SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A-1
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-22017
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NACT TELECOMMUNICATIONS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 87-0378662
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization Number)
191 West 5200 North, Provo, Utah 84604
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (801) 802-3000
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Securities registered pursuant to Section 12(b) of the Act: NONE
Name of each exchange
Title of each class on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
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The aggregate market value at December 23, 1997 of the Registrant's Common
Stock, $0.01 par value (based upon the closing price of $15.00 per share of such
Shares on the Nasdaq Stock Market), held by non-affiliates of the Company was
approximately $45,226,275.00. Solely for the purposes of this calculation,
shares held by directors and officers of the Registrant have been excluded. Such
exclusion should not be deemed a determination or an admission by the registrant
that such individuals are, in fact, affiliates of the Registrant.
At December 23, 1997, there were outstanding 8,128,797 shares of the
registrant's Common Stock, $0.01 par value.
<PAGE>
FORWARD-LOOKING STATEMENTS
This Form 10K contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Although NACT Telecommunications, Inc. (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 Form 10-K 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, the Company's dependence on
recently introduced products and products under development, competition and the
impact of technological change on the Company's products. 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.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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The executive officers, directors and key employees of the Company, their ages
and present positions with the Company are as follows:
Name Age Position(s)
---- --- -----------
A. Lindsay Wallace 48 President, Chief Executive Officer and Director
Eric F. Gurr 38 Chief Financial Officer, Treasurer and Secretary
W. Gordon Blankstein 47 Director
Stephen Irwin 56 Director
Robert L. Olson 47 Director
Clifford V. Sander 60 Director
Ronald S. Eliason 63 Director
Thomas E. Sawyer 65 Director
Gary D. Brown 43 Vice President of Research and Development
Geoffrey Shupe 42 Vice President of Sales and Marketing
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
<PAGE>
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 Telecommunications, Inc., an
indirect parent of the Company ("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 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 has been a director of the Company since March 1997. 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.
Thomas E. Sawyer has been a director of the Company since May 1997. Dr. Sawyer
was Chairman of the Board Emeritus from November 1996 to May 1997, 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.
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
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<PAGE>
Account Representative, and National Account Manager for Sprint from February
1987 through December 1993.
The Board of Directors of the Company currently consists of seven 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.
Item 11. EXECUTIVE COMPENSATION
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The following table sets forth certain information concerning compensation
during the three previous fiscal years of the Company's Chief Executive Officer
and each other most highly compensated executive officer of the Company whose
aggregate cash compensation exceeded $100,000 during the fiscal year ended
September 30, 1997 (collectively, the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------
Annual Compensation Awards Payouts
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Long-Term
Other Annual Securities Incentive All Other
Compensation Underlying Plan Compensation
Name and Principal Position Year Salary($) Bonus($) ($) Options(#) Payouts($) ($)(2)
- --------------------------- ---- ---------- -------- ------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas E. Sawyer(3)........... 1997 -- -- -- 85,000 -- --
Chairman of the 1996 $222,556 $2,066 $5,608(1) -- -- $4,492
Board of Directors 1995 $140,793 $4,733 $14,959(1) -- -- --
A. Lindsay Wallace............ 1997 $165,769 $2,500 -- 160,000 -- $4,308
President and chief 1996 $149,841 $1,036 $27,036(1) -- -- $5,055
Executive Officer 1995 $96,807 $1,300 $63,293(4) -- -- --
Eric F. Gurr.................. 1997 $95,769 $4,550 -- 90,000 -- $10,385
Chief Financial 1996 $70,772 $1,200 $5,035(1) -- -- --
Officer 1995 $53,262 $933 $6,493(1) -- -- --
</TABLE>
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(1) Represent payments made pursuant to the Company's Profit Sharing Plan.
The Company terminated this plan in September 1996.
(2) Represents matching contributions by the Company to its 401(k) Plan.
(3) Dr. Sawyer served as the Company's Chief Executive Officer from October
1988 to March 1996. Dr. Sawyer resigned as Chairman of the Board in
November 1996. From April 1996 until June 30, 1997, his compensation
has been paid entirely by GST USA for services rendered to GST USA and
its subsidiaries.
(4) Represents sales commissions paid.
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<PAGE>
Option Grants Table
NACT Option Grants in Fiscal Year Ended September 30, 1997.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value
---------------------------------------------------------------------- at Assumed Annual Rates
of Stock Price Appreciation for
Option Term(1)
Number of % of Total ------------------------------
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
- ------------------------- -------------- -------------- -------------- --------------
5%($) 10%($)
--------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Sawyer ......... 85,000(2) 9.1% $ 9.35 11/25/01 219,575 485,203
A. Lindsay Wallace ....... 160,000(3) 17.1% $ 9.35 11/25/01 413,317 913,323
Eric F. Gurr ............. 90,000(4) 9.6% $ 9.35 11/25/01 232,491 513,744
</TABLE>
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(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 providing for termination of the option
following termination of employment, nontransferability or difference
in vesting periods.
