UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 14, 2001, there were 14,431,444 shares of the Registrant's
Common Stock outstanding.
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. In particular, we direct your attention
to Item 1. Financial Statements, Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation and Item 3. Quantitative and
Qualitative Disclosures About Market Risk. We intend the forward-looking
statements throughout the Quarterly Report on Form 10-Q and the information
incorporated by reference to be covered by the safe harbor provisions for
forward-looking statements. All projections and statements regarding our
expected financial position and operating results, our business strategy, our
financing plans and the outcome of any contingencies are forward-looking
statements. These statements can sometimes be identified by our use of
forward-looking words such as "may," "believe," "plan," "will," "anticipate,"
"estimate," "expect," "intend", and other phrases of similar meaning. Known and
unknown risks, uncertainties and other factors could cause the actual results to
differ materially from those contemplated by the statements. The forward-looking
information is based on numerous assumptions and developments that are not
within our control. Although we believe that our expectations that are expressed
in these forward-looking statements are reasonable, we cannot promise that our
expectations will turn out to be correct. Our actual results could be materially
different from our expectations due to a variety of factors, including the
following:
o our planned investments in research, development and marketing to expand
our service offerings;
o the length of our sales cycle;
o price competition from entities with substantially greater resources than
us;
o the size, timing and duration of significant customer contracts;
o the number of subscriber records under our management;
o the unpredictable rate of adoption of wireless services by public safety
answering points;
o the introduction and market acceptance of our and our competitors' new
products and services;
o developments in telecommunications legislation and regulations, including
new interpretations of existing laws;
o the amount and timing of expenditures to expand our infrastructure and to
meet our customers' demands;
o the success or failure of our Alliance Program;
o technical difficulties and network downtime, including that caused by
unauthorized access to our systems; and
o our ability to integrate new customers and assets acquired in acquisitions.
This list is intended to identify some of the principal factors that could cause
actual results to differ materially from those described in the forward-looking
statements included elsewhere in this report. These factors are not intended to
represent a complete list of all risks and uncertainties inherent in our
business, and should be read in conjunction with the more detailed cautionary
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2000, under the caption "Item 1. Business - Risk Factors", our
other Securities and Exchange Commission filings, and our press releases.
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Balance Sheets as of March 31, 2001 (Unaudited) and December 31, 2000............... 1
Statements of Operations for the three-months ended March 31, 2001
and 2000 (Unaudited).............................................................. 2
Statements of Cash Flows for the three-months ended March 31, 2001
and 2000 (Unaudited).............................................................. 3
Notes to Financial Statements (Unaudited)........................................... 4
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 8
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.................... 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................................. 15
Item 2 - Changes in Securities and Use of Proceeds..................................... 15
Item 3 - Defaults on Senior Securities................................................. 15
Item 4 - Submission of Matters to a Vote of Security Holders........................... 15
Item 5 - Other Information............................................................. 15
Item 6 - Exhibits and Reports on Form 8-K.............................................. 15
Signatures............................................................................. 16
SCC COMMUNICATIONS CORP.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 5,694 $ 5,036
Short-term investments in marketable securities................................. 2,982 6,939
Accounts receivable, net of allowance for doubtful accounts of approximately
$259 and $184, respectively.................................................... 8,124 7,166
Unbilled revenue................................................................ 358 574
Prepaids and other.............................................................. 894 892
Deferred acquisition costs...................................................... 1,088 1,054
Deferred income taxes........................................................... 869 869
---------- ---------
Total current assets.................................................... 20,009 22,530
---------- ---------
PROPERTY AND EQUIPMENT, at cost:
Computer hardware and equipment................................................. 31,516 30,259
Furniture and fixtures.......................................................... 2,013 1,987
Leasehold improvements.......................................................... 1,069 1,049
---------- ---------
34,598 33,295
Less--Accumulated depreciation.................................................. (22,267) (20,820)
---------- ---------
Total property and equipment, net....................................... 12,331 12,475
OTHER ASSETS...................................................................... 107 107
DEFERRED INCOME TAXES............................................................. 3,206 3,206
DEFERRED COSTS.................................................................... 5,126 5,363
SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization of $950 and $864,
respectively.................................................................... 940 988
---------- ---------
Total assets............................................................ $41,719 $44,669
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 3,096 $ 1,226
Payroll-related accruals........................................................ 1,318 1,144
Other accrued liabilities....................................................... 1,602 2,688
Property and other taxes........................................................ 974 1,026
Current portion of capital lease obligations ................................... 1,836 2,107
Deferred revenue................................................................ 219 200
---------- ---------
Total current liabilities............................................... 9,045 8,391
---------- ---------
CAPITAL LEASE OBLIGATIONS, net of current portion................................. 1,154 1,511
DEFERRED REVENUE.................................................................. 9,811 10,070
---------- ---------
Total liabilities....................................................... 20,010 19,972
---------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 15,000,000 shares authorized; none issued or -- --
outstanding ...................................................................
