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 June 30, 1999 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.
---------------------------------
(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 August, 2 1999 the Company had outstanding 16,561,020 shares of common
stock, $.01 par value per share.
INDEX
PAGE NUMBER
PART I. 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.........16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................19
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders....20
Item 6. Exhibits and Reports on Form 8-K.......................20
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
June 30, December 31,
ASSETS 1999 1998
---- ----
Current assets:
Cash and cash equivalents $ 17,466 $ 18,523
Short-term investments 7,039 7,086
Accounts receivable, net of allowance for billing
adjustments and doubtful accounts of $2,531 in 1999
and $1,508 in 1998 23,163 18,432
Inventory 3,922 3,525
Deferred income taxes 880 1,564
Prepaid expenses and other assets 1,553 823
--------- ---------
Total current assets 54,023 49,953
Property and equipment, net 43,622 38,055
Goodwill, net 3,157 3,460
Other assets 361 292
--------- ---------
Total assets $ 101,163 $ 91,760
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,283 $ 884
Accrued expenses 13,866 10,124
Income taxes payable 464 496
Current maturities of capital lease obligations 1,943 1,052
--------- ---------
Total current liabilities 18,556 12,556
Capital lease obligations, net of current maturities 1,902 546
Shareholders' equity:
Preferred Stock, par value $.01 per share, 2,000,000
Shares authorized, 0 shares issued and outstanding -- --
Common Stock, voting, par value $.01 per share,
35,000,000 shares authorized, 16,642,240 and
16,436,028 shares issued in 1999 and 1998,
respectively 166 164
Additional paid-in capital 92,876 91,683
Treasury stock (101,420 shares, at cost) (673) (673)
Accumulated deficit (11,664) (12,516)
--------- ---------
Total shareholders' equity 80,705 78,658
--------- ---------
Total liabilities and shareholders' equity $ 101,163 $ 91,760
========= =========
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Prepaid wireless services $ 9,731 $ 4,043 $ 17,603 $ 6,977
Teleservices 10,707 6,226 20,550 10,815
Roaming services 5,733 7,059 11,168 14,855
System sales 1,250 3,932 2,264 8,996
-------- -------- -------- --------
27,421 21,260 51,585 41,643
Expenses:
Cost of service revenues 17,067 12,899 32,538 24,940
Cost of system revenues 863 2,180 1,598 4,853
Engineering, research and
development 1,551 1,176 2,814 2,579
Sales and marketing 1,664 1,308 3,270 2,643
General and administrative 1,794 1,469 3,434 2,883
Depreciation and amortization 3,544 2,695 6,916 5,146
Impairment of long-lived assets -- 698 -- 698
-------- -------- -------- --------
Total operating expenses 26,483 22,425 50,570 43,742
-------- -------- -------- --------
Operating income (loss) 938 (1,165) 1,015 (2,099)
Interest income 247 326 521 712
-------- -------- -------- --------
Income (loss) before income taxes 1,185 (839) 1,536 (1,387)
Provision (benefit) for income taxes 523 -- 684 (208)
-------- -------- -------- --------
Net income (loss) per common share $ 662 $ (839) $ 852 $ (1,179)
======== ======== ======== ========
Basic net income(loss) per common
share $ 0.04 $ (0.05) $ 0.05 $ (0.07)
======== ======== ======== ========
Weighted average common shares
outstanding 16,502 16,269 16,472 16,262
======== ======== ======== ========
Diluted net income(loss) per common
share $ 0.04 $ (0.05) $ 0.05 $ (0.07)
======== ======== ======== ========
Weighted average common shares
outstanding 17,041 16,269 17,075 16,262
======== ======== ======== ========
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended
June 30,
1999 1998
---- ----
OPERATING ACTIVITIES
Net income(loss) $ 852 $ (1,179)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 6,916 5,146
Impairment of long-lived assets -- 698
Deferred income taxes 684 --
Changes in operating assets and liabilities:
Accounts receivable (4,731) (3,624)
Inventory (397) (1,191)
Prepaid expenses and other assets (801) (147)
Accounts payable and accrued expenses 5,141 (9)
Income taxes payable (32) (260)
-------- --------
Net cash provided by (used in) operations 7,632 (566)
INVESTING ACTIVITIES
Purchases of property and equipment (9,305) (4,393)
Sales of short-term investments 9,963 12,119
Purchases of short-term investments (9,916) (8,129)
-------- --------
Net cash used in investing activities (9,258) (403)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and employee
stock purchase plan 1,195 74
Repayment of capital leases (626) (562)
-------- --------
Net cash provided by (used in) financing activities 569 (488)
-------- --------
Decrease in cash and cash equivalents (1,057) (1,457)
Cash and cash equivalents at beginning of period 18,524 23,601
-------- --------
Cash and cash equivalents at end of period $ 17,466 $ 22,144
======== ========
Supplemental disclosure of non-cash transactions:
Capital lease obligations $ 2,873
========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
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 audited consolidated financial statements have been
condensed or omitted in accordance with rules of the United States
Securities and Exchange Commission. 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 Company's audited consolidated financial statements,
including the footnotes, thereto contained in the Company's Form 10-K for
the fiscal year ended December 31, 1998.
