<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
QUARTERLY REPORT UNDER 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 PERIOD FROM JANUARY 1, 1999 TO MARCH 31, 1999
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 be 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 practicable date.
Class Outstanding at May 6, 1999
------------------------------- --------------------------
Common Stock, $.01 stated value 8,650,367
<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, March 31, 1999
and December 31, 1998 (Unaudited) 2
Consolidated Statements of Operations, Three Months Ended
March 31, 1999 and 1998 (Unaudited) 3
Consolidated Statements of Cash Flows, Three Months Ended
March 31, 1999 and 1998 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 8
3. Quantitative and Qualitative Disclosures About Market Risk 15
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>
March 31, December 31,
1999 1998
---------- ----------
(amounts in thousands)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 983 $ 463
Accounts receivable, net of allowance 10,594 11,510
Prepaid expenses 861 595
---------- ----------
Total current assets 12,438 12,568
Property and equipment, at cost:
Telecommunications equipment 45,098 43,439
Construction in progress 5,543 4,078
Office equipment 6,227 5,758
---------- ----------
Property and equipment 56,868 53,275
Less accumulated depreciation and amortization (29,544) (27,728)
---------- ----------
Property and equipment, net 27,324 25,547
Patent license rights 1,752 1,877
Software development costs, net 3,344 3,016
Goodwill, net 2,096 2,173
Other assets, net 4,084 3,482
========== ==========
$ 51,038 $ 48,663
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable 4,516 $ 3,056
Accrued liabilities $ 4,228 4,127
Debt 16,448 14,803
---------- ----------
Total current liabilities 25,192 21,986
Long-term debt 316 357
---------- ----------
Total liabilities 25,508 22,343
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 8,632,367 and 8,553,292 86 85
shares, respectively
Additional paid-in capital 28,210 27,963
Accumulated deficit (2,766) (1,728)
---------- ----------
Total shareholders' equity 25,530 26,320
Commitments and contingencies
---------- ----------
$ 51,038 $ 48,663
========== ==========
</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
------------------------------
March 31, March 31,
1999 1998
------------ ------------
(amounts in thousands, except
per share amounts)
<S> <C> <C>
Revenue:
Telecommunication services $ 7,629 $ 8,414
Telecommunication licensing 40 109
Direct call provisioning 1,015 624
Voice print 25 113
------------ ------------
Total revenue 8,709 9,260
------------ ------------
Expenses:
Operating costs and expenses
Telecommunications services 3,820 3,890
Direct call provisioning 949 617
Voice print 4 8
------------ ------------
Total operating costs and expenses 4,773 4,515
Selling, general, and administrative 2,399 1,813
Research and development 829 531
Depreciation and amortization 2,220 2,075
------------ ------------
Total expenses 10,221 8,934
------------ ------------
Operating income (loss) (1,512) 326
Interest expense (239) (243)
------------ ------------
Earnings (loss) before income taxes (1,751) 83
Income taxes (expense) benefit 714 (21)
------------ ------------
Net earnings (loss) $ (1,037) $ 62
============ ============
Basic earnings (loss) per common share $ (0.12) $ 0.01
============ ============
Diluted earnings (loss) per common share $ (0.12) $ 0.01
============ ============
Weighted average common shares
outstanding - basic 8,574 8,490
============ ============
Weighted average common shares
outstanding- diluted 8,574 9,298
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (1,037) $ 62
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,220 2,075
Provision for losses on accounts receivable 203 158
Deferred tax (benefit) expense (714) 21
Changes in operating assets and liabilities, net of
acquisition of business:
Change in accounts receivable 713 (172)
Change in prepaid expenses (266) (187)
Change in other assets 41 (68)
Change in accounts payable 1,460 (911)
Change in accrued liabilities 101 (168)
---------- ----------
Cash provided by operating activities 2,721 810
---------- ----------
Cash flows from investing activities:
Capital expenditures (3,593) (934)
Other investing activities (460) (782)
---------- ----------
Cash used in investing activities (4,053) (1,716)
---------- ----------
Cash flows from financing activities:
Net proceeds under line of credit 1,663 381
Payments of debt (59) (14)
Common stock issued for cash under option plans 248 141
---------- ----------
Cash provided by financing activities 1,852 508
---------- ----------
Net increase (decrease) in cash and cash equivalents 520 (398)
Cash and cash equivalents at beginning of period 463 770
---------- ----------
Cash and cash equivalents at end of period $ 983 $ 372
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
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. Some adjustments
involve estimates, which may require revision in subsequent interim
periods or at year-end. The financial statements have been presented in
accordance with generally accepted accounting principles. Refer to
notes to consolidated financial statements, which appear in the 1998
Annual Report on Form 10-K for the Company's accounting policies, which
are pertinent to these statements.
