<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
---------------------------------------------
FOR THE QUARTER ENDED APRIL 30, 1997 COMMISSION FILE NUMBER 0-25016
T-NETIX, INC.
-------------------------------------------------------
(Exact Name of registrant as Specified in Its Charter)
COLORADO 84-1037352
- ------------------------------------ ------------------------------
(State of Other (I.R.S. Employer
Jurisdiction of Incorporation) Identification No.)
67 INVERNESS DRIVE EAST
ENGLEWOOD, COLORADO 80112
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 790-9111
--------------------------------------------------------------------
Indicate by check X whether the registrant (1) has filed all reports
required to filed by Section 13 or 15 (d) of the Securities and Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes ( X ) No ( )
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Class Outstanding at June 9, 1997
- ------------------------------- -------------------------------
Common Stock, $.01 stated value 8,313,083
<PAGE> 2
T-NETIX, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART ITEM PAGE
- ---- ---- ----
<S> <C> <C>
I. FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheets, April 30, 1997
and July 31, 1996 (Unaudited)........................................ 2
Consolidated Statements of Operations, Three Months Ended
April 30, 1997 and 1996, and Nine Months Ended
April 30, 1997 and 1996 (Unaudited) ................................. 3
Consolidated Statements of Shareholders' Equity, Nine Months Ended
April 30, 1997 and Year Ended July 31, 1996 (Unaudited) ............. 4
Consolidated Statements of Cash Flows, Nine Months Ended
April 30, 1997 and 1996 (Unaudited) ................................. 5
Notes to Consolidated Financial Statements (Unaudited).................... 6
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 8
II. OTHER INFORMATION - Items 1 through 6 ......................................... 15
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
April 30, July 31,
1997 1996
---------- ----------
(amounts in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 336 $ 145
Trade accounts receivable, net of allowance 12,983 8,222
Other receivables 63 73
Prepaid expenses 466 296
Property and equipment, at cost:
Telecommunications equipment 36,681 31,463
Construction in progress 4,701 5,012
Office equipment 3,619 2,771
---------- ----------
Property and equipment 45,001 39,246
Less accumulated depreciation and amortization (15,696) (10,516)
---------- ----------
Property and equipment, net 29,305 28,730
Patent license rights 2,705 2,788
Other assets, net 3,381 2,273
---------- ----------
$ 49,239 $ 42,527
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 6,130 $ 7,968
Accrued liabilities 3,397 2,191
Debt 13,298 6,324
Capital lease obligations 209 485
---------- ----------
Total liabilities 23,034 16,968
Shareholders' equity:
Preferred stock, $0.01 stated value, 10,000,000 shares
authorized; no shares issued -- --
Common stock, $0.01 stated value, 70,000,000 shares
authorized; issued and outstanding
8,312,333 and 8,150,493 shares, respectively 83 81
Additional paid-in capital 26,520 26,208
Accumulated deficit (398) (730)
---------- ----------
Total shareholders' equity 26,205 25,559
---------- ----------
Commitments and contingencies $ 49,239 $ 42,527
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
April 30, April 30, April 30, April 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue:
Telecommunications services $ 8,209 $ 7,441 $ 24,773 $ 22,335
Telecommunications licensing 750 -- 750 --
Direct call provisioning 268 742 1,048 2,358
Voice print 241 -- 389 --
Other revenue 2 -- 20 --
---------- ---------- ---------- ----------
Total revenue 9,470 8,183 26,980 24,693
Expenses:
Operating costs and expenses:
Telecommunications services 3,457 3,216 11,110 9,826
Direct call provisioning 236 705 985 2,312
Voice print 59 -- 73 --
---------- ---------- ---------- ----------
Total operating costs and expenses 3,752 3,921 12,168 12,138
Selling, general, and administrative 1,924 1,618 5,851 4,762
Research and development 692 651 2,090 1,470
Depreciation and amortization 2,022 1,532 5,757 4,262
---------- ---------- ---------- ----------
Total expenses 8,390 7,722 25,866 22,632
Operating income 1,080 461 1,114 2,061
Interest expense, net (245) (122) (590) (462)
---------- ---------- ---------- ----------
Earnings before income taxes 835 339 524 1,599
Income taxes (192) (5) (192) (46)
---------- ---------- ---------- ----------
Net earnings $ 643 $ 334 $ 332 $ 1,553
========== ========== ========== ==========
Net earnings per common share $ 0.07 $ 0.04 $ 0.04 $ 0.17
========== ========== ========== ==========
