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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
T-NETIX, INC.
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(Name of Registrant as Specified In Its Charter)
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(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)(1) 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
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(5) Total fee paid:
$4,813.12
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[X] Fee paid previously with preliminary materials.
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[ ] 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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PRELIMINARY COPY
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
March 29, 1999, 10:00 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 25 OF THIS DOCUMENT.
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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.
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Proxy Statement dated February 26, 1999
and first mailed to shareholders on or about March 1, 1999
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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, March 29, 1999, at 10:00 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 February 24, 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
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John Giannaula
Secretary
February 26, 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>
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Page
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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.........................................3
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..............................................................................4
Forward-Looking Statements May Prove Inaccurate............................................5
Selected Historical Financial Data.........................................................6
Selected Unaudited Pro Forma Combined Financial Data.......................................7
THE SPECIAL MEETING............................................................................10
General .................................................................................10
Record Date...............................................................................10
Matters to Be Considered and Voted Upon...................................................10
Date, Place and Time......................................................................10
Vote Required for Approval................................................................10
Voting and Revocation of Proxies..........................................................11
General ........................................................................11
Revocation of Proxies............................................................11
Solicitation of Proxies...................................................................11
THE MERGER.....................................................................................12
Mechanics of the Merger...................................................................12
Background of the Merger..................................................................12
Reasons for the Merger; Recommendation of the Board.......................................13
Fairness Opinion.................................................................14
Recommendation of the Board of Directors.........................................18
Terms of the Merger Agreement.............................................................18
Operation of the Merger..........................................................18
Consideration for Shares of Gateway Stock........................................18
Issuance of Shares to Gateway Shareholders.......................................19
Indemnification Claims...........................................................19
Covenants in the Merger Agreement................................................20
Conditions of the Merger Agreement...............................................22
Termination of the Merger Agreement..............................................23
Post-Closing Covenants...........................................................23
Operation of Gateway and T-NETIX after the Merger................................24
Employment Agreements............................................................24
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<TABLE>
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Rights of Dissenting Shareholders.........................................................24
Accounting Treatment......................................................................24
Interests of Certain Persons in the Merger................................................25
HSR Act and Other Antitrust Matters.......................................................25
RISK FACTORS...................................................................................25
T-NETIX Depends on a Few Major Customers..................................................25
Challenges of Integrating T-NETIX and Gateway.............................................26
Competition...............................................................................26
Systems and Services May Become Obsolete..................................................26
Protection of Proprietary Technology......................................................26
Risk of Infringing on Existing Patents....................................................26
The Risks Associated with Year 2000 Issues................................................26
DIVIDENDS AND PRICE RANGE OF COMMON STOCK......................................................27
DESCRIPTION OF T-NETIX.........................................................................27
General .................................................................................27
Directors and Executive Officers..........................................................28
Additional Information....................................................................30
DESCRIPTION OF GATEWAY.........................................................................30
Business .................................................................................30
General ........................................................................30
Corrections......................................................................30
Products and Services............................................................31
Product/platform........................................................31
System Architecture and Technology......................................32
Support Infrastructure..................................................32
Pricing ........................................................................32
Direct Call Processing..................................................32
Transaction-based Pricing...............................................32
Customers........................................................................32
Direct Call Processing Customers........................................32
Transaction Fee Customers...............................................33
Research and Product Development.................................................33
Regulation.......................................................................33
Properties................................................................................34
Competition...............................................................................34
Employees and Employee Benefits...........................................................34
Management's Discussion and Analysis of Financial Condition and Results of Operations.....35
Overview ........................................................................35
Liquidity and Capital Resources...........................................................38
The Year 2000 Issue.......................................................................40
Legal Proceedings.........................................................................41
PRINCIPAL SHAREHOLDERS.........................................................................41
AMENDMENTS TO T-NETIX STOCK OPTION PLANS.......................................................44
New Plan Benefits.........................................................................44
Executive Compensation....................................................................44
Compensation of Directors........................................................44
Board Committees and Meetings....................................................45
Executive Compensation Table.....................................................45
Option Grants in the Last Fiscal Year............................................45
</TABLE>
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<TABLE>
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Management Incentive Programs....................................................46
Stock Option Plans...............................................................46
Compensation Committee Interlocks and Insider Participation......................47
Compensation Committee Report on Executive Compensation..........................47
Executive Compensation Policies.........................................47
CEO Compensation........................................................47
Company Performance..............................................................48
SHAREHOLDERS' PROPOSALS........................................................................48
LEGAL MATTERS..................................................................................48
EXPERTS ......................................................................................49
WHERE YOU CAN FIND MORE INFORMATION............................................................49
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS.....................................50
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION...................................51
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
APPENDIX C (SEC ONLY)
APPENDIX D (SEC ONLY)
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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 12)
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 12)
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 18 and 19)
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 18)
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 158,243 shares available to be optioned under the
plans.
INDEMNIFICATION CLAIMS (page 19)
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.
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.
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THE SHAREHOLDERS' MEETING (page 10)
The shareholders' meeting will be held on March 29, 1999, at 10:00 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 10 and 11)
You can vote at the meeting of T-NETIX shareholders if you owned T-NETIX common
stock at the close of business on February 24, 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 13)
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 the merger offers the following strategic and financial benefits:
o 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.
o 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.
