<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
- -------------------------------------------------------------------------------
FOR THE QUARTER ENDED MARCH 31, 2000 COMMISSION FILE NUMBER 0-25016
T-NETIX, INC.
(Exact Name of registrant as Specified in Its Charter)
<TABLE>
<S> <C>
COLORADO 84-1037352
--------------------------------------------- ------------------------------------
(State of Other Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
67 INVERNESS DRIVE EAST
ENGLEWOOD, COLORADO 80112
-------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 790-9111
- --------------------------------------------------------------------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding at May 10, 2000
-------------------------------- ---------------------------
Common stock, $0.01 stated value 12,733,084
<PAGE> 2
FORM 10-Q CROSS REFERENCE INDEX
<TABLE>
<CAPTION>
Page
----
PART I FINANCIAL INFORMATION
<S> <C>
Item 1 Condensed Financial Statements (Unaudited)................... 2
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 13
Item 3 Quantitative and Qualitative Disclosure About Market Risk.... 19
PART II OTHER INFORMATION
Item 1 Legal Proceedings............................................ 20
Item 2 Changes in Securities and Use of Proceeds.................... 20
Item 3 Defaults Upon Senior Securities.............................. 20
Item 4 Submission of Matters to a Vote of Security Holders.......... 20
Item 5 Other Information............................................ 20
Item 6 Exhibits and Reports on Form 8-K............................. 20
</TABLE>
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 (Unaudited)............................................ 2
Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2000 and 1999 (Unaudited)...................................... 3
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 (Unaudited)...................................... 4
Notes to Condensed Consolidated Financial Statements (Unaudited)........... 5
</TABLE>
<PAGE> 4
T-NETIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(AMOUNTS IN THOUSANDS)
ASSETS
<S> <C> <C>
Cash and cash equivalents .................................................... $ 178 $ 118
Accounts receivable, net ..................................................... 14,795 16,459
Prepaid expenses ............................................................. 1,554 1,038
Inventories .................................................................. 100 710
-------- --------
Total current assets ...................................................... 16,627 18,325
Property and equipment, net .................................................. 36,484 33,858
Goodwill, net ................................................................ 6,215 6,401
Deferred tax asset ........................................................... 2,297 2,297
Intangible and other assets, net ............................................. 8,854 9,252
-------- --------
Total assets ............................................................ $ 70,477 $ 70,133
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable .......................................................... $ 12,991 $ 13,187
Accrued liabilities ....................................................... 5,286 5,924
Current portion of long term debt ......................................... 7,712 7,366
-------- --------
Total current liabilities ............................................... 25,989 26,477
Long term debt ............................................................ 23,399 21,555
-------- --------
Total liabilities ....................................................... 49,388 48,032
Stockholders' equity:
Preferred stock, $.01 stated value, 10,000,000 shares authorized;
no shares issued ........................................................ -- --
Common stock, $.01 stated value, 70,000,000 shares authorized;
12,731,584 and 12,699,400 shares issued and outstanding at March 31,
2000 and December 31, 1999, respectively ............................. 127 127
Additional paid-in capital ................................................ 35,858 35,791
Accumulated deficit ....................................................... (14,896) (13,817)
-------- --------
Total stockholders' equity .............................................. 21,089 22,101
-------- --------
Commitments and contingencies
Total liabilities and stockholders' equity ................................... $ 70,477 $ 70,133
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE> 5
T-NETIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenue:
Telecommunications services ................... $ 10,125 $ 9,814
Direct call provisioning ...................... 7,246 6,502
Internet services ............................. 5,817 --
Equipment sales and other ..................... 382 1,468
--------- ---------
Total revenue ........................... 23,570 17,784
--------- ---------
Expenses:
Operating costs:
Telecommunications services ................. 4,501 4,243
Direct call provisioning .................... 6,515 6,080
Internet services ........................... 5,099 --
Cost of equipment sold and other ............ 218 665
--------- ---------
Total operating costs ..................... 16,333 10,988
Selling, general and administrative ........... 3,738 3,360
Research and development ...................... 1,175 1,360
Depreciation and amortization ................. 3,049 2,822
--------- ---------
Total expenses ............................ 24,295 18,530
--------- ---------
