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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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 80301
BOULDER, COLORADO
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (303) 581-5600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 2000, there were 11,275,211 shares of the Registrant's
Common Stock outstanding.
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INDEX
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheets as of September 30, 2000 and December 31, 1999 (Unaudited)......... 2
Statements of Operations for the three months ended September 30, 2000 and 1999 and
the nine months ended September 30, 2000 and 1999 (Unaudited)..................... 4
Statements of Cash Flows for the nine months ended September 30, 2000 and 1999
(Unaudited)....................................................................... 5
Notes to Financial Statements (Unaudited)........................................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 9
Item 2A - Factors That May Affect Future Results...................................... 16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk................... 24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................................ 25
Item 2 - Changes in Securities and Use of Proceeds.................................... 25
Item 3 - Defaults on Senior Securities................................................ 25
Item 4 - Submission of Matters to a Vote of Security Holders.......................... 25
Item 5 - Other Information............................................................ 25
Item 6 - Exhibits and Reports on Form 8-K............................................. 25
Signatures............................................................................ 26
SCC COMMUNICATIONS CORP.
BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2000 1999
------------ -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,665 $ 8,354
Short-term investments.................................... 10,856 12,165
Accounts receivable, net of allowance for doubtful
accounts of approximately $58 in 2000 and 1999........... 5,500 2,255
Unbilled revenue.......................................... 1,889 846
Prepaids and other........................................ 1,842 548
Deferred income taxes -- current portion.................. 653 653
------------ -----------
Total current assets.................................... 25,405 24,821
------------ -----------
PROPERTY AND EQUIPMENT, at cost:
Computer hardware and equipment........................... 28,710 25,411
Furniture and fixtures.................................... 1,078 933
Leasehold improvements.................................... 963 915
------------ -----------
30,751 27,259
Less -- Accumulated depreciation.......................... (19,477) (15,753)
------------ -----------
Total property and equipment............................ 11,274 11,506
------------ -----------
OTHER ASSETS............................................... 107 86
LONG-TERM INVESTMENTS...................................... - 993
DEFERRED INCOME TAXES -- NONCURRENT........................ 3,423 3,423
SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $791 and $575 in 2000 and 1999,
respectively............................................. 1,025 951
-------- --------
$ 41,234 $ 41,780
======== ========
The accompanying notes to financial statements are an integral part of these
balance sheets.
2
SCC COMMUNICATIONS CORP.
BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2000 1999
------------ -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................. $ 1,296 $ 752
Payroll-related accruals.......................................................... 1,193 786
Other accrued liabilities......................................................... 1,708 1,641
Property and other tax liabilities................................................ 966 792
Current portion of capital lease obligations...................................... 2,200 1,971
Deferred contract revenue......................................................... 1,803 865
------------ -----------
Total current liabilities................................................. 9,166 6,807
LONG-TERM DEBT:
Capital lease obligations, net of current portion................................. 1,717 2,038
------------ -----------
Total liabilities......................................................... 10,883 8,845
------------ -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 15,000,000 shares authorized; none issued or
outstanding...................................................................... - -
Common stock, $.001 par value; 30,000,000 shares authorized; 11,273,290 and
11,104,111 shares issued in 2000 and 1999, respectively.......................... 11 11
Additional paid-in capital........................................................ 44,445 43,925
Common stock warrants............................................................. 373 -
Stock subscriptions receivable.................................................... (33) (33)
Accumulated deficit............................................................... (14,445) (10,968)
------------ -----------
Total stockholders' equity................................................ 30,351 32,935
------------ -----------
$ 41,234 $ 41,780
============ ===========
The accompanying notes to financial statements are an integral part of these
balance sheets.
3
SCC COMMUNICATIONS CORP.
STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
Unaudited
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
REVENUE:
ILEC Business Unit.................................................. $ 7,663 $ 6,606 $ 21,432 $ 19,976
CLEC Business Unit.................................................. 1,888 1,092 5,297 2,581
Wireless Business Unit.............................................. 1,265 405 2,980 1,251
Direct Business Unit................................................ 959 194 1,947 294
----------- ----------- ----------- -----------
Total revenue................................................ 11,775 8,297 31,656 24,102
COSTS AND EXPENSES:
ILEC Business Unit.................................................. 4,236 3,704 12,077 11,077
CLEC Business Unit.................................................. 738 535 1,835 1,415
Wireless Business Unit.............................................. 1,349 1,033 3,583 3,117
Direct Business Unit................................................ 1,334 478 3,863 1,240
Sales and marketing................................................. 2,423 1,307 5,881 4,008
General and administrative.......................................... 2,305 1,185 5,803 3,546
Research and development............................................ 907 420 2,713 1,268
----------- ----------- ----------- -----------
Total costs and expenses..................................... 13,292 8,662 35,755 25,671
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS.................................................. (1,517) (365) (4,099) (1,569)
OTHER INCOME (EXPENSE):
Interest and other income........................................... 293 269 911 804
Interest and other expense.......................................... (97) (125) (289) (386)
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,321) (221) (3,477) (1,151)
INCOME TAX BENEFIT.................................................... - 83 - 437
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS....................................... (1,321) (138) (3,477) (714)
LOSS FROM OPERATIONS OF DISCONTINUED DIVISION, net of tax - (25) - (149)
----------- ----------- ----------- -----------
NET LOSS.............................................................. $ (1,321) $ (163) $ (3,477) $ (863)
=========== =========== =========== ===========
NET LOSS PER SHARE (Note 2):
Basic and diluted................................................... $ (0.12) $ (0.01) $ (0.31) $ (0.08)
=========== =========== =========== ===========
SHARES USED IN COMPUTING NET LOSS PER SHARE (Note 2):
Basic and diluted................................................... 11,217,093 11,050,697 11,201,308 10,963,830
=========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
4
SCC COMMUNICATIONS CORP.
STATEMENTS OF CASH FLOWS
(dollars in thousands)
Unaudited
Nine Months
Ended September 30,
------------------
2000 1999
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................................. $ (3,477) $ (863)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Amortization and depreciation........................................................... 3,957 3,806
Accretion of and interest accrued on investments........................................ (184) (214)
Loss on disposal of assets.............................................................. 6 38
Deferred income tax benefit............................................................. - (529)
Provision for doubtful accounts......................................................... - 50
Change in --
Accounts receivable..................................................................... (3,245) 1,998
Unbilled revenue........................................................................ (1,043) 225
Prepaids and other...................................................................... (942) (379)
Accounts payable........................................................................ 544 (109)
Accrued liabilities..................................................................... 648 (408)
Deferred contract revenue............................................................... 938 (1,032)
-------- -------
Net cash provided by (used in) operating activities.................................... (2,798) 2,583
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................................................... (3,503) (1,516)
Purchase of investments................................................................... (10,764) (8,643)
Sale of investments....................................................................... 13,250 7,000
Software development costs................................................................ (291) (426)
-------- -------
Net cash used in investing activities.................................................. (1,308) (3,585)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations........................................... (1,222) (1,432)
Proceeds from equipment lease............................................................. 1,119 -
Exercise of stock options................................................................. 448 258
Proceeds received from employee stock purchase plan....................................... 72 88
Payments received from stock subscriptions................................................ - 22
-------- -------
Net cash provided by (used in) financing activities.................................... 417 (1,064)
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................... (3,689) (2,066)
CASH AND CASH EQUIVALENTS, beginning of period.............................................. 8,354 10,266
-------- -------
CASH AND CASH EQUIVALENTS, end of period.................................................... $ 4,665 $ 8,200
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................................................. $ 250 $ 351
======== =======
Cash paid during the period for taxes..................................................... $ 289 $ 356
======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Property acquired with capital leases..................................................... $ 11 $ 856
======== =======
Issuance of stock warrants................................................................ $ 373 $ -
======== =======
The accompanying notes to financial statements are an integral part of these
statements.
5
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 September 30, 2000 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
December 31, 2000. These financial statements should be read in conjunction with
the financial statements and notes thereto for the year ended December 31, 1999,
which are included in the Company's Annual Report on Form 10-K.
NOTE 2 - EARNINGS PER SHARE
"Basic income (loss) per share" is determined by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during each period. "Diluted income (loss) per share" includes the
effects of potentially issuable common stock, but only if dilutive (i.e., a loss
per share is never reduced). The treasury stock method, using the average price
of the Company's common stock for the period, is applied to determine dilution
from options and warrants. The if-converted method is used for convertible
securities. Potentially dilutive common stock options and warrants that were
excluded from the calculation of diluted income per share because their effect
is antidilutive totaled 859,629 and 816,088 for the three months ended September
30, 2000 and 1999, respectively, and 787,993 and 1,132,604 for the nine months
ended September 30, 2000 and 1999, respectively.