Common stock, $.001 par value; 30,000,000 shares authorized; 11,542,036 and
11,488,040 shares issued and outstanding, respectively......................... 11 11
Additional paid-in capital...................................................... 45,001 44,814
Common stock warrants........................................................... 373 373
Stock subscriptions receivable.................................................. (33) (33)
Accumulated deficit............................................................. (23,643) (20,468)
--------- --------
Total stockholders' equity.............................................. 21,709 24,697
-------- --------
Total liabilities and stockholders' equity.............................. $41,719 $ 44,669
======== ========
The accompanying notes to financial statements are an integral part of these
balance sheets.
1
SCC COMMUNICATIONS CORP.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
------------- -----------
(Unaudited)
TOTAL REVENUE.................................................... $ 13,189 $ 9,033
COSTS AND EXPENSES:
Direct costs................................................... 9,865 6,285
Sales and marketing............................................ 2,732 1,352
General and administrative..................................... 2,610 1,543
Research and development....................................... 1,226 629
------------- -----------
Total costs and expenses................................ 16,433 9,809
------------- -----------
LOSS FROM OPERATIONS............................................. (3,244) (776)
OTHER INCOME (EXPENSE):
Interest and other income...................................... 157 303
Interest and other expense..................................... (88) (92)
------------- -----------
LOSS FROM OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE........................................... (3,175) (565)
------------- -----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net of tax
of $0.......................................................... -- (3,082)
------------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS....................... $ (3,175) $ (3,647)
============= ===========
BASIC AND DILUTED NET LOSS PER SHARE:
Loss per share before cumulative effect of change in accounting $ (0.28) $ (0.05)
principle....................................................
Cumulative effect of change in accounting principle............ -- (0.28)
------------- -----------
Net loss per share............................................. $ (0.28) $ (0.33)
============= ===========
SHARES USED IN COMPUTING NET LOSS PER SHARE:
Basic and Diluted.............................................. 11,505,889 11,130,388
============= ===========
The accompanying notes to financial statements are an integral part of these
statements.
2
SCC COMMUNICATIONS CORP.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
------------- -----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $(3,175) $(3,647)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Amortization and depreciation..................................... 1,530 1,273
Cumulative effect of change in accounting principle............... -- 3,082
Accretion of investments in marketable securities................. (43) (85)
Loss on disposal of assets........................................ 8 --
Provision for doubtful accounts................................... 75 --
Change in--
Accounts receivable............................................. (1,033) 549
Unbilled revenue................................................ 216 (381)
Prepaids and other.............................................. (2) (34)
Deferred costs.................................................. 237 (142)
Accounts payable and accrued liabilities........................ 906 (149)
Deferred revenue................................................ (240) 772
------------- -----------
Net cash provided by (used in) operating activities........... (1,521) 1,238
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment............................... (1,321) (506)
Purchase of investments in marketable securities.................... -- (3,941)
Sale of investments in marketable securities........................ 4,000 6,250
Deferred acquisition costs.......................................... (34) --
Software development costs.......................................... (25) (103)
------------- -----------
Net cash provided by investing activities..................... 2,620 1,700
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations..................... (628) (479)
Proceeds from equipment financing................................... -- 536
Proceeds from exercise of stock options............................. 187 128
------------- -----------
Net cash provided by (used in) financing activities........... (441) 185
------------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................. 658 3,123
CASH AND CASH EQUIVALENTS, beginning of period........................ 5,036 8,354
------------- -----------
CASH AND CASH EQUIVALENTS, end of period.............................. $ 5,694 $11,477
============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................ $ 91 $ 92
============= ===========
Cash paid during the period for taxes............................... $ 204 $ 118
============= ===========
The accompanying notes to financial statements are an integral part of these
statements.
3
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements included herein reflect all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to fairly present the Company's financial position,
results of operations and cash flows for the periods presented. Certain
information and footnote disclosures normally included in audited financial
information prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. The results of operations for the period
ended March 31, 2001 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
December 31, 2001. These financial statements should be read in conjunction with
the financial statements and notes thereto which are included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
Certain prior year amounts have been re-classified to conform with the
current year's presentation.
NOTE 2 - ADOPTION OF SAB 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. The Company concluded that its then current
revenue recognition policies had to change to be in accordance with SAB 101.
Specifically, the guidance provided by SAB 101 required the Company to defer the
up-front NRE fee, certain enhancement fees and related incremental costs and
recognize them over the life of each contract. Prior to the adoption of SAB 101,
the Company recognized revenue from the NRE Services and Enhancement Services on
the percentage of completion method over the period in which the services were
performed.
The Company adopted SAB 101 during the quarter ended December 31, 2000. The
adoption of SAB 101 required the Company to reflect a cumulative effect of
change in accounting principles of $3.1 million as if SAB 101 had been
implemented on January 1, 2000 and to restate all of the previously reported
2000 quarterly results.
