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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[_] 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
BOULDER, COLORADO 80301
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number,
Including Area Code: (303) 581-5600
Securities registered pursuant
to Section 12 (b) of the Act: None
Securities registered pursuant to
Section 12 (g) of the Act: Common stock, par value $.001 per share
(Title of Class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Registration S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the common stock on
February 29, 2000 as reported on the Nasdaq National Market, was approximately
$48,985,000. Shares of common stock held by each officer and director and by
each person who owns 5% or more of the outstanding shares of common stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. As of February 29, 2000, the Registrant had outstanding
11,151,151 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive proxy statement for its 2000 Annual Meeting of
Stockholders is incorporated by reference in Part III of this Form 10-K to the
extent stated herein.
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SCC COMMUNICATIONS CORP.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
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Item 1. Business.................................................................... 3
Item 2. Properties.................................................................. 22
Item 3. Legal Proceedings........................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders......................... 22
PART II
Item 5a. Market for Registrant's Common Equity and Related Stockholder Matters....... 22
Item 5b. Changes in Securities and Use of Proceeds................................... 23
Item 6. Selected Financial Data..................................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................... 25
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.................. 31
Item 8. Financial Statements and Supplementary Data................................. 32
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure.......................................................... 48
PART III
Item 10. Directors and Executive Officers of Registrant.............................. 48
Item 11. Executive Compensation...................................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 48
Item 13. Certain Relationships and Related Transactions.............................. 49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 49
Signatures............................................................................ 51
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ITEM 1. BUSINESS
Overview
SCC Communications Corp. is the leading provider of 9-1-1 operations
support systems, or OSS, services to telecommunications carriers. Our customers
include incumbent local exchange carriers, or ILECs, competitive local exchange
carriers, or CLECs, wireless carriers, and state and local governments in North
America. We have redefined the market for 9-1-1 OSS by creating the first and
largest 9-1-1 service bureau, with over 85 million subscriber data records under
management throughout North America.
We manage the data that enable a 9-1-1 call to be routed to the appropriate
public safety answering point, or PSAP, with accurate and timely information
about the caller's identification, call-back number and location. Each day, we
receive subscriber and coverage updates from our telecommunications carrier
customers, as well as public safety jurisdiction boundary changes from PSAPs.
Records identified as potentially having problems are separated automatically
and reviewed and analyzed by our data integrity team. The clean data are then
inserted into the 9-1-1 system, so that the call may be routed to the
appropriate PSAP with the correct location and call-back number. This complex
and detailed process allows our customers to comply with regulatory mandates and
to provide additional value-added services.
Our solution is comprehensive and cost-effective, as well as highly
reliable and secure. Our customers may outsource virtually all of their 9-1-1
data management operations, including system activation, routine data
administration, event transaction processing and performance management. Our
customers include Ameritech, AT&T Wireless Services, BellSouth, MCI Worldcom,
Sprint PCS, the General Services Commission of the State of Texas and U S WEST.
In addition, we license our 9-1-1 OSS software to carriers that wish to manage
their 9-1-1 data systems in-house.
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.
Industry Background
Historically, telecommunications carriers in the United States operated in
a highly regulated environment, with both local and long-distance service
providers operating as monopolies. The desire for long-distance competition in
the 1970s led the government to force the breakup of AT&T in 1984. AT&T split
into a competitive long-distance company and seven independent Regional Bell
Operating Companies, or RBOCs, which offered local service and local access to
long-distance service. In the early 1990's, these RBOCs and other ILECs realized
that regulatory changes would increase competition in their local exchange
markets. To remain competitive, these RBOCs and ILECs began to make their
operations more efficient and to develop new products that would make their
service offerings more attractive to their customers and generate new revenue.
The Telecommunications Act, adopted in 1996, significantly increased competition
and encouraged CLECs, long-distance carriers, wireless carriers and other
communications providers to enter local exchange markets. The Telecommunications
Act also required each ILEC to modify its systems to allow for fair and equal
access by competitive carriers. Competition caused telecommunications carriers
to differentiate their service offerings, improve service quality, decrease time
to market, introduce new services and increase cost efficiencies. In addition to
updating their systems to remain competitive, some carriers began to outsource
selected functions, such as 9-1-1 OSS services.
Previously, carriers used closed and proprietary systems to operate their
networks. These systems were often mainframe-based and were not compatible with
new software and technologies, such as new advanced switching capabilities and
other technologies that would allow the carrier to offer value-added services.
Today, carriers need more advanced systems to improve the reliability of their
networks, offer more advanced services and comply with regulatory requirements
of the Telecommunications Act. New technologies emerged that improve the
carriers' ability to provide telecommunications services, manage operations,
take and bill customer orders and plan and engineer their systems. 9-1-1 is
another essential OSS service that requires close coordination of data and
network elements, because changes in customer service information usually
require changes in the data needed for 9-1-1 service.
9-1-1 service includes routing emergency calls to the appropriate PSAP
responsible for dispatching police, fire and other emergency services. Most
jurisdictions in the United States now provide enhanced 9-1-1 service, or
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E9-1-1, which provides the caller's telephone number and location to the call
taker at the PSAP. When a caller dials 9-1-1, the call is routed through the
network and queries the 9-1-1 data servers. The 9-1-1 data servers attach the
caller's location and telephone number to the call and identify the PSAP to
which the call should be routed. The information in the data servers must be
current and accurate for 9-1-1 calls to receive prompt response. Each time a
telephone subscriber modifies its data, such as an added telephone line or
change of address, the data must be changed in the 9-1-1 database. Changes in
PSAP boundaries, such as the addition of a street or a change in the name of a
street, also must be changed in the 9-1-1 database. If these changes to the 9-1-
1 database are not made accurately and in a timely manner, the response to a
9-1-1 call could be affected. The complicated and critical process of 9-1-1
service delivery requires coordination of data from multiple sources, review and
processing of the data, resolution of data errors and conflicts, and insertion
of the data into network and mission-critical data servers.
Today, local exchange carriers must provide 9-1-1 service. According to the
National Emergency Number Association, nearly 93% of the current wireline
telephone subscribers in the United States are covered by some type of 9-1-1
service and approximately 95% of that coverage is E9-1-1 service.
The growth of the wireless telecommunications industry introduces
significant new challenges to 9-1-1 service delivery. Since a wireless caller's
location is constantly changing, the location of the caller is not easily
identified. The Cellular Telephone Information Association estimates that
approximately 98,000 9-1-1 calls are made each day from wireless phones. We
estimate that approximately 25% of wireless callers cannot identify the location
from where they are calling. Most wireless networks must be modified to route
calls accurately to the appropriate PSAP and to provide location information.
Recognizing the public safety need for improved wireless E9-1-1 services,
the Federal Communications Commission, or FCC, issued Report and Order 94-102 on
June 12, 1996. Report and Order 94-102 includes two phases for adoption of E9-1-
1 technology by wireless carriers. Phase I requires wireless carriers to provide
the PSAP receiving the call with the 9-1-1 caller's telephone number and the
location of the cell sector from where the call was made. Phase I allows the
call to be routed to the PSAP that is near the caller and would be assigned to
handle that area. Since April 1998, wireless carriers have been required to
comply with the Phase I mandate within six months after a PSAP request. Except
in states which have passed specific cost recovery legislation, carrier cost
recovery is no longer a prerequisite to their obligation to provide Phase I
services. Implementation of Phase I services has been slowed by a number of
issues, including carrier cost recovery, liability protection and technology
issues.
Phase II will require wireless carriers to locate wireless 9-1-1 callers
within location parameters specified in the FCC guidelines. Under the FCC rules,
wireless carriers must declare by October 2000 whether they will use technology
in the wireless telephone handset or a network-based solution to locate wireless
9-1-1 callers. The FCC rules include a timeline for implementation that requires
Phase II service to be substantially available to requesting PSAPs by October 1,
2001. In addition to the requirements of Report and Order 94-102, wireless
carriers are motivated to implement wireless 9-1-1 services because of their
desire to improve emergency services and the increasing pressure from public
safety agencies. The technology required for Phase II service can also be used
by wireless carriers to provide other value-added location services to their
customers, including location-based traffic reporting, emergency roadside
assistance or other services that require the location of the caller.
New technologies have expanded the demand for public safety services. Phase
II of Report and Order 94-102 requires that 9-1-1 service be provided to
wireless phone users. The expansion of the internet into homes and wireless
internet devices introduces new vehicles to reach the public and the potential
for increased public safety. Telematics devices, which are communication devices
in automobiles that can be used for location-based services such as traffic
reporting and emergency roadside assistance, are also entering the market at a
rapid pace. The Strategis Group estimates that emergency roadside assistance
will be a $2.9 billion market by 2004. In addition, telephony products and
services based on the internet protocol are becoming common elements of
telecommunications infrastructure. Each of these technologies introduces public
safety challenges that are not addressed in a significant manner today.
Today carriers and other service providers, including state and local
government entities, may deliver 9-1-1 data management solutions using their own
proprietary solutions, by licensing the software and managing the delivery of
public safety products and services themselves, or by outsourcing their 9-1-1
OSS needs.
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Our Solution
We redefined the U.S. market for 9-1-1 OSS by creating the first and
largest 9-1-1 service bureau, with over 85 million subscriber data records under
management throughout North America. We offer a cost-effective outsourcing
solution that covers virtually all aspects of 9-1-1 data management. Our 9-1-1
data management services include system activation, routine data administration,
event transaction processing and performance management. Our services are also
extremely secure and reliable and can interface with each carrier's proprietary
or open systems. In addition, we license our 9-1-1 OSS software to carriers that
wish to control the delivery of 9-1-1 services in-house. We believe that our
solution offers the following principal features and benefits:
Focus on Data Integrity. The accuracy of subscriber records that
identify and provide caller location information is an essential element of
9-1-1 service. Our systems conduct more than 60 logical tests to prepare
data for use in 9-1-1 operations. Our data integrity team researches and
resolves transactions identified by the system as requiring further
analysis. Our data integrity team also creates and maintains boundary
information. Live 9-1-1 calls access our database to route the call to the
proper PSAP and to provide timely and accurate subscriber location
information to the 9-1-1 call taker.
Survivability and Reliability. We process a large volume of mission-
critical transactions using highly reliable and scalable operating
platforms. We have more than 20 servers that are built with multiple layers
of redundancy and are located in diverse locations to ensure continued
service. The 9-1-1 network that connects our systems to our customers is
monitored continuously. Since we launched our 9-1-1 data management
services in 1994, our systems for 9-1-1 service delivery have provided
uninterrupted service to our customers. We also have a comprehensive
disaster recovery program for our central data administration operations.
Leading-Edge Technology. We believe we are the technological leader in
the 9-1-1 data management services industry based on our advances in the
areas of systems architecture, spatial data management and advanced network
integration. Our products and services are updated regularly to comply with
regulatory and industry requirements, as well as to implement innovative
solutions. Our innovations include advanced intelligent call routing
support, local number portability data transaction support, technologies
that improve 9-1-1 availability, a transaction-based map maintenance
system, a spatial coordinate-based E9-1-1 management system and large-scale
internet applications for E9-1-1. We were the first to demonstrate data
management support for wireless systems that complied with both Phase I and
Phase II of Report and Order 94-102. We also have developed systems for the
use of spatial coordinate data for use in managing and routing non-address
specific 9-1-1 calls.
Flexible Business Model. PSAPs generally pay carriers a fixed rate
based on the number of subscribers located in a particular PSAP's
jurisdiction. Our outsourcing solution allows customers to avoid costly
capital expenditures and fix their expenses for 9-1-1 services on a per
subscriber basis. Additionally, we will customize their service packages
both to meet the needs of their subscribers and to comply with regulatory
mandates. Alternatively, carriers may elect to license 9-1-1 OSS software
directly from us and manage the 9-1-1 data themselves.
Neutral Solution Providing Equal Access. Since we are not a
telecommunications carrier, we are able to act as a neutral third party to
carriers who must access their competitors' systems to provide 9-1-1
service. Where state or local governments choose to control 9-1-1 data
management, we can provide equal access to all carriers in the region. As
local exchange competition increases, a neutral solution that provides
equal access becomes increasingly important.
Our Strategy
Our objective is to be the leading national provider of 9-1-1 OSS and other
complementary and synergistic services. We focus on developing innovative and
automated solutions to provide customers with a comprehensive system for
managing large amounts of dynamic subscriber information. Key elements of our
strategy are to:
Maintain and Extend Our Leadership Position in the Wireline 9-1-1 Data
Management Market. We currently manage more than 85 million wireline
subscriber data records out of an estimated 167 million total wireline
telephone subscriber records in the United States. We intend to maintain
and extend our market leadership in the wireline 9-1-1 OSS systems market
by adding new service and license customers, increasing the number
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of subscriber data records under management, enhancing our existing 9-1-1
services and supporting the evolving telecommunications infrastructure.
Capitalize on Emerging Wireless Carrier Opportunities. We have
contracts to provide Phase I wireless 9-1-1 services to 11 wireless
carriers which have approximately 27 million subscribers. As of December
31, 1999, we have 726,000 live subscribers on our wireless 9-1-1 services.
We believe there is a significant opportunity to increase our wireless 9-1-
1 services by implementing a larger portion of the subscribers we have
under contract and signing contracts with more wireless carriers. We also
are positioning to provide Phase II wireless services. The significant
growth in wireless telephone users, the FCC mandate and the increased
demand for enhanced wireless service offerings present opportunities for
growth in our wireless 9-1-1 services.