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o We believe that the combined company will have strong relationships with
the Regional Bell Operating Companies, which will provide significant
cross-selling opportunities.
o 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.
o 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.
o 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 25 and "Cautionary
Statement Concerning Forward- Looking Statements" on page 50.
OUR RECOMMENDATION TO SHAREHOLDERS (page 18)
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 24)
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.
CONDITIONS TO COMPLETION OF THE MERGER (page 22)
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.
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 23)
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.
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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 23 and 24)
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 24)
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 25)
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 410,500 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 25)
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 27)
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 March 12, 1999,
T-NETIX common stock closed at $5.9375 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
$24,033,201 based on T-NETIX's closing stock price on March 12, 1999. Of course,
the market price of T-NETIX common stock will fluctuate prior to the merger,
while the exchange ratio is fixed.
THE COMPANIES (pages 27 and 30)
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
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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 25 and 50)
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> 13
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 for the fiscal year ended July 31, 1998, and
unaudited consolidated financial statements contained in the Quarterly
Transition Report on Form 10-QT 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
------- ------- ------- ------- ------- ------- -------
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C> <C> <C>
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>
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."
- 6 -
<PAGE> 14
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>
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>
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 51 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."
- 7 -
<PAGE> 15
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) (2,746) 1,954 3,312 4,690 2,138
Net earnings (loss) (3,175) 717 775 1,958 1,321
PER SHARE DATA
Diluted earnings (loss) per share $ (0.25) $ 0.05 $ 0.06 $ 0.15 $ 0.10
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 $66,036
Debt 25,510
Total liabilities 37,629
Shareholders' equity 28,407
</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.
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."
- 8 -
<PAGE> 16
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 $ (0.25) $ 0.05 $ 0.06 $ 0.15 $ 0.10
Book value per share $ 2.25
</TABLE>
GATEWAY HISTORICAL
<TABLE>
<CAPTION>
Five Months
Ended December 31, Year Ended 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>
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 $ (1.26) $ 0.25 $ 0.30 $ 0.76 $ 0.50
Book value per share 11.33
</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.
- 9 -
<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 March 29, 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 February 24, 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 158,243 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 10:00 a.m., local time, on Monday,
March 29, 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.
VOTE REQUIRED FOR APPROVAL
As of the Record Date, there were __________ 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.
- 10 -
<PAGE> 18
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.
- 11 -
<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 March 31, 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 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.
- 12 -
<PAGE> 20
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:
o 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.
o 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.
o 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.
o 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
Containsm 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 Containsm product
lines from four to approximately twenty-four people without
significant incremental costs.
- 13 -
<PAGE> 21
o 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.
o 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
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 $2.25. 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 50 and "Risk Factors"
on page 25.
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;
- 14 -
<PAGE> 22
(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.
The following ratios indicate the value public markets place on companies
in a particular market segment:
o Total Market Capitalization/Revenue ("TMC/R")
o Total Market Capitalization/EBITDA ("TMC/EBITDA")
o Price/Earnings ("P/E")
o 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:
o TTM Revenue
o TTM Revenue Growth
o TTM EBITDA Margin
o TTM earnings before interest and taxes ("EBIT") Margin
o TTM Net Margin
o Equity Market Capitalization
o TTM TMC/R ratio
o TTM TMC/EBITDA ratio
o TTM P/E ratio
o TMC/Projected Calendar Year ("CY") 1999 Revenue ratio ("Forward 1999
TMC/R")
o Price/Projected CY1999 Earnings ratio ("Forward 1999 P/E")
o Forward CY1999 PEG ratio
- 15 -
<PAGE> 23
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.
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 0.78 3.40 1.54
Capitalization/Revenue
- ----------------------------------------------------------------------------------------------------------------------------
Trailing Twelve Month Total Market 7.12 14.98 10.32
Capitalization/EBITDA
- ----------------------------------------------------------------------------------------------------------------------------
Trailing Twelve Month Price/Earnings 28.11 36.17 31.04
- ----------------------------------------------------------------------------------------------------------------------------
Forward Calendar Year 1999 Total 0.57 1.68 1.10
Market Capitalization/Revenue
- ----------------------------------------------------------------------------------------------------------------------------
Forward Calendar Year 1999 9.58 33.04 19.36
Price/Earnings
- ----------------------------------------------------------------------------------------------------------------------------
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 $6,230 $70,674 $26,538
Capitalization/Revenue
- ----------------------------------------------------------------------------------------------------------------------------
Trailing Twelve Month Total Market $8,226 $28,898 $16,645
Capitalization/EBITDA
- ----------------------------------------------------------------------------------------------------------------------------
Trailing Twelve Month Price/Earnings $11,847 $15,247 $13,084
- ----------------------------------------------------------------------------------------------------------------------------
Forward Calendar Year 1999 Total $6,099 $38,116 $21,278
Market Capitalization/Revenue
- ----------------------------------------------------------------------------------------------------------------------------
Forward Calendar Year 1999 $6,272 $21,621 $12,673
Price/Earnings
- ----------------------------------------------------------------------------------------------------------------------------
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
(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 0.73 2.33 1.33
Price/Revenue Multiple
- ----------------------------------------------------------------------------------------------------------------------------
</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 $11,391 $59,189 $29,202
Price/Revenue
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 16 -
<PAGE> 24
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>
- ------------------------------------------------------------------------------------------------------------------------------
Analysis CY1998 CY1999
- ------------------------------------------------------------------------------------------------------------------------------
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 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 2.5(cent), or
14.9%, excluding acquisition expenses, for the fiscal year ending December 31,
1999 and EPS accretion to T-NETIX of 9.4(cent), 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
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.
