 2,000,000 shares
Common Stock offered by the Selling
Stockholder.................................... 1,000,000 shares
Common Stock to be outstanding after the
offering....................................... 8,113,712 shares(1)
Use of proceeds.................................. For product development, sales and marketing,
other working capital and general corporate
purposes and possible acquisitions of or
investments in complementary businesses or
products.
Proposed Nasdaq National Market symbol........... NACT
</TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED FISCAL YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
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1991 1992 1993(2) 1994 1995 1996
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<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $1,666 $1,860 $ 2,422 $5,479 $11,484 $16,285
Gross profit....................... 913 1,047 1,619 3,449 4,878 6,027
Income (loss) from operations
before effect of amortization of
intangibles(3)................... (15) (75) 619 1,147 1,059 1,059
Income (loss) from operations...... (15) (75) 585 705 97 124
Net income(4)...................... $ 67 $ 179 $ 459 $ 493 $ 80 $ 194
Net income per share(4)............ $ 0.03 $ 0.07 $ 0.12 $ 0.08 $ 0.01 $ 0.03
Weighted average shares
outstanding(5)................... 2,728 2,742 3,719 5,998 6,114 6,114
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
ACTUAL AS ADJUSTED(6)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 694 $ 20,821
Working capital..................................................... 4,245 24,372
Total assets........................................................ 14,685 34,811
Total stockholders' equity.......................................... 10,210 30,337
</TABLE>
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(1) Based on the number of shares of Common Stock outstanding as of September
30, 1996. Excludes 1,250,000 shares of Common Stock reserved for issuance
pursuant to the exercise of stock options, 850,000 of which were outstanding
as of December 12, 1996 having an exercise price of $9.35 per share. See
"Management--1996 Stock Option Plan."
(2) The Company changed its fiscal year-end to September 30th, effective with
the fiscal year ended September 30, 1993. Accordingly, the fiscal year ended
September 30, 1993 was a nine-month period.
(3) This line reflects the Company's operating income before the effect of the
amortization of acquired intangibles included in both cost of goods sold and
operating expenses for the nine months ended September 30, 1993 and the
fiscal years ended September 30, 1994, 1995 and 1996 of $34,764, $442,045,
$962,514 and $935,486, respectively. The impact of the effect of the
amortization of acquired intangibles on the Company's operating income for
the fiscal years ending September 30, 1997, 1998 and 1999 is anticipated to
decrease the Company's operating income by $935,486, $935,486 and $524,816,
respectively. These intangibles arose as a result of the acquisition of the
Company by GST USA through a series of purchases of newly issued shares and
shares owned by former stockholders of the Company. Such purchases occurred
from September 1993 through December 1994. GST USA accounted for the
acquisition using the purchase method of
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accounting. The excess of the purchase price over the fair value of the
assets acquired totalled $6,912,322, was assigned by GST USA as product
support contracts, software development costs and goodwill and, in
accordance with requirements of the Securities and Exchange Commission (the
"Commission"), has been recorded on the books of NACT as intangibles. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 1 and 4 of Notes to Financial Statements.
(4) Before the effect of the amortization of acquired intangibles as described
in Note 3 above, the Company's net income would have been $482,371,
$792,824, $792,417 and $833,954 and the Company's net income per share would
have been $0.13, $0.13, $0.13 and $0.14 for the nine months ended September
30, 1993 and the fiscal years ended September 30, 1994, 1995 and 1996,
respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes 1 and 4 of Notes to Financial
Statements.
(5) See Note 1 of Notes to Financial Statements for an explanation of the method
used to determine the number of shares used in computing net income per
share.
(6) Adjusted to reflect the sale of 2,000,000 shares offered by the Company
hereby at an assumed initial public offering price of $11.00 per share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
------------------------------
Unless otherwise indicated, the information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option and (ii) reflects the
reincorporation of the Company in Delaware which will be effected prior to the
effectiveness of the Registration Statement of which this Prospectus is a part.
5
<PAGE> 7
RISK FACTORS
The shares offered hereby involve a high degree of risk. The following risk
factors should be considered carefully in addition to the other information
contained in this Prospectus before purchasing the Common Stock offered hereby.
Dependence on Recently Introduced Product and Products Under
Development. In May 1996, the Company introduced the STX. During the quarter
ended September 30, 1996, sales of the STX comprised approximately 92% of the
Company's product sales. The Company's results of operations are highly
dependent on market acceptance of existing and future applications for the STX.
Increased market acceptance of the STX is dependent on a number of factors, many
of which are not in the Company's control, including the continued deployment of
new telecommunications services, the availability and price of competing
products and technologies and the success of the Company's expanded sales
activities. The Company intends to direct its sales and marketing efforts to a
broader customer base than it has previously addressed. No assurance can be
given that the Company will be successful in broadening its customer base. A
significant portion of the Company's initial sales of the STX were to customers
that had previously purchased the Company's earlier generation switch, the LCX.
Such customers exercised the limited time opportunity offered by the Company to
exchange their LCX for an allowance toward the purchase of an STX. There can be
no assurance that the initial level of sales experienced as a result of this
offer is reflective of an ongoing level of customer demand.
The Company plans to incorporate into the STX certain features and
enhancements such as SS7, E-1, R-2 signaling and ISDN, which are critical to the
Company's strategy to broaden its STX customer base. The Company may experience
delays in incorporating such features and enhancements into the STX. Any such
delays could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is also currently developing an
improved billing system, which is being designed for real-time transaction
processing, with graphical user interface and improved call reports. Due to a
variety of factors, the Company may experience delays in developing its planned
new products. New products may require additional development work, enhancement,
testing or further refinement before they can be made commercially available by
the Company. There can be no assurance that the Company will be successful in
identifying, developing, manufacturing and marketing product enhancements or new
products that respond to technological changes or evolving industry standards.
In addition, there can be no assurance that the Company will not experience
difficulties that could delay or prevent the timely and successful development,
introduction and marketing of these products or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. Should the Company be unsuccessful in its
efforts, the Company's business, financial condition and results of operations
would likely be materially adversely affected. See "-- Compliance with
Regulations and Evolving Industry Standards," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business--Products"
and "Business--Research and Development."
Need to Expand Sales and Technical Support Capabilities. The Company's
results of operations are dependent on its ability to expand its sales and
technical support capabilities. Historically, the Company has sold its products
through a small sales force located primarily in Utah, which the Company
recognizes must be substantially increased. The Company recently established a
regional sales presence in the State of Washington and is currently establishing
sales forces in New York and Florida. While the Company has committed and will
continue to commit funds to expand its sales organization, there can be no
assurance that the Company will be able to recruit, train, motivate, manage and
retain additional qualified sales personnel or that their activities will result
in additional revenues to the Company. In an attempt to broaden its customer
base, the Company will be marketing its products and services to larger
telephony providers whose procurement processes are generally more protracted
and will likely require additional sales efforts on the Company's part. In
addition, the Company recognizes that as its level of sales increases, it will
need to expand its technical support capabilities to service its expanding
customer base. Availability of qualified sales and technical support personnel
is limited, and competition for experienced sales and technical support
personnel in the telecommunications equipment industry is intense. A substantial
increase in sales and technical
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support personnel will also result in increased general and administrative
expenses. The failure to timely expand the Company's sales force and technical
support staff, hire and retain qualified personnel or effectively address the
requirements of new types of customers could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"--Management of Growth," "--Dependence on Key Personnel" and "Business--Sales
and Marketing."
Control By Existing Stockholder; Conflicts of Interest; Certain
Transactions. Prior to this offering, all of the Company's outstanding shares
of Common Stock were held by GST USA, a wholly-owned subsidiary of GST. Upon
completion of the offering, GST USA will beneficially own approximately 63% of
the outstanding Common Stock of the Company (approximately 60% if the
Underwriters' over-allotment option is exercised in full) and will alone control
sufficient votes to determine whether actions that require the consent of
stockholders, including the election of the Company's directors, will be taken.
The ability to elect the Company's Board of Directors will also provide GST USA
with effective control over actions taken by the Company. The Company believes
that GST USA will not be prohibited from acting in its own self interest in
respect of, among other things, the declaration of any dividends, the sale of
some or all of the assets of the Company or the prevention of an acquisition of
or change in control of the Company. There can be no assurance that conflicts of
interest between GST USA and the Company will not arise with respect to such
matters or other matters. Currently, there is no formal procedure for resolving
or preventing conflicts that may arise between the Company and GST USA and there
can be no assurance that GST USA will not act in its own interest on such
matters. If such a conflict were to arise, the inability of the Company to
operate independently of the influence of GST USA could have a material adverse
effect on the Company's business, financial conditions and results of
operations. Also, GST USA and the Company have entered into certain agreements,
which are not the result of arm's length negotiations between independent
parties, providing for indemnification and certain other rights and obligations
for each of them after consummation of the offering. See "Certain Transactions."
In addition, Thomas E. Sawyer, the Chairman of the Board Emeritus of the
Company, serves as a director and executive officer of each of GST and GST USA.
W. Gordon Blankstein, the Chairman of the Board of GST and GST USA, Stephen
Irwin, the Vice Chairman of the Board of GST, and Clifford V. Sander, Senior
Vice President of GST and GST USA and a director of GST USA, each serve as a
director of the Company. See "Management--Compensation Committee Interlocks and
Insider Participation."
GST has, both with financial institutions and holders of publicly traded
debt, substantial amounts of outstanding indebtedness, a portion of which is
governed by indentures. The Company is subject to certain financial restrictions
by reason of its status as a "Restricted Subsidiary" of GST and GST USA under
such indentures. Such restrictions significantly limit or prohibit the ability
of GST and its Restricted Subsidiaries, including the Company, to incur
additional indebtedness or create liens on their assets. Effectively, the
ability of the Company to incur indebtedness is limited by the amount of
indebtedness that GST and its Restricted Subsidiaries, including the Company,
are permitted to incur pursuant to the indentures. In addition, such
restrictions or limitations also limit or prohibit the ability of the Company to
raise capital, pay dividends, sell assets, engage in mergers or acquisitions or
make investments, particularly in international markets. Such restrictions or
limitations also restrict or limit the ability of a third party to acquire a
controlling interest in the Company. There can be no assurance that these
financial restrictions will not have a material adverse effect on the Company's
business, financial conditions and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Potential Fluctuations in Quarterly Operating Results; Timing of
Sales. The Company's quarterly operating results have varied in the past, and
may vary significantly in the future, depending on factors such as the timing of
new product introductions by the Company and its competitors, delays in new
product introductions by the Company, market acceptance of new or enhanced
versions of the Company's products, changes in the product or customer mix,
changes in the level of operating expenses, competitive pricing pressures, the
gain or loss of significant customers, increased research and development and
sales and marketing expenses associated with new product introductions,
7
<PAGE> 9
personnel changes and economic conditions in general and in the Company's
industry. Any unfavorable change in these or other factors could have a material
adverse effect on the Company's operating results for a particular quarter. Due
to the relatively fixed nature of most of the Company's costs, any shortfall in
revenues in any quarter would have a proportionately greater impact on the
Company's results of operations in that quarter, and may result in fluctuations
in the price of the Company's Common Stock.
The Company has experienced large fluctuations in network carrier sales
from quarter to quarter due to substantial sales generated by a limited number
of network carrier customers. When network carrier customers increase their
monthly sales volume substantially, they can then negotiate favorable long
distance rates on substantially the same pricing terms as the Company. When
network carrier customers place their long distance carrier traffic with someone
other than the Company, a significant drop in revenue may occur in quarterly
operating results. When new facilities management and network carrier customers
participate in the Company's facilities management and network carrier sales
program, significant increases in revenue may occur in quarterly operating
results. Due to the significant revenues generated from a single customer
through network carrier sales, the loss or gain of one or more customers could
cause a significant fluctuation in the Company's quarterly revenues.
Fluctuations in quarterly gross and net margins are less significant due to the
low margins generated from network carrier sales. However, due to the
significant revenues generated by an individual customer in network carrier
sales, significantly higher credit risks are involved with the Company's
customers using network carrier services. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quarterly Results of
Operations."
Due to the high unit price and long lead times associated with revenues
derived from equipment orders, the Company's financial results may fluctuate
significantly depending upon the time of the actual shipment of such orders.
Consequently, operating results in any period should not be considered
indicative of the results to be expected for any future period. There can be no
assurance that the Company's revenues will increase, that its recent levels of
quarterly revenues and net income will be sustained, or that the Company will
achieve profitability in any future period. In addition, it is likely that in
some future quarters the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Management of Growth. The Company has recently experienced and is expected
to continue to experience growth in the number of its employees and the scope of
its operations. In particular, the Company intends to increase its engineering,
sales, marketing, manufacturing and technical support staffs. These increases
will result in increased responsibilities for management and are expected to
place a significant strain on the Company's operational, financial and other
resources. To manage potential future growth effectively, the Company must
expand its operational, financial and management information systems and must
hire, train, retain, motivate and manage a growing number of employees. The
future success of the Company also will depend on its ability to increase its
technical support capability and to attract and retain qualified technical
support, sales, marketing and engineering personnel, for whom competition is
intense. In particular, the current availability of qualified sales, technical
support and engineering personnel is limited, and competition for such personnel
is intense. The Company may experience difficulty in filling its needs for
qualified sales, technical support, engineering and other personnel who are
familiar with the Company's proprietary technology. The Company is currently
engaged in efforts to expand its manufacturing capacity. There can be no
assurance that the Company will be able to effectively achieve or manage any
such growth, and failure to do so could delay delivery of products, product
development cycles or otherwise have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's results
of operations will be adversely affected if revenues do not increase
sufficiently to compensate for the planned increase in operating expenses
incurred in anticipation of such growth.
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See "--Need to Expand Sales and Technical Support Capabilities," "--Dependence
on Key Personnel," "Business--Employees" and "Management."
Dependence on Component Availability and Suppliers. The Company's ability
to deliver its products, in part, depends upon the availability of components
used in its products. The Company relies upon suppliers to manufacture and
deliver components in a timely and satisfactory manner. The Company is currently
dependent on a single supplier for its CPU. There can be no assurance that such
supplier will continue to meet the Company's requirements. Certain integrated
circuits and billing system database software are presently available only from
a single source or limited sources of supply. To date, the Company has been able
to obtain adequate supplies of these components in a timely manner. However, the
inability of the Company to obtain sufficient components as needed and at a
reasonable price would materially adversely affect the Company's business,
financial condition and results of operations. The Company generally does not
have any long-term contracts with its suppliers and there can be no assurance
that these suppliers will continue to be able to meet the Company's
requirements. Any significant interruption in the supply of, or degradation in
the quality of, any such item could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's customers frequently require delivery rapidly after placement
of the purchase order. Because the Company does not maintain significant
component inventories, a delay in shipment by a supplier could lead to lost
sales. The Company uses internal forecasts to determine its general materials
and components requirements. Lead times for materials and components may vary
significantly and depend on factors such as specific supplier performance,
contract terms and general market demand for components. If orders vary from
forecasts, the Company may experience excess or inadequate inventory of certain
materials and components. While the Company has not experienced shortages and
allocations of these components to date, any shortages in the future, including
those occasioned by increased sales, could result in delays in fulfillment of
customer orders. Such delays, shortages and allocations could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Competition. The market for telecommunications products is highly
competitive and subject to rapid technological change. The Company expects
competition to increase in the future from existing competitors in the
distributed switching systems market and from other companies that may enter the
Company's existing or future markets, including major central office switch
vendors. The Company currently competes with a number of lower capacity switch
manufacturers such as Communications Product Development, Inc. ("CPDI"),
Integrated Telephony Products, Inc. ("ITP") and PCS Telecom, Inc. ("PCS
Telecom"). The Company also competes with providers of open architecture
(programmable) hardware switching platforms that are enhanced by applications
providers and value added resellers. Such competitors include: Excel, Inc.
("Excel"), which has agreements with software applications providers such as
Boston Technology, Inc. and Magellan Network Systems, Inc. ("Magellan"); Summa
Four, Inc. ("Summa Four"), which collaborates with application developers such
as Open Development Corporation ("Open Development"); and Redcom Laboratories,
Inc. ("Redcom"). As the Company's business develops and it seeks to market its
switches to a broader customer base, the Company's competitors may include
larger switch and telecommunications equipment manufacturers such as Lucent
Technologies Inc., Harris Corporation ("Harris"), Siemens AG, Alcatel Alsthom
Compagnie, Generale D'Electricite, Telefonaktiebolaget, L.M. Ericcson and
Northern Telecom Ltd. Many of these current and potential competitors have
substantially greater financial, technical and marketing resources than the
Company. Increased competition could materially and adversely affect the
Company's business, financial condition and results of operations through price
reductions and loss of market share. There can be no assurance that the Company
will be able to continue to compete successfully with its existing competitors
or that it will be able to compete successfully with new competitors. See
"--Dependence on Recently Introduced Product and Products Under Development,"
"--Impact of Technological Change" and "Business--Competition."
9
<PAGE> 11
Risks Associated With International Expansion. A component of the
Company's strategy is to expand into international markets. To date, the Company
has not made any international sales. There can be no assurance that the Company
will be able to successfully market, sell and deliver its products in
international markets. In addition to this uncertainty, there are certain risks
inherent in conducting business internationally, such as unexpected changes in
regulatory requirements, export restrictions, tariff and other trade barriers,
difficulties in staffing and managing foreign operations, different employment
laws and practices in foreign countries, longer payment cycles, problems in
collecting accounts receivable, political instability, exposure to currency
fluctuations, exchange rates, imposition of currency exchange controls,
potentially adverse tax consequences and country-specific product requirements,
any of which could adversely affect the success of the Company's international
operations. As the Company expands internationally, it will be exposed to gains
and losses on international currency transactions. An additional risk inherent
in conducting business in international markets is the requirement to achieve
and maintain International Standards Organization (ISO) 9000 quality control
standards and other special standards requirements such as E-1 and R-2
signaling. There can be no assurance that one or more of these factors or the
failure to achieve and maintain such standards will not have a material adverse
effect on the Company's future international operations and, consequently, on
the Company's business, financial condition and results of operations.
Furthermore, there can be no assurance that the Company's products will be
accepted internationally or that the Company will be able to compete effectively
in international markets. In addition, if the revenues generated by
international offices opened by the Company are not adequate to offset the
expense of establishing and maintaining these foreign operations, the Company's
business, financial condition and results of operations would be materially
adversely affected. See "-- Dependence on Recently Introduced Product and
Products Under Development" and "Business--Sales and Marketing."
Limited Intellectual Property Protection; Risk of Third Party Claims of
Infringement. The Company's success is dependent in part on intellectual
property rights, including information technology, some of which is proprietary
to the Company. The Company relies on a combination of nondisclosure and other
contractual arrangements, technical measures and trade secret and trademark laws
to protect its proprietary rights. The Company does not presently hold any
patents for its existing products and presently has no patent applications
pending. The Company generally enters into confidentiality agreements with its
employees and attempts to limit access to and distribution of proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of proprietary
information or that the Company will be able to detect unauthorized use or take
appropriate steps to enforce intellectual property rights. In addition, there
can be no assurance that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. Further, the laws of many foreign countries do not protect
the Company's intellectual property rights to the same extent as the laws of the
United States. The failure of the Company to protect its proprietary information
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Intellectual Property and
Other Proprietary Rights."
The telecommunications equipment industry is characterized by the existence
of a large number of patents and frequent litigation based on allegations of
patent infringement. From time to time, third parties may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies that are used by the Company. Litigation may be necessary to defend
against claimed infringements of the rights of others or to determine the scope
and validity of the proprietary rights of others. Future litigation may also be
necessary to enforce and protect trade secrets and other intellectual property
rights owned by the Company. Any such litigation could be costly and cause
diversion of management's attention, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Adverse determinations in such litigation could result in the loss
of the Company's proprietary rights, subject the Company to significant
liabilities (including possible indemnification of its customers), require the
Company to secure licenses from third parties or prevent the Company from
manufacturing or selling its products, any one of which could have a material
adverse effect on the Company's business, financial condition
10
<PAGE> 12
and results of operations. The Company has not conducted a formal patent search
relating generally to the technology used in its products. In addition, since
patent applications in the United States are not publicly disclosed until the
patent issues and foreign patent applications generally are not publicly
disclosed for at least a portion of the time that they are pending, applications
may have been filed which, if issued as patents, would relate to the Company's
products. Software comprises a substantial portion of the technology in the
Company's products. The scope of protection accorded to patents covering
software-related inventions is evolving and is subject to a degree of
uncertainty that may increase the risk and cost to the Company if the Company
discovers the existence of third party patents related to its software products
or if such patents are asserted against the Company in the future. Patents have
been granted recently on fundamental technologies in software, and patents may
issue which relate to fundamental technologies incorporated into the Company's
products. See "Business--Intellectual Property and Other Proprietary Rights."
Pending Litigation. An action was commenced against the Company and a
customer of the Company alleging that the Company's telephone systems
incorporating prepaid debit card features infringe upon a patent issued in 1987.
The plaintiff in such action seeks injunctive relief, damages in an unspecified
amount, damages of up to three times the damages found for willful infringement
of such patent and an order requiring the Company to publish a written apology
to the plaintiff. Whether or not determined in favor of the Company, such
litigation could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel from productive
tasks. There can be no assurance that this litigation will not discourage
companies from purchasing the Company's products. In the event of an unfavorable
decision in this action, the Company may be required to discontinue the use and
sale of infringing products, expend significant resources to develop
non-infringing technology, obtain licenses from third parties, obtain a royalty
agreement with the plaintiff in the action to continue to offer prepaid debit
card services, cease to offer the prepaid debit card feature with its products,
and/or pay money damages. In addition, the Company may be liable to its
customers for indemnification under the Company's sales agreements. Accordingly,
an unfavorable decision could have a material adverse effect on the business,
financial condition and results of operations of the Company. See
"Business--Intellectual Property and Other Proprietary Rights" and
"Business--Legal Proceedings."
Compliance with Regulations and Evolving Industry Standards. The market
for the Company's products is characterized by the need to meet a significant
number of communications regulations and standards, some of which are evolving
as new technologies are deployed. In the United States, the Company's products
must comply with various regulations defined by the Federal Communications
Commission (the "FCC") and standards established by Underwriters Laboratories
and Bell Communications Research and the International Standards Organization
(ISO). For some public carrier services, installed equipment does not fully
comply with current industry standards, and this noncompliance must be addressed
in the design of the Company's products. The failure of the Company's products
to comply, or delays in compliance, with the various existing and evolving
industry standards could delay introduction of the Company's products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Impact of Technological Change. While the Company employs proprietary
software technology for the majority of its products and services and conducts
ongoing research and development, the future success of the Company will depend
in part upon its ability to keep pace with advancing technology, evolving
industry standards within the telecommunications industry and changing customer
requirements in a cost-effective manner. The STX is a closed architecture switch
by virtue of its proprietary operating system and applications software. The
closed architectural design limits the use of the switch to features available
within existing software or customized versions thereof. Other providers offer
open architecture switches that enable owners of such switches to add additional
applications that may be developed by third parties. There can be no assurance
that the Company's products will not be rendered obsolete by other
telecommunications products incorporating techno-
11
<PAGE> 13
logical advances designed by competitors that the Company is unable to
incorporate into its products in a timely manner.
The telecommunications equipment market is characterized by rapidly
changing technologies and frequent new product introductions. The rapid
development of new technologies increases the risk that current or new
competitors could develop products that would reduce the competitiveness of the
Company's products. The Company's success will depend to a substantial degree
upon its ability to respond to changes in technology and customer requirements.
This will require the timely selection, development and marketing of new
products and enhancements on a cost-effective basis. The development of new,
technologically advanced products is a complex and uncertain process, requiring
high levels of innovation. The introduction of new and enhanced products also
requires that the Company manage transitions from older products in order to
minimize disruptions in customer orders, avoid excess inventory of old products
and ensure that adequate supplies of new products can be delivered to meet
customer orders. There can be no assurance that the Company will be successful
in developing, introducing or managing the transition to new or enhanced
products or that any such products will be responsive to technological changes
or will gain market acceptance. The Company's business, financial condition and
results of operations would be materially adversely affected if the Company were
to be unsuccessful, or to incur significant delays, in developing and
introducing such new products or enhancements. See "--Dependence on Recently
Introduced Product and Products under Development" and "Business--Research and
Development."
Dependence on Key Personnel. The Company's future success will depend to a
large extent on the continued contributions of its executive officers and key
management, sales, research and development, technical support and operational
personnel. Each of the Company's executive officers and key personnel would be
difficult to replace. While four of the Company's key employees will be parties
to employment agreements with the Company, the existence of such agreements will
not assure the Company of such employees' services. The loss of the services of
one or more of the Company's executive officers or key personnel, or the
inability of the Company to continue to attract qualified personnel, could delay
product development cycles or otherwise have a material adverse effect on the
Company's business, financial condition and results of operations. Competition
for qualified personnel in the telecommunications equipment industry is intense.
The Company may not be successful in attracting and retaining the personnel it
requires, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management--Employment and
Consulting Agreements."
No Prior Market for the Company's Common Stock; Price Volatility. Prior to
this offering, there has been no public market for the Company's Common Stock,
and there can be no assurance that an active public trading market for the
Common Stock will develop or be sustained after the offering or that the market
price of the Common Stock will not decline below the initial public offering
price. The initial public offering price will be determined by negotiations
among the Company, the Selling Stockholder and the representatives of the
Underwriters and may not necessarily reflect the market price of the Common
Stock after the offering. The market price of the Common Stock could be subject
to wide fluctuations in response to quarter to quarter variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, developments with respect to patents or proprietary
rights, changes in earnings estimates by securities analysts, or other events or
factors. In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices of equity
securities of many technology companies and that have often been unrelated to
the operating performance of such companies. These Company-specific factors or
broad market fluctuations may materially adversely affect the market price of
the Common Stock. See "--Potential Fluctuations in Quarterly Operating Results;
Timing of Sales" and "Underwriting."
Antitakeover Effects of Control by GST USA, Certain Charter Provisions and
Delaware Law. Upon the closing of this offering, GST USA will continue to own
approximately 63% of the outstanding Common Stock of the Company (approximately
60% if the Underwriters' over-allotment option is
12
<PAGE> 14
exercised in full). GST USA, therefore, will continue to be in a position to
prevent a takeover of the Company by one or more third parties, which could
deprive the Company's stockholders of a control premium that might otherwise be
realized by them in connection with the acquisition of the Company. Under the
terms of certain indebtedness of GST and GST USA, GST USA may not distribute to
its shareholders in excess of 10% of the Company's outstanding Common Stock. The
Company's Board of Directors will also have the authority to issue up to
10,000,000 shares of preferred stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of shares of preferred
stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. The Company
has no present intention to issue shares of preferred stock. In addition, the
Company is subject to the antitakeover provisions of Section 203 of the Delaware
General Corporation Law, which will prohibit the Company from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company. See "Description of Capital
Stock."
Shares Eligible for Future Sale. Sales of a substantial number of shares
of Common Stock in the public market following this offering could adversely
affect the market price of the Common Stock. Upon completion of the offering,
the Company will have 8,113,712 shares of Common Stock outstanding. Of these
shares, the 3,000,000 shares sold in the offering will be freely transferable
without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), unless they are held by "affiliates" of the Company as that
term is used under the Securities Act and the rules and regulations promulgated
thereunder. GST USA will own the remaining 5,113,712 shares of Common Stock,
constituting approximately 63% of the outstanding shares of Common Stock
(approximately 60% if the Underwriters' over-allotment option is exercised in
full). GST and GST USA have agreed not to, directly or indirectly, offer to
sell, sell, grant an option for the sale of, assign, transfer, pledge,
hypothecate or otherwise encumber or dispose of any securities issued by the
Company for a period of 180 days from the effective date of the Registration
Statement of which this Prospectus is a part without the prior written consent
of Hambrecht & Quist LLC. See "Underwriting." After expiration of such period,
such shares may be sold (i) in accordance with Rule 144 promulgated under the
Securities Act, (ii) in private offerings or (iii) upon registration under the
Securities Act without regard to the volume limitations of Rule 144. See "Shares
Eligible for Future Sale."
Prior to this offering, there has been no public market for the Common
Stock and any sale of substantial amounts of shares in the open market (or the
announcement of a plan to do so) may adversely affect the market price of the
Common Stock offered hereby. As soon as practicable after the effective date of
the Registration Statement of which this Prospectus is a part, the Company
intends to file a registration statement on Form S-8 under the Securities Act to
register shares of Common Stock reserved for issuance under its 1996 Stock
Option Plan, thus permitting the resale of such shares by non-affiliates in the
public market without restriction under the Securities Act. Such registration
statement will become effective immediately upon filing. See "Management--1996
Stock Option Plan."
No Specific Use of Proceeds. The Company expects to use a substantial
portion of the net proceeds of this offering for product development, sales and
marketing, working capital and general corporate purposes. Other uses may
include possible acquisitions or investments in complementary businesses,
products or otherwise to obtain the right to use complementary technologies that
broaden or enhance the Company's current product offerings. The Company has no
present understandings or agreements with respect to any acquisitions,
investments or other transactions and accordingly, the proceeds will not be
completely applied to these uses for some period of time. Consequently, the
Company's Board of Directors will maintain substantial discretion as to the
allocation of such net proceeds. See "-- Control by Existing Stockholder;
Conflicts of Interest; Certain Transactions." Pending use, the
13
<PAGE> 15
Company plans to invest the net proceeds in investment-grade, interest-bearing
securities. See "Use of Proceeds."
Dilution to Purchasers in Offering. Purchasers of the Common Stock offered
hereby will experience immediate and substantial dilution in net tangible book
value per share of the Common Stock from the initial public offering price per
share. There will be further dilution to the extent outstanding options to
purchase the Company's Common Stock are exercised. See "Dilution" and
"Management--1996 Stock Option Plan."
Restrictions on Dividends. The Company has never declared or paid cash
dividends on shares of its capital stock. The Company currently intends to
retain future earnings in its business and does not intend to pay cash dividends
in the foreseeable future. Moreover, the indentures governing certain
outstanding indebtedness of GST and GST USA restrict the Company's ability to
declare or pay cash dividends and, for the foreseeable future, effectively
prohibit such payments or declarations. See "--Control by Existing Stockholder;
Conflicts of Interest; Certain Transactions," "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Forward-Looking Statements. This Prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act, and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
which are intended to be covered by the safe harbors created thereby. Investors
are cautioned that all forward-looking statements involve risks and uncertainty.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock being offered by the Company hereby at an assumed initial public
offering price of $11.00 per share and after deducting underwriting discounts
and estimated offering expenses are estimated to be approximately $20,126,667
(approximately $24,730,167 if the Underwriters' over-allotment option is
exercised in full). The Company will not receive any proceeds from the sale of
Common Stock by the Selling Stockholder. See "Principal and Selling
Stockholder."
The Company expects to use the net proceeds of the offering for product
development, sales and marketing, working capital and general corporate purposes
and possible acquisitions or investments in complementary businesses, products
or otherwise to obtain the right to use complementary technologies that broaden
or enhance the Company's current product offerings. There are no present
understandings or agreements with respect to any acquisitions, investments or
other transactions. The principal purposes of this offering are to improve the
Company's financial position by obtaining additional working capital, to create
a public market for the Common Stock and to facilitate future access by the
Company to public equity markets. Pending such uses, the Company will invest the
net proceeds of this offering in investment-grade interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its shares of
capital stock and does not intend to pay cash dividends in the foreseeable
future. Moreover, the indentures governing certain outstanding indebtedness of
GST and GST USA restrict the Company's ability to declare or pay cash dividends,
and, for the foreseeable future, effectively prohibit such payments or
declarations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources." See also "Certain
Transactions" for a description of a dividend consisting of stock of a
subsidiary declared and paid by the Company to its sole stockholder in 1995.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth at September 30, 1996, the actual
capitalization of the Company and the capitalization of the Company as adjusted
to give effect to the sale of 2,000,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $11.00 per share
and the receipt of the estimated net proceeds therefrom. This table should be
read in conjunction with the financial statements and notes thereto and
"Selected Financial Data" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(in thousands, except
share and
per share data)
<S> <C> <C>
Long-term debt, net of current portion................................. $ 58 $ 58
--------- ---------
-- --
Stockholders' equity:
Preferred Stock, no par value per share; none authorized, actual;
$.01 par value per share, 10,000,000 shares authorized, no shares
issued and outstanding, as adjusted............................... -- --
Common Stock, no par value per share; 10,000,000 shares authorized,
6,113,712 shares issued and outstanding, actual; $.01 par value,
25,000,000 shares authorized, 8,113,712 shares issued and
outstanding, as adjusted(1)....................................... 9,245 81
Additional paid-in capital........................................... -- 29,291
Retained earnings.................................................... 965 965
Unrealized depreciation on marketable securities..................... -- --
--------- ---------
-- --
---------
Total stockholders' equity........................................ 10,210 30,337
--------- ---------
-- --
---------
Total capitalization......................................... $10,268 $30,395
========= =========
</TABLE>
- ------------------------------
(1) Excludes 1,250,000 shares of Common Stock reserved for issuance pursuant to
the exercise of stock options, 850,000 of which were outstanding as of
December 12, 1996 having an exercise price of $9.35 per share. See
"Management--1996 Stock Option Plan."
16
<PAGE> 18
DILUTION
At September 30, 1996, the Company's net tangible book value was
$5,134,565, or $0.84 per share. Net tangible book value per share represents the
amount of total tangible assets less total liabilities divided by 6,113,712
shares of Common Stock outstanding at September 30, 1996. Dilution per share
represents the difference between the amount per share paid by the purchasers of
shares of Common Stock in the offering made hereby and the pro forma net
tangible book value per share of Common Stock immediately after completion of
the offering. After giving effect to the sale of 2,000,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $11.00 per share and the application of the estimated net proceeds therefrom,
the pro forma net tangible book value of the Company as of September 30, 1996
would have been $25,261,232 or $3.11 per share. This represents an immediate
increase in net tangible book value of $2.27 per share to the existing
stockholder and an immediate dilution in net tangible book value of $7.89 per
share to the purchasers of Common Stock in the offering, as illustrated in the
following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $11.00
Net tangible book value per share before the offering............. $0.84
Increase per share attributable to new investors.................. 2.27
-----
Pro forma net tangible book value per share after the offering...... 3.11
------
Dilution per share to new investors................................. $ 7.89
======
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
1996, the differences between the existing stockholder and purchasers of shares
in the offering with respect to the number of shares purchased, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
--------------------- ------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholder(1)..... 6,113,712 75.4% $ 8,918,744(2) 28.8% $ 1.46
New investors(1)............ 2,000,000 24.6 22,000,000 71.2 11.00
---------- ----- ---------- -----
Total............. 8,113,712 100.0% $30,918,744 100.0%
========== ===== ========== =====
</TABLE>
To the extent that outstanding stock options are exercised, there will be
further dilution to new investors. See "Capitalization" and "Management--1996
Stock Option Plan."
- ------------------------------
(1) Sales by the Selling Stockholder in the offering will reduce the number of
shares held by such stockholder to 5,113,712 shares, or approximately 63%
(approximately 60% if the Underwriters' over-allotment option is exercised
in full) of the total number of shares of Common Stock to be outstanding
after this offering and will increase the number of shares held by new
investors to 3,000,000, or approximately 37% (approximately 40% if the
Underwriters' over-allotment option is exercised in full) of the total
number of shares of Common Stock to be outstanding after the offering. See
"Principal and Selling Stockholder."
(2) Includes cash and Common Shares of GST issued to former stockholders of the
Company at prevailing market prices for such shares.
17
<PAGE> 19
SELECTED FINANCIAL DATA
The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with the financial statements and
the notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this Prospectus. The
statement of operations data for the fiscal years ended September 30, 1995 and
1996 and the balance sheet data as of September 30, 1995 and 1996 are derived
from, and are qualified by reference to, the Company's financial statements
audited by KPMG Peat Marwick LLP, independent certified public accountants,
included elsewhere in this Prospectus. The statement of operations data for the
fiscal year ended September 30, 1994 are derived from, and are qualified by
reference to, the Company's financial statements audited by Squire & Co.,
independent certified public accountants, included elsewhere in this Prospectus.
The statement of operations data for the years ended December 31, 1991 and 1992
and the balance sheet data as of December 31, 1991 and 1992 and September 30,
1994 are derived from the Company's audited financial statements not included
herein. The Company's statement of operations data for the nine months ended
September 30, 1993 and the balance sheet data as of September 30, 1993 are
derived from the Company's unaudited financial statements, which are not
included herein. The unaudited financial statements have been prepared by the
Company on a basis consistent with the Company's audited financial statements
and include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information set forth therein. The
historical results are not necessarily indicative of the results of operations
to be expected in the future.
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED FISCAL YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
--------------- ------------- --------------------------
1991 1992 1993(1) 1994 1995 1996
------ ------ ------------- ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales......................... $1,666 $1,860 $ 2,422 $5,479 $ 7,604 $ 9,930
Network carrier sales................. -- -- -- -- 2,782 3,783
Wins sales(2)......................... -- -- -- -- 1,098 2,572
------ ------ ------ ------ ------ ------
Total revenues................ 1,666 1,860 2,422 5,479 11,484 16,285
Cost of goods sold:
Products.............................. 753 813 803 2,030 3,088 4,304
Network carrier usage................. -- -- -- -- 2,731 3,382
Wins(2)............................... -- -- -- -- 787 2,572
------ ------ ------ ------ ------ ------
Total cost of goods sold(3)... 753 813 803 2,030 6,606 10,258
------ ------ ------ ------ ------ ------
Gross profit(3)....................... 913 1,047 1,619 3,449 4,878 6,027
Operating expenses:
Research and development.............. 277 374 275 677 1,183 1,352
Selling and marketing................. 72 124 178 457 925 954
General and administrative............ 579 624 561 1,353 2,153 3,024
Amortization of acquired
intangibles........................ -- -- 20 257 520 573
------ ------ ------ ------ ------ ------
Total operating expenses(3)... 928 1,122 1,034 2,744 4,781 5,903
------ ------ ------ ------ ------ ------
Income (loss) from operations(3)........ (15) (75) 585 705 97 124
Other income, net....................... 10 87 31 81 189 148
------ ------ ------ ------ ------ ------
Income (loss) before income taxes(3).... (5) 12 616 786 286 272
Income taxes (benefit).................. 0 (5) 157 293 206 78
------ ------ ------ ------ ------ ------
Extraordinary income.................... 72 -- -- -- -- --
Cumulative effect on prior year
accounting change..................... -- 162 -- -- -- --
Net income(3)........................... $ 67 $ 179 $ 459 $ 493 $ 80 $ 194
====== ====== ====== ====== ====== ======
Net income per share(3)................. $ 0.03 $ 0.07 $ 0.12 $ 0.08 $ 0.01 $ 0.03
====== ====== ====== ====== ====== ======
Weighted average shares
outstanding(4)........................ 2,728 2,742 3,719 5,998 6,114 6,114
====== ====== ====== ====== ====== ======
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------- -----------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................. $227 $208 $ 352 $1,186 $ 1,122 $ 694
Working capital...................................... 174 35 3,131 3,280 4,145 4,245
Total assets......................................... 623 884 8,474 9,072 13,178 14,685
Long-term debt, net of current portion............... 270 150 387 -- 85 58
Total stockholders' equity........................... (52) 128 6,094 6,969 9,630 10,210
</TABLE>
- ------------------------------
(1) The Company changed its fiscal year-end to September 30th, effective with
the fiscal year ended September 30, 1993. Accordingly, the fiscal year
ended September 30, 1993 was a nine-month period.
(2) Fiscal 1995 and 1996 include the accounts of the Company and its
wholly-owned subsidiary, Wasatch International Network Services, Inc.
("Wins"), which commenced operations in fiscal 1995 and had total assets,
revenues and a net loss of $316,455, $1,097,950 and $2,361, respectively,
as of and for the year ended September 30, 1995. Wins was a wholly-owned
subsidiary of the Company in 1995. All significant intercompany
transactions and balances have been eliminated in consolidation. On October
1, 1995, the Company transferred ownership and operations of Wins to GST
USA in the form of a dividend accounted for at historical cost. In fiscal
1996, the Company provided carrier services to GST USA for the Wins
operation for which it received $2,571,731. The Company discontinued
providing carrier services to Wins on October 1, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 1 of Notes to Financial Statements.
(3) From September 1993 through December 1994, GST USA acquired a 100% interest
in the Company's Common Stock through a series of purchases of newly issued
shares and shares owned by former stockholders of the Company. GST USA
accounted for the acquisition using the purchase method of accounting. The
excess of the purchase price over the fair value of the assets acquired in
the amount of $6,912,322 was assigned by GST USA as product support
contracts, software development costs and goodwill. In accordance with
requirements of the Commission, this intangible amount has been included in
the balance sheets of the Company with related amortization recorded in
cost of goods sold and other operating expenses for the nine months ended
September 30, 1993 and the fiscal years ended September 30, 1994, 1995 and
1996. In the following table, the columns labeled "Post Amortization"
depict selected Statement of Operations data of the Company as reported,
whereas the columns labeled "Pre Amortization" are indicative of what such
accounts would have been had such amortization not been included in the
Statement of Operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
SEPTEMBER 30, FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------- ---------------------------------------------------------
1993 1994 1995
--------------------------- --------------------------- ---------------------------
PRE POST PRE POST PRE POST
AMORTIZATION AMORTIZATION AMORTIZATION AMORTIZATION AMORTIZATION AMORTIZATION
------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total revenues.................... $2,422 $2,422 $5,479 $5,479 $ 11,484 $ 11,484
Cost of goods sold................ 789 803 1,845 2,030 6,164 6,606
------ ------ ------ ------ ------------ ------------
Gross profit...................... 1,633 1,619 3,634 3,449 5,320 4,878
Operating expenses................ 1,014 1,034 2,487 2,744 4,261 4,781
------ ------ ------ ------ ------------ ------------
Income from operations............ 619 585 1,147 705 1,059 97
Interest and other income......... 31 31 81 81 189 189
------ ------ ------ ------ ------------ ------------
Income before income taxes........ 650 616 1,228 786 1,248 286
Income taxes...................... 168 157 435 293 456 206
------ ------ ------ ------ ------------ ------------
Net income........................ $ 482 $ 459 $ 793 $ 493 $ 792 $ 80
========= ========= ========= ========= ========= =========
Net income per share.............. $ 0.13 $ 0.12 $ 0.13 $ 0.08 $ 0.13 $ 0.01
========= ========= ========= ========= ========= =========
<CAPTION>
1996
---------------------------
PRE POST
AMORTIZATION AMORTIZATION
------------ ------------
<S> <C> <C>
Total revenues.................... $ 16,285 $ 16,285
Cost of goods sold................ 9,896 10,258
---------- ----------
Gross profit...................... 6,389 6,027
Operating expenses................ 5,330 5,903
---------- ----------
Income from operations............ 1,059 124
Interest and other income......... 148 148
---------- ----------
Income before income taxes........ 1,207 272
Income taxes...................... 373 78
---------- ----------
Net income........................ $ 834 $ 194
========= =========
Net income per share.............. $ 0.14 $ 0.03
========= =========
</TABLE>
Amortization expense included in Cost of goods sold -- product was $14,460,
$184,869, $442,734 and $362,428 for the nine months ended September 30,
1993 and the fiscal years ended September 30, 1994, 1995 and 1996,
respectively. Amortization expense included as a component of operating
expenses was $20,304, $257,176, $519,780 and $573,058 for the nine months
ended September 30, 1993 and the fiscal years ended September 30, 1994,
1995 and 1996, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes 1 and 4 of Notes
to Financial Statements.
(4) See Note 1 of Notes to Financial Statements for an explanation of the method
used to determine the number of shares used in computing net income per
share.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
NACT provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. During
the period from 1987 through 1989, the Company developed and began selling its
LCX 120C switch application product and NTS 1000 billing system. During the
period from 1990 through 1995, the Company developed enhancements to the LCX,
including T-1 capability, enhancement of its prepaid debit card services,
automated operator, international call back and call reorigination. During the
same period, the Company also developed the Master Control Unit. In May 1996,
the Company completed development of and began selling the STX, an integrated
digital tandem switching system that includes proprietary systems software that
enables standard applications such as 1+ and optional advanced applications such
as international call back/reorigination, prepaid debit card and prepaid
cellular.
The Company sells its products in the United States to enhanced
telecommunications network service providers through a direct sales force. The
Company has had no international product sales to date. The Company intends to
expand the marketing of its products generally and to commence sales outside the
United States.
In response to customer demand, in fiscal 1995, the Company began offering
facilities management and network carrier services. Facilities management
services enable a customer to concentrate on marketing its products while the
Company maintains such customer's switch(es) in the Company's facilities for a
fee. Such services can include network carrier usage in addition to the
management of a switch. The Company provides network carrier usage at
competitively priced domestic and international rates. Revenues associated with
such facilities management services, including network carrier usage, are
presented in the Company's financial statements as network carrier sales. The
gross profits associated with such sales are substantially lower than those
associated with product sales. In addition, given the small number of customers
and the high volume of revenues generated from an individual customer through
network carrier sales, the loss or gain of one or more customers could cause a
significant fluctuation in the Company's quarterly revenues.
