SCC COMMUNICATIONS CORP, 10-Q, 2000-05-15

SCC COMMUNICATIONS CORP
10-Q, 2000-05-15
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, 2000

[ ] 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 28, 2000, there were 11,230,045 shares of the Registrant's Common
Stock outstanding.

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<PAGE>

INDEX

<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION

<S> <C>
Item 1 - Financial Statements......................................................... 2
Balance Sheets as of March 31, 2000 (Unaudited) and December 31, 1999................ 2
Statements of Operations for the three-months ended March 31, 2000 and 1999
(Unaudited)......................................................................... 4

Statements of Cash Flows for the three-months ended March 31, 2000 and 1999
(Unaudited)......................................................................... 5

Notes to Financial Statements (Unaudited)............................................ 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 8

Item 2A - Factors That May Affect Future Results...................................... 13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk................... 20

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings............................................................ 21
Item 2 - Changes in Securities and Use of Proceeds.................................... 21
Item 3 - Defaults on Senior Securities................................................ 22
Item 4 - Submission of Matters to a Vote of Security Holders.......................... 22
Item 5 - Other Information............................................................ 22
Item 6 - Exhibits and Reports on Form 8-K............................................. 22
Signatures............................................................................ 23
</TABLE>
<PAGE>

SCC COMMUNICATIONS CORP.

BALANCE SHEETS
(dollars in thousands)

March 31, December 31,
2000 1999
-------- --------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 11,477 $ 8,354
Short-term investments.................................... 9,940 12,165
Accounts receivable, net of allowance for doubtful
accounts of approximately $58 in 2000 and 1999........... 1,706 2,255
Unbilled revenue.......................................... 1,227 846
Prepaids and other........................................ 590 548
Deferred income taxes -- current portion.................. 653 653
-------- --------
Total current assets.................................... 25,593 24,821
-------- --------

PROPERTY AND EQUIPMENT, at cost:
Computer hardware and equipment........................... 25,812 25,411
Furniture and fixtures.................................... 1,006 933
Leasehold improvements.................................... 941 915
-------- --------
27,759 27,259
Less -- Accumulated depreciation.......................... (16,949) (15,753)
-------- --------
Total property and equipment............................ 10,810 11,506
-------- --------

OTHER ASSETS............................................... 78 86
LONG-TERM INVESTMENTS...................................... 994 993

DEFERRED INCOME TAXES -- NONCURRENT........................ 3,423 3,423

SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $646 and $575 in 2000 and 1999,
respectively............................................. 983 951
-------- --------
$ 41,881 $ 41,780
======== ========
</TABLE>

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

2
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SCC COMMUNICATIONS CORP.

BALANCE SHEETS
(dollars in thousands)

March 31, December 31,
2000 1999
--------- ------------
(Unaudited)

LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.................................................................. $ 535 $ 752
Payroll-related accruals.......................................................... 874 786
Other accrued liabilities......................................................... 1,641 1,641
Property and other tax liabilities................................................ 772 792
Current portion of capital lease obligations...................................... 2,140 1,971
Deferred contract revenue......................................................... 1,345 865
-------- --------
Total current liabilities................................................. 7,307 6,807

LONG-TERM DEBT:
Capital lease obligations, net of current portion................................. 1,926 2,038
-------- --------
Total liabilities......................................................... 9,233 8,845
-------- --------

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; 11,152,236 and 11,104,111 shares issued
in 2000 and 1999, respectively................................................... 11 11
Additional paid-in capital........................................................ 44,053 43,925
Stock subscriptions receivable.................................................... (33) (33)
Accumulated deficit............................................................... (11,383) (10,968)
-------- --------
Total stockholders' equity................................................ 32,648 32,935
-------- --------
$ 41,881 $ 41,780
======== ========
</TABLE>

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

3
<PAGE>

SCC COMMUNICATIONS CORP.

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

Three Months Ended March 31,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUE:
ILEC Business Unit..................................... $ 6,658 $ 6,564
CLEC Business Unit..................................... 1,699 598
Wireless Business Unit................................. 681 454
Direct Business Unit................................... 287 --
----------- -----------
Total revenue................................... 9,325 7,616
COSTS AND EXPENSES:
ILEC Business Unit..................................... 3,877 3,605
CLEC Business Unit..................................... 559 408
Wireless Business Unit................................. 1,049 936
Direct Business Unit................................... 942 360
Sales and marketing.................................... 1,352 1,280
General and administrative............................. 1,543 1,203
Research and development............................... 629 415
----------- -----------
Total costs and expenses........................ 9,951 8,207
----------- -----------
LOSS FROM OPERATIONS..................................... (626) (591)
OTHER INCOME (EXPENSE):
Interest and other income.............................. 303 273
Interest and other expense............................. (92) (115)
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES...... (415) (433)
BENEFIT FOR INCOME TAXES................................. -- 176
----------- -----------
LOSS FROM CONTINUING OPERATIONS.......................... (415) (257)
LOSS FROM OPERATIONS OF DISCONTINUED DIVISION, net of tax -- (109)
----------- -----------
NET LOSS................................................. $ (415) $ (366)
=========== ===========

NET LOSS PER SHARE (Note 2):
Basic and diluted...................................... $ (0.04) $ (0.03)
=========== ===========

SHARES USED IN COMPUTING NET LOSS PER SHARE (Note 2):
Basic and diluted...................................... 11,130,338 10,890,422
=========== ===========
</TABLE>

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

4
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SCC COMMUNICATIONS CORP.

STATEMENTS OF CASH FLOWS
(dollars in thousands)
Unaudited

<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $ (415) $ (366)
Adjustments to reconcile net loss to net cash provided by
Operating activities --
Amortization and depreciation......................................... 1,273 1,253
Accretion of and interest accrued on investments...................... (85) (146)
Deferred income tax benefit........................................... -- (242)
Change in --
Accounts receivable................................................. 549 2,317
Unbilled revenue.................................................... (381) 209
Prepaids and other.................................................. (34) (40)
Accounts payable.................................................... (217) (161)
Accrued liabilities................................................. 68 (580)
Deferred contract revenue........................................... 480 (895)
------- -------
Net cash provided by operating activities......................... 1,238 1,349
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment................................... (506) (678)
Purchase of investments................................................. (3,941) (2,402)
Sale of investments..................................................... 6,250 --
Software development costs.............................................. (103) (205)
------- -------
Net cash provided by (used in) investing activities............... 1,700 (3,285)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations......................... (479) (471)
Proceeds from equipment lease........................................... 536 --
Exercise of stock options............................................... 128 8
Payments received from stock subscriptions.............................. -- 18
------- -------
Net cash provided by (used in) financing activities............... 185 (445)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... 3,123 (2,381)
CASH AND CASH EQUIVALENTS, beginning of period............................ 8,354 10,266
------- -------
CASH AND CASH EQUIVALENTS, end of period.................................. $11,477 $ 7,885
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest................................ $ 92 $ 116
======= =======
Cash paid during the period for taxes................................... $ 118 $ 151
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Property acquired with capital leases.................................. $ -- $ 754
======= =======
</TABLE>

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

5
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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, 2000 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
December 31, 2000. These financial statements should be read in conjunction
with the financial statements and notes thereto for the year ended December 31,
1999, 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 907,788 and 1,187,006 for the three months ended March 31, 2000 and
1999, respectively.