Maintain and Extend Leadership Position in National Clearinghouse
Services. We have 25 contracts to provide 9-1-1 clearinghouse services to
CLECs. Under our TelConnect services, we process updates to our CLEC
customers' 9-1-1 databases, prepare the data to conform to the ILEC's
network requirements and insert the data into the appropriate ILEC's 9-1-1
system. Our TelConnect services allow CLECs to grow their subscriber bases
while minimizing their investment in OSS technology infrastructure and
personnel. CLECs receive the benefit of our 9-1-1 service delivery
expertise and relationships with PSAPs and others necessary to provide 9-1-
1 services. We plan to build upon our position as a neutral, carrier-
independent service provider by working cooperatively with newly emerging
dial tone providers, including CLECs, fixed-position wireless carriers and
cable television carriers, to increase our sales of 9-1-1 clearinghouse
services. In addition to our base clearinghouse solution, we provide other
value-added products and services, such as local number portability
solutions. Local number portability refers to the transfer of a telephone
number from one carrier to another when a telephone subscriber chooses to
change its local exchange carrier. We recently initiated our alliance
program to partner with OSS providers that provide complementary products,
such as billing and customer care solutions, to CLECs. We and our alliance
partners will jointly market our products and services.
Provide Additional Services. ILECs, CLECs and wireless carriers, as
well as state governmental entities, all seek to apply emerging
technologies in response to competitive pressures and regulatory mandates.
For example, we have developed off-switch routing capabilities for carriers
that have deployed the advanced intelligent network and created local
number portability transaction sets in response to the local number
portability mandates of the Telecommunications Act. By using the experience
and economies of scale we have obtained in managing the 9-1-1 OSS
infrastructure for multiple carriers, we are well-positioned to continue to
develop and offer flexible, scalable solutions that allow carriers to
support cost-effectively new technological developments and regulatory
mandates.
Develop Applications for New Commercial Products. By leveraging our
core competency of managing dynamic subscriber location information, we
believe that we are well-positioned to expand into additional markets
outside of traditional 9-1-1 OSS services. The rapid introduction of the
Internet and wireless devices into the market presents public safety
challenges that are not addressed in a significant manner today. In
addition, the use of internet protocol-based telephony is rapidly expanding
and increasing the complexity of public safety services. We believe we can
leverage our wireline and wireless dynamic call routing, large volume
transaction processing and mission critical networks to provide solutions
for these emerging technologies. Continuing change in the
telecommunications market introduces substantial opportunities for growth
for us. In response, we plan to deliver new products and services to the
dynamic markets that we serve. During 2000, we will announce specific
products and strategic partnerships designed to significantly expand our
market opportunities. We estimate that we will make a special investment
and incur expenses of approximately $10 million toward research,
development and marketing of these new products and services.
Expand International Operations. We believe that a significant
opportunity to generate additional long-term revenue may be created by
partnering with established telecommunications carriers and systems
integration firms to design, implement, maintain and operate effective,
reliable emergency communications systems in countries other than the
United States and Canada. We intend to expand internationally to address
the needs of this market for telecommunications emergency services.
There can be no assurances that we will achieve our objective or any of the
key elements of our strategy. See "Risk Factors."
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Our Services and Products
Our 9-1-1 OSS solution enables a 9-1-1 call to be routed to the appropriate
PSAP along with accurate and timely information about the caller's
identification, call-back number and location. We receive daily service order
updates, which are changes to subscriber data such as address changes, telephone
number changes and other changes to subscriber data that can affect 9-1-1 call
processing. We also receive updates to boundary and routing data needed to route
9-1-1 calls to the appropriate PSAP. We screen this data for accuracy and
analyze and resolve data discrepancies. Certain discrepancies are referred back
to the customer for resolution. Screened data is inserted into the 9-1-1
databases. When a 9-1-1 call occurs, it is routed to the 9-1-1 voice switch,
which queries our databases. Our databases route the call to the appropriate
PSAP and simultaneously send the caller's location and call back number with the
call. The data that are delivered allow PSAPs to dispatch personnel and
equipment to the emergency.
Base Services
Our base services consist of the following:
System Preparation and Administration. To begin providing 9-1-1 data
management services to our customers, we must collect, organize, review and
analyze the data necessary to prepare the systems. Data preparation
includes collecting information on PSAP jurisdictional boundaries,
performing a full inventory of addresses located in an area and loading the
subscriber information into our systems. To improve data quality and,
consequently, 9-1-1 service, our systems run the data through over 60
automated integrity checks. We employ over 100 data integrity analysts who
resolve any data discrepancies and update the databases based on
information received from customers and related sources.
Routine Data Administration. We receive and automatically process
service order updates from telecommunications carriers on a regular basis
to maintain current data in the 9-1-1 databases. Service order updates
include address changes, telephone number changes and other changes that
may affect 9-1-1 call processing. We usually receive between 150,000 and
210,000 service orders per day. We also frequently receive boundary updates
from PSAPs reflecting changes in jurisdiction boundaries for PSAP
responses. Boundary updates may include the addition of streets, changes in
street names, or other changes that may affect the proper routing of a 9-1-
1 call. When we receive a service order update or jurisdiction change, the
information received is checked for complete and appropriate data, and then
distributed throughout our network of geographically dispersed servers.
Event Transaction Processing. When a caller dials 9-1-1 in an area
served by us, the call is routed through one of our data servers with a
request for information. The server rapidly responds and delivers the
caller's location and call-back number to the 9-1-1 dispatcher at the PSAP.
Our data servers also control the switch to route the call to the
appropriate PSAP.
Performance Management. We monitor and report the performance of our
service operations by measuring response time, systems availability, data
accuracy and error resolution intervals, among other performance
measurements. Using these measurements as a basis, we design and implement
programs to improve our services continuously.
Mapping Services. Traditional mapping services do not provide updates
to geographic information often enough to ensure the accuracy of data in an
emergency situation. Thus we maintain a team of geographic information
system experts, who work with carriers and public safety officials to
document, review and analyze call routing boundaries and specific address
information. The mapping services department uses advanced tools to improve
existing mapping information with new and more detailed geographical
information for optimal management of 9-1-1 call records. The mapping
services department also assists in system preparation and quality control
programs to ensure that geographical information is current.
TelConnect Services (previously Clearinghouse Services). Our
TelConnect services provide a single point of contact to process and format
9-1-1 data for CLECs and independent telephone companies. CLECs and
independent telephone companies may be located in multiple communities that
have diverse requirements for delivery of 9-1-1 information. We have the
processes and systems in place to deliver the data in all communities
throughout the United States. CLECs and independent telephone companies
electronically transmit subscriber
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information to SCC. We then reformat the data to comply with the
destination community's local standards, test for detectable errors and
deliver the data to the 9-1-1 data systems that serve that community. The
receiving data systems may be operated by us or by a carrier that does not
use our services or products. Our TelConnect services also include
measurement of certain performance criteria, which allow us and our
customers to continually improve service. To provide added value to
customers, we launched LNP 2000, a program designed to assist customers
with complications in 9-1-1 processing caused by local number portability.
Local number portability resulted from competition in local exchange
service and refers to the need to transfer, or port, a telephone number
from one telephone carrier to another where the telephone subscriber
chooses to change carriers. We also launched our Alliance Program, in which
we are partnering with OSS providers that provide complementary service
offerings to CLECs and independent telephone companies, such as billing and
customer care software.
Enhanced Services of SCC National Data Services Center
We offer enhancements to our 9-1-1 OSS services that provide additional
features and functions. These services are targeted to specific markets and are
sold either directly by us or through our customers.
9-1-1Net. 9-1-1Net is an online tool that allows instant communication and
makes important information available to our customers and PSAPs. Through 9-1-
1Net, users can view live address routing rules, send address updates, review
inbound call load, error statistics and Automatic Location Information, or ALI,
discrepancy reports, and receive new product updates.
Private Switch ALI. Private telephone switches, or PBXs, create a challenge
for E9-1-1 operations. When a call is placed from within a PBX, the location of
the PBX itself is generally displayed to a 9-1-1 dispatcher at a PSAP rather
than the location of the specific PBX extension. In the case of large facilities
such as campuses, hotels and hospitals, emergency response personnel may not
have adequate information to determine the location of the caller quickly.
Private Switch ALI allows PBX or CENTREX system managers to create and transmit
appropriate data records that identify a caller's extension location within a
facility for 9-1-1 response.
9-1-1Connect. We provide wireless carriers with 9-1-1 services similar to
those provided to wireline customers and that fully comply with the FCC's Phase
I mandate. Once a wireless carrier receives an activation request from a PSAP,
our program managers develop a plan with the wireless carrier to activate
service. This plan includes development of ILEC network interconnections for
both data and voice specific to the local wireless network configuration and
interface requirements. The program managers develop graphic coverage area maps
that are superimposed on current maps of public safety agency boundaries.
Routing recommendations can then be made and coordinated with the appropriate
PSAP. The result is that 9-1-1 calls are routed to the appropriate PSAP with the
callback number and cell location of the caller. We also are developing a
solution to address the FCC's Phase II mandate.
Emergency Warning and Evacuation System. We are currently selling our
Emergency Warning and Evacuation System, or EWE, to initiate outbound calls to
selected areas in the event of potential disasters such as floods, hazardous
materials incidents, industrial accidents and localized weather events. EWE uses
spatially classified location information and up-to-date telephone subscriber
data to deliver voice, fax and TDD warnings to geographically targeted
populations.
Subscriber ALI. We are preparing to offer Subscriber ALI, which is designed
to allow subscribers to supply personal information in their 9-1-1 records such
as medical conditions, allergies, disabilities or languages of choice. When a
subscriber calls 9-1-1, data previously provided by the subscriber will be
displayed along with traditional 9-1-1 information to the PSAP. This information
may help emergency response personnel handle an incident with greater safety and
more effectiveness. Subscriber ALI also allows for notification of a designated
relative, security team, remote property owner or other contact person of a 9-1-
1 call made from the subscriber's telephone. For example, parents away from home
would be notified when a child or babysitter calls 9-1-1 from the home
telephone.
License Products
We offer 9-1-1 software to ILECs that elect to manage their own 9-1-1 data
records rather than outsourcing such operations to SCC. We also provide custom
software development services to customers with specific or local requirements
through our engineering department. The engineering department develops,
customizes and enhances
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the software using a structured approach to perform requirements analysis,
software development and quality assurance.
Commercial Services
We believe we can leverage our 9-1-1 expertise to provide other public
safety-related products and services. The new technologies entering the market,
such as wireless location services, the Internet, wireless internet devices,
telematics in automobiles and internet protocol-based telephony, present public
safety challenges that are not comprehensively addressed today. We believe our
expertise in managing large volumes of data, managing geographic call boundaries
and operating mission-critical networks puts SCC in a unique position to address
this evolving market. We will invest and incur expenses of approximately $10
million in 2000 for research, development and implementation of products and
services to address these emerging markets.
Service and Product Pricing
Revenue included in data management services generally includes a non-
recurring fee for the design and implementation of the 9-1-1 OSS, 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. Data management services
revenue also may include revenue from enhanced products and services, which may
include non-recurring and/or monthly fees which are separately stated in the
contract and are recognized in the period in which the services are performed.
We typically enter into two- to ten-year agreements. We also license software,
and provide hardware and professional services necessary for the management of
9-1-1 services to our customers in exchange for license and implementation
services fees and maintenance fees.
Service Infrastructure and Architecture
Our operations include central data administration and distributed systems
for real-time 9-1-1 transaction support. Based on large scale, fault-tolerant
Compaq Tandem computers, our major processing systems are configured to provide
high reliability. They are also designed to provide significant capacity for
continued growth using the Tandem NSK scalable message-based architecture.
Our central data administration systems, located in Boulder, Colorado, are
a key element of our 9-1-1 OSS, and are used to perform routine data maintenance
and to support new customer transition and initial system loads. We also
maintain a central monitoring facility in Boulder that operates 24 hours a day,
seven days a week.
Data networks interconnecting our facility and systems in Boulder, SCC
operated remote systems and SCC client systems are based on traditional T-1 and
frame relay links provided by separate, redundant carriers. To improve
reliability and survivability, the primary links are designed to have three or
more backup paths to access our distributed networks, including VSAT satellite
links. A "hot-site" emergency business recovery facility has been established in
New York and can be activated to continue routine operations in the event of a
disaster at the Boulder site. Electronic processing necessary to handle actual
9-1-1 calls is geographically distributed and remains a local service for each
region, so our central data administration systems are not in the actual 9-1-1
call path.
Distributed throughout the U.S., our real-time 9-1-1 servers are located in
shared, hardened computer facilities. The systems are deployed in pairs or
quads. System pairs are intentionally distributed to different geographic
locations to provide an additional level of reliability. These systems provide
data display for thousands of public safety agencies throughout the service
areas of our customers. Direct interface to telephone control switches is also
supported on these platforms, providing the information necessary to route calls
to the jurisdictionally appropriate PSAP. We also use a number of Microsoft NT
servers and various Unix servers for internal administrative processing and
extranet support.
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, provide 9-1-1 data clearinghouse services directly to CLECs
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and provide 9-1-1 data management services indirectly to over 750 independent
telephone companies. During the year ended December 31, 1999, we recognized
approximately 81% 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 year ended December 31, 1998, we recognized approximately
73% of total revenue from Ameritech, BellSouth Inc. and U S WEST, each of which
accounted for greater than 10% of our revenue. During the year ended December
31, 1997, we recognized approximately 81% 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. No other customers accounted for more than
10% of our total revenue during those years.