In 1995, the Company formed Wins, a wholly-owned subsidiary, to provide
specialized long distance services (e.g. prepaid debit card, international call
back/reorigination) to potential switching system customers who wanted to enter
the specialized long distance service market before making a major capital
investment in switching equipment. By providing this service, the Company
believes it was able to retain customers it might otherwise have lost. In many
cases, as customers built up substantial customer bases, they purchased their
own NACT switching equipment. The Company's financial statements for the fiscal
year ended September 30, 1995 include the accounts of the Company and Wins. On
October 1, 1995, the Company transferred ownership and operations of Wins to GST
USA in the form of a dividend accounted for at historical cost. From October 1,
1995 through September 30, 1996, the Company provided carrier services to GST
USA for the Wins operation. The Company ceased providing carrier services to
Wins on October 1, 1996. Therefore, no revenue will be recognized by the Company
from this operation after September 30, 1996.
GST USA acquired a 100% interest in the Company's Common Stock through a
series of purchases of newly issued shares and shares owned by former
stockholders of the Company from September 1993 through December 1994. GST USA
accounted for the acquisition using the purchase method of accounting. The
excess of the purchase price over the fair value of the assets acquired was
accounted for by GST USA as product support contracts, software development
costs and goodwill. In accordance with requirements of the Commission, the
Company's financial statements for fiscal 1993 through fiscal 1996 reflect these
intangible assets on its balance sheet, with related amortization recorded in
cost of goods sold and other operating expense in the respective years. Product
support contracts and software development costs are being amortized over a five
year straight-line period and goodwill is
20
<PAGE> 22
being amortized over a 20 year straight-line period. For the fiscal years ending
September 30, 1997, 1998 and 1999, the impact of the amortization of acquired
intangibles on the Company's gross margin is anticipated to decrease the
Company's gross profit by $362,428, $362,428 and $163,099, respectively, and to
decrease the Company's operating income by $935,486, $935,486, and $524,816,
respectively. See "Prospectus Summary--Summary Financial Data" and "Selected
Financial Data."
The Company is subject to certain financial restrictions by reason of its
status as a "Restricted Subsidiary" of GST and GST USA under indentures relating
to certain outstanding indebtedness of GST and GST USA. Such restrictions
significantly limit or prohibit the ability of GST and its Restricted
Subsidiaries to incur additional indebtedness or to create liens on their
assets. Effectively, the ability of the Company to incur indebtedness is limited
by the amount of indebtedness that GST and its Restricted Subsidiaries is
permitted to incur pursuant to the terms of the indentures. Upon completion of
this offering, GST USA will own approximately 63% of the outstanding Common
Stock of the Company (approximately 60% if the Underwriters' over-allotment
option is exercised in full) and will continue to control the Company. See "Risk
Factors--Control by Existing Stockholder; Conflicts of Interest; Certain
Transactions."
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
presented as a percentage of revenues, for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Revenues:
Product sales............................................. 100.0% 66.2% 61.0%
Network carrier sales..................................... 0.0 24.2 23.2
Wins sales................................................ 0.0 9.6 15.8
----- ----- -----
Total revenues......................................... 100.0 100.0 100.0
Cost of goods sold:
Products.................................................. 37.1 26.9 26.4
Network carrier usage..................................... 0.0 23.7 20.8
Wins...................................................... 0.0 6.9 15.8
----- ----- -----
Total cost of goods sold............................... 37.1 57.5 63.0
----- ----- -----
Gross profit................................................ 62.9 42.5 37.0
Operating expenses:
Research and development.................................. 12.4 10.3 8.3
Selling and marketing..................................... 8.3 8.1 5.8
General and administrative................................ 24.7 18.7 18.6
Amortization of acquired intangibles...................... 4.7 4.5 3.5
----- ----- -----
Total operating expenses.......................... 50.1 41.6 36.2
Income from operations...................................... 12.8 0.9 0.8
Interest and other income, net.............................. 1.5 1.6 0.9
----- ----- -----
Income before income taxes.................................. 14.3 2.5 1.7
Income taxes................................................ 5.3 1.8 0.5
----- ----- -----
Net income.................................................. 9.0% 0.7% 1.2%
===== ===== =====
</TABLE>
Fiscal Years Ended September 30, 1994, 1995 and 1996
Revenues. Revenues increased by 41.8% from $11.5 million in fiscal 1995 to
$16.3 million in fiscal 1996. Product sales increased by 30.6% from $7.6 million
in fiscal 1995 to $9.9 million in fiscal 1996 primarily due to the introduction
of the Company's new STX product line in May 1996. Network carrier sales
increased by 36.0% from $2.8 million in fiscal 1995 to $3.8 million in fiscal
1996 due to
21
<PAGE> 23
increased carrier usage volumes from existing network carrier customers. Wins
generated $1.1 million in revenues in fiscal 1995. On October 1, 1995, the
Company transferred ownership and operations of Wins to GST USA. Revenues
generated from Wins network carrier sales in fiscal 1996 were $2.6 million.
Revenues increased by 109.6% from $5.5 million in fiscal 1994 to $11.5
million in fiscal 1995. Product sales increased by 38.8% from $5.5 million in
fiscal 1994 to $7.6 million in fiscal 1995 primarily due to an increase in unit
sales to prepaid debit card and international call back/reorigination customers,
the expansion of the Company's customer base through increased sales and
marketing efforts, an increased market acceptance of the Company's products and
the release of new hardware and software enhancements resulting in repeat sales
to the Company's existing customer base. The Company began providing network
carrier services in fiscal 1995 to switch customers that desired to house their
switch in the Company's switch facility for a fee and purchase aggregated
network pricing for domestic and international carrier services from the
Company.
Gross Profit.
Product Sales. Gross profit on product sales increased 24.6% from
$4.5 million in fiscal 1995 to $5.6 million in fiscal 1996 due to an increase in
product sales resulting from the introduction of the STX in May 1996. Gross
profit on product sales as a percent of product sales decreased from 59.4% in
fiscal 1995 to 56.7% in fiscal 1996 primarily due to lower margins resulting
from the discontinuance of the LCX as the Company transitioned to the STX.
Margins on initial STX sales were lower due to special STX upgrade pricing
provided to the Company's current customers through June 1, 1996. Gross profit
on product sales increased 30.9% from $3.4 million in fiscal 1994 to $4.5
million in fiscal 1995 due to an increase in product sales volumes. Gross profit
on product sales as a percent of product sales decreased from 62.9% in fiscal
1994 to 59.4% in fiscal 1995 due to the Company's decision to discount the LCX
sales price to maintain sales volumes.
Network Carrier Sales. Gross profit on network carrier sales
increased from $0.1 million in fiscal 1995 to $0.4 million in fiscal 1996 due to
increased network carrier sales volume. Gross profit on network carrier sales as
a percent of network carrier sales increased from 1.8% in fiscal 1995 to 10.6%
in fiscal 1996 due to increased volume discounts received from the underlying
carriers as a result of increased network carrier usage. The Company began its
network carrier operations in fiscal 1995 and therefore, there was no network
carrier gross profit in fiscal 1994.
Wins. Wins generated $0.3 million of gross profit in fiscal 1995 or
28.3% of Wins sales. The Company transferred ownership and operations of Wins to
GST USA on October 1, 1995 and provided carrier services at cost to GST USA for
the Wins operations in fiscal 1996.
Overall. Gross profit increased 23.6% from $4.9 million in fiscal
1995 to $6.0 million in fiscal 1996 due to an increase in both product and
network sales volume. Gross profit as a percentage of net revenues decreased
from 42.5% in fiscal 1995 to 37.0% in fiscal 1996 primarily due to lower margins
resulting from the discontinuance of the LCX as the Company transitioned to the
STX and lower margins on initial sales of the STX. Gross profit increased by
41.4% from $3.4 million in fiscal 1994 to $4.9 million in fiscal 1995 due to an
increase in product sales volume and commencement of network carrier operations.
Gross profit as a percentage of net revenues decreased from 62.9% in fiscal 1994
to 42.5% in fiscal 1995 due to the commencement of network carrier operations,
which has substantially lower gross margins than the Company's product lines.
Research and Development. Research and development expenses increased by
14.3% from $1.2 million in fiscal 1995 to $1.4 million in fiscal 1996 as the
Company moved to more rapidly develop an improved billing system and to maintain
ongoing research and development of the Company's existing hardware and software
product lines.
Research and development expenses increased by 74.9% from $0.7 million in
fiscal 1994 to $1.2 million in fiscal 1995 primarily due to the expansion of the
Company's engineering staff and overhead
22
<PAGE> 24
as a result of a decision by the Company to more rapidly develop the STX switch
and to maintain ongoing research and development of the Company's existing
hardware and software product lines. The Company capitalizes software costs when
technological feasibility is obtained. When the product becomes commercially
available, the Company amortizes the capitalized costs to cost of sales over a
three-year period. The Company's capitalized software development costs were
$0.2 million and $0.4 million in fiscal 1995 and 1996, respectively. See Note 1
to the Company's Financial Statements included elsewhere herein. The Company
expects that research and development expenses will increase in the future to
facilitate the rapid deployment of new products and applications.
Selling and Marketing. Selling and marketing expenses increased 3.1% from
$0.9 million in fiscal 1995 to $1.0 million in fiscal 1996 primarily due to
continued expansion of the Company's sales and marketing staff and
notwithstanding a decrease in expenses associated with fees paid to the Chairman
of the Board of the Company. Fiscal 1996 selling and marketing expenses were
offset by the transfer of certain salary and fringe benefit expenses to general
and administrative when the Director of Sales and Marketing was promoted to
Executive Vice President and then to President and Chief Executive Officer. The
Company anticipates that selling and marketing expenses will increase as a
result of the planned expansion of the Company's sales force. See "Business--The
NACT Strategy."
Selling and marketing expenses increased by 102.4% from $0.5 million in
fiscal 1994 to $0.9 million in fiscal 1995 primarily due to an expansion of the
Company's sales and marketing staff and increased commissions and travel
expenses related thereto, and an increase in advertising and trade show expenses
as the Company enhanced its marketing program.
General and Administrative. General and administrative expenses increased
by 40.5% from $2.2 million in fiscal 1995 to $3.0 million in fiscal 1996
primarily due to an increase in the provision for bad debt, continued expansion
of the manufacturing and technical support departments, the expansion of the
finance department and implementation of a Company-wide quality assurance
program, which is anticipated to culminate in an ISO 9000 certification. The
Company expects that general and administrative expenses will increase in fiscal
1997 as a result of increased levels of staffing.
General and administrative expenses increased by 59.1% from $1.4 million in
fiscal 1994 to $2.2 million in fiscal 1995 when the Company expanded the
manufacturing and technical support departments to facilitate higher product
sales volumes.
Income Taxes. The Company recorded provisions for income taxes with
effective rates of 37.3%, 71.9% and 28.8% of income before taxes for fiscal
1994, 1995 and 1996, respectively. The increase in the effective tax rate in
1995 is a result of additional amortization of goodwill which is not deductible
for income tax purposes and the absence of a research and development tax credit
which was available in 1994. The decrease in the 1996 effective tax rate is a
result of an adjustment to the intercorporate tax account. Future effective tax
rates are expected to be in excess of statutory rates during the amortization
period of the acquired goodwill from GST USA, as the goodwill is not deductible
for income tax purposes.
23
<PAGE> 25
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly financial
information for the eight quarters in the period ended September 30, 1996.
Management believes that this information has been prepared on the same basis as
the audited consolidated financial statements appearing elsewhere in this
Prospectus and all necessary adjustments (consisting only of normal recurring
adjustments) have been included to present fairly the unaudited quarterly
results when read in conjunction with the audited financial statements of the
Company and the notes thereto appearing elsewhere in this Prospectus. These
operating results are not necessarily indicative of results that may be expected
for any subsequent periods.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1994 1995 1995 1995 1995 1996 1996 1996
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales.................. $1,833 $1,973 $1,870 $ 1,928 $1,969 $1,612 $2,450 $ 3,899
Network carrier sales.......... 326 634 879 943 354 904 1,139 1,386
Wins sales..................... -- 240 371 487 496 594 778 704
------ ------ ------ ------ ------ ------ ------ ------
Total revenues.......... 2,159 2,847 3,120 3,358 2,819 3,110 4,367 5,989
Cost of goods sold:
Products....................... 709 811 879 689 804 865 1,092 1,543
Network carrier usage.......... 279 617 656 1,179 311 514 1,113 1,444
Wins........................... -- 178 233 376 496 594 778 704
------ ------ ------ ------ ------ ------ ------ ------
Total cost of goods
sold.................. 988 1,606 1,768 2,244 1,611 1,973 2,983 3,691
------ ------ ------ ------ ------ ------ ------ ------
Gross profit................... 1,171 1,241 1,352 1,114 1,208 1,137 1,384 2,298
Operating expenses:
Research and development....... 251 322 314 296 296 332 328 396
Selling and marketing.......... 128 307 229 261 207 236 241 270
General and administrative..... 441 414 541 757 578 699 813 934
Amortization of acquired
intangibles.................. 130 130 130 130 143 143 143 144
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 950 1,173 1,214 1,444 1,224 1,410 1,525 1,744
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from operations.... 221 68 138 (330) (16) (273) (141) 554
Other income, net................ 28 56 62 43 21 16 34 77
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes.......................... 249 124 200 (287) 5 (257) (107) 631
Income taxes (benefit)........... 179 89 144 (206) 1 (74) (31) 182
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)................ $ 70 $ 35 $ 56 $ (81) $ 4 $ (183) $ (76) $ 449
====== ====== ====== ====== ====== ====== ====== ======
Net income per share............. $ 0.01 $ 0.01 $ 0.01 $ (0.01) $ 0.00 $(0.03) $(0.01) $ 0.07
====== ====== ====== ====== ====== ====== ====== ======
Weighted average shares
outstanding.................... 6,114 6,114 6,114 6,114 6,114 6,114 6,114 6,114
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1994 1995 1995 1995 1995 1996 1996 1996
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales.................. 84.9% 69.3% 59.9% 57.4% 69.8% 51.8% 56.1% 65.1%
Network carrier sales.......... 15.1 22.3 28.2 28.1 12.6 29.1 26.1 23.1
Wins sales..................... 0.0 8.4 11.9 14.5 17.6 19.1 17.8 11.8
---- ---- ----- ----- ----- ----- ----- ----
Total revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of goods sold:
Products....................... 32.9 28.5 28.2 20.5 28.5 27.8 25.0 25.8
Network carrier usage.......... 12.9 21.7 21.0 35.1 11.0 16.5 25.5 24.1
Wins........................... 0.0 6.2 7.5 11.2 17.6 19.1 17.8 11.8
---- ---- ----- ----- ----- ----- ----- ----
Total cost of goods
sold.................. 45.8 56.4 56.7 66.8 57.1 63.4 68.3 61.7
---- ---- ----- ----- ----- ----- ----- ----
Gross profit................... 54.2 43.6 43.3 33.2 42.9 36.6 31.7 38.3
Operating expenses:
Research and development....... 11.6 11.3 10.1 8.9 10.5 10.7 7.5 6.6
Selling and marketing.......... 5.9 10.8 7.3 7.8 7.3 7.6 5.5 4.5
General and administrative..... 20.5 14.5 17.3 22.5 20.5 22.5 18.6 15.6
Amortization of acquired
intangibles.................. 6.0 4.6 4.2 3.9 5.1 4.6 3.3 2.4
---- ---- ----- ----- ----- ----- ----- ----
Total operating
expenses.............. 44.0 41.2 38.9 43.1 43.4 45.4 34.9 29.1
---- ---- ----- ----- ----- ----- ----- ----
Income (loss) from operations.... 10.2 2.4 4.4 (9.9) (0.5) (8.8) (3.2) 9.2
Other income, net................ 1.3 2.0 2.0 1.3 0.7 0.5 0.7 1.3
---- ---- ----- ----- ----- ----- ----- ----
Income (loss) before income
taxes.......................... 11.5 4.4 6.4 (8.6) 0.2 (8.3) (2.5) 10.5
Income taxes (benefit)........... 8.3 3.2 4.6 (6.2) 0.1 (2.4) (0.7) 3.0
---- ---- ----- ----- ----- ----- ----- ----
Net income (loss)................ 3.2% 1.2% 1.8% (2.4)% 0.1% (5.9)% (1.8)% 7.5%
==== ==== ===== ===== ===== ===== ===== ====
</TABLE>
Product sales and gross profit decreased in the second quarter of fiscal
1996 as a result of decreased customer demand for, and the attendant lower sales
volume and discounting of, the LCX during the transition from the LCX to the
STX. The Company's first sale of an STX occurred in May 1996. As a result of
sales of STX upgrades to existing customers of the Company, which sales were
made on favorable and limited time upgrade pricing terms, revenues and gross
profits increased in the third quarter of fiscal 1996. Revenues and gross
profits in the fourth quarter of fiscal 1996 increased as a result of higher
product sales associated with sales of STXs to new customers under the Company's
standard STX pricing terms.
The Company has experienced large fluctuations in network carrier sales
from quarter to quarter due to the substantial sales generated from a limited
number of network carrier customers. When network carrier sales customers
substantially increase their monthly sales volume, they can then negotiate
competitive long distance rates. When network carrier customers place their long
distance carrier traffic with someone other than the Company, a substantial drop
in revenue may occur in the quarterly operating results. When new network
carrier customers join the Company's network carrier sales program, substantial
increases in revenue may occur in the quarterly operating results.
Network carrier sales decreased between the fourth quarter of fiscal 1995
and the first quarter of fiscal 1996 due to the loss of a significant network
carrier customer that was able to obtain carrier usage rates directly from
another carrier at competitive rates. This customer is currently one of the
largest purchasers of the Company's products. Network carrier sales increased
between the first quarter of fiscal 1996 and the second quarter of fiscal 1996
due to increased carrier usage volumes from the Company's other network carrier
customers. These other network carrier customers were primarily international
call back/reorigination providers.
Operating results have in the past and may in the future fluctuate due to
factors such as the timing of new product introductions by the Company and its
competitors, delays in new product introductions by the Company, market
acceptance of new or enhanced versions of the Company's products, changes in the
product or customer mix, changes in the level of operating expenses, competitive
pricing pressures, the gain or loss of significant customers, increased research
and development and sales and marketing expenses associated with new product
introductions and economic conditions in general and in the Company's industry.
Due to the high unit price and long lead times associated with
25
<PAGE> 27
revenues derived from equipment orders, the Company's financial results may
fluctuate significantly depending upon the time of the actual shipment of such
orders. All of the above factors are difficult for the Company to forecast, and
these or other factors can materially adversely affect the Company's business,
financial condition and results of operations for one quarter or a series of
quarters. The Company's expense levels are based in part on its expectations
regarding future sales and are fixed in the short term to a large extent.
Therefore, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in sales. Any significant decline in
demand relative to the Company's expectations or any material delay of customer
orders could have a material adverse effect on the Company's business, financial
condition and results of operations.
Fluctuations in operating results may cause volatility in the price of the
Company's Common Stock. See "Risk Factors--No Prior Market for the Company's
Common Stock; Price Volatility."
LIQUIDITY AND CAPITAL RESOURCES
The primary source of financing for the Company has been cash flow from
operations and proceeds of $2.6 million from the sale of securities in fiscal
1993 and 1994. These proceeds were used for research and development and sales
and marketing operations, the acquisition of capital equipment and to finance
inventory and accounts receivable growth.
Net cash used by operating activities in fiscal 1994 and 1996 totalled $0.3
million and $0.1 million, respectively. Net cash provided by operating
activities in fiscal 1995 was $0.4 million. The increase in net cash used by
operating activities from 1995 to 1996 was due primarily to the STX upgrade
program that allowed current customers to trade-in their LCX switching systems
for credit against a new STX switch during a limited period through June 1, 1996
and as a result of increased internal financing of customer switch and billing
systems.
The Company made capital expenditures of $0.2 million, $0.3 million, and
$0.3 million in fiscal 1994, 1995 and 1996, respectively, primarily for the
purchase of computers and testing equipment. The Company has made commitments
for capital expenditures in fiscal 1997 of approximately $4.7 million for the
purchase and furnishing of its new corporate offices and manufacturing building,
and $0.3 million for the purchase of the source code for the development of SS7
capability in the STX. Excluding the cost to purchase and furnish the Company's
new office and manufacturing building, the Company expects that its capital
expenditures in fiscal 1997 will increase above recent historical levels. See
"Business--Facilities" and "Certain Transactions."
As of September 30, 1996, the Company's principal sources of liquidity were
cash and marketable securities of $0.9 million. In addition, the Company has a
revolving bank line facility of $0.2 million. The Company believes that cash
generated from proceeds of this offering, available funds, anticipated cash
flows from operations and its line of credit will satisfy the Company's working
capital and capital expenditure requirements for at least the next twelve
months. However, there can be no assurance that the Company will not be required
to seek additional capital sooner or, if so required, that adequate capital will
be available on terms acceptable to the Company, or at all.
FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, which are intended to be covered by the safe harbors created thereby.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Prospectus will prove to be
accurate. Factors that could cause actual results to differ from the results
discussed in the forward-looking statements include, but are not limited to,
those discussed in "Risk Factors." In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
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<PAGE> 28
BUSINESS
The Company provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. As a
single source provider, the Company believes that it is the only company in its
market that designs, develops and manufactures all hardware and software
elements necessary for a fully integrated, turnkey telecommunications switching
solution. Because the Company provides a complete, integrated solution, its
customers do not require the multiple suppliers of hardware and value added
resellers of software that would otherwise be necessary to provide a wide range
of services and applications. The Company's customers include long distance
carriers, prepaid debit card and prepaid cellular network operators,
international call back/reorigination providers and other specialty
telecommunications service providers.
The Company's products and services include the STX application switching
platform, the NTS telemanagement and billing system and facilities management
services. In May 1996, the Company introduced the STX, an integrated digital
tandem switching system that currently supports up to 1,024 ports per switch and
can be combined with three additional STXs to provide a total capacity of 4,096
ports per system. The STX includes proprietary systems software that enables
standard applications such as 1+ and optional advanced applications such as
international call back/reorigination, prepaid debit card and prepaid cellular.
The Company has targeted the STX, with its enhanced features and scaleable
capacity, to an expanded group of customers, including independent telephone
companies, CAPs/CLECs, shared tenant service providers, Fortune 1000
corporations and local telephone companies outside the United States. The
Company believes that the STX offers value added features and capacity at price
points typically lower than those offered by its competitors. The NTS performs
call rating, accounting, switch management, invoicing and traffic engineering
for multiple switches that may either be NACT switches or a number of other
industry switches. In conjunction with the sale of a system, the Company offers
a facilities management service whereby the Company will operate and maintain a
customer's switch for a fee. In providing this service, the Company enables its
customers to direct their attention toward marketing their products rather than
focusing on the technical aspects of operating a switch.
INDUSTRY BACKGROUND
Deregulation of long distance phone service in 1984 opened competition in
the telecommunications market to companies such as MCI Communications, Inc.
("MCI"), Sprint Corporation ("Sprint"), WorldCom Inc. ("WorldCom"), and many
smaller specialty services providers. Today, there are over 450 long distance
companies in the United States according to the FCC. In addition to basic long
distance calling (1+), many of these companies are providing high value added,
specialty long distance products such as international call back/reorigination,
prepaid debit card and prepaid cellular to differentiate their services from
each other and to generate higher margin revenue than basic long distance phone
services can provide.
International call back/reorigination. International call
back/reorigination companies provide least cost long distance calling services
from one foreign country to another through the use of a switch located in the
United States that takes advantage of the lower rate per call charged in the
United States. According to M.J. Scheele and Associates ("M.J. Scheele"), the
international call back/reorigination market increased from $300.0 million in
1994 to $485.0 million in 1995, with estimated growth in 1996 to over $750.0
million and over $1.1 billion by 1997. M.J. Scheele also estimates that growth
in the number of call back/reorigination providers will continue as well from
103 by the end of 1995 to 144 by the end of 1996 and 188 by the end of 1997. The
Company believes that as deregulation takes place in specific countries,
international call back/reorigination providers will be positioned for
additional opportunities to provide direct dial international calling by virtue
of their established customer base.
Prepaid debit cards/Prepaid cellular. Prepaid debit cards allow users to
make long distance calls from any touch tone phone based on a given number of
minutes that have been credited to the card. Prepaid debit card applications
include promotional campaigns, fund raising for charitable organizations and
budgeted out-of-town calling for travelling employees. In addition, prepaid
debit cards allow
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<PAGE> 29
long distance companies to generate revenues from a base of customers who would
otherwise not have the opportunity to take advantage of long distance services
due to credit and other considerations. The United States prepaid debit card
market is expected to grow from $12.0 million in 1992 to approximately $1.1
billion in 1996 to over $2.0 billion in 2000, according to MultiMedia Publishing
Company ("MultiMedia"). An emerging application in the prepaid market is prepaid
cellular, a service whereby cellular phone users can limit their monthly dollar
usage automatically in the same manner that a prepaid debit card limits the time
a user can call. The Company believes that the potential prepaid cellular market
is not currently being effectively addressed in the United States. The potential
market, which, according to MultiMedia, is approximately $1.5 billion and is
expected to exceed $3.0 billion by 2000, consists of a large number of potential
users who either are denied traditional cellular service due to lack of credit
or need to limit the usage of cellular service. Prepaid cellular offers a way to
capture revenue from these potential subscribers.
1+. 1+ is a dialing method that enables equal access to telephone networks
by all service providers offering direct dial long distance, whether inside or
outside of a caller's own area code. This protocol also enables the introduction
of telephone exchanges with the same three digits as area codes. The 1+ market
is comprised of both large global companies including MCI, Sprint, AT&T and
WorldCom and smaller, entrepreneurial long distance providers that are either
facilities based or switchless. Historically, these smaller specialty services
providers have competed exclusively based on price. However, the Company
believes that these companies are competing increasingly based on their ability
to provide enhanced services as well as on price. According to Frost & Sullivan,
revenues in the United States 1+ market were over $60.0 billion in 1995 and are
predicted to exceed $70.0 billion by 1998. The share of total long distance
revenues related to international services rose from 16.0% in 1994 to 17.0% in
1995 and is likely to exceed 20.0% by 1999. Additionally, Frost & Sullivan
estimates that the international market is growing over two times as fast as the
domestic market.
As long distance service providers have increasingly offered enhanced
services to their customers, demand for these services has also increased in the
local exchange market. Competitors such as CAPS/CLECs, cellular and PCS service
providers, specialized mobile radio companies and, more recently, cable
television providers have begun rapidly deploying enhanced services and
providing cost effective interfaces to long distance carriers. In addition, the
Telecommunications Act of 1996 allows CLECs to compete with the incumbent LEC
(generally, the RBOC or GTE) for basic local telephone service. NationsBanc
Capital Markets, Inc., in 1996, has estimated that the business and
institutional market for telecommunications services totals approximately $72.0
billion, all of which is addressable by CLECs. Additionally, demand for enhanced
services is expected to increase internationally as new service opportunities
result from the combination of privatization of previously government-owned
telecommunications systems, competition created in these international markets
and the creation of services in developing countries with typically low
densities of telephones.
The Company believes that companies competing in this new environment
require switching platform systems that are flexible to meet the diverse
requirements of an expanding array of applications. These systems must be
compatible with the variety of transmission technologies utilized by telephone
companies and must be capable of processing multiple concurrent services. In
order to provide enhanced services to end users, a provider must purchase (i)
one or more applications switch platforms, (ii) software applications to run the
switches and provide system functionality and (iii) a billing system.
Historically, an entrepreneur interested in entering the international call
back/reorigination, prepaid debit card and prepaid cellular markets had to
purchase each of these components from a separate vendor. Customers who purchase
components from different sources must, either on their own or through the
services of a consultant, configure the disparate components and provide for the
system's maintenance and upgrading. This requires a significant expenditure of
time and money, limits interoperability and technology upgrading, and diverts
company resources. The Company believes that in today's market environment its
customers require solutions that allow quick, easy entry into the market,
flexibility to add new services and additional capacity, high reliability and
low cost.
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THE NACT SOLUTION
The Company provides its customers with a complete, integrated package
consisting of both the application platform hardware and the operations
application software necessary to provide a full array of intelligent network
services. The Company offers a switching solution that includes essentially all
of the key elements necessary to enable a customer to offer enhanced services
such as the installation of the switch, the training of the customer for the use
of the switch, available applications, a billing system and ongoing customer
support. The Company believes that it is the only provider of a system that
integrates all of these components into one comprehensive package that includes
a broad range of applications, competitive pricing, interoperability and
scaleable port capacity. The Company sells its products to long distance
carriers, international call back/reorigination providers, prepaid debit card
and prepaid cellular network operators and other specialty telecommunications
service providers.
The Company offers a turnkey system, integrated with customer support, that
can be quickly implemented and upgraded to meet evolving market requirements.
The Company makes available to its customers a full array of technical and
commercial support on a 24 hour a day, seven day a week basis. The Company also
offers to manage and operate a customer's application platform and provide
competitively priced network services. Further, the Company continually develops
enhancements to its software applications in an effort to enable its customers
to utilize the latest technologies and most efficient systems available. The
Company strives to address its customers' specific needs and regularly enhances
its products to meet such needs. The Company believes its products enable its
customers to enter the marketplace and expand their businesses with increased
switching capacity and software applications as the need arises.
THE NACT STRATEGY
The Company's objective is to be a leading manufacturer and supplier of
turnkey solutions to providers of enhanced telecommunications services on a
worldwide basis. Key elements of the Company's strategy are to:
- Provide a Complete Integrated Switch Solution. The Company's product
strategy is to offer a switching platform consisting of both the hardware
and software necessary to provide intelligent network services, thus
offering a single source solution to its customers. The Company provides
its customers with a switching solution that includes essentially all of
the key elements a customer needs to offer enhanced telephone services.
The Company's package also includes installation and training with respect
to the use of the switch and the applications. The Company additionally
offers its facilities management services to operate and maintain a
customer's switch if a customer does not have the time or necessary
technical capability to do so on its own.
- Focus on Growth-Oriented Telecommunications Providers. The Company
focuses on emerging providers of enhanced long distance and local
telecommunications services that are entering existing service markets
recently opened to competition. The Company expects to capitalize on the
opportunities created by the deregulation of the telecommunications
industry worldwide and the resulting increased demand for advanced,
integrated telecommunications switching equipment by offering enhanced
services and network management and billing systems. The Company believes
that as the telecommunications industry continues to evolve, individual
providers will offer more diverse services and, as a result, will require
intelligent switches with application software and flexible billing
systems.
- Build Direct Sales Organization. The Company believes that a direct
sales organization that understands and can solve complex switching and
network management and billing system requirements will enable the Company
to increase product sales to specialty telecommunications network service
providers. To date, the Company has sold its products through a small
direct sales and technical support organization located primarily in Utah.
The Company has recently established a sales presence in the State of
Washington, is currently establishing sales
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forces in New York and Florida and intends to further expand its sales
organization both domestically and internationally.
- Target Customers with Large Capacity Requirements. Historically, the
Company has focused its sales and marketing efforts on small,
entrepreneurial telecommunications service providers for which 480 port
integrated switching systems were adequate to serve their customer base.
With the introduction of the STX and its enhanced, interoperable feature
set and capacity to provide 4,096 ports, the Company is capable of
addressing the port requirements of larger customers. This customer base
consists of larger IXCs and LECs, rural independent telephone companies,
CLECs, organizations with large volumes of telecommunications traffic
(especially multi-national corporations) and manufacturers of large port
capacity switches that do not have integrated capabilities to provide
enhanced telephony services.
- Expand into International Markets. The Company believes that the
international markets for competitive services present significant
opportunities for its products. To facilitate the implementation of its
international strategy, the Company is developing and adapting its
existing products to meet international standards such as E-1 and R-2
signaling. The Company intends to build its international presence by
forming relationships with distributors, service providers and large
telecommunications equipment manufacturers and by creating an
international sales force.
- Maintain a High Level of Customer Satisfaction. The Company's customers
operate in an environment in which reliability and availability of
technical support are increasingly critical factors. The Company's
manufacturing and technical support operations are intended to achieve
high reliability of its products and services. The Company's technical
support staff provides business consulting as well as trouble-shooting
services to its customers. The Company believes that its research and
development efforts contribute materially to ongoing customer satisfaction
by providing product features requested by customers. The Company makes a
significant number of sales as a result of repeat sales and referrals from
its existing customers. The Company also believes that significant
investments in research and development will be important in maintaining
and building its customer base.
PRODUCTS
The Company's product line consists of the STX solution, the NTS billing
system and the LCX switching platform.
The STX Solution
The Company's STX solution consists of an integrated application switching
platform and a suite of applications software. The Company sells an optional
companion Master Control Unit ("MCU") to integrate and service multiple STXs and
to add redundancy to the network. The Company has targeted the STX to an
expanded group of customers, including larger enhanced long distance providers,
independent telephone companies, CAPs/CLECs, shared tenant service providers,
Fortune 1000 corporations and local telephone companies in other countries. The
Company believes that its STX switching platform meets or exceeds the
scaleability, performance, interoperability and reliability standards of this
expanded customer base.
The Company believes that the STX offers valued added features and capacity
at price points typically below those offered by its competitors. A 1,024 port
STX configuration with two applications in addition to 1+, 10 languages and a
complete NTS billing system with RAID level five is priced at approximately
$330,000. A similarly configured 4,096 port STX system, which includes four STXs
and an integrated MCU, is priced at approximately $859,000.
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The STX Switching Platform
The STX application switching platform was designed as a hardware platform
for the enhanced service features that are delivered by the Company's own suite
of applications software. The STX platform consists of a digital tandem switch
that currently supports up to 1,024 ports per switch. It is a single chassis
design with dual disk drives or RAID mass storage, digital audiotape (DAT) or
digital linear tape (DLT) back-up, console and dual modems. The simplicity of
its design makes it a reliable hardware platform to which enhanced
telecommunications service features can easily be added by software. The STX
platform has also been designed so that users can easily replace boards by
hotswapping them, a process that does not require the user to shut down or
temporarily disable the switching system.
The STX applications platform has a cost-effective design incorporating
only three types of boards, CPU, T-1 and DSP, and a chassis with a backplane
that supports 2,048 time slots. The current CPU board is powered by a 33 MHz
Motorola 68040 processor and contains 64 or 128 megabytes of RAM, a SCSI-2
peripheral interface, two ARCnet LAN controllers (backplane and external for
communication with the MCU and other STX switches), eight RS-232 serial ports
and alarm LEDs and external relays. The T-1 board is powered by a Motorola
processor and has two megabytes of RAM, an ARCnet LAN controller, and eight T-1
interface controllers that handle 192 ports. The DSP board uses a Motorola
processor with eight megabytes of RAM, an ARCnet controller, three DSP
processors (96 or 120 channels of tone decoding or encoding) and a 64-channel
audio device for the playback of integrated audio messages or the temporary
recording of audio. Each DSP board may cache up to seven megabytes of
frequently-used audio phrases, regardless of language. All boards have been
designed with low-cost components.
The STX hardware platform can operate on a standalone basis with a port
capacity of 1,024. The Company's optional MCU can link up to four STXs which can
be served by a common database for a total system capacity of 4,096 ports. The
STX is also designed to work seamlessly with the Company's NTS 1000 billing
system.
Applications Software
The Company's suite of STX applications software consists of over one
million lines of code. This software supports major application features that
are fully integrated and interoperable. The major applications features include
equal access calling (1+), automated operator (0+), live operator service
provider support (0-), real-time validation of credit card and billing numbers,
prepaid debit cards, prepaid cellular, international call back/reorigination,
phone centers, real-time rating, fraud minimization, external computer
application programming interfaces, call re-origination, and integrated audio
with more than twenty languages. Interoperability enables several applications
packages to be used in conjunction with each other. For example, a prepaid,
international call back call can be assisted by a live operator and rated as a
prepaid, operator-assisted, international call back call. Almost all features
are implemented in software, allowing unlimited capability for enhancement and
customization.
Master Control Unit
The Master Control Unit allows interconnectivity between multiple NACT
applications platforms and permits database information to become centralized by
connecting collocated NACT systems. Interconnectivity permits expanded carrier
call routing. With more ports available due to the MCU, the likelihood of a
caller receiving a "system busy" signal is greatly reduced. Downtime of a single
switch has minimal caller impact when proper carrier management is used.
The Company's turnkey STX solution provides:
Scaleability. The STX architecture allows configurations from 24 to 1,024
ports in a single chassis. The MCU allows up to four STX platforms to use a
single, common database and to appear as a single applications system of up to
4,096 ports with common control of required features such as concurrency
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checking and fraud minimization. With the current Motorola 68040 CPU board, the
STX accommodates 1,024 ports and the MCU accommodates four 1,024 port STX
platforms. With a new CPU board under development by the Company, incorporating
a Motorola 68060 microprocessor, the STX and MCU systems will achieve the full
capacity of their architectures of 2,048 and 8,192 ports, respectively.
Performance. The STX applications platform with the Motorola 68040 CPU
board can process seven to eight million call minutes per month in a 1,024 port
nonblocked configuration. The Motorola 68060 processor will increase capacity to
15 million call minutes in a 2,048 port nonblocked configuration. By linking
four STXs with the MCU, capacity will be increased to up to 60 million call
minutes per month using the Motorola 68060 CPU board. See "-- Research and
Development."
Interoperability. The STX applications platform has been developed to
allow multiple application packages to run simultaneously and in a seamless
fashion. An example would be a client wishing to use international call
back/reorigination, with the assistance of an operator to place the call, and
the cost of the call being debited from the client's prepaid calling account.
Virtually all features are implemented in the software allowing unlimited
capability for enhancement and customization.
Reliability. The STX applications platform is designed using digital
components and is capable of running on single or redundant power supplies. When
multiple STX platforms are placed under the control of an MCU, the failure of a
single STX platform is handled through carrier routing of calls into the
remaining STX systems. With the introduction of the redundant MCU feature,
currently under development, the failure of a single STX will not compromise the
flow of calls through the system.
NTS Billing System
The NTS 1000 is a call rating, accounting, switch management, invoicing and
traffic engineering system designed to process the day-to-day operations of a
small-to-medium sized long distance company. The NTS 1000 can collect calls from
most major switching platforms including the STX and LCX application platforms
and can rate all types of call traffic and, using a sophisticated rating engine,
provides the owner with a highly flexible and completely customized rating
capability. The accounting system handles all of the required information for
managing a long distance customer base including configuration of authorization
codes, ANIs, accounts receivable, and management of delinquent accounts. A major
feature of the NTS 1000 is its switch management capability. When coupled with
the STX and LCX application platforms, information that has been entered into
the NTS 1000 can be electronically transferred into these systems, thereby
minimizing data entry needs. This integrated communication between the NTS 1000
and the LCX and STX also allows for automatic disabling of authorization codes
or ANIs when credit limits are exceeded. The NTS 1000 also has complete
international call back/reorigination and prepaid debit card management support,
as well as a complete invoicing package that supports multiple invoice styles
and options for summary reports. It has a sophisticated traffic engineering
reporting package that provides the ability to generate over 20 types of reports
with a user specified beginning and ending time range. A basic NTS 1000 system,
when sold individually, is priced at approximately $27,000.
The NTS 1000 system uses high performance Pentium or Pentium Pro servers
using RAID and error correcting code (ECC) memory with the option of adding
additional processors. It uses SCO's latest Unix offering, 5.0, which supports
multiple processors and has full LAN support and enhanced Unix graphical user
interface (GUI) system administration tools. The NTS 1000 uses Unify's
relational database management system (RDBMS) for storage of information and for
screen entry and reports. Access to the application can be either through a LAN
using a terminal emulation package on PCs or using terminals connected directly
through RS-232 ports.
LCX Switching Platform
Prior to introducing the STX, the Company's principal product was the LCX
applications platform, which has a maximum capacity of 480 ports in a single
cabinet configuration. While the Company continues to sell refurbished LCXs and
support users of LCXs, the Company does not plan to
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manufacture additional LCXs or develop ongoing enhancements for the LCX. The
versatility of the LCX, which was designed to operate in an unattended
environment, enables it to provide, in an integrated fashion, the following
applications: long distance, pay phone or courtesy phone network management,
international call back/reorigination and prepaid debit card. During the
introduction of the STX, the Company offered an option to customers of the LCX
to return their LCX system in exchange for a discount on their purchase of an
STX system. The Company refurbishes and resells the returned LCX systems, which
are attractive to customers with lower capacity and feature requirements. The
reliability of the LCX enables the system to be easily refurbished by general
cleaning and functional testing procedures. The system is then upgraded to the
latest LCX configuration, including both hardware and software, and made ready
for shipment to customers. Refurbished LCXs are currently being sold with any
two applications and five languages. A 360 port LCX with a NTS billing system is
priced at approximately $80,000 and is targeted to smaller customers who are
considering buying a PC-based switch without an integrated billing system for
essentially the same price.
SERVICES
The Company offers facilities management services to its customers who do
not have or plan to hire technical operators. This service allows the customer
to concentrate on marketing its products while the Company operates and
maintains its switch for a fee. The Company began offering facilities management
services to facilitate sales of its switches. The Company also provides
competitively priced domestic and international network services to its
customers, thereby facilitating their smooth entry into the communications
business. Through the aggregation of customer traffic, the Company has
negotiated favorable carrier rates from the major interexchange carriers.
Currently, the switch room that houses a customer's equipment is located at the
Company's headquarters in Orem, Utah. However, in conjunction with the expansion
of the Company's sales organization domestically and internationally, the
Company is exploring the possibility of providing facilities management services
to its customers in locations where it opens sales offices. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CUSTOMERS
The Company's applications platforms and billing systems have been accepted
in a variety of segments of the telecommunications industry and serve a broad
array of domestic and international applications. To date, the Company estimates
that it has installed over 300 application platforms and billing systems.
Representative companies using NACT applications platforms and billing systems
by industry segment are:
<TABLE>
<S> <C>
International Call Back/Reorigination Interexchange/Long Distance Carriers
- --------------------------------------------------------------------------------------------
GST Telecommunications, Inc. Apartment Services, Inc.
Intertoll Communications Network Corp. Bee Line Long Distance
Justice Technology Corp.* National Telephone Exchange, Inc.
Ursus Telecom Corporation*
Prepaid Debit Cards and Prepaid Cellular Other
- --------------------------------------------------------------------------------------------
American Cellular Rental Inc. (cellular) Custom Teleconnect, Inc.
Hello Card, Inc.* IEC Communications, Inc. (Hambrecht & Quist)*
International Telecom Inc. (Alaska Telecom) Questar InfoComm, Inc.
JD Services, Inc.* Telecommunications Technology, Inc. (TTI)
VarTec National, Inc.* Strategic Alliances, Inc.*
</TABLE>
- ---------------
* Indicates multiple systems
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The Company's customers are diverse and represent many different aspects of
the telecommunications industry. These customers have implemented a wide variety
of features on the LCX and STX. Some examples of leading customer applications
include the following:
- One of the most often used applications of the Company's applications
platform switching equipment is the prepaid debit card application. One
of the Company's customers was primarily in the long distance service
business when the decision to enter into the prepaid market led to the
purchase of a single NACT switch. This customer was able to obtain
contracts with a major convenience store chain and a large truck rental
chain. Today, this customer is operating three STX switches due to the
growth of its segment of the prepaid debit card market.
- A firm with a marketing plan for developing an international call back
business came to the Company looking for a solution. The firm saw an
opportunity in the international call back market but did not want to
spend time learning how to run and manage a switching and billing system.
With the Company's integrated switching, billing and applications
platform product, this customer has been able to enter the market quickly
and has grown to generate several million dollars of revenues per month.
This customer is now selling usage to carriers, currently has four LCX
switching application platforms and is in the process of upgrading two of
its switches to the STX.
- A firm that provides operator services to several hotels in Las Vegas,
Nevada uses an NACT switch for both payphones and guest rooms services.
This customer uses the automated operator feature to provide both
auto-collect and third party calls. In addition, the Company's
applications switching platform processes 0+ calls using credit cards,
phone cards and travel and entertainment cards. The NTS is used to rate
the calls and process call records into a format for clearing to receive
payment.
During the fiscal years ended September 30, 1994, 1995 and 1996, Caribbean
Telephone & Telegraph, Inc. accounted for 12%, 16% and 4% of the Company's total
revenues, respectively. During the fiscal year ended September 30, 1996,
Intertoll Communications Network Corp. ("Intertoll") and Overseas Telecom
("Overseas") accounted for 12% and 13% of the Company's total revenues,
respectively. Revenues from Intertoll consisted of both switch and network
carrier sales while revenues from Overseas were derived exclusively from network
carrier sales. The Company maintains a security interest in the systems it sells
until the related account balances are paid in full. Management provides an
allowance for doubtful accounts and notes based on current customer information
and historical statistics. See "Risk Factors--Potential Fluctuations in
Quarterly Operating Results; Timing of Sales" and Note 9 of Notes to Financial
Statements.