NOTE 3 - REPORTABLE SEGMENTS

The Company has five reportable segments, or "business units": Incumbent
Local Exchange Carrier ("ILEC"), Competitive Local Exchange Carrier ("CLEC"),
Wireless, Direct, and Corporate. The Company measures its reportable business
units based on revenue and costs directly related to each business unit.
Substantially all of the Company's customers are in the United States. The
Company's business units are segmented based on the type of customer each
business unit serves. The ILEC, CLEC and Wireless business units address ILEC,
CLEC and wireless carriers, respectively. The Direct business unit addresses
sales, either directly or indirectly, to state and local government entities.
The Corporate business unit captures costs that are not directly related to a
specific Business Unit. These segments are managed separately because the
nature of and resources used for each segment is unique.

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

6
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(dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
ILEC CLEC WIRELESS DIRECT CORPORATE
March 31, March 31, March 31, March 31, March 31,
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------

Revenue $6,658 $6,564 $1,699 $ 598 $ 681 $ 454 $ 287 $ -- $ -- $ --

Direct costs 3,877 3,605 559 408 1,049 936 942 360 -- --
Sales and marketing 351 464 122 106 108 151 314 50 457 509
General and
administrative -- -- -- -- -- -- -- -- 1,543 1,203
Research and
development 121 93 86 30 139 39 185 253 98 --
------ ------ ------ ----- ------- ------- --------- ------- -------- ---------
Total 4,349 4,162 767 544 1,296 1,126 1,441 663 2,098 1,712

Operating income
(loss) 2,309 2,402 932 54 (615) (672) (1,154) (663) (2,098) (1,712)
Other income, net -- -- -- -- -- -- -- -- 211 158
------ ------ ------ ----- ------- ------- --------- ------- --------- ---------
Income (loss) before
income taxes 2,309 2,402 932 54 (615) (672) (1,154) (663) (1,887) (1,554)

Income tax benefit -- -- -- -- -- -- -- -- -- 176
------ ------ ------ ----- ------- ------- --------- ------- -------- ---------

Net income (loss)
from continuing
operations before
extraordinary item 2,309 2,402 932 54 (615) (672) (1,154) (663) (1,887) (1,378)

Loss from operations
of discontinued
division, net of tax -- -- -- -- -- -- -- -- -- (109)
------ ------ ------ ----- ------- ------- --------- ------- -------- ---------
Net income (loss) $2,309 $ 2,402 $ 932 $ 54 $ (615) $ (672) $ (1,154) $ (663) $ (1,887) $ (1,487)
====== ======= ====== ===== ======= ======= ======== ======= ======== ========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
March 31,
-------------
<S> <C> <C>
2000 1999
---- ----

Revenue $ 9,325 $ 7,616

Direct costs 6,427 5,309
Sales and marketing 1,352 1,280
General and
administrative 1,543 1,203
Research and
development 629 415
------- -------
Total 9,951 8,207

Operating income
(loss) (626) (591)

Other income, net 211 158
------- -------
Income (loss) before
income taxes (415) (433)

Income tax benefit -- 176
------- -------

Net income (loss)
from continuing
operations before
extraordinary item (415) (257)

Loss from operations
of discontinued
division, net of tax -- (109)
------- -------
Net income (loss) $ (415) $ (366)
======= =======
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

. Information for 1999 has been reclassified to reflect the realignment of
various business units. Licenses and implementation services are now
included in the ILEC Business Unit. ILEC, CLEC, Wireless and Direct and
Wireless were formerly included in Data Management Services.

NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 133 and No. 137

In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. It requires
an entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
In June 1999, the FASB issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133 - An amendment of FASB Statement
No. 133." SFAS No. 137 delays the effective date of SFAS No. 133 to financial
quarters and financial years beginning after June 15, 2000. The Comapny does
not typically enter into arrangements that would fall under the scope of
Statement No. 133 and thus, management believes that Statement No. 133 will not
significantly affect its financial condition and results of operations.

Staff Accounting Bulletin No. 101

In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, "Revenue Recognition." SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in financial statements. The Company is required to ascertain the accounting
impact of SAB 101 no later than the Company's second fiscal quarter of 2000. The
Company is continuing to review the application of SAB 101 to its financial
statements and in particular the extent to which it will require the Company to
change its revenue recognition policies. If the Company determines that its
revenue recognition policies must change to be in compliance with SAB 101, the
Company will need to restate its first quarter 2000 operating results to reflect
a cumulative effect of change in accounting principle as if SAB 101 had been
implemented on January 1, 2000. The Company is currently reviewing SAB 101 to
determine if a change in its revenue recognition policies will be necessary for
it to comply with SAB 101 or, if a change is required, the extent to which that
change might have a material affect on its reported operating results.

7
<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. OUR 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
"ITEM 2A. FACTORS THAT MAY AFFECT FUTURE RESULTS" BELOW.

Overview

We are the leading provider of 9-1-1 data management services to ILECs, CLECs
and wireless carriers in the United States. We manage 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. We were
incorporated in July 1979 in the State of Colorado under the name Systems
Concepts of Colorado, Inc. and were reincorporated in September 1993 in the
State of Delaware under the name SCC Communications Corp. Prior to 1995,
substantially all of our revenue was derived from the sale of software licenses
and related implementation services to ILECs and public safety agencies. During
1994, we began investing in infrastructure to provide our 9-1-1 OSS solution to
telephone operating companies seeking to outsource such operations. We signed
our first 9-1-1 data management services contract in August 1994 and continue to
add to the number of records under management. We began to recognize revenue
from wireless carriers in the third quarter of 1997, and continue to increase
the number of live wireless subscribers managed. In addition, we signed a
contract with the General Services Commission of the State of Texas in November
1998, representing the first time that a state agency has endeavored to
centralize 9-1-1 OSS and data management services with a neutral third party.

