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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 0-25016
T-NETIX, INC.
(Exact name of registrant as Specified in Its Charter)
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COLORADO
(State of Other Jurisdiction of 84-1037352
Incorporation) (I.R.S. Employer Identification No.)
67 INVERNESS DRIVE EAST
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices) (Zip Code)
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Registrant's Telephone Number, Including Area Code: (303) 790-9111
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Securities Registered Pursuant to Section 12(b) of the Act: NONE.
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock
(TITLE OF CLASS)
Indicate by check mark whether the Registrant: (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 21, 2000, was approximately $66,187,000.
The number of shares outstanding of the Registrant's common stock as of
March 21, 2000, were 12,727,334.
The following document is incorporated herein by reference into the part of
the Form 10-K indicated: the Proxy Statement for the 2000 Annual Meeting of
Shareholders to be filed prior to April 30, 2000, pursuant to regulation 14A of
the General Rules and Regulations of the Commission is incorporated by reference
into Part III of this Form 10-K.
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FORM 10-K CROSS REFERENCE INDEX
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PART I
Item 1 Business.................................................... 3
Item 2 Properties.................................................. 18
Item 3 Legal Proceedings........................................... 18
Item 4 Submission of Matters to a Vote of Security-Holders......... 19
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 19
Item 6 Selected Financial Data..................................... 20
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Item 7A Quantitative and Qualitative Disclosure About Market Risk... 29
Item 8 Financial Statements and Supplementary Data................. 29
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................. 29
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 30
Item 11 Executive Compensation...................................... 30
Item 12 Security Ownership of Certain Beneficial Owners and
Management................................................ 30
Item 13 Certain Relationships and Related Transactions.............. 30
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 31
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
Our primary business is providing specialized call processing and other
services to the corrections industry directly or through our telecommunications
service provider customers. Most recently, we entered into the business of
providing inter-LATA Internet bandwidth to our customer's Internet subscribers.
In addition, we provide specialized speaker verification computer products. Our
principal office is located in Englewood, Colorado. We also have significant
operations in Carrollton, Texas. At December 31, 1999 we had 511 employees in
approximately 44 states.
We were incorporated on August 21, 1986 under the name of Tele-Matic
Corporation. In 1995 we changed our name to T-NETIX, Inc. In October 1995, we
acquired SpeakEZ, Inc. ("SpeakEZ"). SpeakEZ is a wholly-owned subsidiary and is
engaged in the sale, marketing, and development of speaker verification
biometric technology. On June 14, 1999, we completed a merger with Gateway
Technologies, Inc. ("Gateway"), a privately held provider of inmate call
processing services. Gateway became a wholly-owned subsidiary of T-NETIX.
In December 1998, we adopted a fiscal year-end reporting period of December
31. This change from our July 31 year-end was effective on December 31, 1998.
The merger with Gateway was accounted for as a pooling-of-interests and as a
result, our financial statements have been restated as indicated in the notes
which accompany the consolidated financial statements. See Notes 1 and 3 of
"Notes to Consolidated Financial Statements."
This report contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," and similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements which apply only as of the date of this report.
Actual results could differ materially from those anticipated in the
forward-looking statements for many reasons, including risks faced by us and
described in "Risk Factors" and elsewhere in this report. These forward looking
statements include those described in this Form 10-K and, from time-to-time, in
our other filings with the Securities and Exchange Commission.
FINANCIAL INFORMATION ABOUT SEGMENTS
Information relating to our revenue, operating profit or loss, and total
assets by segment, is set forth in Note 7 of "Notes to Consolidated Financial
Statements."
NARRATIVE DESCRIPTION OF BUSINESS
T-NETIX has three operating segments; the Corrections Division, the
Internet Services Division, and the SpeakEZ Division. Our mission is primarily
to be an integrated solutions provider to the corrections industry. The addition
of our new Internet Services Division allows us expand into the Internet market
by using our telecommunications expertise and bandwidth purchasing power. In
addition, we believe that our speaker verification technology, SpeakEZ Voice
Print(R), can become an industry leading technological solution for the emerging
speaker verification market.
Corrections Division
MARKET DESCRIPTION
We are primarily a provider of specialized call processing and other
services to the corrections industry. These services are delivered through
direct contracts with correctional facilities and through well-established
relationships with large telecommunications companies or telecommunication
service providers. Our primary customers for these services are AT&T, Bell
Atlantic, US WEST, SBC Communications, Inc. (including Ameritech), GTE, Sprint,
and Bell South. Through a series of acquisitions, we have expanded our presence
in
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the corrections industry. The addition of products for parolee monitoring and
jail management has positioned us as a leader in providing technological
services to the corrections industry.
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 of the
corrections industry to other telecommunications service providers and us.
Specialized call processing within the corrections industry requires the
development of advanced capabilities such as fraud control of outgoing calls and
flexible billing systems.
According to the U.S. Bureau of Justice Statistics as of December 1998:
- 5.9 million adults were under some form of correctional supervision
- approximately 4.1 million adults were under parole or probation sanction
- there were approximately 1.8 million inmates in state and federal and
local prisons
- from 1990 to 1998 the number of inmates increased by an average of 6.0
percent annually
- there are approximately 4,500 correctional facilities in the U.S.
The inmate calling market presents unique and substantial challenges to the
telecommunications service provider. Correctional authorities generally favor
telecommunications service providers who can manage the inmate phone systems
themselves, maintain consistent service and easily process new inmates into the
systems. Correctional authorities 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
telecommunications service provider must be able to customize the call control
features by facility, cellblock, 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. Inmates 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,
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 authorities generally select telecommunications service
providers on the basis of services and features provided and on the level of
commissions paid to the facilities. Competition is intense among the
telecommunications service providers and this has led to commission payments to
correctional facilities at very high levels. In addition, to win new contracts
and renew existing contracts, telecommunications service providers must
differentiate their services from those of the competition. 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. Correctional authorities need these additional services due to the
increasing administrative requirements placed on them. Correctional authorities
recognize the benefits in outsourcing to telecommunications service providers
that provide leading edge technology that can assist their goal of improving
efficiency in operations.
PRINCIPAL PRODUCTS AND SERVICES
The primary focus in the design of our products and services is to provide
software-based solutions to "niche" problems faced in the corrections industry.
We believe that this approach results in correctional authorities and our
telecommunication service providers' customers finding our products and services
economically advantageous.
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Inmate Calling System
Our inmate calling system has provided us with telecommunications services
revenue and direct call provisioning revenue in the following percentages of our
total revenue:
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Year Ended December 31, 1999................................ 91%
Year Ended December 31, 1998................................ 96%
Year Ended December 31, 1997................................ 94%
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After our merger with Gateway, we determined that the Gateway ComBridge
Platform ("ComBridge") would be our inmate calling system for both new customers
and upgrades for existing customers. However, we still support a large installed
base of pre-existing technology. We use our inmate calling systems (ComBridge
and pre-existing systems) to manage the inmate calling process.
The inmate calling 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 ("PINs"). 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 our ComBridge system can be configured to concentrate multiple
inmate phones to one outbound telephone line. This line concentration allows for
cost savings in the provisioning of the number of inmate telephone lines.
Our systems contain many patented technologies, one of which is our
patented three-way call detection/ prevention technology, Strike-Three!(TM),
that prevents inmates from bypassing control features through three-way calling.
We believe that our intellectual property portfolio, with a total of 6 patents
and licenses to an additional 6 patents, gives our customers leading edge
technology that is recognized as technically unique within the corrections
industry.
The new ComBridge platform has a QNX operating system with a Windows
95(R)/NT(R) interface for client use. Using high-density digital/analog network
interfaces and sharing hardware resources allows for many channels of call
control to be housed in a single box. We believe that these expanded
capabilities are especially critical in the installation of larger systems.
We record all inmate calling system revenue in our financial statements
under the caption of either "Telecommunications services" revenue or "Direct
Call Provisioning" revenue depending upon the contractual relationship at the
site and type of customer.
Digital Recording System
The DRS-500 Digital Recording System or the "DRS" is a fully digital
recording system designed specifically for use in conjunction with one or more
of our inmate calling systems. The DRS allows for the recording of specific
dialed numbers, lines, or PINs. When the DRS detects activity based on the
selected criteria, conversations will be automatically recorded. As an
alternative mode of operation, the system will simultaneously record all inmate
conversations. In addition, telephone numbers can be defined as "Record
Restricted" to prevent recording of privileged communication. Recorded
conversations may be played back on demand using the integrated playback module.
The audio may be directed to the integrated loudspeaker or headphones. This
output may also be used to record the conversations to a standard analog tape
recorder.
A local area network connects the DRS to our inmate calling system(s). The
DRS is fully automatic with each call being digitally recorded onto high-speed,
high-capacity disk drives. When all recordings on the first drive are completed,
the DRS archives the recordings automatically onto compact disks housed in a CD
Jukebox. This dual, active drive process also provides for immediate redundancy
should one of the active drives fail. The CD Jukebox provides for storage of up
to 1,800 hours of recorded conversation.
Once a recording has been made, a designated party can access one or more
recordings by completing a search screen on the monitor to retrieve all
recordings matching the specified parameters. Once the search
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form has been completed, the system user is presented with a list of matching
recordings that can be reviewed. In addition, the DRS enables correctional
authorities to listen to a conversation in progress on a near real-time basis
and have the conversation recorded at the same time. When live monitoring is
selected from the main menu, the selected recording screen will display all
conversations currently in progress.
We record all DRS sales in our financial statements under the caption of
"Equipment sales and other" revenue.
Trust Fund and Commissary
Our Corrections Division's Trust Fund/ Commissary system or "TFC" manages
inmate trust fund and commissary accounts through an integrated automated
accounting and operations system. TFC is a software system that automates all
inmate accounting and product inventory while also managing commissary
operations with comprehensive retail and banking capabilities. TFC uses bar code
technology and Oracle(R)-based software. TFC is a Windows(R)-based environment
that allows for system navigation to access logically organized screens.
Security features control system access and archive and purge routines allow for
user defined system maintenance.
TFC manages all inmate account activity, including initial deposits,
regular accounting activity such as fund disbursements, commissary charges and
the ultimate disbursement of the funds upon release, all on a real time basis.
TFC integrates the inmate account with the cash management and sales accounting
data of the correctional facility commissary. This integration allows for
enforcement of inmate restrictions and facility imposed mandates.
TFC also allows for the efficient operation of the correctional facility
commissary with its inventory tracking and management system. Each commissary
transaction-affecting inventory is recorded real-time and will update the
inventory on-hand balance upon completion. The inventory reporting system
provides information on items received, suggested pricing, adjustments and
transfers, sales histories, supplies on hand and vendors.
TFC is also used as the accounting engine for our pre-paid debit inmate
calling systems. We installed one of these systems at a state department of
corrections in this past year. We are currently integrating this application
with the ComBridge system and expanding it to include features common to most
debit calling platforms. We expect to offer these additional debit-based
services during fiscal 2000.
We record all TFC sales in our financial statements under the caption of
"Telecommunications services" revenue.
JAIL MANAGEMENT SYSTEM
Lock&Track(TM) is our jail and prison information management system. It
assists correctional authorities in performing most major data tasks necessary
to run a correctional facility, such as:
- inmate booking and classification
- visitation documentation
- food services management
- inmate work and educational programs
- inmate medical records
- commissary ordering and inventory
- facilities maintenance tracking
- officer training in scheduling and system maintenance
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Lock&Track(TM) is easy to setup and operate. It includes the following:
- functional desktop organization for easy customization to job functions
- screens and report customization
- keyboard shortcuts for data entry
- integrated tools, such as photo, bar-codes, and document imaging systems
- flexible record searching
Lock&Track(TM) uses an Internet-based client/server application. We can
then administer a secure and maintenance-free system. The server is powered
using fault-tolerant Compaq DEC Alpha hardware, which runs a large percentage of
the Internet traffic. The operating system is Open VMS and the database is
Oracle(R)/Rdb. The user can choose a traditional "green screen" interface or a
graphical user interface, which is based on a more sophisticated client
technology called RAPT.
Lock&Track(TM) has been deployed in a customer environment for more than
ten years. Using an applications service provider model, Lock&Track(TM) is
available to numerous correctional authorities that may have common reporting
requirements. We believe this centralized service delivery is a competitive
advantage for products such as Lock&Track(TM). This service-bureau type
deployment uses an Internet-based access system and provides our customers with
a lower initial cost of ownership while providing us recurring revenues.
We record all Lock&Track(TM) revenue in our financial statements under the
caption of either "Equipment sales and other" or "Telecommunications Services"
revenue depending upon the terms of the contracts.
Contain(R)
Contain(R) is a service offering which uses voice verification and the
Internet for cost-effective offender caseload management by community
corrections, probation and parole agencies. A combination of advanced computer
telephony, automated speech and Internet technologies, Contain(R) facilitates
automated, programmable telephone contact with the subject offender during which
SpeakEZ Voice Print(R) speaker verification technology is utilized to verify the
subject's identity.
Contain(R) is a Windows(R)-based product that uses the Internet as the
transport mechanism between the officer and the Contain(R) database, allowing
for access to the system from a remote location via an Internet-ready portable
desktop PC. The Contain(R) system allows the officer to verify that a subject is
present at one of a number of approved locations. The verification is performed
via a comparison of a stored voice print to the utterance obtained in response
to the system request.
The system provides for:
- flexible verification frequency and call parameters
- voice verification result output, including notification mechanisms
- detailed date and time stamped remarks
- voice messaging
- immediate access to caseloads
- call summary and call detail reporting
- achieve and retrieve history
- analytical reporting
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We record all Contain(R) sales in our financial statements under the
caption of "Telecommunications services" revenue, and such revenue has not been
significant to date.
PIN-LOCK(R)
PIN-LOCK(R) is a method of biometric authentication of an inmate's identity
using SpeakEZ Voice Print(R) technology. PIN-LOCK(R) makes it practical for all
correctional facilities to assign PIN's to inmates. Currently, in high turnover
institutions, like large county jails, the cost and effort required to assign
numbers to all inmates is too great. However, PIN-LOCK(R) is not labor
intensive. When an inmate is booked into a facility using PIN-LOCK(R), he will
be asked to say his name into a preprogrammed phone, four to five times. These
repeated utterances of his name enroll the inmate into the system, and become
the basis for the inmate's personal voice verification file. This automated file
replaces the traditional PINs that require a large amount of data maintenance.
This means of identification may be used in different parts of the prison to
allow access to different areas, and secured from others.
When an inmate places a call, he first keys in his PIN, and then the system
will prompt him for his name. The inmate may be asked to repeat his name, if the
register of his voice does not appear the same. Once approved, which takes less
than a second, the inmate can place his call. We believe that PIN-LOCK(R) is a
significant enhancement to the security features of our inmate calling system.
We record all PIN-LOCK(R) sales in our financial statements under the
caption of "Telecommunications services" revenue and such revenue has not been
significant to date.
Automated Billing Inquiry Service and Other Billing Services
Telecommunications fraud throughout the United States is estimated at over
$4 billion. This fraud has focused telecommunication service providers on the
bad debt expense associated with calls processed by their systems. The
Corrections Division has developed a fraud service that identifies and controls
higher risk users of inmate telecommunications services. Our Automated Billing
Inquiry Service or "ABIS" combines our inmate calling system with a credit
inquiry program. ABIS provides for daily, weekly, and monthly call limit
reporting. It plays messages for the calling and called party advising them of
their balances and instructing them on how to manage their credit problems. We
utilize ABIS in with our Direct contracts and we are marketing these same fraud
control services to our telecommunication service provider customers. Because of
changes in the regulatory environment, our customers are increasingly affected
by the problem of bad debt expense allocation and are looking for a solution to
it that controls the fraud and bad debt while encouraging the increased use of
inmate calling services. We believe ABIS is such a service. We use a trained
staff of customer service representatives in our call center in Carrollton,
Texas to verify payment history, determine appropriate credit levels and monitor
outstanding debt balances. The integration with our inmate calling system allows
us to take corrective action, which may include blocking all future calls. We
anticipate using our nationwide frame-relay network as a part of our service
delivery infrastructure that will help us provide these services on a real-time
basis, cost-effectively.
We record all ABIS sales in our financial statements under the caption of
"Telecommunications services" revenue and such revenue has not been significant
to date.
Dial-tone Provisioning Services
One of the largest technical requirements of our telecommunications service
provider customers in the inmate calling industry is the provisioning of local
dial tone. The telephone operations divisions of the telecommunications service
provider most often provide this dial tone. However, we are aware of
circumstances where that is not the most economical source of dial tone. As a
nation-wide certified telecommunications carrier, we are uniquely positioned to
be able to offer dial tone to our carrier customers as a service bundled with
the other components of our inmate calling products and services.
We have not sold any dial-tone provisioning services to date, but intend to
market it in the future.
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Service Delivery and Support Infrastructure
NATIONAL SERVICE CENTER
We operate a trouble-shooting help desk that is available 24 hours a day,
seven days a week. Located at our headquarters in Englewood, Colorado, the
National Service Center ("NSC") provides a single point of contact for all
customers for remote diagnostic systems maintenance. Once a call is placed, the
NSC Customer Service Analysts perform an initial problem diagnosis. In addition
to remote repair capabilities, we also have a network of trained and experienced
field support personnel who can perform on-site repairs and maintenance. This
field consists of over 330 employees covering 44 states. We deploy our service
administrators depending on several criteria, including the contract terms, the
size of the facility, the feature set the facility requires (PIN versus
non-PIN), the geographic proximity of our current service administrator force
and the correctional facility contract requirements.
Also located at our headquarters is the Network Operations Center ("NOC").
Our NOC provides remote system management and real-time system diagnostics
across our wide area frame relay network. This system monitors the wide area
network that connects many of our installed systems and provides for centralized
collection of call and reporting data and real-time diagnostic information on
the status of each major system component. We also use the network to process
the on-line, real-time called number validation, process its call records and
transmit administrative data between each location and headquarters. Call data
are then formatted and provided to customers for their billing process. As part
of the system calling process, we perform real-time billed number validation by
querying an external database over the network to an on-line database. The NOC
provides 24-hour a day, seven days a week system support.
WEB-BASED SERVICE DELIVERY
The Corrections Division's Lock&Track(TM) and Contain(R) systems can be
accessed from the Internet by correctional authorities. This access gives
correctional authorities comprehensive management systems without the capital
investment or on-going administration costs which would otherwise force them to
use less feature-rich products or manage without and run less efficiently. We
are positioned to offer the appropriate users of corrections related data the
information they need to perform their responsibilities efficiently and
effectively. For example, a corrections administrator is interested in
incarceration information, a parole officer in parole information, but a judge
may be interested in the entire history of the subject under scrutiny. We
believe we are the only company providing this information to the customers who
need it with no investment on the part of the customer beyond an internet
capable PC and connectivity to us. This connectivity is already available in
approximately 650 institutions across the country.
The Corrections Division infrastructure can support Internet access, web
site hosting, educational content for officers and inmates alike, law research
facilities, and trust fund/commissary operations. In fiscal 2000 we intend to
offer a complete suite of web-based corrections applications. Through this
offering, we believe the Corrections Division can become a leading provider of
web-based software and services that control information provided to all levels
of the criminal justice system.
PRICING
Transaction-based Pricing
Our Corrections Division's transaction-based pricing for our inmate calling
system provides a recurring, usage-driven revenue stream. In a typical
arrangement, we operate under long-term, site-specific contracts generally three
to five years, with both a long-distance carrier and a local call provider. The
customer pays transaction fees or a percentage of revenue for each call
processed by us. The type of service performed and the total volume of calls
processed for the customer during the monthly billing period determine the
transaction fees. We bill these customers for transaction fees associated with
calls processed during the previous month on net 30-day terms. We separately
bill the customer for other network services required by the customer, such as
on-line database queries performed as part of the collect call validation
process, and for certain types of network access lines. We bill our Contain(R)
products and services in a similar manner by using a charge per verification fee
structure.
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Direct Call Provisioning
Our Corrections Division also provides our inmate calling services directly
as a certified telecommunications provider to correctional authorities or
"Direct Customers". In a typical arrangement, we operate under long-term
site-specific contracts, generally three to five years. We buy "wholesale" call
services and re-sell such services as collect calls to the inmates' called
parties. We use the services of third parties to bill our calls on the called
party's local exchange carrier bill. We pay commissions on the gross billed
revenue to the correctional facilities. The higher prices associated with
billing the collect calls results in direct call provisioning services providing
substantially higher revenue than transaction based pricing. However, because of
commissions and other operating costs, including bad debt write-offs, the
percentage gross margins from this line of business are lower than our
transaction-based arrangements.
Equipment Sales and Software Licensing
We also sell our inmate calling system on a per unit price basis with
software and maintenance provided and priced separately. This arrangement is
primarily with only one customer. Our DRS product is also sold on a per unit
basis or using a monthly lease payment.
We license our Lock&Track(TM) product through various contractual
relationships including system sales of hardware and software as well as
transactional based fees for monthly services. The contractual arrangements
often include component pricing for hardware, software, installation and design
services, and post contract customer support.
CUSTOMERS
Service Providers
Our Corrections Division provides our corrections products to specific
correctional institutions and to telecommunications service providers such as
AT&T, Bell Atlantic, SBC Communications, Inc. (including Ameritech), U S West,
BellSouth, Sprint, GTE and other call providers. For the year ended December 31,
1999, revenue from the following customers accounted for the noted percentages
of our total revenue:
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AT&T........................................................ 13%
Bell Atlantic............................................... 10%
SBC Communications.......................................... 10%
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No other customer accounted for more than 10% of our total revenue in the
same period. Our strategic relationships with our telecommunications service
provider customers have resulted in several important benefits to us:
- our Corrections Division services over 1,100 correctional facilities
containing approximately 37% of the current U.S. inmate population
- we are currently servicing all or a portion of 23 state departments of
corrections as of December 31, 1999
- we service state, federal, and county facilities in 46 states including
34 of the 50 largest counties based on inmate population
- we believe we have the largest single sales force in the correction
services industry
Direct Customers
Our Corrections Division also has generated significant revenue from its
Direct Customers. For the year ended December 31, 1999, 38% of our total revenue
was generated from agreements with Direct Customers to be the exclusive provider
of telecommunications services to inmates within the facility. No single
customer accounted for more than 10% of our direct call provisioning revenue. We
are discussing with our telecommunications service provider customers the
conversion of several Direct Customers to a transaction fee based
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model. We believe that these conversions, if implemented, would decrease our
overall revenue, however, the converted sites would be more profitable.
Lock&Track(TM) Customers
Lock&Track(TM) is currently being used by the Oregon Department of
Corrections in conjunction with numerous counties in Oregon, and by the City of
Philadelphia, and most recently by Suffolk County, Massachusetts (Boston).
Contain(R) Customers
The Contain(R) product is used by approximately 15 community correction
probation and parole agencies, including a program for the U.S. Probation and
Pre-Trial Services Division of the federal government. We intend to market
Contain(R) in the near future through distributor relationships which we believe
should expand the acceptance of the product with less direct marketing by us.
COMPETITION
The corrections industry, which includes the inmate calling market, is and
can be expected to remain highly competitive. We compete directly with other
suppliers of inmate call processing systems and other corrections related
products that sell their products to our customers. These competitors include
Evercom Inc., Global Tel*Link (a wholly owned subsidiary of Schlumberger
Technologies, Inc.) and Science Dynamics Corporation. We also compete with some
of these same companies that are teamed with various telecommunications service
providers, including our current customers. The competition for our other
products and services such as jail management and parolees systems includes
companies such as BI, Inc., TRW, Inc., Science Applications International
Corporation, Voicetrack Corporation, Ameritech Corporation, and FileNET
Corporation.
RESEARCH AND PRODUCT DEVELOPMENT
We believe that the timely development of new products and enhancements to
existing products is essential to maintain our competitive position. We conduct
research and development to enhance existing products and to build new products,
both complementary to the existing product line and in new functional areas. Our
research and product development expenditures for the Corrections Division were
approximately as follows:
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Year Ended December 31, 1999............................ $4.2 million
Year Ended December 31, 1998............................ $2.4 million
Year Ended December 31, 1997............................ $2.1 million
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Internet Services Division
MARKET DESCRIPTION
The Internet has experienced dramatic growth, both in terms of the number
of users and as a means of conducting business transactions, and is expected to
continue to grow rapidly. International Data Corporation estimates that the
number of Internet users will increase from 196 million in 1999 to 502 million
in 2003. The Internet has created a public infrastructure that enables customers
to market and sell their products and services through e-business applications.
International Data Corporation estimates that the volume of commerce over the
Internet will increase from approximately $111 billion in 1999 to approximately
$1.3 trillion in 2003.
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PRODUCTS AND SERVICES
Our new Internet Services Division was established as a separate
subsidiary, T-NETIX Internet Services, Inc. in 1999. The Internet Services
Division's primary function is to be a Global Service Provider (GSP) for our
telecommunications customers. As a GSP to the Internet subscribers of US WEST
ENTERPRISE America, Inc. (US WEST), a subsidiary of US WEST, Inc., we provide
the inter-LATA Internet transport to US WEST's Internet subscribers through the
assignment of contracts with Internet service providers, or ISPs, such as UUNET
Technologies, Inc., Sprint Communications Company L. P., GTE Internetworking,
Cable and Wireless and others. In conjunction with this service, we provide US
WEST ordering and provisioning services, network operation, design, and capacity
planning services. This GSP contract is for a term of the later of 16 months or
until US WEST is allowed to provide these inter-LATA services directly to its
subscribers by certain state regulatory entities. We receive monthly revenue
from US WEST for retail, dial-up, ISDN, and dedicated service subscribers, and a
monthly management fee for other services provided to US WEST.
Our Internet Services Division positions us to offer similar services to
other ISPs that may have similar regulatory requirements. In addition, the
purchasing power afforded by our contracts with major backbone Internet access
providers is a valuable commodity that we hope to use in future operations or
resell to smaller ISPs. We plan to resell Internet access to various ISPs whose
current capacity do not allow them individually to negotiate rates as economical
as the Internet Services Division can provide. The Internet Services Division
has currently under contract over 2,500 megabytes of Internet network transport
capabilities. Our intent is to provide access design and provisioning directly
to the customer premises. We believe this avoids expensive infrastructure
implementations. Our planned services are designed to add network capacity and
generate economies of scale to be realized as capacity increases. This allows us
to keep operational costs low and prices competitive.
We believe the Internet Services Division is positioned to integrate
Internet access capabilities with Corrections Division's existing
infrastructure, including our frame relay network. Our Corrections Division's
web-based products, Lock&Track(TM) and Contain(R) are products that can benefit
from our expansion of the capabilities in the Internet Services Division.
Speaker Verification Division
MARKET DESCRIPTION
Technologies surrounding the use of speech as a data automation tool are
common to a variety of industries. Speech recognition has become a common means
of processing information in a significant number of service markets. The use of
biometric technologies (those which use unique human characteristics such as
fingerprints, hand, facial or eye images and voice) for personal identification
are becoming more integrated with these information and data processing systems.
SpeakEZ Voice Print(R) technology is proprietary software which compares
the speech pattern of a current speaker with a stored digital voice print of the
authorized person to confirm or reject claimed identity. A digital voice print
for a user is created when a user enrolls in the speaker verification system.
Enrollment consists of having the user speak a specific password several times.
The user can select any phrase in any language for a password. This is one of
the unique aspects about the SpeakEZ Voice Print(R) technology compared to most
speaker verification technologies that require the user enroll with digits or a
specific phrase that is not selected by the user. When authenticating with the
speaker verification system, the user speaks the same password used during
enrollment and the system will then compute a decision regarding authenticity of
the user. The SpeakEZ Voice Print(R) technology uses a patented pattern
recognition algorithm called the "Neural Tree Network" or "NTN". During
enrollment, the NTN processes the input speech data from the enrolling user
along with speech data from other users. The NTN learns which parts of the
enrolling user's password are unique for that user and which parts are easily
confused with data from other people. The NTN then uses this information during
the verification phase to determine whether or not the speech came from the
authentic user. The NTN is a unique component of the SpeakEZ Voice Print(R)
technology.
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SpeakEZ Voice Print(R) has several competitive advantages: it does not
require additional and expensive special purpose hardware to support the
technology (SpeakEZ Voice Print(R) uses in-place microphones and sound cards)
and it is not intrusive to the user. Because biometric technologies measure
something that a person "is" rather than a piece of information or a piece of
equipment a person "has", they lend themselves well to solving the many
information needs associated with data and other information security.
Specifically, speaker verification offers the optimal combination of accuracy,
user-friendliness, (it is non-intrusive; natural), and value.
PRODUCTS AND SERVICES
SpeakEZ Voice Print(R) products are designed to be technically superior and
cost effective forms of personal security. The marketing strategy centers around
a licensing strategy that focuses on larger scale customers whom can integrate
the SpeakEZ software product into its existing product line. This larger
customer, such as a computer manufacturer or software application designer,
would then be responsible for the product integration and ultimate delivery to
the end user customer. The SpeakEZ Division's products do not currently, nor
have they in the past, generated significant revenue. The products are primarily
associated with computer and network security and are as follows:
- VoicEntry I(sm) Screen Saver and VoicEntry II(sm) Secure Logon are
alternatives to typed password protection for individual and shared
computer users and are available for Windows95(R) and Windows 98(R)
systems.
- VeriNetWEB(sm) is a user verification product designed for Internet-based
applications including electronic commerce and wireless electronic
commerce applications.
PRICING
Pricing for the SpeakEZ Voice Print(R) technology is primarily based on the
licensing of software to a large OEM or system integrator, or providing the
system through a royalty agreement.
CUSTOMERS
The SpeakEZ Division markets its SpeakEZ Voice Print(R) technology through
various marketing channels. These include leveraging off current strategic
relationships with OEMs using distribution and sales agreements to deploy the
technology to a variety of industries. We also have a long-standing installation
with Intrust Bank, N.A. The SpeakEZ Division also has a distributor relationship
with Sentry Systems, Inc., a developer of a turnkey Internet security systems
for E-Commerce transactions.
COMPETITION
The market for speaker verification technology is just emerging. Our
SpeakEZ Division competes with speaker verification providers and with
established companies using technology such as speech recognition, interactive
voice response and automated call distribution. These competitors include Lucent
Technologies, ITT Industries, Phillips Electronics, Lernout and Hauspie Speech
Products, Nuance Communications, and Veritel Corporation. We also face
competition from a variety of biometric technology providers with products such
as facial recognition, iris scan, retina scan and fingerprint technology.
Additionally, the more traditional forms of verification, such as PINs and token
technology are also a form of competition that is a barrier to the increased use
of products like our SpeakEZ Voice Print(R) technology. We believe that our
ability to compete for verification processing, depends on the performance of
our technology, and the acceptance of voice related security products in
general.
RESEARCH AND PRODUCT DEVELOPMENT
Research and development in the SpeakEZ Division is primarily focused upon
improving the efficiency of the core software engine. Currently not as much time
is spent on product integration as there was in past years. The new licensing
strategy is designed to have other parties incur such integration costs. We
maintain a staff of
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<PAGE> 14
research professionals that we believe is necessary to maintain the software at
a highly productive and competitive position. Our research and product
development expenditures for the SpeakEZ Division were approximately as follows:
<TABLE>
<S> <C>
Year Ended December 31, 1999............................ $0.9 million
Year Ended December 31, 1998............................ $1.5 million
Year Ended December 31, 1997............................ $1.5 million
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
All Segments
PATENTS AND OTHER PROPRIETARY RIGHTS
We rely on a combination of patents, copyrights, and trade secrets to
establish and protect our intellectual proprietary rights. We have been issued 7
patents relating to the architecture of our products. In addition, we have filed
7 U.S. patent applications relating to our products. We consider any patents
issued to be a significant factor in enabling us to compete in the inmate
calling industry. We believe our success is primarily dependent on the
knowledge, ability and experience of our personnel, and our ongoing ability to
develop viable products and services to meet our customers' needs. We have
sought and received federal and state trademark protection for certain of our
trademarks, including Strike Three!(TM) and T-NET(TM).
