<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
----------
FOR THE QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NUMBER 0-25016
T-NETIX, INC.
------------------------------------------------------
(Exact Name of registrant as Specified in Its Charter)
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<S> <C>
COLORADO 84-1037352
---------------------------------------------- -----------------------------------
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
67 INVERNESS DRIVE EAST
ENGLEWOOD, COLORADO 80112
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 790-9111
----------
Indicate by check [X] whether the registrant (1) has filed all reports
required to filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Class Outstanding at August 10, 2000
------------------------------- ------------------------------
Common Stock, $.01 stated value 12,733,084
<PAGE> 2
FORM 10-Q CROSS REFERENCE INDEX
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<CAPTION>
Page
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PART I FINANCIAL INFORMATION
Item 1 Condensed Financial Statements (Unaudited)............................................. 2
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 14
Item 3 Quantitative and Qualitative Disclosure About Market Risk.............................. 22
PART II OTHER INFORMATION
Item 1 Legal Proceedings...................................................................... 23
Item 2 Changes in Securities and Use of Proceeds.............................................. 23
Item 3 Defaults Upon Senior Securities........................................................ 23
Item 4 Submission of Matters to a Vote of Security Holders.................................... 24
Item 5 Other Information...................................................................... 24
Item 6 Exhibits and Reports on Form 8-K....................................................... 24
</TABLE>
1
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 (Unaudited) ......................................................... 3
Condensed Consolidated Statements of Operations for the Three Months Ended
June 30, 2000 and 1999, and the Six Months Ended June 30, 2000 and 1999 (Unaudited)....... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)........................................................ 5
Notes to Condensed Consolidated Financial Statements (Unaudited)............................ 6
</TABLE>
2
<PAGE> 4
T-NETIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................................... $ 298 $ 118
Accounts receivable, net ............................................................ 18,009 16,459
Prepaid expenses .................................................................... 1,569 1,038
Inventories ......................................................................... 525 710
-------- --------
Total current assets ............................................................. 20,401 18,325
Property and equipment, net ......................................................... 37,454 33,858
Goodwill, net ....................................................................... 6,035 6,401
Deferred tax asset .................................................................. 2,243 2,297
Intangible and other assets, net .................................................... 8,497 9,252
-------- --------
Total assets ................................................................... $ 74,630 $ 70,133
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable ................................................................. $ 15,810 $ 13,187
Accrued liabilities .............................................................. 4,715 5,924
Current portion of long term debt ................................................ 30,659 7,366
-------- --------
Total current liabilities ...................................................... 51,184 26,477
Long-term debt ................................................................... 77 21,555
-------- --------
Total liabilities .............................................................. 51,261 48,032
Series A redeemable convertible preferred stock, $1,000 per share,
stated value, 3,750 shares authorized; issued and outstanding
at June 30, 2000; liquidation preference of $3,811,000 at June 30, 2000 ........ 1,842 --
Stockholders' equity:
Common stock, $.01 stated value, 70,000,000 shares authorized; 12,733,084 and
12,699,400 shares issued and outstanding at June 30, 2000 and December 31, 1999,
respectively ................................................................... 127 127
Additional paid-in capital ....................................................... 37,566 35,791
Accumulated deficit .............................................................. (16,166) (13,817)
-------- --------
Total stockholders' equity .................................................... 21,527 22,101
-------- --------
Commitments and contingencies
Total liabilities, redeemable convertible preferred stock and stockholders' equity .. $ 74,630 $ 70,133
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
T-NETIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Telecommunications services .............. $ 11,953 $ 10,065 $ 22,077 $ 19,879
Direct call provisioning ................. 7,247 7,021 14,492 13,523
Internet services ........................ 6,743 -- 12,561 --
Equipment sales and other ................ 826 660 1,208 2,128
-------- -------- -------- --------
Total revenue ...................... 26,769 17,746 50,338 35,530
-------- -------- -------- --------
Expenses:
Operating costs:
Telecommunications services ............ 5,360 4,263 9,861 8,506
Direct call provisioning ............... 6,751 6,468 13,268 12,548
Internet services ...................... 5,550 -- 10,648 --
Cost of equipment sold and other ....... 332 214 549 879
-------- -------- -------- --------
Total operating costs ................ 17,993 10,945 34,326 21,933
Selling, general and administrative ...... 4,583 3,259 8,321 6,619
Research and development ................. 1,569 1,253 2,744 2,613
Depreciation and amortization ............ 3,117 2,848 6,166 5,670
-------- -------- -------- --------
Total expenses ....................... 27,262 18,305 51,557 36,835