Each of our Business Units provides an outsourcing solution for its respective
customer bases' 9-1-1 data management. Revenue generally includes a non-
recurring initial fee for the design and implementation of the solution,
conversion of the customer's data to our 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. Our contracts also separately allow for 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. Related costs are
expensed as they are incurred. We may also offer our customers enhanced products
or services, for which revenue is recognized in the period that the work is
performed. Our revenue breaks down as a percent of total revenue as follows:

Three Months Ended March 31
----------------------------
2000 1999
---- ----
ILEC Business Unit 72% 86%
CLEC Business Unit 18% 8%
Wireless Business Unit 7% 6%
Direct Business Unit 3% 0%

During the three months ended March 31, 2000 and 1999, we recognized
approximately 71% and 84%, respectively, of total revenue from Ameritech,
BellSouth Inc. and U S WEST, each of which accounted for greater than 10% of our
total revenue in such periods.

As of December 31, 1999, we had net operating loss carryforwards of $11.2
million available to offset future net income for U.S. federal income tax
purposes. Since we expect to incur losses in the near term related to
development costs for new commercial products, future taxable income may not be
sufficient to realize additional deferred tax assets that will be created by the
projected net operating losses. Consequently, we presently expect our statement
of operations will not reflect tax benefits for projected operating losses to be
incurred during 2000.

In June 1997, we sold the net assets of our Premise Products Division. The
sale of our Premise Products Division resulted in a net loss from the sale of
$2.0 million. Net loss from operations of this division, net of tax, totaled
$109,000 in the first quarter of 1999, and is presented in our financial
statements as loss from operations of discontinued division. This loss resulted
from final closeout of unassigned contracts and the transition of customers to
the company that acquired this division.

Historically, substantially all of our revenue has been generated from sales
to customers in the United States. However, we have generated revenue in Canada
and intend to enter additional international markets, which may

8
<PAGE>

require significant management attention and financial resources. International
sales are subject to a variety of risks. See "Item 2A. Factors That May Affect
Future Results."

Our quarterly and annual operating results have varied significantly in the
past. The variation in operating results will likely continue and may intensify.
We believe that period to period comparisons of results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Our 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,
our ability to hire, train and retain qualified personnel, increased
competition, changes in operating expenses, changes in our strategy, the
financial performance of our customers, changes in telecommunications
legislation and regulations that may affect the competitive environment for our
services, and general economic factors. Our contracts for 9-1-1 data management
services generally include a separate non-recurring fee for the design and
implementation of services, conversion of the customer's data to our systems,
hiring and training of personnel, and other costs required to prepare for the
processing of customer data, and therefore, we may recognize significantly
increased revenue for a short period of time upon commencing services for a new
customer.

Our expense levels are based in significant part on our expectations regarding
future revenue. Our revenue is difficult to forecast because the market for our
services is evolving rapidly and the length of our 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, we 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 our business, financial
condition and results of operations. We expect to incur expenses of
approximately $10 million in 2000 for research, development and marketing to
expand our product offerings. As of March 31, 2000 we have invested
approximately $300,000. In addition, we hired additional employees in 1999 and
expect to continue hiring additional employees during 2000. We also began
leasing office space in Texas in December 1999, from which we will perform some
of our operations. We cannot assure you that we can report operating profits or
that our investments in research and development will generate future revenue.
Failure to do so could have a material adverse effect on our business, financial
condition and results of operations.

We are currently reviewing the potential impact of adopting Staff Accounting
Bulletin No. 101, "Revenue Recognition." SAB 101 provides interpretive guidance
on the recognition, presentation and disclosure of revenue in our financial
statements. If we determine that our revenue recognition policies will need to
be changed to be in compliance with SAB 101, we will be required to restate our
first quarter 2000 results to reflect the cumulative change in accounting
principle as if SAB 101 had been implemented on January 1, 2000. See "Recently
Issued Accounting Pronouncements."

Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999

Total Company

Total revenue increased 22%, from $7.6 million in the first quarter of 1999 to
$9.3 million in the first quarter of 2000. Total direct costs increased 21%,
from $5.3 million in the first quarter of 1999 to $6.4 million in the first
quarter of 2000, representing 70% and 69% of total revenue, respectively.

ILEC Business Unit

ILEC revenue increased 1%, from $6.6 million in the first quarter of 1999 to
$6.7 million in the first quarter of 2000, representing 86% and 72% of total
revenue for such periods, respectively. The recurring portion of ILEC revenue
increased 10% from the first quarter of 1999 to the same period in 2000. ILEC
revenue increased due to an increase in the number of records under management,
offset by a decrease in non-recurring fees for enhanced services. ILEC direct
costs increased 8%, from $3.6 million in the first quarter of 1999 to $3.9
million in the first quarter of 2000, representing 55% and 58% of ILEC revenue
for such periods, respectively. Costs increased due to the hiring of additional
systems operations staff and increased systems maintenance costs to accommodate
growth. ILEC sales and marketing expenses decreased 24%, from $464,000 in the
first quarter of 1999 to $351,000 in the first quarter of 2000, representing 7%
and 5% of ILEC revenue for such periods, respectively. The decrease in sales
and marketing costs is due to a reduction in product management staff in late
1999 and early 2000. ILEC research and development costs increased 30%, from
$93,000 in the first quarter of 1999 to $121,000 in the first quarter of 2000,
representing 1% and 2% of ILEC revenue for such periods, respectively. ILEC
research and development costs increased due to the development of new features
related to our core operating systems.

9
<PAGE>

CLEC Business Unit

CLEC revenue increased 184%, from $598,000 in the first quarter of 1999 to
$1.7 million in the first quarter of 2000, representing 8% and 18% of total
revenue for such periods, respectively. CLEC revenue increased due to an
increase in the number of records under management for new and existing
customers and additional non-recurring revenue recognized on new customers
signed in late 1999 and in the first quarter of 2000. CLEC direct costs
increased 37%, from $408,000 in the first quarter of 1999 to $559,000 in the
first quarter of 2000, representing 68% and 33% of CLEC revenue for such
periods, respectively. The dollar increase in CLEC costs is due to the hiring
of additional CLEC operations staff to assist with the continued growth in
records under management. The percent decrease in CLEC costs is due mainly to
volume efficiencies gained by the growth in records managed. CLEC sales and
marketing expenses increased 15%, from $106,000 in the first quarter of 1999 to
$122,000 in the first quarter of 2000, representing 18% and 7% of CLEC revenue
for such periods, respectively. The increase in CLEC sales and marketing
expenses is due to the hiring of additional sales personnel to accommodate the
growth in the CLEC Business Unit and increased direct marketing campaign costs.
CLEC research and development costs increased 187%, from $30,000 in the first
quarter of 1999 to $86,000 in the first quarter of 2000, representing 5% of CLEC
revenue for both periods. CLEC research and development costs increased due to
the development of Local Number Portability (LNP) software applications.

