<PAGE> 1
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-49767
[SCC LOGO]
3,300,000 SHARES
COMMON STOCK
------------------------------
Of the 3,300,000 shares of Common Stock offered hereby, 2,100,000 shares
are being sold by SCC Communications Corp. ("SCC" or the "Company"), and
1,200,000 shares are being sold by the Selling Stockholders. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholders. Prior to this offering, there has
been no public market for the Common Stock of the Company. See "Underwriting"
for information relating to the method of determining the initial public
offering price. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "SCCX."
------------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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============================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1) SELLING STOCKHOLDERS
- ----------------------------------------------------------------------------------------------------------------------------
Per Share....................... $12.00 $0.84 $11.16 $11.16
- ----------------------------------------------------------------------------------------------------------------------------
Total(2)........................ $39,600,000 $2,772,000 $23,436,000 $13,392,000
============================================================================================================================
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $800,000.
(2) The Company and certain Selling Stockholders have granted the Underwriters a
30-day option to purchase up to an additional 495,000 shares of Common Stock
solely to cover over-allotments, if any. See "Underwriting." If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholders will
be $45,540,000, $3,187,800, $26,951,400 and $15,400,800, respectively.
------------------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about June 29, 1998.
BANCAMERICA ROBERTSON STEPHENS HAMBRECHT & QUIST
THE DATE OF THIS PROSPECTUS IS JUNE 24, 1998
<PAGE> 2
Diagram consisting of four boxes encircled in text (starting at top, moving
clockwise):
WIRELESS ILECS-CLECS WIRELINE PCS-CELLULAR
Tag line above Diagram:
9-1-1 is an Essential Part of the Operational Support Systems Market
Upper left box text:
Planning & Engineering
Decision support
Network design and optimization
Product planning and development
Upper right box text:
Service Provisioning
Inventory management
Provisionary/assignment
Service activation
Service order processing
[With 9-1-1 Database Management logo]
Lower left box text:
Operations
HR/payroll/financial
Network management
Repair/craft interface
Security
Workforce management
[With 9-1-1 Network Management logo]
Lower right box text:
Customer Care & Billing
Billing
Customer service and support
Marketing and sales
Pricing/rating
SCC logo below diagram
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET FOR THE COMMON STOCK OF
THE COMPANY, INCLUDING ENTERING STABILIZING BIDS EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE> 3
Inside Panel:
SCC Solution Set
SCC provides 9-1-1 OSS services to ILECs, CLECs and wireless carriers throughout
North America. SCC focuses on developing innovative and automated solutions to
provide customers with a comprehensive system for managing large amounts of
dynamic subscriber information.
NDSC Services
Through its NDSC, SCC offers a comprehensive, cost-effective solution to the
9-1-1 service provisioning needs of ILECs, CLECs and wireless carriers by
enabling them to outsource virtually all aspects of the operations of their
9-1-1 data management. Services include system activation, routine data
administration, event transaction processing and performance management, with a
high level of security and survivability.
Enhanced Public Safety Services
SCC offers enhancements to its 9-1-1 OSS services that provide additional
features and functionality. Services currently include 9-1-1Net, Private Switch
ALI and 9-1-1Connect. In addition, SCC expects to introduce Subscriber ALI and
Emergency Warning & Evacuation System by late 1998.
License Products
SCC offers 9-1-1 OSS software to customers that elect to manage their own 9-1-1
data records rather than outsourcing such operations. SCC also provides custom
software development services to customers with specific or local requirements
through its engineering department. The engineering department develops,
customizes and enhances the software using a structured approach to perform
requirements analysis, software development and quality assurance.
Commercial Services
SCC is developing new products and services such as dynamic call routing for
multi-location call centers for both telecommunication carriers and others and
improved address information for the billing, ordering and provisioning
departments of telecommunication carriers.
[SCC logo Above Map]
Tag Line Above Map:
Providing 9-1-1 OSS Services Throughout North America...
Continued Tag Line Below Map:
and Leveraging Our Infrastructure and Expertise Beyond 9-1-1...
[Map of United States Communications Network]
Text Underneath Map:
This map is an artistic impression of SCC's contracted network and processing
elements
Customer Names Below Map:
Ameritech AT&T Wireless Bell Canada Nextel 360 degrees Communications Time
Warner Telecom US WEST Communications Vanguard Cellular WorldCom, Inc. ...and
others
SCC Strategy -- Key Elements
Maintain and extend leadership in wireline 9-1-1 data management market
Capitalize on emerging wireless carrier opportunities
Maintain and extend leadership position in National Clearinghouse Services
Provide additional services to telecommunications carriers
Develop applications for new commercial products
Expand international operations
<PAGE> 4
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL JULY 19, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------
TABLE OF CONTENTS
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PAGE
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Summary..................................................... 4
Risk Factors................................................ 7
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 30
Management.................................................. 41
Certain Transactions........................................ 47
Principal and Selling Stockholders.......................... 48
Description of Capital Stock................................ 50
Shares Eligible for Future Sale............................. 52
Underwriting................................................ 54
Legal Matters............................................... 56
Experts..................................................... 56
Additional Information...................................... 56
Glossary of Terms........................................... 57
Index to Financial Statements............................... F-1
</TABLE>
------------------------------
9-1-1 Extended Architecture, 9-1-1NRC, 9-1-1XA, 9-1-1 National Reference
Center, 9-1-1 Net and 9-1-1 Connect are trademarks of the Company. This
Prospectus contains other product names, trade names and trademarks of the
Company and of other organizations.
3
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include those discussed under
"Risk Factors," as well as those discussed elsewhere in this Prospectus. Certain
terms used herein are defined under the heading "Glossary of Terms."
THE COMPANY
SCC is the leading provider of 9-1-1 operations support systems ("OSS")
services to incumbent local exchange carriers ("ILECs"), competitive local
exchange carriers ("CLECs") and wireless carriers in the United States. The
Company has redefined the U.S. market for 9-1-1 OSS by creating the first and
largest 9-1-1 service bureau, the SCC National Data Services Center ("NDSC"),
with over 70 million subscriber data records under management throughout North
America. The Company manages the data that enable a 9-1-1 call to be routed to
the appropriate public safety agency along with accurate and timely information
about the caller's identification and location. Through SCC's NDSC, the Company
offers a comprehensive, cost-effective solution to the 9-1-1 service
provisioning needs of ILECs, CLECs and wireless carriers by enabling them to
outsource virtually all aspects of the operations of their 9-1-1 data management
services, including system activation, routine data administration, event
transaction processing and performance management, with a high level of security
and survivability. In addition, the Company licenses its 9-1-1 OSS software to
carriers that wish to manage the delivery of 9-1-1 data management services
in-house. Representative carriers using SCC's 9-1-1 OSS solution include
Ameritech, AT&T Wireless Services, BellSouth, MCI, Sprint PCS and Worldcom
Network SVCS.
Today, 9-1-1 is a fundamental element of local exchange service and
carriers' OSS infrastructure. 9-1-1 service involves the routing of emergency
calls to the appropriate public safety answering point ("PSAP") responsible for
dispatching police, fire and other emergency services. When a caller dials
9-1-1, information about the caller's location, telephone number and the
jurisdictionally appropriate PSAP must be quickly accessed from carriers'
network and mission-critical data servers. Thus, delivery of 9-1-1 service
presents a difficult OSS challenge for carriers because it requires the
coordination of data from multiple sources, the review and processing of the
data, the resolution of data errors and conflicts, and the insertion of the data
into network and mission-critical data servers. ILECs, CLECs and wireless
carriers require a 9-1-1 solution that addresses these OSS challenges and cost
effectively provides a high degree of data integrity and reliability, allows
them to comply with regulatory mandates, and addresses their need to provide
additional value-added services. ILECs are seeking to reduce the significant
capital expenditures associated with supporting rapidly evolving 9-1-1
infrastructure and upgrading their 9-1-1 data management and network control
services to meet PSAP requirements and technological advancements. CLECs and
wireless carriers, many of which are relatively small and new to the markets in
which they are now competing, are seeking to increase their own subscriber bases
while minimizing their investment in OSS technology infrastructure and
personnel, as well as the relationships with PSAPs necessary to provide 9-1-1
service. Carriers with these requirements may choose to develop their own
proprietary solutions, to license the 9-1-1 software and manage the delivery of
9-1-1 service themselves, or to outsource their 9-1-1 OSS needs.
Through SCC's NDSC, the Company provides the data management services that
ILECs, CLECs and wireless carriers need to deliver 9-1-1 calls to the
appropriate PSAP, along with critical information such as caller location and
call-back number that PSAPs need to respond effectively to emergencies. Complex
data screening and preparation are completed to initialize properly the
underlying systems necessary for 9-1-1 call routing and information display for
the call taker. SCC's NDSC frequently receives and processes electronic
transmissions from ILECs, CLECs and wireless carriers detailing subscriber and
coverage updates and public safety jurisdiction boundary changes from PSAPs.
Records identified as potentially having problems are automatically separated
for manual review and analysis by SCC data integrity analysts. Using the updated
4
<PAGE> 6
information, SCC's 9-1-1 OSS then provides the information to route the 9-1-1
call and transmit essential information to the emergency service provider.
The Company's objective is to be the leading national provider of 9-1-1 OSS
and other complementary services to ILECs, CLECs and wireless carriers. SCC
focuses on developing innovative and automated solutions to provide customers
with a comprehensive system for managing large amounts of dynamic subscriber
information. Key elements of the Company's strategy are to: (i) maintain and
extend its leadership position in the 9-1-1 wireline data management market;
(ii) capitalize on emerging wireless carrier opportunities; (iii) maintain and
extend its leadership position in national clearinghouse services; (iv) provide
additional services to telecommunications carriers; (v) develop applications for
new commercial products; and (vi) expand international operations.
The Company was incorporated in July 1979 in the State of Colorado under
the name of Systems Concepts of Colorado, Inc., and was reincorporated in
September 1993 in the State of Delaware under the name SCC Communications Corp.
The Company's principal executive offices are located at 6285 Lookout Road,
Boulder, Colorado 80301. Its telephone number is (303)581-5600.
THE OFFERING
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Common Stock Offered by the Company................ 2,100,000 shares
Common Stock Offered by the Selling Stockholders... 1,200,000 shares
Common Stock to be Outstanding after the 10,442,853 shares(1)
Offering.........................................
Use of Proceeds.................................... For repayment of certain indebtedness, working
capital and other general corporate purposes,
and possible acquisitions. See "Use of
Proceeds."
Nasdaq National Market Symbol...................... SCCX
</TABLE>
- ------------
(1) Based on shares outstanding as of April 30, 1998. Includes 6,383,723 shares
of Common Stock to be issued upon conversion of convertible preferred stock
and exercise of a warrant concurrently with the closing of the offering made
hereby. Excludes 1,114,046 shares of Common Stock issuable upon exercise of
stock options outstanding as of April 30, 1998 at a weighted average
exercise price of $3.11 per share, 286,078 shares of Common Stock reserved
for grant of future options as of April 30, 1998, under the Company's 1990
Stock Option Plan, and 500,000 shares of Common Stock reserved for issuance
under the Company's 1998 Stock Incentive Plan. See "Management -- Benefit
Plans -- 1998 Stock Incentive Plan."
5
<PAGE> 7
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ---------------
1995 1996 1997 1997 1998
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................................... $ 7,413 $14,802 $27,072 $5,132 $7,902
Costs and expenses.............................. 6,727 13,329 23,738 4,639 6,940
Other expense, net.............................. 368 527 879 150 301
Income from continuing operations before income
taxes......................................... 318 946 2,455 343 661
Provision (benefit) for income taxes............ 16 9 (2,328) 24 46
Net income from continuing operations........... 302 937 4,783 319 615
Loss from discontinued operations, net of tax
and disposal of discontinued division......... (1,746) (562) (2,908) (253) --
Net income (loss)............................... (1,444) 375 1,875 66 615
Net income (loss) from continuing operations per
share(1):
Basic......................................... $ (0.02) $ 0.15 $ 2.17 $ 0.07 $ 0.20
Diluted....................................... $ (0.02) $ 0.11 $ 0.54 $ 0.04 $ 0.07
Net income (loss) per share(1):
Basic......................................... $ (1.07) $ (0.17) $ 0.61 $(0.07) $ 0.20
Diluted....................................... $ (1.07) $ 0.05 $ 0.21 $ 0.01 $ 0.07
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MARCH 31, 1998
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
-------- -------------- --------------
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BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 1,177 $ 1,177 $19,203
Working capital......................................... (2,031) (2,031) 16,445
Total assets............................................ 23,328 23,328 41,354
Long-term debt.......................................... 9,642 9,642 6,998
Total stockholders' equity (deficit).................... (11,485) 4,810 25,930
</TABLE>
- ------------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
determination of shares used in computing net income (loss) from continuing
operations per share.
(2) Reflects the conversion of convertible preferred stock into an aggregate of
6,188,575 shares of Common Stock and the exercise of an outstanding warrant
to acquire 195,148 shares of Common Stock. See Note 4 of Notes to Financial
Statements.
(3) Reflects the conversion of convertible preferred stock into an aggregate of
6,188,575 shares of Common Stock, the exercise of an outstanding warrant to
acquire 195,148 shares of Common Stock, the sale of 2,100,000 shares of
Common Stock by the Company and the application of the estimated net
proceeds therefrom. See "Use of Proceeds," "Capitalization" and Note 4 of
Notes to Financial Statements.
------------------------------
Except as otherwise indicated herein, all information presented in this
Prospectus (i) gives effect to a 1-for-3 reverse stock split, (ii) reflects the
conversion of all outstanding shares of the Company's mandatorily redeemable,
convertible preferred stock, par value $.001 (the "Convertible Preferred
Stock"), into an aggregate of 6,188,575 shares of Common Stock and the exercise
of an outstanding warrant to acquire 195,148 shares of Common Stock, (iii) gives
effect to the filing of an Amended and Restated Certificate of Incorporation
upon the closing of this offering to, among other things, create a new class of
undesignated preferred stock and (iv) assumes no exercise of the Underwriters'
over-allotment option.
6
<PAGE> 8
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information
contained in this Prospectus, should be carefully considered in evaluating the
Company and its business before purchasing shares of the Common Stock offered
hereby. This Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below as well as that discussed elsewhere in this Prospectus.
SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company has experienced fluctuations in its quarterly operating results
and anticipates that such fluctuations will continue and could intensify.
Fluctuations in operating results may result in volatility in the price of the
Company's Common Stock. Although the Company was profitable in seven of its last
eight quarters, there can be no assurance that the Company's profitability will
continue in the future or, if the Company is profitable, that its levels of
profitability will not vary significantly between quarters.
The Company experienced a net loss of approximately $453,000 in 1997,
exclusive of the benefit for income taxes, as a result of losses from
discontinued operations of approximately $876,000 and losses on the disposal of
such operations of approximately $2.0 million. The Company's operating results
may fluctuate as a result of many factors, including the length of the sales
cycle for new or existing customers, the size, timing or duration of significant
customer contracts, fluctuations in the number of subscriber records under
management, timing of new service offerings, demand by license customers for new
development services, customer acceptance of service offerings, ability of the
Company to hire, train and retain qualified personnel, increased competition,
changes in operating expenses, changes in the Company's strategy, the financial
performance of the Company's customers, changes in telecommunications
legislation and regulations that may affect the competitive environment for the
Company's services, and general economic factors. The Company's contracts for
data management services generally include a non-recurring initial fee, and
therefore, the Company may recognize significantly increased revenue for a short
period of time upon commencing services for a new customer.
The Company's expense levels are based in significant part on its
expectations regarding future revenue. The Company's revenue is difficult to
forecast because the market for the Company's services is evolving rapidly and
the length of the Company's sales cycle, the size and timing of significant
customer contracts and license fees and the timing of recognition of
non-recurring initial fees vary substantially among customers. Accordingly, the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected shortfall in revenue. Any significant shortfall could therefore
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the Company hired a significant number
of employees in 1996, 1997 and the first quarter of 1998, and expects to
continue hiring additional employees during the remainder of 1998. The Company
expects that this increase will affect the Company's operating margins for the
short term. There can be no assurance that the Company can continue to report
operating profits, and failure to do so could have a material adverse effect on
the Company's business, financial condition and results of operations.
Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from quarter to
quarter. As a result, quarter-to-quarter comparisons of operating results are
not necessarily meaningful or indicative of future performance. Furthermore, it
is possible that in some future quarter the Company's operating results will be
below the expectations of public market analysts or investors. In such event, or
in the event that adverse conditions prevail, or are perceived to prevail, with
respect to the Company's business or generally, the market price of the
Company's Common Stock would likely be materially adversely affected. See
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
7
<PAGE> 9
LENGTHY SALES CYCLE
Potential customers of the Company typically commit significant resources
to the technical evaluation of the Company's services and products and the
Company typically spends substantial time, effort and money providing education
regarding the Company's 9-1-1 OSS solution. The evaluation process often results
in an extensive and lengthy sales cycle, typically ranging between six months
and two years, making it difficult for the Company to forecast the timing and
magnitude of sales contracts. Delays associated with customers' internal
approval and contracting procedures, procurement practices, and testing and
acceptance processes are common. For example, customers' budgetary constraints
and internal acceptance reviews may cause potential customers to delay or forego
a purchase. The delay or failure to complete one or more large contracts could
have a material adverse effect on the Company's business, financial condition
and results of operations and cause the Company's operating results to vary
significantly from quarter to quarter. See "-- Significant Fluctuations in
Quarterly Results of Operations" and "Business -- Sales and Marketing."
RELIANCE ON SIGNIFICANT CUSTOMERS
The Company historically has depended on, and expects to continue to depend
on, large contracts from a limited number of significant customers. During the
year ended December 31, 1996, the Company recognized approximately 82% of its
total revenue from continuing operations from Ameritech and U.S. WEST, each of
which accounted for greater than 10% of the Company's revenue in such year.
During the year ended December 31, 1997, the Company recognized approximately
81% of its total revenue from continuing operations from Ameritech, BellSouth
Inc. and U.S. WEST, each of which accounted for greater than 10% of the
Company's revenue in such year. The Company believes that these customers will
continue to represent a substantial portion of the Company's total revenue in
the future. Certain of the Company's contracts with these customers allow them
to cancel their contracts with the Company in the event of changes in
regulatory, legal, labor or business conditions. The Company's contracts with
these customers expire between 2004 and 2005. The loss of any of these customers
would have a material adverse effect on the Company's business, financial
condition and results of operations. Recently SBC Communications, Inc., which is
not a customer of the Company, agreed to acquire Ameritech. The Company cannot
predict what effect, if any, this acquisition will have on the Company and there
can be no assurance that this acquisition or any future consolidation in the
telecommunications industry will not have a material adverse effect on the
Company's business, financial condition and results of operation. None of the
Company's major customers has any obligation to purchase additional products or
additional services beyond those currently contemplated by their existing
contracts. Consequently, the failure by the Company to develop relationships
with significant new customers could have a material adverse effect on the rate
of growth in the Company's revenue, if any. If the Company fails to monitor and
maintain adequately the quality and expand the breadth of its services and
products, advance its technology or continue to price its services and products
competitively, one or more of its major customers may select alternative
providers or seek to develop services and products internally. See "Business --
Customers."
RATE OF ADOPTION BY PUBLIC SAFETY ANSWERING POINTS
A growing percentage of the Company's revenue is derived from the
management of 9-1-1 data records for wireless carriers. Recognizing the public
safety need for improved wireless 9-1-1 service, the Federal Communications
Commission (the "FCC") issued Report & Order 94-102 (the "Order") on June 12,
1996, a directive that mandated the adoption of 9-1-1 technology by wireless
carriers in two phases. Phase I required wireless carriers to provide to
requesting PSAPs at the time of a 9-1-1 call, the caller's telephone number and
location of the receiving cell site. Wireless carriers had to comply with Phase
I mandates by the later of April 1, 1998, or six months after the PSAP request.
Phase II requires wireless carriers to locate a 9-1-1 caller to within 125
meters, subject to FCC guidelines. Wireless carriers must comply with Phase II
mandates for requesting PSAPs by October 1, 2001. The Company believes that the
technological challenges confronting wireless carriers attempting to comply with
the Order will encourage them to outsource their 9-1-1 services. If many
wireless carriers decide not to outsource such services, the Company's business,
financial condition and results of operations could be materially and adversely
affected. If PSAPs delay demanding services complying
8
<PAGE> 10
with the Order from wireless carriers, the Company would experience a delay in
receiving revenue under its current wireless contracts that, because the Company
has already incurred costs in expectation of such revenue, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON NEW PRODUCTS AND SERVICES; RAPID TECHNOLOGICAL CHANGE
The market for the Company's services is characterized by rapid
technological change, frequent new product or service introductions, evolving
industry standards and changing customer needs. The Company currently intends to
begin offering in late 1998 both its Subscriber ALI product, which will allow
subscribers to enter personal information into their 9-1-1 records, and its
Emergency Warning and Evacuation System, which will allow PSAPs to call all
numbers in a given area and warn of imminent danger. The introduction of
products and services embodying new technologies and the emergence of new
industry and technology standards can render existing products and services
obsolete and unmarketable in short periods of time. The Company expects other
vendors regularly to introduce new products and services, as well as
enhancements to their existing products and services, that will compete with the
services and products offered by the Company. As a result, the life cycles of
the Company's services and products are difficult to estimate. The Company
believes that its future success will depend in large part on its ability to
maintain and enhance its current service and product offerings, to develop and
introduce regularly new services and products that will keep pace with
technological advances and satisfy evolving customer requirements, and to
achieve acceptable levels of sales of its new services and products through its
current customers that resell the Company's solutions to their subscribers.
However, there can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of such new services and products or that its new
services and products will adequately meet the requirements of the marketplace
and achieve market acceptance. Announcements of currently planned or other new
service and product offerings by the Company or its competitors may cause
customers to defer the purchase of existing Company services and products. The
Company's inability to develop on a timely basis new services or products, or
the failure of such new services or products to achieve market acceptance, could
have a material adverse effect on the Company's business, financial condition
and results of operations. The development of new, technologically advanced
products and services is a complex and uncertain process requiring high levels
of innovation, as well as the accurate anticipation of technological and market
trends. There can be no assurance that the Company will successfully develop,
introduce or manage the transition to new services and products. Furthermore,
services and products such as those offered by the Company may contain
undetected or unresolved errors when they are first introduced or as new
versions are released. There can be no assurance that, despite extensive testing
by the Company, errors will not be found in new services and products after
commencement of commercial availability, resulting in delay in or loss of market
acceptance and sales, diversion of development resources, injury to the
Company's reputation or increased service and warranty costs, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Significant delays in meeting deadlines for announced
service or product introductions or performance problems with such products or
upgrades could result in an undermining of customer confidence in the Company's
services and products, which would materially adversely affect its customer
relationships as well.
In addition, the Company plans to introduce transaction-based services and
software products to industries different from those the Company has
traditionally supported. There can be no assurance that the Company will be
successful in developing and marketing these new services and products or that
its current or new services and products will adequately meet the demands of its
new markets. Because it is generally not possible to predict the time required
and costs involved in reaching certain research, development and engineering
objectives related to entering new markets, actual development costs could
exceed budgeted amounts and estimated development schedules could require
extensions. Furthermore, there can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these services and products. If the Company is
unable to develop and introduce new services and products to these new markets
in a timely manner, or if a new release of a product or service to such new
markets does not achieve market acceptance, the Company's business, financial
condition and results of operations could be materially adversely affected.
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DEPENDENCE ON A SINGLE SERVICE OFFERING; SUSTAINABILITY OF GROWTH
The Company currently derives substantially all of its revenue from the
provision of its 9-1-1 OSS solution to ILECs, CLECs and wireless carriers.
Accordingly, the Company is susceptible to adverse trends affecting this market
segment, such as government regulation, technological obsolescence and the entry
of new competition. The Company expects that this market will continue to
account for substantially all of its revenue in the near future. As a result,
the Company's future success will depend on its ability to continue to sell its
9-1-1 OSS solution to ILECs, CLECs and wireless carriers, maintain and increase
its market share by providing other value-added services to the market, and
successfully adapt its technology and services to other related markets. There
can be no assurance that markets for the Company's existing services and
products will continue to expand or that the Company will be successful in its
efforts to penetrate new markets. See "Business -- Strategy."
FIXED PRICE CONTRACTS AND OTHER PROJECT RISKS
During 1997, approximately 75% of the Company's revenue was generated on a
fixed price per subscriber basis. The Company generally enters into contracts
with a ten-year term for wireline data management services and with a
two-to-five-year term for wireless data management services for which the
Company generally receives a fixed monthly fee based upon the number of
subscribers and upon the services selected by the customer. Therefore, the
Company's failure to estimate accurately the resources required for a fixed
price per subscriber contract could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
The Company provides 9-1-1 OSS services that are critical to the public's
perception of its customers. The Company's failure to meet a customer's
expectations in the performance of its services could damage the Company's
reputation and adversely affect its ability to attract new business, and may
have a material adverse effect upon its business, financial condition and
results of operations. The Company has undertaken, and in the future may
undertake, projects in which the Company guarantees performance based upon
defined operating specifications. Unsatisfactory performance may result in
client dissatisfaction and a reduction in payment to, or payment of damages by,
SCC, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Because the Company's services and products are utilized by its customers
to provide critical 9-1-1 services, the provision of services and licensing of
software by the Company may entail the risk of product liability and related
claims. The Company's agreements with its customers typically require the
Company to indemnify its customers for the Company's own acts of negligence. The
Company currently has product liability insurance that, subject to liability
limitations and customary exclusions, covers claims resulting from the failure
of the Company's services or products to perform the function or serve the
purpose intended. To the extent that any claims are not covered by such
insurance, the Company's business, financial condition and results of operations
may be materially and adversely affected by a successful product liability
claim.
EMERGING TELECOMMUNICATIONS MARKET AND NEW CARRIERS; REGULATORY UNCERTAINTY
The Company provides its 9-1-1 OSS solution to telecommunications carriers
in the wireline and wireless markets. Although these markets have experienced
significant growth and have been characterized by increased deregulation and
competition in recent years, there can be no assurance that such trends will
continue at similar rates or that the Company will be able to market and sell
effectively its products and services in such markets. In addition, many of the
new entrants in the telecommunications market are companies that lack
significant financial and other resources. To cultivate relationships with such
new market entrants, the Company may be required to offer alternative pricing
arrangements, which may provide for deferred payments. However, there can be no
assurance that the Company will be able to develop such relationships or that
new carriers that become customers of the Company will gain market acceptance
for their telecommunications services. If the Company permits customers that do
not have adequate financial resources to pay the Company for its services on a
deferred basis, the Company ultimately may be unable to collect
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payments for such services. Because the Company historically has depended on a
limited number of long-term customer relationships, the failure of the Company
to develop relationships with, make sales to, or collect payments from new
telecommunications carriers, or the failure of the Company's customers to
compete effectively in the telecommunications market, could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the telecommunications industry is experiencing
substantial consolidations and changes that are unpredictable, and any such
consolidation or change could have a material adverse effect on the Company's
business, financial condition and results of operations.
9-1-1 services generally are funded by a locally imposed fee per subscriber
per month. A portion of this tax is paid to the local carrier providing the
9-1-1 services. The Company generally receives a monthly fee per subscriber from
its customers for management of 9-1-1 data records, allowing the carrier to
match its fixed revenue stream for 9-1-1 services with a fixed cost for record
management. Changes by local governments in the funding mechanism for 9-1-1
services or the parties responsible for the provision of such services could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The market for the Company's services and products has been influenced by
the adoption of regulations under the Telecommunications Act of 1996 (the "1996
Act"), the new duties imposed on ILECs by the 1996 Act to open the local
telephone markets to competition, and the new requirements imposed on wireless
carriers by the Order. Therefore, any changes to such legal requirements, the
adoption of new regulations by federal or state regulatory authorities under the
1996 Act or any legal challenges to the 1996 Act could have a material adverse
effect upon the market for the Company's services and products. Although the
1996 Act was designed to expand competition in the telecommunications industry,
the realization of the objectives of the 1996 Act is subject to many
uncertainties, including judicial and administrative proceedings designed to
define rights and obligations pursuant to the 1996 Act, actions or inactions by
ILECs and other carriers that affect the pace at which changes contemplated by
the 1996 Act occur, resolution of questions concerning which parties will
finance such changes, and other regulatory, economic and political factors.
