SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549  FORM 10-Q  [ X ] Quarterly report pursuant to sections 13 or 15(d) of the Securities Exchange Act of 1934  For the quarterly period ended March 31, 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 March31, 2006Common stock
        
        543,859.65 sharesClass B common stock
        
        53,496.76 shares     TABLE OF CONTENTS






PART I - FINANCIAL INFORMATION
        3ITEM 1. FINANCIAL STATEMENTS
        3ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS13

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK24

ITEM 4. CONTROLS AND PROCEDURES24


PART II
        - OTHER INFORMATION25ITEM 1. LEGAL PROCEEDINGS
        25ITEM 1A. RISK FACTORS26

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS26

ITEM 3. DEFAULTS UPON SENIOR SECURITIES26

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS26

ITEM 5. OTHER INFORMATION26

ITEM 6. EXHIBITS27




PART I  FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



SECURUS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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




December 31,
        
        
        March 31,2005
        
        
        2006(Unaudited)ASSETSCash and cash equivalents
        
        $
        2,630
        
        
        $
        2,443Restricted cash
        
        
        1,396
        
        
        
        1,410Accounts receivable, net
        
        
        63,180
        
        
        
        65,641Prepaid expenses and other current assets
        
        
        5,659
        
        
        
        5,003Current deferred income taxes
        
        $
        7,785
        
        
        $
        7,563Total current assets
        
        
        80,650
        
        
        
        82,060Property and equipment, net
        
        
        43,862
        
        
        
        45,624Intangibles and other assets, net
        
        
        104,482
        
        
        
        103,140Goodwill
        
        
        37,936
        
        
        
        37,936Total assets
        
        $
        266,930
        
        
        $
        268,760LIABILITIES AND STOCKHOLDERS DEFICITAccounts payable
        
        $
        46,502
        
        
        $
        42,912Accrued liabilities
        
        
        37,756
        
        
        
        32,955Deferred revenue and customer advances
        
        
        5,051
        
        
        
        5,108Current portion of long-term debt
        
        
        108
        
        
        
        69Total current liabilities
        
        
        89,417
        
        
        
        81,044Deferred income taxes
        
        
        9,769
        
        
        
        9,769Long-term debt, net of current
portion
        
        
        197,847
        
        
        
        210,944Other long-term liabilities
        
        
        1,765
        
        
        
        1,751Total liabilities
        
        
        298,798
        
        
        
        303,508Commitments 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 March 31, 2006
        
        
        5
        
        
        
        5Additional paid-in capital
        
        
        34,027
        
        
        
        34,055Accumulated deficit
        
        
        (65,900
        )
        
        
        (68,808
        )Total stockholders deficit
        
        
        (31,868
        )
        
        
        (34,748
        )Total liabilities and stockholders deficit
        
        $
        266,930
        
        
        $
        268,760

See accompanying notes to condensed consolidated financial statements.




SECURUS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED FINANCIAL STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2005 and 2006

(Dollars in thousands)




March 31,
        
        
        March 31,2005
        
        
        2006Revenue:
        
        (Unaudited)Telecommunications services
        
        $
        7,745
        
        
        $
        4,522Direct call provisioning
        
        
        72,033
        
        
        
        81,968Solutions services
        
        
        11,263
        
        
        
        12,231Equipment sales and other
        
        
        385
        
        
        
        115Total revenue
        
        
        91,426
        
        
        
        98,836Cost of service (exclusive of depreciation and amortization shown separately below):Telecommunications services
        
        
        3,376
        
        
        
        2,130Direct call provisioning, exclusive of bad debt expense
        
        
        47,701
        
        
        
        54,454Direct call provisioning bad debt expense
        
        
        9,205
        
        
        
        9,723Solutions services expense
        
        
        10,393
        
        
        
        8,998Cost of equipment sold and other
        
        
        9
        
        
        
        62Total cost of service
        
        
        70,684
        
        
        
        75,367Selling, general and administrative
        
        
        11,471
        
        
        
        12,442Compensation expense on employee stock options
        
        
        -
        
        
        
        28Depreciation and amortization
        
        
        5,419
        
        
        
        6,728Total operating costs and expenses
        
        
        87,574
        
        
        
        94,565Operating income
        
        
        3,852
        
        
        
        4,271Interest and other expenses, net
        
        
        6,698
        
        
        
        6,931Loss before income taxes
        
        
        (2,846
        )
        
        
        (2,660
        )Income taxes expense
        
        
        587
        
        
        
        248Net loss
        
        $
        (3,433
        )
        
        $
        (2,908
        )

See accompanying notes to condensed consolidated financial statements.