-------- -------- -------- --------
Operating loss ..................... (493) (559) (1,219) (1,305)
Merger transaction expenses ................. -- (827) -- (1,017)
Interest and other expense, net ............. (673) (633) (1,027) (1,117)
-------- -------- -------- --------
Loss before income taxes .................... (1,166) (2,019) (2,246) (3,439)
Income tax benefit (expense) ................ (103) 810 (103) 1,398
-------- -------- -------- --------
Net loss .................................... (1,269) (1,209) (2,349) (2,041)
Accretion of discount on redeemable
convertible preferred stock ............... (430) -- (430) --
-------- -------- -------- --------
Net loss applicable to common stock ......... $ (1,699) $ (1,209) $ (2,779) $ (2,041)
-------- -------- -------- --------
Basic and diluted loss per common share ..... $ (0.13) $ (0.10) $ (0.22) $ (0.17)
======== ======== ======== ========
Shares used in computing basic
and diluted net loss per common share ..... 12,701 12,372 12,756 12,318
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
T-NETIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $ (2,349) $ (2,041)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ............................. 6,166 5,670
Deferred income tax benefit ............................... 54 (1,398)
Gain on sale of property and equipment .................... (265) --
Accretion of discount on subordinated note payable ........ (17) --
Changes in operating assets and liabilities:
Accounts receivable, net ............................... (1,550) 1,905
Prepaid expenses ....................................... (531) (199)
Inventories ............................................ 185 (1,015)
Intangibles and other assets ........................... (24) (294)
Accounts payable ....................................... 2,623 3,235
Accrued liabilities .................................... (1,209) (521)
-------- --------
Cash provided by operating activities ................ 3,083 5,342
-------- --------
Cash used in investing activities:
Purchase of property and equipment ............................ (8,537) (6,295)
Proceeds from disposal of property and equipment .............. 285 --
Other investing activities .................................... -- (894)
-------- --------
Cash used in investing activities .................... (8,252) (7,189)
-------- --------
Cash flows from financing activities:
Net proceeds from (payments on) line of credit ................ (807) 3,390
Proceeds from debt ............................................ 3,750 1,716
Payments of debt .............................................. (1,128) (2,271)
Proceeds from issuance of redeemable convertible
preferred stock, net ........................................ 3,459 --
Common stock issued for cash under option plans ............... 75 256
-------- --------
Cash provided by financing activities ................ 5,349 3,091
-------- --------
Net increase in cash and cash equivalents ............................ 180 1,244
Cash and cash equivalents at beginning of period ..................... 118 678
-------- --------
Cash and cash equivalents at end of period ........................... $ 298 $ 1,922
-------- --------
Cash paid for interest ............................................... $ 617 $ 1,088
======== ========
Cash paid for income taxes ........................................... $ 103 $ 113
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<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 and six
months ended June 30, 2000 of $1.3 million and $2.3 million, respectively
and had a working capital deficit of $30.8 million at June 30, 2000. In
July 2000, the Company and its lenders amended the Company's credit
agreement to revise certain financial covenants and extended the maturity
date until April 30, 2001, and as a result the debt with the bank has been
classified as a current liability. The Company raised $7.5 million of
additional financing in April 2000. The financing consisted of preferred
stock and subordinated debt. The net proceeds of approximately $7.2 million
were used to reduce the outstanding balance on the credit facility.
The Company is taking steps to increase cash flow from operations,
including renegotiating contract pricing and cost control measures, in
order to carry out the remainder of its fiscal 2000 business plan. However,
there can be no assurance that the Company will be successful in increasing
its cash flow from operations and the Company may require additional
financing to fund operations. In the event additional financing is
required, the Company may not be able to obtain financing on terms
acceptable to the Company and it may have to curtain operations.
6
<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 is presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, Earnings
Per Share (SFAS 128). Basic earnings per share excludes the impact of
potentially dilutive securities and is computed by dividing income or loss
available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted 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. There is
no difference between basic and diluted net loss per share since
potentially dilutive securities from the conversion of redeemable
convertible preferred stock and the exercises of options and warrants are
anti-dilutive for all periods presented. The calculations of diluted net
loss per common share for the three and six months ended June 30, 2000 and
1999, do not include 991,000 and 748,000 and 385,000 and 424,000,
respectively, of potentially dilutive securities, including common stock
options and warrants and redeemable convertible preferred stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation - an 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 provisions cover specific events
that occur after either December 15, 1998 or January 12, 2000. The Company
does not expect that the application of FIN 44 will have a material effect
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 the Company until the
quarter ended December 31, 2000. The Company does not expect the
application of SAB 101 to have a material impact 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," as amended by SFAS No. 137.