Operating loss .......................... (725) (746)
Merger transaction expenses ...................... -- (190)
Interest and other income (expense), net ......... (354) (484)
--------- ---------
Loss before income taxes .................. (1,079) (1,420)
Income tax benefit ............................... -- 588
--------- ---------
Net loss ......................................... $ (1,079) $ (832)
========= =========
Basic and diluted loss per common share .......... $ (0.08) $ (0.07)
========= =========
Weighted average common shares ................... 12,715 12,246
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE> 6
T-NETIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss ....................................................... $(1,079) $ (832)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ................................ 3,049 2,822
Deferred income tax benefit .................................. -- (588)
Gain on sale of property and equipment ....................... (248) --
Changes in operating assets and liabilities:
Change in accounts receivable, net ........................ 1,664 (309)
Change in prepaid expenses ................................ (516) (122)
Change in inventory ....................................... 610 (870)
Change in intangibles and other assets .................... (16) 553
Change in accounts payable ................................ (196) 2,385
Change in accrued liabilities ............................. (638) (167)
------- -------
Cash provided by operating activities ..................... 2,630 2,872
------- -------
Cash used in investing activities:
Purchase of property and equipment ........................... (5,046) (4,286)
Proceeds from disposal or property and equipment ............. 228 --
Other investing activities ................................... (9) (460)
------- -------
Cash used in investing activities ......................... (4,827) (4,746)
------- -------
Cash flows from financing activities:
Net proceeds (payments) under line of credit ................. 2,351 1,663
Payments of debt ............................................. (161) (192)
Proceeds from debt ........................................... -- 682
Common stock issued for cash under option plans .............. 67 140
------- -------
Cash provided by financing activities ..................... 2,257 2,293
------- -------
Net increase in cash and cash equivalents ...................... 60 419
Cash and cash equivalents at beginning of period ............... 118 678
------- -------
Cash and cash equivalents at end of period ..................... $ 178 $ 1,097
------- -------
Cash paid for interest ......................................... $ 638 $ 537
======= =======
Cash paid for income taxes ..................................... $ -- $ 113
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE> 7
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements reflect
all adjustments which, in the opinion of management, are necessary to
reflect a fair presentation of the financial position and results of
operations of T-NETIX, Inc. and subsidiaries (the Company) for the
interim periods presented. All adjustments, in the opinion of
management, are of a normal and recurring nature. Some adjustments
involve estimates, which may require revision in subsequent interim
periods or at year-end. The financial statements have been presented in
accordance with generally accepted accounting principles. Refer to
notes to consolidated financial statements, which appear in the 1999
Annual Report on Form 10-K for the Company's accounting policies, which
are pertinent to these statements.
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.
LIQUIDITY
The Company incurred losses from continuing operations in the three
months ended March 31, 2000 of $1.1 million and had a working capital
deficit of $ 9.4 million at March 31, 2000. In March 2000 the Company
reached an agreement with its lenders to amend its credit agreement to
provide for revised financial covenants. As of March 31, 2000 the
Company is in compliance with all terms in the agreement with the
lenders. The Company raised $7.5 million of additional financing in
April 2000. The financing consisted of preferred stock and subordinated
debt. The net proceeds were used to reduce the outstanding balance on
the credit facility required by the lenders. The new agreement has not
been fully executed by the Company or the lenders; however the Company
expects to complete the agreement in May 2000. There can be no
assurance that the agreement will be completed with the currently
anticipated terms or other acceptable terms.
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 the remainder of 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.
-5-
<PAGE> 8
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 three months ended March 31, 2000 and 1999,
common stock equivalents of 459,000 and 460,000 respectively were not
included in the diluted earnings per share calculation, as their effect
would be anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 44 "Accounting for Certain Transactions involving
Stock Compensation - and interpretation of APB Opinion No. 25 ("FIN
44"). This interpretation provides guidance on the accounting for
certain stock option transactions and subsequent amendments to stock
option transactions. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15,
1998 or January 12, 2000. The Company has not yet assessed the impact,
if any, that FIN 44 might have on its financial position or results of
operations.
