AZ Contract 2007-2014 Request for Clarification from Evercom-Securus
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1601 West Jefferson
Phoenix, Arizona 85007
(602) 542-5497
JANET NAPOLITANO
GOVERNOR
DORA B. SCHRIRO
Via Fax (972) 277-0514
DIRECTOR
January 10, 2007
Kevin Collins, Account Executive
EVERCOM a division of SECURUS Technologies
14651 Dallas Parkway, Suite 600
Dallas, Texas 75254-8815
Re:
Request for Proposal (RFP) No. 060072DC
Inmate Telephone System
Request for Clarification
Dear Mr. Collins:
The Arizona Department of Corrections (Department) is in the process of evaluating your proposal submitted
in response to the referenced RFP. In order to complete its evaluation the Department is requesting
clarification of:
The Department has reviewed your proposed exceptions regarding the Uniform Terms and Conditions, and
hereby provides the following determination.
Uniform Terms and Conditions, Page II, Paragraph 2.9, Ownership of Intellectual Property: This paragraph
shall remain as written in the RFP. The Department understands the Ownership of Intellectual Property
remains with the Contractor. Please provide a list of your intellectual property.
Uniform Terms and Conditions, Page 12, Paragraph 3.7, Property of the State: This paragraph shall remain
as written in the RFP. The Department understands the Contractor's right to obtain patents and copyrights
on its own intellectual property. All materials, documents, data aed reports prepared by the Contractor under
the Contract shall become the property of the Department.
Uniform Terms and Conditions, Page IS, Paragraph 6.5, Third Party Antitrust Violations: This paragraph
shall remain as written in the RFP.
Uniform Terms and Conditions, Page 18, Paragraph 8.5, Right of Offset: This paragraph shall remain as
written in the RFP.
Uniform Terms and Conditions, Page 18, Paragraph 9.4, Tennination for Convenience: This paragraph shall
remain as written in the RFP. Please refer to ARS 41, 23,9, Page 19, Paragraph 10.
Uniform Terms and Conditions, Page 19, Paragraph 9.5.1, Termination for Default: This paragraph shall
remain as written in the RFP. Please refer to Special Terms and Conditions, Page 25, Paragraph 1.20.
Contracts Administration, 1601 W. Jefferson, Phoenix, Arizona 85007, Mail Code 55303
Fax: 602-364-3790
Mr. Kevin Collins
January 10, 2007
Page 2
Uniform Terms and Conditions, Page 19, Paragraph 9.5.2, Termination for Default: This paragraph shall
remain as written in the RFP.
Uniform Terms and Conditions, Page 19, Paragraph 9.5.3, Termination for Default: This paragraph shall
remain as written in the RFP.
Scope of Work, Page 43, Paragraph 2.4.3.36, please confirm if the UPS minimum is for central equipment
only or for each of the Department's facilities as well.
Scope of Work, Page 50, Paragraph 2.4.7.7.3, please explain why there is the initial limit of 50 simultaneous
users access to the system for live monitoring of calls or administration of the system.
Scope of Work, Page 61, Paragraph 2.4.14, Semi-Annual Review, please describe the review process and
what it would entail.
Scope of Work, Page 76, Paragraph 2.6.10, Added Value to the Department. Please provide detailed
information on this section.
Scope of Work, Page 76, Paragraph 2.6.11.2, please provide a copy of the contractor's Dunn and Bradstreet,
Equifax, TRW, or other appropriate credit rating. No credit rating was provided on Dunn and Bradstreet.
Scope of Work, Page 76, Paragraph 2.6.11.3, please provide a copy of the organization, audited financial
records for the past three (3) years.
Please confirm your acceptance. of the terms and conditions as identified in this letter and submit the
requested information. Please submit your response via fax to (602) 364-3790 no later than January 18,
2007,3:00 P.M., Mountain Standard Time and send the otiginal to the address listed below.
If you have any questions, please contact Kristine Yaw, Contracts Supervisor or me at (602) 542-1172.
Sincerely,
~.
Denel Pickering
Chief Procurement Officer
Enclosure
DPIky
cc:
RFP File, Suspense File, 1/18/07 (ky)
Contracts Administration, 1601 W. Jefferson, Phoenix, Arizona 85007, Mail Code 55303
Fax: 602-364-3790
)
)
Transmitted Via Fax: 602-364-3790
January 18, 2007
Denel Pickening
Chief Procurement Officer
Arizona Department of Corrections
Contracts Administration
1601 W. Jefferson
Phoenix, AZ 85007
Re: Request for Proposal (RFP) No. 060072DC Inmate Telephone System Request
for Clarification
Dear Denel:
Evercom, a division of SECURUS Technologies, accepts the terms and conditions
as identified in your letter and has submitted the requested information. Our
response has been sent via fax to (602) 364-3790 by 3:00P.M. January 18, 2007,
Mountain Standard Time. This original response information has been shipped
overnight, for delivery on 1/19/07, to Contracts Administration, 1601 W. Jefferson,
Phoenix, Arizona 85007 Mail Code 55303.
Sincerely,
f;~·tolL
Kevin Collins
National Account Manager
14651 Dallas Parkway, Suite 600
Dallas, Texas 75254-8815
720.530.9840
)
)
Uniform Terms and Conditions, Page 11, Paragraph 2.9, Ownership of Intellectual
Property: This paragraph shall remain as written in the RFP. The Department understands
the Ownership of Intellectual Property remains with the Contractor. Please provide a list of
your intellectual property.
o
RESPONSE: Evercom has read, agrees and will comply.
Our reputation is firmly established as the leader in fraud prevention;
advanced call processing technology and customer service in the
corrections industry. Often the technological breakthroughs we develop
are so advanced they can be patented. We are proud to hold 47 granted
patents with another 80+ patents pending and/or in process. No other
inmate processing company can claim such a history of product
innovation. In fact, we believe that the combined number of inmate calling
patents held by all other companies is no more than 10.
Below is list of our intellectual property in the form of a summary of the
patents we have been granted, in addition, we currently have another 80+
other patents pending and/or in process:
Patent/Product Matrix
Item
Network Architecture
Remote Call Forwarding
a-way Detection
Call Processing
Connect Me Now
First Call Connect
Call Recordin£ls
Good Behavior
Number Validation
Word Spotting/Key Word Search
Secure Instant Mail
Permablock
Total:
Issued
1
2
11
17
a
2
a
1
2
1
2
2
47
Uniform Terms and Conditions, Page 12, Paragraph 3.7, Property of the State: This
paragraph shall remain as written in the RFP. The Department understands the
Contractor's right to obtain patents and copyrights on its own intellectual property. All
materials, documents, data and reports prepared by the Contractor under the Contract'
shall become the property of the Department.
o
RESPONSE: Evercom has read, agrees and will comply.
)
)
Uniform Terms and Conditions, Page 15, Paragraph 6.5, Third Party Antitrust Violations:
This paragraph shall remain as written in the RFP.
o
RESPONSE: Evercom has read, agrees and will comply.
Uniform Terms and Conditions, Page 18, Paragraph 8.5, Right of Offset; This paragraph
shall remain as written in the RFP.
o
RESPONSE: Evercom has read, agrees and will comply.
Uniform Terms and Conditions, Page 18, Paragraph 9-4, Termination for Convenience:
This paragraph shall remain as written in the RFP. Please refer to ARS 41,23,9, Page 19,
Paragraph 10.
o
RESPONSE: Evercom has read, agrees and will comply.
Uniform Terms and Conditions, Page 19, Paragraph 9.5.1, Termination for Default: This
paragraph shall remain as written in the RFP. Please refer to Special Terms and
Conditions, .Page 25, Paragraph 1.20.
o
RESPONSE: Evercom has read, agrees and will comply.
Uniform Terms and Conditions, Page 19, Paragraph 9.5.2, Termination for Default: This
paragraph shall remain as written in the RFP.
o
RESPONSE: Evercom has read, agrees and will comply.
Uniform Terms and Conditions, Page 19, Paragraph 9.5.3, Termination for Default; This
paragraph shall remain as written in the RFP.
o
RESPONSE: Evercom has read, agrees and will comply.
Scope of Work, Page 43, Paragraph 2.4.3.36, please confirm if the UPS minimum is for
central equipment only or for each of the Department's facilities as well.
o
RESPONSE: Evercom has read, agrees and will comply.
Evercom will maintain a one hour minimum Uninterruptible Power Supply
(UPS) backup for the equipment installed at each department. These UPS
systems eliminate spikes, sags, surges, transients, and all other over/under
voltage and frequency conditions, providing clean power to connected
critical loads.
)
)
In addition to the equipment onsite, Evercom operates and maintains three
major datacenters to be network to the equipment at each Department.
Each datacenter has it own Internet connection, UPS, and Generator to
insure maximum facility uptime. The traditional data circuits (MPlS, Frame
Relay, VoIP) all have dual connectivity feeds to and from the
Telecommunication Carrier to our datacenters.
The UPS systems located in our Primary Data Center are 2N redundancy.
Dual Source power runs through Static Bypass Switch. Battery Rooms
support the UPS Systems with gel cell battery banks. Fifteen (15) minutes
of battery backup available at full load (e.g. 90 watts/square foot). Each
Battery Bank is continuously monitored to ensure optimum operating
availability. Upon loss of commercial power, paralleling Switch Gear
automatically powers up all nine generators when commercial power is
interrupted for more than 15 seconds; generators are shed to cover load as
needed. Typical transition from UPS to generator power takes 60 seconds.
Scope of Work, Page 50, Paragraph 2.4.7.7.3, please explain why there is the initial limit of
50 simultaneous users' access to the system for live monitoring of calls or administration
of the system.
o
RESPONSE: Evercom has read, agree.s and will comply.
This answer indicated a user access license that is only required by PIX
firewall devices if connection through the State network is desired. This
license maybe expanded beyond 50 simultaneous users, but that is
unlikely because connection to the State network is not required to access
Monitoring and Administration of the system therefore user access is
unlimited.
Scope of Work, Page 61, Paragraph 2.4.14, Semi-Annual Review, please describe the
review process and what it would entail.
o
RESPONSE: Evercom has read, agrees and will comply.
The Semi-Annual review process enables the AZ DOC to furnish to
Evercom the telephone numbers of all Department staff, volunteers, and
consultants or individuals the Department desires to audit. The audit will
be designed to be an additional method to identify suspicious or potentially
harassing contact by inmates. Evercom will place the number list in a SQl
data base and periodic additions and deletions of submitted numbers by
DOC staff can be managed by email to a designated Evercom email
address. Evercom will of block or alarm calling to any of these audited
numbers at the specific direction of the DOC. Evercom is willingly to
perform this review on a quarterly rather than on a semi-annual basis if it
better suits the needs of the AZ DOC.
)
)
Evercom will compare the number list to the Department Inmate IPIN SQL
data base looking for common numbers to both. The numbers that match
will then be reported to the Department through the Regional Service
Manager with the assistance of designated system administrators when it
is required. As part of review process numbers identified can be reviewed
across all facilities to validate if identified numbers are being called from
multiple facilities, including al other facilities that Evercom or SECURUS
serves.
Scope of Work, Page 76, Paragraph 2.6.10, Added Value to the Department. Please provide
detailed information on this section.
o
RESPONSE: Evercom has read, agrees and will comply.
The most important aspect of our organization structure (organizational
chart attachment 14) is the support each of these departments is
committed to providing our customer service structure that interfaces with
our accounts. The key personnel in our structure will be the AZ DOC
,Account Manger, Don Lee, and the Regional Service Manager, John Jacoby
who has been 'dedicated to AZ DOC for the past 9 years for your account.
The Account Manager is your single point of contact for all issues relating
to services and products provided by Evercom. For the Arizona
Department of Corrections the Regional Service Manager will be located in
Arizona and have daily service responsibilities to your account and will be
assisted by a AZ DOC field service team consisting of two field service
technicians and four system administrators, also in Arizona and dedicated
solely to provisions of services to the AZ DOC. From an administrative
perspective, the AZ DOC will also be able to contact our service center, 24
fours a day, 7 days a week, to report specific problems at your sites if
necessary.
Once the implementation of our proposed technology is completed,
Evercom will provide the highest levels of service and responsiveness to
all of your needs. Our departmental teams recognize that each
implementation is unique and routinely prepares for all scenarios. Upon
system transition the daily management of the Department to our local
service and management team as well as our National Service Center (NSC)
for technical support and Correctional Billing Services (CBS) for end user
support. These teams will operate with oversight from a dedicated IPS
System Administrator and Service Manager that will continuously monitor
service and operational compliance with our Agreement. In addition to
these levels of support, all of our customers receive escalation lists with
full contact information for accessing all levels of management if
nec~ssary.
While forty (40%) percent of our service tickets are self generated via our
system monitoring software, remaining issues are generated via direct
customer contact or through a request by our own field and management
)
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II=> SECURUS'"
T,CHNDLDGIES
personnel. Should an AZ DOC facility require a service visit that is outside
the scope of routine or a Department require visits, a ticket will be opened
to track the event and allow for further analysis of any system issues
and/or performance. Information on the issue will be gathered by the
certified technician to ensure our response is commensurate and
appropriate with the service event. Diagnosis of the event will drive if the
request or repair can be performed remotely or if on site trouble shooting
assistance with our local field technical force working in conjunction with
our NSC is necessary. All service events whether resolved remotely or via
on-site visits are tracked, our customers are given the ability to provide
feedback to us on how we have performed, and if we have met their
expectations. Further, the service event will be assessed to avoid repetitive
service issues that may indicate a system deficiency issue or fraudulent
activity.
,
When not responding to service requests from facilities, our certified field
technical force will proactively perform routine preventative maintenance
on your telephones and system to ensure compliance with our response. In
addition to verifying that the physical telephone equipment is in clean and
proper working order our technicians will place test calls to verify audio,
clarity proper call branding and cost rating as well as system functionality.
Upon completing each visit, the technician will verify with the on site
contact that we are meeting the facilities service expectations and report
any outstanding action items to the dedicated System Administrator for
follow up.
.
Evercom will provide four site administrators (SA) that will perform the
various functions for the Department with regard to the IPS installed at
each facility eliminating DOC staff intervention regarding inmate/DOC
change requests, handle complaints, report generation, etc in a timely
manner. The SA will act as the primary liaison between Evercom and the
assigned DOC facilities to insure effective operation of the IPS System and
timely communication between all parties. Our system administrators at a
minimum test the IPS to ensure functionality each day and initiate or
facilitate maintenance and repair of the IPS, as required. The SA performs
PIN data base entries for necessary PIN changes, moves, transfers,
discipline sanctions and review of inmate PIN approved number call list for
departmental personnel telephone numbers semi annually or quarterly as
proposed. SAs also perform tasks relating to blocks and unblocks, debit &
prepaid transactions, investigations of inmate and facility complaints, and
processing of internal documents. They will also handle any production of
administrative and investigative reports as required and transfer call
recordings to portable media as directed by the Department.
Administrative SA duties Include keeping accurate logs and documentation
conveying messages and information in writing and/or via e-mail. Any
outstanding action items remaining through a Field Services site visit the
SA can open a service (Heat tracking) ticket for the facility service affecting
issue. The SA will continue to follow-up with the facility to insure all
)
systems are operational and work is completed thoroughly and accurately.
The Evercom System Administrators have additional centralized resources
to assist in performing certain administrative functions. Our Dallas based
Central Service Administration responsibilities include administration of
inmate facility telephone blocks & unblocks, data entry of IPINs and inmate
calling lists for new inmates, transfers, moves, and discharges. Our
centralized SA team can assist the field SA on inmate action form
investigations and reports generation. Any debit, prepaid, and calling card
requests can be processed through this centralized team as well as
performing remote monitoring of the telephone processing platform, if
necessary. All inquiries and tasks are assigned a "heat ticket" for tracking
purposes indicating the material received, a 'Heat' tracking system ticket
number assigned to the submission, and the anticipated time for
resolution. This team provides additional redundancy and backup to our
SA Arizona DOC account team.
Our dedicated Account Manager, Don Lee, will oversee all aspects of the
daily operation of our proposed technologies working closely with our
Regional Service Manager, John Jacoby and dedicated SA team. This
support will cover all requirements of our proposal as well as offering an
ongoing conduit for updates on our technologies under development or
any technology or operational challenges faced by the Department on
which we can assist. It is our desire that our Account Manager and Service
Manager will act as an employees of the Department with your needs and
concerns driving daily tasks.
In the event of an emergency Evercom maintains a toll-free, 24x7
emergency access phone number lists that will be readily available for use
during an emergency situation at state or county level. Contact information
will be updated at regular intervals to ensure accuracy. The National
Service Center will also maintain these emergency contact phone number
lists and coordinate on a regular basis with field staff to ensure that all lists
are accurate.
We understand that throughout the duration of a critical event, our
customers rely on our support to guide them through with minimal loss of
equipment and data. Qualified resources will be available to assist Arizona
DOC, including over 150 full-time field technicians that can be deployed
nationwide and a full list of management contacts.
We also realize that during a disaster, it may be even more important that
inmates and detainees are able to stay in contact with their friends and
family. To support these end users, Evercom maintains four separate call
centers in Alabama, Antigua, and Canada that are all able to continue call
processing even if there is a failure at one location.
)
)
Throughout our daily service, maintenance and monitoring activities, our
administrative and management personnel are measuring performance and
customer feedback from all correctional agencies served in the. state
through our established channels to drive organizational change through
technology and internal training and development. Customer feedback
through our periodic Customer Satisfaction Surveys (CSAT) is utilized to
quantify our success and challenges on both a national and state scale as
well as at an individual customer level. We never assume we are meeting
our customer's expectations, choosing rather to ask for feedback and act
upon that input to improve our service. Our personnel are measured for
their performance on these surveys. Evercom welcomes the accountability
that comes with being a provider of communications technologies to
Correctional facilities and feels our proven track record and established
personnel and technical infrastructure meet the level of service
commitment required to exceed the expectations set forth by the
Department.
Evercom will conduct an annual technology and IPS performance review
with the Arizona DOC. It is our commitment to continue to provide software
and other upgrades of the system throughout the life of the IPS agreement.
During the annual technology review, the Arizona DOC will be presented
with a comprehensive update on the performance of the system and
information on our latest service offerings. The DOC will be able to
determine which features or services should be integrated into your
system and a process to activate or install the features or services will be
initiated. We anticipate that these performance review sessions will also
be an opportunity for Evercom to identify technological and performance
areas we can improve upon based on your input and direction.
Evercom and our parent company SECURUS, are committed to providing
the best Inmate Phone System (IPS) possible, but we are equally committed
to developing and delivering services and· products that provide
efficiencies and/or security to the Arizona DOC that "Provide Value Beyond
IPS". Therefore, in addition to the value added through the personnel and
the processes designed by Evercom to reduce the administrative burden
on the Arizona DOC, Evercom is offering the following technological
applications to improve the efficiencies and security for the DOC:
~
Friends and Family Connection Center (Kiosk) - Friends and Family
Connections Center provides friends and family the ability to
establish an account and manage an account via a kiosk. We are
proposing to place these kiosks strategically at mutually agreeable
locations that allow for the recovery of their installation and
maintenance costs. When these kiosks are used to fund inmate
trust accounts it will help eliminate the need to take manual
payments from inmates' friends and families and reduce the
administrative burden on the DOC. These kiosks process cash in
addition to alternative forms of payments such as credit and debit
cards.
)
»
Secure Instant Mail - Secure Instant Mail is the first field-tested
electronic form of controlled email that is a faster and more reliable
way of delivering mail correspondence to correctional facilities. For
facilities, it reduces time to process mail, enhances security,
reduces contraband opportunities, and enhances investigative
abilities by providing security feature such as key word searches
and transliteration to English from 12 different languages. Secure
Instant Mail provides the ability to reduce the cost of processing
mail, yet provides the opportunity for more effective security and
investigative capabilities.
.
Another tool to assist AZ DOC is the Evercom Administrative Assistant.
This application is a web portal that will provide the Department with the
ability to access, share and review call record detail, commission
information, and service request status online. This means the State will
have the capability to continuously monitor and audit ·the IPS system
virtually all of its significant data elements online anytime. This feature can
be accessed from any PC with an internet access provided the user and the
PC have appropriate security validation.
A prime example of how SECURUS can provide "Value Beyond IPS" is in
its support of reducing recidivism and overcrowding. Our JobFinderTM
application can decrease operating costs through recidivism reduction by
increasing offender employment percentages. It does this by linking
inmates nearing release with willing employers. Facilities also benefit from
improved community relations as the public learns of the constructive
initiatives that help released inmates become valuable, productive
members of society. Job Finder is offered without any additional charge to
the Arizona DOC.
Our commitment is to assist AZ DOC in reducing operating costs by
improving staff efficiencies. The Evercom organization is built around
providing excellent customer service through a dedicated service and
support team, as well as though technological innovation. We are confident
in our ability to provide services and support beyond the basic
requirements of this Request for Proposal.
Scope of Work, Page 76,Paragraph 2.6.11.2, please provide a copy of the contractor's
. Dunn and Bradstreet, Equifax, TRW, or other appropriate credit rating. No credit rating was
provided on Dunn and Bradstreet.
It! RESPONSE: Evercom has read, agrees and will comply.
Evercom has enclosed a revised Dunn and Bradstreet report for your
review which provides credit ratings on SECURUS Technologies
additionally SECURUS' publicly traded senior secured notes carry a credit
rating of "B+" with Standard & Poor's and a "B2" with Moody's. We have
included these reports as well for your review.
)
Scope of Work, Page 76, Paragraph 2.6.11-3, please provide a copy of the organization,
audited financial records for the past three (3) years.
o
RESPONSE: Evercom has read, agrees and will comply.
Regarding the Arizona DOC's request for Evercom to provide audited
statements for the last three years, SECURUS was formed in January of
2004 and began its operations in March 2004 with its purchase of T-Netix,
Inc., and, consequently, does not have audited financial statements for
years prior to 2004. SECURUS purchased 100% of Evercom in September
2004 and, as such, Evercom's last audited statements were for its fiscal
year ended December 31, 2003. SECURUS does not maintain separate
financial statements for Evercom or for any of its subsidiaries and reports
only on a consolidated basis.
To be responsive to the State's request, we are furnishing SECURUS' Form
S-4 as filed with the Securities and Exchange Commission on June 24,
2005. Evercom's audited financial statements for the year ended December
31, 2003 are presented beginning with page F-39 of the S-4. Additionally,
on page 45 of the S-4, pro forma financial results are presented for
SECURUS which present its 2004 financial results as if each of its
acquisitions occurred on January 1, 2004, thus allowing for enhanced
comparability with SECURUS' audited 2005 results.
In summary, we are providing you with audited financial statements for
Evercom for the year ended December 31, 2003, and audited financial
statements for Evercom's parent, SECURUS, for its fiscal years ended
December 31, 2004 and December 31, 2005, which is in strict compliance
with your inquiry dated January 10, 2007. Additionally, we we are
providing a pro forma view of SECURUS' 2004 operating results, as
presented in the 2005 S-4, derived from audited financial statements of
SECURUS and its acquired businesses in 2004 which provide greater
comparability to SECURUS' 2005 audited financial statements.
To further help the State understand SECURUS' financial results, we want
to provide you with the following summary.
As reference, we have provided the State with our Form 10-K filed with the
Securities and Exchange Commission for SECURUS, the parent
of Evercom, for the year ended December 31, 2005 which includes our
consolidated financial statements audited by KPMG. We also submitted
our Form 10-Q for the period ended September 30, 2006 which includes our
most current unaudited interim financial statements filed with the SEC,
along with our 2005 S-4.
)
II> SECURUS'"
.
.
TECHNOLOGIES
Our revenues are growing significantly. For the twelve months ended
September 30, 2006 we generated $394 million of revenue as compared to
$377 million for the year ended December 31, 2005. Our annual operating
income of $12 million has been very consistent, after considering several
million dollars of costs we began incurring annually to insure we meet the
rigorous financial reporting standards of the Sarbanes Oxley Act.
Our creditors and our investors principally measure our bottom line
financial performance by monitoring our earnings before interest, income
taxes, depreciation and amortization ("EBITDA"), which has been very
stable in the $40 million per year range for many years, when considering
both SECURUS and the operating results of its acquired businesses prior
to their acquisition by SECURUS. EBITDA is a measure of cash flow
generated by the business, which we in-turn use to pay the interest on our
debt of approximately $17 million per year (which is fixed for the next five
years). We use the substantial excess cash flow that the business
consistently generates to develop state-of-the-art new products for our
customers and to insure we have the most robust, reliable back-office
infrastructure in the industry. These investments are reflected in our
annual capital expenditures.
SECURUS currently generates a net loss principally due to $10 million of
annual non-cash interest expense. This non-cash interest expense is
accruing on a portion of our long-term debt. This unsecured subordinated
debt could actually be considered additional stockholders' equity because
the interest and principal is not due until the year 2014. The related interest
could actually be considered accumulated but unpaid dividends on stock,
however, generally accepted accounting principles require us to book the
. non-cash interest as current period interest expense.
In addition to our significantly positive cash flow, we have $25 million of
unrestricted borrowing availability under our existing credit facilities and
we are in compliance with all of our loan covenants and project full
compliance in the future.
In summary, we can assure you that SECURUS and its subsidiaries,
specifically Evercom, are financially strong and stable enterprises.
SECURUS' revenue is growing consistently, profits are stable, and cash
flow is strong and more than adequate to meet all of our obligations while
making the necessary investments to serve our customers with leading
edge technology. Finally, we are proud that we are the only independent
competitor in the industry who is an SEC registrant required to comply with
the rigorous financial and operational controls mandated by the Sarbanes
Oxley Act.
)
)
As an SEC registrant, we are required to comply with the Sarbanes Oxley
Act which mandates that we maintain a rigorous set of financial and
operational controls to insure the accuracy of our financial statements and
related disclosures. The Act requires us to maintain a "tone at the top"
that fosters honesty and integrity across our organization. Accordingly, we
require our employees to report any and all violations of our code of ethics
through a dedicated and outsourced "800" service with all matters being
investigated and resolved through independent members of our Board of
Directors who comprise our Audit Committee. All such matters and their
resolution are reviewed by our auditors, KPMG. Additionally, we have a
dedicated internal audit department that monitors all of our compliance
with all laws, contractual agreements, regulations, and ethics, including the
Sarbanes Oxley Act. We are the only independent vendor whose entire
operations are dedicated to servicing the correctional industry, who is also
an SEC registrant and subject to the Sarbanes Oxley Act. As such, our
inmate telecommunications operations and corporate financial reporting
are subject to far greater review and scrutiny than any other vendor.
This response has been reviewed by our Chief Financial Officer, Keith
Kelson, to assure it is a comprehensive and accurate account of the
financial performance of Evercom and its parent SECURUS Technologies.
)
ATTACHMENTS
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o
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Cover Letter Dated 1/17/07 for attachments
• Dun & Bradstreet Report
• Standard & Poor's Credit Rating
• Moody's Credit Rating
• S-4
•
•
10-k
10-q
FedEx Receipt Confirmation
Receipt of Fax Acknowledgement
)
January 17, 2007
Denel Pickening
Chief Procurement Officer
Arizona Department of Corrections
Contracts Administration
1601 W. Jefferson
Phoenix, AZ 85007
Re: Request for Proposal (RFP) No. 060072DC Inmate Telephone System Request
for Clarification Financial Attachments
Dear Denel:
Evercom, a division of SECURUS Technologies, accepts the terms and conditions
as identified in your letter and will submit the requested responses via fax.
Because the requested financial attachments amounted to over 300 pages, the
following documents were not faxed and instead are included herein:
Dun & Bradstreet Report
Standard & Poor's Credit Rating
Moody's Credit Rating
S-4
10-k
10-q
The specific responses to your questions will be faxed to you no later than 3PM
Mountain Time on January 18,2007.
Sincerely,
ff~to1t-~
Kevin Collins
National Account Manager
14651 Dallas Parkway, Suite 600
Dallas, Texas 75254-8815
720.530.9840
Page 10f2
)
)
Minnie Walker
From:
TrackingUpdates@fedex.com
Sent:
Thursday, January 18, 2007 10:39 AM
To:
Minnie Walker
Subject: FedEx Shipment 791212252716 Delivered
This tracking update has been requested by:
Company Name: Evercom
Name:
E-mail:
Art Heckel
mwalker@securustech.net
Our records indicate that the following shipment has been delivered:
Tracking number:
Reference:
Ship (P/U) date,
Delivery date:
Sign for by:
Delivered to:
Service type:
Packaging type:
Number of pieces:
Weight,
Shipper Information
Art Heckel
EVercom
791212252716
AZ DOC Financials
Jan 18 1
2007
Jan 18, 2007 09,35 AM
M.NAVAREZ
Receptionist/Front Desk
FedEx Priority Overnight
FedEx Box
1
6.0 LB
14651 Dallas Parkway
Suite 600
Recipient Information
Denel Pickening
Arizona Dept of Corrections
1601 W. Jefferson
Phoneix
Dallas
TX
US
AZ
US
85007
75254
Special handling/Services:
Deliver Weekday
Please do not respond to this message. This email was sent from an unattended
mailbox. This report was generated at approximately 10:39 AM CST
on 01/18/2007.
To learn more about FedEx Express, please visit our website at
~~g§_?C~_9.9n:!.
All weights are estimated.
To track the latest status of your shipment, click on the tracking number
or visit us at ":t"_I:}_~~~~gg~.
above,
This tracking update has been sent to you by FedEx on the behalf of the
Requestor noted above. FedEx does not validate the authenticity of the
requestor and does not validate, guarantee or warrant the authenticity of the
request, the requestor's message, o"r the accuracy of this tracking update. For
tracking results and fedex.comr s terms of use, go to ":t;:~.~.:t~.~!..g9n.!.
1/18/2007
hp officejet 4100 series 4~_b
Personal prinI.Jr/Fax/coPier/scanner
Log for
Securus Tech
9722770514
1/18/2007 14:17
Last Transaction
Date
Time
Type
Identification
18 Jan 14:13 Fax Sent 916023643790
Duration Pages Result
3:32
15
OK
Pnes.'Inl.:ed to:
Arizona Department of Corrections
A TTN: Contracts Administration
1601 IN. Jefferson St.
M/C55303
Phoenix, Arizona 85007-3002
Presented by:
Kevin Collins
Account Executive
720·488·5696
EVERCOM
a division of SECURUS Technologies
14651 Dallas Parkway
Suite 600
Dallas, TX 75254·8815
WWW.SECURUSTECH.NET
THE POWER OF ONE
)
..
)
)
January 17, 2007
Denel Pickening
Chief Procurement Officer
Arizona Department of Corrections
Contracts Administration
1601 W. Jefferson
Phoenix, AZ 85007
Re: Request for Proposal (RFP) No. 060072DC Inmate Telephone System Request
for Clarification Financial Attachments
Dear Denel:
Evercom, a division of SECURUS Technologies, accepts the terms and conditions
as identified in your letter and will submit the requested responses via fax.
)
Because the requested financial attachments amounted to over 300 pages, the
following documents were not faxed and instead are included herein:
Dun & Bradstreet Report
Standard & Poor's Credit Rating
Moody's Credit Rating
S-4
10-k
10-q
The specific responses to your questions will be faxed to you no later than 3PM
Mountain Time on January 18, 2007.
Sincerely,
Kevin Collins
National Account Manager
14651 Dallas Parkway, Suite 600
Dallas, Texas 75254-8815
720.530.9840
)
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(
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\
,
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..
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D&B SelfMonitor: SECURUS TECHNOLOGIES INC
Page 1 of 9
)
)
D&B Self Monitor for
O-U-N-S #: 19-285-8954
)
For questions or to update your company data,
please contact our Customer Service Center
at 800 234 DUNS (3867) or
SECURUS TECHNOLOGIES INC
January 17, 2007
pustserv@dnb,Gom
~ f'rio!1his regorf
• To save this report to your PC: Select File and then Save As from the browser menu bar. Click on the Save in: drop-down
menu and select a location for your file. Enter a file name and save the report as a .html or .txt file.
Copyright 2007 Dun & Bradstreet - Provided under contract for the exclusive use of subscriber SECURUS TECHNOLOGIES INC
Company Snapshot
Business Summary
Profile
SECURUS TECHNOLOGIES INC
14651 Dallas Pkwy Ste 600
Dallas, TX 75240
Likelihood your company will not pay on
time over the next 12 months
LOWM
Credit Score Class: 2
f ,na9iiU;'i.,
_~,jlii+>
Tel: 972 988-3737
Fax: 972 988-3744
123
Low
Moderate
High
www..§JH::.IJJ.w§l§.c!1.--.J&l
O-U-N-S #: 19-285-8954
O&B Rating: -Company Stats
Year started
Employees
Sales
Chief Executive
S.t.C.
Likelihood your company will experience
financial distress in the next 12 months
2005
602 (2 here)
$380,000,000
Richard Falcone, Ceo
6719
4813
5999
Industry
Holding company
LOWM
Financial Stress Class: 1
Low
t.,,1oderate
Timeliness of historical payments for
your company"''''
High
SLOW&'
O&B PAYOEX®: 67
This is a headquarters location.
Branch(es) or division(s) exist.
_
:oJ,.
a
100
Tho Net Worth amount in this section may have been adjusted by D&B
to reflect typical deductions, such as certain intangible assots.
Antioipates Prompt
30
dayss:low
120
dayss:low
Industry benchmark: Slow
"Based on 45 trade experiences on Ii Ie with D&B
Payment performance trend
over the past 90 days
O&B offers guidance on credit limits for your company based on its profile as well as profiles of
other companies similar in size, Industry, and credit usage
Evidence of bankruptcy, fraud, or criminal proceedings in the history of this business or its
management
Noteworthy special events in your company's file
)
Total number of suits, liens and judgments in your company's file
5;2' UNCHANGED
I
Q~L~~elgi!s,
N/A
YES.
OM
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D&B SelfMonitor: SECURUS TECHNOLOGIES INC
Page 20f9
)
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$0[;2]
Value of open suits, liens and judgments for your company
Value of open records refers only to 10 most recent filings for each record type.
Creditworthiness
Summary
Likelihood your company will
LOWfril D&B Rating: --
experience financial distress in
the next 12 months
Likelihood your company will not
pay on time over the next 12
months
LOW [;2]
Tho blank rating symbol should not bo interpreted as indicating that
credit should be denied. It simply moans that the information available
to D&8 does not permit us to classify the company within our rating key
and that further enquiry should be made before reaching a decision.
Some reasons for using a "." symbol include: deficit not worth,
bankruptcy proceedings, insufficient payment information, or
incomplote history information. For more information, soc the 0&8
Hating Key.
Default on Payment: Financial Stress Summary
Likelihood your company will
LOW [;2]
experience financial distress In
the next 12 months
- Financial Stress Score: 1468 (high risk: 1,001 ;Iow risk: 1,875)
- Control age or date entered in D&B files indicates higher risk.
Financial Stress Class: 1
~1fl;JiF::
",
i lIii!!i!'
)
Low
Key Factors
- 45 trade experiences exist for your company.
3
Moderate
High
During the prior year, firms in this Financial Stress Class had a
failure rate of 1.2%, which is 0.46 times lower than the national
average.
Financial stress national percentile: 91 (high risk: 1%; low risk:
100%)
National percentile industry norm: 63 (high risk: 1%; low risk:
100%)
Payment within Terms: Credit Score Summary
Likelihood your company will not
pay on time over the next 12
Key Factors
- 45 trade experiences exist for your company.
months
- No record of open lien(s), or judgment(s) in the D&B liles.
Credit Score Class: 2
~Ur~miii'
1
2
Low
3
Moderate
High
The Credit Score class of 2 for this company shows that 4.6% of
firms with this classification paid one or more bills severely
delinquent, which is lower than the average of businesses in
D&B's database.
Credit score percentile: 76 (high risk: 1%; low risk: 100%)
Industry norm percentile: 54 (high risk: 1%; low risk: 100%)
)
Additional Information
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D&B SelfMonitor: SECURUS TECHNOLOGIES INC
Page 3 of9
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Financial Stress Summary
- The Financial Stress Class indicates that this firm shares
some of the same business and financial characteristics of
other companies with this classification. It does not mean the
firm will necessarily experience financial stress.
- The Incidence of Financial Stress shows the percentage of
firms in a given Class that discontinued operations over the
past year with loss to creditors. The Incidence of Financial
Stress - National Average represents the national failure rate
and is provided for comparative purposes.
- The Financial Stress National Percentile reflects the relative
ranking of a company among all seorable companies in O&8's
file.
Credit Score Summary
. The Incidence of Delinquent Payment is the percentage of
companies with this classification that were reported 90
days past due or more by creditors. The calculation of this
value is based on an inquiry weighted sample.
~ The Percentile ranks this firm relative to other businesses.
For example, a firm in the 80th percentile has a lower risk of
paying in a severely delinquent manner than 79% of all
scorable companies in D&8's files.
- The Financial Stress Score offers a more precise measure of
the level of risk than the Class and Percentile. It is especially
helpful to customers using a scorecard approach to
determining overall business performance.
~ All Financial Stress Class, Percentile, Score and Incidence
statistics are based on 2004.
Payment History
Summary
Average payment performance trend
when weighted by dollar amount
UNCHANGED
m.
Company's payment performance over the
past 12 months compared with its peers
SLOW.A.
)
Payment History Overview
45
Payment experiences on Iffe with 0&6:
Payments made within terms:
35 (77%)
0(0%)
Amount placed for collections:
Average highest credit:
$16,900
Largest high credit:
$400,000
Highest now owing:
$400,000
Highest past due:
$10,000
Historical Payment Trends: PAYDEX®
Average payment performance trend when weighted by dollar amount
Last 3 months: Trend is unchanged
Last 12 months: 18 days beyond terms
Industry benchmark: Slow
C:j UNCHANGED I
-
0&6 PAYDEX®: 67
1 00
Antloipates Prompt
30
120
days slol)\1
days slol)\1
Based on payments collected over last 12 months.
Indications at slowness can be the result of dispute over merchandise, skipped invoices, etc. Accounts are sometimes placed for collection even
though the existence or amount of the debt is disputed.
Historical Payment Trends: PAYDEX® Comparison to Industry
)
Company's payment performance over the past
12 months compared with Its peers
SLOW.6..
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D&B SeltMonitor: SECURUS TECHNOLOGIES INC
Page 4 of9
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Your company's 12-month high: 67, or equal to 18 days beyond terms
Your company's 12-month low: 66, or equal to 19 days beyond terms
N~:I
30
40
1:i50":::;;'
'"
~M)~
~ :~I·
100
: . . :-. . : . . :.
I
I
I
I
I
I
I
I
I
I
I
I
02/0603/0604/0605/0606/06 07/06 08/06 09/06 10/06 11/06 12/0601107
___ Your Company
•
Industry Benchmark
Shows PAYDEX scoros 01 this Business cornparod to tho Primary Industry from oach of tho last four quartors. The Primary Industry is Holding
company, based on SIC code 6719.
Payment History Details
t Date Reported
IHigh Credit ($)
Now Owes ($)
IPast Due ($)
i 12/06
15,000
i 12106
Prompt
15,000
12/06
Prompt
15,000
12/06
Prompt
2,500
12/06
Prompt
2,500
• 12/06
Prompt
12 ,500
• 12/06
Prompt
2,500
12,500
0
12/06
I Prompt
1,000
11,000
0
12/06
I Prompt
1,000
12/06
I Prompt
1,000
12/06
IPrompt
750
: 12106
Prompt
250
· 12/06
Prompt-Slow 30
400,000
1400 ,000
• 12/06
Prompt-Slow 30
10,000
10,000
· 12/06
Prompt-Slow 30
2,500
0
0
12/06
Prompt-Slow 30
750
0
0
• 12/06
Prompt-Slow 60
15,000
12 ,500
Slow 60+
250
1
17,500
250
12/06
120 ,000
1
1 ,000
________
Last Sale Within
(months)
120 ,000
1
0
0
10
I
6-12
I0
I0
INet30
2-3
1
1~~_---l_6-12_
l:t==jt=j
1
1
0
0
250
o
o
o
Net30
10,000
1
2,500
Net30
INet30
Net30
250
Netl0
1 ,000
I,OO()
5,000
o
2,500
0
o
o
o
1
6-12
4-5
0
2,500
1 1,000
2-3
1
15,000
1
2-3
0
5,000
11,000
Selling Terms
.
IPrompt
IPrompt
: 12/06
)
Paying Record
1
i
!
~---~----~1-7-5o------~I,-0------~~0________~.--------__
1250
1100
~
1250
1100
0
I
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D&B SelfMonitor: SECURUS TECHNOLOGIES INC
Page 5 of9
)
11/06
)
• 11/06
Prompt
50
50
Prompt-Slow 90
500
.100
1
Slow 10
1 2 .500
12.500
i 10/06
Prompt-Slow 60
190 ,000
120 ,000
: 09/06
Prompt
[5,000
15 ,000
007/06
Prompt
11/06
10,000
I
INetl0
INot:lO
INet30
0
1
0
1
100
1
12 ,500
10
50
10
10
Prompt
0
0
0
1
02/06
Prompt
1,000
: 02/06
Prompt
1,000
I
l===:j
I
01/06
0
11/05
Prompt
0
Prompt-Slow 30
50,000
0
1
0
1
0
1
17 ,500
0
1
0
1
0
1
12 ,500
Slow 30
100
06/06
Prompt
50,000
: 04/06
Prompt
15,000
04/06
Prompt
04/06
i
i
Slow 30 90
11/05
10/05
N
IPrompt-Slow 30
1
1 5 ,000
1 10 ,000
11
11
[I
[
0
1
0
1
50
1 ,000
: 07/06
11
I~
6·12
6-12
I
INet30
I
INet30
4~5
11
Payment experiences reflect how bills are met in relation to the terms granted. In some instances payment beyond terms can be the result of
dispute ovor merchandise, skipped invoices, etc.
Each experience shown is from a separate supplier. Updated trade experiences replace Ihose previously reported.
Payment Analysis By Industry
)
Company's dollar-weighted payments listed by the primary industries of its suppliers
Total Received Total Dollar Largest High Within
Amount ($) Credit ($)
(#)
Terms
Slow 1-30 Slow 3160
Slow 61-
10
97
3
0
0
0
0
Slow91+
90
(% of dollar amount)
Industry
Nonclassified
)
45,000
20,000
Telephone communictns
9
16,600
10,000
100
0
0
0
Help supply service
7
72,250
50,000
85
to
0
4
Public finance
3
17,000
15,000
100
0
0
0
0
Security broker/deal
2
5,750
5,000
57
0
43
0
0
Radiotelephone commun
2
100
100
0
100
0
0
0
Mfg computers
400,000
400,000
50
50
0
0
0
Ret-direct selling
90,000
90,000
50
0
50
0
0
Whol electronic parts
50,000
50,000
50
!)O
0
0
0
Management consulting
10,000
10,000
50
50
0
0
0
Whol office equipment
7,500
7,500
0
50
0
0
50
Photocopying service
5,000
5,000
100
0
0
0
0
Whol electrical equip
2,500
2,500
0
100
0
0
0
Data processing svcs
2,500
2,500
100
0
0
0
0
Whol computers/softwr
1,000
1,000
100
0
0
0
0
Whol office supplies
750
750
50
50
0
0
0
Misc business service
500
500
50
0
0
50
0
Whol service paper
250
250
100
0
0
0
0
0
0
Other payment categories
Cash experiences
0
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D&B SeltMonitor: SECURUS TECHNOLOGIES INC
Page 6 of9
)
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)
Payment record unknown
0
0
0
Unfavorable comments
0
0
0
With D&B
0
0
0
Other
0
NIA
0
Total in D&B's file
45
726,700
400,000
Placed for collection
There are 45 payment experiences in O&8's file for the most recent 12 months, with 32 experiences reported during the last three
month period.
Public Filings
Summary of Court Actions
The following data Includes both open and closed filings found in D&B's database on the subiect company.
Open Records
Record Type
Total Records
Suits
0
0
0
Liens
0
0
0
Judgments
0
0
0
UCC FiUngs
7
NIA
7
NIA
0
0
Bankruptcy Proceedings
)
Open Value
Most Recent Filing Date
08/22/2006
Public filing data is for informational purposes only and is not the official record. Certified copies can only by obtained from the official source.
Number and value of open records refers only to 10 most recent filings for each record type.
Special Events
03/13/2006
STOCK/BOND ISSUANCE/REDEMPTION/REPURCHASE: According to published reports, SECURUS Technologies,
Inc. announced that it has extended its solicitation of consents for a proposed amendment to the indenture governing
its $154,000,000 principal amount of 11 % Second·priority Senior Secured Notes due 2011. The consent solicitation,
scheduled to expire on March 10, 2006, will now expire on March 17, 2006, unless further extended or earlier
terminated by SECURUS. All other terms, provisions and conditions of the Consent Solicitation Statement, dated
February 17, 2006, including the proposed amendment to the indenture governing the Notes, will remain in full force
and effect.
03/03/2006
STOCK/BOND ISSUANCE/REDEMPTION/REPURCHASE: According to published reports, SECURUS Technologies,
Inc. announced that it has extended its solicitation of consents for a proposed amendment to the indenture governing
its $154,000,000 principal amount of 11 % Second- priority Senior Secured Notes due 2011. The consent solicitation,
scheduled to expire on March 2, 2006, will now expire on March 10, 2006, unless further extended or earlier terminated
by SECURUS.
02/17/2006
STOCK/BOND ISSUANCE/REDEMPTION/REPURCHASE: According to published reports, SECURUS Technologies,
Inc. announced that it has commenced a consent solicitation to seek an amendment to the indenture governing its
$154,000,000 principal amount of 11 % Second-priority Senior Notes due 2011.
UCC Filings
)
Cottateral
Type
Sec. Party
Debtor
Date Filed Additional Details
BU8iness
machinery/equipment
Original
US BANCOI1P,
MAF1SHALL. MN
SECURUS
TECHNOLOGIES
INC
03/3t/2006 Filing numbor: 060010548428
Business
machinery/equipment
Original
SUMNER GROUP
INC. SAINT LOUIS.
MO
SECURLJS
TECHNOLOIES
INC
02/08/200(; Filing number: 0600()4470B39
Filed with: SECRETARY OF
STATE/UCC DIVISION,
AUSTIN, TX
Latest info Received: 04/03/2006
Filed with: SECRETARY OF
STATF/LJGC DIVISION,
AUSTIN, TX
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D&B SelfMonitor: SECURUS TECHNOLOGIES INC
Page 7 of9
)
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Latest info Received: 02/24/2006
Business
machinery/equipment
Original SlJMNFH GI!OUP
INC, SAINT LOUIS,
MO
SFCURUS
TECHNOLOGIES
INC
12/12/200[; Filing number: 050037916324
Communications oquipment
.. Computor equipment Business
machinery/equipment
Original
SUMNEH GROUP
INC, SAINT LOUIS,
MO
SECURUS
TECHNOLOGIES
INC
101'1212005 Filing number: 0500317B:166:1
FilLld with: SECRETARY OF
STATE/UCC DIVISION,
AUSTIN, TX
Latest info RocoivBd; 10/24/2005
Leased Computer equipment Original
and proceeds
DELL FINANCIAL
SERVICES LP.,
AUSTIN, TX
SECUHIJS
TECHNOLOGIES,
INC
08/22/2.006 Filing number: 6292607 9
Leased Computer eqUipment Original
and procEwds
DELL FINANCIAL
SERVICES LP.,
AUSTIN, TX
SECURUS
TECHNOLOGIES,
INC
0!5/24/2006 filing number: G1762BB 9
Filed wilh: SECHETARY OF
STATE/UCC DIVISION,
DOVEH,DE
LatHst info Rocoived: 06/2H/2006
Leased Cornputer equipment Original
and proceeds
DELL FINANCIAL
SEHVICES, L.P.,
AUSTIN, TX
SEClJFtlJS
TECHNOLOGIES,
INC
02/23/2006 Filing number: 6063864 3
Filed with: SECRETARY OF
STATE/UCC DIVISION,
AUSTIN, TX
Latest info Received: 12/27/2005
Filed with: SECRETAIW OF
STATE/UCC DIVISION,
DOVEH,DF
Latest info Received: 10109/2006
Filed willl: SECRETARY OF
STATE/lJCC DIVISION,
DOVFI!, DE
Latest info Received: 03/24/2006
TIle_public record items contained in this report may have boon paid, terminated, vacated or released prior to the date this report was printed. Any
public litings displayed in red are open.
Government Activity
)
Activity Summary
Borrower (Dir/Guar)
No
Administrative Debt
No
Contractor
No
Grantee
No
Party Excluded from Federal Program(s)
No
Possible Candidate for Socio-Economic Program
Consideration
Yes (2006)
Labor Surplus Area
Small Business
NIA
8(A) Firm
NIA
The details provided in the Government Activity section are as reported to D&B by the federal
govf~rnment
and other sources.
History & Operations
Topic
)
Description
History
Detailed information on the history of a company, including background information on the management team
and key principals, and information on related companies.
Corporate Family
Detailed information on all related companies, including subsidiaries, affiliates and branches.
Company
Operations
Detailed information on a company's operations, including the identity of the parent company, the geographic
scope of the business, and the key holdings.
Industry
Classification
Details on the specific industry within which a company is classified.
History
Officer(s}:
THE OFFICER(S)
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)
Page 8 of9
)
RICHARD FALCONE, CEO
KEITH KELSON, CFO
)
Corporate details are unavailable.
Business started 2005. 85% of capital stock is owned by HIG Capital, Miami, FL. 15% of capital stock is owned by officers & outside
investors.
RICHARD FALCONE. Antecedents are unknown.
KEITH KELSON. Antecedents are unknown.
Corporate Fam ily
Subsidiaries (US):
Evercom Systems, Inc
14651 Dallas Pkwy Ste 600, Dallas, TX
DUNS # 96-572-7498
Company Operations
Description:
Operates as a personal holding company. Provides telephone communications. Retails telephone equipment and
systems.
Nonseasonal.
Employees:
602 which includes officer(s). 2 employed here.
Subsidiaries:
This business has 2 subsidiaries listed below.
)
T.Netix, Inc, Dallas,TX, Duns#61-904-0173 (100%) chartered 1999. Operates as Mfg & Operate telephone sys.
EVercom Systems, Inc,lrving,TX, Duns#96-572-749a (100%) chartered 2004. Operates as Telephone Comm, Ret Mise
Mer.
Industry Classification
SIC
NAICS
6.719.9902 Personal holding companies, except banks 551112 Offices of Other Holding
Companies
1J3J_QOOOO Telephone communication, except radio
517310 Telecommunications
Resellers
15.9990603 Telephone equipment and systems
443112 Radio, Television, and
Other Electronics Stores
Based on information in our file, D&8 has assigned your company an extended a-digit SIC, D&B's use of a-digit SICs enables us to be more
specific to a company's operations than if we use the standard 4-digit code.
The 4-digit SIC numbers link to the description on tho Occupational Safety & Health Administration (OSHA) Web sito. links open in a new browser
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Banking & Finance
Key Business Ratios
)
Business ratios are not available for this company or its industry. Certain segments, such as financial services, insurance companies,
government agencies and public institutions, have distinctive financial reporting characteristics that do not allow for calculation of these
measures.
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D&B SelfMonitor: SECURUS TECHNOLOGIES INC
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Page 9 of9
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Finance
02/16/2006
On February 16, 2006, attempts to contact the management of this business have been unsuccessful. Outside sources confirmed
operation and location.
Customer Service
For questions or to update your company data, please contact our Customer Service Center at 800 234 DUNS (3867) or
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Copyright 2007 Dun & Bradstreet - Provided under contract for the exclusive use of subscriber SECURUS TECHNOLOGIES INC
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Securus Technologies Inc.
Primary Credit Analyst: Ben Bubeck, CFA, New York, (1) 212-438-2176;
ben_bubeck@standardandpoors.com
Ratings List
Securus Technologies Inc.
Corporate credit rating
Senior secured debt
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B+/Watch Neg/-B+/Watch Neg/--
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Securus Technologies, Inc_ (HoldCo - 1)
Instrument Name
$154mm 11 % Second-priority Sr Sec Notes
due 2011
)
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Face
Amount
Modeled
Amount
Priority
Rank
154
154
3
LGD
LG D Rate Assessment
41%
LGD3
Issue
Rating
B2
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Securus Technologies, Inc.
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Page 2 of245
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Table of Contents
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 16,2005
Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SECURUS TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Chartel)
Delaware
(State or Other Jurisdiction of
incorporation or Organization)
4899
(Primmy Standard Industrial
Classification Code Number)
14651 Dallas Parkway, Suite 600
Dallas, Texas 75254-8815
(972)'277-0300
20-0673095
(I.R.S. Employer
Identification Number)
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offic~)
Keith Kelson
Chief Financial Officer
14651 Dallas Parkway, Suite 600
Dallas, Texas 75254-8815
(972) 277-0300
)
(Address, Incll/ding Zip Code. and Telepholle NI/mbe/~
Including Area Code. of Agent For Service)
With copies to:
Jorge L. Freeland, Esq.
Jeffrey M. Oshinsky, Esq.
White & Case LLP
200 S. Biscayne Blvd., Suite 4900
Miami, Florida 33131
(305) 371-2700
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of
this Registration Statement.
If the securities being registered on this form are being offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check the following box. 0
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, of
1933, as amended (the "Securities Act") check the following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. 0
Ifthis form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act check the following box
and list the Securities Act registration statement number of the earlier effective registration statement for the same
offering. 0
CALCULATION OF REGISTRATION FEE
Title of Each Class of
Securities to be Reelstered
)
II % Second-priority Senior
Secured Notes due 20 II
Guarantees of II % Secondpriority Senior Secured Notes
due 201l(2}
Amount to be
Re!!lstered
Proposed Maxhnum
Offering
Price Der Share(l)
Proposed Maximum
Aggregate
Offerln!! Price(1)
Amount of
Registration
Fcc
$154000000
100%
$154,000,000
$18,125
(3)
(3)
(3)
(4)
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Table of CI!!!!cnts
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Table of Additional Registrants
Exact Name of Subsidiary Registrant as
Specified in Its Charter(1)
T-NETlX, INC
Telequip Labs, Inc.
State or Other
Jurisdiction of
Incorporation or
Organization
DE
NV
T-NETIX Telecommunications Services, Inc.
TX
SpeakEZ, Inc.
T-Netix Monitoring Corporation
Evercom Holdings, Inc.
Evercom, Inc.
Evercom Systems, Inc.
Everconnect, Inc.
CO
CO
DE
DE
DE
DE
Primary Standard
Industrial
Classification
Code Number
4899
4899
4899
3669
4899
4899
4899
4899
4899
IRS Employer
Identification
Number
84-1037352
75-2212916
84-1051608
84-1518202
68-0141093
27-0062736
75-2680266
75-2722144
75-2724447
(I) The address afthe principal executive office for each additional registrant is 14651 Dallas Parkway, Suite 600, Dallas,
Texas 75254-8815 and its telephone number is (972) 277-0300. The name and address and telephone number of the
agent for service of process for each of the additional registrants is the same as for Securus Technologies, Inc.
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(I) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(1)(1) under the Securities Act of
1933, as amended (the "Securities Act").
(2) See inside facing page for table of additional registrants which are providing the guarantees being registered hereby.
(3) No separate consideration will be received for the guarantees of the II % Second-priority Senior Secured Notes due
2011.
(4) Pursuant to Rule 457(n) under the Securities Act, no registration fee is required with respect to the guarantees.
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the
Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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TQble of ContenM
)
The information in this prospectus is not complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to
sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is
not permitted.
SUBJECT TO COMPLETION, DATED MAY 16, 2005
PROSPECTUS
$154,000,000
SECURUS
Securus Technologies, Inc.
Offer to Exchange
$154,000,000 principal amount of its 11% Second'priority Senior Secured Notes due 2011, which have been registered
under the Securities Act of 1993, or the Securities Act, for any and all of its outstanding II % Second-priority Senior Secured
Notes due 2011.
)
We are offering to exchange all of our outstanding II % Second-priority Senior Secured Notes due 2011, which we refer
to as the old notes, in exchange for our registered II % Second-priority Senior Secured Notes due 20 II, which we refer to as
the exchange notes, and together with the old notes, the notes. We are also hereby offering the subsidialY guarantees of the
exchange notes, which are described herein. The terms of the exchange notes are identical to the terms of the old notes except
that the exchange notes have been registered under the Securities Act of 1933, and therefore, will be freely transferable.
Interest on the exchange notes will accrue from March I, 2005 at II % per annum, and shall be payable semi-annually on
each March I and September I commencing on September I, 2005. The notes will mature on September I, 2011.
The exchange notes will be issued under, and entitled to the benefits of, the same indenture under which the old notes
were issued and will be guaranteed on a joint and several basis by all of our current subsidiaries and our future subsidiaries
on an unconditional basis. The notes will be secured by a second-priority lien, subject to certain exceptions and permitted
liens, on ce11ain of our and our subsidiaty guarantors' existing and future assets and a pledge of the capital stock of certain of
our guarantors.
The principal features of the exchange offer are as follows:
• The exchange offer expires at 5:00 p.m., Eastern Standard time, on
currently intend to extend the exchange offer.
,2005, unless extended. We do not
• We will exchange all old notes that are validly tendered and not validly withdrawn for an equal principal amount of
exchange notes that we have registered under the Securities Act.
• You may withdraw tendered old notes at any time prior to the expiration of the exchange offer.
• We believe the exchange of old notes for exchange notes pursuant to the exchange offer will not be a taxable event for
U.S. federal income tax purposes.
• The exchange offer is subject to customary conditions, which we may waive in our sole discretion, but is not
conditioned upon any minimum aggregate principal amount of old notes being tendered.
• We will not receive any proceeds from the exchange offer.
• We do not intend to apply for listing of the exchange notes on any securities exchange or automated quotation system.
Investing in the notes involves risks. See "Risk Factors" beginning on page 15.
Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or
)
disapproved of the securities to be distribnted in the exchange offer, nor have any of these organizations determined
that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense,
The date of this prospectus is
,2005.
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Page 6 of245
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TABLE OF CONTENTS
Page
)
Where You Can Find More Information
Notice to New Hampshire Residents
Forward-Looking Statements
Shorthand References
Induslly and Market Data
Summary
Risk Factors
The Evercom Acquisition
The Exchange Offer
Use Of Proceeds
Capitalization
l1l1am!ited PrQ!'.9.f!!!JLFinancial Data
S.elected Financial Information And Other Data
Management's Discussion And Analysis Of Finaneial Condition And Results Of Operations
Sllle.cled.C~Ql1sQlidate_d Finaneial Data - Evercom
Management's Discussion And Analysis Of Finaneial Condition And Results Of
Operations - Evercom
Business
Regulation
Management
Security Ownership Of CertaitLBI~IwficialQ",!!ers~An<l Man.gement
Certain Relationships And Related Party Transactions
Description Of Our Other Indebtedness
Description Of The Exchange Notes
Material U.S. Federal Income Tax Considerations
.1'[a11. QfJ2istrilmliQ)]
1.e!\l!LMlllters
Indellendent Experts
Index. TO. CQ)1soHdatedJ'iml)1ci!!LStatements
Agreement and Plan of Merw
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws of Securus Technologies, Inc.
Certificate of Incorporation ofT-Netix. Inc.
Bylaws ofT-Netix.lnc.
Atiicles of Incol'Roratio!l ofTeleq~jp Labs, Inc.
ii
ii
ii
iv
iv
1
15
29
30
43
44
45
48
50
64
66
75
89
93
100
102
105
108
155
156
157
157
F-I
AJ)1el1<le_d&Restll!"QQf~I<Heq!lip-.L'll!s,.Jl)C,
ArtiQJ~S--.9fJnCQIP~mti9--.n_ of T-l'l~1hLr~J~~QnJmJlniG~ti.9J1§,JU!_Ju:l1tmd~.d
ByI.flw9fT:J~l~ti,KT~l~<;ornxn_LJ.nJ~fJ.1LQn§.J.n~
Arlic1esQfIIlCQmQmliQt19JSpeakEZ,Ju".
By!aws QfSpeakEiZ, 1m'.
Atilck~s of Incorporation ofT-Netix Monitoring Corp"
Bylaws ofT-Netix Monitoring Corp.
Certificate of Incorporation of Eivercom Holdings, Inc.
Bylaws of Evercom Holdings. Inc.
Amended & Restated Certificate of Incorporation of Evercom, Inc.
Bylaws of Evercom. Inc.
Certificate of IncOl:poration of Evercom Systems. Inc.
ByJfl:W~_Q(Ever~.QrrLS-X-~lIDn~.Jm~~
Certiflcate of Inco.Ip..QratWn_Q.f.EY~rQODnect. Inc ..• as amf!11Jl~d
)
ayJ!tw~_illJ~YJ~r~QDJ1~_Q.t,J!1~,_
JlQ!'mQLU%S_~Ql1d:J11jQl'(tySmior S~~m:edNQ\e"-,ltl~_ZmH
IQdentl!l'~
R~gistr~tiQn Rights Agr~eme_nt
SJl_Gurily_Agreemeu\,-"<lIe_dS_epIember 9,2 QQ4
Patent Security Agreement, dated September 9, 2004
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CJ)RyI"ighLSKYI"ityAgr~~!11~ll!, dated SegtembeL2,ZQ04:
Trademark Security Agreement, dated September 9, 2004
!,led~Agreement,~QatedSell!ember 9, 2004
Cr~ditAgreeJ1lelll,dl!Jed_SeRlemb~t:.9,20Q'l
Jnt~·.Qr~®or Ag@~m~nlpY.JmgJPJJQnKSecllrY~
!nt~Jct:edij9J"AgreelnentJ)Y3ml amqngLaminar Direct Capjtal
Q[:li!liO!LQLWhiJe_&;'.Ca~~.. LL!'
Stockholder Agreement
R"~JrictedJ3tock Pm:cbjj~~ Agl:e~!llel!l
. Amended and Restated Consulting Services Agreement
Amended and Restated Professional Services Agreement
Computation of Ratio of Earnings to Fixed Charges
Schedule of Subsidiaries of Securus
Consent of KPMG
(:;o!!~enLQf De19itte&Tot\che LLP
Statement of Eligibility of Trustee on Form T-l
Farm of Letter of Transmittal
No.UGe. Qf(hmr"nJ~~JtD~JiY~[y
Letter.toCliellts
Letter pf Registered Holders
l'ormQ[lmtt:YcjlimtQRJ;gis\!TIU:lQldeJS
Form of Exchange Agent Agreement
You should rely only on the information contained in this prospectus or to which we have referred you. We have
not authorized anyone to provide you with information that is different. This prospectus may only be used where it is
legal to sell these securities. The information in this prospectus may be accurate only on the date of this prospectus.
)
Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge
that it will deliver a prospectus in connection with any resale of such exchange notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act, This prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of the exchange notes received in exchange for old notes where such old
notes were acquired by such broker-dealer as a result of market-making activities 01' other trading activities. We have agreed
that, for a period of 180 days after the expiration of the exchange offer, we will make this prospectus available to any brokerdealer for use in connection with any such resale. See "Plan of Distribution."
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Table of Cogte\l~~
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We have not authorized any dealer, salesperson or other person to give any information or to make any representation
other than those contained or incorporated by reference in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
Following completion of this exchange offer, we will be required to file periodic and current reports and other
information with the Securities and Exchange Commission, or the SEC. You may read any of our filings and, for a fee, copy
any document that we file with the SEC at the public reference facility maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of these documents may also be obtained at prescribed rates
from the Public Reference Section of the SEC at Room 1024, JudicialY Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. You
may also obtain the documents that we file electronically from the SEC's website at httn://www.sec.gQY. The indenture
governing the notes requires us to file periodic reports and other information required to be filed under the Securities
Exchange Act of 1934, or the Exchange Act, with the SEC and provide such information to you, upon request, regardless of
whether we are subject to the reporting requirements of the Exchange Act. The reports we will file will contain financial
information that will be examined and reported on by independent accountants to the extent required by the Exchange Act.
Our repolis and other information that we have filed, or may in the future file, with the SEC are not incorporated in and do
not constitute part of this prospectus.
We have filed with the SEC a registration statement on Form S-4 with respect to the exchange notes offered by this
prospectus. This prospectus is part of the registration statement and, as permitted by the SEC's lUles, does not contain all of
the information presented in the registration statement. Whenever a reference is made in this prospectus to one of our
contracts or other documents, please be aware that this reference is not necessarily complete and that you should refer to
exhibits that are a part of the registration statement for a copy of the contract or other document and a more complete
understanding of the contract or document. We refer you to the Form S-4 for further information regarding Securus and the
securities offered in this prospectus.
)
You can obtain a copy of the indenture, registration rights agreement and other agreements referred to in this
prospectus at no charge upon written or oral request directed to: Securus Technologies, Inc., 14651 Dallas Parkway,
Suite 600, Dallas, Texas 75254-8815, Attention: Corporate Secretary, telephone (972) 277-0300. To obtain timely
delivery of any of our mings, agreements or other documents, you must make your request to us no later than five
business days before the expiration date of the exchange offer. The exchange offer will expire at 5:00 p.m., Eastern
Time, on
, 2005, unless we extend the offer. See the caption "The Exchange Offer" for more detailed
information.
NOTICE TO NEW HAMPSHIRE RESIDENTS
Neither the fact that a registration statement or all application for a license has been med under Chapter 421-B of
the New Hampshire Revised Statutes with the State of New Hampshire nor the fact that a security is effectively
registered or a person is licensed in the State of New Hampshire constitutes a finding by the Secretary of State that
any document med under RSA 421-B is true, complete and not misleading. Neither any such fact nor the fact that an
exemption or exception is available for a security or a transaction means that the Secretary of State has passed in any
way upon the merits or qualifications of, or recommended or given approval to, any person, security or transaction. It
is unlawful to make, or cause to be made, to any prospective purchaser, customer or client any representation
inconsistent with the p"ovisions of this paragraph.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of the federal securities laws. These fOlwardlooking statements are contained throughout this prospectus, for example in the sections
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entitled "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," "Regulation" and "Unaudited Pro Forma Financial Data," Such forward-looking statements reflect,
among other things, our cun'ent expectations, plans and strategies, and anticipated financial results, all of which are subject to
known and unknown risks, uncetiainties and factors that may cause our actual results to differ materially from those
expressed or implied by these fOlward-looking statements. Many of these risks are beyond our ability to control or predict.
Any statements contained in this prospectus 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. These forward-looking statements are subject to risks,
uncertainties and assumptions set forth in this prospectus, including the factors described under the heading "Risk Factors."
These risks, uncertainties and other impOltant factors, include, among other things:
• our substantial amount of debt and our need for a significant amount of cash to service and repay our debt, including the
notes;
• our ability to incur more debt, including secured debt, some or all of which may effectively rank senior to the notes and
the guarantees;
• restrictive covenants in the indenture, our working capital facility and our senior subordinated debt agreements;
• our financial results are dependent on the success of our billing and bad debt management systems;
• dependence on third party vendors for our information and billing systems;
• the integration of Evercom into our business;
• loss of major partners or customers and recent trends in the inmate telecommunications industty and the risks of
government contracts;
• our ability to protect our proprietaty technology;
)
• our ability to ensure that we are not infringing on the proprietary technology of other companies;
• competition in our industry and in the telecommunications industry generally;
• system failures and security breaches;
• our ability to adapt successfully to new technologies, to respond effectively to customer requirements or to provide new
products and services;
• our ability to comply with administrative policies and procedures employed by our customers who are federal, state and
local governmental entities;
• control by our equity investors, whose interests may differ from yout's or from each other, and who may decide to exit
their investment in us;
• our ability to aUract and retain qualified management and other personnel;
• current challenges to the exclusive provider system;
• extensive government legislation and regulations that apply to us and the telecommunications industry; and
• our ability to adapt to changes in state and federal regulations that apply to the inmate telecommunications industry.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety
by the cautionary statements contained throughout this prospectus. Because of
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Page 10 of245
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these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements.
FUlthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal
securities laws or the IUles and regulations of the SEC, we do not undertake any obligation to update any such forward-
looking information, whether as a result of new information, future events or otherwise.
SHORTHAND REFERENCES
In this prospectus, we use the following terms for ease of reference, unless stated othelwise or it is othelwise evident from
the context:
• "Securus," "our company," "we," "us" and "our" each refer to Securus Technologies, Inc. and its subsidiaries on a
consolidated basis;
• "T-Netix" refers to T-NETIX, Inc. and its subsidiaries on a consolidated basis;
• "Evercom" refers to Evercom Holdings, Inc. and its subsidiaries on a consolidated basis;
• the "Predecessor" refers to Securus' predecessor company for the period from JanualY 1,2000 to March 2, 2004;
• the "issuer" refers to Securus, as the issuer of the old notes and the exchange notes;
• "H.I.G." refers to H.I.G. Capital, LLC and its affiliates;
• our "equity investors" refers to H.I.G. and the other parties to our stockholders' agreement. See "Security Ownership of
Certain Beneficial Owners and Management" and "Certain Relationships and Related Party Transactions";
• "Transactions" refers to the issuance of the old notes, the acquisition of Evercom, the repayment of our then existing
bank debt, the procurement of our $30 million working capital facility, the issuance of $40 million of our 17% senior
)
subordinated notes and related warrant financing, the cash equity investment by our equity investors and our payment of
the related expenses. See "The Evercom Acquisition," "Description of the Exchange Notes," and "Description of Our
Other Indebtedness";
• "notes" refers to the old notes issued on September 9, 2004 and the exchange notes. See "Description of the Exchange
Notes";
• "pro forma" or "on a pro forma basis," when used to describe our operations or financial condition, refers to our
operations 01' financial condition, after giving effect to the acquisition ofT-Netix, the consummation of the Transactions
and the use of proceeds therefrom as if they had each occurred on January I, 2004, for the results of operations and the
financial condition data.
INDUSTRY AND MARKET DATA
Industry and market data and other information used throughout this prospectus are based on independent industry
publications, government publications, publicly available information, repolts by market research firms or other published
independent sources. Some data are also based on estimates made by our management, which are derived from their review
of internal surveys and induslly knowledge. Although we believe these sources are reliable, we have not independently
verified the information, and we cannot guarantee its accuracy or completeness.
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SUMMARY
This summaty highlights certain information concerning our business and this exchange offer. It does not contain all
of the information that may be important to you in deciding whether to participate in the exchange offer. Thefollowing
summmy is qualified in its entirety by the more detailed information andfinancial statements and notes thereto
appearing elsewhere in this prospectus. You should carefully read the entire prospectus and should consider, among
other things, the matters setforth in "Risk Factors" before deciding to participate in the exchange offer.
Our Company
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. We estimate that, as of December 31,2004, we:
• derived direct and indirect revenues from over 3,375 correctional facilities in the United States and Canada;
• processed over 16 million calls per month; and
• provided services, directly and indirectly, to approximately 1.1 million inmates.
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 typically 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 pattnered with regional bell operating companies, or RBOCs, local exchange carriers, or LECs, and
interexchange carriers, or IXCs, for which we provided our equipment and, as needed, back office support, including
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call validation and billing and collections services, and charged 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 information management systems, call activity repOliing
and call blocking.
The inmate telecommunications industry requires highly specialized systems and related services in order to address
the unique needs of the corrections industry. Security and public safety concerns require that correctional facilities have
the ability to control inmate access to telephones and certain telephone numbers and to monitor inmate telephone
activity. In addition, concerns regarding fraud and the credit quality of the patties billed for inmate telephone usage have
led to the development of billing and validation systems and procedures unique to this industty. Inmate
telecommunications services in the United States are operated by a large and diverse group of service providers,
including RBOCs, LECs and IXCs, such as SBC Communications, MCI and Sprint, and independent public pay
telephone and inmate telephone companies.
We estimate that the inmate telecommunications market opportunity for city, county, state and federal correctional
facilities in the United States is approximately $1.7 billion. We estimate that the total direct inmate telecommunications
market, excluding intra-industry services, is approximately $1.4 billion. Approximately 58% of this market is directly
served by RBOCs, LECs and IXCs, with the remainder of this market setved by independent service providers. We
believe that we account for approximately 47% of the independent service provider market. Including activities to
support our partners, we estimate that our platforms provide services to approximately 1.1 million inmates in city,
county, state and federal correctional facilities.
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.
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For the year ended December 31, 2004, our pro forma revenues were approximately $364.1 million of which 78%
represented direct call provisioning to correctional facilities, 20% represented the provision of Solutions,
telecommunications and billing services to RBOC, LEC and IXC paltners and 2% represented equipment and hardware
sales and other ancillary services.
Our Strengths
Significant Revenues Under Contract with High Renewal Rates
Correctional facilities typically enter into fixed-term contracts with us for a contract life of approximately three to
five years. For the year ended December 31, 2004, approximately 90% of our pro forma revenues were under fixed-term
contracts. As of December 31, 2004, the average remaining life of our fixed-term contracts was more than two years.
Further, we have shown consistent success in renewing our contracts when they come up for renewal. During the year
ended December 31, 2004, we renewed contracts representing an average of approximately 94% of our annualized direct
revenues coming up for renewal during such period. We believe that we are able to achieve high renewal rates as a result
of our providing high quality service as well as our customers' desire to maintain stability in their inmate
telecommunications systems. Additionally, the recurring nature and stability of our customer base provides for a high
level of visibility in our future revenues.
Positive Corrections Industry Dynamics
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The corrections industry has experienced consistent growth over the past decade as a result of societal and political
trends. The number of inmates incarcerated in federal and state prisons and in city and county correctional facilities
increased from approximately 1.7 million at December 31, 1995 to approximately 2.1 million at June 30, 2004,
representing an annual growth rate of approximately 2.6%. Incarceration rates have historically risen over the last
10 yeal~ to approximately 700 inmates per 100,000 residents. We expect the growth in the corrections industry to
continue, based on the continuing enactment of anti-crime legislation and limitations on parole and spending
authorizations for crime prevention. Accordingly, we believe that our target market will continue to expand, affording us
more oppOltunities for growth.
Industry Leading Bad Debt Systems
We believe that we are among the industry leaders in limiting our exposure to bad debt expense, which is a leading
risk to operating margins in the inmate telecommunications business. In particular, we believe that Evercom is a leader
in providing systems to manage bad debt, as evidenced by the growth of its Solutions business, whereby we provide
telecommunications product and billing services, bad debt management and other related products and services to
RBOCs, LECs and IXCs to support their direct contracts with corrections facilities. Evercom's Solutions business grew
from $2.5 million in revenues in 2001 to approximately $28.8 million in revenues for the year ended December 31,
2004. Over the past two years, both T-Netix and Evercom have implemented initiatives to enhance their systems and
reduce their exposure to bad debt. These initiatives include improved identification of unbillable numbers, which
represent calls completed where there is no billing address for the called number, improved identification and
management of billed parties that represent significant credit risks, increased levels of prepaid revenues, and improved
systems to monitor their risks and policies on a real-time basis. Since the implementation of its enhanced bad debt
initiatives, T -Netix decreased its bad debt expense as a percentage of direct provisioning revenues from approximately
31 % for the first quarter of2002 to approximately 16% for the year ended December 31, 2004. Similarly, since the
inception of its bad debt initiatives, Evercom decreased its direct provisioning bad debt expense as a percentage of direct
provisioning revenues from 20% for the year ended December 31, 2001 to approximately 13% for the year ended
December 31, 2004.
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Diverse Customer Base with Broad Revenue Opportunities
We serve a broad range of correctional facilities with T-Netix historically serving medium- to large-sized facilities
and Evercom historically serving small- to medium-sized facilities. We believe that our acquisition of Evercom provides
for a complementary and diverse customer base that allows us to leverage our infrastmcture, acquire more data on
customer usage patterns, optimize our systems effectively and provides us with a greater ability to cross-sell our
services. Additionally, we believe that such a diverse customer base will likely reduce our exposure to customer
concentration, as no customer accounted for more than 10% of our pro forma 2004 revenues and our five largest
customers accounted for approximately 24% of our pro forma 2004 revenues.
Demonstrated Leadership in Product Innovation
Our focus on product innovation has allowed us to develop a broad set of products and services to provide a "onestop" solution for our customers. Our customers rank technology as one of the top reasons for choosing a provider. We
believe that we hold one of the broadest intellectual prope!ty pOltfolios in the inmate telecommunications industry, with
80 patents and patent applications owned or exclusively licensed that support our proprietary product offerings and
services. We fUlther believe that our key products, such as automated operators, three-way calling detection, bad debt
management, and revenue generation solutions, demonstrate our strength in this industry. For example, recently T-Netix
successfully settled a patent infringement claim relating to several patents, including our three-way calling detection
product, pursuant to which we received a one-time cash payment of$12.0 million from Schlumberger Inc.'s Global
Tel'Link business and will receive an ongoing royalty over the remaining life of our affected patents. In addition, we
sell our inmate call processing systems to other telecommunications services providers. As a result, we estimate that we
are the leading inmate telecommunications platform provider in the United States, either directly through us or indirectly
through our telecommunications service provider partners.
Experienced Management Team
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As a result of our historical acquisitions, we have assembled one ofthe leading management teams in the industry.
Our management team has an average of approximately 17 years of experience in the telecommunications industry and
has demonstrated the ability to deliver profitable growth while providing high levels of customer satisfaction.
Specifically, our management team has:
• particular expertise in providing superior quality of service to state, county and local correctional facilities;
• a focus on technology development and product innovation; and
• a proven record of successful business integrations, including more than 13 acquisitions.
Business Strategy
Our primary business objectives are to be a high-quality, cost-efficient provider of telecommunications services to
correctional facilities in the United States and Canada and to continue to expand our installed base of inmate call
processing systems and our provision of products and services. We have developed and are implementing the following
strategies to meet these objectives:
Continue to Target the Corrections Industry with Specialized Products and Services
Our strategy is to retain our focus, intensity and customer service on the corrections industry to enhance relationships
with existing clients and to attract new customers. We seek to increase cash flow by providing new and innovative
products and services to new and existing customers. We intend to grow our business by working closely with our
partners to support their sales, appropriately converting accounts to direct customers to obtain higher gross margin
dollars, continuing to win business from our competitors, enhancing customer service and obtaining greater
opportunities to sell and cross-sell additional products
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and services directly to end users. Moreover, in light of the recent trend of large dominant industry telecommunications
cRniers exiting the direct inmate telecommunications business, we will seek to take advantage of opportunities to
procure agreements to provide direct call provisioning services to those correctional facilities currently serviced by such
large carriers. We will also seek to leverage our infrastructure and databases in order to address the current and future
needs of correctional facilities for additional law enforcement activities and services. As homeland security issues
increase and more inmates move among facilities, we intend to expand our business by offering products and services to
meet the changing and increasing needs of the industry. See "Risk Factors - Risks Relating to Our Business - A
number of our customers individually account for a large percentage of our revenues, and therefore the loss of one or
more of these customers could harm our business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Industty Trends."
Refine Credit Management Systems
Our operating stmtegy is to prudently manage and ultimately lower our bad debt exposure by continuously
enhancing our systems and credit management contL'Ols in order to maximize earnings. We continually seek to refine our
bad debt management systems to predict which billed parties present the highest credit risk and redirect such billed
parties to our direct billing or prepayment options. We continuously monitor our experience with billed parties and
credit indicators, as well as other geneml economic conditions, to adjust credit availability andlor block calls. Evercom
has implemented an advanced patent pending billing and bad debt management system, which uses proprietaty, multivariable algorithms to monitor exposure to bad debt, that we believe leads the industry in reducing operating costs and
affords us a competitive advantage. We plan to leverage Evercom's advanced bad debt management system to further
improve T-Netix's bad debt management. Additionally, we plan to leverage the data generated by having a broader
customer base to further enhance our algorithms and analyses. We may also generate additional revenues by offering our
bad debt management systems to our telecommunications services provider partners through our Solutions business.
Capitalize upon Economies of Scale
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We believe that the combination ofT-Netix and Evercom provides us with an opportunity to improve our operating
efficiencies. We are consolidating all of the departments in both companies, which we believe will yield substantial
annual cost savings once all consolidation activities are completed, which we expect to occur during 2005 and which
will have a full year effect in fiscal 2006. We are redesigning the system architecture of our networks to enable us to
provide more specialized products from a single system and realize long-term reductions in overall capital expenditures.
In addition, we believe that our existing infrastmcture will allow us to operate new and acquired inmate call processing
volumes in our existing markets without significant incremental field service, collection, and other general and
administrative costs. We also plan to continue to seek cost savings both internally and from our vendors as we grow our
business.
Improve Billing and Collections by Utilizing Direct Billing Agreements with LECs
A principal competitive advantage in our industty is the ability to bill called parties directly through LECs. Direct
billing arrangements with LECs can be advantageous because they eliminate the costs associated with third-party billing
aggregators, expedite the billing and collection process, increase collectibility and reduce account charge-offs. Thirdparty billing agreements are utilized by a majority of independent inmate telecommunications companies, including TNetix. During 2004, Evercom billed approximately 74% of its operating revenues and 89% of its collect call revenues
through LEe direct billing agreements. We will seek to leverage these agreements by expanding our relationships to
include T-Netix's business in an effort to enhance our operating results.
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History of the Company
Securus was formed in January 2004. We completed our tender offer for T-Netix's common stock on March 3, 2004
and our acquisition of Evercom on September 9, 2004.
T-Netix was incorporated in 1987 as a company engaged in designing, manufacturing, marketing and servicing
public pay telephones, including those used in correctional facilities. In 199 I, T -Netix shifted its focus towards
specialized telecommunications services for the inmate calling market. With its development of the first three-way call
detection and prevention technology in the corrections market, T-Netix quickly became known as an innovator in the
industry.
With 17 years in the industty, T-Netix is one of the oldest and, we believe, most widely-known independent
providers of inmate telecommunications services to correctional facilities. T-Netix has a history of acquiring industry
participants, having acquired three companies since its formation. These acquisitions included TELEQUIP Labs, Inc., a
small, strategically based provider of corrections industry telecommunications services and equipment, and Gateway
Technologies, Inc., a privately held provider of inmate call processing services (including three-way call detection
technology). T-Netix was listed on the Nasdaq National Market under the symbol TNTX from November 1994 to
March 3,2004, when we purchased all ofT-Netix's outstanding common stock for approximately $69 million and
repaid approximately $19 million ofT-Netix's indebtedness, primarily with approximately $17 million ofT-Netix's
cash on hand.
On September 9, 2004, we acquired all of the outstanding capital stock of Evercom for a purchase price of
approximately $87 million and we repaid approximately $38 million of Evercom's indebtedness. Our acquisition of
Evercom was financed by borrowings under our $30 million working capital facility, the issuance of the old notes,
$40 million of 17% senior subordinated notes and a cash equity investment by H.I.G. For a more complete description of
this acquisition, see "The Evercom Acquisition."
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Evercom was formed in 1996 in connection with its acquisitions of AmeriTel Pay Phones, Inc. and Talton
Telecommunications Corporation, combining the strengths of two recognized independent providers of inmate
telecommunications services. Since that time, Evercom has become one of the largest independent service providers in
the industry by acquiring 10 additional inmate telecommunications selvice providers, including Security Telecom, Inc.,
Correctional Communications Corporation and InVision Telecom, Inc. Beginning in 2001, Evel'com changed its
management team and initiated a recapitalization of its balance sheet that was completed in February 2003. During this
time, Evercom implemented an upgrade to its bad debt management systems. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Evercom." Evercom's predecessors have been in the
inmate telecommunications industry since 1984.
Corporate Information
We are a Delaware corporation incorporated in Januaty 2004. Our principal office is located at 14651 Dallas
Parkway, Suite 600, Dallas, Texas 75254-8815. Our telephone number is (972) 277-0300.
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The Exchange Offer
On September 9, 2004, we issued $154 million aggregate principal amount of our II % Second-priority Senior
Secured Notes due 2011. We refer to these notes in this prospectus as the "old notes." We sold the old notes in
transactions that were exempt from or not subject to the registration requirements under the Securities Act of 1933, as
amended. Accordingly, the old notes are subject to transfer restrictions. Old notes may not be offered or sold in the
United States or to, or for the account or benefit of, U.S. persons except in transactions either registered under the
Securities Act or exempt from or not subject to the Securities Act registration requirements.
In connection with the sale of the old notes, we entered into a registration rights agreement with the initial purchasers
of the old notes. Pursuant to that agreement, we agreed to file the registration statement, of which this prospectus is a
part, with the SEC and to use our reasonable best efforts to have the registration statement declared effective by the SEC
within 270 days after the date of the original issue of the old notes and to commence the exchange offer promptly
following the date that the registration statement became effective. In the exchange offer, you are entitled to exchange
your old notes for exchange notes. The exchange notes will be substantially identical to the old notes, will evidence the
same debt and will be governed by the same indenture as the old notes. However, based on interpretations of the SEC
staff, your exchange notes will be freely tradeable. You should read the discussion under the heading "Exchange
Offer - Resale of the Exchange Notes." For fUlther information about the exchange notes, you should read the
discussion under the heading "Description of the Exchange Notes."
Each broker-dealer that receives exchange notes for its own account in exchange for old notes, where such old notes
were acquired by such broker-dealer as a result of market making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such exchange notes. For further information, please
read "Plan of Distribution."
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If you do not exchange your old notes in the exchange offer, you will no longer be able to require us to register
your old notes under the Securities Act except in the limited circumstances provided under the registration rights
agreement. In addition, you will not be able to ,·esell or otherwise transfer your old notes unless we have
registered your old notes under the Securities Act, or unless you resell, offer to resell or otherwise transfer them
under an exemption from the registration requirements, or in a transaction not subject to, the Securities Act.
We have summarized the terms of the exchange offer below. You should read the discussion under the heading "The
Exchange Offer" for further information about the exchange offer and the resale of exchange notes.
Expiration
The exchange offer will expire at 5:00 p.m., Eastern Standard time, on
,
2005, or such later date and time to which we extend it. We do not currently intend to
extend the exchange offer. Pursuant to the terms of the registration rights agreement,
the exchange offer must remain open for not less than thirty days (or longer if
required by applicable law) after the date that the notice of the exchange offer is
mailed to holders of the old notes.
Withdrawal of Tenders
You may withdraw your tender of old notes at any time prior to the expiration of the
exchange offer. See "The Exchange Offer - Withdrawal of Tenders" for a more
complete description of the withdrawal provisions.
Conditions to the Exchange Offer The exchange offer is subject to customary conditions, which we may, but are not
required to, waive. However, the exchange offer is not conditioned upon any
minimum aggregate principal amount of old notes being tendered. Please read "The
Exchange
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Offer-Conditions to the Exchange Offer" for more information about the conditions
to the exchange offer.
Procedures for Tendering Old
Notes
If you wish to tender your old notes for exchange pursuant to the exchange offer, you
must:
• complete, sign and date the accompanying letter of transmittal, or a facsimile of the
letter of transmittal, and mail or othetwise deliver the letter of transmittal, together
with all other documents required by the letter of transmittal, including your old notes
to the exchange agent, at the address set forth on the cover page of the letter of
transmittal; or
• arrange for The Depository Trust Company to transmit certain required information,
including an agent's message forming part of a book-ently transfer in which you
agree to be bound by the terms of the letter of transmittal. to the exchange agent in
connection with a book-entry transfer.
By tendering your old notes in either manner, you will be representing, among other
things, that:
• the exchange notes you receive pursuant to the exchange offer are being acquired in
the ordinary course of your business;
• you are not participating, do not intend to participate and have no agreement or
understanding with any person to participate, in the distribution of exchange notes
issued to you in the exchange offer; and
• you are not an "affiliate" of ours, or if you are an affiliate of ours you will comply
with the applicable registration and prospectus delivelY requirements of the Securities
Act.
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If a broker, dealer, commercial bank, trust company or other nominee is the
registered holder of the notes, we urge you to contact that person or entity promptly
to tender your old notes in the exchange offer.
For more information on tendering your old notes, please refer to the sections in this
prospectus entitled "The Exchange Offer - Acceptance of Old Notes for Exchange"
and "- Procedures for Tendering Old Notes."
Guaranteed Delivery Procedures
If you wish to tender your old notes and:
• certificates representing your old notes are not lost but are not immediately
available,
• time will not permit your letter of transmittal and other required documents to reach
the exchange agent on or prior to the expiration date of the exchange offer, or
• the procedures for book-entry transfer cannot be completed on or prior to the
expiration date of the exchange offer,
you must tender your old notes according to the guaranteed delivery procedures
described in this prospectus under the caption "The Exchange Offer - Procedures
for Tendering Old Notes - Guaranteed DelivelY."
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Consequences of Failure to
Exchange Old Notes
Old notes that are not tendered in the exchange offer or are not accepted for exchange
will continue to bear legends restricting their transfer. You will not be able to offer or
sell the old notes unless:
• you do so pursuant to an exemption from the requirements of the Securities Act;
• the old notes are registered under the Securities Act; or
• the transaction requires neither such an exemption nor registration.
After the exchange offer is closed, we will no longer have an obligation to register
the old notes.
Resale of New Notes
Based on interpretations by the staff of the SEC set fOlth in no-action letters issued to
third parties, we believe that exchange notes issued pursuant to the exchange offer in
exchange for old notes may be offered for resale, resold and otherwise transferred by
you without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that:
• you are acquiring the exchange notes in the ordinary course of your business;
• you are not a broker-dealer who acquired the exchange notes directly from us
without compliance with the registration and prospectus delive.y provisions of the
Securities Act;
• you have not engaged in, do not intend to engage in, and have no arrangement or
understanding with any person to palticipate in the distribution of the exchange
notes; and
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• you are not our affiliate as defined under Rule 405 of the Securities Act.
Each participating broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer in exchange for old notes that were acquired as a
result of market-making or other trading activity must acknowledge that it will
deliver a prospectus in connection with any resale of exchange notes. Prospectus
delivelY requirements are discussed in greater detail in the section captioned "Plan of
Distribution."
Any holder of old notes who:
• is our affiliate;
• does not acquire exchange notes in the ordinary course of its business;
• tenders in the exchange offer with the purpose of participating in a distribution of
exchange notes; or
• is a broker-dealer that acquired the old notes directly from us
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with the resale of exchange notes.
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U.S. Federal Income Tax
Consequences
We believe that the exchange of old notes for exchange notes in the exchange offer
will not be a taxable event for U.S. federal income tax purposes. Please read
"Material U.S. Federal Income Tax Considerations" for a more detailed description
of the tax consequences of the exchange offer.
