**SECURITIES AND EXCHANGE COMMISSION**

Washington, DC 20549

|   |   |   |
|--------|--------|--------|

 

FORM 10-Q

 

[ X ] Quarterly report pursuant to sections 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2009

Or

[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For The Transition Period From _____ to _____

 

Commission File Number 333-124962

 

**SECURUS TECHNOLOGIES, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                    |   | **20-0673095**         |
|---------------------------------|--------|------------------------|
| (State of other jurisdiction of |   | (I.R.S. Employer       |
| incorporation or organization)  |   | Identification Number) |

 

14651 Dallas Parkway, Suite 600

Dallas, TX 75254-8815

(972) 277-0300

 

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.          Yes [ X ]          No   [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posed on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such        files).  Yes [ ]    No   [ ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act  (Check one):

| Large Accelerated Filer  [   ] |    | Accelerated Filer  [   ] |    | Non-Accelerated Filer  [ X ] | Smaller reporting company  [   ] |
|----------------------------------------------------|--------------|----------------------------------------------|--------------|----------------------------------------|------------------------------------------------------|

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

| Yes   [   ] |    | No  [ X ] |
|---------------------------------|--------------|----------------|

 

No established published trading market exists for either the common stock, par value $0.001 per share, of Securus Technologies, Inc. or the Class B common stock, par value $0.001 per share, of Securus Technologies, Inc.

 

Shares outstanding of each of the registrant’s classes of common stock:

 

| **Class**            |   | **Outstanding at March** **31, 2009** |
|----------------------|--------|--------------------------------------------|
| Class A Common Stock |   | 14,132 shares                              |
| Class B Common Stock |   | 166,990 shares                             |

 

 

 

 

1

 

 

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**TABLE OF CONTENTS**

 

| **PART I – FINANCIAL INFORMATION** | **3** |
|------------------------------------------|-------|

|   | **ITEM 1. FINANCIAL STATEMENTS** | **3** |
|--------|----------------------------------|-------|

|   | **ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION** | **16** |
|--------|--------------------------------------------------------------------------------------------------------|--------|

|   | **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** | **28** |
|--------|------------------------------------------------------------------------|--------|

|   | **ITEM 4. CONTROLS AND PROCEDURES** | **29** |
|--------|-------------------------------------|--------|

| **PART II — OTHER INFORMATION** | **29** |
|---------------------------------------|--------|

|   | **ITEM 1. LEGAL PROCEEDINGS** | **29** |
|--------|-------------------------------|--------|

|   | **ITEM 1A. RISK FACTORS** | **31** |
|--------|---------------------------|--------|

|   | **ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS** | **31** |
|--------|-------------------------------------------------------------------------|--------|

|   | **ITEM 3. DEFAULTS UPON SENIOR SECURITIES** | **31** |
|--------|---------------------------------------------|--------|

|   | **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS** | **31** |
|--------|-----------------------------------------------------------------|--------|

|   | **ITEM 5. OTHER INFORMATION** | **31** |
|--------|-------------------------------|--------|

|   | **ITEM 6. EXHIBITS** | **31** |
|--------|----------------------|--------|

 

 

2

 

 

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**PART I – FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(Dollars in thousands, except share and per share amounts)

|                                                                                                                                                                                                                                      |   | **December 31,** |     |    | **March 31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|----------|---------|---------------|--------|
|                                                                                                                                                                                                                                      |   | **2008**         |     |    | **2009**      |   |
| ***ASSETS***                                                                                                                                                                                                                              |   |             |     |    |          | **(**  | **Unaudited)** |   |
| Cash and cash equivalents                                                                                                                                                                                                                 |   | $                | 6,576    |    |          | $      | 8,023 |   |
| Restricted cash                                                                                                                                                                                                                           |   |             | 1,599    |    |          |   | 1,603 |   |
| Accounts receivable, net                                                                                                                                                                                                                  |   |             | 45,316   |    |          |   | 41,761 |   |
| Prepaid expenses                                                                                                                                                                                                                          |   |             | 6,116    |    |          |   | 5,049 |   |
| Current deferred income taxes                                                                                                                                                                                                             |   |             | 1,973    |    |          |   | 1,957 |   |
| Total current assets                                                                                                                                                                                                                      |   |             | 61,580   |    |          |   | 58,393 |   |
| Property and equipment, net                                                                                                                                                                                                               |   |             | 35,364   |    |          |   | 32,790 |   |
| Intangibles and other assets, net                                                                                                                                                                                                         |   |             | 98,550   |    |          |   | 95,013 |   |
| Goodwill                                                                                                                                                                                                                                  |   |             | 63,468   |    |          |   | 62,811 |   |
| Total assets                                                                                                                                                                                                                              |   | $                | 258,962  |    |          | $      | 249,007 |   |
|                                                                                                                                                                                                                                      |   |             |     |    |          |   |   |   |
| ***LIABILITIES , REEDEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT***                                                                                                                                                |   |             |     |    |          |   |   |   |
| Accounts payable                                                                                                                                                                                                                          |   | $                | 14,743   |    |          | $      | 13,562 |   |
| Accrued liabilities                                                                                                                                                                                                                       |   |             | 44,371   |    |          |   | 34,355 |   |
| Deferred revenue and customer advances                                                                                                                                                                                                    |   |             | 15,069   |    |          |   | 16,364 |   |
| Current deferred income taxes                                                                                                                                                                                                             |   |             | 817      |    |          |   | 543 |   |
| Total current liabilities                                                                                                                                                                                                                 |   |             | 75,000   |    |          |   | 64,824 |   |
| Deferred income taxes                                                                                                                                                                                                                     |   |             | 10,893   |    |          |   | 10,932 |   |
| Long-term debt                                                                                                                                                                                                                            |   |             | 288,341  |    |          |   | 294,521 |   |
| Other long-term liabilities                                                                                                                                                                                                               |   |             | 2,238    |    |          |   | 2,174 |   |
| Total liabilities                                                                                                                                                                                                                         |   |             | 376,472  |    |          |   | 372,451 |   |
|                                                                                                                                                                                                                                      |   |             |     |    |          |   |   |   |
| Commitments and contingencies                                                                                                                                                                                                             |   |             |     |    |          |   |   |   |
|                                                                                                                                                                                                                                      |   |             |     |    |          |   |   |   |
| Series A redeemable convertible preferred stock, $2,000 stated value, total redemption value $11,489 and $11,808 at December 31, 2008 and March 31, 2009; 5,100 shares authorized and outstanding at December 31, 2008 and March 31, 2009 |   |             | 11,321   |    |          |   | 11,656 |   |
|                                                                                                                                                                                                                                      |   |             |     |    |          |   |   |   |
| Stockholders’ deficit:                                                                                                                                                                                                              |   |             |     |    |          |   |   |   |
| Common stock, $0.001 par value; 1,355,000 and 1,500,000 shares authorized at December 31, 2008 and March 31, 2009; 161,037 and 181,122 shares issued and outstanding at December 31, 2008 and March 31, 2009                              |   |             | 8   |    |          |   | 8 |   |
| Additional paid-in capital                                                                                                                                                                                                                |   |             | 34,304   |    |          |   | 33,970 |   |
| Accumulated other comprehensive loss                                                                                                                                                                                                      |   |             | (2,701   | )  |          |   | (3,190 | )  |
| Accumulated deficit                                                                                                                                                                                                                       |   |             | (160,442 | )       |          |   | (165,888 | ) |
| Total stockholders’ deficit                                                                                                                                                                                                         |   |             | (128,831 | )       |          |   | (135,100 | ) |
| Total liabilities, redeemable convertible preferred stock and stockholders’ deficit                                                                                                                                            |   | $                | 258,962  |    |          | $      | 249,007 |   |

See accompanying notes to condensed consolidated financial statements. 

 

3

 

 

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**SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

For the Three Months Ended March 31, 2008 and 2009

(Dollars in thousands)

 

|                                                                                 |   | **March 31,**   |    |    | **March 31,** |   |
|--------------------------------------------------------------------------------------|--------|-----------------|---------|---------|---------------|--------|
|                                                                                 |   | **2008**        |    |    | **2009**      |   |
| Revenue:                                                                             |   | **(Unaudited)** |    |
| Direct call provisioning                                                             |   | $               | 84,898  |    |          | $      | 82,917 |   |
| Offender management software                                                         |   |            | 4,190   |    |          |   | 6,215 |   |
| Wholesale services                                                                   |   |            | 8,585   |    |          |   | 7,088 |   |
| Total revenue                                                                        |   |            | 97,673  |    |          |   | 96,220 |   |
| Cost of service (exclusive of depreciation and amortization shown separately below): |   |            |    |    |          |   |   |   |
| Direct call provisioning, exclusive of bad debt expense                              |   |            | 55,059  |    |          |   | 52,486 |   |
| Direct call provisioning bad debt expense                                            |   |            | 7,363   |    |          |   | 7,183 |   |
| Offender management software expense                                                 |   |            | 2,665   |    |          |   | 2,906 |   |
| Wholesale services expense                                                           |   |            | 4,284   |    |          |   | 3,770 |   |
| Total cost of service                                                                |   |            | 69,371  |    |          |   | 66,345 |   |
| Selling, general and administrative expenses                                         |   |            | 19,841  |    |          |   | 16,735 |   |
| Restructuring costs                                                                  |   |            | 224     |    |          |   | - |   |
| Depreciation and amortization                                                        |   |            | 8,598   |    |          |   | 7,939 |   |
| Total operating costs and expenses                                                   |   |            | 98,034  |    |          |   | 91,019 |   |
| Operating income (loss)                                                              |   |            | (361    | )  |          |   | 5,201 |   |
| Interest and other expenses, net                                                     |   |            | 10,185  |    |          |   | 10,611 |   |
| Loss before income taxes                                                             |   |            | (10,546 | )       |          |   | (5,410 | ) |
| Income tax expense (benefit)                                                         |   |            | (599    | )  |          |   | 36 |   |
| Net loss                                                                             |   |            | (9,947  | )       |          |   | (5,446 | ) |
| Accrued dividends on redeemable convertible preferred stock                          |   |            | (348    | )  |          |   | (334 | ) |
| Net loss available to common stockholders                                            |   | $               | (10,295 | )       |          | $      | (5,780 | ) |

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4

 

 

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**SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

For the Three Months Ended March 31, 2008 and 2009

(Dollars in thousands)

 

|                                                                                      |   | **March 31,**   |          |    | **March 31,** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------|---------------|---------|---------------|--------|
|                                                                                      |   | **2008**        |          |    | **2009**      |   |
|                                                                                      |   | **(Unaudited)** |          |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |   |            |          |    |          |   |   |   |
| Net loss                                                                                  |   | $               | (9,947        | )       |          | $      | (5,446 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |   |            |          |    |          |   |   |   |
| Depreciation and amortization                                                             |   |            | 8,598         |    |          |   | 7,939 |   |
| Amortization of fair value of contracts acquired                                          |   |            | 796           |    |          |   | (2 | ) |
| Deferred income taxes                                                                     |   |            | (708          | )  |          |   | (99 | ) |
| Conversion of interest paid “in kind” to senior subordinated notes            |   |            | 2,968         |    |          |   | 3,507 |   |
| Amortization of deferred financing costs and debt discounts                               |   |            | 830           |    |          |   | 999 |   |
| Other operating activities, net                                                           |   |            | 12            |    |          |   | (8) |   |
| Changes in operating assets and liabilities:                                              |   |            |          |    |          |   |   |   |
| Restricted cash                                                                           |   |            | (10           | )       |          |   | (4 | ) |
| Accounts receivable                                                                       |   |            | (3,751        | )       |          |   | 3,383 |   |
| Prepaid expenses and other current assets                                                 |   |            | 252           |    |          |   | 1,057 |   |
| Other assets                                                                              |   |            | (567          | )       |          |   | (166 | ) |
| Accounts payable                                                                          |   |            | 46            |    |          |   | 298 |   |
| Accrued liabilities                                                                       |   |            | (4,893        | )       |          |   | (8,671 | ) |
| Net cash provided by (used in) operating activities                                       |   | $               | (6,374        | )       |          | $      | 2,787 |   |
|                                                                                      |   |            |          |    |          |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |   |            |          |    |          |   |   |   |
| Purchase of property and equipment and intangible assets                                  |   | $               | (4,073        | )       |          | $      | (2,722 | ) |
| Proceeds from sale of asset                                                               |   |            | -   |    |          |   | 50 |   |
| Net cash used in investing activities                                                     |   | $               | ( 4,073       | )       |          | $      | (2,672 | ) |
|                                                                                      |   |            |          |    |          |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |   |            |          |    |          |   |   |   |
| Net advances on revolving credit facility                                                 |   | $               | 5,278         |    |          | $      | 2,429 |   |
| Change in cash overdraft                                                                  |   |            | 3,960         |    |          |   | (1,474 | ) |
| Debt issuance costs                                                                       |   |            | -             |    |          |   | (77 | ) |
| Net cash provided by financing activities                                                 |   | $               | 9,238         |    |          | $      | 878 |   |
| Effect of exchange rates on cash and cash equivalents                                     |   |            | 711           |    |          |   | 454 |   |
| Increase(decrease) in cash and cash equivalents                                           |   | $               | (498          | )       |          | $      | 1,447 |   |
| Cash and cash equivalents at the beginning of the period                                  |   |            | 2,072         |    |          |   | 6,576 |   |
| Cash and cash equivalents at the end of the period                                        |   | $               | 1,574         |    |          | $      | 8,023 |   |
|                                                                                      |   |            |          |    |          |   |   |   |
| SUPPLEMENTAL DISCLOSURES:                                                                 |   |            |          |    |          |   |   |   |
| Cash paid during period for:                                                              |   |            |          |    |          |   |   |   |
| Interest                                                                                  |   | $               | 10,843        |    |          | $      | 11,090 |   |
| Income taxes                                                                              |   | $               | -   |    |          | $      | 375 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

 

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**SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1 –** **Description of Business and Significant Accounting Policies and Practices**

 

*Description of Business and Organization*

Securus Technologies, Inc. and its subsidiaries (“Securus” or the “Company”) provide inmate telecommunications services and software solutions to correctional facilities operated by city, county, state and federal authorities and other types of confinement facilities in 44 states. Securus also provides offender management and other software solutions to U.S. and        foreign correctional facilities and law enforcement agencies. The Company was incorporated in Delaware on January 12, 2004, and on March 3, 2004 and September 9, 2004, the Company acquired all of the outstanding equity interests of T-Netix, Inc. (“T-Netix”) and Evercom Holdings, Inc. (“Evercom”), respectively. On June 29, 2007, the Company acquired Syscon Holdings, Ltd. and certain of its affiliates (“Syscon”). 

 

*Basis of Presentation*

The accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2008 and 2009 have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the        information and notes required by U.S. Generally Accepted Accounting Principles for complete financial statements of Securus.  In the opinion of management, all adjustments necessary for a fair presentation have been included and are of a normal and recurring nature.  Interim results are not necessarily indicative of the results that may be expected for the year.  The condensed consolidated financial statements should be read in conjunction with the        consolidated financial statements and notes thereto included in Securus’ December 31, 2008 Annual Report on Form 10-K.