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.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands):
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
- -----------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per
share:
Net income (loss) $662 $(839) $852 $(1,179)
- -----------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -
weighted average shares 16,502 16,269 16,472 16,262
Effect of dilutive securities:
Employee stock options 539 -- 603 --
- -----------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversion 17,041 16,269 17,075 16,262
- -----------------------------------------------------------------------------------------
Basic net income (loss) per common share $0.04 $(0.05) $0.05 $(0.07)
- -----------------------------------------------------------------------------------------
Diluted net income (loss) per common share $0.04 $(0.05) $0.05 $(0.07)
- -----------------------------------------------------------------------------------------
3. Inventory
Inventories consisted of the following at (in thousands):
June 30, December 31,
1999 1998
---- ----
Purchased parts $3,197 $2,690
Work-in-process 725 835
Finished goods -- --
------ ------
$3,922 $3,525
====== ======
4. Segment Reporting
Divisional Data
(in thousands, except for percentages)
Prepaid
Wireless Roaming
Three months ended June 30, Services Teleservices Services Systems Total
- ------------------------------------------------------------------------------------------
1999
Revenues $9,731 $10,707 $5,733 $1,250 $27,421
Gross margin $6,104 $2,081 $919 $387 $9,491
Gross margin percentage 63% 19% 16% 31% 35%
Operating income (loss) $1,413 $475 $196 $(1,146) $938
Percentage of total revenues 15% 4% 3% (92)% 3%
1998
Revenues $4,043 $6,226 $7,059 $3,932 $21,260
Gross margin $1,396 $1,419 $1,614 $1,752 $6,181
Gross margin percentage 34% 23% 23% 45% 29%
Operating income (loss) $(2,785) $103 $793 $724 $(1,165)
Percentage of total revenues (69)% 2% 11% 18% (5)%
Prepaid
Wireless Roaming
Six months ended June 30, Services Teleservices Services Systems Total
- ------------------------------------------------------------------------------------------
1999
Revenues $17,603 $20,550 $11,168 $2,264 $51,585
Gross margin 10,847 4,137 1,799 666 17,449
Gross margin percentage 62% 20% 16% 29% 34%
Operating income (loss) 2,000 1,011 342 (2,338) 1,015
Percentage of total revenues 11% 5% 3% (103)% 2%
1998
Revenues $6,977 $10,815 $14,855 $8,996 $41,643
Gross margin 1,787 2,367 3,553 4,143 11,850
Gross margin percentage 26% 22% 24% 46% 28%
Operating income (loss) (5,861) (217) 1,899 2,080 (2,099)
Percentage of total revenues (84)% (2)% 13% 23% (5)%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
Consolidated Results of Operations
The Company's total revenues increased 29% from $21.3 million in the three
months ended June 30, 1998 to $27.4 million in the three months ended June 30,
1999 and increased 24% from $41.6 million in the six months ended June 30, 1998
to $51.6 million in the six months ended June 30,1999. During the six month
period, the growth was primarily attributable to a 141% increase in the
Company's principal business, prepaid wireless, and a 72% increase in
teleservices revenues. A 68% decline in systems revenues and an 19% decline in
roaming services revenues partially offset the growth in prepaid wireless and
teleservices.
