<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, 1998 COMMISSION FILE NUMBER 0-25016
T-NETIX, INC.
-------------
(Exact Name of registrant as Specified in Its Charter)
<TABLE>
<S> <C>
COLORADO 84-1037352
- --------------------------------------------- ----------------------------------
(State of Other Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
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 11, 1998
------------------------------- ----------------------------
Common Stock, $.01 stated value 8,543,507
<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, 1998
and July 31, 1997 (Unaudited)................................................. 2
Consolidated Statements of Operations, Three Months Ended
April 30, 1998 and 1997, and Nine Months Ended
April 30, 1998 and 1997 (Unaudited) .......................................... 3
Consolidated Statements of Shareholders' Equity, Nine Months Ended
April 30, 1998 and Year Ended July 31, 1997 (Unaudited) ...................... 4
Consolidated Statements of Cash Flows, Nine Months Ended
April 30, 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>
April 30, July 31,
1998 1997
---- ----
(amounts in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 637 $ 190
Accounts receivable, net of allowance 11,939 11,779
Prepaid expenses 356 236
Property and equipment, at cost:
Telecommunications equipment 41,224 39,065
Construction in progress 4,016 3,626
Office equipment 4,856 3,901
-------- --------
Property and equipment 50,096 46,592
Less accumulated depreciation and amortization (23,314) (17,798)
-------- --------
Property and equipment, net 26,782 28,794
Patent license rights 2,211 2,586
Software development costs, net 974 449
Investment 1,277 --
Other assets, net 2,903 2,876
-------- --------
$ 47,079 $ 46,910
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 3,585 $ 2,992
Accrued liabilities 2,123 3,688
Debt 12,737 13,378
-------- --------
Total liabilities 18,445 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 8,524,757 and 8,314,583 85 83
shares, respectively
Additional paid-in capital 28,085 26,908
Retained earnings (deficit) 464 (139)
-------- --------
Total shareholders' equity 28,634 26,852
Commitments and contingencies
-------- --------
$ 47,079 $ 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 Nine Months Ended
---------------------- ----------------------
April 30, April 30, April 30, April 30,
1998 1997 1998 1997
--------- --------- --------- ---------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue:
Telecommunications services $ 8,539 $ 8,209 $ 26,321 $ 24,773
Telecommunications licensing 109 750 165 750
Direct call provisioning 664 268 1,733 1,048
Voice print 122 243 583 409
-------- -------- -------- --------
Total revenue 9,434 9,470 28,802 26,980
Expenses:
Operating costs and expenses:
Telecommunications services 3,947 3,457 11,929 11,110
Direct call provisioning 658 236 1,667 985
Voice print 9 59 83 73
-------- -------- -------- --------
Total operating costs and expenses 4,614 3,752 13,679 12,168
Selling, general, and administrative 1,774 1,924 5,369 5,851
Research and development 606 692 1,718 2,090
Depreciation and amortization 2,056 2,022 6,262 5,757
-------- -------- -------- --------
Total expenses 9,050 8,390 27,028 25,866
Operating income 384 1,080 1,774 1,114
Interest expense (237) (245) (770) (590)
-------- -------- -------- --------
Earnings before income taxes 147 835 1,004 524
Income taxes (59) (192) (401) (192)
-------- -------- -------- --------
Net earnings $ 88 $ 643 $ 603 $ 332
======== ======== ======== ========
Basic earnings per common share 0.01 0.08 0.07 0.04
======== ======== ======== ========
Diluted earnings per common share 0.01 0.07 0.07 0.04
======== ======== ======== ========
Weighted average common shares
outstanding - basic 8,506 8,268 8,477 8,208
======== ======== ======== ========
Weighted average common shares
outstanding-diluted 9,304 9,064 9,198 9,180
======== ======== ======== ========
</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 210 2 776 -- 778
Stock option tax benefit -- -- 401 -- 401
Net earnings -- -- -- 603 603
------- ------- ------- ------- -------
Balances at April 30, 1998 8,524 $ 85 $28,085 $ 464 $28,634
======= ======= ======= ======= =======
</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, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------- --------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 603 $ 332
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,262 5,757
Provision for losses on accounts receivable 434 210
Deferred tax expense 401 192
Changes in operating assets and liabilities, net of
acquisition of business:
Change in accounts receivable (594) (4,971)
Change in prepaid expenses (120) (160)
Change in other assets (316) (174)
Change in accounts payable 593 (1,838)
Change in accrued liabilities (1,565) 1,098
------- -------
Cash provided by operating activities 5,698 446
------- -------
Cash flows from investing activities:
Capital expenditures (3,504) (5,755)
Other investing activities (1,884) (1,066)
------- -------
Cash used in investing activities (5,388) (6,821)
------- -------
Cash flows from financing activities:
Net proceeds (payments) under line of credit (404) 6,833
Payments of debt (237) (456)
Common stock issued for cash under option plans 778 189
------- -------
Cash provided by financing activities 137 6,566
------- -------
Net increase in cash and cash equivalents 447 191
Cash and cash equivalents at beginning of period 190 145
------- -------
Cash and cash equivalents at end of period $ 637 $ 336
======= =======
</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
$607,000 in software development costs for the nine months ended April
30, 1998. Unamortized capitalized software cost was $974,000 at April
30, 1998.
