| INTRADO INC under the caption Item 1A Risk Factors, our other Securities and Exchange Commission filings and our press releases |
| iii ______________________________________________________________________ INTRADO INC 2005 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I [1]Item 1 |
| [2]Business [3]Item 1A [4]Risk Factors ITEM 1A 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 |
| 13 ______________________________________________________________________ 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 depend on large contracts from a limited number of significant customers |
| We provide our services to a range of customers, including ILECs, CLECs, wireless carriers and state and local government agencies |
| During the year ended December 31, 2005, we recognized approximately 46prca of our total revenue from SBC, Cingular Wireless and Verizon, each of which accounted for approximately 10prca or greater of our revenue in 2005 |
| During the year ended December 31, 2004, we recognized approximately 46prca of our total revenue from BellSouth, SBC and Verizon, each of which accounted for greater than 10prca of our revenue in 2004 |
| During the year ended December 31, 2003, we recognized approximately 55prca of total revenue from BellSouth, Qwest, SBC and Verizon each of which accounted for greater than 10prca of our revenue |
| We believe that these customers and others may continue to represent a substantial portion of our total revenue in the future |
| Contracts for four of our largest 14 wireless customers are scheduled to expire in 2006 |
| As we enter negotiations to renew these contracts, our customers may demand price or other contractual concessions |
| Our ILEC customers could decide to develop and utilize their own proprietary 9-1-1 software and to perform internally the services that they presently outsource to us |
| Our wireless customers may also choose to not renew with us or to significantly decrease the amount of services they outsource to us in favor of competitors or their own in-house solutions |
| Moreover, existing contract provisions allow these customers and others to receive contract concessions or to cancel their contracts in the event of customer consolidations, changes in regulatory, legal, labor or business conditions |
| Contract concessions, or the loss of a major customer, could have a material adverse effect on our business, financial condition, results of operations and cash flows |
| Acquisitions, consolidations, bankruptcies and reorganizations among our telecommunications customers may have a material adverse effect on our market share, liquidity, financial position and operating results |
| Acquisitions and consolidations among our telecommunications customers, especially in the wireless sector, involve integration risk and create uncertainties related to our pricing structure, ability to negotiate contracts and operating results |
| Although we believe that we are well positioned to maintain our market share without significant price degradation or loss of customers, we cannot be certain that our financial forecasts and renewal and retention strategies will be successful |
| Customer consolidations and merger activity may have a material adverse effect on our ability to renew contracts as they expire and maintain current price levels, especially where a consolidated customer base will be able to negotiate volume price discounts |
| Therefore, customer consolidations and merger activity may have a material adverse effect on our market share, liquidity, financial position, cash flows and operating results |
| Moreover, some of our customers have filed voluntary petitions for reorganization under Chapter 11 of the US Bankruptcy Code |
| Other telecommunications customers have experienced cash flow and operating difficulties and may also file for protection from creditors under the federal bankruptcy laws |
| In addition to the fact that financially troubled customers may be more susceptible to industry consolidations and merger activity, as discussed above, we may experience difficulty in collecting amounts due from these customers |
| Although we believe that we have provided adequate reserves for bad debt on existing receivables as of the date of this report, future bankruptcies, reorganizations and consolidations in the telecommunications industry may have a material adverse effect on our market share, liquidity, financial position, cash flows and operating results |
| Our market is characterized by rapid technological change, as evidenced by the increased use of VoIP technology, and we could lose our competitive position if we are not successful in developing new products that achieve market acceptance |
| The market for our services is characterized by intense competition, rapid technological change, frequent new product or service introductions, evolving industry standards and changing customer needs |
| Existing products may become obsolete and unmarketable when products featuring new technologies are introduced |
| To be successful, we must be able to enhance existing products and to develop new products that keep pace with technological changes, satisfy our customers and achieve market acceptance |
| This is best evidenced by the increasing use of VoIP in the traditional 14 ______________________________________________________________________ wireline market during 2005 |
| VoIP is an innovative technology that enables voice traffic to be carried over an IP-based network |