The Company is aware of certain litigation challenging the validity of the
1996 Act and the local telephone competition rules adopted by the FCC to
implement the 1996 Act. The U.S. Eighth Circuit Court of Appeals has invalidated
the pricing methodology and unbundling requirements adopted by the FCC while
upholding a portion of the FCC's local competition rules, and both the U.S.
federal government and ILECs have filed petitions for review with the U.S.
Supreme Court. In a recent decision, a U.S. District Court in Texas declared
unconstitutional the provisions of the 1996 Act requiring the Regional Bell
Operating Companies (the "RBOCs") to comply with certain conditions, including
local number portability ("LNP"), in order to receive regulatory approval to
enter long distance markets. The U.S. Department of Justice, representing the
FCC, has appealed this decision. Such litigation may serve to delay
implementation of the 1996 Act, which could adversely affect demand for the
Company's services and products. Any delays in the deadlines imposed by the 1996
Act, the FCC or the Order, or any invalidation, repeal or modification in the
requirements imposed by the 1996 Act, the FCC or the Order, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, customers may require, or the Company otherwise
may deem it necessary or advisable, that the Company modify its services and
products to address actual or anticipated changes in the regulatory environment.
Any other delays in implementation of the 1996 Act, or other regulatory changes,
could materially adversely affect the Company's business, financial condition
and results of operations.
RISK OF SYSTEM FAILURES
The Company's operations are dependent upon its ability to maintain its
computer and telecommunications equipment and systems in effective working
order, and to protect its systems against damage from fire, natural disaster,
power loss, telecommunications failure or similar events. Although all of the
Company's mission-critical systems and equipment are designed with built-in
redundancy and security, there can be no assurance that a fire, natural
disaster, power loss, telecommunications failure or similar event would not
result in an interruption of the Company's services. Any damage, failure or
delay that causes interruptions in the Company's operations could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, any future addition or expansion of the
Company's facilities to increase
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capacity could increase the Company's exposure to damage from fire, natural
disaster, power loss, telecommunications failure or similar events. There can be
no assurance that the Company's property and business interruption insurance
will be adequate to compensate the Company for any losses that may occur in the
event of a system failure or that such insurance will continue to be available
to the Company at all or, if available, that it will be available on
commercially reasonable terms. See "Business -- Products and Services."
MANAGEMENT OF CHANGE
The Company has expanded its operations rapidly over the past several
years, placing significant demands on its administrative, operational and
financial personnel and systems. Additional expansion by the Company may further
strain its management, operational, financial reporting, and other systems and
resources. There can be no assurance that the Company's systems, resources,
procedures, controls and existing space will be adequate to support such
expansion of the Company's operations. The Company's future operating results
will depend substantially on the ability of its officers and key employees to
manage changing business conditions and to implement and improve its management,
operational, financial control and other reporting systems. In addition, the
Company's future operating results depend on its ability to attract, train and
retain qualified consulting, technical, sales, financial, marketing and
management personnel. Failure to hire, train or retain qualified personnel
necessary to keep pace with the Company's development of products and services
could have a material adverse effect on the Company's business, financial
condition and results of operations. Continued expansion will require the
Company's management to: enhance management information and reporting systems;
standardize implementation methodologies of SCC's NDSC; further develop its
infrastructure; and continue to maintain customer satisfaction. If the Company
is unable to respond to and manage changing business conditions, the quality of
the Company's products and services, its ability to retain key personnel and its
business, financial condition and results of operation could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Management."
HIGHLY COMPETITIVE MARKET; COMPETITION
The market for 9-1-1 OSS solutions is intensely competitive and the Company
expects competition to increase in the future. The Company believes that the
principal competitive factors affecting the market for 9-1-1 OSS services
include flexibility, reliability, manageability, technical features, wireless
support, performance, ease of use, price, scope of product offerings, and
customer service and support. Although the Company believes that its solution
competes favorably with respect to such factors, there can be no assurance that
the Company can maintain its competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
support service, technical and other competitive resources.
The Company's principal competitors generally fall within one of three
categories: internal development departments of major carriers or consulting
firms that support such departments; relatively smaller companies that offer
applications with limited scope; and larger companies that are either in the
process of entering the Company's market or have the potential to develop
products and services that compete with the Company's service offerings.
A number of companies currently market or have under development software
products and services to provide 9-1-1 administration. The Company competes with
a few smaller companies, including XYPoint Corporation, for the provision of
9-1-1 data management services to wireless carriers, although the Company
expects more significant competition in the future. Mergers or consolidations
among these competitors or acquisitions of these companies by larger competitors
would make them more formidable competitors to the Company. There can be no
assurance that the Company's current and potential competitors will not develop
products and services that may be more effective than the Company's current or
future 9-1-1 solutions or that the Company's technologies and offerings will not
be rendered obsolete by such developments.
Finally, there are a number of companies that market and sell various
products and services to telecommunications carriers, such as billing software
and advanced telecommunications equipment, that have been broadly adopted by the
Company's customers and potential customers. In addition, vendors of
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telecommunications software and hardware in the future may enhance their
products to include functionality that is currently provided by the Company's
solutions. The widespread inclusion of the functionality of the Company's
service offerings as standard features of other telecommunications software or
hardware could render the Company's services obsolete and unmarketable,
particularly if the quality of such functionality were comparable to that of the
Company's services. Furthermore, even if the 9-1-1 functionality provided as
standard features by telecommunications software or networking hardware is more
limited than that of the Company's services, there can be no assurance that a
significant number of customers would not elect to accept more limited
functionality in lieu of purchasing additional products or services. For
example, Lucent Technologies offers carriers software systems with functionality
similar to the Company's services. Many of these larger companies have longer
operating histories, greater name recognition, access to larger customer bases
and significantly greater financial, technical and marketing resources than the
Company. As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products and services, than the
Company. If these companies were to introduce products or services that
effectively compete with the Company's service offerings, they could be in a
position to substantially lower the price of their 9-1-1 products and services
or to bundle such products and services with their other product and service
offerings.
For the foregoing reasons, there can be no assurance that the Company will
be able to compete successfully against its current and future competitors.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which could materially and adversely affect the
Company's business, financial condition and results of operations. See
"Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service
of its key management, sales, product development and operational personnel,
including George Heinrichs, President and Chief Executive Officer, John Sims,
Chief Operating Officer, and Nancy Hamilton, Chief Financial Officer, and on the
Company's ability to continue to attract, motivate and retain highly qualified
employees, including technical, managerial and sales and marketing personnel.
Additionally, the Company expects to continue to expand the number of employees
engaged in sales, marketing and product development. However, competition in the
recruitment of highly qualified personnel in the software and telecommunications
services industry is intense and has become particularly significant in the
Denver metropolitan area. The inability to hire and retain qualified personnel
or the loss of the services of key personnel could have a material adverse
effect upon the Company's current business, development efforts and future
business prospects. If such personnel do not remain active in the Company's
business, the Company's operations could be materially adversely affected. The
Company currently maintains a key person life insurance policy only with respect
to Mr. Heinrichs. The Company is the named beneficiary of this $1,000,000
policy. See "Business -- Employees" and "Management."
DEPENDENCE ON PROPRIETARY RIGHTS
The Company's success and its ability to compete depends significantly upon
its proprietary rights. The Company relies primarily on a combination of
copyright, trademark and trade secret laws, as well as confidentiality
procedures and contractual restrictions to establish and protect its proprietary
rights. There can be no assurance that such measures will be adequate to protect
the Company's proprietary rights. Further, the Company may be subject to
additional risks as it enters into transactions in foreign countries where
intellectual property laws are not well developed or are difficult to enforce.
Legal protections of the Company's proprietary rights may be ineffective in such
countries. Litigation to defend and enforce the Company's intellectual property
rights could result in substantial costs and diversion of resources, and could
have a material adverse effect on the Company's business, financial condition
and results of operations, regardless of the final outcome of such litigation.
Despite the Company's efforts to safeguard and maintain its proprietary rights,
there can be no assurance that the Company will be successful in doing so or
that the steps taken by the Company in this regard will be adequate to deter
misappropriation or independent third-party development of the Company's
technology, or to prevent an unauthorized third party from copying or otherwise
obtaining and using the
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Company's technology. There also can be no assurance that others will not
independently develop similar technologies or duplicate any technology developed
by the Company. Any such events could have a material adverse effect on the
Company's business, financial condition and results of operations.
As the number of entrants to the Company's markets increases and the
functionality of the Company's services and products increases and overlaps with
the products and services of other companies, the Company may become subject to
claims of infringement or misappropriation of the intellectual property rights
of others. In certain of its customer agreements, the Company agrees to
indemnify its customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third parties. In certain
limited instances, the amount of such indemnities may be greater than the
revenue the Company may have received from the customer. There can be no
assurance that third parties will not assert infringement or misappropriation
claims against the Company in the future with respect to current or future
product or service offerings. Any claims or litigation, with or without merit,
could be time consuming, result in costly litigation or require the Company to
enter into royalty or licensing arrangements. Such royalty or licensing
arrangements, if required, may not be available on terms acceptable to the
Company, if at all, and could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
Although substantially all of the Company's revenue is generated from sales
to customers in the United States, the Company has generated revenue in Canada
and intends to enter additional international markets, which will require
significant management attention and financial resources. International sales
are subject to a variety of risks, including difficulties in establishing and
managing international distribution channels, and in translating products and
related materials into foreign languages. International operations are also
subject to difficulties in collecting accounts receivable, staffing, managing
personnel and enforcing intellectual property rights. Other factors that can
adversely affect international operations include fluctuations in the value of
foreign currencies and currency exchange rates, changes in import/export duties
and quotas, introduction of tariff or non-tariff barriers and economic or
political changes in international markets. There can be no assurance that these
factors will not have a material adverse effect on the Company's future
international sales and, consequently, on the Company's business, financial
condition and results of operations. Furthermore, any inability to obtain
foreign regulatory approvals on a timely basis could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Business -- Strategy."
RISKS RELATING TO POTENTIAL ACQUISITIONS
As part of its overall strategy, the Company regularly evaluates
opportunities to enter into strategic acquisitions, including potential business
combinations and significant investments in complementary companies, assets,
products and technologies, although the Company has no present arrangements,
commitments or agreements with respect to any acquisition. Acquisitions involve
a number of operating risks that could materially adversely affect the Company's
business, financial condition and results of operations, including the diversion
of management's attention to assimilate the operations, products and personnel
of the acquired companies, the amortization of acquired intangible assets, and
the potential loss of key employees of the acquired companies. Furthermore,
acquisitions may involve businesses in which the Company lacks experience.
Because management has limited experience in acquisitions and the Company has no
experience in integrating acquired companies or technologies into its
operations, there can be no assurance that the Company will be able to manage
one or more acquisitions successfully, or that the Company will be able to
integrate the operations, products or personnel gained through any such
acquisitions without a material adverse effect on the Company's business,
financial condition and results of operations. See "Use of Proceeds."
YEAR 2000 CAPABILITY
Many currently installed computer and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish twenty-first century dates from
twentieth century dates. As a result, in less than two years, computer systems
and/or software used
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by many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance.
The Company believes that the purchasing patterns of customers and
potential customers may be significantly affected by Year 2000 issues. Many
companies are expending significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase services such as those offered by the
Company. Additionally, Year 2000 issues could cause a significant number of
companies, including current customers of the Company, to re-evaluate their
current system needs, and as a result, consider switching to other systems or
suppliers. This could have a material adverse effect on the Company's business,
financial condition and results of operations.
Certain of the Company's current contracts with its customers require that
the Company warrant Year 2000 capability by a certain date. Any failure to
achieve Year 2000 compliance by such date could have a material adverse effect
on the Company's business, financial condition and results of operations.
Although the Company is designing its services and products to be Year 2000
capable and tests third-party software that is incorporated with the Company's
services and products, there can be no assurance that the Company's services and
products, particularly when such products and services incorporate third-party
software, will contain all necessary date code changes in time. The Company
expects to incur approximately $125,000 in costs in 1998 in making its services
and products Year 2000 compliant. Any additional unanticipated expenses could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company utilizes off-the-shelf and custom software developed internally
and by third parties. To the extent that such software and systems do not comply
with Year 2000 requirements, there can be no assurance that potential systems
interruptions or the cost necessary to update such software will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Company's Common Stock will develop or be sustained after the offering. The
initial offering price will be determined by negotiation among the Company and
the Underwriters based upon several factors. See "Underwriting" for a discussion
of the method of determining the initial public offering price. The trading
price of the Company's Common Stock could be subject to wide fluctuations in
response to variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, changes in
financial estimates by securities analysts, and other events or factors. In
addition, the stock market has experienced volatility that has particularly
affected the market prices of equity securities of many high technology
companies and that often has been unrelated to the operating performance of such
companies. These broad market fluctuations may materially adversely affect the
market price of the Company's Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of Common Stock in this offering will experience immediate
and substantial dilution in the net tangible book value per share of their
Common Stock. After deducting estimated offering expenses payable by the Company
and underwriting discounts and commissions, investors in this offering will
incur dilution of $9.42 per share. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price for the
Company's Common Stock. The number of shares of Common Stock available for sale
in the public market is limited by restrictions under the Securities Act of
1933, as amended (the "Securities Act"), and lock-up agreements under which the
holders of such shares have agreed not to sell or otherwise dispose of any of
their shares for a period of 180 days after the date of this Prospectus without
the prior written consent of the BancAmerica Robertson Stephens. However,
BancAmerica Robertson Stephens, in its sole discretion and at any time without
notice, may release all or any portion of the securities subject to lock-up
agreements. When determining whether or not to release shares from the lock-up
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agreements, BancAmerica Robertson Stephens may consider, among other factors,
the holder's reasons for requesting the release, the number of shares for which
the release is being requested and market conditions at the time. As a result of
these restrictions, based on shares outstanding and options granted as of April
9, 1998, the following shares of Common Stock will be eligible for future sale:
on the date of this Prospectus, 3,361,469 shares (including the 3,300,000 shares
offered hereby) are eligible for sale and an additional 6,970,470 shares will be
eligible for sale 180 days after the date of this Prospectus. In addition, the
Company intends to register on a registration statement on Form S-8,
approximately 90 days following the date of this Prospectus, a total of
1,901,055 shares of Common Stock subject to outstanding options or reserved for
issuance under the 1998 Stock Incentive Plan. Upon expiration of the lock-up
agreements referred to above, holders of approximately 6,383,723 shares of
Common Stock will be entitled to certain registration rights with respect to
such shares. If such holders, by exercising their registration rights, cause a
large number of shares to be registered and sold in the public market, such
sales could have a material adverse effect on the market price for the Company's
Common Stock. See "Shares Eligible for Future Sale."
CONTROL BY EXISTING STOCKHOLDERS; EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
Following the completion of this offering, members of the Board of
Directors and the executive officers of the Company, together with members of
their families and entities that may be deemed affiliates of or related to such
persons or entities, will beneficially own approximately 54.2% of the
outstanding shares of Common Stock of the Company. Accordingly, these
stockholders will be able to elect all members of the Company's Board of
Directors and determine the outcome of corporate actions requiring stockholder
approval, such as mergers and acquisitions. This level of ownership by such
persons and entities may have a significant effect in delaying, deferring or
preventing a change in control of the Company and may adversely affect the
voting and other rights of other holders of Common Stock. Certain provisions of
the Company's Amended and Restated Certificate of Incorporation, Amended and
Restated Bylaws, Delaware law and equity incentive plans also may discourage
certain transactions involving a change in control of the Company. This level of
ownership by such persons and entities, when combined with the ability of the
Board of Directors to issue "blank check" preferred stock without further
stockholder approval, may have the effect of delaying, deferring or preventing a
change in control of the Company. See "Management -- Directors and Executive
Officers," "Certain Transactions," "Principal and Selling Stockholders" and
"Description of Capital Stock."
MANAGEMENT'S DISCRETION OVER PROCEEDS OF THE OFFERING
The primary purposes of this offering are to create a public market for the
Common Stock, to facilitate future access by the Company to public equity
markets and to obtain additional equity capital. As of the date of this
Prospectus, the Company has no specific plans as to the use of the net proceeds
from this offering, other than to pay $4,610,000 of outstanding bank
indebtedness and a related prepayment premium; accordingly, the Company's
management will have broad discretion as to the application of such net
proceeds. Pending any such uses, the Company plans to invest the net proceeds in
short-term, investment grade, interest-bearing securities. See "Use of
Proceeds."
NO DIVIDENDS
The Company has not paid any cash or other dividends on its Common Stock,
nor does it expect to pay dividends in the foreseeable future. See "Dividend
Policy."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
The completion of the offering made by this Prospectus will provide
significant benefits to the current stockholders of the Company, including
certain of its Directors and officers. The net proceeds to the Selling
Stockholders from the sale of the 1,200,000 shares of Common Stock offered by
them hereby, after deducting underwriting discounts and commissions, will be
approximately $13.4 million. The Company will not receive any of the proceeds
from the sale of shares by the Selling Stockholders. The completion of this
offering will also create a public market for the Common Stock and thereby is
expected to increase the market value of the investment by current stockholders
in the Company. Upon the closing of this offering, the difference between the
aggregate purchase price paid or payable by the Company's named executive
officers for shares of
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Common Stock held by them or subject to options held by them and the aggregate
market value of such shares will be approximately $9.0 million. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,100,000 shares of
Common Stock offered by the Company hereby, after deducting estimated expenses
payable in connection with this offering and underwriting discounts and
commissions, are estimated to be approximately $22,636,000 ($26,151,400 if the
Underwriters' over-allotment option is exercised in full). The Company will not
receive any proceeds from the sale of Common Stock by the Selling Stockholders.
The principal purposes of this offering are to create a public market for the
Company's Common Stock, to facilitate future access by the Company to public
equity markets and to increase the Company's equity capital.
The Company intends to use $4.6 million of the proceeds to pay outstanding
bank indebtedness and a related prepayment premium. Of this amount, $4.0 million
will be used to prepay outstanding indebtedness and to pay a prepayment premium
of $160,000, pursuant to the Company's loan agreement with a bank. Such
indebtedness currently bears interest at the rate of 11% per annum and requires
principal payments of $250,000 beginning on March 31, 2001 and each subsequent
quarter end through December 31, 2002. Thereafter, principal payments of
$500,000 are due on March 31, 2003 and each subsequent quarter end, with the
final payment becoming due on November 30, 2003. Additionally, the Company
intends to use a portion of the proceeds to repay $450,000 outstanding under its
line of credit. Borrowings under the line of credit bear interest at prime rate
plus 1% (9.5% at April 30, 1998) and are due on April 15, 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company expects to use its remaining net proceeds (estimated to be
approximately $18.0 million) for product development and general corporate
purposes, including working capital. A portion of the net proceeds also may be
used for the acquisition of businesses, products and technologies that are
complementary to those of the Company. While the Company regularly evaluates
opportunities to enter into strategic acquisitions, including potential business
combinations and investments in complementary companies, assets, products and
technologies, the Company has no present arrangements, commitments or agreements
with respect to any acquisition. Pending such uses, the Company intends to
invest the net proceeds from this offering in short-term, investment-grade,
interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock and
does not anticipate paying cash dividends within the foreseeable future. Certain
covenants contained in the Company's line of credit agreement and a loan
agreement restrict the payment of any dividends without the lender's prior
consent. Payments of future dividends, if any, will be at the discretion of the
Company's Board of Directors, subject to the restrictions discussed above, after
taking into account various factors, including the Company's financial
condition, operating results, cash needs and expansion plans. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
17
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998: (i) on an actual basis; (ii) on a pro forma basis giving effect
to the conversion of all outstanding shares of Convertible Preferred Stock and
the exercise of an outstanding warrant to purchase shares of Common Stock, all
upon the closing of this offering; and (iii) on a pro forma basis, as further
adjusted to reflect the receipt of the estimated net proceeds from the sale of
2,100,000 shares of Common Stock offered by the Company hereby and the
application of the net proceeds therefrom as described under "Use of Proceeds."
This table should be read in conjunction with the Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt............................................ $ 9,642 $ 9,642 $ 6,998
======== ======== ========
Mandatorily redeemable, convertible preferred stock
(Series A, B, C, D, E and F), $.001 par value; 6,188,575
shares authorized; 6,188,575 shares issued and
outstanding, actual; none issued or outstanding, pro
forma or pro forma as adjusted.......................... 14,774 -- --
Putable common stock warrant.............................. 1,521 -- --
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 15,000,000 shares
authorized; none issued or outstanding............... -- -- --
Common stock, $.001 par value; 30,000,000 shares
authorized; 1,958,284 shares outstanding, actual;
8,342,007 shares outstanding, pro forma; 10,442,007
shares outstanding, pro forma as adjusted(1)......... 2 8 10
Additional paid-in capital.............................. 453 16,742 39,376
Treasury stock, 36,250 shares, at cost.................. (3) (3) (3)
Stock subscriptions receivable.......................... (99) (99) (99)
Accumulated deficit..................................... (11,838) (11,838) (13,354)
-------- -------- --------
Total stockholders' equity (deficit)............ (11,485) 4,810 25,930
-------- -------- --------
Total capitalization............................ $ 14,452 $ 14,452 $ 32,928
======== ======== ========
</TABLE>
- ------------
(1) Excludes 1,116,126 shares of Common Stock issuable upon exercise of stock
options outstanding as of March 31, 1998 at a weighted average exercise
price of $3.13 per share, and 117,442 shares of Common Stock reserved for
grant of future options as of March 31, 1998, under the 1990 Stock Option
Plan. From April 1, 1998 to April 30, 1998, the Company issued 846 shares of
Common Stock upon the exercise of outstanding options and granted options to
purchase 3,333 shares of Common Stock pursuant to the 1990 Stock Option
Plan. In addition, the number of shares reserved for issuance under the 1990
Stock Option Plan was increased by 166,667 shares effective April 7, 1998.
On June 23, 1998, an additional 500,000 shares were reserved for issuance
under the Company's 1998 Stock Incentive Plan. See "Management -- Benefit
Plans.
18
<PAGE> 20
DILUTION
The pro forma net tangible book value of the Company at March 31, 1998 was
approximately $4,354,000, or $0.52 per share. Pro forma net tangible book value
per share represents the total amount of the Company's tangible assets less
total liabilities, divided by the number of shares of Common Stock outstanding
after giving effect to the conversion of all outstanding Convertible Preferred
Stock and the exercise of an outstanding warrant. After giving effect to the
sale of 2,100,000 shares of Common Stock offered hereby by the Company and after
deducting estimated offering expenses payable by the Company and underwriting
discounts and commissions, the Company's pro forma net tangible book value at
March 31, 1998, would have been $26,990,000, or $2.58 per share. This represents
an immediate dilution of $9.42 per share to new investors purchasing shares of
Common Stock in this offering. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $12.00
Pro forma net tangible book value per share as of March
31, 1998............................................... $0.52
Increase per share attributable to new investors.......... 2.06
-----
Pro forma net tangible book value per share after the
offering.................................................. 2.58
------
Net tangible book value dilution per share to new
investors................................................. $ 9.42
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and to be paid by new investors (before deducting
underwriting discounts and commissions and estimated expenses of this offering):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).... 8,342,007 79.9% $12,932,000 33.9% $ 1.55
New investors(1)............ 2,100,000 20.1 25,200,000 66.1 $12.00
---------- ----- ----------- -----
Total............. 10,442,007 100.0% $38,132,000 100.0%
========== ===== =========== =====
</TABLE>
- ------------
(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by the existing stockholders to 7,142,007 or approximately 68.4%
of the total number of shares of Common Stock outstanding after this
offering, and will increase the number of shares to be purchased by new
investors to 3,300,000 or approximately 31.6% of the total number of shares
of Common Stock outstanding after the offering. See "Principal and Selling
Stockholders."
The foregoing tables assume no exercise of outstanding options. As of March
31, 1998, there were outstanding stock options to purchase an aggregate of
1,116,126 additional shares of Common Stock at a weighted average exercise price
of $3.13 per share. To the extent that these options are exercised, there will
be further dilution to new investors. See "Management -- Benefit Plans -- 1998
Stock Incentive Plan" and Note 5 of Notes to Financial Statements.
19
<PAGE> 21
SELECTED FINANCIAL DATA
The following selected financial data are qualified by reference to and
should be read in conjunction with the Company's Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The statement of
operations data for the years ended December 31, 1995, 1996 and 1997 and the
balance sheet data at December 31, 1996 and 1997 are derived from, and are
qualified by reference to, the audited Financial Statements and Notes included
elsewhere in this Prospectus. The statement of operations data for the years
ended December 31, 1994 and 1993 and the balance sheet data at December 31,
1993, 1994 and 1995 are derived from audited financial statements not included
in this Prospectus. The data presented as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998 are derived from unaudited Financial
Statements included elsewhere in this Prospectus. In the opinion of management,
these unaudited Financial Statements include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the data for such
periods. The results of operations for the three months ended March 31, 1998 are
not necessarily indicative of the results to be expected for the full year or
for any future period.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------ ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Data management services......................... $ -- $ 170 $ 3,531 $13,165 $24,005 $ 4,861 $ 7,533
Licenses and implementation services............. 4,799 1,830 3,882 1,637 3,067 271 369
------ ------- ------- ------- ------- ------- -------
Total revenue.............................. 4,799 2,000 7,413 14,802 27,072 5,132 7,902
Costs and expenses:
Cost of data management services................. -- 1,137 2,840 7,996 15,378 3,123 4,798
Cost of licenses and implementation services..... 2,148 789 1,041 596 1,283 98 153
Sales and marketing.............................. 1,080 1,262 2,016 3,204 3,850 933 843
General and administrative....................... 439 227 830 1,533 3,227 485 1,146
------ ------- ------- ------- ------- ------- -------
Total costs and expenses................... 3,667 3,415 6,727 13,329 23,738 4,639 6,940
------ ------- ------- ------- ------- ------- -------
Income (loss) from operations...................... 1,132 (1,415) 686 1,473 3,334 493 962
Other expenses, net................................ 8 10 368 527 879 150 301
------ ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations before
income taxes..................................... 1,124 (1,425) 318 946 2,455 343 661
Provision (benefit) for income taxes............... 298 53 16 9 (2,328) 24 46
------ ------- ------- ------- ------- ------- -------
Net income (loss) from continuing operations....... 826 (1,478) 302 937 4,783 319 615
Income (loss) from operations of discontinued
division, net of tax............................. 103 (1,956) (1,746) (562) (876) (253) --
Loss from disposal of discontinued division........ -- -- -- -- (2,032) -- --
------ ------- ------- ------- ------- ------- -------
Net income (loss).................................. $ 929 $(3,434) $(1,444) $ 375 $ 1,875 $ 66 $ 615
====== ======= ======= ======= ======= ======= =======
PER SHARE DATA(1):
Net income (loss) from continuing operations per
share:
Basic............................................ $ 0.68 $ (1.36) $ (0.02) $ 0.15 $ 2.17 $ .07 $ .20
====== ======= ======= ======= ======= ======= =======
Diluted.......................................... $ 0.15 $ (1.36) $ (0.02) $ 0.11 $ 0.54 $ .04 $ .07
====== ======= ======= ======= ======= ======= =======
Net income (loss) per share:
Basic............................................ $ 0.78 $ (3.02) $ (1.07) $ (0.17) $ 0.61 $ (0.07) $ 0.20
====== ======= ======= ======= ======= ======= =======
Diluted.......................................... $ 0.16 $ (3.02) $ (1.07) $ 0.05 $ 0.21 $ 0.01 $ 0.07
====== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------- ------- ------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 1,139 $ 721 $ 1,004 $ 32 $ 2,503 $ 1,177
Working capital (deficit).............................. (3,729) (7,468) (8,135) (7,345) (2,670) (2,031)
Total assets........................................... 6,150 6,422 11,755 18,482 21,106 23,328
Long-term debt......................................... 230 494 1,934 3,318 6,891 9,642
Total stockholders' deficit(2)......................... (2,547) (5,845) (4,614) (13,068) (11,867) (11,485)
</TABLE>
- ------------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the shares used in computing net income (loss) per share.
