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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR

FOR THE TRANSITION PERIOD FROM                              TO                             .

COMMISSION FILE NUMBER: 000-29678

INTRADO INC.
(Exact name of registrant as specified in its charter)

        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 ý No o

        As of August 1, 2002, there were 15,307,632 shares of the Registrant's Common Stock outstanding.

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

        This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In particular, we direct your attention to Item 1. Financial Statements, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation and Item 3. Quantitative and Qualitative Disclosures About Market Risk. We intend the forward-looking statements throughout the Quarterly Report on Form 10-Q and the information incorporated by reference to be covered by the safe harbor provisions for forward-looking statements. All projections and statements regarding our expected financial position and operating results, our business strategy, our financing plans and the outcome of any contingencies are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as "may," "believe," "plan," "will," "anticipate," "estimate," "expect," "intend," and other words and phrases of similar meaning. Known and unknown risks, uncertainties and other factors could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on information available as of the date of this report on Form 10-Q and on numerous assumptions and developments that are not within our control. Although we believe these forward-looking statements are reasonable, we cannot assure you they will turn out to be correct. Actual results could be materially different from our expectations due to a variety of factors, including the following:

•

our reliance on large contracts from a limited number of significant telecommunications customers and, especially in light of recent competitive pressures in the telecommunications industry, their ability to pay for our services;

•

fluctuations in quarterly operating results, including those that are due to adverse trends in the telecommunications industry, bankruptcy filings by WorldCom and other customers, and other factors that are beyond our control;

•

whether our investments in research and development will expand our service offerings and prove to be economically viable;

•

our ability to retain key executives, particularly George K. Heinrichs, our co-founder, President, Chief Executive Officer and Chairman of the Board;

•

service and price competition from entities with substantially greater resources than us;

•

our ability to integrate businesses and assets that we may acquire;

•

constraints on our sales and marketing channels due to the fact that many of our customers compete with each other;

•

our ability to accurately predict and recoup the large amount of up-front expenditures necessary to serve new customers over a lengthy sales cycle;

•

our ability to expand our services beyond our traditional business and into the highly competitive data management industry, such as our proposed IntelliBase^SM National Repository Line Level Database ("IntelliBase^SM NRLLDB") and our IntelliCast^SM Target Notification services (formerly EWE^SM);

•

the unpredictable rate of adoption of wireless 9-1-1 services, including possible delays in the Federal Communications Commission's mandated deployment of Phase I and Phase II wireless location services;

•

the potential for liability claims, including product liability claims relating to our software;

•

technical difficulties and network downtime, including that caused by sabotage or unauthorized access to our systems; and

•

developments in telecommunications regulation and the unpredictable manner in which existing or new legislation and regulation may be applied to our business.

        This list is intended to identify some of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included elsewhere in this report. These factors are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements included in our Annual Report on Form 10-K under the caption "Item 1. Business—Risk Factors," our other Securities and Exchange Commission filings, and our press releases.

INDEX

INTRADO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data; Unaudited)

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.

INTRADO INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands; Unaudited)

The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets.

INTRADO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands; Unaudited)

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1—BASIS OF PRESENTATION

        The unaudited consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly present the consolidated financial position, results of operations and cash flows of Intrado Inc. (the "Company") for the periods presented. Certain information and footnote disclosures normally included in audited financial information prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. The results of operations for the period ended June 30, 2002 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2002. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

Reclassifications

        Certain prior period amounts have been re-classified to conform with the current period's presentation.

Deferred Equipment Costs

        Deferred equipment costs represent computer equipment purchased specifically for a customer's existing system or inventory shipped to a customer site. These costs will be expensed when all of the revenue recognition criteria has been met.

Revenue and Cost Recognition

        The Company generates the vast majority of its revenue from four of its five segments, or "business units:" ILEC, CLEC, Wireless and Direct. The revenue from these business units is derived primarily from monthly data management and maintenance services, systems upgrades, new products and professional services. The Corporate business unit captures costs that are not directly related to the other business units, but does generate a small amount of revenue from the Company's new IntelliBase^SM NRLLDB service.

        Payments received in advance are deferred until the service is provided. Up-front fees received, such as implementation fees and non-recurring engineering fees, are deferred and recognized over the longer of the contractual period or the expected customer relationship. In accordance with Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial Statements," and Statement of Position No. 97-2 "Software Revenue Recognition," the Company's policy is to recognize revenue when the applicable revenue recognition criteria have been met, which generally include the following:

•

persuasive evidence of an arrangement exists;

•

the price is fixed or determinable;

•

delivery has occurred or services have been rendered; and

•

collectibility is reasonably assured.

