SCC COMMUNICATIONS CORP, 10-Q, 1999-05-17

SCC COMMUNICATIONS CORP
10-Q, 1999-05-17
COMPUTER PROCESSING & DATA PREPARATION

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER: 000-29678

SCC COMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 84-0796285
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)

6285 LOOKOUT ROAD 80301
BOULDER, COLORADO
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (303) 581-5600

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

As of April 30, 1999, there were 10,892,654 shares of the Registrant's
Common Stock outstanding.

================================================================================
<PAGE>

INDEX

PART 1 - FINANCIAL INFORMATION

Item 1 - Financial Statements

Balance Sheets as of March 31, 1999 (Unaudited) and December 31,
1998

Statements of Operations for the three-months ended March 31, 1999
and 1998 (Unaudited)

Statements of Cash Flows for the three-months ended March 31, 1999
and 1998 (Unaudited)

Notes to Financial Statements (Unaudited)

Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

Item 2 - Changes in Securities and Use of Proceeds

Item 3 - Defaults on Senior Securities

Item 4 - Submission of Matters to a Vote of Security Holders

Item 5 - Other Information

Item 6 - Exhibits and Reports on Form 8-K

Signatures

2
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SCC COMMUNICATIONS CORP.

BALANCE SHEETS
(dollars in thousands)

March 31, December 31,
1999 1998
--------- ------------
(Unaudited)

ASSETS

CURRENT ASSETS:
Cash and cash equivalents .......................... $ 7,885 $ 10,266
Short-term investments ............................. 12,363 7,761
Accounts receivable, net of allowance for doubtful
accounts of approximately $50 in 1999 and 1998 .. 2,503 4,820
Unbilled project revenue ........................... 826 1,035
Prepaids and other ................................. 531 484
Deferred income taxes -- current portion ........... 2,108 2,025
-------- --------
Total current assets ....................... 26,216 26,391
-------- --------

PROPERTY AND EQUIPMENT, at cost:
Computer hardware and equipment .................... 24,260 23,687
Furniture and fixtures ............................. 862 800
Leasehold improvements ............................. 944 920
-------- --------
26,066 25,407
Less -- Accumulated depreciation ................... (12,229) (11,056)
-------- --------
Total property and equipment ............... 13,837 14,351
-------- --------

OTHER ASSETS ......................................... 112 105
LONG-TERM INVESTMENTS ................................ -- 2,054

DEFERRED INCOME TAXES -- NONCURRENT .................. 1,663 1,504

SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $407 and $346 in 1999 and 1998,
respectively ....................................... 827 683
-------- --------
$ 42,648 $ 45,095
======== ========

The accompanying notes to financial statements are an integral part of
these balance sheets.

3
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SCC COMMUNICATIONS CORP.

BALANCE SHEETS
(dollars in thousands)

March 31, December 31,
1999 1998
--------- ------------
(Unaudited)

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable ................................... $ 620 $ 1,211
Payroll-related accruals ........................... 865 734
Other accrued liabilities .......................... 1,695 2,546
Property and other tax liabilities ................. 512 696
Current portion of capital lease obligations ....... 1,804 1,618
Deferred contract revenue .......................... 1,013 1,908
-------- --------
Total current liabilities ....................... 6,509 8,713

LONG-TERM DEBT:
Capital lease obligations, net of current portion .. 2,888 2,791
-------- --------
Total liabilities ............................... 9,397 11,504
-------- --------

STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 15,000,000 shares
authorized; none issued or outstanding ........... -- --
Common stock, $.001 par value; 30,000,000 shares
authorized; 10,892,654 and 10,886,353 shares
issued in 1999 and 1998, respectively ............ 11 10
Additional paid-in capital ......................... 43,327 43,320
Stock subscriptions receivable ..................... (41) (59)
Accumulated deficit ................................ (10,046) (9,680)
-------- --------
Total stockholders' equity ...................... 33,251 33,591
-------- --------
$ 42,648 $ 45,095
======== ========

The accompanying notes to financial statements are an integral part
of these balance sheets.