The Company generated operating income of $938,000 during the three months ended
June 30, 1999 compared to an operating loss of $1.2 million for the same period
in the prior year. For the six months ended June 30, 1999, the Company generated
operating income of $1.0 million compared to an operating loss of $2.1 million
for the six months ended June 30, 1998. The increases in 1999 resulted from an
improvement in the operating results of prepaid wireless services and
teleservices, partially offset by a decline in operating income from the systems
and roaming services divisions. The specifics of each division's revenues and
operating results are discussed in greater detail below.
Prepaid Wireless Services Division
Prepaid Wireless Services Division revenues increased 141% from $4.0 million in
the three months ended June 30, 1998 to $9.7 million in the three months ended
June 30, 1999 and increased 152% from $7.0 million to $17.6 million for the six
month periods ended June 30, 1998 and 1999, respectively. The Company's carrier
customers began to more aggressively price and market prepaid services and also
added many new markets to the C2C network to help stimulate these increases in
revenues. As of June 30, 1999 there were approximately 1.36 million prepaid
subscribers on the C2C network, compared to 487,000 subscribers at June 30,
1998, an increase of 177%.
The revenue increase excluded amounts for outages experienced on the C2C network
that resulted in performance penalties and the inability to bill certain
revenues. The Company has put controls in place to helpidentify such future
outages in advance. These controls are designed to minimize the likelihood of
future outages. The Company also invested additional capital to improve system
redundancy that should significantly reduce downtime if an unforeseen outage
occurs. However, there can be no assurances that additional outages will not
occur or that any such outages will not have a material adverse effect on the
Company's business, financial condition or results of operations.
Gross margins for the Prepaid Wireless Services Division improved from 34% of
prepaid wireless services revenues in the three months ended June 30, 1998 to
63% in the three months ended June 30, 1999 and from 26% of prepaid wireless
services revenues for the six months ended June 30, 1998 to 62% for the six
months ended June 30, 1999. Because the costs associated with the prepaid
division are generally fixed, the increase in prepaid wireless services revenues
in 1999 did not have a corresponding increase in variable costs.
In the three months ended June 30, 1999, the Prepaid Wireless Services Division
generated operating income of $1.4 million, compared to an operating loss of
$2.8 million in the three months ended June 30, 1998 and operating income of
$2.0 million for the six months ended June 30, 1999 compared to an operating
loss of $5.9 million for the six months ended June 30, 1998. The operating
losses incurred in 1998 were due to costs associated with expansion of the C2C
network, including personnel costs and depreciation of telecommunications
equipment and software. However, the increases in revenues and gross margin in
1999 more than offset these costs that are more fixed than variable, resulting
in an operating profit.
Teleservices Division
Teleservices Division revenues increased 72% from $6.2 million in the three
months ended June 30, 1998 to $10.7 million in the three months ended June 30,
1999 and increased 90% from $10.8 million for the three months ended June 30,
1998 to $20.5 million for the three months ended June 30,1999. The significant
increases in Teleservices revenues resulted primarily from additional services
provided to existing carrier customers and increased revenue generated from
billing inquiry services provided to the Prepaid Division's carriers.
Teleservices revenues from prepaid billing inquiry services were $1.2 million
for the three months ended June 30, 1998 and increased to $4.0 million for the
three months ended June 30, 1999 and were $2.3 million and $8.6 for the six
months ended June 30, 1998 and 1999, respectively.
Gross margins for the Teleservices Division decreased from 23% of teleservices
revenue for the three months ended June 30, 1998 to 19% for the three months
ended June 30, 1999 and decreased from 22% for the six months ended June 30,
1998 to 20% for the six months ended June 30, 1999. Although the Division
experienced a the significant increase in revenues, gross margins for the three
and six month periods ended June 30, 1999 decreased due to increased upfront
costs incurred to support growth and expansion into new call centers. These
costs include labor and related costs to train new personnel and improve their
skills to appropriate levels. In addition, the Company has outsourced certain
teleservices programs to a third party and therefore costs that would typically
be incurred as general and administrative and depreciation expenses are charged
as costs of services, thereby reducing gross margin but not necessarily
operating income.
Operating income for the Teleservices Division increased from $103,000 in the
quarter ended June 30, 1998 to $475,000 in the quarter ended June 30, 1999 and
increased from an operating loss of $217,000 for the six months ended June 30,
1998 to operating income of $1.0 million for the six months ended June 30, 1999.
These improvements in operating income resulted from the increased
revenue from the Teleservices Division, which absorbed more of the fixed sales,
administrative and depreciation costs in the quarter and six months ended June
30, 1999 compared to the same periods in 1998.