        The majority of the Company's revenue is derived from long-term contracts with its customers and is recognized ratably over the term of the contract as services are performed. The Company also sells software enhancements and professional services to its customer base that may not be subject to deferral under SAB 101. For the three months and six months ended June 30, 2002, the Company recognized $3.1 million and $6.3 million, respectively, in revenue from the sale of software enhancements and licenses, and professional services that were not deferred under SAB 101.

        As of June 30, 2002, the Company had total deferred contract revenue of approximately $18.2 million and deferred contract costs of approximately $4.5 million. Of the total deferred contract revenue at June 30, 2002, the Company anticipates that approximately $5.2 million will be recognized in 2002 when all the revenue recognition criteria have been met. Of the $5.2 million of current deferred contract revenue, approximately $1.8 million has already been received and approximately $3.4 million is included in accounts receivable as of June 30, 2002. As of June 30, 2002, the non-current deferred contract revenue balance of approximately $13.0 million represents non-recurring engineering fees and certain enhancements where revenue recognition criteria had not yet been met. The non-current deferred contract revenue, net of deferred contract costs, is estimated to be recognized as follows:

Provision for Income Taxes

        For the period January 1, 2000 through December 31, 2001, the Company did not record an income tax benefit for any generated net operating loss carryforwards or net increases in deferred tax assets because the Company believed the criteria for recognition was not met. To the extent the Company is able to generate taxable income in 2002, it will first utilize the net operating losses for which it recognized benefit in the pre-2000 period. As of June 30, 2002, the Company had net operating loss carryforwards of approximately $19.9 million available to offset current and future net income for U.S. federal income tax purposes. During the six months ended June 30, 2002, no income tax benefit or expense was recorded as the criteria for recognition has not been met.

NOTE 2—EARNINGS (LOSS) 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," 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. A loss per share is never reduced or diluted. 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. Since a net loss was generated for both the three months ended and the six months ended June 30, 2002 and June 30, 2001, all common stock options were considered antidilutive and excluded from the calculation of diluted EPS. The number of antidilutive stock options totaled to 1,476,720 and 1,231,228 in the three months ended June 30, 2002 and 2001, respectively, and to 1,571,091 and 824,380 for the six months ended June 30, 2002 and 2001, respectively.

NOTE 3—REPORTABLE SEGMENTS

        The management approach to segment identification designates the internal organization that is used by management for making operational decisions and assessing performance as the source of the Company's reportable segments. Based on this approach, the Company has five reportable segments, or "business units": ILEC, CLEC, Wireless, Direct, and Corporate. The Company's business units are segmented by 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. 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. These segments are managed separately because the nature of and the resources used for each segment are unique.

        Revenue and costs are segregated in the following Statements of Operations for the reportable segments. The Company does not segregate assets between the segments as it is impractical to do so.

NOTE 4—RELATED PARTY TRANSACTIONS

Lucent and New Ventures Partners II

        As part of the May 11, 2001 acquisition of Lucent Public Safety Systems ("LPSS"), the Company now provides maintenance services to Lucent customers on database and call handling contracts on a subcontracted basis. Because these contracts were not assigned directly to the Company under the purchase agreement, the Company bills Lucent for services rendered and Lucent, in turn, bills the customer. In effect, Lucent serves as a pass-through entity for billing purposes. During the three months and six months ended June 30, 2002, the Company recognized approximately $2.7 million and $5.3 million, respectively, in revenue under the subcontracted services agreement with Lucent. As of June 30, 2002, Lucent owes the Company approximately $442,000. The payable to Lucent of approximately $4.6 million at June 30, 2002, represents the obligation to pay for the inventory acquired in the LPSS acquisition, including interest.

        The Company issued 2,250,000 shares of common stock in connection with its May 2001 acquisition of LPSS. As of June 30, 2002, 1,792,079 of these shares are held by NV Partners II L.P., formerly a wholly owned subsidiary of Lucent Technologies, Inc., and 457,921 shares are held by Lucent Technologies Inc.

Ameritech

        The Company provides data management and consulting services pursuant to a service agreement dated August 31, 1994 with Ameritech Information Systems. Under a master lease agreement dated March 11, 1996, the Company leases personal property from Ameritech Credit Corporation. Ameritech Information Systems, Ameritech Credit Corporation and Ameritech Mobile Communications are affiliates of Ameritech Development Corp., which beneficially owned approximately 1.6 million shares of the Company's common stock until June 2000. A member of the Company's board of directors was a representative of Ameritech Development Corp. at the time the service and master lease agreements were executed.

