<Page>
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 SEPTEMBER 30, 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
INTRADO INC.
(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
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
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 November 8, 2001, there were 14,672,786 shares of the Registrant's
Common Stock outstanding.
<Page>
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 Part I 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 information available as
of the date of this report on Form 10-Q and 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 assure you 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 whether our investments in research, development and marketing
will expand our service offerings;
o the size, timing and duration of significant customer contracts;
o our ability to integrate new customers and assets acquired in
acquisitions, such as our May 2001 acquisition of Lucent Public Safety
Systems;
o changes in the number of subscriber records under our management;
o the unpredictable rate of adoption of wireless services by public
service answering points and the financial performance of our
customers;
o our ability to expand our services beyond our traditional business
and into the highly competitive data management industry;
o the introduction and market acceptance of our and our competitors' new
products and services;
o price competition from entities with substantially greater resources
than us;
o the amount of up-front expenditures required to meet our customers'
demands and to expand our infrastructure, combined with the length of
our sales cycle;
o constraints on our sales channels and marketing efforts due to
conflicts of interest and the fact that many of our customers compete
with each other;
o the success or failure of our Alliance Program, which we initiated in
1999 to partner with companies that provide support systems that are
complementary with our 9-1-1 support systems, such as billing and
customer care services;
o technical difficulties and network downtime, including that caused by
unauthorized access to our systems; and
o new developments in telecommunications legislation and regulations and
the unpredictable manner in which existing or new legislation and
regulation may be applied to our efforts.
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 under the caption "Item 1.
Business - Risk Factors", our other Securities and Exchange Commission filings,
and our press releases.
i
<Page>
INDEX
<Table>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 2001 (Unaudited)
and December 31, 2000 ............................................ 1
Consolidated Statements of Operations for the three months ended
September 30, 2001 and 2000 and the nine months ended
September 30, 2001 and 2000 (Unaudited) .......................... 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000 (Unaudited) .......................... 3
Notes to Consolidated Financial Statements (Unaudited) .............. 4
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk ...... 17
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K ................................ 19
Signatures ............................................................... 20
</Table>
ii
<Page>
INTRADO INC.
CONSOLIDATED
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 7,556 $ 5,036
Short-term investments in marketable securities ............... -- 6,939
Accounts receivable, net of allowance for doubtful
accounts of approximately $334 and $184, respectively ....... 22,002 7,166
Unbilled revenue .............................................. 76 574
Inventory ..................................................... 6,247 --
Prepaids and other ............................................ 2,762 892
Deferred acquisition costs .................................... -- 1,054
Deferred income taxes ......................................... 869 869
-------- --------
Total current assets .................................. 39,512 22,530
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Computer hardware and equipment ............................... 33,852 30,259
Furniture and fixtures ........................................ 2,156 1,987
Leasehold improvements ........................................ 1,160 1,049
-------- --------
37,168 33,295
Less-- Accumulated depreciation ............................... (24,625) (20,820)
-------- --------
Total property and equipment, net ..................... 12,543 12,475
-------- --------
GOODWILL AND OTHER INTANGIBLES, net of accumulated
amortization of $1,730 and $0, respectively ................... 23,289 --
DEFERRED INCOME TAXES AND OTHER ................................. 3,269 3,313
DEFERRED CONTRACT COSTS ......................................... 4,873 5,363
SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $1,126 and $864, respectively ................. 2,346 988
-------- --------
Total assets .......................................... $ 85,832 $ 44,669
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................. $ 2,944 $ 1,226
Payroll-related accruals ...................................... 2,919 1,144
Other accrued liabilities ..................................... 4,783 3,714
Current portion of capital lease obligations .................. 3,717 2,107
Payable to Lucent ............................................. 4,296 --
Deferred contract revenue-current portion ..................... 5,591 200
-------- --------
Total current liabilities ............................. 24,250 8,391
CAPITAL LEASE OBLIGATIONS, net of current portion ............... 2,349 1,511
LINE OF CREDIT .................................................. 3,954 --
OTHER LIABILITIES ............................................... 809 --
DEFERRED CONTRACT REVENUE, non-current portion .................. 9,824 10,070
-------- --------
Total liabilities ..................................... 41,186 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; 14,582,941 and 11,488,040 shares issued
and outstanding, respectively ............................... 15 11
Additional paid-in capital .................................... 72,369 44,814
Common stock warrants ......................................... 462 373
Stock subscriptions receivable ................................ -- (33)
Treasury stock, 4,738 and 0 shares, respectively, at cost ..... (39) --
Accumulated deficit ........................................... (28,161) (20,468)
-------- --------
Total stockholders' equity ............................ 44,646 24,697
-------- --------
Total liabilities and stockholders' equity ............ $ 85,832 $ 44,669
======== ========
</Table>
The accompanying notes to financial statements are an
integral part of these balance sheets.
1
<Page>
INTRADO INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
TOTAL REVENUE ................................... $ 21,006 $ 11,527 $ 52,514 $ 30,809
COSTS AND EXPENSES:
Direct costs .................................. 13,379 7,386 35,922 20,657
Sales and marketing ........................... 3,639 2,423 9,753 5,881
General and administrative .................... 4,648 2,305 11,017 5,803
Research and development ...................... 1,233 907 3,282 2,713
------------ ------------ ------------ ------------
Total costs and expenses ............... 22,899 13,021 59,974 35,054
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ............................ (1,893) (1,494) (7,460) (4,245)
OTHER INCOME (EXPENSE):
Interest and other income ..................... 79 293 365 911
Interest and other expense .................... (390) (97) (598) (289)
------------ ------------ ------------ ------------
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ................ (2,204) (1,298) (7,693) (3,623)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of tax of $0 ................... -- -- -- (3,082)
------------ ------------ ------------ ------------
NET LOSS ........................................ $ (2,204) $ (1,298) $ (7,693) $ (6,705)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE:
Loss per share before cumulative effect
of change in accounting principle ........... $ (0.15) $ (0.12) $ (0.58) $ (0.33)
Cumulative effect of change in
accounting principle ........................ -- -- -- (0.27)
------------ ------------ ------------ ------------
Net loss per share ............................ $ (0.15) $ (0.12) $ (0.58) $ (0.60)
============ ============ ============ ============
SHARES USED IN COMPUTING NET LOSS PER SHARE:
Basic and diluted ............................. 14,499,510 11,217,093 13,188,473 11,201,308
============ ============ ============ ============
</Table>
The accompanying notes to financial statements are an
integral part of these statements.
