SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 10549
FORM 10-Q
(x) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000 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
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sylvan Road, Woburn, Massachusetts 01801
(Address of principal executive offices)
Registrant's telephone number, including area code: (617)692-7000
_________________________________________________________________
(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 April 20, 2000 the Company had outstanding 16,688,159 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.........13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................17
PART II. OTHER INFORMATION:
Item 4. Legal Proceedings.......................................18
Item 6. Exhibits and Reports on Form 8-K........................18
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March December
ASSETS 31, 31,
2000 1999
Current assets:
Cash and cash equivalents $25,360 $21,145
Short-term investments 6,998 9,091
Accounts receivable, net of allowance for
billing adjustments and doubtful accounts of
$2,736 in 2000 and $2,025 in 1999 19,551 18,546
Inventory 1,930 2,007
Deferred income taxes 356 1,169
Prepaid expenses and other assets 1,904 1,758
Total current assets 56,099 53,716
Property and equipment, net 43,134 44,995
Goodwill, net 2,703 2,854
Other assets 563 516
Total assets $102,499 $102,081
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,193 $ 941
Accrued expenses 14,225 15,012
Income taxes payable 565 505
Current maturities of capital lease
obligations 2,158 2,378
Total current liabilities 18,141 18,836
Capital lease obligations, net of current 3,420 3,876
maturities
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, 16,788,579 and 16,699,874 shares
issued in 2000 and1999, respectively 168 167
Additional paid-in capital 93,673 93,177
Treasury stock (101,420 shares, at cost) (673) (673)
Accumulated deficit (12,230) (13,302)
Total shareholders' equity 80,938 79,369
Total liabilities and shareholders' $102,499 $102,081
equity
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three months ended
March 31,
2000 1999
Revenues:
Prepaid wireless services $12,344 $7,872
Teleservices 7,665 9,843
Roaming services 4,807 5,435
Systems 391 1,014
25,207 24,164
Expenses:
Cost of service revenues 13,403 15,471
Cost of system revenues 434 735
Engineering, research and development 1,807 1,263
Sales and marketing 1,548 1,606
General and administrative 1,994 1,640
Depreciation and amortization 4,450 3,372
Total operating expenses 23,636 24,087
Operating income 1,571 77
Interest income 314 274
Income before income taxes 1,885 351
Provision for income taxes 813 161
Net income per common share $1,072 $ 190
Basic net income per common share $ 0.06 $ 0.01
Shares used in computing basic net income
per share 16,628 16,442
Diluted net income per common share $ 0.06 $ 0.01
Shares used in computing diluted net income
per share 17,009 17,108
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended
March 31,
2000 1999
OPERATING ACTIVITIES
Net income $ 1,072 $ 190
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,450 3,372
Deferred income taxes 813 161
Changes in operating assets and liabilities:
Accounts receivable (1,005) (2,038)
Inventory 77 (1,392)
Prepaid expenses and other assets (193) (41)
Accounts payable and accrued expenses (535) 3,403
Income taxes payable 60 (32)
Net cash provided by operations 4,739 3,623
INVESTING ACTIVITIES
Purchases of property and equipment (2,438) (3,915)
Sales of short-term investments 6,074 5,946
Purchases of short-term investments (3,981) (6,967)
Net cash used in investing activities (345) (4,936)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and
employee stock purchase plan 497 839
Repayment of capital leases (676) (301)
Net cash provided by(used in) financing
activities (179) 538
Increase (decrease) in cash and cash equivalents 4,215 (775)
Cash and cash equivalents at beginning of period 21,145 18,523
Cash and cash equivalents at end of period $25,360 $17,748
Supplemental disclosure of non-cash transactions:
Capital lease obligations $ 188
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 consolidated financial statements, which are prepared
in accordance with generally accepted accounting principles, 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 footnotes to the Company's audited consolidated
financial statements contained in the Company's Form 10-K for the fiscal
year ended December 31, 1999.
