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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE YEAR ENDED JULY 31, 1996 COMMISSION FILE NUMBER 0-25016
T-NETIX, INC.
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(Exact Name of registrant as Specified in Its Charter)
COLORADO 84-1037352
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(State of Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
6675 SOUTH KENTON STREET
ENGLEWOOD, COLORADO 80111
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 790-9111
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Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
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(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports 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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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of October 15, 1996, was approximately $63,748,295.
The number of shares outstanding of the Registrant's common stock as of October
15, 1996, was 8,177,868.
The following document is incorporated herein by reference into the part of the
Form 10-K indicated: the Proxy Statement for the 1996 Annual Meeting of
Shareholders to be filed prior to November 30, 1996, pursuant to regulation 14A
of the General Rules and Regulations of the Commission is incorporated by
reference into Part III of this Form 10-K.
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FORM 10-K CROSS REFERENCE INDEX
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PART I
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Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 4 Submission of Matters to a Vote of Security-Holders . . . . . . . . . . . 22
PART II
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Item 5 Market for Registrant's Common Equity and Related Stockholder Matters . . 23
Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 8 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . 33
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . 33
PART III
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Item 10 Directors and Executive Officers of the Registrant . . . . . . . . . . . 33
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 12 Security Ownership of Certain Beneficial Owners and Management . . . . . 33
Item 13 Certain Relationships and Related Transactions . . . . . . . . . . . . . 33
PART IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . 33
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PART I
ITEM 1. BUSINESS
THE COMPANY
T-NETIX, Inc. (the "Company" or the "Registrant") provides advanced call
processing and fraud prevention technology to the telecommunications and other
service industries. The Company's primary customers include AT&T, Bell
Atlantic, GTE, NYNEX Pacific Telesis, Southwestern Bell and U.S. West. These
customers use the Company's products and services to provide annually over
80,000,000 inmate collect calls in over 750 correctional institutions. The
Company's products and services include comprehensive transaction processing,
call management and identification systems for the corrections industry and
special-purpose speech processing software and systems. Most of the Company's
current products are based on proprietary software, the most critical of which
are patented or patent pending, and a combination of proprietary and
"off-the-shelf" electronic hardware. These systems are designed to be flexible
delivery platforms which are easily integrated with its customer's networks and
information systems. The Company's revenue stream is mostly recurring, as a
result of the Comapny historically generally charging for its services on a fee
per transaction processed basis over the long term contracts.
In October 1995, the Company acquired SpeakEZ, Inc. (SpeakEZ). SpeakEZ is a
wholly-owned subsidiary. The Company is marketing new fraud prevention
products and services based on its SpeakEZ biometric identification technology.
Developed by SpeakEZ, this technology uses "voiceprints" or speech patterns as
a means to verify or determine an individual's identity. The Company believes
SpeakEZ Voice Print(sm) products to have a particular applicability to the fraud
problems experienced by the financial services, telecommunications and security
industries.
The Company's objective is to be a leading provider of innovative fraud
prevention and identification products and services to the global
telecommunications, financial services and security industries. The Company
believes that it expansion into these new markets will be assisted by its
strategic relationships with its customers, its network integration expertise
and its national service infrastructure. To date, substantially all the
Company's revenues has been derived from its corrections industry call
processing services.
TELECOMMUNICATIONS INDUSTRY BACKGROUND
In recent years, the telecommunications industry has become increasingly
competitive. In the U.S., established service providers such as AT&T and the
RBOCs are experiencing intense competition in long distance and local services
from other providers such as MCI and Sprint, numerous re-sellers and
specialized service providers. Competition in the long distance market is
expected to increase as a result of the Telecommunications Act of 1996 which
will permit AT&T and the RBOCs to compete with each other in their respective
markets. Additionally, Competitive Access Providers or "CAPS" have begun to
offer access alternatives, while traditional cable television providers can
offer dial-tone services over their cable distribution networks. Wireless
operators, including Personal Communications Services ("PCS") operators, are
expected to offer services which will compete with both local dial-tone and
long distance services. The international telecommunications services industry
is also facing significant changes. Many countries are privatizing their
state- owned telecommunications monopolies, while others have begun to open
their markets to competition through deregulation.
Telecommunications service providers compete on the basis of price, service
differentiation and the introduction of new services. Technologies which
enable these providers to lower the costs of delivering their services and to
introduce new services are increasingly important. In addition, many local and
long-distance providers "outsource" certain support operations to third parties
which offer more cost-effective and flexible alternatives to internal
solutions. By doing so, service
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providers are able to develop services for customers with special needs and to
reduce the time required to introduce such services into the market. As a
result, the Company believes that new business opportunities are being created
for third-party organizations that can provide these technologies.
The Company is addressing this market opportunity by offering services which
lower costs through automated call processing, lower bad debt charges through
fraud prevention, increase the level of customer service and integrate the
end-user's information management requirements through full-service support.
MARKETS
TELECOMMUNICATIONS - WIRELINE
Public Communications services, broadly defined as calls not billed to the
originating telephone, includes local and long-distance credit and pre-paid
card calls, third-party calls and collect calls. These calls typically require
specialized network-based functionality to facilitate billing, call handling
and account validation. As a result, Public Communications calls generate
higher per-call revenues than standard residential and commercial calls.
While the industry has almost universally automated calling card calling to
reduce processing costs, the automation of collect and third-party calling has
presented greater challenges due to the customized handling required for these
calls. Such requirements include the need to identify the caller to the billed
party, to obtain billing acceptance, and in some cases, verify the callers
billing authority. Moreover, automation of these services by the major call
providers faces significant technological hurdles, since their networks were
historically built upon a framework of large network switches designed to
reliably process a high volume of calls with few customized features. The need
to meet these challenges has created an opportunity for vendors such as the
Company to (1) provide custom call processing services through premises-based
equipment, adjunct call processing platforms or other proprietary technology
that is integrated within the telecommunications network and (2) to offer
validation of information associated with the call or calling party.
Specialized call processing within the Public Communications market requires
the development of advanced capabilities such as control of outgoing calls,
flexible billing procedures and easy-to-use speaker identification and
verification procedures. The Company believes such services are also
applicable to calling card, bill-to-third number, and debit or pre-paid
calling.
In addition to the call processing challenges facing the Public Communications
providers, the entire telecommunications industry is focused on finding
effective solutions for fraud prevention. According to a report published by
Telecomm and Network Security Review the industry suffered over $3.325 billion
in losses due to the lack of effective means to verify or authenticate a user's
identity. Without such means crooks bill long distance calls to fraudulently
obtained, valid calling card accounts, bill international and long distance
calls to unsuspecting homes and businesses, and "hack" into office telephone or
voice mail systems to defraud long distance networks. The costs of this fraud
to the carriers is reflected in its cost of services to its customers.
Early attempts by carriers to combat fraud resulted in the use of Personal
Identification Numbers along with special calling card numbers. These methods,
however, are cumbersome for the customer and easily compromised by the crook.
In some cases, the carrier control measures cause
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legitimate customers' use of its services to decline or, in the worst case, to
switch carriers. What is needed is a method of verifying a caller's billing
authority which is natural and intuitive to the caller, yet reliable and
effective at preventing fraud for the carrier. The solution must also be able
to use standard telephony and easily integrated with the carrier's network.
SECURITY SERVICES - INMATE CALLING MARKET
Calls from inmates of federal, state and local correctional facilities comprise
a significant segment of the Public Communications market. Inmates typically
may only place calls for a limited duration, generating a high volume of calls
per phone, and generally may only place collect calls, which tend to generate
higher revenue per call than other types of calling. Consequently, the inmate
calling market is an attractive segment to call provides.
According to the U.S. Bureau of Justice Statistics, the number of inmates in
state and federal and local prisons as of June 1995 reached approximately 1.5
million. In the ensuing year, the number of inmates in federal, state and
local prisons increased to an estimated 1.6 million.
The inmate calling market presents unique and substantial challenges to the
call provider. Correctional facilities generally favor call providers who can
manage the inmate phone systems themselves, maintain consistent service and
easily process new inmates into the systems. Corrections officials generally
require control features that limit the length of calls, limit the time of day
calls are made, and restrict the ability of inmates to make harassing or
unapproved telephone calls. The call provider must be able to customize the
call control features by facility, cell block, telephone and, in some cases,
each inmate. One of the unique challenges is to prevent the fraudulent
bypassing of these controls through three-way calling. Inmates bypass
traditional control features by calling an accomplice at an approved number and
having the accomplice use three-way calling to conference a non-allowed party.
Through this method, inmates have been known to harass and intimidate people,
such as witnesses, whose numbers would otherwise be blocked, or to call
merchants to conduct fraudulent activities.
Correctional facilities generally select telephone/telecommunications service
providers on the basis of services and features provided and on the level of
commissions paid to the facilities. To date, intense competition among the
service providers has led to commission payments to correctional facilities at
levels that the Company believes only the major service providers can afford.
In addition, to win new contracts and renew existing contracts, call providers
must differentiate their services from the competition. They do so by offering
advanced call control services as well as additional complementary services
such as booking and identification processes, trust fund and commissary
automation and management, investigatory support and jail management support
systems.
TELECOMMUNICATIONS - WIRELESS
According to Cellular Telecommunications Industry Association ("CTIA"),
wireless fraud in the form of "cloned" cell phones, cost domestic carriers a
staggering $650 million or about 4% of revenues in 1995. Part of the root of
this problem is the ease with which analog cellular phones' electronic serial
and identification numbers can be copied off the air waves and reprogrammed
into another illegal or "cloned" cell phone. While digital technology is
expected to somewhat solve this problem, over 80% of the existing 33 million
cell phones in the U.S. use analog technology and the U.S. carriers are many
years and many millions if not billions of dollars away from converting their
networks and users to digital technology.
To address this compelling issue, cellular carriers are implementing interim
fraud prevention technologies such as PIN, RF Fingerprinting and A-Key
Authentication for use in their home markets. Because of the high costs of
acquiring and implementing these technologies, they are not universally adopted
by all carriers. They are for the most part deployed in the highest fraud
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markets such as New York and Los Angeles by the largest carriers. Other small
carriers in other markets either use less technologically sophisticated methods
such as PIN or post-call analysis to combat fraud or simply have no protection.
In the cellular fraud business, as with other types of crime, crooks seek the
path of least resistance. As some carriers implement home market fraud
protection, crooks either re-locate the criminal enterprise to less-protected
markets or, as is most often the case, stay at "home" and clone the cell phones
of unsuspecting callers who "roam" into their territories. This phenomena is
borne out of by the latest industry statistics which put roaming fraud at an
estimated 30%, or over $200 million, of the total industry fraud. This would
suggest that about 10% of the total industry roaming revenue of approximately
$2.1 billion is lost to fraud. The fact that roaming revenues constitute much
of a carriers revenue growth and profit potential make this problem even more
compelling.
Cellular carriers are looking for a solution to this problem. Some have
implemented "brown-out" policies which simply deny roaming service to their
subscribers in the high fraud markets. Of course not only do these practices
sacrifice "good" revenues, but risk the "churn" of the customer to a competing
carrier because of the perceived poor service. Others carriers are looking to
extend their home market fraud prevention technologies to the roaming
environment. But as different carriers deploy different technologies, the
barriers to interoperability and carrier cooperation become more challenging.
Another phenomena experienced by carriers who have implemented digital cellular
networks, principally the European carriers, is the evolution of the type of
fraud they experience. Because cloning of digital phones is arguably
impracticable (at the moment, at least) crooks resort to cell phone theft and
subscription fraud to continue their fraud business. In the UK, the cost of
this wireless fraud is estimated at $150 million annually. This type of fraud
differs from "cloning" fraud because the cell phone or device is
"authenticated" or otherwise legitimate. The fraudulent part is the user.
Digital cellular technology, and the home market technologies such as RF
Fingerprinting and A-key Authentication only verify the device - not the user.
What is needed is a means by which home market and roaming calls can be easily
verified at the individual user, rather than the device level. Verification
technology is preferred when easy to use, i.e., not requiring the dialing of
digits or the memorization of PINs or other codes or passwords. The use of the
technology must be interoperable between carrier networks and cost effective to
implement.
FINANCIAL SERVICES MARKET
A Nilson Report recently estimated domestic credit card fraud losses to be in
excess of $1.5 billion last year alone. Overall, fraud is estimated to cost
the industry in excess of several billion dollars per year and is on the
increase. Credit card fraud, check forgery and wire transfer fraud, are at all
time highs. Concurrently, the financial services industry is experiencing
explosive growth in "virtual" or remote banking transactions. Financial
institutions, seeking the cost efficiencies inherent in telephony and
network-based transaction processing, seek to implement automated, albeit
"depersonalized" customer interaction systems. These factors lead to increased
anonymity, the breeding ground of criminal enterprise.
To counter this burgeoning fraud dilemma, financial institutions are examining
and deploying technologies which not only automate many customer transactions
or interactions but also determine the identity of remote customers before the
transaction is permitted. Many institutions are using Interactive Voice
Response ("IVR") technologies which when integrated with the institution's
telephone systems, provide the means to automate common customer transactions.
Typical IVR systems are recorded or synthetic voice prompts to provide the
following customer interaction: automated answering of the customer call,
solicitation of the customer ID or account
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number through the customer's use of his telephone keypad; presentation of an
action menu to the customer; voice- prompted guidance through the chosen
action; and integration of the customer input into the institutions' MIS
application. The action items usually offered to the customer during the IVR
session commonly include account balance and available credit queries, billing
balances and payment status; order or trading status; account maintenance such
change of billing address; and transfer of funds between same customer
accounts. A more recent trend by certain large financial institutions is to
expand the customer's automated account activities to include wire transfer;
funds transfer to creditor and other accounts; and trading of securities and
mutual funds.
In addition to the use of IVR technologies, financial institutions are rushing
to deploy new automation technologies such as: "virtual branch banks" such as
enhanced Automated Teller Machines ("ATM"); card-based technologies such as
debit, cash or "smart" cards; and PC-based Home and Internet Banking. These
latest technologies provide the customer with greater interaction, account
control access capabilities and help the institution achieve its automation
goals. These expanded capabilities, however, significantly increase risk
exposure of the institution and its customers. Without adequate customer
identification, these automated, impersonal capabilities promote criminal
opportunity.
The only security element currently used in most of these automated processes
is a Personal Identification Number or PIN. PINs have many disadvantages from
both the user and security perspectives. Users dislike PINs because they are
not intuitive, most often not chosen by the user, and intrusive and difficult
to remember among other reasons. PINs can be easily comprised through user
observance or "shoulder-surfing", customer service manipulation, account
maintenance abuse, transaction recording and intercept and many other criminal
methods.
To address the shortcomings of PIN utilization, financial institutions are
evaluating the use of newer, biometric identification technologies. These
technologies include electronic signature analysis, eye retinal or iris
comparison, electronic fingerprint identification and speaker verification.
Besides the performance characteristics of the approaches. financial
institutions are also concerned with the cost and implementation aspects of the
technology integration and customer perception or the human factors. Ideally,
the identification method should be natural and intuitive to the user,
physically non-intrusive and easy to implement without the requirement of
special hardware or devices.
PRODUCTS AND SERVICES
The Company's primary focus in the design of its products and services is to
provide innovative, software-based solutions to very costly "niche" problems
with which major services providers are faced. The Company believes this
approach to result in a willingness of its customers to pay more value for
these solutions and thus an opportunity to generate higher margin revenues.
Also important is the ease with its solutions are supported by available
hardware and operating systems and integrated with its customers in-place
networks.
These products and services provide specific, caller-level customization and
advanced call processing capabilities to the Company's customers' service
offerings. Combined with the full service delivery option, the Company's
advanced call processing solutions provide its customers with services which
can be differentiated from that of the customer's competitors and which lower
the cost of providing such services.
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INMATE CALLING PRODUCTS
Currently, all of the Company's revenue is derived from the services it
provides to its customers for use in correctional facilities. The Company's
products and services for the inmate calling market include a comprehensive set
of technological and administrative features which provide call control, fraud
prevention and systems integration capabilities. The Company offers the
following advanced features for each phase of the calling process:
Pre-connection Restriction Features. Unlimited individual number blocking
capabilities; personal identification number ("PIN") operation with allowed or
denied number lists; SpeakEZ Voice Print(sm) speaker verification technology;
restrictions based on calls per time period per inmate; restrictions on the
number of call attempts versus completions; restrictions on calls to a single
number; and real-time billed number validation by external database query.
Call Connection Automation. Automated operator; debit or collect calling
operation; custom call announcement and identification of facility and call
provider; customized introductory messages such as the possibility that the
call may be recorded; PIN-based automated inmate caller identification by which
the inmate is identified to the called party through a pre-recorded statement
of the inmate's name in his own voice; active billing acceptance which requires
the called party to respond with a key-press to accept the inmate call; and
multi-lingual and international call processing.
Post-connection Services. Three-way call detection/prevention technology based
on the Company's patented Strike Three!(TM) technology that prevents inmates
from bypassing control features through three-way calling; "Hot Number"
operation, a real-time alert feature based on inmate PINs, destination number
or originating telephone number; automated attorney-client confidentiality
which precludes recording or monitoring of calls between the inmate and his
attorney; and comprehensive system reports for billing, administrative, law
enforcement and investigative support purposes.
PIN-LOCK(sm). The Company recently announced another technological
innovation-PIN-LOCK(sm), Inmate Caller Verification Service, expected to
increase the competitive advantage provided by its patented Strike Three!(TM)
technology. Before this innovation, inmates would use another inmate's PIN to
subvert call restriction controls. PIN-LOCK(sm) prevents this practice by
denying the call if there is not a match with the proper inmate's "voice
print". The Company believes this technology will greatly enhance the security
of its call processing systems.
Corrections Systems Integration Applications. The Company's customers offer
additional services as an off-set to higher commission payments to win new and
retain existing inmate calling contracts. The Company offers to its customers
an expanded set of integrated automation, identification and management
applications. The Company's integration design focuses on inmate
identification. Identification attributes such as voice print, PIN, Video
Digital Image, recorded conversations and bar codes are common to the various
corrections applications. The individual applications offered by the Company
include the following:
Trust Fund and Commissary. The Company's Trust Fund/Automated Commissary
system ("TFC") provides for a fully- integrated, point-of-sale commissary
or canteen operation including inventory management, using the inmate bar
coded-ID card for transaction processing. The commissary purchases are
electronically processed on a cashless, electronic funds transfer basis,
through the trust fund accounting system provided by the Company.
Tel-Base Investigative Services and Recording Access Management. Tel-Base
provides tools to monitor inmate telephone usage for abuse and criminal
conduct. The user-friendly interface permits corrections officers to sort
and identify calls using a variety of search criteria including by PIN,
destination number, originating telephone, etc. Through the Recording
Access
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Management (RAM) application, officers can designate certain calls to be
recorded onto magnetic digital or analog tape. Calls can be selected for
playback of the recorded conversations and the officer can record notes of
the conversation and append these notes as text files to the investigative
file. Call detail information is provided by the inmate calling
application. The integration of the call management system with the
recording system is very beneficial to the corrections officer who
previously had no efficient means of relating telephone calls to specific
recorded conversations.
By facilitating the concentration and selection of calls for recording, RAM
requires much less recording capacity than the typical
one-recording-channel per phone arrangement. The savings in recording
capacity provides cost savings benefits to the Company's customers.
Video Imaging/ Inmate Management. Video imaging is used primarily for
admission and release identification purposes. Corrections officers use a
Company-provided work station to take a digital image or snapshot of an
inmate, input pertinent information, such as allowed/denied calling
numbers, medical requirements, currency on hand, etc., and print an
identification card or wrist band which contains the bar-coded
representation of the inmate identification number or other code. This
data is saved in data bases, with the inmate calling application, the TFC
system, and Tel-Base investigative and Recording Access Management
applications. The Company's Video Imaging/ Inmate Management System
eliminates the costly and cumbersome manual photography process typically
used today.
SPEAKER VERIFICATION PRODUCTS
SECURITY SERVICES
The Company believes one of the key applications of SpeakEZ Voice Print(sm)
technology is the use of speaker verification for secured-area access. Most
current security technologies use some form of card-identification or pass-key
- - as the basic identification medium for access to secured areas. Since cards
can be lost, stolen or replicated and used by non- authorized personnel,
security is significantly enhanced through the addition of biometric
identification technology. The Company plans to address these market demands
by developing products to address such security needs.
TELECOMMUNICATIONS - WIRELINE
SpeakEZ Voice Print(sm) technology could have a major impact on types of
criminal activity which contribute to the industry's $3.3 billion fraud problem.
By requiring a match between the speech pattern of the caller and the authorized
customer, illegally obtained PINs and calling card numbers are useless to the
crook. The Company's Speaker Verification Service(sm) ("SVS") application
provides these capabilities through its enrollment and verification processes.
Through the service support organizations of carriers subscribing in the future
to the Company's services, authorized callers are "enrolled" into the SVS
system. This process is fully automated and requires the authorized caller to
state her password, usually her name, 3 or 4 times in response to the Company's
IVR prompts. In less than a minute, the technology prepares a "voiceprint", or
digital code which represents the speech pattern of this caller. The voiceprint
data is then uploaded into the verification system data base. When the caller
attempts to make a call of the type for which SVS is applicable - typically a
call which will be billed to another number or account and which originate from
a pay telephone or hotel phone - the carrier's network will route the caller to
the SVS platform for verification. Verification consists of a request to the
caller to state her name or password and a nearly instantaneous analysis of the
match between the current caller's voiceprint with that of the stored voiceprint
of the authorized caller. In the verification process, the SVS system produces
a confidence coefficient of voiceprint match. This coefficient enables the
carrier
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to set variable thresholds in the verification or rejection of call attempts.
If the caller's voiceprint meets the established pass threshold, the call is
completed through the carrier's network. In the event the caller's voiceprint
does not meet the carrier's threshold, the caller is transferred to customer
care representatives for further validation information.
Through the use of SpeakEZ Voice Print(sm) SVS, the carrier's level of network
billing security will be greatly enhanced. Because caller voiceprints are
unique to the individual, they cannot be copied and if "stolen"; i.e., learned,
overheard or recorded, are nonetheless useless to the criminal. Also, because
the caller uses her name or some other short, intuitive phrase for verification
purposes, the caller inconveniences of PIN utilization are avoided. SVS runs
as a software application program on the Company's Adjunct Processors so it is
easily integrated with the carrier's network.
SVS is being marketed to the Company's current telecommunications customers as
well as to other major domestic and international telecommunications companies.
Recently, AT&T began testing SVS to be used for account billing verification on
some of its most fraud-prone long distance services.
TELECOMMUNICATIONS -WIRELESS
The Company's wireless solution Voice Verifi-Air(sm) uses SpeakEZ Voice
Print(sm) technology to verify the identity of the roaming cellular caller.
Similar in function to the SVS application, Voice Verifi-Air(sm) , compares a
cellular caller's password utterance or voiceprint, with the stored voiceprint
of the authorized caller. With Voice Verifi-Air(sm) ("VVA"), the Company
provides the carrier with subscriber enrollment support, through IVR-driven
interfaces with the carrier's customer care center. The subscriber enrolls his
voiceprint with VVA in the standard manner for SpeakEZ Voice Print(sm)
applications - by stating his password 3-4 times. The subscriber's voiceprint
is then linked to the subscriber's Mobile Identification Number or MIN.
To verify cellular roaming calls it is necessary to intercept the call and
route it to the network system on which VVA is available. The Company intends
to enter into a strategic relationship and services provisioning agreement with
established companies who have the wireless network infrastructure to
accomplish to the call interception and routing tasks. Recently, one such
company, GTE Telecommunications Services, Inc. (GTE-TSI"), the cellular service
subsidiary of GTE MobileNet, announced their decision to trial the Company's
Voice Verifi-Air(sm) application as part of their FraudForce service offering.
GTE-TSI's technology for intercepting and routing wireless roaming calls, a
service generally referred to as Roamer Verification Reinstatement or "RVR" was
recently endorsed by CTIA.
When a subscriber travels to a market or city in which the subscriber's home
carrier uses GTE-TSI's FraudForce or similar services, GTS-TSI's RVR service
will intercept the call and route it the Company's Voice Verifi-Air(sm) platform
for voiceprint verification. If the confidence coefficient resulting from
VVA's voiceprint match exceeds the pass threshold established by the carrier,
the caller's roaming session will be enabled. If the threshold is not
attained, the caller will be routed to the carrier's customer care center for
additional verification information.
Unlike technology for home market verification, Voice Verifi-Air(sm) validates
the identity of the caller - not the cell phone or device. Because of this
fact, the Company believes its SpeakEZ Voice Print(sm) technology will be
effective at controlling other kinds of wireless fraud, such as subscription
fraud and cell phone theft. This factor along with the avoidance of major
capital investments by the carrier and RVR infrastructure, should make VVA an
attractive solution to the cellular carriers' roaming fraud problems.
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FINANCIAL SERVICES MARKET
The SpeakEZ Voice Print(sm) technology for the commercial market field is
Customer Verification Service(sm) (CVS). CVS is designed for use by banks,
brokerage houses, insurance companies, and other financial institutions to
authenticate customer transactions. CVS can work in conjunction with an
overall plan to provide the very best in customer service while at the same
time protecting the financial institution from fraudulent transactions from
unauthorized persons. Access to services would only be permitted when
requested by individuals whose voice print is on file and whose real- time
password utterance matches the stored voice print.
A customer simply dials the access number to the financial institution's call
center. The customer is then instructed to enter his/her Personal
Identification Number (PIN) or account number. The SpeakEZ Voice Print(sm)
system's Voice Response Unit (VRU) prompts the caller to speak the password
which was previously established by the caller in the enrollment process. At
this stage, the system analyzes the characteristics of the caller's statement
of the password (Feature Extraction) and characterizes its tonal aspects
(Modulation Model). The process also results in characterization and isolation
of the channel environment (i.e., line type, hand-set type).
The account number data is indexed to the authorized caller's voice print as a
result of the enrollment process. The stored voice print is then accessed from
the T-NETIX Voice Identification Data Basesm (VIDB). The voice print of the
authorized caller, which is stored in the form of a pattern classifier, is used
to process the utterance. Through the use of the Neural Tree Network, a nearly
instantaneous (300-500 milliseconds) response is obtained that consists of a
coefficient which indicates the confidence level of the match. The financial
institution determines the confidence or "matching" level at which the call is
to be denied, allowed or referred (transferred) to a live operator for
assistance or further screening. The entire process, including the VRU
prompts, is accomplished in less than five seconds.
The Company believes CVS will be cost effective and easy to implement for the
financial institution. The caller uses an ordinary office, home or public
telephone - unlike other biometric identification technologies such as
fingerprint, signature or retinal scans, no special hardware or devices are
required at the "point of sale". CVS is client server and network-based. It
can run in Window-NT and OS/2 and will support the prevalent Interactive Voice
Response ("IVR") and Computer Telephony Integration ("CTI") environments. CVS
is near completion of its integration with IBM's DirectTalk/Call Path systems
Dialogic's Antares offerings. Currently, several major financial institutions
are evaluating the performance, integration, and customer acceptance aspects of
CVS.
SYSTEM ARCHITECTURES AND TECHNOLOGY
Call Processing Technology
The Company's proprietary technology is designed for the specialized call
processing environment and includes the Company's system architectures
consisting of microprocessor-based line cards connected to multiple host
processors by fiber-optic local area networks. The host processors consist of
dual 386, 486 or Pentium microprocessors. System features are implemented
through a combination of proprietary software and database management
applications. The Company uses and supports a variety of network interfaces
including 2-wire and 4-wire, T-1, ISDN and Feature Group D to interface with
its customers' networks. Remote system management and real-time system
diagnostics across the Company's wide area frame relay network is provided
through the Company's network operations center which operates 24 hours a day.
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The Company's system architectures are fault tolerant, with redundancies
provided for critical operations. The multiple host processor design provides
backup in the event one host fails. If a local area network link or multiple
host processors were to fail, the line cards can operate as stand-alone call
processing systems. Moreover, call record data is stored in several media at
the line card and host processor level to ensure against call data loss. This
distributed and redundant design is highly reliable and reduces the probability
of complete system downtime.
The proprietary technology referred to above can be deployed to service
providers in varying methods. In both the premises and network architectures,
the telephones and the interconnecting network lines are usually provided and
maintained by the Company's customers at their cost. Typically, the Company
owns, installs and operates at its cost the systems which interface with the
customers' telephones and their networks.
Correctional Industry Systems Architecture
The Company has developed both premises-based and network-based systems to
provide flexibility in the provision of inmate calling services by its
customers. The Company's premises-based systems are located in secure areas of
the jail or prison and are operated by the Company's system administrators. In
a typical installation, microprocessor-based controllers, or "line cards," are
positioned between the customer-provided inmate telephones and their network
access lines.
Unlike the premises-based systems, the network-based systems are not directly
connected to the inmate telephone. Instead, calls originating from the inmate
telephones are switched to the Company's equipment, located in leased
commercial office space referred to as a "point of presence" ("POP"), through a
software routing instruction programmed into the local carrier's central office
switch. The Company's network-based systems offer higher utilization per line
card and are deployed without requiring the installation of any of the
Company's equipment within the correctional facility.
The Company's latest network-based system (T-NET(TM)) is the adjunct
architecture. T-NET(TM) is designed in stand-alone and network-based
configurations. The stand-alone T-NET(TM) systems are located in POPs, usually
in close proximity to the customer's network switch. The T-NET(TM) adjunct is
designed to work with the #5ESS switch, offering advanced call processing
services in a manner transparent to the larger AT&T network.
Currently, the Company has deployed 57 stand-alone T-NET(TM) systems and 15
T-NET(TM) adjunct systems for AT&T. Also, the Company has installed a large
stand-alone system for an RBOC customer located in the customer's central
office. The Company intends to migrate all stand-alone T-NET(TM) systems to
adjunct systems as they are developed and deployed. Both systems have been
designed with this migration process in mind, so most of the system components
are compatible.
The first version of the T-NET(TM) adjunct system was jointly developed with
AT&T Bell Labs to interface with the #5ESS network switching system. The first
of 33 such adjuncts was deployed in an AT&T switching office in Atlanta,
Georgia. The adjunct version of T-NET(TM) has several economic advantages over
its stand-alone version. For example, the Company can obtain 100% coverage of
the U.S. by deploying in 33 geographic locations compared to 200 potential
sites for the stand alone version. This greatly reduces the Company's system
administration, office leasing and operating costs. Additionally, the new
version has enhanced interfaces with AT&T's billing and fraud databases which
eliminates several back office support functions currently being provided by
the Company's Denver Data Center.
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Speaker Verification Technology
SpeakEZ Voice Print(sm) technology is proprietary software which compares the
speech pattern of a current speaker with a stored digital voice print of the
authorized person to confirm or reject claimed identity. The technology can be
used in a text independent or text dependent mode and is being adapted to
perform identification (no preclaimed ID such as a PIN). The technology is
both language and vocabulary independent. The system uses a combination of
neural network technology and decision trees called a "neural tree network."
Each node of the system's decision tree consists of a single neuron. Training
of neurons requires four or five repetitions of a user-defined password (text
dependent) or a small sample of speech (text independent) and applies
"discriminant training" to the input. This discriminant training contrasts
acoustic features of the speaker being enrolled with features for all the
speakers already enrolled in the system. During verification, each neuron must
decide whether acoustic features of the spoken input are more like those of the
person whose identity is claimed or more like those of all other speakers in
the system. Speakers are enrolled using a personal abbreviated password,
typically the person's name, which they must say before being allowed to place
a telephone call or perform a transaction. The password utterance is then
compared to the stored print for that allowed user or users. The user
population can be large and varied. The system can reside on the public
network as an intelligent peripheral or can be placed as an adjunct servicing a
customer phone system or PBX. In a cellular environment, the system can be an
adjunct to the Mobile Service Center (MSC). The system also operates on
T-NETIX, Inc.'s Adjunct Processor ("AP") platform.
The first point of integration with a customer is accomplished through trunking
between the AP and a customer's Call Center PBX/ACD. This interface permits
the transmission of the account number or other relevant data from the caller
in the event that the Account Number Data or other relevant data is not
provided via the integration of the AP with the Computer Telephone Integration
(CTI) Server. The voice path interface also permits the AP VRU to prompt the
caller to speak their password and allows the speaker verification process to
be performed. At the conclusion of the SpeakEZ Voice Print(sm) speaker
verification process and based on the customer-selected post-processing
instructions, the call is released back to the PBX/ACD for either normal
processing or to be transferred to an operator center for further handling.