Weighted average common shares
outstanding 9,104 9,198 9,264 9,048
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Common stock Additional Total
------------------- paid-in Accumulated shareholders'
Shares Amounts capital deficit equity
-------- -------- -------- ----------- ------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balances at August 1, 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 30 -- -- -- --
Common stock issued in
business acquisition 195 2 2,269 -- 2,271
Stock option tax benefit -- -- 1,008 -- 1,008
Net earnings -- -- -- 1,627 1,627
-------- -------- -------- -------- --------
Balances at July 31, 1996 8,151 81 26,208 (730) 25,559
Common stock issued upon
exercise of stock options 153 2 187 -- 189
Common stock issued in
business acquisition 8 -- 94 -- 94
Stock option tax benefit -- -- 31 -- 31
Net earnings -- -- -- 332 332
-------- -------- -------- -------- --------
Balances at April 30, 1997 8,312 $ 83 $ 26,520 $ (398) $ 26,205
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended April 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 332 $ 1,553
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,757 4,262
Provision for losses on accounts receivable 210 378
Deferred income tax expense 192 --
NonCash reductions in loan from customer -- (449)
Changes in operating assets and liabilities, net of
acquisition of business:
Change in trade accounts receivable (4,971) (2,788)
Change in other receivables 10 (63)
Change in prepaid expenses (170) (168)
Change in other assets (174) (321)
Change in accounts payable (1,838) 3,956
Change in accrued liabilities 1,098 (343)
---------- ----------
Cash provided by operating activities 446 6,017
---------- ----------
Cash flows from investing activities:
Capital expenditures (5,755) (6,766)
Acquisition of business -- (431)
Other investing activities (1,066) (432)
---------- ----------
Cash used in investing activities (6,821) (7,629)
---------- ----------
Cash flows from financing activities:
Proceeds from borrowings 6,833 1,259
Payments of debt (180) (18)
Payments of capital lease obligations (276) (379)
Common stock issued for cash 189 95
---------- ----------
Cash provided by financing activities 6,566 957
---------- ----------
Net increase (decrease) in cash and cash equivalents 191 (655)
Cash and cash equivalents at beginning of period 145 872
---------- ----------
Cash and cash equivalents at end of period $ 336 $ 217
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited financial statements
The accompanying unaudited consolidated financial statements reflect all
adjustments which, in the opinion of management, are necessary to reflect
a fair presentation of the financial position and results of operations of
T-NETIX, Inc. and subsidiaries (the Company) for the interim periods
presented. All adjustments, in the opinion of management, are of a normal
and recurring nature.
Reclassification
Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.
Capitalized Software Cost
Certain costs of internally developed software to be sold, leased, or
otherwise marketed are capitalized over the economic useful life of the
software product, which is generally estimated to be three years.
Unamortized capitalized software cost was $314,000 at April 30, 1997.
Earnings per common share
Earnings per common share for the three and nine months ended April 30,
1997 and 1996, 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).
Income taxes
A valuation allowance is provided when it is more likely than not that
some portion or all of the net deferred tax asset will not be realized.
The Company has historically established valuation allowances primarily
for net operating loss carryforwards and portions of other deferred tax
assets as a result of its history of net losses. The Company recorded
deferred tax expense of $192,000 for the nine months ended April 30, 1997.
The Company reduced the valuation allowance and recognized a stock option
tax benefit to the extent of the deferred taxes recognized.
Debt
In June 1997, the Company entered into a new Loan Agreement with its
current commercial bank. The Loan Agreement is for a total of $20,000,000
in committed credit. The agreement provides for various financial
covenants, including maintaining certain financial ratios and minimum net
worth requirements.
Contingencies
Effective as of February 11, 1997, the Company entered into a Settlement
Agreement with BellSouth Telecommunications, Inc. ("BellSouth") in
settlement of the suits pending between the parties in federal courts in
Colorado and Georgia. Under the terms of the Agreement, the parties agreed
to enter Stipulated Orders of Dismissal in both suits, ending the
litigation between them.