- 17 -
<PAGE> 25
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 March 31, 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 Agreement") 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
- 18 -
<PAGE> 26
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 March 12, 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 will be held at the offices of Rothgerber Johnson & Lyons
LLP in Denver, Colorado, at 9:00 a.m. (local time) on March 31, 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.
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
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<PAGE> 27
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> 28
(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
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<PAGE> 29
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 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;
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<PAGE> 30
(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
(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.
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.
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<PAGE> 31
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 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
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<PAGE> 32
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."
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
410,500 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.
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
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<PAGE> 33
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 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
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<PAGE> 34
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.
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 February 24, 1999, the Record Date, there were
approximately 151 holders of record of T-NETIX Stock and 8,564,067 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 March
12, 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 $5.9375 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 3-12-99)............ $ 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.
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.,
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<PAGE> 35
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 February 24, 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 1993 2001
Officer and Director
John Giannaula 37 Vice President of Finance N/A N/A
and 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.
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.
- 28 -
<PAGE> 36
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 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.
- 29 -
<PAGE> 37
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 for the
fiscal year ended July 31, 1998, and Transition Report on Form 10-QT 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."
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.
- 30 -
<PAGE> 38
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 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
- 31 -
<PAGE> 39
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 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
- 32 -
<PAGE> 40
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.
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
- 33 -
<PAGE> 41
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 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.
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<PAGE> 42
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.
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>
- 35 -
<PAGE> 43
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
-------------- --------------
OPERATING EXPENSES:
<S> <C> <C>
Direct call processing 88% 86%
Telecommunications services 13 13
Cost of equipment sold 40 51
</TABLE>
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.
- 36 -
<PAGE> 44
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>
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.
- 37 -
<PAGE> 45
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
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.
- 38 -
<PAGE> 46
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.
- 39 -
<PAGE> 47
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.
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
- 40 -
<PAGE> 48
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.
PRINCIPAL SHAREHOLDERS
As of March 12, 1999, there were 8,564,067 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 March 12, 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.
- 41 -
<PAGE> 49
<TABLE>
<CAPTION>
Stock Ownership
-----------------------------------------------
Number of Percentage Pro
Shares Bene- of Shares Forma
Name and Address of Beneficial Owners ficially 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 2,636,799(6) 29.7% 20.4%
as a group (8 persons)
</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 March 12, 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 March 12,
1999.
(3) Includes 187,250 shares issuable pursuant to options exercisable within
60 days of March 12, 1999.
(4) Includes 5,000 shares issuable pursuant to options exercisable within
60 days of March 12, 1999.
(5) Includes 15,000 shares issuable pursuant to options exercisable within
60 days of March 12, 1999.
(6) Includes 302,250 shares issuable pursuant to options exercisable within
60 days of March 12, 1999.
As of March 12, 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
- 42 -
<PAGE> 50
executive officers and directors of Gateway as a group. The information is
provided as of March 12, 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 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
-----------------------------------------------------------
Number of Percentage Pro Pro
Shares Bene- of Shares Forma Forma
Name and Address of Beneficial Owners ficially Owned Outstanding Ownership Percentage
- ------------------------------------- -------------- ----------- ----------- ----------
<S> <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 March 12, 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.
- 43 -
<PAGE> 51
(4) Includes footnotes (1), (2) and (3) above, and 4,229 shares issuable
pursuant to options exercisable within 60 days of March 12, 1999,
assuming consummation of the Merger.
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 158,243
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.
- 44 -
<PAGE> 52
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.
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.
- 45 -
<PAGE> 53
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 current market price in
- 46 -
<PAGE> 54
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.
- 47 -
<PAGE> 55
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.
- 48 -
<PAGE> 56
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
Transition Report on Form 10-QT Transition period from August 1, 1998, through
December 31, 1998
Current Reports on Form 8-K Filed December 15, 1998
Filed December 31, 1998 and amended March 15, 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 and
Transition Report on Form 10-QT 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
- 49 -
<PAGE> 57
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
Please request documents by March 15, 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 FEBRUARY 26, 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 and Transition Report on Form 10-QT 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;
- 50 -
<PAGE> 58
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;
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.
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
- 51 -
<PAGE> 59
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 and the unaudited consolidated interim financial
statements contained in its Transition Report on Form 10-QT 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."
- 52 -
<PAGE> 60
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)(g) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
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)(g) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
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 (e) 3,584 893 -- 4,477
-------- -------- -------- -------- -------- -------- --------
Total expenses 17,606 614 (43) 18,177 12,602 (192) 30,587
Operating income (loss) (2,518) (315) (256) (3,089) 229 114 (2,746)
Interest and other income (expense) (420) -- (55)(f) (475) (966) -- (1,441)
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) before income taxes (2,938) (315) (311) (3,564) (737) 114 (4,187)
Income taxes 750 -- 46 796 255 (39) 1,012
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss) $ (2,188) $ (315) $ (265) $ (2,768) $ (482) $ 75 $ (3,175)
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per common share $ (0.26) $ (0.04) $ (0.32) $ (0.66) $ (0.25)
======== ======== ======== ======== ========
(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.