The second point of integration is the customer's data base usually associated
with the fraud management system. This data integration provides the
capability to keep current the T-NETIX VIDB(sm) and for the transmission of
management and fraud alert reports from the T-NETIX AP to the customer's fraud
management system. This communication can be accomplished via the CTI link to
the PBX/ACD or directly to the appropriate server.
The final point of integration that would be required is between the customer's
Account Activation/ Maintenance operations and the T-NETIX VIDB(sm) enrollment
process. This integration provides for the conversion enrollment of existing
subscribers to the system and for the activation enrollment of new subscribers.
The enrollment process itself is VRU-based with the subscriber being asked to
state his/her password 4-5 times to allow the system software to construct the
authorized voice print. Within minutes the system prepares the voice print,
and on a regularly scheduled basis updates T-NETIX VIDB(sm) with the new
subscriber identification information. As an option, the T-NETIX AP can be
located as a network Point-of-Presence (POP). Calls would be routed to the AP
via the carrier for the customer. The process for the customer would be
similar to the Premise Delivery architecture. At the conclusion of the SpeakEZ
Voice Print(sm) speaker verification process and based on the customer-selected
post-processing instructions, the call is released back to the PBX/ACD for
either normal processing or to be transferred to an operator center for further
handling.
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The benefit of this option would be the ability to handle calls potentially
from multiple Call Centers and route the call appropriately once the speaker
verification is completed. The interface requirements with the customer fraud
management system and the Account Maintenance and Activation operations would
be the same. These interfaces would also benefit from the ability to handle
multiple Call Centers from a single location.
SUPPORT INFRASTRUCTURE
Call Processing
The call applications enabled by the Company's technology provide customized
programming and call handling services on a per call or per person basis and
require optimized systems management. The Company's systems administration
employees typically assume all operational responsibilities for the Company's
systems and manage the day-to-day configuration of the systems. These
employees perform such functions as changing all blocking profiles for inmates
and monitoring and cataloging calls and are critical to the smooth operation of
the Company's systems. To deliver its services with the highest quality, the
Company has adopted a Total Quality Management program. Its systems are
supported by a national services organization consisting of over 177 employees
covering 43 states. The Company's systems can be administered on-site or from
a remote location through network management software. The Company deploys its
system administrators depending on several criteria, including the size of the
facility, the feature set of the facility (PIN versus non-PIN), the geographic
proximity of the Company's current system administrator force and the
correctional facility requirements.
A wide area network connects all of the Company's installed systems and
provides for centralized collection of call and reporting data and real-time
diagnostic information on the status of each major system component. The
Company also uses the network to process the on-line called number validation,
tele-process its call records and transmit administrative data between each
location and headquarters. This call data is reformatted and provided to the
customer to be incorporated in the billing process. To process calls, the
Company performs real-time billed number validation by external database query
over the network to an on-line database service provided by its customers. Its
Denver-based network operations center provides 24-hour per day system support.
Speaker Verification
The Company's SpeakEZ Voice Print(sm) technology is designed for full service
delivery or for "plug-and-play" applications. The company anticipates its
SpeakEZ Voice Print(sm) software applications will be mostly customer
administered.
PRICING
Transaction-based Pricing
The Company's transaction-based pricing provides a recurring, usage-driven
revenue stream. In a typical arrangement, the Company operates under long-term
(three to seven years) site-specific contracts with both a long-distance
carrier and a local call provider. The customer pays transaction fees for each
call processed by the Company, regardless of whether the customer collects the
revenue for the call. The transaction fee is determined by the type of service
performed by the Company and the total volume of calls processed for the
customer during the monthly billing period. The Company bills these customers
for transaction fees associated with calls processed during the previous month
on net 30-day terms.
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The Company offers its customers a volume-adjusted schedule of transaction fees
which provides discounts for higher volumes of calls processed per month.
Since the discounted fees apply to all of the Company's call processing
services, the customers have the incentive to increase the amount and scope of
services performed by the Company.
The Company separately bills the customer for other network services required
by the customer, such as on-line database queries performed as part of the
collect call validation process, and for certain types of network access lines.
These services are billed to the customer with minimal margins on net 30-day
terms.
The Company's transaction-based pricing structure was developed in response to
customers' demand for lower deployment costs and to reward customers for
increased utilization of the Company's services. The Company believes that its
transaction-based pricing policy differentiates it substantially from its
competitors, enables its customers to rapidly deploy advanced call processing
services to new sites and reinforces the relationships between the Company and
its customers.
Speaker Verification Pricing
To date there have been no sales of the SpeakEZ Voice Print(sm) technology.
Pricing strategies may include client-server and licensing options along with
transaction based pricing.
CUSTOMERS
Inmate Calling
The Company provides its call processing services to AT&T, Bell Atlantic, GTE,
NYNEX, Pacific Telesis, Southwestern Bell, US West, and other call providers.
For the year ended July 31, 1996, AT&T, Bell Atlantic, Southwestern Bell and US
West accounted for approximately 40%, 10%, 14% and 13%, respectively, of the
Company's total revenue. No other customer accounted for more than 10% of the
Company's total revenue in the same period. The Company believes that its
customers have selected it on the basis of the quality and breadth of its
turn-key services, the capability of its technology and its ability to price
its services at competitive rates. The Company generally establishes
non-exclusive master agreements with its customers which set forth the general
terms and conditions, including price, under which the Company will provide its
call processing services. The Company then enters into three to seven year
site-specific contracts under these master agreements which govern the
provision of services in specific correctional facilities. Each master
agreement provides that its term is automatically extended through the term of
any site-specific contract under the master agreement. Certain site-specific
contracts contain early termination provisions, including penalties. The
Company's services are generally evaluated by its customers against both
internal and external competition. During an extensive trial or testing phase,
typically lasting nine to eighteen months, the Company's delivery of services
is evaluated to ensure interoperability with the customer's infrastructure.
In a typical installation at a correctional facility, the Company provides its
services to AT&T, for inter-LATA calls, and one of its other customers for
local and intra-LATA calls. Under this arrangement, the Company's services are
provided to both customers, who, in turn, can offer a consistent service
offering to the correctional facility. The Company believes this joint teaming
arrangement with AT&T and an intra-LATA provider, usually an RBOC, presents a
formidable competitive bid relative to the offerings of many of the Company's
competitors.
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The Company's strategic relationships with its customers have resulted in
several important benefits to the Company:
- - A significant portion of the Company's revenue has come from the
conversion of its customers' existing contracts with correctional
facilities. The Company has received a commitment from AT&T to
convert all of its inmate calling traffic not currently serviced by
the Company to the T-NET(TM) adjunct call processing platform.
- - The Company and its customers jointly submit proposals to state
departments of corrections and large correctional facilities for new
business opportunities. The Company is providing its services to 25
such state departments (including the District of Columbia) as of July
31, 1996.
- - The Company benefits from the scope of its customers' sales and
marketing staffs and greater market presence.
One of the Company's longest standing and most significant strategic
relationships is with AT&T. The Company believes it is AT&T's primary choice
for the provisioning of its inmate calling services to correctional facilities
with over 25 inmate telephone lines. The Company participates in AT&T's
product team meetings to plan future services to the corrections market.
Through its relationship with AT&T, the Company intends to offer its expanded
and integrated corrections applications to the inmate calling market and
anticipates offering other non-inmate network-based services to other markets.
Speaker Verification
There have been no sales to date for the SpeakEZ Voice Print(sm) verification
technology. The Company is considering various marketing channels for
distribution of such products. This may include service provider delivery and
leveraging off current customer relationships. The Company has, however,
established relationships for trials of applications of its SpeakEZ Voice
Print(sm) technology. For example, in the wireless market GTE-TSI has agreed
to test the Company's SpeakEZ Voice Print(sm) technology as the means by which
the roaming callers' authenticity will be verified. GTE-TSI has indicated, that
pending satisfactory performance and user acceptance, it will use the Company's
SpeakEZ Voice Print(sm) technology exclusively and will commit to specific
roll-out or deployment obligations.
In the wireline market, the Company has entered into a trial with AT&T for the
potential use of SpeakEZ Voice Print(sm) technology to address fraud on some of
AT&T's long distance services.
COMPETITION
Inmate Calling
The telecommunications services industry, especially the Public Communications
sector and the inmate calling market, is and can be expected to remain highly
competitive. The Company competes directly with other suppliers of inmate call
processing systems that sell their products to the Company's customers, such as
manufacturers of call processing equipment. These include Lucent Technologies
(formerly AT&T Network Systems), NORTEL (formerly Northern Telecom, Inc.),
Gateway Technologies, Inc., Harris Corporation, and Science Dynamics
Corporation. The Company and its customers compete with other call providers,
such as MCI and Sprint to obtain contracts for inmate calling services.
Finally, the Company's systems may also compete with technologies developed
internally by its customers, such as those developed by AT&T Bell Labs. The
Company believes that its ability to compete in the inmate calling industry
depends upon the quality of the features and services it provides, its
proprietary technology such as three-way call prevention, lower cost of
deployment through transaction-based pricing, the availability of on-site
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administrators, the flexibility it offers through both premises-based and
network-based systems and the strength of its relationships with customers.
However, the Company often relies on its customers to market its services to
correctional facilities, which has the effect of limiting the Company's control
over the outcome of competitive bidding processes.
Speaker Verification
The market for speaker verification technology is relatively new. The Company
will primarily compete with speech verification companies along with
established speech recognition, IVR and telephone system companies. These
include AT&T, InterVoice, Inc., ITT Aerospace/ Communication, MOSCOM Corp.,
Texas Instruments, Veritel Corporation and Voice Control Systems, Inc., and
Voice Processing Corporation. The Company believes that its ability to compete
for the markets outlined previously, depends on the performance of its
technology, its feature-rich nature, and the cost and ease with which it is
integrated with customers networks. In addition, the Company believes existing
relationships and experience strengthen its competitive position.
MANUFACTURING AND PRODUCT DESIGN
Inmate Calling
The Company designs and develops its proprietary technology for its inmate
calling systems. The Company has designed eleven proprietary printed circuit
boards for its products.
The manufacturing process consists of line card assembly (performed by ISO 9002
compliant subcontractors) and system integration and testing (performed by the
Company). The Company's primary subcontractor purchases virtually all of the
peripheral devices and components of its systems from other manufacturers.
Most of the components and peripheral devices are available from a number of
different suppliers, although the Company purchases one component from a single
source. Although the Company has not experienced any significant problems in
obtaining required supplies and believes that alternative sources for most
items could be obtained, future shortages of components could result in
installation delays which might have a material adverse effect on its business.
The Company has adopted inventory policies which are designed to mitigate this
risk.
The final assembly and systems installation consists of rack-mounting multiple
line cards, configuring the local area network, calibrating and conditioning
the system and customizing software as required by the correctional facility.
These procedures are performed by the Company's installers and system
administrators on site, or at the point-of- presence in the case of a
network-based installation. The Company strongly emphasizes quality control in
the design, manufacture, installation and test phases of the product
development and service delivery process.
Speaker Verification
SpeakEZ Voice Print(sm) technology is primarily software applications. The
hardware necessary for implementation is primarily provided by third party
manufacturers and is available from a variety of suppliers.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that the timely development of new products and
enhancements to existing products is essential to maintain its competitive
position. The Company conducts research and development to enhance its
existing products (including inmate calling products and SpeakEZ
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Voice Print(sm) products) and to build new products , both complementary to the
existing product line and in new functional areas. Delays or difficulties
associated with new products or product enhancements could have a material
adverse affect on the Company's business, operating results and financial
condition.
During fiscal 1996, 1995 and 1994, the Company's research and product
development expenditures were approximately $2.4 million, $0.7 million and $0.5
million. In fiscal 1996 approximately $1.3 million of research and product
development expenditures were for the SpeakEZ Voice Print(sm) technology. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
DIRECT INMATE CALL PROVISIONING
Prior to the establishment of its transaction-based fee structure, the Company
conducted business as a private provider of inmate calling services directly to
certain correctional facilities. The Company is contractually bound to
continue this business operation; however, it has been converting this business
to the transaction-based fee structure as contracts come up for renewal.
Additionally, the Company from time to time acquires new contracts to provide
inmate calling services directly as an accommodation to certain customers in
situations where the customer has a contract to provide long-distance services
to the correctional facility but where the local exchange carrier is not a
customer and not a member of the bidding team. In these cases, the Company
then acts as the local call provider delivering a consistent level of service
for all inmate calls, local or long distance.
As a direct inmate call provider, the Company buys "wholesale" call services
from the call providers to be re-sold as collect calls to the inmates' called
parties. The Company uses the services of third parties to bill its calls to
the billed parties. The Company enters into direct contracts with the
correctional facilities and pays commissions on the gross billed revenue to the
correctional facilities. Because of these and other operating costs, including
bad debt write-offs, the margins from this line of business are significantly
lower than the Company's transaction-based arrangements and the risk is
considerably higher. As a result, the Company's strategy is to continue to
manage this line of business as an accommodation and expects to convert the
business to the transaction basis as soon as it is practicable to do so.
REGULATION
The Company's customers, and a minor portion of its current operations, are
subject to regulation by the FCC and public utility commissions of certain
states in which the Company and its customers operate. Regulatory actions have
impacted, and are likely to continue to impact, both the Company's customers
and its operations. For example, the adoption of regulations which would
encourage additional competition in the business of the Company's customers
could have a material adverse effect on the amount of business done by such
customers and the manner in which such business is done. A reduction in the
amount of business done by the Company's customers would have a material
adverse impact on the Company's revenue since such revenues are directly
related to volumes of calls processed under the Company's transaction fee
pricing. Changes in the manner in which the Company's customers conduct their
business could have a material adverse impact on the Company if, as a result of
such changes, the Company's services and features were no longer needed or
desired or if the Company were not able to modify, or add to, its services in a
way that meets the new market demands of its customers.
The FCC has adopted a petition filed by an industry group comprised of
independent inmate call providers asking the FCC to adopt regulations modifying
the treatment of the provision of inmate calling services by all LECs including
the RBOCs. This petition requires the LECs to provide separate accounting
records for their public communication segments which includes inmate
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calling. These regulations may be to require LECs to allocate more of their
costs to inmate calling services, thereby making the RBOC customers of the
Company less competitive in this market, which in turn could have a material
adverse effect on the Company.
In 1996, Congress passed the Telecommunications Act of 1996. This legislation
opens up the network of local exchange carriers to further competition, and to
eliminate certain prohibitions upon LECs entering into other lines of business.
The legislation (i) opens local exchange service to competition and preempts
states from imposing barriers preventing such competition, (ii) imposes new
unbundling and interconnection requirements on local exchange carrier networks,
(iii) removes prohibitions on inter-LATA services and manufacturing if certain
competitive conditions are met, (iv) transfers any remaining requirements of
the Consent Decree (including its nondiscrimination provisions) to the FCC's
jurisdiction, (v) imposes requirements to conduct certain competitive
activities only through structurally separate affiliates and (vi) eliminates
many of the remaining cable and telephone company cross-ownership restrictions.
Additionally, the legislation requires the special accounting provisions for
the LECs as requested in the petition described above.
This legislation will significantly change the competitive landscape of the
telecommunications industry as a whole. For example, permitting the RBOCs to
provide long-distance service cause the Company's RBOC customers to become
direct competitors of AT&T, which in turn could adversely affect the Company's
relationships with all such customers. For example, the Company's current
relationship with AT&T may foreclose opportunities to provide long distance
services to its current RBOC customers, if and when they enter the
long-distance market. As a result, a loss of long-distance market share by
AT&T could result in a corresponding loss of market share by the Company.
In April 1992, the FCC proposed a new access plan for operator-assisted
interstate calls. Currently, the site owner selects the call provider for
interstate collect calls or other operator-assisted interstate calls
originating from the site owner's premises. Under the proposed access plan,
referred to as "billed party preference," interstate collect calls or other
operator-assisted interstate calls would instead be provided by the interstate
call provider chosen by the party paying for the call. The billed party
preference proposal, if adopted, could immediately reduce the Company's revenue
derived from existing contracts to the extent that billed parties for
interstate calls currently processed by the Company select call providers with
whom the Company has no relevant contractual relationship. Moreover, if
implementation of this proposal leads to technological or structural changes in
the Public Communications industry, it could render the Company's technology
obsolete, diminish the value of the Company's customer relationships, or reduce
the volume or profitability of calls originating from correctional facilities.
The foregoing discussion does not purport to describe all present and proposed
federal, state and local regulations, legislation, and related judicial or
administrative proceedings relating to the telecommunications industry and
thereby affecting the businesses of the Company. The impact of increased
competition on the operations of the Company will be influenced by the future
actions of regulators and legislators who are increasingly advocating
competition. While the Company would attempt to modify its customer
relationships and its service offerings to meet the challenges resulting from
changes in the telecommunications competitive environment, there is no
assurance it will be able to do so.
PATENTS AND OTHER PROPRIETARY RIGHTS
The Company relies on a combination of patent and copyright law, non-disclosure
agreements and technical measures to establish and protect its proprietary
rights in its systems. The Company vigorously pursues protection of its
proprietary technology and other intellectual properties. On June 7, 1994,
the U.S. Patent & Trademark Office issued to the Company Patent No. 5,319,702
related to three-way call detection. The Company has filed a corresponding
patent application with
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the patent office in Canada, but this application has not yet been acted upon.
On July 23, 1996, the U.S. Patent Trademark Office issued to the Company Patent
No. 5,539,812 which is a continuation-in-part of Patent No. 5,319,702. While
the Company considers any patents issued to be a significant factor in enabling
it to compete in the inmate calling industry, the Company believes its success
is primarily dependent on the knowledge, ability and experience of its
personnel, its customer service and its ongoing ability to develop services to
meet its customers' needs. The Company has sought federal and state trademark
protection for certain of its trademarks, including Strike Three!(TM) and T-
NET(TM).
In conjunction with its acquisition of SpeakEZ, the Company has obtained
certain exclusive and/or non-exclusive rights U.S. and foreign patent
applications relating to the speaker verification and/or identification
technology that are pending in the name of Rutgers University including one
already issued U.S. Patent, i.e., No. 5,522,012 for "Speaker Identification and
Verification System," which was issued on May 28, 1996. The Company has also
filed a patent application in its own name for further developments in that
field.
Despite the precautions taken by the Company, it may be possible for
unauthorized third parties to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. The
Company has and intends to continue to enforce patents issued to it and protect
its trade secrets.
In December 1995, the Company was awarded a Consent Order from the U.S.
District Court in Colorado as a result of a patent infringement lawsuit it
brought against Communications Equipment and Engineering Corp. (CEECO). By
terms of the Consent Order, CEECO admitted infringement of the Company's
technology and agreed to cease the manufacturing of the infringing product.
Included in the CEECO settlement, the Company was granted an exclusive license
for U.S. Patent No. 4,993,062 for "Telephone Control System Including Stored
Blocked and Allowed Telephone Numbers: (the "DULA Patent").
EMPLOYEES
As of July 31, 1996, the Company had 288 full-time equivalent employees in the
following departments: 38 engineering and product development personnel; 18
marketing and sales personnel; 41 finance, information systems and
administrative personnel; 14 production and installation personnel; and 177
field operations personnel. None of the Company's employees are subject to a
collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's corporate headquarters and assembly operations are located in
approximately 13,500 square feet of leased space in Englewood, Colorado. The
lease for such space terminates effective December 31, 1996. 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. These facilities are suitable and adequate for the Company's
operations currently and through the end of the lease. The Company also leases
10,000 square feet in Piscataway, New Jersey, where the company's SpeakEZ Voice
Print(sm) research and development operations are located. In addition, as of
July 31, 1996, the Company leased 25 point of presence locations throughout the
country, with a maximum size of approximately 780 square feet. These point of
presence facilities are suitable and adequate for the Company's operations in
these locations currently and for the foreseeable future.
-20-
<PAGE> 21
ITEM 3. LEGAL PROCEEDINGS
Except as set forth below, the Company is not a part to any pending material
legal proceedings before any court, administrative agency or other tribunal.
Further, the Company is not aware of any litigation which is threatened against
it in any court, administrative agency or other tribunal.
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 "'702 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 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.
In June, 1996, the motions filed by the Company and AT&T to
dismiss all claims made against the Company and AT&T by Telequip were granted.
The ruling made by the United States District Court for the Northern District
of Texas on June 28, 1996, specifically stated that Telequip had failed to
allege a claim upon which relief could be granted against the Company or
-21-
<PAGE> 22
AT&T. Judge Barefoot Sanders dismissed Telequip's claims of false and
deceptive advertising under the Lanham Act; violations of the Racketeering
Influenced and Corrupt Organizations Act ("RICO"), including allegations that
the Company had committed securities fraud by misrepresenting the true
three-way call detection capabilities of the Company's equipment; and unfair
competition.
On October 21, 1996, the Company reached a settlement with
Gateway Technologies, Inc. of Carrollton, Texas ("Gateway") regarding the
patent infringement litigation between them.
As previously reported in 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. 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. On October
21, 1996, the parties resolved the matters involved in both lawsuits.
Pursuant to the settlement agreement, the parties have filed
and the courts have entered stipulated final judgments and orders dismissing
the claims in litigation. As part of the settlement, the Company and Gateway
have agreed to cross-license certain patents involved in the litigation. Each
party will pay royalties to the other for the use of such patents.
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 July 1996, the Company filed a patent infringement lawsuit
against BellSouth Telecommunications, Inc. ("BellSouth"). The suit seeks an
injunction against the continued use of infringing product by BellSouth's
current prison and jail customers. The Company alleged that BellSouth has
purchased, installed and continued to use equipment which infringes on the
Company's three-way call detection technology (the "'702 Patent"). The
equipment in question was manufactured by Communications Equipment and
Engineering Corp. Also in July 1996, BellSouth filed an action against the
Company requesting a declaratory judgment of noninfringement and invalidity of
the Company's '702 Patent. Bell South has not claimed any monetary damages in
either action to date and to date there is no basis for any claims which would
result in a material loss to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter of the fiscal year on which this report is being made.
-22-
<PAGE> 23
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of the Company is quoted on the NASDAQ National Market System
under the symbol "TNTX." The following table sets forth the range of quarterly
high and low closing sale prices of the Common Stock of the Company, all as
reported on the NASDAQ National Market System since the Company's initial
public offering on November 8, 1994.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Year Ended July 31, 1996
First quarter . . . . . . . . . . . . . . $ 15.00 $11.50
Second quarter . . . . . . . . . . . . . . 13.75 8.19
Third quarter . . . . . . . . . . . . . . 12.75 8.75
Fourth quarter . . . . . . . . . . . . . . 16.50 7.25
Year Ended July 31, 1995
Second quarter (from November 8, 1994) . . $ 10.25 $ 7.38
Third quarter . . . . . . . . . . . . . . 13.00 9.00
Fourth quarter . . . . . . . . . . . . . . 14.50 10.00
</TABLE>
As of October 15, 1996, the number of record holders of the Company's common
stock was approximately 228, and the Company estimates that as of that date
there were 2,019 beneficial owners of its stock.
The Company has never declared or paid any cash dividends on its capital stock.
The Company currently intends to retain its earnings, if any, to finance future
growth and therefore does not anticipate paying any cash dividends in the
foreseeable future.
-23-
<PAGE> 24
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of the end of, each of
the years in the five-year period ended July 31, 1996, are derived from the
audited consolidated financial statements of the Company and subsidiaries. The
consolidated financial statements as of July 31, 1996 and 1995, and for each of
the years in the three-year period ended July 31, 1996, are included elsewhere
in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Telecommunications services . . . . . . . . . $30,249 $24,262 $ 7,529 $ 2,000 $ 131
Direct call provisioning . . . . . . . . . . . 3,072 3,492 3,416 3,342 2,280
Other revenue . . . . . . . . . . . . . . . . 57 - - - -
Equipment sales . . . . . . . . . . . . . . . - - 345 225 693
------- ------- ------- -------- -------
Total revenue . . . . . . . . . . . . . . 33,378 27,754 11,290 5,567 3,104
Expenses:
Operating costs and expenses:
Telecommunications services . . . . . . . . 13,489 10,658 3,128 1,172 83
Direct call provisioning . . . . . . . . . . 2,940 3,370 2,840 2,695 1,828
Cost of equipment sold . . . . . . . . . . . - - 304 182 646
------- ------- -------- -------- -------
Total operating costs and expenses . . . . 16,429 14,028 6,272 4,049 2,557
Selling, general and administrative . . . . . 6,434 5,413 2,703 1,965 1,944
Research and development . . . . . . . . . . . 2,374 732 494 317 199
Depreciation and amortization . . . . . . . . 5,920 3,607 1,099 381 70
------- ------- ------- -------- -------
Total expenses . . . . . . . . . . . . . . 31,157 23,780 10,568 6,712 4,770
------- ------- ------- -------- -------
Operating income (loss) . . . . . . . . . . . 2,221 3,974 722 (1,145) (1,666)
Interest and other expenses, net . . . . . . . (548) (636) (1,044) (441) (234)
------- ------- ------- ------- -------
Earnings (loss) before income taxes . . . 1,673 3,338 (322) (1,586) (1,900)
Income taxes . . . . . . . . . . . . . . . . . (46) (150) - - -
------- -------- ------- ------- -------
Net earnings (loss) . . . . . . . . . . . $ 1,627 $ 3,188 $ (322) $(1,586) $(1,900)
======= ======= ======= ======= =======
Net earnings (loss) per common share . . . . . $ 0.18 $ 0.38 $ (0.06) $ (0.32) $ (0.61)
======= ======= ======= ======== =======
Weighted average common shares
outstanding . . . . . . . . . . . . . . . . 9,151 8,360 5,280 4,907 3,102
NUMBER OF CALLS PROCESSED . . . . . . . . . . . . 79,760 61,650 19,846 5,974 386
<CAPTION>
JULY 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(AMOUNT IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . . . . . . $42,527 $34,904 $16,968 $ 5,838 $2,123
Loans from customer . . . . . . . . . . . . . . . - 449 3,728 3,550 277
Debt and capital lease obligations . . . . . . . 6,809 5,613 5,883 2,185 1,593
Total liabilities . . . . . . . . . . . . . . . . 16,968 14,449 15,401 7,535 3,068
Shareholders' equity (deficit) . . . . . . . . . 25,559 20,455 1,567 (1,697) (945)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For a comprehensive understanding of the Company's financial condition and
performance, this discussion should be considered within the context of the
consolidated financial statements and accompanying notes and other information
contained herein.
-24-
<PAGE> 25
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained in management's
discussion and analysis of financial condition and results of operations and
elsewhere in this Form 10-K include forward-looking statements that involve
risks and uncertainties not limited to, the demand for the Company's products
and services and market acceptance risks, the effect of economic conditions,
the impact of competitive products and pricing, the Company's continuing
ability to develop hardware and software products, commercialization and
technological difficulties, manufacturing capacity and product supply
constraints or difficulties, actual purchases by current and prospective
customers under existing and expected agreements, the progress of contract
implementation efforts that allow the Company to recognize revenue under its
accounting policies, and the results of financing efforts, along with the other
risks detailed herein.
OVERVIEW
The Company derives revenue under contracts with its customers, including AT&T,
Bell Atlantic, GTS, NYNEX, Pacific Telesis, Southwestern Bell and US West, and
other telecommunications 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
------------------------------------------------------------------------------------------------------
JUL. 31, APR. 30, JAN. 31, OCT. 31, JUL. 31, APR. 30, JAN. 31, OCT. 31,
1996 1996 1996 1995 1995 1995 1995 1994
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Call volumes processed ....... 21,064,000 20,344,000 19,715,000 18,637,000 18,131,000 16,958,000 15,020,000 11,541,000
Average daily transactions.... 229,000 226,000 214,000 203,000 197,000 191,000 163,000 125,000
</TABLE>
The Company's call volume and revenue growth have resulted primarily from
adding call processing systems for both existing and new customers. The
Company believes it has also benefited, to a lesser extent, from 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 systems for existing
customers. For the year ended July 31, 1996, the Company processed
approximately 79.8 million calls, as compared to approximately 61.7 million for
the corresponding period of 1995. 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 and
identification technologies. The Company believes that its on going product
development activities for the SpeakEZ Voice Print(sm) technology will provide
future opportunities for revenues. The Company is currently unable to estimate
the timing or amount of any future revenues from this technology. 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 and marketing associated with these products. This trend is
expected to increase. Correspondingly, the Company's selling, general and
administrative expenses (including marketing) have increased significantly in
support of these additional research and development activities and in
anticipation of the eventual entry by the Company into new markets.
-25-
<PAGE> 26
RESULTS OF OPERATIONS
Fiscal 1996 Compared to Fiscal 1995
The following table sets forth certain statement of operations data as a
percentage of total revenue for the years ended July 31, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Revenue:
Telecommunications services . . . . 91% 87%
Direct call provisioning . . . . . . 9 13
Other revenue . . . . . . . . . . . - -
--- ---
Total revenue . . . . . . . . . . . 100 100
Expenses:
Operating costs and expenses . . . . 49 51
Selling, general and administrative 19 19
Research and development . . . . . . 7 3
Depreciation and amortization . . . 18 13
--- ---
Operating income . . . . . . . . . . 7 14
Interest and other income (expense) (2) (2)
--- ---
Earnings before income taxes . . . . 5 12
Income taxes . . . . . . . . . . . . - (1)
--- ---
Net earnings . . . . . . . . . . . 5% 11%
=== ===
</TABLE>
Total Revenue. Total revenue increased 20% to $33,378,000 for the year ended
July 31, 1996, from $27,754,000 for the prior year. This increase resulted
from a 25% increase in telecommunications services revenue to $30,249,000 for
the year ended July 31, 1996, from $24,262,000 in the prior year, due to a 29%
increase in call volume to 79,760,000 calls resulting primarily from an
increase in the number of installed systems and the conversion of direct call
provisioning to transaction based fee contracts with other call providers. Due
to the Company's significant 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 telecommunications services revenue
dollars is a reduction in charges per call as the Company's customers meet
contractually agreed upon call volume discounts. Specifically, these discounts
accounted for a reduction in revenue of approximately $1,180,000 during the
year ended July 31, 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 customers reach
contractually agreed upon call volume discounts. Direct call provisioning
revenue decreased as a percentage of total revenue in part due to the increase
in telecommunications services revenue and due to the conversion of direct
sites to telecommunications services revenue. There was also a dollar decrease
in direct call provisioning revenue 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. Other revenue, although not material, includes amounts
earned on government funding from a Small Business Innovative Research (SBIR)
grant centered around the SpeakEZ Voice Print(sm) technology.
Operating Costs and Expenses. Total operating costs and expenses increased to
$16,429,000 for the year ended July 31, 1996, from $14,028,000 for the year
ended July 31, 1995, but decreased as a percentage of total revenue to 49% from
51% in the prior year. Total operating costs and expenses as a percentage of
total revenue decreased due to an increase in telecommunications services
revenue which has a higher margin than direct call provisioning. This was
partially offset
-26-
<PAGE> 27
by a decline in margins for telecommunications services due to 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 years ended July
31, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Operating costs and expenses:
Telecommunications services . . . . . . . . . . 45% 44%
Direct call provisioning . . . . . . . . . . . 96 97
</TABLE>
Operating costs and expenses associated with providing telecommunications
services increased as a percentage of corresponding revenue to 45% for the year
ended July 31, 1996, from 44% in the prior year. During fiscal 1996 there was
a decline in margin for telecommunications 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 with minimal margins. Direct call
provisioning costs decreased as a percentage of corresponding revenue to 96%
for the year ended July 31, 1996, from 97% in the prior year. This percentage
decrease is primarily attributable to a decrease in local and long distance
expenses and commission expenses for sites converted to transaction fee sites
or sites not in operation subsequent to July 31, 1995. Bad debt expense
remained constant as a percentage of direct call provisioning revenue at 16%
for the year ended July 31, 1996 and 1995, and is based upon the estimates
provided by the Company's billing agent. There were no equipment sales in the
year ended July 31, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $6,434,000 for the year ended July 31,
1996, from $5,413,000 in the prior year, and remained constant as a percentage
of total revenue at 19%. The dollar increase was $1,021,000. This increase
consists primarily of approximately $695,000 for salaries for administrative
personnel and related expenses (including contract personnel), $238,000 in
insurance costs, and $68,000 in property taxes. Total professional expenses
including accounting, legal, public reporting, and other (net) accounted for a
minimal increase. The increase in salaries and contract personnel is due
primarily to growth in the infrastructure to support current inmate call
processing operations and the development of SpeakEZ Voice Print(sm) technology.