        During the three months and six months ended June 30, 2002, the Company recognized approximately $2.8 million and $5.4 million in revenue, respectively, from the Ameritech service agreement. As of June 30, 2002 and 2001, Ameritech owed the Company approximately $1.3 million and $1.4 million, respectively, for services provided. During the three months ended June 30, 2002 and 2001, the Company paid Ameritech approximately $502,000 and $375,000, respectively, pursuant to lease schedules to the master lease agreement. As of June 30, 2002 and 2001, the Company owed approximately $4.1 million and $828,000, respectively, pursuant to lease schedules to the master lease agreement. The leases have interest rates ranging from 6.27% to 9.5%, require monthly payments and have expiration dates varying through May 2005.

TechnoCom Corporation

        During the three months ended June 30, 2002, the Company purchased 294,118 shares of TechnoCom Corporation's Series A Preferred Stock for $500,000, representing 2.9% of the aggregate dilutive voting power of TechnoCom as of June 30, 2002. The Company does not exercise any operational control over TechnoCom and does not have any board representation. Based on the above, the Company has accounted for its investment on a cost rather than equity basis. TechnoCom is under contract to provide development and implementation services to the Wireless business unit in connection with its recently announced PDE (Position Determining Equipment) product offering. TechnoCom also provides subcontracted services to the Company's ILEC customers. During the three and six months ended June 30, 2002, the Company paid $132,000 and $277,000 for their services, respectively. During the three and six months ended June 30, 2001, the Company made no payments to TechnoCom.

NOTE 5—GOODWILL AND INTANGIBLES

        The Company adopted SFAS No. 141 ("SFAS 141") "Business Combinations" on July 1, 2001 and SFAS No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets," on January 1, 2002. SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase accounting method. SFAS 142 states that goodwill is no longer subject to amortization over its useful life. Rather, goodwill will be subject to an annual assessment for impairment and be written down to its fair value only if the carrying amount is greater than the fair value. In addition, intangible assets will be recognized separately if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer's intent to do so. The amount and timing of non-cash charges related to intangibles acquired in business combinations will change significantly from prior practice.

        The Company has recorded on its balance sheet $11.7 million of goodwill, net, as of June 30, 2002, which relates to the excess of the purchase price over the estimated fair value of net identifiable assets acquired in the May 2001 LPSS acquisition. As part of the adoption of SFAS142 the Company combined the workforce intangible of $1.3 million with goodwill. Approximately $10.2 million of the goodwill is associated with the ILEC reporting unit and $1.5 million is associated with the Direct reporting unit. As a result of the adoption of SFAS 142, no goodwill was amortized during the six months ended June 30, 2002. Prior to 2002, the Company amortized approximately $600,000 of goodwill on a quarterly basis.

        The following table presents the impact of SFAS 142 on net loss as if the standard had been in effect for the three months and six months ended June 30, 2001 (dollars in thousands, except per share data; unaudited):

        The Company hired an independent firm to complete our initial impairment test during the three months ended June 30, 2002. The income approach was used to determine the fair value of each reporting unit that had been assigned goodwill. The income approach involved discounting each reporting unit's projected free cash flow at its weighted average cost of capital to ascertain whether the fair value was higher than the book value, including goodwill. The Company determined that the fair value of each reporting unit with goodwill exceeded its book value. Therefore, per SFAS 142, if the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired and no further impairment testing is necessary. Going forward, the Company will perform annual impairment tests as required by SFAS 142.

        The Company has recorded $9.1 million (net of accumulated amortization of $2.7 million) on its balance sheet relating to acquired intangible assets as of June 30, 2002. The acquired intangible assets include intellectual property and contracts acquired as part of the LPSS acquisition. In accordance with SFAS 142, the Company reevaluated the book value and the useful lives and determined that no adjustments were necessary. Accordingly, we continue to amortize the amounts originally assigned to intellectual property and contracts. For the three months and six months ended June 30, 2002, the Company recorded approximately $600,000 and $1.2 million, respectively, of amortization expense related to these separately identifiable intangible assets.

        The following table details the intangibles as of June 30, 2002 by class:

        For the separately identifiable intangible assets above pertaining to contracts and intellectual property, we estimate that we will book the following amortization expense over the next five years:

NOTE 6—ASSET IMPAIRMENT CHARGE

        As part of our original acquisition of Lucent Public Safety Systems in May 2001, the Company acquired a purchase obligation for inventory of $4.8 million. The inventory consisted of eight high-capacity, high-speed UNIX servers and software licenses. The obligation to purchase the inventory requires four equal quarterly installment payments of $1.2 million beginning in August 2002. At the time the payments are remitted to Lucent, title for 25% of the inventory will transfer to the Company.