Roaming Services Division
Roaming services revenues decreased 19% from $7.1 million in the second quarter
of 1998 to $5.7 million in the second quarter of 1999 and decreased 25% from
$14.9 million in the six months ended June 30, 1998 to $11.2 million for the six
months ended June 30, 1999. The decreases in roaming services revenues in 1999
were primarily attributable to fewer suspensions of inter-carrier automatic
roaming agreements and roaming customers taking advantage of prepaid wireless
offerings in the marketplace. In addition, demand for the Company's roaming
service, whose premium rates are set by the Company's carrier customers, has
been adversely affected by an increase in one-rate registered roaming plans
offered by some national carriers. The Company anticipates that these trends
will continue and, therefore, roaming services revenues will continue to
decrease over time as compared to prior periods.
Gross margins for the Roaming Services Division decreased from 23% of roaming
services revenues in the three months ended June 30, 1998 to 16% in the three
months ended June 30, 1999 and decreased from 24% of roaming services revenues
for the six month period ended June 30, 1998 to 16% for the six month period
ended June 30, 1999. The decreases were primarily the result of reduced roaming
services revenues that could not absorb the fixed costs associated with
operating this Division.
Operating income for the Roaming Services Division decreased from $793,000 in
the three months ended June 30, 1998 to $196,000 in the three months ended June
30, 1999 and decreased from $1.9 million for the six months ended June 30, 1998
to $342,000 for the same period in 1999. The decreases in 1999 were primarily a
result of the reduction in gross margin and lower absorption of fixed operating
and depreciation costs due to the decline in roaming services revenues.
Systems Division
Systems revenues decreased 68% from $3.9 million in the second quarter of 1998
to $1.3 million in the second quarter of 1999 and decreased 75% from $9.0
million for the six months ended June 30, 1998 to $2.3 million for the same
period in 1999. The decreases were due to the decline in orders for the
Division's international prepaid systems. In addition, the first quarter of 1998
included an unusually large sale to a wireless carrier that was implementing
prepaid wireless systems throughout South America.
Gross margins for the Systems Division decreased from 46% of systems revenues in
the June 30, 1998 to 31% in the three months ended June 30, 1999 and decreased
from 46% of systems revenues for the six months ended June 30, 1998 compared to
29% for the six months ended June 30, 1999. The decreases resulted from
decreased systems revenue for the period that could not absorb fixed
manufacturing overhead.
Operating income for the Systems Division decreased from operating income of
$724,000 in the three months ended June 30, 1998 to an operating loss of $1.1
million in the three months ended June 30, 1999 and decreased from operating
income of $2.1 million for the six months ended June 30, 1998 to an operating
loss of $2.3 million for the six months ended June 30, 1999. The decreases in
1999 were primarily a result of the low sales volume that caused lower gross
margins and absorption of fixed operating, depreciation and amortization costs.
The Systems Division has generated losses during each of the last four quarters.
In an effort to improve the results of this division, the Company has hired a
new general manager with extensive wireless industry knowledge and international
experience. The Company believes that this new general manager will help the
Division in expanding its presence in the international market, while ensuring
that corporate exposure to the under-performance of the Division is minimized.
However, should these efforts not be successful, the Systems Division may incur
additional operating losses, asset impairment charges or other write-offs that
could materially and adversely affect the Company's business, operating results
and financial condition.
Operating Data
1999 1998
% of % of
Three months ended June 30, Total Total
($ in thousands) Total Revenues Total Revenues
- -------------------------------------------------------------------------------
Total revenues $27,421 100% $21,260 100%
Engineering, research and development 1,551 6% 1,176 6%
Sales and marketing 1,664 6% 1,308 6%
General and administrative 1,794 7% 1,469 7%
Depreciation and amortization 3,544 13% 2,695 13%
1999 1998
% of % of
Six months ended June 30, Total Total
($ in thousands) Total Revenues Total Revenues
- -------------------------------------------------------------------------------
Total revenues $51,585 100% $41,643 100%
Engineering, research and development 2,814 5% 2,579 6%
Sales and marketing 3,270 6% 2,643 6%
General and administrative 3,434 7% 2,883 7%
Depreciation and amortization 6,916 13% 5,146 12%
Engineering, research and development expenses
Engineering, research and development expenses primarily include the salaries
and benefits for software development and engineering personnel associated with
the development, implementation and maintenance of existing and new services.