The cumulative effect of change in accounting principle reflects the amount
of income that had been recognized under the Company's previously existing
revenue recognition methods that would have been deferred as of December 31,
1999 had the Company been under the guidelines of SAB 101.
The restatement of the previously reported 2000 quarterly results reflects
the net difference of fees received and incremental costs incurred that were
deferred from previous periods and recognized in the current quarter and the
fees received and incremental costs incurred in the current quarter that are
deferred into future periods. The table below illustrates the restatement of
previously filed unaudited information for the three months ended March 31,
2000.
For the Three Months Ended
March 31, 2000
---------------------------------------
ORIGINALLY SAB 101
(amounts in thousands) REPORTED ADJUSTMENT RESTATED
---------- ------------- -----------
Revenue...................................... $ 9,325 $ (292) $ 9,033
Direct Costs................................. 6,427 (142) 6,285
Net income before cumulative effect of
change in accounting principle............ (415) (150) (565)
Cumulative effect of change in accounting
principle................................. -- (3,082) (3,082)
Net income................................... $ (415) $ (3,232) $ (3,647)
Income (loss) per share (basic and diluted).. $ (0.04) $ (0.29) $ (0.33)
NOTE 3 - 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
earnings (loss) per share is determined
4
by dividing net income (loss) available to common stockholders 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 as-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 733,747 and 907,788 for the three months ended March 31, 2001 and
2000, respectively.
NOTE 4 - REPORTABLE SEGMENTS
The Company has five reportable segments, or "Business Units": Incumbent
Local Exchange Carrier ("ILEC"), Competitive Local Exchange Carrier ("CLEC"),
Wireless, Direct, and Corporate. The Company measures its reportable business
units based on revenue and costs directly related to each business unit.
Substantially all of the Company's customers are in the United States. The
Company's business units are segmented based on the type of customer each
business unit serves. The ILEC, CLEC and Wireless business units address ILEC,
CLEC and wireless carriers, respectively. The Direct business unit addresses
sales, either directly or indirectly, to state and local government entities.
The Corporate business unit captures costs that are not directly related to a
specific Business Unit. These segments are managed separately because the nature
of and resources used for each segment is unique.
The Company does not segregate assets between the segments as it is
impractical to do so.
(dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
ILEC CLEC WIRELESS DIRECT CORPORATE TOTAL
March 31, March 31, March 31, March 31, March 31, March 31,
-----------------------------------------------------------------------------------------------------------
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Revenue $ 7,252 $ 6,838 $ 3,090 $ 1,371 $ 1,788 $ 526 $ 1,059 $ 298 $ -- $ -- $ 13,189 $ 9,033
Direct costs 4,391 3,978 1,371 473 2,406 888 1,697 946 -- -- 9,865 6,285
Sales and
marketing 656 351 422 122 428 108 387 314 839 457 2,732 1,352
General and
administrative -- -- -- -- -- -- -- -- 2,610 1,543 2,610 1,543
Research and
development 189 121 17 86 1 139 69 185 950 98 1,226 629
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Total 5,236 4,450 1,810 681 2,835 1,135 2,153 1,445 4,399 2,098 16,433 9,809
Operating income
(loss) 2,016 2,388 1,280 690 (1,047) (609) (1,094) (1,147) (4,399) (2,098) (3,244) (776)
Other income, net -- -- -- -- -- -- -- -- 69 211 69 211
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Net income (loss)
from operations
before
cumulative
effect of change
in accounting
principle 2,016 2,388 1,280 690 (1,047) (609) (1,094) (1,147) (4,330) (1,887) (3,175) (565)
Cumulative effect
of change in
accounting
principle -- (1,663) -- (413) -- (887) -- (119) -- -- -- (3,082)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Net income (loss) $ 2,016 $ 725 $ 1,280 $ 277 $(1,047) $(1,496) $(1,094) $(1,266)$(4,330) $(1,887) $ (3,175) $ (3,647)
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======== ========
- -------------------------------------------------------------------------------------------------------------------------------
NOTE 5 - Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 and No. 137
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value. In
June 1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - An amendment of FASB Statement No.
133." SFAS No. 137 delays the effective date of SFAS No. 133 to financial
quarters and financial years beginning after June 15, 2000. The Company does not
typically enter into arrangements that would fall under the scope of
5
Statement No. 133 and thus, Statement No. 133 did not significantly affect
the Company's financial condition and results of operations.
Statement of Financial Accounting Standards No. 140
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Asset and Extinguishments of Liabilities." SFAS No.
140 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. It is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001 and is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
Company does not believe that this statement will materially impact its results
of operations.