        There were various factors considered by management in determining that an impairment had occurred and a write-down was warranted. Analysis revealed that there was a significant level of uncertainty regarding the potential future internal use of these assets by the Company or the possible future sale to our customer base. On April 30, 2002, the original equipment manufacturer, IBM, announced they were discontinuing production of this equipment and the underlying support and maintenance would end on December 31, 2007. While management made concerted efforts to sell this inventory since the acquisition date, the "end of life" announcement by IBM had a material adverse impact on various sales channels the Company was pursuing at the time. When the IBM announcement was made, management had already begun to evaluate the potential utility this inventory would have as internally deployed assets. The analysis of the potential benefits that could be generated by internal deployment of this inventory was completed in July 2002, but contained a significant amount of uncertainty and risk. Other factors considered by management in making the impairment determination were the historically long sell cycles for this type of equipment and reduced overall capital expenditure forecasts within our customer base.

        Based on the above factors, and the significant levels of uncertainty that exists regarding the utility and market value of this equipment, the Company determined that the fair market value was minimal and limited to the value of the software licenses acquired as part of the inventory purchase.

NOTE 7—RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations." SFAS 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. SFAS 143 requires an entity to recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate can be made. The Company is required to adopt SFAS 143 in its fiscal year 2003. The Company does not believe that SFAS 143 will have a material impact on its prospective financial statements.

        In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 applies to recognized long-lived assets of an entity to be held and used or to be disposed of and does not apply to goodwill, intangible assets not being amortized, financial instruments and deferred tax assets. SFAS 144 requires an impairment loss to be recorded for assets to be held and used when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. An asset that is classified as held for sale shall be recorded at the lower of its carrying amount or fair value less cost to sell. Although no adjustments were made in the six months ended June 30, 2002 as a result of SFAS 144, the Company believes that SFAS 144 may have a prospective effect on its financial statements in the determination of impairment charges and presentation of any future dispositions of business components.

        In April 2002, the FASB issued SFAS No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements"; SFAS 145 also rescinds SFAS No. 44, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provision of SFAS 145 related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002; the provisions related to SFAS No. 13 shall be effective for transactions occurring after May 15, 2002; all other provisions of SFAS 145 shall be effective for financial statements issued on or after May 15, 2002. Early adoption of SFAS 145 is encouraged. The adoption of SFAS 145 has not had, nor does the Company believe it will have, a material impact on its current or prospective financial statements.

        In June 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and replaces Emerging Issues Task Force (EITF) No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs in a Restructuring)." The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company believes that SFAS 146 may have a prospective effect on its financial statements for costs associated with future exit or disposal activities it may undertake after December 31, 2002.

NOTE 8—SUBSEQUENT EVENT—AMENDMENT TO REVOLVING LINE OF CREDIT

        On July 1, 2002, the Company executed an amendment to the Revolving Line of Credit with GE Capital that was originally executed on July 31, 2001. This amendment is filed as Exhibit 10.01 to this quarterly report. The amendment modifies the definitions of covenant requirement calculation specifically for Quick Ratio and the Fixed Charge Coverage (FCC) Ratio and also waives defaults that occurred on the Quick Ratio for the months of April and May 2002. The actual Quick Ratios for April and May were 0.98 and 0.95, respectively based on the original covenant requirements. The original agreement required a Quick Ratio of not less than 1.0. Specifically, when calculating the Quick Ratio, the amendment now excludes outstanding letter of credit obligations and short-term deferred revenues from the Current Liabilities definition. Also, the FCC ratio, which became effective in the quarter ending June 30, 2002, was modified such that the amount of capitalized software development costs appearing on the Cash Flow Statement as a use of funds would be deducted from EBITDA beginning in the quarter ending September 30, 2002.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

        We are a leading provider of solutions that manage and deliver mission-critical information for telecommunications providers and public safety organizations. Our customers include incumbent local exchange carriers ("ILECs"), competitive local exchange carriers ("CLECs"), wireless carriers and state and local governments in North America. 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 originating telephone number and location.

        With our acquisition of LPSS in May 2001, we now provide 9-1-1 supporting hardware and software technology. A number of telecommunications companies manage their 9-1-1 infrastructure with these hardware and software systems. In addition, our Palladium® call center and data-management systems are used by public safety answering points (PSAPs) across the nation to receive and respond to wireline and wireless E9-1-1 calls.

        We generate the majority of our revenue from four of our five segments, or "business units": ILEC, CLEC, Wireless and Direct. The revenue from these business units is derived from monthly data management services, maintenance, sales of systems and new products and professional services. The Corporate business unit captures costs that are not directly related to the other business units, as well as a small amount of revenue from our new IntelliBase^SM NRLLDB service.

        The following table represents revenue amounts and percentages by business unit:

        Our expense levels are based in significant part on our expectations regarding future revenue. Certain components of our revenue growth are difficult to forecast because the market for our services is evolving rapidly and the length of our sales cycle, along with 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.

