<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
---------------------------------------------
FOR THE QUARTER ENDED JUNE 30, 1999 COMMISSION FILE NUMBER 0-25016
T-NETIX, INC.
----------------------------------------------------
(Exact Name of registrant as Specified in Its Charter)
<TABLE>
<S> <C>
COLORADO 84-1037352
--------------------------------------------- ---------------------------------
(State of Other Jurisdiction of Incorporation) (I.R.S.Employer Identification No.)
</TABLE>
67 INVERNESS DRIVE EAST
ENGLEWOOD, COLORADO 80112
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 790-9111
--------------------------------------------------------------------
Indicate by check (X) whether the registrant (1) has filed all
reports required to filed by Section 13 or 15 (d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days
Yes ( X ) No ( )
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical date.
<TABLE>
<CAPTION>
Class Outstanding at August 12, 1999
------------------------------- ------------------------------
<S> <C>
Common Stock, $.01 stated value 12,699,402
</TABLE>
<PAGE> 2
T-NETIX, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART ITEM PAGE
----
<S> <C>
I. FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheets, June 30, 1999
and December 31, 1998 (Unaudited) 2
Consolidated Statements of Operations, Three Months Ended
June 30, 1999 and 1998, and Six Months Ended
June 30, 1999 and 1998 (Unaudited) 3
Consolidated Statements of Cash Flows, Six Months Ended
June 30, 1999 and 1998 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
2. Management's Discussion and Analysis of Financial Condition and
Results of Operation 11
3. Quantitative and Qualitative Disclosures About Market Risk 22
II. OTHER INFORMATION - Items 1 through 6 23
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(amounts in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,922 $ 678
Accounts receivable, net of allowance 14,448 16,353
Prepaid expenses 1,619 1,420
-------- --------
Total current assets 17,989 18,451
Property and equipment, at cost:
Telecommunications equipment 55,396 51,995
Construction in progress 8,087 5,185
Office equipment 8,177 7,382
-------- --------
Property and equipment 71,660 64,562
Less accumulated depreciation and amortization (37,269) (32,988)
-------- --------
Property and equipment, net 34,391 31,574
Patent license rights and other technology rights 4,114 1,877
Goodwill, net 5,479 5,823
Software development costs, net 3,667 3,016
Deferred tax assets 2,802 1,404
Other assets, net 3,549 3,583
-------- --------
$ 71,991 $ 65,728
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 7,923 $ 4,688
Accrued liabilities 4,967 5,488
Debt 24,306 21,710
-------- --------
Total current liabilities 37,196 31,886
Long-term debt 4,052 3,800
Deferred tax liabilities 442 442
-------- --------
Total liabilities 41,690 36,128
Shareholders' equity:
Preferred stock, $0.01 stated value, 10,000,000 shares
authorized; no shares issued -- --
Common stock, $0.01 stated value, 70,000,000 shares
authorized; issued and outstanding 12,698,052 and
12,225,636 respectively 127 122
Additional paid-in capital 35,790 33,053
Accumulated deficit (5,616) (3,575)
-------- --------
Total shareholders' equity 30,301 29,600
Commitments and contingencies
-------- --------
$ 71,991 $ 65,728
======== ========
</TABLE>
(1) Restated for pooling of interests - See Note 2
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ -----------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- --------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue:
Telecommunications services $ 10,065 $ 10,964 $ 19,879 $ 21,317
Direct call provisioning 7,021 5,781 13,523 11,543
Equipment sales 626 193 2,069 948
Voice print 34 100 59 213
-------- -------- -------- --------
Total revenue 17,746 17,038 35,530 34,021
Expenses:
Operating costs and expenses:
Telecommunications services 4,263 4,502 8,506 8,752
Direct call provisioning 6,468 5,353 12,548 10,701
Cost of equipment sold 213 98 875 357
Voice print 1 -- 4 8
-------- -------- -------- --------
Total operating costs and expenses 10,945 9,953 21,933 19,818
Selling, general, and administrative 3,259 2,988 6,619 5,753
Pooling transaction expenses 827 -- 1,017 --
Research and development 1,253 1,099 2,613 1,939
Depreciation and amortization 2,848 2,457 5,670 4,955
-------- -------- -------- --------
Total expenses 19,132 16,497 37,852 32,465
Operating income (loss) (1,386) 541 (2,322) 1,556
Interest expense (633) (354) (1,117) (770)
-------- -------- -------- --------
Earnings (loss) before income taxes (2,019) 187 (3,439) 786
Income taxes 810 (75) 1,398 (254)
-------- -------- -------- --------
Net earnings (loss) $ (1,209) $ 112 $ (2,041) $ 532
======== ======== ======== ========
Basic earnings (loss) per
common share $ (0.10) $ 0.01 $ (0.16) $ 0.04
======== ======== ======== ========
Diluted earnings (loss) per
common share $ (0.10) $ 0.01 $ (0.16) $ 0.04
======== ======== ======== ========
Weighted average common shares
outstanding - basic 12,372 12,208 12,318 12,185
======== ======== ======== ========
Weighted average common shares
outstanding- diluted 12,372 12,928 12,318 12,950
======== ======== ======== ========
</TABLE>
(1) Restated for pooling of interests - See Note 2
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
T-NETIX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(2,041) $ 532
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,670 4,955
Deferred tax (benefit) expense (1,398) 254
Changes in operating assets and liabilities, net of
acquisition of business:
Change in accounts receivable 1,905 (3,845)
Change in prepaid expenses (199) (440)
Change in other assets (294) (88)
Change in accounts payable 3,235 (656)
Change in accrued liabilities (521) (17)
------- ------
Cash provided by operating activities 6,357 695
------- ------
Cash flows from investing activities:
Capital expenditures (7,310) (3,063)
Other investing activities (894) (1,362)
------- ------
Cash used in investing activities (8,204) (4,425)
------- ------
Cash flows from financing activities:
Net proceeds (payments) under line of credit 3,390 3,467
Payments of debt (2,271) (1,986)
Proceeds from debt 1,716 2,161
Common stock issued for cash under option plans 256 176
------- ------
Cash provided by financing activities 3,091 3,818
------- ------
Net increase (decrease) in cash and cash equivalents 1,244 88
Cash and cash equivalents at beginning of period 678 945
------- ------
Cash and cash equivalents at end of period $ 1,922 $1,033
======= ======
</TABLE>
(1) Restated for pooling of interests - See Note 2
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited financial statements
The accompanying unaudited consolidated financial statements reflect
all adjustments which, in the opinion of management, are necessary to
reflect a fair presentation of the financial position and results of
operations of T-NETIX, Inc. and subsidiaries (the Company) for the
interim periods presented. All adjustments, in the opinion of
management, are of a normal and recurring nature. Some adjustments
involve estimates, which may require revision in subsequent interim
periods or at year-end. The financial statements have been presented in
accordance with generally accepted accounting principles. Refer to
notes to consolidated financial statements, which appear in the 1998
Annual Report on Form 10-K for the Company's accounting policies, which
are pertinent to these statements.