 

*Reclassification*

Certain amounts in the March 31, 2008 condensed consolidated financial statements have been reclassified to conform to current period presentation. This reclassification had no impact on operating income (loss), net loss, cash flows or the financial position of the Company for the prior periods presented.

 

*Accounting Estimates*

The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and        the reported amounts of revenue and expenses during the reported period.  Significant items subject to such estimates include the valuation allowances for receivables, the recoverability of property and equipment, goodwill, intangible and other assets, and deferred income taxes.  Actual results could differ from those estimates.

 

*Principles of Consolidation*

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, T-Netix, Evercom, and Syscon. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

*Income Taxes*

The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109,*Accounting for Income Taxes*. Under SFAS No. 109, deferred tax assets and liabilities for the expected future tax consequences of transactions and events. Under this method, deferred 

 

6

 

 

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tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

 

The Company’s unrecognized tax benefits as of March 31, 2009, amounted to $0.6million, including interest and penalties of $0.1 million. The amount of unrecognized tax benefits that would impact the effective rate, if recognized, would be $0.2 million. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits over        the next twelve months.

 

The Company files income tax returns in the U.S. federal jurisdiction, Canada, the United Kingdom, Australia and various states. The Company has open tax years for the U.S. federal return from 1996 forward with respect to its net operating loss (“NOL”) carryforwards, where the IRS may not raise tax for these years, but can reduce NOLs. Otherwise, with few exceptions, the        Company is no longer subject to federal, foreign, state, or local income tax examinations for years prior to 2004.

 

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. For the quarter ended March 31, 2009, the Company recognized $13,000 in potential interest with respect to unrecognized tax benefits.

 

*Recent Accounting Pronouncements*

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, *Fair Value Measurement*(“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements. The Company adopted the        provisions of SFAS No. 157 on January 1, 2008 for financial assets and liabilities. Effective January 1, 2009, the Company adopted SFAS No. 157 for nonfinancial assets and nonfinancial liabilities.The adoption of SFAS No. 157 did not have amaterial impact on the Company’s results of operations and financial position. 

 

In December 2007, the FASB issued SFAS No. 141R, *Business Combinations*(“SFAS No. 141R”)*,*which requires the acquiring entity in a business combination to recognize the full fair value of the assets acquired, liabilities assumed and any noncontrolling interest as of the        acquisition date, the immediate expense recognition of transaction costs, and accounting for restructuring plans separately from the business combination. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141R as of January 1, 2009, has not impacted the Company’s financial statements; however, the        financial statements may be impacted to the extent the Company acquires entities in a purchase combination in the future. 

 

*Comprehensive Loss*

Statement of Financial Accounting Standards (“SFAS”) No. 130,*Reporting Comprehensive Income*, requires that certain items such as foreign currency translation adjustments be presented as separate components of shareholders’ equity.  Total comprehensive loss for the three months ended March 31, 2008        and 2009 was $10.9 million and $5.9 million, respectively.

 

7

 

 

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**Note 2 –** **Balance Sheet Components**

 

Accounts receivables, net consist of the following (in thousands):

 

|   |                                  |   | **December 31,** |   |   | **March 31,** |            |   |
|--------|---------------------------------------|--------|------------------|--------|--------|---------------|-----------------|--------|
|   |                                  |   | **2008**         |   |   | **2009**      |            |   |
|   |                                  |   |             |   |   |          | **(Unaudited)** |   |   |
|   | **Accounts receivable, net:**         |   |             |   |   |          |            |   |   |   |
|   | Trade accounts receivable             |   | $                | 49,282 |   |          | $               | 46,408 |   |   |
|   | Advance commissions receivable        |   |             | 847    |   |          |            | 538    |   |   |
|   | Other receivables                     |   |             | 367    |   |          |            | 459    |   |   |
|   |                                  |   |             | 50,496 |   |          |            | 47,405 |   |   |
|   | Less: Allowance for doubtful accounts |   |             | (5,180 | )      |          |            | (5,644 | ) |   |
|   |                                  |   | $                | 45,316 |   |          | $               | 41,761 |   |   |

 

At December 31, 2008 and March 31, 2009, the Company had advanced commissions to certain facilities totaling $0.8 million and $0.5 million, respectively, which are recoverable from such facilities as a reduction of earned commissions for specified monthly amounts. Amounts included in the accounts receivable represent the estimated recoverable amounts during the next fiscal        year.

 

Direct call provisioning bad debt expense for the three months ended March 31, 2008 was $7.4 million, or 8.7%, of direct call provisioning revenue of $84.9 million. Direct call provisioning bad debt expense for the three months ended March 31, 2009 was $7.2 million, or 8.7%, of direct call provisioning revenue of $82.9 million.

 

Property and equipment, net consists of the following (in thousands): 

 

|   |                                            |   | **December 31,** |    |   | **March 31,** |            |    |
|--------|-------------------------------------------------|--------|------------------|---------|--------|---------------|-----------------|---------|
|   |                                            |   | **2008**         |    |   | **2009**      |            |    |
|   |                                            |   |             |    |   |          | **(Unaudited)** |    |   |
|   | **Property and equipment, net:**                |   |             |    |   |          |            |    |   |   |
|   | Telecommunications equipment                    |   | $                | 60,291  |   |          | $               | 61,217  |   |   |
|   | Leasehold improvements                          |   |             | 3,860   |   |          |            | 3,870   |   |   |
|   | Construction in progress                        |   |             | 3,348   |   |          |            | 2,697   |   |   |
|   | Office equipment                                |   |             | 19,215  |   |          |            | 19,593  |   |   |
|   |                                            |   |             | 86,714  |   |          |            | 87,377  |   |   |
|   | Less: Accumulated depreciation and amortization |   |             | (51,350 | )      |          |            | (54,587 | ) |   |
|   |                                            |   | $                | 35,364  |   |          | $               | 32,790  |   |   |

 

Intangibles and other assets, net consist of the following (in thousands): 

|                                   |   | **December 31, 2008** |
|----------------------------------------|--------|-----------------------|
|                                   |   |                  | **Gross** |   |   |   |   |   |   |   |   |   |   | **Weighted** |
|                                   |   |                  | **Carrying** |   |   |   | **Accumulated** |   |   |   |   |   |   | **Average** |
|                                   |   |                  | **Value** |   |   |   | **Amortization** |   |   |   | **Net** |   |   | **Life** |
| Patents and trademarks                 |   | $                     | 24,129 |   |   | $ | (8,351 | ) |   | $ | 15,778 |   |   | 9.8 |
| Deferred financing costs               |   |                  | 15,308 |   |   |   | (5,499 | ) |   |   | 9,809 |   |   | 5.8 |
| Capitalized software development costs |   |                  | 25,964 |   |   |   | (13,495 | ) |   |   | 12,469 |   |   | 4.5 |
| Custom software development costs      |   |                  | 6,698 |   |   |   | (1,060 | ) |   |   | 5,638 |   |   | 10.0 |
| Acquired contract rights               |   |                  | 96,714 |   |   |   | (44,645 | ) |   |   | 52,069 |   |   | 9.9 |
| Deposits and long-term prepayments     |   |                  | 1,846 |   |   |   | - |   |   |   | 1,846 |   |   | -  |
| Non-compete and employee agreements    |   |                  | 1,540 |   |   |   | (599 | )  |   |   | 941 |   |   | 4.3 |
|                                   |   | $                     | 172,199 |   |   | $ | (73,649 | ) |   | $ | 98,550 |   |   |   |

 

 

8

 

 

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|                                   |   | **March** **31, 2009 (Unaudited)** |
|----------------------------------------|--------|-----------------------------------------|
|                                   |   |                                    | **Gross** |   |   |   |   |   |   |   |   |   |   | **Weighted** |
|                                   |   |                                    | **Carrying** |   |   |   | **Accumulated** |   |   |   |   |   |   | **Average** |
|                                   |   |                                    | **Value** |   |   |   | **Amortization** |   |   |   | **Net** |   |   | **Life** |
| Patents and trademarks                 |   | $                                       | 23,958 |   |   | $ | (8,704 | ) |   | $ | 15,254 |   |   | 9.8 |
| Deferred financing costs               |   |                                    | 15,385 |   |   |   | (6,254 | ) |   |   | 9,131 |   |   | 5.8 |
| Capitalized software development costs |   |                                    | 27,306 |   |   |   | (14,450 | ) |   |   | 12,856 |   |   | 4.5 |
| Custom software development costs      |   |                                    | 6,532 |   |   |   | (1,203 | ) |   |   | 5,329 |   |   | 10.0 |
| Acquired contract rights               |   |                                    | 96,562 |   |   |   | (46,964 | ) |   |   | 49,598 |   |   | 9.9 |
| Deposits and long-term prepayments     |   |                                    | 2,027 |   |   |   | - |   |   |   | 2,027 |   |   | - |
| Non-compete and employee agreements    |   |                                    | 1,497 |   |   |   | (679 | ) |   |   | 818 |   |   | 4.3 |
|                                   |   | $                                       | 173,267 |   |   | $ | (78,254 | ) |   | $ | 95,013 |   |   |   |
|                                   |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                        |        |                                         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At December 31, 2008 and March 31, 2009, the carrying amount assigned to patents and trademarks that were not subject to amortization was $2.8 million.

 

Amortization expense for the three months ended March 31, 2008 and 2009 was $5.6 million (of which $0.6 million was included in interest expense and $0.8 million was amortized against revenue), and $5.3 million (of which $0.8 million was included in interest expense), respectively. Estimated amortization expense related to intangibles and other assets, excluding        deferred financing costs and other assets, at March 31, 2009, and for each of the next five years through March 31, 2014, and thereafter, is summarized as follows (in thousands): 

 

|   | **Period ending March 31** |   | **(unaudited)** |   |
|--------|----------------------------|--------|-----------------|--------|
|   | 2010                       | $      | 16,771          |   |
|   | 2011                       |   | 15,157          |   |
|   | 2012                       |   | 12,789          |   |
|   | 2013                       |   | 8,507           |   |
|   | 2014                       |   | 7,560           |   |
|   | Thereafter                 |   | 20,168          |   |
|   |                       | $      | 80,952          |   |

 

Accrued liabilities consist of the following (in thousands):

|                           |                        |   | **December 31,** |   |   | **March 31,**   |   |   |
|--------------------------------|-----------------------------|--------|------------------|--------|--------|-----------------|--------|--------|
|                           |                        |   | **2008**         |   |   | **2009**        |   |   |
| **Accrued liabilities:**  |                        |   |             |   |   | **(Unaudited)** |   |   |
|                           | Accrued expenses            |   | $                | 26,433 |   |            | $      | 23,866 |   |   |
|                           | Accrued compensation        |   |             | 6,287  |   |            |   | 4,541  |   |   |
|                           | Accrued facility exit costs |   |             | 207    |   |            |   | 160    |   |   |
|                           | Accrued taxes               |   |             | 4,187  |   |            |   | 3,888  |   |   |
|                           | Accrued interest and other  |   |             | 7,257  |   |            |   | 1,900  |   |   |
|                           |                        |   | $                | 44,371 |   |            | $      | 34,355 |   |   |

 

Restructuring charges of $0.2 million were incurred and paid during the first quarter of 2008 related to the realignment of our field service organization because of efficiencies gained from our new packet-based architecture, which we began to install in 2006 and will continue to install as customer contracts are renewed.

 

 

 

9

 

 

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**Note 3 –** **Goodwill**

 

Goodwill allocated to our reportable segments is summarized as follows (in thousands):

|                         |   |   |             |   |   |   | **Offender**   |    |   |   |      |    |
|------------------------------|--------|--------|------------------|--------|--------|--------|----------------|---------|--------|--------|-----------|---------|
|                         |   |   | **Direct Call**  |   |   |   | **Management** |    |   |   |      |    |
|                         |   |   | **Provisioning** |   |   |   | **Software**   |    |   |   | **Total** |    |
| Balance at December 31, 2007 |   | $      | 37,936           |   |   | $      | 31,099         |    |   | $      | 69,035    |    |
| Foreign currency translation |   |   | -      |   |   |   | (5,567         | )  |   |   | (5,567    | )  |
| Balance at December 31, 2008 |   | $      | 37,936           |   |   | $      | 25,532         |    |   | $      | 63,468    |    |
| Foreign currency translation |   |   | -                |   |   |   | (657           | )  |   |   | (657      | )  |
| Balance at March 31, 2009    |   | $      | 37,936           |   |   | $      | 24,875         |    |   | $      | 62,811    |    |

 

**Note 4 –** **Debt**

 

Debt consists of the following (in thousands):

|                                                                            |   | **December 31,** |    |   | **March 31,**   |   |
|---------------------------------------------------------------------------------|--------|------------------|---------|--------|-----------------|--------|
|                                                                            |   | **2008**         |    |   | **2009**        |   |
|                                                                            |   |             |    |   | **(Unaudited)** |   |
| Revolving credit facility                                                       |   | $                | 16,511  |   |            | $      | 18,940 |   |
| Second-priority senior secured notes                                            |   |             | 194,000 |   |            |   | 194,000 |   |
| Senior subordinated notes                                                       |   |             | 82,484  |   |            |   | 85,991 |   |
|                                                                            |   |             | 292,995 |   |            |   | 298,931 |   |
| Less unamortized discount on senior secured notes and senior subordinated notes |   |             | (4,654  | )      |            |   | (4,410 | ) |
|                                                                            |   | $                | 288,341 |   |            | $      | 294,521 |   |

 

*Revolving Credit Facility*— On September 30, 2008, the Company and certain of its subsidiaries entered into a senior credit agreement with a lending institution and the other lenders party thereto (the “Credit Agreement”) to refinance its existing revolving credit facility. The Credit Agreement provides the Company with a $10 million letter        of credit facility and a revolving facility of up to the lesser of (i) $30 million and (ii) 125% of the Company’s consolidated EBITDA (as defined in the Credit Agreement) for the preceding 12 months less the face amount of outstanding letters of credit. The Credit Agreement expires on June 9, 2011. Advances bear interest at an annual rate of our option equal to one of the following: (a) LIBOR plus 4.0%, or (b) a rate equal to the Base Rate plus 3.0%. The Base Rate is the greater        of (i) 5%, (ii) the Federal Funds rate plus 0.5%, or (iii) the prime rate (as defined in the Credit Agreement), which was 3.25% as of March 31, 2009. Interest is payable in arrears on the first day of each month. The unused availability under the Credit Agreement is subject to a fee based on a per annum rate of 0.375% due monthly. Borrowings under the Credit Agreement are secured by a first lien on substantially all of the Company’s and certain of the Company’s        subsidiaries’ assets. The Company draws from the available credit under the Credit Agreement to cover normal business cash requirements. As of December 31, 2008 and March 31, 2009, the Company had $13.5 million and $11.1 million, respectively, of borrowing availability under the Credit Agreement.

 

*Second-Priority Senior Secured Notes*— The Company has $194.0 million of 11% Second-priority Senior Secured Notes outstanding. These notes were issued at a discount of $4.5 million, or 97.651% of face value. The Senior Secured Notes are secured by a second lien on substantially all of the Company’s and certain of the Company’s        subsidiaries’ assets other than accounts receivable, inventory and real property.