Critical Accounting Policies and Estimates

        Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. While preparing these financial statements, we made estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventory, intangible assets, capitalized software costs, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

        Revenue Recognition:    Payments received in advance are deferred until the service is provided. Up-front fees received, such as implementation fees and non-recurring engineering fees, are deferred and recognized over the longer of the contractual period or the expected customer relationship. In accordance with Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial Statements," and Statement of Position No. 97-2, "Software Revenue Recognition," our policy is to recognize revenue when the applicable revenue recognition criteria have been met, which generally include the following:

•

persuasive evidence of an arrangement exists;

•

the price is fixed or determinable;

•

delivery has occurred or services have been rendered; and

•

collectibility is reasonably assured.

        The majority of our revenue is derived from long-term contracts with our customers and is recognized ratably over the term of the contract as services are performed. We also sell software enhancements and professional services to our customer base which may not be subject to deferral under SAB 101. For the three months and six months ended June 30, 2002, we recognized $3.1 million and $6.3 million, respectively, in revenue from the sale of software enhancements and licenses, and professional services that were not deferred under SAB 101.

        Allowances:    We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, additional allowances may be required. We also maintain allowances for credit memos that may be issued in the future for current period revenue. The allowances, which are based on historical trends and management estimates and judgments, may prove to be inadequate. The allowance as of June 30, 2002 was $440,000, up from $328,000 at December 31, 2001 and $337,000 at June 30, 2001. The increases are primarily attributable to competitive pressures in the telecommunications industry and bankruptcy filings by some of our CLEC customer base. The accounts receivable balance for these customers at June 30, 2002 was approximately $1.3 million. As discussed further in the "Liquidity and Capital Resources—Assessment of Future Liquidity" section, we believe that we are adequately reserved for potential bad debts that may arise from these customers as of June 30, 2002.

        Software Capitalization:    We capitalize certain software development costs related to significant new product offerings after technological feasibility is established and prior to general release or availability. Capitalization of software requires judgment in determining when a project has reached the technological feasibility phase and when it is available for general release and its intended use. We capitalized $3.0 million and $5.2 million in additional development costs in the three months and six months ended June 30, 2002, respectively. The costs related primarily to our ongoing efforts to develop new products, such as IntelliBase^SM NRLLDB, Mobile Positioning Center, and other major software initiatives. The net realizable value ("NRV") of all software projects is reviewed on a quarterly basis and may result in significant write-offs if the expected NRV does not support the amounts capitalized on the balance sheet.

Discussion of Operating Results

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

Total Company

Revenue

        Total revenue increased $8.1 million, or 44%, from $18.3 million in the three months ended June 30, 2001 to $26.4 million in the three months ended June 30, 2002. This increase is attributable primarily to:

•

ILEC revenue increased by $2.6 million, from $10.5 million in the three months ended June 30, 2001 to $13.1 million in the three months ended June 30, 2002. Integration of the LPSS business, which we acquired in May 2001, accounted for $1.9 million of the increase, with the balance coming from an increase in records under management of 2% and additional enhancements sold to customers.

•

CLEC revenue increased by $600,000, from $3.4 million in the three months ended June 30, 2001 to $4.0 million in the three months ended June 30, 2002, due to the continued increase in the number of subscribers from 7.1 million to 9.3 million, respectively.

•

Wireless revenue increased by $3.5 million, from $2.7 million in the three months ended June 30, 2001 to $6.2 million in the three months ended June 30, 2002, primarily due to services provided to the increased subscriber base of 23.2 million, up from 7.8 million in the three months ended June 30, 2001, as well as the sale of additional software enhancements and professional services.

•

Direct revenue increased by $1.2 million, from $1.8 million in the three months ended June 30, 2001 to $3.0 million in the three months ended June 30, 2002. Activity from the LPSS acquisition, including sales of systems and ongoing maintenance to PSAPs, accounted for the majority of the increase.

•

Corporate revenue increased by $97,000, from $0 in the three months ended June 30, 2001. This increase was primarily due to sales of our new IntelliBase^SM NRLLDB services, a new offering in the commercial data management industry.

Costs

        Total costs increased 40%, or $8.3 million, from $20.6 million in the three months ended June 30, 2001 to $28.9 million in the three months ended June 30, 2002, representing 113% and 110% of total revenue, respectively. This increase is attributable primarily to:

•

$4.7 million of asset impairment charges related to inventory purchased in the May 2001 LPSS acquisition.

•

$1.5 million of expenses related to the integration of the LPSS acquisition, of which $1.2 million represented direct operating costs, such as salaries, retention bonuses and maintenance expenses for subcontracted services provided by third-party vendors, and an additional $300,000 represented amortization of intangibles.