NOTE 3 - WARRANTS
During the second quarter, the Company issued a warrant to purchase 100,000
shares of the Company's common stock to an investor relations consulting firm
for services to be provided over one year. The Company recorded the fair value
of the warrant, totaling $273,000, as a prepaid expense which will be amortized
over the one-year service period on a straight-line basis.
The Company also issued a warrant to purchase 36,590 shares of the
Company's common stock to a marketing firm for services to be provided in the
future. The Company recorded the fair value of the warrant, totaling $100,000,
as a prepaid expense which was expensed as services were provided during the
three months ended September 30, 2000.
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.
Revenue and costs are segregated in the Statement of Operations for the
reportable segments. The Company does not segregate assets between the segments
as it is impractical to do so.
6
For the Three Months Ended September 30:
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
ILEC CLEC WIRELESS DIRECT CORPORATE TOTAL
-------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
Revenue $7,663 $6,606 $1,888 $1,092 $ 1,265 $ 405 $ 959 $ 194 $ - $ - $ 11,775 $8,297
Direct costs 4,236 3,704 738 535 1,349 1,033 1,334 478 - - 7,657 5,750
Sales and marketing 516 420 216 81 284 155 336 150 1,071 501 2,423 1,307
General and
administrative - - - - - - - - 2,305 1,185 2,305 1,185
Research and
development 62 62 38 35 117 143 243 180 447 - 907 420
------ ------ ------ ------ ------- ------- ------- ------- ------- ------- ------- ------
Total 4,814 4,186 992 651 1,750 1,331 1,913 808 3,823 1,686 13,292 8,662
Operating income
(loss) 2,849 2,420 896 441 (485) (926) (954) (614) (3,823) (1,686) (1,517) (365)
Other income, net - - - - - - - - 196 144 196 144
------ ------ ------ ------ ------- ------- ------- ------- ------- ------- ------- ------
Income (loss) before
income taxes 2,849 2,420 896 441 (485) (926) (954) (614) (3,627) (1,542) (1,321) (221)
Income tax benefit - - - - - - - - - 83 - 83
------ ------ ------ ------ ------- ------- ------- ------- ------- ------- ------- ------
Net income (loss)
from continuing
operations before
extraordinary item 2,849 2,420 896 441 (485) (926) (954) (614) (3,627) (1,459) (1,321) (138)
Loss from operations
of discontinued
division, net of tax - - - - - - - - - (25) - (25)
------ ------ ------ ------ ------- ------- ------- ------- ------- ------- ------- ------
Net income (loss) $2,849 $2,420 $ 896 $ 441 ($ 485) ($ 926) ($ 954) ($ 614) ($ 3,627) ($ 1,484) ($ 1,321) ($ 163)
====== ====== ====== ====== ======= ======= ======= ======= ======= ======= ======= ======
- ------------------------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30:
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
ILEC CLEC WIRELESS DIRECT CORPORATE TOTAL
-------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
Revenue $21,432 $19,976 $5,297 $2,581 $ 2,980 $1,251 $ 1,947 $ 294 $ - $ - $31,656 $24,102
Direct costs 12,077 11,077 1,835 1,415 3,583 3,117 3,863 1,240 - - 21,358 16,849
Sales and marketing 1,268 1,283 522 275 584 439 1,018 306 2,489 1,705 5,881 4,008
General and
administrative - - - - - - - - 5,803 3,546 5,803 3,546
Research and
development 226 243 199 93 482 266 637 666 1,169 - 2,713 1,268
------- ------- ------ ------ ------- ------ ------- ------- ------- ------- ------- -------
Total 13,571 12,603 2,556 1,783 4,649 3,822 5,518 2,212 9,461 5,251 35,755 25,671
Operating income
(loss) 7,861 7,373 2,741 798 (1,669) (2,571) (3,571) (1,918) (9,461) (5,251) (4,099) (1,569)
Other income, net - - - - - - - - 622 418 622 418
------- ------- ------ ------ ------- ------ ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes 7,861 7,373 2,741 798 (1,669) (2,571) (3,571) (1,918) (8,839) (4,833) (3,477) (1,151)
Income tax benefit - - - - - - - - - 437 - 437
------- ------- ------ ------ ------- ------ ------- ------- ------- ------- ------- -------
Net income (loss)
from continuing
operations before
extraordinary item 7,861 7,373 2,741 798 (1,669) (2,571) (3,571) (1,918) (8,839) (4,396) (3,477) (714)
Loss from operations
of discontinued
division, net of tax - - - - - - - - - (149) - (149)
------- ------- ------ ------ ------- ------ ------- ------- ------- ------- ------- -------
Net income (loss) $ 7,861 $ 7,373 $2,741 $ 798 ($ 1,669)($2,571)($ 3,571) ($ 1,918) ($ 8,839) ($ 4,545)($ 3,477) ($ 863)
======= ======= ====== ====== ======= ====== ======= ======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------------------
7
Information for 1999 has been reclassified to reflect the realignment of various
business units. Licenses and implementation services are now included in the
ILEC Business Unit. ILEC, CLEC, Wireless and Direct were formerly included in
Data Management Services.
NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 and No. 137
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value. In
June 1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - An amendment of FASB Statement No.
133." SFAS No. 137 delays the effective date of SFAS No. 133 to financial
quarters and financial years beginning after June 15, 2000. The Company does not
typically enter into arrangements that would fall under the scope of Statement
No. 133 and thus, management believes that Statement No. 133 will not
significantly affect the Company's financial condition and results of
operations.
Staff Accounting Bulletin No. 101
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, "Revenue Recognition." SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in financial statements. The accounting impact of SAB 101 is required to be
determined no later than the Company's fourth fiscal quarter of 2000. The
Company has concluded that its current revenue recognition policies will have to
change to be in accordance with SAB 101. Specifically, the guidance provided by
SAB 101 requires the Company to defer the up-front Non-Recurring Engineering,
("NRE"), fee and related direct costs and amortize them over the life of the
contract. The implementation of SAB 101 requires the Company to restate all of
its previously reported 2000 quarterly results to reflect a cumulative effect of
change in accounting principle as if SAB 101 had been implemented on January 1,
2000. The Company is currently reviewing its contracts to determine the impact
SAB 101 will have on its financial position and results of operations, but
currently expects the cumulative effect of change in accounting principle to be
between $5 million and $6 million.
8
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 incumbent
local exchange carriers or ILECs, competitive local exchange carriers or 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.
On October 17, 2000, we issued a press release announcing our signing of a
definitive agreement to acquire specified assets, and assume specified
liabilities, associated with the business of Lucent Public Safety Systems, an
internal venture of Lucent Technologies Inc. A copy of the press release is
included in a Current Report on Form 8-K filed with the SEC on October 17, 2000.
Each of our Business Units provides an outsourcing solution for its
respective customer bases' 9-1-1 data management. Revenue generally includes a
non-recurring initial fee for the design and implementation of the solution,
conversion of the customer's data to our systems, hiring and training of
personnel, and other costs required to prepare for the processing of customer
data. Non-recurring fees are recognized on the percentage-of-completion method
over the period required to perform the tasks necessary to prepare for the
processing of customer data. Our contracts also separately allow for a monthly
service fee based on the number of subscriber records under management, which is
recognized in the period in which the services are rendered. Related costs are
expensed as they are incurred. We may also offer our customers enhanced products
or services, for which revenue is recognized in the period that the work is
performed. Our revenue breaks down as a percent of total revenue as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
ILEC Business Unit 65% 80% 68% 83%
CLEC Business Unit 16% 13% 17% 11%
Wireless Business Unit 11% 5% 9% 5%
Direct Business Unit 8% 2% 6% 1%
We have concluded that our current revenue recognition policies must change
in order to comply with SAB 101. Specifically, SAB 101 requires that we defer
the up-front NRE fee, certain enhancement fees and related direct costs and
amortize them over the life of our contracts. The implementation of SAB 101
requires us to restate all of our reported 2000 quarterly results, including the
operating results reported in this Quarterly Report on Form 10-Q, to reflect a
cumulative effect of change in accounting principle as if SAB 101 had been
implemented on January 1, 2000. We are currently reviewing our contracts to
determine the impact SAB 101 will have on our financial position and results of
operations but currently expect the cumulative effect of change in accounting
principle to be between $5 million and $6 million. See "Recently Issued
Accounting Pronouncements."
9
During the nine months ended September 30, 2000 and 1999, we recognized
approximately 67% and 78%, respectively, of total revenue from Ameritech,
BellSouth Inc. and U S WEST, each of which accounted for greater than 10% of our
total revenue in such periods.
As of December 31, 1999, we had net operating loss carryforwards of $11.2
million available to offset future net income for U.S. federal income tax
purposes. Since we expect to incur losses in the near term related to
development costs for new commercial products, future taxable income may not be
sufficient to realize additional deferred tax assets that will be created by the
projected net operating losses. Consequently, we presently expect our statement
of operations will not reflect tax benefits for projected operating losses to be
incurred during 2000.