As it relates to our SpeakEZ Voice Print(R) technology, Rutgers University
had developed technology relating to speaker and speech recognition. Such
technology centered around the verification of a speaker by comparison of spoken
phrases to speech patterns stored on a computer. Rutgers entered into a license
agreement with SpeakEZ to develop that technology, prior to our acquisition of
SpeakEZ. We became a successor-in-interest to SpeakEZ's rights under the license
agreement. We then negotiated with Rutgers an Assumed and Amended License
Agreement in 1996. As a part of this agreement, the Company acquired exclusive
worldwide rights under existing Rutgers' patents and patent applications,
copyrights and software related to speaker and speech recognition developed by
Rutgers. Several additional Rutgers-owned patent applications are pending. We
have also filed for and received patent applications in our own name for further
developments in this field.
REGULATION
We are primarily affected by regulation in the Corrections Division.
However, the Internet Services Division also is affected. Our telecommunications
service provider customers and we are subject to varying degrees of federal,
state, and local regulation. Regulatory actions have impacted, and are likely to
continue to impact, both our customers and us. For example, the adoption of
regulations that would encourage additional competition in the business of our
customers could have a material adverse effect on the amount of business done by
such customers and the manner in which such business is done. A reduction in the
amount of business done by our customers would have a material adverse impact on
our revenue since such revenues are directly related to volumes of calls
processed under our transaction fee pricing structure. Changes in the manner in
which our customers conduct their business could have a material adverse impact
on us if, as a result of such changes, our services and features were no longer
needed or desired or if the we were not able to modify, or add to, our services
in a way that meets the new market demands of our customers.
The inmate calling market is regulated at the federal level by the FCC and
at the state level by the public utilities commissions of various states. In
addition, from time to time, Congress or the various state legislatures that
affect the telecommunications industry generally and the inmate calling industry
specifically may enact legislation. Court decisions interpreting applicable laws
and regulations may also have a significant effect on the inmate calling
industry. Changes in existing laws and regulations, as well as the adoption of
new laws and regulations applicable to our activities or other
telecommunications businesses, could have a material adverse effect on us.
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<PAGE> 15
Federal Regulation
Prior to 1996, the federal government's role in the regulation of the
inmate calling industry was limited. The enactment of the Telecommunications Act
of 1996 or the "Act", however, marked a significant change in scope of federal
regulation of the inmate telephone service. Section 276 of the Act directed the
FCC to implement rules to overhaul the regulation of the provisioning of pay
phone service, which Congress defined to include the provisioning of inmate
telephone service in correctional institutions. The Act (i) opens local exchange
service to competition and preempts states from imposing barriers preventing
such competition, (ii) imposes new unbundling and interconnection requirements
on incumbent local exchange carrier networks, (iii) removes prohibitions on
inter-LATA services and manufacturing if certain competitive conditions are met,
(iv) transfers any remaining requirements of the consent decree (including its
nondiscrimination provisions) to the FCC's jurisdiction, (v) imposes
requirements to conduct certain competitive activities only through structurally
separate affiliates and (vi) eliminates many of the remaining cable and
telephone company cross-ownership restrictions.
Section 276 of the Act directed the FCC to require all incumbent local
exchange carriers or "ILECs" to transfer their inmate telephone operations from
their regulated accounts to the ILEC's unregulated accounts. Many aspects of the
FCC's rules implementing Section 276 are currently the subject of requests for
clarification or reconsideration by the FCC or in collateral proceedings. This
legislation and related rulings will significantly change the competitive
landscape of the telecommunications industry as a whole. For example, permitting
the ILECs to provide long-distance service cause our ILEC customers to become
direct competitors of AT&T, which in turn could adversely affect our
relationships with all such customers. For example, our current relationship
with AT&T may foreclose opportunities to provide long distance services to its
current ILEC customers, if and when they enter the long-distance market. As a
result, a loss of long-distance market share by AT&T could result in a
corresponding loss of market share by us.
On January 29, 1998 the FCC issued Order 98-7. This Order required that all
called parties 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. Currently, our inmate calling systems provide such a
feature.
State Regulation
The most significant state involvement in the regulation of inmate
telephone service is the limit on the maximum rates that can be charged for
intrastate collect calls set by most states, referred to as "rate ceilings".
Since collect calls are generally the only kind of calls that can be made by
inmates in correctional facilities, the state-imposed rate ceilings on those
calls can have a significant effect on our business.
The foregoing discussion does not 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 our business. The impact of increased competition on our
operations will be influenced by the future actions of regulators and
legislators who are increasingly advocating competition. While we would attempt
to modify our customer relationships and our service offerings to meet the
challenges resulting from changes in the telecommunications competitive
environment, there is no assurance we will be able to do so.
EMPLOYEES
As of December 31, 1999, we employed 511 full-time equivalent employees.
For our Corrections Division, the departmental classification of such employees
was as follows: 31 engineering and product development personnel; 45 marketing
and sales personnel; 84 finance, information systems and administrative
personnel; 339 production, installation and field operations personnel. The
Internet Services Division, shares technical resources from the
telecommunications department of the Corrections Division. For our SpeakEZ
Division, the departmental classification of such employees was as follows: 8
research and product development personnel; 2 marketing, sales and
administrative personnel. None of our employees are represented by a labor union
and we have experienced no work stoppages to date.
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RISK FACTORS
You should carefully consider the following information about risks,
together with other information in this report, when evaluating our business.
The risks described below are intended to highlight risks that are specific to
us and are not the only ones we face. Additional risks and uncertainties, such
as those that generally apply to our industries also may impair our business
operations.
A SMALL NUMBER OF CUSTOMERS ACCOUNTED FOR A HIGH PERCENTAGE OF OUR REVENUE,
THEREFORE, THE LOSS OF A MAJOR CUSTOMER COULD HARM OUR BUSINESS
In the Corrections Division, a small number of customers account for a
significant portion of our revenue. If we lose existing customers and do not
replace them with new customers, our revenue will decrease and may not be
sufficient to cover our costs. For the year ended December 31, 1999, AT&T, Bell
Atlantic and SBC Communications, Inc. accounted for approximately 13%, 10% and
10%, respectively of our total revenue. In the Internet Services Division, a
single customer, US WEST !NTERPRISE America, Inc., accounts for all of our
Internet Services revenue. If we lose this customer and do not replace it with
new customers, our revenue will decrease, we will be unable to continue this
line of business and this could harm our business.
CHANGES IN GOVERNMENT TELECOMMUNICATIONS REGULATIONS COULD CAUSE REDUCED DEMANDS
FOR OUR PRODUCTS AND SERVICES.
In our Corrections Division, our telecommunications service provider
customers and we are subject to varying degrees of federal, state, and local
regulation. Regulatory actions have impacted, and are likely to continue to
impact, both our customers and us. Regulatory actions may cause changes in the
manner in which our customers or we conduct business. The products that we
develop must comply with standards established by the Federal Communications
Commission. A change in these standards may have a material adverse affect on
our business, operating results, and financial condition. In the Internet
Services Division, if state regulatory authorities grant our existing Internet
service customer the ability to carry inter-LATA Internet services, the need for
our Internet services could be extinguished and our existing contract would
terminate.
WE OPERATE IN HIGHLY COMPETITIVE MARKETS AND MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
The telecommunications industry, particularly the inmate calling market, is
and can be expected to remain highly competitive. In our Corrections Division we
compete directly against other suppliers of inmate call processing systems, such
as private pay phone operators and manufacturers of call processing equipment.
In addition, our customers and we jointly compete against other call providers
to obtain contracts for inmate calling services. Finally, we may also compete
against our customers who choose to use another call provider on a particular
bid. Changes in regulations have affected the competitive dynamics within our
industry. Increased competition may reduce the fees we charge, reduce margins
and cause a loss of market share. As a result of these and other factors, we may
not be able to compete effectively with our current or future competitors, which
would have a material adverse affect on our business, operating results, and
financial condition.
CHANGES IN TECHNOLOGY AND OUR ABILITY TO ENHANCE OUR EXISTING PRODUCTS MAY
ADVERSELY AFFECT OUR FINANCIAL RESULTS
The markets for our products, especially the telecommunications industry,
change rapidly because of technological innovation, changes in customer
requirements, declining prices, and evolving industry standards, among other
factors. To be competitive, we must develop and introduce product enhancements
and new products, which increase our customers' and our ability to increase
market share in the corrections industry. New products and new technology often
render existing information services or technology infrastructure obsolete,
excessively costly, or otherwise unmarketable. As a result, our success depends
on our ability to timely innovate and integrate new technologies into our
current products and services and to develop new products. In addition, as the
telecommunications networks are modernized and evolve from analog-based to
digital-based systems, certain features offered by us may diminish in value.
Moreover, regulatory actions
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<PAGE> 17
affecting the telecommunications industry may require significant upgrades to
our current technology or may render our service offerings obsolete or
commercially unattractive. We cannot guarantee that we will have sufficient
technical, managerial or financial resources to develop or acquire new
technology or to introduce new services or products that would meet our
customers needs in a timely manner.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY AND
ENSURE THAT OUR SYSTEMS ARE NOT INFRINGING ON OTHER COMPANIES
Our success depends to a significant degree on our protection of our
proprietary technology, particularly in the area of three-way call prevention.
The unauthorized reproduction or other misappropriation or our proprietary
technology could enable third parties to benefit from our technology without
paying us for it. Although we have taken steps to protect our proprietary
technology, they may be inadequate. We rely on a combination of patent and
copyright law and non-disclosure agreements to establish and protect our
proprietary rights in our systems. However, existing trade secret, copyright and
trademark laws offer only limited protection. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or obtain and use trade secrets or other information we regard as
proprietary. If we resort to legal proceedings to enforce our intellectual
property rights, the proceedings would be burdensome and expensive and could
involve a high degree of risk.
In addition, with respect to our intellectual property rights, we cannot be
sure that a third party will not accuse us of infringement. Any claim of
infringement could cause us to incur substantial costs defending against that
claim, even if the claim is not valid, and could distract our management from
our business. A party making a claim also could secure judgment that requires us
to pay substantial damages. A judgment could also include an injunction or other
court order that could prevent us from selling our products. Any of these events
could have a material adverse effect on our business, operating results and
financial condition.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS AND SERVICES FAIL TO
PERFORM OR BE PERFORMED PROPERLY
Products as complex as ours may contain undetected errors or "bugs", which
result in product failures or security breaches or otherwise fail to perform in
accordance with customer expectations. Any failure of our systems could result
in a claim for substantial damages against us, regardless of our responsibility
for the failure. Although we maintain general liability insurance, including
coverage for errors and omissions, there can be no assurance that our existing
coverage will continue to be available on reasonable terms or will be available
in amounts sufficient to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim. The occurrence of errors
could result in loss of data to us or our customers which could cause a loss of
revenue, failure to achieve acceptance, diversion of development resources,
injury to our reputation, or damages to our efforts to build brand awareness,
any of which could have a material adverse affect on our market share and, in
turn, our operating results and financial condition.
OUR FAILURE TO EFFECTIVELY INTEGRATE THE BUSINESSES WE HAVE ACQUIRED MAY
ADVERSELY AFFECT OUR BUSINESS
On June 14, 1999 we merged with Gateway Technologies, Inc. A failure to
effectively integrate this business could have a material adverse effect on our
business, operating results and financial condition. There can be no assurance
that we will be able to consolidate the operations of Gateway with our
operations in a manner that will achieve efficient operating results. In
addition, there can be no assurance that we will be able to retain personnel
from Gateway.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS.
We incurred losses from continuing operations in the current year of $10.2
million and had a working capital deficit of $8.2 million at December 31, 1999.
We received a waiver from our lenders relating to various covenant violations on
our bank credit facility. In connection with the waiver, the lenders agreed to
revise the existing covenant requirements if we can raise $7 million of
additional financing, on or before April 14, 2000. The funds are required to be
used to reduce the outstanding balance on the credit facility.
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We have taken steps to obtain the additional financing, on or before the
deadline of April 14, 2000, by entering into term sheets to issue convertible
preferred securities to a non-related party and subordinated debt instruments to
one of our directors. We believe that we will complete the above financing
arrangements in the time frame imposed by the lenders. Should we be unable to
complete the financing arrangements or an alternative financing arrangement by
the deadline currently imposed by the lenders, we would again breach our
covenants and the lenders could commence immediate collection activity.
In addition, we are taking steps to increase cash flow from operations and
obtain additional financing to ensure that we are able to carry out our fiscal
2000 business plan. There can be no assurance that we will be successful in
increasing our cash flow from operations or that additional financing will be
available, or if available, will be obtained on acceptable terms. The financing
may also dilute existing stockholders.
If we cannot obtain adequate funds on acceptable terms, we may be unable
to:
- fund our working capital requirements;
- fund anticipated new installations of inmate call processing systems and
upgrades of existing systems;
- take advantage of strategic opportunities;
- respond to competitive pressures; and
- develop or enhance our services.
Any of these failures could adversely affect our profitability. If we do
not achieve or sustain profitability in the future, we may be unable to continue
our operations.
ITEM 2. PROPERTIES
Our corporate headquarters is located in approximately 38,000 square feet
of leased office space in Englewood, Colorado. This lease terminates effective
November 1, 2001. These facilities are suitable and adequate for our operations
currently and through the end of the lease. We have options on up to 17,000
square feet of additional space at the current location, which are exercisable
in 2001. Our Texas-based operations are located in over 26,000 square feet in a
suburban Dallas office park. The premises are leased until September 30, 2002.
We also lease approximately 13,000 square feet in Piscataway, New Jersey.
ITEM 3. LEGAL PROCEEDINGS
From time to time we have been, and expect to continue to be subject to
various legal and administrative proceedings or various claims in the normal
course of our business. We believe the ultimate disposition of these matters
will not have a material affect on our financial condition, liquidity, or
results of operations.
In a case brought in the First Judicial District Court of the State of New
Mexico, styled Valdez v. State of New Mexico, et. al., the complaint joins as
defendants the State of New Mexico, several political subdivisions of the State
of New Mexico and several inmate telecommunications service providers, including
T-NETIX and Gateway. The complaint includes a request for certification by the
court of a plaintiffs' class action consisting of all persons who have been
billed for and paid for telephone calls initiated by an inmate confined in a
jail, prison, detention center or other New Mexico correctional facility. The
complaint alleges violations of New Mexico Unfair Practices Act, the New Mexico
Antitrust Act and the New Mexico Constitution, and also alleges unjust
enrichment, constructive trust, economic compulsion, constructive fraud and
illegality of contracts, all in connection with the provision of "collect only"
inmate telecommunications services. Although management believes the likelihood
of an unfavorable outcome is low, there can be no assurance that a judgment
against a class of defendant providers will not ultimately be entered.
On April 8, 1999, in the District Court of Dallas County 116th Judicial
District, Gateway filed a lawsuit, as a shareholder of Telequip Labs, Inc.
("Telequip"), against Telequip, James Burton Hellwarth, and David Hellwarth. On
March 23, 2000, Telequip filed a counterclaim against Gateway for tortious
interference with contract, breach of contract, rescission, declaratory relief,
violations of the Texas Free Enterprises and
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Antitrust Act, conspiracy to monopolize, conversion of trade secrets, and
business disparagement. We have not had sufficient time to investigate the
merits of the counterclaims; however, we will vigorously defend the
counterclaims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter of the fiscal year on which this report is being made.
PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is quoted on the Nasdaq Stock Market(sm) under the symbol
"TNTX." The following table sets forth the range of quarterly high and low
closing sale prices of our Common Stock, all as reported on the Nasdaq Stock
Market(sm) for the two most recent fiscal years.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
Year Ended December 31, 1999
Fourth quarter............................................ $ 7.13 $3.75
Third quarter............................................. 6.25 4.38
Second quarter............................................ 6.88 4.88
First quarter............................................. 7.13 4.75
Year Ended December 31, 1998
Fourth quarter............................................ $11.00 $8.00
Third quarter............................................. 13.88 9.38
Second quarter............................................ 11.00 8.38
First quarter............................................. 11.00 6.88
</TABLE>
As of March 21, 2000, we had approximately 145 record holders of our common
stock, and we estimate that as of that date there were 2,021 beneficial owners
of our stock.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain our earnings, if any, to finance future growth and
therefore we do not anticipate paying any cash dividends in the foreseeable
future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data under the captions "Statement of
Operations Data" and "Consolidated Balance Sheet Data" has been presented for
each of the years in the five-year period ended December 31, 1999. The selected
financial data has been derived from our audited consolidated financial
statements. The consolidated financial statements as of December 31, 1999 and
1998, and for each of the years in the three-year period ended December 31,
1999, are included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue........................... 73,235 68,241 62,305 53,811 44,025
Total expenses.......................... 81,445 65,421 57,938 51,988 39,758
-------- ------- ------- ------- -------
Operating income (loss)................. (8,210) 2,820 4,367 1,823 4,267
Merger transaction expenses............. (1,017) -- -- -- --
Interest and other income (expense),
net.................................. (2,137) (2,354) (1,583) (912) (305)
-------- ------- ------- ------- -------
Earnings (loss) before income
taxes......................... (11,364) 466 2,784 911 3,962
Income tax benefit (expense)............ 1,117 (196) (1,039) 202 (379)
-------- ------- ------- ------- -------
Net earnings (loss)............. $(10,247) $ 270 $ 1,745 $ 1,113 $ 3,583
======== ======= ======= ======= =======
Diluted earnings (loss) per common
share................................ $ (0.82) $ 0.02 $ 0.13 $ 0.09 $ 0.29
======== ======= ======= ======= =======
Weighted average common shares
outstanding -- diluted............... 12,511 12,930 12,988 12,453 12,310
======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1999 1998 1997 1996 1995
------- -------- ------- -------- -------
(AMOUNT IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................ $70,542 $ 65,479 $60,796 $ 53,941 $43,547
Working capital deficit................. (8,152) (13,259) (8,592) (14,023) (5,134)
Total debt.............................. 28,921 25,510 20,606 13,221 10,286
Total liabilities....................... 48,441 35,875 30,219 26,375 21,284
Stockholders' equity.................... 22,101 29,604 29,977 26,966 21,663
</TABLE>
All periods have been restated to reflect our merger with Gateway
Technologies, Inc., which was accounted for as a pooling of interests, and the
change in our year-end to December 31. The Selected Financial Data for the year
ended December 31, 1999 reflects the combined results of T-NETIX and Gateway for
the entire year. The Statement of Operations Data for the years ended December
31, 1998, 1997, 1996 and 1995 reflects the results of operations of T-NETIX for
the years ended July 31, 1998, 1997, 1996 and 1995, respectively, combined with
that of Gateway for the years ended December 31, 1998, 1997, 1996 and 1995. The
Balance Sheet Data as of December 31, 1998, 1997, 1996, and 1995 reflects the
financial position of T-NETIX as of December 31, 1998, and July 31, 1997, 1996
and 1995 combined with the financial position of Gateway as of December 31,
1998, 1997, 1996 and 1995. See Note 1 of "Notes to Consolidated Financial
Statements."
As a result of T-NETIX and Gateway having different fiscal year ends prior
to 1999, the results of operations of T-NETIX for the five month period ended
December 31, 1998, have been excluded from the reported results of operations.
The net loss for the period has been accounted for as an adjustment of the
accumulated deficit at January 1, 1999. T-NETIX had revenue, expenses, and net
loss of $15,041,000, $17,606,000, and $2,235,000, respectively, for the five
month period ended December 31, 1998.
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<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For a comprehensive understanding of our 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 this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this Form 10-K includes forward-looking statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, but are not limited to, those
listed under the caption "Risk Factors", which may affect the potential
technological obsolescence of existing systems, the renewal of existing site
specific Corrections and Internet Service Division customer contracts, the
ability to retain the base of current site specific customer contracts, the
continued relationship with existing customers, the ability to win new contracts
for our products and services, including Lock & Track(TM), Contain(R) and the
Internet Services Division, the successful integration of Gateway Technologies,
Inc. into our business, our ability to penetrate the market for jail management
systems, 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 that could affect our sales or pricing, the
impact of competitive products and pricing particularly in the our Corrections
Division, our 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, we completed our merger with Gateway Technologies, Inc.
or "Gateway" by exchanging 3,672,234 shares of our common stock for all of the
common stock of Gateway. Each share of Gateway was exchanged for 5.0375 shares
of our common stock. In addition, outstanding Gateway stock options were
converted at the same exchange rate into options to purchase approximately
379,000 shares of our 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 has
been restated to include the combined results of operations, financial position
and cash flows of T-NETIX and Gateway as though Gateway had always been a part
of T-NETIX. The results of operations, financial position and cash flows for the
years ended December 31, 1998 and 1997 reflect the results of operations and
cash flows for T-NETIX for the year ended July 31, 1998 and 1997, respectively,
combined with Gateway's results for the years ended December 31, 1998 and 1997.
The consolidated balance sheet as of December 31, 1997 reflects the financial
position of T-NETIX as of August 1, 1997 combined with the financial position of
Gateway as of December 31, 1997.
In addition, in connection with the merger transaction, T-NETIX issued
375,341 shares of common stock to certain shareholders of Gateway in exchange
for their terminating a royalty agreement with Gateway. 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, multiplied by 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, the
remaining term of the underlying patent.
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<PAGE> 22
Acquisition of Evans and Ricker, Inc.
In October 1999, we completed an asset acquisition of Evans and Ricker,
Inc. or "E&R", of Portland, Oregon for total consideration of $1.4 million. The
assets included cash and accounts receivable. The remaining purchase price not
allocated to these assets was allocated to goodwill. E&R specialize in software
used to control and manage information for correctional facilities. E&R's
product Lock&Track(TM) is a comprehensive relational database designed to handle
the operational control and reporting needs of municipal, state, federal, and/or
private correctional facilities. We plan to use our Corrections Division sales
force to promote Lock&Track(TM) to correctional facilities and departments
throughout the country. We expect that the current Corrections Division sales
force will be adequate to promote Lock&Track(TM). In addition, we believe
research and development expense in the Corrections Division will increase due
to the addition of employees to support the Lock&Track(TM) product.
Corrections Division
In the Corrections Division we derive revenue from three main sources:
telecommunications services, direct call provisioning and equipment sales. Each
form of revenue has 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.
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 to
telecommunications service providers for their customers, the correctional
facilities. Such telecommunications service providers include AT&T, Bell
Atlantic, US WEST, SBC Communications (including Ameritech), BellSouth, Sprint
and GTE, and other telecommunications service providers. We are paid a
prescribed fee for each call completed and additional fees for validating phone
numbers dialed by inmates.
As a direct inmate call provider, we buy "wholesale" call services to be
re-sold as collect calls. We use the services of third parties to bill the
collect calls. We then enter into direct contracts with the correctional
facilities and generally pay to the correctional facilities commissions on the
gross billed revenue. The rates charged by us are consistent with the collect
call rates charged by the incumbent local exchange carrier or "ILEC" in the same
service area and the predominant interexchange carrier or "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 however in a higher-than-industry-average
uncollectible cost.
Equipment sales and other revenue includes the sales of our inmate calling
system and the DRS system. The sales of the inmate calling system are generally
made to only one customer. We then charge monthly maintenance fees to keep the
system operational. Sales to this customer can vary depending upon the success
of the customer in winning contracts with correctional facilities.
We experienced an increase in total revenue in 1999 from 1998 of
approximately $5.0 million or an increase of 7% over 1998. However, we continue
to experience reductions in call volumes that affect telecommunications services
revenue and overall financial performance. We had a net reduction in call volume
in 1999 of approximately 7% from 1998. We believe that the primary causes for
the reductions are due to price increases by our telecommunications service
provider customers to the end users. Additionally, reductions are also
attributable to 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.
We will continue to market our products and services to other telecommunication
service providers; however, we expect growth in call processing volumes and
corresponding telecommunications services revenue will come predominantly from
adding new systems for existing customers and from the sale of other corrections
related products and services. Systems that are currently scheduled for
installation are not expected to contribute to significant call volume increases
until the later half of fiscal 2000 and on into fiscal 2001.
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<PAGE> 23
Internet Services Division
In December 1999, we entered into a master service agreement with US WEST
!NTERPRISE America, Inc. to provide interLATA Internet services to US WEST
customers. The contract, which commenced December 1, 1999, calls for us to buy,
resell and process billing of Internet bandwidth to this customer. The contract
with US WEST is for a minimum of sixteen months.
We anticipate a significant increase in Internet Services revenue and
related costs in fiscal 2000. We anticipate our gross margin on these services
will range from 4% to 6%. The costs associated with this contract are primarily
the costs for Internet bandwidth. There were no capital outlays required to
begin provisioning these services. We have added three employees to perform the
services under this contract, and their cost will be reflected in our selling,
general and administrative expenses in future periods.
Extension of the contract beyond the minimum sixteen-month period is
dependent upon the regulatory approval process in various states. In the event
that US WEST receives regulatory approval to provide inter-LATA
telecommunications services during or after the initial sixteen month period,
our Internet Services revenue could be reduced significantly or eliminated.
Speaker Verification Division
We completed consolidation of our SpeakEZ operations to our Englewood
facility 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 these customers. 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. Our voice print revenue has
been minimal to date. There is no assurance that the SpeakEZ products will be
commercially accepted or profitable in the future.
RESULTS OF OPERATIONS
Current Operations
We experienced a substantial net loss during 1999 of $10.2 million. The
loss increased our accumulated deficit to $13.8 million. The 1999 net loss and
increase in the accumulated deficit resulted primarily from the following items:
- A reduction in gross margin from telecommunications services due
primarily to a reduction in call volumes
- A significant impairment of telecommunications assets due to a change in
product strategy coincident with the merger with Gateway
- An increase in research and development expense to bring new products to
market
- A charge for merger-related expenses
We plan to continue to invest in new installations and anticipate a
significant number of installations in the first part of 2000. These
expenditures do not produce immediate profitability due to the long-term nature
of our contracts, however, we believe these contracts will be contributing
factors to future profitability. We
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<PAGE> 24
have implemented a business plan that we believe will address operational
efficiencies and result in improved margins.
The following table sets forth certain statement of operations data as a
percentage of total revenue for the years ended December 31, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue:
Telecommunications services............................... 53% 63% 64%
Direct call provisioning.................................. 38 33 30
Equipment sales and other................................. 9 4 6
Total revenue..................................... 100 100 100
Expenses:
Operating costs and expenses.............................. 63 55 53
Selling, general and administrative....................... 19 20 19
Research and development.................................. 7 6 6
Impairment of telecommunications assets................... 6 -- --
Depreciation and amortization............................. 16 15 15
--- --- ---
Operating income (loss)................................ (11) 4 7
Merger transaction expenses............................... (1) -- --
Interest and other income (expense), net.................. (3) (3) (2)
--- --- ---
Earnings (loss) before income taxes.................... (15) 1 5
Income tax (expense) benefit.............................. 1 -- (2)
--- --- ---
Net earnings (loss)............................... (14)% 1% 3%
=== === ===
</TABLE>
Total Revenue. Total revenue in 1999 was $73.2 million, an increase of 7%
over $68.2 million in 1998. This increase was primarily attributable to an
increase in direct call provisioning revenue and equipment sales offset in part
by decreases in telecommunications services revenue. Total revenue in 1998 was
$68.2 million, an increase of 10% over $62.3 million in 1997. This increase was
attributable to an increase in telecommunications services revenue and direct
call provisioning revenue offset in part by decreases in equipment sales.
The 9% decrease in telecommunications services revenue to $39.3 million in
1999, from $43.1 million in 1998, was due primarily to a decrease in call volume
at existing sites. The reduction in call volume is primarily due to price
increases by our telecommunications provider customers to the end users.
Additionally, reductions are also attributable to 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. Telecommunications services revenue increased 9% in
1998 to $43.1 million, from $39.6 million in 1997. The reason for the increase
was an increase in call volumes due to the addition of new call processing
systems.
Direct call provisioning revenue increased 21% to $27.5 million in 1999,
from $22.7 million in 1998. This increase was due to the addition of sites for
which we are provisioning the long distance service. The addition of sites is
primarily a result of our being successful in competitive bidding arrangements
for contracts directly with correctional institutions. Direct call provisioning
revenue increased 19% to $22.7 million in 1998, from $19.1 million in 1997. The
increase again was due to an increase in the number of sites serviced.
Equipment sales and other revenue increased 167% to $6.4 million for 1999
from $2.4 million in 1998 and decreased 34% to $2.4 million for 1998 from $3.6
million in 1997. The amounts in 1999 include approximately $1.5 million of
revenue for our Internet Services Division. The contract producing this revenue
became effective December 1999. The remaining portion of the increase is
attributable to an increase in sales to one of our customers. This customer
purchases our equipment for installation in correctional institutions and then
pays us a monthly maintenance and support fee. Such sales are dependent upon the
timing of installations with
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<PAGE> 25
this customer and the customer's success rate in its territory. In addition, in
1999 we had a single sale of $1.1 million for our DRS product to a
telecommunications service provider customer for a state department of
corrections. The reduction in 1998 from 1997 is due primarily to the timing of
purchases from this customer.
We had SpeakEZ Voice Print(R) revenue of $93,000, $632,000 and $676,000 for
1999, 1998, and 1997, respectively. Such amounts are included in other revenue.
The reduction in revenue is due to the change in strategy whereby small projects
that were previously performed are no longer accepted. SpeakEZ Voice Print(R)
revenue was derived primarily 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 the impact of new
competition.
Operating costs and expenses. Total operating costs and expenses were $46.3
million in 1999, an increase of 22% from $37.9 million in 1998, which in turn
was an increase of 15% from $33.0 million in 1997. The increases were primarily
due to an increase in the amount of direct call provisioning expenses and cost
of equipment sold and other expenses including Internet services expense.
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 and other includes primarily the
purchase price of equipment which is resold. Other equipment cost components
were minimal. Also included are operating expenses for Internet Services that
consists of Internet access costs. Voice print operating costs are also included
and were for royalty charges, the cost of hardware and the cost of services.
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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating costs and expenses:
Telecommunications services............................... 45% 39% 39%
Direct call provisioning.................................. 91 88 86
Cost of equipment sold and other.......................... 56 35 36
</TABLE>
Operating costs and expenses associated with providing telecommunications
services as a percentage of corresponding revenue was 45% in 1999, an increase
from 39% in both 1998 and 1997. The increase in 1999 is primarily due to the
reduction in telecommunications services revenue, primarily due to a reduction
in call volumes, and increases in personnel costs, whereas the expense
percentages in 1998 and 1997 remained consistent. Total telecommunications
services operating expenses were $17.7 million, $17.0 million, and $15.3 million
for 1999, 1998, and 1997, respectively. The increase from 1998 to 1999 was due
primarily to increases in personnel costs. The increase from 1997 to 1998 was
due primarily to personnel costs and communication costs applicable to the
addition of new sites. We anticipate that we will continue to increase our
personnel costs for our National Service Center, however, we believe this
centralization of customer support will allow us to begin to reduce field
operations costs. Direct call provisioning costs as a percentage of applicable
revenue increased to 91% of revenue for 1999 from 88% in 1998 and 86% in 1997.
The increase is primarily attributable to higher commission and
telecommunications costs. Cost of equipment sold and other increased in 1999
from 1998 primarily due to the costs of Internet services, which were
approximately 93% of Internet services revenue. In addition, the change in the
revenue mix for equipment sales and voice print sales also contributed to the
changes. The decrease in 1998 from 1997 is due to a change in the product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $13.8 million in 1999, compared to $13.4 million in
1998 and $11.8 million in 1997. Selling, general and administrative expenses
associated with the Corrections Division were $13.0 million in 1999, $11.3
million in
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<PAGE> 26
1998 and $10.9 million in 1997. The increase in 1999 was primarily due to
increases in salary and benefits for additional sales and marketing personnel
and due from raises and cost of living adjustments for existing personnel. Other
expenses, including travel and telecommunications cost increased due to the
merger with Gateway and additional sales and marketing travel. Another component
of the 1999 increase in selling, general and administrative expenses was
professional services and consulting fees, which increased as a result of the
implementation of a Year 2000 compliant internal accounting system. The increase
in 1998 from 1997 was primarily attributable to salary expenses and other
related personnel costs. We anticipate an increase in selling, general and
administrative expenses due to an expansion of our sales and related support
organizations in order to leverage new corrections products and the new market
position established as a result of the merger with Gateway.
Selling, general and administrative expenses for the SpeakEZ Division were
$751,000 for 1999 a decrease from $2.1 million in 1998 and $938,000 in 1997. The
decrease is due to the change in the SpeakEZ Division's organization in 1999 to
reduce personnel and the marketing approach to a licensing approach versus a
direct sales approach. We anticipate maintaining the current level of
administrative costs associated with the SpeakEZ Division.
