<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, 1998 COMMISSION FILE NUMBER 0-25016
T-NETIX, INC.
-------------
(Exact Name of registrant as Specified in Its Charter)
COLORADO 84-1037352
- --------------------------------------------- -------------------
(State of Other Jurisdiction of Incorporation) (I.R.S.Employer
Identification No.)
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 A 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.
<TABLE>
<CAPTION>
Class Outstanding at March 12, 1998
- ------------------------------- -----------------------------
<S> <C>
Common Stock, $.01 stated value 8,493,232
</TABLE>
<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, 1998
and July 31, 1997 (Unaudited) ............................ 2
Consolidated Statements of Operations, Three Months Ended
January 31, 1998 and 1997, and Six Months Ended
January 31, 1998 and 1997 (Unaudited) .................... 3
Consolidated Statements of Shareholders' Equity, Six Months Ended
January 31, 1998 and Year Ended July 31, 1997 (Unaudited) ......... 4
Consolidated Statements of Cash Flows, Six Months Ended
January 31, 1998 and 1997 (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................................................ 16
</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,
1998 1997
---- ----
(amounts in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 115 $ 190
Accounts receivable, net of allowance 11,592 11,779
Prepaid expenses 631 236
Property and equipment, at cost:
Telecommunications equipment 39,745 39,065
Construction in progress 4,814 3,626
Office equipment 4,601 3,901
--------------- ---------------
Property and equipment 49,160 46,592
Less accumulated depreciation and amortization (21,507) (17,798)
--------------- ---------------
Property and equipment, net 27,653 28,794
Patent license rights 2,336 2,586
Software development costs, net 878 449
Other assets, net 3,451 2,876
--------------- ---------------
$ 46,656 $ 46,910
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 3,211 $ 2,992
Accrued liabilities 2,152 3,688
Debt 12,940 13,378
--------------- ---------------
Total liabilities 18,303 20,058
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 8,477,482 and 8,314,583 85 83
shares, respectively
Additional paid-in capital 27,892 26,908
Retained earnings (deficit) 376 (139)
--------------- ---------------
Total shareholders' equity 28,353 26,852
Commitments and contingencies
--------------- ---------------
$ 46,656 $ 46,910
=============== ===============
</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,
1998 1997 1998 1997
--------- ---------- ---------- ----------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue:
Telecommunications services $ 8,979 $ 8,505 $ 17,782 $ 16,564
Telecommunications licensing 10 -- 56 --
Direct call provisioning 563 351 1,069 780
Voice print 81 148 461 166
-------- -------- -------- --------
Total revenue 9,633 9,004 19,368 17,510
Expenses:
Operating costs and expenses:
Telecommunications services 4,019 3,743 7,982 7,653
Direct call provisioning 527 312 1,009 749
Voice print 36 14 128 14
-------- -------- -------- --------
Total operating costs and expenses 4,582 4,069 9,119 8,416
Selling, general, and administrative 1,732 2,063 3,595 3,927
Research and development 530 687 1,112 1,398
Depreciation and amortization 2,063 1,909 4,152 3,735
-------- -------- -------- --------
Total expenses 8,907 8,728 17,978 17,476
Operating income 726 276 1,390 34
Interest expense (263) (190) (533) (345)
-------- -------- -------- --------
Earnings (loss) before income taxes 463 86 857 (311)
Income taxes (185) -- (342) --
-------- -------- -------- --------
Net earnings (loss) $ 278 $ 86 $ 515 $ (311)
======== ======== ======== ========
Basic and diluted earnings (loss) per
common share $ 0.03 $ 0.01 $ 0.06 $ (0.04)
======== ======== ======== ========
Weighted average common shares
outstanding - basic 8,476 8,178 8,462 8,182
======== ======== ======== ========
Weighted average common shares
outstanding- diluted 9,192 9,212 9,136 8,182
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Add- Total
Common stock itional Retained share-
----------------------- paid-in earnings holders'
Shares Amounts capital (deficit) equity
---------- ---------- ---------- ---------- ----------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balances at August 1, 1996 8,151 $ 81 $ 26,208 $ (730) $ 25,559
Common stock issued upon
exercise of stock options 155 2 204 -- 206
Common stock issued in
business acquisition 8 -- 94 -- 94
Stock option tax benefit -- -- 402 -- 402
Net earnings -- -- -- 591 591
---------- ---------- ---------- ---------- ----------
Balances at July 31, 1997 8,314 83 26,908 (139) 26,852
Common stock issued upon
exercise of stock options 163 2 642 -- 644
Stock option tax benefit -- -- 342 -- 342
Net earnings -- -- -- 515 515
---------- ---------- ---------- ---------- ----------
Balances at January 31, 1998 8,477 $ 85 $ 27,892 $ 376 $ 28,353
========== ========== ========== ========== ==========
</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, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 515 $ (311)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,152 3,735
Provision for losses on accounts receivable 263 177
Deferred tax expense 342 --
Changes in operating assets and liabilities, net of acquisition of business:
Change in accounts receivable (76) (1,165)
Change in prepaid expenses (395) (143)
Change in other assets (158) (194)
Change in accounts payable 219 (1,704)
Change in accrued liabilities (1,536) 132
---------- ----------
Cash provided by operating activities 3,326 527
---------- ----------
Cash flows from investing activities:
Capital expenditures (2,568) (4,386)
Other investing activities (1,039) (981)
---------- ----------
Cash used in investing activities (3,607) (5,367)
---------- ----------
Cash flows from financing activities:
Net proceeds (payments) under line of credit (1,835) 3,215
Payments of debt (45) (207)
Common stock issued for cash under option plans 644 147
Bank overdraft 1,442 1,745
---------- ----------
Cash provided by financing activities 206 4,900
---------- ----------
Net increase (decrease) in cash and cash equivalents (75) 60
Cash and cash equivalents at beginning of period 190 145
---------- ----------
Cash and cash equivalents at end of period $ 115 $ 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 1997 financial statements have been reclassified to
conform with the 1998 presentation.
Research and development
Costs associated with the research and development of new technology or
significantly altering existing technology are charged to operations as
incurred.
Software development costs have been accounted for in accordance with Statement
of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed. Under the standard,
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations.
Capitalized software costs are amortized over the economic useful life of the
software product, which is generally estimated to be three years. The Company
capitalized $429,000 in software development costs for the six months ended
January 31, 1998. Unamortized capitalized software cost was $878,000 at January
31, 1998.
Earnings (loss) per common share
Earnings (loss) per common share for the three and six months ended January 31,
1998 and 1997, is presented in accordance with the provisions of Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128
replaced the presentation of primary and fully diluted earnings (loss) per share
(EPS), with a presentation of basic EPS and diluted EPS. Under SFAS 128, basic
EPS excludes dilution for common stock equivalents and is computed by dividing
income or loss available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock and resulted in the issuance of
common stock. For the three months ended January 31, 1998 and 1997, diluted
common and common equivalent shares outstanding includes 716,000 and 1,035,000
respectively, common share equivalents, consisting of stock options, determined
under the treasury stock method. For the six months ended January 31, 1998
diluted common and common equivalent shares outstanding includes 673,000 common
share equivalents, consisting of stock options, determined under the treasury
stock method. Common equivalents for the six month period ended January 31, 1997
were not included in the diluted EPS calculation as they would be anti-dilutive.
Income taxes
A valuation allowance is provided when it is more likely than not that some
portion or all of the net deferred tax asset will not be realized. The Company
has historically established valuation allowances primarily for net operating
loss carryforwards and portions of other deferred tax assets as a result of its
history of net losses. The Company has pre-tax earnings for the six months ended
January 31, 1998 and has reversed the valuation allowance to the extent that the
net
6
<PAGE> 8
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income taxes (continued)
operating losses and other items were used to offset taxable income. The net
reduction in the valuation allowance resulted from decreases associated with tax
benefits related to utilization of net operating losses offset by increases
attributable to certain originating stock option deductions. The decrease in the
valuation allowance for the six months ended January 31, 1998 was offset by an
increase in paid-in capital.
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 which may affect the potential
technological obsolescence of existing systems, 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 recent FCC
orders and regulations, and the Telecommunications Act of 1997, 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
INMATE CALLING SERVICES
The Company derives revenue under contracts with its customers, including AT&T,
MCI, Bell Atlantic, GTE, SBC Communications, Inc., BellSouth, U S 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. 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,
1998 1997 1998 1997
-------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Call volumes processed 23,636,000 23,059,000 47,136,000 44,790,000
Average daily transactions 257,000 250,000 256,000 243,000
</TABLE>
The Company's call volume and revenue growth have resulted primarily from the
net addition of 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. These factors have been offset somewhat by
the reductions in call volumes as a result of non-renewal of existing site
specific customer contracts in competitive bidding arrangements, prisoner
relocation programs, and increased use of call volume control measures by
correctional institutions. 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.