•

$700,000 in direct costs associated with increased headcount and other operating expenses for the delivery of services to our increased subscriber base.

•

$900,000 of additional sales and marketing expense related to new product promotions, increased headcount, participation in national trade shows and public relations charges.

•

$800,000 of increased corporate general and administrative costs primarily due to additional investments in infrastructure and personnel, increased insurance costs and the lease for our new Longmont, Colorado facility.

        These increases were partially offset by a $300,000 reduction in research and development costs. During the three months ended June 30, 2002, we capitalized more software development costs after determining that the related product offerings had reached technological feasibility earlier than anticipated.

Net Loss

        Net Loss increased by $600,000, from a net loss of $2.3 million in the three months ended June 30, 2001 to net loss of $2.9 million in the three months ended June 30, 2002, primarily due to:

•

$4.7 million of asset impairment charges related to inventory purchased in the May 2001 LPSS acquisition.

•

$600,000 of additional expenses in the three months ended June 30, 2002 attributable to the Corporate business unit, primarily related to increased headcount to support expanded operations, increased rent expenses related to our expanded headquarters building that is still under construction, offset by a reduction in research and development costs due to an increase in amount of costs capitalized that were associated with efforts on major software development initiatives for new product offerings that had reached feasibility.

•

$300,000 increase in net interest expenses due to lower interest income generated from short-term investments and increased interest expense related to capital equipment leases and an increase in the principal balance on our revolving credit facility with GE Capital.

        These costs were offset by:

•

A $1.7 million increase in ILEC net income, from $3.4 million in the three months ended June 30, 2001 to $5.1 million in the three months ended June 30, 2002, which included $1.1 million of net income related to the LPSS database division and $600,000 attributable to our ability to leverage operating expenses against increased sales.

•

A $700,000 increase in CLEC net income, from $1.4 million in the three months ended June 30, 2001 to $2.1 million in the three months ended June 30, 2002, which is attributable to increased sales and improved operating efficiencies.

•

A $2.1 million increase in net income in our Wireless business unit, from a loss of $600,000 in the three months ended June 30, 2001 to net income of $1.5 million in the three months ended June 30, 2002, primarily attributable to our ability to deploy additional cell sites and generate sales of higher margin enhancements and professional services. Gross margins improved from 1% in the three months ended June 30, 2001, to 42% in the three months ended June 30, 2002.

•

A $500,000 reduction in the operating loss in our Direct business unit, from an $800,000 operating loss in the three months ended June 30, 2001 to a $300,000 operating loss in the three months ended June 30, 2002. Gross margins improved in the three months ended June 30, 2002 to 14%, from a negative 22% in the three months ended June 30, 2001, due to operational efficiencies realized with delivery of services to the State of Texas and additional sales of systems and enhancements to our PSAP customer base at higher gross margins than those derived from ongoing maintenance contracts.

ILEC Business Unit

        Revenue increased 25%, from $10.5 million in the three months ended June 30, 2001 to $13.1 million in the three months ended June 30, 2002, representing 57% and 50% of total company revenue for such periods, respectively. Approximately $1.9 million of this increase is attributable to successful integration of the LPSS database division. The remaining $700,000 increase is due to an increase in the number of records under management, which grew to 88.7 million as of June 30, 2002 and additional enhancements sold to customers.

        Direct costs increased 5%, from $6.2 million in the three months ended June 30, 2001 to $6.5 million in the three months ended June 30, 2002, representing 59% and 50% of ILEC revenue for such periods, respectively. The $300,000 increase is primarily due to the addition of staff in conjunction with the LPSS acquisition, increases in maintenance expenses related to LPSS's database division and additional investments in support personnel to accommodate revenue growth from new and existing customers. ILEC direct costs as a percentage of revenue decreased due to higher margins realized on the sale of software enhancements and operational efficiencies realized through integration of support functions.

        Sales and marketing expenses increased 54%, from $779,000 in the three months ended June 30, 2001 to $1.2 million in the three months ended June 30, 2002, representing 7% and 9% of ILEC revenue for such periods, respectively. Approximately $100,000 of this increase is attributable to payroll expenses related to the LPSS acquisition, with the remaining increase due to internal expansion in other ILEC sales and marketing departments to facilitate growth and align support functions with customer requirements.

        General and administrative costs increased from $117,000 during the three months ended June 30, 2001 to $259,000 during the three months ended June 30, 2002. This increase is due to the addition of a finance position within the business unit during 2002 as well as increased costs related to management of the business unit.

        Net income increased $1.7 million, from $3.4 million in the three months ended June 30, 2001 to $5.1 million in the three months ended June 30, 2002. This increase included a $1.1 million increase in net income related to the acquisition of LPSS's database division and $600,000 of improved operating efficiencies. Gross margins increased from 41% in the three months ended June 30, 2001 to 50% in the three months ended June 30, 2002 primarily due to higher margins on sales of software enhancements to new and existing customers.

