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, 2001 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 0-28432
Boston Communications Group, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3026859
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Sylvan Road, Woburn, Massachusetts 01801
(Address of principal executive offices)
Registrant's telephone number, including area code: (781)904-5000
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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 April 16, 2001 the Company had outstanding 17,053,020 shares of common
stock, $.01 par value per share.
16
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.......................................................9
Certain Factors That May Affect Future Results.............................12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.......................................................................15
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings..............................................15
Item 6. Exhibits and Reports on Form 8-K.................................15
This Quarterly Report contains forward-looking statements that involve risks and
uncertainties, including without limitation, statements regarding the
anticipated decrease in Prepaid Wireless Services revenues and gross margins in
the second quarter of 2001, the continued decline in Prepaid Wireless per minute
rates as growth in carrier minutes of usage results in higher volume discounts,
increased average monthly minutes of usage per subscriber as carriers' retail
prepaid rates decrease, reduction of Roaming Service revenues resulting from the
trend of consolidation in the wireless industry and national carriers offering
one-rate registered roaming plans, reductions in sales and marketing and general
and administrative expenses as the Company continues to leverage and effectively
manage its expenses, the increase in depreciation expense as additional
equipment and software is placed in service and the anticipation that interest
income may not grow at historical rates, as interest rates earned on the
Company's investments have decreased due to the impact of the recent Federal
Reserve rate reductions. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements.
Any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these words.
There are a number of important factors that could cause actual events or the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth under the captions "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Certain Factors That May Affect Future
Results", "Quantitative and Qualitative Disclosures About Market Risk" and those
set forth in Items 2 and 3 of Part I of this Quarterly Report on Form 10-Q. The
factors discussed herein do not reflect the potential future impact of any
mergers, acquisitions or dispositions. The Company does not assume any
obligation to update any forward-looking statements made herein.
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
March 31, December 31,
ASSETS 2001 2000
------------------ -------------------
Current assets:
Cash and cash equivalents $48,138 $50,499
Short-term investments 6,200 4,111
Accounts receivable, net of allowance for billing adjustments and
doubtful accounts of $1,327 in 2001 and $2,032 in 2000 13,339 13,761
Inventory 807 895
Prepaid expenses and other assets 951 1,163
- ------------------------------------------------------------------------------- ------------------ -------------------
Total current assets 69,435 70,429
Property and equipment, net 44,347 45,037
Goodwill, net 2,096 2,247
Other assets 928
931
- ------------------------------------------------------------------------------- ------------------ -------------------
Total assets $116,806 $118,644
- ------------------------------------------------------------------------------- ------------------ -------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $762 $1,481
Accrued expenses 13,399 16,166
Deferred revenue 2,353 2,851
Income taxes payable 1,329
1,484
Current maturities of capital lease obligations 1,212 1,186
- ------------------------------------------------------------------------------- ------------------ -------------------
Total current liabilities 19,055 23,168
Commitments and contingencies
Deferred income taxes 373 39
Capital lease obligations, net of current maturities 427 740
Shareholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares authorized,
none issued and outstanding -- --
Common Stock, voting, par value $.01 per share, 35,000,000
shares authorized, 17,154,440 and 17,078,988 shares issued
in 2001 and 2000, respectively 172 171
Additional paid-in capital 98,802 98,285
Treasury Stock (101,420 shares), at cost (673) (673)
Accumulated deficit (1,350) (3,086)
- ------------------------------------------------------------------------------- ------------------ -------------------
Total shareholders' equity 96,951 94,697
- ------------------------------------------------------------------------------- ------------------ -------------------
Total liabilities and shareholders' equity $116,806 $118,644
- ------------------------------------------------------------------------------- ------------------ -------------------
See accompanying notes.
