<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
T-NETIX, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
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(2) Aggregate number of securities to which transaction applies:
4,231,315
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
$5.6875, the average of the high and low prices of T-NETIX Stock on
the Nasdaq National Market on February 9, 1999.
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$24,065,604
- --------------------------------------------------------------------------------
(5) Total fee paid:
4,813.12
- --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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T-NETIX, INC.
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Gateway Technologies, Inc. and T-NETIX, Inc.
have agreed to combine Gateway and T-NETIX. Your Board of Directors believes
that this proposed merger will create one of the strongest specialized call
processing companies in the country. This combination of two companies which
individually have been among the specialized call processing industry's leaders
will create an even more dynamic competitor with annual revenues of nearly $70
million, and a strong financial position from which to generate growth
internally and through possible expansion into other call processing services.
The familiarity of the two companies with one another should assist the
integration of the two companies. Your Board of Directors unanimously approved
the merger and believes that the merger is in your best interest.
In the merger, a subsidiary of T-NETIX will merge with and into Gateway,
and Gateway will become a wholly owned subsidiary of T-NETIX. Your shares of
T-NETIX common stock will not change as a result of the merger. T-NETIX will
issue up to 4,231,315 shares to current shareholders of Gateway in connection
with the merger. Also in connection with the merger, we will amend two of
T-NETIX's stock option plans to increase the number of shares which may be
optioned under the plans from 2,000,000 to 2,600,000. We will not amend the
plans unless the shareholders approve the issuance of the shares in connection
with the merger.
We cannot complete the merger unless the shareholders of T-NETIX approve
the issuance of the shares and the amendment to the plans. We will hold a
special meeting of our shareholders to vote on these proposals. YOUR VOTE IS
VERY IMPORTANT. Whether or not you plan to attend the shareholder meeting,
please take the time to vote by completing and mailing the enclosed proxy card
to us. If you date and mail your proxy card without indicating how you want to
vote, your proxy will be counted as a vote FOR the merger and FOR the amendment
to the plans.
The date, time and place of the meeting are as follows:
67 Inverness Drive East, Suite 100
Englewood, Colorado 80112
June 14, 1999, 8:00 a.m. local time
This Proxy Statement gives you detailed information about the merger we are
proposing, and it includes our merger agreement as an appendix. We encourage you
to read this entire document carefully. You can also obtain information about
T-NETIX from publicly available documents that T-NETIX has filed with the
Securities and Exchange Commission.
I enthusiastically support this compelling combination of two of the
premier franchises in specialized call processing and join with the other
members of your Board of Directors in recommending that you vote in favor of the
merger and in favor of amending the stock option plans.
Alvyn A. Schopp
Chief Executive Officer
T-NETIX, Inc.
PLEASE SEE "RISK FACTORS" AT PAGE 30 OF THIS DOCUMENT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
PROXY STATEMENT OR DETERMINED IF THIS PROXY STATEMENT IS ACCURATE OR ADEQUATE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Proxy Statement dated May 10, 1999
and first mailed to shareholders on or about May 14, 1999
<PAGE> 3
T-NETIX, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
A special meeting of shareholders of T-NETIX, Inc. ("T-NETIX") will be held
at T-NETIX's headquarters at 67 Inverness Drive East, Suite 100, Englewood,
Colorado, on Monday, June 14, 1999, at 8:00 a.m., local time, for the following
purposes:
1. To consider and vote upon a proposal to approve the issuance of up
to 4,231,315 shares of common stock, $0.01 stated value, of T-NETIX to the
shareholders of Gateway Technologies, Inc. ("Gateway"), in accordance with
the Agreement and Plan of Merger dated as of February 10, 1999 (the "Merger
Agreement"), among T-NETIX, Gateway, and a wholly owned subsidiary of
T-NETIX called T-NETIX Acquisition Corp. ("TAC"), pursuant to which TAC
will be merged with and into Gateway (the "Merger") with Gateway surviving
the Merger as a wholly owned subsidiary of T-NETIX.
2. To consider and vote upon a proposal in connection with the Merger
to amend T-NETIX's 1993 Incentive Stock Option Plan and T-NETIX's
Non-Qualified Stock Option Plan (collectively, the "Plans") to increase
from 2,000,000 to 2,600,000 the number of shares which may be optioned
under the Plans.
These matters are described in detail in the accompanying Proxy Statement.
The Plans will not be amended unless the shareholders approve both proposals
listed above.
The record date for determining the holders of common stock entitled to
vote at the special meeting or any adjournment thereof is the close of business
on May 7, 1999.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE TO
APPROVE THE PROPOSALS LISTED ABOVE.
PLEASE PROMPTLY VOTE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED ENVELOPE.
By Order of the Board of Directors
/s/ JOHN GIANNAULA
------------------------------------
John Giannaula
Secretary
May 10, 1999
Please do not mail in your T-NETIX stock certificates. Shareholders of
T-NETIX are not required to submit their T-NETIX stock certificates in
connection with the Merger.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY..................................................... 1
The Merger................................................ 1
Mechanics of the Merger................................... 1
Issuance of Shares to Gateway Shareholders................ 1
Gateway Stock Options/T-NETIX Option Plans................ 1
Indemnification Claims.................................... 1
The Shareholders' Meeting................................. 2
Record Date; Vote Required................................ 2
The Board's Reasons for the Merger........................ 2
Our Recommendation to Shareholders........................ 3
Dissenters' Appraisal Rights.............................. 3
Conditions to Completion of the Merger.................... 3
Termination of the Agreement; Expenses and Damages........ 4
Management and Operations after the Merger................ 4
Accounting Treatment...................................... 4
Interests of Directors and Officers in the Merger that
Differ from Your Interests............................. 4
Regulatory Approvals...................................... 4
Comparative Per Share Market Price Information............ 4
The Companies............................................. 5
Forward-Looking Statements May Prove Inaccurate........... 5
Selected Historical Financial Data........................ 6
Selected Unaudited Pro Forma Combined Financial Data...... 8
THE SPECIAL MEETING......................................... 11
General................................................... 11
Record Date............................................... 11
Matters to Be Considered and Voted Upon................... 11
Date, Place and Time...................................... 11
Vote Required for Approval................................ 12
Voting and Revocation of Proxies.......................... 12
General................................................ 12
Revocation of Proxies.................................. 12
Solicitation of Proxies................................... 12
THE MERGER.................................................. 13
Mechanics of the Merger................................... 13
Background of the Merger.................................. 13
Reasons for the Merger; Recommendation of the Board....... 14
Fairness Opinion....................................... 16
Recommendation of the Board of Directors............... 22
Terms of the Merger Agreement............................. 22
Operation of the Merger................................ 22
Consideration for Shares of Gateway Stock.............. 22
Issuance of Shares to Gateway Shareholders............. 23
Indemnification Claims................................. 23
Covenants in the Merger Agreement...................... 24
Conditions of the Merger Agreement..................... 26
Termination of the Merger Agreement.................... 27
Post-Closing Covenants................................. 27
Operation of Gateway and T-NETIX after the Merger...... 28
Employment Agreements.................................. 28
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Rights of Dissenting Shareholders......................... 28
Accounting Treatment...................................... 28
Interests of Certain Persons in the Merger................ 29
HSR Act and Other Antitrust Matters....................... 29
RISK FACTORS................................................ 30
T-NETIX Depends on a Few Major Customers.................. 30
Challenges of Integrating T-NETIX and Gateway............. 30
Competition............................................... 30
Systems and Services May Become Obsolete.................. 30
Protection of Proprietary Technology...................... 31
Risk of Infringing on Existing Patents.................... 31
The Risks Associated with Year 2000 Issues................ 31
DIVIDENDS AND PRICE RANGE OF COMMON STOCK................... 32
DESCRIPTION OF T-NETIX...................................... 33
General................................................... 33
Directors and Executive Officers.......................... 33
Additional Information.................................... 35
DESCRIPTION OF GATEWAY...................................... 36
Business.................................................. 36
General................................................ 36
Corrections............................................ 36
Products and Services.................................. 37
Product/platform..................................... 37
System Architecture and Technology................... 37
Support Infrastructure............................... 37
Pricing................................................ 38
Direct Call Processing............................... 38
Transaction-based Pricing............................ 38
Customers.............................................. 38
Direct Call Processing Customers..................... 38
Transaction Fee Customers............................ 38
Research and Product Development....................... 39
Regulation............................................. 39
Properties................................................ 40
Competition............................................... 40
Employees and Employee Benefits........................... 40
Management's Discussion and Analysis of Financial
Condition and Results of Operations Overview........... 40
Liquidity and Capital Resources........................... 43
The Year 2000 Issue....................................... 44
Legal Proceedings......................................... 45
PRINCIPAL SHAREHOLDERS...................................... 46
</TABLE>
ii
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMENDMENTS TO T-NETIX STOCK OPTION PLANS.................... 48
New Plan Benefits......................................... 48
Executive Compensation.................................... 48
Compensation of Directors.............................. 48
Board Committees and Meetings.......................... 49
Executive Compensation Table........................... 49
Option Grants in the Last Fiscal Year.................. 49
Management Incentive Programs.......................... 50
Stock Option Plans..................................... 50
Compensation Committee Interlocks and Insider
Participation......................................... 51
Compensation Committee Report on Executive
Compensation.......................................... 51
Executive Compensation Policies...................... 51
CEO Compensation..................................... 51
Company Performance.................................... 52
SHAREHOLDERS' PROPOSALS..................................... 52
LEGAL MATTERS............................................... 52
EXPERTS..................................................... 53
WHERE YOU CAN FIND MORE INFORMATION......................... 53
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 54
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... 56
GATEWAY TECHNOLOGIES, INC. FINANCIAL STATEMENTS............. F-1
Independent Auditors' Report of KPMG LLP.................. F-1
Balance Sheets............................................ F-2
Statements of Operations.................................. F-3
Statements of Stockholders' Equity........................ F-4
Statements of Cash Flows.................................. F-5
Notes of Financial Statements............................. F-6
APPENDIX A
APPENDIX B
</TABLE>
APPENDIX C (SEC ONLY)
APPENDIX D (SEC ONLY)
iii
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SUMMARY
This brief summary highlights selected information from the Proxy
Statement. It does not contain all of the information that is important to you.
We urge you to carefully read the entire Proxy Statement and the other documents
to which this document refers so that you can fully understand the merger. See
"Where You Can Find More Information."
THE MERGER (PAGE 13)
We have attached the merger agreement to this document as APPENDIX A.
Please read the merger agreement. It is the legal document that governs the
merger.
MECHANICS OF THE MERGER (PAGE 13)
We propose a combination in which a subsidiary of T-NETIX will merge into
Gateway. Gateway will survive the merger as a subsidiary of T-NETIX. The
combined company's corporate headquarters will be in Englewood, Colorado, but
Gateway will also keep its offices in Carrollton, Texas. We expect to complete
the merger during the second quarter of 1999.
As a result of the merger, the status of the current shareholders and
option holders of T-NETIX will remain the same. The current shareholders of
Gateway will become shareholders of T-NETIX. Also, those persons who currently
hold options to purchase Gateway common stock will exchange those options for
options to purchase T-NETIX common stock.
Please complete and sign the enclosed proxy card and send it to T-NETIX in
the postage-paid return envelope which has been provided to you so that your
shares of T-NETIX common stock will be represented and voted at the
shareholders' meeting. You do not need to send in your T-NETIX stock
certificates.
ISSUANCE OF SHARES TO GATEWAY SHAREHOLDERS (PAGES 22 AND 23)
In the merger, T-NETIX will issue up to 4,231,315 shares of its common
stock to current shareholders of Gateway. This total is made up of three parts:
(1) 3,672,358 shares to be issued to Gateway shareholders in exchange for their
shares of Gateway common stock, based upon the exchange ratio of 5.0375 shares
of T-NETIX common stock for each share of Gateway common stock; (2) 375,339
additional shares to be issued to certain Gateway shareholders in exchange for
their terminating their interests in a royalty agreement they have with Gateway;
and (3) 183,618 shares which T-NETIX will set aside, but which T-NETIX will not
issue to Gateway shareholders unless T-NETIX is required under the merger
agreement to reimburse the Gateway shareholders for any losses resulting from a
breach of the merger agreement.
GATEWAY STOCK OPTIONS/T-NETIX OPTION PLANS (PAGE 22)
In the merger, outstanding options to buy Gateway common stock will become
options to buy T-NETIX common stock. T-NETIX stock options for approximately
348,000 shares will be issued in the merger.
In order to accommodate the T-NETIX stock options being issued in exchange
for Gateway stock options, T-NETIX must amend its 1993 Incentive Stock Option
Plan and its Non-qualified Stock Option Plan to increase the number of shares
which may be optioned under the plans from 2,000,000 to 2,600,000. This will
also allow for new incentive compensation alternatives for employees of the
combined company. There are currently 320,428 shares available to be optioned
under the plans.
INDEMNIFICATION CLAIMS (PAGE 23)
Instead of issuing all of the T-NETIX common stock to Gateway's
shareholders right away, T-NETIX will hold back 5% of the shares of T-NETIX
common stock to be issued in the merger (183,618 shares total).
If Gateway breaches the merger agreement or if any of Gateway's
representations or warranties in the merger agreement are inaccurate, Gateway's
shareholders will reimburse T-NETIX for certain expenses and losses which result
from the breach.
Unless the breach is a knowing and willful misrepresentation, Gateway's
shareholders will only have to reimburse T-NETIX by giving up their rights to
the held-back shares. After Gateway's shareholders have given up their rights to
all of the held-back shares, Gateway's shareholders will not have to reimburse
T-NETIX for any other amounts.
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Unless the breach is a willful, knowing or intentional misrepresentation,
no reimbursement will be required unless and until the total amount claimed for
reimbursement exceeds $500,000.
The reimbursement period will only last one year, and may last a shorter
time. However, if someone makes a written claim for reimbursement before the
reimbursement period ends, the reimbursement period will last until that claim
is resolved.
When the reimbursement period ends, T-NETIX will issue any remaining
held-back shares to Gateway's shareholders.
T-NETIX will also reserve and set aside 183,618 additional shares of
T-NETIX common stock. These shares will not be deducted from the shares to be
issued to Gateway's shareholders.
If T-NETIX breaches the merger agreement or if any of T-NETIX's
representations or warranties in the merger agreement are inaccurate, T-NETIX
will reimburse Gateway's shareholders for certain expenses and losses which
result from the breach.
Unless the breach is a knowing and willful misrepresentation, T-NETIX will
only have to reimburse Gateway's shareholders by issuing reserved shares. After
all reserved shares have been issued, T-NETIX will not have to reimburse
Gateway's shareholders for any other amounts.
Unless the breach is a willful, knowing or intentional misrepresentation,
no reimbursement will be required unless and until the total amount claimed for
reimbursement exceeds $500,000.
The reimbursement period will only last one year, and may last a shorter
time. However, if someone makes a written claim for reimbursement before the
reimbursement period ends, the reimbursement period will last until that claim
is resolved.
When the reimbursement period ends, T-NETIX will not have to issue any
remaining reserved shares to Gateway's shareholders.
THE SHAREHOLDERS' MEETING (PAGE 11)
The shareholders' meeting will be held on June 14, 1999, at 8:00 a.m.,
local time, at the headquarters of T-NETIX, 67 Inverness Drive East, Suite 100,
Englewood, Colorado 80112. At the shareholders' meeting, you will be asked:
1. To approve the issuance of T-NETIX common stock under a merger
agreement that provides for the merger of a subsidiary of T-NETIX into
Gateway; and
2. To adopt amendments to our company's stock option plans to increase
the number of shares of T-NETIX common stock that can be optioned under the
plans from 2,000,000 to 2,600,000.
The additional option shares will facilitate the exchange of T-NETIX stock
options for Gateway stock options in the merger, and will allow for new
incentive compensation alternatives for employees of the combined company. The
additional option shares will also be available for current directors, officers
and employees of T-NETIX.
We will not effect the amendments to the stock option plans unless the
issuance of stock in the merger is approved.
RECORD DATE; VOTE REQUIRED (PAGES 11 AND 12)
You can vote at the meeting of T-NETIX shareholders if you owned T-NETIX
common stock at the close of business on May 7, 1999. You can cast one vote on
each proposal for each share of T-NETIX common stock that you owned at that
time. To approve the issuance of T-NETIX common stock in the merger and to adopt
the amendments to our stock option plans, the holders of a majority of the
shares of T-NETIX common stock voting at the meeting must vote in favor of doing
so.
You may vote your shares in person by attending the meeting or by mailing
us your proxy if you are unable or do not wish to attend. You can revoke your
proxy at any time before we take a vote at the meeting by sending a written
notice revoking the proxy or a later-dated proxy to the secretary of T-NETIX, or
by attending the meeting and voting in person.
THE BOARD'S REASONS FOR THE MERGER (PAGE 14)
We are proposing the merger because we believe that by combining T-NETIX
and Gateway we can create a stronger and more diversified company that will
provide significant benefits to our shareholders and customers. Specifically, we
believe that
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the merger offers the following strategic and financial benefits:
- We believe the combined company will be a preeminent, high-quality
specialized call processing company with a broader product range,
stronger business prospects and greater market diversification than
either company could accomplish alone.
- The combined company will own what we believe will be a formidable
portfolio of call processing intellectual property in areas such as
automated operator, three-way calling, integrated recording and
monitoring, call blocking, commissary and speaker verification features.
- We believe that the combined company will have strong relationships with
the Regional Bell Operating Companies, which will provide significant
cross-selling opportunities.
- We expect the combination of the sales forces to allow the combined
company to sell broad-based services to the telecommunications carriers,
and to market the company's products directly to the correctional
facilities.
- We believe that increased market capitalization of the combined company
will create greater visibility in the investment community and will
provide the combined company's shareholders greater liquidity for their
shares, thereby enhancing the stock's attractiveness to current and
prospective shareholders.
- We believe the combined company will be better positioned to raise
capital to finance future growth.
In addition, T-NETIX received an opinion from the investment banking firm
of Broadview International LLC that the merger is fair to T-NETIX and its
shareholders from a financial point of view. That opinion is attached as
APPENDIX B.
The discussion of our reasons for the merger includes forward-looking
statements about possible or assumed future results of our operations and the
performance of the combined company after the merger. For a discussion of
factors that could affect these future results, see "Risk Factors" on page 30
and "Cautionary Statement Concerning Forward -- Looking Statements" on page 54.
OUR RECOMMENDATION TO SHAREHOLDERS (PAGE 22)
The Board of Directors believes that the merger and the amendments to the
plans are fair to you and in your best interests and unanimously recommends that
you vote "FOR" the proposal to approve the issuance of T-NETIX common stock in
the merger, and "FOR" the adoption of the amendments to T-NETIX's stock option
plans.
DISSENTERS' APPRAISAL RIGHTS (PAGE 28)
Colorado law does not provide T-NETIX shareholders with dissenters'
appraisal rights in the merger because T-NETIX common stock is listed on the
Nasdaq National Market.
not been satisfied, as long as the law allows it to do so.
We cannot be certain when, or if, the conditions to the merger will be
satisfied or waived, or that the merger will be completed.
CONDITIONS TO COMPLETION OF THE MERGER (PAGE 26)
Completing the merger depends on a number of conditions being met.
Following is a list of a few of the conditions:
(a) That neither company has suffered a material adverse change in its
business;
(b) That the shareholders of both companies approve the merger;
(c) That T-NETIX's legal counsel has given the companies a legal
opinion that the merger will be tax free to both companies and tax free to
all shareholders (except as to cash received instead of fractions of
shares, and except as to shareholders who dissent);
(d) That the interests of certain of Gateway's shareholders in the
royalty agreement between Gateway and such shareholders have been
terminated;
(e) That the companies receive all required governmental and other
third party approvals of the merger, and that no legal action has been
taken to try to prevent the merger; and
(f) That the merger will be accounted for as a pooling of interests
under the accounting rules.
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A party to the merger agreement could choose to complete the merger even
though a condition has not been satisfied, as long as the law allows it to do
so.
We cannot be certain when, or if, the conditions to the merger will be
satisfied or waived, or that the merger will be completed.
TERMINATION OF THE AGREEMENT; EXPENSES AND DAMAGES (PAGE 27)
The companies can agree at any time to terminate the merger agreement
without completing the merger. Also, either company can decide, without the
consent of the other, to terminate the merger agreement in certain
circumstances, such as if a condition to the merger has not been satisfied and
the company that wants to terminate the merger agreement has not materially
violated the merger agreement. If the companies terminate the merger agreement,
each will pay its own expenses, and in most circumstances will not have any
liability to each other.
However, if one of the companies terminates the merger agreement because of
certain reasons and then merges with someone else, the company that terminated
the merger agreement has to pay the other company $5 million.
MANAGEMENT AND OPERATIONS AFTER THE MERGER (PAGES 27 AND 28)
Upon completion of the merger, T-NETIX's Board of Directors will include
all of the individuals currently serving on T-NETIX's Board of Directors. In
addition, Richard E. Cree and W.P. Buckthal, who are now Gateway shareholders,
will join T-NETIX's Board of Directors. This will result in a nine (9) member
Board of Directors for T-NETIX.
Alvyn A. Schopp, currently President and Chief Executive Officer of
T-NETIX, will remain in his current position. Gateway's President and Chief
Executive Officer, Richard E. Cree, will become the Executive Vice President of
T-NETIX following the merger. The remainder of the senior management teams of
T-NETIX and Gateway are expected to remain the same.
ACCOUNTING TREATMENT (PAGE 28)
It is a condition to the merger that the merger qualify as a "pooling of
interests." This means that, for accounting and financial reporting purposes, we
will treat our companies as if they had always been one company.
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER THAT DIFFER FROM YOUR
INTERESTS (PAGE 29)
Certain of our officers and directors may have interests in the merger that
are different from yours, and may in fact conflict with your interests. For
example, after T-NETIX issues stock options to holders of Gateway options in the
merger, there will be approximately 572,600 shares of T-NETIX Stock available to
be optioned because of the amendments to T-NETIX's stock option plans. T-NETIX's
directors and officers will be eligible to receive these options, although there
are no specific plans to grant options to them at this time.
REGULATORY APPROVALS (PAGE 29)
Because of the size of the merger, the companies were legally required to
file notice of the merger with the U.S. Federal Trade Commission and the U.S.
Department of Justice. After filing the notice, we would not be permitted to
complete the merger for 30 days or until the FTC terminated our waiting period
early. We filed the notice on February 23, 1999, and the FTC has terminated our
waiting period.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 32)
Shares of T-NETIX common stock are listed on the Nasdaq National Market. On
February 10, 1999, which was the last trading day before we announced the
merger, T-NETIX common stock closed at $6.625 per share. On May 7, 1999, T-NETIX
common stock closed at $6.00 per share. There is no public trading market for
Gateway common stock. The most recent trade of Gateway common stock of which
management is aware was a sale of 6,500 shares for $18.98 per share in April
1998.
Based on the 5.0375-for-one exchange ratio and including the 375,339 shares
to be issued for terminating the royalty agreement, the total market value of
the consideration that Gateway shareholders will receive in the merger would be
$26,815,993 based on T-NETIX's closing stock price on February 10, 1999, and
$24,286,182 based on T-NETIX's closing stock price on May 7, 1999. Of course,
the market price of T-NETIX common stock will fluc-
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tuate prior to the merger, while the exchange ratio is fixed.
THE COMPANIES (PAGES 33 AND 36)
T-NETIX, Inc.
67 Inverness Drive East, Suite 100
Englewood, CO 80112
(303) 790-9111
T-NETIX provides specialized call processing services to the
telecommunications and other service industries. T-NETIX's primary customers
include AT&T, Bell Atlantic, US WEST, SBC Communications, Inc., BellSouth, MCI
WorldCom and GTE. These customers use T-NETIX's products and services to provide
annually over 93,000,000 billable inmate collect calls in over 800 correctional
institutions. T-NETIX's products and services include comprehensive transaction
processing, call management and identification systems for the corrections
industry and special-purpose speech processing software and systems. T-NETIX's
current products are based on proprietary software, the most critical of which
is patented or patent pending, and a combination of proprietary and
"off-the-shelf" electronic hardware. These systems are designed to be flexible
delivery platforms which are easily integrated with T-NETIX's customer's
networks and information systems. T-NETIX's revenue stream is mostly recurring,
as a result of T-NETIX's generally charging for its services on a fee per
transaction processed basis over long-term contracts.
At December 31, 1998, T-NETIX's assets were $48,663,000 and total
shareholders' equity was $26,320,000. For the fiscal year ended July 31, 1998,
T-NETIX's net earnings were $599,000.
Gateway Technologies, Inc.
1544 Valwood Parkway, Suite 102
Carrollton, Texas 75006
(972) 241-1535
Gateway is engaged in the development, manufacturing, marketing and support
of computer-automated telephone systems. Gateway receives nearly all of its
revenues from its operation of inmate telecommunications systems located in
correctional facilities in approximately 23 states.
Gateway's primary customers include two distinct groups. The first group
consists of correctional facilities for which Gateway serves as the exclusive
provider of telecommunication services to inmates. The second group includes
regional Bell operating companies and inter-exchange carriers such as Ameritech,
Bell Atlantic, US WEST, SBC Communications, Inc., AT&T and MCI WorldCom. Gateway
provides specialized call processing and fraud control services to these
customers. These two customer groups combined use Gateway's products and
services to provide annually over 40,000,000 billable inmate collect calls in
over 500 correctional institutions.
Gateway's products and services include comprehensive transaction
processing, call management, call recording and identification systems for the
corrections industry. Gateway's current products are based on proprietary
software, the most critical of which are patented or patent pending, and a
combination of proprietary and "off-the-shelf" electronic hardware. These
systems are designed to be flexible delivery platforms which are easily
integrated with Gateway's customers' networks and information systems.
Gateway's revenue stream is mostly recurring, as a result of the continuous
collect calls generated by the correctional facilities and the fee per
transaction charged to the other customers over long-term contracts.
At December 31, 1998, Gateway's assets were $17,451,000 and total
shareholders' equity was $3,665,000. For the fiscal year ended December 31,
1998, Gateway's net earnings were $5,000.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGES 30 AND 54)
We have made forward-looking statements in this document (and in documents
to which we refer in this document) that are subject to risks and uncertainties.
These forward-looking statements include information about possible or assumed
future combined results of our operations or the performance of the combined
company after the merger is completed. When we use any of the words
"anticipate," "believe," "effect," "estimate" "expect," "intend," "plan" or
similar expressions, we are making forward-looking statements. Many possible
events or factors could affect the future financial results and performance of
our companies after the merger and could cause those results or performance to
differ materially from those expressed in our forward-looking statements.
5
<PAGE> 12
SELECTED HISTORICAL FINANCIAL DATA
T-NETIX. The selected financial data presented below under the captions
"Statement of income data," "Per share data" and "Balance sheet data" are for
T-NETIX, as of and for each of the years in the five-year period ended July 31,
1998, and as of and for each of the five-month periods ended December 31, 1998
and 1997. Such data have been derived from, and should be read in conjunction
with, the audited consolidated financial statements contained in T-NETIX's
Annual Report on Form 10-K/A for the fiscal year ended July 31, 1998, and
unaudited consolidated financial statements contained in the Quarterly
Transition Report on Form 10-QT/A for the five months ended December 31, 1998,
including the notes thereto, incorporated by reference into and enclosed with
this document. See "Where You Can Find More Information." T-NETIX has changed
its fiscal year-end from July 31 to December 31, effective December 31, 1998.
T-NETIX, INC. AND SUBSIDIARIES
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
DECEMBER 31 YEAR ENDED JULY 31
----------------- -----------------------------------------------
1998 1997 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Total revenue................ $15,088 $16,137 $38,213 $36,292 $33,378 $27,754 $11,290
Operating income (loss)...... (2,518) 1,068 1,852 1,955 2,221 3,974 722
Net earnings (loss).......... (2,188) 467 599 591 1,627 3,188 (322)
PER SHARE DATA
Diluted earnings (loss) per
common share............... $ (0.26) $ 0.05 $ 0.07 $ 0.06 $ 0.18 $ 0.38 $ (0.06)
Weighted average common
shares
outstanding -- diluted..... 8,551 9,126 9,206 9,156 8,814 8,360 5,280
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 JULY 31
----------------- -----------------------------------------------
1998 1997 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets................. $48,663 $45,891 $44,673 $46,910 $42,527 $34,904 $16,968
Debt......................... 15,160 11,203 10,803 13,378 6,809 6,062 9,611
Total liabilities............ 22,343 17,779 16,203 20,058 16,968 14,449 15,401
Shareholders' equity......... 26,320 28,112 28,470 26,852 25,559 20,455 1,567
</TABLE>
6
<PAGE> 13
Gateway. The following table sets forth selected financial data for Gateway
as of and for each of the years in the five-year period ended December 31, 1998.
Such data have been derived from, and should be read in conjunction with, the
audited financial statements of Gateway for the year ended December 31, 1998,
including the notes thereto, attached to this Proxy Statement. See "Where You
Can Find More Information."
GATEWAY TECHNOLOGIES, INC.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Total revenue.............................. $30,366 $26,013 $20,433 $16,271 $11,530
Operating income (loss).................... 1,306 2,412 (398) 293 699
Net earnings (loss)........................ 5 1,154 (514) 395 261
PER SHARE DATA
Diluted earnings (loss) per share.......... $ (0.01) $ 1.48 $ (0.83) $ 0.60 $ 0.44
Weighted average common shares
outstanding -- diluted.................. 731 779 666 610 588
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets................................. $17,451 $14,272 $11,743 $8,804 $6,334
Debt and redeemable preferred stock.......... 10,350 7,828 7,012 4,824 3,067
Total liabilities and redeemable preferred
stock..................................... 13,786 11,147 10,336 7,596 5,605
Stockholders' equity......................... 3,665 3,125 1,407 1,208 729
</TABLE>
7
<PAGE> 14
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth selected unaudited pro forma combined
financial data (the "Selected Unaudited Pro Forma Financial Data") for T-NETIX
as of and for each of the three years in the period ended July 31, 1998, and as
of and for the five-month periods ended December 31, 1998 and 1997. The Selected
Unaudited Pro Forma Financial Data are presented to reflect the estimated impact
on the historical consolidated financial statements of T-NETIX of the merger,
which will be accounted for as a pooling of interests, and the issuance of
approximately 4,048,000 shares of T-NETIX common stock upon consummation of the
merger. See "The Merger -- Accounting Treatment." The unaudited pro forma
combined statements of income data assume that the merger had been consummated
as of August 1, 1995, and the unaudited pro forma combined balance sheet data
assume that the merger had been consummated on December 31, 1998. Certain
adjustments to the data presented have also been made to reflect the different
fiscal years of T-NETIX and Gateway (see note a, below).
The Selected Unaudited Pro Forma Financial Data have been derived from or
prepared consistently with the unaudited pro forma condensed combined financial
statements, which start at page 56 of this Proxy Statement. The Selected
Unaudited Pro Forma Financial Data are presented for illustrative purposes only
and are not necessarily indicative of the financial position or operating
results that would have occurred or that will occur upon consummation of the
merger. The following Selected Unaudited Pro Forma Financial Data should be read
in conjunction with the historical and unaudited pro forma condensed combined
financial statements and notes thereto incorporated by reference into, or
included elsewhere in, this document. See "Where You Can Find More Information"
and "Unaudited Pro Forma Condensed Combined Financial Information."
T-NETIX, INC. AND SUBSIDIARIES
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED DECEMBER 31 YEAR ENDED JULY 31
----------------- ---------------------------
1998 1997 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Total revenue.............................. $27,841 $27,520 $66,941 $62,243 $53,811
Operating income (loss).................... (2,849) 1,851 3,064 4,442 1,890
Net earnings (loss)........................ (3,293) 640 531 1,794 1,157
PER SHARE DATA
Diluted earnings (loss) per share.......... $ (0.26) $ 0.05 $ 0.04 $ 0.14 $ 0.09
Weighted average common shares
outstanding -- diluted.................. 12,599 13,174 13,254 13,204 12,862
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
1998
-----------
<S> <C>
BALANCE SHEET DATA
Total assets........................................... $68,516
Debt................................................... 25,510
Total liabilities...................................... 37,629
Shareholders' equity................................... 30,887
</TABLE>
- ---------------
(a) The selected unaudited pro forma combined statements of income and per
share data, which present data for T-NETIX for the fiscal years ended July
31, 1998, 1997 and 1996, and the five months ended December 31, 1998 and
1997, have been combined with the recast statements of income and per share
data of Gateway for the twelve-month period ended July 31, 1998, and the
fiscal years ended December 31, 1997 and 1996, and the five months ended
December 31, 1998 and 1997. The selected unaudited pro forma combined
balance sheet data present the balance sheets of T-NETIX and Gateway as of
December 31, 1998.
(b) On December 31, 1998, T-NETIX completed the purchase of Cell-Tel
Monitoring, Inc. The balance sheet data at December 31, 1998 includes the
net assets acquired in the purchase.
8
<PAGE> 15
COMPARATIVE PER SHARE DATA
The following table sets forth earnings and book value per share data for
T-NETIX and Gateway on both historical and pro forma combined bases and on a per
share equivalent pro forma basis for Gateway. Pro forma combined earnings per
share are derived from the Unaudited Pro Forma Condensed Combined Financial
Information presented elsewhere in this Proxy Statement, which gives effect to
the merger accounted for under the pooling of interests method. There were no
cash dividends declared in the periods indicated. Book value per share for the
pro forma combined presentation is based upon outstanding shares of T-NETIX
common stock, adjusted to include shares of T-NETIX common stock to be issued in
the merger for outstanding shares of Gateway common stock at the effective time
of the merger, based on the conversion of each share of Gateway common stock
into 5.0375 shares of T-NETIX common stock. The information set forth below
should be read in conjunction with the respective historical audited annual and
unaudited interim financial statements of T-NETIX and Gateway incorporated by
reference or attached to this Proxy Statement and the "Selected Unaudited Pro
Forma Combined Financial and Other Data" and the notes thereto presented in the
"Summary" hereto. See "Where You Can Find More Information" and "Unaudited Pro
Forma Condensed Combined Financial Information."
T-NETIX AND GATEWAY COMPARATIVE PER SHARE DATA
T-NETIX HISTORICAL
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED DECEMBER 31 YEAR ENDED JULY 31
----------------- -----------------------
1998 1997 1998 1997 1996
------- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Diluted earnings (loss) per share......... $(0.26) $0.05 $0.07 $0.06 $0.18
Book value per share...................... $ 3.08 $3.32 $3.33 $3.23 $3.14
</TABLE>
T-NETIX AND GATEWAY -- UNAUDITED PRO FORMA COMBINED(a)(c)
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED DECEMBER 31 YEAR ENDED JULY 31
----------------- -----------------------
1998 1997 1998 1997 1996
------- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Diluted earnings (loss) per share......... $(0.26) $0.05 $0.04 $0.14 $0.09
Book value per share...................... $ 2.45
</TABLE>
GATEWAY HISTORICAL
<TABLE>
<CAPTION>
FIVE MONTHS YEAR ENDED
ENDED DECEMBER 31, YEAR ENDED DECEMBER 31
------------------ JULY 31 ---------------
1998 1997 1998 1997 1996
------ ------ ---------- ----- ------
<S> <C> <C> <C> <C> <C>
Diluted earnings (loss) per share.............. $0.66 $0.70 $1.24 $1.48 $(0.83)
Book value per share........................... $4.98 $4.43 $ 2.11
</TABLE>
9
<PAGE> 16
GATEWAY PER SHARE EQUIVALENTS (b)
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED DECEMBER 31 YEAR ENDED JULY 31
------------------ -------------------------
1998 1997 1998 1997 1996
------- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Diluted earnings (loss) per share............. $(1.31) $0.25 $0.20 $0.71 $0.45
Book value per share.......................... $12.34
</TABLE>
- ---------------
(a) The unaudited pro forma T-NETIX and Gateway combined diluted earnings
(loss) per share present the combination of T-NETIX financial information
for the five months ended December 31, 1998 and 1997, and for the fiscal
years ended July 31, 1998, 1997, and 1996, and the recast Gateway financial
information for the five months ended December 31, 1998 and 1997, and for
the twelve-month period ended July 31, 1998, and the years ended December
31, 1997, and 1996. The T-NETIX and Gateway unaudited pro forma combined
book value per share presents the book value of T-NETIX and Gateway as of
December 31, 1998.
(b) Gateway per share equivalent unaudited pro forma data represent the
unaudited pro forma combined per share data multiplied by the exchange
ratio of 5.0375 shares of T-NETIX common stock for each share of Gateway
common stock.
(c) On December 31, 1998, T-NETIX completed the purchase of Cell-Tel
Monitoring, Inc. The book value per share data at December 31, 1998
includes the net assets acquired in the purchase.
10
<PAGE> 17
THE SPECIAL MEETING
GENERAL
This Proxy Statement is furnished by T-NETIX, Inc. ("T-NETIX") to the
holders of the common stock of T-NETIX, stated value $0.01 per share (the
"T-NETIX Stock"), in connection with the solicitation of proxies by the Board of
Directors of T-NETIX (the "T-NETIX Board") for use at the special meeting of the
shareholders of T-NETIX (the "Special Meeting") to be held on June 14, 1999, for
the purposes described in this document. Each copy of this Proxy Statement
mailed to holders of T-NETIX Stock is accompanied by a form of proxy ("Proxy
Card") for use at the Special Meeting.
RECORD DATE
The T-NETIX Board has fixed the close of business on May 7, 1999, as the
record date (the "Record Date") for determining the holders of T-NETIX Stock
that are entitled to receive notice of and to vote at the Special Meeting.
MATTERS TO BE CONSIDERED AND VOTED UPON
At the Special Meeting, shareholders will be asked to consider and vote
upon the following proposals relating to the merger (the "Merger") of T-NETIX
Acquisition Corp. ("TAC"), a wholly owned subsidiary of T-NETIX, with and into
Gateway Technologies, Inc. ("Gateway"), with Gateway surviving the Merger as a
wholly owned subsidiary of T-NETIX:
1. To approve the issuance of up to 4,231,315 shares of T-NETIX Stock
in connection with the Merger; and
2. In connection with the Merger, to adopt amendments to T-NETIX's
1993 Incentive Stock Option Plan and Non-qualified Stock Option Plan
(collectively, the "Plans") to increase from 2,000,000 to 2,600,000 the
number of shares which may be optioned under the Plans.
The total of 4,231,315 shares of T-NETIX Stock is made up of (1) 3,672,358
shares to be issued to the shareholders of Gateway in exchange for their shares
of Gateway common stock, $1.00 par value per share (the "Gateway Stock") at an
exchange ratio of 5.0375-for-one; (2) the issuance of 375,339 shares to certain
of Gateway's shareholders in exchange for their termination of a royalty
agreement among them and Gateway; and (3) T-NETIX's reservation of 183,618
shares (5% of 3,672,358) for possible issuance to Gateway's shareholders in the
event that T-NETIX is required under the Agreement and Plan of Merger between
T-NETIX and Gateway dated February 10, 1999 (the "Merger Agreement"), to
indemnify Gateway's shareholders for any losses resulting from a breach of the
Merger Agreement. See "The Merger -- Terms of the Merger Agreement."
The amendments to the Plans will accommodate the exchange of outstanding
Gateway stock options for T-NETIX stock options, as provided in the Merger
Agreement. There are currently 320,428 shares of T-NETIX Stock available for
options under the Plans, and T-NETIX stock options for approximately 348,000
shares will be issued in the Merger. The amendments to the Plans will also allow
for new incentive compensation alternatives for employees of the combined
company. See "Amendments to T-NETIX Stock Option Plans -- New Plan Benefits."
The Plans will not be amended unless the shareholders approve both proposals
listed above.
DATE, PLACE AND TIME
The Special Meeting will be held at 8:00 a.m., local time, on Monday, June
14, 1999, at T-NETIX's headquarters at 67 Inverness Drive East, Suite 100,
Englewood, Colorado 80112.
Representatives of KPMG LLP, T-NETIX's and Gateway's independent
accountants, are expected to be present at the Special Meeting, and these
representatives will be available to respond to appropriate questions.
11
<PAGE> 18
VOTE REQUIRED FOR APPROVAL
As of the Record Date, there were 8,650,367 shares of T-NETIX Stock
outstanding. Each share of T-NETIX Stock is entitled to one vote upon each
matter properly submitted to shareholders at the Special Meeting.
Approval of each proposal requires that a quorum be present at the Special
Meeting, in person or by proxy, and requires the affirmative vote of a majority
of the votes cast, in person or by proxy, at the Special Meeting.
Abstentions and broker non-votes will be counted as present for purposes of
determining whether a quorum is present. A "broker non-vote" occurs when a
nominee who holds shares for a beneficial owner may not vote because the nominee
does not have discretionary voting power and has not received instructions from
the beneficial owner with respect to a proposal. Because abstentions and broker
non-votes do not constitute votes cast, they will have no effect on the outcomes
of the votes on the proposals.
As of the Record Date, directors and executive officers of T-NETIX and
their affiliates owned beneficially an aggregate of 2,636,799 shares of T-NETIX
Stock (including shares subject to options which are exercisable within 60
days). This constitutes 29.7% of the total outstanding shares of T-NETIX Stock.
Directors and executive officers of T-NETIX have indicated their intention to
vote their T-NETIX Stock in favor of the issuance of T-NETIX Stock in the merger
and in favor of the amendments to the Plans.
VOTING AND REVOCATION OF PROXIES
General
T-NETIX Stock represented by a Proxy Card properly signed and received at
or prior to the Special Meeting, unless subsequently revoked, will be voted in
accordance with the instructions thereon. IF A PROXY CARD IS SIGNED AND RETURNED
WITHOUT INDICATING ANY VOTING INSTRUCTIONS, T-NETIX STOCK REPRESENTED BY THE
PROXY WILL BE VOTED FOR EACH OF THE PROPOSALS. The proxy holders may, in their
discretion, vote shares which have been voted in favor of the proposals to
adjourn the Special Meeting to solicit additional proxies in favor of the
proposals.
Revocation of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the proxy is voted at the Special Meeting if
written notice of such revocation or another duly executed Proxy Card bearing a
later date is filed with the Corporate Secretary of T-NETIX, or by giving oral
notice at the Special Meeting. All written notices of revocation and other
communications with respect to revocation of proxies should be addressed as
follows: T-NETIX, Inc., 67 Inverness Drive East, Suite 100, Englewood, Colorado
80112; Attention: Corporate Secretary. Attendance at the Special Meeting will
not in and of itself constitute revocation of a proxy.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
T-NETIX, none of whom will be specifically compensated for such services, may
solicit proxies from the shareholders of T-NETIX, personally or by telephone,
facsimile, electronic mail, or by other forms of communication. Brokerage
houses, nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending proxy materials to beneficial owners.
T-NETIX will bear its own expenses in connection with the solicitation of
proxies for the Special Meeting.
12
<PAGE> 19
THE MERGER
This section of the Proxy Statement describes the material aspects of the
Merger Agreement and the Merger. The following description does not purport to
be complete and is qualified in its entirety by reference to the Merger
Agreement, which is attached as APPENDIX A to this Proxy Statement and is
incorporated herein by reference. All shareholders should read the Merger
Agreement carefully.
MECHANICS OF THE MERGER
The Board of Directors of T-NETIX proposes to combine the operations of
T-NETIX and Gateway. The combination will be structured as a merger of TAC with
and into Gateway. Gateway will survive the Merger, and will be a wholly owned
subsidiary of T-NETIX after the Merger. As a result of the Merger, the current
shareholders of Gateway (the "Gateway Shareholders") will become shareholders of
T-NETIX. Also, those persons who currently hold options to purchase Gateway
Stock will exchange those options for options to purchase T-NETIX Stock. The
status of the current shareholders and option holders of T-NETIX will remain the
same.
Please complete and sign the enclosed Proxy Card and send it to T-NETIX in
the postage-paid return envelope which has been provided to you so that your
shares of T-NETIX Stock will be represented and voted at the Special Meeting.
You do not need to send in your T-NETIX Stock certificates. The Merger will be
consummated at a closing (the "Closing") to be held when all conditions to
consummation of the Merger have been satisfied or waived. The Closing is
scheduled for June 14, 1999.
BACKGROUND OF THE MERGER
In October 1998, Mr. Alvyn A. Schopp, then President of T-NETIX's Inmate
Calling Services Division, called Mr. Richard E. Cree, President and CEO of
Gateway, to discuss the possibility of a merger of the two companies. Mr. Cree
and Mr. Schopp had previously discussed the potential of a merger on two
previous occasions, in October 1996 when the companies successfully negotiated a
cross-licensing agreement for some of their respective intellectual property
rights in settlement of litigation, and in March 1997, during a phone
conversation between Mr. Cree and Mr. Schopp. Neither of these previous
conversations resulted in any substantive discussions between the companies.
However, in October 1998, changes in the regulatory climate and
consolidation in the industry among the two companies' competitors and customers
made it more attractive for the management and Board of Directors of each
company to explore the opportunities created by a merger of the companies. Both
Mr. Schopp and Mr. Cree met with their respective Boards of Directors and
explained the potential benefits of such a merger. Each Board authorized Mr.
Cree and Mr. Schopp, respectively, to pursue additional negotiations. The
T-NETIX Board engaged Broadview International LLC ("Broadview") to assist Mr.
Schopp in the structuring of a transaction.
On October 5th, Mr. Schopp and Mr. Cree met in Albuquerque to discuss the
merger opportunity on behalf of their respective boards. The discussion focused
on each of the companies' cultures and their potential compatibility.
Additionally, Mr. Schopp and Mr. Cree shared some preliminary financial data on
their respective inmate calling divisions. The result of these meetings was that
Mr. Cree scheduled a visit to Denver.
On October 22nd, Mr. Cree visited Denver to review the Denver operations.
Mr. Schopp and Mr. Cree discussed potential management team responsibilities and
the status of T-NETIX's SpeakEZ operations. At this meeting it was decided that
it would be appropriate to involve several key advisors and board members in the
negotiations.
On November 5th, Mr. Carney (then a Director of T-NETIX, now Chairman of
the Board) and Mr. Schopp, accompanied by Mr. Holt Thrasher of Broadview, met
with Mr. James Franklin, Mr. Paul Buckthal and Mr. Cree of Gateway to discuss
the potential benefits of a merger. At the meeting Mr. Cree presented an
overview of Gateway personnel, technologies and strategies. It was decided at
the meeting that due to the competitive nature of the participants that an
independent consultant was going to be required to
13
<PAGE> 20
evaluate the companies' respective technologies. Mr. Thrasher was commissioned
to hire a consultant to perform the evaluation.
On November 19th and 20th an independent consultant visited each company
and issued a report the following week. The next two weeks Broadview personnel
performed due diligence on Gateway for T-NETIX and the parties tried to
negotiate the terms, including in particular, the amount of T-NETIX Stock to be
issued to Gateway's shareholders in a pooling of interest combination of the
companies. Both companies agreed that a merger was in the best interests of the
shareholders, however, the parties were unable to agree upon the number of
shares of T-NETIX Stock Gateway's shareholders would receive in the transaction.
The negotiations were terminated on November 27th.
In mid-December, Mr. Schopp called Mr. Cree to explain changes in T-NETIX
management structure and operational focus and the Board of Directors decision
to change the business strategy for the SpeakEZ division. This discussion
revitalized the discussions surrounding the proposed merger and Mr. Schopp met
with Mr. Cree in Dallas on December 18th, December 22nd and January 15th. As a
result of additional information each party had about the other, agreement was
reached as to the number of shares of T-NETIX Stock Gateway's shareholders
should receive in the Merger. The companies and their advisors then negotiated
the other terms of a definitive merger agreement, including the number of
T-NETIX shares to be issued to the royalty owners.
Mr. Cree was assisted in the negotiations by Messrs. Franklin, Buckthal and
Irvin Wall, all shareholders of Gateway, and various legal counsel and financial
advisors. Mr. Schopp was assisted by Mr. Carney, Mr. Martin Hart and Mr. Jim
Mann, all members of the T-NETIX Board, and various legal counsel and financial
advisors.
The companies then completed their respective due diligence reviews over
the next two weeks. The T-NETIX Board met on Monday, February 8, 1999 and
approved the terms of the Merger Agreement.
Gateway's Board of Directors met on Wednesday, February 10, 1999, and
approved the terms of the Merger Agreement. T-NETIX received a fairness opinion
from Broadview on Wednesday, February, 10, 1999, and the Merger Agreement was
executed on the same day.
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD
During 1998, the T-NETIX Board considered a range of alternatives to
maximize shareholder value, including strategic acquisitions, new business and
product initiatives and strategic partnerships with other companies in
complementary sectors of the technology and communications industry on an
ongoing basis. In December 1998, prior to the recommencement of the negotiations
with Gateway, the T-NETIX Board concluded that there were no other available
strategic partnership possibilities worth pursuing. As a result, the T-NETIX
Board determined to refocus T-NETIX's activities on expanding T-NETIX's inmate
calling services segment, and to adopt a new strategy of licensing the SpeakEZ
technology.
The Board of Directors believes that the Merger is consistent with and
complementary to the business focus the Board adopted in December 1998. The
Board of Directors also believes that the Merger offers the following
significant strategic and financial benefits to T-NETIX and its shareholders:
- COMPLEMENTARY PRODUCT OFFERINGS
By combining two companies with complementary product lines, the T-NETIX
Board believes that the Merger will create one of the nation's leading
specialized call processors with a broader product range, stronger
business prospects and greater market diversification than either company
could accomplish alone. The T-NETIX Board believes that through T-NETIX's
and Gateway's combined customer relationships, technical expertise, sales
forces and cross knowledge in the inmate calling services market, the
combined company will be better able to provide value to its customer
base.
14
<PAGE> 21
- CONSOLIDATION OF INTELLECTUAL PROPERTY
Over the years, the two companies have developed overlapping and
complementary intellectual property related to inmate calling services. In
October 1996, in settlement of litigation between the companies, the
companies cross-licensed significant aspects of their intellectual
property to each other. After the combination of T-NETIX and Gateway, the
combined company will own what the T-NETIX Board believes will be a
formidable portfolio of call processing intellectual property in areas
such as automated operator, three-way calling, integrated recording and
monitoring, call blocking, commissary and speaker verification features.
The T-NETIX Board believes this will increase the combined company's
competitiveness even more.
- COMPLEMENTARY CUSTOMER BASES AND SERVICE OFFERINGS
While the T-NETIX Board believes T-NETIX has strong relationships with
certain of the Regional Bell Operating Companies and major inter-exchange
carriers, neither T-NETIX nor Gateway independently has relationships with
all the Regional Bell Operating Companies. The T-NETIX Board believes that
a combined Gateway and T-NETIX will have strong relationships with the
Regional Bell Operating Companies which both Companies currently serve and
such relationships will provide significant cross-selling opportunities
not available to the individual companies. Gateway has developed products
and expertise in the area of direct contract sales. This expertise will be
offered to T-NETIX's existing customers. Additionally, T-NETIX has an
extensive online frame relay network that Gateway will be able to offer
its customer base. The volume of the billable calls that the combined
company will process should allow the combined company to achieve savings
in billing and collection activities.
- LARGER DIRECT SALES FORCE
Traditionally, T-NETIX has maintained a smaller sales force because
T-NETIX's mission has been to sell to telecommunications carriers (such as
the Regional Bell Operating Companies and inter-exchange carriers) and
only assist in the contracts with the correctional facilities. Gateway has
maintained a more extensive sales force, selling products and services
directly to the correctional facilities. The T-NETIX Board expects the
combination of the sales forces to allow the combined company to sell
broad-based services to the telecommunications carriers, and to provide
products directly to the correctional facilities. Additionally, the
Gateway direct sales force will be able to add T-NETIX's Contain(sm)
product line to their product portfolio. This product was acquired by
T-NETIX with its December 31, 1998, acquisition of Cell-Tel Monitoring
Inc., now T-NETIX Monitoring Corp., and the Merger will increase the
number of people selling the parole, probation and Contain(sm) product
lines from four to approximately twenty-four people without significant
incremental costs.
- GREATER VISIBILITY IN THE INVESTMENT COMMUNITY
The T-NETIX Board believes that the increased market capitalization,
revenue base and competitiveness of the combined company will create
greater visibility in the investment community, and upon registration of
the shares of T-NETIX Stock issued in the Merger, will provide all
shareholders greater liquidity for their shares, thereby enhancing the
stock's attractiveness to current and prospective shareholders.
- ENHANCED FINANCIAL RESOURCES
The T-NETIX Board believes that the combined company's increased revenue
base will enhance the combined company's ability to raise any capital
necessary to finance future growth from either cash flow or third parties.
In reaching its conclusions, the T-NETIX Board considered the factors
described above, including the presentation and the fairness opinion of its
financial advisor. In reaching its decision to approve the Merger and to
recommend the matter submitted to shareholders for approval in connection with
the Merger, the T-NETIX Board did not assign any relative or specific weights to
the various factors considered, and individual directors may have given
differing weights to different factors. The only negative factors considered
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<PAGE> 22
significant by the T-NETIX Board are the potential dilutive effect of the Merger
on the book value per share of T-NETIX Stock, and the potential for investor
perception of concentration in a limited market. At December 31, 1998, the book
value per share of T-NETIX Stock was $3.08. On a pro forma basis assuming
completion of the Merger, the book value per share of the combined company at
December 31, 1998 was $2.45. The Board of Directors concluded that the potential
future benefits of the Merger outweigh these negative factors. See "T-NETIX and
Gateway Combined Per Share Data."
The foregoing discussion of our reasons for the Merger includes
forward-looking statements about possible or assumed future results of our
operations and the performance of the combined company after the Merger. For a
discussion of factors that could affect these future results, see "Cautionary
Statement Concerning Forward-Looking Statements" on page 54 and "Risk Factors"
on page 30.
Fairness Opinion
T-NETIX engaged Broadview to act as its financial advisor and requested
that Broadview render an opinion regarding the fairness, from a financial point
of view, to T-NETIX's shareholders, of the Merger Consideration. At the meeting
of the T-NETIX Board on Wednesday, February 10, 1999, Broadview rendered its
written opinion (the "Broadview Opinion") that, as of February 10, 1999, based
upon and subject to the various factors and assumptions set forth in the
Broadview Opinion, the Merger Consideration was fair, from a financial point of
view, to the T-NETIX shareholders. The Merger Consideration was determined
pursuant to negotiations between T-NETIX and Gateway as well as in discussions
with Broadview.
The text of the Broadview Opinion, which sets forth assumptions made,
matters considered, and limitations on the review undertaken, is attached as
APPENDIX B to this Proxy Statement. T-NETIX shareholders are urged to read the
Broadview Opinion carefully in its entirety. The Broadview Opinion addresses
only the fairness of the Merger Consideration from a financial point of view and
does not constitute a recommendation to any T-NETIX shareholder as to how such
shareholder should vote on the Merger. Broadview employed a number of
methodologies and sources of information, both qualitative and quantitative, to
determine the fairness of the Merger Consideration from a financial point of
view. These included, but were not limited to, analyses of other comparable
public companies and comparable transactions. In addition, Broadview will
receive a fee from T-NETIX contingent upon successful conclusion of the Merger.
The summary of the Broadview Opinion set forth in this Proxy Statement is
qualified in its entirety by reference to the full text of such opinion.
In rendering its opinion, Broadview, among other actions:
(1) reviewed the terms of the Merger Agreement and the associated
exhibits thereto in the form of the draft dated February 9, 1999, which was
identical in all material respects to the Merger Agreement as executed;
(2) reviewed the audited financial statements of Gateway for its
fiscal years ended December 31, 1997 and 1996 and the unaudited financial
statements of Gateway for the eleven months ended November 30, 1998;
(3) reviewed certain internal financial and operating information,
including income statements and cash-flow projections for the twelve months
ending December 31, 1999 and the twelve months ending December 31, 2000,
relating to Gateway prepared by Gateway management;
(4) participated in discussions with Gateway management concerning the
operations, business strategy, financial performance and prospects for
Gateway;
(5) discussed with Gateway management its view of the strategic
rationale for the Merger;
(6) compared certain aspects of the financial performance of Gateway
with public companies Broadview deemed comparable;
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<PAGE> 23
(7) analyzed available information, both public and private,
concerning other mergers and acquisitions Broadview believed to be
comparable in whole or in part to the Merger;
(8) reviewed T-NETIX's annual report on Form 10-K for its fiscal year
ended July 31, 1998, including the audited financial statements included
therein, and T-NETIX's Form 10-Q for the quarterly period ended October 31,
1998, including the unaudited financial statements included therein;
(9) participated in discussions with T-NETIX management concerning the
operations, business strategy, financial performance and prospects for
T-NETIX;
(10) reviewed the recent reported closing prices and trading activity
for T-NETIX Stock;
(11) discussed with T-NETIX management its view of the strategic
rationale for the Merger;
(12) compared certain aspects of the financial performance of T-NETIX
with public companies Broadview deemed comparable;
(13) considered the total number of shares of T-NETIX Stock
outstanding and the average weekly trading volume of T-NETIX Stock;
(14) reviewed equity analyst reports covering T-NETIX;
(15) analyzed the anticipated effect of the Merger on the future
financial performance of the consolidated entity;
(16) reviewed an independent evaluation and study of the products of
Gateway and T-NETIX performed by Gate-Net Associates and commissioned by
the managements of Gateway and T-NETIX;
(17) assisted in negotiations and discussions related to the Merger
among T-NETIX, Gateway and their accounting and legal advisors; and
(18) conducted other financial studies, analyses and investigations as
Broadview deemed appropriate for purposes of this opinion.
