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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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SCC COMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 84-0796285
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
6285 LOOKOUT ROAD
BOULDER, COLORADO 80301
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (303) 581-5600
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common stock, par
value $.001 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the common stock on
February 28, 2001 as reported on the Nasdaq National Market, was approximately
$75,575,000.
As of February 28, 2001, the Registrant had outstanding 11,507,016 shares of
common stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's preliminary proxy statement, which will be
issued to stockholders in conjunction with the 2001 Annual Meeting of
Stockholders, are incorporated by reference in Part III of this Annual Report on
Form 10-K.
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the information incorporated by
reference contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. In particular, we direct your attention to Item 1.
Business, Item 3. Legal Proceedings, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation, Item 7A. Quantitative
and Qualitative Disclosures About Market Risk, and Item 8. Financial Statements
and Supplementary Data. We intend the forward-looking statements throughout the
Annual Report on Form 10-K and the information incorporated by reference to be
covered by the safe harbor provisions for forward-looking statements. All
projections and statements regarding our expected financial position and
operating results, our business strategy, our financing plans and the outcome of
any contingencies are forward-looking statements. These statements can sometimes
be identified by our use of forward-looking words such as "may," "believe,"
"plan," "will," "anticipate," "estimate," "expect," "intend", and other phrases
of similar meaning. Known and unknown risks, uncertainties and other factors
could cause the actual results to differ materially from those contemplated by
the statements. The forward-looking information is based on numerous assumptions
and developments that are not within our control. Although we believe that our
expectations that are expressed in these forward-looking statements are
reasonable, we cannot promise that our expectations will turn out to be correct.
Our actual results could be materially different from our expectations due to a
variety of factors, including the following:
- our planned investments in research, development and marketing to expand
our service offerings;
- the length of our sales cycle;
- price competition from entities with substantially greater resources than
us;
- the size, timing and duration of significant customer contracts;
- the number of subscriber records under our management;
- the unpredictable rate of adoption of wireless services by public safety
answering points;
- the introduction and market acceptance of our and our competitors' new
products and services;
- developments in telecommunications legislation and regulations, including
new interpretations of existing laws;
- the amount and timing of expenditures to expand our infrastructure and to
meet our customers' demands;
- the success or failure of our Alliance Program;
- technical difficulties and network downtime, including that caused by
unauthorized access to our systems; and
- our ability to integrate new customers and assets acquired in
acquisitions.
This list is intended to identify some of the principal factors that could cause
actual results to differ materially from those described in the forward-looking
statements included elsewhere in this report. These factors are not intended to
represent a complete list of all risks and uncertainties inherent in our
business, and should be read in conjunction with the more detailed cautionary
statements included in this Annual Report on Form 10-K under the caption
"Item 1. Business--Risk Factors", our other Securities and Exchange Commission
filings, and our press releases.
SCC COMMUNICATIONS CORP.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 19
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 29
Item 8. Financial Statements and Supplementary Data................. 30
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 56
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 57
Item 11. Executive Compensation...................................... 57
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 57
Item 13. Certain Relationships and Related Transactions.............. 57
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 58
Signatures............................................................ 60
ITEM 1. BUSINESS
OVERVIEW
SCC Communications Corp. is the leading provider of 9-1-1 operations support
system ("OSS") services to telecommunications carriers. Our customers include
incumbent local exchange carriers ("ILECs"), competitive local exchange carriers
("CLECs"), wireless carriers, and state and local governments in North America.
We have redefined the market for 9-1-1 OSS by creating the first and largest
9-1-1 service bureau, with over 101 million subscriber data records under
management throughout North America.
We manage the data that enables a 9-1-1 call to be routed to the appropriate
public safety answering point ("PSAP") with accurate and timely information
about the caller's identification, call-back number and location. Each day, we
receive subscriber and coverage updates from our telecommunications carrier
customers, as well as public safety jurisdiction boundary changes from PSAPs.
Records identified as potentially having problems are separated automatically
and reviewed and analyzed by our data integrity team. The clean data is then
inserted into the 9-1-1 system, so that the call may be routed to the
appropriate PSAP with the correct location and call-back number. This complex
and detailed process allows our customers to comply with regulatory mandates and
to provide additional value-added services.
Our solution is comprehensive and cost-effective, as well as highly reliable
and secure. Our customers may outsource virtually all of their 9-1-1 data
management operations, including system activation, routine data administration,
event transaction processing and performance management. Our customers include,
among others, Ameritech, AT&T Wireless Services, BellSouth, Worldcom, Sprint
PCS, the General Services Commission of the State of Texas and Qwest. In
addition, we license our 9-1-1 OSS software to carriers that wish to manage
their 9-1-1 data systems in-house.
We incorporated in July 1979 in the State of Colorado under the name Systems
Concepts of Colorado, Inc. and reincorporated in September 1993 in the State of
Delaware under the name SCC Communications Corp.
INDUSTRY BACKGROUND
Historically, telecommunications carriers in the United States operated in a
highly regulated environment, with both local and long-distance service
providers operating as monopolies. The desire for long-distance competition in
the 1970s led the government to force the breakup of AT&T in 1984. AT&T split
into a competitive long-distance company and seven independent Regional Bell
Operating Companies ("RBOCs"), which offered local service and local access to
long-distance service providers. The Telecommunications Act of 1996 increased
competition and encouraged CLECs, long-distance carriers, wireless carriers and
other communications providers to enter local exchange markets. The
Telecommunications Act of 1996 also required each RBOC to modify its systems to
allow for fair and equal access by competitive carriers. Competition caused
telecommunications carriers to differentiate their service offerings, improve
service quality, decrease time to market, introduce new services and increase
cost efficiencies. In addition to updating their systems to remain competitive,
some carriers began to outsource selected functions, such as 9-1-1 OSS services.
Previously, carriers used closed and proprietary systems to operate their
networks. These systems were often mainframe-based and were not compatible with
new software and technologies, such as new advanced switching capabilities and
other technologies that would allow the carrier to offer value-added services.
Today, carriers need more advanced systems to improve the reliability of their
networks, offer more advanced services and comply with the regulatory
requirements of the Telecommunications Act of 1996. New technologies have
emerged that improve the carriers' ability to provide telecommunications
services, manage operations, take and bill customer orders and plan and engineer
their systems. 9-1-1 is
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another essential OSS service that requires close coordination of data and
network elements, because changes in customer service information usually
require changes in the data needed for 9-1-1 service.
9-1-1 service includes the routing of emergency calls to the appropriate
PSAP responsible for dispatching police, fire and other emergency services. Most
jurisdictions in the United States now provide enhanced 9-1-1 service ("E9-1-1")
which provides the wireline caller's telephone number and location to the call
taker at the PSAP. When a caller dials 9-1-1, the call is routed through the
network and queries the 9-1-1 data servers. The 9-1-1 data servers attach the
caller's location and telephone number to the call and identify the PSAP to
which the call should be routed. The information in the data servers must be
current and accurate for 9-1-1 calls to receive prompt response. Each time a
telephone subscriber modifies its data, such as an added telephone line or
change of address, the data must be changed in the 9-1-1 database. Changes in
PSAP boundaries, such as the addition of a street or a change in the name of a
street, also must be changed in the 9-1-1 database. If these changes to the
9-1-1 database are not made accurately and in a timely manner, the response to a
9-1-1 call could be affected. The complicated and critical process of
9-1-1 service delivery requires coordination of data from multiple sources,
review and processing of the data, resolution of data errors and conflicts, and
insertion of the data into network and mission-critical data servers.
Today, local exchange carriers must provide 9-1-1 service. According to the
National Emergency Number Association, nearly 93% of the current wireline
telephone subscribers in the United States are covered by some type of
9-1-1 service and approximately 95% of that coverage is E9-1-1 service.
The growth of the wireless telecommunications industry introduces
significant new challenges to 9-1-1 service delivery. Since a wireless caller's
location is constantly changing, the location of the caller is not as easily
identified as the fixed locations of wireline calls. The Cellular Telephone
Information Association estimates that approximately 119,000 9-1-1 calls are
made each day from wireless phones. We estimate that approximately 25% of
wireless callers cannot identify the location from which they are calling. Most
wireless networks must be modified to route calls accurately to the appropriate
PSAP and to provide location information.
Recognizing the public safety need for improved wireless E9-1-1 services,
the Federal Communications Commission, or FCC, in docket number 94-102 issued a
Report and Order on June 12, 1996 that mandates wireless E9-1-1 to be
accomplished in two phases. Phase I requires wireless carriers to provide the
PSAP receiving the call with the 9-1-1 caller's telephone number and the
location of the cell sector from where the call was made. Phase I allows the
call to be routed to the PSAP that is near the caller and would be assigned to
handle that area. Since April 1998, wireless carriers have been required to
comply with the Phase I mandate within six months after a PSAP request. Except
in states which have passed specific cost recovery legislation, carrier cost
recovery is no longer a prerequisite to their obligation to provide Phase I
services. Implementation of Phase I services has been slowed for the industry as
a whole by a number of issues, including carrier cost recovery, liability
protection and technology issues. This delay has affected our ability to deploy
our services on our customers' behalf.