4
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SCC COMMUNICATIONS CORP.

STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
Unaudited

<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUE:
Data management services ......................... $ 7,480 $ 7,533
Licenses and implementation services ............. 136 369
------------ ------------
Total revenue ............................. 7,616 7,902
COSTS AND EXPENSES:
Cost of data management services ................. 5,671 4,798
Cost of licenses and implementation services ..... 53 153
Sales and marketing .............................. 1,280 843
General and administrative ....................... 1,378 1,146
------------ ------------
Total costs and expenses .................. 8,382 6,940
------------ ------------
INCOME (LOSS) FROM OPERATIONS ...................... 962 (766)
OTHER INCOME (EXPENSE):
Interest and other income ........................ 273 30
Interest and other expense ....................... (115) (331)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES .................. (608) 661
PROVISION (BENEFIT) FOR INCOME TAXES ............... (242) 46
------------ ------------
NET INCOME (LOSS) .................................. $ (366) $ 615
============ ============
Dividends accrued on Series D, E and F
mandatorily redeemable convertible preferred stock -- (185)
Common stock warrant put price adjustment .......... -- (49)
------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK ....... $ (366) $ 381
============ ============
NET INCOME (LOSS) PER SHARE (Note 2):
Basic ............................................ $ (0.03) $ 0.20
============ ============
Diluted .......................................... $ (0.03) $ 0.07
============ ============
SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE
(Note 2):
Basic ............................................ 10,890,422 1,958,143
============ ============
Diluted .......................................... 10,890,422 9,143,534
============ ============
</TABLE>

The accompanying notes to financial statements are an integral
part of these statements.

5
<PAGE>

SCC COMMUNICATIONS CORP.

STATEMENTS OF CASH FLOWS
(dollars in thousands)
Unaudited

<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................. $ (366) $ 615
Adjustments to reconcile net income (loss) to net cash provided by
Operating activities --
Amortization and depreciation .................................... 1,253 985
Amortization of note payable discount ............................ -- 74
Accretion of and interest accrued on investments ................. (146) --
Provision for doubtful accounts .................................. -- (18)
Deferred income tax benefit ...................................... (242) --
Provision for estimated losses on contracts ...................... -- (25)
Change in--
Accounts receivable ............................................ 2,317 (593)
Unbilled project revenue ....................................... 209 28
Prepaids and other ............................................. (40) (204)
Accounts payable ............................................... (161) (217)
Accrued liabilities ............................................ (580) (14)
Deferred contract revenue ...................................... (895) (532)
-------- --------
Net cash provided by operating activities .................... 1,349 99
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment .............................. (678) (399)
Purchase of investments ............................................ (2,402) --
Software development costs ......................................... (205) (56)
-------- --------
Net cash used in investing activities ........................ (3,285) (455)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable ................................ -- (536)
Principal payments on capital lease obligations .................... (471) (435)
Exercise of stock options .......................................... 8 1
Payments received from stock subscriptions ......................... 18 --
-------- --------
Net cash used in financing activities ........................ (445) (970)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................ (2,381) (1,326)
CASH AND CASH EQUIVALENTS, beginning of period ....................... 10,266 2,503
-------- --------
CASH AND CASH EQUIVALENTS, end of period ............................. $ 7,885 $ 1,177
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ........................... $ 116 $ 367
======== ========
Cash paid during the period for taxes .............................. $ 151 $ 71
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Dividends accrued on Series D, E and F Convertible Preferred Stock . $ -- $ 185
======== ========
Property acquired with capital leases .............................. $ 754 $ 3,291
======== ========
</TABLE>

The accompanying notes to financial statements are an integral
part of these statements.