The increase in insurance cost relates to the amount of time directors and
officers and prospectus insurance coverage was in effect for comparative
periods and due to premium increases. Property taxes increased due the
increase in installed systems. The company expects selling, general, and
administrative expenses to increase in anticipation of SpeakEZ Voice Print(sm)
products entering the marketplace. The Company expects approximately a 40%
increase in selling general and administrative expenses for the next fiscal
year, compared to the year ended July 31, 1996. This increase will be
primarily in marketing expenses and related general and administrative support
services associated with the Company's new marketing divisions. These
divisions have responsibility for marketing SpeakEZ Voice Print(sm) products to
their respective industries. There can be no assurance, however, that due to
the potential lack of market acceptance, risk of technological success, or
impact of new competition that revenues will grow at the same rate as the
anticipated selling, general and administrative expenses.
-27-
<PAGE> 28
Research and Development Expenses. Research and development expenses increased
to $2,374,000 for the year ended July 31, 1996, from $732,000 in the
corresponding prior period due to the addition of personnel to develop and
commercialize the Company's SpeakEZ Voice Print(sm) technology and for support
of integration engineering between the Company's core technologies and SpeakEZ
Voice Print(sm) technology. The Company expects the dollar amount of research
and development expense to increase by approximately 50% for the next fiscal
year compared to the year ended July 31, 1996. The increase is associated with
the personnel and other expenses necessary to support the development and
commercialization of SpeakEZ Voice Print(sm) technology related products and
services. There can be no assurance, however, that due to potential lack of
market acceptance, risk of technological success, or impact of new competition
that revenues will grow at the same rate as the anticipated research and
development expenses.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased to $5,920,000 for the year ended July 31, 1996, from $3,607,000 in
the corresponding prior period. The increase is due to an increased fixed
asset base resulting from increased inmate call processing systems 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 for office and testing equipment. The Company
expects depreciation and amortization to continue to increase as the number of
inmate call processing systems and potential installations for SpeakEZ Voice
Print(sm) systems increase and as it purchases additional telecommunications and
office and testing equipment. In addition, amortization of the patent license
rights acquired from SpeakEZ, amounted to $344,000 for the year ended July 31,
1996.
Interest and Other Income (Expense). Interest expense decreased to $548,000
for the year ended July 31, 1996, from $673,000 in the corresponding prior
period. The decrease was primarily attributable to a change in the type of
indebtedness and the related reduction in borrowing rates. Interest income was
not significant for the year ended July 31, 1996 compared to $52,000 for the
corresponding period.
-28-
<PAGE> 29
Fiscal 1995 Compared to Fiscal 1994
The following table sets forth certain statement of operations data as a
percentage of total revenue for the years ended July 31, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------
1995 1994
---- ----
<S> <C> <C>
Revenue:
Telecommunications services . . . . . . . . . . . 87% 67%
Direct call provisioning . . . . . . . . . . . . . 13 30
Equipment sales . . . . . . . . . . . . . . . . . - 3
--- ---
Total revenue . . . . . . . . . . . . . . . . . 100 100
Expenses:
Operating costs and expenses . . . . . . . . . . . 51 56
Selling, general and administrative . . . . . . . 19 24
Research and development . . . . . . . . . . . . . 3 4
Depreciation and amortization . . . . . . . . . . 13 10
--- ---
Operating income . . . . . . . . . . . . . . . . 14 6
Interest and other income (expense) . . . . . . . (2) (9)
--- ---
Earnings (loss) before income taxes . . . . . . 12 (3)
Income taxes . . . . . . . . . . . . . . . . . (1) -
--- ---
Net earnings (loss) . . . . . . . . . . . . . . . 11% (3)%
=== ===
</TABLE>
Total Revenue. Total revenue increased 146% to $27,754,000 for the year ended
July 31, 1995, from $11,290,000 for the prior year. This increase resulted
from a 222% increase in telecommunications services revenue to $24,262,000 for
the year ended July 31, 1995, from $7,529,000 in the prior year, due to a 211%
increase in call volume to 61,650,000, resulting primarily from an increase in
the number of installed systems. Revenue from direct call provisioning and
equipment sales remained relatively constant and/or immaterial.
Operating Costs and Expenses. Total operating costs and expenses increased to
$14,028,000 for the year ended July 31, 1995, from $6,272,000 for the year
ended July 31, 1994, but decreased as a percentage of total revenue to 51% from
56% in the prior year. The decrease in total operating costs and expenses as a
percentage of total revenue was primarily due to the significant increase in
telecommunications services revenue which carries a higher margin than direct
call provisioning. 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 years ended July
31, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------
1995 1994
---- ----
<S> <C> <C>
Operating costs and expenses:
Telecommunications services . . . . . . . . . . . . 44% 42%
Direct call provisioning . . . . . . . . . . . . . 97 83
Cost of equipment sold . . . . . . . . . . . . . . - 88
</TABLE>
-29-
<PAGE> 30
Operating costs and expenses associated with providing telecommunications
services increased as a percentage of corresponding revenue to 44% for the year
ended July 31, 1995, from 42% in the prior year. This percentage increase was
primarily attributable to the increase in costs including a greater proportion
of verification procedure costs, which were billed to customers with minimal
margins. Direct call provisioning costs increased as a percentage of revenue
to 97% for the year ended July 31, 1995, from 83% in the prior year. This
percentage increase is primarily attributable to an increase in local and long
distance expenses and commission expenses for systems added subsequent to July
31, 1994. In addition, bad debt expense for direct call revenue increased as a
percentage of revenue to 16% for the year ended July 31, 1995, from 11% in the
corresponding prior period. The bad debt expense is based upon the estimates
provided by the Company's billing agent. There were no equipment sales in the
year ended July 31, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $5,413,000 for the year ended July 31,
1995, from $2,703,000 in the prior year, but decreased as a percentage of total
revenue to 19% from 24%. The dollar increase was primarily attributable to
legal settlements and expenses, the cost of administrative personnel, sales
commissions which are directly related to number of installed systems, and
telephone charges relating to the support of a larger number of installed
systems.
Research and Development Expenses. Research and development expenses increased
to $732,000 for the year ended July 31, 1995, from $494,000 in the prior year,
due to increased engineering personnel, but remained relatively constant as a
percentage of total revenue.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased to $3,607,000 for the year ended July 31, 1995, from $1,099,000 in
the prior year. These increases were due to an increased fixed asset base,
resulting from increased correctional facilities served by the Company and due
to the Company's continued investment in its data network for verification
procedures.
Interest and Other Income (Expense). Interest and other expenses decreased to
$673,000 for the year ended July 31, 1995, from $1,044,000 in the prior year.
The decrease was primarily attributable to a reduction in indebtedness.
Interest income of approximately $52,000 was primarily derived from temporary
investments of funds from the Company's initial public offering. Changes in
other income (expense) included net gains and losses on debt retirement and
were not significant.
-30-
<PAGE> 31
QUARTERLY RESULTS
The following tables present unaudited quarterly operating results for the
Company and in the opinion of management contain all adjustments necessary for
a fair presentation of the results of operations for these periods. Management
believes that quarter-to-quarter comparisons of the Company's financial results
should not be relied upon as an indication of annual or future performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
JUL. 31, APR. 30, JAN. 31, OCT. 31,
1996 1996 1996 1995
---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Telecommunications services . . . . . . . . . $ 7,914 $ 7,441 $ 7,419 $ 7,475
Direct call provisioning . . . . . . . . . . . 714 742 801 815
Other revenue . . . . . . . . . . . . . . . . 57 - - -
------- ------- ------- -------
Total revenue . . . . . . . . . . . . . . 8,685 8,183 8,220 8,290
Expenses:
Operating costs and expenses . . . . . . . . . 4,291 3,921 4,002 4,215
Selling, general and administrative . . . . . 1,672 1,618 1,526 1,618
Research and development . . . . . . . . . . . 904 651 501 318
Depreciation and amortization . . . . . . . . 1,658 1,532 1,447 1,283
------- ------- ------- -------
Total expenses . . . . . . . . . . . . . . 8,525 7,722 7,476 7,434
------- ------- ------- -------
Operating income . . . . . . . . . . . . . . 160 461 744 856
Interest and other expenses . . . . . . . . . (86) (122) (177) (163)
------- ------- ------- -------
Earnings before income taxes . . . . . . . 74 339 567 693
Income taxes . . . . . . . . . . . . . . . . - (5) (5) (36)
------- ------- ------- -------
Net earnings . . . . . . . . . . . . . . $ 74 $ 334 $ 562 $ 657
======= ======= ======== =======
</TABLE>
The following table sets forth for the periods indicated the percentage of
total revenue represented by certain items in the Company's unaudited quarterly
statement of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
JUL. 31, APR. 30, JAN. 31, OCT. 31,
1996 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Telecommunications services . . . . . . . . . . 91% 91% 90% 90%
Direct call provisioning . . . . . . . . . . . . 8 9 10 10
Other revenue . . . . . . . . . . . . . . . . . 1 - - -
--- --- --- ---
Total revenue . . . . . . . . . . . . . . . . . . 100 100 100 100
Expenses:
Operating costs and expenses . . . . . . . . . 49 48 49 51
Selling, general and administrative . . . . . 19 20 19 20
Research and development . . . . . . . . . . . 11 8 6 4
Depreciation and amortization . . . . . . . . . 19 19 17 15
--- --- --- ---
Operating income . . . . . . . . . . . . . . 2 5 9 10
Interest and other expenses . . . . . . . . . . (1) (1) (2) (2)
--- --- --- ---
Earnings before income taxes . . . . . . . . 1 4 7 8
Income taxes . . . . . . . . . . . . . . . . . (-) (-) (-) (-)
--- --- --- ---
Net earnings . . . . . . . . . . . . . . . . 1% 4% 7% 8%
=== === === ===
</TABLE>
-31-
<PAGE> 32
The following table sets forth the operating costs and expenses for each type
of revenue as a percentage of corresponding revenue for each unaudited quarter:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
JUL. 31, APR. 30, JAN. 31, OCT. 31,
1996 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating costs and expenses:
Telecommunications services . . . . . . . . . . . 46% 43% 43% 45%
Direct call provisioning . . . . . . . . . . . . 88 95 99 100
</TABLE>
Telecommunications services expense in the fourth quarter of $3,663,000
increased $447,000 from the third quarter amount. The increase in
telecommunications services expense as a percentage of corresponding revenue in
the fourth quarter was due to both an increase in validation services revenue
and expense, which carry minimal margins, and an increase in administration
costs associated with newly installed systems. In addition, the growth in
transaction-based revenues was not as large in the fourth quarter as in the
third quarter. Direct call provisioning revenue decreased 4% in the fourth
quarter due to the conversion of several sites to the transaction-based fee
structure. The loss in revenue was accompanied by a decrease in direct call
provisioning costs. Research and development expense in the fourth quarter of
$904,000 increased $253,000 or 39% over the third quarter amount. This was
primarily due to the addition of engineering personnel associated with the
speaker verification technology.
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 year
ended July 31, 1996. The net cash provided by financing activities in the year
ended July 31, 1996 was $1,357,000. Cash provided by operations contributed
$9,474,000 of cash flow for the year ended July 31, 1996, as compared to
$558,000 provided by operations for the prior year. The change in cash
provided by 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 $11,558,000. This included capital
expenditures of $10,440,000 for the year ended July 31, 1996 as compared to
$14,606,000 in the prior year. The capital expenditures for the year ended
July 31, 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 and patent defense
costs. The Company anticipates that capital expenditures for
telecommunications equipment will primarily follow the installation of new
systems. In addition, office and testing equipment expenditures will increase
to support current inmate operations and the new SpeakEZ Voice Print(sm)
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 inmate call processing systems and
potential installations for SpeakEZ Voice Print(sm) 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.
-32-
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is hereby incorporated by reference
to pages F-1 through F-15 of the Company's 1996 Consolidated Financial
Statements, attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Registrant's directors and executive
officers will be set forth in the Registrant's Proxy Statement for use in
connection with the Annual Meeting of Shareholders to be held on or about
December 5, 1996. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be set forth in the
Registrant's Proxy Statement for use in connection with the Annual Meeting of
Shareholders to be held on or about December 5, 1996. Such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners,
directors and executive officers of Registrant will be set forth in the
Registrant's Proxy Statement for use in connection with the Annual Meeting of
Shareholders to be held on or about December 5, 1996. Such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
will be set forth in the Registrant's Proxy Statement for use in connection
with the Annual Meeting of Shareholders to be held on or about December 5,
1996. Such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Index to Financial Statements: A list of the consolidated
financial statements of the Registrant is incorporated herein
at Item 8 and is attached hereto.
2. Financial Statement Schedules: Following is the Index to the
Financial Statement Schedules which are attached hereto.
Independent Auditors' Report on Financial Statement Schedule -
S-1
-33-
<PAGE> 34
Schedule II - Valuation and Qualifying Accounts for the Years
Ended July 31, 1996, 1995 and 1994 - S-2
All other schedules have been omitted because they are not
required, do not apply, or the information is set forth in the
financial statements or notes thereto.
3. Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
(2.1) Acquisition Agreement and Plan of Merger between Registrant and SpeakEZ, Inc. dated October 11, 1995.
(3.1) Articles of Amendment to the Articles of Incorporation of Registrant
(3.2) Amended and Restated Articles of Incorporation of Registrant**
(3.3) Amended and Restated Bylaws of Registrant*
(10.1) 1991 Non-Qualified Stock Option Plan***
(10.2) Form of 1991 Non-Qualified Stock Option Agreement***
(10.3) 1991 Incentive Stock Option Plan***
(10.4) Form of 1991 Incentive Stock Option Agreement***
(10.5) 1993 Incentive Stock Option Plan***
(10.6) Form of 1993 Incentive Stock Option Agreement***
(10.7) Agreement between American Telephone and Telegraph Company and Registrant dated November 1, 1991*
(10.8) Loan Agreement between Registrant and INTRUST BANK, N.A., dated as of April 1, 1996.
(10.9) Standard Industrial Lease between Pacifica Development Properties, II LLC and Registrant dated April
15, 1996 and Amendment Number One thereto, dated May 20, 1996.
(21) Subsidiaries of Registrant*
(23.1) Consent of KPMG Peat Marwick LLP
(27) Financial Data Schedule
- ------------------------
</TABLE>
* Incorporated herein by this reference from the Exhibits to the
Registrant's Registration Statement on Form S-1 filed with the
Commission on September 8, 1994, SEC Registration No. 33-83844.
** Incorporated herein by this reference from the Exhibits to the
Registrant's Amendment No. 1 to Registration Statement on Form S-1
filed with the Commission on October 11, 1994, SEC Registration No.
33-83844.
*** Incorporated herein by this reference from the Exhibits to the
Registrant's Registration Statement on Form S-8 filed with the
Commission on May 23, 1995, SEC Registration No. 33-92642 and amended
on May 3, 1996.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during
the fourth quarter of the year ended July 31, 1996.
-34-
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned on October 28,1996.
T-NETIX, INC.
By: /s/ Thomas J. Huzjak
-------------------------------------------
Thomas J. Huzjak, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Thomas J. Huzjak Chairman/Chief October 28, 1996
- ---------------------------- Executive Officer
Thomas J. Huzjak
/s/ Alvyn A. Schopp Director/Exec. Vice President/ October 28, 1996
- ---------------------------- Chief Accounting Officer
Alvyn A. Schopp
/s/ Daniel M. Carney Director October 28, 1996
- ----------------------------
Daniel M. Carney
/s/ Robert A. Geist Director October 28, 1996
- ----------------------------
Robert A. Geist
/s/ John E. Hayes, Jr. Director October 28, 1996
- ----------------------------
John E. Hayes, Jr.
/s/ James L. Mann Director October 28, 1996
- ----------------------------
James L. Mann
/s/ Kenneth J. Wagnon Director October 28, 1996
- ----------------------------
Kenneth J. Wagnon
</TABLE>
-35-
<PAGE> 36
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets as of July 31, 1996 and 1995 . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for the Years Ended
July 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended
July 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the Years Ended
July 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . F-6
</TABLE>
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
T-NETIX, INC.:
We have audited the accompanying consolidated balance sheets of T-NETIX, Inc.
and subsidiaries as of July 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the years in the three-year period ended July 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of T-NETIX, Inc. and
subsidiaries as of July 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended July
31, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Denver, Colorado
October 7, 1996, except for the first
three paragraphs of Note 11 which
are as of October 21, 1996
F-1
<PAGE> 38
T-NETIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31
-----------------
1996 1995
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 145 $ 872
Trade accounts receivable, net of allowance for doubtful accounts
of $129,000 and $137,000 at July 31, 1996 and 1995,
respectively (note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . 8,222 9,223
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 98
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 267
Property and equipment, at cost (notes 6 and 10):
Telecommunications equipment . . . . . . . . . . . . . . . . . . . . . . . 31,463 23,375
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . 5,012 3,845
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,771 1,585
-------- --------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 39,246 28,805
Less accumulated depreciation and amortization . . . . . . . . . . . . . . (10,516) (5,061)
-------- --------
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . 28,730 23,744
Patent license rights, net (note 4) . . . . . . . . . . . . . . . . . . . . . 2,788 -
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,273 700
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,527 $ 34,904
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,968 $ 6,137
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,191 2,250
Loans from customer (note 5) . . . . . . . . . . . . . . . . . . . . . . . - 449
Debt (note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,324 4,654
Capital lease obligations (note 10) . . . . . . . . . . . . . . . . . . . 485 959
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,968 14,449
Shareholders' equity (note 7):
Preferred stock, $.01 stated value. 10,000,000 shares authorized;
no shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock, $.01 stated value. 70,000,000 shares authorized;
8,150,493 and 7,623,034 shares issued and outstanding at
July 31, 1996 and 1995, respectively . . . . . . . . . . . . . . . . . . 81 76
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 26,208 22,736
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (730) (2,357)
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . 25,559 20,455
Commitments and contingencies (notes 10 and 11)
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . $ 42,527 $ 34,904
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 39
T-NETIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
JULY 31
---------------------
1996 1995 1994
---- ---- ----
(AMOUNTS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue (note 8):
Telecommunications services . . . . . . . . . . . . . . . . . . . $30,249 $24,262 $ 7,529
Direct call provisioning . . . . . . . . . . . . . . . . . . . . . 3,072 3,492 3,416
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 57 - -
Equipment sales - related party . . . . . . . . . . . . . . . . . - - 345
------- ------- -------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . 33,378 27,754 11,290
Expenses:
Operating costs and expenses:
Telecommunications services . . . . . . . . . . . . . . . . . . 13,489 10,658 3,128
Direct call provisioning (including bad debt expense of
$493,000, $559,000 and $384,000 for 1996, 1995 and 1994,
respectively) . . . . . . . . . . . . . . . . . . . . . . . . 2,940 3,370 2,840
Cost of equipment sold . . . . . . . . . . . . . . . . . . . . . - - 304
------- ------- -------
Total operating costs and expenses . . . . . . . . . . . . . . 16,429 14,028 6,272
Selling, general and administrative . . . . . . . . . . . . . . . 6,434 5,413 2,703
Research and development . . . . . . . . . . . . . . . . . . . . . 2,374 732 494
Depreciation and amortization . . . . . . . . . . . . . . . . . . 5,920 3,607 1,099
------- ------- -------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . 31,157 23,780 10,568
------- ------- -------
Operating income . . . . . . . . . . . . . . . . . . . . . . 2,221 3,974 722
Interest and other expenses:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . (548) (673) (1,044)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . - 52 -
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . - (15) -
------- ------- -------
Earnings (loss) before income taxes . . . . . . . . . . . . . 1,673 3,338 (322)
Income taxes (note 9) . . . . . . . . . . . . . . . . . . . . . . (46) (150 -
------- -------- -------
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,627 $ 3,188 $ (322)
======= ======= =======
Net earnings (loss) per common share . . . . . . . . . . . . . . . . $ 0.18 $ 0.38 $ (.06)
======= ======= =======
Weighted average common shares . . . . . . . . . . . . . . . . . . . 9,151 8,360 5,280
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 40
T-NETIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
SHARE-
COMMON STOCK ADDITIONAL ACCUM- HOLDERS'
----------------- PAID-IN ULATED EQUITY
SHARES AMOUNTS CAPITAL DEFICIT (DEFICIT)
------- ------- ------- ------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCES AT AUGUST 1, 1993 . . . . . . . 4,555 $ 46 $ 3,480 $(5,223) $ (1,697)
Amounts due to shareholders converted into
shares of common stock . . . . . . . . 152 2 504 - 506
Common stock issued for cash . . . . . . 546 5 2,998 - 3,003
Common stock issued upon exercise of
stock options . . . . . . . . . . . . . 97 1 27 - 28
Common stock issued for assets acquired 40 - - - -
Common stock issued for services rendered 15 - 49 - 49
Net loss . . . . . . . . . . . . . . . . - - - (322) (322)
----- ---- -------- -------- --------
BALANCES AT JULY 31, 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 acquired . 4 - 22 - 22
Common stock issued for cash, net of
offering costs and underwriting discounts
of $1,631,000 (note 7) . . . . . . . . 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 . . . . . . . . . . . . . 303 3 195 - 198
Common stock issued for assets acquired
(note 3) . . . . . . . . . . . . . . . . 30 - - - -
Common stock issued in business acquisition
(note 4) . . . . . . . . . . . . . . . . 195 2 2,269 - 2,271
Stock option tax benefit (note 9) . . . . - - 1,008 - 1,008
Net earnings . . . . . . . . . . . . . . - - - 1,627 1,627
----- ---- -------- ------- --------
BALANCES AT JULY 31, 1996 . . . . . . . . 8,151 $ 81 $ 26,208 $ (730) $ 25,559
===== ==== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 41
T-NETIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
JULY 31
-------------------------
1996 1995 1994
---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . $ 1,627 $ 3,188 $ (322)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 5,920 3,607 1,099
Provision for losses on accounts receivable . . . . . . . 493 559 384
Noncash interest accruals added to principal . . . . . . . - - 625
Noncash interest accruals added to principal (related party) - 34 172
Noncash reductions of loans from customer . . . . . . . . (449) (2,608) (1,426)
Changes in operating assets and liabilities:
Change in trade accounts receivable . . . . . . . . . . 508 (6,098) (2,820)
Change in other receivables . . . . . . . . . . . . . . 25 (50) (35)
Change in prepaid expenses . . . . . . . . . . . . . . . (28) (241) (4)
Change in other assets . . . . . . . . . . . . . . . . . (163) (448) (98)
Change in accounts payable . . . . . . . . . . . . . . . 1,828 1,312 3,657
Change in accrued liabilities . . . . . . . . . . . . . (287) 1,303 303
------- ------- -------
Cash provided by operating activities . . . . . . . . 9,474 558 1,535
------- ------- -------
Cash used in investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . (10,440) (14,606) (8,427)
Acquisition of business . . . . . . . . . . . . . . . . . (450) - -
Other investing activities . . . . . . . . . . . . . . . . (668) - -
-------- ------- -------
Cash used in investing activities . . . . . . . . . . (11,558) (14,606) (8,427)
------- ------- -------
Cash flows from financing activities:
Proceeds from borrowings . . . . . . . . . . . . . . . . . 1,299 9,506 3,781
Proceeds from borrowings-related party . . . . . . . . . . - 270 201
Payments of debt . . . . . . . . . . . . . . . . . . . . . (25) (8,042) (625)
Payments of debt-related party . . . . . . . . . . . . . . - (1,784) (496)
Proceeds from loans from customer . . . . . . . . . . . . - - 979
Payments of loans from customer . . . . . . . . . . . . . - (671) -
Payments of capital lease obligations . . . . . . . . . . (474) (330) (42)
Common stock issued for cash . . . . . . . . . . . . . . . 198 16,111 3,031
Payment for loan fees and offering costs . . . . . . . . . (37) (434) (89)
Increase (decrease) in bank overdraft . . . . . . . . . . 396 (213) 213
------- ------- -------
Cash provided by financing activities . . . . . . . . 1,357 14,413 6,953
------- ------- -------
Net increase (decrease) in cash and cash equivalents . . . . (727) 365 61
Cash and cash equivalents at beginning of year . . . . . . . 872 507 446
------- ------- -------
Cash and cash equivalents at end of year . . . . . . . . . . $ 145 $ 872 $ 507
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 42
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
T-NETIX, Inc. and subsidiaries ("T-NETIX" or the "Company") was
incorporated in Colorado in 1986. The Company is engaged in the
design, assembly, and management of specialized telecommunications
hardware and software systems.
The Company manages its specialized telecommunications hardware and
software systems for long distance and local exchange carriers on a
contractual basis. The long distance and local exchange carriers in
turn pay a fee per call to the Company for each billable call made
from a phone subject to a contract with the Company. The Company also
receives revenue from billing collect calls made from correctional
facilities in which the Company's specialized telecommunications
hardware and software systems are located.
In October 1995, the Company completed its acquisition of SpeakEZ,
Inc. ("SpeakEZ"). SpeakEZ operates as a wholly-owned subsidiary whose
activity is the research and development of speaker verification
technology. This technology is incorporated into the Company's
proprietary telecommunication systems and is designed in stand alone
verification systems. There has been no significant revenue to date
attributable to the SpeakEZ subsidiary.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and those of its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments, such as
certificates of deposit and money market funds, with original
maturities of 90 days or less.
ACCOUNTS RECEIVABLE
Accounts receivable related to direct call provisioning were $581,000
and $1,008,000 as of July 31, 1996 and 1995, respectively. The
allowance for doubtful accounts relates to these receivables.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, including costs necessary to
place such property and equipment in service. Major renewals and
improvements are capitalized, while repairs and maintenance are
charged to operations as incurred.
Construction in progress represents the cost of material purchases and
construction costs, including interest capitalized during
construction, for telecommunications hardware systems in various
stages of completion. During 1996, 1995 and 1994, interest
capitalized was insignificant.
F-6
<PAGE> 43
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation is computed on a straight-line basis using estimated
useful lives of 3 to 7 years for telecommunications equipment and 5 to
10 years for office equipment. No depreciation is recorded on
construction in progress until the asset is placed in service.
OTHER ASSETS
Other assets include deposits, purchased computer software, patents,
and other intangible assets. Patents and intangible assets are stated
at cost. Amortization is computed on the straight-line basis over 17
years for patent costs and periods ranging from 3 to 7 years for other
intangibles.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its property and equipment and unamortized
intangible assets whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. The Company
estimates the future cash flows expected to result from operations and
if the sum of the expected undiscounted future cash flows is less than
the carrying amount of the long-lived asset, the Company recognizes an
impairment loss by reducing the unamortized cost of the long-lived
asset to its estimated fair value. To date the Company has not
recognized impairment on any long-lived assets.
REVENUE RECOGNITION
Revenue and expenses from telecommunications services and direct call
provisioning are recognized at the time the telephone call is
completed. Revenue under research and development contracts is
recognized as it is earned.
RESEARCH AND DEVELOPMENT
Costs associated with the research and development of new technology
or significantly altering existing technology are charged to
operations as incurred.
401(K) PLAN
The Company established a 401(k) plan for all of its full time
employees effective January 1, 1994. To date, no contributions have
been made to this plan by the Company.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Accordingly, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted income tax rates expected to apply to taxable
income in the years in which those differences are
F-7
<PAGE> 44
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in income tax rates is recognized
in the results of operations in the period that includes the enactment
date.
EARNINGS (LOSS) PER COMMON SHARE
Earnings per common share for the years ended July 31, 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).
The loss per common share for the year ended July 31, 1994 was
computed by dividing the net loss by the weighted average number of
shares of common stock outstanding. For purposes of the calculation
of loss per common share, common stock issued and stock options to
acquire common stock, granted after September 30, 1993, have been
reflected as outstanding for all periods provided, using the treasury
stock method as required by the Securities and Exchange Commission.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123,
"Accounting for the Stock-Based Compensation" ("SFAS 123"), which
establishes a fair value based method of accounting for stock-based
compensation plans. The Company intends to continue to account for
employee stock options under the provisions APB Opinion No. 25,
"Accounting for Stock Issued to Employees". SFAS 123 is effective for
fiscal years beginning after December 15, 1995 and will require
certain additional disclosures in the fiscal 1997 financial
statements.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATION
Certain amounts in the 1995 financial statements have been
reclassified to conform with the 1996 presentation.
(2) SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
Cash paid for interest was approximately $563,000, $591,000 and
$448,000 for the years ended July 31, 1996, 1995 and 1994,
respectively. Cash payments for income taxes during 1996, 1995 and
1994 were not significant.
F-8
<PAGE> 45
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1995 and 1994, the Company acquired $331,000 and $1,000,000,
respectively, in property and equipment subject to capital lease
obligations.
(3) JOINT VENTURE
In November 1991, the Company entered into a joint venture created to
market the Company's specialized telecommunications hardware and
software systems in certain international markets, whereby the Company
owned 49% or the joint venture. Effective October 30, 1995, the
Company acquired the remaining 51% interest in the joint venture,
which was previously owned by a related party, for 30,000 shares of
restricted common stock. As such, the Company recorded its basis in
the assets of the joint venture at the predecessor cost of the related
party, which was not material. There has been no activity in the now
wholly owned subsidiary since acquisition.
(4) BUSINESS ACQUISITION
On October 12, 1995, the Company completed its acquisition of all of
the outstanding stock of SpeakEZ, a development stage company.
SpeakEZ is developing products using biometric identification
technologies including voice print and speaker identification
software. Total consideration for the acquisition was approximately
$3,000,000. The consideration includes $450,000 in cash (including
payment of previously issued notes payable), restricted common stock
of the Company valued at approximately $2,271,000 and approximately
$279,000 payable pursuant to the final distribution agreement, in
restricted stock and cash. The Company accounted for the acquisition
using the purchase method of accounting; accordingly, the purchased
assets and liabilities have been recorded at their estimated fair
value at the date of the acquisition. Amounts in excess of the fair
value of tangible assets acquired were attributed to patent license
rights to existing and pending patents and other intangibles along
with the related deferred income tax effects. The total capitalized
cost of the patent license rights and other intangibles is being
amortized on a straight line basis over seven years. The results of
operations of SpeakEZ have been included in the consolidated financial
statements since the date of the acquisition. Results of operations
of SpeakEZ prior to the acquisition were not significant.
(5) LOANS FROM CUSTOMER
Loans from customer represent amounts borrowed to finance costs
associated with constructing and installing inmate calling systems.
In January 1995, the Company revised the terms of its loans with its
customer and an additional $671,000 was paid to retire a portion of
these loans. The Company recognized a gain of $85,000 on the early
retirement of the loans paid. This amount was included in other
income. The remaining balance of such loans was paid in full in
January, 1996.
F-9
<PAGE> 46
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) DEBT
Debt at July 31, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
JULY 31,
-------------------
1996 1995
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Debt:
Line of credit agreement . . . . . . $ 5,905 $ 4,606
Bank overdraft and other . . . . . . 419 48
------ -------
$ 6,324 $ 4,654
===== =====
</TABLE>
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 (8.25%
at July 31, 1996) and are secured by substantially all of the assets
of the Company. The agreement provides for various financial
covenants, including maintaining certain financial ratios and minimum
net worth requirements. As of July 31, 1996, the Company has an
unused amount on the line of credit of $4,095,000. All of the debt at
July 31, 1996, matures within one year. The Bank has also issued a
standby letter of credit for $225,000 on behalf of the Company in
favor of the lessor on its new office space (note 10). The letter of
credit is for the term of the loan.
(7) SHAREHOLDERS' EQUITY
On November 8, 1994, the Company completed a public offering of
2,100,000 shares of common stock. Of the 2,100,000 shares, 1,800,000
shares were sold by the Company to the public at $9.50 per share. The
proceeds to the Company, net of offering costs and underwriting
discount were $15,469,000.
In May and June 1994, the Company issued 546,000 shares of common
stock in a private placement for $5.50 per share. The shareholders
were subsequently appointed to the Company's Board of Directors.
STOCK OPTION PLANS
The Company has reserved 3,250,000 shares of common stock for
employees and non-employee directors under various stock option plans
(collectively the "Plans"): the 1991 Incentive Stock Option Plan ("the
1991 ISO Plan"); the 1991 Non-Qualified Stock Option Plan ("the 1991
NSO Plan"); and the 1993 Incentive Stock Option Plan ("the 1993 ISO
Plan"). The Plans provide for issuing both incentive stock options,
and non-qualified stock options, which must be granted at not less
than 100% of the fair market value of the stock on the date of grant.