 

All $194.0 million of principal is due September 9, 2011. To the extent the Company generates excess cash flow (as defined in the indenture) in any calendar year, the Company is required by the Senior Secured Notes to offer to repay principal equal to 75% of such excess cash flow at a rate of 102.75% of face value in 2009.  No excess cash flow payment was due for the year        ended December 31, 2008 because an Excess Cash Flow Amount (as defined in the Indenture) greater than $5.0 million was not generated. In the event 

 

10

 

 

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we determine that the Excess Cash Flow Amount is likely to exceed $5.0 million in 2009, we may purchase Senior Secured Notes in the open market, by negotiated private transactions or otherwise, to reduce the aggregate Excess Cash Flow Amount to less than $5.0 million.   Interest is payable semiannually on March 1 and September 1. The effective interest rate is 11.3% on the        Second-priority Senior Secured Notes. 

 

*Senior Subordinated Notes*—The Company has outstanding $86.0 million of Senior Subordinated Notes, unsecured and subordinate to the revolving credit facility, that bear interest at an annual rate of 17%. Interest is payable at the end of each calendar quarter, or, as restricted by our revolving credit facility, is paid-in-kind by adding accrued        interest to the principal balance of the Senior Subordinated Notes. All outstanding principal, including interest paid-in-kind, is due on September 9, 2014 and a mandatory prepayment equal to $20.0 million plus 50% of all outstanding interest paid-in-kind is due on September 9, 2013. In connection with the issuance of the Senior Subordinated Notes, the Company issued warrants to acquire 51.01 shares of its common stock at an exercise price of $10 per share to the Senior        Subordinated Noteholders. As a result, the Company discounted the face value of the Senior Subordinated Notes by $2.9 million representing the estimated fair value of the warrants at the time of issuance. For the three months ended March 31, 2009, $3.5 million of paid-in-kind interest was added to the principal balance of the Senior Subordinated Notes. The effective interest rate is 18.58% on the Senior Subordinated Notes. 

 

All of the Company’s domestic subsidiaries and certain of its foreign subsidiaries (the “Subsidiary Guarantors”) are fully, unconditionally, and jointly and severably liable for the revolving credit facility, Senior Subordinated Notes and Second-priority Senior Secured Notes. The Subsidiary Guarantors are wholly-owned. The Company has not included separate financial        statements of guarantors because (a) their aggregate assets, liabilities, earnings and equity are presented on a consolidated basis and (b) the Company believes that separate financial statements and other disclosures concerning subsidiaries are not material to investors.

 

The Company’s credit facilities contain financial and operating covenants that require the maintenance of certain financial ratios, including specified fixed charge interest coverage ratios, maintenance of minimum levels of operating cash flows and maximum capital expenditure limitations. These covenants also limit the Company’s ability to incur additional indebtedness, make        certain payments including dividends to shareholders, invest and divest company assets, and sell or otherwise dispose of capital stock. In the event that the Company fails to comply with the covenants and restrictions, as specified in the credit agreements, it may be in default, at which time payment of the long term debt and unpaid interest may be accelerated and become immediately due and payable.

 

Based on our current and expected levels of operations, we believe our cash flow from operations, available cash and available borrowings under our $30.0 million revolving credit facility will be adequate to continue to operate for at least twelve months from our balance sheet dated March 31, 2009.As of December 31, 2008 and March 31, 2009, the Company was in compliance with its debt        covenants.

 

The fair value of our debt instruments is as follows (in thousands):

|   |                                 |   | **December 31, 2008** |   | **March 31, 2009** |
|--------|--------------------------------------|--------|-----------------------|--------|--------------------|
|   | Revolving Credit Facility            | $      | 16,511                | $      | 18,940             |
|   | Second-priority Senior Secured Notes |   | 108,205               |   | 119,500            |
|   | Senior Subordinated Notes            |   | 82,484                |   | 85,991             |
|   |                                 | $      | 207,200               | $      | 224,431            |

 

The fair value of the revolving credit facility is equal to its carrying value and is considered a Level 2 fair value measurement (defined as inputs other than quoted prices in active markets that are either directly or indirectly observable) due to the variable nature of its interest rate. The fair values associated with the Second–priority Senior Secured Notes were quoted as of        March 31, 2009 at a trading price of $60.00 and $67.75, an 11.3% and 3.3% increase from the quoted value at December 31, 2008. The fair 

 

11

 

 

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value of the second-priority senior secured notes is considered a Level 2 fair value measurement (defined as inputs other than quoted prices in active markets that are either directly or indirectly observable) of the fair value hierarchy determined on their quoted market value. The fair value of the senior subordinated notes is based on their book value since these notes are not publicly traded and it        is not practical to measure their fair value. These notes would also be valued within Level 3 on the fair value hierarchy as little or no market data exists related to the notes. 

 

**Note 5 –** **Segment Information**

 

SFAS No. 131, *Disclosures About Segments of an Enterprise and Related Information,*establishes standards for reporting operating segments in annual financial statements. SFAS No. 131 also establishes standards for disclosures about products and services, geographic areas and major customers. The Company has chosen to organize        the enterprise around differences in products and services.

 

The Company has three reportable segments: Direct Call Provisioning, Offender Management Software and Wholesale Services. Through these segments, the Company provides inmate telecommunication products and services for correctional facilities, including security enhanced call processing, call validation and billing services for inmate calling, and software solutions to manage and monitor        inmate, parole and probation activity. Depending upon the contractual relationship at the site and the type of customer, the Company provides these products and services primarily through direct contracts between the Company and correctional facilities. A smaller portion of our business is provided through wholesale service agreements with other telecommunications service providers and system sales to certain telecommunications providers. The Company’s foreign operations, revenues        and long-lived assets are reported in the offender management software segment.

 

The Company evaluates performance of each segment based on operating results. Total assets are those owned by or allocated to each segment. Assets included in the “Corporate & Other” column of the following table include all assets not specifically allocated to a segment. There are no intersegment sales. The Company’s reportable segments are specific business units        that offer different products and services and have varying operating costs associated with such products. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company uses estimates to allocate certain direct costs and selling, general and administrative costs, as well as for depreciation and amortization, goodwill, and capital expenditures. Estimation is required in these cases because the Company        does not have the capability to specifically attribute such costs to a particular segment. The estimation is based on relevant factors such as proportionate share of revenue of each segment to the total business.

 

Segment information for the three months ended March 31, 2008 (unaudited) is as follows (in thousands):

|                               |   |             |    |   | **Offender**   |   |         |          |   |   |          |            |   |   |      |          |   |
|------------------------------------|--------|------------------|---------|--------|----------------|--------|--------------|---------------|--------|--------|---------------|-----------------|--------|--------|-----------|---------------|--------|
|                               |   | **Direct Call**  |    |   | **Management** |   |         | **Wholesale** |   |   |          | **Corporate**   |   |   |      |          |
|                               |   | **Provisioning** |    |   | **Software**   |   |         | **Services**  |   |   |          | **& Other** |   |   | **Total** |          |
| Revenue from external customers    |   | $                | 84,898  |   |           | $      | 4,190        |          |   | $      | 8,585         |            |   |   | $         | -   |   |   | $ | 97,673 |   |
| Segment gross margin               |   | $                | 22,476  |   |           | $      | 1,525        |          |   | $      | 4,301         |            |   |   | $         | -   |   |   | $ | 28,302 |   |
| Depreciation and amortization      |   |             | 6,954   |   |           |   | 962          |          |   |   | 652           |            |   |   |      | 30            |   |   |   | 8,598 |   |
| Other operating costs and expenses |   |             | 2,348   |   |           |   | 2,005        |          |   |   | 161           |            |   |   |      | 15,551        |   |   |   | 20,065 |   |
| Operating income (loss)            |   | $                | 13,174  |   |           | $      | (1,442       | )        |   | $      | 3,488         |            |   |   | $         | (15,581       | )      |   |   | (361 | )  |
| Interest and other expense, net    |   |             |    |   |           |   |         |          |   |   |          |            |   |   |      | 10,185        |   |   |   | 10,185 |   |
| Segment loss before income taxes   |   |             |    |   |           |   |         |          |   |   |          |            |   |   |      |          |   |   | $ | (10,546 | ) |
| Capital expenditures               |   | $                | 4,040   |   |           | $      | 25      |          |   | $      | -   |            |   |   | $         | 8             |   |   | $ | 4,073 |   |
| Total assets                       |   | $                | 195,830 |   |           | $      | 61,154       |          |   | $      | 17,409        |            |   |   | $         | 13,077        |   |   | $ | 287,470 |   |
| Goodwill                           |   | $                | 37,936  |   |           | $      | 29,964  |          |   | $      | -   |            |   |   | $         | -   |   |   | $ | 67,900 |   |

 

 

12

 

 

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Segment information for the three months ended March 31, 2009 (unaudited) is as follows (in thousands):

|                               |   |             |    |   | **Offender**   |   |   |          |   |   |   |            |   |   |      |    |   |
|------------------------------------|--------|------------------|---------|--------|----------------|--------|--------|---------------|--------|--------|--------|-----------------|--------|--------|-----------|---------|--------|
|                               |   | **Direct Call**  |    |   | **Management** |   |   | **Wholesale** |   |   |   | **Corporate**   |   |   |      |    |
|                               |   | **Provisioning** |    |   | **Software**   |   |   | **Services**  |   |   |   | **& Other** |   |   | **Total** |    |
| Revenue from external customers    |   | $                | 82,917  |   | $              |   | 6,215  |          |   | $      | 7,088  |            |   |   | $         | -       |   |   | $ | 96,220 |   |
| Segment gross margin               |   | $                | 23,248  |   |           |   | 3,309  |          |   | $      | 3,318  |            |   |   | $         | -       |   |   | $ | 29,875 |   |
| Depreciation and amortization      |   |             | 7,075   |   |           |   | 796    |          |   |   | 37     |            |   |   |      | 31      |   |   |   | 7,939 |   |
| Other operating costs and expenses |   |             | 1,931   |   |           |   | 2,521  |          |   |   | 143    |            |   |   |      | 12,140  |   |   |   | 16,735 |   |
| Operating income (loss)            |   | $                | 14,242  |   | $              |   | (8     | )             |   | $      | 3,138  |            |   |   | $         | (12,171 | )      |   |   | 5,201 |   |
| Interest and other expense, net    |   |             |    |   |           |   |   |          |   |   |   |            |   |   |      | 10,611  |   |   |   | 10,611 |   |
| Segment loss before income taxes   |   |             |    |   |           |   |   |          |   |   |   |            |   |   |      |    |   |   | $ | (5,410 | ) |
| Capital expenditures               |   | $                | 2,497   |   | $              |   | 106    |          |   | $      | 115    |            |   |   | $         | 4       |   |   | $ | 2,722 |   |
| Total assets                       |   | $                | 179,814 |   | $              |   | 45,081 |          |   | $      | 13,024 |            |   |   | $         | 11,088  |   |   | $ | 249,007 |   |
| Goodwill                           |   | $                | 37,936  |   | $              |   | 24,875 |          |   | $      | -      |            |   |   | $         | -       |   |   | $ | 62,811 |   |

 

**Note 6 -**  **Redeemable Convertible Preferred Stock**

 

At March 31, 2009, the Company had 5,100 shares of Series A Redeemable Convertible Preferred Stock (“Preferred Stock”). Each share of the Preferred Stock has a stated value of $2,000 and accrues dividends annually at 12.5% of the stated value. The Preferred Stock has a liquidation preference equal to the greater of its per share purchase price plus any accrued but unpaid        dividends and the amount the holder would receive if such share were converted to shares of common stock. At the election of the Board of Directors, the Company may redeem shares of Preferred Stock at any time on or after January 1, 2010. The redemption price will be equal to the greater of the liquidation amount or the fair market value as of the redemption date. 

 

Each share of Preferred Stock is convertible into 200 shares of Common Stock, as adjusted for certain events. The intrinsic value of the conversion option was zero, as the fair value of the Common Stock was less than the conversion price at the commitment date. 

The Company accrues dividends on the Preferred Stock; however, the Credit Agreement contains financial and operating covenants which limit the ability to make dividend payments to the Company’s shareholders. As of March 31, 2009, the Company had accrued but unpaid dividends of $1.6 million for the Series A Preferred Stock. The accrued but unpaid dividends are included in the        redemption value of the Preferred Stock.

 

**Note 7 –** **Stockholders’ Equity**

 

***Common stock***

On March 25, 2009, the Company filed a Fourth Amended and Restated Certificate of Incorporation, which authorized 1,685,000 shares of capital stock with a par value of $0.001. Additionally, the Board of Directors issued a unanimous resolution to adopt a Fourth Amendment to the 2004 Restricted Stock Plan which increased the number of authorized shares of Class B Common Stock from 165,000        to 175,000 shares. 1,500,000 shares were designated Class A Common Stock, 10,000 were designated Preferred Stock, of which 5,100 were designated as Series A Convertible Preferred Stock, and 175,000 were designated Class B Common Stock. All issued shares of common stock are entitled to vote on a one share/one vote basis. 

 

As of March 31, 2009, 14,132 shares of Common Stock were issued and outstanding and 166,990 shares of the Class B Common Stock were outstanding. Shares of Class B Common Stock are subject to vesting as described below. Other than provisions related to vesting and a $57,000 per share liquidation preference for the Common Stock, holders of the shares of Common Stock and        Class B Common Stock 

 

13

 

 

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have identical rights and privileges. The Company’s credit facilities substantially restrict the ability to pay dividends to holders of common stock. 

***Warrants***

The holders of the Senior Subordinated Notes hold warrants to purchase 51.01 shares of Common Stock. The warrant exercise price is $10 per share, is immediately exercisable upon issuance, and expires on September 9, 2014. As a result, we discounted the face value of the Senior Subordinated Notes by $2.9 million representing the estimated fair value of the stock warrants at the        time of issuance.

 

***Restricted Stock Purchase Plan***

The Company has a 2004 Restricted Stock Purchase Plan under which certain of its employees may purchase shares of our Class B Common Stock. The maximum number of authorized shares that may be delivered pursuant to awards granted under the 2004 Restricted Stock Purchase Plan is 175,000, which equaled 10.4% of our total authorized shares of common stock. 

 

The Company’s Board of Directors administers the 2004 Restricted Stock Purchase Plan. The plan is designed to serve as an incentive to attract and retain qualified and competent employees. The per share purchase price for each share of Class B Common Stock is determined by the Company’s Board of Directors. Class B Common stock will vest based on performance criteria        or ratably over a period or periods, as provided in the related restricted stock purchase agreement.

 

As of March 31, 2009, 166,990 shares of Class B Common Stock were issued under the 2004 Restricted Stock Purchase Plan. Of this amount, (a) 57,072 of these shares were issued to our Chief Executive Officer; (b) 11,414 shares were issued to our Chief Financial Officer; and (c) 98,504 shares were issued to twelve of our executives and to two members of the Company’s Board of        Directors.

