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, 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.
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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, 1999, the Company had outstanding 16,598,454 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 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)
September 30, December 31,
ASSETS 1999 1998
---- ----
Current assets:
Cash and cash equivalents $ 13,856 $ 18,523
Short-term investments 9,011 7,086
Accounts receivable, net of allowance for billing
adjustments and doubtful accounts of $2,092 in 1999
and $1,508 in 1998 25,630 18,432
Inventory 2,182 3,525
Deferred income taxes 1,564 1,564
Prepaid expenses and other assets 1,329 823
-------- --------
Total current assets 53,572 49,953
Property and equipment, net 44,400 38,055
Goodwill, net 3,006 3,460
Other assets 360 292
-------- --------
Total assets $101,338 $ 91,760
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,184 $ 884
Accrued expenses 16,706 10,124
Income taxes payable 486 496
Current maturities of capital lease obligations 1,936 1,052
-------- --------
Total current liabilities 20,312 12,556
Capital lease obligations, net of current maturities 2,233 546
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, 16,699,899 and
16,436,028 shares issued in 1999 and 1998,
respectively 167 164
Additional paid-in capital 93,178 91,683
Treasury stock (101,420 shares) at cost (673) (673)
Accumulated deficit (13,879) (12,516)
-------- --------
Total shareholders' equity 78,793 78,658
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Total liabilities and shareholders' equity $101,338 $ 91,760
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BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Prepaid wireless services $ 9,115 $ 5,010 $26,718 $11,987
Teleservices 10,088 7,514 30,638 18,329
Roaming services 5,956 7,097 17,124 21,952
System sales 955 1,547 3,219 10,543
------- ------- ------- -------
26,114 21,168 77,699 62,811
Expenses:
Cost of service revenues 17,651 13,684 50,189 38,624
Cost of system revenues 728 1,363 2,326 6,216
Cost of system revenues-one-time charge 1,824 -- 1,824 --
Engineering, research and development 1,632 1,426 4,446 4,005
Sales and marketing 1,498 1,387 4,768 4,028
General and administrative 1,985 1,572 5,419 4,455
Depreciation and amortization 3,921 2,908 10,837 8,056
Impairment of long-lived assets -- -- -- 698
------- ------- ------- -------
Total operating expenses 29,239 22,340 79,809 66,082
------- ------- ------- -------
Operating loss (3,125) (1,172) (2,110) (3,271)
Interest income 227 331 748 1,043
------- ------- ------- -------
Loss before income taxes (2,898) (841) (1,362) (2,228)
Provision (benefit) for income taxes (684) 208 -- --
------- ------- ------- -------
Loss per common share $(2,214) $(1,049) $(1,362) $(2,228)
======= ======= ======= =======
Basic and diluted net loss per common share $ (0.13) $ (0.06) $ (0.08) $ (0.14)
======= ======= ======= =======
Weighted average common shares outstanding 16,575 16,277 16,506 16,267
======= ======= ======= =======
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months ended
September 30,
1999 1998
---- ----
OPERATING ACTIVITIES
Net loss $ (1,362) $ (2,228)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 10,837 8,054
Impairment of long-lived assets -- 698
One-time charge 1,824 --
Changes in operating assets and liabilities:
Accounts receivable (7,198) (6,516)
Inventory (134) (2,045)
Prepaid expenses and other assets (576) (129)
Accounts payable and accrued expenses 6,535 1,542
Income taxes payable (10) (10)
-------- --------
Net cash provided by (used in) operations 9,916 (634)
INVESTING ACTIVITIES
Purchases of property and equipment (13,086) (7,044)
Sales of short-term investments 13,897 15,113
Purchases of short-term investments (15,822) (9,188)
-------- --------
Net cash used in investing activities (15,011) (1,119)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and employee
stock purchase plan 1,498 155
Purchase of treasury stock -- (301)
Repayment of capital lease obligations (1,070) (844)
-------- --------
Net cash provided by (used in) financing activities 428 (990)
-------- --------
Decrease in cash and cash equivalents (4,667) (2,743)
Cash and cash equivalents at beginning of period 18,523 23,601
-------- --------
Cash and cash equivalents at end of period $ 13,856 $ 20,858
======== ========
Supplemental disclosure of non-cash transactions:
Capital lease obligations 3,641
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 Nine months
Ended September 30, Ended September 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------
Numerator for basic and diluted loss per share:
Net loss $(2,214) $(1,049) $(1,362) $(2,228)
- ------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share - 16,575 16,277 16,506 16,267
weighted average shares
Effect of dilutive securities:
Employee stock options -- -- -- --
- ------------------------------------------------------------------------------------------
Denominator for diluted earnings per share
adjusted weighted average shares and assumed
