SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 10549
FORM 10-Q
(x) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996 or
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-28432
Boston Communications Group, Inc.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3026859
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sylvan Road, Woburn, Massachusetts 01801
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(Address of principal executive offices)
Registrant's telephone number, including area code: (617)692-7000
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__________________________________________________________________
(Former name, former address, former fiscal year, if changed since
last report)
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 the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
As of November 1, 1996 the Company had outstanding 12,725,740 shares of common
stock, $.01 par value per share.
INDEX
PAGE NUMBER
PART 1. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets.............................3
Consolidated Statements of Operations...................4
Consolidated Statements of Cash Flows...................5
Notes to Consolidated Financial Statements..............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................8
Certain Factors That May Affect Future Results.........11
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.......................13
2
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS DECEMBER 31, SEPTEMBER 30,
1995 1996
(unaudited)
Current assets:
Cash $ 253 $ 5,003
Short-term investments - 21,243
Accounts receivable, net of allowance for
billing adjustments and doubtful accounts
of $ 884 in 1995 and $ 1,130 in 1996 6,250 10,465
Inventory - 743
Deferred income taxes 1,800 1,275
Prepaid expenses and other assets 195 574
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Total current assets 8,498 39,303
Property and equipment, net 4,884 10,735
Goodwill, net - 2,484
Other assets 232 464
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Total assets $13,614 $52,986
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LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,277 $ 1,340
Accrued expenses 4,429 6,170
Current portion of capital lease obligations - 477
Income taxes payable 710 578
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Total current liabilities 6,416 8,565
Capital lease obligations, net of current portion - 847
Redeemable Preferred Stock, nonvoting,
par value $100 per share, 13,000 shares
authorized, 11,871 and 0 shares issued and
outstanding in 1995 and 1996 15,896 -
Shareholders' deficit:
Convertible Preferred Stock, $1.00 par
value per share, 1,325 shares authorized,
850 shares in 1995 and 0 shares in 1996 issued
and outstanding 1 -
Common Stock, voting, par value $.01 per share,
35,000,000 shares authorized, 3,335,985 shares
in 1995 and 12,714,629 shares in 1996 issued
and outstanding 33 127
Additional paid-in capital 1,016 52,742
Accretion of dividend on redeemable preferred stock (4,025) -
Accumulated deficit (5,723) (9,295)
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Total shareholders' equity (deficit) (8,698) 43,574
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Total liabilities, redeemable preferred stock
and shareholders' equity $13,614 $52,986
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3
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1995 1996
-------- --------- --------- ---------
Service revenues:
Calling service revenues $ 7,387 $ 8,873 $18,572 $24,414
Carrier support service revenues 2,706 3,272 5,952 10,422
Prepaid network service revenues - 42 - 111
Prepaid and other system revenues - 1,726 - 2,959
------- ------- ------- -------
10,093 13,913 24,524 37,906
Expenses:
Cost of service revenues 7,612 9,763 18,814 27,538
Cost of system revenues - 1,076 - 1,666
Engineering, research and development 321 957 588 2,120
Sales and marketing 532 680 1,405 1,875
Related party management fees 252 - 756 252
General and administrative 320 607 978 1,711
Depreciation and amortization 246 557 631 1,394
------- ------- ------- -------
Total operating expenses 9,283 13,640 23,172 36,556
------- ------- ------- -------
Operating income 810 273 1,352 1,350
Interest income(expense), net (46) 341 (97) 260
------- ------- ------- -------
Income from continuing operations
before income taxes 764 614 1,255 1,610
Provision for income taxes 100 283 165 706
------- ------- ------- -------
Income from continuing operations 664 331 1,090 904
Discontinued operations:
Loss from operations - - (129) -
Loss on disposal - - (37) -
------- ------- ------- -------
Loss from discontinued operations - - (166) -
------- ------- ------- -------
Net income 664 331 924 904
Accretion of dividends on redeemable
preferred stock (237) - (712) (451)
------- ------- ------- -------
Net income available to common
shareholders $ 427 $ 331 $ 212 $ 453
====== ====== ===== ======
Net income available to common