(2) The Company has never declared or paid dividends on any of its capital
stock.
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus.
OVERVIEW
SCC is the leading provider of 9-1-1 OSS services to ILECs, CLECs and
wireless carriers in the United States. The Company manages the data that enable
a 9-1-1 call to be routed to the appropriate public safety agency with accurate
and timely information about the caller's identification and location. The
Company was incorporated in July 1979 in the State of Colorado under the name
Systems Concepts of Colorado, Inc. and was reincorporated in September 1993 in
the State of Delaware under the name SCC Communications Corp. Prior to 1995,
substantially all of the Company's revenue was derived from the sale of software
licenses and related implementation services to ILECs and public safety
agencies. During 1994, the Company began investing in infrastructure to provide
its 9-1-1 OSS solution to telephone operating companies seeking to outsource
such operations. The Company signed its first 9-1-1 data management services
contract in August 1994 and added to the number of records under management
during 1995, 1996 and 1997. The Company began to recognize revenue from wireless
carriers in the third quarter of 1997, and a growing percentage of the Company's
revenue has been derived from the management of 9-1-1 data records for wireless
carriers.
SCC's data management services revenue is derived from contracts with
ILECs, CLECs and wireless carriers pursuant to which the Company provides an
outsourcing solution for its customers' 9-1-1 data management. Revenue included
in data management services generally includes a non-recurring initial fee for
the design and implementation of the 9-1-1 OSS, conversion of the customer's
data to the Company's systems, hiring and training of personnel, and other costs
required to prepare for the processing of customer data. Non-recurring fees are
recognized on the percentage-of-completion method over the period required to
perform the tasks necessary to prepare for the processing of customer data. The
Company also generally receives a monthly service fee based on the number of
subscriber records under management, which is recognized in the period in which
the services are rendered. Data management services revenue also may include
revenue from enhanced products and services, which are recognized in the period
to which the services are performed. Related costs are expensed as they are
incurred. Data management services revenue comprised 48%, 89% and 89% of the
Company's total revenue in the years ended December 31, 1995, 1996 and 1997,
respectively, and 95% in the three months ended March 31, 1998.
SCC's licenses and implementation services revenue is derived from
contracts with ILECs pursuant to which the Company provides a 9-1-1 software
license or related products and services such as implementation, training,
software enhancements and interfaces to its customers' systems. Licenses and
implementation services revenue is recognized using the percentage-of-completion
method. The related costs include third-party licenses, direct labor and related
expenses, and are expensed as incurred. Subsequent to system installation, the
Company provides its customers with maintenance services that are recognized
ratably over the related contract period on a straight-line basis. The Company's
licenses and implementation services revenue is derived from a limited number of
customers and consequently the concentration of customers can result in
quarterly fluctuations based on the timing of the signing of new contracts and
completion of existing contracts. Margins on such contracts also may fluctuate
based on the elements included in the contract. Licenses and implementation
services revenue comprised 52%, 11% and 11% of the Company's total revenue in
the years ended December 31, 1995, 1996 and 1997, respectively, and 5% in the
three months ended March 31, 1998.
During the year ended December 31, 1996, the Company recognized
approximately 82% of total revenue from continuing operations from Ameritech and
U.S. WEST, each of which accounted for greater than 10% of
21
<PAGE> 23
the Company's total revenue in such periods. During the year ended December 31,
1997, the Company recognized approximately 81% of total revenue from Ameritech,
BellSouth Inc. and U.S. WEST, each of which accounted for greater than 10% of
the Company's total revenue in such periods. During the three months ended March
31, 1998, the Company recognized approximately 92% of total revenue from four
customers, each of which accounted for greater than 10% of the Company's total
revenue in such periods. See "Risk Factors -- Reliance on Significant
Customers."
As of December 31, 1997, the Company had net operating loss carryforwards
of $9.6 million available to offset future net income for U.S. federal income
tax purposes. Thus, the Company's income tax provision for past fiscal years
consisted of alternative minimum taxes, state income taxes in states where the
Company has not had net operating loss carryforwards to offset net income, and
foreign taxes. As of December 31, 1997, the Company reversed $2.5 million of the
valuation allowance on its deferred tax assets as the Company believes that it
is more likely than not that such tax benefits will be realized. There is no
assurance that the Company's remaining deferred tax benefit will be offset by
future taxable income or will not be restricted in the future due to
transactions entered into by the Company or changes in tax legislation.
In June 1997, the Company sold the net assets of its Premise Products
Division. The sale of the Company's Premise Products Division resulted in a net
loss from the sale of $2.0 million. Net losses from operations of this division
totaled $1.7 million, $562,000 and $876,000 in 1995, 1996 and 1997,
respectively, and are presented in the Company's financial statements as loss
from operations of discontinued division.
Historically, substantially all of the Company's revenue has been generated
from sales to customers in the United States. However, the Company has generated
revenue in Canada and intends to enter additional international markets, which
may require significant management attention and financial resources.
International sales are subject to a variety of risks. See "Risk
Factors -- Risks Associated with International Sales."
The Company's quarterly and annual operating results have varied
significantly in the past. The variation in operating results will likely
continue and may intensify. Although the Company was profitable in seven of its
last eight quarters, there can be no assurance that the Company's profitability
will continue in the future or, if the Company is profitable, that its levels of
profitability will not vary significantly between quarters. Accordingly, the
Company believes that period to period comparisons of results of operations are
not necessarily meaningful and should not be relied upon as indications of
future performance. The Company's operating results may fluctuate as a result of
many factors, including the length of the sales cycles for new or existing
customers, the size, timing or duration of significant customer contracts,
fluctuations in number of subscriber records under management, timing or
duration of service offerings, ability of the Company to hire, train and retain
qualified personnel, increased competition, changes in operating expenses,
changes in Company strategy, the financial performance of the Company's
customers, changes in telecommunications legislation and regulations that may
affect the competitive environment for the Company's services, and general
economic factors. The Company's contracts for 9-1-1 OSS services generally
include a non-recurring initial fee, and therefore, the Company may recognize
significantly increased revenue for a short period of time upon commencing
services for a new customer.
The Company's expense levels are based in significant part on its
expectations regarding future revenue. The Company's revenue is difficult to
forecast because the market for the Company's 9-1-1 OSS services is rapidly
evolving. In addition, the Company's sales cycle and the size and timing of
significant customer contracts, license fees and non-recurring initial fees vary
substantially among customers depending on the level of service provided.
Accordingly, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in revenue. Any significant shortfall
could therefore have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company hired
additional employees in 1996, 1997 and the three months ended March 31, 1998,
and expects to continue hiring additional employees during 1998. The Company
expects that this increase will affect the Company's operating margins for the
short term. There can be no assurance that the Company can continue to report
operating profits, and failure to do so is likely to have a material adverse
effect on the Company's financial results. See "Risk Factors -- Significant
Fluctuations in Quarterly Results of Operations" and "-- Management of Change."
22
<PAGE> 24
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data of the
Company expressed as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Data management services................. 47.6% 88.9% 88.7% 94.7% 95.3%
Licenses and implementation services..... 52.4 11.1 11.3 5.3 4.7
----- ----- ----- ----- -----
Total revenue.................... 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of data management services......... 38.3 54.0 56.8 60.8 60.7
Cost of licenses and implementation
services.............................. 14.0 4.0 4.7 1.9 1.9
Sales and marketing...................... 27.2 21.6 14.2 18.2 10.7
General and administrative............... 11.2 10.4 11.9 9.5 14.5
----- ----- ----- ----- -----
Total costs and expenses......... 90.7 90.0 87.6 90.4 87.8
----- ----- ----- ----- -----
Income from operations..................... 9.3 10.0 12.4 9.6 12.2
Other expenses, net........................ 5.0 3.6 3.2 2.9 3.8
----- ----- ----- ----- -----
Net income from continuing operations
before income taxes...................... 4.3 6.4 9.2 6.7 8.4
Provision (benefit) for income taxes....... 0.2 -- (8.5) 0.5 0.6
----- ----- ----- ----- -----
Net income from continuing operations...... 4.1 6.4 17.7 6.2 7.8
Loss from operations of discontinued
division, net of tax..................... (23.6) (3.8) (3.2) (4.9) --
Loss from disposal of discontinued
division................................. -- -- (7.5) -- --
----- ----- ----- ----- -----
Net income (loss).......................... (19.5)% 2.6% 7.0% 1.3% 7.8%
===== ===== ===== ===== =====
Cost of data management services as a
percent of data management services
revenue.................................. 80.4% 60.7% 64.1% 64.2% 63.7%
===== ===== ===== ===== =====
Cost of licenses and implementation
services as a percent of licenses and
implementation services revenue.......... 26.8% 36.4% 41.8% 36.2% 41.5%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenue
Total Revenue. Total revenue increased 54%, from $5.1 million in the first
quarter of 1997 to $7.9 million in the first quarter of 1998.
Data Management Services Revenue. Revenue from data management services
increased 55%, from $4.9 million in the first quarter of 1997 to $7.5 million in
the first quarter of 1998, representing approximately 95% of total revenue in
both periods. The increase resulted primarily from (i) non-recurring and monthly
fees from wireless customers in the first quarter of 1998, as the Company did
not begin to earn revenue from wireless customers until the third quarter of
1997, (ii) increased monthly fees from wireline customers, as the Company had
not completed the transition of records for a major customer in the first
quarter of 1997, and (iii) non-recurring fees from enhanced services provided in
the first quarter of 1998.
Licenses and Implementation Services. Revenue from licenses and
implementation services increased 36%, from $271,000 in the first quarter of
1997 to $369,000 in the first quarter of 1998, as the Company earned revenue in
1998 related to a contract that was not in place in the first quarter of 1997.
23
<PAGE> 25
Costs and Expenses
Cost of Data Management Services. Cost of data management services consists
primarily of labor and costs of interconnection with customers' systems and the
Company's infrastructure. Cost of data management services increased 54%, from
$3.1 million in the first quarter of 1997 to $4.8 million in the first quarter
of 1998, representing 61% and 64% of total revenue and data management services
revenue, respectively, in both periods. The dollar increase was due to the
addition of personnel and expansion of facilities to accommodate growth in the
Company's wireless and wireline operations.
Cost of Licenses and Implementation Services. Cost of licenses and
implementation services consists primarily of labor, license fees for third
party software and related expenses. Cost of licenses and implementation
services increased 56%, from $98,000 in the first quarter of 1997 to $153,000 in
the first quarter of 1998, representing 2% of total revenue in both periods and
36% and 42% of licenses and implementation services revenue in the first quarter
of 1997 and the first quarter of 1998, respectively. The increase in dollars and
as a percent of licenses and implementation services revenue was due to work
performed on a contract in the first quarter of 1998 which contained higher cost
elements, including third-party software, than contracts in process in the first
quarter of 1997.
Sales and Marketing. Sales and marketing expenses consist primarily of
expenses related to salaries and commissions, travel, trade shows and sales
collateral. Sales and marketing expenses decreased 10%, from $933,000 in the
first quarter of 1997 to $843,000 in the first quarter of 1998, representing 18%
and 11% of total revenue in the first quarter of 1997 and the first quarter of
1998, respectively. The decrease was primarily due to decreased commissions and
bonuses in the first quarter of 1998 caused by a change in the structure of the
incentive plans and a bonus paid to an individual in the first quarter of 1997,
as well as the transfer of a vice president to a general and administrative
position. These decreases were offset by increased headcount and public
relations costs.
General and Administrative. General and administrative expenses consist
primarily of expenses related to the Company's information systems, finance,
human resources, legal, executive and financial planning departments. General
and administrative expenses increased 136%, from $485,000 in the first quarter
of 1997 to $1.1 million in the first quarter of 1998, representing 10% and 15%
of total revenue in the first quarter of 1997 and the first quarter of 1998,
respectively. The dollar increase was due to (i) the reassignment of certain
continuing resources, infrastructure and related general and administrative
expenses applicable to continuing operations, (ii) addition of personnel and
computer equipment in the accounting, information systems and human resources
departments to support the Company's growth and (iii) increased executive
bonuses due to increased profitability in the first quarter of 1998.
Other Expenses, Net. Net other expenses consist primarily of interest
expense from the Company's borrowings and leases for capital equipment, offset
by interest income earned on the Company's cash balances. Other expenses
increased 101%, from $150,000 in the first quarter of 1997 to $301,000 in the
first quarter of 1998, representing 3% and 4% of total revenue in the first
quarter of 1997 and the first quarter of 1998, respectively. The dollar increase
was primarily due to interest related to the 4.0 million loan from a bank that
was outstanding in the first quarter of 1998, which was partially offset by
decreased interest expense resulting from a lower balance outstanding on the
Company's line of credit in the first quarter of 1998.
Provision for income taxes. The Company's income tax provision increased
from $24,000 in the first quarter of 1997 to $46,000 in the first quarter of
1998 due to increased income generated in states where the Company did not have
net operating loss carryforwards available to offset net income.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenue
Total Revenue. Total revenue increased 83%, from $14.8 million in 1996 to
$27.1 million in 1997.
Data Management Services Revenue. Revenue from data management services
increased 82%, from $13.2 million in 1996 to $24.0 million in 1997, representing
approximately 89% of total revenue in both years. This increase resulted from an
increase in non-recurring and monthly fees from existing customers, increased
24
<PAGE> 26
sales of new services to existing customers, and the realization of
non-recurring and monthly fees from both wireline and wireless customers.
Licenses and Implementation Services Revenue. Revenue from licenses and
implementation services increased 87%, from $1.6 million in 1996 to $3.1 million
in 1997. The increase resulted from the addition of a new contract in 1997.
Costs and Expenses
Cost of Data Management Services. Cost of data management services
increased 92%, from $8.0 million in 1996 to $15.4 million in 1997, representing
54% and 57%, respectively, of total revenue and 61% and 64%, respectively, of
data management services revenue. The increase as a percentage of total revenue
and data management services revenue resulted from the addition of employees and
other resources in early 1997 in anticipation of wireless contracts, although
the Company did not begin recognizing revenue from such contracts until the
third quarter of 1997.
Cost of Licenses and Implementation Services. Cost of licenses and
implementation services increased 115%, from $596,000 in 1996 to $1.3 million in
1997, representing 4% and 5%, respectively, of total revenue and 36% and 42%,
respectively, of licenses and implementation services revenue. The increase as a
percentage of associated revenue was due to the inclusion of higher cost
elements, including third-party software, in contracts performed in 1997.
Sales and Marketing. Sales and marketing expenses increased 20%, from $3.2
million in 1996 to $3.9 million in 1997, representing 22% and 14%, respectively,
of total revenue. The increase in dollar amount was primarily due to increases
in salaries, recruiting, relocation and travel costs caused by an increase in
the sales force and increased marketing activities in 1997. The remaining
increase was due to the reassignment of marketing resources and related expenses
to the Company's continuing operations.
General and Administrative. General and administrative expenses increased
111%, from $1.5 million in 1996 to $3.2 million in 1997, representing 10% and
12%, respectively, of total revenue. Approximately $1.0 million of the increase
is related to the reassignment of certain continuing resources, infrastructure
and related general and administrative expenses applicable to the Company's
continuing operations. The remaining dollar and percentage increases resulted
primarily from increased costs necessary to develop and maintain the internal
and customer support information systems, increased depreciation expense in
1997, increased executive bonuses paid and accrued in 1997, and expansion of the
Company's facilities to accommodate the Company's growth.
Other Expenses, Net. Other expenses increased 67%, from $527,000 in 1996 to
$879,000 in 1997, representing 4% and 3% of total revenue in 1996 and 1997,
respectively. The increase in dollar amount resulted from an increase in
interest expense caused by an increase in capital leases, a higher average
balance outstanding on the Company's line of credit in 1997, and interest
expense related to a $4.0 million borrowing in November 1997. This increase was
partially offset by an increase in interest income recognized, as the Company's
average cash balance increased in 1997.
Provision (Benefit) for Income Taxes. The Company's income tax provision
(benefit) changed from a provision of $9,000 in 1996 to a benefit of
$(2,328,000) in 1997. In 1997, the Company recorded an income tax benefit of
$2.5 million due to the reversal of a portion of the Company's valuation
allowance on its deferred tax assets. Excluding this benefit, the Company had an
income tax provision of $172,000. This increase over 1996 was due to a foreign
income tax refund received in 1996. In addition, the Company's state income tax
provision increased in 1997, as the Company generated more income in states in
which the Company did not have net operating loss carryforwards available to
offset net income.
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<PAGE> 27
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue
Total Revenue. Total revenue increased 100%, from $7.4 million in 1995 to
$14.8 million in 1996.
Data Management Services Revenue. Revenue from data management services
increased 273%, from $3.5 million in 1995 to $13.2 million in 1996, representing
48% and 89%, respectively, of total revenue. The increase in dollar amount
resulted from increased revenue from non-recurring and monthly fees in 1996 from
both existing and new wireline customers.
Licenses and Implementation Services Revenue. Revenue from licenses and
implementation services decreased 58%, from $3.9 million in 1995 to $1.6 million
in 1996, representing 52% and 11%, respectively, of total revenue. The decrease
resulted from the implementation of a large project in 1995 without a comparable
amount of new business in 1996.
Costs and Expenses
Cost of Data Management Services. Cost of data management services
increased 182%, from $2.8 million in 1995 to $8.0 million in 1996, representing
38% and 54%, respectively, of total revenue and 80% and 61%, respectively, of
data management services revenue. Cost of data management services was greater
as a percentage of the related revenue in 1995 because the Company was building
the infrastructure for its data management services business, including hiring
and training employees, building the network infrastructure, preparing
facilities and converting data to the Company's systems. Cost of data management
services was higher as a percentage of total revenue in 1996 due to the
increased percentage of data management services revenue.
Cost of Licenses and Implementation Services. Cost of licenses and
implementation services decreased 43%, from $1.0 million in 1995 to $596,000 in
1996, representing 14% and 4%, respectively, of total revenue and 27% and 36%,
respectively, of licenses and implementation services revenue. The increase as a
percentage of associated revenue was due to the inclusion of higher cost
elements, including third-party software, on contracts in 1996.
Sales and Marketing. Sales and marketing expenses increased 59%, from $2.0
million in 1995 to $3.2 million in 1996, representing 27% and 22%, respectively,
of total revenue. The increase in dollar amount was primarily due to increased
salary, travel and related facilities costs caused by an increase in the sales
force, increased sales commissions and bonuses due to increased revenue, and
increased costs for trade shows. The remaining increase was due to an increase
in certain marketing expenses from the growth of continuing operations of the
Company.
General and Administrative. General and administrative expenses increased
85%, from $830,000 in 1995 to $1.5 million in 1996, representing 11% and 10%,
respectively, of total revenue. This increase in dollar amount was primarily due
to salaries, travel and other costs related to the hiring of management and
other personnel in anticipation of growth in 1996. The increase was partially
offset by decreased relocation, bad debt and consulting expenses.
Other Expenses, Net. Net other expenses increased 43%, from $368,000 in
1995 to $527,000 in 1996, representing 5% and 4%, respectively, of total
revenue. The increase in dollar amount was due to an increase in interest
expense primarily related to additional capital leases for equipment required to
operate the Company's data management services business. This increase was
partially offset by a decrease in interest expense caused by the conversion to
equity and repayment of certain notes payable in 1996.
Provision for Income Taxes. The income tax provision decreased 44%, from
$16,000 in 1995 to $9,000 in 1996. This decrease was primarily due to a foreign
income tax refund received in 1996, offset by additional income generated in
1996 in states in which the Company did not have net operating loss
carryforwards available to offset net income.
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<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth quarterly results of operations data in
dollars and as a percentage of total revenue for each of the nine quarters in
the period ended March 31, 1998. This quarterly information is unaudited, has
been prepared on the same basis as the annual financial statements and, in the
opinion of the Company's management, reflects all normal recurring adjustments
necessary for a fair presentation of the information for the periods presented,
when read in conjunction with the Company's Financial Statements and Notes
thereto appearing elsewhere in this Prospectus. Operating results for any
quarter are not necessarily indicative of results for any future period. See
"Risk Factors -- Significant Fluctuations in Quarterly Operating Results of
Operations."
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Data management services..... $2,253 $3,241 $3,573 $4,098 $4,861 $ 5,241 $6,394 $7,509 $7,533
Licenses and implementation
services................... 567 596 238 236 271 536 834 1,426 369
------ ------ ------ ------ ------ ------- ------ ------ ------
Total revenue.......... 2,820 3,837 3,811 4,334 5,132 5,777 7,228 8,935 7,902
Costs and expenses:
Cost of data management
services................... 1,435 1,732 2,236 2,593 3,123 3,434 4,174 4,647 4,798
Cost of licenses and
implementation services.... 258 207 120 11 98 254 457 474 153
Sales and marketing.......... 539 949 752 964 933 1,067 901 949 843
General and administrative... 309 370 419 435 485 525 930 1,287 1,146
------ ------ ------ ------ ------ ------- ------ ------ ------
Total costs and
expenses............. 2,541 3,258 3,527 4,003 4,639 5,280 6,462 7,357 6,940
------ ------ ------ ------ ------ ------- ------ ------ ------
Income from operations......... 279 579 284 331 493 497 766 1,578 962
Other expenses, net............ 102 112 150 163 150 208 193 328 301
------ ------ ------ ------ ------ ------- ------ ------ ------
Income from continuing
operations before income
taxes........................ 177 467 134 168 343 289 573 1,250 661
Provision (benefit) for income
taxes........................ 12 34 (53) 16 24 20 40 (2,412) 46
------ ------ ------ ------ ------ ------- ------ ------ ------
Net income from continuing
operations................... 165 433 187 152 319 269 533 3,662 615
Loss from operations of
discontinued division, net of
tax.......................... (30) (366) (39) (127) (253) (623) -- -- --
Loss from disposal of
discontinued division........ -- -- -- -- -- (2,032) -- -- --
------ ------ ------ ------ ------ ------- ------ ------ ------
Net income (loss).............. $ 135 $ 67 $ 148 $ 25 $ 66 $(2,386) $ 533 $3,662 $ 615
====== ====== ====== ====== ====== ======= ====== ====== ======
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue:
Data management services..... 79.9% 84.5% 93.8% 94.6% 94.7% 90.7% 88.5% 84.0% 95.3%
License and implementation
services................... 20.1 15.5 6.2 5.4 5.3 9.3 11.5 16.0 4.7
------ ------ ------ ------ ------ ------- ------ ------ ------
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of data management
services................... 50.9 45.1 58.7 59.8 60.9 59.4 57.7 52.0 60.7
Cost of licenses and
implementation services.... 9.1 5.4 3.1 0.3 1.9 4.4 6.3 5.3 1.9
Sales and marketing.......... 19.1 24.7 19.7 22.2 18.2 18.5 12.5 10.6 10.7
General and administrative... 11.0 9.7 11.0 10.0 9.4 9.1 12.9 14.4 14.5
------ ------ ------ ------ ------ ------- ------ ------ ------
Total costs and
expenses............. 90.1 84.9 92.5 92.3 90.4 91.4 89.4 82.3 87.8
------ ------ ------ ------ ------ ------- ------ ------ ------
Income from operations......... 9.9 15.1 7.5 7.7 9.6 8.6 10.6 17.7 12.2
Other expenses, net............ 3.6 2.9 3.9 3.8 2.9 3.6 2.7 3.7 3.8
------ ------ ------ ------ ------ ------- ------ ------ ------
Income from continuing
operations before income
taxes........................ 6.3 12.2 3.6 3.9 6.7 5.0 7.9 14.0 8.4
Provision (benefit) for income
taxes........................ 0.4 0.9 (1.4) 0.4 0.5 0.3 0.6 (27.0) 0.6
------ ------ ------ ------ ------ ------- ------ ------ ------
Net income from continuing
operations................... 5.9 11.3 5.0 3.5 6.2 4.7 7.3 41.0 7.8
Loss from operations of
discontinued division, net of
tax.......................... (1.1) (9.5) (1.0) (2.9) (4.9) (10.8) -- -- --
Loss from disposal of
discontinued division........ -- -- -- -- -- (35.2) -- -- --
------ ------ ------ ------ ------ ------- ------ ------ ------
Net income (loss).............. 4.8% 1.8% 4.0% 0.6% 1.3% (41.3)% 7.3% 41.0% 7.8%
====== ====== ====== ====== ====== ======= ====== ====== ======
Cost of data management
services as a percent of data
management services
revenue...................... 63.7% 53.4% 62.6% 63.3% 64.2% 65.5% 65.3% 61.9% 63.7%
====== ====== ====== ====== ====== ======= ====== ====== ======
Cost of licenses and
implementation services as a
percent of licenses and
implementation services
revenue...................... 45.5% 34.7% 50.4% 4.7% 36.2% 47.4% 54.8% 33.2% 41.5%
====== ====== ====== ====== ====== ======= ====== ====== ======
</TABLE>
27
<PAGE> 29
LIQUIDITY AND CAPITAL RESOURCES
Since its inception the Company has funded its operations through cash
provided by operations, supplemented by equity and debt financing and leases on
capital equipment. As of March 31, 1998, the Company had $1.2 million in cash
and cash equivalents and $2.9 million in net accounts receivable. In 1996, the
Company generated cash from financing activities through the issuance of shares
of Convertible Preferred Stock for $4.0 million. In addition, the Company
borrowed $4.0 million in 1997 from a bank. The loan bears interest at 11%
through May 31, 1999, and at 12% thereafter through maturity. Principal payments
of $250,000 are due beginning on March 31, 2001, and will be payable at each
subsequent quarter end through December 31, 2002. Principal payments of $500,000
are due on March 31, 2003 and at each subsequent quarter end, with the final
payment due November 30, 2003. The Company may prepay the loan after June 30,
1998; however, a prepayment premium will be due equal to 4% of the amount
outstanding if prepaid between June 30, 1998 and November 30, 1998, 3% if
prepaid between December 1, 1998 and November 30, 1999 and 2% if prepaid between
December 1, 1999 and November 30, 2000. The loan is secured by a first priority
security interest in substantially all of the Company's assets. As of the date
of this Prospectus, the Company was in compliance with all covenants related to
this debt. The Company intends to use a portion of the proceeds from this
offering to prepay the $4.0 million of borrowings and to pay a prepayment
premium of $160,000.
The Company used cash in 1996 and 1997 of $2.4 million and $2.6 million,
respectively, for the purchase of capital assets, primarily for use in the
delivery of its data management services. The Company anticipates making a
comparable level of capital expenditures during 1998, although it currently has
no material commitments for capital expenditures. The Company also paid $2.5
million and $3.6 million in 1996 and 1997, respectively, toward its lease
obligations for capital equipment. The Company hired a significant number of new
employees in 1996, 1997 and the first three months of 1998, and expects to
continue hiring a significant number of additional employees during the
remainder of 1998.
The Company has a line of credit with a bank equal to the lesser of 75% of
qualifying accounts receivable or $2.0 million available to meet operating
needs. Amounts borrowed under the line of credit bear interest at prime rate
plus 1% (9.5% at April 30, 1998) and are due April 15, 1999. The Company intends
to renew this line of credit. The credit line is collateralized by certain
assets of the Company. As of March 31, 1998, $450,000 was outstanding on the
line of credit. During 1996 and 1997, the Company had net borrowings under its
bank notes and line of credit of $623,000 and $2.8 million, respectively. The
Company intends to use a portion of the proceeds from this offering to repay the
$450,000 outstanding under its line of credit.