Wireless Business Unit

Wireless revenue increased 50%, from $454,000 in the first quarter of 1999 to
$681,000 in the first quarter of 2000, representing 6% and 7% of total revenue
for such periods, respectively. Wireless revenue increased due to an increase
in the number of records under management and one-time fees related to system
capacity expansion to accommodate wireless carriers. Wireless costs increased
12%, from $936,000 in the first quarter of 1999 to $1.1 million in the first
quarter of 2000, representing 206% and 154% of Wireless revenue for such
periods, respectively. Costs increased due to the hiring of additional systems
operations staff and increased systems maintenance and telephone line costs to
accommodate growth. Wireless direct cost as a percentage of Wireless revenue
decreased as the increase in subscribers managed grows to cover more of the
infrastructure costs. Wireless sales and marketing expenses decreased 28%,
from $151,000 in the first quarter of 1999 to $108,000 in the first quarter of
2000, representing 33% and 16% of Wireless revenue for such periods,
respectively. The decrease in Wireless sales and marketing expenses is primarily
due to a reduction in sales travel costs. Wireless research and development
costs increased 256% from $39,000 in the first quarter of 1999 to $139,000 in
the first quarter of 2000, representing 9% and 20% of Wireless revenue for such
periods, respectively. Wireless research and development costs increased due to
the development of improvements to our general wireless database application in
2000.

Direct Business Unit

Direct revenue increased from $0 in the first quarter of 1999 to $287,000 in
the first quarter of 2000, representing 0% and 3% of total revenue for such
periods, respectively. Direct revenue increased due to the transition of
records in the State of Texas beginning in 2000. Direct costs increased 161%,
from $360,000 in the first quarter of 1999 to $942,000 in the first quarter of
2000. Costs increased due to the additional personnel and system infrastructure
needed to implement the State of Texas contract and to manage records that have
been transitioned. In addition, we opened an office in Texas to supplement our
operations in late 1999. Direct sales and marketing expenses increased 528%
from $50,000 in the first quarter of 1999 to $314,000 in the first quarter of
2000. The increase in sales and marketing costs is due to the hiring of
additional sales personnel to support the State of Texas contract and the new
EWE (Early Warning & Evacuation) product. Direct research and development costs
decreased 27%, from $253,000 in the first quarter of 1999 to $185,000 in the
first quarter of 2000. Direct research and development costs decreased due to
the completion of the first EWE product release in 1999.

Corporate Business Unit

Corporate general and administrative expenses increased 28%, from $1.2 million
in the first quarter of 1999 to $1.5 million in the first quarter of 2000,
representing 16% and 17% of total revenue for such period, respectively.
Corporate general and administrative expenses increased due to the addition of
corporate legal personnel and outside legal fees to address legislative and
regulatory issues, the hiring of additional human resources staff to accommodate
headcount growth in 2000, and corporate consulting costs. Corporate sales and
marketing expenses decreased 10%, from $509,000 in the first quarter of 1999 to
$457,000 in the first quarter of 2000, representing 7% and 5% in total revenue
for such periods, respectively. Corporate sales and marketing expenses
decreased due to the reallocation of certain resources from marketing-related
activities to legislative and regulatory affairs activities, reduction in
headcount for general corporate product marketing and a reduction in tradeshow
and marketing consulting fees.

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Corporate research and development of $98,000 in the first quarter of 2000
represents labor and associated travel and consulting costs related to the
research and development of new product offerings.

Net other income increased 34%, from $158,000 in the first quarter of 1999 to
$211,000 in the first quarter of 2000, representing 2% of total revenue for both
periods. Other income increased due to interest income earned from investments
and the reduction in interest expense related to the repayment of certain
capital leases.

The benefit for income taxes decreased 100%, from $176,000 in the first
quarter of 1999 to zero in the first quarter of 2000. We expect to incur losses
in the near term related to development costs for new commercial products and
future taxable income may not be sufficient to realize additional deferred tax
assets that will be created by the projected net operating losses.
Consequently, we presently expect our statement of operations will not reflect
tax benefits for projected operating losses to be incurred during 2000.

The loss from operations of discontinued division, net of tax, for the first
quarter of 1999 represents the costs related to the final closeout of unassigned
contracts related to our Premise Products division, which was sold in 1997, and
the transition of customers to the company that acquired this division.

Liquidity and Capital Resources

Since our inception we have funded our operations with cash provided by
operations, supplemented by equity and debt financing and leases on capital
equipment. As of March 31, 2000, we had $22.4 million in cash and cash
equivalents and investments in marketable securities.

We borrowed approximately $536,000 under our capital lease line secured by
capital equipment in the three months ended March 31, 2000, and repaid $479,000
and $471,000 of capital lease obligations during the three months ended March
31, 2000 and 1999, respectively. Additionally, we used $609,000 and $883,000
during the three months ended March 31, 2000 and 1999, respectively, for the
purchase of capital assets and software development. We anticipate that our
level of spending for capital expenditures in the first quarter of 2000 will
continue, although we currently have no material commitments for capital
expenditures.

We are in the process of renewing our line of credit with a bank equal to $2.0
million, which is available to meet operating needs. The interest rate on
amounts borrowed under the line of credit is 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 be collateralized by certain of our assets. As of March 31, 2000, no
borrowings were outstanding on the line of credit.

We also have a $2.0 million capital lease line with a bank, which is available
to meet capital acquisition needs that arise from normal business operations.
The interest rate on capital leased under the lease line is equal to the bank's
cost of funds at the time of each lease. Separate lease schedules are signed
from time to time. Each lease schedule is collateralized by the assets that are
being leased. Each lease has its own termination date, typically 36 months. As
of March 31, 2000, $1.1 million was outstanding on the capital lease line.

We expect to incur research, development and marketing expenses of up to $10
million to expand our product offerings. This may require up to $13 million in
cash due to the capital expenditure requirements. During the three months ended
March 31, 2000, we incurred expense of approximately $300,000 on this
initiative. We may increase our capital lease line to finance this initiative.