2
<Page>
INTRADO INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $ (7,693) $ (6,705)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization and depreciation ............................... 6,234 3,958
Cumulative effect of change in accounting principle ......... -- 3,082
Accretion of and interest accrued on investments ............ (61) (184)
Loss on disposal of assets .................................. 6 6
Provision for doubtful accounts ............................. 225 --
Change in:
Accounts receivable ......................................... (15,061) (3,245)
Unbilled revenue ............................................ 498 (1,043)
Inventory ................................................... (395) --
Prepaids and other .......................................... (122) (942)
Deferred costs .............................................. (1,100) (702)
Accounts payable and accrued liabilities .................... 4,493 1,192
Deferred contract revenue .................................. 5,145 1,785
-------- --------
Net cash used in operating activities ................... (7,831) (2,798)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ......................... (3,385) (3,503)
Purchase of investments in marketable securities .............. -- (10,764)
Sale of investments in marketable securities .................. 7,000 13,250
Software development costs .................................... (1,606) (291)
-------- --------
Net cash provided by (used in) investing activities ..... 2,009 (1,308)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations ............... (2,583) (1,222)
Proceeds from equipment financing ............................. 1,624 1,119
Proceeds from line of credit .................................. 5,954 --
Principal payments on line of credit obligation................ (2,000) --
Proceeds from exercise of warrants ............................ 10 --
Proceeds from private placement ............................... 5,000 --
Costs from private placement .................................. (253) --
Proceeds from exercise of stock options ....................... 426 448
Proceeds received from employee stock purchase plan ........... 164 72
-------- --------
Net cash provided by financing activities ............... 8,342 417
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ 2,520 (3,689)
CASH AND CASH EQUIVALENTS, beginning of period .................. 5,036 8,354
-------- --------
CASH AND CASH EQUIVALENTS, end of period ........................ $ 7,556 $ 4,665
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ...................... $ 240 $ 250
======== ========
Cash paid during the period for taxes ......................... $ 357 $ 289
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING:
Exercise of stock warrants .................................... $ 167 $ --
======== ========
Issuance of stock warrants .................................... $ (246) $ 373
======== ========
</Table>
The accompanying notes to financial statements are an
integral part of these statements.
3
<Page>
INTRADO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 financial position, results of
operations and cash flows of Intrado Inc. (the "Company") 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 three and nine months ended September 30, 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.
RECLASSIFICATIONS
Certain prior year amounts have been re-classified to conform with the
current year's presentation.
REVENUE RECOGNITION
The Company generates revenue from four of its segments, or "business
units": Incumbent Local Exchange Carrier ("ILEC"), Competitive Local Exchange
Carrier ("CLEC"), Wireless and Direct. The revenue from these business units is
derived from monthly data management services, maintenance, systems and new
products, and professional services.
The monthly data management services include revenue from up-front
non-recurring engineering ("NRE") fees and monthly service fees. The Company's
NRE service consists primarily of the clean up of the customer's 9-1-1 data
records, engineering services to enable the customer's legacy system to
interface with Intrado's platform, thereby establishing network connectivity,
public safety boundary mapping, customer training and testing. The charges for
these services are nonrefundable if the contract is cancelled after the services
are performed. After the initial NRE fee, data management customers often buy
enhancements to these services, such as additional software engineering to
improve system functionality or network services to make their network more
effective ("Enhancement Services"). The fees received for NRE services and
Enhancement Services are deferred and recognized as revenue ratably over the
remaining contractual term of the arrangement.
Under outsourcing solution contracts, the Company receives a monthly
service fee to provide ongoing data management services that are required to
keep the records current for all subscribers, to maintain and monitor network
components and to support and maintain the software and systems required to
provide the services. The fees received for these monthly services are
recognized as revenue in the period in which the services are rendered.
Maintenance contracts are sold to customers that purchase database and call
handling systems. These contracts designate a specified amount that is to be
paid in advance for the support and maintenance services. The fees received for
maintenance are deferred and recognized as revenue ratably over the contractual
term of the arrangement.
Systems and new products revenue represents revenue recognized from the
sales of new database and call handling systems as well as enhancements sold to
existing systems customers. Software license revenue and related hardware sales
are recognized upon execution of a contract and completion of delivery
obligations, provided that no uncertainties exist regarding customer acceptance
and that collection of the related receivable is reasonably assured.
Professional services revenue is generated by providing consulting services
to CLECs and is recognized in the period in which the services are rendered.
4
<Page>
NOTE 2 - LINE OF CREDIT
On July 31, 2001, the Company entered into an agreement to establish a
revolving line of credit that is available to meet operating needs. Borrowing
availability is not to exceed $15 million and is further limited to 85% of
the Company's eligible accounts receivable, as defined in the line of credit
agreement. The interest rate on amounts borrowed under the line of credit is
equal to the prime rate plus 2.00% per annum. The line of credit matures on
July 31, 2004 and is collateralized by certain other assets. As of September
30, 2001, approximately $4.0 million was outstanding and an additional
$750,000 was utilized to satisfy letter of credit obligations.
NOTE 3 - 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 approximately $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 from operations 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 in prior
periods that were retroactively deferred and recognized in the periods ended
September 30, 2000, and the fees received and incremental costs incurred during
those periods that were deferred into future periods. The table below
illustrates the restatement of previously filed unaudited information for the
three and nine months ended September 30, 2000.
<Table>
<Caption>
For the Three Months Ended For the Nine Months Ended
September 30, 2000 September 30, 2000
------------------------------------ ------------------------------------
As SAB 101 As SAB 101
(amounts in thousands) Reported Adjustment Restated Reported Adjustment Restated
-------- ---------- -------- -------- ---------- --------
Revenue ....................... $ 11,775 $ (248) $ 11,527 $ 31,656 $ (847) $ 30,809
Direct costs .................. $ 7,657 $ (271) $ 7,386 $ 21,359 $ (702) $ 20,657
Net loss before cumulative
effect of change in
accounting principle ........ $ (1,321) $ 23 $ (1,298) $ (3,478) $ (145) $ (3,623)
Cumulative effect of change
in accounting principle ..... $ -- $ -- $ -- $ -- $ (3,082) $ (3,082)
Net loss ...................... $ (1,321) $ 23 $ (1,298) $ (3,478) $ (3,227) $ (6,705)
Net loss per share (basic
and diluted) ................ $ (0.12) $ (0.00) $ (0.12) $ (0.31) $ (0.29) $ (0.60)
</Table>
NOTE 4 - EARNINGS PER SHARE
The Company presents basic and diluted earnings or loss per share in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings Per Share", which establishes standards for computing and presenting
basic and diluted earnings per share. Under this statement, basic earnings
(loss) per share is determined 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 2,155,755 and 859,629 for the three months ended September 30, 2001 and
2000, respectively, and 1,473,751 and 787,993 for the nine months ended
September 30, 2001 and 2000, respectively.