(2) Such options are currently vested. Options to purchase 25,000 shares of
Common Stock became exercisable on September 30, 1997 and options to
purchase 60,000 shares of Common Stock become exercisable on September
30, 1998.
(3) Options to purchase 80,000 shares of Common Stock vest and become
exercisable 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
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 vested on September 30, 1997 and become exercisable on
September 30, 1998.
(4) Options to purchase 45,000 shares of Common Stock vest and become
exercisable one-third on September 30, 1997, one-third on September 30,
1998 and the remaining one-third on September 30, 1999. Options to
purchase 22,500 shares of Common Stock vest and become exercisable
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 22,500 shares of
Common Stock vested on September 30, 1997 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 $10.00 per share to each of Dr. Sawyer and Mr. Wallace.
Such options expire on May 31, 2001. During the fiscal year ended September 30,
1997, Dr. Sawyer, Mr. Wallace and Mr. Gurr exercised options to purchase 75,000,
22,193 and 21,750 Common Shares of GST, respectively.
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<PAGE>
Option Exercises/Fiscal Year-End Option Values Table
NACT Aggregated Option Exercises during the most recently completed
fiscal year and fiscal year-end option values.
<TABLE>
<CAPTION>
Value(1) of
No. of Shares Unexercised in the
of Common Stock Money Options at
Shares Underlying Unexercised FY-End($)
Acquired on Value Options at FY-End(#) Exercisable/
Name Exercise (#) Realized($) Exercisable/Unexercisable Unexercisable
- ------------------------- --------------- --------------- -------------------------------- -----------------------
<S> <C> <C> <C> <C>
Thomas E. Sawyer............ -- -- 25,000/60,000 $161,575/387,780
A. Lindsay Wallace.......... -- -- 36,667/123,333 $236,979/797,101
Eric F. Gurr................ -- -- 20,625/69,375 $133,299/448,371
</TABLE>
(1) Represents the total gain that would be realized if all in-the-money
options held at September 30, 1997 were exercised, determined by
multiplying the number of shares underlying the options by the
difference between the per share option exercise price and the fair
market value of $15.813 per share at September 30, 1997. An option is
in-the-money if the fair market value of the underlying shares exceeds
the exercise price of the option.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between any member of the Company's Board of
Directors or compensation committee 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, a
director of the Company, serves as a director of each of GST and GST USA and
served as an executive officer of each of GST and GST USA until April 10, 1997.
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.
Employment and Consulting Agreements
The Company has entered into an employment agreement with Mr. Wallace pursuant
to which, effective October 1, 1996, Mr. Wallace is employed as the Company's
President and Chief Executive Officer for a term ending on September 30, 2001.
The agreement provides 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
provides 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 contains 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, 2001. Upon a
change of control of the Company that results in Mr. Wallace's removal from the
Company's Board of Directors, a significant change in the conditions of his
employment or other breach of the agreement, he is to receive liquidated damages
equal to the "base amount," as defined in the United States Internal Revenue
Code of 1986, as amended (the "Code"), of his compensation.
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<PAGE>
The Company has entered into an employment agreement with Mr. Gurr pursuant to
which, effective October 1, 1996, Mr. Gurr is employed as the Company's Chief
Financial Officer for a term ending on September 30, 2001. The terms of Mr.
Gurr's agreement are identical to Mr. Wallace's agreement, except that Mr.
Gurr's agreement provides for an initial base salary of $90,000.
GST USA, Inc., the parent corporation of the Company ("GST USA"), and GST
Telecom entered into a consulting agreement dated April 1, 1996 with Infotec
Consulting, Inc. ("Infotec") under which Dr. Sawyer, a director of the Company,
provided personal services to GST and its subsidiaries, including the Company,
at the rate of $125 per hour for hours invoiced monthly until June 30, 1997. The
agreement provided that Dr. Sawyer render management and technical consulting
services including the development and evaluation of strategic and operational
planning, merger and acquisition proposals, preparation of reports and studies
thereon and assistance in negotiations and discussions pertaining thereto. Such
consulting agreement also contained covenants restricting Dr. Sawyer's ability
to engage in activities competitive with those of GST and its subsidiaries. The
agreement also provided for a payment to Infotec 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. The agreement was
mutually terminated by the parties on April 10, 1997. The Company has entered
into a deferred compensation trust agreement with Dr. Sawyer whereby the Company
funded a trust with $144,000, with principal and related interest thereon to be
paid to Dr. Sawyer based upon a defined payment schedule.