-53-
<PAGE> 61
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 (e) 3,775 625 - 4,400
-------- --------- ---------- --------- -------- ----------- -----------
Total expenses 15,069 20 256 15,345 10,392 (171) 25,566
Operating income (loss) 1,068 (20) (256) 792 1,109 53 1,954
Interest and other income
(expense) (446) - (111) (f) (557) (281) - (838)
-------- --------- ---------- --------- -------- ----------- -----------
Earnings (loss) before income
taxes 622 (20) (367) 235 828 53 1,116
Income taxes (155) - 59 (96) (285) (18) (399)
-------- --------- ---------- --------- -------- ----------- -----------
Net earnings (loss) $ 467 $ (20) $ (308) $ 139 $ 543 $ 35 $ 717
======== ========= ========== ========= ======== =========== ===========
Diluted earnings (loss) per
common share $ 0.05 $ (0.00) $ 0.02 $ 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.
-54-
<PAGE> 62
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 (e) 8,932 1,656 -- 10,588
-------- -------- -------- -------- -------- -------- --------
Total expenses 36,361 235 615 37,211 26,850 (432) 63,629
Operating income (loss) 1,852 (235) (615) 1,002 2,124 186 3,312
Interest and other income (expense) (1,055) -- (189)(f) (1,244) (614) -- (1,858)
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) before income taxes 797 (235) (804) (242) 1,510 186 1,454
Income taxes (198) -- 123 (75) (541) (63) (679)
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss) $ 599 $ (235) $ (681) $ (317) $ 969 $ 123 $ 775
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per common share $ 0.07 $ (0.03) $ (0.03) $ 1.24 $ 0.06
======== ======== ======== ======== ========
(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 proforma information.
- 55 -
<PAGE> 63
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 -- 9,546
------------ ------------ ------------ ------------
Total expenses 34,337 23,601 (385) 57,553
Operating income (loss) 1,955 2,412 323 4,690
Interest and other income expense (932) (651) -- (1,583)
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 1,023 1,761 323 3,107
Income taxes (432) (607) (110) (1,149)
------------ ------------ ------------ ------------
Net earnings (loss) $ 591 $ 1,154 $ 213 $ 1,958
============ ============ ============ ============
Diluted earnings (loss) per common share $ 0.06 $ 1.48 $ 0.15
============ ============ ============
(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.
-56-
<PAGE> 64
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 -- 7,202
---------- ---------- ---------- ----------
Total expenses 31,157 20,831 (315) 51,673
Operating income (loss) 2,221 (398) 315 2,138
Interest and other income expense (548) (364) -- (912)
---------- ---------- ---------- ----------
Earnings (loss) before income taxes 1,673 (762) 315 1,226
Income taxes (46) 248 (107) 95
---------- ---------- ---------- ----------
Net earnings (loss) $ 1,627 $ (514) $ 208 $ 1,321
========== ========== ========== ==========
Diluted earnings (loss) per common share $ 0.18 $ (0.83) $ 0.10
========== ========== ==========
(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.
-57-
<PAGE> 65
T-NETIX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
BALANCE SHEET
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------
Pro Forma Pro Forma
T-NETIX Gateway Adjustments Combined
-------- -------- -------- --------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 463 $ 215 -- $ 678
Accounts receivable 11,510 4,843 -- 16,353
Prepaid expenses 595 825 -- 1,420
Inventory -- 300 -- 300
Investments -- -- -- --
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 -- 4,955
-------- -------- -------- --------
Total assets $ 48,663 $ 17,451 (78) $ 66,036
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 3,056 $ 1,633 $ -- $ 4,689
Accrued expenses 4,127 1,803 1,500 (c) 7,430
Debt 15,160 10,350 -- 25,510
-------- -------- -------- --------
Total liabilities 22,343 13,786 1,500 37,629
SHAREHOLDERS' EQUITY:
Preferred stock -- -- -- --
Common stock 85 729 -- 814
Additional paid-in capital 27,963 4,397 -- 32,360
Retained earnings (1,728) (1,461) (1,578)(a)(c) (4,767)
-------- -------- -------- --------
Total shareholders' equity 26,320 3,665 (1,578) 28,407
-------- -------- -------- --------
Total liabilities and shareholders' equity $ 48,663 $ 17,451 $ (78) $ 66,036
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this proforma information.
-58-
<PAGE> 66
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.
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.
The Royalty Owners' interests in the Royalty Agreement are being
terminated because the automated call processing technology and intellectual
property are considered essential to the operations of Gateway and the
operations of the combined, post-Merger company. The termination through the
issuance of T-NETIX Stock in the Merger allows for the automated call processing
technology and intellectual property to be transferred to the combined,
post-Merger company in a manner consistent with the requirements of the pooling
of interests method of accounting.