NOTE 6 - SUBSEQUENT EVENTS
On May 2, 2001, the Company entered into an agreement to sell 632,111 shares
of its common stock to an institutional investor in a private offering exempt
from registration under the federal securities laws under Rule 506 of Regulation
D and Section 4(2) of the Securities Act of 1933. The sale closed on May 10,
2001. The common stock was purchased at a negotiated price per share of $7.91,
reflecting the arithmetic average of the closing price of the Company's common
stock on the Nasdaq National Market (Symbol: SCCX) for the twenty consecutive
trading days prior to the offering date. As a finder's fee, the Company paid a
fee equal to five percent of the total offering proceeds and will issue a
warrant to purchase 31,605 shares equal to 5% of the shares issued to the
institutional investor at an exercise price equal to the per share offering
price of its common stock on the date of the offering. Other than the
finder's fee, the Company did not pay any other compensation or fees in
conjunction with this offering of common stock. In conjunction with this
offering, the Company also entered into a registration rights agreement that
will require the Company to register the shares issued for resale on behalf
of the institutional investor.
The net proceeds from this offering were $4,750,000. The Company plans to
use the net proceeds for general corporate purposes, including:
o repaying its obligations as they become due;
o financing capital expenditures, including acceleration of the
Company's wireless deployments and development of the Company's
Coordinate Routing Database; and
o working capital.
Pending use of the net proceeds for any of these purposes, the Company may
invest the net proceeds in short-term investment grade instruments,
interest-bearing bank accounts, certificates of deposit, money market
securities, U.S. government securities or mortgage-backed securities guaranteed
by federal agencies.
On May 11, 2001, the Company acquired certain assets, and assumed certain
liabilities, associated with the Call Handling and Database Product Lines of
Lucent Public Safety Systems ("LPSS"), an internal venture of Lucent
Technologies, Inc. ("Lucent"). The Company issued 2.25 million shares of
common stock and incurred other direct costs and assumed other liabilities.
The Company filed details of this transaction on its Form 8-K filed on May
14, 2001. The consideration the Company paid was determined through arm's
length negotiation. There was no material relationship between the Company
and Lucent prior to the acquisition. The results of operations for LPSS for
the three months ended March 31, 2001, are not included in this report. The
Company will amortize the acquired goodwill over a period of seven years
using the straight-line method of amortization.
The Company also committed to acquire approximately $4.8 million of
Sequent computers not later than one year from the date of the agreement.
In addition to the initial issuance of 2,250,000 shares of common stock,
the Company agreed to issue, 24 months from the date of closing, up to $32.9
million of redeemable, non-voting, preferred stock ("Preferred Stock") to
Lucent, subject to the attainment of specific total combined revenue ("Total
Revenue") targets.
The actual amount of the Preferred Stock is subject to a 24-month
contingency period, which commences on June 1, 2001, whereby if Total Revenue
meets or exceeds $258 million, then Lucent is entitled to the full issuance
of $32.9 million in Preferred Stock. If Total Revenue is greater than $179
million, but less than $258 million, Lucent will be entitled to a pro rata
issuance of Preferred Stock at a rate of $0.417 for each dollar of Total
Revenue in excess of $179 million. If the Company sells the "Call Handling"
product line to a third-party during the contingency period, then the minimum
issuance threshold is reduced from $179 million to
6
$161 million; the maximum issuance threshold is reduced to $210 million; and
the pro rata issuance of Preferred Stock is raised from $0.417 for each
dollar of Total Revenue in excess of $179 million to $0.67 for each dollar
of Total Revenue in excess of $161 million.
The redemption of the then issued Preferred Stock, if any, commences 30
days from initial issuance with 33% due, followed by an additional 33% due on
June 1, 2004, and the remaining 34% on June 1, 2005. Early redemption is
available at the option of the Company and the Company must redeem shares of
Preferred Stock with 25% of the gross proceeds of any underwritten public
offering subsequent to issuance of the Preferred Stock.
LPSS provides 9-1-1 supporting hardware and software technology, including
its Palladium(TM) call center and data-management products. A number of
telecommunications companies manage their 9-1-1 infrastructure with LPSS's
hardware and software systems. In addition, LPSS products are used by public
safety call centers across the nation to receive and respond to wireline and
wireless E9-1-1 calls. As with other companies that sell hardware and software
licenses and systems, revenues of LPSS are variable - a combination of monthly
recurring revenues and one-time sales of very large systems. The Company intends
to utilize the assets acquired from LPSS in the same manner that LPSS utilized
the assets.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER
"ITEM 2A. FACTORS THAT MAY AFFECT FUTURE RESULTS" BELOW.
OVERVIEW
We are the leading provider of 9-1-1 data management services to ILECs,
CLECs and wireless carriers in the United States. We manage the data that
enables a 9-1-1 call to be routed to the appropriate public safety agency with
accurate and timely information about the caller's identification and location.
