<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 JANUARY 31, 1997 COMMISSION FILE NUMBER 0-25016
T-NETIX, INC.
-------------
(Exact Name of registrant as Specified in Its Charter)
COLORADO 84-1037352
- ------------------------------- ---------------------------------
(State of Other Jurisdiction (I.R.S.Employer
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 March 10, 1996
- ------------------------------- ---------------------------------
Common Stock, $.01 stated value 8,250,333
<PAGE> 2
T-NETIX, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART ITEM PAGE
- ---- ---- ----
<S> <C>
I. FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheets, January 31, 1997
and July 31, 1996 (Unaudited) ............................... 2
Consolidated Statements of Operations, Three Months Ended
January 31, 1997 and 1996, and Six Months Ended
January 31, 1997 and 1996 (Unaudited) ....................... 3
Consolidated Statements of Shareholders' Equity, Six Months Ended
January 31, 1997 and Year Ended July 31, 1996 (Unaudited) ... 4
Consolidated Statements of Cash Flows, Six Months Ended
January 31, 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>
January 31, July 31,
1997 1996
------------ ------------
(amounts in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 205 $ 145
Trade accounts receivable, net of allowance 9,207 8,222
Other receivables 76 73
Prepaid expenses 439 296
Property and equipment, at cost:
Telecommunications equipment 35,354 31,463
Construction in progress 4,963 5,012
Office equipment 3,257 2,771
------------ ------------
Property and equipment 43,574 39,246
Less accumulated depreciation and amortization (13,834) (10,516)
------------ ------------
Property and equipment, net 29,740 28,730
Patent license rights 2,826 2,788
Other assets, net 3,415 2,273
------------ ------------
$ 45,908 $ 42,527
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 8,405 $ 7,968
Accrued liabilities 2,270 2,191
Debt 9,454 6,324
Capital lease obligations 290 485
------------ ------------
Total liabilities 20,419 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 8,248,833 and 8,150,493
shares, respectively 82 81
Additional paid-in capital 26,448 26,208
Accumulated deficit (1,041) (730)
------------ ------------
Total shareholders' equity 25,489 25,559
Commitments and contingencies
------------ ------------
$ 45,908 $ 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 Six Months Ended
---------------------------- ----------------------------
January 31, January 31, January 31, January 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue:
Telecommunication services $ 8,505 $ 7,419 $ 16,564 $ 14,894
Direct call provisioning 351 801 780 1,616
Voice print 148 -- 148 --
Other revenue -- -- 18 --
------------ ------------ ------------ ------------
Total revenue 9,004 8,220 17,510 16,510
Expenses:
Operating costs and expenses:
Telecommunications services 3,743 3,210 7,653 6,610
Direct call provisioning 312 792 749 1,607
Voice print 14 -- 14 --
------------ ------------ ------------ ------------
Total operating costs and expenses 4,069 4,002 8,416 8,217
Selling, general, and administrative 2,063 1,526 3,927 3,144
Research and development 687 501 1,398 819
Depreciation and amortization 1,909 1,447 3,735 2,730
------------ ------------ ------------ ------------
Total expenses 8,728 7,476 17,476 14,910
Operating income 276 744 34 1,600
Interest expense, net (190) (177) (345) (340)
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 86 567 (311) 1,260
Income taxes -- (5) -- (41)
------------ ------------ ------------ ------------
Net earnings (loss) $ 86 $ 562 $ (311) $ 1,219
============ ============ ============ ============
Net earnings (loss) per common share $ 0.01 $ 0.06 $ (0.03) $ 0.13
============ ============ ============ ============
Weighted average common shares
outstanding 9,314 9,058 8,888 9,122
============ ============ ============ ============
</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 90 1 146 -- 147
Common stock issued in
business acquisition 8 -- 94 -- 94
Net loss -- -- -- (311) (311)
-------- --------- ---------- ---------- ------------
Balances at January 31, 1997 8,249 $ 82 $ 26,448 $ (1,041) $ 25,489
======== ========= ========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended January 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
-------- --------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (311) $ 1,219
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,735 2,730
Provision for losses on accounts receivable 177 261
Noncash reductions of loans from customer -- (449)
Changes in operating assets and liabilities, net
of acquisition of business:
Change in trade accounts receivable (1,162) (1,353)
Change in other receivables (3) (40)
Change in prepaid expenses (143) (60)
Change in other assets (194) (282)
Change in accounts payable (1,704) 1,479
Change in accrued liabilities 132 (540)
-------- --------
Cash provided by operating activities 527 2,965
-------- --------
Cash flows from investing activities:
Capital expenditures (4,386) (3,999)
Acquisition of business -- (450)
Other investing activities (981) (310)
-------- --------
Cash used in investing activities (5,367) (4,759)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings 3,215 1,203
Payments of debt (12) (98)
Payments of capital lease obligations (195) (272)
Common stock issued for cash 147 88
Bank overdraft 1,745 --
-------- --------
Cash provided by financing activities 4,900 922
-------- --------
Net increase (decrease) in cash and cash equivalents 60 (872)
Cash and cash equivalents at beginning of period 145 872
-------- --------
Cash and cash equivalents at end of period $ 205 $ --
======== ========
</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 $255,000 at January 31, 1997.
Earnings (loss) per common share
Earnings (loss) per common share for the three and six months ended
January 31, 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 has a net
loss for the six months ended January 31, 1997 and has increased the
valuation allowance to the extent of the loss.
Debt
In December 1996, the Company increased its Loan Agreement with its
commercial bank to a total of $11,000,000 in committed credit. All other
terms and conditions associated with the Loan Agreement remained the same.
Contingencies
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.
6
<PAGE> 8
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Subsequent Event
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 that was described under Item 3 of the Company's
Annual Report on Form 10-K filed with the Commission on October 29, 1996.
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 licensing revenue and will be recognized
in the Company's financial statements for the period ended April 30, 1997.
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. 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 SIX MONTHS ENDED
----------------------- -----------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Call volumes processed 23,059,000 19,715,000 44,790,000 38,352,000
Average daily transactions 250,000 214,000 243,000 208,000
</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.
8
<PAGE> 10
RESULTS OF OPERATIONS
Three Months Ended January 31, 1997 and 1996
The following table sets forth certain statement of operations data as a
percentage of total revenue for the three months ended January 31, 1997 and
1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenue:
Telecommunications services 94% 90%
Direct call provisioning 4 10
Voice print 2 --
Other revenue -- --
---------- ----------
Total revenue 100% 100%
Expenses:
Operating costs and expenses 45% 49%
Selling, general and administrative 23 19
Research and development 8 6
Depreciation and amortization 21 18
---------- ----------
Operating income 3 8
Interest expense (2) (2)
---------- ----------
Earnings before income taxes 1 6
Income taxes -- --
---------- ----------
Net earnings 1% 6%
========== ==========
</TABLE>
Total Revenue. Total revenue increased 10% to $9,004,000 for the three
months ended January 31, 1997 from $8,220,000 for the corresponding prior
period. This increase resulted from a 15% increase in telecommunications
services revenue to $8,505,000 for the three months ended January 31, 1997,
from $7,419,000 in the corresponding prior period, due to a 17% increase in
call volume to 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 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 $97,000 during
the quarter ended January 31, 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. 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 of $450,000 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. The Company also recognized voice print revenue for
the first time in the amount of $140,000 for professional services associated
with the installation of a SpeakEZ Voice Print(SM) product for the wireless
industry.
Operating costs and expenses. Total operating costs and expenses increased
to $4,069,000 for the three months ended January 31, 1997, from $4,002,000 for
the three months ended January 31, 1996, and decreased as a percentage of total
revenue to 45% for the three months ended January 31,
9
<PAGE> 11
1997 from 49% 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. 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 were primarily the amortization of capitalized software.