5
<Page>
NOTE 5 - REPORTABLE SEGMENTS
The Company has five reportable segments or business units: ILEC, CLEC,
Wireless, Direct, and Corporate. The Company measures its reportable segments
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 ILEC business unit includes the database division acquired as
a result of the May 2001 acquisition of the call handling and database divisions
of Lucent Public Safety Systems ("LPSS"), an internal venture of Lucent
Technologies, Inc. ("Lucent"). The Direct business unit addresses sales, either
directly or indirectly, to state and local government entities and includes the
call handling division acquired as a result of the LPSS acquisition. 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.
<Table>
<Caption>
For the Three Months Ended September 30,
(dollars in thousands)
ILEC CLEC WIRELESS DIRECT
--------------------- --------------------- ---------------------- ---------------------
2001 2000 2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- -------- -------- --------
REVENUE:
Data management $ 7,368 $ 6,482 $ 3,475 $ 1,750 $ 2,877 $ 710 $ 1,407 $ 815
Maintenance 2,575 -- -- -- -- -- 374 --
Systems and new
products 2,118 1,079 -- 165 145 406 435 120
Professional
services -- -- 232 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total 12,061 7,561 3,707 1,915 3,022 1,116 2,216 935
Direct costs 6,172 4,183 1,506 763 3,310 1,136 2,391 1,304
Sales and marketing 1,133 516 398 216 633 284 659 336
General and
administrative -- -- -- -- -- -- -- --
Research and
development 1 62 9 38 -- 117 -- 243
-------- -------- -------- -------- -------- -------- -------- --------
Total 7,306 4,761 1,913 1,017 3,943 1,537 3,050 1,883
Operating income
(loss) 4,755 2,800 1,794 898 (921) (421) (834) (948)
Other income
(expense), net -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 4,755 $ 2,800 $ 1,794 $ 898 $ (921) $ (421) $ (834) $ (948)
======== ======== ======== ======== ======== ======== ======== ========
<Caption>
CORPORATE TOTAL
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUE:
Data management $ -- $ -- $ 15,127 $ 9,757
Maintenance -- -- 2,949 --
Systems and new
products -- -- 2,698 1,770
Professional
services -- -- 232 --
-------- -------- -------- --------
Total -- -- 21,006 11,527
Direct costs -- -- 13,379 7,386
Sales and marketing 816 1,071 3,639 2,423
General and
administrative 4,648 2,305 4,648 2,305
Research and
development 1,223 447 1,233 907
-------- -------- -------- --------
Total 6,687 3,823 22,899 13,021
Operating income
(loss) (6,687) (3,823) (1,893) (1,494)
Other income
(expense), net (311) 196 (311) 196
-------- -------- -------- --------
Net income (loss) $ (6,998) $ (3,627) $ (2,204) $ (1,298)
======== ======== ======== ========
</Table>
6
<Page>
<Table>
<Caption>
For the Nine Months Ended September 30,
(dollars in thousands)
ILEC CLEC WIRELESS DIRECT
--------------------- --------------------- ---------------------- ----------------------
2001 2000 2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- -------- -------- --------
REVENUE:
Data management $ 22,005 $ 19,623 $ 8,917 $ 4,084 $ 7,318 $ 1,326 $ 3,545 $ 1,681
Maintenance 4,009 -- -- -- -- -- 543 --
Systems and new
product 3,780 1,920 11 823 145 1,105 968 247
Professional
services -- -- 1,273 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total 29,794 21,543 10,201 4,907 7,463 2,431 5,056 1,928
Direct costs 16,829 12,141 4,328 1,771 8,441 2,921 6,324 3,824
Sales and marketing 2,568 1,268 1,347 522 1,609 583 1,430 1,019
General and
administrative -- -- -- -- -- -- -- --
Research and
development 163 226 39 201 1 481 82 636
-------- -------- -------- -------- -------- -------- -------- --------
Total 19,560 13,635 5,714 2,494 10,051 3,985 7,836 5,479
Operating income
(loss) 10,234 7,908 4,487 2,413 (2,588) (1,554) (2,780) (3,551)
Other income
(expense), net -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
cumulative effect
of change in
accounting
principle 10,234 7,908 4,487 2,413 (2,588) (1,554) (2,780) (3,551)
Cumulative effect
of change in
accounting
principle -- (1,663) -- (413) -- (887) -- (119)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 10,234 $ 6,245 $ 4,487 $ 2,000 $ (2,588) $ (2,441) $ (2,780) $ (3,670)
======== ======== ======== ======== ======== ======== ======== ========
<Caption>
CORPORATE TOTAL
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUE:
Data management $ -- $ -- $ 41,785 $ 26,714
Maintenance -- -- 4,552 --
Systems and new
product -- -- 4,904 4,095
Professional
services -- -- 1,273 --
-------- -------- -------- --------
Total -- -- 52,514 30,809
Direct costs -- -- 35,922 20,657
Sales and marketing 2,799 2,489 9,753 5,881
General and
administrative 11,017 5,803 11,017 5,803
Research and
development 2,997 1,169 3,282 2,713
-------- -------- -------- --------
Total 16,813 9,461 59,974 35,054
Operating income
(loss) (16,813) (9,461) (7,460) (4,245)
Other income
(expense), net (233) 622 (233) 622
-------- -------- -------- --------
Income (loss) before
cumulative effect
of change in
accounting
principle (17,046) (8,839) (7,693) (3,623)
Cumulative effect
of change in
accounting
principle -- -- -- (3,082)
-------- -------- -------- --------
Net income (loss) $(17,046) $ (8,839) $ (7,693) $ (6,705)
======== ======== ======== ========
</Table>
NOTE 6 - RELATED PARTY TRANSACTIONS
As part of the May 11, 2001 acquisition of LPSS, the Company now provides
subcontracted maintenance services to Lucent on database and call handling
contracts that were not assigned directly to the Company. Lucent owns 2.25
million shares of the Company's common stock. The note payable to Lucent of
approximately $4.3 million represents the obligation incurred to pay for the
fair value of the inventory as part of the acquisition, including interest.
Since the acquisition date, the Company has recognized approximately $4.1
million in revenue under the sub-contracted services agreement with Lucent. As
of September 30, 2001, the accounts receivable balance includes approximately
$3.3 million due from Lucent.
The Company provides data management and consulting services pursuant to
a service agreement dated August 31, 1994 with Ameritech Information Systems.