Engineering, research and development expenses were 6% percentage of total
revenue for each of the quarters ended June 30, 1998 and 1999 and decreased from
6% to 5% for the six months ended June 30, 1998 and 1999, respectively. The
decrease for the six months primarily resulted from certain
engineers devoting less time to developing and building out the C2C network
infrastructure than they had in the prior year. Since these engineers began to
support the operations of the existing network, beginning in 1999 they are
classified in cost of services.
Sales and marketing expenses
Sales and marketing expenses include direct sales, marketing and product
management salaries, commissions, travel and entertainment expenses, in addition
to the cost of trade shows, advertising and other promotional expenses. As a
percentage of total revenues, sales and marketing expenses remained consistent
at 6% for the three and six-month periods ended June 30, 1998 and 1999. The
increases in absolute dollars for the quarter and six months ended June 30, 1999
primarily related to new marketing and business development efforts for the
Company. The Company expects to continue to increase expenditures for sales,
marketing and product management in the future to assist carriers with more
prepaid marketing and distribution efforts. Such expenditures are expected to
remain relatively consistent as a percentage of total revenues.
General and administrative expenses
General and administrative expenses include salaries and benefits of employees
and expenses for other administrative support services provided to the Company.
General and administrative expenses increased from $1.5 million in the three
months ended June 30, 1998 to $1.8 million in the three months ended June 30,
1999 and increased from $2.9 million to $3.4 million for the six month periods
ended June 30, 1998 and 1999, respectively, due to increased personnel and other
related costs to support the Company's growth. General and administrative
expenses as a percentage of total revenues remained consistent at 7% for the
three and six-month periods ended June 30, 1998 and 1999.
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 acquisitions is amortized over eight years. Depreciation and
amortization expense remained consistent at 13% of total revenues for the three
months ended June 30, 1998 and 1999 and increased from 12% of total revenues in
the six months ended June 30, 1998 to 13% of total revenues in the six months
ended June 30, 1999. The increase in 1999 was primarily due to the depreciation
of additional technical equipment and software to support the rapid expansion
and enhancement of the Company's prepaid wireless network. This increase was
partially offset by a decrease in depreciation as a percentage of Teleservices
revenues since most of the Division's growth was facilitated through outsourced
call center facilities.
Beginning in the fourth quarter of 1998, the Company has primarily supported the
growth in Teleservices by leasing call center facilities, equipment and
personnel from third parties and classifying those amounts entirely in cost of
services. Although depreciation and amortization expense is not expected to
increase as a percentage of revenues in 1999, these expenses are expected to
increase in absolute dollars due to increased capital expenditures for
telecommunications hardware and software, primarily related to new C2C features
and functionality and the continued enhancement and expansion of the C2C
network.
Impairment of Long Lived Assets
During the quarter ended June 30, 1998, the Company recorded a pre-tax charge of
$698,000 for an additional impairment loss on equipment that had been removed
from operations.
Interest income
Interest income decreased from $326,000 for the quarter ended June 30, 1998 to
$247,000 in 1999 and from $712,000 to $521,000 for the six month periods ended
June 30, 1998 and 1999, respectively. Interest income was earned from
investments of the proceeds of the Company's public offerings and was offset by
interest expense from the Company's capital leases.
Provision (benefit) for income taxes
The income tax benefit for the six months ended 1998 yielded a 15% income tax
benefit. Income tax expense of $523,000 and $684,000 for the quarter and six
month period ended June 30, 1999 yielded a 44% and 45% income tax rate,
respectively, as compared to the statutory rate of 40%. The Company's effective
income tax rate is greater than the statutory rate due to the impact of
non-deductible goodwill from the Company's acquisitions. The Company's effective
income tax rate may be greater than 40% in future periods due to the continued
impact of non-deductible goodwill.
The Company has recorded a net deferred tax asset for net operating loss carry
forwards and other temporary differences based on management's assessment that
it is more likely than not that future results of operations will be sufficient
to realize this asset.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments decreased from $25.6 million
at December 31, 1998 compared to $24.5 million at June 30, 1999. Net cash
provided by operations of $7.6 million for the six months ended June 30, 1999
was primarily generated from $6.9 million in depreciation and amortization
expense, which resulted from the continued significant investment in
telecommunications systems and equipment. The increase in accounts payable and
accrued expenses of $5.1 million resulted from the timing of payments and was
offset by a $4.7 million increase in accounts receivable due to the increased
sales volume in 1999.