These shares are subject to forfeiture pursuant to the terms of the 2004 Restricted Stock Purchase Plan and the restrictions described hereafter. The restriction period of 33.33% of the shares issued to the majority of the Company’s executives ends upon the sale of the Company’s stock by certain of its other stockholders. The restriction period for 33.34% of the stock ends        upon the lapse of time, ratably over three to four years from the date of issue. With respect to the remaining shares, the restriction period ends upon the Company attaining certain performance measures determined by its Board of Directors.  Upon a change of control, the restriction period could end for all of the restricted shares that have not previously vested. The restricted shares are entitled to dividends, if declared, which will be distributed upon termination of the        restriction period with respect to any such restricted shares.

**Note 8 –** **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 business. We believe the ultimate disposition of these matters will not have a material effect on our financial condition, liquidity, or results of operations.

 

From time to time, inmate telecommunications providers, including the Company, are parties to judicial and regulatory complaints and proceedings initiated by inmates, consumer protection advocates or individual called parties alleging, among other things, that excessive rates are being charged with respect to inmate collect calls, that commissions paid by inmate telephone service        providers to the correctional facilities are too high, that a call was wrongfully disconnected, that security notices played during the call disrupt the call, that the billed party did not accept the collect calls for which they were billed or that rate disclosure was not provided or was inadequate. We are also on occasion the subject of regulatory complaints regarding our compliance with various matters including tariffing, access charges and payphone compensation requirements and rate        disclosure issues. In March 2007, the FCC asked for public comment on a proposal from an inmate advocacy group to impose a federal rate cap on interstate inmate calls. This proceeding could have a significant impact on the rates that we and other companies in the inmate telecommunications industry may charge. Similar proposals have been pending before the FCC for more 

 

14

 

 

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than four years without action by the agency. This newest proceeding remains under review by the FCC and has received strong opposition from the inmate telecommunications industry. In August 2008 a group of inmate telephone service providers provided the FCC with an "industry wide" cost of service study for their consideration.

 

In June 2000, T-NETIX was named, along with AT&T**,**in a lawsuit in the Superior Court of King County, Washington, in which two private citizens allege violations of state rules requiring pre-connect audible disclosure of rates as required by Washington statutes and        regulations**.** T-Netix and other defendants successfully obtained dismissal and a "primary jurisdiction" referral in 2002.  In 2005, after several years of inactivity before the Washington Utilities and Transportation Commission (“WUTC”), the state telecommunications regulatory agency, T-Netix prevailed at the trial court in securing an Order entering summary judgment on grounds of lack of standing, but that        decision was reversed by an intermediate Washington state appellate court in December 2006**.**  T-Netix’s subsequentPetition for Review by the Washington Supreme Court was denied in January 2008, entitling Plaintiffs to continue to pursue their claims against T-Netix and AT&T.  This matter was referred to the WUTC on the grounds of primary jurisdiction, in order for the WUTC to determine various regulatory issues.        On May 22, 2008, AT&T filed with the trial court a cross-claim against T-Netix seeking indemnification. T-Netix moved to dismiss AT&T’s cross-claim, but the court denied that motion and deferred resolution of whether AT&T's belated indemnification claim is within the statute of limitations for summary judgment. Because discovery has not been completed before the WUTC, we cannot estimate the Company's potential exposure or predict the outcome of this        dispute.

 

In May 2007, Global Tel*Link Corporation (“GTL”) and Verizon Business (“Verizon”) filed formal protest petitions against the Florida Department of Corrections (“FDOC”) (the “Protests”). The Protests challenged the FDOC’s intended award to us of a five-year initial term contract for the provision of statewide inmate telephone services.        More specifically, the Protests sought entry of recommended and final orders either (1) awarding the contract to the protestors or (2) rejecting all proposals. The Protests were referred to the Florida Division of Administrative Hearings (“DOAH”), and we intervened as a co-respondent with FDOC. Following a formal hearing, DOAH entered a recommended order to approve the intended contract award to us; in turn the FDOC adopted the recommendation in its final order.        GTL and Verizon appealed the final order and sought a stay to prevent entry of a formal contract between us and the FDOC during the appeal. The court denied the stay and the FDOC Contract was executed on September 25, 2007. GTL and Verizon nevertheless have continued to prosecute their appeal. On August 4, 2008, the appeals court entered an order reversing the final order entered by the FDOC on the basis of a violation of due process, finding that the FDOC Secretary who adopted the DOAH        recommended order was not impartial since he had made the initial decision to award the contract to our company and had testified in support of that decision in the formal hearings before DOAH. The case was remanded to the FDOC for further proceedings consistent with the opinion. On September 18, 2008, the FDOC issued an amended final order that also concluded that the Protests should be dismissed.  GTL and Verizon asked the FDOC to reconsider the amended final order, arguing that        the appellate court’s decision required appointment of a neutral third-party from outside the FDOC to issue the order.  The FDOC did not respond to the request for reconsideration.  On October 17, 2008, GTL and Verizon appealed of the amended final order with the state appeals court.  GTL and the Companyentered into a mutual settlement agreement and release, effective as of April 30, 2009, to fully resolve this and other miscellaneous matters. The parties are in the        process of filing the appropriate documents with the court to dismiss this matter with prejudice. The impact of the settlement on the financial statements of the Company was de minimus.

 

In July 2007, Global Tel*Link Corporation filed suit in the Circuit Court of Montgomery County against T-Netix Inc., the State of Alabama, and the Alabama Department of Finance and Alabama Department of Corrections. This proceeding relates to the protest matter Global Tel* Link filed in Alabama in May 2007, which was concluded in April 2008. We filed a motion to dismiss that was denied;        however, GTL conceded that several of its claims were not viable, and in its amended complaint included only one count, the intentional interference with business and contractual relations claim. The court agreed to postpone setting any scheduling deadlines and postponed the trial date of August 4, 2008. The court ordered the parties to mediate the case but did not specify a deadline. GTL and the Companyentered into 

 

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a mutual settlement agreement and release, effective as of April 30, 2009, to fully resolve this and other miscellaneous matters. The parties are in the process of filing the appropriate documents with the court to dismiss this matter with prejudice. The impact of the settlement on the financial statements of the Company was de minimus.

 

**Note 9 –** **Subsequent Event**

 

In May 2009, the Company entered into a settlement agreement and mutual release regarding several outstanding matters with Global Tel*Link. See Note 8 – Legal Proceedings for a discussion of each of these matters. 

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION**

 

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and related notes, our audited consolidated financial data and related notes and other financial information included elsewhere in this Form 10-Q. Certain information contained in the discussion and        analysis set forth below includes forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements.”

 

**Special Note Regarding Forward-Looking Statements**

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect, among other things, our current expectations, plans and strategies, and anticipated financial results, all of which are subject to known and unknown risks, uncertainties and factors that may cause our actual results to differ        materially from those expressed or implied by these forward-looking statements. Many of these risks are beyond our ability to control or predict. Any statements contained in this quarterly report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. The words “anticipates,” “believes,” “expects,” “intends,” “seeks to,”        “plans,” “estimates,” “targets,” “projects,” “should,” “may,” “will” and similar words and expressions are intended to identify forward-looking statements. All forward-looking statements are based on information available to the Company on the date hereof, and investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that        could cause actual results to differ materially from our expectations, and we expressly do not undertake any duty to update forward-looking statements. These factors include, but are not limited to: (i) competition in our industry and in the telecommunications industry generally; (ii) our substantial amount of debt; (iii) our accumulated deficits; (iv) our financial results being dependent on the success of our billing and bad debt management systems; (v) loss        of major partners or customers and recent trends in the inmate telecommunications industry and the risks of government contracts; (vi) protection of our proprietary technology and ensuring that we do not infringe on the proprietary technology of other companies; (vii) our ability to adapt new technologies and respond effectively to customer requirements or provide new products and services; (viii) control by our equity investors; (ix) our ability to adapt to changes        in state and federal regulations that apply to the inmate telecommunications industry; (x) extensive government legislation and regulations; and (xi) other factors detailed from time to time in our filings with the SEC.

 

**Overview**

 

We are one of the largest independent providers of inmate telecommunications and software solutions services to correctional facilities operated by city, county, state and federal authorities and other types of confinement facilities such as juvenile detention centers, private jails and halfway houses in the United States and Canada. As of March 31, 2009, we provided service to        approximately 2,400 correctional facilities.

 

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Our core business consists of installing, operating, servicing and maintaining sophisticated call processing systems in correctional facilities and providing related services. We enter into multi-year agreements (generally three to five years) directly with the correctional facilities in which we serve as the exclusive provider of telecommunications services to inmates. In exchange for        the exclusive service rights, we pay a negotiated commission to the correctional facility based upon revenues generated by actual inmate telephone use. In addition, on larger contracts we may partner with other telecommunications companies in which we provide our equipment and, as needed, back office support including validation, billing and collections services, and charge a fee for such services. Based on the particular needs of the corrections industry and the requirements of the        individual correctional facility, we also sell platforms and specialized equipment and services such as law enforcement management systems, call activity reporting and call blocking.

 

We also provide a sophisticated and comprehensive software system for correctional facilities and law enforcement agencies for complete offender management. Our system provides correctional facilities with the ability to manage and monitor inmate parole and probation activity and development at a sophisticated level.

 

**Revenues**

 

We derived approximately 87% and 86% of our revenues for the three months ended March 31, 2008 and 2009, respectively, from our direct operation of inmate telecommunication systems and the provision of related services located in correctional facilities within 44 states, including the District of Columbia. We enter into multi-year agreements under direct, or “prime”        contracts with the correctional facilities, pursuant to which we serve as the exclusive provider of telecommunications services to inmates within each facility. In exchange for the exclusive service rights, we pay a commission to the correctional facility based upon inmate telephone use. Our commission rates averaged approximately 44% and 43% for the three months ended March 31, 2008 and 2009, respectively. We install and generally retain ownership of the telephones and the        associated equipment and provide additional services tailored to the specialized needs of the corrections industry and to the requirements of each individual correctional facility, such as call activity recording and call blocking. In our direct call provisioning business, we earn the full retail value of the call and pay corresponding line charges and commissions. As a result, our direct call provisioning business gross profit dollars are higher, but our gross profit percentage is        lower than in our wholesale services business.

 

We derived approximately 4% and 6% of our revenues from our offender management software business for the three months ended March 31, 2008 and 2009, respectively. Offender management systems are platforms that allow facilities managers and law enforcement personnel to analyze data to reduce costs, prevent and solve crimes and facilitate rehabilitation through a single user interface.        Revenue related to the Offender Management software is recognized under Statement of Position 97-2, *Software Revenue Recognition*, as amended. Revenue is recognized using the residual method when the fair value of vendor specific objective evidence (“VSOE”) of the undelivered element is determined. If the VSOE of fair value cannot be determined for any undelivered element or any undelivered element is essential to the        functionality of the delivered element, revenue is deferred until such criteria are met or recognized as the last element is delivered. Under the residual method, the fair value of the undelivered elements is deferred and the difference between the total arrangement fee and the amount recorded as deferred revenue for the undelivered elements is recognized as revenue related to the delivered elements. We believe that we have the most functionally complete offender management system        available on the market. Our offender management software business complements our direct call provisioning business.

 

We derived approximately 9% and 7% of our revenues for the three months ended March 31, 2008 and 2009, respectively, from the wholesale services business. We derive this revenue through (1) validation, uncollectible account management and billing services (solutions services),(2) providing equipment, security enhanced call processing, call validation and service and support through the        primary inmate telecommunications providers (telecommunications services), and (3) the sale of equipment to other telecommunications companies as customers or service partners. 

 

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In the solutions business, accounts receivable generated from calls placed by inmates in correctional facilities are typically purchased from the third party inmate telecommunication providers and we accept responsibility for call validation, uncollectible accounts, and billing and collections costs. However, all purchased receivables must be processed and validated through our risk        management system prior to allowing the call to be completed and also must be billed through our proprietary billing systems. Revenues from our solutions services equal the difference between the face value of the receivables purchased and the amount we pay our solutions partners for the discounted accounts receivable. Because revenues associated with our solutions business represent only a percentage of the face value of the receivables purchased, the associated billing and collection        fees and uncollectible account expense represent a much higher percentage of revenues as compared to our direct call provisioning business. In the solutions business, we do not bear any of the costs of facility commissions, equipment, line charges or direct sales charges, but bear the risk of unbillable and uncollectible accounts receivable. 

 

In the telecommunications business within wholesale services we provide equipment, security enhanced call processing, call validation, and service and support through the telecommunications providers, rather than directly to the facility. Although our revenues for services to telecommunications service providers are lower than in our direct call provisioning business, where we provide        the service to the facility directly and receive the retail value of the call, we do not incur all the additional capital costs related to these larger contracts that can require up-front or guaranteed commission payments. Our gross margin percentage for providing telecommunications services is higher than the margin for our direct call provisioning business because we do not incur commissions, transport costs or risk of collection. We also sell equipment, typically consisting of our        inmate calling system, to a limited number of telecommunication services providers.

 

In our direct call provisioning and solutions businesses, we accumulate call activity data from our various installations and bill our revenues related to this call activity against prepaid customer accounts or through direct billing agreements with LEC billing agents, or in some cases through billing aggregators. We receive payment on a prepaid basis for the majority of our call        provisioning and record deferred revenue until the prepaid balances are used. In each case, we recognize revenue when the calls are completed and record the related telecommunication costs for validating, transmitting, billing and collection, bad debt, and line and long-distance charges, along with commissions payable to the facilities. In our telecommunications services business, our service partner bills the called party and we either share the revenues with our service partner or        receive a prescribed fee for each call completed. We also charge fees for additional services such as customer support and advanced validation. 

 

**Cost of Service**

 

Our principal cost of service for our direct call provisioning business consists of commissions paid to correctional facilities, which are typically expressed as a percentage of either gross or net direct call provisioning revenues and are typically fixed for the term of the agreements with the facilities. Our cost of service for direct call provisioning also includes (1) bad debt        expense, consisting of unbillable and uncollectible accounts; (2) billing and collection charges; (3) telecommunication costs such as telephone line access, long distance and other charges; and (4) field operations and maintenance costs for service on our installed base of inmate telephones. We pay monthly line and usage charges to RBOCs and other LECs for interconnection to the local network for local calls, which are computed on a flat monthly charge plus, for certain LECs, a per        message or per minute usage rate based on the time and duration of the call. We also pay fees to RBOCs and other LECs and long distance carriers based on usage for long distance calls. Third-party billing charges consist of payments to LECs and other billing service providers for billing and collecting revenues from called parties. 

 

Cost of service associated with our offender management software business primarily includes salaries and related costs of employees and contractors who provide technological services to develop, customize or enhance the software for our clients.

 

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Cost of service for our wholesale service business includes billing and collection, call validation, bad debt expense and service costs for correctional facilities, including salaries and related personnel expenses, inmate calling systems repair and maintenance expenses, and the cost of equipment sold to service partners. 

 

*Facility Commissions*. In our direct call provisioning business, we pay a facility commission typically based on a percentage of our billed revenues from such facility. Commissions are set at the beginning of each facility contract.