In rendering the Broadview Opinion, Broadview relied, without independent
verification, on the accuracy and completeness of all the financial and other
information (including without limitation the representations and warranties
contained in the Merger Agreement) that was publicly available or furnished by
T-NETIX or Gateway. Broadview assumed that those projections prepared and
provided by the managements of T-NETIX and Gateway were reasonably prepared and
reflected the best available estimates and good faith judgments as to the future
performance of T-NETIX and Gateway, respectively. Broadview did not make nor
obtain an independent appraisal or valuation of any of Gateway's assets. With
regard to any analyses relating to valuations of comparable public companies,
the share prices used were for the close of trading on February 9, 1999, the
last trading day before the delivery of the Broadview Opinion.
The following is a summary explanation of the various sources of
information and valuation methodologies employed by Broadview in conjunction
with rendering the Broadview Opinion regarding the proposed Merger.
Public Company Comparables Analysis. Several public companies are
comparable to Gateway based on market focus, business model and financial
performance. Broadview reviewed, from a financial point of view, six public
company comparables in the telecommunications software and services segment of
the Information Technology ("IT") market providing call processing services and
equipment and payphone services, with Trailing Twelve Month ("TTM") revenue less
than $150 million, with TTM revenue growth between 10%-50%, and EBITDA (earnings
before interest, taxes, depreciation and amortization) margins between 5%-30%.
The public company comparables were selected from the Broadview Barometer, a
proprietary database of publicly-traded IT companies maintained by Broadview and
broken down by industry segment.
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<PAGE> 24
The following ratios indicate the value public markets place on companies
in a particular market segment:
- Total Market Capitalization/Revenue ("TMC/R")
- Total Market Capitalization/EBITDA ("TMC/EBITDA")
- Price/Earnings ("P/E")
- Price/Forward Growth Adjusted EPS ("Forward PEG")
Broadview employed a Total Market Capitalization ("TMC") valuation in this
analysis because it enables two critical balance sheet items, cash and debt, to
be factored directly into the valuation. The formula for the TMC is as follows:
((market value of equity) + (short term debt + long term debt) - (cash and
equivalents)).
To determine value using this approach, the first step is to calculate the
appropriate TMC/R or TMC/ EBITDA ratio. Next, the revenue or EBITDA of the
company is multiplied by the appropriate TMC/R or TMC/EBITDA ratio determined in
step 1. This provides a total "entity" value which represents the company's
value based on its operating performance, i.e., excluding the effects of
capitalization. The final step is to subtract all short term and long term debt
from the total entity value and then add back cash and equivalents. The result
is one measure of the fair market value of a company's equity.
Broadview reviewed each company's:
- TTM Revenue
- TTM Revenue Growth
- TTM EBITDA Margin
- TTM earnings before interest and taxes ("EBIT") Margin
- TTM Net Margin
- Equity Market Capitalization
- TTM TMC/R ratio
- TTM TMC/EBITDA ratio
- TTM P/E ratio
- TMC/Projected Calendar Year ("CY") 1999 Revenue ratio ("Forward 1999
TMC/R")
- Price/Projected CY1999 Earnings ratio ("Forward 1999 P/E")
- Forward CY1999 PEG ratio
In order of descending TTM TMC/R, the public company comparables consist of
the following:
(1) Transaction Network Services, Inc.
(2) T-NETIX, Inc.
(3) ChoiceTel, Inc.
(4) Boston Communications Group, Inc.
(5) Periphonics Corporation
(6) Brite Voice Systems, Inc.
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<PAGE> 25
The low, high and median financial ratios for the comparable public
companies are listed in the table below:
<TABLE>
<CAPTION>
MULTIPLE LOW HIGH MEDIAN
- -------- ----- ----- ------
<S> <C> <C> <C>
Trailing Twelve Month Total Market Capitalization/Revenue... 0.78 3.40 1.54
Trailing Twelve Month Total Market Capitalization/EBITDA.... 7.12 14.98 10.32
Trailing Twelve Month Price/Earnings........................ 28.11 36.17 31.04
Forward Calendar Year 1999 Total Market
Capitalization/Revenue.................................... 0.57 1.68 1.10
Forward Calendar Year 1999 Price/Earnings................... 9.58 33.04 19.36
Forward PEG................................................. 0.49 1.23 0.95
</TABLE>
The Gateway equity values implied by each financial ratio's low, high and
median are listed in the table below (in thousands):
<TABLE>
<CAPTION>
MULTIPLE LOW HIGH MEDIAN
- -------- ------- ------- -------
<S> <C> <C> <C>
Trailing Twelve Month Total Market
Capitalization/Revenue................................ $ 6,230 $70,674 $26,538
Trailing Twelve Month Total Market
Capitalization/EBITDA................................. $ 8,226 $28,898 $16,645
Trailing Twelve Month Price/Earnings.................... $11,847 $15,247 $13,084
Forward Calendar Year 1999 Total Market Capitalization/
Revenue............................................... $ 6,099 $38,116 $21,278
Forward Calendar Year 1999 Price/Earnings............... $ 6,272 $21,621 $12,673
Forward PEG............................................. $ 7,937 $19,703 $15,269
</TABLE>
Evaluation of T-NETIX Equity. Broadview compared selected valuation
multiples for public companies deemed comparable to T-NETIX based upon business
model, market focus and product offering, with the multiples implied by
T-NETIX's February 9, 1999 share price of $5.88. Broadview reviewed, from a
financial point of view, five public companies in the telecommunications
software and services industry with TTM revenue less than $150 million, with TTM
revenue growth between 10%-50%, and EBITDA margins between 5%-30%. In descending
order of TTM TMC/R, the public company comparables consist of the following:
(1) Transaction Network Services, Inc.
(2) Boston Communications Group, Inc.
(3) ChoiceTel, Inc.
(4) Periphonics Corporation
(5) Brite Voice Systems, Inc.
Transaction Comparables Analysis. Valuation statistics from transaction
comparables indicate the Adjusted Price/Revenue ("P/R") multiple acquirers have
paid for comparable companies in a particular market segment. Broadview reviewed
eight comparable public and private company merger and acquisition ("M&A")
transactions from January 1, 1996 through the present involving sellers sharing
many characteristics with Gateway including products offered, business model and
market focus. Transactions were selected from Broadview's proprietary database
of published and confidential M&A transactions in the IT industry. These
transactions represent eight sellers in the telecom software and services
segments of the IT market providing call processing services and equipment and
payphone services, with TTM revenue between $5 million and $250 million. In
order of descending P/R multiple, the eight public and private company
transactions used are the acquisitions of:
(1) SDX Business Systems plc by Lucent Technologies Inc.
(2) Phonetel Technologies Inc. by Davel Communications Group Inc.
(3) Peoples Telephone Co. by Davel Communications Group Inc.
(4) USLD Communications Corp. by LCI International
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<PAGE> 26
(5) Plessey Corp. Ltd. By Dimension Data Holdings Ltd.
(6) Correctional Communications Corp. by Talton Holdings Inc.
(7) Communications Central Inc. by Davel Communications Group Inc.
(8) Peoples Telephone Co. (Inmate Division) by Talton Holdings Inc.
The low, high and median Price/Revenue ratios of the eight comparable
public and private company transactions are listed in the table below:
<TABLE>
<CAPTION>
ANALYSIS LOW HIGH MEDIAN
- -------- ---- ---- ------
<S> <C> <C> <C>
Public and Private Seller Comparable Price/Revenue
Multiple.................................................. 0.73 2.33 1.33
</TABLE>
The Gateway equity values implied by the low, high and median Price/Revenue
ratios of the eight public and private seller transactions are listed in the
table below:
<TABLE>
<CAPTION>
ANALYSIS LOW HIGH MEDIAN
- -------- ------- ------- -------
<S> <C> <C> <C>
Public and Private Seller Comparable Price/Revenue...... $11,391 $59,189 $29,202
</TABLE>
Relative Contribution Analysis. A relative contribution analysis measures
each of the merging companies' contributions to various income statement and
balance sheet metrics such as Revenue, EBITDA, EBIT, Net Income and Assets on a
percentage basis. Broadview examined the relative contributions during CY1998
and CY1999 based upon projections for T-NETIX and Gateway prepared by
managements of the two companies, for each of the following: (i) Revenue; (ii)
EBITDA; (iii) EBIT; (iv) Net Income; (v) Total Assets; (vi) Property Plant &
Equipment, Net ("PP&E"); (vii) Net Assets; and (viii) Shareholders' Equity.
<TABLE>
<CAPTION>
CY1998 CY1999
----------------- -----------------
ANALYSIS GATEWAY T-NETIX GATEWAY T-NETIX
- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue........................................ 44.5% 55.5% 47.4% 52.6%
EBITDA......................................... 30.7% 69.3% 29.7% 70.3%
EBIT........................................... 100.0% 0.0% 41.8% 58.2%
Net Income..................................... 100.0% 0.0% 33.4% 66.6%
</TABLE>
Gateway's relative contribution to Total Assets for the latest available
balance sheet is 26.9%. Gateway's relative contribution to PP&E is 19.4%.
Gateway's relative contribution to Net Assets is 22.0%. Gateway's relative
contribution to Shareholders' Equity is 13.2%.
Relative Ownership Analysis. A relative ownership analysis measures each of
the merging companies' relative equity ownership of the pro forma combined
company and relative entity value. The relative equity ownership is equal to the
actual number of shares owned divided by the total number of shares outstanding.
The relative entity value of each company is equal to the value of its equity in
the combined company plus its net debt (short term debt + long term debt-cash)
prior to the merger relative to the total market capitalization (TMC) of the
combined company. At the merger consideration defined in the Agreement of 5.0375
shares of T-NETIX per share of Gateway, the implied relative equity ownership
and relative entity value are detailed below:
<TABLE>
<CAPTION>
ANALYSIS GATEWAY T-NETIX
- -------- ------- -------
<S> <C> <C>
Relative Equity Ownership................................... 32.2% 67.8%
Relative Entity Value....................................... 34.4% 65.6%
</TABLE>
Stock Performance Analysis. Broadview examined the following: (i) T-NETIX's
actual share price and trading volume from February 10, 1998 to February 9,
1999; and (ii) an index of the aggregate set of public company comparables vs.
T-NETIX and the S&P 500 index from February 6, 1998 to February 9, 1999.
T-NETIX's maximum share price during this period was $13.125 and its minimum
share price was $4.50 with an average of $8.10. The maximum weekly trading
volume during this period was 189,200 shares, with the
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<PAGE> 27
minimum volume at 0 shares and an average trading volume of 17,490 shares. From
February 6, 1998 to February 9, 1999, T-NETIX's share price decreased 43.4%. By
comparison, the index of the aggregate set of public company comparables
increased by 0.2% during the same period, and the S&P 500 Index increased 20.1%
during the same period. From these results, Broadview drew the conclusion that
the price of T-NETIX Stock under-performed these indices during the applicable
period.
Pro Forma Combination Analyses. A pro forma merger analysis calculates the
EPS accretion or dilution of the pro forma combined entity taking into
consideration various financial effects which will result from a consummation of
the merger. This analysis relies upon certain financial and operating
assumptions provided by management and publicly available data about Gateway and
T-NETIX. Broadview examined a pooling-of-interests scenario using synergy
assumptions provided by the management of T-NETIX. Based on this scenario, the
pro forma pooling model indicates EPS accretion to T-NETIX of 2.5c, or 14.9%,
excluding acquisition expenses, for the fiscal year ending December 31, 1999 and
EPS accretion to T-NETIX of 9.4c, or 22.5%, for the fiscal year ending December
31, 2000.
Present Value of Projected Share Price Analysis. Broadview calculated the
present value of the potential future share price of T-NETIX Common Stock on a
standalone and pro forma for a transaction basis using management projections
for the twelve months ending December 31, 1999 and the twelve months ending
December 31, 2000. The potential future share price is calculated based on
earnings estimates for the twelve months ending December 31, 1999 and the twelve
months ending December 31, 2000 and assumes a median TTM P/E multiple of 31.04,
the median TTM P/E multiple for Gateway's public company comparable set. The
future share price is discounted to today at discount rates ranging from 15.0%
to 25.0% and including the discount rate calculated using an equity cost of
capital of 17.44%, which was estimated using the Capital Asset Pricing Model and
the median capital-structure adjusted beta of the comparable public companies.
The capital-structure adjusted beta of a public company is the value of its beta
after an adjustment to eliminate the effect of differences in capital-structure.
Based on this analysis and the discount rate calculated using the equity
cost of capital, the per share valuation range implied by the present value of
the future share prices using management expectations for the twelve months
ending December 31, 1999 are as follows:
<TABLE>
<CAPTION>
BASIS LOW HIGH MEDIAN
- ----- ----- ----- ------
<S> <C> <C> <C>
Stand-Alone................................................. $2.92 $5.84 $4.53
pro forma Combined.......................................... $3.36 $6.71 $5.21
</TABLE>
Based on this analysis and the discount rate calculated using the equity
cost of capital, the per share valuation range implied by the present value of
the future share prices using management expectations for the twelve months
ending December 31, 2000 are as follows:
<TABLE>
<CAPTION>
BASIS LOW HIGH MEDIAN
- ----- ----- ------ ------
<S> <C> <C> <C>
Stand-Alone................................................. $6.05 $12.09 $ 9.38
pro forma Combined.......................................... $7.41 $14.81 $11.49
</TABLE>
Discounted Cash Flows Valuation Methodology. Broadview valued Gateway based
upon two different sets of free cash flow estimates over a period from the date
of valuation through December 31, 2003. In the first scenario, no operating
synergies are assumed and Gateway's terminal value was calculated based on
terminal growth rates of 5.0%, 6.0% and 7.0%. A discount rate of 16.18%,
calculated using Gateway's equity cost of capital, capital structure, debt cost
of capital and effective tax rate, was applied after careful weighting of all
factors both positively and negatively affecting the riskiness of Gateway's cash
flows. Using the 16.18% discount rate and the assumed terminal growth rates,
total equity values for Gateway are $5,709, $7,262 and $9,154, respectively.
In the second scenario, Broadview assumed operating synergies based on
input from T-NETIX management and Gateway's terminal value was calculated based
on terminal growth rates of 5.0%, 6.0% and 7.0%. A discount rate of 16.18%,
calculated using Gateway's equity cost of capital, capital structure, debt cost
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<PAGE> 28
of capital and effective tax rate, was applied after careful weighting of all
factors both positively and negatively affecting the riskiness of Gateway's cash
flows. Using the 16.18% discount rate and the assumed terminal growth rates,
total equity values for Gateway are $30,501, $33,605 and $37,384, respectively.
Summary of Valuation Analyses. Taken together, the information and analyses
employed by Broadview lead to Broadview's overall opinion that the Merger
Consideration in the Merger is fair, from a financial point of view, to
T-NETIX's shareholders.
Recommendation of the Board of Directors
At a special meeting of the T-NETIX Board held on February 8, 1999, the
Board determined the Merger to be fair to and in the best interests of T-NETIX
and its shareholders. Accordingly, the T-NETIX Board has unanimously approved
and adopted the Merger Agreement, approved the Merger, including the issuance of
T-NETIX Stock in the Merger and the amendments to the Plans, and unanimously
recommends that T-NETIX shareholders vote FOR the proposal to issue up to
4,231,315 shares of T-NETIX Stock to Gateway Shareholders in the Merger, and to
amend the Plans to increase the number of shares available to be optioned under
the Plans from 2,000,000 to 2,600,000.
TERMS OF THE MERGER AGREEMENT
It is presently anticipated that the Merger will be consummated on or about
June 14, 1999, assuming all the conditions set forth in the Merger Agreement
have been satisfied or waived; however, it is possible that the Merger will be
consummated later.
Operation of the Merger
When all conditions to consummation of the Merger have been satisfied, or
have been waived by the party that has the right to require that the conditions
be satisfied, TAC will merge with and into Gateway. TAC will then no longer
exist as a separate entity, and Gateway will survive the Merger and continue to
exist as a separate entity (the "Surviving Corporation"). Gateway will be a
wholly owned subsidiary of T-NETIX. All of this will occur by operation of law
when Articles of Merger are filed with the Colorado and Texas Secretaries of
State (the "Effective Time").
Consideration for Shares of Gateway Stock
At the Effective Time, each share of Gateway Stock, other than shares held
by Gateway Shareholders who dissent from the Merger and do not forfeit their
appraisal rights ("Dissenting Shareholders"), will be converted into the right
to receive 5.0375 shares of T-NETIX Stock (the "Merger Consideration"). In
addition, each certificate which prior to the Effective Time represented Gateway
Stock (each, a "Certificate") will represent the right to receive the Merger
Consideration multiplied by the number of shares of Gateway Stock formerly
represented by such Certificate. Fractional shares will not be issued, and in
lieu thereof T-NETIX will pay cash in an amount equal to the average closing
price of T-NETIX Stock for the five trading days immediately prior to the
Closing Date, times the applicable fraction of a share.
Also at the Effective time, all outstanding options to purchase Gateway
Stock (the "Gateway Options") will be exchanged for options to purchase T-NETIX
Stock (the "T-NETIX Options"). The T-NETIX Options will be issued pursuant to
T-NETIX's Non-Qualified Stock Option Plan, which is already in existence. For
each one (1) share of Gateway Stock underlying a Gateway Option, there will be
5.0375 shares of T-NETIX Stock underlying the T-NETIX Option exchanged therefor.
In addition, the exercise price for each T-NETIX Option will be equal to the
exercise price for the Gateway Option exchanged therefor divided by 5.0375. Each
T-NETIX Option will have the same vesting schedule and the same terms as the
Gateway Option exchanged therefor. Any T-NETIX Option that is exchanged for a
Gateway Option that is fully vested immediately prior to the Effective Time will
be fully vested from and after the Effective Time.
A group of 15 Gateway Shareholders owning approximately 85% of the
outstanding Gateway Stock (the "Royalty Owners") currently has an assignment and
royalty agreement (as amended, the "Royalty Agree-
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<PAGE> 29
ment") with Gateway relating to automated call processing technology and
intellectual property rights conveyed by the Royalty Owners to Gateway. In
exchange for their terminating their interests in the Royalty Agreement, T-NETIX
will issue to the Royalty Owners (pro rata in accordance with their respective
royalty interests) a total of 375,339 shares of T-NETIX Stock. Use of the
pooling of interests accounting method is conditioned on termination of the
Royalty Owners' interests in the Royalty Agreement.
The amount of the Merger Consideration is subject to adjustment. If on the
Closing Date Gateway's indebtedness (as defined in the Merger Agreement) exceeds
$10,500,000 (plus certain adjustments), the Merger Consideration will be reduced
by that number of shares of T-NETIX Stock equal to the excess of Gateway's
indebtedness over the maximum indebtedness allowed under the Merger Agreement,
divided by $6.00 (the average closing price of T-NETIX Stock for the five
trading days immediately prior to February 10, 1999) divided by the number of
shares of Gateway Stock outstanding immediately before the Effective Time (other
than shares held by Dissenting Shareholders). The number of shares of T-NETIX
Stock underlying T-NETIX Options to be exchanged for Gateway Options as
described above will be equally reduced, and the exercise price equally
increased. As of May 7, 1999 Gateway's indebtedness did not exceed $10,500,000.
As of February 10, 1999, there were 729,004 shares of Gateway Stock
outstanding and 8,558,067 shares of T-NETIX Stock outstanding. As of February
10, 1999, options to purchase 69,040 shares of Gateway Stock were outstanding,
and options to purchase 1,906,300 shares of T-NETIX Stock were outstanding.
Issuance of Shares to Gateway Shareholders
The Closing is scheduled to be held at the offices of T-NETIX in Englewood,
Colorado, at 10:00 a.m. (local time) on June 14, 1999, the "Closing Date." At
the Closing, from the aggregate of the Merger Consideration, T-NETIX will deduct
and hold back shares of T-NETIX Stock which represent 5% of the aggregate Merger
Consideration (such shares are called the "Gateway Holdback Shares"). T-NETIX
will also reserve and set aside additional shares of T-NETIX Stock equal in
number to the Gateway Holdback Shares (such shares are called the "T-NETIX
Reserve Shares"). The T-NETIX Reserve Shares will not be deducted from the
aggregate Merger Consideration.
Indemnification Claims
Under the Merger Agreement, T-NETIX will indemnify and hold harmless the
Gateway Shareholders and their respective affiliates, officers, directors,
partners, stockholders, agents, representatives, consultants and employees, and
all of their respective heirs, successors and permitted assigns (collectively,
the "Shareholder Indemnified Parties"), from and against certain expenses and
losses which result from or arise out of or as to which there was any breach or
inaccuracy of any representation, warranty, statement, certification, agreement,
obligation or covenant made by T-NETIX in the Merger Agreement or certain
related documents.
Likewise, the Gateway Shareholders will severally, proportionately in
accordance with their interests, indemnify and hold harmless T-NETIX and its
affiliates and their respective officers, directors, shareholders, agents,
representatives, consultants, employees and affiliates, and all of their
respective heirs, successors and permitted assigns (collectively, the "T-NETIX
Indemnified Parties"), from and against certain expenses and losses which result
from or arise out of or as to which there was any breach or inaccuracy of any
representation, warranty, statement, certification, agreement, obligation or
covenant made by Gateway in the Merger Agreement or in certain related
documents.
Except in the event of a knowing and willful misrepresentation, the total
amount of indemnification payments that T-NETIX may be required to make to the
Shareholder Indemnified Parties is limited in the aggregate to the T-NETIX
Reserve Shares.
Likewise, except in the event of a knowing and willful misrepresentation,
the total amount of indemnification payments that the Gateway Shareholders may
be required to make to the T-NETIX Indemnified Parties is limited in the
aggregate to the Gateway Holdback Shares.
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No indemnification payment will be required to be made unless a claim for
indemnification is made on or prior to the earlier of (1) the first anniversary
of the Closing Date or (2) the date of publication of the first annual combined
audited financial statements of Gateway and T-NETIX.
Except for willful, knowing or intentional misrepresentations in the Merger
Agreement, no indemnification payment will be required to be made by either
T-NETIX or the Gateway Shareholders unless and until the aggregate amount
claimed exceeds $500,000. For the purpose of any indemnification claim, the
Gateway Holdback Shares or the T-NETIX Reserve Shares, as the case may be, shall
be valued at the average closing price of T-NETIX Stock for the five trading
days immediately preceding satisfaction of the claim.
On the earlier of the first anniversary of the Closing Date, the date of
publication of combined annual audited financial statements of Gateway and
T-NETIX, or a date mutually agreed on by the representative of the Gateway
Shareholders and T-NETIX, and subject to the certain terms of the Merger
Agreement, (i) any remaining Gateway Holdback Shares having a value in excess of
the amount of any indemnification claims of T-NETIX will be issued to Gateway
Shareholders, and (ii) any remaining T-NETIX Reserve Shares having a value in
excess of the amount of any indemnification claims of the Gateway Shareholders
will not be issued to the Gateway Shareholders, but instead will remain
authorized but unissued T-NETIX Stock, and will no longer be reserved and set
aside pursuant to the Merger Agreement.
Covenants in the Merger Agreement
The Merger Agreement contains covenants of T-NETIX and Gateway designed to
ensure that the parties proceed toward and do not hinder consummation of the
Merger. These covenants include the following:
(a) Each company will provide the other with access to its records and
other internal information;
(b) Each company will not disclose certain confidential information of
the other company;
(c) Each company will use commercially reasonable efforts to do all
things necessary or desirable to consummate the Merger;
(d) Each company will provide additional disclosure to the other if a
change in circumstances causes any of such company's representations and
warranties in the Merger Agreement to become untrue, misleading or
inaccurate;
(e) T-NETIX will use commercially reasonable efforts to draft this
Proxy Statement and have it filed with the Securities and Exchange
Commission (the "SEC"), and Gateway will cooperate with T-NETIX in doing so
and will promptly provide true and accurate information to T-NETIX for
inclusion herein;
(f) Gateway will cause, or will use its best efforts to cause, certain
directors, officers and other insiders to execute certain letters by which
such persons agree to the restrictions on selling T-NETIX Stock applicable
to such persons pursuant to SEC Rule 145 under the Securities Act of 1933,
as amended (the "Securities Act"), and pursuant to the pooling of interest
accounting rules. Also, T-NETIX will cause, or use its best efforts to
cause, certain directors, officers and other insiders to execute certain
letters by which such persons agree to the restrictions on selling T-NETIX
Stock applicable to such persons under the pooling of interests accounting
rules;
(g) Each company will not make any public announcement of the Merger
without the written consent of the other, unless such announcement is
required by law and the announcing company provides notice to the other
company a reasonable time prior to making the announcement of the nature
and content of the announcement, and consults with the other company
regarding such nature and content;
(h) Each company will take steps to ensure that the pooling of
interests method of accounting for the Merger will be applicable to the
Merger. See "-- Accounting Treatment";
(i) Each company will use commercially reasonable efforts to make all
filings required to be made so that the Merger can occur, and to obtain all
consents that are required for the Merger to occur;
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<PAGE> 31
(j) Each company will cooperate with the other in filing a notice with
the Federal Trade Commission (the "FTC") under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act"), and seek early
termination of any waiting periods thereunder. See "-- HSR Act and Other
Antitrust Matters;"
(k) Each company, its officers and directors, the Gateway shareholders
who signed the Merger Agreement and the shareholders of T-NETIX who signed
the Merger Agreement will not, and each company will direct and use its
best efforts to cause its employees, agents and representatives to not,
except to the extent that the Board of Directors concludes in good faith
that it is legally required for the discharge by the Board of Directors of
its fiduciary duties: (i) sell or arrange for the sale of any of such
company's capital stock; or (ii) negotiate, solicit or encourage or
authorize any person to solicit from any third party any proposals relating
to a change of control of such company, which means the merger or
consolidation of the company, disposition of the business or all or
substantially all the assets of the company or the sale of a total of 50%
or more of the capital stock of the company; or (iii) make any information
concerning such company available to any person for the purpose of
affecting or causing a change of control of such company. These provisions
do not apply to any merger in which the company is the surviving
corporation and the current shareholders of such company are the holders of
at least two-thirds of the voting power and economic benefits of the
company immediately following the merger;
(l) In the event either company receives any solicitation, proposal or
offer from any person relating to a change of control of such company, the
company will promptly give written notice to the other company of such
event; and
(m) T-NETIX will publish financial results covering at least 30 days
of combined operations of T-NETIX and Gateway as soon as practicable after
consummation of the Merger.
The Merger Agreement also contains provisions regarding how each company
will conduct its business from the time the Merger Agreement was signed until
the Closing Date. These provisions include the following:
(1) Gateway will not allow its indebtedness, as defined in the Merger
Agreement, to exceed $10,500,000 plus certain adjustments as of the Closing
Date;
(2) Each company will not amend its Articles of Incorporation or
Bylaws; make any change in its practices, operations or policies with
respect to the selling goods or services, collecting accounts receivable
and/or paying accounts payable; conduct its business in a manner that
departs from the manner in which such business was being conducted prior to
signing of the Merger Agreement; increase the rate or change the form of
compensation payable to any director or officer or increase any employee
benefits, except for normal increases consistent with past practices;
purchase or dispose of any properties or other assets, except in the
ordinary course of business; declare, set aside, pay or make any dividend
or other distribution in respect of any of such company's outstanding
shares of capital stock; issue or sell any shares of such company's capital
stock (whether or not from the treasury) or any other securities; grant any
options, convertibility rights, rights to subscribe for shares of capital
stock or securities convertible into or exchangeable for shares of capital
stock, warrants, calls or other agreements relating to such company's
capital stock; split up, combine, reclassify, redeem, repurchase or
otherwise reacquire any of such company's capital stock, or otherwise
change its capitalization; except as required by regulation or generally
accepted accounting principles ("GAAP"), maintain its books of account
other than in the usual, regular and ordinary manner on a basis consistent
with prior periods, make any change in any of its books, accounting methods
or practices, or reclassify any assets or liabilities; cancel, terminate,
renew or amend any material contract or enter into any contract, agreement,
lease, license or commitment, in each case outside the ordinary course of
business; invest in certificates of deposit in any one bank if such
investments in the aggregate exceed $100,000 at any time; incur any direct
or contingent liability for borrowed money or guarantee the monetary
obligations of any other person or entity, or make any monetary investment
in, advance to or loan to any person or entity other than in the ordinary
course of business; fail to make maintenance expenditures and maintain
inventories in the amounts and at the
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<PAGE> 32
times required to operate its business in the ordinary course consistent
with past practice; implement or adopt any change in its tax methods,
principles or elections; fail to pay accounts payable or collect accounts
receivable in accordance with past practices; fail to use best efforts to
ensure the retention of such company's key employees; enter into any
transaction outside the ordinary course of business; or agree or commit to
do any of the foregoing.
Conditions of the Merger Agreement
Consummation of the Merger is subject to satisfaction or waiver of various
conditions, including compliance with respective covenants, confirmation of
certain representations and warranties, and the absence of any litigation or
regulatory proceeding presenting significant risk that the Merger will not be
consummated. Following are descriptions of other conditions to each company's
obligations to consummate the Merger:
(a) There having been no material adverse effect on Gateway since
November 30, 1998, and there having been no material adverse effect on
T-NETIX since October 31, 1998;
(b) All required approvals of shareholders and all other required
consents, approvals and other documents having been obtained and delivered
to the other company;
(c) Each company having received a legal opinion from counsel to the
other company;
(d) T-NETIX and certain employees of Gateway having executed
employment and non-competition agreements. See "-- Employment Agreements;"
(e) T-NETIX and certain Gateway Shareholders having executed
non-competition agreements;
(f) Each company having received an opinion from Rothgerber Johnson &
Lyons LLP, counsel to T-NETIX, as to the tax consequences of the Merger;
(g) Each company having delivered to the other a Good Standing
Certificate along with a Tax Certificate, if appropriate, for such company
dated as of the Closing Date;
(h) T-NETIX having received from its independent accountants an
opinion that the Merger will qualify for treatment as a pooling of
interests under GAAP. See "-- Accounting Treatment;"
(i) Any waiting period applicable to the Merger under the HSR Act
having expired or earlier termination thereof having been granted and no
action having been instituted by either the United States Department of
Justice (the "DOJ") or the FTC to prevent the consummation of the Merger or
to modify or amend the same in any material manner. See "-- HSR Act and
Other Antitrust Matters;" and
(j) Each company not learning of any matter which would represent a
material adverse effect on the other.
Following are descriptions of additional conditions to T-NETIX's obligation
to consummate the Merger:
(1) Gateway having delivered a certificate, signed by the secretary of
Gateway, certifying current copies, as amended, of the Articles of
Incorporation and Bylaws of Gateway and the resolutions of the Board of
Directors and shareholders of Gateway authorizing the Merger Agreement and
the Merger;
(2) Each Gateway Shareholder having executed a letter by which they
agree to the restrictions on selling T-NETIX Stock applicable to such
persons pursuant to SEC Rule 144 under the Securities Act;
(3) The Royalty Agreement having been duly and validly terminated
effective as of a date prior to the Effective Time for an amount equal to
no more than 375,339 shares of T-NETIX Stock;
(4) T-NETIX having received from Gateway audited financial statements,
including balance sheet and related statements of operations, stockholders'
equity and cash flows, including notes thereto, as of and for the year
ended December 31, 1998, accompanied by the independent auditors' report of
KPMG LLP, independent certified public accountants, and such financial
statements do not reflect a material adverse effect on Gateway since
November 30, 1998; and
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(5) Holders of less than 7% of the shares of Gateway Stock outstanding
exercising their dissenters' rights under Texas law.
Termination of the Merger Agreement
The Merger Agreement may be terminated prior to the Closing in any of the
following ways:
(a) By the mutual agreement of Gateway and T-NETIX;
(b) By either company at any time after May 31, 1999, if any condition
to that company's obligation to consummate the Merger shall not have been
satisfied or waived and that company is not in material breach of the
Merger Agreement;
(c) By either company if any updated disclosures from the other party
cause any representation or warranty of such other party in the Merger
Agreement to be inaccurate in any material respect;
(d) By either company pursuant to its Board of Directors' fulfillment
of its fiduciary duty to such company's shareholders by entering into a
transaction in conflict with the Merger Agreement.
The following will take place upon termination of the Merger Agreement:
(1) Each company will promptly destroy or cause to be returned to the
other all confidential information of the other party;
(2) Each company will pay its own costs and expenses and neither
company will have any obligation or liability to the other company, except
that certain provisions in the Merger Agreement regarding confidential
information and public announcements will remain binding.
Gateway and T-NETIX have agreed not to terminate the Merger Agreement under
paragraph (b) above prior to July 1, 1999.
In the event that (1) Gateway effectuates a change of control in conflict
with the Merger Agreement; (2) T-NETIX terminates the Merger Agreement as a
result of an intentional breach by Gateway of a representation, warranty or
covenant of the Merger Agreement and within one year following such termination
Gateway effectuates a change of control; or (3) Gateway does not take the steps
required to consummate the Merger when all conditions to Gateway's obligation to
carry out the Merger have been satisfied or waived, and within one year after
the earliest date on which all such conditions were satisfied or waived Gateway
effectuates a change of control, then, in addition to any damages which may be
available to T-NETIX, Gateway must pay to T-NETIX $5,000,000.
In the event that (1) T-NETIX effectuates a change of control in conflict
with the Merger Agreement; (2) Gateway terminates the Merger Agreement as a
result of an intentional breach by T-NETIX of a representation, warranty or
covenant of the Merger Agreement and within one year following such termination
T-NETIX effectuates a change of control; or (3) T-NETIX does not take the steps
required to consummate the Merger when all conditions to T-NETIX's obligation to
carry out the Merger have been satisfied or waived, and within one year after
the earliest date on which all such conditions were satisfied or waived T-NETIX
effectuates a change of control, then, in addition to any damages which may be
available to Gateway, T-NETIX must pay to Gateway $5,000,000.
Post-Closing Covenants
Certain provisions of the Merger Agreement require that actions be taken
after the Closing. First, T-NETIX agrees to provide funding to Gateway after the
Closing for Gateway to pay its indebtedness when due.
Second, T-NETIX agrees that for purposes of vesting of employee benefits,
in calculating the term of service for employees of Gateway, T-NETIX will
include such person's term of service with Gateway as shown on Gateway's records
for such employee at the Effective Time. And third, T-NETIX agrees that Richard
E. Cree and W. P. Buckthal will be elected to the Board of Directors of T-NETIX
effective on the Closing Date. The term of Richard E. Cree's directorship will
expire at the 2001 annual meeting of the
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T-NETIX shareholders, and the term of W.P. Buckthal's directorship will expire
at the 2000 annual meeting of the T-NETIX shareholders. In the event a vacancy
occurs in the Board of Directors of T-NETIX, the vacancy will be filled by an
individual mutually agreed upon by Messrs. Cree, Buckthal, Carney and Schopp.
Operation of Gateway and T-NETIX after the Merger
Upon the consummation of the Merger, the separate corporate existence of
TAC will cease and Gateway will be a wholly owned subsidiary of T-NETIX.
As the Surviving Corporation, Gateway will operate under its current
Articles of Incorporation and Bylaws until altered, amended, or repealed
pursuant to their terms or applicable law. The current officers of Gateway will
be the officers of Gateway as the Surviving Corporation. The current directors
of TAC will become the directors of Gateway as the Surviving Corporation. No
changes in the Articles of Incorporation, Bylaws, officers or directors of
T-NETIX will result from the Merger, except that Mr. Cree will be appointed as
Executive Vice President of T-NETIX.
Employment Agreements
In connection with the Merger, T-NETIX will enter into an employment
agreement with Mr. Cree. The term of the agreement is three years, and it
provides for a base annual salary of $190,000. In addition, over a two-year
period Mr. Cree will receive options to purchase a total of 60,000 shares of
T-NETIX Stock, and will receive vacation time and other benefits commensurate
with this position. Mr. Cree will not receive compensation for his participation
on the Board of Directors of any subsidiary of T-NETIX. Under the employment
agreement, T-NETIX may terminate Mr. Cree's employment at any time, with or
without "cause" (as defined in the employment agreement). If, during the term of
the employment agreement, Mr. Cree is terminated without cause, or is terminated
because of a change of control of T-NETIX, he will receive certain severance
benefits. As part of the employment agreement, Mr. Cree will agree not to
disclose confidential information about T-NETIX to any third party, and not to
compete against T-NETIX, in each case for the duration of his employment with
T-NETIX plus three years.
Also in connection with the Merger, T-NETIX will enter into employment
agreements with other employees of Gateway, none of whom will be executive
officers of T-NETIX.
RIGHTS OF DISSENTING SHAREHOLDERS
Under Colorado law, T-NETIX shareholders do not have the right to dissent
from the Merger and, instead of participating in the Merger, receive the
appraised fair value of their shares. This is because T-NETIX stock is traded on
the Nasdaq National Market.
ACCOUNTING TREATMENT
It is a condition to both companies' obligations to consummate the Merger
that the Merger will be accounted for as a pooling of interests. Under this
method of accounting, holders of Gateway Stock will be deemed to have combined
their existing interests with those of the holders of T-NETIX Stock by
exchanging their Gateway Stock for T-NETIX Stock. Accordingly, the book value of
the assets, liabilities and shareholders' equity of Gateway, as reported on its
balance sheet, will be carried over to the balance sheet of T-NETIX, and no
goodwill will be recorded. The results of operations of T-NETIX will include the
results of both T-NETIX and Gateway for the entire fiscal year in which the
Merger occurs and all prior years, as well; however, expenses incurred to effect
the Merger must be treated by the combined company as current charges against
income in the period in which the Merger occurs.
The unaudited pro forma financial information contained in this Proxy
Statement has been prepared assuming the pooling of interests accounting method
is used to account for the Merger. See "Summary -- Selected Unaudited Pro Forma
Combined Financial and Other Data," and "Unaudited Pro Forma Condensed Combined
Financial Information."
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain officers and directors of T-NETIX may have interests in the Merger
that are different from, or in addition to, and may conflict with the interests
of shareholders of T-NETIX generally. After T-NETIX issues stock options to
holders of Gateway options in the merger, there will be approximately 572,600
shares of T-NETIX Stock available to be optioned because of the amendments to
T-NETIX's stock option plans. T-NETIX's directors and officers will be eligible
to receive these options, although there are no specific plans to grant options
to them at this time. See "Amendments to T-NETIX Stock Option Plans -- New Plan
Benefits."
HSR ACT AND OTHER ANTITRUST MATTERS
Under the HSR Act and the rules and regulations thereunder, certain
transactions, including the Merger, may not be consummated unless a notice has
been filed with the FTC and the DOJ, and certain waiting period requirements
have expired or been terminated.
The FTC and DOJ frequently scrutinize the legality under the antitrust laws
of transactions such as the Merger. At any time before or after the Effective
Time the FTC, the DOJ or others could take action under the antitrust laws with
respect to the Merger, including seeking to enjoin the consummation of the
Merger, to rescind the Merger or to require the divestiture of substantial
assets of T-NETIX or Gateway. While T-NETIX believes that the Merger is legal
under the antitrust laws, there can be no assurance that a challenge to the
Merger on antitrust grounds will not be made or, if such a challenge is made,
that it would not be successful.
Under the Merger Agreement, T-NETIX and Gateway have agreed to use their
reasonable best efforts to obtain any governmental clearance required for the
Merger. On February 23, 1999, the companies filed the required notice with the
FTC and the DOJ. After filing the notice, the companies would not be permitted
to complete the Merger for 30 days or until the FTC terminated our waiting
period early. The FTC has terminated our waiting period.
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RISK FACTORS
In addition to other information in this document, please carefully
consider the following risk factors in evaluating the Merger. This section may
contain forward-looking statements that involve risks and uncertainties. The
words "anticipate," "believe," "effect," "estimate," "expect," "intend," "plan"
and similar expressions identify the forward-looking statements. T-NETIX's
actual results could differ materially from these forward-looking statements.
See "Cautionary Statement Concerning Forward-Looking Statements."
T-NETIX DEPENDS ON A FEW MAJOR CUSTOMERS
T-NETIX depends a great deal on its relationships with certain customers.
For the year ended July 31, 1998, AT&T, Bell Atlantic, US WEST and SBC
Communications, Inc. accounted for approximately 31%, 21%, 15% and 15%,
respectively, of T-NETIX's total revenue. We anticipate that these customers
will represent a large portion of the combined company's total revenue in the
future. The loss of any of these four customers would have a material adverse
effect on the combined company's business, operating results and financial
condition.
In addition, T-NETIX and Gateway rely a great deal on their customers to
obtain new contracts with correctional facilities. This limits both companies'
control over the competitive bidding process. The combined company's revenue
growth and stability will depend in large part on its ability to enter into new,
and renew existing contracts with its customers. We cannot assure that the
combined company will be able to do so, or that these customers will not enter
into similar agreements with others. Termination of one or more of these
contracts could have a material adverse effect on the combined company.
CHALLENGES OF INTEGRATING T-NETIX AND GATEWAY
T-NETIX and Gateway entered into the Merger Agreement with the expectation
that the Merger will result in certain benefits, which are described in detail
above. See "The Merger -- Reasons for the Merger; Recommendation of the Board."
Achieving the benefits of the Merger will depend in part on the integration of
our technology, operations and personnel in a timely and efficient manner so as
to minimize the risk that the merger will result in the loss of customers or key
employees or the continued diversion of the attention of management. Among the
challenges involved in this integration is demonstrating to our customers that
the Merger will not result in adverse changes in client service standards or
business focus and demonstrating to our personnel that our business cultures are
compatible. There can be no assurance that T-NETIX and Gateway can be
successfully integrated or that any of the anticipated benefits will be
realized, and failure to do so could have a material adverse effect on the
combined company's business, financial condition and operating results.
COMPETITION
The telecommunications industry, particularly the inmate calling market, is
highly competitive. We believe it will remain competitive after the Merger. We
believe that the combined company's ability to compete in the inmate calling
industry depends on the quality and breadth of its turn-key service offering,
the capability of its technology, its ability to price its services at
competitive rates, and its relationships with key customers. Although the
combined company will have a large sales force, it will also rely on its
customers to market its services to correctional facilities. This will limit the
combined company's control over the marketing and bidding processes. Our
customers' decisions to offer less competitive solutions could have a material
adverse effect on the combined company.
SYSTEMS AND SERVICES MAY BECOME OBSOLETE
The telecommunications industry experiences rapid technological
advancements, frequent new service introductions and changing industry
standards. We believe that the combined company's success will depend upon its
ability to anticipate and respond to such changes. Other companies may develop
technologies, services or standards which could render the combined company's
technology and systems obsolete. In addition, as the telecommunications networks
change, especially from analog-based to digital-based systems, certain features
that the combined company will offer may become less valuable. Also, regulatory
actions
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affecting the telecommunications industry may render the combined company's
service offerings obsolete. There can be no assurance that the combined company
will have sufficient technical, managerial or financial resources to develop or
acquire new technology or to introduce new services or products that would meet
customer needs in a timely fashion.
PROTECTION OF PROPRIETARY TECHNOLOGY
The combined company's success will depend in part on its proprietary
technology, particularly in the area of three-way call prevention. The combined
company will rely on laws and contracts to establish and protect its proprietary
rights in its systems. Such protection may not prevent competitors from
developing systems with features similar to the combined company's offerings.
Although the combined company intends to defend its intellectual property rights
vigorously, there can be no assurance that any measures taken to defend its
rights will be successful.
RISK OF INFRINGING ON EXISTING PATENTS
We believe that the combined company's systems, trademarks, and other
proprietary rights do not infringe upon anyone else's valid proprietary rights.
Nevertheless, there can be no assurance that someone else will not assert
infringement claims against the combined company in the future. The cost of
defending against assertions of patent and trademark infringement could be
material, whether or not the assertions are valid.
THE RISKS ASSOCIATED WITH YEAR 2000 ISSUES
If the combined company fails to resolve Year 2000 issues on or before
December 31, 1999, it could result in system failures or miscalculations. This
would disrupt operations, such as processing transactions, sending invoices,
sending and/or receiving e-mail and voice mail, or engaging in normal business
activities. Additionally, if any third parties upon whom the combined company's
business relies fail to timely resolve their Year 2000 issues, it could disrupt
the combined company's payments, supply of parts and materials, order processing
and other daily operations. While we believe the combined company's Year 2000
Project will adequately address its internal Year 2000 issues, until the
combined company receives responses from a significant number of it suppliers
and customers, the overall risks associated with the Year 2000 issue remain
difficult to accurately describe and quantify. The Year 2000 issue might have a
material adverse effect on the combined company and its operations.
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DIVIDENDS AND PRICE RANGE OF COMMON STOCK
T-NETIX has never paid dividends on T-NETIX Stock, and Gateway has never
paid dividends on Gateway Stock.
Shares of T-NETIX Stock are traded on the Nasdaq National Market under the
symbol "TNTX." As of May 7, 1999, the Record Date, there were approximately 148
holders of record of T-NETIX Stock and 8,650,367 shares of T-NETIX Stock
outstanding.
On February 10, 1999, the last full trading day prior to the public
announcement of the signing of the Merger Agreement, the closing price on the
Nasdaq National Market of the T-NETIX Stock was $6.625 per share. On May 7,
1999, the most recent practicable date prior to the printing of this Proxy
Statement, the closing price on the Nasdaq National Market of the T-NETIX Stock
was $6.00 per share.
The following table sets forth the range of high and low closing price
information of shares of T-NETIX Stock as reported on the Nasdaq National Market
for the calendar quarters indicated. The information in the table has been
adjusted to reflect retroactively all applicable stock dividends and stock
splits.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
Current Year
First Quarter (ended 10-31-98)............................ $ 9.19 $5.00
Second (Transition) Quarter (11-1-98 to 12-31-98)......... $ 6.50 $4.50
Current Quarter (1-1-99 to 5-7-99)........................ $ 7.13 $4.75
Year Ended July 31, 1998
First quarter............................................. $11.00 $6.88
Second quarter............................................ $11.00 $8.38
Third quarter............................................. $13.88 $9.38
Fourth quarter............................................ $11.00 $8.00
Year Ended July 31, 1997
First quarter............................................. $14.75 $8.50
Second quarter............................................ $14.13 $9.25
Third quarter............................................. $12.25 $7.00
Fourth quarter............................................ $10.25 $6.75
</TABLE>
Shares of Gateway Stock are not publicly traded, and no broker maintains a
public market for Gateway Stock. The most recent trade of Gateway Stock of which
Gateway management is aware was in April 1998, when 6,500 shares were sold for
$18.98 per share. As of February 20, 1999, the record date for the special
meeting of Gateway's shareholders relating to the Merger, there were
approximately 32 holders of record of Gateway Stock and 729,004 shares of
Gateway Stock outstanding.
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DESCRIPTION OF T-NETIX
GENERAL
T-NETIX provides specialized call processing services to the
telecommunications and other service industries. T-NETIX's primary customers
include AT&T, Bell Atlantic, US WEST, SBC Communications, Inc., BellSouth, MCI
WorldCom and GTE. These customers use T-NETIX's products and services to provide
annually over 93,000,000 billable inmate collect calls in over 800 correctional
institutions. T-NETIX's products and services include comprehensive transaction
processing, call management and identification systems for the corrections
industry and special-purpose speech processing software and systems. T-NETIX's
current products are based on proprietary software, the most critical of which
is patented or patent pending, and a combination of proprietary and
"off-the-shelf" electronic hardware. These systems are designed to be flexible
delivery platforms which are easily integrated with T-NETIX's customer's
networks and information systems. T-NETIX's revenue stream is mostly recurring,
as a result of T-NETIX's generally charging for its services on a fee per
transaction processed basis over long-term contracts.
At December 31, 1998, T-NETIX's assets were $48,663,000 and total
shareholders' equity was $26,320,000. For the fiscal year ended July 31, 1998,
T-NETIX's net income was $599,000.
DIRECTORS AND EXECUTIVE OFFICERS
T-NETIX's Articles of Incorporation provide that the T-NETIX Board shall be
divided into three classes. Each class of directors consists of two or three
directors who are currently serving staggered three-year terms with one class
being elected each year. The Class I directors are James L. Mann, Mr. Carney and
Robert A. Geist, the Class II directors are Martin T. Hart and John H. Burbank
III and the Class III directors are Mr. Schopp and Daniel J. Taylor. Because
T-NETIX has changed its reporting year from a fiscal year ending July 31 to a
calendar year, T-NETIX will not hold an annual meeting in 1999. T-NETIX's next
annual meeting will be in May of 2000. See "Shareholders' Proposals." Therefore,
the Class I directors will continue in office until the 2002 annual meeting
rather than the 2001 annual meeting as originally scheduled, the Class II
directors will continue in office until the 2000 annual meeting rather than the
1999 annual meeting as originally scheduled, and the Class III directors will
continue in office until the 2001 annual meeting rather than the 2000 annual
meeting as originally scheduled.
Following is a list of the current directors and executive officers of
T-NETIX, including age (as of May 7, 1999), current positions held with T-NETIX
and terms of office.
<TABLE>
<CAPTION>
DIRECTOR TERM TO
NAME AGE POSITION SINCE EXPIRE
---- --- -------- -------- -------
<S> <C> <C> <C> <C>
Daniel M. Carney(1)................... 67 Chairman of the Board, Director 1991 2002
Alvyn A. Schopp....................... 40 President, Chief Executive Officer 1993 2001
and Director
John Giannaula........................ 37 Vice President of Finance and N/A N/A
Secretary
James L. Mann(1)(2)................... 64 Director 1995 2002
Robert A. Geist(1)(2)................. 58 Director 1994 2002
Martin T. Hart(2)..................... 62 Director 1997 2000
Daniel J. Taylor...................... 55 Director 1999 2001
John H. Burbank III................... 35 Director 1999 2000
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
33
<PAGE> 40
Mr. Carney became Chairman of the Board in December 1998 and has served as
a director of T-NETIX since 1991. Since 1977, Mr. Carney has been a private
investor. He co-founded Pizza Hut, Inc. in 1958 and served as Chairman of the
Board until 1975 and as a director through 1977 when Pizza Hut was acquired by
PepsiCo, Inc.
Mr. Schopp has served as Chief Executive Officer since December 1998. Prior
to that, he served as Chief Financial Officer and Treasurer of T-NETIX since
1993. He has also been a director of T-NETIX since 1993, and was named Executive
Vice President in August 1994. In April, 1997, he was named President of the
Inmate Calling Services Division. Prior to joining T-NETIX, he spent 13 years as
an accountant with KPMG Peat Marwick.
Mr. Giannaula has served as Vice President -- Finance of T-NETIX since June
1994 and as Secretary since July 1994. Prior to joining T-NETIX, he spent 10
years as an accountant with KPMG Peat Marwick. He is a Certified Public
Accountant in the State of Colorado.
Mr. Mann became a director of T-NETIX in September 1995. Since 1986, Mr.
Mann has been the Chairman and Chief Executive Officer of SunGard Data Systems,
Inc., a provider of proprietary application software systems and processing
services for investment support activities and a provider of computer disaster
recovery services. From 1983 to 1986 he was SunGard's President and Chief
Operating Officer. From 1981 to 1983 he was President of Bradford National
Corporation, a computer services and software concern.
Mr. Geist has served as a director of T-NETIX since August 1994. Since
1979, he has been Chairman of the Board and Chief Executive Officer of Rage
Administrative & Marketing Services, Inc., a management company for Pizza Hut
franchises. Since 1991, he has been a director of Beauty Warehouse, Inc. (a
franchiser of beauty salons and professional beauty products).
Mr. Hart has served as a director of T-NETIX since 1997. Mr. Hart is a
Denver-based businessman and investor. Mr. Hart serves as a director of P.J.
America, a food service company, Pacific National Financial Group Bank, a bank
holding company, MassMutual Corporate Investors, an investment company,
MassMutual Participation Investors, an investment company, Optical Securities
Corporation, a manufacturer of security systems, Ardent Software, Inc., a data
management company, and Shuler Homes, Inc., a real estate development company.
Mr. Taylor became a director of T-NETIX in February 1999. Since 1996, Mr.
Taylor has been a private investor. From 1983 to 1996, Mr. Taylor served as
chairman of the board of Advantage Companies, Inc., a rental-purchase store
holding company. From 1978 to 1983, Mr. Taylor was president and chairman of the
board of MFY Industries, Inc., a retail management operation. Prior to this, Mr.
Taylor was treasurer and a director of Pizza Hut, Inc. Mr. Taylor serves on the
board of directors of the Cerebral Palsy Research Foundation of Kansas, Inc. and
the Cerebral Palsy Endowment Association.
Mr. Burbank became a director of T-NETIX in February 1999. Since 1996, Mr.
Burbank has been director of research at Valuevest Management Co., a global
value hedge fund. From 1993 to 1994, Mr. Burbank was a joint venture partner at
Odwalla, Inc., a beverage producer. Prior to this, Mr. Burbank was a financial
analyst at Dole Fruit International.
The officers of T-NETIX hold office until their successors are appointed by
the Board of Directors. There are no arrangements or understandings between any
of the above-listed directors or officers, or any other persons, pursuant to
which any of the directors have been selected as directors, or officers have
been selected as officers.
As a result of the Merger, Richard E. Cree and W. P. Buckthal will become
directors of T-NETIX. Following are descriptions of their experience.
Mr. Cree is a founder of Gateway, and has served as its Chief Executive
Officer and President since its inception in 1988. Prior to founding Gateway, he
was Executive Vice President of American Republic Bancshares, a bank holding
company based in New Mexico, from 1982 to 1988. From 1971 to 1982, Mr. Cree
served as President and Chief Executive Officer of C-Five, a telecommunications
company that specialized in
34
<PAGE> 41
the manufacture and development of peripheral telecommunications equipment. Mr.
Cree was born in 1949 and holds a BBA degree in Economics from Southern
Methodist University.
Mr. Buckthal has been an independent geologist and oil and gas producer in
Amarillo, Texas for the past 35 years. Prior to that, he was a geologist for
Hamilton Brothers for three years, and for Texaco for 10 years. He is a member
of the American Association of Petroleum Geologists and has been active in that
organizations' Division of Professional Affairs, including serving as national
board secretary. He has also served on the Alumni Advisory Council of the School
of Geology and Geophysics at the University of Oklahoma. After serving two years
in the Navy during World War II, Mr. Buckthal, 72, attended the University of
Oklahoma and received a BS degree in Geology.
ADDITIONAL INFORMATION
Certain information about T-NETIX, including recent developments,
additional financial information, management's discussion and analysis of
T-NETIX's financial condition and results of operations, a more detailed
description of T-NETIX's business and other matters relating to T-NETIX, is
incorporated herein by reference to T-NETIX's Annual Report on Form 10-K/A for
the fiscal year ended July 31, 1998, and Transition Report on Form 10-QT/A for
the five months ended December 31, 1998. Copies of such documents are enclosed
with this Proxy Statement. See "Where You Can Find More Information."
35
<PAGE> 42
DESCRIPTION OF GATEWAY
BUSINESS
General
Gateway is engaged in the development, manufacturing, marketing and support
of computer-automated telephone systems. Gateway derives substantially all of
its revenues from its operation of inmate telecommunications systems located in
correctional facilities in approximately 23 states. Gateway's primary customers
include two distinct groups. The first group is the correctional facilities
("Direct Customers") with which Gateway enters into multi-year agreements to
serve as the exclusive provider of telecommunication services to inmates within
each facility. Gateway currently accommodates collect calls from these
facilities. The second group includes both Regional Bell Operating Companies
("RBOC Customers") and inter-exchange carriers ("IXC Customers"). These include
Ameritech, Bell Atlantic, US West, SBC Communications, Inc., AT&T and MCI
WorldCom. Gateway provides specialized call processing and fraud control
services to these customers on a transaction fee basis. These two customer
groups combined use Gateway's products and services to process over 40,000,000
billable inmate collect calls annually in over 500 correctional institutions.
Gateway's products and services include comprehensive transaction processing,
call management, call recording and identification systems for the corrections
industry. Gateway's current products are based on proprietary software, the most
critical of which are patented or patent pending, and a combination of
proprietary and "off-the-shelf" electronic hardware. These systems are designed
to be flexible delivery platforms which are easily integrated with Gateway's
customer's networks and information systems. Gateway's revenue stream is mostly
recurring, as a result of the continuous collect calls generated by the Direct
Customers and the fee per transaction charged to the RBOC/IXC Customers over
long term contracts.
Corrections
Calls from inmates of federal, state and local correctional facilities
comprise a significant segment of the public communications market. Inmates
typically may only place calls for a limited duration, which generates a high
volume of calls per phone, and generally may only place collect calls, which
tend to generate higher revenue per call than other types of calling.
Consequently, the inmate calling market is an attractive segment to call
providers.
According to the U.S. Bureau of Justice Statistics as of December 1997,
approximately 5.7 million adults were under some form of correctional
supervision, including approximately 3.9 million adults were under parole or
probation sanction. The U. S. Bureau of Justice Statistics also indicated there
were approximately 1.8 million men and women in the country's approximately
4,700 federal, state, and local correctional facilities. From 1990 to 1997, the
number of prisoners in state and federal institutions increased at an average
annual rate of 6.5%. These inmate populations are the market to which Gateway
delivers a majority of its products and services.