Under a master lease agreement dated March 11, 1996, the Company leases
personal property from Ameritech Credit Corporation. Ameritech Information
Systems, Ameritech Credit Corporation and Ameritech Mobile Communications are
affiliates of Ameritech Development Corp., which beneficially owned
approximately 1.6 million shares of the Company's common stock until June
2000. A member of the Company's board of directors was a representative of
Ameritech Development Corp. at the time the service and master lease
agreements were executed.
During the nine months ended September 30, 2001 and 2000, the Company
recognized approximately $7.6 million and $7.4 million in revenue,
respectively, from the Ameritech service agreement. As of September 30, 2001
and 2000, Ameritech owed the Company approximately $2.6 million and $890,000,
respectively, for services provided. During the nine months ended September
30, 2001 and 2000, the Company paid Ameritech approximately $2.1 million
and $1.6 million, respectively, pursuant to lease schedules to the master
lease agreement. As of September 30, 2001 and 2000, the Company owed
approximately $2.1 million and $1.6 million, respectively, pursuant to lease
schedules to the master lease agreement. The leases have interest rates
ranging from 7.75% to 9.50%, require monthly payments and have expiration
dates varying through August 2004.
NOTE 7 - RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets". These statements prohibit pooling-of-interests accounting for
transactions initiated after June 30, 2001, require the use of the purchase
method of accounting for all combinations after June 30, 2001 and establish a
new accounting standard for goodwill acquired in a business combination. SFAS
Nos. 141 and 142 continue to require recognition of goodwill as an asset, but do
not permit amortization of goodwill as previously required by APB Opinion No. 17
"Intangible Assets." Furthermore,
7
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certain intangible assets that are not separable from goodwill will not be
amortized. However, goodwill and other intangible assets will be subject to
periodic (at least annual) tests for impairment and recognition of impairment
losses in the future could be required based on a new methodology for
measuring impairments prescribed by these pronouncements. The revised
standards include transition rules and requirements for identification,
valuation and recognition of a much broader list of intangibles as part of
business combinations than prior practice, most of which will continue to be
amortized. The potential prospective impact of these pronouncements on the
Company's financial statements may significantly affect the results of future
periodic tests for impairment. The amount and timing of non-cash charges
related to intangibles acquired in business combinations will change
significantly from prior practice. The Company has recorded $1,142 and $1,730
of amortization expense during the three and nine months ended September 30,
2001 relating to goodwill and certain intangibles that will no longer be
amortized upon the adoption of SFAS 142 beginning in January 2002. As a
result of adopting SFAS 142, the Company will be required to conduct an
annual impairment test of its goodwill and non-amortizable intangible assets.
The Company has not yet quantified the impact, if any, that this impairment
test will have on the results of its operations.
During June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting standards for
recognition and measurement of a liability for an asset retirement obligation
and the associated asset retirement cost. SFAS No. 143 requires an entity to
recognize the fair value of a liability for an asset retirement obligation in
the period in which it is incurred if a reasonable estimate can be made. The
Company is required to adopt SFAS No. 143 in its fiscal year 2003. The Company
does not believe that SFAS No. 143 will materially impact results of operations.
During August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for segments to be disposed of. SFAS No. 144
applies to recognized long-lived assets of an entity to be held and used or to
be disposed of and does not apply to goodwill, intangible assets not being
amortized, financial instruments and deferred tax assets. SFAS No. 144 requires
an impairment loss to be recorded for assets to be held and used when the
carrying amount of a long-lived asset is not recoverable and exceeds its fair
value. An asset that is classified as held for sale shall be recorded at the
lower of its carrying amount or fair value less cost to sell. The Company is
required to adopt SFAS No. 144 for the first quarter of 2002. The Company does
not believe that SFAS No. 144 will materially impact results of operations.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are the leading provider of 9-1-1 data management products and 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. In June
2001, we changed our name to Intrado Inc.
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. In 1994, we began investing in infrastructure to provide our
9-1-1 operations support system ("OSS") solution to telephone operating
companies seeking to outsource 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. On May 11, 2001, we acquired
certain assets, and assumed certain liabilities, associated with the call
handling and database divisions of LPSS, an internal venture of Lucent.
With the addition of LPSS, we now provide 9-1-1 supporting hardware and
software technology, including the Palladium(TM) call center and data-management
systems. A number of telecommunications companies manage their 9-1-1
infrastructure with these hardware and software systems. In addition, these
systems are used by public safety call centers across the nation to receive and
respond to wireline and wireless enhanced 9-1-1, or E9-1-1, calls.
We generate revenue from four of our segments, or "business units": ILEC,
CLEC, Wireless and Direct. The revenue from these business units is derived from
monthly data management services, maintenance, systems and new products and
professional services.
The monthly data management services include revenue from up-front NRE fees
and monthly service fees. The NRE service consists primarily of the clean up of
the customer's 9-1-1 data records, engineering services to enable the customer's
legacy system to interface with Intrado's platform, establishing network
connectivity, public safety boundary mapping, customer training and testing. The
charges for these services are nonrefundable if the contract is cancelled after
the services are performed. After the initial NRE fee, data management customers
often buy Enhancement Services, such as additional software engineering to
modify the system functionality or network services to make their network more
effective. The fees received for NRE services and Enhancement Services are
deferred and recognized as revenue ratably over the remaining contractual term
of the arrangement.
Under outsourcing solution contracts, we receive a monthly service fee to
provide ongoing data management services that are required to keep the records
current for all subscribers, to maintain and monitor network components and to
support and maintain the software and systems required to provide the services.
The fees received for these monthly services are recognized as revenue in the
period in which the services are rendered.
Maintenance contracts are sold to customers that purchase database and call
handling systems. These contracts designate a specified amount that is to be
paid over future periods for maintenance services. The fees received for
maintenance are deferred and recognized as revenue ratably over the contractual
term of the arrangement.
Systems and new products revenue represents revenue recognized from the
sales of new database and call handling systems as well as enhancements sold to
existing systems customers. Software license revenue and related hardware sales
are recognized upon execution of a contract and completion of delivery
obligations, provided that no uncertainties exist regarding customer acceptance
and that collection of the related receivable is reasonably assured.
Professional services revenue is generated by providing consulting services
to CLECs and is recognized in the period in which the services are rendered.