 

*Bad Debt*. We account for bad debt as a direct cost of providing telecommunications services. We accrue the related telecommunications cost charges along with an allowance for unbillable and uncollectible calls, based on historical experience. Charges for inmate telephone calls on a collect basis are considered unbillable in cases when there is no billing        address for the telephone number called or uncollectible when the billed party is unable or unwilling to pay for the call. We use a proprietary, specialized billing and bad-debt management system to integrate our billing with our call blocking, validation, and customer inquiry procedures. We seek to manage our higher risk revenues by proactively requiring certain billed parties to prepay collect calls or be directly billed by us. This system utilizes multi-variable algorithms to        minimize bad debt expense by adjusting our credit policies and billing. For example, when unemployment rates are high, we may decrease credit to less creditworthy-billed parties or require them to purchase prepaid calling time in order to receive inmate calls. Bad debt tends to rise as the economy worsens, and is subject to numerous factors, some of which may not be known. To the extent our bad debt management system overcompensates for bad debt exposure by limiting credit to billed        parties, our revenues and profitability may decline as fewer calls are permitted to be made. We expect that as a result of the current economic recession in the U.S., that either our revenues from marginal billed parties will decline or our bad debt expense will rise or a combination of both will occur. We have tightened our credit policy to reduce our risk of loss from bad debts. Consequently, billed minutes, revenues and operating income were negatively impacted in the latter part of        2008 and the first quarter of 2009. We expect this trend to continue through most of 2009 or until the economy recovers. 

 

*Field Operations and Maintenance Costs*. Field operations and maintenance costs consist of service administration costs for correctional facilities. These costs include salaries and related personnel expenses, communication costs, and inmate calling systems repair and maintenance expenses.

 

**Selling, General & Administrative Expenses**

 

SG&A consist of corporate overhead and selling expenses, including customer service, marketing, accounting, legal, regulatory, and research and development costs. Customer service costs consist of both in-house and outsourced customer service representatives who handle questions and concerns and take payments from billed parties.

 

**Industry Trends**

 

The corrections industry, which includes the inmate calling and offender management software markets, is and can be expected to remain highly competitive.  We compete directly with numerous other suppliers of inmate call processing systems and other corrections-related products (including our own wholesale service provider customers) that market their products to our same        customer base. We provide our wholesale products and services to inmate telecommunications service providers, such as Global Tel*Link, Embarq, AT&T, and FSH Communications. For the three months ended March 31, 2008 and 2009, respectively, 9% and 7% of our total revenues were generated from contracts with wholesale service providers. 

 

Contracts to service the facilities are subject to competitive bidding, and as we seek to secure inmate telecommunications contracts with larger county and state departments of corrections, we may be required to provide multi-million dollars in up front payments, surety bonds or guaranteed commissions, as well as incur the cost of equipment and similar costs. To successfully compete for        large county and state departments of corrections contracts without committing significant capital resources, we may seek to partner with other inmate telecommunications service providers. In 2008, we entered into a wholesale 

 

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services partnering arrangement with Embarq. Through this arrangement, we are installing and will operate and maintain a telecommunications network for the Texas Department of Criminal Justice, one of the largest state prison systems in the country, and expect to recognize up to $100 million in wholesale services revenues over the life of this 7- year contract with a potential 4 additional option years. We        may continue to bid on other large county and state department of corrections contracts with Embarq or other carriers.

 

Our offender management software business is being particularly impacted by the current economic downturn as government budgets have been negatively impacted. Corrections agencies are increasing the amount of time they take to evaluate proposals, process contracts and change orders, and in some cases are deferring or cancelling orders for the purchase of technology solutions. Agencies        are being extremely careful as all purchases are under increased scrutiny and require additional steps before approval.  It appears that the U.S. federal government economic stimulus programs may provide some relief domestically, but it is unclear how and when these funds will find their way to individual agencies. The global nature of the downturn is having much of the same impact overseas as in the domestic market.

 

**Results of Operations**

 

The following table sets forth, for the three months ended March 31, 2008 and 2009, our results of operations (in thousands).

 

|                                                        | **For the Three Months Ended** |            |    |    |            |   |   |
|-------------------------------------------------------------|--------------------------------|-----------------|---------|---------|-----------------|--------|--------|
|                                                        |                           | **March 31,**   |    |    | **March 31,**   |   |   |   |   | **%** |   |
|                                                        |                           | **2008**        |    |    | **2009**        |   |   | **Variance** |   | **Change** |   |
|                                                        |                           | **(Unaudited)** |    |    | **(Unaudited)** |   |   |   |   |   |   |   |
| Revenue:                                                    |                           |            |    |    |            |   |   |   |   |   |   |   |   |   |
| Direct call provisioning                                    |                           | $               | 84,898  |    |            | $      | 82,917 |   |   | $ | (1,981 | ) | (2.3 | )% |
| Offender management software                                |                           |            | 4,190   |    |            |   | 6,215  |   |   |   | 2,025 |   | 48.3 |   |
| Wholesale services                                          |                           |            | 8,585   |    |            |   | 7,088  |   |   |   | (1,497 | ) | (17.4 | ) |
|         Total revenue    |                           |            | 97,673  |    |            |   | 96,220 |   |   |   | (1,453 | ) | (1.5) |   |
| Expenses:                                                   |                           |            |    |    |            |   |   |   |   |   |   |   |   |   |
| Cost of service                                             |                           |            | 69,371  |    |            |   | 66,345 |   |   |   | (3,026 | ) | (4.4 | ) |
| Selling, general and administrative                         |                           |            | 19,841  |    |            |   | 16,735 |   |   |   | (3,106 | ) | (15.7 | ) |
| Restructuring costs                                         |                           |            | 224     |    |            |   | -      |   |   |   | (224 | ) | - |   |
| Depreciation and amortization                               |                           |            | 8,598   |    |            |   | 7,939  |   |   |   | (659 | ) | (7.7 | ) |
| Total operating costs and expenses                          |                           |            | 98,034  |    |            |   | 91,019 |   |   |   | (7,015 | ) | (7.2 | ) |
| Operating income (loss)                                     |                           |            | (361    | )  |            |   | 5,201  |   |   |   | 5,562 |   | 100.0 |   |
| Interest and other expenses, net                            |                           |            | 10,185  |    |            |   | 10,611 |   |   |   | 426 |   | 4.2 |   |
| Loss before income taxes                                    |                           |            | (10,546 | )       |            |   | (5,410 | ) |   |   | 5,136 |   | 48.7 |   |
| Income tax expense (benefit)                                |                           |            | (599    | )       |            |   | 36     |   |   |   | 635 |   | 100.0 |   |
| Net Loss                                                    |                           |            | (9,947  | )       |            |   | (5,446 | ) |   |   | 4,501 |   | 45.2 |   |
| Accrued dividends on redeemable convertible preferred stock |                           |            | (348    | )       |            |   | (334   | ) |   |   | 14 |   | 4.0 |   |
| Net Loss available to common stockholders                   |                           | $               | (10,295 | )       |            | $      | (5,780 | ) |   | $ | 4,515 |   | 43.9 | % |

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH** **31, 2009 COMPARED TO THE THREE MONTHS ENDED MARCH** **31, 2008**

 

***Revenues***.  Compared to the first quarter of the prior year, consolidated revenues decreased $1.5 million or 1.5% to $96.2 million. The primary components of the decrease in revenues are discussed below:

 

Direct call provisioning revenues decreased $2.0 million, or 2.3%, to $82.9 million resulting primarily from lower call volumes due to the economic recession and other factors, combined with a mix change between higher priced long distance calling and lower priced local calling, partially offset by approximately $0.5 million in revenues from net contracts won. It is likely we will        continue to see a reduction in direct 

 

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call provisioning revenues over the remainder of 2009 because of the economic recession and continued tightening of our credit policies. Additionally, we will continue to seek to improve our margins by only bidding for new and renewal state and county contracts that meet our profitability requirements, which could result in a short-term reduction of revenues if we are unable to renew contracts at our minimum        profitability requirements. Historically in our direct call provisioning business, the first quarter of the year is the best seasonal quarter for revenue. 

 

Offender management software revenues increased $2.0 million, or 48.3%, to $6.2 million related to the implementation services performed for Her Majesty’s Prison Service in 2009, while we were ramping up for services during the first quarter of 2008. Additionally, in connection with the Syscon acquisition, we valued Syscon’s existing customer contracts and related deferred        revenues at fair value and amortized this cost against revenues, which reduced the amount of revenue and profit we recognized in the first quarter of 2008 by $0.8 million. These contracts were substantially completely amortized by the end of 2008, allowing us to fully recognize revenue and operating profits starting in the first quarter of 2009. The majority of our offender management revenues are currently associated with the ongoing implementation of our software for Her        Majesty’s Prison Service in the United Kingdom, through a sub-contracting agreement with Electronic Data Systems, Inc. The implementation phase of this contract is expected to be complete during the second quarter of 2009, and we currently are seeking to generate revenues from new contracts in the United States and extend our work in the United Kingdom and Australia.

 

Wholesale services revenues decreased by $1.5 million, or 17.4%, due to the ongoing trend of our wholesale partners, who also compete directly with us, terminating our services as their underlying facility contracts expire, partially offset by $0.7 million in revenues related to the installation and project management services associated with the Texas Department of Criminal Justice        (TDCJ) contract.  We expect wholesale services revenues to decline in 2009 as certain wholesale contracts continue to expire.  In addition, we now believe that revenues related to the TDCJ contract will be approximately $4 to $5 million in 2009, or $3 to $4 million lower than previously expected, as a result of delays caused by the lengthy enrollment process required by TDCJ. Although we are not responsible for the friends and family enrollment process, we are proactively        working with both Embarq, our wholesale partner, and TDCJ in developing a more efficient enrollment process. 

 

***Cost of Service**.*Compared to the first quarter of the prior year, cost of service decreased $3.0 million, or 4.4%, to $66.3 million. The decrease was due primarily to the implementation of cost reduction initiatives during 2008 that decreased our direct costs as a percentage of revenues combined with lower revenues in the        direct call provisioning and wholesale services segments, offset by higher revenues and related costs for the offender management software segment. A comparison of the components of our business segment gross margins is provided below:

|                         |   | **For The Three Months**     |   | **For The Three Months** |   |
|------------------------------|--------|------------------------------|--------|--------------------------|--------|
|                         |   | **Ended March** **31,** |   | **Ended March 31,**      |   |
| **(Dollars in thousands)**   |   | **2008**                     |   | **2009**                 |   |
|                         |   | **(Unaudited)**              |   | **(Unaudited)**          |   |
| Direct call provisioning     |   |                         |   |                     |   |   |   |   |   |   |   |   |   |
| Revenue                      |   | $                            | 84,898 |                     |   |   |   | $ | 82,917 |   |   |   |   |
| Cost of service              |   |                         | 62,422 |                     | 73.5   | % |   |   | 59,669 |   | 72.0 | % |   |
| Segment gross margin         |   | $                            | 22,476 |                     | 26.5   | % |   | $ | 23,248 |   | 28.0 | % |   |
| Offender management software |   |                         |   |                     |   |   |   |   |   |   |   |   |   |
| Revenue                      |   | $                            | 4,190  |                     |   |   |   | $ | 6,215 |   |   |   |   |
| Cost of service              |   |                         | 2,665  |                     | 63.6   | % |   |   | 2,906 |   | 46.8 | % |   |
| Segment gross margin         |   | $                            | 1,525  |                     | 36.4   | % |   | $ | 3,309 |   | 53.2 | % |   |
| Wholesale services           |   |                         |   |                     |   |   |   |   |   |   |   |   |   |
| Revenue                      |   | $                            | 8,585  |                     |   |   |   | $ | 7,088 |   |   |   |   |
| Cost of service              |   |                         | 4,284  |                     | 49.9   | % |   |   | 3,770 |   | 53.2 | % |   |
| Segment gross margin         |   | $                            | 4,301  |                     | 50.1   | % |   | $ | 3,318 |   | 46.8 | % |   |

  

 

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Cost of service in our direct call provisioning segment decreased as a percentage of revenue to 72.0% from 73.5% due to lower commissions, network costs and field service expenses due to cost efficiencies and other profitability initiatives implemented during 2008, partially offset by higher billing and collection expenses. Field service expenses declined $1.3 million year over year due        to efficiencies gained from the installation of our packet-based architecture, and we expect to leverage further cost efficiencies in 2009 through other initiatives that we believe will reduce our cost structure and improve our gross margin. Bad debt expense remained consistent with the prior year as a percentage of revenues even with the economic recession as we were able to shift additional customers to our prepaid products during the quarter. Historically, our bad debt has been        highly correlated to unemployment rates; however, we have developed statistical methods to identify high risk customers who we require to prepay for services. During the three months ended March 31, 2008 approximately 45% of our direct provisioning revenues were prepaid, while 54% of our direct provisioning revenues were prepaid for the same period in 2009. With the current economic recession and high unemployment rates, it is possible that bad debt results could deteriorate. Because        our bad debt visibility is delayed by six to nine months, on average, risk exists that we will incur future write-offs and that our bad debt will increase. 

 

Cost of service in our offender management software segment as a percentage of revenue decreased to 46.8 % from 63.6% mainly because the value of acquired customer contracts was substantially completely amortized by the end of 2008. Approximately $0.8 million of amortization was recorded against revenue in the first quarter of 2008 that negatively impacted the gross margin in this        segment. Cost of service for the offender software segment primarily represents salaries and related costs of employees and contractors who provide technological services to develop, customize or enhance the software for our clients. 

 

Cost of service in our wholesale services segment as a percentage of revenue increased to 53.2% from 49.9% resulting from lower margins for project management and installation labor revenues associated with the Texas Department of Criminal Justice (“TDCJ”) contract. Margins in this segment should improve during the second quarter of 2009 when we begin to generate equipment        and billing and collection revenues from this project. Cost of service associated with traditional solutions services is primarily comprised of bad debt expense. During the first quarter of 2009, bad debt expense decreased from the same period in 2008 due to an increase in the proportion of call revenues that were prepaid, as discussed above. However, a rise in unemployment rates could cause a significant erosion of wholesale profitability should bad debt results deteriorate.          

 

***SG&A**.*SG&A expenses of $16.7 million were $3.1 million, or 15.7%, lower than the prior year quarter. The decrease is partially due to a settlement of an intellectual property dispute during the first quarter of 2009, which was recorded against SG&A costs as we have incurred legal and other professional service        fees related to the settlement in SG&A. Additionally, the first quarter of 2009 benefited by over $2.0 million from lower legal fees and expense management initiatives implemented during the second half of 2008. We expect these initiatives to continue to decrease our SG&A expenses through the remainder of 2009. 

 

***Restructuring Costs.***Restructuring charges of $0.2 million were incurred during the first quarter of 2008 related to the realignment of our field service organization because of efficiencies gained from our new packet-based architecture, which we began to install in 2006 and will continue to install as customer contracts are renewed.

 

***Depreciation and Amortization Expenses**.*Depreciation and amortization expenses of $7.9 million were $0.7 million, or 7.7%, lower than the prior year quarter resulting from assets that became fully depreciated or amortized. 

