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 March 31, 1997 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 May 1, 1997 the Company had outstanding 12,731,162 shares of common stock,
$.01 par value per share.
1
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.....................7
Certain Factors That May Affect Future Results.........10
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings......................................12
Item 6. Exhibits and Reports on Form 8-K.......................12
2
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS DECEMBER 31, MARCH 31,
1996 1997
---- ----
(unaudited)
Current assets:
Cash $ 923 $ 357
Short-term investments 20,498 14,731
Accounts receivable, net of allowance for
billing adjustments and doubtful accounts
of $ 1,242 in 1996 and $ 1,191 in 1997 11,060 13,203
Inventory 1,189 2,811
Deferred income taxes 1,334 1,334
Prepaid expenses and other assets 495 710
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Total current assets 35,499 33,146
Property and equipment, net 12,906 16,053
Goodwill, net 3,159 3,051
Other assets 395 411
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Total assets $51,959 $52,661
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,371 $ 1,942
Accrued expenses 7,158 7,167
Income taxes payable 490 522
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Total current liabilities 9,019 9,631
Minority interest 47 26
Shareholders' equity:
Preferred Stock, $.01 par
value, 2,000,000 shares authorized,
0 shares issued and outstanding - -
Common Stock, voting, par value $.01 per
share, 35,000,000 shares authorized,
12,725,749 shares in 1996 and 12,777,582
shares in 1997 issued and outstanding 127 128
Additional paid-in capital 52,738 52,755
Treasury stock (46,420 shares, at cost) (372) (372)
Accumulated deficit (9,600) (9,507)
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Total shareholders' equity 42,893 43,004
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Total liabilities and shareholders'
equity $51,959 $52,661
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3
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
1996 1997
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Service Revenues:
Calling service revenues $ 7,214 $ 7,012
Teleservice revenues 3,847 3,789
Prepaid network service revenues - 790
System revenues 92 4,028
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11,153 15,619
Expenses:
Cost of service revenues 8,311 9,419
Cost of system revenues 37 2,640
Engineering, research and development 419 1,029
Sales and marketing 557 1,063
Related party management fees 252 -
General and administrative 482 670
Depreciation and amortization 360 890
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Total operating expenses 10,418 15,711
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Operating income(loss) 735 (92)
Interest income(expense), net (6) 262
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Income before income taxes
and minority interest 729 170
Minority interest - (21)
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Income before income taxes 729 191
Provision for income taxes 300 98
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Net income 429 93
Accretion of dividends on redeemable
preferred stock (237) -
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Net income available to common
shareholders $ 192 $ 93
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Net income available to common
shareholders per common share:
Net income $ 0.02 $ 0.01
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Shares used in computing net income
per common share 9,179 12,883
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4
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
1996 1997
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OPERATING ACTIVITIES
Net income $ 429 $ 93
Adjustments to reconcile net income to net cash
provided by(used in) operating activities:
Depreciation and amortization 360 890
Deferred income taxes 255 -
Minority interest - (21)
Changes in operating assets and liabilities,
excluding effect of business acquisition:
Accounts receivable (1,176) (2,144)
Inventory - (1,622)
Prepaid expenses and other assets (268) (250)
Accounts payable and accrued expenses 2,214 580
Income taxes payable (171) 31
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Net cash provided by(used in) operations 1,643 (2,443)
INVESTING ACTIVITIES
Acquisition of business, net of cash acquired (497) -
Investment in non-marketable securities (35) -
Purchase of property and equipment (1,527) (3,908)
Sales of short-term investments - 5,766
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Net cash provided by(used in) in investing
activities (2,059) 1,858
FINANCING ACTIVITIES
Proceeds from exercise of stock options 16 19
Proceeds from notes payable 500 -
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Net cash provided by financing activities 516 19
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Increase(decrease) in cash and cash equivalents 100 (566)
Cash and cash equivalents at beginning of period 253 923
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Cash and cash equivalents at end of period $ 353 $ 357
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5
BOSTON COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 10-K for the fiscal year
ended December 31, 1996.
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 February 1997, the Financial Accounting Standards Board issued Statement
of Financial Standard No. 128, "Earnings Per Share" which simplifies the
calculation of earnings per share (EPS) and creates a standard of
comparability to the recently issued International Accounting Standard No.