We believe that our current cash and investments, cash generated from
operations and lease financing will be sufficient to fund our anticipated
working capital needs, research and development initiative, capital expenditures
and any potential future acquisitions through at least the next twelve months,
although we may seek to raise additional capital to further expand our markets.
In the event our plans or assumptions change or prove to be inaccurate, or if we
consummate any unplanned acquisitions of businesses or assets, we 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

Statement of Financial Accounting Standards No. 133 and No. 137

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instruments as well as other hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measures those instruments at fair value. In June 1999,
the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 - An amendment of FASB Statement No. 133." SFAS
No. 137 delays the effective date of SFAS No. 133 to financial quarters and
financial years beginning after June 15, 2000. We do not typically enter into
arrangements that would fall under the scope of Statement No. 133 and thus,
management believes that Statement No. 133 will not significantly affect our
financial condition and results of operations.

Staff Accounting Bulletin No. 101

In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, "Revenue Recognition." SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in financial statements. We are required to ascertain the accounting impact of
SAB 101 by our second fiscal quarter of 2000. We are continuing to review the
application of SAB 101 to our financial statements and in particular the extent
to which it will require us to change our revenue recognition policies. If we
determine that our revenue recognition policies must change to be in compliance
with SAB 101, we will need to restate our first quarter 2000 operating results
to reflect a cumulative effect of change in accounting principle as if SAB 101
had been implemented on January 1, 2000. We are currently reviewing SAB 101 to
determine if a change in our revenue recognition policies will be necessary for
us to comply with SAB 101 or, if a change is required, the extent to which that
change might have a material affect on our reported operating results.

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ITEM 2A. FACTORS THAT MAY AFFECT FUTURE RESULTS

Our operating results fluctuate, and our stock price may be volatile as a
result.

Our quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. We experienced a profit in
1998, but had a net loss of approximately $1.3 million in 1999 and a net loss of
$415,000 for the three months ended March 31, 2000. Therefore, you should not
rely on period-to-period comparisons of revenue or operating results as an
indication of our future performance. If our quarterly revenue or operating
results fall below the expectations of the investors or securities analysts, the
price of our common stock could fall substantially.

Our operating results may continue to fluctuate as a result of many factors,
including:

. our planned investments in research, development and marketing to expand our
service offerings;
. the length of our sales cycle;
. the size, timing and duration of significant customer contracts;
. the number of subscriber records under our management;
. we cannot predict the rate of adoption of wireless services by PSAPs;
. the timing of introduction of new products and services by us and our
competitors; and
. changes in telecommunications legislation and regulations.

Our contracts generally include a separate non-recurring fee for the design
and implementation of the 9-1-1 solution, conversion of the customer's data to
our systems, hiring and training of personnel, and other costs required to
prepare for the processing of customer data. Therefore, we may recognize
significantly increased revenue for a short period of time upon commencing
services for a new customer.

Our sales cycle is relatively long and difficult to predict.

Our potential customers typically commit significant resources to the
technical evaluation of our services and products, and we typically spend
substantial time, effort and money providing education regarding our 9-1-1
solution. The evaluation process often results in an extensive and lengthy sales
cycle, typically ranging between one month and two years, making it difficult
for us 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 our
business, financial condition and results of operations and cause our operating
results to vary significantly from quarter to quarter.

We depend on large contracts from a limited number of significant customers, and
the loss of any of those contracts would adversely affect our operating results.

We historically have depended on, and expect to continue to depend on, large
contracts from a limited number of significant customers. We provide our
services to a range of customers, including ILECs, CLECs, wireless carriers and
state and local government agencies. We also license our software and provide 9-
1-1 data clearinghouse services directly and indirectly to over 750 independent
telephone companies. During the three months ended March 31, 2000, we recognized
approximately 71% of total revenue from continuing operations from Ameritech,
BellSouth Inc. and U S WEST, each of which accounted for greater than 10% of our
revenue. During the three months ended March 31, 1999, we recognized
approximately 84% of total revenue from Ameritech, BellSouth Inc. and U S WEST,
each of which accounted for greater than 10% of our revenue. No other customers
accounted for more than 10% of our total revenue during those periods. We
believe that these customers will continue to represent a substantial portion of
our total revenue in the future. Certain of our contracts with these customers
allow them to cancel their contracts with us in the event of changes in
regulatory, legal, labor or business conditions. Our contracts with these
customers expire through 2005. The loss of any of these customers could have a
material adverse effect on our business, financial condition and results of
operations.

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Two of our significant customers, Ameritech and U S WEST, have entered into
merger agreements with companies that are not our customers. We cannot predict
what effect, if any, these acquisitions will have on us and we cannot assure you
that these acquisitions or any future consolidation in the telecommunications
industry will not have a material adverse effect on our business, financial
condition and results of operation.

None of our major customers has any obligation to purchase additional products
or additional services beyond those currently contemplated by their existing
contracts. Consequently, our failure to develop relationships with significant
new customers could have a material adverse effect on the rate of growth in our
revenue, if any. If we fail to monitor and maintain adequately the quality or
our product and services, expand the breadth of our services and products,
advance our technology or continue to price our services and products
competitively, one or more of our major customers may select alternative
providers or seek to develop services and products internally.

If we lose the services of George Heinrichs or other key personnel, our business
will suffer.

Our future success depends in large part on the continued service of our key
management, sales, product development and operational personnel, including
George Heinrichs, our President and Chief Executive Officer. We have not
entered into employment agreements with Mr. Heinrichs or any of our other key
personnel. Losing the services of one or more of these individuals might hinder
our ability to achieve our business objectives.

We must hire and retain qualified personnel in a competitive labor market.

Our success in large part depends on our ability to continue to attract,
motivate and retain highly qualified employees, including technical, managerial
and sales and marketing personnel. We expect to continue to expand the number of
employees engaged in all aspects of our business. Competition in the recruitment
of highly qualified personnel in the software and telecommunications services
industry is intense and has become particularly difficult in the Denver
metropolitan area. Our inability to hire and retain qualified personnel or the
loss of the services of key personnel could have a material adverse effect upon
our current business, development efforts and future business prospects.

Our business will be adversely affected if Public Safety Answering Points do not
demand E9-1-1 services at the rate we expect.

