UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
/ / TRANSISTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 000-22017
NACT TELECOMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
Delaware 87-0378662
- --------------------------------------- ------------------------------------
(State or Other Jurisdiction (IRS Employer Identification Number)
of Incorporation or Organization)
191 West 5200 North, Provo, Utah 84604
- ---------------------------------------- ------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (801) 802-3000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: At February 13,
1998, there were outstanding 8,129,096 shares of Common Stock, $.01 par
value per share, of the Registrant.
<PAGE>
NACT TELECOMMUNICATIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page Number
-----------
Item 1. Financial Statements:
Balance Sheets
December 31, 1997 and September 30, 1997 . . . . . . . . . . 3
Statements of Income
Three Months Ended December 31, 1997 and 1996 . . . . . . . 4
Statements of Cash Flows
Three months ended December 31, 1997 and 1996 . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . .9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . .12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .12
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
NACT TELECOMMUNICATIONS, INC.
Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
Dec. 31, 1997
(Unaudited) Sept. 30, 1997
--------------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Cash $5,252 $9,947
Marketable securities 7,246 3,247
Accounts receivable, less allowance for doubtful
accounts of $631 in Dec. and $381 in Sept. 9,496 6,841
Notes receivable, less allowance for doubtful
accounts of $295 in Dec. and $250 in Sept. 4,055 3,252
Inventories 2,814 2,780
Prepaid expenses and other assets 216 198
Deferred tax asset - current 817 587
--------------------------------------
Total current assets $29,896 $26,852
Fixed Assets:
Property, plant, and equipment $6,577 $6,337
Less: Accumulated depreciation (698) (554)
--------------------------------------
Net fixed assets $5,879 $5,783
Notes receivable-long term $785 $967
Inventory-long term $225 $225
Intangibles $5,598 $5,776
Other Assets $164 $152
--------------------------------------
Total Assets $42,547 $39,755
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,889 $1,433
Accrued expenses 1,206 963
Current corporate tax liability 1,073 1,353
Deferred Revenue 790 467
Inter company payable 1,743 1,447
--------------------------------------
Total current liabilities $6,701 $5,663
Long Term Liabilities:
Deferred compensation liability $158 $158
Deferred tax liability 1,252 930
--------------------------------------
Total long-term liabilities $1,410 $1,088
Stockholders' Equity:
Common stock, $.01 par value $81 $81
Additional paid-in-capital 28,271 28,130
Retained earnings 6,055 4,781
Unrealized appreciation on marketable securities 29 12
--------------------------------------
Total stockholders' equity $34,436 $33,004
--------------------------------------
Total liabilities and stockholders' equity $42,547 $39,755
======================================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
NACT TELECOMMUNICATIONS, INC.
Statements of Income
(In thousands, except per share data)
Three Months Ended
(Unaudited)
---------------------------------
Dec 31, 1997 Dec 31, 1996
---------------------------------
Revenues:
Product sales $7,300 $4,780
Network carrier sales 1,387 1,610
---------------------------------
Total revenues $8,687 $6,390
Cost of goods sold:
Products $2,158 $1,730
Network carrier usage 1,387 1,558
Amortization of acquired intangibles 170 91
---------------------------------
Total cost of goods sold $3,715 $3,379
---------------------------------
Gross profit $4,972 $3,011
Operating expenses:
Research and development $799 $423
Sales and marketing 767 357
General and administrative 1,362 836
Amortization of acquired intangibles 143 143
---------------------------------
Total operating expenses $3,071 $1,759
---------------------------------
Income from operations $1,901 $1,252
Other Income, net $223 $25
---------------------------------
Income before income taxes $2,124 $1,277
Income taxes $850 $569
---------------------------------
Net income after taxes $1,274 $708
=================================
Weighted average common and common
equivalent shares outstanding:
Basic 8,122 6,114
Diluted 8,443 6,114
Earnings per share:
Basic $0.16 $0.12
Diluted $0.15 $0.12
See accompanying notes to financial statements.
4
<PAGE>
NACT TELECOMMUNICATIONS, INC.