SECURUS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2005 and 2006

(Dollars in thousands)




March 31,
        
        
        March 31,2005
        
        
        2006(Revised Note 1e)(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIESNet loss:
        
        $
        (3,433
        )
        
        $
        (2,908
        )Adjustment to reconcile net loss to net cash (used in) provided by operating activities:Depreciation and amortization
        
        
        5,419
        
        
        
        6,728Deferred income taxes
        
        
        238
        
        
        
        222Conversion of interest paid-in-kind
to secured subordinated notes
        
        
        1,789
        
        
        
        2,114Equity income (loss) from unconsolidated affiliates
        
        
        15
        
        
        
        (66
        )Stock based compensation
        
        
        -
        
        
        
        28Accretion of discount on notes payable
        
        
        131
        
        
        
        133Amortization of deferred financing costs and debt discounts
        
        
        207
        
        
        
        237Changes in operating assets and liabilities:Restricted cash
        
        
        -
        
        
        
        (14
        )Accounts receivable
        
        
        2,000
        
        
        
        (2,461
        )Prepaid expenses and other current assets
        
        
        721
        
        
        
        656Intangible and other assets
        
        
        (61
        )
        
        
        (199
        )Accounts payable
        
        
        (1,728
        )
        
        
        (4,275
        )Accrued liabilities and other liabilities
        
        
        (5,883
        )
        
        
        (4,758
        )Net cash used in operating activities
        
        $
        (585
        )
        
        $
        (4,563
        )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment including
costs of intangibles
        
        $
        (5,293
        )
        
        
        (7,120
        )Net cash used in investing activities
        
        $
        (5,293
        )
        
        $
        (7,120
        )CASH FLOWS FROM FINANCING ACTIVITIES:Advances on revolving credit facility
        
        $
        5,000
        
        
        $
        10,850Cash overdraft
        
        
        (678
        )
        
        
        685Payments on other debt
        
        
        (27
        )
        
        
        (39
        )Net cash provided by financing activities
        
        $
        4,295
        
        
        $
        11,496Decrease in cash and cash equivalents
        
        $
        (1,583
        )
        
        $
        (187
        )Cash and cash equivalents at the beginning of the period
        
        
        1,879
        
        
        
        2,630Cash and cash equivalents at the end of the period
        
        $
        296
        
        
        $
        2,443SUPPLEMENTAL DISCLOSURES:Cash paid during period for:Interest
        
        $
        8,094
        
        
        $
        8,544Income taxes
        
        $
        -
        
        
        $
        -

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 three-month periods ended March 31, 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 March 31, 2005 and 2006 was $3.4 million and $2.9 million, respectively.



(c)New Accounting Pronouncements



In January 1, 2006, the Company adopted SFAS No. 123R Share-Based Payment, which requires share-based compensation to be recognized based on the grant date estimated fair value of each award, net of estimated cancellations, over the employees requisite service period, which is generally the vesting period of the equity grant. The Company elected to adopt SFAS No. 123R using the modified prospective method, which requires compensation expense to be recorded for all unvested share-based awards beginning in the first quarter of adoption. Accordingly, the prior period presented in this Form 10-Q has not been restated to reflect the fair value method of expensing stock options. Also, because the value used to measure compensation expense for unvested shares is the same for APB Option No. 25 and SFAS No. 123R, the adoption of SFAS No. 123R did not
have a material impact on the Companys operating income, loss before income taxes or net loss.



In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections, which is effective for voluntary changes in accounting principles made in fiscal years beginning after December 15, 2005. SFAS 154 replaces APB Opinion No. 20Accounting Changes(APB 20) and SFAS No. 3Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires that voluntary changes in accounting principles be applied on a retrospective basis to prior period financial statements and eliminates the provisions of APB 20 that cumulative effects of voluntary changes in accounting principles be recognized in net income in the period of change. The adoption of this statement did not have a material impact on the consolidated
financial statements.



In November 2005, the FASB issued FASB Staff Position No. FIN 45-3 (FSP FIN 45-3)Application of FASB Interpretation No.45 to Minimum Revenue Guarantees Granted to a Business or Its Owners, which


SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



is effective for new minimum revenue guarantees issued or modified on or after the beginning of the first fiscal quarter following the date FSP FIN 45-3 was issued. FSP FIN 45-3 amends FASB Interpretation No. 45,Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Othersto include guarantees granted to a business that the revenue of the business for a specified period of time will be at least a specified minimum amount under its recognition, measurement and disclosure provisions. This interpretation was effective for the Company on January 1, 2006 at which time the Company adopted the standard. The adoption of this statement did not have a material impact on the consolidated financial statements.



(d)Reclassification



Certain amounts in the March 31, 2005 condensed consolidated financial statements have been reclassified to conform with current period presentation.



(e)Revisions to Cash Flow Statement



The Company has revised its March 31, 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 March 31, 2005 condensed consolidated cash flow statement is summarized as follows:




For the three months ending March31, 2005Net Cash Provided (Used in)Operating
        
        
        Investing
        
        
        FinancingActivities
        
        
        Activities
        
        
        ActivitiesPreviously reported
        
        $
        (1,263
        )
        
        $
        (5,293
        )
        
        $
        4,973Net change in cash overdrafts
        
        
        678
        
        
        
        -
        
        
        
        (678
        )As revised
        
        $
        (585
        )
        
        $
        (5,293
        )
        
        $
        4,295

2. BALANCE SHEET COMPONENTS



Accounts receivable consist of the following (in thousands):