Use of Proceeds
We will not receive any proceeds from the issuance of the exchange notes in
connection with the exchange offer. We are making the exchange offer solely to
satisfy our obligations under the registration rights agreement. See "Use of
Proceeds,"
Exchange Agent
The Bank of New York Trust Company, N.A., the trustee under the indenture, is
serving as exchange agent in connection with the exchange offer. You should direct
questions and requests for assistance and requests for additional copies of this
prospectus (including the letter of transmittal) to the exchange agent at the address set
forth under "The Exchange Offer - Exchange Agent."
Fees and Expenses
We will bear all expenses related to the exchange offer. See "The Exchange OfferFees and Expenses."
Summary of Terms of the Exchange Notes
The terms and covenants of the exchange notes are substantially identical to those of the old notes except that the
exchange notes will not have restrictions on transfer or registration rights. The exchange notes will evidence the same
debt as the old notes and will be governed by the same indenture under which the old notes were issued. The following
summaty contains basic information about the exchange notes and is not intended to be complete. It may not contain all
of the infonnation that is impOltant to you. For a more complete understanding of the exchange notes, please refer to the
section of this prospectus entitled "Description of the Exchange Notes."
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Securities Offered
$154.0 million aggregate principal amount of II % Second-priority Senior Secured
Notes due 20 II.
Maturity Date
September I, 20 II.
Interest
11 % per annum, payable semi-annually. in arrears on each March 1, and
September I, of each year, commencing on September I, 2005. Interest on the
exchange notes will accrue from March 1,2005, the date our last interest payment
was made.
Guarantees
The exchange notes will be guaranteed, jointly and severally, on a senior secured
basis, by all of our current subsidiaries, including T-Netix and Evercom, and, as
required by the indenture governing the exchange notes, future domestic restricted
subsidiaries and any subsidiary that guarantees our or any of our domestic restricted
subsidiaries' debt.
Ranking
The exchange notes and related guarantees will be our and the subsidiary guarantors'
senior secured obligations, ranking equal in right of payment to all of our and the
subsidiaty guarantors' existing and future senior indebtedness, including debt under
our working capital facility and the guarantees thereof, junior in priority as to
collateral with respect to our and our subsidiary
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guarantors' obligations under our working capital facility and any other future
obligations secured by a first-priority lien on the collateral and structurally
subordinated to all liabilities of any subsidiaries that are not guarantors.
Optional Redemption
Prior to September I, 2008, we may redeem all, but not less than all, of the exchange
notes at a redemption price equal to 100% of the principal amount plus a "makewhole" premium, and plus any accrued and unpaid interest to the date of redemption.
Thereafter, we may redeem all or part of the exchange notes at any time at the
redemption prices set forth in the section "Description of the Notes - Optional
Redemption," plus accrued and unpaid interest, if any, to the date of redemption.
In addition, prior to September 1,2007, we may redeem up to 35% of the aggregate
principal amount of the exchange notes with the proceeds of certain sales of our
equity securities at III % of the principal amount thereof, plus accrued and unpaid
interest, if any. to the date of redemption. See "Description of the Exchange Notes ~
Optional Redemption."
Change of Control
lfwe experience a Change of Control Cas defined under "Description of the Exchange
Notes - Change of Control"), we will be required to make an offer to repurchase the
exchange notes at a price in cash equal to I 0 I % of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any, up to, but excluding, the date of
repurchase. See "Description of the Exchange Notes - Repurchase at the Option of
Holders upon a Change of Control."
Collateral
The exchange notes and the guarantees will be secured by second-priority liens on:
• substantially all of our and our subsidiary guarantors' tangible and intangible assets,
except for current assets (including accounts receivable and inventory and any
proceeds thereof) and those assets excluded as collateral under our working capital
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facility; and
• the capital stock of certain of QUI' subsidiaries, including T~Netix and Evercom (but
only to the extent, as to any subsidiary, that such a pledge of capital stock does not
give rise to reporting requirements on the part of such subsidiaty under the rules of
the Securities and Exchange Commission or any other governmental authorities). See
"Description of the Exchange Notes - Limitations on Stock Collateral."
Excess Cash Flow
Within 120 days following the end of the twelve-month period ending December 31
of each year beginning with the twelve-month period ending December 31, 2005, we
must use a pOltion of our excess cash flow to offer holders of the exchange notes the
opportunity to sell us a pro rata portion of their exchange notes at a purchase price in
cash equal to the lesser ofCi) 104% and Cii) the then applicable redemption price of
the exchange notes, in each case of their principal amount plus
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accrued and unpaid interest to the date of purchase. See "Description of the Exchange
Notes - Excess Cash Flow."
Intercreditor Agreement
Pursuant to an intercreditor agreement, the liens securing the exchange notes are
expressly second in priority to all liens that secure our working capital facility and
future indebtedness incurred to replace or refinance our working capital facility in
accordance with the terms of the indenture governing the exchange notes. Pursuant to
the intercreditor agreement, the second-priority liens securing the exchange notes
may not be enforced at any time when the obligations secured by the first-priority
lien are outstanding, subject to certain limited exceptions. The holders of the firstpriority liens will receive all proceeds from any realization on the collateral until the
obligations secured by the first-priority liens are paid in full. See "Description of the
Exchange Notes - Security for the Notes."
Restrictive Covenants
The indenture governing the exchange notes contains certain covenants that limit,
among other things, our ability and the ability of our restricted subsidiaries to:
• incur additional debt;
• pay dividends on, redeem or repurchase capital stock, make payments on
subordinated debt or make certain investments;
• place limitations on distributions from restricted subsidiaries;
• issue capital stock of restricted subsidiaries;
• sell assets;
• enter into certain types of transactions with affiliates;
)
• engage in unrelated businesses;
• create liens;
• engage in sale-leaseback transactions; and
• consolidate, merge or sell all or substantially all of our assets.
In addition, certain covenants require us to maintain a specified fixed charge
coverage ratio (tested on a quarterly basis).
These covenants are subject to a number of important qualifications and exceptions.
See "Description of the Exchange Notes - Certain Covenants."
Absence of a Public Market for
the Exchange Notes
The exchange notes will be a new issue of debt securities of the same class as the old
notes and will generally be freely transferable. Notwithstanding the foregoing, we
cannot assure you as to the development of an active trading market for the exchange
notes or their liquidity. We do not intend to apply for listing of the exchange notes on
any securities exchange or any automated quotation system.
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Risk Factors
Participating in the exchange offer, and therefore investing in the exchange notes, involves substantial risk. See
"Risk Factors" section of this prospectus for a description of the material risks you should consider before investing in
the exchange notes.
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Summary Historical and Pro Forma Financial Information
(Dollars in millions)
The following tables set forth summary historical statement of operations data for (i) T -Netix, our predecessor, for
the period from Janua,y I, 2004 to March 2, 2004; (ii) Evercom, for the period from January I, 2004 to September 8,
2004; and (iii) SeculUs, after giving effect to the acquisition ofT-Netix and the consummation of the Transactions, for
the period from January 12,2004 (inception) to December 31,2004. The summa,y unaudited pro forma combined
financial and other operating data for, and as of, the year ended December 31, 2004, is adjusted to give effect to the
acquisition ofT-Netix on March 3, 2004 and the consummation of the Transactions on September 9, 2004 and have
been derived from (i) the audited consolidated financial statements of Securus, appearing elsewhere in this prospectus,
which, with respect to the statement of operations data, give effect to the acquisition ofT-Netix and the consummation
of the Transactions as of they had occurred as of JanuOlY 1,2004; (ii) the audited financial statements ofT-Netix from
January 1,2004 to March 2, 2004; and (iii) the unaudited financial statements of Evercom included elsewhere in this
prospectus and the books and records of Evercom with respect to the period from JanuOlY 1,2004 to September 8, 2004.
In the opinion of management, the financial information provided herein reflects all adjustments necessary for a fair
presentation of the data for the periods presented. The unaudited pro forma combined financial and other data does not
purport to represent what our results would have been if the acquisition ofT-Netix and the consummation of the
Transactions had occurred as of such date or what such results will be for future periods. The historical balance sheet
data as of December 31, 2004 is derived from Secul'lls' audited balance sheet appearing elsewhere in this prospectus.
The information set forth below should be read in conjunction with the information under "Unaudited Pro Forma
Financial Data," "Selected Financial Information and Other Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Evercom" and the consolidated financial statements and related notes and other financial
information included elsewhere herein.
Securus Technologies, Inc.
)
Statement of Operations Data:
Operating revenues
Cost of revenues
Selling, general and administrative( I)
Depreciation and amortization
Non-cash impairment of assets
Other operating expenses(2)
Income (loss) from operations
Other Income (Expense):
Restructuring, transaction expenses and othcr
charges(3)
Interest and other expenses. net
Income (loss) from continuing operations before
income taxes
Income tax expense (benefit)
Net Income (loss) from continuing operations
Other Pro Forma Combined Financial Data:
Total Direct Provisioning revenues(4)
Total Telecommunications services revenues
Total Solutions services revenues
Total Equipment and Othcr revenues
)
$
T-Netlx
lPredeeessor}
Evercom
Period from
January I,
2004 to
March 2.
2004
Period from
January I.
2004 to
Scptember 8.
2004
17.4 $
11.4
3.6
1.6
0.3
5.3
(4.8)
(5.4)
[2.2)
$
(12.4)
[2.6)
[9.8) $
9.7
7.6
0.2
Securus
lSuccessor)
Period from
January 12.
2004
(Inception)
Pro Forma
Adjustments
Combined
Pro Forma
As Adlusted
For the Year
Ended
December 31.
2004
to
December 3 t,
2004
1.7(5)
2.6
8.2
173.4
130.9
27.5
13.2
50.6
5.6
(54.4)
(1.7)'5)
364.1
277.8
49.4
25.2
50.9
13.5
(52.7)
(1.3)
[2.6)
(1.0)
[14.0)
[6.9)(5)
(7.7)
[25.7)
(8.6)
[18.4)(5)
9.8
$
(86.1 )
[32.7)
[53.4)
173.3
135.5
18.3
8.7
4.3
1.0
3.3
152.5
19.3
1.6
$
$
(69.4)
[12.7)
[56.7) $
120.9
30.3
18.5
3.7
$
283.0
37.9
37.7
5.5
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As of
December 31. 2004
Balance Sheet Data:
Cash and cash equivalents, including restricted cash
Total current assets
Net plant, propetty & equipment
Total assets
Total long-term debt (including current portion)(6)
Stockholders' equity (deficit)
$
3.2
78.1
36.1
272.1
189.9
(22.8)
(l) Includes research and development expenses.
(2) Includes gain on sale of assets, loss on debt extinguishment and compensation expense on employee options and
restricted stock, including compensation expense of $4.1 million due to option payments made by us in connection
with our acquisition ofT-Netix for the period from Januaty 1,2004 to March 2, 2004.
(3) Includes (a) one-time charges related to Evercom's exchange offer and reorganization for the year ended
December 31, 2003, (b) one-time transaction expenses incurred by T-Netix related to our purchase ofT -Netix for
the year ended December 31, 2004, and (c) expenses incurred by Evercom related to the Transactions.
(4) Includes revenues from T-Netix's direct provisioning business and Evercom's direct provisioning business, as well
as Evercom's Information Manager product and payphone operations.
(5) See "Unaudited Pro Forma Financial Data" for an explanation of this pro forma adjustment.
(6) Represents total long-term debt of$196.3 million before considering $3.5 million of original issue discount, or
OID, and $2.9 million offair value attributable to warrants issued in connection with our senior subordinated debt
and warrant financing. See "Description of Our Other Indebtedness - Senior Subordinated Notes."
)
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RISK FACTORS
You should car~rully consider the risks described below, together with all ~r the other information contained in this
prospectus, before making an investment decision. The risks described below are not the only ones facing our company.
Additional risks and uncertainties not currently known to us or that we currently deem to he immaterial may also materially
and adversely affect ourflnancial condition, results of operations or cash flow. Any of the following risks could materially
and adversely C!ffect ourfinancial condition or results of operations. In such case, you may lose all or part o.fyour original
investment.
Risks Related to the Exchange Offer and the Exchange Notes
ljyoll tlo not properly lentler YOllr oltl noles, YOllr ubility 10 Irunsfer YOllr old 1I0ies will be utlversely "Ifecled.
We will only issue exchange notes in exchange for old notes that are timely received by the exchange agent, together with
all required documents. Therefore, you should allow sufficient time to ensure timely delivery of the old notes and you should
carefully follow the instructions on how to tender your old notes. Neither we nor the exchange agent are required to tell you
of any defects or irregularities with respect to your tender of the old notes. If you do not tender your old notes or if we do not
accept your old notes because you did not tender your old notes properly, then, after the exchange offer expires, you may
continue to hold old notes that are subject to the existing transfer restrictions.
lfyolt do 1101 exchullge YOllr old 1I01es, Ihey muy be tlifficlIlllo resell.
It may be difficult for you to sell the old notes that are not exchanged in the exchange offer since any old notes not
exchanged will remain subject to the restrictions on transfer provided for under the Securities Act. These restrictions on
transfer of your old notes exist because we issued the old notes pursuant to an exemption from the registration requirements
of the Securities Act and applicable state securities laws. Generally, the old notes that are not exchanged for the new notes
pursuant to the exchange offer will remain restricted securities. Accordingly, such old notes may be resold only:
)
• to us (upon redemption of the notes or othelwise);
• pursuant to an effective registration statement under the Securities Act;
• so long as the old notes are eligible for resale pursuant to Rule l44A under the Securities Act to a qualified institutional
buyer within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A;
• outside the United States to a foreign person pursuant to the exemption from the registration requirements of the
Securities Act provided by Regulation S under the Securities Act;
• pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available); or
• pursuant to another available exemption from the registration requirements of the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United States.
Except as proved in this exchange offer, we do not intend to register the old notes under the Securities Act. To the extent any
old notes are tendered and accepted in the exchange offer, the trading market, if any, for the old notes that remain outstanding
after the exchange offer could be adversely affected due to a reduction in market liquidity.
We have (l substalltial (UIlOImt of debt olltstallding alld have sigllijicallt illt€l'est paymellts.
We have a significant amount of debt outstanding. As of December 31,2004, we had $196.3 million of long-term debt
outstanding before considering $3.5 million of OlD on our second-priority senior secured notes and $2.9 million offair value
attributable to warrants issued in connection with our senior
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subordinated debt financing, each of which are reflected as discounts to our outstanding long-term debt on our financial
statements. As of December 31, 2004, we had a stockholders' deficit of $22.8 million.
Our substantial debt could have impOltant consequences for you. For example, it could:
• require us to dedicate a substantial portion of our cash flow from operations to make payments on our debt, thereby
reducing funds available for operations, future business opportunities and other purposes;
• limit our flexibility in planning for,
Of
reacting to, changes in our business and the industry in which we operate;
• make it more difficult for us to satisfy our obligations with respect to the notes and our other debt obligations;
• limit our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital
expenditures, acquisitions or other purposes;
• increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates;
• place us at a competitive disadvantage compared to our competitors which may have less debt; and
• prevent us from raising the funds necessary to repurchase notes tendered to us if there is a change of control, which
would constitute a default under the indenture governing the notes and our working capital facility.
We cannot assure you that we will generate sufficient cash flow to service and repay our debt and have sufficient funds
left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs or
compete successfully in our markets. If we cannot meet our debt service and repayment obligations, we would be in default
under the terms of the agreements governing our debt, which would allow the lenders under our working capital facility to
declare all borrowings outstanding to be due and payable, which would in tum trigger an event of default under the indenture
and the agreements governing the senior subordinated debt. In addition, our lenders could compel us to apply all of our
available cash to repay our borrowings. If the amounts outstanding under our working capital facility or the notes were to be
accelerated, we cannot assure you that our assets would be sufficient to repay in full the money owed to the lenders or to our
)
other debt holders, including you as a noteholder. In addition, we may need to refinance our debt, obtain additional financing
or sell assets, which we may not be able to do on commercially reasonable terms 01' at all. Any failure to do so on
commercially reasonable terms could have a material adverse effect on our business, operations and financial condition.
We may be able to incllr more debt, incllllling secllred llebt, and some or all of this debt may effectively rank senior to
the notes allli the gllarantees.
Subject to the restrictions in our working capital facility, the indenture governing the notes and the senior subordinated
debt financing agreements, we may be able to incur additional debt, including secured debt that would effectively rank senior
to the notes. As of December 31, 2004, we would have been able to incur approximately $24.3 million of additional secured
debt under our working capital facility. Although the terms of our working capital facility, the indenture and our senior
subordinated debt financing agreements contain restrictions on our ability to incur additional debt, these restrictions are
subject to a number of important exceptions. If we incur additional debt, the risks associated with our substantial leverage,
including our ability to service our debt, would likely increase.
There //lay not be sufficient collateral to pay all or (lilY of the notes.
Indebtedness under our senior secured credit facility (referred to herein as the "First-Priority Lien Obligations") is
secured by a first-priority lien on substantially all of our and our subsidiary guarantors' tangible and intangible assets, except
for certain excluded collateral (such as hedging agreements and, as
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of the issue date of the notes, any real estate interests). The notes are secured by a second-priority lien on only a portion of
the assets that secure the First-Priority Lien Obligations. In the event of a bankruptcy, liquidation, dissolution, reorganization
or similar proceeding against us or any future domestic subsidiary, the assets that are pledged as shared collateral securing the
First-Priority Lien Obligations and the notes must be used first to pay the First-Priority Lien Obligations, as well as any other
obligation secured by a priority lien on the collateral, in full before making any payments on the notes.
Although at December 31, 2004, no amounts of senior indebtedness (excluding the old notes and related guarantees)
constituting First-Priority Lien Obligations were outstanding, approximately $24.3 million of First-Priority Lien Obligations
could have been borrowed under our working capital facility.
Certain of OUl' assets, such as our accounts receivable and inventory and any proceeds thereof, are not part of the
collateral securing the old notes or the exchange notes, but do secure the First-Priority Lien Obligations. With respect to
those assets that are not pali of the collateral securing the old and exchange notes but which secure other obligations, the old
notes are and the exchange notes will be effectively junior to these obligations to the extent of the value of such assets. There
is no requirement that the lenders under the First-Priority Lien Obligations first look to these excluded assets before
foreclosing, selling 01' otherwise acting upon the collateral shared with the old 01' the exchange notes.
No appraisals of any collateral have been prepared in connection with the exchange offering. The value of the collateral at
any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral.
By their nature, some or all of the pledged assets may be illiquid and may have no readily ascertainable market value. The
value of the assets pledged as collateral for the notes could be impaired in the future as a result of changing economic
conditions, our failure to implement our business strategy. competition and other future trends. In the event of a foreclosure.
liquidation. bankruptcy or similar proceeding, no assurance can be given that the proceeds from any sale or liquidation of the
collateral will be sufficient to pay our obligations under the notes, in full or at all, after first satisfying our obligations in full
under the First-Priority Lien Obligations and any other obligations secured by a priority lien on the collateral.
)
Accordingly, there may not be sufficient collateral to pay all 01' any of the amounts due on the old note or the exchange
notes. Any claim for the difference between the amount, if any, realized by holders of such notes from the sale of the
collateral securing the old and exchange notes and the obligations under such notes will rank equally in right of payment with
all of our other unsecured unsubordinated indebtedness and other obligations, including trade payables.
Holders of exchange notes will not control l/ecisions regarding col/ateral.
The holders of the First-Priority Lien Obligations control substantially all matters related to the collateral securing the
First-Priority Lien Obligations and the notes. INO Capital LLC, the administrative agent under the security agreements
governing the collateral, is one of the principal lenders under our working capital facility. The holders of the First-Priority
Lien Obligations may cause the administrative agent to dispose of, release or foreclose on, or take other actions with respect
to the shared collateral with which holders of the notes may disagree or that may be contrmy to the interests of holders of the
notes. The security documents generally provide that, so long as the First-Priority Lien Obligations are in effect, the holders
of the First-Priority Lien Obligations may change, waive, modify or valY the security documents without the consent of the
holders of the notes, provided that any such change, waiver 01' modification does not disproportionately affect the rights of
the holders of the notes and not the other secured creditors in a like or similar manner. Furthermore, as long as no event of
default under the indenture governing the notes has occurred, the security documents generally allow us and our subsidiaries
to remain in possession of, retain exclusive control over, to freely operate, and to collect, invest and dispose of any income
from, the collateral securing the notes. See "Description of the Notes -
Security for the Notes."
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The capital stock secllring the notes will automatically be released frol1l the second-priority lien and no tOllger be
deemed to be col/llterlli to the extent the pledge ofsllch Cltpitlll stock IVollld reqllire the filing of sepllrt/te fillancial
statements for (lilY 0/ Ollr subsidiaries (including T-Netix and Evercom) with the SEC.
The indenture governing the notes and the security documents provide that, to the extent that separate financial statements
of any of our subsidiaries (including T -Netix and Evercom) would be required by the rules of the SEC (or any other
governmental agency) due to the fact that such subsidiaty's capital stock or other securities secure the notes, then such capital
stock or other securities will automatically be deemed not to be part of the collateral securing the notes to the extent
necessaty to not be subject to such requirement. As a result, holders of the notes could lose a portion of their security interest
in the capital stock or other securities while any such rule is in effect. On the date of issuance of the old notes, the provisions
described above had the effect of limiting the amount of capital stock ofT -Netix and Evercom that constitutes collateral to, in
each case, 19.9% of the outstanding capital stock.
The intlentllre and our working capital facility contain covenants that limit the discretion of ollr management in
operating Ollf business and could prevent liS frolll capitalizing 011 business opportunities llIu/ taking other corporate
actions.
The indenture, our working capital facility and our senior subordinated debt financing agreements impose significant
operating and financial restrictions on us. These restrictions effectively limit or restrict, among other things, our and most of
our subsidiaries' ability to:
• incur additional debt and issue preferred stock;
)
• make restricted payments, including paying dividends on, redeeming, repurchasing or retiring our capital stock;
• make investments and prepay or redeem debt;
• enter into agreements restricting our subsidiaries' ability to pay dividends, make loans or transfer assets to us;
• create liens;
• sell or othelwise dispose of assets, including capital stock of subsidiaries;
• engage in transactions with affiliates;
• engage in sale and leaseback transactions;
• make capital expenditures;
• engage in business other than telecommunications businesses; and
• consolidate or merge.
In addition, the indenture governing the notes, our working capital facility and our senior subordinated debt financing
agreements require, and any future credit facilities may require, us to comply with specified financial covenants, including, in
each case, interest coverage ratios and, in the case of our working capital facility, minimum levels of earnings before interest,
taxes and depreciation, or EBITDA, and capital expenditure limits. Our ability to comply with these covenants may be
affected by events beyond our control. Furthermore, the indenture governing the notes requires us to use a significant portion
of our cash generated from operations to make an offer to purchase notes on a pro rata basis. The restrictions contained in the
indenture, our working capital facility and our senior subordinated debt financing agreements could:
• limit our ability to plan for or react to market conditions, meet capital needs or othelwise restrict our activities or
business plans; and
• adversely affect our ability to finance our operations, enter into acquisitions or engage in other business activities that
would be in our interest.
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A breach ofaoy of the covenants contained in our working capital facility, or in any future credit facilities, or our
inability to comply with the financial ratios could result in an event of default, which would allow the lenders to declare all
borrowings outstanding to be due and payable, which would in tum trigger an event of default under the indenture. In
addition, our lenders could compel us to apply all of our available cash to repay our borrowings. If the amounts outstanding
under our working capital facility or the notes were to be accelerated, we cannot assure you that our assets would be
sufficient to repay in full the money owed to the lenders or to our other debt holders, including you as a noteholder.
We are a holding company and we lIlay not have access to sufficient cash to make payments 011 the notes. In {u/dition,
the notes are effectively subordinated to the liabilities of Ollr subsilliftries.
Securus Technologies, Inc., the issuer of the notes, is a holding company with no direct operations. Its principal assets are
the equity interests it holds, directly and indirectly, in its subsidiaries. Since all of our operations are conducted through our
subsidiaries, our ability to service our indebtedness, including the notes, will be dependent upon the eamings of our
subsidiaries and the distribution of those earnings, or upon loans or other payments of funds, by our subsidiaries to us. Our
subsidiaries are legally distinct from us and have no obligation to pay amounts due on our debt or to make funds available to
us for such payment. The payment of dividends and the making of loans and advances to us by our subsidiaries may be
subject to various restrictions, including restrictions under our working capital facility more fully described below. In
addition, the ability of our subsidiaries to make such payments or advances to us may be limited by the laws of the relevant
states in which our subsidiaries are organized or located, including, in some instances, by requirements imposed by state
regulatory bodies that oversee the telecommunications industry in such states. In certain circumstances, the prior or
subsequent approval of such payments or advances by our subsidiaries to us is required from such regulatory bodies or other
governmental entities. The notes, therefore, without giving effect to any guarantees of the notes, will be effectively
subordinated to creditors (including trade creditors) of our subsidiaries. Although the indenture will contain limitations on the
amount of additional indebtedness that we and our restricted subsidiaries may incur, the amounts of such indebtedness could
be substantial and such indebtedness may be First-Priority Lien Obligations. In addition, each of our subsidiaries has other
liabilities, including contingent liabilities (including the guarantee obligations under our working capital facility and the
senior subordinated debt financing) that may be significant.
)
In addition, our working capital facility restricts all payments from our subsidiaries to us during the continuance of a
payment default and also restricts payments to us for a period of up to 180 days during the continuance of a non-payment
default.
Our working capital facility is, and future credit facilities may be, guaranteed by our domestic restricted subsidiaries.
Although the indenture contains limitations on the amount of additional indebtedness that we and our restricted subsidiaries
may incur, the amounts of such indebtedness could be substantial and such indebtedness may be secured. As of December 31,
2004, we expect that we would have been able to incur approximately $24.3 million of additional secured debt constituting
First-Priority Lien Obligations under our working capital facility.
u.s. bankruptcy or frflluiuient conveyance law lIIay interfere with the payment ofthe notes anll the guarantees and the
enforcement o/the security interests.
Our incurrence of debt, such as the notes and the guarantees, as well as the security interests related to the notes and the
guarantees, may be subject to review under U.S. federal bankruptcy law or relevant state fraudulent conveyance laws if a
bankruptcy proceeding or lawsuit is commenced by or on behalf of our unpaid creditors. Under these laws, if in such a
proceeding or lawsuit a court were to find that, at the time we incurred debt (including debt represented by the notes and the
guarantees),
• we incurred such debt with the intent of hindering, delaying or defrauding current or future creditors; or
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• we received less than reasonably equivalent value or fair consideration for incurring such debt and we:
• were insolvent Of were rendered insolvent by reason of any of the transactions;
• were engaged, or about to engage, in a business or transaction for which our remaining assets constituted
unreasonably small capital to canyon our business;
• intended to incur, or believed that we would incur, debts beyond our ability to pay as these debts matured (as all of
the foregoing terms are defined in or interpreted under the relevant fraudulent transfer or conveyance statutes); or
• were defendants in an action for money damages or had a judgment for money damages entered against us (if, in
either case, after final judgment such judgment is unsatisfied);
then that court could avoid or subordinate the amounts owing under the notes to our presently existing and future debt, void
or decline to enforce the security interest and take other actions detrimental to you,
The measure of insolvency for pUlposes of the foregoing considerations will vary depending upon the law of the
jurisdiction that is being applied in any proceeding. Generally, a company would be considered insolvent if, at the time it
incurred the debt:
• the sum of its debts (including contingent liabilities) was greater than its assets, at fair valuation;
• the present fair saleable value of its assets was less than the amount required to pay the probable liability on its total
existing debts and liabilities (including contingent liabilities) as they became absolute and mature; or
• it could not pay its debts as they became due.
We cannot predict what standards a court would use to determine whether we 01' our subsidiary guarantors were solvent at
the relevant time, 01' whether the notes, the guarantees or the security interests would be avoided or further subordinated on
another of the grounds set forth above, In rendering their opinions in connection with the transactions, our counsel will not
express any opinion as to the applicability of federal or state fraudulent transfer and conveyance laws.
)
We may be tillable to repurchase the IIotes "POll a challge of cOlltrol as required by the illl/elltllre.
Upon the occurrence ofa change of control as specified in "Description of the Exchange Notes," we will be required to
make an offer to repurchase all notes, In addition, the agreements governing any of our future senior indebtedness may
contain prohibitions of certain events that would constitute a change of control or require such senior indebtedness to be
repurchased or repaid upon a change of control. Moreover, the exercise by the holders of their right to require us to
repurchase the notes could cause a default under such agreements, even if the change of control itself does not, due to the
financial effect of such repurchase on us, Under any of these circumstances, we cannot assure you that we will have sufficient
funds available to repay all of our senior debt and any other debt that would become payable upon a change of control and to
repurchase the notes. Our failure to purchase the notes would be a default under the indenture, which would in turn trigger a
default under our working capital facility. We would need to refinance our working capital facility or cure the default
thereunder, before making the change of control offer.
The definition of change of control includes a phrase relating to the sale or other transfer of "all or substantially all" of
our assets. There is no precise definition of the phrase under applicable law. Accordingly, in certain circumstances there may
be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition ofuaU 01' substantially
all" of our assets, and therefore it may be unclear as to whether a change of control has occurred and whether the holders of
the notes have the right to require us to repurchase such notes.
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Rights of holders of 1I0tes in Ihe collateral may be adversely ltffected by bllnkrllptcy proceedillgs.
The right of the administrative agent to repossess and dispose of the collateral securing the notes upon acceleration is
likely to be significantly impaired by federal bankruptcy law if bankruptcy proceedings are commenced by or against us or
any of our subsidiaries prior to or possibly even after the administrative agent has repossessed and disposed of the collateral.
Under the U.S. Bankmptcy Code, a secured creditor, such as the administrative agent, is prohibited from repossessing its
security from a debtor in a bankruptcy case, or from disposing of security repossessed from a debtor, without bankruptcy
court approval. Moreover, bankruptcy law permits the debtor to continue to retain and to use collateral, and the proceeds,
products, rents or profits of the collateral, even though the debtor is in default under the applicable debt instruments, provided
that the secured creditor is given "adequate protection," The meaning of the term "adequate protection" may vary according
to circumstances, but it is intended in general to protect the value of the secured creditor's interest in the collateral and may
include cash payments or the granting of additional security, if and at such time as the court in its discretion determines, for
any diminution in the value of the collateral as a result of the stay of repossession or disposition or any use of the collateral
by the debtor during the pendency of the bankruptcy case. In view of the broad discretionalY powers of a bankruptcy COUlt, it
is impossible to predict how long payments under the notes could be delayed following commencement of a bankruptcy case,
whether or when the administrative agent would repossess or dispose of the collateral, or whether or to what extent holders of
the notes would be compensated for any delay in payment or loss of value of the collateral through the requirements of
"adequate protection." FUlthermore, in the event the bankruptcy court determines that the value of the collateral is not
sufficient to repay all amounts due on the notes, the holders of the notes would have "unsecured claims" as to the difference.
Federal bankruptcy laws do not permit the payment or accrual of interest, costs and attorneys' fees for "unsecured claims"
during the debtor's bankruptcy case.
Rights of holders ofllotes ill the collateral may be adversely ltffected by Ihefit/illre 10 perfeci secllrity inleresls in
certain collateral acquired ill the future.
)
The security interest in the collateral securing the notes includes assets, both tangible and intangible, whether now owned
or acquired or arising in the future. Applicable law requires that certain property and rights acquired after the grant of a
general security interest can only be perfected at the time such property and rights are acquired and identified. There can be
no assurance that the trustee or the administrative agent will monitor, or that we will inform the trustee or the administrative
agent of, the future acquisition of property and rights that constitute collateral, and that the necessmy action will be taken to
properly perfect the security interest in such after-acquired collateral. Such failure may result in the loss of the security
interest therein or the priority of the security interest in favor of the notes against third parties.
An active trading lIIarket for the exchange notes lIIay not develop, which could reduce their value.
The exchange notes will be a new issue of debt securities of the same class as the old notes and will generally be freely
transferable. Notwithstanding the foregoing, a liquid market may not develop for the exchange notes and you may not be able
to sell your exchange notes at a particular time, as we do not intend to apply for the exchange notes to be listed on any
securities exchange or to arrange for quotation on any automated dealer quotation system. In addition, the trading prices of
exchange notes could be subject to significant fluctuations in response to variations in quarterly operating results,
government regulations, demand for telecommunications services, general economic conditions and various other factors.
The liquidity of the trading market in the exchange notes and the market price quoted for the exchange notes may also be
adversely affected by changes in the overall market for high yield securities and by changes in our financial performance or
prospects or in the prospects for companies in our industry generally. As a result, an active trading market may not develop
for the exchange notes. If no active trading market develops, you may not be able to resell your exchange notes at their fair
market value or at all.
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The notes may be deeme{/ to he contingent payment debt instrllments.
The notes are subject to a contingency (described in "Description of the Exchange Notes - Excess Cash Flow") in that a
pOltion of them may be repaid prior to their stated maturity with excess cash generated by our operations. See "Description of
the Exchange Notes - Excess Cash Flow." As such, they are likely to be treated as indebtedness subject to special U.S. tax
rules applicable to contingent payment debt obligations. Consequently, original issue discount will be included (as ordinaty
interest income) in the gross income of a U.S. holder of notes for U.S. federal income tax purposes in advance of the receipt
of cash payments on the notes, and upon the sale of the notes a U.S. holder may recognize ordinary, rather than capital, gain
or loss. See "Material U.S. Federal Income Tax Considerations,"
Risk Relating to Our Business
Ollr financial results are dependent on the success of ollr billing lind bad debt management systems.
The inmate telecommunications business is subject to significant risk of bad debt or uncollectible accounts receivable. In
addition, our Solutions business is particularly sensitive to variations in bad debt expense because we typically take full
ownership of bad debt of our customers while in turn earning a fee for those services equal to a contractual percentage of our
customers' revenues. Most calls are collect calls paid by the called or billed party. Historically, such billed patty's ability to
pay for collect calls has been tied to the economic conditions, and unemployment rates in particular, that exist in their
community. Our exposure to bad debt risk increases as unemployment rises and the economy worsens. In other cases, the
billed patty may still be unable or unwilling to pay for the call.
)
We principally bill for our direct and Solutions services through LECs and, in the case of a small portion of our services,
through billing aggregators, which aggregate our charges with other service providers and bill through the applicable LEC.
Our agreements with the LECs and the billing aggregators specify that the LECs get paid their portion of a bill prior to ours
and we share the remaining risk of nonpayment with other non-LEC service providers. In certain circumstances, LEes are
unable to trace the collect call to a proper billed number and the call is unbillable. We are also subject to the risks that the
LEC decides not to charge for a call on the basis of billing or service error and that we may be unable to retain our current
billing collection agreements with LECs, many of which are terminable at will. Furthermore, an important part of our
strategy is to leverage Evercom's billing agreements with LECs to T-Netix's business in order to realize cost savings, which
we may not be able to achieve.
There is a significant lag time (averaging six to nine months) between the time a call is made and the time we learn that
the billed party has failed to pay for a call and, in the interim period, we typically do not have visibility as to actual collection
results. During this period, we may continue to extend credit to the billed party prior to terminating service and thus increase
our exposure to bad debt. Additionally, because of the significant lag time, deteriorating trends in collection rates may not be
immediately visible and bad debt may therefore increase prior to our ability to adjust our algorithms and reduce credit limits.
We seek to minimize our bad debt expense by using multi-variable algorithms to adjust our credit policies and billing. We
cannot be sure that our algorithms are accurate or will remain accurate as circumstances change. Moreover, to the extent we
overcompensate for bad debt exposure by limiting credit to billed parties, our revenues and profitability may decline as fewer
calls are allowed to be made. To the extent our billing and bad debt management systems are less than effective or we are
otherwise adversely affected by the foregoing factors, our financial position, results of operations and ability to make
payments on the notes may be materially adversely affected.
We are depelulellt on thiNt party velldors/or Ollr ill/ormatioll and hilling systems.
Sophisticated information and billing systems are vital to our ability to monitor and control costs, bill customers, process
customer orders, provide customer service and achieve operating efficiencies. We currently rely on internal systems and third
party vendors to provide all of our information and processing systems. Some of our billing, customer service and
management information systems have been developed by third parties for us and may not perform as anticipated. In
addition, our plans for developing and
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implementing our information and billing systems rely substantially on the delivelY of products and services by third party
vendors. Our right to use these systems is dependent upon license agreements with third party vendors. Some of these
agreements are cancelable by the vendor, and the cancellation or nonrenewable nature of these agreements could impair our
ability to process orders or bill our customers. Since we rely on third party vendors to provide some of these services, any
switch in vendors could be costly and could affect operating efficiencies.
We lIIay face challenges in integrating EvercolII and lIIay not realize the expected benefits of the acquisition.
Our future success, and our ability to pay interest and principal on the notes, will depend in part on our ability to integrate
Evercom into our business. Every acquisition involves integrating the operations of two separate and distinct companies and
management teams as well as implementing our operating and growth strategies. The acquisition and integration of Evercom
involves a number of special risks including:
• failure of Evercom to achieve the results we expect;
• potential disruption of our business;
• greater demands on our management and administrative resources;
• difficulties and unexpected costs in integrating Evercom's operations, personnel, services, technologies and other
systems;
• possible unexpected loss of key employees, customers and suppliers;
• unanticipated liabilities and contingencies of Evercom; and
• failure to achieve expected cost savings.
)
In addition, we have experienced, and may continue to experience, difficulties in integrating Evercom into our business.
We have required a significant amount of personnel to assume additional responsibilities, which has placed an increased
burden on our remaining personnel. In some cases we have lost personnel that we had intended to retain. We have also
experienced difficulties and delays in integrating Evercom's and T-Netix's accounting systems. Ifwe are unable to integrate
or manage Evercom successfully, we may not realize our anticipated revenue growth or cost savings, which may result in
reduced profitability or operating losses and may materiaIly and adversely affect our business, financial condition and results
of operations.
A nllmber %llr clIstomers indivi{/llally account/or a large percentage %llr revenlles, and there/ore the loss 0/ one
or more o/these customers could harm ollr business.
If we lose existing customers and do not replace them with new customers, our revenues will decrease and may not be
sufficient to cover our costs. For the year ended December 31, 2004, AT&T accounted for approximately 9.6% of our total
pro forma revenues and our top five customers accounted for approximately 24% of our total pro forma revenues. Ifwe lose
one or more of these customers, our revenues will be adversely affected, which could harm our business.
We have also been advised that large industlY participants Verizon and AT&T have determined to depalt the inmate
telecommunications business in the immediate future. During 2004, Verizon and AT&T were our two largest
telecommunications services customers and, AT&T was our largest Solutions customer. These anticipated departures
continue the recent trend of large dominant telecommunications carriers exiting the direct inmate telecommunications
business. As a result of this trend, we anticipate that the high revenue margins associated with our telecommunications
services product line will continue to decline and that the master agreements we have in place with these RBOCs and IXCs
wiIl not be renewed upon expiration. Although we expect to seek to procure agreements to provide direct caIl provisioning
services to those correctional facilities previously serviced by these large carriers, there can be no assurances that we will be
able to obtain such contracts or that the up-front costs we may be required
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to absorb to obtain any such contracts will not be prohibitive. Any failure to obtain direct contracts with correctional facilities
previously serviced by such caniers could have an adverse effect on our results of operations. During the period from
JanualY 12,2004 to December 31,2004, we recognized a non-cash impairment charge of$50.6 million as a result ofthese
announcements and the anticipated continued reduction in our telecommunications services and Solutions businesses. See
"Management's Discussion and Analysis of Financial Condition and Results of Operations -lnduslIy Trends."
Our success l/epentis 011 Ollr ability to protect ollr proprietary technology and ensllre that Ollr systems are not
in/ringing Oil the proprietary technology of other companies.
Our success depends to a significant degree on our protection of our proprietary technology, particularly in the areas of
three-way call prevention, automated operators, bad debt management, revenue generation and architecture restructuring. The
unauthorized reproduction or other misappropriation of our proprietalY technology could enable third parties to benefit from
our technology without paying uS for it. Although we have taken steps to protect our proprietary technology, they may be
inadequate. We rely on a combination of patent and copyright law and contractual restrictions to establish and protect our
proprietary rights in our systems. However, existing trade secret, patent, copyright and trademark laws offer only limited
protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our
products or obtain and use trade secrets or other information we regard as proprietaly. If we resort to legal proceedings to
enforce our intellectual property rights, the proceedings could be burdensome and expensive, involve a high degree of risk,
and adversely affect our relationships with our customers.
We cannot assure you that a third party will not accuse us of infringement on their intellectual property rights. Any claim
of infringement could cause us to incur substantial costs defending against that claim, even if the claim is not valid, and could
distract our management from our business. A party making a claim also could secure a judgment that requires us to pay
substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our
products. Any of these events could have a material adverse effect on our business, operating results and financial condition.
)
We may not be able to atillpt successfully to new technologies, to respond effectively to
provide new products lind services.
clI,~tomer
requirements or to
The telecommunications industry, including inmate telecommunications, is subject to rapid and significant changes in
technology, frequent new service introductions and evolving industry standards. Technological developments may reduce the
competitiveness of our services and require unbudgeted upgrades, significant capital expenditures and the procurement of
additional services that could be expensive and time consuming. To be competitive, we must develop and introduce product
enhancements and new products. New products and new technology often render existing information services or technology
infrastructure obsolete, excessively costly, or otherwise unmarketable. As a result, our success depends on our ability to
create and integrate new technologies into our current products and services and to develop new products. Ifwe fail to
respond successfully to technological changes or obsolescence or fail to obtain access to important new technologies, we
could lose customers and be limited in our ability to attract new customers or sell new services to our existing customers. The
failure to adapt to new technologies could have a material adverse effect on our business, financial condition and results of
operations.
The successful development of new services, which is an element of our business strategy, is uncertain and dependent on
many factors, and we may not generate anticipated revenues from such services. In addition, as telecommunications networks
are modernized and evolve from analog-based to digital-based systems, certain features offered by us may diminish in value.
We cannot guarantee that we will have sufficient technical, managerial or financial resources to develop or acquire new
technology or to introduce new services or products that would meet our customers' needs in a timely manner.
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Ollr business could be adversely affected if Ollr products and services /ttilto perform or be performed properly.
Products as complex as ours may contain undetected errors or "bugs," which could result in product failures or security
breaches. Any failure of our systems could result in a claim for substantial damages against us, regardless of our
responsibility for the failure. Claims could be widespread, as in the case of class actions filed on behalf of inmates or the
called parties of the inmates. Although we maintain general liability insurance, including coverage for errors and omissions,
we cannot assure you that our existing coverage will continue to be available on reasonable terms or will be available in
amounts sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim.
The occurrence of product failures or security breaches could result in a loss of data to us or our customers, which could
cause a loss of revenues and other financial risks, failure to achieve acceptance, diversion of development resources, injury to
our reputation, damages to our efforts to build brand awareness or legal claims being brought against us, any of which could
have a material adverse effect on our market share, operating results or financial condition.
System failures cOllld cause fJelays or interrllptions of service and security breaches, which cOlllfl calise liS to lose
cllstomers.
To be successful, we will need to continue to provide our customers with reliable service. Some of the events that could
adversely affect our ability to deliver reliable service include:
• physical damage to our network operations centers;
• disruptions beyond our control;
• breaches of our security systems;
• power surges or outages; and
• software defects.
)
System failures or security breaches may cause interruptions in service or reduced capacity for customers, either of which
could cause us to lose customers and incur unexpected expenses, as well as increase our exposure to claims for damages for
contractual outage payments.
We are depelldent on the telecommunications industry, which subjects ollr bllsiness to risks affecting the
indllstry generally.
telecommllnication~'
Although we focus on the inmate telecommunications industty, our business is directly affected by risks facing the
telecommunications industry in general. The telecommunications industty has been, and we believe it will continue to be,
characterized by several trends, including the following:
• substantial regulatory change due to the passage and implementation of the Telecommunications Act, which included
changes designed to stimulate competition for both local and long distance telecommunications services~
• rapid development and introduction of new technologies and services;
• increased competition within established markets from current and new market entrants that may provide competing or
alternative services;
• the increase in mergers and strategic alliances that allow one telecommunications provider to offer increased services or
access to wider geographic markets; and
• continued changes in the laws and regulations affecting rates for collect and prepaid calls.
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The market for telecommunications services is highly competitive. Our ability to compete successfully in our markets
will depend on several factors, including the following:
• how well we market our existing services and develop new technologies;
• the quality and reliability of our network and service;
• our ability to anticipate and respond to various competitive factors affecting the telecommunications industry, including
a changing regulatOlY environment that may affect us differently from our competitors, pricing strategies and the
introduction of new competitive services by our competitors, changes in consumer preferences, demographic trends and
economic conditions; and
• our ability to successfully defend any claims against us.
Competition could intensify as a result of new competitors and the development of new technologies, products and
services. Some or all of these risks may cause us to have to spend significantly more in capital expenditures than we currently
anticipate in order to keep existing, and attract new, customers.
Many of our competitors, such as RBOCs, LECs and IXCs such as SBC Communications, Mel and Sprint, have brand
recognition and financial, personnel, marketing and other resources that are significantly greater than ours. In addition, due to
consolidation and strategic alliances within the telecommunications industry, we cannot predict the number of competitors
that will emerge, especially as a result of existing or new federal and state regulatOlY or legislative actions. Increased
competition from existing and new entities could lead to higher commissions paid to corrections facilities, loss of customers,
reduced operating margins or loss of market share.
Some of ollr clistomers are governmental entities that reqllire
to attract and retain cllstomers.
)
liS
to adhere to certltin policies that may limit Ollr ability
Our customers include U.S. federal, state and local governmental entities responsible for the administration and operation
of correctional facilities. We are subject, therefore, to the administrative policies and procedures employed by, and the
regulations that govern the activities of, these govemmental entities, including policies, procedures, and regulations
concerning the procurement and retention of contract rights and the provision of services. Our operations may be adversely
affected by the policies and procedures employed by, or the regulations that govern the activities of, these governmental
entities and we may be limited in our ability to secure additional customer contracts, renew, retain and enforce existing
customer contracts, and consummate acquisitions as a result of such policies, procedures and regulations.
Ollr eqllity investors' interests may (liffer from YOllr interests.
Circumstances may arise in which the interests of our equity investors could be in conflict with yours as a noteholder. In
particular, our equity investors may have an interest in pursuing certain strategies or transactions that, in their judgment,
enhance the value of their investment in us even though these strategies or transactions may involve risks to you as
noteholders. FUlther conflicts of interest may arise between you and our equity investors when we are faced with decisions
that could have different implications for you and our equity investors, including financial budgets, potential competition, the
issuance and disposition of securities, the payment of distributions by us, regulatolY and legal positions and other matters.
Because our equity investors control us, these conflicts may be resolved in a manner adverse to, or that imposes more risks
on, you as noteholders.
In addition, conflicts of interest may arise between us and one or more of our equity investors when we are faced with
decisions that could have different implications for us and our equity investors. For example, our equity investors and their
affiliates are permitted to compete with us. Because our equity investors control us, conflicts of interest arising due to
competition between us and an equity investor could be resolved in a manner adverse to us. It is possible that there will be
situations where our equity investors' interests are in conflict with our interests, and our equity investors, acting through the
board of directors or through our executive officers, could resolve these conflicts in a manner adverse to us.
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Ollr slIccess depends on ollr ability to attract and retain qluilijied management and other personnel.
We are dependent on the efforts of our officers and other senior management personnel. We believe that it would be
difficult to replace the expertise and experience of our senior management. Accordingly, the loss of the services of one or
more of these individuals could have a material adverse effect on us and our ability to implement our strategies and to
achieve our goals. In addition, our failure to attract and retain additional management to support our business strategy could
also have a material adverse effect on us, See "Management."
Ollr lIulIUlgelllent in/ormation, internal controls and financial reporting systems may lIeed fllrther enhancements and
development to comply with the requirements ofthe Securities Exchllnge Act of1934 lind the SlIrbllnes-Oxley Act of
2002 alltl the costs of compliance may strain ollr resources.
Upon the effectiveness of the exchange offer registration statement of which this prospectus is a part, we will become
subject to the reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of2002. These
requirements may place a strain on our systems and resources. The Securities Exchange Act requires, among other things,
that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley
Act requires, among other things, that we maintain effective disclosure controls and procedures and intemal controls for
financial reporting. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and report on our system of internal
controls beginning with our Annual Report on Form IO-K for the year ending December 31, 2006. Ifwe fail to maintain the
adequacy of our internal controls, we could be subject to regulatOlY scrutiny, and civil or criminal penalties. Any inability to
provide reliable financial repOits could harm our business. Section 404 of the Sarbanes-Oxley Act also requires that our
independent registered public accounting firm report on management's evaluation of our system of intemal controls and to
identify material weaknesses in our accounting systems and controls. We are in the process of documenting and testing our
system of internal controls to provide the basis for this report. Any failure to implement required new or improved controls,
or difficulties encountered in the implementation of adequate controls over our financial processes and reporting in the future,
could harm our operating results or cause us to fail to meet our reporting obligations.
)
Regulatory Risks
The FCC is currently reviewing challenges and alternatives to the exc/usive-provil/er system that, ijimplemented,
could have alt adverse effect on ollr business.
Most correctional facilities grant exclusive contracts to a single provider of inmate telecommunications services. The
FCC has opened several rulemaking proceedings that put into question whether the current regulatory regime applicable to
the provision of inmate telecommunications services is responsive to the needs of correctional facilities, inmate
telecommunications service providers, the inmates and their families. Parties participating in these proceedings generally
include prison inmates and their families, parties receiving calls from inmates, several national inmate advocacy
organizations such as Citizens United for the Rehabilitation of Errants (CURE), and providers of inmate telecommunications
services. In general, the position of those challenging the current regulatory regime is that inmate telecommunications service
rates are excessive due to lack of competitive market forces and that the FCC should make the exclusive service
arrangements unlawful, permit open access by multiple inmate telecommunications service providers, establish rate caps,
prohibit commissions to correctional facilities and mandate the offering by inmate telecommunications service providers of
debit (prepaid) card alternatives to collect calling. Such a regime would require a new and complex set of federal regulations
that, if adopted, could immediately reduce our revenues derived from existing contracts and could lead to increased costs
associated with regulatOlY compliance. Moreover, if implementation of these regulations leads to technological or structural
changes in the industry, it could render our technology obsolete, diminish the value of our intellectual property and our
customer relationships and lead to a reduction of volume and profitability of calls originating from correctional facilities.
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We operate in a highly regulatell industry, and are slIbject to restrictions ill the manner in which we conduct Ollr
business and a variety of claims relating to slIch regulation.
Our operations are subject to federal regulation, and we must comply with the Communications Act of 1934, as amended,
and FCC regulations promulgated thereunder. We are also subject to the applicable laws and regulations of various states and
other state agencies, including regulation by public utility commissions. Federal laws and FCC regulations generally apply to
interstate telecommunications (including international telecommunications that originate or terminate in the United States),
while state regulatory authorities generally have jurisdiction over telecommunications that originate and terminate within the
same state. Generally, we must obtain and maintain prior authorization from, or register with, regulatory bodies in most states
where we offer intrastate services and must obtain or submit prior regulatory approval of rates, terms and conditions for our
intrastate services in most of these jurisdictions. We are also in some cases required, along with other telecommunications
providers, to contribute to federal and state funds established for universal service, number portability, payphone
compensation and related purposes. Laws and regulations in this industry such as those identified above, and others including
those regulating call recording and call rate announcements, and billing, collection and solicitation practices, are all highly
complex and burdensome, making it difficult to always be in complete compliance. The degree of difficulty is sometimes
exacerbated by technology issues. Although we actively seek to comply with all laws and regulations and to remedy all areas
in which we become aware of our non-compliance, we have not always been, and are not currently, in full compliance with
all regulations applicable to us. Once our non-compliance is remedied, we may not always remain in compliance with all
applicable requirements in the future. Failure to comply with these requirements can result in potentially significant fines,
penalties, regulatory sanctions and claims for substantial damages. Claims may be widespread, as in the case of class actions
commenced on behalf of inmates or the called patties of inmates. Significant fines, penalties, regulatOlY sanctions and
damage claims could be material to our business, operating results and financial condition. Additionally, regulation of the
telecommunications industry is changing rapidly, and the regulatOlY environment varies substantially from state to state.
Future regulatory, judicial or legislative activities may have an adverse effect on our operations or financial condition, and
domestic or internationairegulators or third parties may raise material issues with regard to our compliance or noncompliance with applicable regulations.
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THE EVERCOM ACQUISITION
We acquired all of the outstanding capital stock of Evercom on September 9, 2004. The purchase price for Evercom's
capital stock consisted of approximately $87 million cash and we repaid approximately $38 million of Evercom's then
existing indebtedness,
We financed the acquisition by issuing the old notes, entering into a $30 million working capital facility, issuing
$40 million of 17% senior subordinated notes and through a cash equity investment by H.I.G. and other investors who were
then stockholders of Evercom. The senior subordinated note holders also received warrants to purchase up to 51,0 II shares
of our common stock in connection with the senior subordinated financing. See "Description of Our Other Indebtedness."
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THE EXCHANGE OFFER
This section of the prospectus describes the exchange offer. While we believe that the description covers the material
terms of the exchange offer, this summary may not contain all of the information that is important to you, You should
carefully read this entire document and the other documents referred to herein for a more complete understanding of the
exchange offer.
Purpose of the Exchange Offer
We sold the old notes in transactions that were exempt from the registration requirements under the Securities Act.
Accordingly, the old notes are subject to transfer restrictions. Old notes may not be offered or sold in the United States or to,
or for the account or benefit of, U.S. persons except in transactions either registered under the Securities Act or exempt from,
or not subject to, the Securities Act registration requirements.
In connection with the issuance of the old notes, we entered into a registration rights agreement that requires us to use our
reasonable best effOlis to conduct the exchange offer. A copy of the registration rights agreement relating to the old notes is
filed as an exhibit to the registration statement of which this prospectus is a part. Under the registration rights agreement, we
agreed that we would, at our expense, subject to certain exceptions:
• file this registration statement with the SEC with respect to a registered offer to exchange the old notes for the exchange
notes;
• use our reasonable best efforts to cause the registration statement to be declared effective under the Securities Act by
June 6, 2005;
• following the declaration of the effectiveness of the registration statement, promptly offer the exchange notes in
exchange for surrender of the old notes; and
)
• keep the exchange offer open for not less than 30 days (or longer if required by applicable law) after the date notice of
the exchange offer is mailed to the holders of old notes.
For each old note validly tendered to us pursuant to the exchange offer, we will issue to the holder of such old note an
exchange note having a principal amount equal to that of the surrendered old note, Interest on each exchange note will accrue
from March I, 2005, the date our last interest payment was made.
Under existing interpretations of the staff of the SEC issued to third parties, the exchange notes will be freely transferable
by holders other than our affiliates after the exchange offer without further registration under the Securities Act if the holder
of the exchange notes represents to us in the exchange offer that it is acquiring the exchange notes in the ordinary course of
its business, that it has no arrangement or understanding with any person to participate, and is not engaging nor intends to
engage, in the distribution of the exchange notes and that it is not an affiliate of ours, as such terms are interpreted by the
SEC; provided, however, that broker-dealers receiving the exchange notes in exchange for old notes acquired as a result of
market-making or other trading activities will have a prospectus delivelY requirement with respect to resales of such
exchange notes. The SEC has taken the position that such participating broker-dealers may fulfill their prospectus delivery
requirements with respect to the exchange notes (other than a resale of an unsold allotment from the original sale of the old
notes) with the prospectus contained in this registration statement. Each broker-dealer that receives the exchange notes for its
own account in exchange for the old notes, where such old notes were acquired by such broker-dealer as a result of
marketmaking activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any
resale of such exchange notes. See "Plan of Distribution,"
Under the registration rights agreement, we are required to allow participating broker-dealers and other persons, if any,
with similar prospectus delivery requirements to use the prospectus contained in this registration statement in connection with
the resale of the exchange notes for 90 days following the consummation of the exchange offer.
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A holder of old notes (other than certain specified holders) who wishes to exchange the old notes for exchange notes in
the exchange offer will be required to represent to us that any exchange notes to be received by it will be acquired in the
ordinary course of its business and that at the time of the commencement of the exchange offer it is not engaging, nor intends
to engage, and has no arrangement or understanding with any person to pa11icipate in the distribution (within the meaning of
the Securities Act) of the exchange notes and that it is not an "affiliate" of ours, as defined in Rule 405 of the Securities Act,
or if it is an affiliate or broker-dealer, that it will comply with the registration and prospectus delivelY requirements of the
Securities Act to the extent applicable.
Pursuant to the registration rights agreement, we will cause the indenture relating to the notes to be qualified under the
Trust Indenture Act of 1939. In the event qualification would require a new trustee, we will appoint a new trustee pursuant to
the indenture.
In the event that:
(I) any change in law or in applicable interpretations thereof by the staff of the SEC do not permit us to effect a
registered exchange offer, or
(2) for any other reason we do not consummate the exchange offer by July 6, 2005; or
(3) any initial purchaser of the old notes so requests, following consummation of the exchange offer after notification
that the old notes held by it are not eligible to be exchanged for the exchange notes in the exchange offer, or
(4) certain holders of the old notes are not eligible to participate in the exchange offer or may not resell the now notes
acquired by them in the exchange offer to the public without delivering a prospectus,
then, we will, subject to certain exceptions.
(I) file a shelf registration statement with the SEC covering the offer and sale of the old notes or the exchange notes,
as the case may be, as promptly as practicable, but in no event more than 45 days after so required or requested (which
we call the shelf filing date);
)
(2) use our reasonable best efforts to cause the shelf registration statement to be declared effective under the
Securities Act; and
(3) use our reasonable best efforts to keep the shelf registration statement continuously effective until the earliest of
(A) two years from the effective date of the shelf registration statement, (B) the date on which all old notes or exchange
notes registered thereunder are sold and (C) the time when the old notes or the exchange notes covered by the shelf
registration statement are no longer restricted securities (as defined in Rule 144 under the Securities Act).
We will, in the event a shelf registration statement is filed, among other things, provide to each holder for whom such
shelf registration statement was filed copies of the prospectus which is a part of the shelf registration statement, notify each
such holder when the shelf registration statement has become effective and take certain other actions as are required to permit
unrestricted resales of the old notes or the exchange notes, as the case may be. A holder selling such old notes or exchange
notes pursuant to the shelf registration statement generally would be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to celtain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the provisions of the registration rights agreement that
are applicable to such holder (including certain indemnification obligations).
We will pay additional cash interest on the applicable old notes and exchange notes, subject to certain exceptions:
(I) if we fail to file the registration statement of which this prospectus forms a part with the SEC or, if required, the
shelf registration statement, on or prior to March 28, 2005;
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(2) if the exchange offer is not consummated or, if required, the shelf registration statement is not declared effective,
on or before July 6, 2005; or
(3) after the registration statement of which this prospectus forms a part or the shelf registration statement, as the case
may be, is declared effective, such registration statement thereafter ceases to be effective or usable (subject to certain
exceptions); from and including the date on which any such default shall occur to but excluding the date on which all
such defaults have been cured.
The rate of any such additional interest will be 0.50% per annum for the first 90-day period immediately following the
occurrence of the default, and such rate shall increase by an additional 0.50% per annum with respect to each subsequent 90day period until all defaults have been cured, up to a maximum interest rate of2.0% per annum. We will pay any such
additional interest on regular interest payment dates. Such additional interest will be in addition to any other interest payable
from time to time with respect to the old notes and the exchange notes.
All references in the indenture, in any context, to any interest or other amount payable on 01' with respect to the old notes
or the exchange notes shall be deemed to include any additional interest pursuant to the registration rights agreement relating
to the old notes.
If we effect the exchange offer, we will be entitled to close the exchange offer 30 days after the commencement thereof
provided that we have accepted all old notes validly tendered in accordance with the terms of the exchange offer.
Each broker-dealer that receives the exchange notes for its own account in exchange for old notes, where such old notes
were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of the exchange notes. Please read the section captioned "Plan of
Distribution" for more details regarding the transfer of the exchange notes.
Background of the Exchange Offer
)
We issued an aggregate of $154.0 million principal amount of our old notes on September 9, 2004 under the indenture.
The maximum principal amount of the exchange notes that will be issued in this exchange offer for the old notes is
$154.0 million. The terms of the exchange notes and the old notes will be identical in all material respects, except that the
exchange notes will be registered under the Securities Act and will not have restrictions on transfer or registration rights. The
exchange notes and the old notes not exchanged in the exchange offer will constitute a single class of debt securities under
the indenture.
The exchange notes will bear interest at a rate of 11 % per year, payable semiannually in arrears on each March 1 and
September I of each year, beginning on March 1,2005, the date of our last interest payment.
In order to exchange your old notes for the exchange notes containing no transfer restrictions in the exchange offer, you
will be required to make the following representations:
• the exchange notes will be acquired in the ordinary course of your business;
• you have no arrangements with any person to participate in the distribution of the exchange notes within the meaning of
the Securities Act;
• you are not our "affiliate" as defined in Rule 405 of the Securities Act, or if you are an affiliate of Securus, you will
comply with the applicable registration and prospectus delivery requirements of the Securities Act;
• if you are not a broker-dealer, you are not engaged in, and do not intend to engage in, the distribution of the exchange
notes; and
• if you are a broker-dealer, that you will received exchange notes for your own account in exchange for old notes that
were acquired by you as a result of market-making activities or other trading
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activities and that you will be required to deliver a prospectus in connection with any resale of such exchange notes.
Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept for
exchange any old notes properly tendered and not validly withdrawn in the exchange offer, and the exchange agent will
deliver the exchange notes promptly after the expiration date of the exchange offer. We expressly reserve the right to delay
acceptance of any of the tendered old notes or terminate the exchange offer and not accept for exchange any tendered old
notes not already accepted if any conditions set forth under " - Conditions to the Exchange Offer" have not been satisfied or
waived by us or do not comply, in whole or in part, with any applicable law.
If you tender your old notes, you will not be required to pay brokerage commissions 01' fees or, subject to the instructions
in the letter of transmittal, transfer taxes with respect to the exchange of the old notes. We will pay all charges, expenses and
transfer taxes in connection with the exchange offer, other than certain taxes described below under "- Transfer Taxes."
Expiration Date; Extensions; Termination; Amendments
,2005, unless we extend it. We
The exchange offer will expire at 5:00 p.m., Eastern Standard Time, on
expressly reserve the right to extend the exchange offer on a daily basis or for such period or periods as we may determine in
our sole discretion from time to time by giving oral, confirmed in writing, or written notice to the exchange agent and by
making a public announcement by press release to the Dow Jones News Service prior to 9:00 a.m., Eastern Standard Time, on
the first business day following the previously scheduled expiration date. During any extension of the exchange offer, all old
notes previously tendered, not validly withdrawn and not accepted for exchange, will remain subject to the exchange offer
and may be accepted for exchange by us.
To the extent we are legally permitted to do so, we expressly reserve the absolute right, in our sale discretion, but are not
required, to:
• waive any condition of the exchange offer, and
• amend any terms of the exchange offer.
)
Any waiver or amendment to the exchange offer will apply to all old notes tendered, regardless of when or in what order
the old notes were tendered. Ifwe make a material change in the terms of the exchange offer or if we waive a material
condition of the exchange offer, we will disseminate additional exchange offer materials, and we will extend the exchange
offer to the extent required by law.
We expressly reserve the right, in our sole discretion, to terminate the exchange offer if any of the conditions set forth
under " - Conditions to the Exchange Offer" have not been satisfied or waived. Any such termination will be followed
promptly by a public announcement. In the event we terminate the exchange offer, we will give immediate notice to the
exchange agent, and all old notes previously tendered and not accepted for exchange will be returned promptly to the
tendering holders.
In the event that the exchange offer is withdrawn or otherwise not completed, the exchange notes will not be given to
holders of old notes who have validly tendered their old notes. We will return any old notes that have been tendered for
exchange but that are not exchanged for any reason to their holder without cost to the holder or, in the case of the old notes
tendered by book-entry transfer into the exchange agent's account at a book-ently transfer facility under the procedure set
forth under "- Procedures for Tendering Old Notes - Book-Entry Transfer," such old notes will be credited to the account
maintained at such book-entry transfer facility from which such old notes were delivered, unless otherwise requested by such
holder under "Special DelivelY Instl'Uctions" in the letter of transmittal, promptly following the exchange date or the
termination of the exchange offer.
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Resale ofthe Exchange Notes
Based on interpretations of the SEC set forth in no-action letters issued to third parties, we believe that the exchange
notes issued pursuant to the exchange offer in exchange for the old notes may be offered for resale, resold and otherwise
transferred by you without compliance with the registration and prospectus delivelY provisions of the Securities Act, if:
• you are not an "affiliate" of ours within the meaning of Rule 405 under the Securities Act;
• you are acquiring the exchange notes in the ordinary course of your business; and
• you do not intend to participate in, and are not engaged in, the distribution of the exchange notes.
The staff of the SEC, however, has not considered this particular exchange offer for the exchange notes in the context of a
no-action letter, and the staff of the SEC may not make a similar detemlination as in the no-action letters issued to these third
parties.
Ifyau tender old notes in the exchange offer with the intention of participating in any manner in a distribution of the
exchange notes:
• you cannot rely on those interpretations of the SEC; and
• you must comply with the registration and prospectus delivelY requirements of the Securities Act in connection with a
secondaty resale transaction.
Unless an exemption from registration is othelwise available, any security holder intending to distribute the exchange
notes should be covered by an effective registration statement under the Securities Act containing the seIling security
holder's information required by Item 507 of Regulation S-K. This prospectus may be used for an offer to resell, a resale
other re-transfer of the exchange notes only as specifically set forth in the section captioned "Plan of Distribution." Only
01'
broker-dealers that acquired the exchange notes as a result of market-making activities or other trading activities may
participate in the exchange offer. Each broker-dealer that receives the exchange notes for its own account in exchange for old
notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. Please read
the section captioned "Plan of Distribution" for more details regarding the transfer of the exchange notes.
Acceptance of Old Notes for Exchange
We will accept for exchange old notes validly tendered pursuant to the exchange offer,
defect has been waived by us, after the later of:
01'
defectively tendered, if such
• the expiration date of the exchange offer; and
• the satisfaction or waiver of the conditions specified below under "- Conditions to the Exchange Offer."
Except as specified above, we will not accept old notes for exchange subsequent to the expiration date of the exchange
offer. Tenders of old notes will be accepted only in principal amounts equal to $1,000 01' integral multiples thereof. The
exchange offer is not conditioned upon any minimum aggregate principal amount of old notes being tendered. We expressly
reserve the right in our sole discretion, to:
• delay acceptance for exchange of old notes tendered under the exchange offer, subject to Rule 14e-l under the Securities
Exchange Act of 1934, as amended, which requires that an offeror pay the consideration offered or return the securities
deposited by or on behalf of the holders promptly after the termination or withdrawal of a tender offer; or
• terminate the exchange offer and not accept for exchange any old notes, if any of the conditions set forth below under
" - Conditions to the Exchange Offer" have not been satisfied or waived by us or in order to comply in whole or in part
with any applicable law.
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In all cases, the exchange notes will be issued only after timely receipt by the exchange agent of certificates representing
old notes, or confirmation of book-entty transfer, a properly completed and duly executed letter of transmittal, or a manually
signed facsimile thereof, and any other required documents. For purposes of the exchange offer, we will be deemed to have
accepted for exchange validly tendered old notes, or defectively tendered old notes with respect to which we have waived
such defect if, as and when we give oral. confirmed in writing, or written notice to the exchange agent. Promptly after the
expiration date, we will deposit the exchange notes with the exchange agent, who will act as agent for the tendering holders
for the purpose of receiving the exchange notes and transmitting them to the holders. The exchange agent will deliver the
exchange notes to holders of old notes accepted for exchange after the exchange agent receives the exchange notes.
If, for any reason, we delay acceptance for exchange of validly tendered old notes or we are unable to accept for exchange
validly tendered old notes, then the exchange agent may, nevertheless, on its behalf, retain tendered old notes, without
prejudice to our rights described in this prospectus under the captions u _ Expiration Date; Extensions; Termination;
Amendments," "- Conditions to the Exchange Offer" and "- Withdrawal of Tenders," subject to Rule 14e-l nnder the
Securities Exchange Act of 1934, which requires that an offeror pay the consideration offered or return the securities
deposited by or on behalf of the holders thereof promptly after the termination or withdrawal of a tender offer.
If any tendered old notes are not accepted for exchange for any reason, or if certificates are submitted evidencing more
old notes than those that are tendered, certificates evidencing old notes that are not exchanged will be returned, without
expense, to the tendering holder, or, in the case of the old notes tendered by book-entry transfer into the exchange agent's
account at a book-entry transfer facility under the procedure set fOlth under "- Procedures for Tendering Old Notes Book-Entty Transfer," such old notes will be credited to the account maintained at such book-entty transfer facility from
which such old notes were delivered, unless otherwise requested by such holder under "Special DelivelY Instructions" in the
letter of transmittal, promptly following the exchange date or the termination of the exchange offer.
Tendering holders of old notes exchanged in the exchange offer will not be obligated to pay brokerage commissions or
transfer taxes with respect to the exchange of their old notes other than as described under the caption "- Transfer Taxes" or
as set forth in the letter of transmittal. We will pay all other charges and expenses in connection with the exchange offer.
)
Procedures for Tendering Old Notes
Any beneficial owner whose old notes are registered in the name of a broker, dealer, commercial bank, trust company or
other nominee or held through a book-enlly transfer facility and who wishes to tender old notes should contact such
registered holder promptly and instmct such registered holder to tender old notes on such beneficial owner's behalf.
Tentler ofOltl Notes HeM Throllgh the Depository Trllst Company
The exchange agent and The Depository Trust Company, or DTC, have confirmed that the exchange offer is eligible for
the DTC automated tender offer program. Accordingly, DTC participants may electronically transmit their acceptance of the
exchange offer by causing DTC to transfer old notes to the exchange agent in accordance with DTC's automated tender offer
program procedures for transfer. DTC will then send an agent's message to the exchange agent.
The term "agent's message" means a message transmitted by DTC and received by the exchange agent that forms part of
the book-entry confirmation. The agent's message states that DTC has received an express acknowledgment from the
participant in DTC tendering old notes that are the subject of that book-entry confirmation, that the participant has received
and agrees to be bound by the terms of the letter of transmittal, and that we may enforce such agreement against such
participant. In the case of an agent's message relating to guaranteed delivelY, the term means a message transmitted by DTC
and received by the exchange agent, which states that DTC has received an express acknowledgment from the
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participant in DTC tendering old notes that they have received and agree to be bound by the notice of guaranteed delivery.
Te"der Of Old Noles Held I" Physic,,1 Form
For a holder to validly tender old notes held in physical form:
• the exchange agent must receive at its address set forth in this prospectus a properly completed and validly executed
letter of transmittal, or a manually signed facsimile thereof, together with any signature guarantees and any other
documents required by the instructions to the letter of transmittal; and
• the exchange agent must receive certificates for tendered old notes at such address, or such old notes must be transferred
pursuant to the procedures for book-entlY transfer described above. A confirmation of such book-entry transfer must be
received by the exchange agent prior to the expiration date of the exchange offer. A holder who desires to tender old
notes and who cannot comply with the procedures set forth herein for tender on a timely basis or whose old notes are not
immediately available must comply with the procedures for guaranteed delivelY set forth below.
LETTERS OF TRANSMITTAL AND OLD NOTES SHOULD BE SENT ONLY TO THE EXCHANGE AGENT, AND
NOT TO US OR TO ANY BOOK-ENTRY TRANSFER FACILITY. THE METHOD OF DELIVERY OF OLD NOTES,
LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT
THE ELECTION AND RISK OF THE HOLDER TENDERING OLD NOTES. DELIVERY OF SUCH DOCUMENTS
WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH
DELIVERY IS BY MAIL, WE SUGGEST THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL
WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF
THE EXPIRATION DATE OF THE EXCHANGE OFFER TO PERMIT DELIVERY TO THE EXCHANGE AGENT
PRIOR TO SUCH DATE. NO ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF OLD NOTES WILL
BE ACCEPTED.
Signatllre Guarantees
)
A signature on a letter of transmittal or a notice of withdrawal must be guaranteed by an eligible institution. Eligible
institutions include banks, brokers, dealers, municipal securities dealers, municipal securities brokers, government securities
dealers, government securities brokers, credit unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations. The signature need not be guaranteed by an eligible institution if the old notes are
tendered:
• by a registered holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal; or
• for the account of an eligible institution.
Ifthe letter of transmittal is signed by a person other than the registered holder of any old notes, the old notes must be
endorsed or accompanied by a properly completed bond power. The bond power must be signed by the registered holder as
the registered holder's name appears on the old notes and an eligible institution must guarantee the signature on the bond
power.
If the letter of transmittal or any old notes or bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciaty or representative capacity, these persons should so
indicate when signing. Unless we waive this requirement, they should also submit evidence satisfactory to us of their
authority to deliver the letter of transmittal.
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Book-Entry Transfer
The exchange agent will seek to establish a new account or utilize an existing account with respect to the old notes at
DTC promptly after the date of this prospectus. Any financial institution that is a participant in the book-entry transfer facility
system and whose name appears on a security position listing it as the owner of the old notes may make book-entlY delivery
of old notes by causing the book-entlY transfer facility to transfer such old notes into the exchange agent's account.
HOWEVER, ALTHOUGH DELIVERY OF OLD NOTES MAY BE EFFECTED THROUGH BOOK-ENTRY TRANSFER
INTO THE EXCHANGE AGENT'S ACCOUNT AT A BOOK-ENTRY TRANSFER FACILITY, A PROPERLY
COMPLETED AND VALIDLY EXECUTED LETTER OF TRANSMITTAL, OR A MANUALLY SIGNED FACSIMILE
THEREOF, MUST BE RECEIVED BY THE EXCHANGE AGENT AT ITS ADDRESS SET FORTH IN THIS
PROSPECTUS ON OR PRIOR TO THE EXPIRATION DATE OF THE EXCHANGE OFFER, OR ELSE THE
GUARANTEED DELIVERY PROCEDURES DESCRIBED BELOW MUST BE COMPLIED WITH. The confirmation of
a book-entry transfer of old notes into the exchange agent's account at a book-entlY transfer facility is referred to in this
prospectus as a "hook-ently confirmation." Delivery of documents to the book-entry transfer facility in accordance with that
book-entry transfer facility's procedures does not constitute delivery to the exchange agent.
Gllaranteel/ Delivery
If you wish to tender your old notes and:
" certificates representing your old notes are not lost but are not immediately available;
• time will not permit your letter of transmittal, certificates representing your old notes and all other required documents
to reach the exchange agent on or prior to the expiration date of the exchange offer, or
• the procedures for book-entry transfer cannot be completed on or prior to the expiration date of the exchange offer;
you may tender your old notes if:
)
• your tender is made by or through an eligible institution;
• on or prior to the expiration date of the exchange offer, the exchange agent has received from the eligible institution a
properly completed and validly executed notice of guaranteed delivelY, by manually signed facsimile transmission, mail
or hand delivelY, in substantially the form provided with this prospectus:
• setting forth your name and address, the registered number(s) of your old notes and the principal amount of the old
notes tendered;
• stating that the tender is being made by guaranteed delivery;
• guaranteeing that, within three New York Stock Exchange trading days after the date of the notice of guaranteed
delivelY, the letter of transmittal or facsimile thereof, properly completed and validly executed, together with
certificates representing the old notes, or a book-entry confirmation, and any other documents required by the letter of
transmittal and the instructions thereto, will be deposited by the eligible institution with the exchange agent; and
• the exchange agent receives the properly completed and validly executed letter of transmittal or facsimile thereof with
any required signature guarantees, together with certificates for all old notes in proper form for transfer, or a book-entry
confirmation, and any other required documents, within three New York Stock Exchange trading days after the date of
the notice of guaranteed delivery.
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Other Matters
Exchange notes will be issued in exchange for old notes accepted for exchange only after timely receipt by the exchange
agent of:
• certificates for, or a timely book-entry confirmation with respect to, your old notes;
• a properly completed and duly executed letter of transmittal or facsimile thereof with any required signature guarantees,
or, in the case of a book-entry transfer, an agent's message; and
• any other documents required by the letter of transmittal.
All questions as to the form of all documents and the validity, including time of receipt, and acceptance of all tenders of
old notes will be determined by us, in our sole discretion, the determination of which shall be final and binding.
ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF OLD NOTES WILL NOT BE CONSIDERED
VALlO. We reserve the absolute right to reject any or all tenders of old notes that are not in proper form or the acceptance of
which, in our opinion, would be unlawful. We also reserve the right to waive any defects, irregularities or conditions of
tender as to any particular old notes. Our interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all parties.
Unless waived by us, any defect or irregularity in connection with tenders of old notes must be cured within the time that
we determine. Tenders of old notes will not be deemed to have been made until all defects and irregularities have been
waived by us 01' cured. Neither us, the exchange agent, nor any other person will be under any duty to give notice of any
defects or irregularities in tenders of old notes, or will incur any liability to holders for failure to give any such notice.
By signing or agreeing to be bound by the letter of transmittal, you will represent to us that, among other things:
• any exchange notes that you receive will be acquired in the ordinary course of your business;
• you have no arrangement or understanding with any person or entity to participate in the distribution of the exchange
notes;
)
• if you are not a broker-dealer, that you are not engaged in and do not intend to engage in the distribution of the exchange
notes;
• you acknowledge and agree that any person participating in the exchange offer for the purpose of distributing the new
notes:
• must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the new notes acquired by such person; and
• cannot rely on the position of the SEC set forth in the Exxon Capital Holdings Corporation no-action letter (available
May 13, 1988) or similar letters;
• you understand that a secondary resale transaction described in the preceding bullet point should be covered by an
effective registration statement containing the selling security holder information required by Item 507 of Regulation SKofthe SEC;
• if you are a broker-dealer, that you will receive the exchange notes for your own account in exchange for old notes that
were acquired as a result of market-making activities or other trading activities, that you may not rely on the position of
the SEC enunciated in Morgan Stanley & Co. Incorporated (available June 5,1991) and Exxon Capital Holdings
Corporation (available May 13, 1988), as interpreted in the SEC's letter to Shearman & Sterling (available July 2,
1993), and similar no-action letters and you will deliver a prospectus, as required by law, in connection with any resale
of the exchange notes; and
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• you are not an "affiliate" of ours, as defined in Rule 405 of the Securities Act, or, if you are an affiliate, you will comply
with any applicable registration and prospectus delivelY requirements of the Securities Act.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, you may withdraw your tender of old notes at any time prior to the
expiration date of the exchange offer.
For a withdrawal to be effective:
• the exchange agent must receive a written notice of withdrawal at the address set forth below under "- Exchange
Agent"; or
• you must comply with the appropriate procedures ofDTC's automated tender offer program system.
Any notice of withdrawal must:
• specify the name of the person who tendered the old notes to be withdrawn; and
• identify the old notes to be withdrawn, including the principal amount of the old notes to be withdrawn.
If certificates for the old notes have been delivered or otherwise identified to the exchange agent, then, prior to the release
of those certificates, the withdrawing holder must also submit:
• the serial numbers of the particular certificates to be withdrawn; and
• a signed notice of withdrawal with signatures guaranteed by an eligible institution, unless the withdrawing holder is an
eligible institution.
)
If the old notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn old notes and
otherwise comply with the procedures of DTC.
We will determine all questions as to the validity, form and eligibility, including time of receipt, of notices ofwithdrawal,
and our determination shall be final and binding on all parties. We will deem any old notes so withdrawn not to have been
validly tendered for exchange for purposes of the exchange offer.
We will return any old notes that have been tendered for exchange but that are not exchanged for any reason to their
holder without cost to the holder. In the case of old notes tendered by book-entry transfer into the exchange agent's account
at DTC, according to the procedures described above, those old notes will be credited to an account maintained with DTC for
the old notes. This return 01' crediting will take place as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. You may re-tender properly withdrawn old notes by following one of the procedures
described under " - Procedures for Tendering Old Notes" at any time on or prior to the expiration date of the exchange offer.
Conditions to the Exchange Offer
Despite any other term of the exchange offer, we will not be required to accept for exchange any old notes and we may
terminate or amend the exchange offer as provided in this prospectus before accepting any old notes for exchange if in our
reasonable judgment:
• the exchange notes to be received will not be tradable by the holder without restriction under the Securities Act and the
Exchange Act and without material restrictions under the blue sky or securities laws of substantially all of the states of
the United States;
• the exchange offer, or the making of any exchange by a holder of old notes, would violate applicable law or any
applicable interpretation of the staff of the SEC; or
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• any action or proceeding has been instituted or threatened in any court or by or before any governmental agency with
respect to the exchange offer that would reasonably be expected to impair our ability to proceed with the exchange offer.
We will not be obligated to accept for exchange the old notes of any holder that has not made to us:
• the representations described under the captions "- Procedures for Tendering Old Notes -
Other Matters" and "Plan
of Distribution;" and
• any other representations that may be reasonably necessary under applicable SEC rules, regulations or interpretations to
make available to us an appropriate form for registration of the exchange notes under the Securities Act.
We expressly reserve the right, at any time or at various times, to extend the period of time during which the exchange
offer is open. Consequently, we may delay acceptance of any old notes by giving oral or written notice afan extension to
their holders. During an extension, all old notes previously tendered will remain subject to the exchange offer, and we may
accept them for exchange. We will return any old notes that we do not accept for exchange for any reason without expense to
their tendering holder promptly after the expiration or termination of the exchange offer.
We expressly reserve the right to amend or terminate the exchange offer and to reject for exchange any old notes not
previously accepted for exchange, upon the occurrence of any of the conditions of the exchange offer specified above. By
public announcement we will give oral or written notice of any extension, amendment, non-acceptance or termination to the
holders of the old notes promptly. If we amend the exchange offer in a manner that we consider material, we will disclose the
amendment in the manner required by applicable law.
These conditions are solely for our benefit and we may asseli them regardless of the circumstances that may give rise to
them or waive them in whole or in part at any time or at various times in our sole discretion. If we fail at any time to exercise
any of the foregoing rights, this failure will not constitute a waiver of that right. Each of these rights will be deemed an
ongoing right that we may assert at any time or at various times. All conditions to the exchange offer, other than those
conditions subject to government approvals, will be satisfied or waived prior to the expiration orthe exchange offer.
We will not accept for exchange any old notes tendered, and will not issue the exchange notes in exchange for any old
)
notes, ifat any time a stop order is threatened or in effect with respect to the registration statement of which this prospectus
constitutes a part or the qualification of the indenture under the Trust Indenture Act of 1939.
Transfer Taxes
We will pay all transfer taxes, if any, applicable to the transfer and exchange of old notes pursuant to the exchange offer.
The tendering holder, however, will be required to pay any transfer taxes, whether imposed on the record holder or any other
person, if:
• delivety of the exchange notes, 01' certificates for old notes for principal amounts not exchanged, are to be made to any
person other than the record holder of the old notes tendered;
• tendered certificates for old notes are recorded in the name of any person other than the person signing any letter of
transmittal; or
• a transfer tax is imposed for any reason other than the transfer and exchange of old notes under the exchange offer.
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Consequences of Failure to Exchange
If you do not exchange your old notes for exchange notes in the exchange offer, you will remain subject to restrictions on
transfer of the old notes:
• as set forth in the legend printed on the old notes as a consequence of the issuance of the old notes pursuant to the
exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable
state securities laws; and
• as othelwise set forth in the offering circular distributed in connection with the private offering of the old notes.
In general, you may not offer or sell the old notes unless they are registered under the Securities Act, or if the offer 01' sale
is exempt from registration under the Securities Act and applicable state securities laws. Except as required by the
registration rights agreement relating to the old notes, we do not intend to register resales of the old notes under the Securities
Act.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the old notes as reflected in our accounting records on
the date of the exchange. Accordingly, we will not recognize any gain or loss for accounting purposes upon the completion of
the exchange offer. The expenses of the exchange offer that we pay will increase our deferred financing costs in accordance
with generally accepted accounting principles.
Fees and Expenses
We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, we may make
additional solicitation by facsimile, telephone or in person by our officers and regular employees and those of our affiliates.
)
We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to
broker-dealers or others soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable
and customary fees for its services and reimburse it for its related reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the exchange offer. They include:
• SEC registration fees;
• fees and expenses of the exchange agent and trustee;
• accounting and legal fees and printing costs; and
• related fees and expenses.
Exchange Agent
The Bank of New York Trust Company, N.A. has been appointed as exchange agent for the exchange offer. You should
direct questions and requests for assistance, requests for additional copies of this prospectus, the letter of transmittal or any
other documents to the exchange agent. You should send
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certificates for old notes, letters of transmittal and any other required documents to the exchange agent addressed as follows:
The Bank of New York Trust Company, N.A.
By Registered 01' Certified Mail,
By Hand 01' Overnight Delivery:
The Bank of New York
Corporate Trust Operations
Reorganization Unit
Attn: Giselle Guadalupe
101 Barclay Street, 7 East
New York, NY 10286
Facsimile Transmissions:
(Eligible Institutions Only)
(212) 298-1915
To Corifil'ln by Telephone
In/ormation Call:
(212) 815-6331
01'/01'
Delivery of the letter of transmittal to an address other than as shown above or transmission via facsimile other than as set
fOlth above does not constitute a valid delivety of the letter of transmittal.
Other
Participation in the exchange offer is voluntaty, and you should carefully consider whether to exchange the old notes for
the exchange notes. We urge you to consult your financial and tax advisors in making your own decision on what action to
take.
We may in the future seek to acquire untendel'ed old notes in open market or privately negotiated transactions, through
subsequent exchange offers or otherwise, on terms that may differ from the terms of the exchange offer. We have no present
plans to acquire any old notes that are not tendered in the exchange offer or to file a registration statement to permit resales of
any untendered old notes.
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USE OF PROCEEDS
This exchange offer is intended to satisty our obligations under the registration rights agreement, dated August 18, 2004,
by and among Securus, the subsidiary guarantors pal1y thereto, and the initial purchasers of the old notes. We will not receive
any proceeds from the issuance of the exchange notes in the exchange offer. Instead, we will receive in exchange old notes in
like principal amoun!. We will retire or cancel all of the old notes tendered in the exchange offer. Accordingly, the issuance
of the exchange notes will not result in any increase in our indebtedness. The form and terms of the exchange notes are
identical in all respects to the form and terms of the old notes, except the exchange notes are registered under the Securities
Act and will not have restrictions on transfer 01' registration rights.
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CAPITALIZATION
The following table sets forth our cash, cash equivalents and capitalization at December 31,2004. The information in this
table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical consolidated financial statements and accompanying notes thereto appearing elsewhere in this
prospectus.
Asof
December 31,
2004
(In millions)
)
Cash and cash equivalents and restricted cash
$ 3.2
Long-term debt (including current portion):
Working capital facility(l)
II % second-priority senior secured notes due 20 II (2)
Senior subordinated debt financing, net of fair value ofwarrants(3)
Other
Total Debt
Stockholders' deficit
Total capitalization
150.5
39.2
0.2
189.9
(22.8)
$167.1
=
=
(1) Our working capital facility consists of a five-year $30.0 million senior secured revolving credit facility. As of
December 31, 2004, no amounts were outstanding under our working capital facility although approximately
$5.7 million of letters of credit were issued under the facility. See "Description of Our Other Indebtedness - Working
Capital Facility."
(2) The amount shown is net of $3.5 million of original issue discount, or OID. OlD represents the amount equal to the
excess of the stated redemption price at maturity of the notes over their issue price.
(3) The amount of proceeds allocated to the warrants issued in connection with the senior subordinated debt financing was
$2.9 million based on their estimated fair value and is shown as an increase to stockholders' equity. This amount will be
amortized over the life of the senior subordinated notes.
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UNAUDITED PRO FORMA FINANCIAL DATA
(Dollars in thousands)
The following unaudited pro forma financial data has been derived by the application of pro forma adjustments to (i) the
audited financial statements ofT-Netix (predecessor basis) for the period from January 1,2004 to March 2, 2004;
(ii) Secul'lls' (successor basis) audited historical consolidated financial statements for the 355-day period from January 12 to
December 31, 2004; and (iii) the unaudited financial statements and the books and records of Evercom for the period from
January I, 2004 to September 8, 2004. The adjustments give effect to the acquisition ofT-Netix on March 3, 2004 and the
consummation of the Transactions on September 9, 2004 as if each had occurred as of Januaty I, 2004. The unaudited pro
forma financial data does not purport to be representative of what our results of operations would have been if the acquisition
ofT-Netix or the Transactions had occurred as of the date indicated, nor are they indicative of the results ofany future
periods.
The unaudited pro forma financial data account for the Transactions utilizing purchase accounting, which requires that we
revalue or adjust the assets and liabilities of the acquired business to their fair values. Fair values are based on valuations and
other studies that are substantially complete. We do not expect that the effect of any final adjustments to such valuations and
studies will result in material adjustments to the purchase price allocation.
You should read the unaudited pro forma financial data and the related notes thereto in conjnnction with our historical
consolidated financial statements and the related notes thereto and other information contained in "Management's Discussion·
and Analysis of Financial Condition and Results of Operations" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Evercom" included elsewhere in this prospectus.
Pro Forma
T·Netlx
Period from
January I to
March2,
Securus
lSuccessor}
Period from
January 12
(Inception) to
December31,
2004
2004
~Predecessorl
)
)
Revenues:
Direct call
provisioning
$
Telecommunications
services
Solutions services
Equipment sales and
other
Total Revenues
Expenses:
Operating costs
Selling, general &
administrative
Compensation
expense on
employee options
and restricted
stock
Non-cash
impairment
Research and
development
Gain on sale of
assets
Employee severance
Loss on debt
extinguishment
Depreciation and
amortization
9,651 $
7,552
Evercom
Adjustments
Related to
T-Netix
Acgulsltlon
120,868 $
Year Ended
December3t,
2004
$
130,519 $
HIstorical
January I to
Seetember 8
Adjustments
Related to tlte
Transactions
152,463 $
Pro F
..!.!..M.