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
(Unaudited) (Unaudited)
-------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $1,274 $708
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 498 322
Provision for loss on accounts and notes receivable 382 218
Provision for loss on inventory 228
Capital contribution by parent company 497
Deferred taxes 91 (10)
Decrease (increase) in operating assets:
Trade accounts and notes receivable (3,658) (2,717)
Inventories (262) (205)
Prepaid expenses and other assets (19) (167)
Increase (decrease) in operating liabilities:
Accounts payable 456 (1,088)
Accrued expenses 243 54
Income taxes payable (280) 71
Payable to GST USA 296 2,110
Deferred revenue and deferred compensation 324 4
-------------------------------------
Net cash provided by (used in)
operating activities (427) (203)
Cash flows from investing activities:
Purchase of land, property, plant and equipment (240) (63)
Proceeds from sale of marketable securities 1,121 250
Purchase of marketable securities (5,103)
Capitalization of software development costs (187) (125)
-------------------------------------
Net cash provided by (used in)
investing activities (4,409) (142)
Cash flows from financing activities:
Proceeds from issuance of common stock 141
Principle payments of capital lease obligations (1)
--------------------------------------
Net cash provided by (used in)
Financing activities 141 (1)
Net (decrease) increase in cash (4,695) (142)
Cash at beginning of period 9,947 694
--------------------------------------
Cash at end of period $5,252 $552
======================================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
NACT TELECOMMUNICATIONS, INC.
Statements of Cash Flows (continued)
(In thousands)
Three Months Ended
December 31,
1997 1996
(Unaudited) (Unaudited)
----------- -----------
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $-0- $2
Income taxes $1,038 $-0-
See accompanying notes to financial statements.
6
<PAGE>
NACT TELECOMMUNICATIONS, INC.
Notes to financial statements
1. Basis of Presentation
The interim financial statements included herein have been prepared by NACT
Telecommunications, Inc. without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such SEC rules and regulations. These condensed financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's September 30, 1997 audited financial
statements filed on form 10K with the SEC in December 1997. In the opinion of
management, the condensed financial statements included herein reflect all
adjustments necessary to present fairly the financial position of the Company as
of December 31, 1997 and September 30, 1997, and the results of its operations
and cash flows for the three month periods ended December 31, 1997 and 1996. The
results of operations for the interim periods are not necessarily indicative of
the results of operations for the full year.
2. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). SFAS 128
established a different method of computing earnings per share than these same
computations under the provisions of Accounting Principles Board Opinion No. 15.
Under SFAS 128, the Company is required to present both basic earnings per share
and diluted earnings per share. SFAS 128 is effective for both interim and
annual periods ending after December 15, 1997. Accordingly, the Company has
adopted SFAS 128 in the first quarter of fiscal 1998.
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the three month periods ended December 31, 1997
and 1996. Diluted earnings per share for the three month periods ended December
31, 1997 and 1996 is computed considering the dilutive effect of stock options,
and is not materially different from the basic earnings per share calculations.
3. Stock Plan
The Company's 1996 Stock Option Plan (the "Stock Option Plan") was approved by
the Board of Directors and 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, and non-qualified stock options. Incentive
stock options may be granted to employees (including officers and directors who
are employees). Non-qualified stock options may be granted to employees,
officers, directors, independent contractors and consultants of the Company. As
of December 31, 1997, 1,250,000 shares were reserved for issuance under the
Stock Option Plan and options to purchase 1,039,065 shares of Common Stock were
outstanding.
Options become exercisable at such times and in such installments as the Board
of Directors or Compensation Committee provides. The Stock Option Plan will
terminate on November 25, 2006, unless earlier terminated by the Board of
Directors.
