<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
------------------------------
FOR THE QUARTER ENDED APRIL 30, 1996 COMMISSION FILE NUMBER 0-25016
T-NETIX, INC.
------------------------------------------------------
(Exact Name of registrant as Specified in Its Charter)
COLORADO 84-1037352
- ---------------------------------------------- -------------------------
(State of Other Jurisdiction of Incorporation) (I.R.S. Employer
Identification No.)
6675 SOUTH KENTON STREET
ENGLEWOOD, COLORADO 80111
- ----------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 790-9111
-------------------------------------------------
Indicate by check ( X ) whether the registrant (1) has filed all
reports required to filed by Section 13 or 15(d) of the Securities and
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 practical date.
Class Outstanding at June 11, 1996
- ------------------------------- ----------------------------
Common Stock, $.01 stated value 8,136,543
<PAGE> 2
T-NETIX, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART ITEM PAGE
- ---- ---- ----
<S> <C> <C>
I. FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheets, April 30, 1996
and July 31, 1995 (Unaudited)........................................... 2
Consolidated Statements of Operations, Three Months Ended
April 30, 1996 and 1995, and Nine Months Ended
April 30, 1996 and 1995 (Unaudited) .................................... 3
Consolidated Statements of Shareholders' Equity, Nine Months Ended
April 30, 1996 and Year Ended July 31, 1995 (Unaudited) ................ 4
Consolidated Statements of Cash Flows, Nine Months Ended
April 30, 1996 and 1995 (Unaudited) .................................... 5
Notes to Consolidated Financial Statements (Unaudited)........................... 6
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 9
II. OTHER INFORMATION - Items 1 through 6 ................................................... 15
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
April 30, July 31,
1996 1995
---- ----
(amounts in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 217 $ 872
Trade accounts receivable, net of allowance 11,633 9,223
Other receivables 161 98
Prepaid expenses 436 267
Property and equipment, at cost:
Telecommunications equipment 27,342 22,916
Construction in progress 5,461 3,845
Office equipment 2,769 2,044
---------------- -----------------
Property and equipment 35,572 28,805
Less accumulated depreciation and amortization (8,988) (5,061)
---------------- -----------------
Property and equipment, net 26,584 23,744
Patent license rights, net 2,885 --
Other assets, net 1,196 700
---------------- -----------------
$ 43,112 $ 34,904
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 10,096 $ 6,137
Accrued liabilities 2,130 2,250
Loans from customer -- 449
Debt 5,895 4,654
Capital lease obligations 617 959
---------------- -----------------
Total liabilities 18,738 14,449
Shareholders' equity:
Preferred stock, $0.01 stated value, 10,000,000 shares
authorized; no shares issued -- --
Common stock, $0.01 stated value, 70,000,000 shares
authorized; issued and outstanding 8,020,335 and 7,623,034
shares, respectively 80 76
Additional paid-in capital 25,098 22,736
Accumulated deficit (804) (2,357)
---------------- -----------------
Total shareholders' equity 24,374 20,455
Commitments and contingencies
---------------- -----------------
$ 43,112 $ 34,904
================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Month Ended
------------------------------------ -------------------------------------
April 30, April 30, April 30, April 30,
1996 1995 1996 1995
----------------- ----------------- ------------------ -----------------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue:
Telecommunication services $ 7,441 $ 6,640 $ 22,335 $ 16,848
Direct call provisioning 742 975 2,358 2,674
----------------- ----------------- ----------------- ---------------
Total revenue 8,183 7,615 24,693 19,522
Expenses:
Operating costs and expenses:
Telecommunications services 3,216 2,715 9,826 7,201
Direct call provisioning 705 885 2,312 2,526
----------------- ----------------- ----------------- ---------------
Total operating costs and expenses 3,921 3,600 12,138 9,727
Selling, general, and administrative 1,618 1,348 4,762 3,391
Research and development 651 211 1,470 542
Depreciation and amortization 1,532 1,002 4,262 2,480
----------------- ----------------- ----------------- ---------------
Total expenses 7,722 6,161 22,632 16,140
Operating income 461 1,454 2,061 3,382
Interest expense, net (122) (64) (462) (481)
----------------- ----------------- ----------------- ---------------
Earnings before income taxes 339 1,390 1,599 2,901
Income taxes (5) (40) (46) (120)
----------------- ----------------- ----------------- ---------------