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 per share (in 000's except per share amounts):
Three Months
Ended March 31,
2000 1999
Numerator for basic and diluted earnings per share:
Net income $1,072 $190
Denominator:
Denominator for basic earnings per share -
weighted average shares 16,628 16,442
Effect of dilutive securities:
Employee stock options 381 666
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversion 17,009 17,108
Basic net income per common share $ 0.06 $ 0.01
Diluted net income per common share $ 0.06 $ 0.01
3. Inventory
Inventories consisted of the following at (in 000's):
March 31, December 31,
2000 1999
Purchased parts $1,078 $ 1,356
Work-in-process 852 651
$1,930 $ 2,007
4. Segment Reporting
Divisional Data (in 000's)
Prepaid
Three months Wireless Roaming
ended Service Teleservic Service System Eliminations Total
March 31,
2000
Revenues $12,344 $7,665 $4,807 $2,360 $(1,969) $25,207
Gross margin 8,734 1,736 943 723 (766) 11,370
Operating income
(loss) 2,911 (153) 161 (582) (766) 1,571
1999
Revenues $7,872 $9,843 $5,435 $2,670 $(1,656) $24,164
Gross margin 4,743 2,056 880 924 (645) 7,958
Operating income
(loss) 587 536 146 (547) (645) 77
5. Recent Accounting Pronouncements
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation (the Interpretation). This
Interpretation clarifies how companies should apply the Accounting Principles
Board's Opinion No. 25, Accounting for Stock Issued to Employees. The
Interpretation will be applied prospectively to new awards, modifications
to outstanding awards, and changes in employee status on or after July 1,
2000, except as follows: the definition of an employee applies to awards
granted after December 15, 1998; the Interpretation applies to modifications
that reduce the exercise price of an award after December 15, 1998; and the
Interpretation applies to modifications that add a reload feature to an award
made after January 12, 2000. At the present time, there are no awards granted
by the Company which would result in an adjustment at July 1, 2000 as a result
of this Interpretation.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements.
SAB 101 clarifies the SEC staff's views on applying generally accepted
accounting principles to revenue recognition in financial statements.
In March 2000, the SEC issued an amendment, SAB 101A, which deferred the
effective date of SAB 101. The Company will adopt SAB 101 in the second
quarter of 2000 in accordance with the amendment. The adoption of this
SAB is not expected to have a significant impact on the Company's financial
statements.
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 4% from $24.2 million in the three
months ended March 31, 1999 to $25.2 million in three months ended March 31,
2000. The growth was primarily attributable to a 57% increase in the
Company's principal business, prepaid wireless, partially offset by a 22%
decline in teleservices revenues, a 12% decline in roaming service revenues
and a 12% decline in systems revenues, including interdivisional revenue. In
2000, for internal financial reporting purposes, the Company began reporting
interdivision sales from the Systems Division to the Prepaid Services
Division for voice nodes and related equipment shipped during the quarter.
Prior year amounts have been reclassified to permit comparison.
The Company generated operating income of $1.6 million during the quarter ended
March 31, 2000 compared to operating income of $77,000 for the same period in
the prior year. The Company also generated net income of $1.1 million during
the quarter ended March 31, 2000 compared to net income of $190,000 for the
same period in the prior year. The increases in operating income and net income
resulted from a significant improvement in the operating results of prepaid
wireless services, partially offset by a decline in operating results from the
teleservices and systems divisions. The specifics of each division's revenues
and operating results are discussed in greater detail below:
Divisional Data
(in 000's except percentages)
Prepaid
Quarter ended Wireless Roaming
March 31, Services Teleservices Services Systems Eliminations Total
2000
Revenues $12,344 $7,665 $4,807 $2,360 $(1,969) $25,207
Gross margin $ 8,734 1,736 $943 $723 $(766) $11,370
Gross margin
percentage 71% 23% 20% 31% 45%
Operating income
(loss) $2,911 $(153) $161 $(582) $(766) $1,571
Percentage of
total revenues 24% (2)% 3% (25)% 6%
1999
Revenues $7,872 $9,843 $5,435 $2,670 $(1,656) $24,164
Gross margin $4,743 2,056 $880 $924 $(645) $7,958
Gross margin
percentage 60% 21% 16% 35% 33%
Operating income
(loss) $587 $536 $146 $(547) $(645) $77
Percentage of
total revenues 7% 5% 3% (20)% 0%
Prepaid Wireless Services Division
Prepaid Wireless Services Division revenues increased 57% from $7.9 million
in the first quarter of 1999 to $12.3 million in the first quarter of 2000.