SALES AND MARKETING
The Company has historically sold its products through a small direct sales
force located primarily at the Company's headquarters in Orem, Utah. The
Company's marketing strategy has been to generate leads through attendance at
trade shows, advertising in industry periodicals and referrals from existing
customers. The Company convenes annual two-day round table discussions for its
customers. The Company invites its customers and their competitors to meet in an
environment of cooperation and collaboration to discuss their experiences with
the Company's products, providing significant consideration for future NACT
product development and enhancement.
The Company has recently established a sales presence in the State of
Washington, is currently establishing sales forces in New York and Florida and
plans to establish sales forces in other cities in the United States and in
other countries it believes to be strategically advantageous. The Company
believes that a sales organization that understands and can solve complex
switching and network management and billing systems requirements is necessary
to sell its products to specialty telecommunications network service providers
and corporate end users. The Company intends to invest significantly to enlarge
its sales organization in order to expand its customer base and to be more
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<PAGE> 36
geographically proactive. There can be no assurance that such increased sales
and marketing efforts will result in additional sales of the Company's products.
The Company believes that the development of a sales organization with
regional sales offices will enable sales personnel to follow up on leads in
person in remote locations as well as to generate additional leads through
direct solicitation. The Company's sales efforts will continue to include
responding to leads resulting from advertisements, attendance at trade shows and
from its relationship with its parent, GST, a provider of a broad range of
integrated telecommunications products and services. Further, the Company
expects that its technical support organization and customer referrals will
continue to be an important factor in the Company's sales. In attempting to
broaden its customer base, the Company will be marketing its products and
services to larger telephony providers whose procurement processes are generally
more protracted and may be expected to require additional effort on the
Company's part.
To date, the Company has, made no direct sales to international customers.
The Company believes that the international market for its products will
represent growth potential in the future, particularly in the developing
countries and in countries in which the telecommunications industry is being
deregulated. The Company intends to address these opportunities by creating an
international sales force and by marketing its products through international
partners directly involved in telecommunications equipment sales.
TECHNICAL SUPPORT
The Company's technical support staff provides business consulting as well
as trouble-shooting services to its customers. The Company's customers operate
in an environment in which reliability and availability of technical support are
increasingly critical factors. Such value-added services have resulted in a
recurring stream of revenues for the Company.
Since inception, the Company has been committed to building a strong
service and support organization. The Company's technical support department
installs and supports systems sold by the Company and provides ongoing services
that include training, business consultations, trouble-shooting and upgrades.
Since the Company sells a single switching solution that includes essentially
all of the key elements a customer needs to offer enhanced services, a customer
need not look beyond the Company, its "single source," for its technical
switching solutions.
The technical support department is involved with a customer as soon as a
sale has been finalized. A detailed pre-installation checklist is completed with
the customer prior to installation. A technical support engineer installs the
equipment at the customer's location, configures software for the specific
applications to be utilized and brings up the telephone circuits. Typically, a
system is operational shortly after it is delivered.
After the equipment is installed, the Company's technical support
department works with the customer to keep the equipment functioning reliably.
Modem access to all customer equipment enables the Company's technical support
personnel to perform diagnostics, trouble-shoot equipment, perform software
upgrades, transmit programs and configure hardware from a remote location. In
addition, technical support provides consulting services on network issues and
additional applications.
To quickly and efficiently resolve customer issues, the technical support
department uses an automated tracking system that contains the complete
installed customer database, software and hardware configuration, site
addresses, contacts and modem phone numbers. An incoming customer call is
monitored on this system, and the status of the resolution of the customer
problem and the mean-time to repair are updated and maintained for reporting
back to the customer. An incident escalation procedure ensures that all customer
problems receive appropriate visibility until a solution has been achieved. The
technical support department maintains 24 hour, 7-day-a-week emergency service
coverage. The Company's equipment is warrantied for one year, after which the
customer pays an annual fee for factory support. Factory support includes toll
free telephone support, as well as all
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<PAGE> 37
operating system software upgrades and free board repair. These upgrades allow
the Company's customers to take advantage of software enhancements offered by
the Company.
All of the Company's technical support operations are currently conducted
in Orem, Utah. The Company plans to expand the department into several key
locations in conjunction with the opening of additional sales offices.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on the
development of new products and the addition of new features and capabilities to
its existing products. The research and development department continually works
to improve the quality of the Company's products and to ensure that such
products meet industry standards and government regulations. In addition, the
Company is working toward the successful development of new products that will
enable it to offer additional intelligence to a customer's existing network.
During the past 15 years, the Company's engineers have introduced seven hardware
platforms, 10 software applications, 20 international language software packages
and numerous enhancements to such products.
The Company is working to increase the port capacity of the STX and to
improve and supplement its enhanced services and its billing system platform.
The Company is incorporating the Motorola 68060 CPU board into the STX
application platform to enable the STX to support 2,048 ports per chassis or
8,192 ports per integrated MCU system. With the Motorola 68060 processor, the
STX is expected to process up to 15 million call minutes per month in a 2,048
port nonblocked configuration or can be combined with three additional STXs to
provide up to 60 million call minutes per month.
The Company is currently developing an improved billing system, the NTS
2000, which is being designed for real time transaction processing and will use
a graphic user interface and improved call reports and will allow for greater
customization of invoices, bills and reports. The Company expects that the NTS
2000 will be available for use with its applications platform switches in the
first half of 1997 and will be available for use with non-NACT switches in the
future. However, no assurance can be made that the development of the NTS 2000
will be completed on time or that the Company will not experience delays
inherent in the development of products incorporating new technology. Any delays
in incorporating this new product into the Company's product line could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The "server" side of the NTS 2000 will use one or more Pentium Pro
PC-server systems with the SCO UNIX operating system and an Informix database
management system. The "client" side will use a PC computer with the Windows 95
operating system. All processing will be based upon real time transaction
processing. The NTS 2000 will allow for the customization of reports and
customer invoices on "client" PC computers while providing standard features on
the "server" computers.
The telecommunications equipment market is characterized by rapidly
changing technologies and frequent new product introductions. The rapid
development of new technologies increases the risk that current or new
competitors could develop products that would reduce the competitiveness of the
Company's products. The Company's success will depend to a substantial degree
upon its ability to respond to changes in technology and customer requirements.
This will require the timely selection, development and marketing of new
products and enhancements on a cost-effective basis. The development of new,
technologically advanced products is a complex and uncertain process, requiring
high levels of innovation. Further, the telecommunications industry is
characterized by the need to design products that meet industry standards for
safety, emissions and network interconnection. With new and emerging
technologies, such standards are often changing or unavailable. As a result,
there is a potential for product development delay due to the need for
compliance with new or modified standards. The introduction of new and enhanced
products also requires that the Company manage transitions from older products
in order to minimize disruptions in customer orders, avoid excess inventory of
old products and ensure that adequate supplies of new products can be delivered
to meet customer orders. There can be no assurance that the Company will be
successful in developing,
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<PAGE> 38
introducing or managing the transition to new or enhanced products or that any
such products will be responsive to technological changes or will gain market
acceptance. The Company's business, financial condition and results of
operations would be materially adversely affected if the Company were to be
unsuccessful, or to incur significant delays, in developing and introducing such
new products or enhancements. See "Risk Factors--Potential Fluctuations in
Quarterly Operating Results; Timing of Sales and "Risk Factors--Impact of
Technological Change."
As of September 30, 1996, approximately 20 full-time employees were engaged
in research and development. The Company expects that it will continue to expend
significant resources for product research and development.
MANUFACTURING AND QUALITY ASSURANCE
The Company's manufacturing operations consist primarily of material
requirements planning, material procurement and final assembly, test and quality
control of subassemblies and completed systems. The Company outsources its
printed circuit board assembly. The Company believes that by outsourcing its
printed circuit board assembly, the Company gains flexibility in the
manufacturing process and achieves lower direct labor and overhead costs.
The Company currently conducts its manufacturing operations in its facility
in Orem, Utah in a space of approximately 2,300 square feet. In fiscal 1997, the
Company is planning to move its entire operations to a facility that is being
built in Provo, Utah. The manufacturing operations will utilize over 10,000
square feet of the new facility. The Company believes that the increased space
will enable the Company to improve its productivity and manufacturing output
significantly. See "--Facilities."
The Company utilizes an annual planning forecast, which is modified
monthly, to determine its material and outsourcing requirements. The Company
orders materials with differing lead times, generally 30 to 180 days in advance.
The Company uses "just-in-time" ordering of materials that are readily available
to minimize inventory carrying costs. The Company's systems are manufactured to
a standard configuration that allows for better production planning, lower
direct labor and overhead costs and shorter order-to-shipment times.
The Company tests its systems in accordance with Company-designed quality
control specifications that are consistent with ISO 9000 requirements. ISO 9000
is an international quality certification process, developed in the European
Common Market and adopted in the United States as the method by which companies
can demonstrate the functionality of their quality control system.
ISO 9000 certification is a three step process: writing a "quality manual"
in accordance with the ISO 9000 requirements; documenting the processes and
procedures used to design, build, sell and finance products; and being audited
by an official ISO 9000 registrar. The Company has completed the "quality
manual," is currently documenting the processes and procedures and has selected
an ISO 9000 registrar to conduct the certification audit. In conjunction with
ISO 9000 certification, the Company presently has an in-house quality inspection
program where it tests all products prior to shipment to ensure the highest
standard of quality. The inability of the Company to meet and/or maintain ISO
standards would materially adversely effect the Company's business, financial
condition and results of operations.
On-time delivery of the Company's products is dependent upon the
availability of quality components and subassemblies used in its products. The
Company primarily uses standard parts and components for its products, procured
from multiple vendors. Certain integrated circuits, card cage chassis and
billing system database software are presently available only from a single
source or limited sources of supply. To date, the Company has been able to
obtain adequate supplies of these components in a timely manner. However, the
inability of the Company to obtain sufficient components as needed would
materially adversely affect the Company's business, financial condition and
results of operations.
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COMPETITION
The market for switching equipment and network management and billing
systems is highly competitive, and the Company expects competition to increase
in the future. The market is subject to rapid technological change, regulatory
developments in the telecommunications industry and emerging industry standards.
The Company believes that the primary competitive factors in the market for
switching equipment and network telemanagement and billing systems are the
development and rapid introduction of new product features, price/performance,
reliability and quality of customer support. There can be no assurance that the
Company's products and products under development will be able to compete
successfully with respect to these or other factors. To the extent that current
or potential competitors can expand their current offerings to include products
that have functionality similar to the Company's products and planned products,
the Company's business, financial condition and results of operations could be
materially adversely affected.
The Company believes that it competes across three categories:
PC Based Switch Platforms. A PC-based switch platform is a personal
computer, usually with high capacity, that contains generic telephony boards for
interfacing with the public network. A typical platform provides a single
application such as debit card or international call back/reorigination which
are software applications that can be brought to market rapidly. Leading
providers of these types of switches are CPDI, ITP, and PCS Telecom. The users
of this equipment generally tend to be start-up operations that are concerned
about initial equipment costs and that are generally able to bring software
solutions to the market rapidly. While these users may feel that PC-based
solutions are relatively low cost, as their business grows, it becomes apparent
that these systems are costly to expand on a cost per port basis and offer few
features that are standard with switch-based platforms. Additionally, PC-based
systems are not regarded as a viable solution for larger users due to their
reliability needs and concerns.
Open Architecture (Programmable) Hardware Platforms. A programmable
hardware platform generally consists of proprietary switch hardware, together
with the necessary software to provide a programming application interface (API)
that allows other computers executing third-party application software to
control the calls within the switch hardware. Leading providers of these types
of switches are Summa Four, Excel and Redcom and the value added software
providers that support this type of hardware, such as Magellan, Boston
Technology and Open Development. The users of this type of equipment tend to be
companies that have the ability and desire to write their own applications code
or are willing to purchase their applications code from a specialized third
party developer.
Application Switch Platforms. An application switching platform is an
integrated hardware/software switching system that contains software
applications that perform basic 1+ and operator assisted services over the
public network. To provide intelligent functionality, an adjunct switch must be
connected to the application switch platform. Leading providers of application
switch platforms are Harris and Siemens Stromberg Carlson. The major users are
companies that are established in their telephony business such as 1+ providers
that now need to expand their offerings to their customers to remain competitive
in the marketplace. Enhanced services are particularly attractive to these
customers and play a large part in their decision making process.
As the Company's business develops and it seeks to market its switches to a
broader customer base, the Company's competitors may include larger switch and
telecommunications equipment manufacturers such as Lucent Technologies Inc.,
Harris, Siemens AG, Alcatel Alsthom Compagnie, Generale D'Electricite,
Telefonaktiebolaget, L.M. Ericcson and Northern Telecom Ltd. Many of the
Company's current and potential competitors have substantially greater
technical, financial, manufacturing and marketing resources than the Company. In
addition, many of the Company's competitors have long-established relationships
with telecommunications network service providers. There can be no assurance
that the Company will have the financial resources, technical expertise,
manufacturing, marketing, distribution and support capabilities to compete
successfully in the future. See "Risk Factors--Competition."
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INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success is dependent in part on intellectual property rights,
including information technology, some of which is proprietary to the Company.
The Company relies on a combination of copyright, trade secret, and trademark
law, confidentiality procedures and other contractual restrictions to establish
and protect proprietary rights in its products and technologies. As part of
these confidentiality procedures, the Company generally enters into
confidentiality and non-disclosure agreements with its employees and limits
access to and distribution of its proprietary information. The Company has filed
federal trademark applications for the marks STX and NTS 2000 and is currently
conducting a review of its products to determine for which products it will seek
patent, trademark or copyright registration protection. While the Company
believes that its technology provides it with certain competitive advantages,
there can be no assurance that the Company's competitors will not be able to
develop similar technology. The Company currently licenses certain technology
from third parties and plans to do so in the future. See "Risk Factors--Limited
Intellectual Property Protection; Risk of Third Party Claims of Infringement."
The telecommunications equipment industry is characterized by the existence
of a large number of patents and frequent litigation based on allegations of
patent infringement. The scope of protection accorded to patents covering
software-related inventions is evolving and is subject to a degree of
uncertainty which may increase the risk and cost to the Company if such patents
are asserted against the Company in the future. In its sales agreements, the
Company typically indemnifies its customers for liabilities, up to the cost of
the equipment less 25% at each anniversary, resulting from claimed infringements
of patents or copyrights of third parties. In the event of litigation to
determine the validity of any third-party claims, such litigation, whether or
not determined in favor of the Company, could result in significant expense to
the Company and divert efforts of the Company's technical and management staff
from productive tasks. In the event of an adverse ruling in such litigation, the
Company might be required to discontinue the use and sale of infringing
products, expend significant resources to develop non-infringing technology or
obtain licenses from third parties. There can be no assurance that such licenses
from third parties would be available on acceptable terms, if at all.
On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc. (collectively,
"Aerotel") commenced an action against the Company and one of its customers
alleging that telephone systems manufactured and sold by the Company
incorporating prepaid debit card features infringe upon Aerotel's patent issued
in November 1987. The Company believes that it has valid defenses to the Aerotel
claims.
In the event of a successful claim against the Company and the failure of
the Company to develop or license a substitute technology, the Company's
business, financial condition and results of operations would be materially
adversely affected. See "Risk Factors--Pending Litigation" and "--Legal
Proceedings."
EMPLOYEES
At September 30, 1996, the Company had 68 full-time employees, of whom 20
were engaged in research and development, 19 in manufacturing and quality
control, seven in sales and marketing, 13 in technical support and nine in
administration and finance. None of the Company's employees is represented by a
collective bargaining agreement nor has the Company experienced any work
stoppage. The Company considers its relations with its employees to be good. See
"Risk Factors--Dependence on Key Personnel" and "Management--Employment and
Consulting Agreements."
FACILITIES
The Company's headquarters and principal administrative, engineering and
manufacturing facility is located in a facility containing approximately 13,400
square feet located in Orem, Utah. The Company leases this facility on a
month-to-month basis.
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GST Realco, Inc. ("GST Realco"), a subsidiary of GST, has entered into a
construction contract pursuant to which a 40,000 square foot office building is
currently being built for the Company in Provo, Utah. It is anticipated that
after the construction has been completed (currently estimated to be no later
than June 1997), the Company will move its entire operations to such facility.
It is further anticipated that the Company will occupy substantially all of the
space in the building, with some small portion of the building to be made
available to GST, or subsidiary companies of GST. To date, all of the
construction costs have been borne by GST Realco. The Company is currently in
the process of securing permanent financing for the purchase of the land and the
building from GST Realco. The purchase price will include the construction and
other costs incurred by GST Realco plus interest. See "Certain Transactions."
LEGAL PROCEEDINGS
On August 24, 1995, Aerotel commenced an action against the Company and a
customer of the Company in the United States District Court, Southern District
of New York, alleging that telephone systems manufactured and sold by the
Company incorporating prepaid debit card features infringe upon Aerotel's patent
which was issued in November of 1987 (the "Aerotel Patent"). The complaint
further alleges defamation and unfair competition as a result of a Special
Report disseminated by the Company to its customers and tortious interference
with prospective business relations, alleging that the Company induced third
parties to abandon licensing negotiations with Aerotel. Aerotel seeks injunctive
relief, damages in an unspecified amount, damages of up to three times the
damages found for willful infringement of the Aerotel Patent and an order
requiring the Company to publish a written apology to Aerotel. An Answer and
Counterclaim has been filed in which the Company denies infringement of the
Aerotel Patent and seeks judgment that the Aerotel Patent is invalid and that
Aerotel has misused its patent in violation of antitrust laws. The Company also
denies that it has committed defamation, unfair competition and tortious
interference with prospective business relations. The Company believes that it
has valid defenses to the Aerotel claims. The Company has filed with the Court a
motion to have the Aerotel Patent declared unenforceable. The Court has not yet
ruled on the Company's motion. The case is still in the discovery phase. The
case is not expected to be tried until late 1997 at the earliest. In the event
of an unfavorable decision in this action, the Company would be required to
obtain a royalty agreement with Aerotel to continue to offer prepaid debit card
services or cease to offer an infringing prepaid debit card feature with its
products. An unfavorable decision could have a material adverse effect on the
business, financial condition and results of operations of the Company. See
"Risk Factors--Pending Litigation." In addition, the Company may be liable to
its customers for indemnification under the Company's sales agreements. See
"Business--Intellectual Property and Other Proprietary Rights."
The Company is not currently involved in any other material legal action.
From time to time, however, the Company may be subject to claims and lawsuits
arising in the normal course of business.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company, their
ages and present positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- -------------------------- --- ----------------------------------------------------------
<S> <C> <C>
Thomas E. Sawyer.......... 64 Chairman of the Board, Emeritus
A. Lindsay Wallace........ 47 President, Chief Executive Officer and Director
Eric F. Gurr.............. 37 Chief Financial Officer, Treasurer and Secretary
W. Gordon Blankstein...... 46 Director
Stephen Irwin............. 55 Director
Robert L. Olson........... 46 Director
Clifford V. Sander........ 59 Director
Ronald S. Eliason......... 62 Director*
Gary D. Brown............. 42 Vice President of Research and Development
Geoffrey Shupe............ 41 Vice President of Sales and Marketing
</TABLE>
- ------------------------------
* This individual has agreed to serve as a director of the Company effective
upon completion of the offering.
THOMAS E. SAWYER has been the Chairman of the Board Emeritus since November
1996. Dr. Sawyer was a director of the Company from 1982 to November 1996, the
Chairman of the Board of Directors of the Company from October 1985 to November
1996 and was Chief Executive Officer of the Company from October 1988 to March
1996. In December 1993, he was appointed Chief Technology Officer of GST and was
appointed a director of GST in August 1995. Dr. Sawyer has over 35 years of
experience in information technology industries and 23 years of experience in
senior management of four publicly-traded information technology firms.
A. LINDSAY WALLACE has been the President and a director of the Company
since January 1996 and Chief Executive Officer of the Company since April 1996.
From January 1994 to January 1996, he was the Director of Sales and Marketing of
the Company and was the Executive Vice President of the Company from October
1995 to January 1996. From 1988 to December 1993, Mr. Wallace was a National
Account Manager of Sprint and opened the Sprint/Telnet data office in Salt Lake
City, Utah. From 1984 to 1988, he was President and Chief Executive Officer of
Hybrid Micrographics, Inc.
ERIC F. GURR has been the Company's Vice President of Finance and
Administration and Chief Financial Officer since August 1995 and Treasurer and
Secretary since June 1989. Between June 1989 and August 1995, Mr. Gurr served as
Controller and Director of Administration and Finance. Mr. Gurr served as Chief
Financial Officer and Treasurer of Wins, now a subsidiary of GST USA, from
January 1995 to September 1996. From 1985 to 1989, Mr. Gurr served as a Senior
Auditor for Deseret Management Corporation, a diversified conglomerate. Mr. Gurr
is a Certified Public Accountant.
W. GORDON BLANKSTEIN has been a director of the Company since April 1994.
Mr. Blankstein has been Chairman of the Board of GST since February 1995. He is
a founder, past President and Chairman of the Board and former director of ICG
Communications, Inc. Mr. Blankstein was the founder and a director of GST from
November 1992 to January 1993 and has been a director since January 1994. He was
elected Vice Chairman of the Board of GST in February 1994.
STEPHEN IRWIN has been a director of the Company since November 1996. Mr.
Irwin has been Vice Chairman of the Board and a director of GST since September
1995 and has been the Secretary of GST since November 1992. Mr. Irwin is an
attorney specializing in corporate matters, and has been of
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counsel to the New York law firm of Olshan Grundman Frome & Rosenzweig LLP since
1990. Mr. Irwin was a senior partner in Greenberg, Irwin and Weisinger, a New
York law firm specializing in securities, business and corporate matters, from
1968 to 1990.
ROBERT L. OLSON has been a director of the Company since November 1996. Mr.
Olson has been the Vice President and General Manager of Exchange and Wireless
Services of GST Telecom Inc., a wholly-owned subsidiary of GST USA ("GST
Telecom"), since March 1995. From 1986 to January 1995, Mr. Olson was Vice
President of Metroplex Communications Corporation.
CLIFFORD V. SANDER has been a director of the Company since November 1996.
Mr. Sander has been Senior Vice President and Treasurer of GST since March 1995.
He has also been the Executive Vice President and Chief Financial Officer of GST
Telecom since June 1994. From 1962 to 1994, Mr. Sander was in private accounting
practice in Portland, Oregon. He was acting Chief Financial Officer of Electric
Lightwave, Inc. ("ELI") during its formation in 1988 and continued to provide
accounting and financial consulting services to ELI through 1993. Mr. Sander is
a Certified Public Accountant.
RONALD S. ELIASON will become a director of the Company upon completion of
the offering. Mr. Eliason has been the President and Chief Executive Officer of
Campus Credit Union, a financial institution based in Provo, Utah, since June
1991. He was the Vice President-Administration and Chief Financial Officer of
Novell, Inc. from August 1985 to April 1990.
GARY D. BROWN has been the Company's Vice President of Research and
Development since June 1996. Prior to being named Vice President, he had served
as the Director of Research and Development since July 1990. In these positions,
he has helped conceive and direct all development activities of the Company.
From July 1985 until July 1990, Mr. Brown served as a Senior Software Engineer.
Prior to joining the Company in July 1985, Mr. Brown was a Lead Software
Engineer for a proprietary operating system at WICAT Systems, Inc. for over five
years.
GEOFFREY SHUPE has been the Company's Vice President of Sales and Marketing
since October 1996. Mr. Shupe is responsible for sales development, strategic
sales development, marketing and Technical Support. He joined the Company in
January 1994 as Major Account Manager for sales and became the Director of Sales
and Marketing in January 1996. Mr. Shupe was an account representative, Major
Account Representative, and National Account Manager for Sprint from February
1987 through December 1993.
The Board of Directors of the Company currently consists of five members.
Currently all directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
Executive officers are elected by and serve at the discretion of the Board of
Directors.
Pursuant to the listing requirements of the Nasdaq National Market, the
Company is required to add two independent directors to its Board of Directors
and to establish an independent audit committee. The Nasdaq National Market
Qualifications Committee has granted the Company 90 days following the date of
this Prospectus to satisfy these requirements. A failure by the Company to
comply with these requirements may result in the delisting of the Common Stock
from the Nasdaq National Market. The Company has undertaken to add two
independent directors to its Board of Directors within 90 days after the date of
this Prospectus. In connection with this undertaking, the Board of Directors has
agreed to increase the authorized number of directors from five to seven. Mr.
Eliason, whose biographical data appears above, is not currently a director of
the Company, but has agreed to become a director of the Company upon completion
of this offering.
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BOARD COMMITTEES
Prior to completion of this offering, the Board of Directors will authorize
three standing committees: Executive Committee, Audit Committee and Compensation
Committee. Following the completion of this offering, the Board of Directors
intends to fill the positions of the standing committees. Only independent
directors will be appointed to the Audit Committee.
Executive Committee. The Executive Committee of the Board of Directors
will possess and exercise all the power and authority of the Board of Directors
in the management and direction of the business and affairs of the Company
except as limited by law and except for the power to change the membership or to
fill vacancies on the Board of Directors or the Executive Committee.
Audit Committee. The Audit Committee of the Board of Directors will review
the results and scope of the annual audit and other services provided by the
Company's independent accountant, review and evaluate the Company's internal
audit and control functions, and monitor transactions between the Company and
its principal stockholder and its employees, officers and directors.
Compensation Committee. The Compensation Committee of the Board of
Directors will administer the 1996 Stock Option Plan and review and approve the
compensation and benefits for the Company's executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, the Company's Board of Directors has reviewed and
approved the compensation and benefits of the Company's executive officers. No
interlocking relationship exists between any member of the Company's Board of
Directors and any member of the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past, except as follows: Thomas E. Sawyer, the Chairman of the Board Emeritus of
the Company serves as a director and executive officer of each of GST and GST
USA. W. Gordon Blankstein, the Chairman of the Board of GST and GST USA, Stephen
Irwin, the Vice Chairman of the Board of GST, and Clifford V. Sander, Senior
Vice President of GST and GST USA and a director of GST USA, each serve as a
director of the Company.
DIRECTOR COMPENSATION
The Company does not pay any compensation to employees of the Company or
GST who serve on the Board of Directors. However, the Board of Directors may in
the future authorize the payment of a fixed sum to directors for their
attendance at regular and special meetings of the Board of Directors as is
customary for similar companies. Independent directors will be reimbursed for
out-of-pocket expenses incurred in connection with attendance at such meetings.
Upon completion of this offering, the Company will grant five-year options
to purchase 25,000 shares of Common Stock at an exercise price per share equal
to the initial public offering price of the shares offered hereby to each of Mr.
Eliason and one other individual, who will become directors of the Company upon
completion of this offering.
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EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
of the Company's Chief Executive Officer and each other most highly compensated
executive officer of the Company whose aggregate cash compensation exceeded
$100,000 during the fiscal year ended September 30, 1996 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------------
PAYOUTS
ANNUAL COMPENSATION AWARDS ---------
-------------------------------------- ---------- LONG-TERM
OTHER SECURITIES INCENTIVE
NAME AND PRINCIPAL ANNUAL UNDERLYING PLAN ALL OTHER
POSITION SALARY BONUS COMPENSATION(1) OPTIONS PAYOUTS($) COMPENSATION(2)
- ------------------------ -------- ------ --------------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Sawyer(3)..... $222,556 $2,066 $ 5,608 -- -- $ 4,492
Chairman of the Board
of Directors
A. Lindsay Wallace...... 149,841 1,036 27,036 -- -- 5,055
President and Chief
Executive Officer
</TABLE>
- ------------------------------
(1) Represents payments made pursuant to the Company's Profit Sharing Plan. The
Company terminated this plan in September 1996.
(2) Represents matching contributions by the Company to its 401(k) Plan.
(3) Dr. Sawyer served as the Company's Chief Executive Officer from October 1988
to March 1996. Since April 1996, his compensation has been paid entirely by
GST USA for services rendered to GST USA and its subsidiaries. It is
anticipated that Dr. Sawyer will continue to be compensated by GST USA until
June 30, 1997. See "Management--Employment and Consulting Agreements."
OPTION GRANTS TABLE
NACT Option Grants
There were no options to purchase shares of Common Stock of the Company
granted to the Named Executive Officers during the fiscal year ended September
30, 1996. The following table sets forth certain information regarding grants of
options to purchase Common Stock of the Company made to each of the Named
Executive Officers on November 26, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO OPTION TERM(1)
GRANTED EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME (#) FISCAL YEAR PRICE ($/SH) DATE 5%($) 10%($)
- ---------------------------- ---------- ------------ ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Sawyer............ 60,000(2) 7.1% $ 9.35 11/25/01 154,994 342,496
A. Lindsay Wallace.......... 160,000(3) 18.8% $ 9.35 11/25/01 413,317 913,323
</TABLE>
- ------------------------------
* Less than 1%.
(1) The potential realizable portion of the foregoing table illustrates value
that might be realized upon exercise of options immediately prior to the
expiration of their term, assuming (for illustrative purposes only) the
specified compounded rates of appreciation of the Common Stock of the
Company over the term of the option. These numbers do not take into account
provisions
44
<PAGE> 46
providing for termination of the option following termination of employment,
nontransferability or difference in vesting periods.
(2) Such options are currently vested and become exercisable in full on
September 30, 1998.
(3) Options to purchase 80,000 shares of Common Stock vest and become
exercisable as follows: (a) one-third on September 30, 1997, one-third on
September 30, 1998 and the remaining one-third on September 30, 1999.
Options to purchase 40,000 shares of Common Stock vest and become
exercisable as follows: (a) one-fourth on September 30, 1997, one-fourth on
September 30, 1998, one-fourth on September 30, 1999 and the remaining
one-fourth on September 30, 2000. Options to purchase an additional 40,000
shares of Common Stock vest if and when certain performance based criteria
are achieved and become exercisable on September 30, 1998.
GST Option Grants
On June 1, 1996, GST granted options to purchase 5,000 of its Common Shares
at an exercise price of $10 per share to each of Dr. Sawyer and Mr. Wallace.
Such options expire on May 31, 2001. During the fiscal year ended September 30,
1996, Mr. Wallace exercised options to purchase 8,691 Common Shares of GST.
EMPLOYMENT AND CONSULTING AGREEMENTS
Prior to the consummation of this offering, the Company intends to enter
into an employment agreement with Mr. Wallace pursuant to which, effective
October 1, 1996, Mr. Wallace is to be employed as the Company's President and
Chief Executive Officer for a term ending on September 30, 2001. The agreement
will provide for an initial base salary of $160,000 annually or such greater
amount as the Board of Directors may determine, and incentive compensation as
awarded by the Board of Directors from time to time. In the event of Mr.
Wallace's death while employed by the Company, the agreement will provide for a
payment of one and a half times his then current base annual salary, over a
period of one and a half years, to his designated beneficiary. In the event of
his disability, Mr. Wallace is to receive the full amount of his base salary for
six months. If such six-month period ends prior to September 30, 2001, he is to
receive salary at a rate of one-half his then current base salary for a further
period ending on the earlier of one year thereafter or September 30, 2001. The
agreement will contain covenants restricting Mr. Wallace's ability to engage in
activities competitive with those of the Company for a period ending on the
earlier of two years after his termination or September 30, 2000.
GST USA and GST Telecom have entered into a consulting agreement dated
April 1, 1996 with Infotec Consulting, Inc. ("Infotec") under which Dr. Sawyer,
the Chairman of the Board Emeritus of the Company, is to provide personal
services to the Company at the rate of $125 per hour for hours invoiced monthly
until June 30, 1997. Such consulting agreement also contains covenants
restricting Dr. Sawyer's ability to engage in activities competitive with those
of GST and its subsidiaries. The agreement also provides for a payment of one
and one half times the amount paid to Infotec during the six months preceding
Dr. Sawyer's death in the event of Dr. Sawyer's death during the term of the
agreement.
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (the "Stock Option Plan") was approved
by the Board of Directors and the sole stockholder of the Company on November
26, 1996. The purpose of the Stock Option Plan is to create additional
incentives for the Company's employees, directors and others who perform
substantial services to the Company by providing an opportunity to purchase
shares of the Common Stock pursuant to the exercise of options granted under the
Stock Option Plan. The Company may grant options that qualify as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and non-qualified stock options. Incentive stock options may be granted
to employees (including officers and directors who are employees). Non-
45
<PAGE> 47
qualified stock options may be granted to employees, officers, directors,
independent contractors and consultants of the Company. As of December 12, 1996,
1,250,000 shares were reserved for issuance under the Stock Option Plan and
options to purchase 850,000 shares of Common Stock were outstanding.
The Board of Directors or the Compensation Committee thereof (the
"Compensation Committee") is authorized to administer the Stock Option Plan in a
manner that complies with Rule 16b-3 under the Exchange Act. The Board of
Directors or Compensation Committee determines which eligible individuals are
granted options and the terms of such options, including the exercise price,
number of shares subject to the option and the vesting and exercisability
thereof; provided, the maximum term of an incentive stock option granted under
the Stock Option Plan may not exceed five years.
The exercise price of an incentive stock option granted under the Stock
Option Plan must equal at least 100% of the fair market value of the subject
stock on the date of grant and the exercise price of all non-qualified stock
options must equal at least 80% of the fair market value of the subject stock on
the date of grant. With respect to any participant who owns more than 10% of the
voting power of the Common Stock of the Company, the exercise price of any
option granted must equal at least 110% of the fair market value on the date of
grant. The aggregate fair market value on the date of grant of the stock for
which incentive stock options are exercisable for the first time by an employee
of the Company during any calendar year may not exceed $100,000.
Options shall become exercisable at such times and in such installments as
the Board of Directors or Compensation Committee shall provide. Non-qualified
and incentive stock options granted under the Stock Option Plan are not
transferable other than by will or the laws of descent or distribution, and each
option that has not yet expired is exercisable only by the recipient during such
person's lifetime, or for 12 months thereafter by the person or persons to whom
the option passes by will or the laws of descent or distribution. The Stock
Option Plan may be amended at any time by the Board of Directors, although
certain amendments require stockholder approval. The Stock Option Plan will
terminate on November 25, 2006, unless earlier terminated by the Board of
Directors.
401(K) PLAN
The Company maintains a defined contribution 401(k) plan (the "401(k)
Plan") which is available to all employees of the Company who have attained the
age of twenty-one. Such eligible employees may elect to defer any percentage of
their current salary subject to a maximum of 15% or the statutory maximum
($9,500 in 1996), whichever is the lesser. The maximum salary that can be
considered for compensation purposes is $150,000 per year.
The Company matches the deferrals of its employees to the extent of 50% of
such deferrals, up to a maximum of 7.5% of the annual compensation of such
employees. During the fiscal year ended September 30, 1996, the Company
contributed $59,881 to the 401(k) Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law (the "Delaware Law"),
the Company's Certificate of Incorporation provides that no director of the
Company will be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except (i) for any
breach of the directors' duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or involving intentional misconduct
or a knowing violation of law, (iii) unlawful payments of dividends or unlawful
stock repurchases or redemptions, or (iv) for any transaction from which the
director derives any improper personal benefit. In addition, the Company's
Bylaws provide that any director or officer who was or is a party or is
threatened to be made a party to any action or proceeding by reason of his or
her services to the Company will be indemnified to the fullest extent permitted
by the Delaware Law.
46
<PAGE> 48
The Company intends to enter into indemnification agreements with each of
its directors and executive officers pursuant to which the Company will agree to
indemnify each of them against expenses and losses incurred for claims brought
against them by reason of their being a director or executive director of the
Company. In addition, the Company's directors and executive officers are covered
by GST's directors' and officers' liability insurance.
There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any pending or threatened litigation that may result in claims
for indemnification by any director or executive officer.
The Company believes that the indemnification of its directors and officers
will facilitate the Company's ability to continue to attract and retain
qualified individuals to serve as directors and officers of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
OWNERSHIP OF COMMON SHARES OF GST BY
DIRECTORS AND OFFICERS OF THE COMPANY
The following table shows the amount and nature of beneficial ownership, as
of September 30, 1996, of Common Shares of GST beneficially owned by each
director of the Company, each Named Executive Officer and all directors of the
Company and Named Executive Officers as a group.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE OF
NAME OF BENEFICIAL OWNER OWNED(1) CLASS
- ------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Thomas E. Sawyer................................................... 279,130(2) 1.3%
A. Lindsay Wallace................................................. 35,634(3) *
W. Gordon Blankstein............................................... 399,300(4) 1.9%
Stephen Irwin...................................................... 276,345(5) 1.3%
Robert L. Olson.................................................... 5,153(6) *
Clifford V. Sander................................................. 419,100(7) 2.0%
All Named Executive Officers and directors as a group (6
persons)......................................................... 1,414,662(8) 6.5%
</TABLE>
- ---------------
* Less than 1%.
(1) Each director and Named Executive Officer has sole voting and investment
power with respect to all shares beneficially owned by him, unless otherwise
indicated.
(2) Includes 155,000 Common Shares of GST issuable upon exercise of options.
(3) Includes 35,634 Common Shares of GST issuable upon exercise of options.
(4) Includes 177,500 Common Shares of GST issuable upon exercise of options held
in escrow pursuant to policies of the VSE. Does not include 200,000 Common
Shares of GST issuable upon the exercise of options that are not exercisable
until the market price of the Common Shares of GST on the American Stock
Exchange reaches certain levels for certain prescribed periods.
(5) Includes (i) 115,000 Common Shares of GST issuable upon exercise of options
and (ii) 100,000 Common Shares of GST issuable upon exercise of an
outstanding warrant. Does not include (i) 200,000 Common Shares of GST
issuable upon the exercise of options that are not exercisable until the
market price of the Common Shares of GST on the American Stock Exchange
reaches certain levels for certain prescribed periods and (ii) 200,000
Common Shares of GST issuable upon exercise of an outstanding warrant.
(6) Consists of Common Shares of GST issuable upon exercise of options.
(7) Includes 55,000 Common Shares of GST issuable upon exercise of options.
(8) Includes 643,287 Common Shares of GST issuable upon exercise of options.
47
<PAGE> 49
CERTAIN TRANSACTIONS
From time to time the Company has made short-term loans to GST, or
subsidiary companies of GST, in order to provide for temporary working capital
requirements. Such loans were made at prevailing rates of interest, and all have
been repaid in full, with interest. At September 30, 1996 and at the date of
this Prospectus, no such loans were outstanding.
GST Realco has entered into a construction contract pursuant to which a
40,000 square foot office building is currently being built for the Company in
Provo, Utah. It is anticipated that after the construction has been completed
(currently estimated to be no later than June 1997), the Company will move its
entire operations to such facility. It is further anticipated that the Company
will occupy substantially all of the space in the building, with some small
portion of the building to be made available to GST, or subsidiary companies of
GST. To date, all of the construction costs have been borne by GST Realco. The
Company is currently in the process of securing permanent financing for the
purchase of the land and the building from GST Realco. The purchase price will
include the construction and other costs incurred by GST Realco plus interest.
In early 1995, the Company began offering prepaid debit and international
call back/reorigination services to its customers that did not yet desire to
expend a substantial amount of capital on hardware. The Company incorporated
Wins to offer such services. The Company was able to increase sales of its
switch systems as a result of services provided by Wins as certain users of
these services grew to be able to justify the capital expenditure to purchase a
switch. Effective October 1, 1995, the Company declared a dividend consisting of
100% of the outstanding capital stock of Wins payable to its sole stockholder,
GST USA. Since becoming a subsidiary of GST USA, Wins has continued to refer
customers to the Company.
The Company provides facilities management services to certain of its
customers who have purchased switching and billing systems. Included in the
provision of facilities management services is the offering of network carrier
services. Prior to October 1, 1996, the Company offered such services to its
customers pursuant to a resale contract that it had negotiated with major
interexchange carriers. Effective October 1, 1996, the Company has been and will
continue to purchase all carrier service from GST or subsidiaries thereof. The
Company obtains such service from GST on terms no less favorable than those
accorded to the network carrier accounts of GST which enjoy the most
preferential rates.
The Company believes that the foregoing transactions were in its best
interests. It is the Company's current policy that all transactions by the
Company with officers, directors, 5% stockholders and their affiliates will be
entered into only if such transactions are approved by a majority of the
disinterested independent directors, are on terms no less favorable to the
Company than could be obtained from unaffiliated parties and are reasonably
expected to benefit the Company.
48
<PAGE> 50
PRINCIPAL AND SELLING STOCKHOLDER
Prior to this offering, 100% of the Company's issued and outstanding Common
Stock was owned by the Selling Stockholder. Upon completion of this offering,
the Selling Stockholder will own approximately 63% of the Common Stock
(approximately 60% if the Underwriters' over-allotment option is exercised in
full).
By virtue of its beneficial ownership of a majority of the outstanding
Common Stock of the Company upon completion of this offering, the Selling
Stockholder will continue to control actions that require the consent of
stockholders, including the election of directors. See "Risk Factors--Control by
Existing Stockholder; Conflicts of Interest; Certain Transactions." In addition,
certain members of GST's Board of Directors will continue to serve on the
Company's Board of Directors. See "Management."
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Common Stock as of the date of this
Prospectus as adjusted to reflect the sale of the shares offered hereby by the
Selling Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)
----------------------- NUMBER OF -----------------------
SELLING STOCKHOLDER NUMBER PERCENT SHARES OFFERED NUMBER PERCENT
- ---------------------------------- ----------- ------- -------------- ----------- -------
<S> <C> <C> <C> <C> <C>
GST USA, Inc.(2).................. 6,113,712 100% 1,000,000 5,113,712 63%
</TABLE>
- ------------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares of Common Stock subject
to options held by that person that are currently exercisable or exercisable
within 60 days of the date hereof are deemed outstanding. Such shares,
however, are not deemed outstanding for the purposes of computing the
percentage ownership of each other person. To the Company's knowledge, the
Selling Stockholder has sole voting and investment power with respect to
such shares.
(2) The address of the Selling Stockholder, GST USA, Inc., is 4317 N.E. Thurston
Way, Vancouver, Washington 98662.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, $.01 par value per share and 10,000,000 shares of preferred
stock, $.01 par value per share (the "Preferred Stock"). As of the date of this
Prospectus, there were outstanding 6,113,712 shares of Common Stock held of
record by one stockholder and no shares of Preferred Stock outstanding.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Certificate of Incorporation
which is included as an exhibit to the Registration Statement of which this
Prospectus is a part and by the provisions of applicable law.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of preferred stock which may from time to time be outstanding, if any,
holders of Common Stock are entitled to receive ratably dividends when, as, and
if declared by the Board of Directors out of funds legally available therefor
and, upon the liquidation, dissolution or winding up of the Company, are
entitled to share ratably in all assets remaining after payment of liabilities
and payment of accrued dividends and liquidation preferences on the preferred
stock, if any. Holders of Common Stock have no preemptive rights and have no
rights to convert their Common Stock into any securities. The outstanding Common
Stock is, and the Common Stock to be outstanding
49
<PAGE> 51
upon completion of this offering will be, duly authorized and validly issued,
fully paid and nonassessable.
Subsequent to the completion of this offering, the Selling Stockholder will
own approximately 63% of the then-outstanding shares of Common Stock of the
Company (approximately 60% if the Underwriters' over-allotment option is
exercised in full) and, whether or not the Underwriters' over-allotment option
is exercised, will control actions that require the consent of stockholders,
including the election of directors. See "Risk Factors--Control by Existing
Stockholder; Conflicts of Interest; Certain Transactions."
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by Delaware law, to provide for the issuance of Preferred Stock in one or more
series, to establish from time to time the number of shares to be included in
each such series, to fix the rights, preferences and privileges of the shares of
each wholly unissued series and any qualifications, limitations or restrictions
thereon, and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding), without
any further vote or action by stockholders. The Board of Directors may authorize
and issue Preferred Stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of Common Stock, because
the terms of the Preferred Stock that might be issued could conceivably prohibit
the Company's consummation of any merger, reorganization, sale of substantially
all its assets, liquidation or other extraordinary corporate transaction absent
approval of the outstanding shares of Preferred Stock. Thus, the issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no current plan to issue any
shares of Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The Company has appointed Continental Stock Transfer & Trust Company, New
York, New York as Transfer Agent and Registrar for the Common Stock.
LISTING
Application will be made for quotation of the Common Stock on the Nasdaq
National Market under the symbol NACT.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 8,113,712 shares of
Common Stock outstanding. Of these shares, the 3,000,000 shares sold in this
offering will be freely transferable without restriction under the Securities
Act, unless they are held by "affiliates" of the Company as that term is used
under the Securities Act and the rules and regulations promulgated thereunder.