CLEC Business Unit

        Revenue increased 18%, from $3.4 million in the three months ended June 30, 2001 to $4.0 million in the three months ended June 30, 2002, representing 19% and 15% of total company revenue for such periods, respectively. CLEC revenue increased primarily as a result of an increase in the number of records under management for new and existing customers, which increased 31% from 7.1 million at June 30, 2001 to 9.3 million at June 30, 2002.

        Direct costs decreased 7%, from $1.4 million in the three months ended June 30, 2001 to $1.3 million in the three months ended June 30, 2002, representing 40% and 33% of CLEC revenue for such periods, respectively. Direct costs as a percentage of revenue decreased due to volume and operational efficiencies gained by the growth in records under management.

        Sales and marketing expenses decreased 23%, from $527,000 in the three months ended June 30, 2001 to $408,000 in the three months ended June 30, 2002, representing 15% and 10% of CLEC revenue for such periods, respectively. This decrease is due to a reduction in headcount and other operational efficiencies.

        General and administrative costs increased from $82,000 during the three months ended June 30, 2001 to $207,000 during the three months ended June 30, 2002. This increase is due to the addition of a finance position within the business unit, increased managerial costs and additional bad debt expenses associated with the financial volatility of certain CLEC customers.

        Net income increased 50%, from $1.4 million in the three months ended June 30, 2001 to $2.1 million in the three months ended June 30, 2002, primarily due to a $600,000 increase in CLEC revenue and operational efficiencies realized in various support functions discussed above.

Wireless Business Unit

        Revenue increased 130%, from $2.7 million in the three months ended June 30, 2001 to $6.2 million in the three months ended June 30, 2002, representing 14% and 23% of total company revenue for such periods, respectively. Wireless revenue increased due to an increase in the number of records under management, professional fees, and sales of enhancements for new and existing products. We implemented 8,400 new cell sites in the three months ended June 30, 2002 for Phase I Wireless E9-1-1 services compared to the 2,400 cell sites deployed in the same period a year ago, a 249% increase. As of June 30, 2002, 33,700 cell sites had been implemented, compared to 9,300 at the same time last year, a 262% increase. The 33,700 cell sites deployed as of June 30, 2002 equates to approximately 23 million subscribers, a 197% increase from the number of subscribers at June 30, 2001 of 7.8 million.

        Direct costs increased 38% from $2.6 million in the three months ended June 30, 2001 to $3.6 million in the three months ended June 30, 2002, representing 99% and 58% of Wireless revenue for such periods, respectively. The $1 million increase is due to the hiring of additional staff to implement subscriber services and increased systems maintenance and telephone line costs to accommodate growth. Wireless direct costs as a percentage of revenue decreased due to economies of scale associated with the increased number of subscribers and higher margins on sales of new products.

        Sales and marketing expenses increased 55%, from $548,000 in the three months ended June 30, 2001 to $848,000 in the three months ended June 30, 2002, representing 21% and 14% of Wireless revenue for such periods, respectively. This increase is due to investments in product management and additional sales personnel to accommodate growth.

        General and administrative costs increased from $107,000 during the three months ended June 30, 2001 to $268,000 during the three months ended June 30, 2002. This increase is due to the addition of finance positions within the business unit as well as increased managerial costs.

        Net income increased from a loss of $620,000 in the three months ended June 30, 2001 to income of $1.5 million in the three months ended June 30, 2002. Gross margins improved from 1% in the three months ended June 30, 2001, to 42% in the three months ended June 30, 2002 due to an increase in recurring monthly revenue from additional cell site implementations for Phase I Wireless E9-1-1 services and sales of enhancements and professional services at higher margins.

Direct Business Unit

        Revenue increased 67%, from $1.8 million in the three months ended June 30, 2001 to $3.0 million in the three months ended June 30, 2002, representing 10% and 11% of total company revenue for such periods, respectively. Direct revenue increased due to additional deployments of our IntelliCast^SM products and $1.3 million of increased maintenance and systems revenue related to the call handling division acquired in the LPSS transaction. The Texas subscriber base grew to 7.3 million in 2002, a 4% increase from June 30, 2001. The IntelliCast^SM subscriber base grew to 5.3 million at June 30, 2002.

        Direct costs increased 18%, from $2.2 million in the three months ended June 30, 2001 to $2.6 million in the three months ended June 30, 2002, representing 122% and 86% of Direct revenue for such periods, respectively. Costs increased due to the additional personnel associated with a larger subscriber base in Texas, our new contracts for IntelliCast^SM Target Notification services, and the call handling division acquired in the LPSS acquisition. Direct costs as a percentage of revenue decreased due to higher margins on the LPSS maintenance and systems revenue and operational efficiencies realized with the delivery of services to the State of Texas.