SFAS 137 defers the effective date of SFAS 133 to all fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS 133 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. SFAS 133 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. The Company does not expect the adoption of
SFAS 133 to have a material impact on its financial position or results of
operations.
7
<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>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accounts receivable, net:
Trade accounts receivable ..................... $ 13,684 $ 11,797
Direct call provisioning receivable ........... 5,343 7,268
Customer reimbursable receivable .............. 377 752
Other receivables ............................. 213 231
-------- --------
19,617 20,048
Less: Allowance for doubtful accounts ....... (1,608) (3,589)
-------- --------
$ 18,009 $ 16,459
======== ========
</TABLE>
Bad debt expense was $1.5 million and $1.6 million for the three months ended
June 30, 2000 and 1999, respectively, and $2.8 million and $2.9 million for the
six months ended June 30, 2000 and 1999, respectively.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Property and equipment, net:
Telecommunications equipment .................. $ 60,160 $ 55,487
Construction in progress ...................... 8,129 7,341
Office equipment .............................. 10,696 9,169
-------- --------
78,985 71,997
Less: Accumulated depreciation and
amortization ........................ (41,531) (38,139)
-------- --------
$ 37,454 $ 33,858
======== ========
</TABLE>
8
<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>
JUNE 30, 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 ........ 663 651
Acquired software technologies ................ 1,791 1,783
Patent defense and application costs .......... 2,579 2,583
Deposits and long-term prepayments ............ 1,512 1,183
Other ......................................... 1,386 1,649
-------- --------
13,743 13,661
Less: Accumulated amortization .............. (5,246) (4,409)
-------- --------
$ 8,497 $ 9,252
======== ========
</TABLE>
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accrued liabilities:
Deferred revenue and customer advances .. $ 1,667 $ 2,114
Compensation related .................... 875 1,175
Other ................................... 2,173 2,635
-------- --------
$ 4,715 $ 5,924
======== ========
</TABLE>
9
<PAGE> 11
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(3) DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Debt:
Bank lines of credit .......................... $ 26,704 $ 28,461
Subordinated note payable ..................... 3,750 --
Other ......................................... 282 460
-------- --------
30,736 28,921
Less current portion .......................... 30,659 7,366
-------- --------
Non current portion ......................... $ 77 $ 21,555
======== ========
</TABLE>
Bank Line of Credit
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 million subject to
limitations based on financial covenant calculations. The Credit Facility
is comprised of a one year LIBOR component of $15 million at an interest
rate of LIBOR plus 4.0% at June 30, 2000; a one month LIBOR component of $7
million at an interest rate of LIBOR plus 4.0% at June 30, 2000; and $4.7
million at the Bank's prime rate, 9.5% at June 30, plus 1.25%. As of June
30, 2000, the total interest rates on borrowings under the bank Credit
Facility ranged from 8.8% to 10.75%. 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 July 2000, the Company and its lenders amended its credit agreement to
provide for revised financial covenants and extended the maturity date
until April 30, 2001 and as a result the debt with the bank has been
classified as a current liability. The Company raised $7.5 million of
additional financing in April 2000. The net proceeds were used to reduce
the outstanding balance on the credit facility. As of June 30, 2000, the
Company is in compliance with all terms of 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 at June 30, 2000 are
less than $40 million.
Subordinated Note Payable
The Company issued a subordinated note payable of $3.75 million, due April
30, 2001, to a director and significant shareholder of the Company. The
note bears interest at prime rate plus one percent per annum (10.5% at June
30, 2000) which is payable every six months beginning in October 2000. The
lender also received warrants to purchase 25,000 shares of common stock at
an exercise price of $6.05 per share for a period of five years. The
estimated fair value of the stock purchase warrants, using the
Black-Scholes model, has been recorded as deferred financing fees and is
being amortized over the term of the debt.
10
<PAGE> 12
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(4) STOCKHOLDERS EQUITY
PREFERRED STOCK OFFERING
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 Company allocated the fair value of the warrants
($1.1 million) to additional paid-in capital and recognized a discount on
the preferred shares issued. The net proceeds from the issuance were $3.5
million, net of offering costs. The Company also issued warrants to
purchase 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 were valued at fair value ($163,000) using the Black-Scholes model
and are being amortized as accretion of discount on preferred stock over
the term of the preferred stock.