GST USA will own the remaining 5,113,712 shares of Common Stock,
constituting approximately 63% of the outstanding shares of Common Stock
(approximately 60% if the Underwriters' over-allotment option is exercised in
full). Each of GST and GST USA has agreed not to, directly or indirectly, offer
to sell, sell, grant an option for the sale of, assign, transfer, pledge,
hypothecate or otherwise encumber or dispose of any securities issued by the
Company for a period of 180 days from the effective date of the Registration
Statement of which this Prospectus is a part without the prior written consent
of Hambrecht & Quist LLC. See "Underwriting." After expiration of such period,
such shares may be sold (i) in accordance with Rule 144 promulgated under the
Securities Act, (ii) in private offerings or (iii) upon registration under the
Securities Act without regard to the volume limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including any affiliate of the
Company, who beneficially owns "restricted shares"
50
<PAGE> 52
for a period of at least two years is entitled to sell within any three-month
period, shares equal in number to the greater of (i) 1% of the then-outstanding
shares of Common Stock or (ii) the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the filing of the required notice
of sale with the Commission. The seller also must comply with the notice and
manner of sale requirements of Rule 144, and there must be current public
information available about the Company. In addition, any person (or persons
whose shares are aggregated) who is not, at the time of the sale, nor during the
preceding three months, an affiliate of the Company, and who has beneficially
owned restricted shares for at least three years, can sell such shares under
Rule 144(k) without regard to notice, manner of sale, public information or the
volume limitations described above. In addition, the Commission has proposed
revisions to Rule 144 and Rule 144(k), the effect of which would be to shorten
the holding period under Rule 144 from two years to one year and to shorten the
holding period under Rule 144(k) from three years to two years. See "Risk
Factors--Shares Eligible for Future Sale."
As soon as practicable after the effective date of the Registration
Statement of which this Prospectus is a part, the Company intends to file a
registration statement on Form S-8 under the Securities Act to register shares
of Common Stock reserved for issuance under the Stock Option Plan, thus
permitting the resale of such shares by nonaffiliates in the public market
without restriction under the Securities Act. Such registration statement will
become effective immediately upon filing.
Prior to this offering, there has been no public market for the Common
Stock. Any sale of substantial amounts of shares in the open market (or the
announcement of a plan to do so) may adversely affect the market price of the
Common Stock offered hereby.
51
<PAGE> 53
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives Hambrecht & Quist LLC
and Montgomery Securities, have severally agreed to purchase from the Company
and the Selling Stockholder the following respective number of shares of Common
Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC.............................................
Montgomery Securities.............................................
---------
Total............................................................. 3,000,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent accountants. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the shares, the offering price and
other selling terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
Each of GST and the Selling Stockholder has agreed that it will not,
without the prior written consent of Hambrecht & Quist LLC, offer to sell, sell,
grant an option for the sale of, assign, transfer, pledge, hypothecate or
otherwise encumber or dispose of any shares of Common Stock, options or warrants
to acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock owned by it during a period of 180 days from the
effective date of the Registration
52
<PAGE> 54
Statement of which this Prospectus is a part. Upon the expiration of such
180-day period, approximately 5,113,712 shares will be eligible for resale in
accordance with Rule 144. The Company has agreed that it will not, without the
prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose
of any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common Stock
during the 180 day period except that the Company may grant additional options
under its stock option plans and issue shares upon exercise of options.
The Underwriters do not intend to confirm sales to accounts over which they
have discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiations among the Company, the Selling Stockholder and the
Representatives. Among the factors considered in determining the initial public
offering price are prevailing market and economic conditions, revenues and
earnings of the Company, market valuations of other companies engaged in
activities similar to the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant. The
estimated initial public offering price range set forth on the cover of this
preliminary prospectus is subject to change as a result of market conditions and
other factors.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholder by Olshan Grundman Frome & Rosenzweig LLP,
505 Park Avenue, New York, New York 10022. Stephen Irwin, of counsel to Olshan
Grundman Frome & Rosenzweig LLP, is an officer and director of GST and a
director of the Company and holds 61,345 Common Shares of GST and has been
granted options and warrants to purchase an additional 615,000 Common Shares of
GST. Certain legal matters in connection with the offering will be passed upon
for the Underwriters by Brobeck, Phleger & Harrison LLP, One Market, Spear
Street Tower, San Francisco, California 94105.
EXPERTS
The financial statements of the Company as of September 30, 1995 and 1996
and for the years then ended included herein have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of the Company for the year ended September 30,
1994 included herein have been included herein in reliance on the report of
Squire & Co., independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement on Form S-1 under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Certain items are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as a part thereof.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and, in each
instance, if such contract or document
53
<PAGE> 55
is filed as an exhibit, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference to such exhibit. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New
York, NY 10048, and copies of all or any part thereof may be obtained from such
office after payment of fees prescribed by the Commission. Such material may
also be accessed electronically by the means of the Commission's home page on
the Internet at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements which will be audited on by its independent
public accounting firm, and such other periodic reports as the Company may
determine to be appropriate or as may be required by law.
54
<PAGE> 56
GLOSSARY OF TERMS
ANI (Automatic Number Identification): A feature that sends a calling
party's telephone number over the network to the called party.
ARCnet (Attached Resource Computer Network): One of the earliest and most
popular local area networks which operates at 2.5 Mbps (megabits per second)
using a modified token-passing protocol.
CAP (Competitive Access Provider): A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access services and switched access services. CAPs are
also referred to in the industry as alternative access vendors, alternative
local telecommunications service providers (ALTs), metropolitan area network
providers (MANs) and Competitive Local Exchange Carriers (CLECs).
CENTRAL OFFICE SWITCHING: A switching regime that provides dial tone within
a narrowly defined geographical area, completes local calls within the area and
routes interexchange (long distance) calls to the switch of the interexchange
carrier.
CLEC (Competitive Local Exchange Carrier): A company that provides
customers with an alternative to the local telephone company for a wide range of
services, including private line, special access, switched access, local dial
tone and enhanced services. Prior to the installation of switching equipment in
their networks and the passage of deregulatory legislation, CLECs were commonly
referred to as CAPs, ALTS or MANs.
CPU (Central Processing Unit): The "computing" part or "brain" of a
computer. It manipulates data and processes instructions coming from software or
a human operator.
DIGITAL: Describes a method of storing, processing and transmitting
information through the use of distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital transmission and switching
technologies employ a sequence of these pulses to represent information, as
opposed to the continuously variable analog signal. The precise digital numbers
virtually eliminate any distortion (such as graininess or snow, in the case of
video transmission, or static or other background distortion, in the case of
audio transmission).
DISTRIBUTED SWITCHING SYSTEMS: A switching regime that processes incoming
calls from widely dispersed locations and routes them to different, widely
dispersed locations.
DSP (Digital Signal Processor): A microprocessor that acts upon digital
signals in a more powerful and efficient manner than that provided by
conventional microprocessors.
E-1: The European equivalent of the North American 1.544 Mbps T-1, except
that E-1 carries information at the rate of 2.048 Mbps. This is the rate used by
European CEPT carriers to transmit thirty 64 Kbps (kilobits per second) digital
channels for voice or data calls, plus a 64 Kbps channel for signaling, and a 64
Kbps channel for synchronization and maintenance. CEPT stands for the Conference
of European Postal and Telecommunication Administrations.
INTERNATIONAL CALL BACK: A process whereby a call that originates in a
foreign country is not completed, and effectively re-dialed from the United
States at significantly lower rates than those prevailing in the foreign
country.
ISDN (Integrated Services Digital Network): A means of transmitting both
voice and data simultaneously over the same line. Primary rate ISDN consists of
24 channels operating at 64 kbps, thereby producing a transmission capability of
1.5 Mbps.
IXC (InterExchange Carrier): A long distance telephone company, as
contrasted to the LEC -- the Local Exchange Carrier, a new word for a local
phone company. InterExchange Carriers used to be called "Other Common Carriers,"
except that such term did not include AT&T. Now, AT&T, MCI, Sprint and all long
distance carriers are called IXCs.
LAN (Local Area Network): A private data communications network linking a
variety of data devices, such as computer terminals, personal computers and
minicomputers, all housed in a defined building, plant or geographic area. LANs
range widely in size and complexity, from simple user-installable networks
connecting together a few personal computers to vast networks tying thousands of
55
<PAGE> 57
terminals to multiple mainframe computers. LANs will allow a computer user to
access a computer other than the user's own in order to send and retrieve
electronic mail and data files at transmission rates generally between 100 Kbps
and 50Mbps. LANs are purchased or leased by customers; they generally do not
employ circuits from telephone common carriers or other network service
providers. LANs may, however, provide a bridge or gateway to other public or
private networks. Some telephone common carriers offer data communications
services with capabilities resembling those of LANs, as an alternative to the
purchase of a LAN.
LATA (Local Access and a Transport Area): The approximately 165 geographic
areas created by the consent decree related to the divestiture of AT&T in 1984
which define the regions in which each RBOC was allowed to provide service. The
consent decree was superseded by the Telecommunications Act.
LEC (Local Exchange Carrier): A company providing local telephone services,
also referred to in the industry as a "local exchange telephone company." These
include the RBOCs, GTE and more than 1,000 other independents.
PCS (Personal Communications Services): Digital wireless communications
services which use a microcell technology and operate at a higher speed then
cellular systems.
PORT: An entrance to or exit from a switch. The interface between a process
or program and a communications or transmission facility. A point in the
computer or telephone system where data may be accessed.
PREPAID DEBIT CARD: A debit (calling) card which allows the purchaser to
purchase, in advance, a given amount of long distance minutes. Upon completion
of the call, the card is debited the number of minutes actually used. Also
called a "prepaid calling card."
R-2 SIGNALING: A series of specifications that refer to European analog and
digital trunk signaling. R-2 is a type of loop start trunk in Europe that uses
compelled handshaking on every MF (multi-frequency) signaling digit.
RAID (Random Array of Independent Disks): A feature that prevents the loss
of data in the event of the failure of hard disk drives.
RBOC (Regional Bell Operating Company): Any of the seven regional companies
created by the AT&T divestiture to take over ownership of the Bell operating
companies within their region. They are Ameritech, Bell Atlantic, BellSouth,
NYNEX, Pacific Telesis, SBC Communications and US West. The RBOCs also have set
up numerous unregulated subsidiaries engaged in a variety of communications-
related and non-communications businesses. The divestiture agreement barred
RBOCs from engaging in certain business activities, such as providing long
distance service, but provided mechanisms for review, waiver, modification or
removal of the prohibitions. The RBOCs are also known as regional holding
companies (RHCs).
RS-232-C: Also known as RS-232 and in its latest version EIA/TIA-232-E. A
set of standards specifying various electrical and mechanical characteristics
for interfaces between computers, terminals and modems. The RS-232-C standard,
which was developed by the EIA (Electrical Industries Association), defines the
mechanical and electrical characteristics for connecting DTE and DCE data
communications devices. It defines what the interface does, circuit functions
and their corresponding connector pin assignments. The standard applies to both
synchronous and asynchronous binary data transmission. Most personal computers
use the RS-232-C interface to attach modems. Some printers also use RS-232-C.
SCO UNIX (Santa Cruz Operations UNIX): A powerful operating system for
computers. UNIX was developed in 1969 by Ken Thompson of AT&T Bell Laboratories,
sold to Novell, and resold to Santa Cruz Operations. UNIX enables a computer to
handle multiple users and multiple programs simultaneously. UNIX facilitates
moving programs among computers with little change; this moving is also known as
"porting."
56
<PAGE> 58
SCSI (Small Computer System Interface): A way for a personal computer (PC)
to communicate with and control as many as seven different devices -- such as
magnetic hard disks, optical disks, tape drives, printers and
scanners -- without siphoning excessive power away from the computer's main
processor.
SS7 (Signaling System 7): All phone systems require signalling, which is
the transmission of electrical signals to and from the user's premises and to
the telephone company central office. Signals serve the three basic functions of
supervising, alerting and addressing. Supervising consists of monitoring the
status of a line or circuit to see if it is busy, idle or requesting service.
Supervision is a term derived from the job telephone operators perform in
manually monitoring circuits on a switchboard. On switchboards, supervisory
signals are shown by a lit lamp indicating a request for service on an incoming
line or an on-hook condition of a switchboard cord circuit. In the network
(i.e., the automated part of the network), supervisory signals are indicated by
the voltage level on signaling leads, or the on-hook/off-hook status of
signaling tones or bits. Alerting consists of indicating the arrival of an
incoming call. Alerting signals are bells, buzzers, woofers, tones, strobes and
lights. Addressing consists of transmitting routing and destination signals over
the network. Addressing signals are in the form of dial pulses, tone pulses or
data pulses over loops, trunks and signaling networks. An out-of-band signalling
system is used to provide basic routing information, call set-up and other call
termination functions. Signalling is removed from the voice channel itself and
put on a separate data network.
SWITCH: A switch connects an originating call location with the final
destination of the call or with other intermediate switches. Switches consist of
a hardware platform having ports connecting to incoming and outgoing lines.
Switches can be tandem and/or digital. Tandem switches connect trunks to each
other and pass the calls to desired destinations. Digital switches employ a
sequence of binary encoded pulses along the connection.
T-1: A standard telecommunications industry signal format which allows for
the transmission of 24 simultaneous voice conversations. Referred to as a DS-1
in digital parlance. DS-1 service has a bit rate of 1.544 Mbps.
57
<PAGE> 59
NACT TELECOMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
Independent Auditors' Reports......................................................... F-2
Balance Sheets as of September 30, 1995 and 1996...................................... F-4
Statements of Income for the Years Ended September 30, 1994, 1995 and 1996............ F-5
Statements of Stockholder's Equity for the Years Ended September 30, 1994, 1995 and
1996................................................................................ F-6
Statements of Cash Flows for the Years Ended September 30, 1994, 1995 and 1996........ F-7
Notes to Financial Statements......................................................... F-9
</TABLE>
F-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NACT Telecommunications, Inc.:
We have audited the accompanying balance sheets of NACT Telecommunications,
Inc. as of September 30, 1995 and 1996, and the related statements of income,
stockholder's equity, and cash flows for the years then ended. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of NACT Telecommunications,
Inc. as of September 30, 1995 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Salt Lake City, Utah
November 21, 1996, except as to Note 13
which is as of November 26, 1996
F-2
<PAGE> 61
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
NACT Telecommunications, Inc. (formerly known
as National Applied Computer Technologies, Inc.
Orem, Utah
We have audited the accompanying statements of income, stockholder's equity and
cash flows of NACT Telecommunications, Inc. (formerly known as National Applied
Computer Technologies, Inc.) for the year ended September 30, 1994. 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 statements of income, stockholder's equity, and cash
flows are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the statements of
income, stockholder's equity, and cash flows. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements of income,
stockholder's equity and cash flows. We believe that our audit of the statements
of income, stockholder's equity and cash flows provides a reasonable basis for
our opinion.
In our opinion, the statements of income, stockholder's equity and cash flows
referred to above present fairly, in all material respects, the results of
operations of NACT Telecommunications, Inc. for the year ended September 30,
1994, in conformity with generally accepted accounting principles.
Squire & Co.
Orem, Utah
January 5, 1995
F-3
<PAGE> 62
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................................... $1,121,730 $ 694,359
Marketable securities (note 2)................................ 846,213 250,000
Trade accounts receivable, less allowance for doubtful
accounts of $116,410 in 1995 and $100,000 in 1996.......... 3,117,526 3,171,180
Notes receivable, less allowance for doubtful accounts of
$40,000 in 1995 and $310,000 in 1996....................... 606,670 561,396
Inventories................................................... 387,089 2,406,399
Prepaid expenses.............................................. 106,530 16,338
Deferred tax assets (note 6).................................. 165,094 418,449
----------- -----------
Total current assets..................................... 6,350,852 7,518,121
----------- -----------
Property and equipment, net (note 3)............................ 708,648 717,804
Notes receivable, less current portion.......................... 216,912 1,179,750
Intangibles, net (note 4)....................................... 5,635,025 5,075,366
Other assets.................................................... 266,105 193,709
----------- -----------
$13,177,542 $14,684,750
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.............................................. $1,514,028 $2,251,800
Accrued expenses.............................................. 373,496 266,451
Income taxes payable (note 6)................................. 138,979 199,557
Deferred revenue.............................................. 163,419 350,439
Current installments of capitalized leases (note 7)........... 15,436 21,848
Intercompany payable.......................................... -- 183,176
----------- -----------
Total current liabilities................................ 2,205,358 3,273,271
Capitalized leases, less current installments (note 7).......... 84,501 58,221
Deferred compensation (note 8).................................. 151,364 157,819
Deferred tax liabilities (note 6)............................... 1,106,280 985,508
----------- -----------
Total long-term liabilities.............................. 1,342,145 1,201,548
----------- -----------
Commitments and contingencies (notes 7, 8, 9, and 10)
Stockholder's equity:
Common stock, no par value. Authorized 10,000,000 shares;
issued and outstanding 6,113,712 shares in 1995 and 1996... 8,854,937 9,244,847
Retained earnings............................................. 771,497 965,255
Unrealized appreciation (depreciation) on marketable
securities (note 2)........................................ 3,605 (171)
----------- -----------
Total stockholder's equity............................... 9,630,039 10,209,931
----------- -----------
$13,177,542 $14,684,750
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 63
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Product sales.................................... $5,478,957 $7,604,071 $9,929,702
Network carrier sales............................ -- 2,781,761 3,783,445
Wins (note 1b)................................... -- 1,097,950 2,571,731
--------- ----------- -----------
Total revenues.............................. 5,478,957 11,483,782 16,284,878
--------- ----------- -----------
Cost of goods sold (notes 1a and 4):
Products......................................... 2,029,834 3,088,380 4,303,957
Network carrier usage............................ -- 2,731,295 3,381,716
Wins (note 1b)................................... -- 786,699 2,571,731
--------- ----------- -----------
Total cost of goods sold.................... 2,029,834 6,606,374 10,257,404
--------- ----------- -----------
Gross profit................................ 3,449,123 4,877,408 6,027,474
Operating expenses (notes 1a and 4):
Research and development......................... 676,465 1,183,422 1,352,138
Selling and marketing............................ 457,373 924,542 953,486
General and administrative....................... 1,352,796 2,152,898 3,024,361
Amortization of acquired intangibles............. 257,176 519,780 573,058
--------- ----------- -----------
Total operating expenses.................... 2,743,810 4,780,642 5,903,043
--------- ----------- -----------
Income from operations...................... 705,313 96,766 124,431
--------- ----------- -----------
Other income (expense):
Interest income.................................. 88,118 155,949 127,043
Interest expense................................. (23,998) (1,514) (14,202)
Miscellaneous income............................. 16,886 34,635 34,670
--------- ----------- -----------
Total other income.......................... 81,006 189,070 147,511
--------- ----------- -----------
Income before income taxes......................... 786,319 285,836 271,942
Income taxes (note 6).............................. 293,428 205,517 78,184
--------- ----------- -----------
Net income......................................... $ 492,891 $ 80,319 $ 193,758
========= =========== ===========
Net income per share............................... $ 0.08 $ 0.01 $ 0.03
========= =========== ===========
Weighted average shares outstanding................ 5,998,205 6,113,712 6,113,712
========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 64
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
COMMON STOCK ON
--------------------- TREASURY RETAINED MARKETABLE
SHARES AMOUNT STOCK EARNINGS SECURITIES TOTAL
-------- --------- -------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at September 30,
1993.......................... 5,773,712 $5,895,869 -- $198,287 -- $6,094,156
Stock issued, net of expenses... 340,000 381,703 -- -- -- 381,703
Net income...................... -- -- -- 492,891 -- 492,891
--------- ---------- -------- ------- ------ ----------
Balances at September 30,
1994.......................... 6,113,712 6,277,572 -- 691,178 -- 6,968,750
Capital contribution by parent
company....................... -- 414,981 -- -- -- 414,981
Addition to capital arising from
push down accounting.......... -- 2,162,384 -- -- -- 2,162,384
Net increase in unrealized
appreciation on marketable
securities, net of tax
effect........................ -- -- -- -- $ 3,605 3,605
Net income...................... -- -- -- 80,319 -- 80,319
--------- ---------- -------- ------- ------ ----------
Balances at September 30,
1995.......................... 6,113,712 8,854,937 -- 771,497 3,605 9,630,039
Capital contribution by parent
company....................... -- 389,910 -- -- -- 389,910
Net decrease in unrealized
appreciation on marketable
securities, net of tax
effect........................ -- -- -- -- (3,776) (3,776)
Net income...................... -- -- -- 193,758 -- 193,758
--------- ---------- -------- ------- ------ ----------
Balances at September 30,
1996.......................... 6,113,712 $9,244,847 -- $965,255 $ (171) $10,209,931
========= ========== ======== ======= ====== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 65
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 492,891 $ 80,319 $ 193,758
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 519,790 1,212,039 1,165,885
Provision for loss on accounts and notes
receivable.................................... 62,879 229,342 942,785
Gain on sale of marketable securities and
equipment..................................... (5,617) (34,635) (4,399)
Capital contribution by parent company.......... -- 414,981 389,910
Deferred taxes.................................. (128,304) (271,762) (374,127)
Decrease (increase) in operating assets:
Trade accounts and notes receivable........... (1,294,218) (2,266,741) (1,980,342)
Inventories................................... (214,220) 19,873 (2,019,310)
Prepaid expenses.............................. (9,545) (94,484) 89,441
Other assets.................................. (219) (227,882) 58,360
Increase (decrease) in operating liabilities:
Accounts payable.............................. 92,733 1,210,516 888,670
Accrued expenses.............................. 42,508 148,411 45,287
Income taxes payable.......................... 174,532 (208,468) 60,578
Deferred revenue and deferred compensation.... (3,273) 180,844 193,475
Intercompany payable.......................... -- -- 243,176
---------- ---------- ----------
Net cash provided by (used in) operating
activities............................... (270,063) 392,353 (106,853)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment................. (242,115) (326,796) (304,614)
Proceeds from sale of equipment.................... 820 34,635 --
Proceeds from sale of marketable securities........ -- -- 596,836
Purchase of marketable securities.................. (837,811) -- --
Capitalization of software development costs....... -- (162,025) (419,154)
Cash included in transfer of Wins to parent (note
1).............................................. -- -- (173,718)
---------- ---------- ----------
Net cash provided by (used in) investing
activities............................... (1,079,106) (454,186) (300,650)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from payment of note receivable from
issuance of common stock........................ 2,250,000 -- --
Principal payments of long-term debt............... (150,000) -- --
Proceeds from issuance of long-term debt........... 82,700 -- --
Principal payments on capital lease obligations.... -- (2,271) (19,868)
---------- ---------- ----------
Net cash provided by (used in) financing
activities............................... 2,141,006 (2,271) (19,868)
---------- ---------- ----------
Net (decrease) increase in cash...................... 833,531 (64,104) (427,371)
Cash at beginning of year............................ 352,303 1,185,834 1,121,730
---------- ---------- ----------
Cash at end of year.................................. $1,185,834 $1,121,730 $ 694,359
========== ========== ==========
</TABLE>
F-7
<PAGE> 66
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest............... $ 23,998 $ 1,145 $ (17,707)
Cash paid during the year for income taxes........... 252,821 263,735 --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Disposition of fully depreciated asset............... $ -- $ -- $ 132,270
Repossession of equipment in settlement of accounts
and notes receivable............................... -- 128,936 45,000
Property purchased under capitalized leases.......... -- 102,208 --
Conversion of convertible debenture to equity........ 320,000 -- --
Transfer of inventory to property, plant, and
equipment.......................................... 35,399 -- --
Increase in property, plant, and equipment due to
sales return....................................... 117,987 -- --
Intangibles capitalized a result of push down........ -- 2,162,384 --
Increase in deferred tax liability as a result of
push down.......................................... -- --
Disposition of equipment............................. -- -- 47,366
Sale of equipment to Wins on note receivable......... -- -- 60,000
SUPPLEMENTAL DISCLOSURE OF THE ASSETS AND LIABILITIES
TRANSFERRED TO GST (NOTE 1 b)
Cash................................................. -- -- $ (173,718)
Trade accounts receivable............................ -- -- (68,705)
Prepaid expenses..................................... -- -- (751)
Property and equipment, net.......................... -- -- (46,020)
Other assets......................................... -- -- (14,036)
Accounts payable..................................... -- -- 150,898
Accrued expenses..................................... -- -- 152,332
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 67
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994, 1995 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND DESCRIPTION OF BUSINESS
NACT Telecommunications, Inc. (the "Company") designs, develops and
manufactures advanced telecommunications switching platforms with integrated
applications software and network telemanagement capabilities.
From September 1993 through September 30, 1994, GST USA, Inc. ("GST USA")
acquired approximately an 80% interest in the common stock of the Company. This
acquisition was accomplished through a series of purchases of newly issued
shares and the shares of principal stockholders of the Company. The Company
received a total of $2,528,306, net of expenses, for the issuance of 3,340,000
newly issued common shares. GST USA also purchased 1,551,219 shares of Common
Stock from the Company's principal stockholders. During the year ended September
30, 1995, GST USA acquired the remaining outstanding shares from stockholders of
the Company. As a result of these transactions, the Company is a wholly owned
subsidiary of GST USA.
GST USA accounted for the acquisition using the purchase method of
accounting. The excess of the purchase price over the fair value of the assets
acquired totalled $6,912,322 and was assigned by GST USA as product support
contracts, software development costs and goodwill. This amount is included in
the accompanying balance sheet as intangible assets with related amortization
recorded in cost of goods sold and other operating expenses in their respective
fiscal years. Amortization of the intangible amounts discussed above decreased
income from operations by $442,045, $962,514 and $935,486 for the years ending
September 30, 1994, 1995 and 1996, respectively.
(b) WASATCH INTERNATIONAL NETWORK SERVICES
The 1995 financial statements include the accounts of the Company and its
wholly-owned subsidiary Wasatch International Network Services, Inc. ("Wins"),
which commenced operations in fiscal 1995 and had total assets, revenues, and
net loss of $316,455, $1,097,950 and $2,361, respectively, as of and for the
year ended September 30, 1995. All significant intercompany transactions and
balances have been eliminated in consolidation. On October 1, 1995, the Company
transferred ownership and operations of Wins to GST USA in the form of a
dividend at historical cost. From October 1, 1995 through September 30, 1996,
the Company provided carrier services to GST USA for the Wins operation for
which it received $2,571,731. GST USA began providing its own carrier services
for Wins on October 1, 1996.
(c) INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1995 1996
-------- ---------
<S> <C> <C>
Raw materials...................................................... $316,940 $ 377,734
Work-in-process.................................................... 70,149 346,273
Finished goods..................................................... -- 317,392
Refurbished inventory held for sale................................ -- 1,365,000
-------- ----------
$387,089 $2,406,399
======== ==========
</TABLE>
F-9
<PAGE> 68
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1994, 1995 AND 1996
Refurbished inventory is stated at the estimated selling price less
refurbishing costs, selling costs and a normal profit margin. Management
periodically reviews the selling price of this inventory and will record
adjustments to the carrying value, if any, in the period in which they occur.
See Note 10.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method for financial reporting purposes. Depreciation is based
upon the estimated useful lives of individual classes of assets. The estimated
useful lives of the individual assets are as follows:
<TABLE>
<S> <C>
Furniture and fixtures................................. 7-10 years
Computer equipment..................................... 3-7 years
Application platform and test equipment................ 3-7 years
</TABLE>
(E) SOFTWARE DEVELOPMENT COSTS
Software development costs are capitalized upon the establishment of
technological feasibility of the product. Capitalization is discontinued when
the product is available for general release to customers. During 1995 and 1996,
the Company capitalized $162,025 and $419,154, respectively of software
development costs. No costs were capitalized in 1994.
(F) REVENUE RECOGNITION AND DEFERRED REVENUE
Revenue from product sales is recognized upon shipment of product. Revenue
from network carrier sales is recognized as the related service is provided.
Deferred revenue consists of warranty payments billed or received in advance and
deposits related to future product sales. Warranty payments are amortized over
the period of the warranty agreement which is typically one year.
(G) INCOME TAXES
The Company is a member of a controlled group which has elected for federal
income tax purposes to file a consolidated tax return with GST USA for the years
ending September 30, 1995 and 1996. In accordance with the tax sharing
arrangement with GST USA, the Company records income tax expense as if the
Company filed a tax return on a separate company basis using the asset and
liability method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. GST USA agreed to
make a capital contribution to the Company in an amount that approximates the
Company's current federal income tax expense for 1995 and 1996 in lieu of an
intercompany payment for such taxes.
(H) NET INCOME PER SHARE
Net income per share is based on the weighted average number of common
shares and common share equivalents resulting from stock options outstanding
during the period.
F-10
<PAGE> 69
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1994, 1995 AND 1996
(I) FAIR VALUE DISCLOSURE
At September 30, 1995 and 1996, the book value of the Company's financial
instruments approximates fair value.
(J) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from these estimates.
(2) MARKETABLE SECURITIES
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("Statement 115") at October 1, 1994. Adoption of Statement 115 did
not have a material effect on the financial statements. Under Statement 115, the
Company classifies all of its marketable equity securities as available-for-sale
which are recorded at fair market value. Unrealized holding gains and losses are
excluded from earnings and are reported, net of tax, as a separate component of
stockholder's equity until realized. A decline in the market value of any
available-for-sale security below cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new cost basis for the
security. Dividend income is recognized when earned. Realized gains and losses
are included in earnings and are derived using the specific-identification
method for securities sold.
The Company's investment portfolio is comprised of U.S. Treasury
securities. The amortized cost of these securities at September 30, 1995, was
$840,667 with gross realized gains of $6,484 and gross unrealized losses of
$938. The amortized cost at September 30, 1996, was $250,273 with gross
unrealized losses of $273.
(3) PROPERTY AND EQUIPMENT
Property and equipment are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Furniture and equipment....................................... $ 168,838 $ 212,525
Computer equipment............................................ 386,729 440,827
Switch and testing equipment.................................. 535,367 492,052
---------- ----------
1,090,934 1,145,404
Less accumulated depreciation and amortization................ 382,286 427,600
---------- ----------
$ 708,648 $ 717,804
========== ==========
</TABLE>
F-11
<PAGE> 70
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1994, 1995 AND 1996
(4) INTANGIBLES
Intangible assets are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------- AMORTIZATION
1995 1996 PERIOD
--------- --------- ------------
<S> <C> <C> <C>
Goodwill........................................ $2,863,766 $2,863,766 20 years
Software development costs...................... 2,064,405 2,483,559 3-5 years
Product support contracts....................... 2,146,176 2,146,176 5 years
---------- ----------
7,074,347 7,493,501
Less amortization............................... 1,439,322 2,418,135
---------- ----------
$5,635,025 $5,075,366
========== ==========
</TABLE>
On an ongoing basis, management reviews the valuation and amortization of
intangible assets to determine possible impairment by comparing the carrying
value of the asset to its undiscounted estimated future cash flows.
Amortization expense relating to these assets was $442,045, $962,514 and
$978,813 for 1994, 1995 and 1996, respectively. Of these amounts, $184,869,
$442,734, and $405,755 for 1994, 1995 and 1996, respectively, was recorded as a
component of cost of goods sold.
(5) STOCK OPTIONS
In January 1994, the Company adopted an incentive stock option plan. Under
the plan, 200,000 shares of common stock were reserved for granting of options
to key employees and other persons to purchase shares of the Company's common
stock. Incentive stock options were granted at their fair market value at the
date of the grant. The period for the exercise of each option was determined by
the plan committee, but the plan requires that the option period could not
exceed five years from the date of grant.
There were 77,500 stock options granted during 1994, with an exercise price
of $2.00 per share, all of which were outstanding at September 30, 1994. During
1995, the Company's incentive stock option plan was terminated, and the
outstanding stock options were converted into options in the option program of
GST Telecommunications, Inc., the parent of GST USA. See Note 13.
F-12
<PAGE> 71
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1994, 1995 AND 1996
(6) INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- --------- --------
<S> <C> <C> <C>
Year ended September 30, 1994:
U.S. federal.......................................... $360,960 $(110,299) $250,661
State................................................. 59,841 (17,074) 42,767
-------- --------- --------
$420,801 $(127,373) $293,428
======== ========= ========
Year ended September 30, 1995:
U.S. federal.......................................... $414,981 $(237,014) $177,967
State................................................. 64,239 (36,689) 27,550
-------- --------- --------
$479,220 $(273,703) $205,517
======== ========= ========
Year ended September 30, 1996:
U.S. federal.......................................... $389,910 $(322,207) $ 67,703
State................................................. 60,358 (49,877) 10,481
-------- --------- --------
$450,268 $(372,084) $ 78,184
======== ========= ========
</TABLE>
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34% to pretax income from continuing operations as a
result of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense.......................... $267,348 $ 97,184 $ 92,460
Increase (reduction) in income taxes resulting from:
Amortization of goodwill............................... 20,757 48,899 48,899
State and local income taxes, net of federal income tax
benefit............................................. 28,226 10,276 3,909
Research and experimentation credit.................... (42,200) -- --
Other, net............................................. 19,297 49,158 (67,084)
-------- -------- --------
$293,428 $205,517 $ 78,184
======== ======== ========
</TABLE>
F-13
<PAGE> 72
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1994, 1995 AND 1996
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1995 and 1996, are presented below:
<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Net current deferred tax assets:
Accounts receivable principally due to allowance for doubtful
accounts.................................................... $ 58,341 $ 152,930
Unearned product warranty...................................... 55,386 47,074
Accrued vacation payable....................................... 35,390 37,327
Unearned sales deposits........................................ 5,595 83,640
Inventory principally due to uniform capitalization and
reserves.................................................... 10,382 97,478
----------- ---------
Total gross deferred tax assets........................... 165,094 418,449
----------- ---------
Net long-term deferred tax liabilities:
Deferred compensation.......................................... 56,459 58,866
Plant and equipment, principally due to differences in
depreciation and capitalized interest....................... (48,804) (87,588)
Capitalized software........................................... (60,435) (200,619)
Push-down intangibles.......................................... (1,051,559) (756,269)
Unrealized (gain) loss on investments.......................... (1,941) 102
----------- ---------
Total gross deferred tax liabilities...................... (1,106,280) (985,508)
----------- ---------
Net deferred tax liability................................ $ (941,186) $(567,059)
=========== =========
</TABLE>
Management believes that existing taxable temporary differences will more
likely than not reverse within the applicable carryforward periods to allow
future realization of existing deferred tax assets.
(7) LEASES
The Company entered into various capital leases for certain equipment that
expire at various dates during the next four years. At September 30, 1996, the
gross amount of equipment and related accumulated amortization recorded under
capital leases are as follows:
<TABLE>
<S> <C>
Equipment............................................... $106,691
Less accumulated amortization........................... 23,544
--------
$ 83,147
========
</TABLE>
The Company also has noncancelable operating leases, primarily for
facilities, that expire over the next year. These leases generally require the
Company to pay all executory costs such as maintenance and insurance. Rental
expense was $82,994, $116,944 and $100,299 for the years ended September 30,
1994, 1995 and 1996, respectively.
F-14
<PAGE> 73
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1994, 1995 AND 1996
Future minimum capital lease payments as of September 30, 1996 are:
<TABLE>
<S> <C>
Year ending September 30:
1997................................................... $28,702
1998................................................... 24,304
1999................................................... 26,665
2000................................................... 15,058
2001................................................... --
-------
Total minimum lease payments...................... 94,729
Less amount representing interest (at rates ranging from
8.9% to 9.8%).......................................... 14,660
-------
Net minimum lease payments........................ 80,069
Less current installments of obligations under capital
leases................................................. 21,848
-------
Obligations under capital leases, excluding
current installments........................... $58,221
=======
</TABLE>
(8) PROFIT SHARING PLANS AND DEFERRED COMPENSATION TRUST
The Company sponsors a defined contribution 401(k) plan (the "Plan") for
employees who have completed one year of service and attained the age of 21.
Participants may defer up to 15% of eligible compensation. The Company, at its
discretion, may match 50% of participant contributions up to 7.5% of participant
compensation. Employer contributions made to the Plan were $32,577, $51,863 and
$59,881 for the years ended September 30, 1994, 1995 and 1996, respectively.
Through September 30, 1996, the Company provided a discretionary profit
sharing program for full time employees who had completed one full year of
employment. Under the plan, 10% of the increase in profits based on the
Company's previous highest retained earnings balance were allocated among
employees determined on length of employment and salary level at the discretion
of the Board of Directors. Contributions to the program were $105,181, $171,483
and $132,450 for the years ended September 30, 1994, 1995 and 1996,
respectively. The program was terminated on September 30, 1996.
The Company has entered into a Deferred Compensation Trust Agreement (the
"Trust") with the Chairman of the Company whereby the Company funded the trust
in the amount of $144,000. The principal and related interest thereon are
payable to the Chairman based on a defined payment schedule. The Company, at its
sole discretion, may at any time make additional contributions to the Trust. The
Trust is subject to claims of the Company's creditors in the event of the
Company's insolvency.
F-15
<PAGE> 74
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1994, 1995 AND 1996
(9) MAJOR CUSTOMERS, CONCENTRATION OF CREDIT RISK AND NETWORK CARRIER SALES
Sales to individual customers exceeding 10% of total revenues and total
trade receivables as of and for the years ended September 30, 1994, 1995 and
1996, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
REVENUES
----------------------
CUSTOMER 1994 1995 1996
- ---------------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Caribbean Telephone & Telegraph, Inc.................................. 12% 16% 4%
Intertoll Communications Network Corp................................. -- 3 12
Overseas Telecom...................................................... 2 6 13
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
RECEIVABLES
----------------------
CUSTOMER 1994 1995 1996
- ---------------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Caribbean Telephone & Telegraph, Inc.................................. 25% 27% --
Intertoll Communications Network Corp................................. -- 7 6%
Overseas Telecom...................................................... -- 7 25
</TABLE>
The Company's customers consist of business entities geographically
dispersed throughout the United States. The Company maintains a security
interest in the telecommunications systems it sells until the related account
balances are paid in full. Management provides an allowance for doubtful
accounts and notes based on current customer information and historical
statistics.
The Company had deposits with financial institutions in excess of the
federally insured amount of $100,000 in the amount of $1,068,364 and $467,737
for the years ended September 30, 1995 and 1996, respectively.
Network carrier sales originating from countries outside the United States
aggregated $736,669 and $2,104,399 for the years ended September 30, 1995 and
1996, respectively. These sales are payable in US dollars.
The Company has sold carrier services to Overseas Telecom ("Overseas")
since 1994. During the year ended September 30, 1996, Overseas became delinquent
on certain of its payments. Subsequent to year-end, Overseas entered into a note
receivable agreement which provides for repayment of the non-current outstanding
amount (approximately $0.93 million at September 30, 1996) bearing interest at
12%. The terms of this agreement provide for payments in the amount of 6% of
Overseas' monthly gross revenue. Additionally, 25% of its monthly net income,
with a minimum payment in the amount of $2,500, will also be allocated to
repayment of this note. The note is secured by Overseas' accounts receivable,
customer list and certain assets. Management has established an allowance of
$310,000 to provide for possible future losses relating to this note based on
currently available information. Management periodically reviews the allowance
and will record additional adjustments, if any, in the period in which they
occur.
(10) COMMITMENTS AND CONTINGENCIES
At September 30, 1996, the Company was contingently liable under repurchase
agreements for a maximum of $1,035,032 to Zions Credit Corporation ("Zions").
Zions provides lease financing to the Company's customers on a recourse basis.
The Company has established a $1,000,000 line of credit with
F-16
<PAGE> 75
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1994, 1995 AND 1996
Zions in fiscal 1996 to provide funding for payment of these leases, if required
and a $200,000 revolving bank line of credit. No balances were outstanding under
these lines of credit at September 30, 1996.
On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc., (collectively,
"Aerotel") filed a patent infringement suit against the Company alleging that
telephone systems manufactured and sold by the Company incorporating prepaid
calling features infringe upon a patent which was issued to Aerotel in November
1987. The complaint further alleges defamation and unfair competition by the
Company and seeks various damages. The Company has filed an Answer and
Counterclaim denying patent infringement, defamation or unfair competition and
seeking judgment that the Aerotel patent is invalid and that Aerotel has misused
its patent in violation of antitrust laws. Based on information currently
available, management is of the opinion that there will be no material impact of
the Company's financial position, results of operations or liquidity as a result
of this suit. Accordingly, no provision for loss has been provided in the
accompanying financial statements. An unfavorable decision could have a material
adverse effect on the business, financial condition and results of operations of
the Company.
For a specified period of time subsequent to the release of its new STX
application platform, the Company allowed customers meeting certain criteria to
upgrade to this new application platform. Deposits totaling $385,000 had been
received prior to September 30, 1996, from customers wishing to participate in
this program. The Company holds in inventory 32 application platforms
repurchased under this program, which it is in the process of servicing and
reselling, and has agreed to repurchase an additional 11 application platforms
in exchange for future sales.
GST Realco, Inc. ("GST Realco"), a subsidiary of GST USA, has entered into
a construction contract pursuant to which a 40,000 square foot office building
is currently being built for the Company in Provo, Utah. It is anticipated that
after the construction has been completed (currently estimated to be no later
than June 1997), the Company will move its entire operations to such facility.
The Company is in the process of securing permanent financing for the purchase
of the land and the building from GST Realco.
(11) RELATED PARTY TRANSACTIONS
During the years ended September 30, 1995 and 1996, GST USA borrowed
$500,000 and $250,000, respectively, from the Company on short-term notes
bearing interest at 11 percent. The notes were repaid by year-end. The Company
recorded interest income of $9,823 and $2,602 relating to these notes during the
years ended September 30, 1995 and 1996, respectively.
Also during the year ended September 30, 1996, the Company sold $356,000 of
application platform switching products and $2,571,731 of wholesale carrier
usage to GST USA and purchased $361,000 of wholesale carrier usage from GST USA.
Since April 1, 1996, the Company's Chairman of the Board was compensated by
GST USA for services rendered to GST USA and its subsidiaries, which arrangement
is expected to continue through June 1997.
(12) ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (FASB 123). The Company is required to adopt the provisions of this
statement in Fiscal 1996. This statement encourages all entities to adopt a fair
value based method of accounting for employee stock options or similar equity
instruments. However, it also allows an entity to continue to measure
compensation cost for those
F-17
<PAGE> 76
NACT TELECOMMUNICATIONS, INC.
(A WHOLLY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1994, 1995 AND 1996
plans using the intrinsic-value method of accounting prescribed by APB opinion
No. 25, Accounting for Stock Issued to Employees (APB 25). Entities electing to
remain with the accounting in APB 25 must make pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
defined in this statement had been applied. It is currently anticipated that the
Company will continue to account for employee stock options or similar equity
instruments in accordance with APB 25 and provide the disclosures required by
FASB 123.
(13) SUBSEQUENT EVENTS
In November 1996, the Company adopted the 1996 Stock Option Plan ("1996
Plan") which was approved by the Board of Directors and GST USA . The Company
has reserved 1,250,000 shares for issuance under the 1996 Plan, of which options
to purchase 850,000 shares of Common Stock at an exercise price of $9.35 per
share were granted. The Company may grant incentive stock options and
nonqualified stock options to employees, officers, directors, independent
contractors, and consultants. The Board of Directors or the Compensation
Committee thereof determines which eligible individuals are granted options,
terms of the options, exercise price, number of share subject to the option,
vesting and exercisability.
The Board of Directors has authorized the filing of a registration
statement with the Securities and Exchange Commission permitting the Company to
sell shares of its common stock to the public.
F-18
<PAGE> 77
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF ANY OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 6
Use of Proceeds............................ 15
Dividend Policy............................ 15
Capitalization............................. 16
Dilution................................... 17
Selected Financial Data.................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 20
Business................................... 27
Management................................. 41
Ownership of Common Shares of GST by
Directors and Officers of the Company.... 47
Certain Transactions....................... 48
Principal and Selling Stockholder.......... 49
Description of Capital Stock............... 49
Shares Eligible for Future Sale............ 50
Underwriting............................... 52
Legal Matters.............................. 53
Experts.................................... 53
Additional Information..................... 53
Glossary of Terms.......................... 55
Index to Financial Statements.............. F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
3,000,000 SHARES
LOGO
NACT
TELECOMMUNICATIONS, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
, 1997
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE> 78
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses (other than
underwriting discounts and commissions) which will be paid by the Registrant in
connection with the issuance and distribution of the securities being
registered. With the exception of the SEC registration fee and the NASD filing
fee, all amounts shown are estimates.
<TABLE>
<S> <C>
SEC registration fee..................................................... $12,545.46
NASD filing fee.......................................................... 4,640.00
Nasdaq listing expenses.................................................. *
Blue Sky fees and expenses (including legal and filing fees)............. *
Printing expenses (other than stock certificates)........................ *
Printing and engraving of stock certificates............................. *
Transfer and Registrar fees and expenses................................. *
Accounting fees and expenses............................................. *
Legal fees and expenses (other than Blue Sky)............................ *
Miscellaneous expenses................................................... *
-----
Total.......................................................... $ *
=====
</TABLE>
- ------------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the Delaware General Corporation Law (the "Delaware Law"),
the Company's Certificate of Incorporation provides that no director of the
Company will be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except (i) for any
breach of the directors' duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or involving intentional misconduct
or a knowing violation of law, (iii) unlawful payments of dividends or unlawful
stock repurchases or redemptions, or (iv) for any transaction from which the
director derives any improper personal benefit. In addition, the Company's
Bylaws provide that any director or officer who was or is a party or is
threatened to be made a party to any action or proceeding by reason of his or
her services to the Company will be indemnified to the fullest extent permitted
by the Delaware Law.