The estimated fair value of the Royalty Agreement as of February 10,
1999 was approximately $2,697,000. The fair value of the royalty payment was
calculated based upon the net present value of the anticipated cash flows from
the Royalty Agreement. Future cash flows were calculated using the adjusted
historical gross revenues for fiscal 1998 as a basis for projection and
projecting revenue growth of 5% per year for Gateway. The payment stream was
projected for 10 years, giving consideration to the technology life cycle of the
automated call processing technology and intellectual property rights. This cash
flow was then discounted to present value at a discount rate of 16%, which takes
into account Gateway's equity cost of capital, capital structure, debt cost of
capital and effective tax rate. The number of shares issued resulted from
negotiations between the Royalty Owners and T-NETIX. Such negotiations
considered the estimated fair value, however, the actual shares to be issued
were not contractually tied to the estimated fair value or the stock price of
T-NETIX Stock.
(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. No intangible asset has been reflected on the pro forma balance sheet as
the asset contributed by the Royalty Owners in exchange for the T-NETIX Stock
had no cost basis immediately prior to the Merger.
(e) 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.
(f) Represents an adjustment for interest charges on the additional
borrowings that would have been incurred for the incremental preferred stock
purchases, cash payments pursuant to exercise of the purchase option and
acquisition costs. Such borrowings were $1,708,000, $3,433,000 and $2,440,000
during the five-month periods ended December 31, 1998 and 1997, and the year
ended July 31, 1998, respectively. These amounts exclude the purchases of
preferred stock and related interest expense reflected in the historical
financial statements. All borrowings would have been drawn under T-NETIX's line
of credit facility, which had an effective interest rate of 7.75% at December
31, 1998. This rate was used to determine the pro forma interest expense for all
periods presented. There were no direct costs associated with the conversion of
the preferred stock to common stock.
The impact of a change of 1/8th percent in the current interest rate on
pro forma combined net income (loss) would have been $1,000, $3,000, and $2,000
for the five-month periods ended December 31, 1998 and 1997, and the year ended
July 31, 1998, respectively.
(g) Represents the elimination of intercompany service revenue between
T-NETIX and Cell-Tel.
-59-
<PAGE> 67
IV. 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.
-60-
<PAGE> 68
GATEWAY TECHNOLOGIES, INC.
Financial Statements
December 31, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE> 69
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> 70
GATEWAY TECHNOLOGIES, INC.
Balance Sheets
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
ASSETS 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> 71
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> 72
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> 73
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> 74
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.
(b) 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:
Leasehold improvements Lesser of lease term or useful life
Office equipment 5-7 years
Telecommunications equipment 5 years
(Continued)
F-6
<PAGE> 75
GATEWAY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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
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.
(Continued)
F-7
<PAGE> 76
GATEWAY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(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>
(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.
(Continued)
F-8
<PAGE> 77
GATEWAY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(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.
(Continued)
F-9
<PAGE> 78
GATEWAY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(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 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.
(Continued)
F-10
<PAGE> 79
GATEWAY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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>
(Continued)
F-11
<PAGE> 80
GATEWAY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(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
F-12 (Continued)
<PAGE> 81
GATEWAY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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.
(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
F-13 (Continued)
<PAGE> 82
GATEWAY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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.
As of December 31, 1998, principal payments due on all
indebtedness, in future years were as follows (amounts in
thousands):
1999 $ 4,019
2000 536
2001 2,736
2002 461
2003 67
(Continued)
F-14
<PAGE> 83
GATEWAY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(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>
(Continued)
F-15
<PAGE> 84
GATEWAY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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>
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.
(Continued)
F-16
<PAGE> 85
GATEWAY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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
ended December 31, 1998, 1997 and 1996, respectively. These
royalty payments are included in operating expenses in the
accompanying statements of operations.
(Continued)
F-17
<PAGE> 86
GATEWAY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(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.
(Continued)
F-18
<PAGE> 87
GATEWAY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(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).
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-19
<PAGE> 88
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> 89
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1
MERGER............................................................................................................1
1.1 PLAN OF MERGER..................................................................................1
1.2 MERGER CONSIDERATION............................................................................2
1.3 NO FURTHER RIGHTS OF TRANSFER...................................................................3
1.4 SURVIVING CORPORATION...........................................................................4
1.5 THE CLOSING.....................................................................................4
1.6 T-NETIX STOCK...................................................................................5
1.7 DISSENTING GATEWAY SHAREHOLDERS.................................................................6
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF T-NETIX.........................................................................6
2.1 ORGANIZATION, STANDING, CORPORATE AUTHORIZATION, AND ENFORCEABILITY.............................6
2.2 CAPITALIZATION..................................................................................7
2.3 ARTICLES OF INCORPORATION AND BYLAWS; CERTAIN RECORDS...........................................8
2.4 COMPLIANCE WITH OTHER INSTRUMENTS AND LAWS......................................................8
2.5 GOVERNMENTAL AUTHORIZATIONS; CONSENTS...........................................................8
2.6 LITIGATION......................................................................................9
2.7 FINANCIAL STATEMENTS; CONDUCT OF T-NETIX BUSINESS;
NO UNDISCLOSED LIABILITIES......................................................................9
2.8 ABSENCE OF CERTAIN CHANGES OR EVENTS............................................................9
2.9 TITLE TO PROPERTY, ABSENCE OF LIENS AND ENCUMBRANCES...........................................11
2.10 FULL AUTHORITY; COMPLIANCE WITH LAWS...........................................................12
2.11 T-NETIX BENEFIT PLANS..........................................................................12
2.12 CLAIMS.........................................................................................14
2.13 TAXES..........................................................................................15
2.14 ENVIRONMENTAL QUALITY..........................................................................16
2.15 INTELLECTUAL PROPERTY..........................................................................18
2.16 LABOR MATTERS..................................................................................18
2.17 BROKERS AND FINDERS............................................................................19
2.18 T-NETIX'S KNOWLEDGE............................................................................19
2.19 YEAR 2000 COMPLIANCE...........................................................................19
2.20 CUSTOMERS AND VENDORS..........................................................................19
2.21 ACCURACY.......................................................................................20
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF GATEWAY........................................................................20
3.1 ORGANIZATION, STANDING, CORPORATE AUTHORIZATION, AND ENFORCEABILITY............................20
3.2 CAPITALIZATION.................................................................................21
3.3 ARTICLES OF INCORPORATION AND BYLAWS; CERTAIN RECORDS..........................................21
</TABLE>
- i -
<PAGE> 90
<TABLE>
<CAPTION>
<S> <C>
3.4 COMPLIANCE WITH OTHER INSTRUMENTS AND LAWS.....................................................22
3.5 GOVERNMENTAL AUTHORIZATIONS; CONSENTS..........................................................22
3.6 LITIGATION.....................................................................................22
3.7 FINANCIAL STATEMENTS; CONDUCT OF GATEWAY BUSINESS;
NO UNDISCLOSED LIABILITIES.....................................................................22
3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS...........................................................23
3.9 TITLE TO PROPERTY, ABSENCE OF LIENS AND ENCUMBRANCES...........................................24
3.10 FULL AUTHORITY; COMPLIANCE WITH LAWS...........................................................25
3.11 BENEFIT PLANS..................................................................................25
3.12 CLAIMS.........................................................................................27
3.13 TAXES..........................................................................................27
3.14 CONTRACTS......................................................................................29
3.15 ENVIRONMENTAL QUALITY..........................................................................31
3.16 INTELLECTUAL PROPERTY..........................................................................32
3.17 RELATED PARTY TRANSACTIONS.....................................................................32
3.18 LABOR MATTERS..................................................................................32
3.19 CUSTOMERS AND VENDORS..........................................................................33
3.20 OTHER DISCLOSURES..............................................................................33
3.21 PARACHUTE PAYMENTS.............................................................................34