$282
30,341
18,466
37,893
18,466
19,274
37
37
232
17,435
3,701
173,376
3,933
190,811
1,555
173,292
5
364
11,387
130,883
142,270
135,482
277
3,032
25,118
28,150
18,266
4E
4,069
977
5
4,069
285
50,585
50,870
5C
607
2,397
3,004
3
(274)
3,127
(274)
3,127
3
1,239
2,802
4,041
1,640
1,649
13,157
13,891
8,667
(915)(1)
5
2,661(1)
25
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Pro Forma
Securus
{Successor}
T-Netlx
!Predecessor~
Period from
January I to
March 2,
2004
Operating
income
(loss)
Interest and
other
expense,
net
Transaction
expenses
Income
Evereom
Period from
January 12
Adjustments
(inception) to
December 31,
2004
Related to
T-Netlx
Acgulsltloll
Year Ended
December 3 t,
2004
Historical
January 1 to
Seetember 8
Adjustments
Related to the
Pro Forma
as Adjusted
Transactions
(58,337)
8,260
(14,001)
(16,192)
(2,576)
(6,903)(2) (25,671)
(5,365)
(987)
(6,352)
(1,345)
(7,697)
(12,389)
(69,407)
(80,881)
4,339
(80,881) $
1,006
3,333 $
(4,833)
(54,419)
(2,191 )
915
(2,661)
(52,738)
(loss)
from
continuing
operations
before
income
taxes
Income tax
expense
(benefit)
Net loss
$
(2,575)
(9,814) $
915
(12,659)
(56,748) $
15,234(3)
(14,319) $
(9,564)
(86,106)
(33,726)(3) (32,720)
24,162
$(53,386)
)
(I) Reflects the amortization of tangible and intangible assets with definite lives over their useful lives. The useful life ofa
tangible or intangible asset is the period over which the asset is expected to contribute directly or indirectly to the future
cash flows of our business. In estimating the useful lives of the tangible and intangible assets, management considered
many factors including:
• The expected use of the assets
• The expected useful life of another asset or group of assets to which the useful life of the tangible or intangible asset
may relate
• Any legal, regulatory or contractual provisions that may limit the useful life
• The effect of obsolescence, demand, competition and other economic factors, and
• The level of maintenance expenditure requires to obtain the future cash flows from the asset.
Based on the assessment of these factors, management assigned the average useful lives, which resulted in the following
pro forma adjustments to depreciation and amortization for the allocation of identifiable intangible assets at Evercom:
Pro Forma
Depreciation
and Amortization
Useful Life in
Years
)
Fair value of property and
equipment
Fair value adjustment to
Operating Contracts and
Customer Agreements
Fair value adjustment to
Patent & License Rights
3·5 $
12
Year Ended December 3 •• 2004
Pro Forma
Adjustment to
Reported
Depreciation anti
Historical
Amortization Related
to the T-Netlx
Depreciation
Acquisition
and Amortization
(Dollars In thousands)
15,873 $
6,022
12
$
3,325
25,220 $
16,148
$
5,230
2,096
23,474
(1,247)
(202)
$
534
(915)
http://sec.gov/Archives/edgar/data/929757/000095014405005614/g9367 4sv4.htm
Pro Forma
Adjustment to
Depreciation
and Amortization
Related to the
Transactions
$
Total Pro
Forma
Adlustment
972 $
994
(275)
792
::-_ _-::-:"69"'5 ::-~1~,22~9
$
2,661 ;:;.$="l1!f,74;;6
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(2) The pro forma adjustments to interest expense and other, net are based on the amounts borrowed and the rates assumed
to be in effect at the closing of the transactions:
Year Ended
Det!ember 31,
2004
(Dollars in
thousands)
Interest expense of old notes(a)
Interest expense of senior subordinated notes(b)
Interest expense of working capital facility(c)
Amortization of deferred financing costs of working capital facility, senior subordinated notes
debt and old notes
Pro fonna interest expense
Elimination of historical interest expense
Pro forma adjustment to interest and other expenses, net
(a)
$
$
(17,434)
(7,091)
(75)
(1,071)
(25,671)
18,768
(6,903)
Includes amortization of OID of $494 for the year ended December 31, 2004.
(b) Includes amortization of fair value of warrants of $291 for the year ended December 31, 2004.
(c) Amounts outstanding under the working capital facility are assumed to bear interest at 250 basis points above LIBOR.
Interest expense of working capital facility includes expenses on letters of credit of $5,700 at an assumed rate of
250 basis points, as well as unused line fees and annual agent fees.
Deferred financing costs of$8.0 million were incurred in connection with our working capital facility, the senior
)
subordinated notes and the issuance of the old notes. Such costs will be amortized using the interest method, over the
term of the related indebtedness. The terms ofthe working capital facility, the senior subordinated notes and the old
notes are 5 years, 10 years and 7 years, respectively. Historical debt issuance costs of $1.6 million were eliminated with
the retirement of the existing credit facilities and subordinated notes at T-Netix and Evercom upon the closing of the
Transactions.
(3) The assumed effective tax rate of the pro forma adjustments is 38.0% for all periods presented.
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SELECTED FINANCIAL INFORMATION AND OTHER DATA
(Dollars in millions)
The following selected consolidated historical financial and other data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the
related notes thereto appearing elsewhere in this prospectus. Our predecessor company for the period from January I, 2000 to
March 2, 2004 was T-Netix (the Predecessor). We completed the Transactions as of September 9, 2004, and as a result of
adjustments to the carrying value of assets and liabilities resulting from the Transactions, the financial position and results of
operations for the period subsequent to the Transactions may not be comparable to those of the Predecessor. The selected
historical financial and other data set forth below for, and as of the end of, the fiscal years ended December 31, 2000,
December 31, 200 I, December 31, 2002 and December 31, 2003 have been derived from the audited consolidated financial
statements of the Predecessor. The selected historical consolidated financial and other data presented below for, and as of, the
periods Januaty I, 2004 to March 2, 2004 and Januaty 12, 2004 through December 31, 2004 have been derived from our
audited consolidated financial statements for the year ended December 31, 2004.
Securus Technologies, Inc.
Predecessor
Successor
Period from
January 1,
2004 to
Year Ended December 31 2
March 2,
)
vr,cg7;tb
Consolidated Statement of Operations Data:
Operating revenues
Costs of revenues
Selling, general and administrative(3)
Depreciation and amortization
Non-cash impairment of assets
Other operating expenses(4)
Income (loss) from operations
Other Income (Expense):
Patent litigation settlement, net of expenses
(5)
Transaction expenses and other charges(6)
Interest and other expenses, net
Income (loss) from continuing operations
~
2!!!!L
~
~
$103.2
63.5
24.1
11.6
$117.8
66.9
28.8
13.0
2.7
$119.8
72.7
26.4
12.1
1.1
$117.2
75.7
26.2
11.9
0.4
4.0
6.4
7.5
3.0
(0.5)
(2.1)
9.9
~) ---2::7)
before income taxes
Income tax expense (benefit)
Net income (loss) from continuing operations
Loss from discontinued operations
1.6
$
1.6
= (2.0)
3.2
0.7
2.5
$
2004(1)
$
17.4
11.4
3.6
1.6
0.3
5.3
(4.8)
$
$
9.2
2.7
6.5
(Inception)
2004 to
December 31,
2004(2)
$
173.4
130.9
27.5
13.2
50.6
5.6
(54.4 )
-
(5.4)
(2.2)
(1.0)
(14.0)
(12.4)
(2.6)
(9.8)
(69.4)
(12.7)
(56.7)
~ ~)
2.6
0.2
2.4
Period from
January 12,
$
$
(2.3)
(0.6)
-
(l.l)
0.3
-
(Impairment)/gain on sale of assets of
discontinued operations
Accretion of discount on redeemable
convertible preferred stock
Charge for conversion of redeemable
convertible preferred stock
Net income (loss) applicable to common
stockholders
(1.1)
(1.1)
-
_iQJ)
-
$ (1.6) $ (2.0) $
=
2.1
$
=
6.5
$
(9.8)
$
(56.7
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)
PredeceSS01'
Period from
January I,
2004 to
Year Ended December 31 1
March 2,
..1QQ!L
.El!!!...
2002
2003
$ 28.1
51.4
$26.9
62.4
$48.8
57.5
$56.7
50.6
23.7
28.5
13.5
9.9
1.4
1.7
1.6
2.9
2004(1)
Successor
Period from
January 12,
(Inception)
2004 to
December 31,
2004(2)
Other Financial Data:
Total Direct Provisioning revenues
Total Telecommunications services revenues
Total Solutions services revenues
Total Equipment Sales and Other revenues
Other Data:
Ratio of earnings to fixed charges
Deficiency of earnings to fixed charges
Consolidated Cash Flow Data:
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Capital expenditures
Balance Sheet Data (end of period):
Cash and cash equivalents
Total current assets
Net property and equipment
Total assets
Total long-term debt (including current
portion)
Stockholders' equity (deficit)
)
$
9.7
7.6
$
120.8
30.3
18.5
3.7
0.2
$
8.7
$
55.8
$ 5.5
(10.7)
6.3
11.0
$19.4
(7.4)
(9.3)
5.2
$13.5
(6.4)
(1.6)
5.9
$26.8
(6.8)
(3.7)
6.5
$
(3.8)
(0.6)
(0.9)
0.6
$
6.6
(213.1)
208.4
12.4
$ 0.1
20.3
34.7
71.5
$ 1.0
21.0
30.2
63.2
$ 6.6
31.3
25.3
66.7
$22.9
40.0
21.5
68.9
$
17.6
45.7
20.0
74.7
$
3.2
78.1
36.2
272.1
31.7
23.2
22.4
24.5
22.8
27.1
19.2
35.2
18.3
25.4
189.9
(22.8)
(I) This column presents the data for T-Netix (Predecessor) for the 62-day period from JanualY 1,2004 to March 2, 2004,
prior to our acquisition ofT -Netix on March 3, 2004.
(2) Does not include information for T-Netix (Predecessor) for the period from January 1,2004 to March 2, 2004 prior to
our acquisition ofT-Netix on March 3, 2004, or information for Evercom for the period from JanualY 1,2004 to
September 8, 2004, prior to our acquisition of Evercom on September 9,2004.
(3) Includes research and development expenses.
(4) Gain on sale of assets, compensation expense on employee options, severance payments and loss on debt
extinguishment.
(5) Reflects income from a one-time litigation settlement, net oflegal expenses.
(6) Represents one-time transaction expenses related to (a) T-Netix's purchase of Gateway Technologies, Inc. in the year
ended December 31,1999, (b) Secul'lls' purchase ofT-Netix on March 3, 2004, and (c) Securus' purchase of Evercom
on September 9,2004.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with our historical consolidated financial statements and related
notes, our unaudited pro forma combined financial data and related notes and other financial information included elsewhere
in this prospectus.
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 December 31, 2004, we provided service to over 3,375
correctional facilities housing approximately 1.1 million inmates.
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 LEes, and interexchange carriers, or IXCs, for which we
provided our equipment and, as needed, back office support, including validation, billing and collections services, and
charged a fee for such services. Based on the particular needs of the corrections industty 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 repolting 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 in connection with the Transactions.
)
Revenues
We derived approximately 78% of our pro forma 2004 revenues 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 (generally three to five years) 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 conectional facility based upon inmate telephone use. Our commission rates averaged 43.2% of direct
revenues for 2004. 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 industty and to the requirements of each individual
correctional facility, such as call activity recording and call blocking. In our direct call provisioning business, we eam 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 10% of our pro forma 2004 revenues by providing telecommunications services to RBOCs,
LECs and 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 though the telecommunications provider, rather than directly to the
facility. Although our revenues for services to telecommunications service providers are lower than in our direct call
provisioning business, where we provide the service to the facility directly and receive the retail value of the call, we do not
incur all the additional capital costs related to these larger contracts that typically require up-front or guaranteed commission
payments. Our gross margin percentage for providing telecommunications services is higher
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than the margin for our direct call provisioning business because we do not incur commissions, transpOli costs or risk of
collection.
We also offer our Solutions services and the sale of equipment to RBOCs, LECs and IXCs as customers to support their
telecommunications contracts with correctional facilities. We derived approximately 10% of our pro forma 2004 revenues
from our Solutions business. The Solutions business consists of providing validation, uncollectible account management and
billing selVices. In this business. accounts receivable generated from calls placed by inmates in correctional facilities are
typically purchased from the third party inmate telecommunications provider 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 service equal the
difference between the face value of the receivables purchased and the amount we pay the RBOC, LEC or lXC 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 01' direct sales charges, but bear the
risk of un billable and uncollectible accounts receivable.
We also sell equipment, typically consisting of our inmate calling system and digital recording systems, to a limited
number of telecommunications 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 telecommunications 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.
)
OpeI'atillg Expenses
Our principal operating expenses 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 offield 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.
Operating costs of telecommunications services consist primarily of service administration costs for correctional
facilities, including salaries and related personnel expenses, communication costs and inmate calling systems repair and
maintenance expenses. Operating costs of telecommunications services also include costs associated with call validation
procedures (primarily network expenses and database access charges).
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Operating costs associated with the Solutions business generally include the same operational costs that we incur in our
telecommunications 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 primalY 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 proprietmy, 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 pmties to prepay collect calls 01' 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 01' require them to purchase prepaid
calling time in order to receive inmate calls. This system, combined with the direct billing to LECs, has enabled us to realize
what we believe to be industry-low bad debt margins. Bad debt tends to rise as the economy worsens, and is subject to
numerous factors, some of which may not be known. To the extent our bad debt management system overcompensates for
bad debt exposure by limiting credit to billed parties. our revenues and profitability may decline as fewer calls are permitted
to be made.
Field Operations and Maintenance Costs. Field operations and maintenance costs consist of service administration costs
for correctional facilities, including salaried and related personnel expenses, and inmate calling systems (including related
equipment), repair and maintenance. The costs of providing services primarily consist of service administration costs for
correctional facilities, including salaries and related personnel expenses, communication costs, and inmate calling systems
repair and maintenance expenses.
)
SG&A. SG&A expenses consist of corporate overhead and selling expenses, including marketing, legal, regulatory and
research and development costs.
Purchase Accounting. We acquired T-Netix on March 3, 2004 and Evercom on September 9, 2004 in each case utilizing
the purchase method of accounting. As a result, our financial statements do not include the operations of these two companies
for periods prior to their respective dates of acquisition and period to period comparisons of results of operations may not be
meaningful.
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 efficiences long term.
Industry Trends
In the first qUal1er of2005 large industty pat1icipants Verizon and AT&T communicated plans to exit the inmate
telecommunications sector. 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 continue the recent trend of
large dominant telecommunications carriers exiting the direct inmate telecommunications business. For the year ended
December 31, 2004, telecommunications services and Solutions revenues generated under agreements with Verizon and
AT&T represented approximately 4% and 10% of our gross revenues, respectively. As a result of this trend, we
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anticipate that our revenue margins associated with these product lines will continue to decline and that the master
agreements we have in place with these two companies will not be renewed upon expiration.
Notwithstanding the foregoing developments and the anticipated declining revenue stream associated with our highly
profitable telecommunications services product line, we believe that the departure of large industty 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 the large carriers 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
depal1ments 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 telecommunications and Solutions 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
telecommunications contracts, we will be required on a case-by-case basis to weigh the 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.
The following table sets forth, for the years ended December 31, 200 I, 2002, 2003 and 2004, respectively, the results of
operations of T -Netix (Predecessor) and Securus.
Year Ended December 31 1
2002
2003
(Dollars In thousands)
20{H
Revenues:
Direct call provisioning
Telecommunications services
Solutions services
intemet services
Equipment sales and other
Total revenues
Expenses:
Operating costs
Seiling, general and administrative
Compensation expense on employee options and
restricted stock
Non-cash impairment of telecommunication assets
Research and development
Gain on sale of assets
Employee severance
Loss on debt extinguishment
Depreciation and amortization
Operating income (loss)
Patent litigation settlement, net of expenses
Interest and other expense, net
Transaction expenses
Income (loss) from continuing operations before
income taxes
Income tax expense (benefit)
$ 26,899
62,378
23%
$ 48,798
57,514
41%
13,498
119,810
48
0
0
II
100
72,721
23,358
61
19
$ 56,735
50,645
2004(ll
48%
9,864
117,244
3,701
173,376
75,722
22,640
65
19
130,883
25,118
75
14
66,856
24,190
57
21
91
2,678
4,539
0
2
4
0
0
12,963
6,442
524
2,677
II
5
0
2
0
12,101
7,463
2,085
2,825
10
6
2
2
0
11,892
2,998
(9,935)
3,761
10
3
(8)
3
0
3,241
735
3
I
2,553
180
2
0
9,172
2,676
8
2
0
I
3
0
0
70%
17
II
0
2
100
23,886
4,596
117,759
30
1,119
3,054
(36)
$ 120,868
43
0
0
9
100
53
0
20
4
100
653
3,629
(290)
0
I
3
0
0
30,341
18,466
14,001
987
0
29
I
0
2
2
8
(31)
0
8
I
(69,407)
(12,659)
(40)
(7)
50,585
2,397
(274)
3,127
2,802
13,157
(54,419)
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Year Ended December 31 1
2003
20Gl
2001
2004(1}
(Dollars in thousands)
Net income (loss) from continuing operations
Net loss from discontinued operations
Gain on sale of discontinued operations
Impairment of assets of discontinued operations
Accretion of discount on redeemable convertible preferred
stock
Net income (loss) applicable to common stockholders
2,506
(2,346)
(1,125)
...J1QZ2)
$ (2,042)
2
(2)
0
(1)
(1)
(2)%
2,373
(616)
308
2
(I)
0
0
6,496
0
$ 2,065
=
2%
6
0
0
0
(56,748)
0
$ 6,496
6%
$ (56,748)
(33)
0
0
0
0
(33)%
(I) This column presents the data for Securus for the 355-day period from JanualY 12, 2004 (inception) to December 31,
2004. Does not include information for T-Netix (Predecessor) for the period January 1,2004 to March 2, 2004, prior to
our acquisition ofT-Netix on March 3, 2004 or information for Evercom for the period JanuaIY 1,2004 to September 8,
2004, prior to our acquisition of Evercom on September 9, 2004.
Resllits ojOpertltionsjor the Yetlrs Emled December 31,2004 (SeCllrtlS) Comptlred to December 31,2003
(Predecessor)
)
Total Revenues. Total revenues for the year ended December 31,2004 increased by $56.2 million, or 47.9%, to
$173.4 million from $117.2 million for the year ended December 31, 2003. This increase was attributable to revenues of
$77.8 million generated by Evercom following our acquisition of Evercom on September 9, 2004, offset by a net decline of
$4.2 million consisting of declines of$12.8 million and $7.8 million, respectively, in our telecommunications services and
equipment sales and other revenues, offset by increases of$8.8 million and $7.6 million, respectively, of Solutions and direct
call provisioning revenues. The total revenues for the year ended December 31, 2004 do not include $17.4 million ofTNetix's revenues for the 2004 period prior to our acquisition ofT-Netix on March 3, 2004. Had such revenues been included,
our 2004 revenues would have increased by $73.6 million as compared to the year ended December 31, 2003. In 2004 we
principally pursued a strategy whereby on a selective basis we attempted to convert accounts from telecommunications
services revenue to direct call provisioning as accounts came up for renewal in order to obtain a greater share of the revenue
from each contract. As a result, telecommunications services and equipment sales declined, while direct call provisioning
revenues increased. Additionally, we were awarded substantial new Solutions business from AT&T, our largest customer.
This newly awarded business represented approximately $8.8 million of additional 2004 revenues. Total revenues were
negatively impacted by a non-cash adjustment of $1.2 million that resulted from a writedown of certain deferred revenue to
fair value in conjunction with purchase accounting rules relative to the T-Netix and Evercom acquisitions.
Direct call provisioning revenues for 2004 increased by $64.2 million, or 113.2%, to $120.9 million from $56.7 million in
2003. Of this increase approximately $66.2 million was attributable to our acquisition of Evercom and $7.6 million was the
result of the growth in the number of inmates and accounts served, offset by $9.6 million of revenue for T-Netix for the
period January 1,2004 through March 2, 2004 prior to our acquisition ofT-Netix on March 3, 2004.
Telecommunications services revenues for 2004 decreased by 40.1 %, to $30.3 million from $50.6 million in 2003.
Approximately $12.8 million ofthis decline was principally the result of conversions of accounts as they came up for renewal
to direct call provisioning and conversion of revenue to our new Solutions services as a result of a new contract with our
largest customer, offset by accounts that we did not retain upon contract renewal. Evercom did not historically provide
telecommunications services prior to its acquisition by us in September 2004. Telecommunications services revenues for the
year ended December 31, 2004 do not include $7.5 million ofT-Netix's revenues for the 62-day period from January 1,2004
to March 2, 2004, prior to our acquisition ofT-Netix on March 3, 2004.
Solutions services revenues for 2004 were $18.5 million, as compared to zero in 2003. Of this increase, $9.7 million was
attributable to Evercom following our acquisition of Evercom on September 9,
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2004 and the remaining increase of$8.8 million was the result of substantial new Solutions business we were awarded by our
largest customer.
Equipment sales and other revenues for 2004 decreased by $6.2 million, or, 62.6%, to $3.7 million from $9.9 million in
2003. Approximately $7.8 million of this decline is primarily due to the strategy we pursued in 2004 whereby on a selective
basis we attempted to convert accounts from telecommunications services revenue to direct call provisioning revenue. As a
result of this strategy, our telecommunications services customers, who are also typically our equipment customers,
purchased less equipment from us in 2004. The decline was also due to our equipment customers winning less new business
in 2004, resulting in their buying less equipment from us. The decline included $1.8 million of equipment sales revenue
generated by Evercom following our acquisition, but excluded $0.2 million of equipment sales revenue generated by T -Netix
during the period JanualY 1,2004 through March 2, 2004.
Operating costs. Total operating costs increased for 2004 by $55.2 million, or 72.9%, to $130.9 million from
$75.7 million in 2003. This increase was attributable to costs of$60.9 million generated by Evercom following our
acquisition of Evercom, offset by $11.4 million of operating costs incurred by T -Netix prior to our acquisition ofT-Netix on
March 3, 2004. The remaining increase of $5.7 million was primarily the result of higher operating costs associated with the
change in mix of our operating revenues. In 2004 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 business than in the telecommunications
services and equipment sales businesses. Additionally, we incurred $1.0 million of bad debt expense in December 2004 as a
result ofthe decision to eliminate billing clearinghouse transactions by migrating T-Netix billing functions to Evercom's
direct billing agreements with LEes. This migration is expected to yield cost savings in 2005 and thereafter. We also
incurred $1.9 million of expenses in December 2004 associated with disputes with several of our customers.
SG&A. SG&A expenses were $25.1 million in 2004 as compared to $22.6 million in 2003, an increase of$2.5 million, 01'
11.1 %. Of this increase, $9.5 million was attributable to our acquisition of Evercom offset by $4.0 million of expenses
)
resulting from cost cutting measures undet1aken in 2004, including reductions in personnel following our acquisition of
Evercom, and $3.0 million attributable to T-Netix for the 62-day period from JanualY 1,2004 to March 2, 2004, prior to our
acquisition ofT-Netix on March 3, 2004.
Research and Development Expenses. Research and development expenses were $2.4 million in 2004 as compared to
$3.6 million in 2003, a decrease of $1.2 million 01', approximately 33%. This decrease was the result of cost cutting measures
undertaken in 2004, including reductions in research and development personnel, and $0.6 million attributable to T -Netix for
the 62-day period from January 1,2004 to March 2, 2004, prior to our acquisition ofT-Netix on March 3, 2004.
Impairment. We recognized a $50.6 million non-cash impairment charge in December 2004 as a result ofVerizon's and
AT&T's decision to exit the inmate telecommunications business and an overall decline in our telecommunications services
revenues. The impairment consisted of (i) a $3.9 million write-down of property and equipment, (ii) a $26.3 million writedown of intangible assets and (iii) a $20.4 million write-down of goodwill. These write-downs represent the impairment of
assets used to support the telecommunications and Solutions services we provide to Verizon and AT&T. We do not presently
expect to record any future impairment charges relating to Verizon's and AT&T's decision to exit the inmate
telecommunications business, but anticipate that the loss of the higher margin telecommunications services provided to
Verizon and AT&T will have an adverse effect on our near term margins and profitability. In 2003, we wrote off the
remaining $0.3 million of a terminated prepaid contract for call validation query services that had been classified as an "Asset
Held for Sale." See "Risk Factors - Risks Relating to Our Business - A number of our customers individually account for
a large percentage of our revenues, and therefore the loss of one or more of these customers could harm our business,"
Employee Severance, We incurred $3, I million of employee severance expenses in 2004 as a result of the termination of
employees in conjunction with the downsizing and consolidation of our T-Netix and
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Evercom subsidiaries, resulting in the termination of 147 individuals. No comparable events occurred in 2003.
Loss on Debt Extinguishment. We recognized a $2.8 million loss on debt extinguishment in 2004 as a result of our
refinancing activities. There was no comparable loss on debt extinguishment in 2003.
Depreciation and Amortization Expenses. Depreciation and amortization expenses were $13.2 million in 2004 and
$11.9 million in 2003, a net increase of $1.3 million, 01' approximately 10.9%. Of this increase approximately $4.9 million
was due to our acquisition of Evercom coupled with the impact of purchase accounting adjustments to the book values of
both T-Netix and Evercom assets that were made upon their respective acquisition dates, offset by $1.6 million of
depreciation and amortization expense incurred by T-Netix for the 62-day period from January 1,2004 to March 2, 2004
prior to our acquisition of T-Netix on March 3, 2004.
Transaction Expenses. In connection with our acquisitions ofT-Netix and Evercom, we incurred transaction expenses of
$1.0 million in 2004. These transaction expenses consisted primarily of professional service fees and bonuses paid in
connection with the acquisitions ofT-Netix and Evercom, There were no comparable transaction expenses in 2003,
Interest and Other Expenses. Net. Interest and other expenses were $14.0 million in 2004 and $3.8 million in 2003. The
increase is primarily due to the incremental borrowings on our debt facilities, including the old notes and the senior
subordinated notes, to fund the T -Netix and Evercom acquisitions,
Income Tax Expense (Benefit). We repOited an income tax benefit of$12.7 million for the period Januaty 12,2004
(inception) through December 31, 2004, compared to an income tax expense of $2.7 million for the year ended December 31,
2003. The income tax benefit reported for 2004 was due to operating losses incurred during such period.
Reslllts o/Operations/or Ihe Years Ended December 31,2003 (Predecessor) Compared to December 31,2002
(Predecessor)
)
Total Revenues. Total revenues for the year ended December 31, 2003 decreased by 2% to $117.2 million from
$119.8 million for the year ended December 3 I, 2002. This decrease was attributable to a decline in telecommunications
services revenues of $6.9 million and in equipment sales and other of $3.6 million, offset partially by an increase in direct
call provisioning revenues of $7.9 million.
Direct call provisioning revenues for 2003 increased by 16% to $56.7 million from $48.8 million for 2002. This increase
was primarily due to T-Netix's having been awarded several new departments of corrections direct contracts in the latter half
of2002 and throughout 2003. Partially offsetting the increased call volume from new contracts was a decline in call volumes
related to T-Netix's use of improved technology to block certain call attempts that were identified as being unbillable 01'
likely uncollectible.
Telecommunications services revenues for 2003 decreased by 12% to $50.6 million, from $57.5 million for 2002. This
decrease was primarily due to the transition of certain departments of corrections contracts to a direct call provisioning basis,
the loss of contracts by telecommunications service provider customers and to a decline in call volumes related to T -Netix's
use of improved technology to block certain call attempts that were identified as being nnbillable or likely uncollectible.
Equipment sales and other revenues for 2003 decreased by 27% to $9.9 million from $13.5 million for 2002. This
decrease was primarily due to the favorable settlement in 2002 of celtain financial aspects of an agreement with Qwest which
resulted in a one-time $3.7 million payment in that year.
Operating costs. Total operating costs increased to $75.7 million for 2003, or 4%, from $72.7 million for 2002. The
increase was primarily due to an increase in direct call provisioning expenses of$4.6 million, offset partially by decreases in
telecommunications services costs of $1.1 million and costs of equipment sales and other of $0.5 million.
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Direct call provisioning expenses, including bad debt expenses, for 2003 increased by 10% to $51.4 million from
$46.8 million for 2002. This increase was due to increased call volumes resulting from the awarding of several departments
of corrections contracts in the latter half of2002, which were not reflected for the full year in 2002. Direct call provisioning
costs decreased, however, as a percentage of corresponding revenues from 96% for 2002 to 91 % for 2003. This decrease in
costs as a percentage of direct revenues was due primarily to a decrease in bad debt and communications expenses. The
decrease in bad debt expense reflects T-Netix's improved ability to block calls attempting to be processed through LECs
where T-Netix does not have billing arrangements. Beginning in the first quarter of2002, T-Netix began modifying its call
handling processes to the least creditworthy of these LEC customers. Combined with the deployment of new technology and
techniques to control unbillable and likely uncollectible calls, T-Netix has been successful in reducing its unbillable call
volume and overall bad debt expense as a percentage of applicable revenues to 21 % for 2003 compared to 27% for 2002.
Total costs of equipment sold and other were $4.2 million for 2003 compared to $4.7 million for 2002. Cost of equipment
sold and other as a percentage of applicable revenue increased to 43% of revenues for 2003 from 35% for 2002, primarily
due to a change in the revenue mix for equipment and other sales. The increase in costs as a percentage of applicable
revenues was primarily due to the favorable settlement of certain claims and liabilities associated with Qwest in 2002.
SG&A. SG&A expenses were $22.6 million for 2003 and $23.4 million for 2002. The decrease in 2003 was due primarily
to reductions in professional services fees, contract labor and communications expenses, offset partially by an increase in
non-recurring year-end personnel costs.
Research and Development Expenses. Research and development expenses were $3.6 million for 2003 compared to
$3.1 million for 2002. This increase was primarily due to an increase in consulting costs related to the acceleration of several
product development efforts.
)
impairment of Telecommunications Assets. In 2002, T-Netix recorded a $1.1 million impairment charge relating to a
disputed prepaid contract for call validation quely services. The $1.1 million impairment charge recorded during the fOUith
quarter of2002 reduced the carrying value of the asset to $0.9 million, which represented the expected net value to be
realized through the sale ofT-Netix's rights under the contract. In September 2003, T-Netix reached a preliminaty settlement
of this legal dispute and fUither reduced the value of the contract to $0.3 million by recognizing a $0.6 million impairment
charge in 2003. At the end of each of2003 and 2002, the prepaid contract was classified as an "Asset Held for Sale."
Depreciation and Amortization Expenses. Depreciation and amOltization expense for 2003 decreased by 2% to
$11.9 million from $12.1 million for 2002. Depreciation expense increased to $11.0 million for 2003 compared to
$10.9 million for 2002. Amoltization expenses declined to $0.9 million for 2003 compared to $1.2 million for 2002.
Patent Litigation Settlement, Net q( Expenses. In September 2003, T-Netix settled a patent infringement lawsuit with
Global Tel'Link Corporation for a one-time cash payment to T-Netix of$12.0 million and an ongoing royalty fee to be paid
to T-Netix over the remaining life of certain ofT-Netix's patents based on the number of telephone instl'Uments in service. TNetix incurred $2.1 million in related legal, professional services and license fees during each of 2003 and 2002.
Interest and Other Expenses, Net. Interest and other expense was $3.8 million in 2003 compared to $2.8 million in 2002.
Of this amount, interest expense was $3.5 million for 2003 and $2.4 million for 2002. The increase in 2003 was attributable
to an increase in the average amount of indebtedness outstanding, amOitization of debt financing costs and higher applicable
interest rates related to the credit facility obtained in November 2002. Other 2003 expenses included a $0.3 million equity
loss from unconsolidated affiliates.
Income Tax Expense. Income tax expense was $2.7 million for 2003 compared to $0.2 million for 2002 due primarily to
the increase in pre-tax income in 2003.
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Liquidity and Capital Resources
General
Our principal liquidity requirements are to service and repay our debt and meet our capital expenditure and operating
needs. We are significantly leveraged. As of December 31, 2004, we had $196.3 million in total debt outstanding before
considering $3.5 million of OlD on our second-priority senior secured notes and $2.9 million affair value attributable to
warrants issued in connection with our senior subordinated debt financing, both of which are reflected as discounts to our
outstanding long-term debt on our financial statements. As of December 31, 2004, we had unused capacity of $24.3 million
under our working capital credit facility and total stockholders' deficit of $22.8 million.
Cash Flows
The following table provides our cash flow data for the period JanualY 12,2004 (inception) to December 31,2004 for
Securus and for the fiscal years ended December 31,2003 and 2002, respectively, for the Predecessor:
Predecessor
Predecessor
Secllflls
Year Ended December3l 1
2002
2003
2004
(Dollars In thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
$
$
$
13,546
(6,389)
(1,620)
$
$
$
26,809
(6,792)
(3,696)
$
6,568
$ (213,066)
$ 208,377
Net cash provided by operating activities was $6.6 million for the period January 12,2004 (inception) to December 31,
2004, as compared to $26.8 million for the year ended December 31, 2003. Net cash used in operating activities was
$13.5 million for the year ended December 31, 2002. Net cash used in operating activities consisted primarily of operating
income before considering non-cash expenses, such as depreciation and amortization. Net cash from operating activities for
T-Netix was unusually high in 2003 as a result ofa $10 million settlement of patent litigation net of litigation costs.
)
Cash used in investing activities was $213.1 million for the period JanualY 12,2004 (inception) to December 31, 2004,
consisting primarily of $201.0 million of costs to acquire T-Netix and Evercom and $12.1 million of investments in
equipment to maintain and grow the direct call provisioning business, as compared to $6.8 million for the year ended
December 31, 2003. Cash used in investing activities was $6.4 million for the year ended December 31,2002.
Cash provided by financing activities was $208.4 million for the period JanualY 12, 2004 (inception) to December 31,
2004, consisting primarily of new borrowings to fund the Evercom and T-Netix acquisitions and to repay outstanding debt, as
compared to $3.7 million used in financing activities for the year ended December 31, 2003. Cash used in financing activities
was $1.6 million for the year ended December 31, 2002.
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 the next 12 months and for the foreseeable future. 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 discretionalY
capital expenditures, further
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reduce or eliminate discretionary selling, general and administrative costs, and sell or close certain of our operations.
Debt and other Obligations
Senior Notes. We have outstanding $154.0 million principal amount of second-priority senior secured notes due 20 II.
See "Description of the Exchange Notes."
Working Capital Facility. We have a working capital facility which provides for up to $30.0 million in revolving
availability, with a sublimit for leUers of credit. As of December 31, 2004, no amounts were drawn under our working capital
facility although we have outstanding approximately $5.7 million of letters of credit issued under the facility. See
"Description of Our Other Indebtedness - Working Capital Facility."
The obligations under our working capital facility are guaranteed on a secured, first priority basis by us and our
subsidiaries, as described under "Description of Our Other Indebtedness - Working Capital Facility." 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 our and our subsidiaries' tangible and intangible non-real estate properties and assets.
The credit agreement contains a number of customary affirmative and negative covenants that are subject to significant
exceptions. Subject to celtain 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 saleleaseback 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. The senior subordinated
notes are unsecured and subordinated to the notes and amounts owed under our working capital facility. Our obligations
under the senior subordinated notes are irrevocably and unconditionally guaranteed on a senior subordinated basis by our
subsidiaries, including T-Netix and Evercom.
)
The note purchase agreement governing the senior subordinated notes contains a number of customary affirmative and
negative covenants. Subject to ce11ain 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, repay pari passu our subordinated
indebtedness, sell assets, engage in transactions with affiliates, make loans, investments, guarantees or acquisitions, declare
dividends, redeem or repurchase equity interests 01' make other restricted payments, and engage in mergers, acquisitions,
asset sales and sale-leaseback transactions. The senior subordinated notes also include specified financial covenants
consistent with those contained in the indenture governing the notes. See "Description of Our Other Indebtedness - Senior
Subordinated Debt Financing."
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Capitlll Requirements
As of December 31, 2004, our contractual cash obligations and commitments on an aggregate basis are as follows:
Pa~ments
2006
2005
Long term debt( I)
Operating leases
Capital leases
Total contractual cash obligations and
commitments
•
,
$
$
Due
b~
Period
2009
2008
2007
,
Thereafter
(Dollars In thousands)
$
-'
$
$
1,964
27
1,903
1,347
1,026
1,991
$ 1,903
$ 1,347
$ 1,026
•
•
$
$
194,000'
5,187
$
199,187
896
$
896
Assumes no repurchases of notes or senior subordinated notes during such periods. Also does not give effect to
mandatory purchases of notes, if any, with excess cash flow. See "Description of the Notes -
Excess Cash Flow."
(I) Does not include any amounts that may be drawn under our working capital facility, which expires on September 9,
2009, or accmed interest under our long-term debt.
Snrely Bonds
In the ordinary course of business, we obtain for the benefit of our customers surety, performance and similar bonds. As
of December 31, 2004, we had outstanding approximately $5.7 million of these bonds which are backed by letters of credit
issued under our working capital facility.
Quantitative and Qualitative Disclosure about Market Risk
)
As of December 31, 2004, we had $196.3 million face amount of fixed-rate debt outstanding and approximately
$5.7 million ofletters of credit issued under our working capital facility. In addition, up to an additional $24.3 million of
variable rate borrowings were available under our working capital facility. The revolving loans under our working capital
facility exposes us to changes in interest rates as borrowings bear interest at floating rates based on LIBOR or the prime rate.
For fixed-rate debt, interest rate changes generally affect the fair market value but do not affect earnings or cash flows.
The fair market value of fixed-rate obligations is determined based on discounted cash flow analyses, using the rates and
maturities of these obligations compared to terms and rates currently available in the long-term markets. To the extent we
seek to purchase notes on the open market or othetwise, the prices we pay to purchase the notes will therefore be affected by
interest rates generally.
Critical Accounting Policies
A "critical accounting policy" is one that is both important to the portrayal ofa 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 ofmaUers that are inherently uncertain. The financial statements ofT-Netix and Evercom have been, and our
financial statements will be, prepared in accordance with generally accepted accounting principles in the United States, or
GAAP. The process of preparing financial statements in conformity with GAAP requires us to use estimates and assumptions
to determine certain of our assets, liabilities, revenues and expenses. We base these determinations upon the best information
available to us during the period in which we are accounting for our results. Out' estimates and assumptions could change
materially as conditions within and beyond our control change or as further information becomes available. Futther, these
estimates and assumptions are affected by
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management's application of accounting policies. Changes in our estimates are recorded in the period the change occurs. Our
critical accounting policies include, among others:
• revenue recognition and bad debt reserve estimates;
• goodwill and other intangible assets;
• accounting for income taxes; and
• acquisition-related assets and liabilities.
The following is a discussion of our critical accounting policies and the related management estimates and assumptions
necessary for determining the value of related assets or liabilities.
Revenue Recognition
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 (Inti Other IlIt(lIIgibie 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 ofFASB 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, Accountingfor
Impairment or Disposal of Long-Lived Assets. We review our unamortized intangible assets whenever events or changes in
circumstances indicate that the canying 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 canying 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.
Accoulltillg for Illcome TlIxes
We recognize deferred tax assets and liabilities for the expected future tax consequences of transactions and events.
Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in
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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.
Acqllisition 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 prope11ies, 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 oflong-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.
Recent Accounting Pronouncements
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS ISO establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify
a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 amends certain
other existing pronouncements. For mandatorily redeemable financial instruments of public entities, the requirements of
SFAS 150 must be applied in the first fiscal period beginning after June 15,2003. We have adopted this pronouncement. The
adoption of this pronouncement did not have a material effect on our consolidated financial statements.
)
In December 2003, the Financial Accounting Standard Board (UFASB") issued FASB interpretation No. 46 (revised
December 2003), Consolidation 0/ Variable Interest Entities, which addresses how a business enterprise should evaluate
whether it had controlling financial interest in an entity through means other than voting rights and accordingly should
consolidate the entity. The Company applies FIN 46R to variable interest in VIEs created after December 31, 2003. For
variable interests in VIEs created before January 1,2004, the Interpretation will be applied beginning January 1,2005. For
any VIE; that must be consolidated under FIN 46R that were created before January 1,2004, the assets, liabilities and
noncontrolling interest of the VIE initially would be measured at their carrying amounts with any difference between the net
amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an
accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be
used to measure the assets, liabilities and noncontrolling interest of the VIE. The adoption of this pronouncement did not
have material impact on our consolidated financial statements.
In December 2004, the Financial Accounting Standard Board (UFASB U) issued SFAS No. 123 (revised 2004), Share-
Based Payment, which addresses the accounting for transaction in which an entity exchanges its equity instruments for goods
or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment
transactions. This Statement is a revision to Statement No. 123 and supersedes APB Opinion No. 25, Accounting/or Stock
Issued to Employees, and its related implementation guidance. For nonpublic companies, this Statement will require
measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value
of the employee stock options. Incremental compensation costs arising from subsequent modifications of awards after the
grant date must be recognized. This Statement will be applicable to us as of Januaty 1,2006. We do not expect that the
adoption of this Statement will have a material impact on our consolidated financial statements.
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In December 2004, the FASB issued SFAS No. 151, Inventory Costs, which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Under this Statement, such items
will be recognized as current-period charges. In addition, the Statement requires that allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the production facilities. This Statement will be applicable to us
for inventOlY costs incurred on or after January 1, 2006. We do not expect that the adoption of this Statement will have a
material impact on our consolidated financial statements.
In December 2004, the FSAB issued SFAS No. 153, Exchange o(Nonmonetary Assets, which eliminates an exception in
APB No. 29 for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges
on nonmonetary assets that do not have commercial substance. This Statement will be applicable to us for nonmoneta.y asset
exchanges occurring on or after January 1,2006. We do not expect that the adoption of this Statement will have a material
impact on our consolidated financial statements.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), Accountingfor Conditional Asset Retirement
Obligations - an inte/pretation ofSFAS No. 143, which clarifies the term "conditional asset retirement obligation" used in
SFAS No. 143, Accountingfor Asset Retirement Obligations, and specifically when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is required to be adopted no later
than September 30, 2005. We do not expect the adoption of FIN 47 to have a material impact on our consolidated financial
statements.
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SELECTED CONSOLIDATED FINANCIAL DATA (In millions)
EVERCOM
The selected consolidated historical financial data presented below for and as of the end of each of the years in the fiveyear period ended December 31, 2003 are derived from the consolidated financial statements of Evercom, which financial
statements have been audited by Deloitte & Touche LLP, Evercom's independent auditors. The selected consolidated
historical financial data for and as of the end of the six-month periods ended June 30, 2003 and 2004 have been derived from
unaudited consolidated financial statements which, in the opinion of management, reflect all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the financial infOimation for such periods and as of such dates. The
consolidated historical results for the six-month periods ended June 30, 2003 and 2004 are not necessarily indicative of
results for a full fiscal year. The other financial data presented below for and as of the end of each of the years in the fiveyear period ended December 31,2003 and for the six-month periods ended June 30, 2003 and 2004 are derived from the
accounting records of Evercom. The following selected historical consolidated financial data should be read in conjunction
with the audited consolidated financial statements of Evercorn, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Evercom," and "Pro Forma Combined Financial Statements" and, in each case, the
related notes included elsewhere in this prospectus.
Six Months Ended
June 301
2003
2004
Year Ended December 31 1
-122L
~
--1QQL
~
--1lli!L
(Unaudited)
)
Consolidated Statement of Operations Data:
Operating revenues
Costs of revenues
Selling, general and administrative(l)
Depreciation and amortization(2)
Restructuring, transactions expenses and other
charges(3)
Other operating expenses(4)
Income from operations
Other Income (Expense):
Interest and other expenses, net
Income (loss) from continuing operations
before income taxes
Income tax expense
Cumulative effect of the change in accounting
principles
Net income (loss)
$236.8
182.2
17.2
28.7
$234.5
178.0
17.7
23.1
$245.2
195.7
21.6
22.1
$238.8
192.2
2l.!
18.8
$233.1
181.0
24.2
14.5
$ 115.1
91.2
10.5
7.8
$ 126.3
98.5
13.2
6.4
15.7
1.0
4.8
3.6
0.7
2.4
1.2
3.6
8.6
1.2
0.1
4.3
1.0
0.9
6.3
(0.1)
8.8
~
-.l!21)
~
-.illJ)
.---i21)
(6.3)
(1.9)
(l0.7)
0.4
(3.6)
0.6
(13.9)
0.1
(20.7)
(0.6)
0.1
(2.0)
4.4
0.6
$(1l.!)
$ (4.2)
$ (14.0)
~
$ (32.5)
1.5
$ (0.7)
$
(2.0)
Preferred stock dividends
Net income (loss) applicable to common
stockholders
$(12.4)
$ (5.6)
$ (15.5)
$ (34.0)
$ (0.8)
$
Other Financial Data(5):
Total Direct Provisioning revenues(6)
Total Solutions Services revenues(7)
Total Equipment Sales and Other revenues
$212.7
22.3
1.8
$211.0
22.5
1.0
$215.5
2l.!
8.6
$211.8
2l.!
5.9
$205.3
24.5
3.3
$ 101.9
12.0
1.2
1.4
1.3
1.5
0.1
$
3.8
$
3.8
0.1
(2.1)
$ !l0.8
14.0
1.5
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Six Months Ended
June 301
2003
2004
(Unaudited)
Year Ended December 31 1
Consolidated Cash Flow Data:
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Capital expenditures
Consolidated Balance Sheet Data (end of
period):
Cash and cash equivalents
Total current assets
Net property and equipment
Total assets
Total long-term debt (including current
portion)
Stockholders' (deficit) equity
~
-M!!!!L
--1lli!L
--1!!QL
-1lli!L
$ 15.9
(12.1)
(3.5)
8.4
$ 20.2
(12.2)
(5.8)
10.2
$ 11.0
(15.6)
0.6
13.7
$ 22.0
(9.1)
(12.8)
10.1
$ 16.3
(15.3)
(1.0)
13.7
$
$ 2.0
46.0
28.4
172.1
$ 4.2
49.4
27.1
162.5
$
$
$
$
166.5
(48.0)
172.0
(43.0)
0.2
40.0
29.3
153.9
163.5
(52.9)
0.2
37.2
23.4
127.4
151.9
(86.7)
0.3
47.0
23.5
133.1
40.4
42.4
4.8
(6.5)
1.6
6.5
0.2
43.0
22.7
128.3
40.5
41.0
$
$
12.0
(6.0)
(3.5)
6.3
2.7
49.8
24.2
135.9
36.9
47.1
(I) Includes research and development expense.
(2) Includes amOliization of acquired facility contracts.
(3) Represents one-time charges related to Evercom's exchange offer and reorganization completed in February 2003 and
expenses related to the transactions contemplated hereby that have been paid in cash or accrued in the six months ended
June 30, 2004. Those accrued transaction expenses will be paid upon consummation of the transactions and are included
in the sources and uses.
(4) Includes loss on debt extinguishment and compensation expense on restricted stock.
(5) Information presented in Other Financial Data derived from accounting records of Evercom which support the audited
)
statements.
(6) Includes revenues from Evercom's direct provisioning business, as well as Evel'com's Information Manager product and
their payphone operations.
(7) Includes revenues from Evercom's Solutions and Billing Service businesses.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - EVERCOM
Overview
Evercom provides inmate telecommunications services to local, county, state, federal and private correctional facilities in
the United States. Evercom derives its revenues directly from its operation of inmate telecommunications systems located in
correctional facilities in 43 states and the District of Columbia and indirectly by providing its Solutions and selling equipment
and services to RBOCs, LECs and IXCs as a subcontractor. As of March 31, 2004, Evercom served 1,958 correctional
facilities through its direct business and served an additional 393 customer sites in its Solutions business as a subcontractor.
Revenues
Evercom's direct telecommunications business consists of owning, operating and maintaining equipment in 1,958
primarily local and county correctional facilities as of March 31, 2004. Evercom enters into multi-year agreements (generally
three to five years) with correctional facilities, pursuant to which it serves as the exclusive provider of telecommunications
services to inmates within each facility. In exchange for the exclusive service rights. Evercom pays a percentage of its
revenues from the facility as a commission to that facility. Evercom primarily provides its selVices to local and county
correctional facilities, where commission rates tend to be lower. Evercom experienced overall average commissions of 40%
of direct provisioning revenues for 2003. Typically, Evercom installs and retains ownership of the telephones and related
equipment and provides additional services to correctional facilities that are tailored to the specialized needs of the
corrections industty and to the requirements of the individual correctional facility, such as call activity repolting and call
blocking. In its direct business, Evercom earns the full retail value of the call and pays corresponding line charges and
commissions; consequently. its net profit dollars are higher, but its net profit margin is lower. than in its Solutions business.
Evercom also offers its Solutions services and the sale of equipment to RBOCs, LECs and IXCs as customers to support
their telecommunications contracts with correctional facilities. 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 telecommunications provider and
Evercom accepts 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
Evercom's risk management system prior to allowing the call to be completed and also must be billed through Evercom's
proprietalY billing systems. Evercom's revenues from its Solutions service equal the difference between the face value ofthe
receivables purchased and the amount Evercom pays the RBOC, LEC or IXC customer for the discounted accounts
receivable. Because Evercom's revenues associated with its 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 Evercom's direct call provisioning business. In the Solutions business,
Evercom does not bear any of the costs of facility commissions, equipment, line charges or direct sales charges, but bears the
risk of un billable and uncollectible accounts receivable.
Evercom acquired FortuneLinX, Inc. in June 2001. FortuneLinX was a start-up provider of validation services to the
telecommunications industry. Although FortuneLinX technology was valuable and used in Evercom's bad debt management,
FOltuneLinX incurred operating losses and Evercom elected to assign all of its service contracts to a third party in January
2003.
Evercom has provided billing services to a major RBOC since 1998. These selvices were similar to the Solutions
services. This major RBOC decided to discontinue its inmate telecommunications business and, consequently, Evercom's
revenues from this customer gradually declined and, as of March 31, 2004, Evercom no longer serviced this major RBOC. In
2001, revenues were approximately $18.6 million as compared to approximately $3.6 million for the year ended
December 31, 2003.
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Evercom bills substantially all of its direct and Solutions revenues through LECs when it has an agreement with the LEC
in which the billed party is located, and utilizes third-party billing aggregators in certain rural and other areas when it does
not. During 2003, Evercom billed approximately 78% of its operating revenues and 89% of its collect call revenues through
LEC direct billing agreements. Direct billing through LECs is advantageous because it eliminates third-patty costs, expedites
the billing and collection process, increases collectibility and reduces write-offs.
Operating Expellses
Evercom's principal operating expenses in its direct call provisioning business consist of (i) telecommunications costs,
which include bad debt expense; (ii) commissions paid to correctional facilities, which are typically expressed as a
percentage of either gross, billed and collected, or net revenues; (iii) field operations and maintenance costs, which consist
primarily offield service on Evercom's installed base of inmate telephones; and (iv) SG&A.
Telecommunications Costs. The principal components of telecommunications costs are long distance transmission costs,
local access costs, third party billing costs, customer service costs and costs of unbillable and uncollectible accounts. Long
distance costs consist of charges for minutes afuse purchased from IXCs. Local access charges consist of monthly line and
usage charges paid 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 LEes, a per message or per minute usage rate based on the time and duration of the
call. Third-party billing charges consist of payments to LECs and other billing service providers for billing and collecting
revenues from called patties. Customer service costs represent either in-house or contracted customer service representatives
who handle questions and concerns and take payments from billed parties.
)
Bad Debt. Evercom accounts for bad debt as a cost of providing telecommunications in its direct call provisioning
business and Solutions business lines. Evercom accrues 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 patty is unable or unwilling to pay for the call. Evercom uses a proprietary, specialized billing and bad-debt
management system to integrate its billing with its call blocking, validation, and customer inquiIy procedures. Evercom seeks
to manage its higher risk revenues by proactively requiring cettain billed patties to prepay collect calls or be directly billed by
Evercom. This system utilizes multi-variable algorithms to minimize bad debt expense by adjusting Evercom's credit policies
and billing. For example, when unemployment rates are high, Evercom may decrease credit to less creditworthy billed parties
or require them to purchase prepaid calling time to receive inmate calls. This system, combined with the direct billing to
LECs, has enabled Evercom to realize what we believe to be industty-low bad debt margins since its inception in 1996 with
significant enhancements made to the system in 2002. 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 Evercom's bad debt management system
overcompensates for bad debt exposure by limiting credit to billed parties, Evercom's revenues and profitability may decline
as fewer calls are allowed to be made.
There is a significant lag time (averaging six to nine months) between the time a call is made and the time Evercom learns
from a LEC that the billed party has failed to pay for a call. During this period, Evercom may continue to extend credit to the
billed party prior to terminating service and thus increase exposure to bad debt. Additionally, because of the significant lag
time, deteriorating trends in collection rates may not be immediately visible and bad debt may therefore increase prior to
Evercom's ability to adjust its algorithms and reduce credit limits.
Facility Commissions. Evercom pays its direct customers a commission that is typically based on a percentage of its
revenues from each facility in its direct call provisioning business. Commissions are generally set for the duration of the
multi-year contract with the facility, and in some cases, are subject to monthly minimum amounts and up-front payments.
Commission rates are one of the primary bases of competition for obtaining and retaining facility contracts. Evercom's ability
to offer increasingly attractive
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commission rates to facilities depends on its ability to control its operating expenses. Commission rates are expected to
gradually increase as a percentage of revenues in the future.
Field Operations and Maintenance. Field operations and maintenance expenses consist of maintenance costs associated
with inmate phones and related equipment.
SG&A. SG&A expenses consist of corporate overhead and selling expenses, including marketing, legal, regulatory and
research and development costs.
Reorgllllizatioll
Evercom completed a reorganization of its capital structure in Februaty 2003, which affects year-to-year comparisons of
financial information. Pursuant to the restructuring, Evercom exchanged $1 12.9 million of its then outstanding senior notes
for 5,905,557 shares of common stock. As of June 30, 2004, $1.7 million principal amount of the subordinated notes
remained outstanding. In connection with the restructuring, Evercom incurred professional rees of $ 1.0 million in 2003 and
$3.6 million in 2002, an increase in stockholders equity of$129.8 million and a subsequent corresponding decrease in
interest expense.
Results of Operations
The following table sets forth, for the years ended December 3 I, 200 I, 2002 and 2003 and for the six months ended
June 30, 2003 and 2004, respectively, the results of operations of Evercom.
Year Ended December 31 z
2001
)
Operating Revenues
Direct call provisioning
Solutions
Equipment sales and other
Bitting Services
FortuneLinX
Operating Expenses:
Telecommunication costs
Facility commissions
Field operations and maintenance
Setting, general, and
administrative
Transaction expenses
Cost of equipment sales
Depreciation and impairment
Amortization of intangibles
Impairment of goodwill
Restmcturing expense
Loss on debt extinguishment
Compensation expense 011
issuance of restricted stock and
options
Gain on sale of fixed assets
Total operating expenses
Operating Income
$245,179
215,457
2,516
7,651
18,600
955
2002
(Dollars In thousands)
100% $238,835
88
211,772
I
10,809
1,563
3
8
10,251
0
4,440
Six Months Ended JUlie 301
2004
2003
(Unaudited)
2003
100% $233,096
100% $115,083
100% $126,281
205,297
20,896
3,111
3,631
161
88
9
I
2
0
101,882
9,780
1,065
2,195
161
89
8
I
2
0
110,824
13,880
1,477
100
88
38
35
4
45,932
40,527
4,013
40
35
3
47,946
45,457
4,231
38
36
3
II
102,651
81,867
7,552
42
33
3
102,008
82,161
6,978
43
3
88,854
81,539
8,304
21,558
9
21,119
9
24,201
10
10,492
9
3,651
11,065
11,059
I
5
5
1,055
\3,893
4,921
1,490
3,584
0
6
2
0
2
2,320
10,529
3,958
I
5
2
712
5,720
2,121
I
5
2
\3,185
1,055
808
4,724
1,647
0
1,176
3,453
0
I
1,174
1,055
140
0
(4l_0
224,470
96
8,626
4
58
0
891
110,749
4,334
96
4
119,945
6,336
(I22l_0
240,336
98
4,843
2
100%
89
5
0
4
2
34
(75Il_0
236,458
99
2,377
1
II
I
0
I
I
4
I
95
5
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Year Ended December 31,
2002
(Dollars In thousands)
2001
Other Income (Expense):
Interest expense, net
Other
Total other income (expense)
(Loss) Income before Income Taxes
and Cumulative Effect of the
Change in Accounting Principle
Income Tax Expense
Net (Loss) Income before Cumulative
Effect of the Change in Accounting
Principle
Cumulative Effect of the Change in
Accounting Principle
Net (Loss) Income
Six Months Ended June 301
2004
2003
2003
(Unaudited)
(18,713)
(8)
(23,061)
(10)
(9,242)
(4)
(18,713)
(8)
(23,061)
(10)
(9,242)
(4)
(13,870)
(85)
(6)
0
(20,684)
(7)
(9)
(616)
0
--...ill)
0
0
(13,955)
(6)
(20,691)
(9)
(662)
0
(11,792)
$(32,483)
~
$(13,955) .....®%
(14)%
$ (662)
=
0%
(6,325)
3
(6,322)
(5)
0
(5)
(1,988)
(2)
(I)
--(1,880)
--(I)
4,456
4
~-D.l
--- (1,988)
(1,880)
(2)
$(1,988) ---0%
3,811
$ 3,811
=
3
=
3%
Six MOlllhs Em/eli Jlllle 30,2004 Compltreli To Six MOlllhs EIU/eli Jlllle 30,2003
Operating Revenues. Evercom's operating revenues for the six months ended June 30, 2004 increased by 10% to
$126.3 million from $115.1 million for the corresponding period in 2003. The increase in operating revenues was primarily
due to increases in inmates selved through direct contracts and additional Solutions business ($13.0 million combined),
partially offset by a $2.1 million decline during the period due to a decision by a major RBOC billing services customer to
gradually exit the inmate telecommunications market and cease its relationship with Evercom. This RBOC is now completely
out of the revenue base. Revenues from equipment sales were $1.5 million and $1.1 million for the six months ended
June 30, 2004 and 2003, respectively.
)
Operaling Expenses. Total operating expenses for the six months ended June 30, 2004 increased by 8% to $119.9 million
from $110.7 million for the corresponding period in 2003. Operating expenses as a percentage of operating revenues
decreased 1% to 95% for the six months ended June 30, 2004 from 96% for the corresponding period in 2003. The decrease
in operating expenses as a percentage ofl'evenues is primarily due to the factors discussed below.
Telecommunication costs for the six months ended June 30, 2004 increased by 4% to $47.9 million from $45.9 million for
the corresponding period in 2003. Telecommunication costs represented 38% of operating revenues for the six months ended
June 30, 2004 and 40% of operating revenues for the corresponding period in 2003, a decrease of 2%. The percentage
decrease is primarily due to lower costs of uncollectible accounts as a result of new bad debt initiatives and declining long
distance costs related to new contracts negotiated with lXCs. These favorable variances were partially offset by cost increases
implemented by EverCOlll's third-party billing agents. Evercolll anticipates future cost increases from its third-party billing
agents.
Facility commissions for the six months ended June 30, 2004 increased by 12% to $45.5 million from $40.5 million for
the corresponding period in 2003. Facility commissions represented 36% of operating revenues for the six months ended
June 30, 2004 and 35% of operating revenues for the corresponding period in 2003, an increase of 1%. Commissions as a
percentage of revenues for Evercom's direct call provisioning increased to 41 % for the six months ended June 30, 2004 from
40% for the six months ended June 30, 2003. This increase is due to competition for new business and increased commission
rates on renewals. Commission rates are expected to gradually increase in the future based 011 prevailing competitive trends.
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Field operations and maintenance costs for the six months ended June 30, 2004 increased by 5% to $4.2 million from
$4.0 million for the corresponding period in 2003. Field operations and maintenance costs represented 3% of operating
revenues for the six months ended June 30, 2004 and 2003. The dollar increase is primarily due to incremental costs to
service direct business won from competitors.
'
SG&A for the six months ended June 30, 2004 increased by 26% to $13.2 million from $10.5 million for the
corresponding period in 2003. SG&A represented 10% of operating revenues for the six months ended June 30, 2004 and 9%
of operating revenues for the corresponding period in 2003, an increase of I %. The variance is primarily due to $0.6 million
in increased spending on research and development, $0.7 million of expenses relating to a specific litigation matter,
$0.5 million in increased employee bonus compensation and $0.9 million in increased sales and marketing and other costs to
support market share growth.
Transaction expenses, In connection with merger related activities, Evercom incurred transaction related expenses of
$1.1 million for the six months ended June 30, 2004. These transaction expenses consisted primarily of professional service
fees and other costs incurred, There were no comparable transaction expenses for the corresponding period in 2003.
Cost qf equipment sales for the six months ended June 30, 2004 increased by 13% to $0.8 million from $0.7 million for
the corresponding period in 2003 due to increased sales of equipment. Margins on the equipment business for the six months
ended June 30, 2004 were 45% compared to 33% for the corresponding period in 2003.
Depreciation and amortization costs for the six months ended June 30, 2004 decreased by 19% to $6.4 million from
$7.8 million for the corresponding period in 2003. Depreciation and am0l1ization costs represented 5% of operating revenues
for the six months ended June 30, 2004 and 7% of operating revenues for the corresponding period in 2003, a decrease of
2%. The decrease as a percentage of operating revenues is primarily due to depreciation and amortization expense associated
with the expiration and renewal of certain inmate facility contracts. Evercom amortizes acquired inmate facility contracts and
depreciates the corresponding equipment over each contract's remaining term at the acquisition date. As the contract terms
expire, the acquired inmate facility contracts become fully amortized and the equipment becomes fully depreciated, and as a
result, depreciation and amortization expense declines.
)
Restructuring Expense. Evercom incurred $1.2 million for professional fees during the six months ended June 30, 2003 as
a result of the two-month effort to close the exchange offer and reorganization. No comparable fee was incurred for the
corresponding period in 2004.
Compensation Expense on Issuance of Restricted Stock and Options. Evercom recognized non-cash compensation
expense of $0.9 million and $0.1 million for the six months ended June 30, 2004 and 2003, respectively, for restricted shares
and options issued to management.
Operating Income. Evercom's operating income for the six months ended June 30, 2004 increased by 47% to $6.3 million
from $4.3 million for the corresponding period in 2003, substantially due to the factors described above. Evercom's operating
income margin increased to 5% for the six months ended June 30, 2004 from 4% for the corresponding period in 2003,
primarily as a result of the same factors.
Interest Expense, Net. Interest expense, net, consisting of interest expense offset by interest income for the six months
ended June 30, 2004 decreased by 70% to $1.9 million from $6.3 million for the corresponding period in 2003. This decrease
is primarily a result ofthe exchange offer and reorganization that was completed in Febmary 2003.
Income Tax Expense. Income tax expense for the six months ended June 30, 2004 increased to $0.6 million from a
negligible amount for the corresponding period in 2003. The increase in income tax expense for the six months ended
June 30, 2004 was the result of our generating net income as compared to incurring a net loss for the con'esponding period in
2003.
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Year Elided December 31,2003 Compared To Year Elided December 31,2002
Operating Revenues. Evercom's operating revenues for 2003 decreased by 2% to $233.1 million from $238.8 million for
2002. The decrease in operating revenues was primarily due to Evercom's implementation of its new bad debt management
systems to reduce its bad debt expense. Evercom reduced its bad debt exposure to high-risk customers by reducing their
available credit and/or blocking their calls. As a result, Evercom's revenues declined for 2003 as compared to 2002.
Additionally, the billing services provided to a major RBOC customer that elected to discontinue its inmate
telecommunications business declined $6.6 million for 2003 as compared to 2002. Evercom's operating revenues also
declined by $4.3 million between 2003 and 2002 as a result of the assignment of all of FortuneLinX's service contracts to a
third party in January 2003. These revenue declines were partially offset by new accounts added in both the direct and
Solutions businesses as well as increased equipment sales. Revenues increased in the direct business as a result of net new
accounts won from competitors. Additionally, revenues increased by $10.1 million in the Solutions business as a result of
increased market penetration and the addition of new customers. Revenues also increased by $1.5 million as a result of higher
equipment sales.
Operating Expenses. Total operating expenses for 2003 decreased by 5% to $224.5 million from $236.5 million for 2002.
Operating expenses as a percentage of operating revenues decreased by 3% to 96% for 2003 from 99% for 2002. The'
decrease in operating expenses as a percentage of revenues is primarily due to factors discussed below:
Telecommunication costs in 2003 decreased by 13% to $88.9 million from $102.0 million for 2002. Telecommunication
costs represented 38% of operating revenues for 2003 and 43% of operating revenues in 2002, a decrease of 5%. The
percentage decrease is primarily due to a 3% decrease in bad debt expense as a result of Evercom implementing its new
billing and bad debt management system and a I % decrease in long distance charges as a result of new contracts negotiated
with lXCs. Additionally, Evercom received a $1.2 million refund of local access charges relating to prior years. These
favorable variances were partially offset by cost increases implemented by Evercom's third-party billing agents.
Facility commissions for 2003 decreased by I % to $81.5 million from $82.2 million for 2002. Facility commissions
represented 35% of operating revenues for 2003 and 34% for 2002, an increase of I%. Commission expense as a percentage
of revenues for Evercom's direct call provisioning was 40% and 39% for 2003 and 2002, respectively. This increase was due
)
to competition for new business and increased commission rates on renewals.
Field operations and maintenance costs for 2003 increased by 19% to $8.3 million from $7.0 million in 2002. Field
operations and maintenance costs represented 4% of operating revenues for 2003 and 3% of operating revenues for 2002, an
increase of 1%. The increase is due to increased costs to service direct business won from competitors, a $0.3 million writeoff of obsolete inventory and elimination of short-term cost-containment measures in 2002 that were implemented to
conserve cash while Evercom attempted to restructure its balance sheet.
SG&A for 2003 increased by 15% to $24.2 million from $21.1 million for 2002. SG&A represented 10% of operating
revenues for 2003 and 9% of operating revenues for 2002, an increase of I %. The dollar increase is primarily due to the
elimination of the shott-term cost-containment measures, which resulted in raises and higher incentive bonuses for personnel
and increased sales and marketing budgets to increase market share. Additionally, Evercom incurred $0.3 million of expenses
related to a specific litigation matter for 2003. SG&A also increased by $0.3 million as a result of a settlement with a state of
an ongoing excise tax matter and a $0.5 million accrual for a rating dispute with another state public utility commission.
These increases were partially offset by $1.0 million of savings of Evercom's assignment of all of FortuneLinX's service
contracts to a third party in January 2003. The increase in SG&A as a percentage of revenues is attributable to the
aforementioned matters and the decline in revenues resulting from the initiatives to reduce bad debt expense.
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Cost of equipment sales for 2003 increased by 109% to $2.3 million from $1.1 million for 2002 due to increased sales of
equipment. Margins on the equipment business for 2003 were 25% compared to 33% for 2002.
Total depreciation and amortization costs for 2003 decreased by 23% to $14.5 million from $18.8 million for 2002.
Depreciation and amo11ization costs represented 7% of operating revenues for 2003 and 8% of operating revenues for 2002, a
decrease of 1%. The decrease as a percentage of operating revenues is primarily due to depreciation and amortization
associated with the fully depreciated telephone equipment and expiration of inmate facility contracts.
Impairment of Intangibles. Due to a loss of a significant customer of FortuneLinX during 2002, Evercom recorded a
$1.5 million impairment loss against goodwill related to the acquisition of F011uneLinX. No comparable loss was recorded
for 2003.
Restructuring Expense. Evercom incurred $1.2 million for 2003 and $3.6 million for 2002 for professional fees in
connection with the exchange offer and reorganization consummated in FeblUaty 2003.
Loss on Debt Extinguishment. During 2003, Evercom refinanced its existing debt and wrote off$3.5 million of
unamortized loan costs.
Compensation Expense on Issuance of Restricted Stock and Options. During 2003, Evercom incurred $0.1 million of noncash compensation expense related to the issuance of restricted stock to one of its officers,
Gain on Sale ofFixed Assets. Gain on sale of fixed assets was a negligible amount for 2003 and was $0.8 million for
2002. The gain for 2002 was a result of two sales of used equipment to a Solutions customer.
Interest Expense, Net. Interest expense, net, consisting of interest expense offset by interest income, decreased
$13.9 million, or 60%, to $9.2 million for 2003 from $23.1 million for 2002. This decrease was a result ofthe exchange offer
and reorganization that was completed in Februaty 2003.
Income Tax Expense. Income tax expense was negligible in 2002 and 2003 as Evercom had negligible taxable income
and substantial income tax net operating losses.
)
Year Ended December 31,2002 Compared To Year EUffed December 31,2001
Operating Revenues. Evercom's operating revenues for 2002 decreased by 3% to $238.8 million from $245.2 million for
2001. The decrease in operating revenues was primarily due to Evercom's implementation of its new debt management
systems to reduce its bad debt expense. Evercom reduced its bad debt exposure to high-risk customers by reducing their
available credit and/or blocking their calls. As a result, Evercom's revenues declined for 2002 as compared to 2001.
Additionally, the billing services provided to a major RBOC customer that elected to discontinue its inmate
telecommunications business declined $8.3 million for 2002 as compared to 2001. Evercom's equipment sales revenue
declined by $6.1 million between 2002 and 2001 as a result of abnormally high equipment sales in 200 I to a customer who
had won two large state contracts. These revenue declines were partially offset by new accounts added in both the direct and
Solutions businesses as well as increased FOl'tuneLinX revenues. Revenues increased in the direct business as a result of net
new accounts won from competitors. Revenues increased by $8.3 million in the Solutions business as a result of increased
market penetration and the addition of new customers. FortuneLinX revenues increased by $3.5 million between 2002 and
200 I as a result of new customer additions.
Operating Expenses. Total operating expenses for 2002 decreased by 2% to $236.5 million from $240.3 million for 2001.
Operating expenses as a percentage of operating revenues increased by 1% to 99%
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for 2002 from 98% for 2001. The increase in operating expenses as a percentage of revenues is primarily due to factors
discussed below:
Telecommunication costs for 2002 decreased by 1% to $102.0 million from $102.7 million for 2001. Telecommunication
costs represented 43% of operating revenues for 2002 and 42% of operating revenues for 200 I, an increase of 1%. Excluding
the effect of equipment sales that do not have associated telecommunications costs, telecommunications costs represented
43% of operating revenues for both 2002 and 2001. These favorable variances were substantially offset by cost increases
implemented by Evercom's third-patty billing agents and by incremental direct costs of Evercom's newly acquired
FortuneLinX subsidiaty, and increased customer service costs related to the implementation of the bad debt initiatives.
Additionally, in 2001 Evercom received a one-time refund oflong distance costs from one of its carriers that pettained to
prior years.
Facility commissions for 2002 increased by less than I % to $82.2 million from $81.9 million for 2001. Facility
commissions represented 34% of operating revenues for 2002 and 33% for 200 I, an increase of 1%. Excluding the effect of
equipment sales that do not have associated facility commission costs, facility commissions represented 35% of operating
revenue for both 2002 and 200 I. Commission expense as a percentage of revenues for Evercom's direct call provisioning
was 39% and 38% for 2002 and 200 I, respectively. This increase was due to competition for new business and increased
commission rates on renewals.
Field operations and maintenance costs for 2002 decreased by 8% to $7.0 million from $7.6 million for 200 I. Field
operations and maintenance costs represented 3% of operating revenues for both 2002 and 200 I. This decrease was due to
short-term cost containment measures implemented to conserve cash while Evercom restructured its balance sheet.
SG&A for 2002 decreased by 2% to $21.1 million from $21.6 million for 200 I. SG&A represented 9% of operating
revenues for both 2002 and 200 I. SG&A declined primarily as a result of short-term cost containment measures implemented
to conserve cash while Evercom restructured its balance sheet. These cost containment measures were partially offset by
$0.4 million of SG&A associated with the FortuneLinX acquisition.
Cost of equipment sales for 2002 decreased by 70% to $1.1 million from $3.7 million for 200 I due to decreased sales of
equipment. Margins on the equipment business were 33% for 2002 as compared to 52% for 2001.
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Total depreciation and amortization costs for 2002 decreased by 15% to $18.8 million from $22.1 million for 2001.
Depreciation and amortization costs represented 8% of operating revenues for 2002 and 10% of operating revenues for 2001,
a decrease of 2%. The decrease as a percentage of operating revenues is primarily due to depreciation and amortization
associated with the fully depreciated telephone equipment and expiration of inmate facility contracts. These decreases were
offset by an increase in depreciation expense in 2002 as a result of the change in Evercom's estimate of the useful life of its
telephone equipment from 7.5 years to 5 years.
Impairment of Intangibles. Due to the loss of a significant customer of FortuneLinX during 2002, Evercom recorded a
$1.5 million impairment loss against goodwill related to the acquisition of FortuneLinX. No comparable loss was recorded
for 2001.
Restructuring Expense. Evercom incurred $3.6 million during 2002 for professional fees in connection with the exchange
offer and reorganization.
Loss on Debt Extinguishment. During 2001, Evercom refinanced its existing debt and wrote off $1.1 million of
unamortized loan costs.
Gain on Sale ofFixed Assets. Gain on sale of fixed assets for 2002 increased by 700% to $0.8 million from $0.1 million
for 2001 as a result of two sales of used equipment to a Solutions customer.
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Interest Expense, net. Interest expense, net, consisting of interest expense offset by interest income, for 2002 increased by
24% to $23.1 million from $18.7 million for 2001. The increase was due to the refinancing of Evercom's senior credit facility
in late 2001 coupled with higher interest rates resulting from defaults under its senior credit facility and senior notes.
Income Tax Expense. Income tax expense was negligible for both 2002 and 200 I as Evercom had negligible taxable
income and substantial net operating losses.
Cumulative Effect o/Change in Accounting Principle. In 2002 Evercom incurred $1 1.8 million for the cumulative effect
of a change in accounting principle as a result of the implementation of FASB 142.
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BUSINESS
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. We estimate that, as of December 31, 2004, we:
• derived direct and indirect revenues from over 3,375 correctional facilities in the United States and Canada;
• processed over 16 million calls per month; and
• provided services, directly and indirectly, to approximately l.l million inmates.
Our business consists of installing, operating, servicing and maintaining sophisticated call processing systems in
correctional facilities and providing related services. We generally 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 typically pay a negotiated commission to the correctional facility
generally based upon revenues generated by actual inmate telephone use. In addition, on larger contracts we have typically
pa11nered with regional bell operating companies, or RBOCs, local exchange carriers, or LEes, and interexchange carriers, or
IXCs, for which we have provided our equipment and back office suppOli, including validation, billing and collections
services, and charged a fee for such services. Based on the particular needs of the corrections industty 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 repoliing and call blocking.
The inmate telecommunications industty requires highly specialized systems and related services in order to address the
unique needs of the corrections industry. Security and public safety concerns require that correctional facilities have the
ability to control inmate access to telephones and certain telephone numbers and to monitor inmate telephone activity. In
addition, concerns regarding fraud and the credit quality of the parties billed for inmate telephone usage have led to the
development of billing and validation systems and procedures unique to this industly. Inmate telecommunications services in
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the United States are operated by a large and diverse group of service providers, including RBOCs, LECs and [XCs, such as
SBC Communications, MCI, and Sprint and independent public pay telephone and inmate telephone companies.
We estimate that the inmate telecommunications market opportunity for city, county, state and federal correctional
facilities in the United States is approximately $1.7 billion. We estimate that the total direct inmate telecommunications
market, excluding intra-industty services, is approximately $1.4 billion. Approximately 58% of this market is directly served
by RBOCs, LECs and IXCs, with the remainder of this market served by independent service providers. We believe that we
account for approximately 47% of the independent service provider market. Including activities to support our partners, we
estimate that our platforms provide services to approximately 1.1 million inmates in city, county, state and federal
correctional facilities.
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.
For the year ended December 31, 2004, our pro forma revenues were $364.1 million, of which 78% represented direct
call provisioning to correctional facilities, 20% represented the provision of Solutions, telecommunications and billing
services to RBOC, LEC and IXC partners and 2% represented equipment and hardware sales and other ancillary services.
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Industry Overview
The corrections industry has experienced sustained growth over the last decade as a result of societal and political trends.
Anti-crime legislation, limitations on parole, and spending authorizations for crime prevention and construction of additional
correctional facilities have contributed to this industty growth. The United States has one of the highest incarceration rates of
any country in the world. The U.S. Department of Justice estimates that as of June 30, 2003, there were approximately
2.1 million inmates housed in U.S. correctional facilities, or approximately one inmate for every 140 U.S. residents. Of this
total, approximately two-thirds were housed in federal and state prisons and approximately one-third was housed in city and
county correctional facilities.
According to U.S. Depal1ment of Justice statistics, the inmate popUlation in federal and state prisons, which generally
house inmates for longer terms than city and county facilities, increased from approximately $1.2 million at December 31,
1995 to approximately 1.4 million at June 30, 2004, representing an average annual growth rate of approximately 1.9%. The
inmate population in city and county facilities, which generally house inmates for terms of one year or less, increased from
approximately 500,000 at December 31, 1995 to approximately 700,000 at June 30, 2004, representing an average annual
growth rate of approximately 3.9%.
The inmate telecommunications industry requires specialized telecommunications systems and related services. Security
and public safety concerns associated with inmate telephone use require that correctional facilities have the ability to control
inmate access to telephones and to certain telephone numbers and to monitor inmate telephone activity. In addition, concerns
regarding fraud and the credit quality of the parties billed for inmate telephone usage have also led to the development of
systems and procedures unique to this industry.
Within the inmate telecommunications industty, companies compete for the right to serve as the exclusive provider of
inmate calling services within a particular correctional facility. Contracts may be awarded on a facility-by-facility basis, such
as for most city or county correctional systems as well as federal prison systems, which generally include small and medium-
sized facilities, or system-wide, such as for most state prison systems. Generally, contracts for federal facilities and state
systems are awarded pursuant to a competitive bidding process, while contracts for city and county facilities are awarded
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both through competitive bidding and negotiations with a single party. Contracts generally have multi-year terms and
typically contain renewal options. As part of the service contract, the service provider generally installs, operates, and
maintains all inmate telecommunications equipment. In exchange for the exclusive contract rights, the service provider pays a
commission to the operator of the correctional facility based upon inmate telephone use. These commissions have historically
been used by the facilities to support their law enforcement activities.
Competition
In the inmate telecommunications business, we compete with numerous independent providers of inmate telephone
systems, as well as RBOCs, LECs, and IXCs such as SBC Communications, MCI and Sprint. Many of our competitors are
larger, better capitalized and have significantly greater financial resources than we have. We believe that the principal
competitive factors in the inmate telecommunications industry are system features and functionality, system reliability and
service, the ability to customize inmate call processing systems to the specific needs of the particular correctional facility,
relationships with correctional facilities, rates of commissions paid to the correctional facilities, end-user rates, the ability to
identify and manage credit risks and bad debt and calling rates. We seek to compete for business on local, county, state and
federal levels, and in privately managed correctional facilities.
Historically, federal and state correctional facilities, which are generally bid on a system-wide basis, have been served by
RBOCs, large LECs and lXCs, which are able to leverage their brand and network infrastructure to serve these large, highvolume customers through sub-contracting with independent providers for their platform and back office operations. These
same service providers, however, have generally not focused to the same degree on the smaller city and county correctional
systems. Because of
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the variance in the level of service required by these relatively small facilities, service providers must maintain a more
extensive service infrastructure in order to compete within this portion of the corrections industty. Due to greater costs
associated with serving smaller facilities and their lower volume of telecommunications traffic, we believe that large service
providers have historically found the smaller facilities less attractive to serve. As a result, a significant portion of city and
county correctional facilities are served by independent inmate telephone and public pay telephone companies. We believe
that the market for city and county correctional facilities is fragmented and is occupied by a number of competing service
providers.
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 cOlTections related products
(including our own telecommunications service provider customers) that market their products to our same customer base.
Our Strengths
Significant Revenues Under Contract with High Renewal Rates
Correctional facilities typically enter into fixed-term with us for an a contract life of approximately three to five years.
For the year ended December 31, 2004, approximately 90% of our pro forma revenues were under long-term contract. As of
December 31, 2004, the average remaining life of our fixed-term was more than two years. Further, we have shown
consistent success in renewing our contmcts when they come up for renewal. During the year ended December 31, 2004, we
renewed contracts representing an average of approximately 94% of our annualized direct revenues coming up for renewal
during such period. We believe that we are able to achieve high renewal rates as a result of our providing high quality service
as well as our customers' desire to maintain stability in their inmate telecommunications systems. Additionally, the recurring
nature and stability of our customer base provides for a high level of visibility in our future revenues.
Positive Corrections Industry DYllamics
)
The corrections industry has experienced consistent growth over the past decade as a result of societq.l and political
trends. The number of inmates incarcerated in federal and state prisons and in city and county correctional facilities increased
from approximately 1.7 million at December 31, 1995 to approximately 2.1 million at June 30, 2004, representing an annual
growth rate of approximately 2.6%. Incarceration rates have historically risen over the last 10 years to approximately 700
inmates per 100,000 residents. We expect the growth in the corrections industty to continue, based on the continuing
enactment of anti-crime legislation and limitations on parole and spending authorizations for crime prevention. Accordingly,
we believe that our target market will continue to expand, affording us more opportunities for growth.
Indllstry Leading Bad Debt Systems
We believe that we are among the industry leaders in limiting our exposure to bad debt expense, which is a leading risk to
operating margins in the inmate telecommunications business. In particular, we believe that Evercom is a leading provider of
systems to manage bad debt, as evidenced by the growth of its Solutions business, through which Evercom provides its bad
debt management and other telecommunications products and services to RBOCs, LECs and IXCs to support their direct
contracts with corrections facilities. Evercom's Solutions business grew from $2.5 million in revenues in 2001 to
approximately $28.8 million in revenues during the year ended December 31, 2004. Over the past two years, both T -Netix
and Evercom have implemented initiatives to enhance their systems and reduce their exposure to bad debt. These initiatives
include improved identification of unbillable numbers, which represent calls completed where there is no billing address for
the called number, improved identification and management of billed parties that represent significant credit risks, increased
levels of prepaid revenues, and improved systems to monitor our risks and policies on a real-time basis. Since the
implementation of
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its enhanced bad debt initiatives, T -Netix decreased its bad debt expense as a percentage of direct provisioning revenues from
approximately 31 % for the first quarter of 2002 to approximately 16% for the year ended December 31, 2004. Similarly,
since the inception of its bad debt initiatives, Evercom decreased its direct provisioning bad debt expense as a percentage of
direct provisioning revenues from 20% for the year ended December 31, 2001 to approximately 13% for the year ended
December 31, 2004.
Diverse Cus/olller Base with Broad Revellue Opportunities
We serve a broad range of correctional facilities with T-Netix historically serving medium to large-sized facilities and
Evercom historically serving small to medium-sized facilities. We believe that our acquisition of Evercom provides us with a
compiementalY and diverse customer base that allows us to leverage our infrastructure, acquire more data on customer usage
patterns, optimize our systems effectively and provide us with a greater ability to cross-sell our services. Additionally, we
believe that such a diverse customer base will likely minimize our exposure to customer concentration, as no customer
accounted for more than 10% of our pro forma 2004 revenues and our five largest customers accounted for approximately
24% of our pro forma 2004 revenues.
Demonstrated Leadership in Prot/llct InnoVlltion
)
Our focus on product innovation has allowed us to develop a broad set of products and services to provide a "one-stop"
solution for our customers. Our customers rank technology as one of the top reasons for choosing a provider. We believe that
we hold one of the broadest intellectual property portfolios in the inmate telecommunications industty, with 80 patents and
patent applications owned or exclusively licensed that support our proprietaty product offerings and selvices. We fUlther
believe that our key products, such as automated operators, three-way calling detection, bad debt management, and revenue
generation solutions give us a competitive advantage in this industty. For example, recently we settled a patent infringement
claim relating to several patents, including our three-way calling detection product, pursuant to which we received a one-time
cash payment of$12.0 million from Schlumberger Inc. 's Global Tel'Link business and will receive an ongoing royalty over
the remaining life of our affected patents. In addition, we sell our inmate call processing systems to other telecommunications
services providers. As a result, we estimate that we are the leading inmate platform provider in the United States, either
directly through us or indirectly through our telecommunications service provider partners.
Experienced Management Team
As a result of our historical acquisitions, we have assembled one of the leading management teams in the industry. Our
management team has an average of approximately 17 years of experience in the telecommunications industty and has
demonstrated the ability to deliver profitable growth while providing high levels of customer satisfaction. Specifically, our
management team has:
• particular expertise in providing superior quality of service to state, county and local correctional facilities;
• a focus on technology development and product innovation; and
• a proven record of successful business integrations, including more than 13 acquisitions.
Business Strategy
Our primary business objectives are to be a high-quality, cost-efficient provider of telecommunications services to
correctional facilities in the United States and Canada and to continue to expand our installed
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base of inmate call processing systems and our provision of products and services. We have developed and are implementing
the following strategies to meet these objectives:
Continlle to Target the Corrections Industry with Specialized Prodllcts and Services
OUf strategy is to retain our focus, intensity and customer service on the corrections industry to enhance relationships
with existing clients and to attract new customers. We seek to increase cash flow by providing new and innovative products
and services to new and existing customers. We intend to grow our business by working closely with our partners to SUppOlt
their sales, appropriately converting accounts to direct customers to obtain higher gross margin dollars, continuing to win
business from our competitors, enhancing customer service and obtaining greater opportunities to sell and cross-sell
additional products and services directly to end-users. Moreover, in light of the recent trend of large dominant industry
telecommunications carriers exiting the direct inmate telecommunications business, we will seek to take advantage of
opportunities to procure agreements to provide direct call provisioning services to those correctional facilities currently
serviced by such large carriers. We will seek to leverage our infrastructure and databases in order to address the current and
future needs of correctional facilities for additional law enforcement activities and services. As homeland security issues
increase and more inmates move among facilities, we intend to expand our business by offering products and services to meet
the changing and increasing needs of the industty. See "Risk Factors - Risks Relating to Our Business - A number of our
customers individually account for a large percentage of our revenues, and therefore the loss of one or more of these
customers could harm our business" and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -Industty Trends."
Refille Credit Mallagemellt Systems
Our operating strategy is to prudently manage and ultimately lower our bad debt exposure by continuously enhancing our
systems and credit management controls in order to maximize earnings. We continually seek to refine our bad debt
management systems to predict which billed parties present the highest credit risk and redirect such billed parties to our
direct billing or prepayment options. We continuously monitor our experience with billed parties and credit indicators, as
well as other general economic conditions, to adjust credit availability and/or block calls. Evercom has implemented an
)
advanced billing and bad debt management system, which uses proprietary, multi-variable algorithms to monitor exposure to
bad debt, that we believe leads the industry in reducing operating costs and affords us a competitive advantage. We plan to
leverage Evercom's advanced patent pending bad debt management system to further improve T-Netix's bad debt
management. Additionally, we plan to leverage the data generated by having a broader customer base to further enhance our
algorithms and analyses. We also intend to generate additional revenues by offering our bad debt management systems to our
telecommunications services provider partners through our Solutions business.
Capitalize IIpon Economies of Scale
We believe that the combination ofT-Netix and Evercom provides us with an opportunity to improve our operating
efficiencies. We are in the process of consolidating all of the departments in both companies, which we believe will yield
substantial annual cost savings once all consolidation activities are completed, which we expect to occur duriug 2005 and
which will have a full year effect in fiscal 2006. We are redesigning the system architecture of our networks to enable us to
provide more specialized products from a single system and realize long-term reductions in overall capital expenditures. In
addition, we believe that our existing infrastructure and our planned enhancements to that infrastructure will allow us to
operate new and acquired inmate call processing volumes in our existing markets without significant incremental field
service, collection, and other general and administrative costs. We also plan to continue to seek cost savings both internally
and from our vendors as we grow our business.
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Improve Billing ami Collections by Utilizing Direct Billing Agreemellts with LECs
A principal competitive advantage in our industry is the ability to bill called parties directly through LECs. Direct billing
arrangements with LECs can be advantageous because they eliminate the costs associated with third-patty billing
aggregators, expedite the billing and collection process, increase collectibility and reduce account charge-offs. Third-party
billing agreements are utilized by a majority of independent inmate telecommunications companies, including T-Netix.
During 2004, Evercom billed approximately 74% of its operating revenues and 89% of its collect call revenues through LEC
direct billing agreements. We will seek to leverage these agreements by expanding our relationships to include T-Netix's
business in an effort to enhance its operating results.
Primary Sources of Revenues
The following chart summarizes the primary sources of our pro forma revenues for the year ended December 31, 2004.
Revenue Source
% of Total
PI'O Forma
Revenues
Direct Call Provisioning
Description
Direct call provisioning services through multiyear contracts directly to local correctional
facilities as well as large county jails and state
78%
Telecommunications Services
10%
Solutions and Billing Services
)
10%
Equipment and Other
2%
departments of corrections facilities.
Telecommunications services (equipment, security
enhanced call processing, validation and customer
service and support) to corrections facilities
through contracts with some of the world's leading
communication service providers, including
Verizon, AT&T, SBC Communications and
Qwest.
Solutions and billing services (validation, fraud
management and billing and collection services) to
third parties including some of the world's largest
communication service providers.
Equipment and other sales of inmate calling and
digital recording systems to telecommunications
service providers.
Direct Cull Provisioning
We provide inmate telecommunications services directly as a state certificated telecommunications provider to
correctional facilities. In a typical arrangement, we operate under a site-specific, exclusive contract, generally for a period of
three to five years. We provide the equipment, security-enhanced call processing, validation, and customer service and
support directly to the facility. We then bill the calls on the billed party's LEC bill or, in some cases, using the services of
third party aggregators. Direct call provisioning revenues are substantially higher than that of our telecommunications
services because we receive the entire retail value of the collect call. In our direct call provisioning business, we are
responsible for customer commissions, line charges and other operating costs, including billing and bad debt costs.