The inmate calling market presents unique and substantial challenges to the
call provider. Correctional facilities generally favor call providers that can
manage the inmate phone systems themselves, maintain consistent service and
easily process new inmates into the systems. Corrections officials generally
require control features that limit the length of calls, limit the time of day
calls are made and restrict the ability of inmates to make harassing or
unapproved telephone calls. The call provider must be able to customize the call
control features by facility, cell block, telephone and, in some cases, each
inmate. One of the unique challenges is to prevent the fraudulent bypassing of
these controls through three-way calling. Some inmates attempt to bypass
traditional control features by calling an accomplice at an approved number and
having the accomplice use three-way calling to conference a non-allowed party.
Through this method, some inmates have been known to harass and intimidate
people, such as witnesses, whose numbers would otherwise be blocked, or to call
merchants to conduct fraudulent activities.
Correctional facilities generally select telephone/telecommunications
service providers on the basis of services and features provided and on the
level of commissions paid to the facilities. To win new contracts and renew
existing contracts, call providers must differentiate their services from those
of competitors. They do so
36
<PAGE> 43
by offering advanced call control services as well as additional complementary
services such as booking and identification processes, trust fund and commissary
automation and management, investigation support and jail management support
systems.
Products and Services
Gateway's primary focus in the design of its products and services is to
provide software-based solutions to "niche" problems faced in the corrections
industry. Gateway believes this approach will result in a willingness of its
Direct Customers to accept lower commissions and its RBOC customers to pay more
for these solutions, and thus provides an opportunity to generate higher margin
revenue.
Product/platform. Currently, substantially all of Gateway's revenue is
derived from the services it provides to its customers for use in correctional
facilities. During fiscal 1998, Gateway expended significant research and
development time and funds to upgrade its Inmate Calling platform to a new
technology. Gateway's Digital ComBridge platform is an on-premise network of
computers that provides what Gateway believes are industry-leading telephony
features and controls, as well as graphical user interface and flexible
reporting. Gateway provides the following features through the Digital ComBridge
platform:
1. Call Processing System. The system provides dialing instructions,
call announcement and acceptance messages and error prompts in up to six
different languages. A flexible inmate account option allows for management
of inmate personal identification numbers. System control features
applicable to each inmate telephone such as call blocking, call timers,
system reports, alarm parameters and real-time display of activity allow
for expanded control. The system may be configured to have one inmate phone
for every one outbound telephone line or the system may be configured to
concentrate multiple inmate phones to one outbound telephone line.
2. Optional Services. The Digital Recording System allows for
recording and monitoring with the management of privileged conversations.
The DLT tape, CD or RAID storage allows for flexible storage and an
improved speed of retrieval. Three-way call detection has been
re-engineered and is more tightly coupled with the call processor for even
more reliability and effectiveness all in a smaller footprint. The Inmate
Trust Accounting System provides a central point to administer all inmate
funds held by the facility by interfacing with all other Digital ComBridge
features to allow centralized collection, disbursement, auditing and
reporting of inmate funds. The Commissary System interacts with the Trust
Accounting System allowing for efficient management of inmate orders. The
Inmate Management System allows the site to capture images, fingerprints
and maintain information on each inmate. The system may be expanded to
include debit calling to allow for additional options of payment.
Utilizing the latest digital technology, Gateway has re-engineered its
previous Call Processing System (CPS-4000). This effort has resulted in an easy
to use Inmate Telephone platform for large multi-site Department of Correction
facilities or small county jails.
System Architecture and Technology. Gateway provides a call processing
system composed of a custom personal computer based application that uses
patented software, proprietary line cards and off-the-shelf hardware. Additional
applications have been added as options for customer use in conjunction with the
CPS-4000 to assist in the management of the facility. These are Jail Management,
Digital Recording System, Commissary System and Inmate Management System. All of
the additional applications are maintained and supported by Gateway.
During 1998, Gateway installed the first site with the new Digital
ComBridge platform. The new system has a QNX operating system and a Windows
95/NT interface for client use. Utilization of high density digital/analog
network interfaces and shared hardware resources allow for many channels of call
control to be housed in a single box. Gateway believes that the expanded
capabilities of this system should allow for the installation of larger systems.
Support Infrastructure. Gateway supports its Inmate platform with a
seven-day-a-week, twenty-four-hour-a-day Client Services Department located at
Gateway's headquarters in Carrollton, Texas. The Client
37
<PAGE> 44
Services Department provides a single source of contact for problem analysis.
Problems are logged, remotely diagnosed and solved or dispatched for a site
visit. Gateway uses a combination of employees and contractors who perform site
maintenance. All maintenance at the site is dispatched from the Client Services
Department with an expected four hour response time.
Pricing
Direct Call Processing. Gateway provides inmate calling services as a local
exchange carrier and long distance carrier to its Direct Customers. Gateway buys
"wholesale" call services from the call providers to be resold as collect calls
to the inmates' called parties. The rates charged by Gateway for these collect
calls are consistent with collect call rates charged by the local exchange
carrier in the same service area and by the predominant IXC. Gateway uses the
services of third parties to bill its calls. Gateway enters into long-term (3 to
5 years) contracts with the Direct Customers and generally pays commissions on
the gross billed revenue to the Direct Customers. The uncertainty of the
creditworthiness of the billed parties results in higher than industry average
uncollectible costs.
Transaction-based Pricing. Gateway's transaction-based pricing provides a
recurring, usage-driven revenue stream. In a typical arrangement, Gateway
operates under long-term (3 to 5 years) site-specific contracts with the RBOC
Customers. Gateway also strives to enter into contracts to provide long distance
service for Direct Customers. This provides an additional direct call processing
revenue stream. The RBOC Customers pay transaction fees for each call processed
by Gateway, regardless of whether the RBOC Customer collects the revenue for the
call. The transaction fee is determined by the type of service performed by
Gateway and the total volume of calls processed for the customer during the
monthly billing period. Gateway bills these customers for transaction fees
associated with calls processed during the previous month on net 30-day terms.
Customers
Direct Call Processing Customers. Gateway derives substantially all of its
revenues from its operation of inmate telecommunications systems located in
correctional facilities. For the year ended December 31, 1998, 67% of Gateway's
total revenues were generated from agreements with Direct Customers to be the
exclusive provider of telecommunication services to inmates within the facility.
Multnomah County, Oregon and Santa Clara County, California are Gateway's two
largest Direct Customers, accounting for 6% and 5% of the total direct call
processing revenues and 4% and 3% of Gateway's total revenues. No other single
customer exceeds 5% of the total direct call processing revenues in the same
period. In exchange for exclusive service rights, Gateway pays a percentage of
its revenues from each Direct Customer to that Direct Customer as a commission.
Typically, Gateway installs and retains ownership of the telephones and related
equipment. Gateway believes that its customers have selected it on the basis of
the quality of its services, the capability of its technology and its ability to
offer competitive commission rates.
Transaction Fee Customers. Gateway also derives substantial revenues from
its call processing services provided to the RBOC and IXC Customers. For the
year ended December 31, 1998, Ameritech and SBC Communications, Inc. accounted
for approximately 9% and 11%, respectively, of Gateway's total revenues. No
other customer accounted for more than 10% of Gateway's total revenues in the
same period. Gateway believes that its customers have selected it on the basis
of the quality and breadth of its turn-key services, the capability of its
technology and its ability to price its services at competitive rates. Gateway
generally establishes non-exclusive master agreements with its customers which
set forth the general terms and conditions, including price, under which Gateway
will provide its call processing services. Gateway then enters into 3 to 5 year
site-specific contracts under these master agreements which govern the provision
of services in specific correctional facilities. Each master agreement provides
that its term is automatically extended through the term of any site-specific
contract under the master agreement. Certain site-specific contracts contain
early termination provisions, including penalties.
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<PAGE> 45
Research and Product Development
Gateway believes that the timely development of quality-assured products
and enhancements are essential to maintaining its competitive position. The
multi-channel research in the design and modification of new and complimentary
products allows for a continual stream of upgrades to the customer base.
During the year ended December 31, 1998, 1997, and 1996, research and
development expenditures were $1,582,000, $785,000, and $485,000, respectively.
These investments allowed for the deployment of the new ComBridge platform, the
release of the Inmate Management System and quarterly releases on the CPS 4000,
DRS 5000, Jail Management System and Commissary.
In 1998, Gateway developed an integrated Quality Assurance Program. This
process allows Gateway to better attain its goals of decreasing the number of
errors reported in all delivered products and increasing the satisfaction of its
customers.
Regulation
Gateway's customers, and a portion of its current operations, are subject
to regulation by the Federal Communications Commission (the "FCC") and the
public utilities commissions of certain states in which Gateway and it customers
operate. Regulatory actions have impacted, and are likely to continue to impact,
both Gateway's customers and its operations. For example, certain regulations
encourage additional competition in the businesses of Gateway's RBOC/IXC
Customers and affect the manner in which their business is conducted. A
reduction in the amount of business done by Gateway's RBOC/IXC Customers would
have a material adverse impact on Gateway's revenue since such revenues are
directly related to volumes of calls processed under Gateway's transaction fee
pricing structure. Changes in the manner in which Gateway's RBOC/IXC Customers
conduct their business could have a material adverse impact on Gateway if, as a
result of such changes, Gateway's services and features were no longer needed or
desired or if Gateway were not able to modify, or add to, its services in a way
that meets the new market demands of its customers.
The FCC has adopted a petition filed by an industry group comprised of
independent inmate call providers asking the FCC to adopt regulations modifying
the treatment of the provision of inmate calling services by all Local Exchange
Carriers ("LECs"), including the RBOCs. This petition requires the LECs to
provide separate accounting records for their public communication segments
which includes inmate calling. The regulations that may result from the petition
could require LECs to allocate more of their costs to inmate calling services,
thereby making the RBOC customers of Gateway less competitive in this market,
which in turn could have a material adverse effect on Gateway.
In 1996, Congress passed the Telecommunications Act of 1996. This
legislation opens up the network of LECs to further competition, and eliminates
certain prohibitions upon LECs' entering into other lines of business. The
legislation (1) opens local exchange service to competition and preempts states
from imposing barriers preventing such competition, (2) imposes new unbundling
and interconnection requirements on LEC networks, (3) removes prohibitions on
inter-LATA services and manufacturing if certain competitive conditions are met,
(4) transfers any remaining requirements of a consent decree (including its
nondiscrimination provisions) to the FCC's jurisdiction, (5) imposes
requirements to conduct certain competitive activities only through structurally
separate affiliates and (6) eliminates many of the remaining cable and telephone
company cross-ownership restrictions. Additionally, the legislation requires the
special accounting provisions for the LECs as requested in the petition
described above.
On January 29, 1998, the FCC issued Order 98-7. This Order requires that
all parties called collect have the opportunity to receive a rate quote before
accepting a collect call. These rate quotes are necessary for all public
payphones and all inmate collect calling. Gateway's equipment provides this
feature.
The foregoing discussion does not purport to describe all present and
proposed federal, state and local regulations, legislation, and related judicial
or administrative proceedings relating to the telecommunications industry and
thereby affecting the businesses of Gateway. The impact of increased competition
on the operations of Gateway will be influenced by the future actions of
regulators and legislators who are increasingly advocating competition. While
Gateway would attempt to modify its customer relationships and
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<PAGE> 46
its service offerings to meet the challenges resulting from changes in the
telecommunications competitive environment, there is no assurance it will be
able to do so.
PROPERTIES
Gateway's headquarters are located at 1544 Valwood Parkway, Suite 102,
Carrollton, Texas 75006. The premises are located in an office park in suburban
Dallas, Texas, and include over 26,000 square feet of space housing operations
and offices. The premises are leased until September 30, 2002, with a five-year
renewal option. Current monthly lease payments are $18,510, and the payments
increase after September 30, 1999, to $19,595. It is expected that Gateway will
need additional space later in 1999. There is additional space available at
Gateway's current location which management intends to negotiate to obtain.
However, there is no assurance that the space will be made available on
reasonable terms.
COMPETITION
The telecommunications services industry, especially the public
communications sector and the inmate calling market, is and can be expected to
remain highly competitive. Gateway competes directly with other suppliers of
inmate call processing systems. These include T-NETIX, Evercom Communications,
and Science Dynamics Corporation. Gateway also competes with some of these same
companies that are teamed with various call providers, including Gateway's
current RBOC/IXC Customers. Gateway believes that its ability to compete in the
inmate calling industry depends to a large extent upon the quality of the
features and services it provides, its proprietary technologies such as onsite
digital recording, and its lower cost of deployment through transaction-based
pricing. Gateway relies on both its customers and direct sales to market its
services to correctional facilities, which helps Gateway maintain some control
of the outcome of competitive bidding processes.
EMPLOYEES AND EMPLOYEE BENEFITS
As of December 31, 1998, Gateway had 106 full-time equivalent employees.
The departmental classifications of such employees are as follows: 19
engineering and product development personnel; 16 marketing and sales personnel;
31 finance, information systems and administrative personnel; 10 production and
installation personnel; and 30 field operations personnel.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For a comprehensive understanding of Gateway's financial condition and
performance, this discussion should be considered within the context of the
financial statements and accompanying notes and other information contained
herein.
Overview
Gateway derives revenue from two main sources, direct call processing
(Direct Customers) and transaction processing (RBOC/IXC Customers). As a direct
inmate call provider, Gateway buys "wholesale" call services to be re-sold as
collect calls. Gateway uses the services of third parties to bill its calls.
Gateway enters into direct contracts with the correctional facilities and
generally pays commissions on the gross billed revenue to the correctional
facilities.
The rates charged by Gateway are consistent with collect call rates charged
by the Local Exchange Carrier in the same service area and by the predominant
IXC. Since all calls originating from the inmate phones are collect calls, each
phone generates higher than industry average revenues. The uncertainty of the
creditworthiness of the billed parties results in a higher than industry average
uncollectible cost.
Transaction processing is a per call charge to a RBOC/IXC customer for the
provisioning of specialized call processing services for correctional
facilities. Gateway's customers include Ameritech, Bell Atlantic, US West, SBC
Communications, Inc., AT&T and MCI WorldCom. The revenue per call is
substantially lower than with direct call processing but the margins are
substantially higher.
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<PAGE> 47
Year ended December 31, 1998, compared to December 31, 1997
The following table sets forth certain statement of operations data as a
percentage of total revenue for the year ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1998 1997
----- -----
<S> <C> <C>
REVENUES:
Direct call processing.................................... 67% 68%
Telecommunications services............................... 27 24
Equipment sales........................................... 6 8
--- ---
Total revenues.................................... 100 100
EXPENSES:
Operating expenses........................................ 65 66
Selling, general and administrative....................... 20 17
Research and development.................................. 5 3
Depreciation and amortization............................. 6 5
--- ---
Operating income.................................. 4 9
Interest expense and other, net........................... (4) (3)
--- ---
Income before income taxes........................ -- 6
Income tax expense........................................ -- (2)
--- ---
Net income........................................ 0% 4%
=== ===
</TABLE>
Total Revenue. Total revenue increased 17% to $30,366,000 for the year
ended December 31, 1998, from $26,013,000 for the prior year. This increase
resulted from increases in direct call processing and telecommunications
services revenue. The 34% increase in telecommunications services revenue to
$8,229,000 for the year ended December 31, 1998, from $6,145,000 in the prior
year, was due to the addition of a new RBOC customer as well as an increase in
volume from existing customers.
Direct call processing revenue increased 15%, or $2,564,000, for the year
ended December 31, 1998 to $20,220,000 compared to the prior year revenues of
$17,656,000. This increase was primarily due to the addition of correctional
facilities for which Gateway is processing collect calls for the inmate
population.
Operating Costs and Expenses. Total operating costs and expenses increased
to $19,601,000 for the year ended December 31, 1998, from $17,077,000 for the
year ended December 31, 1997, and decreased as a percentage of total revenue to
65% from 66% in the prior year. Operating costs and expenses associated with
direct call processing include the costs associated with telephone line access
and transport, commissions paid to correctional facilities, billing charges,
costs associated with uncollectible accounts and call verification procedures.
Operating costs and expenses of telecommunications services primarily consist of
communication costs and inmate calling systems repair and maintenance expense.
Also included are costs associated with call verification procedures, primarily
database access charges. Gateway invoices these verification procedure costs to
its customers with minimal margins. Equipment sales operating costs include the
cost of hardware systems sold 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 years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1998 1997
----- -----
<S> <C> <C>
OPERATING EXPENSES:
Direct call processing.................................... 88% 86%
Telecommunications services............................... 13 13
Cost of equipment sold.................................... 40 51
</TABLE>
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<PAGE> 48
Direct call processing expenses increased as a percentage of corresponding
revenue to 88% for the year ended December 31, 1998, from 86% in the prior year.
This percentage increase was primarily due to an increase in transport
regulatory costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $5,953,000 for the year ended December 31,
1998, from $4,328,000 in the prior year, and increased as a percentage of total
revenue to 20% from 17% in the corresponding prior year. The dollar increase was
$1,625,000. The increase is due to an increase in salaries and employee benefits
as well as an increase in costs related to a more aggressive marketing strategy.
Research and Development Expenses. Research and development expenses
increased to $1,582,000 for the year ended December 31, 1998, from $785,000 in
the prior year. This increase of $797,000 is due to an accelerated
implementation plan for Gateway's new inmate call processing platform.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased to $1,924,000 for the year ended December 31, 1998, from
$1,411,000 in the prior year. The increase is due to an increased fixed and
intangible assets base due to continuing installation of inmate call processing
systems at new sites and an acquisition in 1998.
Interest Expense. Interest expense increased to $789,000 for the year ended
December 31, 1998, from $660,000 in the corresponding prior year. The increase
was primarily attributable to an increase in the average daily debt balance. The
increase in indebtedness was necessary to support capital expenditures for
inmate call processing systems and the 1998 acquisition.
Net other expenses increased to $510,000 for the year ended December 31,
1998, or a $519,000 increase as compared to the prior year. This increase was
principally due to the write-off of a $600,000 investment in a private company
which Gateway determined was impaired due to several adverse events experienced
by such private company during 1998. The investment impairment loss was
partially offset by a net gain of $83,000 on the sale of equipment.
Year ended December 31, 1997, compared to December 31, 1996
The following table sets forth certain statement of operations data as a
percentage of total revenue for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1997 1996
----- -----
<S> <C> <C>
REVENUES:
Direct call processing.................................... 68% 71%
Telecommunications services............................... 24 27
Equipment sales........................................... 8 2
--- ---
Total revenues.................................... 100 100
EXPENSES:
Operating expenses........................................ 66 68
Selling, general and administrative....................... 17 26
Research and development.................................. 3 2
Depreciation and amortization............................. 5 6
--- ---
Operating income (loss)........................... 9 (2)
Interest expense and other, net........................... (3) (2)
--- ---
Income (loss) before income taxes................. 6 (4)
Income tax (expense) benefit.............................. (2) 1
--- ---
Net income (loss)................................. 4% (3)%
=== ===
</TABLE>
42
<PAGE> 49
Total Revenue. Total revenue increased 27% to $26,013,000 for the year
ended December 31, 1997, from $20,433,000 for the prior year. This increase
resulted primarily from increases in direct call processing and
telecommunications services revenue. The 11% increase in telecommunications
services revenue to $6,145,000 for the year ended December 31, 1997, from
$5,552,000 in the prior year, was due to an increase in volume from existing
RBOC/IXC customers.
Direct call processing revenue increased 23% or $3,273,000, for the year
ended December 31, 1997 to $17,656,000 compared to the prior year revenues of
$14,383,000. This increase was primarily due to the addition of correctional
facilities for which Gateway is processing collect calls for the inmate
population.
Operating Costs and Expenses. Total operating costs and expenses increased
to $17,077,000 for the year ended December 31, 1997, from $13,888,000 for the
year ended December 31, 1996, and decreased as a percentage of total revenue to
66% from 68% in the prior year. The increase related primarily to expenses
necessary to support the additional revenue for the year. The percentage
decrease is primarily attributable to cost containment measures implemented by
Gateway.
The following table sets forth the operating costs and expenses for each
type of revenue as a percentage of corresponding revenue for the years ended
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-----------
1997 1996
---- ----
<S> <C> <C>
OPERATING COSTS AND EXPENSES:
Direct call processing.................................... 86% 89%
Telecommunications services............................... 13 13
Cost of equipment sold.................................... 51 60
</TABLE>
Direct call processing costs decreased as a percentage of corresponding
revenue to 86% for the year ended December 31, 1997, from 89% in the prior year.
This percentage decrease is primarily due to increased volume discounts for
transmission costs and billing and collection costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $4,328,000 for the year ended December 31,
1997, from $5,176,000 in the prior year, and decreased as a percentage of total
revenue to 17% from 26% in the prior year. The dollar decrease was $848,000. The
decrease was primarily due to a decrease in legal costs of $1,300,000 associated
with defending a patent, offset by an increase in salaries and employee
benefits.
Research and Development Expenses. Research and development expenses
increased to $785,000 for the year ended December 31 1997, from $485,000 in the
prior year. This increase was due to the initial start-up costs for the
development of a new inmate call processing platform.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased to $1,411,000 for the year ended December 31, 1997, from
$1,282,000 in the prior year. The increase was due to an acquisition of tangible
and intangible assets made during 1996.
Interest Expense. Interest expense increased to $660,000 for the year ended
December 31, 1997, from $563,000 in the corresponding prior period. The increase
was primarily attributable to an increase in the average daily debt balance. The
increase in indebtedness was necessary to support capital expenditures for
inmate call processing systems.
LIQUIDITY AND CAPITAL RESOURCES
Gateway has historically relied upon commercial borrowings, stockholder
financing, the sale of equity securities and operating cash flow to fund its
operations and capital needs. Cash provided by financing activities was
$2,784,000 for the year ended December 31, 1998, as compared to $1,248,000 for
the prior year. The increase in cash provided by financing activities was
primarily attributable to borrowings of $2,600,000 from stockholders to finance
the October 1998 acquisition of certain site contracts from Consolidated
43
<PAGE> 50
Telecom, Inc. Cash provided by operations was $2,259,000 for the year ended
December 31, 1998, compared to $580,000 in the prior year. The increase in cash
provided by operations is primarily due to the net change in operating assets
and liabilities. These net amounts totaled to cash used of $79,000 for the year
ended December 31, 1998, compared to cash used of $1,337,000 for 1997. The
increase in cash provided by operations is also due to higher noncash items such
as deferred revenue earned, write-off of investment, and depreciation and
amortization, offset by lower net income and deferred income taxes. Net income
adjusted for noncash items amounted to $2,338,000 for the year ended December
31, 1998 compared to $1,917,000 in the prior year.
The net cash used in investing activities in the year ended December 31,
1998, was $5,003,000. This included $2,679,000 for the acquisition of site
contracts in October 1998 from Consolidated Telecom, Inc. Additionally,
investing activities included capital expenditures of $2,445,000 for the year
ended December 31, 1998, as compared to $1,700,000 in the prior year. The
capital expenditures for the year ended December 31, 1998 were mainly for
telecommunications equipment and office equipment. Gateway 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 ability. Gateway has been funding its
operations by using cash provided by operations, available borrowings under a $3
million line of credit, and in the case of the 1998 acquisition, with borrowings
from stockholders. Management believes that the credit facility should be
sufficient to fund Gateway's operations and anticipated new inmate call
processing systems, as well as upgrades of existing systems. If the borrowing
facilities and cash from operations are insufficient to satisfy Gateway's
requirements, Gateway may be required to sell additional equity securities or
extend its borrowing arrangements. 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 Gateway'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 Gateway and its suppliers and customers.
Gateway's State of Readiness. Gateway has established a Year 2000 Oversight
Committee. It is the responsibility of the committee to evaluate all potential
Year 2000 problems of current computer systems, software, and embedded
technologies. The evaluation revealed that approximately 70% of Gateway's
current proprietary hardware based inmate calling platform deployed on behalf of
its customers is currently Year 2000 compliant. The targeted date for the
remaining 30% is June 1999. The software utilized on these systems is targeted
to be Year 2000 compliant with the planned March 1999 release. The software will
be deployed over a six month period with a scheduled completion date of
September 1999. The evaluation also revealed that the internal operating system
that provides Gateway's Local Area Network ("LAN"), voice mail system and
accounting and business process software are additional major resources that do
have Year 2000 compliance issues. These internal systems and or programs are
predominantly "off-the-shelf" products with Year 2000 versions now available.
Gateway's internal network, voice mail system and accounting and business
process software are scheduled for update utilizing vendor provided upgrades by
June 1999.
As a part of the Year 2000 Oversight Committee's evaluation process,
significant suppliers and large customers have been contacted to determine the
extent to which Gateway is vulnerable to those third parties' failure to solve
their own Year 2000 issue. There can be no guarantee that the systems of other
companies on which Gateway's business relies will be timely converted, or that a
failure to convert by another company, or a conversion that is incompatible with
Gateway's systems would not have a material adverse effect on Gateway and its
operations.
The Costs to Address Gateway's Year 2000 Issues. Expenditures in fiscal
1998 for the Year 2000 Project amounted to less than $15,000. Management expects
that the completion of its Year 2000 Project may result in additional
expenditures of approximately $500,000.
44
<PAGE> 51
The Risks Associated with Gateway's Year 2000 Issues. Gateway'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 Gateway's business relies to
timely solve their Year 2000 issues could result in disruptions in Gateway's
supply of network parts and materials, late, missed, or unapplied payments,
temporary disruptions in order processing and other general problems related to
Gateway's daily operations. While Gateway believes its Year 2000 Oversight
Committee will adequately address Gateway's internal Year 2000 issues, until
Gateway receives responses from a significant number of Gateway's suppliers and
customers, 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 Gateway and
its operations.
Gateway's Contingency Plan. Gateway has not, to date, implemented a Year
2000 Contingency Plan. It is Gateway's goal to have the major Year 2000 issues
resolved by October 1999. Gateway has not yet been notified by its customers
that it will be required to have an outside consultant to verify and validate
Gateway's Year 2000 compliance. Final Year 2000 verification and validation is
scheduled to occur March 1999. At this time Gateway's Year 2000 Oversight
Committee plans to evaluate the need for and develop a contingency plan, if
required.
LEGAL PROCEEDINGS
Except as described below, Gateway is not a party to any pending material
legal proceedings before any court, administrative agency or other tribunal.
Further, Gateway is not aware of any litigation which is threatened against it
in any court, administrative agency or other tribunal.
1. On July 29, 1998, six inmates of the Santa Clara, California County
Department of Corrections filed Brazeau v. Ryan against the County of Santa
Clara, alleging that their rights had been violated by implementation of a
telephone recording system. On September 18, 1998, the plaintiffs joined
Gateway as a co-defendant. While it is impossible to predict the outcome of
this litigation, Gateway believes that it will be resolved without material
liability.
2. In a case brought in the U.S. District Court for the Western
District of Kentucky at Louisville, styled Gus "Skip" Daleure, Jr., et al.
v. Commonwealth of Kentucky, et al., the complaint joins as defendants
several states, political subdivision of states, and inmate service
telecommunications providers and was filed contemporaneously with a request
for certification by the court of a nationwide plaintiffs' class action
consisting of all persons who have received and paid for telephone calls
initiated by an inmate at a prison, jail or other correctional institution
for the provision of "collect only" inmate telecommunications services. The
complaint alleges violations of the Sherman Antitrust Act, the
Robinson-Patman Act and the U.S. Constitution. Although management believes
that the likelihood of an unfavorable outcome is low, there is no assurance
that a judgment against a class of defendant providers will not ultimately
be entered.
3. In Jamal Williams v. Multnomah County Sheriff Department, et al.,
brought in the Circuit Court of Oregon for the County of Multnomah, the
complaint in the case, which alleges tortious invasion of privacy by
intrusion upon seclusion, was received by Gateway on February 1, 1999.
Although management believes that the likelihood of an unfavorable outcome
is low, it is impossible to predict the outcome of this litigation.
45
<PAGE> 52
PRINCIPAL SHAREHOLDERS
As of May 7, 1999, there were 8,650,367 shares of T-NETIX Stock
outstanding. The two shareholders known by T-NETIX to be beneficial owners of at
least 5% of the shares of T-NETIX Stock then outstanding were Ingalls and
Snyder, LLC and Daniel M. Carney. The following table gives stock ownership
information for these 5% or greater shareholders, each current director of
T-NETIX and all executive officers and directors of T-NETIX as a group. The
information is provided as of May 7, 1999, and also on a pro forma basis
assuming the issuance of approximately 4,048,000 shares of T-NETIX Stock in
connection with the Merger and the issuance of a T-NETIX Option for 5.0375
shares of T-NETIX Stock for each outstanding Gateway Option to purchase one
share of Gateway Stock in connection with the Merger. Mr. Carney is both a
director and a 5% or greater shareholder, and his information is shown under the
category "Current Directors." Except as otherwise indicated, each of the persons
named below has sole voting and investment power with respect to the T-NETIX
Stock owned by such person.
<TABLE>
<CAPTION>
PERCENTAGE PRO
NUMBER OF SHARES OF SHARES FORMA
NAME AND ADDRESS OF BENEFICIAL OWNERS BENEFICIALLY OWNED OUTSTANDING PERCENTAGE
- ------------------------------------- ------------------ ----------- ----------
<S> <C> <C> <C>
Ingalls and Snyder, LLC................................ 472,825 5.5% 3.7%
61 Broadway
New York, NY 10006
NAMES OF CURRENT DIRECTORS
- ------------------------
Daniel M. Carney....................................... 1,915,140(1) 22.3% 15.2%
Tallgrass Executive Park
Building 1900
8100 East 22nd Street North
Wichita, KS 67226
Robert A. Geist........................................ 310,000(2) 3.6% 2.5%
Alvyn A. Schopp........................................ 220,109(3) 2.5% 1.7%
Martin T. Hart......................................... 35,000(4) * *
James L. Mann.......................................... 16,900(5) * *
Daniel J. Taylor....................................... 80,000 * *
John H. Burbank III.................................... 4,450 * *
All Current Directors and Executive Officers as a group
(8 persons).......................................... 2,636,799(6) 29.7% 20.4%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes (i) 115,000 shares owned by Communication Vending Corporation of
Arizona, of which Mr. Carney has a 30% beneficial interest; and (ii) 20,000
shares issuable pursuant to options exercisable within 60 days of May 7,
1999.
(2) Includes (i) 290,000 shares are held by Starwood Investments L.P., a company
owned and controlled by Mr. Geist; and (ii) 20,000 shares issuable pursuant
to options exercisable within 60 days of May 7, 1999.
(3) Includes 187,250 shares issuable pursuant to options exercisable within 60
days of May 7, 1999.
(4) Includes 5,000 shares issuable pursuant to options exercisable within 60
days of May 7, 1999.
(5) Includes 15,000 shares issuable pursuant to options exercisable within 60
days of May 7, 1999.
(6) Includes 302,250 shares issuable pursuant to options exercisable within 60
days of May 7, 1999.
As of May 7, 1999, there were 729,004 shares of Gateway Stock outstanding.
The five shareholders known by Gateway to be beneficial owners of at least 5% of
the shares of Gateway Stock then outstanding were W. Paul Buckthal, George B.
Cree, Jr., Richard E. Cree, James B. Franklin and Irvin Wall. The following
table gives stock ownership information for these 5% or greater shareholders,
each current director of Gateway and all executive officers and directors of
Gateway as a group. The information is provided as of May 7, 1999, and also on a
pro forma basis assuming conversion of each share of Gateway Stock held into
5.0375 shares of T-NETIX Stock, conversion of each Gateway Option for one share
of Gateway Stock into a
46
<PAGE> 53
T-NETIX Option for 5.0375 shares of T-NETIX Stock, and issuance of 375,339
shares of T-NETIX Stock to the Royalty Owners (pro rata recording to their
royalty interests). Richard E. Cree is both a director and a 5% or greater
shareholder, and his information is shown below under the category of "Current
Directors." Except as otherwise indicated, each of the persons named below has
sole voting and investment power with respect to the Gateway Stock owned by such
person.
<TABLE>
<CAPTION>
STOCK OWNERSHIP
---------------------------------------------------------
PERCENTAGE PRO PRO
NUMBER OF SHARES OF SHARES FORMA FORMA
NAME AND ADDRESS OF BENEFICIAL OWNERS BENEFICIALLY OWNED OUTSTANDING OWNERSHIP PERCENTAGE
- ------------------------------------- ------------------ ----------- --------- ----------
<S> <C> <C> <C> <C>
W. Paul Buckthal............................ 108,426 14.9% 593,178 4.7%
700 South Fillmore, Suite 444
Amarillo, Texas 79101-2444
George B. Cree, Jr. ........................ 78,196 10.7% 412,705 3.3%
P.O. Box 1821
Pampa, Texas 75006
James B. Franklin........................... 108,426 14.9% 593,178 4.7%
700 South Fillmore, Suite 444
Amarillo, Texas 79101-2444
Irvin Wall.................................. 108,426 14.9% 593,178 4.7%
700 South Fillmore, Suite 435
Amarillo, Texas 79101
NAMES OF CURRENT DIRECTORS
- ------------------------
Richard E. Cree............................. 89,060(1) 11.6% 473,990 3.7%
1544 Valwood Parkway, Suite 102
Carrollton, Texas 75006
Harold A. Cree.............................. 35,692(2) 4.9% 205,151 1.6%
Keith Fowler................................ 34,507 4.7% 192,622 1.5%
Jack O'Boyle................................ 15,499(3) 2.1% 87,472 *
All Current Directors and Executive Officers
as a group (5 persons).................... 186,067(4) 24.2% 1,016,208 7.5%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes 3,219 shares held by the Jonathan B. Cree Trust and 3,219 shares
held by the Lindsay Adair Cree Trust, each of which Mr. Cree is co-trustee,
and 34,947 shares issuable pursuant to options exercisable within 60 days of
May 7, 1999, assuming consummation of the Merger.
(2) Includes 5,981 shares held by the Richard J. Cree Trust, of which Harold A.
Cree is co-trustee.
(3) Includes 1,109 shares held by the John J. O'Boyle Trust, of which Mr.
O'Boyle is co-trustee.
(4) Includes footnotes (1), (2) and (3) above, and 4,229 shares issuable
pursuant to options exercisable within 60 days of May 7, 1999, assuming
consummation of the Merger.
47
<PAGE> 54
AMENDMENTS TO T-NETIX STOCK OPTION PLANS
NEW PLAN BENEFITS
In connection with the Merger, T-NETIX proposes to amend its 1993 Incentive
Stock Option Plan (the "ISO Plan") and its Non-Qualified Stock Option Plan (the
"NQSO Plan") to increase the number of shares of T-NETIX Stock available for
options under the Plans from 2,000,000 to 2,600,000. This will serve two
purposes. First, it will accommodate the T-NETIX Options being issued in the
Merger in exchange for Gateway Options. There are currently 320,428 shares of
T-NETIX Stock available for T-NETIX Options under the Plans, and T-NETIX Options
for 347,789 shares of T-NETIX Stock will be issued in the Merger in exchange for
Gateway Options. Second, it will allow for new incentive compensation
alternatives for employees of the combined company.
The consideration that T-NETIX will receive for the grant of T-NETIX
Options to the holders of Gateway Options will be the cancellation of the
Gateway Options. T-NETIX will not receive any other consideration for the grant
of any options under the Plans. There will be no federal tax consequences upon
the grant of any option under either of the Plans. For options under the NQSO
Plan, upon exercise of an option the option holder will incur ordinary income
tax on the difference between the fair market value of the shares underlying the
option and the exercise price of the option, while T-NETIX will recognize a tax
deduction for the same amount. For options under the ISO Plan, no income to the
option holder or expense to T-NETIX is recognized upon exercise of the option.
Upon sale of the shares underlying the option, the selling shareholder will
incur capital gains tax on the difference between the sale price and the
exercise price. The other material features of the Plans are described below
under "Executive Compensation -- Stock Option Plans."
Currently, there is no plan to allocate options for the additional 600,000
shares of T-NETIX Stock to any particular officer, director, employee or group
thereof, other than allocating options for approximately 348,000 shares to the
holders of Gateway Options pursuant to the Merger. Options for the remaining
shares of T-NETIX Stock available under the Plans will be granted from time to
time by the Board of Directors of T-NETIX to the various eligible individuals
according to factors which the Board deems relevant at the time of grant.
T-NETIX Options for 176,046 shares will be granted to Richard E. Cree in
the Merger. T-NETIX Options for 171,743 shares will be granted to other holders
of Gateway Options in the Merger.
EXECUTIVE COMPENSATION
The information in this section is for T-NETIX for the fiscal year ended
July 31, 1998. Since that date, Mr. Huzjak has resigned as Chief Executive
Officer and Mr. Schopp has been appointed as Chief Executive Officer. The
position of Chief Financial Officer remains open at this time.
Compensation of Directors
T-NETIX's non-employee directors are compensated at the rate of $1,000 per
meeting attended inclusive of expenses. In August 1994, T-NETIX granted options
to acquire 20,000 shares of T-NETIX Stock to each of the directors of T-NETIX
other than Mr. Huzjak and Mr. Schopp under T-NETIX's NQSO Plan with an exercise
price of $5.50 per share. In September 1995, Mr. Mann was granted options to
acquire 20,000 shares of T-NETIX Stock with an exercise price of $13.00 per
share. In August 1997, Mr. Mann's options were amended to lower the option price
to $7.25 per share. In December 1997, Mr. Hart was granted options to acquire
20,000 shares of T-NETIX Stock with an exercise price of $9.00 per share. In
February 1999, Messrs. Burbank and Taylor were each granted options to acquire
20,000 shares of T-NETIX Stock with an exercise price of $6.125 per share. See
"-- Stock Option Plans." The options granted to directors vest evenly over a
four-year period.
48
<PAGE> 55
Board Committees and Meetings
The T-NETIX Board has established a Compensation Committee which makes
recommendations to the T-NETIX Board concerning salaries and incentive
compensation for officers and employees of T-NETIX. See "-- Report by the
Compensation Committee on Executive Compensation." The Compensation Committee is
currently composed of Mr. Geist, Mr. Mann (Chairman) and Mr. Carney. The T-NETIX
Board also has an Audit Committee which reviews the results and scope of the
audit and other accounting related services. The Audit Committee is currently
composed of Mr. Geist, Mr. Mann and Mr. Hart (Chairman). Nominees for the
T-NETIX Board are determined by the entire Board.
For the year ended July 31, 1998, there were five meetings of the T-NETIX
Board, one meeting of the Compensation Committee and one meeting of the Audit
Committee. All directors attended 100% of T-NETIX's Board meetings and meetings
of Board committees on which they served, except for Mr. Hart, who attended two
of the three meetings of the T-NETIX Board that occurred between the time he
became a Director and July 31, 1998.
Executive Compensation Table
The following table sets forth information concerning the compensation
received for services rendered in all capacities to T-NETIX for the years ended
July 31, 1998, 1997, and 1996, by Mr. Huzjak and Mr. Schopp. No other executive
officer's compensation exceeded $100,000 during the year ended July 31, 1998. No
restricted stock awards, long-term incentive plan payouts or stock appreciation
rights ("SARs") were granted to Mr. Huzjak or Mr. Schopp in such years.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
FISCAL --------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUSES(2) STOCK OPTIONS
- --------------------------- ------ -------- ---------- -------------
<S> <C> <C> <C> <C>
Thomas J. Huzjak................................... 1998 $240,000 $15,000 --
Chairman of the Board 1997 195,000 -- $36,000
and Chief Executive Officer 1996 175,000 -- 100,000
Alvyn A. Schopp.................................... 1998 $158,625 $15,000 --
Chief Financial Officer 1997 143,750 -- $32,000
1996 113,000 -- 75,000
</TABLE>
- ---------------
(1) With respect to each of the individuals named in the Summary Compensation
Table, the aggregate amount of perquisites and other personal benefits
received did not exceed the lesser of either $50,000 or 10% of the total of
annual salary and bonus reported for such individual.
(2) Bonuses, if applicable, were paid pursuant to the Management Incentive
Programs described below under "-- Management Incentive Programs."
Option Grants in the Last Fiscal Year
No stock options were granted to executive officers during the fiscal year
ended July 31, 1998.
49
<PAGE> 56
The following table provides information as to the aggregate dollar value
of unexercised stock options held by Mr. Huzjak and Mr. Schopp at July 31, 1998.
No stock options were exercised by Mr. Huzjak and or Mr. Schopp during fiscal
1998.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END AT FISCAL YEAR END(1)(2)
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas J. Huzjak........................ 184,010 93,250 $528,360 $98,375
Alvyn A. Schopp......................... 144,250 77,750(3) 393,500 86,750(3)
</TABLE>
- ---------------
(1) Represents the fair market value of the T-NETIX Stock based upon the closing
price per share as quoted on Nasdaq on July 31, 1998 ($8.00 per share), less
the option exercise price.
(2) Amounts reflect the August 11, 1997, re-pricing of certain stock options.
See "-- Stock Option Plans."
(3) Does not include options for 100,000 shares of T-NETIX Stock granted to Mr.
Schopp in December 1998 at an exercise price of $5.00 per share in
connection with his promotion to Chief Executive Officer.
Management Incentive Programs
In October 1998, the T-NETIX Board adopted the 1998 Management Incentive
Program (covering fiscal year 1999) by readopting the same basic terms as the
prior year Management Incentive Program with new performance targets.
In September 1997, the T-NETIX Board adopted the 1997 Management Incentive
Program (covering fiscal year 1998) which provided that certain employees of
T-NETIX will be rewarded for achieving specific individual and company
objectives. The 1997 Management Incentive Program rewarded individuals for
company performance targets based on revenue and earnings before interest and
taxes (subject to adjustments for extraordinary events).
In August 1996, the T-NETIX Board adopted the 1996 Management Incentive
Program (covering fiscal year 1997) which provided that certain employees of
T-NETIX would be rewarded for achieving specific individual and company
objectives. The 1996 Management Incentive Program was designed to reward
individuals for company performance targets based on total revenue, new revenue,
and earnings before interest and taxes.
Stock Option Plans
T-NETIX's ISO Plan, adopted by T-NETIX on May 1, 1993, and T-NETIX's 1991
Incentive Stock Option Plan, adopted by T-NETIX on January 10, 1991, provide
that options for T-NETIX Stock may be granted to such key employees, including
officers and directors who are also employees, of T-NETIX or its subsidiaries
whom the T-NETIX Board deems to be important to the future of T-NETIX or its
subsidiaries. There are five officers, one employee/director and approximately
30 other key employees eligible to participate in the ISO Plan. T-NETIX's NQSO
Plan, adopted by T-NETIX on January 10, 1991, provides that options for T-NETIX
Stock may be granted to eligible employees, officers and directors of T-NETIX or
its subsidiaries. There are also five officers, one employee/director and
approximately 30 other employees eligible to participate in the NQSO Plan. The
period for which an option is granted under all three plans may not exceed ten
years from the date of the grant. In general, an optionee may not exercise any
part of an option granted under the two incentive plans unless the optionee has
been in the continuous employment of T-NETIX or a subsidiary at all times from
the date of the grant until the date three months prior to the date of exercise.
The option price per share is determined by the T-NETIX Board at the time an
option is granted and cannot be less than 100% of the fair market value of
T-NETIX Stock on the date of grant.
On July 24, 1997, the T-NETIX Board amended the ISO Plan and the NQSO Plan
to provide that the Compensation Committee may amend certain outstanding options
with an exercise price in excess of the
50
<PAGE> 57
current market price in order to modify the exercise price to the current market
price or greater. On August 11, 1997, the Compensation Committee re-priced the
exercise price to $7.25 per share for certain outstanding options under the ISO
Plan and NQSO Plan having an exercise price equal to or greater than $7.50 prior
to such re-pricing. This re-pricing affected 725,500 options under the ISO Plan
and 48,000 options under the NQSO Plan.
The T-NETIX Board may amend these plans at any time but may not, without
shareholder approval, adopt any amendment that would (i) materially increase the
benefits accruing to participants, (ii) materially modify the eligibility
requirements, or (iii) increase the maximum number of shares which may be issued
under each plan.
Compensation Committee Interlocks and Insider Participation
The following non-employee directors served as members of the Compensation
Committee for the year ended July 31, 1998: Messrs. Geist, Mann and Carney. The
members of T-NETIX's Compensation Committee have no interlocking relationships
as defined by SEC rules and regulations.
Compensation Committee Report on Executive Compensation
Executive Compensation Policies. The Compensation Committee recognizes that
the success of T-NETIX, including its ability to expand its service offerings
and its markets and to maintain its existing contracts and customer
relationships, is dependent on the performance of its employees. T-NETIX's
employees are its primary asset. As a result, the Compensation Committee has
adopted the following executive compensation policies:
(1) T-NETIX's executive compensation policies should balance the
long-term and short-term goals of T-NETIX. They should encourage growth and
yet reward current profitability.
(2) Base salaries should be at or close to market but salaries should
be enhanced by bonus plans and stock option incentives to provide
opportunities for above market compensation to retain employees key to
T-NETIX's success.
(3) Cash bonus plans should be designed to provide incentives to meet
or exceed company goals, should reward both group and individual
performances, and should be flexible in their design and application.
(4) Stock options should be awarded to reward performance and to align
executives interests with those of shareholders.
The Compensation Committee believes its executive compensation program
effectively serves the interests of shareholders by allowing T-NETIX to attract
and retain talented executive personnel who have incentives to perform at the
highest levels.
CEO Compensation. Thomas J. Huzjak served as T-NETIX's Chief Executive
Officer from August 1994 to December 1998. Prior thereto he was President and
Chief Operating Officer. In fiscal 1998, Mr. Huzjak received a base salary of
$240,000 in recognition of his duties. In accordance with the 1997 Management
Incentive Program, Mr. Huzjak was eligible to receive a bonus based upon
performance targets for revenue and earnings before income taxes (subject to
adjustments for extraordinary events). Mr. Huzjak received a bonus under the
1997 Management Incentive Program that was less than the maximum that could have
been received had the targets been fully achieved. The Committee recommended
that no additional stock options be granted to Mr. Huzjak at that time. For
fiscal 1999, Mr. Schopp will receive an annual salary of $180,000. Also, in
connection with his promotion, Mr. Schopp received options for 100,000 shares of
T-NETIX Stock under the ISO Plan. The exercise price is $5.00 per share, which
was the fair market value of T-NETIX Stock on the date of grant. The Committee
will continue to review all aspects of Mr. Schopp's compensation annually to
establish goals for the ensuing fiscal year against which his performance and
adjustments in compensation will be evaluated. For fiscal 1999, Mr. Schopp has
been given the opportunity to receive a bonus based upon performance targets.
51
<PAGE> 58
The foregoing report has been prepared by T-NETIX's Compensation Committee.
James L. Mann (Chairman)
Robert A. Geist
Daniel M. Carney
Company Performance
The following table presents the cumulative total yearly shareholder return
for the T-NETIX Stock since November 8, 1994, the date of T-NETIX's initial
public offering, compared with the Nasdaq Market Index and the Nasdaq
Telecommunications Stock Index. The table assumes that $100 was invested on
November 8, 1994, and that all dividends were reinvested.
STOCK PRICE PERFORMANCE
COMPARISON OF CUMULATIVE TOTAL RETURN
T-NETIX, INC., NASDAQ MARKET INDEX AND
NASDAQ TELECOMMUNICATIONS STOCK INDEX
TOTAL RETURN TO STOCKHOLDERS
(ASSUMES $100 INVESTMENT ON NOVEMBER 8, 1994)
<TABLE>
<CAPTION>
NASDAQ
MEASUREMENT PERIOD TELECOM NASDAQ
(FISCAL YEAR COVERED) T-NETIX, INC. INDEX COMPOSITE (US)
- --------------------- ------------- ------- --------------
<S> <C> <C> <C>
11-08-94........................................ 100.00 100.00 100.00
07-31-95........................................ 131.58 119.59 130.44
07-31-96........................................ 92.11 120.84 140.79
07-31-97........................................ 84.21 160.39 207.65
07-31-98........................................ 84.21 261.11 243.95
</TABLE>
SHAREHOLDERS' PROPOSALS
It is expected that the 2000 Annual Meeting of Shareholders of T-NETIX will
be held on May 11, 2000. Any proposals intended to be presented at the 2000
Annual Meeting must be received at T-NETIX's offices on or before November 5,
1999, in order to be considered for inclusion in T-NETIX's Proxy Statement and
form of proxy relating to such meeting.
Any proposal from a T-NETIX shareholder to be presented at the 2000 Annual
Meeting of Shareholders of T-NETIX that is submitted outside the processes of
Rule 14a-8 under the Exchange Act, and that therefore will not be included in
proxy materials to be sent to T-NETIX shareholders by T-NETIX, must be received
by the Secretary of T-NETIX not earlier than 180 days prior nor later than 90
days prior to the date of such meeting in order to be considered timely received
by T-NETIX.
LEGAL MATTERS
Rothgerber Johnson & Lyons LLP will pass upon certain legal matters for
T-NETIX relating to the T-NETIX Stock to be issued pursuant to the Merger, as
well as the tax consequences of the Merger.
52
<PAGE> 59
EXPERTS
The consolidated financial statements of T-NETIX as of July 31, 1998 and
1997, and for each of the years in the three-year period ended July 31, 1998,
and the related schedule, have been incorporated by reference in this Proxy
Statement in reliance upon the reports of KPMG LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of Gateway as of December 31, 1998 and 1997, and
for each of the years in the three-year period ended December 31, 1998, have
been included herein and in this Proxy Statement in reliance upon the report of
KPMG LLP, independent certified public accountants, and upon the authority of
said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
T-NETIX files annual, quarterly and special reports, proxy statements and
other information with the SEC. Shareholders may read and copy any reports,
statements or other information that T-NETIX files at the SEC's public reference
rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Please
call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms. T-NETIX's public filings are also available from commercial
document retrieval services and at the Internet web site maintained by the SEC
at http://www.sec.gov.
The SEC allows T-NETIX to "incorporate by reference" information into this
Proxy Statement, which means that T-NETIX can disclose important information to
shareholders by referring them to another document filed separately with the
SEC. The information incorporated by reference is deemed to be part of this
Proxy Statement, except for any information superseded by information contained
directly herein. This Proxy Statement incorporates by reference the documents
set forth below that T-NETIX has previously filed with the SEC. These documents
contain important information about T-NETIX and its financial condition.
<TABLE>
<CAPTION>
T-NETIX SEC FILINGS (FILE NO. 0-25016) PERIOD
- -------------------------------------- ------
<S> <C>
Annual Report on Form 10-K................ Year ended July 31, 1998, as amended May 11,
1999
Transition Report on Form 10-QT........... Transition period from August 1, 1998, through
December 31, 1998, as amended May 11, 1999
Current Reports on Form 8-K............... Filed December 15, 1998 Filed December 31, 1998
and amended March 15, 1999 and May 11, 1999
</TABLE>
Additional documents that T-NETIX may file with the SEC between the date of
this Proxy Statement and the date of the Special Meeting are also incorporated
by reference. These include any periodic reports, such as Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as
any proxy statements. The Annual Report on Form 10-K/A and Transition Report on
Form 10-QT/A referred to above are enclosed with this Proxy Statement.
You can obtain any of the documents incorporated by reference in, but not
included with, this Proxy Statement from T-NETIX without charge, excluding all
exhibits unless T-NETIX has specifically incorporated by reference an exhibit in
this Proxy Statement, by requesting them in writing or by telephone from the
following address:
T-NETIX, Inc.
Attn: John Giannaula, Corporate
Secretary
67 Inverness Drive East, Suite 100
Englewood, Colorado 80112
Telephone: (303) 790-9111
53
<PAGE> 60
Please request documents by May 27, 1999, to ensure receipt before the
meeting of shareholders described herein. Incorporated documents requested by
shareholders will be mailed by first class mail, or other equally prompt means,
within one business day of receipt of your request.
SHAREHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED
BY REFERENCE IN THIS PROXY STATEMENT TO VOTE THEIR SHARES AT THE SPECIAL
MEETING. NO ONE HAS BEEN AUTHORIZED TO PROVIDE ANY INFORMATION THAT IS DIFFERENT
FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED
MAY 10, 1999. SHAREHOLDERS SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN
THE PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND NEITHER
THE MAILING OF THIS PROXY STATEMENT TO SHAREHOLDERS NOR THE ISSUANCE OF T-NETIX
STOCK IN THE MERGER WILL CREATE ANY IMPLICATION TO THE CONTRARY.
CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS
T-NETIX has made forward-looking statements in this document and the
documents incorporated by reference herein or included as an appendices hereto
that are subject to risks and uncertainties. These statements are based on
management's beliefs and assumptions, based on information currently available
to management. Forward-looking statements include the information concerning
possible or assumed future results of operations of T-NETIX and Gateway set
forth (1) under "Summary," "Risk Factors," "The Merger -- Background of the
Merger," "-- Reasons for the Merger"; "-- Recommendations of the Boards of
Directors" and "Unaudited Pro Forma Condensed Combined Financial Information";
(2) under "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" herein and in the T-NETIX Annual Report on
Form 10-K/A and Transition Report on Form 10-QT/A incorporated by reference into
this document; and (3) in this document and the documents incorporated herein by
reference preceded by, followed by, or that include the words "anticipate,"
"believe," "effect," "estimate," "expect," "intend," "plan" or similar
expressions.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and shareholder value
of T-NETIX may differ materially from those expressed in these forward-looking
statements. Many of the factors that will determine these results and values are
beyond T-NETIX's ability to control or predict. Shareholders are cautioned not
to put undue reliance on any forward-looking statements. For those statements,
T-NETIX claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
Shareholders of T-NETIX should understand that included among the many
possible events or factors that could materially affect the future financial
results and performance of T-NETIX, in addition to those discussed elsewhere
herein and in the documents which are incorporated by reference into this Proxy
Statement, are the following important factors:
1. Our revenues after the merger may be lower than expected;
2. Competition among specialized call processing services companies
may increase;
3. We may have more trouble integrating our businesses after the
merger than we expect;
4. General economic conditions may change or be worse than we expect;
5. Legislative or regulatory changes may adversely affect our
business;
6. Technology-related changes, including "Year 2000" data systems
compliance, may be harder to make or more expensive than we expect;
7. The demand for the combined company's products and services and
market acceptance risks may affect the potential technological obsolescence
of existing systems;
54
<PAGE> 61
8. Existing site specific customer contracts may not be renewed;
9. Retaining the base of current site specific customer contracts may
be more difficult than we expect;
10. Continued relationships with existing customers may become
strained;
11. We may not be able to reduce expenditures in our SpeakEZ Division
as quickly or in as high an amount as we expect;
12. We may not be able to successfully license voice verification and
fraud prevention technology;
13. We may not have the continuing ability to develop hardware and
software products;
14. Commercialization and technological issues may prove more
difficult than we expect;
15. Manufacturing capacity and product supply may be more constrained
than we expect;
16. There may be fewer actual purchases by current and prospective
customers under existing and expected agreements than we expect;
17. The progress of contract implementation efforts that allow T-NETIX
and Gateway to recognize revenue under its accounting policies may be
slower than we expect; and
18. The results of financing efforts may not be favorable.
55
<PAGE> 62
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
(the "Unaudited Pro Forma Information") gives effect to the Merger under the
pooling of interests method of accounting. The Unaudited Pro Forma Information
is presented to reflect the estimated impact of the Merger and the issuance of
5.0375 shares of T-NETIX Stock for each share of Gateway Stock issued and
outstanding. As of the record date for Gateway's special meeting of shareholders
for consideration of the Merger, there were approximately 729,000 shares of
Gateway Stock issued and outstanding. The Unaudited Pro Forma Information
assumes the issuance of approximately 4,048,000 shares of T-NETIX Stock in the
Merger (assuming no T-NETIX Reserve Shares are issued). See "The
Merger -- Accounting Treatment."
The Unaudited Pro Forma Information is presented as if the Merger had been
consummated as of August 1, 1995, for the unaudited pro forma condensed combined
statements of income and as of December 31, 1998, for the unaudited pro forma
condensed combined balance sheet. Certain adjustments to the data presented have
also been made to reflect the different fiscal years of T-NETIX and Gateway (see
"-- Notes to Unaudited Pro Forma Condensed Combined Statements of Income and
Balance Sheet -- Basis of Presentation," below). All column headings used in the
Unaudited Pro Forma Information refer to the period-end date of T-NETIX.
The Unaudited Pro Forma Information gives effect to the reclassifications
and adjustments set forth in the accompanying Notes to Unaudited Pro Forma
Condensed Combined Financial Statements and does not reflect any cost savings
that may result from the Merger. See "The Merger -- Reasons for the Merger;
Recommendation of the Board." The Unaudited Pro Forma Information is not
necessarily indicative of the operating results and financial position that
might have been achieved had the Merger been consummated (on the dates or as of
the beginning of each period indicated), nor is it necessarily indicative of
operating results and financial position which may occur in the future.
The Unaudited Pro Forma Information should be read in conjunction with the
historical consolidated financial statements of T-NETIX contained in its Annual
Report on Form 10-K/A and the unaudited consolidated interim financial
statements contained in its Transition Report on Form 10-QT/A for the five
months ended December 31, 1998, and the historical financial statements of
Gateway included in this document. See "Where You Can Find More Information."