8
<PAGE> 10
SPEAKEZ SUBSIDIARY
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
current and future opportunities for revenue. SpeakEZ Voice Print(sm) products
are available and ready for sale in the telecommunications, financial services,
computer network and computer telephony integration (OCTIO) markets. However,
there can be no assurance that these products will achieve market acceptance and
become widely adopted. The market for speaker verification software has only
recently begun to develop. As is typical in the case of a new and rapidly
evolving market, demand and market acceptance for recently introduced products
and services are subject to a high level of uncertainty. Voice print revenue for
the Company has been minimal to date.
The SpeakEZ Voice Print(sm) products are also often times subject to a long
sales cycle. This is especially true in the Company's target markets, where
customers generally commit significant resources to an evaluation of new
software and require the vendor to expend substantial time, effort, and money
educating them about the value of the vendor's solution. As a result, sales to
these types of customers generally require an extensive sales effort throughout
the organization, and often require final approval by an executive officer or
senior level employee. Further, in most cases the Company's SpeakEZ Voice
Print(sm) software applications must be integrated and made compatible with the
customers' embedded information systems. Typically, the system integration
effort requires the cooperation of other technology vendors which also
contribute to the extension of the sales cycle. The Company will likely
experience delays following initial contact with prospective customers and
expend substantial funds and management effort in connections with these sales.
There can be no assurance that the Company will be able to successfully execute
such sales. The Company uses other technology suppliers in addition to its own
direct sales force to distribute its technology and therefore at time lacks
control over such partners. For these reasons, revenue from the Company's
SpeakEZ Voice Print(sm) products and services will be difficult to predict.
While the Company attempts to pursue multiple market revenue opportunities at
any given time, there can be no assurance that the Company will not experience
fluctuations in revenue from its SpeakEZ Voice Print(sm) products and services.
The Company has and will continue to invest significant time and effort and
resources in bringing these products to market and anticipates the continued
offering of new SpeakEZ Voice Print(sm) products and services.
9
<PAGE> 11
RESULTS OF OPERATIONS
Three Months Ended January 31, 1998 and 1997
The following table sets forth certain statement of operations data as a
percentage of total revenue for the three months ended January 31, 1998 and
1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenue:
Telecommunications services .............. 93% 94%
Telecommunications licensing ............. -- --
Direct call provisioning ................. 6 4
Voice print .............................. 1 2
---- ----
Total revenue ........................ 100 100
Expenses:
Operating costs and expenses ............. 48 45
Selling, general and administrative ...... 18 23
Research and development ................. 5 8
Depreciation and amortization ............ 21 21
---- ----
Operating income ....................... 8 3
Interest expense ......................... (3) (2)
---- ----
Earnings before income taxes ........... 5 1
Income taxes ............................. (2) --
---- ----
Net earnings ........................... 3% 1%
==== ====
</TABLE>
Total Revenue. Total revenue increased 7% to $ 9,633,000 for the three months
ended January 31, 1998 from $9,004,000 for the corresponding prior period. This
increase resulted from increases in telecommunications services revenue and
direct revenue, offset by a reduction in voice print revenue. The 6% increase in
telecommunications services revenue to $8,979,000 for the three months ended
January 31, 1998, from $8,505,000 in the corresponding prior period was due to a
3% increase in call volume resulting primarily from a net increase in the number
of installed systems and due to an increase in revenue associated with call
verification procedures for new and existing customers. The Company recognized
$10,000 in telecommunications licensing revenue associated with the Strike
Three(tm) product for the three months ended January 31, 1998. No such revenue
was recognized in the three months ended January 31, 1997. Direct call
provisioning revenue increased as a percentage of total revenue. There was a
dollar increase in direct call provisioning revenue of $212,000 in the three
months ended January 31, 1998 compared to the three months ended January 31,
1997. These increases were due primarily to the addition of sites in which the
Company is provisioning the long distance service. The Company anticipates it
will actively attempt to provision long distance calling services on potential
site contracts. Voice print revenue decreased to $81,000 for the three months
ended January 31, 1997 from $148,000 for the corresponding prior period. The
SpeakEZ Voice Print(sm) revenue for the three months ended January 31, 1998 was
for the provisioning of services and for the sale of software licenses and
software development kits. 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 increased to