Year End
Effective December 1998, the Company changed its fiscal year from a
fiscal year ended July 31 to a fiscal year ended December 31. All 1998
amounts have been presented on the basis of the new fiscal year end.
Revenue Recognition
In October 1997, the AICPA issued Statement of Position (SOP) 97-2,
Software Revenue Recognition, which supersedes SOP 91-1. The provisions
of SOP 97-2 have been applied to transactions entered into after July
31, 1998. Prior to that date, the Company's revenue recognition policy
was in accordance with SOP No. 91-1.
SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements (i.e. software products,
upgrades/enhancements, post contract customer support, installation,
training, etc.) to be allocated to each element based on the relative
fair value of the elements. The fair value of an element must be based
on evidence, which is specific to the vendor. The revenue generally is
recognized upon delivery of the products. The revenue allocated to post
contract customer support generally is recognized ratably over the term
of the support and revenue allocated to service elements (such as
training and installation) generally is recognized as the services are
performed. If a vendor does not have evidence of the fair value for all
elements in a multiple-element arrangement, all revenue from the
arrangement is deferred until such evidence exists or until all
elements are delivered. There was no material impact on the Company's
results of operations as a result of the adoption of SOP 97-2.
5
<PAGE> 7
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Research and Development
Costs associated with the research and development of new technology or
significantly altering existing technology are charged to operations as
incurred.
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed.
Under the standard, capitalization of software development costs begins
upon the establishment of technological feasibility, subject to net
realizable value considerations. Capitalized software costs are
amortized over the greater of: 1) the amount computed using the ratio
that current gross revenues for a product bear to the total current and
anticipated future gross revenues for that product; or 2) the straight
line method over the remaining estimated useful life of the product in
which the life is generally estimated to be three years. The Company
capitalized $894,000 in software development costs for the six months
ended June 30, 1999.
Income taxes
The Company's tax provision for the three and six months ended June 30,
1999 and 1998 was calculated using the estimated effective tax rate for
the fiscal year.
(2) POOLING OF INTERESTS
On June 14, 1999, the Company completed a merger with Dallas-based
Gateway Technologies, Inc. ("Gateway"), a privately held provider of
inmate telecommunications calling services, by exchanging 3,672,234
shares of its common stock for all of the common stock of Gateway. Each
share of Gateway was exchanged for 5.0375 shares of T-NETIX common
stock. In addition, outstanding Gateway stock options were converted at
the same exchange factor into options to purchase approximately 379,000
shares of T-NETIX common stock.
The merger constituted a tax-free reorganization and has been accounted
for as a pooling of interests under Accounting Principles Board Opinion
No. 16. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined results of
operations, financial position and cash flows of Gateway as though it
had always been a part of T-NETIX.
6
<PAGE> 8
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Selected financial data of T-NETIX and Gateway, prior to its merger
with T-NETIX, on a combined basis, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
---------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
T-NETIX GATEWAY COMBINED
------- ------- ---------
<S> <C> <C> <C>
Revenue $ 8,815 $8,931 $ 17,746
Net earnings (loss) $(1,347) $ 138 $ (1,209)
Diluted earnings (loss) per
common share $ (0.15) $ (0.10)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
---------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
T-NETIX GATEWAY COMBINED
------- ------- ---------
<S> <C> <C> <C>
Revenue $9,778 $7,260 $17,038
Net earnings $ 71 $ 41 $ 112
Diluted earnings per
common share $ 0.01 $ 0.01
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
T-NETIX GATEWAY COMBINED
------- ------- ---------
<S> <C> <C> <C>
Revenue $ 17,484 $18,046 $ 35,530
Net earnings (loss) $ (2,424) $ 383 $ (2,041)
Diluted earnings (loss) per
common share $ (0.28) $ (0.16)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
T-NETIX GATEWAY COMBINED
------- ------- ---------
<S> <C> <C> <C>
Revenue $18,929 $15,092 $34,021
Net earnings $ 24 $ 508 $ 532
Diluted earnings per
common share $ -- $ 0.04
</TABLE>
In addition, as a part of the merger transaction, T-NETIX issued
375,341 shares of common stock to certain shareholders of Gateway in
exchange for terminating a Royalty Agreement. The Royalty Agreement
related to automated call processing technology and intellectual
property rights that were assigned to Gateway by the Royalty Owners in
exchange for royalty payments. The termination of the Royalty Owners'
interests resulted in the acquisition of an intangible asset. The asset
has been recorded at fair value, or $2,487,000. The fair value is based
on the value of T-NETIX common stock at February 10, 1999 (date of the
Merger Agreement), or $6.625, times the number of shares issued in
exchange for termination of the Royalty Owners' interests. The
intangible asset has an estimated useful life of 10 years.
7
<PAGE> 9
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Transactions between T-NETIX and Gateway prior to the merger consisted
of licensing revenue from each party. All such amounts have been
eliminated in the restated consolidated financial statements. Certain
reclassifications were made to the Gateway financial statements to
conform to T-NETIX's presentations.