        Sales and marketing expenses increased 17%, from $384,000 in the three months ended June 30, 2001 to $451,000 in the three months ended June 30, 2002, representing 22% and 15% of total Direct revenue for such periods, respectively. The increase in sales and marketing costs is primarily due to additional payroll and marketing expenses in the IntelliCast^SM subunit.

        General and administrative costs increased from $66,000 during the three months ended June 30, 2001 to $273,000 during the three months ended June 30, 2002. This increase is due to the addition of a finance position within the business unit during 2002 as well as increased managerial costs.

        Net loss decreased 63%, from $840,000 in the three months ended June 30, 2001 to $307,000 in the three months ended June 30, 2002. Gross margins improved in the three months ended June 30, 2002 to 14%, from a negative 22% in the three months ended June 30, 2001, due to the integration of the LPSS call handling division and resulting sales of systems at higher gross margins.

Corporate Business Unit

        The Corporate business unit realized $97,000 of revenue in the three months ended June 30, 2002 from sales of IntelliBase^SM NRLLDB services.

        Sales and marketing expenses increased 27%, from $1.1 million in the three months ended June 30, 2001 to $1.4 million in the three months ended June 30, 2002, representing 6% and 5% of total company revenue for such periods, respectively. This increase is due to investments in additional support personnel, primarily related to the recent launch of IntelliBase^SM NRLLDB commercial database products.

        General and administrative expenses increased 13%, from $3.8 million in the three months ended June 30, 2001 to $4.3 million in the three months ended June 30, 2002. Total general and administrative costs as a percentage of total company revenue decreased, from 21% to 16% in the three months ended June 30, 2001 and June 30, 2002, respectively. Corporate general and administrative expenses increased due to a full quarter of amortization in 2002 of intangibles acquired in the LPSS acquisition, offset by the lack of goodwill amortization, increased headcount in corporate support departments, increased insurance costs, as well as increased rent expenses related to expansion of our headquarters building. As discussed in Note 5 of the Notes to Consolidated Financial Statements, we no longer amortize goodwill as of January 1, 2002 in accordance with SFAS 142.

        Asset impairment charge increased from $0 in the three months ended June 30, 2001 to $4.7 million in the three months ended June 30, 2002. The impairment resulted from a determination that the net book value of the inventory purchased as part of the LPSS acquisition exceeded its current fair market value.

        Research and development decreased 40%, from $823,000 in the three months ended June 30, 2001 to $494,000 representing 4% and 2% of total revenue for such periods, respectively. This decrease is primarily due to an increase in the amount of costs capitalized that were associated with efforts on major software development initiatives for new product offerings that reached feasibility.

        Net other expenses increased from income of $10,000 in the three months ended June 30, 2001 to an expense of $333,000 in the three months ended June 30, 2002 due to lower interest income from investments and increased interest expense related to capital equipment leases and an increase in the principal balance on our line of credit facility with GE Capital.

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

Total Company

Revenue

        Total revenue increased $19.1 million, or 61%, from $31.5 million in the six months ended June 30, 2001 to $50.6 million in the six months ended June 30, 2002. This increase is attributable primarily to the following:

•

ILEC revenue increased by $8.2 million, from $17.7 million in the six months ended June 30, 2001 to $25.9 million in the six months ended June 30, 2002. Integration of the LPSS business, which we acquired in May 2001, accounted for $6.7 million of the increase, with the balance coming from an increase in records under management of 2% and additional sales of enhancements to our customers.

•

CLEC revenue increased by $1.6 million, from $6.5 million in the six months ended June 30, 2001 to $8.1 million in the six months ended June 30, 2002, due to an increase in the number of subscribers from 7.1 million to 9.3 million.

•

Wireless revenue increased by $6.7 million, from $4.4 million in the six months ended June 30, 2001 to $11.1 million in the six months ended June 30, 2002, primarily due to an increase in the subscriber base from 7.8 million to 23.2 million.

•

Direct revenue increased by $2.7 million, from $2.8 million in the six months ended June 30, 2001 to $5.5 million in the six months ended June 30, 2002. Activity from the LPSS acquisition, including sales of systems and ongoing maintenance to PSAPs, accounted for $1.9 million of the increase, with the balance attributable to sales of our IntelliCast^SM Target Notification services (formerly known as EWE^SM).

•

Corporate revenue increased from $0 in the six months ended June 30, 2001 to $97,000 in the six months ended June 30, 2002. This increase is primarily due to sale of our new IntelliBase^SM NRLLDB services, a new offering in the commercial data management industry.

Costs