In June 1997, we sold the net assets of our Premise Products Division. The
sale of our Premise Products Division resulted in a net loss from the sale of
$2.0 million. Net loss from operations of this division, net of tax, totaled
$149,000 in the first nine months of 1999, and is presented in our financial
statements as loss from operations of discontinued division. This loss resulted
from final closeout of unassigned contracts and the transition of customers to
the company that acquired this division.
Historically, substantially all of our revenue has been generated from
sales to customers in the United States. However, we have generated revenue in
Canada and intend to enter additional international markets, which may require
significant management attention and financial resources. International sales
are subject to a variety of risks. See "Item 2A. Factors That May Affect Future
Results."
Our quarterly and annual operating results have varied significantly in the
past. The variation in operating results will likely continue and may intensify.
We believe that period to period comparisons of results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Our operating results may continue to fluctuate as a result of many
factors, including the length of the sales cycles for new or existing customers,
the size, timing or duration of significant customer contracts, fluctuations in
number of subscriber records under management, timing or duration of service
offerings, rate of adoption of wireless services by Public Safety Answering
Points, efforts expended to accelerate the introduction of certain new products,
our ability to hire, train and retain qualified personnel, increased
competition, changes in operating expenses, changes in our strategy, the
financial performance of our customers, changes in telecommunications
legislation and regulations that may affect the competitive environment for our
services, and general economic factors. Our contracts for 9-1-1 data management
services generally include a separate non-recurring fee for the design and
implementation of services, conversion of the customer's data to our systems,
hiring and training of personnel, and other costs required to prepare for the
processing of customer data, and therefore, we may recognize significantly
increased revenue for a short period of time upon commencing services for a new
customer.
Our expense levels are based in significant part on our expectations
regarding future revenue. Our revenue is difficult to forecast because the
market for our services is evolving rapidly and the length of our sales cycle,
the size and timing of significant customer contracts and license fees and the
timing of recognition of non-recurring initial fees vary substantially among
customers. As discussed, our revenue recognition policy will change to be in
accordance with SAB 101 which will spread the NRE revenue recognition over the
life of the contract. Accordingly, we may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in revenue. Any
significant shortfall could therefore have a material adverse effect on our
business, financial condition and results of operations. We expect to incur
expenses of approximately $10 million in 2000 for research, development and
marketing to expand our product offerings. As of September 30, 2000, we had
incurred expenses of approximately $2.2 million. We cannot assure you that we
can report operating profits or that our investments in research and development
will generate future revenue. Failure to do so could have a material adverse
effect on our business, financial condition and results of operations. In
addition, we hired additional employees in 1999 and year-to-date 2000, and
expect to continue hiring additional employees during the remainder of 2000. 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 September 30, 2000 Compared to Three Months Ended September
30, 1999
Total Company
Total revenue increased 42%, from $8.3 million in the third quarter of 1999
to $11.8 million in the third quarter of 2000. Total direct costs increased 33%,
from $5.8 million in the third quarter of 1999 to $7.7 million in the third
quarter of 2000, representing 70% and 65% of total revenue, respectively.
10
ILEC Business Unit
ILEC revenue increased 17%, from $6.6 million in the third quarter of 1999
to $7.7 million in the third quarter of 2000. ILEC subscribers under management
grew to 85.3 million, an increase of 6% from September 30, 1999. Approximately
86% of third quarter ILEC revenue for 2000 was recurring. ILEC revenue increased
due to an increase in the number of records under management and non-recurring
fees recognized for enhanced services. ILEC direct costs increased 14%, from
$3.7 million in the third quarter of 1999 to $4.2 million in the third quarter
of 2000, representing 56% and 55% 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 from $420,000 in the third quarter of 1999 to
$516,000 in the third quarter of 2000, representing 6% and 7% of ILEC revenue
for such periods, respectively. ILEC research and development costs remained
constant at $62,000 for both periods, representing 1% of ILEC revenue for both
periods.
CLEC Business Unit
CLEC revenue increased 73%, from $1.1 million in the third quarter of 1999
to $1.9 million in the third quarter of 2000. CLEC revenue increased due to an
increase in the number of records under management for new and existing
customers and additional non-recurring revenue recognized on new customers
signed in 2000. As of September 30, 2000, we had 35 CLEC contracts, representing
4.8 million subscribers. Approximately 91% of CLEC revenue in the third quarter
of 2000 was recurring.
CLEC direct costs increased 38%, from $535,000 in the third quarter of 1999
to $738,000 in the third quarter of 2000, representing 49% and 39% of CLEC
revenue for such periods, respectively. The dollar increase in CLEC costs was
due to the hiring of additional CLEC operations staff to assist with the
continued growth in records under management. The percent decrease in CLEC costs
was due mainly to volume efficiencies gained by the growth in records managed.
CLEC sales and marketing expenses increased 167%, from $81,000 in the third
quarter of 1999 to $216,000 in the third quarter of 2000, representing 7% and
11% of CLEC revenue for such periods, respectively. The dollar increase in CLEC
sales and marketing expenses was due to the hiring of additional sales and
marketing personnel to accommodate the growth in the CLEC Business Unit and
increased direct marketing campaign costs. CLEC research and development costs
increased 9%, from $35,000 in the third quarter of 1999 to $38,000 in the third
quarter of 2000, representing 3% and 2% of CLEC revenue for such periods,
respectively. CLEC research and development costs increased due to the
development of local number portability, or LNP, software applications.
Wireless Business Unit
Wireless revenue increased 221%, from $405,000 in the third quarter of 1999
to $1.3 million in the third quarter of 2000. Wireless revenue increased due to
one-time fees related to system capacity expansion to accommodate wireless
carriers and an increase in the number of records under management. Wireless
subscribers grew 59% from the second quarter of 2000 to 2.6 million. Public
safety agency requests for wireless services increased 33% from the second
quarter of 2000 to 4,686, covering approximately 22 million subscribers. We
signed 5 new wireless contracts in the third quarter of 2000, bringing our total
customers to 20 as of September 30, 2000. Our wireless customers represented
approximately 35.9 million subscribers at that date.
Wireless costs increased 30%, from $1.0 million in the third quarter of
1999 to $1.3 million in the third quarter of 2000, representing 255% and 107% 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
grew to cover more of the infrastructure costs. Wireless sales and marketing
expenses increased 83%, from $155,000 in the third quarter of 1999 to $284,000
in the third quarter of 2000, representing 38% and 22% of Wireless revenue for
such periods, respectively. The increase in Wireless sales and marketing
expenses was due to the hiring of additional sales personnel in 2000. Wireless
research and development costs decreased 18% from $143,000 in the third quarter
of 1999 to $117,000 in the third quarter of 2000, representing 35% and 9% of
Wireless revenue for such periods, respectively. Wireless research and
development costs decreased due to our software engineering staff focusing on
projects for other business units.
Direct Business Unit
Direct revenue increased from $194,000 in the third quarter of 1999 to
$959,000 in the third quarter of 2000. Direct revenue increased due to the
transition of records in the State of Texas, fees recognized for enhanced
services and recurring and non-recurring revenues related to our Emergency
Warning and Evacuation, or EWE, product. Both the Texas contract and EWE were
launched in the beginning of 2000. The subscriber base in Texas increased
11
to 6.7 million and EWE increased to 600,000 as of September 30, 2000. We had ten
EWE customers as of that date. Direct costs increased from $478,000 in the third
quarter of 1999 to $1.3 million in the third quarter of 2000. Costs increased
due to the additional personnel and system infrastructure needed to implement
the State of Texas contract and to manage records that have been transitioned.
In addition, we opened an office in Texas in late 1999 to supplement our
operations. Direct sales and marketing expenses increased from $150,000 in the
third quarter of 1999 to $336,000 in the third quarter of 2000, representing 77%
and 35% of Direct revenue for such periods, respectively. The increase in sales
and marketing costs was due to the hiring of additional sales personnel to
support the State of Texas contract and EWE. Direct research and development
costs increased 35%, from $180,000 in the third quarter of 1999 to $243,000 in
the third quarter of 2000. Direct research and development costs increased due
to the reduction in EWE application development after the product was launched.