Consequently our gross profit dollars are higher but our gross margins are lower as compared to our telecommunications
services and Solutions business. During 2004 we pursued a strategy to selectively convert accounts from telecommunications
services to a direct call provisioning basis. In providing direct call provisioning services, we earn more revenues and gross
profit dollars per call and have direct access to the customer. Direct access to the customer provides us with a greater
opportunity to sell and cross-sell
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additional services and to provide "one-stop shopping" for all of their inmate telecommunication needs, including inmate
management systems, digital recording systems, security and other ancillary products. In addition, a customer receives better
customer service when we have a direct contract because the customer's needs are not filtered through a third patty. We
believe that our customers select our direct call provisioning services because of our industry leading technology, the depth
and breadth of products that minimize complaints from billed parties and inmates and are user friendly, the high quality of
OUr customer services and our competitive commission structure. This strategy has resulted in an increase in our direct call
provisioning revenues with a corresponding decline in our telecommunications and equipment sales revenues.
Solutions
Our Solutions business consists of offering inmate telecommunications products and services, including validation, bad
debt management and billing services, to RBOCs, LECs and IXCs to SUppOlt their telecommunications contracts with larger
county, state and federal correctional facilities. In this business, we enter into either long-term or evergreen contracts with the
RBOCs, LECs and IXCs that are voluntarily telminable by either party on 30 to 90 days' notice, pursuant to which we will
typically purchase accounts receivable generated from calls placed by inmates in correctional facilities and accept
responsibility for call validation, uncollectible accounts and billing and collections costs, with no recourse to the customer.
These purchased receivables are processed and validated through our risk management system prior to allowing the call to be
completed and are also typically processed through our proprietalY systems and billed through LECs.
Our revenues from the Solutions service equal the difference between the face value of the receivables purchased and the
amount we pay the customer for the discounted accounts receivable. Because our revenues associated with the 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 other direct sales charges, but bear the risk of unbillable and uncollectible accounts receivable. See "Risk
Factors - Risks Relating to Our Business - A number of our customers individually account for a large percentage of our
revenues, and therefore the loss of one or more of these customers could harm our business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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TeiecOlllllllwicatiolls Services
In our telecommunications services business, we have typically partnered with RBOCs, LECs and IXCs on larger
contracts where the working capital requirements to win the contract were significant. For example, some of the larger county
and state depa11ments of corrections inmate telecommunications contracts often require multi-million dollar up-front
payments, surety bonds andlor guaranteed commissions. In such cases, we provide at our expense some or all of our
equipment, technology, security enhanced call processing, call validation and other services andlor customer service through
the provider, rather than directly to the facility. Our telecommunications service customer does the billing and we either share
the revenues or receive a prescribed fee from them for each call completed, but have no exposure to bad debt. We do,
however, incur typical capital expenditures related to installing our equipment and technology at the corrections facility. We
receive additional fees for validating the phone numbers dialed by inmates, digital recording systems, voice security and
other services we provide. By partnering with some of the largest industry participants on capital intensive, larger contracts,
we increase our likelihood of participating in the contract, which increases our market penetration, leverages our
infrastructure and generates additional income. In light of the recent industry trend of large dominant industty
telecommunications carriers exiting the business, we anticipate the decline of revenues generated from the
telecommunications services business. See "Risk Factors - Risks Relating to OUf Business - A number of our customers
individually account for a large percentage of our revenues, and therefore the loss of one
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or more of these customers could harm our business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -
Industry Trends."
Equipment Sales
In addition to our direct call provisioning, telecommunications selvices and Solutions businesses, we also sell our
products, including our inmate calling applications and facility management products, to a limited number of
telecommunications service provider customers. We elect to sell these products and services directly to the service providers
when we do not have the opportunity to provide direct call provisioning, telecommunications or Solutions services.
eustolllers
We have direct contracts to provide inmate telecommunications services on either an exclusive basis or jointly with
another provider to approximately 2,400 correctional facilities ranging in size from small municipal jails to large, state-
operated facilities, as well as other types of confinement facilities, including juvenile detention centers, private jails and
halfway houses. Historically, T-Netix has focused on larger correctional facilities where it believes its proprietary technology
gives it a competitive advantage in obtaining the contract and where the revenue potential is larger. Additionally, T-Netix
seeks to leverage its infrastructure and support functions in larger facilities because of the greater opportunities to sell
ancillOlY products and services, such as voice security and its inmate calling and digital recording systems.
Most of our direct call provisioning contracts have multi-year terms (generally three to five years) and typically contain
renewal options while our Solutions contracts generally have shorter terms. We often seek to negotiate extensions of our
contracts before the end of their stated terms. For the year ended December 31, 2004, we retained more than 94% of our
beginning-of-period direct customer revenue base through contract extensions or renewals. Many of our contracts provide for
automatic renewal unless terminated by written notice within a specified period of time before the end of the current term.
Direct Cllstomers
)
We provide our direct call provisioning products and services directly to correctional facilities. For the year ended
December 31, 2004, 78% of our pro forma revenues were generated from direct contracts with correctional facilities as the
exclusive provider of telecommunications services to inmates within the facility. During 2004, we attempted, on a selective
basis, to convert accounts from telecommunications services to a direct call provisioning basis, because in providing direct
call provisioning services we earn more revenues and gross profit dollars per call and have direct access to the customer. No
direct customer accounted for more than 10% of our total pro forma direct call provisioning revenues for the year ended
December 31, 2004.
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Telecolllmullications and So/utiolls Service Provider Customers
We provide our products and services to telecommunications and Solutions servlce providers such as AT&T, Vel'izon,
Public Communications Services (PCS), SBC Communications and Sprint, among other call providers. For the year ended
December 31, 2004, 20% of our total pro forma 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 year ended December 31, 2004:
Approximate % of Total
Solutions Services
Customer
AT&T'
Revenues
Approximate % of Tota)
Telecommunications
Services Revenues
18%
36%
58%
Verizon*
Public Communications
Services (PCS)
SBC Communications
22%
Sprint
FSH Communications
18%
*
Contract Expiration Date**
March I, 2008
December 19,2006
Month-to-Month
August 31, 2005, subject to
25%
3%
16%
annual renewals
Month-to-Month
Month-to-Month
Have announced plans to exit the inmate telecommunications industry in the near future. See "Risk Factors - Risks
Relating to Our Business -
A number of our cllstomers individually account for a large percentage of our revenues, and
therefore the loss of one 01' more of these customers could harm our business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Indusl1y Trends."
** Represents expiration dates for master customer contracts. In some cases, our subcontracts with such customers for
cel1ain correctional facilities may extend beyond the term ofthe related master contract, in which case our agreements
with these customers generally extend through the term of the subcontract.
)
No other telecommunications and Solutions service provider customer accounted for more than 10% of our total pro
forma telecommunications and Solutions service provider revenues for the year ended December 31, 2004.
Marketing
We seek new direct contracts by participating in competitive bidding processes and by negotiating directly with the
individuals or entities responsible for operating correctional facilities. We market our inmate telecommunications services
through a sales staff largely made up of former law enforcement officials and others with experience in the corrections and
telecommunications industries who understand the specialized needs of correctional facilities. Our marketing strategy
emphasizes our specialized products and services, our proprietary technology, our knowledge, experience and reputation in
the inmate telecommunications industry and our high level of service. We believe we have one of the largest national sales
forces dedicated to serving the inmate telecommunications indusl1y. We rely on the experience and background of our sales
staff to effectively communicate our capabilities to both existing and potential customers. In addition to conducting in-person
sales calls to the operators of correctional facilities, we participate in trade shows and are active in local law enforcement
associations.
T-Netix has historically focused its direct marketing efforts on state and larger county correctional facilities where there
are more inmates who are incarcerated for longer periods. These facilities generally have greater requirements for additional
and more sophisticated products and services. The greater call volumes generated at these large facilities support the
implementation and service ofT-Netix's products. Because bidding for contracts to serve state and larger county correctional
facilities is generally more competitive than bidding processes for city and smaller county facilities, T-Netix pays higher
commission rates on a relative basis for these facilities. Evercom, on the other hand, has generally focused its
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marketing efforts on city and county correctional facilities. City and county facilities house inmates for shorter durations than
federal and state prisons and generally have higher inmate call volumes. In addition, because bidding for contracts to serve
city and county correctional facilities is generally less competitive than that for state and federal facilities, Evercom pays
relatively lower commission rates for these facilities. However, because of their smaller size and limited resources, these
facilities typically require a greater service effort per revenue dollar than federal and state facilities.
Principal Products and Services
We believe that the specialized products and services we offer differentiate us from our competitors. Our products and
services are designed to streamline operation of corrections facilities and empower administrators with administrative,
investigative and economic capabilities. Our principal specialized products and services include:
Inmate Calling System
The Inmate Calling System, or ICS, is T-Netix's primaty product offering. ICS is designed and built expressly for the
inmate calling marketplace and is utilized by T-Netix at each correctional facility that uses its inmate calling services. ICS is
a patented software system that detects three-way calling, prevents connections to restricted numbers, validates the caller and
authorizes or blocks calls to the billed party. ICS is easily adaptable to most additional security features that correctional
facilities seek in their requests for proposals, or RFPs. T-Netix primarily utilizes Digital ComBridge, a scalable telephony
system, as the platfOlm for ICS. ComBridge provides call processing that can be customized to meet varying requirements
and is suppOlted by applications that provide recording, monitoring, and system administration functions.
Call Manager
The flagship product of Evercom's system, this fully integrated inmate calling applications manager offers innovative
feature applications that give facilities extensive administrative and investigative control. The system offers networking
functions, system and application stability, heightened security features, user auditing, and password-specific utilities. The
system's innovative investigative tools have proven to be an invaluable resource to its customers nationwide.
)
SECUREvoice™
ICS utilizes the SECUREvoice Inmate Telecommunications Identification Service, or ITIS. ITIS is a powerful method of
authentication of a person's identity. Compared to other techniques, it is quick, non-intrusive and cost-effective. ITIS is based
on the fact that each person's voice contains a unique signature, which can be accurately validated and cannot be imitated.
The ITIS system has been deployed for over two years in local, county and state correctional institutions identifying over
50,000 inmates. ITIS makes it practical for all correctional facilities to assign PIN numbers to inmates. Currently, in high
turnover institutions the cost and effort required to assign PIN numbers to all inmates and monitor their use is often too great.
In other facilities that do have call restricted lists limiting the individuals each inmate may call, the ability to eliminate those
individual lists may have a positive impact on the number of calls from the facility. This is driven by the facility's ability to
reliably identify the inmate making a call with a verified voiceprint, allowing facility administrators to properly monitor and
track improper inmate communications behavior. In addition to potentially allowing more calls to be made, this service
feature is provided at no expense to correctional facilities. It is a high margin product because the operating costs are mostly
incremental with the greatest element to implementing this technology based on intellectual property to which T-Netix has
access.
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Prepaid Calling Programs
Inmate telecommunications systems customarily allow calls to be placed as collect only, without the involvement of a
live operator. Our prepaid calling offerings provide flexibility in the utilization of called patty prepaid calling and inmate
prepaid calling. Our prepaid calling systems offer a paperless, card-free prepaid calling solution for both the called parties
and the inmates. The prepaid account is managed by either the called party's phone number or the inmate's PIN. Our Prepaid
Calling platform allows correctional facilities to offer inmate families an alternative to collect calls and acts as a cash
management tool to help those families budget more effectively for calls. Additionally, because prepayment virtually
eliminates bad debt, fewer calls are blocked and correctional facilities recognize the financial benefits of higher call volumes.
We also continue to provide paper prepaid calling cards for facilities that desire a fast and simple calling solution for their
inmates. These are sold to the inmates out of the facility's commissaty service. The cards may be used for both domestic and
international calling. Many of our competitors provide similar prepaid services.
Correctional Billing Services (CBS)
We are able to provide on a nationwide basis a Customer Care and Billing Center dedicated to the inmate's friends and
family. CBS, a division of Evercom, provides dedicated customer service to the called patty 24 hours per day, seven days per
week, 365 days per year. CBS also offers multiple payment options including prepayment of charges, remittance directly to
the local phone company, credit card payments and check by phone.
Intelligelll Call ami Billillg Mallagement SOllltioll (ICBS)
)
We have developed Intelligent Call and Billing Management Solution, or ICBS, a proprietary call validation and billing
technology that is designed to minimize bad debt expense. Our Solutions services include ICBS technology. Specifically,
ICBS allows us to rapidly identify and prevent or block collect calls from being connected to potential non-paying call
recipients through a continuously growing and improving database. As an enhancement to revenues, the blocked call
recipient is notified that an inmate has attempted contact and, upon request, can receive inmate calls through various prepaid
methods. We believe that our technology provides us with generally lower bad debt expense as a percentage of revenues in
the industty, while offering the broadest, most sophisticated suite of payment method alternatives in the industty.
Facility M(lllllger
Our Facility Manager is comprised of three specific applications - Detention Management System (DMS), Records
Management System (RMS), and Computer-Aided Dispatch (CAD). These applications provide authorized personnel the
tools to track, investigate, record, report, and most importantly, efficiently manage a correctional facility's day-ta-day
activities. The system's three-tiered focus on program functionality, platform stability and system usability is clearly evident
in every aspect of the Facility Manager application.
Illtelligellt Techllologies Architectllre
We are developing the Intelligent Technologies Architecture suite of applications, which will provide a wide array of
solutions-based, technologically advanced, integrated applications for the criminal justice community. The Intelligent
Technologies Architecture applications are being designed to provide solutions targeted at the identified needs of the criminal
justice community.
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Systems and Equipment
We currently utilize automated operator calling systems that consist of third-party and intemally developed software
applications installed on specialized equipment. Our specialized systems limit inmates to collect calls or prepaid calls,
validate and verify the payment history of each number dialed for billing purposes, and confirm that the destination number
has not been blocked. Ifthe number is valid and has not been blocked, the system automatically requests the inmate's name,
records the inmate's response, and waits for the called party to answer. When the call is answered the system informs the
called party that there is a collect call, plays back the name of the inmate in the inmate's voice, and instructs the called party
to accept or reject the call. The system completes calls that have been accepted by the called party.
The system automatically records the details of each call (i.e., the number called and the length of the call) and transmits
the data to a centralized billing center for bill processing and input into our call activity database. Our database of telephone
numbers and call activity allows us to provide extensive call activity reports to the correctional facilities and to law
enforcement authorities, in addition to identifying numbers appropriate for blocking, thus helping to reduce the number of
uncollectible calls. These include reports that can further assist law enforcement authorities in connection with ongoing
investigations. We believe this database offers competitive advantages, particularly within states in which we have achieved
substantial market penetration.
Maintenance, Service and Support Infrastructure
We provide and install telephone systems in correctional facilities at no cost to the facility and generally perform all
maintenance activities. We maintain a geographically dispersed staff of trained field service technicians and independent
contractors, which allows us to respond quickly to service interruptions and perform on-site repairs and maintenance. In
addition, we have the ability to make some repairs remotely through electronic communication with the installed equipment
without the need of an on-site service call. We believe that system reliability and service quality are particularly important in
the inmate telecommunications industry because of the potential for disruptions among inmates if telephone service remains
unavailable for extended periods.
)
Billing and Collection
We use LEe direct billing agreements and third-party clearinghouse billing agreements to bill and collect phone charges.
Under both direct billing agreements and clearinghouse agreements, the LEC includes collect call charges for our services on
the local telephone bill sent to the recipient of the inmate collect call. We generally receive payment from the LEe for such
calls 60 days after the end of the month in which the call is submitted to the LEC for billing. The payment that we receive is
net of a service fee and net of write-offs of uncollectible accounts for which we previously received payment, or net of a
reserve for future uncollectible accounts.
Unlike many smaller independent service providers with lower telecommunications traffic, we have been able to enter
into direct billing agreements with LECs in most of our markets because of our high market penetration. During 2004, we
billed approximately 74% of our pro forma operating revenues and approximately 89% of our pro forma collect call revenues
through LEe direct billing agreements. We believe that direct billing agreements with LEes decrease bad debt expense and
billing expenses by eliminating an additional third-party billing entity, while expediting and increasing collectibility. In
addition, direct billing agreements help us resolve disputes with billed parties by facilitating direct communication between
us and the called party, thereby reducing the number of charge-offs.
In the absence of a LEe direct billing arrangement, we bill and collect our fees through third-party billing and collection
clearinghouses that have billing and collection agreements with LECs. When we employ third-party billing and collection
clearinghouses, the account proceeds are forwarded by the various LEes to the clearinghouses, which then forward the
proceeds to us, less a processing fee. With both LEC direct and third-party billing and collection agreements, we reconcile
our call records with collections and write-offs on a regular basis. The entire billing and collection cycle (including
reconciliation), on average,
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takes between six to nine months after we submit the caIl record to the LEe or to third-party billing and coIlection
clearinghouses.
Our specialized billing and bad debt management system integrates our LEC direct billing arrangements with our caIl
blocking, validation and customer inquity procedures. Through the use of this system, we have experienced levels of bad
debt expense that are generaIly lower than those experienced in the inmate telecommunications industry.
Employees
As of December 31, 2004, we employed 600 fuIl-time equivalent employees, of which 288 are salaried and 312 are
hourly employees. None of our employees is represented by a labor union, and we have not experienced any material work
stoppages to date. We believe that our management currently has a good relationship with our employees. [n anticipation of
and in connection with the consummation of the Transactions, we have, as of March 17,2005, terminated approximately 120
employees in connection with our consolidation.
Properties
Our principal executive office is located in, and a portion of our operations are conducted from, leased premises located
at [465[ DaIlas Parkway, Suite 600, DaIlas, Texas 75254-88[5. We also lease additional regional facilities from which we
conduct our operations located in Selma, Alabama; Bedford, Massachusetts; Raleigh, North Carolina; Irving and
San Antonio, Texas; Foxboro, Massachusetts; Hammonton, New Jersey; and Camp Hill, Pennsylvania.
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 palties 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 patty did not accept the collect calls for which they were billed
or that rate disclosure was not provided or was inadequate. We are also on occasion the subject ofregulatOlY complaints
regarding our compliance with various matters including tariffing, access charges and payphone compensation requirements
and rate disclosure issues. Currently, Evercom, T-Netix and other inmate telecommunications providers are parties to a case
pending in the Superior Court for the State of Califomia in and for the County of Alameda, the Condes litigation, in which
the plaintiffs have alleged that they were 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. The plaintiffs in such
judicial proceedings, including the Condes litigation, generally seek class action certification against all named inmate
telecommunications providers, as defendants, with all recipients of calls from inmate facilities, as plaintiffs. Although class
certification was recently denied in the Condes litigation, the plaintiffs were successful in their motion for reconsideration.
We intend to vigorously contest the Condes matter and other such class action matters as they may arise in the future. During
2004, T -Netix and Evercom paid an aggregate of $1.7 million of legal fees and related expenses associated with the Condes
litigation, of which approximately $1.0 million was incurred by Evercom prior to our acquisition of Evercom on
September 9, 2004.
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Research and Product Development
We believe that the timely development of new products and enhancements to existing products is essential to maintain
our competitive position. We conduct ongoing research and development for the development of new products and
enhancement of existing products that are complementary to the existing product line.
OUf current research and development efforts are focused on further improvements to our bad debt management systems.
including improved algorithms to monitor and analyze our risk on a real-time basis, enhanced three-way call detection,
advanced call validation systems, voice-over internet protocol and general improvements to our call processing platforms in
order to improve operating efficiency and reduce capital costs of new installations. In addition, we are developing products
and services that will provide law enforcement officials with greater access to communications capabilities, inmate
information and intelligence on inmate calls within a correctional facility as well as on inmate calls between correctional
facilities and other law enforcement agencies.
Patents and Other Proprietary Rights
We rely on a combination of patents. copyrights and trade secrets to establish and protect our intellectual property rights.
We have been issued 38 patents and currently have 42 pending patent applications related to our inmate call processing
technology. We consider any patents issued or licensed to us to be a significant factor in enabling us to more effectively
compete in the inmate calling industIy.
We believe that our intellectual property portfolio provides our customers leading edge technology recognized as
technologically superior within the inmate telecommunications industry. We believe that we currently hold the broadest
intellectual property portfolio in the industIy, with 80 patents and applications. We believe that the duration of applicable
patents is adequate relative to our product and service offerings.
Although we have filed many patent applications and hold several patents relating to our internally developed call
processing and other technology, such technology and intellectual property rights could infringe on other parties' intellectual
property rights and could be contested or challenged. Should our call processor or any material feature of our call processor
or other proprietaty technology be detetmined to violate applicable patents, we may be required to cease using these features
or to obtain appropriate licenses for the use of that technology and could be subject to material damages if our infringement
were determined to be lengthy or willful.
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REGULATION
The inmate telecommunications indus/IY is subject to vmying degrees a/federal, state, and local regulation. Regulatory
actions have qffected, and are likely to continue to affect, our correctional/acility clistomers, our telecommunications service
provider customers, our competitors and us.
The inmate telecommunications market is regulated at the/ederallevel by the FCC and at the state level by public
utilities commissions or equivalent agencies ("PUCs "J of the various states. In addition, from time to time, Congress or the
various stale legislatures may enacl legislation that affects the telecommunications industlY generally and the inmate
telecommunications industry specifically. Court decisions interpreting applicable laws and regulations may also have a
significant effect on the inmate telecommunications industlY. Changes in existing laws and regulations, as well as the
adoption of new laws and regulations applicable to our activities or other telecommunications businesses, could have a
material adverse eflect on us, See "Risk Factors - Regulatmy Risks."
Federal Regulation
Prior to 1996. the level of the federal government's role in the regulation of the inmate telecommunications industty was
relatively limited. The enactment of the Telecommunications Act of 1996 (the "Telecom Act"), however, marked a
significant change in scope of federal regulation of the inmate telecommunications service. Generally, the Telecom Act
(i) opened local exchange service to competition and preempted states from imposing barriers preventing such competition,
(ii) imposed new unbundling and interconnection requirements on incumbent local exchange carrier networks, (iii) removed
prohibitions on inter-LATA services and manufacturing where certain competitive conditions are met, (iv) transferred any
remaining requirements of the consent decree governing the 1984 Bell System divestiture (including its nondiscrimination
provisions) to the FCC's jurisdiction, (v) imposed requirements to conduct certain competitive activities only through
structurally separate affiliates, and (vi) eliminated many of the remaining cable and telephone company cross-ownership
restrictions.
This legislation and related rulings significantly changed the competitive landscape of the telecommunications industry as
a whole. For example, permitting the RBOCs to once again provide long-distance service causes our RBOC customers to
)
become direct competitors of AT&T, which in turn could adversely affect our relationships with all such customers. For
example, our current relationship with AT&T may foreclose opportunities to provide long distance services to its current
RBOC customers if and when they enter the long-distance market. As a result, a loss of long-distance market share by AT&T
could result in a corresponding loss of market share by us.
More specifically for the inmate telecommunications induslly, the Telecom Act added Section 276 to the principal
U.S. federal communications statute, the Communications Act of 1934. Section 276 directed the FCC to implement rules to
overhaul the regulation of the provisioning of pay phone service, which Congress defined to include the provisioning of
inmate telecommunications service in correctional institutions.
Before the adoption of the Telecom Act, LEes generally included inmate telecommunications service operations as part
of their regulated local exchange telephone company operations. This allowed the LECs to pool revenue and expenses from
their monopolistic local exchange operations with revenues and expenses from their inmate telecommunications service
operations. This commingling of operations made possible the subsidization of the LEes' inmate telecommunications service
operations through other regulated revenues. The LECs were also able to shift certain costs from their inmate
telecommunications service operations to their local exchange monopoly accounts. In particular, the LECs were able to pool
the bad debt from their inmate telecommunications service operations with their other bad debt. Because independent inmate
telecommunications service providers act as their own carrier, they bear the risk of fraudulent calling and uncollectible calls
and other bad debt. Bad debt is substantially higher in the inmate telecommunications induslly than in other segments of the
telecommunications induslly. The LECs' practice of pooling bad debt shifted the high costs of bad debt from inmate
telecommunications service operations to the expense accounts of other LEC operations, presenting a vehicle for the cross89
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subsidization of the LEes' inmate operations. This, in tum, allowed the LEes to offer commissions to correctional facilities
that were often significantly higher than those that independent inmate telecommunications service providers can offer.
Section 276 directed the FCC to adopt regulations to end the LECs subsidization of their inmate telecommunications
service operations from regulated revenues. Congress also directed the FCC to ensure that the RBOCs could not discriminate
in favor of their own operations to the competitive detriment of independent inmate telecommunications service providers.
Finally, Congress required the FCC to ensure that all inmate telecommunications service providers were fairly compensated
for "each and every" call made from their telephone.
To cany out its legislative mandate, the FCC adopted regulations requiring all LECs to transfer their inmate
telecommunications service operations from their regulated accounts to the LECs' unregulated accounts by no later than
April IS, 1997. The FCC's rules implementing Section 276 are designed to eliminate cross-subsidization and cost-shifting.
However, since the bad debt from inmate telecommunications services arises from the charges for collect calls, which have
traditionally been regulated carrier activities, the FCC's rules did not prevent shifting of bad debt from the LECs' inmate
telecommunications service operations to the LEes' regulated accounts.
In implementing Section 276 the FCC also addressed the one-time transfer of existing inmate telecommunications service
assets from the LEes' regulated accounts to the unregulated accounts established for inmate telecommunications service
operations. The FCC ordered the transfer of those assets at their net book value rather than at their fair market value. The
inmate telecommunications industry had argued to the FCC that the tmnsfer should be accomplished at the assets' fair market
value, including the value of the contracts between the LEes' inmate telecommunications service operations and correctional
facilities. The net book value of those assets may be lower than their fail' market value. In the event that the valuation of the
assets is below market, the LECs' inmate telecommunications service operations may be able to post nominally higher
returns on their assets than they would otherwise be able to and hence relieve operating pressures for returns on assets. This
could result in a competitive advantage for the LECs with respect to access to capital markets compared with independent
inmate telecommunications service providers.
)
"
To eliminate discrimination. the Fce initially required, among other things, that the LEes' inmate telecommunications
service operations take any tariffed services from their regulated operations at the tariffed rate for the selvice. Before the
Telecom Act. the LECs' inmate telecommunications service operations were able to take these services at some variant of
their underlying costs without regard to the tariffed rate being charged to independent inmate telecommunications service
providers. Under the Telecom Act, the LEes' inmate telecommunications service operations must take tariffed services on an
arm's length basis, at tariffed rates that are subject to regulatory approval. Further, the rates for the tariffed services offered to
both the LECs' inmate telecommunications service operations and independent inmate telecommunications service providers
must be developed on a consistent basis. The test that the FCC mandated for the pricing of services (the "new services test")
to both independent inmate telecommunications providers and LECs' own inmate operations applied to existing rates and
could potentially cause a rate reduction for services in some instances, while resulting in rate increases in others. However,
the FCC ruled, and the U.S. federal courts have affirmed, that in Section 276 Congress only clearly mandated that the test be
applied to the RBOCs. At the same time, the FCC urged state commissions to apply the test to all LECs in their states. In any
case, the requirement for a consistent methodology for developing rates should substantially reduce LEC opportunities for
unfavorable rate discrimination against independent inmate telecommunications service providers like Securus.
To ensure "fair compensation" for inmate telecommunications service providers, the FCC held that it was not required to
prescribe compensation for collect calls because inmate telecommunications service providers act as their own carriers and
collect the revenue from those calls directly from called parties. (We nonetheless have from time to time been required to
defend against complaints to the FCC from certain payphone owners not in the inmate telecommunications industry. that
haye unsuccessfully claimed
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a right to compensation for calls initiated from the inmate telecommunications service providers.) The inmate
telecommunications industry argued to the FCC, however, that because of state-mandated ceilings on the rates for intrastate
collect calls, inmate telecommunications providers could not recover adequate revenues for those calls, and accordingly, had
sought an "inmate system compensation charge" in addition to the charges collected for carrying the call. See "- State
Regulation." However, the FCC only determined that Section 276's fair compensation requirement does not require either
preemption of state local collect calling rate caps or imposition of a federally-tariffed surcharge above state rate caps for local
inmate calls. This decision, unless subject to further review, appeal or revision as a result of further proceedings, leaves
intact, from a Federal perspective, the current impact of state-mandated rate ceilings.
The FCC has also declined to modify the accounting safeguards implemented to guarantee that regulated revenues
properly follow regulated costs, and unregulated revenues follow unregulated costs. Thus, it remains that only inmate
telecommunications equipment and not the collect calling service itself is included in the inmate telecommunications services
that the RBOCs must provide on a non-regulated basis. Consequently, it is possible that the RBOCs will to some extent
continue to be able to subsidize and discriminate in favor of their inmate telecommunications service operations. In
particular, so long as the RBOCs can continue to define their inmate collect calling service as part of their regulated
operations, they may be commingling bad debt associated with that service with bad debt from other services.
Because of the proceedings still pending before the FCC, the ultimate effects of the rule changes mandated by the
Telecom Act are uncertain. For example, the FCC is currently considering comments filed in Docket No. 96-128 on the costs
associated with the provision of inmate telecommunications services to explore whether the current regulatory regime
applicable to the provision of inmate telecommunications services is responsive to the needs of corrections facilities, inmate
calling services providers, and inmates, and if not, whether and how unmet needs might be addressed. This includes claims
concerning the rates charged for inmate calls. See "Business - Legal Proceedings." See "Risk Factors - Regulatory Risks."
Apatt from its proceedings to implement the Telecom Act, the FCC also adopted regulations for interstate calls requiring
inmate telecommunications service providers to announce to called parties, before the called party incurs any charges, that
rate quotes may be obtained by dialing no more than two digits or remaining on the line. The FCC subsequently clarified the
rules to require exact, and not maximum, rate quotes on a per minute basis.
)
Significantly, however, the FCC adopted the rate disclosure option in lieu of the so-called "Billed Patty Preference"
proposal that had been pending before the FCC for several years. Under that plan, inmate telecommunications service
providers would have been required to send their interstate inmate collect calls to the called patty's pre-subscribed carrier,
thereby bypassing the opportunity for the inmate telecommunications service provider to receive revenue from the calls. We
believe that the rate quote regulations adopted by the FCC are a preferable alternative to Billed Party Preference, which
would potentially have had a much more adverse effect on our business. However, the FCC, in Docket No. 96-128, recently
took further comments on a request by inmate groups to require multiple carrier access to certain inmate facilities on
interstate calls. The FCC has also taken comment on other technologies advanced as a method to avoid the single carrier per
facility system that currently prevails in the inmate telecommunications industry.
State Regulation
In many states, inmate telecommunications service providers must obtain prior authorizations from, or register with, the
PUC and file tariffs or price lists of their rates. The most significant state involvement in the economic regulation of inmate
telecommunications service is the limit on the maximum rates that can be charged for intrastate collect calls set by most
states, referred to as "rate ceilings." Since collect calls are at many facilities the only kind of calls that can be made by
inmates, the state-imposed rate ceilings on those calls can have a significant effect on our business.
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In many states, the rate ceilings on inmate collect calls within the originating LEe's service area are tied to the rate
charged by the LEC and subject to state regulatory approval. Thus, where the LEC chooses not to raise its rates, independent
inmate telecommunications service providers are precluded from raising theirs. Prior to the passage of the Telecom Act, the
LEes had less incentive to raise their rates than independent inmate telecommunications service providers because the LEes
were able to subsidize their inmate telecommunications service operations and discriminate in their favor, as described above.
See " - Federal Regulation." It is possible that as a result of the FCC's rules designed to eliminate these subsidies, some
LEes may periodically choose to file with their state commissions to raise their rates for inmate collect calls. If this occurs,
inmate telecommunications service providers could also raise their rates. It is difficult to predict the extent to which the LECs
will raise their rates.
For intrastate calls going outside the originating LEC's service area, there may be state rate ceilings tied to the rates of the
IXCs for similar calls. In some cases, these rate ceilings can also make sufficient cost recovelY difficult. In general, the cost
recovelY problems that arise from rate ceilings tied to IXC rates are not as severe as the difficulties created by rate ceilings
tied to LEC rates.
In its rulemaking implementing the Telecom Act, the FCC declined to address these state rate ceilings. The FCC ruled
that inmate telecommunications providers must first seek relief from the state rate ceilings at the state level. The outcome of
any such proceedings at the state level, ifunde11aken, is uncertain. Further, despite reserving the right to do so, it is unce11ain
whether the FCC would intervene or ifso, how, in the event a state failed to provide relief. Moreover, as noted above, the
FCC recently declined to preempt state rate caps on local inmate calls or permit an additional surcharge thereon. See
"Business - Legal Proceedings,"
In addition to imposing rate caps, the states may regulate various other aspects of the inmate telecommunications
industry. While the degree of regulatOlY oversight varies significantly from state to state, state regulations generally establish
minimum technical and operating standards to ensure that public interest considerations are met. Among other things, most
states have established rules that govern the service provider in the form of postings or verbal announcements, and
requirements for rate quotes upon request. See "Business - Legal Proceedings."
)
The foregoing discussion does not describe all present and proposed federal, state and local regulations, legislation, and
related judicial or administrative proceedings relating to the telecommunications industry, including inmate
telecommunications services, and thereby affecting our business. The effect of increased competition on our operations will
be influenced by the future actions of regulators and legislators, who are increasingly advocating competition. While we
would attempt to modify our customer relationships and our service offerings to meet the challenges resulting from changes
in the telecommunications competitive environment, there is no assurance we would be able to do so.
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MANAGEMENT
The following is a list of our executive officers, other senior officers and directors as of May 13, 2005.
All of our directors serve until a successor is duly elected and qualified or until the earlier of his death, resignation or
removal. Our executive officers are appointed by and serve at the discretion of our board of directors. There are no family
relationships between any of our directors or executive officers.
Name
Richard E. Cree
Richard Falcone
Keith S. Kelson
Jimmy Jobe
Robert Rae
John Viola
Randy Hoffman
Sami Mnaymneh
Tony Tamer
Brian Schwartz
Douglas Berman
Lewis Schoenwetter
Jack McCarthy(l)
James Neal Thomas( 1)
~
54
60
38
51
37
54
55
43
45
36
38
34
62
59
Position
Chairman and Director
President, Chief Executive Officel' and Director
Chief Financial Officer and Assistant Secretary
Senior Vice President, IT Development Operations
Vice President, Enterprise Services and Operations
Vice President and General Manager, Correctional
Systems
Vice President and General Manager, Partner Solutions
Director
Director
Dil'ector
Director
Director
Director
Director
(l) Member of the Audit Committee.
The following information summarizes the business experience of each of our directors, executive officers and other
senior officers.
)
Richard E. Cree serves as our Chairman. Prior to becoming our Chairman, Mr. Cree served as Chief Executive Officer of
T-Netix from November 2002 to the consummation of the Transactions, Chief Operating Officer from June 1999 through
March 2000 and Executive Vice President of Business Development from April 2000 through November 2002. From 1989 to
1999, Mr. Cree was the Chief Executive Officer and President of Gateway Technologies, Inc. From 1982 to 1988, Mr. Cree
was Executive Vice President of American Republic Bancshares, a bank holding company based in New Mexico. From 1971
to 1982, Mr. Cree served as President and Chief Executive Officer of C-Five, a telecommunications company specializing in
the manufacture and development of peripheral telecommunications equipment.
Richard Falcone serves as our President and Chief Executive Officer. Mr. Falcone served as Chief Executive Officer of
Evercom from October 2000 to the consummation of the Transactions. Prior to joining Evercom, Mr. Falcone was a Senior
Vice President for AT&T serving in a variety of capacities, including leading AT&T's Small Business Markets servicing
organization of several thousand employees and establishing AT&T's national e-Servicing strategy. Mr. Falcone received a
B.S.E.E. from Northeastern University and has had Executive Level education at MIT Sloan, Stanford University, Brookings
Institute in Tokyo and the International Institute for Management Development in Lausanne, Switzerland. Mr. Falcone has
served on the Board of the National Foundation of Women Business Owners and is a founding father of the National Black
Business Council.
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Keith S. Kelson serves as our Chief Financial Officer and Assistant Secretaty. Mr. Kelson served as Evercom's Chief
Financial Officer from March 2000 to the consummation of the Transactions. From April 1998 to March 2000, Mr. Kelson
served as Evercom's Vice President of Finance. Prior to joining Evercom, Mr. Kelson was a certified public accountant in the
accounting and auditing services division of Deloitte & Touche LLP and held various financial positions with subsidiaries of
Kaneb Services, Inc. Mr. Kelson has over 16 years of combined accounting experience, serving seven of those years with
Deloitte & Touche LLP and nine years in financial management (including seven years with Evercom). Mr. Kelson has a
B.B.A. in Accounting from Texas Christian University, from which he graduated cum laude. Mr. Kelson is a certified public
accountant.
Jimmy Jobe serves as our Senior Vice President, IT Development Operations. Prior to joining Securus in September
2004, from June 2004 to September 2004 Mr. Jobe served as Vice President of Worldwide Product Development and
thereafter as Chief Operating Officer of Lumenare Networks focusing on enterprise telecommunications lab and test
automation products. Previously, Mr. Jobe served as President and Chief Executive Officer of Jobe Consulting Services
beginning in October 2002, a company focused on assisting early stage software product companies in defining and
executing product strategies, among other things, and served as Chief Technical Officer for Coherent Networks, a company
with commercial products focused on real time SS7 QOS, protocol analysis and SMS products for telecommunications
service providers' world wide and BSS mediation platforms for emerging power utility markets in North America beginning
in August 200 I. Mr. Jobe formerly served as Senior Vice President of Product Development of DSET Corporation beginning
in January 1999. Mr. Jobe has held senior management roles in several public and venture capital start-up companies and
served in multiple senior management positions during a twenty-year career at Texas Instruments.
Robert Rae serves as our Vice President, Enterprise Services and Operations. Mr. Rae served as Evercom's Executive
Director of Services/ Operations from December 2002 to the consummation of the Transactions. Prior to joining Evercom,
Mr. Rae was Vice President of Operations for EngineX Networks, an engineering professional services firm specializing in
engineering carrier telecommunications networks. Mr. Rae has also held leadership roles with Fujitsu, where he led
international professional services and technical support operations, and with Bell Atlantic, where he led strategic planning of
operations and engineering of telecommunications networks. Mr. Rae has a B.A. in Economics and a B.S. in Psychology
)
fi'Om the UniveJsity of Pittsburgh and an M.B.A. from the Katz Graduate School of Business. Mr. Rae has had Executive
Level education at the Wharton School of Business.
John Viola serves as our Vice President and General Manager, Correctional Systems. Mr. Viola served as the Vice
President and General Manager of Evercom Correctional Systems from November 2000 to the consummation of the
Transactions. Prior to joining Evercom, Mr. Viola served as Vice President of Sales and Marketing for a national ecommerce and connectivity company. Mr. Viola also served as General Manager of AT&T's small business group in the
western United States during his 18-year tenure with AT&T. Mr. Viola has over 25 years of experience in senior level sales,
marketing and management. Mr. Viola holds a B.A. in Marketing and Management from the University of Illinois, an
M.B.A. from Roosevelt University in Chicago and has Executive Level education from Texas A&M University. Mr. Viola
has served on numerous civic organizations, including the Board of Directors for the Public Education Business Coalition
and Colorado Uplift, promoting education for inner city youths.
Randy H~fJman serves as our Vice President and General Manager, Partner Solutions. Mr. Hoffman served as Evercom's
Vice President and General Manager of Solutions from January 2001 to the consummation of the Transactions. Prior to
joining Evercom, Mr. Hoffman was Vice President of Fairpoint Communications, a North Carolina-based CLEC.
Mr. Hoffman also served as General Manager of AT&T responsible for Small Business Markets, Mid-Sized Growth accounts
and AT&T's largest global customers. Mr. Hoffman has more than 26 years of experience in the telecommunications
industly with a background in sales and marketing. Mr. Hoffman holds a B.B.A. in Management from Texas Tech
University. Mr. Hoffman has served on the Board of Directors of numerous civic organizations, including the st. Louis
Symphony, Junior Achievement and the Regional Commerce and Growth Organization. He has also served as Vice
Chairman of the St. Louis Sports Commission.
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Sami Mnaymneh has served as a member of our board of directors since February 2004. Mr. Mnaymneh is a co-founding
Partner ofH.LG. Capital and serves as a Managing Partner of the firm. Mr. Mnaymneh has been an active investor in a
number of industries throughout H.I.G.'s life. Prior to founding H.I.G. in 1993, Mr. Mnaymneh was a Managing Director at
The Blackstone Group, a prominent New York based merchant bank, where he specialized in providing financial advisolY
services to Fortune 100 companies. Over the course of his career, Mr. Mnaymneh has led over 75 transactions with an
aggregate value in excess of$1O billion. He currently serves on the board of directors of several H.I.G. companies.
Tony Tamer has served as a member of our board of directors since February 2004. Mr. Tamer is a co-founding Patiner of
H.I.G. Capital and serves as a Managing Partner of the firm. Mr. Tamer has been an active investor in a number of industries
throughout H.I.G.'s life. Prior to founding H.I.G. in 1993, Mr. Tamer was opaliner at Bain & Company, one of the world's
leading management consulting firms, and, through Bain Capital, one of the most successful private equity funds in the
United States. Mr. Tamer has extensive operating experience palticularly in the communications and semiconductor
industries, having held marketing, engineering and manufacturing positions at Hewlett-Packard and Sprint Corporation.
Mr. Tamer holds an M.B.A. degree from Harvard Business School, and a Masters degree in Electrical Engineering from
Stanford University. His undergraduate degree is from Rutgers University. He currently serves on the board of directors of
several H.I.G. companies.
Brian Schwartz has served as a member of our board of directors since February 2004 and served as our President until
we acquired Evercom in September 2004. Mr. Schwartz is a Managing Director at H.I.G. Capital. Since joining H.I.G. in
1994, Mr. Schwartz has led numerous transactions in a diverse set of industries including business services (healthcare and
IT), building products, and manufacturing. Prior to joining H.I.G., Mr. Schwartz was a Business Manager in PepsiCo, Inc. 's
strategic planning group. Mr. Schwartz began his career with the investment banking firm of Dillon, Read and Co. where he
advised clients on transactions encompassing initial public offerings, debt offerings and mergers and acquisitions.
Mr. Schwartz earned his M.B.A. from Harvard Business School and his B.S. with honors from the University of
Pennsylvania. He currently serves on the board of directors of several H.I.G. companies.
Douglas Berman has served as a member of our board of directors since February 2004. Mr. Berman is a Managing
Director at H.I.G. Capital. He has made investments in the manufacturing, telecommunications, and business services
)
industries. Since joining H.I.G. in 1996, Mr. Berman has led a number of industry consolidations, purchasing more than 30
businesses creating several industry-leading companies. Prior to joining H.1.0., Mr. Berman was with Bain & Company,
where he managed a variety of projects for Fortune 100 clients, developing expertise in telecommunications, financial
services, and manufacturing. Mr. Berman currently serves on the board of directors of several H.1.0. companies.
Lewis Schoenwetter has served as a member of our board of directors since February 2004 and served as our Vice
President, until Januaty 1,2005. Mr. Schoenwetter is a Principal at H.I.G. Capital. With more than 10 years of experience in
private equity investing, Mr. Schoenwetter has played a significant role in more than 30 acquisitions with an aggregate value
in excess of$2 billion. Prior to joining H.I.G. in April 2003, Mr. Schoenwetter was a director with Levine Leichtman Capital
Partners. He currently serves on the board "fdirectors of several H.I.G. companies.
Jack McCarthy has served as a member of our board of directors since May 9, 2005. Mr. McCarthy also currently serves
on the board of directors, audit committee, and compensation committee of Webco Industries, Inc. From 1986 to 2002
Mr. McCarthy held various positions at The Williams Companies, Inc., including Senior Vice President of Finance and Chief
Financial Officer. From 1983 to 1986, Mr. McCarthy was the Executive Director of Tax at Tenneco, Inc. where he was
responsible for national and international tax planning. Prior to joining Tenneco, Inc., Mr. McCarthy was the Vice President
of Tax of The El Paso Company from 1978 to 1983. Mr. McCarthy is a certified public accountant and was a manager in the
tax division of Arthur Young & Company. Mr. McCarthy holds a B.B.A. and M.B.A from University of Michigan and a J.D.
from Wayne State University.
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James Neal Thomas has served as a member of our hoard of directors since May 9, 2005. Mr. Thomas currently serves on
the board of directors of Haggar Corp. and is currently the chairman of its audit committee. Until 2000, Mr. Thomas was a
senior audit partner of Ernst & Young, LLP, where he began his career in 1968. While at Ernst & Young, Mr. Thomas served
mostly Fottune 500 companies including, Wal-Mart Stores, Inc., The Williams companies, Inc. and Tyson Foods, Inc.
Mr. Thomas is a retired certified public accountant and holds a degree in accounting from the University of Arkansas.
Board Committees
Our board of directors directs the management of our business and affairs as provided by Delaware law and conducts its
business through meetings of the full board of directors and a standing audit committee. In addition, from time to time, other
committees may be established under the direction of the board of directors when necessaty to address specific issues.
Jack McCarthy and James Neal Thomas comprise our audit committee. Each of the members ofthe audit committee
qualifY as a financial expert, as such term is defined by SEC regulations, and are independent, as defined by the National
Association of Securities Dealers Rule 4200. The duties and responsibilities of the audit committee include the appointment
and termination of the engagement of our independent public accountants, otherwise overseeing the independent auditor
relationship, reviewing our significant accounting policies and internal controls and repotting its findings to the full board of
directors.
CompensatIon Committee Interlocks and Insider Participation
Our hoard of directors has not established a compensation committee. Consequently, during 2004 Qur entire hoard of
directors participated in the determination of our executive officers' compensation. Included in the 2004 compensation
meetings were Richard Falcone, our current Chief Executive Officer, Brian Schwartz, our former President and Lewis
Schoenwetter, our former Vice President and Treasurer.
Indemnification Agreements
)
We have entered indemnification agreements with celtain of our officers and directors which provide for their
indemnification and the reimbursement and advancement to them of expenses, as applicable, in connection with actual or
threatened proceedings and claims arising out of their status as a director or officer.
Director Compensation
Except for Messrs. McCarthy and Thomas, our directors receive no compensation for serving on the board other than
reimbursement of reasonable expenses incurred in attending meetings. Each of Messrs. McCarthy and Thomas receives
$50,000 annually for serving on the board and audit committee. Additionally, Mr. Thomas will receive $6,000 annually for
serving as Chairman of the Audit Committee.
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Executive Compensation
The following table sets forth compensation information for each person who served as our Chief Executive Officer
during 2004 and four additional executive officers who were the most highly compensated for the year ended December 31,
2004. We refer to these individuals collectively as our "named executive officers."
Summary Compensation Table
Long Term
Compensation Awards
Annual Coml!cnsation
Name and Principal Position
Year
Salarr
Bonus
All Other
Compensation
Restricted
Stock Awards
-(2)
Richard Falcone,
President, Chief Executive Officer and
Director
2004 $
107,658(1) $
214,439(1)
$
Richard Cree, Chairman
John C. Poss,
Chief Operating Officer - T-Netix
Thomas Meriam,
Executive Vice President - Strategic
Markets - T-Netix
Wayne A. Johnson, II,
Vice President, General Counsel and
Secretary
2004 $
2004 $
235,185(3) $
194,651(4) $
413,779(3)
213,350(4)
$
8,653(5)
2004 $
140,788(6) $
217,445(6)
$
6,888(7)
2004 $
141,350(8) $
231,495(8)
(I) Mr. Falcone's employment agreement provides for an annual salary of at least $349,000. The above compensation does
not include salaty of $242,231 and bonus payments of $458,000 earned from Janua,y I, 2004 through September 9,
2004 during Mr. Falcone's employment with Evercom as Chief Executive Officer.
(2) Contemporaneously with the consummation of the acquisition of Evercom and pursuant to the Company's 2004
Restricted Stock Purchase Plan, Mr. Falcone purchased 16,856.96 shares of restricted stock of the Company for
$0.01 per share or $168.57.
(3) Mr. Cree's employment agreement provides for an annual salary of not less than $265,000. The above compensation
does not include sala,y of $40,769 earned from January 1,2004 through March 2, 2004 during Mr. Cree's employment
with T-Netix as Chief Executive Officer. Also does not include $951,777 paid to Mr. Cree contemporaneously with our
acquisition of T-Netix in respect of vested in-the-money options to acquire shares ofT -Netix common stock. See
"Management - Separation Agreements."
(4) The above compensation does not include sala,y of$32,884 earned from Januaty 1,2004 through March 2, 2004 during
Mr. Poss' employment with T-Netix. Also does not include $142,000 paid to Mr. Poss contemporaneously with our
acquisition ofT~Netix in respect of vested in~the~money options to acquire shares ofT~Netix common stock. Mr. Poss'
employment with us ended effective December 10, 2004. See "Management- Separation Agreements."
(5) The above amount represents payments to Mr. Poss during 2004 pursuant to his separation agreement with the
Company. See "Management - Separation Agreements."
(6) The above compensation does not include salary of$28,713 earned from January 1, 2004 through March 2,2004 during
Mr. Meriam's employment with T-Netix. Also does not include $326,710 paid to Mr. Meriam contemporaneously with
our acquisition ofT-Netix in respect of vested in-the-money options to acquire shares ofT-Netix common stock.
Mr. Meriam's employment with us ended December 10,2004. See "Management - Separation Agreements."
(7) The above amount represents payments to Mr. Meriam during 2004 pursuant to his separation agreement with the
Company. See "Management - Separation Agreements."
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(8) The above compensation does not include salmy of$28,362 earned from January 1,2004 through March 2, 2004 during
Mr. Johnson's employment with T-Netix as General Counsel. Also does not include $268,620 paid to Mr. Johnson
contemporaneously with our acquisition ofT-Netix in respect of vested in-the-money options to acquire shares ofT-
Netix common stock. See "Management - Separation Agreements,"
Employment Agreements
In connection with the Transactions, we entered into an employment agreement with Richard Falcone under which
Mr. Falcone serves as our president and chief executive officer. The initial term of this agreement terminates on January 5,
2007 and may be extended for an additional one-year period so long as Mr. Falcone gives notice between July 1,2006 and
August I, 2006 of his desire to extend the employment period for an additional year and we agree to do so. Mr. Falcone
receives: (i) a base salmy of not less than $349,900 per year; (ii) a bonus of up to 100% of base salmy which is earned upon
achievement of mutually agreed objectives for each year; (iii) eligibility to receive restricted shares of the company's
common stock; (iv) an automobile allowance of $850 per month; and (v) other benefits, such as life and health insurance,
paid vacation, and reimbursement of business expenses. Mr. Falcone reports directly to our board of directors and must
secure the board's written consent before consulting with any other entity or gaining more than a 5% ownership interest in
any enterprise other than Securus, unless such ownership interest will not have a material adverse effect upon his ability to
perform his duties under this agreement.
We may terminate Mr. Falcone's employment for cause, in which case we will pay him any base salmy accrued or owing
to him through the date of termination, less any amounts he owes to us. We may also terminate Mr. Falcone's employment
without cause or Mr. Falcone may terminate his own employment due to constructive discharge. If Mr. Falcone's
employment is terminated without cause or for constructive discharge, we will pay Mr. Falcone an amount equal to (i) the
lesser of (I) two times his annual base salmy or (2) the amount of remaining base salary that would have been payable to him
from the date of such termination of employment through the agreement expiry date plus an additional six months of base
salalY, plus (ii) the benefits which were paid to him in the year prior to the year in which his employment was terminated plus
(iii) a pro-rated bonus for the year in which Mr. Falcone's employment was terminated.
)
During Mr. Falcone's employment and for the one-year period (or, under certain conditions, up to the two-year period)
immediately following the expiration or earlier termination of the employment period, Mr. Falcone is prohibited from
competing with us anywhere in the United States, including locations in which we currently operate and plan to expand, and
must abide by customary covenants to safeguard our confidential information.
On April 17, 1998 Keith Kelson, our chief financial officer, entered into an employment letter agreement with Talton
Holdings, Inc., a predecessor of Evercom. The agreement term continues until terminated either by us or Mr. Kelson. If the
agreement is terminated for any reason other than gross misconduct, Mr. Kelson is entitled to receive a severance payment of
twelve months salalY. During 2004, Mr. Kelson was entitled to a base salalY of $151 ,000 and earned an annual bonus of up to
50% of his base salary.
Separation Agreements
We have entered into a separation agreement with Richard E. Cree whereby effective June 30, 2005, Mr. Cree will resign
as Chairman of our board of directors, but will remain as a non-executive member of our board of directors. In connection
with his resignation, Mr. Cree will be paid severance from July 2005 through November 30, 2006, at a rate of $305,000 per
year (plus paid health insurance premiums) and his employment agreement, executed January 22, 2004, will terminate on
July I, 2005. Mr. Cree will be reimbursed for reasonable expenses incurred in attending meetings of our board of directors,
but will not receive any other compensation. Pursuant to Mr. Cree's former employment agreement, he continues to be
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prohibited from competing with us and must abide by custommy covenants to safeguard our confidential information through
June 30, 2007.
Effective December 10,2004, we entered into a separation agreement with John C. Poss whereby Mr. Poss' employment
with us and our affiliates was terminated. In connection with his separation, Mr. Poss receives monthly severance payments
(plus paid health insurance premiums) through March 10, 2006, at a rate of his annual salary of $225,000. Pursuant to
Mr. Poss' former employment agreement, he continues to be prohibited from competing with us and must abide by
customa.y covenants to safeguard our confidential information through December 10, 2006.
Effective December 10, 2004, we entered into a separation agreement with Thomas R. Meriam whereby Mr. Meriam's
employment with us and our affiliates was terminated. In connection with his separation, Mr. Meriam receives monthly
severance payments through March 10,2006, at a rate of his annual salmy of$185,000. Pursuant to Mr. Meriam's fonner
employment agreement, he continues to be prohibited from competing with us and must abide by customary covenants to
safeguard our confidential information through December 10, 2006.
Effective May 13,2005, we entered into a separation agreement with Wayne A. Johnson, II whereby Mr. Johnson's
employment with us and our affiliates was terminated, In connection with his separation, Mr. Johnson receives monthly
severance payments through May 13,2006, at a rate of his annual salmy of$170,000. Pursuant to Mr. Johnson's former
employment agreement, he continues to be prohibited from competing with us and must abide by customary covenants to
safeguard our confidential information through May 13,2007.
2004 Restricted Stock Purchase Plan
)
We adopted a 2004 Restricted Stock Purchase Plan contemporaneously with the Transactions under which ce.tain of our
employees may purchase shares of our common stock or a junior class of common stock. The maximum number of
authorized shares subject to grants under the 2004 Restricted Stock Purchase Plan equals 9.75% of our total issued and
outstanding shares of common stock on a fully diluted basis, subject to adjustment for changes in our capital structure such as
stock dividends, stock splits, stock subdivisions, mergers and recapitalizations. Our board of directors administers the
restricted stock purchase plan. The plan is designed to serve as an incentive for both us and our operating subsidiaries, TNetix and Evercom, to attract and retain qualified and competent employees. The per share purchase price for each share of
restricted stock is determined by our board of directors. Restricted stock will vest based on performance criteria or ratably
over a period or periods, as provided in the related restricted stock purchase agreement.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets f0l1h information with respect to the beneficial ownership of our outstanding capital stock as of
May 13,2005 by:
• each person who is known by us to beneficially own 5% or more of Qur outstanding of capital stock;
• each member of our board of directors; and
• each of our executive officers.
Beneficial ownership is determined in accordance with the applicable rules and regulations of the SEC, which generally
require inclusion of shares over which a person has voting 01' investment power. Share ownership in each case includes shares
that may be acquired within 60 days through the exercise of any convertible securities. To our knowledge, each of the holders
of capital stock listed below has sole voting and investment power as to the capital stock owned unless otherwise noted.
Number of
Shares Beneficially Owned
Percentage of
Name and Address of Beneficial Owner(l)
)
Common Stock
H.1.0.-TNetix,lnc.(3)
AIF Investment Company(4)
Alpine Associates, L.P.(5)
D.E. Shaw Laminar Portfolios, L.L.C.(6)
Richard E. Cree(7)
Richard Falcone(8)
Keith S. Kelson
Jimmy Jobe
Robert Rae
John Viola
Randy Hoffman
Sami Mnaymneh(9)
Tony Tamer(9)
Brian Schwartz(9)
Douglas Berman(9)
Lewis Schoenwetter(9)
Jack McCarthy
James Neal Thomas
Directors and executive officers as a group (14 persons)(IO)
480,789.95
147,456.62
37,637.72
48,461.00
13,157.90
2,491.23
Class B
Common Stock
16,856.96
77.93%
23.90%
6.10%
7.85%
2.13%
3.14%
77.93%
77.93%
77.93%
77.93%
77.93%
480,789.95
480,789.95
480,789.95
480,789.95
480,789.95
496,439.08
Common
Stock(2)
16,856.96
83.20%
(I) Unless otherwise indicated, the address of each beneficial owner listed above is c/o Securus Technologies, Inc., 14651
Dallas Parkway, Suite 600, Dallas, Texas 75254-8815.
(2)
Represents the aggregate ownership of our common stock and Class B common stock. Calculated based on
616,990.77 shares of common stock and Class B common stock outstanding, giving effect to immediately exercisable
options and warrants to purchase an aggregate of 56,274 shares of common stock. See notes (5), (6) and (7) below.
(3)
Includes an aggregate of 147,456.62 shares of common stock beneficially owned by AIF Investment Company. AIF
Investment Company is wholly-owned by H.1.0.-TNetix. Each of Messrs. Mnaymneh and Tamer currently serve as a
director and officer of H.1.0.-TNetix, Inc. Messrs. Mnaymneh and Tamer constitute all of the officers and directors of
H.1.0.-TNetix, Inc. The
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(4)
(5)
(6)
(7)
(8)
(9)
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address ofH.l.G.-TNetix, Inc. is cia H.l.G. Capital, LLC, 1001 Brickell Bay Drive, 27th Floor, Miami, Florida 33131.
H.l.G.-TNetix is the majority stockholder of AIF Investment Company. Each of Messrs. Mnaymneh and Tamer
currently serve as a director and officer of AIF Investment Company. Messrs. Mnaymneh and Tamer constitute all ofthe
officers and directors of AIF Investment Company. The address of AIF Investment Company is clo H.l.G. Capital, LLC,
100 I Brickell Bay Drive, 27 th Floor, Miami, Florida 33131.
Includes 4,064 shares held by Alpine Partners, L.P., an affiliate of Alpine Associates, L.P. Also represents exercisable
warrants to purchase an aggregate of 2,550 shares of our common stock granted in connection with the senior
subordinated debt financing. These warrants are exercisable at the option of the holder at any time through September 9,
2014.
Represents warrants to purchase an aggregate of 48,461 shares of common stock granted in connection with the senior
subordinated debt financing. These warrants are exercisable at the option of the holder any time through September 9,
2014.
Includes 7,894.74 shares of common stock acquired by Mr. Cree concurrently with the closing of the Transactions. Also
includes exercisable options to purchase an aggregate of 5,263 shares of common stock at a price of $57 per share. Such
option is exercisable by Mr. Cree through September 9, 2005.
Represents 2,491.23 shares of common stock acquired by Mr. Falcone concurrently with the closing of the Transactions.
Also represents 16,856.96 shares of Class B common stock purchased by Mr. Falcone pursuant to our 2004 Restricted
Stock Purchase Plan.
Represents shares beneficially owned by H.l.G.-TNetix, Inc. and AIF Investment Company. H.l.G. Capital Partners III,
L.P. is the controlling stockholder of H.l.G.-TNetix, Inc. and H.l.G. TNetix is the controlling stockholder of AIF
Investment Company. Each of Messrs. Mnaymneh and Tamer is a member ofH.l.G. Advisors III, L.L.C., the general
paliner ofH.l.G. Capital Partners III, L.P., the ultimate parent entity ofH.l.G.-TNetix, Inc. and AIF Investment
Company. Messrs. Mnaymneh, Tamer, Schwartz, Berman and Schoenwetter may, by virtue of their respective
relationships with either H.l.G.- TNetix, Inc., AIF Investment Company or H.l.G. Capital, L.L.C., be deemed to
beneficially own the securities held by H.l.G.-TNetix, Inc. and AIF Investment Company, and to share voting and
investment power with respect to such securities. Each of Messrs. Mnaymneh, Tamer, Schwartz, Berman and
Schoenwetter disclaim beneficial ownership of the securities beneficially owned by H.l.G.-TNetix and AIF Investment
Co. The address of each of Messrs. Mnaymneh, Tamer, Schwartz, Berman and Schoenwetter is clo H.l.G. Capital, LLC,
100 I Brickell Bay Drive, 27th Floor, Miami, Florida 33131.
(10) Represents 13,157.74 shares beneficially owned by Richard E. Cree, 19,348.19 shares beneficially owned by Richard
Falcone and 480,789.95 shares beneficially owned by H.l.G-TNetix, Inc. and AIF Investment Company and
attributable to each of Messrs. Mnaymneh, Tamer, Schwartz, Berman and Schoenwetter. Does not include shares of
common stock subject to grants under our 2004 Restricted Stock Purchase Plan other than those purchased by
Mr. Falcone (see note (6) above). See "Managemenl."
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Restricted Stock Purchase Agreements
We have entered or intend to enter into restricted stock purchase agreements with Mr. Falcone and other members of our
management pursuant to our 2004 Restricted Stock Plan. The maximum number of authorized shares of common stock
subject to grants under the 2004 Restricted Stock Purchase Plan equals 9.75% of our total issued and outstanding shares of
common stock on a fully diluted basis, subject to adjustment. Contemporaneously with the closing of the Evercom
acquisition, Mr. Falcone purchased 16,856.96 shares of restricted stock pursuant to the terms of a restricted stock purchase
agreement. Pursuant to the telms ofthe plan and the applicable restricted stock purchase agreements, shares of stock are
subject to time and performance vesting based upon the length of service such executive has with us and other vesting criteria
including in the event we obtain a specified sales price in connection with our sale to an independent third party. Shares of
common stock issuable pursuant to restricted stock purchase agreements are subject to certain rights of repurchase and
celtain restrictions on transfer. Generally, shares of restricted stock that have not vested prior to or in connection with a sale
of us to an independent third party shall be forfeited to us without consideration.
Equity Investment by Richard Falcone
)
In connection with QUI' acquisition of Evercom, Richard Falcone, our President and Chief Executive Officer, purchased
2,491.23 shares of our common stock for an aggregate purchase price of $142,000, or a price per share of$57. Additionally,
Mr. Falcone acquired an aggregate of 16,856.96 shares of restricted common stock pursuant to a restricted stock purchase
agreement. These restricted shares are subject to forfeiture pursuant to the terms of our 2004 Restricted Stock Purchase Plan
and the restrictions described hereafter. The restriction period for Mr. Falcone's restricted stock ends upon the occurrence of
ce11ain events and upon lapse of time. With respect to 38.46% of the restricted stock, the restriction period ends upon the sale
of our stock by ce11ain of our other stockholders. The restriction period for 30.77% of the restricted stock ends upon the lapse
of time, 6.154% each December 31 and June 30 beginning December 31, 2004. With respect to the remaining shares, the
restriction period ends upon our attainment of certain performance measures determined by our board of directors and
Mr. Falcone. Further, upon a change of control of Secums, the restriction period will end for all of Mr. Falcone's restricted
shares that have not previously vested. The restricted shares are entitled to dividends, if declared, which will be distributed
upon termination of the restriction period with respect to any such restricted shares.
Equity Investment by Richard E. Cree
In connection with our acquisition of Evercom, Richard E. Cree, our Chairman. purchased 7,894.74 shares of our
common stock for an aggregate purchase price of $450,000, or a price per share of$57. In addition to the foregoing
investment by Mr. Cree, we also granted him the option to purchase an additional $300,000 of shares of our common stock at
a price per share of$57, which option is exercisable for the 12-month period beginning September 9, 2004 and as of the date
hereof, none of such options have been exercised.
Stockholders' Agreement
We and our stockholders have entered into a stockholders' agreement to assure continuity in our management and
ownership. to limit the manner in which our outstanding shares of capital stock may be transferred, and to provide certain
registration rights. A summary of the material terms of this Stockholders Agreement are produced below.
Trallsfer Restrictions ami Rights of First Refusal
The stockholders' agreement prohibits the transfer of our securities held by our stockholders, except (i) to ce11ain
permitted transferees provided that such transferees agree to be bound by the stockholders'
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agreement, (ii) on the terms, and subject to the conditions, set forth in the restricted stock purchase agreement of each
management stockholder, (iii) by a non-management stockholder to any affiliate, (iv) to us pursuant to celtain rights of first
refusal and tag-along rights, and (v) in connection with any reorganization of our company.
Under the stockholders' agreement, the rights of first refusal require a stockholder wishing to sell (other than in a
permitted transfer) all or part of our equity securities held by such stockholder to first offer such shares on the same terms and
conditions to us, and if we elect not to purchase all of such securities, then to our other stockholders. These transfer
restrictions set forth in the stockholders' agreement shall continue until the subject shares have been transferred pursuant to a
registered offering or Rule 144 under the Securities Act, a sale of our company to an independent third patty or a public
offering of our equity securities having an aggregate value of at least $50 million.
Drag-Along Rights
The stockholders' agreement provides for certain drag-along rights such that in the event of a sale of our company to an
independent third party, each stockholder would be required to sell its equity interest in us to such independent third party,
each sale being on the same terms and conditions. In the event of a transfer of any of our shares of capital stock to a third
party, such transferee shall agree in writing to be bound by the provisions of the stockholders' agreement.
Tag-Along Rights
Pursuant to certain tag-along rights under the stockholders' agreement, ifany stockholder proposes to sell (other than in a
permitted transfer) all or patt of our equity securities held by such stockholder to any independent third party and we and our
other stockholders have not exercised the rights of first refusal, such stockholder shall offer our other stockholders the
0ppo11unity to participate in the proposed sale on the same telms and conditions on a pro rata basis with respect to the
number of shares of our common stock held by each such holder or issuable upon the exercise of any securities convertible
into shares of our common stock.
Preemptive Rights
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Except under limited circumstances, if we make an offer to issue capital stock or other of our equity interests at any time
prior to conducting an initial public offering or a sale of our company to an independent third party, our stockholders have the
right to purchase a pro rata portion of the offered securities, which allows the stockholders to maintain their respective
ownership percentages in our company.
Corporate GovenlUllce
The stockholders' agreement provides that our board of directors is comprised of (i) five representatives designated by
H.I.G.-TNetix, Inc., an affiliate ofH.I.G., provided that if we increase the number of our directors and H.I.G.-TNetix and its
affiliates own more than 50% of our common stock, H.I.G.-TNetix may designate additional directors such that it designates
a majority of our board of directors, (ii) our chief executive officer, currently Richard Falcone, and (iii) a senior member of
our management designated by H.I.G.-TNetix.
Registration Rights
Pursuant to the stockholders' agreement, we granted certain of our stockholders "demand" registration rights and all of
our stockholders certain "piggyback" registration rights to be exercised when we propose to register any of our common
stock under the Securities Act (other than an initial public offering, a transaction described under Rule 145 or any successor
rule of the Securities Act, a transaction registering securities convertible into our common stock or pursuant to Forms S-4, S8 or their successor forms).
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Anllual Payment to Evercolll Investors
Pursuant to the stockholders agreement, we have agreed to pay an aggregate of $1 00,000 annually on a pro rata basis to
those Evercom stockholders who invested in our company contemporaneously with the closing of the Transactions.
Lock-Up Agreemellts
The stockholders' agreement provides that each stockholder will not sell or distribute its equity interest in us (including
sales pursuant to Rule 144) (i) during the seven days prior to and during (i) the 90-day period beginning on the effective date
of any underwritten registration, or (ii) the ISO-day period beginning on the effective date of an initial public offering of our
common stock, unless we and the undelwritel's otherwise agree.
IlldemllijiClltioll of Stockholders
Under our stockholders' agreement, we agree to indemnify, to the fullest extent permitted by applicable law, each of our
stockholders (in their capacity as sellers of securities and not as officers of our company), their officers and directors and
each person who controls such stockholder for losses which the indemnified person may sustain, incur or assume as a result
of our violation of the Securities Act, the Exchange Act or any state securities law, or any untrue or alleged untrue statement
of material fact contained in any document we file with the SEC.
H.I.G. Capital, LLC Consulting Agreements
Consulting Services Agreement
In connection with the consummation of the Transactions, we entered into an amended and restated consulting services
agreement with H.I.G., pursuant to which H.I.G. is entitled to receive an annual consulting services fee of$750,000 for
management, consulting and financial advisOlY services. In addition, H.1.0. is entitled to receive fees equal to 2% of the
consideration received by us upon a public offering of our capital stock 01' the sale of all or substantially all of our assets,
which provision survives the termination of the agreement.
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Professional Services Agreement
In connection with the consummation of the Transactions, we entered into an amended and restated professional services
agreement with H.I.G., pursuant to which H.I.G. is entitled to receive investment banking fees equal to 2% of the value of
any transaction in which we (i) sell all or substantially all of our assets or a majority of our stock, (ii) acquire any other
companies or (iii) secure any debt or equity financing. In addition, in connection with our consummation of the Transactions,
H.1.0. received a professional services fee equal to 2% ofthe transaction value, or approximately $2.49 million.
Management
Certain of our directors are affiliated with H.I.G. Mr. Sami Mnaymneh and Mr. Tony Tamer are managing partners of
H.I.O., Mr. Brian Schwartz and Mr. Douglas Berman are managing directors of H.I.G., and Mr. Lewis Schoenwetter is a
principalofH.I.G.
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DESCRIPTION OF OUR OTHER INDEBTEDNESS
We summarize below certain terms ofour working capitalfacility and senior subordinated notes. These summaries are
not complete descriptions of all of the terms and provisions ~f the agreements governing these debt instruments.
Working Capital Facility
We have a senior secured revolving credit facility provided by a syndicate of banks and other financial institutions led by
INO Capital LLC, as lead arranger and administrative agent. The working capital facility provides financing of up to
$30.0 million, subject to a borrowing base, consisting of a revolving credit facility with a five-year maturity. This revolving
credit facility includes a subfacility for letters of credit. We are the borrower and each of our subsidiaries are guarantors
under this working capital facility.
Principal amounts outstanding under the revolving credit facility are due and payable in full at September 9,2009. As of
December 31, 2004, no amounts were outstanding under this working capital facility, although approximately $5.7 million of
letters of credit were issued and outstanding under the facility.
Prepayments. The working capital facility requires us to prepay the outstanding loan, subject to certain exceptions, with:
• 100% of the net proceeds of all non-ordinary course asset sales; and
• 100% of the net proceeds of the sale of any subsidiaty.
We may also voluntarily repay outstanding loans under the working capital facility at any time without any premium or
penalty, other than customary "breakage" costs with respect to LIBOR loans.
Interest Rates and Fees. The borrowings under the working capital facility bear interest at a rate equal to, at our option,
either a Prime rate or a LIBOR rate plus 2.50%.
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In addition to paying interest on outstanding principal under the working capital facility, we are required to pay a
commitment fee to the lenders under the revolving credit facility in respect of unutilized commitments thereunder at a rate
equal to 0.50% per annum. We must also pay customalY letter of credit fees and fees of the administrative agent.
Collateral. To secure the working capital facility, we and our subsidiaries granted a first priority security interest in
substantially all of our assets, including, but not limited to, the following, and subject to certain exceptions:
• a pledge of the capital stock of each subsidiaty and
• a security interest in substantially all of our tangible and intangible non-real estate assets.
Certain Covenants and Events of Default, Our working capital facility contains a number of covenants, that, among other
things, restrict, subject to certain exceptions, our ability and the ability of our subsidiaries, to:
• incur additional indebtedness;
• create liens on assets;
• repay other indebtedness (including the notes);
• sell assets;
• make investments, loans. guarantees or advances;
• pay dividends, repurchase equity interests or make other restricted payments;
• engage in transactions with affiliates;
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• make capital expenditures;
• enter into sale-leaseback transactions;
• enter into agreements that restrict dividends from subsidiaries; and
• change the business conducted by Secul'Us and its subsidiaries.
In addition, the working capital facility limits our business activities and the business activities of our subsidiaries to
specific activities and will require us and our subsidiaries to, among other things:
• furnish specified financial information to the lenders;
• comply with applicable laws;
• maintain its properties and assets;
• maintain insurance on its properties;
• keep books and records which accurately reflect its business affairs;
• comply with environmental laws;
• pledge after acquired property as collateral and cause certain additional subsidiaries to become guarantors; and
• keep in effect all rights, licenses, permits, privileges, franchises, patents and other intellectual property.
Our working capital facility also includes specified financial covenants, requiring us to comply with certain financial
covenants, and to certify compliance on a quarterly basis, including a minimum interest coverage ratio and minimum
EBITDA level. The working capital facility contains customalY representations and warranties and events of default,
including but not limited to payment defaults, breach of representations and warranties, covenant defaults. cross-defaults to
certain indebtedness and other material agreements, certain events of bankruptcy, material judgments, the occurrence of
certain ERISA events and the occurrence of a change of control. If such an event of default occurs, the lenders under the
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working capital facility will be entitled to take various actions, including the acceleration of the amounts due thereunder and
all actions permitted to be taken by a secured creditor.
Senior Subordinated Notes
We have issued and sold $40 million in principal amount of senior subordinated notes to certain institutional investors,
which are unsecured and subordinated to our working capital facility and the notes. For purposes of this discussion, our
working capital facility and the notes shall be collectively referred to as the "Senior Financing." Our subsidiaries have
irrevocably and unconditionally guaranteed the senior subordinated notes on a senior subordinated basis. Such guarantees are
subordinated to our Senior Financing. The senior subordinated notes mature on September 9, 2014.
Mandatory Redemption. We are required to redeem the full principal amount of the senior subordinated notes upon the
occurrence of any of the following (subject to restrictions in our Senior Financing); the maturity date of the senior
subordinated notes; an initial public offering of our common stock; an offering of bonds of our company; a change of control
of our company; a sale of a substantial portion of our or our subsidiaries' assets; or an event of default under the senior
subordinated notes.
Optional Redemption. Beginning on September 9, 2005, we will have the option, subject to restrictions contained in our
Senior Financing, to redeem the senior subordinated notes upon not less than 30 and not more than 60 days notice to the
purchasers of the senior subordinated notes at designated redemption prices.
Interest Rates and Fees. The senior subordinated notes bear interest at a rate of 17% per annum and are payable quarterly
in arrears. We are required to pay interest on the senior subordinated notes in cash,
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but for any quarter in which we are prohibited from doing so by the terms of the Senior Financing, interest on our senior
subordinated notes is payable in-kind. During the year ended December 31, 2004, $2.1 million of paid-in-kind interest was
added to the principal balance of the senior subordinated notes.
Certain Covenants and Events of Default. The agreements goveming the senior subordinated notes contain specified
financial covenants, generally consistent with, though less restrictive than, those covenants contained in the indenture
governing the notes. Additionally, the agreements governing the senior subordinated notes contain events of default
consistent with those contained in the indenture governing the notes and include a cross acceleration right to our Senior
Financing.
Subordination Upon an Event of Default. Ifan event of default occurs under the senior subordinated debt agreements, the
purchasers of the senior subordinated notes will be subject to a 180-day standstill period and will thereafter be entitled to take
certain actions permitted to be taken by an unsecured creditor.
Board Observation Rights. The purchasers of the senior subordinated notes are entitled to have up to two representatives
attend all meetings of our board of directors and meetings of committees of our board of directors as obselvers without the
right to vote.
Warrants
We issued warrants to purchase up to 51,011 shares of our common stock to the purchasers of the senior subordinated
notes. The warrant exercise price is $0.01 per share in cash or securities. Such warrants provide certain anti-dilution
protection, preemptive rights, co-sale rights, indirect put rights and registration rights.
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DESCRIPTION OF THE EXCHANGE NOTES
Securus Technologies, Inc. will issue the exchange notes under an Indenture, dated as of September 9, 2004, among itself,
its subsidiaries and The Bank of New York, as Trustee. On September 9, 2004, we issued $154.0 million aggregate principal
amount of II % Second-priority Senior Secured Notes due 2011 under the Indenture. The terms of the Notes include those
stated in the Indenture, the Security Documents and those made part of the Indenture by reference to the Trust Indenture Act.
Certain terms used in this description are defined under the subheading < 1 - Certain Definitions." In this description, the
word "Company" refers only to Securus Technologies, Inc. and not to any of its subsidiaries.
The terms of the old notes are identical in all material respects to the exchange notes exchanged pursuant to the
Registration Rights Agreement except that the exchange notes will be registered under the Securities Act and free of any
covenants regarding exchange registration rights. We refer to the exchange notes together with the old notes as the "Notes,"
The following description is only a summary of the material provisions of the Indenture, the Security Documents and the
Registration Rights Agreement. We urge you to read the Indenture, the Security Documents and the Registration Rights
Agreement because they, not this description, define your rights as holders ofthese Notes. You may request copies of these
agreements at our address set forth under the heading "Where You Can Find More Information."
Brief Description of the Exchange Notes
The exchange notes:
• are senior obligations of the Company;
• are secured by a second-priority lien on the Collateral;
• are guaranteed by each SubsidialY Guarantor on a senior secured basis; and
• have been registered under the Securities Act.
Principal, Maturity and Interest
The Company will issue up to a maximum aggregate principal amount of $154 million of exchange notes in this
exchange offer for any and all of our old notes. The Company will issue the exchange notes in denominations of $1 ,000 and
any integral multiple of $1 ,000. The exchange notes will mature on September I, 20 II. Subject to our compliance with the
covenant described under the subheading " - Celtain Covenants - Limitation on Indebtedness", we are permitted to issue
more Notes from time to time under the Indenture (the "Additional Notes"). The exchange notes, any old notes not
exchanged in the exchange offer and the Additional Notes, ifany, will be treated as a single class for all purposes of the
Indenture, including waivers, amendments, redemptions and offers to purchase. Unless the context otherwise requires, for all
purposes of the Indenture and this "Description of the Exchange Notes", references to the Notes includes the old notes, the
exchange notes and any Additional Notes actually issued.
Interest on these exchange notes will accrue at the rate of II % per annum and will be payable semiannually in arrears on
March I and September I, commencing on March 1,2005. We will make each interest payment to the holders of record of
these exchange notes on the immediately preceding February 15 and August 15. We will pay interest on overdue principal at
1% per annum in excess of the above rate and will pay interest on overdue installments of interest at such higher rate to the
extent lawful.
Interest on the exchange notes will accrue from March 1,2005, the last date on which interest was paid on the old notes
surrendered in exchange therefor. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
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Additional interest may accrue on the Notes in certain circumstances pursuant to the Registration Rights Agreement.
Optional Redemption
Except as set forth below, we will not be entitled to redeem the Notes at our option prior to September 1, 2008.
On and after September 1, 2008, we will be entitled at our option to redeem all or a portion of these Notes upon not less
than 30 nor more than 60 days' notice, at the redemption prices (expressed in percentages of principal amount on the
redemption date), plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on
September I of the years set forth below:
Period
Redemption Price
2008
2009
2010
105.500%
102.750%
100.000%
Prior to September 1, 2007, we will be entitled at our option on one or more occasions to redeem Notes (which includes
Additional Notes, if any) in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the Notes
(which includes Additional Notes, if any) at a redemption price (expressed as a percentage of principal amount) of 111.000%,
plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more Equity Offerings;
provided, however, that
(I) at least 65% of such aggregate principal amount of Notes (which includes Additional Notes, if any) remains outstanding
immediately after the occurrence of each such redemption (other than Notes held, directly or indirectly, by the Company
or its Affiliates); and
(2) each such redemption occurs within 90 days after the date of the related Equity Offering.
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Prior to September 1,2008, we will be entitled at our option to redeem all, but not less than all, of the Notes at a
redemption price equal to 100% of the principal amount of the Notes plus the Applicable Premium as of, and accrued and
unpaid interest to, the redemption date (subject to the right of Holders on the relevant record date to receive interest due on
the relevant interest payment date). Notice of such redemption must be mailed by first-class mail to each Holder's registered
address, not less than 30 nor more than 60 days prior to the redemption date.
Selection and Notice of Redemption
Ifwe are redeeming less than all the Notes at any time, the Trustee will select Notes on a pro rata basis to the extent
practicable.
We will redeem Notes of$I,OOO or less in whole and not in part. We will cause notices of redemption to be mailed by
first-class mail at least 30 but not more than 60 days before the redemption date to each holder of Notes to be redeemed at its
registered address.
If any Note is to be redeemed in part only, the notice of redemption that relates to that Note will state the portion of the
principal amount thereof to be redeemed. We will issue a new Note in a principal amount equal to the unredeemed portion of
the original Note in the name of the holder upon cancelation of the original Note. Notes called for redemption become due on
the date fixed for redemption. On and after the redemption date, interest ceases to accrue on Notes or portions of them called
for redemption.
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Mandatory Redemption; Offers to Purchase; Open Market Purchases
We are not required to make any sinking fund payments with respect to the Notes. However, under certain circumstances,
we may be required to offer to purchase Notes as described under the captions "- Excess Cash Flow," "- Change of
Control" and " - Certain Covenants - Limitation on Sales of Assets and Subsidiary Stock." We may at any time and from
time to time purchase Nates in the open market or othelwise.
Guarantees
The Subsidiary Guarantors jointly and severally guaranteed, on a senior secured basis, our obligations under these Notes.
The obligations of each SubsidialY Guarantor under its SubsidialY Guarantee is secured by a second-priority security interest
(subject to Permitted Liens) in the Collateral owned by such SubsidialY Guarantor and is limited as necessary to prevent that
SubsidialY Guarantee from constituting a fraudulent conveyance under applicable law. See "Risk Factors - Risks Related to
this Offering and Our Capital Structure - U.S. bankruptcy or fraudulent conveyance law may interfere with the. payment of
the notes and the guarantees and the enforcement of the security interests."
Each Subsidiary Guarantor that makes a payment under its Subsidiary Guarantee will be entitled upon payment in full of
all guaranteed obligations under the Indenture to a contribution from each other Subsidiaty Guarantor in an amount equal to
such other SubsidiaIY Guarantor's pro rata portion of such payment based on the respective net assets of all the Subsidiary
Guarantors at the time of such payment determined in accordance with GAAP.
If a Subsidiary Guarantee were rendered voidable, it could be subordinated by a court to all other indebtedness (including
guarantees and other contingent liabilities) of the applicable Subsidiary Guarantor, and, depending on the amount of such
indebtedness, a SubsidialY Guarantor's liability on its SubsidialY Guarantee could be reduced to zero.
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Pursuant to the Indenture, (A) a Subsidiary Guarantor may consolidate with, merge with or into, or transfer all or
substantially all its assets to any other Person to the extent described below under "- Certain Covenants - Merger and
Consolidation" and (8) the Capital Stock of a Subsidiary Guarantor may be sold or otherwise disposed of to another Person
to the extent described below under "- Certain Covenants - Limitation on Sales of Assets and Subsidiary Stock";
provided, however, that in the case of the consolidation, merger or transfer of all or substantially all the assets of such
Subsidiary Guarantor, if such other Person is not the Company or a Subsidiary Guarantor, such Subsidiary Guarantor's
obligations under its Subsidiary Guarantee must be expressly assumed by such other Person, except that such assumption will
not be required in the case of:
(I) the sale or other disposition (including by way of consolidation or merger) of a SubsidiaIY Guarantor (other than
T-Netix and Evercom), including the sale or disposition of Capital Stock of a Subsidiary Guarantor following which such
Subsidiary Guarantor is no longer a Subsidiary; or
(2) the sale or disposition of all or substantially all the assets of a SubsidialY Guarantor (other than T -Netix and
Evel'com);
in each case other than to the Company or an Affiliate of the Company and as permitted by the Indenture and if in connection
therewith the Company provides an Officers' Certificate to the Trustee to the effect that the Company will comply with its
obligations under the covenant described under "- Limitation on Sales of Assets and Subsidiary Stock" in respect of such
disposition. Upon any sale or disposition described in clause (I) or (2) above, the obligor on the related Subsidiary Guarantee
will be released from its obligations thereunder.
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The Subsidiaty Guarantee of a Subsidiaty Guarantor also will be released (except, in the case of clause (I) below, for TNetix, Inc. and Evercom):
(I) upon the designation of such Subsidiaty Guarantor as an Unrestricted Subsidiaty; or
(2) if we exercise our legal defeasance option or our covenant defeasance option as described under "- Defeasance"
or if our obligations under the Indenture are discharged in accordance with the terms of the Indenture; or
(3) if such Restricted Subsidiaty ceases to be a Subsidiary as a result of any foreclosure of any pledge or security
interest in favor of First Priority Lien Obligations, subject to, in each case, the application of the proceeds of such
foreclosure in the manner described under "- Security for the Notes - Release of Collateral."
Ranking
Sellior Indebtedness versus Notes
The indebtedness evidenced by these Notes and the Subsidiary Guarantees is Senior Indebtedness of the Company and of
the Subsidiary Guarantors, as applicable, and ranks pari passu in right of payment with all existing and future Senior
Indebtedness of the Company and the Subsidiary Guarantors, as the case may be, and has the benefit of the second-priority
security interest in the Collateral as described under " - Security for the Notes" and is senior in right of payment to all
existing and future subordinated indebtedness of the Company and the Subsidiaty Guarantors, as the case may be. Pursuant to
the Security Documents and the Intercreditor Agreement, the security interests securing the Notes and the Guarantees are
second in priority (subject to Permitted Liens, including exceptions described under the caption " - Security for the Notes")
to all security interests at any time granted to secure First-Priority Lien Obligations. The Notes, therefore, are effectively
subordinated to Indebtedness Incurred pursuant to the Credit Facility, to the extent of the value of the collateral securing such
Indebtedness.
)
As of December 31, 2004, long term debt related to the Company's and the Subsidiary Guarantors' Senior Indebtedness
was $150.5 million ($154.0 million without giving effect to original issue discount with respect to the notes). Virtually all of
the Senior Indebtedness of the SubsidialY Guarantors consists of their respective Guarantees of Senior Indebtedness ofthe
Company with respect to the Notes and their obligations under the Credit Agreement.
Liabilities of Subsidiaries versus Notes
All of our operations are conducted through our subsidiaries. Some of our current and future Subsidiary Guarantors may
be released as guarantors of the Notes under certain circumstances. In addition, certain of our foreign subsidiaries may not be
required to Guarantee the Notes. Claims of creditors of such non-guarantor subsidiaries, including trade creditors and
creditors holding indebtedness or Guarantees issued by such non-guarantor subsidiaries, and claims of preferred stockholders
of such non-guarantor subsidiaries generally will have priority with respect to the assets and earnings of such non-guarantor
subsidiaries over the claims of our creditors, including holders of the Notes. Accordingly, the Notes will be effectively
subordinated to creditors (including trade creditors) and preferred stockholders, if any, of our non-guarantor subsidiaries.
At the Issue Date, all of our Subsidiaries guaranteed the Notes.
Security for the Notes
The Notes and the Subsidiary Guamntees are secured by second-priority security interests (subject to Permitted Liens) in
the Collateral. The Collateral consists of (i) 100% of the Capital Stock of direct and indirect Wholly Owned Subsidiaries of
the Company (subject to the limitations described in the next paragraph and "- Limitations on Stock Collateral"), (ii) 65%
of the Capital Stock of certain future direct and indirect Foreign Subsidiaries of the Company (subject to the limitations
described in the next
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paragraph and " - Limitations on Stock Collateral") and (iii) substantially all of the other property and assets, in each case,
that are held by the Company or any of the SubsidialY Guarantors, to the extent that such assets secure the First-Priority Lien
Obligations and to the extent that a second-priority security interest is able to be granted or perfected therein; provided,
however, that (x) the accounts receivable and inventOlY of the Company and the Subsidiary Guarantors and any proceeds
thereof will be pledged to secure only the First-Priority Lien Obligations and will not be pledged to secure the Notes or the
SubsidiaIY Guarantees, (y) leasehold interests of the Company and the SubsidiaIY Guarantors will not be pledged to secure
the First-Priority Lien Obligations, the Notes or the SubsidiaIY Guarantees and (z) pursuant to the Security Documents and
the Intercreditor Agreement, the security interest in any cash ofthe Company and the Subsidiary Guarantors that constitutes
part of the Collateral will be perfected upon an Event of Default, but will remain an unperfected security interest until such
occurrence.
The security interests securing the Notes are second in priority to any and all security interests at any time granted to
secure the First-Priority Lien Obligations and are also be subject to all other Permitted Liens. The First-Priority Lien
Obligations include our working capital facility and related obligations, as well as certain hedging obligations and certain
other obligations in respect of cash management services. The Person holding such First-Priority Lien Obligations may have
rights and remedies with respect to the property subject to such Liens that, if exercised, could adversely affect the value of
the Collateral or the ability of the Intercreditor Agent to realize or foreclose on the Collateral on behalf of holders of the
Notes.
Limitatlons on Stock Collateral
)
The Capital Stock and securities of a SubsidialY of the Company that are owned by the Company or any Subsidiary
Guarantor constitute Collateral only to the extent that such Capital Stock and securities can secure the Notes or the
Subsidiary Guarantees without Rule 3-10 or Rule 3-16 of Regulation S-X under the Securities Act (or any other law, rule or
regulation) requiring separate financial statements of such SubsidialY to be filed with the SEC (or any other governmental
agency). In the event that Rule 3-10 or Rule 3-16 of Regulation S-X under the Securities Act requires or is amended,
modified or interpreted by the SEC to require (or is replaced with another rule or regulation, or any other law, rule or
regulation is adopted, which would require) the filing with the SEC (or any other governmental agency) of separate financial
statements of any SubsidiaIY due to the fact that such SubsidiaIY's Capital Stock and securities secure the Notes or the
SubsidiaIY Guarantees, then the Capital Stock and securities of such SubsidiaIY shall automatically be deemed not to be part
of the Collateral (but only to the extent necessary to not be subject to such requirement). In such event, the Security
Documents may be amended or modified, without the consent of any Holder of Notes, to the extent necessary to release the
second-priority security interests on the shares of Capital Stock and securities that are so deemed to no longer constitute part
of the Collateral.