December 31,
        
        
        March 31,2005
        
        
        2006(Unaudited)Accounts receivable, net:Trade accounts receivable
        
        $
        78,614
        
        
        $
        77,625Advance commissions receivable
        
        
        3,815
        
        
        
        4,263Other receivables
        
        
        153
        
        
        
        24282,582
        
        
        
        82,130Less: Allowance for doubtful accounts
        
        
        (19,402
        )
        
        
        (16,489
        )$
        63,180
        
        
        $
        65,641

At December 31, 2005 and March 31, 2006, the Company had advanced commissions to certain facilities totaling $3.9 million and $4.3 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 months ended March 31, 2005 was $9.2 million, or 12.8%, of direct call provisioning revenue of $72.0 million. Bad debt expense for the three months ended March 31, 2006 was $9.7 million, or 11.9%, of direct call provisioning revenue of $82.0 million.




SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



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




December 31,
        
        
        March 31,2005
        
        
        2006(Unaudited)Property and equipment, net:Telecommunications equipment
        
        $
        35,600
        
        
        $
        38,270Leasehold improvements
        
        
        4,382
        
        
        
        4,392Construction in
progress
        
        
        6,624
        
        
        
        7,663Vehicles
        
        
        64
        
        
        
        16Office equipment
        
        
        10,482
        
        
        
        11,44357,152
        
        
        
        61,784Less: Accumulated depreciation and amortization
        
        
        (13,290
        )
        
        
        (16,160
        )$
        43,862
        
        
        $
        45,624

Intangibles and other assets consist 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

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




March31, 2006 (Unaudited)Gross
        
        
        
        
        
        
        
        
        
        
        WeightedCarrying
        
        
        
        Accumulated
        
        
        
        
        
        
        AverageValue
        
        
        
        Amortization
        
        
        
        Net
        
        
        LifePatents and trademarks
        
        $
        18,625
        
        
        $
        (2,945
        )
        
        $
        15,680
        
        
        10.9Deferred financing costs
        
        
        9,022
        
        
        
        (1,300
        )
        
        
        7,722
        
        
        7.3Capitalized software development costs
        
        
        14,615
        
        
        
        (4,342
        )
        
        
        10,273
        
        
        4.1Acquired contract rights
        
        
        80,353
        
        
        
        (13,248
        )
        
        
        67,105
        
        
        9.9Deposits and long-term prepayments
        
        
        1,511
        
        
        
        -
        
        
        
        1,511Other
        
        
        849
        
        
        
        -
        
        
        
        849$
        124,975
        
        
        $
        (21,835
        )
        
        $
        103,140

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




SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS



Certain intangibles and other assets amounts have been reclassified as of December 31, 2005. Amortization expense for the three months ended March 31, 2005 and 2006 was $2.3 million and $3.9 million, respectively. Estimated amortization expense related to intangibles and other assets, excluding deferred financing costs, at March 31, 2006 and for each of the next five years through March 31, 2011 and thereafter is summarized as follows (in thousands):




Period ending March 31 (unaudited):2007
        
        $
        15,1012008
        
        
        13,1322009
        
        
        11,6602010
        
        
        9,4932011
        
        
        8,562Thereafter
        
        
        35,110$
        93,058

Accrued liabilities consist of the following (in thousands):




December 31,
        
        
        March 31,2005
        
        
        2006(Unaudited)Accrued expenses
        
        $
        23,201
        
        
        $
        23,954Accrued compensation
        
        
        5,258
        
        
        
        4,429Accrued severance and exit costs
        
        
        668
        
        
        
        253Accrued taxes
        
        
        2,932
        
        
        
        2,795Accrued interest and other
        
        
        5,697
        
        
        
        1,524$
        37,756
        
        
        $
        32,955

During the year ended December 31, 2004, the Company entered into separation agreements with certain executives.  FASB No. 88,Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans for Termination Benefits, requires the Company to accrue severance payments for these executives. As of December 31, 2005, the Company accrued approximately $0.7 million as a result of these agreements of which $0.6 million related to severance and related costs and the remaining $0.1 million related to leased facility and other costs. During the quarter ended March 31, 2006, the Company paid approximately $0.4 million in severance and related costs.



3. DEBT



Debt consists of the following (in thousands):




December 31,
        
        
        
        March 31,2005
        
        
        
        2006(Unaudited)Revolving credit facility
        
        $
        -
        
        
        $
        10,850Second-priority senior secured notes
        
        
        49,745
        
        
        
        51,859Senior subordinated notes
        
        
        154,000
        
        
        
        154,000Other
        
        
        108
        
        
        
        69Total debt
        
        
        203,853
        
        
        
        216,778Less unamortized discount on senior secured notes and senior subordinated notes
        
        
        (5,898
        )
        
        
        (5,765
        )197,955
        
        
        
        211,013Less current portion of long-term debt
        
        
        (108
        )
        
        
        (69
        )Long-term debt, net
        
        $
        197,847
        
        
        $
        210,944


SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS



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 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 revolving credit facility 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 7.5% at March 31, 2006. Securus Technologies draws from the available credit on the revolver to cover normal business cash requirements. As of December 31, 2005 and March 31, 2006, Securus Technologies had $30.0 million and $19.2 million, respectively, of borrowing availability under the revolver.