In connection with the merger, the Company incurred pooling transaction
expenses of $827,000 and $1,017,000 for the three months and six months
ended June 30, 1999, respectively. Pooling transaction expenses
consisted primarily of fees for investment bankers, attorneys,
accountants, financial printing and other related charges.
(3) EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share for the three and six months ended
June 30, 1999 and 1998, are presented in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, Earnings Per
Share (SFAS 128). SFAS 128 replaced the presentation of primary and
fully diluted earnings per share (EPS), with a presentation of basic
EPS and diluted EPS. Under SFAS 128, basic EPS excludes dilution for
common stock equivalents and is computed by dividing income or loss
available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. For
the three and six months ended June 30, 1999 common stock equivalents
were not included in the diluted EPS calculation, as they would be
anti-dilutive. For the three and six months ended June 30, 1998,
diluted common and common equivalent shares outstanding includes
720,000 and 765,000, respectively of common share equivalents,
consisting of stock options, determined under the treasury stock
method.
(4) SUBSEQUENT EVENTS
In August 1999, the Company signed a Commitment Letter for a Senior
Secured Revolving Credit Facility ("Credit Facility") with a commercial
bank. The Credit Facility will provide for a maximum credit of
$40,000,000. The Credit Facility will be for a period of approximately
two years. The Credit Facility will be used for working capital and
refinancing existing debt. The Company anticipates closing on the line
by August 31, 1999. In connection with this transaction, the Company
extended its current Line of Credit agreement until August 31, 1999.
8
<PAGE> 10
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) SEGMENT INFORMATION
The Company operated in two business segments: inmate calling services
and SpeakEZ Voice Print(R). The Company's reportable segments are
specific business units that offer different products and services.
They are managed separately because each business requires different
technology and marketing strategies. Inmate calling services includes
the provisioning of specialized call processing and offender monitoring
services. Segment information for the three and six months ended June
30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
--------------------------------
(AMOUNTS IN THOUSANDS)
INMATE CALLING
SERVICES SPEAKEZ TOTAL
-------- ------- -----
<S> <C> <C> <C>
Revenue from external customers ........ $ 17,712 $ 34 $ 17,746
Operating income (loss) ................ (812) (574) (1,386)
Depreciation and amortization .......... 2,611 237 2,848
Interest expense ....................... 426 207 633
Segment earnings (loss) before taxes ... (1,238) (781) (2,019)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
--------------------------------
(AMOUNTS IN THOUSANDS)
INMATE CALLING
SERVICES SPEAKEZ TOTAL
-------- ------- -----
<S> <C> <C> <C>
Revenue from external customers ........ $16,938 $ 100 $17,038
Operating income (loss) ................ 1,607 (1,066) 541
Depreciation and amortization .......... 2,226 231 2,457
Interest expense ....................... 192 162 354
Segment earnings (loss) before taxes ... 1,415 (1,228) 187
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
-------------------------------
(AMOUNTS IN THOUSANDS)
INMATE CALLING
SERVICES SPEAKEZ TOTAL
-------- ------- -----
<S> <C> <C> <C>
Revenue from external customers ........ $ 35,471 $ 59 $ 35,530
Operating income (loss) ................ (953) (1,369) (2,322)
Depreciation and amortization .......... 5,173 497 5,670
Interest expense ....................... 703 414 1,117
Segment earnings (loss) before taxes ... (1,656) (1,783) (3,439)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
-------------------------------
(AMOUNTS IN THOUSANDS)
INMATE CALLING
SERVICES SPEAKEZ TOTAL
-------- ------- -----
<S> <C> <C> <C>
Revenue from external customers ........ $33,808 $ 213 $34,021
Operating income (loss) ................ 3,653 (2,097) 1,556
Depreciation and amortization .......... 4,489 466 4,955
Interest expense ....................... 443 327 770
Segment earnings (loss) before taxes ... 3,210 (2,424) 786
</TABLE>
9
<PAGE> 11
T-NETIX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
There was no intersegment revenue for the three and six months ended June 30,
1999 and 1998. Unallocated amounts to arrive at net earnings included income tax
expense (benefit) of $(810,000) and $75,000 for the three months ended June 30,
1999 and 1998, respectively and $(1,398,000) and $254,000 for the six months
ended June 30, 1999 and 1998, respectively. Consolidated total assets included
eliminations of approximately $15,877,000 and $14,507,000 as of June 30, 1999
and December 31, 1998, respectively. Eliminations consist of intercompany
receivables in the ICS Division and intercompany payables in the SpeakEZ
division related solely to the intercompany borrowing of the SpeakEZ Division.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For a comprehensive understanding of the Company's financial condition and
performance, this discussion should be considered within the context of the
consolidated financial statements and accompanying notes and other information
contained herein.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained in management's
discussion and analysis of financial condition and results of operations and
elsewhere in this Form 10-Q includes forward-looking statements. Important
factors that would cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to, the demand for the
Company's products and services and market acceptance risks which may affect the
potential technological obsolescence of existing systems, the renewal of
existing site specific customer contracts, the ability to retain the base of
current site specific customer contracts, the continued relationship with
existing customers, the successful integration of Gateway Technologies, Inc.
into T-NETIX's business, the ability to reduce expenditures in the SpeakEZ
Division and to successfully license voice verification and fraud prevention
technology, the effect of economic conditions, the effect of regulation,
including the Telecommunications Act of 1996, the effect of the Year 2000 Issue,
the impact of competitive products and pricing, the Company's continuing ability
to develop hardware and software products, commercialization and technological
difficulties, manufacturing capacity and product supply constraints or
difficulties, actual purchases by current and prospective customers under
existing and expected agreements, and the results of financing efforts, along
with the other risks detailed herein.
OVERVIEW
ACQUISITION OF GATEWAY TECHNOLOGIES, INC.
On June 14, 1999, the Company completed a merger with Dallas-based Gateway
Technologies, Inc. ("Gateway"), a privately held provider of inmate
telecommunications calling services, by exchanging 3,672,234 shares of its
common stock for all of the common stock of Gateway. Each share of Gateway was
exchanged for 5.0375 shares of T-NETIX common stock. In addition, outstanding
Gateway stock options were converted at the same exchange factor into options to
purchase approximately 379,000 shares of T-NETIX common stock.