We were incorporated in July 1979 in the State of Colorado under the name
Systems Concepts of Colorado, Inc. and were reincorporated in September 1993 in
the State of Delaware under the name SCC Communications Corp. Prior to 1995,
substantially all of our revenue was derived from the sale of software licenses
and related implementation services to ILECs and public safety agencies. During
1994, we began investing in infrastructure to provide our 9-1-1 OSS solution to
telephone operating companies seeking to outsource such operations. We signed
our first 9-1-1 data management services contract in August 1994 and continue to
add to the number of records under management. We began to recognize revenue
from wireless carriers in the third quarter of 1997, and continue to increase
the number of live wireless subscribers managed. In addition, we signed a
contract with the General Services Commission of the State of Texas in November
1998, representing the first time that a state agency has endeavored to
centralize 9-1-1 OSS and data management services with a neutral third party.
Each of our four revenue-generating Business Units provides an
outsourcing solution for its respective customer bases. Revenue generally
includes a non-recurring initial fee ("NRE") for the design and
implementation of the solution, conversion of the customer's data to our
systems, hiring and training of personnel, and other costs required to
prepare for the processing of customer data. NREs and the associated costs
are recognized ratably over the life of the contract. Our contracts also
separately allow for a monthly service fee based on the number of subscriber
records under management, which is recognized in the period in which the
services are rendered. Related costs are expensed as they are incurred. We
may also offer our customers enhanced products or services for which revenue
is recognized over the life of the contract. Our revenue breaks down as a
percent of total revenue as follows:
Year Ended December 31,
------------------------------------------------
Revenue Percent
----------------------- ------------------------
2001 2000 2001 2000
---------- ----------- ------------ ----------
ILEC Business Unit $ 7,252 $ 6,838 55% 76%
CLEC Business Unit 3,090 1,371 23 15
Wireless Business Unit 1,788 526 14 6
Direct Business Unit 1,059 298 8 3
---------- ----------- ------------ ----------
$ 13,189 $ 9,033 100% 100%
During 2000, we changed our revenue recognition policies to comply with SAB
101. Specifically, SAB 101 requires that we defer the up-front NRE fee, certain
enhancement fees and related incremental costs and recognize them over the lives
of our contracts. The adoption of SAB 101 required us to reflect a cumulative
effect of change in accounting principle as if SAB 101 had been implemented on
January 1, 2000 and to restate all of our reported 2000 quarterly results.
During the three months ended March 31, 2001 and 2000, we recognized
approximately 55% and 71%, respectively, of our total revenue from Ameritech,
BellSouth Inc. and Qwest, each of which accounted for greater than 10% of our
total revenue in such periods.
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.
As of December 31, 2000, we had net operating loss carryforwards of
approximately $16.9 million available to offset future net income for U.S.
federal income tax purposes. Since we expect to incur losses in the near term
related to development costs for new commercial products, future taxable income
may not be sufficient to realize additional deferred tax assets that may be
created by the projected net operating losses.
8
Our quarterly and annual operating results have varied significantly in the
past. The variation in operating results may 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 ("PSAPs"), 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 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
and the size and timing of significant customer contracts vary substantially.
Accordingly, we may be unable to adjust spending in a timely manner to
compensate for any unexpected changes in operations. As of March 31, 2001, we
had incurred expenses of approximately $5.1 million in marketing, legal and
research and development to expand our product offerings with our 9-1-1
SafetyNet(SM) initiative. We may spend up to an additional $5 million on this
initiative in 2001. In addition, we hired additional employees in 2000, and
expect to continue hiring additional employees during 2001. We also began
leasing office space in Texas in December 1999, from which we are performing
some of our operations. In October 2000, we also leased additional office space
in Colorado to accommodate our increased personnel.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
TOTAL COMPANY
Total revenue increased 47% from $9.0 million in the first quarter of 2000 to
$13.2 million in the first quarter of 2001. Total direct costs increased 57%,
from $6.3 million in the first quarter of 2000 to $9.9 million in the first
quarter of 2001, representing 70% and 75% of total revenue, respectively.
ILEC BUSINESS UNIT
ILEC revenue increased 7%, from $6.8 million in the first quarter of 2000 to
$7.3 million in the first quarter of 2001, representing 76% and 55% of total
revenue for such periods, respectively. ILEC revenue increased due to an
increase in the number of records under management. ILEC subscribers under
management grew 5.8% from 82.0 million in the first quarter of 2000 to 86.8
million as of March 31, 2001. ILEC direct costs increased 10%, from $4.0 million
in the first quarter of 2000 to $4.4 million in the first quarter of 2001,
representing 58% and 60% of ILEC revenue for such periods, respectively. Costs
increased due to the hiring of additional systems operations staff and increased
systems maintenance costs to accommodate growth. ILEC sales and marketing
expenses increased 87%, from $351,000 in the first quarter of 2000 to $656,000
in the first quarter of 2001, representing 5% and 9% of ILEC revenue for such
periods, respectively. The increase in sales and marketing costs is due to an
increase in product management staff in 2001. ILEC research and development
costs increased 56%, from $121,000 in the first quarter of 2000 to $189,000 in
the first quarter of 2001, representing 2% and 3% of ILEC revenue for such
periods, respectively. ILEC research and development costs increased due to the
development of new features related to our core operating systems.
