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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.
28
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133 AND NO. 137
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value. In
June 1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133--An amendment of FASB Statement
No. 133." SFAS No. 137 delays the effective date of SFAS No. 133 to financial
quarters and financial years beginning after June 15, 2000. We do not typically
enter into arrangements that would fall under the scope of Statement No. 133 and
thus, management believes that Statement No. 133 will not significantly affect
our financial condition and results of operations.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 140
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Asset and Extinguishments of Liabilities." SFAS
No. 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. It is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001 and is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. We
do not believe that this statement will materially impact our results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
in the areas of changes in United States interest rates. These exposures are
directly related to our normal operating and funding activities. Historically
and as of December 31, 2000, we have not used derivative instruments or engaged
in hedging activities.
INTEREST RATE RISK
The interest payable on our line of credit is variable and is determined
based on the lender's prime rate or the one, two, or three month Libor rate plus
2.25% per annum, and, therefore, is affected by changes in market interest
rates. At December 31, 2000, no amounts were outstanding under our line of
credit, however, we may borrow up to 80% of qualified accounts receivable, not
to exceed $2,000,000. Rates on our capital lease line are also dependent on
interest rates in effect at the time the lease line is drawn upon. In addition,
we invest excess funds in high-grade treasury bonds and commercial paper on
which we monitor interest rates frequently and as the investments mature. Based
on amounts invested in treasury bonds and commercial paper at December 31, 2000,
if the markets were to experience a decline in rates of 1%, we would have a
resulting decline in future earnings, fair values and cash flows of
approximately $70,000.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SCC COMMUNICATIONS CORP.
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Public Accountants.................... 31
Balance Sheets as of December 31, 2000 and 1999............. 32
Statements of Operations for the years ended December 31,
2000, 1999 and 1998....................................... 33
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 2000, 1999 and 1998.................... 35
Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998....................................... 36
Notes to Financial Statements............................... 37
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SCC Communications Corp.:
We have audited the accompanying balance sheets of SCC Communications Corp.
(a Delaware corporation) as of December 31, 2000 and 1999, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SCC Communications Corp. as
of December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
As discussed in the Summary of Significant Accounting Policies footnote to
the financial statements, in 2000 the Company changed its method of accounting
for revenue recognition.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
January 26, 2001.
31
SCC COMMUNICATIONS CORP.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,036 $ 8,354
Short-term investments in marketable securities........... 6,939 12,165
Accounts receivable, net of allowance for doubtful
accounts of approximately $184 and $58, respectively.... 7,166 2,255
Unbilled revenue.......................................... 574 846
Prepaids and other........................................ 892 548
Deferred acquisition costs................................ 1,054 --
Deferred income taxes..................................... 869 653
-------- --------
Total current assets.................................... 22,530 24,821
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Computer hardware and equipment........................... 30,259 25,411
Furniture and fixtures.................................... 1,987 933
Leasehold improvements.................................... 1,049 915
-------- --------
33,295 27,259
Less--Accumulated depreciation............................ (20,820) (15,753)
-------- --------
Total property and equipment, net....................... 12,475 11,506
OTHER ASSETS................................................ 107 86
LONG-TERM INVESTMENTS in marketable securities.............. -- 993
DEFERRED INCOME TAXES....................................... 3,206 3,423
DEFERRED COSTS.............................................. 5,363 --
SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization
of $864 and $575, respectively............................ 988 951
-------- --------
$ 44,669 $ 41,780
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,226 $ 752
Payroll-related accruals.................................. 1,144 786
Other accrued liabilities................................. 2,688 1,641
Property and other taxes.................................. 1,026 792
Current portion of capital lease obligations (Note 6)..... 2,107 1,971
Deferred revenue.......................................... 1,596 865
-------- --------
Total current liabilities............................... 9,787 6,807
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION
(Note 6).................................................. 1,511 2,038
DEFERRED REVENUE............................................ 8,674 --
-------- --------
Total liabilities....................................... 19,972 8,845
COMMITMENTS AND CONTINGENCIES (Notes 9 and 13)
STOCKHOLDERS' EQUITY (Note 5):
Preferred stock, $.001 par value; 15,000,000 shares
authorized; none issued or outstanding.................. -- --
Common stock, $.001 par value; 30,000,000 shares
authorized; 11,488,040 and 11,104,111 shares issued and
outstanding, respectively............................... 11 11
Additional paid-in capital................................ 44,814 43,925
Common stock warrants..................................... 373 (33)
Stock subscriptions receivable............................ (33) --
Accumulated deficit....................................... (20,468) (10,968)
-------- --------
Total stockholders' equity.............................. 24,697 32,935
-------- --------
$ 44,669 $ 41,780
======== ========
The accompanying notes to financial statements are an integral part of these
balance sheets.
32
SCC COMMUNICATIONS CORP.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
TOTAL REVENUE............................................... $ 43,124 $ 32,584 $ 34,449
COSTS AND EXPENSES:
Direct costs.............................................. 28,868 22,736 20,200
Sales and marketing....................................... 8,869 5,314 4,119
General and administrative................................ 8,343 4,931 4,959
Research and development.................................. 4,174 1,740 1,376
---------- ---------- ----------
Total costs and expenses................................ 50,254 34,721 30,654
========== ========== ==========
INCOME (LOSS) FROM OPERATIONS............................... (7,130) (2,137) 3,795
OTHER INCOME (EXPENSE):
Interest and other income................................. 1,147 1,095 654
Interest and other expense................................ (435) (488) (948)
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE................................... (6,418) (1,530) 3,501
BENEFIT FOR INCOME TAXES (Note 7)........................... -- 468 379
---------- ---------- ----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE...................................... (6,418) (1,062) 3,880
DISCONTINUED OPERATIONS (Note 4):
Loss from operations of discontinued division, net of tax
benefit of $100......................................... -- (226) --
---------- ---------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................. (6,418) (1,288) 3,880
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT, net of
tax benefit of $533....................................... -- -- (909)
---------- ---------- ----------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE...................................... (6,418) (1,288) 2,971
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net of
tax of $0................................................. (3,082) -- --
---------- ---------- ----------
NET INCOME (LOSS)........................................... (9,500) (1,288) 2,971
---------- ---------- ----------
Dividends accrued on Series D, E and F mandatorily,
redeemable convertible preferred stock.................. -- -- (355)
Common stock warrant put price adjustment................. -- -- (77)
---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS......... $ (9,500) $ (1,288) $ 2,539
========== ========== ==========
BASIC INCOME (LOSS) PER SHARE:
Earnings (loss) per share from continuing operations
before extraordinary item and cumulative effect of
change in accounting principle.......................... $ (0.57) $ (0.10) $ 0.53
Loss per share from discontinued operations............... -- (0.02) --
Loss per share from extraordinary item.................... -- -- (0.14)
Loss per share from change in accounting principle........ (0.27) -- --
---------- ---------- ----------
Basic earnings (loss) per share......................... $ (0.84) $ (0.12) $ 0.39
========== ========== ==========
33
SCC COMMUNICATIONS CORP.
STATEMENTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
DILUTED INCOME (LOSS) PER SHARE:
Earnings (loss) per share from continuing operations
before extraordinary item and cumulative effect of
change in accounting principle.......................... $ (0.57) $ (0.10) $ 0.38
Loss per share from discontinued operations............... -- (0.02) --
Loss per share from extraordinary item.................... -- -- (0.09)
Loss per share from change in accounting principle........ (0.27) -- --
---------- ---------- ----------
Diluted earnings (loss) per share....................... $ (0.84) $ (0.12) $ 0.29
========== ========== ==========
SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE:
Basic..................................................... 11,257,718 10,989,091 6,433,564
========== ========== ==========
Diluted................................................... 11,257,718 10,989,091 10,334,556
========== ========== ==========
PRO FORMA EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Note 2):
PRO FORMA NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE................................... $ (6,418) $ (1,139) $ 3,205
========== ========== ==========
PRO FORMA NET EARNINGS (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS.............................................. $ (9,500) $ (1,365) $ 2,296
========== ========== ==========
PRO FORMA NET EARNINGS (LOSS) PER SHARE FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE:
Basic..................................................... $ (0.57) $ (0.10) $ 0.50
========== ========== ==========
Diluted................................................... $ (0.57) $ (0.10) $ 0.31
========== ========== ==========
PRO FORMA NET EARNINGS (LOSS) PER SHARE:
Basic..................................................... $ (0.84) $ (0.12) $ 0.36
========== ========== ==========
Diluted................................................... $ (0.84) $ (0.12) $ 0.22
========== ========== ==========
The accompanying notes to financial statements are an integral part of these
statements.
34
SCC COMMUNICATIONS CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL COMMON STOCK TREASURY STOCK
--------------------- PAID-IN STOCK SUBSCRIPTIONS -------------------
SHARES AMOUNT CAPITAL WARRANTS RECEIVABLE SHARES AMOUNT
---------- -------- ---------- --------- ------------- -------- --------
BALANCES, at December 31, 1997....... 1,994,281 $ 2 $ 452 $ -- $(99) (36,250) $ (3)
Dividends accrued on Series D, E
and F Convertible Preferred
Stock............................ -- -- -- -- -- -- --
Issuance of common stock through
Initial Public Offering, net of
issuance costs of $964........... 2,415,000 2 25,985 -- -- -- --
Conversion of preferred stock into
common stock..................... 6,188,575 6 14,938 -- -- -- --
Issuance of common stock upon
exercise of warrants............. 195,148 -- 1,549 -- -- -- --
Issuance of common stock under
Employee Stock Purchase Plan..... 61,105 -- 243 -- -- -- --
Issuance of common stock upon
exercise of options.............. 68,494 -- 39 -- -- -- --
Common stock warrant put price
adjustment....................... -- -- -- -- -- -- --
Stock subscription payment
received......................... -- -- -- -- 40 -- --
Tax benefit related to
disqualifying dispositions of
common stock..................... -- -- 117 -- -- -- --
Retirement of treasury stock....... (36,250) -- (3) -- -- 36,250 3
Net income......................... -- -- -- -- -- -- --
---------- --- ------- ---- ---- ------- ----
BALANCES, at December 31, 1998....... 10,886,353 10 43,320 -- (59) -- --
Issuance of common stock under
Employee Stock Purchase Plan..... 38,679 -- 145 -- -- -- --
Issuance of common stock upon
exercise of options.............. 179,079 1 460 -- -- -- --
Stock subscription payments
received......................... -- -- -- -- 26 -- --
Net loss........................... -- -- -- -- -- -- --
---------- --- ------- ---- ---- ------- ----
BALANCES, at December 31, 1999....... 11,104,111 11 43,925 -- (33) -- --
Issuance of common stock under
Employee Stock Purchase Plan..... 54,386 -- 216 -- -- -- --
Issuance of common stock upon
exercise of options.............. 323,626 -- 625 -- -- -- --
Issuance of common stock for Board
compensation..................... 5,917 -- 37 -- -- -- --
Issuance of common stock
warrants......................... -- -- -- 373 -- -- --
Accelerated options................ -- -- 11 -- -- -- --
Net loss........................... -- -- -- -- -- -- --
---------- --- ------- ---- ---- ------- ----
BALANCES, at December 31, 2000....... 11,488,040 $11 $44,814 $373 $(33) -- $ --
========== === ======= ==== ==== ======= ====
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
------------ -------------
BALANCES, at December 31, 1997....... $(12,219) $(11,867)
Dividends accrued on Series D, E
and F Convertible Preferred
Stock............................ (355) (355)
Issuance of common stock through
Initial Public Offering, net of
issuance costs of $964........... -- 25,987
Conversion of preferred stock into
common stock..................... -- 14,944
Issuance of common stock upon
exercise of warrants............. -- 1,549
Issuance of common stock under
Employee Stock Purchase Plan..... -- 243
Issuance of common stock upon
exercise of options.............. -- 39
Common stock warrant put price
adjustment....................... (77) (77)
Stock subscription payment
received......................... -- 40
Tax benefit related to
disqualifying dispositions of
common stock..................... -- 117
Retirement of treasury stock....... -- --
Net income......................... 2,971 2,971
-------- --------
BALANCES, at December 31, 1998....... (9,680) 33,591
Issuance of common stock under
Employee Stock Purchase Plan..... -- 145
Issuance of common stock upon
exercise of options.............. -- 461
Stock subscription payments
received......................... -- 26
Net loss........................... (1,288) (1,288)
-------- --------
BALANCES, at December 31, 1999....... (10,968) 32,935
Issuance of common stock under
Employee Stock Purchase Plan..... -- 216
Issuance of common stock upon
exercise of options.............. -- 625
Issuance of common stock for Board
compensation..................... -- 37
Issuance of common stock
warrants......................... -- 373
Accelerated options................ -- 11
Net loss........................... (9,500) (9,500)
-------- --------
BALANCES, at December 31, 2000....... $(20,468) $ 24,697
======== ========
The accompanying notes to financial statements are an integral part of these
statements.
35
SCC COMMUNICATIONS CORP.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (9,500) $ (1,288) $ 2,971
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Amortization and depreciation........................... 5,408 5,117 4,315
Stock-based compensation expense........................ 373 -- --
Cumulative effect of change in accounting principle..... 3,082 -- --
Amortization and write-off of note payable discount..... -- -- 1,430
Accretion of investments in marketable securities....... (267) (284) (316)
Loss on disposal of assets.............................. 20 53 --
Provision for estimated losses on contracts............. -- -- 7
Provision for doubtful accounts......................... 126 8 --
Deferred income tax benefit............................. -- (547) (912)
Change in--
Accounts receivable................................... (5,037) 2,557 (2,492)
Unbilled revenue...................................... 272 189 (39)
Prepaids and other.................................... (364) (38) (286)
Deferred costs........................................ (5,363) -- --
Accrued liabilities................................... 2,113 (462) 396
Deferred revenue...................................... 6,323 (1,043) (705)
-------- -------- --------
Net cash provided by (used in) operating
activities.......................................... (2,814) 4,262 4,369
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (6,097) (1,961) (2,995)
Purchase of investments in marketable securities.......... (10,764) (14,559) (14,446)
Sale of investments in marketable securities.............. 17,250 11,500 4,947
Deferred acquisition costs................................ (1,054) -- --
Software development costs................................ (327) (497) (397)
-------- -------- --------
Net cash used in investing activities................... (992) (5,517) (12,891)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable....................... -- -- (4,986)
Principal payments on capital lease obligations........... (1,522) (1,870) (5,038)
Proceeds from equipment financing......................... 1,121 581 --
Proceeds from exercise of stock options................... 673 461 39
Stock subscription payments received...................... -- 26 40
Proceeds from issuance of common stock through employee
stock purchase plan..................................... 216 145 243
Proceeds from initial public offering and overallotment,
net of underwriters' discount........................... -- -- 26,951
Costs related to initial public offering.................. -- -- (964)
-------- -------- --------
Net cash provided by (used in) financing activities..... 488 (657) 16,285
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (3,318) (1,912) 7,763
CASH AND CASH EQUIVALENTS, beginning of period.............. 8,354 10,266 2,503
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 5,036 $ 8,354 $ 10,266
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 370 $ 439 $ 801
======== ======== ========
Cash paid during the period for taxes..................... $ 289 $ 459 $ 95
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING
ACTIVITIES:
Property acquired with capital leases..................... $ 11 $ 889 $ 3,488
======== ======== ========
Issuance of warrants...................................... $ 373 $ -- $ --
======== ======== ========
The accompanying notes to financial statements are an integral part of these
statements.