3.22 BROKERS AND FINDERS............................................................................34
3.23 GATEWAY'S KNOWLEDGE............................................................................34
3.24 YEAR 2000 COMPLIANCE...........................................................................34
3.25 RIGHT OF FIRST REFUSAL.........................................................................34
3.26 TERMINATION OF EXISTING AGREEMENT..............................................................34
3.27 ACCURACY.......................................................................................34
ARTICLE 4
ADDITIONAL REPRESENTATIONS AND WARRANTIES OF GATEWAY,
GATEWAY SHAREHOLDER SIGNATORIES AND GATEWAY SHAREHOLDERS.........................................................35
4.1 OWNERSHIP OF SHARES............................................................................35
4.2 INVESTMENT REPRESENTATIONS.....................................................................35
ARTICLE 5
COVENANTS OF GATEWAY.............................................................................................35
5.1 CONDUCT OF BUSINESS............................................................................35
5.2 CONFIDENTIALITY................................................................................37
5.3 ACCESS.........................................................................................37
5.4 NO SALE OR TRANSFER OF SHARES..................................................................38
5.5 NO SHOPPING....................................................................................38
5.6 FILINGS AND CONSENTS...........................................................................38
5.7 UPDATED GATEWAY DISCLOSURE LETTER..............................................................38
5.8 MAXIMUM INDEBTEDNESS...........................................................................39
5.9 POOLING AND TAX-FREE REORGANIZATION TREATMENT..................................................39
</TABLE>
- ii -
<PAGE> 91
<TABLE>
<CAPTION>
<S> <C>
5.10 PROXY MATERIALS................................................................................39
ARTICLE 6
COVENANTS OF T-NETIX.............................................................................................39
6.1 CONDUCT OF BUSINESS............................................................................39
6.2 CONFIDENTIALITY................................................................................41
6.3 ACCESS.........................................................................................41
6.4 NO SHOPPING....................................................................................41
6.5 FILINGS AND CONSENTS...........................................................................42
6.6 UPDATED T-NETIX DISCLOSURE LETTER..............................................................42
6.7 POOLING AND TAX-FREE REORGANIZATION TREATMENT..................................................42
6.8 PROXY MATERIALS................................................................................42
ARTICLE 7
COVENANTS OF ALL PARTIES.........................................................................................43
7.1 COMMERCIALLY REASONABLE EFFORTS; FURTHER ASSURANCES............................................43
7.2 CERTAIN FILINGS, ETC...........................................................................43
7.3 PUBLIC ANNOUNCEMENTS...........................................................................43
7.4 HART-SCOTT-RODINO FILING.......................................................................43
7.5 AFFILIATES.....................................................................................43
ARTICLE 8
CONDITIONS TO CLOSING............................................................................................44
8.1 CONDITIONS FOR THE BENEFIT OF T-NETIX..........................................................44
8.2 CONDITIONS FOR THE BENEFIT OF GATEWAY..........................................................46
ARTICLE 9
POST-CLOSING COVENANTS...........................................................................................48
9.1 ADDITIONAL FUNDING.............................................................................48
9.2 SERVICE CREDIT.................................................................................48
9.3 BOARD OF DIRECTORS.............................................................................48
ARTICLE 10
TERMINATION OF AGREEMENT.........................................................................................48
10.1 RIGHT TO TERMINATE AGREEMENT...................................................................48
10.2 EFFECT OF TERMINATION..........................................................................49
10.3 DAMAGES........................................................................................49
ARTICLE 11
CERTAIN REMEDIES AND LIMITATIONS.................................................................................50
11.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS..........................................50
11.2 INDEMNIFICATION BY T-NETIX.....................................................................50
11.3 LIMITATIONS ON LIABILITY OF T-NETIX............................................................51
</TABLE>
- iii -
<PAGE> 92
<TABLE>
<CAPTION>
<S> <C>
11.4 INDEMNIFICATION BY GATEWAY SHAREHOLDERS........................................................51
11.5 LIMITATIONS ON LIABILITIES OF GATEWAY SHAREHOLDERS.............................................52
11.6 INDEMNIFICATION CLAIMS.........................................................................52
11.7 DEFENSE OF THIRD-PARTY ACTIONS.................................................................53
11.8 SUBROGATION....................................................................................55
11.9 EXCLUSIVITY....................................................................................55
11.10 RETENTION OF RECORDS...........................................................................55
ARTICLE 12
MISCELLANEOUS....................................................................................................55
12.1 MATERIALITY....................................................................................55
12.2 NOTICES; ETC...................................................................................56
12.3 ASSIGNMENT.....................................................................................57
12.4 ENTIRE AGREEMENT; AMENDMENT; GOVERNING LAW; ETC................................................57
12.5 COUNTERPARTS...................................................................................57
12.6 THIRD-PARTY RIGHTS.............................................................................57
12.7 RECITALS AND EXHIBITS..........................................................................57
12.8 PRONOUNS.......................................................................................57
12.9 AUTHORITY AND EXECUTION........................................................................58
12.10 SEVERABILITY...................................................................................58
12.11 TIME OF ESSENCE................................................................................58
12.12 INTERPRETATION.................................................................................58
</TABLE>
EXHIBITS
<TABLE>
<CAPTION>
<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
E Non-competition Agreements of G. B. Cree Jr., W. P. Buckthal, Irvin Wall and
James B. Franklin
F Investor Representation Letter
G Opinion of Rothgerber Johnson & Lyons LLP
</TABLE>
- iv -
<PAGE> 93
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Terms Page
- ----- ----
<S> <C>
Affiliate .......................................................................................................13
Agreement ........................................................................................................1
Annual Financial Statements......................................................................................22
Benefit Plan ....................................................................................................26
Business .........................................................................................................1
CERCLA ..........................................................................................................16
Certificate ......................................................................................................3
Claim Notice ....................................................................................................53
Claimants .......................................................................................................53
Claims ...........................................................................................................9
Closing ..........................................................................................................4
Closing Date .....................................................................................................4
COBRA ...........................................................................................................14
Code .............................................................................................................1
Colorado Corporation Act..........................................................................................2
Confidential Information.........................................................................................41
Disqualified Individuals.........................................................................................34
Dissenters' Rights................................................................................................6
Dissenting Shareholders...........................................................................................6
Effective Time ...................................................................................................2
Employment Agreements............................................................................................45
Environmental Laws...............................................................................................16
ERISA ...........................................................................................................12
Financial Statements.............................................................................................22
Gateway ..........................................................................................................1
Gateway Associates...............................................................................................37
Gateway Change of Control........................................................................................38
Gateway Confidential Information.................................................................................41
Gateway Disclosure Letter........................................................................................20
Gateway Equity Rights............................................................................................21
Gateway Holdback Shares...........................................................................................4
Gateway Intellectual Property....................................................................................32