The Company is designing its services and products to be Year 2000 capable
and tests third-party software that is incorporated with the Company's services
and products. There can be no assurance, however, that the Company's services
and products, particularly when such services and products incorporate third-
party software, will contain all necessary date code changes in time. The
Company expects to incur approximately $125,000 in costs in 1998 in making its
services and products Year 2000 compliant. Any additional unanticipated expenses
could have an adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Year 2000 Capability."
The Company believes that the remaining net proceeds from this offering,
together with cash generated from operations, will be sufficient to fund its
anticipated working needs, capital expenditures and any potential future
acquisitions for at least 1999. In the event the Company's plans or assumptions
change or prove to be inaccurate, or if the Company consummates any unplanned
acquisitions of businesses or assets, the Company may be required to seek
additional sources of capital. Sources of additional capital may include public
and private equity and debt financings, sales of nonstrategic assets and other
financing arrangements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." This statement, effective for fiscal years beginning
after December 15, 1997, would require the Company to report components of
comprehensive income in a financial statement that is displayed with the same
prominence as other
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<PAGE> 30
financial statements. Comprehensive income is defined by Concepts Statement No.
6, "Elements of Financial Statements," as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
Company adopted SFAS 130 in the first quarter of 1998, however, the Company did
not have any transactions which would require additional disclosure under SFAS
130.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information." This statement, effective for financial statements for
periods beginning after December 15, 1997, requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. Generally, financial information is required to be reported
on the basis that it is used internally for evaluation of segment performance
and deciding how to allocate resources to segments. The adoption of SFAS 131 is
not expected to have a material impact on the Company's financial statements.
29
<PAGE> 31
BUSINESS
THE COMPANY
SCC Communications Corp. ("SCC" or the "Company") is the leading provider
of 9-1-1 operations support systems ("OSS") services to incumbent local exchange
carriers ("ILECs"), competitive local exchange carriers ("CLECs") and wireless
carriers in the United States. The Company has redefined the U.S. market for
9-1-1 OSS by creating the first and largest 9-1-1 service bureau, the SCC
National Data Services Center ("NDSC"), with over 70 million subscriber data
records under management throughout North America. The Company manages the data
that enable a 9-1-1 call to be routed to the appropriate public safety agency
with accurate and timely information about the caller's identification and
location. Through SCC's NDSC, the Company offers a comprehensive, cost-effective
solution to the 9-1-1 service provisioning needs of ILECs, CLECs and wireless
carriers by enabling them to outsource virtually all aspects of the operations
of their 9-1-1 data management services, including system activation, routine
data administration, event transaction processing and performance management,
with a high level of security and survivability. In addition, the Company
licenses its 9-1-1 OSS software to carriers that wish to manage the delivery of
9-1-1 data management services in-house. Representative carriers using SCC's
solution include Ameritech, AT&T Wireless Services, BellSouth, MCI, Sprint PCS
and Worldcom Network SVCS.
ILECs, CLECs and wireless carriers require a 9-1-1 solution that cost
effectively provides a high degree of data integrity and reliability, allows
them to comply with regulatory mandates, and addresses their need to provide
additional value-added services. Through SCC's NDSC, the Company provides the
data management services that ILECs, CLECs and wireless carriers need to deliver
9-1-1 calls to the appropriate PSAP, along with critical information such as the
caller's location and call-back number that PSAPs need to respond effectively to
emergencies. Complex data screening and preparation are completed to initialize
properly the underlying systems necessary for 9-1-1 call routing and information
display for the call taker. SCC's NDSC frequently receives and processes
electronic transmissions from ILECs, CLECs and wireless carriers detailing
subscriber and coverage updates and public safety jurisdiction boundary changes
from PSAPs. Records identified as potentially having problems are automatically
separated for manual review and analysis by SCC data integrity analysts. Using
the updated information, SCC's 9-1-1 OSS then provides the information to route
the 9-1-1 call and transmit essential information to the emergency service
provider.
INDUSTRY BACKGROUND
Historically, telecommunications carriers in the United States operated in
a highly regulated environment, with both local and long distance service
providers operating as monopolies. The U.S. telecommunications market opened to
competition with the 1984 breakup of AT&T into seven independent Regional Bell
Operating Companies ("RBOCs"). In the early 1990's, the RBOCs and other ILECs,
anticipating regulatory changes that would introduce competition in their local
exchange markets, began restructuring their service models to provide increased
operating efficiencies and new revenue opportunities. Competitive pressures on
the ILECs intensified with the passage of the Telecommunications Act of 1996
(the "1996 Act"), which allowed CLECs, long distance carriers and wireless
carriers to enter local exchange markets. In addition, the regulatory mandates
of the 1996 Act required each carrier to modify its technical infrastructure to
allow for fair and equal access by other carriers. ILECs, CLECs and wireless
carriers began to seek competitive advantages by differentiating their service
offerings, improving service quality, decreasing time to market, introducing new
services and increasing cost efficiencies. To gain these advantages, carriers
streamlined their business practices, in part by updating technological
infrastructure.
Previously, carriers operated effectively using closed and proprietary
systems to provision and manage their networks. In order to deliver services
demanded by an increasingly competitive market, service providers today require
more advanced service provisioning, operations, customer care and billing, and
planning and engineering systems. These systems that collectively constitute a
carrier's OSS directly support the routine processes and procedures of a
carrier's telecommunications operating infrastructure. Historically, carriers'
OSS have typically been "legacy" mainframe-based systems that in many cases
utilized incompatible and inflexible software and technologies. These OSS were
further strained by the many incremental changes that
30
<PAGE> 32
had been made in order to accommodate new technologies, such as new advanced
switching capabilities, and the proliferation of value-added services, such as
greater consumer choice in mix of services. Recent improvements in OSS, however,
have allowed carriers to offer more advanced services by incorporating new
technologies to improve the reliability of existing infrastructure and to comply
with the regulatory requirements of the 1996 Act. For example, next-generation
customer care and billing systems, which interact with multiple carriers'
systems across the increasingly complex telecommunications network environment,
collect and process customer usage data and generate invoices, enhance the
billing collection process, and provide information regarding customer behavior.
9-1-1, another essential OSS service, similarly requires close coordination of
data and network elements, because changes in customer service information
usually affect the data needed for 9-1-1 services.
9-1-1 service involves the routing of emergency calls to the appropriate
public safety answering point ("PSAP") responsible for dispatching police, fire
and other emergency services. Most jurisdictions in the United States now
provide enhanced 9-1-1 services ("Enhanced 9-1-1 or E9-1-1"), which also provide
the caller's telephone number and location to the call taker at the PSAP. When a
caller dials 9-1-1, information about the caller's location, telephone number
and the jurisdictionally appropriate PSAP must be quickly accessed from
carriers' network and mission-critical data servers. Carriers need current,
accurate information about their subscribers in order to facilitate a prompt
response to a 9-1-1 call. Each service order received by a carrier and each
change in PSAP jurisdiction, including expansion to accommodate new addresses,
may affect the information required for the proper handling of a 9-1-1 call.
Thus, delivery of 9-1-1 service presents a difficult OSS challenge for carriers
because it requires the coordination of data from multiple sources, the review
and processing of the data, the resolution of data errors and conflicts and the
insertion of the data into network and mission-critical data servers.
Today, 9-1-1 is a fundamental element of local exchange service and
carriers' OSS infrastructure. According to the National Emergency Number
Association, more than 85% of the current wireline telephone subscribers in the
United States are covered by some type of 9-1-1 service and 95% of that coverage
is E9-1-1 service. The provisioning of 9-1-1 services presents even greater
challenges for wireless carriers, since the mobility of wireless callers makes
the callers' locations difficult to determine. The Cellular Telephone
Information Association estimates that approximately 83,000 9-1-1 calls are made
each day from wireless phones, representing approximately 25% of all 9-1-1
calls. The Company believes that approximately 25% of wireless callers cannot
identify their locations. Most of the existing wireless infrastructure requires
modification to enhance the location data so that wireless calls can be
accurately routed to the appropriate PSAP. Recognizing the public safety need
for improved wireless 9-1-1 services, the Federal Communications Commission (the
"FCC") issued Report & Order 94-102 (the "Order") on June 12, 1996, a directive
that mandated the adoption of 9-1-1 technology by wireless carriers in two
phases. Phase I required wireless carriers to provide to requesting PSAPs at the
time of a 9-1-1 call, the caller's telephone number and location of the
receiving cell site. Wireless carriers had to comply with Phase I mandates by
the later of April 1, 1998, or six months after the PSAP request. Phase II
requires wireless carriers to locate a 9-1-1 caller to within 125 meters,
subject to FCC guidelines. Wireless carriers must comply with Phase II mandates
for requesting PSAPs by October 1, 2001. The FCC wireless mandates, the wireless
industry's desire to continue to improve emergency services and increasing
pressure from public safety agencies have rapidly accelerated the demand for
E9-1-1 wireless services.
ILECs, CLECs and wireless carriers require a 9-1-1 solution that cost
effectively provides a high degree of data integrity and reliability, allows
them to comply with regulatory mandates, and addresses their need to provide
additional value-added services. ILECs are seeking to reduce the significant
capital expenditures associated with supporting rapidly evolving 9-1-1
infrastructure and upgrading their 9-1-1 data management and network control
services to meet PSAP requirements and technological advancements. CLECs and
wireless carriers, many of which are relatively small and new to the markets in
which they are now competing, are seeking to increase their own subscriber bases
while minimizing their investment in OSS technology infrastructure and
personnel, as well as in the relationships with PSAPs necessary to provide 9-1-1
service. ILECs, CLECs and wireless carriers are also seeking a comprehensive
9-1-1 solution that effectively operates in multiple geographic locations over a
wide variety of legacy systems. In addition, the 9-1-1 OSS services
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<PAGE> 33
offered by carriers and other service providers increasingly include
complementary add-on products and services, such as public warning services,
that enable them to reduce costs and generate value-added services for their
customers. Carriers with these requirements may choose to develop their own
proprietary solutions, to license the 9-1-1 OSS software and manage the delivery
of the 9-1-1 services themselves, or to outsource their 9-1-1 OSS needs.
THE SCC SOLUTION
The Company has redefined the U.S. market for 9-1-1 OSS by creating the
first and largest 9-1-1 service bureau, the SCC National Data Services Center,
with over 70 million subscriber data records under management throughout North
America. Through its NDSC, the Company offers a comprehensive, cost-effective
solution to the 9-1-1 service provisioning needs of ILECs, CLECs and wireless
carriers by enabling them to outsource virtually all aspects of the operations
of their 9-1-1 data management services, including system activation, routine
data administration, event transaction processing and performance management,
with a high level of security and survivability. The Company delivers an
outsourcing solution that can interface with each carrier's proprietary or open
system. In addition, the Company licenses its 9-1-1 OSS software to carriers
that wish to control the delivery of 9-1-1 services in-house. The Company
believes that its solution offers the following principal features and benefits:
Focus on Data Integrity. The accuracy of subscriber records that
identify and provide location information regarding the caller is an
essential element of 9-1-1 service. Using its software solution, SCC
conducts more than 60 logical tests to prepare the data for use in 9-1-1
operations. The Company's systems interface with other elements of a
carrier's OSS to provide timely and accurate subscriber location
information. Transactions identified by the system as requiring further
analysis are researched and resolved by a team of data integrity analysts.
Survivability and Reliability. SCC offers large scale,
mission-critical transaction processing through reliable, scalable
operating platforms. To provide high assurance of continued service, SCC
has designed systems that provide critical 9-1-1 data with multiple layers
of redundancy by deploying over 20 fault-tolerant, geographically dispersed
servers to provide multiple sources of 9-1-1 data. Since the launch of its
NDSC more than three years ago, SCC's systems for 9-1-1 information
delivery have provided uninterrupted service to its customers. SCC has also
developed a comprehensive disaster recovery program for its central data
administration operations.
Leading-Edge Technology. The Company believes it is the technological
leader in the 9-1-1 data management services industry based on its advances
in the areas of systems architecture, spatial data management and advanced
network integration. The Company's innovations include advance intelligent
call routing support, local number portability ("LNP") data transaction
support, technologies that improve 9-1-1 availability, a transaction-based
map maintenance system, a spatial coordinate-based E9-1-1 management system
and large-scale Internet applications for E9-1-1. The Company was the first
to demonstrate data management support capable of interfacing with wireless
systems that complied with both the Phase I and Phase II mandates of the
Order, and also has developed systems for the use of spatial coordinate
data for use in managing and routing non-address specific 9-1-1 calls.
Flexible Business Model. PSAPs generally pay carriers a capitated rate
based on the number of subscribers located in a particular PSAP's
jurisdiction. By outsourcing its data management and service provisioning
needs to the Company, a carrier can avoid costly capital expenditures and
fix its expenses for 9-1-1 services on a per subscriber basis.
Additionally, outsourcing allows carriers to customize their service
packages both to meet the needs of their subscribers and to comply with
regulatory mandates. The Company provides CLECs and wireless carriers with
clearinghouse services to format and insert subscriber data into the
appropriate 9-1-1 systems. Alternatively, carriers may elect to license
9-1-1 OSS software directly from the Company and manage the 9-1-1 data
themselves.
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STRATEGY
The Company's objective is to be the leading national provider of 9-1-1 OSS
and other complementary services to ILECs, CLECs and wireless carriers. SCC
focuses on developing innovative and automated solutions to provide customers
with a comprehensive system for managing large amounts of dynamic subscriber
information. Key elements of the Company's strategy are to:
Maintain and Extend Leadership Position in Wireline 9-1-1 Data
Management Market. SCC currently manages more than 70 million wireline
subscriber data records out of an estimated 178 million total wireline
telephone subscriber records in the United States. The Company intends to
maintain and extend its market leadership in the wireline 9-1-1 OSS systems
market by adding new service and license customers, increasing the number
of subscriber data records under management, enhancing its existing 9-1-1
services and supporting the evolving telecommunications infrastructure.
Capitalize on Emerging Wireless Carrier Opportunities. The Company
believes there is a significant opportunity to offer outsourcing services
to wireless carriers given the growing public demand for effective wireless
9-1-1 services and the FCC mandates for minimum service performance. The
Company intends to take advantage of this opportunity by leveraging its
position as the first company to offer both Phase I and Phase II compliant
solutions and its large market share in both the wireline and wireless data
management services industry.
Maintain and Extend Leadership Position in National Clearinghouse
Services. The Company believes opportunities exist to sell 9-1-1
clearinghouse services to CLECs which, in order to activate 9-1-1 service
for their customers, must provide subscriber and network information that
is compatible with an ILEC's 9-1-1 OSS. CLECs and wireless carriers, many
of which are relatively small and new to the markets in which they are now
competing, are seeking to grow their own subscriber bases while minimizing
their investment in OSS technology infrastructure and personnel, as well as
in the relationships with PSAPs and other service providers necessary to
provide 9-1-1 services. SCC plans to build upon its position as a neutral,
carrier-independent service provider by working cooperatively with newly
emerging dial tone providers, including CLECs, fixed-position wireless
carriers and cable television carriers, to increase its sales of 9-1-1
clearinghouse services.
Provide Additional Services to Telecommunications Carriers. ILECs,
CLECs and wireless carriers are seeking to apply emerging technologies in
response to competitive pressures and regulatory mandates. For example, the
Company has developed off-switch routing capabilities for carriers that
have deployed the advanced intelligent network and created LNP transaction
sets in response to the LNP mandates of the 1996 Act. By leveraging the
experience and economies of scale it has obtained in managing the 9-1-1 OSS
infrastructure for multiple carriers, the Company is well-positioned to
continue to develop and offer flexible, scalable solutions that allow
carriers to cost-effectively support new technological developments and
regulatory mandates.
Develop Applications for New Commercial Products. By leveraging its
core competency of managing dynamic subscriber location information, the
Company believes that it is well-positioned to expand into additional
markets outside 9-1-1 OSS services. The Company currently has under
development new products and services such as dynamic call routing for
multi-location call centers for both telecommunications carriers and others
and improved address information for operations areas of telecommunications
carriers such as their billing, ordering and provisioning departments.
Expand International Operations. SCC believes that a significant
opportunity to generate additional long-term revenue may be created by
partnering with established telecommunications carriers and systems
integration firms to design, implement, maintain and operate effective,
reliable emergency communications systems in countries other than the
United States or Canada. The Company intends to expand internationally to
address the needs of this market for telecommunications emergency services.
There can be no assurance that the Company will achieve its objective or any of
the key elements of its strategy. See "Risk Factors."
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<PAGE> 35
SERVICES AND PRODUCTS
SCC's 9-1-1 OSS solution enables a 9-1-1 call to be routed to the
appropriate PSAP along with accurate and timely information about the caller's
identification and location. Complex data screening and preparation is completed
to initialize properly the underlying systems necessary for 9-1-1 call routing
and information display for the call taker. SCC's NDSC frequently receives and
processes electronic transmissions from ILECs, CLECs and wireless carriers
detailing subscriber and coverage updates and public safety jurisdiction
boundary changes from PSAPs. Records identified as potentially having problems
are automatically separated for manual review and analysis by SCC data integrity
analysts. Using the updated information, SCC's 9-1-1 OSS then provides the
information to route the 9-1-1 call and transmit essential information to the
emergency service provider.
[CHART]
(1) When a caller dials 9-1-1, the call is directed to the 9-1-1 voice switch.
(2) The 9-1-1 switch queries SCC's dispersed 9-1-1 servers to determine the
jurisdictionally appropriate PSAP. The 9-1-1 OSS automatically responds with
call routing information.
(3) The 9-1-1 voice switch routes the call to the appropriate PSAP.
(4) Simultaneously, SCC's 9-1-1 OSS directs subscriber information, including
caller's address and call-back number, to call-taker's screen at the PSAP.
(5) PSAP dispatches personnel and equipment to assist.
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<PAGE> 36
BASE SERVICES OF SCC NATIONAL DATA SERVICES CENTER
Through SCC's NDSC, the Company provides the data management services that
ILECs, CLECs and wireless carriers need to deliver 9-1-1 calls to the
appropriate PSAP, along with critical information such as caller location and
call-back number that PSAPs need to respond effectively to emergencies. Services
include:
System Preparation and Administration. Before providing 9-1-1 data
management services to its customers, SCC must collect, organize, review
and analyze the data necessary to initialize the system properly. Data
preparation includes collecting information on PSAP jurisdictional
boundaries, performing a full inventory of addresses located in an area and
loading the subscriber information into the Company's systems. To improve
data quality and, therefore, 9-1-1 service, the Company performs diagnostic
reviews and analyses of information loaded into the NDSC systems. SCC
engages over 80 data integrity analysts to facilitate the creation,
maintenance and transition of key information.
Routine Data Administration. SCC's NDSC receives and automatically
processes service order updates from ILECs, CLECs and wireless carriers on
a regular basis, in order to maintain current data in the 9-1-1 OSS.
Service order updates include address changes, telephone number changes and
other information pertinent to 9-1-1 call processing. To maintain reliable
9-1-1 service, SCC usually receives between 100,000 and 500,000 service
orders per day and frequently receives boundary updates from PSAPs
reflecting changes in jurisdiction boundaries for PSAP responses. When SCC
receives a service order update or jurisdiction change, information
received must be checked for complete and appropriate data, and then
distributed throughout SCC's network of geographically dispersed servers.
Event Transaction Processing. When a caller dials 9-1-1 in an area
served by the Company, a request for information is automatically generated
by the PSAP answering the call and sent to one of the Company's
fault-tolerant servers. The server rapidly responds to the call taker with
information from the OSS database regarding the caller's location and
call-back number. Automated support is also available for real-time switch
control to direct the routing of the call.
Performance Management. SCC monitors and reports the performance of
its service operations by measuring response time, systems availability,
data accuracy and error resolution intervals, among other performance
measurements. Using these measurements as a basis, SCC designs and
implements programs to improve continuously the 9-1-1 OSS services provided
by its NDSC.
Mapping Services. Since traditional mapping services do not provide
the frequent updates necessary for the provision of emergency services, SCC
maintains a team of geographic information system experts, who work with
carriers and public safety officials to document, review and analyze call
routing boundaries and specific address information. The mapping services
department uses advanced tools to improve existing mapping information with
new and more detailed geographical information for optimal management of
9-1-1 call records. The mapping services department also assists in system
preparation and quality control programs to provide the SCC's NDSC with
current geographical information.
Clearinghouse Services. SCC's clearinghouse department provides a
single point of contact to process and format 9-1-1 data for CLECs and
independent telephone companies. CLECs and independent telephone companies
can utilize the services of the Company's clearinghouse department to offer
service in numerous localities without having to independently develop the
9-1-1 OSS systems, procedures and expertise necessary for each community.
CLECs and independent telephone companies electronically transmit
subscriber information to the clearinghouse department. The information is
then reformatted to comply with the destination community's local
standards, tested for detectable errors and delivered to the appropriate
9-1-1 data systems. The Company can process information for its
clearinghouse customers even if the data will be inserted in a system
operated by a carrier that does not utilize the Company's services or
products.
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<PAGE> 37
ENHANCED SERVICES OF SCC NATIONAL DATA SERVICES CENTER
The Company offers enhancements to its 9-1-1 OSS services that provide
additional features and functionality. These services are targeted to specific
markets and are sold directly by the Company or indirectly through the Company's
customers.
9-1-1Net. 9-1-1Net, an online tool, creates an active communication channel
serving the NDSC, carriers and PSAPs. Through 9-1-1Net, users can view live
address routing rules, send address updates, review inbound call load, error
statistics and ALI discrepancy reports, and receive new product updates.
Private Switch ALI. Private telephone switches, commonly known as PBX's,
create a challenge for E9-1-1 operations because information describing the
individual caller's phone station or extension within a PBX may not be available
to the network receiving the 9-1-1 call. In the case of large facilities such as
campuses, hotels and hospitals, emergency response personnel may not have
adequate information to quickly determine the location of the caller. Private
Switch ALI allows PBX system managers to create and transmit appropriate data
records that identify a caller's extension or location within a facility for the
9-1-1 OSS.
9-1-1Connect. SCC provides wireless carriers with 9-1-1 OSS services that
are similar to those provided to wireline customers and that fully comply with
Phase I of the Order. Once a wireless carrier receives a request from a PSAP to
activate wireless 9-1-1 services, SCC's program managers develop a plan with the
wireless carrier to activate service, including development of ILEC network
interconnections for both data and voice that are specific to the local wireless
network configuration and interface requirements. The program managers develop
graphic coverage area maps that are superimposed on maps of current public
safety agency boundaries. Routing recommendations can then be made and
coordinated with the appropriate PSAP.
Subscriber ALI. The Company is currently preparing to test Subscriber ALI,
which is designed to allow subscribers to supply personal information in their
9-1-1 records such as medical condition, disability and language of choice. When
a subscriber calls 9-1-1, data previously provided by the subscriber will be
displayed along with traditional 9-1-1 information to the PSAP. A subscriber
also can designate a third party to be notified in the event a 9-1-1 call is
initiated from the subscriber's telephone. For example, parents away from home
would be notified when a child or babysitter calls 9-1-1 from their telephone.
The Company currently anticipates that this service will be available by late
1998.
Emergency Warning and Evacuation System. The Company is currently
developing its Emergency Warning and Evacuation System to initiate outbound
calls selectively in the event of potential disasters such as flash flooding,
hazardous materials incidents, industrial accidents and localized weather
events. The Emergency Warning and Evacuation System will utilize spatially
classified location information and up-to-date telephone subscriber data and
will be able to deliver voice or fax warnings to a geographically targeted
population. SCC intends to offer its Emergency Warning and Evacuation System by
late 1998.
LICENSE PRODUCTS
The Company offers 9-1-1 OSS software to customers that elect to manage
their own 9-1-1 data records rather than outsourcing such operations to SCC. SCC
also provides custom software development services to customers with specific or
local requirements through its engineering department. The engineering
department develops, customizes and enhances the software using a structured
approach to perform requirements analysis, software development and quality
assurance.
COMMERCIAL SERVICES
Many of the underlying elements used by the Company in managing large
volumes of dynamic subscriber information have commercial applications in other
industries. For instance, the Company has developed and is testing a dynamic
call routing system that will allow telecommunications carriers to support
real-time assignment of routing destinations for calls processed in public
telecommunications networks. Historically, calls have been routed pursuant to
preplanned and preprogrammed routing instructions. The Company's dynamic call
assignment will allow greater flexibility in call routing to respond to call
load or other complex non-network factors. The Company also intends to offer
improved address information to other operations
36
<PAGE> 38
areas of telecommunications carriers such as their billing, ordering and
provisioning departments. Carriers can increase efficiencies and improve
customer service by responding to service calls with more accurate subscriber
location information.
SERVICE AND PRODUCT PRICING
Pricing for SCC's NDSC services usually includes a non-recurring initial
fee due upon execution of a contract with a customer. Thereafter, customers
generally pay a monthly fee based on the number of subscriber records maintained
by the NDSC and upon the services selected by the customer. The Company
typically enters into ten-year agreements for wireline base services and two to
five-year agreements for wireless base services. During the contract term, SCC
may offer customers enhanced services, which may be provided on a revenue
sharing basis. SCC also licenses software, hardware and professional services
necessary for the management of 9-1-1 services to its customers in exchange for
license and implementation services fees and maintenance fees.
SERVICE INFRASTRUCTURE AND ARCHITECTURE
The Company's operations include central data administration and
distributed systems for real-time 9-1-1 transaction support. Based on large
scale, fault-tolerant Tandem computers, the Company's major processing systems
are configured to provide high reliability. They are also designed to provide
significant capacity for continued growth using the Tandem NSK scalable
message-based architecture.
The Company's central data administration systems, located in Boulder,
Colorado, are a key element of its 9-1-1 OSS, and are used to perform routine
data maintenance and to support new customer transition and initial system
loads. SCC's NDSC also maintains a central monitoring facility in Boulder that
operates 24 hours a day, seven days a week. Data network access for the central
administration systems is provided using traditional T-1 connectivity to the
networks operated by SCC and its customers. To improve reliability and
survivability, the primary links are designed to have three or more backup paths
to access SCC's distributed networks, including VSAT satellite links. A
"hot-site" emergency business recovery facility has been established in New York
and can be activated to continue routine operations in the event of a disaster
at the Boulder site. Electronic processing necessary to handle actual 9-1-1
calls is geographically distributed and remains a local service for each region,
so SCC's central data administration systems are not in the actual 9-1-1 call
path.
Distributed throughout the U.S., the Company's real-time 9-1-1 OSS servers
are located in shared, hardened computer facilities. The systems are deployed in
pairs or quads. System pairs are intentionally distributed to different
geographic locations to provide an additional level of reliability. These
systems provide data display for thousands of public safety agencies throughout
the service areas of SCC's customers. Direct interface to telephone control
switches is also supported on these platforms, providing the information
necessary to route calls to the jurisdictionally appropriate PSAP. The Company
also uses a number of Microsoft NT servers for internal administrative
processing and extranet support.
CUSTOMERS
The Company provides its services to a range of telecommunications service
providers, including ILECs, CLECs and wireless carriers. The Company also
licenses its software and provides 9-1-1 data clearinghouse services directly
and indirectly to over 600 independent telephone companies. During the year
ended December 31, 1996, the Company recognized approximately 82% of total
revenue from continuing operations from Ameritech and U.S. WEST, each of which
accounted for greater than 10% of the Company's revenue in such periods. During
the year ended December 31, 1997, the Company recognized approximately 81% of
total revenue from Ameritech, BellSouth Inc. and U.S. WEST customers, each of
which accounted for greater than 10% of the Company's revenue in such period.
During the three months ended March 31, 1998, the Company recognized
approximately 92% of total revenue from Ameritech, AT&T, BellSouth Inc. and U.S.