Net earnings $ 334 $ 1,350 $ 1,553 $ 2,781
================= ================= ================= ===============
Net earnings per common share $ .04 $ 0.15 $ .17 $ 0.34
================= ================= ================= ===============
Weighted average common shares 9,198 8,925 9,048 8,078
outstanding ================= ================= ================= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Add- Total
Common stock itional Accum- share-
------------------------- paid-in ulated holders'
Shares Amounts capital deficit equity
---------- ------------ ------------ ------------ ------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balances at August 1, 1994 5,405 $ 54 $ 7,058 $ (5,545) $ 1,567
Common stock issued upon
exercise of stock options 414 4 205 -- 209
Common stock issued for assets 4 -- 22 -- 22
acquired
Common stock issued for cash, net
of offering costs and underwriting
discount of $1,631,000 1,800 18 15,451 -- 15,469
Net earnings -- -- -- 3,188 3,188
------- ------------- ----------- ------------ ----------
Balances at July 31, 1995 7,623 76 22,736 (2,357) 20,455
Common stock issued upon
exercise of stock options 172 2 93 -- 95
Common stock issued for assets
acquired 30 -- -- -- --
Common stock issued in
business acquisition 195 2 2,269 -- 2,271
Net earnings -- -- -- 1,553 1,553
------- ------------- ----------- ------------ ----------
Balances at April 30, 1996 8,020 $ 80 $ 25,098 $ (804) $ 24,374
======= ============= =========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended April 30, 1996 and 1995 (Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,553 $ 2,781
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,262 2,480
Provision for losses on accounts receivable 378 358
Noncash interest accruals added to principal -- 11
Noncash interest accruals added to principal-related party -- 34
Noncash reductions of loans from customer (449) (1,985)
Changes in operating assets and liabilities, net of
acquisition of business:
Change in trade accounts receivable (2,788) (6,338)
Change in other receivables (63) (98)
Change in prepaid expenses (168) (304)
Change in other assets (753) (160)
Change in accounts payable 3,956 1,910
Change in accrued liabilities (343) 548
----------------- -----------------
Cash provided by (used in) operating activities 5,585 (763)
----------------- -----------------
Cash flows from investing activities:
Capital expenditures (6,766) (12,194)
Acquisition of business (431) --
----------------- -----------------
Cash used in investing activities (7,197) (12,194)
----------------- -----------------
Cash flows from financing activities:
Proceeds from borrowings 11,140 7,621
Proceeds from borrowings --related party -- 270
Payments of loans from customer -- (671)
Payments of debt (9,899) (7,540)
Payments of debt -- related party -- (1,784)
Payments of capital lease obligations (379) (228)
Common stock issued for cash 95 16,022
Payment for loan fees and offering costs -- (382)
Increase (decrease) in bank overdraft -- (212)
----------------- -----------------
Cash provided by financing activities 957 13,096
----------------- -----------------
Net increase (decrease) in cash and cash equivalents (655) 139
Cash and cash equivalents at beginning of period 872 507
----------------- -----------------
Cash and cash equivalents at end of period $ 217 $ 646
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited financial statements
The accompanying unaudited consolidated financial statements
reflect all adjustments which, in the opinion of management, are
necessary to reflect a fair presentation of the financial position and
results of operations of T-NETIX, Inc. (the Company) for the interim
periods presented. All adjustments, in the opinion of management, are
of a normal and recurring nature.
Earnings per common share
Earnings per common share for the three and nine months ended
April 30, 1996 and 1995, are computed based upon the weighted average
number of common and dilutive common equivalent shares outstanding
during the period. For purposes of the calculation of earnings per
common share, common stock equivalents consist of stock options to
acquire common stock (using the treasury stock method).
Debt
In April 1996, the Company entered into a Loan Agreement with
a Bank. This agreement replaced the prior Credit Agreement with
another bank. The Loan Agreement allows the Company to borrow a
maximum of $10,000,000 limited to a percentage of qualifying accounts
receivables and property and equipment. Borrowings are at the prime
rate and are secured by substantially all of the assets of the
Company. The agreement provides for various financial covenants,
including certain financial ratios and minimum net worth requirements.
As of April 30, 1996 the Company has an outstanding balance of
$5,865,000 under the loan agreement.