 

***Interest and Other Expenses, net**.*Interest and other expenses were $10.2 million and $10.6 million for the three months ended March 31, 2008 and 2009, respectively. The 4.2% increase relates primarily to the increasing principal on the Senior Subordinated notes due to interest being paid-in-kind. Partially offsetting        this increase was a $0.6 million decrease in foreign exchange transaction losses from the prior year quarter.

 

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***Income Tax Expense (Benefit)**.*Income tax benefit for the three months ended March 31, 2008 was $0.6 million compared to an income tax expense of $36,000 for the three months ended March 31, 2009. Tax expense was insignificant due to the benefit being offset by changes in valuation allowances included in our deferred tax        balances. 

 

***Accrued Dividends on Redeemable Convertible Preferred Stock.***Dividends accrue on the Series A Redeemable Convertible Preferred Stock issued in December 2007. Each share of the preferred stock has a stated value of $2,000 and accrues dividends annually at 12.5% of the stated value. For the three months ended March 31, 2008 and 2009, the Company had        accrued dividends of $0.3 million for the Series A Preferred Stock. 

 

**Liquidity and Capital Resources**

 

The Company’s principal liquidity requirements are to service and repay our debt and meet our capital expenditure and operating needs. We are significantly leveraged. As of March 31, 2009, we had $298.9 million in total debt outstanding before considering $2.2 million of original issue discount on our Second-Priority Senior Secured Notes and $2.2 million of fair value        attributable to warrants issued in connection with our Senior Subordinated debt financing, both of which are reflected as discounts to outstanding long-term debt in our condensed consolidated financial statements (see additional information on our long and short term debt under "Debt and Other Obligations" below). As of March 31, 2009, we had unused capacity of $11.1 million under our working capital facility and a total stockholders’ deficit of $135.1        million. 

 

Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future, which to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current and expected level of operations, we believe our        cash flow from operations, available cash and available borrowings under our $30.0 million revolving credit facility will be adequate to make required capital expenditures, service our indebtedness and meet our other working capital needs for at least twelve months from our balance sheet dated March 31, 2009. We cannot assure you, however, that our available sources of cash will be sufficient to enable us to make        such capital expenditures, service our indebtedness or to fund our other working capital needs. Further, in the event we wish to make additional acquisitions, we may need to seek additional financing. 

 

**Cash Flows**

 

Our cash flow from operations is primarily attributable to the operations of our direct call provisioning business which represents 86% of our revenues for the three months ended March 31, 2009. The level of our cash flow depends on multiple factors, including contract renewals and new business as well as growth in inmate populations. Our net cash provided by (used in) operating        activities is also affected by the level of our operating and other expenses.

 

|   | The following table provides cash flow data for the three months ended March 31, 2008 and 2009:  |
|--------|-------------------------------------------------------------------------------------------------------|

|                                                |   | **For The Three Months Ended** |          |
|-----------------------------------------------------|--------|--------------------------------|---------------|
| **(Dollars in thousands)**                          |   |                           | **March 31,** |   |   |   | **March 31,** |   |
|                                                |   |                           | **2008**      |   |   |   | **2009** |   |
|                                                |   | **(Unaudited)**                |          |
| Net cash provided by (used in) operating activities |   | $                              | (6,374        | ) |   | $ | 2,787 |   |
| Net cash used in investing activities               |   | $                              | (4,073        | ) |   | $ | (2,672 | ) |
| Net cash provided by financing activities           |   | $                              | 9,238         |   |   | $ | 878 |   |

 

 

23

 

 

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**Cash Flows for the Three Months Ended March** **31, 2009 Compared to the Three Months Ended March** **31, 2008**

 

Net cash provided by operating activities for the three months ended March 31, 2009 consisted primarily of $13.1 million of operating income before considering non-cash expenses, such as $7.9 million of depreciation and amortization, and $0.8 million of working capital benefit, offset by $11.1 million of cash paid for interest. Net cash used in operating activities        for the three months ended March 31, 2008 consisted primarily of $8.2 million of operating income before considering non-cash expenses, such as $8.6 million of depreciation and amortization, offset by $10.8 million for cash paid for interest expense and $3.8 million of working capital use. The working capital fluctuations were due to lower receivables since a higher proportion of our call services were prepaid, along with short-term month-end timing of certain normal        operating receipts and disbursements.

 

Cash used in investing activities was $4.1 million and $2.7 million for the three months ended March 31, 2008 and 2009, respectively. The $2.7 million was utilized primarily for investments in equipment and intangibles to maintain and grow the direct call provisioning business and for the implementation of the TDCJ contract. The decline in spending from 2008 was        principally due to the timing of equipment installations at customer sites and a decline in signing bonuses offered on newly acquired or renewed contracts. 

 

Cash provided by financing activities was $9.2 million and $0.9 million for the three months ended March 31, 2008 and 2009, respectively. The $0.9 million primarily relates to $2.4 million in net draws on the Company's revolving credit facility for short term operational needs offset by a reduction in outstanding checks. As of May 12, 2009, there were $18.9 million of        borrowings under the revolving credit facility.

 

**Debt and other Obligations**

 

*Revolving Credit Facility*— On September 30, 2008, we and certain of our subsidiaries entered into a senior credit agreement with a lending institution and the other lenders party thereto (the “Credit Agreement”) to refinance our existing revolving credit facility. The Credit Agreement provides us with a $10 million letter of credit facility        and a revolving facility of up to the lesser of (i) $30 million and (ii) 125% of consolidated EBITDA (as defined in the Credit Agreement) for the preceding 12 months less the face amount of outstanding letters of credit. The Credit Agreement expires on June 9, 2011. Advances bear interest at an annual rate of our option equal to one of the following: (a) LIBOR plus 4.0%, or (b) a rate equal to the Base Rate plus 3.0%. The Base Rate is the greater of (i) 5%, (ii) the Federal Funds rate        plus 0.5%, or (iii) the prime rate (as defined in the Credit Agreement), which was 3.25% as of March 31, 2009. Interest is payable in arrears on the first day of each month. The unused availability under the Credit Agreement is subject to a fee based on a per annum rate of 0.375% due monthly.Borrowings under the Credit Agreement are secured by a first lien on substantially all of our and certain of our        subsidiaries’ assets. We draws from the available credit under the Credit Agreement to cover normal business cash requirements. As of December 31, 2008 and March 31, 2009, we had $13.5 million and $11.1 million, respectively, of borrowing availability under the Credit Agreement.

 

*Second-priority Senior Secured Notes*— We have $194.0 million of the 11% Second-priority Senior Secured Notes outstanding. These notes were issued at a discount of $4.5 million, or 97.651% of face value. The Senior Secured Notes are secured by a second lien on substantially all of our and certain of the subsidiaries’ assets other than        accounts receivable, inventory and real property.

 

All $194.0 million of principal is due September 9, 2011. To the extent we generate excess cash flow (as defined in the indenture) in any calendar year, we are required by the Senior Secured Notes to offer to repay principal equal to 75% of such excess cash flow at a rate of 102.750% of face value in 2009.  No excess cash flow payment was due for the three months ended        March 31, 2009, because the Excess Cash Flow Amount (as defined in the Indenture) greater than $5.0 million was not generated. In the event we determine that the Excess Cash Flow Amount is likely to exceed $5.0 million in 2009, we may purchase Senior Secured Notes in the open market, by negotiated private transactions or otherwise, to reduce the aggregate Excess Cash Flow Amount to less than $5.0 million. We and our affiliates may from time to time 

 

24

 

 

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seek to retire or purchase our outstanding debt, including the Notes, through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Interest is payable semiannually        on March 1 and September 1. The effective interest rate is 11.3% on the Second-priority Senior Secured Notes.

 

The fair values associated with our Senior Secured Notes were quoted as of March 31, 2009, at a trading price of $60.00 and $67.75, an 11.3% and 3.3% increase from the quoted value at December 31, 2008. We believe the increase in value is a result of a more positive debt market, the Company’s positive results reported as of December 31, 2008, and additional trading volume.        

 

*Senior Subordinated Notes*— We have outstanding $86.0 million of Senior Subordinated Notes unsecured and subordinate to the revolving credit facility, that bear interest at an annual rate of 17%. Interest is payable at the end of each calendar quarter, or, as restricted by our revolving credit facility, is paid-in-kind by adding accrued interest to        the principal balance of the Senior Subordinated Notes. All outstanding principal, including interest paid-in-kind, is due on September 9, 2014 and a mandatory prepayment equal to $20.0 million plus 50% of all outstanding interest paid-in-kind is due on September 9, 2013. In connection with the issuance of the Senior Subordinated Notes, we issued warrants to acquire 51 shares of its common stock at an exercise price of $10 per share to the Senior Subordinated Noteholders.        As a result, we discounted the face value of the Senior Subordinated Notes by $2.9 million representing the estimated fair value of the warrants at the time of issuance. For the three months ended March 31, 2009, $3.5 million of paid-in-kind interest was added to the principal balance of the Senior Subordinated Notes. The effective interest rate is 18.58% on the Senior Subordinated Notes. 

 

All of our domestic subsidiaries and certain of our foreign subsidiaries (the “Subsidiary Guarantors”) are jointly and severably liable for the working capital facility, Senior Subordinated Notes and Second-priority Senior Secured Notes. The Subsidiary Guarantors are wholly-owned. We have not included separate financial statements of our subsidiaries because (a)        our aggregate assets, liabilities, earnings and equity are presented on a consolidated basis, and (b) we believe that separate financial statements and other disclosures concerning subsidiaries are not material to investors.

 

Our credit facilities contain financial and operating covenants that require the maintenance of certain financial ratios, including specified fixed interest coverage ratios, maintenance of minimum levels of operating cash flows and maximum capital expenditure limitations. These covenants also limit our ability to incur additional indebtedness, make certain payments including dividends to        shareholders, invest and divest company assets, and sell or otherwise dispose of capital stock. In the event that we fail to comply with the covenants and restrictions, as specified in the credit agreements, we may be in default, at which time payment of the long term debt and unpaid interest may be accelerated and become immediately due and payable. As of December 31, 2008 and March 31, 2009, the Company was in compliance with its debt covenants.

 

***Other Long-Term Liabilities**.*Other long-term liabilities represent approximately $2.2 million of tenant improvement concessions pertaining to the lease of our primary facility that will be amortized over the life of the lease as prescribed by SFAS No. 13 and FASB Technical Bulletin 88-1. The Company recorded amortization        totaling $69,000 for these improvement concessions during the quarter ended March 31, 2008.

 

25

 

 

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**Capital Requirements**

 

As of March 31, 2009, our contractual cash obligations and commitments on an aggregate basis were as follows: 

|                                                 | **For the twelve months ending March 31,** |   |   |
|------------------------------------------------------|--------------------------------------------|--------|--------|
|                                                 | **2010**                                   |   |   | **2011** |   |   | **2012** |   |   | **2013** |   |   | **2014** |   |   | **Thereafter** |   |   |
| Long-term debt (1)                                   | $                                          | -      |   |   | $ | - |   |   | $ | 212,939 |   |   | $ | -    |   |   | $ | 42,996 |   |   | $ | 42,996 |   |   |
| Unrecognized tax benefits                            |                                       | -      |   |   |   | - |   |   |   | - |   |   |   | -    |   |   |   | - |   |   |   | 587 |   |   |
| Operating leases                                     |                                       | 3,152  |   |   |   | 2,641 |   |   |   | 2,152 |   |   |   | 1,925 |   |   |   | 1,765 |   |   |   | 1,798 |   |   |
| Minimum commission 

payments                        |                                       | 5,538  |   |   |   | 2,028 |   |   |   | 399 |   |   |   | 258 |   |   |   | 57 |   |   |   | - |   |   |
| Minimum purchase 

guarantees                        |                                       | 2,972  |   |   |   | 1,692 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |
| Total contractual cash 

obligations and commitments | $                                          | 11,662 |   |   | $ | 6,361 |   |   | $ | 215,490 |   |   | $ | 2,183 |   |   | $ | 44,818 |   |   | $ | 45,381 |   |   |

 

| (1) | Does not include any amounts that may be drawn under our working capital facility, which expires on June 9, 2011, or accrued interest under our long-term debt. Assumes no repurchases of second-priority senior secured notes or senior subordinated notes during such periods whether or not mandatory. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Critical Accounting Policies**

 

A “critical accounting policy” is one that is both important to the portrayal of a company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our financial statements prepared in accordance with        generally accepted accounting principles in the United States, or GAAP. The process of preparing financial statements in conformity with GAAP requires us to use estimates and assumptions to determine certain of our assets, liabilities, revenues and expenses. We base these determinations upon the best information available to us during the period in which we are accounting for our results. Our estimates and assumptions could change materially as conditions within and beyond our control        change or as further information becomes available. Further, these estimates and assumptions are affected by management’s application of accounting policies. Changes in our estimates are recorded in the period the change occurs. Our critical accounting policies include, among others:

 

| **•** | revenue recognition and bad debt reserve estimates; |
|------------|-----------------------------------------------------|
|       |                                                |
| **•** | goodwill and other intangible assets;               |
|       |                                                |
| **•** | accounting for income taxes; and               |
|       |                                                |
| **•** | acquisition-related assets and liabilities.         |

 

The following is a discussion of our critical accounting policies and the related management estimates and assumptions necessary for determining the value of related assets or liabilities.

 

***Revenue Recognition and Bad Debt Reserve Estimates***

 

Revenues related to collect and prepaid calling services generated by the direct call provisioning segment are recognized during the period in which the calls are made. In addition, during the same period, we accrue the related telecommunication costs for validating, transmitting, billing and collection, and line and long distance charges, along with commissions payable to the facilities        and allowances for unbillable and uncollectible calls, based on historical experience.

 

Revenues related to the wholesale services segments are recognized in the period in which the calls are processed through the billing system, or when equipment and software is sold. During the same period, we 

 

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accrue the related telecommunications costs for validating, transmitting, and billing and collection costs, along with allowances for unbillable and uncollectible calls, as applicable, based on historical experience.

 

We apply Emerging Issues Task Force (“EITF”) Issue No. 99-19, *Reporting Revenue Gross as a Principal versus net as an Agent.*Based on this consensus, all call revenues related to the wholesale services segment are presented in the statement of operations at the net amount. For records processed through our billing        system, this is the amount charged to the end user customer less the amount paid to the inmate telecommunication provider.

 

Revenues related to the Offender Management software is recognized under Statement of Position 97-2, *Software Revenue Recognition*, as amended. Revenue is recognized using the residual method when the fair value of vendor specific objective evidence (“VSOE”) of the undelivered element is determined. If the VSOE of fair value        cannot be determined for any undelivered element or any undelivered element is essential to the functionality of the delivered element, revenue is deferred until such criteria are met or recognized as the last element is delivered. Under the residual method, the fair value of the undelivered elements is deferred and the difference between the total arrangement fee and the amount recorded as deferred revenue for the undelivered elements is recognized as revenue related to the delivered        elements.