56
<PAGE> 63
T-NETIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIVE MONTHS ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------
HISTORICAL
-------------------------------------------
PRO FORMA T-NETIX PRO FORMA PRO FORMA
T-NETIX CELL-TEL ADJUSTMENTS ADJUSTED GATEWAY ADJUSTMENTS COMBINED
------- -------- ----------- -------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Telecommunications services....... $13,288 $ -- $ -- $13,288 $3,484 $ -- $ 16,772
Telecommunications licensing...... 47 -- -- 47 31 (78)(a) --
Direct call provisioning.......... 1,595 -- -- 1,595 8,472 -- 10,067
Voice print....................... 158 -- -- 158 -- -- 158
Equipment sales................... -- -- -- -- 844 -- 844
Professional service fees......... -- 299 (299)(h) -- -- -- --
------- ------ ------- ------- ------ ------ ---------
Total revenue............... 15,088 299 (299) 15,088 12,831 (78) 27,841
EXPENSES:
Operating costs and expenses
Telecommunications services..... 6,878 -- -- 6,878 497 (52)(d) 7,323
Direct call provisioning........ 1,503 -- -- 1,503 7,468 (127)(d) 8,844
Voice print..................... 510 -- -- 510 -- -- 510
Cost of equipment sold.......... -- -- -- -- 362 (13)(d) 349
Cost of professional services... -- 299 (299)(h) -- -- -- --
------- ------ ------- ------- ------ ------ ---------
Total operating costs and
expenses.................. 8,891 299 (299) 8,891 8,327 (192) 17,026
Selling, general and
administrative.................. 4,390 122 -- 4,512 2,541 -- 7,053
Research and development.......... 1,036 154 -- 1,190 841 -- 2,031
Depreciation and amortization..... 3,289 39 256(f) 3,584 893 103(e) 4,580
------- ------ ------- ------- ------ ------ ---------
Total expenses.............. 17,606 614 (43) 18,177 12,602 (89) 30,690
Operating income (loss)......... (2,518) (315) (256) (3,089) 229 11 (2,849)
Interest and other income
(expense)....................... (420) -- (123)(g) (543) (966) -- (1,509)
------- ------ ------- ------- ------ ------ ---------
Earnings (loss) before income
taxes......................... (2,938) (315) (379) (3,632) (737) 11 (4,358)
Income taxes...................... 750 -- 64 814 255 (4) 1,065
------- ------ ------- ------- ------ ------ ---------
Net earnings (loss)................. $(2,188) $ (315) $ (315) $(2,818) $ (482) $ 7 $ (3,293)
======= ====== ======= ======= ====== ====== =========
Diluted earnings (loss) per common
share............................. $(0.26) $(0.04) $ (0.33) $(0.66) $ (0.26)
======= ====== ======= ====== =========
(736)(b)
Weighted average common shares...... 8,551 8,500 (8,500) 8,551 736 4,048 12,599
======= ====== ======= ======= ====== ====== =========
</TABLE>
The accompanying notes are an integral part of this proforma information.
57
<PAGE> 64
T-NETIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIVE MONTHS ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------
HISTORICAL
-----------------------------------------
PRO FORMA T-NETIX PRO FORMA PRO FORMA
T-NETIX CELL-TEL ADJUSTS ADJUSTED GATEWAY ADJUSTMENTS COMBINED
------- -------- --------- -------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Telecommunications services..... $14,795 $ -- $ -- $14,795 $2,865 $ -- $17,660
Telecommunications licensing.... 56 -- -- 56 62 (118)(a) --
Direct call provisioning........ 878 -- -- 878 7,953 -- 8,831
Voice print..................... 408 -- -- 408 -- -- 408
Equipment sales................. -- -- -- -- 621 -- 621
Professional service fees....... -- -- -- -- -- -- --
------- ------ ------- ------- ------- ------ -------
Total revenue............. 16,137 -- -- 16,137 11,501 (118) 27,520
EXPENSES:
Operating costs and expenses
Telecommunications services... 6,656 -- -- 6,656 380 (43)(d) 6,993
Direct call provisioning...... 835 -- -- 835 6,637 (119)(d) 7,353
Voice print................... 68 -- -- 68 -- -- 68
Cost of equipment sold........ -- -- -- -- 393 (9)(d) 384
Cost of professional
services.................... -- -- -- -- -- -- --
------- ------ ------- ------- ------- ------ -------
Total operating costs and
expenses................ 7,559 -- -- 7,559 7,410 (171) 14,798
Selling, general and
administrative................ 3,025 8 -- 3,033 1,975 -- 5,008
Research and development........ 978 -- -- 978 382 -- 1,360
Depreciation and amortization... 3,507 12 256(f) 3,775 625 103(e) 4,503
------- ------ ------- ------- ------- ------ -------
Total expenses............ 15,069 20 256 15,345 10,392 (68) 25,669
Operating income (loss)....... 1,068 (20) (256) 792 1,109 (50) 1,851
Interest and other income
(expense)..................... (446) -- (123)(g) (569) (281) -- (850)
------- ------ ------- ------- ------- ------ -------
Earnings (loss) before income
taxes....................... 622 (20) (379) 223 828 (50) 1,001
Income taxes.................... (155) -- 62 (93) (285) 17 (361)
------- ------ ------- ------- ------- ------ -------
Net earnings (loss)............... $ 467 $ (20) $ (317) $ 130 $ 543 $ (33) $ 640
======= ====== ======= ======= ======= ====== =======
Diluted earnings (loss) per common
share........................... $ 0.05 $(0.00) $ 0.01 $ 0.70 $ 0.05
======= ====== ======= ======= =======
(781)(b)
Weighted average common shares.... 9,126 8,500 (8,500) 9,126 781 4,048(b) 13,174
======= ====== ======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of this proforma information.
58
<PAGE> 65
T-NETIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1998
--------------------------------------------------------------------------------
HISTORICAL
--------------------------------
PRO FORM T-NETIX PRO FORMA PRO FORMA
T-NETIX CELL-TEL ADJUSTMENTS ADJUSTED GATEWAY ADJUSTMENTS COMBINED
------- -------- ----------- -------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Telecommunications services... $34,860 $ -- $ -- $34,860 $7,538 $ -- $42,398
Telecommunications
licensing................... 205 -- -- 205 41 (246)(a) --
Direct call provisioning...... 2,516 -- -- 2,516 19,701 -- 22,217
Voice print................... 632 -- -- 632 -- -- 632
Equipment sales............... -- -- -- -- 1,694 -- 1,694
Professional service fees..... -- -- -- -- -- -- --
------- ------ ------- ------- ------- ------ -------
Total revenue........... 38,213 -- -- 38,213 28,974 (246) 66,941
Expenses:
Operating costs and expenses
Telecommunications
services.................. 15,920 -- -- 15,920 977 (112)(d) 16,785
Direct call provisioning.... 2,311 -- -- 2,311 16,906 (295)(d) 18,922
Voice print................. 78 -- -- 78 -- -- 78
Cost of equipment sold...... -- -- -- -- 801 (25)(d) 776
Cost of professional
services.................. -- -- -- -- -- -- --
------- ------ ------- ------- ------- ------ -------
Total operating costs
and expenses.......... 18,309 -- -- 18,309 18,684 (432) 36,561
Selling, general and
administrative.............. 7,448 153 -- 7,601 5,387 -- 12,988
Research and development...... 2,354 15 -- 2,369 1,123 -- 3,492
Depreciation and
amortization................ 8,250 67 615(f) 8,932 1,656 (248)(e) 10,836
------- ------ ------- ------- ------- ------ -------
Total expenses.......... 36,361 235 615 37,211 26,850 (184) 63,877
Operating income (loss)....... 1,852 (235) (615) 1,002 2,124 (62) 3,064
Interest and other income
(expense)................... (1,055) -- (295)(g) (1,350) (614) -- (1,964)
------- ------ ------- ------- ------- ------ -------
Earnings (loss) before
income taxes.......... 797 (235) (910) (348) 1,510 (62) 1,100
Income taxes.................. (198) -- 149 (49) (541) 21 (569)
------- ------ ------- ------- ------- ------ -------
Net earnings (loss)............. $ 599 $ (235) $ (761) $ (397) $ 969 $ (41) $ 531
======= ====== ======= ======= ======= ====== =======
Diluted earnings (loss) per
common share.................. $ 0.07 $(0.03) $ (0.04) $ 1.24 $ 0.04
======= ====== ======= ======= =======
(762)(b)
Weighted average common
shares........................ 9,206 8,500 (8,500) 9,206 762 4,048(b) 13,254
======= ====== ======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of this pro forma information.
59
<PAGE> 66
T-NETIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1997
----------------------------------------------
PRO FORMA PRO FORMA
T-NETIX GATEWAY ADJUSTMENTS COMBINED
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Telecommunications services...................... $33,471 $ 6,083 $ -- $39,554
Telecommunications licensing..................... 750 62 (62)(a) 750
Direct call provisioning......................... 1,395 17,656 -- 19,051
Voice print...................................... 676 -- -- 676
Equipment sales.................................. -- 2,212 -- 2,212
------- ------- ------ -------
Total revenue............................ 36,292 26,013 (62) 62,243
EXPENSES:
Operating costs and expenses
Telecommunications services................... 14,478 784 (92)(d) 15,170
Direct call provisioning...................... 1,297 15,165 (264)(d) 16,198
Voice print................................... 170 -- -- 170
Cost of equipment sold........................ -- 1,128 (29)(d) 1,099
------- ------- ------ -------
Total operating costs and expenses....... 15,945 17,077 (385) 32,637
Selling, general and administrative.............. 7,488 4,328 -- 11,816
Research and development......................... 2,769 785 -- 3,554
Depreciation and amortization.................... 8,135 1,411 248(e) 9,794
------- ------- ------ -------
Total expenses........................... 34,337 23,601 (137) 57,801
Operating income (loss)............................ 1,955 2,412 75 4,442
Interest and other income expense................ (932) (651) -- (1,583)
------- ------- ------ -------
Earnings (loss) before income taxes...... 1,023 1,761 75 2,859
Income taxes..................................... (432) (607) (26) (1,065)
------- ------- ------ -------
Net earnings (loss)................................ $ 591 $ 1,154 $ 49 $ 1,794
======= ======= ====== =======
Diluted earnings (loss) per common share........... $ 0.06 $ 1.48 $ 0.14
======= ======= =======
(779)(b)
Weighted average common shares..................... 9,156 779 4,048(b) 13,204
======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of this pro forma information.
60
<PAGE> 67
T-NETIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1996
----------------------------------------------
PRO FORMA PRO FORMA
T-NETIX GATEWAY ADJUSTMENTS COMBINED
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Telecommunications services...................... $30,249 $ 5,552 $ -- $35,801
Telecommunications licensing..................... -- -- -- --
Direct call provisioning......................... 3,072 14,383 -- 17,455
Voice print...................................... 57 -- -- 57
Equipment sales.................................. -- 498 -- 498
------- ------- ------ -------
Total revenue............................ 33,378 20,433 -- 53,811
EXPENSES:
Operating costs and expenses
Telecommunications services................... 13,489 726 (81)(d) 14,134
Direct call provisioning...................... 2,940 12,863 (216)(d) 15,587
Voice print................................... -- -- -- --
Cost of equipment sold........................ -- 299 (18)(d) 281
------- ------- ------ -------
Total operating costs and expenses....... 16,429 13,888 (315) 30,002
Selling, general and administrative.............. 6,434 5,176 -- 11,610
Research and development......................... 2,374 485 -- 2,859
Depreciation and amortization.................... 5,920 1,282 248(e) 7,450
------- ------- ------ -------
Total expenses........................... 31,157 20,831 (67) 51,921
Operating income (loss)....................... 2,221 (398) 67 1,890
Interest and other income expense................ (548) (364) -- (912)
------- ------- ------ -------
Earnings (loss) before income taxes........... 1,673 (762) 67 978
Income taxes..................................... (46) 248 (23) 179
------- ------- ------ -------
Net earnings (loss)................................ $1,627 $ (514) $ 44 $ 1,157
======= ======= ====== =======
Diluted earnings (loss) per common share........... $ 0.18 $ (0.83) $ 0.09
======= ======= =======
(666)(b)
Weighted average common shares..................... 8,814 666 4,048(b) 12,862
======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of this pro forma information.
61
<PAGE> 68
T-NETIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------
PRO FORMA PRO FORMA
T-NETIX GATEWAY ADJUSTMENTS COMBINED
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents........................ $ 463 $ 215 -- $ 678
Accounts receivable.............................. 11,510 4,843 -- 16,353
Prepaid expenses................................. 595 825 -- 1,420
Inventory........................................ -- 300 -- 300
-------- ------- -------- --------
Total current assets................... 12,568 6,183 -- 18,571
Property and equipment, at cost
Telecommunications equipment................... 43,439 8,942 (78)(a) 52,303
Construction in progress....................... 4,078 838 -- 4,916
Office equipment............................... 5,758 1,624 -- 7,382
-------- ------- -------- --------
Property and equipment........................... 53,275 11,404 (78) 64,601
Less accumulated depreciation.................. (27,728) (5,260) -- (32,988)
-------- ------- -------- --------
Property and equipment, net...................... 25,547 6,144 (78) 31,613
Patent license rights............................ 1,877 -- -- 1,877
Goodwill, net.................................... 2,173 3,651 -- 5,824
Software development costs, net.................. 3,016 -- -- 3,016
Other assets, net................................ 3,482 1,473 2,480(d) 7,435
-------- ------- -------- --------
Total assets........................... $ 48,663 $17,451 2,402 $ 68,516
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable................................. $ 3,056 $ 1,633 $ -- $ 4,689
Accrued expenses................................. 4,127 1,361 1,500(c) 6,988
Debt............................................. 15,160 6,550 -- 21,710
-------- ------- -------- --------
Total current liabilities.............. 22,343 9,554 1,500 33,387
Long-term debt................................... -- 3,800 -- 3,800
Deferred tax liabilities......................... -- 442 -- 442
-------- ------- -------- --------
Total liabilities...................... 22,343 13,786 1,500 37,629
-------- ------- -------- --------
SHAREHOLDERS' EQUITY:
Preferred stock................................ -- -- -- --
Common stock................................... 85 729 4(d) 818
Additional paid-in capital..................... 27,963 4,397 2,476(d) 34,836
Retained earnings.............................. (1,728) (1,461) (1,578)(a)(c) (4,767)
-------- ------- -------- --------
Total shareholders' equity............. 26,320 3,665 902 30,887
-------- ------- -------- --------
Total liabilities and shareholders'
equity............................... $ 48,663 $17,451 $ 2,402 $ 68,516
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of this proforma information.
62
<PAGE> 69
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF INCOME AND BALANCE SHEET
I. BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial statements reflect the
Merger accounted for under the pooling of interests method and the acquisition
of Cell-Tel Monitoring, Inc. on December 31, 1998, which was accounted for as a
purchase. The unaudited pro forma condensed combined statements of income for
each year in the three-year period ended July 31, 1998, and for the five month
periods ended December 31, 1998 and 1997, give effect to the Merger as though
this event had occurred on August 1, 1995. The unaudited pro forma condensed
combined statements of income for the year ended July 31, 1998 and for the
five-month periods ending December 31, 1998 and 1997, give effect to the
acquisition of Cell-Tel as though this event had occurred on August 1, 1997. The
unaudited pro forma condensed combined balance sheet as of December 31, 1998,
assumes that the Merger and the acquisition of Cell-Tel had been consummated on
that date.
The unaudited pro forma condensed combined statements of income present
financial information for T-NETIX for five months ended December 31, 1998 and
1997, and the fiscal years ended July 31, 1998, 1997, and 1996, and the
financial information of Gateway for the five months ended December 31, 1998 and
1997, and the recast financial information for the twelve-month period ended
July 31, 1998, and the years ended December 31, 1997, and 1996. Gateway's fiscal
year ends December 31. The recast financial information for the twelve month
period ended July 31, 1998 includes the five month period ended December 31,
1997, which financial information is also included in the financial information
for the year ended December 31, 1997.
The unaudited pro forma condensed combined balance sheet presents the
balance sheets of T-NETIX and Gateway as of December 31, 1998.
The unaudited pro forma condensed combined statements of income exclude the
positive effects of potential cost savings which may be achieved upon combining
the resources of the companies and non-recurring transaction costs of
approximately $1.5 million, including investment banking, legal, and accounting
fees. These transaction costs will be reflected in the results of operations in
the first period reported by the combined company. Further, T-NETIX expects to
restructure the combined company, resulting in additional non-recurring charges.
The range of amounts and timing of such charges cannot be reasonably estimated
until an analysis of the newly combined operations is completed and a detailed
restructuring plan is developed, but such charges may be material.
On December 31, 1998, T-NETIX exercised its option to acquire 100% of the
common stock of Cell-Tel Monitoring, Inc. ("Cell-Tel"), a Florida corporation.
Cell-Tel engaged in the sales, marketing, research and development of a
prisoner/parolee electronic monitoring device utilizing the Internet and using
T-NETIX's SpeakEZ Voice Printer(R) technology. The purchase price was
approximately $3.8 million, consisting of the conversion of $2.0 million of
Cell-Tel preferred stock and an additional $1.8 million in cash and acquisition
costs. The acquisition has been accounted for by the purchase method of
accounting, and, accordingly, the results of operations for Cell-Tel for the
period beginning January 1, 1999, will be included in T-NETIX's financial
statements. Assets acquired and liabilities assumed have been recorded at their
estimated fair values.
The excess of cost over the estimated fair value of net assets acquired was
allocated to goodwill. A total of $2,173,000 was allocated to goodwill which
will be amortized on a straight-line basis over 7 years. The remaining net
assets were allocated primarily to software development costs and office
equipment.
II. PRO FORMA ADJUSTMENTS
(a) Represents elimination of intercompany licensing revenue between
T-NETIX and Gateway.
(b) Represents an adjustment to reflect the combined weighted average
number of common shares of T-NETIX and Gateway, reflecting the assumed issuance
of approximately 3,673,000 shares of T-NETIX Stock in exchange for approximately
729,000 shares of Gateway Stock outstanding utilizing an exchange ratio of
5.0375 shares of T-NETIX Stock for each share of Gateway Stock and approximately
375,000 shares issued to certain shareholders of Gateway in exchange for
terminating the Royalty Agreement.
63
<PAGE> 70
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF INCOME AND BALANCE SHEET -- (CONTINUED)
The Royalty Agreement calls for payment by Gateway to the Royalty Owners of
a percentage of adjusted gross revenues, as defined (1.5% as of December 31,
1998). Payments are due on or before the 15th day of each month for the previous
month's adjusted gross revenues. Payments under this arrangement were $448,000,
$385,000, $315,000, and $240,000 for the years ended December 31, 1998, 1997,
1996 and 1995, respectively. The Royalty Agreement relates to automated call
processing technology and intellectual property rights that were assigned to
Gateway by the Royalty Owners in exchange for the royalty payments.
(c) Reflects an accrual for the estimated $1,500,000 transaction costs
related to the Merger.
(d) Represents elimination of royalty expense relating to the Royalty
Agreement. In exchange for their terminating their interests in the Royalty
Agreement, T-NETIX will issue 375,339 shares of T-NETIX Stock to the Royalty
Owners. The termination of the Royalty Owners' interests resulted in the
acquisition of an intangible asset. The asset has been recorded at fair value,
or $2,480,000. The fair value is based on the value of T-NETIX Stock at February
10, 1999, $6.625, times the number of shares issued in exchange for termination
of the Royalty Owners' interests. The intangible asset has an estimated useful
life of 10 years.
(e) Represents adjustments to reflect the amortization of intangible assets
acquired as a result of the termination of the Royalty Owners' interests in the
Royalty Agreement. The value of the intangible assets of $2,480,000 is to be
amortized over 10 years.
(f) Represents adjustments to reflect the amortization of goodwill,
capitalized software, and furniture and equipment from the acquisition of
Cell-Tel. The value of the Goodwill, $2,173,000, is to be amortized over seven
years. The fair value of the computer software, $1,358,000, is to be amortized
over five years. The fair value of the furniture and equipment, $164,000, is to
be depreciated over five years.
(g) Represents an adjustment for interest charges on the borrowings
associated with the purchase price of Cell-Tel, assuming the entire purchase
price of $3.8 million was outstanding during the five-month periods ended
December 31, 1998 and 1997, and the year ended July 31, 1998. All borrowings
would have been drawn under T-NETIX's line of credit facility. The interest rate
for the facility is the prime rate and may vary over the term of the credit
facility. The effective interest rate was 7.75% at December 31, 1998. This rate
was used to determine the pro forma interest expense for all periods presented.
The impact of a change of 1/8th percent in the current interest rate on
pro forma combined net income (loss) would have been $2,000, $4,000, and $4,000
for the five-month periods ended December 31, 1998 and 1997, and the year ended
July 31, 1998, respectively.
(h) Represents the elimination of intercompany service revenue between
T-NETIX and Cell-Tel.
III. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The unaudited pro forma condensed combined financial statements assume that
the Merger qualifies as a tax-free reorganization for federal income tax
purposes.
64
<PAGE> 71
GATEWAY TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE> 72
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Gateway Technologies, Inc.:
We have audited the accompanying balance sheets of Gateway Technologies,
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gateway Technologies, Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
KPMG LLP
Dallas, Texas
February 26, 1999
F-1
<PAGE> 73
GATEWAY TECHNOLOGIES, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Current assets:
Cash...................................................... $ 215 $ 175
Accounts receivable, net of allowance for doubtful
accounts of $1,046 in 1998 and $996 in 1997 (note 5)... 4,843 5,037
Prepaid expenses.......................................... 825 398
------- -------
Total current assets.............................. 5,883 5,610
Property and equipment, net (notes 3 and 5)................. 6,144 5,236
Intangible assets, net (note 4)............................. 4,068 1,616
Deferred tax assets (note 6)................................ 654 415
Investment.................................................. -- 600
Other assets................................................ 702 795
------- -------
$17,451 $14,272
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 1,633 $ 1,962
Accrued liabilities....................................... 1,361 652
Federal income taxes payable.............................. -- 319
Advances on direct call processing (note 5)............... 2,531 2,212
Current maturities on indebtedness (note 5)............... 1,419 1,204
Notes payable to stockholders, current (notes 5 and 8).... 2,600 --
------- -------
Total current liabilities......................... 9,544 6,349
Indebtedness, net of current maturities (note 5)............ 1,600 1,612
Notes payable to stockholders, noncurrent (notes 5 and 8)... 2,200 2,200
Deferred tax liabilities (note 6)........................... 442 386
------- -------
13,786 10,547
Series A redeemable preferred stock, 6% cumulative,
nonvoting, nonparticipating, $1 par value, 250,000 shares
authorized, none and 29,996 shares issued and outstanding
at December 30, 1998 and 1997, respectively (note 7)...... -- 600
Stockholders' equity (note 9):
Common stock, $1 par value, 1,000,000 shares authorized,
735,504 and 705,861 issued and outstanding at December
31, 1998 and 1997, respectively........................ 736 706
Treasury Stock, 6,853 shares at December 31, 1998......... (7) --
Paid-in capital........................................... 4,397 3,850
Accumulated deficit....................................... (1,461) (1,431)
------- -------
Total stockholders' equity........................ 3,665 3,125
Commitments (note 10)
======= =======
Total liabilities and stockholders' equity........ $17,451 $14,272
======= =======
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 74
GATEWAY TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Direct call processing.................................... $ 20,220 $ 17,656 $ 14,383
Telecommunication services................................ 8,229 6,145 5,552
Equipment sales........................................... 1,917 2,212 498
-------- -------- --------
Total revenues.................................... 30,366 26,013 20,433
-------- -------- --------
Expenses:
Operating expenses:
Direct call processing................................. 17,737 15,165 12,863
Telecommunication services............................. 1,094 784 726
Cost of equipment sold................................. 770 1,128 299
-------- -------- --------
Total operating expenses.......................... 19,601 17,077 13,888
-------- -------- --------
Selling, general and administrative....................... 5,953 4,328 5,176
Research and development.................................. 1,582 785 485
Depreciation and amortization............................. 1,924 1,411 1,282
-------- -------- --------
Total expenses.................................... 29,060 23,601 20,831
-------- -------- --------
Operating income (loss)........................... 1,306 2,412 (398)
-------- -------- --------
Other income (expense):
Interest expense.......................................... (513) (440) (403)
Interest expense -- related party (note 8)................ (276) (220) (160)
Other, net................................................ (510) 9 199
-------- -------- --------
Total other income (expense)...................... (1,299) (651) (364)
-------- -------- --------
Income (loss) before income taxes................. 7 1,761 (762)
Income tax expense (benefit) (note 6)....................... 2 607 (248)
-------- -------- --------
Net income (loss)................................. 5 1,154 (514)
Preferred stock dividends (note 7).......................... 9 36 36
-------- -------- --------
Net income (loss) available to common
stockholders.................................... $ (4) $ 1,118 $ (550)
======== ======== ========
Basic earnings (loss) per common share...................... $ (0.01) $ 1.59 $ (0.83)
======== ======== ========
Diluted earnings (loss) per common share.................... $ (0.01) $ 1.48 $ (0.83)
======== ======== ========
Weighted average common shares -- basic..................... 730,564 703,383 665,579
======== ======== ========
Weighted average common shares -- diluted................... 730,564 778,825 665,579
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 75
GATEWAY TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT STOCK EQUITY
------- --------- ------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995........ 615,861 616 2,591 (1,999) -- 1,208
Issuance of common stock........... 50,000 50 699 -- -- 749
Net loss........................... -- -- -- (514) -- (514)
Dividends paid to preferred
stockholders.................... -- -- -- (36) -- (36)
------- ---- ----- ------ --- -----
Balances at December 31, 1996........ 665,861 666 3,290 (2,549) -- 1,407
Issuance of common stock........... 40,000 40 560 -- -- 600
Net income......................... -- -- -- 1,154 -- 1,154
Dividends paid to preferred
stockholders.................... -- -- -- (36) -- (36)
------- ---- ----- ------ --- -----
Balances at December 31, 1997........ 705,861 706 3,850 (1,431) -- 3,125
Conversion of redeemable preferred
stock (note 7).................. 29,643 30 563 -- -- 593
Purchase of shares into treasury... -- -- (91) (26) (7) (124)
Stock compensation (note 9)........ -- -- 75 -- -- 75
Net income......................... -- -- -- 5 -- 5
Dividends paid to preferred
stockholders.................... -- -- -- (9) -- (9)
------- ---- ----- ------ --- -----
Balances at December 31, 1998........ 735,504 $736 4,397 (1,461) (7) 3,665
======= ==== ===== ====== === =====
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 76
GATEWAY TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 5 $ 1,154 $ (514)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 1,924 1,411 1,282
(Gain) loss on disposition of equipment................ (83) 6 17
Deferred revenue earned................................ -- (822) (337)
Deferred income taxes.................................. (183) 168 (248)
Noncash compensation expense........................... 75 -- --
Write-off of investment................................ 600 -- --
Change in operating assets and liabilities:
Accounts receivable.................................. 194 (1,822) (436)
Prepaid expenses..................................... (427) (206) 62
Other assets......................................... 93 (69) (723)
Federal income taxes payable......................... (319) 319 68
Accounts payable..................................... (329) 142 264
Accrued liabilities.................................. 709 299 508
------- ------- -------
Net cash provided by (used in) operating
activities...................................... 2,259 580 (57)
------- ------- -------
Cash flows from investing activities:
Acquisitions of intangible assets and contracts........... (2,679) (175) (1,406)
Purchases of property and equipment....................... (2,445) (1,700) (1,436)
Proceeds from disposals of property and equipment......... 121 13 --
------- ------- -------
Net cash used in investing activities............. (5,003) (1,862) (2,842)
------- ------- -------
Cash flows from financing activities:
Net increase on advances on direct call processing........ 319 502 249
Proceeds from debt........................................ 5,412 3,220 4,569
Payments of debt.......................................... (2,807) (3,038) (2,691)
Issuance of common stock.................................. -- 600 748
Issuance of preferred stock............................... -- -- --
Treasury stock purchased.................................. (124) -- --
Redemption of redeemable preferred stock.................. (7) -- --
Dividends paid on preferred stock......................... (9) (36) (36)
------- ------- -------
Net cash provided by financing activities......... 2,784 1,248 2,839
------- ------- -------
Net increase (decrease) in cash............................. 40 (34) (60)
Cash at beginning of period................................. 175 209 269
------- ------- -------
Cash at end of period....................................... $ 215 $ 175 $ 209
======= ======= =======
Supplemental schedule of noncash investing and financing
activities -- acquisition of equipment through capital
lease..................................................... $ 198 $ 132 $ 62
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during period for interest expense.............. $ 748 $ 608 $ 560
======= ======= =======
Cash paid during period for income taxes.................. $ 622 $ 95 $ 35
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 77
GATEWAY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
Gateway Technologies, Inc. (the "Company") was incorporated in the state of
Texas in 1988. The Company provides inmate telecommunication services and
technology for use in correctional facilities throughout the United States.
Through specialized on-site telecommunications hardware and software, the
Company receives direct call processing revenue from billing collect calls made
from correctional facilities. The Company also has contractual arrangements with
long distance and local exchange carriers whereby it receives a fee per each
billable call made from a phone subject to such a contract at correctional
facilities. The Company also assembles and sells specialized telecommunications
equipment comprised of hardware and software components to a local exchange
carrier for use in correctional facilities.
On February 10, 1999, the Company entered into a definitive agreement to
merge with T-Netix, Inc., a public company listed on NASDAQ.
(b) Revenues
Revenues from direct call processing and telecommunications services are
recognized when the service is provided. Revenues from equipment sales are
recognized when the equipment is shipped to customers.
(c) Allowance for Doubtful Accounts and Credit Risk
An allowance for doubtful accounts has been established based on historical
experience and management's evaluation of outstanding accounts receivable at the
end of the accounting period.
(d) Property and Equipment
Property and equipment are recorded at cost, including certain direct and
indirect costs associated with the installation of telecommunications systems at
correctional facilities, including equipment awaiting installation in such
facilities. Depreciation and amortization on installed equipment which is ready
for its intended use is calculated using the straight-line method over the
estimated useful lives of the assets which are as follows:
<TABLE>
<S> <C>
Leasehold improvements................................ Lesser of lease term or useful life
Office equipment...................................... 5-7 years
Telecommunications equipment.......................... 5 years
</TABLE>
Expenditures for major renewals and betterments are capitalized;
expenditures for maintenance and repairs are charged to expense as incurred.
When equipment is retired, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in income.
(e) Intangible Assets
The excess of cost over the fair value of net identifiable tangible assets
from acquisitions has been attributed to contract rights and is amortized using
the straight-line method over an estimated useful life of 10 years.
Patent acquisition costs are capitalized and amortized over the estimated
useful life, which is principally 17 years.
The Company continually evaluates the propriety of the carrying amount of
intangible assets as well as the amortization period to determine whether
current events or circumstances warrant adjustments to the carrying value and/or
revised estimates of the useful life. This evaluation consists of the projection
of
F-6
<PAGE> 78
GATEWAY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
undiscounted cash flows over the remaining amortization period. To the extent
such projections indicate that the undiscounted cash flows are not expected to
be adequate to recover the carrying amounts of intangible assets, such carrying
amounts are written down by charges to expense. The amount of intangible asset
impairment, if any, is measured based on projected discounted cash flows.
(f) Investment
The Company used the cost method of accounting for its investment in the
common stock of a third party as it did not have the ability to exercise
significant influence over the entity. The Company held 528.205 shares, which
represented a 16.9% interest in an unrelated telecommunications company. As a
result of the investee's negative operating results, significant decrease in
revenues and the loss of a key member of management during 1998, the Company
wrote off the carrying value of its investment. This charge of $600,000 is
included in other expense in the accompanying 1998 statement of operations.
(g) Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to be
realized. Income tax expense is the total of tax payable for the period and the
change during the period in deferred tax assets and liabilities.
(h) Earnings (Loss) Per Common Share
Earnings (loss) per common share are presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, Earnings Per
Share ("SFAS 128"). Under SFAS 128, basic earnings (loss) per share ("EPS")
excludes dilution for potentially dilutive securities 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. Potentially dilutive
securities are excluded from the computation of diluted earnings (loss) per
share when their inclusion would be antidilutive. The computations of basic and
diluted weighted average shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- ---------- ---------
<S> <C> <C> <C>
Numerator:
Net income (loss) available to common
stockholders.................................. $ (4,000) $1,118,000 $(550,000)
Preferred stock dividends.......................... -- 36,000 --
-------- ---------- ---------
Numerator for diluted earnings (loss) per
share......................................... $ (4,000) $1,154,000 $(550,000)
======== ========== =========
Denominator:
Denominator for basic earnings (loss) per share
weighted average shares outstanding........... 730,564 703,383 665,579
Effect of dilutive securities:
Employee stock options........................ -- 45,446 --
Redeemable preferred stock.................... -- 29,996 --
-------- ---------- ---------
Denominator for dilutive earnings (loss) per
share weighted average shares outstanding..... $730,564 $ 778,825 $ 665,579
======== ========== =========
</TABLE>
F-7
<PAGE> 79
GATEWAY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(i) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(j) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
(k) Stock Option Plan
Effective July 1, 1996, the Company implemented the 1996 Long-Term
Incentive Plan which authorized the Board of Directors to grant options to
employees. Prior to July 1, 1996, the Company had no outstanding options. During
1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and provide pro forma net income disclosure for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(l) Fair Value of Financial Instruments
The carrying values of cash, accounts receivable, accounts payable and
advances on direct call processing approximate fair value due to their short
maturities. It was not practicable to estimate the fair value of the Company's
investment representing 16.9% of the issued common stock of an untraded company
as of December 31, 1997; that investment was carried at its original cost of
$600,000 in the accompanying balance sheet. As of and for the year ended
December 31, 1997, total assets reported by the untraded company were
approximately $2,205,000 and the common stockholders' equity was $1,592,000,
revenues were $6,317,000 and net income was $724,000. It is not practical to
estimate the fair value of the redeemable preferred stock outstanding at
December 31, 1997, which was issued in a private placement, as such stock is not
traded in the open market and a market price is not readily available. See note
5 for fair value of debt instruments.
(m) Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods to be provided for
comparative purposes. The Company adopted SFAS
F-8
<PAGE> 80
GATEWAY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
No. 130 on January 1, 1998, however no incremental disclosures are required as
the Company does not have any elements of comprehensive income (loss) except for
the net income (loss) reported in the statements of operations.
(2) ACQUISITION
In October 1998, the Company acquired certain contracts and assets of
Consolidated Telecom, Inc. ("Consolidated") for cash consideration of
approximately $2,753,000, including direct costs of the acquisition. This
acquisition was funded with proceeds from stockholder notes payable (note 5).
This acquisition was accounted for as a purchase, and accordingly, the purchase
price was allocated to tangible and intangible assets based on fair market
values at the date of acquisition. The purchase price is subject to adjustment
one year from the date of acquisition based on the actual cash flows received by
the Company directly as a result of the contracts acquired.
In June 1996, the Company acquired certain contracts and assets of Business
Telecommunications Systems, Inc. ("BTS") for cash consideration of approximately
$1,461,000, including direct costs of the acquisition. This acquisition was
funded with proceeds from a note payable (note 5). This acquisition was
accounted for as a purchase, and accordingly, the purchase price was allocated
to tangible and intangible assets based on fair market values at the date of
acquisition. In conjunction with the acquisition, the Company issued a $100,000
note receivable to the sellers. The note, which bears interest at 10%, is due in
monthly interest and quarterly principal installments, with the final payment
due on July 1, 1999.
Unaudited pro forma operating results as though the acquisition of
Consolidated had occurred on January 1, 1997, with adjustments to give effect to
amortization, interest expense and certain other adjustments is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
UNAUDITED
<S> <C> <C>
Revenues................................................... $30,775 $26,558
Operating income........................................... 1,347 2,467
Net income (loss).......................................... (508) 766
</TABLE>
The pro forma information does not purport to represent what the Company's
results of operations would have been had such transactions occurred on January
1, 1997, or to project the Company's results of operations for any future
period.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Equipment held awaiting installation........................ $ 838 1,000
Leasehold improvements...................................... 36 31
Office and plant equipment.................................. 1,588 1,208
Telecommunications equipment................................ 8,942 6,625
------- -------
11,404 8,864
Accumulated depreciation and amortization................... (5,260) (3,628)
------- -------
$ 6,144 $ 5,236
======= =======
</TABLE>
F-9
<PAGE> 81
GATEWAY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------ ------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Patent...................................................... $ 676 $ 619
Acquired contract rights.................................. 4,013 1,391
------ ------
4,689 2,010
Less accumulated amortization............................. (621) (394)
------ ------
$4,068 $1,616
====== ======
</TABLE>
(5) INDEBTEDNESS AND ADVANCES
Debt and advances consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------ ------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Advances:
Advances on direct call processing (a)................. $2,531 $2,212
------ ------
Debt:
Notes payable to stockholders (b)...................... 4,800 2,200
Notes payable to bank (c).............................. 625 775
Bank lines of credit (d)............................... 2,169 1,795
Equipment notes (e).................................... -- 50
Other.................................................. 225 196
------ ------
7,819 5,016
Less: current notes payable to stockholders............... 2,600 --
Less: current maturities on other debt.................... 1,419 1,204
------ ------
Total long-term debt.............................. $3,800 $3,812
====== ======
</TABLE>
(a) Advances on Direct Call Processing
Advances on direct call processing consist of revolving advances with the
Company's billing and collection company. The advances are collateralized with
accounts receivable processed by the billing company, which are $4,399,000 and
$4,195,000 as of December 31, 1998 and 1997, respectively. Advances are made to
the Company when the receivable is determined and repaid when the receivable is
collected by the Company, including interest at the prime rate (7.75% at
December 31, 1998) plus three percentage points.
(b) Notes Payable to Stockholders
At December 31, 1998 and 1997, notes payable to seven stockholders in the
amount of $4,800,000 and $2,200,000 are outstanding, respectively. The notes
bear interest at 10% (payable quarterly) and are uncollateralized. Amounts
borrowed to finance the acquisition of Consolidated of $2,600,000 are due July
15, 1999 with the remaining $2,200,000 due on April 15, 2001. The carrying value
of these notes approximates fair value at December 31, 1998 and 1997 as such
notes bear interest at the Company's current incremental borrowing rate for
uncollateralized borrowings.
F-10
<PAGE> 82
GATEWAY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(c) Notes Payable to Bank
The Company entered into a note payable with a bank for $1,500,000 in June
1996 in conjunction with an acquisition (note 2). In 1997, with the purchase of
additional assets related to the 1996 acquisition, an additional $175,000 was
borrowed from the bank. The note is collateralized by the acquired equipment and
contracts and bears interest at 10.0%. The note is payable in monthly
installments of principal and interest, with the final payment due on December
31, 1999. Amounts outstanding under this note payable were $375,000 and $775,000
at December 31, 1998 and 1997, respectively.
The Company entered into a second a note payable with the same bank for
$500,000 in June 1998 in conjunction with signing two new site contracts. The
note is collateralized by contracts and bears interest at 10.0%. The note is
payable in monthly installments of principal and interest, beginning August 1,
1998, with the final payment due on July 1, 1999. Amounts outstanding under this
note payable were $250,000 at December 31, 1998.
The carrying value of the notes payable to banks at December 31, 1998 and
1997 approximates fair value as amounts outstanding bear interest at rates
similar to the Company's incremental borrowing rate for similar borrowings.
(d) Bank Lines of Credit
The Company has a line of credit with a bank providing for borrowings of up
to $500,000. Borrowings outstanding bear interest at the bank's prime rate plus
a margin of 1.5% (effective interest rate of 9.25% at December 31, 1998).
Amounts outstanding under this facility are due on May 13, 1999. Borrowings
outstanding under this credit facility, which are personally guaranteed by
certain shareholders of the Company, were $226,000 and $123,000 at December 31,
1998 and 1997, respectively. The carrying value of borrowings outstanding under
this line of credit at December 31, 1998 and 1997 approximate fair value as
amounts outstanding bear interest at current market rates.
The Company has a second line of credit with a lender providing for
borrowings of up to $2,432,000. Borrowings outstanding bear interest at the
30-day commercial paper rate plus 2.70% (effective interest rate of 7.80% at
December 31, 1998). Availability of funds under the facility is reduced
annually, with final payment of any borrowings outstanding on December 31, 2002.
Borrowings outstanding under this agreement, which are collateralized by
equipment, contracts and accounts receivable, were $1,889,000 and $1,672,000 at
December 31, 1998 and 1997, respectively. The carrying value of borrowings
outstanding under this line of credit at December 31, 1998 and 1997 approximate
fair value as amounts outstanding bear interest at current market rates.
During 1998, the Company entered into a third line of credit agreement with
a lender providing for borrowings of up to $1,000,000. Borrowings outstanding
bear interest at the 30-day commercial paper rate plus 2.70% (effective interest
rate of 7.80% at December 31, 1998). Availability of funds under the facility is
reduced monthly, with final payment of any borrowings outstanding on June 30,
2003. Borrowings outstanding under this agreement, which are collateralized by
equipment, contracts and accounts receivable, were $54,000 at December 31, 1998.
The carrying value of borrowings outstanding under this line of credit at
December 31, 1998 approximates fair value as amounts outstanding bear interest
at current market rates.
(e) Equipment Notes
The Company has entered into notes payable with a financing company to
purchase telecommunications equipment. Notes payable of $50,000, bearing
interest at 12% and due in monthly principal and interest installments of
approximately $25,000, with final payment made on January 15, 1998, were
outstanding at December 31, 1997. The notes were collateralized by the specific
equipment that was financed. The fair value of the notes payable at December 31,
1997 approximates fair value due to the short maturity of the notes.
F-11
<PAGE> 83
GATEWAY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, principal payments due on all indebtedness, in
future years were as follows (amounts in thousands):
<TABLE>
<S> <C>
1999....................................................... $4,019
2000....................................................... 536
2001....................................................... 2,736
2002....................................................... 461
2003....................................................... 67
</TABLE>
(6) INCOME TAXES
Income tax expense (benefit) attributed to income (loss) before income
taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Current..................................................... $ 185 $439 $ --
Deferred.................................................... (183) 168 (248)
----- ---- -----
$ 2 $607 $(248)
===== ==== =====
</TABLE>
Total income tax expense (benefit) differed from the amount computed by
applying the U.S. federal statutory income tax rate of 34% to income (loss)
before income taxes for the years ended December 31, 1998, 1997 and 1996 as a
result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)................... $ 2 $599 $(259)
Nondeductible expenses...................................... 8 11 11
Revision of prior year estimate............................. -- -- --
Other, net.................................................. (8) (3) --
--- ---- -----
$ 2 $607 $(248)
=== ==== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
----- -----
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 355 $ 279
Goodwill -- difference in amortization.................... 18 17
Accrued compensation...................................... 17 13
Investment -- difference in basis......................... 211 --
Other..................................................... 53 106
----- -----
Total deferred tax assets......................... 654 415
----- -----
Deferred tax liability --
Property and equipment, primarily resulting from
difference in depreciation............................. (442) (386)
----- -----
Net deferred tax asset............................ $ 212 $ 29
===== =====
</TABLE>
F-12
<PAGE> 84
GATEWAY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities are computed by applying the U.S.
federal income tax rate in effect to the gross amounts of temporary differences
and other tax attributes, such as net operating loss carryforwards.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. The Company expects the
deferred tax assets at December 31, 1998 to be realized as a result of the
reversal during the carryforward period of existing taxable temporary
differences giving rise to deferred tax liabilities and the generation of
taxable income in the carryforward period.
(7) REDEEMABLE PREFERRED STOCK
During 1995, the Company issued 29,996 shares of Series A Convertible
Preferred Stock, par value $1, to existing common stockholders of record as of
January 15, 1995. The preferred stock was nonvoting with dividend and
liquidation preference over common stock. Cumulative dividends of 6% on the $20
purchase price of the preferred stock were paid quarterly beginning May 31,
1995.
Under the terms of the preferred stock designation, on March 1, 1998, the
preferred stockholders could elect to require the Company to redeem the
preferred stock at the stated value of $20 plus unpaid dividends. Any preferred
stock not redeemed at March 1, 1998 was to be automatically converted into
shares of the Company's common stock on a one share for one share basis. On
March 1, 1998, 353 shares of Series A Preferred were redeemed at their purchase
price of $20 per share and 29,643 shares were converted to common stock on a one
share for one share basis, at the election of the Series A Preferred
stockholders.
(8) RELATED PARTY TRANSACTIONS
(a) Notes Payable to Stockholders
Various stockholders or their companies made loans to the Company during
the year for operations. Below is a summarization of these transactions (note
5).
<TABLE>
<CAPTION>
1998 1997
------ ------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Beginning balance........................................... $2,200 $2,200
Payments.................................................... -- --
Advances.................................................... 2,600 --
------ ------
Ending balance.............................................. $4,800 $2,200
====== ======
</TABLE>
Interest paid to shareholders or their companies during the years ended
December 31, 1998, 1997 and 1996 was $276,000, $220,000 and $160,000,
respectively.
(b) Assignment and Royalty Agreement
Telequip Technology Development Partners ("TTDP"), a partnership in which
the Company, through its stockholders, had a related interest, had assigned to
the Company its rights and interests in all agreements with Telequip Labs, Inc.
In exchange for this assignment, the Company pays a one and one half percent
royalty on all revenues generated from operations of the Company excluding
interest, dividends and capital gains. Effective January 1, 1995, TTDP had
dissolved and the royalty was paid to the former partners on an individual
basis. The Company paid the former TTDP partners $448,000, $385,000, $315,000
for the years
F-13
<PAGE> 85
GATEWAY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1998, 1997 and 1996, respectively. These royalty payments are
included in operating expenses in the accompanying statements of operations.
(9) STOCK OPTIONS
The Company has established the 1996 Long-Term Incentive Plan (the "Plan")
which provides for the issuance of stock options to officers and other key
employees of the Company. The Plan makes available 86,000 shares of common stock
for issuance. Options issued under the Plan have varying vesting periods as
provided in separate stock option agreements and carry an expiration date of ten
years subsequent to the date of issuance. In July 1996, 59,130 options were
issued with an exercise price of $8.10, which approximated the market price at
date of grant. No options were granted in 1997. In 1998, 3,784 options were
issued with an exercise price of $8.10, with an estimated market price of $28.00
on the date of grant. The Company recorded compensation expense in the amount of
$75,000 related to the issuance of these options in 1998. Additionally, 5,657 of
the options granted in 1996 were forfeited during 1998. No options have been
exercised as of December 31, 1998. The weighted average fair value of options
granted during 1998 and 1996 were $10.00 and $2.10, respectively.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized in the accompanying
financial statements for the stock options issued in 1996. As noted above,
compensation expense of $75,000 was recorded for options granted in 1998 with
exercise prices below estimated fair market value of the underlying common
stock. If the Company had determined compensation cost based on the fair value
at the grant date for these stock options under SFAS No. 123, the Company's net
income (loss) would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net income (loss) (in thousands):
As reported.............................................. $ 5 $1,154 $ (514)
Pro forma................................................ $ 35 $1,123 $ (545)
Basic earnings (loss) per common share:
As reported.............................................. $(0.01) $ 1.59 $(0.83)
Pro forma................................................ $ 0.04 $ 1.55 $(0.87)
Diluted earnings (loss) per common share:
As reported.............................................. $(0.01) $ 1.48 $(0.83)
Pro forma................................................ $ 0.03 $ 1.44 $(0.87)
</TABLE>
The fair value of the option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants: dividend yield of 0% for all years; expected
volatility of 0%; risk-free interest rate of 6.0% and expected life of five
years.
Of the 57,257 options outstanding at December 31, 1998, 27,861 are vested.
The unvested options will automatically vest in full if there is a change in
control of the Company, including upon the successful merger with T-NETIX, Inc.
(10) COMMITMENTS
The Company leases certain office equipment under noncancellable capital
leases expiring in 1998 through 2000. Capitalized costs of the equipment under
capital leases was not significant at December 31, 1997 and 1996 and the related
indebtedness is included in indebtedness in the accompanying balance sheet (note
5).
F-14
<PAGE> 86
GATEWAY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has entered into an operating lease which expires September 30,
2002 for office space at $19,000 a month. The rent expense was $213,000,
$162,000, $160,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. At December 31, 1998, future minimum lease payments were as
follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31:
- -----------------------
<S> <C>
1999........................................................ $225
2000........................................................ 235
2001........................................................ 235
2002........................................................ 176
</TABLE>
The Company has entered into certain binding agreements with two vendors to
purchase additional inventory items at a fixed price in the aggregate amount of
$156,000. All current inventory purchase commitments are expected to be
fulfilled by December 31, 1999.
F-15
<PAGE> 87
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
T-NETIX, INC.,
A COLORADO CORPORATION,
AND
T-NETIX ACQUISITION CORP.,
A COLORADO CORPORATION
GATEWAY TECHNOLOGIES, INC.,
A TEXAS CORPORATION,
CERTAIN SHAREHOLDERS
OF T-NETIX, INC.
AND
CERTAIN SHAREHOLDERS
OF GATEWAY TECHNOLOGIES, INC.
February 10, 1999
<PAGE> 88
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE
MERGER.............................................................. 1
1.1 PLAN OF MERGER.............................................. 1
1.2 MERGER CONSIDERATION........................................ 2
1.3 NO FURTHER RIGHTS OF TRANSFER............................... 2
1.4 SURVIVING CORPORATION....................................... 3
1.5 THE CLOSING................................................. 3
1.6 T-NETIX STOCK............................................... 4
1.7 DISSENTING GATEWAY SHAREHOLDERS............................. 4
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF T-NETIX........................... 5
2.1 ORGANIZATION, STANDING, CORPORATE AUTHORIZATION, AND
ENFORCEABILITY.............................................. 5
2.2 CAPITALIZATION.............................................. 5
2.3 ARTICLES OF INCORPORATION AND BYLAWS; CERTAIN RECORDS....... 6
2.4 COMPLIANCE WITH OTHER INSTRUMENTS AND LAWS.................. 6
2.5 GOVERNMENTAL AUTHORIZATIONS; CONSENTS....................... 6
2.6 LITIGATION.................................................. 6
2.7 FINANCIAL STATEMENTS; CONDUCT OF T-NETIX BUSINESS; NO
UNDISCLOSED LIABILITIES..................................... 6
2.8 ABSENCE OF CERTAIN CHANGES OR EVENTS........................ 7
2.9 TITLE TO PROPERTY, ABSENCE OF LIENS AND ENCUMBRANCES........ 8
2.10 FULL AUTHORITY; COMPLIANCE WITH LAWS........................ 8
2.11 T-NETIX BENEFIT PLANS....................................... 8
2.12 CLAIMS...................................................... 10
2.13 TAXES....................................................... 10
2.14 ENVIRONMENTAL QUALITY....................................... 11
2.15 INTELLECTUAL PROPERTY....................................... 12
2.16 LABOR MATTERS............................................... 13
2.17 BROKERS AND FINDERS......................................... 13
2.18 T-NETIX'S KNOWLEDGE......................................... 13
2.19 YEAR 2000 COMPLIANCE........................................ 13
2.20 CUSTOMERS AND VENDORS....................................... 14
2.21 ACCURACY.................................................... 14
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF GATEWAY........................... 14
3.1 ORGANIZATION, STANDING, CORPORATE AUTHORIZATION, AND
ENFORCEABILITY.............................................. 14
3.2 CAPITALIZATION.............................................. 15
3.3 ARTICLES OF INCORPORATION AND BYLAWS; CERTAIN RECORDS....... 15
3.4 COMPLIANCE WITH OTHER INSTRUMENTS AND LAWS.................. 15
3.5 GOVERNMENTAL AUTHORIZATIONS; CONSENTS....................... 15
3.6 LITIGATION.................................................. 15
3.7 FINANCIAL STATEMENTS; CONDUCT OF GATEWAY BUSINESS; NO
UNDISCLOSED LIABILITIES..................................... 16
3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS........................ 16
3.9 TITLE TO PROPERTY, ABSENCE OF LIENS AND ENCUMBRANCES........ 17
3.10 FULL AUTHORITY; COMPLIANCE WITH LAWS........................ 17
3.11 BENEFIT PLANS............................................... 17
</TABLE>
A-i
<PAGE> 89
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.12 CLAIMS...................................................... 19
3.13 TAXES....................................................... 19
3.14 CONTRACTS................................................... 20
3.15 ENVIRONMENTAL QUALITY....................................... 21
3.16 INTELLECTUAL PROPERTY....................................... 22
3.17 RELATED PARTY TRANSACTIONS.................................. 22
3.18 OTHER MATTERS............................................... 22
3.19 CUSTOMERS AND VENDORS....................................... 23
3.20 OTHER DISCLOSURES........................................... 23
3.21 PARACHUTE PAYMENTS.......................................... 23
3.22 BROKERS AND FINDERS......................................... 23
3.23 GATEWAY'S KNOWLEDGE......................................... 23
3.24 YEAR 2000 COMPLIANCE........................................ 24
3.25 RIGHT OF FIRST REFUSAL...................................... 24
3.26 TERMINATION OF EXISTING AGREEMENT........................... 24
3.27 ACCURACY.................................................... 24
ARTICLE 4
ADDITIONAL REPRESENTATIONS AND WARRANTIES OF GATEWAY, GATEWAY
SHAREHOLDER SIGNATORIES AND GATEWAY SHAREHOLDERS.................. 24
4.1 OWNERSHIP OF SHARES......................................... 24
4.2 INVESTMENT REPRESENTATIONS.................................. 24
ARTICLE 5
COVENANTS OF GATEWAY................................................ 25
5.1 CONDUCT OF BUSINESS......................................... 25
5.2 CONFIDENTIALITY............................................. 25
5.3 ACCESS...................................................... 26
5.4 NO SALE OR TRANSFER OF SHARES............................... 26
5.5 NO SHOPPING................................................. 26
5.6 FILINGS AND CONSENTS........................................ 26
5.7 UPDATED GATEWAY DISCLOSURE LETTER........................... 27
5.8 MAXIMUM INDEBTEDNESS........................................ 27
5.9 POOLING AND TAX-FREE REORGANIZATION TREATMENT............... 27
5.10 PROXY MATERIALS............................................. 27
ARTICLE 6
COVENANTS OF T-NETIX................................................ 27
6.1 CONDUCT OF BUSINESS......................................... 27
6.2 CONFIDENTIALITY............................................. 28
6.3 ACCESS...................................................... 28
6.4 NO SHOPPING................................................. 29
6.5 FILINGS AND CONSENTS........................................ 29
6.6 UPDATED T-NETIX DISCLOSURE LETTER........................... 29
6.7 POOLING AND TAX-FREE REORGANIZATION TREATMENT............... 29
6.8 PROXY MATERIALS............................................. 29
ARTICLE 7
COVENANTS OF ALL PARTIES............................................ 30
7.1 COMMERCIALLY REASONABLE EFFORTS; FURTHER ASSURANCES......... 30
7.2 CERTAIN FILINGS, ETC. ...................................... 30
7.3 PUBLIC ANNOUNCEMENTS........................................ 30
7.4 HART-SCOTT-RODINO FILING.................................... 30
7.5 AFFILIATES.................................................. 30
</TABLE>
A-ii
<PAGE> 90
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 8
CONDITIONS TO CLOSING............................................... 31
8.1 CONDITIONS FOR THE BENEFIT OF T-NETIX....................... 31
8.2 CONDITIONS FOR THE BENEFIT OF GATEWAY....................... 32
ARTICLE 9
POST-CLOSING COVENANTS.............................................. 33
9.1 ADDITIONAL FUNDING.......................................... 33
9.2 SERVICE CREDIT.............................................. 33
9.3 BOARD OF DIRECTORS.......................................... 33
ARTICLE 10
TERMINATION OF AGREEMENT............................................ 34
10.1 RIGHT TO TERMINATE AGREEMENT................................ 34
10.2 EFFECT OF TERMINATION....................................... 34
10.3 DAMAGES..................................................... 34
ARTICLE 11
CERTAIN REMEDIES AND LIMITATIONS.................................... 35
11.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS....... 35
11.2 INDEMNIFICATION BY T-NETIX.................................. 35
11.3 LIMITATIONS ON LIABILITY OF T-NETIX......................... 35
11.4 INDEMNIFICATION BY GATEWAY SHAREHOLDERS..................... 36
11.5 LIMITATIONS ON LIABILITIES OF GATEWAY SHAREHOLDERS.......... 36
11.6 INDEMNIFICATION CLAIMS...................................... 36
11.7 DEFENSE OF THIRD-PARTY ACTIONS.............................. 37
11.8 SUBROGATION................................................. 38
11.9 EXCLUSIVITY................................................. 38
11.10 RETENTION OF RECORDS........................................ 38
ARTICLE 12
MISCELLANEOUS....................................................... 39
12.1 MATERIALITY................................................. 39
12.2 NOTICES; ETC. .............................................. 39
12.3 ASSIGNMENT.................................................. 40
12.4 ENTIRE AGREEMENT; AMENDMENT; GOVERNING LAW; ETC. ........... 40
12.5 COUNTERPARTS................................................ 40
12.6 THIRD-PARTY RIGHTS.......................................... 40
12.7 RECITALS AND EXHIBITS....................................... 40
12.8 PRONOUNS.................................................... 40
12.9 AUTHORITY AND EXECUTION..................................... 40
12.10 SEVERABILITY................................................ 40
12.11 TIME OF ESSENCE............................................. 41
12.12 INTERPRETATION.............................................. 41
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
A-1 Articles of Merger (Colorado)
A-2 Articles of Merger (Texas)
B Rule 145 Letter
D-1 Employment Agreement of Richard E. Cree
Non-competition Agreements of G. B. Cree Jr., W. P.