The preferred stock is convertible into common stock at a variable
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 if it is below $6.05. With limited exceptions relating to a
change in control of the Company, during the six month period after the
issuance of the preferred stock, the preferred stock is not convertible
into the common stock unless the market price of the common stock equals or
exceeds the fixed conversion price. After the six-month period, the Company
has the right repurchase the preferred stock upon receipt of notice to
convert the preferred shares into common stock, if the market price of the
common stock is less that the fixed conversion price.
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 for 10 consecutive days. The redemption is
subject to notice requirements. The cash redemption price is the greater of
120% of the liquidation preference, or a value based on 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. Redemption of the
preferred stock is mandatory at its maturity date, April 17, 2003; upon
assignment of all assets of the Company; bankruptcy; failure to maintain a
Nasdaq listing; or failure to meet certain other terms set forth in the
preferred stock agreements.
The preferred stock is non-voting and pays no dividends. In the event of
liquidation, dissolution or winding up of the Company, or major
transaction, including merger or sale or disposal of 50% of the company,
the holders of the preferred stock are entitled to a liquidation preference
of 8% per annum.
The Company accounted for these transactions in accordance with ETIF 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios." The company recognized an
increase in additional paid in capital in the amount of $771,000 for the
value of the beneficial conversion. The Company will accrete the resulting
discount in the preferred stock to loss applicable to common stockholders
over the six-month period beginning April 17, 2000.
11
<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 the 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 and six
months ended June 30, 2000 and 1999 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE FROM EXTERNAL CUSTOMERS:
Corrections Division ...................... $ 20,006 $ 17,712 $ 37,677 $ 35,471
SpeakEZ Division .......................... 20 34 100 59
Internet Services Division ................ 6,743 -- 12,561 --
-------- -------- -------- --------
$ 26,769 $ 17,746 $ 50,338 $ 35,530
OPERATING INCOME (LOSS):
Corrections Division ...................... $ (1,149) $ 15 $ (2,203) $ 64
SpeakEZ Division .......................... (538) (574) (928) (1,369)
Internet Services Division ................ 1,194 -- 1,912 --
-------- -------- -------- --------
$ (493) $ (559) $ (1,219) $ (1,305)
DEPRECIATION AND AMORTIZATION:
Corrections Division ...................... $ 2,887 $ 2,611 $ 5,699 $ 5,173
SpeakEZ Division .......................... 230 237 467 497
Internet Services Division ................ -- -- -- --
-------- -------- -------- --------
$ 3,117 $ 2,848 $ 6,166 $ 5,670
INTEREST AND OTHER EXPENSE, NET:
Corrections Division ...................... $ (367) $ (426) $ (442) $ (703)
SpeakEZ Division .......................... (306) (207) (585) (414)
Internet Services Division ................ -- -- -- --
-------- -------- -------- --------
$ (673) $ (633) $ (1,027) $ (1,117)
SEGMENT EARNINGS (LOSS) BEFORE
INCOME TAXES:
Corrections Division ...................... $ (1,516) $ (1,238) $ (2,645) $ (1,656)
SpeakEZ Division .......................... (844) (781) (1,513) (1,783)
Internet Services Division ................ 1,194 -- 1,912 --
-------- -------- -------- --------
$ (1,166) $ (2,019) $ (2,246) $ (3,439)
</TABLE>
12
<PAGE> 14
T-NETIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(5) SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
SEGMENT ASSETS:
Corrections Division ............................ $ 72,382 $ 66,534
SpeakEZ Division ................................ 2,248 3,599
Internet Services Division ...................... -- --
-------- --------
$ 74,630 $ 70,133
======== ========
</TABLE>
There was no intersegment revenue for the three months ended June 30, 2000
and 1999. Unallocated amounts to arrive at net earnings (loss) included an
income tax (expense) benefit of $(103,000) and $1,398,000 for the six
months ended June 30, 2000 and 1999, respectively. Consolidated total
assets included eliminations of approximately $12.7 million and $13.0
million as of June 30, 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.
13
<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 ability to
perform under contractual performance requirements, 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 ability of our existing customers, including AT&T, to maintain
their market share of the inmate calling market, 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.
14
<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.
Pricing historically provided for transaction fees paid on a per-call basis. We
are paid a prescribed fee for each call completed and additional fees for
validating phone numbers dialed by inmates. The per-call charge is primarily for
the provisioning of specialized call processing services to telecommunications
service providers for their customers, the correctional facilities. However,
recently we entered into a contract amendment with a significant customer to
record revenue as a percentage of gross revenue earned by the customer, subject
to certain adjustments. This new pricing was an effort by us to have our pricing
remain flexible and not be effected by factors that affected call volumes.