Income taxes
A valuation allowance is provided when it is more likely than
not that some portion or all of the net deferred tax asset will not be
realized. The Company has historically established valuation
allowances primarily for net operating loss carryforwards and portions
of other deferred tax assets as a result of its history of net losses.
The Company has pre-tax net earnings for the nine months ended April
30, 1996 and has reversed an amount of the valuation allowance to the
extent that net operating losses were used to offset taxable earnings.
During the quarter ended April 30, 1996, the deferred tax assets'
valuation allowance decreased approximately $133,000,which was
reflected as a reduction in the provision for income taxes. There can
be no assurance, however, that the Company will generate taxable
earnings or that it will achieve any specific level of net earnings in
the future.
The Company has recognized current tax expense during the
three months ended April 30, 1996 of $ 5,000. This charge relates
primarily to a provision for certain state income taxes.
Commitments and Contingencies
On November 28, 1995, the Company reached a settlement with
Communications Equipment & Engineering Corporation of Plantation,
Florida ("CEECO") regarding the patent infringement litigation between
them.
As previously reported, in January 1995, the Company initiated
a civil action against CEECO alleging infringement of the Company's
U.S. Patent 5,319,702 on three-way call detection technology (the
"O702 Patent"). (Tele-Matic Corporation v. Communications Equipment &
Engineering Corporation, Civil Action No. 95-S-41, in the United
States District Court for the District of Colorado.) On June 6, 1995,
CEECO initiated an action against the Company alleging
6
<PAGE> 8
infringement of U.S. Patent No. 4,993,062 for "Telephone Control
System Including Stored Blocked and Allowed Telephone Numbers: (the
"Dula Patent"). (Communications Equipment & Engineering Corporation v.
Tele-Matic Corporation, Civil Action No 95-6518, in the United States
District Court for the Southern District of Florida.) On November 28,
1995, the parties resolved the matters involved in both lawsuits.
As a result of the settlement agreement, the United States
District Court for the District of Colorado issued a stipulated Final
Order and Judgment on December 13, 1995 which:
(a) Recognizes that T-NETIX' owns the '702 Patent
and that the patent is valid and enforceable;
(b) Recognizes that CEECO has infringed the '702
Patent by manufacturing and selling three-way call detection devices;
and
(c) Enjoins CEECO and others from manufacturing,
using and selling CEECO's three-way call detection devices.
In addition, under the settlement agreement, CEECO has agreed to pay
T-NETIX an undisclosed sum of money over the next five years and has
granted T-NETIX an exclusive license under the Dula Patent with the
right to enforce it against others.
On Friday, December 8, 1995, the Company was officially
permitted to join in litigation initiated by AT&T against Telequip
Laboratories ("Telequip") of Richardson, Texas pending in the United
States District Court for the Northern District of Texas. Telequip is
a competitor of the Company in providing automated operator systems to
correctional facilities. For several years Telequip has engaged in an
advertising campaign disparaging the Company's Strike Three!(TM)
three-way call detection products and services offered by the Company
and AT&T. Following the receipt of information that Telequip's
advertisements had an adverse effect on potential customer's
purchasing decision, AT&T formally complained to Telequip and asked it
to refrain from further publication of false and misleading
advertisements. Telequip responded by initiating an action against
AT&T in a Texas state court requesting that the court declare that
Telequip's advertisements are not false and misleading.
The case has been removed to federal court. (Telequip Labs,
Inc. v. AT&T, 395-CV1630-H pending in the United States District Court
for the Northern District of Texas, Dallas Division.) Because
Telequip's advertisements referred to both AT&T and the Company by
name, the Company requested that the court permit it to intervene in
the case and to assert a complaint against Telequip for false and
misleading advertising and other related causes of action. The
Complaint seeks an injunction against Telequip and a judgment for
damages incurred by the Company. Telequip has apparently ceased
publishing the offending advertisements in trade journals.