$4,582,000 for the three months ended January 31, 1998, from $4,069,000 for the
corresponding prior period, and increased as a percentage of total revenue to
48% for the three months ended January 31, 1998 from 45% in the corresponding
prior period due to a larger portion of operating costs and expenses including
direct call provisioning expenses, which have a lower gross margin. Operating
costs and expenses of telecommunications services primarily consist of service
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
10
<PAGE> 12
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 for the three months ended January 31, 1998 include the cost of
services performed, amortization of software development 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 January 31, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Operating costs and expenses:
Telecommunications services....................................................... 45% 44%
Direct call provisioning.......................................................... 94 89
Voice print....................................................................... 44 9
</TABLE>
Operating costs and expenses associated with providing telecommunications
services increased as a percentage of corresponding revenue to 45% for the three
months ended January 31, 1998 from 44% for the corresponding prior period. The
increase is primarily due to increases in personnel related expenses and
communication costs associated with the addition of new sites including call
verification expenses. Direct call provisioning costs increased as a percentage
of corresponding revenue to 94% for the three months ended January 31, 1998,
from 89% in the corresponding prior period. This percentage increase is
primarily attributable to higher commission rates associated with newly served
sites.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $1,732,000 for the three months ended
January 31, 1998, from $2,063,000 in the corresponding prior period, and
decreased as a percentage of total revenue to 18% from 23%. The dollar decrease
was $331,000. Increases in the costs associated with the marketing personnel and
other marketing costs to support the SpeakEZ Voice Print(sm) products of
$289,000 were offset primarily by reductions in estimated property taxes and for
legal and other professional services fees aggregating approximately $453,000.
The selling, general and administrative expenses associated with the SpeakEZ
Voice Print(sm) technology was $501,000 for the three months ended January 31,
1998 as compared to $212,000 for the corresponding prior period. The Company
expects the level of selling, general, and administrative expenses to remain at
the current levels over this fiscal year.
Research and Development Expenses. Research and development expenses decreased
to $530,000 for the three months ended January 31, 1998, from $687,000 in the
corresponding prior period. The research and development for the Inmate Calling
Services division decreased to $154,000 for the three months ended January 31,
1998, from $321,000 in the corresponding prior period. The primary reasons for
the decrease are the overall reduction in personnel costs and due to the
capitalization of software development costs for the new collect and prepaid
calling platform for the inmate and various other industries of approximately
$150,000. No such costs were capitalized in the corresponding prior period. The
research and development expense associated with the SpeakEZ Voice Print(sm)
technology was $376,000 for the three months ended January 31, 1998 as compared
to $366,000 for the corresponding prior period. For the three months ended
January 31, 1998, the Company capitalized $86,000 of computer software
development costs associated with the SpeakEZ Voice Print(sm) technology
compared to $110,000 for the corresponding prior period. In addition, under a
government contract the Company is partially reimbursed for expenses on this
project. This reimbursement totaled approximately $121,000 for the three months
ended January 31, 1998 and was recognized as a reduction to SpeakEZ Voice
Print(sm) technology related research and development expenses. Such
reimbursements were $81,000 for the corresponding prior period. The Company
expects the dollar amount of research and development expense to remain at
current levels or increase over the remainder of the fiscal year depending on
the amount of software development costs eligible for capitalization.
11
<PAGE> 13
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased to $2,063,000 for the three months ended January 31, 1998, from
$1,909,000 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. In addition, infrastructure additions in
research and development and selling, general and administrative functions also
add to an increase in depreciation for office equipment. The depreciation and
amortization associated with the SpeakEZ Voice Print(sm) technology and the
related business acquisition was $204,000 for the three months ended January 31,
1998 as compared to $212,000 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 $263,000 for the three months
ended January 31, 1998, from $190,000 in the corresponding prior period. The
increase was primarily attributable to a increase in the average balance of
indebtedness. The increase in indebtedness was necessary to support capital
expenditures for inmate call processing systems and operating and other cash
expenses.