Phase II requires wireless carriers to locate wireless 9-1-1 callers within
more precise location parameters specified in the FCC guidelines. Under the FCC
rules, wireless carriers were required to declare by October 2000 whether they
will use technology in the wireless telephone handset or a network-based
solution to locate wireless 9-1-1 callers. The FCC rules include a timeline for
implementation that requires Phase II service to be substantially available to
requesting PSAPs by October 1, 2001. In addition to the requirements of Report
and Order 94-102, wireless carriers are motivated to implement wireless
9-1-1 services because of their desire to improve emergency services and the
increasing pressure from public safety agencies. The technology required for
Phase II service can also be used by wireless carriers to provide other
value-added location services to their customers,
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including location-based traffic reporting, emergency roadside assistance or
other services that require the location of the caller.
New technologies have expanded the demand for public safety services.
Phase II of Report and Order 94-102 require that 9-1-1 service be provided to
wireless phone users. The expansion of the internet into homes and wireless
internet devices introduces new vehicles to reach the public and the potential
for increased public safety activity. Telematics devices, which are
communication devices in automobiles that can be used for location-based
services such as traffic reporting and emergency roadside assistance, are also
entering the market at a rapid pace. The Strategis Group, a Washington D.C.
research firm, estimates that annual telematics revenue may be more than
$2.8 billion per year by 2005. In addition, telephony products and services
based on internet protocols are becoming common elements of telecommunications
infrastructure. Each of these technologies introduces public safety challenges
that are not addressed in a significant manner today.
Today carriers and other service providers, including state and local
government entities, may deliver 9-1-1 data management solutions by using their
own proprietary solutions, licensing the software and managing the delivery of
public safety products and services themselves, or outsourcing their 9-1-1 OSS
needs.
OUR SOLUTION
We redefined the U.S. market for 9-1-1 OSS by creating the first and largest
9-1-1 service bureau, with over 101 million subscriber data records under
management throughout North America. We offer a cost-effective outsourcing
solution that covers virtually all aspects of 9-1-1 data management, including
system activation, routine data administration, event transaction processing and
performance management. Our services are also extremely secure and reliable and
can interface with each carrier's proprietary or open systems. In addition, we
license our 9-1-1 OSS software to carriers that wish to control the delivery of
9-1-1 services in-house. We believe that our solution offers the following
principal features and benefits:
FOCUS ON DATA INTEGRITY. The accuracy of subscriber records that identify
and provide caller location information is an essential element of
9-1-1 service. Our systems conduct more than 60 logical tests to prepare data
for use in 9-1-1 operations. Our data integrity team researches and resolves
transactions identified by the system as requiring further analysis. Our data
integrity team also creates and maintains boundary information. Live
9-1-1 calls access our database to route the call to the proper PSAP and to
provide timely and accurate subscriber location information to the 9-1-1 call
taker.
SURVIVABILITY AND RELIABILITY. We process a large volume of
mission-critical transactions using highly reliable and scalable operating
platforms. We have more than 20 servers that are built with multiple layers of
redundancy and are located in diverse locations to ensure continued service. The
9-1-1 network that connects our systems to our customers is monitored
continuously. Since we launched our 9-1-1 data management services in 1994, our
systems for 9-1-1 service delivery have provided uninterrupted service to our
customers. We also have a comprehensive disaster recovery program for our
central data administration operations.
LEADING-EDGE TECHNOLOGY. We believe we are the technological leader in the
9-1-1 data management services industry based on our advances in the areas of
systems architecture, spatial data management and advanced network integration.
Our products and services are updated regularly to comply with regulatory and
industry requirements, as well as to implement innovative solutions. Our
innovations include advanced intelligent call routing support, local number
portability data transaction support, technologies that improve
9-1-1 availability, a transaction-based map maintenance system, a spatial
coordinate-based E9-1-1 management system and large-scale internet applications
for E9-1-1. In June 1996, we were the first to demonstrate data management
support for wireless systems that
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complied with both Phase I and Phase II of Report and Order 94-102. We also have
developed systems for the use of spatial coordinate data for use in managing and
routing non-address specific 9-1-1 calls.
FLEXIBLE BUSINESS MODEL. PSAPs generally pay carriers a fixed rate based on
the number of subscribers located in a particular PSAP's jurisdiction. Our
outsourcing solution allows customers to avoid costly capital expenditures and
fix their expenses for 9-1-1 services on a per subscriber basis. Additionally,
we may customize their service packages both to meet the needs of their
subscribers and to comply with regulatory mandates. Alternatively, carriers may
elect to license 9-1-1 OSS software directly from us and manage the 9-1-1 data
themselves.
NEUTRAL SOLUTION PROVIDING EQUAL ACCESS. We are able to act as a neutral
third party to carriers who must access their competitors' systems to provide
9-1-1 service. Where state or local governments choose to control 9-1-1 data
management, we can provide equal access to all carriers in the region. As local
exchange competition increases, a neutral solution that provides equal access
becomes increasingly important.
OUR STRATEGY
Our objective is to be the leading national provider of 9-1-1 OSS and other
complementary and synergistic services. We focus on developing innovative and
automated solutions that provide customers with a comprehensive system for
managing large amounts of dynamic subscriber information. Key elements of our
strategy are to:
MAINTAIN AND EXTEND OUR LEADERSHIP POSITION IN THE WIRELINE 9-1-1 DATA
MANAGEMENT MARKET. We currently manage more than 101 million wireline subscriber
data records out of an estimated 170 million total wireline telephone subscriber
records in the United States. We intend to maintain and extend our market
leadership in the wireline 9-1-1 OSS systems market by adding new service and
license customers, increasing the number of subscriber data records under
management, enhancing our existing 9-1-1 services and supporting the evolving
telecommunications infrastructure.
CAPITALIZE ON EMERGING WIRELESS CARRIER OPPORTUNITIES. We have contracts to
provide Phase I wireless 9-1-1 services to 21 wireless carriers which have
approximately 35 million subscribers. As of December 31, 2000, we have
3.7 million live subscribers on our wireless 9-1-1 services. We believe there is
a significant opportunity to increase our wireless 9-1-1 services by
implementing a larger portion of the subscribers we have under contract and
signing contracts with more wireless carriers. We also intend to provide Phase
II wireless services. The significant growth in wireless telephone users, the
FCC mandate and the increased demand for enhanced wireless service offerings
present opportunities for growth in our wireless 9-1-1 services.
MAINTAIN AND EXTEND LEADERSHIP POSITION IN TELCONNECT(SM) SERVICES. We have
38 contracts to provide 9-1-1 clearinghouse services to CLECs. Under our
TelConnect(SM) services, we process updates to our CLEC customers'
9-1-1 databases, prepare the data to conform to the ILEC's network requirements
and insert the data into the appropriate ILEC's 9-1-1 system. Our TelConnect(SM)
services allow CLECs to grow their subscriber bases while minimizing their
investment in OSS technology infrastructure and personnel. CLECs receive the
benefit of our 9-1-1 service delivery expertise and relationships with PSAPs and
others necessary to provide 9-1-1 services. We plan to build upon our position
as a neutral, carrier-independent service provider by working cooperatively with
newly emerging dial tone providers, including CLECs, fixed-position wireless
carriers and cable television carriers, to increase our sales of
9-1-1 TelConnect(SM) services. In addition to our base TelConnect(SM) solution,
we provide other value-added products and services, such as local number
portability solutions. Local number portability refers to the transfer of a
telephone number from one carrier to another when a telephone subscriber chooses
to change its local exchange carrier. We initiated our Alliance Program in 1999
to partner with OSS providers that provide complementary products, such as
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billing and customer care solutions, to CLECs. We may jointly market our
products and services with our alliance partners.
PROVIDE ADDITIONAL SERVICES. ILECs, CLECs and wireless carriers, as well as
state and local governmental entities, all seek to apply emerging technologies
in response to competitive pressures and regulatory mandates. For example, we
have developed off-switch routing capabilities for carriers that have deployed
the advanced intelligent network and created local number portability
transaction sets in response to the local number portability mandates of the
Telecommunications Act of 1996. We have also invested significantly in our
9-1-1 SafetyNet(SM) offerings which are designed as next generation products and
services to address the industry's growing needs to accommodate new
technologies. By using the experience and economies of scale we have obtained in
managing the 9-1-1 OSS infrastructure for multiple carriers, we are
well-positioned to continue to develop and offer flexible, scalable solutions
that allow carriers to cost-effectively support new technological developments
and regulatory mandates.
DEVELOP APPLICATIONS FOR NEW COMMERCIAL PRODUCTS. By leveraging our core
competency of managing dynamic subscriber location information, we believe that
we are well-positioned to expand into additional markets outside of traditional
9-1-1 OSS services. The rapid introduction of the Internet and wireless devices
into the market presents public safety challenges that are not addressed in a
significant manner today. In addition, the use of internet protocol-based
telephony is rapidly expanding and increasing the complexity of public safety
services. We believe we can leverage our wireline and wireless call routing,
large volume transaction processing and mission critical networks to provide
solutions for these emerging technologies. Continuing change in the
telecommunications market introduces substantial opportunities for growth. In
response, we plan to deliver new products and services to the dynamic markets
that we serve.
EXPAND INTERNATIONAL OPERATIONS. We believe that a significant opportunity
to generate additional long-term revenue may be created by partnering or finding
other ways to interconnect telecommunications carriers with systems integration
firms to design, implement, maintain and operate effective, reliable emergency
communications systems in countries other than the United States and Canada. We
intend to expand internationally to address the needs of this market for
telecommunications emergency services.