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
2001 2000
- ------------------------------------------------------------- ------------------- -----------------
- ------------------------------------------------------------- ------------------- -----------------
REVENUES:
Prepaid wireless services $14,025 $12,344
Roaming services 3,341 4,807
System sales 1,623 391
- ------------------------------------------------------------- ------------------- -----------------
18,989
17,542
EXPENSES:
Cost of prepaid wireless services revenues 3,934 3,206
Cost of roaming services revenues 2,894 3,918
Cost of system revenues 723 434
Engineering, research and development 2,273
1,807
Sales and marketing 1,444
1,462
General and administrative 1,719
1,712
Depreciation and amortization 3,866 3,786
- ------------------------------------------------------------- ------------------- -----------------
16,853
16,325
- ------------------------------------------------------------- ------------------- -----------------
Operating income 2,136 1,217
Interest income, net 756 357
- ------------------------------------------------------------- ------------------- -----------------
Income before income taxes 2,892
1,574
Provision for income taxes 1,156 679
- ------------------------------------------------------------- ------------------- -----------------
Income from continuing operations 1,736 895
Income from discontinued operations (net of income taxes of
$118) - 177
- ------------------------------------------------------------- ------------------- -----------------
Net income $1,736
$1,072
- ------------------------------------------------------------- ------------------- -----------------
Basic net income per common share:
Continuing operations $0.10 $0.05
- ------------------------------------------------------------- ------------------- -----------------
Net income $0.10 $0.06
- ------------------------------------------------------------- ------------------- -----------------
Weighted average common shares outstanding 17,018 16,628
- ------------------------------------------------------------- ------------------- -----------------
Diluted net income per share:
Continuing operations $0.10 $0.05
- ------------------------------------------------------------- ------------------- -----------------
Net income $0.10 $0.06
- ------------------------------------------------------------- ------------------- -----------------
Weighted average common shares outstanding 17,695 17,009
- ------------------------------------------------------------- ------------------- -----------------
See accompanying notes.
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended March 31,
2001 2000
- ------------------------------------------------------------------------------- --------------- ---------------
OPERATING ACTIVITIES
Net income from continuing operations $1,736 $895
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,866 3,786
Deferred income taxes 334 813
Changes in operating assets and liabilities:
Accounts receivable 422 (1,005)
Inventory 88 77
Prepaid expenses and other assets 215 121
Accounts payable and accrued expenses (3,984) (535)
Income taxes payable (155) 60
- ------------------------------------------------------------------------------- --------------- ---------------
Net cash provided by continuing operations 2,522 4,212
Income from discontinued operations - 177
Net change in operating assets and liabilities of discontinued operations - 6
- ------------------------------------------------------------------------------- --------------- ---------------
Net cash provided by operating activities from discontinued operations - 183
Net cash provided by operations 2,522 4,395
INVESTING ACTIVITIES
Purchases of property and equipment (3,025) (2,406)
Sales of short-term investments 3,111 6,074
Purchases of short-term investments (5,200) (3,981)
- ------------------------------------------------------------------------------- --------------- ---------------
Net cash used in investing activities (5,114) (313)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and employee stock purchase 518 497
plan
Repayment of capital leases (287) (364)
- ------------------------------------------------------------------------------- --------------- ---------------
Net cash provided by financing activities 231 133
Increase (decrease) in cash and cash equivalents (2,361) 4,215
Cash and cash equivalents at beginning of period 50,499 21,145
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Cash and cash equivalents at end of period $48,138 $25,360
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See accompanying notes.
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, 2000.
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. Significant Accounting Policies
Revenue Recognition
The Company earns prepaid wireless services revenues by processing
prepaid wireless minutes and earns roaming services revenues by
processing wireless calls for unregistered wireless subscribers who have
roamed outside of their service area. These revenues are recognized when
the service is provided and is recorded net of estimated billing
adjustments. The Company recognizes revenue from the sale of systems at
the time the systems are shipped. Installation revenue is deferred until
the entire installation is complete.
In the fourth quarter of 2000, the Company adopted the Securities and
Exchange Commission's (SEC) Staff Accounting Bulletin (SAB) 101, Revenue
Recognition in Financial Statements, and its adoption did not have a
significant impact on the Company's financial statements.