36
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
(1) ORGANIZATION, BUSINESS AND LIQUIDITY
SCC Communications Corp. (the "Company") is a Delaware corporation. The
Company is the leading provider of 9-1-1 operations support system services to
incumbent local exchange carriers ("ILECs"), competitive local exchange carriers
("CLECs"), wireless carriers and state and local governments in the United
States. The Company manages the data which enables 9-1-1 calls to be routed to
the appropriate public safety agency with accurate and timely information about
the caller's identification and location. In addition, the Company licenses its
9-1-1 software to carriers that wish to manage the delivery of 9-1-1 data
management services in-house.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
highly liquid investments with original maturities of 90 days or less.
INVESTMENTS IN MARKETABLE SECURITIES
The Company's investments in corporate debt securities are classified as
held-to-maturity and stated at cost, adjusted for amortization of premiums and
accretion of discounts. The investments had the following values at
December 31, 2000 and 1999, respectively:
AMORTIZED/ ACCRUED GROSS UNREALIZED GROSS UNREALIZED
ACCRETED COST INTEREST HOLDING GAINS HOLDING LOSSES FAIR VALUE
------------- ------------ ---------------- ---------------- -----------
Corporate Debt
Securities, maturing
within one year....... $12,165,000 $ -- $ -- $(10,000) $12,155,000
Corporate Debt
Securities, maturing
after one year through
five years............ 993,000 -- -- (2,000) 991,000
----------- ------- ------ -------- -----------
Balances at December 31,
1999.................. $13,158,000 $ -- $ -- $(12,000) $13,146,000
=========== ======= ====== ======== ===========
Corporate Debt
Securities, maturing
within one year....... $ 6,939,000 $ -- $5,000 $ -- $ 6,944,000
Corporate Debt
Securities, maturing
after one year through
five years............ -- -- -- -- --
----------- ------- ------ -------- -----------
Balances at December 31,
2000.................. $ 6,939,000 $ -- $5,000 $ -- $ 6,944,000
=========== ======= ====== ======== ===========
37
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is computed using the straight-line
method over estimated useful lives of three to five years for computer hardware
and equipment, seven years for furniture and fixtures and the lesser of the
asset life or the life of the lease for leasehold improvements. The costs of
repairs and maintenance are expensed while enhancements to existing assets are
capitalized. Depreciation expense totaled approximately $5,118,000, $4,888,000
and $4,174,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs represent direct third party costs incurred with
the attempted acquisition of Lucent Public Safety Systems. If the Company is
successful, these costs will be included as a cost of the acquisition. If the
transaction is not completed, these costs will be expensed in the period that
the Company abandons the transaction.
SOFTWARE DEVELOPMENT COSTS
The Company expenses the costs of developing computer software until
technological feasibility is established and capitalizes all costs incurred from
that time until the software is available for general customer release.
Technological feasibility for the Company's computer software products is based
upon the earlier of the achievement of (a) a detailed program design free of
high-risk development issues or (b) completion of a working model. Costs of
major enhancements to existing products with a wide market are capitalized while
routine maintenance of existing products is charged to expense as incurred. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of capitalized computer software development costs requires
considerable judgment by management with respect to certain external factors,
including, but not limited to, technological feasibility, anticipated future
gross revenue, estimated economic life and changes in software and hardware
technology.
Capitalized software costs are amortized on a product-by-product basis. The
annual amortization is the greater of the amount computed using (a) the ratio
that current gross revenue for a product compares to the total of current and
anticipated future gross revenue for that product, or (b) the straight-line
method over the remaining estimated economic life of the product which is
typically five years. Amortization expense related to capitalized software costs
totaled approximately $290,000, $229,000 and $145,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
REVENUE AND COST RECOGNITION
The Company generates revenue from four of its segments, or "business
units": ILEC, CLEC, Wireless and Direct. The revenue from these business units
is derived from two sources: up-front non-recurring engineering ("NRE") services
and monthly data management services. Prior to 1998 the Company also generated
revenue from software license agreements.
The NRE service consists primarily of the clean up of the customer's 9-1-1
data records, engineering services to enable the customer's legacy system to
interface with SCC's platform, building the network that will route the calls,
public safety boundary mapping, customer training and testing.
38
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, the Company receives a monthly service
fee for providing ongoing data management services that 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.
The fees received from software license agreements have been deferred and
are recognized as revenue ratably over the contractual term of the arrangements.
The Company defers incremental costs incurred in providing the NRE and
Enhancement Services for which the revenues are deferred. The deferred costs are
recognized ratably over the remaining contractual term of the arrangement. All
other costs associated with generating revenue are recognized in the period
incurred.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101
provides interpretive guidance on the recognition, presentation and disclosure
of revenue in financial statements. The Company concluded that the current
revenue recognition policies had to change to be in accordance with SAB 101.
Specifically, the guidance provided by SAB 101 requires the Company to defer the
up-front NRE fee, certain enhancement fees and related incremental costs and
recognize them over the life of each contract. Prior to the adoption of SAB 101,
the Company recognized revenue from the NRE Services and Enhancement Services on
the percentage of completion method over the period in which the services were
performed. The Company adopted SAB 101 during the quarter ending December 31,
2000. The adoption of SAB 101 required the Company to reflect a cumulative
effect of change in accounting principles of $3.1 million as if SAB 101 had been
implemented on January 1, 2000 and to restate all of the previously reported
2000 quarterly results.
The cumulative effect of change in accounting principle reflects the amount
of income that had been recognized under the Company's previously existing
revenue recognition methods that would have been deferred as of December 31,
1999 had the Company been under the guidelines of SAB 101. The pro forma effect
of change in accounting principle is presented in the Statement of Operations to
present the income from operations as if the SAB 101 had been applied during all
periods presented.
39
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table illustrates what periods the Company originally
recognized the revenue and incremental costs which have, as a result of SAB 101,
been deferred and included in the cumulative effect of change in accounting
principle.
1994 1995 1996 1997 1998 1999 TOTAL
-------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenue................................ $170 $1,091 $2,269 $1,892 $1,618 $507 $7,547
Direct Costs........................... 170 721 1,080 1,121 943 430 4,465
---- ------ ------ ------ ------ ---- ------
Cumulative Effect...................... $ -- $ 370 $1,189 $ 771 $ 675 $ 77 $3,082
==== ====== ====== ====== ====== ==== ======
The restatement of the previously reported 2000 quarterly results reflects
the net difference of fees received and incremental costs incurred that were
deferred from previous periods and recognized in the current quarter and the
fees received and incremental costs incurred in the current quarter that are
deferred into future periods. The table below illustrates the restatement of
previously filed unaudited quarterly information.