33, "Earnings Per Share". Since early application is not permitted, the
Company will adopt this standard in the fourth quarter of 1997. Its
adoption does not have a material effect on the Company's financial
position or results of operations in the first quarter of 1997.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - MARCH 31, 1996 AND 1997
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Service and system revenues
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Total revenues increased 39.3% from $11.2 million in the three months ended
March 31, 1996 to $15.6 million in the three months ended March 31, 1997.
Calling service revenues decreased 2.9% or $212,000 from the three months ended
March 31, 1996 to the same period ended March 31, 1997. The decrease in calling
service revenues resulted from declining trends in industry-wide cellular
roaming and the decrease in the frequency of the suspension of intercarrier
roaming agreements due to improved fraud controls implemented by the carriers.
Teleservice revenues decreased $58,000 for the three month period ended March
31, 1997 compared to the same period in the prior year. The decrease resulted
primarily from the discontinuance of certain special carrier programs, offset by
the expansion of services provided to existing customers and additional service
programs provided to new carrier customers. Revenues generated from prepaid
network services for the three months ended March 31, 1997 are principally
related to usage in markets where C2C prepaid services were commercially
available. As of March 31, 1997, twenty-five C2C Network switches were deployed
in various markets throughout the United States. Of these switches, nineteen
were fully operational and processing live transactions by the end of the first
quarter. System revenues are generated by Voice Systems Technology, Inc. (VST),
acquired in February 1996, and increased $3.9 million from the three month
period ended March 31, 1996 to the same period ended March 31, 1997. The
increase resulted primarily from the sale of systems to continue the expansion
of a prepaid cellular system in Mexico and, to a lesser extent, from the full
quarter of operations of its systems division for the three months ended March
31, 1997.
Cost of service revenues
- ------------------------
Cost of service revenues consist primarily of cellular network and landline
costs in addition to the personnel costs associated with operator assisted
ROAMERplus calling service calls, teleservice calls and C2C operations. Cost of
service revenues increased from 75.1% of service revenues for the three months
ended March 31, 1996 to 81.3% of service revenues for the three months ended
March 31, 1997. The increase in cost of service revenues as a percentage of
service revenues was primarily due to the high initial operating costs as
subscribers are added and usage is generated on the C2C network.
Cost of system revenues
- -----------------------
Cost of system revenues represent the cost of prepaid and voice systems sold.
Cost of system revenues increased from 40.2% of system revenues for the three
months ended March 31, 1996 to 65.4% of system revenues for the three months
ended March 31, 1997. The increase in cost of system revenues as a percentage
of system revenues reflects the increased personnel and other overhead to
support higher sales volumes and the expansion of the Company's manufacturing
operations. In addition, lower margins were generated from the sale of systems
to continue the expansion of a prepaid cellular system in Mexico.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - MARCH 31, 1996 AND 1997 (CONTINUED)
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Engineering, research and development expenses
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Engineering, research and development expenses include primarily the salaries
and benefits for software development engineering personnel associated with the
development, implementation and maintenance of existing and new services.
Engineering, research and development expenses increased $610,000 or 145.6% from
the three months ended March 31, 1996 to the three months ended March 31, 1997.
The increase was 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 teleservices.
Sales and marketing expenses
- ----------------------------
Sales and marketing expenses include direct sales force salaries and
commissions, travel and entertainment expenses, and the cost of trade shows,
advertising and other promotional expenses. Sales and marketing expenses
increased $506,000 or 90.8% from the three months ended March 31, 1996 to the
three months ended March 31, 1997. The increase in sales and marketing expenses
was due to additional expenditures to support the more sales intensive prepaid
service business and concentrated sales and marketing efforts related to
teleservices. In addition, the acquisitions of Voice Systems Technology, Inc.
(VST) and Wireless Americas Corp. (WAC) in 1996 resulted in the Company
incurring increased expenditures to support system sales globally.
General and administrative expenses
- -----------------------------------
General and administrative expenses include salaries and benefits and other
expenses that provide administrative support to the Company. General and
administrative expenses and related party management fees decreased $64,000 or
8.7% from the three months ended March 31, 1996 compared to the three months
ended March 31, 1997. The decrease resulted from consolidation of the Company's
administrative facilities and certain related party management fees which are
attributable to engineering, research and development for the three months ended
March 31, 1997.