Year End
Effective December 1998, the Company changed its fiscal year from a
fiscal year ended July 31 to a fiscal year ended December 31. The first
quarterly report for the new fiscal year-end is for the three months
ended March 31, 1999. All 1998 amounts have been presented on the basis
of the new fiscal year end.
Revenue Recognition
In October 1997, the AICPA issued Statement of Position (SOP) 97-2,
Software Revenue Recognition, which supercedes SOP 91-1. The provisions
of SOP 97-2 have been applied to transactions entered into after July
31, 1998. Prior to that date, the Company's revenue recognition policy
was in accordance with SOP No. 91-1.
SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements (i.e. software products,
upgrades/enhancements, post contract customer support, installation,
training, etc.) to be allocated to each element based on the relative
fair value of the elements. The fair value of an element must be based
on evidence, which is specific to the vendor. The revenue generally is
recognized upon delivery of the products. The revenue allocated to post
contract customer support generally is recognized ratably over the term
of the support and revenue allocated to service elements (such as
training and installation) generally is recognized as the services are
performed. If a vendor does not have evidence of the fair value for all
elements in a multiple-element arrangement, all revenue from the
arrangement is deferred until such evidence exists or until all
elements are delivered. There was no material impact on the Company's
results of operations as a result of the adoption of SOP 97-2.
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
5
<PAGE> 7
realizable value considerations. Capitalized software costs are
amortized over the greater of: 1) the amount computed using the ratio
that current gross revenues for a product bear to the total current and
anticipated future gross revenues for that product; or 2) the straight
line method over the remaining estimated useful life of the product in
which the life is generally estimated to be three years. The Company
capitalized $460,000 in software development costs for the three months
ended March 31, 1999.
Acquisitions
On February 10, 1999, the Company signed a definitive Agreement and
Plan of Merger with Dallas-based Gateway Technologies, Inc., a
privately held provider of inmate telecommunications calling services
in a transaction valued at approximately $35.2 million. The merger is
anticipated to be completed by June 14, 1999. It is expected that the
merger will be accounted for using the pooling of interests method of
accounting.
Earnings (loss) per common share
Earnings (loss) per common share for the three months ended March 31,
1999 and 1998, are 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 during 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. For the
three months ended March 31, 1999 common stock equivalents were not
included in the diluted EPS calculation as they would be anti-dilutive.
For the three months ended March 31, 1998, diluted common and common
equivalent shares outstanding includes 808,000 of common share
equivalents, consisting of stock options, determined under the treasury
stock method.
Income taxes
The Company's tax provision for the three months ended March 31, 1999
and 1998 was calculated using the estimated effective tax rate for the
fiscal year.
Subsequent events
In April 1999, the Company amended its Loan Agreement with its current
commercial bank. The Loan Agreement provides for a line of credit of
$20,000,000. The amendment extends the term of the Loan Agreement to
August 2, 1999 and amends certain financial covenants.
6
<PAGE> 8
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Segment Information
The Company operated in two business segments; inmate calling services
and SpeakEZ Voice Print(R). The Company's reportable segments are
specific business units that offer different products and services.
They are managed separately because each business requires different
technology and marketing strategies. Inmate calling services includes
the provisioning of specialized call processing and offender monitoring
services. Segment information for the three months ended March 31, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------
(AMOUNTS IN THOUSANDS)
INMATE CALLING
SERVICES SPEAKEZ TOTAL
--------------- ---------- ----------
<S> <C> <C> <C>
Revenue from external customers .......... $ 8,684 $ 25 $ 8,709
Operating income (loss) .................. (717) (795) (1,512)
Depreciation and amortization ............ 1,960 260 2,220
Interest expense ......................... 32 207 239
Segment earnings (loss) before taxes ..... (749) (1,002) (1,751)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------
(AMOUNTS IN THOUSANDS)
INMATE CALLING
SERVICES SPEAKEZ TOTAL
--------------- ---------- ----------
<S> <C> <C> <C>
Revenue from external customers .......... $ 9,147 $ 113 $ 9,260
Operating income (loss) .................. 1,357 (1,031) 326
Depreciation and amortization ............ 1,840 235 2,075
Interest expense ......................... 81 162 243
Segment earnings (loss) before taxes ..... 1,276 (1,193) 83
</TABLE>
There was no intersegment revenue for the three months ended March 31,
1999 and 1998. Unallocated amounts to arrive at net earnings included
income tax expense (benefit) of $(714,000) and $21,000 for the three
months ended March 31, 1999 and 1998, respectively. Consolidated total
assets included eliminations of $14,745,000 and $14,507,000 as of March
31, 1999 and December 31, 1998, respectively. Eliminations consist of
intercompany receivables in the ICS Division and intercompany payables
in the SpeakEZ division related solely to the intercompany borrowing of
the SpeakEZ Division.