7
<PAGE>
4. Inventories
<TABLE>
<CAPTION>
Inventories are as follows (in thousands):
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Raw materials $1,577 $1,065
Work-in-process 587 498
Finished goods 189 303
Refurbished inventory held for sale 461 914
--------------------------------------------
$2,814 $2,780
============================================
Inventory-long term $225 $225
============================================
</TABLE>
5. Property and Equipment
Property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Furniture and equipment $311 $280
Computer equipment 900 785
Switch and testing equipment 1,165 1,082
Land 563 563
Building 3,638 3,627
--------------------------------------------
6,577 6,337
Less accumulated depreciation and amortization 698 554
--------------------------------------------
$5,879 $5,783
============================================
</TABLE>
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements that involve risks and
uncertainties. The actual future results of the Company could differ materially
from those statements. Factors that could cause or contribute to such
differences include, but are not limited to, uncertainties regarding market
acceptance of new products and product enhancements, delays in the introduction
of new products or enhancements, size and timing of individual orders,
competition and pricing in the software industry, general economic conditions in
the Company's geographic markets, seasonality of revenues, litigation involving
the Company, and the management of the Company's growth as well as factors
discussed in the Prospectus relating to the Company's initial public offering
consummated in March 1997.
Results of Operations
The following table sets forth certain statement of operations data presented as
a percentage of revenues, for the period indicated:
Three Months Ended
------------------------------------
Dec. 31, 1997 Dec. 31, 1996
------------------------------------
(Unaudited)
Revenues:
Product sales 84.0% 74.8%
Network carrier sales 16.0% 25.2%
------------------------------------
Total revenues 100.0% 100.0%
Cost of goods sold:
Products 24.8% 27.1%
Network carrier usage 16.0% 24.4%
Amortization of acquired intangibles 2.0% 1.4%
------------------------------------
Total cost of goods sold 42.8% 52.9%
------------------------------------
Gross profit 57.2% 47.1%
Operating expenses:
Research and development 9.2% 6.6%
Sales and marketing 8.8% 5.6%
General and administrative 15.7% 13.1%
Amortization of acquired intangibles 1.6% 2.2%
------------------------------------
Total operating expenses 35.3% 27.5%
------------------------------------
Income from operations 21.9% 19.6%
Other Income, net 2.6% 0.4%
------------------------------------
Income before income taxes 24.5% 20.0%
Income taxes 9.8% 8.9%
------------------------------------
Net income after taxes 14.7% 11.1%
====================================
9
<PAGE>
Total Revenues. The Company's revenues increased 35.9% from $6.4 million for the
three months ended December 31, 1996 to $8.7 million in the equivalent 1997
quarter. Product sales, which includes switching application systems, software
and factory support, increased 52.1% from $4.8 million for the three months
ended December 31, 1996 to $7.3 million in the equivalent 1997 quarter,
primarily due to sales of STX and NTS switching and billing systems into the
international market and sales of larger port capacity STX switches. Network
carrier sales decreased 12.5% from $1.6 million for the three months ended
December 31, 1996 to $1.4 million in the equivalent 1997 quarter primarily due
to decreased carrier usage volumes from existing network carrier customers.
Gross Profit.
Product Sales. The Company's gross profit increased 64.5% from $3.1 million for
the three months ended December 31, 1996 to $5.1 million in the equivalent 1997
quarter due to an increase in product sales resulting from sales of the higher
margin, larger port capacity STX switches. Gross profit on product sales as a
percent of product sales was 63.8% and 70.4% for the three months ended December
31, 1996 and 1997, respectively.
Network Carrier Sales. The Company's gross profit decreased 100.0% from $52,000
for the three months ended December 31, 1996 to $0 in the equivalent 1997
quarter primarily due to a decrease in network carrier sales and higher carrier
usage costs from the Company's long distance carriers. Gross profit on network
carrier sales as a percent of network carrier sales was 3.2% and 0.0% for the
three months ended December 31, 1996 and 1997, respectively.
Research and Development. The Company's research and development expenses
increased 88.9% from $423,000 for the three months ended December 31, 1996 to
$799,000 in the equivalent 1997 quarter. The increase is primarily due to an
increase in personnel and other expenditures for completion of several hardware
and software research and development projects designed to enhance the STX
switching platform and upgrade the NTS billing system to a new hardware and
software platform. Capitalized software development costs were approximately
$125,000 and $187,000 for the three months ended December 31, 1996 and 1997,
respectively.
Sales and Marketing. The Company's sales and marketing expenses increased 114.8%
from $357,000 for the three months ended December 31, 1996 to $767,000 in the
equivalent 1997 quarter primarily due to the hiring of additional sales
personnel, the opening of new domestic sales offices, increased advertising and
trade show expenditures, and increased commissions paid as a result of the
increase in product sales.