There can be no assurances that we will achieve our objective or any of the
key elements of our strategy. See "Risk Factors."
OUR SERVICES AND PRODUCTS
Our 9-1-1 OSS solution enables a 9-1-1 call to be routed to the appropriate
PSAP along with accurate and timely information about the caller's
identification, call-back number and location. We receive daily service order
updates from our telecommunications carrier customers, which are changes to
subscriber data such as address changes, telephone number changes and other
changes to subscriber data that can affect 9-1-1 call processing. We also
receive updates to boundary and routing data needed to route 9-1-1 calls to the
appropriate PSAP. We screen this data for accuracy and analyze and resolve data
discrepancies. Certain discrepancies are referred back to the customer for
resolution. Screened data is inserted into the 9-1-1 databases. When a
9-1-1 call occurs, it is routed to the 9-1-1 voice switch, which queries our
databases. Our databases route the call to the appropriate PSAP and
simultaneously send the caller's location and call back number with the call.
The data that is delivered allows PSAPs to dispatch personnel and equipment to
the emergency.
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BASE SERVICES
Our base services include the following:
SYSTEMS PREPARATION AND ADMINISTRATION. To begin providing 9-1-1 data
management services to our customers, we must collect, organize, review and
analyze the data necessary to prepare our systems. Data preparation includes
collecting information on PSAP jurisdictional boundaries, performing a full
inventory of addresses located in an area and loading the subscriber information
into our systems. To improve data quality and, consequently, 9-1-1 service, our
systems run the data through over 60 automated integrity checks. We employ over
100 data integrity analysts who resolve any data discrepancies and update the
databases based on information received from customers and related sources.
ROUTINE DATA ADMINISTRATION. We receive and automatically process service
order updates from telecommunications carriers on a regular basis to maintain
current data in the 9-1-1 databases. Service order updates include address
changes, telephone number changes and other changes that may affect 9-1-1 call
processing. We usually receive between 200,000 and 250,000 service orders per
day. We also frequently receive boundary updates from PSAPs reflecting changes
in jurisdiction boundaries for PSAP responses. Boundary updates may include the
addition of streets, changes in street names, or other changes that may affect
the proper routing of a 9-1-1 call. When we receive a service order update or
jurisdiction change, the information received is checked for complete and
appropriate data, and then distributed throughout our network of geographically
dispersed servers.
EVENT TRANSACTION PROCESSING. When a caller dials 9-1-1 in an area served
by us, the call is routed through one of our data servers with a request for
information. The server rapidly responds and delivers the caller's location and
call-back number to the 9-1-1 dispatcher at the PSAP. Our data servers also
control the switch to route the call to the appropriate PSAP.
PERFORMANCE MANAGEMENT. We monitor and report the performance of our
service operations by measuring response time, systems availability, data
accuracy and error resolution intervals, among other performance measurements.
Using these measurements as a basis, we design and implement programs to improve
our services continuously.
MAPPING SERVICES. Traditional mapping services do not provide updates to
geographic information often enough to ensure the accuracy of data in an
emergency situation. Thus we maintain a team of geographic information system
experts, who work with carriers and public safety officials to document, review
and analyze call routing boundaries and specific address information. The
mapping services department uses advanced tools to improve existing mapping
information with new and more detailed geographical information for optimal
management of 9-1-1 call records. The mapping services department also assists
in system preparation and quality control programs to ensure that geographical
information is current.
TELCONNECT(SM) SERVICES (PREVIOUSLY CLEARINGHOUSE SERVICES). Our
TelConnect(SM) services provide a single point of contact to process and format
9-1-1 data for CLECs and independent telephone companies. CLECs and independent
telephone companies may be located in multiple communities that have diverse
requirements for delivery of 9-1-1 information. We have the processes and
systems in place to deliver the data in all communities throughout the United
States. CLECs and independent telephone companies electronically transmit
subscriber information to SCC. We then reformat the data to comply with the
destination community's local standards, test for detectable errors and deliver
the data to the 9-1-1 data systems that serve that community. The receiving data
systems may be operated by us or by a carrier that does not use our services or
products. Our TelConnect(SM) services also include measurement of certain
performance criteria, which allow us and our customers to continually improve
service. To provide added value to customers, we launched LNP 2000, a program
designed to
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assist customers with complications in 9-1-1 processing caused by local number
portability ("LNP"). Local number portability resulted from competition in local
exchange service and refers to the need to transfer, or port, a telephone number
from one telephone carrier to another where the telephone subscriber chooses to
change carriers. We also launched our Alliance Program in 1999, in which we are
partnering with OSS providers that provide complementary service offerings to
CLECs and independent telephone companies, such as billing and customer care
software.
ENHANCED SERVICES OF SCC PUBLIC SAFETYNET OPERATIONS CENTER--
We offer enhancements to our 9-1-1 OSS services that provide additional
features and functions through our Public SafetyNet Operations Center. These
services are targeted to specific markets and are sold either directly by us or
through our customers.
9-1-1NET-REGISTERED TRADEMARK-. 9-1-1Net-Registered Trademark- is an online
tool that allows instant communication and makes important information available
to our customers and PSAPs. Through 9-1-1Net-Registered Trademark-, users can
view live address routing rules, send address updates, review inbound call load,
error statistics and Automatic Location Information ("ALI") discrepancy reports,
and receive new product updates.
PRIVATE SWITCH ALI. Private telephone switches ("PBXs") create a challenge
for E9-1-1 operations. When a call is placed from within a PBX, the location of
the PBX itself is generally displayed to a 9-1-1 dispatcher at a PSAP rather
than the location of the specific PBX extension. In the case of large facilities
such as campuses, hotels and hospitals, emergency response personnel may not
have adequate information to determine the location of the caller quickly.
Private Switch ALI allows PBX or CENTREX system managers to create and transmit
appropriate data records that identify a caller's extension location within a
facility for 9-1-1 response.
9-1-1CONNECT(SM). We provide wireless carriers with 9-1-1 services similar
to those provided to wireline customers and that fully comply with the FCC's
Phase I mandate. Once a wireless carrier receives an activation request from a
PSAP, our program managers develop a plan with the wireless carrier to activate
service. This plan includes development of ILEC network interconnections for
both data and voice specific to the local wireless network configuration and
interface requirements. The program managers develop graphic coverage area maps
that are superimposed on current maps of public safety agency boundaries.
Routing recommendations can then be made and coordinated with the appropriate
PSAP. The result is that 9-1-1 calls are routed to the appropriate PSAP with the
callback number and cell location of the caller. We have also developed a
solution to address the FCC's Phase II mandate.
EMERGENCY WARNING AND EVACUATION SYSTEM(SM). In 1999, we began selling our
Emergency Warning and Evacuation System(SM) ("EWE(SM)") to initiate outbound
calls to selected areas in the event of potential disasters such as floods,
hazardous materials incidents, industrial accidents and localized weather
events. EWE(SM) uses spatially classified location information and up-to-date
telephone subscriber data to deliver voice, fax and TDD warnings to
geographically targeted populations.
LICENSE PRODUCTS
We offer 9-1-1 software to ILECs that elect to manage their own 9-1-1 data
records rather than outsourcing such operations to SCC. We also provide custom
software development services to customers with specific or local requirements
through our engineering department. The engineering department develops,
customizes and enhances the software using a structured approach to perform
requirements analysis, software development and quality assurance.
7
COMMERCIAL SERVICES
We believe we can leverage our 9-1-1 expertise to provide other data
management products and services. The new technologies entering the market, such
as wireless location services, the Internet, wireless internet devices,
telematics in automobiles and internet protocol-based telephony, present public
safety challenges that are not comprehensively addressed today. We believe our
expertise in managing large volumes of data, managing geographic call boundaries
and operating mission-critical networks puts SCC in a unique position to address
this evolving market. SCC's 9-1-1 SafetyNet(SM) product provides wireless
carriers and other non-traditional telecommunications service providers with the
ability to properly route and deliver 9-1-1 calls throughout the United
States--a service that is available today only on a regional or local level. Key
components of 9-1-1 SafetyNet(SM) include a national voice and data network
overlay to rapidly and accurately deliver emergency calls throughout North
America and a nationwide 9-1-1 coordinate routing data server that provides
high-speed spatial routing determination to enable the delivery of emergency
calls to the correct jurisdiction. SCC's 9-1-1 SafetyNet(SM) complements but
does not replace the existing 9-1-1 infrastructure.
SERVICE AND PRODUCT PRICING
Our revenue is derived from up-front non-recurring engineering ("NRE")
services and monthly data management services. Prior to 1998 we also generated
revenue from software license agreements. We typically enter into two- to
ten-year agreements.
The NRE service consists primarily of the clean up of the customers'
9-1-1 data records, engineering services to enable the customers' legacy system
to interface with SCC's platform, building the network that will route calls,
public safety boundary mapping, customer training and testing. The charges for
these services are nonrefundable if the contract is cancelled after the services
are performed. After the initial NRE, customers often buy components of these
services, such as additional software engineering to modify the system
functionality or network services to make their network more effective and
enhance their solution ("Enhancement Services"). The fees received for NRE
services and Enhancement Services are deferred and recognized as revenue ratably
over the remaining contractual term of the arrangement.
Under outsourcing solution contracts we receive a monthly service fee for
providing ongoing data management services which are required to keep the
records current for all subscribers, maintain and monitor the network and
support and maintain the software and systems required to provide the services.