6
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NOTES TO FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The unaudited financial statements included herein reflect all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary to fairly present the Company's financial
position, results of operations and cash flows for the periods presented.
Certain information and footnote disclosures normally included in audited
financial information prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations. The results of operations for the
period ended March 31, 1999 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
December 31, 1999. These financial statements should be read in conjunction with
the financial statements and notes thereto for the year ended December 31, 1998,
which are included in the Company's Annual Report on Form 10-K.

NOTE 2 - EARNINGS PER SHARE

"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 because their effect
is antidilutive totaled 1,187,006 and 46,801 for the three months ended March
31, 1999 and 1998, respectively.

A reconciliation of the numerators and denominators used in computing per
share net income from continuing operations before extraordinary item is as
follows:

Three Months Ended March 31,
----------------------------
1999 1998
------------ ------------
Numerator:
Net income (loss) (numerator for
diluted loss per share) ........... $ (366,000) $ 615,000
Dividends on Convertible
Preferred Stock ................. -- (185,000)
Common stock warrant put price
adjustment ....................... -- (49,000)
------------ ------------
Numerator for basic income per share $ (366,000) $ 381,000
============ ============
Denominator for basic income
(loss) per share:
Weighted average common shares
outstanding ...................... 10,890,422 1,958,143
============ ============
Denominator for diluted income
(loss) per share:
Convertible Preferred Stock ........ -- 6,188,575
Weighted average common shares
outstanding ...................... 10,890,422 1,958,143
Options issued to employees ........ -- 801,668
Putable common stock warrant ....... -- 195,148
------------ ------------
Denominator for diluted
income (loss) per share ....... 10,890,422 9,143,534
============ ============

Income (loss) per common share was computed as follows:

Three Months
Ended March 31,
---------------
1999 1998
------- -------

Basic net income (loss) per share.... $ (0.03) $ 0.20
======= =======
Diluted income (loss) per share..... $ (0.03) $ 0.07
======= =======

7
<PAGE>

NOTE 3 - REPORTABLE SEGMENTS

The Company has two reportable segments, data management services and
licenses and implementation services. The Company measures its reportable
segments based on revenue for each segment and costs directly related to each
segment. General and administrative, sales and marketing and other costs are not
measured by segment. Data management services include the provisioning of an
outsourcing solution for 9-1-1 data management to customers, including ILECs,
CLECs and wireless carriers. Licenses and implementation services include the
licensing, customization and installation of the Company's 9-1-1 software
solutions. Substantially all of the Company's customers are in the United
States.

These segments are managed separately because the nature of and resources
used for each segment is unique. Data management services include ongoing data
management and monitoring of systems and other enhanced services. Under data
management services, the customer's data is transferred to the Company's systems
and the Company owns the systems used to manage the data. Under licenses and
implementation services, the customer performs data management and systems
monitoring activities. The customer also owns the hardware, licenses the
Company's software and maintains the data on its internal systems under this
segment.

Revenue and costs are segregated in the Statement of Operations for the
two reportable segments. The Company does not segregate assets between the
segments as it is impractical to do so.

8
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE RESULTS" CONTAINED
HEREIN.

Overview

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 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 in subsequent years. The Company began to
recognize revenue from wireless carriers in the third quarter of 1997.

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
in which the services are performed. Related costs are expensed as they are
incurred. Data management services revenue comprised 98% and 95% of the
Company's total revenue in the three months ended March 31, 1999 and 1998,
respectively.

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 2% and 5% of the Company's total revenue in the three
months ended March 31, 1999 and 1998, respectively.

During the three months ended March 31, 1999, the Company recognized
approximately 84% 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 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, each of which accounted for greater than 10% of the
Company's total revenue in such period. In the third quarter of 1998, one of the
Company's licenses and implementation services customers, Bell Atlantic, who
merged with Nynex, announced its decision to standardize its 9-1-1 hardware and
software platform utilizing non-SCC systems that had been used by Nynex prior to
the merger. This transition will occur over the course of 1999, during which
time SCC will continue to support the systems installed in Bell Atlantic and
will co-operate fully to ensure a smooth transition of these systems. Bell
Atlantic comprised approximately 8% of the Company's total revenue in the year
ended December 31, 1998. See "Factors that May Affect Future Results -- Reliance
on Significant Customers."