In addition to permitting the Company to intervene in the
case, the court permitted Telequip to file additional claims against
both AT&T and the Company including claims for false and deceptive
advertising under the Lanham Act, for violations of the Racketeering
Influenced and Corrupt Organizations Act, including securities fraud
for misrepresenting the true three-way call detection capabilities of
its equipment, and for unfair competition. Although there are a wide
range of allegations regarding the Company's advertisement of its
Strike Three!(TM) three-way call detection services, they all appear to
relate to the principal assertion that AT&T and the Company falsely
advertise that the Company's Strike Three!(TM) services can detect 93%
of attempted three-way calls. The Company believes that AT&T and the
Company's advertisements are supported. Telequip seeks an accounting
and damages in an unspecified amount and a preliminary and permanent
injunction against further false and misleading advertising relating
to the Company's three-way call detection services. Telequip has also
asked the court for trebling of damages and an award of its attorney's
fees and costs. The Company intends to prosecute its claims against
Telequip; it believes Telequip's claims are without merit and intends
to defend them vigorously.
7
<PAGE> 9
On April 21, 1995, the Company filed a civil action against
Gateway Technologies, Inc. ("Gateway") alleging infringement of the
Company's U.S. Patent 5,319,702 on three-way call detection (the "'702
Patent"), in Tele-Matic Corporation v. Gateway Technologies, Inc.,
Civil Action No. 95-S-880, pending in the United States District Court
for the District of Colorado. Gateway has filed an answer denying the
Company's allegations and requesting that the court declare that the
'702 Patent is invalid and is not infringed by Gateway. On May 5,
1995, Gateway and Intellicall, Inc. ("Intellicall") filed an action
against the Company alleging infringement of U.S. Patents No.
4,935,956, 4,908,852, 4,920,558, 5,920,562, 4,933,966 and 5,093,858
(collectively, the "Gateway Patents") in Gateway Technologies, Inc.
et. al. v. Tele-Matic Corporation, Civil Action No. 395-CV-0855R,
pending in the U.S. District Court for the Northern District of Texas,
Dallas Division ( the "Gateway Infringement Claim"). The Gateway
Infringement Claim seeks a permanent injunction against future
infringement, damages for willful infringement, costs and attorney's
fees. Although specific equipment and methods of the Company have not
been identified in the Gateway Infringement Claim, it appears that the
allegations relate to a substantial portion of the equipment and many
of the methods used by the Company in providing inmate calling
services and from which the Company currently and in the foreseeable
future expects to derive a substantial portion of its revenue. With
respect to the U.S. Patent 4,935,956 (the "Hellwarth Patent"), which
is the most comprehensive of the Gateway Patents, the Company received
an opinion from Patent Counsel in June 1994 that the Company does not
infringe on the Hellwarth Patent. The Company has not requested an
opinion from Patent Counsel with respect to the other patents.
However, based on the opinion of the Patent Counsel regarding the
Hellwarth Patent, and the analysis by the Company with its legal
counsel of the remaining patents, the Company believes that the
ultimate resolution of this matter will not have a material adverse
effect on its financial condition, results of operations or cash
flows. There can be no assurance that the Company will ultimately
prevail on its claims or the counterclaims.
In August 1995, Independent Telecommunications Network,
Inc. ("ITN") filed a demand for arbitration with the American
Arbitration Association, claiming the Company had breached certain
query transport services contracts with ITN by, ITN alleges,
terminating those contracts. ITN seeks damages of approximately $3
million based on its alleged potential future earnings under the
contracts. Given that the dispute is in the early stages of
arbitration, and the speculative nature of arbitration in general, the
Company is unable to predict with certainty the outcome of this
dispute. However, the Company believes that the ultimate resolution of
this matter will not have a material adverse effect on its financial
condition, results of operations or cash flows.
In April 1996, the Company entered into a lease agreement for
approximately 38,000 square feet of office space. The term of the
lease is for five years and commences on November 1, 1996. The lease
agreement coincides with the termination of the Company's existing
office space.
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the Company's consolidated financial
condition, results of operations and capital resources. This discussion and
analysis should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere herein.
OVERVIEW
The Company derives revenue under contracts with its customers,
including AT&T, five of the seven Regional Bell Operating Companies, GTE
Telephone Operations, and other telecommunication service providers, primarily
from the provisioning of specialized call processing services for correctional
facilities. This revenue is generated under long-term contracts which provide
for transaction fees paid on a per-call basis. The Company is paid a prescribed
fee for each call completed and additional fees for validating phone numbers
dialed by inmates. The Company also derives revenue as a direct provider of
inmate calls, although this service is provided primarily as an accommodation
to certain customers. The Company expects to derive a declining percentage of
total revenue from its direct call provisioning business. The following table
sets forth certain information concerning the accepted calls processed by the
Company for its customers in the inmate calling market and excludes direct call
provisioning.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- -------------------------------
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Call volumes processed 20,344,000 16,958,000 58,696,000 43,519,000
Average daily transactions 226,000 191,000 215,000 159,000
</TABLE>
The Company's call volume and revenue growth have resulted primarily
from adding sites for both existing and new customers. The Company believes it
has also benefited, to a lesser extent, from higher call volumes at existing
facilities and the overall growth in the inmate calling market. The Company
will continue to market its services to additional call providers; however, it
expects growth in call processing volumes will come predominantly from adding
new sites for existing customers. The Company expects the rate of growth in
calls processed will decrease relative to the historical rates.