The increase was primarily due to the increased number of subscribers and
greater minutes of use, offset by a decrease in the average price per minute.
As of March 31, 2000 there were approximately 2.3 million prepaid subscribers
on the C2C network, compared to 1.2 million subscribers at March 31, 1999,
an increase of 92%. The Company expects the average price per minute to
continue to decline as carrier growth results in higher volume discounts.
Additionally, the full effect of renegotiated pricing in recent contract
renewals will contribute to a decreased average price per minute. During the
first quarter, two significant prepaid services contracts were renewed.
Gross margins for the Prepaid Wireless Services Division improved from 60% of
prepaid wireless services revenues in the first quarter of 1999 to 71% in the
first quarter of 2000. The improvement resulted from higher revenues, improved
system performance, reduced telecommunications costs and management's focus on
effectively managing operating expenses.
In the first quarter of 2000, the Prepaid Wireless Services Division generated
operating income of $2.9 million compared to $587,000 in the first quarter of
1999. The continued increase in revenue helped to offset increases in operating
costs which are more fixed than variable.
Going forward, management expects that the seasonal trends experienced in 1999
for subscriber additions, churn and average minutes of use will continue, with
the growth in fourth and first quarter showing much stronger usage and
subscriber trends than the slower seasons in the second and the third quarters.
Teleservices Division
Teleservices Division revenues decreased 22% from $9.8 million in the first
quarter of 1999 to $7.7 million in the first quarter of 2000. The decrease in
Teleservices revenues primarily reflects the Company's previously announced
November 1999 closing of its Woburn, Massachusetts call center. In addition,
the decrease reflects the Company's strategy to provide its prepaid carrier
customers the opportunity to license the Company's prepaid customer
service software product and operate their own in-house call centers or
outsource their prepaid subscriber customer care to the Company. Licensing
revenue for the prepaid customer service software product is recorded in
the Prepaid Wireless Services Division.
Gross margins for the Teleservices Division increased from 21% to 23% for the
quarters ended March 31, 1999 and 2000. The improvement was due to the closing
of the Woburn call center which reduced labor costs. In addition, in October
1999, the Company cancelled the facilities management contract for the DeLand
call center and acquired the underlying leases for the call center facilities
to achieve additional cost savings. This buyout also had a positive effect on
the gross margin for the first quarter of 2000 given that a portion of the
related expenses are now classified as depreciation or general and
administrative expenses. These factors were partially offset by costs
associated with transferring certain customer services to the Company's call
centers that had previously been outsourced to a third party.
Operating income for the Teleservices Division was $536,000 in the quarter
ended March 31, 1999 compared to an operating loss of $153,000 in the quarter
ended March 31, 2000. The operating loss in 2000 was primarily due to the
reduction in revenue, including the loss of two customers in 1999, as well as
the costs associated with transferring services to the Company's call centers
that had been previously outsourced to a third party.
In April 2000 the Company announced that it is exploring strategic business
alternatives for the Teleservices Division. This effort reflects the Company's
intention to focus its attention and resources on further improving its
prepaid wireless business.
Roaming Services Division
Roaming services revenues decreased 12% from $5.4 million in the first quarter
of 1999 to $4.8 million in the first quarter of 2000. The decrease in roaming
services revenues in 2000 was primarily attributable to fewer suspensions of
inter-carrier automatic roaming agreements and some cannibalization of
unregistered roaming use by prepaid wireless growth. 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 increased from 16% of roaming
services revenues in 1999 to 20% in 2000. The increase was primarily a
result of management's efforts to reduce the costs associated with delivering
unregistered roaming calls.
Operating income for the Roaming Services Division increased from $146,000 in
1999 to $161,000 in 2000. The increase in 2000 was primarily a result of the
increased gross margins for the first quarter. The Company does not anticipate
that these margins will continue to improve as revenue continues to decline.