We typically enter into contracts with carriers and their affiliates to
provide services to some or all of the carrier's operating entities. We have two
segments, data management services and licenses and implementation services. Set
forth below is a list of carriers utilizing our services or products, which we
believe are representative of our overall customer base. All of these customers
are in the data management services segment except for license customers, which
are in the licenses and implementation services segment. See Note 10 of our
financial statements for further information regarding our reportable segments.
ILECs. Our customers include Ameritech, BellSouth Inc. and U S WEST.
CLECs. Our customers include ICG Telecom, MCI Worldcom, TriVergent
Communications Inc. and Nextlink Communications Inc.
Wireless Carriers. Our customers include CommNet Cellular Inc., AT&T
Wireless Services, Sprint PCS and US WEST Wireless.
State Agency. We have a contract with the General Services Commission of
the State of Texas.
License Customers. Our license customers include Bell Canada.
We signed a contract to provide 9-1-1 data management services to the
General Services Commission. This contract was assigned by the General Services
Commission of the State of Texas to the Texas Commission for State Emergency
Communications. This is the first time that a state entity decided 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 have typically applied to
local exchange services providers, thus the regulations 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 the State of 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. However, 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 its 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 Texas Public Utilities Commission, which is expected to
decide on these matters in 2000. Until such resolution, the 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 Texas Public Utilities Commission will be favorable to us
and the Texas Commission for State Emergency
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Communications. However, we cannot assure you that the Texas Public Utilities
Commission will decide in favor of us and the Texas Commission for State
Emergency Communications or that SBC Communications will not pursue this legal
challenge on a longer term basis, thus causing further delay in implementing
services, by exercising its right to appeal a Texas Public Utilities Commission
decision that favors us or the Texas Commission for State Emergency
Communications. If the Texas Public Utilities Commission 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 Texas Public Utilities Commission'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 Texas Public Utilities Commission 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 delivers our services in Texas.
Sales and Marketing
Our marketing efforts are focused on targeting key carriers, government
bodies, and PSAPs in each geographical market through advertising in
telecommunications industry publications, participation in trade shows,
presentations at technical conferences and other initiatives. Additionally, SCC
employees serve as the chairpersons and members of key standards committees
related to emergency communications services. Our sales strategy relies
primarily on direct channels of distribution for our services, although we
recently initiated an alliance program to jointly market our TelConnect services
with OSS companies who sell complementary products. We have dedicated account
teams to work with each existing and potential customer. Our account teams
develop relationships with 9-1-1 service providers through a consultative,
problem-solving sales process and work closely with customers and potential
customers to determine how their needs can be fulfilled by our services. As of
February 29, 2000, we employed 28 persons in our sales and marketing
organization. Sales cycles range from one month to over two years.
Research and Development
We direct our research and development efforts toward providing highly
scalable, fault tolerant applications to the public safety, telecommunications
and wireless industries. Development efforts currently in process are focused on
integrating internet technology, spatial data mapping systems and enabling the
more efficient E9-1-1 OSS processes that improve data quality. We plan to invest
and incur expenses of approximately $10 million in research, development and
marketing of new products and services to address the rapidly evolving changes
in wireless telecommunications. Research and development expenses totaled
approximately $1,740,000, $1,376,000 and $738,000 for December 31, 1999, 1998,
and 1997, respectively.
Competition
The market for 9-1-1 OSS 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 OSS solutions include effectiveness with
existing infrastructure, reliability, manageability, technical features,
wireless support, performance, ease of use, price, scope of product offerings,
and customer service and support. Although we believe that our solution competes
favorably with respect to such factors, we cannot assure you that we can
maintain our competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service
support, technical and other competitive resources.
Our principal competitors fall generally 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 the Company's 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.
Potential customers sometimes rely on their own internal development teams
to formulate 9-1-1 OSS systems or retain consultants to undertake such a
project. We believe that our 9-1-1 OSS solution competes favorably with
internally developed systems, which may be expensive to develop and maintain,
may not provide a comprehensive,
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reliable approach to 9-1-1 OSS services, and may not provide the flexibility to
adapt readily to regulatory, technological and market changes.
In addition, a number of companies currently market or have under
development software products and services to provide 9-1-1 administration. We
compete with a few relatively smaller companies, including XY Point Corporation,
for the provision of 9-1-1 OSS services to wireless carriers. We also compete
with a few relatively smaller companies for CLEC 9-1-1 services, such as HBF
Group, Inc. Although we expect more significant competition to emerge in the
future, we believe that, to date, none of these relatively smaller companies
offer products or services that are as robust in features or as comprehensive in
scope as our products and services. While it is likely that the product
development efforts of these companies eventually will enable them to offer a
line of products or services to compete with our current service offerings, we
intend to continue to dedicate significant resources for product and service
development to expand our capabilities and stay ahead of these competitors.
Notwithstanding, we expect additional competition from these established
competitors and from other emerging companies. Mergers or consolidations among
these competitors or acquisitions of these companies by larger competitors would
make them more formidable competitors to us. We cannot assure you that our
current and potential competitors will not develop products and services that
may be more effective than our current or future 9-1-1 data management solutions
or that our technologies and offerings will not be rendered obsolete by such
developments.
Finally, there are a number of companies that currently market and sell
various products and services to telecommunications carriers, such as billing
software and advanced telecommunications equipment, that have been broadly
adopted by 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. For
example, Lucent Technologies offers carriers software systems with functionality
similar to our 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 us. 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. We believe that the
entry of these larger companies into our market will require them to undertake
operations that are currently not within their core areas of expertise, and thus
expose them to significant uncertainties in the product development process or
in providing a range of products and services to comprehensively address the
9-1-1 requirements which our services address. However, if these companies were
to introduce products or services that effectively compete with our 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, we cannot assure you that we will be able to
compete successfully against our current and future competitors. Increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which would materially and adversely affect our business,
financial condition and results of operations.
Proprietary 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 both in the
United States and abroad, we cannot assure you that we will be successful in
doing so or that the steps taken by us in this regard will be
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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.
As the number of entrants to our markets increases and the functionality of
our products and services 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 certain instances, the amount of such
indemnities may be greater than the revenue we may have received from the
customer. We cannot assure you that third parties will not assert infringement
or misappropriation claims against us in the future with respect to current or
future products or services. Any claims or litigation, with or without merit,
could be time consuming, result in costly litigation or require us to enter into
royalty or licensing arrangements. Such 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.
Employees
As of February 29, 2000, we employed 315 full-time employees in ten states.
Of these employees, 33 were involved in research and development, 28 in sales
and marketing, 204 in technical support and operations and 50 in administration
and finance. No employees are covered by any collective bargaining agreements.
We believe that our relationships with our employees are good.
Facilities
Our principal administrative, sales and marketing, research and development
and support facilities consist of approximately 80,000 square feet of office
space in Boulder, Colorado. We occupy these premises under a lease expiring
December 31, 2002. As of February 29, 2000, the annual base rent for this
facility was approximately $878,000; however, the lease agreement provides for
periodic defined increases in rent through the lease term. In December 1999, we
leased an additional 2,100 square feet of office space in Austin, Texas to
supplement and serve as a back up to our Boulder, Colorado facility. We occupy
these premises under a lease expiring November 30, 2003. As of February 29,
2000, the annual base rent for this facility was approximately $37,000; however
the lease agreement provides for periodic defined increases in rent through the
lease term. We expect to lease additional space in 2000 to accommodate growth.
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.
RISK FACTORS
In evaluating our business, you should carefully consider the risks and
uncertainties discussed in this section, in addition to the other information
presented in this Annual Report on Form 10-K. The risks and uncertainties
described below may not be the only risks that we face. If any of these risks or
uncertainties actually occurs, our business, operating results or financial
condition could be materially adversely affected. This could cause the market
price of our common stock to decline.
Our operating results fluctuate, and our stock price may be volatile as a
result.
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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. 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;
- our sales cycle is relatively long;
- the size, timing and duration of significant customer contracts can
vary significantly;
- the number of subscriber records under our management may fluctuate;
- we cannot predict the rate of adoption of wireless services by PSAPs;
- our revenue will be affected by the timing of introduction of new
products and services by us and our competitors; and
- changes in telecommunications legislation and regulations may affect
the competitive environment for our services.
Our contracts for data management services generally include a separate
non-recurring 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, and 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 OSS
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 year ended December 31, 1999, we
recognized approximately 81% 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 year ended December 31, 1998, we recognized
approximately 73% of total revenue from Ameritech, BellSouth Inc. and U S WEST,
each of which accounted for greater than 10% of our revenue. During the year
ended December 31, 1997, we recognized approximately 81% 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. No other customers accounted for
more than 10% of our total revenue during those years. 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 would have a material adverse effect on
our business, financial condition and results of operations.
Two of our significant customers, Ameritech and US 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.
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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, the caller's telephone number and location of the receiving cell site.
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 anticipated by us. 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 (EWE)
product, in the fourth quarter of 1999, which allows PSAPs to call all numbers
in a given area 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
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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 OSS 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 OSS 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 OSS
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 1999, approximately 88% 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 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, 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 new 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.
17
<PAGE>
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 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 delivers 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,
18
<PAGE>
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.
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 OSS solutions is highly competitive, and we could lose our
market position if we fail to compete effectively.
The market for 9-1-1 OSS 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 OSS 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,
19
<PAGE>
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 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.
20
<PAGE>
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, although we have no present arrangements, commitments or
agreements with respect to any acquisition. 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.
Our business may be adversely affected by Year 2000 technology problems.
Many currently installed computer and software products were coded to
accept only two digit entries in the date code field. These date code fields
need to accept four digit entries to distinguish twenty-first century dates from
twentieth century dates. We use off-the-shelf and custom software developed
internally and by third parties for our production, information technology (IT)
and non-IT systems. We programmed and tested our systems and installed all
upgrades necessary to make them Year 2000 compliant. We spent approximately
$400,000 to make our systems Year 2000 compliant. As a result of our Year 2000
readiness efforts, our production systems, IT systems and non-IT systems
successfully distinguished twenty-first century dates from twentieth century
dates on January 1, 2000 without any system failures. However, we are continuing
to monitor our systems throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly. Despite the fact that many
companies' software and computer systems are currently processing twenty-first
century dates correctly, these companies, including us, could experience latent
Year 2000 problems.
The market price of our common stock may experience price and volume
fluctuations for reasons over which we have no control.
The stock market has from time to time experienced, and is likely to
continue to experience, extreme price and volume fluctuations. Recently, prices
of securities of high technology companies have been especially volatile and
have often fluctuated for reasons that are unrelated to the operating
performance of the affected companies. The market price of shares of our common
stock has fluctuated greatly since our initial public offering and could
continue to fluctuate due to a variety of factors. In the past, companies that
have experienced volatility in the market price of their stock have been the
objects of securities class action litigation. If we were the object of
securities class action litigation, it could result in substantial costs and a
diversion of our management's attention and resources.
Our corporate documents and Delaware law make a takeover of our company more
difficult, which may limit the market price of the common stock.
Our charter and by-laws and Section 203 of the Delaware General Corporation
Law contain provisions that might enable our management to resist a takeover of
our company. Among other things, the board of directors has the ability to issue
"blank check" preferred stock without further stockholder approval. These
provisions may discourage, delay or prevent a change in control or a change in
our management. These provisions also could discourage proxy contests and make
it more difficult for you and other stockholders to elect directors and take
other corporate actions. The existence of these provisions could limit the price
that investors are willing to pay for shares of common stock.
Our officers and directors have significant voting power and may substantially
influence the outcome of any stockholder vote.
Members of our board of directors and our executive officers, together with
members of their families and entities that may be deemed affiliates of or
related to such persons or entities, beneficially own approximately 22.6% of the
outstanding shares of our common stock as of February 29, 2000. Accordingly,
these stockholders are able to influence election of all members of our board of
directors and influence the outcome of corporate actions requiring stockholder
approval, such as mergers and acquisitions. This level of ownership by such
persons and entities may
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<PAGE>
have a significant effect in delaying, deferring or preventing a change in
control and may adversely affect the voting and other rights of other holders of
common stock.
ITEM 2. PROPERTIES
Our principal administrative, sales and marketing, research and development
and support facilities consist of approximately 80,000 square feet of office
space in Boulder, Colorado. We occupy these premises under a lease expiring
December 31, 2002. In December 1999, we leased an additional 2,100 square feet
of office space in Austin, Texas. This facility will supplement and serve as a
back up to our Boulder, Colorado facility. We occupy the Texas premises under a
lease expiring November 30, 2003. We expect to lease additional space in 2000 to
accommodate growth.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) On December 2, 1999, we held our 1999 Annual Meeting of Stockholders (the
"Annual Meeting").
b) One matter voted on at the Annual Meeting was the election of six
directors. The six nominees, who were existing directors and nominees of
our Board of Directors, were re-elected at our Annual Meeting as directors,
receiving the number and percentage of votes for election and abstentions
as set forth next to their respective names below:
<TABLE>
<CAPTION>
NOMINEE FOR DIRECTOR FOR ABSTAIN
-------------------- --- -------
<S> <C> <C> <C> <C>
George K. Heinrichs 6,301,620 97.6% 154,275 2.4%
Stephen O. James 6,303,898 97.6% 151,997 2.4%
David Kronfeld 6,303,898 97.6% 151,997 2.4%
Mary Beth Vitale 6,302,398 97.6% 153,497 2.4%
Winston J. Wade 6,303,898 97.6% 151,997 2.4%
Darrell A. Williams 6,302,398 97.6% 153,497 2.4%
</TABLE>
c) The following additional matter was separately voted upon at the Annual
Meeting and received the votes of the holders of the number of shares of
our common stock voted in person or by proxy at the Annual Meeting and the
percentage of total votes cast as indicated below:
Ratification of selection of Arthur Andersen LLP as independent accountants
for 2000 fiscal year:
For 6,306,528 97.7%
Against 10,400 0.2%
Abstain 138,967 2.1%
d) Not applicable.