The Company's investing activities utilized $9.3 million of net cash during the
six-month period ended June 30, 1999 for purchases of property and equipment. In
addition, $2.9 million in property and equipment was leased during the same
period. These capital additions include $9.1 million for telecommunications
systems equipment and software for expansion of the Company's C2C network. The
Company anticipates that over the next 12 months it will continue to make
significant capital investments for additional equipment and enhanced feature
capabilities to strengthen prepaid wireless services.
The Company's financing activities generated $569,000 in net cash during the six
months ended June 30, 1999, due to proceeds from exercise of stock options,
partially offset by payments of capital lease obligations. In addition, the
Company entered into a lease for $3.5 million of which $2.7 million was funded
as of June 30, 1999 to acquire certain telecommunication systems equipment.
The Company believes that its cash and cash equivalents, short-term investments
and the funds anticipated to be generated from operations will be sufficient to
finance the Company's operations for at least the next 12 months.
Year 2000 Readiness Disclosure
The Company has implemented Y2K enterprise-wide projects and conducted tests to
ensure that all products, services and support systems can fully process
date/time data before, during, and after midnight December 31, 1999, recognize
the year 2000 as a Leap Year and maintain existing interoperability and
interfaces with other devices already in use without any modifications or
changes in operations. The Company is managing its readiness by:
1) Conducting and maintaining inventories of all hardware, software,
telecommunications providers, and material third party
relationships. This stage is complete and the process will continue
to be updated during 1999.
2) Seeking compliance certification from each vendor through direct
communication. The Company is conducting unit, regression,
interoperability, and call flow tests wherever possible. Dedicated
resourcesmanage this comprehensive effort.
3) Implementing test plans that are supported by doctorate level
technical consultants and dedicated QA equipment and personnel that
are examining multiple static and rollover date scenarios.
In June 1998, the Company completed the re-write, redesign and implementation of
its C2C prepaid system. The Company's development team devoted nearly one year
to produce the necessary changes and included Year 2000 readiness as part of
this process. Additionally, desktop hardware and software, call distribution
systems and customer service handling software are Year 2000 ready today. To
ensure Year 2000 readiness, the Company has upgraded these systems through
vendor-provided Year 2000 patches or purchases of new systems during the normal
course of business. Core business teams for all divisions have examined internal
and external support systems including facilities,
finance and human resource components. The Company has completed a comprehensive
on-site physical inventory and upgraded all of its C2C nodes, of which Year 2000
readiness was a component. The remedial action required as a result of this
inventory was minimal and was completed before June 30, 1999. In addition, BCGI
has upgraded all servers for core services to be Year 2000 ready.
As of June 30, 1999 the Prepaid, Teleservices, Roaming and Systems Divisions
have successfully completed Year 2000 readiness testing of all systems and
applications owned and operated by the Company to provide core services. Many of
these tests were conducted in conjunction with some of the Company's major
customers and telecommunications vendors. The remaining administrative systems
and applications are currently being tested for Year 2000 readiness and expect
to be Year 2000 ready by September 30, 1999.
The Company is fully dependent on the services of multiple telecommunications
providers. If these providers fail to deliver services because of Year 2000
issues or otherwise, the Company would be vulnerable to serious service failures
and be exposed to liability to customers and third parties, including the
potential for significant lost revenue. The Company is communicating with all
providers in order to assess this risk. These telecommunications providers have
either announced their networks as currently Year 2000 compliant or will be by
September 1999. Additionally, the Company will evaluate contingency options in
the event of a failure by such providers. The Company has not currently
developed any contingency plans for the services of these providers. In the
event that tests reveal failures that cannot be remedied within the Company's
timetable for readiness, contingency plans will be established.
The Company has spent significant amounts in research and development to ensure
that its products and services are Year 2000 ready. In addition, during 1998 and
through June 30, 1999 the Company has incurred and expensed approximately
$710,000 in payroll, benefit and consulting costs for dedicated resources
related to Year 2000 issues. The Company currently estimates additional costs of
approximately $230,000 will be incurred in 1999 to resolve Year 2000 issues. The
Company anticipates that the amounts and resources utilized to achieve Year 2000
readiness will not delay or reduce the resources available to complete other
projects.