9
<PAGE>

As of December 31, 1998, the Company had net operating loss carryforwards
of $8.5 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, 1998, the Company reversed all but $450,000 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. The Company
evaluates the valuation allowance each accounting period and adjusted the
valuation allowance for the utilization of the net operating loss carryforward
for the three months ended March 31, 1999. 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 and July 1998, the Company completed an initial public offering of
its common stock, which generated proceeds of $26.0 million, net of the
underwriter's discount and other estimated offering costs and including the
exercise of the underwriters' overallotment option. See "Liquidity and Capital
Resources."

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 "Factors
That May Affect Future Results -- Risks Associated with International Sales."

Although the Company experienced a profit in 1998, the Company generated a
net loss of $366,000 in the three months ended March 31, 1999 and has
experienced significant fluctuations in its quarterly results. The Company's
operating results may continue to 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, rate of adoption of wireless services by Public Safety Answering
Points, efforts expended to accelerate the introduction of certain new products,
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
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 1998, and expects to continue hiring additional
employees during 1999. 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.

Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998

Revenue

Total Revenue. Total revenue decreased 4%, from $7.9 million in the first
quarter of 1998 to $7.6 million in the third quarter of 1999.

Data Management Services Revenue. Revenue from data management services
remained constant at $7.5 million in the first quarter of 1998 and 1999,
representing 95% and 98% of total revenue for such periods, respectively. Data
management services revenue decreased due to monthly minimum fees from a
wireless carrier in the first quarter of 1998 that expired at the end of 1998
and a decrease in non-recurring fees related to enhanced services. These
decreases were offset by increased monthly fees due to an increase in the number
of records under management for ILEC and CLEC customers.

10
<PAGE>

Licenses and Implementation Services. Revenue from licenses and
implementation services decreased 63%, from $369,000 in the first quarter of
1998 to $136,000 in the first quarter of 1999, as the Company had no licenses
and implementation services contracts in process during the first quarter of
1999 other than warranty contracts.

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
18%, from $4.8 million in the first quarter of 1998 to $5.6 million in the first
quarter of 1999, representing 61% and 74% of total revenue for such periods,
respectively, and 64% and 76% of data management services revenue in the first
quarter of 1998 and first quarter of 1999, respectively. The dollar increase was
due to the addition of equipment and telephone lines to accommodate growth in
the Company's wireless and wireline operations and additional headcount and
related costs incurred in anticipation of growth for both wireline and wireless
services. The percentage increase occurred primarily because demand for the
Company's wireless and enhanced services has been slower than anticipated,
although the Company has built the infrastructure to service the anticipated
demand.

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 decreased 65%, from $153,000 in the first quarter of 1998 to $53,000 in
the first quarter of 1999, representing 2% and 1% of total revenue for such
periods, respectively. Additionally, cost of licenses and implementation
services revenue represented 41% and 39% of licenses and implementation services
revenue in the first quarter of 1998 and first quarter of 1999, respectively.
The dollar decrease occurred because the Company had no licenses and
implementation services contracts in process during the first quarter of 1999
other than warranty contracts.

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 increased 52%, from $843,000 in the
first quarter of 1998 to $1.3 million in the first quarter of 1999, representing
11% and 17% of total revenue in such quarters, respectively. The dollar increase
was due to the addition of personnel, the creation of a regulatory affairs
department to interpret and influence legislation related to the Company's
operations and related legal expenses, and tradeshows that the Company attended
in the first quarter of 1999.

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 20%, from $1.1 million in the first
quarter of 1998 to $1.4 million in the first quarter of 1999, representing 15%
and 18% of total revenue in the first quarter of 1998 and first quarter of 1999,
respectively. The dollar increase was due to (i) increased legal fees related to
regulatory and legislative issues concerning the implementation of the Company's
services in the State of Texas, (ii) creation of an investor relations
department, and (iii) increased legal and accounting costs related to quarterly
and annual reporting requirements as the Company became a publicly traded
company in June 1998.