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The following table represents revenue percentages by business unit:
<Table>
<Caption>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------- ---------------------------------------------
Revenue Percent Revenue Percent
2001 2000 2001 2000 2001 2000 2001 2000
------- ------- ------- ------- ------- ------- ------- -------
ILEC Business Unit $12,061 $ 7,561 57% 65% $29,794 $21,543 57% 70%
CLEC Business Unit 3,707 1,915 18 17 10,201 4,907 19 16
Wireless Business Unit 3,022 1,116 14 10 7,463 2,431 14 8
Direct Business Unit 2,216 935 11 8 5,056 1,928 10 6
------- ------- ------- ------- ------- ------- ------- -------
$21,006 $11,527 100% 100% $52,514 $30,809 100% 100%
</Table>
During 2000, we changed our revenue recognition policies to comply with SAB
101. Specifically, SAB 101 requires that we defer up-front NRE fees, 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 nine months ended September 30, 2001, we recognized
approximately 53% of total revenue from Ameritech, BellSouth Inc., Qwest and
Verizon, each of which accounted for greater than 10% of our total revenue in
such period. During the nine months ended September 30, 2000, we recognized
approximately 67% of total revenue from Ameritech, BellSouth Inc. and Qwest,
each of which accounted for greater than 10% of our total revenue in such
period.
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. Future taxable income may not be sufficient to
realize additional deferred tax assets that may be created by the projected net
operating losses. Consequently, we have provided a valuation allowance to fully
offset our net deferred tax assets.
Our quarterly and annual operating results have varied significantly in
the past. The variation in operating results may 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 those identified above under the caption "Cautionary
Note About Forward-Looking Statements" and in our Annual Report on Form 10-K
under the caption "Item 1. Business - Risk Factors."
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
TOTAL COMPANY
Total revenue increased 83%, from $11.5 million in the third quarter of
2000 to $21.0 million in the third quarter of 2001. Included in this increase is
revenue related to the LPSS acquisition of approximately $5.3 million. Total
direct costs increased 81%, from $7.4 million in the third quarter of 2000 to
$13.4 million in the third quarter of 2001, representing 64% of total revenue
for both periods. Included in this increase are direct costs related to the LPSS
acquisition of approximately $2.2 million.
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ILEC BUSINESS UNIT
ILEC revenue increased 59%, from $7.6 million in the third quarter of 2000
to $12.1 million in the third quarter of 2001. ILEC revenue increased due to an
increase in the number of records under management, recurring systems and new
product and maintenance revenue related to the database division acquired as
part of the LPSS acquisition. Included in this increase is revenue related to
LPSS's database systems representing approximately $4.7 million. ILEC
subscribers under management grew 3% from 85.3 million subscribers as of
September 30, 2000, to 87.9 million as of September 30, 2001.
ILEC direct costs increased 48%, from $4.2 million in the third quarter of
2000 to $6.2 million in the third quarter of 2001, representing 55% and 51% of
ILEC revenue for such periods, respectively. Costs increased due to the addition
of staff as a result of the LPSS acquisition as well as an increase in the
amount of ILEC work performed by our software development group on ILEC
enhancements during the third quarter of 2001. Included in this increase are
direct costs related to LPSS's database division representing approximately $1.7
million.
ILEC sales and marketing expenses increased 113%, from $516,000 in the
third quarter of 2000 to $1.1 million in the third quarter of 2001, representing
7% and 9% of ILEC revenue for each period, respectively. ILEC sales and
marketing expenses increased as a result of additional headcount acquired as
part of the LPSS acquisition as well as in other ILEC sales and marketing
departments to accommodate growth. Included in this increase are sales and
marketing costs related to LPSS's database division representing approximately
$115,000.
ILEC research and development costs decreased 98%, from $62,000 in the
quarter ended September 30, 2000 to $1,000 in the quarter ended September 30,
2001, representing 1% and 0% of ILEC revenue for such periods, respectively.
ILEC research and development costs decreased primarily due to an increase in
the amount of software engineering costs that were capitalized during the
quarter ended September 30, 2001.
CLEC BUSINESS UNIT
CLEC revenue increased 95%, from $1.9 million in the third quarter of 2000
to $3.7 million in the third quarter of 2001. CLEC revenue increased due to an
increase in the number of records under management for new and existing
customers and additional professional services recognized on new customers. We
now have 43 CLEC contracts and 8.4 million subscribers, representing a 76%
increase in subscribers from September 30, 2000.
CLEC direct costs increased 97%, from $763,000 in the third quarter of 2000
to $1.5 million in the third quarter of 2001, representing 40% of CLEC revenue
for both periods. The increase in CLEC direct costs is due to the hiring of
additional CLEC operations staff to assist with the continued growth in records
under management and to support professional services.
CLEC sales and marketing expenses increased 84%, from $216,000 in the third
quarter of 2000 to $398,000 in the third quarter of 2001, representing 11% of
CLEC revenue for both periods. The increase in CLEC sales and marketing expenses
is due to the hiring of additional sales and marketing personnel to accommodate
growth.
CLEC research and development costs decreased 76%, from $38,000 in the
quarter ended September 30, 2000 to $9,000 in the quarter ended September 30,
2001, representing 2% and 0% of CLEC revenue for such periods, respectively.
CLEC research and development costs decreased primarily due to an increase in
the amount of software engineering costs that were capitalized during the
quarter ended September 30, 2001.
WIRELESS BUSINESS UNIT
Wireless revenue increased 173%, from $1.1 million in the third quarter of
2000 to $3.0 million in the third quarter of 2001. Wireless revenue increased
due to an increase in the number of records under management and fees received
for new products. Wireless subscribers grew 331% from 2.6 million at September
30, 2000 to 11.2 million at September 30, 2001.
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Wireless direct costs increased 200%, from $1.1 million in the third
quarter of 2000 to $3.3 million in the third quarter of 2001, representing 100%
and 110% 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. Also included in
this increase are approximately $498,000 of costs incurred as a result of the
LPSS acquisition. Wireless direct cost as a percentage of Wireless revenue
decreased as the increase in subscribers managed covered more of the
infrastructure costs.
Wireless sales and marketing expenses increased 123%, from $284,000 in the
third quarter of 2000 to $633,000 in the third quarter of 2001, representing 26%
and 21% of Wireless revenue for such periods, respectively. The increase in
Wireless sales and marketing expenses is due to the creation of a product
management department and the hiring of additional sales personnel in 2001.
Wireless research and development costs decreased 100%, from $117,000 in the
quarter ended September 30, 2000 to $0 in the quarter ended September 30, 2001,
representing 11% and 0% of Wireless revenue for such periods, respectively.
Wireless research and development costs decreased primarily due to an increase
in the amount of software engineering costs that were capitalized during the
quarter ended September 30, 2001.