| The location of the VoIP caller is not necessarily fixed, presenting a challenge related to the handling and routing of emergency 9-1-1 calls |
| Increased use of VoIP and other new technologies could open the traditional 9-1-1 data services market to new competition with substantially greater resources than us |
| 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 |
| If we do not realize anticipated benefits from our capitalized software, we may be forced to record an impairment, thereby adversely affecting our operating results |
| In assessing the recoverability of our existing capitalized software assets, we rely on estimates and judgments to determine the net realizable value of each product |
| When evaluating the net realizable value of a given product, we prepare a forward-looking business case that is comprised of an assessment of future expected benefits to be generated |
| The expected benefits are compared to the direct costs associated with supporting the product on an ongoing basis to arrive at a contribution margin, defined as expected benefits less direct costs |
| This contribution margin is compared to the carrying value of the asset at the reporting date to determine if the contribution margin exceeds the asset carrying value plus any additional investments such as hardware or additional development required to enhance or maintain the product |
| If the aggregate contribution margin is less than the carrying value, an impairment is recorded |
| Our ability to estimate future expected revenue and benefits with a measured degree of probability is the most significant factor in our estimate of recoverability |
| If our ability to estimate the expected benefits changes significantly in any given period, we could record impairment charges for certain assets and our operating results could be adversely affected |
| In the second quarter of 2004, we determined that, due to the continued limited visibility regarding the timing of forecasted revenue opportunities for our Commercial Database product offerings, it was necessary to impair dlra1dtta7 million of software assets |
| We also recorded an impairment charge of dlra588cmam000 in the second quarter of 2004 related to a subset of our MPC product offerings based on limited revenue visibility |
| An economic slowdown and increased international political instability may have a material adverse affect on our business and results of operations |
| An economic slowdown or increased international political instability, as demonstrated by terrorist threats, the conflict in Iraq, increasing tension in the Middle East and Korea, and the resulting need for enhanced security measures may have a detrimental effect on our business |
| An economic slowdown, for example, may impact our customers’ purchasing decisions |
| In addition, increased political instability may adversely affect our ability to obtain adequate insurance at reasonable rates or require us to take extra security precautions for our operations and computer database systems |
| If the economic slowdown or international political instability continues or increases, our business, results of operations and the market price of our common stock could be adversely affected |
| If we are unable to retain key executives, our operating results and growth potential may be adversely affected |
| Our success greatly depends on our ability to attract and retain key technical, sales and executive personnel |
| We are especially dependent on the continued services of our senior management team |
| Although members of our executive team are subject to non-competition agreements, they are not presently subject to employment contracts |
| As a result, they can terminate their employment at any time |
| The loss of any member of our senior management team could adversely affect our operating results and growth potential |
| Restrictions on state and local government budgets and other factors may cause our operating results to fluctuate and, as a result, our stock price may decline |
| Our revenue, operating results and cash flows are difficult to predict and may fluctuate significantly from quarter to quarter as a result of restrictions on state and local government budgets, adverse trends in the telecommunications industry and other factors |
| Therefore, you should not rely on period-to-period comparisons of revenue or operating results as an indication of our future performance |
| If our revenue, operating results and cash flows fall below the expectations of investors or securities analysts, the price of our common stock could fall substantially |
| 15 ______________________________________________________________________ The value of your common stock may decrease if employees and other security holders exercise their options and warrants |
| As shown in the table below, as of February 15, 2006, we have reserved 3cmam253cmam678 shares of common stock for future issuance upon exercise of outstanding options and redeemable warrants |
| Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights Weighted Average Exercise Price of Outstanding Options and Share Right Awards Equity compensation plans approved by stockholders Stock Options 2cmam565cmam655 $ 11dtta27 Share Right Awards(1) 685cmam023 — Restricted Stock Units 3cmam000 — Total 3cmam253cmam678 _________________ (1) Represents the maximum number of shares issuable upon vesting of share right awards |
| Share right awards vest (i) upon the achievement of three performance goals (revenue, operating margin and return on invested capital) during the 12-month period ending June 30, 2008; or (ii) upon a change in control |