Other income (expense), net. Net other income (expense) consists 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. Net
other expense was $301,000 in the first quarter of 1998 compared to net other
income of $158,000 in the first quarter of 1999, representing (4)% and 2% of
total revenue for such periods, respectively. The dollar increase was primarily
due to a decrease in interest expense related to the repayment of certain bank
debt and capital leases that were outstanding in the first quarter of 1998 and
interest earned from the investment of funds received from the Company's initial
public offering in June and July of 1998.

Provision (Benefit) for Income Taxes. The Company's income tax provision
was $46,000 in the first quarter of 1998 compared to a net income tax benefit of
$242,000 in the first quarter of 1999. The Company recorded an income tax
benefit in the first quarter of 1999 as it believes that it is more likely than
not that the net operating loss carryforward generated will be utilized against
future earnings.

Liquidity and Capital Resources

Since its inception the Company has funded its operations with cash
provided by operations, supplemented by equity and debt financing and leases on
capital equipment. As of March 31, 1999, the Company had $20.2 million in cash
and cash equivalents and investments in marketable securities.

11
<PAGE>

In June 1998, the Company completed an initial public offering of
2,100,000 shares of its Common Stock, which generated proceeds of $22.5 million
to the Company, net of the underwriter's discount and other offering costs. The
Company used approximately $4.4 million of the proceeds to repay its bank loans
and $160,000 for the related prepayment penalty. In July 1998, the underwriters
of the Company's initial public offering exercised their over-allotment option.
Under the over-allotment option, the Company sold an additional 315,000 shares
of its Common Stock, generating net proceeds of $3.5 million.

The Company repaid $471,000 and $971,000 of other bank debt and capital
lease obligations during the three months ended 1999 and 1998, respectively.
Additionally, the Company used $883,000 and $455,000 during 1999 and 1998,
respectively, for the purchase of capital assets and software development. The
Company anticipates that its level of spending for capital expenditures will
continue during 1999, although it currently has no material commitments for
capital expenditures.

The Company is in the process of renewing its line of credit with a bank
equal to $2.0 million, which will be available to meet operating needs. The
interest rate on amounts borrowed under the line of credit will be equal to the
bank's prime rate or the one, two or three month Libor rate plus 2.25% per
annum. The line of credit will mature April 15, 2000 and will be collateralized
by certain assets of the Company. As of March 31, 1999, no borrowings were
outstanding on the line of credit.

The Company believes that the remaining net proceeds from its initial
public offering, together with cash generated from operations, will be
sufficient to fund its anticipated working capital needs, capital expenditures
and any potential future acquisitions through at least the next twelve months.
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.

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, by the end of 1999, computer systems
and/or software used 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 uses off-the-shelf and custom software developed internally
and by third parties for its production systems. The Company has completed its
assessment of and is implementing a plan for the programming and testing of its
internally developed software to make it Year 2000 compliant. In addition, the
Company has identified which of its third party production systems it believes
have date-sensitive applications to determine where Year 2000 issues may exist.
The Company has contacted the third-party suppliers and has received responses
from most of those suppliers, including the suppliers that the Company considers
critical. The Company has received patches for the systems that are not Year
2000 compliant and has installed approximately half of them. The Company intends
to complete the installation of such patches by the end of the second quarter of
1999.

The Company estimates that its total costs to convert its production
systems to be Year 2000 compliant, including primarily internal labor and third
party hardware and internal and third party software costs, will be
approximately $400,000, of which approximately 95% has been incurred. The
Company expects to complete the conversion of its production systems in the
second quarter of 1999. However, there can be no assurance that unidentified
Year 2000 problems will not cause the Company to incur material expenses in
responding to such problems or otherwise have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
to the extent that such software and systems do not become Year 2000 compliant,
there can be no assurance that potential systems interruptions, the Company's
potential inability to meet its contractual obligations 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. 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.