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 including, but 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 ability to reduce expenditures in its SpeakEZ Division
and to successfully license voice verification and fraud prevention technology,
the effect of economic conditions, the effect of regulation, including the
Telecommunications Act of 1996, the effect of the Year 2000 Issue, 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, and the results of financing efforts, along
with the other risks detailed herein.
OVERVIEW
INMATE CALLING SERVICES DIVISION
The Company derives revenue under contracts with its customers, including AT&T,
Bell Atlantic, U S WEST, SBC Communications, BellSouth, MCI WorldCom and GTE,
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
----------------------------------
March 31, March 31,
1999 1998
-------------- -------------
<S> <C> <C>
Call volumes processed 21,580,000 23,031,000
Average daily transactions 240,000 256,000
</TABLE>
The Company had a net reduction in call volume in 1999 primarily as a result of
prisoner relocation programs and increased use of call control measures by
correctional institutions at existing sites. In addition, non-renewal of some
existing site-specific customer contracts in competitive bidding arrangements
contributed to the reduction. These factors were partially offset by increases
associated
8
<PAGE> 10
with the addition of new call processing systems. 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. Systems that are currently scheduled for installation are
not expected to contribute to call volume increases until the third and fourth
fiscal quarters.
In December 1998, the Company completed its acquisition of Cell-Tel Monitoring,
Inc. The Company includes all of the financial activity of this new business
within the ICS Division. The product acquired in the acquisition is a
prisoner/parolee electronic monitoring devise utilizing the Internet and using
the Company's SpeakEZ Voice Print(R) technology. There has been no significant
revenue to date for the monitoring product. In addition, the acquisition is
expected to contribute to increases in the ICS Division operating expenses,
including selling, general and administrative, research and development, and
depreciation and amortization for the current period and into the foreseeable
future. There can be no assurance that the monitoring products and services will
achieve the necessary market acceptance or become widely adopted. There is no
assurance that the monitoring products and services will be commercially
accepted or profitable in the future.
SPEAKEZ DIVISION
In December 1998, the Company began an evaluation of the SpeakEZ Division and
determined the best course of action was to combine its research and development
operations previously located in New Jersey with its corporate operations in
Englewood, Colorado. The Company completed the reorganization of the SpeakEZ
operations in February 1999. The reorganization included a change in marketing
strategy from a direct customer sales strategy to a technology licensing
strategy. A direct customer sales strategy markets a specifically developed
software product to a specific, end user customer. The strategy is then to find
other specific customers who have similar operating systems and market this
product to them. In contrast, a technology licensing strategy focuses on a
larger scale customer who can integrate the SpeakEZ software product into its
existing product line. This larger customer, such as a computer manufacturer, is
then responsible for the product integration and ultimate delivery to the end
user customer.
Even with the changes in marketing strategy, there can be no assurance that the
SpeakEZ products will achieve the necessary market acceptance or 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. There is no assurance that the SpeakEZ products will be
commercially accepted or profitable in the future.
9
<PAGE> 11
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
The following table sets forth certain statement of operations data as
a percentage of total revenue for the three months ended March 31, 1999 and
1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenue:
Telecommunications services ................... 88% 91%
Telecommunications licensing .................. -- 1
Direct call provisioning ...................... 12 7
Voice print ................................... -- 1
---------- ----------
Total revenue ............................. 100 100
Expenses:
Operating costs and expenses .................. 55 49
Selling, general and administrative ........... 28 19
Research and development ...................... 9 6
Depreciation and amortization ................. 25 22
---------- ----------
Operating income (loss) ..................... (17) 4
Interest expense .............................. (3) (3)
---------- ----------
Earnings (loss) before income taxes ......... (20) 1
Income taxes .................................. 8 (--)
---------- ----------
Net earnings (loss) ......................... (12)% 1%
========== ==========
</TABLE>
Total Revenue. Total revenue decreased 6% to $8,709,000 for the three months
ended March 31, 1999, from $9,260,000 for the prior year. This decrease resulted
primarily from decreases in telecommunications services revenue and voice print
revenue, offset by an increase in direct call provisioning revenue. The 9%
decrease in telecommunications services revenue to $7,629,000 for the three
months ended March 31, 1999, from $8,414,000 in the prior year, was due
primarily to a 6% decrease in call volume. The net reduction in call volumes is
comprised of decreases as a result of prisoner relocation programs, increased
use of call control measures by correctional institutions, and non-renewal of
existing site specific customers contracts in competitive bidding arrangements.
