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 September 30, 2006  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. Employerincorporation 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 is an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act  (Check one):  Large Accelerated Filer  [
        ]
        Accelerated Filer  [
        ]
        Non-Accelerated Filer  [ X ]  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 $0.01 per share, of Securus Technologies, Inc. or the Class B common stock, par value $0.01 per share, of Securus Technologies, Inc.  Shares outstanding of each of the registrants classes of common stock:  Class
        
        Outstanding at September30, 2006Common stock
        
        597,356 shares     TABLE OF CONTENTS


PARTI-FINANCIAL INFORMATION
        3ITEM1.FINANCIAL STATEMENTS
        3ITEM2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS14


ITEM3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
        30ITEM4.CONTROLS AND PROCEDURES
        30PARTII-OTHER INFORMATION
        31ITEM1.LEGAL PROCEEDINGS
        31ITEM1A.RISK FACTORS
        32ITEM2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
        32ITEM3.DEFAULTS UPON SENIOR SECURITIES
        32ITEM4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
        32ITEM5.OTHER INFORMATION
        32ITEM6.EXHIBITS
        33




PARTIFINANCIALINFORMATION



ITEM1.FINANCIAL STATEMENTS



SECURUS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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




December 31,
        
        
        September30,2005
        
        
        2006(Unaudited)ASSETSCash and cash equivalents
        
        $
        2,630
        
        
        $
        420Restricted cash
        
        
        1,396
        
        
        
        1,443Accounts receivable, net
        
        
        63,180
        
        
        
        62,597Prepaid expenses and other current assets
        
        
        5,659
        
        
        
        5,213Current deferred income taxes
        
        
        7,785
        
        
        
        7,563Total current assets
        
        
        80,650
        
        
        
        77,236Property and equipment, net
        
        
        43,862
        
        
        
        46,438Intangibles and other assets, net
        
        
        104,482
        
        
        
        100,202Goodwill
        
        
        37,936
        
        
        
        37,936Total assets
        
        $
        266,930
        
        
        $
        261,812LIABILITIES AND STOCKHOLDERS DEFICITAccounts payable
        
        $
        46,502
        
        
        $
        43,452Accrued liabilities
        
        
        37,756
        
        
        
        32,787Deferred revenue and customer advances
        
        
        5,051
        
        
        
        5,500Current portion of long-term debt
        
        
        108
        
        
        
        28Total current liabilities
        
        
        89,417
        
        
        
        81,767Deferred income taxes
        
        
        9,769
        
        
        
        10,420Long-term debt, net of current portion
        
        
        197,847
        
        
        
        212,124Other long-term liabilities
        
        
        1,765
        
        
        
        1,713Total liabilities
        
        
        298,798
        
        
        
        306,024Commitments and contingencies
        
        
        -
        
        
        
        -Stockholders deficit:Common stock, $0.01 stated value, 1,000,000 shares authorized; 597,356 shares issued and outstanding at December 31, 2005 and September 30, 2006
        
        
        5
        
        
        
        5Additional paid-in capital
        
        
        34,027
        
        
        
        34,110Accumulated deficit
        
        
        (65,900
        )
        
        
        (78,327
        )Total stockholders' deficit
        
        
        (31,868
        )
        
        
        (44,212
        )Total liabilities and stockholders deficit
        
        $
        266,930
        
        
        $
        261,812

See accompanying notes to condensed consolidated financial statements.


SECURUS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2005 and 2006

(Dollars in thousands)

(Unaudited)




For the Three Months Ended
        
        
        For the Nine Months EndedSeptember30,
        
        September30,
        
        
        September30,
        
        
        September30,2005
        
        2006
        
        
        2005
        
        
        2006Revenue:Direct call provisioning
        
        $
        76,706
        
        $
        84,094
        
        
        $
        224,935
        
        
        $
        251,721Solutions services
        
        
        12,074
        
        
        11,183
        
        
        
        35,184
        
        
        
        35,161Telecommunications services
        
        
        5,614
        
        
        2,744
        
        
        
        20,091
        
        
        
        11,077Equipment sales and other
        
        
        358
        
        
        64
        
        
        
        1,026
        
        
        
        494Total revenue
        
        
        94,752
        
        
        98,085
        
        
        
        281,236
        
        
        
        298,453Cost of service, exclusive of depreciation and amortization shown separately below:Direct call provisioning, exclusive of bad debt expense
        
        
        50,205
        
        
        57,276
        
        
        
        147,447
        
        
        
        167,296Direct call provisioning bad debt expense
        
        
        9,325
        
        
        9,595
        
        
        
        29,392
        
        
        
        29,634Solutions services expense
        
        
        9,484
        
        
        8,619
        
        
        
        28,556
        
        
        
        26,314Telecommunications services
        
        
        2,748
        
        
        1,307
        
        
        
        8,908
        
        
        
        5,421Cost of equipment sold and other
        
        
        50
        
        
        18
        
        
        
        169
        
        
        
        367Total cost of service
        
        
        71,812
        
        
        76,815
        
        
        
        214,472
        
        
        
        229,032Selling, general and administrative
        
        
        12,687
        
        
        12,336
        
        
        
        36,916
        
        
        
        38,696Stock-based compensation
        
        
        -
        
        
        28
        
        
        
        -
        
        
        
        83Depreciation and amortization
        
        
        5,737
        
        
        7,609
        
        
        
        16,987
        
        
        
        21,307Total operating costs and expenses
        
        
        90,236
        
        
        96,788
        
        
        
        268,375
        
        
        
        289,118Operating income
        
        
        4,516
        
        
        1,297
        
        
        
        12,861
        
        
        
        9,335Interest and other expenses, net
        
        
        6,570
        
        
        6,892
        
        
        
        19,958
        
        
        
        20,742Loss before income taxes
        
        
        (2,054
        )
        
        (5,595
        )
        
        
        (7,097
        )
        
        
        (11,407
        )Income tax (benefit) expense
        
        
        (1,270
        )
        
        392
        
        
        
        (896
        )
        
        
        1,020Net loss
        
        $
        (784
        )
        $
        (5,987
        )
        
        $
        (6,201
        )
        
        $
        (12,427
        )

See accompanying notes to condensed consolidated financial statements.


SECURUS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2005 and 2006

(Dollars in thousands)

(Unaudited)




September30,
        
        
        September30,2005
        
        
        2006(Revised -Note 1d)CASH FLOWS FROM OPERATING ACTIVITIESNet loss:
        
        $
        (6,201
        )
        
        $
        (12,427
        )Adjustment to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
        
        
        16,987
        
        
        
        21,307Deferred income taxes
        
        
        (896
        )
        
        
        873Conversion of interest paid-in-kind to secured subordinated notes
        
        
        5,601
        
        
        
        6,616Net equity income from unconsolidated affiliates
        
        
        -
        
        
        
        (348
        )Stock-based compensation
        
        
        -
        
        
        
        83Accretion of discount on notes payable
        
        
        378
        
        
        
        411Amortization of deferred financing costs and debt discounts
        
        
        634
        
        
        
        732Changes in operating assets and liabilities:
        
        
        -Restricted cash
        
        
        (32
        )
        
        
        (47
        )Accounts receivable, net
        
        
        5,818
        
        
        
        583Prepaid expenses and other current assets
        
        
        751
        
        
        
        446Intangibles and other assets
        
        
        (664
        )
        
        
        (705
        )Accounts payable
        
        
        (5,657
        )
        
        
        (5,643
        )Accrued liabilities and other liabilities
        
        
        (4,909
        )
        
        
        (4,572
        )Net cash provided by operating activities
        
        $
        11,810
        
        
        $
        7,309CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment including costs of intangibles
        
        $
        (18,732
        )
        
        
        (19,282
        )Net cash used in investing activities
        
        $
        (18,732
        )
        
        $
        (19,282
        )CASH FLOWS FROM FINANCING ACTIVITIES:Net advances on revolving credit facility
        
        $
        5,000
        
        
        $
        7,250Cash overdraft
        
        
        1,120
        
        
        
        2,593Debt issuance costs
        
        
        (755
        )
        
        
        -Payments on long term debt
        
        
        (87
        )
        
        
        (80
        )Net cash provided by financing activities
        
        $
        5,278
        
        
        $
        9,763Decrease in cash and cash equivalents
        
        $
        (1,664
        )
        
        $
        (2,210
        )Cash and cash equivalents at the beginning of the period
        
        
        1,879
        
        
        
        2,630Cash and cash equivalents at the end of the period
        
        $
        235
        
        
        $
        420SUPPLEMENTAL DISCLOSURES:Cash paid during period for:Interest
        
        $
        17,093
        
        
        $
        17,347Income taxes
        
        $
        -
        
        
        $
        131NONCASH FINANCING AND INVESTING ACTIVITIES:Leasehold improvements
        
        $
        1,800
        
        
        $
        -

See accompanying notes to condensed consolidated financial statements.


SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



(a)Unaudited Quarterly Financial Statements



The accompanying unaudited condensed consolidated financial statements for the nine months ended September 30, 2005 and 2006 have been prepared in accordance with U.S. Generally Accepted Accounting Principles 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 Technologies, Inc. (Securus or the Company).  In the opinion of management, all adjustments necessary for a fair presentation have been included and are of a normal 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 Technologies, Inc.s December 31, 2005 Annual Report on Form 10-K.



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 carrying amount for property and equipment, goodwill, intangible and other assets, and deferred income taxes.  Actual results could differ from those estimates.



(b)Comprehensive Income



Statement of Financial Accounting Standards (SFAS) No. 130,Reporting Comprehensive Income, requires that certain items such as foreign currency translation adjustments and unrealized gains and losses on certain derivative instruments classified as a hedge be presented as separate components of shareholders equity.  Total comprehensive loss for the three months ended September 30, 2005 and 2006 was $0.8 million and $6.0 million, respectively.  For the nine months ended September 30, 2005 and 2006, the comprehensive loss was $6.2 million and $12.4 million, respectively.



(c)Reclassification



Certain amounts in the September 30, 2005 condensed consolidated financial statements have been reclassified to conform with current period presentation.