In December 1999, the SEC released Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements", which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. Subsequently, the SEC released
SAB 101A, which delayed the implementation date of SAB 101 for
registrants with fiscal years beginning between December 16, 1999 and
March 15, 2000. The Company has not yet assessed the impact, if any,
that SAB 101 might have on its financial position or results of
operations.
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.
-6-
<PAGE> 9
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION
Certain amounts in the 1999 financial statements have been reclassified
to conform to the 2000 presentation.
(2) BALANCE SHEET COMPONENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accounts receivable, net:
Trade accounts receivable ........................... $ 11,224 $ 11,797
Direct call provisioning receivable ................. 6,441 7,268
Customer reimbursable receivable .................... 342 752
Other receivables ................................... 208 231
-------- --------
18,215 20,048
Less: Allowance for doubtful accounts ............. (3,420) (3,589)
-------- --------
$ 14,795 $ 16,459
======== ========
</TABLE>
Bad debt expense was $1,314,000 and $1,351,000 for the three
months ended March 31, 2000 and 1999, respectively.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Property and equipment, net:
Telecommunications equipment ................. $ 57,772 $ 55,487
Construction in progress ..................... 8,521 7,341
Office equipment ............................. 9,833 9,169
-------- --------
76,126 71,997
Less: Accumulated depreciation and
amortization .................... (39,642) (38,139)
-------- --------
$ 36,484 $ 33,858
======== ========
</TABLE>
-7-
<PAGE> 10
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2) BALANCE SHEET COMPONENTS (CONTINUED)
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Intangible and other assets, net:
Patent license rights .......................... $ 3,325 $ 3,325
Purchased technology assets .................... 2,487 2,487
Capitalized software development costs ......... 660 651
Acquired software technologies ................. 1,783 1,783
Patent defense and application costs ........... 2,583 2,583
Deposits and long-term prepayments ............. 1,353 1,183
Other .......................................... 1,496 1,649
-------- --------
13,687 13,661
Less: Accumulated amortization ............... (4,833) (4,409)
-------- --------
$ 8,854 $ 9,252
======== ========
</TABLE>
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accrued liabilities:
Deferred revenue and customer advances ......... $1,549 $2,114
Compensation related ........................... 1,808 1,175
Other .......................................... 1,929 2,635
------ ------
$5,286 $5,924
====== ======
</TABLE>
-8-
<PAGE> 11
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(3) DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Debt:
Bank lines of credit .......... $30,812 $28,461
Other ......................... 299 460
------- -------
31,111 28,921
Less current portion .......... 7,712 7,366
------- -------
Non current portion ......... $23,399 $21,555
------- -------
</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 4.0% at March 31, 2000; a one month
LIBOR component of $7,000,000 at an interest rate of LIBOR plus 4.0% at
March 31, 2000; and $8,812,000 at the Bank's prime rate, 9.0% at March
31, 2000, plus 1.25%. As of March 31, 2000, the interest rate on
borrowings under the line of credit ranged from 11.7% to 12.0%. The
Company also pays a fee of 0.40% 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.
In March 2000, the Company reached an agreement with its lenders to
amend its credit agreement to provide for revised financial covenants.
The Company raised $7.5 million of additional financing in April 2000
as required by the lenders. The net proceeds were used to reduce the
outstanding balance on the credit facility. As of March 31, 2000 the
Company is in compliance with all terms proposed in the agreement with
the lenders. The maximum amount of credit under the credit facility
available to the Company is dependent upon the Company's financial
performance. Based on the financial covenants, the Company's maximum
borrowings are less than $40.0 million. The new terms contained in the
agreement with the bank plan to extend the maturity date of the
facility to May 2001. The new agreement has not been fully executed by
the Company or the lenders; however the Company expects to complete the
agreement in May 2000. There can be no assurance that the agreement
will be completed with the currently anticipated terms or other
acceptable terms.