Systems Division
In 2000, the Company began reporting interdivision revenues to the Prepaid
Services Division for voice nodes and related equipment deployed during the
quarter. Including such sales, Systems revenues decreased 12% from $2.7 million
in the first quarter of 1999 to $2.4 million in the first quarter of 2000. The
decrease in sales reflects fewer international system sales, offset slightly
by an increase in shipments of prepaid voice nodes.
Gross margins for the Systems Division decreased from 35% of systems revenues
in the first quarter of 1999 to 31% in the first quarter of 2000. The decrease
resulted from decreased systems revenue for the period that could not absorb
fixed manufacturing overhead.
The operating loss for the Systems Division increased from an operating loss of
$547,000 in the first quarter of 1999 to an operating loss of $582,000 in the
first quarter of 2000. The increase in 2000 was primarily a result of the
reduced gross margin that was mostly offset by reduced operating costs, which
were a result of the 1999 restructuring.
Operating Data
(in 000's except percentages)
2000 1999
% of Total % of Total
($ in thousands) Total Revenues Total Revenues
Total revenues $25,207 100% $24,164 100%
Engineering, research and development 1,807 7% 1,263 5%
Sales and marketing 1,548 6% 1,606 7%
General and administrative 1,994 8% 1,640 7%
Depreciation and amortization 4,450 18% 3,372 14%
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 increased as a
percentage of total revenues from 5% to 7% for the quarter ended March 31, 1999
and 2000, respectively. This increase primarily resulted from additional
resources devoted to expanding and enhancing the capabilities of the Company's
prepaid micropayment processing system.
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 quarters ended March 31, 1999 and 2000, respectively. The decrease is
due to the integration of the Company's Systems Division sales force into the
corporate sales force to leverage relationships with existing carrier customers
and expand the customer base. In addition, the decrease resulted from the use
of distribution arrangements in the Systems Division.
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 as a percentage of total revenues increased
from 7% to 8% for the quarters ended March 31, 1999 and 2000, respectively.
The increase was due to increased personnel and other related costs to support
the Company's growth.
Depreciation and amortization expense
Depreciation and amortization expense includes depreciation of
telecommunications systems, furniture and equipment, building 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 in the first quarter of 1999 to 18% of total revenues in the first
quarter of 2000. The increase in 2000 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. 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.
Interest income
Interest income increased from $274,000 for the quarter ended March 31, 1999
to $314,000 for the quarter ended March 31, 2000. Interest income was earned
from investments of the proceeds of the Company's secondary public offering
and was offset slightly by interest expense from the Company's capital leases.
The Company's interest income increased in 2000 due to additional cash flow
generated from operations. This increase was partially offset by interest
expense generated from additional capital leases entered into during the
second half of 1999.
Provision for income taxes
Income tax expense of $813,000 for the quarter ended March 31, 2000 yielded
a 43% income tax rate compared to $161,000 or a 46% rate for the quarter ended
March 31, 1999. The Company's effective income tax rate is greater than the
statutory rate of 40% 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 increased to $32.4 million
at March 31, 2000 compared to $30.2 million at December 31, 1999. Net cash
provided by operations of $4.7 million in 2000 was primarily generated from
$4.5 million in depreciation and amortization expense, which resulted from
the continued significant investment in telecommunications systems and
equipment. Accounts Receivable increased $1.0 million in the first quarter of
2000 due to the significant increase in prepaid wireless services revenues. The
increase in accounts payable and accrued expenses of $535,000 resulted
from the timing of payments.
The Company's investing activities utilized $345,000 of net cash in the first
quarter of 2000. The Company expended $2.4 million in the first quarter of
2000, of which $2.3 million was for telecommunications systems equipment and
software for expansion of the Company's C2C network. The Company also had
$2.1 million in sales of short-term investments, net of purchases, during the
quarter. 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 enhance its prepaid wireless services.
The Company's financing activities utilized $179,000 in net cash during the
quarter ended March 31, 2000, mainly due to payments of capital lease
obligations, partially offset by proceeds from the exercise of stock options.