Pursuant to the amendment, we also recognized certain telecommunications
expenses that were previously reimbursable charges to this customer. These
charges were previously reimbursable costs to the customer. Our
telecommunications service provider customers include AT&T, Bell Atlantic, Qwest
(formerly US WEST), SBC Communications (including Ameritech), BellSouth, Sprint
and GTE.
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 significant Internet Services revenue and related costs for the
three and six months ended June 30, 2000 under this agreement. Our gross margin
on these services was 18% and 15% for the three and six months ended June 30,
2000, respectively. The gross margin is effected by the 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. The Company anticipates
adding personnel to expand the service offerings of the Internet Services
Division beyond the scope of the current contract.
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.
15
<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
products based on the SpeakEZ technology 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.
16
<PAGE> 18
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO
JUNE 30, 1999
The following table sets forth certain statement of operations data as a
percentage of total revenue for the three months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Revenue:
Telecommunications services ........................ 45% 57%
Direct call provisioning ........................... 27 39
Internet services .................................. 25 --
Equipment sales and other .......................... 3 4
------ ------
Total revenue ......................................... 100 100
Expenses:
Operating costs .................................... 67 62
Selling, general and administrative ................ 17 18
Research and development ........................... 6 7
Depreciation and amortization ...................... 12 16
------ ------
Operating loss ................................... (2) (3)
Merger transaction expenses ........................ -- (5)
Interest and other expense ......................... (2) (3)
------ ------
Loss before income taxes ......................... (4) (11)
Income tax (expense) benefit ....................... (1) 4
------ ------
Net loss ................................... (5) (7)
Accretion of discount on redeemable convertible
preferred stock .................................. (2) --
------ ------
Net loss applicable to common stock ........ (7)% (7)%
====== ======
</TABLE>
Total Revenue. Total revenue for the three months ended June 30, 2000 was $26.8
million, an increase of 51% 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 telecommunications services revenue and
equipment sales and other offset, in part by decreases in direct call
provisioning revenue.
The 19% increase in telecommunications services revenue to $12.0 million in the
three months ended June 30, 2000, from $10.1 million for the corresponding prior
period, was due primarily to an increase in contract prices. We changed our
pricing to a significant customer whereby revenue is calculated as a percentage
of our customer's gross revenue versus a transaction fee per call. In addition
we experienced an increase in revenue due to call volume increases, primarily
due to the addition of new sites.
Direct call provisioning revenue increased to $7.2 million for the three months
ended June 30, 2000, from $7.0 million in the corresponding prior period. This
increase was due to the addition of sites for which we were 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. Internet
gross margin for the three months ended June 30, 2000 was 18%.
Equipment sales and other revenue increased 25% to $826,000 for the three months
ended June 30, 2000 from $660,000 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 June 30,
2000 we had sales of approximately $676,000 to this telecommunications service
provider customer. We do not expect significant equipment sales in the near
future.
17
<PAGE> 19
Operating costs. Total operating costs were $18.0 million in the three months
ended June 30, 2000, an increase of 64% from $10.9 million in the corresponding
prior period. The increases were primarily due to the commencement of Internet
services as well as increases in telecommunication services and the cost of
equipment sold and other expenses offset by a reduction in direct call
provisioning expenses.
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 was 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 June
30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Operating costs:
Telecommunications services .................... 45% 42%
Direct call provisioning ....................... 93 92
Internet services .............................. 82 --
Cost of equipment sold and other ............... 40 32
</TABLE>
Operating costs associated with providing telecommunications services as a
percentage of corresponding revenue was 45% for the three months ended June 30,
2000, an increase from 42% for the corresponding prior period. The increase was
due primarily to cost increases. Total telecommunications services operating
expenses were $5.4 million for the three months ended June 30, 2000 and $4.3
million for the corresponding prior period. The increase in 2000 is due to new
services being provisioned for a significant customer as part of a contract
amendment and due to increases in personnel costs. The increase included bonus
costs associated with our line installation bonus program. The bonus program
ended as of June 30, 2000. Also, the addition of new personnel in the National
Service Center and other operational support functions contributed to cost
increases. To a lesser extent, increases in travel and contract labor
contributed to the overall cost increase. With the addition or personnel at our
National Service Center and based on contract negotiations we believe we can
reduce field operations personnel in the near future.