WEST customers, each of which accounted for greater than 10% of the Company's
revenue in such period. No other customers accounted for more than 10% of the
Company's total revenue in such periods. See "Risk Factors -- Reliance on
Significant Customers."
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<PAGE> 39
The Company typically enters into contracts with carriers and their
affiliates to provide services to some or all of the carrier's operating
entities. Set forth below is a list of carriers utilizing the Company's services
or products, which the Company believes are representative of the Company's
overall customer base.
ILECs. The Company's customers include Ameritech, BellSouth Inc. and U.S.
WEST.
CLECs. The Company's customers include ICG Telecom, MCI and Worldcom
Network SVCS.
Wireless Carriers. The Company's customers include 3608 Communications
Company, AT&T Wireless Services, Sprint PCS, U.S. WEST Wireless and Vanguard
Cellular Systems.
License Customers. The Company's license customers include Bell Atlantic,
Bell Canada, Pacific Bell and GTE Network Services.
SALES AND MARKETING
The Company's marketing efforts are focused on targeting key carriers and
PSAPs in each geographical market through advertising in telecommunications
industry publications, participation in trade shows, presentations at technical
conferences and other initiatives. Additionally, SCC employees serve as the
chairpersons and members of key standards committees related to emergency
communications services. The Company's sales strategy relies on direct channels
of distribution for its services. The Company has dedicated account teams to
work with each existing and potential customer. The Company's account teams
develop relationships with 9-1-1 service providers through a consultative,
problem-solving sales process and work closely with customers and potential
customers to determine how their needs can be fulfilled by the Company's
services. As of April 30, 1998, the Company employed 18 persons in its sales and
marketing organization. Sales cycles range from six months to over two years.
See "Risk Factors -- Significant Fluctuations in Quarterly Results of
Operations" and "-- Lengthy Sales Cycle."
RESEARCH AND DEVELOPMENT
The Company directs its research and development efforts toward providing
highly scalable applications that enable a more efficient 9-1-1 OSS process that
improves data quality. Development efforts currently in process are focused on
further embedding and using spatial coordinate data to manage geographic
assignment and other data, further enhancing the Company's wireless offerings.
These offerings include improving the Company's software, integrating standard
Web browser technology, and the development of decision support systems. By late
1998, the Company expects to introduce Subscriber ALI, which will allow
subscribers to append medical and other important data to their ALI record, and
Emergency Warning and Evacuation System, which will allow PSAPs to call all
numbers in a given area and warn of imminent danger. Research and development
expenses totaled approximately $338,000, $230,000 and $738,000 for December 31,
1995, 1996, and 1997, respectively. See "-- Products and Services -- Enhanced
Services of SCC National Data Services Center" and "Risk Factors -- Dependence
on New Products; Rapid Technological Change."
COMPETITION
The market for 9-1-1 OSS solutions is intensely competitive and the Company
expects competition to increase in the future. The Company believes that the
principal competitive factors affecting the market for 9-1-1 OSS solutions
include effectiveness with existing infrastructure, reliability, manageability,
technical features, wireless support, performance, ease of use, price, scope of
product offerings, and customer service and support. Although the Company
believes that its solution competes favorably with respect to such factors,
there can be no assurance that the Company can maintain its competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service support, technical and other competitive
resources.
The Company's principal competitors generally fall within one of three
categories: internal development departments of major carriers or consulting
firms that support such departments; relatively smaller companies that offer
applications with limited scope; and larger companies that are either in the
process of entering the Company's market or have the potential to develop
products and services that compete with the Company's
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<PAGE> 40
service offerings. Potential customers sometimes rely on their own internal
development teams to formulate 9-1-1 OSS systems or to retain consultants to
undertake such a project. The Company believes that its 9-1-1 OSS solution
competes favorably with internally developed systems, which are expensive to
develop and maintain, may not provide a comprehensive, reliable approach to
9-1-1 OSS services, and may not provide the flexibility to adapt readily to
regulatory, technological and market changes.
In addition, a number of companies currently market or have under
development software products and services to provide 9-1-1 administration. The
Company competes with a few smaller companies, including XYPoint Corporation,
for the provision of 9-1-1 OSS services to wireless carriers, although the
Company expects more significant competition to emerge in the future. The
Company believes that, to date, none of these relatively smaller companies offer
products or services that are as robust in features or as comprehensive in scope
as the Company's products and services. Although it is likely that the product
development efforts of these companies eventually will enable them to offer a
line of products or services to compete with the Company's current service
offerings, the Company intends to continue to dedicate significant resources for
product and service development in order to expand the Company's capabilities
ahead of these competitors. Notwithstanding, the Company expects additional
competition from these established competitors and from other emerging
companies. Mergers or consolidations among these competitors or acquisitions of
these companies by larger competitors would make them more formidable
competitors to the Company. There can be no assurance that the Company's current
and potential competitors will not develop products and services that may be
more effective than the Company's current or future 9-1-1 data management
solutions or that the Company's technologies and offerings will not be rendered
obsolete by such developments.
Finally, there are a number of companies that currently market and sell
various products and services to telecommunications carriers, such as billing
software and advanced telecommunications equipment, that have been broadly
adopted by the Company's customers and potential customers. In addition, vendors
of telecommunications software and hardware in the future may enhance their
products to include functionality that is currently provided by the Company's
solutions. The widespread inclusion of the functionality of the Company's
service offerings as standard features of other telecommunications software or
hardware could render the Company's services obsolete and unmarketable,
particularly if the quality of such functionality were comparable to that of the
Company's services. Furthermore, even if the 9-1-1 functionality provided as
standard features by telecommunications software or networking hardware is more
limited than that of the Company's services, there can be no assurance that a
significant number of customers would not elect to accept more limited
functionality in lieu of purchasing additional products or services. For
example, Lucent Technologies offers carriers software systems with functionality
similar to the Company's services. Many of these larger companies have longer
operating histories, greater name recognition, accesses to larger customer bases
and significantly greater financial, technical and marketing resources than the
Company. As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products and services, than the
Company. The Company believes that the entry of these larger companies into its
market will require them to undertake operations that are currently not within
their core areas of expertise, and thus expose them to significant uncertainties
in the product development process or in providing a range of products and
services to comprehensively address the 9-1-1 requirements which the Company's
services addresses. However, if these companies were to introduce products or
services that effectively compete with the Company's service offerings, they
could be in a position to substantially lower the price of their 9-1-1 products
and services or to bundle such products and services with their other product
and service offerings.
For the foregoing reasons, there can be no assurance that the Company will
be able to compete successfully against its current and future competitors.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which would materially and adversely affect the
Company's business, financial condition and results of operations. See "Risk
Factors -- Highly Competitive Market; Competition."
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<PAGE> 41
PROPRIETARY RIGHTS
The Company's success and its ability to compete depends significantly upon
its proprietary rights. The Company relies primarily on a combination of
copyright, trademark and trade secret laws, as well as confidentiality
procedures and contractual restrictions to establish and protect its proprietary
rights. There can be no assurance that such measures will be adequate to protect
the Company's proprietary rights. Further, the Company may be subject to
additional risks as it enters into transactions in foreign countries where
intellectual property laws are not well developed or are difficult to enforce.
Legal protections of the Company's proprietary rights may be ineffective in such
countries. Litigation to defend and enforce the Company's intellectual property
rights could result in substantial costs and diversion of resources, and could
have a material adverse effect on the Company's business, financial condition
and results of operations, regardless of the final outcome of such litigation.
Despite the Company's efforts to safeguard and maintain its proprietary rights
both in the United States and abroad, there can be no assurance that the Company
will be successful in doing so or that the steps taken by the Company in this
regard will be adequate to deter misappropriation or independent third-party
development of the Company's technology, or to prevent an unauthorized third
party from copying or otherwise obtaining and using the Company's technology.
There also can be no assurance that others will not independently develop
similar technologies or duplicate any technology developed by the Company. Any
such events could have a material adverse effect on the Company's business,
financial condition and results of operations.
As the number of entrants to the Company's markets increases and the
functionality of the Company's products and services increases and overlaps with
the products and services of other companies, the Company may become subject to
claims of infringement or misappropriation of the intellectual property rights
of others. In certain of its customer agreements, the Company agrees to
indemnify its customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third parties. In certain
limited instances, the amount of such indemnities may be greater than the
revenue the Company may have received from the customer. There can be no
assurance that third parties will not assert infringement or misappropriation
claims against the Company in the future with respect to current or future
products or services. Any claims or litigation, with or without merit, could be
time consuming, result in costly litigation or require the Company to enter into
royalty or licensing arrangements. Such royalty or licensing arrangements, if
required, may not be available on terms acceptable to the Company, if at all,
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
EMPLOYEES
As of April 30, 1998, the Company employed 249 full-time employees in eight
states. Of these employees, 34 were involved in research and development, 18 in
sales and marketing, 165 in technical support and operations and 32 in
administration and finance. No employees are covered by any collective
bargaining agreements. The Company believes that its relationships with its
employees are good.
FACILITIES
The Company's principal administrative, sales and marketing, research and
development and support facilities consist of approximately 80,000 square feet
of office space in Boulder, Colorado. The Company occupies these premises under
a lease expiring December 31, 2002. As of March 31, 1998, the annual base rent
for this facility was approximately $670,000; however, the lease agreement
provides for periodic defined increases in rent through the lease term.
LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have a
material adverse effect on the Company or its business.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Directors and executive officers and their ages as of April
30, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
George K. Heinrichs.............. 40 President, Chief Executive Officer and Director
John J. Sims..................... 42 Chief Operating Officer
Nancy K. Hamilton................ 45 Chief Financial Officer
John G. Hill(1).................. 57 Director
Darrell A. Williams(1)(2)........ 38 Director
David Kronfeld(2)................ 50 Director
</TABLE>
- ------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
George K. Heinrichs has been the President and a Director of the Company
since he cofounded the Company in 1979, and also has served as Chief Executive
Officer since February 1995. Prior to founding the Company, Mr. Heinrichs served
in a variety of public safety and criminal justice positions.
John J. Sims has been Chief Operating Officer of the Company since November
1995. From 1977 until October 1995, Mr. Sims was employed by Tandem Computers,
Inc., where he held a number of positions including Vice President of Sales and
General Manager for Worldwide Telecommunications, Director of Materials
Management, Vice President of Management Information Systems and Vice President
of the Tandem Alliance Group.
Nancy K. Hamilton has been the Chief Financial Officer and Senior Vice
President of the Company since December 1993. Prior to joining the Company, Ms.
Hamilton was Vice President and Chief Financial Officer of Fischer Imaging
Corp., a manufacturer of medical imaging systems, from January 1993 to November
1993. Prior to January 1993, Ms. Hamilton served in a variety of senior
management positions, including Chief Financial Officer, at NBI, Incorporated,
which at that time was a developer of hardware and software and a systems
integrator.
John G. Hill has been a Director of the Company since January 1990. Since
1989, Mr. Hill has been a general partner of Hill, Carman Ventures, a limited
partnership which is the general partner of The Hill Partnership III, a venture
capital fund and a stockholder of the Company. Since 1981, Mr. Hill has been the
General Partner of Hill Ventures. Mr. Hill currently serves as a director of
Genicom Corporation, a provider of midrange printer solutions, network
integration and multivendor services.
David Kronfeld has been a Director of the Company since March 1998 and
previously served as a Director of the Company from February 1992 until July
1996. Mr. Kronfeld has been a manager of JK&B Management L.L.C. since its
founding in October 1995. Since 1989, Mr. Kronfeld has been a general partner of
Boston Capital Ventures Limited Partnership, Boston Capital Ventures II Limited
Partnership, and Boston Capital Ventures III, L.P., all of which are venture
capital funds and stockholders of the Company, and a general partner of Boston
Capital Ventures, a venture capital fund.
Darrell A. Williams has been a Director of the Company since February 1998.
Mr. Williams is Vice President, Venture Capital in the Ameritech Development
Corporation, which he joined in January 1995. From 1992 to 1995, Mr. Williams
was Director, Investment Acquisitions and Divestitures of Ameritech Corporation.
BOARD COMMITTEES
The Company has a standing Audit Committee currently composed of Darrell A.
Williams and David Kronfeld. The Audit Committee reviews and supervises the
Company's financial controls, including selecting the Company's auditors,
reviewing the books and accounts of the Company, meeting with the officers of
the Company regarding the Company's financial controls, acting upon
recommendations of auditors, and taking
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such further action as the Committee deems necessary to complete an audit of the
books and accounts of the Company, as well as other matters that may come before
it or as directed by the Board of Directors of the Company.
The Company has a standing Compensation Committee currently composed of
John G. Hill and Darrell A. Williams. The Compensation Committee reviews and
acts on matters relating to compensation levels and benefits plans for the
Company's executive officers and key employees. The Compensation Committee is
also responsible for granting stock awards, stock options, stock appreciation
rights and other awards to be made under the Company's existing incentive
compensation plans.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned during the 1997
fiscal year for services rendered in all capacities to the Company and its
subsidiaries during such fiscal year by the Company's Chief Executive Officer
and each of the two other executive officers whose annual bonus and salary for
such fiscal year exceeded $100,000 (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SHARES
-------------------- UNDERLYING
NAME AND PRESENT PRINCIPAL POSITION SALARY BONUS OPTIONS(1)
- ----------------------------------- -------- -------- ------------
<S> <C> <C> <C>
George K. Heinrichs................................... $173,746 $180,000 66,667
President and Chief Executive Officer
John J. Sims.......................................... 225,000 100,000 120,000
Chief Operating Officer
Nancy K. Hamilton..................................... 148,750 100,000 57,333
Chief Financial Officer and Senior Vice President
</TABLE>
- ------------
(1) The options listed in the table were granted under the 1990 Stock Option
Plan. See "-- Option Grants During Last Fiscal Year."
OPTION GRANTS DURING LAST FISCAL YEAR
The following table sets forth information concerning the stock option
grants made to each of the Named Officers in the 1997 fiscal year.
OPTION GRANTS DURING LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM(2)
OPTIONS EMPLOYEES IN PER EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YEAR SHARE DATE 5% 10%
- ---- ---------- ------------ -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
George K. Heinrichs........ 66,667 19.6% $7.50 10/21/07 $314,449 $776,875
John J. Sims............... 66,666 19.7 6.00 02/18/07 251,555 637,491
53,334 15.7 7.50 10/21/07 251,561 637,505
Nancy K. Hamilton.......... 15,666 4.6 4.50 02/18/07 44,335 112,354
41,667 12.3 7.50 10/21/07 196,531 498,049
</TABLE>
- ------------
(1) The options were granted to each of the Named Officers pursuant to the 1990
Stock Option Plan. Each option vests 24% one year from the date of grant and
2% each month thereafter.
(2) The five percent and ten percent assumed annual rates of compounded stock
price appreciation are mandated by the rules of the Securities and Exchange
Commission. There can be no assurance provided to the option holder or any
other holder of the Company's securities that the actual stock price
appreciation over the ten-year option term will be at the assumed five
percent and ten percent levels or at any other defined level.
42
<PAGE> 44
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option exercises and
option holdings for the 1997 fiscal year with respect to each of the Named
Officers. None of the Named Officers exercised any options during the 1997
fiscal year.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE-MONEY
NUMBER OF SECURITIES UNDERLYING OPTIONS AT
UNEXERCISED OPTIONS AT DECEMBER 31, 1997 DECEMBER 31, 1997(1)
---------------------------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
George K. Heinrichs......... 220,785 115,514 $2,482,913 $ 745,627
John J. Sims................ 54,558 175,501 543,023 1,187,507
Nancy K. Hamilton........... 96,483 78,667 1,039,348 513,501
</TABLE>
- ------------
(1) There was no public trading market for the Common Stock on December 31,
1997. Accordingly, solely for purposes of this table, the values in these
columns have been calculated on the basis of the initial public offering
price of $12.00 per share (rather than a determination of the fair market
value of the Common Stock on December 31, 1997), less the aggregate exercise
price of the options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board was formed in 1995, and
the current members of the Compensation Committee are John G. Hill and Darrell
Williams. Prior to April 1998, George K. Heinrichs and Mr. Hill were the members
of the Compensation Committee. Throughout the year ended December 31, 1997, Mr.
Heinrichs was an officer of the Company. No executive officer of the Company
serves as a member of the Board of Directors or Compensation Committee of any
entity that has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
DIRECTOR COMPENSATION
Directors currently are not compensated for serving on the Board of
Directors. The Company reimburses its directors for all reasonable and necessary
travel and other incidental expenses incurred in connection with their
attendance at meetings of the Board of Directors. The Company has not previously
granted non-employee Board members options to purchase shares of Common Stock,
although the Company may grant options to its non-employee directors in the
future at the discretion of the Board. See "-- Benefit Plans -- 1998 Stock
Incentive Plan."
BENEFIT PLANS
1998 Stock Incentive Plan
The Company's 1998 Stock Incentive Plan (the "1998 Plan") is intended to
serve as the successor equity incentive program to the Company's 1990 Stock
Option Plan, as amended (the "Predecessor Plan"). The 1998 Plan was adopted by
the Board and the stockholders on April 7, 1998 (the "Plan Effective Date").
A total of 1,901,055 shares of Common Stock have been authorized for
issuance under the 1998 Plan. Such share reserve consists of (i) the number of
shares available for issuance under the Predecessor Plan on April 7, 1998,
including the shares subject to outstanding options and (ii) an additional
increase of approximately 500,000 shares. In addition, the share reserve will
automatically be increased on the first trading day of each calendar year,
beginning with the 1999 calendar year, by an amount equal to 3% of the total
number of shares of Common Stock outstanding on the last trading day in December
of the immediately preceding calendar year, but in no event shall any such
annual increase exceed 731,000 shares. To the extent any unvested shares of
Common Stock issued under the Predecessor Plan are repurchased by the Company
after the date on which the Common Stock is first registered under Section 12 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), at the
exercise price paid per share, in connection with the holder's termination of
service, those repurchased shares will be added to the reserve of Common Stock
available for issuance under the 1998 Plan, but in no event shall more than
476,776 shares be added to the reserve from such repurchases. In no event may
any one participant in the 1998 Plan receive option grants,
43
<PAGE> 45
separately exercisable stock appreciation rights or direct stock issuances for
more than 500,000 shares of Common Stock in the aggregate per calendar year.
On the date on which the Common Stock was first registered under Section 12
of the Exchange Act, outstanding options issued under the Predecessor Plan were
incorporated into the 1998 Plan. No further option grants will be made under the
Predecessor Plan. The incorporated options will continue to be governed by their
existing terms, unless the Plan Administrator elects to extend one or more
features of the 1998 Plan to those options. Except as otherwise noted below, the
incorporated options have substantially the same terms as will be in effect for
grants made under the Discretionary Option Grant Program of the 1998 Plan.
The 1998 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program, under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members and
consultants) may, in the Plan Administrator's discretion, be granted options to
purchase shares of Common Stock at an exercise price not less than their fair
market value on the grant date; (ii) the Stock Issuance Program, under which
such individuals may, in the Plan Administrator's discretion, be issued shares
of Common Stock directly, through the purchase of such shares at a price not
less than their fair market value at the time of issuance or as a bonus tied to
the performance of services; (iii) the Salary Investment Option Grant Program,
which may, in the Plan Administrator's discretion, be activated for one or more
calendar years and thereby allow executive officers and other highly compensated
employees the opportunity to invest a portion of their base salary in special
below-market stock option grants; (iv) the Automatic Option Grant Program, under
which option grants will automatically be made at periodic intervals to eligible
non-employee Board members to purchase shares of Common Stock at an exercise
price equal to their fair market value on the grant date; and (v) the Director
Fee Option Grant Program, which may, in the Plan Administrator's sole
discretion, be activated for one or more calendar years and thereby allows
non-employee Board members the opportunity to apply all or any portion of the
annual retainer fee otherwise payable to them in cash each year to the
acquisition of special below-market option grants. The Discretionary Option
Grant, Stock Issuance Program and Automatic Option Program become effective on
the date on which the Underwriting Agreement to be executed in connection with
this offering is executed (the "Underwriting Date"). The implementation date of
the Salary Investment Option Grant Program and the Director Fee Option Program
will be decided by the Compensation Committee.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when such option grants or stock issuances are to be
made, the number of shares subject to each such grant or issuance, the status of
any granted option as either an incentive stock option or a non-statutory stock
option under the Federal tax laws, the vesting schedule to be in effect for the
option grant or stock issuance, and the maximum term for which any granted
option is to remain outstanding. The Compensation Committee will also have the
exclusive authority to select the executive officers and other highly
compensated employees who may participate in the Salary Investment Option Grant
Program in the event that program is activated for one or more calendar years,
but neither the Compensation Committee nor the Board will exercise any
administrative discretion with respect to option grants made under the Salary
Investment Option Grant Program or under the Automatic Option Grant or Director
Fee Option Grant Program for the non-employee Board members.
In the event the Plan Administrator elects to activate the Salary
Investment Option Grant Program for one or more calendar years, each executive
officer and other highly compensated employee of the Company selected for
participation may elect, prior to the start of the calendar year, to reduce his
or her base salary for that calendar year by a specified dollar amount not less
than $10,000 nor more than $50,000. If such election is approved by the Plan
Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Common Stock determined by dividing the salary reduction amount by two-thirds of
the fair market value per share of Common Stock on the grant date. The option
will be exercisable at a price per share equal to one-third of the fair market
value of the option shares on the grant date. As a result, the total spread on
the option shares at the time of grant (the fair market value of the option
shares on the grant date less the aggregate exercise price payable for those
shares) will be equal to the amount
44
<PAGE> 46
of salary invested in that option. The option will vest in a series of 12 equal
monthly installments over the calendar year for which the salary reduction is to
be in effect and will be subject to full and immediate vesting upon certain
changes in the ownership or control of the Company.
The Company has not previously granted non-employee Board members options
to purchase shares of Common Stock. However, under the Automatic Option Grant
Program, each individual who first becomes a non-employee Board member at any
time after the Underwriting Date will automatically be granted an option to
purchase 15,000 shares of Common Stock on the date such individual joins the
Board, provided such individual has not been in the prior employ of the Company.
In addition, on the date of each Annual Stockholders Meeting held on or after
the Underwriting Date, each non-employee Board member who is to continue to
serve as a non-employee Board member (including individuals who joined the Board
prior to the Underwriting Date) will automatically be granted an option to
purchase 3,000 shares of Common Stock, provided such individual has served on
the Board for at least six months.
Each automatic grant for the non-employee Board members will have a term of
10 years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any unvested shares purchased under the option will
be subject to repurchase by the Company, at the exercise price paid per share,
should the optionee cease Board service prior to vesting in those shares. The
shares subject to each initial 15,000 share automatic option grant will vest
over a four-year period, as follows: (i) 25% of the option shares upon the
optionee's completion of one year of Board service measured from the grant date
and (ii) the balance of the option shares in a series of 36 successive equal
monthly installments upon the optionee's completion of each additional month of
service measured from the first anniversary of the grant date. The shares
subject to each annual 3,000 share grant will vest upon the optionee's
completion of one year of Board service measured from the grant date. However,
the shares subject to each automatic option grant will immediately vest in full
upon certain changes in control or ownership of the Company or upon the
optionee's death or disability while a Board member.
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of the annual retainer fee otherwise payable in cash to the acquisition
of a below-market option grant. The option grant will automatically be made on
the first trading day in January in the calendar year for which the retainer fee
would otherwise be payable in cash. The option will have an exercise price per
share equal to one-third of the fair market value of the option shares on the
grant date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of Common Stock on the grant date. As a result,
the total spread on the option (the fair market value of the option shares on
the grant date less the aggregate exercise price payable for those shares) will
be equal to the portion of the retainer fee invested in that option. The option
will become exercisable for the option shares in a series of twelve (12) equal
monthly installments over the calendar year for which the election is to be in
effect. However, the option will become immediately exercisable for all the
option shares upon (i) certain changes in the ownership or control of the
Company or (ii) the death or disability of the optionee while serving as a Board
member.
The Board may amend or modify the 1998 Plan at any time, subject to any
required stockholder approval. The 1998 Plan will terminate on the earliest of
(i) April 30, 2008, (ii) the date on which all shares available for issuance
under the 1998 Plan have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.
1998 Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in March 1998 and approved by the Company's
stockholders in April 1998. A total of 200,000 shares of Common Stock have been
reserved for issuance under the Purchase Plan. There is automatically added to
the Purchase Plan in March of each year (i) that number of shares needed to
restore the maximum aggregate shares available to 200,000 shares or (ii) a
lesser amount determined by the Board. The Purchase Plan, which is intended to
qualify under Section 423 of the Code, provides for two six-month offering
periods each year beginning on the first of January and the first of July,
respectively; however, the initial offering period began on
45
<PAGE> 47
March 1, 1998 and continues through December 31, 1998. The Purchase Plan is
administered by a committee of at least two disinterested Directors appointed by
the Board. Employees (including officers and employee directors) of the Company
are eligible to participate if they are employed by the Company on a regular
full time or part time basis and if they are regularly scheduled to work more
than 20 hours per week. The Purchase Plan permits eligible employees to purchase
shares of Common Stock through periodic payroll deductions at a price equal to
the lower of 85% of the fair market value of the Company's Common Stock at the
beginning or end of the offering period. Employees may end their participation
in the offering at any time during the offering period, and participation ends
automatically on termination of employment with the Company. The Board of
Directors has the power to amend or terminate the Purchase Plan as long as such
action does not adversely affect any outstanding rights to purchase stock
thereunder.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation eliminates,
subject to certain exceptions, directors' personal liability to the Company or
its stockholders for monetary damages for breaches of fiduciary duties. The
Amended and Restated Certificate of Incorporation does not, however, eliminate
or limit the personal liability of a Director for (i) any breach of the
Director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law or (iv) any transaction from which the Director derived an
improper personal benefit.
The Company's Restated Bylaws, which will become effective upon the closing
of this offering, provide that the Company shall indemnify its Directors and
executive officers to the fullest extent permitted under the Delaware General
Corporation Law and may indemnify its other officers, employees and other agents
as set forth in the Delaware General Corporation Law. In addition, the Company
plans to enter into indemnification agreements (the "Indemnification
Agreements") with each of its Directors and executive officers, effective upon
the effectiveness of the Registration Statement of which this Prospectus forms a
part. The indemnification agreements will contain provisions that require the
Company, among other things, to indemnify its Directors and executive officers
against certain liabilities (other than liabilities arising from intentional or
knowing and culpable violations of law) that may arise by reason of their status
or service as Directors or executive officers of the Company or other entities
to which they provide service at the request of the Company and to advance
expenses they may incur as a result of any proceeding against them as to which
they could be indemnified. The Company believes that these provisions and
agreements are desirable to attract and retain qualified Directors and officers.
The Company has obtained an insurance policy covering Directors and officers for
claims that such Directors and officers may otherwise be required to pay or for
which the Company is required to indemnify them, subject to certain exclusions.
EMPLOYMENT AGREEMENTS AND COMPENSATION PLAN
Employment Agreements
The Company does not presently have any employment contracts with the Named
Officers.
Management Incentive Compensation Plan
In early 1998, the Compensation Committee of the Board of Directors
approved a Management Incentive Compensation Plan, under which selected key
employees, including executive officers, are eligible to receive bonus payments.
At the beginning of the year, financial objectives were established and approved
by the Compensation Committee for each participant in the program. A minimum
performance level must be achieved by the Company before any bonus may be earned
by a participant. Thereafter, an established progression rewards higher levels
of achievement with greater bonus payments. Aggregate bonuses payable under the
Management Incentive Compensation Plan in any one year will be limited to a
pre-determined percentage of each participant's salary.