All options to date have been granted at the fair market value of
F-10
<PAGE> 47
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the stock as determined by the Board of Directors. Options issued
prior to 1994 had vesting terms of one to three years from the date of
grant. Substantially all of the Incentive Stock Options issued after
1993 vest over four years from the date of grant. The Options expire
ten years from the date of grant.
<TABLE>
<CAPTION>
SHARES RESERVED OPTIONS EXERCISE
FOR OPTIONS OUTSTANDING PRICE
<S> <C> <C> <C> <C>
Outstanding at July 31, 1993 . . . . 500,000 1,240,000 0.20 - 3.00
Granted . . . . . . . . . . . . . (476,500) 476,500 2.00 - 5.50
Exercised . . . . . . . . . . . . - (97,572) 0.20 - 2.00
Canceled . . . . . . . . . . . . 11,550 (11,550) 3.25
--------- ---------
Outstanding at July 31, 1994 . . . . 35,050 1,607,378 0.20 - 5.50
Increase in authorized shares . . 1,000,000 -
Granted . . . . . . . . . . . . . (691,500) 691,500 5.50 - 12.20
Exercised . . . . . . . . . . . . - (413,563) 0.20 - 3.25
Canceled . . . . . . . . . . . . 101,751 (101,751) 3.00 - 5.50
--------- ---------
Outstanding at July 31, 1995 . . . . 445,301 1,783,564 0.20 - 12.20
Increase in authorized shares . . 500,000 -
Granted . . . . . . . . . . . . . (650,000) 650,000 8.50 - 15.50
Exercised . . . . . . . . . . . . - (302,746) 0.20 - 5.50
Canceled . . . . . . . . . . . . 74,817 (74,817) 3.25 - 9.25
--------- ---------
Outstanding at July 31, 1996 . . . . 370,118 2,056,001 0.20 - 5.50
========= =========
</TABLE>
At July 31, 1996, 925,747 options were exercisable at prices ranging
from $0.20 to $12.25.
In December 1995, the Company's Board of Directors approved by
resolution an increase of 500,000 shares to 3,250,000 in the amount
reserved for options. The resolution was approved by shareholders at
the December 7, 1995, annual shareholders' meeting.
(8) MAJOR CUSTOMERS
Revenue, as a percentage of total revenue, attributable to significant
customers was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Customer A . . . . . . . . . . . . . . . 10% 14% 23%
Customer B . . . . . . . . . . . . . . . 40% 37% 26%
Customer C . . . . . . . . . . . . . . . 13% 12% -
Customer D . . . . . . . . . . . . . . . 14% 11% -
</TABLE>
F-11
<PAGE> 48
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES
Income taxes differ from the expected statutory income tax benefit, by
applying the U.S. federal income tax rate of 34% to pretax income
(loss), for the years ended July 31, 1996, 1995 and 1994 due to the
following (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Expected statutory income tax benefit (expense) . . . . . . . . $ (569) $(1,135) $ 109
Amounts not deductible for income tax purposes . . . . . . . . . (61) (35) 6
Benefit of net operating loss not realized . . . . . . . . . . . - - (122)
State taxes, net of federal benefit . . . . . . . . . . . . . . (30) (110) -
Change in valuation allowance, relating to provision . . . . . 614 1,130 7
------ ------- ------
Total income tax expense . . . . . . . . . . . . . . . . . . $ (46) $ (150) $ -
====== ======= ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax
liabilities are presented below:
<TABLE>
<CAPTION>
JULY 31
------------------------
1996 1995
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards . . . . . . . . . . . . . . $ 3,939 $2,810
Allowance for doubtful accounts . . . . . . . . . . . . . . . 49 56
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 213
------- ------
Total gross deferred income tax assets . . . . . . . . . . 4,056 3,079
Less valuation allowance . . . . . . . . . . . . . . . . . . (1,546) (1,959)
------- ------
2,510 1,120
Deferred income tax liabilities:
Intangible assets, due to difference in book/tax basis . . . (1,008) -
Property and equipment, principally due to differences
in depreciation . . . . . . . . . . . . . . . . . . . . . (1,230) (1,117)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272) (3)
------- ------
Total gross deferred tax liabilities . . . . . . . . . (2,510) (1,120)
------- ------
$ - $ -
======= ======
</TABLE>
At July 31, 1996, the Company had net operating loss carryforwards for
tax purposes aggregating approximately $10,400,000 which, if not
utilized to reduce taxable income in future periods, expire at various
dates through the year 2009. Approximately $1,300,000 of these net
operating loss carryforwards are subject to certain rules limiting
their annual usage. The Company believes these annual limitations
will not ultimately affect the Company's ability to use substantially
all of its net operating loss carryforwards for income tax purposes.
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
F-12
<PAGE> 49
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
deferred tax assets as a result of its history of net losses. The
Company has pre-tax net earnings for the year ended July 31, 1996, and
has reversed the valuation allowance to the extent that net operating
losses and other items were used to offset such earnings. This
decrease in the valuation allowance was reflected as a reduction in
the provision for income taxes and was offset by an increase to the
valuation allowance associated with certain stock option deductions
discussed below.
The exercise of stock options which have been granted under the
Company's 1991 NSO stock option plan gives rise to compensation which
is includable in the taxable income of the applicable option holder
and deductible by the Company for federal and state income tax
purposes. Compensation resulting from increases in the fair market
value of the Company's Common Stock subsequent to the date of grant of
the applicable exercised stock options is not recognized, in
accordance with Accounting Principles Board Opinion No. 25, as an
expense for financial accounting purposes and the related tax benefits
are taken directly to additional paid-in capital.
The Company has recognized current tax expense during the year ended
July 31, 1996 of $46,000. This charge relates primarily to a
provision for certain state income taxes.
(10) COMMITMENTS
The Company leases certain telecommunications and office equipment
under capital leases and leases office space under operating lease
agreements. Capitalized costs of the property and equipment under
capital leases was $1,150,000 at July 31, 1996, and accumulated
amortization was $448,000. Rent expense under operating lease
agreements for the years ended July 31, 1996, 1995 and 1994 was
approximately $450,000, $320,000, and $213,000, respectively. Future
minimum lease payments under these lease agreements for each of the
next five years are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Year ending July 31:
1997 . . . . . . . . . . . . . . . . . . . . $ 398 $ 681
1998 . . . . . . . . . . . . . . . . . . . . 92 629
1999 . . . . . . . . . . . . . . . . . . . . 51 623
2000 . . . . . . . . . . . . . . . . . . . . - 621
2001 . . . . . . . . . . . . . . . . . . . . - 570
------- --------
Total minimum lease payments . . . . . . 541 $ 3,124
======= ========
Less amount representing interest . . . . . (56)
-------
$ 485
=======
</TABLE>
The corporate office operating lease terminates effective December 31,
1996. 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 Bank
has also issued a standby letter of credit on behalf of the Company
for $225,000 in favor of the lessor on the new lease (note 6). The
company leases an additional 10,000 square feet of office space for
its SpeakEZ operations under a five year lease, and various point of
presence locations throughout the United States.
F-13
<PAGE> 50
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) CONTINGENCIES
On October 21, 1996, the Company reached a settlement with Gateway
Technologies, Inc. of Carrollton, Texas ("Gateway") regarding the
patent infringement litigation between them.
As previously reported in April 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
technology (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.
On October 21, 1996, the parties resolved the matters involved in both
lawsuits.
Pursuant to the settlement agreement, the parties have filed and the
courts have entered stipulated final judgments and orders dismissing
the claims in litigation. As part of the settlement, the Company and
Gateway have agreed to cross-license certain patents involved in the
litigation. Each party will pay royalties to the other for the use of
such patents.
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 July 1996, the Company filed a patent infringement lawsuit against
BellSouth Telecommunications, Inc. ("BellSouth"). The suit seeks an
injunction against the continued use of infringing product by
BellSouth's current prison and jail customers. The Company alleged
that BellSouth has purchased, installed and continued to use equipment
which infringes on the Company's three-way call detection technology
(the "'702 Patent"). The equipment in question was manufactured by
Communications Equipment and
F-14
<PAGE> 51
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Engineering Corp. Also in July 1996, BellSouth filed an action
against the Company requesting a declaratory judgment of
noninfringement and invalidity of the Company's '702 Patent. Bell
South has not claimed any monetary damages in either action to date
and to date there is no basis for any claims which would result in a
material loss to the Company.
Certain other claims and suits have been filed or are pending against
the Company. In the opinion of management, all matters are adequately
accrued for, or if not, are of such a nature, or involve such amounts,
as would not have a material effect on the financial position, results
of operations and cash flows of the Company if disposed of
unfavorably.
(12) QUARTERLY RESULTS - (UNAUDITED)
The following tables present unaudited quarterly operating results for
the Company and in the opinion of management contain all adjustments,
necessary for a fair presentation of the results of operations for
these periods. Management believes that quarter-to-quarter
comparisons of the Company's financial results should not be relied
upon as an indication of annual or future performance.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
----------- --------------------------------------------
JULY 31, JULY 31, APR 31, JAN 31, OCT 31,
1996 1996 1996 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUE:
Telecommunication services............... $30,249 $ 7,914 $ 7,441 $ 7,419 $ 7,475
Direct call provisioning................. 3,072 714 742 801 815
Other revenue............................ 57 57 - - -
------- ------- ------- ------- -------
Total revenue......................... 33,378 8,685 8,183 8,220 8,290
EXPENSES:
Operating costs and expenses............. 16,429 4,291 3,921 4,002 4,215
Selling, general and administrative...... 6,434 1,672 1,618 1,526 1,618
Research and development................. 2,374 904 651 501 318
Depreciation and amortization............ 5,920 1,658 1,532 1,447 1,283
------- ------- ------- ------- -------
Total expenses......................... 31,157 8,525 7,722 7,476 7,434
======= ======= ======= ======= =======
Operating income......................... 2,221 160 461 774 856
Interest and other expenses.............. (548) (86) (122) (177) (163)
------- ------- ------- ------- -------
Earnings before income taxes............. 1,673 74 339 567 693
Income taxes............................. (46) - (5) (5) (36)
------- ------- ------- ------- -------
Net earnings.......................... $ 1,627 $ 74 $ 334 $ 562 $ 657
======= ======= ======= ======= =======
Net earnings per common share............ $ 0.18 $ 0.01 $ 0.04 $ 0.06 $ 0.07
======= ======= ======= ======= =======
</TABLE>
F-15
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
T-NETIX, INC.:
Under the date of October 7, 1996, except for the first three paragraphs of
Note 11 which are as of October 21, 1996, we reported on the consolidated
balance sheets of T-NETIX, Inc. and subsidiaries as of July 31, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
July 31, 1996, as contained in the 1996 annual report to shareholders. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
Schedule II. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Denver, Colorado
October 7, 1996
S-1
<PAGE> 53
T-NETIX, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and Deductions/ at End
of Period Expenses Write-offs of Period
--------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended July 31, 1994:
Allowance for doubtful accounts . . . . . . $293 384 (508) $169
==== === ==== ====
Year ended July 31, 1995:
Allowance for doubtful accounts . . . . . . $169 559 (591) $137
==== === ==== ====
Year ended July 31, 1996:
Allowance for doubtful accounts . . . . . . $137 493 (501) $129
==== === ==== ====
</TABLE>
S-2
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit Page
- ------ ---------------------- ----
<S> <C> <C>
(2.1) Acquisition Agreement and Plan of Merger between Registrant and SpeakEZ, Inc. dated October 11, 1995.
(3.1) Articles of Amendment to the Articles of Incorporation of Registrant
(3.2) Amended and Restated Articles of Incorporation of Registrant**
(3.3) Amended and Restated Bylaws of Registrant*
(10.1) 1991 Non-Qualified Stock Option Plan***
(10.2) Form of 1991 Non-Qualified Stock Option Agreement***
(10.3) 1991 Incentive Stock Option Plan***
(10.4) Form of 1991 Incentive Stock Option Agreement***
(10.5) 1993 Incentive Stock Option Plan***
(10.6) Form of 1993 Incentive Stock Option Agreement***
(10.7) Agreement between American Telephone and Telegraph Company and Registrant dated November 1, 1991*
(10.8) Loan Agreement between Registrant and INTRUST BANK, N.A., dated as of April 1, 1996.
(10.9) Standard Industrial Lease between Pacifica Development Properties, II LLC and Registrant dated April
15, 1996 and Amendment Number One thereto, dated May 20, 1996.
(21) Subsidiaries of Registrant*
(23.1) Consent of KPMG Peat Marwick LLP
(27) Financial Data Schedule
- ------------------------
</TABLE>
* Incorporated herein by this reference from the Exhibits to the
Registrant's Registration Statement on Form S-1 filed with the
Commission on September 8, 1994, SEC Registration No. 33-83844.
** Incorporated herein by this reference from the Exhibits to the
Registrant's Amendment No. 1 to Registration Statement on Form S-1
filed with the Commission on October 11, 1994, SEC Registration No.
33-83844.
*** Incorporated herein by this reference from the Exhibits to the
Registrant's Registration Statement on Form S-8 filed with the
Commission on May 23, 1995, SEC Registration No. 33-92642 and amended
on May 3, 1996.
<PAGE> 1
EXHIBIT 2.1
AGREEMENT
THIS AGREEMENT, dated as of October 11, 1995, is by and
between Bruce Brickman, an individual residing at 10 Daum Road, Manalapan, NJ
07726, Stephen Carter, an individual residing at 11C Franklin Greens, Somerset,
NJ 08873, Richard Mammone, an individual residing at 182 Beaumonte Way,
Bridgewater, NJ 08807, Jeffrey Milanette, an individual residing at 325 Kimball
Ave., Westfield, NJ 07090, Manish Sharma, an individual residing at BPO 23899,
P.O. Box 1119, Piscataway, NJ 08855, and Rutgers University, The State
University of New Jersey, Office of Corporate Liaison and Technology Transfer,
ASB Annex II, Bevier Road, P.O. Box 1179, Piscataway, New Jersey 08855-1179
(collectively, the "Parties").
WHEREAS, each of the Parties is a shareholder in SpeakEZ,
Inc., a New Jersey corporation ("SpeakEZ");
WHEREAS, under the terms of a certain Acquisition Agreement
and Plan of Merger dated as of September 7, 1995 between Tele-Matic Corporation
("Tele-Matic") and SpeakEZ (the "Acquisition Agreement"), SpeakEZ is to be
acquired by Tele-Matic through the merger of Tele-Matic's wholly owned
subsidiary, Tele-Matic Merger Corporation, with and into SpeakEZ;
WHEREAS, under the terms of the Acquisition Agreement the
shareholders of SpeakEZ are to receive (i) shares of Tele-Matic common stock
having a value (based upon the average market value of such stock for the five
business days preceding the closing date) of $2,655,000 ("Tele-Matic Shares"),
(ii) Notes in the amount of $75,000 bearing interest at the rate of 8% per
annum with principal and interest payable on January 3, 1996 (the "Notes"), and
(iii) cash in the amount of $270,000 (items i, ii and iii shall hereinafter be
collectively referred to as the "Consideration");
WHEREAS, Tele-Matic has indicated to the Parties that the
Consideration may be comprised of different amounts of Notes, Tele-Matic Shares
and cash, if the Parties so desire (see Paragraph 3 below); and
WHEREAS, the Parties desire to allocate the Consideration
among themselves in a manner different than a straight pro rata distribution of
the Consideration.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises, the mutual
covenants herein contained, and other good and valuable consideration, it is
hereby agreed as follows:
1. Percentage in SpeakEZ. Each of the Parties hereby
agrees that the following represents the ownership of all of the shareholders
in SpeakEZ:
<TABLE>
<CAPTION>
Shareholder No. Shares Percent Ownership
-----------------------------------------------------------
<S> <C> <C>
Manish Sharma 125 shares 5% equity
Stephen Carter 125 shares 5% equity
Bruce K. Brickman 175 shares 7% equity
Jeffrey Milanette 250 shares 10% equity
Rutgers University 75 shares 3% equity
Richard Mammone 1750 shares 70% equity
</TABLE>
2. Pro Rata Entitlement. Each of the Parties hereby
acknowledges that if the Parties wanted to receive their pro rated portion of
the Consideration granted to them under the terms of the Acquisition Agreement,
the Consideration would be distributed as follows:
<TABLE>
<CAPTION>
No. Tele-Matic
Shareholder Shares* Note Amount Cash
--------------------------------------------------------------------
<S> <C> <C> <C>
Manish Sharma 9,681 $ 3,750 $ 13,500
Stephen Carter 9,681 $ 3,750 $ 13,500
Bruce K. Brickman 13,553 $ 5,250 $ 18,900
Jeffrey Milanette 19,362 $ 7,500 $ 27,000
Rutgers University 5,809 $ 2,250 $ 8,100
Richard Mammone 135,533 $ 52,500 $189,000
</TABLE>
* Based on $13.7125 per Tele-Matic share; $13.7125 being the average
closing price for such shares for the five (5) days immediately
preceding the closing as provided in the Acquisition Agreement.
2
<PAGE> 3
3. Agreed Entitlement. Each of the Parties hereby agrees
that he or it shall receive the following distribution of the Consideration for
the shares of stock in SpeakEZ set forth in Paragraph 1 (the "Agreed
Entitlement"):
<TABLE>
<CAPTION>
No. Tele-Matic
Shareholder Shares* Note Amount Cash
---------------------------------------------------------------
<S> <C> <C> <C>
Manish Sharma 9,845 $ 0 $ 15,000
Stephen Carter 7,293 $ 0 $ 50,000
Bruce K. Brickman 13,491 $ 0 $ 25,000
Jeffrey Milanette 10,939 $ 85,000 $ 65,000
Rutgers University 0 $ 0 $ 90,000
Richard Mammone 153,145 $ 0 $ 0
</TABLE>
* Based on $13.7125 per Tele-Matic share; $13.7125 being the average
closing price for such shares for the five (5) days immediately
preceding the closing as provided in the Acquisition Agreement.
4. Waiver of All Other Consideration. Each of the
Parties hereby agrees that upon the execution of this Agreement, said Party
shall have all right, title and interest in, and own in absolute, the Agreed
Entitlement set forth opposite said Party's name in Paragraph 3 of this
Agreement to have and to hold forever and said Party waives and relinquishes
any and all claim, right or title forever to any other portion of the
Consideration offered under the Acquisition Agreement, including without
limitation any Consideration that would have been received by said Party in a
distribution as set forth in Paragraph 2.
5. Notice. Whenever under the provisions of this
Agreement notice is required to be given, it shall be in writing and shall be
deemed given when either served personally or mailed, postage prepaid, by
registered or certified mail, return receipt requested, addressed to the
Parties at their addresses as set forth above, or to such other address as the
Parties shall give written notice to the others from time to time in accordance
with this Paragraph.
6. Consent to Jurisdiction. Each of the Parties hereby
consents to accept service by certified mail at the address set forth at the
beginning of this Agreement, or at the address each such Party may so designate
pursuant to notice under Paragraph 5, in any action or proceeding against a
Party arising out of or in connection with this Agreement. Each Party hereby
consents that any action or proceeding against him or it be commenced and
maintained in any court within the State of New Jersey or in the United States
District of New Jersey by service of process on him or it as permitted
hereunder; and each Party consents that the courts of the State of New Jersey
and the United States District Court for the District of New Jersey
3
<PAGE> 4
shall have jurisdiction with respect to the subject matter hereof and consents
to the venue of such courts.
7. Amendments. This Agreement may not be amended or
supplemented at any time unless by a writing executed by the Parties hereto,
and all such amendments and supplements shall, except as otherwise provided
hereinafter, be binding upon all other persons interested herein. No amendment,
supplement or termination of this Agreement shall affect or impair any rights
or obligations which have heretofore matured hereunder.
8. Pronouns. All references made and pronouns used herein
shall be construed in the singular or plural and in such gender as the sense
and circumstances require.
9. Severability. If any provision of this Agreement
shall be declared invalid or illegal for any reason whatsoever, then
notwithstanding such invalidity or illegality, the remaining terms and
provisions of the within Agreement shall remain in full force and effect in
the same manner as if the invalid or illegal provision had not been contained
herein.
10. Assignment. This Agreement shall be binding upon and
shall inure to the benefit of the Parties hereto, and to their respective
heirs, executors, administrators, successors and assigns, and shall be binding
upon any person to whom the Agreed Entitlement is transferred in violation of
the provisions of this Agreement, and the heirs, executors, administrators,
successors or assigns of such person.
11. Termination. This Agreement shall terminate upon the
written consent of the Parties hereto.
12. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New Jersey.
4
<PAGE> 5
IN WITNESS WHEREOF, the Parties hereto have hereunto placed
their signatures, or caused these presents to be properly executed by their
duly authorized corporate officers, as of the day and year first above written.
/s/ MANISH SHARMA
-------------------------------
Manish Sharma
/s/ STEPHEN CARTER
--------------------------------
Stephen Carter
/s/ BRUCE K. BRICKMAN
--------------------------------
Bruce K. Brickman
/s/ JEFFREY C. MILANETTE
--------------------------------
Jeffrey Milanette
/s/ RICHARD MAMMONE
--------------------------------
Richard Mammone
RUTGERS UNIVERSITY
By:
-----------------------------
Name:
Title:
5
<PAGE> 1
EXHIBIT 3.1
FILED COPY
MAIL TO: SECRETARY OF STATE
CHANGE OF NAME CORPORATIONS SECTION
1560 BROADWAY, SUITE 200
DENVER, CO 80202
(303) 894-2251
MUST BE TYPED Fax (303) 894-2242
FILING FEE: $25.00
MUST SUBMIT TWO COPIES DP871686079
ARTICLES OF AMENDMENT 951123248 C $25.00
Please include a typed TO THE SECRETARY OF STATE
self-addressed envelope ARTICLES OF INCORPORATION 10-05-95 16:25
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the corporation is Tele-Matic Corporation
SECOND: The following amendment to the Articles of Incorporation was adopted on
September 25, 1995, as prescribed by the Colorado Business Corporation Act, in
the manner marked with an X below:
No shares have been issued or Directors Elected - Action by Incorporators
- ----
No shares have been issued but Directors Elected - Action by Directors
- ----
Such amendment was adopted by the board of directors where shares have
- ---- been issued.
x Such amendment was adopted by a vote of the shareholders. The number of
- ---- shares voted for the amendment was sufficient for approval.
ARTICLE I
The name of the corporation is TNETIX, Inc. (the "Corporation").
THIRD: The manner, if not set forth in such amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
amendment shall be effected, is as follows:
If these amendments are to have a delayed effective date, please list that
date:
--------------
(Not to exceed ninety (90) days from the date of filing)
TELE-MATIC CORPORATION
By /s/ [ILLEGIBLE]
-------------------------------------
Its President
-----------------------
Title
<PAGE> 2
MAIL TO: SECRETARY OF STATE FOR OFFICE USE ONLY 006
CORPORATIONS SECTION
PLEASE INCLUDE A TYPED 1560 BROADWAY, SUITE 200 RECEIVED
SELF-ADDRESSED ENVELOPE DENVER, CO 80202 1995 OCT 16 PM 3:41
(303) 894-2251 SECRETARY OF STATE
MUST BE TYPED FAX (303) 894-2242 STATE OF COLORADO
FILING FEE: $10.00
MUST SUBMIT TWO COPIES
CERTIFICATE OF CORRECTION
Pursuant to the Colorado Business Corporation Act, the undersigned hereby
executes the following certificate of correction:
FIRST: The exact name of the corporation is T-NETIX, Inc. organized under
the laws of Colorado
SECOND: Description of the documents being corrected (i.e. Articles of
Incorporation, Amendment, Merger or other) or an attached copy of the
document: Articles of Amendment to the Articles of Incorporation
THIRD: Date document was filed October 5, 1995.
FOURTH: Statement of incorrect information:
ARTICLE I
The name of the corporation is TNETIX, Inc. (the "Corporation").
FIFTH: Statement of corrected information:
ARTICLE I
The name of the corporation is T-NETIX, Inc. (the "Corporation").
Signature /s/ JOHN GIANNAULA
------------------------------
John Giannaula
Title Vice President-Finance/Secretary
--------------------------------
Revised 7/95
<PAGE> 1
EXHIBIT 10.8
LOAN AGREEMENT
THIS AGREEMENT, made and entered into this 1st day of April,
1996, by and between the INTRUST BANK, N.A. (herein referred to as "Bank"), and
T-NETIX, INC. (herein referred to as "Borrower").
WITNESSETH:
WHEREAS, Borrower has requested a line of credit from Bank; and
WHEREAS, Bank has agreed to supply such line of credit under
certain terms and conditions.
NOW, THEREFORE, in consideration of the terms and conditions
contained herein, the parties agree as follows:
ARTICLE I - NOTES AND SECURITY
Section 1.1. REVOLVING CREDIT FACILITY. Bank agrees to
establish a revolving credit facility of $10,000,000 (the "Facility") in favor
of Borrower evidenced by a promissory note (the "Note"), a copy of which is
attached hereto, which shall mature on April 1, 1997.
Section 1.2. TERMS OF PAYMENT ON CREDIT FACILITIES. Interest
on the Note, or any advance thereunder, shall be adjusted daily to the prime
rate as published in the Money Rates section of the Southwest Edition of the
Wall Street Journal. Accrued interest shall be due on the first day of each
month.
Section 1.3. LIMITATIONS ON CREDIT FACILITIES. Borrower may
borrow, partially or wholly repay its borrowings, and reborrow, by requesting
advances from the Facility; so long as:
(a) The Facility balance, including all principal and accrued
interest, does not exceed the amount of the Facility at any one time;
(b) None of the terms and conditions of this Agreement are in
default and Bank has not determined that there has been a material adverse
change in the financial condition of Borrower;
(c) Borrower is not in default under any loan or any other
financial obligation, or any other agreement.
Section 1.4. USE OF PROCEEDS. The proceeds from the Facility
shall be used to pay in full an existing line of credit at Bank IV Kansas, N.A.
and for working capital.
Section 1.5. SECURITY. As security for the entire indebtedness
to Bank, Borrower hereby pledges, assigns, and grants a first security interest
in favor of Bank in all accounts, contract rights, inventory (including all
"construction in progress" as set forth in Borrower's financial statements),
fixtures, machinery, equipment and general intangibles of Borrower now owned or
hereinafter acquired including all proceeds from
1
<PAGE> 2
the disposition or collection thereof (the "Collateral"). "Accounts" include
all receivables, third-party claims, instruments, documents, chattel paper and
executory contract rights.
Section 1.6. RENEWALS AND EXTENSIONS. Any renewal or extension
of the Facility Note, or any advance made pursuant to the terms of such note,
or any other indebtedness which Borrower may have with Bank in the future,
shall be subject to the terms of this Agreement. Bank is under no obligation to
renew any indebtedness when it matures.
Section 1.7. INDEBTEDNESS. Where the term "indebtedness" is
used in this Agreement, it shall include all debt of Borrower to Bank of every
kind and description, direct or indirect, primary or secondary, secured or
unsecured (including overdrafts), joint and several, absolute or contingent,
due or to become due, now existing or hereafter arising, regardless of how it
may be evidenced.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants, and so long as any
indebtedness from Borrower to the Bank remains outstanding, continuously
represents and warrants as follows:
Section 2.1. LEGAL STATUS. Borrower is a corporation duly
organized and existing under the laws of the State of Colorado, and is
qualified to do business, and is in good standing, in all jurisdictions in
which it conducts its business.
Section 2.2. NO VIOLATION. The making and performance by
Borrower of this Agreement does not violate any provision of law, or result in
a breach of, or constitute a default under, Borrower's articles of
incorporation and bylaws, or any Loan Documents, agreement, indenture or other
instrument to which Borrower may be a party or by which it may be bound.
Section 2.3. LITIGATION. There are no pending or threatened
actions or proceedings before any court or administrative agency against
Borrower which may adversely affect the financial condition or operation of
Borrower other than those heretofore disclosed to Bank in writing.
Section 2.4. CORRECTNESS OF FINANCIAL STATEMENTS. The
financial statements heretofore and hereafter delivered by Borrower to Bank
present fairly the financial condition of Borrower, and have been prepared in
accordance with generally accepted accounting principles consistently applied.
As of the date of each such financial statement, and since such date, there has
been no material adverse change in the condition or operation of Borrower, nor
has Borrower mortgaged, pledged or granted a security interest in, or
encumbered, any assets or properties since such date.
Section 2.5. AUTHORIZATION. The Loan Documents have been duly
authorized, executed and delivered by Borrower and are the legal, valid and
binding obligations of Borrower, enforceable in accordance with their
respective terms. As used in this Loan Agreement, "Loan Documents" shall mean
and refer to this Loan Agreement, all Notes, all Security Agreements and
Assignments, all Guaranty Agreements, and all other documents and agreements
required to be executed herein, and as any of them may be extended, renewed,
amended or supplemented from time to time.
2
<PAGE> 3
Section 2.6. NO SUBORDINATION. The obligations of Borrower
under this Agreement, are not subordinated in right of payment or in lien
priority to any obligation of Borrower.
Section 2.7. PERMITS, FRANCHISES. The Borrower now possesses,
and will hereafter possess, all permits, memberships, franchises, contracts,
and licenses required and all trademark rights, trade names, trade name rights,
patents, patent rights, and fictitious name rights necessary to enable it to
conduct its business without conflict with the rights of others.
ARTICLE III - CONDITIONS PRECEDENT
The obligation of Bank to make any advance under the Facility
Note, is subject to the fulfillment of the following conditions:
Section 3.1. APPROVAL OF BANK COUNSEL. All legal matters
incidental to all such advances hereunder shall be satisfactory to legal
counsel of Bank.
Section 3.2. COMPLIANCE. The representations and warranties
contained herein shall be true as of the date of the signing of this Agreement
and on the date of any advance, no Event of Default, as defined in Article VI
herein, and no condition, event or act which, with the giving of notice or the
lapse of time or both, would constitute an Event of Default, shall have
occurred.
Section 3.3. DOCUMENTATION. Borrower shall have delivered to
Bank in form and substance satisfactory to Bank the following described
documents:
(a) This Agreement and Facility Note duly executed.
(b) All Security Agreements and other loan documents duly
executed by Borrower granting to Bank a first and prior perfected security
interest in the assets described in Section 1.5 of this Agreement.
(c) Certified copy of Corporate Resolution of Borrower
ratifying this Agreement and authorizing the execution of the Loan Documents.
(d) Such other documentation as the Bank may reasonably
require.
ARTICLE IV - AFFIRMATIVE COVENANTS
Borrower covenants that so long as Borrower is indebted to
Bank under this Agreement, Borrower will:
Section 4.1. PUNCTUAL PAYMENT. Punctually pay to Bank all
payments required to be made under this Loan Agreement, the Facility Note and
any other indebtedness.
Section 4.2. ACCOUNTING RECORDS. Maintain adequate books and
accounts in accordance with generally accepted accounting principles
consistently applied, so that anytime and from time to time the
3
<PAGE> 4
true and complete financial condition of Borrower is fairly presented and can
be readily determined, and permit any representative of Bank at any reasonable
time, to inspect, audit and examine such books and accounts of Borrower and
permit Bank to make and obtain copies of any such books and accounts, and to
permit any representative of Bank to inspect the properties of Borrower.
Section 4.3. FINANCIAL STATEMENTS: Furnish Bank:
(a) Not later than 90 days after, and as of the end of each
fiscal year, an audited financial statement of Borrower to include balance
sheet and income statement.
(b) Not later than 60 days after the end of each quarter, a
balance sheet and statement of income of Borrower in a form satisfactory to
Bank, certified correct by an officer of Borrower and copies of Form 10-Q;
(c) Not later than 30 days after the end of each month, an
aged listing of all accounts payable and receivable of Borrower certified
correct by an officer of Borrower;
(d) Not later than 30 days after the end of each month, a
lending base certificate from an officer of Borrower in the form of the
attached Exhibit certifying that Borrower is in compliance with all the terms
of this Agreement.
(e) Semi-annually, commencing July 31, 1996, a one year cash
flow estimate from telecommunication contracts by state.
(f) From time to time such other information as Bank may
reasonably request.
Section 4.4. NOTICE TO ACCOUNTANTS. Notify Borrower's
accountants in writing that Bank intends to rely upon financial information
prepared by such accountants in behalf of Borrower in determining whether to
make any extension of credit covered by this Loan Agreement, including any
advance, renewal or extension thereto.
Section 4.5. EXISTENCE. Preserve and maintain the existence
and all of the rights, privileges and franchises of Borrower; conduct all
business in an orderly, efficient, and regular manner; and comply with the
requirements of all applicable laws, rules, regulations and orders of a
governmental authority.