Direct call provisioning costs as a percentage of applicable revenue increased
slightly to 93% of revenue for the three months ended June 30, 2000 an increase
from 92% for the corresponding prior period. These costs include increases due
to site commissions and transmissions costs offset by a reduction in bad debt
expense because of improved collections.
The contract for Internet services commenced in December 1999. Future revenue
increases are dependent upon the base of subscribers and additional contract
incentive payments. Cost of equipment sold and other increased in the three
months ended June 30, 2000 and also increased as a percentage of corresponding
revenue from the corresponding prior primarily due to the change in the revenue
mix for equipment sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $4.6 million for the three months ended June 30,
2000 compared to $3.3 million for the corresponding prior period. Selling,
general and administrative expenses associated with the Corrections Division
were $4.5 million for the three months ended June 30, 2000 compared to $3.1
million in the corresponding prior period. The increase in the three months
ended June 30, 2000 was primarily due to increases in salary and benefits for
additional personnel, from raises for existing personnel and the installation
bonus program. Other expenses, including travel and professional fees, increased
due to the integration of Gateway's operations. We anticipate selling, general
and administrative expenses to remain consistent with current levels in the near
future.
Research and Development Expenses. Research and development expenses were $1.6
million in the three months ended June 30, 2000 compared to $1.3 million for the
corresponding prior period. Research and development expenses for the
18
<PAGE> 20
Corrections Division were $1.3 million in the three months ended June 30, 2000
and $1.1 million in the corresponding prior period. The increase was primarily
due to increased personnel expenses. We anticipate research and development
expenses to remain consistent for the remainder of the year.
Depreciation and Amortization Expenses. Depreciation and amortization expense
was $3.1 million in the three months ended June 30, 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 $827,000 for the three months ended
June 30, 1999. Merger transaction expenses consisted primarily of fees for
investment bankers, attorneys, accountants, financial printing and other related
charges.
Interest and Other Expense, Net. Interest and other expense, net was $673,000
for the three months ended June 30, 2000, an increase from $633,000 for the
corresponding prior period. Included in other income in the three months ended
June 30, 2000 is a gain of approximately $46,000 on the sale of used
telecommunications equipment. Interest expense was $719,000 for the three months
ended June 30, 2000, and $633,000 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.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO
JUNE 30, 1999
The following table sets forth certain statement of operations data as a
percentage of total revenue for the six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Revenue:
Telecommunications services ........................ 44% 56%
Direct call provisioning ........................... 29 38
Internet services .................................. 25 --
Equipment sales and other .......................... 2 6
------ ------
Total revenue ..................................... 100 100
Expenses:
Operating costs .................................... 68 62
Selling, general and administrative ................ 17 19
Research and development ........................... 5 7
Depreciation and amortization ...................... 12 16
------ ------
Operating loss ..................................... (2) (4)
Merger transaction expenses ........................ -- (3)
Interest and other expense ......................... (2) (3)
------ ------
Loss before income taxes ........................... (4) (10)
Income tax (expense) benefit ....................... -- 4
------ ------
Net loss ................................... (4) (6)
Accretion of discount on redeemable convertible
preferred stock .................................... (1) --
------ ------
Net loss applicable to common stock ........ (5)% (6)%
====== ======
</TABLE>
Total Revenue. Total revenue for the six months ended June 30, 2000 was $50.3
million, an increase of 42% over $35.5 million for the corresponding prior
period. This increase was primarily attributable to the commencement of Internet
services, as well as increases in telecommunications services revenue and direct
call provisioning revenue offset in part by decreases in equipment sales and
other.
The 11% increase in telecommunications services revenue to $22.1 million in the
six months ended June 30, 2000, from $19.9 million for the corresponding prior
period, was due primarily to an increase in contract prices. We changed our
pricing to a significant customer whereby revenue is calculated as a percentage
of our customer's gross revenue versus a
19
<PAGE> 21
transaction fee per call. In addition we experienced an increase in revenue due
to call volume increases, primarily due to the addition of new sites.
Direct call provisioning revenue increased 7% to $14.5 million for the six
months ended June 30, 2000, from $13.5 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
increases are dependent upon the base of subscribers and additional contract
incentive payments.
Equipment sales and other revenue decreased 43% to $1.2 million for the six
months ended June 30, 2000 from $2.1 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 six months ended June
30, 2000 we had sales of approximately $1.1 million to this telecommunications
service provider customer. The reduction for the six months ended June 30, 2000
from the corresponding prior period is due primarily to the timing of purchases
by this customer.