The Company's acquisition of SpeakEZ in October 1995 has led to an
increased focus on new technology, specifically speaker verification
technologies. Although no revenue to date has been recorded for this area of
the Company's operations, the Company has invested significant time and effort
and resources in research and development associated with these products. This
trend is expected to increase. Correspondingly, the Company's selling, general
and administrative expenses (including marketing) have increased cost activity
in support of these additional research and development activities and
implementation of the eventual entry by the Company into new markets.
9
<PAGE> 11
RESULTS OF OPERATIONS
Three Months Ended April 30, 1996 and 1995
The following table sets forth certain statement of operations data as
a percentage of total revenue for the three months ended April 30, 1996 and
1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
--------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Revenue:
Telecommunications services 91 % 87 %
Direct call provisioning 9 13
-------- --------
Total revenue 100 % 100 %
Expenses:
Operating costs and expenses 48 % 47 %
Selling, general and administrative 20 18
Research and development 8 3
Depreciation and amortization 19 13
-------- --------
Operating income 6 19
Interest expense, net (1) (1)
-------- --------
Earnings before income taxes 5 18
Income taxes -- (1)
-------- --------
Net earnings 5 % 17 %
======== ========
</TABLE>
Total Revenue. Total revenue increased 7% to $8,183,000 for the three
months ended April 30, 1996 from $7,615,000 for the corresponding prior period.
This increase resulted from a 12% increase in telecommunications services
revenue to $7,441,000 for the three months ended April 30, 1996, from
$6,640,000 in the corresponding prior period, due to a 20% increase in call
volume to 20,344,000 resulting primarily from an increase in the number of
installed sites. Due to the Company's significant growth in market share, the
Company expects that the rate of growth in calls processed will decrease
relative to the historical rate. An offsetting factor to the increase in
revenue dollars is a reduction in fees per call as the Company's customers
reach contractually agreed upon call volume discounts. Specifically, these
discounts accounted for a reduction in revenue of approximately $303,000 during
the quarter ended April 30, 1996. These discounts will continue to have a
similar effect on revenue (by reducing revenue per call) in future periods to
the extent the call volumes continue to increase and as additional existing
customers reach contractually agreed upon call volume discounts. Direct call
provisioning revenue decreased as a percentage of total revenue due to the
increase in telecommunications services revenue. The dollar decrease in direct
call provisioning revenue was due to conversion of sites serviced to
transaction based fees. The Company anticipates it will continue to convert
some of its direct call provisioning accounts to telecommunications services
customers for which it receives transaction fee revenue versus direct call
provisioning revenue.
Operating costs and expenses. Total operating costs and expenses
increased to $3,921,000 for the three months ended April 30, 1996, from
$3,600,000 for the three months ended April 30, 1995, increasing as a
percentage of total revenue to 48% from 47% in the corresponding prior period.
During the period, there was a decline in total margin. This was due to a
reduction in telecommunication services margins because of volume discounts.
Because of the effect of the reduction in margins, the actual impact on
operating costs and expenses was an increase of two percentage points. This
increase was offset by a one percentage point decrease in operating costs and
expenses due to a change in the mix of revenue to include a larger percentage
of telecommunications services revenue versus direct call provisioning revenue.
Operating costs and expenses of telecommunications services primarily consist
of system administration costs for correctional facilities, including salaries
and related personnel expenses and
10
<PAGE> 12
inmate calling systems repair and maintenance expense. Operating costs and
expenses of telecommunications services also include costs associated with call
verification procedures, primarily network expenses and database access
charges. The Company invoices these verification procedure costs to its
customers with minimal margins. Operating costs and expenses associated with
direct call provisioning include the costs associated with telephone line
access, commissions paid to correctional facilities, costs associated with
uncollectible accounts, and billing charges.