The Company has completed its assessment of its information technology
("IT") and non-IT systems. Non-IT systems include fax machines, photocopiers,
telephone switches, security systems and other common office devices. The
Company's assessment included contacting third party suppliers regarding Year
2000 compliance. Patches are installed or are scheduled to be installed by the
end of the second quarter of 1999. Failure of one or more of these

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internal systems to become Year 2000 compliant could impair the Company's
ability to communicate with its customers and perform critical business
operations and could cause the Company to process information manually or limit
access to data.

The Company is developing contingency plans with respect to Year 2000
issues for certain of its systems and is continually monitoring the risks
involved. Some of these contingency plans include manual processing until such
time that the system becomes compliant. The Company will freeze all software
changes in the fourth quarter of 1999 and perform recontamination testing of its
production systems to ensure that any changes made to the systems since the last
Year 2000 testing have not impaired the Year 2000 compliance of the systems. To
supplement the Company's normal on-call procedures, key employees of the Company
will be on site where critical systems are located through the Year 2000
changeover. The Company is also making support arrangements with its critical
third party suppliers to ensure that support is available if unanticipated
problems arise.

Although the Company expects to identify and resolve all Year 2000 issues
that could materially affect its business operations, the Company believes it is
not possible to determine with complete certainty that all Year 2000 issues will
be identified or corrected in time. If the costs to convert the Company's
systems to be Year 2000 compliant are greater than anticipated or if the
Company's systems do not contain all necessary date code changes in time, there
is no assurance that system interruptions or an inability to meet contractual
obligations would not occur or that such occurrences would not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Year 2000 Capability."

Recently Issued Accounting Pronouncements

Statement of Financial Accounting Standards No. 133

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.

Statement No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the Statement as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). Statement No. 133 cannot be applied retroactively. Statement
No. 133 must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the company's election,
before January 1, 1998).

The Company does not typically enter into arrangements that would fall
under the scope of Statement No. 133. The Company's management has not yet
quantified the impacts of adopting Statement 133 on the Company's financial
statements and has not determined the timing of or method of the Company's
adoption of Statement No. 133. However, should the Company determine to utilize
the arrangements covered by Statement No. 133, the Statement could increase
volatility in earnings and other comprehensive income. Because the Company has
not historically entered into such arrangements, management believes that
Statement No. 133 will not significantly affect its financial reporting.

Statement of Position 98-9

In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9 ("SOP 98-9"), "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." SOP 98-9
amends certain paragraphs of Statement of Position 97-2 ("SOP 97-2"), "Software
Revenue Recognition," to require the application of a residual method of
accounting for software revenue when certain conditions exist. SOP 98-9 also
amends Statement of Position 98-4 ("SOP 98-4"), "Deferral of the Effective Date
of a Provision of SOP 97-2" to extend the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or
before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999.
Earlier adoption is permitted, however, retroactive application is prohibited.
The Company believes SOP 98-9 will not materially impact its financial
statements.

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FACTORS THAT MAY AFFECT FUTURE RESULTS

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 five
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.

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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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

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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".

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 three months ended March 31, 1999, the Company recognized
approximately 84% 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 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, each of which accounted for greater than 10% of the
Company's total revenue in such period. 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 2002 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. 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.

Dependence on Key Personnel; Recent Management Turnover

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 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's Chief Operating Officer, John Sims, resigned from the Company
effective February 26, 1999 and the Company's Chief Financial Officer, Nancy
Hamilton, announced her resignation effective May 20, 1999. There can be no
assurance that the Company will be able to replace Mr. Sims or Ms. Hamilton
within a reasonable timeframe or that the Company will not experience
significant interruption in its business as a result of their departures. Ms.
Hamilton has an agreement with the Company providing for payments subsequent to
the termination of her employment. The Company currently maintains key person
life insurance policies with respect to Mr. Heinrichs and Ms. Hamilton. The
Company is the named beneficiary of these policies, which are for $3,000,000 and
$1,000,000, respectively.