6
<PAGE> 8
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under the Agreement, the Company has agreed to a limited license of
certain of its technology, including U.S. Patent No. 5,319,702 relating to
three-way call detection technology, to BellSouth in exchange for an
up-front payment of $750,000 and additional payments, based on additional
lines which may be deployed by BellSouth in the future, of up to $350,000.
The terms of the license permit BellSouth to use, or have made for its
use, three-way call detection products utilizing the Company's technology,
but not to sublicense or to manufacture or sell products utilizing such
technology for use by others. The use license extends to those customers
of BellSouth with respect to products supplied by BellSouth.
Payments by BellSouth represent telecommunications licensing revenue and
have been recognized in the Company's financial statements for the three
and nine months ended April 30, 1997.
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 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.
7
<PAGE> 9
ITEM 2. 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.
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-Q 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 renewal of existing site specific
customer contracts, the ability to retain the base of current site specific
customer contracts, the continued relationship with existing customers, the
effect of economic conditions, the effect of regulation, including the
Telecommunications Act of 1996, 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, GTE, 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.
However, in the event the Company is awarded contracts as a long distance
provider, revenue will increase accordingly. The following table sets forth
certain information concerning the accepted calls processed by the Company for
its customers in the inmate calling market and excludes direct call
provisioning.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- ------------------------
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Call volumes processed 22,695,000 20,344,000 67,485,000 58,696,000
Average daily transactions 255,000 226,000 247,000 215,000
</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. The Company expects the rate of growth in calls processed will
decrease relative to the historical rates.
The Company has begun to recognize revenue from the sale of hardware and
software licenses associated with the installation of the SpeakEZ Voice
Print(sm) products. The Company has and will continue to invest significant
time and resources in bringing these products to market and anticipates the
continued offering of new SpeakEZ Voice Print(sm) products and services.
8
<PAGE> 10
RESULTS OF OPERATIONS
Three Months Ended April 30, 1997 and 1996
The following table sets forth certain statement of operations data as a
percentage of total revenue for the three months ended April 30, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Revenue:
Telecommunications services 87% 91%
Telecommunications licensing 8 --
Direct call provisioning 3 9
Voice print 2 --
Other revenue -- --
---------- ----------
Total revenue 100% 100%
Expenses:
Operating costs and expenses 40% 48%
Selling, general and administrative 20 20
Research and development 7 8
Depreciation and amortization 21 18
---------- ----------
Operating income 12 6
Interest expense (3) (1)
---------- ----------
Earnings before income taxes 9 5
Income taxes (2) --
---------- ----------
Net earnings 7% 5%
========== ==========
</TABLE>
Total Revenue. Total revenue increased 16% to $ 9,470,000 for the three
months ended April 30, 1997 from $8,183,000 for the corresponding prior period.
This increase resulted from a 10% increase in telecommunications services
revenue to $8,209,000 for the three months ended April 30, 1997, from
$7,441,000 in the corresponding prior period. The increase in
telecommunications services revenue was due to a 12% increase in call volume
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 the rate of growth in calls processed will decrease relative to
the historical rate. An offsetting factor to the increase in revenue dollars is
a reduction in fees per call as the Company's customers reach contractually
agreed upon call volume discounts. Specifically, these discounts accounted for
a reduction in revenue of approximately $71,000 during the quarter ended April
30, 1997. 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. The Company recorded $750,000 of telecommunications licensing
revenue during the three months ended April 30, 1997. This revenue was
associated with the licensing of the Company's Strike Three(TM) product to a
single customer. There was no such revenue in the corresponding prior period.
The Company does not expect significant contribution from telecommunications
licensing revenue in the near future. Direct call provisioning revenue
decreased as a percentage of total revenue in part due to the increase in
telecommunications services revenue and other forms of revenue and due to the
conversion of direct sites to telecommunications services revenue sites. There
was also a dollar decrease in direct call provisioning revenue of $474,000 due
to conversion of certain 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.
9
<PAGE> 11
The Company also recognized SpeakEZ Voice Print(sm) revenue in the amount of
$241,000 for custom engineering and for the sale of hardware and software
licenses. Future amounts of voice print revenue are unpredictable and depend
upon market acceptance, risk of technological success, and impact of new
competition.