-9-
<PAGE> 12
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(4) SUBSEQUENT EVENTS
FINANCING ACTIVITIES
In April 2000, the Company issued 3,750 shares of our Series A
Convertible Redeemable Preferred Stock and a five-year stock purchase
warrant exercisable for 340,909 shares at $6.60 per share of the
Company's common stock to RGC International Investors, LLC, a fund
managed by Rose Glen Capital Management LP. The net proceeds from the
issuance were $3,525,000, net of offering costs. The preferred stock
has a yield of 8% per annum payable on liquidation, and is convertible
into our common stock at a conversion price based on the closing market
price of the common stock during a pricing period of 5 consecutive
trading days during the 22 consecutive trading days preceding
conversion, up to a "fixed" conversion price. The fixed conversion
price is the lower of $6.05 per share or 110% of the market price of
the Company's common stock for 10 days ending on August 17, 2000. With
limited exceptions relating to a change of control of the Company,
during the six month period after the issuance of the preferred stock,
the preferred stock is not convertible into the Company's common stock
unless the market price of the common stock equals or exceeds the fixed
conversion price. After that, the Company has the right to issue cash
instead of common stock upon conversion of the preferred stock, if the
market price of the common stock is less than the fixed conversion
price. The Company will account for these transactions in accordance
with ETIF 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios.
The preferred stock is redeemable at the option of the Company, subject
to certain restrictions, if the market price of the Company's common
stock is less than or equal to $4.00. The redemption is subject to
notice requirements. The cash redemption price is the greater of 120%
of the stated value of the preferred stock plus the liquidation
preference, or the number of shares of common stock issuable upon
conversion of the preferred stock multiplied by the highest closing
price of the common stock during a period from notice of redemption
until the redemption date.
The Company also issued subordinated notes payable of $3.75 million to
a director and significant shareholder of the Company. The note bears
interest and prime rate plus one percent per annum and is payable every
six months beginning in October 2000. The director and significant
shareholder also received five-year stock purchase warrants to purchase
25,000 shares of common stock at an exercise price of $6.05 per share.
The Company also issued stock purchase warrants exercisable for 50,000
shares of common stock to the broker on the sale of the preferred stock
at an exercise price of $6.60 per share. The stock purchase warrants
will be valued at fair value using the Black-Scholes model and will be
amortized as financing fees over the term of the respective debt or
warrant.
-10-
<PAGE> 13
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(5) SEGMENT INFORMATION
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 for the three months ended March 31, 2000
and 1999 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
REVENUE FROM EXTERNAL CUSTOMERS:
Corrections Division ...................... $ 17,672 $ 17,759
SpeakEZ Division .......................... 81 25
Internet Services Division ................ 5,817 --
-------- --------
$ 23,570 $ 17,784
======== ========
OPERATING INCOME (LOSS):
Corrections Division ...................... $ (1,053) $ 49
SpeakEZ Division .......................... (390) (795)
Internet Services Division ................ 718 --
-------- --------
$ (725) $ (746)
======== ========
DEPRECIATION AND AMORTIZATION
Corrections Division ...................... $ 2,812 $ 2,562
SpeakEZ Division .......................... 237 260
Internet Services Division ................ -- --
-------- --------
$ 3,049 $ 2,822
======== ========
INTEREST AND OTHER INCOME (EXPENSE)
Corrections Division ...................... $ (76) $ (277)
SpeakEZ Division .......................... (278) (207)
Internet Services Division ................ -- --
-------- --------
$ (354) $ ( 484)
======== ========
SEGMENT EARNINGS (LOSS) BEFORE TAX:
Corrections Division ...................... $ (1,129) $ (418)
SpeakEZ Division .......................... (668) (1,002)
Internet Services Division ................ 718 --
-------- --------
$ (1,079) $ (832)
======== ========
</TABLE>
-11-
<PAGE> 14
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(5) SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
SEGMENT ASSETS:
Corrections Division ................ $67,102 $66,534
SpeakEZ Division .................... 3,375 3,599
Internet Services Division .......... -- --
------- -------
$70,477 $70,133
======== =======
</TABLE>
There was no intersegment revenue for the three months ended March 31,
2000 and 1999. Unallocated amounts to arrive at net earnings (loss)
included an income tax benefit of $588,000 for the three months ended
March 31, 1999. Consolidated total assets included eliminations of
approximately $13,156,000 and $12,976,000 as of March 31, 2000 and
December 31, 1999, 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.
-12-
<PAGE> 15
ITEM 2. 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 in the context of the condensed
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-Q 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" in the Company's Form 10-K for the year
ended December 31, 1999, 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 our 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 therein.