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 and receive (i)
an annual retainer of $15,000, paid quarterly, (ii) $2,500 per committee
appointment, (iii) $1,500 for each Board or committee meeting attended and (iv)
$1,000 per committee meeting for serving as chairman of a committee.
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 (the "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 January 15, 1998, 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.
The maximum number of shares that may be subject to options granted under the
Stock Option Plan to any individual in any calendar year may not exceed 100,000
and the method of counting such shares shall conform to any requirements
applicable to "performance-based" compensation under Section 162(m) of the Code.
It is intended that compensation realized upon the exercise of an option granted
under the Stock Option Plan will thereupon be regarded as "performance-based"
under Section 162(m) of the Code and that such compensation may be deductible
without regard to the limits of Section 162(m) of the Code.
The Board of Directors or the Compensation Committee thereof (the "Compensation
Committee") composed of two or more non-management directors that are
"non-employee directors" within the meaning
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<PAGE>
of Rule 16b-3 promulgated under the Exchange Act and "outside directors" within
the meaning of Section 162(m) of the Code, 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; provided, however, that if an option granted to the Company's Chief
Executive Officer or to any of the Company's other four most highly compensated
officers is intended to qualify as "performance-based" compensation under
Section 162(m) of the Code, the exercise price must equal at least 100% 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
1997), 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, 1997, the Company contributed $88,361
to the 401(k) Plan.
Report on Executive Compensation
Compensation Philosophy
The Compensation Committee is responsible for developing and making
recommendations to the Board of Directors with respect to the Company's
executive compensation and stock option policies and practices. In addition, the
Compensation Committee determines the compensation to be paid to the Chief
Executive Officer and each of the other executive officers of the Company.
The Company's executive compensation programs are designed to enhance the value
of the Company to its shareholders. This is accomplished through policies and
practices that facilitate the achievement
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<PAGE>
of the Company's performance objectives, provide compensation that will attract
and retain the superior talent required by the Company's aggressive goals and
align the executive officers' interests with the interests of its shareholders.
The Company's approach to executive compensation, as implemented by the
Compensation Committee, has been designed to provide a competitive compensation
program that will enable the Company to attract, motivate, reward and retain
individuals who possess the skills, experience and talents necessary to advance
the growth and financial performance of the Company. The Company's compensation
policies are based on the principle that each executive's financial rewards
should be aligned with the financial interests of the shareholders of the
Company. The Compensation Committee also believes that the potential for equity
ownership by management is beneficial in aligning management's and shareholders'
interest in the enhancement of shareholder value. The Company's executive
compensation has two key elements: (i) a long-term component consisting of stock
options and (ii) an annual component, i.e., base salary, with more emphasis
being placed on the long-term component than on the annual component. The
Company has not established a policy with regard to Section 162(m) of the Code
because the Company has not to date paid compensation in excess of $1 million
per annum to any employee.
Salaries
Base salaries for the Company's executive officers are determined initially by
evaluating the responsibilities associated with the position held and the
experience of the individual, and by reference to the competitive marketplace
for management talent, including a comparison of base salaries for comparable
positions at comparable companies within the Company's industry. Adjustments in
salary are determined by evaluating the competitive marketplace, the performance
of the Company, the performance of the executive officer, with respect to the
ability to manage growth of the Company, and any increased responsibilities
assumed by the executive officer. As long term compensation such as stock
options is the more important component of the compensation package, much
consideration is given to the stock options held by such executive officers in
determining their cash remuneration. The Company believes that its executive
officers' salaries are generally less than those of its competitors. The Company
has employment agreements with each of Messrs. Wallace, Gurr, Brown and Shupe
which initially set the base salaries for such individuals.
In determining the cash bonuses and incentive compensation paid to its executive
officers, the Compensation Committee considers the extent of achievement by the
Company of its strategic and operating goals, the level of personal achievement
by the executive officer (such as the level of cost savings achieved by such
executive officer), the executive officer's ability to manage and motivate
employees and the achievement of projects for which the executive officer is
responsible. The Compensation Committee also takes into consideration the extent
of the Company's cash reserves available for such payments.
Compensation of Chief Executive Officer
In addition, with respect to the determination of the Chief Executive Officer's
compensation, the Compensation Committee made comparisons to other companies in
the telecommunications industry carrying on businesses similar to those of the
Company. The consideration accounted for approximately 50% of the determination
of the Chief Executive Officer's salary. The other 50% was based on the
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Compensation Committee's determination of what level of remuneration was
necessary to attract and retain people having the experience and ability of the
Company's Chief Executive Officer.