 

Services related to the implementation, customization, and modification of software are not separable and are essential to the functionality for the customer. Accordingly, we account for the combined upfront software license fee and customization revenue under contract accounting, recognizing revenue and related costs using the percentage-of-completion method in accordance with AICPA        Statement of Position 81-1, *Accounting for Performance of Construction-Type and Certain Production-Type Contracts*. The percentage of completion is calculated using hours incurred to date compared to total estimated hours to complete the project. Our estimates are based upon the knowledge and experience of project managers and other personnel, who review each project to assess the contract’s schedule, performance, technical matters        and estimated hours to complete. When the total cost estimate exceeds revenue, the estimated project loss is recognized immediately. Support contracts, which require our ongoing involvement, are billed in advance and recorded as deferred revenue and amortized over the term of the contract, typically one year.

 

In evaluating the collectibility of our trade receivables, we assess a number of factors including historical cash reserves held by our LEC billing agents, collection rates with our billing agents and a specific customer’s ability to meet the financial obligations to us, as well as general factors, such as the length of time the receivables are past due and historical collection        experience. Based on these assessments, we record reserves for uncollectible receivables to reduce the related receivables to the amount we ultimately expect to collect from our customers.

 

If circumstances related to specific customers change or economic conditions worsen such that our past collection experience is no longer relevant, our estimate of the recoverability of our trade receivables could be further reduced or increased from the levels provided for in our financial statements. Because the majority of our receivables are collected through our LEC billing agents        and such agents typically do not provide us with visibility as to collection results for an average six to nine month period, our bad debt reserves are estimated and may be subject to substantial variation.

 

***Goodwill and Other Intangible Assets***

The calculation of amortization expense is based on the cost and estimated economic useful lives of the underlying intangible assets, intellectual property assets and capitalized computer software, and patent license rights. Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination        and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of FASB Statement No. 142, *Goodwill and Other Intangible Assets*. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement No. 144,        *Accounting for Impairment or Disposal of Long-Lived Assets*. We review our unamortized intangible assets whenever 

 

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events or changes in circumstances indicate that the carrying amount may not be recoverable or the estimated useful life has been reduced. We estimate the future cash flows expected to result from operations, and if the sum of the expected undiscounted future cash flows is less than the carrying amount of the intangible asset, we recognize an impairment loss by reducing the unamortized cost of the long-lived        asset to its estimated fair value.

 

***Accounting for Income Taxes***

We recognize deferred tax assets and liabilities for the expected future tax consequences of transactions and events. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. If        necessary, deferred tax assets are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable. We must make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount of the valuation allowance.

 

***Acquisition Related Assets and Liabilities***

Accounting for the acquisition of a business as a purchase transaction requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The most difficult estimations of individual fair values are those involving long-lived assets, such as properties, plant and equipment and intangible assets. We        use all available information to make these fair value determinations and, for major business acquisitions, engage an independent valuation specialist to assist in the fair value determination of the acquired long-lived assets. Due to inherent subjectivity in determining the estimated fair value of long-lived assets and the significance of the business acquisitions that we have completed, we believe that the recording of acquired assets and liabilities is a critical accounting        policy.

 

**Changes in Accounting Standards**

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, *Fair Value Measurement*(“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements. The Company adopted the        provisions of SFAS No. 157 on January 1, 2008 for financial assets and liabilities. Effective January 1, 2009, the Company adopted SFAS No. 157 for nonfinancial assets and nonfinancial liabilities. The adoption of SFAS No. 157 did not have a material impact on the Company’s results of operations and financial position. 

 

In December 2007, the FASB issued SFAS No. 141R, *Business Combinations*(“SFAS No. 141R”)*,*which requires the acquiring entity in a business combination to recognize the full fair value of the assets acquired, liabilities assumed and any noncontrolling interest as of the        acquisition date, the immediate expense recognition of transaction costs, and accounting for restructuring plans separately from the business combination. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141R as of January 1, 2009, has not impacted the Company’s financial statements; however, the        financial statements may be impacted to the extent the Company acquires entities in a purchase combination in the future. 

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to market rate risk for changes in interest rates related to our revolving line of credit. Interest expense on our floating rate debt will increase more than expected if interest rates rise. Our $30.0 million revolving line of credit bears an interest rate equal to one of the following, at our option: (a) LIBOR plus 4.0%, or (b) a rate equal to the Base Rate plus 3.0%. The        Base Rate is the greater of (i) 5%, (ii) the Federal Funds rate plus 0.5%, or (iii) the prime rate (as defined in the Credit Agreement). The effect of a 

 

28

 

 

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10% fluctuation in the interest rate on our revolving line of credit would have had a negligible impact on our interest expense for the three months ended March 31, 2008 and 2009. Approximately 90% of outstanding debt at March 31, 2009, is fixed-rate debt. While changes in interest rates impact the fair value of this debt, there is no impact on net earnings and cash flows. 

 

We are exposed to foreign currency exchange rates on the earnings, cash flows and financial position of our international operations. We are not able to project the possible effect of these fluctuations on translated amounts or future earnings due to our constantly changing exposure to various currencies, the fact that all foreign currencies do not react in the same manner in relation to        the U.S. dollar and each other, and the number of currencies involved. Our most significant exposure is to the British pound. 

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**1. Disclosure Controls and Procedures**

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms, and that such        information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based        upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

**2. Changes in Internal Control Over Financial Reporting**

 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

**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 business. We believe the ultimate disposition of these matters will not have a material effect on our financial condition, liquidity, or results of operations.

 

From time to time, inmate telecommunications providers, including the Company, are parties to judicial and regulatory complaints and proceedings initiated by inmates, consumer protection advocates or individual called parties alleging, among other things, that excessive rates are being charged with respect to inmate collect calls, that commissions paid by inmate telephone service        providers to the correctional facilities are too high, that a call was wrongfully disconnected, that security notices played during the call disrupt the call, that the billed party did not accept the collect calls for which they were billed or that rate disclosure was not provided or was inadequate. We are also on occasion the subject of regulatory complaints regarding our compliance with various matters including tariffing, access charges and payphone compensation requirements and rate        disclosure issues. In March 2007, the FCC asked for public comment on a proposal from an inmate advocacy group to impose a federal rate cap on interstate inmate calls. This 

 

29

 

 

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proceeding could have a significant impact on the rates that we and other companies in the inmate telecommunications industry may charge. Similar proposals have been pending before the FCC for more than four years without action by the agency. This newest proceeding remains under review by the FCC and has received strong opposition from the inmate telecommunications industry. In August 2008 a group of inmate        telephone service providers provided the FCC with an "industry wide" cost of service study for their consideration. 

 

In June 2000, T-NETIX was named, along with AT&T**,**in a lawsuit in the Superior Court of King County, Washington, in which two private citizens allege violations of state rules requiring pre-connect audible disclosure of rates as required by Washington statutes and        regulations**.** T-Netix and other defendants successfully obtained dismissal and a "primary jurisdiction" referral in 2002.  In 2005, after several years of inactivity before the Washington Utilities and Transportation Commission (“WUTC”), the state telecommunications regulatory agency, T-Netix prevailed at the trial court in securing an Order entering summary judgment on grounds of lack of standing, but that        decision was reversed by an intermediate Washington state appellate court in December 2006**.**  T-Netix’s subsequentPetition for Review by the Washington Supreme Court was denied in January 2008, entitling Plaintiffs to continue to pursue their claims against T-Netix and AT&T.  This matter was referred to the WUTC on the grounds of primary jurisdiction, in order for the WUTC to determine various regulatory issues.        On May 22, 2008, AT&T filed with the trial court a cross-claim against T-Netix seeking indemnification. T-Netix moved to dismiss AT&T’s cross-claim, but the court denied that motion and deferred resolution of whether AT&T's belated indemnification claim is within the statute of limitations for summary judgment. Because discovery has not been completed before the WUTC, we cannot estimate the Company's potential exposure or predict the outcome of this        dispute.

 

In May 2007, Global Tel*Link Corporation (“GTL”) and Verizon Business (“Verizon”) filed formal protest petitions against the Florida Department of Corrections (“FDOC”) (the “Protests”). The Protests challenged the FDOC’s intended award to us of a five-year initial term contract for the provision of statewide inmate telephone services.        More specifically, the Protests sought entry of recommended and final orders either (1) awarding the contract to the protestors or (2) rejecting all proposals. The Protests were referred to the Florida Division of Administrative Hearings (“DOAH”), and we intervened as a co-respondent with FDOC. Following a formal hearing, DOAH entered a recommended order to approve the intended contract award to us; in turn the FDOC adopted the recommendation in its final order.        GTL and Verizon appealed the final order and sought a stay to prevent entry of a formal contract between us and the FDOC during the appeal. The court denied the stay and the FDOC Contract was executed on September 25, 2007. GTL and Verizon nevertheless have continued to prosecute their appeal. On August 4, 2008, the appeals court entered an order reversing the final order entered by the FDOC on the basis of a violation of due process, finding that the FDOC Secretary who adopted the DOAH        recommended order was not impartial since he had made the initial decision to award the contract to our company and had testified in support of that decision in the formal hearings before DOAH. The case was remanded to the FDOC for further proceedings consistent with the opinion. On September 18, 2008, the FDOC issued an amended final order that also concluded that the Protests should be dismissed.  GTL and Verizon asked the FDOC to reconsider the amended final order, arguing that        the appellate court’s decision required appointment of a neutral third-party from outside the FDOC to issue the order.  The FDOC did not respond to the request for reconsideration.  On October 17, 2008, GTL and Verizon appealed of the amended final order with the state appeals court.  GTL and the Companyentered into a mutual settlement agreement and release, effective as of April 30, 2009, to fully resolve this and other miscellaneous matters. The parties are in the        process of filing the appropriate documents with the court to dismiss this matter with prejudice. The impact of the settlement on the financial statements of the Company was de minimus. 

 

In July 2007, Global Tel*Link Corporation filed suit in the Circuit Court of Montgomery County against T-Netix Inc., the State of Alabama, and the Alabama Department of Finance and Alabama Department of Corrections. This proceeding relates to the protest matter Global Tel* Link filed in Alabama in May 2007, which was concluded in April 2008. We filed a motion to dismiss that was denied;        however, GTL conceded that several of its claims were not viable, and in its amended complaint included only one count, the intentional interference with business and contractual relations claim. The judge agreed 

 

30

 

 

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to postpone setting any scheduling deadlines and postponed the trial date of August 4, 2008. The judge ordered the parties to mediate the case but did not specify a deadline. GTL and the Companyentered into a mutual settlement agreement and release, effective as of April 30, 2009, to fully resolve this and other miscellaneous matters. The parties are in the process of filing the appropriate documents with        the court to dismiss this matter with prejudice. The impact of the settlement on the financial statements of the Company was de minimus.

 

**ITEM 1A. RISK FACTORS**

 

You should carefully consider those risk factors discussed in Forward-Looking Statements set forth previously in this document, as well as the other factors detailed from time to time in the our filings with the SEC. These risks are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially        and adversely affect our business, financial condition, or results of operations.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY 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**

 

(a)  None

 

(b)  None

 

**ITEM 6. EXHIBITS**

 

See the Exhibit Index beginning on the signature page to this Form 10-Q.

 

31

 

 

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**Signatures**

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

|               | **SECURUS TECHNOLOGIES, INC.**

(Registrant) |
|--------------------|----------------------------------------------|
|               |                                         |   |
| DATE: May 14, 2009 | By:                                          | /s/ RICHARD A. SMITH |
|               |                                         | Richard A. Smith |
|               |                                         | Chairman of the Board, President, and |
|               |                                         | Chief Executive Officer |
|               |                                         |   |
|               |                                         |   |
| DATE: May 14, 2009 | By:                                          | /s/ WILLIAM D. MARKERT |
|               |                                         | William D. Markert |
|               |                                         | Chief Financial Officer |

 

 

 

32

 

 

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**EXHIBIT INDEX**

 

| 2.1    | Stock Purchase Agreement, dated April 11, 2007, by and among Securus Technologies, Inc., Appaloosa Acquisition Company, 0787223 B.C. Ltd, and 0787223 B.C. Ltd’s sole stockholder, incorporated by reference from Form 8-K filed April 16, 2007.          |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                            |
| 2.1.1  | Settlement Agreement, dated November 12, 2008, by and among Securus Technologies, Inc., Syscon Justice Systems Canada, Ltd., 0787223 B.C. Ltd., and 0787223 B.C. Ltd’s sole stockholder incorporated by reference from Form 10-Q filed November 14, 2008. |
|   |                                                                                                                                                                                                                                                            |
| 2.1.2  | Consulting Agreement, dated November 12, 2008, by and among Securus Technologies, Inc., Syscon Justice Systems Canada, Ltd., 0787223 B.C. Ltd., and 0787223 B.C. Ltd’s sole stockholder incorporated by reference from Form 10-Q filed November 14, 2008. |
|   |                                                                                                                                                                                                                                                            |
| 3.1    | Fourth Amended and Restated Certificate of Incorporation of Securus Technologies, Inc., incorporated by reference from Form 10-K filed March 31, 2009.                                                                                                          |
|   |                                                                                                                                                                                                                                                            |
| 3.2    | Amended and Restated Bylaws of Securus Technologies, Inc., incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                                                          |
|   |                                                                                                                                                                                                                                                            |
| 3.3    | Certificate of Incorporation of T-Netix, Inc., filed on September 7, 2001, as amended, incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                              |
|   |                                                                                                                                                                                                                                                            |
| 3.4    | Bylaws of T-Netix, Inc, incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                            |
| 3.5    | Articles of Incorporation of Telequip Labs, Inc., filed on November 9, 1987, as amended, incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                            |
|   |                                                                                                                                                                                                                                                            |
| 3.6    | Amended and Restated Bylaws of Telequip Labs, Inc., incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                            |
| 3.7    | Articles of Incorporation of T-NETIX Telecommunications Services, Inc., filed on February 11, 1988, as amended, incorporated by reference from Form S-4 filed May 16, 2005.                                                                                     |
|   |                                                                                                                                                                                                                                                            |
| 3.8    | Bylaws of T-NETIX Telecommunications Services, Inc., incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                                                                |
|   |                                                                                                                                                                                                                                                            |
| 3.9    | Certificate of Incorporation of Evercom Holdings, Inc., filed on November 25, 2002, as amended, incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                     |
|   |                                                                                                                                                                                                                                                            |
| 3.10   | Bylaws of Evercom Holdings, Inc., incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                            |
| 3.11   | Amended and Restated Certificate of Incorporation of Evercom, Inc., filed on February 19, 2003, incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                     |
|   |                                                                                                                                                                                                                                                            |
| 3.12   | Bylaws of Evercom, Inc., incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                            |
| 3.13   | Certificate of Incorporation of Evercom Systems, Inc., filed on August 22, 1997, as amended, incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                        |
|   |                                                                                                                                                                                                                                                            |
| 3.14   | Bylaws of Evercom Systems, Inc., incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                            |
| 3.15   | Certificate of Incorporation of Syscon Justice Systems Canada Ltd., incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                          |

 

 

33

 

 