The merger constituted a tax-free reorganization and has been accounted for as a
pooling of interests under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period information contained in this management's
discussion and analysis of financial condition and results of operations
presented has been restated to include the combined results of operations,
financial position and cash flows of Gateway as though it had always been a part
of T-NETIX.
In addition, as a part of the merger transaction, T-NETIX issued 375,341 shares
of common stock to certain shareholders of Gateway in exchange for terminating a
Royalty Agreement. The Royalty Agreement related to automated call processing
technology and intellectual property rights that were assigned to Gateway by the
Royalty Owners in exchange for royalty payments. The termination of the Royalty
Owners' interests resulted in the acquisition of an intangible asset. The asset
has been recorded at fair value, or $2,487,000. The fair value is based on the
value of T-NETIX common stock at February 10, 1999 (date of the Merger
Agreement), or $6.625, times the number of shares issued in
11
<PAGE> 13
exchange for termination of the Royalty Owners' interests. The intangible asset
has an estimated useful life of 10 years.
Gateway's business model includes a revenue mix that was different than the
T-NETIX model prior to the transaction. Based on Gateway's historical financial
statements, direct call provisioning accounted for approximately 70% of total
revenue. Telecommunications services accounted for 25% and equipment sales
accounted for 5% of total revenue respectively. T-NETIX prior to the merger had
revenues that were 90% telecommunications services and 10% direct call
provisioning. It did not have any sales of equipment. The following discussion
reflects this change in overall revenue mix and the related changes in costs and
operating expenses.
T-NETIX, with the acquisition of Gateway plans on developing marketing
strategies that will utilize the strengths of the combined company. This
strength is representative of each individual company's prior marketing
approaches. Gateway's sales strategy is designed to focus on the individual jail
or correctional institution level. This direct sales force allows T-NETIX the
opportunity to deliver correctional products, in addition to its inmate calling
system, at the individual jail level. While at the same time, the relationship
based strategy of T-NETIX plans to deliver a new set of products, including
billing services and bad debt management to its existing carrier customers.
INMATE CALLING SERVICES DIVISION
The Company derives revenue from three main sources, telecommunications
services, direct call provisioning and equipment sales. Each form of revenue
will have specific and varying operating costs associated with such revenue.
Selling, general and administrative expenses, along with research and
development and depreciation and amortization are common expenses regardless of
the revenue generated.
In telecommunications services, revenue is generated under long-term contracts,
which provide for transaction fees paid on a per-call basis. The per call charge
is primarily for the provisioning of specialized call processing services for
correctional facilities to its telecommunications carrier customer. Such
customers include AT&T, Ameritech, Bell Atlantic, US WEST, SBC Communications,
BellSouth, MCI WorldCom and GTE, and other telecommunications services. The
Company is paid a prescribed fee for each call completed and additional fees for
validating phone numbers dialed by inmates.
As a direct inmate call provider, the Company buys "wholesale" call services to
be re-sold as collect calls. The Company uses the services of third parties to
bill its calls. The Company 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 the Company are consistent with
the collect call rates charged by the Local Exchange Carrier in the same service
area and the predominant Interexchange Carrier. 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.
The Company experienced increases in total revenue from 1998 to 1999. However,
the Company continues to experience reductions in call volumes that affect
telecommunications services revenue and overall financial performance. The
Company had a net reduction in call volume in 1999 primarily as a result of
prisoner relocation programs and increased use of call control measures by
correctional institutions at existing sites. In addition, non-renewal of some
existing site-specific customer contracts in competitive bidding arrangements
contributed to the reduction. These factors were partially offset
12
<PAGE> 14
by increases associated with the addition of new call processing systems. The
Company will continue to market its services to additional call providers;
however, it expects growth in call processing volumes and corresponding
telecommunications services revenue will come predominantly from adding new
systems for existing customers. Systems that are currently scheduled for
installation are not expected to contribute to significant call volume increases
until the fourth fiscal quarter.
In December 1998, the Company completed its acquisition of Cell-Tel Monitoring,
Inc. ("Cell-Tel"). The Company includes all of the financial activity of this
new business within the Inmate Calling Services Division. The product acquired
in the acquisition is a prisoner/parolee electronic monitoring device utilizing
the Internet and using the Company's SpeakEZ Voice Print(R) technology. There
has been no significant revenue to date for the monitoring product. In addition,
the acquisition is expected to contribute to increases in the Inmate Calling
Services Division operating expenses, including selling, general and
administrative, research and development, and depreciation and amortization for
the current period and into the foreseeable future. In August 1999, the Company
will move all of the operations of this business unit to the corporate
headquarters in Colorado and will close an office in Florida. There can be no
assurance that the monitoring products and services will achieve the necessary
market acceptance or become widely adopted. There is no assurance that the
monitoring products and services will be commercially accepted or profitable in
the future.
SPEAKEZ DIVISION
In December 1998, the Company began an evaluation of the SpeakEZ Division and
determined the best course of action was to combine its research and development
operations previously located in New Jersey with its corporate operations in
Englewood, Colorado. The Company completed the reorganization of the SpeakEZ
operations in February 1999. The reorganization included a change in marketing
strategy from a direct customer sales strategy to a technology licensing
strategy. A direct customer sales strategy markets a specifically developed
software product to a specific, end user customer. The strategy is then to find
other specific customers who have similar operating systems and market this
product to them. In contrast, a technology licensing strategy focuses on a
larger scale customer who can integrate the SpeakEZ software product into its
existing product line. This larger customer, such as a computer manufacturer,
would then be responsible for the product integration and ultimate delivery to
the end user customer.
Even with the changes in marketing strategy, there can be no assurance that the
SpeakEZ products will achieve the necessary market acceptance or become widely
adopted. The market for speaker verification software has only recently begun to
develop. As is typical in the case of a new and rapidly evolving market, demand
and market acceptance for recently introduced products and services are subject
to a high level of uncertainty. Voice print revenue for the Company has been
minimal to date. There is no assurance that the SpeakEZ products will be
commercially accepted or profitable in the future.