The Company believes that the indemnification of its directors and officers
will facilitate the Company's ability to continue to attract and retain
qualified individuals to serve as directors and officers of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
The Company intends to enter into indemnification agreements with each of
its directors and executive officers pursuant to which the Company will agree to
indemnify each of them against expenses and losses incurred for claims brought
against them by reason of their being a director or executive director of the
Company. In addition, the Company's directors and executive officers are covered
by GST's directors' and officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant did not sell any of its
securities without registration under the Securities Act of 1933, as amended.
II-1
<PAGE> 79
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement by and among the Company, GST USA, Inc.,
Hambrecht & Quist Incorporated and Montgomery Securities.
3.1 -- Certificate of Incorporation of the Company.*
3.2 -- By-laws of the Company.*
4.1 -- Specimen Certificate of the Company's Common Stock.*
4.2 -- Form of 1996 Stock Option Plan.
5.1 -- Opinion of Olshan Grundman Frome & Rosenzweig LLP.*
10.1 -- Employment Agreement dated as of October 1, 1996, by and between the Company and
A. Lindsay Wallace.*
10.2 -- Employment Agreement dated as of October 1, 1996, by and between the Company and
Eric F. Gurr.*
10.3 -- Employment Agreement dated as of October 1, 1996, by and between the Company and
Gary Brown.*
10.4 -- Employment Agreement dated as of October 1, 1996, by and between the Company and
Geoffrey Shurpe.*
10.5 -- Revolving Line of Credit Agreement dated February 6, 1996, by and between the
Company and Zions Bank.
10.6 -- Form of Recourse Lease Financing Agreement between the Company and Zions Credit
Corporation.
10.7 -- Lease Agreement dated October 20, 1994, by and between the Company and Busch-
Provo, LTD.
10.8 -- Lease Extension Agreement dated May 15, 1996, by and between the Company and
Busch-Provo, LTD.
10.9 -- Capital Lease Agreement dated May 8, 1995, by and between the Company and Zions
Credit Corporation.
10.10 -- Promissory Note dated November 25, 1996 of Overseas and MC International.
23.1 -- Consent of Olshan Grundman Frome & Rosenzweig LLP (contained in Exhibit 5.1).*
23.2 -- Consent of KPMG Peat Marwick LLP.
23.3 -- Consent of Squire & Co.
23.4 -- Consent of Ronald S. Eliason.
24.1 -- Power of Attorney (included on the signature page to this Registration
Statement).
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules
Independent Auditors' Reports
II -- Valuation and Qualifying Accounts.
All other schedules are omitted as not being required or the information
required therein is included in the financial statements or notes
thereto.
II-2
<PAGE> 80
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) that, for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration statement
as of the time it was declared effective.
(2) that, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undesigned Registrant hereby undertakes to provide to the underwriters
at the closing as specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Orem, State of Utah, on the 11th day of December,
1996.
NACT TELECOMMUNICATIONS, INC.
By: /s/ A. LINDSAY WALLACE
------------------------------------
A. Lindsay Wallace
President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Thomas E. Sawyer, A. Lindsay Wallace and
Stephen Irwin, his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and any related registration
statement filed pursuant to Rule 462(b) of the Act, and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- -------------------------------- ------------------
<S> <C> <C>
/s/ A. Lindsay Wallace President, Chief Executive December 11, 1996
- ------------------------------------- Officer and Director (principal
A. Lindsay Wallace executive officer)
/s/ Eric F. Gurr Chief Financial Officer, December 11, 1996
- ------------------------------------- Treasurer and Secretary
Eric F. Gurr (principal financial and
accounting officer)
/s/ W. Gordon Blankstein Director December 11, 1996
- -------------------------------------
W. Gordon Blankstein
/s/ Stephen Irwin Director December 11, 1996
- -------------------------------------
Stephen Irwin
/s/ Robert L. Olson Director December 11, 1996
- -------------------------------------
Robert L. Olson
/s/ Clifford V. Sander Director December 11, 1996
- -------------------------------------
Clifford V. Sander
</TABLE>
II-4
<PAGE> 82
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
NACT Telecommunications, Inc.:
Under date of November 21, 1996, except as to note 13 which is as of November
26, 1996, we reported on the balance sheets of NACT Telecommunications, Inc.
(the Company) as of September 30, 1995 and 1996, and the related statements of
income, stockholder's equity, and cash flows for the years then ended. In
connection with our audit of the aforementioned financial statements, we also
audited the related financial statement schedule for the years ended September
30, 1995 and 1996. The financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Salt Lake City
November 21, 1996, except as to Note 13
which is as of November 26, 1996
S-1
<PAGE> 83
Independent Auditors' Report
The Board of Directors and Stockholder
NACT Telecommunications, Inc.
(formerly known as National Applied Computer Technologies)
Under date of January 5, 1995 we reported on the balance sheet of NACT
Telecommunications, Inc. (the Company) as of September 30, 1994, and
the related statements of income, stockholder's equity, and cash flows for the
year ended September 30, 1994. In connection with our audit of the
aforementioned financial statement, we also audited the related financial
statement schedule for the year ended September 30, 1994. The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audit.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Squire & Company
Orem, Utah
January 5, 1995
S-2
<PAGE> 84
NACT TELECOMMUNICATIONS, INC.
(A Wholly Owned Subsidiary of GST USA)
Valuation and Qualifying Accounts
Years ended September 30, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Additions
Balance at charged to Charges Balance at
beginning cost and against end of
Account of year expenses allowance of year
------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts receivable
1996...................... $116,410 672,785 689,195 100,000
1995...................... 59,795 189,342 132,727 116,410
1994...................... 75,586 62,879 78,670 59,795
Allowance for doubtful notes
receivable
1996...................... $ 40,000 270,000 -- 310,000
1995...................... -- 40,000 -- 40,000
1994...................... -- -- -- --
Inventory reserve
1996...................... $ -- 85,800 -- 85,800
1995...................... -- -- -- --
1994...................... -- -- --
</TABLE>
S-3
<PAGE> 1
EXHIBIT 1.1
NACT TELECOMMUNICATIONS, INC.
3,000,000 SHARES1/
COMMON STOCK
UNDERWRITING AGREEMENT
___________________, 1997
HAMBRECHT & QUIST LLC
MONTGOMERY SECURITIES, INC.
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
NACT Telecommunications, Inc., a Delaware corporation (herein
called the Company), proposes to issue and sell 2,000,000 shares of its
authorized but unissued Common Stock, $________ par value (herein called the
Company Common Stock), and the stockholder of the Company named in Schedule II
hereto (herein called the Selling Stockholder) propose to sell an aggregate of
1,000,000 shares of Common Stock of the Company (said 1,000,000 shares of
Common Stock being herein called the Selling Stockholder Stock and the
aggregate of said 3,000,000 shares of Common Stock being herein called the
Underwritten Stock). The Company proposes to grant to the Underwriters (as
hereinafter defined) an option to purchase up to 450,000 additional shares of
Common Stock (herein called the Option Stock and with the Underwritten Stock
herein collectively called the Stock). The Stock is more fully described in
the Registration Statement and the Prospectus hereinafter mentioned.
The Company and the Selling Stockholder severally hereby
confirm the agreements made with respect to the purchase of the Stock by the
several underwriters, for whom you are acting, named in Schedule I hereto
(herein collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.
1. REGISTRATION STATEMENT. The Company has filed with
the United States Securities and Exchange Commission (herein called the
Commission) a registration statement on Form S-1 (No. 333-_____), including the
related preliminary prospectus, for the registration under the Securities Act
of 1933, as amended (herein called the Securities Act) of the Stock. Copies of
such registration statement and of each amendment thereto, if any, including
the related preliminary prospectus (meeting the requirements of Rule 430A of
the rules and regulations of the Commission (herein called the Rules and
Regulations)) heretofore filed by the Company with the Commission have been
delivered to you.
The term ``Registration Statement'' as used in this Agreement
shall mean such registration statement, including financial statements,
schedules and exhibits, in the form in which it became or becomes, as
__________________________________
1/ Plus an option to purchase from the Company up to 450,000 additional
shares to cover over-allotments.
1.
<PAGE> 2
the case may be, effective (including, if the Company omitted information from
the registration statement pursuant to Rule 430A(a) or files a term sheet
pursuant to Rule 434 of the Rules and Regulations, the information deemed to be
a part of the registration statement at the time it became effective pursuant
to Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in the event
of any amendment thereto or the filing of any abbreviated registration
statement pursuant to Rule 462(b) of the Rules and Regulations relating thereto
after the effective date of such registration statement, shall also mean (from
and after the effectiveness of such amendment or the filing of such abbreviated
registration statement) such registration statement as so amended, together
with any such abbreviated registration statement. The term ``Preliminary
Prospectus'' as used in this Agreement shall mean each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective.
The term ``Prospectus'' as used in this Agreement shall mean the prospectus
relating to the Stock as included in such Registration Statement at the time it
becomes effective (including, if the Company omitted information from the
Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations,
the information deemed to be a part of the Registration Statement at the time
it became effective pursuant to Rule 430A(b) of the Rules and Regulations);
provided, however, that if in reliance on Rule 434 of the Rules and Regulations
and with the consent of Hambrecht & Quist LLC, the Company shall have provided
to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable,
prior to the time that a confirmation is sent or given for purposes of Section
2(10)(a) of the Securities Act, the term Prospectus shall mean the "prospectus
subject to completion" (as defined in Rule 434(g) of the Rules and Regulations)
last provided to the Underwriters by the Company and circulated by the
Underwriters to all prospective purchasers of the Stock (including the
information deemed to be a part of the Registration Statement at the time it
became effective pursuant to Rule 434(d) of the Rules and Regulations).
Notwithstanding the foregoing, if any revised prospectus shall be provided to
the Underwriters by the Company for use in connection with the offering of the
Stock that differs from the prospectus referred to in the immediately preceding
sentence (whether or not such revised prospectus is required to be filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term
Prospectus shall refer to such revised prospectus from and after the time it is
first provided to the Underwriters for such use. If in reliance on Rule 434 of
the Rules and Regulations and with the consent of Hambrecht & Quist LLC, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Securities Act, the Prospectus
and the term sheet, together, will not be materially different from the
prospectus in the Registration Statement.
The Registration Statement has been declared effective under
the Securities Act, and no post-effective amendment to the Registration
Statement has been filed as of the date of this Agreement. The Company has
caused to be delivered to you copies of each Preliminary Prospectus and has
consented to the use of such copies for the purposes permitted by the
Securities Act.
2. REPRESENTATIONS AND WARRANTIES.
(a) Each of the Company, the Selling Stockholder and GST
Telecommunications, Inc. (``GST Telecommunications'') hereby represents and
warrants as follows:
(i) The Company is duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation with full power and authority (corporate and
other) to own, lease and operate its properties and conduct its business as
described in the Prospectus; the Company is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company; no proceeding has been instituted in any such jurisdiction, revoking,
limiting or curtailing, or seeking to revoke, limit or curtail, such power and
authority or qualification; the Company is in possession of and operating in
compliance with all authorizations, licenses, certificates, consents, orders
and permits from state, federal and other regulatory authorities which are
2.
<PAGE> 3
material to the conduct of its business, all of which are valid and in full
force and effect; the Company is not in violation of its charter or bylaws or
in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any material bond, debenture,
note or other evidence of indebtedness, or in any material lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which the Company is a party or by which it may be
bound; and the Company is not in material violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company of which it has knowledge. The Company does not own or control,
directly or indirectly, any other corporation, limited liability company,
limited partnership, general partnership or association.
(ii) Each of the Company, the Selling Stockholder
and GST Telecommunications, Inc. ("GST Telecommunications") has full legal
right, power and authority to enter into this Agreement and perform the
transactions contemplated hereby. This Agreement has been duly authorized,
executed and delivered by (or on behalf of) each of the Company, the Selling
Stockholder and GST Telecommunications and is a valid and binding agreement on
the part of the Company, the Selling Stockholder and GST Telecommunications
enforceable in accordance with its terms, except as rights to indemnification
hereunder which may be limited by applicable law and except as to the
enforcement hereof which may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; the performance
of this Agreement and the consummation of the transactions herein contemplated
(including the amendments to the Company's certificate of incorporation or
bylaws and its reincorporation into the state of Delaware) will not result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any bond, debenture, note or other evidence of
indebtedness, or under any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to which the
Company or the Selling Stockholder or GST Telecommunications is a party or by
which the Selling Stockholder or GST Telecommunications or any of their
subsidiaries or their respective properties may be bound, including, but not
limited to the Convertible Notes Indenture and the Senior Notes Indenture, each
of which is dated as of December 19, 1995, and is among the Selling
Stockholder, GST Telecommunications and U.S. Trust and covers notes due in 2005
(the "Indentures"), (ii) the charter or bylaws of the Company or the Selling
Stockholder or GST Telecommunications, or (iii) any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or the Selling Stockholder or GST Telecommunications or over their
respective properties. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or the Selling
Stockholder or GST Telecommunications or over their respective properties is
required for the execution and delivery of this Agreement and the consummation
by the Company or the Selling Stockholder or GST Telecommunications of the
transactions herein contemplated, except such as may be required under the
Securities Act or under state or other securities or Blue Sky laws, all of
which requirements have been satisfied in all material respects.
(iii) There is not any pending or, to the best of
the Company's knowledge, threatened, action, suit, claim or proceeding against
(i) the Company, (ii) the Selling Stockholder or (iii) GST Telecommunications,
or any of their directors, officers or any of their properties, assets or
rights before any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over (i) the Company, (ii) the Selling Stockholder
or (iii) GST Telecommunications or over their respective officers, directors or
properties which (i) might result in any material adverse change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company or might materially and adversely affect its
properties, assets or rights, (ii) might prevent consummation of the
transactions contemplated hereby or (iii) is required to be disclosed in the
Registration Statement or Prospectus and is not so disclosed; and there are no
agreements, contracts, leases or documents of the Company or the Selling
Stockholder or GST Telecommunications of a character required to be described
or referred to in the Registration Statement or Prospectus or to be filed as an
exhibit to the Registration
3.
<PAGE> 4
Statement by the Securities Act or the Rules and Regulations which have not
been accurately described in all material respects in the Registration
Statement or Prospectus or filed as exhibits to the Registration Statement.
(iv) All outstanding shares of capital stock of
the Company (including the Selling Stockholder Stock) have been duly authorized
and validly issued and are fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, were not issued in
violation of the Indentures or in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and the
authorized and outstanding capital stock of the Company is as set forth in the
Registration Statement and Prospectus under the caption "Capitalization" and
conforms in all material respects to the statements relating thereto contained
in the Registration Statement and the Prospectus (and such statements correctly
state the substance of the instruments defining the capitalization of the
Company); the stock to be purchased hereunder with respect to the Selling
Stockholder Stock, has been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, with respect to the Company Common
Stock, when issued and delivered by the Company against payment therefor in
accordance with the terms of this Agreement, will be duly authorized and
validly issued for sale to the Underwriters pursuant to this Agreement. All of
the Stock to be sold hereunder, when delivered to the Underwriters against
payment therefor in accordance with the terms of this Agreement, will also be
fully paid and nonassessable, and will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first refusal or
other similar right of stockholders exists with respect to any of the stock to
be purchased hereunder or the issuance and sale thereof other than those that
have been expressly waived prior to the date hereof and those that will
automatically expire upon the consummation of the transactions contemplated on
the Closing Date. No further approval or authorization of any securityholder
or Board of Directors of the Company, the Selling Stockholder or GST
Telecommunications or others is required for the issuance and sale or transfer
of the Stock, except as may be required under the Securities Act, or under
state or other securities or Blue Sky laws. Except as disclosed in or
contemplated by the Prospectus and the financial statements of the Company, and
the related notes thereto, included in the Registration Statement and the
Prospectus, the Company does not have outstanding any options to purchase, or
any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Registration
Statement and the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(v) KPMG Peat Marwick, which has examined the
consolidated financial statements of the Company together with the related
schedules and notes, as of September 30, 1995 and 1996 and for each of the
years in the three (3) years ended September 30, 1996 and performed the
procedure set out in Statement on Accounting Standards No. 71 ("SAS 71") for a
review of the interim financial information and provided a report of KPMG Peat
Marwick LLP as described in SAS 71 on the financial statements for each of the
three month periods ended December 31, 1995 and 1996 filed with the Commission
as a part of the Registration Statement and included in the Prospectus, are
independent accountants within the meaning of the Act and the Rules and
Regulations; the audited consolidated financial statements of the Company,
together with the related schedules and notes, and the unaudited consolidated
financial information, forming part of the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company and its subsidiaries at the respective dates and for the
respective periods to which they apply; and all audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, filed with the Commission as
part of the Registration Statement, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved except as may be otherwise stated therein. The selected and
summary financial and statistical data included in the Registration Statement
present fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements or schedules are required to be included in the
Registration Statement.
4.
<PAGE> 5
(vi) Squire & Co., which has examined the
consolidated financial statements of the Company for each of the two years
ended September 30, 1994 and for each of the two years ended December 31, 1992,
filed with the Commission as a part of the Registration Statement and are
included in the Prospectus, are independent accountants within the meaning of
the Act and the Rules and Regulations; the audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position
and the results of operations of the Company and its subsidiaries at the
respective dates and for the respective periods to which they apply; and all
audited consolidated financial statements of the Company, together with the
related schedules and notes, and the unaudited consolidated financial
information, filed with the Commission as part of the Registration Statement,
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as may be otherwise
stated therein. The selected and summary financial and statistical data
included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules are
required to be included in the Registration Statement.
(vii) Subsequent to the respective dates as of
which information is given in the Registration Statement and Prospectus, there
has not been (i) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company, (ii) any transaction that is material to the Company, except
transactions entered into in the ordinary course of business, (iii) any
obligation, direct or contingent, that is material to the Company, incurred by
the Company, the Selling Stockholder or GST Telecommunications, except
obligations incurred in the ordinary course of business, (iv) any change in the
capital stock or outstanding indebtedness of the Company that is material to
the Company, (v) any dividend or distribution of any kind declared, paid or
made on the capital stock of the Company, or (vi) any loss or damage (whether
or not insured) to the property of the Company which has been sustained or will
have been sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company.
(viii) Except as set forth in the Registration
Statement and Prospectus, (i) the Company has good and marketable title to all
properties and assets described in the Registration Statement and Prospectus as
owned by it, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, other than such as would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise, (ii) the agreements to which the Company is a
party described in the Registration Statement and Prospectus are valid
agreements, enforceable by the Company, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the best of the Company's knowledge, the
other contracting party or parties thereto are not in material breach or
material default under any of such agreements, and (iii) the Company has valid
and enforceable leases for all properties described in the Registration
Statement and Prospectus as leased by it, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles. Except as set forth in the Registration
Statement and Prospectus, the Company owns or leases all such properties as are
necessary to its operations as now conducted or as proposed to be conducted.
(ix) The Company has timely filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown thereon as due, and there is no tax deficiency that has been or, to
the best of the Company's knowledge, might be asserted against the Company or
any of its subsidiaries that might have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company; and all tax liabilities are adequately provided for
on the books of the Company.
5.
<PAGE> 6
(x) The Company maintains insurance with insurers
of recognized financial responsibility of the types and in the amounts
generally deemed adequate for their respective businesses and consistent with
insurance coverage maintained by similar companies in similar businesses,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect; the Company has not been refused any
insurance coverage sought or applied for; and the Company has no reason to
believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would not
materially and adversely affect the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(xi) To the best of Company's knowledge, no labor
disturbance by the employees of the Company exists or is imminent; and the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, subassemblers, value added
resellers, subcontractors, original equipment manufacturers, authorized dealers
or distributors that might be expected to result in a material adverse change
in the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company. No collective bargaining agreement exists
with any of the Company's employees and, to the best of the Company's
knowledge, no such agreement is imminent.
(xii) The Company owns or possesses adequate rights
to use all patents, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names and copyrights which are necessary to
conduct its businesses as described in the Registration Statement and
Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company; the Company has not received any
notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of the Company by others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(xiii) The Common Stock has been approved for
quotation on the Nasdaq National Market, subject to official notice of
issuance.
(xiv) The Company has been advised concerning the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the
future to conduct, its affairs in such a manner as to ensure that it will not
become an "investment company" or a company "controlled" by an "investment
company" within the meaning of the 1940 Act and the rules and regulations
thereunder.
(xv) The Company, the Selling Stockholder and GST
Telecommunications have not distributed and will not distribute prior to the
later of (i) the Closing Date, or any date on which Option Stock is to be
purchased, as the case may be, and (ii) completion of the distribution of the
Stock, any offering material in connection with the offering and sale of the
Stock other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Securities Act.
(xvi) Neither the Company nor the Selling
Stockholder nor GST Telecommunications has at any time during the last five (5)
years (i) made any unlawful contribution to any candidate for foreign office or
failed to disclose fully any contribution in violation of law, or (ii) made any
payment to any federal or state
6.
<PAGE> 7
governmental officer or official, or other person charged with similar public
or quasi-public duties, other than payments required or permitted by the laws
of the United States or any jurisdiction thereof.
(xvii) The Company, the Selling Stockholder and GST
Telecommunications have not taken and will not take, directly or indirectly,
any action designed to or that might reasonably be expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Stock.
(xviii) Except as set forth in the Registration
Statement and Prospectus, (i) the Company is in compliance with all rules, laws
and regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its business, (ii) the Company, the Selling Stockholder
and GST Telecommunications have received no notice from any governmental
authority or third party of an asserted claim under Environmental Laws, which
claim is required to be disclosed in the Registration Statement and the
Prospectus, (iii) the Company will not be required to make future material
capital expenditures to comply with Environmental Laws and (iv) no property
which is owned, leased or occupied by the Company, the Selling Stockholder or
GST Telecommunications has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site
under applicable state or local law.
(xix) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access
to assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xx) There are no outstanding loans, advances
(except normal advances for business expenses in the ordinary course of
business) or guarantees of indebtedness by the Company to or for the benefit of
the Selling Stockholder, GST Telecommunications or any of the officers or
directors of the (i) Company, (ii) the Selling Stockholder or (iii) GST
Telecommunications, or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(xxi) The Company has complied with all provisions
of Section 517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
(xxii) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
has not been any material adverse change in the business, general assets,
properties, financial condition or results of operations of the Company,
whether or not arising from transactions in the ordinary course of business,
other than as set forth in the Registration Statement and the Prospectus, and
since such dates, except in the ordinary course of business, the Company has
not entered into any material transaction not referred to in the Registration
Statement and the Prospectus, and neither the Selling Stockholder nor GST
Telecommunications has entered into any material transaction not referred to in
the Registration Statement and the Prospectus that, to the best of their
knowledge, could have a material adverse effect on the business, general
assets, properties, financial condition or results of operations of the
Company.
(xxiii) The Registration Statement has been prepared
by the Company in conformity with the requirements of the Securities Act, as
amended and the applicable Rules and Regulations under the Securities Act and
has been filed with the Commission; such amendments to such registration
statement, such amended prospectuses subject to completion and such abbreviated
registration statements pursuant to Rule 462(b) of the Rules
7.
<PAGE> 8
and Regulations as may have been required prior to the date hereof have been
similarly prepared and filed with the Commission; and the Company will file
such additional amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
as may hereafter be required. Copies of such registration statement and
amendments, of each related prospectus subject to completion (the Preliminary
Prospectuses) and of any abbreviated registration statement pursuant to Rule
462(b) of the Rules and Regulations have been delivered to you.
If the registration statement relating to the
Stock has been declared effective under the Securities Act by the Commission,
the Company will prepare and promptly file with the Commission the information
omitted from the registration statement pursuant to Rule 430A(a) or, if
Hambrecht & Quist LLC, on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations pursuant to subparagraph (1), (4)
or (7) of Rule 424(b) of the Rules and Regulations or as part of a
post-effective amendment to the registration statement (including a final form
of prospectus). If the registration statement relating to the Stock has not
been declared effective under the Act by the Commission, the Company will
prepare and promptly file an amendment to the registration statement, including
a final form of prospectus, or, if Hambrecht & Quist LLC, on behalf of the
several Underwriters, shall agree to the utilization of Rule 434 of the Rules
and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations.
(xxiv) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus or instituted
proceedings for that purpose, and each such Preliminary Prospectus has
conformed in all material respects to the requirements of the Securities Act
and the Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up
to and on the Closing Date (hereinafter defined) and on any later date on which
Option Stock are to be purchased, (i) the Registration Statement and the
Prospectus, and any amendments or supplements thereto, contained and will
contain all material information required to be included therein by the
Securities Act and the Rules and Regulations and will in all material respects
conform to the requirements of the Act and the Rules and Regulations, (ii) the
Registration Statement, and any amendments or supplements thereto, did not and
will not include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (iii) the Prospectus, and any amendments or
supplements thereto, did not and will not include any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that none of the representations and warranties
contained in this subparagraph (b) shall apply to information contained in or
omitted from the Registration Statement or Prospectus, or any amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
(b) The Selling Stockholder hereby represents and
warrants as follows:
(i) Such Selling Stockholder now has and on the
Closing Date will have valid marketable title to the Selling Stockholder Stock
to be sold by such Selling Stockholder, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than pursuant
to this Agreement; and upon delivery of such Selling Stockholder Stock
hereunder and payment of the purchase price as herein contemplated, each of the
Underwriters will obtain valid marketable title to the Stock purchased by it
from such Selling Stockholder, free and clear of any pledge, lien, security
interest pertaining to such Selling Stockholder or such Selling Stockholder's
property, encumbrance, claim or equitable interest, including any liability for
estate or inheritance taxes, or any liability to or claims of any creditor,
devisee, legatee or beneficiary of such Selling Stockholder.
8.
<PAGE> 9
(ii) Such Selling Stockholder has duly authorized,
executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of Attorney")
appointing ___________ and ___________ as attorneys-in-fact (collectively, the
"Attorneys" and individually, an "Attorney") and a Letter of Transmittal and
Custody Agreement (the "Custody Agreement") with
______________________________, as custodian (the "Custodian"); each of the
Power of Attorney and the Custody Agreement constitutes a valid and binding
agreement on the part of such Selling Stockholder, enforceable in accordance
with its terms, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and each of such Selling Stockholder's Attorneys, acting alone, is
authorized to execute and deliver this Agreement and the certificate referred
to in Section 9(e) hereof on behalf of such Selling Stockholder, to determine
the purchase price to be paid by the several Underwriters to such Selling
Stockholder as provided in Section 3 hereof, to authorize the delivery of the
Selling Stockholder Stock under this Agreement and to duly endorse (in blank or
otherwise) the certificate or certificates representing such Selling
Stockholder Stock or a stock power or powers with respect thereto, to accept
payment therefor, and otherwise to act on behalf of such Selling Stockholder in
connection with this Agreement.
(iii) All consents, approvals, authorizations and
orders required for the execution and delivery by such Selling Stockholder of
the Power of Attorney and the Custody Agreement, the execution and delivery by
or on behalf of such Selling Stockholder of this Agreement and the sale and
delivery of the Selling Stockholder Stock under this Agreement (other than, at
the time of the execution hereof (if the Registration Statement has not yet
been declared effective by the Commission), the issuance of the order of the
Commission declaring the Registration Statement effective and such consents,
approvals, authorizations or orders as may be necessary under state or other
securities or Blue Sky laws) have been obtained and are in full force and
effect; such Selling Stockholder, if other than a natural person, has been duly
organized and is validly existing in good standing under the laws of the
jurisdiction of its organization as the type of entity that it purports to be;
and such Selling Stockholder has full legal right, power and authority to enter
into and perform its obligations under this Agreement and such Power of
Attorney and Custody Agreement, and to sell, assign, transfer and deliver the
Stock to be sold by such Selling Stockholder under this Agreement.
(iv) Certificates in negotiable form for all
Selling Stockholder Stock to be sold by such Selling Stockholder under this
Agreement, together with a stock power or powers duly endorsed in blank by such
Selling Stockholder, have been placed in custody with the Custodian for the
purpose of effecting delivery hereunder.
(v) All information furnished by or on behalf of
such Selling Stockholder relating to such Selling Stockholder and the Selling
Stockholder Stock that is contained in the representations and warranties of
such Selling Stockholder in such Selling Stockholder's Power of Attorney or set
forth in the Registration Statement and the Prospectus is, and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date, was or will be,
true, correct and complete, and does not, and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date (hereinafter defined) will
not, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make such
information not misleading.
(vi) Such Selling Stockholder will review the
Prospectus and will comply with all agreements and satisfy all conditions on
its part to be complied with or satisfied pursuant to this Agreement on or
prior to the Closing Date and will advise one of its Attorneys and Hambrecht &
Quist LLC prior to the Closing Date if any statement to be made on behalf of
such Selling Stockholder in the certificate contemplated by Section ___ would
be inaccurate if made as of the Closing Date.
9.
<PAGE> 10
(vii) Such Selling Stockholder has reviewed the
Registration Statement and Prospectus and, although such Selling Stockholder
has not independently verified the accuracy or completeness of all the
information contained therein, nothing has come to the attention of such
Selling Stockholder that would lead such Selling Stockholder to believe that on
the Effective Date, the Registration Statement contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading;
and, on the Effective Date the Prospectus contained and, on the Closing Date
and any later date on which Option Stock is to be purchased, contains any
untrue statement of a material fact or omitted or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties
and subject to the terms and conditions herein set forth, the Company agrees to
issue and sell 2,000,000 shares of the Underwritten Stock to the several
Underwriters, the Selling Stockholder agrees to sell to the several
Underwriters 1,000,000 shares of the Selling Stockholder Stock (see Schedule
II), and each of the Underwriters agrees to purchase from the Company and the
Selling Stockholder the respective aggregate number of shares of Underwritten
Stock set forth opposite its name in Schedule I. The price at which such
shares of Underwritten Stock shall be sold by the Company and the Selling
Stockholder and purchased by the several Underwriters shall be $_____ per
share. The obligation of each Underwriter to the Company and each of the
Selling Stockholder shall be to purchase from the Company and the Selling
Stockholder that number of shares of the Underwritten Stock which represents
the same proportion of the total number of shares of the Underwritten Stock to
be sold by each of the Company and the Selling Stockholder pursuant to this
Agreement as the number of shares of the Underwritten Stock set forth opposite
the name of such Underwriter in Schedule I hereto represents of the total
number of shares of the Underwritten Stock to be purchased by all Underwriters
pursuant to this Agreement, as adjusted by you in such manner as you deem
advisable to avoid fractional shares. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is
to purchase only the respective number of shares of the Underwritten Stock
specified in Schedule I.
(b) If for any reason one or more of the Underwriters
shall fail or refuse (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 8 or 9 hereof) to
purchase and pay for the number of shares of the Underwritten Stock agreed to
be purchased by such Underwriter or Underwriters, the Company or the Selling
Stockholder shall immediately give notice thereof to you, and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by you of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon between you
and such purchasing Underwriter or Underwriters and upon the terms herein set
forth, all or any part of the shares of the Underwritten Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the
non-defaulting Underwriters fail so to make such arrangements with respect to
all such shares and portion, the number of shares of the Underwritten Stock
which each non-defaulting Underwriter is otherwise obligated to purchase under
this Agreement shall be automatically increased on a pro rata basis to absorb
the remaining shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase; provided, however, that the non-defaulting
Underwriters shall not be obligated to purchase the shares and portion which
the defaulting Underwriter or Underwriters agreed to purchase if the aggregate
number of such shares of the Underwritten Stock exceeds 10% of the total number
of shares of the Underwritten Stock which all Underwriters agreed to purchase
hereunder. If the total number of shares of the Underwritten Stock which the
defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Stockholder shall have the right, within 24 hours next
succeeding the 24-hour period above referred to, to make arrangements with
other underwriters or purchasers satisfactory to you for purchase of such
shares and portion on the terms herein set forth. In any such case, either you
or the Company and the Selling Stockholder shall have the right to postpone the
Closing Date determined as provided in Section 5 hereof for not more than seven
business
10.
<PAGE> 11
days after the date originally fixed as the Closing Date pursuant to said
Section 5 in order that any necessary changes in the Registration Statement,
the Prospectus or any other documents or arrangements may be made. If neither
the non-defaulting Underwriters nor the Company and the Selling Stockholder
shall make arrangements within the 24-hour periods stated above for the
purchase of all the shares of the Underwritten Stock which the defaulting
Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall
be terminated without further act or deed and without any liability on the part
of the Company or the Selling Stockholder to any non-defaulting Underwriter and
without any liability on the part of any non-defaulting Underwriter to the
Company or the Selling Stockholder. Nothing in this paragraph (b), and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and
covenants herein contained, and subject to the terms and conditions herein set
forth, the Company grants an option to the several Underwriters to purchase,
severally and not jointly, up to 450,000 shares in the aggregate of the Option
Stock from the Company at the same price per share as the Underwriters shall
pay for the Underwritten Stock. Said option may be exercised only to cover
over-allotments in the sale of the Underwritten Stock by the Underwriters and
may be exercised in whole or in part at any time (but not more than once) on or
before the thirtieth day after the date of this Agreement upon written or
telegraphic notice by you to the Company setting forth the aggregate number of
shares of the Option Stock as to which the several Underwriters are exercising
the option. Delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made as provided in Section 5 hereof. The number of
shares of the Option Stock to be purchased by each Underwriter shall be the
same percentage of the total number of shares of the Option Stock to be
purchased by the several Underwriters as such Underwriter is purchasing of the
Underwritten Stock, as adjusted by you in such manner as you deem advisable to
avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the
Underwriters of the Stock to be purchased by them shall be as set forth in the
Prospectus. The Underwriters may from time to time change the public offering
price after the closing of the initial public offering and increase or decrease
the concessions and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on
the front cover page and under "Underwriting" in the Registration Statement,
any Preliminary Prospectus and the Prospectus relating to the Stock filed by
the Company (insofar as such information relates to the Underwriters)
constitutes the only information furnished by the Underwriters to the Company
for inclusion in the Registration Statement, any Preliminary Prospectus, and
the Prospectus, and you on behalf of the respective Underwriters represent and
warrant to the Company and the Selling Stockholder and GST Telecommunications
that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the
Underwritten Stock and the Option Stock (if the option granted by Section 3(c)
hereof shall have been exercised not later than [7:00 A.M., San Francisco]
time, on the date two business days preceding the Closing Date), and payment
therefor, shall be made at the office of________,________, at [7:00 a.m., San
Francisco] time, on the [fourth]2/ business day after the date of this
Agreement, or at such time on such other day, not later than seven full
business days after such [fourth] business day, as shall be agreed upon in
writing by the Company, the Selling Stockholder and you. The date and hour of
__________________________________
2/ This assumes that the transaction will be priced after the close of
market and that T+4 will apply to the transaction. If the pricing took place
before or during market hours (which will generally not be the case), the
closing would be three business days after pricing.
11.
<PAGE> 12
such delivery and payment (which may be postponed as provided in Section 3(b)
hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be
exercised after 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date, delivery of certificates for the shares of Option
Stock, and payment therefor, shall be made at the office of________,________,
at 7:00 a.m., San Francisco time, on the third business day after the exercise
of such option.
(c) Payment for the Stock purchased from the Company
shall be made to the Company or its order, and payment for the Stock purchased
from the Selling Stockholder shall be made to the Custodian, for the account of
the Selling Stockholder, in each case by wire transfer of same-day federal
funds. Such payment shall be made upon delivery of certificates for the Stock
to you for the respective accounts of the several Underwriters against receipt
therefor signed by you. Certificates for the Stock to be delivered to you
shall be registered in such name or names and shall be in such denominations as
you may request at least one business day before the Closing Date, in the case
of Underwritten Stock, and at least one business day prior to the purchase
thereof, in the case of the Option Stock. Such certificates will be made
available to the Underwriters for inspection, checking and packaging at the
offices of Lewco Securities Corporation, 2 Broadway, New York, New York 10004
on the business day prior to the Closing Date or, in the case of the Option
Stock, by 3:00 p.m., New York time, on the business day preceding the date of
purchase.
It is understood that you, individually and not on behalf of
the Underwriters, may (but shall not be obligated to) make payment to the
Company and the Selling Stockholder for shares to be purchased by any
Underwriter whose funds shall not have been received by you on the Closing Date
or any later date on which Option Stock is purchased for the account of such
Underwriter. Any such payment by you shall not relieve such Underwriter from
any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING
STOCKHOLDER. Each of the Company and the Selling Stockholder respectively
covenants and agrees as follows:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been
advised and furnished with a copy or to which you shall have reasonably
objected in writing or which is not in compliance with the Securities Act or
the rules and regulations of the Commission.
(b) The Company will promptly notify each Underwriter in
the event of (i) the request by the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
additional information, (ii) the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement, (iii) the
institution or notice of intended institution of any action or proceeding for
that purpose, (iv) the receipt by the Company of any notification with respect
to the suspension of the qualification of the Stock for sale in any
jurisdiction, or (v) the receipt by it of notice of the initiation or
threatening of any proceeding for such purpose. The Company and the Selling
Stockholder will make every reasonable effort to prevent the issuance of such a
stop order and, if such an order shall at any time be issued, to obtain the
withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date,
deliver to you a signed copy of the Registration Statement as originally filed
and of each amendment thereto filed prior to the time the Registration
Statement becomes effective and, promptly upon the filing thereof, a signed
copy of each post-effective amendment, if any, to the Registration Statement
(together with, in each case, all exhibits thereto unless previously furnished
12.
<PAGE> 13
to you) and will also deliver to you, for distribution to the Underwriters, a
sufficient number of additional conformed copies of each of the foregoing (but
without exhibits) so that one copy of each may be distributed to each
Underwriter, (ii) as promptly as possible deliver to you and send to the
several Underwriters, at such office or offices as you may designate, as many
copies of the Prospectus as you may reasonably request, and (iii) thereafter
from time to time during the period in which a prospectus is required by law to
be delivered by an Underwriter or dealer, likewise send to the Underwriters as
many additional copies of the Prospectus and as many copies of any supplement
to the Prospectus and of any amended prospectus, filed by the Company with the
Commission, as you may reasonably request for the purposes contemplated by the
Securities Act.
(d) If at any time during the period in which a
prospectus is required by law to be delivered by an Underwriter or dealer any
event relating to or affecting the Company, shall occur as a result of which it
is necessary, in the opinion of counsel for the Company to supplement or amend
the Prospectus in order to make the Prospectus not misleading in the light of
the circumstances existing at the time it is delivered to a purchaser of the
Stock, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the Prospectus as
so supplemented or amended will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time such
Prospectus is delivered to such purchaser, not misleading. If, after the
initial public offering of the Stock by the Underwriters and during such
period, the Underwriters shall propose to vary the terms of offering thereof by
reason of changes in general market conditions or otherwise, you will advise
the Company in writing of the proposed variation, and, if in the opinion of
counsel for the Company such proposed variation requires that the Prospectus be
supplemented or amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended prospectus setting
forth such variation. The Company authorizes the Underwriters and all dealers
to whom any of the Stock may be sold by the several Underwriters to use the
Prospectus, as from time to time amended or supplemented, in connection with
the sale of the Stock in accordance with the applicable provisions of the
Securities Act and the applicable rules and regulations thereunder for such
period.
(e) Prior to the filing thereof with the Commission, the
Company will submit to you, for your information, a copy of any post-effective
amendment to the Registration Statement and any supplement to the Prospectus or
any amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by
you, in the qualification of the Stock for offer and sale under the securities
or blue sky laws of such jurisdictions as you may designate and, during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, in keeping such qualifications in good standing under
said securities or blue sky laws; provided, however, that the Company shall not
be obligated to file any general consent to service of process or to qualify as
a foreign corporation in any jurisdiction in which it is not so qualified. The
Company will, from time to time, prepare and file such statements, reports, and
other documents as are or may be required to continue such qualifications in
effect for so long a period as you may reasonably request for distribution of
the Stock.
(g) During a period of five years commencing with the
date hereof, the Company will furnish to you, and to each Underwriter who may
so request in writing, copies of all periodic and special reports furnished to
stockholders of the Company and of all information, documents and reports filed
with the Commission (including the Report on Form SR required by Rule 463 of
the Commission under the Securities Act).
(h) Not later than the 45th day following the end of the
fiscal quarter first occurring after the first anniversary of the Effective
Date, the Company will make generally available to its security holders an
earnings statement in accordance with Section 11(a) of the Securities Act and
Rule 158 thereunder.
13.
<PAGE> 14
(i) The Company and the Selling Stockholder jointly and
severally agree to pay all costs and expenses incident to the performance of
their obligations under this Agreement, including all costs and expenses
incident to (i) the preparation, printing and filing with the Commission and
the National Association of Securities Dealers, Inc. ("NASD") of the
Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the
furnishing to the Underwriters of copies of any Preliminary Prospectus and of
the several documents required by paragraph (c) of this Section 6 to be so
furnished, (iii) the printing of this Agreement and related documents delivered
to the Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (d) of
this Section 6, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 6 and (vi) the
printing and issuance of stock certificates, including the transfer agent's
fees. The Selling Stockholder will pay any transfer taxes incident to the
transfer to the Underwriters of the shares the Stock being sold by the Selling
Stockholder.
(j) The Company and the Selling Stockholder jointly and
severally agree to reimburse you, for the account of the several Underwriters,
for blue sky fees and related disbursements (including counsel fees and
disbursements and cost of printing memoranda for the Underwriters) paid by or
for the account of the Underwriters or their counsel in qualifying the Stock
under state securities or blue sky laws and in the review of the offering by
the NASD.
(k) The provisions of paragraphs (i) and (j) of this
Section are intended to relieve the Underwriters from the payment of the
expenses and costs which the Company and the Selling Stockholder hereby agree
to pay and shall not affect any agreement which the Company and the Selling
Stockholder may make, or may have made, for the sharing of any such expenses
and costs.
(l) The Company and the Selling Stockholder and GST
Telecommunications hereby agree that, without the prior written consent of
Hambrecht & Quist LLC, the Company or such Selling Stockholder or GST
Telecommunications, as the case may be, will not, for a period of 180 days
following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make
any short sale, pledge, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase
or acquire Common Stock or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences or ownership
of Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (A) the Stock to
be sold to the Underwriters pursuant to this Agreement, and (B) options granted
by the Company to purchase Common Stock granted under the option plans
described in the Registration Statement and the Prospectus.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and the Selling Stockholder jointly and
severally agree to indemnify and hold harmless each Underwriter and each person
(including each partner or officer thereof) who controls any Underwriter within
the meaning of Section 15 of the Securities Act from and against any and all
losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Securities Exchange Act of 1934, as amended (herein called the Exchange
Act), or the common law or otherwise, and the Company and the Selling
Stockholder jointly and severally agree to reimburse each such Underwriter and
controlling person for any legal or other expenses (including, except as
otherwise hereinafter provided, reasonable fees and disbursements of counsel)
incurred by the respective indemnified parties in connection with defending
against any such losses, claims, damages or liabilities or in connection with
any investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact
14.
<PAGE> 15
contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post- effective
amendment thereto (including any Rule 462(b) registration statement), or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus or the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
thereof or supplement thereto) or the omission or alleged omission to state
therein a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that (1) the indemnity agreements of the Company and the
Selling Stockholder contained in this paragraph (a) shall not apply to any such
losses, claims, damages, liabilities or expenses if such statement or omission
was made in reliance upon and in conformity with information furnished as
herein stated or otherwise furnished in writing to the Company by or on behalf
of any Underwriter for use in any Preliminary Prospectus or the Registration
Statement or the Prospectus or any such amendment thereof or supplement
thereto, (2) the indemnity agreement contained in this paragraph (a) with
respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof, and (3) the Selling
Stockholder shall only be liable under this paragraph with respect to (A)
information pertaining to such Selling Stockholder furnished by or on behalf of
such Selling Stockholder expressly for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto or (B) facts that would constitute a breach of any
representation or warranty of such Selling Stockholder set forth in Section
2(b) hereof. The indemnity agreements of the Company and the Selling
Stockholder contained in this paragraph (a) and the representations and
warranties of the Company and the Selling Stockholder contained in Section 2
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and
hold harmless the Company, each of its officers who signs the Registration
Statement on his own behalf or pursuant to a power of attorney, each of its
directors, each other Underwriter and each person (including each partner or
officer thereof) who controls the Company or any such other Underwriter within
the meaning of Section 15 of the Securities Act, and the Selling Stockholder
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act, or the common law or otherwise and
to reimburse each of them for any legal or other expenses (including, except as
otherwise hereinafter provided, reasonable fees and disbursements of counsel)
incurred by the respective indemnified parties in connection with defending
against any such losses, claims, damages or liabilities or in connection with
any investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including any Rule 462(b) registration statement) or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact contained in
the Prospectus (as amended or as supplemented if the Company shall have filed
with the Commission any amendment thereof or supplement thereto) or the omission
or alleged omission to state therein a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in the Registration Statement or the Prospectus or any such
amendment thereof or supplement
15.