Operating costs and expenses. Total operating costs and expenses decreased
to $ 3,752,000 for the three months ended April 30, 1997, from $3,921,000 for
the three months ended April 30, 1996, and decreased as a percentage of total
revenue to 40% for the three months ended April 30, 1997 from 48% in the
corresponding prior period. Operating costs and expenses of telecommunications
services primarily consist of system administration costs for correctional
facilities, including salaries and related personnel expenses, communication
costs 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. There were minimal costs directly associated
with telecommunications licensing revenue. 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. Voice print
operating costs for the three months ended April 30, 1997 include the cost of
hardware systems sold, installation costs, and royalty charges.
The following table sets forth the operating costs and expenses for each
type of revenue as a percentage of corresponding revenue for the three months
ended April 30, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
APRIL 30, APRIL 30,
1997 1996
-------- --------
<S> <C> <C>
Operating costs and expenses:
Telecommunications services 42% 43%
Direct call provisioning 88 95
Voice print 24 --
</TABLE>
Operating costs and expenses associated with providing telecommunications
services decreased as a percentage of corresponding revenue to 42% for the
three months ended April 30, 1997 from 43% for the corresponding prior period.
This percentage is consistent with the prior period and the reduction is due to
cost containment measures and the increase in telecommunications services
revenue. Direct call provisioning costs decreased as a percentage of
corresponding revenue to 88% for the three months ended April 30, 1997, from
95% in the corresponding prior period. This percentage decrease is primarily
attributable to the conversion of sites that had an overall higher cost
structure due to a higher commission expense than the remaining direct sites.
Voice print operating costs for the three months ended April 30, 1997 include
the cost of hardware systems sold, installation costs, and royalty charges.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $1,924,000 for the three months ended
April 30, 1997, from $1,618,000 in the corresponding prior period, and remained
consistent as a percentage of total revenue at 20%. The dollar increase was
$306,000. This increase consists primarily of approximately $301,000 for
marketing personnel and other marketing costs to support the SpeakEZ Voice
Print(sm) products. The Company expects the level of selling general and
administrative expenses to remain at current levels over the remainder of the
current fiscal year. 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.
Research and Development Expenses. Research and development expenses
increased to $692,000 for the three months ended April 30, 1997, from $651,000
in the corresponding prior period, primarily due to the addition of personnel
to develop and commercialize the Company's SpeakEZ Voice Print(sm) technology.
The research and development expense associated with the SpeakEZ Voice Printsm
technology was $410,000 for the three months ended April 30, 1997 as compared
to $268,000 for the
10
<PAGE> 12
corresponding prior period. For the three months ended April 30, 1997, the
Company capitalized $70,000 of computer software development costs associated
with the SpeakEZ Voice Print(sm) technology. There were no such costs
capitalized in the corresponding prior period. In addition, under a government
contract the Company is partially reimbursed for expenses on this project. This
reimbursement totaled approximately $93,000 for the three months ended April
30, 1997 and was recognized as a reduction to SpeakEZ Voice Print(sm) technology
related research and development expenses. Such reimbursements were not
significant for the corresponding prior period. The Company expects the dollar
amount of research and development expense to remain at current levels over the
remainder of the current fiscal year. 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 $2,022,000 for the three months ended April 30, 1997,
from $1,532,000 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 depreciation and amortization associated with the SpeakEZ
Voice Print(sm) technology and the related business acquisition was $184,000 for
the three months ended April 30, 1997 as compared to $112,000 for the
corresponding prior period. 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. The
increases, however, may be offset as certain capitalized costs from previous
periods become fully depreciated.
Interest Expense. Interest expense increased to $245,000 for the three
months ended April 30, 1997, from $122,000 in the corresponding prior period.
The increase was primarily attributable to a increase in the balance of
indebtedness. The increase in indebtedness was necessary to support capital
expenditures for inmate call processing systems and operating expenses. In
addition, the Company had a significant increase in accounts receivable due to
a change in a major customer's purchase order system. Approximately $6,302,000
of accounts receivable is attributable this customer at April 30, 1997 and
approximately $1,800,000 has been collected by June 1997. Management believes
that the processing issues will be resolved and the full amount outstanding
will be paid by the customer.