DIRECT BUSINESS UNIT
Direct revenue increased 135% from $935,000 in the third quarter of 2000
to $2.2 million in the third quarter of 2001. Direct revenue increased due to
the transition of records in the State of Texas, fees recognized for enhanced
services, revenues related to our Emergency Warning and Evacuation ("EWE")
system and maintenance and systems revenue related to the call handling
division acquired as part of the LPSS transaction. Included in this increase
are approximately $642,000 of revenue related to the call handling division
acquired as part of the LPSS acquisition. The subscriber base in Texas
increased 6% from 6.7 million at September 30, 2000 to 7.1 million at
September 30, 2001 and EWE increased 360% from 500,000 at September 30, 2000
to 2.3 million at September 30, 2001.
Direct costs increased 85% from $1.3 million in the third quarter of 2000
to $2.4 million in the third quarter of 2001. Costs increased due to the
additional personnel and costs associated with an increased subscriber base in
Texas and EWE contracts as well as additional personnel acquired as part of the
LPSS transaction. Included in this increase are approximately $938,000 of direct
costs related to the call handling division.
Direct sales and marketing expenses increased 96% from $336,000 in the
third quarter of 2000 to $659,000 in the third quarter of 2001, representing 36%
and 30% of Direct revenue for such periods, respectively. The increase in sales
and marketing costs is due to the addition of personnel acquired as part of the
LPSS transaction. Included in this increase are approximately $311,000 of sales
and marketing costs related to the call handling division.
Direct research and development costs decreased 100%, from $243,000 in the
quarter ended September 30, 2000 to $0 in the quarter ended September 30, 2001,
representing 26% and 0% of Direct revenue for such periods, respectively. Direct
research and development costs decreased primarily due to an increase in the
amount of software engineering costs that were capitalized during the quarter
ended September 30, 2001.
CORPORATE BUSINESS UNIT
Corporate general and administrative expenses increased 100%, from $2.3
million in the third quarter of 2000 to $4.6 million in the third quarter of
2001. Corporate general and administrative expenses increased due to the
amortization of intangibles acquired as a result of the LPSS transaction,
increased headcount to accommodate growth in our corporate support
departments and personnel acquired from the LPSS transaction. Costs related
to the LPSS acquisition, including amortization of intangibles, were
approximately $1.4 million.
Corporate sales and marketing expenses decreased 26%, from $1.1 million in
the third quarter of 2000 to $816,000 million in the third quarter of 2001,
representing 10% and 4% in total revenue for such periods, respectively.
Included in corporate sales and marketing are costs associated with public
relations. Corporate sales and marketing expenses decreased primarily due to
lower contracted service costs.
Corporate research and development increased 168% from $447,000 in the
third quarter of 2000 to $1.2 million in the third quarter of 2001, representing
labor and associated travel and consulting costs related to the research and
development of new product offerings.
Net other income (expense) decreased 259%, from $196,000 in the third
quarter of 2000 to $(311,000) in the third quarter of 2001, representing 2% and
(1)% of total revenue for such periods, respectively. Other income (expense)
12
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decreased due to less interest income earned from investments and increased
interest expense related to new capital equipment leases and the new line of
credit facility.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
TOTAL COMPANY
Total revenue increased 70%, from $30.8 million in the nine months ended
September 30, 2000 to $52.5 million in the nine months ended September 30, 2001.
Included in this increase is revenue related to the LPSS acquisition of
approximately $8.3 million. Total direct costs increased 73%, from $20.7 million
in the nine months ended September 30, 2000 to $35.9 million in the nine months
ended September 30, 2001, representing 67% and 68% of total revenue for such
periods, respectively. Included in this increase are direct costs related to the
LPSS acquisition of approximately $4.5 million.
ILEC BUSINESS UNIT
ILEC revenue increased 39%, from $21.5 million in the nine months ended
September 30, 2000 to $29.8 million in the nine months ended September 30, 2001.
ILEC revenue increased due to an increase in the number of records under
management, recurring systems and new product and maintenance revenue related to
the database division acquired as part of the LPSS acquisition. Included in this
increase is revenue related to LPSS's database systems representing
approximately $7.4 million.
ILEC direct costs increased 39%, from $12.1 million in the nine months
ended September 30, 2000 to $16.8 million in the nine months ended September 30,
2001, representing 56% of ILEC revenue for both periods. Costs increased due to
the addition of staff as a result of the LPSS acquisition as well as an increase
in the amount of ILEC work performed by our software development group on ILEC
enhancements during 2001. Included in this increase are direct costs related to
LPSS's database division representing approximately $2.4 million.
ILEC sales and marketing expenses increased 100%, from $1.3 million in the
nine months ended September 30, 2000 to $2.6 million in the nine months ended
September 30, 2001, representing 6% and 9% of ILEC revenue for such periods,
respectively. ILEC sales and marketing expenses increased as a result of
additional headcount acquired as part of the LPSS acquisition as well as in
other ILEC sales and marketing departments to accommodate growth. Included in
this increase are sales and marketing costs related to LPSS's database division
representing approximately $158,000.
ILEC research and development costs decreased 28%, from $226,000 in the
nine months ended September 30, 2000 to $163,000 in the nine months ended
September 30, 2001, representing 1% of ILEC revenue for both periods. ILEC
research and development costs decreased primarily due to an increase in the
amount of software engineering costs that were capitalized during the
quarter ended September 30, 2001.
CLEC BUSINESS UNIT
CLEC revenue increased 108%, from $4.9 million in the nine months ended
September 30, 2000 to $10.2 million in the nine months ended September 30, 2001.
CLEC revenue increased due to an increase in the number of records under
management for new and existing customers and additional professional services
recognized on new customers.
CLEC direct costs increased 139%, from $1.8 million in the nine months
ended September 30, 2000 to $4.3 million in the nine months ended September 30,
2001, representing 37% and 42% of CLEC revenue for such periods, respectively.
The increase in CLEC direct costs is due to the hiring of additional CLEC
operations staff to assist with the continued growth in records under management
and to support professional services.
CLEC sales and marketing expenses increased 149%, from $522,000 in the nine
months ended September 30, 2000 to $1.3 million in the nine months ended
September 30, 2001, representing 11% and 13% of CLEC revenue for such periods,
respectively. The increase in CLEC sales and marketing expenses is due to the
hiring of additional sales and marketing personnel and consultants to
accommodate growth.
CLEC research and development costs decreased 81%, from $201,000 in the
nine months ended September 30, 2000 to $39,000 in the nine months ended
September 30, 2001, representing 4% and 0% of CLEC revenue for such
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periods, respectively. CLEC research and development costs decreased
primarily due to an increase in the amount of software engineering costs that
were capitalized during the quarter ended September 30, 2001.
WIRELESS BUSINESS UNIT
Wireless revenue increased 213%, from $2.4 million in the nine months ended
September 30, 2000 to $7.5 million in the nine months ended September 30, 2001.
Wireless revenue increased due to an increase in the number of records under
management and fees received for new products.