CLEC BUSINESS UNIT
CLEC revenue increased 121%, from $1.4 million in the first quarter of 2000
to $3.1 million in the first quarter of 2001, representing 15% and 23% of total
revenue for such periods, respectively. CLEC revenue increased due to an
increase in the number of records under management for new and existing
customers and additional services revenue recognized on new customers. We now
have 39 CLEC customers representing 6.4 million subscribers. CLEC direct costs
increased from $473,000 in the first quarter of 2000 to $1.4 million in the
first quarter of 2001, representing 34% and 45% of CLEC revenue for such
periods, respectively. The increase in CLEC costs is due to the hiring of
additional CLEC operations staff to assist with the continued growth in records
under management. CLEC sales and marketing expenses increased from $122,000 in
the first quarter of 2000 to $422,000 in the first quarter of 2001, representing
9% and 14% of CLEC revenue for such periods, respectively. The increase in CLEC
sales and marketing expenses is due to the hiring of additional sales personnel
to accommodate the growth in the CLEC Business Unit and increased direct
marketing campaign costs. CLEC research and development costs decreased 80%,
from $86,000 in the first quarter of 2000 to $17,000 in the first quarter of
2001, representing 6% and 1% of CLEC
9
revenue for such periods, respectively. CLEC research and development costs
decreased because research and development efforts were focused on the ILEC
unit in the first quarter of 2001.
WIRELESS BUSINESS UNIT
Wireless revenue increased 242%, from $526,000 in the first quarter of 2000
to $1.8 million in the first quarter of 2001, representing 6% and 14% of total
revenue for such periods, respectively. Wireless revenue increased due to an
increase in the number of records under management. Revenue generating
subscribers grew to 5.9 million, at March 31, 2001, a 637% increase over the
same period last year. Wireless direct costs increased from $888,000 in the
first quarter of 2000 to $2.4 million in the first quarter of 2001, representing
168% and 133% of Wireless revenue for such periods, respectively. Costs
increased due to the hiring of additional systems operations staff and increased
systems maintenance and telephone line costs to accommodate growth. Wireless
direct costs as a percentage of Wireless revenue decreased as the increase in
subscribers managed grows to cover more of the infrastructure costs. Wireless
sales and marketing expenses increased from $108,000 in the first quarter of
2000 to $428,000 in the first quarter of 2001, representing 21% and 24% of
Wireless revenue for such periods, respectively. The increase in Wireless sales
and marketing expenses is primarily due to the creation of a product management
department and the hiring of additional sales and marketing personnel to
accommodate growth. Wireless research and development costs decreased from
$139,000 in the first quarter of 2000 to $1,000 in the first quarter of 2001,
representing 26% and 1% of Wireless revenue for such periods, respectively.
Wireless research and development costs decreased because research and
development efforts were focused on the ILEC unit in the first quarter of 2001.
DIRECT BUSINESS UNIT
Direct revenue increased from $298,000 in the first quarter of 2000 to $1.1
million in the first quarter of 2001, representing 3% and 8% of total revenue
for such periods, respectively. Direct revenue increased due to the transition
of records in the State of Texas beginning in 2000. Direct costs increased 80%,
from $946,000 in the first quarter of 2000 to $1.7 million in the first quarter
of 2001. Costs increased due to the additional personnel and system
infrastructure needed to implement the State of Texas contract and to manage
records that have been transitioned. Direct sales and marketing expenses
increased 23% from $314,000 in the first quarter of 2000 to $387,000 in the
first quarter of 2001. The increase in sales and marketing costs is due to the
hiring of additional sales personnel to support the State of Texas contract and
the EWE (Early Warning & Evacuation) product. Direct research and development
costs decreased 63%, from $185,000 in the first quarter of 2000 to $69,000 in
the first quarter of 2001. Direct research and development costs decreased
because research and development efforts were focused on the ILEC unit in the
first quarter of 2001.
CORPORATE BUSINESS UNIT
Corporate general and administrative expenses increased 73%, from $1.5
million in the first quarter of 2000 to $2.6 million in the first quarter of
2001, representing 17% and 20% of total revenue for such period, respectively.
Corporate general and administrative expenses increased due to the addition of
corporate legal personnel and outside legal fees to address legislative and
regulatory issues, the hiring of additional human resources and finance staff to
accommodate headcount growth in 2000, and corporate consulting costs. Corporate
sales and marketing expenses increased 84%, from $457,000 in the first quarter
of 2000 to $839,000 in the first quarter of 2001, representing 5% and 6% of
total revenue for such periods, respectively. Corporate sales and marketing
expenses increased due to the addition of marketing staff and increased
investment in marketing campaigns. Corporate research and development increased
from $98,000 in the first quarter of 2000 to $1.0 million, representing 1% and
8% of total revenue for such periods, respectively. These costs represent labor
and associated travel and consulting costs related to the research and
development of new product offerings. The increase is due to the increased focus
on our 9-1-1 SafetyNet offering.