General and Administrative. The Company's general and administrative expenses
increased 62.9% from $836,000 for the three months ended December 31, 1996 to
$1,362,000 in the equivalent 1997 quarter primarily due to the hiring of new
finance, technical support, training, and facilities management personnel to
support the Company's increased sales, shipments and installations of STX
switching and NTS billing systems, and the additional overhead expenses of the
Company's new headquarters/manufacturing facility which was completed on July 1,
1997.
Amortization of Acquired Intangibles. The Company has included amortization of
acquired intangibles as a component of both cost of sales and operating
expenses. 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 accounting. The excess of the purchase price over the fair
value of the assets acquired 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, has been included in the
balance sheets of the Company with related amortization recorded in cost of
goods sold and other operating expenses. Product support
10
<PAGE>
contracts and software development costs are being amortized over a five year
straight-line period and goodwill is being amortized over a 20 year
straight-line period. In addition, the Company acquired the customer list of its
Eastern Europe network carrier customer in September 1997. This customer list
was recorded on the Company's books at the lower of fair market value or cost as
an intangible asset, and is being amortized to cost of sales over a three year
period.
Income Taxes. The Company's effective tax rate for the three months ended
December 31, 1997 was 40.0%. This is higher than the respective statutory
federal and state tax rates due to amortization of goodwill. This higher
effective tax rate is expected to continue during the amortization period of the
acquired goodwill from GST USA.
Fluctuations in quarterly operating results. 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 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.
Liquidity and Capital Resources.
The Company currently finances its operations, and normal reoccurring capital
expenditures through cash flow from operations and its current cash and
short-term investment balances. For the three months ended December 31, 1997,
operating activities used cash of $0.4 million. Capital expenditures, primarily
for computer and testing equipment, totaled $0.2 million for the three month
period ended December 31, 1997.
As of December 31, 1997, the Company had cash, cash equivalents and marketable
securities totaling $12.5 million, a decrease of $0.7 million from September 30,
1997. This decrease relates primarily to the increases in trade and note
receivable balances from September 30, 1997 to December 31, 1997.
The Company maintains an unsecured bank line of credit expiring in February 1999
that provides borrowings up to $1,000,000 at the bank's prime rate plus one
point. There were no outstanding draws under the line of credit at December 31,
1997.
As of December 31, 1997, the Company was contingently liable under repurchase
agreements for a maximum of $4.2 million to Zions Credit Corporation ("Zions").
Zions provides lease financing to the Company's customers on a recourse basis.
11
<PAGE>
The Company believes that the December 31, 1997 cash and marketable securities
balances, 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.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(4)(vii) Approximately $700,000 of net proceeds from the Company's
initial public offering were used for the purchases of computer and
testing equipment, systems development, and working capital.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
None
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 13, 1998
NACT TELECOMMUNICATIONS, INC.
(Registrant)
/S/ A. Lindsay Wallace
-------------------------------------
A. Lindsay Wallace
President and Chief Executive Officer
/S/ Eric F. Gurr
--------------------------------------
Eric F. Gurr
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-Q for the quarter ended December 31, 1997 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 5,252,000
<SECURITIES> 7,246,000
<RECEIVABLES> 15,262,000
<ALLOWANCES> (926,000)
<INVENTORY> 3,039,000
<CURRENT-ASSETS> 29,896,000
<PP&E> 6,577,000
<DEPRECIATION> (698,000)
<TOTAL-ASSETS> 42,547,000
<CURRENT-LIABILITIES> 6,701,000
<BONDS> 0
<COMMON> 81,000
0
0
<OTHER-SE> 34,355,000
<TOTAL-LIABILITY-AND-EQUITY> 42,547,000
<SALES> 8,687,000
<TOTAL-REVENUES> 8,687,000
<CGS> 3,715,000
<TOTAL-COSTS> 3,071,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 693,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,124,000
<INCOME-TAX> 850,000
<INCOME-CONTINUING> 1,274,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,274,000
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