shareholders per common share:
Continuing operations $ 0.05 $ 0.03 $ 0.04 $ 0.04
====== ======= ====== =======
Net income $ 0.05 $ 0.03 $ 0.02 $ 0.04
====== ====== ====== =======
Shares used in computing net income
per common share 9,178 13,135 9,178 10,601
====== ======= ====== =======
4
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1996
---- ----
OPERATING ACTIVITIES
Income from continuing operations $ 1,090 $ 904
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 631 1,394
Deferred income taxes - 525
Changes in operating assets and liabilities,
excluding effects of discontinued operations:
Accounts receivable (2,095) (4,164)
Inventory - (682)
Prepaid expenses and other assets (76) (556)
Accounts payable and accrued expenses (437) 1,438
Income taxes payable (11) (132)
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(898) (1,273)
Loss from discontinued operations (166) -
Adjustments to reconcile loss from
discontinued operations:
Loss on disposal of discontinued operations 37 -
Cash flow related to results of operations
until disposal date 803 -
------- --------
674 -
------- --------
Net cash used in operations (224) (1,273)
INVESTING ACTIVITIES
Acquisition of business, net of cash acquired - (534)
Investment in non-marketable securities - (110)
Purchase of property and equipment (2,180) (5,378)
Purchases of short-term investments - (21,243)
Net proceeds from sale of lines of business 628 -
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Net cash used in investing
activities (1,552) (27,265)
FINANCING ACTIVITIES
Proceeds from exercise of stock options - 26
Proceeds from issuance of common stock - 49,792
Redemption of redeemable preferred stock - (16,347)
Repayment of capital leases - (183)
Proceeds from notes payable 1,900 -
------- --------
Net cash provided by financing activities 1,900 33,288
------- --------
Increase in cash 124 4,750
Cash at beginning of period 204 253
------- --------
Cash at end of period $ 328 $ 5,003
======= ========
Supplemental disclosure of noncash transactions:
Capital lease obligations $ - $ 1,507
======= ========
Shares issued in connection with acquisition of
business $ - $ 2,000
======= ========
5
BOSTON COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
1. The accompanying consolidated financial statements have been prepared by
the Company, without audit, and reflect all adjustments which in the
opinion of management, are necessary for a fair statement of the results of
the interim periods presented. All adjustments were of a normal recurring
nature. Certain information and footnote disclosures normally included in
the annual consolidated financial statements which are prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. Accordingly, the Company believes that although the
disclosures are adequate to make the information presented not misleading,
the consolidated financial statements should be read in conjunction with
the footnotes contained in the Company's Form S-1 for the fiscal year ended
December 31, 1995.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Standard No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," which establishes
criteria for the recognition and measurement of impairment or loss
associated with long-lived assets. The Company adopted this standard in the
first quarter of 1996, and its adoption did not have a material impact on
the Company's financial position or results of operations.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for
its stock-based compensation plans, rather than the alternative fair value
accounting method provided for under Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation," as this
alternative requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, since
the exercise price of options granted under these plans equals the market
price of the underlying stock on the date of grant, no compensation expense
is required.
2. Initial Public Offering
On June 21, 1996 the Company issued 3.5 million shares of common stock
through a public offering, resulting in net proceeds (after deducting
expenses) of $44,342. The proceeds were used to redeem all of the
outstanding shares of redeemable preferred stock for $16,347 and to repay
$2,000 outstanding under an account purchase agreement.
In July 1996, the Company received net proceeds of $5,450 from additional
shares of common stock sold to cover over-allotments.
6
BOSTON COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
3. Acquisition
In February 1996, the Company acquired the net assets of Voice Systems
Technology, Inc. (VST), a company which develops and markets voice
processing systems, for approximately $2,500 ($500 cash and 265,373 shares
of common stock). The acquisition has been accounted for under the purchase
method of accounting and the results of operations will be included in the
Company's results of operations from the date of acquisition. The Company is
amortizing the goodwill associated with the acquisition over eight years
using the straight line method.