The fees received for these monthly services are recognized as revenue in the
period in which the services are rendered.
SERVICE INFRASTRUCTURE AND ARCHITECTURE
Our operations include central data administration and distributed systems
for real-time 9-1-1 transaction support. Based on large scale, fault-tolerant
Compaq Tandem computers, our major processing systems are configured to provide
high reliability. They are also designed to provide significant capacity for
continued growth using the Tandem NSK scalable message-based architecture.
Our central data administration systems, located in Boulder, Colorado, are a
key element of our 9-1-1 OSS, and are used to perform routine data maintenance
and to support new customer transition and initial system loads. We also
maintain a central monitoring facility in Boulder that operates 24 hours a day,
seven days a week.
Data networks interconnecting our facility and systems in Boulder,
SCC operated remote systems and SCC client systems are based on traditional
T-1 and frame relay links provided by separate, redundant carriers. To improve
reliability and survivability, the primary links are designed to have three or
more backup paths to access our distributed networks, including VSAT satellite
links. A "hot-site"
8
emergency business recovery facility has been established in Sterling Forest,
New York and can be activated to continue routine operations in the event of a
disaster at the Boulder site. Electronic processing necessary to handle actual
9-1-1 calls is geographically distributed and remains a local service for each
region, so our central data administration systems are not in the actual
9-1-1 call path.
Distributed throughout the United States, our real-time 9-1-1 servers are
located in shared, hardened computer facilities. The systems are deployed in
pairs or quads. System pairs are intentionally distributed to different
geographic locations to provide an additional level of reliability. These
systems provide data displays for thousands of public safety agencies throughout
the service areas of our customers. Direct interface to telephone control
switches is also supported on these platforms, providing the information
necessary to route calls to the jurisdictionally appropriate PSAP. We also use a
number of Microsoft NT servers and various Unix servers for internal
administrative processing and extranet support.
CUSTOMERS
We provide our services to a range of customers, including ILECs, CLECs,
wireless carriers and state and local government agencies. We also license our
software to ILECs and provide 9-1-1 data management services indirectly to over
750 independent telephone companies. We intend to include an expanded set of
customers that would be the recipients of the telecommunications-related
products and services associated with growth opportunities discussed above.
During the year ended December 31, 2000, we recognized approximately 66% of
total revenue from continuing operations from Ameritech, BellSouth Inc. and
Qwest, each of which accounted for greater than 10% of our revenue. During the
year ended December 31, 1999, we recognized approximately 81% of total revenue
from Ameritech, BellSouth Inc. and Qwest, each of which accounted for greater
than 10% of our revenue. During the year ended December 31, 1998, we recognized
approximately 73% of total revenue from continuing operations from Ameritech,
BellSouth Inc. and Qwest, each of which accounted for greater than 10% of our
revenue. No other customers accounted for more than 10% of our total revenue
during those years.
Historically, we have typically entered into contracts with carriers and
their affiliates to provide services to some or all of the carrier's operating
entities, and we have a contract that governs the licensing of our proprietary
software. We currently have four revenue generating segments. Set forth below is
a partial list of carriers utilizing our services or products, which we believe
are representative of our overall customer base at this time.
ILEC: Our customers include Ameritech, BellSouth Inc. and Qwest.
CLEC: Our customers include Worldcom, TriVergent Communications Inc. and
Nextlink Communications Inc.
WIRELESS: Our customers include CommNet Cellular Inc., AT&T Wireless
Services, Sprint PCS, Qwest Wireless, Nextel and Nextel Partners.
DIRECT: We have a contract with the General Services Commission of the
State of Texas, which was assigned, to the Texas Commission for State Emergency
Communications.
See Note 8 of our financial statements for further information regarding our
reportable segments.
SALES AND MARKETING
Our marketing efforts target key carriers, government bodies, and PSAPs in
each geographical market through advertising in telecommunications industry
publications, participation in trade shows, presentations at technical
conferences and other initiatives. Additionally, SCC employees serve as the
chairpersons and members of key standards committees related to emergency
communications services.
9
Our sales strategy relies primarily on direct channels of distribution for our
services, although we initiated an Alliance Program in 1999 to jointly market
our TelConnect(SM) services with OSS companies who sell complementary products.
We have dedicated account teams to work with each existing and potential
customer. Our account teams develop relationships with 9-1-1 service providers
through a consultative, problem-solving sales process and work closely with
customers and potential customers to determine how their needs can be fulfilled
by our services. As of February 28, 2001, we employed 60 people in our sales and
marketing organization. Sales cycles range from one month to over two years.
RESEARCH AND DEVELOPMENT
We direct our research and development efforts toward providing highly
scalable, fault tolerant applications to the public safety, telecommunications
and wireless industries. Development efforts in process are focused on
integrating internet technology, spatial data mapping systems, advanced
switching and transport elements capable of interfacing with existing networks,
and enabling the more efficient E9-1-1 OSS processes that improve data quality.
Research and development expenses totaled approximately $4,174,000, $1,740,000
and $1,376,000 for December 31, 2000, 1999, and 1998, respectively. The 2000
costs include a portion of the costs incurred on our 9-1-1 SafetyNet(SM)
initiative. As of February 28, 2001, we employed 46 people in our research and
development organization.
COMPETITION
The market for 9-1-1 OSS solutions is intensely competitive and we expect
competition to increase in the future. We believe that the principal competitive
factors affecting the market for 9-1-1 OSS solutions include effectiveness of
existing infrastructure, reliability, manageability, technical features,
wireless support, performance, ease of use, price, scope of product offerings,
and customer service and support. Although we believe that our solution competes
favorably with respect to such factors, we may not be able to maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, service support, technical and
other competitive resources.
Our principal competitors fall generally within one of three categories:
- internal development departments of major carriers or consulting firms
that support such departments;
- 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.
Potential customers sometimes rely on their own internal development teams
to formulate 9-1-1 OSS systems or retain consultants to undertake such a
project. We believe that our 9-1-1 OSS solution competes favorably with
internally developed systems, which may be expensive to develop and maintain,
may not provide a comprehensive, reliable approach to 9-1-1 OSS services, and
may not provide the flexibility to adapt readily to regulatory, technological
and market changes.
In addition, a number of companies currently market or have under
development software products and services to provide 9-1-1 administration. We
compete with a few relatively smaller companies, including Telecommunications
Systems, Inc., for the provision of 9-1-1 OSS services to wireless carriers. We
also compete with a few relatively smaller companies for CLEC 9-1-1 services,
such as HBF Group, Inc. Although we expect more significant competition to
emerge in the future, we believe that, to date, none of these companies offer
products or services that are as robust in features or as comprehensive in scope
as our products and services. While it is likely that the product development
efforts of these companies may eventually enable them to offer a line of
products or
10
services to compete with our current service offerings, we intend to continue to
dedicate significant resources for product and service development to expand our
capabilities and stay ahead of these competitors. Nonetheless, we expect
additional competition from these established competitors and from other
emerging companies. Mergers or consolidations among these competitors or
acquisitions of these companies by larger competitors would make them more
formidable competitors to us. Our current and potential competitors may develop
products and services that may be more effective than our current or future
9-1-1 data management solutions and our technologies and offerings may be
rendered obsolete by these developments.
Finally, there are a number of competitors that currently market and sell
various products and services to telecommunications carriers, such as billing
software and advanced telecommunications equipment, that have been successfully
marketed to 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, a significant
number of customers may elect to accept more limited functionality in lieu of
purchasing additional products or services. For example, Lucent Technologies
offers carriers software systems with functionality similar to our services.
Many of these larger companies have longer operating histories, greater name
recognition, access to larger customer bases and significantly greater
financial, technical and marketing resources than 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 we may. We believe that the entry of these
larger companies into our market may require them to undertake operations that
are currently not within their core areas of expertise, and thus expose them to
significant uncertainties in the product development process or in providing a
range of products and services to comprehensively address the
9-1-1 requirements which our services address. However, if these companies were
to introduce products or services that effectively compete with our service
offerings, they could be in a position to substantially lower the price of their
9-1-1 products and services or to bundle such products and services with their
other product and service offerings.
For the foregoing reasons, we may not be able to compete successfully
against our current and future competitors. Increased competition may result in
price reductions, reduced gross margins and loss of market share, any of which
would materially and adversely affect our business, financial condition and
results of operations.
PROPRIETARY RIGHTS
We currently have one patent application pending at the U.S. Patent and
Trademark Office, which is in the confidential approval process but has not yet
been issued. We are the owner of the following registered trademarks and service
marks: 9-1-1Net-Registered Trademark-, 9-1-1 Extended
Architecture-Registered Trademark-, 9-1-1 National Reference
Center-Registered Trademark-, 9-1-1XA-Registered Trademark-,
9-1-1NRC-Registered Trademark- and SCC(TM) (stylized). We are the owner, and are
seeking federal registration, of the following marks: 9-1-1Connect(SM),
911.com(SM), EWE(SM), Emergency Warning and Evacuation(SM), 911.net(SM),
LNP2000(SM), TelConnect(SM), CallMachine(SM), 9-1-1 SafetyNet(SM), Personal
SafetyNet(SM), RealWorld9-1-1(SM), SCC(TM), Intrado(TM), and informed
response(TM).