<PAGE> 16
thereto or (iii) any act or failure to act or any alleged act or failure to act
by any Underwriter in connection with, or relating in any manner to, the Stock
or the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out of or
based upon matters covered by clause (i) or (ii) above (provided that the
Company shall not be liable under this clause (iii) to the extent that it is
determined in a final judgment by a court of competent jurisdiction that such
loss, claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its gross negligence or willful misconduct). The indemnity agreement of each
Underwriter contained in this paragraph (b) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of
paragraphs (a) and (b) of this Section 7 agrees that, upon the service of a
summons or other initial legal process upon it in any action or suit instituted
against it or upon its receipt of written notification of the commencement of
any investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall
not relieve such indemnifying party or parties from any liability which it or
they may have to the indemnified party for contribution or otherwise than on
account of such indemnity agreement. Any indemnifying party shall be entitled
at its own expense to participate in the defense of any action, suit or
proceeding against, or investigation or inquiry of, an indemnified party. Any
indemnifying party shall be entitled, if it so elects within a reasonable time
after receipt of the Notice by giving written notice (herein called the Notice
of Defense) to the indemnified party, to assume (alone or in conjunction with
any other indemnifying party or parties) the entire defense of such action,
suit, investigation, inquiry or proceeding, in which event such defense shall
be conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or
parties shall be entitled to conduct the defense to the extent reasonably
determined by such counsel to be necessary to protect the interests of the
indemnified party or parties and (ii) in any event, the indemnified party or
parties shall be entitled to have counsel chosen by such indemnified party or
parties participate in, but not conduct, the defense. If, within a reasonable
time after receipt of the Notice, an indemnifying party gives a Notice of
Defense and the counsel chosen by the indemnifying party or parties is
reasonably satisfactory to the indemnified party or parties, the indemnifying
party or parties will not be liable under paragraphs (a) through (c) of this
Section 7 for any legal or other expenses subsequently incurred by the
indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding, except that (A) the indemnifying
party or parties shall bear the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the proviso to
the preceding sentence and (B) the indemnifying party or parties shall bear
such other expenses as it or they have authorized to be incurred by the
indemnified party or parties. If, within a reasonable time after receipt of
the Notice, no Notice of Defense has been given, the indemnifying party or
parties shall be responsible for any legal or other expenses incurred by the
indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7
is unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party
16.
<PAGE> 17
as a result of the losses, claims, damages or liabilities referred to in
paragraph (a) or (b) of this Section 7 (i) in such proportion as is appropriate
to reflect the relative benefits received by each indemnifying party from the
offering of the Stock or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of each indemnifying party in connection with the statements
or omissions that resulted in such losses, claims, damages or liabilities, or
actions in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholder on the one hand and the Underwriters on the other shall be deemed
to be in the same respective proportions as the total net proceeds from the
offering of the Stock received by the Company and the Selling Stockholder and
the total underwriting discount received by the Underwriters, as set forth in
the table on the cover page of the Prospectus, bear to the aggregate public
offering price of the Stock. Relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by each indemnifying party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this
paragraph (d). The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities, or actions in respect thereof, referred
to in the first sentence of this paragraph (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigation, preparing to defend or defending against any
action or claim which is the subject of this paragraph (d). Notwithstanding
the provisions of this paragraph (d), no Underwriter shall be required to
contribute any amount in excess of the underwriting discount applicable to the
Stock purchased by such Underwriter. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this paragraph
(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the
service of a summons or other initial legal process upon it in any action
instituted against it in respect of which contribution may be sought, it will
promptly give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
of any such service shall not relieve the party from whom contribution may be
sought from any obligation it may have hereunder or otherwise (except as
specifically provided in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Stockholder will,
without the prior written consent of each Underwriter, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim,
action, suit or proceeding in respect of which indemnification may be sought
hereunder (whether or not such Underwriter or any person who controls such
Underwriter within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act is a party to such claim, action, suit or proceeding)
unless such settlement, compromise or consent includes an unconditional release
of such Underwriter and each such controlling person from all liability arising
out of such claim, action, suit or proceeding.
8. TERMINATION. This Agreement may be terminated by you
at any time prior to the Closing Date by giving written notice to the Company
and the Selling Stockholder if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in
17.
<PAGE> 18
economic or political conditions in the financial markets of the United States
would, in the Underwriters' reasonable judgment, make the offering or delivery
of the Stock impracticable, (iii) suspension of trading in securities generally
or a material adverse decline in value of securities generally on the New York
Stock Exchange, the American Stock Exchange, or the Nasdaq Stock Market, or
limitations on prices (other than limitations on hours or numbers of days of
trading) for securities on either such exchange or system, (iv) the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of, or commencement of any proceeding or investigation
by, any court, legislative body, agency or other governmental authority which in
the Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Stockholder to the Underwriters and no liability of the Underwriters to the
Company or the Selling Stockholder; provided, however, that in the event of any
such termination the Company and the Selling Stockholder agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Stockholder under
this Agreement, including all costs and expenses referred to in paragraphs (i)
and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The
obligations of the several Underwriters to purchase and pay for the Stock shall
be subject to the performance by the Company and by the Selling Stockholder of
all their respective obligations to be performed hereunder at or prior to the
Closing Date or any later date on which Option Stock is to be purchased, as the
case may be, and to the following further conditions:
(a) The Registration Statement shall have become
effective; and no stop order suspending the effectiveness thereof shall have
been issued and no proceedings therefor shall be pending or threatened by the
Commission.
(b) The legality and sufficiency of the sale of the Stock
hereunder and the validity and form of the certificates representing the Stock,
all corporate proceedings and other legal matters incident to the foregoing,
and the form of the Registration Statement and of the Prospectus (except as to
the financial statements contained therein), shall have been approved at or
prior to the Closing Date furnished to and by Brobeck, Phleger & Harrison LLP,
counsel for the Underwriters.
(c) You shall have received from Olshan Grundman Frome &
Rosenzweig LLP, counsel for the Company and the Selling Stockholder, and from
Madson & Metcalf, patent counsel for the Company, opinion, addressed to the
Underwriters and dated the Closing Date, covering the matters set forth in
Annex A and Annex B hereto, respectively, and if Option Stock is purchased at
any date after the Closing Date, additional opinions from each such counsel,
addressed to the Underwriters and dated such later date, confirming that the
statements expressed as of the Closing Date in such opinions remain valid as of
such later date.
(d) You shall be satisfied that (i) as of the Effective
Date, the statements made in the Registration Statement and the Prospectus were
true and correct and neither the Registration Statement nor the Prospectus
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, respectively, not misleading, (ii)
since the Effective Date, no event has occurred which should have been set
forth in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment, (iii) since the respective dates as of
which information is given in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, there has
not been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, and, since such dates, except
in the ordinary course of business
18.
<PAGE> 19
has not and does not have/neither the Company has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv) the
Company does not have any material contingent obligations which are not
disclosed in the Registration Statement and the Prospectus, (v) there are not
any pending or known threatened legal proceedings to which the Company, the
Selling Stockholder or GST Telecommunications is a party or of which property
or assets of the Company is the subject which are material and which are not
disclosed in the Registration Statement and the Prospectus, (vi) there are not
any franchises, contracts, leases or other documents which are required to be
filed as exhibits to the Registration Statement which have not been filed as
required, (vii) the representations and warranties of the Company, the Selling
Stockholder and GST Telecommunications herein are true and correct in all
material respects as of the Closing Date or any later date on which Option
Stock is to be purchased, as the case may be, and (viii) there has not been any
material change in the market for securities in general or in political,
financial or economic conditions from those reasonably foreseeable as to render
it impracticable in your reasonable judgment to make a public offering of the
Stock, or a material adverse change in market levels for securities in general
(or those of companies in particular) or financial or economic conditions which
render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on
any later date on which Option Stock is to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties
of the Company in this Agreement are true and correct in all material
respects, as if made on and as of the Closing Date or any later date
on which Option Shares are to be purchased, as the case may be, and
the Company has complied in all material respects with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date or any later
date on which Option Stock is to be purchased, as the case may be;
(ii) No stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Securities Act;
(iii) When the Registration Statement
became effective and at all times subsequent thereto up to the
delivery of such certificate, the Registration Statement and the
Prospectus, and any amendments or supplements thereto, contained all
material information required to be included therein by the Securities
Act and the Rules and Regulations, and in all material respects
conformed to the requirements of the Securities Act and the Rules and
Regulations; the Registration Statement, and any amendment or
supplement thereto, did not and does not include any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading; the Prospectus, and any amendment or supplement thereto,
did not and does not include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been so set forth;
and
(iv) Subsequent to the respective dates
as of which information is given in the Registration Statement and
Prospectus, there has not been (a) any material adverse change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company, (b) any transaction that is
material to the Company, except transactions entered into in the
ordinary course of business, (c) any obligation, direct or contingent,
that is material to the Company, incurred by the Company, or, to the
best of their knowledge, by the Selling Stockholder or GST
Telecommunications,
19.
<PAGE> 20
except obligations incurred in the ordinary course of business, (d)
any change in the capital stock or outstanding indebtedness of the
Company that is material to the Company and its subsidiaries
considered as one enterprise, (e) any dividend or distribution of any
kind declared, paid or made on the capital stock or assets of the
Company, or (f) any loss or damage (whether or not insured) to the
property or other assets of the Company which has been sustained or
will have been sustained which has a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company.
(f) You shall be satisfied that, and you shall have
received a certificate, dated the Closing Date, or any later date on which
Option Stock is to be purchased, as the case may be, from the Attorney for the
Selling Stockholder to the effect that, as of the Closing Date, or any later
date on which Option Shares are to be purchased, as the case may be, that:
(i) The representations and warranties
made by such Selling Stockholder herein are true or correct as of the
Closing Date or on any later date on which Option Stock is to be
purchased, as the case may be; and
(ii) Such Selling Stockholder has
complied with every obligation and satisfied any condition required to
be performed or satisfied on the part of such Selling Stockholder at
or prior to the Closing Date or any later date on which Option Stock
is to be purchased, as the case may be.
(g) You shall have received from KPMG Peat Marwick LLP
and Squire & Co., letters, addressed to the Underwriters and dated the Closing
Date and any later date on which Option Stock is purchased, confirming that
they are independent public accountants with respect to the Company within the
meaning of the Securities Act and the applicable published rules and
regulations thereunder and based upon the procedures described in their letter
(and referred to in Section 2(a)(v) and 2(a)(vi) of this Agreement) delivered
to you concurrently with the execution of this Agreement (herein called the
Original Letter) (and, with respect to the letters of KPMG Peat Marwick LLP,
carried out to a date not more than three business days prior to the Closing
Date or such later date on which Option Stock is purchased),` (i) confirming,
to the extent true, that the statements and conclusions set forth in the
Original Letter are accurate as of the Closing Date or such later date, as the
case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Stock or
the purchase of the Option Stock as contemplated by the Prospectus. The
letters shall also state that based upon a review of the Company's system of
internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's financial
statements did not disclose any weakness in internal controls that they
considered to be material weaknesses.
(h) Prior to the Closing Date, the Stock shall have been
duly authorized for listing by the Nasdaq National Market upon official notice
of issuance.
(i) On or prior to the Closing Date itemized in Annex C,
any and all consents or waivers, deemed necessary by Olshan Grundman Frome &
Rosenzweig LLP for the consummation of the offering contemplated by this
Agreement.
(j) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company) as to the accuracy of the
representations
20.
<PAGE> 21
and warranties of the Company herein, as to the performance by the Company of
its obligations hereunder and as to the other conditions concurrent and
precedent to the obligations of the Underwriters hereunder.
All the agreements, opinions, certificates and letters
mentioned above or elsewhere in this Agreement shall be deemed to be in
compliance with the provisions hereof only if Brobeck, Phleger & Harrison LLP,
counsel for the Underwriters, shall be satisfied that they comply in form and
substance.
In case any of the conditions specified in this Section 9
shall not be fulfilled, this Agreement may be terminated by you by giving
written notice to the Company and to the Selling Stockholder. Any such
termination shall be without liability of the Company or the Selling
Stockholder to the Underwriters and without liability of the Underwriters to
the Company or the Selling Stockholder; provided, however, that (i) in the
event of such termination, the Company and the Selling Stockholder agree to
indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company and the Selling
Stockholder under this Agreement, including all costs and expenses referred to
in paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is
terminated by you because of any refusal, inability or failure on the part of
the Company or the Selling Stockholder to perform any agreement herein, to
fulfill any of the conditions herein, or to comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE
SELLING STOCKHOLDER. The obligation of the Company and the Selling Stockholder
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10
shall not be fulfilled, this Agreement may be terminated by the Company and the
Selling Stockholder by giving notice to you. Any such termination shall be
without liability of the Company and the Selling Stockholder to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Stockholder; provided, however, that in the event of any such
termination the Company and the Selling Stockholder jointly and severally agree
to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company and the Selling
Stockholder under this Agreement, including all costs and expenses referred to
in paragraphs (i) and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to
their other obligations under Section 7 of this Agreement (and subject, in the
case of a Selling Stockholder, to the provisions of paragraph (f) of Section
7), the Company and the Selling Stockholder hereby jointly and severally agree
to reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in paragraph (a) of Section 7 of this Agreement, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the obligations under this Section 11 and the possibility that such payments
might later be held to be improper; provided, however, that (i) to the extent
any such payment is ultimately held to be improper, the persons receiving such
payments shall promptly refund them and (ii) such persons shall provide to the
Company, upon request, reasonable assurances of their ability to effect any
refund, when and if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This
Agreement shall inure to the benefit of the Company, the Selling Stockholder
and the several Underwriters and, with respect to the provisions of Section 7
hereof, the several parties (in addition to the Company, the Selling
Stockholder and the several Underwriters) indemnified under the provisions of
said Section 7, and their respective personal representatives, successors and
21.
<PAGE> 22
assigns. Nothing in this Agreement is intended or shall be construed to give
to any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser,
as such purchaser, of any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Hambrecht & Quist
LLC, One Bush Street, San Francisco, California 94104; if to the Company, shall
be mailed, telegraphed or delivered to it at its office, at 382 East 720 South,
Orem, Utah 84058, Attention: Chief Financial Officer; and if to the Selling
Stockholder, shall be mailed, telegraphed or delivered to the Selling
Stockholder in care of________at ________. All notices given by telegraph
shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification
and contribution agreements contained in this Agreement and the
representations, warranties and covenants in this Agreement shall remain in
full force and effect regardless of (a) any termination of this Agreement, (b)
any investigation made by or on behalf of any Underwriter or controlling person
thereof, or by or on behalf of the Company or the Selling Stockholder or their
respective directors or officers, and (c) delivery and payment for the Stock
under this Agreement; provided, however, that if this Agreement is terminated
prior to the Closing Date, the provision of paragraph (l) of Section 6 hereof
shall be of no further force or effect.
This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California.
22.
<PAGE> 23
Please sign and return to the Company and to the Selling
Stockholder in care of the Company the enclosed duplicates of this letter,
whereupon this letter will become a binding agreement among the Company, the
Selling Stockholder and the several Underwriters in accordance with its terms.
Very truly yours,
NACT Telecommunications, Inc.
By
-----------------------------------
[Name]
[Title]
GST USA, Inc.
By
-----------------------------------
[Name]
[Title]
GST Telecommunications, Inc.
By
-----------------------------------
[Name]
[Title]
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
MONTGOMERY SECURITIES
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
By HAMBRECHT & QUIST LLC
By_________________________________________
Managing Director
23.
<PAGE> 24
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
------------ ---------
<S> <C>
Hambrecht & Quist LLC . . . . . . . . . . . . .
Montgomery Securities . . . . . . . . . . . . .
-----
Total . . . . . . . . . . . . . . . . . . . . .
============
</TABLE>
24.
<PAGE> 25
SCHEDULE II
SELLING STOCKHOLDER
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME TO BE
SELLING STOCKHOLDER SOLD
------------------- ----
<S> <C>
GST USA, Inc. . . . . . . . . . . . . . . . . . 1,000,000
---------
Total . . . . . . . . . . . . . . . . . . . . . . 1,000,000
=========
</TABLE>
25.
<PAGE> 26
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP
COUNSEL FOR THE COMPANY
AND THE SELLING STOCKHOLDER
26.
<PAGE> 27
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF
PATENT COUNSEL FOR THE COMPANY
27.
<PAGE> 1
EXHIBIT 4.2
NACT TELECOMMUNICATIONS, INC.
1996 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN.
This 1996 Stock Option Plan (the "Plan") is intended as an
incentive, to retain in the employ of and as consultants and advisors to NACT
TELECOMMUNICATIONS, INC., a Utah corporation with its principal office at
382 East 720 South, Orem, Utah 84058 (the "Company") and any Subsidiary of the
Company, within the meaning of Section 425(f) of the United States Internal
Revenue Code of 1986, as amended (the "Code"), persons of training, experience
and ability, to attract new employees, directors, advisors and consultants
whose services are considered valuable, to encourage the sense of
proprietorship and to stimulate the active interest of such persons in the
development and financial success of the Company and its Subsidiaries.
It is further intended that certain options granted pursuant
to the Plan shall constitute incentive stock options within the meaning of
Section 422 of the Code (the "Incentive Options") while certain other options
granted pursuant to the Plan shall be nonqualified stock options (the
"Nonqualified Options"). Incentive Options and Nonqualified Options are
hereinafter referred to collectively as "Options."
The Company intends that the Plan meet the requirements of
Rule 16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act") and that transactions of the type
specified in subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and
directors of the Company pursuant to the Plan will be exempt from the operation
of Section 16(b) of the Exchange Act. In all cases, the terms, provisions,
conditions and limitations of the Plan shall be construed and interpreted
consistent with the Company's intent as stated in this Section 1.
2. ADMINISTRATION OF THE PLAN.
The Board of Directors of the Company (the "Board") shall
appoint and maintain as administrator of the Plan a Committee (the "Committee")
consisting of two or more Non-Employee Directors (as such term is defined in
Rule 16b-3), which shall serve at the pleasure of the Board. The Committee,
subject to Sections 3 and 5 hereof, shall have full power and authority to
designate recipients of Options, to determine the terms and conditions of
respective Option agreements (which need not be identical) and to interpret the
provisions and supervise the administration of the Plan. The Committee shall
have the authority, without limitation, to designate which Options granted
under the Plan shall be Incentive
<PAGE> 2
Options and which shall be Nonqualified Options. To the extent any Option does
not qualify as an Incentive Option, it shall constitute a separate Nonqualified
Option.
Subject to the provisions of the Plan, the Committee shall
interpret the Plan and all Options granted under the Plan, shall make such
rules as it deems necessary for the proper administration of the Plan, shall
make all other determinations necessary or advisable for the administration of
the Plan and shall correct any defects or supply any omission or reconcile any
inconsistency in the Plan or in any Options granted under the Plan in the
manner and to the extent that the Committee deems desirable to carry into
effect the Plan or any Options. The act or determination of a majority of the
Committee shall be the act or determination of the Committee and any decision
reduced to writing and signed by all of the members of the Committee shall be
fully effective as if it had been made by a majority at a meeting duly held.
Subject to the provisions of the Plan, any action taken or determination made
by the Committee pursuant to this and the other Sections of the Plan shall be
conclusive on all parties.
In the event that for any reason the Committee is unable to
act or if the Committee at the time of any grant, award or other acquisition
under the Plan of Options or Stock (as hereinafter defined) does not consist
of two or more Non-Employee Directors, then any such grant, award or other
acquisition may be approved or ratified in any other manner contemplated by
subparagraph (d) of Rule 16b-3.
3. DESIGNATION OF OPTIONEES.
The persons eligible for participation in the Plan as
recipients of Options (the "Optionees") shall include employees, officers and
directors of, and consultants and advisors to, the Company or any Subsidiary;
provided that Incentive Options may only be granted to employees of the Company
and the Subsidiaries. In selecting Optionees, and in determining the number of
shares to be covered by each Option granted to Optionees, the Committee may
consider the office or position held by the Optionee or the Optionee's
relationship to the Company, the Optionee's degree of responsibility for and
contribution to the growth and success of the Company or any Subsidiary, the
Optionee's length of service, age, promotions, potential and any other factors
that the Committee may consider relevant. An Optionee who has been granted an
Option hereunder may be granted an additional Option or Options, if the
Committee shall so determine.
4. STOCK RESERVED FOR THE PLAN.
Subject to adjustment as provided in Section 7 hereof, a total
of 1,250,000 shares of the Company's Common Stock, without par value (the
"Stock"), shall be subject to the Plan. The shares of Stock subject to the
Plan shall consist of unissued
-2-
<PAGE> 3
shares or previously issued shares held by any Subsidiary of the Company, and
such amount of shares of Stock shall be and is hereby reserved for such
purpose. Any of such shares of Stock that may remain unsold and that are not
subject to outstanding Options at the termination of the Plan shall cease to be
reserved for the purposes of the Plan, but until termination of the Plan the
Company shall at all times reserve a sufficient number of shares of Stock to
meet the requirements of the Plan. Should any Option expire or be cancelled
prior to its exercise in full or should the number of shares of Stock to be
delivered upon the exercise in full of an Option be reduced for any reason, the
shares of Stock theretofore subject to such Option may be subject to future
Options under the Plan.
5. TERMS AND CONDITIONS OF OPTIONS.
Options granted under the Plan shall be subject to the
following conditions and shall contain such additional terms and conditions,
not inconsistent with the terms of the Plan, as the Committee shall deem
desirable:
(a) Option Price. The purchase price of each
share of Stock purchasable under an Incentive Option shall be determined by the
Committee at the time of grant, but shall not be less than 100% of the Fair
Market Value (as defined below) of such share of Stock on the date the Option
is granted; provided, however, that with respect to an Optionee who, at the
time such Incentive Option is granted, owns (within the meaning of Section
424(d) of the Code) more than 10% of the total combined voting power of all
classes of stock of the Company or of any Subsidiary, the purchase price per
share of Stock shall be at least 110% of the Fair Market Value per share of
Stock on the date of grant. The purchase price of each share of Stock
purchasable under a Nonqualified Option shall not be less than 80% of the Fair
Market Value of such share of Stock on the date the Option is granted. The
exercise price for each Option shall be subject to adjustment as provided in
Section 7 below. Fair Market Value means the closing price of publicly traded
shares of Stock on the principal securities exchange on which shares of Stock
are listed (if the shares of Stock are so listed), or on the NASDAQ Stock
Market (if the shares of Stock are regularly quoted on the NASDAQ Stock
Market), or, if not so listed or regularly quoted, the mean between the closing
bid and asked prices of publicly traded shares of Stock in the over-the-counter
market, or, if such bid and asked prices shall not be available, as reported by
any nationally recognized quotation service selected by the Company, or as
determined by the Committee in a manner consistent with the provisions of the
Code. Anything in this Section 5(a) to the contrary notwithstanding, in no
event shall the purchase price of a share of Stock be less than the minimum
price permitted under rules and policies of the rules and policies of the
national securities exchange on which the shares of Stock are listed.
-3-
<PAGE> 4
(b) Option Term. The term of each Option shall
be fixed by the Committee, but no Option shall be exercisable more than five
years after the date such Option is granted.
(c) Exercisability. Subject to Section 5(j)
hereof, Options shall be exercisable at such time or times and subject to such
terms and conditions as shall be determined by the Committee at the time of
grant.
(d) Method of Exercise. Options to the extent
then exercisable may be exercised in whole or in part at any time during the
option period, by giving written notice to the Company specifying the number of
shares of Stock to be purchased, accompanied by payment in full of the purchase
price, in cash, by check or such other instrument as may be acceptable to the
Committee. As determined by the Committee, in its sole discretion, at or after
grant, payment in full or in part may also be made in the form of Stock owned
by the Optionee (based on the Fair Market Value of the Stock on the trading day
before the Option is exercised). An Optionee shall have the right to dividends
and other rights of a stockholder with respect to shares of Stock purchased
upon exercise of an Option after (i) the Optionee has given written notice of
exercise and has paid in full for such shares and (ii) becomes a stockholder of
record with respect thereto.
(e) Non-transferability of Options. Options are
not transferable and may be exercised solely by the Optionee during his
lifetime or after his death by the person or persons entitled thereto under
his will or the laws of descent and distribution. Any attempt to transfer,
assign, pledge or otherwise dispose of, or to subject to execution, attachment
or similar process, any Option contrary to the provisions hereof shall be void
and ineffective and shall give no right to the purported transferee.
(f) Termination by Death. Unless otherwise
determined by the Committee at grant, if any Optionee's employment with or
service to the Company or any Subsidiary terminates by reason of death, the
Option may thereafter be exercised, to the extent then exercisable (or on such
accelerated basis as the Committee shall determine at or after grant), by the
legal representative of the estate or by the legatee of the Optionee under the
will of the Optionee, for a period of one year after the date of such death or
until the expiration of the stated term of such Option as provided under the
Plan, whichever period is shorter.
(g) Termination by Reason of Disability. Unless
otherwise determined by the Committee at grant, if any Optionee's employment
with or service to the Company or any Subsidiary terminates by reason of total
and permanent disability, any Option held by such Optionee may thereafter be
exercised, to the extent it
-4-
<PAGE> 5
was exercisable at the time of termination due to Disability (or on such
accelerated basis as the Committee shall determine at or after grant), but may
not be exercised after 30 days after the date of such termination of employment
or service or the expiration of the stated term of such Option, whichever
period is shorter; provided, however, that, if the Optionee dies within such 30
day period, any unexercised Option held by such Optionee shall thereafter be
exercisable to the extent to which it was exercisable at the time of death for
a period of one year after the date of such death or for the stated term of
such Option, whichever period is shorter.
(h) Termination by Reason of Retirement. Unless
otherwise determined by the Committee at grant, if any Optionee's employment
with or service to the Company or any Subsidiary terminates by reason of Normal
or Early Retirement (as such terms are defined below), any Option held by such
Optionee may thereafter be exercised to the extent it was exercisable at the
time of such Retirement (or on such accelerated basis as the Committee shall
determine at or after grant), but may not be exercised after 30 days after the
date of such termination of employment or service or the expiration of the
stated term of such Option, whichever period is shorter; provided, however,
that, if the Optionee dies within such 30 day period, any unexercised Option
held by such Optionee shall thereafter be exercisable, to the extent to which
it was exercisable at the time of death, for a period of one year after the
date of such death or for the stated term of such Option, whichever period is
shorter.
For purposes of this paragraph (h), Normal Retirement shall
mean retirement from active employment with the Company or any Subsidiary on or
after the normal retirement date specified in the applicable Company or
Subsidiary pension plan or if no such pension plan, age 65. Early Retirement
shall mean retirement from active employment with the Company or any Subsidiary
pursuant to the early retirement provisions of the applicable Company or
Subsidiary pension plan or if no such pension plan, age 55.
(i) Other Termination. Unless otherwise
determined by the Committee at grant, if any Optionee's employment with or
service to the Company or any Subsidiary terminates for any reason other than
death, Disability or Normal or Early Retirement, the Option shall thereupon
terminate, except that the portion of any Option that was exercisable on the
date of such termination of employment may be exercised for the lesser of 30
days after the date of termination or the balance of such Option's term if the
Optionee's employment or service with the Company or any Subsidiary is
terminated by the Company or such Subsidiary without cause (the determination
as to whether termination was for cause to be made by the Committee). The
transfer of an Optionee from the employ of the Company to a Subsidiary, or vice
versa, or from one Subsidiary to
-5-
<PAGE> 6
another, shall not be deemed to constitute a termination of employment for
purposes of the Plan.
(j) Limit on Value of Incentive Option. The
aggregate Fair Market Value, determined as of the date the Incentive Option is
granted, of Stock for which Incentive Options are exercisable for the first
time by any Optionee during any calendar year under the Plan (and/or any other
stock option plans of the Company or any Subsidiary) shall not exceed $100,000.
(k) Transfer of Incentive Option Shares. The
stock option agreement evidencing any Incentive Options granted under this Plan
shall provide that if the Optionee makes a disposition, within the meaning of
Section 424(c) of the Code and regulations promulgated thereunder, of any share
or shares of Stock issued to him upon exercise of an Incentive Option granted
under the Plan within the two-year period commencing on the day after the date
of the grant of such Incentive Option or within a one-year period commencing on
the day after the date of transfer of the share or shares to him pursuant to
the exercise of such Incentive Option, he shall, within 10 days after such
disposition, notify the Company thereof and immediately deliver to the Company
any amount of United States federal income tax withholding required by law.
6. TERM OF PLAN.
No Option shall be granted pursuant to the Plan on or after
November 25, 2006, but Options theretofore granted may extend beyond that date.
7. CAPITAL CHANGE OF THE COMPANY.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares reserved for issuance under the
Plan and in the number and option price of shares subject to outstanding
Options granted under the Plan, to the end that after such event each
Optionee's proportionate interest shall be maintained as immediately before the
occurrence of such event.
8. PURCHASE FOR INVESTMENT.
Unless the Options and shares covered by the Plan have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
or the Company has determined that such registration is unnecessary, each
person exercising an Option under the Plan may be required by the Company to
give a representation in writing that he is acquiring the shares for his own
account for investment and not with a view to, or for sale in connection with,
the distribution of any part thereof.
-6-
<PAGE> 7
9. TAXES.
The Company may make such provisions as it may deem
appropriate, consistent with applicable law, in connection with any Options
granted under the Plan with respect to the withholding of any taxes or any
other tax matters.
10. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on November 26, 1996, provided
however that the Plan shall subsequently be approved by majority vote of the
Company's shareholders not later than November 25, 1997.
11. AMENDMENT AND TERMINATION.
The Board may amend, suspend, or terminate the Plan, except
that no amendment shall be made that would impair the rights of any Optionee
under any Option theretofore granted without his consent, and except that no
amendment shall be made which, without the approval of the stockholders of the
Company would:
(a) materially increase the number of shares that
may be issued under the Plan, except as is provided in Section 7;
(b) materially increase the benefits accruing to
the Optionees under the Plan;
(c) materially modify the requirements as to
eligibility for participation in the Plan;
(d) decrease the exercise price of an Incentive
Option to less than 100% of the Fair Market Value per share of Stock on the
date of grant thereof or the exercise price of a Nonqualified Option to less
than 80% of the Fair Market Value per share of Stock on the date of grant
thereof; or
(e) extend the term of any Option beyond that
provided for in Section 5(b).
The Committee may amend the terms of any Option theretofore
granted, prospectively or retroactively, but no such amendment shall impair the
rights of any Optionee without his consent. The Committee may also substitute
new Options for previously granted Options, including options granted under
other plans applicable to the participant and previously granted Options having
higher option prices, upon such terms as the Committee may deem appropriate.
-7-
<PAGE> 8
12. GOVERNMENT REGULATIONS.
The Plan, and the grant and exercise of Options hereunder, and
the obligation of the Company to sell and deliver shares under such Options,
shall be subject to all applicable laws, rules and regulations, and to such
approvals by any governmental agencies, national securities exchanges and
interdealer quotation systems as may be required.
13. GENERAL PROVISIONS.
(a) Certificates. All certificates for shares of
Stock delivered under the Plan shall be subject to such stop transfer orders
and other restrictions as the Committee may deem advisable under the rules,
regulations and other requirements of the Securities and Exchange Commission,
or other securities commission having jurisdiction, any applicable Federal or
state securities law, any stock exchange or interdealer quotation system upon
which the Stock is then listed or traded and the Committee may cause a legend
or legends to be placed on any such certificates to make appropriate reference
to such restrictions.
(b) Employment Matters. The adoption of the Plan
shall not confer upon any Optionee of the Company or any Subsidiary any right
to continued employment or, in the case of an Optionee who is a director,
continued service as a director, with the Company or a Subsidiary, as the case
may be, nor shall it interfere in any way with the right of the Company or any
Subsidiary to terminate the employment of any of its employees, the service of
any of its directors or the retention of any of its consultants or advisors at
any time.
(c) Limitation of Liability. No member of the
Board or the Committee, or any officer or employee of the Company acting on
behalf of the Board or the Committee, shall be personally liable for any
action, determination or interpretation taken or made in good faith with
respect to the Plan, and all members of the Board or the Committee and each and
any officer or employee of the Company acting on their behalf shall, to the
extent permitted by law, be fully indemnified and protected by the Company in
respect of any such action, determination or interpretation.
(d) Registration of Stock. Notwithstanding any
other provision in the Plan, no Option may be exercised unless and until the
Stock to be issued upon the exercise thereof has been registered under the
Securities Act and applicable state securities laws, or are, in the opinion of
counsel to the Company, exempt from such registration in the United States.
The Company shall not be under any obligation to register under applicable
federal or state securities laws any Stock to be issued upon the exercise of an
Option granted hereunder in order to permit the exercise of an Option and the
issuance and sale of the Stock subject to such
-8-
<PAGE> 9
Option however, the Company may in its sole discretion register such Stock at
such time as the Company shall determine. If the Company chooses to comply
with such an exemption from registration, the Stock issued under the Plan may,
at the direction of the Committee, bear an appropriate restrictive legend
restricting the transfer or pledge of the Stock represented thereby, and the
Committee may also give appropriate stop transfer instructions to the Company's
transfer agents.
NACT TELECOMMUNICATIONS, INC.
November 26, 1996
-9-
<PAGE> 1
EXHIBIT 10.5
PROMISSORY NOTE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$200,000.00 02-06-1996 12-31-1996 9001 505 10403 6823009 10403
- -------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of
this document to any particular loan or item.
- -------------------------------------------------------------------------------------------------
BORROWER: NATIONAL APPLIED COMPUTER TECHNOLOGIES LENDER: ZIONS FIRST NATIONAL BANK
744 SOUTH 400 EAST WASATCH UNIVERSITY MALL
OREM, UT 84058 111 NORTH 200 WEST
PROVO, UT 84601
=================================================================================================
</TABLE>
PRINCIPAL AMOUNT: INITIAL RATE: DATE OF NOTE:
$200,000.00 9.500% FEBRUARY 6, 1996
PROMISE TO PAY. NATIONAL APPLIED COMPUTER TECHNOLOGIES ("Borrower") promises to
pay to ZIONS FIRST NATIONAL BANK ("Lender"), or order, in lawful money of the
United States of America, the principal amount of Two Hundred Thousand & 00/100
Dollars ($200,000.00) or so much as may be outstanding, together with interest
on the unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one
payment of all outstanding principal plus all accrued unpaid interest on
December 31, 1996. In addition, Borrower will pay regular quarterly payments of
accrued unpaid interest beginning May 6, 1996, and all subsequent interest
payments are due on the same day of each quarter after that. Interest on this
Note is computed on a 365/360 simple interest basis; that is, by applying the
ratio of the annual interest rate over a year of 360 days, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at lender's address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to any unpaid collection costs and any late charges, then to any unpaid
interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is the ZIONS FIRST NATIONAL
BANK BASE RATE (the "Index"). BASE RATE MEANS AN INDEX WHICH IS DETERMINED DAILY
BY THE PUBLISHED COMMERCIAL LOAN VARIABLE RATE INDEX HELD BY ANY TWO OF THE
FOLLOWING BANKS: CHEMICAL BANK, WELLS FARGO BANK N.A., AND BANK OF AMERICA, N.T.
& S.A. IN THE EVENT NO TWO OF THE ABOVE BANKS HAVE THE SAME PUBLISHED RATE, THE
BANK HAVING THE MEDIAN RATE WILL ESTABLISH LENDERS' BASE RATE. IF, FOR ANY
REASON BEYOND THE CONTROL OF LENDER, ANY OF THE AFOREMENTIONED BANKS BECOMES
UNACCEPTABLE AS A REFERENCE FOR THE PURPOSE OF DETERMINING THE BASE RATE USED
HEREIN, LENDER MAY, FIVE DAYS AFTER POSTING NOTICE, IN LENDERS' OFFICES,
SUBSTITUTE ANOTHER COMPARABLE BANK FOR THE ONE DETERMINED UNACCEPTABLE. AS USED
IN THIS PARAGRAPH, "COMPARABLE BANK" SHALL MEAN ONE OF THE TEN LARGEST
COMMERCIAL BANKS HEADQUARTERED IN THE UNITED STATES OF AMERICA. THIS DEFINITION
OF BASE RATE IS TO BE STRICTLY INTERPRETED AND IS NOT INTENDED TO SERVE ANY
PURPOSE OTHER THAN PROVIDING AN INDEX TO DETERMINE THE VARIABLE INTEREST RATE
USED HEREIN. IT IS NOT THE LOWEST RATE AT WHICH LENDER MAY MAKE LOANS TO ANY OF
ITS CUSTOMERS, EITHER NOW OR IN THE FUTURE. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that Lender may
make loans based on other rates as well. The interest rate change will not occur
more often than each DAY. The index currently is 8.250% per annum. The interest
rate to be applied to the unpaid principal balance of this Note will be at a
rate of 1.250 percentage points over the index, resulting in an initial rate of
9.500% per annum. NOTICE: Under no circumstances will the interest rate on this
Note be more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default), except
as otherwise required by law. Except for the foregoing, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments of accrued unpaid interest.
Rather, they will reduce the principal balance due.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any of the events described in this default section occurs with respect to
any guarantor of this Note. (h) A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or performance
of the Indebtedness is impaired.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if borrower, after receiving written notice from Lender demanding
cure of such default; (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 4.250
percentage points over the Index. The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
reasonable attorneys' fees and Lender's legal expenses whether or not there is a
lawsuit, including reasonable attorneys' fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection services. If
not prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO
LENDER AND ACCEPTED BY LENDER IN THE STATE OF UTAH. IF THERE IS A LAWSUIT,
BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE
COURTS OF UTAH COUNTY, THE STATE OF UTAH. SUBJECT TO THE PROVISIONS ON
ARBITRATION, THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF UTAH.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA, Keogh, and trust
accounts. Borrower authorizes Lender, to the extent permitted by applicable law,
to charge or setoff all sums owing on this Note against any and all such
accounts.
<PAGE> 2
02-06-1996 PROMISSORY NOTE PAGE 2
(CONTINUED)
================================================================================
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing. All
communications, instructions, or directions by telephone or otherwise to Lender
are to be directed to Lender's office shown above. The following party or
parties are authorized to request advances under the line of credit until Lender
receives from Borrower at Lender's address shown above written notice of
revocation of their authority: THOMAS E. SAWYER, PRESIDENT; AND KYLE BOWEN LOVE,
VICE-PRESIDENT. Borrower agrees to be liable for all sums either: (a) advanced
in accordance with the instructions of an authorized person or (b) credited to
any of Borrower's accounts with Lender. The unpaid principal balance owing on
this Note at any time may be evidenced by endorsements on this Note or by
Lender's internal records, including daily computer print-outs. Lender will have
no obligation to advance funds under this Note if: (a) Borrower or any guarantor
is in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender; or (d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender.
ARBITRATION DISCLOSURES:
1. AS USED IN THIS ARBITRATION SECTION, THE TERM "PARTIES" MEANS THE LENDER,
ANY OTHER SIGNERS HERETO AND PERMITTED SUCCESSORS AND ASSIGNS.
2. ARBITRATION IS USUALLY FINAL AND BINDING ON THE PARTIES AND SUBJECT TO
ONLY VERY LIMITED REVIEW BY A COURT.
3. THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT, INCLUDING THEIR
RIGHT TO A JURY TRIAL.
4. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED AND DIFFERENT FROM
COURT PROCEEDINGS.
5. ARBITRATORS' AWARDS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL
REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK MODIFICATION OF
RULINGS BY ARBITRATORS IS STRICTLY LIMITED.
6. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
7. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE
AMERICAN ARBITRATION ASSOCIATION.
ARBITRATION PROVISIONS:
(a) Any controversy or claim between or among the parties, including but not
limited to those arising out of or relating to this Agreement or any
agreements or instruments relating hereto or delivered in connection
herewith, and including but not limited to a claim based on or arising from
an alleged tort, shall at the request of any party be determined by
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. The arbitration proceedings shall be
conducted in Salt Lake City, Utah. The arbitrator(s) shall have the
qualifications set forth in subparagraph (c) hereto. All statutes of
limitations which would otherwise be applicable in a judicial action brought
by a party shall apply to any arbitration or reference proceedings hereunder.
(b) In any judicial action or proceeding arising out of or relating to this
Agreement or any agreements or instruments relating hereto or delivered in
connection herewith, including but not limited to a claim based on or arising
from an alleged tort, if the controversy or claim is not submitted to
arbitration as provided and limited in subparagraph (a) hereto, all decisions
of fact and law shall be determined by a reference in accordance with Rule 53
of the Federal Rules of Civil Procedure or Rule 53 of the Utah Rules of Civil
Procedure or other comparable, applicable reference procedure. The parties
shall designate to the court the referee(s) selected under the auspices of
the American Arbitration Association in the same manner as arbitrators are
selected in Association-sponsored arbitration proceedings. The referee(s)
shall have the qualifications set forth in subparagraph (c) hereto.
(c) The arbitrator(s) or referee(s) shall be selected in accordance with the
rules of the American Arbitration Association from panels maintained by the
Association. A single arbitrator or referee shall be knowledgeable in the
subject matter of the dispute. Where three arbitrators or referees conduct an
arbitration or reference proceeding, the claim shall be decided by a majority
vote of the three arbitrators or referees, at least one of whom must be
knowledgeable in the subject matter of the dispute and at least one of whom
must be a practicing attorney. The arbitrator(s) or referee(s) shall award
recovery of all costs and fees (including reasonable attorneys' fees,
administrative fees, arbitrators' fees, and court costs). The arbitrator(s)
or referee(s) also may grant provisional or ancillary remedies such as, for
example, injunctive relief, attachment, or the appointment of a receiver,
either during the pendency of the arbitration or reference proceeding or as
part of the arbitration or reference award.
(d) Judgment upon an arbitration or reference award may be entered in any
court having jurisdiction, subject to the following limitation: the
arbitration or reference award is binding upon the parties only if the amount
does not exceed Four Million Dollars ($4,000,000.00); if the award exceeds
that limit, either party may commence legal action for a court trial de novo.
Such legal action must be filed within thirty (30) days following the date of
the arbitration or reference award; if such legal action is not filed within
that time period, the amount of the arbitration or reference award shall be
binding. The computation of the total amount of an arbitration or reference
award shall include amounts awarded for arbitration fees, attorneys' fees,
interest, and all other related costs.
(e) At the Lender's option, foreclosure under a deed of trust or mortgage may
be accomplished either by exercise of a power of sale under the deed of trust
or by judicial foreclosure. The institution and maintenance of an action for
judicial relief or pursuit of a provisional or ancillary remedy shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests
such action for judicial relief.
(f) Notwithstanding the applicability of other law to any other provision of
this Agreement, the Federal Arbitration Act, 9 U.S.C. 1 et seq., shall apply
to the construction and interpretation of this arbitration paragraph.
TIME OUT OF DEBT. FOR A PERIOD OF AT LEAST 30 DAYS EACH CALENDAR YEAR, 30 DAYS
OF WHICH MUST BE CONSECUTIVE, BORROWER SHALL NOT HAVE AN OUTSTANDING BALANCE
UNDER THE PROMISSORY NOTE DATED MARCH 31, 1995 IN THE AMOUNT OF $200,000.00.
RENEWAL. THIS PROMISSORY NOTE IS A RENEWAL OF A PROMISSORY NOTE DATED MARCH 31,
1995.
COLLATERAL. THIS PROMISSORY NOTE IS SECURED BY A COMMERCIAL SECURITY AGREEMENT
DATED MARCH 31, 1995.
<PAGE> 3
02-06-1996 PROMISSORY NOTE PAGE 3
(CONTINUED)
===============================================================================
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo
enforcing any of its rights or remedies under this Note without losing them.
Borrower and any other person who signs, guarantees or endorses this Note, to
the extent allowed by law, waive presentment, demand for payment, protest and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by
Lender without the consent of or notice to anyone. All such parties also agree
that Lender may modify this loan without the consent of or notice to anyone
other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
NATIONAL APPLIED COMPUTER TECHNOLOGIES
By: /s/ Eric F. Gurr By: /s/ Lindsay Wallace
------------------------------------- ------------------------------
ERIC F. GURR, C.F.O. LINDSAY WALLACE, PRESIDENT
================================================================================
<PAGE> 4
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<Caption
- --------------------------------------------------------------------------------------------------------------------------
Principal / Loan Date / Maturity / Loan No / Call / Collateral / Account / Officer / Initials /
$200,000.00 02-06-1996 12-31-1996 9001 505 10403 6823009 10403
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
particular loan or item.