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
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 its estimated 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> 16
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.
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 recognized a significant increase in Internet Services revenue and related
costs for the three months ended March 31, 2000. Our gross margin on these
services was 12% for the three months ended March 31, 2000. Factors affecting
margin include a negotiated base management fee and contract incentive payments.
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 costs are reflected in our selling, general and
administrative expenses. The Company anticipates the addition of personnel as it
intends to expand the service offerings of the Internet Services Division beyond
the scope of the current single contract. The additions will be for technical
and administrative staff.
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.
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<PAGE> 17
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.
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<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenue for the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenue:
Telecommunications services ................... 43% 55%
Direct call provisioning ...................... 31 37
Internet services ............................. 25 --
Equipment sales and other ..................... 1 8
---- ----
Total revenue .................................... 100 100
Expenses:
Operating costs ............................... 69 62
Selling, general and administrative ........... 16 19
Research and development ...................... 5 7
Depreciation and amortization ................. 13 16
---- ----
Operating loss .............................. (3) (4)
Merger transaction expenses ................... -- (1)
Interest and other income (expense), net ...... (2) (3)
---- ----
Loss before income taxes ..................... (5) (8)
Income tax (expense) benefit ................. -- 3
---- ----
Net loss ..................................... (5)% (5)%
==== ====
</TABLE>
Total Revenue. Total revenue for the three months ended March 31, 2000 was $23.6
million, an increase of 33% over $17.8 million for the corresponding prior
period. This increase was primarily attributable to the commencement of Internet
services, as well as increases in direct call provisioning revenue and
telecommunications services revenue offset in part by decreases in equipment
sales and other.
The 3% increase in telecommunications services revenue to $10.1 million in the
three months ended March 31, 2000, from $9.8 million for the corresponding prior
period, was due primarily to an increase in call volumes. The increase in call
volumes is primarily due to the addition of new sites.
Direct call provisioning revenue increased 11% to $7.2 million for the three
months ended March 31, 2000, from $6.5 million in the corresponding prior
period. This increase was due to the addition of new sites primarily 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.
The Internet Services contract commenced in December 1999. Future revenue is
dependent upon the base of subscribers and contract incentive payments.
Equipment sales and other revenue decreased 74% to $382,000 for the three months
ended March 31, 2000 from $1.5 million in the corresponding prior period. Such
sales are primarily associated with one telecommunications service provider
customer and are dependent upon the timing of installations for this customer
and the customer's success rate in its territory. In the three months ended
March 31, 2000 we had sales of approximately $268,000 to this telecommunications
service provider customer. The reduction for the three months ended March 31,
2000 from the corresponding prior period is due primarily to the timing of
purchases by this customer.
Operating costs. Total operating costs were $16.3 million in the three months
ended March 31, 2000, an increase of 49% from $11.0 million in the corresponding
prior period. The increases were primarily due to the commencement of Internet
services as well as increases in telecommunication services expenses offset by a
reduction in the cost of equipment sold and other expenses.
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<PAGE> 19
Operating costs 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 of telecommunications services also include
costs associated with call verification procedures, primarily network expenses
and database access charges. Operating costs 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. Internet Services expense
consists of Internet bandwidth costs. Cost of equipment sold and other includes
primarily the purchase price of equipment which is resold. Other equipment cost
components were minimal. Voice print operating costs include royalty charges,
the cost of hardware and the cost of services which amounts are reflected as
other operating costs.
The following table sets forth the operating costs and expenses for each type of
revenue as a percentage of corresponding revenue for the three months ended
March 31, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Operating costs:
Telecommunications services............ 44% 43%
Direct call provisioning............... 90 94
Internet services...................... 88 --
Cost of equipment sold and other ...... 57 45
</TABLE>
Operating costs associated with providing telecommunications services as a
percentage of corresponding revenue was 44% for the three months ended March 31,
2000, an increase from 43% for the corresponding prior period. The increase was
due to cost increases without corresponding revenue increases. Total
telecommunications services operating expenses were $4.5 million for the three
months ended March 31, 2000 and $4.2 million for the corresponding prior period.