Earnings per common share
Earnings per common share for the three and nine months ended April 30,
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 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 April 30, 1998 and
1997, diluted common and common equivalent shares outstanding includes
803,000 and 796,000 respectively, common share equivalents, consisting
of stock options, determined under the treasury stock method. For the
nine months ended April 30, 1998 and 1997 diluted common and common
equivalent shares outstanding includes 721,000 and 973,000
respectively, common share equivalents, consisting of stock options,
determined under 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
pre-tax earnings for the nine months ended April 30, 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 net
months ended April 30, 1998 was offset by an increase in paid-in
capital.
Debt
In June 1998, the Company amended its Loan Agreement with its current
commercial bank. The Loan Agreement is for a total line of credit of
$20,000,000. The amendment extends the term of the Loan Agreement
through June 1999 with substantially the same conditions and financial
covenants.
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 NINE MONTHS ENDED
----------------------------------------- -------------------------------------
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
1998 1997 1998 1997
------------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Call volumes processed 22,972,000 22,695,000 70,108,000 67,485,000
Average daily transactions 258,000 255,000 257,000 247,000
</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 ("CTI") 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 April 30, 1998 and 1997
The following table sets forth certain statement of operations data as
a percentage of total revenue for the three months ended April 30, 1998 and
1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Revenue:
Telecommunications services..................... 91% 87%
Telecommunications licensing.................... 1 8
Direct call provisioning........................ 7 3
Voice print ................................. 1 2
- -
Total revenue............................... 100 100
Expenses:
Operating costs and expenses.................... 49 40
Selling, general and administrative............. 19 20
Research and development........................ 6 7
Depreciation and amortization................... 22 21
-- --
Operating income.............................. 4 12
Interest expense................................ (2) (3)
-- --
Earnings before income taxes.................. 2 9
Income taxes ................................. (1) (2)
--- ---
Net earnings ................................. 1% 7%
= =
</TABLE>
Total Revenue. Total revenue decreased to $ 9,434,000 for the three months ended
April 30, 1998 from $9,470,000 for the corresponding prior period. This net
decrease resulted from increases in telecommunications services revenue and
direct revenue, offset by a reduction in telecommunication licensing and voice
print revenue. The 4% increase in telecommunications services revenue to
$8,539,000 for the three months ended April 30, 1998, from $8,209,000 in the
corresponding prior period was due to a 1% 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. An offsetting factor to the increase in revenue dollars is a
reduction in fees per call as the Company's customers reach contractually agreed
volume discounts. These discounts accounted for a reduction in revenue of
approximately $87,000 for the three months ended April 30, 1998. 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
recognized $109,000 in telecommunications licensing revenue associated with the
Strike Three(tm) product for the three months ended April 30, 1998 compared to
$750,000 for the three months ended April 30, 1997. The 1997 revenue was
associated with the licensing of the Strike Three(tm) product to a single
customer. Direct call provisioning revenue increased as a percentage of total
revenue. There was a dollar increase in direct call provisioning revenue of
$396,000 in the three months ended April 30, 1998 compared to the three months
ended April 30, 1997. This increase was 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 $122,000 for the
three months ended April 30, 1998 from $243,000 for the corresponding prior
period. The SpeakEZ Voice Print(sm) revenue for the three months ended April 30,
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
$4,614,000 for the three months ended April 30, 1998, from $3,752,000 for the
corresponding prior period, and increased
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<PAGE> 12
as a percentage of total revenue to 49% for the three months ended April 30,
1998 from 40% in the corresponding prior period due to the inclusion of a larger
proportion of direct call provisioning expenses and increases in
telecommunication services expense associated with personnel and communications.
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 three months ended April
30, 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 three
months ended April 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Operating costs and expenses:
Telecommunications services.................... 46% 42%
Direct call provisioning....................... 99 88
Voice print ............................... 7 24
</TABLE>
Operating costs and expenses associated with providing telecommunications
services increased as a percentage of corresponding revenue to 46% for the three
months ended April 30, 1998 from 42% 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. Direct call
provisioning costs increased as a percentage of corresponding revenue to 99% for
the three months ended April 30, 1998, from 88% 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 $1,774,000 for the three months ended April
30, 1998, from $1,924,000 in the corresponding prior period, and decreased as a
percentage of total revenue to 19% from 20%. The dollar decrease was $150,000.