| For each performance goal, there are four levels of achievement (less than 90prca, 90prca, 100prca, and 110prca) |
| For more information regarding share right awards, refer to the disclosure in our Current Report on Form 8-K/A, as filed with the SEC on July 1, 2005 |
| We may issue additional equity-based securities in the future, including stock options, share right awards, restricted stock units and other securities that are convertible into common stock |
| Our 1998 Stock Incentive Plan, which was approved by stockholders, includes an evergreen provision in which the number of shares issuable under the Plan automatically increases on the first trading day in January of each calendar year by an amount equal to 3prca of the total number of shares of common stock outstanding on the last trading day in December of the preceding calendar year (but in no event in excess of 731cmam000 shares) |
| Equity securities representing an additional 900cmam233 shares are presently issuable under the 1998 Stock Incentive Plan |
| As these securities are exercised or vest, you will experience dilution in the market value and earnings per share of your common stock |
| Substantially all of our revenue is derived from our 9-1-1 data management solutions, and our operating results, financial position and cash flows may depend upon our ability to continue to sell these solutions |
| We currently derive substantially all of our revenue from the provisioning of our 9-1-1 data management solutions 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 solutions, 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 |
| 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; 16 ______________________________________________________________________ providers of interconnected VoIP service provide E9-1-1 capabilities to their customers in accordance with regulations imposed by the FCC in WC Docket Nos |
| 04-36 and 05-196; • The duties imposed on us or on our wholly owned subsidiary, Intrado Communications Inc, as a result of its status as a regulated competitive local exchange carrier or as an inter-exchange carrier; • The duties imposed on incumbent local exchange carriers by the Telecommunications Act of 1996, or other legislation, regulation or judicial or administrative determinations, to open local telephone markets, including 9-1-1 service as a part of local exchange service, to competition; • The responsibilities of local exchange carriers to provide subscriber records to emergency service providers under the Wireless Communications and Public Safety Act of 1999; and • The impact of various federal and state regulations on wireless carriers that provide E9-1-1 service, including, but not limited to, regulations imposed by the FCC in CC Docket Nodtta 94-102 |
| Any changes to these legal requirements, including those caused by the adoption of new laws and regulations or by legal challenges, could have a material adverse effect upon the market for our services and products |
| In particular, any delay in implementation of the newly imposed regulatory requirements imposed by the FCC on VoIP services could have a material adverse effect on our business, financial condition and results of operations |
| Our business is subject to reporting and governance requirements that have significantly increased our compliance costs in the impacted areas |
| Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded |
| These entities, including the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, the SEC and the NASDAQ Stock Market, have recently issued new regulations and requirements and are currently developing additional regulations and requirements in response to laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002 |
| Our compliance with current and proposed rules, such as Section 404 of the Sarbanes-Oxley Act, has required and is likely to continue to require the commitment of significant financial and managerial resources |
| Our Sarbanes-Oxley compliance costs were approximately dlra500cmam000 in 2005 and exceeded dlra2 million in 2004 |
| We also cannot predict whether our compliance efforts will result in operational efficiencies that will help to offset past or ongoing compliance costs |
| The expenditures necessary to comply with new regulations and regulatory requirements may continue to have a material adverse impact on our financial condition and results of operations |
| We could incur substantial costs from product liability, negligence, wrongful death and similar claims relating to our services and our software |
| Because customers utilize our services and licensed software products to provide critical 9-1-1 services, we are subject to product liability, negligence, wrongful death and related claims |
| Our agreements with customers typically require us to indemnify customers for our own acts of negligence and non-performance |
| Product liability and other forms of insurance are 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 sufficient amounts or that our insurer may not disclaim coverage as to a future claim |
| Payments of material claims for product liability, negligence, wrongful death or similar claims may adversely affect our business, operating results or financial condition |