Legal Costs
The Company accrues costs of settlements, damages and, under certain
conditions, costs of defense when such costs are probable and estimable;
otherwise, such costs are expensed as incurred.
3. Earnings Per Share
The following table sets forth the computation of basic and diluted net
income per share for:
Three Months Ended March 31,
(in 000's, except per share amounts) 2001 2000
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Numerator for basic and diluted earnings per share:
Income from continuing operations $1,736 $895
Income from discontinued operations --- 177
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Net income $1,736 $1,072
Denominator:
Denominator for basic earnings per share 17,018 16,628
Effect of dilutive employee stock 677 381
options
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Denominator for diluted earnings per share 17,695 17,009
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Basic net income per common share:
Income from continuing operations $0.10 $0.05
Income from discontinued operations --- 0.01
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Net 0.10 0.06
income
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Diluted net income per common share:
Income from continuing operations 0.10 0.05
Income from discontinued operations --- 0.01
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Net income $0.10 $0.06
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4. Inventory
Inventories consisted of the following at:
(in 000's) March 31, 2001 December 31, 2000
-------------------------------- ----------------------- ----------------------
Purchased parts $326 $ 490
Work-in-process 481 405
-
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$807 $ 895
-------------------------------- ----------------------- ----------------------
5. Segment Reporting
(in 000's except percentages)
Prepaid Eliminations
Three months ended Wireless Roaming
March 31, Services Services Systems Total
---------------------------- -------------- ------------ ------------ ------------------ -----------
2001
Revenues $14,025 $3,341 $2,429 ($806) $18,989
======= ====== ====== ====== =======
Gross margin 10,091 447 1,213 (313) 11,438
====== === ===== ===== ======
Gross margin percentage 72% 13% 50% 60%
=== === === ===
2000
Revenues $12,344 $4,807 $2,360 ($1,969) $17,542
======= ====== ====== ======== =======
Gross margin 9,084 943 723 (766) 9,984
===== === === ===== =====
Gross margin percentage 74% 20% 31% 57%
=== === === ===
6. Discontinued Operations
On November 7, 2000, the Company sold the net assets of its Teleservices
business for approximately $15 million including the assumption of certain
liabilities, with potential additional cash payments to the Company of up
to $20 million through 2005, based upon the achievement of predetermined
revenue targets. There can be no assurances that the Company will be
successful in meeting the predetermined revenue targets or earning any of
the potential cash payments available. Pursuant to APB 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business," the Consolidated Financial Statements have been reclassified to
reflect the sale of the Teleservices business. Accordingly, the operating
results of the Teleservices business have been segregated as discontinued
operations in the Consolidated Statement of Operations and Consolidated
Statements of Cash Flows. Operating results from discontinued operations
for the three months ended March 31, 2000 are as follows:
- ------------------------------------------------------------------------------
Net revenues $7,665
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Income from discontinued operations 177
- ------------------------------------------------------------------------------
Basic and diluted net income from
discontinued operations per common share $0.01
- ------------------------------------------------------------------------------
7. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
established standards for the recognition, measurement, and reporting of
derivatives and hedging activities. The Company adopted this accounting
standard in 2001 and it did not have a material impact on the Company's
consolidated 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 8% from $17.5 million in the three months
ended March 31, 2000 to $19.0 million in the three months ended March 31, 2001.
The growth was primarily attributable to a 14% increase in the Company's
principal business, prepaid wireless, and a 3% increase in systems revenues
including inter-segment revenue, partially offset by a 30% decline in roaming
service revenues.