Gateway Options ..................................................................................................3
Gateway Related Agreements.......................................................................................20
Gateway Shareholder Indemnified Obligation.......................................................................51
Gateway Shareholder Signatories...................................................................................1
Gateway Shareholders..............................................................................................1
Gateway Shareholders' Representative..............................................................................5
Gateway Stock ....................................................................................................2
Gateway Title Notice.............................................................................................25
</TABLE>
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<PAGE> 94
<TABLE>
<CAPTION>
<S> <C>
Hazardous Materials..............................................................................................16
HSR Act .........................................................................................................43
Indebtedness ....................................................................................................39
Indemnification Claim............................................................................................53
Indemnified Parties..............................................................................................53
Indemnifying Parties.............................................................................................53
Initial Consideration.............................................................................................4
Interim Financial Statements.....................................................................................22
Leased Property .................................................................................................25
Legal Requirement ................................................................................................8
Losses ..........................................................................................................50
Material Adverse Effect..........................................................................................55
Material Contracts...............................................................................................29
Merger ...........................................................................................................1
Merger Consideration..............................................................................................2
Multiemployer Plan...............................................................................................13
Non-Competition Agreements.......................................................................................45
PBGC ............................................................................................................13
Pension Plan ....................................................................................................13
Permits .........................................................................................................12
Permitted Liens .................................................................................................11
Person ...........................................................................................................5
Pro Rata Share ...................................................................................................2
Property ........................................................................................................31
RCRA ............................................................................................................16
Real Property ...................................................................................................24
Related Parties .................................................................................................32
SEC ..............................................................................................................1
SEC Filings ......................................................................................................9
Securities Act ..................................................................................................35
Shareholder Indemnified Obligation...............................................................................52
Shareholder Indemnified Parties..................................................................................50
Surviving Corporation.............................................................................................2
T-NETIX ..........................................................................................................1
T-NETIX Associates...............................................................................................41
T-NETIX Benefit Plan.............................................................................................12
T-NETIX Change of Control........................................................................................42
T-NETIX Confidential Information.................................................................................37
T-NETIX Disclosure Letter.........................................................................................6
T-NETIX Equity Rights.............................................................................................8
T-NETIX Indemnified Parties......................................................................................51
T-NETIX Intellectual Property....................................................................................18
T-NETIX Leased Property..........................................................................................11
T-NETIX Options ..................................................................................................3
</TABLE>
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<PAGE> 95
<TABLE>
<CAPTION>
<S> <C>
T-NETIX Real Property............................................................................................11
T-NETIX Related Agreements........................................................................................7
T-NETIX Reserve Shares............................................................................................4
T-NETIX Shareholder Signatories...................................................................................1
T-NETIX Shareholders..............................................................................................2
T-NETIX Stock ....................................................................................................2
T-NETIX Title Notice.............................................................................................11
TAC ..............................................................................................................1
TAC Stock ........................................................................................................2
Tax .............................................................................................................15
Tax Opinion .....................................................................................................45
Tax Returns .....................................................................................................15
Taxes ...........................................................................................................15
Texas Corporation Act.............................................................................................1
TTDP Royalty Agreement............................................................................................3
TTDP Royalty Owners...............................................................................................3
Updated Gateway Disclosure Letter................................................................................39
Updated T-NETIX Disclosure Letter................................................................................42
Year 2000 Compliant..............................................................................................19
</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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<PAGE> 96
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.
<PAGE> 97
(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 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."
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<PAGE> 98
(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 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.
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<PAGE> 99
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
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<PAGE> 100
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 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
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<PAGE> 101
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 publically 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 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:
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<PAGE> 102
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
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<PAGE> 103
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 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
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<PAGE> 104
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 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;
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(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;
(l) implemented or adopted any change in its tax methods,
principles or elections;
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(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.
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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
(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:
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(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 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
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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.
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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.
(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
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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.
(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
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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.
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(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 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
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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.
(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
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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
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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.
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