Under the revolver, as amended, Securus Technologies also has available a $12.5 million and a separate $10.0 million sub-facility for letters of credit, as further described above, typically used to provide collateral for service bonds required by contracts with correctional facilities. As of December 31, 2005 and March 31, 2006, the Company had outstanding letters of credit totaling $6.8 million. Securus Technologies pays a quarterly fee equal to a per annum rate of 2.125%, as amended, on amounts reserved under the letters of credit.



Second-priority Senior Secured Notes On September 9, 2004, Securus Technologies issued $154.0 million of Second-priority Senior Secured Notes that bear interest at an 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, as defined, 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 outstanding long-term debt obligations. The effective interest rate is 11.5% on the Second-priority Senior Secured Notes.



Senior Subordinated Notes On September 9, 2004, Securus Technologies 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 Technologies 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 Technologies 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 year ended December 31, 2005, $7.6 million of paid-in-kind interest was added to the principal balance of the Senior Subordinated Notes. During the three months ended March 31, 2006, $2.1 million of paid-in-kind interest was added to the principal balance of the Notes. The effective interest rate is 18.6% on the Senior Subordinated Notes.


SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS



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 Technologies 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 March 31, 2006, we were in compliance with all of our covenants.



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.



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



4. SEGMENT INFORMATION



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



The Companys management has chosen to organize the enterprise around differences in products and services. During the period 2003 through 2005, the Company and its predecessor had four reportable segments: Telecommunications Services, Direct Call Provisioning, Solutions Services and Equipment Sales. Through these segments, the Company provided 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 provided these products and services through service agreements with other telecommunications service providers, including Verizon/Public Communications Services, AT&T/Global Tel*Link, AT&T/SBC, 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 sold 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


SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS



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 three months ended March 31, 2005 (Unaudited) is as follows (in thousands):




Telecommunications
        
        
        Direct Call
        
        
        Solutions
        
        
        Equipment
        
        
        CorporateServices
        
        
        Provisioning
        
        
        Services
        
        
        Sales & Other
        
        
        & Other
        
        
        TotalRevenue from external customers
        
        $
        7,745
        
        
        $
        72,033
        
        
        $
        11,263
        
        
        $
        385
        
        
        $
        -
        
        
        $
        91,426Segment gross margin
        
        $
        4,369
        
        
        $
        15,127
        
        
        $
        870
        
        
        $
        376
        
        
        $
        -
        
        
        $
        20,742Depreciation and amortization
        
        
        592
        
        
        
        4,780
        
        
        
        -
        
        
        
        14
        
        
        
        33
        
        
        
        5,419Other operating costs and expenses
        
        
        -
        
        
        
        2,082
        
        
        
        304
        
        
        
        34
        
        
        
        9,051
        
        
        
        11,471Operating income (loss)
        
        $
        3,777
        
        
        $
        8,265
        
        
        $
        566
        
        
        $
        328
        
        
        $
        (9,084
        )
        
        $
        3,852Interest and other expenses, net
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        6,698Segment loss before income taxes
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        (2,846
        )Total assets
        
        $
        13,659
        
        
        $
        221,866
        
        
        $
        17,262
        
        
        $
        1,117
        
        
        $
        15,143
        
        
        $
        269,047Goodwill
        
        $
        -
        
        
        $
        50,263
        
        
        $
        -
        
        
        $
        -
        
        
        $
        -
        
        
        $
        50,263Capital Expenditures
        
        $
        -
        
        
        $
        3,205
        
        
        $
        -
        
        
        $
        -
        
        
        $
        2,088
        
        
        $
        5,293

Segment information for the three months ended March 31, 2006 (Unaudited) is as follows (in thousands):




Telecommunications
        
        
        Direct Call
        
        
        Solutions
        
        
        Equipment
        
        
        CorporateServices
        
        
        Provisioning
        
        
        Services
        
        
        Sales & Other
        
        
        & Other
        
        
        TotalRevenue from external customers
        
        $
        4,522
        
        
        $
        81,968
        
        
        $
        12,231
        
        
        $
        115
        
        
        $
        
        
        
        $
        98,836Segment gross margin
        
        $
        2,392
        
        
        $
        17,791
        
        
        $
        3,233
        
        
        $
        53
        
        
        $
        -
        
        
        $
        23,469Depreciation and amortization
        
        
        143
        
        
        
        6,235
        
        
        
        316
        
        
        
        -
        
        
        
        34
        
        
        
        6,728Other operating costs and expenses
        
        
        -
        
        
        
        2,246
        
        
        
        130
        
        
        
        -
        
        
        
        10,094
        
        
        
        12,470Operating income (loss)
        
        $
        2,249
        
        
        $
        9,310
        
        
        $
        2,787
        
        
        $
        53
        
        
        $
        (10,128
        )
        
        $
        4,271Interest and other expenses, net
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        6,931Segment loss before income taxes
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (2,660
        )Total assets
        
        $
        3,305
        
        
        
        211,429
        
        
        
        28,601
        
        
        
        40
        
        
        
        25,385
        
        
        $
        268,760Goodwill
        
        $
        -
        
        
        $
        37,936
        
        
        $
        -
        
        
        $
        -
        
        
        $
        -
        
        
        $
        37,936Capital Expenditures
        
        $
        -
        
        
        $
        7,120
        
        
        $
        -
        
        
        $
        -
        
        
        $
        -
        
        
        $
        7,120

5. STOCKHOLDERS EQUITY



As of March 31, 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. At March 31, 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 $28,000 to the condensed consolidated statements of operations.