EMPLOYEES
As of February 28, 2001, we employed 531 full-time employees in eleven
states. Of these employees, 46 were involved in research and development, 60 in
sales and marketing, 344 in technical support and operations and 81 in
administration and finance. No employees are covered by any collective
bargaining agreements. We believe that our relationships with our employees are
good.
11
FACILITIES
Our principal administrative, sales and marketing, research and development
and support facilities consist of approximately 80,000 square feet of office
space in Boulder, Colorado. We occupy these premises under a lease that expires
December 31, 2002. As of February 28, 2001, the annual base rent for this
facility was approximately $914,000; however, the lease agreement provides for
periodic defined increases in rent throughout the lease term. In December 1999,
we leased an additional 2,100 square feet of office space in Austin, Texas to
supplement and serve as a back up to our Boulder, Colorado facility. We occupy
these premises under a lease that expires November 30, 2003. As of February 28,
2001, the annual base rent for this facility was approximately $38,000; however,
the lease agreement provides for periodic defined increases in rent through the
lease term. In October 2000, we leased an additional 35,000 square feet of
office space in Longmont, Colorado. We occupy these premises under a lease
expiring March 31, 2002. As of February 28, 2001, the annual base rent for this
facility was approximately $391,000.
RISK FACTORS
IN EVALUATING OUR BUSINESS, YOU SHOULD CAREFULLY CONSIDER THE RISKS AND
UNCERTAINTIES DISCUSSED IN THIS SECTION, IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS ANNUAL REPORT ON FORM 10-K. THE RISKS AND UNCERTAINTIES
DESCRIBED BELOW MAY NOT BE THE ONLY RISKS THAT WE FACE. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCURS, OUR BUSINESS, OPERATING RESULTS OR FINANCIAL
CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED AND THE MARKET PRICE OF OUR
COMMON STOCK MAY DECLINE.
OUR OPERATING RESULTS MAY FLUCTUATE, CAUSING OUR STOCK PRICE TO DECLINE.
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
$9.5 million for the year ended December 31, 2000. Therefore, you should not
rely on period-to-period comparisons of revenue or operating results as an
indication of our future performance. If our quarterly revenue or operating
results fall below the expectations of the investors or securities analysts, the
price of our common stock could fall substantially.
Our operating results may continue to fluctuate as a result of many factors,
including:
- our planned investments in research, development and marketing to expand
our service offerings;
- the length of our sales cycle;
- price competition from entities with substantially greater resources than
us;
- the size, timing and duration of significant customer contracts;
- the number of subscriber records under our management;
- the unpredictable rate of adoption of wireless services by PSAPs;
- the introduction and market acceptance of our and our competitors' new
products and services;
- developments in telecommunications legislation and regulations, including
new interpretations of existing law;
- the amount and timing of expenditures to expand our infrastructure and to
meet our customers' demands;
12
- the success or failure of our Alliance Program;
- technical difficulties and network downtime, including that caused by
unauthorized access to our systems;
- our ability to integrate new customers and assets acquired in
acquisitions.
WE DEPEND ON LARGE CONTRACTS FROM A LIMITED NUMBER OF SIGNIFICANT CUSTOMERS AND
THE LOSS OF ANY OF THOSE CONTRACTS WOULD ADVERSELY AFFECT OUR OPERATING RESULTS.
We historically have depended on, and expect to continue to depend on, large
contracts from a limited number of significant customers. We provide our
services to a range of customers, including ILECs, CLECs, wireless carriers and
state and local government agencies. We also license our software and provide
9-1-1 data clearinghouse services directly and indirectly to over 750
independent telephone companies. During the year ended December 31, 2000, we
recognized approximately 66% of total revenue from continuing operations from
Ameritech, BellSouth Inc. and Qwest, each of which accounted for greater than
10% of our revenue. During the year ended December 31, 1999, we recognized
approximately 81% of total revenue from Ameritech, BellSouth Inc. and Qwest,
each of which accounted for greater than 10% of our revenue. During the year
ended December 31, 1998, we recognized approximately 73% of total revenue from
Ameritech, BellSouth Inc. and Qwest. No other customers accounted for more than
10% of our total revenue during those periods. We believe that these customers
may continue to represent a substantial portion of our total revenue in the
future. Certain 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 in 2005. The loss
of any of these customers would have a material adverse effect on our business,
financial condition and results of operations.
IF WE SUCCEED IN ACQUIRING LUCENT PUBLIC SAFETY SYSTEMS, WE MAY EXPERIENCE
FINANCIAL OR OPERATIONAL PROBLEMS AND YOUR OWNERSHIP INTEREST MAY BE
SIGNIFICANTLY DILUTED.
In October 2000, we entered into an 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. Delays in
closing the transaction have necessitated the renegotiations of several deal
terms. Although we have not reached agreement on these revised terms, we are
negotiating in good faith to attain that goal. However, there is a possibility
that the transaction may not be completed.
If we succeed in acquiring Lucent Public Safety Systems, the acquisition may
not produce the revenues, earnings or business synergies that we anticipate. If
we decide to issue shares of our common stock to complete the acquisition, your
stock ownership may be diluted. Furthermore, 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 may not be able to manage the proposed acquisition successfully.
Moreover, we may spend a significant amount of time and effort in completing the
acquisition and integrating the acquired business, which may divert our time and
attention from existing operations.
Lucent Public Safety Systems has not previously been accounted for as a
separate reporting entity within Lucent Technologies, and we are not attempting
to acquire 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 if we succeed in acquiring Lucent Public Safety
Systems. If we issue common stock or securities convertible into common stock to
complete the acquisition, the ownership
13
interest of existing stockholders may be diluted significantly. Any of these
outcomes could prevent us from realizing the anticipated benefits of the
acquisition and cause the market value of our common stock to decline.
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 various laws
and regulations, including:
- 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 LECs' ("Local Exchange Carrier") responsibility to provide subscriber
records to emergency service providers under the Wireless Communications
and Public Safety Act of 1999;
- various state and local requirements; including but not limited to
jurisdictions in which we are a regulated utility and may be a party to
various regulatory actions, and
- the requirements imposed on carriers by the FCC in 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 renewed
Congressional interest and 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 may finance such
changes, and other regulatory, economic and political factors.
We are aware of litigation challenging various aspects of the
Telecommunications Act and 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 invalidation, repeal,
modification or delay in the requirements imposed by the FCC or any of the state
utility commissions 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.
As part of our new initiatives to market and sell our 9-1-1 SafetyNet(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 may be successful
14
in those areas where third parties may challenge this kind of expansion of the
Act's provisions. We have requested interconnection under sections 251 and 252
of the Telecommunications Act from five ILECs. In addition, we have requested
arbitration assistance from state Commissions in Illinois, Texas and California,
in relation to one of those ILECs, and we are pursuing the other requests
through negotiation. Our new initiatives depend largely on the success of these
legal and regulatory initiatives. Thus, the same kinds of delays or problems
outlined above regarding matters pending in the State of Texas may occur in
other states and could have substantial and material impacts on the success of
our business.
9-1-1 services generally are funded by a locally imposed monthly subscriber
fee. A portion of this fee 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. 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 MAY 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, including government regulation,
technological obsolescence and the entry of new competition. We expect that this
market may continue to account for substantially all of our revenue in the near
future. As a result, our future success depends 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. Markets for our existing services and
products may not continue to expand and we may not 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 year ended December 31, 2000, approximately 89% of our revenue
was generated on a fixed price per subscriber basis. 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.
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
is at risk of product liability and related claims. Our agreements with our
customers typically require us to indemnify our customers for our own acts of
15
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 may 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 OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY ANY INTERRUPTION OF OUR
SERVICES OR 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, sabotage, unauthorized access to our system or
similar events. Although all of our mission-critical systems and equipment are
designed with built-in redundancy and security, any unanticipated interruption
or delay in our operations could have a material adverse effect on our business,
financial condition and results of operations. Furthermore, any 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. Our property and business interruption insurance may not be
adequate to compensate us for any losses that may occur in the event of a system
failure. Furthermore, insurance may not be available to us at all or, if
available, may not be commercially reasonable.
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. Our systems,
resources, procedures, controls and existing space may not be adequate to
support such expansion of our operations. Our future operating results 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. If our marketing strategy is successful, we may experience
difficulties responding to customer demand for services and technical support
and in pace with the development of products and services. To manage our growth,
if any, we must:
- improve and enhance management information and reporting systems;
- standardize implementation methodologies of our operations;
- further develop and upgrade our infrastructure;
- continue to maintain customer satisfaction; and
- hire, train and manage qualified personnel.
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, 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
16
service and support. We may not be able to maintain our competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, support service, technical and other competitive
resources.
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
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.
THE MARKET PRICE OF OUR COMMON STOCK MAY EXPERIENCE PRICE FLUCTUATIONS FOR
REASONS OVER WHICH WE HAVE NO CONTROL.
The stock market has from time to time experienced, and is likely to
continue to experience, extreme price and volume fluctuations. Recently, prices
of securities of high technology companies have been especially volatile and
have often fluctuated for reasons that are unrelated to the operating
performance of the affected companies. The market price of shares of our common
stock has fluctuated greatly since our initial public offering and could
continue to fluctuate due to a variety of factors, some of which are not within
our control. In the past, companies that have experienced volatility in the
market price of their stock have been the objects of securities class action
litigation. If we were the object of securities class action litigation, it
could result in substantial costs and a diversion of our management's attention
and resources.