The costs to complete Year 2000 analysis and remediation are based on
management's best estimates, which have been determined through numerous
assumptions about future events including the availability of resources and
other factors. However, there can be no assurances that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that could generate significant negative consequences include
undetected errors or defects of third party hardware and software utilized in
the Company's operations, noncompliance of other providers (phone service,
electricity, other utilities, etc.) and other uncertainties. Although management
does not expect Year 2000 issues to have a material impact on its business or
results of operations, there can be no assurance that there will not be
interruptions or other limitations of system functionality.
Certain Factors That May Affect Future Results
This Quarterly Report contains forward-looking statements that involve risks and
uncertainties, including without limitation, statements regarding the trend of
decreased suspensions of inter-carrier automatic roaming agreements, roaming
customers taking advantage of prepaid wireless offerings in the marketplace and
carrier marketing of one-rate registered roaming plans to reduce roaming service
revenues, expenditures for sales, marketing and product management, greater
costs of depreciation and amortization and an effective income tax rate greater
than 40%. The Company's actual results may differ significantly from the results
discussed in the forward-looking statements. A number of important factors 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 successfully support its C2C network, the ability of the
Company's carrier customers to successfully continue to market and sell C2C
prepaid wireless services, 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 have 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, the services being performed for the teleservices
programs and the level of system sales. 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.
A number of the Company's Prepaid, Teleservices and Systems Division contracts
have been extended beyond their expiration dates or will expire in 1999 and
beyond. There can be no assurances that the Company will be successful in
renewing any of these contracts. If these contracts are not renewed the
Company's business, financial condition and results of operations could be
materially adversely affected.
The Company has experienced fluctuations in its quarterly operating results and
anticipates that such fluctuations will continue and could intensify. The
Company experienced an operating loss in 1997 and the first three quarters of
1998, primarily due to expenses associated with the development and expansion of
its C2C network. In addition, the Company's Systems Division has experienced
operating losses during each of the last four quarters due to fewer sales of
international prepaid systems. 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, variations
in the level of system sales, changes in regulations affecting the wireless
industry, changes in the Company's operating expenses, the ability to identify,
hire and retain qualified
personnel 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
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 and adversely affected.
The Company has recently taken steps in an attempt to improve the results of the
Systems Division, which has generated losses during each of the last four
quarters. However, should these efforts not be successful, the Systems Division
may incur additional operating losses, asset impairment charges or other
write-offs that could materially and adversely affect the Company's overall
business, operating results and financial condition.
The Company historically has provided its services almost exclusively to
wireless carriers. Although the wireless telecommunications 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 wireless carriers
will continue to use the Company's services. The Company expects that demand for
its roaming services will continue to decline as fewer inter-carrier roaming
agreements are suspended, roaming customers taking advantage of prepaid wireless
offerings in the marketplace and carriers more frequently offer one-rate roaming
plans. In addition, prepaid wireless and PCS services are relatively new
services in new markets, 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 would be materially and
adversely affected.
The Company's future success depends, in large part, on the continued use of its
existing services and systems, the acceptance of new services in the wireless
industry and the Company's ability to develop new services and systems or adapt
existing services or systems to keep pace with changes in the wireless telephone
industry. Further, a rapid shift away from the use of wireless in favor of other
services, could affect demand for the Company's service offerings and could
require the Company to develop modified or alternative service offerings to
address the particular needs of the 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 or systems in a timely manner, or at all.
The Company is currently devoting significant resources toward the support and
enhancement of its prepaid wireless services and systems to maintain system
reliability and expand the C2C network. Several of the Company's carrier
customer contracts contain penalty clauses that provide for reductions in
revenue for certain network outages. There can be no assurance that the Company
will successfully support and enhance the C2C network effectively to avoid
system outages and any associated loss in revenue, that the market for the
Company's prepaid service will continue to develop, or that the Company's C2C
network will successfully support current and future growth. Furthermore, the
Company has expended significant amounts of capital to support the C2C
agreements it has secured with its carrier customers. Because C2C revenues are
principally generated by prepaid subscriber minutes of use, the Company's C2C
revenues can be impacted by the carrier's ability to successfully market and
sell prepaid services. Revenues from the Company's C2C network are dependent on
the ability to retain subscribers on the network (i.e. churn rate) and there can
be no assurance that the Company's
churn rate will not increase which would result in reductions in related
revenues. In addition, teleservices revenues associated with billing inquiry
support for C2C carrier customers are becoming a more significant portion of
teleservices revenues and therefore these revenues are dependent upon the size
and growth of the C2C subscriber base.