PART II
ITEM 5a. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"SCCX." We commenced our initial public offering of the common stock on June 24,
1998 at a price of $12 per share. Prior to such date, there
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<PAGE>
was no public market for the common stock. The following table sets forth the
high and low bid prices for the common stock for the periods indicated, as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C>
June 24, 1998 through June 30, 1998 $14.00 $12.00
Quarter ended September 30, 1998 16.00 2.88
Quarter ended December 31, 1998 5.56 2.88
Quarter ended March 31, 1999 6.38 3.00
Quarter ended June 30, 1999 5.00 3.00
Quarter ended September 30, 1999 7.13 4.00
Quarter ended December 31, 1999 7.09 5.00
</TABLE>
As of February 29, 2000, there were approximately 173 holders of record.
We have not paid any cash dividends on our capital stock since our
inception, and do not expect to pay cash dividends on our common stock in the
foreseeable future. Certain covenants contained in our line of credit agreement
restrict the payment of dividends without the lender's prior consent. Payments
of future dividends, if any, will be at the discretion of our Board of
Directors, subject to the restrictions discussed above, after taking into
account various factors, including our financial condition, operating results,
cash needs and expansion plans.
ITEM 5b. 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 December 31, 1999, the proceeds of the offering have been applied
as follows:
<TABLE>
<S> <C>
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
</TABLE>
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.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are qualified by reference to and
should be read in conjunction with our financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7. The statement of operations data for the years
ended December 31, 1999, 1998 and 1997 and the balance sheet data at December
31, 1999 and 1998 are derived from, and are qualified by reference to, the
audited financial statements and notes included in Item 8. The statement of
operations data for the years ended December 31, 1996 and 1995 and the balance
sheet data at December 31, 1997, 1996 and 1995 are derived from audited
financial statements not included in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Data management services.................................. $32,096 $30,610 $24,005 $13,165 $ 3,531
Licenses and implementation services...................... 488 3,839 3,067 1,637 3,882
------- ------- ------- ------- -------
Total revenue....................................... 32,584 34,449 27,072 14,802 7,413
Costs and expenses:
Cost of data management services.......................... 24,338 20,740 15,378 7,996 2,840
Cost of licenses and implementation services.............. 138 836 1,283 596 1,041
Sales and marketing....................................... 5,314 4,119 3,850 3,204 2,016
General and administrative................................ 4,931 4,959 3,227 1,533 830
------- ------- ------- ------- -------
Total costs and expenses............................ 34,721 30,654 23,738 13,329 6,727
------- ------- ------- ------- -------
Income (loss) from operations............................... (2,137) 3,795 3,334 1,473 686
Other income (expense), net................................. 607 (294) (879) (527) (368)
------- ------- ------- ------- -------
Income (loss) from continuing operations before income taxes
(1,530) 3,501 2,455 946 318
Provision (benefit) for income taxes........................ (468) (379) (2,328) 9 16
------- ------- ------- ------- -------
Net income (loss) from continuing operations before .......
extraordinary item......................................... (1,062) 3,880 4,783 937 302
Loss from operations of discontinued division, net of tax... (226) -- (876) (562) (1,746)
Loss from disposal of discontinued division, net of tax..... -- -- (2,032) -- --
------- ------- ------- ------- -------
Net income (loss) before extraordinary item................. (1,288) 3,880 1,875 375 (1,444)
Loss from early extinguishment of debt, net of tax.......... -- (909) -- -- --
------- ------- ------- ------- -------
Net income (loss)........................................... $(1,288) $ 2,971 $ 1,875 $ 375 $(1,444)
======= ======= ======= ======= =======
Per Share Data:
Net income (loss) from continuing operations before
extraordinary item per share:
Basic..................................................... $ (0.10) $ 0.53 $ 2.17 $ 0.15 $ (0.02)
======= ======= ======= ======= =======
Diluted................................................... $ (0.10) $ 0.38 $ 0.54 $ 0.11 $ (0.02)
======= ======= ======= ======= =======
Net income (loss) per share:
Basic..................................................... $ (0.12) $ 0.39 $ 0.61 $ (0.17) $ (1.07)
======= ======= ======= ======= =======
Diluted................................................... $ (0.12) $ 0.29 $ 0.21 $ 0.05 $ (1.07)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............. $ 8,354 $10,266 $ 2,503 $ 32 $ 1,004
Short and long-term investments in
marketable securities................ 13,158 9,815 -- -- --
Working capital (deficit).............. 18,014 17,678 (2,670) (7,345) (8,135)
Total assets........................... 41,780 45,095 21,106 18,482 11,755
Long-term debt......................... 2,038 2,791 6,891 3,318 1,934
Total stockholders' equity (deficit)... 32,935 33,591 (11,867) (13,068) (4,614)
</TABLE>
See Note 2 of notes to financial statements for an explanation of the
determination of the shares used in computing net income (loss) per share.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K 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 below
and in the section entitled "Risk Factors" in Item 1.
Overview
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.
Our data management services revenue is derived from contracts with ILECs,
CLECs, wireless carriers and a state agency pursuant to which we provide an
outsourcing solution for our customers' 9-1-1 data management. Revenue included
in data management services generally includes a non-recurring fee for the
design and implementation of the 9-1-1 OSS, 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. Data management services revenue also may include
revenue from enhanced products and services, which may include non-recurring
and/or monthly fees which are separately stated in the contract and are
recognized in the period in which the services are performed. Related costs are
expensed as they are incurred. Data management services revenue comprised 99% of
our total revenue in 1999 and 89% in each of the years ended December 31, 1998
and 1997.
Our licenses and implementation services revenue is derived from contracts
with ILECs pursuant to which we provide a 9-1-1 software license or related
products and services such as implementation, training, software enhancements
and interfaces to our 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, we provide our
customers with maintenance services that are recognized ratably over the related
contract period on a straight-line basis. Our 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. We completed the licenses and implementation services contracts we
had in place in 1998 and did not sign additional contracts due to our focus on
our longer term services contracts. We do not expect to generate significant
revenue from licenses and implementation services during 2000. Licenses and
implementation services revenue comprised 1% of our total revenue in 1999 and
11% in each of the years ended December 31, 1998 and 1997.
During the year ended December 31, 1999, we recognized approximately 81% of
total revenue from Ameritech, BellSouth Inc. and U S WEST, each of which
accounted for greater than 10% of our total revenue. During the year ended
December 31, 1998, we recognized approximately 73% of total revenue from
Ameritech, BellSouth Inc. and U S WEST, each of which accounted for greater than
10% of our total revenue. During the year ended December 31, 1997, we recognized
approximately 81% of total revenue from continuing operations from Ameritech,
BellSouth Inc. and U S WEST, each of which accounted for greater than 10% of our
total revenue.
In the third quarter of 1998, one of our licenses and implementation
services customers, Bell Atlantic, who had merged with Nynex, announced their
decision to standardize their 9-1-1 hardware and software platform utilizing
25
<PAGE>
non-SCC systems that had been used by Nynex prior to the merger. In the fourth
quarter of 1998, we entered into a Termination, Settlement and Release Agreement
with Bell Atlantic, under which Bell Atlantic paid us for work that had been
performed prior to cancellation of the contract. This transition occurred over
the course of 1999, during which time we continued to support the systems
installed in Bell Atlantic and cooperated fully to ensure a smooth transition of
these systems. Bell Atlantic comprised approximately 8% of our total revenue in
1998.
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. We reversed $1.7 million of the valuation allowance on our deferred
tax assets in the year ended December 31, 1998 and recorded an additional income
tax benefit of $468,000 from continuing operations in the year ended December
31, 1999, as we believe that it is more likely than not that such tax benefits
will be realized. Of the $912,000 tax benefit recorded in 1998, $533,000 related
to the extraordinary loss from early extinguishment of debt. 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.
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 losses from operations of this division totaled $876,000 and
$226,000 in 1997 and 1999, respectively, and are presented in our financial
statements as loss from operations of discontinued division. The loss from
discontinued operations in 1999 resulted from final closeout of unassigned
contracts and the transition of customers to the company that acquired this
division.
In June and July 1998, we completed an initial public offering of our
common stock, which generated proceeds of $26.0 million, net of the
underwriter's discount and other offering costs and including the exercise of
the underwriters' overallotment option. See Note 2 to the accompanying financial
statements and "Liquidity and Capital Resources."
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 require
significant management attention and financial resources. International sales
are subject to a variety of risks.
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 OSS services
generally include a separate non-recurring fee for the design and implementation
of the 9-1-1 OSS, 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 will incur expenses of approximately $10
million in 2000 for research, development and marketing to expand our product
offerings. In addition, we hired additional employees in 1999, 1998 and 1997,
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.
26
<PAGE>
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue
Total Revenue. Total revenue decreased 5%, from $34.4 million in 1998 to
$32.6 million in 1999.
Data Management Services Revenue. Revenue from data management services
increased 5%, from $30.6 million in 1998 to $32.1 million in 1999, representing
approximately 89% and 99% of total revenue, respectively. Data management
services revenue increased due to an increase in the number of records under
management for ILEC and CLEC customers caused by customer growth and the signing
of additional CLEC contracts. These increases were offset by monthly minimum
fees from a wireless carrier in 1998 that expired at the end of 1998 and a
decrease in non-recurring fees related to wireless and wireline services.
Licenses and Implementation Services. Revenue from licenses and
implementation services decreased 87%, from $3.8 million in 1998 to $488,000 in
1999, as we had no licenses and implementation services contracts in process in
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 our
infrastructure. Cost of data management services increased 17%, from $20.7
million in 1998 to $24.3 million in 1999, representing 60% and 75% of total
revenue, respectively, and 68% and 76% of data management services revenue,
respectively. The dollar increase was due to the pilot phase and start of
implementation of our contract with the State of Texas, increased depreciation
expense and telephone lines to accommodate growth in our wireless and wireline
operations and additional headcount and related costs incurred to accommodate
growth for both wireline and wireless services. The percentage increase occurred
primarily because the rollout of our wireless and enhanced services has been
slower than anticipated, although we have built the infrastructure to service
the anticipated demand, and the infrastructure required to begin the State of
Texas contract before significant revenue was generated. In addition, in 1998,
we received monthly minimum fees from a wireless customer which expired at the
end of 1998.
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 83%, from $836,000 in 1998 to $139,000 in 1999, representing
2% and 0.4% of total revenue, respectively, and 22% and 28% of licenses and
implementation services revenue, respectively. The dollar decrease occurred
because we had no licenses and implementation services contracts in process
during 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 29%, from $4.1 million in
1998 to $5.3 million in 1999, representing 12% and 16% of total revenue,
respectively. The dollar increase was due to the addition of marketing
personnel, the creation of a government affairs department to interpret and
influence legislation primarily related to our wireless operations and related
legal expenses, addition of sales staff for enhanced services and an increase in
tradeshow expenses.
General and Administrative. General and administrative expenses consist
primarily of expenses related to our information systems, finance, human
resources, legal, executive and financial planning departments. General and
administrative expenses decreased 1%, from $5.0 million in 1998 to $4.9 million
in 1999, representing 14% and 15% of total revenue, respectively. We experienced
decreases due to a decrease in expenses related to the resignations of our chief
operating officer and chief financial officer. These decreases were partially
offset by:
- the addition of information technology personnel and related expenses;
- increased legal and accounting costs related to quarterly and annual
reporting requirements as we became a publicly traded company in June
1998;
27
<PAGE>
- increased legal staffing and other fees related to regulatory and
legislative issues concerning the implementation of our services in
Texas; and
- the creation of an investor relations department.
Other Income (Expense),Net. Net other income (expense) consists primarily
of interest expense from our borrowings and leases for capital equipment, offset
by interest income earned on our cash and investment balances. Net other expense
was $294,000 in 1998 compared to net other income of $607,000 in 1999,
representing (1)% and 2% of total revenue for such periods, respectively. The
dollar increase in net other income was primarily due to a decrease in interest
expense related to the repayment of certain bank debt outstanding through the
second quarter of 1998 and repayment of certain capital leases and an increase
in interest earned from the investment of funds received from our initial public
offering in June and July of 1998.
Benefit for Income Taxes. Our income tax benefit from continuing operations
increased from $379,000 in 1998 to $468,000 in 1999. In 1998, we reversed a
portion of our valuation allowance and in 1999 recorded an income tax benefit
related to our deferred tax assets as we believe that it is more likely than not
that the tax assets will be realized.
Loss from Operations of Discontinued Division. We recorded a charge of
$226,000 in 1999, net of the related tax benefit, related to the final closeout
of unassigned contracts and the transition of customers to the company that
acquired this division.
Loss from Early Extinguishment of Debt. We recorded a charge of $909,000 in
1998, net of the related tax benefit, related to the write-off of the remaining
debt discount and other costs associated with the early extinguishment of our
bank debt.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue
Total Revenue. Total revenue increased 27%, from $27.1 million in 1997 to
$34.4 million in 1998.
Data Management Services Revenue. Revenue from data management services
increased 28%, from $24.0 million in 1997 to $30.6 million in 1998, representing
approximately 89% of total revenue in both periods. The increase resulted
primarily from increases in:
- monthly fees from wireline customers due to an increase in the number
of subscribers under management;
- non-recurring and monthly fees from wireless customers, as we did not
begin to earn revenue from wireless customers until the third quarter
of 1997 and signed several new contracts in 1998;
- non-recurring fees from enhanced services; and
- non-recurring fees from new wireline customers that were transitioned
to our systems.