4. Subsequent Event
On October 23, 1996 the Company paid $917 to increase its ownership interest
in Wireless Americas Corporation (WAC) from 17.5% to 80%. The Company will
consolidate WAC's balance sheet and results of operations from the date of
acquisition.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - SEPTEMBER 30, 1995 AND 1996
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Service and system revenues
- ---------------------------
Total revenues increased 37.8% from $10.1 million in the three months ended
September 30, 1995 to $13.9 million in the three months ended September 30, 1996
and increased 54.6% from $24.5 million in the nine months ended September 30,
1995 to $37.9 million for the nine months ended September 30, 1996. Calling
service revenues increased 20.1% or $1.5 million from the three months ended
September 30, 1995 to the same period ended September 30, 1996 and 31.5% or $5.8
million from the nine months ended September 30, 1995 to the nine months ended
September 30, 1996. The increase in revenues was generated principally from
existing carrier customers and resulted from the general growth in the number of
cellular subscribers and increased roaming by cellular subscribers. Carrier
support service revenues increased $0.6 million and $4.5 million, respectively
for the three month and nine month periods ended September 30, 1996 compared to
the same periods in the prior year. The increase consisted primarily of
increased revenues from existing cellular carriers who increased their use of
the Company's services and, to a lesser extent, additional revenues from new
cellular carriers. Revenues generated from prepaid network services for the
three months ended September 30, 1996 are principally related to usage in
markets where C2C prepaid services were commercially available. As of September
30, 1996, eleven C2C Network switches were deployed in various markets
throughout the United States. Of these switches, four were fully operational
and processing live transactions by the end of the third quarter. Prepaid and
other system revenues are $1.7 million and $3.0 million, respectively, for the
three month and nine month periods ended September 30, 1996, the first such
periods in which the Company had prepaid system revenues. Prepaid and other
system revenues consist principally of prepaid cellular systems and voice mail
systems sold by Voice Systems Technology, Inc. (VST), acquired in February 1996.
Cost of service revenues
- ------------------------
Cost of service revenues increased from 75.4% of service revenues for the three
months ended September 30, 1995 to 80.1% of service revenues for the three
months ended September 30, 1996. The increase in cost of service revenues as a
percentage of service revenues was primarily due to costs associated with the
opening of Company's new operations center in the second quarter of 1996. Cost
of service revenues for the nine months ended September 30, 1995 and 1996 were
76.7% and 78.8%, respectively, of service revenues.
Engineering, research and development expenses
- ----------------------------------------------
Engineering, research and development expenses increased $636,000 or 198% from
the three months ended September 30, 1995 to the three months ended September
30, 1996 and $1,532,000 or 261% from the nine months ended September 30, 1995 as
compared to the nine months ended September 30, 1996. The increases were
principally due to the costs associated with the Company's hiring of new
personnel to support the development, implementation and deployment of the C2C
Network and, to a lesser extent, additional personnel to support the expansion
of its carrier support services.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - SEPTEMBER 30, 1995 AND 1996 (CONTINUED)
- ---------------------------------------------------------------
Sales and marketing expenses
- ----------------------------
Sales and marketing expenses increased $148,000 or 27.8% from the three months
ended September 30, 1995 to the three months ended September 30, 1996. Sales
and marketing costs for the nine month period ended September 30, 1996 were
$470,000 or 33.5% more than the same period in the prior year. These increases
resulted from additional sales personnel and trade show costs to support the
carrier support service business and to promote the Company's C2C Network.
General and administrative expenses
- -----------------------------------
General and administrative expenses and related party management fees increased
$35,000 or 6.1% from the three months ended September 30, 1995 compared to the
three months ended September 30, 1996. For the nine months ended September 30,
1996 general and administrative expenses and related party management fees
increased $229,000 or 13.2% from the same period in the prior year. These
increases were principally due to the increased general and administrative costs
resulting from the opening of the Company's new operations center in March 1996
and other costs to support the Company's growth.