We expect the percentage of our 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 FCC issued Report and Order 94-102
on June 12, 1996 and subsequent orders in 1999 and 2000 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, tools to deliver the call to the appropriate PSAP and send the caller's
telephone number and location of the receiving cell site with the call. Phase
II requires wireless carriers to locate a 9-1-1 caller more accurately, subject
to FCC guidelines. However, under the FCC rules, wireless carriers are not
required to provide wireless 9-1-1 service without a PSAP request. To provide
an additional impetus for wireless 9-1-1 implementation, the Federal Wireless
Communications and Public Safety Act was signed into law in October 1999. This
legislation provides liability protection to wireless carriers that is in parity
with wireline carriers' liability protection. However, there is no assurance
that the legislation will have the desired effect of accelerating wireless E9-1-
1 deployment. The FCC continues to work with the wireless industry to facilitate
wireless E9-1-1 implementation. The FCC has outlined a phased implementation
schedule for Phase II. We believe that the technological challenges confronting
wireless carriers attempting to comply with Report and Order 94-102 will
encourage them to outsource their E9-1-1 services. If many wireless carriers
decide not to outsource such services, our business, financial condition and
results of operations could be materially and adversely affected. Due to cost
recovery, liability and operational issues, the number of PSAPs demanding
services complying with Report and Order 94-102 from wireless carriers has been
less than we anticipated. If the rate of adoption by PSAPs continues to be slow
because of cost recovery, liability or operational issues, extensions granted by
the FCC or other reasons, we will continue to experience delays in receiving
revenue under our current wireless contracts that, because we have already
incurred costs in expectation of such revenue, could have a material adverse
effect on our business, financial condition and results of operations.

Our market is characterized by rapid technological change, and we could lose our
competitive position and fail to grow our business if we do not develop and
offer new products and services.

The market for our services is characterized by rapid technological change,
frequent new product or service introductions, evolving industry standards and
changing customer needs. We launched our Emergency Warning and Evacuation, or
EWE, product, in the fourth quarter of 1999, which allows PSAPs to call all
numbers in a given area

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and warn citizens of imminent danger. We intend to offer other new products
in the future. 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. We expect other vendors to regularly 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 us. As a result,
the life cycles of our services and products are difficult to estimate. We
believe that our future success will depend in large part on our ability to
maintain and enhance our current service and product offerings, to develop and
regularly introduce new services and products that will keep pace with
technological advances and satisfy evolving customer requirements, and to
achieve acceptable levels of sales of our new services and products through our
current customers that resell our solutions to their subscribers. However, we
cannot assure you that we will not experience difficulties that could delay or
prevent the successful development, introduction or marketing of such new
services and products or that our 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 us or our
competitors may cause customers to defer the purchase of our existing services
and products. Our 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 our 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. We cannot assure you that we will successfully develop, introduce
or manage the transition to new services and products. Furthermore, services and
products such as those offered by us may contain undetected or unresolved errors
when they are first introduced or as new versions are released. We cannot assure
you that, despite extensive testing by us, 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 our reputation or increased service and warranty costs, any
of which could have a material adverse effect on our 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
our services and products, which would materially adversely affect our customer
relationships as well.

In addition, we plan to introduce transaction-based services and software
products to industries different from those we have traditionally supported. We
cannot assure you that we will be successful in developing and marketing these
new services and products or that our current or new services and products will
adequately meet the demands of our 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, we cannot assure
you that we will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these services and
products. If we are 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, our business,
financial condition and results of operations could be materially adversely
affected.

Substantially all of our revenue is derived from our 9-1-1 data management
solution, and our operating results will depend upon our ability to continue to
sell this solution.

We currently derive substantially all of our revenue from the provisioning of
our 9-1-1 data management solution to ILECs, CLECs, wireless carriers and state
and local government agencies. Accordingly, we are susceptible to adverse trends
affecting this market segment, such as government regulation, technological
obsolescence and the entry of new competition. We expect that this market will
continue to account for substantially all of our revenue in the near future. As
a result, our future success will depend on our ability to continue to sell our
9-1-1 solution, maintain and increase our market share by providing other value-
added services to the market, and successfully adapt our technology and services
to other related markets. We cannot assure you that markets for our existing
services and products will continue to expand or that we will be successful in
our efforts to penetrate new markets.

Our operating results could be adversely affected if we underestimate costs on
our fixed price contracts.

During the three months ended March 31, 2000 and the year ended December 31,
1999, approximately 89% and 88%, respectively, of our revenue was generated on a
fixed price per subscriber basis. We generally enter into contracts with two- to
ten-year terms. We generally receive a fixed monthly fee based upon the number
of subscribers and upon the services selected by the customer. Therefore, our
failure to estimate accurately the resources required for a fixed price per
subscriber contract could have a material adverse effect on our business,
financial condition and results of operations.

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We could incur substantial costs from product liability claims relating to our
software.

Because our services and products are utilized by our customers to provide
critical 9-1-1 services, the provisioning of services and licensing of software
by us may entail the risk of product liability and related claims. Our
agreements with our customers typically require us to indemnify our customers
for our own acts of negligence. Product liability insurance is expensive and may
not be available in the future. We cannot be sure that we will be able to
maintain or obtain insurance coverage at acceptable costs or in a sufficient
amount, that our insurer will not disclaim coverage as to a future claim or that
a product liability claim would not otherwise adversely affect our business,
operating results or financial condition.

Our success depends upon the continued growth of wireline and wireless
telecommunications markets.

We provide our 9-1-1 data management 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, we cannot assure you that such trends will continue
at similar rates or that we will be able to market and sell effectively our
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, we
may be required to offer alternative pricing arrangements, which may provide for
deferred payments. However, we cannot assure you that we will be able to develop
such relationships or that new carriers that become our customers will gain
market acceptance for their telecommunications services. If we permit customers
that do not have adequate financial resources to pay us for our services on a
deferred basis, we ultimately may be unable to collect payments for such
services. Because we historically have depended on a limited number of long-term
customer relationships, our failure to develop relationships with, make sales
to, or collect payments from new telecommunications carriers, or the failure of
our customers to compete effectively in the telecommunications market, could
have a material adverse effect on our 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 our business,
financial condition and results of operations.

Our business is subject to government regulation and other legal uncertainties,
which could adversely affect our operations.

The market for our services and products has been influenced by the adoption
of regulations under the Telecommunications Act, the duties imposed on ILECs by
the Telecommunications Act to open the local telephone markets to competition,
and the requirements imposed on wireless carriers by Report and Order 94-102.
Therefore, any changes to such legal requirements, the adoption of new
regulations by federal or state regulatory authorities under the
Telecommunications Act or any legal challenges to the Telecommunications Act
could have a material adverse effect upon the market for our services and
products. Although the Telecommunications Act was designed to expand competition
in the telecommunications industry, the realization of the objectives of the
Telecommunications Act is subject to many uncertainties, including judicial and
administrative proceedings designed to define rights and obligations pursuant to
the Telecommunications Act, actions or inactions by ILECs and other carriers
that affect the pace at which changes contemplated by the Telecommunications Act
occur, resolution of questions concerning which parties will finance such
changes, and other regulatory, economic and political factors.