(d)Revision to Cash Flow Statement



The Company has revised its September 30, 2005 condensed consolidated cash flow statement to classify the net change in cash overdrafts within financing activities.  Previously, such amounts were reported as cash flows used in operating activities.  The effects of the above revision to the September 30, 2005 condensed consolidated cash flow statement is summarized as follows:




For The Nine Months Ended September30, 2005Net Cash Provided (Used in)Operating
        
        
        Investing
        
        
        FinancingActivities
        
        
        Activities
        
        
        Activities(in thousands)Previously reported
        
        $
        12,930
        
        
        $
        (18,732
        )
        
        $
        4,158Net change in cash overdrafts
        
        
        (1,120
        )
        
        
        -
        
        
        
        1,120As revised
        
        $
        11,810
        
        
        $
        (18,732
        )
        
        $
        5,278


2.BALANCE SHEET COMPONENTS



Accounts receivable, net consists of the following (in thousands):




December 31,
        
        
        September30,2005
        
        
        2006(Unaudited)Accounts receivable, net:Trade accounts receivable
        
        $
        78,614
        
        
        $
        74,650Advance commissions receivable
        
        
        3,815
        
        
        
        1,933Other receivables
        
        
        153
        
        
        
        48082,582
        
        
        
        77,063Less: Allowance for doubtful accounts
        
        
        (19,402
        )
        
        
        (14,466
        )$
        63,180
        
        
        $
        62,597

At December 31, 2005 and September 30, 2006, the Company had advanced commissions to certain facilities totaling $3.9 million and $1.9 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, with the remaining long-term portion recorded in other assets.



Bad debt expense for the three and nine months ended September 30, 2005 was $9.3 million, or 12.2%, and $29.4 million, or 13.1%, respectively, of direct call provisioning revenue of $76.7 million and $224.9 million, respectively.  Bad debt expense for the three and nine months ended September 30, 2006 was $9.6 million, or 11.4%, and $29.6 million, or 11.8%, respectively, of direct call provisioning revenue of $84.1 million and $251.7 million, respectively.



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




December 31,
        
        
        September30,2005
        
        
        2006(Unaudited)Property and equipment, net:Telecommunications equipment
        
        $
        35,600
        
        
        $
        47,066Leasehold improvements
        
        
        4,382
        
        
        
        3,359Construction in progress
        
        
        6,624
        
        
        
        7,217Office equipment and other
        
        
        10,546
        
        
        
        11,41657,152
        
        
        
        69,058Less: Accumulated depreciation and amortization
        
        
        (13,290
        )
        
        
        (22,620
        )$
        43,862
        
        
        $
        46,438

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




December 31, 2005Gross
        
        
        
        
        
        
        
        
        
        
        WeightedCarrying
        
        
        
        Accumulated
        
        
        
        
        
        
        AverageValue
        
        
        
        Amortization
        
        
        
        Net
        
        
        LifePatents and trademarks
        
        $
        18,324
        
        
        $
        (2,439
        )
        
        $
        15,885
        
        
        10.6Deferred financing costs
        
        
        9,022
        
        
        
        (1,063
        )
        
        
        7,959
        
        
        7.3Capitalized software development costs
        
        
        13,416
        
        
        
        (3,510
        )
        
        
        9,906
        
        
        4.0Acquired contract rights
        
        
        79,407
        
        
        
        (10,871
        )
        
        
        68,536
        
        
        10.8Deposits and long-term prepayments
        
        
        1,413
        
        
        
        -
        
        
        
        1,413Other
        
        
        783
        
        
        
        -
        
        
        
        783$
        122,365
        
        
        $
        (17,883
        )
        
        $
        104,482




September30, 2006 (Unaudited)Gross
        
        
        
        
        
        
        
        
        
        
        WeightedCarrying
        
        
        
        Accumulated
        
        
        
        
        
        
        AverageValue
        
        
        
        Amortization
        
        
        
        Net
        
        
        LifePatents and trademarks
        
        $
        19,004
        
        
        $
        (4,034
        )
        
        $
        14,970
        
        
        10.2Deferred financing costs
        
        
        9,022
        
        
        
        (1,795
        )
        
        
        7,227
        
        
        7.3Capitalized software development costs
        
        
        16,720
        
        
        
        (5,983
        )
        
        
        10,737
        
        
        4.2Acquired contract rights
        
        
        82,542
        
        
        
        (18,205
        )
        
        
        64,337
        
        
        10.6Deposits and long-term prepayments
        
        
        1,800
        
        
        
        -
        
        
        
        1,800Other
        
        
        1,131
        
        
        
        -
        
        
        
        1,131$
        130,219
        
        
        $
        (30,017
        )
        
        $
        100,202

At December 31, 2005 and September 30, 2006, the carrying amount of trademarks assigned to patents and trademarks that were not subject to amortization was $3.0 million.



Certain intangibles and other assets amounts have been reclassified as of December 31, 2005.  Amortization expense for the three months ended September 30, 2005 and 2006 was $3.0 million and $4.1 million, respectively.  Amortization expense for the nine months ended September 30, 2005 and 2006 was $9.0 million and $12.1 million, respectively.  Estimated amortization expense related to intangibles and other assets, excluding deferred financing costs, at September 30, 2006 and for each of the next five years and thereafter is summarized as follows (in thousands):




Period ending September30 (unaudited):2007
        
        $
        16,1342008
        
        
        12,1262009
        
        
        10,3952010
        
        
        8,8372011
        
        
        7,550Thereafter
        
        
        35,002$
        90,044

Accrued liabilities consist of the following (in thousands):




December 31,
        
        
        September30,2005
        
        
        2006(Unaudited)Accrued expenses
        
        $
        23,201
        
        
        $
        24,569Accrued compensation
        
        
        5,258
        
        
        
        4,068Accrued severance and exit costs
        
        
        668
        
        
        
        164Accrued taxes
        
        
        2,932
        
        
        
        2,447Accrued interest and other
        
        
        5,697
        
        
        
        1,539$
        37,756
        
        
        $
        32,787

During the years ended December 31, 2004 and 2005, the Company entered into separation agreements with certain executives.  SFAS No. 88,Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans for Termination Benefits, requires the Company to accrue severance payments for these executives.  At December 31, 2005, the Company had accrued approximately $0.7 million related to these agreements, of which $0.6 million related to severance and the remaining $0.1 million related to leased facility costs.  For the nine months ended September 30, 2006, the Company paid approximately $0.5 million of this liability, leaving approximately $0.2 million.






3.DEBT



Debt consists of the following (in thousands):




December 31,
        
        
        
        September30,2005
        
        
        
        2006(Unaudited)Revolving credit facility
        
        $
        -
        
        
        $
        7,250Second-priority senior secured notes
        
        
        154,000
        
        
        
        154,000Senior subordinated notes
        
        
        49,745
        
        
        
        56,361Other
        
        
        108
        
        
        
        28Total debt
        
        
        203,853
        
        
        
        217,639Less unamortized discount on senior secured notes and senior subordinated notes
        
        
        (5,898
        )
        
        
        (5,487
        )197,955
        
        
        
        212,152Less current portion of long-term debt
        
        
        (108
        )
        
        
        (28
        )Long-term debt, net
        
        $
        197,847
        
        
        $
        212,124

Revolving Credit Facility.The Company has a revolving credit facility (the Revolver) with a syndicate of banks and other lending institutions with a borrowing base limitation equal to 80% of eligible receivables and 50% of inventory, as defined in the credit agreement.  The Revolver provides for financing on a revolving basis of up to $30.0 million and a $22.5 million letter of credit facility that expires on September 9, 2009.  To the extent that letters of credit outstanding are greater than $10.0 million, the incremental letters of credit outstanding over $10.0 million reduces our availability.  The Companys maximum permitted annual capital expenditures are $30.0 million for 2006.  Amounts unused under the Revolver are subject to a fee, due quarterly,
based on a per annum rate, as amended, of 0.375%.  Advances bear simple interest at an annual rate equal to one of the following, at our option (i) the Prime Rate or (ii) a rate equal to the Eurodollar Rate as adjusted by the Eurodollar Reserve Percentage plus 2.0%, as amended. Interest is payable quarterly, following the end of each previous calendar quarter. Advances received on the Revolver bore interest at our option using the prime rate, which was 7.25% at December 31, 2005 and 8.25% at September 30, 2006.  Securus draws from the available credit on the Revolver to cover normal business cash requirements.  As of December 31, 2005 and September 30, 2006, Securus had $30.0 million and $22.8 million, respectively, of borrowing availability under the Revolver.



In April 2006, the Company and its lenders executed a second amendment to the Revolver to clarify certain debt compliance calculations.



Second-priority Senior Secured Notes.On September 9, 2004, Securus issued $154.0 million of Second-priority Senior Secured Notes that bear interest at a per annum rate of 11%. All principal is due September 9, 2011.  To the extent the Company generates excess cash flow (as defined in the indenture) in any calendar year beginning with the year ended December 31, 2005, the Company is required by the Second-priority Senior Secured Notes to offer to repay principal equal to 75% of such excess cash flow at a rate of 104% of face value.  No excess cash flow payment was due for the calendar year ended December 31, 2005 because no excess cash flow was generated.  Interest is payable semiannually on March 1 and September 1.  The Second-priority Senior Secured Notes were issued at a
discount to face value of $3.6 million or 97.651%.  Proceeds obtained from the issuance of Second-priority Senior Secured Notes were used to finance the acquisition of Evercom and to repay then outstanding long-term debt obligations.  The effective interest rate is 11.6% on the Second-priority Senior Secured Notes.



In connection with the issuance of its outstanding 11% Second-priority Senior Secured Notes, the Company entered into a registration rights agreement pursuant under which the Company agreed to exchange the outstanding Second-priority Senior Secured Notes for registered 11% Second-priority Senior


Secured Notes due 2011 (the Exchange Offer).  Pursuant to this registration rights agreement, the Company agreed to file a registration statement relating to such Exchange Offer on or before March 28, 2005.  As a result of the Companys failure to timely file a registration statement relating to such Exchange Offer, the Company was required to pay an additional 0.5% interest to its Second-priority Senior Secured Noteholders from March 28, 2005 to May 16, 2005, the filing date of the Exchange Offer registration statement, and from July 7 to July 27, 2005, the consummation date of the Exchange Offer.



Senior Subordinated Notes.On September 9, 2004, Securus issued $40.0 million of Senior Subordinated Notes, unsecured and subordinate to the Revolving Credit Facility and the Senior Notes, that bear interest at an annual rate of 17%.  Interest is payable at the end of each calendar quarter, or, as restricted by the Companys 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, Securus issued warrants to acquire 51,011 shares of Securus
Technologies, Inc. common stock at an exercise price of $0.01 per share to the Senior Subordinated Note holders.  As a result, Securus 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.  Proceeds obtained from the issuance of the Senior Subordinated Notes were used to finance the acquisition of Evercom, repay outstanding long-term debt obligations, and for general operating purposes.   During the nine months ended September 30, 2006, $6.6 million of paid-in-kind interest was added to the principal balance of the Notes.  The effective interest rate is 18.9% on the Senior Subordinated Notes.



All of the Companys subsidiaries (the Subsidiary Guarantors) are fully, unconditionally, and jointly and severably liable for the Revolving Credit Facility, Second-priority Senior Secured Notes and Senior Subordinated Notes.  The Subsidiary Guarantors are wholly-owned and constitute all of the Companys direct and indirect subsidiaries.  The Company has not included separate financial statements of its subsidiaries because (a) the aggregate assets, liabilities, earnings and equity of the Company 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, among other items, that require the maintenance of certain financial ratios, including specified interest coverage ratios, maintenance of minimum levels of operating cash flows (as defined), 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 the Company fails to comply with the covenants and restrictions, as specified in the credit agreements, Securus 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 September 30, 2006, the Company was in compliance with all covenants.