Wireless direct costs increased 190%, from $2.9 million in the nine months
ended September 30, 2000 to $8.4 million in the nine months ended September 30,
2001, representing 121% and 112% 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 covered more of the infrastructure costs.
Also included in this increase are approximately $728,000 of costs incurred as a
result of the LPSS acquisition.
Wireless sales and marketing expenses increased 174%, from $583,000 in the
nine months ended September 30, 2000 to $1.6 million in the nine months ended
September 30, 2001, representing 24% and 21% of Wireless revenue for such
periods, respectively. The increase in Wireless sales and marketing expenses is
due to the creation of a product management department and the hiring of
additional sales personnel in 2001.
Wireless research and development costs decreased 100% from $481,000 in
the nine months ended September 30, 2000 to $1,000 in the nine months ended
September 30, 2001, representing 20% and 0% of Wireless revenue for such
periods, respectively. Wireless research and development costs decreased
primarily due to an increase in the amount of software engineering costs that
were capitalized during the quarter ended September 30, 2001.
DIRECT BUSINESS UNIT
Direct revenue increased 168% from $1.9 million in the nine months ended
September 30, 2000 to $5.1 million in the nine months ended September 30, 2001.
Direct revenue increased due to the transition of records in the State of Texas,
fees recognized for Enhanced Services, revenues related to our EWE systems and
maintenance and systems revenue related to the call handling division acquired
as part of the LPSS transaction. Included in this increase are approximately
$851,000 of revenue related to the call handling division acquired as part of
the LPSS acquisition.
Direct costs increased 66% from $3.8 million in the nine months ended
September 30, 2000 to $6.3 million in the nine months ended September 30, 2001.
Costs increased due to the additional personnel and costs associated with an
increased subscriber base in Texas and EWE contracts as well as additional
personnel acquired as part of the LPSS transaction. Included in this increase
are approximately $1.4 million of direct costs related to the call handling
division during the period.
Direct sales and marketing expenses increased 40% from $1.0 million in the
nine months ended September 30, 2000 to $1.4 million in the nine months ended
September 30, 2001, representing 53% and 27% of Direct revenue for such periods,
respectively. The increase in sales and marketing costs is due to the addition
of personnel acquired as part of the LPSS transaction. Included in this increase
are approximately $436,000 of sales and marketing costs related to the call
handling division.
Direct research and development costs decreased 87%, from $636,000 in
the nine months ended September 30, 2000 to $82,000 in the nine months ended
September 30, 2001. Direct research and development costs decreased primarily
due to an increase in the amount of software engineering costs that were
capitalized during the quarter ended September 30, 2001.
CORPORATE BUSINESS UNIT
Corporate general and administrative expenses increased 90%, from $5.8
million in the nine months ended September 30, 2000 to $11.0 million in the
nine months ended September 30, 2001, representing 19% and 21% of total
revenue for such periods, respectively. Corporate general and administrative
expenses increased due to the amortization of intangibles acquired as a
result of the LPSS transaction, increased headcount to accommodate growth in
our corporate support departments and personnel acquired from the LPSS
transaction. Costs related to the acquisition, including amortization of
intangibles, were approximately $2.0 million.
Corporate sales and marketing expenses increased 12%, from $2.5 million in
the nine months ended September 30, 2000 to $2.8 million in the nine months
ended September 30, 2001, representing 8% and 5% in total revenue for such
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periods, respectively. Corporate sales and marketing expenses increased due to
increased personnel and public relations charges.
Corporate research and development expenses increased 158% from $1.2
million in the nine months ended September 30, 2000 to $3.1 million in the nine
months ended September 30, 2001 representing labor and associated travel and
consulting costs related to the research and development of new product
offerings.
Net other income (expense) decreased 137%, from $622,000 in the nine months
ended September 30, 2000 to $(232,000) in the nine months ended September 30,
2001, representing 2% and 0% of total revenue for such periods, respectively.
Other income (expense) decreased due to less interest income earned from
investments and increased interest expense related to new leases and the
addition of the line of credit.
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 our previously existing revenue recognition methods that
would have been deferred as of December 31, 1999 had we 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.
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 September 30, 2001, we had approximately $7.6 million in
cash and cash equivalents. We anticipate that our operating cash flows will
be positive in the fourth quarter of 2001 as we are beginning to generate
revenue from our increased subscriber base and our wireless deployment
efforts.
We repaid $2.6 million and $1.2 million of capital lease obligations
during the nine months ended September 30, 2001 and 2000, respectively.
Additionally, we used $5.0 million and $3.8 million in the nine months ended
September 30, 2001 and 2000, respectively, for the purchase of capital assets
and software development. We currently have no material commitments for
capital expenditures other than the following. On May 7, 2001, we signed an
eight-year lease to occupy approximately 210,000 square feet of additional
office space in Longmont, Colorado. We expect to move our corporate
headquarters to Longmont beginning in early 2002, with full occupancy
anticipated by the third quarter of 2002. We expect to incur between $4
million and $6 million of moving costs, leasehold improvements and capital
purchases in 2002.
In addition, we incurred an obligation to purchase approximately $4.1
million of computers in conjunction with the LPSS acquisition. The LPSS
computers are held in inventory along with additional computer systems. In
the third quarter of 2001, we purchased $1.7 million of computer upgrades,
which are also included in our inventory. 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 LPSS.
On July 31, 2001, we entered into an agreement to establish a revolving
line of credit, which is available to meet operating needs. Borrowing
availability is not to exceed $15 million and is further limited to 85% of our
eligible accounts receivable, as defined in the line of credit agreement. The
interest rate on amounts borrowed under the line of credit is equal to the prime
rate plus 2.00% per annum. The line of credit matures on July 31, 2004 and is
collateralized by accounts receivable and certain other assets. As of September
30, 2001, approximately $4.0 million was outstanding. An additional $750,000 is
being utilized to satisfy letter of credit obligations.
We also have access to a maximum of $7.5 million through capital lease
lines with two entities. The interest rate is equal to the entities' cost of
funds at the time of each lease. Each lease schedule is collateralized by the
assets that are being leased and is subject to review and approval by the lessor
at the time of our application. Each lease has its own termination date,
typically 36 months. As of September 30, 2001, we have utilized approximately
$3.6 million of the $7.5 million available under the capital lease lines.
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 our
common stock on the Nasdaq National Market for the twenty consecutive trading
days prior to the offering date. As a finder's fee, we paid a $250,000 fee
and issued a warrant to purchase 31,605 shares with an exercise price of
$7.91 per share and an expiration date of May 2006. Other than the finder's
fee, we did not pay any other compensation or fees in conjunction with this
offering of common stock. Pursuant to this offering, we registered the shares
held by the institutional investor and the finder in July 2001.