Depreciation and amortization expense
- -------------------------------------
Depreciation and amortization expense increased $311,000 or 126% and $763,000 or
121% during the three month and nine month periods ended September 30, 1996
compared to the same periods in the prior year. Most of the increase resulted
from depreciation of additional technical equipment to support the Company's
calling and carrier support services and furniture and leasehold improvements to
support the expansion of the Company's operations center. The remainder of the
increase was attributable to amortization of goodwill generated from the
acquisition of VST in February 1996. The Company expects depreciation and
amortization expense to continue to increase as the Company continues to launch
its C2C Network commercially and continues to amortize goodwill from the VST
acquisition.
Interest income(expense), net
- -----------------------------
Interest income(expense) increased $387,000 and $357,000, respectively for the
three and nine months ended September 30, 1996 as compared to prior years. The
increase resulted primarily from interest earned on the short-term investments
of the proceeds from the public offering.
Provision for income taxes
- --------------------------
The Company's effective income tax rate for the three and nine month periods
ended September 30, 1996 reflects an increase from comparable periods in the
prior year due to the Company's reversal of its valuation reserve in the fourth
quarter of 1995. The current effective income tax rate also reflects the non-
deductibility of goodwill amortization from the acquisition of VST.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 1996 the Company had working capital of $30.7 million as
compared to $2.1 million at December 31, 1995. The increase is primarily
attributable to an initial public offering (IPO) which yielded net proceeds of
$49.8 million. The proceeds were used to repay $16.3 million of redeemable
preferred stock and $2.0 million of notes payable. As a result, cash and short-
term investments increased from $253,000 at December 31, 1995 to $26.2 million
at September 30, 1996.
Net cash used in operating activities for the nine months ended September 30,
1996 was $1.3 million and consisted primarily of an increase of accounts
receivable offset by an increase in accounts payable and accrued expenses.
Accounts receivable increased due to increased calling service revenues and
system sales from the Company's subsidiary, VST. Accounts payable and accrued
expenses increased as a result of the Company's growth and the VST acquisition.
Net cash used in investing activities was $27.3 million for the nine months
ended September 30, 1996 and consisted primarily of purchases of short-term
interest bearing investments, telecommunications equipment purchases to support
the Company's C2C Network and furniture and leasehold improvements obtained to
support the Company's new operations center. In addition, in February 1996 the
Company acquired the net assets of VST for common stock and cash.
Net cash provided by financing activities for the nine months ended September
30, 1996 was $33.3 million. The increase resulted from the proceeds from the
IPO less the cash used to redeem the redeemable preferred stock.
In 1996, the Company financed the acquisition of $1.5 million of
telecommunications equipment and furniture and fixtures through a Master Lease
Agreement which was accounted for as a capital lease.
The Company believes that it has the necessary liquidity and capital resources
to sustain existing operations for at least the next eighteen months.
10
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report may contain forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. A number of
uncertainties exist that could affect the Company's future operating results,
including, without limitation, technological changes in the Company's industry,
the ability of the Company to develop and successfully deploy its C2C Network,
the Company's ability to retain existing customers and attract new customers,
increased competition and general economic factors.
Historically, a significant portion of the Company's revenues in any particular
period has been attributable to a limited number of customers. This
concentration of customers can cause the Company's revenues and earnings to
fluctuate from quarter to quarter, based on the volume of call traffic generated
through these customers or the services being performed pursuant to carrier
support programs. A significant decrease in business from any of the Company's
major customers, including a decrease in business due to factors outside of the
Company's control, would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company historically has provided all of its services to cellular carriers,
including roaming services and carrier support services. Although the cellular
market, and in particular, the roaming segment of the cellular market, has
experienced significant growth in recent years, there can be no assurance that
such growth will continue at similar rates, or at all, or that cellular carriers
will continue to use the Company's services. In addition, the prepaid wireless
service and PCS markets are in their initial stages of development, and if these
markets do not grow as expected or if the carriers in these markets do not use
the Company's services, the Company's business, financial condition and results
of operations could be materially and adversely affected.