Corporate Business Unit
Corporate general and administrative expenses increased 92%, from $1.2
million in the third quarter of 1999 to $2.3 million in the third quarter of
2000. Corporate general and administrative expenses increased due to the
addition of corporate legal personnel and outside legal fees to address
legislative and regulatory issues related our 9-1-1 SafetyNet Product and other
offerings, the hiring of additional human resources staff to accommodate
headcount growth in 2000, and corporate consulting costs. Corporate sales and
marketing expenses increased 120%, from $501,000 in the third quarter of 1999 to
$1.1 million in the third quarter of 2000, representing 6% and 9% in total
revenue for such periods, respectively. Corporate sales and marketing expenses
increased due to national tradeshow costs, direct marketing costs related to
9-1-1 SafetyNet, and public relations charges. The increase was partially
offset by the reallocation of certain resources from marketing-related
activities to legislative and regulatory affairs activities and the reduction in
headcount for general corporate product marketing. Corporate research and
development of $477,000 in the third quarter of 2000 represented labor and
associated travel and consulting costs related to network architecture of our 9-
1-1 SafetyNet product offering. During the third quarter of 2000, we signed our
first 9-1-1 SafetyNet customer. We currently estimate that our 9-1-1 SafetyNet
product will begin to generate revenue in the first half of 2001.
Net other income increased 36%, from $144,000 in the third quarter of 1999
to $196,000 in the third quarter of 2000, representing 2% of total revenue for
both periods.
The benefit for income taxes decreased from $83,000 in the third quarter of
1999 to zero in the third quarter of 2000. We expect to incur losses in the near
term related to development costs for new commercial products and future taxable
income may not be sufficient to realize additional deferred tax assets that will
be created by the projected net operating losses. Consequently, we presently
expect our statement of operations will not reflect tax benefits for projected
operating losses to be incurred during 2000.
The loss from operations of discontinued division, net of tax, for the
third quarter of 1999 of $25,000 represents the costs related to the final
closeout of unassigned contracts related to our Premise Products division, which
was sold in 1997, and the transition of customers to the company that acquired
this division.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Total Company
Total revenue increased 32%, from $24.1 million in the nine months ended
September 30, 1999 to $31.7 million in the nine months ended September 30, 2000.
Eighty-seven percent of revenue in the nine months ended September 30, 2000 was
recurring. Total direct costs increased 27%, from $16.8 million in the nine
months ended September 30, 1999 to $21.3 million in the nine months ended
September 30, 2000, representing 70% and 67% of total revenue, respectively.
ILEC Business Unit
ILEC revenue increased 7%, from $20.0 million in the nine months ended
September 30, 1999 to $21.4 million in the nine months ended September 30, 2000.
ILEC revenue increased due to an increase in the number of records under
management and from the sale of enhancements to our existing customer base. ILEC
subscribers under management grew to 85.3 million, an increase of 6 percent from
September 30, 1999. ILEC direct costs increased 9%, from $11.1 million in the
nine months ended September 30, 1999 to $12.1 million in the nine months ended
September 30, 2000, representing 56% and 57% 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 remained constant at $1.3 million for both periods,
representing 7% and 6% of
12
ILEC revenue for such periods, respectively. The decrease in sales and marketing
costs percentage was due to a reduction in product management staff in late 1999
and early 2000. ILEC research and development costs decreased 7%, from $243,000
in the nine months ended September 30, 1999 to $226,000 in the nine months ended
September 30, 2000, representing 1% of ILEC revenue for both periods. ILEC
research and development costs decreased due to increased focus by our software
engineering staff on projects for other business units.
CLEC Business Unit
CLEC revenue increased 104%, from $2.6 million in the nine months ended
September 30, 1999 to $5.3 million in the nine months ended September 30, 2000.
CLEC revenue increased due to an increase in the number of records under
management for new and existing customers and additional non-recurring revenue
recognized on new customers signed in 2000. CLEC direct costs increased 29%,
from $1.4 million in the nine months ended September 30, 1999 to $1.8 million in
the nine months ended September 30, 2000, representing 54% and 34% of CLEC
revenue for such periods, respectively. The dollar increase in CLEC costs was
due to the hiring of additional CLEC operations staff to assist with the
continued growth in records under management. The percent decrease in costs was
due mainly to volume efficiencies gained by the growth in records managed. CLEC
sales and marketing expenses increased 90%, from $275,000 in the nine months
ended September 30, 1999 to $522,000 in the nine months ended September 30,
2000, representing 11% and 10% of CLEC revenue for such periods, respectively.
The increase in CLEC sales and marketing expenses was due to the hiring of
additional sales and marketing personnel to accommodate the growth in the CLEC
Business Unit and increased direct marketing campaign costs. CLEC research and
development costs increased 114%, from $93,000 in the nine months ended
September 30, 1999 to $199,000 in the nine months ended September 30, 2000,
representing 4% of CLEC revenue for both periods. CLEC research and development
costs increased due to the development of LNP software applications.
Wireless Business Unit
Wireless revenue increased 131%, from $1.3 million in the nine months ended
September 30, 1999 to $3.0 million in the nine months ended September 30, 2000.
Wireless revenue increased due to an increase in the number of records under
management and one-time fees related to system capacity expansion to accommodate
wireless carriers. Wireless costs increased 16%, from $3.1 million in the nine
months ended September 30, 1999 to $3.6 million in the nine months ended
September 30, 2000. 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 grew to cover more of the
infrastructure costs. Wireless sales and marketing expenses increased 33%,
from $439,000 in the nine months ended September 30, 1999 to $584,000 in the
nine months ended September 30, 2000, representing 35% and 20% of Wireless
revenue for such periods, respectively. The increase in Wireless sales and
marketing expenses was due to the hiring of additional sales personnel in 2000.
Wireless research and development costs increased 81% from $266,000 in the nine
months ended September 30, 1999 to $482,000 in the nine months ended September
30, 2000, representing 21% and 16% of Wireless revenue for such periods,
respectively. Wireless research and development costs increased due to the
development of improvements to our general wireless database application in
2000.
Direct Business Unit
Direct revenue increased from $294,000 in the nine months ended September
30, 1999 to $1.9 million in the nine months ended September 30, 2000. Direct
revenue increased due to the transition of records in the State of Texas
beginning in 2000 and delivery of the EWE product offering. Direct costs
increased from $1.2 million in the nine months ended September 30, 1999 to $3.9
million in the nine months ended September 30, 2000. Costs increased due to the
additional personnel and system infrastructure needed to implement the State of
Texas contract and to manage records that have been transitioned. In addition,
we opened an office in Texas in late 1999 to supplement our operations. Direct
sales and marketing expenses increased from $306,000 in the nine months ended
September 30, 1999 to $1.0 million in the nine months ended September 30, 2000,
representing 104% and 53% of Direct revenue for such periods, respectively. The
increase in sales and marketing costs was due to the hiring of additional sales
personnel to support the State of Texas contract and our EWE product. Direct
research and development costs decreased 4%, from $666,000 in the nine months
ended September 30, 1999 to $637,000 in the nine months ended September 30,
2000. Direct research and development costs decreased due to the reduction in
EWE application development in 2000 after the product was launched.
Corporate Business Unit
Corporate general and administrative expenses increased 66%, from $3.5
million in the nine months ended September 30, 1999 to $5.8 million in the nine
months ended September 30, 2000, representing 15% and 18% of
13
total revenue for such period, respectively. Corporate general and
administrative expenses increased due to the addition of corporate legal
personnel and outside legal fees to address legislative and regulatory issues,
the hiring of additional human resources staff to accommodate headcount growth
in 2000, including growth related to 9-1-1 SafetyNet, and corporate consulting
costs. Corporate sales and marketing expenses increased 47%, from $1.7 million
in the nine months ended September 30, 1999 to $2.5 million in the nine months
ended September 30, 2000, representing 7% and 8% in total revenue for such
periods, respectively. Corporate sales and marketing expenses increased due to
national tradeshow costs, direct marketing related to 9-1-1 SafetyNet, and
public relations charges. The increase was partially offset by the reallocation
of certain resources from marketing-related activities to legislative and
regulatory affairs activities and the reduction in headcount for general
corporate product marketing. Corporate research and development of $1.2 million
in the nine months ended September 30, 2000 represented labor and associated
travel and consulting costs related to the network architecture of the 9-1-1
SafetyNet product offering.
Net other income increased 49%, from $418,000 in the nine months ended
September 30, 1999 to $622,000 in the nine months ended September 30, 2000.
Other income increased due to interest income earned from investments and the
reduction in interest expense related to the repayment of certain capital
leases.
The benefit for income taxes decreased from $437,000 in the nine months
ended September 30, 1999 to zero in the nine months ended September 30, 2000. We
expect to incur losses in the near term related to development costs for new
commercial products and future taxable income may not be sufficient to realize
additional deferred tax assets that will be created by the projected net
operating losses. Consequently, we presently expect our statement of operations
will not reflect tax benefits for projected operating losses to be incurred
during 2000.
The loss from operations of discontinued division, net of tax, for the nine
months ended September 30, 1999 of $149,000 represents the costs related to the
final closeout of unassigned contracts related to our Premise Products division,
which was sold in 1997, and the transition of customers to the company that
acquired this division.
Liquidity and Capital Resources
Since our inception we have funded our operations with cash provided by
operations, supplemented by equity and debt financing and leases on capital
equipment. As of September 30, 2000, we had $15.5 million in cash and cash
equivalents and investments in marketable securities.