OUR CORPORATE DOCUMENTS AND DELAWARE LAW MAKE A TAKEOVER OF OUR COMPANY MORE
DIFFICULT, WHICH MAY LIMIT THE MARKET PRICE OF THE COMMON STOCK.
Our charter and by-laws and Section 203 of the Delaware General Corporation
Law contain provisions that might enable our management to resist a takeover of
our company. Among other things, the board of directors has the ability to issue
"blank check" preferred stock without further stockholder approval. These
provisions may discourage, delay or prevent a change in control or a change in
our management. These provisions also could discourage proxy contests and make
it more difficult for you to elect directors and take other corporate actions.
The existence of these provisions could limit the price that investors are
willing to pay for shares of common stock and prevent you from realizing the
premium return that stockholders may receive in conjunction with a corporate
takeover.
OUR OFFICERS AND DIRECTORS HAVE SIGNIFICANT VOTING POWER AND MAY SUBSTANTIALLY
INFLUENCE THE OUTCOME OF ANY STOCKHOLDER VOTE.
As of February 28, 2001, members of our board of directors and our executive
officers, together with members of their families and entities that may be
deemed affiliates of or related to such persons or entities, beneficially own
approximately 19.4% of the outstanding shares of our common stock. Accordingly,
these stockholders are able to influence election of our board of directors and
the outcome of corporate actions requiring stockholder approval, such as mergers
and acquisitions. This level of ownership by such persons and entities may have
a significant effect in delaying, deferring or preventing a change in control
and may adversely affect the voting and other rights of other holders of common
stock.
17
A GENERAL ECONOMIC DOWNTURN COULD ADVERSELY AFFECT OUR SALES AND PRODUCT
DEVELOPMENT.
In the last five years, the general health of the economy has been
relatively strong. Growing companies have spent unprecedented amounts of capital
to keep pace with rapid technological advances. In late 2000, the economy
started to slow down. To the extent the general economic health of the United
States declines from recent historically high levels, or to the extent
individuals or companies fear a decline is imminent, these individuals and
companies may reduce expenditures such as those for our services. Any decline or
concern about an imminent decline could delay decisions among certain customers
to roll out our services or could delay decisions by prospective customers to
make initial evaluations of our services. Any delays would have a material and
adverse effect on our business.
ITEM 2. PROPERTIES
Refer to the disclosure under the caption "Item 1. Business--Facilities."
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any litigation that we believe could have a material
adverse effect on our business or us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"SCCX." We commenced our initial public offering of the common stock on
June 24, 1998 at a price of $12 per share. Prior to such date, there was no
public market for the common stock. The following table sets forth the high and
low closing market prices for each full quarterly period within the last two
fiscal years and from January 1, 2001 through February 28, 2001.
STOCK PRICE
--------------------
2001 HIGH LOW
- ---- -------- --------
January 1, 2001--February 28, 2001...................... $ 9.75 $4.00
2000
- ----
Fourth Quarter. $ 8.19 $ 4.06
Third Quarter........................................... $ 8.63 $5.25
Second Quarter.......................................... $ 9.25 $5.06
First Quarter........................................... $15.31 $5.44
1999
- ----
Fourth Quarter. $ 7.09 $ 5.00
Third Quarter........................................... $ 7.13 $4.00
Second Quarter.......................................... $ 5.00 $3.00
First Quarter........................................... $ 6.38 $3.00
As of February 28, 2001, there were approximately 168 direct holders of
record, not including shares held in street name.
We have not paid any cash dividends on our capital stock since our
inception, and do not expect to pay cash dividends on our common stock in the
foreseeable future. Certain covenants contained in our line of credit agreement
restrict the payment of dividends without the lender's prior consent. Payment of
future dividends, if any, may be declared at the discretion of our board of
directors, subject to the restrictions discussed above, after taking into
account various factors, including our financial condition, operating results,
cash needs and expansion plans.
On June 24, 1998, we consummated our initial public offering of our common
stock. The estimated net offering proceeds to us after deducting the foregoing
discounts, commissions, fees and expenses were $25,988,400, of which $3,510,400
relates to the exercise of the underwriters' over-allotment option on July 22,
1998. Through December 31, 2000, the proceeds of the offering have been applied
as follows:
Aggregate offering price.................................... $28,980,000
Direct and indirect payment to others for:
Underwriting discounts and commissions.................... 2,028,600
Other offering expenses................................... 963,000
Construction of building and facilities................... 300,000
Capital lease payment to receive discount................. 2,878,500
Repayment of indebtedness................................. 4,610,000
9-1-1 SafetyNet(SM) Initiative............................ 4,800,000
Working capital........................................... 13,399,900
19
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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and
should be read in conjunction with our financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7. The statement of operations data for the years
ended December 31, 2000, 1999 and 1998 and the balance sheet data at
December 31, 2000 and 1999 are derived from, and are qualified by reference to,
the audited financial statements and notes included in Item 8. The statement of
operations data for the years ended December 31, 1997 and 1996 and the balance
sheet data at December 31, 1998, 1997 and 1996 are derived from audited
financial statements not included in this Annual Report on Form 10-K. Pro forma
information reflects results from operations as if SAB 101 had been adopted
prior to January 1996.
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total revenue.................................. $43,124 $32,584 $34,449 $27,072 $14,802
Net income (loss) from continuing operations
before extraordinary item and cumulative
effect of change in accounting principle..... (6,418) (1,062) 3,880 4,783 937
Net earnings (loss) per share from continuing
operations before extraordinary item and
cumulative effect of change in accounting
principle:
Basic........................................ $ (0.57) $ (0.10) $ 0.53 $ 2.17 $ 0.15
======= ======= ======= ======= =======
Diluted...................................... $ (0.57) $ (0.10) $ 0.38 $ 0.54 $ 0.11
======= ======= ======= ======= =======
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 5,036 $ 8,354 $10,266 $ 2,503 $ 32
Short and long-term investments in marketable
securities.................................. 6,939 13,158 9,815 -- --
Working capital (deficit)..................... 12,743 18,014 17,678 (2,670) (7,345)
Total assets.................................. 44,669 41,780 45,095 21,106 18,482
Long-term capital lease obligation............ 1,511 2,038 2,791 6,891 3,318
Total stockholders' equity (deficit).......... 24,967 32,935 33,591 (11,867) (13,068)
20
PRO FORMA EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
DECEMBER 31,
------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA NET INCOME (LOSS) FROM
CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM AND CHANGE IN
ACCOUNTING PRINCIPLE $ (6,418) $ (1,139) $ 3,205 $ 4,012 $ (252)
========== ========== ========== ========= =========
PRO FORMA NET INCOME (LOSS)
APPLICABLE TO COMMON STOCK......... $ (9,500) $ (1,365) $ 2,296 $ 1,104 $ (814)
========== ========== ========== ========= =========
PRO FORMA NET EARNINGS (LOSS) PER
SHARE FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM AND
CHANGE IN ACCOUNTING PRINCIPLE
(Note 2):
Basic.............................. $ (0.57) $ (0.10) $ 0.50 $ 2.16 $ (0.14)
========== ========== ========== ========= =========
Diluted............................ $ (0.57) $ (0.10) $ 0.31 $ 0.46 $ (0.03)
========== ========== ========== ========= =========
PRO FORMA NET EARNINGS (LOSS) PER
SHARE (Note 2):
Basic.............................. $ (0.84) $ (0.12) $ 0.36 $ 0.59 $ (0.45)
========== ========== ========== ========= =========
Diluted............................ $ (0.84) $ (0.12) $ 0.22 $ 0.13 $ (0.10)
========== ========== ========== ========= =========
SHARES USED IN COMPUTING PRO FORMA
NET EARNINGS (LOSS) PER SHARE
(Note 2):
Basic.............................. 11,257,718 10,989,091 6,433,564 1,857,413 1,790,230
========== ========== ========== ========= =========
Diluted............................ 11,257,718 10,989,091 10,334,556 8,788,816 8,299,362
========== ========== ========== ========= =========
See Note 2 of notes to financial statements for an explanation of the
determination of the shares used in computing net income (loss) per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are the leading provider of 9-1-1 data management services to ILECs,
CLECs and wireless carriers in the United States. We manage the data that
enables a 9-1-1 call to be routed to the appropriate public safety agency with
accurate and timely information about the caller's identification and location.
We were incorporated in July 1979 in the State of Colorado under the name
Systems Concepts of Colorado, Inc. and were reincorporated in September 1993 in
the State of Delaware under the name SCC Communications Corp. Prior to 1995,
substantially all of our revenue was derived from the sale of software licenses
and related implementation services to ILECs and public safety agencies. During
1994, we began investing in infrastructure to provide our 9-1-1 OSS solution to
telephone
21
operating companies seeking to outsource such operations. We signed our first
9-1-1 data management services contract in August 1994 and continue to add to
the number of records under management. We began to recognize revenue from
wireless carriers in the third quarter of 1997, and continue to increase the
number of live wireless subscribers managed. In addition, we signed a contract
with the General Services Commission of the State of Texas in November 1998,
representing the first time that a state agency has endeavored to centralize
9-1-1 OSS and data management services with a neutral third party.