| Our operating results, financial condition and cash flows could be adversely affected by unauthorized access to our system or 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 unauthorized access to our system by third parties or 17 ______________________________________________________________________ employees and against damage from fire, natural disaster, power loss, telecommunications failure, sabotage or other events |
| Any unauthorized access or unanticipated interruption or delay in our operations could have a material adverse effect on our financial condition, results of operations and cash flows |
| 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, unauthorized access 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 or a breach of security |
| Furthermore, insurance may not be available to us at all or, if available, may not be available on commercially reasonable terms |
| To protect our proprietary rights or to deal with claims that we infringe the proprietary rights of others, we may be forced to incur substantial costs and to divert valuable managerial resources away from our business operations |
| The success of our business depends on our ability to assert and defend our intellectual property rights |
| To protect our rights, we rely on a combination of copyright, trademark, patent and trade secret laws, and contractual restrictions |
| We cannot be sure that these steps will be adequate to prevent misappropriation or infringement of our intellectual property |
| Nor can we be sure that competitors will not independently develop technologies that are substantially equivalent or superior to our proprietary property and technology |
| In our industry, competitors often assert intellectual property claims against one another |
| As the functionality of our services and products increases and overlaps with the products and services of other companies, we may be forced to assert our intellectual property rights or become subject to claims of infringement or misappropriation of the intellectual property rights of others |
| These claims could result in substantial costs and diversion of resources, even if the claims are ultimately decided in our favor |
| 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 |
| Although we have not experienced any material claims to date, future claims or litigation, with or without merit, could be time consuming and expensive or require us to enter into royalty or licensing arrangements |
| We cannot be sure that such licenses would be offered or obtained on commercially reasonable terms, if at all |
| Any litigation or 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 financial condition, results of operations and cash flows |
| If we do not adequately anticipate and respond to the risks inherent in international operations, our operating results and stock price could be adversely affected |
| Although our consolidated financial statements are prepared in US dollars, the operations of our foreign subsidiaries, bmd wireless AG, Intrado International Ltd, and Intrado International Singapore Pte |
| Ltd, and our China joint venture, Intrado (XieAn) Technology (China) Co |
| Ltd, are conducted primarily in Swiss francs, euros, Singapore dollars, and Chinese yuan renminbi |
| Consequently, changes in exchange rates can unpredictably and adversely affect our consolidated operating results and could result in exchange losses |
| We do not currently hedge against the risks associated with fluctuations in exchange rates |
| Although we may use hedging techniques in the future, we may not be able to eliminate or reduce the effects of currency fluctuations |
| Thus, exchange rate fluctuations could have a material adverse impact on our operating results and stock price |
| In addition, our financial results may be adversely affected by other international risks, such as: • Changes in government regulation in various countries; • Trade barriers; • Adverse tax consequences; • The absence or significant inadequacy of legal protection for intellectual property rights; 18 ______________________________________________________________________ • The adoption of data privacy laws or regulations; • Political and economic instability; and • Costs associated with expansion into new territories |
| Although our international operations do not presently represent a material portion of our business, we intend to seek other opportunities in Europe and Asia |
| If we do not anticipate and respond to the risks associated with international operations, it could have a material adverse effect on our operating results and stock price |
| The adoption of new accounting requirements relating to expensing stock options is expected to significantly reduce our results of operations in future periods and may impact our ability to retain existing employees and directors |
| We currently account for the issuance of stock options under Accounting Principles Board, or APB, Opinion Nodtta 25, Accounting for Stock Issued to Employees (APB 25) |
| With the adoption of new accounting requirements related to historical and prospective stock awards and incentives, including Statement of Financial Accounting Standards, or SFAS, Nodtta 123R (revised 2004), Share-Based Payment (SFAS 123R), we will now be required to treat the value of the stock options granted to employees and directors as compensation expense beginning in the first quarter of 2006 |
| As a result, we may decide to reduce the number of stock options granted to employees and directors or to grant other forms of equity-based compensation, including restricted stock, restricted stock units and stock appreciation rights |
| This could adversely affect our ability to retain existing employees or directors and attract qualified candidates |