These factors were partially offset by increases associated with the addition of
new call processing systems.
Direct call provisioning revenue increased 63% to $1,015,000 for the three
months ended March 31, 1999 from $624,000 for the prior period. This increase
was due to the addition of sites in which the Company is provisioning the long
distance service. The Company's ability to increase direct call provisioning
revenue in the future is tied, in part, to the continued provisioning of long
distance service on certain site contracts. There can be no assurance that the
Company will be successful in increasing the number of sites serviced. The
Company also recognized SpeakEZ Voice Print(R) revenue in the amount of $25,000
for the three months ended March 31, 1999 or a decrease of $88,000 from the
corresponding prior period. SpeakEZ Voice Print(R) revenue was derived primarily
from the provisioning of services and from the sale of software licenses and
software development kits. Future amounts of voice print revenue are
unpredictable and depend upon market acceptance, technological success, and
impact of new competition.
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<PAGE> 12
Operating costs and expenses. Total operating costs and expenses increased to
$4,773,000 for the three months ended March 31, 1999, from $4,515,000 for the
corresponding prior period, and increased as a percentage of total revenue to
55% for the three months ended March 31, 1999 from 49% for the corresponding
prior period. The increase was primarily due to an overall change in the revenue
mix to include a greater portion of direct call provisioning revenue and
expenses and a lesser amount of telecommunications services revenue and
expenses. 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. There were minimal costs directly associated with telecommunications
licensing revenue. Operating costs and expenses associated with direct call
provisioning include the costs associated with telephone line access, long
distance charges, commissions paid to correctional facilities, costs associated
with uncollectible accounts and billing charges. Voice print operating costs for
the three months ended March 31, 1999 was for 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 March 31, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Operating costs and expenses:
Telecommunications services....................................................... 50% 46%
Direct call provisioning.......................................................... 94 98
Voice print....................................................................... 16 7
</TABLE>
Operating costs and expenses associated with providing telecommunications
services increased as a percentage of corresponding revenue to 50% for the three
months ended March 31, 1999, from 46% in the corresponding prior period. The
increase is primarily due to the reduction in telecommunications services
revenue and increases in personnel and telecommunications related costs. Direct
call provisioning costs decreased to 94% for the three months ended March 31,
1999 from 98% in the corresponding prior period. This percentage decrease is
primarily attributable to an increase in higher margin long distance related
direct call provisioning revenue. Voice print expenses increased as a percentage
of revenue primarily due to a change in the revenue mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $2,399,000 for the three months ended March
31, 1999, from $1,813,000 in the corresponding prior period, and increased as a
percentage of total revenue to 28% from 19% in the corresponding prior period.
Selling, general and administrative expenses associated with the ICS Division
increased by $823,000 to $2,116,000 for the three months ended March 31, 1999
from $1,293,000 for the corresponding prior period. The increase was primarily
due to increases in salary and other expenses including travel, equipment
maintenance, materials and supplies and telecommunication cost of $343,000. This
increase included approximately $159,000 of expenses associated with the support
for the monitoring products. Another component to the increase in selling,
general and administrative expenses was professional services and consulting
fees, which increased by $369,000. Included in these professional services and
consulting fees is $190,000 in merger related expenses associated with the
pending merger with Gateway Technologies, Inc. ("Gateway"). The remaining amount
of professional services is primarily associated with the upgrade of the
Company's internal financial
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<PAGE> 13
accounting systems to be Year 2000 compliant. The Company anticipates an
increase in selling, general and administrative expenses due to additional
merger related expenses associated with the acquisition of Gateway. Selling,
general and administrative expenses associated with the SpeakEZ Voice Print(R)
technology were $283,000 for the three months ended March 31, 1999 as compared
to $519,000 for the corresponding prior period. The decrease was due primarily
to a reduction in personnel costs of $156,000 and a decrease in travel,
marketing costs and legal expenses of $96,000. The Company anticipates a
continued reduction in the administrative costs associated with SpeakEZ due to
the consolidation of corporate facilities. The Company believes it can implement
these reductions without sacrificing potential revenue growth. 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 revenue will grow at
the same rate as that anticipated for selling, general and administrative
expenses.