Six Months Ended January 31, 1998 and 1997
The following table sets forth certain statement of operations data as a
percentage of total revenue for the six months ended January 31, 1998 and 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Revenue:
Telecommunications services ................... 92% 95%
Telecommunications licensing .................. -- --
Direct call provisioning ...................... 6 4
Voice print ................................... 2 1
---- ----
Total revenue ............................. 100 100
Expenses:
Operating costs and expenses .................. 47 48
Selling, general and administrative ........... 19 23
Research and development ...................... 6 8
Depreciation and amortization ................. 21 21
---- ----
Operating income ............................ 7 --
Interest expense .............................. (3) (2)
---- ----
Earnings (loss) before income taxes ......... 4 (2)
Income taxes .................................. (2) --
---- ----
Net earnings (loss) ......................... 2% (2)%
==== ====
</TABLE>
Total Revenue. Total revenue increased 11% to $19,368,000 for the six months
ended January 31, 1998 from $17,510,000 for the corresponding prior period. The
7% increase in telecommunications services revenue to $17,782,000 for the six
months ended January 31, 1998, from $16,564,000 in the corresponding prior
period was due to a 5% increase in call volume resulting primarily from a net
increase in the number of installed systems and due to an increase in revenue
associated with call verification procedures for new and existing customers. The
Company recognized $56,000 in telecommunications licensing revenue associated
with the Strike Three(tm) product for the six months ended January 31, 1998. No
such revenue was recognized in the six months ended January 31, 1997. Direct
call provisioning revenue increased as a percentage of total revenue. There was
a dollar increase in
12
<PAGE> 14
direct call provisioning revenue of $289,000 in the six months ended January 31,
1998 compared to the six months ended January 31, 1997 was due primarily to the
addition of sites in which the Company is provisioning the long distance
service. The Company anticipates it will continue to actively attempt to
provision long distance calling services on potential site contracts. Voice
print revenue increased to $461,000 for the six months ended January 31, 1998
from $166,000 for the corresponding prior period. The SpeakEZ Voice Print(sm)
revenue was for the provisioning of services and for the sale of software
licenses and hardware systems, and software development kits. The increase is
due primarily to the increase in software licenses and hardware systems sold.
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 increased to
$9,119,000 for the six months ended January 31, 1998, from $8,416,000 for the
corresponding prior period, and decreased as a percentage of total revenue to
47% for the six months ended January 31, 1998 from 48% in the corresponding
prior period due to revenue increases without significant additional costs.
Operating costs and expenses of telecommunications services primarily consist of
service 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 for the six months ended January
31, 1998 include the cost of services performed 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 six months
ended January 31, 1998 and 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Operating costs and expenses:
Telecommunications services....................................................... 45% 46%
Direct call provisioning.......................................................... 94 96
Voice print....................................................................... 28 9
</TABLE>
Operating costs and expenses associated with providing telecommunications
services decreased as a percentage of corresponding revenue to 45% for the six
months ended January 31, 1998 from 46% for the corresponding prior period. The
decrease is primarily due to revenue increases at a greater rate than the rate
of costs associated with additional personnel and telecommunications costs for
new sites. Direct call provisioning costs decreased as a percentage of
corresponding revenue to 94% for the six months ended January 31, 1998, from 96%
in the corresponding prior period. This percentage decrease is primarily
attributable to reduction in telecommunications costs offset by increases in
commission expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $3,595,000 for the six months ended January
31, 1998, from $3,927,000 in the corresponding prior period, and decreased as a
percentage of total revenue to 19% from 23%. The dollar decrease was $332,000.
Increases in the costs associated with the marketing personnel and other
marketing costs to support the SpeakEZ Voice Print(sm) products of $588,000 and
increases in salaries and office expenses of $200,000 were offset primarily by
reductions in estimated property taxes, travel expenses and legal and other
professional fees aggregating approximately $960,000. The selling, general and
administrative expenses associated with the SpeakEZ Voice Print(sm) technology
was $990,000 for the six months ended January 31, 1998 as compared to $402,000
for the corresponding prior period.