- --------------------------------------------------------------------------------------------------------------------------
Borrower: NATIONAL APPLIED COMPUTER TECHNOLOGIES Lender: ZIONS FIRST NATIONAL BANK
744 SOUTH 400 EAST WASATCH UNIVERSITY MALL
OREM, UT 84058 111 NORTH 200 WEST
PROVO, UT 84601
===========================================================================================================================
LOAN TYPE. This is a Variable Rate (1.250% over ZIONS FIRST NATIONAL BANK BASE RATE, making an initial rate of 9.500%),
Revolving Line of Credit Loan to a Corporation for $200,000.00 due on December 31, 1996. This is a secured renewal loan.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
[ ] Personal, Family, or Household Purposes or Personal Investment.
[X] Business (Including Real Estate Investment).
SPECIFIC PURPOSE. The specific purpose of this loan is: TO PROVIDE FUNDS FOR BUSINESS PURPOSES.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Lender's conditions
for making the loan have been satisfied. Please disburse the loan proceeds of $200,000.00 as follows:
Undisbursed Funds: $200,000.00
Amount paid to others on Borrower's behalf $0.00
-----------
Note Principal: $200,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the following charges:
Prepaid Finance Charges Paid in Cash: $1,000.00
$1,000.00 Loan Fees
---------
Total Charges Paid in Cash: $1,000.00
FINAL AGREEMENT. Borrower understands that the loan documents signed in connection with this loan are the final expression
of the agreement between Lender and Borrower and may not be contradicted by evidence of any alleged oral agreement.
ALLOCATION OF PROCEEDS. THE PROCEEDS OF THIS LOAN WILL BE USED TO RENEW AN OUTSTANDING REVOLVING LINE OF CREDIT.
THE CURRENT OUTSTANDING BALANCE AND THE AMOUNT AVAILABLE ARE DESCRIBED IN THE ABOVE SECTION ENTITLED AMOUNT PAID TO OTHERS
ON BORROWER'S BEHALF.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND WARRANTS TO LENDER THAT THE INFORMATION
PROVIDED ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS AUTHORIZATION IS DATED FEBRUARY 6, 1996.
BORROWER:
NATIONAL APPLIED COMPUTER TECHNOLOGIES
By: /s/ Eric F. Gurr By: /s/ Lindsay Wallace
----------------------------------------------- ----------------------------------------------------
ERIC F. GURR, C.F.O. LINDSAY WALLACE, PRESIDENT
=============================================================================================================================
</TABLE>
<PAGE> 1
Exhibit 10.6
Lease No:____________________
Lease Date:__________________
Schedule No:_________________
Schedule Date:_______________
REPURCHASE AGREEMENT
THIS AGREEMENT, entered into this _______________ day of_________,
199__, by and between National Applied Technologies ("Seller") and Zions Credit
Corporation, a Utah Corporation ("Buyer").
WITNESSETH:
WHEREAS, Seller has concurrently herewith entered into a purchase
order agreement with Buyer for the Sale to Buyer of _______________
("Property"), which Buyer intends to lease to _______________ ("Lessee") under
a Lease ("Lease") between Buyer, as Lessor, and the named Lessee, and
WHEREAS, as further consideration inducing Buyer to acquire said
Property from Seller, the parties hereto have entered into the agreements
contained herein relating to the repurchase by Seller of the Property.
NOW THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknowledged, and in consideration of the mutual covenants of
the parties hereto, it is agreed and promised as follows:
1. Should the Lessee default in the performance of any rental
payments or other obligation imposed upon it under the Lease and should such
default not be cured in the manner provided in said Lease, Seller hereby agrees
that on or before the expiration of ten (10) days following the receipt of a
written notice ("Ten-Day Notice") of Buyer's election to repossess said
property under the terms of the Lease, Seller shall repurchase from Buyer all
of the property without the necessity of Buyer pursuing any remedy it may have
against Lessee, or any other person obligated to Buyer in connection with the
Lease as a condition to Seller's obligations hereunder. Buyer agrees that it
will furnish Seller with a copy of final notice of default that it may give to
the Lessee concurrently with the giving of such notice.
2. The total purchase price ("Repurchase Price") payable by
Seller to Buyer upon the repurchase provided for in Paragraph 1 shall be
computed as follows:
(a) The Repurchase Price shall be a maximum of $______
until the Lessee makes the first monthly rental
payment due under the Lease.
(b) The Repurchase Price will be reduced to an amount
equal to the account payoff amount based on the Rule
of 78's interest calculation plus any other amounts
under the lease for each monthly rental payment made
by Lessee under the Lease.
(c) All property shall be subject to this repurchase
obligation.
3. Seller shall pay the full amount of the Repurchase Price to
Buyer in cash, by certified funds, or cashier's check on or prior to the
expiration of the Ten-Day Notice period provided for in Paragraph 1. Seller's
obligations hereunder shall be absolute, regardless of the condition of the
Property at the time Seller is called upon to repurchase the same.
4. Upon payment of the Repurchase Price as provided for in
Paragraph 3, Buyer shall deliver to Seller a Bill of Sale covering the
property. Said Bill of Sale shall contain a warranty that Buyer has, as of the
date thereof, good and sufficient title to all of the Property free and clear
of all liens or encumbrances.
5. Promptly upon the receipt of the Bill of Sale, Seller shall,
at its own expense, remove the Property from the premises where the Lessee has
located or left the same and Buyer shall not be responsible for any failure on
the part of Lessee to surrender possession thereof to Seller or for any
expenses incurred by Seller in repossessing the same. It shall be the sole
responsibility of Seller to locate, repossess, and remove the Property from its
then location and Buyer shall not be liable to Seller for any damage to the
Property, regardless of cause, and whether or not occurring before or after the
default of Lessee under the Lease. Buyer makes no warranty or representations
of any kind regarding the Property. The Property is sold "as is" and "where is".
6. If within ninety (90) days after the completion of the
repurchase contemplated hereby in accordance with the terms hereof, Buyer does
not commence an action against the Lessee for any rentals or damages then due
to Buyer as a result of the Lessee's default under the Lease if requested by
Seller, Buyer will assign to Seller all of its right, title and interest in,
and to any claim it may have against the Lessee for such rentals or damages.
Such assignment shall be deemed to be additional consideration for the monies
paid by Seller to Buyer hereunder.
7. Any notice required to be given hereunder shall be sent by
United States mail, postage prepaid, to Seller at 744 South 400 East Orem, Utah
84058, and Buyer at Zions Credit Corporation, P.O. Box 3954, Salt Lake City,
Utah 84110-3954 or at such other address as either party may specify by
written notice to the other.
8. In the event suit is instituted by Buyer against Seller to
enforce any of the terms and conditions hereof, Seller agrees that, in the
event Buyer is successful in any such action, to pay all Buyer's costs and
expenses incurred in connection therewith, including reasonable attorney's
fees.
IN WITNESS WHEREOF, this instrument has been executed the day and year
first above written.
National Applied Computer Technologies
_________________________________________
Seller
_________________________ By:______________________________________
Witness
Title:___________________________________
ZIONS CREDIT CORPORATION
_________________________________________
Buyer
By:______________________________________
Title:
___________________________________
I, ________________________________________________, Secretary of
National Applied Computer Technologies, having custody of the corporate records
of said corporation and of the minutes of its Board of Directors, do hereby
certify that at a duly called and held meeting of the Board of Directors of
National Applied Computer Technologies held on the ___ day of _______________,
19__, a quorum being present, the foregoing agreement was duly submitted to and
approved by said Board of Directors, and that said Board of Directors thereupon
authorized and directed the President and Secretary of said Corporation to
execute and deliver said agreement as the valid and binding obligation of
National Applied Computer Technologies for and on its behalf, and that the
resolution of said Board of Directors so providing is still in full force and
effect and has not been revoked.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
corporate seal of National Applied Computer Technologies this ___ day
of_____________, 19_____.
National Applied Computer Technologies
_________________________________________
Corporate Name
_________________________________________
Secretary
<PAGE> 1
Exhibit 10.7
LEASE AGREEMENT
THIS AGREEMENT is made and entered into this 20th day of October,
1994, between BUSCH-PROVO, LTD., a Utah limited partnership, hereinafter
referred to as "Lessor," and National Applied Computer Technologies, Inc., A
Utah Corporation, hereinafter referred to as "Lessee."
WHEREAS, Lessee desires to lease space at Lincoln Square, Orem, Utah;
and
THEREFORE, the parties desire to enter into a lease agreement to
define the rights of each pertaining to the lease of property;
NOW THEREFORE, in consideration of the mutual covenants contained
herein and other valuable and adequate consideration, the receipt of which is
hereby acknowledged, the parties agree as follows;
1. Lessor hereby leases to Lessee, and Lessee leases from Lessor,
on the terms set forth herein, the real property described as a part of Lincoln
Square with the particular property described as follows, the address hereby
designated as 382 East 720 South, Suite 101, Orem, Utah, 84058 referred to
herein as the "Premises" or the "Demised Premises."
2. Lessee shall have possession of the Demised Premises for a term
of Twenty Two (22) months, commencing December 1, 1994 and ending on October 31,
1996. In further consideration of the agreement of the Lessor to lease this
additional space to Lessee, Lessee agrees that with respect to all lease
agreements with Lessor specifically identified as (i) November 1, 1993, (ii)
December 13, 1993 and (iii) October 20, 1994 (2 Leases), respectively
hereinafter collectively referred to as "Leases", it is mutually agreed between
Lessor and Lessee that Lessee shall be obligated to give Lessor not less than
six (6) months written notice of Lessee election not to renew any of the Leases,
notwithstanding anything to the contrary in the Leases, it is further agreed
that the term of the Leases shall be extended for a term of six (6) months from
the time of such notice and Lessee shall be required to pay rent on all of the
Leases for not less than the greater of the remaining term of the Leases or six
(6) months following delivery to Lessor of any such notice.
3. Lessee shall pay as rental the sum of $.681281 per square foot
per month, based on the agreed square footage of 2,030, for a monthly rental of
$1,383.00. Payable as follows: First month rental payments due at the
commencement dates listed above. Monthly lease payments shall be paid on the
first (1st) day of each calendar month in advance in lawful money of the United
States, Lessor acknowledges receipt in advance of the first months rent. A
payment of five (5) percent of the monthly rent or $150.00, whichever is
greater, shall be added to any monthly payment received by the Lessor more than
ten (10) days after said payment was due (late payments). Late payments shall
accrue interest as shall unpaid utility and fee balances at the rate of four
(4) percent above prime rate per month until paid. The interest rate on unpaid
balances shall not go below 10% or above 18%. Payments shall be delivered or
mailed to Lessor at Carpenter & Associates Inc., 1345 East 3900 South, Suite
102, Salt Lake City, Utah, 84124, or such other address as Lessor may direct
from time to time.
<PAGE> 2
4. Lessee shall pay Lessor a Security Deposit in the amount of
$1400.00 with the first month rental payment. The Security Deposit shall be
held by Lessor during the term of the Lease and upon termination the Security
Deposit shall first apply to any unpaid utilities, fees and/or other expenses
or damages for which the Lessee is responsible, the remaining portion of the
Security Deposit shall be refunded to the Lessee after all amounts owing to
Lessor have been satisfied. Lessor shall have the right but shall not be
obligated to utilize all or any part of the Security Deposit as rent. Lessee
acknowledges he has inspected the Demised Premises prior to occupancy and has
inspected the condition of said Premises. Except as noted on exhibit A-1
"Condition of Premise," Lessee accepts the Demised Premises in its present
condition. Lessee upon termination of this Lease Agreement for whatever reason
agrees to return the Demised Premises to the Lessor in the same condition,
reasonable wear and tear excepted.
5. Lessee agrees to make, at its expense, necessary maintenance
and repairs to keep the improvements constructed on the Premises in good
condition and repair throughout the entire term of the lease. If, however, said
maintenance and repairs result from deficiencies in the original installation
and construction of the improvements, Lessor agrees to correct such
deficiencies. Lessor shall maintain, at its expense, common areas and
facilities unless otherwise provided herein, which shall include: (1) the
foundations, columns, girders, beams, supports, main walls, roofs, decks,
stairways, fire escapes, walks, and entrance and exits of all buildings; and
(2) yards, gardens, parking areas, and storage spaces. Lessor shall also
maintain plumbing, mechanical (heating and air conditioning systems) and
electrical systems.
6. Lessee shall maintain, repair, or replace as applicable at its
expense: broken windows, light covers, outlet and light switch covers, mirrors,
excessive damage and wear to carpet, walls, ceilings, doors, cupboards and
shelves, railings, bathroom fixtures, cabinets, and replacement of light bulbs
and fluorescent lamps. Excessive damage as defined for purpose of this lease is
damage or use incurred beyond normal wear and tear or damage caused by
negligence or willful acts of commission or omission of Lessee, or Lessee's
business invitees.
7. Lessee shall not make or permit to be made any alterations,
additions or improvements to the Premises or any part thereof without the
written consent of Lessor. Any request for Lessor's consent shall be
accompanied by plans and specifications showing in detail Lessee's proposed
alterations, additions or improvements. Any alterations, additions or
improvements to the Premises made by Lessee, except for removable trade
fixtures, shall at once become a part of the realty and belong to Lessor.
Lessee shall repair all damage caused by Lessee's removal of all trade
fixtures. Lessee at the end of this Lease shall do restoration which
restoration shall include but not limited to all holes in walls and other
similar damage caused by the use and or removal of Lessee's property.
Alterations, additions or improvements to the Premises by Lessee shall be made
at Lessee's sole cost and expense. Lessee shall cause any permitted
alterations, additions or improvements to be constructed in a good and
workmanlike manner free of any liens for labor and materials and in strict
accordance with the plans and specifications approved by Lessor. Lessee agrees
to indemnify, hold Lessor harmless from and defend Lessor against any loss,
liability, injury, mechanic's, materialman's or other liens resulting from such
work, and shall cause any lien filed against the Premises or Lincoln Square to
be cancelled and discharged of record.
2
<PAGE> 3
8. (a) Lessee shall not do or permit anything to be done in
or about the Premises nor bring or keep anything therein which will in any way
increase the existing rate of, or adversely affect any fire or other insurance
covering Lincoln Square.
(b) Lessee shall not do or permit anything to be done in
or about the Premises which will in any way obstruct or interfere with the
rights of other tenants or occupants of the Premises or injure or annoy any of
them, nor shall Lessee permit the Premises to be used for any immoral or
unlawful purpose. Lessee shall not be the source of loud music, vibrations,
odors, or other nuisances which are objectionable to Lessor, other occupants of
the Premises or other occupants of adjacent buildings.
(c) Lessee shall not overload the floors nor permit or
allow any waste, abuse, or destructive use of the Premises to occur.
(d) The plumbing facilities within the Premises shall not
be used by Lessee for any other purpose than that for which they are
constructed, and no other foreign substance of any kind shall be thrown
therein. The expense of any breakage, stoppage or damage to such plumbing lines
resulting from a violation of this provision shall be borne by Lessee.
(e) Lessee shall not, without Lessor's prior written
consent, which shall not be unreasonably withheld, (i) make any changes to the
exterior of the Premises or Common Areas, nor (ii) install any exterior
lighting, canopies or awning, or any exterior decorations or paintings, nor
(iii) install any sign, window or door lettering, placards, decorations or
advertisement of any type which can be viewed from the exterior of the
Premises, nor (iv) place any object near exterior windows and doors which may
appear unsightly from outside of the Premises. All signs, awnings, canopies,
decorations, lettering or other items approved by Lessor and installed by
Lessee shall be kept in good repair and in proper operating condition at all
times, shall be removed at the termination of the Lease and any damage caused
by such items or their removal shall be repaired at Lessee's expense. Any items
installed or maintained in violation of this subparagraph may be promptly
removed by Lessor at Lessee's expense. Use of the roof on the Premises is
reserved to Lessor.
(f) Lessee shall not alter any lock nor install any new
or additional locks or any bolts on any door of the Premises, without first
obtaining Lessor's written consent, which shall not be unreasonably withheld.
(g) Lessee shall not install any telephone or other
special utility lines within he Premises without first obtaining Lessor's
written consent, which shall not be unreasonably withheld.
(h) Lessee shall not use the Premises in any way which
will violate any law, statute, ordinance or governmental rule or regulation now
in force or which may hereinafter be enacted or promulgated.
(i) Lessee shall securely close and lock all doors and
windows in the Premises before leaving Premises each day and shall insure that
all water faucets and water apparatus and other equipment under Lessee's
control within the Premises are shut off so as to prevent any waste or damage.
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<PAGE> 4
9. (a) Lessor shall procure insurance coverage insuring Lessor
against loss of, or damage to, the Premises by reason of fire and other
casualties. Such insurance shall be underwritten by a responsible insurance
company qualified to do business in the State of Utah and shall be in the fact
amount equal to at least 80% of the insurable value of the Premises, as
determined by Lessor. Such insurance shall cover loss or damage by fire, and
loss or damage arising out of the normal extended coverage perils which are
windstorm, hail, explosion, riot, riot attending a strike, civil commotion,
aircraft, vehicles, and smoke. Lessor shall also obtain extended coverage on
the Premises insuring against loss or damage arising from vandalism and
malicious mischief within the Premises. The proceeds of any such insurance in
case of loss of or damage to the Premises, or to such boilers and machinery
shall be paid to Lessor to be applied on account of the obligations of Lessor.
Any proceeds not required for such purpose shall be the sole property of
Lessor.
(b) Lessor and Lessee each agree to secure for themselves
and keep in force from and after the date Lessor shall deliver possession of
the Premises to Lessee and throughout the term of this Lease, comprehensive
general liability insurance coverage against death, bodily or personal injury
or property damage occurring within the Premises or the Common Areas. Such
insurance as obtained by each party shall be in the combined single limit
amount of $100,000. Lessee's liability insurance coverage shall include a
contractual liability endorsement covering the indemnity for death, bodily
injury to persons and damage to property and a personal injury endorsement
covering such wrongful acts as false arrest, false imprisonment, malicious
prosecution, libel and slander. Lessee shall also keep in force, at its sole
cost and expense, fire and extended coverage insurance and insurance against
water damage and against vandalism and malicious mischief covering Lessee's
improvements, trade fixtures, furnishing, equipment and contents within the
Premises in the full replacement value thereof. Such insurance shall name
Lessor as an additional insured, shall be written as primary coverage, not
contributing with and not in excess of coverage which Lessor may carry and
shall be noncancellable except upon Lessor first receiving twenty (20) days
advanced written notice from the insurance company.
(c) Each of the parties hereby waives any rights it may
have against the other party on account of any loss or damage to its property
(including the Premises, the contents of such, and property located on the
Common Areas) which arises from any risk generally covered by fire and extended
coverage insurance, whether or not such party may have been negligent or at
fault in causing such loss or damage. Each of the parties shall obtain a clause
or endorsement in the policies of such insurance obtained by it to the effect
that the insurer waives, or is otherwise denied the right of subrogation
against the other party for loss covered by such insurance.
10. The general real estate taxes and assessment on Lincoln Square
shall be paid by Lessor. Lessee shall pay all taxes and assessments on the
personal property of Lessee contained within the Premises.
11. All utilities shall be paid by Lessee, including natural gas,
electricity, water, sewer and garbage. Lessee agrees and covenants to keep said
payments of utilities, paid as they accrue and are billed to Lessee by Lessor
each month for Lessee's share. Lessor will pay for snow removal and care of
lawns, shrubs, and other common area expenses.
4
<PAGE> 5
12. (a) Lessee and all those claiming through or under Lessee
shall store their property in and shall occupy and use the Premises and the
Common Areas solely at their own risk. Lessee and all those claiming through or
under Lessee hereby release Lessor from all claims of every kind, including
loss of life, personal or bodily injury, damage to merchandise, equipment,
fixtures or other property, or damage to business (including business
interruption) arising, directly or indirectly, out of or from or on account of
such occupancy and use or resulting from any present or future condition or
state of repair thereof, except to the extent directly caused by the negligence
of Lessor.
(b) Except to the extent directly caused by the
negligence of Lessor, Lessee hereby agrees to defend, indemnify and hold Lessor
harmless from and against any and all claims, demands, fines, suits, actions,
proceedings, orders, decrees, judgments and liabilities of every kind, and all
reasonable expenses incurred in investigating and resisting the same (including
reasonable attorneys' fees), resulting from or in connection with loss of life,
bodily or personal injury or property damage (i) arising out of or on account
of any occurrence in or on the Premises by Lessee, or (ii) occasioned wholly or
in part through the use and occupancy of the Premises or any improvements
therein or appurtenances thereto by Lessee, or (iii) occasioned by any act or
omission or negligence of Lessee or any subtenant, concessionaire or licensee
of Lessee, or their respective employees, agents or contractors, which occurs
in the Premises or in the doorways thereof or in Common Areas, including those
portions thereof owned, leased, subleased or controlled by others.
13. Lessor and its authorized representatives shall have the right
to enter upon the Premises at all reasonable times during normal business hours
to inspect or exhibit the same to prospective purchasers, mortgagees and
tenants, and to make such repairs, additions, alterations or improvements as
Lessor may reasonably deem desirable, provided Lessor does not unreasonable
interfere with Lessee's business operations. Lessor shall be allowed to take
all material upon the Premises that may be reasonably required to accomplish
the foregoing without the same constituting an actual or constructive eviction
of Lessee and the rents reserved herein shall not abate while any such work
herein described is in progress, provided Lessor does not unreasonably
interfere with Lessee's business operations. Lessor shall have the right to
enter at any time to remove items in violation or to otherwise prevent
violations of Paragraph 7 of this Lease.
14. The occurrence of any of the following shall constitute a
material default and breach of this Lease by Lessee:
(a) Lessee fails to pay when due any rental or any other
sum required to be paid hereunder and such failure is not cured within fifteen
(15) days following the date when due after written notice.
(b) Lessee abandons or vacates the Premises or violates
the provisions dealing with Purpose or Assignment and Subletting.
(c) Lessee fails to observe and perform any other
provision of this Lease to be observed or performed by Lessee, where such
failure continues for fifteen (15) days after written notice is given to
Lessee; provided, however, that if the nature of such default is such that the
same cannot reasonably be cured within such fifteen day period, Lessee shall
not be deemed to be in default if Lessee shall within such period commence such
cure and thereafter diligently prosecute the same to completion.
5
<PAGE> 6
15. Upon the occurrence of any event of default described above,
Lessor shall have the option to take any or all of the following actions,
without further notice or demand of any kind to Lessee, or to any other person:
(a) Lessor may re-enter and remove all persons and
property from the Premises, storing such property in a public place or
warehouse for the account of, and at the risk of Lessee, all without service of
notice or resort to legal process and without being deemed guilty of, or liable
in, trespass, forcible entry or damages resulting from such re-entry and
removal. No such re-entry or taking possession of the Premises by Lessor shall
be construed as an election on its part to terminate this Lease unless a
written notice of such intention is given by Lessor to Lessee. Lessor may sell
such property in any reasonable manner and shall apply the proceeds thereof
first against costs of moving and storage and then against any other obligation
of Lessee.
(b) Lessor may, but shall have no obligation to relet the
Premises or any portion thereof at any time or from time to time and for such
term or terms and upon such conditions and at such rental as is reasonably
prudent under the circumstances. If Lessor relets the Premises, or any portion
thereof, such reletting shall not relieve Lessee of any obligation hereunder,
except that Lessor shall apply the rent or other proceeds actually collected by
it as a result of such reletting against the costs of removing Lessee and
reletting the Premises and against those sums due from Lessee hereunder. Lessor
shall not by any such reletting or any other act be deemed to have accepted any
surrender by Lessee of the Premises, or any portion thereof, or be deemed to
have otherwise terminated this Lease, unless Lessor shall have given Lessee
express written notice of Lessor's election to do so.
(c) Lessor may collect by legal action or otherwise,
without reletting the Premises, each installment of rent or other sum as it
becomes due hereunder.
(d) Lessor may terminate this Lease by written notice to
Lessee. In the event of such termination, Lessee agrees to immediately
surrender possession of the Premises. Should Lessor terminate this Lease, it
may recover from Lessee all damages Lessor may incur by reason of Lessee's
breach, including the cost of recovering the Premises, reasonable attorneys'
fees, and the worth at the time of such termination of the excess, if any, of
the amount of rent and charges equivalent to rent reserved in this Lease for
the remainder of the stated term over the then-reasonable rental value of the
Premises for the remainder of the stated term, all of which amounts shall be
immediately due and payable from Lessee to Lessor.
(e) The remedies given to Lessor in this paragraph shall
be cumulative and shall be in addition and supplemental to all the rights and
remedies which Lessor may have at equity or under the laws then in force.
16. At the time of surrender, Lessee shall place the leased
Premises in the same condition as when received, normal wear and tear excepted.
17. Lessee shall not make any claim to the Demised Premises against
the interest of Lessor, and if Lessee holds the Premises after termination of
the agreement, a tenancy from month to month shall be created thereby upon the
terms and conditions as set forth herein, and the acceptance of the rental by
Lessor shall not extend the term of this agreement in any manner.
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<PAGE> 7
18. Lessee may assign or sublet the entire Demised Premises or any
portion thereof with the prior written consent of the Lessor. Lessor will not
unreasonably withhold consent.
19. (a) If the Premises or Lincoln Square is damaged as result
of flood, earthquake, nuclear radiation or contamination, act of war or other
risk which is not covered by Lessor's insurance, or if the Premises or the
Lincoln Square are damaged to the extent of fifty percent (50%) or more of
their then replacement value, or if the repair of the Premises, or the Lincoln
Square would require more than forty-five (45) days, Lessor shall either
terminate this Lease upon written notice given to Lessee within fifteen (15)
days following such casualty or commence as soon as is reasonably possible.
(b) In the event this Lease is not terminated and Lessor
undertakes to repair any portion of the Premises, until such repair is
complete, rent shall abate proportionately as to the portion of the Premises
rendered untenable. Notwithstanding the foregoing, however, if the damage being
repaired was caused by the negligence of Lessee or its employees, agents,
licensees or concessionaires, there shall be no abatement of rent during the
repair period.
(c) Unless this Lease is terminated, Lessee shall, at its
expense, repair the fixtures and improvements installed by it within the
Premises and repair or replace any of Lessee's furniture or equipment damaged
by such casualty.
20. If all or any part of the Premises or all or a material
portion of the Common Areas shall be taken or appropriated by any public or
quasi-public authority under the power of eminent domain, or transfer in lieu
thereof, either party hereto shall have the right, at its option, to terminate
this Lease, and Lessor shall be entitled to any award, or other payment made in
connection therewith, and Lessee shall have no claim against Lessor or the
condemning entity for the value of any unexpired term of this Lease. If a part
of the Premises shall be so taken or appropriated and neither party hereto
shall elect to terminate this Lease, the rental thereafter to be paid shall be
equitably reduced.
21. In the event of a sale or conveyance by Lessor of Lincoln
Square or any part thereof, the same shall operate to release Lessor from any
future liability upon any of the covenants or conditions, express or implied,
herein contained in favor of Lessee, and in such event Lessee agrees to look
solely to the successor-in-interest of Lessor for performance of such covenants
and conditions. This Lease shall not be affected by any such sale, and Lessee
agrees to recognize and attorn to Lessor's successor-in-interest as the
landlord hereunder.
22. The defaulting party shall pay all costs, including attorneys'
fees, incurred by the non-defaulting party in enforcing the covenants and
agreements to be kept and performed under the provisions of this Lease, whether
or not legal action is commenced.
23. From time to time after the Commencement Date and when
requested by Lessor, Lessee shall execute and deliver to Lessor within fifteen
(15) days following such request a written certificate ratifying this Lease;
the terms hereof, and other provisions usually found in such certificates.
24. The waiver by Lessor of any term, covenant or condition herein
contained shall not be deemed to be a waiver of such term, covenant or
condition in the event of any subsequent breach of the same or any other term,
covenant or condition herein contained. The subsequent acceptance of rent
7
<PAGE> 8
hereunder by Lessor shall not be deemed to be a waiver of any preceding breach
by Lessee of any term, covenant or condition of this Lease, other than the
failure of Lessee to pay the particular rental so accepted, regardless of
Lessor's knowledge of such preceding breach at the time of acceptance of such
rent.
25. All notices and demands which may or are required to be given
by either party to the other under this Lease shall be delivered in person or
sent by United States mail, postage prepaid, and shall be addressed to the last
known principal place of business of the party to receive such notice. Any such
notice or demand shall be deemed given on the date personally delivered, or on
the date deposited in the United States mail, if properly addressed and
stamped.
26. The covenants and conditions herein contained shall, subject
to the provisions of this Lease relating to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
27. Lessee has deposited with Lessor a security deposit, receipt
of which is hereby acknowledged, to secure the faithful performance by Lessee
of all of the terms, covenants and conditions of this Lease to be kept and
performed by Lessee during the term hereof. If Lessee defaults with respect to
any provision of this Lease, Lessor may (but shall not be required to) use,
apply or retain all or any part of this security deposit for the payment of any
rent or any damages, or other sum in default, or for the payment of any other
amount for losses which Lessor may suffer by reason of Lessee's default. If any
portion of said deposit is so used or applied, Lessee shall, upon demand
therefor, deposit cash with Lessor in an amount sufficient to restore the
security deposit to its original amount and Lessee's failure to do so shall be
a material breach of this Lease. Lessor shall not be required to keep such
security deposit separate from its general funds, and Lessee shall not be
entitled to interest on such deposit. If Lessee shall fully and faithfully
comply with every provision of this Lease, the security deposit or any balance
thereof shall be returned to Lessee following the expiration of the Lease term.
In the event of an assignment of Lessor's interest in this Lease, Lessor shall
transfer said deposit to Lessor's successor-in- interest and, upon notice to
Lessee of such transfer, Lessor shall be relieved of any further liability for
such deposit.
28. (a) Lessee agrees that from time to time it shall, if so
requested by Lessor and if doing so will not materially and adversely affect
Lessee's economic interests under this Lease or its use of the Premises, join
with Lessor in amending the terms of this Lease so as to meet the reasonable
needs or requirements of any lender who is considering furnishing, or who has
furnished, any financing which is, or will be, secured by the Premises and the
land underlying such.
(b) Lessee hereby subordinates its rights in this Lease
to the lien of any mortgage or deed of trust of lien or other security interest
resulting from any method of financing or refinancing which encumbers or is
intended to encumber the Premises or the land underlying such and to all
advances subsequently made upon the strength of such security. So long as
Lessee is not in default under the terms of this Lease, however, this Lease
shall remain in full force and effect for the full term hereof and shall not be
terminated as a result of any foreclosure (or transfer in lieu thereof) of such
mortgage or other security instrument to which Lessee has subordinated its
rights pursuant to this Subparagraph.
8
<PAGE> 9
29. Lessee shall not cause or permit any Hazardous Substance to be
used, stored, generated, or disposed of on or in the Premises by Lessee,
Lessee's agents, employees, contractors or invitees, without first obtaining
Lessor's written consent, which may be withheld at Lessor's sole and absolute
discretion. If Hazardous Substances are used, stored, generated, or disposed of
on or in the Premises, or if the Premises become contaminated in any manner for
which Lessee is legally liable, Lessee shall indemnify, defend, and hold
harmless the Lessor from any and all claims, damages, fines, judgments,
penalties, costs, liabilities, or losses (including, without limitation, a
decrease in value of the Premises or the building(s) of which they are a part,
damages because of adverse impact on marketing of the space, and any and all
sums paid for settlement of claims, attorneys', consultant, and expert fees)
arising during or after the Lease Term and arising as a result of such
contamination by Lessee. This indemnification includes, without limitation, any
and all costs incurred because of any investigation of the site or any cleanup,
removal or restoration mandated by a federal, state, or local agency or
political subdivision. In addition, if Lessee causes or permits the present of
any Hazardous Substance on the Premises and this results in contamination,
Lessee shall promptly, at its sole expense, take any and all necessary actions
to return the Premises to the condition existing before the presence of any
such Hazardous Substance on the Premises, provided, however, that Lessee shall
first obtain Lessor's approval for any such remedial action.
As used herein, "Hazardous Substance" means any substance which is
toxic, ignitable, reactive, or corrosive and which is regulated by any local
government, the State of Utah, or the United States government. "Hazardous
Substance" includes any and all material or substances which are defined as
"hazardous waste," "extremely hazardous waste," or a "hazardous substance,"
pursuant to state, federal, or local governmental law. "Hazardous Substance"
includes but is not restricted to asbestos, polychlorinated biphenyls ("PCBs"),
and petroleum.
30. (a) This Lease and the attachments hereto constitute the
entire agreement between the parties. Any prior conversations or writings are
merged herein and are extinguished. No subsequent amendment to this Lease shall
be binding upon Lessor or Lessee unless reduced to writing and signed.
(b) The invalidity of unenforceability of any provision
hereof shall not affect or impair any other provision of this Lease.
31. No payment by Lessee or receipt by Lessor of an amount less
than is due hereunder shall be deemed to be other than payment toward or on
account of the earliest portion of the amount then due, nor shall any
endorsement or statement on any check or payment (or any letter accompanying
any check or payment) be deemed an "accord and satisfaction" (or payment in
full) and Lessor may accept such check or payment without prejudice to Lessor's
right to recover the balance of such amount or pursue any other remedy provided
herein.
32. Each person executing this Lease individually and personally
represents and warrants that he is duly authorized to execute and deliver the
same on behalf of the entity for which he is signing (whether a corporation,
general or limited partnership, or otherwise) and that this Lease is binding
upon said entity in accordance with its terms.
9
<PAGE> 10
33. Any notice required by this Lease Agreement shall be given by
delivery to the parties at the following addresses:
Carpenter & Associates Inc. N.A.C.T.
1345 East 3900 South Suite 102 744 South 400 East
Salt Lake City, Utah 84124 Orem, Utah 84058
Such addresses shall remain in effect until changed in writing by
either of the parties. Notices shall be deemed received either:
(a) Upon personal delivery.
(b) The facts.
(c) Three days after deposit in U.S. Mail postage prepaid.
IN WITNESS WHEREOF, the parties have duly executed this Lease as of
the day and year first above written.
LESSOR: LESSEE:
- ------- -------
BUSCH-PROVO LTD., National Applied Computer Technologies, Inc.
a Utah limited partnership A Utah Corporation
/s/ MARK B. HANSEN /s/ KYLE BOWEN LOVE
- ------------------------------- -------------------------------
Mark B. Hansen, General Partner Kyle Bowen Love, President
10/21/94
- ------------------------------- -------------------------------
Date Date
October 19, 1994
10
<PAGE> 11
ADDENDUM
This ADDENDUM shall attach to and become part of the Lease dated
October 20, 1994 by and between BUSCH PROVO, LTD., a Utah limited partnership,
hereinafter referred to as "Lessor", and National Applied Computer Technology, A
Utah Corporation Inc., hereinafter referred to as "Lessee".
The following shall become incorporated into the Lease:
1. Lessor shall do improvements to the Demised Premises as shown
on attached Exhibit "A" which shall include but not limited to removal of walls,
doors, along with the installation of doors, walls, and a window as shown in
Exhibit "A".
2. Lessor shall paint and carpet the Demised Premises.
All terms and conditions of the Lease not specifically modified by
this ADDENDUM shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have duly executed this Lease as of
the day and year first above written.
LESSOR: LESSEE:
- ------- -------
BUSCH-PROVO LTD., National Applied Computer Technologies, Inc.
a Utah limited partnership A Utah Corporation
/s/ KYLE BOWEN LOVE
- ------------------------------- -----------------------------
Mark B. Hansen, General Partner Kyle Bowen Love, President
10/21/94
- ------------------------------- -----------------------------
Date Date
October 19, 1994
21
<PAGE> 1
EXHIBIT 10.8
BUSCH PROVO LTD
5253 S. Saddleback Dr.
Salt Lake City, Utah 84117
(801) 278-2774
May 2, 1996
National Applied Computer Technologies, Inc. (N.A.C.T.)
Wasatch International Network Services, Inc. (W.I.N.S.)
RE: Lease Agreements dated November 1, 1993, December 13, 1993,
October 20, 1994 (2 Leases)
-----------------------------------------------------------
Gentlemen:
The following presents two alternatives to you for the continued
occupancy of your space beyond the current termination points. The following is
a proposal and does not in any way modify the terms of the written agreements
between the parties unless and until accepted in writing by both parties.
Proposal 1: Upon the expiration of the current terms of the Leases,
Lessee may occupy the space on a month to month basis (with a minimum 60 days
notice before vacating). The following rate of rental per month for the
respected areas will be, to-wit:
N.A.C.T. Spaces $ 13,885.42 per month
W.I.N.S. Space $ 2,112.25 per month
Proposal 2: In lieu of Proposal 1, Lessee may determine to occupy the
respective premises for additional time beyond current expiration as follows:
A. Six (6) Months:
N.A.C.T. Spaces $ 13,607.84 per month
W.I.N.S. Space $ 2,112.25 per month
B. Nine (9) Months:
N.A.C.T. Spaces $ 13,329.17 per month
W.I.N.S. Space $ 2,070.83 per month
C. Twelve (12) Months:
N.A.C.T. Spaces $ 13,049.48 per month
W.I.N.S. Space $ 2,029.42 per month
Either proposal, if acceptable, will be governed by the terms of the
leases as presently written, except as modified by the terms of this proposal.
<PAGE> 2
National Applied Computer Technologies, Inc. (N.A.C.T.)
Wasatch International Network Services, Inc. (W.I.N.S.)
May 2, 1996
Page 2
This proposal is good for ten (10) calendar days from the date hereof.
A mutual acceptance shall be manifested by acknowledging acceptance of the
proposal as indicated below.
BUSCH PROVO, LTD.
By /s/ MARK B. HANSEN
------------------------------------
Mark B. Hansen, General Partner
Reviewed and accept proposal 1 this 15 day of May, 1996.
National Applied Computer Technologies, Inc.
By /s/ Eric F. Gurr
------------------------------------
Its CFO
------------------------------------
Reviewed and accept proposal 1 this 15 day of May, 1996.
Wasatch International Network Services, Inc.
By /s/ Eric F. Gurr
------------------------------------
Its Treasurer
------------------------------------
<PAGE> 1
EXHIBIT 10.9
MASTER FINANCE LEASE ZIONS CREDIT CORPORATION Lease No. 6942
P. O. Box 3954
Salt Lake City, Utah 84110-3954 Dated May 8, 1995
ZIONS CREDIT CORPORATION (hereinafter "LESSOR"), a Utah corporation, with
offices at 37 West 100 South, Salt Lake City, Utah and National Applied
Computer Technologies (hereinafter "LESSEE") with offices at 744 South 400
East, Orem, UT 84058 in consideration of the mutual covenants and promises
hereinafter set forth agree as follows:
1. LEASE. Lessor hereby leases to Lessee and Lessee hereby leases from
Lessor (for Commercial and Business purposes only) the property
described and referred to in any Equipment Schedule or Schedules now
or hereafter executed by the parties hereto (hereinafter "Equipment"
or "Item of Equipment").
2. TERM, RENTAL. The lease term and rental payments are specified in said
Equipment Schedule or Schedules. Lessee's obligation to make rental
payments is unconditional and rental payments shall be paid without
defense, offset, or counterclaim. The term shall commence on the date
indicated on each Equipment Schedule or Schedules. All rents shall be
paid at the office of Lessor in Salt Lake City or at such other place
as Lessor may hereafter designate.
3. ADDITIONAL LEASING. Lessee and Lessor, from time to time, and by
mutual consent, may lease other Equipment, subject to the terms and
conditions contained in this Lease for such term and rental payments
as may be agreed, by execution of a subsequent Equipment Schedule or
Schedules, each of which shall become an amendment hereto and a part
hereof.
4. OWNERSHIP. Title to the Equipment shall at all times remain in Lessor
except as set forth in this Lease or Equipment Schedule or Schedules
hereto. The Equipment is and shall remain personal property
notwithstanding that the Equipment or any part thereof may be or
hereafter become in any manner affixed to or attached to any real
property or any building thereon. Lessor may require Lessee, at
Lessee's expense, to affix and keep affixed in a prominent place on
Equipment labels, plates, or other markings stating that the Equipment
is owned by Lessor. Lessee agrees to keep the Equipment at the
location set forth in said Equipment Schedule(s), and will notify
Lessor promptly in writing of and prior to any change in the location
of the Equipment within such State, but will not remove the Equipment
from such State without the prior written consent of Lessor. Lessee
shall pay to Lessor an amount equal to all taxes paid, payable or
required to be collected by Lessor, however designated, which are
levied or based on the Monthly Rental or on the possession, use,
operation, control, or value of the Equipment, including, without
limitation, state and local privilege or excise taxes, sales and use
taxes, property taxes, and taxes or charges based on gross revenue,
excluding taxes based on Lessor's net income. Lessor shall invoice
Lessee for all such taxes and Lessee shall promptly remit to Lessor
all such taxes and charges upon receipt of such invoice from Lessor.
Lessee agrees to pay all penalties and interest resulting from its
failure to timely remit such taxes to Lessor. Charges for penalties
and interest shall be promptly paid by Lessee when invoiced by Lessor.
5. DISCLAIMER, WARRANTIES, DEFECTS, SHIPPING CHARGES. Lessor warrants
that during the term of this Lease, if no Event of Default has
occurred, Lessee's use of the Equipment shall not be
interrupted by Lessor or anyone claiming solely through or
under Lessor. The warranty set forth in the preceding
sentence is in lieu of all other warranties of Lessor, whether
written, oral, or implied; and Lessor shall not, by virtue
Initial Here of having leased the Equipment or delivered any bill or bills
of sale pursuant to this Lease, or for any other reason be
deemed to have made, and Lessor hereby DISCLAIMS ANY
OTHER REPRESENTATION OR WARRANTY, EITHER EXPRESSED OR IMPLIED,
AS TO ANY MATTER WHATSOEVER, WITHOUT LIMITATION. The seller,
method of shipment, make, model, specifications, performance
capacities, and all other matters relating to the ordering,
____________ delivery, operation, and performance of each item of Equipment
have been selected and determined by Lessee and Lessee agrees:
(i) ALL EQUIPMENT IS LEASED IN AN "AS IS" CONDITION. THE ENTIRE
RISK AS TO THE QUALITY AND PERFORMANCE OF THE EQUIPMENT IS
WITH LESSEE. THIS DISCLAIMER AND WARRANTY AGREEMENT IS
EXPRESSLY IN LIEU OF ANY AND ALL REPRESENTATIONS AND
WARRANTIES EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTY
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
CONCERNING THE DESIGN OR CONDITION OF THE EQUIPMENT, WHETHER
ARISING FROM STATUTE, COMMON LAW, CUSTOM, OR OTHERWISE. NO
PERSON SHALL HAVE ANY AUTHORITY TO BIND LESSOR TO ANY
REPRESENTATION OR WARRANTY OTHER THAN THIS DISCLAIMER AND
WARRANTY. LESSOR SHALL NOT BE LIABLE FOR ANY CONSEQUENTIAL
DAMAGES RESULTING FROM THE USE OF THE EQUIPMENT OR CAUSED BY
ANY DEFECT, FAILURE, OR MALFUNCTION OF THE EQUIPMENT WHETHER A
CLAIM FOR SUCH DAMAGE IS BASED UPON WARRANTY, CONTRACT, STRICT
LIABILITY, NEGLIGENCE, OR OTHERWISE.
(ii) TO INDEMNIFY AND SAVE LESSOR HARMLESS FROM ANY AND ALL
LIABILITY ATTRIBUTABLE TO THE SELLER OF ANY ITEM OF EQUIPMENT.
(iii) TO PAY ALL SHIPPING CHARGES AND OTHER EXPENSES INCURRED IN
CONNECTION WITH THE SHIPMENT OF THE EQUIPMENT BY THE SELLER TO
LESSEE AND TO BEAR ALL RISK OF LOSS THEREOF.
(iv) LESSOR SHALL NOT BE LIABLE FOR AND LESSEE WILL BE LIABLE FOR
LOSS OR DAMAGE OCCASIONED BY ANY CAUSE, CIRCUMSTANCE, OR EVENT
OF WHATSOEVER NATURE, ARISING OUT OF THE ORDERING,
MANUFACTURING, DELIVERY, OPERATION, OR PERFORMANCE OF THE
EQUIPMENT, INCLUDING BUT NOT LIMITED TO THE FACT THAT LESSOR
HAS NOT INSPECTED THE EQUIPMENT. Nothing herein contained
shall be construed to deprive the Lessee of whatever rights
Lessee may have against parties other than the Lessor such as
the supplier and the manufacturer of any Equipment and Lessee
agrees to look solely to such third parties with respect to
any and all claims concerning the Equipment. So long as Lessee
is not in breach or default of this Lease, Lessee may pursue
such claims for the mutual benefit of Lessor and Lessee.
6. LESSEE'S INSPECTION AND ACCEPTANCE. It shall be conclusively presumed
upon execution of the delivery and acceptance notice that Lessee has
irrevocably accepted Equipment, that it is in full compliance with the
terms of this Lease, and that it is in good condition and repair.