conversion 16,575 16,277 16,506 16,267
- ------------------------------------------------------------------------------------------
Basic and diluted net loss per common share $(0.13) $(0.06) $(0.08) $(0.14)
- ------------------------------------------------------------------------------------------
3. Inventory
Inventories consisted of the following at (in thousands):
September 30, December 31,
1999 1998
----- ----
Purchased parts $1,714 $2,690
Work-in-process 468 835
Finished goods -- --
-- --
------ ------
$2,182 $3,525
====== ======
4. Segment Reporting
Divisional Data
(in thousands, except for percentages)
Prepaid
Three months ended Wireless Roaming
September 30, Services Teleservices Services Systems Total
- ------------------------------------------------------------------------------------------
1999
Revenues $9,115 $10,088 $5,956 $955 26,114
Gross margin 5,173 1,233 1,102 (1,597) 5,911
Gross margin percentage 57% 12% 19% (167)% 23%
Operating income (loss) 15 (417) 351 (3,074) (3,125)
Percentage of total revenues 0% (4)% 6% (322)% (12)%
1998
Revenues $5,010 $7,514 $7,097 $1,547 21,168
Gross margin 2,513 1,855 1,569 184 6,121
Gross margin percentage 50% 25% 22% 12% 29%
Operating income (loss) (1,378) 432 718 (944) (1,172)
Percentage of total revenues (28)% 6% 10% (61)% (6)%
Prepaid
Nine months ended Wireless Roaming
September 30, Services Teleservices Services Systems Total
- -----------------------------------------------------------------------------------------
1999
Revenues 26,718 30,638 17,124 3,219 77,699
Gross margin 16,020 5,370 2,901 (931) 23,360
Gross margin percentage 60% 18% 17% (29)% 30%
Operating income (loss) 2,015 594 693 (5,412) (2,110)
Percentage of total revenues 8% 2% 4% (168)% (3)%
1998
Revenues 11,987 18,329 21,952 10,543 62,811
Gross margin 4,300 4,222 5,122 4,327 17,971
Gross margin percentage 36% 23% 23% 41% 29%
Operating income (loss) (7,239) 215 2,617 1,136 (3,271)
Percentage of total revenues (60)% 1% 12% 11% (5)%
5. One-Time Charge
In September 1999, the Company recorded a one-time charge of $1.8 million
as a result of the reorganization of the Systems Division. The charge
primarily relates to expenses associated with the reorganization of the
Systems Division including inventory write-downs and severance.
6. Subsequent Events
In October 1999, the Company terminated a services agreement with a third
party who leased and operated call center equipment and a facility on
behalf of the Company. The leases were assigned to the Company, resulting
in capital additions of approximately $2.7 million. In addition, the
Company will prepay rent of $2.4 million over the next 12 months for the
remaining 48 months on the facility lease.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Consolidated Results of Operations
The Company's total revenues increased 23% from $21.2 million in the three
months ended September 30, 1998 to $26.1 million in the three months ended
September 30, 1999 and increased 24% from $62.8 million in the nine months ended
September 30, 1998 to $77.7 million in the nine months ended September 30, 1999.
During the nine-month period ended September 30, 1999, the growth was primarily
attributable to a 123% increase in the Company's principal business, prepaid
wireless, and a 67% increase in teleservices revenues. A 70% decline in systems
revenues and a 22% decline in roaming services revenues during the nine-month
period ended Septemeber 30, 1999 partially offset the growth in prepaid wireless
and teleservices.
The Company generated an operating loss of $3.1 million during the three months
ended September 30, 1999 compared to an operating loss of $1.2 million for the
same period in the prior year. For the nine months ended September 30, 1999, the
Company generated an operating loss of $2.1 million compared to an operating
loss of $3.3 million for the nine months ended September 30, 1998. The operating
loss during the three months ended September 30, 1999 included the $1.8 million
one-time charge due to the reorganization of the Systems Division. For the
three-month periods, the improved results for prepaid wireless services were
offset by a decline in operating income for the other divisions. For the
nine-month periods, the improvement in the operating results of prepaid wireless
services and teleservices was 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 82% from $5.0 million in
the three months ended September 30, 1998 to $9.1 million in the three months
ended September 30, 1999 and increased 123% from $12.0 million to $26.7 million
for the nine month periods ended September 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. Increased usage continues to result in certain
carriers achieving volume price discounts that, along with contractual renewals,
yield lower revenue rates per minute of usage. In
addition, lower minutes of usage per subscriber were generated compared to the
same periods in prior year. As of September 30, 1999 there were approximately
1.47 million prepaid subscribers on the C2C network, compared to 623,000
subscribers at September 30, 1998, an increase of 136%.