We borrowed approximately $1.1 million under our capital lease line secured
by capital equipment in the nine months ended September 30, 2000, and repaid
$1.2 million and $1.4 million of capital lease obligations during the nine
months ended September 30, 2000 and 1999, respectively. Additionally, we used
$3.8 million and $1.9 million during the nine months ended September 30, 2000
and 1999, respectively, for the purchase of capital assets and software
development. We anticipate that our level of spending for capital expenditures
in the nine months ended September 30, 2000 will continue, although we currently
have no material commitments for capital expenditures.
We have a line of credit with a bank equal to $2.0 million, which is
available to meet operating needs. The interest rate on amounts borrowed under
the line of credit is equal to the bank's prime rate or the one, two or three
month Libor rate plus 2.25% per annum. The line of credit matures April 15, 2001
and is collateralized by certain of our assets. As of September 30, 2000, 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 on capital leased under the lease line is equal to
the bank's cost of funds at the time of each lease. Separate lease schedules are
signed from time to time. Each lease schedule is collateralized by the assets
that are being leased. Each lease has its own termination date, typically 36
months. As of September 30, 2000, $2.0 million was utilized under the capital
lease line.
We expect to incur research, development and marketing expenses of up to
$10 million on our 9-1-1 SafetyNet product. This may require up to $13 million
in cash due to the capital expenditure requirements. During the nine months
ended September 30, 2000, we incurred expense of approximately $2.2 million on
this initiative.
Although we believe that our current cash and investments, cash generated
from operations and lease financing will be sufficient to fund our anticipated
working capital needs, research and development initiative and capital
expenditures for our core operations, we may seek to raise additional capital to
fund our 9-1-1 SafetyNet product initiative. We may seek a new capital lease
line or other sources of debt or equity financing 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. Sources of
14
additional capital may include public and private equity and debt financings,
sales of nonstrategic assets and other financing arrangements.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 and No. 137
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. It requires
an entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
In June 1999, the FASB issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133 - An amendment of FASB Statement
No. 133." SFAS No. 137 delays the effective date of SFAS No. 133 to financial
quarters and financial years beginning after June 15, 2000. We do not typically
enter into arrangements that would fall under the scope of Statement No. 133 and
thus, management believes that Statement No. 133 will not significantly affect
our financial condition and results of operations.
Staff Accounting Bulletin No. 101
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition." SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in financial statements. We are required to determine the potential impact of
SAB 101 no later than fourth quarter of 2000. We have concluded that our current
revenue recognition policies will have to change to be in accordance with SAB
101. Specifically, the guidance provided by SAB 101 requires us to defer the up-
front NRE fee, certain enhancement fees and related direct costs and amortize
them over the life of our contracts. The implementation of SAB 101 requires us
to restate all of our previously reported 2000 quarterly results to reflect a
cumulative effect of change in accounting principle as if SAB 101 had been
implemented on January 1, 2000. We are currently reviewing our contracts to
determine the impact SAB 101 will have on our financial position and results of
operations but currently expect the cumulative effect of change in accounting
principle to be between $5 million and $6 million.
15
ITEM 2A. FACTORS THAT MAY AFFECT FUTURE RESULTS
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 BELOW.
Our operating results fluctuate, and our stock price may be volatile as a
result.
Our quarterly revenue and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. We experienced a profit in
1998, but had a net loss of approximately $1.3 million in 1999 and a net loss of
$3.5 million for the nine months ended September 30, 2000. Therefore, you should
not rely on period-to-period comparisons of revenue or operating results as an
indication of our future performance. If our quarterly revenue or operating
results fall below the expectations of the investors or securities analysts, the
price of our common stock could fall substantially.
Our operating results may continue to fluctuate as a result of many
factors, including:
. our planned investments in research, development and marketing to expand
our service offerings;
. the length of our sales cycle;
. the size, timing and duration of significant customer contracts;
. the number of subscriber records under our management;
. we cannot predict the rate of adoption of wireless services by PSAPs;
. the timing of introduction and market acceptance of new products and
services by us and our competitors; and
. changes in telecommunications legislation and regulations.
Our contracts generally include a separate non-recurring fee for the design
and implementation of the 9-1-1 solution, conversion of the customer's data to
our systems, hiring and training of personnel, and other costs required to
prepare for the processing of customer data. Therefore, we may recognize
significantly increased revenue for a short period of time upon commencing
services for a new customer.
Our sales cycle is relatively long and difficult to predict.
Our potential customers typically commit significant resources to the
technical evaluation of our services and products, and we typically spend
substantial time, effort and money providing education regarding our 9-1-1
solution. The evaluation process often results in an extensive and lengthy sales
cycle, typically ranging between one month and two years, making it difficult
for us to forecast the timing and magnitude of sales contracts. Delays
associated with customers' internal approval and contracting procedures,
procurement practices, and testing and acceptance processes are common. For
example, customers' budgetary constraints and internal acceptance reviews may
cause potential customers to delay or forego a purchase. The delay or failure to
complete one or more large contracts could have a material adverse effect on our
business, financial condition and results of operations and cause our operating
results to vary significantly from quarter to quarter.
We depend on large contracts from a limited number of significant customers, and
the loss of any of those contracts would adversely affect our operating results.
We historically have depended on, and expect to continue to depend on,
large contracts from a limited number of significant customers. We provide our
services to a range of customers, including ILECs, CLECs, wireless carriers and
state and local government agencies. During the nine months ended September 30,
2000, we recognized approximately 67% of total revenue from continuing
operations from Ameritech, BellSouth Inc. and U S WEST, each of which accounted
for greater than 10% of our revenue. During the nine months ended September 30,
1999, we recognized approximately 78% of total revenue from Ameritech, BellSouth
Inc. and U S WEST, each of which accounted for greater than 10% of our revenue.
No other customers accounted for more than 10% of our total revenue during those
periods. We believe that these customers will continue to represent a
substantial portion of our total revenue in the future. Certain of our contracts
with these customers allow them to cancel their contracts with us in the event
of changes in regulatory, legal, labor or business conditions. Our contracts
with these customers expire through 2005. The loss of any of these customers
could have a material adverse effect on our business, financial condition and
results of operations.
16
Two of our significant customers, Ameritech and U S WEST, have entered into
merger agreements with companies that are not our customers. We cannot predict
what effect, if any, these acquisitions will have on us and we cannot assure you
that these acquisitions or any future consolidation in the telecommunications
industry will not have a material adverse effect on our business, financial
condition and results of operation.
None of our major customers has any obligation to purchase additional
products or additional services beyond those currently contemplated by their
existing contracts. Consequently, our failure to develop relationships with
significant new customers could have a material adverse effect on the rate of
growth in our revenue, if any. If we fail to monitor and maintain adequately the
quality or our product and services, expand the breadth of our services and
products, advance our technology or continue to price our services and products
competitively, one or more of our major customers may select alternative
providers or seek to develop services and products internally.
If we lose the services of George Heinrichs or other key personnel, our business
will suffer.
Our future success depends in large part on the continued service of our
key management, sales, product development and operational personnel, including
George Heinrichs, our President and Chief Executive Officer. We have not entered
into employment agreements with Mr. Heinrichs or any of our other key personnel.
Losing the services of one or more of these individuals might hinder our ability
to achieve our business objectives.
Our proposed acquisition of the business of Lucent Public Safety Systems may
cause financial or operational problems and will significantly dilute the
ownership interests of existing stockholders.
On October 17, 2000, we entered into a definitive agreement to acquire
specified assets, and assume specified liabilities, associated with the business
of Lucent Public Safety Systems, an internal venture of Lucent Technologies Inc.
This acquisition may not produce the revenues, earnings or business synergies
that we anticipate, and the acquired business may not perform as we expect.
If we complete the acquisition, we may encounter significant difficulties
and incur substantial expenses in integrating the operations and personnel of
the acquired business into our operations while preserving the goodwill of the
acquired business. In particular, we may lose the services of key employees of
the acquired business and the separation of the business from Lucent
Technologies may impair relationships between the acquired business and its
employees and customers. Because our management has limited experience in
acquisitions and in integrating acquired companies or technologies into our
operations, we cannot assure you that we will be able to manage the proposed
acquisition successfully. Moreover, our management will spend a significant
amount of time and effort in completing the acquisition and integrating the
acquired business, which will divert management's time and attention from our
historical operations. The acquired business has not previously been accounted
for as a separate reporting entity, and we are not acquiring all of the assets
currently used in operating the Lucent Public Safety Systems business. As a
result, we may encounter unexpected financial or operational difficulties in
operating the acquired business. Any of these outcomes could prevent us from
realizing the anticipated benefits of the acquisition.
If the acquisition is completed, we will issue approximately 6.1 million
shares of common stock. The issued shares would represent approximately 35% of
our outstanding stock after the acquisition, and as a result, our stockholders
would experience significant dilution of their ownership interests.