7. LESSOR'S INSPECTION. Upon the request of Lessor, Lessee shall advise
Lessor as to the location of each Item of Equipment and shall, at any
reasonable time, make the Equipment available to Lessor for inspection
at the place where it is ordinarily located, and shall make Lessee's
records pertaining to the Equipment available to Lessor for
inspection.
8. SUBLEASE AND ASSIGNMENT. Lessee will NOT SUBLET, LEND, OR OTHERWISE
RELINQUISH POSSESSION OF THE EQUIPMENT OR ASSIGN this Lease or any of
its rights hereunder without the prior written consent of Lessor. In
no event shall any sublease, lending arrangement, or other
relinquishment of possession of the Equipment, or any assignment by
Lessee of this Lease or any of its rights hereunder, cause Lessee's
obligations under this Lease to be discharged or diminished to any
extent. Lessor may assign this Lease and all rights it has hereunder
without Lessee's consent. Any such assignment by Lessor shall not
materially change the Lessor's duty nor materially increase the burden
or risk imposed on the Lessee under this Lease.
9. MAINTENANCE, USE, AND COMPLIANCE WITH LAWS. Lessee, at its own cost
and expense shall repair and maintain Equipment so as to keep the
Equipment in good operating condition, ordinary wear and tear
excepted. The Equipment shall not be moved from the location(s) stated
in the Equipment Schedule without the prior written consent of Lessor.
Lessee may from time to time add parts or accessories to any Item of
Equipment provided that such addition does not impair the value or
utility of such Item of Equipment. Any parts or accessories added will
be the property of Lessor. Lessee shall use the Equipment solely in
the conduct of its business and shall use and maintain the Equipment
in conformity with all governmental laws, ordinances, regulations,
requirements, and rules and in accordance with general industry
standards for the maintenance of the Equipment.
10. MORTGAGE, LIENS, ETC. Lessee will not directly or indirectly create,
incur, assume, or suffer to exist any mortgage, security interest,
pledge, lien, charge, encumbrance, or claim on or with respect to the
Equipment, title thereto, or any interest therein (and Lessee will
promptly, at its own expense, take such action as may be necessary to
duly discharge any such mortgage, security interest, pledge, lien,
charge, encumbrance, or claim) except (a) the respective rights of
Lessor and Lessee as herein provided, (b) liens or encumbrances which
result from claims against Lessor (other than liens and encumbrances
arising from failure of Lessee to perform any of Lessee's obligations
hereunder), (c) liens for taxes
Page 1 of 4
<PAGE> 2
either not yet due or being contested in good faith and by appropriate
proceedings, (d) inchoate materialmen's, mechanics', workmen's,
repairmen's, employee's, or other like liens arising in the ordinary
course of business and not delinquent. The obligations of Lessee
arising under this section shall continue in full force and effect,
notwithstanding the expiration or termination of this Lease or
Equipment Schedules hereto.
11. LOSS, DAMAGE, OR REPLACEMENT. In the event any Item of Equipment shall
be lost, stolen, destroyed, damaged beyond repair, or rendered
permanently unfit for use, Lessee shall remain obligated under this
Lease, and this Lease will continue in full force and effect. In such
an event, Lessee may discharge its covenant to pay rent by paying to
Lessor within 30 days of loss all rent plus all other sums due under
this Lease, together with the termination value of such Equipment,
which is the stated purchase amount as indicated in the applicable
Equipment Schedule, less the amount of recovery, if any, actually
received by Lessor from any insurance or otherwise resulting from such
Equipment being lost, stolen, destroyed, damaged beyond repair, or
rendered permanently unfit for use. If any one or more of the events
enumerated in the first sentence of this Section occur, or if any Item
of Equipment is replaced, Lessee shall notify Lessor in writing
immediately. If any Item of Equipment is damaged, but not beyond
repair, Lessee, at its own cost and expense, shall repair such Item of
Equipment so that it will be in the same or better condition as it was
before the damage occurred. In the event that any Item of Equipment is
replaced for any reason it must be with the prior written approval of
Lessor and with comparable equipment in quality and workmanship to the
original Equipment. All new Equipment replacing any original Item of
Equipment shall become the property of Lessor and subject to this
Lease and Equipment Schedule or Schedules hereto. Lessee agrees to
execute any documentation required by Lessor to protect Lessor's
ownership in the new Equipment. All costs of the new Equipment will be
borne by Lessee and Lessee warrants to Lessor free and clear title to
the new Equipment. In the event Lessor shall pay any part or all of
the purchase price of any Item of Equipment prior to Lessee's
inspection and acceptance as described in Section 6 hereof, the risk
of loss for such Item of Equipment shall be with Lessee from the time
of any such payment by Lessor.
12. INSURANCE. Lessee shall, at its own expense, maintain at all times
from the time Lessee has an insurable interest, public liability,
property damage, and physical damage insurance in amounts satisfactory
to Lessor and with insurance companies protecting Lessor as an
additional insured and loss payee thereunder, and providing for 30
day's written notice to Lessor before any policy shall be altered or
canceled. Lessee shall deliver to Lessor evidence of such insurance
coverage satisfactory to Lessor. Lessee covenants, warrants, and
represents that Lessee will not do any act or voluntarily suffer any
act to be done whereby any insurance required hereunder shall or may
be suspended, impaired, or defeated and that Lessee in no
circumstances will suffer or permit any Item of Equipment to be used
or operated during any period under this Lease when Lessor may be at
risk for the risks protected against by the above-described insurance
without all said insurance being fully in effect. Lessee shall provide
immediately to Lessor evidence of all insurance coverage obtained
pursuant to this section. Lessee shall make and file timely all
claims, and Lessee may, unless Lessee is then in default, settle and
adjust all such claims. In the event of default Lessee hereby
irrevocably authorizes Lessor to make, settle, and adjust claims under
such policy or policies and to endorse the name of Lessee on any check
or another item of payment for the proceeds thereof.
13. INDEMNITY. Lessee agrees and covenants to indemnify, protect, save
harmless, and defend Lessor and its employees, officers, directors,
agents, and servants from any and all claims, actions, suits,
liabilities, damages, losses, costs, and expenses, including
reasonable attorney's fees, incurred or asserted against Lessor in any
way relating to, arising out of, or as the result of the manufacture,
purchase, acceptance or rejection, ownership, delivery, lease,
possession, use, condition, sales, return, or other disposition
hereunder of the Equipment. The scope of this indemnity includes, but
is not limited to, all claims based on negligence, whether of Lessor
or another, breach of contract, breach of warranty, or strict
liability.
14. SURRENDER. Upon the expiration or termination of this Lease, Lessee
shall, at its own cost and expense, return Equipment unencumbered to
Lessor at the address specified by Lessor, in the same condition as
received, reasonable wear and tear excepted except as otherwise
indicated in the Equipment Schedule or Schedules hereto. In the event
that Lessee retains possession of the Equipment and with the consent
of Lessor, after expiration of the Lease term, this Lease shall be
deemed to be in effect on a month to month basis. Except as provided
in this paragraph all terms and conditions of this Lease shall
continue. Rent payment shall continue at the regular Lease rate set
forth in the Equipment Schedule or Schedules pertaining to the
Equipment retained by Lessee. Rent paid on a month to month basis
shall not create any ownership rights in the Lessee in the Equipment.
Lessee shall arrange and pay for any repairs necessary in order for
the manufacturer or qualified maintenance organization to accept the
Equipment under contract maintenance at the applicable standard rates.
15. DEFAULT AND REMEDIES.
(a) Time is of the essence and the following events shall
constitute Events of Default:
(i) Lessee shall fail to make any Rent or other payment
hereunder including payment of insurance, personal
property taxes, other taxes, fees, claims, or
assessments within 10 days after the same shall
become due; or
(ii) Lessee shall fail to perform or observe any other
covenant, condition, or agreement to be performed or
observed by it under this Lease or any Equipment
Schedules or amendments thereto; or
(iii) Lessee shall make any representation or warranty to
Lessor under this Lease or any Equipment Schedules or
amendments thereto, or furnish any document or
certificate to Lessor in connection therewith that
shall prove to be incorrect in any material respect
at the time made; or
(iv) Lessee does not generally pay its debts as they
become due, or shall admit in writing its inability
to pay its debts; or shall make an assignment for
benefit of creditors; or shall commence, or have
commenced against it, any case, proceeding, or action
seeking to have an order for relief entered on its
behalf or against it as a debtor or to adjudicate it
as bankrupt or insolvent or seeking reorganization,
arrangement, adjustment, liquidation, dissolution, or
composition of it or its debts under any law relating
to bankruptcy, insolvency, reorganization or relief
of debtors, or seeking appointment of a receiver,
trustee, custodian, or other similar official for it
or for all or any part of its property; or to take
any action in contemplation of or to authorize any of
the above actions; or
(v) The occurrence of any event described in
(i),(ii),(iii), or (iv) with respect to any guarantor
or other party liable to Lessor in the event of
Lessee's nonpayment or nonperformance of this Lease,
or any Equipment Schedules or amendments thereto; or
(vi) The breach, termination or adverse modification of
any instrument, agreement, or document by which such
guarantor or other party is liable to Lessor; or
(vii) Lessee shall fail to discharge any mortgage, security
interest, pledge, lien, charge, encumbrance, or claim
as defined in section 10.
(viii) Lessee is in default pursuant to the provisions of
any other agreement by and between Lessor and Lessee
or if Lessee or any Guarantor is in default, and any
applicable cure period has expired, under any
material agreement for the payment of money.
(b) In the Event of Default, Lessor at its sole option shall have
the right to exercise concurrently or separately any one or
more of the following remedies, and without any election of
remedies being deemed to have been made:
(i) With or without notice or demand, to declare the
entire rental plus all other sums due provided for
under this Lease and each and every Equipment
Schedule hereto, plus the termination value of the
Equipment as defined in Section 11 herein to be
immediately due and payable;
(ii) With or without notice or demand and with or without
legal process enter into the premises where any or
all Items of Equipment may be located and take
possession of and remove same. Any such taking of
possession shall not constitute termination of this
Lease as to any or all Items of Equipment unless
Lessor expressly notifies Lessee in writing to that
effect. In the event of entry and repossession,
Lessee hereby expressly waives all rights to
possession and all claims for damages or loss by
reason of such entry and repossession;
(iii) Terminate this Lease and any Equipment Schedules or
amendments thereto and retain as damages all rents or
other amounts paid by Lessee;
Page 2 of 4
<PAGE> 3
(iv) Lessor may lease the Equipment to any third party,
upon such terms and conditions as Lessor shall
determine, or may sell the equipment at private or
public sale, at which sale Lessor may be the
purchaser. In either of such events, there shall be
due from Lessee and Lessee shall immediately pay to
Lessor the total unpaid rental plus all other sums
provided to be paid herein together with the
termination value of the Equipment as defined in
Section 11 herein, less the net proceeds of the sale
or re-lease, net proceeds being defined as follows:
The cost basis of the new lease to any third person
or the purchase price at said sale, as the case may
be, less all costs and expenses of Lessor in
repossessing, holding, re-leasing, transporting,
repairing, selling, or otherwise handling the
Equipment.
(v) Proceed by appropriate action either at law or in
equity or bankruptcy to enforce performance by Lessee
of the applicable covenants of this Lease or to
recover damages for breech thereof;
(vi) Pursue any other remedy available to Lessor at law or
in equity.
(c) In the Event of Default all amounts remaining unpaid shall
accrue interest at the rate of twenty-one percent (21%) per
annum both before and after judgment.
16. COLLECTION CHARGES, RIGHT OF SET-OFF. Should Lessee fail to pay when
due any part of the rent herein reserved or any other sum required to
be paid to Lessor by Lessee, Lessee shall pay to Lessor a reasonable
late charge of five percent (5%) of all payments due, together with
all other expenses necessarily incurred by reason of Lessee's default
including reasonable attorney's fees in connection with any efforts by
Lessor to recover possession of any of the Equipment or to enforce any
of the terms and conditions or provisions hereof or to obtain damages
for any breach hereof. Upon the occurrence of any Event of Default,
Lessor is hereby authorized at any time and from time to time, without
notice to Lessee (any such notice being expressly waived by Lessee) to
set off and apply any and all deposits at any time held to any
obligation of Lessee under this Lease and any Equipment Schedules
hereto. In the event that this Lease or any Equipment Schedule or
Schedules hereto are assigned by Lessor, the Assignee shall be
entitled to the same rights of set off as Lessor for any and all
deposits (general or special, time or demand, provisional of final) at
any time held by Assignee against any obligations of Lessee.
17. ADDITIONAL FEES. In addition to the rent provided herein, Lessee
agrees to pay to Lessor reasonable fees for preparation of documents,
filing and/or recording fees, plus all other costs and expenses
incurred by Lessor in negotiating, preparing, enforcing, or protecting
Lessor's rights under this Lease or any Equipment schedules hereto,
including but not limited to, all attorney's fees whether or not legal
proceedings are instituted, all costs and expenses of obtaining
abstracts and title reports, title insurance, appraisals, foreclosure
reports, and all costs incurred in preserving, storing, or selling any
Item of Equipment. Further, Lessor may charge a Lease Origination Fee
which shall be disclosed to Lessee prior to the execution of this
Lease, or any Equipment Schedules hereto.
18. PERFORMANCE OF LESSEE'S OBLIGATIONS BY LESSOR. In the event that
Lessee shall fail duly and promptly to perform any of its obligations
under this Lease, or any Equipment Schedule hereto, Lessor may, at its
option, immediately or at any time thereafter perform the same for the
account of Lessee without thereby waiving such default, and any amount
paid for expenses or liability incurred by Lessor in such performance,
together with interest thereon at a rate of twenty-one percent (21%)
per annum, shall be payable by Lessee upon demand as additional rent
for the leased Equipment.
19. NOTICES, REMEDIES, WAIVERS, SUCCESSORS. All notices relating hereto
shall be delivered in person to an office of Lessor or Lessee or shall
be mailed by United States mail postage prepaid to Lessor or Lessee at
its respective address shown above or at any later address last known
to the sender. All remedies of Lessor hereunder are cumulative and not
alternative. A waiver of a default shall not be a waiver of any other
subsequent default. This Lease shall be binding upon Lessor and Lessee
and Lessee's heirs, executors, administrators, successors, and assigns
and shall inure to the benefit of the successor and assigns of Lessor.
20. ARBITRATION DISCLOSURES.
(i) Arbitration is usually final and binding on the parties and
subject to only very limited review by a court.
(ii) The parties are waiving their right to litigate in court,
including their right to a jury trial.
(iii) Pre-arbitration discovery is generally more limited and
different from court proceedings.
(iv) Arbitrators' awards are not required to include factual
findings or legal reasoning and any party's right to appeal or
to seek modification of rulings by arbitrators is strictly
limited.
(v) A panel of arbitrators might include an arbitrator who is or
was affiliated with the banking industry.
ARBITRATION PROCEDURES:
(a) Any controversy or claim between or among the parties, including but
not limited to those arising out of or relating to this Agreement or
any agreements or instruments relating hereto or delivered in
connection herewith, AND including but not limited to a claim based on
or arising from an alleged tort, shall at the request of any party be
determined by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. The
arbitration proceedings shall be conducted in Salt Lake City, Utah.
The arbitrator(s) shall have the qualifications set forth in
subparagraph (c) hereto. All statutes of limitations which would
otherwise be applicable in a judicial action brought by a party shall
apply to any arbitration or reference proceeding hereunder.
(b) In any judicial action or proceeding arising out of or relating to
this Agreement or any agreements or instruments relating hereto or
delivered in connection herewith, including but not limited to a claim
based on or arising from an alleged tort, if the controversy or claim
is not submitted to arbitration as provided and limited in
subparagraph (a) hereto, all decisions of fact and law shall be
determined by a reference in accordance with Rule 53 of the Federal
Rules of Civil Procedure or Rule 53 of the Utah Rules of Civil
Procedure or other comparable, applicable reference procedure. The
parties shall designate to the court the referee(s) selected under the
auspices of the American Arbitration Association in the same manner as
arbitrators are selected in Association-sponsored arbitration
proceedings. The referee(s) shall have the qualifications set forth in
subparagraph (c) hereto.
(c) The arbitrator(s) or referee(s) shall be selected in accordance with
the rules of the American Arbitration Association from panels
maintained by the Association. A single arbitrator or referee shall be
knowledgeable in the subject matter of the dispute. Where three
arbitrators or referees conduct an arbitration or reference
proceeding, the claim shall be decided by a majority vote of the three
arbitrators or referees, at least one of whom must be knowledgeable in
the subject matter of the dispute and at least one of whom must be a
practicing attorney. The arbitrator(s) or referee(s) shall award
recovery of all costs and fees (including attorneys' fees,
administrative fees, arbitrators' fees, and court costs). The
arbitrator(s) or referee(s) also may grant provisional or ancillary
remedies such as, for example, injunctive relief, attachment, or the
appointment of a receiver, either during the pendency of the
arbitration or reference proceeding or as part of the arbitration or
reference award.
(d) Judgment upon an arbitration or reference award may be entered in any
court having jurisdiction, subject to the following limitation: the
arbitration or reference award is binding upon the parties only if the
amount does not exceed Four Million Dollars ($4,000,000.00); if the
award exceeds that limit, either party may commence legal action for a
court trial de novo: Such legal action must be filed within thirty
(30) days following the date of the arbitration or reference award; if
such legal action is not filed within that time period, the amount of
the arbitration or reference award shall be binding. The computation
of the total amount of an arbitration or reference award shall include
amounts awarded for arbitration fees, attorneys' fees, and all other
related costs.
(e) At the Bank's option, foreclosure under a deed of trust or mortgagee
may be accomplished either by exercise of a power of sale under the
deed of trust or mortgage or by judicial foreclosure. The institution
and maintenance of an action for judicial relief or pursuit of a
provisional or ancillary remedy shall not constitute a waiver of the
right of any party, including the plaintiff, to submit the controversy
or claim to arbitration if any other party contests such action for
judicial relief.
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<PAGE> 4
(f) Notwithstanding the applicability of other law to any other provision
of this Agreement, the Federal Arbitration Act, 9 U.S.C. s 1 et seq.,
shall apply to the construction and interpretation of this arbitration
paragraph.
21. GOVERNING LAWS. This agreement shall be deemed to have been made and
executed in UTAH regardless of the order in which the signatures of
the parties shall be affixed hereto and shall be interpreted and the
right and liabilities of the parties hereto determined in accordance
with the laws of the State of UTAH except as may be provided in
Section 20.
22. CONFLICT OF APPLICABLE LAW. If any provision of this Lease is contrary
to, prohibited by, or deemed invalid under applicable laws or
regulations of any jurisdiction in which it is sought to be enforced,
than such provision shall be deemed inapplicable and deemed omitted
but shall not invalidate the remaining provisions hereof.
23. STATEMENTS. Lessee will furnish Lessor within 90 days after the close
of each fiscal year of Lessee, a balance sheet and profit and loss
statement as of the end of such year and quarterly financial
statements, all prepared in accordance with generally accepted
accounting principles, and such other information respecting the
financial condition and operations of Lessee as Lessor may from time
to time reasonably request.
24. UNIFORM COMMERCIAL CODE. At Lessor's request, Lessee shall execute and
deliver to Lessor any document Lessor believes will protect Lessor's
ownership interest in said Equipment under the Uniform Commercial Code
as adopted by the State of Utah or any other state where Equipment is
to be located. The execution and/or filing of any such document shall
not alter the parties' respective interest in and rights to the
Equipment. Without limiting the foregoing, Lessee hereby authorizes
and irrevocably appoints Lessor as Lessee's attorney in fact, with
full power of substitution, to execute and file any financing
statement and other documents in all places where necessary to protect
Lessor's interest in the Equipment.
25. LESSEE REPRESENTATIONS AND WARRANTIES. Lessee represents and warrants
as follows:
(i) Lessee is a corporation, duly organized, validly existing, and
in good standing under the laws of the state of its
incorporation and in all jurisdictions where the leased
equipment will be located or operated under the Lease.
(ii) Lessee has all requisite power and authority to conduct its
business, to own and lease its properties and to enter into
and perform all of its obligations under the Lease.
(iii) This Lease has been duly authorized by Lessee and constitutes
the valid, legal, and binding obligation of Lessee and is
enforceable in accordance with its terms.
(iv) No event has occurred or is continuing which constitutes an
event of default under the Lease. There is no action, suit,
order, or proceeding pending or threatened against or
affecting Lessee before or by any court, administrative agency
or other governmental authority which brings into question the
validity of the transaction contemplated by the Lease or which
might materially impair the ability of Lessee to perform its
obligations under the Lease.
(v) Neither the execution and delivery by Lessee of the Lease, nor
the compliance by Lessee with the provisions hereof, conflicts
with or results in a breach of the provisions of the Articles
of Incorporation, or bylaws of Lessee, or any applicable law,
judgment, order, writ, injunction, decree, rule, or regulation
of any court, administrative agency or other governmental
authority, or of any agreement or other instrument to which
Lessee is bound, or constitutes or will constitute a default
under any thereof.
26. ENTIRE AGREEMENT. This Lease contains the entire agreement between the
parties and may not be changed, modified, terminated, or
discharged except in writing. There are no promises, terms,
conditions, or obligations other than those contained herein;
and this Lease shall supersede all previous communications,
representations, or agreements, either verbal or written,
Initial Here between the parties hereto. This agreement is, and is intended
to be a lease, and Lessee does not acquire hereby any right,
title, or interest whatsoever, legal or equitable, in or to
any of the Equipment or the proceeds of the sale of any
____________ Equipment, except its interest as a Lessee hereunder.
By execution hereof, the signer hereby
certifies that he has read four
pages of this Agreement, and that he
is duly authorized to execute this
lease on behalf of the Lessee.
Executed this ______ day of ____________, 1995.
National Applied Computer Technologies
______________________________________________
Lessee
___________________________ By____________________________________________
Witness to Lessee Signature Authorized Signature Title
______________________________________________
Print Name of Signatory
State of )
)ss
County of )
Subscribed and sworn to before me this ______ day of ___________, 1995.
_____________________________
Notary Public
_____________________________
Residing at
Accepted this ______ day of ___________________, 1995.
ZIONS CREDIT CORPORATION
___________________________________________
Lessor
By_________________________________________
Norman Weldon
Title: Vice President
_____________________________________
THIS LEASE CANNOT BE CANCELLED
Rev: 10/13/94 Page 4 of 4
<PAGE> 5
ZIONS CREDIT CORPORATION
May 8, 1995
- ---------------------------------- --------------------------------------
(Insurance Agent) Schedule # 1
National Applied Computer Technologies
- ---------------------------------- --------------------------------------
(Address)
744 South 400 East
- ---------------------------------- --------------------------------------
Orem, UT 84058
- ---------------------------------- --------------------------------------
(Area) (Telephone)
Dear Agent:
Effective: May 8, 1995, we entered into a lease agreement with Zions
Credit Corporation for equipment incidental to our operations. Their insurable
interest is shown on the attached form which must be completed in full, signed,
and returned to them within thirty days. Any premium charged is our
responsibility.
If you are not able to use this form, Zions Credit Corporation will
require a memorandum copy of the policy, with the endorsements for their
interests attached. The Acord 25, or other "certificate" form, which contains
the wording: "will endeavor to", "but failure to mail such notice shall impose
no obligation or liability of any kind upon the company, its agents or
representatives, is not acceptable.
If you have questions, please call the insurance coordinator at Zions
Credit Corporation (801) 524-4791.
Thank you for providing this service as agent of record.
National Applied Computer Technologies
______________________________________
Lessee
By:____________________________________
Title:_________________________________
(Please fill in complete insurance information above.)
===============================================================================
To Lessee:
This letter will be sent directly to your insurance company for immediate
coverage. If Zions Credit Corporation does not receive the evidence of
coverage or a copy of the policy in thirty days, insurance may be taken out
with Zions Insurance Agency to protect our interest, and if so, the premium
amount will be added on to your lease agreement.
<PAGE> 6
Lease No: 6942
EQUIPMENT SCHEDULE Lease Date: May 8, 1995
(Option) Schedule No: 1
Schedule Date: May 8, 1995
ZIONS CREDIT CORPORATION (hereinafter "Lessor"), a Utah corporation, with
offices at 37 West 100 South, Salt Lake City, Utah and National Applied
Computer Technologies (hereinafter "Lessee") with offices at 744 South 400
East, Orem, UT 84058 have entered into a Master Finance Lease No. 6942, dated
May 8, 1995 (herein incorporated by reference and called the "Lease") pursuant
to which Lessor has agreed to lease to Lessee, and Lessee has agreed to lease
from Lessor, the equipment described in one or more Equipment Schedules to the
Lease.
NOW, THEREFORE, Lessee by executing this Equipment Schedule and Lessor
by accepting it hereby agree as follows:
1. EQUIPMENT. The Lessor hereby leases to Lessee and Lessee hereby
leases from Lessor the property described in the Attached Schedule "A"
("Equipment") upon the terms and conditions of the Lease except as
expressly provided herein.
2. Lessee shall pay all rents to Lessor at the office of Lessor in Salt
Lake City, Utah or at such other place as Lessor may hereafter
designate. Rent payments are due monthly in advance commencing
, 1995, and subsequently on the same day of each month thereafter for
a period of 48 months. The total advance rental of $1,086.55
(representing the first months payment(s)) is due at the time of
signing this Equipment Schedule. The rental amount is as follows:
<TABLE>
<S> <C>
Rent: $1,023.84
Use Tax (6.125%): 62.71 (or applicable rate at time rental is due)
TOTAL RENT: $1,086.55
</TABLE>
3. LEASE TERM. The term of this Lease with respect to the Equipment
described herein commences on , 1995, and unless earlier terminated in
accordance with the provisions of the Lease, expires on
, 1999.
4. OPTION TO PURCHASE. Provided this Lease has not been earlier
terminated, and Lessee has faithfully performed all terms and
conditions hereunder, including payment of all rents and other sums
when due, and Lessee is not then in default, Lessee shall have the
option to purchase, immediately upon expiration of the Lease Term, all
but not less than all property covered by this Lease for the amount of
$1.00 plus all applicable taxes.
5. PROPERTY TAXES. Zions Credit Corporation ("Lessor") is the owner of
the leased equipment. With the exception of titled vehicles, Lessor
will declare the equipment with the taxing authorities, obtain and pay
the tax bill, and then invoice Lessee for the property taxes. If
Lessee believes any of the leased equipment is property tax exempt,
Lessee must inform Lessor prior to commencing the lease.
6. Lessee irrevocably authorizes Lessor to insert the commencement and
expiration date of the Lease term and the commencement date of the
Lease payments on this Equipment Schedule and the serial number(s) of
the Equipment on the attached Schedule "A".
Executed this day of ,19 .
National Applied Computer Technologies
______________________________________________
Lessee
______________________________ By:___________________________________________
Witness
Title:________________________________________
Accepted this_______day of _____________, 19____.
ZIONS CREDIT CORPORATION
__________________________________________
Lessor
By:_______________________________________
Norman Weldon
Title: Vice President
------------------------------------
Rev: 2-17-95
<PAGE> 7
SCHEDULE "A"
Page 1 of 1
This schedule is attached to and forms a part of the Master Finance Lease No.
6942 Schedule No. 1 dated May 8, 1995 between National Applied Computer
Technologies, as Lessee and Zions Credit Corporation, as Lessor.
_______________________________________________________________________________
DESCRIPTION OF EQUIPMENT
Equipment Location: 744 South 400 East, Orem, UT 84058
1 - Digital Key-Bx S-400 Telephone System to include:
3- Executive Dap Base
3- Expanded Display
50- Display Speakerphone Station
6- Speakerphone Station
2- Telrad Link Data Card
7-4 Button Set
2- Add On Module
66- K Style Handsets for DKeyBX
1- Digital 400 Basic Pkg
1- Digital 400 Under Carriage
1- Digital 400 Power Supply
1-400 Memory Cartridge
1- Option Card
2- Option Module
4- Digital Station Card
2- Co Loop Start Card
1- T-1 Interface Card
1- I.V.M. 4 Port System
1- I.V.M. 2 Port Expansion Card
Together with all present and future accessories, attachments, or improvements
thereto and replacements or substitutions therefor and proceeds thereof.
National Applied Computer Technologies
__________________________________________
Lessee
By:_______________________________________
Title:____________________________________
<PAGE> 8
Lease No: 6942
Lease Date: May 8, 1995
Schedule No: 1
Schedule Date: May 8, 1995
DELIVERY AND ACCEPTANCE
To: Zions Credit Corporation
The Items of Equipment described in the above referenced Master Finance Lease
and Equipment Schedule have been received by us on the date below. We certify
that all Items of Equipment have been fully completed, that the Items of
Equipment have been examined and/or tested and are in good order and operating
condition and are in all respects satisfactory and acceptable to us as
delivered.
You are hereby irrevocably authorized and directed to deliver the Lease funds
to the following in the amounts specified below:
Name: Tri-Tel Communications, Inc.
Address: 162 East 4500 South
Salt Lake City, UT 84107
Amount: $40,516.00
National Applied Computer Technologies
__________________________________________
Lessee
By:_______________________________________
Title:____________________________________
Equipment Acceptance Date:_____________________________________________________
<PAGE> 9
ZIONS CREDIT CORPORATION
_______________________________________________________________________________
P.O. Box 3954
Salt Lake City
Utah 84110-3954
(801) 524-4791
Fax (801) 524-4988
INVOICE
Due Date: Due upon signing lease documents
Lessee: National Applied Computer Technologies
Lease #: 6942, Sch. #2
Equipment: Port Advanced Hammer Package on Rackmount System
<TABLE>
<S> <C>
First Months Payment . . . . . . . . . . $1,451.91
Closing Fee . . . . . . . . . . . . . . . $ 914.54
Total Amount Due . . . . . . . . . . . . $2,366.45
=========
</TABLE>
<PAGE> 10
Lease No: 6942
EQUIPMENT SCHEDULE Lease Date: May 8, 1995
(Option) Schedule No: 2
Schedule Date: July 21, 1995
ZIONS CREDIT CORPORATION (hereinafter "Lessor"), a Utah corporation, with
offices at 37 West 100 South, Salt Lake City, Utah and National Applied Computer
Technologies (hereinafter "Lessee") with offices at 744 South 400 East, Orem, UT
84058 have entered into a Master Finance Lease No. 6942 dated May 8, 1995
(herein incorporated by reference and called the "Lease") pursuant to which
Lessor has agreed to lease to Lessee, and Lessee has agreed to lease from
Lessor, the equipment described in one or more Equipment Schedules to the Lease.
NOW, THEREFORE, Lessee by executing this Equipment Schedule and Lessor by
accepting it hereby agree as follows:
1. EQUIPMENT. The Lessor hereby leases to Lessee and Lessee hereby leases
from Lessor the property described in the Attached Schedule "A"
("Equipment") upon the terms and conditions of the Lease except as
expressly provided herein.
2. Lessee shall pay all rents to Lessor at the office of Lessor in Salt
Lake City, Utah or at such other place as Lessor may hereafter
designate. Rent payments are due monthly in advance commencing
, 1995, and subsequently on the same day of each month
thereafter for period of 60 months. The total advance rental of
$1,451.91 (representing the first months payment(s)) is due at the
time of signing this Equipment Schedule. The rental amount is
as follows:
Rent: $1,368.11
Use Tax (6.125%): 83.80 (or applicable rate at time rental is due)
---------
TOTAL RENT: $1,451.91
=========
3. LEASE TERM. The term of this Lease with respect to the Equipment
described herein commences on , 1995, and unless earlier terminated in
accordance with the provisions of the Lease, expires on , 2000.
4. OPTION TO PURCHASE. Provided this Lease has not been earlier
terminated, and Lessee has faithfully performed all terms and
conditions hereunder, including payment of all rents and other sums
when due, and Lessee is not then in default, Lessee shall have the
option to purchase, immediately upon expiration of the Lease Term, all
but not less than all property covered by this Lease for the amount of
$1.00 plus all applicable taxes.
5. PROPERTY TAXES. Zions Credit Corporation ("Lessor") is the owner of the
leased equipment. With the exception of titled vehicles, Lessor will
declare the equipment with the taxing authorities, obtain and pay the
tax bill, and then invoice Lessee for the property taxes. If Lessee
believes any of the leased equipment is property tax exempt, Lessee
must inform Lessor prior to commencing the lease.
6. Lessee irrevocably authorizes Lessor to insert the commencement and
expiration date of the Lease term and the commencement date of the
Lease payments on this Equipment Schedule and the serial number(s) of
the Equipment on the attached Schedule "A".
Executed this day of , 1995.
National Applied Computer Technologies
--------------------------------------------
Lessee
By:
- -------------------------------- ----------------------------------------
Witness
Title:
-------------------------------------
Accepted this day of , 1995.
ZIONS CREDIT CORPORATION
- ---------------------------------------
Lessor
By:
-----------------------------------
Norman Weldon
Title: Vice President
---------------------------------
Rev: 2-17-95
<PAGE> 11
SCHEDULE "A"
Page 1 of 1
This schedule is attached to and forms a part of the Master Finance Lease
No. 6942 Schedule No. 2 dated July 21, 1995 between National Applied Computer
Technologies, as Lessee and Zions Credit Corporation, as Lessor.
_______________________________________________________________________________
DESCRIPTION OF EQUIPMENT
Equipment Location: 744 South 400 East, Orem, UT 84058
1- T-48 R-48 Port Advanced Hammer Package on Rackmount Systems
1- TCP/IP
1- SR-8 Ports Speech Rec
1-4 Ports of Analog
Together with all present and future accessories, attachments, or improvements
thereto and replacements or substitutions therefor and proceeds thereof.
National Applied Computer Technologies
__________________________________________
Lessee
By:_______________________________________
Title:____________________________________
<PAGE> 12
Lease No: 6942
Lease Date: May 8, 1995
Schedule No: 2
Schedule Date: July 21, 1995
DELIVERY AND ACCEPTANCE
To: Zions Credit Corporation
The Items of Equipment described in the above referenced Master Finance Lease
and Equipment Schedule have been received by us on the date below. We certify
that all Items of Equipment have been fully completed, that the Items of
Equipment have been examined and/or tested and are in good order and operating
condition and are in all respects satisfactory and acceptable to us as
delivered.
You are hereby irrevocably authorized and directed to deliver the Lease funds
to the following in the amounts specified below:
Name: Hammer Technologies, Inc.
Address: 226 Lowell Street
Wilmington, MA 01887
Amount: $66,175.00
National Applied Computer Technologies
__________________________________________
Lessee
By:_______________________________________
Title:____________________________________
Equipment Acceptance Date:_____________________________________________________
<PAGE> 13
ZIONS CREDIT CORPORATION
July 21, 1995
______________________________________ ____________________________________
(Insurance Agent) Schedule # 2
National Applied Computer Technologies
______________________________________ ____________________________________
(Address)
744 South 400 East
______________________________________ ____________________________________
Orem, UT 84058
______________________________________ ____________________________________
(Area) (Telephone)
Dear Agent:
Effective: July 21, 1995, we entered into a lease agreement with Zions
Credit Corporation for equipment incidental to our operations. Their insurable
interest is shown on the attached form which must be completed in full, signed,
and returned to them within thirty days. Any premium charged is our
responsibility.
If you are not able to use this form, Zions Credit Corporation will require
a memorandum copy of the policy, with the endorsements for their interests
attached. The Acord 25, or other "certificate" form, which contains the
wording: "will endeavor to", "but failure to mail such notice shall impose no
obligation or liability of any kind upon the company, its agents or
representatives," is not acceptable.
If you have questions, please call the insurance coordinator at Zions
Credit Corporation (801) 524-4791.
Thank you for providing this service as agent of record.
National Applied Computer Technologies
__________________________________________
Lessee
By:_______________________________________
Title:____________________________________
(Please fill in complete insurance
information above.)
===============================================================================
To Lessee:
This letter will be sent directly to your insurance company for immediate
coverage. If Zions Credit Corporation does not receive the evidence of
coverage or a copy of the policy in thirty days, insurance may be taken out
with Zions Insurance Agency to protect our interest, and if so, the premium
amount will be added on to your lease agreement.
<PAGE> 1
EXHIBIT 10.10
PROMISSORY NOTE AND SECURITY AGREEMENT
$928,210.00 November 25, 1996
Promise to Pay. For value received, the undersigned (referred to
collectively and individually in this Note as "Maker"), jointly and severally
promise and agree to pay to National Applied Computer Technologies, Inc., a
Utah corporation with a place of business at 382 East 720 South, Orem, Utah
84958 ("NACT"), in lawful money of the United States of America, the principal
sum of Nine Hundred Twenty-Eight Thousand Two Hundred One Dollars ($928,201
.00) plus interest from the date of this Note as provided below.
Additional Amounts. This Note shall also encompass and govern any
additional sums that the Maker may borrow from NACT in the future without need
of any additional documentation, which additional sums loaned to Maker by NACT
shall automatically be added to the principal amount payable hereunder and
shall be subject to the same rate of interest charged hereunder and all other
terms and conditions hereof.
Interest. Interest shall accrue on the unpaid balance of this Note at
a rate of Twelve percent (12%) per annum, and shall be paid as provide below.
After the occurrence of any event of default, and during the continuance of the
default, this Note shall bear interest at a rate of eighteen percent (18%) per
annum.
Payment. The principal and interest shall be payable in monthly
installments beginning on December 2, 1996 and continuing thereafter on the
20th day of each succeeding month until all sums payable under this Note have
been paid in full. The amount of each monthly installment, including principal
and interest shall be equal to
(a) six percent (6%) of Makers's combined gross billing for the
immediately preceding calendar month, plus
(b) the greater of (i) Twenty-five percent (25%) of Maker's
combined net profits before taxes for the immediately
preceding calendar month, or (ii) Two Thousand Five Hundred
dollars ($2,500)
For purposes of this Note, combined gross billings during a calendar
month shall be calculated by dividing the carrier charges billed to Maker
during the month by 75%. Net profit before taxes shall mean Gross billing less
carrier usage and operating expenses.
Financial Statements. Together with each payment under this Note,
maker shall provide to NACT, a statement of operations and cash flow for the
preceding calendar month, and a statement indicating how the monthly payment
was calculated. All financial statements provided to NACT hereunder shall be
prepared using generally accepted accounting principles consistently applied.
Maker shall not change any of its accounting methods or procedures from methods
and procedures used in preparing financial statements that previously have been
provided to NACT.
Application of Payments. All payments shall be applied first, to
expenses incurred to
<PAGE> 2
enforce the Maker's obligations under this Note, second, to any accrued
interest, and the remainder shall be applied to principal.
Prepayment. Prepayments hereunder may be made at any time and in any amount
without penalty. Any partial prepayment made under this Note shall be applied
to installments due in reverse order of maturity and shall not operate to
postpone, suspend the obligation to make, or alter the size of any future
payment(s) due hereunder.
Place and Manner of Payment. All payment shall be made by certified
check or other form of payment acceptable to NACT and shall be delivered to
NACT at the address first set out above, attn: Eric Gurr.
Default. Each of the following shall constitute an event of default
under this Note:
(a) Maker fails to pay any sum due under this Note in the
agreed upon amount on the due date as promised in this
Note, and the failure remains uncured for a period of
fifteen (15) days.
(b) Maker fails to perform any promise made by Maker in
this Note Or any other written agreement with NACT.
(c) Any Maker or any guarantor or person acknowledging
this Note makes any false representation to NACT, or
provides information that is false, or refuses to
supply financial information to NACT upon NACT's
request.
(d) Any Maker or guarantor is dissolved or liquidated, or
any Maker ceases to function as a going concern or
ceases to conduct its operations in the normal course
of business, or makes an assignment for the benefit
of its property, or any proceedings are commenced by
or against Maker under any bankruptcy, insolvency, or
debtor's relief law.
Certain Rights upon Default. In the event of any default under this
Note, all sums payable hereunder shall be accelerated and shall become
immediately due and payable. Maker agrees to pay any and all costs and expenses
(regardless of the particular nature thereof and whether incurred with or
without suit or before or after judgment) that may be incurred by NACT in
connection with the enforcement of any of NACT's rights under this Note,
including but not limited to NACT's court costs and reasonable attorneys' fees.
Security. As security for all of Maker's obligations under this Note,
Maker hereby grants to NACT a security interest in all of its accounts
receivable, inventory, equipment, capital assets and customer lists as shown on
Schedule A to this Note. As further security, Maker hereby grants to NACT an
assignment of its contracts with all of its customers. In the event of any
default under this Note, NACT shall have the right immediately to use Maker's
customer lists
<PAGE> 3
without compensation to Maker and to contact Maker's customers and obtain the
customers' consent to the assignment granted hereunder and/or to enter into new
agreements with the customers. Any and all sums received by NACT arising out of
such agreements , less expenses incurred by NACT in connections therewith,
shall be applied to this Note. NACT shall also have the right to take
possession of any tangible assets given as security for this Note and to notify
accounts to make payments directly to NACT. All of NACT's rights hereunder may
be exercised by NACT without judicial process.
Further Assurances. Maker agrees to do such further acts and execute
and deliver such further documents and/or instruments as may be necessary or
desirable to assure payment of all amounts payable under this Note, and Maker
agrees to cooperate with NACT in filing any financing statement or other
document reasonably deemed necessary by NACT to perfect NACT's security
interest hereunder.
Certain Waivers by Maker. Maker waives presentment for payment,
protest, demand, notice of protest, notice of dishonor, and notice of
nonpayment, and expressly agrees that this Note, or any payment hereunder, may
be extended from time to time by NACT hereof without in any way affecting
Maker's liability. This Note shall be fully binding upon Maker and Maker's
lawful heirs, representatives, successors, and permitted assignees.
Waiver by NACT. The acceptance of any payment after the occurrence of
a default or any event giving rise to a right of acceleration shall not
constitute a waiver of the right of acceleration in connection with the default
or event or any subsequent default or event.
Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of Utah, and the parties hereto consent
to personal jurisdiction in any court in the State of Utah.
MC INTERNATIONAL OVERSEAS
/s/ Brian M. Miller /s/ Brian M. Miller
____________________________________ ___________________________________
Name: Brian M. Miller Name: Brian M. Miller
Title: Vice President of Operations Title: Vice President of Operations
The undersigned represent and warrant that they are familiar with the
operations of the makers of this Note, that the accounts being handled by
Lender under the Maker's names are accounts of the makers, and that the
security interest granted under this Note is valid and binding with respect to
such accounts and the other assets identified herein.
/s/ Larry F. Gehl 12/2/96 /s/ Elia Tasca 12/2/96
______________________________ ______________________________
Larry Gehl Date Elia Tasca Date
/s/ Brian M. Miller 12/2/96
______________________________
Brian Miller Date
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
NACT Telecommunications, Inc.
We consent to the use in this Prospectus of our report dated November 21, 1996,
except as to Note 13 which is as of November 26, 1996 relating to the financial
statements of NACT Telecommunications, Inc. included herein as of and for the
years ended September 30, 1995 and 1996, and to the references to our firm under
the headings "Selected Financial Data" and "Experts" in this Prospectus.
KPMG Peat Marwick LLP
Salt Lake City, Utah
December 11, 1996
<PAGE> 1
[SQUIRE & COMPANY, PC LETTERHEAD]
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS
The Board of Directors
NACT Telecommunications, Inc.
We consent to the use in this Prospectus of our report dated January 5, 1995
relating to the financial statements of NACT Telecommunications, Inc. (formerly
known as National Applied Computer Technologies, Inc.), included therein, for
the fiscal year ended September 30, 1994 and to the references to our firm
under the heading "Selected Financial Data" and "Experts" in this Prospectus.
SQUIRE & CO.
Squire & Co.
Orem, Utah
December 11, 1996
<PAGE> 1
EXHIBIT 23.4
Universal
Campus
Credit Union
November 29, 1996
Thomas E. Sawyer, Chairman
NACT Telecommunications, Inc.
382 East 720 South
Orem, Utah 84058
Gentlemen:
I hereby consent to your referencing me in the "Management Section" of your
form S-1 Registration Statement as an individual who will become a director
upon completion of the public offering.
Sincerely,
/s/ Ronald S. Eliason
- --------------------------
Ronald S. Eliason
President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 694,359
<SECURITIES> 250,000
<RECEIVABLES> 5,322,326
<ALLOWANCES> 410,000
<INVENTORY> 2,406,399
<CURRENT-ASSETS> 7,518,121
<PP&E> 1,145,404
<DEPRECIATION> 427,600
<TOTAL-ASSETS> 14,684,750
<CURRENT-LIABILITIES> 3,273,271
<BONDS> 0
0
0
<COMMON> 9,244,847
<OTHER-SE> (171)
<TOTAL-LIABILITY-AND-EQUITY> 14,684,750
<SALES> 16,284,878
<TOTAL-REVENUES> 16,284,878
<CGS> 10,257,404
<TOTAL-COSTS> 10,257,404
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 942,785
<INTEREST-EXPENSE> 14,202
<INCOME-PRETAX> 271,942
<INCOME-TAX> 78,184
<INCOME-CONTINUING> 193,758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 193,758
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