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The net proceeds from this offering were $4,750,000. We used the net
proceeds for general corporate purposes, including:
o repaying our obligations;
o financing capital expenditures, including acceleration of our wireless
deployments and development of our coordinate routing database; and
o working capital.
On May 11, 2001, we acquired certain assets, and assumed certain
liabilities, associated with the call handling and database divisions of LPSS,
an internal venture of Lucent. As part of the acquisition, we issued 2,250,000
shares of our common stock to Lucent, incurred an obligation to pay
approximately $4.8 million in cash to Lucent for inventory either as the
inventory is sold or at a specified future date, and agreed to issue, 24 months
from the date of closing, up to $32.9 million of mandatorily redeemable,
non-voting, preferred stock ("Preferred Stock") to Lucent, subject to the
attainment of specific total combined revenue ("Total Revenue") targets. No
dividends will be paid on the Preferred Stock.
The obligation to purchase approximately $4.8 million in inventory from
Lucent is payable in four equal installments beginning in August 2002 and ending
in May 2003 and therefore, was discounted and recorded at $4.1 million (as of
the date of the acquisition). If the inventory is sold prior to May 2002, that
portion of the obligation would be due and payable immediately.
The actual amount of the Preferred Stock that we may be required to issue
is subject to a 24-month contingency period, which commences on June 1, 2001. If
Total Revenue meets or exceeds $258 million for that period, 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
division 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. This commitment will not be recorded until the targets are met, if at
all, and will be treated as an increase in the purchase price by increasing
goodwill. The Preferred Stock will be recorded at its face value over the
redemption period. The accretion will be treated as a dividend, reducing the
income available to common stockholders.
The mandatory 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. We must redeem shares of Preferred Stock
with 25% of the gross proceeds of any underwritten public offering.
FUTURE CAPITAL NEEDS AND RESOURCES
We anticipate that, for the foreseeable future, significant amounts of
available cash flows will be utilized for:
o capital expenditures for the expansion and enhancement of our networks
and the continued development of new or enhanced products and
services;
o operating expenses to support the continued implementation of existing
customer contracts, particularly in the wireless business unit;
o potential acquisition opportunities that may arise;
o debt service requirements; and
o other general corporate expenditures, including moving and build-out
costs for our new corporate facility.
We expect cash inflows from operating activities to exceed outflows by the
end of 2001. However, our success depends on the execution of our strategies,
including our ability to:
o effectively integrate the operations of LPSS with our historic
business;
o develop business and pricing models that realize benefits from
economies of scale;
o develop new and better products that we can competitively price and
sell;
o expand our services beyond our traditional business and into the
highly competitive data management industry; and
o implement more cost effective internal processes.
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We cannot be sure that we will be successful in decreasing our overall operating
costs or increasing operating profits.
If we are not successful in implementing these initiatives and realizing
positive cash flows from operations, and we are unable to raise additional funds
or obtain funds from other sources on acceptable terms and in a timely manner,
we may be required to conserve available cash for use in funding existing
business activities, thereby slowing enhancement and implementation of existing
contracts and services.
Based on available cash resources, anticipated capital expenditures and
projected operating cash flow, we believe that we will be able to fully fund our
operations through 2002. In making this assessment, we have considered:
o our consolidated cash, cash equivalents and short-term investments of
$7.6 million as of September 30, 2001;
o the availability of up to $10.2 million of funding related to our
revolving credit facility as of September 30, 2001;
o the anticipated level of capital expenditures during the remainder of
2001 and 2002;
o presently scheduled debt service requirements during the remainder of
2001 and 2002; and
o our expectation of realizing positive cash flow from operations during
the fourth quarter of 2001.
If our business plans change, or if economic conditions or competitive
practices in the telecommunications industry change materially, our cash flow,
profitability and anticipated cash needs could change significantly. In
particular, any acquisition or new business opportunity could involve
significant additional funding needs in excess of the identified currently
available sources, and could require us to raise additional equity or debt
funding to meet those needs.
The availability of borrowings under our credit facility and lease line of
credit is subject to certain conditions and limitations, and we cannot be sure
that those conditions will be met. The instruments relating to our financing
arrangements contain provisions that limit the amount of borrowings that we may
incur. The terms of the credit facility and lease line of credit also require us
to maintain compliance with specified operating and financial covenants or
ratios, including specified covenants and ratios related to leverage, which
become more stringent over time.
In addition, our capital needs, and our ability to adequately address those
needs through debt or equity funding sources, are subject to a variety of
factors that we cannot presently predict, including:
o the commercial success of our products and services;
o our ability to collect accounts receivable;
o the amount and timing of our capital expenditures and operating income
or losses;
o the volatility and demand of the equity and debt markets; and
o the market price of our common stock.
We have had and may in the future have discussions with third parties
regarding potential equity investments and debt financing arrangements to
satisfy actual or anticipated financing needs. At present, other than the
existing equity or debt financing arrangements that have been consummated or are
described in this quarterly report, we have no legally binding commitments or
understandings with any third parties to obtain any material amount of equity or
debt financing.
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 September 30, 2001, we have not used derivative instruments or engaged
in hedging activities.
INTEREST RATE RISK
The interest payable on our new line of credit is variable and is
determined based on the prime rate plus 2.00% per annum, and, therefore, is
affected by changes in market interest rates on our capital lease line are also
dependent on interest rates in effect at the time the lease line is drawn upon.
Total liabilities outstanding at September 30, 2001 under the line of credit and
capital lease lines were approximately $14.0 million. Based on amounts borrowed
as of
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September 30, 2001, if the markets were to experience an increase in prime
lending rates of 1%, we would have a resulting decline in future quarterly
earnings and cash flows of approximately $35,000.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<Table>
<Caption>
Exhibit
Number Description
------- ------------------------------------------------------------
10.1 General Electric Capital Corporation Loan and Security
Agreement dated as of July 31, 2001
</Table>
(b) Reports on Form 8-K.
On July 26, 2001, we filed a Current Report on Form 8-K to include
proforma financial statements for the three months ended March 31,
2001 for the previously announced acquisition of certain assets and
assumption of certain liabilities associated with the database and
call handling divisions of LPSS.
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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.
INTRADO INC.
(Registrant)
November 14, 2001 \s\ George K. Heinrichs
- ----------------- ---------------------------
Date George K. Heinrichs, President
and Chief Executive Officer
November 14, 2001 \s\ Michael D. Dingman, Jr.
- ----------------- -------------------------------
Date Michael D. Dingman, Jr.
Financial Officer
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