Securus Technologies :: Securus Technologies, Inc. Announces Third Quarter 2008 Operating Results
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Securus Technologies, Inc. Announces Third Quarter 2008 Operating Results
11.14.2008
DALLAS, Nov. 14 /PRNewswire-FirstCall/ -- Securus Technologies, Inc., a leading provider of inmate communications services and innovative offender and case management software design, today announced results for the quarter and nine months ended September 30, 2008.

Highlights for Q3 2008:
  • Q3 to Q3 Core (Direct and Syscon) Revenue Increase of 5.4%
  • Q3 to Q3 EBITDA Increase of 188.2%, 131.9% on a Normalized Basis
  • Q3 to Q3 FCF Increase of 858%, 593% on a Normalized Basis
  • Q3 to Q3 Syscon Revenue Increase of 54.8%
  • Q3 to Q3 Bad Debt Decrease of 31.6%
  • TDCJ Win -- One of the largest inmate telecommunications contracts in the United States
  • Refinancing of Revolving Credit Facility- Increased availability and extension of maturity date
  • Executive Additions -- Increased bandwidth of Executive Team, history of achieving good results



Securus Technologies, Inc.
Consolidated Financial and Operating Data
(Dollars and Calls in Thousands, Except per Unit)

For The Nine Months
Q3 Q2 Q3 Ended September 30,
2008 2008 2007 2008 2007

Total Revenue $95,794 $99,773 $95,033 $293,239 $298,410
Revenue - Direct
Provisioning $81,661 $84,727 $79,755 $251,286 $258,593
Revenue - Syscon (1) $7,427 $7,426 $4,798 $19,042 $4,798
EBITDA $12,723 $10,168 $4,415 $31,127 $21,642
Capital Expenditures $4,620 $4,667 $5,360 $13,360 $16,948
EBITDA less Capital
Expenditures $8,103 $5,501 $(945) $17,767 $4,694
Billed Calls 34,061 34,426 34,236 104,001 110,369
Domestic Revenue
per Call $2.59 $2.68 $2.64 $2.64 $2.66
Percent Prepaid
Revenue - Direct
Provisioning 46.8% 45.4% 36.3% 45.7% 34.0%
Percent Bad Debt -
Non-Syscon 8.5% 9.6% 12.2% 9.5% 13.8%
Total Headcount 652 654 703 652 703
Quota Carrying Field
Sales Associates 41 41 46 41 46

(1) Syscon Justice Systems, Ltd. was acquired on June 29, 2007.


Richard A. (Rick) Smith, Securus' Chief Executive Officer and President said, "We turned in another solid quarter as both EBITDA and free cash flow all showed significant growth in Q3 2008 versus 2007 -- EBITDA increased over 188%, while unlevered cash flow was a positive $8.1M after being negative $0.9M in Q3 2007. We had some one-time events that benefited Q3 2008 results but even if we normalized these out of the run-rate, Q3 results versus last year still showed over 100% improvement. Syscon revenue remained strong in the quarter and was 54.8% higher than a year ago. We settled multiple long standing patent infringement lawsuits in the quarter that will save us several million dollars in outside legal fees on a go forward basis. And, in partnership with Embarq, we were awarded a very large contract from the Texas Department of Criminal Justice (TDCJ) that we believe will generate up to $100M in revenue for Securus over the next seven years. Lastly, we hired a number of additional executives to the Securus leadership team in the quarter to improve customer service, improve our platform reliability and back office systems and improve both revenue growth and gross margin of the products we offer. The executives who came on board this past quarter were Danny de Hoyos, Vice President of Customer Service; Arlin B. Goldberg, Chief Information Officer; and Robert E. Pickens, Chief Marketing Officer. I've worked with all three of these executives for many years and I am confident in their abilities and leadership skills to improve our business results in each of their assigned areas."