We must hire and retain qualified personnel in a competitive labor market.
Our success in large part depends on our ability to continue to attract,
motivate and retain highly qualified employees, including technical, managerial
and sales and marketing personnel. We expect to continue to expand the number of
employees engaged in all aspects of our business. Competition in the recruitment
of highly qualified personnel in the software and telecommunications services
industry is intense and has become particularly difficult in the Denver
metropolitan area. Our inability to hire and retain qualified personnel or the
loss of the services of key personnel could have a material adverse effect upon
our current business, development efforts and future business prospects.
Our business will be adversely affected if Public Safety Answering Points do not
demand E9-1-1 services at the rate we expect.
We expect the percentage of our revenue derived from the management of
9-1-1 data records for wireless carriers to increase. Recognizing the public
safety need for improved wireless 9-1-1 service, the FCC issued a Report and
Order in CC Docket 94-102 on June 12, 1996 and subsequent orders in 1999 and
2000 that mandated the adoption of 9-1-1 technology by wireless carriers in two
phases. Phase I requires wireless carriers to route 9-1-1 calls to the most
17
geographically-appropriate PSAP that requests service and to provide to PSAPs at
the time of a 9-1-1 call the caller's telephone number and location of the cell
site that initially received the call. Phase II requires wireless carriers to
provide more accurate location information of a 9-1-1 caller, subject to
specific FCC guidelines. However, under the FCC rules, wireless carriers are not
required to provide wireless 9-1-1 service without a PSAP request. To provide an
additional impetus for wireless 9-1-1 implementation, the Wireless
Communications and Public Safety Act of 1999 (WCPSA) was signed into law in
October 1999. Earlier this year, the FCC amended its rules to no longer
guarantee wireless carriers cost recovery but did not disturb any existing
contracts or state or local statutes/ordinances providing for cost recovery. To
date, this development does not appear to have had an adverse impact on wireless
E9-1-1 deployment, and in fact may have had a positive impact in some regions;
however, no assurances can be given that this development will not result in
adverse impacts on our operations. The FCC also has not addressed in unambiguous
terms the respective obligations of the various parties impacted by Docket 94-
102, and certain disputes linger with regard to, for example, which party may
select the technology to be deployed, and no assurances can be given that these
uncertainties will not have an adverse impact on our operations. The WCPSA
legislation provides liability protection to wireless carriers that is in parity
with wireline carriers' liability protection. However, there is no assurance
that the legislation will have the desired effect of accelerating wireless E9-1-
1 deployment. The FCC continues to work with the wireless industry to facilitate
wireless E9-1-1 implementation and, using the WCPSA as enabling legislation, has
recently invited public comment on implementation of universal wireless 9-1-1
service. The FCC has outlined a phased implementation schedule for Phase II. We
believe that the technological challenges confronting wireless carriers
attempting to comply with Docket 94-102 will encourage them to outsource their
E9-1-1 services. If many wireless carriers decide not to outsource such
services, our business, financial condition and results of operations could be
materially and adversely affected. Due to cost recovery, liability and
operational issues, the number of PSAPs demanding services from wireless
carriers has been less than we anticipated. If the rate of adoption by PSAPs
continues to be slow because of cost recovery, liability or operational issues,
extensions granted by the FCC or other reasons, we will continue to experience
delays in receiving revenue under our current wireless contracts that, because
we have already incurred costs in expectation of such revenue, could have a
material adverse effect on our business, financial condition and results of
operations.
Our business is subject to government regulation and other legal uncertainties,
which could adversely affect our operations.
The market for our services and products has been influenced by the
adoption of regulations under the Telecommunications Act of 1996, the duties
imposed on ILECs by the Telecommunications Act to open the local telephone
markets to competition, the Wireless Communications and Public Safety Act of
1999 related to LECs' responsibility to provide subscriber records to emergency
services providers, requirements in the various states, including but not
limited to Texas where we are a regulated utility and a party to various Texas
PUC dockets, and the requirements imposed on wireless carriers by the FCC Docket
94-102. Therefore, any changes to such legal requirements, the adoption of new
regulations by federal or state regulatory authorities under these laws and
regulations or any legal challenges to them could have a material adverse effect
upon the market for our services and products. Although these laws and
regulations were designed or modified in some respects to expand competition in
the telecommunications industry, the realization of the objectives of these laws
and regulations is subject to many uncertainties, including judicial and
administrative proceedings designed to define rights and obligations, actions or
inactions by ILECs and other carriers that affect the pace at which changes
contemplated by these laws and regulations occur, resolution of questions
concerning which parties will finance such changes, and other regulatory,
economic and political factors.
We are aware of litigation challenging the validity of the
Telecommunications Act and the local telephone competition and other rules
adopted by the FCC to implement the Telecommunications Act, as well as certain
administrative rule makings either underway or anticipated with respect to other
laws and regulations. The final impact of the application of these laws and
rules is not yet known. Litigation, regulatory and legislative activity may
serve to delay full implementation of these laws and regulations, which could
adversely affect demand for our services and products. Any delays in the
deadlines imposed by these laws and regulations, the FCC, state utility
commissions, or any invalidation, repeal or modification in the requirements
imposed by these laws or regulations, state utility commissions or the FCC could
have a material adverse effect on our business, financial condition and results
of operations. Moreover, customers may require, or we otherwise may deem it
necessary or advisable, that we modify our services and products to address
actual or anticipated changes in the regulatory environment. Any other delays in
implementation of these laws and regulations, or other regulatory changes or
similar developments, could materially adversely affect our business, financial
condition and results of operations.
In 1998, the company signed a contract to provide 9-1-1 data management
services to the State of Texas. As this is the first time that a state entity
has endeavored to centralize 9-1-1 OSS and data management services with a
neutral third party, federal and state regulations governing 9-1-1 service
provisioning, which have typically applied to
18
local exchange services providers, are being challenged and clarified for the
first time. In accordance with Texas law, and on the recommendation of the Texas
Public Utilities Commission, we have been granted a Service Provider Certificate
of Operating Authority in the State of Texas. We successfully completed the
field trial required under the contract in July 1999 and are in the process of
marketing our services to the state's public safety agencies and implementing
services to those who opt into the contract. Prior to commencement of the field
trial, SBC Communications, which historically has been responsible for the
provisioning of 9-1-1 OSS, data transport and data management services in Texas,
challenged whether SBC Communications must allow other parties such as SCC to
interconnect to their selective routing switches and whether they are obligated
by law to unbundle components of their network functionality. An interim
agreement among the involved parties was reached in March 1999 that allowed us
to perform the field trial to test the interfacing technology solutions in the
Houston area, and that agreement continues to operate as a basis for ongoing
operations in Texas, however, the dispute has not been fully resolved. As part
of the interim agreement, the legal challenges and all related proceedings were
placed in abeyance to permit the parties to proceed with the field trial. Those
matters have been taken out of abeyance and are currently being addressed by an
administrative law judge on behalf of the Texas Public Utilities Commission.
As required by a separate interim agreement and pursuant to a new 9-1-1
regulatory rule issued by the Texas PUC, SBC Communications filed wireline and
wireless tariffs regarding its portion of the unbundled services. Verizon
Communications, formerly operating in Texas as GTE, also filed tariffs. We have
challenged both tariffs, in pertinent part due to our belief that the tariffs
are anti-competitive in nature in that they do not give proper consideration to
our status as a certificated telecommunications provider in Texas, which affords
us benefits not contemplated under the proposed tariffs. The outcome of the
tariff filing is uncertain, although the parties continue to operate under this
separate interim agreement which substantially sets the rates to be charged to
public safety agencies who wish to procure our solution until a final tariff is
determined. We believe that these legal and technological issues and their
associated cost implications are likely to be readdressed by the PUC, which is
likely to decide same in 2001. Until such resolution, this interim tariff
agreement will govern those rates and charges. We believe that the services that
we will provide under our contract with the State of Texas are permitted within
the scope of the existing regulations and that the outcome of the matter before
the PUC will be favorable to us and the Texas Commission for State Emergency
Communications. However, we cannot assure you that the Texas PUC will decide in
favor of us and the Texas Commission for State Emergency Communications or that
SBC Communications or Verizon Communications will not resume its desire to
pursue this and other legal challenges on a longer term basis, thus causing
further delay of the commencement of the services by exercising its right to
appeal a PUC decision that favors us or the Texas Commission for State Emergency
Communications. If the PUC does not decide in our favor or places contingencies
on the manner in which the services are provided, we may be prohibited from
delivering further services to the State of Texas, may incur additional delays
in that regard, may expend significant resources to appeal the PUC's decision or
may expend additional costs to redesign the methodology by which the services
are provided. In addition, if SBC Communications or Verizon exercise their right
to appeal, we may be required to spend significant resources to defend our right
to provide our services in the State of Texas.