4.SEGMENT INFORMATION



SFAS No. 131,Disclosures About Segments of an Enterprise and Related Information, establishes standards for reporting operating segments in financial statements.  SFAS No. 131 also establishes standards for disclosures about products and services, geographic areas and major customers.



Management organized the enterprise around differences in products and services.  The Company and its predecessor had four reportable segments: direct call provisioning, solutions services, telecommunications services, and equipment sales.  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. Depending upon the contractual relationship at the site and the type of customer, the Company provides these products and services through service agreements with other telecommunications service providers, including Verizon/Public Communications Services, Global Tel*Link, AT&T (formerly SBC), Embarq (formerly Sprint) and Qwest (i.e., telecommunications services segment and solutions services segment) and
through direct contracts


between the Company and correctional facilities (i.e., direct call provisioning segment).  In addition, the Company sells systems to certain telecommunication providers (i.e., Equipment Sales 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 and 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 Company uses estimation 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 identify 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 nine months ended September 30, 2005 (unaudited) is as follows (in thousands):




Direct Call
        
        
        Solutions
        
        
        Telecommunications
        
        
        Equipment
        
        
        CorporateProvisioning
        
        
        Services
        
        
        Services
        
        
        Sales & Other
        
        
        & Other
        
        
        TotalRevenue from external customers
        
        $
        224,935
        
        
        $
        35,184
        
        
        $
        20,091
        
        
        $
        1,026
        
        
        $
        -
        
        
        $
        281,236Segment gross margin
        
        $
        48,096
        
        
        $
        6,628
        
        
        $
        11,183
        
        
        $
        857
        
        
        $
        -
        
        
        $
        66,764Depreciation and amortization
        
        
        14,255
        
        
        
        -
        
        
        
        2,600
        
        
        
        37
        
        
        
        95
        
        
        
        16,987Other operating costs and expenses
        
        
        6,019
        
        
        
        953
        
        
        
        -
        
        
        
        34
        
        
        
        29,910
        
        
        
        36,916Operating income (loss)
        
        $
        27,822
        
        
        $
        5,675
        
        
        $
        8,583
        
        
        $
        786
        
        
        $
        (30,005
        )
        
        $
        12,861Interest and other expenses, net
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        19,958Segment loss before income taxes
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (7,097
        )Capital expenditures
        
        $
        12,356
        
        
        $
        -
        
        
        $
        -
        
        
        $
        -
        
        
        $
        6,376
        
        
        $
        18,732September 30, 2005:Total assets
        
        $
        221,340
        
        
        $
        17,670
        
        
        $
        12,925
        
        
        $
        1,381
        
        
        $
        17,096
        
        
        $
        270,412Goodwill
        
        $
        49,385
        
        
        $
        -
        
        
        $
        -
        
        
        $
        -
        
        
        $
        -
        
        
        $
        49,385


Segment information for the nine months ended September 30, 2006 (Unaudited) is as follows (in thousands):




Direct Call
        
        
        Solutions
        
        
        Telecommunications
        
        
        Equipment
        
        
        CorporateProvisioning
        
        
        Services
        
        
        Services
        
        
        Sales & Other
        
        
        & Other
        
        
        TotalRevenue from external customers
        
        $
        251,721
        
        
        $
        35,161
        
        
        $
        11,077
        
        
        $
        494
        
        
        $
        -
        
        
        $
        298,453Segment gross margin
        
        $
        54,791
        
        
        $
        8,847
        
        
        $
        5,656
        
        
        $
        127
        
        
        $
        -
        
        
        $
        69,421Depreciation and amortization
        
        
        19,789
        
        
        
        987
        
        
        
        428
        
        
        
        -
        
        
        
        103
        
        
        
        21,307Other operating costs and expenses
        
        
        5,856
        
        
        
        337
        
        
        
        -
        
        
        
        -
        
        
        
        32,586
        
        
        
        38,779Operating income (loss)
        
        $
        29,146
        
        
        $
        7,523
        
        
        $
        5,228
        
        
        $
        127
        
        
        $
        (32,689
        )
        
        $
        9,335Interest and other expenses, net
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        20,742Segment loss before income taxes
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (11,407
        )Capital expenditures
        
        $
        19,174
        
        
        $
        -
        
        
        $
        -
        
        
        $
        -
        
        
        $
        108
        
        
        $
        19,282September 30, 2006:Total assets
        
        $
        213,270
        
        
        $
        23,523
        
        
        $
        1,499
        
        
        $
        -
        
        
        $
        23,520
        
        
        $
        261,812Goodwill
        
        $
        37,936
        
        
        $
        -
        
        
        $
        -
        
        
        $
        -
        
        
        $
        -
        
        
        $
        37,936



Segment information for the three months ended September 30, 2005 is as follows (in thousands):




Direct Call
        
        
        Solutions
        
        
        Telecommunications
        
        
        Equipment
        
        
        CorporateProvisioning
        
        
        Services
        
        
        Services
        
        
        Sales & Other
        
        
        & Other
        
        
        TotalRevenue from external customers
        
        $
        76,706
        
        
        $
        12,074
        
        
        $
        5,614
        
        
        $
        358
        
        
        $
        -
        
        
        $
        94,752Segment gross margin
        
        $
        17,176
        
        
        $
        2,590
        
        
        $
        2,866
        
        
        $
        308
        
        
        $
        -
        
        
        $
        22,940Depreciation and amortization
        
        
        4,573
        
        
        
        -
        
        
        
        1,126
        
        
        
        9
        
        
        
        29
        
        
        
        5,737Other operating costs and expenses
        
        
        2,030
        
        
        
        379
        
        
        
        -
        
        
        
        -
        
        
        
        10,278
        
        
        
        12,687Operating income (loss)
        
        $
        10,573
        
        
        $
        2,211
        
        
        $
        1,740
        
        
        $
        299
        
        
        $
        (10,307
        )
        
        $
        4,516Interest and other expenses, net
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        6,570Segment loss before income taxes
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (2,054
        )Capital expenditures
        
        $
        5,153
        
        
        $
        -
        
        
        $
        -
        
        
        $
        -
        
        
        $
        2,025
        
        
        $
        7,178




Segment information for the three months ended September 30, 2006 (Unaudited) is as follows (in thousands):




Direct Call
        
        
        Solutions
        
        
        Telecommunications
        
        
        Equipment
        
        
        CorporateProvisioning
        
        
        Services
        
        
        Services
        
        
        Sales & Other
        
        
        & Other
        
        
        TotalRevenue from external customers
        
        $
        84,094
        
        
        $
        11,183
        
        
        $
        2,744
        
        
        $
        64
        
        
        $
        -
        
        
        $
        98,085Segment gross margin
        
        
        17,223
        
        
        
        2,564
        
        
        $
        1,437
        
        
        
        46
        
        
        
        -
        
        
        
        21,270Depreciation and amortization
        
        
        7,083
        
        
        
        348
        
        
        
        143
        
        
        
        -
        
        
        
        35
        
        
        
        7,609Other operating costs and expenses
        
        
        1,803
        
        
        
        113
        
        
        
        -
        
        
        
        -
        
        
        
        10,448
        
        
        
        12,364Operating income (loss)
        
        $
        8,337
        
        
        $
        2,103
        
        
        $
        1,294
        
        
        $
        46
        
        
        $
        (10,483
        )
        
        $
        1,297Interest and other expenses, net
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        6,892Segment loss before income taxes
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        $
        (5,595
        )Capital expenditures
        
        $
        6,174
        
        
        $
        -
        
        
        $
        -
        
        
        $
        -
        
        
        $
        23
        
        
        $
        6,197

5.STOCKHOLDERS EQUITY



As of September 30, 2006, 53,497 shares were issued and outstanding of Class B Common Stock under the 2004 Restricted Stock Purchase Plan to certain members of management.  These shares are subject to forfeiture pursuant to the terms of managements respective Restricted Stock Purchase Agreements and the 2004 Restricted Stock Purchase Plan and the restrictions described herein and therein.  The restricted periods end upon either the occurrence of certain events or upon lapse of time.  With respect to one-third of the stock, the restricted period ends upon the lapse of time in equal increments with certain exceptions.  The restricted period for up to one-third of the stock ends upon the sale of the Companys stock to an independent third party, as defined in the 2004 Restricted Stock Plan.  With respect to the remaining
shares, the restricted period ends upon the Company attaining certain performance measures determined by the Companys Board of Directors.  Further, upon a change of control of the Company, the restricted 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 restricted period with respect to any such restricted shares.  The Company measures compensation expense on these restricted shares commensurate with their vesting schedules.  For the portion of the restricted shares that vest contingently with the occurrence of certain events, the Company records compensation expense when such events become probable.  For the three and nine months ended September 30, 2006, the incremental compensation expense on the restricted shares issued to the Companys CEO and other executives was
determined based on the estimated fair value of the Class B Common Stock, which resulted in compensation charges of approximately $28,000 and $83,000, respectively, to the condensed consolidated statements of operations.



6.GUARANTEES



FSP 45-3 the Financial Accounting Standards Board (FASB) amends Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to require a guarantor to recognize a liability for the estimated fair value of guarantee obligations entered into after January 1, 2006 and disclosure of the maximum amount that could be paid under the guarantee obligation. In February 2006, the Company entered into an agreement with a telecommunications vendor, primarily for local and long distance services, whereby the Company


guarantees a minimum purchase commitment over a two to three year period.  Management has reviewed the agreements and believes the fair value to be zero. The maximum amount that would be paid under this guarantee totals $15.0 million at September 30, 2006.



7.RECENT ACCOUNTING PRONOUNCEMENT



In July 2006, FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxesan interpretation of SFAS No. 109(FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined, recognized in an entitys financial statements in accordance with SFAS No. 109. It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return.  This interpretation is effective for fiscal years beginning after December 15, 2006.  We will be required to adopt this initiative in the first quarter of fiscal 2007.  The Company has not yet determined the impact this interpretation will have on our results from operations or financial position.



In September 2006, the FASB issued Statement No. 157,Fair Value Measurements.  This new standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  The new standard is effective for financial statements for the fiscal years beginning after November 15, 2007, and interim periods within those years.  The provisions of the new standard are to be applied prospectively for most financial instruments and retrospectively for others as of the beginning of the fiscal year in which the standard is initially applied.  We will be required to adopt this new standard in the first quarter of 2008.  We are currently evaluating the requirements of Statement No. 157 and have not yet
determined the impact on our consolidated financial statements.