Increases in the costs associated with the marketing personnel and other
marketing costs to support the SpeakEZ Voice Print(sm) products of $189,000 were
offset primarily by reductions in estimated property taxes and for legal and
other professional services fees aggregating approximately $341,000. The
selling, general and administrative expenses associated with the SpeakEZ Voice
Print(sm) technology were $490,000 for the three months ended April 30, 1998 as
compared to $301,000 for the corresponding prior period. The Company expects the
level of selling, general, and administrative expenses to remain at the current
levels over the remainder of this fiscal year.
Research and Development Expenses. Research and development expenses decreased
to $606,000 for the three months ended April 30, 1998, from $692,000 in the
corresponding prior period. The research and development for the Inmate Calling
Services division decreased to $236,000 for the three months ended April 30,
1998, from $282,000 in the corresponding prior period. The primary reason for
the decrease is 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 $90,000. No such costs were capitalized in the
corresponding prior period. The research and development expense associated with
the SpeakEZ Voice Print(sm) technology was $370,000 for the three months ended
April 30, 1998 as compared to $410,000 for the corresponding prior period. For
the three months ended April 30, 1998, the Company capitalized $88,000 of
computer software development costs associated with the SpeakEZ Voice Print(sm)
technology compared to $70,000 for the corresponding prior period. In addition,
under a government contract, the Company is partially reimbursed for expenses on
this
11
<PAGE> 13
contract. This reimbursement totaled approximately $129,000 for the three
months ended April 30, 1998 and was recognized as a reduction to SpeakEZ Voice
Print(sm) technology related research and development expenses. Such
reimbursements were $93,000 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.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased to $2,056,000 for the three months ended April 30, 1998, from
$2,022,000 in the corresponding prior period. The increase is due primarily to
amortization of intangibles and depreciation of office equipment, offset by
reductions due to fully depreciated telecommunications equipment. The
depreciation and amortization associated with the SpeakEZ Voice Print(sm)
technology and the related business acquisition was $232,000 for the three
months ended April 30, 1998 as compared to $184,000 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 decreased to $237,000 for the three months
ended April 30, 1998, from $245,000 in the corresponding prior period. The
decrease was not significant.
Nine Months Ended April 30, 1998 and 1997
The following table sets forth certain statement of operations data as
a percentage of total revenue for the nine months ended April 30, 1998 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 30,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Revenue:
Telecommunications services................... 91% 92%
Telecommunications licensing.................. 1 3
Direct call provisioning...................... 6 4
Voice print ............................... 2 1
- -
Total revenue............................. 100 100
Expenses:
Operating costs and expenses.................. 47 45
Selling, general and administrative........... 19 22
Research and development...................... 6 8
Depreciation and amortization................. 22 21
-- --
Operating income............................ 6 4
Interest expense.............................. (3) (2)
-- --
Earnings before income taxes................ 3 2
Income taxes ............................... (1) (1)
--- ---
Net earnings ............................... 2% 1%
= =
</TABLE>
Total Revenue. Total revenue increased 7% to $28,802,000 for the nine months
ended April 30, 1998 from $26,980,000 for the corresponding prior period. The 6%
increase in telecommunications services revenue to $26,321,000 for the nine
months ended April 30, 1998, from $24,773,000 in the corresponding prior period
was due to a 4% 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. An offsetting
factor to the increase in revenue dollars is a reduction in fees per call as the
Company's customers reach contractually agreed volume
12
<PAGE> 14
discounts. These discounts accounted for a reduction in revenue of approximately
$87,000 for the nine months ended April 30, 1998. The Company recognized
$165,000 in telecommunications licensing revenue associated with the Strike
Three(tm) product for the nine months ended April 30, 1998 compared to $750,000
for the nine months ended April 30, 1997. The 1997 revenue was associated with
the licensing of the Strike Three(tm) product to a single customer. Direct call
provisioning revenue increased as a percentage of total revenue. There was a
dollar increase in direct call provisioning revenue of $685,000 in the nine
months ended April 30, 1998 compared to the nine months ended April 30, 1997.
This increase was due primarily to the addition of sites in which the Company is
provisioning the long distance service. Voice print revenue increased to
$583,000 for the nine months ended April 30, 1998 from $409,000 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
$13,679,000 for the nine months ended April 30, 1998, from $12,168,000 for the
corresponding prior period, and increased as a percentage of total revenue to
47% for the nine months ended April 30, 1998 from 45% in the corresponding prior
period due to the inclusion of a larger proportion of direct call provisioning
expenses and increases in telecommunication services expense associated with
personnel and communications. 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
nine months ended April 30, 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 nine
months ended April 30, 1998 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 30,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Operating costs and expenses:
Telecommunications services.................... 45% 45%
Direct call provisioning....................... 96 94
Voice print ............................... 14 18
</TABLE>
Operating costs and expenses associated with providing telecommunications
services remained constant as a percentage of corresponding revenue at 45% for
the nine months ended April 30, 1998 and for the corresponding prior period.