In the event that Rule 3-10 or Rule 3-16 of Regulation S-X under the Securities Act is amended, modified or interpreted
by the SEC to permit (or is replaced with another rule or regulation, or any other law, rule or regulations adopted, which
would permit) such SubsidialY's Capital Stock and securities to secure the Notes or the Subsidiary Guarantees in excess of
the amount then pledged without the filing with the SEC (or any other governmental agency) of separate financial statements
of such Subsidiary, then the Capital Stock and securities of such Subsidiary (up to the amounts described in clauses (i) and
(ii) under " - Security for the Notes") shall automatically be deemed to be a part of the Collateral (but only to the extent
necessary to not be subject to any such financial statement requirement). In such event, the Security Documents may be
amended or modified, without the consent of any holder of Notes, to the extent necessalY to subject such additional Capital
Stock and securities to the Liens under the Security Documents.
In accordance with the limitations set forth in the two immediately preceding paragraphs, as of the Issue Date, the
Collateral includes shares of Capital Stock of the Subsidiaries only to the extent that the applicable value of such Capital
Stock (on a Subsidiary-by-Subsidiary basis) is less than 20% of the
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aggregate principal amount of the Notes outstanding. Following the Issue Date, however, the portion of the Capital Stock of
Subsidiaries constituting Collateral may decrease or increase as described above.
After-Acquired Collateral
Subject to certain limitations and exceptions, if the Company or any Subsidiary Guarantor creates any additional security
interest upon any property or asset (other than inventory and accounts receivable and any proceeds thereof) to secure any
First-Priority Lien Obligations (which include Obligations in respect of the Credit Agreement), it must concurrently grant a
second-priority security interest (subject to Permitted Liens, including the first-priority lien that secures obligations in respect
of the First-Priority Lien Obligations) upon such propelty as security for the Notes or the Subsidiary Guarantees, as
applicable. Also, if granting a security interest in such property requires the consent of a third party, the Company will use
commercially reasonable efforts to obtain such consent with respect to the second-priority security interest for the benefit of
the Trustee on behalf of the holders of the Notes. If such third party does not consent to the granting of the second-priority
security interest after the use of such commercially reasonable efforts, the applicable entity will not be required to provide
such security interest.
Security Documents and Intcrcreditor Agreement
The Company, the SubsidialY Guarantors and the Tmstee have entered into Security Documents defining the terms of the
security interests that secure the Notes and the Subsidiary Guarantees. These security interests secure the payment and
performance when due of all of the Obligations of the Company and the Subsidiary Guarantors under the Notes, the
Indenture, the SubsidialY Guarantees and the Security Documents, as provided in the Security Documents. The Company and
the Subsidiaty Guarantors will use their commercially reasonable efforts to complete on or as soon as practicable after the
Issue Date all filings and other similar actions required in connection with the perfection of such security interests.
,)
The Trustee and the Intercreditor Agent have entered into the Intercreditor Agreement, which may be amended from time
to time to add other parties holding other Second-Lien Obligations and other First-Priority Lien Obligations permitted to be
incurred under the Indenture. The Intercreditor Agent will initially be the administrative agent under the Credit Agreement.
Pursuant to the terms of the Intercreditor Agreement, at any time that First-Priority Lien Obligations are outstanding (whether
incurred prior to, on or after the Issue Date), the Intercreditor Agent will determine the time and method by which the
security interests in the Collateral will be enforced. The Trustee will not be permitted to enforce the security interests even if
an Event of Default under the Indenture has occurred and the Notes have been accelerated except (a) in any insolvency or
liquidation proceeding, as necessary to file a claim or statement of interest with respect to such Notes or the SubsidialY
Guarantees or (b) as necessary to take any action (not adverse to the Liens securing the First-Priority Lien Obligations or the
rights of the Intercreditor Agent or the holders of the First-Priority Lien Obligations to exercise remedies in respect thereof)
in order to create, prove, preserve, perfect or protect (but not enforce) its rights in the second-priority Liens. See "Risk
Factors - Risk Factors Related to this Offering and Our Capital Structure - Holders of notes will not control decisions
regarding collateral." At any time at which all First-Priority Lien Obligations have been discharged in full, the Trustee in
accordance with the provisions of the Indenture and the Security Documents will distribute all cash proceeds (after payment
of the costs of enforcement and collateral administration) of the Collateral received by it under the Security Documents for
the ratable benefit of the holders of the Notes. The proceeds from the sale of the Collateral remaining after the satisfaction of
all First-Priority Lien Obligations may not be sufficient to satisfy the obligations owed to the holders of the Notes. By its
nature some or all of the Collateral will be illiquid and may have no readily ascertainable market value. Accordingly, the
Collateral may not be able to be sold in a ShOlt period of time, if salable. See "Risk Factors - Risk Factors Related to this
Offering and Our Capital Structure - There may not be sufficient collateral to pay all or any of the notes."
In addition, the Security Documents and the Intercreditor Agreement provide that, so long as there are First-Priority Lien
Obligations outstanding (whether incurred prior to, on or after the Issue Date),
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(1) the holders of First-Priority Lien Obligations may direct the Intercreditor Agent to take actions with respect to the
Collateral (including the release of Collateral and the manner of realization) without the consent of the holders of the Notes
and (2) the holders of the First-Priority Lien Obligations may change, waive, modify or valY the security documents without
the consent of the holders of the Notes, provided that any such change, waiver or modification does not disproportionately
affect the rights of the holders of the Notes and not the other secured creditors in a like or similar manner. See "Risk Factors
Related to this Offering and Our Capital Stmcture - Holders of notes will not control decisions regarding Collateral."
Subject to the terms of the Security Documents, the Company and the Subsidiaty Guarantors have the right to remrtin in
possession and retain exclusive control of the Collateral securing the Notes and the Subsidiaty Guarantees (other than certain
securities constituting part of the Collateral and deposited with the Intercreditor Agent in accordance with the provisions of
the Security Documents and other than as set forth in the Security Documents), to freely operate the Collateral and to collect,
invest and dispose of any income therefrom.
See "Risk Factors - Risk Factors Related to this Offering and Our Capital Structure collateral may be adversely affected by bankruptcy proceedings."
Rights of holders of notes in the
Release of Collateral
The Company and the Subsidiary Guarantors will be entitled to the releases of property and other assets included in the
Collateral from the Liens securing the Notes under anyone or more of the following circumstances:
(I) to enable us to consummate the disposition of such property or assets, other than to the Company or a Restricted
SubsidialY, to the extent not prohibited under the covenant described under "- Certain Covenants - Limitation on Sales
of Assets and Subsidiary Stock;"
(2) in the case of a Subsidiaty Guarantor that is released from its Subsidiaty Guarantee with respect to the Notes, the
release of the property and assets of such SubsidialY Guarantor; or
(3) as described above under " - Security Documents and Intercreditor Agreement" and under " - Amendments and
Waivers" below.
)
The second-priority security interests in all Collateral securing the Notes will also be released upon (i) payment in full of
the principal of, together with accrued and unpaid interest (including additional interest, if any) on, the Notes and all other
Obligations under the Indenture, the SubsidialY Guarantees under the Indenture and the Security Documents that are due and
payable at or prior to the time such principal, together with accrued and unpaid interest (including additional interest, if any),
are paid or (ii) a legal defeasance or covenant defeasance under the Indenture as described below under " - Defeasance" or
upon the discharge of our obligations under the Indenture in accordance with the terms of the Indenture.
Book-Entry, Delivery and Form
We will issue the exchange notes in the form of one or more global notes (the "Global Exchange Note"). The Global
Exchange Note will be deposited with, or on behalf of, DTC and registered in the DTC or its nominee. Except as set forth
below, the Global Exchange Note may be transferred, in whole and not in part, and only to DTC or another nominee ofDTC.
You may hold your beneficial interests in the Global Exchange Note directly through DTC if you have an account with DTC
or indirectly through organizations that have accounts with DTC.
Depo~'itory Proce{{IIres
The following description of the operations and procedures of DTC is provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective settlement
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systems and are subject to changes by them. We take no responsibility for these operations and procedures and urge investors
to contact the system or their participants directly to discuss these matters.
DTC has advised us that DTC is a limited-purpose trust company organized under the laws of the State of New York, a
"banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the Uniform Commercial Code and a "clearing agency" registered pursuant to
the provisions of Section 17 A of the Exchange Act. DTC was created to hold securities for its palticipating organizations
(collectively, the "participants ") and to facilitate the clearance and settlement of transactions in those securities between
participants through electronic book~entry changes in accounts of its patticipants. The participants include securities brokers
and dealers (including the initial purchasers), banks, trust companies, clearing corporations and certain other organizations.
Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a patticipant, either directly or indirectly (collectively, the "indirect
participants "). Persons who are not participants may beneficially own securities held by or on behalf of DTC only through
the participants or the indirect participants. The ownership interests in, and transfers of ownership interests in, each security
held by or on behalf of DTC are recorded on the records of the participants and indirect participants.
DTC has also advised us that, pursuant to procedures established by it:
(I) upon deposit of the Global Exchange Notes, DTC will credit the accounts of Holders with pOltions of the principal
amount of the Global Exchange Notes; and
(2) ownership of these interests in the Global Exchange Notes will be shown on, and the transfer of ownership of
these interests will be effected only through, records maintained by DTC (with respect to the Holders) or by the Holders
and the indirect Holders (with respect to other owners of beneficial interests in the Global Exchange Notes).
)
Investors in the Global Exchange Notes who are participants in DTC's system may hold their interests therein directly
through DTC. Investors in the Global Exchange Notes who are not participants may hold their interests therein indirectly
through organizations which are participants in such system. All interests in a Global Exchange Note may be subject to the
procedures and requirements of DTC. The laws of some states require that celtain Persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Exchange Note to such
Persons will be limited to that extent. Because DTC can act only on behalf of participants, which in turn act on behalf of
indirect participants, the ability ofa Person having beneficial interests in a Global Exchange Note to pledge such interests to
Persons that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by
the lack of a physical certificate evidencing such interests.
Except as described below, owners of an interest in the Global Exchange Note will not have Notes registered in
their names, will not receive physical delivery of Notes in certificated form and will not be considered the registered
owners or "Holders" thereof under the Indenture for any purpose.
Payments in respect of the principal of, and interest and premium and additional interest, if any, on a Global Exchange
Note registered in the name of DTC or its nominee will be payable to DTC in its capacity as the registered Holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee will treat the Persons in whose names the Notes,
including the Global Exchange Notes, are registered as the owners of the Notes for the purpose of receiving payments and for
all other purposes. Consequently, neither the Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for:
(1) any aspect of DTC's records or any participant's or indirect participant's records relating to or payments made on
account of beneficial ownership interests in the Global Exchange Notes or for maintaining, supervising or reviewing any
of DTC's records or any patticipant's or indirect participant's records relating to the beneficial ownership interests in the
Global Exchange Notes; or
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(2) any other matter relating to the actions and practices of DTC or any of its participants or indirect participants.
DTC has advised us that its current practice, upon receipt of any payment in respect of securities such as the Notes
(including principal and interest), is to credit the accounts of the relevant participants with the payment on the payment date
unless DTC has reason to believe it will not receive payment on such payment date. Each relevant participant is credited with
an amount prop011ionate to its beneficial ownership of an interest in the principal amount of the relevant security as shown on
the records of DTC. Payments by the participants and the indirect participants to the beneficial owners of Notes will be
governed by standing instructions and customary practices and will be the responsibility of the participants or the indirect
participants and will not be the responsibility of DTC, the Trustee or the Company. Neither the Company nor the Trustee will
be liable for any delay by DTC or any of its participants in identifying the beneficial owners of the Notes, and the Company
and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all
purposes.
Subject to the transfer restrictions set forth under "Transfer Restrictions", transfers between participants in DTC will be
effected in accordance with DTC's procedures, and will be settled in same-day funds.
DTC has advised the Company that it will take any action permitted to be taken by a Holder of Notes only at the direction
of one or more participants to whose account DTC has credited the interests in the Global Exchange Notes and only in
respect of such portion of the aggregate principal amount of the Notes as to which such participant or participants has or have
given such direction. However, if there is an Event of Default under the Notes, DTC reserves the right to exchange the Global
Exchange Notes for legended Notes in certificated form, and to distribute such Notes to its participants.
Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Exchange
Notes among participants, it is under no obligation to perform such procedures, and such procedures may be discontinued or
changed at any time. Neither the Company nor the Trustee nor any of their respective agents will have any responsibility for
the performance by DTC or its participants or indirect participants of their respective obligations under the rules and
procedures governing their operations.
Exchllllge of Global Notesfor Certificated Notes
)
Subject to certain conditions, the exchange notes represented by the Global Exchange Notes are exchangeable for
Certificated Notes if:
(l) DTC (A) notifies the Company that it is unwilling or unable to continue as depositary for the Global Exchange
Notes or (B) has ceased to be a clearing agency registered under the Exchange Act and, in each case, a successor
depositaty is not appointed;
(2) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Certificated
Notes; or
(3) there has occurred and is continuing a Default with respect to the Notes.
In addition, beneficial interests in a Global Exchange Note may be exchanged for Certificated Notes upon prior written
notice given to the Trustee by or on behalf of DTC in accordance with the Indenture. In all cases, Certificated Notes
delivered in exchange for any Global Exchange Note or beneficial interests in Global Exchange Notes will be registered in
the names, and issued in any approved denominations, requested by or on behalf of the depositaty (in accordance with its
customa.y procedures) and will bear the applicable restrictive legend referred to in "Transfer Restrictions", unless that legend
is not required by applicable law.
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Exchallge o/Cerlijicaled Noles/or Global Exch(mge Noles
Certificated Notes may not be exchanged for beneficial interests in any Global Exchange Note unless the transferor first
delivers to the Trustee a written certificate (in the form provided in the Indenture) to the effect that such transfer will comply
with the appropriate transfer restrictions applicable to such Notes. See "Transfer Restrictions,"
Sume Day Settlement lind Payment
The Company will make payments in respect of the Notes represented by the Global Exchange Notes (including
principal, premium, if any, interest and additional interest, if any) by wire transfer of immediately available funds to the
accounts specified by the Global Exchange Note Holder. The Company will make all payments of principal, interest and
premium and additional interest, if any, with respect to Certificated Notes by wire transfer of immediately available funds to
the accounts specified by the Holders of the Certificated Notes or, if no such account is specified, by mailing a check to each
such Holder's registered address.
Registered Exchange Offer; Registration Rights
In connection with the offering of the old notes, we, the Subsidiary Guarantors and the initial purchasers entered into a
Registration Rights Agreement relating to the old notes, which provides for this exchange offer. A copy of the Registration
Rights Agreement relating to the old notes is filed as an exhibit to the registration statement of which this prospectus is a part.
Please read the section captioned "The Exchange Offer" for more details regarding the terms of the Registration Rights
Agreement.
Excess Cash Flow
)
(a) Within 120 days after the end of each Excess Cash Flow Period, the Company shall, unless a default shall have
occurred and be continuing under the Credit Agreement (in which case the obligations set forth under this heading shall apply
once such default is cured or waived without regard to whether it is cured or waived after such 120-day period), make an
offer to all Holders to purchase Notes using an amount equal to the Excess Cash Flow Amount pursuant to an Excess Cash
Flow Offer (as defined below) .
. Each offer to purchase Notes pursuant to this provision (each, an "Excess Cash Flow Offer") shall be made to each
Holder at the time of such offer, shall offer to purchase Notes at a purchase price equal to the lesser of (i) 104% and (ii) the
then applicable redemption price set forth in the table under "Optional Redemption", in each case, oftheir principal amount
and shall remain open for a period of not less than 20 Business Days (or any longer period as is required by law).
(b) If the Company is required to make an Excess Cash Flow Offer pursuant to this provision, no later than 120 days (or
such later time as a default has been cured or waived after such 120-day period in accordance with the circumstances
described above in paragraph (a)) after the end of the applicable Excess Cash Flow Period, the Company shall mail a notice
of such Excess Cash Flow Offer to each Holder stating:
(i) that the Company is offering to use an amount equal to the Excess Cash Flow Amount to purchase Notes at a
purchase price in cash equal to the lesser of (i) 104% and (ii) the then applicable redemption price set forth in the table
under "Optional Redemption", in each case, of their principal amount on the date of purchase, plus accrued and unpaid
interest, if any, to the date of purchase (without duplication, subject to the right of Holders of record on the relevant date
to receive interest on the relevant interest payment date);
(ii) the purchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is
mailed); and
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(iii) the instmctions, as determined by the Company, consistent with the covenant described hereunder, that a Holder
must follow in order to tender its Notes.
(c) If the aggregate purchase price (exclusive of accrued and unpaid interest) of the Notes tendered in connection with
any Excess Cash Flow Offer exceeds the Excess Cash Flow Amount allotted to their purchase, the Trustee will select the
Notes to be purchased on a pro rata basis but in denominations of $1 ,000 principal amount or multiples thereof. Ifthe
aggregate purchase price of the Notes tendered in connection with any Excess Cash Flow Offer is less than the Excess Cash
Flow Amount allotted to their purchase, the Company shall be permitted to use the portion of the Excess Cash Flow Amount
that is not applied to the purchase of Notes in connection with such Excess Cash Flow Offer for general corporate purposes
or for any other purposes not prohibited by the Indenture. To the extent the Excess Cash Flow Amount for any Excess Cash
Flow Period is less than $5.0 million, the Company may elect not to make an Excess Cash Flow Offer for such Excess Cash
Flow Period and, in lieu thereof add such Excess Cash Flow to the amount of Excess Cash Flow for the next succeeding
Excess Cash Flow Period. Upon completion of an Excess Cash Flow Offer, the Excess Cash Flow Amount with respect
thereto will be deemed to be reduced by the aggregate amount of such Excess Cash Flow Offer.
(d) The Company shall comply with the requirements of Rule 14e-l under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of
Notes pursuant to an Excess Cash Flow Offer. To the extent that the provisions of any securities laws or regulations conflict
with the provisions of the covenant described hereunder, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the covenant described hereunder by virtue of its
compliance with such securities laws or regulations.
Change of Control
Upon the occurrence ofany of the following events (each a "Change 4Control"), each Holder shall have the right to
require that the Company purchase such Holder's Notes at a purchase price in cash equal to 101% ofthe principal amount
thereof on the date of purchase plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders
of record on the relevant record date to receive interest due on the relevant interest payment date):
)
(I) prior to the first public offering of common stock of the Company, the Permitted Holders cease to be the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of 40% of the
aggregate of the total voting power of the Voting Stock of the Company, whether as a result of issuance of securities of
the Company, any merger, consolidation, liquidation or dissolution of the Company, or any direct or indirect transfer of
securities (for purposes of this clause (I) and clause (2) below, the Permitted Holders shall be deemed to beneficially own
any Voting Stock ofa Person (the "specified person") held by any other Person (the "parent entity") so long as the
Permitted Holders beneficially own (as so defined), directly or indirectly, in the aggregate a majority of the voting power
of the Voting Stock of the parent entity);
(2) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more
Permitted Holders, is or becomes the beneficial owner (as defined in clause (I) above, except that for purposes of this
clause (2) such person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more
than 50% of the total voting power of the Voting Stock of the Company (for the purposes of this clause (2), such other
person shall be deemed to beneficially own any Voting Stock ofa specified person held by a parent entity, ifsuch other
person is the beneficial owner (as defined in this clause (2)), directly or indirectly, of more than 50% of the voting power
of the Voting Stock of such parent entity);
(3) individuals who on the Issue Date constituted the Board of Directors (together with any new directors whose
election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved
by a vote of66'h% of the directors of the Company then
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still in office who were either directors on the Issue Date or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of Directors then in office; provided, however, that
any individual appointed by H.I.G. to replace any existing H.I.G. Director shall be deemed to have been a member of the
Board of Directors on the Issue Date;
(4) the adoption ofa plan relating to the liquidation or dissolution of the Company;
(5) the merger or consolidation of the Company with or into another Person or the merger of another Person with or
into the Company, or the sale of all or substantially all the assets of the Company (determined on a consolidated basis) to
another Person other than (A) a transaction in which the survivor or transferee is a Person that is controlled by the
Permitted Holders or (8) a transaction following which (i) in the case of a merger or consolidation transaction, holders of
securities that represented at least a majority of the Voting Stock of the Company immediately prior to such transaction
(or other securities into which such securities are converted as part of such merger or consolidation transaction) own
directly or indirectly at least a majority of the voting power of the Voting Stock of the surviving Person in such merger or
consolidation transaction immediately after such transaction and (ii) in the case of a sale of assets transaction, each
transferee becomes an obligor in respect of the Notes and a Subsidiary of the transferor of such assets; or
(6) the Company ceases to be the beneficial owner (as defined in clause (\) above), directly or indirectly, of 100% of
the Voting Stock of each of T-Netix and Evercom, 01', following a merger of T-Netix and Evercom, such surviving entity.
Within 30 days following any Change of Control, we will mail a notice to each Holder with a copy to the Trustee (the
"Change of Control Offer") stating:
(I) that a Change of Control has occurred and that such Holder has the right to require us to purchase such Holder's
Notes at a purchase price in cash equal to 10 I % of the principal amount thereof on the date of purchase, plus accrued and
unpaid interest, if any, to the date of purchase (subject to the right of Holders of record on the relevant record date to
receive interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of Control (including information with respect to pro
forma historical income, cash flow and capitalization, in each case after giving effect to such Change of Control);
)
(3) the purchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is
mailed); and
(4) the instructions, as determined by us, consistent with the covenant described hereunder, that a Holder must follow
in order to have its Notes purchased.
We will not be required to make a Change of Control Offer following a Change of Control if a third party makes the
Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change of Control Offer made by us and purchases all Notes validly tendered and not withdrawn
under such Change of Control Offer.
We will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other
securities laws or regulations in connection with the purchase of Notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the provisions of the covenant described hereunder, we will
comply with the applicable securities laws and regulations and shall not be deemed to have breached our obligations under
the covenant described hereunder by virtue of our compliance with such securities laws or regulations.
The Change ofContl'ol purchase feature of the Notes may in certain circumstances make more difficult or discourage a
sale or takeover of the Company and, thus, the removal of incumbent management. The Change of Control purchase feature
is a result of negotiations between the Company and the Initial Purchasers. We have no present intention to engage in a
transaction involving a Change of
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Control, although it is possible that we could decide to do so in the future. Subject to the limitations discussed below, we
could, in the future, enter into certain transactions, including acquisitions, refinancings
01'
other recapitalizations, that would
not constitute a Change of Control under the Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect our capital structure or credit ratings. Restrictions on our ability to Incur additional
Indebtedness are contained in the covenants described under "- Celtain Covenants - Limitation on Indebtedness", "Limitation on Liens" and " - Limitation on Salel Leaseback Transactions." Such restrictions can only be waived with the
consent of the holders of a majority in principal amount of the Notes then outstanding. Except for the limitations contained in
such covenants, however, the Indenture will not contain any covenants or provisions that may afford holders of the Notes
protection in the event of a highly leveraged transaction.
In the event a Change of Control occurs at a time when we are prohibited from purchasing Notes, we may seek the
consent of our lenders to the purchase of Notes or may attempt to refinance the borrowings that contain such prohibition. If
we do not obtain such a consent or repay such borrowings, we will remain prohibited from purchasing Notes. In such case,
our failure to offer to purchase Notes would constitute a Default under the Indenture, which would, in turn. constitute a
default under the Credit Agreement.
Future indebtedness that we may incur may contain prohibitions on the occurrence of certain events that would constitute
a Change of Control or require the repurchase of such indebtedness upon a Change of Control. Moreover, the exercise by the
holders of their right to require us to repurchase their Notes could cause a default under such indebtedness, even if the
Change of Control itself does not, due to the financial effect of such repurchase on us. Finally, our ability to pay cash to the
holders of Notes following the occurrence ofa Change of Control may be limited by our then existing financial resources.
There can be no assurance that sufficient funds will be available when necessary to make any required repurchases.
The definition of "Change of Control" includes a disposition of all or substantially all of the assets of the Company to any
Person. Although there is a limited body of case law interpreting the phrase "substantially all", there is no precise established
definition ofthe phrase under applicable law. Accordingly, in certain circumstances there may be a degree of uncertainty as
to whether a particular transaction would involve a disposition of "all or substantially all" of the assets of the Company. As a
result, it may be unclear as to whether a Change of Control has occurred and whether a holder of Notes may require the
Company to make an offer to repurchase the Notes as described above.
)
The provisions under the Indenture relative to our obligation to make an offer to repurchase the Notes as a result of a
Change of Control may be waived or modified with the written consent ofthe holders ofa majority in principal amount of the
Notes.
Certain Covenants
The Indenture contains covenants including, among others, those summarized below.
Limitlltion 011 Illdebtedlless
(a) The Company will not, and will not permit any Restricted Subsidiaty to, Incur, directly or indirectly, any
Indebtedness; provided, however, that the Company and the Subsidiary Guarantors will be entitled to Incur Indebtedness if,
on the date of such Incurrence and after giving effect thereto on a pro forma basis the Fixed Charge Coverage Ratio exceeds
2.00 to I.
(b) Notwithstanding the foregoing paragraph (a), the Company and the Restricted Subsidiaries will be entitled to Incur
any or all of the following Indebtedness:
(I) Indebtedness Incurred by the Company and the Subsidiary Guarantors pursuant to the Credit Facility (other than
Indebtedness Incurred under clause (10)); provided, however, that, immediately after giving effect to any such Incurrence,
the aggregate principal amount of all Indebtedness Incurred under this clause (I) and then outstanding does not exceed
$30.0 million;
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(2) Indebtedness owed to and held by the Company or a Restricted SubsidialY; provided, however, that (A) any
subsequent issuance or transfer of any Capital Stock which results in any such Restricted SubsidialY ceasing to be a
Restricted SubsidialY or any subsequent transfer of such Indebtedness (other than to the Company or a Restricted
Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the obligor thereon, (8) if
the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in
full in cash of all obligations with respect to the Notes, and (C) if a Subsidiary Guarantor is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations of such
SubsidialY Guarantor with respect to its Subsidiaty Guarantee;
(3) the Notes and the Exchange Notes (other than any Additional Notes);
(4) Indebtedness outstanding on the Issue Date (other than Indebtedness described in clause (I), (2) (3) or (6) of this
covenant);
(5) Indebtedness of a Restricted Subsidiaty Incurred and outstanding on or prior to the date on which such Subsidiary
was acquired by the Company (other than Indebtedness Incurred in connection with, or to provide all or any portion of
the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such
Subsidiaty became a SubsidialY or was acquired by the Company); provided, however, that on the date of such
acquisition and after giving pro forma effect thereto, the Company would have been entitled to Incur at least $1.00 of
additional Indebtedness pursuant to paragraph (a) ofthis covenant;
(6) the Mezzanine Debt;
(7) Refinancing Indebtedness in respect ofindebtedness Incurred pursuant to paragraph (a) or pursuant to clause (3),
(4), (5) or (6) or this clause (7); provided, however, that to the extent such Refinancing Indebtedness directly or indirectly
Refinances Indebtedness of a Subsidiaty Incurred pursuant to clause (5), such Refinancing Indebtedness shall be Incurred
only by such SubsidialY;
(8) Hedging Obligations consisting of Interest Rate Agreements directly related to Indebtedness permitted to be
Incurred by the Company and its Restricted Subsidiaries pursuant to the Indenture;
(9) obligations in respect of letters of credit, performance, bid and surety bonds and completion guarantees provided
by the Company or any Restricted Subsidiary in the ordinary course of business;
(10) Indebtedness consisting of letters of credit issued pursuant to the Credit Agreement, not to exceed $10.0 million
at any time issued and outstanding;
(II) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar
instrument drawn against insufficient funds in the ol'dinaty course of business; provided, however, that such Indebtedness
is extinguished within two Business Days of its Incurrence;
(12) Indebtedness consisting of the Subsidiaty Guarantee ofa Subsidiaty Guarantor and any Guarantee by a
Subsidiary Guarantor of Indebtedness Incurred pursuant to paragraph (a) or pursuant to clause (I), (2), (3), (4) or (6) or
pursuant to clause (7) to the extent the Refinancing Indebtedness Incurred thereunder directly or indirectly Refinances
Indebtedness Incurred pursuant to paragraph (a) or pursuant to clause (3), (4) or (6); and
(13) Indebtedness of the Company or a Subsidiary Guarantor in an aggregate principal amount which, when taken
together with all other Indebtedness of the Company and the Subsidiaty Guarantors outstanding on the date of such
Incurrence (other than Indebtedness permitted by clauses (I) through (12) above or paragraph (a» does not exceed
$5.0 million.
(c) Notwithstanding the foregoing, neither the Company nor any SubsidialY Guarantor will incur any Indebtedness
pursuant to the foregoing paragraph (b) ifthe proceeds thereof are used, directly or indirectly, to Refinance any Subordinated
Obligations of the Company or any Subsidiary Guarantor unless such Indebtedness shall be subordinated to the Notes or the
applicable Subsidiary Guarantee to at least the same extent as such Subordinated Obligations.
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(d) For purposes of determining compliance with this covenant:
(I) any Indebtedness remaining outstanding under the Credit Facility after the application of the net proceeds from the
sale of the Notes will be treated as Incurred on the Issue Date under clause (I) of paragraph (b) above;
(2) in the event that an item of Indebtedness (or any portion thereof) meets the criteria of more than one of the types
ofIndebtedness described above, the Company, in its sole discretion, will classify such item ofIndebtedness (or any
portion thereof) at the time of Incurrence and will only be required to include the amount and type of such Indebtedness
in one of the above clauses; and
(3) the Company will be entitled to divide and classify an item ofIndebtedness in more than one of the types of
Indebtedness described above.
Limitation on Restricted Payments
(a) The Company will not, and will not permit any Restricted Subsidiaty, directly or indirectly, to make a Restricted
Payment if at the time the Company or such Restricted Subsidiaty makes such Restricted Payment:
(I) a Default shall have occurred and be continuing (or would result therefrom);
(2) the Company is not entitled to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "- Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other Restricted Payments since the Issue Date would
exceed the sum of (without duplication):
(A) 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) from the
beginning of the fiscal quarter immediately following the fiscal quarter during which the Issue Date occurs to the end
of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or, in case such
Consolidated Net Income shall be a deficit, minus I 00% of such deficit); plus
)
(8) I 00% of the aggregate Net Cash Proceeds received by the Company from the issuance or sale of its Capital
Stock (other than Disqualified Stock) subsequent to the Issue Date (other than an issuance or sale to a Subsidia.y of
the Company and other than an issuance or sale to an employee stock ownership plan or to a trust established by the
Company or any of its Subsidiaries for the benefit of their employees) and 100% of any cash capital contribution
received by the Company from its stockholders subsequent to the Issue Date; plus
(C) the amount by which Indebtedness of the Company is reduced upon the conversion or exchange subsequent to
the Issue Date of any Indebtedness of the Company convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash, or the fair value of any other property, distributed
by the Company upon such conversion or exchange); provided, however, that the foregoing amount shall not exceed
the Net Cash Proceeds received by the Company or any Restricted Subsidiaty from the sale of such Indebtedness
(excluding Net Cash Proceeds from sales to a Subsidiaty of the Company or to an employee stock ownership plan or
to a trust established by the Company or any of its Subsidiaries for the benefit of their employees); plus
net
(D) an amount equal to the slim of (i) the
reductio';;;; the Invest-ments (other than -Permitted[nvestments)
made by the Company or any Restricted Subsidia.y in any Person resulting from repurchases, repayments or
redemptions of such Investments by such Person, proceeds realized on the sale of sllch Investment and proceeds
representing the return of capital (excluding dividends and distributions), in each case received by the Company or
any Restricted Subsidia.y, and (ii) to the extent such Person is an Unrestricted Subsidiaty, the pOltion (propOltionate
to the Company's equity interest in such Subsidiary) of the fair market value of
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the net assets of such Unrestricted Subsidiaty at the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any such Person or Unrestricted
Subsidiary, the amount of Investments (excluding Permitted Investments) previously made (and treated as a
Restricted Payment) by the Company or any Restricted Subsidia.y in such Person or Unrestricted Subsidia.y.
(b) The preceding provisions will not prohibit:
(I) any Restricted Payment made out of the Net Cash Proceeds of the substantially concurrent sale of, or made by
exchange for, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to
a Subsidiaty of the Company or an employee stock ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees) or a substantially concurrent cash capital contribution received by the
Company from its stockholders; provided, however, that (A) such Restricted Payment shall be excluded in the calculation
of the amount of Restricted Payments and (B) the Net Cash Proceeds from such sale or such cash capital contribution (to
the extent so used for such Restricted Payment) shall be excluded from the calculation of amounts under clause (3)(B) of
paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of Subordinated
Obligations of the Company or a Subsidia.y Guarantor made by exchange for, or out of the proceeds of the substantially
concurrent Incurrence of, Indebtedness of such Person which is permitted to be Incurred pursuant to the covenant
described under " - Limitation on Indebtedness"; provided, however, that notwithstanding anything to the contrary
contained in this clause (2), any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value
of the Mezzanine Debt may only be made by exchange for, or out of the proceeds of, the substantially concurrent
Incurrence of Subordinated Obligations of the Company; and provided further that any purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value made pursuant to this clause (2) shall be excluded in the
calculation of the amount of Restricted Payments;
)
(3) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend
would have complied with this covenant; provided, however, that at the time of payment of such dividend, no other
Default shall have occurred and be continuing (or result therefrom); providedfi/rther, however, that such dividend shall
be included in the calculation of the amount of Restricted Payments;
(4) so long as no Default has occurred and is continuing, the purchase, redemption or other acquisition of shares of
Capital Stock of the Company or any of its Subsidiaries from employees, former employees, directors or former directors
of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or
former directors), pursuant to the terms of the agreements (including employment agreements) or plans (or amendments
thereto) approved by the Board of Directors under which such individuals purchase or sell or are granted the option to
purchase or sell, shares of such Capital Stock; provided, however, that the aggregate amount of such Restricted Payments
(excluding amounts representing cancelation oflndebtedness) shall not exceed $2.0 million in any calendar year;
providedfi/rther, however, that such repurchases and other acquisitions shall be excluded in the calculation of the amount
of Restricted Payments;
(5) the declaration and payments of dividends on Disqualified Stock issued pursuant to the covenant described under
" - Limitation on Indebtedness"; provided, however, that at the time of payment of such dividend, no Default shall have
occurred and be continuing (or result therefrom); providedfurther, however, that such dividends shall be excluded in the
calculation of the amount of Restricted Payments;
(6) repurchases of Capital Stock deemed to occur upon exercise of stock options if such Capital Stock represents a
portion of the exercise price of such options; provided, however, that such Restricted Payments shall be excluded in the
calculation of the amount of Restricted Payments;
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(7) cash payments in lieu of the issuance of fractional shares in connection with the exercise of warrants, options or
other securities convertible into or exchangeable for Capital Stock of the Company; provided, however, that any such
cash payment shall not be for the purpose of evading the limitation of the covenant described under this subheading (as
determined in good faith by the Board ofDirectors);providedjurther, however, that such payments shall be excluded in
the calculation of the amount of Restricted Payments;
(8) in the event of a Change of Control, and if no Default shall have occurred and be continuing, the paymeut,
purchase, redemption, defeasance Of other acquisition or retirement of Subordinated Obligations of the Company or any
Subsidiary Guarantor, in each case, at a purchase price not greater than 101 % of the principal amount of such
Subordinated Obligations, plus any accrued and unpaid interest thereon; provided, however, that prior to such payment,
purchase, redemption, defeasance or other acquisition or retirement, the Company (or a third party to the extent permitted
by the Indenture) has made a Change of Control Offer with respect to the Notes as a result of such Change of Control and
has repurchased all Notes validly tendered and not withdrawn in connection with such Change of Control Offer; provided
further, however, that such payments, purchases, redemptions, defeasances or other acquisitions or retirements shall be
included in the calculation of the amount of Restricted Payments; or
(9) payments of intercompany subordinated Indebtedness, the Incurrence of which was permitted under clause (2) of
paragraph (b) of the covenant described under " - Limitation on Indebtedness"; provided, however, that no Default has
occurred and is continuing or would otherwise result therefrom; providedfurther, however, that such payments shall be
excluded in the calculation of the amount of Restricted Payments.
Limitatioll 011 Restrictiolls 011 Distributiolls from Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiaty to, create or othelwise cause or permit to exist or
become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (a) pay dividends
or make any other distributions on its Capital Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed
to the Company, (b) make any loans or advances to the Company or (c) transfer any of its property or assets to the Company,
except:
)
(I) with respect to clauses (a), (b) and (c),
(A) any encumbrance or restriction pursuant to an agreement in effect at 01' entered into on the Issue Date
(including the Credit Facility);
(8) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to
any Indebtedness Incurred by such Restricted Subsidiaty on or prior to the date on which such Restricted Subsidiary
was acquired by the Company (other than Indebtedness Incurred as consideration in, or to provide all or any portion
of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to
which such Restricted Subsidiaty became a Restricted Subsidiary or was acquired by the Company) and outstanding
on such date;
(C) any encumbrance or restriction pursuant to an agreement effecting a Refinancing of Indebtedness Incurred
pursuant to an agreement referred to in clause (A) or (B) of clause (I) of this covenant or this clause (C) or contained
in any amendment to an agreement referred to in clause (A) or (B) of clause (I) of this covenant or this clause (C);
provided, however, that the encumbrances and restrictions with respect to such Restricted Subsidiaty contained in any
such refinancing agreement or amendment are no less favorable to the Noteholders than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in such predecessor agreements; and
(D) any encumbrance or restriction with respect to a Restricted Subsidiaty imposed pursuant to an agreement
entered into for the sale or disposition of all or substantially all the
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Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition; and
(2) with respect to clause (c) only,
(A) any encumbrance or restriction consisting of customary nonassignment provisions in leases goveming
leasehold interests to the extent such provisions restrict the transfer of the lease or the property leased thereunder
consistent with past practices of the Company or its Restricted Subsidiaries; and
(8) any encumbrance or restriction contained in security agreements or mortgages securing Indebtedness of a
Restricted Subsidiaty to the extent such encumbrance or restriction restricts the transfer of the property subject to
such security agreements or mortgages.
Limitation on Sales of Assets alUl Subsidiary Stock
(a) The Company will not, and will not permit any Restricted SubsidialY to, directly or indirectly, consummate any Asset
Disposition of any Collateral unless:
(I) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including as to the value of all non-cash consideration), as determined in good faith by the
Board of Directors, of the shares and assets subject to such Asset Disposition;
(2) at least 75% of the consideration thereof received by the Company or such Restricted Subsidiaty is in the form of
cash or cash equivalents; and
(3) an amount equal to 100% of the Net Available Cash from such Asset Disposition is paid directly by the purchaser
thereof to the Intercreditor Agent, or, ifno First-Priority Lien Obligations are outstanding, the Trustee, to be held in trust
and applied by the Company (or such Restricted Subsidiary, as the case may be) at the Company's election:
(A) to acquire Additional Assets, which Additional Assets are concurrently with their acquisition added to the
Collateral securing the Notes,
)
(8) to repay outstanding First-Priority Lien Obligations, or
(C) to make an offer to the holders of the Notes pursuant to and subject to the conditions contained in the
Indenture,
in each case within six months from the later of the date of such Asset Disposition or the receipt of such Net
Available Cash.
(b) The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset
Disposition (other than an Asset Disposition of Collateral) unless:
(I) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including as to the value of all non-cash consideration), as determined in good faith by the
Board of Directors, of the shares and assets subject to such Asset Disposition;
(2) at least 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of
cash or cash equivalents; and
(3) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidimy), as the case may be:
(A).first, to the extent the Company elects (or is required by the terms of any Indebtedness), to prepay, repay,
redeem or purchase Senior Indebtedness of the Company or Indebtedness (other than any Disqualified Stock) of a
Restricted Subsidiary (in each case other
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than Indebtedness owed to the Company or an Affiliate of the Company) within one year from the later of the date of
such Asset Disposition or the receipt of such Net Available Cash;
(B) second, to the extent of the balance of such Net Available Cash after application in accordance with
clause (A), to the extent the Company elects, to acquire Additional Assets within one year from the later of the date of
such Asset Disposition or the receipt of such Net Available Cash; and
(C) third, to the extent of the balance of such Net Available Cash after application in accordance with
clauses (A) or (B), to make an offer to the holders of the Notes (and to holders of other Senior Indebtedness of the
Company or ofa Subsidiary Guarantor designated by the Company to purchase Notes (and such other Senior
Indebtedness of the Company or of a Subsidiaty Guarantor) pursuant to and subject to the conditions contained in the
Indenture;
provided. however, that in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (A) or
(C) above, the Company or such Restricted Subsidiaty shall permanently retire such Indebtedness and shall cause the related
loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or
purchased.
(c) Notwithstanding the foregoing provisions of paragraph (b), the Company and the Restricted Subsidiaries will not be
required to apply any Net Available Cash in accordance with such paragraph except to the extent that the aggregate Net
Available Cash from all Asset Dispositions subject to those paragraphs which is not applied in accordance with such
paragraph exceeds $10.0 million. Pending application of Net Available Cash pursuant to this covenant, such Net Available
Cash shall be invested in Temporary Cash Investments or applied to temporarily reduce revolving credit indebtedness.
(d) For the purposes of this covenant, the following are deemed to be cash or cash equivalents:
(I) the assumption or discharge of Indebtedness of the Company (other than obligations in respect of Disqualified
Stock of the Company) or any Restricted Subsidiary (other than obligations in respect of Disqualified Stock or Preferred
Stock ofa Subsidiaty Guarantor) and the release of the Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition; and
)
(2) securities received by the Company or any Restricted Subsidiaty from the transferee that are promptly converted
by the Company or such Restricted Subsidiary into cash, to the extent of cash received in that conversion.
(e) In the event of an Asset Disposition that requires the purchase of Notes (and any other Senior Indebtedness of the
Company or of a SubsidialY Guarantor) pursuant to clause (a)(3)(C) or (b)(3)(C) above, the Company will purchase Notes
tendered pursuant to an offer by the Company for the Notes (and such other Senior Indebtedness) at a purchase price of 100%
of their principal amount (or, in the event such other Senior Indebtedness of the Company was issued with significant original
issue discount, 100% of the accreted value thereot) without premium, plus accrued but unpaid interest (or, in respect of such
other Senior Indebtedness of the Company, such lesser price, if any, as may be provided for by the terms of such Senior
Indebtedness) in accordance with the procedures (including, prorating in the event of oversubscription) set forth in the
Indenture. Ifthe aggregate purchase price of the securities tendered exceeds the Net Available Cash allotted to their purchase,
the Company will select the securities to be purchased on a pro rata basis but in round denominations, which in the case of
the Notes will be denominations of $1 ,000 principal amount or multiples thereof. The Company shall not be required to make
such an offer to purchase Notes (and other Senior Indebtedness of the Company) pursuant to paragraph (b) of this covenant if
the Net Available Cash available therefore is less than $10.0 million (which lesser amount shall be carried forward for
purposes of determining whether such an offer is required with respect to the Net Available Cash from any subsequent Asset
Disposition). Upon completion of an offer to purchase Notes and any other Senior Indebtedness of the Company pursuant to
this covenant, Net Available Cash will be deemed to be reduced by the aggregate amount of such offer
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and any then remaining Net Available Cash following such offer may be used by the Company for any purpose not
prohibited by the Indenture.
(f) The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and
any other securities laws or regulations in connection with the purchase of Notes pursuant to this covenant. To the extent that
the provisions of any securities laws or regulations conflict with provisions of this covenant, the Company will comply with
the applicable securities laws and regulations and will not be deemed to have breached its obligations under this covenant by
virtue of its compliance with such securities laws or regulations.
Limitlltion 011 Affiliate TnlllS(lctiollS
(a) The Company will not, and will not permit any Restricted SnbsidialY to, enter into or permit to exist any transaction
(including the purchase, sale, lease or exchange of any property, employee compensation arrangements or the rendering of
any service) with, or for the benefit of, any Affiliate ofthe Company (an "Affiliate Transaction ") unless:
(I) the terms of the Affiliate Transaction are no less favorable to the Company or such Restricted Snbsidiaty than
those that could be obtained at the time of the Affiliate Transaction in arm's-length dealings with a Person who is not an
Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of$5.0 million, the terms of the Affiliate Transaction
are set forth in writing and a majority of the Board of Directors of the Company disinterested with respect to such
Affiliate Transaction have determined in good faith that the criteria set forth in clause (I) are satisfied and have approved
the relevant Affiliate Transaction as evidenced by a resolution of the Board of Directors; and
(3) if such Affiliate Transaction involves an amount in excess of $1 0.0 million, the Board of Directors shall also have
received a written opinion from an Independent Qualified Party to the effect that such Affiliate Transaction is fair, from a
financial standpoint, to the Company and its Restricted Subsidiaries or is not less favorable to the Company and its
Restricted Subsidiaries than could reasonably be expected to be obtained at the time in an arm's-length transaction with a
Person who was not an Affiliate.
)
(b) The provisions of the preceding paragraph (a) will not prohibit:
(I) any Investment (other than a Permitted Investment) or other Restricted Payment, in each case permitted to be
made pursuant to (but only to the extent included in the calculation of the amount of Restricted Payments made pursuant
to paragraph (a)(3) of) the covenant described under "- Limitation on Restricted Payments";
(2) any issuance of securities, or other payments, awards 01' grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors;
(3) loans or advances to employees in the ordinary course of business in accordance with the past practices ofthe
Company or its Restricted Subsidiaries, but in any event not to exceed $2.0 million in the aggregate outstanding at any
one time;
(4) the payment of reasonable fees to directors of the Company and its Restricted Subsidiaries who are not employees
of the Company or its Restricted Subsidiaries;
(5) any transaction with the Company, a Restricted Subsidiary or joint venture or similar entity which would
constitute an Affiliate Transaction solely because the Company or a Restricted Subsidiary owns an equity interest in 01'
otherwise controls such Restricted Subsidiary, joint venture or similar entity;
(6) the issuance or sale of any Capital Stock (other than Disqualified Stock) of the Company;
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(7) the payment of (i) an annual consulting services fee, not to exceed $750,000 in any twelve month period, pursuant
to the Consulting Services Agreement, (ii) annual directors and other services fees, not to exceed $200,000 in any twelve
month period, pursuant to the Stockholders' Agreement, (iii) consulting services fees, in an amount equal to 2% of the
consideration received by the Company upon the initial public offering of its capital stock or the sale of all or
substantially all of its assets, pursuant to the Consulting Services Agreement. (iv) professional service fees, in an amount
equal to 2% of the value of any transaction in which the Company (A) sells all or substantially all of its assets or a
majority of its capital stock, (B) consummates the acquisition of another company or (C) secures any debt or equity
financing, in each case pursuant to the Professional Services Agreement and (v) reasonable out-of-pocket expenses
related to the foregoing, in each case, by the Company or any of its Restricted Subsidiaries to H.1.0.; and
(8) any agreement as in effect on the Issue Date and described in the offering circular distributed in connection with
the private offering of the old notes or any renewals or extensions of any such agreement (so long as such renewals or
extensions are not less favorable to the Company or the Restricted Subsidiaries) and the transactions evidenced thereby.
Lim;tatioll on Line of Busilless
The Company will not, and will not permit any Restricted Subsidiaty, to engage in any business other than a Related
Business.
Limitlltioll
Oil
the St,le or Isstttlllce olellpi/lIl Stock 01 Restricted Subsidiaries
The Company
(I) will not, and will not permit any Restricted Subsidiary to, sell, lease, transfer or otherwise dispose of any Capital
Stock of any Restricted Subsidiaty to any Person (other than the Company or a Wholly Owned SubsidialY), and
(2) will not permit any Restricted SubsidialY to issue any of its Capital Stock (other than, if necessary, shares of its
Capital Stock constituting directors' or other legally required qualifying shares) to any Person (other than to the Company or
a WhollyOwned SubsidialY),
)
unless
(A) immediately after giving effect to such issuance, sale or other disposition, neither the Company nor any of its
Subsidiaries own any Capital Stock of such Restricted SubsidialY; or
(B) immediately after giving effect to such issuance, sale or other disposition, such Restricted Subsidiaty would no
longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect thereto is
treated as a new Investment by the Company and such Investment would be permitted to be made under the covenant
described under "- Limitation on Restricted Payments" if made on the date of such issuance, sale or other disposition.
For purposes of this covenant, the creation of a Lien on any Capital Stock of a Restricted Subsidiary to secure
Indebtedness of the Company or any of its Restricted Subsidiaries will not be deemed to be a violation of this covenant;
provided, however, that any sale or other disposition by the secured party of such Capital Stock following foreclosure of its
Lien will be subject to this covenant.
Limitatioll 011 Liens
The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien (the "Initial Lien") of any nature whatsoever on any of its properties that are included as Collateral (including Capital
Stock ofa Restricted Subsidiary) to secure Indebtedness other than Liens securing First-Priority Lien Obligations, Liens
securing the Notes and the Exchange Notes and any Refinancings thereof and other Permitted Liens.
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The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Initial Lien of any nature whatsoever on any of its properties that are not included as Collateral (including Capital Stock of a
Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, securing any Indebtedness, other than
Permitted Liens, without effectively providing that the Notes shall be secured equally and ratably with (or prior to, in the case
of Subordinated Obligations) the obligations so secured for so long as such obligations are so secured.
Any Lien created for the benefit of the Holders of the Notes pursuant to the preceding sentence shall provide by its terms
that such Lien shall be automatically and unconditionally released and discharged upon the release and discharge of the
Initial Lien.
Limitation 011 Sale/ Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to, enter into any Sale/ Leaseback Transaction with
respect to any property unless:
(I) the Company or such Restricted Subsidiary would be entitled to (A) Incur Indebtedness in an amount equal to the
Attributable Debt with respect to such Sale/ Leaseback Transaction pursuant to the covenant described under "Limitation on Indebtedness" and (B) create a Lien on such property securing such Attributable Debt without equally and
ratably securing the Notes pursuant to the covenant described under "- Limitation on Liens";
(2) the net proceeds received by the Company or any Restricted Subsidiary in connection with such Sale/ Leaseback
Transaction are at least equal to the fair market value (as determined by the Board of Directors) of such property; and
(3) the Company applies the proceeds of such transaction in compliance with the covenant described under "Limitation on Sale of Assets and Subsidiary Stock."
Maintenance of Minimlllll Credit Facility Coverage Ratio
)
The Company will not pennit the Credit Facility Coverage Ratio, measured on the dates on which the Company is
required to deliver financial statements under the Credit Facility as in effect on the Issue Date, with respect to each fiscal
quarter commencing with the fiscal quarter ending on December 31, 2004, to be less than 1.75 to 1.00.
Merger and Conso/illation
(a) The Company will not consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a
series of transactions, directly or indirectly, all or substantially all its assets to, any Person, unless:
(I) the resulting, surviving or transferee Person (the "Successor Company") shall be a Person organized and existing
under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) shall expressly assume, by an indenture supplemental thereto, executed and delivered to the Trustee,
in form satisfactory to the Trustee, all the obligations of the Company under the Notes and the Indenture;
(2) immediately after giving proforma effect to such transaction (and treating any Indebtedness which becomes an
obligation of the Successor Company or any Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no Default shall have occurred and be
continuing;
(3) immediately after giving pro forma effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under "- Limitation on
Indebtedness"; and
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(4) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Indenture;
provided, however, that clause (3) will not be applicable to (A) a Restricted Subsidia.y consolidating with, merging into or
transferring all or part of its properties and assets to the Company (so long as no Capital Stock of the Company is distributed
to any Person) or another Subsidiaty Guarantor that is a Wholly Owned Subsidia.y or (8) the Company merging with an
Affiliate of the Company solely for the purpose and with the sole effect of reincorporating the Company in another
jurisdiction.
For purposes of this covenant, the sale, lease, conveyance. assignment, transfer or other disposition of all or substantially
all of the properties and assets of one or more Subsidiaries of the Company, which properties and assets, if held by the
Company instead of such Subsidiaries, would constitute all or substantially all of the prope.iies and assets of the Company on
a consolidated basis, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company.
The Successor Company will be the successor to the Company and shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, and the predecessor Company, except in the case of a
lease, shall be released from the obligation to pay the principal of and interest on the Notes.
(b) The Company will not permit any Subsidia.y Guarantor to consolidate with or merge with or into, or convey, transfer
or lease, in one transaction or a series of transactions, all or substantially all of its assets to any Person unless:
)
(I) the resulting, surviving or transferee Person (if not such Subsidia.y) shall be a Person organized and existing
under the laws of the jurisdiction under which such Subsidia.y was organized or under the laws of the United States of
America, or any State thereof or the District of Columbia, and such Person shall expressly assume, by a Guarantee
Agreement, in a form satisfactOlY to the Trustee, all the obligations of such Subsidiary, if any, under its Subsidia.y
Guarantee; provided, however, that the foregoing shall not apply in the case of a Subsidiaty Guarantor (other than TNetix and Evercom) (x) that has been disposed of in its entirety to another Person (other than to the Company or an
Affiliate of the Company), whether through a merger, consolidation or sale of Capital Stock or assets or (y) that, as a
result of the disposition of all or a portion of its Capital Stock, ceases to be a Subsidiaty. in both cases, if in connection
therewith the Company provides an Officers' Certificate to the Trustee to the effect that the Company will comply with
its obligations under the covenant described under "- Limitation on Sales of Assets and Subsidiary Stock" in respect of
such disposition;
(2) immediately after giving effect to such transaction or transactions on a pro forma basis (and treating any
Indebtedness which becomes an obligation of the resulting, surviving or transferee Person as a result of such transaction
as having been issued by such Person at the time of such transaction), no Default shall have occurred and be
continuing; and
(3) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such Guarantee Agreement, ifany, complies with the Indenture.
Flltllre Gllarantors
The Company will cause each domestic Subsidiaty to, and each Foreign Subsidiary that enters into a Guarantee of any
Indebtedness of the Company or a Restdcted Subsidiary (other than a Foreign Subsidiaty that Guarantees Indebtedness
Incurred by another Foreign Subsidiary) to, in each case, at the same time that such Guarantee is entered into, execute and
deliver to the Trustee a Guarantee Agreement pursuant to which such Restricted Subsidiary will Guarantee payment of the
Notes on the same terms and conditions as those set f0l1h in the Indenture.
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Impairment of Security Interest
The Company will not, and will not permit any of its Restricted Subsidiaries to, take or knowingly or negligently omit to
take, any action which action or omission might or would have the result of materially impairing the security interest with
respect to the Collateral for the benefit of the Trustee and the holders of the Notes.
SEC Reports
At all times from and after the date of the commencement of the exchange offer or the effectiveness ofa shelfregistl'ation
statement relating to the Notes (the "Registration "), notwithstanding that the Company may not be required to be or remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the SEC
(subject to the next sentence) and provide the Trustee and Noteholders with such annual and other rep0l1s as are specified in
Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such reports to be
so filed and provided at the times specified for the filings of such reports under such Sections and containing all the
information, audit rep0l1s and exhibits required for such rep0l1s. If at any time, the Company is not subject to the periodic
reporting requirements of the Exchange Act for any reason, the Company will nevertheless continue filing the reports
specified in the preceding sentence with the SEC within the time periods required unless the SEC will not accept such a
filing. The Company agrees that it will not take any action for the purpose of causing the SEC not to accept any such filings.
If, notwithstanding the foregoing, the SEC will not accept such filings for any reason, the Company will post the reports
specified in the preceding sentence on its website within the time periods that would apply if the Company were required to
file those reports with the SEC.
At any time that any of the Company's Subsidiaries are Unrestricted Subsidiaries, then the quarterly and annual financial
information required by the preceding paragraph will include a reasonably detailed presentation, either on the face of the
financial statements or in the footnotes thereto, and in "Management's Discussion and Analysis ofFinancial Condition and
Results o/Operations ", of the financial condition and results of operations of the Company and its Restricted Subsidiaries
separate from the financial condition and results of operations ofthe Unrestricted Subsidiaries of the Company.
)
Defaults
Each of the following is an Event of Default:
(I) a default in the payment of interest on the Notes when due, continued for 30 days;
(2) a default in the payment of principal of any Note when due at its Stated Maturity, upon optional redemption, upon
required purchase, upon declaration of acceleration or otherwise;
(3) the failure by the Company to comply with its obligations under "- Certain Covenants -
Merger and
Consolidation" above;
(4) the failure by the Company to comply for 30 days after notice with any of its obligations in the covenants
described above under "Excess Cash Flow" or "Change of Control" (other than in each case a failure to purchase Notes)
or under u _ Certain Covenants" under u _ Limitation on Indebtedness", "- Limitation on Restricted Payments", "Limitation on Restrictions on Distributions from Restricted Subsidiaries", "- Limitation on Sales of Assets and
Subsidiaty Stock" (other than a failure to purchase Notes), " - Limitation on Affiliate Transactions", " - Limitation on
Line of Business", "- Limitation on the Sale or Issuance ofCapitai Stock of Restricted Subsidiaries", or "- Limitation
on Liens", "- Limitation on Sale/Leaseback Transactions", "- Future Guarantors", "- Impairment of Security
Interest" or "- SEC Reports";
(5) the failure by the Company to (i) comply with the covenant described under "Maintenance ofO'edit Facility
Coverage Ratio" and (ii) in the event the Company shall not comply with such
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covenant in any fiscal quarter. return to compliance with such covenant in the immediately succeeding fiscal quarter;
(6) the failure by the Company or any SubsidialY Guarantor to comply for 60 days after notice with its other
agreements contained in the Indenture or in the Security Documents;
(7) Indebtedness of the Company, any Subsidiary Guarantor or any Significant Subsidiary is not paid within any
applicable grace period after final maturity or is accelerated by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $10.0 million (the "cross acceleration provision");
(8) certain events of bankruptcy, insolvency or reorganization of the Company, a Subsidiary Guarantor or any
Significant Subsidiary (the "bankruptcy provisions");
(9) any judgment or decree for the payment of money in excess of$IO.O million is entered against the Company, a
Subsidiary Guarantor or any Significant SubsidialY, remains outstanding for a period of 60 consecutive days following
such judgment and is not discharged, waived or stayed (the "judgment default provision");
(10) a SubsidialY Guarantee ceases to be in full force and effect (other than in accordance with the terms of such
Subsidimy Guarantee) or a Subsidiary Guarantor denies or disaffirms its obligations under its SubsidialY Guarantee (the
"Subsidiary Guarantee provision"); or
(II) the security interest under the Security Documents shall, at any time, cease to be in full force and effect for any
reason other than the satisfaction in full of all obligations under the Indenture and discharge of the Indenture or any
security interest created thereunder shall be declared invalid or unenforceable (other than security interests that are (i) not
material with respect to the Collateral taken as a whole and (ii) subsequently declared valid and enforceable within
10 days of such declaration of the invalidity or unenforceability of such security interest) or the Company or any
Subsidiary Guarantor shall assert, in any pleading in any court of competent jurisdiction, that any such security interest is
invalid or unenforceable (the "security default provision").
)
However, a default under clauses (4), (5) and (6) will not constitute an Event of Default until the Trustee or the holders of
25% in principal amount of the outstanding Notes notify the Company of the default and the Company does not cure such
default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the
outstanding Notes may declare the principal of and accrued but unpaid interest on all the Notes to be due and payable. Upon
such a declaration, such principal and interest shall be due and payable immediately. If an Event of Default relating to certain
events of bankmptcy, insolvency or reorganization of the Company occurs and is continuing. the principal of and interest on
all the Notes will ipso facto become and be immediately due and payable without any declaration or other act on the part of
the Trustee or any holders of the Notes. Under certain circumstances, the holders of a majority in principal amount of the
outstanding Notes may rescind any such acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default occurs and is
continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request
or direction of any of the holders of the Notes unless such holders have offered to the TlUstee reasonable indemnity or
security against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium (if any) or
interest when due, no holder of a Note may pursue any remedy with respect to the Indenture or the Notes unless:
(I) such holder has previously given the Trustee notice that an Event of Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding Notes have requested the Trustee to pursue the
remedy;
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(3) such holders have offered the TlUstee reasonable security or indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after the receipt thereof and the offer of security or
indemnity; and
(5) holders of a majority in principal amount of the outstanding Notes have not given the Trustee a direction
inconsistent with such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount of the outstanding Notes are given the right to
direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any
trust or power conferred on the Tmstee. The Trustee, however, may refuse to follow any direction that conflicts with law or
the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other holder of a Note or that would
involve the Trustee in personal liability.
If a Default occurs, is continuing and is known to the Trustee, the Trustee must mail to each holder of the Notes notice of
the Default within 90 days after it occurs. Except in the case of a Default in the payment of principal of or interest on any
Note, the Trustee may withhold notice if and so long as a committee of its Trust Officers in good faith determines that
withholding notice is not opposed to the interest of the holders of the Notes. In addition, we are required to deliver to the
Trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any
Default that occurred during the previous year. We are required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any event which would constitute celiain Defaults, their status and what action we are taking or
propose to take in respect thereof.
Amendments and Waivers
Subject to certain exceptions, the Indenture and the Security Documents may be amended with the consent of the holders
of a majority in principal amount of the Notes then outstanding (including consents obtained in connection with a tender offer
or exchange for the Notes) and any past default or compliance with any provisions may also be waived with the consent of
the holders ofa majority in principal amount of the Notes then outstanding. However, without the consent of each holder of
)
an outstanding Note affected thereby, an amendment or waiver may not, among other things:
(I) reduce the amount of Notes whose holders must consent to an amendment;
(2) reduce the rate of or extend the time for payment of interest on any Note;
(3) reduce the principal of or change the Stated Maturity of any Note;
(4) reduce the amount payable upon the redemption of any Note or change the time at which any Note may be
redeemed as described under " - Optional Redemption" above;
(5) make any Note payable in money other than that stated in the Note;
(6) impair the right of any holder of the Notes to receive payment of principal of and interest on such holder's Notes
on or after the due dates therefore or to institute suit for the enforcement of any payment on or with respect to such
holder's Notes;
(7) make any change in the amendment provisions which require each holder's consent or in the waiver provisions;
(8) make any change in the ranking or priority of any Note that would adversely affect the Noteholders;
(9) make any change in, or release other than in accordance with the Indenture, any Subsidiary Guarantee that would
adversely affect the Noteholders; or
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(10) subject to the provisions described under "Limitations on Stock Collateral" and "Security Documents and
Intercreditor Agreement", make any change in any Security Document or the provisions of the Indenture dealing with
Security Documents or application of proceeds of the Collateral, or release Collateral, that would adversely affect the
.
Noteholders.
Notwithstanding the preceding, without the consent of any holder of the Notes, the Company, the Subsidiary Guarantors
and Trustee may amend the Indenture or the Security Documents:
(l) to cure any ambiguity, omission, defect 01' inconsistency;
(2) to provide for the assumption by a successor corporation of the obligations of the Company, or any SubsidialY
Guarantor under the Indenture;
(3) to provide for uncertificated Notes in addition to or in place of certificated Notes (provided that the uncertificated
Notes are issued in registered form for pUlposes of Section 163(1) of the Code, or in a manner such that the uncertificated
Notes are described in Section I 63(1)(2)(B) of the Code);
(4) to add Guarantees with respect to the Notes, including any Subsidiary Guarantees, or to provide further security
for the Notes;
(5) to add to the covenants of the Company or a SubsidialY Guarantor for the benefit ofthe holders of the Notes or to
surrender any right or power conferred upon the Company or a Subsidiary Guarantor;
(6) to make any change that does not adversely affect the rights of any holder of the Notes;
(7) to comply with any requirement of the SEC in connection with the qualification of the Indenture under the Trust
Indenture Act;
)
(8) to make any amendment to the provisions of the Indenture relating to the transfer and legending of Notes;
provided, however, that (a) compliance with the Indenture as so amended would not result in Notes being transferred in
violation of the Securities Act or any other applicable securities law and (b) such amendment does not materially and
adversely affect the rights of Holders to transfer Notes; or
(9) as described under " - Security Documents and Intercreditor Agreement" and " - Limitation on Stock
CollateraL"
The consent of the holders of the Notes is not necessary under the Indenture to approve the particular form of any
proposed amendment. It is sufficient if such consent approves the substance ofthe proposed amendment.
After an amendment under the Indenture or the Security Documents becomes effective, we are required to mail to holders
of the Notes a notice briefly describing such amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
Neither the Company nor any Affiliate of the Company may, directly or indirectly, payor cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or
amendment of allY of the terms or provisions of the Indenture or the Notes unless such consideration is offered to all Holders
and is paid to all Holders that .so consent, waive or agree to amend in the time frame set forth in solicitation documents
relating to such consent, waiver or agreement.
Transfer
The Notes will be issued in registered form and will be transferable only upon the surrender of the Notes being
transferred for registration of transfer. We may require payment of a sum sufficient to cover
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any tax, assessment or other govemmental charge payable in connection with celtain transfers and exchanges.
Satisfaction and Discharge
When we (I) deliver to the Trustee all outstanding Notes for cancelation or (2) all outstanding Notes have become due
and payable, whether at maturity or as a result of the mailing of notice of redemption, and, in the case of clause (2), we
irrevocably deposit with the Trustee funds sufficient to pay at maturity or upon redemption all outstanding Notes, including
interest thereon to maturity or such redemption date, and if in either case we pay all other sums payable under the Indenture
by us, then the Indenture shall, subject to certain exceptions, cease to be of fUlther effect.
Defeasance
At any time, we may terminate all our obligations under the Notes, the Indenture and the Security Documents ("legal
defeasance"), except for certain obligations, including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a registrar and paying
agent in respect of the Notes.
In addition, at any time we may terminate our obligations under "- Excess Cash Flow," "- Change of Control" and
under the covenants described under "- Certain Covenants" (other than the covenant described under "- Merger and
Consolidation"). the operation of the cross acceleration provision, the bankruptcy provisions with respect to Subsidiary
Guarantors and Significant Subsidiaries, the judgment default provision, the SubsidialY Guarantee provision and the security
default provision described under " - Defaults" above and the limitations contained in clause (3) of the first paragraph under
"- Certain Covenants -
Merger and Consolidation" above ("covenant defeasance").
We may exercise our legal defeasance option notwithstanding our prior exercise of our covenant defeasance option. If we
exercise our legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default with
respect thereto. Ifwe exercise our covenant defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (4), (6), (7) (with respect only to Significant Subsidiaries and SubsidialY Guarantors),
(8), (9) or (10) under " - Defaults" above or because of the failure of the Company to comply with clause (3) of the first
)
paragraph under "- Certain Covenants -
Merger and Consolidation" above. If we exercise our legal defeasance option or
our covenant defeasance option, each SubsidialY Guarantor will be released from all of its obligations with respect to its
Subsidiary Guarantee and the Security Documents.
In order to exercise either of our defeasance options, we must irrevocably deposit in trust (the "defeasance trust") with the
Trustee money or U.S. Government Obligations for the payment of principal and interest on the Notes to redemption or
maturity, as the case may be, and must comply with certain other conditions, including delivelY to the Trustee of an Opinion
of Counsel to the effect that holders of the Notes will not recognize income, gain or loss for Federal income tax purposes as a
result of such deposit and defeasance and will be subject to Federal income tax on the same amounts and in the same manner
and at the same times as would have been the case if such deposit and defeasance had not occurred (and, in the case of legal
defeasance only, such Opinion of Counsel must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
Concerning the Trustee
The Bank of New York Trust Company, N.A. is the Trustee under the Indenture. We have appointed The Bank of New
York Trust Company, N.A. as Registrar and Paying Agent with regard to the Notes.
The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Company, to
obtain payment of claims in certain cases,
01'
to realize on certain property received in respect of any such claim as security or
otherwise. The Trustee will be permitted to engage in other
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transactions; provided, however, if it acquires any conflicting interest it must either eliminate such conflict within 90 days,
apply to the SEC for permission to continue or resign.
The Holders of a majority in principal amount of the outstanding Notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the Trustee, subject to ce11ain exceptions. If an
Event of Default occurs (and is not cured), the Trustee will be required, in the exercise of its power, to use the degree of care
of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense and then only to the extent
required by the terms of the Indenture.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company or any SubsidialY Guarantor will have any
liability for any obligations of the Company or any Subsidiary Guarantor under the Notes, any SubsidialY Guarantee or the
Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Each Holder of the Notes
by accepting a Note waives and releases all such liability. The waiver and release are palt of the consideration for issuance of
the Notes. Such waiver and release may not be effective to waive liabilities under the U.S. Federal securities laws, and it is
the view of the SEC that such a waiver is against public policy.
Governing Law
The Indenture, the Security Documents and the Notes are governed by, and construed in accordance with, the laws of the
State of New York.
Certain Definitions
"Additional Assets" means:
)
(I) any property, plant or equipment used in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted SubsidialY as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiaty;
provided, however, that any such Restricted Subsidiary described in clause (2) or (3) above is primarily engaged in a Related
Business.
"Adjusted Treasury Rate" means, with respect to any redemption date, (i) the yield, under the heading which represents
the average for the immediately preceding week, appearing in the most recently published statistical release designated "H. I 5
(519)" or any successor publication which is published weekly by the Board of Governors of the Federal Reserve System and
which establishes yields on actively traded United States TreasUlY securities adjusted to constant maturity under the caption
"Treasury Constant Maturities," for the maturity corresponding to the Comparable Treasury Issue (if no maturity is within
three months before or after September I, 2008, yields for the two published maturities most closely corresponding to the
Comparable TreasUlY Issue shall be determined and the Adjusted TreasUlY Rate shall be interpolated or extrapolated from
such yields on a straight line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not
published during the week preceding the calculation date or does not contain such yields, the rate per year equal to the semiannual equivalent yield to maturity of the Comparable TreasUlY Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price for such redemption date, in each case calculated on the third Business Day
immediately preceding the redemption date, pins, in either case, 0.50%.
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"Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under
direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or othelwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing. For purposes of the covenants described under "- Certain Covenants - Limitation
on Restricted Payments", "- Ce11ain Covenants - Limitation on Affiliate Transactions" and "- Certain CovenantsLimitation on Sales of Assets and Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of Capital Stock
representing 10% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or ofrights
or warrants to purchase such Capital Stock (whether or not currently exercisable) and any Person who would be an Affiliate
of any such beneficial owner pursuant to the fi.~t sentence hereof.
"Applicable Premium" means, with respect to a Note at any redemption date, the greater of (I) 1.00% of the principal
amount of such Note at such time and (2) the excess of (A) the present value at such time of (i) the redemption price of such
Note on September 1,2008 (such redemption price being described under " - Optional Redemption" above, exclusive of any
accrued interest) plus (ii) all required remaining scheduled interest payments due on such Note through September I, 2008
(but excluding accrued and unpaid interest to the redemption date), computed using a discount rate equal to the Adjusted
Treasmy Rate, over (8) the principal amount of such Note on such redemption date.
"Asset Disposition" means any sale, lease, transfer, conveyance or other disposition (or series of related sales, leases,
transfers, conveyances or dispositions) by the Company or any Restricted Subsidia.y, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of:
(I) any shares of Capital Stock of a Restricted Subsidia.y (other than directors' qualifying shares or shares required
by applicable law to be held by a Person other than the Company or a Restricted Subsidia.y);
(2) all or substantially all the assets of any division or line of business of the Company or any Restricted
SubsidialY; or
)
(3) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the
Company or such Restricted Subsidiary
(other than, in the case of clauses (I), (2) and (3) above,
(A) a disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted SubsidialY to a
Restricted SubsidialY;
(8) for purposes of the covenant described under " - Certain Covenants - Limitation on Sales of Assets and
SubsidialY Stock" only, (i) a disposition that constitutes a Restricted Payment (or would constitute a Restricted
Payment but for the exclusions from the definition thereof) and that is not prohibited by the covenant described under
" - Certain Covenants - Limitation on Restricted Payments" and (ii) a disposition of all or substantially all the
assets of the Company in accordance with the covenant described under "- Certain Covenants - Merger and
Consolidation";
(C) a disposition of assets with a fair market value of less than $1,000,000;
(D) a disposition of cash or Temporary Cash Investments;
(E) the creation of a Lien (but not the sale or other disposition of the property subject to such Lien); and
(F) the licensing of intellectual property to third persons on terms consistent with market practice (as determined
by the board of directors in good faith).
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"Attributable Debt" in respect of a Salel Leaseback Transaction means, as at the time of determination, the present value
(discounted at the interest rate borne by the Notes, compounded annually) of the total obligations of the lessee for rental
payments during the remaining term of the lease included in such Salel Leaseback Transaction (including any period for
which such lease has been extended); provided, however, that if such Salel Leaseback Transaction results in a Capital Lease
Obligation, the amount of Indebtedness represented thereby will be determined in accordance with the definition of "Capital
Lease Obligation."
"Average Life" means, as of the date of determination, with respect to any Indebtedness, the quotient obtained by
dividing:
(I) the sum of the products of the numbers of years from the date of determination to the dates of each successive
scheduled principal payment of or redemption or similar payment with respect to such Indebtedness multiplied by the
amount of such payment by
(2) the sum of all such payments.
"Bank Indebtedness" means all Obligations pursuant to the Credit Facility.
"Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on
behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means an obligation that is required to be classified and accounted for as a capital lease for
financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall
be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be
the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty. For purposes of the covenant described under "- Certain
Covenants - Limitation on Liens", a Capital Lease Obligation will be deemed to be secured by a Lien on the propelty being
leased.
)
"Capital Stock" of any Person means any and all shares, interests (including partnership interests), rights to purchase,
warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including
any Preferred Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means all the collateral described in the Security Documents.
"Comparable Treaswy Issue" means, with respect to any redemption date, the United States Treasmy security selected
by the Quotation Agent as having a maturity comparable to the remaining term of the Notes from such redemption date to
September I, 2008, that would be utilized, at the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of a maturity most nearly equal to September I, 2008.
"Comparable Treasury Price" means, with respect to any redemption date, if clause (ii) of the Adjusted Treasury Rate is
applicable, the average of three, or such lesser number as is obtained by the Trustee, Reference Treasury Dealer Quotations
for such redemption date.
"Consolidated Cash Flow" shall mean, for any period, Consolidated Net Income for such period plus, to the extent
deducted in computing Consolidated Net Income:
(I) an amount equal to any extraordinalY or non-recurring loss in such period plus any net loss realized in such period
in connection with an Asset Sale;
(2) provision for taxes based on income or profits of the Company and the Restricted Subsidiaries for such period;
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(3) Consolidated Interest Expense for such period; and
(4) depreciation, amortization (including amortization of goodwill, purchase accounting adjustments and other
intangibles) and all other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual
of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior
period) of the Company and the Restricted Subsidiaries for such period.
Notwithstanding the foregoing, the provision for taxes based on the income or profits of, the Fixed Charges of, and the
depreciation and amortization and other non-cash charges of, a Restricted Subsidiary shall be added to Consolidated Net
Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that Net Income of such
Restricted SubsidialY was included in calculating the Consolidated Net Income.
"Consolidated Interest Expense" shall mean, for any period, the sum of, without duplication:
(I) the interest expense of the Company and the Restricted Subsidiaries for such period, on a consolidated basis,
determined in accordance with GAAP (including amortization of original issue discount, non-cash interest expense, the
interest component of all payments associated with commissions, discounts and other fees and charges incurred in respect
of letter of credit or bankers' acceptance financings, and net payments, if any, pursuant to Currency Agreements and
Interest Rate Protection Obligations; provided that in no event shall any amortization of deferred financing costs be
included in Consolidated Interest Expense); and
(2) the consolidated capitalized interest of the Company and the Restricted Subsidiaries for such period, whether paid
or accrued.
Notwithstanding the foregoing, the Consolidated Interest Expense with respect to any Restricted Subsidiary that is not a
Wholly Owned Restricted Subsidiary shall be included only to the extent (and in the same propOltion) that the Net Income of
such Restricted SubsidialY was included in calculating Consolidated Net Income.
)
"Consolidated Net Income" shall mean, for any period, the aggregate of the Net Income of the Company and the
Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (I) the
Net Income (or loss) of any Person that is not a Restricted SubsidiaIY or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person
or a Restricted Subsidiary thereof, (2) the Net Income (or loss) of any Restricted SubsidialY shall be excluded to the extent
that the declaration or payment of dividends or similar distributions by that Restricted SubsidiaIY of that Net Income (or loss)
is not, at the date of determination, permitted without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted SubsidialY, (3) the cumulative effect of a change in accounting
principles shall be excluded and (4) all severance charges and transaction expenses directly attributable to, and incurred
within 24 months from the date of, the Transactions, shall be excluded.
"Consulting Services Agreement" means the Amended and Restated Consulting Services Agreement, to be dated as of
September 9, 2004, between the Company and H.I.G.
"Credit Agreement" means the credit agreement to be entered into by and among the Company, as Borrower, T -Netix,
Evercom and the other Subsidiary Guarantors, as guarantors, the lenders referred to therein and ING Capital LLC, as
Administrative Agent, together with the related documents thereto (including the revolving loans thereunder, any guarantees
and security documents), as amended, extended, renewed, restated, supplemented, otherwise modified or replaced (in whole
or in p811) from time to time, and any agreement (and related document) governing Indebtedness IncmTed to Refinance, in
whole or in part, the borrowings and commitments then outstanding or permitted to be outstanding under such credit
agreement or a successor agreement.
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"Credit Facility" means the credit facility evidenced by the Credit Agreement.
"Credit Facility Cash Flow" means, with respect to the Company on a consolidated basis with its Subsidiaries for any
period, the Credit Facility Net Income for such period, plus (a) without duplication and to the extent deducted in determining
Credit Facility Net Income for such period, the sum of (i) income taxes, (ii) Credit Facility Interest Expense (excluding any
amortization of original issue discount attributable to such period), (iii) depreciation and amortization expense, (iv) all other
non-cash charges and non-cash losses, (v) purchase accounting adjustments, (vi) non-recurring severance payments and
expenses relating thereto in the ordinary course of business or as a result of the consummation of the Tender Offer, the TNetix Consolidation and the Merger, (vii) fees, costs and expenses incurred in connection with the Tender Offer, the T-Netix
Consolidation and the transactions consummated on the Issue Date and contemplated by the Loan Documents, the Merger
Documents and the Senior Note Documents (each as defined in the Credit Facility on the Issue Date) to the extent such fees,
costs and expenses are disclosed to the Intercreditor Agent in writing, (viii) the fees payable to H.I.G. under the Consulting
Services Agreement and the Professional Services Agreement, (ix) other success bonuses paid to H.I.G. or its Affiliates,
(x) extraordinary losses (xi) fees to directors of the Company and to former shareholders of Evercom as contemplated by
Section 8.4(c} of the Credit Agreement on the Issue Date and (xii) fees, costs and expenses incurred in connection with the
restructuring of Evercom and its Subsidiaries to the extent such fees, costs and expenses (A) are disclosed to the Intercreditor
Agent in writing and (B) do not exceed $210,000 in the aggregate minus (b) without duplication and to the extent added in
computing Credit Facility Net Income for such period, (i) non-cash gains and other non-cash income and (ii) extraordinary
gains; provided, however, that if any such calculation includes any period in which an acquisition or sale of a Person or all or
substantially all of the assets of a Person occurred, then such calculation shall be made on a Credit Facility Pro Forma Basis.
"Credit Facility Coverage Ratio" means, with respect to the Company and its subsidiaries on a consolidated basis, the
ratio of (a) Credit Facility Cash Flow for the four most recently completed fiscal quarters plus Credit Facility Junior Capital
issued during such period to (b) Credit Facility Interest Expense during such period.
"Credit Facility Interest Expense" means, for any period, cash interest expense of the Company and its Subsidiaries,
determined on a consolidated basis in accordance with GAAP, in respect of the Loan Documents and the Senior Loan
Documents (each as defined in the Credit Agreement on the Issue Date).
)
"Credit Facility Junior Capital" shall mean the amount of any equity that is issued by the Company.
"Credit Facility Net Income" means, with respect to any Person for any period, the consolidated net income (or deficit)
of such Person and its Subsidiaries for such period, determined in accordance with GAAP.
"Credit Facility Pro Forma Basis" means giving pro forma effect to any acquisition or sale of a Person, all or
substantially all of the business or assets of a Person, and any related incurrence, repayment or refinancing of Funded Debt
(as defined in the Credit Agreement on the Issue Date), Capital Expenditures (as defined in the Credit Agreement on the
Issue Date) or other related transactions which would otherwise be accounted for as an adjustment permitted by GAAP or as
calculated in the definition ofEBITDA (as defined in the Credit Agreement on the Issue Date), in each case, as if such
acquisition or sale and related transactions were realized on the first day of the relevant period; provided that the pro forma
adjustments listed on Schedule l(c} to the Credit Agreement as in effect on the Issue Date shall be permitted in any event.
"Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement with
respect to currency values.
"Default" means any event which is, or after notice or passage of time or both would be, an Event of Default.
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"Disqualified Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable at the option of the holder) or upon the happening of any
event:
(l) matures or is mandatorily redeemable (other than redeemable only for Capital Stock of such Person which is not
itself Disqualified Stock) pursuant to a sinking fund obligation or othelwise;
(2) is convertible or exchangeable at the option of the holder for Indebtedness or Disqualified Stock; or
(3) is mandatorily redeemable or must be purchased upon the occurrence of certain events or otherwise, in whole or in
part;
in each case on or prior to the first anniversmy of the Stated Maturity of the Notes; provided, however, that any Capital Stock
that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person
to purchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversalY ofthe Stated Maturity of the Notes shall not constitute Disqualified Stock if:
(l) the "asset sale" or "change of control" provisions applicable to such Capital Stock are not more favorable to the
holders of such Capital Stock than the terms applicable to the Notes and described under "- Celiain Covenants Limitation on Sales of Assets and Subsidimy Stock" and "- Certain Covenants - Change of Control"; and
(2) any such requirement only becomes operative after compliance with such terms applicable to the Notes, including
the purchase of any Notes tendered pursuant thereto.
The amount of any Disqualified Stock that does not have a fixed redemption, repayment or repurchase price will be
calculated in accordance with the terms of such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or
repurchased on any date on which the amount of such Disqualified Stock is to be determined pursuant to the Indenture;
provided, however, that if such Disqualified Stock could not be required to be redeemed, repaid or repurchased at the time of
such determination, the redemption, repayment or repurchase price will be the book value of such Disqualified Stock as
reflected in the most recent financial statements of such Person.
)
"Equity Offering" means any undelwritten public offering of Capital Stock (other than Disqualified Stock) of the
Company pursuant to a registration statement filed pursuant to the Act or any private placement of Capital Stock (other than
Disqualified Stock) of the Company which offering or placement was consummated after the Issue Date.
"Evercom" means Evercom Holdings, Inc., a Delaware corporation, and its successors.
"Excess Cash Flow" means, for the Company and its Restricted Subsidiaries, for any Excess Cash Flow Period (I) its
Consolidated Cash Flow for such period less the sum, without duplication, of (A) the Company's consolidated cash interest
expense (other than interest expense of the Company related to any Subordinated Obligations of the Company as determined
in accordance with GAAP but excluding any amortization of original issue discount attributable to such period; (B) all
federal, state, foreign and other income taxes accrued or paid in cash (without duplication) by the Company and its Restricted
Subsidiaries during such period; (C) an amount equal to the capital expenditures made in cash during such period; (D) an
amount equal to any extraordinary or non-recurring loss in such period; (E) the amount by which the net difference between
(x) current assets, other than cash and cash equivalents, and (y) current liabilities, other than the current amount of
Indebtedness outstanding under the Credit Facility, in each case of the Company and its Restricted Subsidiaries as of the last
day of such period, has increased, if at all, from the comparable amount calculated as of the day immediately preceding the
first day of such period; and (F) non cash gains on Asset Dispositions during such period, plus (2) any Excess Cash Flow
carried over from the prior Excess Cash Flow Period in compliance with clause (c) under "- Excess Cash Flow" above.
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"Excess Cash Flow Amount" means, for any Excess Cash Flow Period, an amount equal to (i) 75% of Excess Cash Flow
for such Excess Cash Flow Period less (ii)(l) the aggregate amount of all scheduled, mandatOlY and voluntary prepayments,
repayments, redemptions or purchases of Senior Indebtedness or Capitalized Lease Obligations of the Company made by the
Company during such Excess Cash Flow Period (other than prepayments, repayments, redemptions or purchases made with
the proceeds of Indebtedness Incurred to Refinance such Senior Indebtedness or Capitalized Lease Obligations), plus (2) any
cash required to be restricted to cash collateralize letters of credit either under the Credit Facility or otherwise.
"Excess Cash Flow Period" means the twelve-month period ending on December 31 of each year beginning with the
twelve-month period ending December 31,2005.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended.
"Exchange Notes" means the debt securities of the Company issued pursuant to the Indenture in exchange for, and in an
aggregate principal amount equal to, the Notes, in compliance with the terms of the Registration Rights Agreement.
"First-Priority Lien Obligations" means (i) all Secured Bank Indebtedness, (ii) all other Obligations (not constituting
Indebtedness) of the Company and its Subsidiaries under the agreements governing Secured Bank Indebtedness, (iii) all other
Obligations of the Company or any of its Subsidiaries in respect of Hedging Obligations in connection with Indebtedness
described in clause (i) or Obligations described in clause (ii).
)
"Fixed Charge Coverage Ratio" shall mean, for any period, the ratio of Consolidated Cash Flow for such period
(exclusive of amounts attributable to discontinued operations, as determined in accordance with GAAP, or operations and
businesses disposed of prior to the Calculation Date (as defined below in this definition)) to Fixed Charges for such period
(exclusive of amounts attributable to discontinued operations, as determined in accordance with GAAP, or operations and
businesses disposed of prior to the Calculation Date). In the event that any ofthe Company or any Restricted Subsidiary
Incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving credit borrowings) or issues or redeems
Preferred Stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving proforma effect to such Incurrence,
assumption, Guarantee or redemption of Indebtedness, or such issuance or redemption of Preferred Stock, as if the same had
occurred at the beginning of the applicable period. In addition, for purposes of making the computation referred to above,
acquisitions or investments in cash or cash equivalents using the proceeds from the disposition of such operations and
businesses that have been made by the Company or any of its Restricted Subsidiaries, including all mergers or consolidations
and any related financing transactions, during the period or subsequent to such period and on or prior to the Calculation Date
shall be calculated to include (i) the Consolidated Cash Flow of the acquired entities and (ii) interest from such investments
in cash or cash equivalents on a pro forma basis. after giving effect to cost savings resulting from employee terminations.
facilities consolidations and closings. standardization of employee benefits and compensation practices, consolidation of
property, casualty and other insurance coverage and policies, standardization of sales and distribution methods, reductions in
taxes other than income taxes and other cost savings reasonably expected to be realized from such acquisition, as determined
in good faith by an officer of the Company (regardless of whether such cost savings could then be reflected in proforma
financial statements under GAAP, Regulation S-X promulgated by the SEC or any other regulation or policy of the SEC) and
without giving effect to clause (3) of the proviso set forth in the definition of Consolidated Net Income, and shall be deemed
to have occurred on the first day of the period for which Consolidated Cash Flow shall be calculated. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating
thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith,
the pro forma
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calculations shall be determined in good faith by a responsible financial or accounting officer of the Company.
"Fixed Charges" shall mean, for any period, the sum, without duplication, of (1) Consolidated Interest Expense for such
period, (2) interest expense on Indebtedness of another Person that is Guaranteed by, or secured by a lien on the assets of
Holdings or any Restricted Subsidiary and (3) all tax-effected dividend payments on any series of Preferred Stock of the
Company or any Restricted Subsidiary (other than dividends payable solely in Capital Stock that is not Disqualified Stock),
in each case, on a consolidated basis and in accordance with GAAP.
"Foreign Subsidiwy" means any Restricted SubsidialY of the Company that is not organized under the laws of the United
States of America or any State thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Issue Date,
including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public
Accountants;
(2) statements and pronouncements of the Financial Accounting Standards Board;
(3) such other statements by such other entity as approved by a significant segment of the accounting profession; and
(4) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and
pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or othelwise, of any Person directly or indirectly guaranteeing any
Indebtedness of any Person and any obligation, direct 01' indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such Person
(whether arising by virtue of paltnership arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services, to take-or-pay or to maintain financial statement conditions or otherwise); or
)
(2) entered into for the pUlpose of assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit and trade pay abies in
the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor"
shall mean any Person Guaranteeing any obligation.
"Guarantee Agreement" means a supplemental indenture, in a form satisfactory to the Trustee, pursuant to which a
Subsidiary Guarantor guarantees the Company's obligations with respect to the Notes on the terms provided for in the
Indenture.
"Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or
Currency Agreement.
"H.1. G." means H.I.G. Capital, LLC, together with its Affiliates.
"H. I. G. Directors" means Sami Mnaymneh, Tony Tamer, Brian Schwartz, Douglas Berman and Lewis Schoenwetter.
"Holder" or "Noteholder" means the Person in whose name a Note is l'egistei'ed on the Registrar's books.
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)
"Incur" means issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness
of a Person existing at the time such Person becomes a Restricted Subsidiary (whether by merger, consolidation, acquisition
or otherwise) shall be deemed to be Incurred by such Person at the time it becomes a Restricted Subsidiary. The term
"Incurrence" when used as a noun shall have a correlative meaning. Solely for purposes of determining compliance with "Certain Covenants - Limitation on Indebtedness":
(I) amortization of debt discount or the accretion of principal with respect to a non-interest bearing or other discount
security;
(2) the payment of regularly scheduled interest in the form of additional Indebtedness of the same instrument or the
payment of regularly scheduled dividends on Capital Stock in the form of additional Capital Stock of the same class and
with the same terms; and
(3) the obligation to pay a premium in respect of Indebtedness arising in connection with the issuance of a notice of
redemption or making of a mandatOlY offer to purchase such Indebtedness
will not be deemed to be the Incurrence of Indebtedness
"Indebtedness" means, with respect to any Person on any date of determination (without duplication):
(I) the principal in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced
by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable,
including, in each case, any premium on such indebtedness to the extent such premium has become due and payable;
(2) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale! Leaseback Transactions
entered into by such Person;
(3) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person under any title retention agreement (but excluding any
accounts payable or other liability to trade creditors arising in the ordinaty course of business);
)
(4) all obligations of such Person for the reimbursement of any obligor on any letter of credit, bankers' acceptance or
similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than
obligations described in clauses (I) through (3) above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the tenth Business Day following payment on the letter of credit);
(5) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock of such Person or, with respect to any Preferred Stock of any Subsidiary of such Person, the principal
amount of such Preferred Stock to be determined in accordance with the Indenture (but excluding, in each case, any
accrued dividends);
(6) all obligations of the type referred to in clauses (I) through (5) of other Persons and all dividends of other Persons
for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor
or otherwise, including by means of any Guarantee;
(7) all obligations of the type referred to in clauses (I) through (6) of other Persons secured by any Lien on any
property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such
obligation being deemed to be the lesser of the fair market value of such property or assets and the amount of the
obligation so secured; and
(8) to the extent not otherwise included in this definition, Hedging Obligations of such Person.