The following table sets forth the operating costs and expenses for
each type of revenue as a percentage of corresponding revenue for the three
months ended April 30, 1996 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
APRIL 30, APRIL 30,
1996 1995
----------- -----------
<S> <C> <C>
Operating costs and expenses:
Telecommunications services 43 % 41 %
Direct call provisioning 95 91
</TABLE>
Operating costs and expenses associated with providing
telecommunications services increased as a percentage of corresponding revenue
to 43% from 41% in the corresponding period. During the current period there
was a decline in margin for telecommunication services because of volume
discounts. This caused a one percentage point increase in telecommunications
services operating costs and expenses. There was an additional one percentage
point increase due to a change in the mix of revenue and costs within
telecommunications services between site services and validation services.
Validation services are billed to customers at minimal margins. The Company
anticipates operating costs and expenses to remain consistent with current
ratios, however, the Company continues to explore more cost effective methods
to deliver its services. Direct call provisioning costs increased as a
percentage of corresponding revenue to 95% for the three months ended April 30,
1996, from 91% in the corresponding prior period. This percentage increase is
primarily attributable to an increase in local and long distance expenses and
personnel costs for sites added subsequent to April 30, 1995. In addition, bad
debt expense increased as a percentage of revenue to 16% for the three months
ended April 30, 1996 from 15% in the corresponding prior period. The bad debt
expense is based upon the estimates provided by the Company's billing agent.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $1,618,000 for the three months ended
April 30, 1996, from $1,348,000 in the corresponding prior period, and
increased as a percentage of total revenue to 20% from 18%. One percentage
point of this increase is due to the reduction in revenue per call associated
with volume discounts. The remainder is due to an actual dollar increase of
$270,000. This amount consists primarily of an increase of approximately
$130,000 for cost of salaries for administrative personnel and related expenses
(including contract personnel) and for professional services of approximately
$112,000, including legal and insurance costs. The increase in salaries and
contract personnel is due to growth in the infrastructure to support current
inmate operations and the new speaker verification technology. The increase in
professional services is due to additional consulting activities, various legal
actions, and general cost increases for services. The Company anticipates
selling, general and administration expense to increase in anticipation of
speaker verification technology products entering the marketplace.
Research and Development Expenses. Research and development expenses
increased to $651,000 for the three months ended April 30, 1996, from $211,000
in the corresponding prior period, due primarily to the addition of personnel
to support the speaker verification technology and for support of integrated
applications between the current core technologies and speaker verification.
The Company expects the dollar amount of research and development expenses will
continue to increase as it incurs personnel and other costs associated with the
research and development of speaker verification related products and services.
In addition, the costs associated with the core engineering function are
expected to increase as the core technology platforms are integrated with
speaker verification technologies.
11
<PAGE> 13
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased to $1,532,000 for the three months ended April 30, 1996,
from $1,002,000 in the corresponding prior period. The increase is due to an
increased fixed asset base of telecommunications equipment, resulting from
increased correctional facilities installed by the Company and due to the
Company's continued investment in its data network for verification procedures.
In addition, infrastructure additions in research and development and selling,
general and administrative functions also add to an increase in depreciation
from office equipment. The Company expects depreciation and amortization to
continue to increase as the number of installed correctional facilities served
increases and as it purchases additional telecommunications and office
equipment. In addition, amortization of the patent license rights acquired from
SpeakEZ, amounted to $112,000 for the quarter ended April 30, 1996.
Interest expense, net. Interest expense increased to $122,000 for the
three months ended April 30, 1996, from $74,000 in the corresponding prior
period. The increase was primarily attributable to an increase in the amount of
indebtedness. Interest income was not significant for the three months ended
April, 30, 1996 and 1995. The reduction was due to the use of the proceeds from
the Company's initial public offering, such funds were previously invested in
short term investments. The Company anticipates interest expense to increase as
the Company increases outstanding debt under its line of credit agreement.