E Buckthal, Irvin Wall and James B. Franklin
F Investor Representation Letter
G Opinion of Rothgerber Johnson & Lyons LLP
</TABLE>
A-iii
<PAGE> 91
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERMS PAGE
- ----- ----
<S> <C>
Affiliate................................................... 10
Agreement................................................... 1
Annual Financial Statements................................. 16
Benefit Plan................................................ 18
Business.................................................... 1
CERCLA...................................................... 11
Certificate................................................. 2
Claim Notice................................................ 37
Claimants................................................... 36
Claims...................................................... 7
Closing..................................................... 3
Closing Date................................................ 3
COBRA....................................................... 10
Code........................................................ 1
Colorado Corporation Act.................................... 1
Confidential Information.................................... 28
Disqualified Individuals.................................... 23
Dissenters' Rights.......................................... 4
Dissenting Shareholders..................................... 4
Effective Time.............................................. 2
Employment Agreements....................................... 31
Environmental Laws.......................................... 12
ERISA....................................................... 8
Financial Statements........................................ 16
Gateway..................................................... 1
Gateway Associates.......................................... 25
Gateway Change of Control................................... 26
Gateway Confidential Information............................ 28
Gateway Disclosure Letter................................... 14
Gateway Equity Rights....................................... 15
Gateway Holdback Shares..................................... 3
Gateway Intellectual Property............................... 22
Gateway Options............................................. 2
Gateway Related Agreements.................................. 14
Gateway Shareholder Indemnified Obligation.................. 35
Gateway Shareholder Signatories............................. 1
Gateway Shareholders........................................ 1
Gateway Shareholders' Representative........................ 4
Gateway Stock............................................... 2
Gateway Title Notice........................................ 17
Hazardous Materials......................................... 11
HSR Act..................................................... 30
Indebtedness................................................ 27
Indemnification Claim....................................... 36
Indemnified Parties......................................... 37
Indemnifying Parties........................................ 37
Initial Consideration....................................... 3
Interim Financial Statements................................ 16
Leased Property............................................. 17
</TABLE>
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<TABLE>
<CAPTION>
TERMS PAGE
- ----- ----
<S> <C>
Legal Requirement........................................... 6
Losses...................................................... 35
Material Adverse Effect..................................... 39
Material Contracts.......................................... 20
Merger...................................................... 1
Merger Consideration........................................ 2
Multiemployer Plan.......................................... 9
Non-Competition Agreements.................................. 31
PBGC........................................................ 9
Pension Plan................................................ 9
Permits..................................................... 8
Permitted Liens............................................. 8
Person...................................................... 3
Pro Rata Share.............................................. 2
Property.................................................... 21
RCRA........................................................ 11
Real Property............................................... 17
Related Parties............................................. 22
SEC......................................................... 1
SEC Filings................................................. 6
Securities Act.............................................. 24
Shareholder Indemnified Obligation.......................... 35
Shareholder Indemnified Parties............................. 35
Surviving Corporation....................................... 1
T-NETIX..................................................... 1
T-NETIX Associates.......................................... 28
T-NETIX Benefit Plan........................................ 9
T-NETIX Change of Control................................... 29
T-NETIX Confidential Information............................ 25
T-NETIX Disclosure Letter................................... 5
T-NETIX Equity Rights....................................... 6
T-NETIX Indemnified Parties................................. 36
T-NETIX Intellectual Property............................... 12
T-NETIX Leased Property..................................... 8
T-NETIX Options............................................. 2
T-NETIX Real Property....................................... 8
T-NETIX Related Agreements.................................. 5
T-NETIX Reserve Shares...................................... 3
T-NETIX Shareholder Signatories............................. 1
T-NETIX Shareholders........................................ 1
T-NETIX Stock............................................... 2
T-NETIX Title Notice........................................ 8
TAC......................................................... 1
TAC Stock................................................... 2
Tax......................................................... 11
Tax Opinion................................................. 31
Tax Returns................................................. 11
Taxes....................................................... 11
Texas Corporation Act....................................... 1
TTDP Royalty Agreement...................................... 2
TTDP Royalty Owners......................................... 2
</TABLE>
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<TABLE>
<CAPTION>
TERMS PAGE
- ----- ----
<S> <C>
Updated Gateway Disclosure Letter........................... 27
Updated T-NETIX Disclosure Letter........................... 29
Year 2000 Compliant......................................... 13
</TABLE>
<TABLE>
<CAPTION>
INDEX OF DEFINED TERMS IN EXHIBITS
- ----------------------------------
<S> <C>
Acquisition................................................. Exhibit B
Accredited Investor......................................... Exhibit F
Acquisition Documents....................................... Exhibit C
Competition................................................. Exhibit E
Competitive Operation....................................... Exhibit E
Customer.................................................... Exhibit E
Non-Competition Period...................................... Exhibit E
Restricted Area............................................. Exhibit E
Sophisticated Investor...................................... Exhibit F
T-NETIX Entities............................................ Exhibit E
</TABLE>
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AGREEMENT AND PLAN OF MERGER OF T-NETIX AND GATEWAY
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into as of February 10, 1999, by and among T-NETIX, INC., a Colorado corporation
("T-NETIX"), T-NETIX ACQUISITION CORP. ("TAC"), a Colorado corporation and a
wholly owned subsidiary of T-NETIX, and GATEWAY TECHNOLOGIES, INC., a Texas
corporation ("Gateway"), and those shareholders of T-NETIX (the "T-NETIX
Shareholder Signatories") and Gateway (the "Gateway Shareholder Signatories")
who have executed this Agreement for the purpose of those agreements contained
in Section 1.1(a) or (b) as applicable.
WITNESSETH:
WHEREAS, the Boards of Directors of Gateway, T-NETIX and TAC have
determined that it is in the best interests of Gateway, T-NETIX and their
respective shareholders for TAC to be merged with and into Gateway (the
"Merger") upon and subject to the terms, conditions, representations and
warranties set forth herein.
WHEREAS, Gateway is in the business of providing inmate calling equipment
and services (the "Business").
WHEREAS, the Parties intend the Merger to be a "pooling of interests" for
accounting purposes and a "reorganization" within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the mutual covenants, representations
and warranties made herein and of the mutual benefits to be derived herefrom,
Gateway and T-NETIX agree as follows:
ARTICLE 1
MERGER
1.1 PLAN OF MERGER. Subject to the terms and conditions of this Agreement,
including the receipt of all requisite shareholder approvals, the Merger will be
carried out in the following manner:
(a) As soon as practicable after the joint proxy statement/offering
memorandum referred to in Section 6.8 hereof has been completed and filed with
the Securities and Exchange Commission (the "SEC"), and all applicable waiting
periods have expired, Gateway shall duly call, notice and hold a meeting of its
shareholders (the "Gateway Shareholders") to approve the Merger under the Texas
Business Corporation Act, as amended (the "Texas Corporation Act"). The Gateway
Shareholder Signatories agree to vote for approval of the Merger at such
meeting.
(b) As soon as practicable after the T-NETIX joint proxy statement/offering
memorandum referred to in Section 6.8 hereof has been completed and filed with
the SEC and all applicable waiting periods have expired, T-NETIX shall duly
call, notice and hold a meeting of its shareholders (the "T-NETIX Shareholders")
to approve the Merger under the Colorado Business Corporation Act, as amended
(the "Colorado Corporation Act"). The T-NETIX Shareholder Signatories agree to
vote for approval of the Merger at such meeting.
(c) At the Effective Time (as defined in Section 1.1(d)), TAC shall merge
with and into Gateway, the separate existence of TAC shall cease and Gateway
shall continue as the surviving corporation (Gateway, in its capacity as the
corporation surviving the Merger, is hereinafter sometimes referred to as the
"Surviving Corporation").
(d) Subject to the provisions of this Agreement, Articles of Merger
substantially in the forms of Exhibits A-1 and A-2 shall be duly executed and,
on the Closing Date (as defined in Section 1.5 hereof) filed, respectively, with
the Texas Secretary of State in accordance with the Texas Corporation Act and
the
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Colorado Secretary of State in accordance with the Colorado Corporation Act. The
Merger shall become effective upon the filing of the Articles of Merger (the
"Effective Time").
(e) At the Effective Time, each share of common stock of Gateway, par value
$1.00 per share (the "Gateway Stock") shall be converted into the right to
receive the Merger Consideration (as defined in Section 1.2). In addition, each
Certificate (as defined in Section 1.3 below) shall represent the right to
receive the Merger Consideration multiplied by the number of shares of Gateway
Stock formerly represented by such Certificate.
(f) At the Effective Time, each share of common stock of TAC, no par value
(the "TAC Stock"), shall be converted into the right to receive one (1) share of
Gateway Stock.
1.2 MERGER CONSIDERATION.
(a) The "Merger Consideration" shall consist of 5.0375 shares of the common
stock of T-NETIX, $0.01 stated value per share (the "T-NETIX Stock") for each
one (1) share of Gateway Stock outstanding at the Effective Time (other than
shares held by Dissenting Gateway Shareholders, as defined in Section 1.7
hereof). Fractional shares shall not be issued, and in lieu thereof T-NETIX
shall pay cash in an amount equal to the average closing price of T-NETIX Stock
for the five trading days immediately prior to the Closing Date, times the
applicable fraction of a share. The number of shares of Gateway Stock that will
be owned by each Gateway Shareholder immediately before the Effective Time is
set forth in the Gateway Disclosure Letter (as defined in Article 3 hereof), and
each Gateway Shareholder's proportion of ownership of the total number of shares
of Gateway Stock outstanding immediately before the Effective Time (and not held
by Dissenting Gateway Shareholders) shall be referred to herein as such Gateway
Shareholder's "Pro Rata Share."
(b) All outstanding options to purchase Gateway Stock (the "Gateway
Options") shall be exchanged for options to purchase T-NETIX Stock (the "T-NETIX
Options") to be issued pursuant to T-NETIX's Non-Qualified Stock Option Plan.
For each one (1) share of Gateway Stock underlying a Gateway Option, there shall
be 5.0375 shares of T-NETIX Stock underlying the T-NETIX Option exchanged
therefor. In addition, the exercise price for each T-NETIX Option shall be equal
to the exercise price for the Gateway Option exchanged therefor divided by
5.0375. Each T-NETIX Option shall have the same vesting schedule as the Gateway
Option exchanged therefor and shall in all other material respects have the same
terms as the Gateway option exchanged therefor. Any T-NETIX Option that is
exchanged for a Gateway Option that is fully vested immediately prior to the
Effective Time, whether or not due to acceleration of such vesting, shall be
fully vested from and after the Effective Time. T-NETIX shall register the
T-NETIX Options on Form S-8 no later than six months after the Effective Time.
(c) In exchange for termination of that certain dated royalty agreement
dated October 5, 1989 (the "TTDP Royalty Agreement") between Gateway and certain
other parties thereto (the "TTDP Royalty Owners"), and in addition to the
consideration stated in paragraphs (a) and (b) of this Section 1.2, T-NETIX
shall issue to the TTDP Royalty Owners (pro rata in accordance with their
respective royalty interests) a total of 375,339 shares of T-NETIX Stock. The
Gateway Disclosure Letter shall reflect the shares of T-NETIX Stock to be issued
under this paragraph (c) of Section 1.2, and the recipients thereof.
(d) In the event that Gateway's Indebtedness (as defined in Section 5.8
hereof) exceeds the maximum amount permitted by that section, the Merger
Consideration shall be reduced by that number of shares of T-NETIX Stock equal
to the excess of Gateway's Indebtedness over the maximum Indebtedness allowed
pursuant to Section 5.8 hereof, divided by the average closing price of T-NETIX
Stock for the five trading days immediately prior to the date hereof, divided by
the number of shares of Gateway Stock outstanding immediately before the
Effective Time (other than shares held by Dissenting Gateway Shareholders). The
number of shares of T-NETIX Stock underlying T-NETIX Options exchanged for
Gateway Options pursuant to Section 1.2(b) hereof shall be equally reduced, and
the exercise price of such T-NETIX Options shall be equally increased.
1.3 NO FURTHER RIGHTS OF TRANSFER. At and after the Effective Time, each
holder of a certificate formerly representing one or more shares of Gateway
Stock (a "Certificate") shall cease to have
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any rights as a shareholder of Gateway, except for the right to surrender such
Certificate in exchange for the Merger Consideration deliverable in respect
thereof, and no transfer of shares of Gateway Stock shall be made on the stock
transfer books of Gateway. Certificates presented to the Surviving Corporation
after the Effective Time shall be canceled and exchanged for the Merger
Consideration as provided in this Article 1. At the close of business on the day
of the Effective Time, the stock ledger of Gateway with respect to the shares of
Gateway Stock shall be closed.
1.4 SURVIVING CORPORATION. The Articles of Incorporation and Bylaws of
Gateway, as in effect immediately prior to the Effective Time, shall be the
Articles of Incorporation and Bylaws of the Surviving Corporation. At the
Effective Time, the directors of TAC immediately prior to the Effective Time
shall be the directors of the Surviving Corporation, each to hold office,
subject to the applicable provisions of the Articles of Incorporation and Bylaws
of the Surviving Corporation, until the next annual shareholders' meeting of the
Surviving Corporation and until their respective successors shall be duly
elected or appointed and qualified. At the Effective Time, the officers of
Gateway immediately prior to the Effective Time shall be the officers of the
Surviving Corporation, each to hold office in accordance with the terms of his
or her employment (which, unless otherwise stated in writing, shall be
employment-at-will).
1.5 THE CLOSING. The closing of the transactions contemplated by this
Article 1 (the "Closing") shall be held at the offices of Rothgerber Johnson &
Lyons LLP in Denver, Colorado, at 9:00 a.m. (local time) on March 31, 1999, or
at such other place, time and date as may be jointly designated by T-NETIX and
Gateway (the date on which the Closing takes place, the "Closing Date"). At or
before the Closing, each of the following shall occur:
(a) At the Closing, from each Gateway Shareholder's Merger Consideration
according to such Gateway Shareholder's Pro Rata Share, T-NETIX shall deduct and
hold back shares of T-NETIX Stock which represent five percent (5%) of the
aggregate Merger Consideration (such shares being referred to herein as the
"Gateway Holdback Shares"). T-NETIX shall also reserve and set aside additional
shares of T-NETIX Stock equal in number to the Gateway Holdback Shares (such
shares being referred to herein as the "T-NETIX Reserve Shares"). T-NETIX shall
reserve and set aside the Gateway Holdback Shares and the T-NETIX Reserve Shares
exclusively for issuance pursuant to this Section 1.5 and to Article 11 hereof.
(b) The shares of T-NETIX Stock comprising the Merger Consideration
remaining after the holdback provided for in Section 1.5(a) shall be the
"Initial Consideration." At the Closing, each Gateway Shareholder shall
surrender for cancellation all Certificates held by such Gateway Shareholder,
duly endorsed in blank or accompanied by such transmittal letters as T-NETIX may
reasonably require. As soon as reasonably practicable but in no event later than
ten (10) days following the date upon which the materials described in the
preceding sentence have been deliver to T-NETIX, T-NETIX shall issue and deliver
to each Gateway Shareholder such Gateway Shareholder's Pro Rata Share of the
shares of the T-NETIX Stock comprising the Initial Consideration.
(c) If the Merger Consideration (or any portion thereof) is to be delivered
to a Person other than the Gateway Shareholder in whose name the Certificates
surrendered in exchange therefor are registered, it shall be a condition to the
issuance and delivery of the shares of T-NETIX Stock comprising the Merger
Consideration that the Certificates so surrendered shall be properly endorsed or
accompanied by appropriate stock powers and otherwise in proper form for
transfer, that such transfer otherwise be proper and that the Gateway
Shareholder requesting such transfer pay to T-NETIX any transfer or other taxes
payable by reason of the foregoing or establish to the satisfaction of T-NETIX
that such taxes have been paid or are not required to be paid.
For purposes of this Agreement, "Person" shall mean and include an
individual, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization, a group and a government or other department or
agency thereof.
(d) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the Gateway Shareholder claiming
such Certificate to be lost, stolen or destroyed, and upon such Gateway
Shareholder's agreement to indemnify the Surviving Corporation against any claim
that may be
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made against the Surviving Corporation with respect to the Certificate claimed
to have been lost, stolen or destroyed, or, if reasonably required by T-NETIX,
upon such Gateway Shareholder's obtaining a lost instrument bond in form and
amount satisfactory to T-NETIX, T-NETIX will issue in exchange for such lost,
stolen or destroyed Certificate a duplicate certificate for the shares of
T-NETIX Stock representing the Merger Consideration deliverable in respect
thereof as determined in accordance with this Article 1.
(e) Subject to the other terms of this Agreement, (i) any remaining Gateway
Holdback Shares in excess of the amount of any Indemnification Claims (as
defined in Section 11.6) of T-NETIX will be issued to Gateway Shareholders, and
(ii) any remaining T-NETIX Reserve Shares in excess of the amount of any
Indemnification Claims of Gateway Shareholders will remain authorized but
unissued T-NETIX Stock, and will no longer be reserved and set aside pursuant
hereto, all on the earlier of the first anniversary of the Closing Date or the
date of publication of the first combined annual audited financial statements of
Gateway and T-NETIX, or on such earlier date as may be mutually agreed upon in
writing by T-NETIX and the Gateway Shareholders' Representative.
(f) As of the Effective Time, Richard E. Cree shall, without further action
on his part or on the part of the Gateway Shareholders, become the "Gateway
Shareholders' Representative" hereunder. As Gateway Shareholders'
Representative, Mr. Cree shall have full power and authority to act for the
Gateway Shareholders and the Gateway Shareholder Indemnified Parties (as defined
in Section 11.2 hereof), on their behalf, and in their names, places and steads,
in taking all actions, fulfilling all duties and executing all documents as may
be required in connection with the Gateway Holdback Shares, the T-NETIX Reserve
Shares and any indemnification claims under Article 11 hereof.
1.6 T-NETIX STOCK. The T-NETIX Stock to be issued and delivered to Gateway
Shareholders will not be registered under federal or state securities laws, but
rather, issued pursuant to an exemption therefrom. As a result, such T-NETIX
Stock is "restricted" stock as such term is defined under such securities laws
and cannot be sold, pledged or transferred unless subsequently registered or
unless an exemption is available allowing its resale. T-NETIX shall file
registration statements with respect to the T-NETIX Stock (including a Form S-8
registration statement covering the shares underlying the T-NETIX Options)
within 120 days (180 days in the case of the Form S-8 registration statement)
after the Closing and use its best efforts to cause such registration statements
to become effective under applicable state and federal securities laws within
180 days after the Closing and to remain current and effective for as long as is
necessary to allow each Gateway Shareholder to sell such T-NETIX Stock publicly
without restriction (except for restrictions that apply to persons who become
affiliates (as that term is defined in Rule 144) of T-NETIX). T-NETIX shall only
have the obligation to register such T-NETIX Stock one time. Such registration
rights and obligations shall terminate as to a particular Gateway Shareholder at
such time as that Gateway Shareholder can sell such Gateway Shareholder's
T-NETIX Stock without regard to volume or other limitations pursuant to Rule 144
under the Securities Act of 1933.
1.7 DISSENTING GATEWAY SHAREHOLDERS. Any shares of Gateway Stock held by
persons who have satisfied the requirements of Sections 5.11, 5.12 and 5.13 of
the Texas Corporation Act related to the rights of dissenting shareholders
("Dissenters' Rights"), and have not effectively withdrawn or lost such
Dissenters' Rights (such persons being referred to as "Dissenting Gateway
Shareholders"), shall not be converted pursuant to this Agreement. Instead,
Dissenting Gateway Shareholders shall be entitled only to such Dissenters'
Rights. Each Dissenting Gateway Shareholder who is entitled to payment for his
or her shares of Gateway Stock pursuant to such Dissenters' Rights shall receive
payment from T-NETIX in an amount as determined pursuant to such Dissenters'
Rights. Upon payment by T-NETIX of any amount due to Dissenting Gateway
Shareholders, if the amount paid to Gateway Dissenting Shareholders exceeds the
value of the Merger Consideration (with T-NETIX Stock valued at the average
closing price of T-NETIX Stock for the five trading days immediately prior to
the date hereof) that would have otherwise been payable to such Dissenting
Gateway Shareholders, that number of Gateway Holdback Shares having a value
(with T-NETIX Stock valued at the average closing price of T-NETIX Stock for the
five trading days immediately prior to the date hereof) equal to such excess,
shall be released from classification as Gateway Holdback Shares. T-NETIX shall
not pay any amount to Dissenting Gateway Shareholders in an amount per share in
excess of
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the Merger Consideration unless directed to do so by the Gateway Shareholders'
Representative or by order of a court of competent jurisdiction.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF T-NETIX
T-NETIX represents and warrants to Gateway and each of the Gateway
Shareholders that, except as set forth on the disclosure letter (the "T-NETIX
Disclosure Letter") separately delivered by T-NETIX to Gateway before the date
hereof (the items on such T-NETIX Disclosure Letter being identified by the
section or sections hereof to which they relate), the following statements are
true and accurate as of the date of this Agreement:
2.1 ORGANIZATION, STANDING, CORPORATE AUTHORIZATION, AND ENFORCEABILITY.
(a) T-NETIX is a corporation duly organized, validly existing and operating
under the laws of the State of Colorado. T-NETIX is in good standing under the
laws of the State of Colorado and has all requisite corporate power and
authority to carry on its businesses as currently conducted and to own or lease
and operate its properties. T-NETIX is qualified to do business and is in good
standing in each jurisdiction in which the property owned, leased or operated by
it, or the nature of the business conducted by it, makes such qualification
necessary, except where the failure to so qualify would not materially affect
the ability of T-NETIX to conduct its business there.
(b) This Agreement and any related agreements executed or to be executed by
T-NETIX in connection with transactions contemplated hereby (the "T-NETIX
Related Agreements") constitute the valid and legally binding obligations of
T-NETIX and are enforceable in accordance with their terms, except as such
enforceability may be limited by equitable principles and by applicable
bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws
relating to or affecting the rights of creditors generally. T-NETIX has the
requisite corporate power and authority to enter into this Agreement and the
T-NETIX Related Agreements.
(c) The execution and delivery of this Agreement, the T-NETIX Related
Agreements, and all other documents and instruments executed or to be executed
by T-NETIX pursuant to this Agreement, and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate and other action on the part of T-NETIX. This Agreement and the
T-NETIX Related Agreements have been or will have been, at the time of their
respective executions and deliveries, duly executed and delivered by a duly
authorized officer of T-NETIX.
(d) T-NETIX does not own, directly or indirectly, the capital stock (or
other similar equity interests) of any other corporation, joint venture,
partnership, limited liability company or other similar entity.
2.2 CAPITALIZATION. As of the date of this Agreement, the authorized
capital stock of T-NETIX consists only of 70,000,000 shares of T-NETIX Stock, of
which 8,557,567 shares are issued and outstanding, and 10,000,000 shares of
preferred stock, $0.01 par value per share, of which no shares are issued or
outstanding. All prior issuance of securities by T-NETIX and all prior
repurchases, redemptions or exchanges affecting the outstanding securities of
T-NETIX have complied with all applicable Legal Requirements (as defined below)
(including federal and state securities laws), preemptive rights and contractual
restrictions. All Shares of T-NETIX Stock have been duly authorized and validly
issued and are fully paid and nonassessable. Except as described above, T-NETIX
does not have shares of its capital stock authorized, issued or outstanding.
There are currently 1,906,300 shares of T-NETIX Stock underlying outstanding
T-NETIX Options. Set forth in the T-NETIX Disclosure Letter is a list of
outstanding T-NETIX Options, including numbers of underlying shares, amounts
vested and exercise prices. Except as described above, there are no outstanding
convertible or exchangeable securities, subscriptions, calls, options, warrants,
rights (contractual or arising by operation of law, including, without
limitation, rights of first refusal and preemptive rights), or other agreements
or commitments of any character to which T-NETIX is a party or by which it is
bound, relating to the issuance, purchase, other acquisition or voting of any
shares of the capital stock of, or other
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equity or ownership interest in (collectively, "T-NETIX Equity Rights") T-NETIX.
No bonds, debentures, notes or other indebtedness having the right to vote under
any circumstances (or convertible into securities having such right to vote) of
T-NETIX are issued and outstanding. There are no agreements, arrangements or
commitments of any character (contingent or otherwise) pursuant to which any
person or entity is or may be entitled to receive any payment based on the
revenues or earnings, or calculated in accordance therewith, of T-NETIX. There
are no voting trusts, proxies or other agreements or understandings to which
T-NETIX is a party or by which T-NETIX is bound with respect to the voting of
any shares of capital stock or other T-NETIX Equity Rights.
For purposes of this Agreement, the term "Legal Requirement" shall mean any
federal, state or local law, statute, legislation, ordinance, code, rule,
regulation, decree, award, order, permit, franchise, consent or authorization
of, any federal, state, local or other governmental body or agency, department,
commission, bureau, board, council, court, magistrate, panel or instrumentality
of the United States, any political subdivision thereof or any state or local
governmental authority.
2.3 ARTICLES OF INCORPORATION AND BYLAWS; CERTAIN RECORDS. Copies of the
Articles of Incorporation, Bylaws, minute books and stock records of T-NETIX
have been made available to Gateway, and each such copy is true, correct and
complete. All material records of any type and description in whatever form or
medium that presently exist and that relate to the business or properties of
T-NETIX are in the possession or control of T-NETIX and are located at the
offices of T-NETIX or of its counsel, independent auditors, consultants, or
other advisors, and T-NETIX will have the right to possession of all such
records upon the consummation of the transactions contemplated by this
Agreement.
2.4 COMPLIANCE WITH OTHER INSTRUMENTS AND LAWS. The execution and delivery
of this Agreement and the Related Agreements and the consummation of the
transactions contemplated hereby and thereby will not conflict with or result in
any violation of or default under any provision of the Articles of Incorporation
or Bylaws of T-NETIX or any material mortgage, indenture, trust, lease,
partnership or other agreement or other instrument, permit, concession, grant,
franchise, license, judgment, order, decree, or Legal Requirement applicable to
T-NETIX or any of the properties of T-NETIX, nor will they result in the
creation or imposition of any material lien, security interest, charge, claim or
other encumbrance of any nature whatsoever on any of the properties or assets of
T-NETIX or the shares of T-NETIX Stock, nor will they prevent or materially
delay the consummation of the transactions contemplated hereby.
2.5 GOVERNMENTAL AUTHORIZATIONS; CONSENTS. No consents, licenses,
approvals or authorizations of, or registrations or declarations with, any
governmental authority, agency, bureau or commission, or any third party, are
required to be obtained or made (i) by T-NETIX in connection with the execution,
delivery, performance, validity and enforceability of this Agreement or any
Related Agreement, or (ii) by T-NETIX in connection with the sale or transfer of
the shares of T-NETIX Stock pursuant to the transactions contemplated by this
Agreement, and will not prevent or materially delay the consummation of the
transactions contemplated hereby.
2.6 LITIGATION. No action, suit, proceeding or governmental investigation
is pending or, to the knowledge of T-NETIX, threatened, at law or in equity,
which seeks to question, delay or prevent, or could have the effect of delaying
or preventing, the consummation of all or any portion of the transactions
contemplated hereby.
2.7 FINANCIAL STATEMENTS; CONDUCT OF T-NETIX BUSINESS; NO UNDISCLOSED
LIABILITIES.
(a) T-NETIX has delivered to Gateway T-NETIX's Form 10-K for the year ended
July 31, 1998, Annual Report to Shareholders for the year ended July 31, 1998,
Proxy Statement dated November 10, 1998 relating to T-NETIX's Annual Meeting of
Shareholders to be held December 10, 1998, Form 10-Q for the fiscal quarter
ended October 31, 1998, Form 8-K dated December 15, 1998, and Form 8-K dated
December 31, 1998 (collectively referred to as the "SEC Filings"). To the extent
applicable, all of the SEC Filings have been prepared in accordance with GAAP
consistently applied for all relevant periods (except as indicated therein) and
present fairly the financial position of T-NETIX as of the dates thereof and the
results
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of its operations for the periods then ended, subject, as applicable, to normal
recurring year-end adjustments and the absence of notes.
(b) T-NETIX has no Claims, debts, obligations, guaranties of the
obligations of others or liabilities (whether absolute or contingent, liquidated
or unliquidated, due or to become due) that are required by GAAP to be reflected
in financial statements or notes thereto, except for (i) Claims, debts,
obligations, guaranties and liabilities to the extent reflected or reserved
against in the T-NETIX Financial Statements, (ii) debts, obligations, guaranties
and liabilities incurred or entered into subsequent to October 31, 1998, in the
ordinary course of business and otherwise not in contravention of this
Agreement, and (iii) debts, obligations and liabilities relating to this
Agreement and the Related Agreements and instruments being executed and
delivered in connection herewith and the transactions referred to herein and
therein.
(c) As used in this Agreement, "Claims" means any and all claims,
liabilities, causes of action, arbitrations, audits, hearings, investigations,
litigation or suits, whether in contract, tort or otherwise, whether statutory
or common law, whether civil, criminal, administrative, investigative, formal or
informal, whether known or unknown, fixed or contingent.
2.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except (i) for matters disclosed
in the SEC Filings or (ii) as contemplated by this Agreement, T-NETIX has not,
since July 31, 1998:
(a) undergone any change in its condition (financial or otherwise),
properties, assets, liabilities, business or operations, except for changes in
the ordinary course of business which have not either individually or in the
aggregate had a negative material effect on T-NETIX;
(b) changed any of its methods of accounting or accounting practices or
classifications of assets or liabilities, or failed to maintain its books of
account in the usual, regular and ordinary manner in accordance with GAAP unless
required by regulation or GAAP;
(c) modified the material terms of, or canceled or terminated, any T-NETIX
Material Contract (as defined below);
(d) terminated, discharged or received any written notice regarding the
resignation, discharge or termination of any officer;
(e) established or adopted any T-NETIX Benefit Plan, or increased the
amount of the wages, bonus, salary, commissions, fringe benefits or other
compensation or remuneration payable to, any of its directors, officers or
employees, except such salary increases as do not exceed T-NETIX's current wage
scale or pre-date normal review time periods for any individual, and except
bonuses consistent with past practices;
(f) declared, set aside, made or paid any dividend or other distribution in
respect of its capital stock or purchased or redeemed, directly or indirectly,
any shares of its capital stock, or split up, combined, reclassified, redeemed,
repurchased or otherwise reacquired any of its capital stock;
(g) issued or sold any shares of its capital stock of any class or any
subscriptions, options, warrants, calls or other rights to purchase directly or
indirectly any such shares or any securities directly or indirectly convertible
into or exchangeable for such shares or made any other change in its capital
structure;
(h) incurred any direct or contingent liability for borrowed money or
guaranteed the monetary obligations of any other person or entity, or made any
monetary investment in, advance to or loan to any person or entity other than in
the ordinary course of business;
(i) mortgaged, pledged or subjected to any material lien, lease, security
interest or other charge or encumbrance any of its properties or assets,
tangible or intangible;
(j) made any material change in its practices, operations or policies with
respect to the method for selling goods or services, or other method for
accounting for sales, the conduct of accounts receivable collection or accounts
payable payment activities or the maintenance of inventory levels;
(k) merged or consolidated with or into any other entity;
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(l) implemented or adopted any change in its tax methods, principles or
elections;
(m) acquired or disposed of any material assets or properties or made any
capital improvement other than in the ordinary course of business; or
(n) suffered any damage, destruction or loss (whether or not covered by
insurance) which has had or could reasonably be expected to have a material
effect on T-NETIX.
2.9 TITLE TO PROPERTY, ABSENCE OF LIENS AND ENCUMBRANCES.
(a) For the purposes of this Agreement, the term "Permitted Liens" shall
mean liens for current taxes not yet due and imperfections of title, liens and
encumbrances, if any, which do not materially and adversely affect the use,
value or marketability of the property affected thereby.
(b) T-NETIX has good title to its owned material assets, including the
tangible assets reflected on the balance sheet included in the SEC Filings,
other than assets disposed of or used after the date thereof in the ordinary
course of business for fair value, and other than T-NETIX Intellectual Property,
which is addressed by Section 2.15 hereof. The tangible assets owned by T-NETIX
are owned free and clear of all liens, mortgages, pledges, charges, security
interests or encumbrances, except for Permitted Liens. T-NETIX owns, leases or
licenses, and has adequate rights to use all material real and personal property
and other material assets necessary to conduct a going concern on a basis
consistent with past practices. The assets of T-NETIX are in good operating
condition and repair (subject to normal wear and tear). Neither the whole nor
any part of T-NETIX's real property ("T-NETIX Real Property") has been condemned
by any public authority, nor, to T-NETIX's knowledge, is any such condemnation
or taking threatened or contemplated. There exists free and uninterrupted egress
and ingress over a public roadway to all operating facilities.
(c) T-NETIX validly holds the leasehold created by the leases (true,
complete and correct copies of which have been provided to Gateway) as described
in the T-NETIX Disclosure Letter as the "T-NETIX Leased Property" and such
leases are enforceable by T-NETIX as the lessee thereunder.
(d) T-NETIX is not a party to any agreement granting any third party the
right or an option to purchase or lease all or any portion of the T-NETIX Real
Property or any personal property of T-NETIX.
(e) There is not pending nor has T-NETIX received any written notice of (i)
any Claim or proceeding asserting or seeking to establish a title interest in
the T-NETIX Real Property or T-NETIX Leased Property, or any Claim of default
("T-NETIX Title Notice") under any of the leases under which leaseholds have
been created, or (ii) the existence of any facts or proceedings which may result
in the issuance of such a T-NETIX Title Notice; and, there are not any such
proceedings nor is there any T-NETIX Title Notice.
2.10 FULL AUTHORITY; COMPLIANCE WITH LAWS. To the knowledge of T-NETIX,
T-NETIX is in compliance with all material applicable Legal Requirements. Set
forth in the T-NETIX Disclosure Letter is a list of any and all material
permits, licenses, consents, orders, approvals, franchises, certificates or
other authorizations under any applicable Legal Requirement (collectively, the
"Permits"), issued to T-NETIX in connection with the ownership, operation and
maintenance of its businesses or assets. T-NETIX has obtained and maintained all
Permits. Each of the Permits is in full force and effect, and T-NETIX is
substantially in compliance with all the provisions of such Permits.
2.11 T-NETIX BENEFIT PLANS.
(a) Except as set forth in its SEC Filings, T-NETIX does not maintain,
sponsor, participate in or contribute to, or is required to contribute to,
directly or indirectly, or has any obligation under:
(i) Any employee benefit plan, employee pension benefit plan, employee
welfare benefit plan (including any medical, dental, disability, accident
or sickness, salary continuation or life insurance plan or arrangement), or
multiemployer plan, all as defined in the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), regardless of whether or not a
plan is exempt from some or all of the otherwise applicable requirements of
ERISA; or
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(ii) Except as disclosed in the SEC Filings, any bonus, commission,
deferred compensation, incentive compensation, restricted stock, stock
purchase, stock option, stock appreciation right, debenture, supplemental
pension, profit sharing, royalty pool, vacation, sick leave, severance or
termination pay policies, supplemental unemployment benefits plan, loan
guarantee, relocation assistance, employee loan or other extensions of
credit, or other similar plan, program, agreement, policy, commitment,
arrangement or benefit currently in effect under which current or former
employees or their dependents, beneficiaries, representatives or estates
are currently or will in the future be entitled to benefits.
(b) With respect to each plan, program, agreement, policy, commitment,
arrangement or benefit described in its SEC Filings (a "T-NETIX Benefit Plan"),
T-NETIX has furnished to Gateway true, correct and complete copies of such
T-NETIX Benefit Plan, including amendments, if applicable, summary plan
descriptions, if applicable, the Internal Revenue Service determination letter,
if applicable, and the two most recent Forms 5500, 5500-C or 5500-R, as
applicable, and has made available to Gateway the most recent actuarial reports
of or regarding such T-NETIX Benefit Plan. As to each T-NETIX Benefit Plan not
reduced to writing, T-NETIX has provided to Gateway a description of all
material elements of such T-NETIX Benefit Plan.
(c) Except as set forth in its SEC Filings:
(i) Each T-NETIX Benefit Plan has been operated and administered
substantially in accordance with its terms and applicable laws, including
but not limited to ERISA and the Code. Each T-NETIX Benefit Plan that is
intended to be qualified under the Code either has received from the
Internal Revenue Service, or timely applied for, a determination letter on
such T-NETIX Benefit Plan's qualified status.
(ii) To the knowledge of T-NETIX, neither T-NETIX nor any other party
in interest (within the meaning of ERISA) has engaged in any non-exempt
prohibited transaction with respect to any T-NETIX Benefit Plan under ERISA
or the Code, and there is no pending assertion of the occurrence of any
such transaction.
(iii) All contributions required under applicable law or the terms of
any T-NETIX Benefit Plan, collective bargaining agreement or other
agreement relating to a T-NETIX Benefit Plan to be paid by T-NETIX for all
periods prior to the Closing Date have been or will have been completely
and timely made to each T-NETIX Benefit Plan when due, and T-NETIX has
established adequate reserves on its books to meet liabilities for
contributions accrued but that have not been made because they are not yet
due and payable.
(iv) There is no current or pending investigation or audit by the
Internal Revenue Service, the Department of Labor or any other governmental
entity of any T-NETIX Benefit Plan, nor has T-NETIX received notification
from any such governmental entity of such a pending audit or investigation,
and there are no actions, suits or claims pending (other than routine
claims for benefits) or threatened, with respect to any T-NETIX Benefit
Plan or against the assets of any such T-NETIX Benefit Plan.
(v) Except as disclosed in its SEC Filings, no T-NETIX Benefit Plan is
or ever has been a plan subject to Title IV of ERISA, Part 3 of Subtitle B
of Title I of ERISA or Section 412 of the Code ("Pension Plan") or is or
ever has been a multiemployer plan as defined in Section 3(37) of ERISA or
Section 414(f) of the Code ("Multiemployer Plan"). T-NETIX has not incurred
any liability to the Pension Benefit Guaranty Corporation ("PBGC") with
respect to any Pension Plan, except for required premium payments, which
payments have been made when due. No accumulated funding deficiency (within
the meaning of Section 312 of the Code or Section 302 of ERISA) or
reportable event (as defined in Section 4043 of ERISA) has occurred with
respect to any Pension Plan. No event has occurred in connection with any
Pension Plan which could subject T-NETIX or any Pension Plan, or Gateway,
its Affiliates or any of their respective benefit plans, to liability under
Section 4062, 4063 or 4064 of ERISA, and, no event has occurred which might
give rise to any liability of T-NETIX or any Pension Plan, or Gateway, its
Affiliates or any of their respective benefit plans, to the PBGC under
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Title IV of ERISA or which could reasonably be anticipated to result in any
Claims being made against T-NETIX or any Pension Plan, or Gateway, its
Affiliates or any of their respective benefit plans, by the PBGC. For
purposes of this Agreement, an "Affiliate" of a party is any individual,
company or other entity that owns five percent (5%) or more of the voting
or capital stock or other equity interest of such party or of which five
percent (5%) of the voting or capital stock or other equity interest is
owned or otherwise controlled by that party or an Affiliate of that party,
as the case may be. T-NETIX has not incurred and, as a result of the
transactions contemplated by this Agreement, will not incur any withdrawal
liability (including any contingent or secondary withdrawal liability)
within the meaning of Section 4201 and 4204 of ERISA to any Multiemployer
Plan. Upon a complete withdrawal or a partial withdrawal (as those terms
are defined in Section 4203 and 4205, respectively, of ERISA) from a
Multiemployer Plan occurring on or before the close of the most recent
fiscal year of each such Multiemployer Plan ended prior to the Closing
Date, T-NETIX would not have been subject to withdrawal liability under
Title IV, Subtitle E, Part 1 of ERISA and, there has been no change in the
financial condition of any Multiemployer Plan that would result in the
imposition of such liability due to such complete or partial withdrawal on
or before the Closing Date.
(vi) T-NETIX has substantially complied with all notice and
continuation coverage requirements applicable to group health plans under
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"), with respect to all medical and health benefits provided by
T-NETIX that are subject to COBRA.
(vii) No T-NETIX Benefit Plan amendments have been adopted nor will
any such amendments be adopted prior to the Closing Date except as may be
necessary for compliance purposes with the Code or ERISA and there is no
arrangement, commitment or understanding to create any additional plan
which would constitute a T-NETIX Benefit Plan or increase the rate of
benefit accrual or contribution requirement under any of the T-NETIX
Benefit Plans or modify, change or terminate any existing T-NETIX Benefit
Plan.
(viii) T-NETIX is not a member of a "controlled group" of
organizations (as defined in Sections 414(b), (c), (m) or (o) of the Code)
which sponsors or maintains any employee benefit plan within the meaning of
Section 3(3) of ERISA which under Title IV of ERISA or any section of the
Code or ERISA would subject T-NETIX or Gateway or any of their respective
employee benefit plans or the fiduciaries thereof or their respective
assets to any taxes, encumbrances, penalties or other liabilities.
2.12 CLAIMS. Except as set forth in the SEC Filings, there are no Claims
against, or to the knowledge of T-NETIX, threatened against, T-NETIX or its
properties, at law or in equity or before any court, governmental department,
commission, board, agency, authority or instrumentality, domestic or foreign.
T-NETIX is not subject to any judgment, stipulation, order or decree arising
from any action, suit, proceeding or investigation which could be reasonably
expected to have, individually or in the aggregate, a material effect on T-NETIX
before or after the Closing Date. No action, suit, proceeding or governmental
investigation is pending or threatened against T-NETIX which seeks to question,
delay or prevent the consummation of the transactions contemplated hereby.
2.13 TAXES.
(a) Except for the tax years set forth in the T-NETIX Disclosure Letter,
for which valid extensions of the time for filing Tax Returns have been filed,
T-NETIX has filed or will file or cause to be filed, within the applicable
period prescribed by law, all federal, state, local, foreign or other Tax
Returns required by such law to be filed by T-NETIX for all taxable periods
ending on or prior to the Closing Date.
(b) T-NETIX has paid, within the time and in the manner prescribed by law,
all Taxes shown as due on all such Tax Returns and, with respect to all Tax
Returns which T-NETIX has not yet filed, but will file prior to the Closing
Date, shall pay, within the time and in the manner prescribed by law, all Taxes
shown as due on such Tax Returns.
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(c) For purposes of this Agreement, "Taxes" in the plural and "Tax" in the
singular shall refer to any and all taxes, charges, fees, levies, or other
assessments of whatever kind or nature, including, but not limited to, any
federal, state, local or foreign net income, gross income, gross receipts,
unitary, license, payroll, unemployment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including, but not limited to, taxes
under section 59A of the Code), occupational, leasing, lease, fuel, customs,
duties, capital stock, franchise, profits, withholding, Social Security,
unemployment, disability, ad valorem, real property, personal property (tangible
and intangible), sales, use, transfer, registration, value added, alternative or
minimum, estimated, or any other kind of tax whatsoever, including the recapture
of any tax items, recoveries under escheat or similar laws, and including any
interest, addition, penalty or other associated charge thereto, whether disputed
or not. For purposes of this Agreement, "Tax Returns" shall mean any returns,
reports or statements with respect to Taxes which are required to be filed with
any taxing authority.
(d) No Claim or assertion has been made against T-NETIX by any Tax
authority in any jurisdiction in which no Tax Return has been filed by T-NETIX
that T-NETIX is or may be subject to taxation of any sort in such jurisdiction
or otherwise is required to file a Tax Return in such jurisdiction.
(e) Except for Permitted Liens, there are no Tax liens or other security
interests or encumbrances of any type resulting from Tax liabilities on any of
the assets of T-NETIX.
(f) There is no dispute, Claim or any other controversy concerning any Tax
liability of T-NETIX either (i) raised or asserted by any Tax authority in
writing; or (ii) whether or not formally asserted or claimed.
(g) None of the income Tax Returns for any open tax year that include
T-NETIX has been audited by any taxing authority. T-NETIX has made available to
Gateway a correct and complete copy of each federal income Tax Return,
examination report, statement of deficiency, or any other administrative or
judicial assertion, assessment or determination of federal income Tax liability
with respect to T-NETIX.
(h) T-NETIX has employed a permissible method of Tax accounting, validly
elected for each taxable period ending on or prior to the Closing Date. T-NETIX
has not changed, or requested to be permitted to change, any method of Tax
accounting.
(i) T-NETIX has not waived any statute of limitations with respect to any
Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency, except for such waivers or extensions which, by their terms, have
elapsed as of the date of this Agreement, nor are any requests for such waivers
or extensions pending.
(j) T-NETIX (i) has not filed a consent under Section 341(f) of the Code
concerning collapsible corporations, (ii) has not made any payments, is not
obligated to make any payments, and is not a party to any agreement that will
render it (or the payor of compensation under the agreement) subject to the
provision of section 280G of the Code regarding payments as a result of a change
in control, (iii) has not been a United States real property holding company
within the meaning of section 897(c)(2) of the Code and (iv) is not a party to
any Tax allocation or Tax sharing agreement.
(k) The unpaid Taxes of T-NETIX, including Taxes attributable to all
periods ending on or prior to the Closing Date which are not yet due and
payable, do not exceed the reserve on the SEC Filings for tax liability.
2.14 ENVIRONMENTAL QUALITY.
(a) For the purposes of this Agreement, the term "Hazardous Materials"
shall mean any substance, material or waste which is regulated by any local
government authority, the State of Texas, or other state where applicable, or
the United States Government, including, without limitation, any material or
substance which is (a) defined as a "hazardous waste," "hazardous material,"
"hazardous substances," "extremely hazardous waste," "extremely hazardous
substance," "regulated substance" or "restricted hazardous waste" under any
provision of the laws of the State of Texas, or any other applicable law,
including, but not limited to, the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901 et seq. ("RCRA"), and the Comprehensive Environmental
Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq.
("CERCLA") and (b) petroleum, including crude oil and any fraction thereof and
any refined petroleum products and derivatives thereof.
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(b) For purposes of this Agreement, the term "Environmental Laws" shall
mean all federal, state and local laws, ordinances and regulations pertaining to
air and water quality, soils and subsurface strata, natural resources, Hazardous
Materials, waste generation, management, transportation and disposal or other
environmental matters, including the Clean Water Act, the Clean Air Act, the
Federal Water Pollution Control Act, the Solid Waste Disposal Act, the Toxic
Substance Control Act, 15 U.S.C. Section 2601, et seq., RCRA, CERCLA, and the
rules, regulations and ordinances of the city and county in which the Property
is located, the Environmental Protection Agency and all other applicable
federal, state, regional and local agencies.
(c) Neither T-NETIX nor, to the knowledge of T-NETIX, any previous owner,
tenant, occupant, user or operator of the T-NETIX Real and Leased Property has
released or disposed of any Hazardous Materials on, under, in or about the site
of the T-NETIX Real and Leased Property, except when substantially in compliance
with applicable Environmental Laws.
(d) To the knowledge of T-NETIX, the T-NETIX Real and Leased Property
substantially complies with all applicable Environmental Laws. Without limiting
the generality of the foregoing, T-NETIX is not currently liable nor, to its
knowledge, potentially liable for any response costs or natural resource damages
under Sections 107(a) or 113(f) of CERCLA, or under any other so-called
"superfund" or "superlien" law or similar Legal Requirement, at or with respect
to the T-NETIX Real and Leased Property and, to the knowledge of T-NETIX, no
circumstances exist, which with notice or lapse of time or both could result in
such liability.
(e) To the knowledge of T-NETIX, the conduct of T-NETIX's business
substantially complies with all applicable Environmental Laws.
(f) T-NETIX has not sent any Hazardous Material to a site that, pursuant to
any applicable Environmental Laws, (i) has been placed on the "National
Priorities List" of hazardous waste sites or any similar state list, (ii) is
otherwise designated or identified as a potential site for remediation, cleanup,
closure or other environmental remedial activity, or (iii) is subject to a
Claim, an administrative order or other request to take "removal" or "remedial"
action, as defined in any applicable Environmental Laws, or to make payment for
the costs of cleaning up the site.
(g) T-NETIX (i) is not involved in any suit or proceeding with respect to a
release or threatened release of any Hazardous Material or a violation or
alleged violation of any applicable Environmental Laws, nor has T-NETIX received
any notice of any Claims from any person or entity relating to property damage
or to personal injuries from exposure to any Hazardous Material, nor has T-NETIX
received any notice or request for information from any governmental agency or
authority or other third party with respect to any of the foregoing, and (ii)
has not failed to timely file any report required to be filed, failed to acquire
all necessary certificates, approvals and permits or failed to generate and
maintain all required data, documentation and records under all applicable
Environmental Laws.
(h) There are currently no underground storage tanks in or under the
T-NETIX Real and Leased Property, and no underground storage tank was removed
from the T-NETIX Real and Leased Property during the period that T-NETIX
maintained an interest in such property.
(i) To its knowledge, T-NETIX has provided Gateway with all information in
its possession regarding the environmental condition of the T-NETIX Real and
Leased Property.
2.15 INTELLECTUAL PROPERTY. T-NETIX either owns or has the right to use by
license, sublicense, or other written agreement, all of the inventions,
improvements, domestic and foreign patents and applications therefor, customer
lists, copyrights, copyright registrations and applications therefor,
trademarks, trade names, service marks, trade dress, logos, rights in computer
software, and all rights granted or retained in licenses under any of the
foregoing which are used in connection with the conduct of T-NETIX's business as
presently conducted (collectively the "T-NETIX Intellectual Property"). None of
the T-NETIX Intellectual Property used in connection with the conduct of
T-NETIX's business is, or has been in the past five years, involved in, or the
subject of, any pending or, to the knowledge of T-NETIX, threatened
infringement, interference, opposition or similar action, suit or proceeding
that would significantly affect the use or practice
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of its T-NETIX Intellectual Property rights. None of the T-NETIX Intellectual
Property has infringed, or is now infringing on, or otherwise violating, the
rights of any third party nor does the use of such T-NETIX Intellectual Property
by T-NETIX infringe on, or otherwise violate, the rights of others. Since its
organization, T-NETIX has taken reasonable measures to protect the secrecy,
confidentiality and value of all intellectual property and inventions. Any
former or current employees of T-NETIX who, alone or with others, developed,
invented, discovered, derived, programmed, or designed any significant aspect of
the T-NETIX Intellectual Property have signed confidentiality and work-for-hire
agreements assigning the rights to such T-NETIX Intellectual Property to
T-NETIX, relinquishing all rights thereto and agreeing to maintain the
confidentiality thereof. T-NETIX is not aware of any person who is in violation
of any such agreement. The license fees, royalties and other amounts payable by
T-NETIX in connection with the use of the T-NETIX Intellectual Property,
together with the terms and conditions on which, and periods for which such
amounts are payable, are set forth in the T-NETIX Disclosure Letter.
2.16 LABOR MATTERS. T-NETIX has not entered into or is a party to any
collective bargaining agreement, memorandum of understanding or other written
document binding on T-NETIX respecting terms and conditions of employment with
respect to an identified group of employees with any labor union that would
cover any T-NETIX employees and (b) the employees of T-NETIX are not subject to
any collective bargaining agreement, memorandum of understanding or other
written document binding on T-NETIX respecting terms and conditions of
employment with respect to an identified group of employees, nor are any such
employees, in their capacities as employees, represented by any labor union.
There are no Claims, controversies, labor disturbances, investigations,
proceedings or complaints pending or threatened by any governmental agency or
any of T-NETIX's employees or any party or parties representing any of such
employees against T-NETIX before any court, arbitrator or other tribunal. To the
best of T-NETIX's knowledge, there are no organizational efforts presently being
made or threatened by or on behalf of any labor union with respect to the
employees of T-NETIX nor has there been in the last five (5) years. T-NETIX has
not experienced a work stoppage, strike, lock-out or other labor disturbance
within the past five (5) years, and there is no work stoppage, strike, lock-out
or other labor disturbance presently occurring, or threatened. T-NETIX has
substantially complied with all Legal Requirements relating to its employees,
the employment of labor, and the safety and health of employees, including,
without limitation, all Legal Requirements relating to occupational health and
safety, discrimination, unemployment, wages, hours, the Family and Medical Leave
Act, collective bargaining, and the collection and payment of withholding taxes
and similar taxes in respect of the business of T-NETIX.
2.17 BROKERS AND FINDERS. No person nor entity is entitled to any
brokerage commission, finder's fee or like payment in connection with the
transactions contemplated in this Agreement.
2.18 T-NETIX'S KNOWLEDGE. No officer or director of T-NETIX has actual
knowledge, as of the date hereof, of any state of facts which will have a
negative material effect on T-NETIX, except for such matters as have been
disclosed to Gateway or its representatives and are contained in the T-NETIX
Disclosure Letter.
2.19 YEAR 2000 COMPLIANCE.
(a) All of the computer hardware, software and information systems,
including without limitation the financial, operational and manufacturing
systems, used by T-NETIX are Year 2000 Compliant. For purposes of this
Agreement, "Year 2000 Compliant" shall mean that such systems: (i) are prior to,
during and after calendar year 2000 A.D. capable of operating without errors
relating to date data, including errors relating to date data which represents
or references different calendar centuries or more than one century, and of
providing all date related functionalities, interfaces and data fields,
including the indication of century; (ii) are able to accurately manage and
process date and date-related data (including, but not limited to, calculating,
comparing, sequencing and sorting) from, into and between the twentieth and
twenty-first centuries, including single and multiple centuries and leap years;
and (iii) shall not abnormally terminate or provide invalid or incorrect results
due to date or date-related data, specifically including date data which
represents or references different centuries or more than one century.
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(b) The hardware and software sold or licensed by T-NETIX to customers are
Year 2000 Compliant. The cost to T-NETIX of replacing products which are not
Year 2000 Compliant will not exceed $600,000 after the date hereof.
2.20 CUSTOMERS AND VENDORS. The T-NETIX Disclosure Letter contains true
and correct lists of the 20 largest customers and the 10 largest vendors of
T-NETIX during the 12-month period ended July 31, 1998, and the three-month
period ended October 31, 1998, with the amount of sales made to each such
customer, or the amount of purchases from each such vendor, as the case may be,
during such period as reasonably ascertained from readily available information,
such amounts being estimated in good faith as being within five percent (5%) of
the actual sales made to such customer or, the amount paid to such vendor, as
the case may be. T-NETIX does not have any information indicating that any of
these customers or vendors intends to cease doing business with T-NETIX or
significantly alter the amount of the business that it is presently doing with
T-NETIX.
2.21 ACCURACY. The representations and warranties made by T-NETIX to
Gateway and Gateway Shareholders set forth in this Agreement, the T-NETIX
Disclosure Letter (including any Updated T-NETIX Disclosure Letter (as defined
below)) delivered, or to be delivered, to Gateway prior to Closing, and the
written agreements, instruments and documents delivered and to be delivered
pursuant to or in connection with this Agreement and to which Gateway has been,
or will be, afforded access, do not include an untrue statement of material fact
or omit to state any material fact necessary to make them, when taken together
and in light of the circumstances in which they were or are made, not misleading
in any material respect.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF GATEWAY
Gateway represents and warrants to T-NETIX that, except as set forth in the
disclosure letter (the "Gateway Disclosure Letter") separately delivered by
Gateway to T-NETIX before the date hereof (the items on such Gateway Disclosure
Letter being identified by the section or sections hereof to which they relate),
the following statements are true and accurate as of the date of this Agreement:
3.1 ORGANIZATION, STANDING, CORPORATE AUTHORIZATION, AND ENFORCEABILITY.
(a) Gateway is a corporation duly organized, validly existing and operating
under the laws of the State of Texas. Gateway is in good standing under the laws
of the State of Texas and has all requisite corporate power and authority to
carry on its businesses as currently conducted and to own or lease and operate
its properties. Gateway is qualified to do business and is in good standing in
each jurisdiction in which the property owned, leased or operated by it, or the
nature of the business conducted by it, makes such qualification necessary,
except where the failure to so qualify would not materially affect the ability
of Gateway to conduct its business there.
(b) This Agreement and all other agreements, documents and instruments
executed or to be executed by Gateway in connection herewith (the "Gateway
Related Agreements") constitute the valid and legally binding obligations of
Gateway and are enforceable in accordance with their terms, except as such
enforceability may be limited by equitable principles and by applicable
bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws
relating to or affecting the rights of creditors generally. Gateway has the
requisite corporate power and authority to enter into this Agreement and the
Gateway Related Agreements.
(c) The execution and delivery of this Agreement and the Gateway Related
Agreements, and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate and other action on
the part of Gateway. This Agreement and the Gateway Related Agreements have been
or will have been, at the time of their respective executions and deliveries,
duly executed and delivered by a duly authorized officer of Gateway.
(d) Gateway does not own, directly or indirectly, the capital stock (or
other similar equity interests) of any other corporation, joint venture,
partnership, limited liability company or other similar entity.