Research and Development Expenses. Research and development expenses increased
to $829,000 for the three months ended March 31, 1999, from $531,000 in the
corresponding prior period. The research and development for the Inmate Calling
Services division increased to $556,000 for the three months ended March 31,
1999, from $150,000 in the corresponding prior period. The increase is as a
result of personnel cost increases of $322,000. In addition, the research and
development expenses associated with the monitoring products totaled $222,000
for the three months ended March 31, 1999. For the three months ended March 31,
1999, the Company capitalized $460,000 of computer software development costs
associated with the development of a new inmate calling platform compared to
$246,000 for the corresponding prior period. The Company expects research and
development expense for the ICS Division to increase to support new products and
due to the increase in technical personnel. The research and development expense
associated with the SpeakEZ Voice Print(R) technology was $273,000 for the three
months ended March 31, 1999 as compared to $381,000 for the corresponding prior
period. The decrease was due to a reduction in personnel and consolidation of
the research facilities into the corporate headquarters. For the three months
ended March 31, 1999, there was no capitalized computer software development
costs associated with the SpeakEZ Voice Print(R) 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 project. The activity
under this contract has been significantly reduced. This reimbursement totaled
approximately $4,000 for the three months ended March 31, 1999 and was
recognized as a reduction to SpeakEZ Voice Print(R) technology related research
and development expenses. Such reimbursements were $62,000 for the corresponding
prior period. The research and development expense associated with the SpeakEZ
Voice Print(R) technology is expected to decrease as a result of personnel
decreases and consolidation of facilities.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased to $2,220,000 for the three months ended March 31, 1999, from
$2,075,000 in the corresponding prior period. The increase was due primarily to
the amortization of capitalized software development costs and goodwill of
approximately $145,000. The depreciation and amortization for the SpeakEZ
Division was $260,000 for the three months ended March 31, 1999 as compared to
$235,000 for the corresponding prior period. The Company anticipates that
depreciation expense will increase, as new sites are added, however it will be
offset to the extent that equipment currently in use becomes fully depreciated.
Interest Expense. Interest expense decreased to $239,000 for the three months
ended March 31, 1999, from $243,000 in the corresponding prior period. The
decrease is attributable to a reduction in interest rates offset by an increase
in the daily average balance of indebtedness.
12
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied upon commercial borrowings and operating
cash flow to fund its operations and capital needs. Cash provided by financing
activities supplied the Company with a majority of its cash needs for the three
months ended March 31, 1999. The net cash provided by financing activities was
$1,852,000 for the three months ended March 31, 1999 compared to $508,000 for
the corresponding prior period. Cash provided by operations was $2,721,000 for
the three months ended March 31, 1999 as compared to $810,000 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 the change in the Company's deferred tax provision. Comparably,
these changes totaled $672,000 for the three months ended March 31, 1999 and
$2,316,000 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 three months ended March 31,
1999 consisted primarily of decreases in accounts receivable of $713,000 and
increases in accounts payable of $1,460,000. The total change for the three
months ended March 31, 1998 consisted primarily of an increase in accounts
receivable of $172,000 and decreases in accounts payable of $911,000.
Cash used in investing activities was $4,053,000. This included capital
expenditures of $3,593,000 for the three months ended March 31, 1999 as compared
to $934,000 in the corresponding prior period. The capital expenditures for the
three months ended March 31, 1999 were mainly for telecommunications equipment
and office equipment. The telecommunications equipment was related to new sites
pending installation and for upgrade costs for existing sites that have been
renewed. Additional investing activities of $460,000 for the three months ended
March 31, 1999 was for capitalized software development costs. Other investing
activities of $782,000 for the three months ended March 31, 1998 included
expenditures for investments in preferred stock of Cell-Tel Monitoring, Inc. and
capitalized software development costs. The acquisition of Cell-Tel was
completed as of December 31, 1998. The Company anticipates that capital
expenditures for telecommunications equipment will primarily follow the
installation of new systems and will increase as the current base of systems are
upgraded to provide increased functional capability and to be compliant with FCC
regulations regarding rate announcements.