The increase in 2000 is due to increases in personnel costs as a result of
raises for existing personnel and the addition of new personnel in the National
Service Center and other operational support functions. We anticipate that we
will continue to increase our personnel costs for our National Service Center
and other operations management personnel, 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 decreased to 90% of revenue for the three months ended March 31, 2000
from 94% in for the corresponding prior period. This decrease was primarily due
to a reduction in bad debt expense because of improved historical collections.
The contract for Internet services commenced in December 1999. Cost of equipment
sold and other decreased in the three months ended March 31, 2000 but increased
as a percentage of corresponding revenue from the corresponding prior primarily
due to the change in the revenue mix for equipment sales and voice print sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3.7 million for the three months ended March 31,
2000 compared to $3.4 million for the corresponding prior period. Selling,
general and administrative expenses associated with the Corrections Division
were $3.6 million for the three months ended March 31, 2000 compared to $3.1
million in the corresponding prior period. The increase in the three months
ended March 31, 2000 was primarily due to increases in salary and benefits for
additional personnel and 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. We anticipate an increase in selling, general and administrative
expenses due to reorganization of existing personnel to increase the number of
people in support organizations.
Research and Development Expenses. Research and development expenses were $1.2
million in the three months ended March 31, 2000 compared to $1.4 million for
the corresponding prior period. Research and development expenses for the
Corrections Division were $1.0 million in the three months ended March 31, 2000
and $1.1 million in the corresponding prior period. The decrease was primarily
due to reduced personnel expenses.
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<PAGE> 20
Depreciation and Amortization Expenses. Depreciation and amortization expense
was $3.0 million in the three months ended March 31, 2000, an increase from $2.8
million for the corresponding prior period. The increase was due primarily to
the depreciation associated with new site installations.
Merger Transaction Expenses. These expenses were directly related to the merger
with Gateway and amounted to approximately $190,000 for the three months ended
March 31, 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 $354,000 for the three months ended March 31, 2000, a decrease from
$484,000 for the corresponding prior period. Included in other income in the
three months ended March 31, 2000 is a gain of approximately $248,000 on the
sale of used telecommunications equipment. There was $59,000 of miscellaneous
other income in the three months ended March 31, 1999. Interest expense was
$602,000 for the three months ended March 31, 2000, and $543,000 for the
corresponding prior period. The increase in 2000 was attributable to an increase
in the average amount of indebtedness outstanding and an increase in interest
rates. The average debt balance increased primarily due to the increase in
capital expenditures and business acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
We incurred losses from continuing operations in the current year of $1.1
million and had a working capital deficit of $9.4 million at March 31, 2000. We
reached an agreement with our lenders to amend our credit agreement to provide
for revised financial covenants. Additionally, we raised $7.5 million of
additional financing in April 2000. The net proceeds were used to reduce the
outstanding balance on our credit facility. However, 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 are taking steps to increase cash flow from operations and obtain additional
financings to ensure that we are able to carry out the remainder of 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.
We present the following information for the three months ended March 31, 2000
and 1999 and as of March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash provided by operating activities............. $ 2,630 $ 2,872
Working capital deficit........................... $ (9,362) $ (8,152)
Current ratio..................................... 0.64 0.69
</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 decreased 8% to $2.6 million for the three months ended
March 31, 2000 from $2.9 million in the corresponding prior period primarily
due to an increase in net loss.
Purchases of property and equipment were $5.0 million in the three months ended
March 31, 2000 compared to $4.3 for the corresponding prior period. The 18%
increase in purchases of property and equipment was primarily due to additional
inmate calling system installations and upgrades to existing systems.
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<PAGE> 21
DEBT AND EQUITY
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 maximum amount of credit under the credit facility
available to the Company is dependent upon the Company's financial performance.
Based on the financial covenants, the Company's maximum borrowings are less than
$40.0 million. In March 2000 we reached an agreement with the lenders to amend
our credit facility to provide for revised financial covenants. The new
agreement has not been fully executed by the Company or the lenders; however the
Company expects to complete the agreement in May 2000. There can be no assurance
that the agreement will be completed with the currently anticipated terms or
other acceptable terms. Subsequent to the period end we raised $7.5 million of
additional financing in April 2000. The net proceeds were used to reduce the
outstanding balance on the Credit Facility.