In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,Considering the Effects of Prior Year Misstatement when Qualifying Misstatements in Current Year Financial Statements.  SAB 108 addresses the views of the SEC staff regarding the process of quantifying financial statements misstatements.  SEC registrants are expected to reflect the effects of initially applying the guidance in SAB 108 in their annual financial statements covering the first fiscal year ending November 15, 2006.  The cumulative effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year and the offsetting adjustment should be made to the opening balance of retained earnings for that year.  We will be required to adopt the
interpretations in SAB 108 in the fourth quarter of 2006.  We are currently evaluating the impact of applying this guidance.



8.SUBSEQUENT EVENTS



On November 13, 2006, the Company entered into a new employment contract with Richard Falcone, the Companys Chairman of the Board and Chief Executive Officer.  The employment contract extends through January 5, 2009.  Among other provisions, the contract specifies Mr. Falcone will receive a minimum base salary of $400,000 per year and will have the potential to earn an annual bonus targeted to equal 100% of his base salary.  In addition, Mr. Falcone will receive a one-time bonus, payable upon the contract execution date, of $485,500 and will also receive a $460,000 bonus payable at the end of the contract term.  In conjunction with the execution of the contract, the Company entered into a restricted shares agreement with Mr. Falcone whereby Mr. Falcone received an additional 9,484 shares of Class B common stock.



ITEM2.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion and analysis of the Companys financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this report. 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 limited operating history and accumulated deficits; (iv) the integration of Evercom into our business; (v) our financial results being dependent on the success of our billing and bad debt
management systems; (vi) loss of major partners or customers and recent trends in the inmate telecommunications industry and the risks of government contracts; (vii) protection of our proprietary technology and ensuring that we do not infringe on the proprietary technology of other companies; (viii) our ability to adapt new technologies and respond effectively to customer requirements or provide new products and services; (ix) control by our equity investors; (x) our ability to adapt to changes in state and federal regulations that apply to the inmate telecommunications industry; (xi) extensive government legislation and regulations; and (xii) other factors detailed from time to time in our filings with the SEC.



Overview



We are the largest independent provider of inmate telecommunications 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 September 30, 2006, we provided service to approximately 3,000 correctional facilities.



Our business consists of installing, operating, servicing and maintaining sophisticated call processing systems in correctional facilities and providing related services. We typically 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 typically have partnered with regional bell operating companies, or RBOCs, local exchange carriers, or LECs, and interexchange carriers, or IXCs as well as independent telecommunications companies, for 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.



Our business is conducted primarily through our two principal subsidiaries: T-Netix, which we acquired in March 2004, and Evercom, which we acquired in September 2004.






Revenues



We derived approximately 80.0% and 84.3% of our revenues for the nine months ended September 30, 2005 and 2006, respectively, from our direct operation of inmate telecommunication systems located in correctional facilities in 48 states and the provision of related services. 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 43.0% of direct revenues for the year ended December 31, 2005 and averaged 42.6% and 43.9% for the nine months ended September 30, 2005 and 2006, 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 margin is lower, than in our services business.



We derived approximately 7.1% and 3.7% of our revenues for the nine months ended September 30, 2005 and 2006, respectively, by providing telecommunication services to RBOCs, LECs, IXCs, and independent telecommunications companies, our service partners, typically through subcontracts in connection with the RBOCs, LECs or IXCs separate contracts with larger correctional institutions. In such instances, we provide equipment, security enhanced call processing, call validation, and service and support though the telecommunications provider, 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 typically 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 offer our solutions services, as described below, and the sale of equipment to RBOCs, LECs, IXCs and independent telecommunications companies as customers, to support their telecommunication contracts with correctional facilities. We derived approximately 12.5% and 11.8% of our revenues for the nine months ended September 30, 2005 and 2006, respectively, from our solutions business. The solutions business consists of providing validation, uncollectible account management and billing services. In this 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, with no recourse to the RBOC, LEC, IXC or independent customer. 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 the RBOC, LEC, IXC or independent customers 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.



We also sell equipment, typically consisting of our inmate calling system and digital recording systems, to a limited number of telecommunication services providers and some direct facilities.



In our direct call provisioning business and solutions services, we accumulate call activity data from our various installations and bill our revenues related to this call activity primarily through direct billing agreements, or in some cases through billing aggregators. In each case, we accrue 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 revenues and are typically fixed for the term of the agreements with the facilities; bad debt expense, consisting of unbillable and uncollectible accounts and billing charges; telecommunication costs such as telephone line access, long distance and other charges, field operations and maintenance costs, which consist primarily of field service on our installed base of inmate telephones; and selling, general, and administrative costs. 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. Customer service costs represent either in-house or contracted customer service representatives who handle questions and concerns and take payments from billed parties.



Cost of service associated with telecommunication services consists primarily of service administration costs for correctional facilities, including salaries and related personnel expenses, communication costs and inmate calling systems repair and maintenance expenses. Cost of service associated with telecommunication services also includes costs associated with call validation procedures (primarily network expenses and database access charges).



Cost of service associated with the solutions business generally includes billing and collection and the risk of unbillable and uncollectible accounts receivable.



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. Commission rates are one of the primary bases of competition for obtaining and retaining facility contracts.



Bad Debt. We account for bad debt as a cost of providing telecommunications in our direct call provisioning and solutions business lines. 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. This system, combined with the direct billing to LECs, has enabled us to realize what we believe to be industry-low bad debt margins. 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.



Field Operations and Maintenance Costs. Field operations and maintenance costs consist of service administration costs for correctional facilities, including salaried and related personnel expenses, and inmate calling systems (including related equipment), repair and maintenance. The costs of providing services primarily consist of service administration costs for correctional facilities, including salaries and


related personnel expenses, communication costs, and inmate calling systems repair and maintenance expenses.



SG&A. SG&A expenses consist of corporate overhead and selling expenses, including marketing, legal, regulatory and research and development costs.



Industry Trends



We provide our products and services to telecommunications and solutions service providers such as Global Tel*Link, Verizon/Public Communications Services (PCS), AT&T (formerly SBC) and Embarq (formerly Sprint), among other call providers. For the three and nine months ended September 30, 2006, 14.2% and 15.5%, respectively, of our total revenues were generated from contracts with telecommunications and solutions service providers. The following table lists our largest telecommunications and solutions service provider contracts for the three months ended September 30, 2006:






Approximate % of
        
        Approximate % of Total
        
        ContractTotal Solutions
        
        Telecommunications
        
        ExpirationCustomer
        
        Services Revenue
        
        Services Revenue
        
        Date**Global Tel*Link*
        
        73.6
        %
        
        36.0
        %
        
        March 1, 2008Embarq (formerly Sprint)
        
        21.6
        %
        
        7.2
        %
        
        Month-to-MonthAT&T (formerly SBC)***
        
        -
        
        
        28.0
        %
        
        May 1, 2009FSH Communications
        
        -
        
        
        25.4
        %
        
        Month-to-MonthVerizon / Public Communications Services, Inc.*
        
        -
        
        
        1.4
        %
        
        Month-to-Month


*
        AT&T sold its inmate telecommunications business to Global Tel*Link in 2005. Verizon sold its inmate telecommunications business to Public Communications Services, Inc. in 2005.**
        Represents expiration dates for master customer contracts. Below the master customer contracts, subcontracts govern site-specific contract durations, which are typically consistent with the terms of our partners prime contracts with the underlying correctional facilities. In some cases, our subcontracts with such customers for certain correctional facilities may extend beyond the term of the related master contract, in which case our agreements with these customers generally extend through the term of the subcontract.***
        SBC Recently changed its name to AT&T

In the first quarter of 2005 large industry participants Verizon and AT&T communicated plans to exit the inmate telecommunications business. During 2004, Verizon and AT&T were our two largest telecommunications services customers and, AT&T was our largest solutions customer. These communications by Verizon and AT&T continued a recent trend of large dominant telecommunications carriers exiting the direct inmate telecommunications business. Both Verizon and AT&T subsequently sold their inmate telecommunications businesses to Securus competitors in 2005. As a result of this trend and the Verizon and AT&T sales, we anticipate that our revenue and profits associated with these product lines will continue to decline.



We anticipate that our revenues and profits associated with our customer, Global Tel*Link, will continue to decline and that agreements we have in place with them will not be renewed upon expiration. We believe it is reasonable to expect that they will elect to replace our services over time with their internal resources or will procure services from other third parties who otherwise do not compete with them on a


direct call provisioning basis. Global Tel*Link has recently begun notifying us of their intent to eliminate our services, to the best of our knowledge, in all cases where their contracts have come to term.  We therefore expect our solutions and telecommunications services businesses with Global Tel*Link  to decline to zero over the next several years.  Contractually, our solutions and telecommunications services customers can replace our services as their underlying phone contracts with correctional facilities expire.



Notwithstanding the foregoing developments and the anticipated declining revenue stream associated with our solutions and telecommunication services product lines, we believe that the departure of large industry participants such as Verizon and AT&T from the direct call provisioning business may present significant opportunities for us and other independent providers in the future. Specifically, we are well positioned to procure agreements to provide direct call provisioning services to those corrections facilities previously serviced by Verizon and AT&T because we have been providing some inmate capabilities to those facilities on a sub-contractor basis. However, we anticipate that contracts to service the facilities will likely be subject to competitive bidding. Moreover, if we seek to secure inmate telecommunications contracts with larger county and state departments of
corrections, we may be required to provide multi-million dollar up front payments, surety bonds or guaranteed commissions, as well as incur the cost of equipment and similar costs. Although we have typically incurred equipment and similar costs in connection with providing telecommunication and solution services, we have not incurred the high capital costs related to these larger contracts, which have historically been absorbed by our RBOC and IXC partners. Given the large up-front costs associated with the procurement of larger county and state departments of corrections inmate telecommunication contracts, we will be required, on a case-by-case basis, to weigh the sufficiency of benefits of bidding on such contracts given the large up-front payment requirements and the anticipated lower gross margins we will generate on such agreements.