Section 4.6. INSURANCE. Maintain and keep in force insurance
of the types and in amounts customarily carried in the line of business similar
to that of Borrower, including, but not limited to, fire, public liability,
property damage, workers' compensation, and carried with companies and in
amounts satisfactory to Bank; and Borrower shall deliver to Bank from time to
time, at Bank's request, schedules setting forth all insurance then in effect.
Borrower shall maintain and keep in force product liability insurance in such
amounts deemed adequate and economically feasible by the parties.
Section 4.7. FACILITIES. Keep all Borrower's properties in
good repair and condition, and from time to time make necessary repairs,
renewals and replacements thereto so that such properties shall be
4
<PAGE> 5
fully and efficiently preserved and maintained. Borrower shall promptly satisfy
any and all mechanic's or materialmen's liens filed on any of its facilities.
Section 4.8. TAXES AND OTHER LIABILITIES. Pay and discharge
when due any and all indebtedness, obligations, assessments, and taxes of
Borrower, except such as it may in good faith contest or as to which a bona
fide dispute may arise.
Section 4.9. LITIGATION. Promptly give notice in writing to
Bank of any litigation pending or threatened against Borrower.
Section 4.10. NOTICE TO BANK. Promptly give notice in writing
to Bank of (a) the occurrence of any Event of Default, as defined in Article
VI; (b) any change in the name, identity or corporate structure of Borrower; or
(c) any uninsured or partially uninsured loss in any fiscal year through fire,
theft, liability or property damage in excess of an aggregate of $500,000 to
Borrower.
Section 4.11. SECURITY DOCUMENTATION AND POWER OF ATTORNEY.
Upon request of Bank, assist Bank in obtaining and filing all security
agreements, financing statements, and other documentation required to retain
Bank's perfected security interest in the assets of Borrower. Borrower
irrevocably appoints Bank as its attorney in fact to execute all financing
statements and amendments thereto in behalf of Borrower.
Section 4.12. FINANCIAL CONDITIONS. Maintain Borrower's
financial condition as follows:
(a) Borrower shall maintain a minimum tangible net worth of
$18,000,000. Tangible net worth shall be defined as the equity of the Borrower
as determined by generally accepted accounting principles.
(b) Borrower shall maintain a current assets to current
liabilities ratio of not less than .75:1. Current assets include only cash and
cash equivalents, trade accounts receivable (net of allowance), other
receivables and prepaid expenses. Current liabilities include only accounts
payable, accrued liabilities, loans from customers, and debt, excluding
revolving credit facility with Bank.
(c) Borrower shall maintain a total liabilities to net worth
ratio of not greater than 1:1.
(d) Borrower shall maintain a Collateral base where the total
balance due Bank at any time from Borrower does not exceed:
(i) 75% of Eligible Receivables which are transaction
fees and line information data base receivables from AT&T, Bell Atlantic,
Southwestern Bell, U.S. West, Nynex, Nevada Bell, Cincinnati Bell, and GTE
less than 90 days past due; plus
(ii) 50% of Eligible Direct Receivables, net of
allowance, less than 60 days past due; plus
(iii) 35% of book value of Telecommunications Equipment
in use under telecommunication contracts, at least 90% of which must be under
contract with AT&T, Bell Atlantic,
5
<PAGE> 6
Southwestern Bell, U.S. West, Nynex, Nevada Bell, Cincinnati Bell and GTE
(limited to $5,000,000 of the Facility).
Excluded from Eligible Receivables and Eligible Direct Receivables are amounts
due from affiliated companies or foreign companies, amounts in dispute, amounts
subject to setoff, and amount subject to a prior claim.
Section 4.13. PAYMENT OF COSTS AND EXPENSES. Borrower agrees
to pay to Bank, on demand, all reasonable and necessary costs and expenses as
provided in this Agreement and the other Loan Documents, and all costs and
expenses reasonably and necessarily incurred by Bank from time to time in
connection with this Agreement and the other Loan Documents, including, without
limitation, those reasonably and necessarily incurred in: (i) preparing,
negotiating, amending, waiving or granting consent with respect to the terms of
any or all of the Loan Documents; (ii) enforcing the Loan Documents; (iii)
performing any of Borrower's duties under the Loan Documents upon Borrower's
failure to perform them; (iv) filing financing statements, assignments or other
documents relating to the Collateral (e.g., filing fees, registration taxes);
(v) compromising, pursuing, or defending any controversy, action or proceeding
resulting, directly or indirectly, from Bank's relationship with Borrower,
regardless of whether Borrower is a party to such controversy, action or
proceeding and of whether the controversy, action or proceeding occurs before
or after the all indebtedness owing to Bank by Borrower has been paid in full;
provided, however, that Borrower shall not be liable to Bank for costs and
expenses resulting from the gross negligence or the willful misconduct of Bank
in connection therewith; (vi) enforcing or collecting any part of the
indebtedness owing to Bank by Borrower or any guaranty contemplated under the
Loan Documents; (vii) actual out of pocket expenses of Bank incurred to employ
collection agencies or other agents to collect any or all of the accounts and
accounts receivables; and (viii) obtaining independent appraisals of the
Collateral from time to time as deemed reasonably necessary by Bank. Any amount
due to Bank pursuant to this Section shall, if not paid upon demand, accrue
interest at the Facility Note rate.
ARTICLE V - NEGATIVE COVENANTS
Borrower covenants that so long as Borrower is indebted to
Bank, Borrower will not, without prior written consent of Bank:
Section 5.1. OTHER INDEBTEDNESS. Except as to indebtedness
owed Bank, create, incur, or permit to exist any liabilities resulting from
borrowings, leases, loans or advances, whether secured or unsecured, or any
liens, mortgages or other encumbrances, other than indebtedness outstanding as
of the date of this Agreement. Bank will not unreasonably withhold approval for
capital leases for equipment which is subsequently leased to AT&T or to
Regional Bell Operating Companies. Nothing in this Section shall prevent
Borrower from incurring obligations in the ordinary course of business.
Section 5.2. MERGER, CONSOLIDATION, SALE OF ASSETS. Merge into
or consolidate with any corporation or other entity or acquire all or
substantially all of the assets of any other corporation or entity; or sell,
lease, assign, transfer or otherwise dispose of all or substantially all of its
assets.
Section 5.3. GUARANTIES. Guarantee or become liable in any way
as surety, endorser (other than as endorser of negotiable instruments in the
ordinary course of business) or accommodation for the debt or obligations of
any person or entity.
6
<PAGE> 7
ARTICLE VI - EVENTS OF DEFAULT
Section 6.1. EVENTS OF DEFAULT. Any of the following shall
constitute an Event of Default.
(a) Default by Borrower in any payment of principal or
interest under the Facility Note or any sum due in this Agreement.
(b) Any representation or warranty made by Borrower hereunder
which shall prove to be at any time incorrect in any material respect.
(c) Default by Borrower in the performance of any other term,
covenant or agreement contained herein, which default is not cured within 20
days from its occurrence.
(d) Default by Borrower under the terms of any agreement, note
or other instrument and such default having not been cured within 30 days;
provided, however, that if Borrower defaults in its performance under any other
agreement, note, or instrument and such default causes Borrower's obligations
to be immediately due and payable, then Bank, in its sole discretion, may
immediately exercise its rights under Section 6.2 herein.
(e) The failure of Borrower to promptly pay and discharge any
judgment, levy of attachment, execution or other process against the assets of
Borrower and such judgment be not satisfied, or such levy or other process be
not removed, within 10 days after the entry of levy thereof.
(f) Borrower shall be adjudicated a bankrupt or insolvent, or
shall consent to or apply for the appointment of a receiver, trustee or
liquidator of itself or any of its property, or shall admit in writing its
inability to pay its debts generally as they become due, or shall make a
general assignment for the benefit of creditors, or shall file a voluntary
petition in bankruptcy or voluntary petition or an answer seeking
reorganization or arrangement in a proceeding under any bankruptcy law.
(g) There shall have occurred a material adverse change, as
reasonably determined by Bank, in the financial condition or results in
operations of the Borrower since the date of this Agreement.
(h) An Event of Default (as defined in the other Loan
Documents) occurs in any of the other Loan Documents.
Section 6.2. ACCELERATION. If an Event of Default shall occur,
any indebtedness of Borrower under this Agreement or the Facility Note, any
term of such Note to the contrary notwithstanding, shall, at Bank's option and
without notice become immediately due and payable without presentment, notice
or demand, all of which are hereby expressly waived by Borrower; and the
obligation, if any, of the Bank to permit further borrowings hereunder shall
immediately cease and terminate.
7
<PAGE> 8
ARTICLE VII - MISCELLANEOUS
Section 7.1. WAIVER. No delay or failure of Bank, or any
holder of the Facility Note, in exercising any right, power or privilege
hereunder, shall affect such right, power or privilege; nor shall any single or
partial exercise thereof or any abandonment or discontinuance of steps to
enforce such a right, power or privilege hereunder, shall affect such right,
power or privilege. The rights and remedies of Bank hereunder are cumulative
and not exclusive. Any waiver, permit, consent or approval of any kind to
Bank, or any holder of the Facility Note, of any breach or default hereunder,
or any such waiver of any provisions or conditions hereof, must be in writing
and shall be effective only to the extent set forth in such writing.
Section 7.2. JURY WAIVER. BORROWER EXPRESSLY WAIVES ANY RIGHT
TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDINGS TO ENFORCE OR DEFEND ANY RIGHTS
HEREUNDER OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED,
OR WHICH MAY HEREAFTER BE DELIVERED, TO BORROWER.
Section 7.3. NOTICES. All notices, requests and demands given
to or made upon the respective parties shall be deemed to have been given or
made when deposited in the mail, postage prepaid, and addressed as follows:
Borrower: T-NETIX, INC.
6675 S. Kenton Street
Englewood, Colorado 80111
Bank: INTRUST Bank, N.A.
P.O. Box One
Wichita, KS 67201
Attn: Commercial Loan Department
Section 7.4. WRITTEN AGREEMENTS. THIS LOAN AGREEMENT, TOGETHER
WITH OTHER WRITTEN AGREEMENTS OF THE PARTIES, IS THE FINAL EXPRESSION OF THE
AGREEMENT BETWEEN THE BANK AND THE BORROWER, AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF ANY PRIOR OR CONTEMPORANEOUS ORAL AGREEMENT BETWEEN THE PARTIES.
ANY NON-STANDARD TERM MUST BE WRITTEN BELOW TO BE ENFORCEABLE.
BY SIGNING BELOW THE PARTIES AFFIRM THERE ARE NO UNWRITTEN
AGREEMENTS BETWEEN THEM.
"BANK" "BORROWER"
INTRUST Bank, N.A. T-NETIX, INC.
By /s/ [ILLEGIBLE] By /s/ JOHN GIANNAULA
---------------------------- -----------------------------
Vice President John Giannaula
Vice President
8
<PAGE> 9
Section 7.5. KANSAS LAW APPLICABLE. This Agreement shall be
construed in accordance with the laws of the State of Kansas, without regard to
principles of conflicts of laws, and applicable federal law. Borrower
expressly agrees that jurisdiction and venue for all legal proceedings filed in
connection herewith shall lie exclusively in Sedgwick County, Kansas.
Section 7.6. PREVIOUS SECURITY AGREEMENTS. Any security
interest previously granted to Bank by Borrower shall survive and continue to
exist in priority.
Section 7.7. OTHER LOAN DOCUMENTS. Borrower understands and
agrees that it is additionally bound by the terms and conditions of the other
Loan Documents, which such terms and conditions are incorporated herein and
made a part of this Agreement. To the extent that any term or provision
contained in other Loan Documents conflicts with a term or provision of this
Agreement, the term or provision providing the Bank the most security or the
greatest right shall control.
Section 7.8. BINDING EFFECT. The rights and obligations of the
parties under this Agreement shall inure to the benefit of, and shall be
binding upon their heirs, personal representatives, successors and assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement
the day first above written.
"BANK" "BORROWER"
INTRUST Bank, N.A. T-NETIX, INC.
By [ILLEGIBLE] By /s/ JOHN GIANAULA
-------------------------------- --------------------------------
Vice President John Giannaula
Vice President
9
<PAGE> 1
EXHIBIT 10.9
STANDARD INDUSTRIAL LEASE - MULTI-TENANT
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO]
1. PARTIES. This Lease, dated, for reference purposes only, April 15,
1996, is made by and between Pacifica 67 Inverness, LLC, a Colorado limited
liability company (herein called "Lessor") and T-NETIX, Inc., a Colorado
corporation (herein called "Lessee").
2. PREMISES, PARKING AND COMMON AREAS.
2.1 PREMISES. Lessor hereby leases to Lessee and Lessee leases
from Lessor for the term, at the rental, and upon all of the conditions set
forth herein, real property situated in the County of Arapahoe, State of
Colorado commonly known as 67 Inverness Drive East, Englewood, Colorado and
described as 37,575 square feet in a 54,280 square foot multi-tenant building
as shown on Exhibit A attached hereto, herein referred to as the "Premises", as
may be outlined on Exhibit A attached hereto, including rights to the Common
Areas as hereinafter specified but not including any rights to the roof of the
Premises or to any Building in the Industrial Center. The Premises are a
portion of a building, herein referred to as the "Building." The Premises, the
Building, the Common Areas, the land upon which the same are located may be
collectively referred to as the "Industrial Center."
2.2 VEHICLE PARKING. Lessee shall be entitled to 100 vehicle
parking spaces, unreserved and unassigned, on those portions of the Common
Areas designated by Lessor for parking. Lessee shall not use more parking
spaces than said number. Said parking spaces shall be used only for parking by
vehicles no larger than full size passenger automobiles or pick-up trucks,
herein called "Permitted Size Vehicles." Vehicles other than Permitted Size
Vehicles are herein referred to as "Oversized Vehicles."
2.2.1 Lessee shall not permit or allow any vehicles that
belong to or are controlled by Lessee or Lessee's employees, suppliers,
shippers, customers, or invitees to be loaded, unloaded, or parked in areas
other than those designated by Lessor for such activities. See Paragraph 1 of
the Addendum.
2.2.2 If Lessee permits or allows any of the prohibited
activities described in paragraph 2.2 of this Lease, then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it
may have, to remove or tow away the vehicle involved and charge the cost to
Lessee, which cost shall be immediately payable upon demand by Lessor.
2.3 COMMON AREAS -- DEFINITION. The term "Common Areas" is defined
as all areas and facilities outside the Premises and within the exterior
boundary line of the Industrial Center that are provided and designated by the
Lessor from time to time for the general non-exclusive use of Lessor, Lessee
and of other lessees of the Industrial Center and their respective employees,
suppliers, shippers, customers and invitees, including parking areas, loading
and unloading areas, trash areas, roadways, sidewalks, parkways, driveways and
landscaped areas and are designated on Exhibit A hereto.
2.4 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to
Lessee, for the benefit of Lessee and its employees, suppliers, shippers,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and
regulations or restrictions governing the use of the Industrial Center. Under
no circumstances shall the right herein granted to use the Common Areas be
deemed to include the right to store any property, temporarily or permanently,
in the Common Areas. Any such storage shall be permitted only by the prior
written consent of Lessor or Lessor's designated agent, which consent may be
revoked at any time. In the event that any unauthorized storage shall occur
then Lessor shall have the right, without notice, in addition to such other
rights and remedies that it may have, to remove the property and charge the
cost to Lessee, which cost shall be immediately payable upon demand by Lessor.
2.5 COMMON AREAS -- RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and management
of the Common Areas and shall have the right, from time to time, to establish,
modify, amend and enforce reasonable rules and regulations with respect
thereto. Lessee agrees to abide by and conform to all such rules and
regulations, and to cause its employees, suppliers, shippers, customers, and
invitees to so abide and conform. Lessor shall not be responsible to Lessee for
the non-compliance with said rules and regulations by other lessees of the
Industrial Center.
2.6 COMMON AREAS - CHANGES. Lessor shall have the right, in
Lessor's sole discretion, from time to time:
(a) To make changes to the Common Areas, including,
without limitation, changes in the location, size, shape and number of
driveways, entrances, parking spaces, parking areas, loading and unloading
areas, ingress, egress, direction of traffic, landscaped areas and walkways;
(b) To close temporarily any of the Common Areas for maintenance purposes so
long as reasonable access to the Premises remains available; (c) To designate
other land outside the boundaries of the Industrial Center to be a part of the
Common Areas; (d) To add additional buildings and improvements to the Common
Areas; (e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; (f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Industrial Center as Lessor may, in
the exercise of sound business judgment, deem to be appropriate.
2.6.1 Lessor shall at all times provide the parking
facilities required by applicable law and in no event shall the number of
parking spaces that Lessee is entitled to under paragraph 2.2 be reduced.
3. TERM.
3.1 TERM. The term of this Lease shall be for Sixty (60) months
commencing on November 1, 1996 and ending on October 31, 2001 (THE "PRIMARY
LEASE TERM") unless sooner terminated pursuant to any provision hereof.
3.2 DELAY IN POSSESSION. Notwithstanding said commencement date,
if for any reason, Lessor cannot deliver possession of the Premises to Lessee
on said date, such failure shall not affect the validity of this Lease or the
obligations of Lessee hereunder, but in such case, Lessee shall not be
obligated to pay rent, except as may be otherwise provided in this Lease, until
possession of the Premises is tendered to Lessee. SEE PARAGRAPH 2 OF THE
ADDENDUM.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to
said commencement date, such occupancy shall be subject to all provisions of
this Lease, such occupancy shall not advance the termination date, and Lessee
shall not pay rent for such period at the initial monthly rates set forth
below.
4. RENT.
4.1 BASE RENT. Lessee shall pay to Lessor, as Base Rent for the
Premises, without any offset or deduction, except as may be otherwise expressly
provided in this Lease, on the 1st day of each month of the term hereof,
monthly payments in advance of $34,756.88 ($11.10 psf per year) subject to
adjustments as defined in PARAGRAPH 3 OF the Addendum. Rent for any period
during the term hereof which is for less than one month shall be a pro rata
portion of the Base Rent. Rent shall be payable in lawful money of the United
States to Lessor at the address stated herein or to such other persons or at
such other places as Lessor may designate in writing.
4.2 OPERATING EXPENSES. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter
defined, of all Operating Expenses, as hereinafter defined, during each
calendar year of the term of this Lease, in accordance with the following
provisions:
(a) "Lessee's Share" is defined, for purposes of this
Lease, as 69.22 percent.
(b) "Operating Expenses" is defined, for purposes of this
Lease, as all costs incurred by Lessor, if any, related to the Industrial Center
except as may be expressly excluded hereunder, including, without limitation:
(i) The operation, repair and maintenance, in
neat, clean, good order and condition, of the following:
(aa) The Common areas, including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation
systems, Common Area lighting facilities and fences and gates;
(bb) Snow removal services and parking
lot sweeping;
(cc) Tenant directories;
(dd) Fire detection systems including
sprinkler system maintenance and repair;
MULTI TENANT - MODIFIED NET Initials: /s/
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(4/12/96)
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(ee) roof and exterior walls, excluding
(i) those items for which Lessor has
a valid warranty; and (ii) roof
replacement.
(ff) professional management fees in any
calendar year, which shall not
exceed the amounts described in
Paragraph 4.A of the Addendum.
(gg) exterior painting shall be part of
Common Area Expenses.
(hh) Security services.
(ii) Any other service to be provided by
Lessor that is elsewhere in this
Lease stated to be an "Operating
Expense."
(ii) Any deductible portion of an insured loss
concerning any of the items or matters described in paragraph
4.2;
(iii) The cost of the premiums for the liability and
property insurance policies to be maintained by Lessor under
paragraph 8 hereof;
(iv) The amount of the real property tax to be
paid by Lessor under paragraph 10.1 hereof;
(v) The cost of water, gas and electricity to
service the Common Areas.
(c) The inclusion of the improvements, facilities and
services set forth in paragraph 4.2(b)(i) of the definition of Operating
Expenses shall not be deemed to impose an obligation upon Lessor to either have
said improvements or facilities or to provide those services unless the
Industrial Center already has the same, Lessor already provides the services,
or Lessor has agreed elsewhere in this Lease to provide the same or some of
them.
(d) Lessee's Share of Operating Expenses shall be payable
by Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of annual
Operating Expenses and the same shall be payable monthly or quarterly, as
Lessor shall designate, during each twelve-month period of the Lease term, on
the same day as the Base Rent is due hereunder. In the event that Lessee pays
Lessor's estimate of Lessee's Share of Operating Expenses as aforesaid, Lessor
shall deliver to Lessee within one hundred eighty (180) days after the
expiration of each calendar year a reasonably detailed statement showing
Lessee's Share of the actual Operating Expenses incurred during the preceding
year. If Lessee's payments under this paragraph 4.2(d) during said preceeding
year exceed Lessee's Share as indicated on said statement, Lessee shall be
entitled to credit the amount of such overpayment against Lessee's Share of
Operating Expenses next falling due. If Lessee's payments under this paragraph
during said preceding year were less than Lessee's Share as indicated on said
statement, Lessee shall pay Lessor the amount of the deficiency within ten (10)
days after delivery by Lessor to Lessee of said statement. Lessor's failure to
deliver statement of Lessee's share within 180 days shall be conclusive that
Lessee owes no deficiency for such calendar year. SEE PARAGRAPH 4 OF THE
ADDENDUM.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof $34,756.88 as security for Lessee's faithful performance of Lessee's
obligations hereunder. If Lessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Lessor may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any other
sum to which Lessor may become obligated by reason of Lessee's default, or to
compensate Lessor for any loss or damage which Lessor may suffer thereby. If
Lessor so uses or applies all or any portion of said deposit, Lessee shall
within ten (10) days after written demand therefor deposit cash with Lessor in
an amount sufficient to restore said deposit to the full amount then required
of Lessee. Lessor shall not be required to keep said security deposit separate
from its general accounts. If Lessee performs all of Lessee's obligations
hereunder, said deposit, or so much thereof as has not theretofore been applied
by Lessor, shall be returned, without payment of interest or other increment
for its use, to Lessee (or, at Lessor's option, to the last assignee, if any,
of Lessee's interest hereunder) at the expiration of the term hereof, and after
Lessee has vacated the Premises. No trust relationship is created herein
between Lessor and Lessee with respect to said Security Deposit. SEE PARAGRAPH
5 OF THE ADDENDUM.
6. USE.
6.1 USE. The Premises shall be used and occupied only for general
office and warehouse use or any other use which is reasonably comparable and
for no other purpose. SEE PARAGRAPH 6 OF THE ADDENDUM.
6.2 COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in the
state existing on the date that the Lease term commences, but without regard to
the use for which Lessee will occupy the Premises, does not violate any
covenants or restrictions of record, or any applicable building code,
regulation or ordinance in effect on such Lease term commencement date. In the
event it is determined that this warranty has been violated, then it shall be
the obligation of the Lessor, after written notice from lessee, to promptly, at
Lessor's sole cost and expense, rectify any such violation. In the event Lessee
does not give Lessor written notice of the violation of this warranty within
six months from the date that the Lease term commences, the correction of same
shall be the obligation of the Lessee at Lessee's sole cost. The warranty
contained in this paragraph 6.2(a) shall be of no force or effect if, prior to
the date of this Lease, Lessee was an owner or occupant of the Premises and, in
such event, Lessee shall correct any such violation at Lessee's sole cost.
(b) Except as provide in paragraph 6.2(a) Lessee shall,
at Lessee's expense, promptly comply with all applicable statutes, ordinances,
rules, regulations, orders, covenants and restrictions of record, and
requirements of any fire insurance underwriters or rating bureaus, now in
effect or which may hereafter come into effect, whether or not they reflect a
change in policy from that now existing, during the term or any part of the
term hereof, relating in any manner to the Premises and the occupation and use
by Lessee of the Premises and of the Common Areas. Lessee shall not use nor
permit the use of the Premises or the Common Areas in any manner that will tend
to create waste or a nuisance or shall tend to disturb other occupants of the
Industrial Center.
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee clean and
free of debris on the Lease commencement date (unless Lessee is already in
possession) and Lessor warrants to Lessee that the plumbing, lighting, air
conditioning, heating, and loading doors in the Premises shall be in good
operating condition on the Lease commencement date. In the event that it is
determined that this warranty has been violated, then it shall be the
obligation of Lessor, after receipt of written notice from Lessee setting forth
with specificity the nature of the violation, to promptly, at Lessor's sole
cost, rectify such violation. Lessee's failure to give such written notice to
Lessor within thirty (30) days after the Lease commencement date shall cause
the conclusive presumption that Lessor has complied with all of Lessor's
obligations hereunder. The warranty contained in this paragraph 6.3(a) shall be
of no force or effect if prior to the date of this Lease, Lessee was an owner
or occupant of the Premises.
(b) Except as otherwise provided in this Lease, Lessee
hereby accepts the Premises in their condition existing as of the Lease
commencement date or the date that Lessee takes possession of the Premises,
whichever is earlier, subject to all applicable zoning, municipal, county and
state laws, ordinances and regulations governing and regulating the use of the
Premises, and any covenants or restrictions of record, and accepts this Lease
subject thereto and to all matters disclosed thereby and by any exhibits
attached hereto. Lessee acknowledges that neither Lessor nor Lessor's agent had
made any representation or warranty as to the present or future suitability of
the Premises for the conduct of Lessee's business.
7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES.
7.1 LESSOR'S OBLIGATIONS. Subject to the provisions of paragraphs
4.2 (Operating Expenses), 6 (Use), 7.2 (Lessee's Obligations) and 9 (Damage or
Destruction) and except for damage caused by any negligent or intentional act
or omission of Lessee, Lessee's employees, suppliers, shippers, customers, or
invitees, in which event Lessee shall repair the damage, Lessor, at Lessor's
expense, subject to reimbursement pursuant to paragraph 4.2, shall keep in good
condition and repair the foundations, exterior walls, structural condition of
interior bearing walls, and roof of the Premises, as well as the parking lots,
walkways, driveways, landscaping, fences, signs and utility installations of
the Common Areas and all parts thereof, as well as providing the services for
which there is an operating Expense pursuant to paragraph 4.2. Lessor shall
not, however, be obligated to paint the exterior or interior surface of
exterior walls, nor shall Lessor be required to maintain, repair or replace
windows, doors or plate glass of the Premises. Lessor shall have no obligation
to make repairs under this paragraph 7.1 until a reasonable time after receipt
of written notice from Lessee of the need for such repairs. Lessee expressly
waives the benefits of any statute now or hereafter in effect which would
otherwise afford Lessee the right to make repairs at Lessor's expense or to
terminate this Lease because of Lessor's failure to keep the Premises in good
order, condition and repair. Lessor shall not be liable for damages or loss of
any kind or nature by reason of Lessor's failure to furnish any Common Area
Services when such failure is caused by accident, breakage, repairs, strikes,
lockout, or other labor disturbances or disputes of any character, or by any
other cause beyond the reasonable control of Lessor.
7.2 LESSEE'S OBLIGATIONS. LESSEE SHALL BE RESPONSIBLE FOR TRASH
REMOVAL.
(a) Subject to the provisions of paragraphs 6 (Use). 7.1
(Lessor's Obligations), and 9 (Damage or Destruction). Lessee, at Lessee's
expense, shall keep in good order, condition and repair the Premises and every
part thereof (whether or not the damaged portion of the Premises or the means
of repairing the same are reasonably or readily accessable to Lessee)
including, without limiting the generality of the foregoing, all plumbing,
heating, ventilating and air conditioning, systems (Lessee shall procure and
maintain, at Lessee's expense, a ventilating and air conditioning system
maintenance contract), electrical and lighting facilities and equipment within
the Premises, fixtures, interior walls and interior surfaces of exterior walls,
ceilings, windows, doors, plate glass and skylights located within the
Premises. Lessor reserves the right to procure and maintain the ventilating and
air conditioning system maintenance contract and the trash removal contract and
if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost
thereof.
(b) If Lessee fails to perform Lessee's obligations under
this paragraph 7.2 or under any other paragraph of this Lease, Lessor may enter
upon the Premises after ten (10) days' prior written notice to Lessee (except
in the case of emergency, in which no notice shall be required), perform such
obligations on Lessee's behalf and put the Premises in good order, condition
and repair, and the cost thereof together with interest thereon at the maximum
rate then allowable by law shall be due and payable as additional rent to
Lessor together with Lessee's next Base Rent installment.
(c) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same
condition as received, ordinary wear and tear excepted, clean and free of
debris. Any damage or deterioration of the Premises shall not be deemed
ordinary by the installation or removal of Lessee's trade, fixtures,
alterations, furnishings and equipment. Notwithstanding anything to the
contrary otherwise stated in this Lease, Lessee shall leave the air lines,
power panels, electrical distribution systems, lighting fixtures, space
heaters, air conditioning, plumbing and fencing on the Premises in good
operating condition. See Paragraph 7 of the Addendum.
7.3 ALTERATIONS AND ADDITIONS.
(a) Lessee shall not, without Lessor's prior written
consent make any alterations, improvements, additions, or Utility Installations
in, on or about the Premises, or the Industrial Center, except for
nonstructural interior alterations to the Premises not exceeding $25,000.00 in
cumulative costs, during the term of this Lease. In any event, whether or not
in excess of $25,000.00 in cumulative cost, Lessee shall make no change or
alteration to the
MULTI TENANT - MODIFIED NET Initials: /s/
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/s/
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<PAGE> 3
exterior of the Premises nor the exterior of the Building nor the Industrial
Center without Lessor's prior written consent. As used in this paragraph 7.3
the term "Utility Installation" shall mean carpeting, window coverings, air
lines, power panels, electrical distribution systems, lighting fixtures, space
heaters, air conditioning, plumbing, and fencing. Lessor may require that
Lessee remove any or all of said alterations, improvements, additions or
Utility Installations at the expiration of the term, and restore the Premises
and the Industrial Center to their prior condition. Lessor may require Lessee
to provide Lessor, at Lessee's sole cost and expense, a lien and completion
bond in an amount equal to one and one-half times the estimated cost of such
improvements, to insure Lessor against any liability for mechanic's and
materialmen's liens and to insure completion of the work. Should Lessee make
any alterations, improvements, additions or Utility Installations without the
prior approval of Lessor. Lessor may, at any time during the term of this
Lease, require that Lessee remove any or all of the same.
(b) Any alterations, improvements, additions or Utility
Installations in or about the Premises or the Industrial Center that Lessee
shall desire to make and which requires the consent of the Lessor shall be
presented to Lessor in written form, with proposed detailed plans. If Lessor
shall be presented to Lessor in written form, with proposed detailed plans. If
Lessor shall give its consent, the consent shall be deemed conditioned upon
Lessee acquiring a permit to do so from appropriate governmental agencies, the
furnishing of a copy thereof to Lessor prior to the commencement of the work
and the compliance by Lessee of all conditions of said permit in a prompt and
expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or
for use in the Premises, which claims are or may be secured by any mechanic's
or materialmen's lien against the Premises, or the Industrial Center, or any
interest therein. Lessee shall give Lessor not less than ten (10) days' notice
prior to the commencement of any work in the Premises, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises or the
Buildings as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend itself and Lessor against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises or the Industrial Center, upon the
condition that if Lessor shall require, Lessee shall furnish to Lessor a surety
bond satisfactory to Lessor in an amount equal to such contested lien claim or
demand indemnifying Lessor against liability for the same and holding the
Premises and the Industrial Center free from the effect of such lien or claim.
In addition, Lessor may require Lessee to pay Lessor's attorneys fees and costs
in participating in such action if Lessor shall decide it is to Lessor's best
interest to do so.
(d) All alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made on the Premises, shall be the property
of Lessor and shall remain upon and be surrendered with the Premises at the
expiration of the Lease term, unless Lessor requires their removal pursuant to
paragraph 7.3(a). Notwithstanding the provisions of this paragraph 7.3(d),
Lessee's machinery and equipment, other than that which is affixed to the
Premises so that it cannot be removed without material damage to the Premises,
and other than Utility Installations, shall remain the property of Lessee and
may be removed by Lessee subject to the provisions of paragraph 7.2, except as
expressly provided to the contrary in this Lease.
7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or
additional utility facilities throughout the Building and the Common Areas for
the benefit of Lessor or Lessee, or any other lessee of the Industrial Center,
including, but not by way of limitation, such utilities as plumbing, electrical
systems, security systems, communication systems, and fire protection and
detection systems, so long as such installations do not unreasonably interfere
with Lessee's use of the Premises.