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 may 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 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.
ITEM 3. 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 $30,812,000 at March
31, 2000. 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 differing rates including, $22,000,000 at LIBOR plus 4.0% and the
remaining balance at the prime rate, 9.0% at March 31, 2000, plus 1.25%.
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 new terms contained in the agreement with the bank plan to extend
the maturity date of the facility to May 15, 2001.
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<PAGE> 22
PART II OTHER INFORMATION
ITEM 1. 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 Technologies, Inc. ("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,
recission, declaratory relief, violations of the Texas Free Enterprises and
Antitrust Act, conspiracy to monopolize, conversion of trade secrets, and
business disparagement. On April 25, 2000, Gateway, Telequip, and other parties
to the litigation entered into a settlement agreement releasing one another from
the claims against them in the lawsuit. The settlement does not prejudice
Gateway's right to assert in litigation that it has terminated its patent
license agreement with Telequip, or Telequip's right to assert in litigation
that the patent license agreement has not been terminated.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.11 Employment Agreement between T-NETIX, Inc and Thomas E. Larkin
dated March 3, 2000
27 Financial Data Schedule
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<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
T-NETIX, INC.
-------------
(Registrant)
Date May 15, 2000 By: /s/ Alvyn A. Schopp
-------------------
Alvyn A. Schopp, Chief Executive Officer
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<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.11 Employment Agreement
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective as of
the 3rd day of March 2000 (the "Effective Date") by and between T-NETIX, Inc., a
Colorado corporation ("T-NETIX") , and Thomas E. Larkin ("Employee").
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 two year term commencing on 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 two year term
commencing on the Effective Date and ending on the second 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 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 $180,000 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. (2) Employee
shall be entitled to an annual bonus of 30% or more of his annual salary based
upon achieving performance objectives established by the Board or a committee
thereof.
(b) If Employee's Base Salary is increased at any time, it shall not
thereafter be decreased during the term of this Agreement, unless such decrease
is the result of a general reduction affecting the base salaries of
substantially all other executive officers of T-NETIX.
<PAGE> 2
(c) On the Effective Date, T-NETIX shall grant to Employee options
for 185,000 shares of T-NETIX's common stock with an exercise price equal to the
then fair market value of such common stock. Options for 46,250 shares shall
vest and be exercisable on each of the first four anniversaries of the date of
grant if Employee is continuously employed by T-NETIX to such date. 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 receive such additional options as may be granted
from time to time to him by the Board or a committee thereof consistent with
terms of the applicable option plans and the compensation policies of the Board
or its Compensation Committee.
(e) 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, 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
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<PAGE> 3
period. The Board will determine if Employee's termination is due to total and
permanent disability according to any long-term disability plan then in effect
for senior executives of T-NETIX, and otherwise in good faith consistent with
generally prevailing practices of employers.
(iii) Upon termination for Employee's death, T-NETIX shall
continue to pay Employee's salary to a legal representative previously
designated in writing by Employee (the "Legal Representative"), or if no such
designation has been made, to Employee's estate, for a period of the greater of
twelve months or the remaining term of this Agreement 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 greater of twelve months or the remaining term of this Agreement
in monthly increments.
(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 12, 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
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<PAGE> 4
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 for the longer of one year from the date of the notice of
termination or the second anniversary date of the Effective Date.
(d) Resignation. Employee may terminate this Agreement at any time
upon thirty days written notice to T-NETIX. Employee's termination pursuant to
this Section 5(d) shall be deemed a Voluntary Resignation. In the event of
Employee's Voluntary Resignation other than following 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 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:
(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.
- 4 -
<PAGE> 5
(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.
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 equal monthly installments through the second anniversary
of the Effective Date upon Employee's Voluntary Resignation during the term of
this Agreement and following the Change of Control..
(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 14.
(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, Employee shall have immediate vesting of all options granted to
Employee and full vesting in all other employee benefit plans and compensation
plans.
- 5 -
<PAGE> 6
8. OTHER SEVERANCE BENEFITS. If at any time during the term of this
Agreement, Employee is Terminated Without Cause, or the Agreement is terminated
by Employee's Voluntary Resignation following a Change of Control as provided in
Section 7, then Employee shall be entitled to of T-NETIX Benefits Plans until
one year after termination.