Operating costs. Total operating costs were $34.3 million in the six months
ended June 30, 2000, an increase of 57% from $21.9 million in the corresponding
prior period. The increases were primarily due to the commencement of Internet
services as well as increases in telecommunication services and direct call
provisioning expenses offset by a reduction in the cost of equipment sold and
other expenses.
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 was 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 six months ended June
30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Operating costs:
Telecommunications services ............... 45% 43%
Direct call provisioning .................. 92 93
Internet services ......................... 85 --
Cost of equipment sold and other .......... 45 41
</TABLE>
Operating costs associated with providing telecommunications services as a
percentage of corresponding revenue was 45% for the six months ended June 30,
2000, an increase from 43% for the corresponding prior period. The increase was
due to cost increases. Total telecommunications services operating expenses were
$9.9 million for the six months ended June 30, 2000 and $8.5 million for the
corresponding prior period. The increase in 2000 is due to new services being
provisioned for a significant customer as part of a contract amendment and due
to increases in personnel costs. The increase included bonus costs associated
with our line installation bonus program. The bonus program ended as of June 30,
2000. Also, the addition of new personnel in the National Service Center and
other operational support functions contributed to cost increases. To a lesser
extent, increases in travel, consulting services, repairs and maintenance
contributed to the overall cost increase.
Direct call provisioning costs as a percentage of applicable revenue decreased
to 92% of revenue for the six months ended June 30, 2000 from 93% in for the
corresponding prior period. This decrease was primarily due to a reduction in
bad debt expense because of improved collections.
20
<PAGE> 22
The contract for Internet services commenced in December 1999. Cost of equipment
sold and other decreased in the six months ended June 30, 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 $8.3 million for the six months ended June 30, 2000
compared to $6.6 million for the corresponding prior period. Selling, general
and administrative expenses associated with the Corrections Division were $8.1
million for the six months ended June 30, 2000 compared to $6.2 million in the
corresponding prior period. The increase in the six months ended June 30, 2000
was primarily due to increases in salary and benefits for additional personnel,
from raises for existing personnel and the installation bonus program. Other
expenses increased due to travel, communications and professional fees due to
the integration of Gateway operations.
Research and Development Expenses. Research and development expenses were $2.7
million in the six months ended June 30, 2000 compared to $2.6 million for the
corresponding prior period. Research and development expenses for the
Corrections Division were $2.4 million in the six months ended June 30, 2000 and
$2.2 million in the corresponding prior period. The increase was primarily due
to higher travel and consulting costs.
Depreciation and Amortization Expenses. Depreciation and amortization expense
was $6.2 million in the six months ended June 30, 2000, an increase from $5.7
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 $1.0 million for the six months ended
June 30, 1999. Merger transaction expenses consisted primarily of fees for
investment bankers, attorneys, accountants, financial printing and other related
charges.
Interest and Other Expense, Net. Interest and other expense, net was $1.0
million for the six months ended June 30, 2000, a decrease from $1.1 million for
the corresponding prior period. Included in other income in the six months ended
June 30, 2000 is a gain of approximately $334,000 on the sale of used
telecommunications equipment. There was $59,000 of miscellaneous other income in
the six months ended June 30, 1999. Interest expense was $1.4 million for the
six months ended June 30, 2000, and $1.0 million 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 for the six months ended June 30,
2000 of $2.3 million and had a working capital deficit of $30.8 million at June
30, 2000. In July 2000 our lenders amended our credit agreement to provide for
revised financial covenants. Additionally, we raised $7.5 million of debt and
equity financing in April 2000. The net proceeds were used to reduce the
outstanding balance on our credit facility. We are taking steps to improve our
cash flow from operations, including renegotiating contract pricing and cost
control measures in order to carry out the remainder of our fiscal 2000 business
plan. However, there can be no assurance that we will be successful in
increasing our cash flow from operations and we may require additional financing
to fund our operations. In the event additional financing is required, we may
not be able to obtain financing on terms acceptable to us and we may have to
curtain operations.
We present the following information for the six months ended June 30, 2000 and
1999 and as of June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash provided by operating activities ............ $ 3,083 $ 5,342
Working capital deficit .......................... $(30,783) $ (8,152)
</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 42% to $3.1 million for the six months ended
June 30, 2000 from $5.3 million in the corresponding prior period primarily due
to an increase in the net loss, reductions in accounts
21
<PAGE> 23
payable, and increases in accounts receivable. The increase in the working
capital deficit is primarily due to the classification of the bank credit
facility. The current maturity of the facility is April 30, 2001.