Licenses and Implementation Services. Revenue from licenses and
implementation services increased 25%, from $3.1 million in 1997 to $3.8 million
in 1998, due to increased work performed on contracts that began in 1997 and
were completed or terminated during 1998.
Costs and Expenses
Cost of Data Management Services. Cost of data management services
increased 35%, from $15.4 million in 1997 to $20.7 million in 1998, representing
57% and 60% of total revenue, respectively, and 64% and 68% of data management
services revenue, respectively. The dollar increase was due to the addition of
personnel and equipment and expansion of facilities to accommodate growth in our
wireless and wireline operations.
Cost of Licenses and Implementation Services. Cost of licenses and
implementation services decreased 35%, from $1.3 million in 1997 to $836,000 in
1998, representing 5% and 2% of total revenue, respectively, and 42% and 22% of
licenses and implementation services revenue, respectively. The decrease in
dollars and as a percent of licenses and implementation services revenue was
primarily due to the reversal of accrued third party software fees that will not
be required and an increase in warranty revenue, both of which resulted from the
cancellation of our contract with Bell Atlantic.
28
<PAGE>
Sales and Marketing. Sales and marketing expenses increased 7%, from $3.9
million in 1997 to $4.1 million in 1998, representing 14% and 12% of total
revenue, respectively. The increase was primarily due to salaries and related
costs of hiring additional sales and marketing personnel during 1998 and public
relations costs incurred in 1998. These increases were partially offset by
decreases in sales commissions, as well as the transfer of a vice president to a
general and administrative position.
General and Administrative. General and administrative expenses increased
54%, from $3.2 million in 1997 to $5.0 million in 1998, representing 12% and 14%
of total revenue, respectively. The dollar increase was due to:
- the reassignment of certain continuing resources, infrastructure and
related general and administrative expenses applicable to continuing
operations;
- addition of personnel and computer equipment in the accounting,
information systems, legal and human resources departments to support
our growth;
- the transfer of a marketing vice president to a general and
administrative position; and
- strategic consulting costs incurred in 1998.
The increases were partially offset by a decrease in executive bonuses.
Other Expenses, Net. Other expenses decreased 67%, from $879,000 in 1997 to
$294,000 in 1998, representing 3% and 1% of total revenue, respectively. The
dollar decrease was primarily due to the repayment of certain bank debt and
capital leases during 1998 and interest earned from the investment of funds from
our initial public offering in June and July of 1998.
Income Tax Benefit. The income tax benefit of $379,000 in 1998 consists of
the reversal of a portion of our valuation allowance on our deferred tax assets,
compared to a reversal of valuation allowance of $2.4 million in 1997. We did
not record a state income tax provision in 1998 primarily due to the utilization
of state net operating loss carryforwards. In 1997, we recorded a state
provision of $172,000 as more business was conducted in states where net
operating loss carryforwards were not available.
Loss from Sale and Operations of Discontinued Division. In 1997, we
recorded a charge of $2.9 million, net of the related tax effect, related to the
sale of the net assets of our Premise Products Division.
Loss from Early Extinguishment of Debt. We recorded a charge of $909,000 in
1998, net of the related tax benefit, related to the write-off of the remaining
debt discount and other costs associated with the early extinguishment of our
bank debt.
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 December 31, 1999, we had $21.5 million in cash and cash
equivalents and investments in marketable securities.
In June 1998, we completed an initial public offering of 2,100,000 shares
of our common stock, which generated proceeds of $22.5 million to us, net of the
underwriter's discount and other offering costs. We used approximately $4.4
million of the proceeds to repay our bank loans and $160,000 for the related
prepayment penalty. In July 1998, the underwriters of our initial public
offering exercised their over-allotment option. Under the over-allotment option,
we sold an additional 315,000 shares of our common stock, generating net
proceeds of $3.5 million.
In addition to the $4.4 million of debt repaid with the proceeds of the
initial public offering, we repaid $5.6 million and $1.9 million of other bank
debt and capital lease obligations during 1998 and 1999, respectively.
Additionally, we used $3.4 million and $2.5 million during 1998 and 1999,
respectively, for the purchase of capital assets and software development. We
anticipate that our level of spending for capital expenditures in 1999 will
continue during 2000, although we currently have no material commitments for
capital expenditures.
We have a 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
29
<PAGE>
month Libor rate plus 2.25% per annum. The line of credit matures April 15, 2000
and is collateralized by certain of our assets. As of December 31, 1999, 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 December 31, 1999, $582,000 was outstanding on the capital lease
line.
We have announced plans to incur research, development and marketing
expenses of approximately $10 million to expand our product offerings. This will
require approximately $13 million in cash due to the capital expenditure
requirements. We may also increase our capital lease line to finance this
initiative. We believe that our remaining net proceeds from our initial public
offering, 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. 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.
Year 2000 Capability
Many currently installed computer and software products were coded to
accept only two digit entries in the date code field. These date code fields
need to accept four digit entries to distinguish twenty-first century dates from
twentieth century dates. We use off-the-shelf and custom software developed
internally and by third parties for our production, information technology (IT)
and non-IT systems. We programmed and tested our systems and installed all
upgrades necessary to make them Year 2000 compliant. We spent about $400,000 to
make our systems Year 2000 compliant. As a result of our Year 2000 readiness
efforts, our production systems, IT systems and non-IT systems successfully
distinguished twenty-first century dates from twentieth century dates on January
1, 2000 without any system failures. However, we are continuing to monitor our
systems throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly. Despite the fact that many companies'
software and computer systems are currently processing twenty-first century
dates correctly, these companies, including us, could experience latent Year
2000 problems.
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. 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.
Statement of Position 98-9
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 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, "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,
"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
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<PAGE>
years beginning after March 15, 1999. Earlier adoption is permitted, however,
retroactive application is prohibited. We believe SOP 98-9 will not materially
impact our financial statements.
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. SAB 101 must be applied to financial statements no
later than the second fiscal quarter of 2000. We are currently reviewing SAB 101
to determine what impact, if any, the adoption of SAB 101 will have on our
financial position and results of operations.
ITEM 7a. 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 December 31, 1999, 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
December 31, 1999, 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.
31
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SCC COMMUNICATIONS CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.................................................................... 33
Balance Sheets as of December 31, 1999 and 1998............................................................. 34
Statements of Operations for the years ended December 31, 1999, 1998 and 1997............................... 35
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1999, 1998 and 1997........... 36
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............................... 37
Notes to Financial Statements............................................................................... 38
</TABLE>
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of SCC Communications Corp.:
We have audited the accompanying balance sheets of SCC Communications Corp.
(a Delaware corporation) as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SCC Communications Corp. as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado
January 21, 2000
33
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SCC COMMUNICATIONS CORP.
BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 8,354 $ 10,266
Short-term investments in marketable securities.................................. 12,165 7,761
Accounts receivable, net of allowance of approximately $58 and $50 in 1999 and 2,255 4,820
1998, respectively, for doubtful accounts........................................
Unbilled revenue.................................................................. 846 1,035
Prepaids and other................................................................ 548 484
Deferred income taxes -- current portion.......................................... 653 2,025
-------- --------
Total current assets............................................................ 24,821 26,391
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Computer hardware and equipment................................................... 25,411 23,687
Furniture and fixtures............................................................ 933 800
Leasehold improvements............................................................ 915 920
-------- --------
27,259 25,407
Less -- Accumulated depreciation.................................................. (15,753) (11,056)
-------- --------
Total property and equipment.................................................... 11,506 14,351
-------- --------
OTHER ASSETS....................................................................... 86 112
LONG-TERM INVESTMENTS in marketable securities..................................... 993 2,054
DEFERRED INCOME TAXES -- NONCURRENT................................................ 3,423 1,504
SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization of $575 and $346 in
1999 and 1998, respectively....................................................... 951 683
-------- --------
$ 41,780 $ 45,095
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................. $ 752 $ 1,211
Payroll-related accruals.......................................................... 786 734
Other accrued liabilities......................................................... 1,641 2,546
Property and other taxes.......................................................... 792 696
Current portion of capital lease obligations (Note 5)............................. 1,971 1,618
Deferred contract revenue......................................................... 865 1,908
-------- --------
Total current liabilities....................................................... 6,807 8,713
LONG-TERM DEBT:
Capital lease obligations, net of current portion (Note 5)........................ 2,038 2,791
-------- --------
Total liabilities............................................................... 8,845 11,504
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 11)
STOCKHOLDERS' EQUITY (Note 4):
Preferred stock, $.001 par value; 15,000,000 shares authorized; none issued or -- --
outstanding......................................................................
Common stock, $.001 par value; 30,000,000 shares authorized; 11,104,111 and 11 10
10,886,353 shares issued at December 31, 1999 and 1998, respectively.............
Additional paid-in capital........................................................ 43,925 43,320
Stock subscriptions receivable.................................................... (33) (59)
Accumulated deficit............................................................... (10,968) (9,680)
-------- --------
Total stockholders' equity...................................................... 32,935 33,591
-------- --------
$ 41,780 $ 45,095
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part
of these balance sheets.
34
<PAGE>
SCC COMMUNICATIONS CORP.
STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Data management services................................................ $ 32,096 $ 30,610 $ 24,005
Licenses and implementation services.................................... 488 3,839 3,067
----------- ----------- ----------
Total revenue.................................................... 32,584 34,449 27,072
COSTS AND EXPENSES:
Cost of data management services........................................ 24,338 20,740 15,378
Cost of licenses and implementation services............................ 138 836 1,283
Sales and marketing..................................................... 5,314 4,119 3,850
General and administrative.............................................. 4,931 4,959 3,227
----------- ----------- ----------
Total costs and expenses......................................... 34,721 30,654 23,738
----------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS............................................. (2,137) 3,795 3,334
OTHER INCOME (EXPENSE):
Interest and other income............................................... 1,095 654 88
Interest and other expense.............................................. (488) (948) (967)
----------- ----------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM....................................................... (1,530) 3,501 2,455
BENEFIT FOR INCOME TAXES (Note 6)......................................... (468) (379) (2,328)
----------- ----------- ----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM.... (1,062) 3,880 4,783
DISCONTINUED OPERATIONS (Note 3):
Loss from operations of discontinued division, net of tax............... (226) -- (876)
Loss from disposal of discontinued division, net of tax................. -- -- (2,032)
----------- ----------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............................... (1,288) 3,880 1,875
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT, net of tax.......... -- (909) --
----------- ----------- ----------
NET INCOME (LOSS)......................................................... $ (1,288) $ 2,971 $ 1,875
=========== =========== ==========
Dividends accrued on Series D, E and F mandatorily redeemable
convertible preferred stock............................................. -- (355) (740)
Common stock warrant put price adjustment................................ -- (77) (8)
----------- ----------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK.............................. $ (1,288) $ 2,539 $ 1,127
=========== =========== ==========
NET INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM (Note 2):
Basic................................................................... $ (0.10) $ 0.53 $ 2.17
=========== =========== ==========
Diluted................................................................. $ (0.10) $ 0.38 $ 0.54
=========== =========== ==========
NET INCOME (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM (Note 2):
Basic................................................................... $ (0.12) $ 0.53 $ 0.61
=========== =========== ==========
Diluted................................................................. $ (0.12) $ 0.38 $ 0.21
=========== =========== ==========
NET INCOME (LOSS) PER SHARE (Note 2):
Basic................................................................... $ (0.12) $ 0.39 $ 0.61
=========== =========== ==========
Diluted................................................................. $ (0.12) $ 0.29 $ 0.21
=========== =========== ==========
SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE (Note 2):
Basic................................................................... 10,989,091 6,433,564 1,857,413
=========== =========== ==========
Diluted................................................................. 10,989,091 10,334,556 8,788,816
=========== =========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
35
<PAGE>
SCC COMMUNICATIONS CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common Stock Additional Stock
-------------------- Paid-in Subscriptions
Shares Amount Capital Receivable
---------- ------ ---------- -------------
<S> <C> <C> <C> <C>
BALANCES, at December 31,
1996.............................. 1,840,899 $ 2 $ 298 $(19)
Dividends accrued on Series D, E
and F Convertible Preferred Stock -- -- -- --
Exercise of stock options,
including options exercised in
exchange for notes receivable... 153,382 -- 154 (80)
Common stock warrant put price
adjustment (Note 4).............. -- -- -- --
Net income........................ -- -- -- --
---------- --- ------- ----
BALANCES, at December 31,
1997.............................. 1,994,281 2 452 (99)
Dividends accrued on Series D, E
and F Convertible Preferred Stock -- -- -- --
Issuance of common stock through 25,985 --
Initial Public Offering, net of
issuance costs of $964.......... 2,415,000 2 25,985 --
Conversion of preferred stock into
common stock...................... 6,188,575 6 14,938 --
Conversion of common stock
warrants.......................... 195,148 -- 1,549 --
Issuance of common stock under
Employee Stock Purchase Plan.... 61,105 -- 243 --
Exercise of stock options.......... 68,494 -- 39 --
Common stock warrant put
price adjustment.................. -- -- -- --
Stock subscription payments
received.......................... -- -- -- 40
Tax benefit related to
disqualifying dispositions of
common stock...................... -- -- 117 --
Retirement of treasury stock....... (36,250) -- (3) --
Net income......................... -- -- -- --
---------- --- ------- ----
BALANCES, at December 31, 1998...... 10,886,353 10 43,320 (59)
Issuance of common stock under
Employee Stock Purchase Plan...... 38,679 -- 145 --
Exercise of stock options.......... 179,079 1 460 --
Stock subscription payments
received........................ -- -- -- 26
Net loss........................... -- -- -- --
---------- --- ------- ----
BALANCES, at December 31, 1999...... 11,104,111 $11 $43,925 $(33)
========== === ======= ====
</TABLE>
<TABLE>
<CAPTION>
Total
Treasury Stock Additional Stockholders'
-------------------- Accumulated Equity
Shares Amount Capital (Deficit)
---------- ------ ----------- -------------
<S> <C> <C> <C> <C>
BALANCES, at December 31,
1996.............................. (36,250) $(3) $(13,346) $(13,068)
Dividends accrued on Series D, E
and F Convertible Preferred Stock -- -- (740) (740)
Exercise of stock options,
including options exercised in
exchange for notes receivable... -- -- -- 74
Common stock warrant put price
adjustment (Note 4).............. -- -- (8) (8)
Net income........................ -- 1,875 1,875
-------- --- -------- --------
BALANCES, at December 31,
1997.............................. (36,250) (3) (12,219) (11,867)
Dividends accrued on Series D, E
and F Convertible Preferred Stock -- -- (355) (355)
Issuance of common stock through
Initial Public Offering, net of
issuance costs of $964.......... -- -- -- 25,987
Conversion of preferred stock into
common stock...................... -- -- 14,944
Conversion of common stock warrants -- -- -- 1,549
Issuance of common stock under
Employee Stock Purchase Plan...... -- -- -- 243
Exercise of stock options.......... -- -- -- 39
Common stock warrant put
price adjustment.................. -- -- (77) (77)
Stock subscription payments
received........................ -- -- -- 40
Tax benefit related to
disqualifying dispositions of
common stock...................... -- -- -- 117
Retirement of treasury stock....... 36,250 3 -- --
Net income......................... -- -- 2,971 2,971
-------- --- -------- --------
BALANCES, at December 31, 1998...... -- -- (9,680) 33,591
Issuance of common stock under
Employee Stock Purchase Plan...... -- -- -- 145
Exercise of stock options.......... -- -- -- 461
Stock subscription payments
received.......................... -- -- -- 26
Net loss........................... -- -- (1,288) (1,288)
-------- --- -------- --------
BALANCES, at December 31, 1999...... -- $-- $(10,968) $ 32,935
======== === ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
36
<PAGE>
SCC COMMUNICATIONS CORP.
STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss)...................................................... $ (1,288) $ 2,971 $ 1,875
Adjustments to reconcile net income to net cash provided by
operating activities --
Amortization and depreciation........................................ 5,117 4,315 3,534
Amortization and write-off of note payable discount.................. -- 1,430 33
Accretion of investments in marketable securities.................... (284) (316) --
(Gain) loss on disposal of assets.................................... 53 -- (40)
Loss on disposal of discontinued division............................ -- -- 2,032
Provision for estimated losses on contracts.......................... -- 7 (196)
Provision for doubtful accounts...................................... 8 -- 25
Deferred income tax benefit.......................................... (547) (912) (2,500)
Change in --
Accounts receivable................................................ 2,557 (2,492) (977)
Unbilled revenue................................................... 189 (39) (190)
Prepaids and other................................................. (38) (286) (202)
Accounts payable................................................... (29) 246 236
Accrued liabilities................................................ (433) 150 1,337
Deferred contract revenue.......................................... (1,043) (705) 303
Decrease in current assets and liabilities from discontinued
operations......................................................... -- -- 110
-------- -------- -------
Net cash provided by operating activities........................ 4,262 4,369 5,380
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment.................................. (1,961) (2,995) (2,646)
Proceeds from sale of net assets....................................... -- -- 603
Purchase of investments in marketable securities....................... (14,559) (14,446) --
Sale of investments in marketable securities........................... 11,500 4,947 --
Software development costs............................................. (497) (397) (142)
-------- -------- -------
Net cash used in investing activities............................ (5,517) (12,891) (2,185)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable................................ -- -- 4,275
Principal payments on notes payable.................................... -- (4,986) (1,439)
Principal payments on capital lease obligations........................ (1,870) (5,038) (3,634)
Proceeds from equipment financing...................................... 581 -- --
Exercise of stock options.............................................. 461 39 74
Stock subscription payments received................................... 26 40 --
Purchases through employee stock purchase plan......................... 145 243 --
Proceeds from initial public offering and overallotment,
net of underwriters' discount........................................ -- 26,951 --
Costs related to initial public offering............................... -- (964) --
-------- -------- -------
Net cash provided by (used in) financing activities.............. (657) 16,285 (724)
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... (1,912) 7,763 2,471
CASH AND CASH EQUIVALENTS, beginning of period........................... 10,266 2,503 32
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of period................................. $ 8,354 $ 10,266 $ 2,503
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................... $ 439 $ 801 $ 942
======== ======== =======
Cash paid during the period for taxes.................................. $ 459 $ 95 $ 18
======== ======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Dividends accrued on Series D, E and F Convertible Preferred Stock..... $ -- $ 355 $ 740
======== ======== =======
Common stock issued to employees in exchange for employee notes
receivable........................................................... $ -- $ -- $ 80
======== ======== =======
Property acquired with capital leases.................................. $ 889 $ 3,488 $ 3,074
======== ======== =======
Conversion of preferred stock.......................................... $ -- $ 14,943 $ --
======== ======== =======
Conversion of warrants................................................. $ -- $ 1,549 $ --
======== ======== =======
Retirement of treasury stock........................................... $ -- $ 3 $ --
======== ======== =======
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
37
<PAGE>
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION, BUSINESS AND LIQUIDITY
SCC Communications Corp. (the "Company") is a Delaware corporation. The
Company is the leading provider of 9-1-1 operations support systems services to
incumbent local exchange carriers ("ILECs"), competitive local exchange carriers
("CLECs"), wireless carriers and state and local governments in the United
States. The Company manages the data which enables 9-1-1 calls to be routed to
the appropriate public safety agency with accurate and timely information about
the caller's identification and location. In addition, the Company licenses its
9-1-1 software to carriers that wish to manage the delivery of 9-1-1 data
management services in-house.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operating Cycle
Assets and liabilities related to contracts are included in current assets
and liabilities in the accompanying balance sheets since they will be liquidated
in the normal course of contract completion, although this may require more than
one year.
Property and Equipment
Depreciation of property and equipment is computed using the straight-line
method over estimated useful lives of three to five years for computer hardware
and equipment, seven years for furniture and fixtures and the life of the lease
for leasehold improvements. The costs of repairs and maintenance are expensed
while enhancements to existing assets are capitalized. Depreciation expense
totaled approximately $4,888,000, $4,174,000 and $3,399,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Software Development Costs
The Company expenses the costs of developing computer software until
technological feasibility is established and capitalizes all costs incurred from
that time until the software is available for general customer release.
Technological feasibility for the Company's computer software products is based
upon the earlier of the achievement of (a) a detailed program design free of
high-risk development issues or (b) completion of a working model. Costs of
major enhancements to existing products with a wide market are capitalized while
routine maintenance of existing products is charged to expense as incurred. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of capitalized computer software development costs requires
considerable judgment by management with respect to certain external factors,
including, but not limited to, technological feasibility, anticipated future
gross revenue, estimated economic life and changes in software and hardware
technology.
Capitalized software costs are amortized on a product-by-product basis. The
annual amortization is the greater of the amount computed using (a) the ratio
that current gross revenue for a product compares to the total of current and
anticipated future gross revenue for that product, or (b) the straight-line
method over the remaining estimated economic life of the product which is
typically five years. Amortization expense related to capitalized software costs
totaled approximately $229,000, $145,000 and $107,000 for the years ended
December 31, 1999, 1998 and 1997, respectively, and is included in cost of data
management services and licenses and implementation services in the statements
of operations.
38
<PAGE>
Revenue Recognition
The Company reports revenue based on its two segments, data management
services and licenses and implementation services.
Revenue from data management services generally consists of a non-recurring
fee and monthly recurring revenue. Revenue included in data management services
generally includes a non-recurring 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's
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. Data management services revenue also may include
revenue from enhanced products and services, which may include non-recurring
and/or monthly fees which are separately stated in the contract and are
recognized in the period in which the services are performed.
Revenue related to software license fees and implementation of the
Company's 9-1-1 systems at customer sites is recognized using the percentage-of-
completion method because the Company's software requires significant
modification for each customer. Such contracts include a license fee for the use
of the Company's software and service fees for the installation and
customization of the system. The Company's costs to install its systems include
direct labor, third-party license fees and miscellaneous expenses. Such costs
are included in cost of licenses and implementation services.
In applying the percentage-of-completion method, revenue and related costs
are recognized based on the percentage that labor hours incurred to date
compared to total estimated labor hours. Revenue recognized in excess of amounts
billed is reflected as unbilled revenue and amounts billed in excess of revenue
recognized are reflected as deferred contract revenue in the accompanying
balance sheets. The Company recognizes any known or anticipated loss on
contracts in process when such losses are determined to exist.
Revenue from licenses and implementation services includes customer support
revenue which is recognized ratably over the related contract period on a
straight-line basis. Costs related to customer support revenue are included in
cost of licenses and implementation services in the accompanying statements of
operations.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents, accounts
receivable and investments in high-grade treasury bonds and commercial paper.
The Company maintains its cash balances in the form of bank demand deposits,
money market accounts, treasury bonds and commercial paper with original
maturities less than ninety days. The Company's deposits and investments are
with financial institutions that management believes are creditworthy and
investments are high-grade. The Company's accounts receivable are from customers
that are generally telecommunications service providers; accordingly, the
Company's accounts receivable are concentrated in the telecommunications
industry. The Company's principal customers (Note 10) accounted for 71% and 30%
of the Company's accounts receivable as of December 31, 1999 and 1998,
respectively. The Company has no significant financial instruments with off-
balance sheet risk of accounting loss, such as foreign exchange contracts,
option contracts or other foreign currency hedging arrangements.
Research and Development
Research and development efforts consist of salaries, supplies and other
related costs. These costs are expensed as incurred and totaled approximately
$1,740,000, $1,376,000 and $738,000 for the years ended December 31, 1999, 1998
and 1997, respectively. These costs are included in cost of data management
services and licenses and implementation services in the accompanying statements
of operations and do not include development costs incurred as part of the
efforts performed under licenses and implementation services contracts with the
Company's customers.
39
<PAGE>
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
highly liquid investments with original maturities of 90 days or less.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Fair Market Value of Financial Instruments
Financial instruments include cash and cash equivalents, corporate debt
securities, accounts receivable and debt obligations. The carrying amounts for
cash and cash equivalents and accounts receivable approximate fair market value
because of the short maturity of these instruments. The fair value of notes are
estimated based on current rates available for debt with similar maturities and
securities, and at December 31, 1999 and 1998, approximates the carrying value.
Investments in Marketable Securities
The Company's investments in corporate debt securities are classified as
held-to-maturity and are carried at the amortized cost basis. The investments
had the following values at December 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
Amortized/ Gross Unrealized Gross Unrealized
Accreted Cost Accrued Interest Holding Gains Holding Losses Fair Value
------------- ----------------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Corporate Debt Securities,
maturing within one year $ 7,761,000 $(237,000) $13,000 $ (2,000) $ 7,535,000
Corporate Debt Securities,
maturing after one year
through five years 2,054,000 (33,000) 3,000 -- 2,024,000
----------- --------- ------- -------- -----------
Balances at December 31, 1998 $ 9,815,000 $(270,000) $16,000 $ (2,000) $ 9,559,000
----------- --------- ------- -------- -----------
Corporate Debt Securities,
maturing within one year $12,165,000 $ -- $ -- $(10,000) $12,155,000
Corporate Debt Securities,
maturing after one year
through five years 993,000 -- -- (2,000) 991,000
----------- --------- ------- -------- -----------
Balances at December 31, 1999 $13,158,000 $ -- $ -- $(12,000) $13,146,000
=========== ========= ======= ======== ===========
</TABLE>
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109
("SFAS 109"), which requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted
tax laws, of temporary differences between the financial reporting and tax basis
of assets and liabilities. SFAS 109 also requires recognition of deferred tax
assets for the expected future tax effects of loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, on a more likely
than not basis, are not expected to be realized (Note 6).
Stock Based Compensation Plans
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB Opinion No. 25") in accounting for its stock option and other
stock-based compensation plans for employees and directors. The Company has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," for such
options and stock-based plans for employees and directors (Note 4).
40
<PAGE>
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable from future undiscounted cash flows. Impairment losses are
recorded for the excess, if any, of the carrying value over the fair value of
the long-lived assets.
Earnings Per Share
The Company presents basic and diluted earnings or loss per share in
accordance with Statement of Financial Accounting Standards No. 128 "Earnings
Per Share" ("SFAS 128"), which establishes standards for computing and
presenting basic and diluted earnings per share. Under this statement, 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 1,085,747, 51,000 and 298,017 in 1999, 1998 and 1997, respectively.