FOR THE THREE MONTHS ENDED,
------------------------------------------------------------------------------------------------------
MARCH 31, 2000 JUNE 30, 2000 SEPTEMBER 30, 2000
-------------------------------- -------------------------------- --------------------------------
AS SAB 101 AS SAB 101 AS SAB 101
REPORTED ADJUSTMENT RESTATED REPORTED ADJUSTMENT RESTATED REPORTED ADJUSTMENT RESTATED
-------- ---------- -------- -------- ---------- -------- -------- ---------- --------
(AMOUNTS IN THOUSANDS)
Revenue............... $9,325 $ (292) $ 9,033 $10,556 $ (307) $10,249 $11,775 $ (248) $11,527
Direct Costs.......... 6,427 (142) 6,285 7,275 (289) 6,986 7,657 (271) 7,386
Net income before
cumulative effect of
change in accounting
principle........... (415) (150) (565) (1,742) (18) (1,760) (1,321) 23 (1,298)
Cumulative effect of
change in accounting
principle........... -- (3,082) (3,082) -- -- -- -- -- --
Net income............ $ (415) $(3,232) $(3,647) $(1,742) $ (18) $(1,760) $(1,321) $ 23 $(1,298)
Income (loss) per
share (basic and
diluted) $(0.04) $ (0.29) $ (0.33) $ (0.16) $(0.00) $ (0.16) $ (0.12) $(0.00) $ (0.12)
As of December 31, 2000, the Company has deferred revenue of $10,270,000 and
deferred costs of $5,363,000. A portion of these amounts relates to contracts
for which the start of the contract period has not yet been established. As a
result, the exact periods for which these amounts will be recognized is not yet
known. The amount of deferred revenue, net of deferred costs, relating to these
contracts is
40
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
approximately $1,845,000. These amounts will be fully recognized by
December 31, 2005. The remaining deferred revenue, net of deferred costs will be
recognized as follows:
2001............................................... $ 913,000
2002............................................... 738,000
2003............................................... 657,000
2004............................................... 500,000
2005............................................... 254,000
----------
Total............................................ $3,062,000
==========
RESEARCH AND DEVELOPMENT
Research and development efforts consist of salaries, supplies and other
related costs. These costs are expensed as incurred and totaled approximately
$4,174,000, $1,740,000 and $1,376,000 for the years ended December 31, 2000,
1999 and 1998, respectively. These costs are included in the accompanying
statements of operations.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. The Company had
advertising expenses of $68,000, $27,000 and $57,000 for the years ending 2000,
1999 and 1998, respectively.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109
("SFAS 109"), which requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted
tax laws, of temporary differences between the financial reporting and tax basis
of assets and liabilities. SFAS 109 also requires recognition of deferred tax
assets for the expected future tax effects of loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, on a more likely
than not basis, are not expected to be realized.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents, accounts
receivable and investments in high-grade treasury bonds and commercial paper.
The Company maintains its cash balances in the form of bank demand deposits,
money market accounts, treasury bonds and commercial paper with original
maturities of less than ninety days. The Company's deposits and investments are
with financial institutions that management believes are creditworthy and
investments that are high-grade. The Company's accounts receivable are from
customers that are generally telecommunications service providers; accordingly,
the Company's accounts receivable are concentrated in the telecommunications
industry. The Company's principal customers (Note 12) accounted for 50% and 71%
of the Company's accounts receivable as of December 31, 2000 and 1999,
respectively. The Company has no significant financial instruments with
41
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
off-balance sheet risk of accounting loss, such as foreign exchange contracts,
option contracts or other foreign currency hedging arrangements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions. These estimates affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash and cash equivalents, corporate debt
securities, accounts receivable and debt obligations. The carrying amounts for
cash and cash equivalents and accounts receivable approximate fair market value
because of the short maturity of these instruments. The fair value of notes are
estimated based on current rates available for debt with similar maturities and
securities, and at December 31, 2000 and 1999, approximates the carrying value.
STOCK BASED COMPENSATION PLANS
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB Opinion No. 25") in accounting for its stock option and other
stock-based compensation plans for employees and directors. The Company has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," for such
options and stock-based plans for employees and directors.
The Company accounts for equity instruments issued to non-employees in
accordance with Statement of Financial Accounting Standards No. 123 and Emerging
Issues Task Force No. 96-18, "Accounting for equity instruments that are issued
to other than employees for acquiring, or in conjunction with selling goods and
services."
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable from future undiscounted cash flows. Impairment losses are
recorded for the excess, if any, of the carrying value over the fair value of
the long-lived assets.
COMPREHENSIVE INCOME
Comprehensive income (loss) includes all changes in equity (net assets)
during a period from nonowner sources. Since inception, comprehensive income
(loss) has been the same as net income (loss).
42
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
The Company presents basic and diluted earnings or loss per share in
accordance with Statement of Financial Accounting Standards No. 128 "Earnings
Per Share" ("SFAS 128"), which establishes standards for computing and
presenting basic and diluted earnings per share. Under this statement, basic
earnings (loss) per share is determined by dividing net income (loss) available
to common stockholders by the weighted average number of common shares
outstanding during each period. Diluted income (loss) per share includes the
effects of potentially issuable common stock, but only if dilutive (i.e., a loss
per share is never reduced). The treasury stock method, using the average price
of the Company's common stock for the period, is applied to determine dilution
from options and warrants. The as if-converted method is used for convertible
securities. Potentially dilutive common stock options that were excluded from
the calculation of diluted income per share because their effect is antidilutive
totaled 858,984, 1,085,747 and 51,000 in 2000, 1999 and 1998, respectively.
A reconciliation of the numerators and denominators used in computing per
share net earnings (loss) from continuing operations is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Numerator:
Net earnings (loss) from continuing operations
before extraordinary item and change in accounting
principle......................................... $(6,418,000) $(1,062,000) $ 3,880,000
Dividends on convertible preferred stock............ -- -- (355,000)
Common stock warrant put price adjustment........... -- -- (77,000)
----------- ----------- -----------
Numerator for basic earnings (loss) per share from
continuing operations before extraordinary
item............................................ $(6,418,000) $(1,062,000) $ 3,448,000
=========== =========== ===========
Denominator for basic earnings (loss) per share:
Weighted-average common shares outstanding.......... 11,257,718 10,989,091 6,433,564
=========== =========== ===========
Denominator for diluted earnings (loss) per share:
Convertible preferred stock......................... -- -- 3,051,900
Weighted-average common shares outstanding.......... 11,257,718 10,989,091 6,433,564
Options issued to employees......................... -- -- 752,863
Putable common stock warrant........................ -- -- 96,229
----------- ----------- -----------
Denominator for diluted earnings (loss) per
share........................................... 11,257,718 10,989,091 10,334,556
=========== =========== ===========
(3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 and No. 137
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. It requires an
entity to
43
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
recognize all derivatives as either assets or liabilities in the statement of
financial position and measures those instruments at fair value. In June 1999,
the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133--An amendment of FASB Statement No. 133."
SFAS No. 137 delays the effective date of SFAS No. 133 to financial quarters and
financial years beginning after June 15, 2000. The Company does not typically
enter into arrangements that would fall under the scope of Statement No. 133 and
thus, management believes that Statement No. 133 will not significantly affect
the Company's financial condition and results of operations.
Statement of Financial Accounting Standards No. 140
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Asset and Extinguishments of Liabilities." SFAS
No. 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. It is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001 and is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
Company does not believe that this statement will materially impact its results
of operations.
(4) DISCONTINUED OPERATIONS
On June 30, 1997, the Company sold the net assets of its Premise Products
Division. The sale resulted in a net loss of $2,032,000. Net losses from
operations of this division totaled $226,000 in 1999 resulting from final
closeout of unassigned contracts and the transition of customers to the company
that acquired this division.
(5) STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK AND PREFERRED STOCK
The Company is authorized to issue up to 30,000,000 shares of common stock
and 15,000,000 shares of undesignated preferred stock. In 1998 the Company
retired 36,250 shares of treasury stock with a carrying value of $3,000.
In June 1998, the Company completed its initial public offering. In this
offering the Company issued 2,415,000 shares of its common stock and received
proceeds of approximately $25,897,000, net of issuance costs of approximately
$964,000.