The revenue increase excludes performance penalties incurred during the three
month period ended September 30, 1999 as a result of outages experienced on the
C2C network due to hardware failures. The Company has been working closely with
its critical vendors to correct the hardware failures, improve support and
minimize the likelihood of future outages. The Company continues to invest
additional capital to improve system redundancy that should 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 50% in
the three months ended September 30, 1998 to 57% in the three months ended
September 30, 1999 and from 36% for the nine months ended September 30, 1998 to
60% for the nine months ended September 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 September 30, 1999, the Prepaid Wireless Services
Division generated operating income of $15,000 compared to an operating loss of
$1.4 million in the three months ended September 30, 1998 and operating income
of $2.0 million for the nine months ended September 30, 1999 compared to an
operating loss of $7.2 million for the nine months ended September 30, 1998. The
operating losses incurred in 1998 were due to costs associated with the
expansion of the C2C network, including personnel costs and depreciation of
telecommunications equipment and software. Although depreciation and other
operating costs increased in 1999 to support the expanded system, 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 34% from $7.5 million in the three
months ended September 30, 1998 to $10.1 million in the three months ended
September 30, 1999 and increased 67% from $18.3 million for the nine months
ended September 30, 1998 to $30.6 million for the nine months ended September
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 carrier customers. As a result of changing customer needs and a
recently developed distributed architecture that will enable carriers to use the
Company's proprietary software to deliver prepaid billing inquiry in-house, the
Company anticipates that Teleservices revenues will decrease. Teleservices
revenues from prepaid billing inquiry services were $2.2 million for the three
months ended September 30, 1998 and increased to $4.5 million for the three
months ended September 30, 1999 and were $5.1 million and $13.0 for the nine
months ended September 30, 1998 and 1999, respectively.
Gross margins for the Teleservices Division decreased from 25% of Teleservices
revenue for the three months ended September 30, 1998 to 12% for the three
months ended September 30, 1999 and decreased from 23% for the nine months ended
September 30, 1998 to 18% for the nine months ended September 30, 1999. Although
the Teleservices Division experienced a significant increase in revenues, gross
margins for the three and nine month periods ended September 30, 1999 decreased
due to penalties incurred from a software problem resulting in calls going
unanswered, along with increased upfront costs incurred to support growth and
expansion into new and existing 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 margins but not necessarily operating income. The Company
also assumed certain call center equipment capital leases in October 1999 which
are expected to improve margins in future quarters since these expenses will no
longer be classified as cost of services but instead will be classified as
depreciation expense. In addition, the Company has relocated substantially all
of its call center operations to lower cost labor markets that should also
improve gross margins.
The Teleservices Division generated operating income of $432,000 for the three
months ended September 30, 1998 compared to an operating loss of $417,000 in the
three months ended September 30, 1999 and increased from operating income of
$215,000 for the nine months ended September 30, 1998 to $594,000 for the nine
months ended September 30, 1999. For the three-month period ended September 30,
1999, the operating loss was generated mainly due to a software problem
resulting in calls going unanswered, along with the loss of a customer whose
customer care was merged into an acquiring company's operations. For the nine
month period ended September 30, 1999, the improvement in operating income
resulted from the increased revenue from the Teleservices Division, which
absorbed more of the fixed sales, administrative and depreciation costs compared
to the same periods in 1998.
Roaming Services Division
Roaming services revenues decreased 16% from $7.1 million in the three months
ended September 30, 1998 to $6.0 million in the three months ended September 30,
1999 and decreased 22% from $22.0 million in the nine months ended September 30,
1998 to $17.1 million for the nine months ended September 30, 1999. The
decreases in roaming services revenues in 1999 were primarily attributable to
consolidation of wireless carriers which is causing their automatic roaming
footprints to expand, fewer suspensions of inter-carrier automatic roaming
agreements and 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 lower priced 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 22% of roaming
services revenues in the three months ended September 30, 1998 to 19% in the
three months ended September 30, 1999 and decreased from 23% of roaming services
revenues for the nine month period ended September 30, 1998 to 17% for the nine
month period ended September 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 $718,000 in
the three months ended September 30, 1998 to $351,000 in the three months ended
September 30, 1999 and decreased from $2.6 million for the nine months ended
September 30, 1998 to $693,000 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 38% from $1.5 million in the third quarter of 1998 to
$955,000 in the third quarter of 1999 and decreased 70% from $10.5 million for
the nine months ended September 30, 1998 to $3.2 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 12% of systems revenues in
the September 30, 1998 to (167%) in the three months ended September 30, 1999
and decreased from 41% of systems revenues for the nine months ended September
30, 1998 compared to (29%) for the nine months ended September 30, 1999. The
decreases resulted from decreased systems revenue for the period that could not
absorb fixed manufacturing overhead. In addition, during the third quarter of
1999, the Company reorganized the Systems Division and in conjunction with the
reorganization recorded a one-time charge of $1.8 million. The charge
principally relates to expenses associated with inventory write-downs to bring
the level of inventory in line with the future sales strategy, as well as
severance costs. The Company believes that the reorganization will help position
the Division to expand its presence in the international market, while ensuring
that corporate exposure to the under-performance of the Division is minimized.