6. GUARANTEES



FSP 45-3, amends FASB 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 agreement and believes the fair value to be zero. The maximum amount that would be paid under this guarantee totals $10.5 million at March 31, 2006.



ITEM 2. 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.



Special Note Regarding Forward-Looking Statements



This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect, among other things, our current expectations, plans and strategies, and anticipated financial results, all of which are subject to known and unknown risks, uncertainties and factors that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Many of these risks are beyond our ability to control or predict. Any statements contained in this quarterly report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. The words anticipates, believes, expects, intends, seeks to, plans,
estimates, targets, projects, should, may, will and similar words and expressions are intended to identify forward-looking statements. All forward-looking statements are based on information available to the Company on the date hereof, and investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations, and we expressly do not undertake any duty to update forward-looking statements. These factors include, but are not limited to: (i) competition in our industry and in the telecommunications industry generally; (ii) our substantial amount of debt; (iii) our accumulated deficit; (iv) the changing dynamics of our industry and 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 adopt to 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 March 31, 2006, we provided service to approximately 3,100 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, 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 82.9% of our revenues for the three months ended March 31, 2006 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 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 43.9% of direct revenues for the three month period ended March 31, 2006. 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 4.6% of our actual revenues for the three months ended March 31, 2006 by providing telecommunication services to Regional Bell Operating Companies (RBOCs), Local Exchange Carriers (LECs) and Inter Exchange Carriers (IXCs), 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 to 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 risks of collection.



We also offer our solutions services, as described below, and the sale of equipment to RBOCs, LECs and IXCs as customers to support their telecommunication contracts with correctional facilities. We derived approximately 12.4% of our actual revenues for the three months ended March 31, 2006 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 or IXC 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 or IXC customer 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, 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 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 telecommunication costs such as telephone line access, long distance and other charges, 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; 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 the same operational costs that we incur in our telecommunication services business, in addition to the costs of 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 salaries 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.



Integration Costs. We commenced integrating the operations of Evercom and T-Netix shortly following our acquisition of Evercom in September 2004. The integration has involved consolidating the personnel, systems and facilities of the two companies, which is designed to improve our operating efficiencies over the long term. As of July 2005, the integration was substantially complete.



Industry Trends



We provide our products and services to telecommunications and solutions service providers such as Global Tel*Link, Public Communications Services (PCS), AT&T/SBC and Sprint, among other call providers. For the three months ended March 31, 2006, 17% 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 March 31, 2006:




Approximate % of
        
        Approximate % of Total
        
        ContractTotal Solutions
        
        Telecommunications
        
        ExpirationCustomer
        
        Services Revenue
        
        Services Revenue
        
        Date**AT&T/Global Tel*Link*
        
        78
        %
        
        24
        %
        
        March 1, 2008Sprint
        
        20
        %
        
        4
        %
        
        Month-to-MonthSBC/AT&T***
        
        -
        
        
        30
        %
        
        September 1, 2006FSH Communications
        
        -
        
        
        21
        %
        
        Month-to-MonthVerizon/Public Communications Services, Inc.*
        
        -
        
        
        14
        %
        
        December 19, 2006




*
        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 these customers will continue to decline and that agreements we have in place with these two companies will not be renewed upon expiration. We believe it is reasonable to expect that our competitors, who recently purchased the AT&T and Verizon inmate businesses, 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. In two cases, the competitor has already notified us of their intention to eliminate our services. Contractually, the competitor can replace our Solutions services as their underlying phone contracts with correctional facilities expire. In addition to the expected continuing declines in telecommunication service and Solutions revenues associated with AT&T and Verizon,
we expect telecommunications business from our other customers to continue to decline given the industry trend of large dominant telecommunications carriers exiting the market.



Notwithstanding the foregoing developments and the anticipated declining revenue stream associated with our highly profitable telecommunication services product line, 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 expect to be well positioned to procure agreements to provide direct call provisioning services to those corrections facilities previously serviced by Verizon and AT&T because we already provide some inmate capabilities to those facilities currently serviced by Verizon and AT&T on a sub-contractor basis. However, we anticipate that contracts to service the facilities and accounts currently serviced by Verizon and AT&T 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 table (in thousands) sets forth, for the three months ended March 31, 2005 and 2006, the results of operations of the Company.