Research and Development Expenses. Research and development expenses were
$5.1 million in 1999, $3.9 million in 1998 and $3.6 million in 1997. Research
and development expenses for the Corrections Division were $4.2 million in 1999,
$2.4 million in 1998 and $2.1 million in 1997. The increases were primarily due
to an increase in personnel expenses due to a reduction in the amount of such
costs capitalized as software development costs. The Company expects research
and development expense for the Corrections Division to continue to increase
because of technical personnel needed to support new and existing products.
Research and development expenses for the SpeakEZ Division were $882,000
for 1999, a decrease of 41% from $1.5 million in 1998 and 1997. The decrease in
1999 was a result of a reduction in personnel and the consolidation of the
research facilities into the corporate headquarters. Research and development
expenses for the SpeakEZ Division are expected to remain at present levels.
Impairment of Telecommunications Assets. During 1999, we recorded an
impairment of telecommunications assets of $4.6 million. Impaired
telecommunications assets consisted of software development costs, construction
in progress, and inmate calling platform assets. Two events indicated that the
carrying value of certain equipment and intangible assets might not be
recoverable. In September 1999, we completed an evaluation of the future
viability of our new inmate calling platform ("DL Platform") which we had been
developing over the past two years. The merger with Gateway allowed us to
consider an alternative to the DL Platform. We determined that the Gateway
ComBridge Platform ("ComBridge"), would be the platform to install for both new
customers and upgrades of existing customers. However, over the last year, we
had been awarded certain contracts where the DL Platform was to be deployed.
Since we believe that it would not be cost effective to maintain and support two
separate systems, we proceeded to renegotiate all existing contracts to install
ComBridge instead of the DL Platform. During the quarter ended September 30,
1999, we successfully completed these negotiations. Due to the abandonment of
the DL Platform, we no longer have any anticipated cash flow to support the
carrying value of assets related to the DL Platform. Capitalized costs relating
to the DL Platform included the software development costs, components
(consisting primarily of telephony cards) and other supporting computer
peripheral equipment. As a result, software development costs at December 31,
1999 were impaired by $2.0 million and certain components of construction in
progress relating to these products were impaired by $1.6 million. This charge
was applicable to the Corrections Division.
In addition, we had deployed a version of our old inmate calling platform
that resides in our customers' network locations. We have recently experienced a
reduction in call volumes and revenues for this platform. The customer has
indicated to us that it does not intend to use the platform as a source of
future services. Additionally, since the platform was based on the predecessor
to the DL Platform, there is not an upgrade path available for the platform. Any
new feature or service offering would be evaluated based on the new ComBridge
Platform. The reduction in call volumes caused the estimated fair value of these
assets to be less than its existing book value. We estimated the fair value of
these assets based on the discounted cash flows
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<PAGE> 27
from each location. After consideration of minimal salvage value of these assets
due to their specific use, we recorded an impairment charge of approximately
$1.0 million. This charge was applicable to the Corrections Division.
Depreciation and Amortization Expenses. Depreciation and amortization
expense was $11.6 million in 1999, an increase from $10.2 million in 1998 and
$9.5 million in 1997. The increase was due primarily to the amortization of
intangible assets and goodwill of approximately $2.2 million in 1999, $1.1
million in 1998 and $940,000 in 1997. Depreciation and amortization expense for
the SpeakEZ Division was $969,000, $924,000 and $705,000 for 1999, 1998 and
1997, respectively. We anticipate 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.
Merger Transaction Expenses. These expenses were directly related to the
merger with Gateway and amounted to approximately $1.0 million in 1999. Merger
transaction expenses consisted primarily of fees for investment bankers,
attorneys, accountants, financial printing and other related charges.
Interest and Other Income (Expense), Net. Interest and other income
(expense), net was $2.1 million in 1999, a decrease from $2.4 million in 1998.
Included in other income in 1999 is a gain of approximately $206,000 on the sale
of used telecommunications equipment. Interest expense was $2.3 million in 1999,
$2.4 million in 1998 and $1.6 million in 1997. The decrease in 1999 was
attributable to a decrease in the average amount of indebtedness outstanding and
a reduction in interest rates. The increase in 1998 over 1997 was attributable
to an increase in the average amount of indebtedness outstanding during 1998
offset by a reduction in interest rates. The average debt balance increased
primarily due to the increase in capital expenditures and business acquisitions.
TRANSITIONAL PERIOD FOR T-NETIX, INC.
T-NETIX results of operations for the five month period ended December 31,
1998, have been excluded from the reported results of operations. The net loss
for the period has been accounted for as an adjustment of the accumulated
deficit at January 1, 1999. T-NETIX had revenue, expenses, and a net loss of
$15.0 million, $17.6 million, and $2.2 million, respectively, for the five month
period ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
We incurred losses from continuing operations in the current year of $10.2
million and had a working capital deficit of $8.2 million at December 31, 1999.
We received a waiver from our lenders relating to various covenant violations on
our bank credit facility. In connection with the waiver, the lenders agreed to
revise the existing covenant requirements if we can raise $7 million of
additional financing on or before April 14, 2000. The funds raised are required
to be used to reduce the outstanding balance on the credit facility. These
factors among others may indicate that we may not be able to meet our
obligations as they become or due or we may have to significantly reduce
installations and curtail other operations.
We have taken steps to obtain the additional financing, on or before the
deadline of April 14, 2000, by entering into term sheets to issue convertible
preferred securities to a non-related party and subordinated debt instruments to
one of our directors. We believe that we will complete the above financing
arrangements in the time frame imposed by the lenders. Should we be unable to
complete the financing arrangements or an alternative financing arrangement by
the deadline currently imposed by the lenders, we would again be in breach of
the loan agreement covenants and the lenders could commence immediate collection
activity.
In addition, we are taking steps to increase cash flow from operations and
obtain additional financing to ensure that we are able to carry out our fiscal
2000 business plan. There can be no assurance that we will be successful in
increasing our cash flow from operations or that additional financing will be
available, or if available, will be obtained on acceptable terms.
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<PAGE> 28
We present the following information for the years ended December 31, 1999,
1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash provided by operating activities.............. $12,216 $ 10,443 $ 2,581
Percentage increase (decrease)..................... 13% 305% (74)%
Working capital deficit............................ $(8,152) $(13,259) $(8,592)
Current ratio...................................... 0.70 0.58 0.67
</TABLE>
We have historically relied upon commercial borrowings, operating cash flow
and the sale of equity securities to fund our operations and capital needs. Cash
provided by operations increased 13% to $12.2 million in 1999 from $10.4 million
in 1998. The increase was primarily attributable to increases in accounts
payable of $7.0 million and in accrued liabilities of $1.9 million, all offset
by an increase in the net loss. Cash provided by operating activities increased
in 1998 compared to 1997 due mainly to decreases in accounts receivable.
Capital expenditures were $14.6 million in 1999 compared to $6.2 million in
1998 and $9.1 million in 1997. The 123% increase in capital spending was due to
additional inmate calling system installations and upgrades to existing systems
to comply with FCC orders. Investing activities for the year ended December 31,
1999 included $1.0 million primarily for capitalized computer software
development costs. Additionally in 1999 we expended approximately $1.4 million
for the purchase of Evans and Ricker, Inc. In 1998 and 1997, other investing
activities of $2.5 million and $1.2 million, respectively included expenditures
for investments in preferred stock, capitalized software development costs and
patent defense costs. The 1998 total included $1.2 million for software
development costs and $1.3 million for a preferred stock investment in Cell-Tel
Monitoring, Inc.
Debt and Equity
We present the following information as of December 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total debt.............................................. $28,921 $25,510 $20,606
Stockholders' equity.................................... $22,101 $29,604 $29,977
Total capitalization.................................... $51,022 $55,114 $50,583
Debt to equity ratio.................................... 1.31 0.86 0.69
Debt to capitalization ratio............................ 0.57 0.46 0.41
</TABLE>
We have been funding our operations primarily from available borrowings
under a line of credit and by using cash provided by operations. Due to our
continued capital requirements and the merger with Gateway, in September 1999,
we entered into a Senior Secured Revolving Credit Facility ("Credit Facility")
with a commercial bank. The Credit Facility provides for a maximum credit of $40
million, subject to restrictions based on financial covenant formulas. These
restrictions based on the financial covenants and other conditions imposed by
the banks reduced our maximum borrowings to $29 million at December 31, 1999. At
December 31, 1999 we were in violation of certain covenants and we have received
a waiver from our lenders relating to various covenant violations. In connection
with the waiver, the lenders agreed to revise the existing covenant requirements
if we can raise $7 million of additional financing on or before April 14, 2000.
The funds raised are required to be used to reduce the outstanding balance on
the Credit Facility. The amount of credit under the Credit facility available to
us is dependent upon our financial performance and may be less than $40 million.
We anticipate that our capital expenditures in 2000 will be consistent with
1999 based on our anticipated growth in installed systems at correctional
facilities. We believe that we will need to obtain additional financing in order
to supplement our Credit Facility and cash flows from operations in order for us
to meet our anticipated cash needs for anticipated new installations of inmate
call processing systems and upgrades of
28
<PAGE> 29
existing systems and to finance our operations for at least the next 12 months.
In the event we do not get sufficient financing, current cash flows may not be
sufficient for the planned level of installations and we may have to reduce the
number of sites that we install. There can be no assurance that such financing
will be available or, if available, will be obtainable on acceptable terms.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. In June, 1999, the Financial Accounting Standards Board issued SFAS
137, "Accounting for Derivative Instruments and Hedging Activities Deferral of
the Effective Date of FASB No. 133 -- An amendment of FASB Statement No. 133."
SFAS 137 defers the effective date of SFAS 133 to all fiscal quarters of all
fiscal years beginning after June 15, 2000. The Company does not expect the
adoption of SFAS 133 to have a material impact on its financial position or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to interest rate risk as discussed below.
Interest Rate Risk
We have current debt outstanding under a line of credit of $28,461,000 at
December 31, 1999. Under the terms of the debt agreement the maximum credit
available is $40,000,000 depending on certain financial covenant requirements.
The loan bears interest at different rates, $25,000,000 at LIBOR plus 2.75% and
the remaining balance at the prime rate, (8.5% at December 31, 1999). Interest
on LIBOR rate loans is payable at the end of the interest period applicable to
the loan but not longer than every three months. Interest on prime rate loans is
payable every three months. Since the interest rates on the loans outstanding
are variable and are reset periodically, we are exposed to interest rate risk.
The terms of the bank dictate that $7 million of this credit facility is due
April 14, 2000 with the remaining balance of the facility due April 30, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 are included herein beginning
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
29
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors and executive officers will be set
forth in our Proxy Statement for use in connection with the Annual Meeting of
Stockholders to be held on or about May 11, 2000. Such information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be set forth in our Proxy
Statement for use in connection with the Annual Meeting of Stockholders to be
held on or about May 11, 2000. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners, our
directors and our executive officers will be set forth in our Proxy Statement
for use in connection with the Annual Meeting of Stockholders to be held on or
about May 11, 2000. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will
be set forth in our Proxy Statement for use in connection with the Annual
Meeting of Stockholders to be held on or about May 11, 2000. Such information is
incorporated herein by reference.
30
<PAGE> 31
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997.............. F-
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-
Notes to Consolidated Financial Statements.................. F-
</TABLE>
2. Financial Statement Schedules:
<TABLE>
<S> <C>
Independent Auditors' Report on Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts for the
Years Ended December 31, 1999, 1998 and 1997.
</TABLE>
3. Exhibit Index:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
(2.1) -- Acquisition Agreement and Plan of Merger between
Registrant and SpeakEZ, Inc. dated October 11, 1995.****
(2.2) -- Agreement and Plan of Merger of T-NETIX and Gateway dated
February 10, 1999*****
(3.1) -- Articles of Amendment to the Articles of Incorporation of
Registrant****
(3.2) -- Amended and Restated Articles of Incorporation of
Registrant**
(3.3) -- Amended and Restated Bylaws of Registrant*
(10.1) -- 1991 Non-Qualified Stock Option Plan***
(10.2) -- Form of 1991 Non-Qualified Stock Option Agreement***
(10.3) -- 1991 Incentive Stock Option Plan***
(10.4) -- Form of 1991 Incentive Stock Option Agreement***
(10.5) -- 1993 Incentive Stock Option Plan***
(10.6) -- Form of 1993 Incentive Stock Option Agreement***
(10.7) -- Agreement between American Telephone and Telegraph
Company and Registrant dated November 1, 1991* (10.8)
Loan Agreement between Registrant and Bank One, Colorado
NA, COBANK, ACB, and INTRUST BANK, N.A., dated as of
September 9, 1999.
(10.9) -- Standard Industrial Lease between Pacifica Development
Properties, II LLC and Registrant dated April 15, 1996
and Amendment Number One thereto, dated May 20, 1996.****
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
(10.10) -- Employment Agreement between Gateway and Richard E. Cree
dated January 1, 1998.
(21) -- Subsidiaries of Registrant*
(23.1) -- Consent of KPMG LLP
(27) -- Financial Data Schedule
</TABLE>
- ---------------
* Incorporated herein by this reference from the Exhibits to the
Registrant's Registration Statement on Form S-1 filed with the
Commission on September 8, 1994, SEC Registration No. 33-83844.
** Incorporated herein by this reference from the Exhibits to the
Registrant's Amendment No. 1 to Registration Statement on Form S-1 filed
with the Commission on October 11, 1994, SEC Registration No. 33-83844.
*** Incorporated herein by this reference from the Exhibits to the
Registrant's Registration Statement on Form S-8 filed with the
Commission on May 23, 1995, SEC Registration No. 33-92642 and amended on
May 3, 1996.
**** Previously filed with the Commission as an exhibit to the Company's
Annual Report on Form 10-K for fiscal year ended 1996.
***** Previously filed with the Commission as an exhibit to the Company's
Proxy Statement dated May 10, 1999.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during the
fourth quarter of the year ended December 31, 1999.
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned on March 29, 1999.
T-NETIX, INC.
By: /s/ ALVYN A. SCHOPP
----------------------------------
Alvyn A. Schopp,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ALVYN A. SCHOPP Chief Executive March 29, 2000
- ----------------------------------------------------- Officer/Director
Alvyn A. Schopp
/s/ JOHN GIANNAULA Chief Accounting Officer March 29, 2000
- -----------------------------------------------------
John Giannaula
/s/ DANIEL M. CARNEY Chairman of the Board/Director March 29, 2000
- -----------------------------------------------------
Daniel M. Carney
/s/ ROBERT A. GEIST Director March 29, 2000
- -----------------------------------------------------
Robert A. Geist
/s/ JAMES L. MANN Director March 29, 2000
- -----------------------------------------------------
James L. Mann
/s/ MARTIN T. HART Director March 29, 2000
- -----------------------------------------------------
Martin T. Hart
/s/ DANIEL J. TAYLOR Director March 29, 2000
- -----------------------------------------------------
Daniel J. Taylor
/s/ B. HOLT THRASHER Director March 29, 2000
- -----------------------------------------------------
B. Holt Thrasher
/s/ W.P. BUCKTHAL Director March 29, 2000
- -----------------------------------------------------
W.P. Buckthal
/s/ RICHARD E. CREE Director March 29, 2000
- -----------------------------------------------------
Richard E. Cree
/s/ JOHN H. BURBANK III Director March 29, 2000
- -----------------------------------------------------
John H. Burbank III
</TABLE>
33
<PAGE> 34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997.............. F-4
Consolidated Statements of Cash for the Years Ended December
31, 1999, 1998 and 1997................................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
34
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
T-NETIX, Inc.:
We have audited the accompanying consolidated balance sheets of T-NETIX,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of T-NETIX,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
March 21, 2000
F-1
<PAGE> 36
T-NETIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 118 $ 678
Accounts receivable, net (note 2)........................... 16,868 16,489
Prepaid expenses............................................ 1,038 1,023
Inventories................................................. 710 269
-------- -------
Total current assets.............................. 18,734 18,459
Property and equipment, net (note 2)........................ 33,858 31,498
Goodwill, net............................................... 6,401 5,824
Deferred tax asset.......................................... 2,297 962
Intangible and other assets, net (note 2)................... 9,252 8,736
-------- -------
Total assets...................................... $ 70,542 $65,479
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable.......................................... $ 11,914 $ 4,688
Accrued liabilities (note 2).............................. 7,606 5,677
Debt (note 5)............................................. 7,366 21,353
-------- -------
Total current liabilities......................... 26,886 31,718
Long term debt (note 5)................................... 21,555 4,157
-------- -------
Total liabilities................................. 48,441 35,875
Stockholders' equity (note 6):
Preferred stock, $.01 stated value, 10,000,000 shares
authorized; no shares issued........................... -- --
Common stock, $.01 stated value, 70,000,000 shares
authorized; 12,699,400 and 12,225,634 shares issued and
outstanding at December 31, 1999 and 1998,
respectively........................................... 127 122
Additional paid-in capital................................ 35,791 33,052
Accumulated deficit....................................... (13,817) (3,570)
-------- -------
Total stockholders' equity........................ 22,101 29,604
-------- -------
Commitments and contingencies (note 9)
Total liabilities and stockholders' equity.................. $ 70,542 $65,479
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 37
T-NETIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue:
Telecommunications services............................... $ 39,274 $43,089 $39,616
Direct call provisioning.................................. 27,517 22,736 19,051
Equipment sales and other................................. 6,444 2,416 3,638
-------- ------- -------
Total revenue..................................... 73,235 68,241 62,305
-------- ------- -------
Expenses:
Operating costs and expenses:
Telecommunications services............................ 17,674 17,014 15,262
Direct call provisioning............................... 25,032 20,048 16,462
Cost of equipment sold and other....................... 3,615 848 1,298
-------- ------- -------
Total operating costs and expenses................ 46,321 37,910 33,022
Selling, general and administrative....................... 13,794 13,401 11,816
Research and development.................................. 5,078 3,936 3,554
Impairment of telecommunications assets................... 4,632 -- --
Depreciation and amortization............................. 11,620 10,174 9,546
-------- ------- -------
Total expenses.................................... 81,445 65,421 57,938
-------- ------- -------
Operating income (loss)........................... (8,210) 2,820 4,367
Merger transaction expenses................................. (1,017) -- --
Interest and other income (expense), net.................... (2,137) (2,354) (1,583)
-------- ------- -------
Earnings (loss) before income taxes............... (11,364) 466 2,784
Income tax benefit (expense) (note 8)....................... 1,117 (196) (1,039)
-------- ------- -------
Net earnings (loss)......................................... $(10,247) $ 270 $ 1,745
======== ======= =======
Basic earnings(loss) per common share....................... $ (0.82) $ 0.02 $ 0.15
======== ======= =======
Diluted earnings (loss) per common share.................... $ (0.82) $ 0.02 $ 0.13
======== ======= =======
Weighted average common shares -- basic..................... 12,511 12,172 11,909
======== ======= =======
Weighted average common shares -- diluted................... 12,511 12,930 12,988
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 38
T-NETIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1997.................. 11,505 $115 $30,130 $ (3,279) $ 26,966
Common stock issued upon exercise of stock
options.................................... 155 2 204 -- 206
Common stock issued in business
acquisition................................ 8 -- 94 -- 94
Common stock issued for cash................. 202 2 598 -- 600
Dividends paid to preferred stockholders..... -- -- -- (36) (36)
Tax benefit from stock options exercised
(note 8)................................... -- -- 402 -- 402
Net earnings................................. -- -- -- 1,745 1,745
------ ---- ------- -------- --------
BALANCES AT DECEMBER 31, 1997................ 11,870 119 31,428 (1,570) 29,977
Common stock issued upon exercise of stock
options.................................... 230 2 819 -- 821
Conversion of preferred stock................ 149 1 592 -- 593
Purchase of treasury stock................... (32) -- (98) (26) (124)
Stock compensation........................... -- -- 75 -- 75
Dividends paid to preferred stockholders..... -- -- -- (9) (9)
Tax benefit from stock options exercised
(note 8)................................... -- -- 198 -- 198
Adjustments to conform year ends of combined
companies.................................. 9 -- 38 (2,235) (2,197)
Net earnings................................. -- -- -- 270 270
------ ---- ------- -------- --------
BALANCES AT DECEMBER 31, 1998................ 12,226 122 33,052 (3,570) 29,604
Common stock issued upon exercise of stock
options.................................... 98 1 256 -- 257
Common stock issued for intangible asset
(note 3)................................... 375 4 2,483 -- 2,487
Net loss..................................... -- -- -- (10,247) (10,247)
------ ---- ------- -------- --------
BALANCES AT DECEMBER 31, 1999................ 12,699 $127 $35,791 $(13,817) $ 22,101
====== ==== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 39
T-NETIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)......................................... $(10,247) $ 270 $ 1,745
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization............................. 11,620 10,174 9,546
Impairment loss and investment write-off.................. 4,632 600 --
Deferred income tax expense (benefit)..................... (1,117) 15 570
Loss (gain) on sale of property and equipment............. (206) (83) 6
Stock compensation expense................................ -- 75 --
Changes in operating assets and liabilities:
Change in accounts receivable, net..................... (263) 1,680 (5,306)
Change in prepaid expenses............................. (48) (678) (146)
Change in inventory.................................... (441) (164) 15
Change in intangibles and other assets................. (593) (227) (371)
Change in accounts payable............................. 6,972 (549) (4,834)
Change in accrued liabilities.......................... 1,907 (670) 1,356
-------- -------- --------
Cash provided by operating activities................ 12,216 10,443 2,581
-------- -------- --------
Cash used in investing activities:
Capital expenditures...................................... (14,560) (6,190) (9,061)
Acquisition of business or business assets................ (1,377) (2,679) (175)
Proceeds from disposal or property and equipment.......... 473 121 13
Other investing activities................................ (980) (2,460) (1,208)
-------- -------- --------
Cash used in investing activities.................... (16,444) (11,208) (10,431)
-------- -------- --------
Cash flows from financing activities:
Net proceeds (payments) under line of credit.............. 11,489 (2,318) 6,765
Payments of debt.......................................... (8,078) (3,064) (3,396)
Proceeds from debt........................................ -- 5,731 3,722
Common stock issued for cash under option plans........... 257 821 206
Common stock issued for cash.............................. -- -- 600
Treasury stock purchased.................................. -- (124) --
Dividends on preferred stock.............................. -- (9) (36)
Redemption on preferred stock............................. -- (7) --
-------- -------- --------
Cash provided by (used in ) financing activities..... 3,668 1,030 7,861
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (560) 265 11
Adjustment to conform year ends of combined companies....... -- 48 --
Cash and cash equivalents at beginning of year.............. 678 365 354
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 118 $ 678 $ 365
======== ======== ========
Cash paid for interest...................................... $ 2,568 $ 1,773 $ 1,502
======== ======== ========
Cash paid for income taxes.................................. $ 217 $ 622 $ 95
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 40
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
T-NETIX, Inc. and subsidiaries ("T-NETIX" or the "Company") was
incorporated in Colorado in 1986. The Company has three reportable segments the
Corrections Division, the Internet Services Division and the SpeakEZ Division
("SpeakEZ").
The Corrections Division primarily manages its specialized
telecommunications hardware and software systems for long distance and local
exchange carriers on a contractual basis. The long distance and local exchange
carriers in turn pay a fee per call to the Company for each billable call made
from a phone subject to a contract with the Company. The Company also receives
revenue from billing collect calls made from correctional facilities in which
the Company's specialized telecommunications hardware and software systems are
located. The Internet Services Division provides interLATA Internet services to
Internet subscribers and buys and resells Internet bandwidth. SpeakEZ engages in
the research and development and sales and marketing of speaker verification
technology.
Basis of Presentation
On June 14, 1999, the Company completed a merger with Gateway Technologies,
Inc. ("Gateway"), a privately held provider of inmate calling services. As a
result of the merger, Gateway became a wholly owned subsidiary of the Company.
Prior to the merger, the Company changed its year-end from July 31 to December
31. Gateway's year-end was December 31.
The merger was accounted for as a pooling of interests. As a result, the
Company's financial statements have been restated to combine Gateway's financial
statements as if the merger had occurred at the beginning of the earliest period
presented. Information concerning common stock and per share data has been
restated on an equivalent share basis.
The consolidated statements of operations and cash flows for the years
ended December 31, 1998 and 1997 have been recast to reflect the results of
operations and cash flows for T-NETIX for the years ended July 31, 1998 and
1997, respectively, combined with Gateway for the years ended December 31, 1998
and 1997.
As a result of T-NETIX and Gateway having different fiscal year ends prior
to 1999, the results of operations of T-NETIX for the five month period ended
December 31, 1998, have been excluded from the reported results of operations.
The net loss for the period and common stock transactions during that period
have been accounted for as an adjustment of stockholders' equity at January 1,
1999. T-NETIX had revenue, expenses, and net loss of $15,041,000, $17,606,000,
and $2,235,000, respectively, for the five month period ended December 31, 1998.
Liquidity
The Company incurred losses from continuing operations in the current year
of $10.2 million and had a working capital deficit of $8.2 million at December
31, 1999. The Company received a waiver from its lenders relating to various
covenant violations on its bank credit facility. In connection with the waiver,
the lenders agreed to revise the existing covenant requirements if the Company
can raise $7 million of additional financing on or before April 14, 2000. The
funds raised are required to be used to reduce the outstanding balance on the
credit facility. These factors among others may indicate that the Company may
not be able to meet its obligations as they become due or the Company may have
to significantly reduce installations and curtail other operations.
F-6
<PAGE> 41
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has taken steps to obtain the additional financing, on or
before the deadline of April 14, 2000, by entering into term sheets to issue
convertible preferred securities to a non-related party and subordinated debt
instruments to one of the Company's directors. Management believes that they
will complete the above financing arrangements in the time frame imposed by the
lenders. Should the Company be unable to complete the financing arrangements or
an alternative financing arrangement by the deadline currently imposed by the
lenders, the Company would again be in breach of the loan agreement covenants
and the lenders could commence immediate collection activity.
In addition, the Company is taking steps to increase cash flow from
operations and obtain additional financing to ensure that the Company is able to
carry out its fiscal 2000 business plan. There can be no assurance that the
Company will be successful in increasing its cash flow from operations or that
additional financing will be available, or if available, will be obtained on
acceptable terms.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Risks and Uncertainties
A majority of the Company's revenue is generated from services provided to
significant telecommunications customers. The loss of a major customer could
affect operating results adversely.
Cash Equivalents
Cash equivalents consist of highly liquid investments, such as certificates
of deposit and money market funds, with original maturities of 90 days or less.
Fair Value of Financial Instruments
The reported amounts of the Company's financial instruments including cash
and cash equivalents, receivables, accounts payable, and accrued liabilities
approximate fair value due to their short maturities. The reported amounts of
debt approximate fair value due to market interest rates that these debts bear.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company's revenue is primarily concentrated in the
United States in the telecommunications industry. The Company had trade accounts
receivable from 5 customers that comprised 28% and 31% of total trade accounts
receivable at December 31, 1999 and 1998, respectively. The Company does not
require collateral on accounts receivable balances and provides allowances for
potential credit losses. An allowance for doubtful accounts has been established
based
F-7
<PAGE> 42
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on historical experience and management's evaluation of outstanding accounts
receivable at the end of the accounting period.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Provisions, when required, are made to
reduce excess and obsolete inventories to their estimated net realizable values.
Property and Equipment
Property and equipment is stated at cost, including costs necessary to
place such property and equipment in service. Major renewals and improvements
are capitalized, while repairs and maintenance are charged to operations as
incurred.
Construction in progress represents the cost of material purchases and
construction costs, including interest capitalized during construction, for
telecommunications hardware systems in various stages of completion. During the
years ended December 31, 1999, 1998 and 1997, interest capitalized was
insignificant.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 7 years for telecommunications equipment and 5 to 10 years for
office equipment. No depreciation is recorded on construction in progress until
the asset is placed in service.
Intangible and Other Assets
Other assets include intellectual property assets, capitalized computer
software, patent defense and application costs, deposits and long-term
prepayments and other intangible assets. Patents and intangible assets are
stated at cost. Amortization is computed on the straight-line basis over 17
years for patent costs and periods ranging from 3 to 7 years for other
intangibles. Amortization charged to expense was $1,500,000, $936,000, and
$796,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Goodwill
Goodwill, representing the excess of the cost over the net tangible and
identifiable assets of the acquired businesses, is stated at cost and is
amortized, principally on a straight-line basis, over the estimated future
periods to be benefited 5 to 10 years. On an annual basis, the Company reviews
the recoverability of goodwill based primarily on an analysis of undiscounted
cash flows from the acquired business. Accumulated amortization amounted to
$1,103,000 and $364,000 at December 31, 1999 and 1998, respectively.
Impairment of Long-Lived Assets
The Company reviews its property and equipment and unamortized intangible
assets whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. The Company estimates the future cash flows
expected to result from operations and if the sum of the expected undiscounted
future cash flows is less than the carrying amount of the long-lived asset, the
Company recognizes an impairment loss by reducing the unamortized cost of the
long-lived asset to its estimated fair value.
During the year ended December 31, 1999, the Company recorded an impairment
charge of telecommunications assets of $4,632,000. Impaired telecommunications
assets consisted of software development costs, construction in progress, and
inmate calling platform assets. Two events occurred in 1999 indicated that the
carrying value of certain equipment and intangible assets may not be
recoverable.
F-8
<PAGE> 43
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In September, 1999, the Company completed an evaluation of the future
viability of its new inmate calling platform ("DL Platform") which it had been
developing over the past two years. The merger with Gateway allowed the Company
to consider an alternative to the DL Platform. The Company determined that the
Gateway ComBridge Platform ("ComBridge"), would be the platform to install for
both new customers and upgrades of existing customers. However, over the last
year the Company had been awarded certain contracts where the DL Platform was to
be deployed. Since the Company believes that it would not be cost effective to
maintain and support two separate systems, the Company proceeded to renegotiate
all existing contracts to install ComBridge instead of the DL Platform. During
the quarter ended September 30, 1999, the Company successfully completed these
negotiations. Due to the abandonment of the DL Platform, the Company no longer
has any anticipated cash flow to support the carrying value of assets related to
the DL Platform. Capitalized costs relating to the DL Platform included software
development costs, components (consisting of primarily telephony cards) and
other supporting computer peripheral equipment. The estimated impairment, being
the excess of the carrying amounts over the respective estimated fair value of
these assets, is approximately $3,669,000 for the year ended December 31, 1999.
As a result, software development costs at December 31, 1999 were impaired by
$2,093,000 and construction in progress relating to these products was impaired
by $1,576,000. All of these charges are applicable to the Corrections Division.
In addition, the Company deployed a version of its old inmate calling
platform that resides in its customer's network locations. The Company has
recently experienced a reduction in call volumes and revenues for this platform.
The customer has indicated to the Company that it does not intend to use the
platform as a source of future services. Additionally, since the platform was
based on the predecessor to the DL Platform, there is not an upgrade path
available for the new platform. Any new feature or service offering would be
evaluated based on the new ComBridge Platform. The reduction in call volumes
caused the estimated fair value of these assets to be less than the existing
book value. The Company estimated the fair value of these assets based on the
discounted cash flows from each service location. After consideration of minimal
salvage value of these assets due to their specific use, the Company recorded an
impairment charge of approximately $963,000. This charge was applicable to the
Corrections Division.
Revenue Recognition
Revenue and expenses from telecommunications services and direct call
provisioning are recognized at the time the telephone call is completed.
Provision is made for uncollectible accounts in the period direct call
provisioning revenue is recorded. Revenue from equipment sales is recognized
when the equipment is shipped to customers. Internet services are recognized as
the services are provided. The Company records deferred revenue for advance
billings to customers, or prepayments by customers prior to the completion of
installation or prior to the provision of contractual bandwidth usage.
The Company recognizes revenue from the sale of computer software in
accordance with the American Institute of Certified Public Accountants
("AICPA"), Statement of Position 97-2, "Software Revenue Recognition" ("SOP
97-2"), as amended by Statement of Position 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2" ("SOP 98-4").
SOP 97-2 and SOP 98-4 generally require revenue earned on software
arrangements involving multiple elements (i.e. software products,
upgrades/enhancements, post contract customers 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 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 the 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
of all elements in a multiple-element arrangement, all revenue from the
arrangement is deferred until such evidence exists or until all elements are
delivered.