Notwithstanding the foregoing, in connection with the purchase by the Company or any Restricted Subsidiary of any business
or Person, the term "Indebtedness" will exclude post-closing payment adjustments to which the seller may become entitled to
the extent such payment is determined by a final
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closing balance sheet or such payment depends on the performance of such business after the closing; provided, however,
that, at the time of closing, the amount of any such payment is not determinable and, to the extent such payment thereafter
becomes fixed and determined, the amount is paid within 30 days thereafter.
The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all obligations as
described above; provided, however, that in the case of Indebtedness sold at a discount, the amount of such Indebtedness at
any time will be the accreted value thereof at such time.
"Independent Qualified Party" means an investment banking firm, accounting firm or appraisal firm of national standing;
provided, however, that such firm is not an Affiliate of the Company.
"Intercreditor Agent" means, initially, ING Capital LLC, and thereafter, any other Person designated by holders of a
majority in principal amount of Secured Bank Indebtedness.
"Intercreditor Agreement" means the intercreditor agreement to be entered into on or about the Issue Date, among ING
Capital LLC, as Intercreditor Agent, the Trustee, the Company and the Subsidiary Guarantors.
"Interest Rate Agreement" means any interest rate swap agreement, interest rate cap agreement or other financial
agreement or arrangement with respect to exposure to interest rates.
)
"Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary
course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extensions of credit
(including by way of Guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of
Capital Stock, Indebtedness or other similar instruments issued by such Person. If the Company or any Restricted Subsidiary
issues, sells or otherwise disposes of any Capital Stock of a Person that is a Restricted Subsidiaty such that, after giving
effect thereto, such Person is no longer a Restricted Subsidiary, any Investment by the Company or any Restricted Subsidiaty
in such Person remaining after giving effect thereto will be deemed to be a new Investment at such time. The acquisition by
the Company or any Restricted Subsidiary ofa Person that holds an Investment in a third Person will be deemed to be an
Investment by the Company or such Restricted Subsidiary in such third Person at such time. Except as otherwise provided for
herein, the amount of an Investment shall be its fair market value at the time the Investment is made and without giving effect
to subsequent changes in value.
For purposes of the definition of "Unrestricted Subsidiary", the definition of "Restricted Payment" and the covenant
described under u _ Certain Covenants - Limitation on Restricted Payments":
(I) "Investment" shall include the portion (propOltionate to the Company's equity interest in such Subsidiaty) of the
fair market value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an
Unrestricted Subsidiary; provided, however, that upon a redesignation of such SubsidialY as a Restricted Subsidiaty, the
Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an
amount (if positive) equal to (A) the Company's "Investment" in such Subsidiary at the time of such redesignation less
(B) the portion (proportionate to the Company's equity interest in such SubsidialY) of the fair market value of the net
assets of such Subsidiary at the time of such redesignation; and
(2) any propelty transferred to or from an Unrestricted SubsidialY shall be valued at its fair market value at the time of
such transfer, in each case as determined in good faith by the Board of Directors.
"Issue Date" means September 9, 2004.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions are not required to be open in the
State of New York.
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"Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional
sale or other title retention agreement 01' lease in the nature thereof).
"Merger" shall mean the acquisition by the Company on the Issue Date of the Capital Stock of Evercom pursuant to the
Merger Agreement.
"Merger Agreement" shall mean that certain Agreement and Plan of Merger dated as of July 10,2004, by and among the
Company (formerly known as TZ Holdings, Inc.), New Mustang Acquisition, Inc., Evercom and the Indemnification
Representative (as defined therein), as in effect on the Issue Date.
"Mezzanine Debt" means the $40,000,000 pay in-kind senior subordinated notes of the Company issued on the Issue
Date pursuant to the Note Purchase Agreement dated as of September 9, 2004 as on the Issue Date among the Company, the
Subsidiary Guarantors and the institutions named therein as the same may increase from time to time pursuant to its pay in-
kind interest provisions.
"Net Available Cash" from an Asset Disposition means cash payments received therefrom (including any cash payments
received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from
the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any
other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other non-cash form), in each case net of:
(I) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal,
state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such Asset
Disposition;
(2) all payments made on any Indebtedness which is secured by any assets subject to such Asset Disposition, in
accordance with the terms of any Lien upon or other security agreement of any kind with respect to such assets, or which
must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law, be repaid out
of the proceeds from such Asset Disposition;
)
(3) all distributions and other payments required to be made to minority interest holders in Restricted Subsidiaries as a
result of such Asset Disposition;
(4) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any
liabilities associated with the property or other assets disposed in such Asset Disposition and retained by the Company or
any Restricted Subsidiary after such Asset Disposition; and
(5) any portion of the purchase price from an Asset Disposition placed in escrow, whether as a reserve for adjustment
of the purchase price, for satisfaction of indemnities in respect of such Asset Disposition or othelwise in connection with
that Asset Disposition; provided, however, that upon the termination of that escrow, Net Available Cash will be increased
by any portion of funds in the escrow that are released to the Company or any Restricted SubsidialY.
"Net Cash Proceeds ", with respect to any issuance or sale of Capital Stock or Indebtedness, means the cash proceeds of
such issuance or sale net of attorneys' fees, accountants' fees, undelwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.
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"Net Income" shall mean, with respect to any Person, the net income (loss) of such Person, determined in accordance
with GAAP and before any reduction in respect of preferred stock dividends, excluding, however,
(I) any gain (or loss), together with any related provision for taxes on such gain (or loss), realized in connection with:
(a) any Asset Disposition (including dispositions pursuant to sale and leaseback transactions); or
(b) the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries; and
(2) any extraordinary or nonrecurring gain (or loss), together with any related provision for taxes on such
extraordinary Of nonrecurring gain (or loss).
"Obligations" means, with respect to any Indebtedness, all obligations for principal, premium, interest, penalties, fees,
indemnifications, reimbursements, and other amounts payable pursuant to the documentation governing such Indebtedness.
"Officer" means the Chairman of the Board, the President, any Vice President, the Treasurer or the Secretary of the
Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion oj Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be
an employee of or counsel to the Company or the Trustee.
"Permitted Holders" means H.I.G., Richard E. Cree and Richard Falcone and (I) any entities controlled by Richard E.
Cree or Richard Falcone, (2) charitable foundations established by Richard E. Cree or Richard Falcone, (3) husts for the
benefit of Richard E. Cree or Richard Falcone and/or their respective family members and (4) the estate and heirs of Richard
E. Cree or Richard Falcone. Except for a Permitted Holder specifically identified by name, in determining whether Voting
Stock is owned by a Permitted Holder, only Voting Stock acquired by a Permitted Holder in its described capacity will be
treated as "beneficially owned" by such Permitted Holder.
"Permitted Investment" means an Investment by the Company or any Restricted Subsidiary in:
)
(I) the Company, a Restricted SubsidialY or a Person that will, upon the making of such Investment, become a
Restricted Subsidiary; provided, however, that the primary business of such Restricted SubsidialY is a Related Business;
(2) another Person if, as a result of such Investment, such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a Restricted Subsidiary; provided, however, that
such Person's primary business is a Related Business;
(3) cash and Temporaty Cash Investments;
(4) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to
be treated as expenses for accounting purposes and that are made in the ordinary course of business;
(5) loans or advances to employees made in the ordinary course of business consistent with past practices of the
Company or such Restricted SubsidialY;
(6) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing
to the Company or any Restricted Subsidiary or in satisfaction of judgments;
(7) any Person to the extent such Investment represents the non-cash portion of the consideration received for (A) an
Asset Disposition as permitted pursuant to the covenant described
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under "- Certain Covenants - Limitation on Sales of Assets and Subsidiary Stock" or (B) a disposition of assets not
constituting an Asset Disposition;
(8) any Person where such Investment was acquired by the Company or any of its Restricted Subsidiaries (A) in
exchange for any other Investment or accounts receivable held by the Company or any such Restricted Subsidiaty in
connection with or as a result of a bankruptcy, workout, reorganization or recapitalization of the issuer of such other
Investment or accounts receivable or (B) as a result of a foreclosure by the Company or any of its Restricted Subsidiaries
with respect to any secured Investment or other transfer of title with respect to any secured Investment in default;
(9) any Person to the extent such Investments consist of prepaid expenses, negotiable instruments held for collection
and lease, utility and workers' compensation, letters of credit, performance and other similar deposits or bonds made in
the ordinaty course of business by the Company or any Restricted Subsidiaty;
(I 0) any Person to the extent such Investments consist of Hedging Obligations otherwise permitted under the
covenant described under ,,~ Certain Covenants - Limitation on Indebtedness";
(11) any Person to the extent such Investment exists on the Issue Date, and any extension, modification or renewal of
any such Investments existing on the Issue Date, but only to the extent not involving additional advances, contributions or
other Investments of cash or other assets or other increases thereof (other than as a result of the accrual or accretion of
interest or original issue discount or the issuance of pay-in-kind securities, in each case, pursuant to the terms of such
Investment as in effect on the Issue Date; and
(12) Persons to the extent such Investments, when taken together with aU other Investments made pursuant to this
clause (12) and outstanding on the date such Investment is made, do not exceed $10 million.
"Permitted Liens" means, with respect to any Person:
)
(1) pledges or deposits by such Person under worker's compensation laws, unemployment insurance laws or similar
legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness)
or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits
of cash or United States government bonds to secure surety or appeal bonds to which such Person is a party, or deposits
as security for contested taxes or import duties or for the payment of rent, in each case Incurred in the ordinary course of
business;
(2) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, in each case for sums not yet due
or being contested in good faith by appropriate proceedings or other Liens arising out of judgments or awards against
such Person with respect to which such Person shall then be proceeding with an appeal or other proceedings for review
and Liens arising solely by virtue of any statutory or common law provision relating to banker's Liens, rights of set-off or
similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution;
provided, however, that (A) such deposit account is not a dedicated cash collateral account and is not subject to
restrictions against access by the Company in excess of those set forth by regulations promulgated by the Federal Reserve
Board and (B) such deposit account is not intended by the Company or any Restricted Subsidiary to provide collateral to
the depository institution;
(3) Liens for property taxes not yet subject to penalties for non-payment or which are being contested in good faith by
appropriate proceedings;
(4) Liens in favor ofissue,~ of surety bonds or lette" of credit issued pU1~uant to the request of and for the account of
such Person in the ordinary course of its business; provided, however, that such letters of credit do not constitute
Indebtedness;
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(5) minor survey exceptions, minor encumbrances, easements or reservations of, or rights of others for, licenses,
rights-of-way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other
restrictions as to the use of real propelty or Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with Indebtedness and which do not in the aggregate
materially adversely affect the value of said prope!ties or materially impair their use in the operation of the business of
such Person;
(6) Liens securing Indebtedness (including Capital Lease Obligations), in an amount at any time outstanding not to
exceed $10.0 million, Incurred to finance the construction, purchase or lease of, or repairs, improvements or additions to,
propelty, plant or equipment of such Person; provided. however, that the Lien may not extend to any other property
owned by such Person or any of its Restricted Subsidiaries at the time the Lien is Incurred (other than assets and property
affixed or appurtenant thereto), and the Indebtedness (other than any interest thereon) secured by the Lien may not be
Incurred more than 180 days after the later of the acquisition, completion of construction, repair, improvement, addition
or commencement offull operation of the property subject to the Lien;
(7) Liens to secure Indebtedness permitted under the provisions described in clause (b)( I) and (b)(I 0) under "Certain Covenants - Limitation on Indebtedness";
(8) Liens existing on the Issue Date;
(9) Liens on propelty or shares of Capital Stock of another Person at the time such other Person becomes a SubsidialY
of such Person; provided, however, that the Liens may not extend to any other property owned by such Person or any of
its Restricted Subsidiaries (other than assets and property affixed or appurtenant thereto);
(10) Liens on property at the time such Person or any of its Subsidiaries acquires the property, including any
acquisition by means of a merger or consolidation with or into such Person or a Subsidiary of such Person;' provided,
however, that the Liens may not extend to any other property owned by such Person or any of its Restricted Subsidiaries
(other than assets and property affixed or appurtenant thereto);
)
(II) Liens securing Indebtedness or other obligations of a SubsidialY of such Person owing to such Person or a
SubsidialY Guarantor of such Person;
(12) Liens securing Hedging Obligations so long as such Hedging Obligations are permitted to be Incurred under the
Indenture;
(13) Liens in favor of the Company;
(14) Liens to secure Indebtedness permitted under the provisions described in clause (b)(3) under "- Certain
Covenants - Limitation or Indebtedness"; and
(15) Liens to Secure any Refinancing (or successive Refinancings) as a whole, or in part, of any Indebtedness secured
by any Lien referred to in the foregoing clause (6), (8), (9), (10) or (14); provided, however, that:
(A) such new Lien shall be limited to all or part of the same property and assets that secured or, under the written
agreements pursuant to which the original Lien arose, could secure the original Lien (plus improvements and
accessions to, such property or proceeds 01' distributions thereof); and
(8) the Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of
(i) the outstanding principal amount or, if greater, committed amount of the Indebtedness described under clause (6),
(8), (9) or (10) at the time the original Lien became a Permitted Lien and (ii) an amount necessary to pay any fees and
expenses, including premiums, related to such refinancing, refunding, extension, renewal or replacement.
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Notwithstanding the foregoing, "Permitted Liens" will not include any Lien described in clause (6), (9), (10) or (13) above to
the extent such Lien applies to any Additional Assets acquired directly or indirectly from Net Available Cash pursuant to the
covenant described under"~ Certain Covenants - Limitation on Sale of Assets and Subsidiary Stock," For purposes of this
definition, the term "Indebtedness" shall be deemed to include interest on such Indebtedness.
"Person" means any individual, cOlporation, partnership, limited liability company. joint venture, association, joint-stock
company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.
"P/'~re/'/'ed Stock", as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however
designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such
Person.
"principal" ofa Note means the principal of the Note plus the premium, if any, payable on the Note which is due or
overdue or is to become due at the relevant time.
"Prq{essional Services Agreement" means the Amended and Restated Professional Services Agreement, dated
September 9,2004, between the Company and H.I.O.
"Quotation Agent" means the Reference TreasUlY Dealer selected by the Trustee after consultation with the Company.
"Rating Agencies" means S&P and Moody's.
"Reference Treaswy Dealer" means Credit Suisse First Boston LLC, Morgan Stanley & Co. Incorporated and their
respective successors and assigns and one other nationally recognized investment banking firm selected by the Company that
is a primary U.S. Government securities dealer.
"Reference Treaswy Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption
date, the average, as detemlined by the Trustee, ofthe bid and asked prices for the Comparable Treasury Issue, expressed in
each case as a percentage of its principal amount, quoted in writing to the Trustee by such Reference Treasury Dealer at
5:00 p.m., New York City time, on the third Business Day immediately preceding such redemption date.
)
"Rtqfinance" means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, purchase, redeem,
defease or retire, or to issue other Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"R~financing Indebtedness" means Indebtedness that Refinances any Indebtedness of the Company or any Restricted
Subsidiaty existing on the Issue Date or Incurred in compliance with the Indenture, including Indebtedness that Refinances
Refinancing Indebtedness; provided, however, that:
(I) such Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being
Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is
equal to or greater than the Average Life of the Indebtedness being Refinanced;
(3) such Refinancing Indebtedness has an aggregate principal amount (or if Incurred with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal amount (or if Incurred with original issue
discount, the aggregate accreted value) then outstanding (plus fees and expenses, including any premium and defeasance
costs) under the Indebtedness being Refinanced; and
(4) if the Indebtedness being Refinanced is subordinated in right of payment to the Notes, such Refinancing
Indebtedness is subordinated in right of payment to the Notes at least to the same extent as the Indebtedness being
Refinanced;
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providedfurther, however, that Refinancing Indebtedness shall not include (A) Indebtedness ofa Subsidiary that Refinances
Indebtedness of the Company or (B) Indebtedness of the Company or a Restricted Subsidiary that Refinances Indebtedness of
an Unrestricted Subsidiaty.
"Registration Rights Agreement" means the Registration Rights Agreement dated August 18, 2004, among the Company,
the Subsidiary Guarantors, Credit Suisse First Boston LLC and Morgan Stanley & Co. Incorporated.
"Related Business" means any business in which the Company or any of the Restricted Subsidiaries was engaged on the
Issue Date and any business related, ancillary or complementalY to such business.
"Restricted Payment" with respect to any Person means:
(I) the declaration or payment of any dividends or any other distributions of any sort in respect of its Capital Stock
(including any payment in connection with any merger ot' consolidation involving such Person) or similar payment to the
direct or indirect holders of its Capital Stock (other than (A) dividends or distributions payable solely in its Capital Stock
(other than Disqualified Stock), (B) dividends or distributions payable solely to the Company or a Restricted Subsidiary
and (C) pro rata dividends or other distributions made by a Subsidiaty that is not a Wholly Owned Subsidia.y to minority
stockholders (or owners of an equivalent interest in the case of a Subsidiary that is an entity other than a corporation));
(2) the purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of any Capital Stock
of the Company held by any Person (other than by a Restricted Subsidia.y) or of any Capital Stock ofa Restricted
Subsidiaty held by any Affiliate of the Company (other than by a Restricted Subsidiary), including in connection with
any merger or consolidation and including the exercise of any option to exchange any Capital Stock (other than into
Capital Stock of the Company that is not Disqualified Stock);
)
(3) the purchase, repurchase, redemption, defeasance or other acquisition or retirement for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment of any Subordinated Obligations of the Company or
any Subsidiary Guarantor (other than (A) from the Company or a Restricted Subsidia.y or (B) the purchase, repurchase,
redemption, defeasance or other acquisition 01' retirement of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of
such purchase, repurchase, redemption, defeasance or other acquisition or retirement);
(4) the making of any cash payment of interest on or with respect to the Mezzanine Debt; or
(5) the making of any Investment (other than a Permitted Investment) in any Person.
"Restricted Subsidiary" means any Subsidiaty of the Company that is not an Unrestricted Subsidiaty.
"Sale! Leaseback Transaction" means an arrangement relating to property owned by the Company or a Restricted
Subsidiary on the Issue Date or thereafter acquired by the Company or a Restricted Subsidiaty whereby the Company or a
Restricted Subsidimy transfers such property to a Person and the Company or a Restricted Subsidia.y leases it from such
Person.
"SEC" means the U.S. Securities and Exchange Commission.
"Secured Bank Indebtedness" means any Bank Indebtedness that is secured by a Permitted Lien Incurred or deemed
Incurred pursuant to clause (7) of the definition of Permitted Liens.
"Securities Act" means the U.S. Securities Act of 1933, as amended.
"Security Documents" means the Security Agreement among the Company, the Subsidiary Guarantors and the Trustee,
the Pledge Agreement among the Company, the Subsidiary Guarantors and the Trustee, the Intercreditor Agreement and each
other document, instrument or agreement granting Collateral to secure the Obligations of the Company and the Subsidiary
Guarantors under the Notes and the Subsidiaty Guarantees, respectively.
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"Senior Indebtedness" means with respect to any Person:
(I) Indebtedness of such Person, whether outstanding on the Issue Date or thereafter Incun'ed; and
(2) all other Obligations of such Person (including interest accruing on or after the filing of any petition in bankruptcy
or for reorganization relating to such Person whether or not post-filing interest is allowed in such proceeding) in respect
of Indebtedness described in clause (I) above
unless, in the case of clauses (I) and (2), in the instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that such Indebtedness or other obligations are subordinate in right of payment to the Notes or the
Subsidiary Guarantee of such Pel~on, as the case may be; provided, however, that Senior Indebtedness shall not include:
(I) any obligation of such Person to the Company or any SubsidialY;
(2) any liability for Federal, state, local or other taxes owed or owing by such Person;
(3) any accounts payable or other liability to trade creditors arising in the ordinary course of business;
(4) any Indebtedness or other Obligation of such Person which is subordinate or junior in any respect to any other
Indebtedness or other Obligation of such Person; or
(5) that portion of any Indebtedness which at the time of Incurrence is Incurred in violation of the Indenture.
"Significant Subsidimy" means any Restricted Subsidiary that would be a "Significant SubsidialY" of the Company
within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the
final payment of principal of such security is due and payable, including pursuant to any mandatOlY redemption provision
(but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Stockholders' Agreement" means the Stockholders' Agreement to be entered into in connection with the Transactions
among the Company, H.I.G.-TNetix, Inc., a company organized under the laws of the Cayman Islands, American Capital
Strategies, Ltd., a Delaware corporation, and the other stockholders orthe Company named therein.
"Subordinated Obligation" means, with respect to a Person, any Indebtedness of such Person (whether outstanding on
the Issue Date or thereafter Incurred) which is subordinate or junior in right of payment to the Notes or a Subsidiary
Guarantee of such Person, as the case may be, pursuant to a written agreement to that effect.
"Subsidialy" means, with respect to any Person, any corporation, association, partnership or other business entity of
which more than 50% of the total voting power of shares of Voting Stock is at the time owned or controlled, directly or
indirectly, by:
(I) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"Subsidimy Guarantor" means T-Netix and Evercom and each other SubsidialY of the Company that executes the
Indenture as a guarantor on the Issue Date and each other Subsidiary of the Company that thereafter guarantees the Notes
pursuant to the terms of the Indenture.
"Subsidiary Guarantee" means a Guarantee by a Subsidiaty Guarantor of the Company's obligations with respect to the
Notes.
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"T-Netix" means T-NETIX, Inc., a Delaware corporation, and its successors.
"T-Netix Consolidation" shall mean the merger ofTZ Acquisition, Inc., a Delaware corporation, with and into T-Netix
pursuant to the terms of that certain Agreement and Plan of Merger dated as of Januaty 22, 2004, among the Company
(formerly known as TZ Holdings, Inc.), TZ Acquisition, Inc. and T-Netix, which resulted in T-Netix being the surviving
entity and a wholly-owned SubsidialY of the Company.
"Temporaty Cash Investments" means any of the following:
(I) any investment in direct obligations of the United States of America 01' any agency thereof or obligations
guaranteed by the United States of America 01' any agency thereof;
(2) investments in demand and time deposit accounts, certificates of deposit and money market deposits maturing
within 180 days of the date of acquisition thereof issued by a bank 01' trust company which is organized under the laws of
the United States of America, any State thereof or any foreign country recognized by the United States of America, and
which bank 01' trust company has capital, surplus and undivided profits aggregating in excess of$50.0 million (01' the
foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) 01'
higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities
Act) or any money-market fund sponsored by a registered broker dealer 01' mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for underlying securities of the types d,scribed in
clause (I) above entered into with a bank meeting the qualifications described in clause (2) above;
(4) investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of
America 01' any foreign counlly recognized by the United States of America with a rating at the time as of which any
investment therein is made of "P-I" (01' higher) according to Moody's Investors Service or "A-I" (01' higher) according to
Standard and Poor's;
)
(5) investments in securities with maturities of six months or less fL'OIll the date ofacquisitLon issued or fully
guaranteed by any state, commonw~alth or territOlY of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by Stand.rd & Poor's 01' "A" by Moody's Investors Service; and
(6) investments in money market funds that invest substantially all their assets in securities of the types described in
clauses (I) through (5) above.
"Tender Offer" shall mean the offer made to the shareholders ofT-Netix by TZ Acquisition, Inc. to purchase the Capital
Stock ofT-Netix for $4.60 per share, as more fully described in the Schedule TO filed by TZ Acquisition, Inc. with the SEC.
"Transactions" means the acquisition of Evercom, the offering of the Notes, the Incurrence of the Mezzanine Debt and
the closing of the Credit Facility on the Issue Date.
"Trustee" means The Bank of New York Trust Company, N.A. until a successor replaces it and, thereafter, means the
successor.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C. §§ 77aaa-77bbbb) as in effect on the Issue Date.
"Trust Officer" means the Chairman of the Board, the President or any other officer or assistant officer of the Trustee
assigned by the Trustee to administer its corporate bust matters.
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"Unrestricted Subsidiwy" means:
(I) any SubsidialY of the Company that at the time of determination shall be designated an Unrestricted SubsidialY by
the Board of Directors in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any SubsidialY of the Company (including any newly acquired or newly formed
SubsidialY) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or
Indebtedness of, or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a
Subsidiary of the Subsidiary to be so designated; provided, however, that either (A) the Subsidiary to be so designated has
total assets of $ I ,000 or less or (B) if such Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "- Certain Covenants - Limitation on Restricted Payments."
The Board of Directors may designate any Unrestricted SubsidialY to be a Restricted Subsidiary; provided, however, that
immediately after giving effect to such designation (A) the Company could Incur $1.00 of additional Indebtedness under
paragraph (a) ofthe covenant described under " - Certain Covenants - Limitation on Indebtedness" and (B) no Default
shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such
obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the
full faith and credit of the United States of America is pledged and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock of such Person then outstanding and normally entitled
(without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof.
"Wholly Owned SlIbsidimy" means a Restricted SubsidialY all the Capital Stock of which (other than directors'
qualifying shares) is owned by the Company or one or more other Wholly Owned Subsidiaries.
)
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
We have based the following discussion on the current provisions of the Internal Revenue Code of 1986, applicable
Treasury regulations, judicial authority and administrative rulings. We have not obtained an opinion of counsel and have not
sought a ruling from the Internal Revenue Service, and we can give you no assurance that the IRS will agree with the
following discussion. Changes in the applicable law may occur that may be retroactive and could affect the tax consequences
to you of the receipt of exchange notes in exchange for old notes in the exchange offer. Some holders, including financial
institutions, insurance companies, regulated investment companies, tax-exempt organizations, dealers in securities or
currencies, persons whose functional currency is not the U.S. dollar, U.S. expatriates, or persons who hold the exchange
notes as part of a hedge, conversion transaction, straddle or other risk reduction transaction may be subject to special rules
not discussed below. We recommend that you consult your own tax advisor as to the particular tax consequences of receiving
exchange notes in exchange for old notes in the exchange offer, including the applicability and effect of any state, local or
foreign tax law.
The exchange of old notes for exchange notes in the exchange offer willllOt constitute a taxable event. The exchange
notes will be treated as a continuation of the old notes. Consequently, you will not recognize gain upon receipt ofa new note
in exchange for an old note in the exchange offer, your basis in the exchange note received in the exchange offer will be the
same as your basis in the corresponding old note immediately before the exchange and your holding period in the exchange
note will include your holding period in the old note. The United States federal income tax consequences of holding and
disposing of an exchange note received in the exchange offer will be the sane as the United States federal income tax
consequences of holding and disposing of an old note.
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PLAN OF DISTRIBUTION
Based on interpretations by the staff of the SEC in no-action letters issued to third parties, we believe that you may
transfer exchange notes issued in the exchange offer in exchange for old notes if:
• you acquire the exchange notes in the ordinary course OfyOlli' business; and
• you are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to
participate in, a distribution of exchange notes.
We believe that you may not transfer exchange notes issued in the exchange offer in exchange for old notes if you are:
• our "affiliate" within the meaning of Rule 405 under the Securities Act;
• a broker-dealer that acquired old notes directly from us; or
• a broker-dealer that acquired old notes as a result of market-making activities or other trading activities, unless you
comply with the registration and prospectus delivelY requirements of the Securities Act.
If you wish to exchange your old notes for exchange notes in the exchange offer, you will be required to make
representations to us as described in "The Exchange Offer -
Procedures for Tendering -
Your Representations to Us" of
this prospectus and in the letter of transmittal.
Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge
that it will deliver a prospectus in connection with any resale of such exchange notes. This prospectus, as it may be amended
01' supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in
exchange for old notes where such old notes were acquired as a result of market-making activities or other trading activities.
We have agreed that, for a period of up to 180 days after the expiration date, we will make this prospectus, as amended or
supplemented, available to any broker-dealer which requests it in the letter of transmittal, for use in any such resale. In
addition, all broker-dealers effecting transactions in the exchange notes may be required to deliver a prospectus.
)
We will not receive any proceeds from any sale of exchange notes by broker-dealers. Exchange notes received by broker-
dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of options on the exchange notes or a combination of
such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such
exchange notes. Any broker-dealer that resells exchange notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act ad any profit on any such resale of exchange notes and any
commission or concessions received by any such persons may be deemed to be undelwriting compensation under the
Securities Act. The letter of transmittal states that, by acknowledging that it will deliver, and by delivering, a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration date of the exchange offer we will promptly send additional copies of this
prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents in the
letter of transmittal. We have agreed to pay all expenses incident to the exchange offer other than commissions or
concessions of any brokers or dealers and will indemnify the holders of the old notes (including any broker-dealers) against
certain types of liabilities, including liabilities under the Securities Act.
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LEGAL MATTERS
Certain legal matters related to the exchange offer and the validity of the exchange notes will be passed upon for us by
White & Case LLP, Miami, Florida.
INDEPENDENT EXPERTS
The consolidated financial statements for T-Netix, Inc. (Predecessor Company) as of and for the years ended
December 31, 2002 and December 31, 2003 and for the 62 day period from JanualY I, 2004 to March 2, 2004, included in
this prospectus have been so included in reliance on the report of KPMG LLP, independent registered public accounting finn,
given on the authority of said firm as experts in accounting and auditing.
The consolidated financial statements for SecUl'US Technologies, Inc. (Successor Company) for the 355 day period from
JanualY 12,2004 to December 31, 2004, included in this prospectus have been so included in reliance on the report of KPMG
LLP, independent registered public accounting firm, given on the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Evercom Holdings, Inc. and subsidiaries as of December 31, 2003 and 2002 and
for each of the three years ended December 31, 2003, included in this prospectus have been audited by Deloitte & Touche
LLP. independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and aUditing,
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
)
Consolidated Financial Statements - Securus Technologies, Inc. and Subsidiaries
RepJ/!:1..9i.!n.dJl.p.endent RJl.gi~te~!lPubli"-Accounting Firm - As ofDecembedl. 2003 and for the Years
ended December 31, 2002 and 2003 and for the 62 day Period from January I, 2004 to March 2, 2004
IPredecessor)
Report oflndependent Registered Public Accounting Firm - As of December 31, 2004 and for the 355 day
PeriQd"from..Janllary_l2,~Q04 to l2ecember 31, 2004 ISuccessor)
Consolidated Balance Sheets - As of December 31, 2003 (Predecessor) and 2004 (Successor)
ConsoU!late.d.Statement~9fQperations ---, Years ended December 31, 2002 and 2003 and for the Period
from January I, 2004 to March 2,2004 (Predecessor) and Period from January 12,2004 (inception) to
J:lJl-"l'm\1er.3.I,.20Q4_CSJ!<:c_essor)
CQnsolidatedStatements of Stockholders' Equity- Years ended D.ec:ember 31, 2002 and 2003 and for the
Pelio.d fromlJml!J!ly....l~2004 to March 2, 2004 (Predecessor) and Perioq. from January 12, 2004_(JnceptiQ.ll)
to December 31, 2004 (Successor)
Consplid.ted Statements of Cash Flows - Years ended DecembeL31, 2002 and 2003 and for thePeriod
from January I, 2004 to March 2, 2004 IPredecessor) and for the Period from January 12,2004
(In''Jl.ption) to December 31, 2004 (Successor)
Notes to Consolidated Financial Statements
Consolidated Financial Statements - Evercom Holdings, Inc. and Subsidiaries
Independent Auditors' Report
Consolidated Balance Sheets - As of June 3Q, .2004 (l!l!audi.t!1d) and December 31, loO} .and_2002
Consolidated Statements of Operations - For the six months ended June 30, 2004 and 2003
(unauditffi) and years ende<!Pecember U,2003,1002_and 2001
c.onsQ[idate,lJli.!eme!1.lsQ[Stockholders' Eqllity - For the six months ended}"_ne 30, 2004
lunaudited) and Ye.ar~emlerl DecJl.l!lb!l!·3k2J)03, 2002 and 2001
CQ11s.oUdAted 8tJ\tem@tsofCash Flows - For the six months end"d)une..3.0~ 2004 and 2003
(llnal!JJiterl)alldYears ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
F-2
F-3
F-4
F-5
F-6
F-7
F-IO
F-39
F-40
F-41
F-42
F-43
F-44
F-l
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
T-NETIX, Inc.:
We have audited the accompanying consolidated balance sheet ofT-NETIX, Inc. and subsidiaries as of December 31,
2003, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 2003 and for the 62 day period from January 1, 2004 to March 2, 2004. These
consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position ofT-NETIX and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for
each of the years in the two-year period ended December 31, 2003 and the 62 day period ended December 31, 2003, in
conformity with U.S. generally accepted accounting principles.
KPMGLLP
Dallas, Texas
March 12, 2004
)
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Securus Technologies, Inc.:
We have audited the accompanying consolidated balance sheet ofSecurus Technologies, Inc. and subsidiaries as of
December 31, 2004, and the related consolidated statements of operations, stockholders' equity, and cash flows for the
355 day period from January 12, 2004 (inception) to December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Securus Technologies, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of
operations, stockholders' equity and comprehensive income, and cash flows for the 355 day period from Januaty 12,2004 to
December 31, 2004, in conformity with U.S. generally accepted accounting principles.
KPMGLLP
Dallas, Texas
May 12,2005
)
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SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 (Predecessor) and 2004 (Successor)
December 31,
2003
Pl'cdecessor
I
December 31. 2004
Successor
(Amounts in Thousands, Except Per
Share Amount)
ASSETS
$
Cash and cash equivalents
Restricted cash
Accounts receivable, net (note 4)
Prepaid expenses
Refundable income taxes
Current deferred income taxes (note 9)
Total current assets
Property and equipment, net (note 4)
Deferred income taxes (note 9)
Assets held for sale
Intangibles and other assets, net (note 4)
Goodwill (note 5)
Total assets
)
22,875
$
14,489
1,208
$
1,385
39,957
21,463
39
285
4,880
2,245
68,869
$
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
$
3,655
$
Accounts payable
Accrued liabilities (note 4)
9,903
Deferred revenue and customer advances
986
Current portion of long-term debt (note 6)
3,527
Total current liabilities
18,071
Deferred income taxes (note 9)
Long-term debt, net of current pOttion (note 6)
15,645
33,716
Total liabilities
Commitments and contingencies (note 13)
Stockholders' equity(deficit) (note 10):
Common stock, $0.0 I stated value, 70,000,000 shares authorized;
15,052,210 shares issued and outstanding at December 31, 2003;
1,000,000 shares authorized; 560,717 shares issued and
outstanding at December 31, 2004
150
Additional paid-in capital
43,987
Accumulated other comprehensive loss
(56)
Accumulated deficit
(8,928)
Total stockholders' equity (deficit)
35,153
Total liabilities and stockholders' equity (deficit)
$
$
68,869
1,879
1,347
67,498
3,932
634
2,806
78,096
36,170
107,657
50,213
272,136
40,532
41,891
4,317
117
86,857
18,300
189,820
294,977
5
33,902
(56,748)
(22,841)
272,136
See accompanying notes to consolidated financial statements.
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SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2002, 2003 and for the 62 Day Period
from January 1,2004 to March 2, 2004 (Predecessor) and for the 355 Day Period
from January 12, 2004 (Inception) to December 31, 2004 (Successor)
Predecessor
Successor
For the
62 Day
For the Year
Ended
December 31,
2002
Revenue:
Telecommunication services
)
$
Direct call provisioning
Solution services
Equipment sales and other
Total revenue
Cost of service (exclusive of depreciation and amortization
shown separately below):
Telecommunication services
Direct call provisioning, exclusive of bad debt expense
Direct call provisioning bad debt expense
Solutions expense
Cost of equipment sold and other
Total cost of service
Selling, general and administrative
Compensation expense on employee stock options
Research and development
Impairment of telecommunication assets
Gain on sale of assets
Employee severance
Loss on debt extinguishment
Depreciation and amortization
Total operating costs and expenses
Operating income (loss)
Patent litigation settlement, net of expenses
Transaction fees and expenses
Interest and other expenses, net
Income (loss) from continuing operations before income
taxes
Income taxes expense (benefit) (note 9)
Net income (loss) from continuing operations
Net toss from discontinued operations (note 7)
Gain on sate of discontinued operations (note 7)
Loss from discontinued operations
Net income (loss) applicable to common stockholders
57,514
48,798
For the Year
Elided
December 31,
2003
(Amounts In thousands)
$
$
2004 to
March 2,
2004
$
7,552
9,651
13,498
119,810
9,864
117,244
232
17,435
21,222
33,538
13,258
20,093
39,439
11,993
3,126
6,536
1,594
4,703
72,721
23,358
30
3,054
1,119
(36)
4,197
75,722
22,640
131
11,387
3,032
4,069
607
285
3,629
653
(290)
12,101
112,347
7,463
2,085
$
50,645
56,735
11,892
114,246
2,998
(9,935)
$
30,341
120,868
18,466
3,701
173,376
1,239
1,649
22,268
(4,833)
13,215
82,823
16,819
16,000
2,026
130,883
25,118
2,397
50,585
(274)
3,127
2,802
13,157
227,795
(54,419)
987
14,001
(69,407)
(12,659)
(56,748)
-
2,825
3,761
5,365
2,191
2,553
180
2,373
(616)
308
(308)
2,065
9,172
2,676
6,496
(12,389)
(2,575)
(9,814)
$
For the 355 Day
Period from
January 12,
2004 (Inception)
to December 31,
2004
Period
from
January t,
$
$
-
$
6,496
$
(9,814)
$
(56,748)
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 2002, 2003 and for the 62 Day Period
from January 1,2004 to March 2, 2004 (Predecessor) and for the 355 Day Period
from January 12,2004 (Inception) to December 31, 2004 (Successor)
Accumulated
Common Stock
Paid·ln
Shares
Predecessor Balances at
Januaty I, 2002
Common stock issued
upon exercise of stock
options
Employee recourse stock
Amount
15,032 $
150 $
20
loan
Warrants issued in
connection with
subordinated debt
Net income
Predecessor Balances at
December 31, 2002
Taxes related to stock
options
Other comprehensive loss
)
Accumulated
Comprehensive
Dcflclt
Loss
(Amounts in thousands)
Ca~ital
$
41,831
(17,489)
$
Eguitr {Deficit}
$
32
(41)
(41)
2,065
512
2,065
(15,424)
27,060
512
15,052
150
42,334
1,653
(56)
6,496
6,440
1,653
(56)
6,496
15,052
150
24,492
32
Net income
Comprehensive income
Predecessor Balances at
December 31, 2003
Recognition of hedge
liability on termination
Net loss (Januaty 1 to
March 2,2004)
Total
Stockholders'
Other
Additional
43,987
(8,928)
(56)
35,153
56
56
(9,814)
(9,814)
Predecessor Balance
March 2, 2004
15,052 $
150 $
1 $
560
-$
Capital contributed by TZ
Holdings, Inc. (Note 1)
Issuance of common stock
Warrants issued in
conjunction with
subordinated debt
Net loss (January 12 to
December31, 2004)
Successor Balance at
December 31, 2004
5
43,987
$
(18,742)
20,000 $
10,995
$
$
25,395
$
$
20,000
11,000
2,907
2,907
(56,748)
(56,748)
=
561 $
5 $
33,902 $
(56,748)
$
$
(22,841)
See accompanying notes to consolidated financial statements.
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SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2003 and for the 62 Day Period
from January 1, 2004 to March 2, 2004 (Predecessor) and for the 355 Day Period
from January 12,2004 (Inception) to December 31,2004 (Successor)
Predecessor
Successor
For the
For the Year
Ended
For the Year
Ended
December 31,
December 3t,
2002
2003
For the
355 Day
62 Day
Period from
January 12,
2004 to
Period from
January 1,
2004 to
March 2. 2004
December 31,
2004
(Amounts in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES FROM CONTINUING
OPERATIONS:
Net income (loss) from continuing operations
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
$
activities from continuing operations:
Depreciation and amortization
Impairment of telecommunication assets
Deferred income taxes
Conversion of interest paid "in kind" to
secured subordinated notes
Loss on write-down of investments
Gain on sale of fixed assets
2,373
$
12,101
1,119
6,496
$
11,892
653
2,526
(9,814)
1,649
285
(2,575)
$
(56,748)
13,157
50,585
(12,659)
3,035
278
(36)
(290)
Equity income (loss) from unconsolidated
affiliates
(274)
297
27
5,365
(83)
(5,525)
83
384
1,239
2,802
Transaction costs
Accretion of discount on subordinated note
payable
Loss on debt extinguishment
47
Amortization of deferred financing costs and
II7
debt discounts
Changes in operating assets and liabilities, net
of effects of acquisitions:
Restricted cash
Accounts receivable
Prepaid expenses and other current assets
Inventories
(2,008)
(376)
(719)
(278)
(571)
1,499
Other assets
Accounts payable
AcclUed liabilities
Net cash provided by (used in) operating
activities from continuing operations
665
$
13,546
848
5,549
400
840
22
(756)
(1,568)
$
26,809
$
(3,298)
(3,650)
(1,347)
(9,754)
2,954
(3,302)
915
8,970
1,466
10,646
7,465
(3,805)
",$_ _--"'6,"'56""8
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CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Years Ended December 31, 2002 and 2003 and for the 62 Day Period
from January 1,2004 to March 2, 2004 (Predecessor) and for the 355 Day Period
from January 12,2004 (Inception) to December 31, 2004 (Successor)
Successor
For the
355 Day
Period from
Predecessor
For the
62 Day
For the Year
Ended
December 31,
For the Year
Ended
December 31,
2002
2003
Period from
January 1,
2004 to
March 21 2004
January 12,
2004 to
December 31,
2004
(Amounts in thousands)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and equipment
$
Proceeds from sale of assets
(5,903) $
91
Investment itt unconsolidated affiliate
Purchase ofT-Netix stock and repayment ofT-
(6,512) $
532
(812)
(562)
$
(12,356)
274
Netix debt in connection with merger, net of
cash acquired
Purchase of Evercom stock and repayment of
(70,238)
Evercom debt in connection with merger, net
of cash acquired
(I30,746)
Other investing activities
Net cash used in investing activities
)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on line of credit
Payments on subordinated debt
Common stock issued for cash under stock
$
$
(577)
(6,389) $
(562)
$
(213,066)
(I 8,209)
(3,750)
(9)
option plans
Proceeds from
(6,792) $
second~priol'ity
senior secured
notes
150,383
40,000
5,126
Proceeds from senior subordinated notes
Advances on revolving credit facility
Proceeds from (payments on) senior
subordinated promissory note
Proceeds from (payments on) T-Netix senior
secured term note (old)
Debt issuance costs
Redemption of warrants in connection with
merger
Payments on other debt
9,000
14,000
(2,057)
(3,500)
(595)
(I 96)
(875)
(1l,080)
Proceeds from issuance ofT-Netix senior
secured notes, net of payments
(5)
(941)
(68)
35,353
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SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Years Ended December 31, 2002 and 2003 and for the 62 Day Period
from January 1,2004 to March 2, 2004 (Predecessor) and for the 355 Day Period
from January 12,2004 (Inception) to December 31, 2004 (Successor)
Predecessor
Successor
Forlhe
355 Day
Period from
January 12,
For the
62 Day
For the Year
Ended
December 31.
For the Year
Ended
December 31.
2002
Period from
January 1,
2004 to
March 21 2004
2003
20041.
December 31,
2004
(Amounts in thousands)
)
Proceeds from issuance ofT-Netix secured
subordinated notes
Proceeds from issuance of common stock
Payment of long-term debt in connection
with merger
Net cash provided by (used in) financing
activities
Cash flows from discontinued operations:
Net loss from discontinued operations
Proceeds from sale of discontinued
operations
Gain on sale of discontinued operations
Cash provided by discontinued
operations
Increase (decrease) in cash and cash
equivalents
Cash and cash equivalents at beginning of
period
Cash and cash equivalents at end of period
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest
Income taxes
NONCASH FINANCING AND
INVESTING ACTIVITIES:
Notes received in exchanged for assets
$
$
$
$
26,000
31,000
(67,396)
$
(1,620)
$
$
(308)
$
(3,696)
$
(880)
$
$
$
638
(308)
208,377
-
$
22
$
$
$
5,559
$
16,321
$
995
6,554
$
6,554
22,875
$
(5,247)
$
22,875
17,628
-
$
1,879
$
1,879
$
$
2,243
260
$
$
$
91
$
$
$
-
$
278
$
$
$
-
$
$
512
$
$
$
2,907
$
$
$
2,500
2,337
433
$
$
$
643
43
$
$
9,008
213
Common stock received in exchange for
assets
Detachable stock purchase warrants
issued
Accrued acquisition costs
See accompanying notes to consolidated financial statements.
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SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1)
Securus Technologies, Inc. and subsidiaries (the "Company") provides inmate telecommunications services to
correctional facilities operated by city, county, state and federal authorities and other types of confinement facilities in
48 states. The Company was incorporated in Delaware on January 12,2004, and effective March 2, 2004 and September 9,
2004 the Company acquired, as further explained in Note 2, all of the outstanding equity interests ofT-Netix, Inc. ("TNetix") and Evercom Holdings, Inc. ("Evercom"), respectively. For accounting purposes, T-Netix has been deemed the
predecessor to the Company. Therefore, the results disclosed herein for comparative purposes marked predecessor are those
ofT-Netix.
(aJ
Basis ofPresentation
As a result of the acquisitions ofT-Netix and Evercom, the consolidated balance sheet for 2003 and results of operations,
cash flows, and stockholders' equity for 2002 and 2003 and for the period Janumy 1,2004 to March 2, 2004 are those of the
predecessor, T-Netix. The consolidated balance sheet for 2004 and the statement of operations, cash flows, and stockholders'
equity (deficit) for the period January 12,2004 to December 31, 2004 represent the results of the Company subsequent to the
acquisitions ofT-Netix on March 3, 2004 and Evercom on September 9,2004.
During the periods presented, the Company has four reportable segments: Direct Call Provisioning, Solutions Services,
Telecommunications Services, and Equipment Sales.
)
In the Direct Call Provisioning segment, the Company accumulates call activity from its various installations and bills
revenue related to this call activity through major local exchange carriers ("LECs") or through third-pmty billing selvices for
smaller volume LECs, all of which are granted credit in the normal course of business with payment terms between 30 to
60 days. The Company performs ongoing customer credit evaluations and maintains allowances for unbillable and
uncollectible amounts based on historical experience.
In the Solutions Services segment, the Company provides validation, fraud and bad debt management, and billing
services to other telecommunications service providers such as AT&T and Sprint. In providing Solutions Services, the
Company typically assumes all risk of bad debt associated with its customers' inmate telecommunications revenues and all
costs of billing and collection. In return, the Company earns a fee generally based on a percentage of the providers' gross
cllstomer revenues generated from their inmate telecommunications businesses.
In the Telecommunications Services segment, the Company provides inmate telecommunication software and equipment
for correctional facilities, including security-enhanced call processors and call validation and bill processing systems for
inmate calling. Depending upon the contractual relationship at the site and the type of customer, the Company provides these
products and services through service agreements with other telecommunications services providers, such as Verizon, AT&T,
SBC Communications and Sprint. Under these agreements, the Company generates revenue over a specified contract term. In
addition, the Company sells inmate call processing systems to certain telecommunication providers and in these cases records
Equipment Sales revenue and related cost of goods sold when revenue is earned.
(bJ
Principles of COllsoli<illtioll
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries, T -Netix, Inc. and Evercom Holdings, Inc. All significant intercompany accounts and transactions have been
eliminated in consolidation. The accompanying consolidated balance sheet as of December 31, 2004 and the results of
operations and cash flows for the 355 day period from January 12 through December 31, 2004 are for the Company and
represent the stepped up successor basis
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SECURUS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
of accounting ("New T-Netix" and "New Evercom"). The accompanying consolidated balance sheet as of December 31,
2003 and the results of operations, cash flows and comprehensive income for the years ended December 31, 2002 and 2003
and for the 62 day period from January I, 2004 to March 2, 2004 are for T-Netix and its subsidiaries and represent the
predecessor basis of accounting ("Old T-Netix").
(c)
Liqllitlity
Management believes that borrowings available through the revolving credit facility and cash expected to be generated
from operations will be adequate to meet the Company's financing needs for the foreseeable future. In the event that cash in
excess of the amounts generated from operations and available under the revolving credit facility is required to fund the
Company's operations, management will be required to reduce or eliminate discretionary capital expenditures, further reduce
or eliminate discretionary selling, general, and administrative cost, Of to sell or close certain operations.
(d)
Accollnting Estill/lites
The preparation of 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 financial statements and the reported amounts of revenue
and expenses during the reporting 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.
(e)
)
Risks antl Uncertainties
The Company generated 10% of its revenue from its largest customer for the period January I through March 2, 2004.
The loss of this major customer could adversely affect operating results of the Company. Twenty-four percent (24%) of the
Company's telecommunications segment revenue was generated from this customer for the period January 1,2004 to
March 2, 2004. No other customer provided over 10% of the Company's revenues for the period Januaty 1,2004 through
March 2, 2004. The Company generated 12% of its revenue from its largest customer for the period January 12 through
December 31, 2004. The loss of this major customer could adversely affect operating results of the Company. Sixteen percent
(16%) of the Company's telecommunications segment revenue and 83% of the Company's Solutions Services segment
revenue were generated from this customer for the period January 12, 2004 to December 31, 2004. No other customer
provided over 10% of the Company's revenues for the period January 12, 2004 through December 31, 2004. The Company
has become aware of the intentions by its largest customer to exit the inmate telecommunications market in the near future.
The Company has also become aware that a second customer, which is its largest customer in its telecommunications
services reporting segment, also intends to exit the inmate telecommunications market in the neal' future. As a result, the
Company booked a non-cash impairment charge as fUl1her explained in Note 3.
(f)
ClIsh {/I/(/ ClIsh EqllivlI/ellts (/I/(/ Restricted ClIsh
Cash equivalents consist of highly liquid investments, such as certificates of deposit and money market funds, with
original maturities of 90 days or less. Additionally, restricted cash accounts represent amounts established for the benefit of
certain customers in the event the Company does not perform under the provisions of the respective underlying contract with
these customers. Restricted cash at December 31, 2003 and 2004 were none and $1.3 million, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(g)
Trade Accollnts Receivable
Trade accounts receivable are recorded at the invoice amount and do not bear interest. Trade accounts receivable
represent amounts billed or that will be billed for calls placed through the Company's telephone systems. The majority of
these receivables are billed using various LECs or third-party billing services and are reported net of an allowance for
unbillable and uncollectible calls, based on historical experience, for estimated chargebacks to be made by the LECs and
clearinghouses. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses
in the Company's existing accounts receivable.
(h)
Fair Val"e of Fi1l{IIlcial Illstrulllellls
The reported amounts of the Company's financial instruments, including cash and cash equivalents, receivables, accounts
payable, and accrued liabilities, approximate fair value due to their short maturities. Carrying amounts and estimated fair
value of debt are presented in Note 6.
(i)
COllcelltratiolls of Credit Risk
Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of cash
and cash equivalents and accounts receivable. The Company's revenue is primarily concentrated in the United States in the
)
telecommunications industlY. The Company had trade accounts receivable that comprised 88% (five telecommunication
service providers) and 21% (two telecommunication service providers) of trade accounts receivable at December 31, 2003
and 2004, respectively. The Company does not require collateral on accollnts receivable balances and provides allowances
for potential credit losses. An allowance for doubtful accounts has been established based on historical experience and
management's evaluation of collectibility of outstanding accounts receivable at the end of the accounting period.
(j)
Properly I/ml Eqllipmellt
Property and equipment is stated at cost and includes costs necessary to place such propelty and equipment in service.
Major renewals and improvements that extend an asset's useful life are capitalized, while repairs and maintenance are
charged to operations as incurred. Construction in progress represents the cost of material purchases and construction costs
for telecommunications hardware systems in various stages of completion.
Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 5 years for telecommunications
equipment and office equipment. No depreciation is recorded on construction in progress until the asset is placed in service.
(k)
Goodwill alld Illtallgible alld Other Assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business
combinations accounted for as purchases. Intangible and other assets include acquired operating contracts and customer
agreements, capitalized computer software, patents and license rights, patent defense and costs of numerous patent
applications, trademarks, trade names and other intellectual property, deferred financing costs, deposits and long-term
prepayments and other intangible assets. The Company capitalizes contract acquisition costs representing up-frot11 payments
required by customers as part of the competitive process to award a contract. These capitalized costs are included in operating
contracts and customer agreements and are commonly referred to as signing bonuses in the industry.
The Company performs an annual impairment test of goodwill and other intangible assets with indefinite useful lives as
of the last day of each fiscal year in accordance with the provisions of SFAS
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
No. 142, Goodwill and Other Intangible Assets. This test is a two-step process and requires goodwill to be allocated to the
Company's reporting units. The Company defines its reporting units to be the same as the reportable segments (see Note 8).
In the first step, the fair value of the reporting unit is compared with the canying value of the reporting unit. If the fair value
of the reporting unit is less than the canying value, a goodwill impairment may exist and the second step of the test is
performed. In the second step, the implied fair value of the goodwill is compared with the carrying value of the goodwill. An
impairment loss is recognized to the extent that the carrying value of the goodwill exceeds the implied fair value of the
goodwill. The Company recognizes an impairment loss by reducing the carrying value of the asset to its estimated fair value.
The Company also reviews its intangible assets and other long-lived assets for impairment in accordance with SFAS
No. 144, Accounting/or Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate
that the carrying value of these assets may not be recoverable. In reviewing for impairment, the Company compares the
carrying value of such assets to the estimated undiscounted future cash flows expected from the use of the assets and their
eventual disposition, When the estimated undiscounted future cash flows are less than their carrying amount, an impairment
loss is recognized equal to the difference between the assets' fair value and the respective carrying values.
As a result of the Company's annual impairment testing, and in light of it becoming aware that two of its largest
customers are exiting the inmate telecommunications business in the near future, the Company recorded an impairment as of
December 31. 2004 as further explained in Note 3.
Amortization is computed on the straight-line basis over 3 to 12 years for operating contracts and customer agreements
and patents and license rights. The weighted average amortization period for all of the Company's intangible assets as of the
year ended December 31, 2004 subject to amortization is 10 years. Amortization expense was $1.2 million, $0.9 million,
$0.1 million, and $5.1 million for the years ended December 31, 2002 and 2003 and for the 62 day period from January I,
2004 to March 2, 2004 and for the 355 day period from January 12, 2004 to December 31, 2004, respectively.
)
The acquisitions ofT-Netix and Evercom have been accounted for using the purchase method of accounting pursuant to
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141 "), Accountinglor Business Combinations. As a
result, the Company's costs of acquiring T-Netix and Evercom have been allocated to the assets acquired and liabilities
assumed based upon estimated fair values (see Note 2). The purchase price allocations resulted in the recording of
$70.6 million of goodwill. None ofthe goodwill is currently deductible for income tax purposes. Under applicable accounting
principles generally accepted in the United States of America, the new basis of accounting for the Company is "pushed
down" to the subsidiary companies, T -Netix and Evercom. Therefore, T-Netix's and Evercom's financial position and
operating results subsequent to March 2, 2004 and September 8, 2004, respectively, reflect a new basis of accounting and are
not comparable to prior periods. In addition, the tax bases are carried over from both T-Netix and Evercom as a result of the
acquisitions.
(I)
Impail'mellt ol Long-Lived Assets
In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the
canying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value ofthe asset. Assets to be disposed of would be separately presented in the
balance sheet and reported at the lower of the caflying amount 01' fair value less costs to sell, and are no longer depreciated.
The assets and liabilities of a disposal group classified as
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held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
(m)
lllvestments ill Affiliated Comp",.ies
Investments in the common stock of an affiliated company is accounted for by the equity method. The excess of cost of
the stock of those affiliates over the Company's share of their net assets at the acquisition date was recognized as goodwill
and, beginning with the adoption of SFAS No. 142, is not being amortized. The Company would recognize a loss when there
is a loss in value in the equity method investment, which is other than a temporaty decline,
(II)
Research ami Development
Costs associated with the research and development of new technology or significantly altering existing technology are
charged to operations as incurred. Research and development costs amounted to $3.1 million, $3.6 million, $0.6 million and
$2.4 million for the years ended December 31, 2002 and 2003, for the 62 day period from January I, 2004 to March 2, 2004
and for the 355 day period from Januaty 12, 2004 to December 31, 2004, respectively. Capitalization of software
development costs begins upon the establishment of technological feasibility, subject to net realizable value considerations.
Capitalized software costs are amortized over the economic useful life of the software product, which is generally estimated
to be five years.
(0)
)
401(k) Phm
The Company sponsors 40 I (k) savings plans for the benefit of eligible full-time employees. These plans are qualified
benefit plans in accordance with the Employee Retirement Income Security Act ("ERISA"). Employees participating in the
plan can generally make contributions to the plan of up to 15% of their compensation. The plans provide for discretionary
matching contributions by the Company of up to 50% of an eligible employee's contribution for the first 6%. Matching
contributions and plan expenses were $0.2 million, $0.4 million, $0.1 million and $0.5 million for the years ended
December 31,2002 and 2003 and for the 62 day period from January 1,2004 to March 2, 2004 and for the 355 day period
from January 12, 2004 to December 31,2004, respectively.
(p)
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes (see note 9). Accordingly, deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable
income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in income tax rates is recognized in the results of operations in the period that includes the enactment
date.
(q)
Stock-B{/seli Compells{/tioll
The Company utilizes the intrinsic-value method as provided by Accounting Principles Board Opinion ("APB") No. 25 in
accounting for its stock options and restricted stock plans and provides pro forma disclosure of the compensation expense
determined under the fair value provisions of SF AS No. 123, Accountingfor Stock-Based Compensation ("SFAS No. 123").
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Old T-Netix utilized the intrinsic-value method as provided by APB Opinion No. 25, Accounting/or Stock Issued to
Employees in accounting for its stock option plans and provides pro fanna disclosure of the compensation expense
determined under the fair value provisions of SFAS No. 123, as amended by SFAS No. 148, Accounting/or Stock-Based
Compensation- Transition and Disclosure. Accordingly, Old T-Netix did not recognize compensation expense upon the
issuance of its stock options because the option terms were fixed and the exercise price equaled the market price of Old T-
Netix's common stock on the date of grant.
The following table displays the effect on net earnings had the fair value method been applied during each period
presented (in thousands):
For Ihe 355 Day
Period from
January 12,2004
For the 62 Day
Period from
Years Ended December 31 1
Net (loss) income applicable to common
stockholders, as reported:
Less: Stock-based compensation
excluded from reported net earnings,
net of tax
Pro forma net (loss) income
)
2002
2003
Predecessor
PrcdcccsSOI'
January I, 2004
to March 2,
to December 31,
2004
Pl'cdcccssor
2004
Successor
$
2,065
$
6,496 $
(9,814)
$
(56,748)
$
1,749
316
$
1,213
5,283 $
98
(9,912)
$
6
(56,754)
The per share weighted-average fair value of stock options issued by Old T-Netix during 2002 and 2003 was $3.00 and
$\.09, respectively, on the dates of grant using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used to determine the fair value of stock options granted:
Years Ended December 31.
Dividend yield
Expected volatility
Average expected option life
Risk free interest rate
2002
2003
Predecessor
Predecessor
101.4%
4.8 years
3.02%
92.3%
5.4 years
2.87%
For the 62 Day
Period from
January I, 2004 to
March 21 2004
Predecessor
37.8%
5.4 years
2.8%
For the 355 Day
Period from
January 12,2004 to
December 31 1 2004
Successor
20%
I year
2.09%
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective
assumptions, including expected stock price volatility. Because Old T-Netix employee stock options had characteristics
significantly different from those of traded options, and because changes in subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
(r)
Rev.""e Recognition
Revenues related to collect and prepaid calling services generated by the Direct Call Provisioning segment at'e recognized
during the period in which the calls are made. In addition, during the same period, the Company accrues the related
telecommunication costs for validating, transmitting, billing and collection, and line and long distance charges, along with
commissions payable to the facilities and allowances for unbillable and uncollectible calls, based on historical experience.
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Revenues related to the Telecommunication Services and Solutions Services segments are recognized in the period in
which the calls are processed through the billing system, or when equipment and software is sold. During the same period,
the Company accrues the related telecommunications costs for validating, transmitting, and hilling and collection costs, along
with allowances for unbillable and uncollectible calls, as applicable, based on historical experience.
The Company applies Emerging Issues Task Force ("EITF") Issue No. 99-19, Reporting Revenue Gross as a Principal
versus net as an Agent. Based on this consensus, all revenues related to the Telecommunications Services and Solutions
Services segments are presented in the statement of operations at the net amount. This is the amount charged to the end user
customer less the amount paid to the inmate telecommunication provider.
(s)
Comprehensive Income
SFAS No. 130, Reporting Comprehensive income, requires that certain items such as foreign currency translation
adjustments and unrealized gains and losses on ce11ain derivative instruments classified as a hedge be presented as separate
components of shareholders' equity. Total comprehensive income (loss) for the years ended December 31, 2002 and 2003
and for the 62 day period from JanualY 1,2004 to March 2,2004, and for the 355 day period from January 12,2004 to
December 31,2004, was $2.1 million, $6.4 million, $(9.8) million and $(56.7) million, respectively.
The Company had no items of other comprehensive income prior to the year ended December 31, 2003.
(t)
Commitments (lfuf Contingencies
Liabilities for loss contingencies, including environmental remediation costs not within the scope of SF AS No. 143,
Accounting/or Asset Retirement Obligations, arising fL'Om claims, assessments, litigation, fines, and penalties and other
)
sources are recorded when it is probable that a liability has been incurred and the amount of the assessment andlor
remediation can be reasonably estimated. Recoveries of environmental remediation costs from third parties, which are
probable of realization, are separately recorded as assets, and are not offset against the related environmental liability, in
accordance with FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts.
The Company accrues for losses associated with envil'onmentalremediation obligations not within the scope of SFAS
No. 143 when such losses from environmental remediation obligations generally are recognized no later than completion of
the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of
future expenditures for environmental remediation obligations are not discounted to their present value.
(II)
Recently Issued Accounting Prolloullcements
In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46R (revised
December 2003), Consolidation o/Variable Interest Entities ("VIE'; - an interpretation of ARB No. 51, which addresses
how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity. The Company applies FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before January 1,2004, the Interpretation will be
applied beginning January 1,2005. For any VIEs that must be consolidated under FIN 46R that were created before
January I, 2004, the assets, liabilities and noncontrolling interest of the VIE initially would be measured at their carrying
amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting
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change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to
measure the assets, liabilities and noncontrolling interest of the VIE. The adoption of this pronouncement did not have
material impact on the Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which addresses the
accounting for transaction in which an entity exchanges its equity instmments for goods or services, with a primary focus on
transactions in which an entity obtains employee services in share-based payment transactions. This Statement is a revision of
SFAS No. 123 and supersedes APB Opinion No. 25, Accounting/or Stock Issued to Employees, and its related
implementation guidance. For nonpublic companies, this Statement will require measurement of the cost of employee
services received in exchange for stock compensation based on the grant-date fair value of the employee stock options.
Incremental compensation costs arising from subsequent modifications of awards after the grant date will be recognized in an
amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately
before the modification. This Statement will be effective for the Company as of Janunty 1,2006 at which time the Company
will adopt the standard.
In December 2004, the FASB issued SFAS No. 151 Invento/y Costs, which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Under this Statement, such items
will be recognized as current-period charges. In addition, the Statement requires that allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the production facilities. This Statement will be effective for the
Company for inventory costs incurred on or after January I, 2006 at which time the Company will adopt the standard.
In December 2004, the FASB issued SF AS No. 153, Exchanges 0/ NonmonetOlY Assets, which eliminates an exception in
APB No. 29 for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. This Statement will be effective for the Company for
nonmonetary asset exchanges occurring on or after Januaty 1,2006 at which time the Company will adopt the standard.
)
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), Accounting/or Conditional Asset Retirement
Obligations - an interpretation of SFAS No. 143, which clarifies the term "conditional asset retirement obligation" used in
SFAS No. 143, Accounting/or Asset Retirement Obligations, and specifically when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is required to be adopted no later
than September 30, 2005. The Company does not expect the adoption of FIN 47 to have a material impact on its consolidated
financial statements.
(v)
Reclassijicatioll
Certain amounts in the 2002 and 2003 financial statements have been reclassified to conform to the 2004 presentation.
(2)
MERGERS AND ACQUISITIONS
T-Netix announced on January 22, 2004 that it had entered into a definitive agreement with TZ Holdings, Inc. ("TZ
Holdings") and TZ Acquisition, Inc., a wholly-owned subsidiaty ofTZ Holdings, providing for the acquisition ofT-Netix for
$4.60 in cash per share of common stock. TZ Holdings was a newly formed corporation principally owned by H.I.O. Capital,
LLC ("H.I.O."), a Miami, Florida-based private equity firm. As of August 6, 2004, TZ Holdings, Inc. changed its name to
Securus Technologies, Inc. ("Secul'lls Technologies"). The acquisition was effected by a first step cash tender offer for all of
T-Netix's outstanding common stock. The tender offer commenced on February 5, 2004 and was completed on March 3,
2004. The tender offer was followed by a merger in which stockholders whose
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shares were not acquired in the tender offer received $4.60 per common share in cash. The acquisition was funded with
$70.0 million in borrowings under T-Netix's credit facility, $20.0 million of equity funding from TZ Holdings and T-Netix's
available cash resources. Effective March 4,2004, the common stock ofT-Netix was delisted from the NASDAQ National
Market and T-Netix is now a privately-held, wholly-owned subsidiary of the Company. Accordingly, earnings per share data
is not shown,
The total purchase price for T-Netix was $87.9 million representing the purchase of all outstanding common stock,
including liabilities assumed as detailed below. The total purchase price for T-Netix has been allocated as follows (in
thousands):
Purchase price calculations:
Payment for tendered shares
Payment of former credit facility
Total acquisition costs
$
$
Allocation of purchase price:
Current assets
Accounts payable and accrued liabilities
Defen-ed income taxes
Property and equipment, net
Goodwill
Patents and license rights
Operating contracts and customer agreements
$
Other assets
Total allocation
)
$
69,241
18,625
87,866
40,814
(29,340)
(14,878)
16,636
30,233
21,000
14,800
8,601
87,866
On July 10,2004, the Company formed a new wholly-owned subsidiary, New Mustang Acquisition, Inc. ("Mustang"),
and entered into an agreement and plan of merger (the "Plan") with Evercom. The Plan provided for the acquisition by
Mustang of all of the outstanding common stock of Evercom for $14.50 in cash per common share. The Plan was
consummated on September 9, 2004. The total purchase price for Evercom was $132.4 million, including assumed liabilities.
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(Continued)
The total purchase price for Evercom has been allocated as follows (in thousands):
Purchase price calculations:
Payment for tendered shares
Payment of former credit facilities
Transaction costs paid or accrued
Accrued severance and integration costs
Total acquisition costs
$
$
87,045
38,061
4,650
2,692
132,448
Allocation of purchase price:
)
Current assets
$
Accounts payable and accrued liabilities
Deferred income taxes
Property and equipment, net
Goodwill
Patents and license rights
Operating contracts and customer agreements
Other assets
Total allocation
$
46,497
(47,649)
(13,275)
25,581
40,398
15,200
64,956
740
132,448
As a result of the change in control, U.S. generally accepted accounting principles ("GAAP") requires acquisitions by the
Company to be accounted for as a purchase transaction in accordance with SFAS No. 141, Business Combinations. GAAP
requires the application of "push down accounting" in situations where the ownership of an entity changes, meaning that the
post-transaction financial statements of the acquired entities (Le., T-Netix and Evercom) reflect the new basis of accounting
in accordance with Staff Accounting Bulletin No. 54. Accordingly, the financial statements as of December 31, 2004 and for
the 355 day period from JanualY 12,2004 to December 31, 2004 reflect the Company's stepped-up basis resulting from the
acquisitions that has been pushed down to T -Netix and Evercom. The aggregate purchase price has been allocated to the
underlying assets and liabilities of T-Netix and Evercom based upon the respective estimated fail' values at March 3, 2004
and September 9, 2004, respectively (the acquisition dates). Carryover basis accounting applies for tax purposes. All financial
information presented prior to March 3, 2004 represents predecessor basis of accounting.
The purchase price allocations resulted in $70.6 million of goodwill. Goodwill recorded in the purchase price allocations
represents the value the Company paid for T-Netix and Evercom as a result of its assessment of the future prospects for
growth of these businesses. None of the goodwill is deductible for income tax purposes. Fmihermore, in accordance with
SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized, but is tested for impairment on an annual
basis, or more frequently as impairment indicators arise. Impairment tests, which involve the use of estimates related to the
fair market value of the business operations with which goodwill is associated, are performed as of December 31 each year.
Losses, if any, resulting from impairment tests will be reflected in operating income in the consolidated statement of
operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents unaudited pro fonna consolidated results of operations of the Company for the year ended
December 31, 2003 and 2004 as if the T-Netix and Evercom acquisitions had occurred at the beginning of the respective
period (in thousands):
For the Year Ended
For the Year Ended
December 31. 2003
Total revenue
Net income (loss)
$
$
350,340
(2,995)
December 3•. 2004
$
$
364,103
(53,386)
Acquisitions by T-Netix prior to 2004 included the following:
(It)
ACT Telecom, Illc.
In June 2002, T-Netix purchased substantially all of the assets of ACT Telecom, Inc., a Houston, Texas, based prepaid
calling platform provider and wholly owned subsidiary of ClearMediaOne, Inc. Assets included a telecommunication switch,
prepaid calling platform and associated software. The purchase price was approximately $0.7 million, including $0.3 million
in cash and the issuance of a $0.4 million note due and payable on or before June 2003. The purchase price was allocated to
property and equipment ($0.6 million) and intangibles and other assets ($0.1 million).
(b)
)
AcclIdlttlt Techll%gies, Illc.
In March 2003, T-Netix acquired a 50% preferred stock interest in a newly formed company, Accudata Technologies,
Inc. ("Accudata"). Of the $0.8 million invested in Accudata, $0.5 million was applied to the purchase of substantially all of
the assets (in essence the ongoing business) of Revenue Communications, Inc. out of a Chapter XI bankruptcy proceeding.
With such purchase, Accudata became one of only twelve active telephone line information databases ("LlDB") in the United
States where important customer information is stored and maintained, including telephone number, service provider and
collect call preferences. The investment in Accudata is presented under the equity method of accounting and such investment
is included in the consolidated balance sheet as "Intangibles and other assets, net" at December 31, 2004. Equity in the results
of operations were losses of $0.3 million and $0.1 million for the years ended December 31, 2003 and 2004, respectively, and
are included in the consolidated statements of operations as "Interest and other expenses, net."
(3)
IMPAIRMENT
During the year ended December 31, 2002, T -Netix recorded a $1.1 million impairment charge relating to a prepaid
contract for call validation query services that was then in legal dispute between T -Netix and Illuminet. The $1.1 million
impairment charge recorded during the fourth quat1er of2002 reduced the canying value of the asset to $0.9 million, or the
expected value to be realized through sale, net of any selling expenses, ofT-Netix's rights under the contract, which is the
likely course of action for T -Netix with respect to this asset. In September 2003 a preliminalY settlement of this legal dispute
was reached, pending definitive documents (Note 13). As a result of the terms of this preliminary settlement, T-Netix further
reduced the value of the qUCly trallsport service agreement to $0.3 million in September 2003. For the years ended
December 31,2002 and 2003, respectively, the prepaid validation asset has been classified as "Assets Held for Sale." In
March 2004, the fair market value of this quely transpOlt service agreement was determined to be nil and a $0.3 million
impairment charge was recorded during the three months ended March 31, 2004. This determination was reached based on
current market conditions and on T-Netix's lack of success in marketing these rights to others.
Under the requirements of SFAS No. 142, the Company completed its annual impairment test for goodwill on
December 31, 2004. The Company also learned in late December 2004 that its two largest
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telecommunications services customers, AT&T and Vel'izon, and its largest Solutions Services customer, AT&T, have
determined to exit the inmate telecommunications business in the immediate future. As a result of these announcements,
management anticipates that telecommunications services revenues and Solutions Services revenues will decline significantly
over the next several years·, In the course of completing the evaluation, the Company determined that an impairment indicator
required further analysis to be performed under the provisions of SF AS No. 144.
As a result of these factors, the Company recognized a $50.6 million non-cash impairment charge in December 2004 that
was comprised of the following components (in thousands):
Solutions
Services
Segment
Telecom
Services
Segment
Telecommunications equipment
$
3,928
11,835
5,707
2,917
20,418
$ 44,805
Patents and trademarks
Acquired contract rights
Intangibles and other assets
Goodwill
Total non-cash impairment charge
Total
$
4,367
1,413
$
5,780
$ 3,928
16,202
7,120
2,917
20,418
$ 50,585
The Company employed a third party to assist in the estimation of the fair values used in the determination of the
impairment. The Company, with the help of the consultant, applied widely-used and accepted valuation techniques, such as
discounted cash flows of future estimated activity, to develop the fair value estimates and the resulting impairment charge.
See Note 5 for additional information on the goodwill impairment.
(4)
)
BALANCE SHEET COMPONENTS
Accounts receivable consist of the following at December 31 (in thousands):
Accounts receivable, net:
Trade accounts receivable
Advance commissions receivable
2003
2004
Pl'edeeessol'
Successor
$
17,983
$
$
5
17,988
(3,499)
14,489
$
Other receivables
Less: Allowance for doubtful accounts
75,284
1,641
3,805
80,730
(13,232)
67,498
Bad debt expense totaled $13.3 million, or 27%, of the $48.8 million in direct call provisioning revenue for the year
ended December 31, 2002. For the comparative year ended December 31, 2003, bad debt expense was $12.0 million, or 21 %,
of direct call provisioning revenue of $56.7 million. Bad debt expense for the 62 day period from January I, 2004 to March 2,
2004 was $1.6 million, or 16.5%, of direct call provisioning revenue of $9.7 million. Bad debt expense for the 355 day period
from January 12,2004 to December 31, 2004 was $16.8 million, or 13.9%, of direct call provisioning revenue of
$120.9 million.
At December 31, 2003 and December 31, 2004, the Company had advanced commissions to certain facilities totaling
zero and $1.8 million, respectively, which are recoverable from such facilities as a reduction of earned commissions for
specified monthly amounts. Amounts included in accounts receivable
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represent the estimated recoverable amounts during the next fiscal year, with the remaining long-term portion recorded in
other assets.
Property and equipment consists of the following at December 31 (in thousallds):
2003
Predecessor
Property and equipment, net:
Telecommunications equipment
Leasehold improvements
Constmction in progress
Vehicles
Office equipment
$
Less: Accumulated depreciation and amortization
$
2004
Successor
60.896
1,312
2,714
16
11,816
76,754
(55,291)
21,463
$
27,372
1,973
6,738
65
7,489
43,637
(7,467)
36,170
$
Property and equipment and intangible assets have been adjusted to their fair value in accordance with the purchase of TNetix and Evercom by the Company and as a result of a non-cash impairment charge that was recorded in December 2004
(see Note 3).
Intangibles and other assets consist of the following at December 31 (in thousands):
2003 (Predecessor}
Accumulated
Amortization
Gross Carrying
Value
)
Patents and trademarks
Deferred financing costs
Purchased technology assets
Capitalized software development costs
Acquired software technologies
Acquired contract rights
Deposits and long-term prepayments
Investment in unconsolidated affiliate
Other
$
$
2,943
1.371
2,487
1,843
420
1,391
510
515
156
11,636
$
~
(1,779)
(1,216)
(1,843)
(420)
(1,369)
$
(129)
(6,756)
$1,164
1,371
1,271
22
510
515
27
$4,880
=
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2004 (Successor}
Gross
Carrying
Value
Patents and trademarks
Defel1-ed financing costs
Purchased technology assets
Capitalized software development costs
Acquired contract rights
Non-current portion of commission advances to facilities
Deposits and long-term prepayments
Other
$
22,322
7,983
2,102
5,977
74,405
III
582
3
$ 113,485
Weighted
Avel'age
Accunmlatcd
Amortization
$
Net
20,604
7,754
1,969
5,263
71,373
III
582
I
$ 107,657
(2)
(5,828)
$
Life
$
(1,718)
(229)
(133)
(714)
(3,032)
10.5
7.4
4.3
3.1
11.8
Amortization expense related to intangibles and other assets was $1.2 million, $0.9 million, $0.1 million, and $5.1 million
for the years ended December 31, 2002 and 2003 and for the 62 day period from January I, 2004 to March 2, 2004, and for
the 355 day period from Januaty 12,2004 to December 31, 2004, respectively. Estimated amortization expense related to
intangibles and other assets, excluding deferred finance costs, at December 31, 2004 and for each of the next five years
through December 31, 2009 and thereafter is summarized as follows:
)
Year Ending December 31 :
2005
2006
2007
2008
2009
Thereafter
$
$
10,375
10,357
9,768
8,346
7,726
52,637
99,209
Accrued liabilities consist of the following at December 31 (in thousands):
Accrued liabilities:
Accrued expenses
Accrued compensation
Accrued severance and exit costs
Accrued taxes
Accrued interest and other
$
$
2003
2004
Predecessor
Successor
5,081
2,812
1,299
711
9,903
$
$
27,876
3,571
1,953
3,255
5,236
41,891
In conjunction with the acquisition of Evercom, the Company adopted a platt to consolidate T-Netix and Evercom
operations, terminate redundant employees, and exit cel1ain leased premises. As a result, the Company recorded a liability of
$2.5 million for these costs as of September 9, 2004. Of this amount, $0.8 million was capitalized as part of the Evercom
purchase price representing severance for Evel'com
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employees identified by the plan. The plan was formulated by the Company between July and September 2004 and is
expected to be completed by June 30, 2005. Approximately 70 employees will be terminated under the plan, Between
September 9, 2004 and December 31, 2004, the Company paid over $0.5 million associated with the plan as follows (in
thousands):
Balance
919/2004
Severance and related costs
Leased facility and other costs
(5)
$-
$
$
$
2,301
199
2,500
Balance
12/31/2004
Pa~ments
Additions
$
(547)
$
$
(547)
$
1,754
199
1,953
GOODWILL
T-Netix adopted the provisions of SFAS 142 on January 1,2002, The effect of adoption was the cessation of amortization
of goodwill recorded on previous purchase business combinations. T -Netix reviewed the recorded goodwill for impairment
upon adoption of SF AS 142, To accomplish this, T-Netix identified the reporting units and determined the canying value of
each reporting unit. T-Netix defines its repOlting units to be the same as the reportable segments per Note g, To the extent a
reporting unit's canying amount exceeds its fair value, the reporting unit's cost in excess of fair value of net assets acquired
may be impaired, and the second step of the transitional impairment test must be performed. In the second step, T -Netix must
compare the implied fair value of the reporting unit's fair value to all of its assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance with SF AS 141, to its carrying amount, both of
which were measured as of January 1,2002. T-Netix completed its transitional impairment tests and determined that no
impairment losses for goodwill and other intangible assets resulted with the adoption of SFAS 142, T-Netix also performed
annual impairment tests as of December 31, 2002 and 2003 and determined that no impairment loss was required.
,)
The Company performed an annual impairment test as of December 31, 2004, As a result of the annual impairment
testing and recent customer developments, the Company recognized a $20.4 million non-cash impairment of its goodwill on
December 31, 2004 as further discussed in Note 3,
(6)
DEBT
Debt consists of the following at December 31 (in thousands):
Revolving credit facility
Senior subordinated notes (new)
Senior subordinated promissory note (old)
Second-priority senior secured notes (new)
Senior secured term notes (old)
Other
Less unamortized discount on senior secured notes and senior subordinated notes
Less current portion of long-term debt
F-24
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Revolving Credit Facility - In connection with the acquisition of Evercom on September 9, 2004 (See note I), the
Company obtained a new revolving credit facility (the "revolver") with a syndicate of banks and other lending institutions.
The revolver is subject to 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 that expires on September 9,2009.
Amounts unused under the revolving credit facility are subject to a fee, due quarterly, based on a per annum rate of 0.5%.
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 2.50%. 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 5.25% at December 31, 2004. SecUl'us Technologies draws from the available credit on the revolver to
cover normal business cash requirements. As of December 31, 2004, Securus Technologies had $24.3 million of borrowing
availability under the revolver.
Under the revolver, SecUlUS Technologies also has available a $10.0 million sub-facility for letters of credit typically used
to provide collateral for service bonds required by contracts with correctional facilities. As of December 31, 2004,
$5.7 million of this line had been utilized. Securus Technologies pays a quarterly fee equal to a per annum rate 2.625% on
amounts reserved under the letters of credit.
)
Senior Subordinated Notes - On September 9,2004, Securus Technologies issued $40.0 million of Senior Subordinated
Notes, unsecured and subordinate to the Revolving Credit Facility, that bear interest at an annual rate of 17%. Interest is
payable at the end of each calendar quarter, or, as restricted by the Company's Revolving Credit Facility, is paid-in-kind by
adding accrued interest to the principal balance of the Senior Subordinated notes, commencing on December 31, 2004. All
outstanding principal, including interest paid-in-kind, is due on September 9, 2014. In connection with the issuance of the
Senior Subordinated Notes, Securus Technologies issued warrants to acquire 51,011 shares of Securus Technologies, Inc.
common stock at an exercise price of$O.OI 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, 2004, $2.1 million of paid-in-kind interest was added to the principal balance of the
Senior Subordinated Notes.
Second-priority Senior Secured Notes - On September 9, 2004, Securu. Technologies issued $154.0 million of Secondpriority Senior Secured Notes that bear interest at an annum rate of II %. All principal is due September 9,2011.
Additionally, to the extent the Company generates excess cash flow (as defined) in any calendar year beginning with the year
ending 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. Interest is payable semiannually on March I and
September 1, commencing on Mal'ch 1,2005. In connection with our offering, 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.
All of the Company's subsidiaries (the "Subsidiary Guarantors") are fully, unconditionally, and jointly and severably
liable for the Revolving Credit Facility, Senior Subordinated Notes and Second-priority Senior Secured Notes. The
Subsidiary Guarantors are wholly-owned 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
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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 ollr ability to
incur additional indebtedness, make certain payments including dividends to shareholders, invest and divest company assets,
and sell or othetwise dispose of capital stock. In the event that the Company fails to comply with the covenants and
restrictions, as specified in the credit agreements, SecunlS 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 December 31, 2004, we
were in compliance with all of our covenants. However, the Company was not in compliance with a covenant under the
Revolving Credit Facility requiring delivety of annual audited financial statements for its fiscal year ended December 31,
2004. The Company has obtained a waiver through May 16, 2004 from its Revolving Credit Facility lenders for the failure to
deliver the audited financial statements.
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 the date of the filing of the exchange offer for the registration statement.
Future maturities of debt for each of the following five years and thereafter are as follows (in thousands):
Year Ending December 31,
)
2005
2006
2007
2008
2009
Thereafter
117
108
$
$
196,116
196,341
The credit facilities are collateralized by all of the assets and capital stock of the Company and its subsidiaries.
The fair value of the Company's debt instruments as of December 31, 2004 is as follows (in thousands):
Revolving Credit Facility
Senior Subordinated Notes
Second-priority Senior Secured Notes
$
$
154,000
42,116
196,116
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of the revolving credit facility was equal to its carrying value due to the variable nature of its interest rate.
The fair value of the Senior Subordinated Notes is based on their quoted market value. The fair value of the Second-priority
Senior Secured Notes is estimated based on consultation with an independent specialist.
(7)
DISCONTINUED OPERATIONS
In August 2001, T-Netix formalized the decision to offer for sale its voice verification business unit, which included the
SpeakEZ voice verification products, and operations were substantially curtailed in November 2001. Accordingly, related
operating results have been reported as discontinued operations. The financial information for the discontinued speaker
verification operations is as follows (in thousands):
For the Ycal'
Ended
December 31 2
2002
)
Revenue
$
101
Operating loss
Gain on sale of discontinued assets
Net loss
$
(616)
308
(308)
$
In September 2001, T-Netix announced that it had entered into an agreement to sell all of the assets of the SpeakEZ
division; however, the transaction was not completed and the agreement was terminated. As of December 31, 2001, T -Netix
had not sold the SpeakEZ voice verification assets. For this reason, a one-time charge of $1.1 million, net of taxes, was
recognized in 200 I related to the write off of the voice print patent and license assets related to the SpeakEZ product line.
This write-off was based on an analysis, which concluded that the carrying value of our voice print assets exceeded the
present value of estimated future cash flows given current operating results and the absence of a definitive agreement to sell
these assets.
In July 2002, T-Netix completed the sale of the SpeakEZ voice verification assets to Speech Works International, Inc.
(SpeechWorks) for $0.4 million cash and 134,360 shares of SpeechWorks common stock valued at $0.3 million, subject to a
10% escrow provision, and recognized a gain on the sale of discontinued operations of $0.3 million. In addition,
Speech Works will pay T-Netix an earn-out fee based on the sale over the next two years offuture SpeechWorks products
incorporating the SpeakEZ technology. As part of the sales agreement, T-Netix retained the right to utilize the speech
recognition technology in the corrections industry. SpeechWorks stock (net of escrow) received by T-Netix was subsequently
sold in July 2003 with net proceeds to T-Netix of approximately $0.5 million resulting in a gain of$0.3 million.
(8)
SEGMENT INFORMATION -CONTINUING OPERATIONS
SFAS No. 131, Disclosures About Segments 0/ an Enterprise and Related In/ormation. 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 2002 through 2004, the Company and the T-Netix predecessor had foul' reportable segments: the
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
F-27
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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, AT&T, sse Communications, 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 celiain telecommunication providers (Le., Equipment Sales
segment).
The Company evaluates performance of each segment based on operating results. Total assets are those owned by or
allocated to each segment. Assets included in the "Corporate and Other" column of the following table include all assets not
specifically allocated to a segment. There are no intersegment sales. The Company's reportable segments are specific
business units that offer different products and services and have varying operating costs associated with such products. The
accounting policies of the reportable segments are the same as those described in the summary of significant accounting
policies. 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 year ended December 31, 2002 (Predecessor) is as follows (in thousands):
Tclccommunication
Services
)
Dircct Call
Provisioning
Equipmcnt
Salcs & Other
Corporate
and Othel'
Revenue from external customers $
57,514
$
48,798
$
13,498
$
Segment gross margin
Depreciation and amortization
Other operating costs and
expenses
Operating income (loss)
36,292
3,750
$
2,002
2,266
$
8,795
280
$
32,542
$
1,782
6,733
25,743
$ (31,548)
$
$
(264)
$
Total
$119,810
5,805
Patent litigation, net of expenses
Interest and other expenses, net
Segment earnings from
continuing operations before
income taxes
$ 47,089
12, I 0 I
27,525
7,463
2,085
2,825
$
Total assets
$
Goodwill
$
Capital Expenditures
$
14,740
$
18,125
$
1,012
$
1,967
2,553
$ 29,004
$ 66,657
$
$
2,245
$
2,245
$
$
2,924 $
5,903
$
4,788
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Segment information for the year ended December 31, 2003 (Predecessor), is as follows (in thousands):
Tclecommullicatlon
Services
Direct Call
Provisioning
Revenue from external customers $
Segment gross margin
$
Depreciation and amortization
Other operating costs and
expenses
Operating income (loss)
$
Patent litigation, net of expenses
Interest and other expenses, net
Segment earnings from
continuing operations before
income taxes
27,375
Total assets
11,158
Goodwill
Capital Expenditures
50,645
30,552
3,177
$
$
$
Equipment
Sales & Other
Corporate
and Other
56,735
$
9,864
$
5,303
2,148
$
5,667
127
$
3,155
$
1,765
3,775
24,867
$ (31,307)
Total
$117,244
6,440
$ 41,522
11,892
26,632
2,998
(9,935)
3,761
$
$
$
1,823
$
$
$
14,855
$
$
1,672
$
$ 40,637
$ 2,245
$ 3,017
2,219
$ 9,172
$ 68,869
$ 2,245
$ 6,512
Segment information for the period from January 1,2004 to March 2,2004 (Predecessor), is as follows (in thousands):
Telecommunication
Services
)
Revenue from external customers
$
7,552
Segment gross margin
Depreciation and amortization
Other operating costs and expenses
Operating income (loss)
Transaction expenses
Interest and other expenses, net
Segment loss from continuing
operations before income taxes
$
4,426
542
$
$
Capital Expenditures
Direct Call
Provisioning
Equipment
$
$
9,651
3,884
$
1,253
$
211
$
351
$
1,521
268
Corporate
and Other
Sales & Other
$
$
232
101
33
103
(35)
$
$
$
Total
$ 17,435
$ 6,048
806
1,649
9,232
9,129
(9,935) (4,833)
5,365
2,191
$(12,389)
$
$
562
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Segment information for the period from January 12,2004 to December 31, 2004 (Successor), is as follows (in
thousands):
Telecommunication
Direct Call
Provisioning
SCl'Viccs
Solutions
Services
Corporate
Equipment
Sales & Other
Total
and Other
Revenue from external
customers
Segment gross margin
$
30,341
17,126
$
$
120,868
$
21,226
$ 18,466 $
$ 2,466 $
3,701
1,675
$
$173,376
$
$ 42,493
Depreciation and
amOltization
Non-cash impairment
2,155
44,805
6,126
50
4,826
13,157
50,585
30,861
33,170
5,780
Other operating costs and
expenses
Operating income (loss)
$
(29,834)
1,753
13,347
$
196
$ (3,510) $
360
1,265
$ (35,687) $ (54,419)
Transaction expenses
987
Interest and other
expenses, net
14,001
Segment loss from
continuing operations
$ (69,407)
before income taxes
)
$
220,028
$
$
50,213
$
$
$
$
11,808
$
-$
Total assets
$
Goodwill
Capital Expenditures
(9)
12,001
$ 17,807 $
1,538
$ 20,762 $272,136
$
$
$ 50,213
548 $ 12,356
INCOME TAXES
Income tax expense is as follows (in thousands):
For the Years Ended
December 31.