For the Three
        
        
        
        
        For the ThreeMonths Ended
        
        
        
        
        Months EndedMarch 31,
        
        % of
        
        
        March 31,
        
        % of2005
        
        Revenue
        
        
        2006
        
        Revenue(Unaudited)
        
        
        
        
        
        (Unaudited)Revenue:Telecommunications services
        
        $
        7,745
        
        
        9
        %
        
        $
        4,522
        
        
        5
        %Direct call provisioning
        
        
        72,033
        
        
        79
        
        
        
        81,968
        
        
        83Solutions services
        
        
        11,263
        
        
        12
        
        
        
        12,231
        
        
        12Equipment sales and other
        
        
        385
        
        
        -
        
        
        
        115
        
        
        -Total revenue
        
        
        91,426
        
        
        100
        
        
        
        98,836
        
        
        100Expenses:Cost of service
        
        
        70,684
        
        
        77
        
        
        
        75,367
        
        
        76Selling, general and administrative
        
        
        11,471
        
        
        13
        
        
        
        12,442
        
        
        13Compensation expense on employee stock options
        
        
        -
        
        
        -
        
        
        
        28
        
        
        -Depreciation and amortization
        
        
        5,419
        
        
        6
        
        
        
        6,728
        
        
        7Total operating costs and expenses
        
        
        87,574
        
        
        96
        
        
        
        94,565
        
        
        96Operating (loss) income
        
        
        3,852
        
        
        4
        
        
        
        4,271
        
        
        4Interest and other expenses, net
        
        
        6,698
        
        
        7
        
        
        
        6,931
        
        
        7Loss before income taxes
        
        
        (2,846
        )
        
        (3
        )
        
        
        (2,660
        )
        
        (3
        )Income taxes expense
        
        
        587
        
        
        1
        
        
        
        248
        
        
        -Net loss
        
        $
        (3,433
        )
        
        (4
        )
        
        $
        (2,908
        )
        
        (3
        )



RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH31, 2006 COMPARED TO THE THREE MONTHS ENDED MARCH31, 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.



Total Revenues.Total revenues for the three months ended March 31, 2006 increased by $7.4 million, or 8.1%, to $98.8 million. Direct Call Provisioning increased by approximately $9.9 million and Solutions services increased by $1.0  million. Partially offsetting the Direct Call Provisioning and Solutions growth were decreases of $3.2 million and $0.3 million in Telecom services and Equipment sales, respectively. As a result of hurricanes in the United States in the 2005 third quarter, we anticipate some revenue depression may have negatively affected our 2006 first quarter revenues; however, we do not believe the effect is significant.



Direct call provisioning revenues for the three months ended March 31, 2006 increased $9.9 million, or 13.8%, to $82.0 million. This growth was principally due to an increase in the number of inmates and accounts served. Growth in direct call provisioning revenues also increased by $1.1 million during this period from new fees charged to end-users to re-coup billing costs. The first quarter of each year is historically the best seasonal quarter for revenue, representing a 2% to 3% increase over average total year usage on a same facility sales basis for the direct call provisioning segment.



Solutions services revenues for the three months ended March 31, 2006 were $12.2 million, representing an increase of $1.0 million, or 8.6%, over the prior year quarter. The increase resulted primarily from an $0.8 million increase in fees charged to end-users to re-coup billing costs. The remaining increase was a result of an increase in accounts and inmates served. As a result of AT&T selling its inmate telecommunications business in 2005 to a competitor and subsequent communications with that competitor,


it is reasonable to expect that solutions services revenue will decline significantly over the next several years.



Telecommunications services revenues for the three months ended March 31, 2006 decreased by $3.2 million, or 41.6% to $4.5 million, and was 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.



Equipment sales for the three months ended March 31, 2006 declined by $0.3 million, or 70.1%, to $0.1 million. The decline results from a strategy we have pursued whereby, on a selective basis, we attempt to convert telecommunications services revenue to direct call provisioning revenue. Our telecommunications services customers, who also are typically our equipment sales customers, are purchasing less equipment from us. Additionally, the departure of AT&T from the inmate telecommunications market contributed to the declines as AT&T had historically been a significant customer in this segment. We expect this trend to continue and believe equipment sales will be a very small component of our revenue in the future.



Cost of Service.Total cost of service increased by $4.7 million, or 6.6%, to $75.4 million for the three months ended March 31, 2006. The increase was due primarily to the change in the mix of our operating revenues. Our direct call provisioning and solutions services revenues increased while our telecommunications services and equipment sales revenues decreased. 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 solutions segment as a percentage of our revenue declined as a result of the implementation of fees charged to end users to re-coup billing costs, coupled with lower bad debt expense due to migration of call traffic to Securus billing and bad debt management
systems that had previously been processed through legacy systems.



SG&A.SG&A expenses of $12.4 million were $1.0 million, or 8.5%, higher than the prior year quarter. The increase in expense was due primarily to costs associated with higher direct revenues coupled with cost of living increases. In addition, the Company incurred approximately $0.4 million of SG&A expenses related to our ongoing efforts to comply with the Sarbanes-Oxley Act of 2002 during the first quarter of 2006 as compared to zero in 2005.



Depreciation and Amortization Expenses.Depreciation and amortization expenses were $6.7 million and $5.4 million for the three months ended March 31, 2006 and 2005, respectively. The increase was attributable to depreciation and amortization related to 2005 and 2006 additions to property and equipment and intangible assets.