A reconciliation of the numerators and denominators used in computing per
share net income from continuing operations is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Net income (loss) from continuing
operations before extraordinary
item (numerator for diluted loss
per share).......................... $(1,062,000) $3,880,000 $4,783,000
Dividends on Convertible Preferred
Stock............................... -- (355,000) (740,000)
Common stock warrant put price
adjustment.......................... -- (77,000) (8,000)
----------- ---------- ----------
Numerator for basic income (loss)
per share from continuing
operations before extraordinary
item........................... $(1,062,000) $3,448,000 $4,035,000
----------- ========== ----------
Denominator for basic income (loss)
per share:
Weighted average common shares
outstanding....................... 10,989,091 6,433,564 1,857,413
=========== ========== ==========
Denominator for diluted income (loss)
per share:
Convertible Preferred Stock.......... -- 3,051,900 6,188,575
Weighted average common shares
outstanding........................ 10,989,091 6,433,564 1,857,413
Options issued to employees.......... -- 752,863 720,605
Putable common stock warrant......... -- 96,229 22,223
----------- ---------- ----------
Denominator for diluted
income (loss) per share..... 10,989,091 10,334,556 8,788,816
=========== ========== ==========
</TABLE>
Income (loss) per common share was computed as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Basic income (loss) per share:
Income (loss) per share from continuing
operations before extraordinary item........ $(0.10) $ 0.53 $ 2.17
Loss per share from discontinued operations... (0.02) -- (1.56)
Loss per share from extraordinary item........ -- (0.14) --
------ ------ ------
Basic income (loss) per share........... $(0.12) $ 0.39 $ 0.61
====== ====== ======
Diluted income (loss) per share:
Income (loss) per share from continuing
operations................................ $(0.10) $ 0.38 $ 0.54
Loss per share from discontinued operations. (0.02) -- (0.33)
Loss per share from extraordinary item...... -- (0.09) --
------ ------ ------
Diluted income (loss) per share......... $(0.12) $ 0.29 $ 0.21
====== ====== ======
</TABLE>
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 and No. 137
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 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,
41
<PAGE>
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"). SFAS No. 137 delays the effective date of SFAS No. 133 to financial
quarters and financial years beginning after June 15, 2000. The Company 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.
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.
Staff Accounting Bulletin No. 101
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101
provides interpretive guidance on the recognition, presentation and disclosure
of revenue in financial statements. SAB 101 must be applied to financial
statements no later than the second fiscal quarter of 2000. The Company is
currently reviewing SAB 101 to determine what impact, if any, the adoption of
SAB 101 will have on its financial position and results of operations.
(3) DISCONTINUED OPERATIONS
On June 30, 1997, the Company sold the net assets of its Premise Products
Division. The sale resulted in a net loss of $2,032,000. The net losses of this
division are included in the statements of operations as loss from operations of
discontinued division. Revenue from the division for the six months ended June
30, 1997 was $5,785,000. Net losses from operations of this division totaled
$226,000 and $876,000 in 1999 and 1997, respectively, and are presented in the
Company's financial statements as loss from operations of discontinued division.
The loss from discontinued operations in 1999 resulted from final closeout of
unassigned contracts and the transition of customers to the company that
acquired this division.
(4) STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock and Preferred Stock
In March 1998, the Company's Board of Directors authorized an increase in
common stock to 30,000,000 shares and authorized 15,000,000 shares of
undesignated preferred stock. In 1998 the Company also retired 36,250 shares of
treasury stock.
Mandatorily Redeemable Convertible Preferred Stock
In connection with the Company's initial public offering in June 1998, the
Company's mandatorily redeemable convertible preferred stock was converted on a
one-for-one basis to common stock. Activity for 1997, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
Shares Issued and Outstanding
------------------------------------------------------------------------------------
Series A Series B Series C Series D Series E Series F Total
---------- ---------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, at December 31, 1996 and
1997............................... 1,515,152 1,010,101 442,328 912,123 1,083,381 1,225,490 6,188,575
---------- ---------- -------- -------- ---------- ---------- ----------
Conversion of preferred stock to
common stock..................... (1,515,152) (1,010,101) (442,328) (912,123) (1,083,381) (1,225,490) (6,188,575)
---------- ---------- -------- -------- ---------- ---------- ----------
BALANCES, at December 31,
1998 and 1999................... -- -- -- -- -- -- --
========== ========== ======== ======== ========== ========== ==========
</TABLE>
42
<PAGE>
The activity related to the liquidation or redemption value of Series A
through Series F Convertible Preferred Stock for the periods ended December 31,
1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Liquidation or Redemption Value
--------------------------------------------------------------------------------------------
Series A Series B Series C Series D Series E Series F Total
----------- ----------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, at December 31,
1996............................ $ 1,500,000 $ 1,000,000 $ 730,000 $ 2,242,000 $ 3,044,000 $ 5,333,000 $ 13,849,000
Dividends accrued on
Series D, E and F
Convertible Preferred
Stock......................... -- -- -- 129,000 211,000 400,000 740,000
----------- ----------- --------- ----------- ----------- ----------- ------------
BALANCES, at December 31,
1997............................ 1,500,000 1,000,000 730,000 2,371,000 3,255,000 5,733,000 14,589,000
Dividends accrued on
Series D, E and F
Convertible Preferred
Stock......................... -- -- -- 62,000 101,000 192,000 355,000
Conversion of Series A-F
Convertible Preferred Stock to
Common Stock.................... (1,500,000) (1,000,000) (730,000) (2,433,000) (3,356,000) (5,925,000) (14,944,000)
----------- ----------- --------- ----------- ----------- ----------- ------------
BALANCES, at December 31,
1998 and 1999................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
=========== =========== ========= =========== =========== =========== ============
</TABLE>
Until the mandatorily redeemable convertible preferred stock was converted,
dividends of 8% per year were accrued that would be due upon liquidation or
redemption.
Putable Common Stock Warrant
In November 1997, the Company borrowed $4,000,000 from Banc One Capital
Partners II, LLC (the "Lender") (Note 5). In connection with the loan, the
Lender received a warrant to purchase 195,148 shares of the Company's common
stock for $100. In June 1998, the Lender exercised this warrant. Because of the
put feature of the warrant, the Company recorded an amount equal to the number
of shares under the warrant times the difference between the current market
value, as defined, and the market value of the shares at the time the warrant
was issued. This amount was recorded as an increase in the value of the putable
common stock warrant and charged to accumulated deficit in the accompanying
financial statements through the time that the warrant was exercised. The amount
recorded was $77,000 and $8,000 in 1998 and 1997, respectively.
Stock Subscriptions Receivable
In September 1997, in connection with the sale of the Company's Premise
Products Division, several former employees of the Company signed full recourse
promissory notes to the Company to exercise their vested stock options. The
notes accrue interest at 6.07% per annum. The Company extended the due date on
the notes to March 20, 1999 and is pursuing collection of the note that remains
unpaid.
Stock Option Plan
The Company adopted the 1998 Stock Incentive Plan ("1998 Plan") effective
June 23, 1998, which is a successor to the Company's 1990 Option Plan. As of
December 31, 1999, a total of 3,257,647 shares have been authorized for issuance
under the 1998 Plan, including shares authorized under the 1990 Option Plan. The
shares reserved for issuance will increase automatically on the first trading
day of each calendar year, beginning with the 1999 calendar year, by 3% of the
number of shares of common stock outstanding on the last trading day of the
immediately preceding calendar year. The share reserve was increased by 326,590
shares under this provision in 1999. The 1998 Plan allows for issuances of
options to officers, non-employee Board members and consultants, as provided for
under the terms of the 1998 Plan.
Employee Stock Purchase Plan
On March 18, 1998, the Company adopted an employee stock purchase plan
("ESPP") under which eligible employees may contribute up to 10% of their
salaries through payroll deductions to purchase shares of the Company's common
stock. The first offering period of the ESPP began March 1, 1998 and ended on
December 31, 1998. Thereafter, offering periods will be successive six month
periods. At the end of each offering period, amounts contributed by employees
will be used to purchase shares of the Company's common stock at a price equal
to 85%
43
<PAGE>
of the lower of the closing price of the common stock on the first day or last
day of the offering period. The Company's Board of Directors has authorized the
issuance of up to 200,000 shares under the ESPP and may terminate the ESPP at
any time. At March 1 of each year, the shares available under the ESPP will be
restored to 200,000, although the Company's Board of Directors may elect to
restore a lesser number of shares. The Company issued 38,679 and 61,105 shares
under the ESPP in 1999 and 1998, respectively.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
cost for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, provided that pro forma disclosures are made of net income or
loss assuming the fair value based method of SFAS 123 had been applied. The
Company has elected to account for its stock-based compensation plans under APB
25; accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair values of all options granted under the 1998 Plan,
which succeeds the 1990 Option Plan, during 1999, 1998 and 1997, using the
Black-Scholes pricing model and the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate........................ 5.40% 4.71% 6.41%
Expected dividend yield........................ 0.00% 0.00% 0.00%
Expected lives outstanding..................... 4.8 years 4.4 years 5.0 years
Expected volatility............................ 78.614% 66.004% 0.001%
</TABLE>
To estimate lives of options for this valuation, it was assumed options
will be exercised upon becoming fully vested. All options are initially assumed
to vest. Cumulative compensation costs recognized in pro forma net income or
loss with respect to options that are forfeited prior to vesting is adjusted as
a reduction of pro forma compensation expense in the period of forfeiture.
Because the Company's common stock was not yet publicly traded, the expected
market volatility was assumed to be zero in 1997. In 1998 and 1999, the
Company's common stock was not yet traded for an extended period of time, thus
the expected market volatility was based on the stock prices of companies whose
operations are similar to the Company's. Actual volatility of the Company's
common stock may vary. Fair value computations are highly sensitive to the
volatility factor assumed; the greater the volatility, the higher the computed
fair value of options granted.
The total fair value of options granted under the 1998 Option Plan and the
ESPP was computed to be approximately $2,630,000, $1,406,000 and $499,000 for
the years ended December 31, 1999, 1998 and 1997, respectively. These amounts
are amortized ratably over the vesting periods of the options or recognized at
date of grant if no vesting period is required. Pro forma stock-based
compensation, net of the effect of forfeitures, was $496,000, $417,000 and
$232,000 for 1999, 1998 and 1997, respectively.
A summary of stock options under the 1998 Plan and the ESPP as of December
31, 1999, 1998 and 1997 and changes during the years then ended are presented
below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................... 1,339,880 $3.62 1,106,610 $3.03 1,073,908 $1.68
Granted................... 740,364 5.15 379,211 5.81 270,016 6.93
Exercised................. (179,079) 2.56 (68,494) 0.54 (153,382) 1.00
Canceled.................. (245,301) 5.43 (77,447) 8.64 (83,932) 2.46
---------- ---------- ----------
Outstanding at end of
year...................... 1,655,864 $4.15 1,339,880 $3.62 1,106,610 $3.03
========== ========== ==========
Weighted average fair
value of options
granted................... $ 3.38 $ 3.19 $ 1.80
========== ========== ==========
</TABLE>
44
<PAGE>
The following table summarizes information about the options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/99 Life Price at 12/31/99 Price
--------------- ----------- ----------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
$0.12 -- 0.30................... 184,509 1.19 years $ .18 184,509 $ .18
$0.75 -- 3.00................... 334,217 5.33 years 1.98 322,410 1.94
$3.63 -- 5.13................... 679,103 9.13 years 4.39 90,292 4.09
$6.00 -- 7.50................... 425,351 8.13 years 6.59 80,344 7.42
$9.00 -- 12.75.................. 32,684 8.30 years 11.93 16,078 12.02
--------- ------ ------- ------
1,655,864 7.21 years $ 4.15 693,633 $ 2.62
========= =======
</TABLE>
If the Company had accounted for its stock-based compensation plan in
accordance with SFAS 123, the Company's net income from continuing operations
would have been reported as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Net income (loss) from continuing operations before
extraordinary item :
As reported.......................................... $(1,062,000) $3,880,000 $4,783,000
Pro forma............................................ $(1,373,000) $3,619,000 $4,638,000
Basic net income (loss) per share from continuing
operations before extraordinary item:
As reported.......................................... $ (0.10) $ 0.53 $ 2.17
Pro forma............................................ $ (0.12) $ 0.50 $ 2.09
Diluted net income (loss) per share from continuing
operations before extraordinary item:
As reported.......................................... $ (0.10) $ 0.38 $ 0.54
Pro forma............................................ $ (0.12) $ 0.35 $ 0.53
</TABLE>
(5) LONG-TERM DEBT
At December 31, 1999 and 1998, long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Capitalized lease obligations for equipment due on various dates through December 1,
2002, minimum monthly payments in varying amounts, currently approximately $189,000
including imputed interest ranging from 7.75% to 9.50% per annum, collateralized by
the related assets with a net book value of $3,838,000 and $4,273,000, respectively... 4,009,000 4,409,000
Less -- Current portion................................................................ (1,971,000) (1,618,000)
----------- -----------
$ 2,038,000 $ 2,791,000
=========== ===========
</TABLE>
The Company prepaid its $4,000,000 note payable to Banc One Capital
Partners II, LLC on June 30, 1998 and incurred a prepayment premium equal to 4%
of the amount, totaling $160,000. In addition, the Company wrote-off the
remaining debt discount related to the note payable of $1,282,000. The
prepayment penalty and write-off of the debt discount totaling $1,442,000 were
recorded as an extraordinary item, net of the related income tax benefit of
$533,000.
Debt maturities of long-term debt as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Capital
Leases
-----------
<S> <C>
2000................................................... $ 2,250,000
2001................................................... 1,633,000
2002................................................... 537,000
-----------
4,420,000
Less -- Amount related to interest..................... (411,000)
-----------
Principal portion of future obligations................ 4,009,000
Less -- Current portion................................ (1,971,000)
-----------
$ 2,038,000
===========
</TABLE>
(6) INCOME TAXES
The Company has operated in three countries, the United States, Canada and
Australia. For income tax return reporting purposes, the Company has
approximately $11,200,000 of net operating loss carryforwards and
45
<PAGE>
approximately $723,000 of tax credit carryforwards available to offset future
federal taxable income or federal tax liabilities in the United States. The
research and development credit and net operating loss carryforwards expire at
various dates through 2019.