Net other income decreased 67%, from $211,000 in the first quarter of 2000 to
$69,000 in the first quarter of 2001, representing 2% and 1% of total revenue
for such periods, respectively. Other income decreased due to less interest
income earned from investments and the decrease in interest expense related to
the repayment of certain capital leases.
The cumulative effect from change in accounting principle of approximately
$3.1 million in 2000 represents the change associated with adopting SAB 101
effective January 1, 2000. This change reflects the amount of income that had
been recognized under the Company's previously existing revenue recognition
methods that would have been deferred as of December 31, 1999 had the Company
been under the guidelines of SAB 101. The income deferred as a result of
adopting SAB 101 will be recognized on varying dates through 2005.
10
LIQUIDITY AND CAPITAL RESOURCES
Since our inception we have funded operations with cash provided by
operations, supplemented by equity and debt financing and leases on capital
equipment. As of March 31, 2001, we had $8.7 million in cash and cash
equivalents and investments in marketable securities. We expect our operating
cash flows to be negative during the first half of 2001 but we expect them to
turn positive in the second half of 2001 as we begin generating revenue from our
increased subscriber base as a result of our wireless deployment efforts.
We repaid $628,000 and $479,000 of capital lease obligations during the three
months ended March 31, 2001 and 2000, respectively. Additionally, we used $1.3
million and $609,000 in the three months ended March 31, 2001 and 2000,
respectively, for the purchase of capital assets and software development. This
significant increase was due to capital expenditures related to our 9-1-1
SafetyNet(SM) initiative as well as due to capital needs created by our
significant increase in headcount during 2000. We anticipate that our level of
spending for capital expenditures may be slightly less in 2001. We currently
have no material commitments for capital expenditures; however, we may purchase
additional systems in an effort to attain incremental operating efficiencies,
especially in our ILEC and CLEC business units and to incur additional costs and
expenses in connection with our acquisition of certain net assets of Lucent
Public Safety Systems.
We are in the process of renewing or replacing our $2.0 million line of
credit with a bank, which is available to meet operating needs. The interest
rate on amounts borrowed under the line of credit is equal to the bank's
prime rate or the one, two or three month Libor rate plus 2.25% per annum. As
of March 31, 2001, no borrowings were outstanding under 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 is equal to the bank's cost of funds at the time
of each lease. Separate lease schedules are signed from time to time. Each lease
schedule is collateralized by the assets that are being leased. Each lease has
its own termination date, typically 36 months. As of March 31, 2001, the entire
$2.0 million available under the capital lease line had been utilized.
On May 2, 2001, we entered into an agreement to sell 632,111 shares of our
common stock to an institutional investor in a private offering exempt from
registration under the federal securities laws under Rule 506 of Regulation D
and Section 4(2) of the Securities Act of 1933. The sale closed on May 10, 2001.
The common stock was purchased at a negotiated price per share of $7.91,
reflecting the arithmetic average of the closing price of common stock on the
Nasdaq National Market (Symbol: SCCX) for the twenty consecutive trading days
prior to the offering date. As a finder's fee, we paid a fee equal to five
percent of the total offering proceeds and will issue a warrant to purchase
31,605 shares equal to 5% of the shares issued to the institutional investor
at an exercise price equal to the per share offering price of our common
stock on the date of the offering. Other than the finder's fee, we did not
pay any other compensation or fees in conjunction with this offering of
common stock. In conjunction with this offering, we also entered into a
registration rights agreement that will require us to register the shares
issued for resale on behalf of the institutional investor.
The net proceeds from this offering were $4,750,000. We plan to use the net
proceeds for general corporate purposes, including:
o repaying obligations as they become due;
o financing capital expenditures, including acceleration of our
wireless deployments and development of our Coordinate Routing
Database; and
o working capital.
Pending use of the net proceeds for any of these purposes, we may invest the net
proceeds in short-term investment grade instruments, interest-bearing bank
accounts, certificates of deposit, money market securities, U.S. government
securities or mortgage-backed securities guaranteed by federal agencies.
During the year ended December 31, 2000, we incurred research, development
and marketing expenses of approximately $5.1 million on our 9-1-1 SafetyNet(SM)
initiative. We may spend up to an additional $5 million in 2001. Our primary
focus will be in our Wireless Business Unit. We plan to accelerate our wireless
deployments and development of our Coordinate Routing Database ("CRDB"). We may
continue the 9-1-1 SafetyNet(SM) initiative over the next several years as long
as we find the customer demand meaningful enough to make the investment
worthwhile.