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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.
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
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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
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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;
(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.
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(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
(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.
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(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
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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 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.
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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.
(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
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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;
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(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 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
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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 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.
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(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 would cover any Gateway employees and (b) the employees of Gateway are not
subject to any collective bargaining agreement, memorandum of
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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;
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(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 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
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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.
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
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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;
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(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 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.
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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
(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
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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;
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(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 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;
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(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.
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
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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
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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.
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.
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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.
(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.
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(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.
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(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.
(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.
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(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.
ARTICLE 10
TERMINATION OF AGREEMENT
10.1 RIGHT TO TERMINATE AGREEMENT. This Agreement may be terminated
prior to the Closing:
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(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.
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(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.
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;
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(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 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):
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(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.
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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 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
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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-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
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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.
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.
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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
If to Gateway, to: 1544 Valwood Parkway, Suite 102
Carrollton, TX 75006
Attention: Richard E. Cree
Tel:
Fax: (650) 494-1417
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<PAGE> 152
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.
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<PAGE> 153
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, 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
GATEWAY SHAREHOLDER SIGNATORIES
---------------------------------------------------
Richard E. Cree
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<PAGE> 154
---------------------------------------------------
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> 155
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:
----------------------------------
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<PAGE> 156
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
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<PAGE> 157
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.
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.
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<PAGE> 158
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> 159
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
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<PAGE> 160
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 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,
----------------------------------------
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<PAGE> 161
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.
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<PAGE> 162
(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 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.
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<PAGE> 163
(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 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
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<PAGE> 164
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.
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:
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<PAGE> 165
(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
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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 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
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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).
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"
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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.
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");
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(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
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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 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
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<PAGE> 171
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.
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.
T-NETIX, INC. EMPLOYEE
BY:
-------------------------------- ---------------------------------
Richard E. Cree
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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
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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
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
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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 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.
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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.
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<PAGE> 178
[ ] 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.
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
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<PAGE> 180
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.
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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<PAGE> 181
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;
<PAGE> 182
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;
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;
<PAGE> 183
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
<PAGE> 184
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.
<PAGE> 185
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 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
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<PAGE> 186
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.
(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.
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<PAGE> 187
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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<PAGE> 188
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.
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<PAGE> 189
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 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.
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<PAGE> 190
(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. 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
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<PAGE> 191
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.
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
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<PAGE> 192
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.
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<PAGE> 193
PROXY
T-NETIX, INC.
SOLICITED BY THE BOARD OF DIRECTORS FOR
SPECIAL MEETING OF SHAREHOLDERS
MARCH 29, 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 February 26, 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 February 24,
1999, at the Special Meeting of Shareholders of T-NETIX to be held at 67
Inverness Drive East, Suite 100, Englewood, Colorado, on March 29, 1999, at
10:00 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.
(To be continued and signed on the reverse side.)
<PAGE> 194
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
(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
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Signature
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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.