Results of Operations



The following tables present the results of operations of the Company through operating income:




For the Three Months Ended
        
        For the Nine Months EndedSeptember
        
        
        September
        
        
        September
        
        
        September30, 2005
        
        
        30, 2006
        
        
        30, 2005
        
        
        30, 2006(Dollars in thousands)
        
        (Unaudited)
        
        (Unaudited)Revenue:Direct call provisioning
        
        $
        76,706
        
        
        $
        84,094
        
        
        $
        224,935
        
        
        $
        251,721Solutions services
        
        
        12,074
        
        
        
        11,183
        
        
        
        35,184
        
        
        
        35,161Telecommunications services
        
        
        5,614
        
        
        
        2,744
        
        
        
        20,091
        
        
        
        11,077Equipment sales and other
        
        
        358
        
        
        
        64
        
        
        
        1,026
        
        
        
        494Total revenue
        
        
        94,752
        
        
        
        98,085
        
        
        
        281,236
        
        
        
        298,453Expenses:Cost of service
        
        
        71,812
        
        
        
        76,815
        
        
        
        214,472
        
        
        
        229,032Selling, general and administrative
        
        
        12,687
        
        
        
        12,336
        
        
        
        36,916
        
        
        
        38,696Stock-based compensation
        
        
        -
        
        
        
        28
        
        
        
        -
        
        
        
        83Depreciation and amortization
        
        
        5,737
        
        
        
        7,609
        
        
        
        16,987
        
        
        
        21,307Total operating costs and expenses
        
        
        90,236
        
        
        
        96,788
        
        
        
        268,375
        
        
        
        289,118Operating income
        
        $
        4,516
        
        
        $
        1,297
        
        
        $
        12,861
        
        
        $
        9,335


Total Variance
        
        
        
        
        
        Total Variancein Dollars
        
        
        
        
        
        in DollarsBetween the
        
        
        
        
        
        Between theThree Months
        
        
        
        
        
        Nine MonthsEnded
        
        
        
        
        EndedSeptember30,
        
        
        %
        
        September30,
        
        
        %2005 and 2006
        
        
        Change
        
        2005 and 2006
        
        
        Change(Dollars in thousands)
        
        (Unaudited)
        
        (Unaudited)RevenuesDirect call provisioning
        
        $
        7,388
        
        
        9.6
        
        
        $
        26,786
        
        
        11.9Solutions services
        
        
        (891
        )
        
        (7.4
        )
        
        
        (23
        )
        
        (0.1
        )Telecommunications services
        
        
        (2,870
        )
        
        (51.1
        )
        
        
        (9,014
        )
        
        (44.9
        )Equipment sales and other
        
        
        (294
        )
        
        (82.1
        )
        
        
        (532
        )
        
        (51.9
        )Total revenue
        
        
        3,333
        
        
        3.5
        
        
        
        17,217
        
        
        6.1Total cost of service
        
        
        5,003
        
        
        7.0
        
        
        
        14,560
        
        
        6.8Selling, general and administrative
        
        
        (351
        )
        
        (2.8
        )
        
        
        1,780
        
        
        4.8Stock-based compensation
        
        
        28
        
        
        -
        
        
        
        83
        
        
        -Depreciation and amortization
        
        
        1,872
        
        
        32.6
        
        
        
        4,320
        
        
        25.4Total operating costs and expenses
        
        
        6,552
        
        
        7.3
        
        
        
        20,743
        
        
        7.7Operating income
        
        $
        (3,219
        )
        
        (71.3
        )
        
        $
        (3,526
        )
        
        (27.4
        )



COMPARISON OF THREE MONTHS ENDED SEPTEMBER30, 2006 TO THREE MONTHS ENDED SEPTEMBER30, 2005



The corrections industry, which includes the inmate calling market, 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 telecommunications and solutions service provider customers) that market their products to our same customer base.



Revenues.  Compared to the corresponding third quarter of the prior year, consolidated revenues increased $3.3 million or 3.5% to $98.1 million.  The primary components of the increase in revenues are discussed below:




Direct call provisioning revenues increased $7.4 million or 9.6% to $84.1 million primarily due to:New prime business contracts won from competitors, net of accounts not renewed, of approximately $3.8 million;New prime business with the State of Pennsylvania of $3.6 million;  We began serving the State of Pennsylvania on an interim basis in late April 2006, as a result of Verizons desire to exit their existing contract.  We expect to continue providing service on an interim basis for the remainder of 2006.  Thereafter, the contract is expected to transition to a competitor, MCI (now owned by Verizon), who has been awarded the long-term contract.  The interim contract generates just over $1.0 million per month of revenue.Solutions services revenues decreased by $0.9 million or 7.4% to $11.2 million.  Solutions services revenues declined  primarily due to terminations of service by Global Tel*Link as their underlying facility contracts expired.  Solutions services revenues are expected to decline in the future as a result of indications from Global Tel*Link that it intends to eliminate our services as contracts expire.  We expect solutions services revenues to decline by $1.0 million per quarter for the next several quarters  and expect further declines thereafter.


Telecommunications services revenues decreased by $2.9 million or 51.1% to $2.8 million primarily attributable to accounts that we did not retain upon contract renewal or accounts that converted to direct provisioning revenue. We have not retained a significant amount of our telecommunications services contracts upon renewal as a result of our strategy to focus on growing our direct provisioning business. The departures of AT&T and Verizon from the inmate telecommunications market and resulting sale of those businesses to our competitors contributed to the decline. We expect the significant declining trend in telecommunication services revenue to continue.  We expect the telecommunications services revenue to decline by approximately $0.8 million between the third quarter of 2006 and the fourth quarter of 2006.  Thereafter, we expect our
telecommunications services revenues to decline more gradually.Equipment sales and other services revenues represented a minor component of our total revenues.  We do not expect to generate significant equipment sales revenue in the future.

Historically in our direct provisioning business, the third quarter of the year has been our lowest seasonal quarter, representing approximately a 6% average revenue decline from our first quarter and approximately a 5% decline relative to our second quarter.



Cost of Service.Total cost of service increased by $5.0 million, or 7.0%, to $76.8 million. The increase was due primarily to the change in the mix of our operating revenues. A comparison of the components of our business segment gross margins is provided below:








For The Three Months
        
        For The Three MonthsEnded September30,
        
        Ended September30,(Dollars in thousands)
        
        2005
        
        2006(unaudited)
        
        (unaudited)Direct call provisioningRevenue
        
        $
        76,706
        
        
        
        
        $
        84,094Cost of service
        
        
        59,530
        
        77.6
        %
        
        
        66,871
        
        79.5
        %Segment gross margin
        
        $
        17,176
        
        22.4
        %
        
        $
        17,223
        
        20.5
        %Solutions servicesRevenue
        
        $
        12,074
        
        
        
        
        $
        11,183Cost of service
        
        
        9,484
        
        78.5
        %
        
        
        8,619
        
        77.1
        %Segment gross margin
        
        $
        2,590
        
        21.5
        %
        
        $
        2,564
        
        22.9
        %Telecommunications servicesRevenue
        
        $
        5,614
        
        
        
        
        $
        2,744Cost of service
        
        
        2,748
        
        48.9
        %
        
        
        1,307
        
        47.6
        %Segment gross margin
        
        $
        2,866
        
        51.1
        %
        
        $
        1,437
        
        52.4
        %Equipment sales and otherRevenue
        
        $
        358
        
        
        
        
        $
        64Cost of service
        
        
        50
        
        14.0
        %
        
        
        18
        
        28.1
        %$
        308
        
        86.0
        %
        
        $
        46
        
        71.9
        %

Our direct call provisioning revenues increased while our solutions services, telecommunications services and equipment sales and other revenues decreased. Historically, operating costs are a substantially higher component of revenues in the direct call provisioning and solutions services businesses than in the telecommunications services and equipment sales businesses.



Cost of service in our direct provisioning business increased as a percentage of revenue primarily as a result of costs associated with the addition of the State of Pennsylvania account, coupled with increases in commission expense and billing costs.  We believe we have received the majority of final bad debt write-


offs related to Hurricane Katrina from our local exchange carrier billing agents and we believe we are adequately reserved to cover any remaining exposure.  We have filed a claim with our insurance carrier to potentially recover some of the loss.  We expect total cost of service as a percentage of revenue in the direct provisioning business to be relatively stable in the upcoming quarters, and decline in the longer term as we achieve operating efficiencies through our new, centralized voice over internet protocol architecture, which will be rolled out over the next several years.



Cost of service in our solutions segment as a percentage of our revenue improved as a result of favorable bad debt trends.  Cost of service is a more volatile component of solutions services relative to our other business units because most of the cost is comprised of bad debt expense.



Cost of service in our telecommunications segment as a percentage of revenue decreased to 47.6% from 48.9%.  This decrease is the result of the changing mix of contracts as a significant number of accounts were deinstalled.  Cost of service in the telecommunications segment is expected to be relatively stable over the next several quarters.



Cost of service in our equipment sales and other segment increased as a percentage of revenue due to the settlement of a customer dispute.  We believe future cost of service as a percentage of revenue in this segment will be more consistent with long-term historical trends.



SG&A.SG&A expenses of $12.3 million were $0.4 million, or 2.8%, lower than the prior year quarter. The decrease in expense was due primarily to various cost cutting measures.  SG&A was negatively impacted in the quarter by unusually high legal fees related primarily to several intellectual property lawsuits.  The Company also incurred approximately $0.3 million of SG&A expenses in the quarter related to our ongoing efforts to comply with the Sarbanes-Oxley Act of 2002.



Depreciation and Amortization Expenses.Depreciation and amortization expenses were $7.6 million and increased $1.9 million between the periods. The increase was attributable to depreciation and amortization related to 2005 and 2006 additions to property and equipment and intangible assets consisting primarily of investments required for growth in the direct provisioning business, back-office systems as a result of merger consolidation and cost saving initiatives,  investments in a new voice over internet protocol (VOIP) centralized architecture, and investments in new products and services.



Interest and Other Expenses, net.Interest and other expenses were $6.6 million and $6.9 million for the three months ended September 30, 2005 and 2006, respectively. The increase relates primarily to the increasing principal on the Senior Subordinated notes due to interest being paid-in-kind.



Income Tax Expense.The Company had income tax expense of $0.4 million for the three months ended September 30, 2006 and had a $1.3 million tax benefit for the three months ended September 30, 2005.  The Company can generate tax expense despite operating losses due principally to changes in deferred tax balances.



COMPARISON OF NINE MONTHS ENDED SEPTEMBER30, 2006 TO NINE MONTHS ENDED SEPTEMBER30, 2005



Revenues.  The Companys revenue for the nine months ended September 30, 2006 was $17.2 million higher than in the comparable prior year period, representing a 6.1% increase.  This increase was due primarily to growth in the Companys direct call provisioning business.  The primary components of the increase in revenues are discussed below:




Direct call provisioning revenues increased $26.8 million or 11.9% to $251.7 million primarily due to:New prime business contracts won from competitors, net of accounts not renewed of approximately $16.1 million;


$3.7 million of revenue obtained from Verizon upon their exit from the inmate telecommunications market in 2005, whereby we accepted assignment.New prime business with the State of Pennsylvania of $6.3 million;  We began serving the State of Pennsylvania on an interim basis in late April 2006, as a result of Verizons desire to exit their existing contract.  We expect to continue providing service on an interim basis for the remainder of 2006.  Thereafter, the contract is expected to transition to a competitor, MCI (now owned by Verizon), who has been awarded the long-term contract.  The interim contract generates just over $1.0 million per month of revenue.An increase of approximately $0.7 million related to fees charged to end-users to recoup billing costs and end user rate increases.  The increase became effective in the first quarter of 2006.Solutions services revenues were steady at $35.2 million during both periods.   Solutions services revenues are expected to decline in the future as a result of indications from Global Tel*Link that it intends to eliminate our services as contracts expire.  We expect solutions services revenues to decline by $1.0 million per quarter for the next several quarters and expect further declines thereafter.Telecommunications services revenues decreased by $9.0 million or 44.9% to $11.1 million primarily attributable to accounts that we did not retain upon contract renewal or accounts that converted to direct provisioning revenue. We have not retained a significant amount of our telecommunications services contracts upon renewal as a result of our strategy to focus on growing our direct provisioning business. The departures of AT&T and Verizon from the inmate telecommunications market and resulting sale of those businesses to our competitors contributed to the decline. We expect the significant declining trend in telecommunication services revenue to continue.  We expect the telecommunications services revenue to decline by approximately $0.8 million between the third quarter of 2006 and the fourth quarter of 2006.  Thereafter, we expect our
telecommunications services revenues to decline more gradually.Equipment sales and other services revenues were relatively consistent between the periods and were small in relation to the other segments.  We do not expect to generate significant equipment sales revenue in the future.