We are aware of litigation challenging the validity of the Telecommunications
Act and the local telephone competition rules adopted by the FCC to implement
the Telecommunications 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. The FCC adopted new unbundling requirements on
September 15, 1999 to comply with the decision of the Supreme Court. The final
impact of the application of these rules is not yet known. Such litigation may
serve to delay full implementation of the Telecommunications Act, which could
adversely affect demand for our services and products. Any delays in the
deadlines imposed by the Telecommunications Act, the FCC, or any invalidation,
repeal or modification in the requirements imposed by the Act or the FCC could
have a material adverse effect on our business, financial condition and results
of operations. Moreover, customers may require, or we otherwise may deem it
necessary or advisable, that we modify our services and products to address
actual or anticipated changes in the regulatory environment. Any other delays in
implementation of the Telecommunications Act, or other regulatory changes, could
materially adversely affect our business, financial condition and results of
operations.

We signed a contract to provide 9-1-1 data management services to the General
Services Commission of the State of Texas. This contract was assigned by the
General Services Commission to the Texas Commission for State Emergency
Communications. As this is the first time that a state entity has endeavored to
centralize 9-1-1 OSS and

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data management services with a neutral third party, federal and state
regulations governing 9-1-1 service provisioning, which have typically applied
to local exchange services providers, are being challenged and clarified for the
first time. In accordance with Texas law, and on the recommendation of the Texas
Public Utilities Commission, we have been granted a Service Provider Certificate
of Operating Authority in the State of Texas. We successfully completed the
field trial required under the contract in July 1999 and are in the process of
marketing our services to the state's public safety agencies and implementing
services to those who opt into the contract. Prior to commencement of the field
trial, SBC Communications, which historically has been responsible for the
provisioning of 9-1-1 OSS, data transport and data management services in Texas,
challenged whether we have a right to access SBC Communications' source systems
and 9-1-1 database, whether they must allow other parties to interconnect to
their selective routing switches and whether they are obligated by law to
unbundle components of their network functionality. An interim agreement among
the involved parties was reached in March 1999 that allowed us to perform the
field trial to test the interfacing technology solutions in the Houston area. As
part of the interim agreement, the legal challenges and all related proceedings
were placed in abeyance to permit the parties to proceed with the field trial.
Those matters are still held in abeyance.

As required by the agreement, SBC Communications filed wireline and wireless
tariffs regarding its portion of the unbundled services. SBC Communications
failed to unbundle its tariffs in a manner that allowed the cost of our solution
to be competitively neutral to the grandfathered SBC Communications' solution,
and the tariffs were contested by the Texas Commission for State Emergency
Communications, us and various other parties. The outcome of the tariff filing
is uncertain, although the parties to the tariff matters have executed a second
interim agreement for both wireline and wireless services, which sets the rates
to be charged to public safety agencies who wish to procure our solution until a
final tariff is determined. We believe that these legal and technological issues
and their associated cost implications are likely to be readdressed by the PUC,
which is expected to decide on these matters in 2000. Until such resolution,
this interim tariff agreement will govern those rates and charges. We believe
that the services that we will provide under our 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 us and
the Texas Commission for State Emergency Communications. However, we cannot
assure you that the PUC will decide in favor of us and the Texas Commission for
State Emergency Communications or that SBC Communications 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 a PUC decision that favors us or the Texas Commission for State Emergency
Communications. If the PUC does not decide in our favor or places contingencies
on the manner in which the services are provided, we may be prohibited from
delivering our services to the State of Texas, may expend significant resources
to appeal the PUC's decision or may expend additional costs to redesign the
methodology by which the services are provided. In addition, if SBC
Communications exercises its right to appeal, we may be required to spend
significant resources to defend our right to provide our services in the State
of Texas. The tariff proceedings have been held in abeyance pending resolution
of Project 19203, a rulemaking initiated by the PUC to establish the roles and
responsibilities of 9-1-1 service providers in Texas. We cannot assure you that
Project 19203 will be resolved in our favor or that the final rule will not
affect the manner in which we deliver our services in Texas.

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. We generally receive a monthly fee per subscriber from our customers
for management of 9-1-1 data records, allowing the carrier to match our 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 our business, financial condition and results of operations.

Our operating results could be adversely affected by any interruption of our
services because of system failure.

Our operations depend on our ability to maintain our computer and
telecommunications equipment and systems in effective working order, and to
protect our systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. Although all of our mission-
critical systems and equipment are designed with built-in redundancy and
security, we cannot assure you that a fire, natural disaster, power loss,
telecommunications failure or similar event would not result in an interruption
of our services. Any damage, failure or delay that causes interruptions in our
operations could have a material adverse effect on our business, financial
condition and results of operations. Furthermore, any future addition or
expansion of our facilities to increase capacity could increase our exposure to
damage from fire, natural disaster, power loss, telecommunications failure or
similar events. We cannot assure you that our property and business interruption
insurance will be adequate to compensate us for any losses that may occur in the
event of a system failure or that such insurance will continue to be available
to us at all or, if available, that it will be available on commercially
reasonable terms.

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Our failure to manage our growth effectively could adversely affect our ability
to increase our revenue and could increase our operating expenses.

We have expanded our operations rapidly over the past several years, placing
significant demands on our administrative, operational and financial personnel
and systems. Additional expansion by us may further strain our management,
operational, financial reporting, and other systems and resources. We cannot
assure you that our systems, resources, procedures, controls and existing space
will be adequate to support such expansion of our operations. Our future
operating results will depend substantially on the ability of our officers and
key employees to manage changing business conditions and to implement and
improve our management, operational, financial control and other reporting
systems. In addition, our future operating results depend on our 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 our development of products and services
could have a material adverse effect on our business, financial condition and
results of operations. Continued expansion will require our management to:

. enhance management information and reporting systems;
. standardize implementation methodologies of our operations;
. further develop our infrastructure; and
. continue to maintain customer satisfaction.

If we are unable to respond to and manage changing business conditions, the
quality of our products and services, our ability to retain key personnel and
our business, financial condition and results of operation could be materially
adversely affected.