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3.2 CAPITALIZATION. As of the date of this Agreement, the authorized
capital stock of Gateway consists only of 1,000,000 shares of Gateway Stock, of
which 729,004 shares are issued and outstanding. All of the outstanding shares
of Gateway Stock are owned by, or will at the Closing be owned by the Gateway
Shareholders. All prior issuance of securities by Gateway and all prior
repurchases, redemptions or exchanges affecting the outstanding securities of
Gateway have complied with all applicable Legal Requirements (including federal
and state securities laws), preemptive rights and contractual restrictions. Set
forth in the Gateway Disclosure Letter is a list of all prior issuances of
Gateway Stock, and the status of each certificate representing such shares. The
shares have been duly authorized and validly issued and are fully paid and
nonassessable. Except as described above, Gateway does not have shares of its
capital stock authorized, issued or outstanding. There are currently 69,040
shares of Gateway Stock underlying outstanding Gateway Options. Set forth in the
Gateway Disclosure Letter is a list of outstanding Gateway Options, including
optionees, numbers of underlying shares, vesting schedules, exercise prices and
change-of-control acceleration provisions. Except as described above, there are
no outstanding convertible or exchangeable securities, subscriptions, calls,
options, warrants, rights (contractual or arising by operation of law,
including, without limitation, rights of first refusal and preemptive rights),
or other agreements or commitments of any character to which Gateway or to
Gateway's knowledge any of its shareholders is a party or by which any of them
is bound, relating to the issuance, purchase, other acquisition or voting of any
shares of the capital stock of, or other equity or ownership interest in
(collectively, "Gateway Equity Rights") Gateway. All Gateway Equity Rights
listed in the Gateway Disclosure Letter will expire or be canceled at Closing in
exchange for T-NETIX Options as provided herein. No bonds, debentures, notes or
other indebtedness having the right to vote under any circumstances (or
convertible into securities having such right to vote) of Gateway are issued and
outstanding. There are no voting trusts, proxies or other agreements or
understandings to which Gateway or, to Gateway's knowledge, any Gateway
Shareholder is a party or by which Gateway or any Gateway Shareholder is bound
with respect to the voting of any shares of capital stock or other Gateway
Equity Rights.
3.3 ARTICLES OF INCORPORATION AND BYLAWS; CERTAIN RECORDS. Copies of the
Articles of Incorporation, Bylaws, minute books and stock records of Gateway
have been made available to T-NETIX, and each such copy is true, correct and
complete. All material records of any type and description in whatever form or
medium that presently exist and that relate to the business or properties of
Gateway are in the possession or control of Gateway and are located at the
offices of Gateway or of its counsel, independent auditors, consultants, or
other advisors, and Gateway will have the right to possession of all such
records upon the consummation of the transactions contemplated by this
Agreement.
3.4 COMPLIANCE WITH OTHER INSTRUMENTS AND LAWS. The execution and delivery
of this Agreement and the Related Agreements and the consummation of the
transactions contemplated hereby and thereby will not conflict with or result in
any violation of or default under any provision of the Articles of Incorporation
or Bylaws of Gateway or any material mortgage, indenture, trust, lease,
partnership or other agreement or other instrument, permit, concession, grant,
franchise, license, judgment, order, decree, or Legal Requirement applicable to
Gateway or any of the properties of Gateway, nor will they result in the
creation or imposition of any material lien, security interest, charge, claim or
other encumbrance of any nature whatsoever on any of the properties or assets of
Gateway or the shares of Gateway Stock, nor will they prevent or materially
delay the consummation of the transactions contemplated hereby.
3.5 GOVERNMENTAL AUTHORIZATIONS; CONSENTS. No consents, licenses,
approvals or authorizations of, or registrations or declarations with, any
governmental authority, agency, bureau or commission, or any third party, are
required to be obtained or made (i) by Gateway in connection with the execution,
delivery, performance, validity and enforceability of this Agreement or any
Related Agreement, or (ii) by Gateway or any Gateway Shareholder in connection
with the sale or transfer of the shares of Gateway Stock pursuant to the
transactions contemplated by this Agreement, and will not prevent or materially
delay the consummation of the transactions contemplated hereby.
3.6 LITIGATION. No action, suit, proceeding or governmental investigation
is pending or, to the knowledge of Gateway threatened, at law or in equity,
which seeks to question, delay or prevent, or could have the effect of delaying
or preventing, the consummation of all or any portion of the transactions
contemplated hereby.
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3.7 FINANCIAL STATEMENTS; CONDUCT OF GATEWAY BUSINESS; NO UNDISCLOSED
LIABILITIES.
(a) Gateway has delivered to T-NETIX (i) the audited balance sheets of
Gateway as of December 31, 1997, 1996 and 1995, and the related audited
statements of income, retained earnings and cash flows for the fiscal years then
ended, accompanied in each case by the independent auditor's report of KPMG LLP,
independent certified public accountants (such financial statements, including
the notes thereto, hereinafter being referred to as the "Annual Financial
Statements"), and (ii) the unaudited consolidated balance sheet of Gateway as of
November 30, 1998, and the related unaudited consolidated statements of income,
stockholders' equity and cash flows for the eleven (11) months ended November
30, 1998 (the "Interim Financial Statements") (the Annual Financial Statements
and the Interim Financial Statements hereinafter being referred to as the
"Financial Statements"). All of the Financial Statements have been prepared in
accordance with GAAP consistently applied for all relevant periods (except as
indicated therein) and present fairly the financial position of Gateway as of
the dates thereof and the results of its operations for the periods then ended,
subject, in the case of the Interim Financial Statements, to normal recurring
year-end adjustments and the absence of notes.
(b) Gateway has no Claims, debts, obligations, guaranties of the
obligations of others or liabilities (whether absolute or contingent, liquidated
or unliquidated, due or to become due) that are required by GAAP to be reflected
in financial statements or notes thereto, except for (i) Claims, debts,
obligations, guaranties and liabilities to the extent reflected or reserved
against in the Financial Statements, (ii) debts, obligations, guaranties and
liabilities incurred or entered into subsequent to November 30, 1998, in the
ordinary course of business and otherwise not in contravention of this
Agreement, and (iii) debts, obligations and liabilities relating to this
Agreement and the Related Agreements and instruments being executed and
delivered in connection herewith and the transactions referred to herein and
therein.
3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except (i) for matters disclosed
in the Financial Statements or (ii) as contemplated by this Agreement, Gateway
has not, since December 31, 1997:
(a) undergone any change in its condition (financial or otherwise),
properties, assets, liabilities, business or operations, except for changes in
the ordinary course of business which have not either individually or in the
aggregate had a negative material effect on Gateway;
(b) changed any of its methods of accounting or accounting practices or
classifications of assets or liabilities, or failed to maintain its books of
account in the usual, regular and ordinary manner in accordance with GAAP unless
required by regulation or GAAP;
(c) modified the material terms of, or canceled or terminated, any Material
Contract (as defined below);
(d) terminated, discharged or received any written notice regarding the
resignation, discharge or termination of any officer;
(e) established or adopted any Benefit Plan (as defined below), or
increased the amount of the wages, bonus, salary, commissions, fringe benefits
or other compensation or remuneration payable to, any of its directors, officers
or employees, except such salary increases as do not exceed Gateway's current
wage scale or pre-date normal review time periods for any individual, and except
bonuses consistent with past practices;
(f) declared, set aside, made or paid any dividend or other distribution in
respect of its capital stock or purchased or redeemed, directly or indirectly,
any shares of its capital stock, or split up, combined, reclassified, redeemed,
repurchased or otherwise reacquired any of its capital stock;
(g) issued or sold any shares of its capital stock of any class or any
subscriptions, options, warrants, calls or other rights to purchase directly or
indirectly any such shares or any securities directly or indirectly convertible
into or exchangeable for such shares or made any other change in its capital
structure;
(h) incurred any direct or contingent liability for borrowed money or
guaranteed the monetary obligations of any other person or entity, or made any
monetary investment in, advance to or loan to any person or entity other than in
the ordinary course of business;
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(i) mortgaged, pledged or subjected to any material lien, lease, security
interest or other charge or encumbrance any of its properties or assets,
tangible or intangible;
(j) made any material change in its practices, operations or policies with
respect to the method for selling goods or services, or other method for
accounting for sales, the conduct of accounts receivable collection or accounts
payable payment activities or the maintenance of inventory levels;
(k) merged or consolidated with or into any other entity;
(l) implemented or adopted any change in its tax methods, principles or
elections;
(m) acquired or disposed of any material assets or properties or made any
capital improvement other than in the ordinary course of business; or
(n) suffered any damage, destruction or loss (whether or not covered by
insurance) which has had or could reasonably be expected to have a material
effect on Gateway.
3.9 TITLE TO PROPERTY, ABSENCE OF LIENS AND ENCUMBRANCES.
(a) Gateway has good title to its owned material assets, including the
tangible assets reflected on the balance sheet included in Gateway's most recent
Financial Statements, other than assets disposed of or used after the date
thereof in the ordinary course of business for fair value and other than Gateway
Intellectual Property, which is addressed by Section 3.16 hereof. The tangible
assets owned by Gateway are owned free and clear of all liens, mortgages,
pledges, charges, security interests or encumbrances, except for Permitted
Liens. Gateway owns, leases or licenses, and has adequate rights to use all
material real and personal property and other material assets necessary to
conduct a going concern on a basis consistent with past practices. The assets of
Gateway are in good operating condition and repair (subject to normal wear and
tear). Neither the whole nor any part of Gateway's real property ("Real
Property") has been condemned by any public authority, nor, to Gateway's
knowledge, is any such condemnation or taking threatened or contemplated. There
exists free and uninterrupted egress and ingress over a public roadway to all
operating facilities.
(b) Gateway validly holds the leasehold created by the leases (true,
complete and correct copies of which have been provided to T-NETIX) as described
in the Gateway Disclosure Letter as the "Leased Property" and such leases are
enforceable by Gateway as the lessee thereunder.
(c) Gateway is not a party to any agreement granting any third party the
right or an option to purchase or lease all or any portion of the Real Property
or any personal property of Gateway.
(d) There is not pending nor has Gateway received any written notice of (i)
any Claim or proceeding asserting or seeking to establish a title interest in
the Real Property or Leased Property, or any Claim of default (a"Gateway Title
Notice") under any of the leases under which leaseholds have been created, or
(ii) the existence of any facts or proceedings which may result in the issuance
of such a Title Notice; and, there are not any such proceedings nor is there any
Title Notice.
3.10 FULL AUTHORITY; COMPLIANCE WITH LAWS. To the knowledge of Gateway,
Gateway is in compliance with all material applicable Legal Requirements. Set
forth in the Gateway Disclosure Letter is a list of any and all Permits issued
to Gateway in connection with the ownership, operation and maintenance of its
businesses or assets. Gateway has obtained and maintained all Permits. Each of
the Permits is in full force and effect, and Gateway is substantially in
compliance with all the provisions of such Permits.
3.11 BENEFIT PLANS.
(a) Gateway does not maintain, sponsor, participate in or contribute to, or
is required to contribute to, directly or indirectly, or has any obligation
under:
(i) Any employee benefit plan, employee pension benefit plan, employee
welfare benefit plan (including any medical, dental, disability, accident
or sickness, salary continuation or life insurance plan or arrangement), or
multiemployer plan, all as defined in ERISA, regardless of whether or not a
plan is exempt from some or all of the otherwise applicable requirements of
ERISA; or
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(ii) Except as disclosed on the Financial Statements, any bonus,
commission, deferred compensation, incentive compensation, restricted
stock, stock purchase, stock option, stock appreciation right, debenture,
supplemental pension, profit sharing, royalty pool, vacation, sick leave,
severance or termination pay policies, supplemental unemployment benefits
plan, loan guarantee, relocation assistance, employee loan or other
extensions of credit, or other similar plan, program, agreement, policy,
commitment, arrangement or benefit currently in effect under which current
or former employees or their dependents, beneficiaries, representatives or
estates are currently or will in the future be entitled to benefits.
(b) With respect to each plan, program, agreement, policy, commitment,
arrangement or benefit described in the Gateway Disclosure Letter (a "Benefit
Plan"), Gateway has furnished to T-NETIX true, correct and complete copies of
such Benefit Plan, including amendments, if applicable, summary plan
descriptions, if applicable, the Internal Revenue Service determination letter,
if applicable, and the two most recent Forms 5500, 5500-C or 5500-R, as
applicable, and has made available to T-NETIX the most recent actuarial reports
of or regarding such Benefit Plan. As to each Benefit Plan not reduced to
writing, Gateway has provided to T-NETIX a description of all material elements
of such Benefit Plan.
(c)
(i) Each Benefit Plan has been operated and administered substantially
in accordance with its terms and applicable laws, including but not limited
to ERISA and the Code. Each Benefit Plan that is intended to be qualified
under the Code either has received from the Internal Revenue Service, or
timely applied for, a determination letter on such Benefit Plan's qualified
status.
(ii) To the knowledge of Gateway, neither Gateway nor any other party
in interest (within the meaning of ERISA) has engaged in any non-exempt
prohibited transaction with respect to any Benefit Plan under ERISA or the
Code, and there is no pending assertion of the occurrence of any such
transaction.
(iii) All contributions required under applicable law or the terms of
any Benefit Plan, collective bargaining agreement or other agreement
relating to a Benefit Plan to be paid by Gateway for all periods prior to
the Closing Date have been or will have been completely and timely made to
each Benefit Plan when due, and Gateway has established adequate reserves
on its books to meet liabilities for contributions accrued but that have
not been made because they are not yet due and payable.
(iv) There is no current or pending investigation or audit by the
Internal Revenue Service, the Department of Labor or any other governmental
entity of any Benefit Plan, nor has Gateway received notification from any
such governmental entity of such a pending audit or investigation, and
there are no actions, suits or claims pending (other than routine claims
for benefits) or threatened, with respect to any Benefit Plan or against
the assets of any such Benefit Plan.
(v) No Benefit Plan is or ever has been a Pension Plan, or is or ever
has been a Multiemployer Plan. Gateway has not incurred any liability to
the PBGC with respect to any Pension Plan, except for required premium
payments, which payments have been made when due. No accumulated funding
deficiency (within the meaning of Section 312 of the Code or Section 302 of
ERISA) or reportable event (as defined in Section 4043 of ERISA) has
occurred with respect to any Pension Plan. No event has occurred in
connection with any Pension Plan which could subject Gateway or any Pension
Plan, or T-NETIX, its Affiliates or any of their respective benefit plans,
to liability under Section 4062, 4063 or 4064 of ERISA, and, no event has
occurred which might give rise to any liability of Gateway or any Pension
Plan, or T-NETIX, its Affiliates or any of their respective benefit plans,
to the PBGC under Title IV of ERISA or which could reasonably be
anticipated to result in any Claims being made against Gateway or any
Pension Plan, or T-NETIX, its Affiliates or any of their respective benefit
plans, by the PBGC. Gateway has not incurred and, as a result of the
transactions contemplated by this Agreement, will not incur any withdrawal
liability (including any contingent or secondary withdrawal liability)
within the meaning of Section 4201 and 4204 of ERISA to any Multiemployer
Plan. Upon a complete withdrawal or a partial withdrawal (as those terms
are defined in Section 4203 and 4205, respectively, of
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ERISA) from a Multiemployer Plan occurring on or before the close of the
most recent fiscal year of each such Multiemployer Plan ended prior to the
Closing Date, Gateway would not have been subject to withdrawal liability
under Title IV, Subtitle E, Part 1 of ERISA and, there has been no change
in the financial condition of any Multiemployer Plan that would result in
the imposition of such liability due to such complete or partial withdrawal
on or before the Closing Date.
(vi) Gateway has substantially complied with all notice and
continuation coverage requirements applicable to group health plans under
COBRA, with respect to all medical and health benefits provided by Gateway
that are subject to COBRA.
(vii) No Benefit Plan amendments have been adopted nor will any such
amendments be adopted prior to the Closing Date except as may be necessary
for compliance purposes with the Code or ERISA and there is no arrangement,
commitment or understanding to create any additional plan which would
constitute a Benefit Plan or increase the rate of benefit accrual or
contribution requirement under any of the Benefit Plans or modify, change
or terminate any existing Benefit Plan.
(viii) Gateway is not a member of a "controlled group" of
organizations (as defined in Sections 414(b), (c), (m) or (o) of the Code)
which sponsors or maintains any employee benefit plan within the meaning of
Section 3(3) of ERISA which under Title IV of ERISA or any section of the
Code or ERISA would subject T-NETIX or Gateway or any of their respective
employee benefit plans or the fiduciaries thereof or their respective
assets to any taxes, encumbrances, penalties or other liabilities.
3.12 CLAIMS. There are no Claims against, or to the knowledge of Gateway
threatened against, Gateway or its properties, at law or in equity or before any
court, governmental department, commission, board, agency, authority or
instrumentality, domestic or foreign. Gateway is not subject to any judgment,
stipulation, order or decree arising from any action, suit, proceeding or
investigation which could be reasonably expected to have, individually or in the
aggregate, a material effect on Gateway before or after the Closing Date. No
action, suit, proceeding or governmental investigation is pending or threatened
against Gateway which seeks to question, delay or prevent the consummation of
the transactions contemplated hereby.
3.13 TAXES.
(a) Except for the tax years set forth in the Gateway Disclosure Letter for
which valid extensions of the time for filing Tax Returns have been filed,
Gateway has filed or will file or cause to be filed, within the applicable
period prescribed by law, all federal, state, local, foreign or other Tax
Returns required by such law to be filed by Gateway for all taxable periods
ending on or prior to the Closing Date.
(b) Gateway has paid, within the time and in the manner prescribed by law,
all Taxes shown as due on all such Tax Returns and, with respect to all Tax
Returns which Gateway has not yet filed, but will file prior to the Closing
Date, shall pay, within the time and in the manner prescribed by law, all Taxes
shown as due on such Tax Returns.
(c) No Claim or assertion has been made against Gateway by any Tax
authority in any jurisdiction in which no Tax Return has been filed by Gateway
that Gateway is or may be subject to taxation of any sort in such jurisdiction
or otherwise is required to file a Tax Return in such jurisdiction.
(d) Except for Permitted Liens, there are no Tax liens or other security
interests or encumbrances of any type resulting from Tax liabilities on any of
the assets of Gateway.
(e) There is no dispute, Claim or any other controversy concerning any Tax
liability of Gateway either (i) raised or asserted by any Tax authority in
writing; or (ii) whether or not formally asserted or claimed.
(f) None of the income Tax Returns for any open tax year that include
Gateway has been audited by any taxing authority. Gateway has made available to
T-NETIX a correct and complete copy of each federal income Tax Return,
examination report, statement of deficiency, or any other administrative or
judicial assertion, assessment or determination of federal income Tax liability
with respect to Gateway.
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(g) Gateway has employed a permissible method of Tax accounting, validly
elected for each taxable period ending on or prior to the Closing Date. Gateway
has not changed, or requested to be permitted to change, any method of Tax
accounting.
(h) Gateway has not waived any statute of limitations with respect to any
Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency, except for such waivers or extensions which, by their terms, have
elapsed as of the date of this Agreement, nor are any requests for such waivers
or extensions pending.
(i) Gateway (i) has not filed a consent under Section 341(f) of the Code
concerning collapsible corporations, (ii) has not made any payments, is not
obligated to make any payments, and is not a party to any agreement that will
render it (or the payor of compensation under the agreement) subject to the
provision of section 280G of the Code regarding payments as a result of a change
in control, (iii) has not been a United States real property holding company
within the meaning of section 897(c)(2) of the Code and (iv) is not a party to
any Tax allocation or Tax sharing agreement.
(j) The unpaid Taxes of Gateway, including Taxes attributable to all
periods ending on or prior to the Closing Date which are not yet due and
payable, do not exceed the reserve on the Financial Statements for tax
liability.
3.14 CONTRACTS. Except as set forth in this Agreement or in the Gateway
Disclosure Letter (the agreements listed therein being referred to as the
"Material Contracts"), Gateway is not a party to, bound by or obligated under
any:
(a) mortgage, indenture, note or installment obligation or other instrument
or contract for or relating to any borrowing of an amount in excess of $250,000
by Gateway;
(b) guaranty by Gateway of any obligation in excess of $250,000 (excluding
any endorsement made in the ordinary course of business for collection);
(c) license agreement involving the payment or receipt by Gateway of
$250,000 or more during any 12-month period during the term thereof;
(d) lease of real or personal property under which Gateway is a lessor or
lessee involving annual rentals in excess of $250,000;
(e) agreement for the purchase by Gateway of equipment involving
outstanding commitments in excess of $250,000;
(f) agreement purporting to limit the right of Gateway to compete in any
line of business, with any person or other entity or in any geographic area;
(g) agreement for the purchase or sale of raw materials, products or goods
or the provision of services involving payments in excess of $250,000 at prices
that vary from the prices therefor generally prevailing in customary,
arms-length transactions or that may not be terminated by Gateway on not more
than thirty (30) days' notice without penalty;
(h) contract with any governmental or quasi-governmental authority
involving payments in excess of $250,000;
(i) bond, deposit, financial assurance requirement or insurance coverage in
excess of $250,000 individually required to be submitted to customers of
Gateway, under any sale, lease or service arrangement or to any governmental
authority under any Permit or Legal Requirement;
(j) agreement or instrument relating to the acquisition by Gateway of any
entity or all or substantially all of the assets of any person or entity;
(k) other agreement, contract or obligation of Gateway calling for or
involving the payment, potential payment or accrued obligation by or to Gateway
of an amount in excess of $250,000 from the date hereof
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through the earliest date such agreement, contract or obligation can be
terminated unilaterally without material penalty by Gateway;
(l) agreement or commitment relating to the borrowing of money or the
guaranty or indemnity (direct or indirect) in respect of or the granting of
security for any obligation for the borrowing of money, by Gateway or any other
person or entity, in excess of $250,000, including, without limitation,
guarantees, accommodation collateral, letters of credit, mortgages, deeds of
trust, indentures, loan agreements and credit agreements;
(m) agreement or commitment relating to clean-up or remediation involving
Hazardous Materials (as hereinafter defined);
(n) agreement that creates an encumbrance or any restriction on the ability
of Gateway to (i) pay dividends or make similar distributions; (ii) make loans
or advances to any person or entity, or (iii) sell, lease or transfer any of its
properties or assets, except (in each case) for such restrictions or
encumbrances existing under or by reason of (1) applicable Legal Requirements,
or (2) customary non-assignment provisions in leases and other contracts entered
into in the ordinary course of business;
(o) indemnification obligations in favor of any person or entity, and any
escrow agreements related to any indemnification obligation;
(p) confidentiality, secrecy, screening, development or settlement
agreement pertaining to any Intellectual Property; or
(q) contract with any customer of Gateway; or
(r) agreement, arrangement or commitment of any character (contingent or
otherwise) pursuant to which any person or entity is or may be entitled to
receive any payment based on the revenues or earnings, or calculated in
accordance therewith, of Gateway other than payments to employees or contractors
of commissions based on sales.
All of the Material Contracts are legal, valid, binding and in full force and
effect, no default exists thereunder on the part of Gateway, and the
consummation of the transactions contemplated by this Agreement will not cause
any default or condition in respect of any such Material Contracts, the effect
of which is to cause, permit, create or perfect the right in any party (a) to
repudiate or disavow its obligations to Gateway thereunder, (b) to require or
have the right to require Gateway to perform its obligations thereunder
(including obligations to pay indebtedness) prior to such time on which, or on
terms and conditions otherwise different from those that, are provided therein
or (c) to recover from Gateway any material damages or fines. To the knowledge
of Gateway, no party (including Gateway) to any such Material Contract is in
default thereunder. True, correct and complete copies of all the Material
Contracts have been delivered to T-NETIX.
3.15 ENVIRONMENTAL QUALITY.
(a) Neither Gateway nor, to the knowledge of Gateway any previous owner,
tenant, occupant, user or operator of any real property now or ever owned or
leased by Gateway (the "Property") has released or disposed of any Hazardous
Materials on, under, in or about the site of the Property, except when
substantially in compliance with applicable Environmental Laws.
(b) To the knowledge of Gateway, the Property substantially complies with
all applicable Environmental Laws. Without limiting the generality of the
foregoing, Gateway is not currently liable nor, to its knowledge, potentially
liable for any response costs or natural resource damages under Sections 107(a)
or 113(f) of CERCLA, or under any other so-called "superfund" or "superlien" law
or similar Legal Requirement, at or with respect to the Property and, to the
knowledge of Gateway, no circumstances exist, which with notice or lapse of time
or both could result in such liability.
(c) To the knowledge of Gateway, the conduct of Gateway's Business
substantially complies with all applicable Environmental Laws.
(d) Gateway has not sent any Hazardous Material to a site that, pursuant to
any applicable Environmental Laws, (i) has been placed on the "National
Priorities List" of hazardous waste sites or any
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similar state list, (ii) is otherwise designated or identified as a potential
site for remediation, cleanup, closure or other environmental remedial activity,
or (iii) is subject to a Claim, an administrative order or other request to take
"removal" or "remedial" action, as defined in any applicable Environmental Laws,
or to make payment for the costs of cleaning up the site.
(e) Gateway (i) is not involved in any suit or proceeding with respect to a
release or threatened release of any Hazardous Material or a violation or
alleged violation of any applicable Environmental Laws, nor has Gateway received
any notice of any Claims from any person or entity relating to property damage
or to personal injuries from exposure to any Hazardous Material, nor has Gateway
received any notice or request for information from any governmental agency or
authority or other third party with respect to any of the foregoing, and (ii)
has not failed to timely file any report required to be filed, failed to acquire
all necessary certificates, approvals and permits or failed to generate and
maintain all required data, documentation and records under all applicable
Environmental Laws.
(f) There are currently no underground storage tanks in or under the
Property, and no underground storage tank was removed from the Property during
the period that Gateway maintained an interest in such property.
(g) To its knowledge, Gateway has provided T-NETIX with all information in
its possession regarding the environmental condition of the Property.
3.16 INTELLECTUAL PROPERTY. Gateway either owns or has the right to use by
license, sublicense, or other written agreement, all of the inventions,
improvements, domestic and foreign patents and applications therefor, customer
lists, copyrights, copyright registrations and applications therefor,
trademarks, trade names, service marks, trade dress, logos, rights in computer
software, and all rights granted or retained in licenses under any of the
foregoing which are used in connection with the conduct of Gateway's business as
presently conducted (collectively the "Gateway Intellectual Property"). None of
the Gateway Intellectual Property used in connection with the conduct of
Gateway's business is, or has been in the past five years, involved in, or the
subject of, any pending or, to the knowledge of Gateway, threatened
infringement, interference, opposition or similar action, suit or proceeding
that would significantly affect the use or practice of its Gateway Intellectual
Property rights. None of the Gateway Intellectual Property has infringed, or is
now infringing on, or otherwise violating, the rights of any third party nor
does the use of such Gateway Intellectual Property by Gateway infringe on, or
otherwise violate, the rights of others. Since their organization, Gateway has
taken reasonable measures to protect the secrecy, confidentiality and value of
all intellectual property and inventions. Any former or current employees of
Gateway who, alone or with others, developed, invented, discovered, derived,
programmed, or designed any significant aspect of the Gateway Intellectual
Property have signed confidentiality and work-for-hire agreements assigning the
rights to such Gateway Intellectual Property to Gateway, relinquishing all
rights thereto and agreeing to maintain the confidentiality thereof. Gateway is
not aware of any person who is in violation of any such agreement. The license
fees, royalties and other amounts payable by Gateway in connection with the use
of the Gateway Intellectual Property, together with the terms and conditions on
which, and periods for which such amounts are payable, are set forth in the
Gateway Disclosure Letter.
3.17 RELATED PARTY TRANSACTIONS. Set forth in the Gateway Disclosure
Letter is a list of all transactions in an amount greater than $10,000
(including, without limitation, employment contracts, debts, loans, advances, or
other obligations, guarantees, indemnities, accounts and notes payable or
receivable and service agreements) between Gateway and any current officer,
director, employee, Gateway Shareholder or Affiliate of Gateway or any relative
of any such person (collectively, "Related Parties") which (a) were entered into
and/or consummated since January 1, 1998; (b) are or will be effective as of the
date hereof or at Closing; (c) constitute present or future liabilities or
obligations of Gateway to any Related Party; or (d) constitute present or future
liabilities of any Related Party to Gateway; provided that advances which have
been repaid need not be set forth, and the names of the Related Parties need not
be set forth.
3.18 LABOR MATTERS. (a) Gateway has not entered into or is a party to any
collective bargaining agreement, memorandum of understanding or other written
document binding on Gateway respecting terms and conditions of employment with
respect to an identified group of employees with any labor union that
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would cover any Gateway employees and (b) the employees of Gateway are not
subject to any collective bargaining agreement, memorandum of understanding or
other written document binding on Gateway respecting terms and conditions of
employment with respect to an identified group of employees, nor are any such
employees, in their capacities as employees, represented by any labor union. As
to the collective bargaining agreements disclosed in the Gateway Disclosure
Letter, Gateway is not in default thereunder. There are no Claims,
controversies, labor disturbances, investigations, proceedings or complaints
pending or threatened by any governmental agency or any of Gateway's employees
or any party or parties representing any of such employees against Gateway
before any court, arbitrator or other tribunal. To the best of Gateway's
knowledge, there are no organizational efforts presently being made or
threatened by or on behalf of any labor union with respect to the employees of
Gateway nor has there been in the last five (5) years. Gateway has not
experienced a work stoppage, strike, lock-out or other labor disturbance within
the past five (5) years, and there is no work stoppage, strike, lock-out or
other labor disturbance presently occurring, or threatened. Gateway has
substantially complied with all Legal Requirements relating to its employees,
the employment of labor, and the safety and health of employees, including,
without limitation, all Legal Requirements relating to occupational health and
safety, discrimination, unemployment, wages, hours, the Family and Medical Leave
Act, collective bargaining, and the collection and payment of withholding taxes
and similar taxes in respect of the business of Gateway. There are no unfair
labor practice charges, charges of discrimination, or other complaints pending
against Gateway involving employees now or previously employed by Gateway.
3.19 CUSTOMERS AND VENDORS. The Gateway Disclosure Letter contains true
and correct lists of the 20 largest customers and the 10 largest vendors of
Gateway during the 12-month period ended December 31, 1997, and the eleven (11)
month period ended November 30, 1998, with the amount of sales made to each such
customer or the amount of purchases from each such vendor, as the case may be,
during such period as reasonably ascertained from readily available information,
such amounts being estimated in good faith as being within five percent (5%) of
the actual sales made to or by such customer or the amount paid to such vendor,
as the case may be. Gateway does not have any information indicating that any of
these customers or vendors intends to cease doing business with Gateway or
significantly alter the amount of the business that it is presently doing with
Gateway.
3.20 OTHER DISCLOSURES. In addition to the other disclosures required
hereby, the following documents and information pertaining to Gateway have been
made available to T-NETIX:
(a) true, correct and complete copies of each policy of insurance
maintained by Gateway, together with information on premiums, coverage,
insurers, expiration dates and deductibles;
(b) the location and name of each bank or other financial institution in
which Gateway has an account or line of credit, and the identity of each such
account or line of credit, and each bank in which Gateway has a safe deposit
box, together with the names of all persons authorized to draw upon or have
access thereto;
(c) The Gateway Disclosure Letter lists each corporate or trade name under
which Gateway or its predecessors, if any, has conducted business and the state
and county in which any Real Property or personal property of Gateway is
located.
(d) The Gateway Disclosure Letter lists each power-of-attorney given by or
on behalf of Gateway.
3.21 PARACHUTE PAYMENTS. Any bonuses or other compensation or amounts paid
or payable by Gateway, including amounts payable as a result of the transaction
contemplated by this Agreement, have not resulted in and will not result in
payments to "Disqualified Individuals" (as defined in Section 280G(c) of the
Code) of Gateway which, individually or in the aggregate, will constitute
"excess parachute payments" (as defined in Section 280G(b) of the Code)
resulting in the imposition of the excise tax under Section 4999 of the Code or
the disallowance of deductions under Section 280G of the Code.
3.22 BROKERS AND FINDERS. No person nor entity is entitled to any
brokerage commission, finder's fee or like payment in connection with the
transactions contemplated in this Agreement.
3.23 GATEWAY'S KNOWLEDGE. No officer nor director of Gateway has actual
knowledge, as of the date hereof, of any state of facts which will have a
negative material effect on Gateway, except for such
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matters as have been disclosed to T-NETIX or its representatives and are
contained in the Gateway Disclosure Letter.
3.24 YEAR 2000 COMPLIANCE.
(a) All of the computer hardware, software and information systems,
including without limitation the financial, operational and manufacturing
systems, used by Gateway are Year 2000 Compliant.
(b) The hardware and software sold or licensed by Gateway to customers are
Year 2000 Compliant, and the cost to Gateway of replacing products which are not
Year 2000 Compliant will not exceed $500,000 after the date hereof.
3.25 RIGHT OF FIRST REFUSAL. Ameritech Corp has fully relinquished any
right of first refusal, first option or other contractual right it had to
acquire Gateway, and such relinquishment is binding on Ameritech Corp.
3.26 TERMINATION OF EXISTING AGREEMENT. The TTDP Royalty Owners have
agreed to terminate the TTDP Royalty Agreement on the Closing Date, subject to
receipt of the consideration stated in Section 1.2(c) hereof.
3.27 ACCURACY. The representations and warranties made by Gateway to
T-NETIX set forth in this Agreement, the Gateway Disclosure Letter (including
any Updated Gateway Disclosure Letter (as defined below)) delivered, or to be
delivered, to T-NETIX prior to Closing, and the written agreements, instruments
and documents delivered and to be delivered pursuant to or in connection with
this Agreement and to which T-NETIX has been afforded access, do not include an
untrue statement of material fact or fail to state any material fact necessary
to make them, when taken together and in light of the circumstances in which
they were or are made, not misleading in any material respect.
ARTICLE 4
ADDITIONAL REPRESENTATIONS AND WARRANTIES OF GATEWAY,
GATEWAY SHAREHOLDER SIGNATORIES AND GATEWAY SHAREHOLDERS
Each of the Gateway Shareholder Signatories, as to himself, and Gateway as
to all Gateway Shareholders, represents and warrants to T-NETIX that the
following statements are true and accurate as of the date hereof:
4.1 OWNERSHIP OF SHARES. Each of the shares of Gateway Stock is now, and
at the Closing will be, owned by each Gateway Shareholder free and clear of any
lien, pledge, charge, adverse claim, security interest, encumbrance (including
any imposed by law in any jurisdiction), title retention agreement, option or
right to purchase of any kind.
4.2 INVESTMENT REPRESENTATIONS. Each Gateway Shareholder is either an
"accredited investor" as defined under Rule 501 of Regulation D under the
Securities Act of 1933, as amended (the "Securities Act"), or, alone or with his
or her representative(s) has such knowledge and experience in financial and
business matters that he or she is capable of evaluating the merits and risks of
an investment in T-NETIX, and in any case is acquiring the T-NETIX Stock solely
for the purpose of investment and not with a view to, or for sale in connection
with, any distribution thereof. Each Gateway Shareholder Signatory acknowledges
that, except as provided in Section 1.6 hereof, the T-NETIX Stock will not be
registered under the Securities Act or any state securities laws, and that such
T-NETIX Stock may not be transferred or sold except pursuant to the registration
provisions of the Securities Act or pursuant to an applicable exemption
therefrom and pursuant to state securities laws and regulations, as applicable.
Each Gateway Shareholder Signatory acknowledges that the certificate or
certificates evidencing the T-NETIX Stock will bear a legend or legends
referring to the restrictions on the transferability thereof and any other
legends required by applicable law.
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ARTICLE 5
COVENANTS OF GATEWAY
5.1 CONDUCT OF BUSINESS. Gateway agrees that, between the date of this
Agreement and the Closing Date, except as contemplated by this Agreement or
referred to in the Gateway Disclosure Letter, and except as may be necessary to
carry out the transactions contemplated by this Agreement, or as requested by
T-NETIX, Gateway, without T-NETIX's written consent (which consent shall not be
unreasonably withheld), will not:
(a) amend its Articles of Incorporation or Bylaws;
(b) make any change in its practices, operations or policies with respect
to the selling goods or services, collecting accounts receivable and/or paying
accounts payable;
(c) conduct its business in a manner that departs from the manner in which
such business was being conducted prior to the date of this Agreement;
(d) increase the rate or change the form of compensation payable to any
director or officer of Gateway or increase any employee benefits, except for
normal increases consistent with past practices;
(e) purchase or dispose of any properties or other assets, except in the
ordinary course of business;
(f) declare, set aside, pay or make any dividend or other distribution in
respect of any of Gateway's outstanding shares of capital stock;
(g) issue or sell any shares of Gateway's capital stock (whether or not
from the treasury) or any other securities; grant any options, convertibility
rights, rights to subscribe for shares of capital stock or securities
convertible into or exchangeable for shares of capital stock, warrants, calls or
other agreements relating to Gateway's capital stock; split up, combine,
reclassify, redeem, repurchase or otherwise reacquire any of Gateway's capital
stock, or otherwise change its capitalization;
(h) except as required by regulation or generally accepted accounting
principles, maintain its books of account other than in the usual, regular and
ordinary manner on a basis consistent with prior periods, make any change in any
of its books, accounting methods or practices, or reclassify any assets or
liabilities;
(i) cancel, terminate, renew or amend any Material Contract or enter into
any contract, agreement, lease, license or commitment, in each case outside the
ordinary course of business;
(j) invest in certificates of deposit in any one bank if such investments
in the aggregate exceed $100,000 at any time;
(k) incur any direct or contingent liability for borrowed money or
guarantee the monetary obligations of any other person or entity, or make any
monetary investment in, advance to or loan to any person or entity other than in
the ordinary course of business;
(l) fail to make maintenance expenditures and maintain inventories in the
amounts and at the times required to operate its business in the ordinary course
consistent with past practice;
(m) implement or adopt any change in its tax methods, principles or
elections;
(n) fail to pay accounts payable or collect accounts receivable in
accordance with past practices;
(o) fail to use best efforts to ensure the retention of Gateway's key
employees;
(p) enter into any transaction outside the ordinary course of business; or
(q) agree or commit to do any of the foregoing.
5.2 CONFIDENTIALITY. Gateway shall hold in strict confidence, and cause
its stockholders, Affiliates, directors, officers, employees, agents, attorneys,
accountants, financing sources and representatives and those of its Affiliates
(collectively, "Gateway Associates") to hold in strict confidence, all documents
and information obtained with respect to T-NETIX ("T-NETIX Confidential
Information"). Gateway shall not
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permit any T-NETIX Confidential Information to be utilized or to be disclosed or
conveyed to any other person or entity other than Gateway Associates in
furtherance of this Agreement. Without limiting the generality of the foregoing,
and except as required by law or as contemplated by Section 7.3, (i) Gateway
shall not disclose to any person or entity, and shall not permit any Gateway
Associates to disclose to any person or entity, any of the terms or provisions
hereof and (ii) except in the ordinary course of business, Gateway shall not
contact any customers or employees of T-NETIX, and Gateway shall not permit any
Gateway Associates to contact any customers or employees of T-NETIX, without the
prior consent of an officer of T-NETIX. This Section 5.2 shall terminate if and
when the Closing occurs in accordance with Article 1 of this Agreement, or
within two years of the date of execution of this Agreement, whichever occurs
first. This Section 5.2 shall not apply to (y) information about T-NETIX which
is or has become part of the public knowledge or literature, or is or has become
generally available to the public, in either case other than as a result of a
disclosure by or through Gateway or the Gateway Associates; or (z) information
about T-NETIX which was made available to Gateway prior to disclosure by T-NETIX
to Gateway, on a nonconfidential basis, by a person or entity that is not
subject to this Agreement and that is not known to be obligated to keep such
information confidential.
5.3 ACCESS. Gateway agrees that, between the date of this Agreement and
the Closing Date, Gateway shall, after receiving reasonable advance notice from
T-NETIX, give T-NETIX and T-NETIX Associates reasonable access (during normal
business hours) to all information in Gateway's possession regarding the
environmental condition of its Real Property, its intellectual property and to
the books, records, contracts and officers of Gateway for the purpose of
enabling such parties to further investigate and inspect the business,
operations and financial and legal affairs of Gateway.
5.4 NO SALE OR TRANSFER OF SHARES. The Gateway Shareholder Signatories
agree that, between the date of this Agreement and the Closing Date, the Gateway
Shareholder Signatories shall not, directly or indirectly, sell or otherwise
transfer, or agree or commit to transfer any of the shares of Gateway Stock or
any interest in or right relating to such shares.
5.5 NO SHOPPING.
(a) Gateway, its officers and directors, and the Gateway Shareholder
Signatories will not, and Gateway shall direct and use its best efforts to cause
its employees, agents and representatives to not, during the period beginning on
the date hereof and continuing through Closing, except to the extent that the
board of directors concludes in good faith that it is legally required for the
discharge by the board of directors of its fiduciary duties, (i) sell or arrange
for the sale of any Gateway capital stock; or (ii) negotiate, solicit or
encourage or authorize any person to solicit from any third party any proposals
relating to a "Gateway Change of Control," which shall mean the merger or
consolidation of Gateway, disposition of the business or all or substantially
all the assets of Gateway or the sale of a total of fifty percent (50%) or more
of the capital stock of Gateway; or (iii) make any information concerning
Gateway available to any person for the purpose of affecting or causing a
Gateway Change of Control. This paragraph (a) of Section 5.5 shall not apply to
any merger in which Gateway is the surviving corporation and the current
shareholders of Gateway are the holders of at least two-thirds of the voting
power and economic benefits of Gateway immediately following the merger.
(b) In the event Gateway receives any solicitation, proposal or offer from
any person relating to a Gateway Change of Control, Gateway shall promptly give
written notice to T-NETIX of such event. Notice shall not be deemed promptly
given if it is given more than two business days after an officer or the
chairman of the board of Gateway has received or been notified of, orally or in
writing, any such solicitation, proposal or offer.
5.6 FILINGS AND CONSENTS. Gateway shall use commercially reasonable
efforts to do each of the following:
(a) make or give each filing or notice required to be made or given
pursuant to any applicable Legal Requirement, Material Contract or Permit by
Gateway in connection with the execution and delivery of this Agreement or in
connection with the consummation or performance of any of the transactions
contemplated hereby; and
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(b) obtain each consent required to be obtained pursuant to any applicable
Legal Requirement, Permit or Material Contract by Gateway or the Gateway
Shareholder Signatories in connection with the execution and delivery of any of
this Agreement or in connection with the consummation or performance of the
transactions contemplated hereby.
5.7 UPDATED GATEWAY DISCLOSURE LETTER. Between the date of this Agreement
and the Closing Date, if Gateway becomes aware of any fact or condition that
causes any of the representations and warranties of Gateway and/or the Gateway
Shareholders in this Agreement to become untrue, misleading, or inaccurate in
any material respect, such party will immediately deliver to T-NETIX an updated
Gateway Disclosure Letter ("Updated Gateway Disclosure Letter") setting forth
the facts or conditions that cause such representation, warranty, or Gateway
Disclosure Letter to become untrue, misleading, or inaccurate.
5.8 MAXIMUM INDEBTEDNESS. After the termination of the agreement referred
to in Section 3.26 hereof, Gateway's Indebtedness at Closing shall not exceed
$10,500,000 plus any additions to inventory and any additions to prepaid
commissions from the date hereof to the Closing Date. For purposes of this
Agreement "Indebtedness" shall mean all long-term, short-term or "line of
credit" indebtedness to banks, leasing companies and other third parties,
capital lease obligations, accounts receivable financing and overdrafts,
including the current portion of such indebtedness, accrued interest thereon,
and the amount of any fees, early retirement or pre-payment fees and penalties,
and any other amounts due upon the pre-payment thereof.
5.9 POOLING AND TAX-FREE REORGANIZATION TREATMENT. Gateway shall not
intentionally take, fail to take or cause to be taken or not be taken, any
action within its control, whether before or after the Closing, which would
disqualify the Merger as a "pooling of interests" for accounting purposes or as
a "reorganization" within the meaning of Section 368(a) of the Code.
5.10 PROXY MATERIALS. Gateway shall cooperate with T-NETIX in preparing
the joint proxy statement/offering memorandum referred to in Section 6.8 hereof
and shall use commercially reasonable efforts to timely provide all such
information to T-NETIX as T-NETIX deems necessary or advisable for preparation
and distribution of the same. The information provided shall not contain any
material misstatement or omission.
ARTICLE 6
COVENANTS OF T-NETIX
6.1 CONDUCT OF BUSINESS. T-NETIX agrees that, between the date of this
Agreement and the Closing Date, except as contemplated by this Agreement or
referred to in the T-NETIX Disclosure Letter, and except as may be necessary to
carry out the transactions contemplated by this Agreement, T-NETIX without
Gateway's written consent (which consent shall not be unreasonably withheld),
will not:
(a) amend its Articles of Incorporation or Bylaws;
(b) make any change in its practices, operations or policies with respect
to the selling goods or services, collecting accounts receivable and/or paying
accounts payable;
(c) conduct its business in a manner that departs from the manner in which
such business was being conducted prior to the date of this Agreement;
(d) increase the rate or change the form of compensation payable to any
director or officer of T-NETIX or increase any employee benefits, except for
normal increases consistent with past practices;
(e) purchase or dispose of any properties or other assets, except in the
ordinary course of business;
(f) declare, set aside, pay or make any dividend or other distribution in
respect of any of T-NETIX's outstanding shares of capital stock;
(g) issue or sell any shares of T-NETIX's capital stock (whether or not
from the treasury) or any other securities; grant any options, convertibility
rights, rights to subscribe for shares of capital stock or securities
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convertible into or exchangeable for shares of capital stock, warrants, calls or
other agreements relating to T-NETIX's capital stock; split up, combine,
reclassify, redeem, repurchase or otherwise reacquire any of T-NETIX's capital
stock, or otherwise change its capitalization;
(h) except as required by regulation or generally accepted accounting
principles, maintain its books of account other than in the usual, regular and
ordinary manner on a basis consistent with prior periods, make any change in any
of its books, accounting methods or practices, or reclassify any assets or
liabilities;
(i) cancel, terminate, renew or amend any Material Contract or enter into
any contract, agreement, lease, license or commitment, in each case outside the
ordinary course of business;
(j) invest in certificates of deposit in any one bank if such investments
in the aggregate exceed $100,000 at any time;
(k) incur any direct or contingent liability for borrowed money or
guarantee the monetary obligations of any other person or entity, or make any
monetary investment in, advance to or loan to any person or entity other than in
the ordinary course of business;
(l) fail to make maintenance expenditures and maintain inventories in the
amounts and at the times required to operate its business in the ordinary course
consistent with past practice;
(m) implement or adopt any change in its tax methods, principles or
elections;
(n) fail to pay accounts payable or collect accounts receivable in
accordance with past practices;
(o) fail to use best efforts to ensure the retention of T-NETIX's key
employees;
(p) enter into any transaction outside the ordinary course of business; or
(q) agree or commit to do any of the foregoing.
6.2 CONFIDENTIALITY. T-NETIX shall hold in strict confidence, and cause
its stockholders, affiliates, directors, officers, employees, agents, attorneys,
accountants, financing sources and representatives and those of its Affiliates
(collectively, "T-NETIX Associates") to hold in strict confidence, all documents
and information obtained with respect to Gateway ("Gateway Confidential
Information," and collectively with the T-NETIX Confidential Information, the
"Confidential Information"). T-NETIX shall not permit any Gateway Confidential
Information to be utilized or to be disclosed or conveyed to any other person or
entity other than T-NETIX Associates in furtherance of this Agreement. Without
limiting the generality of the foregoing, and except as required by law or as
contemplated by Section 7.3, (i) T-NETIX shall not disclose to any person or
entity, and shall not permit any of its T-NETIX Associates to disclose to any
person or entity, any of the terms or provisions hereof and (ii) except in the
ordinary course of business, T-NETIX shall not contact any customers or
employees of Gateway, and T-NETIX shall not permit any T-NETIX Associates to
contact any customers or employees of Gateway, without the prior consent of an
officer of Gateway. This Section 6.2 shall terminate if and when the Closing
occurs in accordance with Article 1 of this Agreement, or within two years of
the date of execution of this Agreement, whichever occurs first. This Section
6.2 shall not apply to (y) information about Gateway which is or has become part
of the public knowledge or literature, or is or has become generally available
to the public, in either case other than as a result of a disclosure by or
through T-NETIX or the T-NETIX Associates; or (z) information about Gateway
which was made available to T-NETIX prior to disclosure by Gateway to T-NETIX,
on a nonconfidential basis, by a person or entity that is not subject to this
Agreement and that is not known to be obligated to keep such information
confidential.
6.3 ACCESS. T-NETIX agrees that, between the date of this Agreement and
the Closing Date, T-NETIX shall, after receiving reasonable advance notice from
Gateway, give Gateway and Gateway Associates reasonable access (during normal
business hours) to all information in T-NETIX's possession regarding the
environmental condition of its Real Property, its intellectual property and to
the books, records, contracts and officers of T-NETIX for the purpose of
enabling such parties to further investigate and inspect the business,
operations and financial and legal affairs of T-NETIX.
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6.4 NO SHOPPING.
(a) T-NETIX, its officers and directors, and the T-NETIX Shareholder
Signatories will not, and T-NETIX shall direct and use its best efforts to cause
its employees, agents and representatives to not, during the period beginning on
the date hereof and continuing through Closing, except to the extent that the
board of directors concludes in good faith that it is legally required for the
discharge by the board of directors of its fiduciary duties: (i) sell or arrange
for the sale of any T-NETIX capital stock; or (ii) negotiate, solicit or
encourage or authorize any person to solicit from any third party any proposals
relating to a "T-NETIX Change of Control," which shall mean the merger or
consolidation of T-NETIX, disposition of the business or all or substantially
all the assets of T-NETIX or the sale of a total of fifty percent (50%) or more
of the capital stock of T-NETIX; or (iii) make any information concerning
T-NETIX available to any person for the purpose of affecting or causing a
T-NETIX Change of Control. This paragraph (a) of Section 6.4 shall not apply to
any merger in which T-NETIX is the surviving corporation and the current
shareholders of T-NETIX are the holders of at least two-thirds of the voting
power and economic benefits of T-NETIX immediately following the merger.
(b) In the event T-NETIX receives any solicitation, proposal or offer from
any person relating to a T-NETIX Change of Control, T-NETIX shall promptly give
written notice to Gateway of such event. Notice shall not be deemed promptly
given if it is given more than two business days after an officer or the
chairman of the board of T-NETIX has received or has been notified of, orally or
in writing, any such solicitation, proposal or offer.
6.5 FILINGS AND CONSENTS. T-NETIX shall use commercially reasonable
efforts to do each of the following:
(a) make or give each filing or notice required to be made or given
pursuant to any applicable Legal Requirement by T-NETIX in connection with the
execution and delivery of this Agreement or in connection with the consummation
or performance of any of the transactions contemplated hereby; and
(b) obtain each consent required to be obtained by T-NETIX pursuant to any
applicable Legal Requirement or material contract to which T-NETIX is a party or
by which it is bound in connection with the execution and delivery of any of
this Agreement or in connection with the consummation or performance of the
transactions contemplated hereby.
6.6 UPDATED T-NETIX DISCLOSURE LETTER. Between the date of this Agreement
and the Closing Date, if T-NETIX becomes aware of any fact or condition that
causes any of the representations and warranties of T-NETIX in this Agreement to
become untrue, misleading, or inaccurate in any material respect, T-NETIX will
immediately deliver to Gateway an updated T-NETIX Disclosure Letter ("Updated
T-NETIX Disclosure Letter") setting forth the facts or conditions that cause
such representation, warranty, or T-NETIX Disclosure Letter to become untrue,
misleading, or inaccurate.
6.7 POOLING AND TAX-FREE REORGANIZATION TREATMENT. T-NETIX shall not
intentionally take, fail to take or cause to be taken or not be taken, any
action within its control, whether before or after the Closing, which would
disqualify the Merger as a "pooling of interests" for accounting purposes or as
a "reorganization" within the meaning of Section 368(a) of the Code.
6.8 PROXY MATERIALS. T-NETIX shall use commercially reasonable efforts to
prepare a joint proxy statement/offering memorandum for (i) the special meeting
of Gateway Shareholders to be held pursuant to Section 1.1(a) hereof, (ii) the
special meeting of T-NETIX Shareholders to be held pursuant to Section 1.1(b)
hereof, and (iii) offering the T-NETIX Stock to be issued pursuant to the
Merger. Such joint proxy statement/offering memorandum shall comply with all
applicable Legal Requirements and shall be filed with the SEC pursuant to the
Securities Exchange Act of 1934 and the rules thereunder.
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ARTICLE 7
COVENANTS OF ALL PARTIES
The parties hereto agree that:
7.1 COMMERCIALLY REASONABLE EFFORTS; FURTHER ASSURANCES. Subject to the
terms and conditions of this Agreement, each party will use commercially
reasonable efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary or desirable under applicable Legal
Requirements to consummate the transactions contemplated by this Agreement.
Gateway and T-NETIX all agree to execute and deliver such other documents,
certificates, agreements and other writings and to take such other actions as
may be necessary or desirable in order to consummate or implement expeditiously
the transactions contemplated by this Agreement.
7.2 CERTAIN FILINGS, ETC. Gateway and T-NETIX shall cooperate with one
another (a) in determining whether any action by or in respect of, or filing
with, any governmental body, agency, official or authority is required, or any
actions, consents, approvals or waivers are required to be obtained from parties
to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (b) in taking such actions or
making any such filings, in furnishing such information as may be required in
connection therewith, and in seeking timely to obtain any such actions,
consents, approvals or waivers.
7.3 PUBLIC ANNOUNCEMENTS. The parties agree not to issue any press release
or make any public statement with respect to this Agreement or the transactions
contemplated hereby prior to the Closing without the prior consent of T-NETIX
and Gateway (which consent shall not be unreasonably withheld or delayed),
except to the extent that any party hereto is required by law to make any such
disclosure and such party notifies the other parties hereto a reasonable time
before making such disclosure of the nature and content of the intended
disclosure, and consults with such other parties regarding the nature and
content of such disclosure.
7.4 HART-SCOTT-RODINO FILING. The parties shall cooperate in making any
necessary filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(the "HSR Act"), and if appropriate, in seeking early termination of any waiting
periods thereunder. The costs of such filing shall be shared equally by the
parties.
7.5 AFFILIATES.
(a) Promptly, but in any event within fifteen (15) days, after the
execution and delivery of this Agreement, (i) Gateway shall deliver to T-NETIX
(x) a letter identifying all persons who, to the knowledge of Gateway, may be
deemed to be affiliates of Gateway pursuant to Rule 145 under the Securities
Act, including without limitation all directors and executive officers of
Gateway and (y) a letter identifying all persons who, to the knowledge of
Gateway, may be deemed to be affiliates of Gateway as that term (affiliate) is
used for purposes of qualifying for pooling-of-interests accounting treatment;
and (ii) T-NETIX shall identify to Gateway all persons who, to the knowledge of
T-NETIX, may be deemed affiliates of T-NETIX as that term (affiliate) is used
for purposes of qualifying for pooling-of-interests accounting treatment.
(b) Gateway shall cause each director of Gateway to, and Gateway shall use
its best efforts to cause each executive officer of Gateway and each other
person who may be deemed an affiliate of Gateway (pursuant to either Rule 145
under the Securities Act or the accounting treatment rules) to execute and
deliver to T-NETIX within 30 days after the execution and delivery of this
Agreement, a letter substantially in the form of Exhibit B hereto agreeing to be
bound by the restrictions of Rule 145 and agreeing to be bound by the rules
which permit the Merger to be treated as a pooling-of-interests for accounting
purposes. In addition, T-NETIX shall cause each director of T-NETIX, and T-NETIX
shall use its best efforts to cause each executive officer of T-NETIX and each
other person who may be deemed an affiliate of T-NETIX (as that term is used for
purposes of qualifying for pooling-of-interests) to execute and deliver to
Gateway within thirty (30) days after the execution and delivery of this
Agreement, a letter in which such persons agree to be bound by the rules which
permit the Merger to be treated as a pooling-of-interests for accounting
purposes.
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(c) T-NETIX agrees to publish financial results covering at least 30 days
of combined operations of T-NETIX and Gateway as soon as practicable after the
Effective Time.
ARTICLE 8
CONDITIONS TO CLOSING
8.1 CONDITIONS FOR THE BENEFIT OF T-NETIX. The obligation of T-NETIX to
consummate the transactions contemplated hereby is subject to the satisfaction,
as of the Closing Date, of the following conditions (any of which may be waived
by T-NETIX in whole or in part):
(a) Accuracy of Representations and Warranties. The representations and
warranties set forth in Articles 3 and 4 being true and accurate as of the date
of this Agreement and true and accurate in all material respects (except
representations and warranties which are themselves qualified as to materiality,
which shall be true and accurate in all respects) as of the Closing Date with
the same effect as though made on and as of the Closing Date, except to the
extent that (a) any of such representations and warranties refers specifically
to a date other than the Closing Date or (b) the accuracy of any of such
representations and warranties is affected by any of the transactions
contemplated by this Agreement.
(b) Performance. Gateway having performed all obligations required by this
Agreement to be performed by Gateway on or before the Closing Date, including
without limitation the covenants set forth in Article 5.
(c) Certificate. T-NETIX having received from any duly authorized officer
of Gateway a certificate dated the Closing Date confirming that the conditions
in Sections 8.1(a) and (b) have been met. Such certificate shall be deemed a
representation and warranty hereunder.
(d) No Injunction. There not being in effect, at the Closing, any
injunction or other binding order of any court or other tribunal having
jurisdiction over T-NETIX that prohibits the consummation of the transactions
contemplated in this Agreement.
(e) No Material Adverse Effect. There having been no Material Adverse
Effect on Gateway since November 30, 1998.