However, should the reorganization 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 income (loss) for the Systems Division decreased from an operating
loss of $944,000 in the three months ended September 30, 1998 to an operating
loss of $3.1 million in the three months ended September 30, 1999 and decreased
from operating income of $1.1 million for the nine months ended September 30,
1998 to an operating loss of $5.4 million for the nine months ended September
30, 1999. The decreases in 1999 were primarily a result of the one-time charge
along with the low sales volume that caused lower gross margins and less
absorption of fixed operating, depreciation and amortization costs.
Operating Data
1999 1998
% of % of
Three months ended September 30, Total Total
($ in thousands) Total Revenues Total Revenues
- --------------------------------------------------------------------------------
Total revenues $26,114 100% $21,168 100%
Engineering, research and development 1,632 6% 1,426 7%
Sales and marketing 1,498 6% 1,387 7%
General and administrative 1,985 8% 1,572 7%
Depreciation and amortization 3,921 15% 2,908 14%
1999 1998
% of % of
Nine months ended September 30, Total Total
($ in thousands) Total Revenues Total Revenues
- --------------------------------------------------------------------------------
Revenues $77,699 100% $62,811 100%
Engineering, research and development 4,446 6% 4,005 6%
Sales and marketing 4,768 6% 4,028 6%
General and administrative 5,419 7% 4,455 7%
Depreciation and amortization 10,837 14% 8,056 13%
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 decreased from 7% to 6% of
revenues for the quarters ended September 30, 1998 and 1999, respectively, and
were consistent at 6% for the nine months ended September 30, 1998 and 1999. The
percentage decrease for the three 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. On an absolute dollar basis, the engineering,
research and development expenses increased in 1999 due to additional personnel
hired to develop new features and functionality for the Company's C2C network.
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 decreased from 7% to
6% for the three-month periods ended September 30, 1998 and 1999, respectively,
and were consistent at 6% for the nine month periods ended September 30, 1998
and 1999. The increases in absolute dollars for the quarter and nine months
ended September 30, 1999 primarily related to new marketing and business
development efforts for the Company. The decrease in sales and marketing
expenses as a percentage of total revenues for the three-month period resulted
from the use of distribution arrangements in the Systems
Division which reduced sales and marketing costs. 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 7% of total revenues for the
three months ended September 30, 1998 to 8% in the three months ended September
30, 1999 due to increased personnel and other related costs to support the
Company's growth. General and administrative expenses remained consistent at 7%
for the nine-month periods ended September 30, 1998 and 1999.
Depreciation and amortization expense
Depreciation and amortization expense includes depreciation of
telecommunications systems, furniture and equipment, buildings 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
twenty years. Goodwill related to acquisitions is amortized over eight years.
Depreciation and amortization expense increased from 14% of total revenues for
the three months ended September 30, 1998 to 15% of total revenues for the three
months ended September 30, 1999 and increased from 13% of total revenues in the
nine months ended September 30, 1998 to 14% of total revenues in the nine months
ended September 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 amounts entirely in cost of services. Depreciation and amortization
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. In addition, the Company also assumed certain call center
equipment capital leases in October 1999 which are expected to increase
depreciation in future quarters since these expenses will no longer be
classified as cost of services but instead will be classified as depreciation
expense.
Impairment of Long Lived Assets
During the nine months ended September 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 $331,000 for the quarter ended September 30, 1998
to $227,000 in 1999 and from $1.0 million to $748,000 for the nine month periods
ended September 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
In the three-month period ended September 30, 1999 the Company reversed the
previously recorded income tax provision recognized during the prior quarters
due to the losses incurred. In the quarter ended September 30, 1998, the Company
recorded income tax expense of $208,000 that represents the reversal of the
income tax benefit that was recorded in the first quarter of 1998 to reflect the
Company's best estimate for an effective tax rate for the year ending December
31, 1998.