8. INSURANCE; INDEMNITY.
8.1 LIABILITY INSURANCE -- LESSEE. Lessee shall, at Lessee's
expense, obtain and keep in force during the term of this Lease a policy of
Combined Single Limit Bodily Injury and Property Damage insurance insuring
Lessee and Lessor against any liability arising out of the use, occupancy or
maintenance of the Premises and the Industrial Center. Such insurance shall be
in an amount not less than $1,000,000 per occurrence. The policy shall insure
performance by Lessee of the indemnity provisions of this paragraph 8. The
limits of said insurance shall not, however, limit the liability of Lessee
hereunder. The policy shall name Lessor as an additional insured.
8.2 LIABILITY INSURANCE -- LESSOR. Lessor shall obtain and keep in
force during the term of this Lease a policy of Combined Single Limit Bodily
Injury and Property Damage Insurance, insuring Lessor, but not Lessee, against
any liability arising out of the ownership, use, occupancy or maintenance of
the Industrial Center in an amount not less than $1,000,000 per occurrence.
8.3 PROPERTY INSURANCE. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss
or damage to the Industrial Center improvements, but not Lessee's personal
property, fixtures, equipment or tenant improvements paid for by Lessee in an
amount not to exceed the full replacement value thereof, as the same may exist
from time to time, providing protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief, flood
(in the event same is required by a lender having a lien on the Premises)
special extended perils ("all risk", as such term is used in the insurance
industry), plate glass insurance and such other insurance as Lessor deems
advisable. In addition, Lessor shall obtain and keep in force, during the term
of this Lease, a policy of rental value insurance covering a period of one
year, with loss payable to Lessor, which insurance shall also cover all
Operating Expenses for said period. In the event that the Premises shall suffer
an insured loss as defined in paragraph 9.1(g) hereof, the deductible amounts
under the casualty insurance policies relating to the Premises shall be paid by
Lessee. See Paragraph 8 of the Addendum.
8.4 PAYMENT OF PREMIUM INCREASE.
(a) After the term of this Lease has commenced, Lessee
shall not be responsible for paying Lessee's Share of any increase in the
property insurance premium for the Industrial Center specified by Lessor's
insurance carrier as being caused by the use, acts or omissions of any other
lessee of the Industrial Center, or by the nature of such other lessee's
occupancy which create an extraordinary or unusual risk.
(b) Lessee, however, shall pay the entirety of any
increase in the property insurance premium for the Industrial Center over what
it was immediately prior to the commencement of the term of this Lease if the
increase is specified by Lessor's insurance carrier as being caused by the
nature of Lessee's occupancy or any act or omission of Lessee.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of at least B plus, or such
other rating as may be required by a lender having a lien on the Premises, as
set forth in the most current issue of "Best's Insurance Guide." Lessee shall
not do or permit to be done anything which shall invalidate the insurance
policies carried by Lessor. Lessee shall deliver to Lessor copies of liability
insurance policies required under paragraph 8.1 or certificates evidencing the
existence and amounts of such insurance within seven (7) days after the
commencement date of this Lease. No such policy shall be cancellable or subject
to reduction of coverage or other modification except after thirty (30) days
prior written notice to Lessor. Lessee shall, at least thirty (30) days prior
to the expiration of such policies, furnish Lessor with renewals or "binders"
thereof.
8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release
and relieve the other, and waive their entire right of recovery against the
other for loss or damage arising out of or incident to the perils insured
against which perils occur in, on or about the Premises, whether due to the
negligence of Lessor or Lessee or their agents, employees, contractors and/or
invitees. Lessee and Lessor shall, upon obtaining the policies of insurance
required give notice to the insurance carrier or carriers that the foregoing
mutual waiver of subrogation is contained in this Lease.
8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor,
its agents, employees and affiliates from and against any and all claims
arising from Lessee's use of the Industrial Center, or from the conduct of
Lessee's business or from any activity, work or things done, permitted or
suffered by Lessee in or about the Premises or elsewhere and shall further
indemnify and hold harmless Lessor, its agents, employees and affiliates from
and against any and all claims arising from any breach or default in the
performance of any obligaiton on Lessee's part to be performed under the terms
of this Lease, or arising from any act or omission of Lessee, or any of
Lessee's agents, contractors, or employees, and from and against all costs,
attorney's fees, judgments, claims, liens, penalties, consultants' fees,
expenses and liabilities incurred in the defense of any such claim or any
action or proceeding brought thereon; and in case any action or proceeding be
brought against Lessor, its agents, employees and affiliates, by reason of any
such claim. Lessee upon notice from Lessor shall defend the same at Lessee's
expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate
with Lessee in such defense. Lessee, as a material part of the consideration to
Lessor, hereby assumes all risk of damage to property of Lessee or injury to
persons, in, upon or about the Industrial Center arising from any cause and
Lessee hereby waives all claims in respect thereof against Lessor, its agents,
employees and affiliates. See Paragraph 9 of the Addendum.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of
income therefrom or for damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other
person in or about the Premises or the Industrial Center, nor shall Lessor be
liable for injury to the person of Lessee, Lessee's employees, agents or
contractors, whether such damage or injury is caused by or results from fire,
steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures, or from any other cause, whether said
damage or injury results from conditions arising upon the Premises or upon
other portions of the Industrial Center, or from other sources or places and
regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible to Lessee. Lessor shall not be liable for
any damages arising from any act or neglect of any other lessee, occupant or
user of the Industrial Center, nor from the failure of Lessor to enforce the
provisions of any other lease of the Industrial Center.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "Premises Partial Damage" shall mean if the Premises
are damaged or destroyed to the extent that the cost of repair is less than
fifty percent of the then replacement cost of the Premises.
(b) "Premises Total Destruction" shall mean if the
Premises are damaged or destroyed to the extent that the cost of repair is
fifty percent or more of the then replacement cost of the Premises.
(c) "Premises Building Partial Damage" shall mean if the
Building of which the Premises are a part is damaged or destroyed to the extent
that the cost to repair is less than fifty percent of then replacement cost of
the Building.
(d) "Premises Building Total Destruction" shall mean if
the Building of which the Premises are a part is damaged or destroyed to the
extent that the cost to repair is fifty percent or more of the then replacement
cost of the Building.
(e) "Industrial Center Buildings" shall mean the building
on the Industrial Center site.
(f) "Industrial Center Buildings Total Destruction" shall
mean if the Industrial Center Buildings are damaged or destroyed to the extent
that the cost of repair is fifty percent or more of then replacement cost of
the Industrial Center Buildings.
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(g) "Insured Loss" shall mean damage or destruction which
was covered by an event required to be covered by the insurance described in
paragraph 8. The fact that an Insured Loss has a deductible amount shall not
make the loss an uninsured loss.
(h) "Replacement Cost" shall mean the amount of money
necessary to be spent in order to repair or rebuild the damaged area to the
condition that existed immediately prior to the damage occurring excluding all
improvements made by lessees.
9.2 PREMISES PARTIAL DAMAGE; PREMISES BUILDING PARTIAL DAMAGE.
(a) Insured Loss: Subject to the provisions of paragraphs
9.4 and 9.5, if at any time during the term of this Lease there is damage which
is an Insured Loss and which falls into the classification of either Premises
Partial Damage or Premises Building Partial Damage, then Lessor shall, at
Lessor's expense, repair such damage to the Premises, but not Lessee's
fixtures, equipment or tenant improvements, as soon as reasonably possible and
this Lease shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of
paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is
damage which is not an Insured Loss and which falls within the classification
of Premises Partial Damage or Premises Building Partial Damage, unless caused by
a negligent or willful act of Lessee (in which event Lessee shall make the
repairs at Lessee's expense), which damage prevents Lessee from using the
Premises, Lessor may at Lessor's option either (i) repair such damage as soon
as reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) give written notice to Lessee within
thirty (30) days after the date of the occurrence of such damage of Lessor's
intention to cancel and terminate this Lease as of the date of the occurrence
of such damage. In the event Lessor elects to give such notice of Lessor's
intention to cancel and terminate this Lease, Lessee shall have the right
within ten (10) days after the receipt of such notice to give written notice to
Lessor of Lessee's intention to repair such damage at Lessee's expense, without
reimbursement from Lessor, in which event this Lease shall continue in full
force and effect, and Lessee shall proceed to make such repairs as soon as
reasonably possible. If Lessee does not give such notice within such 10-day
period this Lease shall be cancelled and terminated as of the date of the
occurrence of such damage.
9.3 PREMISES TOTAL DESTRUCTION; PREMISES BUILDING TOTAL
DESTRUCTION; INDUSTRIAL CENTER BUILDINGS TOTAL DESTRUCTION.
(a) Subject to the provisions of paragraphs 9.4 and 9.5,
if at any time during the term of this Lease there is damage, whether or not it
is an Insured Loss, and which falls into the classifications of either (i)
Premises Total Destruction, or (ii) Premises Building Total Destruction, or
(iii) Industrial Center Buildings Total Destruction, then Lessor may at
Lessor's option either (i) repair such damage or destruction, but not Lessee's
fixtures, equipment or tenant improvements, as soon as reasonably possible at
Lessor's expense, and this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) after the date of
occurrence of such damage of Lessor's intention to cancel and terminate this
Lease, in which case this Lease shall be cancelled and terminated as of the
date of the occurrence of such damage.
9.4 DAMAGE NEAR END OF TERM.
(a) Subject to paragraph 9.4(b), if at any time during
the last six months of the term of this Lease there is substantial damage,
whether or not an Insured Loss; which falls within the classification of
Premises Partial Damage, Lessor may at Lessor's option cancel and terminate
this Lease as of the date of occurrence of such damage by giving written notice
to Lessee of Lessor's election to do so within 30 days after the date of
occurrence of such damage.
(b) Notwithstanding paragraph 9.4(a), in the event that
Lessee has an option to extend or renew this Lease, and the time within which
said option may be exercised has not yet expired, Lessee shall exercise such
option, if it is to be exercised at all, no later than twenty (20) days after
the occurrence of an Insured Loss falling within the classification of Premises
Partial Damage during the last six months of the term of this Lease. If Lessee
duly exercises such option during said twenty (20) day period, Lessor shall, at
Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or
tenant improvements, as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option
during said twenty (20) day period, then Lessor may at Lessor's option
terminate and cancel this Lease as of the expiration of said twenty (20) day
period by giving written notice to Lessee of Lessor's election to do so within
ten (10) days after the expiration of said twenty (20) day period,
notwithstanding any term or provision in the grant of option to the contrary.
9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event Lessor repairs or restores the Premises
pursuant to the provisions of this paragraph 9, the rent payable hereunder for
the period during which such damage, repair or restoration continues shall be
abated from the date of such damage, in proportion to the degree to which
Lessee's use of the Premises is impaired. Except for abatement of rent, if
any, Lessee shall have no claim against Lessor for any damage suffered by
reason of any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this paragraph 9 and shall not commence such
repair or restoration within ninety (90) days after such obligation shall
accrue. Lessee may at Lessee's option cancel and terminate this Lease by giving
Lessor written notice of Lessee's election to do so at any time prior to the
commencement of such repair or restoration. In such event this Lease shall
terminate as of the date of such notice.
9.6 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this
Lease pursuant to this paragraph 9, an equitable adjustment shall be made
concerning advance rent and any advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's security
deposit as has not theretofore been applied by Lessor.
9.7 WAIVER. Lessor and Lessee waive the provisions of any statute
which relate to termination of leases when leased property is destroyed and
agree that such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as
defined in paragraph 10.3, applicable to the Industrial Center subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2
10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for
paying Lessee's Share of any increase in real property tax specified in the tax
assessor's records and work sheets as being caused by additional improvements
placed upon the Industrial Center by other lessees or by Lessor for the
exclusive enjoyment of such other lessees. Lessee shall, however, pay to Lessor
at the time that Operating Expenses are payable under paragraph 4.2(c) the
entirety of any increase in real property tax if assessed solely by reason of
additional improvements placed upon the Premises by Lessee or at Lessee's
request.
10.3 DEFINITION OF "REAL PROPERTY TAX." As used herein, the term
"real property tax" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed on the Industrial Center or any
portion thereof by any authority having the direct or indirect power to tax,
including any city, county, state or federal government, or any school,
agricultural, sanitary, fire, street, drainage or other improvement district
thereof, as against any legal or equitable interest of Lessor in the Industrial
Center or in any portion thereof, as against Lessor's right to rent or other
income therefrom, and as against Lessor's business of leasing the Industrial
Center. The term "real property tax" shall also include any tax, fee, levy,
assessment or charge (i) in substitution of, partially or totally, any tax,
fee, levy, assessment or charge hereinabove included within the definition of
"real property tax," or (ii) the nature of which was hereinbefore included
within the definition of "real property tax," or (v) which is imposed by reason
of this transaction, any modifications or changes hereto, or any transfers
hereof.
10.4 JOINT ASSESSMENT. If the Industrial Center is not separately
assessed, Lessee's Share of the real property tax liability shall be an
equitable proportion of the real property taxes for all of the land and
improvements included within the tax parcel assessed, such proportion to be
determined by Lessor from the respective valuations assigned in the assessor's
work sheets or such other information as may be reasonably available. Lessor's
reasonable determination thereof, in good faith, shall be conclusive.
10.5 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes
assessed against and levied upon trade fixtures, furnishings, equipment
and all other personal property of Lessee contained in the Premises or
elsewhere. When possible, Lessee shall cause said trade fixtures, furnishings,
equipment and all other personal property to be assessed and billed separately
from the real property of Lessor.
(b) If any of Lessee's said personal property shall be
assessed with Lessor's real property, Lessee shall pay to Lessor the taxes
attributable to Lessee within ten (10) days after receipt of a written
statement setting forth the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light,
power, telephone and other utilities and services supplied to the Premises,
together with any taxes thereon. If any such services are not separately
metered to the Premises. Lessee shall pay at Lessor's option, either Lessee's
Share or a reasonable proportion to be determined by Lessor of all charges
jointly metered with other premises in the Building.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease without the need for notice to Lessee under paragraph 13.1.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph
12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by
or is under common control with Lessee, or to any corporation resulting from
the merger or consolidation with Lessee, or to any person or entity which
acquires all the assets of Lessee as a going concern of the business that is
being conducted on the Premises, all of which are referred to as "Lessee
Affiliate," provided that before such assignment shall be effective said
assignee shall assume, in full, the obligations of Lessee under this Lease. Any
such assignment shall not, in any
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way, affect or limit the liability of Lessee under the terms of this Lease even
if after such assignment or subletting the terms of this Lease are materially
changed or altered without the consent of Lessee, the consent of whom shall not
be necessary.
12.3 TERMS AND CONDITIONS OF ASSIGNMENT. Regardless of Lessor's
consent, no assignment shall release Lessee of Lessee's obligations hereunder
or alter the primary liability of Lessee to pay the Base Rent and Lessee's
Share of Operating Expenses, and to perform all other obligations to be
performed by Lessee hereunder. Lessor may accept rent from any person other
than Lessee pending approval or disapproval of such assignment. Neither a delay
in the approval or disapproval of such assignment nor the acceptance of rent
shall constitute a waiver or estoppel assignment shall not be deemed consent to
any subsequent assignment. In the event of default by any assignee of Lessee or
any successor of Lessee, in the performance of any of the terms hereof. Lessor
may proceed directly against Lessee without the necessity of exhausting
remedies against said assignee. Lessor may consent to subsequent assignments of
this Lease or amendments or modifications to this Lease with assignees of
Lessee, without notifying Lessee, or any successor of Lessee, and without
obtaining its or their consent thereto and such action shall not relieve Lessee
of liability under this Lease.
12.4 TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless of
Lessor's consent, the following terms and conditions shall apply to any
subletting by Lessee of all or any part of the Premises and shall be included
in subleases:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease
heretofore or hereafter made by Lessee, and Lessor may collect such rent and
income and apply same toward Lessee's obligations under this Lease; provided,
however, that until a default shall occur in the performance of Lessee's
obligations under this Lease. Lessee may receive, collect and enjoy the rents
accruing under such sublease. Lessor shall not, by reason of this or any other
assignment of such sublease to Lessor nor by reason of the collection of the
rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a default
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents due and to become due under the sublease. Lessee agrees that
such sublessee shall have the right to rely upon any such statement and request
from Lessor, and that such sublessee shall pay such rents to Lessor without any
obligation or right to inquire as to whether such default exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee or Lessor for any such
rents so paid by said sublessee to Lessor.
(b) No sublease entered into by Lessee shall be effective
unless and until it has been approved in writing by Lessor. In entering into
any sublease, Lessee shall use only such form of sublease as its satisfactory
to Lessor, and once approved by Lessor, such sublease shall not be changed or
modified without Lessor's prior written consent. Any sublessee shall, by reason
of entering into a sublease under this Lease, be deemed, for the benefit of
Lessor, to have assumed and agreed to conform and comply with each and every
obligation herein to be performed by Lessee other than such obligations as are
contrary to or inconsistent with provisions contained in a sublease to which
Lessor has expressly consented in writing.
(c) If Lessee's obligations under this Lease have been
guaranteed by third parties, then a sublease, and Lessor's consent thereto,
shall not be effective unless said guarantors give their written consent to
such sublease and the terms thereof.
(d) The consent by Lessor to any subletting shall not
release Lessee from its obligations or alter the primary liability of Lessee to
pay the rent and perform and comply with all of the obligations of Lessee to be
performed under this Lease.
(e) The consent by Lessor to any subletting shall not
constitute a consent to any subsequent subletting by Lessee or to any
assignment or subletting by the sublessee. However, Lessor may consent to
subsequent sublettings and assignments of the sublease or any amendments or
modifications thereto without notifying Lessee or anyone else liable on the
Lease or sublease and without obtaining their consent and such action shall not
relieve such persons from liability.
(f) In the event of any default under this Lease, Lessor
may proceed directly against Lessee, any guarantors or any one else responsible
for the performance of this Lease, including the sublessee, without first
exhausting Lessor's remedies against any other person or entity responsible
therefor to Lessor, or any security held by Lessor or Lessee.
(g) In the event Lessee shall default in the performance
of its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of Lessee under such sublease from
the time of the exercise of said option to the termination of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to Lessee or for any other prior defaults of
Lessee under such sublease.
(h) Each and every consent required of Lessee under a
sublease shall also require the consent of Lessor.
(i) No sublessee shall further assign or sublet all or
any part of the Premises without Lessor's prior written consent.
(j) Lessor's written consent to any subletting of the
Premises by Lessee shall not constitute an acknowledgement that no default then
exists under this Lease of the obligations to be performed by Lessee nor shall
such consent be deemed a waiver of any then existing default, except as may be
otherwise stated by Lessor at the time.
(k) With respect to any subletting to which Lessor has
consented, Lessor agrees to deliver a copy of any notice of default by Lessee
to the sublessee. Such sublessee shall have the right to cure a default of
Lessee within ten (10) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset
from and against Lessee for any such defaults cured by the sublessee.
12.5 ATTORNEY'S FEES. In the event Lessee shall assign or sublet
the Premises or request the consent of Lessor to any assignment or subletting
or if Lessee shall request the consent of Lessor for any act Lessee proposes to
do then Lessee shall pay Lessor's reasonable attorneys fees incurred in
connection therewith, such attorneys fees not to exceed $350.00 for each such
request.
13. DEFAULT; REMEDIES.
13.1 DEFAULT. The occurrence of any one or more of the following
events shall constitute a material default of this Lease by Lessee:
(a) The abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or
any other payment required to be made by Lessee hereunder, as and when due,
where such failure shall continue for a period of five (5) business days after
written notice thereof from Lessor to Lessee. In the event that Lessor serves
Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful
Detainer statutes such Notice to Pay Rent or Quit shall also constitute the
notice required by this subparagraph.
(c) Except as otherwise provided in this Lease, the
failure by Lessee to observe or perform any of the covenants, conditions or
provisions of this Lease to be observed or performed by Lessee, other than
described in paragraph (b) above, where such failure shall continue for a
period of thirty (30) days after written notice thereof from Lessor to Lessee:
provided, however, that if the nature of the Lessee's noncompliance is such
that more than thirty (30) days are reasonably required for its cure, then
Lessee shall not be deemed to be in default if Lessee commenced such cure
within said thirty (30) day period and thereafter diligently prosecutes such
cure to completion. To the extent permitted by law, such thirty (30) day notice
shall constitute the sole and exclusive notice required to be given to Lessee
under applicable Unlawful Detainer statutes.
(d) (i) The making by Lessee of any general
arrangement or general assignment for the benefit of creditors; (ii) Lessee
becomes a "debtor" as defined in 11 U.S.C. Section 101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days); (iii) the appointment of a trustee
or receiver to take possession of substantially all of Lessee's assets located
at the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution
or other judicial seizure of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days. In the event that any provision of this
paragraph 13.1(d) is contrary to any applicable law, such provision shall be of
no force or effect.
(e) The discovery by lessor that any financial statement
given to Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any
successor in interest of Lessee or any guarantor of Lessee's obligation
hereunder, was materially false.
13.2 REMEDIES. In the event of any such material default by Lessee,
Lessor may at any time thereafter, with or without notice or demand and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such default:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee all damages incurred
by Lessor by reason of Lessee's default including, but not limited to, the cost
of recovering possession of the Premises: expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorney's
fees, and any real estate commission actually paid: the worth at the time of
award by the court having jurisdiction thereof of the amount by which the
unpaid rent for the balance of the term after the time of such award exceeds
the amount of such rental loss for the same period that Lessee proves could be
reasonably avoided; that portion of the leasing commission paid by Lessor
pursuant to paragraph 15 applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case
this Lease shall continue in effect whether or not Lessee shall have vacated or
abandoned the Premises. In such event Lessor shall be entitled to enforce all
of Lessor's rights and remedies under this Lease, including the right to
recover the rent as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located. Unpaid installments of rent and other unpaid monetary obligations
of Lessee under the terms of this Lease shall bear interest from the date due
at the maximum rate then allowable by law.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless
Lessor fails to perform obligations required of Lessor within a reasonable
time, but in no event later than thirty (30) days after written notice by
Lessee to Lessor and to the holder of any first mortgage or deed of trust
covering the Premises whose name and address shall have theretofore been
furnished to Lessee in writing, specifying wherein Lessor has failed to perform
such obligation; provided, however, that if the nature of Lessor's obligation
is such that more than thirty (30) days are required for performance then
Lessor shall not be in default if Lessor commences performance within such
thirty (30) day period and thereafter diligently prosecutes the same to
completion.
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13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of Base Rent, Lessee's Share of Operating Expenses or other
sums due hereunder will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain. Such
costs include, but are not limited to, processing and accounting charges, and
late charges which may be imposed on Lessor by the terms of any mortgage or
trust deed covering the Property. Accordingly, if any installment of Base Rent,
Operating Expenses, or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within ten (10) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
lessor a late charge equal to 6% of such overdue amont. The parties hereby
agree that such late charge represents a fair and reasonable estimate of
the costs Lessor will incur by reason of late payment by Lessee. Acceptance of
such late charge by Lessor shall in no event constitute a waiver of Lessee's
default with respect to such overdue amount, nor prevent Lessor from exercising
any of the other rights and remedies granted hereunder.
14. CONDEMNATION. If the Premises or any portion thereof or the Industrial
Center are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation"),
this Lease shall terminate as to the part so taken as of the date the
condemning authority takes title or possession, whichever first occurs. If more
than ten percent of the floor area of the Premises, or more than twenty-five
percent of that portion of the Common Areas designated as parking for the
Industrial Center is taken by condemnation, Lessee may, at Lessee's option, to
be exercised in writing, only within ten (10) days after Lessor shall have
given Lessee written notice of such taking (or in the absence of such notice,
within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion
of the premises remaining, except that the rent shall be reduced in the
proportion that the floor area of the Premises taken bears to the total floor
area of the Premises. No reduction of rent shall occur if the only area taken
is that which does not have the Premises located thereon. Any award for the
taking of all or any part of the Premises under the power of eminent domain or
any payment made under threat of the exercise of such power shall be the
property of Lessor, whether such award shall be made as compensation for
diminution in value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
award for loss of or damage to Lessee's trade fixtures and removable personal
property. In the event that this Lease is not terminated by reason of such
condemnation, Lessor shall to the extent of severance damages received by
Lessor in connection with such condemnation, repair any damage to the Premises
caused by such condemnation except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall pay any amount in
excess of such severance damages required to complete such repair.
15. BROKER'S FEE.
(a) Upon execution of this Lease by both parties. Lessor shall pay
to Frederick Ross Company Licensed real estate broker(s), a fee set forth in a
separate agreement between Lessor and said broker(s), for brokerage services
rendered by said broker(s) to Lessor in this transaction.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but
also on behalf of any person, corporation, association, or other entity having
ownership interest in said real property or any part thereof, when such fee is
due hereunder. Any transferee of Lessor's interests in this Lease, whether such
transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this paragraph 15. Said broker shall be a
third party beneficiary of the provisions of this paragraph 15.
16. ESTOPPEL CERTIFICATE.
(a) Each party (as "responding party") shall at any time upon not
less than ten (10) days' prior written notice from the other party ("requesting
party") execute, acknowledge and deliver to the requesting party a statement in
writing (i) certifying that this Lease is unmodified in full force and
effect (or,if modified, stating the nature of such modification and certifying
that this Lease, as so modified, is in full force and effect) and the date to
which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to the responding party's knowledge, any
uncured defaults on the part of the requesting party, or specifying such
defaults if any are claimed. Any such statement may be conclusively relied upon
by any prospective purchaser or encumbrancer of the Premises or of the business
of the requesting party.
(b) At the requesting party's option, the failure to deliver such
statement within such time shall be a material default of this Lease by the
party who is to respond, without any further notice to such party, or it shall
be conclusive upon such party that (i) this Lease is in full force and effect,
without modification except as may be represented by the requesting party, (ii)
there are no uncured defaults in the requesting party's performance, and (iii)
if Lessor is the requesting party, not more than one month's rent has been paid
in advance.
(c) If Lessor desires to finance, refinance, or sell the Property,
or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser
designated by Lessor such financial statements of Lessee as may be reasonably
required by such lender or purchaser. Such statements shall include the past
three (3) years' financial statements of Lessee. All such financial statements
shall be received by Lessor and such lender or purchaser in confidence and
shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only
the owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Industrial Center, and except as expressly
provided in paragraph 15, in the event of any transfer of such title or
interest. Lessor herein named (and in case of any subsequent transfers then the
grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall,
subject as aforesaid, be binding on Lessor's successors and assigns, only
during their respective periods of ownership.
18. SEVERABILITY. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided,
any amount due to Lessor not paid when due shall bear interest at 4 1/2
percentage points over the prime rate then publicly announced as such by
Norwest Bank, N.A. Payment of such interest shall not excuse or cure any
default by Lessee under this Lease; provided, however, that interest shall not
be payable on late charges incurred by Lessee nor on any amounts upon which
late charges are paid by Lessee.
20. TIME OF ESSENCE. Time is of the essence with respect to the
obligations to be performed under this Lease.
21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under
the terms of this Lease, including but not limited to Lessee's Share of
Operating Expenses and insurance and tax expenses payable shall be deemed to be
rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
to agreements of the parties with respect any matter mentioned herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. this lease may be modified in writing only signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this lease, Lessee hereby acknowledges that neither the real estate broker
listed in paragraph 15 hereof nor any cooperating broker on this transaction
nor the lessor or any employee or agents of any said persons has made any oral
or written warranties or representations to Lessee relative to the condition or
use by Lessee of the Premises or the Property and Lessee acknowledges that
lessee assumes all responsibility regarding the Occupational Safety Health Act,
the legal use and adaptability of the Premises and the compliance thereof with
all applicable laws and regulations in effect during the term of this lease
except as otherwise specifically stated in this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall
be in writing and may be given by personal delivery or by certified mail, and
if given personally or by mail, shall be deemed sufficiently given when
personally delivered or when deposited in the U.S. mail, postage prepaid,
certified, addressed to Lessee or to Lessor at the address noted below the
signature of the respective parties, as the case may be. Either party may by
notice to the other specify a different address for notice purposes except that
upon Lessee's taking possession of the Premises, the Premises, shall constitute
Lessee's address for notice purposes. A copy of all notices required or
permitted to be given to Lessor hereunder shall be concurrently transmitted to
such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
24. WAIVERS. No waive by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to,
or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to or approval of any subsequent act by Lessee.
the acceptance of rent hereunder by Lessor shall not be a waiver of any
preceding breach by Lessee of any provision hereof other than the failure of
Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge
of such preceding breach at the time of acceptance of such rent.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession
of the Premises or any part thereof after the expiration of the term hereof,
such occupancy shall be a tenancy from month to month upon all the provisions
of this Lease pertaining to the obligations of Lessee, but all Options, if any,
granted under the terms of this Lease shall be deemed terminated and be of no
further effect during said month to month tenancy.
* except that the rent payable shall be one hundred fifty percent (150%) of
the rent payable immediately preceding the termination date of this Lease.
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27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions of paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
where the Industrial Center is located and any litigation concerning this Lease
between the parties hereto shall be initiated in the county in which the
Industrial Center is located.
30. SUBORDINATION.
(a) This Lease, and any Option granted hereby, at Lessor's option, shall
be subordinate to any ground lease, mortgage, deed of trust, or any other
hypothecation or security now or hereafter placed upon the Industrial Center
and to any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease and any
Options granted hereby prior to the lien of its mortgage, deed of trust or
ground lease, and shall give written notice thereof to Lessee, this Lease and
such Options shall be deemed prior to such mortgage, deed of trust or ground
lease, whether this Lease or such Options are dated prior or subsequent to the
date of said mortgage, deed of trust or ground lease or the date of recording
thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination or to make this Lease or any Option granted herein
prior to the lien of any mortgage, deed of trust or ground lease, as the case
may be. Lessee's failure to execute such documents within ten (10) days after
written demand shall constitute a material default by Lessee hereunder without
further notice to Lessee or, at Lessor's option, Lessor shall execute such
documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby
make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact
and in Lessee's name, place and stead, to execute such documents in accordance
with this paragraph 30(b).
31. ATTORNEY'S FEES. If either party or the broker(s) named herein bring an
action to enforce the terms hereof or declare rights hereunder, the prevailing
party in any such action, on trial or appeal, shall be entitled to his
reasonable attorney's fees to be paid by the losing party as fixed by the
court. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to enter
the Premises at reasonable times for the purpose of inspecting the same,
showing the same to prospective purchasers, lenders, or lessees, and making
such alterations, repairs, improvements or additions to the Premises or to the
building of which they are part as Lessor may deem necessary or desirable.
Lessor may at any time place on or about the premises or the Building any
ordinary "For Sale" signs and Lessor may at any time during the last 120 days
of the term hereof place on or about the Premises any ordinary "For Lease"
signs. All activities of Lessor pursuant to this paragraph shall be without
abatement or rent, nor shall Lessor have any liability to Lessee for the same.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent.
34. SIGNS. Lessee shall not place any sign upon the Premises or the Industrial
Center without Lessor's prior written consent. Under no circumstances shall
Lessee place a sign on any roof of the Industrial Center.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to
Lessor of any or all of such subtenancies.
36. CONSENTS. EXCEPT AS EXPRESSLY SET FORTH HEREIN TO THE CONTRARY, WHEREVER IN
THIS LEASE THE CONSENT OF ONE PARTY IS REQUIRED TO AN ACT OF THE OTHER PARTY,
SUCH CONSENT SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED.
37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Property.
39. OPTIONS. SEE PARAGRAPH 10 OF THE ADDENDUM
39.1 DEFINITION. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor: (2) the option or right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of
first refusal to lease other space within the Industrial Center or other
property of Lessor or the right of first offer to lease other space within the
Industrial Center or other property of Lessor: (3) the right or option to
purchase the Premises or the Industrial Center, or the right of first refusal
to purchase the Premises or the Industrial Center, or the right of first offer
to purchase the Premises or the Industrial Center, or the right or option to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor or the right of first offer to purchase other property
of Lessor.
39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original
Lessee while occupying the Premises who does so without the intent of
thereafter assigning this Lease or subletting the Premises or any portion
thereof, and may not be exercised or be assigned, voluntarily or involuntarily,
by or to any person or entity other than Lessee, provided, however that an
Option may be exercised by or assigned to any Lessee Affiliate as defined in
paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are
not assignable separate and apart from this Lease, nor may any Option be
separated from this Lease in any manner, either by reservation or otherwise.