(f) Approvals and Consents. All required approvals of Gateway Shareholders
and all required consents, licenses, approvals, estoppel certificates, releases
of encumbrances, acknowledgments of payment in full and authorizations, as set
forth in the Gateway Disclosure Letter, having been obtained and delivered to
T-NETIX.
(g) Legal Opinions. T-NETIX having received from counsel to Gateway an
opinion in form and substance reasonably satisfactory to T-NETIX.
(h) Certificate of Secretary. Gateway having delivered a certificate,
signed by the secretary of Gateway, certifying (i) current copies, as amended,
of the Articles of Incorporation and Bylaws of Gateway and the resolutions of
the board of directors and shareholders of Gateway authorizing this Agreement
and the transactions contemplated hereby.
(i) Employment/Non-competition Agreements. Richard E. Cree having executed
an employment agreement in the form attached as Exhibits D-1 (the "Employment
Agreement").
(j) Non-competition Agreements. W. P. Buckthal, Irvin Wall and James B.
Franklin having executed non-competition agreements in the form attached as
Exhibit E (the "Non-competition Agreements").
(k) Tax Opinion. T-NETIX shall have received an opinion (the "Tax Opinion")
from Rothgerber Johnson & Lyons LLP, counsel to T-NETIX, that the Merger will
result in a reorganization (as defined in Section 368(c) of the Code) and that
accordingly no gain or loss will be recognized for federal income tax purposes
by the T-NETIX Shareholders or the Gateway Shareholders in the Merger.
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(l) Good Standing and Tax Certificates. Gateway having delivered to T-NETIX
a Good Standing Certificate along with a Tax Certificate, if appropriate, for
Gateway dated as of the Closing Date.
(m) Investor Representation Letter. All Gateway Shareholders having
executed a letter in the form of Exhibit F stating that they have no present
intention to sell or transfer the T-NETIX Stock to be received in the Merger,
and that they will not sell such T-NETIX Stock except pursuant to an effective
registration statement or an exemption therefrom..
(n) Pooling of Interests. T-NETIX having received from its independent
accountants an opinion that the Merger will qualify for treatment as a
pooling-of-interests under GAAP.
(o) Royalty Agreement. The TTDP Royalty Agreement having been duly and
validly terminated effective as of the Effective Time for an amount equal to no
more than 375,339 shares of T-NETIX Stock to be paid pursuant to Section 1.2(c)
hereof.
(p) HSR Act. Any waiting period applicable to the Merger under the HSR Act
shall have expired or earlier termination thereof shall have been granted and no
action shall have been instituted by either the United States Department of
Justice or the Federal Trade Commission to prevent the consummation of the
transactions contemplated by this Agreement or to modify or amend such
transactions in any material manner or, if any such action shall have been
instituted, it shall have been withdrawn or a final judgment shall have been
entered against such Department or Commission, as the case may be.
(q) No Discovery. T-NETIX not being informed of or otherwise having
discovered any matter or matters which would represent a Material Adverse Effect
on Gateway.
(r) Audited Financial Statements. T-NETIX having received from Gateway
audited financial statements, including balance sheet and related statements of
income, retained earnings and cash flows, including notes thereto, as of and for
the year ended December 31, 1998, accompanied by the independent auditor's
report of KPMG LLP, independent certified public accountants, and such financial
statements do not reflect a Material Adverse Effect on Gateway since November
30, 1998.
(s) Dissenting Gateway Shareholders. Holders of less than 7% of the shares
of Gateway Stock outstanding becoming Dissenting Gateway Shareholders hereunder.
8.2 CONDITIONS FOR THE BENEFIT OF GATEWAY. The obligation of Gateway to
consummate the transactions that are to be consummated at the Closing is subject
to the satisfaction, as of the Closing Date, of the following conditions (any of
which may be waived by Gateway in whole or in part by Gateway.
(a) Accuracy of Representations and Warranties. The representations and
warranties of T-NETIX set forth in Article 2 being true and accurate as of the
date of this Agreement, and true and accurate in all material respects (except
representations and warranties which are themselves qualified as to materiality,
which shall be true and accurate in all respects) as of the Closing Date with
the same effect, as though made on and as of the Closing Date, except to the
extent that (a) any of such representations and warranties refers specifically
to a date other than the Closing Date or (b) the accuracy of any of such
representations and warranties is affected by any of the transactions
contemplated by this Agreement.
(b) Performance. T-NETIX having performed all obligations required by this
Agreement to be performed by T-NETIX on or before the Closing Date, including
without limitation the covenants set forth in Article 6.
(c) Certificate. Gateway having received from a duly authorized officer of
T-NETIX a certificate dated the Closing Date confirming that the conditions in
Sections 8.2(a) and (b) have been met. Such certificate shall be deemed a
representation and warranty hereunder.
(d) No Injunction. There not being in effect, at the Closing, any
injunction or other binding order of any court or other tribunal having
jurisdiction over Gateway that prohibits the consummation of the transactions
contemplated by this Agreement.
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(e) No Material Adverse Effect. There having been no Material Adverse
Effect on T-NETIX since October 31, 1998.
(f) Approvals and Consents. All required approvals of T-NETIX Shareholders
and all required consents, licenses, approvals, estoppel certificates, releases
of encumbrances, acknowledgments of payment in full and authorizations, as set
forth in the T-NETIX Disclosure Letter, having been obtained and delivered to
Gateway.
(g) Legal Opinion. Gateway having received from counsel to T-NETIX an
opinion in substantially the form of Exhibit G attached hereto.
(h) Employment Agreements. T-NETIX having executed and delivered Employment
Agreement.
(i) Non-competition Agreements. T-NETIX having executed and delivered the
Non-competition Agreements.
(j) Tax Opinion. Gateway shall have received the Tax Opinion.
(k) Good Standing and Tax Certificates. T-NETIX having delivered to Gateway
a Good Standing Certificate along with a Tax Certificate, if appropriate, for
T-NETIX dated as of the Closing Date.
(l) Pooling of Interests. T-NETIX having received from its independent
accountants an opinion that the Merger will qualify for treatment as a
pooling-of-interests under GAAP.
(m) HSR Act. Any waiting period applicable to the Merger under the HSR Act
shall have expired or earlier termination thereof shall have been granted and no
action shall have been instituted by either the United States Department of
Justice or the Federal Trade Commission to prevent the consummation of the
transactions contemplated by this Agreement or to modify or amend such
transactions in any material manner or, if any such action shall have been
instituted, it shall have been withdrawn or a final judgment shall have been
entered against such Department or Commission, as the case may be.
(n) No Discovery. Gateway not being informed of or otherwise having
discovered any matter or matters which would represent a Material Adverse Effect
on T-NETIX.
ARTICLE 9
POST-CLOSING COVENANTS
9.1 ADDITIONAL FUNDING. T-NETIX agrees to provide such funding to Gateway
after the Closing as may be necessary for Gateway to pay its Indebtedness as
such Indebtedness shall become due.
9.2 SERVICE CREDIT. For purposes of vesting of employee benefits,
including retirement and stock option benefits, in calculating the term of
service for each person who is an employee of Gateway immediately after the
Effective Time, T-NETIX shall include such person's term of service with Gateway
as shown on Gateway's records for such employee at the Effective Time.
9.3 BOARD OF DIRECTORS. T-NETIX shall cause the appointment of Richard E.
Cree and W. P. Buckthal to the Board of Directors of T-NETIX effective on the
Closing Date. The term of Richard E. Cree's directorship shall expire at the
2002 annual meeting of the T-NETIX shareholders, and the term of W. P.
Buckthal's directorship shall expire at the 2001 annual meeting of the T-NETIX
shareholders. In the event a vacancy occurs in the Board of Directors of T-NETIX
for any reason including an increase in the number of directors, the vacancy
shall be filled by an individual mutually agreed upon by the directors appointed
pursuant to this Agreement and the T-NETIX Shareholder Signatories.
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ARTICLE 10
TERMINATION OF AGREEMENT
10.1 RIGHT TO TERMINATE AGREEMENT. This Agreement may be terminated prior
to the Closing:
(a) by the mutual agreement of Gateway and T-NETIX;
(b) by T-NETIX at any time after May 31, 1999, if any condition set forth
in Section 8.1 shall not have been satisfied or waived and T-NETIX is not in
material breach of this Agreement;
(c) by Gateway at any time after May 31, 1999, if any condition set forth
in Section 8.2 shall not have been satisfied or waived and Gateway is not in
material breach of this Agreement;
(d) by T-NETIX or Gateway if any Updated Disclosure Letter of the other
party causes any representation or warranty of such other party in this
Agreement to be inaccurate in any material respect;
(e) by T-NETIX pursuant to its Board of Directors' fulfillment of its
fiduciary duties as contemplated by Section 6.4 hereof; or
(f) by Gateway pursuant to its Board of Directors' fulfillment of its
fiduciary duties as contemplated by Section 5.5 hereof.
10.2 EFFECT OF TERMINATION. Upon the termination of this Agreement
pursuant to Section 10.1:
(a) Each party shall promptly destroy or cause to be returned to the other
all Confidential Information of the other party, including any copies made by or
supplied to such party or any of such party's Associates of any such
Confidential Information;
(b) Each party shall pay its own costs and expenses and no party hereto
shall have any obligation or liability to the other parties hereto; provided,
however that the parties hereto shall remain bound by the provisions of Sections
5.2, 6.2 and 7.3.
10.3 DAMAGES.
(a) In the event that (i) Gateway effectuates a Gateway Change of Control
as described in Section 5.5 hereof; (ii) T-NETIX terminates this Agreement as a
result of an intentional breach by Gateway or the Gateway Shareholder
Signatories of a representation, warranty or covenant hereof and within one year
following such termination Gateway effectuates a Gateway Change of Control; or
(iii) Gateway does not take the steps required to close the transactions
contemplated by this Agreement when all conditions for the benefit of Gateway
have been satisfied or waived, and within one year after the earliest date on
which all conditions for the benefit of Gateway were satisfied or waived Gateway
effectuates a Gateway Change of Control, then, in addition to any damages which
may be available to T-NETIX at law or in equity, Gateway shall pay to T-NETIX
the amount of $5,000,000 in immediately available funds.
(b) In the event that (i) T-NETIX effectuates a T-NETIX Change of Control
as described in Section 6.4 hereof; (ii) Gateway terminates this Agreement as a
result of an intentional breach by T-NETIX or the T-NETIX Shareholder
Signatories of a representation, warranty or covenant hereof and within one year
following such termination T-NETIX effectuates a T-NETIX Change of Control; or
(iii) T-NETIX does not take the steps required to close the transactions
contemplated by this Agreement when all conditions for the benefit of T-NETIX
have been satisfied or waived, and within one year after the earliest date on
which all conditions for the benefit of T-NETIX were satisfied or waived T-NETIX
effectuates a T-NETIX Change of Control, then, in addition to any damages which
may be available to Gateway at law or in equity, T-NETIX shall pay to Gateway
the amount of $5,000,000 in immediately available funds.
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ARTICLE 11
CERTAIN REMEDIES AND LIMITATIONS
11.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations and warranties made by T-NETIX, the T-NETIX Shareholder
Signatories, Gateway or the Gateway Shareholder Signatories in this Agreement,
in any Disclosure Letter or in any certificate delivered pursuant hereto, shall
survive the Closing until the earlier of the first anniversary of the Closing
Date or the date of publication of the first annual combined audited financial
statements of Gateway and T-NETIX, provided that there shall be no termination
of the obligation to indemnify for a Claim involving any such representation or
warranty provided a Claim Notice (as defined in Section 11.6) has been delivered
prior to such date. The representations and warranties of any party shall be
unaffected by any investigation made by or on behalf of the other parties or by
knowledge obtained as a result thereof or otherwise.
11.2 INDEMNIFICATION BY T-NETIX.
(a) T-NETIX will indemnify and hold harmless Gateway Shareholders and their
respective affiliates, officers, directors, partners, stockholders, agents,
representatives, consultants and employees, and all of their respective heirs,
successors and permitted assigns (collectively, the "Gateway Shareholder
Indemnified Parties"), from and against the net amount (determined after
deduction of the amount of any insurance proceeds recovered):
(i) of any and all liabilities, obligations, losses, damages,
diminutions of value, actions, Claims, liens and deficiencies of any kind
or nature ("Losses") which exist, or which are imposed on, incurred by or
asserted against any one or more of the Gateway Shareholder Indemnified
Parties based upon, resulting from or arising out of or as to which there
was any breach or inaccuracy of any representation, warranty, statement,
certification, agreement, obligation or covenant made by T-NETIX in this
Agreement, any T-NETIX Disclosure Letter, any T-NETIX Related Agreement or
in any other written document;
(ii) of any costs or expenses (including, without limitation,
settlement costs and reasonable attorneys', accountants' and experts' fees
and court costs) incurred by Gateway Shareholder Indemnified Parties in
connection with any of the foregoing (including, without limitation, any
reasonable cost or expense incurred by Gateway Shareholder Indemnified
Parties in enforcing their rights pursuant to this Section 11.2).
Any indemnification obligation pursuant to this Section 11.2(a) is for
purposes of this Agreement defined as a "Gateway Shareholder Indemnified
Obligation."
(b) The Gateway Shareholders' Representative shall not be required to make
any claim or demand on behalf of the Gateway Shareholder Indemnified Parties
against any other person or entity prior to the making of any claim or demand
for indemnification or at any other time.
11.3 LIMITATIONS ON LIABILITY OF T-NETIX.
(a) Except in the event of knowing and willful misrepresentation and
notwithstanding anything to the contrary in this Agreement, the total amount of
indemnification payments that T-NETIX may be required to make hereunder shall be
limited in the aggregate to the T-NETIX Reserve Shares, which is the sole source
of Gateway Shareholders' indemnification and T-NETIX's cumulative liability
shall in no event exceed the T-NETIX Reserve Shares.
(b) No payment shall be required to be made for Gateway Shareholder
Indemnified Obligations unless a Claim Notice with respect thereto has been
delivered to T-NETIX on or prior to the earlier of the first anniversary of the
Closing or of the date of publication of the first annual combined audited
financial statements of Gateway and T-NETIX.
(c) Notwithstanding anything to the contrary in this Agreement, and except
for willful, knowing or intentional breaches of the representations and
warranties contained herein, no claim for indemnification may be made on behalf
of any Gateway Shareholder Indemnified Party unless and until the aggregate
amount of
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Losses and/or other amounts claimed for indemnification on behalf of the Gateway
Shareholder Indemnified Parties exceeds $500,000.
11.4 INDEMNIFICATION BY GATEWAY SHAREHOLDERS.
(a) T-NETIX and its Affiliates and their respective officers, directors,
shareholders, agents, representatives, consultants, employees and affiliates,
and all of their respective heirs, successors and permitted assigns
(collectively, the "T-NETIX Indemnified Parties") shall be indemnified and held
harmless, severally, in proportionately in accordance with their interests, by
the Gateway Shareholders entitled to receive the Merger Consideration, against
and in respect of the net amount (determined after deduction of the amount of
any insurance proceeds recovered):
(i) of any and all Losses which exist, or which are imposed on,
incurred by or asserted against any one or more of the T-NETIX Indemnified
Parties, based upon, resulting from or arising out of, or as to which there
was, any breach or inaccuracy of any representation, warranty, statement,
certification, agreement, obligation or covenant made by Gateway or any
Gateway Shareholder Signatory in this Agreement, any Gateway Related
Agreement, any Gateway Disclosure Letter or in any other written document;
(ii) of any costs or expenses (including, without limitation,
settlement costs and reasonable attorneys', accountants' and experts' fees
and court costs) incurred by T-NETIX Indemnified Parties in connection with
any of the foregoing (including, without limitation, any reasonable cost or
expense incurred by T-NETIX Indemnified Parties in enforcing their rights
pursuant to this Section 11.4).
Any indemnification obligation pursuant to this Section 11.4(a) is for
purposes of this Agreement defined as a "T-NETIX Indemnified Obligation."
(b) No T-NETIX Indemnified Party shall be required to make any claim or
demand against any other person or entity prior to the making of any claim or
demand for indemnification or at any other time.
11.5 LIMITATIONS ON LIABILITIES OF GATEWAY SHAREHOLDERS.
(a) Except in the event of a knowing and willful misrepresentation and
notwithstanding anything to the contrary in this Agreement, the total amount of
indemnification payments that the Gateway Shareholders may be required to make
hereunder shall be limited in the aggregate to the Gateway Holdback Shares,
which is the sole source of T-NETIX's indemnification and the Gateway
Shareholders' cumulative liability shall in no event exceed the Gateway Holdback
Shares.
(b) No payment shall be required to be made for T-NETIX Indemnified
Obligations unless a Claim Notice with respect thereto has been delivered to the
Gateway Shareholders' Representative on or prior to the earlier of the first
anniversary of the Closing Date or of the date of publication of the first
annual combined audited financial statements of Gateway and T-NETIX.
(c) Notwithstanding anything to the contrary in this Agreement, and except
for willful, knowing or intentional breaches of the representations and
warranties contained herein, no claim for indemnification may be made by any
T-NETIX Indemnified Party unless and until the aggregate amount of Losses and/or
other amounts claimed for indemnification by T-NETIX Indemnified Parties exceeds
$500,000.
11.6 INDEMNIFICATION CLAIMS.
(a) If either a T-NETIX Indemnified Party, on the one hand, or the Gateway
Shareholders' Representative on behalf of a Gateway Shareholder Indemnified
Party, on the other hand, (the "Claimants") wishes to assert an indemnification
claim hereunder (an "Indemnification Claim"), the Claimant shall deliver to the
Gateway Shareholders' Representative, if a T-NETIX Indemnified Party, or to
T-NETIX, if the
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Claimant is the Gateway Shareholders' Representative on behalf of a Gateway
Shareholder Indemnified Party, a written notice (a "Claim Notice") setting
forth:
(i) the matter giving rise to the Indemnification Claim,
(ii) a detailed description of all of the facts and circumstances
known to Claimant giving rise to the Indemnification Claim, and
(iii) a detailed description of, and a reasonable estimate of the
total amount of, the monetary amounts actually incurred or expected to be
incurred for which indemnification is sought.
(b) T-NETIX Indemnified Parties and Gateway Shareholder Indemnified Parties
are referred to herein as "Indemnified Parties," and the persons from whom
indemnification may be sought pursuant to this Section 11.6 are referred to as
the "Indemnifying Parties." Where the Indemnified Parties or the Indemnifying
Parties are, or are related to, the Gateway Shareholders, the actions described
herein shall be taken on their behalf by the Gateway Shareholders'
Representative. Within twenty (20) days after receipt of any Claim Notice, the
Indemnifying Parties will (i) acknowledge in writing their responsibility for
all or part of such matter for which indemnification is sought under this
Article 11, and will either (x) pay or otherwise satisfy the portion of such
matter as to which responsibility is acknowledged, or (y) take such other action
as is reasonably satisfactory to the Indemnified Party to provide reasonable
security or other assurances for the performance of their obligations hereunder,
and/or (ii) give written notice to the Indemnified Party of their intention to
dispute or contest all or part of such responsibility. Upon delivery of such
notice of intention to contest, the parties will negotiate in good faith to
resolve as promptly as possible any dispute as to responsibility for, or the
amount of, any such matter. The T-NETIX Reserve Shares or the Gateway Holdback
Shares, as the case may be, shall be valued for the purpose of any
Indemnification Claim at the average closing price of T-NETIX Stock for the five
trading days immediately preceding the satisfaction of such Indemnification
Claim.
11.7 DEFENSE OF THIRD-PARTY ACTIONS. If an Indemnified Party receives
notice or otherwise obtains Knowledge of any Claim or any threatened Claim that
may give rise to an Indemnification Claim against an Indemnifying Party, then
the Indemnified Party shall promptly deliver to the Indemnifying Party a written
notice describing such Claim in reasonable detail. The untimely delivery of such
written notice by the Indemnified Party to the Indemnifying Party shall relieve
the Indemnifying Party of liability with respect to such Claim to the extent it
has been prejudiced by lack of timely notice under this Article 11 with respect
to such Claim. The Indemnifying Party shall have the right, at its option, to
assume the defense of any such Claim with its own counsel, reasonably
satisfactory to the Indemnified Party, provided that the Indemnifying Party may
not assume the defense of any Claim unless there are sufficient Gateway Holdback
Shares or T-NETIX Reserve Shares, as applicable, to fully indemnify Indemnified
Party against the amount of such Claim and all other pending Claims against the
Gateway Holdback Shares or T-NETIX Reserve Shares, as applicable. If the
Indemnifying Party elects to assume the defense of any such Claim, then:
(a) notwithstanding anything to the contrary contained in this Agreement,
the Indemnifying Party shall not be required to pay or otherwise indemnify the
Indemnified Party against any attorneys' fees or other expenses incurred on
behalf of the Indemnified Party in connection with such matter following the
Indemnifying Party's election to assume the defense of such matter so long as
the Indemnifying Party continues to diligently conduct such defense;
(b) the Indemnified Party shall make available to the Indemnifying Party
all books, records and other documents and materials that are under the direct
or indirect control of the Indemnified Party or any of the Indemnified Party's
Associates that the Indemnifying Party considers such necessary or desirable for
the defense of such matter at the expense of the Indemnifying Party and shall
make available to the Indemnifying Party reasonable access to Indemnified
Party's personnel;
(c) the Indemnified Party shall execute such documents and take such other
actions as the Indemnifying Party may reasonably request for the purpose of
facilitating the defense of, or any settlement, compromise or adjustment
relating to, such Claim (with the Indemnifying Party to reimburse Indemnified
Party for third-
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party, out-of-pocket expenses) and the Indemnified Party shall not be required
to take any such action or execute any document which imposes any equitable or
unindemnified liability remedy on any Indemnified Party or would adversely
affect the business or operations of T-NETIX or Gateway;
(d) the Indemnified Party shall otherwise fully cooperate as reasonably
requested by the Indemnifying Party in the defense of such Claim (with the
Indemnifying Party to reimburse Indemnified Party for third-party, out-of-pocket
expenses); and
(e) the Indemnified Party shall not admit any liability with respect to
such Claim.
If the Indemnifying Party fails or refuses to assume the defense of such
Claim, then the Indemnified Party shall proceed diligently to defend such Claim
with the assistance of counsel, and the Indemnifying Party shall thereafter
reimburse Indemnified Party on a current basis, in accordance with the
procedures set forth in this Agreement, as requested by Indemnified Party for
all costs and expenses of defense for which Indemnified Party is entitled to
indemnification pursuant to the terms of this Agreement. No third-party Claim
may be settled by the Indemnified Party without notice to, and the written
consent of, the Indemnifying Party which consent must not be unreasonably
withheld. If such consent is not given, or written notice that it is being
withheld and the reasons therefor has not been received by the Indemnified Party
within 15 days after such notice has been received by the Indemnifying Party,
the consent of the Indemnifying Party to such settlement shall be deemed given.
11.8 SUBROGATION. To the extent that the Indemnifying Party makes or is
required to make any indemnification payment to any Indemnified Party, the
Indemnifying Party shall be entitled to exercise, and shall be subrogated to,
any rights and remedies (including rights of indemnity, rights of contribution
and other rights of recovery) that the Indemnified Party or any of the
Indemnified Party affiliates may have against any other person (other than any
T-NETIX Indemnified Party or Gateway Shareholder Indemnified Party) with respect
to any Losses, circumstances or matters to which such indemnification payment is
directly or indirectly related. The Indemnified Party shall permit the
Indemnifying Party to use the name of the Indemnified Party and the names of the
Indemnified Party's affiliates in any transaction or in any proceeding or other
matter involving any of such rights or remedies; and the Indemnified Party shall
take such actions as the Indemnifying Party may reasonably request for the
purpose of enabling the Indemnified Party to perfect or exercise the
Indemnifying Party's right of subrogation hereunder.
11.9 EXCLUSIVITY. The right of each party hereto to assert Indemnification
Claims and receive indemnification payments pursuant to this Article 11 shall be
the sole and exclusive right and remedy exercisable by any person or entity
entitled to indemnification hereunder with respect to any breach by the other
party hereto of any representation or warranty or any other indemnity obligation
hereunder, except as provided in Section 10.3 hereof.
11.10 RETENTION OF RECORDS. From and after the Closing Date, T-NETIX shall
preserve, and shall cause Gateway to preserve, all books, records and other
documents, materials and information relevant to the representations, warranties
and covenants set forth in this Agreement until the later of three (3) years
following the Closing Date or for such longer period as the rights of the
parties hereunder may exist. At all times after the Closing Date, T-NETIX and
Gateway shall give Gateway Shareholders and Gateway Associates reasonable access
to such books, records and other documents, materials and information of T-NETIX
and Gateway relating to the operation of the business of T-NETIX and Gateway up
to and including the Closing Date.
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<PAGE> 132
ARTICLE 12
MISCELLANEOUS
12.1 MATERIALITY. For purposes of this Agreement, a contract, obligation,
liability, transaction, change, breach, encumbrance, proceeding, untruth,
inaccuracy or other matter or event shall not be deemed "material" if the
monetary amount involved is less than $250,000, or, if more than one such matter
or event, $500,000 in the aggregate. A "Material Adverse Effect" is any adverse
effect on the business, operations, assets, Material Contracts or financial
condition or results of a company unless the effect can reasonably be expected
to result in less than a $500,000 effect on the financial condition or results
of operation of such company or the effect is due to general changes in the
economy or the business the company.
12.2 NOTICES; ETC. All notices, instructions and other communications
given hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid, or (ii) via a reputable
nationwide overnight courier service, in each case to the address set forth
below. Any such notice, instruction or communication shall be deemed to have
been delivered three business days after it is sent postage prepaid, or one
business day after it is sent via a reputable nationwide overnight courier
service.
If to T-NETIX or TAC to:
T-NETIX, Inc.
67 Inverness Drive East, Suite 100
Englewood, CO 80112
Attention: Alvyn A. Schopp
Tel: (303) 790-9111
Fax: (303) 790-9540
with a copy to:
Herbert H. Davis III, Esq.
Rothgerber Johnson & Lyons LLP
1200 17th Street, Suite 3000
Denver, CO 80202
Tel: (303) 623-9000
Fax: (303) 623-9222
If to Gateway Shareholders' Representative, to:
Richard E. Cree
1544 Valwood Parkway, Suite 102
Carrollton, TX 75006
Tel:
Fax: (650) 494-1417
With a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
Attention: Kevin Kelso
Tel: (650) 494-0600
Fax: (650) 494-1417
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<PAGE> 133
If to Gateway, to:
1544 Valwood Parkway, Suite 102
Carrollton, TX 75006
Attention: Richard E. Cree
Tel:
Fax: (650) 494-1417
With a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
Attention: Kevin Kelso
Tel: (650) 494-0600
Fax: (650) 494-1417
or, in each case, to such other address as may be specified in writing to the
other parties.
Any party may give any notice, instruction or communication in connection
with this Agreement using any other means (including personal delivery, telecopy
or ordinary mail), but no such notice, instruction or communication shall be
deemed to have been delivered unless and until it is actually received by the
party to whom it was sent. Any party may change the address to which notices,
instructions or communications are to be delivered by giving the other parties
to this Agreement notice thereof in the manner set forth in this Section 12.3.
12.3 ASSIGNMENT. No party may assign or otherwise transfer this Agreement
or any of his or its rights hereunder to any person or entity.
12.4 ENTIRE AGREEMENT; AMENDMENT; GOVERNING LAW; ETC. This Agreement
(together with the Exhibits and Disclosure Letters) embody the entire agreement
and understanding among the parties hereto with respect to the subject matter
hereof. This Agreement may be amended, modified, waived, discharged or
terminated only by (and any consent hereunder shall be effective only if
contained in) an instrument in writing signed by the party against which
enforcement of such amendment, modification, waiver, discharge, termination or
consent is sought. This Agreement shall be construed in accordance with and
governed by the laws of the State of Colorado as it applies to contracts to be
performed entirely within the State of Colorado. No representation or warranty
(either express, implied or otherwise) is being made by any party with respect
to the subject matter hereof other than as expressly set forth herein.
12.5 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which is an original, but all of which shall constitute one instrument.
12.6 THIRD-PARTY RIGHTS. The parties do not intend to confer any benefit
hereunder on any person or entity other than the parties hereto, the Gateway
Shareholders, the Indemnified Parties and their respective successors in
interest.
12.7 RECITALS AND EXHIBITS. Each of the Recitals and Exhibits included
herein or referred to herein and attached hereto is an integral part of this
Agreement and is incorporated herein by this reference.
12.8 PRONOUNS. All pronouns and any variations thereof used in this
Agreement shall be deemed to refer to the masculine, feminine or neuter,
singular or plural, as appropriate.
12.9 AUTHORITY AND EXECUTION. Each person executing this Agreement on
behalf of a party hereto represents and warrants that he is duly and validly
authorized to do so on behalf of such party, with full right and authority to
execute this Agreement and to bind such party with respect to all of its
obligations hereunder.
12.10 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction, as to such jurisdiction, shall be
ineffective to the extent of such invalidity or unenforceability,
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<PAGE> 134
without rendering invalid or unenforceable the remaining terms and provisions of
this Agreement or affecting the validity or enforceability of any of the terms
or provisions of this Agreement in any other jurisdiction.
12.11 TIME OF ESSENCE. Time is of the essence of this Agreement.
12.12 INTERPRETATION. Each party acknowledges that such party, either
directly or through such party's representatives, has participated in the
drafting of this Agreement, and any applicable rule of constructions that
ambiguities are to be resolved against the drafting party should not be applied
in connection with the construction or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly caused this Agreement to
be executed as of the date first above written.
T-NETIX, Inc., a Colorado
corporation
By:
----------------------------------
Alvyn A. Schopp, Chief Executive
Officer
GATEWAY TECHNOLOGIES, INC., a Texas
corporation
By:
----------------------------------
Richard E. Cree, President
T-NETIX ACQUISITION CORP., a
Colorado corporation
By:
----------------------------------
Alvyn A. Schopp, Chief Executive
Officer
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<PAGE> 135
GATEWAY SHAREHOLDER SIGNATORIES
------------------------------------
Richard E. Cree
------------------------------------
G. B. Cree, Jr.
------------------------------------
W. P. Buckthal
------------------------------------
Irvin Wall
------------------------------------
James B. Franklin
T-NETIX SHAREHOLDER SIGNATORIES
------------------------------------
Alvyn A. Schopp
------------------------------------
Daniel M. Carney
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<PAGE> 136
EXHIBIT A-1
ARTICLES OF MERGER
BETWEEN
T-NETIX ACQUISITION CORP.
AND
GATEWAY TECHNOLOGIES, INC.
The undersigned corporations, T-NETIX Acquisition Corp., a Colorado
corporation ("TAC"), and Gateway Technologies, Inc., a Texas corporation
("Gateway"), pursuant to Section 7-111-105 of the Colorado Business Corporation
Act, adopt the following Articles of Merger:
Article 1. On the effective date specified below, TAC shall merge with and
into Gateway and the separate existence of TAC shall cease pursuant to the terms
of the Agreement and Plan of Merger attached hereto as EXHIBIT A ("Agreement"),
and Gateway shall continue as the surviving corporation.
Article 2. On February 9, 1999, the Board of Directors of TAC adopted the
Agreement.
Article 3. On February 9, 1999, the Board of Directors of Gateway adopted
the Agreement.
Article 4. On February 8, 1999, the sole shareholder of TAC voted on the
Agreement. The number of shares voted for the Agreement by each voting group
entitled to vote was sufficient for approval.
Article 5. On , 1999, the shareholders of Gateway voted on
the Agreement. The number of shares voted for the Agreement by each voting group
entitled to vote was sufficient for approval.
Article 6. The effective time and date of the Merger shall be 5:01 p.m.
Eastern Time, , 1999.
IN WITNESS WHEREOF, these Articles of Merger have been signed and verified
by the duly authorized officers of Gateway and TAC on this day of
, 1999.
T-NETIX ACQUISITION CORP., a
Colorado corporation
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
GATEWAY TECHNOLOGIES, INC. a Texas
corporation
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
A-A-1-1
<PAGE> 137
EXHIBIT A-2
ARTICLES OF MERGER
MERGING
T-NETIX ACQUISITION CORP.
INTO
GATEWAY TECHNOLOGIES, INC.
Pursuant to the provisions of Article 5.04 of the Texas Business
Corporation Act ("TBCA"), these Articles of Merger are executed and filed for
purposes of merging T-NETIX ACQUISITION CORP. into GATEWAY TECHNOLOGIES, INC.
ARTICLE I
NAME AND JURISDICTION
The parties to the Agreement and Plan of Merger are Gateway Technologies,
Inc., a Texas corporation ("Gateway"), and T-NETIX, Inc., a Colorado corporation
("T-NETIX"), and T-NETIX Acquisition Corp., a Colorado corporation ("TAC").
ARTICLE II
RESOLUTION
The resolution approving the merger of TAC and Gateway and the Agreement
and Plan of Merger (the "Agreement") was adopted by the Board of Directors of
Gateway on the 9th day of February, 1999, and is attached hereto as EXHIBIT A.
The resolution approving the merger of TAC and Gateway and the Agreement
was adopted by the Board of Directors of TAC on the 9th day of February, 1999,
and is attached hereto as EXHIBIT B. Approval of the Agreement was duly
authorized by all action required by TAC's Articles of Incorporation and Bylaws
and the Colorado Business Corporation Act.
ARTICLE III
ARTICLES OF INCORPORATION
The Articles of Incorporation of Gateway shall be the Articles of
Incorporation of the surviving corporation without amendment.
ARTICLE IV
AGREEMENT ON FILE
The Agreement executed on February 10, 1999, is on file at the principal
office of Gateway, the surviving corporation, at 1544 Valwood Parkway, Suite
102, Carrollton, Texas 75006. A copy of the Agreement will be provided, upon
written request and without cost, to each shareholder of Gateway.
ARTICLE V
OUTSTANDING SHARES
Gateway has 729,004 outstanding shares of common stock. TAC has 729,004
outstanding shares of common stock.
A-A-2-1
<PAGE> 138
ARTICLE VI
SHAREHOLDER APPROVAL
On , 1999, the shareholders of Gateway approved the Agreement.
The number of shares voted for the Agreement was , and the number of
shares voted against the Agreement was .
On , 1999, the shareholders of TAC approved the Agreement. The
number of shares voted for the Agreement was 729,004, and the number of shares
voted against the Agreement was 0.
ARTICLE VII
SERVICE OF PROCESS
Following the Merger, Gateway survives the Merger and may be served with
process in the State of Texas in any proceeding for enforcement of any
obligation of Gateway as well as for enforcement of any obligation of the
Surviving Corporation arising from the Merger, including any suit or proceeding
to enforce the right of any stockholder, and it does hereby irrevocably appoint
the Secretary of State of Texas as its agent to accept service of process in any
such suit or other proceeding. The address to which a copy of such process shall
be mailed by the Secretary of State is 1544 Valwood Parkway, Suite 102,
Carrollton, Texas 75006, until the Surviving Corporation shall have hereafter
designated in writing to the said Secretary of State a different address for
such purpose. Service of such process may be made by personally delivering to
and leaving with the Secretary of State of Texas duplicate copies of such
process, one of which copies the Secretary of State of Texas shall forthwith
send by registered mail to Gateway at the above address.
ARTICLE VIII
EFFECTIVE DATE
The Merger shall be effective at 5:01 p.m. Eastern Time on ,
1999.
IN WITNESS HEREOF, the parties to the Agreement have caused these Articles
of Merger to be signed this day of , 1999.
GATEWAY TECHNOLOGIES, INC.
a Texas corporation
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
T-NETIX ACQUISITION CORP.,
a Colorado corporation
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
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<PAGE> 139
EXHIBIT B
RULE 145 LETTER
T-NETIX, Inc.
67 Inverness Drive East, Suite 100
Englewood, Colorado 80112
Dear Sirs:
In connection with the acquisition (the "Acquisition") of Gateway
Technologies, Inc., a Texas corporation ("Gateway"), by T-NETIX, Inc., a
Colorado corporation ("T-NETIX"), through the merger of T-NETIX Acquisition
Corp., a Colorado corporation and wholly owned subsidiary of T-NETIX ("TAC"),
with and into Gateway, the undersigned, a holder of certain shares of common
stock of Gateway, par value $1.00 per share ("Gateway Stock"), is entitled to
receive certain shares of common stock of T-NETIX, stated value $0.01 per share
("T-NETIX Stock"), pursuant to and in accordance with that certain Agreement and
Plan of Merger dated February 10, 1999 (the "Agreement"), by and among Gateway,
T-NETIX, TAC and certain shareholders of Gateway and T-NETIX. Capitalized terms
used but not defined herein shall have the meanings given them in the Agreement.
The undersigned acknowledges that the undersigned is an "Affiliate" of
Gateway, as that term is defined in Rule 144 under the Securities Act of 1933,
as amended (the "Securities Act"). As such, the undersigned is subject to the
restrictions on resale stated in Rule 145 under the Securities Act.
The undersigned hereby covenants with T-NETIX that the undersigned will not
sell, assign or transfer any of the shares of T-NETIX Stock received by the
undersigned in exchange for shares of Gateway Stock in connection with the
Acquisition (other than to T-NETIX) except (i) in accordance with the provisions
of paragraphs (c), (e), (f) and (g) of Rule 144; (ii) if after the Effective
Time the undersigned is not an Affiliate of T-NETIX and a period of at least one
year, as determined in accordance with Rule 144(d), has elapsed since the
Effective Time and T-NETIX meets the requirements of Rule 144(c); or (iii) at
such time as the undersigned is not, and for three months has not been, an
Affiliate of T-NETIX, and a period of at least two years, as determined in
accordance with Rule 144(d), has elapsed since the Effective Time.
The undersigned agrees that T-NETIX may instruct its transfer agent to
withhold the transfer of any shares of T-NETIX Stock to be transferred by the
undersigned. Provided such transfer is not prohibited by any other provision of
this letter agreement, upon receipt of evidence of compliance with Rule 145
under the Securities Act, as described above, T-NETIX shall cause the transfer
agent to effectuate the proposed transfer of the shares of T-NETIX Stock.
The undersigned further covenants with T-NETIX that if the pooling of
interests method of accounting is used by T-NETIX to account for the
Acquisition, then the undersigned will not sell, transfer or otherwise dispose
of any of the shares of T-NETIX Stock received by the undersigned in exchange
for shares of Gateway Stock in connection with the Acquisition (other than to
T-NETIX) until after such time as results covering at least 30 days of
post-Acquisition combined operations of Gateway and T-NETIX have been published
by T-NETIX, in the form of a quarterly earnings report, an effective
registration statement filed with the SEC, a report to the SEC on Form 10-K,
10-Q or 8-K or any other public filing or announcement which includes such
combined results of operations.
The undersigned acknowledges and agrees that the legends set forth below
will be placed on certificates representing the T-NETIX Stock received by the
undersigned in connection with the Acquisition or held by a transferee thereof,
which legends will be removed by delivery of substitute certificates upon
receipt by T-NETIX of an opinion in form and substance reasonably satisfactory
to T-NETIX from counsel
A-B-1
<PAGE> 140
reasonably satisfactory to T-NETIX to the effect that such legends are no longer
required for purposes of the Securities Act:
The shares represented by this certificate were issued pursuant to a
business combination which is being accounted for as a pooling of
interests, in a transaction to which Rule 145 promulgated under the
Securities Act of 1933 applies. The shares have not been acquired by the
holder with a view to, or for resale in connection with, any distribution
thereof within the meaning of the Securities Act of 1933. The shares may
not be sold, pledged or otherwise transferred (i) until such time as
T-NETIX shall have published financial results covering at least 30 days of
post-merger combined operations and (ii) except in accordance with Rule 145
under the Securities Act of 1933.
The undersigned represents and warrants to T-NETIX that: (a) the
undersigned has full right and power to execute and deliver this letter
agreement, and this letter has been duly executed and delivered by the
undersigned; and (b) the undersigned is acquiring the T-NETIX Stock solely for
the purpose of investment and, except as set forth in the Agreement, not with a
view to, or for sale in connection with, any distribution thereof.
Very truly yours,
------------------------------------
A-B-2
<PAGE> 141
EXHIBIT D-1
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective as of the
day of February 1999 by and between T-NETIX, Inc., a Colorado
corporation ("T-NETIX"), and Richard E. Cree ("Employee").
WHEREAS, T-NETIX has entered into an Agreement and Plan of Merger with
Employee's current employer, Gateway Technologies, Inc. ("GTI") pursuant to
which GTI will merge with a subsidiary of T-NETIX (the "Merger"), and
WHEREAS, T-NETIX desires to continue to have the benefits of Employee's
knowledge and experience as a full time senior executive without distraction by
employment-related uncertainties and considers such employment a vital element
to protecting and enhancing the best interests of T-NETIX, and its subsidiaries
and shareholders, and Employee desires to continue to be employed full time with
T-NETIX; and
WHEREAS, T-NETIX and Employee desire to enter into an agreement under which
Employee will be employed by T-NETIX for a three year term commencing on the
effective date of the Merger (the "Effective Date"),
NOW, THEREFORE, in consideration of the mutual covenants set forth herein
and other good and valuable consideration, the parties agree as follows:
1. TERM.
T-NETIX hereby agrees to employ Employee for a three-year term commencing
on the Effective Date and ending on the third anniversary date of the Effective
Date, unless earlier terminated as provided in this Agreement. The term of this
Agreement may only be extended by the mutual agreement of the parties hereto.
2. DUTIES.
Employee shall serve as the President of GTI and Executive Vice-President
for Corporate Development of T-NETIX and shall report to the Chief Executive
Officer of T-NETIX, and shall assume such other duties as the Chief Executive
Officer or Board of Directors of T-NETIX(the "Board") may from time to time
prescribe consistent with duties of an executive officer of a technology company
of such size as T-NETIX, including such positions with and duties for T-NETIX's
subsidiaries as may be assigned from time to time. Employee agrees to devote
substantially all his time, attention and best efforts to the performance of his
duties.
3. COMPENSATION.
T-NETIX shall compensate Employee for the services rendered under this
Agreement as follows:
(a) An annual base salary ("Base Salary") determined by the Board in its
discretion and consistent with its practices for executive officers of T-NETIX,
but not less than $190,000 per year, payable in equal monthly installments (less
applicable withholding) in accordance with the customary payroll practices of
T-NETIX for the payment of executive officers.
(b) If Employee's Base Salary is increased at any time, it shall not
thereafter be decreased during the term of this Agreement, unless such decrease
is the result of a general reduction affecting the base salaries of
substantially all other executive officers of T-NETIX.
(c) On the Effective Date and on each of the first two anniversary dates of
the Effective Date as long as Employee is still employed by T-NETIX, T-NETIX
shall grant to Employee options for 20,000 shares (60,000 shares in the
aggregate) of T-NETIX's common stock with an exercise price equal to the then
fair market value of such common stock. Each such option shall vest and be
exercisable on the first anniversary of the date of grant if Employee is
continuously employed by T-NETIX to such date. In the event of a "Change
A-D-1-1
<PAGE> 142
of Control" (as defined in Section 6) of T-NETIX any such options not yet
granted in accordance with this Section 3(c) shall be granted immediately prior
to such Change of Control at an exercise price equal to the exercise price for
the options last granted prior to this Section 3(c) and all Options granted
pursuant to this Section 3(c) shall immediately vest and be exercisable. The
number of options granted pursuant to this Section 3(c) will be adjusted to take
account of any recapitalization of T-NETIX that affects the number of shares of
common stock of T-NETIX outstanding, such as a stock split.
(d) Employee shall not be entitled to director's fees for his service on
any board of directors of any T-NETIX subsidiary.
4. EMPLOYEE BENEFITS.
(a) Employee shall be entitled to full participation, on a basis
commensurate with his position with T-NETIX, in all plans of life, accident,
medical payment, health and disability insurance, Options, stock grants,
bonuses, retirement, pension, perquisites and other employee benefit and pension
plans which generally are made available to executive officers of T-NETIX or its
subsidiaries ("T-NETIX Benefits Plans"), except for such plans which the Board,
in its sole discretion, shall adopt for select employees to compensate them for
special or extenuating circumstances.
(b) Employee shall be entitled to an annual vacation leave at full pay as
may be provided for by T-NETIX's vacation policies applicable to executive
officers, but in any event such paid vacation shall not be less than three weeks
in the aggregate.
5. TERMINATION AND RIGHTS UPON TERMINATION.
(a) Death, Total Disability, or Retirement. (i) This Agreement shall
automatically terminate upon the death, total disability, or retirement of
Employee.
(ii) Total disability shall be deemed to occur if, as a result of his
incapacity resulting from physical or mental illness or disease (including
alcohol or other substance addiction) which is likely to be permanent,
Employee shall have been unable to perform his duties hereunder for a
period of more than 120 consecutive days during any twelve-month period.
The Board will determine if Employee's termination is due to total and
permanent disability according to any long-term disability plan then in
effect for senior executives of T-NETIX, and otherwise in good faith
consistent with generally prevailing practices of employers.
(iii) Upon termination for Employee's death, T-NETIX shall continue to
pay Employee's salary to a legal representative previously designated in
writing by Employee (the "Legal Representative"), or if no such designation
has been made, to Employee's estate, for a period of twelve months in
monthly increments.
(iv) Upon termination for Employee's total disability, T-NETIX shall
continue to pay Employee's salary to the Legal Representative (or if no
designation has been made, to Employee or Employee's other legal
representative) and shall continue Employee's participation in all T-NETIX
Benefits Plans, for a period of the lesser of the remaining term of this
Agreement or six months.
(v) Upon termination for Employee's retirement at any time after
Employee reaches the age of 65, Employee's right to compensation shall end
and Employee shall not be entitled to continuation of salary.
(vi) Following any termination pursuant to this Section 5(a), the
Legal Representative or Employee, Employee's heirs, administrator, or
executor, as applicable, shall have a period of one year from the date this
Agreement is terminated to exercise any options previously granted to
Employee. All Options shall continue to vest during such one year period in
accordance with the vesting scheduled included as part of the grant of the
applicable Options.
(b) Termination For Cause. (i) T-NETIX may terminate this Agreement at any
time For Cause (as defined in the following sentence). A Termination tor Cause
means any of (A) the willful failure by Employee to follow the reasonable
instructions of the Board after written notice of such failure has been given to
A-D-1-2
<PAGE> 143
Employee by the Board, (B) the willful commission by Employee of acts that are
dishonest, unethical, or inconsistent with local normal business standards, (C)
the commission by Employee of a felonious act, (D) intentional wrongful
disclosure of confidential information of T-NETIX, (E) Employee's engagement in
any competitive activity in violation of Section 14, or (F) Employee's gross
neglect of his duties.
(ii) Employee's right to compensation and participation in T-NETIX
Benefits Plans shall end and Employee shall not be entitled to a severance
payment if T-NETIX terminates this Agreement For Cause.
(c) Termination Without Cause. (i) T-NETIX may terminate this Agreement at
any time Without Cause, upon thirty days notice to Employee. The termination of
Employee's employment by T-NETIX for any reasons other than those specified in
Section 5(b)(i) shall be deemed a Termination Without Cause.
(ii) Upon Termination Without Cause other than following a Change of
Control. Employee will be entitled to a severance payment equal to the
amount of salary that would be payable to Employee through the term of this
Agreement at his then effective salary had he not been so terminated in
equal monthly installments through the third anniversary date of the
Effective Date.
(d) Resignation. (i) Employee may terminate this Agreement at any time upon
thirty days written notice to T-NETIX. Employee's termination pursuant to this
Section 5(d) shall be deemed Resignation for Good Reason if such resignation
meets the criteria in part (ii) below; otherwise it shall be deemed a Voluntary
Resignation.
(ii) Resignation for Good Reason is defined as Employee's resignation
that (x) is not in connection with T-NETIX's Termination For Cause and (y)
is caused by, and within ninety days of, any of the following:
(A) Without the express written consent of Employee, any duties
that are assigned which materially diminish Employee's position, duties,
or status.
(B) Any transfer or proposed transfer of Employee for a period of
more than 120 days in any 365-day period to a location outside Dallas
County, Texas without his consent, except for strategic reallocations of
the personnel reporting to Employee or relocation of GTI's headquarters.
(C) Employee's Base Salary, as the same may hereafter be increased
from time to time, is reduced, except as permitted under Section 3(c).
(D) T-NETIX fails materially to comply with any of its obligations
under this Agreement.
(iii) Upon Resignation for Good Reason other than following a Change
of Control, Employee shall be entitled to a severance payment equal to the
lesser of (a) Employee's highest Base Salary during the twelve month period
prior to resignation or (b) the amount of salary Employee would have been
paid at his then current salary through the remaining term of this
Agreement in equal monthly installments over the twelve month period
beginning with the date of resignation or over the remaining term of this
Agreement had it not been terminated, as applicable.
(iv) In the event of Employee's Voluntary Resignation other than in
connection with a Change of Control, Employee's right to compensation and
participation in T-NETIX Benefits Plans shall end, and Employee shall not
be entitled to a severance payment.
(e) Termination Following a Chance of Control. Employee's termination
rights following a Change of Control are governed by the provisions of Section
7.
(f) The provisions of Section 8, 10 and 11 shall apply to any termination
of this Agreement that is subject to the provisions of parts (c), (d), or (e) of
this Section 5.
(g) The severance payments provided in parts (c)(ii) and (d)(iii) of this
Section 5 are intended to be in lieu of and not in addition to any payment to
Employee on account of salary for the unexpired term of this Agreement.
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<PAGE> 144
6. DEFINITION OF CHANGE OF CONTROL.
For the purposes of this Agreement, a Change of Control of T-NETIX shall be
deemed to have taken place if one or more of the following occurs:
(a) Any person or entity, as that term is used in Section 13(d) and
14(d)(2) of the Securities Exchange Act of 1934 as amended (the "Exchange Act"),
other than (i) a qualified benefit plan of T-NETIX or of an affiliate of
T-NETIX; (ii) any person who is a stockholder or beneficial owner of stock of
the Effective Date (a "Current Stockholder"); (iii) any successor of a Current
Stockholder who acquires his shares by inheritance, devise, trust, or operation
of law directly from such Current Stockholder (a "Successor"); or (D) any person
or group of which Current Stockholders or Successors hold stock representing an
interest of one-third or more of the person's or group's total stock, becomes a
beneficial owner (as defined in Rule 13d-3 under the Exchange Act as in effect
on the date hereof) directly or indirectly of securities of T-NETIX representing
fifty per cent (50%) or more of the combined voting power of T-NETIX's then
outstanding securities.
(b) T-NETIX's shares are publicly traded, and individuals who, as of the
date immediately following the date T-NETIX shares are first publicly traded,
constitute the Board cease for any reason to constitute at least a majority of
the Board, unless any such change is approved by a unanimous vote of the
directors in office immediately prior to such cessation.
(c) T-NETIX shall (in a single transaction or a series of related
transactions) issue shares, sell or purchase assets, engage in a merger or
engage in any other transaction immediately after which securities of the merged
company representing fifty per cent (50%) or more of the combined voting powers
of the then outstanding securities of the merged company shall be ultimately
owned by persons who shall not have owned voting securities of T-NETIX prior to
such transaction or who shall be a party to such transaction.
(d) T-NETIX and its affiliates shall sell or dispose of (in a single
transaction or series of related transactions) business operations which
generated a majority of the consolidated revenues (determined on the basis of
T-NETIX's four most recently completed fiscal quarters) of T-NETIX and its
subsidiaries immediately prior thereto.
(e) The Board shall approve the distribution to T-NETIX's shareholders of
all or substantially all of T-NETIX's net assets or shall approve the
dissolution of T-NETIX.
(f) Any other transaction or series of related transactions occur which
have substantially the effect of the transactions specified in any of the
preceding clauses in this Section 6.
(g) Employee is terminated Without Cause within the period of ninety days
before an occurrence of a Change of Control or the execution of a contract
intended to effect a Change of Control (for purposes of this part (g) the ninety
day period shall be measured from the first event of any series of events that
constituted the Change of Control).
7. RIGHTS UPON CHANGE OF CONTROL.
(a) If a Change of Control shall occur, Employee shall be entitled to a
severance payment, in an amount equal to the amount of salary at his then
current rate Employee would have been paid through the third anniversary of the
Effective Date had this Agreement not been terminated in equal monthly
installments through the third anniversary of the Effective Date upon any
termination (including Voluntary Resignation) of his employment during the term
of this Agreement and following the Change of Control, other than Termination
For Cause, death, permanent disability, or retirement.
(b) The severance payment payable to Employee under part (a) above shall
not exceed the maximum payment which, after taking into account all other
compensation and benefits which may be payable to Employee, is permitted to be
deducted as compensation expense by T-NETIX and to be received by the Employee
without liability for the assessment of an excise tax on such payment under the
applicable provisions of the Internal Revenue Code. In the event of any
disagreement between the parties regarding the
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determination of the amount under clause (i) or (ii) above (a "Section 7(b)
Dispute"), the matter shall be resolved by arbitration as provided in Section
16.
(c) If a Change of Control shall occur and Employee's employment is
terminated for any reason other than For Cause, death, permanent disability, or
retirement, (i) Employee shall have immediate vesting of all options granted to
Employee and full vesting in all other employee benefit plans and compensation
plans., and (ii) Employee shall have the right to "put" all or any portion of
vested options to T-NETIX for the difference between the option exercise price
and the higher of (W) the market price of T-NETIX's stock (if such stock is
publicly traded) at the date of the "put" or (X) the aggregate consideration per
share received by T-NETIX or its stockholders for T-NETIX's common stock in the
transaction which resulted in a Change of Control. Employee's right to "put"
vested options to T-NETIX shall exist for the period ending thirty days from the
date of the Change of Control.
(d) Notwithstanding any other provision of this Section 7, if following a
Change of Control, (i) the person acquiring control of T-NETIX (the "Corporate
Successor") assumes T-NETIX's obligations under this Agreement and is not in
default hereunder for a period equal to the lesser of two years following the
Change of Control or the remaining term of this Agreement (the "Post-Change of
Control Period"), and (ii) Employee remains in the employ of the Corporate
Successor for the Post-Change of Control Period, then Employee shall forfeit his
rights under this Section 7 with respect to such Change of Control. Employee's
rights shall continue to be governed by this Agreement and the provisions of
Sections 5(e) and 7 shall remain in force with respect to any subsequent Change
of Control.
8. OTHER SEVERANCE BENEFITS.
(a) If at any time during the term of this Agreement, Employee is
Terminated Without Cause, or Employee is terminated following a Change of
Control as provided in Section 7, or Employee Resigns for Good Reason, then
Employee shall be entitled to continuation, without any payment by Employee, of
T-NETIX Benefits Plans until the first to occur of (i) one year after
termination, (ii) the date Employee secures new employment, or (iii) the third
anniversary of the Effective Date.
(b) If at any time during the term of this Agreement, Employee is
Terminated Without Cause, or Employee is terminated following a Change of
Control as provided in Section 7, or Employee resigns for Good Reason, T-NETIX
shall promptly (and in any event within five business days after a request by
Employee therefor) pay directly or reimburse Employee for the costs and expenses
of any executive outplacement firm selected by Employee; provided, however, that
T-NETIX's liability hereunder shall be limited to the first $20,000 of such
expenses incurred by Employee. Employee shall provide T-NETIX with reasonable
documentation of the incurrence of such outplacement costs and expenses.
9. TIMING OF PAYMENT.
The parties agree that, in the event this Agreement is terminated following
a Change of Control, damages for delay in T-NETIX's paying Employee any amounts
due hereunder on the date required under Section 7 may be difficult to ascertain
precisely. T-NETIX and Employee therefore agree that in such event, if the
aggregate amount not paid on any required date exceeds five per cent (5%) of the
total amount due to Employee pursuant to parts (a) and (c) of Section 7,
Employee shall be entitled to an additional payment, as liquidated damages and
not as a penalty, an amount equal to (i) the sum of the amounts due Employee
under parts (a) and (c) of Section 7, assuming that Employee had "put" all
vested Options to T-NETIX within the required time period, (ii) divided by 365
(such calculation is the "Daily Pay"), for each day fill payment is delayed.
Employee's entitlement to Daily Pay pursuant to this Section 9(b) shall not
affect Employee's right to prejudgment interest in any arbitration, if such
interest is awarded by the arbitrator.
10. OTHER BENEFITS.
The provisions of Section 7 and 8 shall not affect Employee's participation
in, or termination of distributions and vested rights under, any T-NETIX
Benefits Plan to which Employee is entitled pursuant to the terms of such plan,
except as otherwise expressly provided in Sections 5, 7 and 8(a).
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11. NO DUTY TO MITIGATE DAMAGES.
In the event of termination of this Agreement as a result of (a) Employee's
termination following a Change of Control, (b) Employee's Termination Without
Cause, or (c) Employee's Resignation for Good Reason, Employee shall not be
required to seek other employment in order to mitigate his damages hereunder,
and no compensation Employee does earn after any termination shall be considered
to mitigate damages Employee has incurred or to reduce any payment T-NETIX is
obligated to make to Employee pursuant to this Agreement, except as specifically
provided in Section 8(a).
12. NO RIGHT TO SET OFF.
T-NETIX shall not be entitled to set off against the amount payable to
Employee any amounts earned by Employee from other employment after termination
of his employment with T-NETIX or any amounts which might have been earned by
Employee in other employment had he sought such other employment, except as
specifically provided in Section 8(a). The amounts payable to Employee under
this Agreement shall not be treated as damages but as severance compensation to
which Employee is entitled by reason of termination of this employment in the
circumstances contemplated by this Agreement.