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 January 31, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
JANUARY 31, JANUARY 31,
1997 1996
---------- ----------
<S> <C> <C>
Operating costs and expenses:
Telecommunications services 44% 43%
Direct call provisioning 89 99
Voice print 9 --
</TABLE>
Operating costs and expenses associated with providing telecommunications
services increased as a percentage of corresponding revenue to 44% for the
three months ended January 31, 1997 from 43% for the corresponding prior
period. This percentage increase is primarily attributable to increased
personnel and communication costs associated with providing such services.
Direct call provisioning costs decreased as a percentage of corresponding
revenue to 89% for the three months ended January 31, 1997, from 99% 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 January 31, 1997 were primarily the
amortization of capitalized software.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $2,063,000 for the three months ended
January 31, 1997, from $1,526,000 in the corresponding prior period, and
increased as a percentage of total revenue to 23% from 19%. The dollar increase
was $537,000. This increase consists primarily of approximately $212,000 for
marketing personnel and other marketing costs to support the SpeakEZ Voice
Print(SM) products. Other selling, general and administrative increases were $
212,000 for salaries for administrative personnel and related expenses
(including contract personnel) and $42,000 in property taxes. Total
professional expenses including accounting, legal, public reporting, and other
(net) accounted for $44,000 of the increase. The increase was offset by
reductions in other office operational related expenses of approximately
$34,000. The increase in salaries and contract personnel is due primarily to
additional personnel and pay rate increases. Property taxes increased due the
increase in installed systems. The increase in professional services is due to
various legal actions and general cost increases for services. The Company
expects the level of selling general and administrative expenses to remain at
current levels over this 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 $687,000 for the three months ended January 31, 1997, from
$501,000 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 $366,000 for the three months ended January 31,
1997 as compared to $241,000 for the corresponding prior period. For the three
months ended January 31, 1997, the Company capitalized $110,000 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 reimbursed for
expenses on this project. This reimbursement totaled approximately $81,000 for
the three months ended January 31, 1997 and was recognized as a reduction to
SpeakEZ
10
<PAGE> 12
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 this 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 $1,909,000 for the three months ended January 31, 1997,
from $1,447,000 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 $212,000 for the
three months ended January 31, 1997 as compared to $109,000 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 $190,000 for the three
months ended January 31, 1997, from $177,000 in the corresponding prior period.
The increase was primarily attributable to a increase in the balance of
indebtedness.
Six Months Ended January 31, 1997 and 1996
The following table sets forth certain statement of operations data as a
percentage of total revenue for the six months ended January 31, 1997 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenue:
Telecommunications services 95% 90%
Direct call provisioning 4 10
Voice print 1 --
Other revenue -- --
---------- ----------
Total revenue 100% 100%
Expenses:
Operating costs and expenses 48% 50%
Selling, general and administrative 23 19
Research and development 8 5
Depreciation and amortization 21 17
---------- ----------
Operating income -- 9
Interest expense (2) (2)
---------- ----------
Earnings (loss) before income taxes (2) 7
Income taxes -- --
---------- ----------
Net earnings (loss) (2)% 7%
========== ==========
</TABLE>
11
<PAGE> 13
Total Revenue. Total revenue increased 6% to $17,510,000 for the six
months ended January 31, 1997 from $16,510,000 for the corresponding prior
period. This increase resulted from a 11% increase in telecommunications
services revenue to $16,564,000 for the six months ended January 31, 1997, from
$14,894,000 in the corresponding prior period, due to a 17% increase in call
volume to 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 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 $149,000 during
the six months ended January 31, 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. 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 of $836,000 due to conversion of sites
serviced to transaction based fees. The Company also recognized voice print
revenue for the first time in the amount of $140,000 for professional services
associated with the installation of a SpeakEZ Voice Print(SM) product for the
wireless industry. Other revenue was not significant.
Operating costs and expenses. Total operating costs and expenses increased
to $8,416,000 for the six months ended January 31, 1997, from $8,217,000 for
the six months ended January 31, 1997, and decreased as a percentage of total
revenue to 48% for the six months ended January 31, 1997 from 50% 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. 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 were
primarily amortization of capitalized software.