39.3. MULTIPLE OPTIONS. In the event that Lessee has any multiple options
to extend or renew this Lease a later option cannot be exercised unless the
prior option to extend or renew this Lease has been so exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding any
provision in the grant of Option to the contrary, (i) during the time
commencing from the date Lessor gives to Lessee a notice of default pursuant to
paragraph 13.1(b) or 13.1(c) and continuing until the noncompliance alleged in
said notice of default is cured, or (ii) during the period of time commencing
on the date after a monetary obligation to Lessor is due from Lessee and unpaid
(without any necessity for notice thereof to Lessee) and continuing until the
obligation is paid, or (iii) at any time after an event of default described in
paragraphs 13.1(a), 13.1(d), or 13.1(e) (without any necessity of Lessor to
give notice of such default to Lessee), nor (iv) in the event that Lessor has
given to Lessee three or more notices of default under paragraph 13.1(b) or
paragraph 13.1(c), whether or not the defaults are cured, during the 12 month
period of time immediately prior to the time that Lessee attempts to exercise
the subject Option.
(b) The period of time within which an Option may be exercised shall not be
extended or enlarged by reason of Lessee's inability to exercise an Option
because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall terminate
and be of no further force or effect, notwithstanding Lessee's due and timely
exercise of the Option, if, after such exercise and during the term of this
Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a
period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to
commence to cure a default specified in paragraph 13.1(c) within thirty (30)
days after the date that Lessor gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion, or
(iii) Lessee commits a default described in paragraph 13.1(a), 13.1(d) or
13.1(e) (without any necessity of Lessor to give notice of such default to
Lessee), or (iv) Lessor gives to Lessee three or more notices of default under
paragraph 13.1(b) or paragraph 13.1(c), whether or not the defaults are cured.
40. SECURITY MEASURES. Lessee hereby acknowledges that Lessor shall have no
obligation whatsoever to provide guard service or other security measures for
the benefit of the Premises or the Industrial Center. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees from acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessor's sole
option, from providing security protection for the Industrial Center or any
part thereof, in which event the cost thereof shall be included within the
definition of Operating Expense, as set forth in paragraph 4.2(b).
41. EASEMENTS. Lessor reserves to itself the right, from time to time, to grant
such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so
long as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall
sign any of the aforementioned documents upon request of Lessor and failure to
do so shall constitute a material default of this Lease by Lessee without the
need for further notice to Lessee.
42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the provision
hereof, the party against whom the obligation to pay the money is asserted
shall have the right to make payment "under protest" and such payment shall not
be regarded as a voluntary payment, and there shall survive the right on the
part of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions
of this Lease.
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43. AUTHORITY. If Lessee is a corporation, trust or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and
deliver this Lease on behalf of said entity. If Lessee is a corporation trust
or partnership, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
44. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions, if any, shall be controlled by the
typewritten or handwritten provisions.
45. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission
of same to Lessee shall not be deemed an offer to lease. This Lease shall
become binding upon Lessor and Lessee only when fully executed by Lessor and
Lessee.
SEE ADDENDUM ATTACHED HERETO AND MADE A PART HEREOF.
Attached hereto and by this reference made a part of this Lease are the
following:
Exhibit "A" - Site Plan
Exhibit "B" - Work Letter
Exhibit "C" - Rules and Regulations
Exhibit "D" - Letter of Credit
Exhibit "E" - Sign Code
Exhibit "F" - Expansion Option I Space
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR APPROVAL.
NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL
ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS
LEASE OR THE TRANSACTION RELATING THERETO: THE PARTIES SHALL RELY SOLELY
UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE.
LESSOR LESSEE
PACIFICA 67 INVERNESS LLC, T-NETIX, INC.,
a Colorado limited liability company a Colorado corporation
- ------------------------------------ -----------------------------------
By /s/ [ILLEGIBLE] By /s/ [ILLEGIBLE]
---------------------------------- ---------------------------------
By By EVP and CFO
---------------------------------- ---------------------------------
Executed on 4-18-96 Executed on April 15, 1996
------------------------ -----------------------
(Corporate Seal) (Corporate Seal)
ADDRESS FOR NOTICES AND RENT ADDRESS
c/o Pacifica Holding Company
- ------------------------------------ -----------------------------------
5350 South Roslyn Street, Suite 240
- ------------------------------------ -----------------------------------
Englewood, CO 80111
- ------------------------------------ -----------------------------------
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are
utilizing the most current form. AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071.
(213) 687-8777.
<PAGE> 9
ADDENDUM
THIS ADDENDUM ("Addendum") to that certain Industrial Lease
("Lease") by and between PACIFICA 67 INVERNESS, LLC, a Colorado limited
liability company ("Lessor") and T-NETIX, INC., a Colorado corporation
("Lessee"), entered into this 15th day of April, 1996. In the event of a
conflict between the terms and provisions of this Addendum and the Lease, the
terms and provisions of this Addendum shall govern.
1. PARKING. Paragraph 2.2 of the printed portion of the Lease
is hereby amended to provide that Lessor reserves the right to designate
certain portions of the Common Areas for employee parking or, at its election,
to require Lessee and its employees to enter license agreements to park in
certain designated spaces. Lessor reserves the right to increase or reduce the
Common Areas, including parking, to change the nature or purpose thereof, to
rearrange the parking spaces and/or the improvements situated in Common Areas
and may limit certain spaces for certain users, for example, visitors or the
disabled; provided that the one hundred (100) vehicle parking spaces described
in Paragraph 2.2 of the printed portion of the Lease, shall be available to
Lessee, its employees, visitors and invitees. Notwithstanding the foregoing,
Landlord agrees to place signage on the 18-20 parking spaces in the first row
of parking nearest the entrance to the Premises marked as reserved parking for
T-Netix; provided, however, Lessor shall have no obligation to patrol such
spaces to assure that they are being used by Lessee's employees, agents, or
invitees.
2. LEASE COMMENCEMENT DATE
A. Paragraph 3.2 of the printed portion of the Lease
shall be amended to provide that Lessor shall deliver possession of the
Premises to Lessee when Lessor shall have substantially completed Lessor's Work
to the extent agreed to in the Work Letter, Exhibit B hereto. On said date, the
Primary Lease Term shall commence; provided, however, if the commencement date
would occur on other than the first day of the month, the commencement date of
the Primary Lease Term shall be further delayed until the first day of the
following month and Tenant shall pay proportionate rent at the same monthly
rate set forth herein, in advance, for such partial month. In the event said
commencement date is so delayed, the expiration of the term hereof shall be
extended so that the Primary Lease Term will continue for the full period set
forth in Section 3.1 of the printed portion of the Lease. As soon as
practicable after the Primary Lease Term commences, Lessor and Lessee shall
execute an addendum to this Lease, if requested by either party, setting forth
the exact date on which the Primary Lease Term commenced and the expiration
date of the Primary Lease Term.
B. If the Lease commencement date is delayed beyond
November 1, 1996, and such delay is not due to Lessee's failure to comply with
Lessee's obligations hereunder or due to delays resulting from acts of God,
strikes, walkouts, fire accident, riot, civil commotion ("force majeure
events") or to Lessee's Delay, as defined in the Work Letter, Lessor agrees to
reimburse Lessee the following: (i) for the month of November, 1996, the
difference between the base rent Lessee actually pays its current landlord for
the space it currently occupies prior to November 1, 1996, and the holdover
rent Lessee actually pays its current landlord during its holdover period after
November 1, 1996 (excluding all operating expense increases); (ii) for the
month of December, 1996, five hundred dollars ($500.00) per day for each day of
December, 1996 that the Premises are not substantially complete (in no event
will the amount exceed fifteen thousand five hundred dollars ($15,500.00);
provided, however, if Lessee is required to pay its current landlord a full
month's rent, notwithstanding that the Premises are substantially complete
during the month of December, 1996, Lessor agrees to pay Lessee a total of
fifteen thousand five hundred dollars ($15,500.00); (iii) for any period
commencing January 1, 1997 and continuing until the Premises are substantially
complete, Lessee's actual losses attributable to the delay that result
therefrom. Lessee shall provide Lessor with a copy of Lessee's cancelled rent
check and the invoice Lessee received for such rent and substantiation for such
losses as Lessee claims are attributable to delay in possession of the
Premises. Lessor shall reimburse Lessee within thirty (30) days of receipt of
such substantiation as Lessor may reasonably require for such amounts. If the
Lease commencement date is delayed beyond November 1, 1996 and such delay is
due to Lessee's failure to comply with Lessee's obligations hereunder, force
majeure events or Lessee's delay, Lessor's obligations to deliver the Premises
to the Lessee shall be extended on a day-to-day basis, and Lessor's obligation
to pay the amounts described in (i) (ii) and (iii) above shall not commence
until the expiration of such day-to-day extension. Lessee's right to payment
as provided in this Paragraph shall be in full settlement of all claims which
Lessee might otherwise have by reason of the delay of the Lease commencement
date. Lessor agrees to notify Lessee of events beyond Lessor's reasonable
control as soon as practicable after Lessor learns of such matters that will
cause a delay in the Lease commencement date beyond November 1, 1996, and
Lessor agrees to use reasonable efforts to limit such delay.
C. To expedite the Lease commencement date, Lessor
agrees to notify Lessee of the date that Lessee may enter the Premises to
install and wire for Lessee's data processing and communications system, which
the parties acknowledge will be about two weeks prior to substantial completion
of Lessor's Work as defined in the Work Letter attached hereto. Prior to
entering the Premises, Lessee shall first obtain Lessor's written approval of
Lessee's wiring plan, Lessee shall deposit with Lessor certificates of
insurance as required by the Lease and Lessee shall comply with other
reasonable requirements of Lessor relating to performance of such installation.
Lessee's work shall be at Lessee's sole cost and expense. Lessee shall
coordinate completion of its work with completion of Lessor's Work and any
interference by Lessee, its contractors, subcontractors, agents or employees
with Lessor's Work shall be deemed Lessee Delay as defined in the Work Letter.
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3. RENT ESCALATIONS.
A. On the first day of the 37th month of the Lease Term
(and on the first day of respective Option Term and on the first day of the
37th month of each Option Term, as described in Paragraph 10 below) the monthly
Base Rent payable under Paragraph 4.1 of the printed portion of the Lease for
all space then under the Lease shall be adjusted by the increase, if any, from
the date this Lease commenced, in the Consumer Price Index of the Bureau of
Labor Statistics of the U.S. Department of labor for Urban Wage Earners and
Clerical Workers, Denver-Boulder, Colorado (1982-84=100), "All Items", herein
referred to as the "C.P.I."
B. The revised monthly Base Rent shall be calculated as
follows: (i) as to the originally demised portion of the Premises, the Base
Rent payable for the first month of the term of this Lease, as set forth in
Paragraph 4.1 of the printed portion of the Lease; (ii) as to each Option Term,
the monthly Base Rent for the first month (or 37th month, as the case may be)
of each Option Term; and (iii) as to the RFO, Expansion I or II Space, the
market rate Base Rent payable the first month such space becomes part of the
Premises, shall be multiplied by a fraction the numerator of which shall be the
C.P.I. of the calendar month during which the adjustment is to take effect, and
the denominator of which shall be the C.P.I. (a) as to (i) above for the
calendar month in which the original Lease term commenced; (b) as to (ii)
above, each Option Term, for the calendar month the Option Term commenced (or
the first month the Base Rent was previously adjusted, as the case may be); or
(c) as to (iii) above, the RFO, Expansion I or II Space, the market rate Base
Rent payable the first month such space becomes part of the Premises. The sum
so calculated shall constitute the new monthly Base Rent hereunder, but in no
event shall such new monthly Base Rent be less than the Base Rent payable for
the month immediately preceding the date for rent adjustment. The Base Rent to
be recalculated on the adjustment date which is on the first day of the
thirty-seventh (37th) month of the Primary Lease Term and on the first (lst)
day of the First Option Term shall not be increased by less than two and
one-half percent (2 1/2%) nor more than three and one-half percent (3 1/2%)
compounded annually for each Lease Year that had elapsed from the commencement
date of the Primary Lease Term or previous adjustment date (or as to the first
adjustment for the RFO, Expansion I or II Space, the Base Rent when such space
becomes part of the Premises.) The Base Rent to be recalculated for the first
day of the thirty-seventh month of the First Option Term and during the Second
Option Term shall not be increased by less than two and one-half percent
(2 1/2%) nor more than four and one-half percent (4 1/2%) compounded annually
for each Lease Year that had elapsed from the previous adjustment date.
C. Pending receipt of the required C.P.I. and
determination of the actual adjustment, Lessee shall pay an estimated adjusted
rental, as reasonably determined by Lessor by reference to the then available
C.P.I. information. Upon notification of the actual adjustment after
publication of the required C.P.I., any overpayment shall be credited against
the next installment of Base Rent due, and any underpayment shall be
immediately due and payable by Lessee. Lessor's failure to request payment of
an estimated or actual rent adjustment shall not constitute a waiver of the
right to any adjustment provided for in the Lease or this Addendum.
D. In the event the compilation and/or publication of
the C.P.I. shall not be published in the calendar months referred to in
subparagraph B above, the C.P.I. published for the calendar month most closely
preceding or following the adjustment month shall be used. (For example, if the
adjustment month was June of a calendar year and the C.P.I. was published in
January or in September of such year, the September C.P.I. for the applicable
year would be used for both the numerator and denominator of the calculation.)
In the event the compilation and/or publication of the C.P.I. shall be
transferred to any governmental department or bureau or agency or shall be
discontinued, the index most nearly the same as the C.P.I. shall be used to
make such calculation. In the event that Lessor and Lessee cannot agree on such
alternative index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of said
association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
4. OPERATING EXPENSES.
A. Paragraph 4.2(b)(ff) of the printed portion of the
Lease, professional management fees, shall be amended to provide that in the
event Pacifica Holding Company is managing the Property for the Lessor, Lessor
agrees to limit the amount of management fees charged to Lessee (without
limitation to the amount Lessor actually pays) the following amounts during the
following time periods: (i) Lease Year One - $.25 per square foot of the
Premises; (ii) Lease Year Two - $.30 per square foot of the Premises; (iii)
Lease Year Three - $.35 per square foot of the Premises; (iv) Lease Years Four
through Five - the lower of market rate (as defined below) or 3 1/2% of the
gross rent payable excluding Operating Expenses; (v) First Option Term - the
lower of market rate (as defined below) or 4% of the gross rent payable
excluding Operating Expenses; and (vi) Second Option Term - the lower of market
rate (as defined below) or 5% of the gross rent payable excluding Operating
Expenses. The term "market rate" as used in this Paragraph shall mean the rate
charged by a qualified Denver-based management company providing comparable
services for comparable properties based on a comparison of three bids, the
bidders to be selected in Lessor's sole discretion. If Pacifica Holding Company
does not perform management services, the limit on the amount of management
fees chargeable to Lessee shall be the lower of market rate (defined above) or
3 1/2% of the gross rent payable excluding Operating Expenses for the Primary
Lease Term, and the same rates as described in (v) and (vi) above for the First
and Second Option Terms.
B. The following shall be added to the end of
subparagraph 4.2(d) of the printed portion of the Lease: "If Lessee shall
dispute the amount of an adjustment submitted by Lessor or as provided in
subparagraph 4.2 above, Lessee, shall give Lessor written notice of such
dispute within thirty (30) days after
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Lessor submits to Lessee the statement referred to in said Paragraph 4.2(d). If
Lessee does not give Lessor such notice within such time, Lessee shall have
waived its right to dispute the amount so determined. If Lessee timely objects,
Lessee shall have the right to engage its own certified public accountants for
the purpose of verifying the accuracy of the statement objected to at Tenant's
sole cost and expense. If Lessee's accountants determine that an error has been
made, Lessor and Lessee's accountants shall endeavor to agree upon the matter,
failing which the parties shall settle the dispute by judicial action, or in
such other manner as they agree. Notwithstanding the pendency of any dispute
over any particular statement, Lessee shall continue to pay Lessor the amount
of the adjusted monthly installments of rent determined by Lessor until the
adjustment has been determined to be incorrect. All costs incurred by Lessee in
obtaining its own accountants shall be paid for by Lessee unless Lessee's
accountants disclose an error acknowledged by Lessor, or found to have occurred
in a judicial action of more than five percent (5%) in the computation of the
total amount of Operating Expenses as set forth in the statement submitted by
Lessor which is challenged, in which event, Lessor shall pay the reasonable
costs incurred by Lessee in obtaining such audit (which costs shall exclude any
contingency fees).
5. SECURITY DEPOSIT. Notwithstanding anything contained in
Paragraph 5 of the printed portion of the Lease to the contrary, on the date of
delivery of the Lessee executed Lease to Lessor, Lessee shall provide to Lessor
a clean unconditional irrevocable letter of credit from a lending institution
reasonably acceptable to Lessor (the "Letter of Credit") in lieu of the
security deposit described in Paragraph 5. The Letter of Credit shall be in the
amount of $225,000.00. The Letter of Credit shall be in the form attached
hereto as Exhibit D and made a part hereof. It is further understood and agreed
that no later than thirty (30) days prior to the expiration date of the initial
Letter of Credit, Lessee shall present Lessor with an extension or renewal of
the initial Letter of Credit or a substitute Letter of Credit in the same
format as Exhibit D and from a lending institution reasonably acceptable to
Lessor that shall be effective no later than upon the expiration of the initial
Letter of Credit and continue in effect for at least a one-year period.
Likewise, throughout the primary Lease term as it may be extended, no later
than thirty (30) days prior to the expiration of the renewed or extended Letter
of Credit or substitute therefor, Lessee shall present Lessor with an
additional extension or renewal of the initial or substituted Letter of Credit.
Any failure of Lessee to provide Lessor with the extensions or renewals or
substitute Letters of Credit as required hereunder shall be deemed a default by
Lessee under the Lease and, without the necessity of further notice, Lessor
shall have the right to present any of the Letters of Credit then in its
possession for payment, with the amounts received thereunder to be held as
security for the outstanding rent or other sums due and owing under the Lease.
Notwithstanding the foregoing, beginning with the second anniversary of the
date the Lease term commenced and continuing on each anniversary date of the
Lease, Lessee shall be entitled to reduce the amount of the Letter of Credit by
1/5, and at such time as the balance is zero, thereafter no further security
deposit shall be required of Lessee. Additionally, Lessee shall not be required
to add to the security deposit if it adds the RFO, Expansion I or II Space.
Lessor agrees that Lessor will not draw on the Letter of Credit until any
applicable cure period expressly provided in Paragraph 13.1(c) of the printed
portion of the Lease has passed.
6. EXCLUSIVE USE. During the Lease term, Lessor will not lease
space in the Industrial Complex to another entity whose business includes the
provision of telephone call control systems services to correctional
institutions. Lessor's agreement and Lessee's exclusive use granted herein
shall be in effect so long as (i) Lessee is occupying and doing business from
the Premises in accordance with the requirements of the Lease; (ii) Lessee is
not in default under the Lease; and (iii) the Lease is in full force and
effect. In the event a claim or action is brought against Lessor arising out of
Lessor's grant or enforcement (or attempted enforcement) of the exclusive use
set forth in this Paragraph, Lessor shall notify Lessee in writing of such
claim or action. Other than in the instance that Lessor has leased space to an
entity known by Lessor as a competitor to Lessor, such as MCI Corp., within
five (5) days of Lessor's notice, Lessee shall submit to Lessor a written
acknowledgment that (a) Lessee agrees to terminate the exclusive right granted
herein by deleting reference to the same in this Paragraph or (b) Lessee will
not relinquish its exclusive use. In the event Lessee elects not to relinquish
its exclusive use, Lessee shall indemnify and hold Lessor harmless for all
costs and expense Lessor incurs in attempting to enforce the exclusive right
described herein and Lessee shall waive its rights against Lessor for breach of
exclusive rights set forth in this Paragraph if it is determined that the
exclusive use right is an unlawful restraint of trade and commerce, price
discrimination, price fixing or monopoly. Lessor's breach of this provision
shall be deemed a breach of the terms hereof entitling the Lessee to exercise
available legal remedies. Lessor shall not be in breach of this provision if
Lessor continues good faith efforts to enforce this provision.
7. GENERATOR. The parties acknowledge that part of Lessor's Work
is the purchase and installation of a generator for Lessee's sole use. The
generator shall be located on Common Area of the Industrial Complex and shall
be owned by Lessor. Notwithstanding the foregoing, at least sixty (60) days
prior to the expiration of the Lease term, Lessee shall give Lessor written
notice if Lessee wishes to purchase the generator. Provided that Lessee gives
such written notice and is not in default under the Lease, Lessee shall be
entitled to purchase the generator by paying Lessor 2/7 of the actual cost to
Lessor for the purchase and installation of the generator. Such amount shall be
payable to Lessor in cash or certified funds prior to the expiration of the
Lease term. Upon such payment, Lessee shall be entitled to remove the generator
at Lessee's sole cost and expense and shall repair the Common Area to its
condition prior to installation of the generator. Lessor, at its election, may
remove the generator for the Lessee, repair the Common Area and charge Lessee
the actual cost thereof. In the event Lessee extends the term of the Lease
pursuant to an Option to extend, Lessee shall be entitled to remove the
generator, at Lessee's sole cost and expense, and shall repair the Common Area
to its condition prior to the installation of the generator at the expiration
of such Option Term without payment to the Lessor for such generator; provided,
that Lessee shall give Lessor written notice of its intention to remove the
generator not less than sixty (60) days prior to the expiration of such Option
term.
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8. INSURANCE. During the Lease term and any extension thereof,
Lessee shall keep its furniture, fixtures, merchandise, equipment and all items
Lessee is obligated to maintain and repair under the Lease insured against loss
or damage by fire with the all-risk endorsements. Notwithstanding the
foregoing, Lessor's property insurance described in Paragraph 8.3 of the
printed portion of the Lease shall insure Lessor's Work notwithstanding that
Lessee is obligated to maintain and repair such items after the commencement of
the Primary Lease Term. It is understood and agreed that Lessee assumes all
risk of damage to its own property arising from any cause whatsoever,
including, without limitation, loss by theft or otherwise. Lessee shall during
the Lease term and any extension thereof, keep in full force and effect
workers' compensation insurance insuring against and satisfying Lessee's
obligations and liabilities under the workers' compensation laws of the State
of Colorado.
9. INDEMNITY. Lessor shall indemnify and hold harmless Lessee,
its agents, employees and affiliates from and against claims of third parties
arising out of injuries to the person or property of such third parties arising
in or upon the Common Areas of the Industrial Center caused by the wilful
misconduct of Lessor, its agents or employees, including all costs, attorneys'
fees, judgments, claims, liens, penalties, consultants' fees, expenses and
liabilities incurred in defense of any such claim, action or proceeding brought
thereon.
10. OPTION TO EXTEND. As additional consideration for the
covenants of Lessee hereunder, Lessor hereby grants unto Lessee an option (the
"Option") to extend the term of this Lease for two (2) additional consecutive
terms of five (5) years each (the "First Option Term" or "Second Option Term"
or together, the "Option Terms"). The Option shall apply to all space then
under the Lease at the time the respective Option Term would commence and shall
be on the following terms and conditions:
A. Written notice of Lessee's interest in exercising the
Option shall be given to Lessor not earlier than nine (9) months and not later
than six (6) months prior to the expiration of the primary lease term or first
Option Term, as the case may be ("Lessee's Notice"). If Lessee gives such
notice and provided the other conditions to the extension have been satisfied,
the term of the Lease shall be automatically extended for the respective Option
Term without requiring further action of the parties. However, at the request
of either party, the parties shall execute an amendment to the Lease to confirm
the terms of the extension.
B. Unless Lessor is timely notified by Lessee in
accordance with subparagraph A above, the Option shall terminate and the Lease
shall expire in accordance with its terms, at the end of the primary Lease term
or the then current Option Term, as the case may be.
C. Lessee's option to extend shall continue only if as
of the date of Lessee's Notice or as of the date of commencement of the
respective Option Term, Lessee (i) shall not be in default under the Lease at
the time of exercise of the Option or at the time of the commencement of the
respective Option Term; (ii) shall not have sublet more than the square footage
then equal to (a) 5,000 square feet of the originally demised Premises plus the
square footage of the Expansion I Space as to the First Option Term or (b)
5,000 square feet of the originally demised Premises plus the square footage of
the Expansion I and II Space as to the Second Option Term; and (iii) shall not
have assigned its interest in the Lease nor vacated the Premises.
D. The Option granted hereunder shall be upon the same
terms and conditions of the Lease, except for the rental to be paid by Lessee
and the right to extend the term. The Base Rent applicable during the first
Lease year of each Option Term shall be the monthly Base Rent Lessee is paying
the immediately preceding month increased in the manner described in
subparagraphs 3.A and B of this Addendum.
E. In the event Lessee exercises the Option as to the
First Option Term, commencing at the beginning of the eighth Lease Year, Lessor
agrees to paint the painted surfaces and recarpet the carpeted areas of the
originally demised Premises that were painted and carpeted as part of Lessor's
Work hereunder with paint and carpet of the same quality as Lessor originally
used as part of Lessor's Work described on EXHIBIT B hereto. In the event
Lessee does not exercise its Option to extend the term for the Second Option
Term, no later than the expiration date of the First Option Term, Lessee shall
pay to Lessor two-fifths (2/5) of Lessor's costs for providing the paint and
carpet described in this subparagraph. Lessor shall provide Lessee with an
invoice for such amount. Lessee's obligation to repay such amount shall survive
the expiration of the Lease Term.
F. After exercise of the Option above described, there
shall be no further rights on the part of Lessee to extend the term of the
Lease. Lessee must exercise the Option for the first Option Term to have the
right to exercise the Option for the Second Option Term.
11. RIGHT OF FIRST OFFER. During the Primary Lease Term only, if
Lessor has space in the Building not leased to Lessee, (the "RFO Space") which
is "available for lease" (as defined herein), prior to leasing same to any
third party, Lessor shall offer to lease such space to Lessee on a continuing
basis by written notice upon the terms and conditions of this Lease for a Lease
term coterminous with the term of this Lease for the Premises and subject to
any renewal rights granted to Lessee herein (the "First Offer Right"). The term
"available for lease" shall exclude renewals of leases, expansion options or
rights of first refusal, or similar rights, granted pursuant to leases executed
after Lessee has elected not to exercise its First Offer Right. Additionally,
the RFO Space shall first be considered "available for lease" from the date of
execution of this Lease by both parties.
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A. Lessee shall have a period of ten (10) calendar days
after receipt of Lessor's notice in which to accept Lessor's offer. If Lessee
does not timely or properly exercise its right with respect to the RFO Space
specified in Lessor's notice, Lessor may, at any time within ninety (90) days
thereafter lease the RFO Space to any third party without complying with the
provisions of this paragraph and affording Lessee the right to again exercise
the First Offer Right with respect to the RFO Space specified in Lessor's
notice. Notwithstanding the foregoing, should Lessor wish to conclude a
transaction for terms materially less favorable to Lessor than those contained
within the notice to the Lessee, prior to conclusion of such a transaction,
the space shall be reoffered to Lessee upon the materially less favorable terms
and Lessee shall have the period described above to respond.
B. If Lessee elects to exercise the offer, Lessor and
Lessee shall execute and deliver an amendment to the Lease reflecting the terms
for the RFO Space, which amendment shall be executed and delivered promptly
after Lessee exercises the First Offer Right. The Base Rent for the RFO Space
to be paid by Lessee (including any tenant improvement allowance) shall be a
rate comparable to the rate for comparable space in a comparable building in
the Inverness Business Park, for a comparable term with comparable tenant
improvements, which Base Rent shall be subject to escalation at the same time
and in the same manner as provided in Paragraph 3 of this Addendum. In addition
to the Base Rent, Lessee shall be obligated to pay Lessee's Share of all
Operating Expenses and Lessee's Share as set forth in Paragraph 4.2(a) of the
printed portion of the Lease shall be recalculated by dividing the square
footage of the Premises, including the RFO Space by 54,280 square feet.
C. Lessee's First Offer Right shall continue only if as
of the date of Lessor's notice of availability Lessee (i) shall not be in
default under the Lease; (ii) shall not have sublet more than the square
footage then equal to 5,000 square feet of the originally demised Premises plus
the square footage of the Expansion I and II Space that Lessee had leased;
(iii) shall not have assigned its interest in the Lease nor vacated the
Premises; and (iv) shall have not less than twenty-four (24) months remaining
in the Lease term or current Option Term, as the case may be; provided,
however, if at the time Lessee elects to exercise the First Offer Right, there
shall be less than twenty-four (24) months remaining in the Lease Term or
Option Term, as the case may be, Lessee may, if an option to extend the Lease
is available, exercise such option and extend the term beyond the twenty-four
(24) month period required herein as a condition to its First Offer Right.
D. Lessor agrees to continue to offer the RFO space to
Lessee each time such space again becomes available to lease.
12. EXPANSION OPTION I. Lessor hereby grants Lessee an option
("Expansion Option I") to add to the Premises not less than approximately 7,200
square feet nor more than the remaining space in the Building contiguous to the
Premises as shown on EXHIBIT F attached hereto and made a part hereof (the
"Expansion I Space") during the Fourth Lease Year (as defined below) on the
following terms and conditions:
A. Lessee shall give Lessor written notice of its
election to exercise Expansion Option I no later than forty-two (42) months
after the Lease commencement date. Within thirty (30) days after receipt of
Lessee's notice, Lessor shall notify Lessee of the approximate date the
Expansion Option I Space will be available (which date shall be during the
Fourth Lease Year of the Lease term) and the Base Rent as described herein.
Lessee shall have a period of ten (10) calendar days after receipt of Lessor's
notice in which to (i) exercise Expansion Option I on the terms and conditions
of Lessor's notice; or (ii) exercise Expansion Option I but object to the Base
Rent as set forth in Lessor's notice; in either case, by delivering written
notice of such exercise to Lessor. If Lessee does not timely notify Lessor in
writing of its election to exercise Expansion Option 1, in accordance with (i)
or (ii) of the preceding sentence, Lessee shall be deemed to have waived
Expansion Option I and Expansion Option II hereunder and they shall be of no
further force and effect, and additionally, Lessor shall not be obligated to
offer any space to Lessee pursuant to the First Offer Right described in
Paragraph 11 above. Upon giving such notice, Lessee shall be deemed to have
added the Expansion I Space to the Premises under the Lease as of such date
Lessor can provide Lessee with possession thereof, after completion of any
tenant improvements (except if delayed due to Lessee's Delay defined in Exhibit
B to the Lease or due to circumstances beyond Lessor's control) on the terms
and conditions of Lessor's notice; provided, however, if Lessee exercised
Expansion Option I but objected to the Base Rent, the space shall be deemed
part of the Premises but the initial Base Rent shall be determined pursuant to
subparagraph F below. The Expansion I Space shall be added to the Premises
without requiring further action of the parties, provided, however, the parties
agree to execute an amendment to the Lease setting forth the addition.
B. The terms on which the Expansion I Space shall be
added to the Premises shall be the same terms and conditions set forth in the
Lease, excluding the Base Rent, and being coterminous with the term of the
Lease. In addition to such Base Rent, Lessee shall be obligated to pay Lessee's
Share of all Operating Expenses, and Lessee's Share as set forth in Paragraph
4.2(a) of the printed portion of the Lease shall be recalculated by dividing
the square footage of the Premises, including the Expansion I Space, by 54,280
square feet. The Base Rent to be paid by Lessee (including any tenant
improvement allowance) shall be a rate comparable to the rate for comparable
space in a comparable building in the Inverness Business Park for a comparable
term with comparable tenant improvements. The Base Rent shall be quoted for the
remainder of the Primary Lease Term, excluding the First Option Term. The Base
Rent shall be subject to escalation for the first time the thirty-seventh
(37th) month of the First Option Term in the same manner as described in
Paragraph 3 of the Addendum, and thereafter at the same time as the Base Rent
for the originally demised Premises.
5
<PAGE> 14
C. The right of Lessee granted in this paragraph shall
continue only so long as Lessee (i) shall not be in default under the Lease;
(ii) shall not have sublet more than 5,000 square feet of the originally
demised Premises; (iii) shall not have assigned its interest in the Lease, nor
vacated the Premises; (iv) has not exercised its First Offer Right as to such
space; and (v) shall have more than twenty-four (24) months remaining in the
Lease term, provided, however, if there are less than twenty-four (24) months
remaining in the Lease term, if Lessee provides Lessor with notice of its
election to exercise Expansion Option I, such notice shall also serve to
exercise Lessee's first Option set forth in Paragraph 10 of this Addendum. The
amendment to the Lease described in subparagraph A above shall confirm the
terms of the first extension Option as well as the Expansion Option I.