11
<PAGE> 13
Nine Months Ended April 30, 1997 and 1996
The following table sets forth certain statement of operations data as a
percentage of total revenue for the nine months ended April 30, 1997 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenue:
Telecommunications services 92% 90%
Telecommunications licensing 3 --
Direct call provisioning 4 10
Voice print 1 --
Other revenue -- --
---------- ----------
Total revenue 100% 100%
Expenses:
Operating costs and expenses 45% 49%
Selling, general and administrative 22 19
Research and development 8 7
Depreciation and amortization 21 17
---------- ----------
Operating income 4 8
Interest expense (2) (2)
---------- ----------
Earnings before income taxes 2 6
Income taxes (1) --
---------- ----------
Net earnings 1% 6%
========== ==========
</TABLE>
Total Revenue. Total revenue increased 9% to $26,980,000 for the nine
months ended April 30, 1997 from $24,693,000 for the corresponding prior
period. This increase resulted from a 11% increase in telecommunications
services revenue to $24,773,000 for the nine months ended April 30, 1997, from
$22,335,000 in the corresponding prior period. The increase in
telecommunications services revenue was due to a 15% increase in call volume
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 the rate of growth in calls processed will decrease relative to
the historical rate. An offsetting factor to the increase in revenue dollars is
a reduction in fees per call as the Company's customers reach contractually
agreed upon call volume discounts. Specifically, these discounts accounted for
a reduction in revenue of approximately $220,000 during the nine months ended
April 30, 1997. 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. The Company recorded $750,000 of telecommunications
licensing revenue during the nine months ended April 30, 1997. This revenue was
associated with the licensing of the Company's Strike Three(TM) product to a
single customer. There was no such revenue in the corresponding prior period.
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 certain direct sites to telecommunications services revenue
sites. There was also a dollar decrease in direct call provisioning revenue of
$1,310,000 due to conversion of sites serviced to transaction based fees. The
Company also recognized SpeakEZ Voice Print(sm) revenue in the amount of
$389,000 for custom engineering and for the sale of hardware and software
licenses.
Operating costs and expenses. Total operating costs and expenses increased
to $12,168,000 for the nine months ended April 30, 1997, from $12,138,000 for
the nine months ended April 30, 1996, and decreased as a percentage of total
revenue to 45% for the nine months ended April 30, 1997 from 49% in
12
<PAGE> 14
the corresponding prior period. Operating costs and expenses of
telecommunications services primarily consist of system administration costs
for correctional facilities, including salaries and related personnel expenses,
communication costs 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. There were minimal costs directly
associated with telecommunications licensing revenue. 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. Voice print
operating costs include the cost of hardware systems sold, installation costs,
and royalty charges.
The following table sets forth the operating costs and expenses for each
type of revenue as a percentage of corresponding revenue for the nine months
ended April 30, 1997 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
APRIL 30, APRIL 30,
1997 1996
--------- ---------
<S> <C> <C>
Operating costs and expenses:
Telecommunications services 45% 44%
Direct call provisioning 94 98
Voice print 19 --
</TABLE>
Operating costs and expenses associated with providing telecommunications
services increased as a percentage of corresponding revenue to 45% for the nine
months ended April 30, 1997 from 44% for the corresponding prior period. This
percentage increase is primarily attributable to increased personnel and
communications costs associated with providing such services. Direct call
provisioning costs decreased as a percentage of corresponding revenue to 94%
for the nine months ended April 30, 1997, from 98% in the corresponding prior
period. This percentage decrease is primarily attributable to the conversion of
sites that had an overall higher cost structure due to a higher commission
expense than the remaining direct sites. Voice print operating costs for the
nine months ended April 30, 1997 include the cost of hardware systems sold,
installation costs, and royalty charges.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $5,851,000 for the nine months ended
April 30, 1997, from $4,762,000 in the corresponding prior period, and
increased as a percentage of total revenue to 22% from 19%. The dollar increase
was $1,089,000. This increase consists primarily of approximately $703,000 for
marketing personnel and other marketing costs to support the SpeakEZ Voice
Print(sm) products.