46
<PAGE> 48
CERTAIN TRANSACTIONS
In connection with the Company's Series F Preferred Stock Financing on
March 5, 1996, the Company and the holders of Convertible Preferred Stock
entered into a Fourth Amended and Restated Registration Rights Agreement (the
"Registration Rights Agreement"). Pursuant to the Registration Rights Agreement,
holders of Convertible Preferred Stock that will be converted into Common Stock
in connection with this offering have the right, beginning six months after the
date of this offering and subject to certain limitations and conditions, to
require the Company to file registration statements under the Securities Act to
register all or a part of their shares of Common Stock. The Company, in certain
circumstances, may defer such registrations, and the Underwriters have the
right, subject to certain limitations, to limit the number of shares included in
such registrations. In the event that the Company proposes to register any of
its securities under the Securities Act, either for its own account or for the
account of other securities holders, the holders of Convertible Preferred Stock
are entitled to include their shares of Common Stock in such registration,
subject to marketing and other limitations. Generally, the Company is required
to bear all of the expenses of such registration. Ameritech Development Corp.,
which holds in the aggregate 23.5% of the outstanding capital stock of the
Company (on an as-converted basis), The Hill Partnership III, L.P. (the "Hill
Partnership"), which holds in the aggregate 25.6% of the outstanding capital
stock of the Company (on an as-converted basis), Boston Capital Ventures Limited
Partnership and its affiliates, which hold in the aggregate 25.0% of the
outstanding capital stock of the Company (on an as-converted basis), are parties
to the Registration Rights Agreement. John G. Hill, an affiliate of The Hill
Partnership, and Darrell A. Williams, an affiliate of Ameritech Development
Corp., are Directors of the Company.
The Company provides 9-1-1 OSS services pursuant to a 9-1-1 Services
Agreement dated as of August 31, 1994, as amended, between Ameritech Information
Systems, Inc. and the Company. Pursuant to a Master Lease dated as of March 11,
1996, with Ameritech Credit Corporation, the Company leases certain personal
property. Additionally, the Company is a party to a Consulting Agreement dated
October 27, 1997 with Ameritech Mobile Communications, Inc. pursuant to which
the Company performed a market survey regarding the provision of 9-1-1 service
to cellular telephone subscribers. Ameritech Information Systems, Inc.,
Ameritech Credit Corporation and Ameritech Mobile Communications, Inc. are
affiliates of Ameritech Development Corp. The Company received net proceeds of
approximately $3,226,000, $6,606,000 and $6,959,000 in 1995, 1996 and 1997,
respectively, pursuant to these agreements.
The Company believes that the terms of the transactions described above
were no less favorable to the Company than would have been obtained from an
unaffiliated third party. Any future transactions between the Company and any of
its officers, Directors or principal stockholders will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
and will be approved by a majority of the independent and disinterested members
of the Board of Directors.
The Company plans to enter into the Indemnification Agreements with its
Directors and executive officers, effective upon the effectiveness of the
Registration Statement of which this Prospectus forms a part. Subject to the
provisions of the Indemnification Agreements, the Company shall indemnify and
advance expenses to such Directors and executive officers in connection with
their involvement in any event or occurrence that arises in their capacity as,
or as a result of, their positions with the Company. See
"Management -- Limitations on Liability and Indemnification Matters."
47
<PAGE> 49
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 30, 1998, and as adjusted to
reflect the sale of 3,300,000 shares of the Company's Common Stock offered
hereby by (i) each person who is known by the Company to beneficially own more
than 5% of the Company's Common Stock, (ii) each of the Company's Directors,
(iii) each of the Named Officers, (iv) all current executive officers and
Directors as a group and (v) other Selling Stockholders.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED NUMBER BENEFICIALLY OWNED
PRIOR TO OFFERING(1) OF AFTER OFFERING(1)(11)
-------------------- SHARES ---------------------
NUMBER PERCENT OFFERED(11) NUMBER PERCENT
---------- ------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS, DIRECTORS, NAMED OFFICERS
AND ALL DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP
The Hill Partnership III(2).................. 2,139,516 25.6% 311,989 1,827,527 17.5%
A Limited Partnership 885 Arapahoe Boulder,
Colorado 80302
John G. Hill(2).............................. 2,139,516 25.6 311,989 1,827,527 17.5
Boston Capital Ventures Limited 2,083,945 25.0 304,477 1,779,468 17.0
Partnership(3).............................
45 School Street Boston, Massachusetts
02109
David Kronfeld(3)............................ 2,083,945 25.0 304,477 1,779,468 17.0
Ameritech Development Corporation(4)......... 1,961,054 23.5 285,965 1,675,089 16.0
30 S. Wacker Drive, 37th Floor Chicago,
Illinois 60606
Darrell A. Williams(4)....................... 1,961,054 23.5 285,965 1,675,089 16.0
George K. Heinrichs(5)....................... 454,317 5.3 32,174 422,143 4.0
Nancy K. Hamilton(6)......................... 109,634 1.3 10,500 99,134 *
John J. Sims(7).............................. 87,432 1.0 -- 87,432 *
All Directors and executive officers as a 6,835,898 77.9 945,105 5,890,793 54.2
group (6 persons)(8).......................
OTHER SELLING STOCKHOLDERS
John Quinlan................................. 389,976 4.7 49,314 340,662 3.3
Stephen Meer(9).............................. 304,052 3.6 36,000 268,052 2.6
R. Chris Roark............................... 276,082 3.3 21,757 254,325 2.4
Donald Van Wie............................... 212,227 2.5 14,000 198,227 1.9
Banc One Capital Partners, II, LLC(10)....... 195,148 2.3 97,574 97,574 *
Jesse Simmons................................ 75,000 * 5,250 69,750 *
David Paulson................................ 71,666 * 8,166 63,500 *
Ronald J. Carroll............................ 63,000 * 4,410 58,590 *
Steve Lowe................................... 37,666 * 10,000 27,666 *
Michael Radicella............................ 20,000 * 700 19,300 *
Mark Flolid.................................. 19,333 * 1,353 17,980 *
Frances Esterbrook........................... 12,916 * 904 12,012 *
Kriston Chapman.............................. 9,260 * 2,100 7,160 *
Patrick Sloter............................... 8,044 * 567 7,477 *
Robert Umbreit............................... 5,602 * 1,423 4,179 *
Gary Ellis................................... 3,373 * 595 2,778 *
Thomas Barlow................................ 2,533 * 420 2,113 *
Robert G. Heil............................... 1,200 * 136 1,064 *
David Oberto................................. 666 * 75 591 *
Todd Kridel.................................. 216 * 151 65 *
</TABLE>
48
<PAGE> 50
- ------------
* Less than 1%
(1) Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to the shares of Common Stock
shown as beneficially owned by them, subject to community property laws
where applicable. Beneficial ownership as reported in the above table has
been determined in accordance with Rule 13d-3 under the Exchange Act, based
on information furnished by the persons listed, and represents the number
of shares of Common Stock for which a person, directly or indirectly,
through any contract, management, understanding, relationship or otherwise,
has or shares voting power, including the power to vote or direct the
voting of such shares, or investment power, including the power to dispose
or to direct the disposition of such shares, and includes shares which may
be acquired upon the exercise of options within 60 days following April 30,
1998. However, shares that may be acquired upon the exercise of options are
not deemed outstanding for the purposes of computing the percentage
ownership of any other person. The address for Messrs. Heinrichs, Sims,
Hill, Williams and Kronfeld and Ms. Hamilton is c/o SCC Communications
Corp., 6285 Lookout Road, Boulder, Colorado 80301. This table assumes no
exercise of the Underwriters' over-allotment option. Percentage of
ownership is based on 8,342,007 shares of Common Stock, pro forma
outstanding on March 31, 1998, and 10,442,853 shares of Common Stock to be
outstanding after completion of this offering.
(2) The general partner of the Hill Partnership III, L.P., is Hill Carman
Ventures, L.P. John G. Hill, a Director of the Company, and Carl D. Carman
are the general partners of Hill Carman Ventures, L.P., and have joint
voting and investment control over the shares held by the Hill Partnership
III, L.P. Mr. Hill and Mr. Carman disclaim beneficial ownership of such
shares except to the extent of their pecuniary interest in Hill Carman
Ventures, L.P.
(3) Includes 314,818 shares held by Boston Capital Ventures, Limited
Partnership, 314,818 shares held by Boston Capital Ventures II, Limited
Partnership and 1,454,309 shares held by Boston Capital Ventures III
Limited Partnership. The general partner of Boston Capital Ventures Limited
Partnership is BC&V Limited Partnership. The general partner of Boston
Capital Ventures II Limited Partnership is Boston Capital Partners II. The
general partner of Boston Capital Ventures III Limited Partnership is BD
Partners Limited Partnership. David Kronfeld, a Director of the Company, is
a general partner of certain of the entities associated with the Boston
Capital Ventures entities. Mr. Kronfeld disclaims beneficial ownership of
any of the shares owned by Boston Capital Ventures Limited Partnership,
Boston Capital Ventures II Limited Partnership and Boston Capital Ventures
III Limited Partnership, except to the extent of his pecuniary interest in
certain Boston Capital Ventures entities.
(4) Ameritech Development Corporation is a wholly-owned subsidiary of Ameritech
Corporation, a publicly traded company. Darrell A. Williams, a Director of
the Company, is a Vice President of Ameritech Development Corporation.
Ameritech Corporation, as the sole stockholder of Ameritech Development
Corporation, has voting and investment control over the shares held by
Ameritech Development Corporation. Mr. Williams disclaims beneficial
ownership of such shares.
(5) Includes options to purchase 234,063 shares of Common Stock, all of which
were immediately exercisable or exercisable within 60 days of April 30,
1998. Includes 1,539 shares held by Mr. Heinrichs' minor daughter and 1,539
shares held by Mr. Heinrichs' minor son. Mr. Heinrichs disclaims beneficial
ownership of his children's shares. Excludes options to purchase 102,236
shares of Common Stock, none of which were exercisable within 60 days of
April 30, 1998.
(6) Includes options to purchase 109,634 shares of Common Stock, all of which
were immediately exercisable or exercisable within 60 days of April 30,
1998. Excludes options to purchase 65,516 shares of Common Stock, none of
which were exercisable within 60 days of April 30, 1998.
(7) Includes options to purchase 87,432 shares of Common Stock, all of which
were immediately exercisable or exercisable within 60 days of April 30,
1998. Excludes options to purchase 142,627 shares of Common Stock, none of
which were exercisable within 60 days of April 30, 1998.
(8) See Notes (2) through (7). Includes options to purchase 431,129 shares of
Common Stock, all of which were immediately exercisable or exercisable
within 60 days of April 30, 1998. Excludes options to purchase 310,379
shares of Common Stock, none of which were exercisable within 60 days of
April 30, 1998.
(9) Includes options to purchase 67,148 shares of Common Stock, all of which
were immediately exercisable or exercisable within 60 days of April 30,
1998. Excludes options to purchase 23,334 shares of Common Stock, none of
which were exercisable within 60 days of April 30, 1998.
(10) Consists of a warrant to purchase Common Stock.
(11) If the underwriters' option is exercised in full, each of the following
Selling Stockholders will sell the following number of additional shares
and, thereafter, will own beneficially the number and percent of shares
indicated parenthetically: The Hill Partnership III, 32,595 shares
(1,794,932 shares, 16.7%); John G. Hill, 32,595 shares (1,794,932 shares,
16.7%); Boston Capital Ventures Limited Partnership, 31,810 shares
(1,747,658 shares, 16.2%); David Kronfeld, 31,810 shares (1,747,658 shares,
16.2%); Ameritech Development Corporation, 29,876 shares (1,645,213 shares,
15.3%); Darrell A. Williams, 29,876 shares (1,645,213 shares, 15.3%);
George K. Heinrichs, 13,789 shares (408,354 shares, 3.7%); Nancy K.
Hamilton, 4,500 shares (94,634 shares, less than one percent); John
Quinian, 21,134 shares (319,528 shares, 3.0%); Stephen Meer, 18,586 shares
(249,466 shares, 2.3%); R. Chris Roark, 9,325 shares (245,000 shares,
2.3%); Donald Van Wie, 6,000 shares (192,227 shares, 1.8%); Jesse Simmons,
2,250 shares (67,500 shares, less than one percent); David Paulson, 3,501
shares (59,999 shares, less than one percent); Ronald J. Carroll, 1,890
shares (56,700 shares, less than one percent); Steve Lowe, 1,131 shares
(26,535 shares, less than one percent); Michael Radicella, 300 shares
(19,000 shares, less than one percent); Mark Flolid, 580 shares (17,400
shares, less than one percent); Frances Esterbrook, 388 shares (11,624
shares, less than one percent); Kriston Chapman, 900 shares (6,260 shares,
less than one percent); Patrick Sloter, 243 shares (7,234 shares, less than
one percent); Robert Umbreit, 610 shares (3,569 shares, less than one
percent); Gary Ellis, 255 shares (2,523 shares, less than one percent);
Thomas Barlow, 180 shares (1,933 shares, less than one percent); Robert G.
Heil, 59 shares (1,005 shares, less than one percent); David Oberto, 33
shares (558 shares, less than one percent); and Todd Kridel, 65 shares (0
shares, 0%).
49
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 30,000,000 shares of Common Stock, $.001
par value, and 15,000,000 shares of undesignated preferred stock, $.001 par
value (the "Preferred Stock").
COMMON STOCK
As of April 30, 1998, there were 8,342,853 shares of Common Stock
outstanding held of record by 124 stockholders. As of April 30, 1998, options to
purchase an aggregate of 1,114,046 shares of Common Stock were also outstanding.
See "Management -- Stock Plans."
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and have cumulative voting rights with
respect to the election of directors. Subject to the prior rights of holders of
Preferred Stock, if any, the holders of Common Stock are entitled to receive
such dividends, if any, as may be declared from time to time by the Board of
Directors in its discretion from funds legally available therefor. Upon
liquidation or dissolution of the Company, the remainder of the assets of the
Company will be distributed ratably among the holders of Common Stock after
payment of liabilities and the liquidation preferences of any outstanding shares
of Preferred Stock. The Common Stock has no preemptive or other subscription
rights and there are no conversion rights or redemption or sinking fund
provisions with respect to such shares. All of the outstanding shares of Common
Stock are, and the shares to be sold in this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
The Company is authorized to issue 15,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the Preferred
Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a series or the
designation of such series, without any further vote or action by the Company's
stockholders. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or preventing a change in
control of the Company without further action by the stockholders and may
adversely affect the market price of, and the voting and other rights of, the
holders of Common Stock. The Company has no current plans to issue any shares of
Preferred Stock.
REGISTRATION RIGHTS
Under the Registration Rights Agreement, the holders of approximately
6,188,575 shares of Common Stock and their permitted transferees (the "Holders")
are entitled to certain rights with respect to the registration of such shares
("Registrable Securities") under the Securities Act. Under the terms of the
Registration Rights Agreement, the holders of at least 50% of the Registrable
Securities may require, on two occasions after December 23, 1998, that the
Company use its best efforts to register the Registrable Securities for public
resale. In addition, if the Company proposes to register any of its securities
under the Securities Act, either for its own account or for the account of other
security holders exercising registration rights, the Holders are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein. The Holders may also require the Company on an unlimited number
of occasions to register all or a portion of their Registrable Securities on
Form S-3 under the Securities Act when use of such form becomes available to the
Company. All such registration rights are subject to certain conditions and
limitations, including the right of the underwriters of an offering to limit the
number of shares to be included in such registration. In addition, the Company
need not effect a registration within six months following a previous
registration, or after such time as all Holders may sell under Rule 144(k) all
shares of Common Stock to which such registration rights apply. See "Certain
Transactions."
Additionally, the holder of a warrant to purchase 195,148 shares of Common
Stock is entitled to request registration of such shares pursuant to a separate
registration rights agreement. In addition, if the Company proposes to register
any of its securities under the Securities Act, either for its own account or
for the account
50
<PAGE> 52
or for other security holders exercising registration rights, the warrant holder
is entitled to notice of such registration and is entitled to include shares of
such Common Stock therein. The warrant will be exercised in full upon the
closing of this offering.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
Amended and Restated Certificate of Incorporation and Restated Bylaws
The Company's Amended and Restated Certificate of Incorporation authorizes
the Board to establish one or more series of undesignated Preferred Stock, the
terms of which can be determined by the Board at the time of issuance. See
"-- Preferred Stock." The Amended and Restated Certificate of Incorporation also
provides that all stockholder actions must be effected at a duly called meeting
of stockholders and not by a consent in writing. In addition, effective upon the
closing of this offering, the Company's Restated Bylaws will not permit
stockholders of the Company to call a special meeting of stockholders; only the
Company's Chief Executive Officer, President or Chairperson of the Board or a
majority of the Board will be permitted to call a special meeting of
stockholders. The Restated Bylaws also will require that stockholders give
advance notice to the Company's Secretary of any nominations for Director or
other business to be brought by stockholders at any stockholders' meeting and
require a vote of 66 2/3% of the stockholders or a majority of the members of
the Board to amend the Restated Bylaws. These provisions of the Amended and
Restated Certificate of Incorporation and the Restated Bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions also may have the effect of preventing changes
in the management of the Company.
Delaware Anti-Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder (defined as any person or entity that is the beneficial owner of at
least 15% of a corporation's voting stock) for a period of three years following
the time that such stockholder became an interested stockholder, unless: (i)
prior to such time, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the stockholder's
becoming an interested stockholder; (ii) upon consummation of the transaction
that resulted in the stockholder's becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding, for purposes of
determining the number of shares outstanding, those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) at or subsequent to such time, the business combination is approved by
the Board and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, lease, exchange, mortgage, transfer, pledge or other disposition involving
the interested stockholder and 10% or more of the assets of the corporation;
(iii) subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder; (iv) any transaction involving the corporation that has
the effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Norwest Bank
Minnesota, N.A.
51
<PAGE> 53
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 10,442,007 shares of Common
Stock of the Company outstanding, based on shares outstanding as of April 9,
1998. There were also approximately 637,270 shares covered by vested options
outstanding, which are not considered to be outstanding shares. Of the
outstanding shares, 3,361,469 shares, including the 3,300,000 shares of Common
Stock sold in this offering, will be immediately eligible for resale in the
public market without restriction under the Securities Act, except that any
shares purchased in this offering by affiliates of the Company ("Affiliates"),
as that term is defined in Rule 144 under the Securities Act ("Rule 144"), may
generally only be resold in compliance with applicable provisions of Rule 144.
Beginning approximately 90 days after the date of this Prospectus, approximately
16,665 additional shares of Common Stock will become eligible for immediate
resale in the public market, subject to compliance with applicable provisions of
Rule 144 and Rule 701 under the Securities Act ("Rule 701").
The Company, the executive officers and Directors of the Company, and
certain security holders of the Company have agreed pursuant to lock-up
agreements that they will not, without the prior written consent of BancAmerica
Robertson Stephens, offer, sell or otherwise dispose of the shares of Common
Stock beneficially owned by them for a period of 180 days from the date of this
Prospectus. Each holder who signed a lock-up agreement has agreed, subject to
certain limited exceptions, not to sell or otherwise dispose of any of the
shares held by them as of the date of this Prospectus for a period of 180 days
after the date of this Prospectus without the prior written consent of
BancAmerica Robertson Stephens. At the end of such 180-day period, approximately
7,702,979 shares of Common Stock (including approximately 671,040 shares
issuable upon exercise of vested options) will be eligible for immediate resale,
subject to compliance with Rule 144 and Rule 701. The remainder of the
approximately 110,068 shares of Common Stock outstanding will become eligible
for sale at various times over a period of less than two years and could be sold
earlier if the holders exercise any available registration rights or upon
vesting pursuant to the Company's standard four year vesting schedule.
Approximately an additional 442,573 shares issuable upon exercise of existing
options will become eligible for sale at various times over a period of less
than four years.
In general, under Rule 144 beginning approximately 90 days after the
effective date of the Registration Statement of which this Prospectus is a part,
a stockholder, including an Affiliate, who has beneficially owned his or her
restricted securities (as that term is defined in Rule 144) for at least one
year from the later of the date such securities were acquired from the Company
or (if applicable) the date they were acquired from an Affiliate is entitled to
sell, within any three-month period, a number of such shares that does not
exceed the greater of one percent of the then outstanding shares of Common Stock
(approximately 104,420 shares immediately after the offering) or the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule 144(k),
if a period of at least two years has elapsed between the later of the date
restricted securities were acquired from the Company or (if applicable) the date
they were acquired from an Affiliate of the Company, a stockholder who is not an
Affiliate of the Company at the time of sale and has not been an Affiliate of
the Company for at least three months prior to the sale is entitled to sell the
shares immediately without compliance with the foregoing requirements under Rule
144.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted prior
to this offering) are also restricted securities and, beginning 90 days after
the date of this Prospectus, may be sold by stockholders other than an Affiliate
of the Company subject only to the manner of sale provisions of Rule 144 and by
an Affiliate under Rule 144 without compliance with its one-year holding period
requirement.
Prior to this offering, there has been no public market for the Common
Stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time. The Company is unable to estimate
the number of shares that may be sold in the public market pursuant to Rule 144,
since this will depend on the market price of the Common Stock, the personal
circumstances of the sellers and other factors. Nevertheless, sales of
52
<PAGE> 54
significant amounts of the Common Stock of the Company in the public market
could adversely affect the market price of the Common Stock and could impair the
Company's ability to raise capital through an offering of its equity securities.
In addition, the Company intends to register approximately 90 days after
the date of this Prospectus a total of 1,901,055 shares of Common Stock subject
to outstanding options or reserved for issuance under the Company's 1998 Plan or
outstanding shares that are subject to repurchase by the Company plus 200,000
shares of Common Stock reserved for issuance under the Purchase Plan.
Furthermore, upon expiration of lock-up agreements described above, holders of
approximately 6,383,723 shares of Common Stock will be entitled to certain
registration rights with respect to such shares. If such holders, by exercising
their registration rights, cause a large number of shares to be registered and
sold in the public market, such sales could have a material adverse effect on
the market price of the Common Stock.
53
<PAGE> 55
UNDERWRITING
The Underwriters named below (the "Underwriters"), acting through their
representatives, BancAmerica Robertson Stephens and Hambrecht & Quist LLC (the
"Representatives"), have severally agreed with the Company and the Selling
Stockholders, subject to the terms and conditions of the Underwriting Agreement,
to purchase from the Company and the Selling Stockholders the number of shares
of Common Stock set forth opposite their names below. The Underwriters are
committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
BancAmerica Robertson Stephens.............................. 1,737,000
Hambrecht & Quist LLC....................................... 1,158,000
Morgan Stanley & Co. Incorporated........................... 125,000
Cowen & Company............................................. 100,000
Hanifen, Imhoff Inc. ....................................... 100,000
Janco Partners, Inc. ....................................... 80,000
---------
Total............................................. 3,300,000
=========
</TABLE>
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the initial public offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of $0.48 per share, of which $0.10 may be reallowed to other
dealers. After the initial public offering, the public offering price,
concession and reallowance to dealers may be reduced by the Representatives. No
such reduction shall change the amount of proceeds to be received by the Company
and the Selling Stockholders as set forth on the cover page of this Prospectus.
The Company and certain Selling Stockholders have granted to the
Underwriters an option, exercisable during the 30-day period after the date of
this Prospectus, to purchase up to 315,000 and 180,000 additional shares of
Common Stock, respectively, at the same price per share as the Company and the
Selling Stockholders will receive for the 3,300,000 shares that the Underwriters
have agreed to purchase. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage of such additional shares that the number of
shares of Common Stock to be purchased by it shown in the above table represents
as a percentage of the 3,300,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those on
which the 3,300,000 shares are being sold. The Company and such Selling
Stockholders will be obligated, pursuant to the option, to sell shares to the
extent the option is exercised. The Underwriters may exercise such option only
to cover over-allotments made in connection with the sale of shares of Common
Stock offered hereby.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
Underwriting Agreement.
Each officer and director and certain holders of shares of the Company's
Common Stock have agreed with the Representatives, for a period of 180 days
after the date of this Prospectus (the "Lock-Up Period"), subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of Common Stock,
any options or warrants to purchase any shares of Common Stock, or any
securities convertible into or exchangeable for shares of Common Stock owned as
of the date of this Prospectus or thereafter acquired directly by such holders
or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of BancAmerica Robertson
Stephens. However, BancAmerica Robertson Stephens may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. There are no agreements between the
Representatives and any of the Company's stockholders providing consent by the
Representatives
54
<PAGE> 56
to the sale of shares prior to the expiration of the Lock-Up Period. The Company
has agreed that during the Lock-Up Period, the Company will not, subject to
certain exceptions, without the prior written consent of BancAmerica Robertson
Stephens, (i) consent to the disposition of any shares held by stockholders
prior to the expiration of the Lock-Up Period or (ii) issue, sell, contract to
sell or otherwise dispose of, any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock, other than the
Company's sale of shares in this offering, the issuance of Common Stock upon the
exercise of outstanding options and warrants and the Company's issuance of
options and stock under the existing stock option and stock purchase plans. See
"Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock offered hereby has been determined through negotiations between the
Company and the Representatives. Among the factors considered in such
negotiations were prevailing market conditions, certain financial information of
the Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
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<PAGE> 57
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, Denver, Colorado. Certain legal
matters in connection with the offering will be passed upon for the Underwriters
by Foley, Hoag & Eliot LLP, Boston, Massachusetts.
EXPERTS
The Financial Statements of the Company as of December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997, included
in this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated by their report with respect thereto, and are included
in reliance upon the authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act,
with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as a part thereof. Statements contained in
this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete. In each instance, reference is made to
the copy of such contract or document filed as an exhibit to the Registration
Statement, and each such statement is qualified in all respects by such
reference. Copies of the Registration Statement, including exhibits and
schedules thereto, may be inspected without charge at the Commission's principal
office in Washington, D.C., or obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the site is
http://www.sec.gov.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also makes electronic filings publicly available on the
Internet within 24 hours of acceptance. The Commission's Web site is located at
http://www.sec.gov. The Commission's Web site also contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the Commission.
56
<PAGE> 58
GLOSSARY OF TERMS
"AIN" -- Advanced Intelligent Network. A system of interconnected telephone
switches and specialized computers that provides advanced telephone
functionality based on computer software rather than software in the telephone
switch.
"ALI" -- Automatic Location Information. The location information
associated with the number of the telephone used to dial 9-1-1. ALI Data may
include address information, subaddress information (such as office number) and
information about the appropriate emergency response organization for the
jurisdiction.
"ANI" -- Automatic Number Identification. The number associated with the
telephone from which a 9-1-1 call is placed.
"cellular" -- Cellular Mobile Telephone System (or CMTS). A wireless
telephone system based on a grid of cell sites. Each cell site serves a limited
geographic area and contains transmitters, receivers and antennae. Each cell
site is connected to centrally-located switching gear and control equipment.
Each cellular telephone has a unique identification number which allows the
central switch to track and coordinate all mobile phones in the service area,
including the hand-offs from one cell site to another.
"CLECs" -- Competitive Local Exchange Carriers. A company that provides its
customers with an alternative to an ILEC for local transport of private line,
special access and interstate and local transport of switched access
telecommunications services.
"E9-1-1" -- Enhanced 9-1-1 service. An emergency telephone response service
that provides ANI and ALI to the PSAP responsible for dispatching police, fire
and other emergency services.
"FCC" -- Federal Communications Commission.
"ILECs" -- Incumbent Local Exchange Carriers. A company that provides its
customers with local transport of private line, special access and interstate
and local transport of switched access telecommunications services. These
companies typically are RBOCS or independent companies that were the only
suppliers before competition.
"LNP" -- Local Number Portability. LNP, which enables customers to retain
their local phone number when changing service providers, was mandated by the
Telecommunications Act of 1996 and regulations promulgated thereunder in order
to facilitate a level playing field for local telephone service competition. The
implementation of LNP utilizes a new ten-digit telephone number, known as the
Location Routing Number, or LRN. The LRN is used by the originating carrier to
determine the identity and location of the terminating carrier's switch.