44
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(5) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
MANDATORILY REDEEMABLE, CONVERTIBLE PREFERRED STOCK
In connection with the Company's initial public offering in June 1998, the
Company's mandatorily redeemable convertible preferred stock was converted on a
one-for-one basis to common stock. Activity for 1998, 1999 and 2000 is as
follows:
SHARES ISSUED AND OUTSTANDING
--------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F TOTAL
---------- ---------- --------- --------- ---------- ---------- ----------
BALANCES, at December 31, 1997.... 1,515,152 1,010,101 442,328 912,123 1,083,381 1,225,490 6,188,575
---------- ---------- -------- -------- ---------- ---------- ----------
Conversion of preferred stock to
common stock.................. (1,515,152) (1,010,101) (442,328) (912,123) (1,083,381) (1,225,490) (6,188,575)
---------- ---------- -------- -------- ---------- ---------- ----------
BALANCES, at December 31, 1998,
1999 and 2000................... -- -- -- -- -- -- --
========== ========== ======== ======== ========== ========== ==========
The activity related to the liquidation or redemption value of Series A
through Series F Convertible Preferred Stock for the periods ended December 31,
1998, 1999 and 2000 is as follows:
LIQUIDATION OR REDEMPTION VALUE
----------------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F TOTAL
----------- ----------- --------- ----------- ----------- ----------- ------------
BALANCES, at
December 31, 1997...... $ 1,500,000 $ 1,000,000 $ 730,000 $ 2,371,000 $ 3,255,000 $ 5,733,000 $ 14,589,000
Dividends accrued on
Series D, E and F
Convertible Preferred
Stock................ -- -- -- 62,000 101,000 192,000 355,000
Conversion of
Series A-F
Convertible Preferred
Stock to Common
Stock................ (1,500,000) (1,000,000) (730,000) (2,433,000) (3,356,000) (5,925,000) (14,944,000)
----------- ----------- --------- ----------- ----------- ----------- ------------
BALANCES, at December 31,
1998, 1999 and 2000.... $ -- $ -- $ -- $ -- $ -- $ -- $ --
=========== =========== ========= =========== =========== =========== ============
Until the mandatorily redeemable, convertible preferred stock was converted,
dividends of 8% per year were accrued that would be due upon liquidation or
redemption.
STOCK SUBSCRIPTIONS RECEIVABLE
In September 1997, in connection with the sale of the Company's Premise
Products Division, several former employees of the Company signed full recourse
promissory notes to the Company to exercise their vested stock options. The
notes accrue interest at 6.07% per annum although no accrual had been recorded
as of December 31, 2000. The Company extended the due date on the notes to
March 20, 1999 and is pursuing collection of the note that remains unpaid.
45
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(5) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
WARRANTS
During the second quarter of 2000, the Company issued a warrant to purchase
100,000 shares of the Company's common stock to an investor relations consulting
firm for services to be provided over one year. Management estimated the fair
value of the warrant to be $273,000 using the Black-Scholes option pricing
model. The fair value of the warrant was recorded as a prepaid expense and is
being amortized as general and administrative expense over the one-year service
period on a straight-line basis. The warrant has an exercise price of $6.031 per
share and expires in April 2002.
The Company issued another warrant during the second quarter of 2000 to
purchase 36,590 shares of the Company's common stock to a marketing firm.
Management estimated the fair value of the warrant to be $100,000 using the
Black-Scholes option model. The fair value of the warrant was expensed as
marketing costs as services were provided during the three months ended
September 30, 2000. The warrant has an exercise price of $6.031 per share and
expires in April 2002.
The Company computed the fair value of these warrants using the
Black-Scholes option pricing model and the following weighted average
assumptions:
2000
--------
Risk-free interest rate..................................... 6.00%
Expected dividend yield..................................... 0.00%
Expected lives outstanding.................................. 2 years
Expected volatility......................................... 78.00%
DIRECTOR COMPENSATION
The Company reimburses its directors for all reasonable and necessary travel
and other incidental expenses incurred in connection with their attendance at
meetings of the board and committees of the board. In addition, all board
members are eligible for compensation equal to $1,000 for each board meeting
attended in person and $500 for each telephonic board meeting. Such compensation
is payable in cash or stock at the director's discretion. Board members may be
paid additional amounts for consulting services that extend beyond their normal
board duties, although no such payments were made to date. During 2000, the
Company issued 5,917 shares of common stock for board compensation totaling
approximately $37,000.
ACCELERATED OPTIONS
During 2000, the Company entered into a severance agreement with an
employee. As part of this agreement, the Company accelerated the vesting of some
of the employee's stock options and charged $11,000 to additional paid-in
capital for this transaction. The employee did not exercise the options and the
options expired in December 2000.
STOCK OPTION PLAN
The Company adopted the 1998 Stock Incentive Plan ("1998 Plan") effective
June 23, 1998, which is a successor to the Company's 1990 Option Plan. As of
December 31, 2000, a total of 4,010,330
46
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(5) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
shares have been authorized for issuance under the 1998 Plan, including shares
authorized under the 1990 Option Plan. The shares reserved for issuance will
increase automatically on the first trading day of each calendar year, beginning
with the 1999 calendar year, by 3% of the number of shares of common stock
outstanding on the last trading day of the immediately preceding calendar year.
The share reserve was increased by 333,123 and 325,590 shares under this
provision in 2000 and 1999 respectively. The 1998 Plan allows for issuances of
options to officers, non-employee Board members and consultants.
EMPLOYEE STOCK PURCHASE PLAN
On March 18, 1998, the Company adopted an employee stock purchase plan
("ESPP") under which eligible employees may contribute up to 10% of their
salaries through payroll deductions to purchase shares of the Company's common
stock. The first offering period of the ESPP began March 1, 1998 and ended on
December 31, 1998. Thereafter, offering periods will be successive six month
periods. At the end of each offering period, amounts contributed by employees
will be used to purchase shares of the Company's common stock at a price equal
to 85% of the lower of the closing price of the common stock on the first day or
last day of the offering period. The Company's board of directors has authorized
the issuance of up to 200,000 shares under the ESPP and may terminate the ESPP
at any time. At March 1 of each year, the shares available under the ESPP will
be restored to 200,000, although the Company's board of directors may elect to
restore a lesser number of shares. The Company issued 54,386, 38,679 and 61,105
shares under the ESPP in 2000, 1999 and 1998, respectively.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
cost for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, provided that pro forma disclosures are made of net income or
loss assuming the fair value based method of SFAS 123 had been applied. The
Company has elected to account for its stock-based compensation plans under APB
25; accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair values of all options granted under the 1998 Plan
during 2000, 1999 and 1998, using the Black-Scholes option pricing model and the
following weighted average assumptions:
2000 1999 1998
--------- --------- ---------
Risk-free interest rate...................... 6.07% 5.40% 4.71%
Expected dividend yield...................... 0.00% 0.00% 0.00%
Expected lives outstanding................... 4.2 years 4.8 years 4.4 years
Expected volatility.......................... 107.900% 78.614% 66.004%
To estimate lives of options for this valuation, it was assumed options will
be exercised upon becoming fully vested and all options will eventually become
fully vested. Cumulative compensation costs recognized in pro forma net income
or loss with respect to options that are forfeited prior to vesting is adjusted
as a reduction of pro forma compensation expense in the period of forfeiture.
The
47
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(5) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
expected volatility refers to the volatility of the Company's common stock over
the expected life of a given option. In 1998 and 1999, the Company's common
stock was not yet traded for an extended period of time, thus the expected
market volatility was based on the stock prices of companies whose operations
are similar to the Company's. In 2000, the Company used the actual volatility of
its common stock over a one year period to estimate the volatility of options
issued. Actual volatility of the Company's common stock may vary. Fair value
computations are highly sensitive to the volatility factor assumed; the greater
the volatility, the higher the computed fair value of options granted.
The total fair value of options granted under the 1998 Option Plan was
computed to be approximately $6,769,000, $2,630,000 and $1,406,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. These amounts are
amortized ratably over the vesting periods of the options or recognized at date
of grant if no vesting period is required. Pro forma stock-based compensation,
net of the effect of forfeitures, was $1,271,000, $496,000 and $417,000 for
2000, 1999 and 1998, respectively.