Current:
Federal
State
Total
Deferred:
Federal
State
Total
Total income taxes
2002
2003
Predecessor
Predecessor
$
$
$
150
180
180
150
180
2,339
187
2,526
2,676
$
For the 355 Day
Period fl'om
January 12,2004 to
December 31.2004
Successor
For the 62 Day
Period from
January I, 2004 to
March 2. 2004
Predecessor
$
$
$
(2,048)
(527)
(2,575)
(2,575)
$
(10,225)
(2,434)
(12,659)
(12,659)
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Income taxes differ from the expected statutory income tax benefit, by applying the U.s. federal income tax rate of35%
to pretax earnings due to the following (in thousands):
For the Years Ended
December 31.
2002
Predecessor
Expected statutory income tax (benefit)
expense
$
Amounts not deductible for income tax
State taxes, net of federal benefit
Change in valuation allowance
Other
Total income tax expense
I, I 18
209
336
(993)
(490)
180
=$====
2003
For the 62 Day
Period from
January 1,2004 to
March 2. 2004
Predecessor
Predecessor
$
$
3,119 $
209
350
(648)
(354)
2,676 $
(4,336)
1,580
(343)
524
(2,575)
For the 355 Day
Period froUl
January 12, 2004 to
December 31. 2004
Successor
$
(24,293)
7,160
(2,447)
6,921
$
(12,659)
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The tax effects of temporary differences that give rise to significant pOltions of the deferred income tax assets and
deferred income tax liabilities as of December 31, 2003 and 2004, respectively, are presented below (in thousands):
2004
Successor
2003
Predecessor
Net current deferred income tax assets:
1,385
5,207
2,534
173
7,914
$
1,385
$
(520)
(520)
(4,588)
2,806
$
1,000
420
949
2,369
$
1,370
15
Allowance for doubtful accounts
Accrued expenses
Other
Current deferred income tax assets
Deferred income tax liabilities:
Other
Current deferred income tax liabilities
Less: Valuation allowance
Net current deferred income tax asset
Net non-current deferred income tax assets (liabilities):
Deferred income tax assets:
Net operating loss and tax credit carryfOlwards
Depreciation
Other
Non-current deferred income tax assets
11,616
506
12,122
Deferred income tax liabilities:
,)
Property and equipment principally due to differences in depreciation
Intangible assets due to difference in book/tax basis
(2,330)
Non-current deferred income tax liabilities
(2,330)
Less: Valuation allowance
Net non-current deferred income tax asset (liability)
Total deferred income tax asset (liability)
$
39
1,424
$
(2,014)
(21,379)
(23,393)
(7,029)
(18,300)
(15,494)
At December 31, 2004, Securus Technologies had net operating loss carryfotwards for tax purposes aggregating
approximately $28.8 million which, ifnot utilized to reduce taxable income in future periods, expire at various dates through
the year 2020. Approximately $11 million of the net operating loss carryforwards are subject to certain rules limiting their
annual usage, Securus Technologies believes these annual limitations will not ultimately affect SeculUs Technologies' ability
to use substantially all of its net operating loss carry forwards for income tax purposes. As a result of the change of control
related to the TZ Holdings Acquisition, the use of the net operating losses may be limited going fotward under Internal
Revenue Code 382.
A valuation allowance is provided when it is more likely than not that some portion or the entire net deferred tax asset
will not be realized. Securus Technologies calculated the deferred tax liability, deferred tax asset, and the related valuation of
net operating loss carryforward for the taxable temporary differences, The valuation allowance represents the excess deferred
tax asset for the net operating loss carryforward over the net deferred tax liability. Securus Technologies has offset its
deferred tax assets with a valuation
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(Continued)
allowance of $11.6 million against net operating loss carryforwards. At December 31, 2003, T -Netix (Predecessor) had no
valuation allowance.
The exercise of stock options granted under T-Netix's 1991 Non-Qualified Stock Plan ("NSO") stock option plan gives
rise to compensation, which is included in the taxable income of the applicable option holder and is deductible by T -Netix for
federal and state income tax purposes. The income tax benefit associated with the exercise of the NSO options is recorded as
an adjustment to additional paid-in capital when realized.
(10)
STOCKHOLDERS' EQUITY
Common Stock
The authorized common stock of the Company includes 935,000 shares of Common Stock and 65,000 shares of Class B
Common Stock. At December 31, 2004, 543,859.65 shares of Common Stock are issued and outstanding and
16,856.96 shares of the Class B Common Stock are outstanding as of December 31, 2004. Shares of Class B Common Stock
are subject to vesting as described below. Other than provisions related to vesting, holders of the shares of Common Stock
and Class B Common Stock have identical rights and privileges with the exception the holders of Common Stock have a
$57 per share liquidation preference. The Company's credit facilities substantially restrict the ability to pay dividends to
holders of common stock.
Warnmts
)
In connection with the acquisition of Evercom on September 9,2004, warrants to purchase 51,011 shares of Common
Stock were issued to holders of the Senior Subordinated Notes. The warrant exercise price is $0.01 per share, is immediately
exercisable upon issuance, and expires on September 9, 2014. 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 stock warrants at the time of
issuance.
Restricteli Stock Purchase PIIII/s
The Company adopted a 2004 Restricted Stock Purchase Plan following the consummation of the acquisition of Evercom
under which certain of our employees may purchase shares of our Class B Common Stock. The maximum number of
authorized shares that may be delivered pursuant to awards granted under the 2004 Restricted Stock Purchase Plan is 64,835,
which equals 9.75% of our total issued and outstanding shares of common stock on a fully diluted basis, subject to
adjustment for changes in our capital structure such as stock dividends, stock splits, stock subdivisions, mergers and
recapitalizations. Our Board of Directors administers the 2004 Restricted Stock Purchase Plan. The plan is designed to serve
as an incentive to attract and retain qualified and competent employees. The per share purchase price for each share of
Class B Common Stock is determined by our Board of Directors. Class B Common Stock will vest based on performance
criteria or ratably over a period or periods, as provided in the related restricted stock purchase agreement.
As of December 31, 2004, 16,856.96 shares of Class B Common Stock were granted under the 2004 Restricted Stock
Purchase Plan. All of such 16,856.96 shares were acquired by the Company's Chief Executive Officer ("CEO") pursuant to a
restricted stock purchase agreement. These shares are subject to forfeiture pursuant to the terms of the 2004 Restricted Stock
Purchase Plan and the restrictions described hereafter. The restriction period for the CEO's restricted stock ends upon the
occurrence of certain events and upon lapse of time. With respect to 38.46% of the stock, the restriction period ends upon the
sale of the Company's stock by certain of the Company's other stockholders. The restriction period for 30.77% of the stock
ends upon the lapse of time, 6.154% each December 31 and June 30 beginning December 31,
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2004. With respect to the remaining shares, the restriction period ends upon the Company attaining certain performance
measures determined by the Company's Board of Directors and the CEO. Further, upon a change of control of the Company,
the restriction period could end for all of the CEO's restricted shares that have not previously vested. The restricted shares are
entitled to dividends, if declared, which will be distributed upon termination of the restriction period with respect to any such
restricted shares. The Company measures compensation expense on these restricted shares commensurate with their vesting
schedules. For the pOltion of the restricted shares that vest contingently with the occurrence of certain events, the Company
records compensation expense when such events become probable, On December 31, 2004, the incremental compensation
expense on the restricted shares issued to the CEO was determined based on the estimated fair value of the Class B Common
Stock, which resulted in a de minimus compensation charge to the consolidated statement of operations.
OptiollS
The Company granted options to a member of the Company's Board of Directors to purchase an additional 5,263 shares
of our common stock at a price per share of $57, which option is exercisable within the 12-month period beginning
September 9, 2004.
The following information summarizes the shares subject to options:
Weighted
Average
Number of
Shares
2004
)
Options outstanding - beginning of year (January 12,2004)
Granted
Expired and forfeited
Options outstanding - end of year
Options exercisable - end of year
Exercise Price
per Share
2004
$
57
5,263
5,263
$
57
5,263
The following table summarizes information about options outstanding as of December 31, 2004:
Exercise PrIce
$
57
Weighted Average Remaining
Contractual Life
Options Outstanding
5,263
Old T-Netix reserved 5,850,000 shares of common stock for employees and non-employee directors under val'ious stock
option plans (collectively the "Plans"): the 1991 Incentive Stock Option Plan (the "1991 ISO Plan"); the 1991 Non-Qualified
Stock Option Plan (the" 1991 NSO Plan"); the 1993 Incentive Stock Option Plan (the "1993 ISO Plan") and the 200 I Stock
Option Plan (the "2001 Plan"). The Plans provided for issuing both incentive and non-qualified stock options, which must be
granted at not less than I 00% of the fail' market value of the stock on the date of grant. All options were granted at the fair
market value of the stock as determined by the Board of Directors. Options that were issued prior to 1994 had vesting terms
of one to three years from the date of grant. Substantially all of the Incentive Stock Options that were issued after 1993 had
vesting terms of foul' years from the date of grant. All options expired ten years fro111 the date of grant.
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(Continued)
A summary of the Old T-Netix (Predecessor) stock option activity, and related information through March 2, 2004, is as
follows:
O~tlons
Outstanding
Weighted
Shares
Available for
Grant
Balance at December 31, 200 I
Granted
Exercised
Canceled
Balance at December 31, 2002
Granted
Canceled
Balance at December 31, 2003
Exercised
Canceled
Balance at March 2, 2004
Average
Exercise
Price
Number of
Shares
3,017,471
588,500
(19,842)
(338,500)
3,247,629
80,500
(261,090)
3,067,039
(3,067,039)
1,203,388
(588,500)
338,500
953,388
(80,500)
261,090
1,133,978
(1,133,978)
$
$
$
$
$
$
$
$
$
$
$
4.32
3.00
1.63
4.61
3.93
1.30
3.19
3.93
2.61
The range of exercise prices for common stock options outstanding and options exercisable at December 31, 2003 is as
follows:
)
Range of Exercise Prices
$0.00 $1.37 $2.74 $4.11 $5.48 $6.86 $8.23 -
$1.37
$2.74
$4.11
$5.48
$6.86
$8.23
$13.71
0l!tions Outstanding
Weighted
Weighted
Average
Remaining
Average
Number of
Contractual
Excl'eisc
Shares
Price
Life {Years}
80,500
891,789
1,020,450
215,300
556,750
228,500
73,750
3,067,039
9.2
5.9
7.8
5.3
3.8
2.1
2.7
5.8
$
$
$
$
$
$
$
$
1.30
2.14
3.12
5.05
5.83
7.25
11M
3.93
0l!tions Exerdsable
Weighted
Average
Exercise
Price
Number of
Shares
600,439
409,525
215,300
510,500
228,500
73,750
2,038,014
$
$
$
$
$
$
$
$
2.03
3.21
5.05
5.79
7.25
llM
4.46
In March 2004, all outstanding employee incentive and non-qualified stock options were exercised and Old T-Netix's
Stock Option Plans were terminated in conjunction with the acquisition ofT-Netix, Inc. by TZ Holdings (see Note I).
Redeemable COllvertible Preferred Stock
In November 2002, T-Netix obtained new financing including a $9.0 million Senior Subordinated Promissory Note, due
in 2008. Subject to the issuance of this note, the lender received detachable stock purchase warrants, which were immediately
exercisable, to purchase 186,792 shares of common stock at an exercise price of $0.0 I per share. The estimated fair value of
the stock purchase warrants, calculated using the Black-Scholes model, was recorded as a debt discount and amortized over
the term of the Senior
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Subordinated Promissory Note. In March 2004, the warrants were exercised by the lender in conjunction with the acquisition
ofT-Netix by TZ Holdings (see Note I).
(11)
INTEREST RATE SWAP
Since the interest rate on the Senior Secured Term Loan outstanding under the former Credit Facility was variable, TNetix was exposed to variability in interest payments due to changes in interest rates. Management believed that it was
prudent to limit variability of its interest payments. To meet this objective, on March 31, 2003, T -Netix entered into an
interest rate swap agreement, which effectively conve11ed the $10.5 million of variable rate debt outstanding under the fonner
Credit Facility to a fixed rate. Under the terms of this interest rate swap agreement, the notional amount of the swap
coincided with the maturity schedule of the former Senior Secured Term Loan and had an expiration date of September 2006.
On a quarterly basis, T-Netix received variable interest rate payments based on 90 day LIBOR and made fixed interest rate
payments of2.4%, thereby creating the equivalent of fixed rate debt. The net effect of this agreement was to lock the
effective interest rate on the former Senior Secured Term Loan at 8.4% through its maturity in 2006.
T-Netix designated the interest rate swap as a cash flow hedge in accordance with the requirements of SFAS No. 133,
Accounting/or Derivatives and Hedging Activities, and its amendments. Any gain or loss was recorded as interest expense in
the same period or periods that the hedged tmnsaction affected earnings. At December 31, 2003, the fair value of the interest
rate swap, with quarterly settlements through September 2006, was a liability of approximately $0.1 million with the offset
recorded in other comprehensive income. T-Netix assessed the valuation of the interest rate swap on a quarterly basis. T-
Netix did not enter into derivative instruments for any other purpose than cash flow hedging purposes and did not intend to
speculate using derivative instruments.
T-Netix entered into a New Credit Facility on March 3, 2004 and terminated the swap agreement immediately by paying
)
the future liability to the counterparty of the contract at which time the amount recorded in other comprehensive income was
reclassified to the statement of operations.
(12)
RELATED-PARTY TRANSACTIONS
In connection with the acquisition of Evercom, Securus Technologies paid transaction fees and expenses of $2.6 million
to one company affiliated with certain stockholders. These amounts were capitalized in connection of the acquisition ofTNetix and Evel'com.
On September 9, 2004, the Company entered into a professional and consulting services agreement with a company
affiliated with certain stockholders. The consulting agreement requires payments of the aggregate minimum annual
consulting fees over the next five years in the following amounts (in thousands):
Years Ending December 31:
2005
2006
2007
2008
2009
$ 750
750
750
750
750
The consulting agreement also provides for the reimbursement of direct expenses. Upon termination of the consulting
agreement, the Company shall pay 2% of the enterprise value (as defined) ofthe company to such affiliated company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The professional and consulting service agreement entitles the related-party to a 2% fee based on the transaction value (as
defined) for any asset or stock acquisitions by SecUl·us Technologies.
The professional and consulting services agreement has a five-year term and is cancelable at either party's discretion. In
connection with this agreement, Securus Technologies paid $0.4 million for the 355 day period from Januaty 12,2004 to
December 31, 2004 and has a liability due to the related party affiliated company of $0.1 million as of December 31, 2004.
(13)
(tt)
COMMITMENTS AND CONTINGENCIES
Opentl;Ilg Leuses
Securus Technologies leases office space and certain office equipment under operating lease agreements and certain
computer and office equipment under capital lease agreements. Rent expense under operating lease agreements for the years
ended December 31, 2002 and 2003 and for the 62 day period from January 1,2004 to March 2, 2004 and for the 355 day
period from Januaty 12,2004 to December 31, 2004 was approximately $1.0 million, $1.1 million, $0.2 million, and
$1.2 million, respectively. Future minimum lease payments under these lease agreements for each of the next five years are
summarized as follows (in thousands):
)
Years Ending December 3 I :
2005
2006
2007
2008
2009
Thereafter
Total minimum lease payments
(b)
$
1,991
1,903
1,347
1,026
896
5,187
12,350
$
Minimllm payments to cllstomers
The Company is required to make the following minimum commission payments to certain of its correctional facility
customers regardless of the level of revenues generated by the Company on those contracts (in thousands):
Years Ending December 31 :
2005
2006
2007
2008
2009
Thereafter
Total minimum commission payments
$
5,755
1,216
280
145
18
$
7,414
No liability has been recorded as of December 31, 2004 because the Company expects to generate sufficient revenues
from these contracts in future periods to offset these payments consistent with contractual and historical average commission
rates and because the Company would not owe these amounts if the correctional facility customer terminates the agreement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(cj
(Continued)
Employment Agreements
As of December 31, 2004, Securus Technologies had entered into employment agreements with certain key management
personnel, which provided for minimum compensation levels and incentive bonuses along with provisions for termination of
benefits in certain circumstances and for certain severance payments in the event of a change in control (as defined).
(tlj
Customer Disputes
The Company has recently received a letter from a vendor that claims the Company owes approximately $2.5 million on
services rendered over the last four years that were never originally billed by the vendor. The Company disputes this claim
but has accrued $0.4 million of expense as of December 31, 2004 based on management's estimate of the probable outcome
of this dispute.
(ej
Litigation
From time to time the Company is subject to various legal proceedings and claims that arise in the ordinary course of
business operations. The Company believes the ultimate disposition of these matters will not have a material adverse effect
on its financial condition, liquidity, or results of operations.
)
T-Netix is a defendant in a state case brought in June 2000 in the Superior Court of Washington for King County, styled
Sandy Judd, ef al. v. American Telephone and Telegraph Company, ef al. In this case, the complaint joined several inmate
telecommunications service providers as defendants, including T-Netix. The complaint includes a request for celtification by
the court of a plaintiffs' class action consisting of all persons who have been billed for and paid for telephone calls initiated
by an inmate confined in ajail, prison, detention center or other Washington correctional facility. The complaint alleges
violations of the Washington Consumer Protection Act ("WCPA") and requests an injunction under the Washington
Consumer Protection Act and common law to enjoin further violations. The trial court dismissed all claims with prejudice
against all defendants except T-Netix and AT&T. The T-Netix and AT&T claims have been referred to the Washington
Utilities and Transportation Commission while the trial court proceeding is in abeyance. The outcome cannot be determined
at this time.
The Company and certain of its subsidiaries including T -Netix, Inc., Evercom, Inc., Evercom Systems, Inc. andlor some
of the predecessors in interest to Evercom Systems, Inc., are parties to several lawsuits brought by prisoners, and family
members of prisoners, in various jails and prisons in several states. The causes of action vary among the cases, but common
allegations are antitrust violations, unfair trade practices, constitutional claims such as due process and equal protection, and
claims under the Telecommunication Act. The lawsuits seek actual damages and injunctive relief, as well as punitive
damages, statutOlY damages under various state statutes, and attorneys' fees for the plaintiffs' 'counsel. Each lawsuit also
sought celtification as a class action, with all persons who are recipients of, and/or who have been billed for, telephone calls
initiated by inmates confined in jails, prisons or other correctional facilities as the plaintiff class. The Company does not
believe that any of these suits have merit and is vigorously defending against each of them. In the opinion of management,
the Company is unable to determine the possible outcome or to estimate the amount or range, if any, of potential loss if the
outcome is unfavorable to the Company. Therefore, no amount has been recorded in the consolidated financial statements.
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INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Evercom Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Evercom Holdings, Inc. and subsidiaries ("Evercom")
as of December 31, 2003 and 2002 and the related consolidated statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the
responsibility of Evercom's management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Evercom as of December 31, 2003 and 2002 and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note I to the consolidated financial statements, during 2003, Evercom adopted Statements of Financial
Accounting Standards No. 145, and as a result, reclassified the extraordinary loss on the debt extinguishment of $1 ,054,871
recorded during 200 I to operating expenses. Additionally, in the year ended December 31, 2002, Evercom changed its
method of accounting for intangible assets to conform to the Statement of Financial Accounting Standards No. 142.
Deloitte & Touche LLP
)
Dallas, Texas
April 16, 2004
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EVERCOM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31 1
June 30,
2002
2003
2004
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable - net
Refundable income taxes
Inventories - net
Prepaid expenses and other current assets
Total current assets
PROPERTY AND EQUIPMENT - Net
GOODWILL - Net
INTANGIBLE AND OTHER ASSETS - Net
TOTAL
)
$
$
248,380
31,903,654
237,207
2,625,709
2,229,983
37,244,933
23,418,453
52,380,613
14,361,744
127,405,743
$
$
264,510
42,920,361
42,782
2,552,408
1,232,881
47,012,942
23,495,735
52,380,613
10,210,239
133,099,529
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable
$
26,664,684
$
29,569,106
20,681,693
Accrued expenses
35,555,728
Current pOltion of long-term debt
115,000,000
13,074,270
Total current liabilities
177,220,412
63,325,069
LONG-TERM DEBT
36,889,013
27,333,593
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, Senior and First Preferred Series A,
$.01 par value - 6,000 and 5,000 shares authorized,
5,303 and 5,000 shares issued and outstanding for
Senior and First Preferred Series A as of December 31,
2002 (cumulative liquidation value of$10,303,000 as
of December 31, 2002)
103
Common stock, $.01 par value - 100,000 shares
authorized, 29,688 shares outstanding as of
December 31, 2002
296
Common stock, $.01 par value - 7,500,000 shares
authorized, 5,905,557 shares issued and outstanding as
of December 31, 2003 and June 30, 2004
59,056
Deferred compensation expense on restricted common
(142,260)
stock and options
32,966,572
162,857,172
Additional paid-in capital
(119,670,653)
(120,333,101)
Accumulated deficit
Total stockholders' equity (deficit)
(86,703,682)
42,440,867
TOTAL
$
127,405,743
$
133,099,529
$
$
$
2,701,879
41,327,060
1,085,993
2,956,420
1,746,678
49,818,030
24,223,161
52,380,613
9,482,061
135,903,865
32,031,148
19,864,665
12,280,836
64,176,649
24,583,593
59,056
$
(551,779)
164,157,944
(116,521,598)
47,143,623
135,903,865
See notes to consolidated financial statements.
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EVERCOM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31 2
2001
OPERATING REVENUE
$
OPERATING EXPENSES:
Telecommunication costs
Facility commissions
Field operations and maintenance
Selling, general, and administrative
Cost of equipment sales
Depreciation and impairment
Amortization of intangibles
Impairment of goodwill
Loss. on debt extinguishment
Compensation expense on issuance of
restricted stock and options
Merger related cost
Restructure expense
Gain on sale of fixed assets
Total operating expenses
OPERATING INCOME
OTHER INCOME (EXPENSE):
Interest expense
Interest income
Other (income) expense
Total other income (expense)
)
(LOSS) INCOME BEFORE INCOME
TAXES AND CUMULATIVE
EFFECT OF THE CHANGE IN
ACCOUNTING PRINCIPLE
INCOME TAX EXPENSE
(LOSS) INCOME BEFORE
CUMULATIVE EFFECT OF THE
CHANGE IN ACCOUNTING
PRINCIPLE
CUMULATIVE EFFECT OF THE
CHANGE IN ACCOUNTING
PRINCIPLE
NET (LOSS) INCOME
PREFERRED STOCK DIVIDENDS
NET (LOSS) INCOME APPLICABLE
TO COMMON STOCK
$
245,178,720
2002
$
102,651,083
81,867,048
7,552,345
21,557,373
3,651,049
11,065,403
11,058,688
238,834,966
Six Months Ended June 302
2003
$
102,007,595
82,161,229
6,977,728
21,119,717
1,054,569
13,892,652
4,921,015
1,490,476
233,095,834
$
88,853,504
81,539,061
8,303,979
24,203,560
2,320,034
10,529,278
3,957,665
1,054,871
2003
2004
(Unaudited)
(Unaudited)
115,082,803
$
126,281,295
45,931,991
40,526,654
4,013,208
10,490,922
711,679
5,720,420
2,121,251
47,945,773
45,456,875
4,230,806
13,184,771
807,899
4,724,015
1,647,860
58,197
891,253
1,055,192
3,452,781
139,940
(121,620)
240,336,240
4,842,480
3,583,662
!750,705)
236,457,938
2,377,028
1,175,697
!4,347)
224,471,152
8,624,682
1,174,269
P,363)
110,745,228
4,337,575
(19,024,782)
312,171
(23,092,796)
31,365
(9,245,453)
3,860
(6,327,391)
2,060
p8,712,611)
!23,061 ,431)
!9 ,241,593)
!6,325,33I)
(13,870,131)
!84,550)
(20,684,403)
(6,887)
(616,911)
!45,537)
(1,987,756)
4,456,709
(645,206)
(13,954,681)
(20,691,290)
(662,448)
(1,987,756)
3,811,503
(13,954,681)
1,503,518
P 1,792,000)
(32,483,290)
1,529,744
(662,448)
122,906
(1,987,756)
122,906
3,811,503
0 5,458,199)
$
P4,013,034)
$
085,354)
$
!2, 110,662)
119,944,444
6,336,851
(1,885,522)
5,153
227
!I,880,142)
$
3,811,503
See notes to consolidated financial statements.
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EVERCOM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Deferred
Compensation
Old Common
(Sec Note 3)
Preferred
~ ~
BALANCEJanumy I, 200 I
10,925 $
Shores
109
16,433 $
Preferred
dividends
Issuance of
common stock
Net loss
BALANCEDecember 31,
2001
Amount
New COllllllon
Expense 011
(Sec Note 3)
Restricted
Shares
Amount
164
$
Comlllon
Additional
Paid-In
Stock
Cal!itlll
)
137
BALANCEDecember 31,
2003
Deferred
compensation
for restricted
common stock
and options
Compensation for
restricted
common stock
and options
Net income
BALANCEJune 30, 2004
(Unaudited)
10,177,299
10,177,436
(13,954,681) (13,954,681)
34,304,874
(87,187,363) (52,882,079)
- - - - --- - - - - 10,925
109
30,153
301
(1,338,313)
(622)
(6)
(465)
-- --
---
10,303
(32,483,290) (32,483,290)
-- ---
29,688
103
(1,338,313)
II
(5)
296
32,966,572
Preferred
dividends
Reorganization
(See Note 3)
Deferred
compensation
for restricted
common stock
Compensation for
restricted
common stock
Net loss
(1,078,839)
(1,078,839)
13,720
(119,670,653)
(122,906)
(10,303)
(103) (29,688)
(296) 5,905,557
59,056
129,789,963
282,200
139,940
- - - - --- - - - - 5,905,557
(662,448)
59,056
(142,260) 162,857,172
(1,300,772)
(120,333,101)
891,253
_
$
139,940
(662,448)
42,440,867
1,300,772
---------$
(86,703,682)
(122,906)
129,731,306
(282,200)
--=
Total
$ 25,206,414 $ (73,232,682) $(48,025,995)
$
Preferred
dividends
Forfeiture of
common and
preferred stock
Net loss
BALANCEDecember 31,
2002
Acculllulnted
Egullr 'Dcflclt~
3,811,503
891,253
3,811,503
5,905,557 $59,056 $ (551,779) $164,157,944 $(116,521,598) $ 47,143,623
See notes to consolidated financial statements.
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EVERCOM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
Years Ended December 31 2
2001
2002
June 301
2003
2003
2004
(Unaudited)
(Unaudited)
)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income
Adjustments to reconcile nelioss to net cash
provided by operating activities:
Depreciation and impainnent
Amortization ofintangiblc assets, including
defclTcd financing costs and change in
accounting principle
Compensation expense on restricted common
stock and options
Loss on debt extinguishment
Gain on sate of assets
Changes in operating assets and liabilities, net of
effects ofacquisiliollS:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Income taxes
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Capital expenditures for purchase of intellectual
property
Refund of escrow for purchase of intellectual
property
Cash outflows for acquisitions
Proceeds from the sale of equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt
Repayment of debt
Net change ill short·tenn borrowings
Payment of defened financing costs
Proceeds from the issuance of common stock and
warrants
Net cash (used in) provided by financing
activities
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS:
Beginning of year
End of year
SUPPLEMENTAL INFORMATION:
Cash paid for interest
Cash paid for income taxes
NONCASH TRANSACTIONS:
Issuance of common stock for acquisitions
,-
,)
$ (13,954,681)
$ (32,483,290)
$
(662,448)
$
(1,987,756)
$
3,811,503
11,065,403
13,892,652
10,529,278
5,720,420
4,724,015
12,534,439
19,776,455
4,859,688
2,707,509
1,829,145
58,197
891,253
139,940
3,452,781
(4,347)
1,054,871
(101,025)
(750,705)
3,833,064
(3,250,977)
(554,723)
1,694,012
(641,299)
(712,861)
10,966,223
2,640,222
1.115,693
(18,482)
4,100,371
13,500,352
234,647
22,007.915
(11,016,707)
228,115
696,089
1,059,677
2,904,422
4,992,480
194,425
16,313,716
939,165
3,236,113
45,253
4,790,793
(817,028)
(1,043,211)
12,029,486
(13,745,284)
( 10,063,692)
(13,673,795)
(6,523,798)
(6,298,684)
(7,150,916)
163,131
1,593,301
(404,012)
(1,017,521)
2,462,041
(1,603,605)
250,000
(1,892,177)
958,646
(9,105,046)
(15,637,461)
7,947
(15,269,453)
889,013
48,706,409
(51,615,352)
(5,441,635)
2,000,000
(1,650,000)
(1,271,660)
(173,833)
(13,622,797)
(93.923)
9,000,000
67,360
649,422
(12,827,707)
(4,021,816)
4,195.034
173,218
$
173,218
248,380
$
248,380
264,510
6,986,233
$
7,132,919
1,572,225
(4,583,407)
1,039,973
p.543,434)
1,639,585
16,130
$
(6.048,683)
67,360
(1,028,133)
75,162
(6,523,798)
(93,420)
$
248,380
154,960
$
3,423,358
2,437,369
$
264,510
2,701,879
$
16,925,239
$
$
1,260,316
$
797,411
$
$
$
$
1,707,369
$
1,177,436
$
$
$
$
Exchange of debt for equity
$
$
$ 112,958,000
$ 112,958,000
Exchange ofaccfued interest for equity
$
$
$
15,177,474
$
15,177,474
$
Exchange of acclUed dividends for equity
$
$
$
4,587,493
$
4,587,493
$
Write-off of loan costs
Loan costs financed with new debt
$
$
$
3,000,364
$
3,000,364
$
$
$
$
1,454,056
$
Prefencd dividends payable
$
122,906
$
122,906
$
Sale of assets for forgiveness of accrued dividends
$
1,078,839
$
1,338,313
$
$
95,000
$
$
$
$
$
See notes to consolidated financial statements.
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EVERCOM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Evercom Holdings, Inc. became the parent and sole owner of Evercom, Inc. on Februaty 19,2003 (see
Note 3), Evercom Holdings, Inc. and subsidiaries, ("Evercom"), owns, operates and maintains telephone systems under
contracts with correctional facilities in 43 states and the District of Columbia. Evercom was incorporated on November 20,
1996, and effective December 1, 1996, acquired all of the outstanding equity interests of Talton Telecommunications
Corporation and AmeriTel Pay Phones, Inc. Evercom has grown through numerous subsequent acquisitions.
Evercom accumulates call activity from its various installations and bills its revenues related to this call activity through
major local exchange carriers ("LEes") or through third-party billing services for smaller volume LEes, all of which are
granted credit in the normal course ofhusiness with terms of between 30 and 60 days. Evercom also provides services
representing validation, fraud management and billing services to third parties ("Solutions"). Evercom provides Solutions
services for the inmate calls of a major Regional Bell Operating Company ("RBOe") and several other inmate
telecommunication carriers. Evercom performs ongoing credit evaluations of its customers and maintains allowances for
unbillable and uncollectible losses based on historical expel'ience.
The accompanying unaudited consolidated financial statements reflect all adjustments which, in the opinion of
management, are necessary to reflect a fair presentation of the financial position, results of operations and cash flows of
Evercom as of and for the six-month periods ended June 30, 2004 and 2003. All adjustments, in the opinion of management,
are of normal and recurring nature. Some adjustments involve estimates, which may require revision in subsequent interim
periods or at year-end. The consolidated financial statements have been presented in accordance with the accounting
principles generally accepted in the United States of America.
Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Evercom and
its wholly owned subsidiaries, Evercom, Inc.; Evercom Systems, Inc.; FortuneLinx, Inc.; and EverConnect, Inc. The results
of these subsidiaries are included in the financial statements effective with their formation or from their dates of acquisition.
Significant intercompany balances and transactions are eliminated in consolidation.
Use of Estimates - The preparation of 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the repOlting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and investments with a remaining
maturity at date of purchase of three months or less.
Accounts Receivable - Trade accounts receivable represent amounts billed or that shall be billed for calls placed through
Evercom's telephone systems. The majol'ity of these receivables are billed using various LEes or third-party billing services
and are reported net of an allowance for unbillable and uncollectible calls, based on historical experience, for estimated
chargebacks to be made by the LEes and clearinghouses.
Inventories - Inventories are stated at the lower of cost, as determined primarily using the weighted average cost
method, or market. Inventory is primarily composed of equipment for installation on new contracts and supplies and parts for
the telephone systems serviced by Evercom.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Property and Equipment - Property and equipment are stated at cost. Depreciation and amortization is provided on a
straight-line basis over the estimated useful lives of the related assets. The following is a summary of useful lives for major
categories of property and equipment.
Useful Life
Asset
5 years
7 years
Telephone system equipment
Office equipment
Leasehold improvements
Vehicles
Lease term
3 years
Maintenance and repairs are expensed when incurred and major repairs that extend an asset's useful life are capitalized.
When items are retired or disposed, the related carrying value and accumulated depreciation are removed from the respective
accounts, and the net difference less any amount realized from the disposition is reflected in the consolidated statement of
operations.
As of December 31, 2001, Evercom changed its estimate of the useful life of its telephone equipment from 7.5 years to
5 years. This change resulted in an increase in expense for 200 I of approximately $1.1 million, which is reported as part of
depreciation and impairment expense in Evercom's 2001 consolidated statement of operations.
Intangible and Other Assets - Evercom's intangible and other assets consist of (I) goodwill, which is not being
amortized commencing in 2002 and beyond; and (2) finite lived intangibles, which consist of acquired facility contracts,
noncompete agreements and deferred loan costs.
)
The impact of accounting for the adoption of Statement of Financial Accounting Standards ("SF AS") No. 142, Goodwill
and Intangible Assets, and the annual impairment methodology thaI Evercom will employ on September 30 of each year in
calculating the recoverability of goodwill is discussed in Note 6. This same impairment test will be performed at other times
during the course of the year should an event occur which suggests that the recoverability of goodwill should be challenged.
Finite lived intangibles are currently evaluated for impairment using the methodology set forth in SFAS No. 144,
Accounting/or the Impairment or Disposal ~f Long-Lived Assets. Recoverability of these assets is assessed only when events
have occurred that may give rise to impairment. When a potential impairment has been identified, forecasted undiscounted
net cash flows of the operations to which the asset relates are compared to the current carrying value of the long-lived assets
present in that operation. If such cash flows are less than such canying amounts, long-lived assets, including such intangibles,
are written down to their respective fair values. Amortization is provided on a straight-line basis over the estimated useful
lives of the related assets. The following is a summary of the useful lives of the major categories of finite lived intangible
assets:
Weighted Average
Useful Life
Asset
Acquired facility contracts, amortized over the contract term
Non-compete agreements, amortized over the agreement term
Deferred loan costs, amortized over the loan term
Other assets and intangibles
3.5 years
7.5 years
4.5 years
2.5 years
Prior to 2002, Evercom employed the impairment methodologies set forth in SFAS No. 121, Accounting/or the
Impairment 0/ Long-Lived Assets and/or Long-Lived Assets to be Disposed of These methodologies did not differ
substantially from SF AS No. 144 as they related to finite lived intangibles.
Income Taxes - Evercom accounts for income taxes using the liability method in accordance with the provisions of
SFAS No. 109, Accounting/or Income Taxes. Under this method, deferred tax assets
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
and liabilities are provided for temporaty differences between the financial statement and tax bases of the assets and
liabilities using current tax rates. A valuation allowance is recorded to reduce the carrying amount of deferred tax assets
unless it is more likely than not those such assets will be realized.
Stock-Based Compensation - Stock-based compensation arising from stock option grants is accounted for by the
intrinsic value method under Accounting Principles Board Opinion No. 25 ("APB No. 25"). SFAS No. 123, Accounting/or
Stock-Based Compensation, encourages (but does not require) the cost of stock-based compensation arrangements with
employees to be measured based on the fair value of the equity instrument awarded. As permitted by SFAS No. 123,
Evercom continues to apply APB No. 25 and related interpretations in accounting for its options. No compensation cost has
been recognized for such option grants as the exercise price of the options granted was not below the estimated fair value of
the stock at the grant date and subsequent measurement dates for variable options. Had compensation costs for Evercom's
options been determined based on fair value at the grant date of the option awards and subsequent measurement dates for
variable options consistent with the method prescribed by SFAS No. 123, Evercom's pro forma net income for December 31
would have been as follows:
December 31 1
2001
Net (loss) income, as reported
$ (13,954,681 )
Total employee compensation
expense determined under fairvalue based method for all stock
option awards, net of tax
(705,000)
Pro-forma net (loss) income
$ (14,659,681 )
)
June 301
2002
2003
2003
2004
(Unaudited)
(Unaudited)
$ (32,483,290)
$
(662,448) $ (1,987,756)
(478,255)
$ (32,961,545)
(600,000)
(48,267)
$ (1,262,448) $ (2,036,023)
$ 3,811,502
(379,698)
$ 3,431,804
There were no options issued during 2002 and for the six months ended June 30, 2004. Fair value of stock options
granted in 2003 and 200 I were calculated in accordance with the Black-Scholes option pricing model, using the following
assumptions: expected volatility of 0% and 0%; expected dividend yield of 0% and 0%; expected option term of eight and ten
years and risk free rate of return ranging from 3.5% and 4.9% for options granted in 2003 and 2001, respectively.
Revenue Recognition - Revenues related to collect and prepaid calling services are recognized during the period in
which the calls are made. In addition, during the same period. Evercom accrues the related telecommunication costs for
validating, transmitting, billing and collection, and line and long-distance charges, along with commissions payable to the
facilities and allowances for unbillable and uncollectible calls, based on historical experience.
Revenues related to the Solutions services are recognized in the period in which the calls are processed through
Evercom's system. During the same period, Evercom accrues the related telecommunications costs for validating,
transmitting, and billing and collection costs, along with allowances for unbillable and uncollectible calls, based on historical
experience.
Evercom applies Emerging Issues Task Force ("EITF") Issue No. 99-19, Reporting Revenue Gross as a Principal versus
net as an Agent. Based on this consensus, all revenues related to the Solutions services are presented in the statement of
operations at the net amount. That is the amount charged to the cllstomer less the amount paid to the inmate
telecommunication provider.
Prepayments for communications services are deferred and recognized as revenue as the communications services are
provided.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Facility Commissions - Under the terms of Evercom's telephone system contracts with correctional facilities, Evercom
pays commissions to these facilities generally based on call volume revenues, Facility commissions are accrued during the
period the revenues are generated.
New Accounting Pronouncements - SFAS No. 145, Rescission ~fFASB Statements No.4, 44 and 64, Amendment ~f
£lASB Statement No. 13, and Technical Corrections, was issued in April 2002 and is applicable to fiscal years beginning after
May IS, 2002. One of the provisions of this technical statement is the rescission of SFAS No.4, Reporting Gains and Losses
From Extinguishment of Debt, whereby any gain or loss on the early extinguishment of debt that was reclassified as an
extraordinary item in prior periods in accordance with SF AS No.4, which does not meet the criteria of an extraordinaty item
as defined by APB Opinion 30, must be reclassified. During 2003, Evercom adopted Statements of Financial Accounting
Standards No. 145, and as a result, reclassified the extraordinary loss on the debt extinguishment of $1 ,054,871 recorded
during 200 I to operating expenses.
In May 2003, the FASB issued SFAS ISO, Accountingfor Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. SFAS No. ISO establishes standards for how a company classifies and measures certain financial
instlUments with characteristics of both debt and equity. SFAS No. ISO, as amended by FASB Staff Position 150-3, is
effective for Evercom in fiscal year 2005. SFAS No. 150 will require, among other matters, mandatorily redeemable
preferred stock to be classified as a liability. The accounting treatment for convertible and redeemable preferred stock
currently is not change by this statement. Evercom is in the process of evaluating the effects of this statement.
In December 2003, the FASB revised FIN 46, Consolidation of Variable Interest Entities - An Inte/pretalion ~f
Accounting Research Bulletin No. 51, addresses consolidation by business enterprises of variable interest which have one of
)
the following characteristics: The equity investment at risk is not sufficient to permit the entity to finance its activities
without additional subordinated financial support from other parties, which is provided through other interests that will
absorb some or all of the expected losses of the entity or the equity investors lack one or essential characteristics of a what is
considered a controlling financial interest. The adoption of this pronouncement did not have a material impact on our
consolidated financial statements.
In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions ofEITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15,2003. The adoption of this pronouncement did not have a
material impact on our consolidated financial statements.
2.
ACQUISITIONS
On May 30, 2001, Evercom acquired all of the capital stock of FortuneLinx, Inc., for shares of Evercom's old Class "A"
Common Stock equal to 6% of Evercom's Common Stock on a fully diluted basis. 3%, or 1,368 shares, was issued on
May 30, 2001, and the remaining 3% was forfeited because certain financial performance objectives were not achieved.
Additionally, options were issued to the sellers allowing them to purchase up to I % of Evercom's Class "A" Common Stock
on a fully diluted basis at an exercise price of $2,000 pel' share. These options were also forfeited in 2002 because certain
performance objectives were not achieved. In conjunction with the closing, a note payable to a FortuneLinx shareholder in
the principal amount of $780,000 was repaid during 200 I plus accrued interest.
The above acquisition was accounted for using the purchase method of accounting as of the acquisition date, and
accordingly, only the results of operations of the acquired company subsequent to the acquisition date are included in the
consolidated financial statements of Evercom. At the acquisition date,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
the purchase price of approximately $2.4 million was allocated to assets acquired, including identifiable intangibles and
liabilities assumed based on their fair values. The excess of the total purchase price over the fair value of the net assets
acquired represents goodwill, approximately $2.4 million.
Pro forma condensed consolidated results of operations assuming FortuneLinx, Inc. had been acquired on Janumy 1,2001
are not presented because the acquisition was not considered significant.
3.
EXCHANGE OFFER AND REORGANIZATION
In November 2002, Evercom, Inc.'s Board of Directors and major stockholders approved a reorganization agreement (the
"Agreement") and created two new subsidiaries: EI Merger Holdings, Inc. (a direct subsidiary) and EI Merger Sub, Inc. (an
indirect subsidialY). The Agreement required Evercom, Inc. to offer to holders of its $115.0 million of II % Senior Notes a
98% ownership of the reorganized Evercom in exchange for forgiveness of the Senior Notes and accrued interest. The
Agreement provided that upon consummation of the exchange offer to Evercom, Inc.'s Senior Note holders, Evercom, Inc.
would merge with its indirect subsidiary, EI Merger Sub, Inc., leaving EI Merger Holdings, Inc. ("Parent") as the new
holding company. In the reorganization, Evercom, Inc. 's Common and Preferred stock were to be conve11ed into the right to
receive warrants to acquire a 2% interest in Parent (with former Senior Noteholders that tendered into the exchange offer
owning the remaining 98% of Parent). All existing Evercom, Inc. warrants and cumulative preferred dividends and related
interest were to be cancelled in the reorganization. Evercom, Inc. 's Common and Preferred stockholders were also to receive
warrants to acquire up to an additional 15% interest in Parent at substantially higher strike prices. (See Note 10.)
)
Holders of98.2% of the outstanding principal amount of Senior Notes accepted the exchange offer and the merger closed
on FebrualY 19, 2003. The remaining 1.8% of the Senior Notes, representing approximately $2.0 million of principal,
remains an outstanding obligation of Evercom. As a result of an amendment to the indenture governing the Senior Notes
(achieved in connection with the exchange offer), all covenants previously required by the Indenture were eliminated and
Evercom is no longer required to file periodic reports with the Securities and Exchange Commission and none of its debt or
equity securities is publicly traded. The Senior Notes are re-designated as "Subordinated Notes" in Evercom's 2003 financial
statements. On March 13, 2003, the Board of Directors approved a change in the name of EI Merger Holdings, Inc. to
"Evercom Holdings, Inc."
4.
ACCOUNTS RECEIVABLE -
NET
Accounts receivable consist of the following:
December 31.
Trade accounts receivable
Advance commissions receivable
Employees and other
Less allowance for unbillable and uncollectible chargebacks
2002
2003
$ 38,764,768
2,281,924
128,788
41,175,480
(9,271,826)
$ 31,903,654
$ 46,951,903
2,980,784
412,712
50,345,399
(7,425,038)
$ 42,920,361
June 30. 2004
(Unaudited)
$
$
46,709,937
2,203,223
75,077
48,988,237
(7,661,\77)
41,327,060
At December 31, 2002 and 2003 and June 30, 2004, Evercom had advanced commissions to certain facilities of
$2,377,981 and $3,224,313 and $2,705,879 (unaudited), respectively, which are recoverable
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EVERCOM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
from such facilities as a reduction of earned commissions at specified monthly amounts. Amounts included in accounts
receivable represent the estimated recoverable amounts during the next fiscal year with the remaining long-term portion
recorded in other assets.
Evercom bills the majority of its collect call revenue through direct billing arrangements with LEes. The LEes establish
reserves for future uncollectibles by withholding funds from Evercom as part of the recurring receivables settlement process.
The allowance for unbillable and uncollectible chargebacks reflected in the financial statements of Evercom is dependent
upon a number of factors, including (i) the amount of reserves already established by the LEes or third-patty billing services
and (ii) Evercom's historical unbillable and uncollectible experience.
5.
PROPERTY AND EQUIPMENT -
NET
Property and equipment consist of the following:
December 31,
2002
June 30. 2004
2003
(Unaudited)
$
Telephone system equipment
Office equipment
Leasehold improvements
Vehicles
Work in process
Less accumulated depreciation
$
)
62,920,376
3,021,498
968,068
347,123
1,099,828
68,356,893
(44,938,440)
23,418,453
$
73,037,000
3,084,063
1,071,344
398,648
1,091,676
78,682,731
(55,186,996)
=$==2=3.",4=95;;0,7;,;3=5
$
78,547,367
3,110,779
1,150,096
398,648
605,192
83,812,082
(59,588,921)
$
24,223,161
Depreciation and impairment of property and equipment in 200 I, 2002, 2003 and for the six-months ended June 30, 2003
and 2004 was $11,065,403, $13,892,652, $10,529,278, $5,720,420 (unaudited) and $4,724,015 (unaudited), respectively.
Included in depreciation and impairment in 200 I, is an impairment loss of $2,533,004 representing the net book value of
telephone system equipment that was removed from service. Also, as of December 31, 2001, Evercom changed its estimate
of the useful life of its telephone system equipment from 7.5 years to 5 years.
6.
INTANGIBLE AND OTHER ASSETS -
NET
In June 2001, the FASB issued SFAS No. 142. Under SFAS No. 142, goodwill and intangible assets with indefinite lives
are no longer amortized but are reviewed annually at a minimum for potential impairment by comparing the carrying value to
the fair value of the reporting unit to which they are assigned. Evercom has one reporting unit. Accordingly, Evercom has
ceased goodwill amortization as of the beginning of fiscal 2002. SFAS No. 142 requires that goodwill be tested for
impairment at the reporting unit level upon initial adoption and at least annually thereafter, utilizing a two-step methodology.
The initial step requires Evercom to determine the fair value of its repOlting unit and compare it to the carrying value,
including goodwill of such unit. If the fair value exceeds the carrying value, no impairment loss would be recognized.
However. if the carrying value of the reporting unit exceeds the corresponding fair value, the goodwill may be impaired. The
amount, if any, of the impairment would then be evaluated with the goodwill balance being adjusted to approximate fair
value.
In connection with adopting this standard, Evercom, completed the transitional testing of goodwill in 2002. The results of
this testing indicated that the carrying values of the net assets of Evercom exceeded
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(Continued)
the estimated fail' value of the entity as determined utilizing various valuation techniques, including discounted cash flow and
offers from third parties to acquire equity in Evercom. This is attributable to decreases in forecasted results versus those
previously contemplated. Accordingly, an impairment charge has been recognized as a change in accounting principle as of
the beginning of2002. The impairment charge was $11.8 million on a before- and after-tax basis.
Had SFAS No. 142 been effective at the beginning of2001, the non-amortization provisions would have had the
following effect on the results of the years ended December 31:
2001
2002
2003
$ (662,448) $
Reported net loss
Add back-Goodwill amortization
Add back-Cumulative effect of the change in accounting
principle
Adjusted loss before cumulative effect of the change in
(32,483,290)
$
(13,954,681)
4,296,243
$
(9,658,438)
11,792,000
$ (662,448) $
accounting principle
(20,691,290)
Intangible and other assets consist of the following:
Gross Carrying
Amount
)
Acquired facility contracts
Non-compete agreements
Deferred loan costs
Other assets and intangibles
Deposits
$
Noncurrent portion of commission advances to facilities
Intangible assets
$
17,183,653
100,000
11,414,382
244,104
596,040
96,057
29,634,236
Gross Carrying
Amount
Acquired facility contracts
$
Non-compete agreements
Deferred loan costs
Other assets and intangibles
Acquired intellectual property
Deposits
Noncurrent portion of commission advances to facilities
Intangible assets
$
December 31 1 2002
AcculIlulated
Amortization
December 3 •. 2003
Accumulated
Amortization
19,942,583
100,000
1,732,375
393,988
1,603,605
746,579
243,529
24,762,659
Net
$ 6,812,201
18,889
6,619,742
218,815
596,040
96,057
$ (15,272,492) $ 14,361,744
$ (10,371,452)
(81,111)
(4,794,640)
(25,289)
$ (14,202,948)
(94,444)
(116,903)
(138,125)
$ (14,552,420)
Net
$ 5,739,635
5,556
1,615,472
255,863
1,603,605
746,579
243,529
$ 10,210,239
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
June 30. 2004
Accumulated
Amortization
Gross Carrying
Amount
Net
(Unaudited)
Acquired facility contracts
Non-compete agreements
Deferred loan costs
Acquired intellectual property
Other assets and intangibles
Deposits
Noncurrent pOltion of commission advances to facilities
Intangible assets
$
20,635,738
100,000
1,979,549
1,353,605
548,076
744,002
502,656
25,863,626
;,:;$===~~~~~
$ (15,736,631 )
(100,000)
(298,188)
(246,746)
$ (16,381,565)
$ 4,899,107
1,681,361
1,106,859
548,076
744,002
502,656
$ 9,482,061
Amortization expense for the net canying amount of intangible assets is estimated to be approximately $4.3 million for
fiscal year 2004, $2.7 million for fiscal year 2005, $0.5 million for fiscal year 2006, $0.5 million for fiscal year 2007 and
$0.2 million for fiscal year 2008.
During 2002, Evercom also recorded a $1.5 million impairment loss against goodwill related to the acquisition of
Fortunelinx, Inc., a subsidiary of Evel'com. The recovelY of this goodwill became questionable and an impairment analysis
was performed when Fortunelinx, Inc. lost a significant customer.
There were no impairment charges recognized in 2003.
7.
)
ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31.
2002
June 302 2004
2003
(Unaudited)
Accrued interest
Facility commissions
Accrued dividends on preferred stock
Billing and collection fees
Accrued excise taxes payable
Accrued payroll and bonuses
Deferred revenue
Accrued income taxes
Other
$ 14,297,184
6,669,075
4,464,586
2,639,283
2,530,869
1,540,219
979,136
125,793
2,309,583
$ 35,555,728
$
179,440
6,830,882
2,040,387
4,002,894
2,791,169
2,665,597
18,952
2,152,372
$ 20,681,693
$
233,142
6,798,697
2,132,991
2,992,931
1,358,267
4,110,515
$
2,238,122
19,864,665
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
S.
(Continued)
LONG-TERM DEBT (SEE NOTE 3)
The following is a summalY oflong-term debt:
December31!
2002
June 302 2004
2003
(Unaudited)
Senior Notes
Senior Credit Facility:
Revolving Loan Facility
Term Loan A
$
115,000,000
Term Loan 8
Term Loan Facility
Subordinated Notes
5,990,863
20,750,000
12,000,000
7,280,836
15,916,593
12,000,000
1,667,000
40,407,863
(13,074,270)
27,333,593
1,667,000
36,864,429
( 12,280,836)
24,583,593
36,889,013
Less current portion of long-term debt
$
)
$
$
151,889,013
(115,000,000)
36,889,013
$
$
Senior Notes - On June 27, 1997, Evercom issued $115.0 million of II % senior notes maturing on June 30, 2007 (the
"Senior Notes"). These notes were secured by all of the capital stock of Evercom. Interest on the Senior Notes was due
semiannually. All of Evercom's subsidiaries were fully, unconditionally, jointly and severally liable for the Senior Notes. Of
the Senior Notes, $113.0 million were converted to equity on February 19,2003 due to the reorganization (See Note 3). As a
result of the reorganization all covenant rights of the Senior Noteholders were eliminated and, consequently, the remaining
$2.0 million were re-designated as subordinated notes (the "Subordinated Notes"). In connection with the refinancing of the
Senior Credit Facility on November 4,2003, Evercom paid off $375,000 against the remaining Subordinated Notes.
Senior Credit Facility - The Senior Credit Facility consisted ofa $30.0 million revolving credit facility and a
$36.0 million term loan facility secured by all the assets of Evercom. On November 4, 2003, Evercom completed a
refinancing of the Senior Credit Facility. Evercom used the proceeds from the new Senior Credit Facility (i) to repay all
outstanding obligations on the old Senior Credit Facility, (ii) to repay $375,000 of the Subordinated Notes plus accrued
interest, and (iii) to fund fees and expenses of the transaction. The new senior credit facility (the "New Senior Credit
Facility") consists of a $25.5 million revolving loan (the "New Revolver"), a $22.0 million term loan A ("New Term
Loan A") and a $10.0 million term loan B ("New Term Loan B"). The New Senior Credit Facility is secured by all the assets
of Evel'com, including the stock of its direct and indirect subsidiaries. In connection with the refinancing, Evercom
recognized a loss of$3,452,781 related to the write off of the previously capitalized loan costs and prepayment penalties.
The New Revolver is subject to a borrowing base limitation equal to 85% of Evercom's "eligible receivables" as defined
in the credit agreement. From November 4, 2003 through March 31, 2004, the first $3.0 million of the New Revolver shall
bear interest and be payable monthly at either: (i) index rate, as defined, plus 1.5% or (ii) LlBOR plus 3.5%. After March 31,
2004 through the remaining term, the first $1.5 million of the New Revolver shall bear interest and be payable monthly at
either: (i) index rate, as defined, plus 1.5% or (ii) LlBOR plus 3.5%. The remaining outstanding New Revolver balance shall
bear interest and be payable monthly at either: (i) index rate, as defined, plus 1.0% or (ii) LlBOR plus 3.0% at Evercom's
option, subject to certain parameters defined in the credit agreement. Interest on the New Revolver was 5.4% at
December 31, 2003. Evercom draws from the available credit on the New Revolver
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to cover normal business cash requirements. Repayments on the New Revolver are made when receipts are collected via a
lockbox agreement directly to Evercom's depository account, which is then applied against any outstanding New Revolver
balance. The New Revolver matures in February 2008 and has no scheduled principal payments until maturity. On
December 31, 2003, Evercom had $14.5 million of borrowing availability on the New Revolver. On June 30, 2004, Evercom
had $9.7 million of borrowing availability on the New Revolver. Based on EITF 95-22 "Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a
Lock-Box Arrangement", the outstanding revolver balance as of December 31, 2003 and June 30, 2004 has been classified as
a current liability.
Under the New Revolver, Evercom also has available a $7.5 million sub-facility for letters of credit typically used to
provide collateral for service bonds required by contracts with correctional facilities. As of December 3 1,2003, $5.5 million
of this line had been utilized. Evercom pays 3.0% interest on the amount reselved for collateral on the letters of credit.
The New Term Loan A requires interest to be paid monthly at either: (i) index rate, as defined, plus 2% or (ii) at the
election of the Borrower, LIBOR plus 4%. Interest on the Term Loan A was 5.6% at December 31, 2003. The New Term
Loan A matures in February 2008 and requires quarterly principal repayments of$I,250,000 commencing on December 31,
2003 through December 31, 2007, with the remaining unpaid balance due in February 2008. Additional annual principal
payments are required to the extent that Excess Cash Flow, as defined in the credit agreement, is generated in the preceding
fiscal year as calculated using Evercom's audited financial statements for the applicable fiscal year. The Excess Cash Flow
sweep begins with Evercom's fiscal year ended December 31, 2003, with the New Term Loan A requiring annual repayments
of principal equal to 50% of Evercom's Excess Cash Flow for the applicable fiscal year. A $2,083,407 principal payment was
paid in April 2004 as a result of Excess Cash Flow generated in 2003.
)
The New Term Loan B requires interest to be paid monthly at a fixed rate of 11% per annum. The New Term Loan B
matures on November 4, 2008 and has no scheduled principal repayments until maturity unless Excess Cash Flow, as
defined, exceeds certain minimum thresholds. Such a principal payment on the New Term Loan B will not be required in
2004 as Evercom's 2003 Excess Cash Flow did not exceed these thresholds.
On December 22, 2003, Evercom entered into an agreement to amend the existing credit agreement to increase the New
Term Loan B to $12.0 million. The proceeds were used to purchase certain intellectual property and license from a third party
for $1.6 million plus transaction costs and expenses. Of the purchase price, $250,000 was withheld at closing, pending certain
terms and conditions as set forth in the asset purchase agreement.
Covenants and Other - The New Senior Credit Facility contains financial and operating covenants requiring, among
other items, the maintenance of certain financial ratios, including total debt to EBITDA (as defined in the credit facility) and
EBITDA to fixed charges, in addition to a minimum EBITDA requirement, maximum capital expenditures and maximum
prepaid commissions. Additionally, the New Senior Credit Facility contains various covenants, which, among other things,
limit Evel'com's ability to incur additional indebtedness, restrict Evercom's ability to invest in and divest of assets and restrict
the payments of dividends to shareholders. As of December 31, 2003, Evercom was not in compliance with the maximum
capital expenditure covenant. On April 13, 2004, Evercom and its lenders amended the New Senior Credit Facility to waive
the noncompliance as of December 31,2003. Additionally, as of March 31, 2004, Evercom was not in compliance with the
covenant required by the Senior Credit Facility to deliver audited financial statements within ninety days after the end of the
fiscal year. Evel'com was also not in compliance with the covenant requiring regulatory approval for the New Senior Credit
Facility because one state approval had not been obtained as of March 31, 2004. On April 13, 2004, Evercom and its
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
lenders amended the New Senior Credit Facility to extend the deadline for the delivery of the audited financial statements to
April 16,2004 and to extend the deadline for the regulatory approval to May 31, 2004. On May 27, 2004, Evercom received
regulatory approval as required in the Senior Credit Facility.
At December 31, 2003, the scheduled maturities of long-term debt were as follows:
2004
2005
2006
2007
2008
$
13,074,270
5,000,000
5,000,000
5,333,593
12,000,000
40,407,863
$
9.
INCOME TAXES
A summary of the income tax expense is as follows:
December 31 2
June 30,
2001
2003
~
2004
(U naudited)
Current income tax expense provision:
State
Federal
Total
)
$ 84,550
$ 84,550
$ 6,887
$ 45,537
$
$ 6,887
$ 45,537
$
=
52,385
592,821
645,206
The following is a reconciliation of income tax expense (benefit) reported in the statement of operations at:
December 31 1
2002
2001
2003
JUlie 301 2004
(Unaudited)
Tax (benefit) expense at statutory rates
Effect of state income taxes
Effect of nondeductible goodwill
am0l1ization and impairment
Valuation allowance on deferred tax assets
Loss of NOL deductions and other
adjustments to gross deferred tax assets
Other
$ (4,271,722)
$
(230,108)
$
$
2,608,385
8,565,853
759,953
4,381,468
(555,041)
84,550
(11,041,975)
(105,379)
$
(19,997)
6,887
(209,749)
45,537
$
162,287
(13,679,162)
$
13,195,597
693,314
45,537
1,559,848
34,050
$
(1,138,082)
27,103
645,206
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The tax effects of temporary differences giving rise to deferred income tax assets and (liabilities) were:
December 31.
2002
Reserves for unbillable uncollectible charge backs
Other reserves
Amortization of intangibles
Net operating loss carryfolward
Depreciation
Valuation allowance
Net deferred income tax asset (liability)
$
$
3,832,714
1,318,872
16,852,957
9,446,363
(1,463,498)
(29,987,408)
2003
$
2,821,515
2,049,206
13,598,949
June 3°12004
(Unaudited)
$
(2,161,424)
(16,308,246)
$
2,911,247
3,133,533
12,521,960
(2,096,208)
(16,470,532)
$
Evercom has established a valuation allowance for deferred tax assets primarily as a result of operating losses. Evercom
was unable to determine that it is more likely than not that the deferred tax assets related to this loss will be realized and has
established a valuation allowance for deferred tax assets. Evercom accumulated a federal income tax net operating loss
canyfolward of approximately $27.9 million through December 31, 2002, which was eliminated as a result of the
reorganization in February 2003 (See Note 3), Due to the tax-free reorganization that occurred in February 2003, Evercom
will not be able to utilize the net operating loss carryfOlward accumulated through December 31, 2002.
10.
)
STOCKHOLDERS' EQUITY (SEE NOTE 3)
The following describes the characteristics of stockholders' equity (deficit) subsequent to the Exchange Offer and
Reorganization on FeblUalY 19,2003. All of the old common stock, Senior Preferred Stock, First Preferred Series "A" Stock
and related Warrants were cancelled as a result of the transaction,
Common Stock - At December 31, 2003, 7,500,000 million shares of Common Stock of Evercom are authorized,
5,905,557 shares of Common Stock are issued and outstanding, including 40,000 restricted shares issued to an officer of
Evercom, On December 31, 2003, the incremental compensation expense on the restricted shares issued to the officer was
determined based on the estimated fair value of the Common Stock on the grant date, which resulted in a compensation
charge of $139,940 recorded in the consolidated statement of operations and unearned compensation of $142,260 recorded on
the consolidated balance sheet as of December 31, 2003. For the six months ended June 30, 2004, Evercom recognized
$195,280 as compensation expense related to the resu'icted stock issued to a director. As of June 30, 2004, unearned
compensation on the consolidated balance sheet was $86,920. The restricted shares vest over a three-year period at 25% in
the first year, 45% in the second year and 30% in year three.
Warrants - In February 2003, in connection with the reorganization, warrants to purchase 952,976 shares of Common
Stock were issued to former shareholders of Evercom, Inc. Of this amount, warrants to purchase approximately 2% interest in
Evercom or 114,567 shares of Common Stock were granted at an exercise price of either $0.0 I or $10.00 per share, at the
discretion of each warrant holder. In June of2003, 114,557 of these warrants were exercised, resulting in proceeds of
$67,360. The remaining ten warrants expired.
Warrants to purchase an additional 838,409 shares of Common Stock were issued to the fonner shareholders of Evercom,
Inc. and expire 10 years from the grant date. The exercise prices of the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
remaining outstanding warrants, which exceeded the estimated fair value of the Common Stock at the grant date, are as
follows:
Number of
Warrants
167,683
335,363
335,363
838,409
Total Warrants at December 31, 2003 arid June 30, 2004
Exercise Price
$
$
$
25.57
33.09
39.09
All warrants held prior to February 19,2003 were cancelled in the reorganization.
Options - On May 26, 1998, Evercom's Board of Directors approved the Evercom, Inc. 1998 Stock Option Plan (the
"Old Plan"). The Old Plan provided for the grant of options to purchase shares of Class "A" Common Stock to certain
officers and employees. As a result of the FebrualY 2003 reorganization, all options previously granted nnder the Old Plan
were equitably adjusted and repriced by the Board of Directors to be exercisable into an aggregate of 100 shares of Common
Stock at an exercise price of$IO per share ("Repriced Options"). On February 19,2003, Evercom's Board of Directors
approved the 2002 Evercom Holdings, Inc. Option Plan (the "New Plan"). Under the New Plan additional options to acquire
526,000 shares of Common Stock were granted to celtain officers and employees during the year ended December 31, 2003.
Each option is exercisable for one share of Common Stock at an exercise price of$IO.OO per share. Of these options 307,000
vest over three years ("Time Vested") and 219,000 vest in the event that a "liquidity event" occurs, provided Evercom is
valued in such transaction above certain predetermined levels ("Event Based Vested").
)
In accordance with Financial Interpretation No. 44, ("FIN 44") the Repriced Options and additional Time Vested options
granted to holders of the Repriced Options, a total of267, 100 Time Vested options are considered to be variable options. At
the date of the modification, the estimated fair value of Evercom's Common Stock exceeded the exercise price of each stock
option and as such no compensation expense was recorded at that time. Changes in the estimated fair market value of
Evercom's Common Stock may result in future changes to compensation expense. A total of267,099 Time Vested variable
options were outstanding as of December 31, 2003. As of December 31, 2003, the exercise price exceeded the estimated fair
value of the common stock. Therefore, no compensation expense has been recorded as of December 31,2003. For the six
months ended June 30, 2004, based on the intrinsic value of these options, Evercom recorded $835,913 of compensation
expense. As of June 30, 2004, unearned compensation on the balance sheet related to these options was $464,859.
All of the Event Based Vested options are considered variable options and compensation expense will be measured and
recognized only when the likelihood of the triggering event becomes probable. Accordingly, no compensation expense has
been recognized as of December 31, 2003 related to the Event Based Vested options.
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The following information summarizes the shares subject to options:
Old Pit",
Weighted Average Exercise
Price per Share
Number of Shares
Options outstanding - beginning of year
Granted
Expired and forfeited
Options outstanding - end of year
2002
4,646
5,249
3,046
2,525
(4,646)
~)
~)
4,646
5,249
Options exercisable - end of year
3,949
=
2003
2002
2001
$ 2,000
$ 2,000
$ 2,534
1,385
2,000
$ 2,009
~
2003
(2,000)
2,000
$ 2,000
$
=1,815
=
Number of
Weighted Average
Exercise Price
Shares
per Share
2003
2003
Options outstanding - beginning of year
Granted
Expired and forfeited
Options outstanding - end of year
$
526,100
(1)
526,099
Options exercisable - end of year
)
to
to
$
10
18,750
The following table summarizes information about options outstanding at December 31, 2003:
Weighted
Number
Outstanding
Exercise Price
$10
11.
526,099
Average
Remaining
Contractual Life
9.14 years
RELATED-PARTY TRANSACTIONS
One of Evercom's subsidiaries leased office space from a stockholder under a lease with total payments in 2001, 2002,
2003 and for the six months ended June 30, 2003 and 2004 of $122,436, $144,240, $146,880, $76,072 (unaudited) and
$78,704 (unaudited), respectively. The lease term extends through December 31,2006, at which time Evercom has an option
to extend the lease for an additional five years.
During 2002, Evercom sold telephone equipment with a net book value of $0 and inventory with a value of $76,200 to a
stockholder in exchange for forgiveness of the stockholder's accrued dividends on such stockholder's preferred stock in the
amount of $95,000.
12.
BENEFIT PLAN
Evercom's subsidiaries sponsor 401(k) savings plans for the benefit of eligible full-time employees, which are qualified
benefit plans in accordance with the Employee Retirement Income Security Act
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EVERCOM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
("ERISA"). Employees participating in the plan can generally make contributions to the plan of up to 15% of their
compensation. The plans provide for discretionary matching contributions by Evercom of up to 50% of an eligible
employee's contribution. Total plan expenses were $272,350, $278,753, $228,750, $168,790 (unaudited) and $158,824
(unaudited) for the years ended December 31, 200 I, 2002, 2003 and for the six months ended June 30, 2003 and 2004,
respectively.
13.
COMMITMENTS AND CONTINGENCIES
Operating Leases - Evercom leases office furniture, office space, vehicles and other equipment under various operating
lease agreements. Rent expense under these operating lease agreements was $1,178,218, $1,233,571, $1,064,311, $540,918
(unaudited) and $518,915 (unaudited) the years ended December 31, 2001, 2002, 2003 and for the six months ended June 30,
2003 and 2004, respectively. Minimum future rental payments under noncancelable operating leases for each of the next five
years ending December 31 and thereafter and in the aggregate are:
Yeal' Ending
December 31 1
2004
2005
2006
2007
2008
$
$
)
715,629
556,658
500,074
319,728
159,565
2,251,654
Employment Agreements - As of December 31, 2003, Evercom had entered into an employment agreement with two
key members of management, which provided for minimum compensation levels and incentive bonuses along with
provisions for termination of benefits in certain circumstances.
Litigation - Evercom is subject to various legal proceedings and claims that arise in the ordinary course of business
operations. In the opinion of management, the amount of liability, if any, with respect to these actions would not materially
affect the financial position, results of operations or cash flows of Evercom.
Class Action Lawsuits - Evercom, Inc., Evercom Systems, Inc. andlor some of the predecessors in interest to Evercom
Systems, Inc., are parties to several lawsuits brought by prisoners, and family members of prisoners, in various jails and
prisons in several states. The causes of action valY among the cases, but common allegations are antitrust violations, unfair
trade practices, constitutional claims such as due process and equal protection, and claims under the Telecommunication Act.
The lawsuits seek actual damages and injunctive relief, as well as punitive damages, statutOlY damages under various state
statutes, and attorneys' fees for the plaintiffs' counsel. Each lawsuit also sought certification as a class action, with all
persons who are recipients of, andlor who have been billed for, telephone calls initiated by inmates confined in jails, prisons
or other correctional facilities as the plaintiff class. Evercom does not believe that any ofthese suits have merit and is
vigorously defending against each of them. In the opinion of management, we are unable to determine the possible outcome
or to estimate the amount or range, if any, of potential loss if the outcome is unfavorable to Evercom. Therefore, no amount
has been recorded in the consolidated financial statements.
Evercom has received notice from four parties that certain features of Evercom's call processing technology or certain
equipment used in certain facilities may infringe upon such parties' patents. Should Evercom's call processor, any material
feature or certain equipment purchased thereof be determined to violate applicable patents, Evercom would be required to
cease using these features or obtain appropriate
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
licenses for the use of such technology. In the opinion of management, we are unable to determine the possible outcome or to
estimate the amount or range, if any, of potelltialloss if the outcome is unfavorable to Evercom. Therefore, no amount has
been recorded in the consolidated financial statements.
14.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to SFAS No. 107, Disclosures About Fair Value o/Financial instruments, Evel'com is required to disclose an
estimate of the fair value of Evercom's financial instruments. Evercom believes that the cRrlying amounts of cash and cash
equivalents, accounts receivable and accounts payable are a reasonable estimate of their fair value because of the short-term
maturities of such instruments. Because the interest rates of the amounts borrowed under the Term Loan Facility, the Term
Loan A and the Revolving Loan Credit are variable, their fair values approximate their canying values. The Term Loan B has
a fixed rate of 11 %, however the fair value of the amounts borrowed under the Term Loan B approximates the canying value
as of December 31, 2003 since Evercom entered this armngement in November 2003.
The fair value of the Subordinated Notes is based on their quoted market value. The following is a summary of the
canying value of Evercom's debt instlUments:
2002
2003
Historical
Carrl:ing Value
)
Senior Notes
Subordinated Notes
Senior Credit Facility
Revolving Loan Facility
Tetm Loan A
Term Loan B
Term Loan Facility
15.
Historical
Carrl:ing Valuc
Fair Valuc
$
$
$
1,667,000
1,667,000
5,990,863
20,750,000
12,000,000
5,990,863
20,750,000
12,000,000
FalrValuc
115,000,000
$ 46,000,000
36,889,013
36,889,013
SUBSEQUENT EVENT
In March 2004, Evercom entered into a non-binding letter of intent with a third patty who is interested in acquiring 100%
of Evel'com's stock.
On July 10, 2004, Evereom entered into an agreement and plan of merger with a third party to acquire 100% of
Evercom's stock.
******
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$154,000,000
OFFER TO EXCHANGE
SECURUS
11 % Second-priority Senior Secured Notes Due 2011
PROSPECTUS
,2005
Dealer Prospectus Delivery Obligation
Until
• • all dealers that effect transactions in these securities, whether or not pmticipating in this
offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or subscriptions.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnijiclliioll of Directors ami Officers
Indemnification Under the Delaware General Corporation Law
Section 145 of the Delaware General Corporation Law, as amended, (the "DGCL"), authorizes a Delaware corporation to
indemnify any person who was or is a party, or is threatened to be made a patty, to any threatened, pending or completed
actlon, suit 01' proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or
was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against
expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by
the person in connection with such action, suit or proceeding, if the person acted in good faith and in a manner the person
reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe the person's conduct was unlawful.
)
Section 145 further authorizes a Delaware corporation to indemnify any person serving in any such capacity who was or
is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the
corporation to procure ajudgment in its favor, against expenses (including attorneys' fees) actually and reasonably incurred
in connection with the defense or settlement of such action or suit, if the person acted in good faith and in a manner the
person reasonably believed to be in 01' not opposed to the best interests of the corporation, except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the
corporation unless, and only to the extent that, the Delaware Comt of Chancery 01' such other court in which such action or
suit was brought shall determine upon application that, despite the adjudication ofliability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper. To the extent that a present or former director or officer of a corporation has
been successful on the merits or otherwise in defense of any action, suit or proceeding referred to above, or in defense of any
claim, issue or matter, such person shall be indemnified against expenses, including attorneys' fees, actually and reasonably
incurred by such person. Indemnity is mandatory to the extent a claim, issue or matter has been successfully defended.
The Delaware General Corporation Law also allows a corporation to provide for the elimination 01' limit of the personal
liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of a director (1) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (3) for unlawful payments of dividends or unlawful stock purchases or
redemptions, or (4) for any transaction from which the director derived an improper personal benefit. The certificate of
incorporation of Securus contains these limitations on the personal liability of directors. These provisions will not limit the
liability of directors or officers under the federal securities laws of the United States.
Article VII of the articles of incorporation of Securus are substantially identical to the provisions of Section 145 of the
Delaware General Corporation Law.
Article VII A of the Company's articles of incorporation provides that the Company shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending 01' completed action, suit or proceeding, whether
civil, criminal, administrative 01' investigative, by reason of the fact that he is 01' was a director, officer, agent or employee of
the Company, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonable incurred by him in connection with such action, suit or proceeding to the fullest extent and in the manner set forth
in and permitted by the General Corporation Law.
Article VII B of the Company's articles of incorporation provides that the Company shall indemnify any person who was
or is a party 01' is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by 01' in the right of the Company to procure a judgment in its favor by reason
of the fact that he is or was a director,
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officer, agent or employee of the Company. or is or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, pat1nel'ship. joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonable incurred by him in connection with
such action, suit or proceeding to the fullest extent and in the matter set fmth in and permitted by the General Corporation
Law.
Article VII G of the Company's attieles of incorporation gives the Company the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership. joint venture,
trust or other enterprise against any liability assetted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the
provisions of Article VII or under Section 145 of the General Corporation Law or any other provision of law.
The Company has purchased and maintains insurance under which, subject to the limitations of such policies, coverage is
provided to its directors and officers against loss arising from claims made by reason of breach of fiduciary duty or other
wrongful acts as a director or officer.
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Exhibits ami Fifl(lIIciai Statement Schetillies
2.1
Agreement and Plan of Merger by and among TZ Holdings, Inc., New Mustang Acquisition, Inc.,
Evercom Holdings, Inc. and such individual designated by Evercom Holdings, Inc. who joins the
Agreement and Plan of Merger <as Indemnification Representative, solely with respect to
Sections 1.10,6.4,7.11,9.2, 11.5, 11.6 and 12.14), dated as of July 10,2004.
)
3.1
Amended and Restated Certificate of Incorporation of Securus Technologies, Inc., filed on
August 6, 2004, as amended on September 21, 2004
3.2
Amended and Restated Bylaws of Securus Technologies, Inc.
3.3
Certificate ofincOlporation ofT-Netix, Inc., filed on September 7, 2001, as amended
3.4
Bylaws ofT-Netix, Inc.
3.5
Articles ofincorporation of Tel equip Labs, Inc., filed on November 9,1987, as amended
3.6
Amended and Restated Bylaws of Telequip Labs, Inc.
3.7
Articles of Incorporation of T-NETIX Telecommunications, Inc., filed on Februaty II, 1988, as
amended
3.8
Bylaws ofT-NETIX Telecommunications, Inc.
3.9
Articles of Incorporation of SpeakEZ, Inc., Inc., filed on February 6, 1987, as amended
3.10
Bylaws of SpeakEZ, Inc.
3.11
ALiicles of Incorporation ofT-Netix Monitoring Corporation, filed on July 10, 1990, as amended
3.12
Bylaws ofT-Netix Monitoring Corporation
3.13
Certificate of Incorporation of Evercom Holdings, Inc., filed on November 25,2002, as amended
3.14
Bylaws of Evercom Holdings, Inc.
3.15
Amended and Restated Certificate of Incorporation of Evercom, Inc., filed on February 19,2003
3.16
Bylaws of Evercom, Inc.
3.17
Certificate of Incorporation of Evercom Systems, Inc., filed on August 22, 1997, as amended
3.18
3.19
Certificate of Incorporation of Evercotlnect, Inc., filed on September 8, 1997, as amended
3.20
Bylaws of Everconnect, Inc.
4.1
Form of II % Second-priority Senior Secured Notes due 200 I
4.2
Bylaws of Evercom Systems, Inc.
Indenture, dated as of September 9, 2004, by and among SecUL'us, 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.
)
4.3
Registration Rights Agreement, dated August 18, 2004, by and among SecuLUS Technologies, Inc.,
Credit Suisse First Boston LLC and Morgan Stanley & Co. IncOLporated.
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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, TNetix 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.
4.5
Patent Security Agreement, dated September 9, 2004, by and among SecUl'us Technologies, Inc., TNetix, 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.
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., Evel'com, Inc.,
EverConnect, Inc., a Delaware corporation, Evercom Systems, Inc., a Delaware corporation and The
Bank of New York Trust Company, N.A.
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4.7
Trademark Security Agreement, dated September 9, 2004, by and among SeculUs 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., Evercom, Inc.,
EverConnect, Inc., a Delaware corporation, Evercom Systems, Inc., a Delaware corporation and
The Bank of New York TlUSt Company, N.A.
4.8
Pledge Agreement, dated September 9, 2004, by and among Securus Technologies, Inc., T-Netix,
Inc., Evercom Holdings, Inc., Evercorn, Inc., and The Bank of New York Trust Company, N.A.
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.
4.10
Intercreditor Agreement, dated as of September 9, 2004, by and among Laminar Direct Capital,
L.P., a Delaware limited partnership, Securus, T-Netix, Inc., a Delaware corporation, T-NETIX
Telecommunications Services, Inc., a Texas corporation, T-Netix Monitoring 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.
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. listed on Schedule I hereto.
5.1
Opinion of White &Case LLP
10.1
Stockholders Agreement, dated September 20,2004, by and among Securus Technologies, Inc.,
H.J.G.-TNetix, 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.
10.2
Restricted Stock Purchase Agreement, dated as of September 9, 2004, between Securus
Technologies, Inc. and Richard Falcone.
10.3
Amended and Restated ConSUlting Services Agreement, dated as of September 9, 2004, by and
between T-Netix, Inc., Evercom Systems, Inc. and H.J.G. Capital, LLC.
10.4
Amended and Restated Professional Services Agreement, dated as of September 9, 2004, by and
between T-Netix, Inc., Evercom Systems, Inc., and H.J.G. Capital, LLC.
12
Computation of Ratio of Earnings to Fixed Charges
21
Schedule of Subsidiaries of Securus
23.1
Consent of KPMG LLP
23.2
Consent of Deloitte & Touche LLP
23.3
Consent of White & Case LLP (included in exhibit 5.1)
24.1
Powers of Attorney (included on signature pages hereto)
25
Statement of Eligibility of Trustee on Form T-I of Bank of New York as Trustee.
99.1
Form of Letter of Transmittal
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99.2
Notice of Guaranteed Delivery
99.3
Letter to Clients
99.4
Letter to Registered Holders
99.5
Form ofinstructions to Registered Holder from Beneficial Owner
99.6
Form of Exchange Agent Agreement.
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(b) Financial Statement Schedules.
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Item 22.
Ulldertakillgs
(a) Each of the undersigned registrants hereby undettakes:
(1) To file, during any period in which offers 01' sales are being made, a post-effective amendment to this registration
statement:
(i) to include any prospectus required by Section lO(a)(3) of the Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means ofa post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
)
(b) Each of the undersigned registrants hereby undertakes to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 1O(b), II 01' 13 of this S-4, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the registration statement through the date of responding to
the request.
(c) Each of the undersigned registrants hereby undertakes to supply by means of a post-effective amendment all
information concerning a transaction, and the company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) Insofar as indemnification for liabilities arising under Securities Act of 1933 may be permitted to directors, officers
and controlling persons of each of the registrants pursuant to the foregoing provisions, or othelwise, the registrants have been
advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by either of the registrants of expenses incurred 01' paid by a director, officer or
controlling person of either of the registrants in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being registered, each of the registrants will, unless in
the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly caused this registmtion statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of Dallas, State of Texas, on May 10,2005.
SECURUS TECHNOLOGIES, INC.
/s/ Richard Falcone
Richard Falcone, Chief Executive Officer
POWER OF ATTORNEY
The undersigned directors and officers ofSecurus Technologies, Inc. hereby appoint each of Richard Falcone and Keith
Kelson as attorney-in-fact for the undersigned, with full power of substitution for, and in the name, place and stead of the
undersigned, to sign and file with the Securities and Exchange Commission under the Securities Act, any and all amendments
(including post - effective amendments) and exhibits to this registration statement on Form S-4 and any and all applications
and other documents to be filed with the Securities and Exchange Commission pertaining to the registration of the securities
covered hereby, with full power and authority to do and perform any and all acts and things whatsoever requisite and
necessary or desirable, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
)
Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in
the capacities and as of the dates indicated.
Signature
Title
Date
President, Chief Executive Officer
and Director
May 10,
2005
Chief Financial Officer
May II,
2005
Chairman and Director
May II,
2005
Director
May II,
2005
Director
May II,
2005
Dil'ector
May II,
2005
Oh'ector
May II,
2005
Director
May II,
2005
Principal Executive Officer:
/s/ Richard Falcone
Richard Falcone
Principal Financial and Accounting q{ficer:
/s/ Keith S. Kelson
Keith S. Kelson
/s/ Richard E. Cree
Richard E. Cree
/s/ Sami Mnaymneh
Sami Mnaymneh
/s/ Tony Tamer
Tony Tamer
/s/ Brian Schwartz
Brian Schwartz
/s/ Douglas Berman
Douglas Berman
)
/s/ Lewis Schoenwetter
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Signature
Title
Date
lsi James Neal Thomas
Dil'ector
May 11,
2005
James Neal Thomas
lsi Jack McCal1hy
Director
Jack McCarthy
May II,
2005
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EXHIBIT INDEX
2.1
Agreement and Plan of Merger by and among TZ Holdings, Inc., New Mustang Acquisition, Inc.,
Evercom Holdings, Inc. and such individual designated by Evercom Holdings, Inc. who joins the
Agreement and Plan of Merger (as Indemnification Representative, solely with respect to
Sections 1.10,6.4,7.11,9.2, 11.5, 11.6 and 12.14), dated as of July 10,2004.
3.1
Amended and Restated Certificate of Incorporation of Securus Technologies, Inc., filed on
August 6, 2004, as amended on September 21, 2004
3.2
Amended and Restated Bylaws of Securus Technologies, Inc.
3.3
Certificate of Incorporation ofT-Netix, Inc., filed on September 7, 2001, as amended
3.4
Bylaws ofT-Netix, Inc,
3.5
Articles of Incorporation of Tel equip Labs, Inc" filed on November 9, 1987, as amended
3.6
Amended and Restated Bylaws of Telequip Labs, Inc,
3.7
Articles of Incorporation ofT-NETIX Telecommunications, Inc" filed on February II, 1988, as
amended
3.8
Bylaws ofT-NETIX Telecommunications, Inc,
3.9
Articles ofincorporation of SpeakEZ, Inc" Inc" filed on February 6, 1987, as amended
3.10
Bylaws of SpeakEZ, Inc,
3.11
Aliicles of Incorporation ofT-Netix Monitoring Corporation, filed on July 10, 1990, as amended
3.12
Bylaws ofT-Netix Monitoring Corporation
3.13
Certificate of Incorporation of Evercom Holdings, Inc" filed on November 25, 2002, as amended
3.14
Bylaws of Evercom Holdings, Inc,
3.15
Amended and Restated Certificate of Incorporation of Evercom, Inc" filed on February 19,2003
3.16
Bylaws of Evercom, Inc.
3.17
Certificate ofincorporation of Evercom Systems, Inc" filed on August 22, 1997, as amended
3.18
3.19
Bylaws of Evercom Systems, Inc.
Certificate of Incorporation of Everconnect, Inc., filed on September 8,1997, as amended
3.20
Bylaws of Everconnect, Inc.
4.1
Form of II % Second-priority Senior Secured Notes due 2001
4.2
Indentlll'e, dated as of September 9, 2004, by and among SecUl'us, T-Netix, Inc" a Delaware
cOlporation, 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, Evel'com Systems, Inc., a Delaware corporation, and The Bank of New York Trust
Company, N,A,
4.3
Registration Rights Agreement, dated August 18, 2004, by and among Securus Technologies, Inc"
Credit Suisse First Boston LLC and Morgan Stanley & Co. Incorporated,
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4.4
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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, TNetix 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.
4.5
Patent Security Agreement, dated September 9, 2004, by and among SecUl'us 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., Evercom, Inc.,
EverConnect, Inc., a Delaware corporation, Evercom Systems, Inc., a Delaware corporation and The
Bank of New York Trust Company, N.A.
4.6
Copyright Security Agreement, dated September 9,2004, by and among SecUl'us 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., Evercom, Inc.,
EverConnect, Inc., a Delaware corporation, Evercom Systems, Inc., a Delaware corporation and The
Bank of New York Trust Company, N.A.
)
.)
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Table of Contents
)
4.7
Trademark Security Agreement, dated September 9, 2004, by and among SeculUs 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., Evercom, Inc.,
EverConnect, Inc., a Delaware corporation, Evel'com Systems, Inc., a Delaware corporation and
The Bank of New York Tiust Company, N.A.
)
..
)
4.8
Pledge Agreement, dated September 9, 2004, by and among Securus Technologies, Inc., T-Netix,
Inc., Evercom Holdings, Inc., Evercom, Inc., and The Bank of New York Trust Company, N.A.
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.
4.10
Intercreditor Agreement, dated as of September 9, 2004, by and among Laminar Direct Capital,
L.P., a Delaware limited partnership. SeculUs, T-Netix, Inc., a Delaware corporation, T-NETIX
Telecommunications Services, Inc., a Texas corporation, T-Netix Monitoring 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.
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. listed on Schedule I hereto.
5.1
Opinion of White &Case LLP
10.1
Stockholders Agreement, dated September 20, 2004, by and among Securus Technologies, Inc.,
H.I.G.-TNetix, 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.
10.2
Restricted Stock Purchase Agreement, dated as of September 9, 2004, between Securus
Technologies, Inc. and Richard Falcone.
10.3
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.
10.4
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.
12
Computation of Ratio of Earnings to Fixed Charges
21
Schedule of Subsidiaries of Securus
23.1
Consent of KPMG LLP
23.2
Consent of Deloitte & Touche LLP
23.3
Consent of White & Case LLP (included in exhibit 5.1)
24.1
Powers of Attorney (included on signature pages hereto)
25
Statement of Eligibility of Trustee on Form T-I of Bank of New York as Trustee.
99.1
Fonn of Letter of Transmittal
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99.2
Notice of Guaranteed DelivClY
99.3
Letter to Clients
99.4
Letter to Registered Holders
99.5
Form ofinstructions to Registered Holder from Beneficial Owner
99.6
Form of Exchallge Agent Agreement.
)
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Page 1 of 104
10-K 1 g00538elOvk.htm SECURUS TECHNOLOGIES, INC.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORMIO-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
or
o
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 inits charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
20-0673095
(I.R.S. Employer
Identification Number)
14651 Dallas Parkway, Suite 600
Dallas, Texas 75254-8815
(972) 277-0300
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
11 % Second-priority Senior Secured Notes due 2011
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
o No ffil
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) ofthe Act.
Yes 0 No ffil
Indicate by check mark whether the registrant (I) 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 ffil No 0
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 1O-K. ffil
Indicate by check mark whether the registrant is a large accelerated filer, 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):
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Large accelerated filer 0 Accelerated filer 0 Non-accelerated filer I&l
Indicate by check mark whether the registrant is a shell company <as defined in Rule 12b-2 of the Act) Yes 0 No I&l
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, ofSecurus Technologies, Inc.
Shares outstanding of each of the registrant's classes of common stock:
Class
Common stock
Class B Common stock
Outstanding at March 1,2006
543,859.65 shares
53,496.76 shares
Documents Incorporated By Reference
None.
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TABLE OF CONTENTS
PA.RTI
ITEM 1. BUSINESS
ITEM I A. RISK F ACTQRS
ITEM lB. UNRESOLVED STAFF CQMMENTS
3
3
15
25
25
1TE1\12.PRo!'ERTIES
JTEM} ..LEGAL.!'Ro.CEEDJ:NGS
1TEMA...SJJ.B.MIS.SIONOEMAITERS.TO.A. .VO.TEOLSECURlTYJ:10LDERS
26
26
I'ARrIl
27
ITEM 5. MARKET FOR REGISTRANT'S CQMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
ITEM 6. SELECTED FINANCIAL INFQRMATION AND OTHER DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIQN AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATNE AND QUALITATNE DISCLOSURE ABOUT MARI(ET IUSK
27
28
30
43
44
!TEM.8.• cONsOLIDATEDEJ:NANC!ALSTATEM!IN.Ts
ITEM9 . cHI>.NGES.J:N.ANDDISAGREEMENTs. 'W!T!:I.ACCOlJJ'lTANISON AccOJJNTJ:NGAND
HNAN.C!.AI".PIscWsIJRE
LTE1L9.A,-<::!lN'IROLll AN]) PRo.<2EmJKUs
!TEM_9B ..!lTliE.RLNEORMATIO:N
74
74
74
f.A.RT.m
75
ITEM 10. MANAGEMENT
ITEM 11. EXECUTNE CQMPENSATION
75
78
JTEM 12 . . SEC.JJR!TYO'WNERSH!l'.OFCERTAillHEl'IEHCIAJ<o'WNERS AND.MA:NAGEMENT
JTEM. 13...CERTAJ:N..RELATIONSH!!'S AND. RULATED..!'ARTY..TRANSACTlol'IS.