F-9
<PAGE> 44
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 1998, the AICPA issued Statement of Position 98-9,
"Modification of 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" ("SOP 98-9"). SOP 98-9 requires the use of the "residual method"
for recognition of revenue when vendor-specific objective evidence exists for
undelivered elements but does not exist for delivered elements of a software
arrangement. The Company will be required to comply with the provisions of SOP
98-9 for transactions entered into beginning January 1, 2000. The Company
believes the adoption of SOP 98-9 will not have a material effect on its
consolidated financial statements, results of operations or financial condition.
Research and Development
Costs associated with the research and development of new technology or
significantly altering existing technology are charged to operations as
incurred. Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. Under the standard,
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations.
Capitalized software costs are amortized over the economic useful life of the
software product, which is generally estimated to be three years.
The American Institute of Certified Public Accountants ("AICPA") Statement
of Position 98-1, "Accounting for the Costs of Computer Software Development or
Obtained for Internal Use ("SOP 98-1") provides guidance for the accounting for
computer software developed or obtained for internal use including the
requirement to capitalize specified costs. There were no such costs capitalized
pursuant to SOP 98-1 at December 31, 1999 and 1998.
401(k) Plan
The Company established a 401(k) plan for all of its full time employees
effective January 1, 1994. In June 1998, the Company implemented a matching
program. The program calls for the Company to match 25% of an employee's
contribution up to 6% of the individual employee's total salary. Matching
contributions and plan expenses were $111,000 for the year ended December 31,
1999 and were not significant for the year ended December 31, 1998.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Accordingly, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted income tax rates
expected to apply to taxable income in the years in which those differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in income tax rates is recognized in the results of
operations in the period that includes the enactment date.
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). Basic earnings per share 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 earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. For the year ended December 31, 1999,
F-10
<PAGE> 45
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
375,000 common stock equivalents were not included in the diluted earnings per
share calculation, as their effect would be anti-dilutive. For the years ended
December 31, 1998 and 1997 diluted common and common equivalent shares
outstanding includes 758,000 and 1,080,000, respectively of common share
equivalents, consisting of stock options, determined under the treasury stock
method.
Stock Compensation
The Company accounts for employee stock options under the provisions APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and has
adopted the "disclosure only" alternative described in Statement of Financial
Accounting Standards No. 123, "Accounting for the Stock-Based Compensation"
("SFAS 123"), which requires pro forma disclosure of compensation expense using
a fair value based method of accounting for stock-based compensation plans.
Comprehensive Income
Statement of Financial Accounting Standards 130, "Reporting Comprehensive
Income," (SFAS 130) establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The objective of SFAS 130 is to report a measure of all
changes in equity of an enterprise that result from transactions and other
economic events of the period other than transactions with stockholders
("comprehensive income"). Comprehensive income is the total of the net income
(loss) and all other non-owner changes in equity. For the year ended December
31, 1999, 1998 and 1997, the Company's comprehensive earnings (loss) was equal
to net earnings (loss).
Recently Issued Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. In June, 1999, the Financial Accounting Standards Board issued SFAS
137, "Accounting for Derivative Instruments and Hedging Activities Deferral of
the Effective Date of FASB No. 133 -- An amendment of FASB Statement No. 133."
SFAS 137 defers the effective date of SFAS 133 to all fiscal quarters of all
fiscal years beginning after June 15, 2000. The Company does not expect the
adoption of SFAS 133 to have a material impact on its financial position or
results of operations.
Reclassification
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 presentation.
F-11
<PAGE> 46
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) BALANCE SHEET COMPONENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accounts receivable, net:
Trade accounts receivable................................. $11,797 $10,963
Direct call provisioning receivable....................... 7,268 6,190
Customer reimbursable receivable.......................... 1,161 785
Other receivables......................................... 231 547
------- -------
20,457 18,485
Less: Allowance for doubtful accounts.................. (3,589) (1,996)
------- -------
$16,868 $16,489
======= =======
</TABLE>
Bad debt expense was $4,981,000, $4,930,000, and $3,785,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Property and equipment, net:
Telecommunications equipment.............................. $ 55,487 $ 52,075
Construction in progress.................................. 7,341 5,011
Office equipment.......................................... 9,169 7,326
-------- --------
71,997 64,412
Less: Accumulated depreciation and amortization........ (38,139) (32,914)
-------- --------
$ 33,858 $ 31,498
======== ========
</TABLE>
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Intangible and other assets, net:
Patent license rights..................................... $ 3,325 $ 3,325
Purchased technology assets............................... 2,487 --
Capitalized software development costs.................... 651 1,821
Acquired software technologies............................ 1,783 1,726
Patent defense and application costs...................... 2,583 2,525
Deposits and long-term prepayments........................ 1,183 505
Other..................................................... 1,649 1,793
------- -------
13,661 11,695
Less: Accumulated amortization......................... (4,409) (2,959)
------- -------
$ 9,252 $ 8,736
======= =======
</TABLE>
F-12
<PAGE> 47
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) BALANCE SHEET COMPONENTS -- (CONTINUED)
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accrued liabilities:
Deferred revenue and customer advances.................... $2,114 $1,228
Compensation related...................................... 1,175 1,292
Other..................................................... 4,317 3,157
------ ------
$7,606 $5,677
====== ======
</TABLE>
(3) MERGERS AND ACQUISITIONS
Gateway
On June 14, 1999, the Company completed a merger with Gateway, 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. Outstanding Gateway stock options were also converted at the same
exchange factor into options to purchase approximately 379,000 shares of T-NETIX
common stock.
In addition, in connection with 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 been recorded in patent license rights and has an estimated useful life of
10 years, the remaining term of the underlying patent.
Selected financial data of T-NETIX and Gateway, prior to the merger were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
THREE MONTHS ENDED DECEMBER 31,
MARCH 31, -----------------
1999 1998 1997
------------------ ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
T-NETIX....................................... $ 8,669 $38,008 $36,292
Gateway....................................... 9,115 30,233 26,013
------- ------- -------
Combined................................... $17,784 $68,241 $62,305
======= ======= =======
Net earnings (loss):
T-NETIX....................................... $(1,077) $ 394 $ 591
Gateway....................................... 245 (124) 1,154
------- ------- -------
Combined................................... $ (832) $ 270 $ 1,745
======= ======= =======
</TABLE>
Transactions between T-NETIX and Gateway prior to the merger consisted of
revenue from a cross-licensing agreement. All such amounts have been eliminated
in the restated consolidated financial statements. There were no material
adjustments required to conform the accounting policies of the two companies.
F-13
<PAGE> 48
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) MERGERS AND ACQUISITIONS -- (CONTINUED)
Certain reclassifications were made to the Gateway financial statements to
conform to T-NETIX's presentations.
In connection with the merger, the Company incurred merger transaction
expenses of $1,017,000 for the year ended December 31, 1999. Merger transaction
expenses consisted primarily of fees for investment bankers, attorneys,
accountants, financial printing and other related charges.
Evans and Ricker Acquisition
Effective October 28, 1999, the Company completed the acquisition of
substantially all of the assets of Evans and Ricker ("E&R"), of Portland,
Oregon. E&R specialize in software used to control and manage information for
correctional facilities. E&R's product, Lock and Track Corrections Information
System ("Lock & Track(TM)") is a comprehensive relational database designed to
handle the operational control and reporting needs of municipal, state, federal,
and/or private correctional facilities. The purchase price was approximately
$1.4 million including acquisition costs. The acquisition has been accounted for
using the purchase method of accounting. The results of operations associated
with the assets acquired are included in the Company's financial statements
beginning November 1, 1999. Assets acquired and liabilities assumed have been
recorded at their fair values. The assets acquired were cash, accounts
receivable and intangibles. The estimated excess of cost over the estimated fair
value of the net assets acquired of approximately $1.3 million was allocated
principally to goodwill, which will be amortized on a straight line basis over 7
years. The remaining net assets acquired were primarily current assets (cash and
accounts receivable) net of current liabilities (accounts payable and accrued
liabilities). The acquisition was funded by borrowings under the Company's line
of credit. Pro forma information giving effect to this acquisition has been
omitted as the pro forma results do not vary materially from the Company's
recorded results, as E&R's operations were not significant in 1998 or 1997.
(4) SPEAKEZ OPERATIONS
In December 1998, the Company began an evaluation of the SpeakEZ Division
and determined that 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. This change coincided with the resignation of
the Company's former chief executive officer on December 9, 1998. This
individual spent a majority of his time in the SpeakEZ Division. For the five
months ended December 31, 1998, the Company charged the cost of the severance
agreement or approximately $240,000 to SpeakEZ selling, general and
administrative expense.
The Company completed the reorganization of SpeakEZ operations in February
1999. The reorganization also included a change in the marketing strategy from a
direct customer sales strategy to a technology licensing strategy. A direct
customer sales strategy markets a specifically developed software product to a
specific, end user customer. The strategy is then to find other specific
customers who have similar operating systems and market this product to them. In
contrast, a technology licensing strategy focuses on a larger scale customer who
can integrate the SpeakEZ software product into its existing product line. This
larger customer, such as a computer manufacturer, is then responsible for the
product integration and ultimate delivery to the end user customer.
The change in marketing approach noted above required the Company to
evaluate future marketability of all products in the SpeakEZ Division. As a
result of this evaluation, management, determined that the capitalized cost for
SpeakEZ products, some of which would no longer be marketed, exceeded their
estimated realizable value. For the five months ended December 31, 1998, the
Company incurred a charge of $490,000 for a reduction in the carrying value of
such capitalized costs to their estimated net realizable value.
F-14
<PAGE> 49
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) SPEAKEZ OPERATIONS (CONTINUED)
The Company also recognized a loss in the SpeakEZ Division on a note
receivable made to a venture partner for $300,000. In December 1998, the venture
partner notified the Company that its plans to raise capital prior to January
1999 were not progressing according to plan and as a result it would not be able
to meet its obligations as they became due.
(5) DEBT
Debt at December 31, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Debt:
Bank lines of credit...................................... $28,461 $16,972
Advances on direct call processing........................ -- 2,531
Notes payable to stockholders............................. -- 4,800
Notes payable to banks.................................... -- 625
Other..................................................... 460 582
------- -------
28,921 25,510
Less current portion................................... 7,366 21,353
------- -------
Non current portion.................................... $21,555 $ 4,157
======= =======
</TABLE>
In September 1999, the Company entered into a Senior Secured Revolving
Credit Facility (the "Credit Facility") with its commercial bank. The Credit
Facility provides for maximum credit of $40,000,000 subject to limitations based
on financial covenant calculations. The Credit Facility is comprised of a one
year LIBOR component of $15,000,000 at an interest rate of LIBOR plus 2.75% at
December 31, 1999; a three month LIBOR component of $10,000,000 at an interest
rate of LIBOR plus 2.75% at December 31, 1999; and $3,461,000 at the Bank's
prime rate, 8.5% at December 31, 1999. As of December 31, 1999, the interest
rate on borrowings under the line of credit ranged from 8.50% to 8.87%. The
Company also pays a fee of 0.30% per annum on the unused portion of the line of
credit.
The Credit Facility is collateralized by substantially all of the assets of
the Company. Under the terms of the Credit Facility, the Company is required to
maintain certain financial ratios and other financial covenants. These ratios
include a debt to a four quarter rolling earnings before interest, taxes and
depreciation and amortization (EBITDA) ratio, a ratio of fixed charges (interest
and debt payments) to EBITDA, and minimum quarterly EBITDA. The Agreement also
prohibits the Company from incurring additional indebtedness.
At December 31, 1999 the Company was in violation of certain covenants and
the Company has received a waiver from its lenders relating to various covenant
violations. In connection with the waiver, the lenders agreed to revise the
existing covenant requirements if the Company can raise $7 million of additional
financing on or before April 14, 2000. The funds raised are required to be used
to reduce the outstanding balance on the Credit Facility. The terms of the bank
dictate that $7 million of the Credit Facility is due April 14, 2000 with the
remaining balance of the facility due April 30, 2001. The amount of credit under
the Credit facility available to the Company is dependent upon our financial
performance and may be less than $40 million.
F-15
<PAGE> 50
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) STOCKHOLDERS' EQUITY
Stock Option Plans
The Company has reserved 3,850,000 shares of common stock for employees and
non-employee directors under various stock option plans (collectively the
"Plans"): the 1991 Incentive Stock Option Plan ("the 1991 ISO Plan"); the 1991
Non-Qualified Stock Option Plan ("the 1991 NSO Plan"); and the 1993 Incentive
Stock Option Plan ("the 1993 ISO Plan"). The Plans provide for issuing both
incentive stock options, and non-qualified stock options, which must be granted
at not less than 100% of the fair market value of the stock on the date of
grant. All options to date have been granted at the fair market value of the
stock as determined by the Board of Directors. Options issued prior to 1994 had
vesting terms of one to three years from the date of grant. Substantially all of
the Incentive Stock Options issued after 1993 vest over four years from the date
of grant. The options expire ten years from the date of grant.
A summary of the Company's stock option activity, and related information
through December 31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------
WEIGHTED
AVERAGE
SHARES AVAILABLE NUMBER OF EXERCISE
FOR GRANT SHARES PRICE
---------------- --------- --------
<S> <C> <C> <C>
Balance at January 1, 1997........................ 476,163 2,513,957 $4.55
Granted......................................... (111,500) 111,500 8.61
Exercised....................................... -- (281,200) 2.67
Canceled........................................ 96,875 (96,875) 6.83
-------- --------- -----
Balance at December 31, 1997...................... 461,538 2,247,382 4.88
Granted......................................... (246,619) 246,619 5.24
Exercised....................................... -- (77,477) 2.86
Canceled........................................ 166,000 (166,000) 6.45
-------- --------- -----
Balance at December 31, 1998...................... 380,919 2,250,524 4.88
Granted......................................... (223,800) 223,800 5.34
Exercised....................................... -- (98,425) 2.61
Canceled........................................ 456,769 (456,769) 6.92
-------- --------- -----
Balance at December 31, 1999...................... 613,888 1,919,130 $4.56
======== ========= =====
</TABLE>
The range of exercise prices for common stock options outstanding and
options exercisable at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
-------------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.20 281,475 1.3 years $ 0.20 281,475 $ 0.20
$ 1.61 307,490 6.7 years $ 1.61 307,490 $ 1.61
$ 3.00-$4.11 154,090 4.4 years $ 3.32 136,590 $ 3.25
$ 4.12-$5.48 222,800 9.2 years $ 5.08 30,000 $ 5.04
$ 5.49-$7.24 455,525 6.2 years $ 5.58 369,025 $ 5.50
$ 7.25 394,750 6.1 years $ 7.25 359,875 $ 7.25
$ 7.26-$10.99 53,000 7.9 years $ 9.07 36,750 $ 9.12
$11.00-$13.71 50,000 6.0 years $13.44 46,250 $13.64
--------- ---------
$ 0.20-$13.71 1,919,130 5.8 years $ 4.56 1,567,455 $ 4.31
========= =========
</TABLE>
F-16
<PAGE> 51
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
The Company has not recorded compensation expense for stock options
granted. The Company has computed the pro forma disclosures required under SFAS
123 for stock options granted using the Black-Scholes option-pricing model. The
assumptions are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Risk free interest rate.............................. 5.43% 5.24% 5.24%
Expected dividend yield.............................. -- -- --
Expected lives (in years)............................ 5.2 years 5.0 years 4.9 years
Expected volatility.................................. 70.0% 70.0% 70.0%
Weighted average remaining contractual life of
options outstanding................................ 5.8 years 4.9 years 5.2 years
Weighted average fair value at grant date............ $3.24 $2.35 $4.11
</TABLE>
The pro forma effects of applying SFAS 123 are as follows for the years
ended December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
-------- ------ ------
(AMOUNT IN THOUSANDS)
<S> <C> <C> <C>
Net earnings (loss):
As reported.............................................. $(10,247) $ 270 $1,745
Pro forma................................................ (11,118) (847) 620
Net earnings (loss) per common share:
As reported:
Basic............................................... $ (0.82) $ 0.02 $ 0.15
Diluted............................................. (0.82) 0.02 0.13
Pro forma:
Basic............................................... $ (0.89) $(0.07) $ 0.05
Diluted............................................. $ (0.89) $(0.07) $ 0.05
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models to not necessarily provide a reliable single
measure of the fair value of its employee stock options.
In July, 1997, the Board of Directors amended the 1993 ISO Plan and the
1991 NSO Plan to provide that the Compensation Committee may amend certain
outstanding options with an exercise price in excess of the current market price
in order to modify the exercise price to the current market price or greater. On
August 11, 1997, the Compensation Committee re-priced the exercise price to
$7.25 per share for certain outstanding options under the 1993 ISO Plan and the
1991 NSO Plan having an exercise price equal to or greater than $7.50 prior to
such re-pricing. This re-pricing affected 773,500 options granted under these
Plans.
F-17
<PAGE> 52
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information, ("SFAS 131") establishes
standards for the way public enterprises report information about operating
segments in annual financial statements. SFAS 131 also establishes standards for
disclosures about products and services, geographic areas and major customers.
The Company has three reportable segments; the Corrections Divisions, the
SpeakEZ Division, and Internet Services Division. The Company evaluates
performance based on earnings (loss) before income taxes. Additional measures
include operating income, depreciation and amortization, and interest expense.
There are no intersegment sales. 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. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies. Segment
information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
REVENUE FROM EXTERNAL CUSTOMERS:
Corrections Division.................................. $71,596 $67,609 $61,629
SpeakEZ Division...................................... 93 632 676
Internet Services Division............................ 1,546 -- --
OPERATING INCOME (LOSS):
Corrections Division.................................. $(5,796) $ 6,816 $ 7,031
SpeakEZ Division...................................... (2,518) (3,996) (2,664)
Internet Services Division............................ 104 -- --
DEPRECIATION AND AMORTIZATION
Corrections Division.................................. $10,651 $ 9,250 $ 8,841
SpeakEZ Division...................................... 969 924 705
Internet Services Division............................ -- -- --
INTEREST AND OTHER INCOME (EXPENSE)
Corrections Division.................................. $(1,217) $(1,762) $(1,216)
SpeakEZ Division...................................... (920) (592) (367)
Internet Services Division............................ -- -- --
SEGMENT EARNINGS (LOSS) BEFORE TAX:
Corrections Division.................................. $(8,029) $ 5,054 $ 5,815
SpeakEZ Division...................................... (3,439) (4,588) (3,031)
Internet Services Division............................ 104 -- --
SEGMENT EARNINGS (LOSS) BEFORE TAX:
Revenue from external customers....................... $73,235 $68,241 $62,305
Operating income (loss)............................... (8,210) 2,820 4,367
Depreciation and amortization......................... 11,620 10,174 9,546
Interest and other (income) expense, net.............. 2,137 2,354 1,583
Segment earnings (loss) before tax.................... (11,364) 466 2,784
</TABLE>
F-18
<PAGE> 53
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) SEGMENT INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
SEGMENT ASSETS:
Corrections Division...................................... 66,943 60,880
SpeakEZ Division.......................................... 3,599 4,599
Internet Services Division................................ -- --
</TABLE>
Substantially all of the Company's reportable segment revenue is derived
within the United States. Revenue as a percentage of total revenue attributable
to significant customers for the years ended December 31, 1999, 1998 and 1997 is
as follows:
<TABLE>
<CAPTION>
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
AT&T........................................................ 13% 16% 19%
Bell Atlantic............................................... 10% 12% 12%
SBC Communications.......................................... 10% 12% 13%
</TABLE>
There was no intersegment revenue for the years ended December 31, 1999,
1998 and 1997. Unallocated amounts to arrive at net earnings (loss) included
income tax expense (benefit) of $(1,117,000), $196,000, and $1,039,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. Consolidated total
assets included eliminations of approximately $12,976,000 and $11,084,000 as of
December 31, 1999 and 1998, respectively. Eliminations consist of intercompany
receivables in the Corrections Division and intercompany payables in the SpeakEZ
Division related solely to intercompany borrowing of the SpeakEZ Division.
(8) INCOME TAXES
Income tax expense for the years ended December 31, 1999, 1998 and 1997 is
as follows (amounts in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ---- ------
<S> <C> <C> <C>
Current:
Federal................................................... $(1,007) $186 $ 439
State..................................................... (191) 25 30
------- ---- ------
Total............................................. (1,198) 211 469
------- ---- ------
Deferred:
Federal................................................... 72 (55) 516
State..................................................... 9 40 54
------- ---- ------
Total............................................. 81 (15) 570
------- ---- ------
Total income tax expense (benefit)................ $(1,117) $196 $1,039
======= ==== ======
</TABLE>
F-19
<PAGE> 54
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES (CONTINUED)
Income taxes differ from the expected statutory income tax benefit, by
applying the US federal income tax rate of 34% to pretax earnings for the years
ended December 31, 1999, 1998 and 1997 due to the following:
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- ------
<S> <C> <C> <C>
Expected statutory income tax (benefit) expense............ $(3,864) $ 273 $ 947
Amounts not deductible for income tax...................... 699 107 97
State taxes, net of federal benefit........................ (377) 43 55
Change in valuation allowance.............................. 2,263 (113) --
Other...................................................... 162 (114) (60)
------- ----- ------
Total income tax expense (benefit)......................... $(1,117) $ 196 $1,039
======= ===== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
as of December 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards............................ $ 6,556 $ 5,406
Allowance for doubtful accounts............................. 1,488 716
Other....................................................... 680 458
------- -------
Total gross deferred income tax assets...................... 8,724 6,580
Less valuation allowance.................................... (3,727) (1,464)
------- -------
4,997 5,116
Deferred income tax liabilities:
Intangible assets, due to difference in book/tax basis...... (474) (1,068)
Property and equipment, principally due to differences in
depreciation.............................................. (1,867) (2,523)
Other assets, due to differences in book/tax basis.......... (359) (563)
------- -------
Total gross deferred tax liabilities........................ (2,700) (4,154)
------- -------
$ 2,297 $ 962
======= =======
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards for
tax purposes aggregating approximately $17.4 million which, if not utilized to
reduce taxable income in future periods, expire at various dates through the
year 2010. Approximately $1.3 million of the net operating loss carryforwards
are subject to certain rules limiting their annual usage. The Company believes
these annual limitations will not ultimately affect the Company's ability to use
substantially all of its net operating loss carryforwards for income tax
purposes.
A valuation allowance is provided when it is more likely than not that some
portion or the entire net deferred tax asset will not be realized. The Company
has offset a portion of its deferred tax assets with a valuation allowance. The
valuation allowance will be adjusted in the future based on the Company's
projected taxable income.
The exercise of stock options, which have been granted under the Company's
1991 NSO stock option plan gives rise to compensation which is included in the
taxable income of the applicable option holder and is deductible by the Company
for federal and state income tax purposes. The income tax benefit associated
with the exercise of the NSO options is recorded as an adjustment to additional
paid-in capital when realized.
F-20
<PAGE> 55
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating lease agreements. Rent
expense under operating lease agreements for the years ended December 31, 1999,
1998 and 1997 was approximately $1,034,000, $930,000, and $629,000,
respectively. Future minimum lease payments under these lease agreements for
each of the next five years are summarized as follows (amounts in thousands):
<TABLE>
<S> <C>
Year ending December 31:
2000..................................................... $ 976
2001..................................................... 721
2002..................................................... 229
2003..................................................... 5
------
Total minimum lease payments..................... $1,931
======
</TABLE>
The Company is involved in various legal proceedings of a nature considered
normal to its business. It is the Company's policy to accrue amounts related to
these legal matters if it is probable that a liability has been incurred an
amount that is reasonable estimable. In the opinion of management, all matters
are of such a nature as would not have a material affect on the Company's
financial position, results of operations and cash flows of the Company if
resolved unfavorably.
F-21
<PAGE> 56
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Shareholders
T-NETIX, Inc.:
Under the date of March 21, 2000, we reported on the consolidated balance
sheets of T-NETIX, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1999. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
Schedule II. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Denver, Colorado
March 21, 2000
S-1
<PAGE> 57
SCHEDULE II
T-NETIX, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS/ AT END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Allowance for doubtful accounts.................. $ 989 $3,785 $(3,821) $ 953
====== ====== ======= ======
Year Ended December 31, 1998:
Allowance for doubtful accounts.................. $ 953 $4,930 $(3,887) $1,996
====== ====== ======= ======
Year Ended December 31, 1999:
Allowance for doubtful accounts.................. $1,996 $4,981 $(3,388) $3,589
====== ====== ======= ======
</TABLE>
S-2
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
(2.1) -- Acquisition Agreement and Plan of Merger between
Registrant and SpeakEZ, Inc. dated October 11, 1995.****
(2.2) -- Agreement and Plan of Merger of T-NETIX and Gateway dated
February 10, 1999*****
(3.1) -- Articles of Amendment to the Articles of Incorporation of
Registrant****
(3.2) -- Amended and Restated Articles of Incorporation of
Registrant**
(3.3) -- Amended and Restated Bylaws of Registrant*
(10.1) -- 1991 Non-Qualified Stock Option Plan***
(10.2) -- Form of 1991 Non-Qualified Stock Option Agreement***
(10.3) -- 1991 Incentive Stock Option Plan***
(10.4) -- Form of 1991 Incentive Stock Option Agreement***
(10.5) -- 1993 Incentive Stock Option Plan***
(10.6) -- Form of 1993 Incentive Stock Option Agreement***
(10.7) -- Agreement between American Telephone and Telegraph
Company and Registrant dated November 1, 1991*
(10.8) -- Loan Agreement between Registrant and Bank One, Colorado
NA, COBANK, ACB, and INTRUST BANK, N.A., dated as of
September 9, 1999.
(10.9) -- Standard Industrial Lease between Pacifica Development
Properties, II LLC and Registrant dated April 15, 1996
and Amendment Number One thereto, dated May 20, 1996.****
(10.10) -- Employment Agreement between Gateway and Richard E. Cree
dated January 1, 1998.
(21) -- Subsidiaries of Registrant*
(23.1) -- Consent of KPMG LLP
(27) -- Financial Data Schedule
</TABLE>
- ---------------
* Incorporated herein by this reference from the Exhibits to the
Registrant's Registration Statement on Form S-1 filed with the
Commission on September 8, 1994, SEC Registration No. 33-83844.
** Incorporated herein by this reference from the Exhibits to the
Registrant's Amendment No. 1 to Registration Statement on Form S-1 filed
with the Commission on October 11, 1994, SEC Registration No. 33-83844.
*** Incorporated herein by this reference from the Exhibits to the
Registrant's Registration Statement on Form S-8 filed with the
Commission on May 23, 1995, SEC Registration No. 33-92642 and amended on
May 3, 1996.
**** Previously filed with the Commission as an exhibit to the Company's
Annual Report on Form 10-K for fiscal year ended 1996.
***** Previously filed with the Commission as an exhibit to the Company's
Proxy Statement dated May 10, 1999.
<PAGE> 1
LOAN AGREEMENT
$40,000,000 REVOLVING LINE OF CREDIT
FROM
BANK ONE, COLORADO, NA,
COBANK, ACB,
AND
INTRUST BANK, NA
TO
T-NETIX, INC.
SEPTEMBER 9, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1. INTERPRETATIONS 1
1.1 Definitions 1
1.2 Accounting Terms and Determinations 9
ARTICLE 2. THE LOAN 10
2.1 The Loan 10
2.2 Repayments by Borrower 12
2.3 Automatic Repayment 13
2.4 Payments to the Lenders 13
2.5 Fees 13
2.6 Letters of Credit 14
ARTICLE 3. CONDITIONS OF LENDING 16
3.1 Advance 16
ARTICLE 4. SECURITY 18
ARTICLE 5. REPRESENTATIONS AND WARRANTIES 18
5.1 Existence 18
5.2 Collateral 19
5.3 Pledged Stock 19
5.4 Noncontravention 19
5.5 Third-Party Authorization 20
5.6 Authorization; Binding Effect 20
5.7 Litigation 20
5.8 Taxes 20
5.9 Liens 20
5.10 Use of Proceeds 20
5.11 Other Obligations 20
5.12 Full Disclosure 21
5.13 Margin Stock 21
5.14 ERISA Compliance 21
5.15 Compliance with Laws 22
5.16 Financial Condition 22
5.17 Environmental Matters 23
5.18 Investment Company Act; Etc 23
5.19 Labor Matters 23
5.20 No Burdensome Agreements 23
5.21 Licenses 23
5.22 Patents, Copyrights, Etc 24
5.23 Subsidiaries and Affiliates 24
5.24 Partnerships and Joint Ventures 24
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE 6. AFFIRMATIVE COVENANTS 24
6.1 Payment and Performance of Loan 24
6.2 Financial Statements 24
6.3 Preservation of Existence, Etc 25
6.4 Maintenance of Property 25
6.5 Payment of Other Obligations 25
6.6 Insurance 26
6.7 Inspection of Property, Books and Records; Meeting
with the Lenders 27
6.8 Notices 27
6.9 Compliance with Laws 28
6.10 Further Assurances 28
6.11 Financial Covenants 29
6.12 Principal Bank Accounts 30
6.13 Loan Expenses 30
6.14 Additional Security 30
6.15 Interest Rate Risk Hedge 30
6.16 SpeakEZ Expenditure 30
6.17 Federal and Other Governmental Contracts 30
ARTICLE 7. NEGATIVE COVENANTS 30
7.1 Indebtedness 31
7.2 Loans and Advances 31
7.3 Investments and New Business 31
7.4 Liens 31
7.5 Stock, Mergers and Consolidations 32
7.6 Dividends and Distributions 32
7.7 Burdensome Undertakings 32
7.8 Disposition of Assets 32
7.9 Use of Proceeds 32
7.10 Transactions with Affiliates 32
7.11 ERISA 33
7.12 Amendments to Organizational Documents 33
ARTICLE 8. EVENTS OF DEFAULT 33
8.1 Nonpayment 34
8.2 Other Defaults 34
8.3 Representation or Warranty 34
8.4 Other Nonpayment 34
8.5 Bankruptcy. Etc 34
8.6 ERISA 34
8.7 Loan Documents 35
8.8 Judgments 35
8.9 Insolvency 35
8.10 Loan Documents 35
8.11 Change in Control 35
8.12 Material Adverse Change 36
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
ARTICLE 9. REMEDIES 36
9.1 Automatic Acceleration of Loans 36
9.2 Optional Acceleration of Loans 36
9.3 Setoff 37
9.4 Expenses 37
ARTICLE 10. THE AGENT 38
10.1 Appointment 38
10.2 Delegation of Duties 38
10.3 Exculpatory Provisions 38
10.4 Reliance by Agent 39
10.5 Notice of Default 39
10.6 Nonreliance on Agent and Other Lenders 39
10.7 Indemnification 40
10.8 Agent and Lenders in Their Individual Capacity 40
10.9 Successor Agent 40
10.10 Lender's Percentage Interest in the Loans 41
10.11 Sharing of Payments 41
10.12 Agreement of Lenders 41
ARTICLE 11. RIGHTS AND DUTIES OF LENDERS 42
11.1 Assignments and Participations 42
11.2 Reliance Upon Attorneys 42
11.3 Acceptance and Consent by the Lenders 43
ARTICLE 12. MISCELLANEOUS 43
12.1 No Waiver; Cumulative Remedies 43
12.2 Notices 43
12.3 Counterpart Execution 44
12.4 Governing Law; Entire Agreement 44
12.5 Amendments and Waivers 45
12.6 Costs, Expenses and Indemnity 45
12.7 Inconsistent Provisions; Severability 46
12.8 Incorporation of Exhibits and Schedules 46
12.9 Amendment of Defined Instruments 46
12.10 References and Titles 46
12.11 Usury 46
12.12 Waiver of Right to Trial by Jury 46
12.13 Successors and Assigns 47
12.14 Term of Agreement 47
12.15 Jurisdiction 47
LIST OF EXHIBITS 52
EXHIBIT A -- REQUEST FOR ADVANCE FORM 53
EXHIBIT B -- ORGANIZATIONAL CHART 55
</TABLE>
iii
<PAGE> 5
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement"), dated as of September 9, 1999, is
by and among, T-NETIX, INC. a Colorado corporation, ("Borrower"), Lenders (as
defined below) and BANK ONE, COLORADO, NA, a national banking association, as
agent for the Lenders (in such capacity, the "Agent").