11
Although we believe that our current cash and investments, cash generated
from operations, lease financing and our recent private equity financing will be
sufficient to fund our anticipated working capital needs, research and
development initiative and capital expenditures for our core operations, we may
seek to raise additional capital to fund our 9-1-1 SafetyNet(SM) product
initiative. We may also seek a new capital lease line or other sources of debt
or equity financing or replace our bank line of credit to fund this initiative.
In the event our plans or assumptions for our core operations 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, which may
include public and private equity and debt financings, sales of nonstrategic
assets and other financing arrangements.
On May 11, 2001, we acquired certain assets, and assumed certain
liabilities, associated with the Call Handling and Database Product Lines of
Lucent Public Safety Systems ("LPSS"), an internal venture of Lucent
Technologies, Inc. ("Lucent"). We issued 2.25 million shares of common stock and
incurred other direct costs and assumed other liabilities. We filed details of
this transaction on our Form 8-K filed on May 14, 2001. The consideration SCC
paid was determined through arm's length negotiation. There was no material
relationship between Lucent and us prior to the acquisition. The results of
operations for LPSS for the three months ended March 31, 2001, are not included
in this report. We will amortize the acquired goodwill over a period of seven
years using the straight-line method of amortization.
We also committed to acquire approximately $4.8 million of Sequent computers
not later than one year from the date of the agreement.
In addition to the initial issuance of 2,250,000 shares of common stock, we
agreed to issue, 24 months from the date of closing, up to $32.9 million of
redeemable, non-voting, preferred stock ("Preferred Stock") to Lucent, subject
to the attainment of specific total combined revenue ("Total Revenue") targets.
The actual amount of the Preferred Stock is subject to a 24-month
contingency period, which commences on June 1, 2001, whereby if Total Revenue
meets or exceeds $258 million, then Lucent is entitled to the full issuance
of $32.9 million in Preferred Stock. If Total Revenue is greater than $179
million, but less than $258 million, Lucent will be entitled to a pro rata
issuance of Preferred Stock at a rate of $0.417 for each dollar of Total
Revenue in excess of $179 million. If we sell the "Call Handling" product
line to a third-party during the contingency period, then the minimum
issuance threshold is reduced from $179 million to $161 million; the maximum
issuance threshold is reduced to $210 million; and the pro rata issuance of
Preferred Stock is raised from $0.417 for each dollar of Total Revenue in
excess of $179 million to $0.67 for each dollar of Total Revenue in excess
of $161 million.
The redemption of the then issued Preferred Stock, if any, commences 30
days from initial issuance with 33% due, followed by an additional 33% due on
June 1, 2004 and the remaining 34% due on June 1, 2005. Early redemption is
available at our option and we must redeem shares of Preferred Stock with 25%
of the gross proceeds of any underwritten public offering subsequent to
issuance of the Preferred Stock.
LPSS provides 9-1-1 supporting hardware and software technology, including
its Palladium(TM) call center and data-management products. A number of
telecommunications companies manage their 9-1-1 infrastructure with LPSS's
hardware and software systems. In addition, LPSS products are used by public
safety call centers across the nation to receive and respond to wireline and
wireless E9-1-1 calls. As with other companies that sell hardware and software
licenses and systems, revenues of LPSS are variable - a combination of monthly
recurring revenues and one-time sales of very large systems. We intend to
utilize the assets acquired from LPSS in the same manner that LPSS utilized the
assets.
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 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
12
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 FINANCIAL ACCOUNTING STANDARDS NO. 140
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Asset and Extinguishments of Liabilities." SFAS No.
140 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. It is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001 and is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. We
do not believe that this statement will materially impact our results of
operations.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
in the areas of changes in United States interest rates. These exposures are
directly related to our normal operating and funding activities. Historically
and as of March 31, 2001, we have not used derivative instruments or engaged in
hedging activities.
INTEREST RATE RISK
The interest payable on our line of credit is variable and is determined
based on the lender's prime rate or the one, two, or three month Libor rate plus
2.25% per annum, and, therefore, is affected by changes in market interest
rates. At March 31, 2001, 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. Based on
amounts invested in treasury bonds and commercial paper at March 31, 2001, if
the markets were to experience a decline in rates of 1%, we would have a
resulting decline in future quarterly earnings, fair values and cash flows of
approximately $7,500 per quarter.
14
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.
We are not a party to any litigation that we believe could have a material
adverse effect on us or our business.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3 - DEFAULTS ON SENIOR SECURITIES.
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5 - OTHER INFORMATION.
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
On March 14, 2001, we filed a Current Report on Form 8-K to
disseminate a press release on our 2001 financial performance.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCC Communications Corp.
(Registrant)
May 15, 2001 /s/ George K. Heinrichs
- ------------ -------------------------------
Date George K. Heinrichs, President
and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
May 15, 2001 /s/ Michael D. Dingman, Jr.
- ------------ -------------------------------
Date Michael D. Dingman, Jr.
Chief Financial Officer
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
16