As part of our new initiatives to market and sell our 9-1-1SafetyNet/SM/
products and services, we are in the process of obtaining certificates of
operating authority in most if not all states across the United States to
operate as a telecommunications provider and to become a bona fide beneficiary
of the Telecommunications Act of 1996, including the right to interconnect with
certain incumbent 9-1-1 network providers. It is our belief that these efforts
and their relation to the provision of telecommunications services are
contemplated by the Act, and we anticipate that we will be successful in those
areas where third parties may challenge this kind of expansion of the Act's
provisions. The success of our new initiatives depends largely on the success
of these legal and regulatory initiatives, and we can not make assurances that
they will be successful. Thus, the same kinds of delays or problems outlined
above regarding matters pending in the State of Texas may also occur in other
states, including all states which could have substantial and material impacts
on the success of our business.
9-1-1 services generally are funded by a locally imposed fee per subscriber
per month. A portion of this tax is paid to the local carrier providing the
9-1-1 services. We generally receive a monthly fee per subscriber from our
customers for management of 9-1-1 data records, allowing the carrier to match
our fixed revenue stream for 9-1-1 services with a fixed cost for record
management. Changes by local governments in the funding mechanism for 9-1-1
services or the parties responsible for the provision of such services could
have a material adverse effect on our business, financial condition and results
of operations.
Our market is characterized by rapid technological change, and we could lose our
competitive position and fail to grow our business if we do not develop and
offer new products and services.
The market for our services is characterized by rapid technological change,
frequent new product or service introductions, evolving industry standards and
changing customer needs. We launched our Emergency Warning and
19
Evacuation, or EWE, product, in the fourth quarter of 1999, which allows PSAPs
to call all numbers in a given area and warn citizens of imminent danger. We
intend to offer other new products in the future, including 9-1-1 SafetyNet. The
introduction of products and services embodying new technologies and the
emergence of new industry and technology standards can render existing products
and services obsolete and unmarketable in short periods of time. We expect other
vendors to regularly introduce new products and services, as well as
enhancements to their existing products and services, that will compete with the
services and products offered by us. As a result, the life cycles of our
services and products are difficult to estimate. We believe that our future
success will depend in large part on our ability to maintain and enhance our
current service and product offerings, to develop and regularly introduce new
services and products that will keep pace with technological advances and
satisfy evolving customer requirements, and to achieve acceptable levels of
sales of our new services and products through our current customers that resell
our solutions to their subscribers. However, we cannot assure you that we will
not experience difficulties that could delay or prevent the successful
development, introduction or marketing of such new services and products or that
our new services and products will adequately meet the requirements of the
marketplace and achieve market acceptance. Announcements of currently planned or
other new service and product offerings by us or our competitors may cause
customers to defer the purchase of our existing services and products. Our
inability to develop on a timely basis new services or products, or the failure
of such new services or products to achieve market acceptance, could have a
material adverse effect on our business, financial condition and results of
operations. The development of new, technologically advanced products and
services is a complex and uncertain process requiring high levels of innovation,
as well as the accurate anticipation of technological and market trends. We
cannot assure you that we will successfully develop, introduce or manage the
transition to new services and products. Furthermore, services and products such
as those offered by us may contain undetected or unresolved errors when they are
first introduced or as new versions are released. We cannot assure you that,
despite extensive testing by us, errors will not be found in new services and
products after commencement of commercial availability, resulting in delay in or
loss of market acceptance and sales, diversion of development resources, injury
to our reputation or increased service and warranty costs, any of which could
have a material adverse effect on our business, financial condition and results
of operations. Significant delays in meeting deadlines for announced service or
product introductions or performance problems with such products or upgrades
could result in an undermining of customer confidence in our services and
products, which would materially adversely affect our customer relationships as
well.
In addition, we plan to introduce transaction-based services and software
products to industries different from those we have traditionally supported. We
cannot assure you that we will be successful in developing and marketing these
new services and products or that our current or new services and products will
adequately meet the demands of our new markets. Because it is generally not
possible to predict the time required and costs involved in reaching certain
research, development and engineering objectives related to entering new
markets, actual development costs could exceed budgeted amounts and estimated
development schedules could require extensions. Furthermore, we cannot assure
you that we will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these services and
products. If we are unable to develop and introduce new services and products to
these new markets in a timely manner, or if a new release of a product or
service to such new markets does not achieve market acceptance, our business,
financial condition and results of operations could be materially adversely
affected.
Substantially all of our revenue is derived from our 9-1-1 data management
solution, and our operating results will depend upon our ability to continue to
sell this solution.
We currently derive substantially all of our revenue from the provisioning
of our 9-1-1 data management solution to ILECs, CLECs, wireless carriers and
state and local government agencies. Accordingly, we are susceptible to adverse
trends affecting this market segment, such as government regulation,
technological obsolescence and the entry of new competition. We expect that this
market will continue to account for substantially all of our revenue in the near
future. As a result, our future success will depend on our ability to continue
to sell our 9-1-1 solution, maintain and increase our market share by providing
other value-added services to the market, and successfully adapt our technology
and services to other related markets. We cannot assure you that markets for our
existing services and products will continue to expand or that we will be
successful in our efforts to penetrate new markets.
Our operating results could be adversely affected if we underestimate costs on
our fixed price contracts.
During the nine months ended September 30, 2000 and the year ended December
31, 1999, approximately 91% of our revenue was generated on a fixed price per
subscriber basis respectively. We generally enter into contracts with two- to
ten-year terms and we generally receive a fixed monthly fee based upon the
number of subscribers and upon the services selected by the customer. Therefore,
our failure to estimate accurately the resources required for a fixed price per
subscriber contract could have a material adverse effect on our business,
financial condition and results of operations.
20
We could incur substantial costs from product liability claims relating to our
software.
Because our services and products are utilized by our customers to provide
critical 9-1-1 services, the provisioning of services and licensing of software
by us may entail the risk of product liability and related claims. Our
agreements with our customers typically require us to indemnify our customers
for our own acts of negligence. Product liability insurance is expensive and may
not be available in the future. We cannot be sure that we will be able to
maintain or obtain insurance coverage at acceptable costs or in a sufficient
amount, that our insurer will not disclaim coverage as to a future claim or that
a product liability claim would not otherwise adversely affect our business,
operating results or financial condition.
Our success depends upon the continued growth of wireline and wireless
telecommunications markets.
We provide our 9-1-1 data management solution to telecommunications
carriers in the wireline and wireless markets. Although these markets have
experienced significant growth and have been characterized by increased
deregulation and competition in recent years, we cannot assure you that such
trends will continue at similar rates or that we will be able to market and sell
effectively our products and services in such markets. In addition, many of the
new entrants in the telecommunications market are companies that lack
significant financial and other resources. To cultivate relationships with such
new market entrants, we may be required to offer alternative pricing
arrangements, which may provide for deferred payments. However, we cannot assure
you that we will be able to develop such relationships or that new carriers that
become our customers will gain market acceptance for their telecommunications
services. If we permit customers that do not have adequate financial resources
to pay us for our services on a deferred basis, we ultimately may be unable to
collect payments for such services. Because we historically have depended on a
limited number of long-term customer relationships, our failure to develop
relationships with, make sales to, or collect payments from new
telecommunications carriers, or the failure of our customers to compete
effectively in the telecommunications market, could have a material adverse
effect on our business, financial condition and results of operations. In
addition, the telecommunications industry is experiencing substantial
consolidations and changes that are unpredictable, and any such consolidation or
change could have a material adverse effect on our business, financial condition
and results of operations.
21
Our operating results could be adversely affected by any interruption of our
services because of system failure.
Our operations depend on our ability to maintain our computer and
telecommunications equipment and systems in effective working order, and to
protect our systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. Although all of our mission-
critical systems and equipment are designed with built-in redundancy and
security, we cannot assure you that a fire, natural disaster, power loss,
telecommunications failure or similar event would not result in an interruption
of our services. Any damage, failure or delay that causes interruptions in our
operations could have a material adverse effect on our business, financial
condition and results of operations. Furthermore, any future addition or
expansion of our facilities to increase capacity could increase our exposure to
damage from fire, natural disaster, power loss, telecommunications failure or
similar events. We cannot assure you that our property and business interruption
insurance will be adequate to compensate us for any losses that may occur in the
event of a system failure or that such insurance will continue to be available
to us at all or, if available, that it will be available on commercially
reasonable terms.
Our failure to manage our growth effectively could adversely affect our ability
to increase our revenue and could increase our operating expenses.
We have expanded our operations rapidly over the past several years,
placing significant demands on our administrative, operational and financial
personnel and systems. Additional expansion by us may further strain our
management, operational, financial reporting, and other systems and resources.