William D. (Bill) Markert, Securus' Chief Financial Officer added, "In addition to the solid financial performance we saw in the third quarter, we were also able to refinance our revolver credit facility with Wells Fargo Foothill. The refinancing extended the maturity of the company's revolver out to June, 2011 and also expanded our cash availability under the new revolver. We were able to accomplish the refinancing in a very difficult credit environment which we believe shows a significant amount of confidence in our business model and in our execution."

Total revenues for the third quarter of 2008 were $95.8 million, a decrease $4.0M from the second quarter of 2008 but $0.8 million increase from the third quarter of 2007. The sequential decline is due primarily to seasonality within our business as call volumes are the lowest in the third quarter of each year and bad debt continued to decline. Also contributing to the lower revenue was a state mandated rate reduction for one of our DOC contracts as well as the impact from two hurricanes that hit states in which we have over 150 sites. Syscon, our offender management software subsidiary, had flat revenues in the quarter but grew over 54% from the same quarter last year.

Cost of service in the third quarter was 73.9% of revenue, flat with Q2 2008 but significantly better than the 77.1% we achieved in the third quarter of 2007. Driving this year over year improvement was our lowering of bad debt expense. Non-Syscon bad debt as a percent of revenue dropped to 8.5% in this quarter which compares favorably to the 9.6% we incurred in Q2 2008 and 12.2% in the second quarter last year. We believe this drop is due primarily to shifting our focus to selling prepaid services versus selling on a post-paid basis. Our prepaid revenue as a percent of our direct provisioning segment increased from 36.3% in the third quarter 2007 to 46.8% in the third quarter this year.

Sales, general and administrative expenses for the third quarter of 2008 were $12.3 million, a reduction of $3.6 million from the second quarter of 2008 and $5.1M decline from a year ago. The third quarter of this year included both favorable and unfavorable one time charges including (1) the patent infringement lawsuits we settled in the quarter which we accounted for as a credit to operating expense; and (2) additional costs recorded associated with our executive leadership changes we made. The net of these two items as well as some other smaller one time charges resulted in SG&A being approximately $2.5M lower than our current run-rate.

EBITDA for the third quarter of 2008 was $12.7 million, an increase of $2.6 million from the second quarter of 2008 and an increase of $8.3 million from the third quarter of 2007. EBITDA is a non-GAAP measure. Below is a schedule reconciling reported GAAP net loss to EBITDA. As mentioned above, we had a net benefit of one-time charges in Q3 2008 of $2.5M that favorably impacted Q3 results. The second quarter of 2008 also had roughly $0.6M of one-time benefits. So, if you normalized for these one-time items in both quarters, our normalized EBITDA sequential growth would have been roughly $0.6M, or about 6%.


Securus Technologies, Inc.
Consolidated Net Loss to EBITDA Reconciliation
(In Thousands)

For The Nine Months
Q3 Q2 Q3 Ended September 30,
2008 2008 2007 2008 2007

Net Loss $(6,638) $(8,533) $(13,187) $(25,118) $(29,232)
Interest expense
and other, net 10,137 9,271 7,744 29,593 22,531
Income taxes
(benefit) 351 774 (46) 526 848
Depreciation and
amortization 8,873 8,656 9,904 26,126 27,495
EBITDA $ 12,723 $10,168 $4,415 $31,127 $21,642


Capital expenditures were $4.6 million in the third quarter vs. $4.7 million in the second quarter of 2008 and $5.4 million in third quarter last year. We have spent approximately $13.4 million dollars in capital expenditures in the first nine months of 2008, $3.6M less than the first nine months of 2007. The decline in spending from 2007 levels continues to be driven by both last year's deployment of our packet-based architecture as well as lower signing bonuses paid.

Net loss for the third quarter of 2008 was $6.6 million, an improvement of $1.9 million from the second quarter of 2008 and $6.5 million from the third quarter of 2007. The improvements in net loss were primarily due to lower bad debt incurred in 2008 as well as the net benefits from the one-time items explained above.