In consideration of the mutual covenants set forth in this Agreement and
the other Loan Documents, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Borrower, Lenders, and Agent
agree as follows:
ARTICLE 1.
INTERPRETATIONS
1.1 Definitions. As used herein, each of the following capitalized terms shall
have the meaning given it in this Section 1.1:
"Accommodation Obligation" means as applied to any Person any obligation of
such Person guaranteeing or intended to guarantee any Indebtedness, leases,
dividends or other obligations ("primary obligations") or to hold harmless the
owner of such primary obligation against loss in respect thereof, whether direct
or indirect in respect of Indebtedness of others, including any obligation to
supply finds to or in any manner to invest in, directly or indirectly, the
debtor, to purchase indebtedness, or to assure the owner of indebtedness against
loss, through an agreement to purchase goods, supplies or services for the
purpose of enabling the debtor to make payment of the indebtedness held by such
owner or otherwise, and the obligations to reimburse the issuer in respect of
any letters of credit. The amount of any Accommodation Obligation shall be
deemed to be an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Accommodation Obligation is made or, if not
stated or determinable, the maximum anticipated liability in respect thereof
(assuming such Person is required to perform thereunder) as determined by the
Agent.
"Adjusted LIBOR Rate" means the LIBOR Rate, plus the LIBOR Spread.
"Advance" means any advance of the Loan and any funds expended with respect
to the Loan which are reimbursable or otherwise payable by Borrower under this
Agreement or any other Loan Document.
"Advance Date" means the date that any Advance is advanced to Borrower.
"Affiliate" means as to any Person, each other Person which, directly or
indirectly (through one or more intermediaries or otherwise), is in control of,
is controlled by, or is under common control with, such Person. For purposes of
this definition, "control," when used with respect to any specified Person,
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise.
1
<PAGE> 6
"Agent" means Bank One, Colorado, NA in its capacity as agent for the
Lenders, or any successor agent appointed pursuant to the provisions of Section
10.9.
"Agreement Concerning Year 2000 Compliance" means the Agreement Concerning
Year 2000 Compliance executed in connection with the Loan.
"Authorized Officer" means the chief executive officer, the president, any
vice president, the chief financial officer, or the treasurer, or any other
officer having substantially the same authority and responsibility.
"Base Rate" means a per-annum interest rate equal to the Prime Rate. The
Base Rate is adjustable the day of any change in the Prime Rate, regardless of
whether Borrower has notice of such change.
"Base Rate Advance" means any Advance which bears interest at the Base
Rate.
"Business Day" means a day other than Saturdays or Sundays (a) on which all
of the Lenders are open for business and (b) in connection with any request for
a LIBOR Advance, a day on which commercial banks are open for business with the
public in Denver, Colorado, or New York, New York, and on which commercial banks
in the City of London, England, are open for dealings in U.S. dollar deposits in
the London Interbank Market.
"Closing Date" means September 9, 1999.
"Code" means the Internal Revenue Code, as amended, together with the
regulations promulgated thereunder.
"Collateral" means all tangible or intangible, real or personal property
now or at any time hereafter pledged pursuant to the Security Documents.
"Consolidated" means the consolidation of any Person, in accordance with
GAAP, with its properly consolidated Subsidiaries. References herein to
Borrower's financial statements, financial position, financial condition,
liabilities, etc. refer to the consolidated financial statements, position,
condition, liabilities, etc. of Borrower and their properly consolidated
Subsidiaries.
"Controlled Group" means the Borrower and all Persons (whether or not
incorporated) under common control or treated as a single employer with Borrower
pursuant to Section 414(b),(c), (m) or (o) of the Code.
"Default Rate"means the otherwise applicable interest rate (determined in
accordance with the Notes), p1j five percent (5%).
"EBITDA" for a period means, the sum for Borrower and Subsidiaries of (i)
pretax earnings from continuing operations, (ii) Interest Expense and (iii)
depreciation, depletion, and amortization of tangible and intangible assets,
before (a) special extraordinary gains, and (b) miscellaneous gains for such
period, computed and calculated on a Consolidated basis in accordance with GAAP.
2
<PAGE> 7
"Environmental Laws" has the meaning set forth in Section 5.17.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, together with the regulations promulgated thereunder.
"ERISA Affiliate" means any trade or business (whether or not incorporated)
under common control with Borrower within the meaning of Section 414(b), 414(c)
or 414(m) of the Code.
"ERISA Event" means (a) a Reportable Event with respect to a Qualified Plan
or a Multiemployer Plan; (b) a withdrawal by Borrower or any ERISA Affiliate
from a Qualified Plan subject to Section 4063 of ERISA during a plan year in
which it was a substantial employer (as defined in Section 400 l(a)(2) of
ERISA); (c) a complete or partial withdrawal by Borrower or any ERISA Affiliate
from a Multiemployer Plan; (d) the filing of a notice of intent to terminate,
the treatment of a plan amendment as a termination under Section 4041 or 4041A
of ERISA or the commencement of proceedings by the PBGC to terminate a Qualified
Plan or Multiemployer Plan subject to Title IV of ERISA; (e) a failure by
Borrower or any member of the Controlled Group to make required contributions to
a Qualified Plan or Multiemployer Plan; (f) an event or condition which might
reasonably be expected to constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Qualified
Plan or Multiemployer Plan; (g) the imposition of any liability under Title IV
of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of
ERISA, upon Borrower or any ERISA Affiliate; (h) an application for a funding
waiver or an extension of any amortization period pursuant to Section 412 of the
Code with respect to any Plan; (i) a non-exempt prohibited transaction occurs
with respect to any Plan for which Borrower or any Subsidiary of Borrower may be
directly or indirectly liable; or a violation of the applicable requirements of
Section 404 or 405 of ERISA or the exclusive benefit rule under Section 401(a)
of the Code by any fiduciary or disqualified person with respect to any Plan for
which Borrower or any Subsidiary may be directly or indirectly liable.
"ERISA Plan" means any pension benefit plan subject to Section 302 of ERISA
or Title IV of ERISA maintained by Borrower or any member of a controlled group
(as defined in Section 4001 (a)(14) of ERISA).
"Event of Default" shall have the meaning set forth in Article 8.
"Existing Letter of Credit" shall have the meaning set forth in Section
2.6(a) below.
"Federal Funds Rate" means, on any day, a per-annum interest rate equal to
the effective closing rate (rounded upwards, if necessary, to the next higher
1/100 of 1%) for the previous Business Day as reported by Federal Reserve Bank
of New York as the "federal funds rate" for such previous Business Day, or if
such rate is not so published or reported, the average of the quotations
(rounded upwards, if necessary, to the next higher 1/100 of 1%) for such
Business Day received by Agent from three federal funds brokers of recognized
standing selected by it. The Federal Funds Rate for any day that is not a
Business Day will be equal to the Federal Funds
3
<PAGE> 8
Rate for the nearest preceding Business Day. The Federal Funds Rate is
adjustable the day of any change in such rate, regardless of whether Borrower
has notice of such change.
"Fixed Charges" means interest expense for Borrower and Subsidiaries,
calculated on a Consolidated basis in accordance with GAAP; plus long-term debt
(including capital leases) principal payments, earn out payments, and redemption
payments; plus all other payments of principal, interest and other amounts if
the failure to pay such amounts would have a material adverse impact on any
Borrower or its operations, as reasonably determined by Agent -- calculated in
each case on the basis of the four Quarters immediately preceding the date of
calculation.
"Fixed Charge Coverage Ratio" means the ratio of (a) Unadjusted EBITDA, to
(b) Fixed Charges.
"GAAP" means generally accepted accounting principles and practices as
consistently applied (except as otherwise required due to changes in GAAP) by
Borrower and certified to by the firm of independent certified public
accountants regularly employed as Borrower's auditors, such principles and
practices at all times being consistent with requirements of the Financial
Accounting Standards Board of the American Institute of Certified Public
Accountants in effect from time to time, as applicable to the nature of the
business conducted by Borrower.
"Guaranties" means each and all guaranty agreements executed by
Subsidiaries in connection with the Loan.
"Indebtedness" of any Person means, without duplication, all obligations,
contingent or otherwise, that should in accordance with GAAP be classified upon
such Person's balance sheet as liabilities, or to which reference should be made
by footnotes thereto, including in any event and whether or not so classified:
(a) all debt or similar monetary obligations, whether direct or indirect; (b)
all liabilities secured by any mortgage, pledge, security interest, lien, charge
or other encumbrance existing on property owned or acquired subject thereto,
whether or not the liability secured thereby shall have been assumed; (c) all
Accommodation Obligations, and (d) all obligations of any nature whatsoever
arising out of or in connection with any Interest Rate Agreement.
"Initial Financial Statements" means the financial statements of Borrower
for the period ending December 31, 1998.
"Interest Expense" means the Borrower's and Subsidiaries total gross
interest expense as calculated on a Consolidated basis and in accordance with
GAAP (excluding interest income), and shall in any event include, without
limitation, (i) interest expensed (whether or not paid) on all Indebtedness,
(ii) the amortization of debt discounts, (iii) the amortization of all fees
payable in connection with the incurrence of Indebtedness to the extent included
in interest expense, and (iv) the portion of any capital lease obligation
allocable to interest expense.
"Interest Period" has the meaning set forth in the Notes.
4
<PAGE> 9
"JMS Acquisition" means the pending asset purchase of a jail management
system by T-NETIX JMS Corporation ("T-NETIX JMS").
"Letters of Credit" means those certain irrevocable stand-by letters of
credit issued by Agent pursuant to Section 2.6 below, including, without
limitation, the existing Letter of Credit.
"Letters of Credit Liability" means the maximum amount available to be
drawn under the Letters of Credit, plus the amount of any unreimbursed
obligation for a draw on any Letter of Credit under Section 2.6 below.
"Lenders" means Bank One, Colorado, NA, CoBank, ACB ("CoBank"), and Intrust
Bank, NA ("Intrust"), together with any other party that acquires an interest in
the Loan and is designated as a Lender pursuant to an amendment to this
Agreement.
"LIBOR Rate" has the meaning set forth in the Notes.
"LIBOR Rate Advance" means an Advance of the Loan which initially bears
interest at the LIBOR Rate.
"LIBOR Spread" means a percentage, which shall be adjusted five Business
Days after each receipt by Agent of the Quarterly Compliance Certificate for the
applicable Quarter as required by Section 6.2 below, determined by reference to
the following table based on ratio of Total Debt to Unadjusted EBITDA:
<TABLE>
<CAPTION>
Ratio of Total Debt
to Unadjusted EBITDA LIBOR Spread
<S> <C>
3.51 and 5.00 2.75%
3.01 and 3.50 2.50%
2.51 and 3.00 2.25%
1.51 and 2.50 2.00%
1.50 1.75%
</TABLE>
"Liens" means any assignment, mortgage, pledge, security interest, lien or
other encumbrance.
"Loan" means all commitments or obligations of Lenders to extend credit to
Borrower pursuant to the terms of this Agreement and all other Loan Documents
and all amounts evidenced at any time and from time to time by the Notes,
including without limitation, all Advances.
"Loan Documents" means this Agreement, the Notes, the Security Documents,
and all other documents executed and delivered by or on behalf of Borrower to
the Agent or the Lenders in connection herewith or therewith, as any such
documents have been or may be expanded, renewed, restated, modified, or amended
at any time and from time to time.
5
<PAGE> 10
"Loan Expenses" means all charges, costs, fees and expenses of any nature
whatsoever of or incurred by the Agent (or after an Event of Default, the
Lenders) at any time in connection with the making, administration,
modification, amendment, repayment or enforcement of the Loan or the Loan
Documents, including, but not limited to, all recording and filing fees, charges
and taxes (other than income taxes on the income of Lenders), appraisal fees,
environmental audits, environmental audit review, fees for consultants retained
by the Agent in connection with the administration of the Loan or the Loan
Documents, title insurance charges, endorsements and premiums, document
preparation fees, fees and disbursements of the Agent's attorneys and their
staff, search fees and credit reporting and investigation fees; including,
without limitation, all of the foregoing whether paid to third parties or
incurred by the Agent's own staff or employees, in which event the foregoing
shall be reimbursed to the Agent at rates comparable to rates that would have
been paid to third parties for rendering the same services to the Agent.
"Loan Fee" means an amount equal to $80,000, payable on or before the
Closing Date.
"Loan Period" means the period from the date of this Agreement to and
including the Maturity Date, or such earlier date on which the Notes become due
and payable.
"Maturity Date" means the earlier of (i) acceleration of the Loan, or (ii)
September 9, 2001, subject to extension as provided in Section 2.1(h) below.
"Maximum Loan Amount" means $40,000,000, minus the Letters of Credit
Liability.
"Multiemployer Plan" means a "multiemployer plan" (within the meaning of
Section 400 1(a)(3) of ERISA) and to which any member of the Controlled Group
makes, is making or is obligated to make contributions or, during the preceding
three calendar years, has made, or been obligated to make, contributions.
"Notes" means the promissory notes made by Borrower and evidencing the
Loan, as they may be amended, restated, extended or supplemented from time to
time and all notes given in substitution therefor.
"Obligations" means all indebtedness, obligations and liabilities of
Borrower or its Subsidiaries to any of the Lenders or the Agent existing on the
date of this Agreement or arising hereafter, direct or indirect, joint or
several, absolute or contingent, matured or unmatured, liquidated or
unliquidated, secured or unsecured, arising by contract, operation of law or
otherwise, arising or incurred under this Agreement or any of the other Loan
Documents or in respect of any of the Loans made or any of the Notes or other
instruments at any time evidencing any of the foregoing.
"Ordinary Course of Business" means, in respect of any transaction, the
ordinary course of such Person's business, substantially as conducted by such
Person prior to or as of the date hereof, and undertaken by such Person in good
faith and not for purposes of evading any covenant or restriction in any Loan
Document.
"Percentage Interest" means, with respect to each of the Lenders, subject
to the provisions of Section 10.10 below, the percentage interest set forth
below:
6
<PAGE> 11
<TABLE>
<CAPTION>
Percentage
Lender Interest
<S> <C>
Agent 62.5%
CoBank 25.0%
Intrust 12.5%
</TABLE>
Notwithstanding anything to the contrary contained in this Agreement, the
Percentage Interest of a Lender that sells a participation in the Loan shall be
deemed to include the Percentage Interest of the participating bank (and the
participating bank shall be deemed to have no Percentage Interest) for all
purposes under this Agreement.
"Person" means an individual, partnership, corporation, association,
limited liability company, business trust, joint stock company, trust or trustee
thereof, unincorporated association, joint venture, governmental unit or any
agency or subdivision thereof, or any other legally recognizable entity.
"Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA)
which Borrower or any member of the Controlled Group sponsors or maintains or to
which Borrower or any member of the Controlled Group makes, is making or is
obligated to make contributions currently or during the past five calendar
years, and includes any Multiemployer Plan or Qualified Plan.
"Pledge Agreements" means all pledges given by Borrower to Agent, as agent
for Lenders, in form and substance satisfactory to Agent, as security for the
Loan, whether now existing or hereafter given, including without limitation, all
pledges of the capital stock of Subsidiaries and Affiliates of Borrower, as all
such pledges have been or may be renewed, modified, extended, restated or
amended at any time and from time to time.
"Pledged Stock" means the stock certificates pledged under the Pledge
Agreements.
"Prime Rate" has the meaning set forth in the Notes.
"Primary States" means Colorado, Texas, New Jersey, Maryland,
Massachusetts, Washington, Virginia, Pennsylvania, Oklahoma and Florida.
"Qualified Plan" means a pension plan (as defined in Section 3(2) of ERISA)
intended to be tax-qualified under Section 401(a) of the Code and which any
member of the Controlled Group sponsors, maintains, or to which it makes, is
making, or is obligated to make contributions, or in the case of a multiple
employer plan (as described in Section 4064(a) of ERISA) has made contributions
at any time during the immediately preceding period covering at least five plan
years, but excluding any Multiemployer Plan.
"Quarter" means, and "Quarterly" refers to, each of the following periods
in any given year: January 1 through March 31, April 1 through June 30, July 1
through September 30, and October 1 through December 31.
7
<PAGE> 12
"Reportable Event" means, as to any Plan, (a) any of the events set forth
in Section 4043(b) of ERISA or the regulations thereunder, other than any such
event for which the thirty-day notice requirement under ERISA has been waived in
regulations issued by the PBGC, (b) a withdrawal from a Plan described in
Section 4063 of ERISA, or (c) a cessation of operations described in Section
4062(e) of ERISA.
"Request for Advance" means a request from Borrower for an Advance of the
Loan in the form of Exhibit A attached hereto.
"Required Lenders" means, at any time, one or more Lenders holding at least
60 percent of the outstanding principal balance of Loan, determined based on the
Lenders' respective Percentage Interests from time to time, subject to the
provisions set forth in the definition "Percentage Interest" with respect to the
treatment of loan participations permitted pursuant to Section 11.1.
"Security Agreements" means security agreements, chattel mortgages, pledges
or similar documents given by Subsidiaries in favor of the Agent as agent for
the Lenders, whether now existing or hereafter given, in form and substance
acceptable to Agent covering, among other things, all personal property of the
Subsidiaries, including, without limitation, all accounts, equipment, fixtures,
inventory, general intangibles, contract rights and all other personal property
of Subsidiaries and all other collateral described therein, as they may be
expanded, restated, modified or amended at any time and from time to time.
"Security Documents" means the Security Agreements, the Guaranties, the
Pledge Agreements and all other security agreements, deeds of trust, mortgages,
chattel mortgages, assignments, pledges, guaranties, financing statements,
continuation statements, extension agreements and other agreements or
instruments now or hereafter delivered by Borrower or any Subsidiary or any
Subsidiary of Borrower to the Agent on behalf of the Lenders or to the Lenders
in connection with this Agreement or any transaction contemplated hereby to
secure or guarantee the payment of any part of the Obligations or the
performance of any other duties and obligations of Borrower or Subsidiaries
under the Loan Documents, as any such documents may be expanded, renewed,
restated, modified, or amended at any time and from time to time.
"Subsidiary" means any corporation, association, partnership, joint
venture, or other business or corporate entity, enterprise or organization which
is directly or indirectly controlled by or owned 51% or more by Borrower,
including, without limitation, Gateway Technologies, Inc. ("Gateway"), T-NETIX
Monitoring Corporation ("Monitoring"), SpeakEZ, Inc. ("SpeakEZ"), and T-NETIX
JMS.
"Total Debt" means all Indebtedness of Borrower and Subsidiaries,
including, but not limited to the Loan.
"Unadjusted EBITDA" means for any of the following dates:
8
<PAGE> 13
(i) June 30, 1999, the product of (x) EBITDA for the period of two
consecutive fiscal quarters ending on, or most recently ended prior to,
such date times (y) two,
(ii) September 30, 1999, the product of (x) EBITDA for the period of
three fiscal quarters ending on, or most recently ended prior to, such date
times (y) 1.33, and
(iii) any date after September 30, 1999, EBITDA for the period of four
consecutive fiscal quarters ending on, or most recently ended prior to,
such date.
"Unfunded Pension Liabilities" means the excess of a Plan's benefit
liabilities under Section 400 1(a)(16) of ERISA, over the current value of that
Plan's assets, determined in accordance with the assumptions used by the Plan's
actuaries for finding the Plan pursuant to Section 412 of the Code for the
applicable plan year.
"Unmatured Event of Default" means any event that with the passage of time
or giving of notice, or both, would constitute an Event of Default.
1.2 Accounting Terms and Determinations. Unless otherwise specified herein,
all accounting terms used herein shall be interpreted, all accounting
determinations hereunder shall be made, and all financial statements required to
be delivered hereunder shall be prepared, in accordance with GAAP, applied on a
basis consistent (except for changes concurred in by the Borrower' independent
public accountants) with the most recent audited consolidated financial
statements of the Borrower delivered to the Lenders. The parties hereto further
agree that in the event that any change in accounting principles from those used
in the preparation of the financial statements of the Borrower to be delivered
to the Agent or the Lenders pursuant to the terms of this Agreement hereafter
occasioned by the promulgation of rules, regulations, pronouncements and
opinions by or required by the Financial Accounting Standards Board or
Accounting Principles Board of the American Institute of Certified Public
Accountants (or successors thereto or agencies with similar functions) results
in any change in the method of calculation of Financial Covenants, standards or
terms found in this Agreement, the parties hereto agree to likewise enter into
negotiations to amend the covenants, terms or standards contained in this
Agreement to equitably reflect such change in accounting principles with the
desired result that the criteria for evaluating the Borrower's financial
condition shall be the same after such change as if such change had not been
made. If the parties cannot agree on such an amendment as contemplated under the
immediately preceding sentence, then the covenants shall be computed without
giving effect to such change in accounting principles.
ARTICLE 2.
THE LOAN
2.1 The Loan.
(a) Subject to the terms and conditions of this Agreement, each Lender,
severally but not jointly, agrees to make future Advances to Borrower from
time to time
9
<PAGE> 14
prior to the Maturity Date, in an aggregate principal amount not to exceed
its Percentage Interest of the Maximum Loan Amount; on the condition that
at no time shall the outstanding amount of the Loan ever exceed the Maximum
Loan Amount. So long as no Event of Default or Unmatured Event of Default
has occurred, Borrower may borrow, repay and reborrow under the Notes prior
to the Maturity Date in accordance with the terms of this Agreement.
(b) Purpose. The Loan shall be used for working capital and to
refinance existing debt.
(c) The Notes. The Loan is evidenced by the Notes.
(d) Maturity. The Loan will mature and is due and payable in full on
the Maturity Date.
(e) Interest. The Loan bears interest at the rates as set forth in and
determined pursuant to the Notes. Upon the occurrence of an Event of
Default, the Loan will bear interest at the Default Rate.
(f) Payments of Principal and Interest. Principal and interest under
the Loan is payable as follows:
(i) Accrued but unpaid interest on the Loan is payable in
accordance with the Notes.
(ii) The entire principal balance of the Loan together with
all accrued but unpaid interest thereon and all other amounts due the
Lenders pursuant to the Loan Documents is due and payable in full on
the Maturity Date.
(g) Advance under the Loan. Subject to the terms and conditions hereof,
Advances will be made either (x) upon request of Borrower or (y)
automatically by Agent on behalf of Borrower.
(i) Requested Advances.
(A) Each request for an Advance under the Loan must be
substantially in the form of the Request for Advance (subject
to modifications approved by Agent) and submitted to the Agent
on or before 11:00 a.m. Denver, Colorado time on (1) the
Business Day preceding the day such Advance is requested to be
made if such Advance is a Base Rate Advance, or (2) three
Business Days preceding the date such Advance is requested to
be made if such Advance is a LIBOR Rate Advance. Upon receipt
of a Request for Advance, the Agent shall promptly provide a
notice thereof to each Lender. If all conditions precedent to
each Advance have been met, not later than 11:00 a.m. Denver
time on the next Business Day with respect to each Base Rate
Advance and the third Business Day with respect to each LIBOR
Rate Advance, each Lender shall make available to the Agent in
immediately available funds the amount of such Lender's
Percentage Interest of the amount specified in the Request for
Advance; provided, however, that the Lenders shall not be
obligated to make any Advance to Borrower that
10
<PAGE> 15
would result in the aggregate unpaid principal balance
outstanding under the Loan exceeding the Maximum Loan
Amount.
(B) If all conditions precedent to such Advance have
been met and the Agent has received from each Lender its
Percentage Interest of the Advance, the Agent will, on the
date requested, make such Advance available to Borrower in
immediately available funds at the Agent's office in Denver,
Colorado. Each Lender shall make its own determination as to
whether the conditions precedent to the Advance have been
complied with and each Lender's making available to Agent its
Percentage Interest of the Advance shall constitute
confirmation from such Lender that all conditions precedent to
the Advance have been satisfied in a manner acceptable to such
Lender. The obligation of each Lender to fund its Percentage
Interest of an Advance shall be a separate obligation of each
Lender, and neither the Agent nor any other Lender shall have
any liability to the Borrower for the failure of any Lender to
fund its Percentage Interest of any Advance. The failure of
any Lender to make the Advance shall not relieve any other
Lender of the obligation to make an Advance.
(C) Each request for a Base Rate Advance under the Loan
must be in an amount of at least $250,000 or such lesser
amount equal to the unadvanced portion of the Loan, and each
request for a LIBOR Rate Advance must be in an amount of at
least $1,000,000 or such lesser amount equal to the unadvanced
portion of the Loan.
(D) Each request for an Advance under the Loan shall be
irrevocable and binding upon the Borrower from and after the
time that a Request for Advance is received by the Agent and
the submission of a Request for Advance to the Agent shall
obligate Borrower to accept such Advance.
(ii) Automatic Advances.
(A) At 2:30 p.m. Denver time on each Business Day,
Agent will review the net activity of Borrower's account(s) at
Agent. To the extent that the balance in Borrower's account(s)
(taking into account such net activity) is less than $10,000
and provided that no Event of Default or Unmatured Event of
Default shall have occurred, Agent shall automatically make a
Base Rate Advance of the Loan (an "Automatic Advance") in an
amount sufficient to increase the balance in Borrower's
account(s) to $10,000 and Borrower hereby authorizes Agent to
make such Automatic Advance; provided however that under no
circumstances shall Agent make any Automatic Advance which
would increase the outstanding principal balance of the Loan
to an amount greater than the Maximum Loan Amount. Advances
pursuant to this Section 2.1(g)(ii) shall be made
automatically by Agent and each Lender hereby acknowledges
that there are no conditions precedent to any such Automatic
Advance.
(B) On a weekly basis, Agent shall notify Lenders of
the aggregate amount of Automatic Advances made during the
preceding week. Provided that such notice is received prior to
11:00 am Denver time, each Lender shall make available to the
Agent in immediately available funds on the same Business Day
(the next Business Day, if such notice is received after 11:00
am Denver time) the amount of such Lender's Percentage
Interest of the aggregate amount of Automatic Advances
specified by Agent. If any Lender fails to make available to
the Agent its Percentage Interest of Automatic Advances as
required pursuant to this
11
<PAGE> 16
Section (B), such Lender shall be obligated to pay to the
Agent interest at the Default Rate from the date due until
the date paid.
(C) Agent shall be entitled to retain all interest on
Automatic Advances from the date Advanced by Agent until the
date each Lender advances its percentage interest of such
Automatic Advances.
(h) Extension of the Maturity Date. Upon request of the Borrower, which
request shall be made no less than 90 days and no more than 150 days prior
to each December 31, commencing with December 31, 2000, the Lenders may,
but shall be under no obligation to, extend the Maturity Date by
consecutive, and successive one year periods (each, an "Extension"). An
Extension shall be in the sole and absolute discretion of the Lenders and
shall require the unanimous approval of all Lenders. Without limiting the
generality of the foregoing, an Extension shall be subject to the following
terms and conditions and such other terms and conditions as the Agent may
reasonably require: (i) Borrower shall provide Agent a written notice
requesting the Extension; (ii) there shall not exist, either on the date
the Extension is requested by the Borrower or on the date the Extension
becomes effective any Event of Default or Unmatured Event of Default; (iii)
all of the representations and warranties contained in the Loan Documents
shall be true and correct on the date the Borrower requests the Extension
and on the date the Extension becomes effective; (iv) there has been no
significant material adverse change in the financial condition of Borrower
or any Subsidiary; (v) Borrower shall execute all documents reasonably
requested by Agent in connection with the Extension; (vi) Borrower shall
pay to Agent, for the benefit of each Lender in accordance with its
Percentage Interest, concurrent with the Extension, an extension fee of
$40,000 together with all reasonable fees and expenses incurred by Agent in
connection with the Extension, and (vii) the Agent and the Lenders shall
have agreed in writing to the Extension. The foregoing list of conditions
to the Extension is illustrative only and shall not in any way restrict the
right of the Lenders to impose additional conditions nor shall the Lenders
be under any obligation to agree to the Extension even if all of the
foregoing conditions have been complied with. Borrower specifically
acknowledges and agrees that the Extension shall be in the sole and
absolute discretion of the Lenders and that the Lenders are under no
obligation to grant the Extension. In the event that the Lenders agree to
the Extension, the Maturity Date shall be extended by a period of one year.
2.2 Repayments by Borrower. All payments of principal and interest
hereunder or under the Notes shall be made at the Agent's offices at 1125 17th
Street, Denver, Colorado 80202-2088 (or at such other place as the Agent
designates to Borrower in writing at least one Business Day prior to the due
date or payment date, as the case may be) by 11:00 am Denver time on the date
due or the date of payment (as the case may be) in immediately available funds
free and clear of any and all taxes and without setoff or counterclaim or
deduction of any kind. If any payment to be made by Borrower hereunder or under
the Notes is due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day and such extension of time shall be included
in computing any interest and fees in respect of such payment. All payments
received from Borrower hereunder (or an automatic repayment under Section 2.3
below) or under any of the Notes must be applied first to pay any fees or
expenses due to the Agent hereunder, second to pay any fees or expenses due to
the Lenders hereunder on a pro rata basis, third to pay accrued but unpaid
interest on the Loan, and lastly, to repay the principal amount of the Loan.
Borrower authorizes Agent to make any and all payments due
12
<PAGE> 17
under the Loan Documents (including without limitation, all interest payments)
by debiting Borrower's account(s) at Agent. Borrower's failure to maintain funds
in such account(s) sufficient to make payment(s) shall not relieve Borrower of
its obligations hereunder.
2.3 Automatic Repayment To the extent that the Agent's review of the net
activity in Borrower's account(s) as described in Section 2.1 (g)(ii)(A) above
reveals a balance greater than $10,000 (taking into account such net activity),
Agent shall automatically make a repayment of amounts outstanding under the Loan
which are accruing interest at the Base Rate (an "Automatic Repayment") in an
amount equal to the lesser of (a) the outstanding principal amount of the Loan
accruing interest at the Base Rate, and (b) an amount equal to the difference
between the balance in Borrower's account(s) and $10,000. Borrower hereby
authorizes Automatic Repayments and acknowledges that there are no conditions
precedent to any such Automatic Repayment.
2.4 Payments to the Lenders. Automatic repayments shall be distributed by
the Agent to the Lenders in like funds on a weekly basis, pro rata according to
the Percentage Interest of each Lender. Agent shall pay to the Lenders the
Federal Funds Rate for each night that funds remain in the Agent's possession
after receipt by Agent (if received by 11:00 am Denver time) but prior to
distribution to the Lenders. In the event the Agent receives less than the
aggregate amount due to all Lenders, the Agent shall distribute ratably to each
Lender, in the case of any payment, the portion of the aggregate amount received
by the Agent on such day multiplied by the Percentage Interest of such Lender.
Payments (other than Automatic Repayments) by Borrower to the Agent on account
of principal of and interest on the Loan or otherwise hereunder shall be
distributed by the Agent to the Lenders on the same day such funds are received
from Borrower in like funds, provided that the Agent receives such finds by
11:00 a.m. Denver time and on the next Business Day if the Agent receives such
funds after 11:00 a.m. Denver time, pro rata according to the Percentage
Interest of each Lender in like funds; provided that in the event the Agent
receives immediately available finds from Borrower before 11:00 a.m. on any
Business Day but does not remit such payments to the Lenders until the next
Business Day, the Agent shall pay to the Lenders the Federal Funds Rate for each
night that funds remain in the Agent's possession. In the event the Agent
receives less than the aggregate amount due to all Lenders on any day, the Agent
shall distribute ratably to each Lender, in the case of any payment, the portion
of the aggregate amount received by the Agent on such day multiplied by the
Percentage Interest of such Lender. Each Lender hereby agrees that Agent may
offset any amounts due and owing to such Lender against any amounts due and
owing from such Lender to Agent.
2.5 Fees.
(a) Loan Fee On or prior to the Closing Date, Borrower shall pay to
Agent on behalf of Lenders the Loan Fee.