The following table summarizes information about the options outstanding at
December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/00 LIFE PRICE AT 12/31/00 PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
$0.30-3.00.............................. 296,081 3.83 years $1.73 296,081 $1.73
$3.63-4.50.............................. 118,256 8.13 years 3.85 54,946 3.78
$4.94-4.94.............................. 234,612 8.58 years 4.94 79,043 4.94
$5.00-6.06.............................. 186,795 9.18 years 5.79 12,961 5.39
$6.13-6.13.............................. 298,500 9.05 years 6.13 46,440 6.13
$6.28-6.63.............................. 83,000 9.55 years 6.42 160 6.50
$6.75-6.75.............................. 785,145 9.78 years 6.75 -- --
$7.50-10.25............................. 172,749 8.07 years 7.90 68,029 7.66
$12.00-12.00............................ 7,431 7.08 years 12.00 5,531 12.00
$12.75-12.75............................ 8,165 7.32 years 12.75 5,151 12.75
--------- ---------- ----- ------- -----
2,190,734 8.45 years $5.67 568,342 $3.73
========= ========== ===== ======= =====
48
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(5) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
A summary of stock options under the 1998 Plan as of December 31, 2000, 1999
and 1998 and changes during the years then ended are presented below:
2000 1999 1998
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding at beginning of
year........................... 1,655,864 $4.15 1,339,880 $3.62 1,106,610 $3.03
Granted........................ 1,338,306 6.64 740,364 5.15 379,211 5.81
Exercised...................... (323,626) 1.92 (179,079) 2.56 (68,494) 0.54
Canceled....................... (479,810) 5.65 (245,301) 5.43 (77,447) 8.64
--------- --------- ---------
Outstanding at end of year....... 2,190,734 $5.67 1,655,864 $4.15 1,339,880 $3.62
========= ===== ========= ===== ========= =====
Weighted average fair value of
options granted................ $ 5.06 $ 3.38 $ 3.19
========= ========= =========
If the Company had accounted for its stock-based compensation plan in
accordance with SFAS 123, the Company's net income (loss) from continuing
operations would have been reported as follows:
2000 1999 1998
----------- ----------- ----------
Net income (loss) from continuing
operations before extraordinary item
and change in accounting principle:
As reported........................... $(6,418,000) $(1,062,000) $3,880,000
Pro forma............................. $(7,689,000) $(1,373,000) $3,619,000
Basic net income (loss) per share from
continuing operations before
extraordinary item and change in
accounting principle:
As reported........................... $ (0.57) $ (0.10) $ 0.53
Pro forma............................. $ (0.68) $ (0.12) $ 0.50
Diluted net income (loss) per share from
continuing operations before
extraordinary item and change in
accounting principle:
As reported........................... $ (0.57) $ (0.10) $ 0.38
Pro forma............................. $ (0.68) $ (0.12) $ 0.35
49
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(6) CAPITALIZED LEASE OBLIGATIONS
At December 31, 2000 and 1999, capital lease obligations consisted of the
following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Capitalized lease obligations for equipment due on various
dates through November 1, 2003, minimum monthly payments
in varying amounts, currently approximately $235,000
including imputed interest ranging from 7.75% to 9.50% per
annum, collateralized by the related assets with a net
book value of $3,646,000 and $3,838,000, respectively..... $3,618,000 $4,009,000
The Company prepaid its $4,000,000 note payable to Banc One Capital Partners
II, LLC on June 30, 1998 and incurred a prepayment premium equal to 4% of the
amount, totaling $160,000. In addition, the Company wrote-off the remaining debt
discount related to the note payable of $1,282,000. The prepayment penalty and
write-off of the debt discount totaling $1,442,000 were recorded as an
extraordinary item, net of the related income tax benefit of $533,000.
Maturities of capital lease obligations as of December 31, 2000, are as
follows:
2001........................................................ $ 2,338,000
2002........................................................ 1,242,000
2003........................................................ 359,000
-----------
Total minimum lease payments.............................. 3,939,000
Less--Amount related to interest............................ (321,000)
-----------
Principal portion of future obligations..................... 3,618,000
Less--Current portion....................................... (2,107,000)
-----------
$ 1,511,000
===========
(7) INCOME TAXES
The Company has operated in three countries, the United States, Canada and
Australia. For income tax return reporting purposes, the Company has
approximately $16,923,000 of net operating loss carryforwards and approximately
$801,000 of tax credit carryforwards available to offset future federal taxable
income or federal tax liabilities in the United States. The research and
development credit and net operating loss carryforwards expire at various dates
through 2020.
50
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(7) INCOME TAXES (CONTINUED)
Deferred income tax assets and liabilities at December 31, 2000 and 1999,
were as follows:
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
Current--
Accrued liabilities and other............................. $ 844,000 $ 640,000
Deferred revenue.......................................... 26,000 70,000
Less--Valuation allowance................................. -- (57,000)
----------- -----------
870,000 653,000
----------- -----------
Noncurrent--
Depreciation differences.................................. (943,000) (1,057,000)
Net operating loss carryforwards.......................... 6,261,000 4,150,000
Tax credit carryforwards.................................. 801,000 723,000
Deferred revenue.......................................... 1,135,000 --
Less--Valuation allowance................................. (4,048,000) (393,000)
----------- -----------
3,206,000 3,423,000
----------- -----------
$ 4,076,000 $ 4,076,000
=========== ===========
During the year ended December 31, 2000, the Company did not record an
income tax benefit for any currently generated net operating loss carryforwards
or net increases in deferred tax assets as the Company believes the criteria for
recognition was not met. This was affected by increasing the valuation allowance
to completely offset the increase in the Company's net deferred tax assets. As
of December 31, 1999 and 1998, the Company believed it was more likely than not
that its net deferred tax assets at those dates would be realized. During the
year ended December 31, 1998, the Company reversed $1,689,000 of the deferred
tax asset valuation allowance as the Company believed the criteria for
recognition of its net deferred tax assets had been met. However, the Company
continued to record a valuation allowance of $393,000 as of December 31, 1999
related to certain foreign tax credits the Company did not feel were realizable.
The components of the benefit for income taxes attributable to income from
operations as of December 31, 2000, 1999 and 1998, were as follows:
DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
Current provision........................... $ -- $ -- $ --
Deferred benefit, federal and state......... -- (468,000) (912,000)
--------- --------- ---------
Income tax benefit.......................... $ -- $(468,000) $(912,000)
========= ========= =========
51
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(7) INCOME TAXES (CONTINUED)
The components of the provision (benefit) for income taxes attributable to
income from discontinued operations as of December 31, 2000, 1999 and 1998, were
as follows:
DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
Deferred benefit--
Federal................................... $ -- $(100,000) $ --
========= ========= =========
A reconciliation of income tax benefit computed by applying the federal
income tax rate of 34% to income from continuing operations before income taxes
as of December 31, 2000, 1999 and 1998, is as follows:
DECEMBER 31,
-------------------------------------
2000 1999 1998
----------- --------- -----------
Computed normal tax (benefit)
provision.............................. $(3,230,000) $(631,000) $ 700,000
Tax effect of permanent differences and
other.................................. (83,000) 124,000 9,000
State tax, net of federal tax impact..... (285,000) (61,000) 68,000
Change in valuation allowance
attributable to
continuing operations.................. 3,598,000 -- (1,689,000)
----------- --------- -----------
Income tax benefit....................... $ -- $(568,000) $ (912,000)
=========== ========= ===========
The benefit for income taxes is attributable to continuing operations and
discontinued operations in 2000, 1999 and 1998 is as follows.