D. All notifications contemplated by this Paragraph,
whether from Lessee to Lessor or from Lessor to Lessee, shall be in writing and
shall be given in the manner provided for notice under this Lease.
E. "Lease Year" as used herein shall mean each twelve
(12) month period commencing with the date the Lease term commences, or any
anniversary thereof, and ending on the preceding day one year later.
F. If Lessee objects to the Base Rent quoted in Lessor's
notice and Lessee timely exercises Expansion Option I under subparagraph A
above, Lessor and Lessee shall attempt in good faith to select one qualified
commercial real estate broker with at least five (5) years experience in
leasing office/industrial space in the southeast Denver metropolitan area
market. If they can so agree, the parties shall split the expense of such
broker's services. The selected broker shall no later than thirty (30) days
after selection make a determination of the Base Rent for the Expansion I Space
based upon the same factors as Lessor has included (for example, the same lease
term to which the Base Rent applies, level of tenant improvements granted by
Lessor but excluding the Base Rent rate quoted by Lessor), which determination
Lessor and Lessee agree to accept as the Base Rent for the Expansion I Space.
Should the parties fail to select one individual within ten (10) days after
Tenant's notice under subparagraph A above, Lessor and Lessee shall each select
a qualified broker as described above, at its own expense, who shall
independently within thirty (30) days thereafter make a determination of the
Base Rent in the same manner described above. Should their individual
determinations of Base Rent differ by less than ten percent (10%), the Base
Rent shall be determined by averaging the two determinations. Should the Base
Rent so determined differ by more than ten percent (10%), the two shall select
a third broker qualified as described above who shall independently make a
similar determination without knowledge of the two previously made. In that
event, the Base Rent applicable to the Expansion I Space shall be determined by
averaging the two closest of the three determinations. For example, if one of
the brokers quotes a Base Rent rate of $13.00 per square foot, the second
broker quotes a Base Rent rate of $14.00 per square foot and the third broker
quotes a Base Rent rate of $11.50 per square foot, the Base Rent shall be the
average of the two closest of the three determinations, i.e., $13.00 + $14.00 =
$27.00/2 = $13.50 per square foot.
13. EXPANSION OPTION II. Lessor hereby grants Lessee an option
("Expansion Option II") to add to the Premises not more than approximately
9,600 square feet of space representing all the remaining space in the Building
(the "Expansion II Space") on the following terms and conditions:
A. Lessee shall give Lessor written notice of its desire
to add the Expansion II Space no later than the fifty-first (51st) month after
the Lease commencement date. Within thirty (30) days after receipt of Lessee's
notice, Lessor shall notify Lessee of the approximate date the Expansion II
Space will be available, which space may not all be available at one time, but
which shall all be available no later than during the Sixth Lease Year of the
Lease term and the Base Rent as described herein. Lessee shall have a period of
five (5) calendar days after receipt of Lessor's notice in which to (i)
exercise Expansion Option II on the terms and conditions of Lessor's notice or
(ii) exercise Expansion Option II but object to the Base Rent as set forth in
Lessor's notice; in either case, by delivering written notice of such exercise
to Lessor. If Lessee does not timely notify Lessor of its election to exercise
Expansion Option II, in accordance with (i) or (ii) of the preceding sentence,
Lessee shall be deemed to have waived Expansion Option II hereunder and it
shall be of no further force and effect, and additionally, Lessor shall not be
obligated to offer any space to Lessee pursuant to the First Offer Right
described in Paragraph 11 above. Upon giving such notice, Lessee shall be
deemed to have added the Expansion II Space to the Premises under the Lease as
of the date Lessor can make such space available to Lessee for occupancy, but
no later than during the Sixth Lease Year after completion of any tenant
improvements (except if delayed due to Lessee's Delay defined in Exhibit B to
the Lease or due to circumstances beyond Lessor's control) on the terms and
conditions of Lessor's notice; provided, however, if Lessee exercised Expansion
Option II but objected to the Base Rent, the space shall be deemed part of the
Premises but the initial Base Rent shall be determined pursuant to subparagraph
F below. The Expansion II Space shall be added to the Premises without
requiring further action of the parties, provided, however, the parties agree
to execute an amendment to the Lease setting forth the addition.
B. The terms on which the Expansion II Space shall be
added to the Premises shall be the same terms and conditions set forth in the
Lease, excluding the Base Rent, and being coterminous with the term of the
Lease. In addition to such Base Rent, Lessee shall be obligated to pay
Lessee's Share of all Operating Expenses, and Lessee's Share as set forth in
Paragraph 4.2(a) of the printed portion of the Lease shall be recalculated by
dividing the square footage of the Premises, including the Expansion II Space,
by 54,280 square feet. The Base Rent to be paid by Lessee (including any tenant
improvement allowance) shall be a rate comparable to the rate for comparable
space in a comparable building in the Inverness Business Park for a comparable
term with comparable tenant improvements. The Base Rent shall be quoted for the
remainder of the Primary Lease Term, including the First Option Term. The Base
Rent shall be subject to escalation for the first time the thirty-seventh
(37th) month of the First Option Term in the same manner as
6
<PAGE> 15
described in Paragraph 3 of the Addendum, and thereafter at the same time as
the Base Rent for the originally demised Premises.
C. The right of Lessee granted in this paragraph shall
continue only so long as Lessee (i) shall not be in default under the Lease;
(ii) shall not have sublet more than 5,000 square feet of the originally
demised Premises plus the square footage of the Expansion I Space; (iii) shall
not have assigned its interest in the Lease, nor vacated the Premises; (iv) has
not exercised its First Offer Right as to such space; and (iv) shall have
extended the term of the Lease for the first extension Option described in
Paragraph 10 of this Addendum; and (v) Lessee did not add all the remaining
space in the Building as Expansion Option I.
D. All notifications contemplated by this Paragraph,
whether from Lessee to Lessor or from Lessor to Lessee, shall be in writing and
shall be given in the manner provided for notice under this Lease.
E. If Lessee objects to the Base Rent Lessor quotes, the
Base Rent shall be determined following the procedure described in Paragraph
12.F above.
14. LESSOR'S OPTION TO CANCEL ASSIGNMENT OR SUBLEASE BY LESSEE.
A. In the event that Lessee or any sublessee or assignee
of Lessee (all hereinafter referred to as "Lessee"), shall intend to sublet all
or a portion of the Premises (which portion is more than 40% of the square
footage in the building on the Premises or more than 40% of the entire Premises
and which sublease is for more than a one year term including options) or
assign its interest under this Lease, to one other than a "Lessee Affiliate",
as defined in Paragraph 12.2 of the printed portion of the Lease, then Lessee
shall give to Lessor written notice of such intent, herein referred to as
"Lessee's Notice of Intent", in strict accordance with the procedures
hereinafter set forth.
B. Lessee's Notice of Intent shall set forth the date,
herein referred to as the "Termination Date", upon which it is intended that a
proposed sublease or assignment would become effective. The Termination Date
shall not be less than ninety (90) days nor more than one hundred and twenty
(120) days from the date that Lessor receives Lessee's Notice of Intent. Within
twenty (20) days after Lessor's receipt of Lessee's Notice of Intent, Lessor
may give written notice to Lessee that Lessor elects to terminate this Lease
effective as of the Termination Date. If Lessor shall so elect to terminate
this Lease then neither Lessor nor Lessee shall be liable to the other for any
reason having to do with this Lease from and after the Termination Date except
for matters which shall have arisen prior to termination and except for the
obligations of Lessee that exist upon termination.
C. In the event that Lessor does not exercise its right
to terminate this Lease and in the event that Lessee does not in fact execute a
final and binding sublease or assignment within one hundred and twenty (120)
days after said Termination Date, which Sublease or Assignment term commences
within one hundred and sixty (160) days after said Termination Date, then
Lessee shall be obligated to give another Lessee's Notice of Intent to Lessor
before Lessee may assign or sublease and the terms of this Addendum shall
reapply. The failure of Lessor to exercise its right to terminate this Lease
under this Paragraph shall not be deemed a waiver of the right to subsequently
terminate this Lease in accordance with the terms hereof, as it is intended
that this option to cancel shall continue to exist during the entire term of
this Lease and any extension thereof.
D. In the event that Lessor, from time to time, declines
to exercise its option to cancel this Lease, that decision shall not be deemed
a waiver by Lessor of Lessor's right to approve or disapprove of the assignment
or subletting by Lessee as the same is otherwise provided for in Paragraph 12.1
of the printed portion of the Lease.
15. MISCELLANEOUS.
A. Business Day's. As used in this Lease, the term
"business day" shall mean a calendar day Monday through Friday except such
days the U.S. Postal Service is closed.
B. Utility Service. The parties acknowledge that all
utilities servicing the Premises are separately metered except for water and
sewer service.
IN WITNESS WHEREOF, this Addendum is executed as of the day
and year first above written.
T-NETIX, INC., a Colorado corporation Pacifica 67 Inverness, LLC, a
Colorado limited liability company
By: /s/ [ILLEGIBLE]
------------------------------------
Title: EVP AND CFO By: /s/ [ILLEGIBLE]
--------------------------------- ------------------------------
Authorized Signature
Attest: "Lessor"
By: /s/ LORRAINE L. BROWN
------------------------------------
Title: Administrative Assistant
---------------------------------
"Lessee"
7
<PAGE> 16
EXHIBIT A
SITE PLAN 'A'
[MAP OF OFFICE BUILDING COMPLEX]
<PAGE> 17
EXHIBIT B
WORK LETTER
Re: Lessee: T-NETIX, INC.
Premises: 67 Inverness Drive East, Englewood, CO
Concurrently herewith, you as Lessee and the undersigned, as Lessor,
have executed a Lease covering the above captioned Premises. The provisions of
said Lease are herein incorporated by reference as if fully set forth herein.
In consideration of the execution of said Lease, Lessee and Lessor mutually
agree as follows:
1. Lessee and Lessor have finalized, initialled and approved a
space plan for the Premises dated March 15, 1996 (the "Plan") and outline
specifications for the Building.
2. Lessor's contractor shall perform the finish work for the
Premises shown in the Plan ("Lessor's Work") at Lessor's costs and expense. In
addition, Lessor has agreed to reimburse Lessee $37,575.00 for the
architectural expenses incurred by Lessee in preparation of the Plan, which
amount shall be paid within thirty (30) days after Lessor receives an invoice
and such substantiation as Lessor may reasonably request therefor from Lessee.
Lessee shall be responsible for all other improvements or finish associated
with Lessee's use or occupancy of the Premises.
3. Changes to the Plan may be made only upon prior written
approval by Lessor and Lessee, consent for which shall not be unreasonably
withheld. Notwithstanding the foregoing, Lessor reserves the right within
Lessor's reasonable discretion to change or substitute materials which may have
been originally specified in the Plan with materials that are substantially
equivalent. All costs incurred by changes requested by Lessee, including costs
of the revisions in architectural, mechanical and electrical working drawings
and costs of construction and materials, and reimbursables necessitated by such
changes, shall be paid for in full by Lessee upon billing by Lessor or Lessor's
designer.
4. Notwithstanding the provisions of the Lease, the commencement
of the term of the Lease and Lessee's rental obligations will not be delayed or
extended by any delay: (i) caused by modifications, revisions and changes to
the Plan or final working drawings due to changes requested by Lessee, its
agents or employees; (ii) in the delivery or installation of any special or
non-standard building items specified by Lessee (of which Lessor will notify
Lessee as soon as practicable after execution of the Lease and thereafter in
the course of regularly scheduled construction meetings); or (iii) of any kind
or nature in the completion of the Premises caused by Lessee, its agents or
employees ("Lessee Delay"). Lessee shall pay all costs arising from Lessee
Delay.
5. Lessee has designated John Giannaula as its sole
representative with respect to the matters set forth in this Work Agreement,
who shall have full authority and responsibility to act on behalf of the Lessee
as required in this Work Letter. Lessee shall have the right, by written
notice to Lessor, to change or add a designated representative.
6. Lessor has designated Greg Downs or Chetter Latcham as its
sole representatives with respect to Lessor's responsibilities under this Work
Agreement, who shall have full authority and responsibility to act on behalf of
the Lessor as required in this Work Letter. Lessor shall have the right, by
written notice to Lessee, to change its designated representative.
7. Any and all notices required to be given hereunder shall be in
writing in accordance with the terms and provisions of the Lease. However, in
all cases notices shall also be given to those individuals to be specified
pursuant to Paragraphs 5 and 6 above.
Very truly yours,
PACIFICA 67 INVERNESS. LLC,
a Colorado limited liability company
By: /s/ ILLEGIBLE
-----------------------------------------
Authorized Representative
"Lessor"
AGREED AND ACCEPTED
this 15th day of April, 1996.
T-NETIX, INC.,
a Colorado corporation
By: /s/ ILLEGIBLE
-------------------------------------
Title: EVP & CFO
-------------------------------------
ATTEST:
By: /s/ LORRAINE L. BROWN
-------------------------------------
Title: ADMIN ASST
-------------------------------------
<PAGE> 18
EXHIBIT C TO LEASE AGREEMENT
RULES AND REGULATIONS
To that certain Lease dated April 15, 1996, between PACIFICA 67
INVERNESS, LLC, A COLORADO LIMITED LIABILITY COMPANY, as lessor, and T-NETIX,
INC., A COLORADO CORPORATION, as Lessee, covering the property located at 65
Inverness Drive East, Englewood, Colorado.
To the extent that this Addendum conflicts with, modifies or supplements other
portions of the Lease, the provisions contained in this Addendum shall govern
and control the rights and obligations of the parties.
I. SIGN CRITERIA: See EXHIBIT E, attached hereto and made a part hereof.
A. General Restrictions:
1. No electrical or audible signs will be allowed.
2. Except as provided herein, no banners, pennants, placards,
freestanding signs, or signs affixed to automobiles or trailers
are allowed on the building, in the landscaped areas, or on
streets or parking area. The restriction pertaining to
automobiles ortrailers does not apply to magnetic or painted
identification signs placed on company or private vehicles for
use in the normal course of business.
II. HAZARDOUS SUBSTANCES:
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCES" as used in this Lease shall mean any product, substance, chemical
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or
effect, either by itself or in combination with other materials expected to be
on the Premises, is either: (i) potentially injurious to the public health,
safety or welfare, the environment or the Premises, (ii) regulated or monitored
by any governmental authority, or (iii) a basis for liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or
fractions thereof. Lessee shall not engage in any activity in, on or about the
Premises which constitutes a Reportable Use (as hereinafter defined) of
Hazardous Substances without the express prior written consent of Lessor and
compliance in a timely manner (at Lessee's sole cost and expense) with all
Applicable Law (all applicable statutes, ordinances, rules, regulations,
orders, covenants, requirement of any governmental or quasi-governmental entity
now in effect or which may hereafter come into effect.) "REPORTABLE USE" shall
mean (i) the installation or use of any above or below ground storage tank,
(ii) the generation, possession, storage, use, transportation, or disposal of a
Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with, any
governmental authority. Reportable Use shall also include Lessee being
responsible for the presence in, on or about the Premises of a Hazardous
Substance with respect to which any Applicable Law requires that a notice be
given to persons entering or occupying the Premises or neighboring properties.
Notwithstanding the foregoing, Lessee may, without Lessor's prior written
consent, but in compliance with all Applicable Law, use any ordinary and
customary materials reasonably required to be used by any Lessee in the normal
course of Lessee's business permitted on the Premises, so long as such use is
not a Reportable Use and does not expose the Premises or neighboring properties
to any meaningful risk of contamination or damage or expose Lessor to any
liability therefor. In addition, Lessor may (but without any obligation to do
so) condition its consent to the use or presence of any Hazardous Substances,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurance as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, installation (and removal on or before Lease expiration or
earlier termination) or reasonably necessary protective modification to the
Premises (such as concrete encasements) and/or deposit of an additional
Security Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance, or a condition involving or
resulting from same, has come to be located in, on, under or about the
Premises, other than as previously consented to by Lessor, Lessee shall
immediately give written notice to such fact to Lessor. Lessee shall also
immediately give Lessor a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action or proceeding given
to, or received from, any governmental authority or private party, or persons
entering or occupying the Premises, concerning the presence, spill, release,
discharge of, or exposure to, any Hazardous Substance or contamination in, on,
or about the Premises, including but not limited to all such documents as may
be involved in any Reportable Uses involving the Premises.
(c) BOND TO THE POSTED. In the event of such notification by
Lessee, Lessee shall post a bond satisfactory to the Lessor equal to the
estimated cost of removal, transporting, storage, disposal and clean up of its
regulated substances should Lessee vacate the leased premises without lawfully
disposing of those regulated substances.
(d) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and
<PAGE> 19
consultant's fees arising out of or involving any Hazardous Substance or
storage tank brought onto the Premises by or for Lessee or under Lessee's
control. Lessee's obligations under this Paragraph II shall include, but not
be limited to, the effect of any contamination or injury to person, property or
the environment created or suffered by Lessee, and the cost of investigation
(including consultant's and attorney's fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and
Lessee shall release Lessee from its obligations under this Lease with respect
to Hazardous Substances or storage tanks, unless specifically so agreed by
Lessor in writing at the time of such agreement.
(e) LESSOR'S OBLIGATION. At the commencement date of the Lease
term, Lessor shall deliver the Premises to Lessee free and clear of Hazardous
Substances that violate Applicable Law.
The provisions of this paragraph are in addition to, and not in lieu
of, any other provisions contained in this Lease.
Ill. TEMPERATURE:
Lessee shall maintain the air temperature in its leased space warm
enough to prevent the freezing of plumbing and sprinkler systems, if any.
IV. DISCLOSURE
(a) This Lease has been prepared by Pacifica Holding Company, a
Colorado Corporation, at the request of the Lessor and Lessee, who are herein
referred to as "the Parties" without regard to number or gender. The Parties
have been advised to have this document reviewed by their own independent
counsel, and confirm that in signing this document, they have not relied on any
acts or any conduct of Pacifica Holding Company, and its agents with regard to
the interpretation or meaning of this documents. The Parties jointly and
severally waive any and all claims, actions, demands, and loss against Pacifica
Holding Company, its agents, employees, and each of them, that a Party may
incur by reason of any act, error, or omission in the preparation of this
document and in its interpretation and meaning, whether or not the
interpretation and meaning is the result of determination by a court or
arbitration panel of competent jurisdiction. The preceding waiver provisions
have been negotiated by and between the Parties on the one part, and Pacifica
Holding Company on the other part.
(b) Please be advised that the Lessor or Lessee of the Premises
may be subject to the Americans With Disabilities Act (the ADA), a Federal law
codified at 42 USC Section 12101 et seq. Among other requirements of the ADA
that could apply to the Premises, Title III of the ADA requires the Lessor and
Lessee of "public accommodations" to remove barriers to access by disabled
persons and provide auxiliary aids and services for hearing, vision or speech
impaired persons by January 26, 1992. The regulations under Title III of the
ADA are codified at 28 CFR Part 36. The Lessor and Lessee have been advised to
have independent counsel review the ADA and the regulations to determine if
this law would apply, and the nature of the requirements.
<PAGE> 20
EXHIBIT D 105 N. Main, PO Box One, Wichita, Kansas 67202, USA
LETTER OF CREDIT Telex: 5101007591
Cable: INTRUSTBK
Telephone: 316-383-1111
Fax: 316-383-1665
<TABLE>
==========================================================================================================================
<S> <C>
ISSUING BANK: IRREVOCABLE
LETTER OF CREDIT
INTRUST BANK, N.A.
105 N. MAIN
WICHITA, KANSAS 67202 NUMBER:
USA
- --------------------------------------------------------------------------------------------------------------------------
PLACE OF ISSUE: WICHITA, KANSAS USA EXPIRY DATE: APRIL 15, 1997
- --------------------------------------------------------------------------------------------------------------------------
DATE OF ISSUE : APRIL 15, 1996 PLACE FOR PRESENTATION: WICHITA, KANSAS USA
- --------------------------------------------------------------------------------------------------------------------------
APPLICANT: BENEFICIARY:
T-NETIX, INC. PPACIFICA 67 INVERNESS, LLC
6675 SOUTH KENTON STREET c/o PACIFICA HOLDING COMPANY
ENGLEWOOD, CO 80111 5350 SOUTH ROSLYN STREET, SUITE 240
ENGLEWOOD CO 80111
- --------------------------------------------------------------------------------------------------------------------------
ADVISING BANK: AMOUNT:
USD225,000.00 **TWO HUNDRED TWENTY FIVE THOUSAND DOLLARS
AND 00/100**
-----------------------------------------------------------
Credit available with Nominated bank:
RESTRICTED TO COUNTERS OF ISSUING BANK
- --------------------------------------------------------------
BY: PAYMENT
TENER: SIGHT
AGAINST THE DOCUMENTS DETAILED HEREIN AND BENEFICIARY'S
DRAFT(s) DRAWN ON:
INTRUST BANK, N.A., WICHITA, KANSAS USA
- --------------------------------------------------------------------------------------------------------------------------
DOCUMENTS REQUIRED
1. THIS LETTER OF CREDIT NO.______; AND
2. CERTIFICATION SIGNED BY AN AUTHORIZED REPRESENTATIVE OF PACIFICA 67 INVERNESS, LLC, A COLORADO LIMITED LIABILITY
COMPANY, OR AN OFFICER OF ITS TRANSFEREE OR ASSIGNEE, STATING ESSENTIAL AS FOLLOWS:
"THE UNDERSIGNED BENEFICARY REQUESTS PAYMENT OF THE ENCLOSED DRAFT UNDER THE ENCLOSED
LETTER OF CREDIT."
SPECIAL CONDITIONS:
1. THIS LETTER OF CREDIT SHALL BE TRANSFERABLE AND ASSIGNABLE TO ANY PERSON OR ENTITY WHO IS THE SUCCESSOR OR ASSIGNEE
OF BENEFICIARY'S INTEREST UNDER THE LEASE ENTERED INTO ON OR ABOUT ________________, BETWEEN PACIFICA 67 INVERNESS,
LLC, A COLORADO LIMITED LIABILITY COMPANY AND T-NETIX, INC., A COLORADO CORPORATION.
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
WE HEREBY ISSUE THE IRREVOCABLE DOCUMENTARY CREDIT IN YOUR FAVOR. IT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR
DOCUMENTARY CREDITS (1993 REVISION, INTERNATIONAL CHAMBER OF COMMERCE, PARIS, FRANCE, PUBLICATION 500) AND ENGAGES US IN
ACCORDANCE WITH THE TERMS THEREOF. THE NUMBER AND THE DATE OF THE CREDIT AND THE NAME OF OUR BANK MUST BE QUOTED ON ALL
DRAFTS REQUIRED. IF THE CREDIT IS AVAILABLE BY NEGOTIATION, EACH PRESENTATION MUST BE NOTED ON THE REVERSE SIDE OF THIS
ADVICE BY THE BANK WHERE THE CREDIT IS AVAILABLE.
INTRUST BANK, N.A.
AUTHORIZED SIGNATURE
Page 1 of 1
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 21
EXHIBIT E
Page 1 of 9
1) [PICTURE OF BUILDING IDENTIFICATION SIGNS]
2) [PICTURE OF INTERSTATE BUILDING IDENTIFICATION SIGNS]
3) [PICTURE OF TENANT IDENTIFICATION SIGNS]
4) [PICTURE OF INFORMATIONAL SIGNS]
INVERNESS BUSINESS PARK SIGNAGE MANUAL
<PAGE> 22
EXHIBIT E
Page 2 of 9
[DIAGRAM OF TEMPORARY SIGN]
<PAGE> 23
EXHIBIT E
Page 3 of 9
Inverness Business Park has established a complete system of exterior signage.
The system is designed to make the Park more efficient by informing, directing
and controlling residents and visitors, and still enhance the appearance of
Inverness by meeting the same high standards of aesthetic quality as the
community itself. All signage, temporary as well as permanent, are to be
designed and constructed in compliance with this guideline.
There are five types of signs in the signage system. They are:
1) Building Identification Signs
2) Interstate Building Identification Signs
3) Tenant Identification Signs
4) Informational Signs
5) Temporary Signs
Each type of sign is discussed in this manual.
The Inverness Planning and Architectural Control Committee (IPACC) oversees
adherence to the signage system. Design for any proposed sign(s) must be
submitted to IPACC for review and approval. Incorporated in the signage design
should be details of design, materials, lettering, location, mounting, size,
color and lighting.
Signage plans are to be submitted to:
THE INVERNESS PLANNING AND ARCHITECTURAL CONTROL COMMITTEE
2 Inverness Drive East, Suite 200
Englewood, Colorado 80112
(303) 649-9857
The individuals and or companies submitting plans will be notified by IPACC if
any changes or adjustments are necessary and will receive written notification
when the plan is approved.
<PAGE> 24
EXHIBIT E
Page 4 of 9
BUILDING IDENTIFICATION SIGN
This is the principal sign identifying the name of each building site or the
name(s) of the company(s) occupying the building(s) and the building address
(number and street) in a consistent location and typeface on the sign. The sign
is to be placed along the street near the site's major auto driveway entrance.
In most cases, one address sign per site is sufficient and normally, only one
address sign is allowed. The exception may be those cases where a site has more
than one major vehicular entrance on different sides of the site or where the
nature of the site and adjacent roadways is such that IPACC determines that
more than one sign is desirable for proper identification. No signs, individual
letters or numbers may be placed directly on office or industrial buildings.
Signs may be placed on commercial buildings in special situations where IPACC
determines it appropriate.
General Specifications:
1. Leg Frame - Fabricated from high quality rectangular tubular steel
formed into the standard shape and one of the approved dimensions
shown in "Exhibit A." Because the frame is hollow, all electrics for
illuminated signage can be concealed. We recommend that identification
signs be illuminated.
2. Sign Box - Formed from steel channel and mounted within the frame.
3. Sign Faces - Constructed of 18 gauge steel with an angle iron support
frame on the back. The sign must have the same layout of information
on both sides.
4. Graphics on the sign faces can be either of the following. We
recommend "a".
a. Routed letters and numbers backed with plexiglass and
illuminated from the interior.
<PAGE> 25
EXHIBIT E
Page 5 of 9
b. Face mounted plexiglass letters and numbers with the address
portion faced with scotchlite or equally reflective material.
Letter height shall not exceed 10" for the company name(s) and
building number, 6" for any descriptive information, and 3"
for the street name. Owners or tenants are encouraged to
design their own trademark graphics for their sign.
5. Color - Sign color can be either a silver gray background with black
letters or a black background with off-white letters. In all cases,
the frame color is to be black. The use of color on the company logo
and name is encouraged.
6. Placement of an identification sign must relate to two factors. One,
the best position for viewing from the roadway and two, the best
visual relationship to the architecture. An identification sign must
be placed perpendicular to approaching vehicular traffic and not
obscure any other sign or reduce sight distance for traffic safety.
INTERSTATE/BUILDING IDENTIFICATION SIGN
Those buildings with Interstate-25 frontage may have signage designed to
identify major tenant(s) for the motorist on the Interstate. The signs are
special purpose and to be allowed only for tenants with national stature, with
a highly visible and instantly recognized company logo.
The sign shall be custom designed to conform to those now existing.
TENANT IDENTIFICATION SIGN
The purpose of tenant identification signs is to provide a means of identifying
tenants and their location in a multitenant and multientry type building. The
tenant sign is located adjacent the exterior front door access to the tenants
leased space.
<PAGE> 26
EXHIBIT E
Page 6 of 9
General Specifications:
1. Leg Frame - Fabricated for high quality 1" x 3" tubular steel into the
standard shape and size.
2. Sign Box - 1" x 3" steel channel formed into a 2 feet x 4 feet frame
and mounted within the leg frame.
3. Sign Faces - Constructed of 18 gauge steel with an angle iron support
frame on the back of each face.
4. Graphics - Face mounted plexiglass or vinyl letters depicting the
company name and logo on one face only.
5. Colors - Sign color can be either silver gray with black letters or
black with off-white letters. In all cases, the frame color is to be
black.
INFORMATIONAL SIGN
Informational signage includes instructions to visitors, vendors, customers,
directional signage, designated parking areas, and driveway entrance signs.
1. Leg Frame - Fabricated for high quality 1" x 3" tubular steel into the
standard shape and size.
2. Sign Box - 1" x 3" steel channel formed into a frame and mounted
within the leg frame. The size of the frame may vary from 18" x 18" to
24" x 24".
3. Sign Faces - Constructed of 18 gauge steel with an angle iron support
frame on the back of each face.
4. Graphics - Face mounted plexiglass letters and numbers. Maximum size
3".
5. Colors - Frame and sign face black with off white letters.
<PAGE> 27
EXHIBIT E
Page 7 of 9
TEMPORARY SIGN
Temporary signs placed on the property are to be removed after the specific
purpose they have served has been satisfied. Examples of such signs are
temporary building identification signs, construction signs, and for lease or
for sale signs.
General Specifications:
1. Leg Frame - Fabricate from steel pipe (1 1/2" diameter) into the shape
and size to fit a standard 36" x 36" sign face.
2. Sign Face - 18 gauge steel backed and attached to the leg frame with
1" x 1" tubular steel.
3. Graphics - Face mounted with vinyl letters and numbers on one face
only. Nomenclature on real estate signage is limited to the nature of
offering (for sale, for lease, etc.), the name of the offering real
estate company, their logo, and phone number.
4. Colors - Frame and back of sign face black. Sign face off-white with
black letters and numbers. Company logo any color.
5. One sign is permitted per site and is to be located parallel to the
street at least 25 feet from the street curb. No signs may be mounted
on building walls.
<PAGE> 28
EXHIBIT E
Page 8 of 9
[DIAGRAM OF BUILDING IDENTIFICATION SIGN]
<PAGE> 29
EXHIBIT E
Page 9 of 9
[DIAGRAM OF TENANT IDENTIFICATION AND INFORMATION SIGN]
<PAGE> 30
EXHIBIT F
SITE PLAN 'A'
[MAP OF OFFICE BUILDING COMPLEX]
<PAGE> 31
AMENDMENT NUMBER ONE TO LEASE AGREEMENT
THIS AMENDMENT NUMBER ONE TO LEASE AGREEMENT is entered into as of the
20th day of May, 1996, by and between Pacifica Development Properties, II LLC,
a Colorado limited liability company ("Lessor") and T-Netix, Inc., a Colorado
corporation ("Lessee").
Recitals:
A. On or about April 15, 1996, Lessor and Lessee entered into a
written lease agreement (the "Lease") pertaining to approximately 37,575 square
feet of space located at 67 Inverness Drive East, Englewood, Colorado (the
"Premises").
B. The Lessor's name was incorrectly reflected in the Lease as
Pacifica 67 Inverness, LLC, a Colorado limited liability company.
C. Lessor and Lessee now desire to amend the Lease and the prior
amendments thereto, if any, in the manner and form hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, Lessor and Lessee
hereby agree as follows:
1. The Lease is hereby amended to substitute in all places in the
Lease where the name of the Lessor appears, the Lessor's correct name, Pacifica
Development Properties, II LLC, a Colorado limited liability company.
2. If there is any conflict between the terms and provisions of
this Amendment and the terms and provisions of the Lease or any prior
amendments thereto, the terms and provisions of this Amendment shall govern.
Except as herein specifically set forth, all other provisions of the Lease and
any prior amendments thereto shall remain in full force and effect and be
binding upon the parties in accordance with their terms.
IN WITNESS WHEREOF, the parties have executed this Amendment to be
effective as of the date set forth above.
T-Netix, Inc., Pacifica Development Properties, II LLC
a Colorado corporation a Colorado limited liability company
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
--------------------------- ---------------------------
Title: [ILLEGIBLE] Authorized Signature
---------------------
ATTEST "Lessor"
By: /s/ [ILLEGIBLE]
---------------------------
Title: [ILLEGIBLE]
------------------------
"Lessee"
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
T-NETIX, INC.:
We consent to incorporation by reference in the registration statement (No.
33-92642) on Form S-8 of T-NETIX, Inc. of our report dated October 7, 1996,
except for the first three paragraphs of Note 11, which are as of October 21,
1996, relating to the consolidated balance sheets of T-NETIX, Inc. and
subsidiaries as of July 31, 1996, and 1995, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the years in the three-year period ended July 31, 1996, and our report
dated October 7, 1996 relating to the consolidated financial statement Schedule
II, which reports appear in the July 31, 1996, annual report on Form 10-K of
T-NETIX, Inc.
/s/ KPMG PEAT MARWICK LLP
--------------------------------
KPMG Peat Marwick LLP
Denver, Colorado
October 29, 1996
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