13
<PAGE> 15
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 and 1998
The following table sets forth certain statement of operations data as
a percentage of total revenue for the three months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue:
Telecommunications services ......... 57% 64%
Direct call provisioning ............ 39 34
Equipment sales ..................... 4 1
Voice print ......................... -- 1
--- ---
Total revenue ................... 100 100
Expenses:
Operating costs and expenses ........ 62 58
Selling, general and administrative . 18 18
Pooling transaction expenses ........ 5 --
Research and development ............ 7 6
Depreciation and amortization ....... 16 15
--- ---
Operating income (loss) ........... (8) 3
Interest expense .................... (3) (2)
--- ---
Earnings (loss) before income taxes (11) 1
Income tax benefit .................. 4 --
--- ---
Net earnings (loss) ............... (7)% 1%
=== ===
</TABLE>
Total Revenue. Total revenue increased 4% to $17,746,000 for the three months
ended June 30, 1999, from $17,038,000 for the prior period. This increase
resulted primarily from increases in direct call provisioning revenue and
equipment sales offset by a decrease in telecommunications services revenue and
voice print revenue.
The 8% decrease in telecommunications services revenue to $10,065,000 for the
three months ended June 30, 1999, from $10,964,000 in the prior period, was due
primarily to a decrease in call volume on existing sites. The reduction in call
volumes is primarily as a result of prisoner relocation programs and increased
use of call control measures by correctional institutions at existing sites. In
addition, non-renewal of some existing site-specific customer contracts in
competitive bidding arrangements contributed to the reduction. These factors
were partially offset by increases associated with the addition of new call
processing systems.
Direct call provisioning revenue increased 21% to $7,021,000 for the three
months ended June 30, 1999 from $5,781,000 for the prior period. This increase
was due to the addition of sites in which the Company is provisioning the long
distance service. The addition of sites is primarily as a result of the Company
being successful in competitive bidding arrangements for contracts directly with
correctional institutions.
14
<PAGE> 16
Equipment sales increased 224% to $626,000 for the three months ended June 30,
1999 from $193,000 for the prior period. The increase was due primarily to sales
arrangements with a single customer. This customer purchases the Company's
equipment for installation in correctional institutions and then pays the
Company a monthly maintenance and support fee for the product. The amounts of
such sales are dependent upon the timing of installations with this customer and
the customer's success rate in its territory.
The Company also recognized SpeakEZ Voice Print(R) revenue in the amount of
$34,000 for the three months ended June 30, 1999 or a decrease of $66,000 from
the corresponding prior period. SpeakEZ Voice Print(R) revenue was derived
primarily from the provisioning of services and from the sale of software
licenses and software development kits. Future amounts of voice print revenue
are unpredictable and depend upon market acceptance, technological success, and
impact of new competition.
Operating costs and expenses. Total operating costs and expenses increased to
$10,945,000 for the three months ended June 30, 1999, from $9,953,000 for the
corresponding prior period, and increased as a percentage of total revenue to
62% for the three months ended June 30, 1999 from 58% for the corresponding
prior period. The increase was primarily due to an overall change in the revenue
mix to a greater amount of direct call provisioning revenue and expenses and a
lesser amount of telecommunications services revenue and expenses. Operating
costs and expenses of telecommunications services primarily consist of service
administration costs for correctional facilities, including salaries and related
personnel expenses, communication costs and inmate calling systems repair and
maintenance expense. Operating costs and expenses of telecommunications services
also include costs associated with call verification procedures, primarily
network expenses and database access charges. Operating costs and expenses
associated with direct call provisioning include the costs associated with
telephone line access, long distance charges, commissions paid to correctional
facilities, costs associated with uncollectible accounts and billing charges.
Cost of equipment sold included the purchase price of equipment held for sale.
Other equipment cost components were minimal. Voice print operating costs for
the three months ended June 30, 1999 were for royalty charges.
The following table sets forth the operating costs and expenses for
each type of revenue as a percentage of corresponding revenue for the three
months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Operating costs and expenses:
Telecommunications services..................... 42% 41%
Direct call provisioning........................ 92 93
Cost of equipment sold.......................... 34 51
Voice print ................................ 3 -
</TABLE>
Operating costs and expenses associated with providing telecommunications
services increased as a percentage of corresponding revenue to 42% for the three
months ended June 30, 1999, from 41% in the corresponding prior period. The
increase is primarily due to the reduction in telecommunications services
revenue and increases in personnel and telecommunications related costs. Direct
call provisioning costs decreased to 92% for the three months ended June 30,
1999 from 93% in the corresponding prior period. This percentage decrease is
primarily attributable to an increase in higher margin long distance related
direct call provisioning revenue. Cost of equipment sold decreased as a
15
<PAGE> 17
percentage of corresponding revenue to 34% for the three months ended June 30,
1999 from 51% in the prior period primarily due to changes in product mix. Voice
print expenses increased as a percentage of revenue primarily due to a change in
the revenue mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3,259,000 for the three months ended June
30, 1999, from $2,988,000 in the corresponding prior period, and remained
consistent as a percentage of total revenue at 18%. Selling, general and
administrative expenses associated with the ICS Division increased by $632,000
to $3,078,000 for the three months ended June 30, 1999 from $2,446,000 for the
corresponding prior period. The total increase was primarily due to increases in
salary and other expenses including travel, equipment maintenance, materials and
supplies and telecommunication cost of $397,000. This increase included
approximately $101,000 of expenses associated with the support for the
monitoring products. Another component to the increase in selling, general and
administrative expenses was professional services and consulting fees, which
increased by $187,000. Included in these professional services and consulting
fees is $85,000 associated with the upgrade of the Company's internal financial
accounting systems to be Year 2000 compliant. The Company anticipates an
increase in selling, general and administrative expenses due to increased
investment in expansion of its sales organization in order to leverage the new
market position established as a result of the merger with Gateway.