The market for 9-1-1 data management solutions is highly competitive, and we
could lose our market position if we fail to compete effectively.

The market for 9-1-1 data management solutions is intensely competitive and we
expect competition to increase in the future. We believe that the principal
competitive factors affecting the market for 9-1-1 data management services
include flexibility, reliability, manageability, technical features, wireless
support, performance, ease of use, price, scope of product offerings, and
customer service and support. We cannot assure you that we can maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, support service, technical and
other competitive resources.

Our 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 featuring portions of
our comprehensive set of E9-1-1 solutions; and
. larger companies that are either in the process of entering our market or
have the potential to develop products and services that compete with our
service offerings.

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 our 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 our solutions. The widespread inclusion of the
functionality of our service offerings as standard features of other
telecommunications software or hardware could render our services obsolete and
unmarketable, particularly if the quality of such functionality were comparable
to that of our 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 our services, we cannot assure you that a significant
number of customers would not elect to accept more limited functionality in lieu
of purchasing additional products or services.

Many of our competitors have longer operating histories, greater name
recognition, access to larger customer bases and significantly greater
financial, technical and marketing resources than we do. 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 us. If these companies were to introduce
products or services that effectively compete with our service offerings, they
could be in a position to substantially

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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.

We may be unable to protect our proprietary technology rights.

Our success and our ability to compete depends significantly upon our
proprietary rights. We rely primarily on a combination of copyright, trademark
and trade secret laws, as well as confidentiality procedures and contractual
restrictions to establish and protect our proprietary rights. We cannot assure
you that such measures will be adequate to protect our proprietary rights.
Further, we may be subject to additional risks as we enter into transactions in
foreign countries where intellectual property laws are not well developed or are
difficult to enforce. Legal protections of our proprietary rights may be
ineffective in such countries. Litigation to defend and enforce our intellectual
property rights could result in substantial costs and diversion of resources,
and could have a material adverse effect on our business, financial condition
and results of operations, regardless of the final outcome of such litigation.
Despite our efforts to safeguard and maintain our proprietary rights, we cannot
assure you that we will be successful in doing so or that the steps taken by us
in this regard will be adequate to deter misappropriation or independent third-
party development of our technology, or to prevent an unauthorized third party
from copying or otherwise obtaining and using our technology. There also can be
no assurance that others will not independently develop similar technologies or
duplicate any technology developed by us. Any such events could have a material
adverse effect on our business, financial condition and results of operations.

Claims by other companies that our products infringe their proprietary rights
could adversely affect our financial condition.

As the number of entrants to our markets increases and the functionality of
our services and products increases and overlaps with the products and services
of other companies, we may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. In certain of
our customer agreements, we agree to indemnify our customers for any expenses or
liabilities resulting from claimed infringements of patents, trademarks or
copyrights of third parties. In some instances, the amount of the indemnities
may be greater than the revenue we received from the customer. Any claims or
litigation, with or without merit, could be time consuming, result in costly
litigation or require us to enter into royalty or licensing arrangements. Any
royalty or licensing arrangements, if required, may not be available on terms
acceptable to us, if at all, and could have a material adverse effect on our
business, financial condition and results of operations.

We face additional risks from any international operations we undertake.

Although substantially all of our revenue is generated from sales to customers
in the United States, we have generated revenue in Canada and intend 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. We cannot assure you that these factors will not have
a material adverse effect on our future international sales and, consequently,
on our 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 our business, financial condition and results of
operations.

Acquisitions could cause financial or operational problems.

As part of our overall strategy, we regularly evaluate opportunities to enter
into strategic acquisitions, including potential business combinations and
significant investments in complementary companies, assets, products and
technologies. Acquisitions involve a number of operating risks that could
materially adversely affect our 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 we
lack experience. Because management has limited experience in acquisitions and
we have no experience in integrating acquired companies or technologies into our
operations, we cannot assure you that we will be able to manage one or more
acquisitions successfully, or that we will be able to integrate the operations,
products or personnel gained through any such acquisitions without a material
adverse effect on our business, financial condition and results of operations.

19
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
in the areas of changes in United States interest rates. These exposures are
directly related to our normal operating and funding activities. Historically
and as of March 31, 2000, we have not used derivative instruments or engaged in
hedging activities.

Interest Rate Risk

The interest payable on our line of credit is variable based on the lender's
prime rate or the one, two, or three month Libor rate plus 2.25% per annum, and,
therefore, is affected by changes in market interest rates. At March 31, 2000,
no amounts were outstanding under our line of credit, however, we may borrow up
to 80% of qualified accounts receivable, not to exceed $2,000,000. Rates on our
capital lease line are also dependent on interest rates in effect at the time
the lease line is drawn upon. In addition, we invest excess funds in high-grade
treasury bonds and commercial paper on which we monitor interest rates
frequently and as the investments mature. We do not believe that reasonably
possible near-term changes in interest rates will result in a material effect on
our future earnings, fair values or cash flows.

20
<PAGE>

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings.

We are not a party to any litigation that we believe could have a material
adverse effect on us or our business. Federal and state regulations governing 9-
1-1 service provisioning have typically applied to local exchange services
providers. We plan to provide 9-1-1 services directly to state and local
governments rather than local exchange carriers in certain areas. Since this is
the first time that such services have been provided in this manner, the
regulations are being challenged and clarified for the first time. We believe
that the services we provide are within the scope of the existing regulations
and that any challenges to the regulations will be decided in our favor.
However, if the regulations are challenged and are not decided in our favor, we
may be prohibited from expanding our services to certain markets.

Item 2 - Changes in Securities and Use of Proceeds.

On June 29, 1998, we consummated our initial public offering of our common
stock. The estimated net offering proceeds to us 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, 2000, 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 our directors,
officers, general partners or their associates or to persons owning 10% or more
of any class of our equity securities or to our affiliates. We expect to use up
to $13 million of our remaining net proceeds in 2000 for research, development
and marketing to expand our product offerings, as well as for 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 ours. We invested approximately $15 million of the offering
proceeds in an investment portfolio consisting mostly of high-grade bonds and
commercial paper.

21
<PAGE>

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.

Exhibit 27 Financial Data Schedule

(b) Reports on Form 8-K.

None.

22
<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 11, 2000 /s/ George K. Heinrichs
_____________ ___________________________
Date George K. Heinrichs, President
and Chief Executive Officer

May 11, 2000 /s/ Carol Nelson
_____________ ____________________________
Date Carol Nelson, Chief
Financial Officer

<PAGE>
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