Rate of Adoption by Public Safety Answering Points

The Company expects the percentage of the Company's revenue derived from
the management of 9-1-1 data records for wireless carriers to increase.
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 requires 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. However,
under the FCC rules, wireless carriers are not required to provide Phase I and
Phase II service without adequate cost recovery. Wireless carriers are required
to comply with Phase I within six months after the PSAP request. However, due to
cost recovery and liability concerns, there are very few live Phase I markets.
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. However, the FCC is currently
accepting waiver requests from wireless carriers, which may result in compliance
date extensions. The Company believes that the technological challenges
confronting wireless carriers attempting to comply with the

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<PAGE>

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. The number of PSAPs demanding services complying with the Order from
wireless carriers has been less than anticipated by the Company. If the rate of
adoption by PSAPs continues to be slow because of cost recovery issues,
extensions granted by the FCC or other reasons, the Company will 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 its Emergency Warning and Evacuation System, which will allow
PSAPs to call all numbers in a given area and warn of imminent danger, in the
second quarter of 1999. The Company intends to begin offering its Subscriber ALI
product, which will allow subscribers to enter personal information into their
9-1-1 records in 2000. 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.

Fixed Price Contracts and Other Project Risks

During the three months ended March 31, 1999 and the year ended December
31, 1998, approximately 90% and 80%, respectively, 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 base services and clearinghouse
services. In addition, the Company has a contract with a state agency. 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 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.

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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 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. Supreme Court in AT&T v. Iowa invalidated the
unbundling requirements adopted by the FCC while upholding a portion of the
FCC's local competition rules. However, the Regional Bell Operating Companies
("RBOCs") have agreed to comply with the invalidated unbundling requirements
while the FCC drafts and proposes new rules to comply with the decision of the
Supreme Court. 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 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.

While the Company has signed a contract to provide 9-1-1 data management
services to the General Services Commission of the State of Texas, certain
issues have been causing delays in the implementation of the services. However,
an interim agreement among the involved parties was recently reached that will
allow the Company to begin conducting a field trial, which is required under the
contract, to test the interfacing technology in the Houston area. SBC
Communications, Inc. ("SBC"), which is currently responsible for the
provisioning of 9-1-1 OSS, data transport and data management services in the
State of Texas, is challenging whether the Company has a right to access SBC's
source systems and 9-1-1 database and whether they are obligated by law to
unbundle components of their network functionality. As this is the first time
that a state entity has endeavored to centralize 9-1-1 OSS and data management
services with a neutral third party, federal and state regulations governing
9-1-1 service provisioning, which have typically applied to certified
telecommunications providers, are being challenged and clarified for the first
time. As part of the interim agreement, this legal challenge and all related
proceedings have been placed in abeyance pending the outcome of the field trial.
The Company believes that these legal and technological issues and their
associated cost implications are likely to be readdressed by the Public
Utilities Commission of the State of Texas ("PUC"), which is expected to decide
on these matters by the end of 1999. The Company believes that the services that
it will provide under its contract with the General Services Commission are
permitted within the scope of the existing regulations and that the outcome of
the matter before the PUC will be favorable to the Company and the General
Services Commission. However, there can be no assurance that the PUC will decide
in favor of the Company and the General Services Commission or that SBC will not
resume its desire to pursue this legal challenge on a longer term basis, thus
causing further delay of the commencement of the services by exercising its
right to appeal the PUC's decision if the decision is in the Company and General
Services Commission's favor. If the PUC does not decide in the Company's favor
or places contingencies on the manner in which the services are provided, the
Company may be prohibited from delivering its services to the State of Texas,
may expend significant resources to appeal the PUC's decision or may expend
additional costs in redesigning the methodology by which the services are
provided. In addition, if SBC exercises its right to appeal, the Company may be
required to spend significant resources in defending its right to provide its
services in the State of Texas.

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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 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.