For the first nine months of 2006, we have won $25.0 million of annualized new direct provisioning revenue from our competitors and have renewed 92% of accounts up for renewal in our direct provisioning segment.  We expect the positive trends in new direct provisioning revenue to continue.



Cost of Service.Total cost of service increased by $14.6 million, or 6.8%, to $229.0 million for the nine months ended September 30, 2006.  The increase was due primarily to the change in the mix of our operating revenues.  A comparison of the components of our business segment gross margins is provided below:


For The Nine Months
        
        For The Nine MonthsEnded September30,
        
        Ended September30,(Dollars in thousands)
        
        2005
        
        2006(unaudited)
        
        (unaudited)Direct call provisioningRevenue
        
        $
        224,935
        
        
        
        
        $
        251,721Cost of service
        
        
        176,839
        
        78.6
        %
        
        
        196,930
        
        78.2
        %Segment gross margin
        
        $
        48,096
        
        21.4
        %
        
        $
        54,791
        
        21.8
        %Solutions servicesRevenue
        
        $
        35,184
        
        
        
        
        $
        35,161Cost of service
        
        
        28,556
        
        81.2
        %
        
        
        26,314
        
        74.8
        %Segment gross margin
        
        $
        6,628
        
        18.8
        %
        
        $
        8,847
        
        25.2
        %Telecommunications servicesRevenue
        
        $
        20,091
        
        
        
        
        $
        11,077Cost of service
        
        
        8,908
        
        44.3
        %
        
        
        5,421
        
        48.9
        %Segment gross margin
        
        $
        11,183
        
        55.7
        %
        
        $
        5,656
        
        51.1
        %Equipment sales and otherRevenue
        
        $
        1,026
        
        
        
        
        $
        494Cost of service
        
        
        169
        
        16.5
        %
        
        
        367
        
        74.3
        %$
        857
        
        83.5
        %
        
        $
        127
        
        25.7
        %

Our direct call provisioning revenues increased while our telecommunications services, solutions services and equipment sales and other revenues decreased. Historically, operating costs are a substantially higher component of revenues in the direct call provisioning and solutions services businesses than in the telecommunications services and equipment sales businesses.



Cost of service in our direct provisioning business decreased as a percentage of revenue as a result of an increase in fees charged to end users to recoup billing costs and cost savings initiatives in the areas of bad debt and network costs.  These benefits more than offset increases in commission expense and billing costs and increased costs associated with the addition of the State of Pennsylvania account.  We believe we have received the majority of final bad debt write-offs related to Hurricane Katrina from our local exchange carrier billing agents and we believe we are adequately reserved to cover any remaining exposure.  We have filed a claim with our insurance carrier to potentially recover some of the loss.  We expect total cost of service as a percentage of revenue in the direct provisioning business to be relatively stable in the upcoming quarters, and decline in the
longer term as we achieve operating efficiencies through our new, centralized voice over internet protocol architecture, which will be rolled out over the next several years.



Cost of service in our solutions segment as a percentage of our revenue decreased significantly to 74.8%.  This decrease was due to the benefit of our successful conversion of all solutions revenues to our primary bad debt controls and billing processes in the first quarter of 2005.  Cost of service is a more volatile component of solutions services relative to our other business units because most of the cost is comprised of bad debt expense.



Cost of service in our telecommunications segment as a percentage of revenue increased to 48.9% from 44.3%.  This increase is the result of the significant number of accounts deinstalled and the relative profitability of those deinstalled accounts compared to the remaining accounts.  Cost of service in the telecommunications segment is expected to be relatively stable over the next several quarters.



Cost of service in our equipment sales and other segment increased as a percentage of revenue as a result of the settlement of customer disputes.  We believe future cost of service as a percentage of revenue in this segment will be more consistent with long-term historical trends.



SG&A.SG&A expenses of $38.7 million for the nine months ended September 30, 2006 were $1.8 million, or 4.8%, higher than the nine months ended September 30, 2005.  The increase in expense


was due primarily to unusually high legal fees related to several ongoing intellectual property lawsuits and approximately $1.1 million of SG&A expenses related to our ongoing efforts to comply with the Sarbanes-Oxley Act of 2002 during the first nine months of 2006.  These increases were partially offset by declines in salaries and contract labor due to synergies achieved as a result of the merger and consolidation.



Depreciation and Amortization Expenses.Depreciation and amortization expenses were $17.0 million and $21.3 million for the nine months ended September 30, 2005 and 2006, respectively.  The increase was attributable to depreciation and amortization related to 2005 and 2006 additions to property and equipment and intangible assets consisting primarily of investments required for growth in the direct provisioning business, back-office systems as a result of merger consolidation and cost saving initiatives,  investments in a new voice over internet protocol (VOIP) centralized architecture, and investments in new products and services.



Interest and Other Expenses, net.Interest and other expenses were $20.0 million and $20.7 million for the nine months ended September 30, 2005 and 2006, respectively.  The increase relates primarily to the increasing principal on the Senior Subordinated notes due to interest being paid-in-kind.



Income Tax Expense.Income tax expense for the nine months ended September 30, 2005 and 2006 was a benefit of $0.9 million and expense of $1.0 million, respectively.  The Company generated tax expense despite operating losses due principally to changes in deferred tax balances.



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 September 30, 2006, we had $217.6 million in total debt outstanding before considering $2.8 million of original issue discount on our second-priority senior secured notes and $2.7 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 September 30, 2006, we had unused capacity of $22.8 million under our working capital credit facility and a total stockholders
deficit of $44.2 million.  As of November 13, 2006, we had unused capacity of $30.0 million under our working capital credit facility.



Cash Flows



Our cash flow from operations is primarily attributable to the operations of our direct call provisioning business which represents 84.3% of our revenues for the nine months ended September 30, 2006. 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 operating activities is also affected by the level of our operating and other expenses.



The following table, in thousands, summarizes our cash flows:




For the Nine Months EndedSeptember30,
        
        September30,2005
        
        2006(Unaudited)Net cash provided by operating activities
        
        $
        11,810
        
        $
        7,309Net cash used in investing activities
        
        $
        (18,732
        )
        $
        (19,282
        )Net cash provided by financing activities
        
        $
        5,278
        
        $
        9,763






Cash Flows for the Nine Months Ended September30, 2006 Compared to the Nine Months Ended September30, 2005



Net cash provided by operating activities for the nine months ended September 30, 2006 consisted primarily of $30.6 million of operating income before considering non-cash expenses such as $21.3 million of depreciation and amortization, offset by $17.5 million for cash paid for interest expense and income taxes, and $5.8 million of working capital use.  This working capital fluctuation was due to an increase in cash withheld by certain billing agents, primarily in the first quarter of 2006, as a reserve against future uncollectible write-offs, coupled with very short-term month end timing of certain normal operating receipts and disbursements along with scheduled annual prepaid commission advances to certain facilities.



Net cash provided by operating activities for the nine months ended September 30, 2005 (see note 1d), consisted primarily of $29.8 million of operating income before considering non-cash expenses such as $17.0 million of depreciation and amortization, offset by $17.1 million for cash paid for interest expense and $0.9 million of working capital use.



Cash used in investing activities for the nine months ended September 30, 2005 and 2006 respectively, was $18.7 million and $19.3 million.  These expenditures primarily represent investments in equipment and intangibles to maintain and grow the direct call provisioning business for both periods presented.  We have spent $1.9 million in 2006 specifically related to the development of new centralized voice over internet protocol architecture which is expected to reduce both our operating expenses and capital expenditures in the future by several millions of dollars per year.



Cash provided by financing activities for the nine months ended September 30, 2005 (see note 1d) was $5.3 million, mainly consisting of borrowing on the Revolver.



Cash provided by financing activities for the nine months ended September 30, 2006 of $9.8 million primarily relates to the net draws on the Company's revolving credit facility of $7.3 million for short term operational needs. As of November 13, 2006, there were no of borrowings under the revolving credit facility.



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 working capital facility will be adequate to meet our liquidity needs for our operations for the foreseeable future.  In the event we wish to make additional acquisitions, we may need to borrow additional debt.  We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our working
capital facility in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs.  In the event that cash in excess of the amounts generated from on-going business operations and available under our working capital facility is required to fund our operations, we may be required to reduce or eliminate discretionary selling, general and administrative costs, and sell or close certain of our operations.



Debt and Other Obligations



Revolving Credit Facility.The Company has a revolving credit facility (the Revolver) with a syndicate of banks and other lending institutions with a borrowing base limitation equal to 80% of the eligible receivables and 50% of inventory, as defined in the credit agreement.  The Revolver provides for financing on a revolving basis of up to $30.0 million and a $22.5 million letter of credit facility that expires on September 9, 2009.  To the extent that letters of credit outstanding are greater than $10.0 million, the incremental letters of credit outstanding over $10.0 million reduces our availability.  The Companys maximum permitted annual capital expenditures are $30.0 million for 2006.  Amounts unused under the Revolver are subject to a fee, due
quarterly, based on a per annum rate, as amended, of 0.375%.  Advances bear simple interest at an annual rate equal to one of the following, at our option (i) the Prime Rate or (ii) a


rate equal to the Eurodollar Rate as adjusted by the Eurodollar Reserve Percentage plus 2.0%, as amended. Interest is payable quarterly, following the end of each previous calendar quarter. Advances received on the Revolver bore interest at our option using the prime rate, which was 7.25% at December 31, 2005 and 8.25% at September 30, 2006.  Securus draws from the available credit on the Revolver to cover normal business cash requirements.  As of December 31, 2005 and September 30, 2006, Securus had $30.0 million and $22.8 million, respectively, of borrowing availability under the Revolver.