13. NON-DISCLOSURE AGREEMENT.
(a) In connection with his employment with T-NETIX, Employee will have
access to and become acquainted with various trade secrets and other proprietary
and confidential information of T-NETIX. "Trade secrets and other proprietary
and confidential information" include but are not limited to the following: (1)
business, pricing, marketing and cost data; (2) technical information regarding
T-NETIX's products; (3) confidential customer information; (4) customer and
supplier lists; (5) contents of contracts and agreements with customers; and (6)
customer requirements and specifications. Employee acknowledges that T-NETIX has
taken steps to keep trade secrets and other proprietary and confidential
information secret, including disclosing the information only on a need-to-know
basis, labeling documents as "confidential," and keeping confidential
information in secure areas. Employee further acknowledges that the trade
secrets and other proprietary and confidential information have been developed
or acquired by T-NETIX through expenditure of substantial time, effort and money
and provide T-NETIX with an advantage over competitors who do not know or use
such trade secrets and other proprietary and confidential information.
(b) In consideration for access to trade secrets and other proprietary and
confidential information, Employee agrees that during the Noncompetition Period
(as defined in Section 14) he will not directly or indirectly disclose or use
for any reason whatsoever any trade secrets and other proprietary and
confidential information obtained by him by reason of his employment with
T-NETIX, except as required to conduct the business of T-NETIX or as authorized
by express written permission of the Board or as otherwise required by law.
(c) Employee confirms that all trade secrets and other proprietary and
confidential information, and all documents reflecting such information, remain
the exclusive property of T-NETIX. All business records, papers and documents
kept or made by Employee relating to the business of T-NETIX shall be and remain
the property of T-NETIX and shall remain in the possession of T-NETIX during the
term of Employee's employment and at all times thereafter. Upon the termination
of his employment with T-NETIX or upon the request of T-NETIX at any time,
Employee shall promptly deliver to T-NETIX, and shall retain no copies of, any
materials, records and documents (in whatever form or medium) made by Employee
or coming into his possession concerning the business or affairs of T-NETIX.
(d) Employee acknowledges and agrees that the nature of the trade secrets
and other proprietary and confidential information to which he will be given
access would make it impossible for him to perform in the capacity of officer,
director, employee, agent, consultant, or representative of any Competitor (as
defined in Section 14) without disclosing or utilizing the trade secrets and
other proprietary and confidential information to which he will be given access
during the course of his employment. Employee further acknowledges and agrees
that T-NETIX's products are marketed in a highly competitive market.
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14. NON-COMPETITION AGREEMENT.
In consideration for access to trade secrets and other proprietary
information of T-NETIX, for so long as Employee is employed by T-NETIX and for a
period of three years thereafter (the "Noncompetition Period"), Employee will
not:
(a) accept a position as an officer, director, employee, agent, consultant,
representative of (i) any other proprietary call processing systems company or
(ii) any other entity that, as of the date of Employee's termination, competes
directly with T-NETIX or any of its subsidiaries (an entity described in either
part (i) or (ii) is referred to in this Agreement as a "Competitor");
(b) acquire or fail to dispose of any stock or other ownership interest in
any Competitor, other than investments equal to less than one per cent of the
outstanding stock of any class issued by any publicly traded company;
(c) solicit or seek business from any of GTI's customers, prospective
customers, suppliers, or prospective suppliers; or
(d) hire or engage any T-NETIX employee or induce any T-NETIX employee to
leave his or her employment with T-NETIX on behalf of any Competitor.
15. REMEDIES.
(a) Without intending to limit the remedies available to T-NETIX, Employee
acknowledges that a breach or threatened breach of any of the covenants
contained in Sections 13 and 14 may result in material irreparable injury to
T-NETIX or one of its subsidiaries for which there is no adequate remedy at law,
that it may not be possible to measure damages for such injuries precisely, and
that in the event of such a breach or threat thereof, T-NETIX shall be entitled
to obtain a temporary restraining order, a preliminary or permanent injunction,
or other comparable provisional or equitable relief restraining Employee from
engaging in activities prohibited by Sections 13 or 14, and such other relief as
may be required to enforce specifically any of the covenants in such Sections.
Employee agrees to personal jurisdiction of any state or federal court in the
State of Texas in any proceeding brought by T-NETIX to enforce Employee's
covenants under Sections 13 and 14.
(b) Without limiting the relief specified in part (a) above, and in
addition to any other remedies available hereunder, at law, or in equity, upon
proof of Employee's deliberate violation of his obligations under Section 13 or
14, T-NETIX shall be entitled to recover from Employee (i) any severance paid
pursuant to Section 5 or 7(a), and (ii) amounts paid to Employee under Section
7(c)(ii).
16. ARBITRATION.
(a) Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration before a single arbitrator
in Dallas County, Texas, in accordance with the rules of the American
Arbitration Association then in effect. The arbitrator shall be selected by the
American Arbitration Association, except that in a Section 7(b) Dispute the
arbitrator shall be selected in the manner provided in part (b) below. Each
parry shall bear his or its own costs of arbitration, except that if Employee is
the prevailing party in such arbitration, he shall be entitled to recover from
T-NETIX as part of any award entered his reasonable expenses for attorneys and
experts fees and disbursements. In any arbitration related to the calculation of
the amount of the severance pay due to employee, each party shall submit a
figure and supporting documentation and the arbitrator shall select the figure
submitted by one of the parties, but no other figure. The arbitrator shall have
no power to award consequential or punitive damages, even if such damages are
permitted under applicable law.
(b) In a Section 7(b) Dispute T-NETIX shall nominate a proposed arbitrator,
who may be the lawyer who represented T-NETIX in the transaction that caused the
Change in Control. Within five days after T-NETIX's nomination, Employee may
accept T-NETIX's nominee as arbitrator, or may propose another lawyer. If
T-NETIX accepts Employee's counter- nominee, that lawyer shall serve as
arbitrator. If T-NETIX
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does not accept Employee's counter- nominee, Employee's counter-nominee and
T-NETIX's nominee shall select a third lawyer, who shall serve as arbitrator.
(c) Nothing in this Section 16 shall prevent T-NETIX from seeking equitable
relief pursuant to Section 15.
17. NOTICES.
All notices, requests, demands and other communication called for or
contemplated hereunder shall be in writing and shall be deemed to have been duly
given when delivered personally or when mailed by United States certified or
registered mail, postage prepaid, addressed to the parties, their successors in
interest or assignees at the following addresses or such other addresses as the
parties may designate by notice in the manner aforesaid:
If to T-NETIX: T-NETIX, Inc.
67 Inverness Drive East, Suite 100
Englewood, Colorado 80112
Attention: Alvyn A. Schopp
If to Employee: Gateway Technologies, Inc.
1544 Valwood Parkway, Suite 102
Carrollton, Texas 75006
Attention: Richard E. Cree
18. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Texas without giving effect to any principle of
conflict-of-laws chat would require the application of the law of any other
jurisdiction.
19. VALIDITY.
The invalidity or unenforceability of any provision or provisions of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, remain in full force and effect.
20. ENTIRE AGREEMENT.
This Agreement constitutes the entire understanding between the parties
with respect to the subject matter hereof, superseding all negotiations, prior
discussions and preliminary agreements, and further superseding any and all
employment arrangements between Employee and T-NETIX or any of T-NETIX's
subsidiaries, affiliates or other related entities. This Agreement may not be
amended except in a writing executed by the parties hereto.
21. EFFECT ON SUCCESSORS IN INTEREST.
This Agreement shall inure to the benefit of and be binding upon the heirs,
administrators, executors and successors of each of the parties hereto. T-NETIX
shall be in material breach of this Agreement if any of its successors or
assigns (including but not limited to any Corporate Successor) fails expressly
to assume T-NETIX's obligations hereunder.
22. ASSIGNMENT.
This Agreement is personal to Employee and Employee may not assign this
Agreement to any other person.
23. EFFECTIVENESS.
This Agreement shall be effective upon the Effective Date.
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24. WAIVER OF RIGHTS UNDER CURRENT AGREEMENT.
If and when the Merger is consummated and in consideration for this
Agreement, Employee waives any rights he may have to severance and other
benefits he may have under his current employment agreement with GTI including,
but not limited to, his rights upon the change of control of GTI resulting from
the Merger.
25. SURVIVAL OF SECTION.
The provisions of Sections 13 and 14 of this Agreement shall survive the
termination of this Agreement for the period provided for therein, and Sections
15 and 16 shall survive for resolution of any dispute arising out of or relating
to this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
<TABLE>
<S> <C>
T-NETIX, INC. EMPLOYEE
BY:
----------------------------------------- --------------------------------------------
Richard E. Cree
</TABLE>
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EXHIBIT E
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT (this "Non-Competition Agreement") is
entered into as of , 1999 (the "Effective Date"), by and
between [W. P. Buckthall] [Irvin Wall] [James B. Franklin] ("Gateway Shareholder
Signatory") and T-NETIX, Inc., a Colorado corporation ("T-NETIX").
WHEREAS, concurrently with the execution and delivery of this
Non-Competition Agreement, pursuant to that certain Agreement and Plan of Merger
dated as of , 1999 (the "Agreement") by and among T-NETIX,
T-NETIX Acquisition Corp. ("TAC"), a Colorado corporation and a wholly owned
subsidiary of T-NETIX, and Gateway Technologies, Inc., a Texas corporation
("Gateway") and the Gateway Shareholder Signatory, among others, by which TAC
will merge with and into Gateway under the terms and conditions contained
therein, and
WHEREAS, as a condition to and in connection with the Agreement, T-NETIX
has required Gateway Shareholder Signatory to enter into a covenant not to
compete with T-NETIX or its subsidiaries including future parents or
subsidiaries (collectively, the "T-NETIX Entities"), upon the terms and
conditions set forth in this Non-Competition Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and the Merger Consideration as defined in the Agreement paid to
Gateway Shareholder Signatory the parties hereto agree as follows:
1. Non-Compete; Non-Solicitation.
(a) For purposes of this Non-Competition Agreement:
(i) The "Non-Competition Period" commences on the date of this
Non-Competition Agreement and continues until the third anniversary of
the Effective Date.
(ii) "Restricted Area" means the United States of America.
(iii) "Competitive Operation" means any entity that engages in or
owns, invests in, manages or controls any venture or enterprise engaged
in the business of providing inmate calling equipment and services.
(iv) "Competition" means the direct or indirect ownership,
management (either as an employee or consultant) or control of a
Competitive Operation.
(v) "Customer" shall include any individual, organization or entity
from whom a T-NETIX Entity or Gateway has received an order or fee for
inmate calling equipment or inmate calling services produced (including
any formal request or submission for proposal) at any time within the
twenty-four (24) month period preceding the Effective Date.
(vi) "Competitive Business" means the business of providing inmate
calling equipment and services.
(b) Gateway Shareholder Signatory agrees that during the
Non-Competition Period, Gateway Shareholder Signatory shall not, directly
or indirectly:
(i) engage in Competition in the Restricted Area.
(ii) (A) induce or attempt to induce or aid others in inducing an
employee of a T-NETIX Entity to leave the employ of a T-NETIX Entity, or
in any way interfere with the relationship between the T-NETIX Entities
and their employees, or (B) induce or attempt to induce any person or
entity that to the Gateway Shareholder Signatory's knowledge is a
Customer, vendor, subcontractor or other business relation of a T-NETIX
Entity to cease doing business with a
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T-NETIX Entity, or in any way interfere with the relationship between
any Customer, vendor, subcontractor or other business relation and a
T-NETIX Entity.
(iii) (A) introduce any Competitive Operation to any person or
entity that to the Gateway Shareholder Signatory's knowledge is a past
or present Customer, vendor, subcontractor or other business relation of
a T-NETIX Entity, (B) solicit business for any Competitive Operation
from past, present or prospective Customers, vendors, subcontractors or
other business relations of a T-NETIX Entity, or (C) accept employment
from any past or present Customer, vendor, subcontractor or other
business relation of a T-NETIX Entity, unless such employment shall be
unrelated to a Competitive Operation or otherwise expressly permitted
pursuant to this Non-Competition Agreement.
(c) Nothing herein shall prohibit Gateway Shareholder Signatory from
being a passive owner of not more than 5% of the outstanding stock of any
class of securities of a Competitive Operation which is publicly traded, so
long as Gateway Shareholder Signatory has no active participation in the
business of such Competitive Operation.
(d) Notwithstanding the prohibitions contained in this Non-Competition
Agreement, Gateway Shareholder Signatory may render services for a
noncompetitive division, affiliate or portion of a Competitive Operation so
long as no such services are provided by Gateway Shareholder Signatory to,
or used by, any other division, affiliate or portion of such Competitive
Operation which is engaged in a Competitive Business.
(e) If, at the time of enforcement of this Non-Competition Agreement,
a court shall hold that the duration, scope, area or other restrictions
stated herein are unreasonable under circumstances then existing, the
parties agree that the maximum duration, scope, area or other restrictions
reasonable under such circumstances shall be substituted for the stated
duration, scope, area or other restrictions.
(f) The Gateway Shareholder Signatory will, while the covenant under
this Non-Competition Agreement is in effect, give notice to T-NETIX, within
ten days after accepting any other employment, of the identity of the
Gateway Shareholder Signatory's employer that may be engaged in Competitive
Operations. T-NETIX may notify such employer that the Gateway Shareholder
Signatory is bound by this Non-Competition Agreement and, at T-NETIX's
election, furnish such employer with a copy of this Non-Competition
Agreement or relevant portions thereof.
(g) The existence of any claim or cause of action of Gateway
Shareholder Signatory against T-NETIX, or any of its respective affiliates,
whether or not predicated upon the terms of this Non-Competition Agreement,
shall not constitute a defense to the enforcement of this covenant.
2. [Reserved].
3. Representation. Gateway Shareholder Signatory represents and warrants to
T-NETIX that the execution and delivery of this Non-Competition Agreement does
not conflict with, or result in the breach by Gateway Shareholder Signatory or
violation by Gateway Shareholder Signatory of, any other agreement to which
Gateway Shareholder Signatory is a party or by which Gateway Shareholder
Signatory is bound.
4. Remedies. The parties hereto agree that T-NETIX would suffer irreparable
harm from a breach by Gateway Shareholder Signatory of any of the covenants or
agreements contained herein. Therefore, in the event of the actual or threatened
breach by Gateway Shareholder Signatory of any of the provisions of this
Non-Competition Agreement, T-NETIX may, in addition and supplementary to other
rights and remedies existing in their favor, apply to any court of law or equity
of competent jurisdiction for specific performance and/or injunctive or other
equitable relief in order to enforce or prevent any violation of the provisions
hereof.
5. Successors and Assigns. This Non-Competition Agreement shall be binding
upon and inure to the benefit of T-NETIX, its parents, affiliates, successors
and assigns, and shall be binding upon Gateway Shareholder Signatory and Gateway
Shareholder Signatory's legal representatives and assigns. T-NETIX may assign or
transfer its rights hereunder to a successor corporation in the event of merger,
consolidation or transfer or sale of all or substantially all of the assets of
T-NETIX. Nothing herein expressed or implied is
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intended or shall be construed to confer upon or give to any person or entity,
other than the parties to this Non-Competition Agreement and the T-NETIX
Entities, and their respective permitted successors and assigns, any rights or
remedies under or by reason of this Non-Competition Agreement.
6. Modification or Waiver. No amendment, modification, waiver, termination
or cancellation of this Non-Competition Agreement shall be binding or effective
for any purpose unless it is made in a writing signed by the party against whom
enforcement of such amendment, modification, waiver, termination or cancellation
is sought. No course of dealing between or among the parties to this
Non-Competition Agreement shall be deemed to affect or to modify, amend or
discharge any provision or term of this Non-Competition Agreement. No delay on
the part of T-NETIX or Gateway Shareholder Signatory in the exercise of any of
their respective rights or remedies shall operate as a waiver thereof, and no
single or partial exercise by T-NETIX or Gateway Shareholder Signatory of any
such right or remedy shall preclude other or further exercise thereof. A waiver
of right or remedy on any one occasion shall not be construed as a bar to or
waiver of any such right or remedy on any other occasion.
7. Severability. Whenever possible each provision and term of this
Non-Competition Agreement shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision or term of this
Non-Competition Agreement shall be held to be prohibited by or invalid under
such applicable law, then such provision or term shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating or affecting
in any manner whatsoever the remainder of such provisions or term or the
remaining provisions or terms of this Non-Competition Agreement.
8. Counterparts. This Non-Competition Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same agreement.
9. Non-Competition Agreement. This Non-Competition Agreement (together with
all documents and instruments referred to herein) constitute the entire
agreement and supersede all other prior agreements and undertakings, both
written and oral, among the parties with respect to the subject matter hereof.
10. Notices. Any notices, consents or other communication required to be
sent or given hereunder by any of the parties shall in every case be in writing
and shall be deemed properly served if (a) delivered personally, (b) sent by
registered or certified mail, in all such cases with first class postage
prepaid, return receipt requested, (c) delivered by a recognized overnight
courier service, or (d) sent by facsimile transmission to the parties at the
addresses as set forth below or at such other addresses as may be furnished in
writing.
To T-NETIX: T-NETIX, Inc.
67 Inverness Drive East, Suite 100
Englewood, CO 80112
To Gateway Shareholder Signatory: To the last address reflected on the
records of Gateway, unless otherwise
provided in writing to T-NETIX pursuant
to this Section 10.
Date of service of such notice shall be (w) the date such notice is
personally delivered, (x) three business days after the date of mailing if sent
by certified or registered mail, (y) one business day after date of delivery to
the overnight courier if sent by overnight courier or (z) the next succeeding
business day after transmission by facsimile.
11. Construction. The parties understand and acknowledge that they have
each been represented by (or have had the opportunity to be represented by)
counsel in connection with the preparation, execution and delivery of this
Non-Competition Agreement. This Non-Competition Agreement shall not be construed
against any party for having drafted it. All words used in this Non-Competition
Agreement will be construed to be of such gender or number as the circumstances
require. Unless otherwise expressly provided, the word "including" does not
limit the preceding words or terms.
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IN WITNESS WHEREOF, the undersigned have executed this Non-Competition
Agreement as of the date first above written.
T-NETIX, INC., a Colorado
corporation
By:
---------------------------------
Name:
---------------------------
Title:
--------------------------
Gateway Shareholder Signatory
------------------------------------
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EXHIBIT F
INVESTOR REPRESENTATION LETTER
T-NETIX, Inc.
67 Inverness Drive East, Suite 100
Englewood, Colorado 80112
Dear Sirs:
In connection with the acquisition (the "Acquisition") of Gateway
Technologies, Inc., a Texas corporation ("Gateway"), by T-NETIX, Inc., a
Colorado corporation ("T-NETIX"), through the merger of T-NETIX Acquisition
Corp. ("TAC"), a Colorado corporation and wholly owned subsidiary of T-NETIX,
with and into Gateway, I, being a holder of certain shares of common stock of
Gateway, par value $1.00 per share ("Gateway Stock"), am entitled to receive
certain shares of common stock of T-NETIX, stated value $0.01 per share
("T-NETIX Stock"), pursuant to and in accordance with that certain Agreement and
Plan of Merger dated February 10, 1999 (the "Agreement"), by and among Gateway,
T-NETIX, TAC and certain shareholders of Gateway and T-NETIX. Capitalized terms
used but not defined herein shall have the meanings given them in the Agreement.
I acknowledge that the T-NETIX Stock to be issued to me upon consummation
of the Acquisition will not be registered under the Securities Act of 1933, as
amended (the "Securities Act"), as of its date of issue, but instead will be
issued under an exemption from registration. (T-NETIX is, however, obligated to
register the T-NETIX Stock within 180 days after the Effective Time in
accordance with the provisions set forth in the Agreement.) I acknowledge that
such exemption from registration is legally permissible only if each Gateway
Shareholder is either an "Accredited Investor," as that term is defined under
federal securities laws, or a "Sophisticated Investor," as that term is defined
below. For purposes of confirming that I am either an Accredited Investor or a
Sophisticated Investor, be advised that (check applicable boxes):
[ ] I have an individual net worth, or joint net worth with my spouse, in excess
of $1,000,000.
[ ] I have had an individual income in excess of $200,000 in each of the last
two years or joint income with my spouse in excess of $300,000 in each of
the last two years and reasonably expect reaching the same income level this
year.
[ ] I am a director or executive officer of Gateway.
[ ] I am subscribing on behalf of a trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the securities
offered, whose purchase is directed by a sophisticated person as described
in Rule 506(b)(2)(ii) of Regulation D under the Securities Act of 1933.
[ ] I am subscribing on behalf of an entity in which all of the equity owners
are Accredited Investors.
[ ] I am a "Sophisticated Investor" in that, either alone or with the advisors I
used in connection with this transaction who were not directly or indirectly
affiliated with or compensated by T-NETIX, I have such knowledge and
experience in financial and business matters that I am capable of evaluating
the merits and risks of the prospective investment in the T-NETIX Stock.
I hereby covenant with T-NETIX that I will not sell, assign or transfer any
of the shares of T-NETIX Stock received by me in exchange for shares of Gateway
Stock in connection with the Acquisition (other than to T-NETIX) except (i)
pursuant to an effective registration statement under the Securities Act, or
(ii) in conformity with the volume and other limitations of Rule 144 promulgated
pursuant to the Securities Act or another exemption from the registration
provisions of the Securities Act, which exemption shall be established to the
satisfaction of the general counsel of T-NETIX or other counsel reasonably
satisfactory to T-NETIX (as shown by an opinion of such counsel), or shall be
described in a "no-action" or interpretive letter from the Staff of the
Securities and Exchange Commission ("SEC") specifically issued with respect to
the transaction to be engaged in by me.
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I agree that until my shares have been registered under an effective
registration statement under the Securities Act, T-NETIX may instruct its
transfer agent to withhold the transfer of any shares of T-NETIX Stock to be
transferred by me. Provided such transfer is not prohibited by any other
provision of this letter agreement, upon receipt of evidence of compliance with
Rule 144 or another exemption from the registration provisions of the Securities
Act, as described above, T-NETIX shall cause the transfer agent to effectuate
the proposed transfer of the shares of T-NETIX Stock.
I acknowledge and agree that the legends set forth below will be placed on
certificates representing the T-NETIX Stock received by me in connection with
the Acquisition or held by a transferee from me, which legends will be removed
by delivery of substitute certificates upon receipt by T-NETIX of an opinion in
form and substance reasonably satisfactory to T-NETIX from counsel reasonably
satisfactory to T-NETIX to the effect that such legends are no longer required
for purposes of the Securities Act:
The shares represented by this certificate were issued in a
transaction to which Rule 144 promulgated under the Securities Act of 1933
applies. The shares have not been acquired by the holder with a view to, or
for resale in connection with, any distribution thereof within the meaning
of the Securities Act of 1933. The shares may not be sold, pledged or
otherwise transferred except in accordance with an exemption from the
registration requirements of the Securities Act of 1933 or pursuant to an
effective registration statement under the Securities Act of 1933.
I represent and warrant to T-NETIX that: (a) I have full right and power to
execute and deliver this letter agreement, and this letter has been duly
executed and delivered by me; and (b) I am acquiring the T-NETIX Stock solely
for the purpose of investment and, except as set forth in the Agreement, not
with a view to, or for sale in connection with, any distribution thereof.
Very truly yours,
------------------------------------
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EXHIBIT G
, 1999
The Shareholders of
Gateway Technologies, Inc.
1544 Valwood Parkway, Suite 102
Carrollton, TX 75006
Ladies and Gentlemen:
We have acted as counsel to T-NETIX, Inc., a Colorado corporation
("T-NETIX"), and T-NETIX Acquisition Corporation ("TAC"), a Colorado corporation
and a wholly owned subsidiary of T-NETIX, in connection with the merger of TAC
with and into Gateway Technologies, Inc., a Texas corporation ("Gateway"),
pursuant to that certain Agreement and Plan of Merger dated February 10, 1999
("Agreement"), and related documents (the "Acquisition Documents"). We have been
requested by T-NETIX and TAC to render this opinion pursuant to Section 8.2 of
the Agreement. Unless defined in this opinion, capitalized terms are used herein
as defined in the Agreement.
In connection with this opinion, we have reviewed the Acquisition
Documents. We have also examined originals or copies of such corporate records,
agreements, documents, and other instruments and such certificates or comparable
documents of public officials and of officers and representatives of T-NETIX and
TAC and have made such inquiries of such officers and representatives as we have
deemed necessary and relevant for purposes of this opinion. We have assumed (a)
the genuineness of all signatures (other than those of T-NETIX and TAC), (b) the
authenticity of all documents and records submitted to us as originals, (c) the
conformity to original documents and records of all documents and records
submitted to us as copies (including conformed copies), and (d) the truthfulness
of all statements of fact contained therein.
Based on the foregoing and subject to the limitations and assumptions set
forth in this opinion, and having due regard for such legal considerations as we
deem relevant, we are of the opinion that:
1. T-NETIX and TAC are corporations duly organized, validly existing,
and in good standing under the laws of Colorado.
2. T-NETIX and TAC have the full corporate power and authority to
execute the Acquisition Documents to which they are parties and to perform
the obligations contemplated thereby. The execution and delivery by T-NETIX
and TAC of the Acquisition Documents to which T-NETIX and TAC are parties
have been authorized by all necessary corporate action on behalf of T-NETIX
and TAC. Each Acquisition Document has been duly executed and delivered by
T-NETIX and TAC and constitutes the legal, valid, and binding obligation of
T-NETIX and TAC enforceable in accordance with its terms, except as such
enforcement may be limited by applicable bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium or similar laws relating to or
affecting the enforcement of creditors' rights generally, and by general
principles of equity.
3. Neither the execution and delivery by T-NETIX and TAC of, nor the
performance by T-NETIX and TAC of their rights under, the Acquisition
Documents violate or conflict with, result in a breach of, or constitute a
default under T-NETIX's and TAC's Certificate of Incorporation or Bylaws,
or any law, judgment, decree, or under order of any court or any other
agency of government applicable to T-NETIX or TAC or T-NETIX's or TAC's
property, or any material agreement to which T-NETIX and TAC are parties or
by which T-NETIX's and TAC's property is bound.
4. No approvals or authorizations by, or filing or qualifications
with, any state, federal, or local agency, authority, or body are required
in connection with the execution, delivery, and performance of the
Acquisition Documents or any other agreements or documents executed and
delivered pursuant thereto by T-NETIX and TAC, except such as have been
duly obtained or made.
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5. There is no action, suit, investigation, or proceeding that is
pending or, to the best of our knowledge, threatened against or affecting
T-NETIX or TAC in any court or before any governmental authority,
arbitration board, or tribunal that restrains or prevents, or seeks to
restrain or prevent, the consummation of the transactions contemplated by
the Acquisition Documents or seeks other material relief with respect to
such transactions.
6. The T-NETIX common stock issued pursuant to the Acquisition
Documents, when so issued for the consideration therein set forth, shall
constitute duly authorized, validly issued, fully paid and non-assessable
shares of the capital stock of T-NETIX and TAC.
We express no opinion as to the law of any jurisdiction other than the
federal law of the United States and the law of the State of Colorado. Our
opinion is given as if the laws of the State of Colorado, without regard to its
conflict of laws provisions, govern the Acquisition Documents.
This opinion may be relied upon by you only in connection with the
consummation of the transactions described herein and may not be used or relied
upon by you or any other person for any other purpose, without in each instance
our prior written consent.
This opinion is limited to the matters expressly stated herein. No implied
opinion may be inferred to extend this opinion beyond the matters expressly
stated herein. We do not undertake to advise you or anyone else of any changes
in the opinions expressed herein resulting from changes in law, changes in facts
or any other matters that hereafter might occur or be brought to our attention.
Very truly yours,
ROTHGERBER JOHNSON & LYONS LLP
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APPENDIX B
February 10, 1999
Board of Directors
T-NETIX, Inc.
67 Inverness Drive East
Englewood, CO 80112
Dear Members of the Board:
We understand that T-NETIX, Inc. ("T-NETIX"), T-NETIX Acquisition Corp., a
wholly owned subsidiary of T-NETIX ("Acquisition"), Gateway Technologies, Inc.
("Gateway" or the "Company") and certain shareholders of T-NETIX and Gateway,
respectively, propose to enter into an Agreement and Plan of Merger (the
"Agreement") pursuant to which, through the merger of Acquisition with and into
Gateway (the "Merger"), each share of Gateway common stock ("Gateway Stock"),
shall be converted into the right to receive 5.0375 shares (the "Merger
Consideration") of T-NETIX common stock ("T-NETIX Stock"). The Merger is
intended to be a tax-free reorganization within the meaning of section 368(a) of
the United States Internal Revenue Code of 1986, as amended, and to be accounted
for as a pooling of interests pursuant to Opinion No. 16 of the Accounting
Principles Board. The terms and conditions of the above described Merger are
more fully detailed in the Agreement.
You have requested our opinion as to whether the Merger Consideration is
fair, from a financial point of view, to T-NETIX shareholders.
Broadview International LLC ("Broadview") focuses on providing merger and
acquisition advisory services to information technology ("IT") companies. In
this capacity, we are continually engaged in valuing such businesses, and we
maintain an extensive database of IT mergers and acquisitions for comparative
purposes. We are currently acting as financial advisor to T-NETIX's Board of
Directors and will receive a fee from T-NETIX upon the successful conclusion of
the Merger.
In rendering our opinion, we have, among other things:
1.) reviewed the terms of the Agreement and the associated exhibits
thereto in the form of the draft dated February 9, 1999 furnished to us by
legal counsel to T-NETIX on February 9, 1999 (which, for the purposes of
this opinion, we have assumed, with your permission, to be identical in all
material respects to the agreement to be executed);
2.) reviewed the audited financial statements of Gateway for its
fiscal years ended December 31, 1997 and 1996 and the unaudited financial
statements of Gateway for the eleven months ended November 30, 1998;
3.) reviewed certain internal financial and operating information,
including certain projections, relating to Gateway prepared by Gateway
management;
4.) participated in discussions with Gateway management concerning the
operations, business strategy, financial performance and prospects for
Gateway;
5.) discussed with Gateway management its view of the strategic
rationale for the Merger;
6.) compared certain aspects of the financial performance of Gateway
with public companies we deemed comparable;
7.) analyzed available information, both public and private,
concerning other mergers and acquisitions we believe to be comparable in
whole or in part to the Merger;
8.) reviewed T-NETIX's annual report and Form 10-K for its fiscal year
ended July 31, 1998, including the audited financial statements included
therein, and T-NETIX's Form 10-Q for the quarterly period ended October 31,
1998, including the unaudited financial statements included therein;
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9.) participated in discussions with T-NETIX management concerning the
operations, business strategy, financial performance and prospects for
T-NETIX;
10.) reviewed the recent reported closing prices and trading activity
for T-NETIX Stock;
11.) discussed with T-NETIX management its view of the strategic
rationale for the Merger;
12.) compared certain aspects of the financial performance of T-NETIX
with public companies we deemed comparable;
13.) considered the total number of shares of T-NETIX Stock
outstanding and the average weekly trading volume of T-NETIX Stock;
14.) reviewed equity analyst reports covering T-NETIX;
15.) analyzed the anticipated effect of the Merger on the future
financial performance of the consolidated entity;
16.) reviewed an independent evaluation and study of the products of
Gateway and T-NETIX performed by Gate-Net Associates and commissioned by
the managements of Gateway and T-NETIX;
17.) assisted in negotiations and discussions related to the Merger
among T-NETIX, Gateway and their accounting and legal advisors; and
18.) conducted other financial studies, analyses and investigations as
we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied, without independent verification,
on the accuracy and completeness of all the financial and other information
(including without limitation the representations and warranties contained in
the Agreement) that was publicly available or furnished to us by T-NETIX,
Gateway or Gateway's advisors. With respect to the financial projections
examined by us, we have assumed that they were reasonably prepared and reflected
the best available estimates and good faith judgments of the managements of
T-NETIX and Gateway as to the future performance of T-NETIX and Gateway. We have
neither made nor obtained an independent appraisal or valuation of any of
Gateway's assets.
Based upon and subject to the foregoing, we are of the opinion that the
Merger Consideration is fair, from a financial point of view, to T-NETIX
shareholders.
For purposes of this opinion, we have assumed that neither T-NETIX nor
Gateway is currently involved in any material transaction other than the Merger
and those activities undertaken in the ordinary course of conducting their
respective businesses. Our opinion is necessarily based upon market, economic,
financial and other conditions as they exist and can be evaluated as of the date
of this opinion, and any change in such conditions would require a reevaluation
of this opinion. We express no opinion as to the price at which T-NETIX Stock
will trade at any time.
This opinion speaks only as of the date hereof. It is understood that this
opinion is for the information of the Board of Directors of T-NETIX in
connection with its consideration of the Merger and does not constitute a
recommendation to any T-NETIX shareholder as to how such shareholder should vote
on the Merger. This opinion may not be published or referred to, in whole or
part, without our prior written permission, which shall not be unreasonably
withheld. Broadview hereby consents to references to, and the inclusion of, this
opinion in its entirety in the Proxy Statement/Prospectus to be distributed to
T-NETIX shareholders in connection with the Merger.
Sincerely,
BROADVIEW INT'L LLC
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APPENDIX C
T-NETIX, INC.
NON-QUALIFIED STOCK OPTION PLAN
1. PURPOSE.
The purpose of the T-NETIX, Inc. Non-qualified Stock Option Plan (the
"Plan") is to provide a means by which T-NETIX, Inc. (the "Corporation"),
through the grant of stock options to eligible employees and/or directors, may
attract and retain persons of ability as employees and/or directors and motivate
such employees and/or directors to exert their best efforts on behalf of the
Corporation and any subsidiary corporation of the Corporation. For the purposes
of the Plan, the term "Subsidiary Corporation" means a subsidiary corporation as
defined by Section 425(f) of the Internal Revenue Code of 1986, as amended. It
is not intended that the options issued under the Plan will qualify as incentive
stock options under Section 422A of the Internal Revenue Code of 1986, as
amended.
2. SHARES SUBJECT TO THE PLAN.
Subject to the provisions of Section 5(g) of the Plan, 2,000,000 shares of
the common stock of the Corporation shall be reserved and may be optioned under
either this Plan or the 1993 Incentive Stock Option Plan of the Corporation (the
"ISO Plan") as may be determined from time to time. The reserved shares may be
authorized and unissued shares or treasury shares of the Corporation or any
combination of both as determined by the Board of Directors of the Corporation.
If an option granted under the Plan ceases to be exercisable in whole or in
part, the shares representing such option shall be available under the Plan and
the ISO Plan for the grant of options in the future.
3. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Board of Directors of the Corporation
or a Committee of the Board of Directors (the "Committee"), which Committee
shall consist of not less than two Directors of the Corporation. Members of the
Committee shall be appointed by and shall serve at the pleasure of the Board of
Directors of the Corporation. Any vacancies in the membership of the Committee
shall be filled by an appointment by the Board of Directors of the Corporation.
The Committee shall keep minutes of its meetings. All actions of the
Committee shall be taken by a majority of its members. Any act approved in
writing by a majority of the Committee members shall be fully effective as it
had been taken by a vote of a majority of the members at a meeting duly called
and held.
Subject to and not inconsistent with the provisions of the Plan, the Board
of Directors or the Committee shall have complete authority in its discretion to
interpret all provisions of the Plan consistently with the law, to prescribe the
form of the instrument evidencing any option granted under the Plan, to adopt,
amend and rescind general and special rules and regulations for the
administration of the Plan and to make all other determinations necessary or
advisable for the administration of the Plan.
4. ELIGIBILITY AND GRANT OF OPTIONS UNDER THE PLAN.
Options may be granted at such times, in such amounts, and, to the extent
not inconsistent with the Plan, on such terms as the Board of Directors or the
Committee shall determine to employees. officers or directors, of the
Corporation or of a Subsidiary Corporation.
5. TERMS AND CONDITIONS OF OPTIONS GRANTED UNDER THE PLAN.
Each option granted under the Plan shall be evidenced by an agreement in a
form determined by the Board of Directors or the Committee. Such agreement shall
be subject to the following express terms and
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conditions, and such other terms and conditions as the Board of Directors or the
Committee may deem appropriate.
(a) Option Period. Each option agreement shall specify the period for which
the option thereunder is granted and shall provide that the option shall expire
at the end of such period. The period for which an option is granted may not
exceed 10 years from the date of the grant of the option.
(b) Exercise of Option. An option may be exercised at any time after it has
vested and prior to its expiration.
(c) Option Price. The option price per share shall be determined by the
Board of Directors or the Committee at the time an option is granted and shall
be not less than 100 percent of the fair market value of a share of the common
stock of the Corporation on the date of the grant as determined in good faith by
the Board of Directors or the Committee. Fair market value at the time of
payment shall be determined without regard to any restriction other than a
restriction that, by its terms, will never lapse. The Board of Directors or the
Committee may reprice the option price at its discretion at a price not less
than 100 percent of the fair market value of a share of the common stock of the
Corporation on the date of such repricing.
(d) Payment of Purchase Price Upon Exercise. Each option shall provide that
the purchase price of the shares for which an option may be exercised shall be
paid to the Corporation at the time of exercise either in cash or with stock of
the Corporation held by the Optionee for more than six months and having a fair
market value equal to the purchase price.
(e) Nontransferability. No option granted under the Plan shall be
transferable other than by a will of an optionee or by the laws of descent and
distribution. During his lifetime, an option shall be exercisable only by an
optionee or by the optionee's attorney-in-fact or conservator.
(f) Investment Representation. The shares of stock to be issued upon the
exercise of all or any portion of any option granted under the Plan shall be
issued on the condition that the optionee represents that the purchase of stock
upon such exercise shall be for investment purposes and not with a view to
resale, distribution, offering, transferring, mortgaging, pledging,
hypothecating or otherwise disposing of any such stock under the circumstances
which would constitute a public offering or distribution under the Securities
Act of 1933 or the securities laws of any state. No shares of stock shall be
issued upon the exercise of any option unless the Corporation shall have
received from the optionee a written statement satisfactory to legal counsel for
the Corporation containing the above representations, stating that certificates
representing such shares may bear a legend restricting their transfer and
stating that the Corporation's transfer agent or agents may be given
instructions to stop transfer of any certificate bearing such legend. Such
representation and restrictions provided for herein, shall not be required if
(1) an effective registration statement for such shares under the Securities Act
of 1933 and any applicable state laws has been filed with the Securities and
Exchange Commission and with the appropriate agency or commission of any state
whose laws apply to the transaction, or (2) an opinion of counsel satisfactory
to the Corporation has been delivered to the Corporation to the effect that
registration is not required under the Securities Act of 1933 or under the
applicable securities laws of any state.
(g) Adjustments in Event of Change in Common Stock. Notwithstanding any
other provision of the Plan, in the event of any change in the outstanding
common stock of the Corporation by reason of any stock dividend,
recapitalization, reorganization, merger, consolidation, split-up, combination
or exchange of shares, rights offering to purchase the common stock at a price
substantially below fair market value or of any similar change affecting the
common stock. the number and kind of shares which thereafter may be optioned and
sold under the Plan and the number and kind of shares subject to option in
outstanding option agreements and the purchase price per share thereof shall be
appropriately adjusted consistent with such change in such manner as the Board
of Directors or the Committee may deem equitable to prevent substantial dilution
or enlargement of the rights granted to, or available for, an optionee under the
Plan.
(h) No Rights as a Shareholder. No optionee shall have any rights as a
shareholder with respect to any shares subject to his option prior to the date
of issuance to him of a certificate or certificates for such shares.
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(i) No Rights to Continued Employment. The Plan and any option granted
under the Plan shall neither confer upon any optionee any right with respect to
continuance of employment by the Corporation or by any subsidiary of the
Corporation, nor shall it interfere in any way wish the right of the Corporation
to terminate his employment at any time.
6. COMPLIANCE WITH OTHER LAWS AND REGULATIONS.
The Plan, the grant and exercise of options under the Plan, and the
obligation of the Corporation to sell and deliver shares under such options,
shall be subject to all applicable federal and state laws, rules and regulations
and to such approvals by any government or regulatory agency as may be required.
The Corporation shall not be required to issue or deliver any certificates for
shares of common stock prior to the completion of any registration or
qualification of such shares under any federal or state law, or any ruling or
regulation of any government body which the Corporation shall, in its sole
discretion, determine to be necessary or advisable.
7. AMENDMENT AND DISCONTINUANCE.
The Board of Directors of the Corporation may amend, suspend or discontinue
the Plan; provided, however, that, subject to the provisions of Section 5(g) no
action of the Board of Directors of the Corporation or of the Board of Directors
or the Committee may (i) increase the number of shares reserved for options
pursuant to Section 2, (ii) permit the grant of any option at an option price
less than the price determined in accordance with Section 5(c), (iii) permit the
granting of options which expire beyond the period provided for in Section 5(a),
or (iv) modify the requirements as to eligibility for participation in the Plan.
Without the written consent of an optionee, no amendment or suspension of the
Plan shall alter or impair any option previously granted to him under the Plan.
8. EFFECTIVE DATE.
The effective date of the Plan shall be January 10, 1991, subject to the
approval by stockholders of the Corporation holding not less than a majority of
the shares present and voting at a meeting of shareholders prior to December 31,
1991. Notwithstanding the foregoing, options may be granted by the Board of
Directors or the Committee as provided by the terms of the Plan subject to such
subsequent stockholder approval. The Plan shall terminate on December 31, 2000.
9. NAME OF THE PLAN.
The Plan shall be known as the T-NETIX, Inc. Non-qualified Stock Option
Plan.
10. EFFECT OF THE PLAN ON OTHER STOCK PLANS.
The adoption of the Plan shall have no effect on awards made or to be made
pursuant to other stock plans covering employees and/or directors of the
Corporation, a subsidiary corporation of the Corporation, a parent corporation
or any predecessors or successors thereto.
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APPENDIX D
T-NETIX, INC.
1993 INCENTIVE STOCK OPTION PLAN
1. PURPOSE.
The purpose of the T-NETIX, Inc. Incentive Stock Option Plan (the "Plan")
is to provide a means by which T-NETIX, Inc. (the "Corporation"), through the
grant of stock options to eligible employees, may attract and retain persons of
ability as employees and motivate such employees to exert their best efforts on
behalf of the Corporation and any subsidiary corporation of the Corporation. For
the purposes of the Plan, the term "Subsidiary Corporation" means a subsidiary
corporation as defined by Section 425(f) of the Internal Revenue Code of 1986,
as amended. It is intended that the options issued under the Plan will qualify
as incentive stock options under Section 422A of the Internal Revenue Code of
1986, as amended.
2. SHARES SUBJECT TO THE PLAN.
Subject to the provisions of Section 5(g) of the Plan, 2,000,000 shares of
the common stock of the Corporation shall be reserved and may be optioned under
either this Plan or the Corporation's Non-qualified Stock Option Plan (the "NSO
Plan") as may be determined from time to time. The reserved shares may be
authorized and unissued shares or treasury shares of the Corporation or any
combination of both as determined by the Board of Directors of the Corporation.
If an option granted under the Plan ceases to be exercisable in whole or in
part, the shares representing such option shall be available under the Plan and
the NSO Plan for the grant of options in the future.
3. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Board of Directors of the Corporation
or a Committee of the Board of Directors (the "Committee"), which Committee
shall consist of not less than two Directors of the Corporation. Members of the
Committee shall be appointed by and shall serve at the pleasure of the Board of
Directors of the Corporation. Any vacancies in the membership of the Committee
shall be filled by an appointment by the Board of Directors of the Corporation.
The Committee shall keep minutes of its meetings. All actions of the
Committee shall be taken by a majority of its members. Any act approved in
writing by a majority of the Committee members shall be fully effective as it
had been taken by a vote of a majority of the members at a meeting duly called
and held.
Subject to and not inconsistent with the provisions of the Plan, the Board
of Directors or the Committee shall have complete authority in its discretion to
interpret all provisions of the Plan consistently with the law, to prescribe the
form of the instrument evidencing any option granted under the Plan, to adopt,
amend and rescind general and special rules and regulations for the
administration of the Plan and to make all other determinations necessary or
advisable for the administration of the Plan.
4. ELIGIBILITY AND GRANT OF OPTIONS UNDER THE PLAN.
Options may be granted at such times, in such amounts, and, to the extent
not inconsistent with the Plan, on such terms as the Board of Directors or the
Committee shall determine subject to the following.
a. Eligibility. Options may be granted to such employees, including
officers and directors, who are also employees, of the Corporation or of a
Subsidiary Corporation that the Board of Directors or the Committee deems to be
key employees who, in the judgment of the Board of Directors or the Committee,
are considered important to the future of the Corporation or a Subsidiary
Corporation.
b. Ten Percent Shareholders. No option may be granted to any such eligible
employee who at the time of such grant owns stock possessing more than 10
percent of the total combined voting power of all classes of stock of the
Corporation or of any Subsidiary Corporation (a "10 Percent Shareholder") unless
at the time
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such option is granted the option price is at least 110 percent of the fair
market value of the stock and such option by its terms is not exercisable after
the expiration of five years from the date such option is granted.
c. LIMITATIONS. The aggregate fair market value of the stock, determined at
the time an option for the stock is granted, for which incentive stock options
are exercisable for the first time by an optionee during any calendar year,
under all the incentive stock option plans of the Corporation and of any
Subsidiary Corporation, may not exceed $100,000.
5. TERMS AND CONDITIONS OF OPTIONS GRANTED UNDER THE PLAN.
Each option granted under the Plan shall be evidenced by an agreement in a
form determined by the Board of Directors or the Committee. Such agreement shall
be subject to the following express terms and conditions, and such other terms
and conditions as the Board of Directors or the Committee may deem appropriate.
a. Option Period. Each option agreement shall specify the period for which
the option thereunder is granted and shall provide that the option shall expire
at the end of such period. The period for which an option is granted may not
exceed 10 years from the date of the grant of the option or five years in the
case of a 10 Percent Shareholder.
b. Exercise of Option.
(i) By an Optionee During Continuous Employment. An optionee may not
exercise any part of an option granted under the Plan unless the optionee
has been in the continuous employment of the Corporation or of a Subsidiary
Corporation at all times from the date of the grant of the option until the
date three months prior to the date of exercise except as provided below.
Such employment must be at least one year before an option can be
exercised. The Board of Directors or the Committee may prescribe a longer
time period before an option may be exercised by an optionee. The option
agreement may provide for exercise in installments of the option granted.
(ii) Exercise in the Event of Death or Termination of Employment.
A. If an optionee shall die (i) while an employee of the
Corporation or a Subsidiary Corporation or (ii) within three months
after termination of his employment with the Corporation or a Subsidiary
Corporation because of his disability, his options may be exercised, to
the extent that the optionee shall have been entitled to do so on the
date of his death or such termination of employment, by the person or
persons to whom the optionee's right under the option pass by will or
applicable law, or if no such person has such right, by his executors or
administrators, at any time, or from time to time, but not later than
the expiration date referred to in Section 5(a) or two years after the
optionee's death, whichever date is earlier.
B. If an optionee's employment by the Corporation or a Subsidiary
Corporation shall terminate because of his disability and such optionee
has not died within the following three months, he may exercise his
options, to the extent that he shall have been entitled to do so at the
date of the termination of his employment, at any time or from time to
time, but not later than the expiration date referred to in Section 5(a)
or one year after termination of employment, whichever date is earlier.
C. If an optionee's employment shall terminate by reason of his
retirement in accordance with the terms of the Corporation's
tax-qualified retirement plans or with the consent of the Board of
Directors or the Committee or involuntarily other than "for cause", all
right to exercise his option shall terminate at the expiration date
referred to in Section 5(a) or three months after termination of
employment, whichever date is earlier. For this purpose, termination
"for cause" shall mean termination of employment by reason of the
optionee's commission of a felony, fraud, or willful misconduct which
had resulted, or is likely to result, in substantial and material damage
to the Corporation or a Subsidiary Corporation, all as the Board of
Directors or the Committee, in its sole discretion, may determine.
D-2
<PAGE> 165
D. If an optionee's employment shall terminate voluntarily or
involuntarily "for cause", all right to exercise his option shall
terminate at the date of such termination of employment.
c. Option Price. The option price per share shall be determined by the
Board of Directors or the Committee at the time an option is granted and shall
be not less than 100 percent of the fair market value (110 percent in the case
of a 10 Percent Shareholder) of a share of the common stock of the Corporation
on the date of the grant as determined in good faith by the Board of Directors
or the Committee. Fair market value at the time of payment shall be determined
without regard to any restriction other than a restriction that, by its terms,
will never lapse. The value of the stock should be the value of a share of stock
not subject to the option. The words "subject to the option" might be
interpreted as a direction to value the stock subject to a restriction, i.e.,
the option. The Board of Directors or the Committee may reprice the option price
per share at its discretion at a price not less than 100 percent of the fair
market value (110 percent in the case of a 10 Percent Shareholder) of a share of
the common stock of the Corporation on the date of such repricing.
d. Payment of Purchase Price Upon Exercise. Each option shall provide that
the purchase price of the shares for which an option may be exercised shall be
paid to the Corporation at the time of exercise either in cash or with stock of
the Corporation held by the Optionee for more than six months and having a fair
market value equal to the purchase price.
e. Nontransferability. No option granted under the Plan shall be
transferable other than by a will of an optionee or by the laws of descent and
distribution. The words "the will" of the optionee suggest the wish of the
optionee rather than the legal document governing the disposition of his
property. During his lifetime, an option shall be exercisable only by an
optionee or by the optionee's attorney-in-fact or conservator, unless such
exercise by the attorney-in-fact or conservator of the optionee would disqualify
the option as an incentive stock option under Section 422A of the Internal
Revenue Code of 1986, as amended.
f. Investment Representation. The shares of stock to be issued upon the
exercise of all or any portion of any option granted under the Plan shall be
issued on the condition that the optionee represents that the purchase of stock
upon such exercise shall be for investment purposes and not with a view to
resale, distribution, offering, transferring, mortgaging, pledging,
hypothecating or otherwise disposing of any such stock under the circumstances
which would constitute a public offering or distribution under the Securities
Act of 1933 or the securities laws of any state. No shares of stock shall be
issued upon the exercise of any option unless the Corporation shall have
received from the optionee a written statement satisfactory to legal counsel for
the Corporation containing the above representations, stating that certificates
representing such shares may bear a legend restricting their transfer and
stating that the Corporation's transfer agent or agents may be given
instructions to stop transfer of any certificate bearing such legend. Such
representation and restrictions provided for herein shall not be required if (1)
an effective registration statement for such shares under the Securities Act of
1933 and any applicable state laws has been filed with the Securities and
Exchange Commission and with the appropriate agency or commission of any state
whose laws apply to the transaction, or (2) an opinion of counsel satisfactory
to the Corporation has been delivered to the Corporation to the effect that
registration is not required under the Securities Act of 1933 or under the
applicable securities laws of any state.
g. Adjustments in Event of Change in Common Stock. Notwithstanding any
other provision of the Plan, in the event of any change in the outstanding
common stock of the Corporation by reason of any stock dividend,
recapitalization, reorganization, merger, consolidation, split-up, combination
or exchange of shares, rights offering to purchase the common stock at a price
substantially below fair market value or of any similar change affecting the
common stock, the number and kind of shares which thereafter may be optioned and
sold under the Plan and the number and kind of shares subject to option in
outstanding option agreements and the purchase price per share thereof shall be
appropriately adjusted consistent with such change in such manner as the Board
of Directors or the Committee may deem equitable to prevent substantial dilution
or enlargement of the rights granted to, or available for, an optionee under the
Plan.
h. No Rights as a Shareholder. No optionee shall have any rights as a
shareholder with respect to any shares subject to his option prior to the date
of issuance to him of a certificate or certificates for such shares.
D-3
<PAGE> 166
i. No Rights to Continued Employment. The Plan and any option granted under
the Plan shall neither confer upon any optionee any right with respect to
continuance of employment by the Corporation or by any subsidiary of the
Corporation, nor shall it interfere in any way with the right of the Corporation
to terminate his employment at any time.
6. COMPLIANCE WITH OTHER LAWS AND REGULATIONS.
The Plan, the grant and exercise of options under the Plan, and the
obligation of the Corporation to sell and deliver shares under such options
shall be subject to all applicable federal and state laws, rules and regulations
and to such approvals by any government or regulatory agency as may be required.
The Corporation shall not be required to issue or deliver any certificates for
shares of common stock prior to the completion of any registration or
qualification of such shares under any federal or state law, or any ruling or
regulation of any government body which the Corporation shall, in its sole
discretion, determine to be necessary or advisable.
7. AMENDMENT AND DISCONTINUANCE.
The Board of Directors of the Corporation may amend, suspend or discontinue
the Plan; provided, however, that, subject to the provisions of Section 5(g) no
action of the Board of Directors of the Corporation or of the Board of Directors
or the Committee may (i) increase the number of shares reserved for options
pursuant to Section 2, (ii) permit the grant of any option at an option price
less than the price determined in accordance with Section 5(c), (iii) shorten
the period provided for in subparagraph (1) of Section 5(b) which must elapse
between the date of the grant of an option and the date on which any part of an
option may be exercised by an optionee, (iv) permit the granting of options
which expire beyond the period provided for in Section 5(a), or (v) modify the
requirements as to eligibility for participation in the Plan. Without the
written consent of an optionee, no amendment or suspension of the Plan shall
alter or impair any option previously granted to him under the Plan.
8. EFFECTIVE DATE.
The effective date of the Plan shall be May 1, 1993, subject to the
approval by stockholders of the Corporation holding not less than a majority of
the shares present and voting at a meeting of shareholders prior to May 27,
1993. Notwithstanding the foregoing, options may be granted by the Board of
Directors or the Committee as provided by the terms of the Plan subject to such
subsequent stockholder approval. The Plan shall terminate on May 1, 2004.
9. NAME OF THE PLAN.
The Plan shall be known as the T-NETIX, Inc. 1993 Incentive Stock Option
Plan.
10. EFFECT OF THE PLAN ON OTHER STOCK PLANS.
The adoption of the Plan shall have no effect on awards made or to be made
pursuant to other stock plans covering employees of the Corporation, a
subsidiary corporation of the Corporation, a parent corporation or any
predecessors or successors thereto.
D-4
<PAGE> 167
PROXY
T-NETIX, INC.
SOLICITED BY THE BOARD OF DIRECTORS FOR SPECIAL MEETING OF SHAREHOLDERS
JUNE 14, 1999
The undersigned holder of common stock of T-NETIX, Inc., a Colorado
corporation ("T-NETIX") acknowledges receipt of a copy of the Notice of Special
Meeting of Shareholders dated May 7, 1999, and, revoking any proxy heretofore
given, hereby appoints Alvyn A. Schopp and Daniel M. Carney, and each of them,
with full power to each of substitution as attorneys and proxies to appear and
vote all shares of common stock of T-NETIX registered in the name(s) of the
undersigned and held by the undersigned of record as of May 7, 1999, at the
Special Meeting of Shareholders of T-NETIX to be held at 67 Inverness Drive
East, Suite 100, Englewood, Colorado, on June 14, 1999, at 8:00 a.m., and at any
postponements and adjournments thereof, upon the following items as set forth in
the Notice of Special Meeting. All properly executed proxies will be voted as
indicated. The proxy holders may, in their discretion, vote shares which have
been voted in favor of the proposals to adjourn the Special Meeting to solicit
additional proxies in favor of the proposals.
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED "FOR" ITEMS 1 and 2:
(1) A proposal to approve the issuance of up to 4,231,315 shares of common
stock, $0.01 stated value, of T-NETIX, Inc. to the shareholders of Gateway
Technologies, Inc., in accordance with the Agreement and Plan of Merger
dated as of February 10, 1999, among T-NETIX, Inc., Gateway Technologies,
Inc., and a wholly owned subsidiary of T-NETIX, Inc. called T-NETIX
Acquisition Corp., pursuant to which T-NETIX Acquisition Corp. will be
merged with and into Gateway Technologies, Inc. with Gateway Technologies,
Inc. surviving said merger as a wholly owned subsidiary of T-NETIX, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(To be continued and signed on the reverse side.)
(2) A proposal in connection with the merger to amend T-NETIX, Inc.'s 1993
Incentive Stock Option Plan and T-NETIX, Inc.'s Non-Qualified Stock Option
Plan to increase from 2,000,000 to 2,600,000 the number of shares subject to
option under said stock option plans.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THIS PROXY IS SOLICITED BY AND ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE
REVOKED PRIOR TO ITS EXERCISE. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
PROPOSALS 1 AND 2. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED.
IF NO DIRECTION IS MADE IT WILL BE VOTED "FOR" PROPOSALS 1 AND 2. PROPOSAL 2
WILL NOT BE CARRIED OUT UNLESS BOTH PROPOSALS 1 AND 2 ARE APPROVED BY THE
SHAREHOLDERS.
[ ] WE DO [ ] DO NOT EXPECT TO ATTEND THIS MEETING.
Date
--------------------------------
--------------------------------
Signature
--------------------------------
Signature if Held Jointly
Please date and sign exactly as
your name(s) appear above. When
signing as attorney, executor,
administrator, trustee or
guardian, please give full
title. All joint owners should
sign. If a corporation, please
sign in full corporate name by
an authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE SIGN AND RETURN THIS
PROXY AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