We cannot assure you that our systems, resources, procedures, controls and
existing space will be adequate to support such expansion of our operations. Our
future operating results will depend substantially on the ability of our
officers and key employees to manage changing business conditions and to
implement and improve our management, operational, financial control and other
reporting systems. In addition, our future operating results depend on our
ability to attract, train and retain qualified consulting, technical, sales,
financial, marketing and management personnel. Failure to hire, train or retain
qualified personnel necessary to keep pace with our development of products and
services could have a material adverse effect on our business, financial
condition and results of operations. Continued expansion will require our
management to:
. enhance management information and reporting systems;
. standardize implementation methodologies of our operations;
. further develop our infrastructure; and
. continue to maintain customer satisfaction.
If we are unable to respond to and manage changing business conditions, the
quality of our products and services, our ability to retain key personnel and
our business, financial condition and results of operation could be materially
adversely affected.
The market for 9-1-1 data management solutions is highly competitive, and we
could lose our market position if we fail to compete effectively.
The market for 9-1-1 data management solutions is intensely competitive and
we expect competition to increase in the future. We believe that the principal
competitive factors affecting the market for 9-1-1 data management services
include flexibility, reliability, manageability, technical features, wireless
support, performance, ease of use, price, scope of product offerings, and
customer service and support. We cannot assure you that we can maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, support service, technical and
other competitive resources.
22
Our principal competitors generally fall within one of three categories:
. internal development departments of major carriers or consulting firms that
support such departments;
. relatively smaller companies that offer applications featuring portions of
our comprehensive set of E9-1-1 solutions; and
. larger companies that are either in the process of entering our market or
have the potential to develop products and services that compete with our
service offerings.
There are a number of companies that market and sell various products and
services to telecommunications carriers, such as billing software and advanced
telecommunications equipment, that have been broadly adopted by our customers
and potential customers. In addition, vendors of telecommunications software and
hardware in the future may enhance their products to include functionality that
is currently provided by our solutions. The widespread inclusion of the
functionality of our service offerings as standard features of other
telecommunications software or hardware could render our services obsolete and
unmarketable, particularly if the quality of such functionality were comparable
to that of our services. Furthermore, even if the 9-1-1 functionality provided
as standard features by telecommunications software or networking hardware is
more limited than that of our services, we cannot assure you that a significant
number of customers would not elect to accept more limited functionality in lieu
of purchasing additional products or services.
Many of our competitors have longer operating histories, greater name
recognition, access to larger customer bases and significantly greater
financial, technical and marketing resources than we do. As a result, they may
be able to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion and sale
of their products and services, than us. If these companies were to introduce
products or services that effectively compete with our service offerings, they
could be in a position to substantially lower the price of their 9-1-1 products
and services or to bundle such products and services with their other product
and service offerings.
We may be unable to protect our proprietary technology rights.
Our success and our ability to compete depends significantly upon our
proprietary rights. We rely primarily on a combination of copyright, trademark
and trade secret laws, as well as confidentiality procedures and contractual
restrictions to establish and protect our proprietary rights. We cannot assure
you that such measures will be adequate to protect our proprietary rights.
Further, we may be subject to additional risks as we enter into transactions in
foreign countries where intellectual property laws are not well developed or are
difficult to enforce. Legal protections of our proprietary rights may be
ineffective in such countries. Litigation to defend and enforce our intellectual
property rights could result in substantial costs and diversion of resources,
and could have a material adverse effect on our business, financial condition
and results of operations, regardless of the final outcome of such litigation.
Despite our efforts to safeguard and maintain our proprietary rights, we cannot
assure you that we will be successful in doing so or that the steps taken by us
in this regard will be adequate to deter misappropriation or independent third-
party development of our technology, or to prevent an unauthorized third party
from copying or otherwise obtaining and using our technology. There also can be
no assurance that others will not independently develop similar technologies or
duplicate any technology developed by us. Any such events could have a material
adverse effect on our business, financial condition and results of operations.
Claims by other companies that our products infringe their proprietary rights
could adversely affect our financial condition.
As the number of entrants to our markets increases and the functionality of
our services and products increases and overlaps with the products and services
of other companies, we may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. In certain of
our customer agreements, we agree to indemnify our customers for any expenses or
liabilities resulting from claimed infringements of patents, trademarks or
copyrights of third parties. In some instances, the amount of the indemnities
may be greater than the revenue we received from the customer. Any claims or
litigation, with or without merit, could be time consuming, result in costly
litigation or require us to enter into royalty or licensing arrangements. Any
royalty or licensing arrangements, if required, may not be available on terms
acceptable to us, if at all, and could have a material adverse effect on our
business, financial condition and results of operations.
We face additional risks from any international operations we undertake.
Although substantially all of our revenue is generated from sales to
customers in the United States, we have generated revenue in Canada and intend
to enter additional international markets, which will require significant
23
management attention and financial resources. International sales are subject to
a variety of risks, including difficulties in establishing and managing
international distribution channels, and in translating products and related
materials into foreign languages. International operations are also subject to
difficulties in collecting accounts receivable, staffing, managing personnel and
enforcing intellectual property rights. Other factors that can adversely affect
international operations include fluctuations in the value of foreign currencies
and currency exchange rates, changes in import/export duties and quotas,
introduction of tariff or non-tariff barriers and economic or political changes
in international markets. We cannot assure you that these factors will not have
a material adverse effect on our future international sales and, consequently,
on our business, financial condition and results of operations. Furthermore, any
inability to obtain foreign regulatory approvals on a timely basis could have a
material adverse effect on our business, financial condition and results of
operations.
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, 2000, we have not used derivative instruments or engaged
in hedging activities.
Interest Rate Risk
The interest payable on our line of credit is variable based on the
lender's prime rate or the one, two, or three month Libor rate plus 2.25% per
annum, and, therefore, is affected by changes in market interest rates. At
September 30, 2000, no amounts were outstanding under our line of credit,
however, we may borrow up to 80% of qualified accounts receivable, not to exceed
$2,000,000. Rates on our capital lease line are also dependent on interest rates
in effect at the time the lease line is drawn upon. In addition, we invest
excess funds in high-grade treasury bonds and commercial paper on which we
monitor interest rates frequently and as the investments mature. We do not
believe that reasonably possible near-term changes in interest rates will result
in a material effect on our future earnings, fair values or cash flows.
24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
We are not a party to any litigation that we believe could have a material
adverse effect on us or our business. Federal and state regulations governing
9-1-1 service provisioning have typically applied to local exchange services
providers. We plan to provide 9-1-1 services directly to state and local
governments rather than local exchange carriers in certain areas. Since this is
the first time that such services have been provided in this manner, the
regulations are being challenged and clarified for the first time. We believe
that the services we provide are within the scope of the existing regulations
and that any challenges to the regulations would be decided in our favor.
However, if the regulations are challenged and are not decided in our favor, we
may be prohibited from expanding our services to certain markets.
Item 2 - Changes in Securities and Use of Proceeds.
On June 29, 1998, we consummated our initial public offering of our common
stock. The estimated net offering proceeds to us after deducting the
underwriting discounts and commissions and other related,, fees and expenses
were $25,988,400, of which $3,510,400 related to the exercise of the
underwriters' over-allotment option on July 22, 1998. Through September 30,
2000, the proceeds of the offering had been applied as follows:
Aggregate offering price $28,980,000
Direct and indirect payment to others for:
Underwriting discounts and commissions 2,028,600
Other offering expenses 963,000
Construction of building and facilities 300,000
Capital lease payment to receive discount 2,878,500
Repayment of indebtedness 4,610,000
9-1-1 SafetyNet initiative 3,100,000
None of such payments were direct or indirect payments to our directors,
officers, general partners or their associates or to persons owning 10% or more
of any class of our equity securities or to our affiliates. We expect to use up
to $13 million of our remaining net proceeds for research, development and
marketing to expand our product offerings, as well as for general corporate
purposes, including working capital. A portion of the net proceeds also may be
used for the acquisition of businesses, products and technologies that are
complementary to ours. We invested a portion of the remaining proceeds in an
investment portfolio consisting mostly of high-grade bonds and commercial paper.
Item 3 - Defaults on Senior Securities.
None.
Item 4 - Submission of Matters to a Vote of Security Holders.
None.
Item 5 - Other Information.
None.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 - Financial Data Schedule
(b) Reports on Form 8-K.
On October 17, 2000, we issued a press release announcing our
signing of a definitive agreement to acquire specified assets,
and assume specified liabilities associated with the business of
Lucent Public Safety Systems, an internal venture of Lucent
Technologies Inc.
25
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)
November 14, 2000 \s\ George K. Heinrichs
_________________ ______________________________
Date George K. Heinrichs, President
and Chief Executive Officer
November 14, 2000 \s\ Michael D. Dingman, Jr.
_________________ ______________________________
Date Michael D. Dingman, Jr., Chief
Financial Officer
26