13
<PAGE> 15
Research and Development Expenses. Research and development expenses decreased
to $1,112,000 for the six months ended January 31, 1998, from $1,398,000 in the
corresponding prior period. The research and development for the Inmate Calling
Services division decreased to $351,000 for the six months ended January 31,
1998, from $670,000 in the corresponding prior period. The primary reasons for
the decrease are the overall reduction in personnel costs and due to the
capitalization of software development costs for the new collect and prepaid
calling platform for the inmate and various other industries of approximately
$250,000. No such costs were capitalized in the corresponding prior period. The
research and development expense associated with the SpeakEZ Voice Print(sm)
technology was $761,000 for the six months ended January 31, 1998 as compared to
$728,000 for the corresponding prior period. For the six months ended January
31, 1998, the Company capitalized $179,000 of computer software development
costs associated with the SpeakEZ Voice Print(sm) technology compared to
$265,000 for the corresponding prior period. In addition, under a government
contract the Company is partially reimbursed for expenses on this project. This
reimbursement totaled approximately $311,000 for the six months ended January
31, 1998 and was recognized as a reduction to SpeakEZ Voice Print(sm) technology
related research and development expenses. Such reimbursements were $121,000 for
the corresponding prior period.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased to $4,152,000 for the six months ended January 31, 1998, from
$3,735,000 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. In addition, infrastructure additions in
research and development and selling, general and administrative functions also
add to an increase in depreciation for office equipment. The depreciation and
amortization associated with the SpeakEZ Voice Print(sm) technology and the
related business acquisition was $407,000 for the six months ended January 31,
1998 as compared to $333,000 for the corresponding prior period.
Interest Expense. Interest expense increased to $533,000 for the six months
ended January 31, 1998, from $345,000 in the corresponding prior period. The
increase was primarily attributable to a increase in the average balance of
indebtedness. The increase in indebtedness was necessary to support capital
expenditures for inmate call processing systems and operating and other cash
expenses.
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 provided by financing activities during the six months
ended January 31, 1998. The net cash provided by financing activities in the six
months ended January 31, 1998 was $206,000 compared to $4,900,000 for the
corresponding prior period. Cash provided by operations was $3,326,000 for the
six months ended January 31, 1998 as compared to $527,000 for the corresponding
prior period. The change in cash provided by operations was primarily
attributable to changes in net earnings, adjusted for noncash expense items such
as depreciation and amortization, provision for losses on accounts receivable
and deferred tax expense. Comparably, these net amounts totaled $5,272,000 for
the six months ended January 31, 1998 and $3,601,000 for the corresponding prior
period. The net change in operating assets and liabilities was the other
offsetting difference in the change in cash provided by operations. The total
change for the six months ended January 31, 1998 was made up primarily of
increases in accounts receivable and prepaid expenses of $471,000 and reductions
in accrued liabilities of $1,536,000. The total change for the six months ended
January 31, 1997 was made up primarily of increases in accounts receivable of
$1,165,000 and decreases in accounts payable of $1,704,000.
Cash used in investing activities was $3,607,000. This included capital
expenditures of $2,568,000 for the six months ended January 31, 1998 as compared
to $4,386,000 in the corresponding prior period. The capital expenditures for
the six months ended January 31, 1998 were mainly for telecommunications
equipment construction in progress and office equipment. Additional investing
activities of $1,039,000 for the six months ended January 31, 1998 and $981,000
for the corresponding prior period included expenditures for patent defense
costs, capitalized software development costs, and investments in preferred
stock. The six month totals included $429,000 for software development costs and
$610,000
14
<PAGE> 16
in preferred stock investment in Cel-Tell Monitoring Inc., the Company's
strategic partner in a home incarceration and probation administration trial
program. The Company anticipates that capital expenditures for
telecommunications equipment will primarily follow the installation of new
systems and the requirement to supply existing sites with additional or
replacement equipment.
The Company has been funding its operations by using cash provided by 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.
15
<PAGE> 17
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. No reports on Form 8-K were filed during the three
month period ended January 31, 1998.
16
<PAGE> 18
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 16, 1998 By: /s/ Alvyn A. Schopp
-------------- ---------------
(Signature)
Alvyn A. Schopp, Executive Vice
President and Chief
Financial Officer
(Principal Accounting Officer)
17
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
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, 1998.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN T-NETIX, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE AND SIX MONTHS ENDED JANUARY 31, 1998 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-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 115
<SECURITIES> 0
<RECEIVABLES> 11,832
<ALLOWANCES> 240
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 49,160
<DEPRECIATION> 21,507
<TOTAL-ASSETS> 46,656
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 28,268
<TOTAL-LIABILITY-AND-EQUITY> 46,656
<SALES> 0
<TOTAL-REVENUES> 19,368
<CGS> 0
<TOTAL-COSTS> 9,119
<OTHER-EXPENSES> 8,859
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 533
<INCOME-PRETAX> 857
<INCOME-TAX> 342
<INCOME-CONTINUING> 515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 515
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