Purchases of property and equipment were $8.5 million in the six months ended
June 30, 2000 compared to $6.3 million for the corresponding prior period. The
36% increase in purchases of property and equipment was primarily due to
additional inmate calling system installations and upgrades to existing systems.
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 capital
requirements for new installations 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
at June 30, 2000 were less than $40 million. In July 2000 our lenders amended
our credit agreement to revise certain financial covenants. In addition, we
raised $7.5 million of debt and equity financing in April 2000. The net proceeds
of approximately $7.2 million 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 our Credit Facility and cash flows from operations will be sufficient
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. However, there
can be no assurance that we will be successful in increasing our cash flow from
operations and we may require additional financing to fund operations. In the
event additional financing is required, we may not be able to obtain financing
on terms acceptable to us and we may have to curtain operations.
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 the credit facility of $26.7 million at
June 30, 2000. The credit facility bears interest at differing rates including,
$22 million at LIBOR plus 4.0% and the remaining balance at the prime rate, 9.5%
at June 30, 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 six
months. Interest on prime rate loans is payable every six months. Since the
interest rates on the loans outstanding are variable and are reset periodically,
we are exposed to interest rate risk. An increase in interest rates of 1% would
increase estimated annual interest expense by approximately $280,000 based on
the amount of borrowings outstanding under the line of credit at June 30, 2000.
22
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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.
In a case brought in the Superior Court of Washington for King County, styled
Sandy Judd, et al. v. American Telephone and Telegraph Company, et. al., the
complaint joins as several inmate telecommunications service providers,
including T-NETIX. 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 Washington correctional facility. The
complaint alleges violations of the Washington Consumer Protection Act and
requests an injunction under the Washington Consumer Protection Act and common
law to enjoin further violations. 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.
Gateway is a defendant in a case brought in United States District Court Western
District of Kentucky at Louisville, styled Gus "Skip" Daleure, Jr., et al vs.
Commonwealth of Kentucky, et al. The complaint in this case joined as defendants
several states, political subdivisions of states, and inmate service
telecommunications providers and was filed contemporaneously with a request for
certification by the court of a nationwide plaintiffs' class action consisting
of all persons who have received and paid for telephone calls initiated by an
inmate at a prison, jail or other correctional institution for the provision of
"collect only" inmate telecommunications services. The complaint sought
declaratory and injunctive relief and money damages in an unstated amount for
alleged violations of the Sherman Antitrust Act, the Robinson-Patman Act and the
U.S. Constitution. The district court held, on motions to dismiss; Kentucky did
not have personal jurisdiction over defendants not located in or doing business
in the state of Kentucky; that telephone calls are not goods or commodities and
thus are not subject to the antitrust provisions of the Robinson-Patman Act;
that Plaintiffs did not state a claim for relief under the Equal Protection
Clause of the Fourteenth Amendment; and that Plaintiffs had not shown any harm
in support of its antitrust claim under Section 1 of the Sherman Act. The trial
judge did not, however, dismiss plaintiff's prayer for injunctive relief,
despite these findings. The case is currently subject to appeal and cross appeal
in the Second Circuit Court of Appeals. Although Gateway believes the District
Court holding will not be overturned it is possible the in may be and there can
be no assurance that a judgment against a class of the providers will not
ultimately be entered.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 12, 2000 the Company held its Annual Meeting of Shareholders to elect
four directors of the Company to hold office until the 2003 Annual Meeting of
Stockholders or until their respective successors are duly elected and qualified
and to ratify the selection of KPMG LLP; independent auditors, as auditors of
the Company for the year ending December 31, 2000. The directors were elected
and KPMG was ratified as independent auditors with the following voting results;
10,712,465 FOR; 113,281 AGAINST; and 400 WITHHOLD.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.12 First Amendment to Loan Agreement $40,000,000 Revolving Line
of Credit from Bank One, Colorado, NA, COBANK, ACB, and
INTRUST Bank, NA dated July 11, 2000.
27 Financial Data Schedule.
(b) The Company filed a Form 8-K dated April 19, 2000 reporting the
following:
Item 5 on Form 8-K regarding additional equity financing.
24
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
T-NETIX, INC.
---------------------------------------------
(Registrant)
Date August 14, 2000 By: /s/ Alvyn A. Schopp
--------------- -----------------------------------------
Alvyn A. Schopp, Chief Executive Officer
25
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.12 First Amendment to Loan Agreement $40,000,000 Revolving Line
of Credit from Bank One, Colorado, NA, COBANK, ACB, and
INTRUST Bank, NA dated July 11, 2000.
27 Financial Data Schedule.
</TABLE>