Selling, general and administrative expenses associated with the SpeakEZ Voice
Print(R) technology were $181,000 for the three months ended June 30, 1999 as
compared to $542,000 for the corresponding prior period. The decrease was due
primarily to a reduction in personnel and travel costs of $263,000 and a
decrease in legal and other professional expenses of $74,000. The Company
anticipates a continued reduction in the administrative costs associated with
SpeakEZ due to the consolidation of corporate facilities. The Company believes
it can implement these reductions without sacrificing potential revenue growth.
Pooling Transaction Expenses. These expenses were directly related to the merger
with Gateway and amounted to $827,000 for the three months ended June 30, 1999.
Pooling transaction expenses consisted primarily of fees for investment bankers,
attorneys, accountants, financial printing and other related charges.
Research and Development Expenses. Research and development expenses increased
to $1,253,000 for the three months ended June 30, 1999, from $1,099,000 in the
corresponding prior period. The research and development for the Inmate Calling
Services division increased to $1,062,000 for the three months ended June 30,
1999, from $706,000 in the corresponding prior period. The increase is primarily
due research and development expenses associated with the monitoring products of
$321,000. For the three months ended June 30, 1999, the Company capitalized
$243,000 of computer software development costs associated with the development
of a new inmate calling platform compared to $89,000 for the corresponding prior
period. The Company expects research and development expense for the Inmate
Calling Services Division to increase to support new products and due to the
increase in technical personnel.
The research and development expense associated with the SpeakEZ Voice Print(R)
technology was $191,000 for the three months ended June 30, 1999 as compared to
$393,000 for the corresponding prior period. The decrease was due to a reduction
in personnel and consolidation of the research facilities into the corporate
headquarters. The research and development expense associated with the SpeakEZ
Voice Print(R) technology is expected to remain consistent at present levels.
16
<PAGE> 18
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased to $2,848,000 for the three months ended June 30, 1999, from
$2,457,000 in the corresponding prior period. The increase was due primarily to
the amortization of capitalized software development costs and goodwill of
approximately $298,000. The depreciation and amortization for the SpeakEZ
Division was $237,000 for the three months ended June 30, 1999 as compared to
$231,000 for the corresponding prior period. The Company anticipates that
depreciation expense will increase, as new sites are added, however it will be
offset to the extent that equipment currently in use becomes fully depreciated.
Interest Expense. Interest expense increased to $633,000 for the three months
ended June 30, 1999, from $354,000 in the corresponding prior period. The
increase is attributable to an increase in the daily average balance of
indebtedness offset by a reduction in interest rates. The average debt balance
increased due to the increase in capital expenditures and the acquisition of
Cell-Tel.
Six Months Ended June 30, 1999 and 1998
The following table sets forth certain statement of operations data as
a percentage of total revenue for the six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue:
Telecommunications services ......... 56% 63%
Direct call provisioning ............ 38 34
Equipment sales ..................... 6 3
Voice print ......................... -- --
--- ---
Total revenue ................... 100 100
Expenses:
Operating costs and expenses ........ 62 58
Selling, general and administrative . 18 17
Pooling transaction expenses ........ 3 --
Research and development ............ 7 6
Depreciation and amortization ....... 16 15
--- ---
Operating income (loss) ........... (6) 4
Interest expense .................... (3) (2)
--- ---
Earnings (loss) before income taxes (9) 2
Income tax benefit (expense) ........ 4 (1)
--- ---
Net earnings (loss) ............... (5)% 1%
=== ===
</TABLE>
Total Revenue. Total revenue increased 4% to $35,530,000 for the six months
ended June 30, 1999, from $34,021,000 for the prior year. This increase resulted
primarily from increases in direct call provisioning revenue and equipment sales
offset by a decrease in telecommunications services revenue and voice print
revenue.
The 7% decrease in telecommunications services revenue to $19,879,000 for the
six months ended June 30, 1999, from $21,317,000 in the prior year, was due
primarily to a decrease in call volume on existing sites. The reduction in call
volumes is primarily as a result of prisoner relocation programs
17
<PAGE> 19
and increased use of call control measures by correctional institutions at
existing sites. In addition, non-renewal of some existing site-specific customer
contracts in competitive bidding arrangements contributed to the reduction.
These factors were partially offset by increases associated with the addition of
new call processing systems.
Direct call provisioning revenue increased 17% to $13,523,000 for the six months
ended June 30, 1999 from $11,543,000 for the prior period. This increase was due
to the addition of sites in which the Company is provisioning the long distance
service. The addition of sites is primarily as a result of the Company being
successful in competitive bidding arrangements for contracts directly with
correctional institutions.
Equipment sales increased 118% to $2,069,000 for the six months ended June 30,
1999 from $948,000 for the prior period. The increase was due primarily to sales
arrangements with a single customer. This customer purchases the Company's
equipment for installation in correctional institutions and then pays the
Company a monthly maintenance and support fee for the product. The amounts of
such sales are dependent upon the timing of installations with this customer and
the customer's success rate in its territory.
The Company also recognized SpeakEZ Voice Print(R) revenue in the amount of
$59,000 for the six months ended June 30, 1999 or a decrease of $154,000 from
the corresponding prior period. SpeakEZ Voice Print(R) revenue was derived
primarily from the provisioning of services and from the sale of software
licenses and software development kits. Future amounts of voice print revenue
are unpredictable and depend upon market acceptance, technological success, and
impact of new competition.
Operating costs and expenses. Total operating costs and expenses increased to
$21,933,000 for the six months ended June 30, 1999, from $19,818,000 for the
corresponding prior period, and increased as a percentage of total revenue to
62% for the six months ended June 30, 1999 from 58% for the corresponding prior
period. The increase was primarily due to an overall change in the revenue mix
to a greater amount of direct call provisioning revenue and expenses and a
lesser amount of telecommunications services revenue and expenses. Operating
costs and expenses of telecommunications services primarily consist of service
administration costs for correctional facilities, including salaries and related
personnel expenses, communication costs and inmate calling systems repair and
maintenance expense. Operating costs and expenses of telecommunications services
also include costs associated with call verification procedures, primarily
network expenses and database access charges. There were minimal costs directly
associated with telecommunications licensing revenue. Operating costs and
expenses associated with direct call provisioning include the costs associated
with telephone line access, long distance charges, commissions paid to
correctional facilities, costs associated with uncollectible accounts and
billing charges. Cost of equipment sold includes the purchase price of equipment
held for sale. Other equipment cost components were minimal. Voice print
operating costs for the six months ended June 30, 1999 were for royalty charges.