| Moreover, this could force us to increase the cash compensation we would have to pay employees |
| The market price of our common stock may experience price fluctuations for reasons over which we have no control, including trends that affect the telecommunications industry as a whole |
| The market price of shares of our common stock has fluctuated greatly since our initial public offering in June 1998 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 |
| If our institutional investors sell large volumes of our common stock within a short period of time, the market price of our common stock may decline |
| As of February 15, 2006, approximately 73dtta4prca of our outstanding common stock is owned by large institutional investors |
| These institutions and others may sell their shares of common stock at any time, causing the market price of our common stock to decline |
| If we fail to integrate businesses and assets that we may acquire, we may lose customers and our liquidity, capital resources and profitability may be adversely affected |
| We acquired bmd wireless AG in February 2004 |
| We may continue to evaluate strategic acquisitions as a part of our long-term business strategy |
| Acquisitions often involve a number of special risks, including the following: • We may encounter difficulties integrating acquired software, operations and personnel and our management’s attention could be diverted from other business concerns; • We may not be able to successfully incorporate acquired technology and rights into our service offerings and maintain uniform standards, controls, procedures and policies; 19 ______________________________________________________________________ • The businesses or assets we acquire may fail to achieve the revenue and earnings we anticipated, causing us to incur additional debt to fund operations and to write down the value of acquisitions on our financial statements; • We may assume product liability or intellectual property liability associated with the sale of the acquired company’s products; • Our resources may be diverted in asserting and defending our legal rights and we may ultimately be liable for contingent and other liabilities, not previously disclosed to us, of the companies that we acquire; • Acquisitions may disrupt our ongoing business and dilute your ownership interest; • Acquisitions may result in litigation from former employees or third parties; and • Due diligence may fail to identify significant issues with product quality, product architecture, ownership rights and legal contingencies, among other matters |
| With regard to our acquisition of bmd wireless AG, we expect significantly greater competitive pressure and a slower path for penetration of bmd’s technology into the European and North American markets |
| We recorded a goodwill impairment charge of dlra14dtta0 million in the fourth quarter of 2004 |
| There can be no assurance that we will realize the full benefits that we anticipated from our acquisition of bmd wireless AG or any future acquisitions |
| Our failure to successfully gain market acceptance of the products acquired or to gain market share could seriously harm our business, operating results, cash flows and financial condition |
| In addition, negotiation of potential acquisitions and the resulting integration of acquired businesses, products, or technologies, could divert management’s time and resources |
| Future acquisitions could include the issuance of dilutive equity securities or cause us to incur debt, contingent liabilities, additional amortization charges from intangible assets, asset impairment charges, or write-off charges for in-process research and development and other indefinite-lived intangible assets that could impact our financial condition, cash flows and operating results |
| If our proposed merger with West Corporation is approved by our stockholders, our common stock will no longer be traded on The Nasdaq Stock Market and you will not be able to participate in our growth or any synergies resulting from the merger |
| On January 29, 2006, our Board of Directors announced that it had entered into a merger agreement with West Corporation in which West had agreed to purchase all or our outstanding common stock for dlra26dtta00 per share |
| If the proposed merger is approved by our stockholders at an upcoming special meeting, then: • we will be wholly owned by West Corporation; • you will no longer participate in our growth and will not participate in any synergies resulting from the merger; and • we will no longer be a public company, and our common stock will no longer be quoted on The Nasdaq National Market |
| If we fail to satisfy the conditions to consummation of the proposed merger, you may not receive the offering price and we may have to pay a termination fee to West Corporation |
| If we or West Corporation fail to satisfy the conditions to consummation of the merger, you may not be entitled to receive the offering price of dlra26dtta00 per share and the market price of our common stock may decline significantly |
| In certain circumstances, we may be required to pay a termination fee of dlra15dtta0 million to West Corporation if the 20 ______________________________________________________________________ merger agreement is terminated |
| Moreover, the announcement of the merger may have a material adverse effect on our customer relationships, operating results and business generally, including our ability to retain key employees |