Interest and Other Expenses, net.Interest and other expenses were $6.9 million and $6.7 million for the three months ended March 31, 2006 and 2005, 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 three months ended March 31, 2006 and 2005 was $0.2 million and $0.6 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 March 31, 2006, we had $216.8 million in total debt outstanding before considering $3.0 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. As of March 31, 2006, we had unused capacity of $19.2 million under our working capital credit facility and a total stockholders


deficit of $34.7 million. As of May 9, 2006, we had unused capacity of $25.0 million under our working capital credit facility. In May 2005, we were notified by one of our LEC billing agents that the agent would begin remitting monthly settlements to us fifteen days later than previous practice. Beginning in July 2005, this change caused a fluctuation in our liquidity by approximately $6.0 million for two weeks of each month.



Cash Flows



The following table, in thousands, provides cash flow data for the three months ended March 31, 2005 and 2006 (dollars in thousands):




For the Three
        
        
        For the ThreeMonths Ended
        
        
        Months EndedMarch 31,
        
        
        March 31,2005
        
        
        2006(Unaudited)Net cash used in operating activities
        
        $
        (585
        )
        
        $
        (4,563
        )Net cash used in investing activities
        
        $
        (5,293
        )
        
        $
        (7,120
        )Net cash provided by financing activities
        
        $
        4,295
        
        
        $
        11,496

Cash Flows for the Three Months Ended March31, 2006 Compared to the Three Months Ended March31, 2005



Net cash used in operating activities for the three months ended March 31, 2006, consisted primarily of $11.0 million of operating income before considering non-cash expenses, such as $6.7 million of depreciation and amortization, offset by $8.5 million for cash paid for interest expense and $7.0 million of working capital use. This working capital fluctuation was due to very short-term month-end timing of certain normal operating receipts and disbursements along with scheduled annual prepaid commission advances to certain facilities.



Cash used in investing activities was $7.1 million and $5.3 million for the three months ended March 31, 2006 and 2005, respectively. The $7.1 million was utilized for investments in equipment and intangibles to maintain and grow the direct call provisioning business. This was also the case in 2005.



Cash generated in financing activities was $11.5 million and $4.3 million for the three months ended March 31, 2006 and 2005. The cash was drawn for short term operational needs.



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 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 revolving credit facility 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 7.5% at March 31, 2006. Securus Technologies draws from the available credit on the revolver to cover normal business cash requirements. As of December 31, 2005 and March 31, 2006, Securus Technologies had $30.0 million and
$19.2 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 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 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 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.We have outstanding $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 $51.9 million as of March 31, 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 pertaining to the Companys lease of its primary facility that will be amortized over the life of the lease as prescribed by SFAS No. 13 and FASB Technical Bulletin 88-1. The Company recorded amortization totaling $45,000 for these improvement concessions during the quarter ended March 31, 2006.




Capital Requirements



As of March 31, 2006, our contractual cash obligations and commitments on an aggregate basis are as follows:




For the twelve months ending March 31,2007
        
        
        2008
        
        
        2009
        
        
        2010
        
        
        2011
        
        
        ThereafterLong-term debt (1)
        $
        -
        *
        
        $
        -
        *
        
        $
        -
        *
        
        $
        -
        *
        
        $
        -
        *
        
        $
        216,709
        *Operating leases
        
        2,099
        
        
        
        1,503
        
        
        
        1,020
        
        
        
        928
        
        
        
        962
        
        
        
        4,028Capital leases
        
        69
        
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        -
        
        
        
        -Total contractual
cash obligations and commitments
        $
        2,168
        
        
        $
        1,503
        
        
        $
        1,020
        
        
        $
        928
        
        
        $
        962
        
        
        $
        220,737


*
        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)
        Does not include any amounts that may be drawn under our working capital facility, which expires on September 9, 2009, or 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 March 31, 2006, we had outstanding approximately $6.8 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 on average 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 FASB Statement No. 142,Goodwill and Other Intangible Assets. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement No. 144,Accounting for Impairment
 or Disposal of Long-Lived Assets. We review our unamortized intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the estimated useful life has been reduced. We estimate the future cash flows expected to result from operations, and if the sum of the expected undiscounted future cash flows is less than the carrying amount of the intangible asset, we recognize an impairment loss by reducing the unamortized cost of the long-lived asset to its estimated fair value.



Accounting for Income Taxes



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.



Acquisition Related Assets and Liabilities



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



Changes in Accounting Standards



In January 1, 2006, the Company adopted SFAS No. 123R Share-Based Payment, which requires share-based compensation to be recognized based on the grant date estimated fair value of each award, net of estimated cancellations, over the employees requisite service period, which is generally the vesting period of the equity grant. The Company elected to adopt SFAS No. 123R using the modified prospective


method, which requires compensation expense to be recorded for all unvested share-based awards beginning in the first quarter of adoption. Accordingly, the prior period presented in this Form 10-Q has not been restated to reflect the fair value method of expensing stock options. Also, because the value used to measure compensation expense for unvested shares is the same for APB Option No. 25 and SFAS No. 123R, the adoption of SFAS No. 123R did not have a material impact on the Companys operating income, loss before income taxes or net loss.