"NDSC" -- The Company's National Data Services Center. Through the NDSC,
the Company offers comprehensive and cost-effective data management services to
ILECs, CLECs and wireless carriers, including system activation, routine data
administration, transaction processing and performance management with a high
level of security and survivability.
"1996 Act" -- The Telecommunications Act of 1996, which imposed, among
other things, new duties on local exchange carriers in order to open local
telephone markets to competition.
"Order" -- Report & Order 94-102 issued by the FCC on June 12, 1996, which
mandated the adoption of 9-1-1 technology by wireless carriers in Phase I and
Phase II.
"OSS" -- Operational Support Systems. The systems and procedures that
directly support the daily operation of the telecommunications infrastructure.
The average local exchange carrier has hundreds of OSS, which may be categorized
into service provisioning, operations, customer care and billing, and planning
and engineering.
"PBX" -- Private Branch Exchange. Privately owned switch systems typically
used in office buildings, college campuses and apartment complexes that connect
calls to a phone company.
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<PAGE> 59
"Phase I" -- Mandate pursuant to the Order that required wireless carriers
to provide to requesting PSAP's, at the time of a 9-1-1 call, the caller's
telephone number and location of the receiving cell site. Wireless carriers had
to comply with Phase I mandates by the later of April 1, 1998, or six months
after the PSAP request.
"Phase II" -- Mandate pursuant to the Order requiring wireless carriers to
locate a 9-1-1 caller to within 125 meters, subject to FCC guidelines. Wireless
carriers must comply with Phase II mandates for requesting PSAPs by October 1,
2001.
"PSAP" -- Public Safety Answering Point. A public agency responsible for
receiving 9-1-1 calls in a jurisdiction.
"RBOCs" -- Regional Bell Operating Companies. The seven local exchange
carriers that were created in 1984 as a result of the breakup of AT&T.
"switch" -- A central facility capable of establishing, routing and
releasing connections on a per call basis between two or more circuits, services
or systems. Switches are used for both wireline and wireless communications
networks.
"VSAT" -- Very Small Aperture Terminal. A data communication system that
utilizes high power geosynchronous satellites and small diameter antenna earth
stations for communications.
58
<PAGE> 60
SCC COMMUNICATIONS CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-3
Statements of Operations for the years ended December 31,
1995, 1996 and 1997 and the three months ended March 31,
1997 and 1998 (unaudited)................................. F-5
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997 and the three
months ended March 31, 1998 (unaudited)................... F-6
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and the three months ended March 31,
1997 and 1998 (unaudited)................................. F-7
Notes to Financial Statements............................... F-8
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of SCC Communications Corp.:
We have audited the accompanying balance sheets of SCC Communications Corp.
(a Delaware corporation) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of SCC Communications Corp. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 20, 1998 (except with
respect to the matters in
Notes 2 and 4 as to which the
dates are March 18, 1998 and
April 8, 1998)
F-2
<PAGE> 62
SCC COMMUNICATIONS CORP.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
------- ------- --------- ---------
(UNAUDITED)
(NOTE 2)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 32 $ 2,503 $ 1,177
Accounts receivable, net of allowance for doubtful
accounts of approximately $25, $50 and $32 in
1996, 1997 and 1998, respectively............... 1,376 2,328 2,939
Unbilled project revenue........................... 806 996 968
Prepaids and other................................. 46 224 461
Deferred income taxes -- current portion........... -- 1,300 1,300
Current assets from discontinued operations (Note
3).............................................. 4,778 -- --
------- ------- -------
Total current assets....................... 7,038 7,351 6,845
------- ------- -------
PROPERTY AND EQUIPMENT, at cost:
Computer hardware and equipment.................... 13,377 18,844 22,468
Furniture and fixtures............................. 581 709 736
Leasehold improvements............................. 552 621 662
Property and equipment from discontinued operations
(Note 3)........................................ 384 -- --
------- ------- -------
14,894 20,174 23,866
Less -- Accumulated depreciation................... (4,613) (8,136) (9,092)
Less -- Accumulated depreciation from discontinued
operations (Note 3)............................. (163) -- --
------- ------- -------
Total property and equipment............... 10,118 12,038 14,774
------- ------- -------
OTHER ASSETS......................................... 62 86 53
DEFERRED INCOME TAXES -- NONCURRENT.................. -- 1,200 1,200
SOFTWARE DEVELOPMENT COSTS:
From continuing operations, net of accumulated
amortization of $97, $201 and $232 in 1996, 1997
and 1998, respectively.......................... 397 431 456
From discontinued operations (Note 3), net of
accumulated amortization of $968 in 1996........ 867 -- --
------- ------- -------
Total software development costs........... 1,264 431 456
------- ------- -------
$18,482 $21,106 $23,328
======= ======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE> 63
SCC COMMUNICATIONS CORP.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
------- ------- --------- ---------
(UNAUDITED)
(NOTE 2)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable....................................... $ 729 $ 965 $ 748
Payroll-related accruals............................... 324 780 629
Other accrued liabilities.............................. 1,410 3,039 3,151
Current portion of notes payable (Note 6).............. 2,005 986 450
Current portion of capital lease obligations (Note
6).................................................. 3,346 1,638 1,817
Deferred contract revenue.............................. 2,310 2,613 2,081
Current liabilities from discontinued operations (Note
3).................................................. 4,259 -- --
------- ------- --------
Total current liabilities...................... 14,383 10,021 8,876
LONG-TERM DEBT:
Notes payable, net of current portion (Note 6)......... 145 4,000 4,000
Discount on long-term note payable (Note 4)............ -- (1,430) (1,356)
Capital lease obligations, net of current portion (Note
6).................................................. 3,173 4,321 6,998
------- ------- --------
Total liabilities.............................. 17,701 16,912 18,518
------- ------- --------
COMMITMENTS AND CONTINGENCIES (Notes 1, 8 and 12)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note
4)
(Series A, B, C, D, E and F) $.001 par value; 6,188,575
shares authorized; 6,188,575 and 6,188,575 shares
issued and outstanding; entitled to $13,849 and
$14,589 in 1996 and 1997, respectively, in
liquidation or upon redemption if requested by the
holders after September 1, 1998, stated at
redemption value (none outstanding pro forma)....... 13,849 14,589 14,774 --
PUTABLE COMMON STOCK WARRANT (Note 4).................... -- 1,472 1,521 --
STOCKHOLDERS' EQUITY (DEFICIT) (Note 5):
Preferred stock, $.001 par value; 15,000,000 shares
authorized; none issued or outstanding (Note 2)..... -- -- -- --
Common stock, $.001 par value; 30,000,000 shares
authorized; 1,840,899, 1,994,281 and 1,994,534
shares issued in 1996, 1997 and 1998, respectively,
and 8,378,257 shares issued pro forma............... 2 2 2 8
Additional paid-in capital............................. 298 452 453 16,742
Treasury stock, 36,250 shares, at cost................. (3) (3) (3) (3)
Stock subscriptions receivable......................... (19) (99) (99) (99)
Accumulated deficit.................................... (13,346) (12,219) (11,838) (11,838)
------- ------- -------- --------
Total stockholders' equity (deficit)........... (13,068) (11,867) (11,485) $ 4,810
------- ------- -------- ========
$18,482 $21,106 $ 23,328
======= ======= ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-4
<PAGE> 64
SCC COMMUNICATIONS CORP.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Data management services...................... $ 3,531 $ 13,165 $ 24,005 $ 4,861 $ 7,533
Licenses and implementation services.......... 3,882 1,637 3,067 271 369
---------- ---------- ---------- ---------- ----------
Total revenue.......................... 7,413 14,802 27,072 5,132 7,902
COSTS AND EXPENSES:
Cost of data management services.............. 2,840 7,996 15,378 3,123 4,798
Cost of licenses and implementation
services.................................... 1,041 596 1,283 98 153
Sales and marketing........................... 2,016 3,204 3,850 933 843
General and administrative.................... 830 1,533 3,227 485 1,146
---------- ---------- ---------- ---------- ----------
Total costs and expenses............... 6,727 13,329 23,738 4,639 6,940
---------- ---------- ---------- ---------- ----------
INCOME FROM OPERATIONS.......................... 686 1,473 3,334 493 962
OTHER INCOME (EXPENSE):
Interest and other income..................... 41 34 88 60 30
Interest and other expense.................... (409) (561) (967) (210) (331)
---------- ---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES......................................... 318 946 2,455 343 661
PROVISION (BENEFIT) FOR INCOME TAXES (Note 7)... 16 9 (2,328) 24 46
---------- ---------- ---------- ---------- ----------
NET INCOME FROM CONTINUING OPERATIONS........... 302 937 4,783 319 615
DISCONTINUED OPERATIONS (Note 3):
Loss from operations of discontinued division,
net of tax.................................. (1,746) (562) (876) (253) --
Loss from disposal of discontinued division... -- -- (2,032) -- --
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)............................... (1,444) 375 1,875 66 615
========== ========== ========== ========== ==========
Dividends accrued on Series D, E and F
mandatorily redeemable convertible preferred
stock......................................... (329) (673) (740) (185) (185)
Common stock warrant put price adjustment....... -- -- (8) -- (49)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK.... $ (1,773) $ (298) $ 1,127 $ (119) $ 381
========== ========== ========== ========== ==========
NET INCOME (LOSS) FROM CONTINUING OPERATIONS PER
SHARE (Note 2):
Basic......................................... $ (0.02) $ 0.15 $ 2.17 $ 0.07 $ 0.20
========== ========== ========== ========== ==========
Diluted....................................... $ (0.02) $ 0.11 $ 0.54 $ 0.04 $ 0.07
========== ========== ========== ========== ==========
NET INCOME (LOSS) PER SHARE
Basic......................................... $ (1.07) $ (0.17) $ 0.61 $ (0.07) $ 0.20
========== ========== ========== ========== ==========
Diluted....................................... $ (1.07) $ 0.05 $ 0.21 $ 0.01 $ 0.07
========== ========== ========== ========== ==========
SHARES USED IN COMPUTING NET INCOME (LOSS) FROM
CONTINUING OPERATIONS PER SHARE AND NET INCOME
(LOSS) PER SHARE (Note 2):
Basic......................................... 1,652,379 1,790,230 1,857,413 1,808,015 1,958,143
========== ========== ========== ========== ==========
Diluted....................................... 1,652,379 8,299,362 8,788,816 8,659,789 9,143,534
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE> 65
SCC COMMUNICATIONS CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCK TREASURY STOCK STOCKHOLDERS
------------------ PAID-IN SUBSCRIPTIONS ---------------- ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL RECEIVABLE SHARES AMOUNT DEFICIT (DEFICIT)
--------- ------ ---------- ------------- ------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, at December 31,
1994...................... 1,296,260 $ 1 $231 $(14) (36,250) $(3) $(11,276) $(11,061)
Series E mandatorily
redeemable convertible
preferred stock
("Convertible Preferred
Stock") issued at $2.55
per share in exchange
for notes payable and
cancellation of
warrants................ -- -- (28) -- -- -- -- (28)
Dividends accrued on
Series D, E and F
Convertible Preferred
Stock................... -- -- -- -- -- -- (329) (329)
Exercise of stock options,
at various prices per
share ranging from $0.12
to $0.30................ 525,188 1 75 (5) -- -- -- 71
Net loss.................. -- -- -- -- -- -- (1,444) (1,444)
--------- --- ---- ---- ------- --- -------- --------
BALANCES, at December 31,
1995...................... 1,821,448 2 278 (19) (36,250) (3) (13,049) (12,791)
Dividends accrued on
Series D, E and F
Convertible Preferred
Stock................... -- -- -- -- -- -- (672) (672)
Exercise of stock options,
at various prices per
share ranging from $0.12
to $1.50................ 19,451 -- 20 -- -- -- -- 20
Net income................ -- -- -- -- -- -- 375 375
--------- --- ---- ---- ------- --- -------- --------
BALANCES, at December 31,
1996...................... 1,840,899 2 298 (19) (36,250) (3) (13,346) (13,068)
Dividends accrued on
Series D, E and F
Convertible Preferred
Stock................... -- -- -- -- -- -- (740) (740)
Exercise of stock options,
including stock issued
at $0.12 and $3.00 per
share in exchange for
notes receivable........ 153,382 -- 154 (80) -- -- -- 74
Common stock warrant put
price adjustment
(Note 4)................ -- -- -- -- -- -- (8) (8)
Net income................ -- -- -- -- -- -- 1,875 1,875
--------- --- ---- ---- ------- --- -------- --------
BALANCES, at December 31,
1997...................... 1,994,281 2 452 (99) (36,250) (3) (12,219) (11,867)
Dividends accrued on
Series D, E and F
Convertible Preferred
Stock (unaudited)....... -- -- -- -- -- -- (185) (185)
Exercise of stock options
at $3.00 per share
(unaudited)............. 253 -- 1 -- -- -- -- 1
Common stock warrant put
price adjustment
(unaudited)............. -- -- -- -- -- -- (49) (49)
Net income (unaudited).... -- -- -- -- -- -- 615 615
--------- --- ---- ---- ------- --- -------- --------
Balances, at March 31, 1998
(unaudited)............... 1,994,534 $ 2 $453 $(99) (36,250) $(3) $(11,838) $(11,485)
========= === ==== ==== ======= === ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE> 66
SCC COMMUNICATIONS CORP.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,444) $ 375 $ 1,875 $ 66 $ 615
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Amortization and depreciation........................... 1,062 2,242 3,534 765 985
Amortization of note payable discount................... 5 -- 33 -- 74
Gain on disposal of assets.............................. (7) -- (40) -- --
Loss on disposal of discontinued division............... -- -- 2,032 -- --
Provision for estimated losses on contracts............. 82 (321) (196) (10) (25)
Provision (recovery) of doubtful accounts............... (16) -- 25 -- (18)
Deferred income tax benefit............................. -- -- (2,500) -- --
Change in --
Accounts receivable................................... (1,370) 102 (977) 262 (593)
Unbilled project revenue.............................. 235 (778) (190) 321 28
Prepaids and other.................................... (116) 327 (202) (180) (204)
Accounts payable...................................... (108) 309 236 1,040 (217)
Accrued liabilities................................... (46) 477 1,337 325 (14)
Deferred contract revenue............................. 1,916 (1,932) 303 (123) (532)
Decrease in current assets and liabilities from
discontinued operations............................... (162) (1,257) 110 (809) --
------- ------- ------- ------ -------
Net cash provided by (used in) operating
activities........................................ 31 (456) 5,380 1,657 99
------- ------- ------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (455) (2,361) (2,646) (548) (399)
Proceeds from sale of net assets.......................... 14 -- 603 -- --
Software development costs................................ (159) (226) (142) (27) (56)
------- ------- ------- ------ -------
Net cash used in investing activities............... (600) (2,587) (2,185) (575) (455)
------- ------- ------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable................... 800 2,150 4,275 -- --
Proceeds from issuance of convertible notes payable....... 1,000 -- -- -- --
Principal payments on notes payable....................... (552) (1,527) (1,439) (329) (536)
Principal payments on capital lease obligations........... (467) (2,528) (3,634) (479) (435)
Exercise of stock options................................. 71 20 74 4 1
Proceeds from issuance of Series F Convertible Preferred
Stock................................................... -- 3,956 -- -- --
------- ------- ------- ------ -------
Net cash provided by (used in) financing
activities........................................ 852 2,071 (724) (804) (970)
------- ------- ------- ------ -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 283 (972) 2,471 278 (1,326)
CASH AND CASH EQUIVALENTS, beginning of period.............. 721 1,004 32 32 2,503
------- ------- ------- ------ -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,004 $ 32 $ 2,503 $ 310 $ 1,177
======= ======= ======= ====== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 400 $ 611 $ 942 $ 181 $ 367
======= ======= ======= ====== =======
Cash paid during the period for taxes..................... $ 17 $ 4 $ 18 $ 11 $ 71
======= ======= ======= ====== =======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING
ACTIVITIES:
Conversion of debt and accrued interest thereon to Series
E Convertible Preferred Stock........................... $ 2,633 $ -- $ -- $ -- $ --
======= ======= ======= ====== =======
Dividends accrued on Series D, E and F Convertible
Preferred Stock......................................... $ 329 $ 673 $ 740 $ 185 $ 185
======= ======= ======= ====== =======
Common stock issued to employees in exchange for employee
notes receivable........................................ $ 5 $ -- $ 80 $ -- $ --
======= ======= ======= ====== =======
Property acquired with capital leases..................... $ 3,735 $ 5,327 $ 3,074 $ 462 $ 3,291
======= ======= ======= ====== =======
Cancellation of common stock warrants..................... $ 101 $ -- $ -- $ -- $ --
======= ======= ======= ====== =======
Conversion of debt and accrued interest thereon to Series
F Convertible Preferred Stock........................... $ -- $ 1,044 $ -- $ -- $ --
======= ======= ======= ====== =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-7
<PAGE> 67
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
(1) ORGANIZATION, BUSINESS AND LIQUIDITY
SCC Communications Corp., doing business as SCC (the "Company"), is a
Delaware corporation. The Company is the leading provider of 9-1-1 operations
support systems services to incumbent local exchange carriers, competitive local
exchange carriers and wireless carriers in the United States. The Company
manages the data which enables 9-1-1 calls to be routed to the appropriate
public safety agency with accurate and timely information about the caller's
identification and location. In addition, the Company licenses its 9-1-1
software to carriers that wish to manage the delivery of 9-1-1 data management
services in-house.
LIQUIDITY
Although the Company had a working capital deficit at December 31, 1997,
the Company generated net income from continuing operations before income taxes
of approximately $2,455,000 while also generating positive operating cash flows
of approximately $5,400,000 in 1997. The Company believes that its operating
cash and its line of credit, which has been renewed through April 15, 1999, will
be adequate to meet its cash requirements for operations for the next twelve
months.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATING CYCLE
Assets and liabilities related to contracts are included in current assets
and liabilities in the accompanying balance sheets since they will be liquidated
in the normal course of contract completion, although this may require more than
one year.
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is computed using the straight-line
method over estimated useful lives of three to five years for computer hardware
and equipment, five years for furniture and fixtures and the life of the lease
for leasehold improvements. The costs of repairs and maintenance are expensed
while enhancements to existing assets are capitalized.
SOFTWARE DEVELOPMENT COSTS
The Company expenses the costs of developing computer software until
technological feasibility is established and capitalizes all costs incurred from
that time until the software is available for general customer release.
Technological feasibility for the Company's computer software products is based
upon the earlier of the achievement of (a) a detail program design free of
high-risk development issues or (b) completion of a working model. Costs of
major enhancements to existing products with a wide market are capitalized while
routine maintenance of existing products is charged to expense as incurred. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of capitalized computer software development costs requires
considerable judgment by management with respect to certain external factors,
including, but not limited to, technological feasibility, anticipated future
gross revenues, estimated economic life and changes in software and hardware
technology.
Capitalized software costs are amortized on a product-by-product basis. The
annual amortization is the greater of the amount computed using (a) the ratio
that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product, or (b) the straight-line
method over the remaining estimated economic life of the product which is
typically five years. Accumulated amortization of capitalized software costs
from continuing operations totaled $38,000, $97,000 and $201,000, respectively,
for the years ended December 31, 1995, 1996 and 1997, and is included in cost of
data management services and licenses and implementation services in the
statements of operations.
F-8
<PAGE> 68
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
REVENUE RECOGNITION
The Company's revenue is derived from 9-1-1 data management services and
certain license fees and related implementation services that the Company
provides to telephone companies. Revenue from data management services generally
consists of a non-recurring initial fee and monthly recurring revenue. The non-
recurring initial fee is recognized using the percentage-of-completion method
over the period required to convert the customer's data to the Company's system
and otherwise prepare for implementation. Revenue from recurring monthly
services is recognized in the period the services are rendered. Related expenses
are recognized as they are incurred and are included in cost of data management
services in the accompanying statements of operations.
Because the Company's software requires significant modification for each
customer, revenue related to software license fees and implementation of the
Company's 9-1-1 systems at customer sites is recognized using the
percentage-of-completion method. Such contracts include a license fee for the
use of the Company's software and service fees for the installation and
customization of the system. The Company's costs to install its systems include
direct labor and expenses. Such costs are included in cost of licenses and
implementation services.
In applying the percentage-of-completion method, revenue and related costs
are recognized based on the percentage that labor hours incurred to date bear to
total estimated labor hours. Revenue recognized in excess of amounts billed is
reflected as unbilled project revenue and amounts billed in excess of revenue
recognized are reflected as deferred contract revenue in the accompanying
balance sheets. The Company recognizes any known or anticipated loss on
contracts in process when such losses are determined to exist.
Revenue from licenses and implementation services includes customer support
revenue which is recognized ratably over the related contract period on a
straight-line basis. Costs related to customer support revenue are included in
cost of licenses and implementation services in the accompanying statements of
operations.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable. The Company's
customers are generally telecommunications service providers; accordingly, the
Company's accounts receivable are concentrated in the telecommunications
industry. The Company's principal customers (Note 11) accounted for 86% and 40%
of the Company's accounts receivable as of December 31, 1996 and 1997,
respectively. The Company has no significant financial instruments with
off-balance sheet risk of accounting loss, such as foreign exchange contracts,
option contracts or other foreign currency hedging arrangements.
RESEARCH AND DEVELOPMENT
Research and development efforts consist of salaries, supplies and other
related costs. These costs are expensed as incurred and totaled approximately
$388,000, $230,000 and $738,000 for the years ended December 31, 1995, 1996 and
1997, respectively. These costs are included in cost of data management services
and licenses and implementation services in the accompanying statements of
operations and do not include development costs incurred as part of the efforts
performed under licenses and implementation services contracts with the
Company's customers.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
highly liquid investments with original maturities of 90 days or less.
F-9
<PAGE> 69
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash and cash equivalents, accounts
receivable and debt obligations. The carrying amounts for cash and cash
equivalents and accounts receivable approximate fair market value because of the
short maturity of these instruments. The fair value of notes and capital lease
obligations are estimated based on current rates available for similar debt with
maturities and securities, and at December 31, 1996 and 1997, approximates the
carrying value.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109
("SFAS 109"), which requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted
tax laws, of temporary differences between the financial reporting and tax bases
of assets and liabilities. SFAS 109 also requires recognition of deferred tax
assets for the expected future tax effects of loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, on a more likely
than not basis, are not expected to be realized (Note 7).
STOCK BASED COMPENSATION PLANS
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for its stock option and other stock-based
compensation plans for employees and directors. The Company has adopted the
disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," for such options and
stock-based plans for employees and directors (Note 5).
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable from future undiscounted cash flows. Impairment losses are
recorded for the excess, if any, of the carrying value over the fair value of
the long-lived assets.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share," by retroactively restating loss per share amounts for
all periods presented. "Basic income (loss) per share" is determined by dividing
net income (loss) available to common shareholders by the weighted average
number of common shares outstanding during each period. "Diluted income (loss)
per share" includes the effects of potentially issuable common stock, but only
if dilutive (i.e., a loss per share is never reduced). The treasury stock
method, using the average price of the Company's common stock for the period, is
applied to determine dilution from options and warrants. The if-converted method
is used for convertible securities. Potentially dilutive common stock options
that were excluded from the calculation of diluted income per share
F-10
<PAGE> 70
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
because their effect is antidilutive totaled 230,316 and 298,017 in 1996 and
1997, respectively, and 46,801 for the three months ended March 31, 1997.
Because of the reported net loss available to common shareholders in 1995,
4,920,954 shares of mandatorily redeemable convertible preferred stock
("Convertible Preferred Stock") and 497,078 common stock options were excluded
from the calculation of diluted net loss per share because their effect is
antidilutive.
A reconciliation of the numerators and denominators used in computing per
share net income (loss) from continuing operations is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income from continuing
operations (numerator for
diluted loss per share for
1996 and 1997).............. $ 302,000 $ 937,000 $4,783,000 $ 319,000 $ 615,000
Dividends on Convertible
Preferred Stock............. (329,000) (673,000) (740,000) (185,000) (185,000)
Common stock warrant put price
adjustment.................. -- -- (8,000) -- (49,000)
---------- ---------- ---------- ---------- ----------
Numerator for basic
income (loss) per
share from continuing
operations (and, for
1995, diluted loss
per share)........... $ (27,000) $ 264,000 $4,035,000 $ 134,000 $ 381,000
========== ========== ========== ========== ==========
Denominator for basic income
(loss) per share:
Weighted average common shares
outstanding................. 1,652,379 1,790,230 1,857,413 1,808,015 1,958,143
========== ========== ========== ========== ==========
Denominator for diluted income
(loss) per share:
Convertible Preferred Stock.... -- 5,970,710 6,188,575 6,188,575 6,188,575
Weighted average common shares
outstanding................. 1,652,379 1,790,230 1,857,413 1,808,015 1,958,143
Options issued to employees.... -- 538,422 720,605 663,199 801,668
Putable common stock warrant... -- -- 22,223 -- 195,148
---------- ---------- ---------- ---------- ----------
Denominator for diluted
income (loss) per
share................ 1,652,379 8,299,362 8,788,816 8,659,789 9,143,534
========== ========== ========== ========== ==========
</TABLE>
F-11
<PAGE> 71
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
Income (loss) per common share was computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------ ---------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic income (loss) per share:
Income (loss) per share from continuing
operations........................... $(0.02) $ 0.15 $ 2.17 $ 0.07 $ 0.20
Net loss per share from discontinued
operations........................... (1.05) (0.32) (1.56) (0.14) --
------ ------ ------ ------ ------
Basic income (loss) per share... $(1.07) $(0.17) $ 0.61 $(0.07) $ 0.20
====== ====== ====== ====== ======
Diluted income (loss) per share:
Income (loss) per share from continuing
operations........................... $(0.02) $ 0.11 $ 0.54 $ 0.04 $ 0.07
Net loss per share from discontinued
operations........................... (1.05) (0.06) (0.33) (0.03) --
------ ------ ------ ------ ------
Diluted income (loss) per
share......................... $(1.07) $ 0.05 $ 0.21 $ 0.01 $ 0.07
====== ====== ====== ====== ======
</TABLE>
REVERSE STOCK SPLIT AND INCREASE IN AUTHORIZED SHARES
On March 18, 1998, the Company's Board of Directors authorized a
one-for-three reverse stock split to be effective upon the effective date of a
Registration Statement on Form S-1 filed by the Company with the Securities and
Exchange Commission. All share amounts, equivalent share amounts and per share
amounts have been adjusted retroactively to reflect the reverse stock split. The
Company's Board of Directors also authorized an increase in authorized common
stock to 30,000,000 shares and authorized 15,000,000 shares of undesignated
preferred stock.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." This statement, effective for fiscal years beginning
after December 15, 1997, would require the Company to report components of
comprehensive income in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income is defined by
Concepts Statement No. 6, "Elements of Financial Statements," as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. The Company adopted SFAS 130 in the first quarter of
1998, however, the Company did not have any transactions which would require
additional disclosure under SFAS 130.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information." This statement, effective for financial statements for
periods beginning after December 15, 1997, requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. Generally, financial information is required to be reported
on the basis that it is used internally for evaluation of segment performance
and deciding how to allocate resources to segments. The adoption of SFAS 131 is
not expected to have a material impact on the Company's financial statements.
F-12
<PAGE> 72
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
UNAUDITED PRO FORMA INFORMATION
The Company is contemplating a public offering of its common stock. If such
an offering is consummated, all of the Convertible Preferred Stock (Note 4)
outstanding as of the closing date will be converted into shares of common
stock. In addition, the put option related to common stock warrants will expire
upon completion of the offering and the common stock warrants will be exercised
for $100 into shares of common stock. The pro forma stockholders' equity in the
balance sheet as of December 31, 1997 reflects the conversion of all outstanding
Convertible Preferred Stock and the exercise of the common stock warrant to
stockholders' equity (deficit). Had the conversion of the Convertible Preferred
Stock occurred on January 1, 1997, basic and diluted net income per share from
continuing operations would have been $0.59 and $0.54, respectively for the year
ended December 31, 1997.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet as of March 31, 1998, the statements of
operations and of cash flows for the three months ended March 31, 1997 and 1998,
and the statement of stockholders' equity (deficit) for the three months ended
March 31, 1998 are unaudited. In the opinion of management, the statements have
been prepared on the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary for
the fair statement of the results of the interim periods. Operating results for
the three months ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform
to the current year presentation.