18
<PAGE> 20
The following table sets forth the operating costs and expenses for
each type of revenue as a percentage of corresponding revenue for the six months
ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Operating costs and expenses:
Telecommunications services.......... 43% 41%
Direct call provisioning............. 93 93
Cost of equipment sold............... 42 38
Voice print ..................... 7 4
</TABLE>
Operating costs and expenses associated with providing telecommunications
services increased as a percentage of corresponding revenue to 43% for the six
months ended June 30, 1999, from 41% in the corresponding prior period. The
increase is primarily due to the reduction in telecommunications services
revenue and increases in personnel and telecommunications related costs. Direct
call provisioning costs remained consistent at 93% for the six months ended June
30, 1999. Cost of equipment sold increased as a percentage of corresponding
revenue to 42% for the six months ended June 30, 1999 from 38% in the prior
period primarily due to changes in product mix. Voice print expenses increased
as a percentage of revenue primarily due to a change in the revenue mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $6,619,000 for the six months ended June
30, 1999, from $5,753,000 in the corresponding prior period, and increased as a
percentage of total revenue to 18% from 17% in the corresponding prior period.
Selling, general and administrative expenses associated with the Inmate Calling
Services Division increased by $1,463,000 to $6,155,000 for the six months ended
June 30, 1999 from $4,692,000 for the corresponding prior period. The total
increase was primarily due to increases in salary and other expenses including
travel, equipment maintenance, materials and supplies and telecommunication cost
of $812,000. This increase included approximately $260,000 of expenses
associated with the support for the monitoring products. Another component to
the increase in selling, general and administrative expenses was professional
services and consulting fees, which increased by $474,000. Included in these
professional services and consulting fees is $127,000 associated with the
upgrade of the Company's internal financial accounting systems to be Year 2000
compliant.
Selling, general and administrative expenses associated with the SpeakEZ Voice
Print(R) technology were $464,000 for the six months ended June 30, 1999 as
compared to $1,061,000 for the corresponding prior period. The decrease was due
primarily to a reduction in personnel and travel costs of $457,000 and a
decrease in legal and other professional expenses of $140,000.
Pooling Transaction Expenses. These expenses were directly related to the merger
with Gateway and amounted to $1,017,000 for the six months ended June 30, 1999.
Pooling transaction expenses consisted primarily of fees for investment bankers,
attorneys, accountants, financial printing and other related charges.
Research and Development Expenses. Research and development expenses increased
to $2,613,000 for the six months ended June 30, 1999, from $1,939,000 in the
corresponding prior period. The research and development for the Inmate Calling
Services division increased to $2,150,000 for the six months ended June 30,
1999, from $1,165,000 in the corresponding prior period. The increase is
primarily due to research and development expenses associated with the
monitoring products of $543,000. The
19
<PAGE> 21
remainder of the increase was primarily increases in personnel costs. For the
six months ended June 30, 1999, the Company capitalized $894,000 of computer
software development costs associated with the development of a new inmate
calling platform compared to $245,000 for the corresponding prior period. The
Company expects research and development expense for the ICS Division to
increase to support new products and due to the increase in technical personnel.
The research and development expense associated with the SpeakEZ Voice Print(R)
technology was $463,000 for the six months ended June 30, 1999 as compared to
$774,000 for the corresponding prior period. The decrease was due to a reduction
in personnel and consolidation of the research facilities into the corporate
headquarters.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased to $5,670,000 for the six months ended June 30, 1999, from $4,955,000
in the corresponding prior period. The increase was due primarily to the
amortization of capitalized software development costs and goodwill of
approximately $594,000. The depreciation and amortization for the SpeakEZ
Division was $497,000 for the six months ended June 30, 1999 as compared to
$466,000 for the corresponding prior period. The Company anticipates that
depreciation expense will increase, as new sites are added, however it will be
offset to the extent that equipment currently in use becomes fully depreciated.
Interest Expense. Interest expense increased to $1,117,000 for the six months
ended June 30, 1999, from $770,000 in the corresponding prior period. The
increase is attributable to an increase in the daily average balance of
indebtedness offset by a reduction in interest rates. The average debt balance
increased due to the increase in capital expenditures and the acquisition of
Cell-Tel.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied upon commercial borrowings and operating
cash flow to fund its operations and capital needs. Cash provided by operating
activities and financing activities supplied the Company with a majority of its
cash needs for the six months ended June 30, 1999. The net cash provided by
financing activities was $3,091,000 for the six months ended June 30, 1999
compared to $3,818,000 for the corresponding prior period. Cash provided by
operations was $6,357,000 for the six months ended June 30, 1999 as compared to
$695,000 for the corresponding prior period. The change in cash provided by
operations was primarily attributable to changes in net earnings, adjusted for
noncash expense items such as depreciation and amortization, provision for
losses on accounts receivable, and the change in the Company's deferred tax
provision. Comparably, these changes totaled $2,231,000 for the six months ended
June 30, 1999 and $5,741,000 for the corresponding prior period. The net change
in operating assets and liabilities was the other offsetting difference in the
change in cash provided by operations. The total change for the six months ended
June 30, 1999 consisted primarily of decreases in accounts receivable of
$1,905,000 and increases in accounts payable of $3,235,000. The total change for
the six months ended June 30, 1998 consisted primarily of an increase in
accounts receivable of $3,845,000 and decreases in accounts payable of $656,000.
Cash used in investing activities was $8,204,000 for the six months ended June
30, 1999. This included capital expenditures of $7,310,000 for the six months
ended June 30, 1999 as compared to $3,063,000 in the corresponding prior period.