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 $22.9 million at September 30, 1999. Net cash
provided by operations of $9.9 million for the nine months ended September 30,
1999 was primarily generated from $10.8 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 $6.9 million resulted from the timing of payments, increased
operating costs and increased capital expenditures and was offset by a $7.2
million increase in accounts receivable due to the increased sales volume in
1999.
The Company's investing activities utilized $15.0 million of net cash during the
nine-month period ended September 30, 1999 primarily for purchases of property
and equipment. In addition, $3.6 million in property and equipment was leased
during the same period. These capital additions include $12.5 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
software to improve redundancy, support new wireless intelligent (WIN)
technology and enhance feature capabilities to strengthen prepaid wireless
services.
The Company's financing activities generated $428,000 in net cash during the
nine months ended September 30, 1999, due to proceeds from exercise of stock
options, partially offset by payments of capital lease obligations.
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) 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) Maintaining compliance certification from each vendor through direct
communication. This stage is complete and the process will continue
to be updated during 1999.
3) Maintaining tested and compliant systems through a company wide
freeze until the successful millennium transition.
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, we believe 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 in June 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 were tested for Year 2000 readiness and completed before
October 1, 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 announced their networks as currently Year 2000 compliant. Additionally,
the Company will evaluate contingency options in the event of a failure by such
providers. The Company has developed limited Y2K contingency plans for the
services of these providers, based upon normal Business Continuity Plans.
The Company has developed a Year 2000 business continuity plan in order to
mitigate any potential impact of Year 2000 issues. In addition, the Company has
formally adopted a Year 2000 freeze strategy that takes effect beginning
November 19, 1999 for all production systems.
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 September 30, 1999 the Company has incurred and expensed approximately
$803,000 in payroll, benefit and consulting costs for dedicated resources
related to Year 2000 issues. The Company currently estimates that additional
costs of approximately $173,000 will be incurred in 1999 to test and remediate
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 continued
decreases in prepaid revenue per minute, decreases in teleservices revenues
resulting from changing carrier needs and proprietary software which enables
carriers to provide prepaid customer care in-house, reduced Teleservices margins
from the relocation of call center operations, 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 and greater
costs of depreciation and amortization. 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.
The Company has recently developed a distributed architecture that will enable
carriers to use our proprietary software to deliver prepaid billing inquiry
in-house. However, any revenues generated from this application will reduce the
need for the Teleservices Division to provide customer care services and
therefore may reduce teleservices revenues in future quarters.
A number of the Company's Prepaid and Teleservices contracts have continued
beyond their expiration dates or will expire in 1999 and beyond. Most of these
contracts are in the process of being renegotiated and renewed. 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. During the three months ended September 30, 1999 an operating
loss was also incurred due to the Systems Division one-time charge and system
outages in Prepaid and a software problem in Teleservices. In addition, the
Company's Systems Division has experienced operating losses during each of the
last five 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 five
quarters. A reorganization plan was implemented in September 1999 in an effort
realign the division and improve operating results. However, should these
reorganization 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 and there can be no assurance
that the Company's churn rate will not increase, which may 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. Average C2C minutes of usage per
subscriber have decreased during the past quarter and there can be no
assurance that these reductions will not continue, which may result in lower
than expected revenues.
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 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. However, there can be no assurances that future results
of operations will be sufficient to fully realize this asset.
The Company is actively addressing the concerns of its operations with respect
to Year 2000 issues. Company management, with the assistance of consultants, has
implemented an enterprise-wide project to identify systems, equipment, vendors
and customers that may be affected by the Year 2000 issues and developed 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 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: November 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)
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
10.51* Letter of Agreement between Centigram Communications
Corporation and Boston Communications Group dated August 12,
1999.
10.52* Amendment #1 to the Agreement between A G Communication
Systems Corporation and Boston Communications Group dated
August 26, 1999
10.53 Lease between Cummings Properties and Boston Communications
Group dated June 3, 1999
10.54* Riverview, New Brunswick, Canada Management Services Agreement
between ICT Group, Inc. and Boston Communications Group, Inc.
dated August 4, 1999
10.55* Lakeland, FL Management Services Agreement between ICT Group,
Inc. and Boston Communications Group, Inc. dated August 4,
1999
27 Financial Data Schedule
* Confidential treatment requested as to certain positions, which positions
have been deleted and filed separately with Securities and Exchange
Commission.