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 or
additional demands placed on the Company as a result of becoming a public
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."

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.

19
<PAGE>

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
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.

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 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

20
<PAGE>

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".

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.

Year 2000 Capability

The Company uses off-the-shelf and custom software developed internally
and by third parties for its production systems. The Company has completed its
assessment of and begun implementing a plan for the programming and testing of
its internally developed software to make it Year 2000 compliant. In addition,
the Company has identified which of its third party production systems it
believes have date-sensitive applications to determine where Year 2000 issues
may exist. The Company has contacted the third-party suppliers and has received
responses from most of those suppliers, including the suppliers that the Company
considers critical. The Company has received patches for the systems that are
not Year 2000 compliant and has installed approximately half of them. The
Company intends to complete the installation of such patches by the end of the
second quarter of 1999.

21
<PAGE>

customers and perform critical business operations and could require the Company
to process information manually or limit access to data.

Potential Volatility of Stock Price

Prior to the Company's initial public offering in June 1998, there was no
public market for the Company's Common Stock. Since completion of the Company's
initial public offering, average daily trading volume has been relatively low.
There can be no assurance that an active public market for the Company's Common
Stock will develop or be sustained. 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.

Control by Existing Stockholders; Effects of Certain Anti-Takeover Provisions

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, beneficially own
approximately 52.1% of the outstanding shares of Common Stock of the Company.
Accordingly, these stockholders are 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.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the areas of changes in United States interest rates.
These exposures are directly related to its normal operating and funding
activities. Historically, the Company has not used derivative instruments or
engaged in hedging activities.

22
<PAGE>

Interest Rate Risk

The Company is in the process of renewing its line of credit for which the
related interest rate will be variable based on the lender's prime rate or the
Libor rate, and, therefore, will be affected by changes in market interest
rates. At March 31, 1999, no amounts were outstanding under the Company's line
of credit. In addition, the Company invests excess funds in high-grade bonds and
commercial paper on which the Company monitors interest rates frequently and as
the investments mature. The Company does not believe that reasonably possible
near-term changes in interest rates will result in a material effect on future
earnings, fair values or cash flows of the Company.

23
<PAGE>

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings.

None.

Item 2 - Changes in Securities and Use of Proceeds.

On June 29, 1998, the Company consummated its initial public offering (the
"Offering") of its common stock, par value $.001 per share (the "Common Stock").
The estimated net offering proceeds to the Company after deducting the foregoing
discounts, commissions, fees and expenses were $25,988,400, of which $3,510,400
relates to the exercise of the underwriters' over-allotment option on July 22,
1998. Through March 31, 1999, the proceeds of the offering have been applied as
follows:

Aggregate offering price $28,980,000

Direct and indirect payment to others for:
Underwriting discounts and commissions 2,028,600
Other offering expenses 963,000
Construction of building and facilities 300,000
Capital lease payment to receive discount 2,878,500
Repayment of indebtedness 4,610,000

None of such payments were direct or indirect payments to directors,
officers, general partners of the Company or their associates or to persons
owning 10% or more of any class of equity securities of the Company or to
affiliates of the Company. The Company expects to use its remaining net proceeds
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. The Company invested approximately $15 million of the offering proceeds
in an investment portfolio consisting mostly of high-grade bonds and commercial
paper.

Item 3 - Defaults on Senior Securities.

None.

Item 4 - Submission of Matters to a Vote of Security Holders.

None.

Item 5 - Other Information.

None.

Item 6 - Exhibits and Reports on Form 8-K.

(a) Exhibits.

None.

(b) Reports on Form 8-K.

None.

24
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SCC Communications Corp.
(Registrant)

May 7, 1999 \s\ George K. Heinrichs
- ---------------- ------------------------------
Date George K. Heinrichs, President
and Chief Executive Officer

May 7, 1999 \s\ Nancy K. Hamilton
- ---------------- ------------------------------
Date Nancy K. Hamilton, Chief
Financial Officer

<PAGE>

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