(3) DISCONTINUED OPERATIONS
On June 30, 1997, the Company sold the net assets of its Premise Products
Division. The sale resulted in a net loss of $2,032,000. The net losses of this
division are included in the statements of operations as loss from operations of
discontinued division. Revenue from the division for the years ended December
31, 1995 and 1996 and the six months ended June 30, 1997, were $8,798,000,
$12,274,000 and $5,785,000, respectively.
F-13
<PAGE> 73
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
(4) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND PUTABLE COMMON STOCK
WARRANT
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has the following Convertible Preferred Stock authorized,
issued and outstanding at March 31, 1998, with the following liquidation or
redemption prices:
<TABLE>
<CAPTION>
SHARES
AUTHORIZED, LIQUIDATION OR ORIGINAL
ISSUED AND REDEMPTION PURCHASE
OUTSTANDING PRICE PRICE
----------- -------------- -----------
<S> <C> <C> <C>
Series A................................... 1,515,152 $ 1,500,000 $ 1,500,000
Series B................................... 1,010,101 1,000,000 1,000,000
Series C................................... 442,328 730,000 730,000
Series D................................... 912,123 2,403,000 1,614,458
Series E................................... 1,083,381 3,308,000 2,632,617
Series F................................... 1,225,490 5,833,000 5,000,000
--------- ----------- -----------
6,188,575 $14,774,000 $12,477,075
========= =========== ===========
</TABLE>
The activity of Series A through Series F Convertible Preferred Stock
issued and outstanding for the periods ended December 31, 1995, 1996 and 1997
and March 31, 1998, is as follows:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
-------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F TOTAL
--------- --------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, at December 31,
1994....................... 1,515,152 1,010,101 442,328 912,123 -- -- 3,879,704
Series E Convertible
Preferred Stock issued at
$2.43 per share in
exchange for notes
payable and cancellation
of warrants.............. -- -- -- -- 1,083,381 -- 1,083,381
--------- --------- ------- ------- --------- --------- ---------
BALANCES, at December 31,
1995....................... 1,515,152 1,010,101 442,328 912,123 1,083,381 -- 4,963,085
Series F Convertible
Preferred Stock issued at
$4.08 per share in
exchange for cash and
notes payable............ -- -- -- -- -- 1,225,490 1,225,490
--------- --------- ------- ------- --------- --------- ---------
BALANCES, at December 31,
1996 and 1997 and March 31,
1998 (unaudited)........... 1,515,152 1,010,101 442,328 912,123 1,083,381 1,225,490 6,188,575
========= ========= ======= ======= ========= ========= =========
</TABLE>
F-14
<PAGE> 74
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
The activity related to the liquidation or redemption value of Series A
through Series F Convertible Preferred Stock for the periods ended December 31,
1995, 1996 and 1997 and March 31, 1998 is as follows:
<TABLE>
<CAPTION>
LIQUIDATION OR REDEMPTION VALUE
---------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F TOTAL
---------- ---------- -------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, at December 31,
1994................... $1,500,000 $1,000,000 $730,000 $1,984,000 $ -- $ -- $ 5,214,000
Series E Convertible
Preferred Stock
issued at $2.43 per
share in exchange for
notes payable and
cancellation of
warrants............. -- -- -- -- 2,633,000 -- 2,633,000
Dividends accrued on
Series D and E
Convertible Preferred
Stock................ -- -- -- 129,000 200,000 -- 329,000
---------- ---------- -------- ---------- ---------- ---------- -----------
BALANCES, at December 31,
1995................... 1,500,000 1,000,000 730,000 2,113,000 2,833,000 -- 8,176,000
Series F Convertible
Preferred Stock
issued at $4.08 per
share in exchange for
cash and notes
payable.............. -- -- -- -- -- 5,000,000 5,000,000
Dividends accrued on
Series D, E and F
Convertible Preferred
Stock................ -- -- -- 129,000 211,000 333,000 673,000
---------- ---------- -------- ---------- ---------- ---------- -----------
BALANCES, at December 31,
1996................... 1,500,000 1,000,000 730,000 2,242,000 3,044,000 5,333,000 13,849,000
Dividends accrued on
Series D, E and F
Convertible Preferred
Stock................ -- -- -- 129,000 211,000 400,000 740,000
---------- ---------- -------- ---------- ---------- ---------- -----------
BALANCES, at December 31,
1997................... 1,500,000 1,000,000 730,000 2,371,000 3,255,000 5,733,000 14,589,000
Dividends accrued on
Series D, E and F
Convertible Preferred
Stock (unaudited).... -- -- -- 32,000 53,000 100,000 185,000
---------- ---------- -------- ---------- ---------- ---------- -----------
BALANCES, at March 31,
1998 (unaudited)....... $1,500,000 $1,000,000 $730,000 $2,403,000 $3,308,000 $5,833,000 $14,774,000
========== ========== ======== ========== ========== ========== ===========
</TABLE>
In March 1996, the Company authorized and issued 1,225,490 shares of Series
F Convertible Preferred Stock, with a liquidation or redemption price of
$5,000,000. The Company received cash proceeds of $3,956,000 and converted its
$1,000,000 note payable and accrued interest thereon of $44,000 to a stockholder
of the Company to Series F Convertible Preferred Stock in this offering.
In the event of any liquidation, holders of Convertible Preferred Stock
would be entitled to preference in the amounts stated above. Any remaining
assets would be distributed to common and convertible preferred stockholders as
defined. At the request of the convertible preferred stockholders on any date
after March 1, 1998 (on March 18, 1998, the Convertible Preferred Stockholders
agreed to extend the date to September 1, 1998), the Convertible Preferred Stock
is redeemable at the above amounts. Such redemption, if requested, will be paid
in three installments as follows: first, the Company will redeem 50% of the
then-outstanding
F-15
<PAGE> 75
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
Convertible Preferred Stock ten days subsequent to the redemption request (the
"Optional Redemption Date"); then 25% on the first anniversary of the Optional
Redemption Date; and finally, 25% on the second anniversary of the Optional
Redemption Date.
Annual dividends of 8% accrue on Series A, B, C, D, E and F Convertible
Preferred Stock when and if declared by the Board of Directors. Upon redemption
or liquidation, a dividend of 8% per annum will accrue from the original
issuance date of the Series D, E and F Convertible Preferred Stock. Accordingly,
the Series D, E and F Convertible Preferred Stock in the accompanying balance
sheets include the accrual of such dividends through December 31, 1997. No
distributions may be made to common stockholders until declared and accrued
preferred stock dividends have been distributed. Common stock dividends may not
be made at a rate higher than the Convertible Preferred Stock dividends.
Each share of Series A, B, C, D, E and F is convertible at the option of
the holder into one share of common stock. The conversion rate is subject to
adjustment if sales of common stock, or equivalent options, excluding sales to
employees under provisions of the stock option plan (see below), are made at a
price lower than the original issue price of the Convertible Preferred Stock.
Each share of Convertible Preferred Stock will be automatically converted into
common stock upon completion of a $10 million firmly underwritten public
offering at a minimum price of at least $6.00 per share or immediately upon
conversion of 75% of the Convertible Preferred Stock into common stock.
During 1994, the Company issued notes payable to three of its existing
investors totaling $2,558,000. The notes were convertible into Series E at $3.00
per share and were interest bearing at 4% per annum. The investors received
warrants to purchase 200,000 shares of the Company's common stock for $600. The
warrants, exercisable for $.03 per share, were recorded at their estimated fair
market value of $100,000 and this amount was reflected as additional paid-in
capital. The notes payable were discounted by this amount and the discount was
being amortized as interest expense over the term of the debt. The notes were
due upon a public offering of the Company's common stock with a per share price
of at least $6.00 and aggregate proceeds of at least $10 million. Absent a
public offering prior to maturity, the notes were due or convertible into Series
E Convertible Preferred Stock, at the Company's option, on May 1, 1995. The
warrants had an expiration date of May 1, 1995. In January 1995, the debt and
accrued interest was replaced with new debt of $2,633,000 with similar terms,
convertible into 1,083,381 shares of Series E Convertible Preferred Stock (at
$2.43 per share). The warrants were canceled. The new debt was immediately
converted into 1,083,381 shares of Series E Convertible Preferred Stock, with a
liquidation or redemption price at that date of $2,633,000.
PUTABLE COMMON STOCK WARRANT
In November 1997, the Company borrowed $4,000,000 from Banc One Capital
Partners II, LLC (the "Lender") (Note 6). In connection with the loan, the
Lender received a warrant to purchase 195,148 shares of the Company's common
stock for $100. Under the warrant, if the Company does not complete a qualified
public offering as defined in the related agreement within twelve months of the
date of the agreement, the number of shares under the warrant is increased by an
additional 97,574 shares of the Company's common stock. If the Company does not
complete a qualified public offering as defined in the related agreement within
eighteen months of the date of the agreement, the number of shares under the
warrant is increased by another 97,574 shares of the Company's common stock. The
Company recorded $1,464,000 for the estimated value of the shares exercisable
under the warrant as a discount on long-term note payable in the accompanying
balance sheets and is amortizing the discount into interest expense over the
six-year term of the note. The warrant expires on the date which is the earliest
of (i) the date on which a qualified initial public offering is completed, (ii)
the date on which a disposition or non-surviving combination is consummated,
(iii) the date on which the Lender exercises its rights under a co-sale
agreement to sell all of its warrant shares or (iv) 90 days after the maturity
date of the related note.
F-16
<PAGE> 76
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
In addition, at any time after the occurrence of a put trigger event and
prior to a qualified public offering, as defined, the Lender may require the
Company to purchase all, but not less than all, of the common shares underlying
the warrant. A put trigger event is defined as the first to occur of any of the
following events: (1) the sixth anniversary date of the agreement; (2) a
disposition as defined in the agreement; (3) a non-surviving combination as
defined in the agreement; (4) the date upon which the Company prepays in full
the outstanding principal, interest and assessments, if any, on the note; or (5)
an acceleration event caused by a default of the note. The put price is
calculated as the greater of the market determined value amount as defined in
the agreement or an amount equal to six times earnings before interest, taxes,
depreciation and amortization for the preceding twelve months, reduced by
current outstanding indebtedness, increased by the fair market value of all
marketable securities, and divided by the number of fully diluted common shares
outstanding. On December 31, 1997, the Company recorded an amount equal to the
number of shares under the warrant times the difference between the current
market value, as defined, and the market value of the shares at the time the
warrant was issued. This amount of $8,000 was recorded as an increase in the
value of the putable common stock warrant and charged to accumulated deficit in
the accompanying financial statements.
The Lender is entitled to request registration of such shares pursuant to a
registration rights agreement. In addition, if the Company proposes to register
any of its securities under the Securities Act, either for its own account or
for the account or for other security holders exercising registration rights,
the warrant holder is entitled to notice of such registration and is entitled to
include shares of such common stock therein.
Pursuant to an agreement with the Lender, dated April 8, 1998, the warrant
will be exercised automatically just before or contemporaneously with the
effectiveness of a qualified initial public offering.
(5) STOCKHOLDERS' EQUITY (DEFICIT)
STOCK SUBSCRIPTIONS RECEIVABLE
In September 1997, in connection with the sale of the Company's Premise
Products Division, several former employees of the Company signed full recourse
promissory notes to the Company to exercise their vested stock options. The
notes accrue interest at 6.07% per annum. The principal and accrued interest
thereon are due the earlier of September 28, 2000 or ninety days after the
Company becomes subject to the reporting requirements under Section 13 of the
Securities Exchange Act of 1934, as amended.
STOCK OPTION PLAN
The Company's 1990 Stock Option Plan (the "1990 Option Plan"), as amended
by the Company's Board of Directors, provides officers and employees options to
purchase up to 2,262,205 shares of common stock of the Company. Under the terms
of the 1990 Option Plan, the Board of Directors may grant officers and employees
either nonqualified or incentive stock options, as defined by the Internal
Revenue Service. The purchase price of the shares subject to incentive stock
options will be the fair market value of the common stock on the date the option
is granted. Options granted under the 1990 Option Plan are exercisable up to ten
years from the date of the grant and are contingent upon continued employment
with the Company.
In October 1995, the Company granted an option to purchase 66,666 shares of
common stock to an officer of the Company. The option is exercisable at $6.00
per share and was issuable contingent on the attainment of certain objectives.
During 1997, the Company's Board of Directors determined that the officer had
met the objectives required under the agreement, causing the options to be
issued. No compensation expense was recorded on this option because the exercise
price exceeded the fair market value of the shares.
F-17
<PAGE> 77
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
cost for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided
that pro forma disclosures are made of net income or loss assuming the fair
value based method of SFAS 123 had been applied. The Company has elected to
account for its stock-based compensation plans under APB 25; accordingly, for
purposes of the pro forma disclosures presented below, the Company has computed
the fair values of all options granted under the 1990 Option Plan during 1995,
1996 and 1997, using the Black-Scholes pricing model and the following weighted
average assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate............................ 5.85% 6.16% 6.41%
Expected dividend yield............................ 0.00% 0.00% 0.00%
Expected lives outstanding......................... 5.0 years 5.0 years 5.0 years
Expected volatility................................ 0.001% 0.001% 0.001%
</TABLE>
To estimate lives of options for this valuation, it was assumed options
will be exercised upon becoming fully vested. All options are initially assumed
to vest. Cumulative compensation costs recognized in pro forma net income or
loss with respect to options that are forfeited prior to vesting is adjusted as
a reduction of pro forma compensation expense in the period of forfeiture.
Because the Company's common stock is not yet publicly traded, the expected
market volatility was assumed to be zero. Actual volatility of the Company's
common stock may vary. Fair value computations are highly sensitive to the
volatility factor assumed; the greater the volatility, the higher the computed
fair value of options granted.
The total fair value of options granted under the 1990 Option Plan was
computed to be approximately $260,000, $187,000 and $499,000 for the years ended
December 31, 1995, 1996 and 1997, respectively. These amounts are amortized
ratably over the vesting periods of the options or recognized at date of grant
if no vesting period is required. Pro forma stock-based compensation, net of the
effect of forfeitures, was $26,000, $80,000 and $232,000 for 1995, 1996 and
1997, respectively.
A summary of stock options under the 1990 Option Plan as of December 31,
1995, 1996 and 1997 and changes during the years then ended are presented below:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year............... 1,470,386 $0.81 919,958 $1.35 1,073,908 $1.68
Granted............... 403,666 2.34 231,983 3.12 270,016 6.93
Exercised............. (525,188) 0.15 (19,450) 0.99 (153,382) 1.00
Canceled.............. (428,906) 1.35 (58,583) 1.92 (83,932) 2.46
--------- --------- ---------
Outstanding at end of
year.................. 919,958 $1.35 1,073,908 $1.68 1,106,610 $3.03
========= ========= =========
Weighted average fair
value of options
granted............... $ 0.63 $ 0.81 $ 1.80
========= ========= =========
</TABLE>
F-18
<PAGE> 78
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
The following table summarizes information about the options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER WEIGHTED
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES AT 12/31/97 LIFE PRICE 12/31/97 PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$0.12 -- 0.30........................ 239,325 3.2 years $0.18 239,325 $0.18
$0.75 -- 1.80........................ 365,000 7.0 years 1.47 260,540 1.41
$3.00 -- 6.00........................ 287,018 8.7 years 4.02 71,501 3.03
$7.50 -- 9.00........................ 215,267 9.8 years 7.53 -- --
--------- -------
1,106,610 7.2 years $3.03 571,366 $1.11
========= =======
</TABLE>
If the Company had accounted for its stock-based compensation plan in
accordance with SFAS 123, the Company's net income from continuing operations
would have been reported as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Net income from continuing operations:
As reported...................................... $302,000 $937,000 $4,783,000
Pro forma........................................ $276,000 $857,000 $4,551,000
Basic income (loss) from continuing operations per
share:
As reported...................................... $ (0.02) $ 0.15 $ 2.17
Pro forma........................................ $ (0.03) $ 0.10 $ 2.05
Diluted net income (loss) from continuing
operations per share:
As reported...................................... $ (0.02) $ 0.11 $ 0.54
Pro forma........................................ $ (0.03) $ 0.10 $ 0.52
</TABLE>
(6) LONG-TERM DEBT
At December 31, 1996 and 1997 and March 31, 1998, notes payable and
long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Borrowings on revolving line of credit
bearing interest at prime plus 1.0% (9.50%
at March 31, 1998), due April 15, 1999.
Collateralized by certain assets of the
Company. Maximum borrowing amount of 75%
of qualified accounts receivable up to
$2,000,000................................ $ 1,950,000 $ 950,000 $ 450,000
</TABLE>
F-19
<PAGE> 79
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Secured promissory note to a bank, bearing
interest at prime plus 1% (9.50% at
December 31, 1997), minimum monthly
payments in varying amounts, currently
$16,000, including imputed interest of
9.50% per annum due February 1998 with a
final payment of $20,000, collateralized
by certain assets of the Company.......... 200,000 36,000 --
Note payable to Banc One Capital Partners
II, LLC, bearing interest at 11% through
May 31, 1999, and 12% thereafter, interest
is payable the last day of each month.
Quarterly principal payments of $250,000
from March 31, 2001 through December 31,
2002, then $500,000 per quarter due at
each subsequent quarter, thereafter. The
final payment is due November 30, 2003.
(Note 4).................................. -- 4,000,000 4,000,000
Capitalized lease obligations for equipment
due on various dates through October 1,
2002, minimum monthly payments in varying
amounts, currently $397,000 including
imputed interest ranging from 3.75% to
10.25% per annum, collateralized by the
related assets with a net book value of
$7,366,000 $8,101,000 and $7,495,000,
respectively.............................. 6,519,000 5,959,000 8,815,000
----------- ----------- ------------
8,669,000 10,945,000 13,265,000
Less -- Current portion..................... (5,351,000) (2,624,000) (2,267,000)
----------- ----------- ------------
$ 3,318,000 $ 8,321,000 $ 10,998,000
=========== =========== ============
</TABLE>
The Company may prepay the $4,000,000 note payable with Banc One Capital
Partners II, LLC after June 30, 1998, however, a prepayment premium will be due
equal to 4% of the amount outstanding if prepaid between June 30, 1998 and
November 30, 1998, 3% if prepaid between December 1, 1998 and November 30, 1999
and 2% if prepaid between December 1, 1999 and November 30, 2000.
F-20
<PAGE> 80
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
Debt maturities of notes payable and long-term debt as of March 31, 1998,
are as follows:
<TABLE>
<CAPTION>
CAPITAL NOTES
LEASES PAYABLE TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
1998, nine months............................. $ 1,812,000 $ 450,000 $ 2,262,000
1999.......................................... 2,893,000 -- 2,893,000
2000.......................................... 2,631,000 -- 2,631,000
2001.......................................... 2,040,000 1,000,000 3,040,000
2002.......................................... 1,285,000 1,250,000 2,535,000
Thereafter.................................... -- 1,750,000 1,750,000
----------- ---------- -----------
10,661,000 4,450,000 15,111,000
Less -- Amount related to interest............ (1,846,000) -- (1,846,000)
----------- ---------- -----------
Principal portion of future obligations....... 8,815,000 4,450,000 13,265,000
Less -- Current portion....................... (1,817,000) (450,000) (2,267,000)
----------- ---------- -----------
$ 6,998,000 $4,000,000 $10,998,000
=========== ========== ===========
</TABLE>
(7) INCOME TAXES
The Company has operated in three countries, the United States, Canada and
Australia. For income tax return reporting purposes, the Company has
approximately $9,600,000 of net operating loss carryforwards; approximately
$364,000 of research and development tax credit carryforwards and $39,000 of
alternative minimum tax credit carryforwards available to offset future federal
taxable income or federal tax liabilities in the United States. The research and
development credit and net operating loss carryforwards expire at various dates
through 2011. The Company also has $208,000 of foreign tax credit carryforwards.
The Tax Reform Act of 1986 contains provisions which may limit the net
operating loss and credit carryforwards available to be used in any given year
upon the occurrence of certain events including significant changes in ownership
of the Company. In accordance with certain provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), a greater than 50% change in ownership of
a company within a three year period results in an annual limitation on the
Company's ability to utilize its net operating loss carryforwards from tax
periods prior to the ownership change.
Deferred income tax assets and liabilities at December 31, 1996 and 1997,
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Depreciation differences.................................. $ (377,000) $ (630,000)
Accrued liabilities and other............................. 374,000 656,000
Deferred revenue.......................................... 596,000 438,000
Net operating loss carryforwards.......................... 3,312,000 3,564,000
Tax credit carryforwards.................................. 647,000 611,000
Less -- Valuation allowance............................... (4,552,000) (2,139,000)
----------- -----------
$ -- $ 2,500,000
=========== ===========
</TABLE>
As of December 31, 1997, the Company reversed $2,500,000 of the valuation
allowance on part of its deferred tax assets, as the Company believes it is more
likely than not that such tax benefits will be realized.
Management believes the entire tax benefit of $4,552,000 as of December 31,
1996 and the remaining tax benefit of $2,139,000 as of December 31, 1997, do not
satisfy the realization criteria set forth in SFAS No. 109 and has recorded a
valuation allowance for such net tax asset.
F-21
<PAGE> 81
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
The components of the provision (benefit) for income taxes attributable to
income from operations as of December 31, 1995, 1996 and 1997, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1995 1996 1997
------- -------- -----------
<S> <C> <C> <C>
Current provision (benefit) --
State........................................... $ 2,000 $ 69,000 $ 172,000
Foreign......................................... 14,000 (60,000) --
------- -------- -----------
$16,000 $ 9,000 $ 172,000
Deferred benefit, federal and state............... -- -- (2,500,000)
------- -------- -----------
Income tax provision (benefit).................... $16,000 $ 9,000 $(2,328,000)
======= ======== ===========
</TABLE>
The income tax provision for the three months ended March 31, 1997 and 1998
is comprised of current provision in states where the Company did not have net
operating loss carryforwards available to offset net income.
The components of the provision for income taxes attributable to income
from discontinued operations as of December 31, 1995, 1996 and 1997, were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Current provision --
Foreign........................................... $ -- $146,000 $100,000
======= ======== ========
</TABLE>
A reconciliation of income tax provision computed by applying the federal
income tax rate of 34% to income from continuing operations before income taxes
as of December 31, 1995, 1996 and 1997, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Computed normal tax provision.................. $ 108,000 $ 322,000 $ 835,000
Tax effect of permanent differences............ 11,000 21,000 34,000
State tax, net of federal tax impact........... 15,000 44,000 113,000
Canada tax..................................... 14,000 -- --
Change in valuation allowance attributable to
continuing operations........................ (132,000) (378,000) (3,310,000)
--------- --------- -----------
Income tax provision (benefit)................. $ 16,000 $ 9,000 $(2,328,000)
========= ========= ===========
</TABLE>
The provision for income taxes is attributable to continuing operations and
discontinued operations as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Provision attributable to continuing
operations................................... $ 148,000 $ 387,000 $ 982,000
Change in valuation allowance attributable to
continuing operations........................ (132,000) (378,000) (3,310,000)
--------- --------- -----------
Net provision (benefit) attributable to
continuing operations........................ 16,000 9,000 (2,328,000)
--------- --------- -----------
Benefit attributable to discontinued
operations................................... (705,000) (432,000) (797,000)
Change in valuation allowance attributable to
discontinued operations...................... 705,000 578,000 897,000
--------- --------- -----------
Net provision attributable to discontinued
operations................................... -- 146,000 100,000
--------- --------- -----------
Total income tax provision
(benefit).......................... $ 16,000 $ 155,000 $(2,228,000)
========= ========= ===========
</TABLE>
F-22
<PAGE> 82
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
(8) COMMITMENTS
The Company leases its office and research facilities and certain equipment
under operating lease agreements which expire through December 2002. Rent
expense for the years ended December 31, 1995, 1996 and 1997 was approximately
$505,000, $621,000 and $718,000, respectively. Future minimum lease obligations
under these agreements are as follows:
<TABLE>
<S> <C>
1998..................................................... $1,716,000
1999..................................................... 1,662,000
2000..................................................... 1,388,000
2001..................................................... 1,385,000
2002..................................................... 1,407,000
----------
Total.......................................... $7,558,000
==========
</TABLE>
(9) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan under which eligible employees may defer up
to 15% of their compensation. The Company may make matching contributions and
discretionary contributions if approved by the Board of Directors. For 1995,
1996 and 1997, no employer matching or discretionary contributions were made to
the 401(k) plan.
(10) RELATED PARTY TRANSACTION
The Company provides data management and certain consulting services to and
leases equipment from entities in which a stockholder of the Company has an
ownership interest. A representative of the stockholder is a member of the
Company's Board of Directors. The Company received net proceeds of approximately
$3,226,000, $6,606,000 and $6,959,000 in 1995, 1996 and 1997, respectively,
pursuant to these agreements. Amounts due to the stockholder under the lease
agreements net of amounts due to the Company for services rendered as of
December 31, 1996 and 1997 were $3,158,000 and $5,148,000, respectively. The
leases have interest rates ranging from 9.25% to 9.50%, require monthly payments
and have expiration dates varying through October 2002.
(11) MAJOR CUSTOMERS
Revenue from certain customers exceeded 10% of total revenue for the
respective year as follows: 44%, 20% and 24% in 1995; 47% and 35% in 1996; and
30%, 29% and 22% in 1997. Contracts with certain of these customers have a
ten-year duration and provide for fixed monthly fees based upon the number of
subscriber records managed and upon the services selected by the customer.
(12) LEGAL MATTERS
The Company is subject to various claims and business disputes in the
ordinary course of business. While the outcome of these matters cannot be
predicted with certainty, management anticipates that the ultimate outcome of
the issues will not have a material impact on the financial statements.
(13) SUBSEQUENT EVENTS (UNAUDITED)
On March 18, 1998, the Company's Board of Directors authorized the filing
of a Registration Statement with the Securities and Exchange Commission covering
the proposed sale of shares of its common stock to the public.
F-23
<PAGE> 83
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING INFORMATION RELATED TO UNAUDITED PERIODS)
On March 18, 1998, the Company adopted an employee stock purchase plan
("ESPP") under which eligible employees may contribute up to 10% of their
salaries through payroll deductions to purchase shares of the Company's common
stock. The first offering period of the ESPP began March 1, 1998 and will end
December 31, 1998. Thereafter, offering periods will be successive six month
periods. At the end of each offering period, amounts contributed by employees
will be used to purchase shares of the Company's common stock at a price equal
to 85% of the lower of the closing price of the common stock on the first day or
last day of the offering period. The Company's Board of Directors has authorized
the issuance of up to 200,000 shares under the ESPP and may terminate the ESPP
at any time. At January 1 of each year, the shares available under the ESPP will
be restored to 200,000, although the Company's Board of Directors may elect to
restore a lesser number of shares.
On April 7, 1998, the Company adopted the 1998 Stock Incentive Plan ("1998
Plan"), which is a successor to the 1990 Option Plan, to become effective upon a
qualified initial public offering. A total of 1,901,055 shares have been
authorized for issuance under the 1998 Plan, including shares authorized under
the 1990 Option Plan. The shares reserved for issuance will increase
automatically on the first trading day of each calendar year, beginning with the
1999 calendar year, by 3% of the number of shares of common stock outstanding on
the last trading day of the immediately preceding calendar year. The 1998 Plan
allows for issuances of options to officers, non-employee Board members and
consultants, as provided for under the terms of the 1998 Plan.
F-24
<PAGE> 84
[SCC LOGO]
[BECAUSE EVERY CALL IS IMPORTANT.]