Each of our four Business Units provides an outsourcing solution for its
respective customer bases. Revenue generally includes a non-recurring initial
fee ("NRE") for the design and implementation of the solution, conversion of the
customer's data to our systems, hiring and training of personnel, and other
costs required to prepare for the processing of customer data. Non-recurring
fees and the associated costs are recognized ratably over the life of the
contract. Our contracts also separately allow for a monthly service fee based on
the number of subscriber records under management, which is recognized in the
period in which the services are rendered. Related costs are expensed as they
are incurred. We may also offer our customers enhanced products or services for
which revenue is recognized over the life of the contract. Our revenue breaks
down as a percent of total revenue as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
REVENUE PERCENT
------------------------------ ------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
ILEC Business Unit............................ $28,757 $26,723 $28,874 67% 82% 84%
CLEC Business Unit............................ 7,280 3,793 1,492 17% 12% 4%
Wireless Business Unit........................ 4,172 1,739 3,867 10% 5% 11%
Direct Business Unit.......................... 2,915 329 306 6% 1% 1%
During 2000, we changed our revenue recognition policies to comply with SAB
101. Specifically, SAB 101 requires that we defer the up-front NRE fee, certain
enhancement fees and related incremental costs and recognize them over the lives
of our contracts. The adoption of SAB 101 required us to reflect a cumulative
effect of change in accounting principle as if SAB 101 had been implemented on
January 1, 2000 and to restate all of our reported 2000 quarterly results.
During the years ended December 31, 2000 and 1999, we recognized
approximately 66% and 81%, respectively, of total revenue from Ameritech,
BellSouth Inc. and Qwest, each of which accounted for greater than 10% of our
total revenue in such periods.
Historically, substantially all of our revenue has been generated from sales
to customers in the United States. However, we have generated revenue in Canada
and intend to enter additional international markets, which may require
significant management attention and financial resources. International sales
are subject to a variety of risks.
As of December 31, 2000, we had net operating loss carryforwards of
approximately $16.9 million available to offset future net income for
U.S. federal income tax purposes. Since we expect to incur losses in the near
term related to development costs for new commercial products, future taxable
income may not be sufficient to realize additional deferred tax assets that may
be created by the projected net operating losses.
Our quarterly and annual operating results have varied significantly in the
past. The variation in operating results may likely continue and may intensify.
We believe that period to period comparisons of results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Our operating results may continue to fluctuate as a result of many
factors, including the length of the sales cycles for new or existing customers,
the size, timing or duration of
22
significant customer contracts, fluctuations in number of subscriber records
under management, timing or duration of service offerings, rate of adoption of
wireless services by PSAPs, efforts expended to accelerate the introduction of
certain new products, our ability to hire, train and retain qualified personnel,
increased competition, changes in operating expenses, changes in our strategy,
the financial performance of our customers, changes in telecommunications
legislation and regulations that may affect the competitive environment for our
services, and general economic factors.
Our expense levels are based in significant part on our expectations
regarding future revenue. Our revenue is difficult to forecast because the
market for our services is evolving rapidly and the length of our sales cycle
and the size and timing of significant customer contracts vary substantially.
Accordingly, we may be unable to adjust spending in a timely manner to
compensate for any unexpected changes in operations. As of December 31, 2000, we
had incurred expenses of approximately $4.0 million in marketing, legal and
research and development to expand our product offerings with our 9-1-1
SafetyNet(SM) initiative. We may spend up to an additional $5 million on this
initiative in 2001. In addition, we hired additional employees in 2000, and
expect to continue hiring additional employees during 2001. We also began
leasing office space in Texas in December 1999, from which we are performing
some of our operations. In October 2000, we also leased additional office space
in Colorado to accommodate our increased personnel.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
TOTAL COMPANY
Total revenue increased 32%, from $32.6 million in 1999 to $43.1 million in
2000. Total direct costs increased 27%, from $22.7 million in 1999 to
$28.9 million in 2000, representing 70% and 67% of total revenue, respectively.
Our lack of profitability during 2000 was primarily due to operating losses in
our direct and wireless business units as well as due to our significant
investment in our 9-1-1 SafetyNet(SM) initiative. The net impact of the SAB 101
adjustments on 2000 revenue and direct costs was a net decrease of approximately
$233,000. We expect that operating profitability may be attainable by the fourth
quarter of 2001.
ILEC BUSINESS UNIT
ILEC revenue increased 7%, from $26.7 million in 1999 to $28.8 million in
2000 due to an increase in the number of records under management and from the
sale of enhancements to our existing customer base. The number of ILEC
subscribers under management grew to 85.8 million, an increase of 5% from
December 31, 1999. ILEC direct costs increased 12.9%, from $14.7 million in 1999
to $16.6 million in 2000, representing 55% and 58% of ILEC revenue for such
periods, respectively. Costs increased due to the hiring of additional systems
operations staff and increased systems maintenance costs to accommodate growth.
The net impact of the SAB 101 adjustments on 2000 ILEC revenue and direct costs
was not material. ILEC sales and marketing expenses increased 6% from
$1.7 million in 1999 to $1.8 million in 2000, representing 6% of ILEC revenue
for both periods, due to an increase in marketing projects in 2000. ILEC
research and development costs increased 7%, from $355,000 in 1999 to $379,000
in 2000, representing 1% of ILEC revenue for both periods, due to increased
focus by our software engineering staff on projects for the ILEC Business Unit.
We expect ILEC revenue in 2001 to grow at a rate consistent with the our
historical 2000 ILEC results. We expect ILEC operating expenses to increase at a
slower rate in 2001 than ILEC revenues as we plan to gain incremental operating
efficiencies and increase productivity.
23
CLEC BUSINESS UNIT
CLEC revenue increased 92%, from $3.8 million in 1999 to $7.3 million in
2000 due to an increase in the number of records under management for new and
existing customers and additional revenue recognized on new customers signed in
2000. As of December 31, 2000, we had 38 CLEC contracts representing
5.4 million subscribers. CLEC direct costs increased 30%, from $2.0 million in
1999 to $2.6 million in 2000, representing 53% and 36% 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 percentage decrease in costs was due mainly to
volume efficiencies gained by the growth in records managed. The net impact of
the SAB 101 adjustments on CLEC 2000 revenue and direct costs was a net decrease
of approximately $453,000. CLEC sales and marketing expenses increased 140%,
from $355,000 in 1999 to $851,000 in 2000, representing 9% and 12% 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 49%, from $167,000
in 1999 to $248,000 in 2000, representing 4% and 3% of CLEC revenue for such
periods respectively, due to the development of Local Number Portability ("LNP")
software applications.
We expect CLEC revenue to continue to increase by approximately 50% in 2001
although we do not believe our past margins are sustainable due to volume
pricing discounts. We expect CLEC costs may increase in 2001 at a faster rate
than revenues but the margins should stabilize by the end of the year.
WIRELESS BUSINESS UNIT
Wireless revenue increased 147%, from $1.7 million in 1999 to $4.2 million
in 2000, due to an increase in the number of records under management and
services provided relating to system capacity expansion to accommodate wireless
carriers. Wireless direct costs increased 10%, from $4.1 million in 1999 to
$4.5 million in 2000, 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
because the increase in subscribers managed covered more of our Wireless
infrastructure costs. The net impact of the SAB 101 adjustments on Wireless 2000
revenue and direct costs was a net increase of approximately $170,000. Wireless
sales and marketing expenses increased 114%, from $560,000 in 1999 to
$1.2 million in 2000, representing 32% and 29% 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 and increased direct
marketing campaign costs. Wireless research and development costs increased 38%
from $409,000 in 1999 to $563,000 in 2000, representing 24% and 13% of Wireless
revenue for such periods, respectively, due to the cost of improvements to our
general wireless database application in 2000.
We expect Wireless revenue to increase by over 100% in 2001 as we continue
to work through our backlog of deployment of Phase I and II. Direct costs may be
significantly greater in 2001 than the increase in revenue in the first half of
the year; however, we expect that the business unit may generate positive
operating income in the final quarter of 2001. At December 31, 2000,
approximately 12% of our subscribers under contract were live. We expect that we
will have approximately 50% of our subscribers under contract live by
December 31, 2001.
DIRECT BUSINESS UNIT
Direct revenue increased from $329,000 in 1999 to $2.9 million in 2000.
Direct revenue increased due to the transition of records in the State of Texas
beginning in 2000 and delivery of the Emergency Warning and Evacuation(SM)
(EWE(SM)) product offering. The Direct Business Unit continued to
24
successfully execute its strategic plan, increasing the subscriber base in Texas
to 6.9 million in 2000. The EWE(SM) subscriber base was 700,000 as of year-end
and 1.4 million as of February 28, 2001. Direct costs increased from
$1.9 million in 1999 to $5.1 million in 2000. Costs increased due to the opening
of our Texas office, hiring of additional personnel and development of system
infrastructure necessary to implement the State of Texas contract and to manage
records that have been transitioned. The net impact of the SAB 101 adjustments
on 2000 Direct revenue and direct costs was not material. Direct sales and
marketing expenses increased from $483,000 in 1999 to $1.4 million in 2000,
representing 147% and 48% 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(SM) product. Direct
research and development costs increased from $809,000 in 1999 to $834,000 in
2000 due to improvements in EWE(SM) application development in 2000 after the
product was launched.
We expect Direct revenue growth to slow down and we do not expect direct
costs to increase in 2001. Management is attempting to reduce direct costs and
we expect that the business unit may provide positive gross margins and
break-even operating income in the final quarter of 2001.