DECEMBER 31,
-----------------------------------
2000 1999 1998
--------- --------- -----------
Provision (benefit) attributable to continuing
operations.............................................. $ -- $(468,000) $ 777,000
Change in valuation allowance attributable to continuing
operations.............................................. -- -- (1,689,000)
--------- --------- -----------
Net benefit attributable to continuing operations......... -- (468,000) (912,000)
--------- --------- -----------
Benefit attributable to discontinued operations........... -- (100,000) --
Change in valuation allowance attributable to discontinued
operations.............................................. -- -- --
--------- --------- -----------
Net provision attributable to discontinued operations..... -- (100,000) --
--------- --------- -----------
Total income tax benefit................................ $ -- $(568,000) $ (912,000)
========= ========= ===========
52
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(8) REPORTABLE SEGMENTS
The Company has five reportable segments, or "business units": ILEC, CLEC,
Wireless, Direct, and Corporate. The Company measures its reportable business
units based on revenue and costs directly related to each business unit.
Substantially all of the Company's customers are in the United States. The
Company's business units are segmented based on the type of customer each
business unit serves. The ILEC, CLEC and Wireless Business Units address ILEC,
CLEC and wireless carriers, respectively. The Direct Business Unit addresses
sales, either directly or indirectly, to state and local government entities.
The Corporate Business Unit captures costs that are not directly related to a
specific business unit. These segments are managed separately because the nature
of and resources used for each segment is unique.
Revenue and costs are segregated in the Statement of Operations for the
reportable segments. The Company does not segregate assets between the segments
as it is impractical to do so.
FOR THE YEAR ENDED DECEMBER 31, 2000:
ILEC CLEC WIRELESS DIRECT CORPORATE TOTAL
-------- -------- --------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
Revenue........................... $28,757 $7,280 $ 4,172 $ 2,915 $ -- $43,124
Direct costs...................... 16,607 2,620 4,525 5,116 -- 28,868
Sales and marketing............... 1,830 851 1,153 1,406 3,629 8,869
General and administrative........ -- -- -- -- 8,343 8,343
Research and development.......... 379 248 563 834 2,150 4,174
------- ------ ------- ------- -------- -------
Total........................... 18,816 3,719 6,241 7,356 14,122 50,254
Operating income (loss)........... 9,941 3,561 (2,069) (4,441) (14,122) (7,130)
Other income, net................. -- -- -- -- 712 712
------- ------ ------- ------- -------- -------
Income (loss) before income
taxes........................... 9,941 3,561 (2,069) (4,441) (13,410) (6,418)
Income taxes...................... -- -- -- -- -- --
Net income (loss) from operations
before cumulative effect of
change in accounting
principle....................... 9,941 3,561 (2,069) (4,441) (13,410) (6,418)
------- ------ ------- ------- -------- -------
Cumulative effect of change in
accounting principle............ (1,663) (413) (887) (119) -- (3,082)
------- ------ ------- ------- -------- -------
Net income (loss)................. $ 8,278 $3,148 $(2,956) $(4,560) $(13,410) $(9,500)
======= ====== ======= ======= ======== =======
53
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(8) REPORTABLE SEGMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999:
ILEC CLEC WIRELESS DIRECT CORPORATE TOTAL
-------- -------- --------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
Revenue........................... $26,723 $3,793 $ 1,739 $ 329 $ -- $32,584
Direct costs...................... 14,745 2,031 4,069 1,891 -- 22,736
Sales and marketing............... 1,696 355 560 483 2,220 5,314
General and administrative........ -- -- -- -- 4,931 4,931
Research and development.......... 355 167 409 809 -- 1,740
------- ------ ------- ------- ------- -------
Total........................... 16,796 2,553 5,038 3,183 7,151 34,721
Operating income (loss)........... 9,927 1,240 (3,299) (2,854) (7,151) (2,137)
Other income, net................. -- -- -- -- 607 607
------- ------ ------- ------- ------- -------
Income (loss) before income
taxes........................... 9,927 1,240 (3,299) (2,854) (6,544) (1,530)
Income taxes...................... -- -- -- -- 468 468
------- ------ ------- ------- ------- -------
Net income (loss) from continuing
operations...................... 9,927 1,240 (3,299) (2,854) (6,076) (1,062)
------- ------ ------- ------- ------- -------
Loss from operations of
discontinued division, net of
tax............................. -- -- -- -- (226) (226)
------- ------ ------- ------- ------- -------
Net income (loss)................. $ 9,927 $1,240 $(3,299) $(2,854) $(6,302) $(1,288)
======= ====== ======= ======= ======= =======
FOR THE YEAR ENDED DECEMBER 31, 1998:
ILEC CLEC WIRELESS DIRECT CORPORATE TOTAL
-------- -------- --------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
Revenue............................ $28,784 $1,492 $3,867 $ 306 $ -- $34,449
Direct costs....................... 16,240 1,299 2,395 266 -- 20,200
Sales and marketing................ 1,659 479 398 249 1,334 4,119
General and administrative......... -- -- -- -- 4,959 4,959
Research and development........... 727 122 381 146 -- 1,376
------- ------ ------ ----- ------- -------
Total............................ 18,626 1,900 3,174 661 6,293 30,654
Operating income (loss)............ 10,158 (408) 693 (355) (6,293) 3,795
Other expenses, net................ -- -- -- -- (294) (294)
------- ------ ------ ----- ------- -------
Income (loss) before income
taxes............................ 10,158 (408) 693 (355) (6,587) 3,501
Income tax benefit................. -- -- -- -- 379 379
------- ------ ------ ----- ------- -------
Net income (loss) from continuing
operations before extraordinary
item............................. 10,158 (408) 693 (355) (6,208) 3,880
------- ------ ------ ----- ------- -------
Extraordinary loss from early
extinguishment of debt........... -- -- -- -- (909) (909)
------- ------ ------ ----- ------- -------
Net income (loss).................. $10,158 $ (408) $ 693 $(355) $(7,117) $ 2,971
======= ====== ====== ===== ======= =======
54
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(8) REPORTABLE SEGMENTS (CONTINUED)
Information for 1999 and 1998 has been reclassified to reflect the realignment
of various business units. Licenses and implementation services are now included
in the ILEC Business Unit. ILEC, CLEC, Wireless and Direct were formerly
included in Data Management Services.
(9) COMMITMENTS
The Company leases its office and research facilities and certain equipment
under operating lease agreements which expire through November 2004. Rent
expense for the years ended December 31, 2000, 1999 and 1998 was approximately
$1,553,000, $1,370,000 and $1,030,000, respectively. Future minimum lease
obligations under these agreements are as follows:
2001........................................................ $2,231,000
2002........................................................ 1,809,000
2003........................................................ 160,000
2004........................................................ 104,000
----------
Total..................................................... $4,304,000
==========
(10) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan under which eligible employees may defer up to
15% of their compensation. The Company may make matching contributions and
discretionary contributions if approved by the board of directors. For 1998, no
employer matching or discretionary contributions were made to the 401(k) plan.
However, in February 1999, the Company's board of directors approved a matching
contribution for employees, which was effective April 1, 1999. The Company
matches 50% of employee contributions up to 6% of the employee's salary, not to
exceed $1,000. Matching contributions will vest 35%, 70% and 100% for one, two
and three years of service, respectively.
(11) RELATED PARTY TRANSACTION
The Company provides data management and certain consulting services to and
leases equipment from entities in which a stockholder of the Company had an
ownership interest. A member of the Company's Board of Directors was also a
representative of the former stockholder until December 2, 1999. The Company
received net proceeds of approximately $7,797,000, $6,979,000 and $6,735,000 in
2000, 1999 and 1998 respectively, pursuant to these agreements. Amounts due to
the former stockholder under the capital lease agreements net of amounts due to
the Company for services rendered as of December 31, 2000, 1999 and 1998 were
($66,000), $3,262,000 and $3,962,000, respectively. The leases have interest
rates ranging from 7.75% to 9.50%, require monthly payments and have expiration
dates varying through October 2002.