Depreciation and amortization expense
- -------------------------------------
Depreciation and amortization expense includes depreciation of
telecommunications systems, furniture and equipment and leasehold improvements.
The Company provides for depreciation using the straight-line method over the
estimated useful lives of the assets, which range from three to seven years.
Goodwill related to the acquisition of VST and WAC is being amortized over eight
years. Depreciation and amortization expense increased $530,000 or 147.2%
during the three month period ended March 31, 1997 compared to the same period
in the prior year. This increase was due primarily to amortization of goodwill
from the Company's two acquisitions and depreciation of additional
telecommunications equipment and software to support the Company's calling
services, carrier support teleservices and prepaid network services. In
addition, the expansion of the Company's call centers and VST assembly facility
resulted in increased depreciation of furniture and equipment and leasehold
improvements. Depreciation and amortization expense are expected to increase in
1997 due to a full year of goodwill amortization from the VST and WAC
acquisitions and
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - MARCH 31, 1996 AND 1997 (CONTINUED)
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increased depreciation of telcommunications systems associated with teleservices
and the expansion of the C2C network.
Interest income(expense), net
- -----------------------------
Interest income(expense) increased $268,000 for the three months ended March 31,
1997 as compared to the same period in the prior year. The increase resulted
primarily from interest earned on the investments of the proceeds from the
Company's initial public offering.
Provision for income taxes
- --------------------------
The Company's effective income tax rate for the three month period ended March
31, 1997 reflects an increase from the prior year due to the non-deductibility
of goodwill amortization from the acquisitions of VST and WAC. The effective
income tax rate is expected to continue to be greater than 40% for the remainder
of 1997 due to the impact of non-deductible goodwill.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash used in operating activities for the three months ended March 31, 1997
was $2.4 million and resulted from an increase of accounts receivable and
inventory offset by an increase in accounts payable and accrued expenses.
Accounts receivable increased due to the sale of systems to Mexico in the first
quarter. Inventory increased to support the increasing sales of VST systems and
the continued assembly of C2C network equipment which is expected to be deployed
in the second quarter. Accounts payable and accrued expenses increased as a
result of increases in capital expenditures and costs associated with the
overall growth of the Company.
Net cash provided by investing activities was $1.9 million for the three months
ended March 31, 1997 and consisted primarily of sales of short-term investments,
needed to meet working capital needs and the purchase of telecommunications
equipment to support the Company's C2C Network and the expansion of the
teleservices business.
The Company believes that it has the necessary liquidity and capital resources
to sustain existing operations for at least the next twelve months.
9
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report contains 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 continue 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 teleservice
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 teleservices. Although 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 continued
development and deployment of its wireless prepaid service, including deployment
of its C2C Network. There can be no assurance that the Company will continue to
successfully develop and deploy 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 continue to 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
10
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.
11
PART II. OTHER INFORMATION:
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Item 1. Legal Proceedings
On April 18, 1997, the former President of Wireless Americas Corp.
("WAC") in which the Company holds an 80% interest, filed an action in
Florida Circuit Court in Dade County against WAC and the Company,
alleging wrongful termination, breach of contract and fraudulent
inducement, in connection with the termination of his employment by
WAC on March 14, 1997. The plaintiff seeks a declaratory judgement and
damages in an unspecified amount. While the matter is in the earliest
stages of the litigation, the Company and WAC intend to contest the
matter vigorously and believe that they have meritorious defenses and
counterclaims with respect to the action.
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
12
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.
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(Registrant)
Date: May 6, 1997 By: /s/ Paul J. Tobin
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Paul J. Tobin
Chief Executive Officer
and President
Date: May 6, 1997 By: /s/ Fritz von Mering
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Fritz von Mering
Vice President, Finance
and Administration
13
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX TO EXHIBITS
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Exhibit No. Description
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10.30 Registration Rights Agreement dated February 29, 1996 between
the Company and Michael J. Buchel, Zuyus Investment Company,
Peter T. Zuyus, Jr., Joseph Giegerich, Terrence G Hare III,
J. Michael Looney and John M. Freese, Sr.
10.31 Amendment, dated December 16, 1996, to the Registration Rights
Agreement, dated February 29, 1996.
10.32 Amendment, dated December 16, 1996, to the Registration Rights
Agreement, dated February 29, 1996.
11.0 Statement RE: Computation of Per Share Earnings
EX.27 Financial Data Schedule