The Company's future success depends, in large part, on the continued use of its
existing services, the acceptance of new services in the wireless industry, such
as prepaid service, and the Company's ability to develop services that keep pace
with changes in the wireless telephone industry. Further, a rapid shift away
from the use of cellular in favor of other services, such as PCS, could affect
demand for the Company's service offerings and could require the Company to
develop modified or alternative service offerings addressing the particular
needs of providers of such new services. There can be no assurance that the
Company will be successful in developing or marketing its existing or future
service offerings in a timely manner, or at all.
The Company is currently devoting significant resources toward the development
and deployment of its wireless prepaid service, including deployment of its C2C
Network. There can be no assurance that the Company will successfully complete
the development and deployment of the C2C Network or its prepaid service in a
timely fashion, that the market for the Company's prepaid service will develop,
or that the Company's C2C Network will operate successfully.
The Company has experienced fluctuations in its quarterly operating results and
anticipates that such fluctuations will continue and could intensify. The
Company's quarterly operating results may vary significantly depending on a
number of factors, including the timing of the introduction or acceptance of new
services offered by the Company or its competitors, changes in the mix of
services provided by the Company, changes in regulations affecting the wireless
industry, changes in the Company's operating expenses, personnel changes and
general economic conditions. Due to all of the foregoing factors, it is
possible that in some future quarter the Company's results of operations
11
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
will be below prior results or the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
Recently, the Company has expanded its operations rapidly, which has created
significant demands on the Company's administrative, operational, development
and financial personnel and other resources. Additional expansion by the
Company may further strain the Company's management, financial and other
resources. There can be no assurance that the Company's systems, procedures,
controls and existing space will be adequate to support expansion of the
Company's operations. If the Company's management is unable to manage growth
effectively, the quality of the Company's services, its ability to retain key
personnel and its business, financial condition and results of operations could
be materially and adversely affected.
The market for services to wireless carriers is highly competitive and subject
to rapid change. A number of companies currently offer one or more of the
services offered by the Company. In addition, wireless carriers are providing
or can provide, in-house, the services that the Company offers. In addition,
the Company anticipates continued growth and competition in the wireless carrier
services industry and consequently, the entrance of new competitors in the
future. An increase in competition could result in price reductions and loss of
market share. Any resulting reduction in gross margins could have a material
adverse effect on the Company's business, financial condition or results of
operations.
The Company's success and ability to compete is dependent in part upon its
proprietary technology. If unauthorized copying or misuse of the Company's
technology were to occur to any substantial degree, the Company's business,
financial condition and results of operations could be materially adversely
affected. In addition, some of the software used to support the Company's
roaming services and prepaid services is licensed by the Company from single
vendors, which are small corporations. There can be no assurance that these
suppliers will continue to license this software to the Company or, if any
supplier terminates its agreement with the Company, that the Company will be
able to develop or otherwise procure software from another supplier on a timely
basis and at commercially acceptable prices.
The Company's operations are dependent on its ability to maintain its computer,
switching and other telecommunications equipment and systems in effective
working order and to protect its systems against damage from fire, natural
disaster, power loss, telecommunications failure or similar events. Any damage,
failure or delay that causes interruptions in the Company's operations could
have a material adverse effect on the Company's business, financial condition
and results of operations.
12
PART II. OTHER INFORMATION:
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
The exhibits listed in the Exhibit Index are part of or included
in this report.
b) Reports on Form 8-K
NONE
13
SIGNATURES
Pursuant to the requirements 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.
Boston Communications Group, Inc.
-------------------------------------
(Registrant)
Date: By: /s/ George K. Hertz
---------------------
George K. Hertz
Chief Executive Officer
and President
Date: By: /s/ Fritz von Mering
----------------------------------------
Fritz von Mering
Vice President, Finance
and Administration
14
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
- ----------- -----------
11.0 Statement RE: Computation of Per Share Earnings