Cash and restricted cash at September 30, 2008 was $5.1 million, a slight decline from the $5.9 million balance at the end of the second quarter. As of September 30, the Company had $17.5 million of availability under its revolving credit facility. However, this availability improved to $24.6 million after our new refinancing was completed.

Investor Call

Management is holding an investor conference call on Friday, November 14, 2008 at 10:00 a.m. (CST) to discuss quarterly results. Investors are invited to participate by calling:

    US Dial in:             800-762-8779
International Dial in: 1-480-248-5081
Passcode: 3934479

Replay details are as follows:

Replay Dates: November 14 - December 13, 2008
Replay available at: 1:00 p.m. CST
US Replay Dial in: 800-406-7325
International Dial in: 303-590-3030
Replay Passcode: 3934479

About Securus Technologies, Inc.

Securus Technologies, Inc. is one of the largest suppliers of inmate communications and information management solutions, serving approximately 2,600 correctional facilities nationwide. A recognized leader in providing comprehensive, innovative technical solutions and responsive customer service, Securus' sole focus is the specialized needs of the corrections and law enforcement communities. Securus is headquartered in Dallas, TX, with regional offices in Bedford, MA; Raleigh, NC; Carrollton and Allen, TX; and Atlanta, GA. For more information please visit the Securus website at http://www.securustech.net

Syscon Holdings, Ltd., our wholly-owned subsidiary, is a world leader in innovative Offender and Case Management Software design and delivery. Syscon's Elite and Exact systems offer management functionality from booking and legal documentation through trust accounting, commissary, and medical records to the management of parole and other forms of community supervision. Syscon's systems have been implemented in many States and large Counties across North America, in Australia and in England. Syscon solutions help manage more than 300,000 inmates and former inmates every day. For more information about Syscon, please visit http://www.syscon.net.

Special Note Regarding Forward-Looking Statements

The foregoing release contains statements that are forward-looking within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are only predictions and are not guarantees of future performance. Investors are cautioned that any such forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to the operations and business environment of Securus Technologies, Inc. that may cause the actual results to be materially different from any future results expressed or implied in such forward-looking statements. Securus assumes no obligation to update the information contained in this press release.


SECURUS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)


December 31, September 30,
2007 2008
(unaudited)
ASSETS
Cash and cash equivalents $2,072 $3,590
Restricted cash 1,535 1,593
Accounts receivable, net 50,788 40,237
Prepaid expenses and other current
assets 5,437 5,904
Deferred income taxes 3,034 3,309
Total current assets 62,866 54,633
Property and equipment, net 40,797 35,956
Intangibles and other assets, net 119,427 106,166
Goodwill 69,035 67,143
Total assets $292,125 $263,898

LIABILITIES, REDEEMABLE, CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS'
DEFICIT
Accounts payable $28,161 $25,082
Due to related party 1,000 2,336
Accrued liabilities 40,188 36,124
Deferred revenue and customer advances 16,674 15,066
Current deferred tax 1,261 1,176
Total current liabilities 87,284 79,784
Deferred income taxes 15,352 13,915
Due to related party 3,510 -
Long-term debt 263,276 273,549
Other long-term liabilities 1,593 2,301
Total liabilities 371,015 369,549

Commitments and contingencies

Series A redeemable convertible
preferred stock, $2,000 stated value,
total redemption value $10,200 and
$11,170 at December 31, 2007 and
September 30, 2008; 5,100 shares
authorized and outstanding at
December 31, 2007 and September 30,
2008 9,971 10,987

Stockholders' deficit:
Common stock, $0.001 par value,
1,290,000 and 1,355,000 shares
authorized at December 31, 2007
and September 30, 2008, respectively
677 and 155,333 shares issued and
outstanding at December 31, 2007 and
September 30, 2008, respectively 7 7
Additional paid-in capital 35,620 34,630
Accumulated other comprehensive income 1,935 266
Accumulated deficit (126,423) (151,541)
Total stockholders' deficit (88,861) (116,638)
Total liabilities, redeemable,
convertible preferred stock and
stockholders' deficit $292,125 $263,898