Second-priority Senior Secured Notes.We have outstanding $154.0 million of 11% Second-priority Senior Secured Notes.  These notes were issued in September 2004 at a discount to face value of $3.6 million and proceeds obtained from the issuance were used to finance the acquisition of Evercom and to repay then outstanding long-term debt obligations. Interest is payable on March 1 and September 1 of each year.  These notes are secured by second-priority security interests in substantially all of our assets including, but not limited, to the capital stock of each of our subsidiaries and all of our and our subsidiaries tangible and intangible non-real estate properties and assets.



The obligations under our working capital facility are guaranteed on a secured first priority basis by Securus and its subsidiaries.  The loans are secured by a first priority lien on substantially all of our assets including, but not limited to, the capital stock of each of our subsidiaries and all of the Company and its subsidiaries tangible and intangible non-real estate properties and assets.



The credit agreement contains a number of customary affirmative and negative covenants.  Subject to certain exceptions, the negative covenants restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness, create and incur liens on assets, repay other indebtedness, sell assets, engage in transactions with affiliates, make loans, investments, guarantees or acquisitions, declare dividends, redeem or repurchase equity interests or make other restricted payments, and engage in mergers, acquisitions, asset sales and sale-leaseback transactions.  The working capital facility also includes specified financial covenants, including maintaining a minimum interest coverage ratio and capital expenditure limits.



Senior Subordinated Notes.On September 9, 2004 Securus issued $40.0 million of Senior Subordinated Notes.  Due to the addition to these Notes of paid-in-kind interest, the principal balance of the Senior Subordinated Notes was $56.4 million as of September 30, 2006.  The Senior Subordinated Notes are unsecured and subordinated to the amounts owed under our working capital facility and our 11% Second-priority Senior Secured Notes. Our obligations under the Senior Subordinated Notes are irrevocably and unconditionally guaranteed on a senior subordinated basis by our subsidiaries.  These notes bear interest at a fixed annual rate of 17%. Interest is payable at the end of each quarter, or, as restricted by the working capital facility, is paid in-kind by adding accrued interest to the principal balance of the
Senior Subordinated Notes.



The note purchase agreement governing the Senior Subordinated Notes contains a number of customary affirmative and negative covenants.  Subject to certain exceptions, these covenants restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness, create and incur liens on assets, repaypari passuour subordinated indebtedness, sell assets, engage in transactions with affiliates, make loans, investments, guarantees or acquisitions, declare dividends, redeem or repurchase equity interests or make other restricted payments, and engage in mergers, acquisitions, asset sales and sale-leaseback transactions.  The Senior Subordinated Notes also include specific financial covenants consistent with those contained in the indenture governing the 11% Second-Priority Senior Secured Notes.



Other Long-Term Liabilities.Other long-term liabilities represent approximately $1.8 million of tenant improvement concessions, of which approximately $23 thousand and $52 thousand of net amortization expense has been recorded for the nine months ended in 2005 and 2006, respectively.  These improvement concessions relate to the Companys lease of its primary facility that will be amortized over the 10-year life of the lease as prescribed by SFAS No. 13 and FASB Technical Bulletin 88-1.




Capital Requirements



As of September 30, 2006, our contractual cash obligations and commitments on an aggregate basis are as follows (in thousands):




For the year ended September30,2007
        
        
        2008
        
        
        2009
        
        
        2010
        
        
        2011
        
        
        ThereafterLong-term debt (1)
        $
        -
        *
        
        $
        -
        *
        
        $
        7,250
        *
        
        $
        -
        *
        
        $
        154,000
        *
        
        $
        56,361
        *Operating leases
        
        1,877
        
        
        
        1,465
        
        
        
        1,090
        
        
        
        1,027
        
        
        
        1,012
        
        
        
        3,552Capital leases
        
        28
        
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        -Total contractual cash obligations and commitments
        $
        1,905
        
        
        $
        1,465
        
        
        $
        8,340
        
        
        $
        1,027
        
        
        $
        155,012
        
        
        $
        59,913


*
        Assumes no repurchases of second-priority senior secured notes or senior subordinated notes during such periods.  These amounts also do not give effect to mandatory purchases of second-priority senior secured notes, if any, with excess cash flow.(1)
        Includes $7.3 million drawn under our working capital facility, which expires on September 9, 2009, and does not include accrued interest under our long-term debt.

Surety Bonds



In the ordinary course of business, we obtain for the benefit of certain of our customers surety, performance and similar bonds.  As of September 30, 2006, we had outstanding approximately $4.0 million of these bonds, which are backed by letters of credit issued under our working capital facility.



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.  The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP.  The process of preparing the condensed consolidated 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; andacquisition-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



Revenues from direct call provisioning are recognized at the time the telephone call is completed and revenues from telecommunications and solutions services are recognized in the period in which calls are


processed through our systems.  Revenues from equipment sales are recognized when the equipment is shipped to customers.  We record deferred revenues for advance billings to customers, or prepayments by customers.



In evaluating the collectibility of our trade receivables, we assess a number of factors including our historical cash resources held by our LEC billing agents and 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 uncollectibles 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 of a 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 SFAS 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 SFAS No. 144,Accounting for Impairment or Disposal of Long-Lived Assets.  We review our unamortized intangible assets whenever 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 Tax



The Company accounts for income taxes under the provisions of 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 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.



Changes in Accounting Standards



In July 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes an interpretation of SFAS No. 109 (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined.  FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes.  This interpretation is effective for fiscal years beginning after December 15, 2006.  The Company has not yet determined the impact this interpretation will have on our results from operations or financial position.



In September 2006, the FASB issued Statement No. 157,Fair Value Measurements.  This new standard defines fair value, establishes a framework for measuring fair value in generally accepted


accounting principles, and expands disclosures about fair value measurements.  The new standard is effective for financial statements for the fiscal years beginning after November 15, 2007, and interim periods within those years.  The provisions of the new standard are to be applied prospectively for most financial instruments and retrospectively for others as of the beginning of the fiscal year in which the standard is initially applied.  We will be required to adopt this new standard in the first quarter of 2008.  We are currently evaluating the requirements of Statement No. 157 and have not yet determined the impact on our consolidated financial statements.



In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,Considering the Effects of Prior Year Misstatement when Qualifying Misstatements in Current Year Financial Statements.  SAB 108 addresses the views of the SEC staff regarding the process of quantifying financial statements misstatements.  SEC registrants are expected to reflect the effects of initially applying the guidance in SAB 108 in their annual financial statements covering the first fiscal year ending November 15, 2006.  The cumulative effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year and the offsetting adjustment should be made to the opening balance of retained earnings for that year.  We will be required to adopt the
interpretations in SAB 108 in the fourth quarter of 2006.  We are currently evaluating the impact of applying this guidance.



ITEM3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



No material changes in our market risk occurred from December 31, 2005 through September 30, 2006.  Information regarding our market risk at September 30, 2006 is contained in  Item 7A Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2005.



ITEM4.CONTROLS AND PROCEDURES



1.Disclosure Controls and Procedures



The Companys management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2006.  Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Companys Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.



2.Changes in Internal Control Over Financial Reporting



No change in the Companys 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 nine months ended September 30, 2006, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.






PARTIIOTHER INFORMATION



ITEM1.LEGAL PROCEEDINGS



From time to time we have been, and expect to continue to be, subject to various legal and administrative proceedings or various claims in the normal course of our business. We believe the ultimate disposition of these matters will not have a material affect on our financial condition, liquidity, or results of operations.



From time to time, inmate telecommunications providers, including our 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, 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. The plaintiffs in such judicial proceedings often seek class action certification on behalf of inmates and those who receive inmate calls against all named inmate telecommunications providers. 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.



Currently, T-NETIX awaits affirmance of the entry of summary judgment in our favor in a Washington case captionedSandra Judd, et al. v. AT&T, et al., initially brought in King County Superior Court in Seattle. InJudd, T-NETIX and several other telecommunication companies were sued on allegations of failure to comply with the audible, pre-connect disclosure of inmate call rates as required by Washington statutes and regulations. T-NETIX and AT&T, the remaining defendants, obtained summary judgment in their favor in September, 2005, and plaintiffs have appealed. We cannot predict the outcome of this appeal at this time.



In February 2006, Evercom was named in a putative class action in Florida federal court captionedKirsten Salb v. Evercom Systems, Inc., et al. Evercom and its wholly owned billing agent are alleged to have violated the Florida Deceptive and Unfair Trade Practices Act and other common law duties because of the alleged incorrect termination of inmate telephone calls. Plaintiff seeks statutory damages, as well as compensatory damages and attorneys fees and costs, and may later seek certification of a class of persons who receive inmate calls from Miami-Dade County. Evercom has moved for complete dismissal of all claims, and we await the Courts decision. This case is in its early stages and we cannot predict the scope of liability or the outcome of the case at this time.



In May 2005, TIP Systems, LLC and TIP Systems Holdings Co., Inc. (TIPS) filed suit in the United States District Court for the Southern District of Texas (Houston Division) against numerous defendants including Evercom, Inc., Evercom Systems, Inc., Evercom Holdings, Inc., T-NETIX, Inc., T-NETIX Telecommunications Services, Inc., and TZ Holdings, Inc. (Evercom), captionedTIP Systems, LLC and TIP Systems Holding Co., Inc. v. Phillips & Brooks/Gladwin, Inc., et al., which was filed in the United States District Court for the Southern District of Texas (Houston Division) for patent infringement.    No trial date has been set in this matter.  Evercom is vigorously defending this suit.   No evaluation of the likelihood of any outcome or reasonable estimate of range of loss can be made at this
time.  After the court denied TIPS request to add additional parties, the TIP Systems entities filed an additional lawsuit in February 2006, in the Southern District of Texas, against numerous defendants, including Securus Technologies, captionedTIP Systems, LLC and TIP Systems Holding Co., Inc. v SBC Operations, Inc., et. al.The suit alleges substantially similar allegations concerning patent infringement claims for cord-free or hands-free inmate phone technology.  Discovery is ongoing in this matter.  Securus denies any wrongdoing and will vigorously defend each and every allegation in the case. No trial date is currently set.  No evaluation of the likelihood of any outcome or reasonable estimate of range of loss can be made at this time.




In October 2003,Value-Added Communications, Inc. (VAC) filed suit in the District Court of Dallas County, Texas against T-NETIX, Inc. (T-NETIX), captionedValue-Added Communications, Inc. (Plaintiff and Counter-Defendant) v. T-NETIX, Inc. (Defendant and Counter-Plaintiff)for alleged breach of a Patent License Agreement between VAC and T-NETIX (the Agreement).  VAC seeks a declaratory judgment related to the interpretation of certain provisions of the Agreement and the rights and obligations of the parties pursuant to the Agreement and an award of its attorneys fees.  T-NETIX is vigorously defending this suit as well as vigorously litigating its claim for affirmative relief.  No trial date has been set in this matter.   No evaluation
of the likelihood of any outcome or reasonable estimate of range of potential loss can be made at this time.