(b) Unused Fee. Borrower shall pay to the Agent on behalf of the
Lenders a Quarterly unused fee equal to the product obtained by multiplying
the Unused Availability by the Unused Fee Percentage, which fee is payable
in arrears within thirty days of the end of each Quarter. The Unused Fee
will be divided among the Lenders pro rata in accordance with each Lender's
Percentage Interest. "Unused Availability" shall be calculated within
thirty days after the end of each Quarter (and on a pro-rata basis for any
partial Quarter)
13
<PAGE> 18
and means the amount by which (i) the Maximum Loan Amount exceeds (ii) the
average daily outstanding balance of the Loan during such Quarter as
reasonably determined by the Agent. The "Unused Fee Percentage" shall be
determined within five days of the end of the applicable Quarter by
reference to the following table based on the ratio of Total Debt to
Unadjusted EBITDA:
<TABLE>
<CAPTION>
Ratio of Total Debt Unused Fee Percentage
to Unadjusted EBITDA (on an annual basis)
<S> <C>
3.51 .30%
3.01 and 3.50 .25%
2.51 and 3.00 .20%
1.51 and 2.50 .15%
1.50 .10%
</TABLE>
(c) Agent's Fee. $10,000 annually, due and payable on or before
September 30 of each year, commencing September 30, 1999.
2.6 Letters of Credit.
(a) Agent has previously issued or will issue a Letter of Credit in
favor of Mack-Cali Realty Corporation in the amount of $225,000 (the
"Existing Letter of Credit").
(b) Agent agrees that upon request of Borrower and subject to the
satisfaction of the terms and conditions described below, it will issue
Letters of Credit on behalf of Borrower; provided, however, that the Letter
of Credit Liability shall never exceed $1,000,000. Agents obligation to
issue Letters of Credit shall be subject to the following conditions:
(i) Borrower shall deliver to the Agent a letter of credit
application at least five (5) Business Days in advance of the proposed
date of issuance;
(ii) Borrower shall pay to Agent all letter of credit fees
required by Agent, including, without limitation, Agent's standard
letter of credit fee, documentary fees and processing charges;
(iii) The maturity date of the Letter of Credit to be issued
shall not extend beyond the Maturity Date;
(iv) There shall exist no Event of Default, and no event that
with notice, the passage of time or both, would result in an Event of
Default;
(v) All of Borrower's representations and warranties continue
to remain true and correct in all material respects;
14
<PAGE> 19
(vi) The outstanding principal amount of the Loan shall not
exceed the Maximum Loan Amount (taking into account the face amount of
the Letter of Credit to be issued); and
(vi) Such other conditions as Agent may reasonably require.
(c) Participations. Immediately upon execution of this Agreement, Agent
shall be deemed to have sold and transferred to each other Lender, and each
other such Lender shall be deemed irrevocably and unconditionally to have
purchased and received from Agent, without recourse or warranty, an
undivided interest and participation, to the extent of such Lender's
Percentage Interest in the Existing Letter of Credit and all rights of
Agent in respect thereof In addition, immediately upon the issuance by
Agent of any Letter of Credit, Administrative Agent shall be deemed to have
sold and transferred to each other Lender, and each other such Lender shall
be deemed irrevocably and unconditionally to have purchased and received
from Agent, without recourse or warranty, an undivided interest and
participation, to the extent of such Lender's Percentage Interest in such
Letter of Credit and all rights of Agent in respect thereof.
(d) Reimbursement Obligation. To induce Agent to issue and maintain
Letters of Credit and to induce Lenders to participate in issued Letters of
Credit, Borrower agrees to pay or reimburse Agent (i) one Business day
after the date on which any draft is presented under any Letter of Credit,
the amount of any draft paid or to be paid by Agent and (ii) promptly, upon
demand, the amount of any fees which Agent customarily charges for honoring
drafts under letters of credit, and taking similar action in connection
with letters of credit. If Borrower has not reimbursed Agent for any draft
paid or to be paid within one Business Day after such draft is presented
under any Letter of Credit, Agent is hereby irrevocably authorized to fund
such reimbursement obligations as a Base Rate Advance to the extent of
availability and if the conditions precedent in this Agreement for such an
Advance (other than any notice requirements or minimum funding amounts)
have, to Agent's knowledge, been satisfied. The proceeds of such Borrowing
shall be advanced directly to Agent in payment of Borrower's unpaid
reimbursement obligations. If for any reason, finds cannot be advanced
under the Loan, then Borrower's reimbursement obligation shall constitute a
demand obligation. Borrower's obligations under this Section 2.6(d) are
absolute and unconditional under any and all circumstances and irrespective
of any setoff, counterclaim, or defense to payment which Borrower may have
at any time against Agent or any other Person. From the date that Agent
pays a draft under a Letter of Credit until the related reimbursement
obligation of Borrower is paid or funded by proceeds of an Advance, unpaid
reimbursement obligations shall accrue interest at the Default Rate, which
accrued interest shall be payable on demand.
(e) Obligation of Lenders. If Borrower fails to reimburse Agent as
provided in this Section 2.6 within 24 hours of the demand therefor by
Agent and funds cannot be advanced under the Loan to satisfy the
reimbursement obligations, then Agent shall promptly notify each Lender of
Borrower's failure, of the date and amount of the draft paid, and of such
Lender's Percentage Interest thereof Each Lender shall promptly and
unconditionally make available to Agent in immediately available funds such
Lender's Percentage Interest of the unpaid reimbursement obligation. Funds
are due and payable to Agent on or before the close of business on the
Business Day when Agent gives notice to each Lender of Borrower's
reimbursement
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failure (if given prior to 1:00 p.m., Denver, Colorado time) or on the next
succeeding Business Day (if notice was given after 1:00 p.m., Denver,
Colorado time). All amounts payable by any Lender shall accrue interest at
the Federal Funds Rate from the day the applicable draft is paid by Agent
to (but not including) the date the amount is paid by the Lender to Agent.
To the extent any Lender has funded its ratable share of any draft under an
Letter of Credit, then Agent shall promptly distribute reimbursement
payments received from Borrower to such Lender according to its ratable
share. In the event any payment by Borrower received by Agent with respect
to an Letter of Credit and distributed to Lenders on account of their
participations therein is thereafter set aside, avoided, or recovered from
Agent in connection with any receivership, liquidation, or bankruptcy
proceeding, each Lender which received such distribution shall, upon demand
by Agent, contribute such Lender's ratable portion of the amount set aside,
avoided, or recovered, together with interest at the rate required to be
paid by Agent upon the amount required to be repaid by it.
(f) Cash Collateral. Upon any demand by Agent upon the occurrence an
Event of Default, Borrower shall provide to Agent, for the benefit of
Lenders, (i) cash collateral in an amount equal to the Letter of Credit
Liability existing on such date, such cash and all interest thereon shall
constitute cash collateral for all Letters of Credit, and (ii) such
additional cash collateral as Agent may from time to time require, so that
the cash collateral amount shall at all times equal or exceeds the Letter
of Credit Liability. Any cash collateral deposited under this Section 2.6,
and all interest earned thereon, shall be held by Agent and invested and
reinvested at the expense and the written direction of Borrower, in U.S.
Treasury Bills with maturities of no more than ninety (90) days from the
date of investment.
ARTICLE 3.
CONDITIONS OF LENDING
3.1 Advance. The Lenders shall have no obligation to make Advances under
the Loan unless the Agent shall have received all of the following, at the
Agent's office in Denver, Colorado, duly executed and delivered and in form and
substance satisfactory to the Agent, the Lenders and their counsel and unless
all of the following shall have been satisfied in a manner acceptable to the
Agent, the Lenders and their counsel:
(a) with respect to the first Advance after the date hereof, this
Agreement, executed by Borrower, the Agent and the Lenders;
(b) with respect to the first Advance, the Notes;
(c) with respect to the first Advance, the Security Documents;
(d) with respect to the first Advance, to the extent requested by
Agent, financing statements in appropriate form for filing with the filing
jurisdictions necessary to cover all of the Collateral;
(e) with respect to the first Advance, results of UCC lien searches
(which have been ordered by Agent) as to Borrower and Subsidiaries for the
State of Colorado and all other states required by Agent which search
results shall be acceptable to the Agent;
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(f) with respect to the first Advance, the Pledge Agreement from
Borrower pledging the Pledged Stock, together with delivery to the Agent of
(1) original stock certificates evidencing the pledged stock, (2) stock
powers (executed in blank) in connection with the pledged stock, and (3)
certified copies of stock ledgers of each Subsidiary;
(g) with respect to the first Advance, the other Loan Documents;
(h) with respect to the first Advance, a certificate dated as of the
Closing Date executed on behalf of Borrower and each Subsidiary by the
Secretary or an Authorized Officer of Borrower and each Subsidiary,
certifying to the correctness and completeness of the following: (A)
Articles of Incorporation, (B) Bylaws, (C) the Certificate of Good Standing
for Borrower and each Subsidiary from such jurisdictions as Agent may
reasonably require and (D) Resolutions adopted-by Borrower's and each
Subsidiary's Board of Directors authorizing the Loan, the pledge of
Collateral and the Guaranties;
(i) with respect to the first Advance, a certificate, dated the Closing
Date and executed by the Secretary or assistant Secretary of the Borrower
and each Subsidiary, which shall contain the names, titles and signatures
of the Authorized Officers of Borrower and each Subsidiary authorized to
execute this Agreement, the Security Documents and the other Loan Documents
on behalf of the Borrower and the Subsidiaries;
(j) with respect to the first Advance, the Loan Fee required to be paid
on the Closing Date under Section 2.5 (a) above;
(k) with respect to the first Advance, Landlord Waivers in form and
substance satisfactory to Agent, from the lessor of Borrower's Colorado
headquarters;
(l) all other documents and assurances which Agent reasonably requires
or which Agent may reasonably request in connection with the transactions
contemplated by this Agreement, and such documents shall be certified, when
appropriate, by proper authorities;
(m) all legal matters incident to the Loan, this Agreement, the Note,
the Security Documents and any other Loan Documents shall be satisfactory
to counsel to the Agent, and with respect to the first Advance after the
date hereof, the Agent shall have received addressed to the Agent and the
Lenders: (1) the opinion of Rothgerber Johnson & Lyons LLP, Counsel to
Borrower in the form previously provided by Lender, and (2) opinions of
such other counsel as Agent may request in its discretion, in each case
containing such exceptions and qualifications as are customary in similar
opinions;
(n) all representations and warranties contained in this Agreement and
in the Loan Documents shall be true on the Closing Date and each Advance
Date as if then given, and Borrower shall have performed or observed all
terms, agreements, conditions and obligations hereunder and under the Loan
Documents to be performed or observed on or prior to the Advance Date;
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(o) no Event of Default or Unmatured Event of Default shall have
occurred and be continuing or would result from the making of the requested
Advance;
(p) since the Initial Financial Statements, or the date of the most
recent Advance, whichever is later, there has been no material adverse
change in the business, financial position or results of operations of
Borrower;
(q) as of the Closing Date and each Advance Date, Borrower and each
Subsidiary shall be solvent and Borrower's and each Subsidiary's property
shall be greater than Borrower's or such Subsidiary's debts, at fair
valuation, giving due consideration to identified contingent liabilities;
(r) as of the Closing Date and each Advance Date, Borrower and each
Subsidiary shall have sufficient capital to carry on its business as it is
now conducted and as it is proposed to be conducted following the Closing
Date or Advance;
(s) as of the Closing Date and each Advance Date, Borrower and each
Subsidiary shall be able to pay their debts as they mature, taking into
account the Advance;
(t) a Request for Advance or certificate, dated the Advance Date and
executed on behalf of Borrower by an Authorized Officer, stating the
substance of Subsections 3.1(m) through (r) above as of the requested
Advance Date;
(u) such Advance shall not be prohibited by any laws or any regulation
or order of any court or governmental authority or agency and shall not
subject any Lender to any penalty or other onerous condition under or
pursuant to any such law, regulation or order; and
(v) The amount of such Advance together with the outstanding principal
amount of the Loan shall not exceed the Maximum Loan Amount.
ARTICLE 4.
SECURITY
The repayment of the Loan and all extensions and renewals thereof, and the
performance of all obligations of the Borrower hereunder and under the other
Loan Documents, shall be secured by the Security Documents encumbering the
Collateral.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to the Agent and each Lender that as of
the date hereof and as of the date of any Advance:
5.1 Existence.
(a) Each of Borrower, Monitoring, T-NETIX JMS and SpeakEZ is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Colorado;
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(b) Gateway is a corporation duly organized, validly existing and in
good standing under the laws of the State of Texas;
(c) The principal place of business for Borrower, Monitoring, T-NETIX
JMS, and SpeakEZ is the State of Colorado, and the principal place of
business for Gateway is the State of Texas. Borrower and each Subsidiary is
qualified to do business in Colorado, and in every other jurisdiction in
which the nature of its business or the ownership of its assets requires
such qualification;
(d) Borrower and each Subsidiary has the power and authority to own the
property which it owns and to carry on its business as such business is now
conducted; and
(e) Borrower and each Subsidiary has all franchises, permits, licenses
and similar agreements necessary to carry on its business as now conducted
and has not received any notices of default or termination under any of
such agreements.
5.2 Collateral. No more than 10% of the collateral consisting of equipment
or inventory (based on net book value as reported on Borrower's quarterly FAS
121 report, which report shall be sent by Borrower to Agent within 30 days after
the end of each calendar quarter) is held in any state other than a Primary
State, and neither Borrower or any Subsidiary will permit more than 10% of the
Collateral consisting of equipment and inventory to be held in any state other
than a Primary State without Agent's prior written consent, such consent not to
be unreasonably withheld. Agent's consent shall be conditioned upon, among other
things, Borrower and each Subsidiary taking all steps requested by Agent to
provide Agent, as agent for Lenders, a perfected, first lien security interest
in all Collateral held in any state other than a Primary State.
5.3 Pledged Stock. The Pledged Stock represents 100% of the outstanding
stock of each of the Subsidiaries, and is owned 100% by the Borrower. Borrower
will not transfer any of the Pledged Stock without the prior written consent of
Agent, which consent shall be in Agent's sole and absolute discretion.
5.4 Noncontravention. The execution, delivery and performance by Borrower
and each Subsidiary of this Agreement and the other Loan Documents and the
borrowings hereunder, and the consummation of the transactions contemplated
herein and therein will not conflict with the Articles of Incorporation, Bylaws
or other organizational or governing documents of Borrower or any Subsidiary, or
conflict with or result in any breach of any mortgage, lien, lease, agreement,
instrument, order, judgment, decree, law, rule, regulation or any other
restriction of any kind or character to which Borrower or any Subsidiary is a
party or is subject or by which Borrower or any Subsidiary or Borrower's or any
Subsidiary's properties are bound or affected or result in the creation or
imposition of any lien, charge or encumbrance upon any property of Borrower or
any Subsidiary.
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5.5 Third-Party Authorization. No consent, approval, exemption,
authorization or order of or other action by, and no notice to or filing with,
any court or governmental authority or third party (other than creditors under
Obligations that will be discharged with the proceeds of the first Advance) is
required by Borrower or any Subsidiary in connection with the execution,
delivery or performance by Borrower and Subsidiaries of this Agreement, or any
other Loan Document or to consummate any transactions contemplated hereby or
thereby.
5.6 Authorization; Binding Effect. Borrower and each Subsidiary has full
power and authority to enter into this Agreement and the other Loan Documents.
The execution and delivery of this Agreement, and the other Loan Documents, and
the performance and observance of their terms, conditions and obligations, have
been duly authorized by all necessary action by Borrower and each Subsidiary.
This Agreement and the other Loan Documents are legal, valid and binding
obligations of Borrower and each Subsidiary, enforceable in accordance with
their respective terms, except as such enforcement may be limited by bankruptcy,
insolvency or similar laws of general application relating to the enforcement of
creditors' rights.
5.7 Litigation. There are no actions, suits, proceedings or claims against
Borrower or any Subsidiary or any of their respective properties pending or, to
the knowledge of Borrower or any Subsidiary, threatened before any court or by
or before any governmental instrumentality, which could have a material adverse
effect on the business, operations, property, prospects or condition (financial
or otherwise) of Borrower or any Subsidiary (taken as a whole) or the ability of
Borrower or any Subsidiary to perform its obligations under this Agreement or
any of the other Loan Documents. There exists no default or breach by Borrower
or any Subsidiary with respect to any order, writ, injunction, decree or demand
of any court or governmental instrumentality, nor will the execution, delivery
or performance by Borrower or any Subsidiary of this Agreement or any of the
other Loan Documents result in any such default or breach.
5.8 Taxes. Borrower and each Subsidiary has filed all required tax returns
and paid all taxes and other governmental charges or levies imposed upon or
against it or its properties (including the Collateral) or profits before the
same became in default, except those being contested in good faith and by
appropriate proceedings, for which adequate reserves have been set up by such
Borrower or Subsidiary and for which there is no imminent risk of loss of any of
the Collateral.
5.9 Liens. All property and assets of Borrower and Subsidiaries are free
and clear of all liens and encumbrances, except for the Liens permitted pursuant
to Section 7.4 and Liens to be discharged with the proceeds of the first
Advance.
5.10 Use of Proceeds. The proceeds of the Loan shall be used solely for the
purposes set forth in Article 2 above. In no event shall funds from the Loan or
any Advance be used directly or indirectly by any Person for personal, family,
household or agricultural purposes.
5.11 Other Obligations. Other than Obligations to be discharged with the
proceeds of the first Advance, neither Borrower nor any Subsidiary has any
outstanding Indebtedness of any kind that is, in the aggregate, material to such
Borrower or Subsidiary or
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material with respect to Borrower's Consolidated financial condition and not
shown in the Initial Financial Statements (or in the context of future Advances,
financial statements subsequently provided to Agent pursuant to this Agreement).
5.12 Full Disclosure. No certificate, statement, report or other
information delivered herewith or heretofore by-Borrower or any Subsidiary to
the Agent or the Lenders in connection with the negotiation of this Agreement or
in connection with any transaction contemplated hereby contains any untrue
statement of a material fact or omits to state any material fact known to such
Person necessary to make the statements contained herein or therein not
materially misleading as of the date made or deemed made. There is no fact known
to Borrower or any Subsidiary that has not been disclosed to the Agent or the
Lenders in writing that could materially and adversely affect Borrower's or
Subsidiary's properties, business, prospects or condition (financial or
otherwise).
5.13 Margin Stock. Neither Borrower nor any Subsidiary owns "margin stock"
or "margin securities" (as such terms are defined respectively in Regulation U
and Regulation G promulgated by the Board of Governors of the Federal Reserve
System) and no proceeds of any Advance will be used for the purpose, whether
immediate, incidental or ultimate, of buying or carrying any "margin stock" or
"margin securities."
5.14 ERISA Compliance. Except as disclosed to Agent in writing:
(a) Each Plan and Multiemployer Plan is in compliance in all material
respects with the applicable provisions of ERISA, the Code and other
federal or state law, including all requirements under the Code or ERISA
for filing reports (which are true and correct in all material respects as
of the date filed), and benefits have been paid in accordance with the
provisions of the Plan.
(b) Each Qualified Plan and Multiemployer Plans has been determined by
the IRS to qualify under section 401 of the Code, and the trusts created
thereunder have been determined to be exempt from tax under the provisions
of section 501 of the Code, and to the best knowledge of Borrower, except
as otherwise disclosed to the Agent or the Lenders in writing, nothing has
occurred that would cause the loss of such qualification or tax-exempt
status.
(c) There are no outstanding material liabilities under Title IV of
ERISA with respect to any Plan maintained or sponsored by Borrower or any
ERISA Affiliate, nor with respect to any Plan to which Borrower or any
ERISA Affiliate contributes or is obligated to contribute.
(d) No Plan subject to Title IV of ERISA has any Unfunded Pension
Liability.
(e) No member of the Controlled Group has ever represented, promised or
contracted (whether in oral or written form) to or with any current or
former employee (either individually or to employees as a group) that such
current or former employee(s) would be provided, at any cost to any member
of the Controlled Group, with life
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insurance or employee welfare plan benefits (within the meaning of section
3(1) of ERISA) following retirement or termination of employment. To the
extent that any member of the Controlled Group has made any such
representation, promise, or contract, such member has expressly reserved
the right to amend or terminate such life insurance or employee welfare
plan benefits with respect to claims not yet incurred.
(f) Members of the Controlled Group have complied in all material
respects with the notice and continuation coverage requirements of section
4980B of the Code.
(g) No ERISA Events have occurred or are reasonably expected to occur
with respect to any Plan(s).
(h) There are no pending or, to the best knowledge of Borrower,
threatened claims, actions or lawsuits, other than routine claims for
benefits in the usual and ordinary course, asserted or instituted against
(i) any Plan maintained or sponsored by Borrower or its assets, (ii) any
member of the Controlled Group with respect to any Qualified Plan, or (iii)
any fiduciary with respect to any Plan for which Borrower may be directly
or indirectly liable, through indemnification obligations or otherwise.
(i) Neither Borrower nor any ERISA Affiliate has incurred nor
reasonably expects to incur (i) any liability (and no event has occurred
which, with the giving of notice under section 4219 of ERISA, would result
in such liability) under section 4201 or 4243 of ERISA, or secondary
liability under Section 4204 of ERISA, with respect to a Multiemployer Plan
or (ii) any liability under Title IV of ERISA (other than premiums due and
not delinquent under section 4007 of ERISA) with respect to a Plan.
(j) Neither Borrower nor any ERISA Affiliate has transferred any
Unfunded Pension Liability to a Person other than Borrower or an ERISA
Affiliate or otherwise engaged in a transaction that could be subject to
section 4069 or 4212(c) of ERISA.
(k) No member of the Controlled Group has engaged, directly or
indirectly, in a nonexempt prohibited transaction (as defined in section
4975 of the Code or section 406 of ERISA) in connection with any Plan that
would reasonably be expected to have a material adverse effect on the
properties, business, operations, prospects or condition (financial or
otherwise) of Borrower.
5.15 Compliance with Laws. Borrower and each Subsidiary is in compliance
with all laws, rules and regulations and any determination of any arbitrator or
governmental authority applicable to or binding upon it or any of its property
or to which it or any of its property is subject.
5.16 Financial Condition. The Initial Financial Statements (and, with
respect to Advances, financial statements provided to Agent pursuant to this
Agreement prior to such Advance) fairly present Borrower's financial position at
the date thereof and the results of Borrower's operations and cash flows for the
period thereof Since the date of the Initial Financial Statements (and, with
respect to Advances, financial statements provided to Agent pursuant to
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this Agreement prior to such Advance), there has been no material adverse change
in the business, financial position or results of operations of Borrower.
5.17 Environmental Matters. (a) The operations of Borrower and each
Subsidiary comply in all material respects with all federal, state or local
laws, statutes, rules, regulations, and all administrative orders, licenses,
authorizations and permits of any governmental authority, relating to
environmental or public health and safety ("Environmental Laws"); (b) none of
the operations of Borrower or any Subsidiary is the subject of federal, state or
local investigation evaluating whether any material remedial action is needed to
respond to a release of any hazardous or toxic waste, substance or constituent
into the environment; (c) Neither Borrower nor any Subsidiary has (and to the
best knowledge of Borrower and each Subsidiary, nor has any other Person) filed
any notice under any federal, state or local law indicating that Borrower or
such Subsidiary is responsible for the release into the environment, or the
improper storage, of any material amount of any hazardous or toxic waste,
substance or constituent or that any such waste, substance or constituent has
been released, or is improperly stored, upon any property of such Person; and
(d) Neither Borrower nor any Subsidiary otherwise has any known material
contingent liability in connection with the release into the environment, or the
improper storage, of any such waste, substance or constituent. The provisions of
this Section 5.17 are in addition to any representations and warranties set
forth by Borrower or Subsidiaries in any environmental indemnity or other
agreement.
5.18 Investment Company Act; Etc. Neither Borrower nor any Subsidiary is an
"investment company" or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended. Neither
Borrower nor any Subsidiary is a "holding company," or a "subsidiary company" of
a "holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company," within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
5.19 Labor Matters. (a) Neither Borrower nor any Subsidiary has experienced
within the four-year period ended on the date hereof any strike, labor dispute,
slowdown or work stoppage due to labor disagreements that would have a material
adverse effect on the business, operations, assets, property, prospects or
condition (financial or otherwise) of Borrower or Subsidiaries; and (b) to the
best knowledge of Borrower and each Subsidiary, there is no such strike,
dispute, slowdown or work stoppage threatened against Borrower or any Subsidiary
that would have a material adverse effect on the business, operations, assets,
property, prospects or condition (financial or otherwise) of Borrower or any
Subsidiary.
5.20 No Burdensome Agreements. Neither Borrower nor any Subsidiary is a
party to or in any manner bound by, any contract or agreement that would
materially adversely affect such Borrower or Subsidiary or its ability to
perform its obligations under the Loan Documents, except as disclosed in the
Initial Financial Statements (and, with respect to Advances, financial
statements provided to Agent pursuant to this Agreement prior to such Advance).
5.21 Licenses. Borrower and each Subsidiary has the right to use all
trademarks, trademark rights, trade names, trade name rights, copyrights,
licenses, permits, authorizations and other rights as are necessary for the
present and planned future conduct by
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Borrower and each Subsidiary of its present businesses to be operated by it on
and after the date hereof All of the foregoing are and will be in full force and
effect, and Borrower and each Subsidiary is and will be in substantial
compliance with the foregoing, without any known conflict with the valid rights
of others that could have or cause a material adverse effect on Borrower's or
any Subsidiary's business, operations, assets, property, prospects or condition
(financial or otherwise). No event has occurred that permits, or after notice or
lapse of time or both would permit, the revocation or termination of any such
license or other right or affects or would affect the rights of the Borrower or
Subsidiary thereunder so as to have a material adverse effect on such Borrower's
or Subsidiary's business, operations, assets, property, prospects or condition
(financial or otherwise).
5.22 Patents, Copyrights, Etc. Other than as set forth in the Loan
Documents, neither Borrower nor any Subsidiary has any rights in any patent,
trademark, copyright, trade name or other or similar intellectual property right
(collectively "Intellectual Property Rights") that is material to the operation
of Borrower's or any Subsidiary's business as now operated (other than any right
to any name under which Borrower or any Subsidiary now does business) and no
such Intellectual Property Rights are required for the conduct or operation of
such Borrower's or Subsidiary's business.
5.23 Subsidiaries and Affiliates. The organizational chart attached to and
made a part of this Agreement as Exhibit B is a complete and accurate
representation of the interrelationship of the Borrower and Subsidiaries and
their respective Subsidiaries and Affiliates, and no Borrower or Subsidiary has
any Affiliate or Subsidiary other than as depicted on such organizational chart.
5.24 Partnerships and Joint Ventures. Neither Borrower nor any Subsidiary
is a partner in any partnership, a member of any limited liability company or a
partner or a party to any joint venture except as disclosed in writing to the
Agent.
ARTICLE 6.
AFFIRMATIVE COVENANTS
Until payment in full of the Loans and termination of all the Obligations
hereunder, without the prior written consent of the Required Lenders:
6.1 Payment and Performance of Loan. Borrower shall duly and punctually pay
or cause to be paid in lawful money of the United States the principal and
interest on the Loan upon the dates, at the place and in the manner set forth in
the Notes and in Article II hereof, and perform and observe all other
obligations of Borrower under this Agreement and the other Loan Documents.
6.2 Financial Statements. Borrower shall and shall cause each Subsidiary to
keep proper books of record and account in which full, true and correct entries
shall be made of all business, dealings and affairs in accordance with GAAP, and
Borrower shall, at Borrower's expense, deliver directly to each Lender and in an
acceptable format:
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(a) Within ninety calendar days after the end of each fiscal year of
Borrower, complete audited annual Consolidated financial statements of
Borrower, together with all notes thereto, prepared in reasonable detail in
accordance with GAAP, together with an unqualified opinion, based on an
audit conducted by independent certified public accountants selected by
Borrower and acceptable to the Agent, stating that such financial
statements present fairly the financial position for the periods indicated
in conformity with GAAP applied on a basis consistent with prior years
(except as otherwise required due to changes in GAAP) and an annual
certificate of the type described in Section 6.2(b) below signed by an
Authorized Officer of Borrower;
(b) Quarterly, within forty-five days after the end of each Quarter,
(i) an internally prepared quarterly Consolidated and consolidating
financial statement including an income statement and balance sheet for
Borrower for the subject Quarter, prepared in reasonable detail and in
accordance with GAAP, and certified by an Authorized Officer of Borrower as
being true and correct and fairly presenting in accordance with GAAP the
financial position and results of operations of Borrower, which document
may be in the form of Borrower's quarterly report on form 10-Q filed with
the Securities and Exchange Commission; and (ii) a certificate signed by an
Authorized Officer of Borrower, showing the calculation of and compliance
with the financial covenants contained in this Agreement, and stating that
there does not exist any condition or event at the time of such certificate
which constitutes an Event of Default or an Unmatured Event of Default, or,
if such condition or event existed, specifying the nature and period of
existence of any such condition or event, generally in form and substance
acceptable to Agent;
(c) Within forty-five days after the end of each Quarter, an accounts
receivable aging report, in form and substance acceptable to Agent;
(d) Within ninety days after the end of each fiscal year, an annual
budget, in form and substance acceptable to Agent; and
(e) Such additional financial and other information as the Agent or the
Lenders may from time to time reasonably request.
6.3 Preservation of Existence, Etc. Borrower and all Subsidiaries of
Borrower shall maintain in full force and effect such Borrower's or Subsidiary's
existence as a corporation or limited liability company and its good standing
under the laws of its state of incorporation or formation and its right to
transact business in all states where its activities and ownership of assets are
such that qualification to transact business is necessary under the laws of such
states.
6.4 Maintenance of Property. Borrower shall and shall cause all
Subsidiaries of Borrower to maintain, preserve, protect and keep (a) in good
repair and in good working order and condition the Collateral and all other
properties, real or personal, used or useful in its business, and (b) in full
force and effect all licenses, permits, authorizations and approvals required,
necessary or desirable for the conduct of its' and the Subsidiaries' business.
6.5. Payment of Other Obligations. Borrower shall and shall cause each
Subsidiary to duly and punctually pay and discharge (i) all taxes, assessments
and other
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governmental charges assessed against or imposed upon or with respect to such
Borrower or such Subsidiary or its properties or assets prior to the date when
they shall become delinquent unless the same are being contested in good faith
and by appropriate proceedings and appropriate reserves have been established in
accordance with GAAP and there is no risk of loss of any of the Collateral; (ii)
all charges for labor, materials and supplies which if unpaid might become a
lien against any part of the property of such Borrower or Subsidiary, unless the
same are being contested in good faith and by appropriate proceedings and
appropriate reserves have been established in accordance with GAAP and there is
no risk of loss of any of the Collateral; and (iii) all federal and state social
security, worker's compensation and similar taxes, payments and contributions
for which such Borrower or Subsidiary may be liable, before the same become
delinquent unless the same are being contested in good faith and by appropriate
proceedings and appropriate reserves have been established in accordance with
GAAP and there is no risk of loss of any of the Collateral.
6.6 Insurance.
(a) In addition to any insurance requirements set forth in the Security
Documents, Borrower shall and shall cause each Subsidiary to keep all of
its insurable property, real and personal, adequately insured at all times
with financially sound and reputable independent insurance companies
against fire and against such other risks as are customarily insured
against by the same or similar businesses of a comparable size, and fully
insure against its employer's and public liability risks, all in such
amounts and upon such terms and conditions, including deductibles, as the
Agent may reasonably require.
(b) Each insurance policy covering the Collateral shall be endorsed:
(i) to provide for payment of losses to the Agent, as agent
for the Lenders, as its interest may appear;
(ii) to provide that such policies may not be canceled,
reduced or affected in any manner for any reason without thirty days
prior written notice to the Agent;
(iii) to provide for any other matters specified in any
applicable Security Document or which the Agent may reasonably require;
and
(iv) to provide for insurance against fire, casualty and any
other hazards normally insured against, in the amount of the full value
(less a reasonable deductible not to exceed amounts customary in the
industry for similarly situated businesses and properties) of the
property insured.
(c) Borrower shall and shall cause each Subsidiary to maintain at all
times adequate insurance against its liability for injury to persons or
property, which insurance shall be by financially sound and reputable
independent insurers, in an amount not less than $10,000,000 for each
occurrence. Upon the request of the Agent, Borrower and each Subsidiary
shall furnish the Agent a certificate of an Authorized Officer of Borrower
or such Subsidiary (and, if requested by the Agent, any insurance broker of
Borrower or any Subsidiary) setting forth
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<PAGE> 31
the nature and extent of all insurance maintained by the Borrower and
Subsidiaries in accordance with this Section 6.6.