In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections, which is effective for voluntary changes in accounting principles made in fiscal years beginning after December 15, 2005. SFAS 154 replaces APB Opinion No. 20Accounting Changes(APB 20) and SFAS No. 3Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires that voluntary changes in accounting principle be applied on a retrospective basis to prior period financial statements and eliminates the provisions of APB 20 that cumulative effects of voluntary changes in accounting principles be recognized in net income in the period of change. The adoption of this statement did not have a material impact on the consolidated
financial statements.



In November 2005, the FASB issued FASB Staff Position No. FIN 45-3 (FSP FIN 45-3)Application of FASB Interpretation No.45 to Minimum Revenue Guarantees Granted to a Business or Its Owners, which is effective for new minimum revenue guarantees issued or modified on or after the beginning of the first fiscal quarter following the date FSP FIN 45-3 was issued. FSP FIN 45-3 amends FASB Interpretation No. 45,Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Othersto include guarantees granted to a business that the revenue of the business for a specified period of time will be at least a specified minimum amount under its recognition, measurement and disclosure
provisions. This interpretation was effective for the Company on January 1, 2006. The adoption of this statement did not have a material impact on the consolidated financial statements.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We are exposed to the impact of interest rate changes. Our exposure to market rate risk for changes in interest rates relates to our fixed rate debt and to our revolving line of credit.



Our fixed rate debt of approximately $206.0 million represents two debt instruments, our Senior Subordinated Notes of approximately $52.0 million which bear an annual interest rate of 17%, and our Second-priority Senior Secured Notes of $154.0 million which bear an annual interest of 11%. Interest expense on our fixed rate debt can be adversely affected due to a decline in interest rates, while interest expense on our floating rate debt will increase more than expected if interest rates rise. The effect of a 10% fluctuation in the interest rate of our fixed rate debt would have had an adverse effect of approximately $1.3 million for the quarter ended March 31, 2006. Our $30.0 million revolving line of credit bears an interest 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% and is calculated on amounts borrowed under the facility. The effect of a 10% fluctuation in the interest rate on our revolving line of credit would have had an effect of less than $0.1 million on our interest expense for the quarter ended March 31, 2006.



ITEM 4. 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 March 31, 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 fiscal quarter ended March 31, 2006, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



PART II  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



From time to time we have been, and expect to continue to be, subject to various legal and administrative proceedings or various claims in the normal course of 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, including theCondeslitigation described below, 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. InCondes v. Evercom Systems, Inc., T-Netix and Evercom, along with other inmate telecommunications providers, were named in this suit, in which the plaintiffs alleged that they were incorrectly charged for collect calls from a number of correctional facilities as a result of systematic defects in the inmate calling platforms of all the telecommunications provider defendants. Although class certification was
denied in theCondeslitigation in March 2005, the plaintiffs obtained the right to bring another class certification motion as to Evercom. Evercom and T-Netix have since executed a settlement agreement of this case with plaintiffs that would require us to pay $525,000 in cash to reimburse the costs of publishing Class Notice and plaintiffs attorneys fees, and free inmate call minutes totaling up to $400,000 in retail value will be provided to members of the class. The Court granted final approval of this settlement on April 14, 2006. Neither Evercom nor T-Netix have admitted any wrongdoing and have vigorously denied each and every allegation in the case. During 2005, Securus paid an aggregate of $0.9 million of legal fees and related expenses associated with theCondeslitigation. 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.




Finally, Evercom was recently 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.



Evercom, Inc., Evercom Systems, Inc., Evercom Holdings, Inc., T-NETIX, Inc., T-NETIX Telecommunications Service, Inc., and TZ Holdings, Inc.(referred to collectively as Evercom) are named parties in the lawsuit 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). InTIP Systems, Evercom, along with other inmate telecommunications providers, are alleged to have infringed on patents concerning cord-free or hands-free inmate phone technology. Evercom has denied any wrongdoing and has vigorously denied each and every allegation in the case. Additionally, the
TIP Systems entities have filed a lawsuit captionedTIP Systems, LLC and TIP Systems Holding Co., Inc. v. SBC Operations, Inc., et. al., which was also filed in the Southern District of Texas. Securus Technologies, Inc. is a named party to the suit, which alleges substantially similar allegations concerning patent infringement claims for cord-free or hands-free inmate phone technology. Securus Technologies denies any wrongdoing and will vigorously defend each and every allegation in the case.



ITEM 1A. RISK FACTORS



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



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



None.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None.



ITEM 5. OTHER INFORMATION



(a)  None



(b)  None




ITEM 6. EXHIBITS





(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-4.4.4
        
        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.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, 2006.31.1*
        
        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: May 12, 2006
        By:
        /s/ RICHARD FALCONERichard Falcone,Chairman of the Board, President,Chief Executive Officer and DirectorDATE: May 12, 2006
        By:
        /s/ KEITH KELSONKeith KelsonChief Financial Officer



EXHIBIT INDEX




Exhibit No.
        
        Description of Exhibit4.13
        
        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.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.