The Tax Reform Act of 1986 contains provisions which may limit the net
operating loss and credit carryforwards available to be used in any given year
upon the occurrence of certain events including significant changes in ownership
of the Company. In accordance with certain provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), a greater than 50% change in ownership of
a company within a three-year period results in an annual limitation on the
Company's ability to utilize its net operating loss carryforwards from tax
periods prior to the ownership change.
Deferred income tax assets and liabilities at December 31, 1999 and 1998,
were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
----------- ----------
<S> <C> <C>
Current -
Accrued liabilities and other....... $ 640,000 $ 852,000
Deferred revenue.................... 70,000 200,000
Net operating loss carryforwards.... -- 1,179,000
Less - Valuation allowance.......... (57,000) (206,000)
----------- ----------
653,000 2,025,000
----------- ----------
Noncurrent -
Depreciation differences............ (1,057,000) (901,000)
Net operating loss carryforwards.... 4,150,000 1,974,000
Tax credit carryforwards............ 723,000 675,000
Less -- Valuation allowance......... (393,000) (244,000)
----------- ----------
3,423,000 1,504,000
----------- ----------
$ 4,076,000 $3,529,000
=========== ==========
</TABLE>
The Company recorded an income tax benefit of $568,000 in 1999 as it
believes that it is more likely than not that the net operating loss generated
will be utilized against future earnings. As of December 31, 1998, the Company
reversed $1,689,000 of the valuation allowance on part of its deferred tax
assets, as the Company believes it is more likely than not that such tax
benefits will be realized. Approximately $533,000 of the income tax benefit in
1998 was allocated to the extraordinary loss on early extinguishment of debt.
Management believes the remaining tax assets of $450,000 as of December 31,
1999 relate to tax credits that do not satisfy the realization criteria set
forth in SFAS No. 109 and has recorded a valuation allowance for such net tax
assets.
The components of the benefit for income taxes attributable to income from
operations as of December 31, 1999, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1999 1998 1997
--------- --------- -----------
<S> <C> <C> <C>
Current provision -- state.................. $ -- $ -- $ 172,000
Deferred benefit, federal and state.......... (468,000) (912,000) (2,500,000)
--------- --------- -----------
Income tax benefit........................... $(468,000) $(912,000) $(2,328,000)
========= ========= ===========
</TABLE>
The components of the provision (benefit) for income taxes attributable to
income from discontinued operations as of December 31, 1999, 1998 and 1997, were
as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Current provision --
Foreign............... $ -- $ -- $100,000
========== ========== ========
Deferred benefit --
Federal............... $(100,000) $ -- $ --
========= ========= ========
</TABLE>
46
<PAGE>
A reconciliation of income tax benefit computed by applying the federal
income tax rate of 34% to income from continuing operations before income taxes
as of December 31, 1999, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998 1997
-------- ----------- ----------
<S> <C> <C> <C>
Computed normal tax (benefit) provision............................ $(631,000) $ 700,000 $ 835,000
Tax effect of permanent differences and other...................... 124,000 9,000 34,000
State tax, net of federal tax impact............................... (61,000) 68,000 113,000
Change in valuation allowance attributable to
continuing operations............................................ -- (1,689,000) (3,310,000)
--------- ----------- -----------
Income tax benefit................................................. $(568,000) $ (912,000) $(2,328,000)
========= =========== ===========
</TABLE>
The benefit for income taxes is attributable to continuing operations and
discontinued operations in 1999, 1998 and 1997 is as follows.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1999 1998 1997
--------- ----------- -----------
<S> <C> <C> <C>
Provision (benefit) attributable to continuing
operations........................................... $(468,000) $ 777,000 $ 982,000
Change in valuation allowance attributable to
continuing operations................................ -- (1,689,000) (3,310,000)
--------- ----------- -----------
Net benefit attributable to continuing operations..... (468,000) (912,000) (2,328,000)
--------- ----------- -----------
Benefit attributable to discontinued operations....... (100,000) -- (797,000)
Change in valuation allowance attributable to
discontinued operations -- -- 897,000
--------- ----------- -----------
Net provision attributable to discontinued operations. (100,000) -- 100,000
--------- ----------- -----------
Total income tax benefit.................... $(568,000) $ (912,000) $(2,228,000)
========= =========== ===========
</TABLE>
(7) COMMITMENTS
The Company leases its office and research facilities and certain equipment
under operating lease agreements which expire through November 2003. Rent
expense for the years ended December 31, 1999, 1998 and 1997 was approximately
$1,370,000, $1,030,000 and $718,000, respectively. Future minimum lease
obligations under these agreements are as follows:
<TABLE>
<S> <C>
2000.......................... $1,580,000
2001.......................... 1,553,000
2002.......................... 1,552,000
2003.......................... 36,000
----------
Total............... $4,721,000
==========
</TABLE>
(8) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan under which eligible employees may defer up
to 15% of their compensation. The Company may make matching contributions and
discretionary contributions if approved by the Board of Directors. For 1998 and
1997, no employer matching or discretionary contributions were made to the
401(k) plan. However, in February 1999, the Company's Board of Directors
approved a matching contribution for employees, which was effective April 1,
1999. The Company matches 50% of employee contributions up to 6% of the
employee's salary, not to exceed $1,000 in 1999 and 2000, respectively. Matching
contributions will vest 35%, 70% and 100% for one, two and three years of
service, respectively.
(9) RELATED PARTY TRANSACTION
The Company provides data management and certain consulting services to and
leases equipment from entities in which a stockholder of the Company has an
ownership interest. A representative of the stockholder was a member of the
Company's Board of Directors until December 2, 1999. The Company received net
proceeds of approximately $6,979,000, $6,735,000 and $6,959,000 in 1999, 1998
and 1997, respectively, pursuant to these agreements. Amounts due to the
stockholder under the capital lease agreements net of amounts due to the Company
for services rendered as of December 31, 1999 and 1998 were $3,262,000 and
$3,962,000, respectively. The leases have interest rates ranging from 7.75% to
9.50%, require monthly payments and have expiration dates varying through
October 2002.
(10) REPORTABLE SEGMENTS AND MAJOR CUSTOMERS
Reportable Segments
47
<PAGE>
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, wireless carriers and state and local governments. 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.
Major Customers
Revenue from certain customers exceeded 10% of total revenue for the
respective year as follows: 27%, 27% and 26% in 1999; 27%, 25% and 21% in 1998
and 30%, 29% and 22% in 1997. Contracts with certain of these customers have a
ten-year duration and provide for fixed monthly fees based upon the number of
subscriber records managed and upon the services selected by the customer. All
of these customers are in the Company's data management services segment.
(11) LEGAL MATTERS
The Company is subject to various claims and business disputes in the
ordinary course of business. While the outcome of these matters cannot be
predicted with certainty, management anticipates that the ultimate outcome of
the issues will not have a material impact on the financial statements. Federal
and state regulations governing 9-1-1 service provisioning have typically
applied to local exchange services providers. The Company plans 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. The Company believes that the services it provides are
within the scope of the existing regulations and that any challenges to the
regulations will be decided in the Company's favor. However, if the regulations
are challenged and are not decided in the Company's favor, the Company may be
prohibited from expanding its services to certain markets.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item, insofar as it relates to directors and
executive officers, will be contained in the definitive Proxy Statement with
respect to the Company's 2000 Annual Meeting of Stockholders (the "2000 Proxy
Statement"), and is hereby incorporated by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be contained in the 2000 Proxy
Statement and is hereby incorporated by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
48
<PAGE>
Information required by this item will be contained in the 2000 Proxy
Statement and is hereby incorporated by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be contained in the 2000 Proxy
Statement and is hereby incorporated by reference thereto.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(1) Financial Statements
The financial statements filed as part of this report are listed on the
index to financial statements on page 32.
(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are not
required, are not applicable or the information is included in the Financial
Statements or Notes thereto.
(3) Exhibits
49
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1* -- Amended and Restated Certificate of Incorporation of the
Company
3.2* -- Restated Bylaws of the Company to be effective upon the
closing of the offering.
4.1* -- Form of Certificate for Common Stock.
4.2* -- Reference is made to Exhibits 3.1 and 3.2.
10.1* -- Fourth Amended and Restated Registration Rights Agreement, dated
March 5, 1996.
10.2* -- 1990 Stock Option Plan.
10.3* -- 1998 Stock Incentive Plan.
10.4* -- 1998 Employee Stock Purchase Plan, as amended.
10.5* -- Form of Directors' and Officers' Indemnification Agreement.
10.6*+ -- 9-1-1 Services Agreement between Ameritech Information Systems,
Inc. and SCC Communications Corp., signed August 31, 1994.
10.7*+ -- Agreement for Services between SCC Communications Corp. and U S
West Communications, Inc. dated December 28, 1995.
10.8*+ -- Services Agreement No. PR-9026-L between SCC Communications Corp.
and BellSouth Telecommunications, Inc. dated October 13, 1995.
10.9*+ -- Wireless E9-1-1 Agreement between SCC Communications Corp. and
Ameritech Mobile Communications, Inc. dated April 1998
10.10*+ -- Asset Purchase Agreement between SCC Communications Corp. and
Printrak International, Inc., dated July 18, 1997.
10.11* -- Amendment One to Asset Purchase Agreement between SCC
Communications Corp. and Printrak International, Inc.
10.12* -- Bank One Loan Agreement dated April 15, 1997, effective as of July
1, 1996.
10.13* -- Banc One Capital Partners and SCC Communications Corp. Senior
Subordinated Note and Warrant Purchase Agreement, dated November 20,
1997.
10.14* -- Banc One Senior Subordinated Note due November 30, 2003.
10.15* -- Banc One Warrant Certificate.
10.16* -- Banc One and SCC Communications Corp. Option Agreement, dated
November 20, 1997.
10.17* -- Banc One and SCC Communications Corp. Registration Rights
Agreement, dated November 20, 1997.
10.18* -- Co-Sale Agreement, dated November 20, 1997, between SCC
Communications Corp., George Heinrichs, John Sims, Nancy Hamilton,
The Hill Partnership III, Ameritech Development Corporation,
Boston Capital Ventures Limited Partnership and Banc One Capital
Partners.
10.19* -- Preemptive Rights Agreement between Banc One Capital Partners and
SCC Communications Corp.
10.20* -- Master Lease Agreement Between Ameritech Credit Corporation and SCC
Communications Corp., dated March 11, 1996.
10.21*+ -- Consulting Agreement Between SCC Communications Corp. and Ameritech
Mobile Communications, Inc. dated October 27, 1997.
10.22* -- Bank One Loan Change in Terms Agreement effective as of April 15,
1998.
10.23# -- Employment Agreement between Nancy Hamilton and SCC Communications Corp.
23.1 -- Consent of Arthur Andersen LLP, Independent Public Accountants.
27.1 -- Financial Data Schedule.
</TABLE>
* Incorporated by reference to identically numbered exhibits included in the
Registrant's Registration Statement on Form S-1 (File No. 333-49767), as
amended.
+ Confidential treatment has been requested for a portion of these Exhibits.
# Incorporated by reference to identically numbered exhibits included in the
Registrant's 1998 Form 10-K.
(4) Reports on Form 8-K
None.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, therunto duly authorized, as of March 28, 2000.
SCC COMMUNICATIONS CORP.
By: /s/ Carol Nelson
------------------------------------------
Carol Nelson
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of March 28, 2000 by the following persons on
behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ George K. Heinrichs President, Chief Executive Officer
- ---------------------------- and Director (Principal Executive
George K. Heinrichs Officer)
/s/ Carol Nelson Chief Financial Officer
- ---------------------------- (Principal Financial and Accounting
Carol Nelson Officer)
/s/ Stephen O. James Director
- ----------------------------
Stephen O. James
/s/ Darrell A. Williams Director
- ----------------------------
Darrell A. Williams
/s/ David Kronfeld Director
- ----------------------------
David Kronfeld
/s/ Mary Beth Vitale Director
- ----------------------------
Mary Beth Vitale
/s/ Winston J. Wade Director
- ----------------------------
Winston J. Wade
</TABLE>
51
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated January 21, 2000, included in
Registration Statement File No. 333-63995. It should be noted that we have not
audited any financial statements for the company subsequent to December 31, 1999
or performed any audit procedures subsequent to the date of our report.
Denver, Colorado
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,354,000
<SECURITIES> 13,158,000
<RECEIVABLES> 2,313,000
<ALLOWANCES> 58,000
<INVENTORY> 0
<CURRENT-ASSETS> 24,821,000
<PP&E> 27,259,000
<DEPRECIATION> 15,753,000
<TOTAL-ASSETS> 41,780,000
<CURRENT-LIABILITIES> 6,807,000
<BONDS> 0
0
0
<COMMON> 11,000
<OTHER-SE> 32,924,000
<TOTAL-LIABILITY-AND-EQUITY> 41,780,000
<SALES> 0
<TOTAL-REVENUES> 32,584,000
<CGS> 0
<TOTAL-COSTS> 24,476,000
<OTHER-EXPENSES> 10,245,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 488,000
<INCOME-PRETAX> (1,530,000)
<INCOME-TAX> (468,000)
<INCOME-CONTINUING> (1,062,000)
<DISCONTINUED> (226,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,288,000)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