Direct call provisioning costs increased as a percentage of corresponding
revenue to 96% for the nine months ended April 30, 1998, from 94% in the
corresponding prior period. This percentage increase is primarily attributable
to increases in commission expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $5,369,000 for the nine months ended April
30, 1998, from $5,851,000 in the corresponding prior period, and decreased as a
percentage of total revenue to 19% from 22%. The dollar decrease was $482,000.
Increases in the costs associated with the marketing personnel and other
marketing costs to support the SpeakEZ Voice Print(sm) products of $777,000 and
increases in office expenses of $142,000 were offset primarily by reductions in
estimated property taxes, travel expenses and legal and other professional fees
aggregating approximately $1,423,000. The selling, general and administrative
13
<PAGE> 15
expenses associated with the SpeakEZ Voice Print(sm) technology was $1,480,000
for the nine months ended April 30, 1998 as compared to $703,000 for the
corresponding prior period.
Research and Development Expenses. Research and development expenses decreased
to $1,718,000 for the nine months ended April 30, 1998, from $2,090,000 in the
corresponding prior period. The research and development for the Inmate Calling
Services division decreased to $587,000 for the nine months ended April 30,
1998, from $952,000 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
$340,000. No such costs were capitalized in the corresponding prior period. The
research and development expense associated with the SpeakEZ Voice Print(sm)
technology was $1,131,000 for the nine months ended April 30, 1998 as compared
to $1,138,000 for the corresponding prior period. For the nine months ended
April 30, 1998, the Company capitalized $267,000 of computer software
development costs associated with the SpeakEZ Voice Print(sm) technology
compared to $324,000 for the corresponding prior period. In addition, under a
government contract, the Company is partially reimbursed for expenses on this
contract. This reimbursement totaled approximately $440,000 for the nine months
ended April 30, 1998 and was recognized as a reduction to SpeakEZ Voice
Print(sm) technology related research and development expenses. Such
reimbursements were $214,000 for the corresponding prior period.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased to $6,262,000 for the nine months ended April 30, 1998, from
$5,757,000 in the corresponding prior period. The increase is due to an
increased fixed asset of telecommunications and office equipment, in addition to
the increased amortization of intangibles. The depreciation and amortization
associated with the SpeakEZ Voice Print(sm) technology and the related business
acquisition was $693,000 for the nine months ended April 30, 1998 as compared to
$517,000 for the corresponding prior period.
Interest Expense. Interest expense increased to $770,000 for the nine months
ended April 30, 1998, from $590,000 in the corresponding prior period. The
increase was primarily attributable to an 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 nine months
ended April 30, 1998. The net cash provided by financing activities in the nine
months ended April 30, 1998 was $137,000 compared to $6,566,000 for the
corresponding prior period. Cash provided by operations was $5,698,000 for the
nine months ended April 30, 1998 as compared to $446,000 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 $7,700,000 for
the nine months ended April 30, 1998 and $6,491,000 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 nine months ended April 30, 1998 was made up primarily of
increases in accounts receivable and other assets of $911,000 and reductions in
accrued liabilities of $1,565,000. 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.
Cash used in investing activities was $5,388,000. This included capital
expenditures of $3,504,000 for the nine months ended April 30, 1998 as compared
to $5,755,000 in the corresponding prior period. The capital expenditures for
the nine months ended April 30, 1998 were mainly for telecommunications
equipment construction in progress and office equipment. Additional investing
activities of $1,884,000 for the nine months ended April 30, 1998 and $1,066,000
for the corresponding prior period included expenditures for patent defense
costs, capitalized software
14
<PAGE> 16
development costs, and investments in preferred stock. The nine month totals as
of April 30, 1998 included $607,000 for software development costs and
$1,277,000 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 April 30, 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 June 15, 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
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
18
<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 NINE MONTHS ENDED APRIL 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<CASH> 637
<SECURITIES> 0
<RECEIVABLES> 12,209
<ALLOWANCES> 270
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 50,096
<DEPRECIATION> 23,314
<TOTAL-ASSETS> 47,079
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 28,549
<TOTAL-LIABILITY-AND-EQUITY> 47,079
<SALES> 0
<TOTAL-REVENUES> 28,802
<CGS> 0
<TOTAL-COSTS> 13,679
<OTHER-EXPENSES> 13,349
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 770
<INCOME-PRETAX> 1,004
<INCOME-TAX> 401
<INCOME-CONTINUING> 603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 603
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