The Company has experienced outages on the C2C network which have resulted in
performance penalties and unbilled revenue. Despite efforts to avoid outages in
the future, there can be no assurance that future outages will not occur. Such
outages can result in additional penalties and lost revenue for the Company. In
addition, outages could damage the Company's reputation. The occurrence of one
or more outages could have a material adverse effect on the company's business,
operating results and financial condition.
The Company has expanded its operations rapidly, creating significant demands on
the Company's administrative, operational, development and financial personnel
and other resources. In addition, the growth of the Company's Teleservices
Division is dependent on recruiting, training and retaining employees to perform
customer services responsibilities. Teleservices has also outsourced a portion
of its call center operations to a third party vendor who is responsible for
certain operational functions, including hiring, training and retaining
employees. There can be no assurance that the vendor will continue to be able to
meet the Company's existing and future needs effectively. 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 Company's operations are supported by many hardware components and software
applications from third party vendors. There can be no assurances that these
hardware components and software applications will function in accordance with
specifications agreed upon by the Company and its vendors. If the hardware and
software do not function as specified, the Company's business, financial
condition and results of operations could be materially and adversely affected.
The Company currently prices and sells all of its systems to international
customers in U.S. dollars. In addition, many Systems Division customers are
multinational corporations that are publicly traded in the U.S. All payments are
received in U.S. dollars which helps to protect the Company from the need to
hedge against foreign currency risk. While these provisions serve to protect the
Company from accounts receivable losses, there can be no assurances that systems
sales to foreign countries will not result in losses due to devaluation of
foreign currencies or other international business conditions outside of the
Company's control.
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, many 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 and 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
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.
The Company is actively addressing the concerns of its operations with respect
to Year 2000 issues. Company management, with the assistance of consultants, is
implementing an enterprise-wide project to identify systems, equipment, vendors
and customers that may be affected by the Year 2000 issues and to develop a
comprehensive plan to be in compliance with the Year 2000 issues prior December
31, 1999. The Company expects to make the necessary changes to be Year 2000
ready, but there can be no assurances that the Company will adequately identify
all Year 2000 issues and the associated costs and expenses in a timely manner.
Also, there can be no assurance that such costs and expenses will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company currently prices and sells all of its systems to international
customers in U.S. dollars. In addition, many Systems Division customers are
multinational corporations that are publicly traded in the U.S. All payments are
received in U.S. dollars which helps to protect the Company from the need to
hedge against foreign currency risk. While these provisions serve to protect the
Company from accounts receivable losses, there can be no assurances that systems
sales to foreign countries will not result in losses
due to devaluation of foreign currencies or other international business
conditions outside of the Company's control.
The Company does not believe that there is any material market risk exposure
with respect to derivative or other financial instruments which would require
disclosure under this item.
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders
The Company held the 1999 Annual Meeting of Shareholders (the
"Annual Meeting") on May 20, 1999. At the Annual Meeting, the
following actions were taken:
1. The shareholders elected Paul J. Tobin, E.Y. Snowden, and
Brian E. Boyle as Class III Directors of the Company to serve
3 year terms. The table below outlines the voting results:
Number of Shares/Votes
----------------------
For Withheld
--- --------
Paul J. Tobin 13,709,920 54,289
E. Y. Snowden 13,708,670 55,539
Brian E. Boyle 13,709,920 54,289
In addition, Fritz von Mering, Paul Gudonis, Mark Kington,
Craig Burr, Gerald Segel and Jerrold Adams are continuing
directors of the Company.
2. The shareholders ratified the appointment of Ernst & Young LLP
as the Company's independent auditors by a vote of 13,743,676
shares of Common Stock for, 8,561 shares of Common Stock
against and 11,972 shares of Common Stock abstained.
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
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: August 11, 1999 By: /s/ Karen A. Walker
-------------------
Karen A. Walker
Vice President, Financial
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED March 31, 1999
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
10.50 Master Equipment Lease between Boston Communications Group and
Fleet Capital Corp. dated May 17, 1999
27 Financial Data Schedule