CORPORATE BUSINESS UNIT
Corporate general and administrative expenses increased 69%, from
$4.9 million in 1999 to $8.3 million in 2000, representing 15% and 19% of total
revenue for such periods, respectively. Corporate general and administrative
expenses increased due to the addition of corporate legal personnel and outside
legal fees to address legislative and regulatory issues, the hiring of
additional human resources and finance staff to accommodate headcount growth in
2000, including growth related to 9-1-1 SafetyNet(SM), and corporate consulting
costs. Corporate sales and marketing expenses increased 64%, from $2.2 million
in 1999 to $3.6 million in 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(SM),
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
$2.2 million in 2000 represented labor and associated travel and consulting
costs related to the network architecture of the 9-1-1 SafetyNet(SM) product
offering.
We expect our corporate general and administrative expenses and corporate
sales and marketing costs in 2001 may remain at or close to our current levels.
We also expect that our 9-1-1 SafetyNet(SM) research and development costs may
be consistent with or below our 2000 expenses. Our corporate expenses may
increase but may be a smaller percentage of revenue in 2001.
Net other income increased 17%, from $607,000 in 1999 to $712,000 in 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 $468,000 in 1999 to zero in
2000. We expect to incur losses in the near term in order to finance new
commercial products. Future taxable income may not be sufficient to realize
additional deferred tax assets that may be created by the projected net
operating losses. Consequently, our statement of operations does not reflect tax
benefits for operating losses incurred during 2000.
The loss from operations of discontinued division, net of tax, for the year
ended December 31, 1999 of $226,000 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.
25
The cumulative effect from change in accounting principle of approximately
$3.1 million in 2000 represents the change associated with adopting SAB 101
effective January 1, 2000. This change reflects the amount of income that had
been recognized under the Company's previously existing revenue recognition
methods that would have been deferred as of December 31, 1999 had the Company
been under the guidelines of SAB 101. The income deferred as a result of
adopting SAB 101 will be recognized on varying dates through 2005. During 2000,
we recognized approximately $628,000 of this amount.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
TOTAL COMPANY
Total revenue decreased 5% from $34.4 million in 1998 to $32.6 million in
1999. Total direct costs increased 12% from $20.2 million in 1998 to
$22.7 million in 1999, representing 59% and 70% of total revenue, respectively.
ILEC BUSINESS UNIT
ILEC revenue decreased 7%, from $28.8 million in 1998 to $26.7 million in
1999 due to a decrease in sales of enhancements to our existing customer base.
ILEC direct costs decreased 9% from $16.2 million in 1998 to $14.7 million in
1999, representing 56% and 55% of ILEC revenue for such periods, respectively,
due to a reduction in contract labor. ILEC sales and marketing expenses remained
constant at $1.7 in 1998 and 1999, representing 6% of ILEC revenue for both
periods. ILEC research and development costs decreased 51%, from $727,000 in
1998 to $355,000 in 1999, representing 3% and 1% of ILEC revenue for such
periods, respectively, due to increased focus by our software engineering staff
on projects for other business units.
CLEC BUSINESS UNIT
CLEC revenue increased 153%, from $1.5 million in 1998 to $3.8 million in
1999 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 1999. CLEC direct costs increased 54% from $1.3 million in
1998 to $2.0 million in 1999, representing 87% and 53% of CLEC revenue for such
periods, respectively, due to the hiring of additional CLEC operations staff to
assist with the continued growth in records under management. CLEC sales and
marketing expenses decreased 26% from $479,000 in 1998 to $355,000 in 1999,
representing 32% and 9% of CLEC revenue for such periods, respectively. The
decrease in CLEC sales and marketing expenses was due partially to the
termination of a sales person in 1999, a decrease in travel costs and a decrease
in direct marketing campaign costs. CLEC research and development costs
increased 37%, from $122,000 in 1998 to $167,000 in 1999, representing 8% and 4%
of CLEC revenue for such periods, respectively, due to the development of LNP
software applications.
WIRELESS BUSINESS UNIT
Total revenue decreased 56% from $3.9 million in 1998 to $1.7 million in
1999, due to the receipt of monthly minimum fees that expired at the end of
1998. Wireless direct costs increased 71%, from $2.4 million in 1998 to
$4.1 million in 1999. Costs increased due to the hiring of additional systems
operations staff and increased systems maintenance and telephone line costs to
accommodate growth. Wireless sales and marketing expenses increased 41%, from
$398,000 in 1998 to $560,000 in 1999, representing 10% and 32% of Wireless
revenue for such periods, respectively, due to the hiring of additional sales
personnel in 1999. Wireless research and development costs increased 7%, from
$381,000 in 1998 to $409,000 in 1999, representing 10% and 24% of Wireless
revenue for such periods,
26
respectively, due to the development of improvements to our general wireless
database application in 1999.
DIRECT BUSINESS UNIT
Direct revenue increased from $306,000 in 1998 to $329,000 in 1999 due to
completion of the State of Texas implementation. Direct costs increased from
$266,000 in 1998 to $1.9 million in 1999. Costs increased due to the opening of
our Texas office, hiring of additional personnel and development of system
infrastructure necessary to implement the State of Texas contract. Direct sales
and marketing expenses increased from $249,000 in 1998 to $483,000 in 1999,
representing 81% and 147% 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(SM) product. Direct
research and development costs increased from $146,000 in 1998 to $809,000 in
1999. Direct research and development costs increased due to the increased
development efforts for the EWE(SM) application in 1999 before the product was
launched.
CORPORATE BUSINESS UNIT
Corporate general and administrative expenses decreased 2%, from
$5.0 million in 1998 to $4.9 million in 1999, representing 15% of total revenue
for both periods. Corporate general and administrative expenses decreased due to
temporarily operating without a Chief Operating Officer and Chief Financial
Officer during a change in officers in 1999, offset partially by increased legal
fees associated with legislative and regulatory issues. Corporate sales and
marketing expenses increased 69% from $1.3 million in 1998 to $2.2 million in
1999 representing 4% and 7% in total revenue for such periods, respectively due
to national tradeshow costs and public relations charges. The increased 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.
Net other income increased from an expense of $294,000 in 1998 to income of
$607,000 in 1999. 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 increased from $379,000 in 1998 to $468,000 in
1999. Benefits were recorded in these years as we believed the increase in
deferred tax assets would be realizable in the future.
The loss from operations of discontinued division, net of tax of $226,000
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 customer 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 December 31, 2000, we had $12.0 million in cash and cash
equivalents and investments in marketable securities. We expect our operating
cash flows to be negative during the first half of 2001 but we expect them to
turn positive in the second half of 2001 due to increased subscriber counts as a
result of our wireless deployment efforts.
We borrowed approximately $1.1 million under our capital lease line secured
by capital equipment in 2000, and repaid $1.5 million and $1.9 million of
capital lease obligations during 2000 and 1999, respectively. Additionally, we
used $6.1 million and $2.0 million in 2000 and 1999, respectively, for the
purchase of capital assets and software development. This significant increase
was due to capital
27
expenditures related to our 9-1-1 SafetyNet(SM) initiative as well as due to
capital needs created by our significant increase in headcount during 2000. We
anticipate that our level of spending for capital expenditures may be slightly
less in 2001. We currently have no material commitments for capital
expenditures; however, we may purchase additional systems in an effort to attain
incremental operating efficiencies, especially in our ILEC and CLEC business
units and to incur additional costs and expenses in connection with our proposed
acquisition of Lucent Public Safety Systems.
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 assets. As of December 31, 2000, no borrowings
were outstanding under the line of credit. We are currently negotiating the
renewal of this line of credit.
We also have a $2.0 million capital lease line with a bank, which is
available to meet capital acquisition needs that arise from normal business
operations. The interest rate is equal to the bank's cost of funds at the time
of each lease. Separate lease schedules are signed from time to time. Each lease
schedule is collateralized by the assets that are being leased. Each lease has
its own termination date, typically 36 months. As of December 31, 2000, the
entire $2.0 million available under the capital lease line had been utilized.
During the year ended December 31, 2000, we incurred research, development
and marketing expenses of approximately $4.0 million on our 9-1-1 SafetyNet(SM)
initiative. We may spend up to an additional $5 million in 2001. Our primary
focus will be in our Wireless business unit. We plan to accelerate our wireless
deployments and development of our Coordinate Routing Database ("CRDB"). We may
continue the 9-1-1 SafetyNet(SM) initiative over the next several years as long
as we find the customer demand meaningful enough to make the investment
worthwhile.
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(SM) 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, which may
include public and private equity and debt financings, sales of nonstrategic
assets and other financing arrangements.
In October 2000, we entered into an 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. Delays in
closing the transaction have necessitated the renegotiation of several deal
terms. Although we have not reached agreement on these revised terms, we are
negotiating in good faith to attain that goal. However, there is a possibility
that the transaction may not be completed. If we reach an agreement to acquire
Lucent Public Safety Systems, it may not produce the revenues, earnings or
business synergies that we anticipate, especially in the near term. Regardless,
we must pay cash for the legal, accounting and other transactions costs
associated with the negotiation of the acquisition. As of December 31, 2000, we
had deferred approximately $1 million of transaction related costs on our
balance sheet. If the transaction closes, these costs will form a part of the
purchase price. If we do not complete the acquisition, these costs will be
expensed. We expect to incur additional transaction costs in 2001 in an attempt
to complete the acquisition.
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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
Instru