SECURUS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2007 and 2008
(Dollars in thousands)

For the Three For The Nine
Months Ended Months Ended
September September September September
30, 30, 30, 30,
2007 2008 2007 2008
(unaudited) (unaudited)
Revenue:
Direct call provisioning $79,755 $81,661 $258,593 $251,286
Offender management
software 4,798 7,427 4,798 19,042
Wholesale services 10,480 6,706 35,019 22,911
Total revenue 95,033 95,794 298,410 293,239
Cost of service
(exclusive of
depreciation and
amortization shown
separately below):
Direct call provisioning,
exclusive of bad debt
expense 55,017 57,145 175,083 172,927
Direct call provisioning
bad debt expense 8,203 6,171 29,648 20,410
Offender management
software
Expense 3,456 3,693 3,456 10,372
Wholesale services
expense 6,600 3,805 22,339 13,948
Total cost of service 73,276 70,814 230,526 217,657
Selling, general and
administrative expense 17,342 12,257 45,628 44,231
Restructuring costs - - 614 224
Depreciation and
amortization expense 9,904 8,873 27,495 26,126
Total operating costs
and expenses 100,522 91,944 304,263 288,238
Operating income (loss) (5,489) 3,850 (5,853) 5,001
Interest and other
expenses, net 7,744 10,137 22,531 29,593
Loss before income
taxes (13,233) (6,287) (28,384) (24,592)
Income tax expense
(benefit) (46) 351 848 526
Net loss (13,187) (6,638) (29,232) (25,118)
Accrued dividends on
redeemable convertible
preferred stock - (334) - (1,017)
Net loss available to
common stockholders $(13,187) $(6,972) $(29,232) $(26,135)



SECURUS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2008
(Dollars in thousands)


September 30, September 30,
2007 2008
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(29,232) $(25,118)
Adjustment to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 27,495 26,126
Amortization of fair value of contracts acquired 861 2,761
Deferred income taxes (1,052) (1,199)
Non-cash interest expense 8,214 9,288
Equity loss from unconsolidated affiliate 102 -
Stock-based compensation 51 26
Amortization of deferred financing
costs and debt discounts 1,540 2,578
Changes in operating assets and liabilities:
Restricted cash (57) (58)
Accounts receivable 15,748 10,175
Prepaid expenses and other current assets 245 (557)
Intangible and other assets 569 634
Accounts payable (7,291) (7,577)
Accrued liabilities and other liabilities (5,384) (4,513)
Net cash provided by operating activities $11,809 $12,566

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment including
costs of intangibles $(16,948) $(13,360)
Cash consideration paid for acquired business (43,689) -
Proceeds from sale of unconsolidated affiliate 985 -
Property insurance proceeds 88 -
Net cash used in investing activities $(59,564) $(13,360)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of second-priority
senior secured notes $39,060 $-
Advances on revolving credit facility, net 10,894 319
Cash overdraft 562 4,568
Debt issuance costs (5,009) (1,468)
Advance from or (payment to) related party 5,000 (2,174)
Net cash provided by financing activities $50,507 $1,245
Effect of exchange rates on cash and
cash equivalents (1,222) 1,067
Increase in cash and cash equivalents $1,530 $1,518
Cash and cash equivalents at the beginning
of the period 558 2,072
Cash and cash equivalents at the end of
the period $2,088 $3,590

SUPPLEMENTAL DISCLOSURES:
Cash paid during period for:
Interest $18,337 $21,813
Income taxes $236 $846
NONCASH FINANCING AND INVESTING ACTIVITIES:
Non-cash consent fee $400 $-
Leasehold improvements $ - $710