Nine Months Ended April 30, 1996 and 1995
The following table sets forth certain statement of operations data as
a percentage of total revenue for the nine months ended April 30, 1996 and
1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 30,
-------------------------------
1996 1995
----------- ---------
<S> <C> <C>
Revenue:
Telecommunications services 90 % 86 %
Direct call provisioning 10 14
------ -----
Total revenue 100 % 100 %
Expenses:
Operating costs and expenses 49 % 50 %
Selling, general and administrative 19 17
Research and development 7 3
Depreciation and amortization 17 13
------ -----
Operating income 8 17
Interest expense, net (2) (2)
------ -----
Earnings before income taxes 6 15
Income taxes -- (1)
------ -----
Net earnings 6 % 14 %
====== =====
</TABLE>
Total Revenue. Total revenue increased 26% to $24,693,000 for the nine
months April 30, 1996 from $19,522,000 for the corresponding prior period. This
increase resulted from a 33% increase in telecommunications services revenue to
$22,335,000 for the nine months ended April 30, 1996, from $16,848,000 in the
corresponding prior period, due to a 35% increase in call volume to 58,696,000
resulting primarily from an increase in the number of installed sites. Due to
the Company's significant growth in market share, the Company expects that the
rate of growth in calls processed will decrease relative to the historical
rate. An offsetting factor to the increase in revenue dollars is a reduction in
fees per call as the Company's customers reach contractually agreed upon call
volume discounts. Specifically, these discounts accounted for a reduction in
revenue of approximately $825,000 during the nine months ended April 30, 1996.
These discounts will continue to have a similar effect on revenue (by reducing
revenue per call) in future periods to the extent the call volumes continue to
increase and as additional
12
<PAGE> 14
existing customers reach contractually agreed upon call volume discounts.
Direct call provisioning revenue decreased as a percentage of total revenue due
to the increase in telecommunications services revenue. The dollar decrease in
direct call provisioning revenue was due to conversion of sites serviced to
transaction based fees.
Operating costs and expenses. Total operating costs and expenses
increased to $12,139,000 for the nine months ended April 30, 1996, from
$9,727,000 for the nine months ended April 30, 1995, but decreased as a
percentage of total revenue to 49% from 50% in the corresponding prior period.
Total operating costs and expenses as a percentage of total revenue decreased
two percentage points due to the increase in telecommunications services
revenue which has a higher margin than direct call provisioning. This was
offset by a one percentage point increase in operating costs and expenses
caused by the effect on telecommunications services margins of volume
discounts. Operating costs and expenses of telecommunications services
primarily consist of system administration costs for correctional facilities,
including salaries and related personnel expenses and inmate calling systems
repair and maintenance expense. Operating costs and expenses of
telecommunications services also include costs associated with call
verification procedures, primarily network expenses and database access
charges. The Company invoices these verification procedure costs to its
customers with minimal margins. Operating costs and expenses associated with
direct call provisioning include the costs associated with telephone line
access, commissions paid to correctional facilities, costs associated with
uncollectible accounts, and billing charges.
The following table sets forth the operating costs and expenses for
each type of revenue as a percentage of corresponding revenue for the nine
months ended April 30, 1996 and 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------
APRIL 30, APRIL 30,
1996 1995
------------- -----------
<S> <C> <C>
Operating costs and expenses:
Telecommunications services 44 % 43 %
Direct call provisioning 98 94
</TABLE>
Operating costs and expenses associated with providing
telecommunications services increased as a percentage of corresponding revenue
to 44% from 43% in the corresponding period. During the current period there
was a decline in margin for telecommunication services because of volume
discounts. This caused a two percentage point increase in telecommunications
services operating costs and expenses. This was offset by a one percentage
point decrease due to a change in the mix of revenue and costs within
telecommunications services between site services and validation services.
Validation services are billed to customers at minimal margins. Direct call
provisioning costs increased as a percentage of corresponding revenue to 98%
for the nine months ended April 30, 1996, from 94% in the corresponding prior
period. This percentage increase is primarily attributable to an increase in
local and long distance expenses and personnel cost for sites added subsequent
to April 30, 1995. In addition, bad debt expense increased as a percentage of
revenue to 16% for the nine months ended April 30, 1996 from 15% in the
corresponding prior period. The bad debt expense is based upon the estimates
provided by the Company's billing agent.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $4,762,000 for the nine months ended April
30, 1996, from $3,391,000 in the corresponding prior period, and increased as a
percentage of total revenue to 19% from 17%. The dollar increase was
$1,371,000. This amount consists primarily of approximately $567,000 for cost
of salaries for administrative personnel and related expenses (including
contract personnel), $272,000 for legal expenses, $158,000 in insurance costs,
and $70,000 in public reporting expenses. The increase in salaries and contract
personnel is due to growth in the infrastructure to support current inmate
operations and the new speaker verification technology. The increase in legal
is due to a variety of legal actions. The increase in public reporting expense
and insurance relate to the amount of time the company was a public company in
the comparative periods.