In April 2005, T-NETIX, Inc. filed suit in the United States District Court for the Northern District of Texas (Dallas Division) against VAC for patent infringement in the case styledT-NETIX, Inc v. Value-Added Communications, Inc v. Securus Technologies, Inc.VAC filed an answer and a counterclaim in this matter, adding Securus Technologies as a party.  VAC seeks declaratory judgments as to non-infringement and invalidity.  Discovery is on-going at this time.  Trial in this matter is set for June 2007.  No evaluation of the likelihood of any outcome can be made at this time.



In October 2006, T-NETIX, Inc. and Evercom Systems, Inc., filed suit in the U.S. Federal District Court for the Eastern District of Texas against (i) Global Tel*Link Corporation; (ii) AGM Telecom Corporation; (iii) Inmate Calling Solutions, Inc.; (iv) Encartele, Inc.; (v) TIP Systems, LLC and TIP Systems Holding Company, Inc.; and (vi) FSH Communications, LLC. for patent infringement of several patents related to the inmate correctional services and telecommunications industry by each such defendant. This case is in its early stages and we cannot predict the outcome at this time.



ITEM1A.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.



ITEM2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



None.



ITEM3.DEFAULTS UPON SENIOR SECURITIES



None.



ITEM4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None.



ITEM5.OTHER INFORMATION



(a) None.



(b) None.


ITEM6.EXHIBITS



(a) Exhibits.




Exhibit No.
        
        Description of Exhibit3.1
        
        Amended and Restated Certificate of Incorporation of Securus Technologies, Inc., filed on August 6, 2004, incorporated by reference from the S-4.3.2
        
        Amended and Restated Bylaws of Securus Technologies, Inc., incorporated by reference from the S-4.3.3
        
        Certificate of Incorporation of T-Netix, Inc., filed on September 7, 2001, as amended, incorporated by reference from the S-4.3.4
        
        Bylaws of T-Netix, Inc, incorporated by reference from the S-4.3.5
        
        Articles of Incorporation of Telequip Labs, Inc., filed on November 9, 1987, as amended, incorporated by reference from the S-4.3.6
        
        Amended and Restated Bylaws of Telequip Labs, Inc., incorporated by reference from the S-4.3.7
        
        Articles of Incorporation of T-NETIX Telecommunications Services, Inc., filed on February 11, 1988, as amended, incorporated by reference from the S-4.3.8
        
        Bylaws of T-NETIX Telecommunications Services, Inc., incorporated by reference from the S-4.3.9
        
        Certificate of Incorporation of Evercom Holdings, Inc., filed on November 25, 2002, as amended, incorporated by reference from the S-4.3.10
        
        Bylaws of Evercom Holdings, Inc., incorporated by reference from the S-4.3.11
        
        Amended and Restated Certificate of Incorporation of Evercom, Inc., filed on February 19, 2003, incorporated by reference from the S-4.3.12
        
        Bylaws of Evercom, Inc., incorporated by reference from the S-4.3.13
        
        Certificate of Incorporation of Evercom Systems, Inc., filed on August 22, 1997, as amended, incorporated by reference from the S-4.3.14
        
        Bylaws of Evercom Systems, Inc., incorporated by reference from the S-4.4.1
        
        Form of 11% Second-priority Senior Secured Notes due 2011, incorporated by reference from the S-4.4.2
        
        Indenture, dated as of September 9, 2004, by and among Securus, T-Netix, Inc., a Delaware corporation, T-NETIX Telecommunications Services, Inc., a Texas corporation, T-Netix Monitoring Corporation, a Colorado corporation, SpeakEZ, Inc., a Colorado corporation, Telequip Labs, Inc., a Nevada corporation, Evercom Holdings, Inc., Evercom, Inc., EverConnect, Inc., a Delaware corporation, Evercom Systems, Inc., a Delaware corporation, and The Bank of New York Trust Company, N.A., incorporated by reference from the S-4.4.3
        
        Registration Rights Agreement, dated August 18, 2004, by and among Securus Technologies, Inc., Credit Suisse First Boston LLC and Morgan Stanley & Co. Incorporated, incorporated by reference from the S-4.


4.4
        
        Security Agreement, dated September 9, 2004, by and among Securus Technologies, Inc., T-Netix, Inc., a Delaware corporation, T-NETIX Telecommunications Services, Inc., a Texas corporation, T-Netix Monitoring Corporation, a Colorado corporation, SpeakEZ, Inc., a Colorado corporation, Telequip Labs, Inc., a Nevada corporation, Evercom Holdings, Inc., a Delaware corporation, Evercom, Inc., a Delaware corporation, EverConnect, Inc., a Delaware corporation, Evercom Systems, Inc., a Delaware corporation, and The Bank of New York Trust Company, N.A., incorporated by reference from the S-4.4.5
        
        Patent Security Agreement, dated September 9, 2004, by and among Securus Technologies, Inc., T-Netix, Inc., a Delaware corporation, T-NETIX Telecommunications Services, Inc., a Texas corporation, T-Netix Monitoring Corporation, a Colorado corporation, SpeakEZ, Inc., a Colorado corporation, Telequip Labs, Inc., a Nevada corporation, Evercom Holdings, Inc., a Delaware corporation, Evercom, Inc., a Delaware corporation, EverConnect, Inc., a Delaware corporation, Evercom Systems, Inc., a Delaware corporation and The Bank of New York Trust Company, N.A., incorporated by reference from the S-4.4.6
        
        Copyright Security Agreement, dated September 9, 2004, by and among Securus Technologies, Inc., T-Netix, Inc., a Delaware corporation, T-NETIX Telecommunications Services, Inc., a Texas corporation, T-Netix Monitoring Corporation, a Colorado corporation, SpeakEZ, Inc., a Colorado corporation, Telequip Labs, Inc., a Nevada corporation, Evercom Holdings, Inc., a Delaware corporation, Evercom, Inc., a Delaware corporation, EverConnect, Inc., a Delaware corporation, Evercom Systems, Inc., a Delaware corporation and The Bank of New York Trust Company, N.A., incorporated by reference from the S-4.4.7
        
        Trademark Security Agreement, dated September 9, 2004, by and among Securus Technologies, Inc., T-Netix, Inc., a Delaware corporation, T-NETIX Telecommunications Services, Inc., a Texas corporation, T-Netix Monitoring Corporation, a Colorado corporation, SpeakEZ, Inc., a Colorado corporation, Telequip Labs, Inc., a Nevada corporation, Evercom Holdings, Inc., a Delaware corporation, Evercom, Inc., a Delaware corporation, EverConnect, Inc., a Delaware corporation, Evercom Systems, Inc., a Delaware corporation and The Bank of New York Trust Company, N.A., incorporated by reference from the S-4.4.8
        
        Pledge Agreement, dated September 9, 2004, by and among Securus Technologies, Inc., T-Netix, Inc., a Delaware corporation, Evercom Holdings, Inc., a Delaware corporation, Evercom, Inc., a Delaware corporation, and The Bank of New York Trust Company, N.A., incorporated by reference from the S-4.4.9
        
        Credit Agreement, dated September 9, 2004, by and among Securus Technologies, Inc., as the Borrower, the Subsidiaries of the Borrower, as Guarantors, the Financial Institutions party thereto as the Lenders, and ING Capital LLC as the Issuing Lender and Administrative Agent, incorporated by reference from the S-4.


4.10
        
        Intercreditor Agreement, dated as of September 9, 2004, by and among Laminar Direct Capital, L.P., a Delaware limited partnership, Securus Technologies, Inc., T-Netix, Inc., a Delaware corporation, T-NETIX Telecommunications Services, Inc., a Texas corporation, T-Netix Monitoring Corporation, a Colorado corporation, SpeakEZ, Inc., a Colorado corporation, Telequip Labs, Inc., a Nevada corporation, Evercom Holdings, Inc., a Delaware corporation, Evercom, Inc., a Delaware corporation, EverConnect, Inc., a Delaware corporation, Evercom Systems, Inc., a Delaware corporation, and The Bank of New York Trust Company, N.A., incorporated by reference from the S-4.4.11
        
        Intercreditor Agreement, dated as of September 9, 2004, by and among ING Capital, LLC, as Intercreditor Agent, The Bank of New York Trust Company, N.A., as Trustee, Securus Technologies, Inc., and each subsidiary of Securus Technologies, Inc., incorporated by reference from the S-4.4.12
        
        First Amendment to Credit Agreement, dated October 12, 2005 among Securus Technologies, Inc., the subsidiary guarantors, ING Capital LLC, as syndicated issuing lender, alternative issuing lender and administrative agent, and lenders from time to time parties thereto, incorporated by reference from the Companys current report on Form 8-K filed as Exhibit 10.1 with the SEC on October 13, 2005.4.13
        
        Second Amendment to Credit Agreement, dated April 17, 2006 among Securus Technologies, Inc., the subsidiary guarantors, ING Capital LLC, as syndicated issuing lender, alternative issuing lender and administrative agent, and lenders from time to time parties thereto.4.14
        
        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 the Companys Form 10-K/A filed on September 13, 2006.10.1
        
        Stockholders Agreement, dated September 9, 2004, by and among Securus Technologies, Inc., H.I.G., T-Netix, Inc., a company organized under the laws of the Cayman Islands, American Capital Strategies, Ltd., a Delaware corporation, Laminar Direct Capital, L.P., a Delaware limited partnership, and each of the other investors then or thereafter set forth on the signature pages thereto, incorporated by reference from the S-4.10.2
        
        Amended and Restated Consulting 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 the S-4.10.3
        
        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 the S-4.10.4
        
        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 the Companys Form 10-Q as filed with the SEC on August 15, 2005.10.5
        
        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 the Companys Form 10-Q as filed with the SEC on August 15, 2005.10.6
        
        Class Action Settlement Agreement, dated December 20, 2005, by and between plantiffs, Elena Condes, Brian H. Getz, Bicka Barlow and Christopher Fank, individually and in their capacity as class representatives, and defendants, Evercom Systems, Inc. and T-Netix Telecommunications Services, Inc., incorporated by reference from the Companys Form 8-K as filed with the SEC on January 31, 2006.


10.7
        
        Restricted Stock Purchase Agreement, dated as of September 9, 2004 between Securus Technologies, Inc. and Richard Falcone, incorporated by reference from the S-4.10.8*
        
        2004 Restricted Stock Purchase Plan.10.9*
        
        Employment Agreement, dated November 13, 2006, by and between the Company and Richard Falcone.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



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: November 14, 2006
        By:
        /s/ RICHARD FALCONERichard Falcone,Chairman of the Board, President,Chief Executive Officer and DirectorDATE: November 14, 2006
        By:
        /s/ KEITH KELSONKeith KelsonChief Financial Officer



EXHIBIT INDEX




Exhibit No.
        
        Description of Exhibit10.8
        
        2004 Restricted Stock Purchase Plan.10.9
        
        Employment Agreement, dated November 13, 2006, by and between the Company and Richard Falcone.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.