6.7 Inspection of Property, Books and Records; Meeting with the Lenders.
(a) Borrower shall and shall cause Subsidiaries to permit the Agent's
and any Lender's duly authorized officers, employees and agents to inspect
(and make copies of or abstracts therefrom) the Collateral and the other
property, books and records of Borrower and Subsidiaries and to discuss
Borrower's and Subsidiaries' affairs, finances and accounts with Borrower's
and Subsidiaries' officers and its independent accountants, and furnish any
other data which the Agent or any Lender may reasonably request, all at the
expense of Borrower and Subsidiaries and at any reasonable time and as
often as the Agent or any Lender may reasonably request.
(b) Promptly upon request by the Agent, such Authorized Officers of
Borrower or Subsidiaries as the Agent shall require, shall meet with the
Agent or the Lenders at any time and from time to time at a place
determined by the Agent.
6.8 Notices. Borrower shall and shall cause each Subsidiary to give written
notice to the Agent within three days after Borrower or any Subsidiary becomes
aware of any of the following:
(a) Any material adverse change in the business, property, prospects,
assets, operations or condition (financial or otherwise) of Borrower or any
Subsidiary;
(b) Any Event of Default or Unmatured Event of Default;
(c) The institution of any litigation or other proceeding before any
governmental body or official against Borrower or any Subsidiary or any of
their respective assets and any developments in any pending litigation or
other proceeding before any governmental body or official that could
materially affect Borrower or any Subsidiary, its business, property,
prospects, assets, operations or condition (financial or otherwise);
(d) Any existing or pending investigation or inquiry by any
governmental authority in connection with any applicable Environmental
Laws;
(e) The institution of, or material development in, any litigation
affecting any of the Collateral, or any other dispute or claim that could
have a material adverse effect on any of the Collateral;
(f) Any fact that causes or may cause the Agent, on behalf of the
Lenders, or the Lenders to fail to have a valid, enforceable and perfected
first priority lien on or security interest in any of the Collateral;
(g) Any of the following events affecting Borrower or any member of its
Controlled Group (but in no event more than ten days after becoming aware
of such event), together with a copy of any notice with respect to such
event that may be required to be filed with any governmental authority and
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<PAGE> 32
any notice delivered by any governmental authority to Borrower or any
member or its Controlled Group with respect to such event:
(i) an ERISA Event;
(ii) the adoption of any new Plan that is subject to Title IV
of ERISA or section 412 of the Code by any member of the Controlled
Group;
(iii) the adoption of any amendment to a Plan that is subject
to Title IV of ERISA or section 412 of the Code, if such amendment
results in a material increase in benefits or unfunded liabilities;
(iv) the commencement of contributions by any member of the
Controlled Group to any Plan that is subject to Title IV of ERISA or
section 412 of the Code;
(h) Any event that with the passage of time or giving of notice, or
both, would permit the holder or holders of any Indebtedness of Borrower to
declare such Indebtedness to be due and payable prior to its stated
maturity;
(i) Any change in the executive management of Borrower;
(j) The name and address of any Person acquiring or selling 20 percent
or more of the capital stock of Borrower, or of any smaller percentage of
such stock that would allow the acquiring Person to appoint or control the
appointment of one or more directors of Borrower;
(k) The name and address of any Person (not previously disclosed by
Borrower pursuant to this Section 6.8) that owns or controls so mach of the
capital stock of Borrower that such Person, and the Affiliates of such
Person, directly or indirectly, have the power to influence the management
or operation of Borrower;
(l) The name and address of any Person (not previously disclosed by
Borrower pursuant to this Section 6.8) that together with the Affiliates of
such Person, owns or controls, directly or indirectly, 20 percent or more
of the capital stock of Borrower; or
(m) The creation or acquisition of any new Subsidiary by Borrower or
any Subsidiary. Notwithstanding the foregoing, Lenders hereby approve of
the JMS Acquisitions, provided that T-NETIX JMS provide to Lenders the
additional security described in Section 6.14 herein.
6.9 Compliance with Laws. Borrower shall and shall cause each Subsidiary to
comply with all applicable laws, statutes, rules and regulations of the United
States and of any state or municipality, and of any official, arbitrator or
governmental authority, in respect of the conduct of business and ownership of
property by such Borrower or Subsidiary.
6.10 Further Assurances. Borrower shall and shall cause each Subsidiary to
promptly at Borrower's and Subsidiary's expense, (a) file and refile in such
offices, at such times
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<PAGE> 33
and as often as may be reasonably necessary, every instrument and every
amendment thereto, and take such other action, as may be reasonably necessary or
desirable to create, perfect, maintain and preserve all liens and security
interests intended to be created by Borrower and Subsidiaries under the Security
Documents in favor of the Agent as agent for the Lenders or in favor of the
Lenders and to protect and preserve the rights and remedies of the Agent and the
Lenders thereunder, (b) furnish to the Agent evidence reasonably satisfactory to
the Agent of all such filings and refilings, (c) otherwise do all things
necessary or expedient to be done to effectively create, perfect, maintain and
preserve the liens and security interests intended to be created by the Security
Documents as a lien on real property and fixtures and a security interest in
personal property and to carry out to the Agent's and the Lender's satisfaction
the transactions contemplated by this Agreement and the other Loan Documents.
6.11 Financial Covenants. Borrower shall comply with the following
financial covenants:
(a) Total Debt to Unadjusted EBITDA. Borrower shall maintain a ratio of
Total Debt to Unadjusted EBITDA less than or equal to the ratio set forth
below for the period in which the applicable Quarter ends, calculated at
the end of each Quarter and unless otherwise specified based on such
Quarter and the three immediately preceding Quarters:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing 5.00
9/30/99 4.35
12/31/99 3.625
3/31/00 3.00
6/30/00 2.50
9/30/00, and at the end of
each Quarter Thereafter 2.25
</TABLE>
(b) Fixed Charge Coverage Ratio. Borrower shall maintain a Fixed Charge
Coverage Ratio not less than the ratio set forth below for the period in
which the applicable Quarter ends, calculated at the end of each Quarter
and unless otherwise specified based on such Quarter and the three
immediately preceding Quarters:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing 3.00
9/30/99 3.00
12/31/99 3.75
3/31/00, and at the end of
each Quarter Thereafter 4.00
</TABLE>
(c) Minimum EBITDA. Borrower shall maintain a minimum EBITDA at the end
of the Quarter identified below in the amount set forth below for such
Quarter (as shown in the applicable financial statements):
<TABLE>
<S> <C>
Quarter ending 9/30/99 $2,350,000
Quarter ending 12/31/99 $3,100,000
Quarter ending 3/31/00 $3,875,000
Quarter ending 6/30/99 $4,125,000
Quarter ending 9/30/00 $4,250,000
Quarter ending 12/31/00 and
each Quarter Thereafter $4,375,000
</TABLE>
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<PAGE> 34
6.12 Principal Bank Accounts. Within 30 days after closing, Borrower shall
establish and at all times thereafter shall maintain its principal deposit
accounts with the Agent during the term of this Agreement.
6.13 Loan Expenses. Within three days after demand by the Agent, Borrower
shall pay any and all Loan Expenses incurred by the Agent at any time and from
time to time.
6.14 Additional Security. If Borrower or any Subsidiary shall create or
acquire any new Subsidiary, such Borrower or Subsidiary shall (unless otherwise
requested in writing by the Required Lenders), within ten days after the
creation or acquisition of such new Subsidiary and solely at Borrower's or
Subsidiaries' expense: (a) provide a guaranty to Lenders by execution of a
Guaranty in form and content acceptable to Lender; (b) pledge the stock or other
ownership interest in such Subsidiary to the Agent, for the benefit of the
Lenders, as additional Collateral; and (c) encumber the assets of such
Subsidiary in favor of the Agent, for the benefit of the Lenders, as additional
Collateral, in the case of subsection (b) and (c) above, by execution and
delivery of Security Documents in form and content acceptable to the Agent.
6.15 Interest Rate Risk Hedge. Within 10 days after the Closing Date,
Borrower shall choose the Adjusted LIBOR Rate interest option for a one year
Interest Period pursuant to and in accordance with the terms of the Notes, which
shall apply to a minimum of $15,000,000 of the outstanding principal balance of
the Notes.
6.16 SpeakEZ Expenditure. Neither SpeakEZ, Inc. nor any affiliate thereof
shall permit total expenses and expenditures (cash and non-cash) for SpeakEZ to
exceed $2,000,000 in any fiscal year, which amount shall be calculated net of
any SpeakEZ revenues or other SpeakEZ income received during such fiscal year.
6.17 Federal and Other Governmental Contracts. Upon entering into any
federal or governmental contract subject to the Federal Assignment of Claims Act
or any similar act, Borrower shall immediately notify Agent that it has entered
into such contract and shall immediately take and cause each Subsidiary to do
all acts necessary to comply with the Federal Assignment of Claims Act or any
other such similar act as is applicable to the relevant contract in order to
give Agent, as agent for Lenders, a valid first priority security interest in
such contracts, or otherwise provide evidence satisfactory to Agent that no such
compliance is necessary.
ARTICLE 7.
NEGATIVE COVENANTS
Until payment in full of the Loans and termination of all the Obligations
hereunder, Borrower and Subsidiaries shall not, and shall not cause, permit or
suffer any Subsidiary of Borrower or Subsidiaries to, without the prior written
consent of the Required Lenders:
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<PAGE> 35
7.1 Indebtedness. Create, incur, assume or permit to exist any Indebtedness
(including, without limitation, any and all loans to Subsidiaries and Affiliates
and any and all guarantees of indebtedness), except:
(a) The Loan;
(b) Current trade payables to Persons incurred for good furnished or
services rendered, in either case in the Ordinary Course of Business;
(c) Indebtedness (other than Accommodation Obligations); including
capital leases, not exceeding $500,000 in the aggregate outstanding at
anyone time (but excluding trade payables permitted under subsection (b)
above and the Loan); and
(d) Loans from (i) any one or more Borrower, Subsidiaries, Subsidiaries
or Affiliates, to (ii) any one or more Borrower, Subsidiaries, Subsidiaries
or Affiliates.
7.2 Loans and Advances. Make any loans or advances to any Person, except
for the following loans and advances which may be made at any time prior to the
occurrence or existence of an Event of Default or Unmatured Event of Default,
but not thereafter: (a) accounts receivable arising from the sale or lease of
goods or services in the Ordinary Course of Business; or (b) loans or advances
that do not exceed $100,000 in the aggregate outstanding at any one time.
7.3 Investments and New Business. (a) Make any acquisitions of or capital
contributions to or other investments in any Person on or after the Closing
Date, or (b) make any investments other than (1) investments in open market
commercial paper, maturing within 365 days after acquisition thereof, with a
credit rating of at least A-1 or P-1 by either Standard & Poor's Corporation or
Moody's Investors Service, Inc., (2) marketable obligations issued or
unconditionally guaranteed by the United States of America or an instrumentality
or agency thereof and entitled to the full faith and credit of the United States
of America, (3) municipal bonds with a credit rating of at least A by either
Standard & Poor's or Moody's, and (4) demand deposits, time deposits (including
certificates of deposit), and money market accounts. Notwithstanding the
foregoing, Lenders hereby approve of the JMS Acquisition, provided that T-NETIX
JMS provide to Lenders the additional security described in Section 6.14 herein.
7.4 Liens. Create, assume or permit to exist any Lien upon any properties
(including licenses) or assets, whether now owned or hereafter acquired, real or
personal, except:
(a) The Security Documents;
(b) Liens for taxes not delinquent or being contested in good faith and
by appropriate proceedings and for which adequate reserves have been set
aside in accordance with GAAP and for which there is no risk of loss to the
Collateral;
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<PAGE> 36
(c) Operator's, mechanic's, workmen's, materialmen's and other like
liens arising in the Ordinary Course of Business in respect of obligations
not overdue or which are being contested in good faith and by appropriate
proceedings and for which adequate reserves have been set aside on such
Person's books and for which there is no risk of loss of any of the
Collateral;
(d) Liens or encumbrances, if any, permitted by the Security Documents
or in favor of Agent.
7.5 Stock, Mergers and Consolidations. Merge or consolidate into or with
any Person, which shall mean the combination of two or more entities in such
fashion that only one of such entities shall survive such transaction or in such
fashion that none of such entities shall survive such transaction, but instead
shall be combined into a new entity or entities.
7.6 Dividends and Distributions. Make any dividends or distributions of
assets, or declare or pay any cash or liquidating distribution or dividends, or
make any other distribution to any of their shareholders. Notwithstanding the
forgoing, the Borrower shall be permitted to re-purchase up to $2,000,000 in the
aggregate of treasury stock provided that no Event of Default or Unmatured Event
of Default shall have occurred either before such transaction takes place or as
a result of such transaction.
7.7 Burdensome Undertakings. Undertake, or become contractually bound to
undertake, any action not in the Ordinary Course of Business that could
materially adversely affect Borrower or any Subsidiary or its business,
properties, prospects, assets, operations or condition (financial or otherwise).
7.8 Disposition of Assets. Sell, transfer, convey, assign, lease, exchange
or otherwise dispose (whether in one or a series of transactions) of any of its
assets (including licenses), real or personal, except sales, transfers, leases,
exchanges or other dispositions of assets by Borrower in the Ordinary Course of
Business; and
(a) sales, transfers, leases, exchanges or other dispositions of assets
by Borrower in the Ordinary Course of Business; and
(b) in the Ordinary Course of Business, so long as such transaction is
on fair and reasonable terms and the proceeds from all such transactions do
not exceed $100,000 in the aggregate.
7.9 Use of Proceeds. Use any funds from the Loan directly or indirectly for
the purpose, whether immediate, incidental or ultimate, of purchasing, acquiring
or carrying any "margin stock" or any "margin securities" (as such terms are
defined respectively in Regulation U and Regulation G promulgated by the Board
of Governors of the Federal Reserve System) or to extend credit to others
directly or indirectly for the purpose of purchasing or carrying any such margin
stock or margin securities.
7.10 Transactions with Affiliates. Enter into any transaction with any
Affiliate, except (a) guarantees of indebtedness within the limitations provided
for in Section 7.1 above,
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<PAGE> 37
and (b) any transaction that is in the Ordinary Course of Business and that is
upon fair and reasonable terms comparable in all material respects to terms that
would be obtained in an arm's-length transaction with a Person not an Affiliate
of Borrower.
7.11 ERISA.
(a) Terminate any Plan subject to Title IV of ERISA that might
reasonably be expected to result in liability to the Borrower or any ERISA
Affiliate in an aggregate amount exceeding $2,000,000;
(b) Permit to exist any ERISA Event or any other event or condition
that might reasonably be expected to result in liability to any member of
the Controlled Group in an aggregate amount exceeding $2,000,000;
(c) Make a complete or partial withdrawal (within the meaning of ERISA
section 4201) from any ERISA Plan that might reasonably be expected to
result in liability to the Borrower or any ERISA Affiliate in an aggregate
amount exceeding $2,000,000;
(d) Enter into any new ERISA Plan or modify any existing ERISA Plan so
as to increase its obligations thereunder which could result in liability
to any member of the Controlled Group in the aggregate amount of $2,000,000
or more;
(e) Permit the present value of all nonforfeitable accrued benefits
under any ERISA Plan (using the actuarial assumptions used by the ERISA
Plan's actuaries for purposes of determining the finding for the ERISA Plan
pursuant to section 412 of the Code) to exceed the fair market value of
ERISA Plan assets allocable to such benefits by $2,000,000 or more;
(f) Cause or permit the occurrence of any combination of events listed
in clauses (a) through (e) that involves a potential liability, excess of
accrued benefits over fair market value, or any combination thereof, in
excess of $5,000,000; or
(g) Establish, maintain or contribute to any ERISA Plans or incur any
obligation to contribute to any "multiemployer plan" as defined in Section
4001 of ERISA or represent, promise, or contract (in oral or written form)
to any current or former employee (individually or as a group) that such
current or former employee(s) would be provided, at any cost to any member
of the Controlled Group, with any employee welfare benefits (as defined in
Section 3(1) of ERISA) following retirement or termination of employment.
7.12 Amendments to Organizational Documents. Amend Borrower's or any
Subsidiary's articles of incorporation, bylaws, or other governing documents.
ARTICLE 8.
EVENTS OF DEFAULT
The occurrence of any of the following shall constitute an event of default
("Event of Default") hereunder:
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<PAGE> 38
8.1 Nonpayment. Failure by Borrower to pay, when due, any installment of
principal of, or interest on, the Notes or any fees or other amounts payable
hereunder or under the Notes or any other Loan Document.
8.2 Other Defaults. Any failure by Borrower to perform or observe any
covenant, agreement, condition or provision contained in this Agreement or the
Notes (except those dealt with specifically in this Article 8), if such failure
continues unremedied for a period of fifteen days following written notice of
default from Agent.
8.3 Representation or Warranty. Any representation or warranty of Borrower
or any Subsidiary, whether contained in this Agreement or in any certificate or
other writing required or contemplated by this Agreement or in any Loan Document
shall be false or misleading in any material respect as of the date made or
deemed made.
8.4 Other Nonpayment. Failure by Borrower or any Subsidiary to pay, when
due, any installment of principal of, or interest on, any Indebtedness having an
aggregate principal amount in excess of $250,000. Any default or event of
default shall occur under any other agreement now or hereafter existing relating
to any Indebtedness of Borrower or any Subsidiary to any Person, having an
aggregate principal amount in excess of $250,000.
8.5 Bankruptcy. Etc. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any
other law for the relief of debtors shall be instituted by or against Borrower
or any Subsidiary (except for an involuntary petition against Borrower or any
Subsidiary, which shall not constitute an Event of Default if such petition is
vacated or dismissed within fifteen days after the filing thereof), or any
order, judgment or decree shall be entered against Borrower or any Subsidiary
decreeing its dissolution or division.
8.6 ERISA. (i) A member of the Controlled Group shall fail to pay when due,
after the expiration of any applicable grace period, any installment payment
with respect to its withdrawal liability under a Multiemployer Plan; (ii)
Borrower or an ERISA Affiliate shall fail to satisfy its contribution
requirements under section 412(c)(11) of the Code, whether or not it has sought
a waiver under section 412(d) of the Code; (iii) in the case of an ERISA Event
involving the withdrawal from a Plan of a "substantial employer" (as defined in
section 4001(a)(2) or Section 4062(e) of ERISA), the withdrawing employer's
proportionate share of that-Plan's Unfunded Pension Liabilities is more than
$2,000,000; (iv) in the case of an ERISA Event involving the complete or partial
withdrawal from a Multiemployer Plan, the withdrawing employer has incurred a
withdrawal liability in an aggregate amount exceeding $2,000,000; (v) in the
case of an ERISA Event not described in clause (iii) or (iv), the Unfunded
Pension Liabilities of the relevant Plan or Plans exceed $2,000,000; (vi) a Plan
that is intended to be qualified under section 401(a) of the Code shall lose its
qualification, and the loss can reasonably be expected to impose on members of
the Controlled Group liability (for additional taxes, to Plan participants, or
otherwise) in the aggregate amount of $2,000,000; or more; (vii) the
commencement or increase of contributions to, or the adoption of or the
amendment of a Plan by, a member of the Controlled Group shall result in a net
increase in unfunded liabilities to the Controlled Group in excess of
$2,000,000; (viii) any member of the Controlled Group engages in or otherwise
34
<PAGE> 39
becomes liable for a nonexempt prohibited transaction and the initial tax or
additional tax under section 4975 of the Code relating thereto might reasonably
be expected to exceed $2,000,000; (ix) a violation of section 404 or 405 of
ERISA or the exclusive benefit rule under section 401(a) of the Code if such
violation might reasonably be expected to expose a member or members of the
Controlled Group to monetary liability in excess of $2,000,000; (x) any member
of the Controlled Group is assessed a tax under section 4980B of the Code in
excess of $2,000,000; (xi) any member of the Controlled Group is subject to a
payment in excess of $2,000,000 in connection with any agreement with the
Internal Revenue Service to prevent the disqualification of a Plan; or (xii) the
occurrence of any combination of events listed in clauses (iii) through (xi)
that involves a potential liability, net increase in aggregate Unfunded Pension
Liabilities, unfunded liabilities, or any combination thereof, in excess of
$2,000,000.
8.7 Loan Documents.
(a) Occurrence of any of the events of default defined in any of the
Loan Documents (other than an event of default that is also a default under
this Agreement).
(b) Any of the Security Documents shall for any reason cease to create
a valid security interest in the collateral purported to be covered thereby
or such security interest shall for any reason cease to be a perfected and
first priority lien and security interest, subject only to those matters
expressly permitted by Section 7.2 hereof or by any applicable Security
Document, if a valid, perfected and first priority lien and security
interest in such collateral is not reinstated or recreated, to the
satisfaction of Agent, within 30 days of written notice from Agent.
8.8 Judgments. Any final judgment, writ or warrant of attachment, or
similar process in an amount of $250,000 (in the aggregate) or more shall be
entered or filed against Borrower, any Subsidiary, any Subsidiary or any
Affiliate, or any of its assets and shall remain unvacated, unbonded or unstayed
for a period of thirty calendar days.
8.9 Insolvency. Borrower or any Subsidiary shall become insolvent, admit in
writing its inability to pay its debts as they mature, or make an assignment for
the benefit of creditors; or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business; or such a receiver or trustee otherwise shall be appointed and shall
not be discharged within thirty calendar days after such appointment.
8.10 Loan Documents. This Agreement, the Note or any of the other Loan
Documents shall for any reason be revoked or invalidated, or otherwise cease to
be in full force and effect.
8.11 Change in Control.
(a) Borrower shall cease to own, directly or indirectly, 100 percent of
the capital stock of each of the Subsidiaries.
(b) A change in the ownership of more than 50 percent of the capital
stock of Borrower.
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<PAGE> 40
(c) Ownership, directly or indirectly, by any Person and the Affiliates
of such Person of so much of the capital stock of Borrower that such
Person, and the Affiliates of such Person, directly or indirectly, control
the election or appointment of a material number of Borrower's board of
directors, where such Person or any of the Affiliates of such Person is not
satisfactory to the Lenders.
(d) Ownership or control, directly or indirectly, by any Person and the
Affiliates of such Person of so much of the capital stock of Borrower that
such Person, and the Affiliates of such Person, directly or indirectly,
have the power to influence the management or operation of Borrower, where
such Person or any of the Affiliates of such Person is not satisfactory to
the Lenders.
(e) Any change in the control, directly or indirectly, by any Person
and the Affiliates of such Person of 20 percent or more of the capital
stock of Borrower which is owned by such Person and the Affiliates of such
Person after the date hereof, or any change in the ownership or control,
directly or indirectly, by any Person and the Affiliates of such Person of
20 percent or more of the capital stock of Borrower which is acquired after
the date hereof by any Person and the Affiliates of such Person who does
not own 10% or more of Borrower's capital stock on the date hereof, where
such Person or any of the Affiliates of such Person is not satisfactory to
the Lenders.
(f) Change in the executive management of Borrower, if such change is
not satisfactory to Lenders in Lenders' sole and absolute discretion.
8.12 Material Adverse Change. Any material adverse change occurs in
Borrower's or any Subsidiary's financial condition or business or operations
(including, without limitation, any material adverse change caused by Borrower
or any Subsidiary becoming subject to any statute, regulation or order of any
governmental authority after the date hereof).
ARTICLE 9.
REMEDIES
9.1 Automatic Acceleration of Loans. Upon the occurrence of any Event of
Default specified in Section 8.5 or 8.9, the obligation of the Lenders to make
Advances under the Loan shall automatically terminate and the unpaid principal
amount of the Loan and all interest and other amounts payable hereunder, under
the Notes or any of the Loan Documents, shall automatically become due and
payable without further act of the Agent or the Lenders.
9.2 Optional Acceleration of Loans. Upon the occurrence of any Event of
Default (other than those specified in Sections 8.5 and 8.9 above), the
obligation of the Lenders to make Advances under the Loan shall automatically
terminate and the Agent shall, at the direction of the Required Lenders from
time to time, do any or all of the following:
(a) Declare all or any part of the Loan to be forthwith due and
payable, together with all accrued and unpaid interest thereon and all
other amounts payable hereunder or under any of the other Loan Documents,
without presentment, demand, protest or other notice of any kind, all of
which are expressly waived by Borrower;
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<PAGE> 41
(b) With respect to any and all contingent, unmatured or unliquidated
obligations of Borrower hereunder, declare such obligations to be
immediately due and payable and require that cash in an amount equal to the
aggregate outstanding amount of all such obligations be immediately paid
over, pledged and delivered to the Agent on behalf of the Lenders to be
held as cash collateral for such obligations; and
(c) Proceed with every remedy provided for herein or in the Notes, the
Security Documents or any contract, agreement or undertaking supplemental
hereto and the Lenders shall have, without limitation, all of the rights of
a secured party under the Uniform Commercial Codes as then in effect with
respect to any security then held for the Loans.
The enforcement of any rights of the Agent and the Lenders as to the
security for the Loans shall not affect the rights of the Agent or the Lenders
to enforce payment of the Loans against Borrower and to recover judgment against
Borrower for any portion thereof remaining unpaid.
9.3 Setoff. Upon the occurrence of any Event of Default, each Lender shall
have the right at any time and from time to time, without prior notice to
Borrower (which notice is hereby waived by Borrower to the fullest extent
permitted by law), to set off and apply any debt owing to Borrower by such
Lender, including, without limitation, any deposits (general or special, time or
demand, provisional or final) now or hereafter maintained by Borrower with such
Lender, against any and all obligations of Borrower now or hereafter existing
under this Agreement or any of the other Loan Documents, although such
obligations may be contingent or unmatured, and for such purpose Borrower hereby
grant a security interest in and assigns to each Lender all such deposit
accounts.
9.4 Expenses. Upon the occurrence of any Event of Default, Borrower shall,
on demand, pay to Agent and each Lender any Loan Expenses incurred by Agent and
Lenders in connection with such Event of Default or the enforcement of its
rights under or with respect to the Loan, this Agreement, the Notes and the
other Loan Documents. This obligation is in addition to any other obligation of
Borrower to reimburse the Agent or the Lenders for the Loan Expenses incurred by
them.
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ARTICLE 10.
THE AGENT
10.1 Appointment. Each Lender hereby irrevocably designates and appoints
the Agent as the continuing agent of such Lender under this Agreement and the
other Loan Documents, and each such Lender irrevocably authorizes the Agent as
the agent for such Lender, to take such action on its behalf under the
provisions of this Agreement and the other Loan Documents and to exercise such
powers and perform such duties as are expressly delegated to the Agent by the
terms of this Agreement and the other Loan Documents, together with such other
powers as are reasonably incidental thereto. Notwithstanding any provision to
the contrary contained elsewhere in this Agreement, the Agent shall not have any
duties or responsibilities, except those expressly set forth herein, or any
fiduciary relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against the Agent.
10.2 Delegation of Duties. The Agent may execute any of its duties under
this Agreement and the other Loan Documents by or through agents or
attorneys-in-fact and shall be entitled to rely on advice of counsel concerning
all matters pertaining to such duties. The Agent shall not be responsible to the
Lenders for the negligence or misconduct of any agents or attorneys-in-fact
selected by it, provided that Agent selects such agent or attorney-in-fact with
reasonable care. Each Lender hereby authorizes Agent, as agent for such Lender
to: (i) to act as nominee for and on behalf of such Lender in and under all Loan
Documents; (ii) to arrange the means whereby the funds of Lenders are to be made
available to Borrower under the Loan Documents; (iii) to take such action as may
be requested by any Lender under the Loan Documents (when such Lender is
entitled to make such request under the Loan Documents and after such requesting
Lender has obtained the concurrence of such other Lenders as may be required
under the Loan Documents); (iv) to receive all documents and items to be
furnished to Lenders under the Loan Documents; (v) to timely distribute, and
Agent agrees to so distribute, to each Lender all material information,
requests, documents, and items received from Borrower under the Loan Documents;
(vi) to distribute to each Lender its ratable part of each payment or prepayment
(whether voluntary, as proceeds of collateral upon or after foreclosure, as
proceeds of insurance thereon, or otherwise) in accordance with the terms of the
Loan Documents; (vii) to deliver to the appropriate Persons requests, demands,
approvals, and consents received from Lenders; and (viii) to execute, on behalf
of Lenders, such releases or other documents or instruments as are permitted by
the Loan Documents or as directed by Required Lenders from time to time;
provided, however, Agent shall not be required to take any action which exposes
Administrative Agent to personal liability or which is contrary to the Loan
Documents or applicable Law.
10.3 Exculpatory Provisions. Neither the Agent nor any of its officers,
directors, employees, agents, attorneys-in-fact or Affiliates shall be (i)
liable for any action lawfully taken or omitted to be taken by it or such Person
or entity under or in connection with this Agreement or any other Loan Document
(except for its or such Person's or entity's own gross negligence or willful
misconduct), or (ii) responsible in any manner to any of the Lenders for any
recitals, statements, representations or warranties made by Borrower,
Subsidiaries, or any representative thereof or any other Person contained in
this Agreement or any other Loan Document or in any certificate, report,
statement or other document referred to or provided for in,
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or received by the Agent under or in connection with, this Agreement or any
other Loan Document or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or the Notes or any other Loan
Document or for any failure of Borrower to perform its obligations hereunder or
thereunder. The Agent shall not be under any obligation to any Lender to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of Borrower.
10.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be
fully protected in relying, upon (a) any writing, resolution, notice, consent,
certificate, affidavit, letter, telecopy or telex message, statement, order or
other document or conversation believed by it to be genuine and correct and to
have been signed, sent or made by the proper Person or Persons, (b)advice and
statements of legal counsel (including, without limitation, counsel to
Borrower), (c) independent accountants and (d) other experts selected by the
Agent. The Agent may deem and treat the payee of any Note as the owner thereof
for all purposes unless a written notice of assignment, negotiation or transfer
thereof shall have been filed with the Agent and such assignment shall have been
made in accordance with Section 11.1 hereunder. The Agent shall be fully
justified in failing or refusing to take any action under this Agreement or any
other Loan Document unless it shall first receive such advice or concurrence of
the Required Lenders as it deems appropriate or it shall first be indemnified to
its satisfaction by the Lenders against any and all liability and expense which
may be incurred by it by reason of taking or continuing to take any such action.
The Agent shall in all cases be fully protected in acting, or in refraining from
acting, under this Agreement and the Notes and the other Loan Documents in
accordance with a request of the Required Lenders, and such request and any
action taken or failure to act pursuant thereto shall be binding upon all the
Lenders and all future holders of the Notes.
10.5 Notice of Default. The Agent shall not be deemed to have knowledge or
notice of the occurrence of any Unmatured Event of Default or Event of Default
hereunder unless the Agent has received notice from a Lender or the Borrower
referring to this Agreement, describing such Unmatured Event of Default or Event
of Default and stating that such notice is a "notice of default." In the event
that the Agent receives such a notice, the Agent shall give notice thereof to
the Lenders.
10.6 Nonreliance on Agent and Other Lenders. Each Lender expressly
acknowledges that neither the Agent nor any of its officers, directors,
employees, agents, attorneys-in-fact or Affiliates has made any representations
or warranties to it and that no act by the Agent hereinafter taken, including
any review of the affairs of the Borrower, shall be deemed to constitute any
representation or warranty by the Agent to any Lender. Each Lender represents to
the Agent that it has, independently and without reliance upon the Agent or any
other Lender, and based on such documents and information as it has deemed
appropriate, made its own appraisal of and investigation into the business,
operations, property, financial and other condition and creditworthiness of
Borrower and made its own decision to make the Loans hereunder and enter into
this Agreement. Each Lender also represents that it will, independently and
without reliance upon the Agent or any other Lender, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit analysis, appraisals and decisions in taking or not taking action
under this Agreement and the other Loan Documents, and to make such
investigation as it deems necessary to inform itself as to the
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business, operations, property, financial and other condition and
creditworthiness of Borrower. Except for notices, reports and other documents
expressly required to be furnished to the Lenders by the Agent hereunder, the
Agent shall not have any duty or responsibility to provide any Lender with any
credit or other information concerning the business, operations, property,
condition (financial or otherwise), prospects or creditworthiness of Borrower
which may come into the possession of the Agent or any of its officers,
directors, employees, agents, attorneys-in-fact or affiliates. In addition, the
Agent and the Lenders agree that each Lender shall be responsible for its own
determination with respect to all matters related to this Agreement and the Loan
Documents, including, without limitation, all matters related to the compliance
by Borrower with the terms and conditions of this Agreement and the Loan
Documents, except that Agent shall act as collateral agent subject to and in
accordance with the terms and conditions of the Security Documents.