(12) MAJOR CUSTOMERS
Revenue from certain customers exceeded 10% of total revenue for the
respective year as follows: 23%, 22% and 21% in 2000; 27%, 27% and 26% in 1999
and 27%, 25% and 21% in 1998. Contracts with certain of these customers have a
ten-year duration through 2005, and provide for fixed monthly
55
SCC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(12) MAJOR CUSTOMERS (CONTINUED)
fees based upon the number of subscriber records managed and upon the services
selected by the customer. All of these customers are in the Company's ILEC
segment.
(13) LEGAL MATTERS
The Company is subject to various claims and business disputes in the
ordinary course of business.
(14) QUARTERLY INFORMATION
The following summarizes selected unaudited quarterly financial information
for each of the two years in the period ended December 31, 2000.
THREE MONTHS ENDED,
-------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------------- ------------------- ------------------- -------------------
2000 1999 2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenue.................. $ 9,033 $7,616 $10,249 $8,189 $11,527 $8,297 $12,315 $8,482
Direct Costs............. 6,285 5,309 6,986 5,790 7,386 5,750 8,211 5,887
Net income from
continuing operations
before extraordinary
item and cumulative
effect of change in
accounting principle... (565) (257) (1,760) (319) (1,298) (138) (2,795) (348)
Net income............... $(3,647) $ (366) $(1,760) $ (334) $(1,298) $ (163) $(2,795) $ (425)
======= ====== ======= ====== ======= ====== ======= ======
Net income from
continuing operations
before extraordinary
item and cumulative
effect of change in
accounting principle
per share.............. $ (0.05) $(0.02) $ (0.16) $(0.03) $ (0.12) $(0.01) $ (0.25) $(0.03)
Income (loss) per share
(basic and diluted).... $ (0.33) $(0.03) $ (0.16) $(0.03) $ (0.12) $(0.01) $ (0.25) $(0.04)
======= ====== ======= ====== ======= ====== ======= ======
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item, will be contained in the definitive Proxy
Statement with respect to the Company's 2001 Annual Meeting of Stockholders (the
"2001 Proxy Statement") and is hereby incorporated by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be contained in the 2001 Proxy
Statement and is hereby incorporated by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be contained in the 2000 Proxy
Statement and is hereby incorporated by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be contained in the 2000 Proxy
Statement and is hereby incorporated by reference thereto.
57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed on the
index to financial statements on page 30.
(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because they are not
required, are not applicable or the information is included in the
Financial Statements or Notes thereto.
(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1* -- Amended and Restated Certificate of Incorporation of the
Company.
3.2* -- Restated Bylaws of the Company to be effective upon the
closing of the offering.
4.1* -- Form of Certificate for Common Stock.
4.2* -- Reference is made to Exhibits 3.1 and 3.2.
10.1* -- Fourth Amended and Restated Registration Rights
Agreement, dated March 5, 1996.
10.2* -- 1990 Stock Option Plan.
10.3* -- 1998 Stock Incentive Plan.
10.4* -- 1998 Employee Stock Purchase Plan, as amended.
10.5* -- Form of Directors' and Officers' Indemnification
Agreement.
10.6*+ -- 9-1-1 Services Agreement between Ameritech Information
Systems, Inc. and SCC Communications Corp., signed
August 31, 1994.
10.7*+ -- Agreement for Services between SCC Communications Corp.
and U S West Communications, Inc. dated December 28, 1995.
10.8*+ -- Services Agreement No. PR-9026-L between SCC
Communications Corp. and BellSouth Telecommunications, Inc.
dated October 13, 1995.
10.9*+ -- Wireless E9-1-1 Agreement between SCC Communications
Corp. and Ameritech Mobile Communications, Inc. dated
April 1998.
10.10*+ -- Asset Purchase Agreement between SCC Communications Corp.
and Printrak International, Inc., dated July 18, 1997.
10.11* -- Amendment One to Asset Purchase Agreement between SCC
Communications Corp. and Printrak International, Inc.
10.12* -- Bank One Loan Agreement dated April 15, 1997, effective
as of July 1, 1996.
10.13* -- Banc One Capital Partners and SCC Communications Corp.
Senior Subordinated Note and Warrant Purchase Agreement,
dated November 20, 1997.
10.14* -- Banc One Senior Subordinated Note due November 30, 2003.
10.15* -- Banc One Warrant Certificate.
10.16* -- Banc One and SCC Communications Corp. Option Agreement,
dated November 20, 1997.
10.17* -- Banc One and SCC Communications Corp. Registration Rights
Agreement, dated November 20, 1997.
58
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.18* -- Co-Sale Agreement, dated November 20, 1997, between SCC
Communications Corp., George Heinrichs, John Sims, Nancy
Hamilton, The Hill Partnership III, Ameritech Development
Corporation, Boston Capital Ventures Limited Partnership
and Banc One Capital Partners.
10.19* -- Preemptive Rights Agreement between Banc One Capital
Partners and SCC Communications Corp.
10.20* -- Master Lease Agreement Between Ameritech Credit
Corporation and SCC Communications Corp., dated March 11,
1996.
10.21*+ -- Consulting Agreement Between SCC Communications Corp. and
Ameritech Mobile Communications, Inc. dated October 27,
1997.
10.22* -- Bank One Loan Change in Terms Agreement effective as of
April 15, 1998.
10.23# -- Employment Agreement between Nancy Hamilton and SCC
Communications Corp.
10.24/ / -- Genesis Select Corporation and SCC Communications Corp.
Common Stock Purchase Warrant Agreement, dated April 19,
2000/ /
10.25/ / -- Leopard Communications and SCC Communications Corp.
Common Stock Purchase Warrant Agreement, dated April 19,
2000/ /
10.26/ / -- Employment Agreement between Carol Nelson and SCC
Communications Corp./ /
23.1 -- Consent of Arthur Andersen LLP, Independent Public
Accountants.
- ------------------------
* Incorporated by reference to identically numbered exhibits included in the
Registrant's Registration Statement on Form S-1 (File No. 333-49767), as
amended.
+ Confidential treatment has been requested for a portion of these Exhibits.
# Incorporated by reference to identically numbered exhibits included in the
Registrant's Form 10-K for the fiscal year ended December 31, 1998.
/ / Incorporated by reference to identically numbered exhibits included in the
Registrant's Form 10-Q for the Quarter ended June 30, 2000.
(B) REPORTS ON FORM 8-K
On October 17, 2000, we issued a press release announcing 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. A copy of the press release was included in a Current Report
on Form 8-K, which we filed with the SEC on October 17, 2000.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of March 29, 2001.
SCC COMMUNICATIONS CORP.
By: /s/ MICHAEL D. DINGMAN, JR.
-----------------------------------------
Michael D. Dingman, Jr.
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of March 29, 2001 by the following persons on
behalf of the registrant and in the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ GEORGE K. HEINRICHS
------------------------------------------- President, Chief Executive Officer and
George K. Heinrichs Director (Principal Executive Officer)
/s/ MICHAEL D. DINGMAN, JR.
------------------------------------------- Chief Financial Officer
Michael D. Dingman, Jr. (Principal Financial and Accounting Officer)
/s/ STEPHEN O. JAMES
------------------------------------------- Director
Stephen O. James
/s/ DAVID KRONFELD
------------------------------------------- Director
David Kronfeld
/s/ PHILIP LIVINGSTON
------------------------------------------- Director
Philip Livingston
/s/ MARY BETH VITALE
------------------------------------------- Director
Mary Beth Vitale
/s/ WINSTON J. WADE
------------------------------------------- Director
Winston J. Wade
/s/ DARRELL A. WILLIAMS
------------------------------------------- Director
Darrell A. Williams
60