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 Sections 5, 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.
11. NON-DISCLOSURE AGREEMENT.
(a) In connection with his employment with T-NETIX, Employee will
have access to and become acquainted with various trade secrets and other
proprietary and confidential information of T-NETIX. "Trade secrets and other
proprietary and confidential information" include but are not limited to the
following: (1) business, pricing, marketing and cost data; (2) technical
information regarding T-NETIX's products; (3) confidential customer information;
(4) customer and supplier lists; (5) contents of contracts and agreements with
customers; and (6) customer requirements and specifications. Employee
acknowledges that T-NETIX has taken steps to keep trade secrets and other
proprietary and confidential information secret, including disclosing the
information only on a need-to-know basis, labeling documents as "confidential,"
and keeping confidential information in secure areas. Employee further
acknowledges that the trade secrets and other proprietary and confidential
information have been developed or acquired by T-NETIX through expenditure of
substantial time, effort and money and provide T-NETIX with an advantage over
competitors who do not know or use such trade secrets and other proprietary and
confidential information.
(b) In consideration for access to trade secrets and other
proprietary and confidential information, Employee agrees that during the
Noncompetition Period (as defined in
- 6 -
<PAGE> 7
Section 12) 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 12) 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.
12. 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 two years thereafter (the
"Noncompetition Period"), Employee will not:
(a) accept a position as an officer, director, employee, agent,
consultant, representative of (i) any other proprietary call processing systems
company or (ii) any other entity that, as of the date of Employee's termination,
competes directly with T-NETIX or any of its subsidiaries (an entity described
in either part (i) or (ii) is referred to in this Agreement as a "Competitor");
(b) acquire or fail to dispose of any stock or other ownership
interest in any Competitor, other than investments equal to less than one per
cent of the outstanding stock of any class issued by any publicly traded
company;
(c) solicit or seek business from any of T-NETIX 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.
- 7 -
<PAGE> 8
13. 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 11 and 12 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 11 or 12, 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 11 and 12.
(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 11 or
12, T-NETIX shall be entitled to recover from Employee (i) any severance paid
pursuant to Section 5 or 7.
14. 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 Arapahoe County, Colorado, 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 Employee's counter-nominee, Employee's
counter-nominee and T-NETIX's nominee shall select a third lawyer, who shall
serve as arbitrator. (1)
- 8 -
<PAGE> 9
(c) Nothing in this Section 14 shall prevent T-NETIX from seeking
equitable relief pursuant to Section 13.
15. 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: Thomas E. Larkin
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado without giving effect to any
principle of conflict-of-laws chat would require the application of the law of
any other jurisdiction.
17. 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.
18. 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.
19. 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
20. ASSIGNMENT. This Agreement is personal to Employee and Employee may
not assign this Agreement to any other person.
21. EFFECTIVENESS. This Agreement shall be effective upon the Effective
Date. 1.
- 9 -
<PAGE> 10
22. SURVIVAL OF SECTION. The provisions of Sections 11 and 12 of this
Agreement shall survive the termination of this Agreement for the period
provided for therein, and Sections 13 and 14 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 /s/ Thomas E. Larkin
------------------------------ --------------------------------
Alvyn A. Schopp Thomas E. Larkin
- 10 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN T-NETIX, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 178
<SECURITIES> 0
<RECEIVABLES> 18,215
<ALLOWANCES> (3,420)
<INVENTORY> 100
<CURRENT-ASSETS> 16,627
<PP&E> 76,126
<DEPRECIATION> (39,642)
<TOTAL-ASSETS> 70,477
<CURRENT-LIABILITIES> 25,989
<BONDS> 23,399
0
0
<COMMON> 127
<OTHER-SE> 20,962
<TOTAL-LIABILITY-AND-EQUITY> 70,477
<SALES> 382
<TOTAL-REVENUES> 23,570
<CGS> 218
<TOTAL-COSTS> 16,333
<OTHER-EXPENSES> 7,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 354
<INCOME-PRETAX> (1,079)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,079)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,079)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