Research and Development Expenses. Research and development expenses
increased to $2,090,000 for the nine months ended April 30, 1997, from
$1,470,000 in the corresponding prior period, primarily due to the addition of
personnel to develop and commercialize the Company's SpeakEZ Voice Print(sm)
technology. The research and development expense associated with the SpeakEZ
Voice Print(sm) technology was $1,138,000 for the nine months ended April 30,
1997 as compared to $574,000 for the corresponding prior period. For the nine
months ended April 30, 1997, the Company capitalized $324,000 of computer
software development costs. There were no such costs capitalized in the
corresponding prior period. In addition, under a government contract the
Company is partially reimbursed for expenses on this project. This
reimbursement totaled approximately $214,000 for the nine months ended April
30, 1997 and was recognized as a reduction to research and development
expenses. Such reimbursements were not significant for the corresponding prior
period.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased to $5,757,000 for the nine months ended April 30, 1997, from
$4,262,000 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
13
<PAGE> 15
and selling, general and administrative functions also add to an increase in
depreciation for office and testing equipment. The depreciation and
amortization associated with the SpeakEZ Voice Print(sm) technology and the
related business acquisition was $517,000 for the nine months ended April 30,
1997 as compared to $244,000 for the corresponding prior period.
Interest Expense. Interest expense increased to $590,000 for the nine
months ended April 30, 1997, from $462,000 in the corresponding prior period.
The increase was primarily attributable to a increase in the balance of
indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied upon commercial borrowings, the sale of
equity securities and operating cash flow to fund its operations and capital
needs. Borrowings from a line of credit with a bank supplied the Company with
a majority of its cash from financing activities during the nine months ended
April 30, 1997. The net cash provided by financing activities in the nine
months ended April 30, 1997 was $6,566,000. Cash provided by operations was
$446,000 for the nine months April 30, 1997 as compared to $6,017,000 for the
prior period. The change in cash provided by operations was primarily
attributable to decreases in net earnings, adjusted for noncash expense items
such as depreciation and amortization, provision for losses on accounts
receivable, and deferred income taxes. Comparably, these net amounts totaled
$6,491,000 for the nine months ended April 30, 1997 and $5,744,000 for the same
period in the prior year. The net change in operating assets and liabilities
was the other major change in cash from operations. The total change for the
nine months ended April 30, 1997 was made up primarily of increases in accounts
receivable of $4,971,000 and decreases in accounts payable of $1,838,000,
offset by increases in accrued liabilities of $1,098,000. The total change for
the nine months ended April 30, 1996 was made up primarily of increases in
accounts receivable of $2,788,000 offset by increases in accounts payable of
$3,956,000.
Cash used in investing activities was $6,821,000. This included capital
expenditures of $5,755,000 for the nine months ended April 30, 1997 as
compared to $6,766,000 in the prior period. The capital expenditures for the
nine months ended April 30, 1997 were mainly for telecommunications equipment
and office equipment. Additional investing activities of $1,066,000 included
expenditures for patent defense costs and capitalized software development
costs. The Company anticipates that capital expenditures for
telecommunications equipment will primarily follow the installation of new
systems.
The Company has been funding its operations by using cash from operations and
available borrowings under a $20,000,000 line of credit arrangement. Management
believes that the credit facility 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.
14
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
27 Financial Data Schedule
B. Reports on Form 8-K were filed during the three
month period ended April 30, 1997.
The Company filed a Form 8-K on February 26, 1997
associated with the Settlement with BellSouth.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
T-NETIX, Inc.
---------------------------------------
(Registrant)
Date June 11, 1997 By: /s/ Alvyn A. Schopp
------------- -----------------------------------
(Signature)
Alvyn A. Schopp, Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
16
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN T-NETIX, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE
NINE MONTHS ENDED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<CASH> 336
<SECURITIES> 0
<RECEIVABLES> 13,012
<ALLOWANCES> 29
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 45,001
<DEPRECIATION> 15,696
<TOTAL-ASSETS> 49,239
<CURRENT-LIABILITIES> 0
<BONDS> 209
0
0
<COMMON> 83
<OTHER-SE> 26,122
<TOTAL-LIABILITY-AND-EQUITY> 49,239
<SALES> 0
<TOTAL-REVENUES> 26,980
<CGS> 0
<TOTAL-COSTS> 12,168
<OTHER-EXPENSES> 13,698
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 590
<INCOME-PRETAX> 524
<INCOME-TAX> 192
<INCOME-CONTINUING> 332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 332
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