The capital expenditures for the six months ended June 30, 1999 were mainly for
telecommunications equipment and office equipment. The telecommunications
equipment was related to new sites pending installation and for upgrade costs
for existing sites that have been renewed. Additional investing activities of
$894,000 for the six months ended June 30, 1999 was for capitalized software
development costs. Other investing activities of $1,362,000 for the six months
ended June 30, 1998 included expenditures for investments in preferred
20
<PAGE> 22
stock of Cell-Tel and capitalized software development costs. The acquisition of
Cell-Tel was completed as of December 31, 1998. The Company anticipates that
capital expenditures for telecommunications equipment will primarily follow the
installation of new systems and will increase as the current base of systems are
upgraded to provide increased functional capability and to be compliant with FCC
regulations regarding rate announcements.
The Company has been funding its operations by using cash provided by operations
and primarily from available borrowings under a line of credit. Due to its
continued capital requirements and the merger with Gateway, In August 1999, the
Company signed a Commitment Letter for a Senior Secured Revolving Credit
Facility ("Credit Facility") with a commercial bank. The Credit Facility will
provide for a maximum credit of $40,000,000. The Credit Facility will be for a
period of approximately two years. The Credit Facility will be used for working
capital and refinancing existing debt. The Company anticipates closing on the
line by August 31, 1999. In connection with this transaction, the Company
extended its current Line of Credit agreement until August 31, 1999. In the
event that the line of credit is not sufficient for the Company's capital
requirements it may have to sell additional equity securities to fund the
Company's operations and anticipated new inmate call processing systems and
upgrades of existing systems. There can be no assurance that such financing will
be available or, if available, will be obtainable on satisfactory terms.
THE YEAR 2000 ISSUE
The Problem. The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable year. As a
result, any of the Company's computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations of the Company and its suppliers and customers.
The Company's State of Readiness. The Company has instituted a Year 2000
Project. As part of the Company's Year 2000 Project, the Company hired
additional project management resources. The Company has completed its initial
evaluation of current computer systems, software, and embedded technologies. The
evaluation revealed that the Company's current proprietary inmate calling
platform deployed on behalf of the Company's customers, the internal network
hardware and operating system that provides the Company's Local Area Network
("LAN") and Wide Area Network ("WAN"), voice mail system, and accounting and
business process software are the major resources that do have Year 2000
compliance issues. These resources will need to be either replaced or upgraded.
Pursuant to the FCC Order 98-7, associated with the requirement for rate quotes,
the Company's inmate calling system must be upgraded by October 1999. As a
result of this upgrade, the inmate calling system will be Year 2000 compliant.
The Company's internal systems and or programs are predominantly "off-the-shelf"
products with Year 2000 compliant versions now available. The Company's internal
network, e-mail system and accounting and business process software are
scheduled for update utilizing vendor provided upgrades by the end of August
1999.
As part of the Company's Year 2000 Project, the Company has contacted its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue. The communications were completed in February 1999 and most
major vendors have verified their Year 2000 compliance. However, there can be no
guarantee that the systems of other companies on which the Company's business
relies will be converted timely, or that a failure to convert by another
company, or a conversion that is incompatible
21
<PAGE> 23
with the Company's systems would not have a material adverse effect on the
Company and its operations.
The Costs to Address the Company's Year 2000 Issues. Expenditures for the six
months ended June 30, 1999 for the Year 2000 Project amounted to approximately
$200,000 and is approximately $400,000 to date. Management expects that the
completion of its Year 2000 Project may result in additional expenditures of
approximately $200,000. The estimated replacement cost of certain network
equipment associated with the WAN portion of the internal network could be an
additional $500,000.
The Risks Associated with the Company's Year 2000 Issues. The Company's failure
to resolve Year 2000 Issues on or before December 31, 1999 could result in
system failures or miscalculations causing disruption in operations, including
among other things, a temporary inability to process transactions, send
invoices, send and/or receive e-mail and voice mail, or engage in normal
business activities. Additionally, failure of third parties upon whom the
Company's business relies to timely remediate their Year 2000 Issues could
result in disruptions in the Company's supply of network parts and materials,
late, missed, or unapplied payments, temporary disruptions in order processing
and other general problems related to the Company's daily operations. While the
Company believes its Year 2000 Project will adequately address the Company's
internal Year 2000 issues, the overall risks associated with the Year 2000 Issue
remain difficult to accurately describe and quantify, and there can be no
guarantee that the Year 2000 Issue will not have a material adverse effect on
the Company and its operations.
The Company's Contingency Plan. The Company has not, to date, implemented its
Year 2000 Contingency Plan. It is the Company's goal to have the major Year 2000
Issues resolved by October 1999. The Company would expect to implement a
contingency plan by the end of August 1999, in the event the Company's Year 2000
Project should fall behind schedule.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
22
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 14, 1999 the Company held a Special Meeting of
Shareholders and at that meeting approved the issuance of up
to 4,231,315 shares of common stock, $0.01 stated value, of
T-NETIX to shareholders of Gateway Technologies, Inc., in
accordance with the Agreement and Plan of Merger dated
February 10, 1999. The results of ballots for this proposal
were 4,786,033 FOR; 17,350 AGAINST; and 17,830 WITHHOLD. In
addition, the shareholders approved a proposal in connection
with the Merger to amend T-NETIX's 1993 Incentive Stock Option
Plan and T-NETIX Non-Qualified Stock Option Plan to increase
from 2,000,000 to 2,600,000 the number of shares which may be
optioned under the Plans. The results of ballots for this
proposal were 4,393,602 FOR; 398,820 AGAINST; and 28,791
WITHHOLD.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
27 Financial Data Schedule
B. The Company filed a Form 8-K dated June 14, 1999
reporting the following:
Item 3 on Form 8-K.
23
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
T-NETIX, Inc.
------------
(Registrant)
Date August 13, 1999 By: /s/ Alvyn A. Schopp
---------------
(Signature)
Alvyn A. Schopp, Chief Executive Officer
By: /s/ John Giannaula
---------------
(Signature)
John Giannaula, Vice President Finance
(Principal Accounting Officer)
24
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN T-NETIX, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,922
<SECURITIES> 0
<RECEIVABLES> 17,214
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127
0
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</TABLE>