13
<PAGE> 15
Research and Development Expenses. Research and development expenses
increased to $1,470,000 for the nine months ended April 30, 1996, from $542,000
in the corresponding prior period, due to the addition of personnel to support
speaker verification technology and for support of integrated applications
between the current core technologies and speaker verification.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased to $4,262,000 for the nine months ended April 30, 1996, from
$2,480,000 in the corresponding prior period. The increase is due to an
increased fixed asset base of telecommunications equipment, resulting from
increased correctional facilities installed by the Company and due to the
Company's continued investment in its data network for verification procedures.
In addition, amortization of the patent license rights acquired from SpeakEZ
amounted to $237,000 for the nine months ended April 30, 1996.
Interest expense, net. Interest expense decreased to $472,000 for the
nine months ended April 30, 1996, from $518,000 in the corresponding prior
period. The decrease was primarily attributable to reduction in indebtedness.
Interest income was not significant for the nine months ended April 30, 1996 as
compared to $52,000 for the corresponding prior period.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied upon shareholder and commercial
borrowings, the sale of equity securities and operating cash flow to fund its
operations and capital needs. Borrowings from a line of credit with a bank
supplied the Company with a majority of its cash from financing activities
during the nine months ended April 30, 1996. The net cash provided by financing
activities in the nine months ended April 30, 1996 was $957,000. Cash provided
by operations contributed $5,585,000 of cash flow for the nine months ended
April 30, 1996, as compared to $763,000 used in operations for the
corresponding prior period. The change in cash provided by (used in) operations
was primarily attributable to increases in net earnings, adjusted for
depreciation and amortization and a decrease in the net change in operating
assets and liabilities.
Cash used in investing activities was $7,197,000. This included
capital expenditures of $6,766,000 for the nine months ended April 30, 1996 as
compared to $12,194,000 in the corresponding prior period. The capital
expenditures for the nine months ended April 30, 1996 were mainly for
telecommunications equipment. The reduction in capital expenditures was due
primarily to the reduction in the number of systems installed for the
comparative periods. Additional investing activities included the cash portion
of the purchase price of SpeakEZ. The Company anticipates that capital
expenditures for telecommunications equipment will primarily follow the
installation of new systems. In addition, office equipment expenditures will
increase to support current inmate operations and the new speaker verification
technology.
Management believes that cash from operations and available borrowings
under a $10,000,000 line of credit arrangement should be sufficient to fund the
Company's operations and anticipated new installations and potential
installations for speaker verification technologies for the foreseeable future.
If the borrowing facilities and cash from operations are insufficient to
satisfy the Company's requirements, the Company may be required to sell
additional equity securities or extend its borrowing facilities. There can be
no assurance that such financing will be available or, if available, will be
obtainable on satisfactory terms.
14
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. 27. Financial Data Schedule
B. No reports on Form 8-K were filed during the three
month period ended April 30, 1996.
15
<PAGE> 17
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.
T-NETIX, Inc.
-------------
(Registrant)
Date June 13, 1996
---------------------- By /s/ Alvyn A. Schopp
-------------------------------------------
(Signature)
Alvyn A. Schopp, Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Page
- ------- ------------------- ----
<S> <C> <C>
27. Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN T-NETIX, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE
NINE MONTHS ENDED APRIL 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> APR-30-1996
<CASH> 217
<SECURITIES> 0
<RECEIVABLES> 12,033
<ALLOWANCES> 400
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 35,572
<DEPRECIATION> 8,988
<TOTAL-ASSETS> 43,112
<CURRENT-LIABILITIES> 0
<BONDS> 617
<COMMON> 80
0
0
<OTHER-SE> 24,294
<TOTAL-LIABILITY-AND-EQUITY> 43,112
<SALES> 0
<TOTAL-REVENUES> 24,693
<CGS> 0
<TOTAL-COSTS> 12,138
<OTHER-EXPENSES> 10,494
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 462
<INCOME-PRETAX> 1,599
<INCOME-TAX> 46
<INCOME-CONTINUING> 1,553
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,553
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