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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.16   | Articles of Syscon Justice Systems Canada Ltd., incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.17   | Articles of Incorporation of Syscon Justice Systems, Inc., incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.18   | Bylaws of Syscon Justice Systems, Inc., incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.19   | Articles of Organization of Modeling Solutions LLC incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.20   | Operating Agreement of Modeling Solutions LLC incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.21   | Articles of Organization of Modeling Solutions, LLC incorporated by reference from Form S-4 filed August 1, 2007                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.22   | Operating Agreement of Modeling Solutions, LLC incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.1    | Form of 11% Second-priority Senior Secured Notes due 2011, incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2    | Indenture, dated as of September 9, 2004, by and among Securus Technologies, Inc., T-Netix, Inc., T-NETIX Telecommunications Services, Inc., T-Netix Monitoring Corporation, SpeakEZ, Inc., Telequip Labs, Inc., Evercom Holdings, Inc., Evercom, Inc., EverConnect, Inc., Evercom Systems, Inc., and The Bank of New York Trust Company, N.A., incorporated by reference from Form S-4 filed May 16, 2005.                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2.1  | Supplemental Indenture, dated June 27, 2007, by and among Appaloosa Acquisition Company Ltd., T-NETIX, Inc., T-NETIX Telecommunications Services, Inc., Telequip Labs, Inc., Evercom Holdings, Inc., Evercom, Inc., and Evercom Systems, Inc., as guarantors, and The Bank of New York, as trustee, incorporated by reference from Form 8-K filed July 2, 2007.                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2.2  | Supplemental Indenture, dated June 29, 2007, by and among Appaloosa Acquisition Company Ltd., Syscon Justice Systems Canada Ltd., Syscon Holdings Ltd., Syscon Justice Systems, Inc., Modeling Solutions, LLC, Modeling Solutions LLC, and The Bank of New York, as trustee, incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.3    | Amended and Restated Security Agreement, dated June 29, 2007, by and among Appaloosa Acquisition Company Ltd., Modeling Solutions, LLC, Modeling Solutions LLC, Syscon Justice Systems International Pty Limited, Syscon Justice Systems International Limited, Syscon Justice Systems Canada Ltd., and Syscon Justice Systems, Inc., as guarantors, and The Bank of New York Trust Company, N.A., incorporated by reference from Form S-4 filed August 1,                        2007. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.3.1  | Supplement to Amended and Restated Security Agreement, dated June 29, 2007, incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

 

34

 

 

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| 4.4    | Amended and Restated Patent Security Agreement, dated June 29, 2007, by and among Securus Technologies, Inc., T-Netix, Inc., T-NETIX Telecommunications Services, Inc., Telequip Labs, Inc., Evercom Holdings, Inc., Evercom, Inc., Evercom Systems, Inc., Modeling Solutions, LLC, Modeling Solutions LLC, Syscon Justice Systems, Inc., and The Bank of New York Trust Company, N.A., incorporated by reference from Form S-4 filed August 1, 2007.    |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.5    | Amended and Restated Copyright Security Agreement, dated June 29, 2007, by and among Securus Technologies, Inc., T-Netix, Inc., T-NETIX Telecommunications Services, Inc., Telequip Labs, Inc., Evercom Holdings, Inc., Evercom, Inc., Evercom Systems, Inc., Modeling Solutions, LLC, Modeling Solutions LLC, Syscon Justice Systems, Inc., and The Bank of New York Trust Company, N.A., incorporated by reference from Form S-4 filed August 1, 2007. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.6    | Amended and Restated Trademark Security Agreement, dated June 29, 2007, by and among Securus Technologies, Inc., T-Netix, Inc., T-NETIX Telecommunications Services, Inc., Telequip Labs, Inc., Evercom Holdings, Inc., Evercom, Inc., Evercom Systems, Inc., Modeling Solutions, LLC, Modeling Solutions LLC, Syscon Justice Systems, Inc., and The Bank of New York Trust Company, N.A., incorporated by reference from Form S-4 filed August 1, 2007. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.7    | Amended and Restated Pledge Agreement, dated June 29, 2007, by and among Appaloosa Acquisition Company Ltd., Syscon Justice Systems, Inc., and T-Netix, Inc., Evercom Holdings, Inc., Evercom, Inc., incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.7.1  | Supplement No. 1 to Amended and Restated Pledge Agreement, dated June 29, 2007, incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.8    | Credit Agreement, dated September 30, 2008, among Securus Technologies, Inc., as Parent and as a Borrower, certain subsidiaries of Parent party thereto, as Borrowers, the lenders from time to time parties thereto, and Wells Fargo Foothill, LLC, as the Arranger, Administrative Agent and lender, incorporated by reference from Form 8-K filed October 7, 2008.                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.9    | General Continuing Guaranty, dated September 30, 2008, by and between Wells Fargo Foothill, LLC and Syscon Justice Systems Canada Ltd., incorporated by reference from Form 8-K filed October 7, 2008.                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.10   | Security Agreement, dated September 30, 2008, among Wells Fargo Foothill, LLC, Securus Technologies, Inc., T-Netix, Inc., Telequip Labs, Inc., T-Netix Telecommunications Services, Inc., Evercom Holding, Inc., Evercom, Inc., Evercom Systems, Inc., Modeling Solutions LLC, Modeling Solutions, LLC, and Syscon Justice Systems, Inc., incorporated by reference from Form 8-K filed October 7, 2008.                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.11   | Security Agreement, dated as of September 30, 2008, between Wells Fargo Foothill, LLC and Syscon Justice Systems Canada Ltd., incorporated by reference from Form 8-K filed October 7, 2008.                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.12   | Trademark Security Agreement, dated September 30, 2008, among Wells Fargo Foothill, LLC, Securus Technologies, Inc., T-Netix, Inc., Telequip Labs, Inc., T-Netix Telecommunications Services, Inc., Evercom Holding, Inc., Evercom, Inc., Evercom Systems, Inc., Modeling Solutions LLC, Modeling Solutions, LLC and Syscon Justice Systems, Inc., incorporated by reference from Form 8-K filed October 7, 2008.                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

 

35

 

 

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| 4.13   | Copyright Security Agreement, dated September 30, 2008, among Wells Fargo Foothill, LLC, Securus Technologies, Inc., T-Netix, Inc., Telequip Labs, Inc., T-Netix Telecommunications Services, Inc., Evercom Holding, Inc., Evercom, Inc., Evercom Systems, Inc., Modeling Solutions LLC, Modeling Solutions, LLC and Syscon Justice Systems, Inc., incorporated by reference from Form 8-K filed October 7, 2008.                                                                                                                                                                      |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.14   | Patent Security Agreement, dated September 30, 2008, among Wells Fargo Foothill, LLC, Securus Technologies, Inc., T-Netix, Inc., Telequip Labs, Inc., T-Netix Telecommunications Services, Inc., Evercom Holding, Inc., Evercom, Inc., Evercom Systems, Inc., Modeling Solutions LLC, Modeling Solutions, LLC and Syscon Justice Systems, Inc., incorporated by reference from Form 8-K filed October 7, 2008.                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.15   | Trademark Security Agreement, dated as of September 30, 2008, between Wells Fargo Foothill, LLC and Syscon Justice Systems Canada Ltd., incorporated by reference from Form 8-K filed October 7, 2008.                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.16   | Copyright Security Agreement, dated as of September 30, 2008, between Wells Fargo Foothill, LLC and Syscon Justice Systems Canada Ltd., incorporated by reference from Form 8-K filed October 7, 2008.                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.17   | Patent Agreement, dated as of September 30, 2008, between Wells Fargo Foothill, LLC and Syscon Justice Systems Canada Ltd., incorporated by reference from Form 8-K filed October 7, 2008.                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.18   | Subordination and Intercreditor Agreement, dated as of September 9, 2004, by and among Laminar Direct Capital, L.P., Securus Technologies, Inc., T-Netix, Inc., T-NETIX Telecommunications Services, Inc., T-Netix Monitoring Corporation, SpeakEZ, Inc., Telequip Labs, Inc., Evercom Holdings, Inc., Evercom, Inc., EverConnect, Inc., Evercom Systems, Inc., and The Bank of New York Trust Company, N.A., incorporated by reference from Form S-4 filed May 16,                        2005.                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.18.1 | First Amendment to Subordination and Intercreditor Agreement, dated as of June 29, 2007, by and among Laminar Direct Capital, L.P., Securus Technologies, Inc., T-Netix, Inc., T-NETIX Telecommunications Services, Inc., Telequip Labs, Inc., Evercom Holdings, Inc., Evercom, Inc., Evercom Systems, Inc., Syscon Justice Systems, Inc., Modeling Solutions, LLC, Modeling Solutions LLC, and The Bank of New York Trust Company, N.A., incorporated by reference from                        Form S-4 filed August 1, 2007.                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.19   | Amended and Restated Intercreditor Agreement, dated as of September 30, 2008, by and among Wells Fargo Foothill, LLC, as Intercreditor Agent, The Bank of New York Mellon Trust Company, N.A., as Trustee, Securus Technologies, Inc., and certain subsidiaries of Securus Technologies, Inc. incorporated by reference from Form 10-Q filed November 14,                        2008.                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.20   | Note Purchase Agreement, dated as of September 9, 2004, by and among Securus Technologies, Inc., T-Netix, Inc., Telequip Labs, Inc., T-Netix Telecommunications Services, Inc., SpeakEZ, Inc., T-Netix Monitoring Corporation, Evercom Holding, Inc., Evercom, Inc., Evercom Systems, Inc., FortuneLinX, Inc., and Everconnect, Inc. and Laminar Direct Capital L.P., incorporated by reference from Form 10-K/A filed September 13, 2006.                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

 

36

 

 

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| 4.20.1 | June 2007 Amendment to Note Purchase Agreement, dated June 29, 2007, by and among Securus Technologies, Inc., T-Netix, Inc., Telequip Labs, Inc., T-Netix Telecommunications Services, Inc., Evercom Holding, Inc., Evercom, Inc., Evercom Systems, Inc., Appaloosa Acquisition Company Ltd., Modeling Solutions, LLC, Modeling Solutions LLC, Syscon Justice Systems International Pty Limited, Syscon Justice Systems International Limited, Syscon Justice Systems                        Canada Ltd., Syscon Justice Systems, Inc., and Laminar Direct Capital L.P., incorporated by reference from Form 8-K filed July 2, 2007. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.21   | Form of 11% Second-priority Senior Secured Notes due 2011, incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.22   | Security Agreement, dated June 29, 2007, by and among Appaloosa Acquisition Company Ltd., Syscon Justice Systems Canada Ltd., Syscon Holdings Ltd., and The Bank of New York, as trustee, incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.23   | Pledge Agreement, dated June 29, 2007, by and among Appaloosa Acquisition Company Ltd., Syscon Justice Systems Canada Ltd., and Syscon Holdings Ltd., and The Bank of New York, as trustee, incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.24   | Trademark Security Agreement, dated June 29, 2007, by and among Appaloosa Acquisition Company Ltd., Syscon Justice Systems Canada Ltd., Syscon Holdings Ltd., a British Columbia corporation and The Bank of New York, as trustee, incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.25   | Copyright Security Agreement, dated June 29, 2007, by and among Appaloosa Acquisition Company Ltd., Syscon Justice Systems Canada Ltd., Syscon Holdings Ltd., and The Bank of New York, as trustee, incorporated by reference from Form S-4 filed August 1, 2007.                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.1   | Stockholders Agreement, dated September 9, 2004, by and among Securus Technologies, Inc., H.I.G.-TNetix, Inc., T-Netix, Inc., American Capital Strategies, Ltd., Laminar Direct Capital, L.P., and each of the other investors then or thereafter set forth on the signature pages thereto, incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2   | Amended and Restated Consulting Services Agreement, dated as of September 9, 2004, among T-Netix, Inc., Evercom Systems, Inc. and H.I.G. Capital, LLC, incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2.1 | First Amendment to Amended and Restated Consulting Services Agreement, dated as of September 30, 2008, among T-Netix, Inc., Evercom Systems, Inc. and H.I.G. Capital, LLC, incorporated by reference from Form 8-K filed October 7, 2008.                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3   | Amended and Restated Professional Services Agreement, dated as of September 9, 2004, by and between T-Netix, Inc., Evercom Systems, Inc., and H.I.G. Capital, LLC, incorporated by reference from Form S-4 filed May 16, 2005.                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3.1 | First Amendment to Amended and Restated Professional Services Agreement, dated as of September 30, 2008, among T-Netix, Inc., Evercom Systems, Inc. and H.I.G. Capital, LLC, incorporated by reference from Form 8-K filed October 7, 2008.                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.4   | Office Lease Agreement, dated as of November 8, 2004, by and between T-Netix, Inc. and the Prudential Insurance Company of America, incorporated by reference from Form 10-Q filed August 15, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

 

37

 

 

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| 10.4.1 | First Amendment to the Office Lease Agreement, dated as of November 19, 2004, by and between T-Netix, Inc. and the Prudential Insurance Company of America, incorporated by reference from Form 10-Q filed August 15, 2005. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                        |
| 10.5   | 2004 Restricted Stock Purchase Plan, incorporated by reference from Form 10-Q filed November 14, 2006.                                                                                                                      |
|   |                                                                                                                                                                                                                        |
| 10.6   | Fourth Amendment to 2004 Restricted Stock Purchase Plan and Stockholder Consent, increasing authorized shares under the plan, incorporated by reference from Form 10-K filed March 31, 2009.                                |
|   |                                                                                                                                                                                                                        |
| 10.7   | Employment Agreement, dated June 11, 2008, by and between Securus Technologies, Inc. and Richard A. Smith, incorporated by reference from Form 8-K filed June 13, 2008.                                                     |
|   |                                                                                                                                                                                                                        |
| 10.8   | Restricted Stock Purchase Agreement, dated June 23, 2008, by and between Securus Technologies, Inc and Richard A. Smith, incorporated by reference from Form 8-K filed June 13, 2008.                                       |
|   |                                                                                                                                                                                                                        |
| 10.9   | Employment Agreement, dated June 20, 2008, by and between Securus Technologies, Inc. and William D. Markert, incorporated by reference from Form 8-K filed June 24, 2008.                                                   |
|   |                                                                                                                                                                                                                        |
| 10.10  | Restricted Stock Purchase Agreement, dated June 30, 2008, by and between Securus Technologies, Inc and William D. Markert, incorporated by reference from Form 8-K filed June 24, 2008.                                     |
|   |                                                                                                                                                                                                                        |
| 14.1   | Securus Code of Ethics, incorporated by reference from Form 10-K filed March 30, 2008.                                                                                                                                      |
|   |                                                                                                                                                                                                                        |
| 21.1*  | Schedule of Subsidiaries of Securus Technologies, Inc.                                                                                                                                                                      |
|   |                                                                                                                                                                                                                        |
| 31.1*  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley of 2002.                                                                                                                        |
|   |                                                                                                                                                                                                                        |
| 31.2*  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley of 2002.                                                                                                                        |
|   |                                                                                                                                                                                                                        |
| 32.1*  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley of 2002.                                                                                                                        |
|   |                                                                                                                                                                                                                        |
| 32.2*  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley of 2002.                                                                                                                        |

 

 

 * Filed herewith.

 

38