ITEM l'h...l'RlNcJl'ALj),ccQUNTAl'IT..FEE.S.Al'ID. SERV!CE.S
80
82
PARTlY.
86
JTE.MJ5,.EXJ:!lmT~'LA.:N!2EINAJ'lJ.;!AL.STATEMENTSCBED]J.LES
86
85
Code of Ethics
Subsidiaries
Section 302 CEQ Certification
Section 302 CFO Certification
S~Q!iQn2Q§CE.OJ:::~t1i!lc.ati9J:!
S.«lltll!!..2.o.§..CI'O.Cetlillg:;!.ll!!
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PART I
ITEM 1. BUSINESS
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. We estimate that, as ofDecember 31, 2005, we:
derived direct and indirect revenues from approximately 3,100 correctional facilities in the United States and
Canada; and
•
processed over 15 million calls per month; and
Our business consists of installing, operating, servicing and maintaining sophisticated call processing systems in
correctional facilities and providing related services. We generally enter into multi-year agreements (generally three to five
years) directly with the correctional facilities in which we selve as the exclusive provider oftelecommunications services to
inmates. In exchange for the exclusive service rights, we typically pay a negotiated commission to the correctional facility
generally based upon revenues generated by actual inmate telephone use. In addition, on larger contracts we have typically
partnered with regional bell operating companies, or RBOCs, local exchange carriers, or LECs, and interexchange carriers, or
IKCs, for which we have provided our equipment and back office support including validation and billing and collections
services, and charged 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.
The inmate telecommunications industry requires highly specialized systems and related services in order to address the
unique needs of the corrections industry. Security and public safety concerns require that correctional facilities have the
ability to control inmate access to telephones and certain telephone numbers andlo monitor inmate telephone activity. In
addition, concerns regarding fraud and the credit quality ofthe parties billed for inmate telephone usage have led to the
development of billing and validation systems and procedures unique to this industry. Inmate telecommunications services in
the United States are operated by a large and diverse group of service providers, including RBOCs, LECs and IXCs, such as
AT&T/SBC, VerizonlMCI, and Sprint and independent public pay telephone and inmate telephone companies.
We estimate that the inmate telecommunications market opportunity for city, county, state and federal correctional
facilities in the United States is approximately $1.7 billion. We estimate that the total direct inmate telecommunications
market, excluding intra-industry services, is approximately $1.4 billion.
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.
For the year ended December 31, 2005, our revenues were $377.2 million, of which approximately 80% represented direct
call provisioning to correctional facilities and 20% represented the provision of solutions, telecommunications and billing
services to RBOC, LEC and IXC partuers.
We were incorporated in Delaware on January 12,2004. We maintain a web site with the address www.securustech.net.
We are not including the informatiollcontained on our web site as a part of, or incorporating it by reference into, this Annual
Report on Form 10-K.
Industry Overview
The corrections industry has experienced sustained growth over the last decade as a result of societal and political trends.
Anti-crime legislation, limitations on parole, and spending authorizations for crime prevention and construction of additional
correctional facilities have contributed to this industry growth.
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The United States has one ofthe highest incarceration rates of any country in the world. The U.S. Department of Justice
estimates that as of June 30, 2004, there were just over 2.1 million inmates housed in U,S. correctional facilities, or
approximately one inmate for every 140 U.S. residents. Of this total, apprpximately two-thirds were housed in federal and
state prisons and approximately one-third was housed in city and county correctional facilities.
According to U.S. Department of Justice statistics, the imnate population in federal and state prisons, which generally
house inmates for longer terms than city and county facilities, increased from approximately 1.2 million at December 31,
1995 to approximately 1.4 million at June 30, 2004, representing an average annual growth rate of approximately 1.7%. The
inmate population in city and county facilities, which generally house inmates for tenns of one year or less, increased from
approximately 500,000 at December 31,1995 to approximately 700,000 at June 30, 2004, representing an average annual
growth rate of approximately 3.8%.
The inmate telecommunications industry requires specialized telecommunications systems and related services. Security
and public safety concerns associated with imnate telephone use require that correctional facilities have the ability to control
inmate access to telephones and to certain telephone numbers and to monitor inmate telephone activity. In addition, concerns
regarding fraud and the credit quality of the parties billed for imnate telephone usage have also led to the development of
systems and procedures unique to this industry.
Within the inmate telecommunications industry, companies compete for the right to serve as the exclusive provider of
inmate calling services within a particular correctional facility. Contracts may be awarded on a facility-by-facility basis, such
as for most city or county correctional systems, which generally include small and medium-sized facilities, or system-wide,
such as for most state and the federal prison systems. Generally, contracts for federal facilities and state systems are awarded
pursuant to a competitive bidding process, while contracts for city and county facilities are awarded both through competitive
bidding and negotiations with'a single party. Contracts generally have multi-year terms and typically contain renewal options.
As part of the service contract, the service provider generally installs, operates, and maintains all inmate telecommunications
equipment. In exchange for the exclusive contract rights, the service provider pays a commission to the operator of the
correctional facility based upon inmate telephone use. These commissions have historically been used by the facilities to
support their law enforcement activities,
Competition
In the inmate telecommunications business, we compete with num~rous independent providers of inmate telephone
systems, as well as RBOCs, LECs, and IXCs such as AT&T/SBC, VerizonIMCI and Sprint. Many of our competitors are
larger, better capitalized and have significantly greater financial resources than we have. We believe that the principal
competitive factors in the inmate telecommunications industry are system features and functionality, system reliability and
service, the apility to customize inmate call processing systems to the specific needs of the particular correctional facility,
relationships with correctional facilities, rates of commissions paid to the correctional facilities, end-user rates, the ability to
identify and manage credit risks and bad debt and calling rates. We seek to compete for business on local, county, state and
federal levels, and in privately managed correctional facilities.
Historically, federal and state correctional facilities, which are generally bid on a system-wide basis, have been served by
RBOCs, large LECs and IXCs, which are able to leverage their brand and network infrastructure to serve these large, highvolume customers through sub-contracting with independent providers for their platform and back office operations. These
same service providers, however, have generally not focused to the saI;lle degree on the smaller city and county correctional
systems. Because of the variance in the level of service reqnired by these relatively small facilities, service providers must
maintain a more extensive service infrastructure in order to compete within this portion of the corrections industry, Due to
greater costs associated with serving smaller facilities and their lower volume of telecommunications traffic, we believe that
large service providers have historically found the smaller facilities less attractive to serve. As a result, a significant portion
of city and county correctional facilities are served by independent inmate telephone and public pay telephone companies.
We believe that the market for city and county correctional facilities is fragmented and is occupied by a number of competing
service providers,
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In the first quarter of 2005, large industry participants Verizon and AT&T communicated plans to exit the inmate
telecommunications sector. 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 telecommnnications carriers exiting the direct inmate telecommunications business. Both Verizon and AT&T
subsequently sold their inmate telecommunications business 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.
With the departure of these large carriers from the imnate telecommunications market, which represents a dramatic
industry change, we believe the independent carriers, like Securus, will begin serving more of the federal and state market on
a direct basis. Accordingly, revenues from wholesale services to the RBOCs and IXCs are expected to continue to decline.
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 ofimnate call processing systems and other corrections related products
(including our own telecommunications service provider customers) that market their products to our same customer base.
Primary Sources of Revenues
The following chart summarizes the primary sources of our revenues for the year ended December 31, 2005.
% of Total
Revenue Source
Direct Call
Revenues
Direct call provisioning services through multi-year contracts directly
to local correctional facilities as well as large county jails and state
departments of corrections facilities.
13%
Solutions and billing services (validation, fraud management and
billing and collection services) to third parties including some of the
world's largest communication service providers.
7%
Telecommunications services (equipment, security enhanced call
processing, validation and customer service and support) to
corrections facilities through contracts with some of the world's
leading communication service providers, including AT&T/SBC and
Sprint.
Provisioning
Solutions and
Billing Services
Telecommunications
Services
Description
80%
Direct Call Provisioning
We provide inmate telecommunications services directly as a state certificated telecommunications provider to
correctional facilities. In a typical arrangement, we operate under a site-specific, exclusive contract, generally for a period of
three to five years. We provide the equipment, security-enhanced call processing, validation, and customer service and
support directly to the facility. We then bill the calls on the billed party's LEC bill or, in some cases, using the services of
third party aggregators. Direct call provisioning revenues are substantially higher than that of our telecommunications
services because we receive the entire retail value of the collect call. In our direct call provisioning business~ we are
responsible for customer commissions, line charges and other operating costs, including billing and bad debt costs.
Consequently our gross profit dollars are higher but our gross margins are lower as compared to our telecommunications
services and solutions businesses.
Solutions
Our solutions business consists of offering inmate telecommunications products and services, including validation, bad
debt management and billing services, to RBOCs, LECs, IXCs and others to support their telecommunications contracts with
larger county, state and federal correctional facilities. In
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this business, we enter into either long-tenn or evergreen contracts with the RBOCs, LEes and IXCs, pursuant to which we
will tYpically purchase accounts receivable generated from calls placed by inmates in correctional facilities and accept
responsibility for call validation, uncollectible accounts and billing and collections costs, with no recourse to the customer.
These purchased receivables are processed and validated through our risk management system prior to allowing the call to be
completed and are also typically processed through our proprietary systems and billed through LECs.
Our revenues from the solutions service equal the difference between the face value of the receivables purchased and the
amount we pay the customer for the discounted accounts receivable. Because our revenues associated with the 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 other direct sales charges, but bear the risk of unbillable and uncollectible accounts receivable. In light ofthe
recent industry trend oflarge dominant industry telecommunications carriers exiting the business, we anticipate the continued
decline of revenues generated from the solutions services business.
Telecommunications Services
In our telecommunications services business, we have typically partnered with RBOCs, LECs and IXCs on larger
contracts where the working capital requirements to win the contract were significant. For example, some of the larger county
and state departments of corrections inmate telecommunications contracts often require multi-million dollar up-front
payments, surety bonds and/or guaranteed commissions. In such cases, we provide at our expense some or all of our
equipment, tecimology, security enhanced call processing, call validation and other services and/or customer service through
the provider, rather than directly to the facility. Our telecommunications service customer does the billing and wc either share
the revenucs or receive a prescribed fee from them for each call completed, but have no exposure to bad debt. We do,
however, incur typical capital expenditures related to installing our equipment and technology at the corrections facility. We
receive additional fces for validating the phone numbers dialed by inmates, digital recording systems, voice security and
other services we provide. By partnering with some of the largest industry participants on capital intensive, larger contracts,
we inc-pease our likelihood of participating in the contract, which increases our market penetration, leverages our
infrastructure and generates additional income. In light of the recent industry trend oflarge dominant industry
telecommunications carriers exiting the business, we anticipate the continued decline of revenues generated from the
telecommunications services business.
Eqllipment Sales
In addition to our direct ca1l provisioning, telecommunications services and solutions businesses, we also sell our
products, including our inmate calling applications and facility management products, to a limited number of
telecommunications service provider customers. We elect to sell these products and services directly to the service providers
when we do not have the opportunity to provide direct call provisioning, telecommunications or solutions serVices. As a
result of the recent changes in the industry and departure ofseveral.RBOCs and IXCs, we expect equipment sales to be very
small in the future.
Customers
We have direct contracts to provide inmate telecommunications services on either an exclusive basis or jointly with
another provider to approximately 2,200 correctional facilities ranging in size from small municipal jails to large, stateoperated facilities, as well as other types of confinement facilities, including juvenile detention centers, private jails and
halfway houses.
Most of our direct call provisioning contracts have multi-year tcrms (gencrally three to five years) and typically contain
renewal options while our solutions contracts generally have shorter tenus. We often seek to negotiate extensions of our
contracts before the end of their stated terms. For the year ended December 31, 2005, we retained more than 92% of our
annualized revenue up for renewal. Many of our contracts provide for automatic renewal unless tenninated by written notice
within a specified period of time before the end of the current term.
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Direct Customers
We provide our direct call provisioning products and services directly to correctional facilities. For the year ended
December 31, 2005, 80% of our revenues were generated from direct contracts with correctional facilities as the exclusive
provider of telecommunications services to inmates within the facility. No direct customer accounted for more than 7% of
our total direct call provisioning revenues for the year ended December 31, 2005.
Telecommunications and Solutions Service Provider Customers
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 year ended
December 31, 2005, 20% 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 year
ended December 31, 2005:
Approximate % of Approximate % of Totat
Contract
Expiration
Total Solutions
Services Revenue
Telecommunications
Services Revenue
AT&T/Global
Tel'Link'
74%
16%
March 1,2008
Sprint
20%
2%
Month-to-Month
SBC/ AT&T'"
25%
September I, 2006
FSH Communications
17%
Month-to-Month
VerizonlPublic
22%
December 19, 2006
"C,,"='st"'om=::er""".,.....,-______________
Date**
Communications
Services, Inc. *
•
AT&T sold its inmate telecommunications business to Global Tel'Link in 2005. Verizon sold its inmate
tel~communications 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.
No other telecommunications and solutions service provider customer accounted for more than 10% of our total
telecommunications and solutions service provider revenues for the year ended December 31, 2005.
Marketing
We seek new direct contracts by participating in competitive bidding processes and by negotiating directly with the
individuals or entities responsible for operating correctional facilities. We market our inmate telecommunications services
through a sales stafflargely made up offormer law enforcement officials and others with experience in the corrections and
telecommunications industries who understand the specialized needs of correctional facilities. Our marketing strategy
emphasizes our specialized products and services, our proprietary technology, our knowledge, experience and reputation in
the inmate telecommunications industry and our high level of service. We believe we have one of the largest national sales
forces dedicated to serving the inmate telecommunications industry. We rely on the experience and background of our sales
staff to effectively communicate our capabilities to both existing and potential customers. In addition to conducting in-person
sales calls to the operators of correctional facilities, we participate in trade shows and are active in local law enforcement
associations.
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Principal Products and Services
We believe that the specialized products and services we offer differentiate us from our competitors. Our products and
services are designed to streamline the operations of corrections facilities and empower administrators with administrative,
investigative and economic capabilities. Our principal specialized products and services include:
Call Manager
The flagship product of Securus, this fully integrated inmate calling applications manager offers innovative feature
applications that give facilities extensive administrative and investigative control. The system offers networking functions,
system and application stability, heightened security features, user auditing, and password-specific utilities. The system's
innovative investigative tools have proven to be an invaluable resource to its customers nationwide.
~l?Cl111l?voiceTM
Inmate Telecommunications Identification Service, or ITIS, is a powerful method of authentication ofa person's identity.
Compared to other techniques, it is quick, non-intrusive and cost-effective. ITIS is based on the fact that each person's voice
contains a unique signature, which can be accurately validated and cannot be imitated.
Prepaid Calling Programs
Inmate telecommunications systems customarily allow calls to be placed as collect only, without the involvement of a live
operator. Our prepaid calling offerings provide flexibility in the utilization of called party prepaid calling and inmate prepaid
calling. Our prepaid calling systems offer a paperless, card-free prepaid calling solution for both the called parties and the
inmates. The prepaid account is managed by either the called party's phone number or the inmate's PIN. Our prepaid calling
platfonn alIows correctional facilities to offer inmate families an alternative to collect calls and acts as a cash management
tool to help those families budget more effectively for calls. Additionally, because prepayment virtually eliminates bad debt,
fewer calls are blocked and correctional facilities recognize the financial benefits of higher call volumes.
We also continue to provide paper prepaid calling cards for facilities that desire a fast and simple calling solution for their
inmates. These are sold to the inmates out of the facility's commissary service. The cards may be used for both domestic and
international calling. Many of our competitors provide similar prepaid services.
Correctional Billing Services
(CB~)
We are able to provide on a nationwide basis a customer care and billing center dedicated to the inmate's friends and·
family. CBS, a division ofSecurus, provides dedicated customer service to the called party 24 hours per day, seven days per
week, 365 days per year. CBS also offers mUltiple payment options including prepayment of charges, remittance directly to
the local phone company, credit card-payments and check by phone.
Intelligent Call and Billing Management Solution
(ICB~)
We have developed Intelligent Call and Billing Management Solution, or ICBS, a proprietary call validation and billing
technology that is designed to minimize bad debt expense. Our solutions services include ICBS technology. Specifically,
ICBS allows us to rapidly identifY and prevent or block collect calls from being connected to potential non-paying call
recipients through a continuously growing and improving database. As an enhancement to revenues, the blocked call
recipient is notified that an inmate has attempted contact and, upon request, can receive inmate calls through various prepaid
methods. We believe that our technology provides us with generally lower bad debt expense as a percentage of revenues in
the industry, while offering the broadest, most sophisticated suite of payment method alternatives in the industry.
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Facility Manager
Our Facility Manager is comprised of three specific applications - Detention Management System (DMS), Records
Management System (RMS), and Computer-Aided Dispatch (CAD). These applications provide authorized personnel the
tools to track, investigate, record, report, and most importantly, efficiently manage a correctional facility's day-to-day
activities. The three-tiered focus on program functionality, platform stability and system usability is clearly evident in every
aspect of the Facility Manager application.
Intelligent Technologies Architectllre
We are developing the Intelligent Technologies Architecture suite of applications, which will provide a wide array of
solutions-based, technologically advanced, integrated applications for the criminal justice community. The Intelligent
Technologies Architecture applications are being designed to provide solutions targeted at the identified needs of the criminal
justice community.
Systems and Equipment
We currently utilize automated operator calling systems that consist of third-party and internally developed software
applications installed on specialized equipment. Our specialized systems limit inmates to collect calls or prepaid calls,
validate and verifY the payment history of each number dialed for billing purposes, and confirm that the destination number
has not been blocked. If the number is valid and has not been bjocked, the system automatically requests the inmate's name,
records the inmate's response, and waits for the called party to answer. When the call is answered the system informs the
called party that there is a collect call, plays back the name of the inmate in the inmate's voice, and instructs the called party
to accept Or reject the call. The system completes calls that have been accepted by the called party.
The system automatically records the details of each call (i.e., the number called and the length of the call) and transmits
the data to a centralized billing center for bill processing and inpnt into our call activity database. Our database of telephone
numbers and call activity allows us to provide extensive call activity reports to correctional facilities and law enforcement
authorities, in addition to identifYing numbers appropriate for blocking, thus helping to reduce the number of uncollectible
calls. These include reports that can further assist law enforcement authorities in connection with ongoing- investigations. We
believe this database offers competitive advantages, particularly within states in which we have achieved substantial market
penetration.
Maintenance, Service and Support Infrastructure
We provide and install telephone systems in correctional facilities at no cost to the facility and generally perform all
maintenance activities. We maintain a geographically dispersed staff oftrained field service technicians and independent
contractors, which allows us to respond quickly to service interruptions and perform on-site repairs and maintenance. In
addition, we have the ability to make some repairs remotely through electronic communication with the installed equipment
without the need of an on-site service call. We believe that system reliability and service quality are particularly important in
the inmate telecommunications industry because of the potential for disruptions among inmates if telephone service remains
unavailable for extended periods.
Billing and Collection
We use LEC direct billing agreements and third-party clearinghouse billing agreements to bill and collect phone charges.
Under both agreements, the LEC includes collect call charges fur our services on the local telephone bill sent to the recipient
of the inmate collect call. We generally receive payment from the LEC for such calls 60 days after the end of the month in
which the call is submitted to the LEC for billing. The payment that we receive is net of a service fee and net of write-offs of
uncollectible accounts for which we previously rcceived payment, or net of a reserve for future uncollectible accounts.
Unlike many smaller independent service providers with lower telecommunications traffic, we have been able to enter into
direct billing agreements with LECs in most of our markets because of our high market penetration. During 2005, we billed
approximately 61 % of our operating revenues and approximately 85% of our collect call revenues through LEC direct billing
agreements. We believe that
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direct billing agreements with LEes decrease bad debt expense and billing expenses by eliminating an additional third-party
billing entity, while expediting and increasing collectibility. In addition, direct billing agreements help us resolve disputes
with billed parties by facilitating direct communication between us and the called party, thereby reducing the number of
charge-offs.
In the absence of a LEe direct billing arrangement, we bill and collect our fees through third·party billing and collection
clearinghouses that have billing and collection agreements with LEes. When we employ third-party billing and collection
clearinghouses, the account proceeds are forwarded by the various LEes to the clearinghouses, which then forward the
proceeds to us, less a processing fee. With both LEe direct and third-party billing and collection agreements, we reconcile
our call records with collections and write-offs on a regular basis. The entire billing and collection cycle (including
reconciliation), takes on average, between six to nine months after we submit the call record to the LEe or to third-party
billing and collection clearinghouses.
Our specialized billing and bad debt management system integrates our LEe direct billing arrangements with our call
blocking, validation and customer inquiry procedures.
Research and Product Development
We believe that the timely development of new products and enhancements to existing products is essential to maintain
our competitive position. We conduct ongoing research and development for the development of new products and
enhancement of existing products that are complementary to the existing product line.
Our current research and development efforts are focused on further improvements to our bad debt management systems,
including improved algorithms to monitor and analyze our risk on a real~time basis, enhanced three-way call detection,
advanced call validation systems, voice-over internet protocol and general improvements to our call processing platfonns in
order to improve operating efficiency and reduce capital costs of new installations. In addition, we are developing products
and services that will provide law enforcement officials with greater access to communications capabilities, inmate
infonnation and intelligence on inmate calls within a correctional facility as well as on inmate calls between correctional
facilities and other law enforcement agencies.
Patents and Other Proprietary Rights
We rely on a combination of patents, copyrights and trade secrets to establish and protect our intellectual property rights.
We have been issued 40 patents. We consider any patents issued or licensed to us to be a significant factor in enabling us to
more effectively compete in the inmate calling industry.
We believe tIiat our intellectual property portfolio provides our customers leading edge technology recognized as
technologically superior within the inmate telecommunications industry. We believe that we currently hold the broadest
intellectual property portfolio in the industry, with more than 80 patents and applications. We believe that the duration of
applicable patents is adequate relative to our product and service offerings.
Although we have filed many patent applications and hold several patents relating to our internally developed call
processing and other technology, such technology and intellectual property rights could infringe on other parties' intellectual
property rights and could be contested or challenged. Should our call processor or any material feature of our call processor
or other proprietary technology be determined to violate applicable patents, we may be required to cease using these features
or to obtain appropriate licenses for the use of that technology and could be subject to material damages if our infringement
were determined to be lengthy or willful.
Regulation
The inmate telecommunications industry is subject to varying degrees offederal, state, and local regnlation. Regulatory
actions have-affected, and are likely to continue to affect, our correctional facility customers, our telecommunications service
provider customers, our competitors and us.
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The inmate telecommunications market is regulated at the federal level by the FCC and at the state level by public utilities
commissions or equivalent agencies (UpUCs") of the various states. In addition, from time to time, Congress or the various
state legislatures may enact legislation that affects the telecommunications industry generally and the inmate
telecommunications industry specifically. Court decisions interpreting applicable laws and regulations may also have a
significant effect on the inmate telecommunications industry. Changes in existing laws and regulations, as well as the
adoption of new laws and regulations applicable to our activities or other telecommunications businesses, could have a
material adverse effect on us. See "Risk Factors - Regulatory Risks."
Federal Regulation
Prior to 1996, the federal government's role in the regulation ofthe imnate telecommunications industry was relatively
limited. The enactment of the Telecommunications Act of 1996 (the "Telecom Act"), however, marked a significant change
in scope of federal regulation of the inmate telecommunications service. Generally, the Telecom Act (i) opened local
exchange service to competition and preempted states from imposing barriers preventing such competition, (ii) imposed new
unbundling and interconnection requirements on incumbent local exchange carrier networks, (iii) removed prohibitions on
inter-LATA services and manufacturing where certain competitive conditions are met, (iv) transferred any remaining
requirements ofthe consent decn;e governing the 1984 Bell System divestiture (including its nondiscrimination provisions)
to the FCC's jurisdiction, (v) imposed requirements to conduct certain competitive activities only through structurally
separate affiliates, and (vi) eliminated many of the remaining cable and telephone company cross-ownership restrictions.
This legislation and related rulings significantly changed the competitive landscape of the telecommunications industry as
a whole. For example, by allowing the RBOCs to once again provide long-distance service, our RBOC customers have
become direct competitors of AT&T, which in turn could adversely affect our relationships with all such customers.
Furthermore, our current relationship with AT&T may foreclose opportunities to provide long distance services to its current
RBOC customers if and when they enter the long-distance market. Therefore, a loss oflong-distance market share by AT&T
could result in a corresponding loss of market share by us.
More specifically for the inmate telecommunications industry, the Telecom Act added Section 276 to the principal U.S.
federal communications statute, the Communications Act of 1934. Section 276 directed the FCC to implement rules to
overhaul the regulation of the provisioning of pay phone service, which Congress defined to include the provisioning of
inmate telecommunications service in correctional institutions.
Before the adoption of the Telecom Act, LECs generally included inmate telecommunications service operations as part of
their regulated local exchange telephone company operations. This allowed the LECs to pool revenue and expenses from
their monopolistic local exchange operations with revenues and expenses from their inmate telecommunications service
operations. This commingling of operations made possible the subsidization of the LECs' inmate telecommunications service
operations through other regulated revenues. The LECs were also able to shift certain costs from their inmate
telecommunications service operations to their local exchange monopoly accounts. In particular, the LECs were able to pool
the bad debt from their inmate telecommunications service operations with their other bad debt. Because independent inmate
telecommunications service providers act as their own carrier, they bear the risk of fraudulent calling and uncollectible calls
and other bad debt. Bad debt is substantially higher in the inmate telecommunications industry than in other segments ofthe
telecommunications industry. The LECs' practice of pooling bad debt shifted the high costs of bad debt from inmate
telecommunications service operations to the expense accounts of other LEC operations, presenting a vehicle for the crosssubsidization ofthe LECs' inmate operations. This, in tum, allowed the LECs to offer commissions to correctional facilities
that were often significantly higher than those that independent iumate telecommunications service providers can offer.
Section 276 directed the FCC to adopt regulations to end the LECs subsidization of their inmate telecommunications
service operations from regulated revenues. Congress also directed the FCC to ensure that the RBOCs could not discriminate
in favor of their own operations to the competitive detriment of independent inmate telecommunications service providers.
Finally, Congress required the FCC to ensure that all inmate telecommunications service providers were fairly compensated
for "each and every" call made from their telephone.
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To carry out its legislative mandate, the FCC adopted regulations requiring all LECs to transfer their inmate
telecommunications service operations from their regulated accounts to the LECs' unregulated accounts by no later than
April 15, 1997. The FCC's rules implementing Section 276 are desigued to eliminate cross-subsidization and cost-shifting.
However, since the bad debt from inmate telecommunications services arises from the charges for collect calls, which have
traditionally been regulated carrier activities, the FCC's rules did not prevent shifting of bad debt from the LECs' inmate
telecommunications service operations to the LEes' regulated accounts.
In implementing Section 276, the FCC also addressed the one-time transfer of existing inmate telecommunications service
assets from the LEes' regulated accounts to the unregulated accounts established for inmate telecommunications service
operations. The FCC ordered the transfer of those assets at their net book value rather than at their fair market value. The
inmate telecommunications industry had argued to the FCC that the transfer should be accomplished at the assets' fair market
value t including the value of the contracts between the LEes' inmate telecommunications service operations and correctional
facilities. The net book value of those assets may be lower than their fair market value. In the event that the valuation ofthe
assets is below market, the LECs' inmate telecommunications service operations may be able to post nominally higher
returns on their assets than they would otherwise be able to and hence relieve operating pressures for returns on assets. This
could result in a competitive advantage for the LECs with respect to access to capital markets as compared to independent
inmate telecommunications service providers.
To eliminate discrimination, the FCC initially required, among other things, that the LECs' inmate telecommunications
service operations take any tariffed services from their regulated operations at the tariffed rate for the service. Before the
Telecom Act, the LEes' inmate telecommunications service operations were able to take these services at some variant of
their underlying costs without regard to the tariffed rate being chargad to independent inmate telecommunications service
providers. Under the Telecom Act, the LECs' inmate telecommunications service operations must take tariffed services on an
arm's length basis, at tariffed rates that are subject to regulatory approval. Further, the rates for the tariffed services offered to
both the LECs' inmate telecommunications service operations and independent inmate telecommunications service providers
must be developed on a consistent basis. The test that the FCC mandated for the pricing of services (the "new services test")
to both independent inmate telecommunications providers and LECs' own inmate operations applied to existing rates and
could potentially cause a rate reduction for services in some instances, while reSUlting in rate increases in others. However,
the FCC ruled, and the U.s. federal courts have affirmed, that Section 276 clearly mandated that the test be applied only to
the RBOCs. At the same time, the FCC urged state commissions to apply the test to all LECs in their states. In any case, the
requirement for a consistent methodology for developing rates should substantially reduce LEC opportunities for unfavorable
rate discrimination against independent inmate telecommunications service providers like Securus.
To ensure "fair compensation" for inmate telecommunications service providers, the FCC held that it was not required to
prescribe compensation for collect calls because inmate telecommunications service providers act as their own carriers and
collect the revenue from those calls directly from called parties. We nonetheless have from time to time been required to
defend ourselves against complaints to the FCC from certain payphone owners not in the inmate telecommunications
industry, that have unsuccessfully claimed a right to compensation for calls initiated from the inmate telecommunications
service providers. The inmate telecommunications industry argued to the FCC, however, that because of state-mandated
ceilings on the rates for intrastate collect calls, inmate telecommunications providers could not recover adequate revenues for
those calls, and accordingly, had sought an "inmate system compensation charge" in addition to the charges collected for
carrying the call. See "- State Regulation." However, the FCC only determined that Section 276's fair compensation
requirement does not require either preemption of state local collect calling rate caps or imposition of a federally-tariffed
surcharge above state rate caps for local inmate calls. This decision, unless subject to further review, appeal or revision as a
result of further proceedings, leaves intact, from a Federal perspective, the current impact of state-mandated rate ceilings.
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The FCC has also declined to modify the accounting safeguards implemented to guarantee that regulated revenues
properly follow regulated costs, and unregulated revenues follow unregulated costs. Thus, it remains that only inmate
telecommunications equipment and not the collect calling service itself is included in the inmate telecommunications services
that the REOCs must provide on a non-regulated basis. Consequently, it is possible that the REOCs will to some extent
continue to be able to subsidize and discriminate in favor of their inmate telecommunications service operations. In
particular, so long as the REOCs can continue to define their inmate collect calling service as part of their regulated
operations, they may be commingling bad debt associated with that service with bad debt from other services.
Because of the proceedings still pending before the FCC, the ultimate effects of the rule changes mandated by the
Telecom Act are uncertain. For example, the FCC is currently considering comments filed in Docket No. 96-128 on the costs
associated with the provision of inmate telecommunications services to explore whether the current reguJatory regime
applicable to the provision of inmate telecommunications services is responsive to the needs of corrections facilities, inmate
calling services providers, and inmates, and ifnot, whether and how unmet needs might be addressed. This includes claims
concerning the rates charged for inmate calls. See "Legal Proceedings." See "Risk Factors - Regulatory Risks."
Apart from its proceedings to implement the Telecom Act, the FCC also adopted regulations for interstate calls requiring
inmate telecommunications service providers to announce to called parties, before the called party incurs any charges, that
rate quotes may be obtained by dialing no more than two digits or remaining on the line. The FCC subsequently clarified the
rules to require exact, and not maximum, rate quotes on a per minute basis.
Significantly, however, the FCC adopted the rate disclosure option in lieu of the so-called "Billed Party Preference"
proposal that had been pending before the FCC for several years. Under that plan, imnate telecommunications service
providers would have been required to send their interstate inmate collect calls to the called party's pre-subscribed carrier,
thereby bypassing the opportunity for the inmate telecommunications service provider to receive revenue from the calls. We
believe that the rate quote regulations adopted by the FCC are a preferable alternative to Billed Party Preference, which
would potentially have had a much more adverse effect on our business. However, the FCC, in Docket No. 96-128, recently
took further comments on a request by inmate groups to require multiple carrier access to certain inmate facilities on
interstate calls. The FCC has also taken comment on other technologies advanced as a method to avoid the single carrier per
facility system that currently prevails in the inmate telecommunications industry.
State Regulation
In many states, inmate telecommunications service providers must obtain prior authorization from, or register with, the
PUC and file tariffs or price lists of their rates. The most significant state involvement in the economic regulation of inmate
telecommunications service is the limit on the maximum rates that can be charged for intrastate collect calls set by most
states, referred to as "rate ceilings." Since at many facilities, collect calls are the only kind of calls that can be made by
inmates, such state-imposed rate ceilings can have a significant effect on our business.
In many states, the rate ceilings on imnate collect calls within the originating LEC's service area are tied to the rate
charged by the LEC and subject to state regulatory approval. Thus, where the LEC chooses not to raise its rates, independent
inmate telecommunications service providers are precluded from raising theirs. Prior to the passage of the Telecom Act, the
LEes had less incentive to raise their rates than independent inmate telecommunications service providers because the LEes
were able to subsidize their inmate telecommunications service operations and discriminate in their favor, as described above.
See " - Federal Regulation." It is possible that as a result of the FCC's rules desigued to eliminate these subsidies, some
LECs may periodically choose to file with their state commissions to raise their rates for inmate collect calls. Ifthis occurs,
inmate telecommunications service providers could also raise their rates. It is difficult to predict the extent to which the LECs
will raise their rates.
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For intrastate caUs going outside the originating LEe's service area, there may be state rate ceilings tied to the rates of the
IXCs for similar calls, In some cases, these rate ceilings can also make sufficient cost recovery difficult. In general, the cost
recovery problems that arise from rate ceilings tied to IXC rates are not as severe as the difficulties created by rate ceilings
tied to LEC rates.
In its rulemaking in implementing the Telecom Act, the FCC declined to address these state rate ceilings. The FCC ruled
that inmate telecommunications providers must first seek relief from the state rate ceilings at the state level. The outcome of
any such proceedings at the state level, if undertaken, is uncertain. Further, despite reserving the right to do so, it is uncertain
whether the FCC would intervene or if so, how, in the event a state failed to provide relief. Moreover, as noted above, the
FCC has declined to preempt state rate caps on local inmate calls or pennit an additional surcharge thereon. See "Legal
Proceedings."
In addition to imposing rate caps, the states may regulate various other aspects ofthe inmate telecommunications industry.
While the degree of regulatory oversight varies siguificantly from state to state, state regulations generally establish
minimum technical and operating standards to ensure that public interest considerations are met. Among other things, most
states have established rules that govern the service provider in the fonn of postings or verbal announcements, and
requirements for rate quotes upon request. See "Legal Proceedings,"
The foregoing discussion does not describe all present and proposed federal, state and local regulations, legislation, and
related judicial or administrative proceedings relating to the telecommunications industry, including inmate
telecommunications services, and thereby affecting our business. The effect of increased competition on our operations will
be influenced by the future actions of regulators and legislators, who are increasingly advocating competition. While we
would attempt to modity our customer relationships and our service offerings to meet the challenges resulting from changes
in 'the telecommunications competitive environment, there is no assurance we would be able to do so.
Employees
As of December 31,2005, we employed 582 full-time equivalent employees, of which 274 are salaried and 308 are hourly
employees. None of our employees are represented by a labor union, and we have not experienced any material work
stoppages to date. We believe that our management currently has a good relationship with our employees. In connection with
the consummation of the T-Netix and Evercom acquisitions, we tenninated approximately 120 employees through our
consolidation of operations.
FORWARD LOOKING STATEMENTS
This Annual Report on Fonn I O-K and, in particular, the description of our Business set forth in nem 1 and our
Management's Discussion and Analysis ofFinaneial Condition and Results of Operations set forth in nem 7 contain or
incorporate a number of forward-looking statements within the meaning of Section 27 A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including statements regarding:
•
projected future sales growth;
•
expected future revenues, operations, expeqitures and cash needs;
•
estimates of the potential for our products and services, including the anticipated drivers for future growth;
•
sales and marketing plans;
assessment of competitors and potential competitors; and
•
potential mergers or acquisitions;
In addition, any statements contained in or incorporated by reference into this report that are not statements of historical
fact should be considered forward-looking statements. You can identity these forward-looking statement by use of the words
"believes," "expects," "anticipates," "plans," "may," "will," "would," "intends," "estimates" and other similar expressions,
whether in the negative or affinnative. We cannot guarantee that we actually will achieve the plans, intentions or expectations
disclosed in the forward looking statements made. There are a number of important risks and uncertainties that could cause
our actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties
include, without limitation, those set forth below under the heading "Risk Factors." We do not intend to update publicly any
forward-looking statements whether as a result of new infonnation, future events or othelWise.
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ITEM IA. RISK FACTORS
You should carefully consider the risks described below, together with all of the other in/ormation contained in this Form
10-I( before making an investment decision. The risks described below are not the only ones/acing our company. Additional
risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and
adversely affect our financial condition, results ofoperations or cash flow. Any of the following risks could materially and
adversely affect our financial condition or results ofoperations. In such case, you may lose all or part afyour original
investment.
Risks Related to our Senior Notes
We have a substantial amount of debt outstanding and have significant interest payments
We have a significant amount of debt outstanding. As of December 31, 2005, we had $203.9 million oflong-tenn debt
outstanding before considering $3.1 million of original issue discount on our second-priority senior secured notes and
$2.8 million affair value attributable to warrants issued in connection with our senior subordinated debt financing, each of
which are reflected as discounts to our outstanding long-tenn debt on our financial statements. As of December 31, 2005, we
had a stockholders' deficit of $31.9 million.
Our substantial debt could have important consequences. For example, it could:
require us to dedicate a substantial portion of our cash flow from operations to make payments on our debt, thereby
reducing funds available for operations, future business opportunities and other purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
make it more difficult for us to satisfy our obligations with respect to the notes and our other debt obligations;
•
limit our ability to borrow additional funds, or to sell assets to raise funds, ifneeded, for working capital, capital
expenditures, acquisitions Of other purposes;
increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates;
•
place us at a competitive disadvantage compared to our competitors which may have less debt; and
prevent us from raising the funds necessary to repurchase notes tendered to us ifthere is a change of control, which
would constitute a default under the indenture governing the notes and our working capital facility.
We cannot assure that we will generate sufficient cash flow to service and repay our debt and have sufficient funds left
over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs or compete
successfully in our markets. Tfwe cannot meet our debt service and repayment obligations. we would be in default under the
terms of the agreements governing our debt, which would allow the lenders under our working capital facility to declare all
borrowings outstanding to be due and payable, which would in turn trigger an event of default under the indenture and the
agreements governing the senior subordinated debt. In addition, our lenders could compel us to apply all of our available cash
to repay our borrowings. If the amounts outstanding under Our working capital facility or the notes were to be accelerated, we
cannot assure that our asse\s would be sufficient to repay in full the money owed to the lenders or to our other debt holders.
In addition, we may need to refinance our debt, obtain additional financing or sell assets, which we may not be able to do on
commercially reasonable tenns or at all. Any failure to do so on commercially reasonable tenns could have a material
adverse effect on our business, operations and financial condition,
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We may be able to incur more debt, including secured debt, and some or all of this debt may effectively rank senior to
the notes and the guarantees
Subject to the restrictions in our working capital facility, the indenture governing the notes and the senior subordinated
debt financing agreements, we may be able to incur additional debt, including secured debt that would effectively rank senior
to the notes. As of December 31, 2005, we would have been able to incur approximately $30.0 million of additional secured
debt under our working capital facility. Although the terms of our working capital facility, the indenture and our senior
subordinated debt financing agreements contain restrictions on our ability to incur additional debt, these restrictions are
subject to a number of important exceptions. Ifwe incur additional debt, the risks associated with our substantial leverage,
including our ability to service our debt, would likely increase. The Company recently attempted to gain consent from the
requisite number of holders of the Senior Notes to amend the indenture to allow the Company to borrow additional Senior
debt to fund possible future acquisitions. This consent process expired on March 17, 2006 because the requisite number of
holders did not consent prior to the expiration date, and the Company chose not to extend.
There may not be sufficient collateral to pay all or any of the notes
Indebtedness under our senior secured credit facility (referred to herein as the "First-Priority Lien Obligations") is secured
by a first-priority lien on substantially all of our and our subsidiary guarantors' tangible and intangible assets, except for
certain excluded collateral (such as hedging agreements and, as of the issue date of the notes, any real estate interests). The
notes are secured by a second-priority lien on only a portion of the assets that secure the First-Priority Lien Obligations. In
the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding against us or any future domestic
subsidiary, the assets that are pledged as shared collateral securing the First-Priority Lien Obligations and the notes must be
used first to pay the First-Priority Lien Obligations, as well as any other obligation secured by a priority lien on the collateral,
in full before making any payments on the notes.
Although at December 31,2005, no amounts of senior indebtedness constituting First-Priority Lien Obligations were
outstanding, approximately $30.0 million of First-Priority Lien Obligations could have been borrowed under our working
capital facility.
Certain of our assets, such as our accounts receivable and inventory and any proceeds thereof, are not part of the collateral
securing the notes, but do secure the First-Priority Lien Obligations. With respect to those assets that are not part of the
collateral securing the notes but which secure other obligations, the notes will be effectively junior to these obligations to the
extent ofthe value of such assets. There is no requirement that the lenders under the First-Priority Lien Obligations first look
to these excluded assets before foreclosing, selling or otherwise acting upon the collateral shared with the notes.
The value of the collateral at any time will depend on market and other economic conditions, including the availability of
suitable buyers for the collateral. By their nature, some or all of the pledged assets may be illiquid and may have no readily
ascertainable market value. The value of the assets pledged as collateral for the notes could be impaired in the future as a
result of changing economic conditions, our failure to implement our business strategy, competition and other future trends.
In the event of a foreclosure, liquidation, bankruptcy or similar proceeding, no assurance can be given that the proceeds from
any sale or liquidation of the collateral will be sufficient to pay our obligations under the notes, in full or at all, after first
satisfying our obligations in full under the First-Priority Lien Obligations and any other obligations secured by a priority lien
on the collateral.
Accordingly, there may not be sufficient collateral to pay all or any of the amounts due on the notes. Any claim for the
difference between the amount, if any, realized by holders of such notes from the sale of the collateral securing the notes and
the obligations under such notes will rank equally in right of payment with all of our other unsecured unsubordinated
indebtedness and other obligations, including trade payables.
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The indenture and our working capital facility contain covenants that limit the discretion of our management in
operating our business and could prevent us from capitalizing 011 business opportunities and taking other corporate
actions.
The indenture, our working capital facility and our senior subordinated debt financing agreements impose significant
operating and financial restrictions on us. These restrictions effectively limit or restrict, among other things, our and most of
our subsidiaries' ability to:
•
incur additional debt and issue preferred stock;
•
make restricted payments, including paying dividends on, redeeming, repurchasing or retiring our capital stock;
•
make, investments and prepay or redeem debt;
•
enter into agreements restricting our subsidiaries' ability to pay dividends, make loans
•
create liens;
•
sell or othenvise dispose of assets, including capital stock of subsidiaries;
•
engage in transactions with affiliates;
•
engage in sale and leaseback transactions;
•
make capital expenditures;
•
engage in business other than telecommu!lications businesses; and
•
consolidate or merge.
Of
transfer assets to us;
In addition, the indenture governing the notes, our working capital facility and our senior subordinated debt financing
agreements require, ~nd any future credit facilities may require, us to comply with specified financial covenants, including, in
each case, interest coverage ratios and, in the case of our working capital facility, minimum levels of earnings before interest,
taxes and depreciation, or EBITDA, and capital expenditure limits. Our ability to comply with these covenants may be
affected by events beyond our control. Furthennore, the indenture governing the notes requires us to use a significant portion
of our cash generated from operations, if certain conditions are met in the future to make an offer to purchase notes on a pro
rata basis. For fiscal year 2005, no such offer was required, because the conditions were not met. The restrictions contained in
the indenture, our working capital facility and our senior subordinated debt financing agreements could:
•
limit our ability to plan for or react to market conditions, meet capital needs or othenvise restrict our activities or
business plans; and
•
adversely affect our ability to finance our operations, enter into acquisitions or engage in other business activities
that would be in our interest.
A breach of any ofthe covenants contained in our working capital facility, or in any future credit facilities, or our inability
to comply with the financial ratios could result in an event of default, which would allow the lenders to declare all
borrowings outstanding to be due and payable, which would in tum trigger an event of default under the indenture. In
addition, our lenders could compel us to apply all of our available cash to repay our borrowings. If the amounts outstanding
under our working capital facility or the notes were to be accelerated, wecaunot assure you that our assets would be
sufficient to repay in full the money owed to the lenders or to our other debt holders, including you as a noteholder.
We are a holding company and we may nol have access 10 sufficienl cash 10 make paymenls on the noles. In addition,
Ihe noles are effeclively.subordinaled 10 Ihe liabililies of our subsidiaries.
Securus Technologies, Inc., the issuer of the notes, is a holding company with no direct operations. Its principal assets are
the equity interests it holds, directly and indirectly, in its subsidiaries. Since all of our operations are conducted through our
subsidiaries, our ability to service our indebtedness, including the notes, will be dependent upon the earnings of our
subsidiaries and the distribution ofthose earnings, or upon loans or other payments of funds, by our subsidiaries to us. Our
subsidiaries are legally distinct from us and have no obligation to pay amounts due on our debt or to make funds available to
us for such payment. The payment of dividends and the making of loans and advances to us by our subsidiaries may be
subject to various restrictions, including restrictions under our working capital facility more fully described
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below. In addition, the ability of our subsidiaries to make such payments or advances to us may be limited by the laws ofthe
relevant states in which our subsidiaries are organized or located, including, in some instances, by requirements imposed by
state regulatory bodies that oversee the telecommunications industry in such states. In certain circumstances, the prior or
subsequent approval of such payments or advances by our subsidiaries to us is required from such regulatory bodies or other
governmental entities. The notes, therefore, without giving effect to any guarantees of the notes, will be effectively
subordinated to creditors (including trade creditors) of our subsidiaries. Although the indentnre contains limitations on the
amount of additional indebtedness that we and our restricted subsidiaries may incur, the amounts of such indebtedness could
be snbstantial and such indebtedness may be First-Priority Lien Obligations. In addition, each of our subsidiaries has other
liabilities, including contingent liabilities (including the guarantee obligations under our working capital facility and the
senior subordinated debt financing) that may be significant.
In addition, our working capital facility restricts all payments from our subsidiaries to us during the continuance of a
payment default and also restricts payments to us for a period of up to 180 days during the continuance of a non-payment
default.
Our working capital facility is, and futute credit facilities may be, guaranteed by our domestic restricted subsidiaries.
Although the indentnre contains limitations on the amount of additional indebtedness that we and our restricted subsidiaries
may incur, the amounts of such indebtedness could be substantial and such indebtedness may be secured. As of December 31,
2005, we expect that we would have been able to incur approximately $30.0 million of additional secured debt constituting
First-Priority Lien Obligations under our working capital facility.
U.S. bankruptcy or fraudulent conveyance law may interfere with the payment of the notes and the guarantees and the
enforcement of the security interests.
Our incurrence of debt, such as the notes and the guarantees, as well as the security interests related to the notes and the
guarantees, may be subject to review under U.S. federal bankruptcy law or relevant state fraudulent conveyance laws if a
bankrnptcy proceeding or lawsuit is commenced by or on behalf of our unpaid creditors. Under these laws, if in such a
proceeding or lawsuit a court were to find that, at the time we incurred debt (including debt represented by the notes and the
guarantees),
•
we incurred such debt with the intent of hindering, delaying or defrauding current or futnre creditors; or
•
we received less than reasonably equivalent value or fair consideration for incurring such debt and we:
•
were insolvent or were rendered insolvent by reason of any of the transactions;
•
were engaged, or about to engage, in a business or transaction for which our remaIning assets constituted
unreasonably small capital to carry on our business;
intended to incur, or believed that we would incur, debts beyond our ability to pay as these debts matnred (as all of
the foregoing terms are defined in or interpreted under the relevant fraudulent transfer or conveyance statutes); or
•
were defendants in an action for money damages or had a judgment for money damages entered against us (if, in
either case, after final judgment such judgment is unsatisfied);
then that court could avoid or subordinate the amounts owing under the notes to our presently existing and futnre debt, void
or decline to enforce the security interest and take other actions detrimental to you.
The measure of insolvency for purposes of the foregoing considerations will vary depending upon the law ofthe
jurisdiction that is being applied in any proceeding. Generally, a company would be considered insolvent if, at the time it
incurred the debt:
•
the sum of its debts (including contingent liabilities) was greater than its assets, at fair valuation;
•
the present fair saleable value of its assets was less than the amount required to pay the probable liability on its total
existing debts and liabilities (including contingent liabilities) as they became absolute and matnre; or
•
it could not pay its debts as they became due.
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We ca~mot predict what standards a court would use to determine whether we or our subsidiary guarantors were solvent at
the relevant time, or whether the notes, the guarantees or the security interests would be avoided or further subordinated on
another of the grounds set forth above. In rendering their opinions in connection with the transactions, our counsel will not
express any opinion as to the applicability of federal or state fraudulent transfer and conveyance laws.
We may be IInable to repllrchase the notes lipan a change of cOlltrol as reqllired by the indentllre.
Upon the occurrence of a change ofcontrol as specified in "Description of the Exchange Notes," we will be required to
make an offer 10 repurchase all notes. In addition, the agreements governing any of our future senior indebtednes.s may
contain prohibitions of certain events that would constitute a change of control or require such senior indebtedness to be
repurchased or repaid upon a change of control. Moreover, the exercise by the holders of their right to require us to
repurchase the notes could cause a default under such agreements, even if the change of control itself does not, due to the
financial effect of such repurchase on us. Under any of these circumstances, we cannot assure you that we will have sufficient
funds available to repay all of our senior debt and any other debt that would become payable upon a change· of control and to
repurchase the notes. Our failure to purchase the notes would be a default under the indenttIre, which would in tum trigger a
default under our working capital facility. We would need to refinance our working capital facility or cure the default
thereunder, before making the change of control offer.
The definition of change of control includes a phrase relating to the sale or other transfer of "all or substantially ail" of our
assets. There is no precise definition of the phrase under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of "all or substantially all"
of our assets, and therefore it may be )mclear as to whether a change of control has occurred and whether the holders of the
notes have the right to require us to repurchase such notes.
Rights of holders ofnotes in the collateral may be adversely affected by ballkruptcy proceedings.
The right ofthe administrative agent to repossess and dispose of the collateral securing the notes upon acceleration is
likely to be significantly impaired by federal bankruptcy law if bankruptcy proceedings are commenced by or against.us or
any of our subsidiaries prior to or possibly even after the administrative agent has repossessed and disposed of the collateral.
Under the U.S. Bankruptcy Code, a secured creditor, such as the administrative agent, is prohibited from repossessing its
security from a debtor in a bankruptcy case, or from disposing of security repossessed from a debtor, without bankruptcy
court approval. Moreover, bankruptcy law permits the debtor to continue to retain and to use collateral, and the proceeds,
products, rents or profits of the collateral, even though the debtor is in default under the applicable debt instruments, provided
that the secured creditor is given "adequate protection." The meaning of the tenn "adequate protection" may vary according
to circumstances, but it is intended in general to protect the value of the secured creditor's interest in the collateral and may
include cash payments or the granting of additional security, if and at such time as the court in its discretion determines, for
any diminution in the value of the collateral as a result of the stay of repossession or disposition or any use of the collateral
by the debtor during the pendency ofthe bankruptcy case. In view of the broad discretionary powers ofa bankruptcy court, it
is impossible to predict how long payments under the notes could be delayed following commencement of a bankruptcy case,
whether or when the administrative agent would repossess or dispose of the collateral, or whether or to what extent holders of
the notes would be compensated for any delay in payment or loss of value of the collateral through the requirements of
"adequate protection." Furthermore, in the event the bankruptcy court determines that the value of the collateral is not
sufficient to repay all amounts due on the notes, the holders of the notes would have "unsecured claims" as to the difference.
Federal bankruptcy laws do not pennit the payment or accrual of interest, costs and attorneys' fees for "unsecured claims"
during the debtor's bankruptcy case.
Rights ofholders of notes in the collateral may be adversely affected by the failure to perfect security interests in certain
collateral acqllired in the future.
The security interest in the collateral securing the notes includes assets, both tangible and intangible, whether now owned
or acquired or arising in the future. Applicable law requires that certain property and rights acquired after the grant of a
general security interest can only be perfected at the time such property
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and rights are acquired and identified. There can be no assurance that the trustee or the administrative agent will monitor, or
that we will infonn the trustee or the administrative agent of, the future acquisition of property and rights that constitute
collateral, and that the necessary action will be taken to properly perfect the security interest in such after-acquired collateral.
Such failure may result in the loss of the security interest therein or the priority ofthe security interest in favor of the notes
against third parties.
The notes may he deemed 10 he contingenl paymenl deht instrumenls.
The notes are subject to a contingency (described in "Description of the Exchange Notes - Excess Cash Flow") in that a
portion of them may be repaid prior to their stated maturity with excess cash generated by our operations. See "Description of
the Exchange Notes - Excess Cash Flow." As such, they are likely to be treated as indebtedness subject to special U.S. tax
rules applicable to contingent payment debt obligations. Consequently, original issue discount will be included (as ordinary
interest income) in the gross income of a U.S. holder of notes for U.s. federal income tax purposes in advance of the receipt
of cash payments on the notes, and upon the sale of the notes a U.S. holder may recognize ordinary, rather than capital, gain
or loss. See "Material U.S. Federal Income Tax Considerations."
Ris\< Relating to Our Business
Our financial resulls are dependenl on I/re success of our hilling and had deht management systems.
The inmate telecommunications business is subject to siguificant risk of bad debt or uncollectible accounts receivable. In
addition, our solutions business is particularly sensitive to variations in bad debt expense because we typically take full
ownership of bad debt of our customers while in tum earning a fee for those services equal to a contractual percentage of our
customers' revenues. Most calls are collect calls paid by the called or billed party. Historically, such billed party's ability to
pay for collect calls has been tied to the economic conditions, and unemployment rates in particular, that exist in their
community. OUf exposure to bad debt risk increases as unemployment rises and the economy worsens. In other cases, the
billed party may still be unable or unwilling to pay for the call.
We principally bill for our direct and solutions services through LECs and, in the case of a small portion of our services,
through billing aggregators, which aggregate our charges with other service providers and bill through the applicable LEe.
Our agreements with the LECs and the billing aggregators specify that the LECs get paid their portion of a bill prior to ours
and we share the remaining risk of nonpayment with other non-LEC service providers. In certain circumstances, LECs are
unable to trace the collect call to a proper billed number and the call is unbillable. We are also subject to the risks that the
LEC decides not to charge for a call on the basis of billing or service error and that we may be unable to retain our current
billing collection agreements with LECs, many of which are terminable at will. In fact, the Company recently disclosed that
one of its largest LEC billing agents, AT&T/SBC had notified the Company of its intent to cancel billing on behalf of the
Company. This notification was subsequently rescinded by AT&T/SBC. Should the Company lose the ability to bill via LEC
billing agents, there is no assurance the Company will be able to maintain historical collection rates and this could materially
impact the Company's operations.
There is a significant lag time (averaging six to nine months) between the time a call is made and the time we learn that
the billed party has failed to pay for a call and, in the interim period, we typically do not have visibility as to actual collection
results. During this period, we may continue to extend credit to the billed party prior to terminating service and thus increase
our exposure to bad debt. Additionally, because of the significant lag time, deteriorating trends in collection rates may not be
immediately visible and bad debt may therefore increase prior to our ability to adjust our algorithms and reduce credit limits.
We seek to minimize our bad debt expense by using multi-variable algorithms to adjust our credit policies and billing. We
cannot be sure that our algorithms are accurate or will remain accurate as circumstances change. Moreover, to the extent we
overcompensate for bad debt exposure by limiting credit to billed parties, our revenues and profitability may decline as fewer
calls are allowed to be made. To the extent our billing and bad debt management systems are less than effective or we are
otherwise adversely affected by the foregoing factors, our financial position, results of operations and ability to make
payments on the notes may be materially adversely affected.
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We are dependelJt on third party vendors for our information and hilling systems.
Sophisticated infonnation and billing systems are vital to our ability to monitor and control costs, bill customers, process
customer orders, provide customer service and achieve operating efficiencies. We currently rely on internal systems and third
party vendors to provide all of our infonnation and processing systems. Some of our billing, customer service and
management infonnation systems have been developed by third parties for us and may not perfonn as anticipated. In
addition, our plans for developing and implementing our infonnation and billing systems rely substantially on the delivery of
products and services by third party vendors. Our right to use these systems is dependent upon license agreements with third
party vendors. Some of these agreements are cancelable by the vendor, and the cancellation or nonrenewable nature of these
agreements could impair our ability to process orders or bill our customers. Since we rely on third party vendors to provide
some of these services, any switch in vendors could be costly and could affect operating efficiencies. Currently we bill
13.5%, 18.2% and 19.1 % of our annual revenue through our top three third party vendors. Although, one of these three
vendors recently threatened cancellation, it subsequently rescinded the cancellation notice.
A number of our cilstomers individually accollnt/or a large percentage of ollr revenues, and therefore the loss 0/ one
or more ofthe~e clls/omers could harm our business.
If we lose existing customers and do not replace them with new customers, our revenues will decrease and may not be
sufficient to cover our costs. For the year ended December 31, 2005, AT&T and its successor accounted for approximately
9.8% of our total revenues and our top five customers accounted for approximately 23% of our total revenues. Ifwe lose one
or more ofthese customers, our revenues will be adversely affected, which could hann our business.
Large industry participants, Verizon and AT&T, have recently departed the inmate telecommunications business. During
2005, Verizon and AT&T, and their $uccessors, were our two largest telecommunications services customers and, AT&T,
and its successor, was our largest solutions customer. These departures continue the recent trend of large dominant
telecommunications carriers exiting the direct inmate telecommunications business. As a result of this trend, we anticipate
that the high revenue margins associated with our telecommunications services product line will continue to decline and that
the master agreements we have in place with these REOCs and IXCs will not be renewed upon expiration. Although we
expect to seek to procure agreements to provide direct call provisioning services to those correctional facilities previously
serViced by these large carriers, there can be no assurances that we will be able to obtain such contracts or that the up-front
costs we may be required to absorb to obtain any such contracts will not be prohibitive. Any failure to obtain direct contracts
with correctional facilities previously serviced by such carriers could have an adverse effect on our results of operations.
During the period from January 12, 2004 to December 31, 2004, we recognized a non-cash impainnent charge of
$50.6 million as a result of these announcements and the anticipated continued reduction in our telecommunications services
and solutions businesses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Industry Trends."
Our success dep(!lIds on our ability to protect our proprietary technology and ensure that our systems are not in/ringing
on the proprietary technology ofother companies.
Our success depends to a significant degree on our protection of our proprietary technology, particularly in the areas of
call prevention, automated operators, bad debt management, revenue generation and architecture restructuring. The
unauthorized reproduction or other misappropriation of our proprietary technology could enable third parties to benefit from
our technology without paying us for it. Although we have taken steps to protect our proprietary technology, they may be
inadequate. We rely on a combination of patent and copyright law and contractual restrictions to establish and protect our
proprietary rights in our systems. However, existing trade secret, patent, copyright and trademark laws offer only limited
protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our
products or obtain and use trade secrets or other infonnation we regard as proprietary. Ifwe resort to legal proceedings to
enforce our intellectual property rights, the proceedings could be burdensome and expensive, involve a high degree of risk,
and adversely affect our relationships with our customers.
three~way
We cannot assure you that a third party will not accuse us of infringement on their intellectual property rights. Any claim
of infringement could cause us to incur substantial costs defending against that claim,
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even if the claim is not valid, and could distract our management from our business. A party making a claim also could
secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court
order that could prevent us from selling our products. Any of these events could have a material adverse effect on our
business, operating results and financial condition.
We may not be able to adapt sllccessflllly to new technologies, to respond effectively to Cllstomer requirements or to
provide new products and services.
.
The telecommunications industry, including inmate telecommunications, is subject to rapid and significant changes in
technology, frequent new service introductions and evolving industry standards. Technological developments may reduce the
competitiveness of our services and require unbudgeted upgrades, significant capital expenditures and the procUrement of
additional services that could be expensive and time consuming. To be competitive, we must develop and introduce product
enhancements and new products. New products and new technology often render existing infonnation services or technology
infrastructure obsolete, excessively costly, or otherwise unmarketable. As a result, our success depends on our ability to
create and integrate new technologies into our current products and services and to develop new products. Ifwe fail to
respond successfully to technological changes or obsolescence or fail to obtain access to important new technologies, we
could lose customers and be limited in our abiJity to attract new customers or sell new services to our existing customers. The
failure to adapt to new technologies could have a material adverse effect on our business, financial condition and results of
operations.
The successful development of new services, which is an element of our business strategy, is uncertain and dependent on
many factors, and we may not generate anticipated revenues from such services, In addition, as telecommunications networks
are modernized and evolve from analog-based to digital-based systems, certain features offered by us may diminish in value.
We cannot guarantee that we will have sufficient technical, managerial or financial resources to develop or acquire new
technology or to introduce new services or products that would meet our customers' needs in a timely manner,
Our business could be adversely affected if our products and services fail to perform or be performed properly.
Products as complex as ours may contain undetected errors or "bugs," which could result in product failures or security
breaches. Any failure of our systems could result in a claim for substantial damages against us, regardless of our
responsibility for the failure. Claims could be widespread, as in the case of class actions filed on behalf of inmates or the
called parties of the inmates. Although we maintain general liability insurance, including coverage for errors and omissions,
we cannot assure that our existing coverage will continue to be available on reasonable tenns or will be available in amounts
sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The
occurrence of product failures or security breaches could result in a loss of data to us or our customers, which c-ould cause a
. loss of revenues and other financial risks, failure to achieve acceptance, diversion of development resources, injury to our
reputation, damages to our efforts to build brand awareness or legal claims being brought against us, any of which could have
a material adverse effect on our market share, operating results or financial condition,
System failures could cause delays or interruptions ofservice and security breaches, whic" could cause us to lose
customers.
To be successful, we will need to continue to provide our customers with reliable service. Some of the events that·could
adversely affect our ability to deliver reliable service include:
physical damage to our network operations centers;
•
disruptions beyond our control;
•
breaches of our security systems;
•
power surges or outages; and
•
software defects.
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System failures or security breaches may cause interruptions in service or reduced capacity for customers, either of which
could cause us to lo~e customers and incur unexpected expenses, as well as increase our exposure to claims for damages for
contractual outage payments.
We are dependent on tlte telecommunications industry, which subjects our business to risks affecting the
telecommunications industry generally.
Although we focus on the inmate telecommunications industry, our business is directly affected by risks facing the
general. The telecommunications industry has been, and we believe it will continue to be,
characterized by several trends, including the following:
telecommuriications industry
•
in
substantial regulatory change due to the passage and implementation of the Telecommunications Act, which
included changes desigued to stimulate competition for both local and long distance telecommunications services;
rapid development and introduction of new technologies and services;
•
o
•
increased competition withln established markets from current and new market entrants that may provide competing
or alternative services;
the increase in mergers and strategic alliances that allow one telecommunications provider to offer increased
services or access to wider geographic markets; and
continued changes in the laws and regulations affecting rates for collect and prepaid calls.
The market for telecommunications services is highly competitive. Our ability to compete successfully in our markets will
depend on several factors, including the following:
how well we market our existing servioes and develop new technologies;
•
the quality and reliability of our network and service;
our ability to anticipate and respond to various competitive factors affecting the telecommunications industry,
including a changing regulatory environment that may affect us differently from our competitors, pricing strategies
and the introduction of new competitive services by our competitors, changes in consumer preferences, demographic
trends and economic conditions; and
•
our ability to successfully defend any claims against us.
Competition could intensify as a result of new competitors and the development of new technologies, products and
services. Some or all of these risks may cause us to have to spend siguificantly more in capital expenditures than we currently
anticipate in order to keep existing, and attract new, customers.
Many of our competitors, such as RBOCs, LECs and IXCs such as AT&T/SBC, MCI and Sprint, have brand recognition
and financial, personnel, marketing and other resources that are significantly greater than ours. In addition, due to
consolidation and strategic alliances within the telecommunications industry, we cannot predict the number of competitors
that will emerge, especially as a result of existing or new federal and state regulatory or legislative actions. Increased
competition from existing and new entities could lead to higher commissions paid to corrections facilities, loss of customers,
reduced operating margins or loss of market share.
Some of our customers are governmental entities that require us to adhere to certain policies that may limit our ability
to attract and retain cllstomers.
Our customers include U.S. federal, state and local governmental entities responsible for the administration and operation
of correctional facilities. We are subject, therefore, to the administrative policies and procedures employed by, and the
regulations that govern the activities of, these governmental entities, including policies, procedures, and regulations
concerning the procurement and retention of contract rights and the provision of seIVices. Our operations may be adversely
affected by the policies and procedures employed by, or the regulations that govern the activities of, these governmental
entities and we may be limited in our ability to secure additional customer contracts, renew, retain and enforce existing
customer contracts, and consummate acquisitions as a result of such policies, procedures and regulations.
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Our equity investors' interests may differ from our noteholders' interests.
Circumstances may arise in which the interests of OUf equity investors could be in conflict with interests of our
noteholders. In particular, our equity investors may have an interest in pursuing certain strategies or transactions that, in their
judgment, enhance the value of their investment in us even though these strategies or transactions may involve risks to the
noteholders, Further, conflicts of interest may arise between our noteholders and our equity investors when we are faced with
decisions that could have different implications for our noteholders and our equity investors, including financial budgets,
potential competition, the issuance and disposition of securities, the payment of distributions by us, regulatory and legal
positions and other matters. Because our equity investors control us, these conflicts may be resolved in a manner adverse to.
or that imposes more risks on our noteholders.
In addition, conflicts of interest may arise between us and one or more of OUf equity investors when we are faced with
decisions that could have different implications for us and our equity investors. For example, our equity investors and their
affiliates ar.e pennitted to compete with us. Because our equity investors control us, conflicts of interest arising due to
competition between us and an equity investor could be resolved in a manner adverse to us, It is possible that there will be
situations where our equity investors' interests are in conflict with our interests, and our equity investors, acting through the
board of directors or through our executive officers, could resolve these conflicts in a manner adverse to us .
. Our ~uccess depends on our ability to attract and retain qualified management and other personnel.
We are dependent on the efforts of our officers and other senior management personneL We believe that it would be
difficult to replace the expertise and experience of our senior management. Accordingly, the loss of the services of one or
more of these individuals could have a material adverse effect on us and our ability to implement our strategies and to
achieve our goals. In addition, our failure to attract and retain additional management to support our business strategy could
also have a material adverse effect on us. See "Management."
Our management in/ormation, internal controls and financial reporti1Jg systems may need/urther enhancements and
development to comply with the requirements of the Securities Exchange Act of1934 and the Sarbanes-Oxley Act of
2002 and the costs of compliance may strain our resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and
internal controls for financial reporting, Section 404 of the Sarbanes-Oxley Act requires that we evaluate and report on our
system of internal controls beginning with our Annual Report on Form 10-K for the year ending December 31,2007, Ifwe
fail to maintain the adequacy of our intemal controls, we could be subject to regulatory scrutiny, and civil or criminal
penalties, Any inability to provide reliable financial reports could harm our business, Section 404 of the Sarbanes-Oxley Act
also requires that our independent registered public accounting firm report on management's evaluation of our system of
internal controls and to identify material weaknesses in our accounting systems and controls, We are in the process of
documenting and testing our system of internal controls to provide the basis for this report, Any failure to implement required
new or improved controls, or difficulties encountered in the implementation of adequate controls over our financial processes
and reporting in the future, could harm our operating results or cause us to fail to meet our reporting obligations,
Regulatory Risks
The FCC is currently reviewing challenges alld alternatives to the exclusive-provider system that, ifimplemellted, could
have an adverse effect on our husiness.
Most correctional facilities grant exclusive contracts toa single provider of inmate telecommunications services. The FCC
has opened several rulemaking proceedings that put into question whether the current regulatory regime applicable to the
provision of inmate telecommWlications services is responsive to the needs of correctional facilities, inmate
telecommunications ,service providers, the inmates and their families. Parties participating in these proceedings generally
include prison inmates and their families, parties receiving calls from inmates, several national inmate advocacy
organizations such as Citizens United for the Rehabilitation of Errants and providers of inmate telecommunications services,
In general, the position of those challenging the current regulatory regime is that inmate telecommunications service rates are
excessive due to lack of competitive market forces and that the FCC should make the exclusive service arrangements
unlawful, permit open access by multiple inmate telecommunications
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service providers, establish rate caps, prohibit commissions to correctional facilities and mandate the offering by inmate
telecommunications service providers of debit (prepaid) card alternatives to collect calling. Such a regime would require a
new and complex set of federal regulations that, if adopted, could immediately reduce our revenues derived from existing
contracts and could lead to increased costs associated with regulatory compliance. Moreover, if implementation ofthese
regulations leads to technological or structnral changes in the industry, it could render our technology obsolete, diminish the
value of our intellectnal property and our customer relationships and lead to a reduction of volume and profitability of calls
originating from correctional facilities.
We operate in a highly regulated industry, and are subject to restrictions in the manner in which we conduct our
business alld a variety of claims relating to such regulation.
Our operations are subject to federal regulation, and we must comply with the Communications Act of 1934, as amended,
and FCC regulations promulgated thereunder. We are also subject to the applicable laws and regulations of various states and
other state agencies, including regulation by public utility commissions. Federal laws and FCC regulations generally apply to
interstate telecommunications (including international telecommunications that originate or tenninate in the United States),
while state regulatory authorities generally ,have jurisdiction over telecommunications that originate and terminate within the
same state. Generally, we must obtain and maintain prior authorization from, or register with, regulatory bodies in most states
where we offer intrastate services and must obtain or submit prior regulatory approval of rates, tenns and conditions for our
intrastate services in most of these jurisdictions. We are also in some cases required, along with other telecommunications
providers, to contribute to federal and state funds established for universal service, number portability, payphone
compensation and related purposes. Laws and regulations in this industry such as those identified above, and others including
those regulating call recording and call rate announcements, and billing, collection and solicitation practices, are all highly
complex and burdensome, making it difficult to always be in complete compliance. The degree of difficulty is sometimes
exacerbated by technology issues. Although we actively seek to comply with all laws and regulations and to remedy all areas
in which we become aware of our non-compliance, we have not always been, and are not currently,,in full compliance with
all regulations applicable to us. Once our non-compliance is remedied, -we may not always remain in compliance with all
applicable requirements in the futnre. Failure to comply with these requirements can result in potentially significant fines,
penalties, regulatory sanctions and claims for substantial damages. Claims may be widespread, as in the case of class actions
commenced on behalf of inmates or the called parties of inmates. Significant fines, penalties, regulatory sanctions and
damage claims could be material to our business, operating results and financial condition. Additionally, regulation of the
telecommunications industry is changing rapidly, and the regulatory environment varies substantially from state to state.
Future regulatory, judicial or legislative activities may have an adverse effect all our operations or financial condition, and
domestic or international regulators or third parties may ra_ise material issues with regard to our compliance or noncompliance with applicable regulations.
ITEM lB. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive office is located in, and a portion of our operations are conducted from, leased premises located at
14651 Dalias Parkway, Suite 600, Dallas, Texas 75254-8815. We also lease additional regional facilities from Which we
conduct our operations located in Selma, Alabama; Bedford, Massachusetts; Raleigh, North Carolina; Irving and San
Antonio, Texas; Foxboro, Massachusetts; Hammonton, New Jersey; and Camp Hill, Pennsylvania. We believe that our
facilities are suitable and the space contained by them adequate for their respective operations.
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ITEM 3. 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 nonnal 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 the Condes
litigation 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 t~riffing, access charges ~md payphone compensation requirel1.1ents
and rate disclosure issues. Currently, T-Netix and Evercom await final dismissal from a lawsuit in the Superior Court for the
State of California in and for the County of Alameda, captioned Condes v. Evercom Systems, Inc., and T-Netix awaits
affirmance of the entry of summary judgment in our favor in a Washington case captioned Sandra Judd, et al. v. AT&T, et
al., initially brought in King County Superior Court in Seattle. In Condes, T-Netix and Evercom, along with other inmate
telecommunications providers, were named in this suit, in which the plaintiffs have 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 the Condes litigation 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 has granted preliminary approval of this settlement; the parties
await final.approval. Neither Evercom nor T-Netix have admitted any wrongdoing and have vigorously denied each al)d
every allegation in the case. During 2005, Securns paid an aggregate of $0.9 million of legal fees and related expenses
associated with the Condes litigation. In Judd, 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 captioned Kirsten 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.
Plaintiffseeks 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-NETlX, Inc., T-NETIX Telecommunications Service,
Inc., and TZ Holdings, Inc. (referred to collectively as "Evercom") are named parties in the lawsuit captioned TIP 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). In TIP Systems, Evercom, along with other inmate
telecommunications providers, are alleged to have infringed on patents concerning Heard-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 captioned TIP Systems, LLC and TIP Systems Holding Co., Inc. v.
SBC Operations, Inc., et. al., which was also filed in the Southern District of Texas. Securns 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth quarter ofthe year ended December 31,
2005.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market In/ormation. Our common stock is not registered and there is currently no established public trading market for
our issued and outstanding equity securities.
(b) Holders a/Record As of March 1,2006, the Company had 10 holders of its Common stock and 10 holders of its Class B
Common stock.
(c) Dividends. We have never declared or paid any cash dividends on our common stock. We currently intend to retain
earnings, if any, to support our business strategy and do not anticipate paying cash dividends in the foreseeable future.
Payment of future dividends, if any, will be at the sale discretion of our board of directors after taking into account
various factors, including restrictions on our ability to pay dividends (see "Management's Discussion and Analysis of
Financial Conditions and Resu!ts of Operations-Debt and Other Obligations"), our financial condition, operating
results, capital requirements and any plans for expansion. The credit agreement governing our second-priority senior
secured notes and the note purchase agreement governing our senior subordinated notes contain certain negative
covenants that restrict our ability to declare dividends.
(d) Securities Authorized/or Issuance Under Equity Compensation Plans. The following table provides information about
the securities authorized for issuance under our equity compensation plans as of December 31, 2005:
Equity Compensation Plan Information
(b)
(a)
Number of
securities
to be issued
upon exercise
of outstanding
options, warrants
and rights (1)(2)
Plan category
Equity compensation
plans approved by
security holders.
Equity compensation
plans not approved
by security holders
(I)
Total
(e)
Weighted~average
exercise price
of outstanding
options, warrants
and rights
Number of Securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column (a»(3)
53,497
$
0.01
11,338
53,497
$
0.01
11,338
(1) Our only equity compensation plan is our 2004 restricted stock plan which has been approved by shareholders. There
are 64,835 shares authorized under the plan.
(2) Includes 53,497 shares of restricted stock issued under the 2004 restricted stock plan.
(3) Includes 11,338 shares of stock issuable under the 2004 restricted stock plan.
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(e) Unregistered Sales o/Equity Securities. During the year ended December 31,2005, the Company sold 36,640 restricted
shares of Class B Common stock ("restricted stock") at a purchase price of $0.01 per share pursuant to the 2004
Restricted Stock Plan to certain members of management. The shares are subject to certain contractual limitations,
including provisions regarding forfeiture and disposition, as provided in management's respective Restricted Stock
Purchase Agreements and the 2004 Restricted Stock Plan. The restricted period ends upon the occurrence of certain
events or the lapse oftime. The sale of the restricted stock was made pursuant to the exemption set forth in Section 4(2)
of the Securities Act of 1933 for transactions not involving a public offering, and regulations promulgated thereunder.
ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following selected consolidated historical financial and other data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the
related notes thereto appearing elsewhere in this Form 10-K. Our predecessor company for the period from January I, 200 I
to March 2, 2004 was T-Netix (the "Predecessor"). We completed the acquisition of Evercom Holdings, Inc. ("Evercom"),
the issuance of our second-priority senior secured notes and the closing of our working capital facility, our senior
subordinated debt and warrant financing (the "Transactions") as of September 9, 2004, and as a result of adjustments to the
carrying value of assets and liabilities resulting from the Transactions, the financial position and results of operations for the
period subsequent to the Transactions may not be comparable to those ofthe Predecessor. The selected historical financial
and other data set forth below for, and as of the end of, the fiscal years ended December 31, 2001, December 31,2002 and
December 31, 2003 have been derived from the audited consolidated financial statements ofthe Predecessor. The selected
historical consolidated financial and other data presented 'below for, and as of, the periods January 1, 2004 to March 2, 2004
and January 12,2004 through December 31,2004 and for, and as of the fiscal year ended December 31, 2005 have been
derived from our audited consolidated financial statements for the year ended December 31,2004, and for, and as oflbe
fiscal year ended December 31,2005.
-9
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T.l!bl~..9LCQ)1!f!!.!~
Predecessor
Period from
January 1,
2004 to
March 2,
2004(1)
~
(in millions)
For the Year Ended December 31 1
Consolidated Statements of
Operations Data:
Operating revenues
Cost of services
Selling, general and
...1!!QL
~
$117.8
66.9
$119.8
72.7
$117.2
75.7
28.8
13.0 .
2.7
26.4
12.1
1.1
26.3
11.9
0.7
6.4
7.5
3.0
(0.5)
(2.1)
9.9
-.S!:.J)
~)
administrative
Depreciation and amortization
Non-cash impainnent of assets
$
~
Other operating expenses(3)
Income (loss) from operations
Other Income (Expense):
Patent litigation settlement, net
of expenses(4)
17.4
11.4
Successor
Period from
January 12,
(Inception)
For the
2004 to
Year Ended
December 31,
December 31,
2005
2004(2)
$
173.4
130.9
$
377.2
289.0
3.6
1.6
0.3
5.3
(4.8)
27.5
13.2
50.6
5.6
(54.4)
(5.4)
(2.2)
(1.0)
(14.0)
(26.6)
(12.4)
(2.6)
(69.4)
(12.7)
(11.3)
(2.2)
48.3
23.9
0.7
15.3
Transaction expenses and other
charges(5)
Interest and other expenses, net
Income (loss) from continuing
operations before income
, taxes
Income tax expense (benefit)
Net income (loss) from
continuing operations
Loss from discontinued
operations
(Impairment)/gain on sale of
assets of discontinued
operations
Accretion of discount on
redeemable convertible
preferred stock
Net income (loss) applicable to
common stockholders
Other Financial Data:
Tot~I direct call provisioning
revenues
Total telecommunications
services revenues
Total solutions services revenues
Total equipment sales and other
revenues
Other Data:
Ratio of earnings to fixed
charges
Deficiency of earnings to fixed
charges
Consolidated Cash Flow Data:
Cash flows from operating
activities
Cash flows from investing
activities
3.2
2.6
........!!:1
~
$
$
=
2.5
2.4
(2.3)
(0.6)
(1.1)
0.3
-.Cl1l
9.2
2.7
$
=
6.5
$
(9.8)
$
(56.7)
$
(9.1)
$
=
6.5
$
(9.8)
$
(56.7)
$
(9.1)
$
9.6
$
120.9
$
--.i!J.)
~
$
=
$ 26.9
$ 48.8
$ 56.7
62.4
57.5
50.6
7.6
30.3
18.5
25.3
47.4
28.5
13.5
9.9
0.2
3.7
1.3
$
1.7
$
2.1
1.6
$
2.9
$
$
9.8
$ 19.4
(7.4)
$ 13.5
(6.4)
$ 26.8
(6.8)
$
(3.8)
(0.6)
$
56.7
$
303.2
(1.8)
(213.1)
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Cash flows from financing
activities
Capital expenditures
Balance Sheet Data (end of
period):
Cash and cash equivalents and
restricted cash
Total current assets
Net property and equipment
Total assets
Total long-term debt (including
cnrrent portion)
Stockholders' equity (deficit)
(9.3)
5.2
$
1.0
21.0
30.2
63.2
22.4
24.5
(1.6)
5.9
$
(0.9)
0.6
(3.7)
6.5
6.6
31.3
25.3
66.7
$ 22.9
40.0
21.5
68.9
22.8
27.1
19.2
35.2
$
17.6
45.7
20.0
74.7
18.3
25.4
216.7
12.4
$
3.2
78.1
36.2
272.1
189.9
(22.8)
(2.8)
26.3
$
4.0
80.7
43.9
266.9
198.0
(31.9)
(I) This column presents the data for T-Netix (predecessor) for the 62-day period from January 1,2004 to March 2, 2004,
prior to our acquisition ofT-Netix on March 3, 2004.
(2) Does not include information for T-Netix (predecessor) for the period from January I, 2004 to March 2, 2004, prior to
our acquisition ofT-Netix on March 3, 2004, or information for Evercom for the period from January 1,2004 to
September 8, 2004, prior to our acquisition of Evercom on September 9, 2004.
(3) Gain on sale of assets, compensation expense on employee options, severance payments and loss on debt
extingnishment.
(4) Reflects income from a one-time litigation settlement, net of legal expenses.
(5) Represents one-time transaction expenses related to Secums' purchase ofT-Netix on March 3, 2004, and Secums'
purchase of Evercom on September 9,2004.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following infonnation should be read in conjunction with our historical consolidated financial statements and related
notes, our audited consolidated financial data and related notes and other financial infonnation included elsewhere in this
FOlm IO-K.
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 December 31, 2005, we provided service to approximately 3,100
correctional facilities.
OUf 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 LEes, and interexchange carriers, or IXCs, for which we
provided our equipment and, as needed, back office support, including validation, billing and collections services, and
charged 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,
arid Evercom, which we acquired in September 2004 in connection with the Transactions.
Revenues
We derived approximately 80% of our 2005 revenues 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
(generally three to five years) 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. OUf commission rates averaged approximately 43%
of direct revenues for 2005. 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 oall 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, hut our gross profit margins are lower as compared to our
telecommunications services and solutions business.
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We derived approximately 7% of our 2005 revenues by providing telecommunications services to RBOCs, LECs, IXCs,
and others, our service partners, typically through subcontracts in connection with their separate contracts with larger
correctional institutions. In such instances, we provide equipment, security enhanced call processing, call validation, and
service and support through the telecommunications provider, rather than directly to the facility. Although our revenues for
services to telecommunications service providers are lower than in our direct call provisioning business, where we provide
the service to the facility directly and receive the retail value of the call, we do not incur all the additional capital costs related
to these larger contracts that typically require up-front or guaranteed commission payments. Our gross margin percentage for
providing telecommunications services is higher than the margin for our direct call provisioning business because we do not
incur commissions, transport costs or risk of collection,
We also offer our solutions services to RBOCs, LEes, IXCs, and others as customers to support their telecommunications
contracts with correctional facilities. We derived approximately 13% of our 2005 revenues 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 telecommunications provider and we accept responsibility for call validation, uncollectible accounts, and billing
and collections costs, with no recourse to the respective 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 service 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 telecommunications 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 telecommunications costs for validating, transmitting, billing and collection, bad debt, and
line and long-distance charges, along with commissions payable to the facilities. In our telecommunications services
business, our service partner bills the called party and we either share the revenues with our service partner or receive a
prescribed fee for each call completed. We also charge fees for additional services such as customer support and advanced
validation.
Cost ofServices
Our cost of services 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 un billable 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.
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Costs of telecommunications services consist primarily of service administration costs for correctional facilities, including
salaries and related personnel expenses, communication costs and inmate calling systems repair and maintenance expenses.
Operating costs of telecommunications services also include costs associated with cai1 validation procedures (primarily
network expenses and database access charges).
Cost of services associated with the solutions business generally include 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 biIling. For example, when
unemployment rates are high, we may decrease credit to less creditworthy-billed parties or require them to purchase prepaid
calling time in order to receive inmate calls. Bad debt tends to rise as the economy worsens, and is subject to numerous
factors,some of which may not be known. To the extent our bad debt management system overcompensates for bad debt
exposure by limiting credit to billed parties, our revenues and profitability may decline as fewer calls are pennitted to be
made.
Field Operations and Maintenance Costs, Field operations and maintenance costs consist of service administration costs
for porrectional facilities, including salaried and related personnel expenses, and inmate calling systems (including related
equipment), repair and maintenance, The costs of providing services primarily consist of service administration costs for
correctional facilities, including salaries and related personnel expenses, communication costs, and inmate calling systems
repair and maintenance expenses,
SG&A. SG&A expenses consist of corporate overhead and selling expenses, including marketing, legal, regulatory and
research and development costs.
Purchase Accounting. We acquired T-Netix on March 3, 2004 and Evercom on September 9,2004 in each case utilizing
the purchase method of accounting. As a result, our financial statements do not include the operations of these two companies
for periods prior to their respective dates of acquisition and period to period comparisons of results of operations may not be
meaningful.
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 long term operating efficiences. As of December 31, 2005, the integration was
substantially complete.
Industry Trends
In the first quarter of2005, large industry participants, Verizon and AT&T, communicated plans to exit the inmate
telecommunications sector, During 2004, Verizon and AT&T were our two largest telecommunications services customers.
and AT&T was our largest solntions 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 wiIl continue to
decline.
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Securus Technologies, Inc,
T~])kQtCm!leJlJ~
Notwithstanding the foregoing developments and the anticipated declining revenue stream associated with our highly
profitable telecommunications 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 agreemeiits to provide direct call
provisioning services to those corrections facilities previously serviced by the large carriers because we already provide some
inmate capabilities to those facilities on a sub~contractor basis, 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 telecommunications and solutions services,
we have not incurred the high capital costs related to these larger contracts which have historically been absorbed by our
RBOe and Ixe partners, Given the large up-front costs associated with the procurement oflarger county'and state
departments of corrections inmate telecommunications contracts, we will be required on a case-by-case basis to weigh the
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.
The following table sets forth, for the years ended December 31, 2002, 2003, 2004 and 2005, respectively, the results of
operations ofT-Netix (predecessor) and Securus (in thousands),
Successor
Predecessor
2002
2003
2005
2004 (1)
Revenues
Direct call
provisioning
Telecommunications
services
Solutions services
Equipment sales and
other
Total revenues
Expenses
Cost of services
$ 48,798
41%
$ 56,735
48% $120,868
70%
$303,174
80%
57,514
48
0
50,645
43
0
30,341
18,466
17
11
25,313
47,398
7
13
13,498
119,810
11
100
9,864
117,244
9
100
3,701
173,376
2
100
1,321
377,206
0
100
72,721
61
75,722
65
130,883
75
288,985
77
26,412
22
26,269
22
27,515
15
48,329
13
30
0
0
125
0
(4)
633
0
0
0
Selling, general and
administrative
Compensation expense
on employee
options and
restricted stock
Non-cash impairment
of
telecommunication
assets
Gain on sale of assets
Employee severance
Loss on debt
extinguishment
Depreciation and
amortization
Operating income
(loss)
Patent litigation
settlement, net of
expenses
1,119
(36)
1
0
0
0
653
(290)
0
1
0
0
50,585
(274)
3,127
29
0
2
0
2,802
2
0
12,101
10
11,892
10
13,157
8
23,856
6
7,463
6
2,998
3
(54,419)
(31)
15,282
4
2,085
2
(9,935)
(8)
2,825
2
3,761
3
14,001
0
987
0
0
Interest and other
expense, net
Transaction fees and
expenses
0
8
26,608
7
0
Income (loss) from
continuing
operations before
income taxes
2,553
2
9,172
8
(69,407)
(40)
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Income tax expense
(benefit)
Net income
(loss) from
continuing
operations
180
o
2,676
2
(12,659)
(7)
(2,174)
2,373
2
6,496
6
(56,748)
(33)
(9,152)
Net loss from
discontinued
operations
Gain on sale of
discontinued
operations
Net income
(loss) applicable
(2)
(616)
(I)
o
o
o
308
o
o
o
o
to common
stockholders
$
2,065
2%
$
6,496
6% $(56,748)
(33)%
$ (9,152)
(2)%
(I) This column presents the data for Securus for the 355-day period from January 12, 2004 (inception) to December 31,
2004. Does not include information for T-Netix (Predecessor) for the period January 1,2004 to March 2, 2004, prior to
our acquisition ofT-Netix on March 3, 2004 or information for Evercom for the period January 1,2004 to September 8,
2004, prior to our acquisition of Evercom on September 9, 2004.
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Results o/Operations/or the Year Ended December 31,2005 Compared to December 31,2004
Total Revenues. Total revenues for the year ended December 31, 2005 increased by $203.8 million, or 117.5%, to
$377.2 million from $173.4 million for the year ended December 31, 2004. Our revenues for the year ended December 31,
2005 represent the consolidated operations ofT-Netix and Evercom for such period while revenues for the period from
January 12,2004 to December 31, 2004 represent only those ofSecurus following our acquisition ofT-Netix on March 3,
2004 and Evercom on September 9, 2004. The revenues for the period ended December 31, 2004 do not include revenues of
$17.5 million and $173.4 million that were generated by T-Netix and Evercom, in the periods, prior to the date of their
acquisition. The remaining increase of $12.9 million consisted of an increase in direct call provisioning revenues of
$20.1 million and an increase in solutions services revenues of $9.6 million. These increases were offset by a decrease in
telecommunications services revenues of $12.6 million and a decrease in equipment sales of $4.2 million.
Direct call provisioning revenues for 2005 increased by $182.3 million, or 150.8%, to $303.2 million from $120.9 million
in 2004. Direct call provisioning revenues for the period from January 12, 2004 to December 31, 2004 do not include
$9.7 million and $152.5 million that were generated by T-Netix and Evercom, respectively, prior to their acquisitions. The
remaining increase of $20.1 million was the result of $31.2 million of revenue growth offset by the conversion of our direct
provisioning contract with the State of North Carolina to solutions services durin