10.7 Indemnification. The Lenders agree to indemnify the Agent in its
capacity as such (to the extent not reimbursed by Borrower and without limiting
the obligation of Borrower to do so), ratably according to each Lender's
Percentage Interest in the Loans, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind whatsoever which may at any time
(including, without limitation, at any time following the payment of the Notes)
be imposed on, incurred by or asserted against the Agent in any way relating to
or arising out of this Agreement, any of the other Loan Documents or the
transactions contemplated hereby or thereby or any action taken or omitted by
the Agent under or in connection with any of the foregoing; provided that no
Lender shall be liable for the payment of any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting solely from the Agent's gross negligence or
willful misconduct. The agreements in this subsection shall survive the payment
of the Notes and all other amounts payable hereunder.
10.8 Agent and Lenders in Their Individual Capacity. Each of the Agent, the
Lenders and their respective Affiliates may enter into agreements with, make
loans to, accept deposits from and generally engage in any kind of business with
Borrower, Subsidiaries, and Affiliates and related parties as though such Person
was not the Agent and/or a Lender, as the case may be, hereunder and under the
other Loan Documents. With respect to Advances made by it and any Note issued to
it, the Agent shall have the same rights and powers under this Agreement and the
other Loan Documents as any Lender and may exercise the same as though it were
not the Agent, and the terms "Lender" and "Lenders" shall include the Agent in
its individual capacity.
10.9 Successor Agent. The Agent may resign as Agent upon ten days' notice
to the Lenders. If the Agent shall resign as Agent under this Agreement and the
other Loan Documents, then the Required Lenders shall appoint from among the
Lenders a successor agent for the Lenders, which successor agent shall be
approved by Borrower (unless there is then an Event of Default or Unmatured
Event of Default, in which event Borrower shall have no approval right),
whereupon such successor agent shall succeed to the rights, powers and duties of
the Agent, and the term "Agent" shall mean such successor agent effective upon
its appointment, and the former Agent's rights, powers and duties as Agent shall
be terminated, without any other or further act or deed on the part of such
former Agent or any of the parties to this Agreement or any holders of the
Notes, other than to give notice of the appointment of such successor agent to
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Borrower. Borrower is entitled to rely upon the existing Agent until Borrower
has received notice of the appointment of a successor agent. After any retiring
Agent's resignation as Agent, the provisions of this subsection shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
Agent under this Agreement and the other Loan Documents. If no successor Agent
shall have been so appointed by the Required Lenders and shall have accepted
such appointment within thirty days after the retiring Agent's giving of notice
of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a
successor Agent, which shall be a financial institution having a rating of not
less than A or its equivalent by Standard & Poor's Corporation. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations hereunder. After any
retiring Agent's resignation, the provision of this Agreement and the other Loan
Documents shall continue to be in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as Agent.
10.10 Lender's Percentage Interest in the Loans. Notwithstanding anything
to the contrary herein, the Percentage Interest of each Lender in the Loans at
any time shall be a percentage determined by dividing the aggregate amount
advanced, and still outstanding at such time, by such Lender under this
Agreement by the total aggregate amount advanced, and still outstanding at such
time, in connection with the Loans. Each party's Percentage Interest of the
Loans shall be pan passu, without priority of one over the other, except as may
be explicitly set forth herein.
10.11 Sharing of Payments. Each Lender agrees with the other Lenders that
in the event that such Lender shall receive and retain any payment, whether
derived from Borrower, any Subsidiary, setoff or application of deposit balances
or otherwise, on any Note or other amount outstanding (excluding fees and
reimbursements for expenses) in excess of its Percentage Interest in payments on
all then outstanding Notes and other amounts then outstanding to the Lenders,
then such Lender shall purchase for cash at face value, but without recourse,
ratably from the other Lenders such amount of the amounts outstanding under the
Notes held by each such other Lender (or an interest therein) as shall be
necessary to cause such Lender to share such excess payment ratably with the
other Lenders in accord with their respective Percentage Interests. Without
limiting the generality of the foregoing, each Lender agrees that any amounts
that any Lender receives by setoff or application of deposit balances or similar
proceeding shall be applied only to the Obligations and each Lender shall pay to
each other Lender its Percentage Interest of any amounts that such Lender
obtains by setoff or application of deposits or similar proceedings.
10.12 Agreement of Lenders. Notwithstanding anything to the contrary in
this Agreement, all Lenders must consent and agree to any of the following: (i)
any extension or increase of the Loan or any commitment issued with respect to
the Loan, (ii) any extension of the Maturity Date or the due date of any
scheduled payments of principal, (iii) any reduction in the fees or the rate of
interest payable with respect to the Loan under this Agreement and the Notes
(other than reductions in fluctuating rates that are based on fluctuations in
such rates), (iv) any amendment or waiver of any default for which a cure period
is not provided or contemplated under this Agreement, and (v) any amendment of
the provisions of this Section 10.12. Except as specifically set forth above in
this Section 10.12, all other actions to be taken by the Lenders or
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all other decisions to be made or consents to be given by the Lenders shall be
based on the decision or consent of the Required Lenders unless the provision of
the Loan Document requiring such consent or decision specifically provides to
the contrary. The parties hereto specifically agree that participants shall have
no right to take part in any decision to be made or any consent required.
ARTICLE 11.
RIGHTS AND DUTIES OF LENDERS
11.1 Assignments and Participations.
(a) Each Lender shall be entitled at any time, and from time to time,
with the prior written approval of the Agent, to grant a participation
interest in its interest in the Loans to up to two participants provided
that (i) no Lender shall grant a participation interest in the Loans to
more than two participants, (ii) no Lender may transfer a participatory
interest of less than $5,000,000, or have an interest of less than
$5,000,000 following transfer of a participation to another lender, and
(iii) the Lender granting such participation shall continue to act on
behalf of itself and all participants hereunder and such participants'
interests in the Loans and the Loan Documents shall be confined solely to
the contractual relationship between the Lender and its participants and
such participants shall not be deemed a direct Lender hereunder.
(b) In addition, each Lender shall have the right at any time, with the
consent of the Borrower, which consent shall not be unreasonably withheld,
and the consent of Agent, to sell all, or a portion not less than
$5,000,000, of such Lender's interest in the Loan to a single purchaser
that is an Eligible Institution. For purposes of this Agreement, an
"Eligible Institution" means (i) a commercial bank organized under the laws
of the United States, or any state thereof, and having a combined capital
surplus of at least $100 million, (ii) any commercial bank organized under
the laws of the United States, or any state thereof, which is an Affiliate
of any of the Lenders, or (iii) any other financial institution reasonably
acceptable to Agent. In the case of any such sale and assignment, Borrower
shall accord full recognition thereto and hereby agree that all rights and
remedies of the selling Lender in connection with the interest so assigned
shall be enforceable against Borrower by the assignee thereof Borrower, the
selling Lender and the assignee shall execute and deliver all amendments to
the Loan Documents and other documents requested by the Agent or the other
Lenders in order to effect such assignment and sale and the selling Lender
or the assignee shall reimburse the Agent and the other Lenders for all
reasonable out-of-pocket expenses incurred by the Agent or other Lenders in
connection therewith, including, but not limited to, all legal fees and
expenses. The assignee institution in any such assignment shall pay to
Agent, as a condition of such assignment, an assignment fee to be
determined and retained solely by Agent. Notwithstanding the foregoing,
upon the occurrence of an Event of Default, the consent of the Borrower
shall not be required to any assignment permitted pursuant to this Section
11.1(b).
11.2 Reliance Upon Attorneys. The Agent ani the Lenders may rely upon
advice received from time to time from attorneys experienced as bank counsel,
and any action taken by the Agent or the Lenders upon the basis of any such
advice shall be deemed to be reasonable.
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11.3 Acceptance and Consent by the Lenders. Unless otherwise indicated
herein, the phrases "acceptable to the Lenders," "acceptable to the Agent" and
"as the Lenders may require" or "as the Agent may require" or other similar
phrases used in this Agreement shall mean acceptable to the Lenders or the Agent
in the Lenders' or the Agent's sole and absolute discretion and as the Lenders
or the Agent may require in the Lenders' or the Agent's sole and absolute
discretion. In addition, any consent by or other action required by the Lenders
or the Agent hereunder or under any other Loan Document or any discretion to be
rendered by the Lenders or the Agent hereunder or under any other Loan Document
shall be in the Lenders' or the Agent's sole and absolute discretion unless
otherwise indicated.
ARTICLE 12.
MISCELLANEOUS
12.1 No Waiver; Cumulative Remedies. No delay on the part of the Agent or
any Lender in exercising any right, power, privilege or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise or waiver
of any right, power, privilege, or remedy hereunder preclude any other or
further exercise of such right, power, privilege, or remedy hereunder or the
exercise of any other right, power or privilege or remedy. The rights and
remedies of the Agent and the Lenders contained herein are cumulative and not
exclusive of any right or remedy which the Agent and the Lenders shall otherwise
have pursuant to the Loan Documents or applicable law. The obligations of
Borrower contained herein are cumulative, and compliance by Borrower with any
covenant shall not excuse compliance by Borrower with any other covenant.
12.2 Notices. All notices given hereunder shall be in writing, shall be
given by certified mail, return receipt requested, nationally recognized
overnight courier service, telecopy, facsimile or copy delivered by hand, and,
(i) if mailed, shall be deemed received three Business Days after having been
deposited in a receptacle for United States mail, postage prepaid, (ii) if
delivered by nationally recognized overnight air courier service, shall be
deemed received one Business Day after having been deposited with such overnight
air courier service, postage prepaid, and (iii) if delivered by telex, telecopy
or hand delivery, shall be deemed received on the day the notice is sent
provided that the sender receives confirmation thereof), in each case addressed
as follows (other than a notice of advance, which shall be sent to the Agent
only):
If to Borrower, or any Subsidiary to:
T-NETIX, INC.
67 Inverness Drive
Englewood, Colorado 80112
Attention: John Giannaula
Facsimile: (303) 705-5584
With a copy to:
Rothgerber, Johnson and Lyons LLP
One Tabor Center, Suite 3000
1200 Seventeenth Street
Denver, Colorado 80202
Attention: Woody Davis, Esq.
Facsimile: (303) 623-9222
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If to the Lenders, to:
Bank One, Colorado, NA
1125 17th Street
Denver, Colorado 80202-208 8
Attention: T. J. Kern
Facsimile: (303) 244-3351
With a copy to:
Holme Roberts & Owen LLP
1700 Lincoln, Suite 4100
Denver, Colorado 80203
Attention: Robert H. Bach, Esq.
Facsimile: (303) 866-0200
If to the Agent, to:
Bank One, Colorado, NA
1125 17th Street
Denver, Colorado 80202-2088
Attention: T. J. Kern
Facsimile: (303) 244-3351
With a copy to:
Holme Roberts & Owen LLP
1700 Lincoln, Suite 4100
Denver, Colorado 80203
Attention: Robert H. Bach, Esq.
Facsimile: (303) 866-0200
Any party may, by written notice so delivered to the others, change the address
or facsimile number to which delivery shall thereafter be made.
12.3 Counterpart Execution. This Agreement may be executed in any number of
counterparts which together will be one and the same instrument. This Agreement
shall become effective whenever each party shall have signed at least one
counterpart.
12.4 Governing Law; Entire Agreement. THIS AGREEMENT AND THE NOTES SHALL BE
DEEMED TO BE CONTRACTS UNDER THE LAWS OF COLORADO AND FOR ALL PURPOSES SHALL BE
CONSTRUED IN ACCORDANCE WITH THE LAWS OF SUCH STATE. Such documents and any
other Loan Documents, together with the
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Security Documents, constitute and incorporate the entire agreement between the
Agent, the Lenders the Subsidiaries and Borrower concerning the subject matter
hereof and thereof, and supersede and cancel any prior or contemporaneous
agreements, verbal or written, between the Agent, the Lenders the Subsidiaries
and Borrower concerning the subject matter hereof and thereof
12.5 Amendments and Waivers. No waiver of any provision of this Agreement,
the Notes or any of the Loan Documents, and no consent with respect to any
departure by Borrower or any Subsidiary therefrom shall be effective unless the
same shall be in writing and signed by the Agent, at the direction of the
Required Lenders or, to the extent required under Section 10.12, all Lenders and
participants. No amendment of any provision of this Agreement or the Loan
Documents shall be effective unless the same shall be in writing and signed by
the Agent and (a) with respect to those matters set forth in Section 10.12
above, all of the Lenders and participants, or (b) such lesser number of Lenders
as may approve an amendment as provided for in this Agreement. Any waiver shall
be effective only in the specific instance and for the specific purpose for
which given. Any consent or approval contemplated herein by the Required Lenders
or the Lenders may be granted or withheld in the sole discretion of such
Persons. Agent and Lenders agree that any permanent change in the terms of any
Loan Document must be effected by an amendment and not by a waiver. Without
limiting the generality of the foregoing, the Lenders and the Agent agree that
any change in the interest rate, maturity date, amortization schedule or other
matters set forth in Section 10.12 must be effected by an amendment and not by a
waiver, and shall be subject to the restrictions contained in Section 10.12.
12.6 Costs, Expenses and Indemnity. Borrower and each Subsidiary shall
indemnify, defend and hold harmless the Agent and each Lender and persons or
entities owned or controlled by or affiliated with such Persons and their
respective directors, officers, shareholders, partners, employees, consultants
and agents (herein individually called an "Indemnified Party," and collectively
called "Indemnified Parties") from and against, and reimburse and pay
Indemnified Parties with respect to, any and all claims, demands, liabilities,
losses, damages (including, without limitation, actual, consequential, exemplary
and punitive damages), causes of action, judgments, penalties, fees, costs and
expenses (including, without limitation, attorneys' fees, court costs and legal
expenses and consultants' and experts' fees and expenses), of any and every kind
or character, known or unknown, fixed or contingent, that may be imposed upon,
asserted against or incurred or paid by or on behalf of any Indemnified Party on
account of, in connection with, or arising out of (a) any bodily injury or death
or property damage occurring in or upon or in the vicinity of the Collateral
through any cause whatsoever, (b) any act performed or omitted to be performed
hereunder or the breach of or failure to perform any warranty, representation,
indemnity, covenant, agreement or condition contained in this Agreement, the
Security Documents or any other Loan Documents, (c) any transaction, act,
omission, event or circumstance arising out of or in any way connected with the
Collateral or with this Agreement, the Security Documents or any other Loan
Documents (other than fees and expenses related to the closing or modification
of the transactions contemplated herein), and (d) the violation of or failure to
comply with any statute, law, rule, regulation or order now existing or
hereafter occurring. The foregoing indemnities shall not apply to any
Indemnified Party to the extent the subject of the indemnification is caused by
or arises out of the gross negligence or willful misconduct of that or another
Indemnified Party. If Borrower or Subsidiary and the Indemnified Party are
jointly named in any action covered by this Section 12.6, the Indemnified Party
shall
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cooperate in the defense of such action to the extent its own rights or defenses
are not compromised thereby. The foregoing indemnities shall not terminate upon
release, foreclosure or other termination of this Agreement, the Security
Documents or the other Loan Documents, but shall survive such release,
foreclosure or termination and the repayment of the Loans. Any amount to be paid
hereunder by Borrower or any Subsidiary to the Agent or any Lender or for which
Borrower or any Subsidiary has indemnified an Indemnified Party shall be a
demand obligation owing by Borrower to the Agent or such Lender and shall bear
interest at the Default Rate until paid, and shall constitute a part of the
Loans and be Obligations secured by the Loan Documents.
12.7 Inconsistent Provisions; Severability. In case of any irreconcilable
conflict between the provisions of this Agreement and those of the Loan
Documents and the Notes, the provisions of this Agreement shall govern. The
invalidity, illegality or unenforceability of any provision of any of the Loan
Documents shall not in any way affect or impair the legality or enforceability
of the remaining provisions of each of the Loan Documents.
12.8 Incorporation of Exhibits and Schedules. All Exhibits and Schedules
attached to this Agreement are a part hereof and are incorporated herein for all
purposes.
12.9 Amendment of Defined Instruments. Unless the context otherwise
requires or unless otherwise provided herein, the terms defined in this
Agreement which refer to a particular agreement, instrument or document also
refer to and include all renewals, extensions and modifications of such
agreement, instrument or document, provided that nothing contained in this
section shall be construed to authorize any such renewal, extension or
modification.
12.10 References and Titles. All references in this Agreement to Exhibits,
Schedules, sections and subsections and other subdivisions refer to the
Exhibits, Schedules, sections and subsections and other subdivisions of this
Agreement unless expressly provided otherwise. Headings are for convenience only
and do not constitute any part of such subdivisions and shall be disregarded in
construing the language contained in such subdivisions. The words "this
Agreement," "this instrument," "herein," "hereof," "hereby," "hereunder" and
words of similar import refer to this Agreement as a whole and not to any
particular subdivision unless expressly so limited. Pronouns in masculine,
feminine and neuter genders shall be construed to include any other gender, and
words in the singular form shall be construed to include the plural and vice
versa, unless the context otherwise requires.
12.11 Usury. It is not intended hereby to charge interest at a rate in
excess of the maximum rate of interest that the Agent and the Lenders may charge
to Borrower under applicable usury and other laws, but if, notwithstanding,
interest in excess of such rate shall be paid hereunder, the interest rates
provided for herein shall be adjusted to the maximum permitted under applicable
law during the period or periods that any of the interest rates otherwise
provided herein would exceed such rate and any excess amount applied at the
Lenders' option to reduce the outstanding principal balance of the Loans or to
be returned to Borrower.
12.12 Waiver of Right to Trial by Jury. EACH PARTY TO THIS AGREEMENT HEREBY
EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION (a) ARISING UNDER THIS
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AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR (b) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH
RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR THE TRANSACTIONS
RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY PARTY TO THIS
AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.
12.13 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns.
12.14 Term of Agreement. This Agreement shall continue in full force and
effect so long as any Indebtedness or other Obligation of Borrower to the
Lenders remains unpaid or outstanding or Borrower has any right to Advances
hereunder.
12.15 Jurisdiction. At the option of the Agent or the Lenders, an action
may be brought to enforce this Agreement in the District Court in and for the
City and County of Denver, State of Colorado, in the United States District
Court for the District of Colorado or in any other court in which venue and
jurisdiction are proper. Borrower and all Subsidiaries hereof consent to venue
and jurisdiction in the District Court in and for the City and County of Denver,
State of Colorado and in the United States District Court for the District of
Colorado and to jurisdiction and service of process under Sections
13-l-124(1)(a) and 13-1-125, Colorado Revised Statutes (1973), as amended, in
any action commenced to enforce this Agreement. BORROWER EXPRESSLY AGREES THAT
ANY SUIT OR ACTION INSTITUTED BY BORROWER AGAINST THE AGENT OR THE LENDERS IN
ANY WAY RELATED TO OR ARISING OUT OF THIS LOAN AGREEMENT, ANY OTHER LOAN
DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED THEREBY SHALL BE BROUGHT BY BORROWER
IN A COURT OF COMPETENT JURISDICTION IN THE STATE OF COLORADO. IN NO
CIRCUMSTANCE SHALL BORROWER COMMENCE ANY SUCH SUIT OR ACTION AGAINST THE AGENT
OR THE LENDERS IN ANY COURT IN THE STATE OF CALIFORNIA.
REMAINDER OF PAGE INTENTIONALLY BLANK
47
<PAGE> 52
EXECUTED to be effective as of the day and year first above written.
BORROWER:
T-NETIX, INC., a Colorado corporation
By:
John Giannaula, Vice President
SUBSIDIARIES:
GATEWAY TECHNOLOGIES, INC., a Texas
corporation
By:
John Giannaula, Vice President
T-NETIX MONITORING CORPORATION, a
Colorado corporation
By:
John Giannaula, Treasurer
SPEAKEZ, INC., a Colorado corporation
By:
John Giannaula, Vice President
T-NETIX JMS CORPORATION, a Colorado
corporation
By:
John Giannaula, Vice President
LENDERS:
BANK ONE, COLORADO, NA, a national
banking association
48
<PAGE> 53
By:
T. J. Kern, Vice President
COBANK, ACB
By:
Kevin Brunkow, Vice President
INTRUST BANK, NA, a national banking
association
By:
Robert P. Harmon, Vice President
AGENT:
BANK ONE, COLORADO, NA, a national
banking association
By:
T. J. Kern, Vice President
49
<PAGE> 54
LIST OF EXHIBITS
Exhibit A Request for Advance Form
Exhibit B Organizational Chart
<PAGE> 55
EXHIBIT A
REQUEST FOR ADVANCE FORM
To Bank One, Colorado, NA:
This Request for Advance is given pursuant to Article 2 of that certain Loan
Agreement, dated as of September 9, 1999, as the same may have been amended to
the date hereof (the "Loan Agreement"), between T-NETIX, Inc. ("Borrower"), Bank
One, Colorado, NA ("Agent"), and Bank One, Colorado, NA and Intrust Bank, NA
(collectively, "Lenders"). Terms defined in the Loan Agreement are used herein
with the same meanings.
The undersigned hereby gives Lender irrevocable notice that Borrower requests an
Advance of the Loan under the Loan Agreement as follows:
1. Date of Loan. The requested date of the proposed Advance is ________,
which is a Business Day.
2. Details of Loan.
(a) Amount of Advance. The requested aggregate amount of the proposed
Advance is: $__________.
(b) Type of Advance and Interest Period. The requested type of Advance
and Interest Period (if applicable) for the proposed Advance is (check (A)
or (B) as applicable):
[ ] (A) A LIBOR Advance for an Interest Period of (check one,
as applicable):
[ ] One month
[ ] Three months
[ ] Six months
[ ] Twelve months
[ ] (B) A Floating Rate Advance.
The undersigned hereby certifies that the following statements are true on the
date hereof, and will be true on the date of the proposed Advance, before and
after giving effect the proposed Advance.
(a) All conditions precedent under Article 3 of the Loan Agreement to
the making of the proposed Advance are satisfied;
<PAGE> 56
(b) All representations and warranties contained in Article 5 of the
Loan Agreement and in the Security Documents are true on the date of such
requested Advance as if then given, and the Borrower has performed or
observed all terms, agreements, conditions and obligations under the Loan
Agreement and under the Security Documents to be performed or observed by
such Person on or prior to the date of such requested Advance.
(c) Borrower is in compliance with all financial covenants contained in
Section 6.11 of the Loan Agreement as of the date of such requested
Advance.
(d) No Event of Default or Unmatured Event of Default shall have
occurred and be continuing or would result from the making of the requested
Advance.
Dated: .
------------------
T-NETIX, INC., a Colorado corporation
By:
John Giannaula, Vice President
2
<PAGE> 57
EXHIBIT B
ORGANIZATIONAL CHART
T-NETIX Inc. owns the following wholly owned subsidiaries:
Gateway Technologies, Inc.
T-NETIX Monitoring Corporation
SpeakEZ, Inc.
T-NETIX JMS Corporation
In addition, T-NETIX Inc. owns a 20% interest in the following entity:
Sentry Systems, Inc.
<PAGE> 1
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective as of
the 14th day of June 1999 by and between T-NETIX, Inc., a Colorado corporation
("T-NETIX"), and Richard E. Cree ("Employee").
WHEREAS, T-NETIX has entered into an Agreement and Plan of Merger with
Employee's current employer, Gateway Technologies, Inc. ("GTI") pursuant to
which GTI will merge with a subsidiary of T-NETIX (the "Merger"), and
WHEREAS, T-NETIX desires to continue to have the benefits of Employee's
knowledge and experience as a full time senior executive without distraction by
employment-related uncertainties and considers such employment a vital element
to protecting and enhancing the best interests of T-NETIX, and its subsidiaries
and shareholders, and Employee desires to continue to be employed full time with
T-NETIX; and
WHEREAS, T-NETIX and Employee desire to enter into an agreement under
which Employee will be employed by T-NETIX for a three year term commencing on
the effective date of the Merger (the "Effective Date"),
NOW, THEREFORE, in consideration of the mutual covenants set forth herein
and other good and valuable consideration, the parties agree as follows:
1. TERM. T-NETIX hereby agrees to employ Employee for a three-year
term commencing on the Effective Date and ending on the third anniversary date
of the Effective Date, unless earlier terminated as provided in this Agreement.
The term of this Agreement may only be extended by the mutual agreement of the
parties hereto.
2. DUTIES. Employee shall serve as the President of GTI and
Executive Vice-President for Corporate Development of T-NETIX and shall report
to the Chief Executive Officer of T-NETIX, and shall assume such other duties as
the Chief Executive Officer or Board of Directors of T-NETIX (the "Board") may
from time to time prescribe consistent with duties of an executive officer of a
technology company of such size as T-NETIX, including such positions with and
duties for T-NETIX's subsidiaries as may be assigned from time to time. Employee
agrees to devote substantially all his time, attention and best efforts to the
performance of his duties.
3. COMPENSATION. T-NETIX shall compensate Employee for the
services rendered under this Agreement as follows:
(a) An annual base salary ("Base Salary") determined by the
Board in its discretion and consistent with its practices for executive officers
of T-NETIX, but not less than $190,000 per year, payable in equal monthly
installments (less applicable withholding) in accordance with the customary
payroll practices of T-NETIX for the payment of executive officers.
(b) If Employee's Base Salary is increased at any time, it
shall not thereafter be decreased during the term of this Agreement, unless such
decrease is the result of a
<PAGE> 2
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> 3
(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> 4
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> 5
(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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<PAGE> 6
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 within five business days after a
request by Employee therefor) pay directly or
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<PAGE> 7
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" 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
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<PAGE> 8
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");
(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;
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<PAGE> 9
(c) solicit or seek business from any of GTI's customers,
prospective customers, suppliers, or prospective suppliers; or
(d) hire or engage any T-NETIX employee or induce any
T-NETIX employee to leave his or her employment with T-NETIX on behalf of any
Competitor.
15. REMEDIES.
(a) Without intending to limit the remedies available to
T-NETIX, Employee acknowledges that a breach or threatened breach of any of the
covenants contained in Sections 13 and 14 may result in material irreparable
injury to T-NETIX or one of its subsidiaries for which there is no adequate
remedy at law, that it may not be possible to measure damages for such injuries
precisely, and that in the event of such a breach or threat thereof, T-NETIX
shall be entitled to obtain a temporary restraining order, a preliminary or
permanent injunction, or other comparable provisional or equitable relief
restraining Employee from engaging in activities prohibited by Sections 13 or
14, and such other relief as may be required to enforce specifically any of the
covenants in such Sections. Employee agrees to personal jurisdiction of any
state or federal court in the State of Texas in any proceeding brought by
T-NETIX to enforce Employee's covenants under Sections 13 and 14.
(b) Without limiting the relief specified in part (a)
above, and in addition to any other remedies available hereunder, at law, or in
equity, upon proof of Employee's deliberate violation of his obligations under
Section 13 or 14, T-NETIX shall be entitled to recover from Employee (i) any
severance paid pursuant to Section 5 or 7(a), and (ii) amounts paid to Employee
under Section 7(c)(ii).
16. ARBITRATION.
(a) Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration
before a single arbitrator in Dallas County, Texas, in accordance with the rules
of the American Arbitration Association then in effect. The arbitrator shall be
selected by the American Arbitration Association, except that in a Section 7(b)
Dispute the arbitrator shall be selected in the manner provided in part (b)
below. Each parry shall bear his or its own costs of arbitration, except that if
Employee is the prevailing party in such arbitration, he shall be entitled to
recover from T-NETIX as part of any award entered his reasonable expenses for
attorneys and experts fees and disbursements. In any arbitration related to the
calculation of the amount of the severance pay due to employee, each party shall
submit a figure and supporting documentation and the arbitrator shall select the
figure submitted by one of the parties, but no other figure. The arbitrator
shall have no power to award consequential or punitive damages, even if such
damages are permitted under applicable law.
(b) In a Section 7(b) Dispute T-NETIX shall nominate a
proposed arbitrator, who may be the lawyer who represented T-NETIX in the
transaction that caused the Change in Control. Within five days after T-NETIX's
nomination, Employee may accept T-NETIX's nominee as arbitrator, or may propose
another lawyer. If T-NETIX accepts Employee's counter-nominee, that lawyer shall
serve as arbitrator. If T-NETIX does not accept
-9-
<PAGE> 10
Employee's counter-nominee, Employee's counter-nominee and T-NETIX's nominee
shall select a third lawyer, who shall serve as arbitrator.
(c) Nothing in this Section 16 shall prevent T-NETIX from
seeking equitable relief pursuant to Section 15.
17. NOTICES. All notices, requests, demands and other
communication called for or contemplated hereunder shall be in writing and shall
be deemed to have been duly given when delivered personally or when mailed by
United States certified or registered mail, postage prepaid, addressed to the
parties, their successors in interest or assignees at the following addresses or
such other addresses as the parties may designate by notice in the manner
aforesaid:
If to T-NETIX: T-NETIX, Inc.
67 Inverness Drive East, Suite 100
Englewood, Colorado 80112
Attention: Alvyn A. Schopp
If to Employee: Gateway Technologies, Inc.
1544 Valwood Parkway, Suite 102
Carrollton, Texas 75006
Attention: Richard E. Cree
18. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas without giving
effect to any principle of conflict-of-laws chat would require the application
of the law of any other jurisdiction.
19. VALIDITY. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, remain in full force and effect.
20. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the parties with respect to the subject matter hereof,
superseding all negotiations, prior discussions and preliminary agreements, and
further superseding any and all employment arrangements between Employee and
T-NETIX or any of T-NETIX's subsidiaries, affiliates or other related entities.
This Agreement may not be amended except in a writing executed by the parties
hereto.
21. EFFECT ON SUCCESSORS IN INTEREST. This Agreement shall inure
to the benefit of and be binding upon the heirs, administrators, executors and
successors of each of the parties hereto. T-NETIX shall be in material breach of
this Agreement if any of its successors or assigns (including but not limited to
any Corporate Successor) fails expressly to assume T-NETIX's obligations
hereunder
22. ASSIGNMENT. This Agreement is personal to Employee and
Employee may not assign this Agreement to any other person.
23. EFFECTIVENESS. This Agreement shall be effective upon the
Effective Date.
-10-
<PAGE> 11
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: /s/ ALVYN A. SCHOPP
------------------------------------ Richard E. Cree
ALVYN A. SCHOPP
-11-
<PAGE> 1
THE BOARD OF DIRECTORS
T-NETIX, INC.:
We consent to the incorporation by reference in the registration statement No.
333-88975 on Form S-3 and Nos. 333-92642 and 333-93819 on Form S-8 of T-NETIX,
Inc. of our reports dated February March 21, 2000, relating to the consolidated
balance sheets of T-NETIX, Inc. and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, cash flows and schedule for each of the years in the three-year period
ended December 31, 1999, which reports appear in the December 31, 1999 annual
report on Form 10-K of T-NETIX, Inc.
KPMG LLP
Denver, Colorado
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN T-NETIX, INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 118
<SECURITIES> 0
<RECEIVABLES> 20,457
<ALLOWANCES> (3,589)
<INVENTORY> 710
<CURRENT-ASSETS> 18,734
<PP&E> 71,997
<DEPRECIATION> (38,139)
<TOTAL-ASSETS> 70,542
<CURRENT-LIABILITIES> 26,886
<BONDS> 0
0
0
<COMMON> 127
<OTHER-SE> 21,974
<TOTAL-LIABILITY-AND-EQUITY> 70,542
<SALES> 6,444
<TOTAL-REVENUES> 73,235
<CGS> 3,615
<TOTAL-COSTS> 46,321
<OTHER-EXPENSES> 35,124
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,137
<INCOME-PRETAX> (11,364)
<INCOME-TAX> 1,117
<INCOME-CONTINUING> (10,247)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,247)
<EPS-BASIC> (0.82)
<EPS-DILUTED> (0.82)
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