Stock Option Plan
The Stock Option Plan contributes to the Company's ability to attract and retain
the best available personnel. It is the philosophy of the Compensation Committee
to tie a significant portion of an executive's total opportunity for financial
gain to increases in the value of the Common Stock of the Company. In the belief
that employees who have a proprietary interest in the Company will focus on its
long term success and on building shareholder wealth, the Compensation Committee
uses the Stock Option Plan as a basis to create a foundation for the long term
growth of the Company and increased shareholder value by providing executive
officers and key employees with an opportunity to obtain and build a meaningful
stake in the Company's future.
All employees, including executive officers and part-time employees,
consultants, advisors and directors of the Company are eligible for grants of
stock options pursuant to the Stock Option Plan. During each fiscal year, the
Compensation Committee grants stock options to employees, including executive
officers, who are recommended by management as being in a position to continue
to contribute to the Company's growth and profitability. The number of options
granted to a particular employee is based on management's assessment of his
performance and contribution. Options have been granted to key employees at all
levels of the Company's management. The ultimate value of the options, if any,
depends on the extent to which shares of Common Stock appreciate in market
value.
The Compensation Committee granted five-year options to purchase 32,000 shares
of Common Stock and 30,000 shares of Common Stock to Mr. Wallace and Mr. Gurr,
respectively, in October 1997, in each case at an exercise price of $13.625 per
share. These options vest one-third on October 1, 1998, one-third on October 1,
1999 and the remaining one-third on October 1, 2000.
DATED this 23rd day of January, 1998.
(signed)
Ronald S. Eliason
Committee Chairman
(signed)
Thomas E. Sawyer
Director
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Performance Graph
The following graph compares the percentage change in the cumulative total
shareholder return on the Common Stock (being the percentage increase (or
decrease) in the trading price of the Common Stock based on an investment in the
Common Stock on February 26, 1997 (the first day on which the Common Stock
commenced trading on Nasdaq) with the cumulative total shareholder return of the
Nasdaq Market Value Index and with a communications industry index (which is
shown on the graph as the MG Group Index). For comparison purposes it is assumed
that $100 had been invested in the Common Stock and in the securities contained
in such indices on February 26, 1997.
COMPARE CUMULATIVE TOTAL RETURN
AMONG NACT TELECOMMUNICATIONS, INC.
NASDAQ MARKET INDEX AND MG GROUP INDEX
2/26/97 9/30/97
------- -------
NACT 100.00 166.45
NASDAQ 100.00 129.02
MG 100.00 114.81
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<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- ---------------------------------------------------
MANAGEMENT
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The following table sets forth information concerning ownership of the Company's
Common Stock outstanding as of January 23, 1998 by (i) each person known by the
Company to be the beneficial owner of more than five percent (5%) of the
Company's Common Stock, (ii) each director, (iii) each of the executive officers
named in the summary compensation table and (iv) all executive officers and
directors of the Company as a group.
Name and Address of Amount of Shares
Beneficial Owner(1) Beneficially Owned(2) Percent of Class
- ------------------- --------------------- -----------------
GST USA, Inc.(3) 5,113,712 62.9%
Thomas E. Sawyer 25,000(4) *
A. Lindsay Wallace 76,667(4) *
W. Gordon Blankstein 0 0%
Stephen Irwin 0 0%
Robert L. Olson 0 0%
Clifford V. Sander 0 0%
Ronald S. Eliason 25,000(4) *
Eric F. Gurr 43,125(4) *
All directors and officers 169,792(4) 2.0%
as a group (8 persons)
- -----------
*
Less than 1%.
(1) Unless otherwise indicated, all addresses are c/o NACT
Telecommunications, Inc. 191 West 5200 North, Provo, Utah 84604.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934 ("Rule 13d-3") and unless
otherwise indicated, represents shares for which the beneficial owner
has sole voting and investment power. The percentage of class is
calculated in accordance with Rule 13d-3 and includes options or other
rights to subscribe which are exercisable within sixty (60) days of
November 30, 1997.
(3) The address of GST USA, Inc. is 4317 N.E. Thurston Way, Vancouver,
Washington 98662.
(4) Represents shares of common stock issuable upon the exercise of options.
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<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED 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 the date of this report, no such loans
were outstanding.
On July 1, 1997, the Company moved its entire operations to a new
40,000-square-foot facility in Provo, Utah. The Company purchased the land and
the building from GST Realco, Inc., a subsidiary of GST, with a portion of the
net proceeds of the Company's initial public offering. The purchase price and
additional costs to the Company to complete construction of the building
aggregated approximately $4.1 million.
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 Wasatch
International Network Services, Inc. ("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 purchased a substantial
portion of its 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.
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<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Provo, State of Utah, on the 23rd day of January, 1998.
NACT TELECOMMUNICATIONS, INC.
By: /s/ A. Lindsay Wallace
-------------------------
A. Lindsay Wallace
Chief Executive Officer