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.
Certain Factors That May Affect Future Results
This Quarterly Report contains forward-looking statements that involve risks
and uncertainties, including without limitation, statements regarding seasonal
trends in Prepaid Wireless revenues, trend of decreased suspensions of
inter-carrier automatic roaming agreements, prepaid cannibalization of
unregistered roaming and carrier marketing of one-rate registered roaming plans
to reduce roaming service revenues, 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.
The Company is currently in the process of exploring strategic business
alternatives relating to the Teleservices Division. The Company feels that
this type of transaction will allow management to focus on the core
competencies and further expand the prepaid wireless services business.
However, there can be no assurances that the Company will successfully identify
a strategic partner, or that the results of any successful strategic alliances
would not have an adverse affect on the Company's operations. There can also
be no assurances that members of the Teleservices Division management team will
remain with the Company, which could have a material adverse effect on the
success of strategic alternatives and the Company's operations.
The Company is exploring opportunities to utilize its prepaid network and
real-time rating engine for mobile and electronic commerce applications. There
can be no assurances that there will be a market for the Company's network in
the mobile and electronic commerce arena. In addition, this market could be
so highly competitive that the Company may not be able to enter it.
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 the Company's 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.
Certain Teleservices and Prepaid Division contracts are beyond their expiration
dates or will expire in 2000 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. Also, when and
if the contracts are renewed, some contractual rates per minute will likely be
lower than in previous years. If subscriber levels begin to drop off,
revenue could be adversely affected due to these lower rates.
The Company has experienced fluctuations in its quarterly operating results and
anticipates that such fluctuations will continue and could intensify. The
Company experienced operating losses during the first three quarters of 1998,
primarily due to expenses associated with the development and expansion of its
C2C network. During the quarter ended September 30, 1999, an operating loss
was also incurred due to the Systems Division one-time charge, system outages
in Prepaid Division and a software problem in Teleservices Division. In
addition, the Company's Systems Division has experienced operating losses
during each of the last seven 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 reduce the operating
expenses of the Systems Division, which has generated losses during each of the
last seven quarters. A reorganization plan was implemented in September 1999
in an effort to realign the division and reduce operating expenses.
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, prepaid cannibalization of
unregistered roaming use increases and carriers offer more one-rate roaming
plans. In addition, prepaid wireless 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. The Company has experienced network
outages that provide for reductions in revenue in accordance with penalty
clauses contained in certain of the Company's carrier customer contracts. If
the Company's future efforts to avoid outages are unsuccessful, such outages
can result in additional lost revenue for the Company and 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.
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 (percentage of total subscribers that terminate service on the
network) will not increase, which may result in reductions in subscriber growth
and related revenues. Teleservices revenues associated with billing inquiry
support for C2C carrier customers are a significant portion of teleservices
revenues and therefore these revenues are dependent upon the size and growth
of the C2C subscriber base. In addition, the Company has enabled carrier
customers to license software that enables C2C customers to perform their
billing inquiry in-house if they choose. This may reduce the Company's
Teleservices revenues significantly and reduce profits accordingly.
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. 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.
All products sold to international customers are priced 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
All products sold to international customers are priced 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. Legal Proceedings
On March 30, 2000, Freedom Wireless, Inc. filed a complaint in the United
States District Court for the Northern District of California against the
Company and a number of wireless carriers, including customers and former
customers of the Company. The suit alleges that the defendants infringe a
patent held by Freedom Wireless, Inc. and seeks injunctive relief and damages
in an unspecified amount. The Company does not believe it infringes this
patent and believes that it has meritorious defenses to the action.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
The exhibits listed in the Exhibit Index are part of
or included in this report.
b) Reports on Form 8-K
NONE
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: May 11, 2000 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
10.58* Distribution agreement between Centigram Communications
Corporation and Boston Communications Group, Inc. dated
January 17, 2000.
27 Financial Data Schedule
* Confidential treatment requested as to certain portions,
which portions have been deleted and filed separately with
Securities and Exchange Commission.