The Company has been funding its operations by using cash provided by operations
and available borrowings under a $20,000,000 line of credit. Management believes
that as a result of its continued capital requirements and the anticipated
merger with Gateway that it will need to expand its credit facility or sell
additional equity securities to fund the Company's operations and anticipated
new inmate call processing systems and upgrades of existing systems. There can
be no assurance that such financing will be available or, if available, will be
obtainable on satisfactory terms.
THE YEAR 2000 ISSUE
The Problem. The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable year. As a
result, any of the Company's computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations of the Company and its suppliers and customers.
13
<PAGE> 15
The Company's State of Readiness. The Company has instituted a Year 2000
Project. As part of the Company's Year 2000 Project, the Company hired
additional project management resources. Additionally, the Company has completed
its initial evaluation of current computer systems, software, and embedded
technologies. The evaluation revealed that the Company's current proprietary
inmate calling platform deployed on behalf of the Company's customers, the
internal network hardware and operating system that provides the Company's Local
Area Network ("LAN") and Wide Area Network ("WAN"), voice mail system, and
accounting and business process software are the major resources that do have
Year 2000 compliance issues. These resources will need to be either replaced or
upgraded. Pursuant to the FCC Order 98-7, associated with the requirement for
rate quotes, the Company's inmate calling system must be upgraded by October
1999. As a result of this upgrade, the inmate calling system will be Year 2000
compliant. The Company's internal systems and or programs are predominantly
"off-the-shelf" products with Year 2000 versions now available. The Company's
internal network, e-mail system and accounting and business process software are
scheduled for update utilizing vendor provided upgrades by August 1999.
As part of the Company's Year 2000 Project, the Company has contacted its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue. The communications were completed in February 1999. However,
there can be no guarantee that the systems of other companies on which the
Company's business relies will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with the Company's
systems would not have a material adverse effect on the Company and its
operations.
The Costs to Address the Company's Year 2000 Issues. Expenditures for the three
months ended March 31, 1999 for the Year 2000 Project amounted to approximately
$100,000 and are approximately $300,000 to date. Management expects that the
completion of its Year 2000 Project may result in additional expenditures of
approximately $400,000. The estimated replacement cost of certain network
equipment associated with the WAN portion of the internal network could be an
additional $500,000.
The Risks Associated with the Company's Year 2000 Issues. The Company's failure
to resolve Year 2000 Issues on or before December 31, 1999 could result in
system failures or miscalculations causing disruption in operations, including
among other things, a temporary inability to process transactions, send
invoices, send and/or receive e-mail and voice mail, or engage in normal
business activities. Additionally, failure of third parties upon whom the
Company's business relies to timely remediate their Year 2000 Issues could
result in disruptions in the Company's supply of network parts and materials,
late, missed, or unapplied payments, temporary disruptions in order processing
and other general problems related to the Company's daily operations. While the
Company believes its Year 2000 Project will adequately address the Company's
internal Year 2000 issues, the overall risks associated with the Year 2000 Issue
remain difficult to accurately describe and quantify, and there can be no
guarantee that the Year 2000 Issue will not have a material adverse effect on
the Company and its operations.
The Company's Contingency Plan. The Company has not, to date, implemented its
Year 2000 Contingency Plan. It is the Company's goal to have the major Year 2000
Issues resolved by October 1999. The Company would expect to implement a
contingency plan by the end of June 1999, in the event the Company's Year 2000
Project should fall behind schedule.
14
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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. Reports on Form 8-K/A
The Company filed a Form 8-K/A dated March 15, 1999 reporting
the following:
Item 7.
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: May 14, 1999 By: /s/ Alvyn A. Schopp
------------ ------------------------------------
(Signature)
Alvyn A. Schopp, Chief Executive Officer
By: /s/ John Giannaula
------------------------------------
(Signature)
John Giannaula, Vice President Finance
(Principal Accounting Officer)
17
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN THE T-NETIX, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED MARCH 31, 1999 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> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 983
<SECURITIES> 0
<RECEIVABLES> 10,594
<ALLOWANCES> 1,259
<INVENTORY> 0
<CURRENT-ASSETS> 12,438
<PP&E> 56,868
<DEPRECIATION> 29,544
<TOTAL-ASSETS> 51,038
<CURRENT-LIABILITIES> 25,192
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 25,444
<TOTAL-LIABILITY-AND-EQUITY> 51,038
<SALES> 0
<TOTAL-REVENUES> 8,709
<CGS> 0
<TOTAL-COSTS> 4,773
<OTHER-EXPENSES> 5,448
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 239
<INCOME-PRETAX> (1,751)
<INCOME-TAX> 714
<INCOME-CONTINUING> (1,037)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,037)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