The following table sets forth the operating costs and expenses for each
type of revenue as a percentage of corresponding revenue for the six months
ended January 31, 1997 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
JANUARY 31, JANUARY 31,
1997 1996
---------- ----------
<S> <C> <C>
Operating costs and expenses:
Telecommunications services 46% 44%
Direct call provisioning 96 99
Voice print 9 --
</TABLE>
Operating costs and expenses associated with providing telecommunications
services increased as a percentage of corresponding revenue to 46% for the six
months ended January 31, 1997 from 44% for the corresponding prior period. This
percentage increase is primarily attributable to increased personnel and
communication costs associated with providing such services. Direct call
provisioning costs decreased as a percentage of corresponding revenue to 96%
for the six months ended January 31, 1997, from 99% 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
six months ended January 31, 1997 were primarily amortization of capitalized
software.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3,927,000 for the six months ended
January 31, 1997, from $3,144,000 in the
12
<PAGE> 14
corresponding prior period, and increased as a percentage of total revenue to
23% from 19%. The dollar increase was $783,000. This increase consists
primarily of approximately $402,000 for marketing personnel and other marketing
costs to support the SpeakEZ Voice Print(SM) products. Other selling, general
and administrative increases were $309,000 for salaries for administrative
personnel and related expenses (including contract personnel) and $98,000 in
property taxes. Total professional expenses including accounting, legal, public
reporting, and other (net) accounted for minimal increase. The increase was
offset by reductions in other office operational related expenses of
approximately $68,000. The increase in salaries and contract personnel is due
primarily to additional personnel and pay rate increases. Property taxes
increased due the increase in installed systems. The increase in professional
services is due to various legal actions and general cost increases for
services.
Research and Development Expenses. Research and development expenses
increased to $1,398,000 for the six months ended January 31, 1997, from
$819,000 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 $728,000 for the six months ended January 31,
1997 as compared to $299,000 for the corresponding prior period. For the six
months ended January 31, 1997, the Company capitalized $265,000 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 reimbursed for expenses on this project. This reimbursement totaled
approximately $121,000 for the six months ended January 31, 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 $3,735,000 for the six months ended January 31, 1997,
from $2,730,000 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 $333,000 for the
six months ended January 31, 1997 as compared to $132,000 for the corresponding
prior period.
Interest Expense. Interest expense increased to $345,000 for the six
months ended January 31, 1997, from $340,000 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 six months ended
January 31, 1997. The net cash provided by financing activities in the six
months ended January 31, 1997 was $4,900,000 . Cash provided by operations was
$527,000 for the six months January 31, 1997 as compared to $2,965,000 for the
prior period. The change in cash provided by operations was primarily
attributable to decreases in net earnings, adjusted for depreciation and
amortization and the net change in operating assets and liabilities.
Cash used in investing activities was $5,367,000 . This included capital
expenditures of $4,386,000 for the six months ended January 31, 1997 as
compared to $3,999,000 in the prior period. The capital expenditures for the
six months ended January 31, 1997 were mainly for telecommunications equipment
and office equipment. The increase in capital expenditures was due primarily to
the increase in the number of systems installed for the comparative periods.
Additional investing activities of $981,000 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.
13
<PAGE> 15
The Company has been funding its operations by using cash from operations and
available borrowings under a $11,000,000 line of credit arrangement. The
Company is currently under discussions to increase its borrowing facilities and
possibly obtain alternative facilities and has received competing alternatives
from institutions including its current lender to increase the facilities to
$20,000,000. Management believes that the new credit facility, once finalized
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
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 that was described
under Item 3 of the Company's Annual Report on Form 10-K filed with
the Commission on October 29, 1996.
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.
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. No reports on Form 8-K were filed during the three month period
ended January 31, 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 March 11, 1997 By: /s/ Alvyn A. Schopp
-------------- ----------------------------
(Signature)
Alvyn A. Schopp, Executive Vice
President and Chief Financial
Officer (Principal Accounting
Officer)
16
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
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MONTHS ENDED JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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