The Company generated operating income of $2.1 million during the quarter ended
March 31, 2001 compared to operating income of $1.2 million for the same period
in the prior year. The Company also generated net income of $1.7 million during
the quarter ended March 31, 2001 compared to net income from continuing
operations of $895,000 for the same period in the prior year. The increases in
operating income and net income resulted from improvements in the operating
results of prepaid wireless services and systems, partially offset by a decline
in operating results from roaming services. The specifics of each segment's
revenues and operating results are discussed in greater detail below:
Segment Data
(in thousands except percentages)
Prepaid Eliminations
Three months ended Wireless Roaming
March 31, Services Services Systems Total
---------------------------- -------------- ------------ ----------- ----------------- ---------------
2001
Revenues $14,025 $3,341 $2,429 ($806) $18,989
======= ====== ====== ====== =======
Gross margin 10,091 447 1,213 (313) 11,438
====== === ===== ===== ======
Gross margin percentage 72% 13% 50% 60%
=== === === ===
2000
Revenues $12,344 $4,807 $2,360 ($1,969) $17,542
======= ====== ====== ======== =======
Gross margin 9,084 943 723 (766) 9,984
===== === === ===== =====
Gross margin percentage 74% 20% 31% 57%
=== === === ===
Prepaid Wireless Services
Prepaid Wireless Services revenues increased 14% from $12.3 million in the first
quarter of 2000 to $14.0 million in the first quarter of 2001. The increase was
primarily due to increased minutes of use and revenues generated from the
Company's Prepaid Connection product. These increases were partially offset by a
decrease in the average price per minute as carriers availed themselves of the
Company's volume discounts. The Company also announced a net subscriber loss in
the first quarter of 2001, primarily due to Rogers AT&T migrating off the
platform, which is expected to result in a revenue decrease for the second
quarter of 2001 as compared to the first quarter of 2001. As of March 31, 2001,
there were approximately 2.1 million prepaid subscribers on the Company's
Intelligent Voice Services Network (IVSN) and transaction processing platform,
compared to 2.3 million subscribers at March 31, 2000. The Company expects the
average price per minute to continue to decline as growth in carrier minutes of
usage results in higher volume discounts. As carrier's continue to reduce retail
prepaid rates, however, we expect the average monthly minutes of usage per
subscriber to increase.
Gross margins for Prepaid Wireless Services declined from 74% of prepaid
wireless services revenues in the first quarter of 2000 to 72% in the first
quarter of 2001. The decrease was a result of the subscriber losses described
above as well as initial costs associated with the launch of the Company's
second data processing site. With the loss of Rogers AT&T in the first quarter
of 2001, the Company expects gross margin levels to decrease in the second
quarter of 2001.
Roaming Services
Roaming services revenues decreased 30% from $4.8 million in the first quarter
of 2000 to $3.3 million in the first quarter of 2001. The decrease in roaming
services revenues in 2001 was primarily attributable to consolidation in the
industry and 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 at similar rates
compared to prior periods.
Gross margins for Roaming Services decreased from 20% of roaming services
revenues in 2000 to 13% in 2001. The decrease primarily resulted from lower
revenues and, therefore, lower absorption of fixed costs.
Systems
Systems revenues remained flat in the first quarter of 2000 compared to the
first quarter of 2001. Excluding inter-segment revenues, Systems revenues
increased 315% from $391,000 in 2000 to $1.6 million in 2001. The increase in
gross revenues reflects an increase in service revenues and orders for
international prepaid systems, partially offset by a decrease in inter-segment
prepaid V-nodes.
Gross margins for Systems increased from 31% of systems revenues in the first
quarter of 2000 to 50% in the first quarter of 2001. The increase resulted from
increased recurring service revenues that yield a higher margin.
Operating Data
Three months ended March 31,
- -------------------------------------------------------------
2001 2000
- ------------------------------------------------------------- -------------------------- -----------------------------
% of Total % of Total
($ in thousands) Total Revenues Total Revenues
- ------------------------------------------------------------- ----------- -------------- ------------- ---------------
Total revenues $18,989 100% $17,542 100%
- -------------------------------------------------------------
Engineering, research and development 2,273 12% 1,807 10%
- -------------------------------------------------------------
Sales and marketing 1,444 8% 1,462 8%
- -------------------------------------------------------------
General and administrative 1,719 9% 1,712 10%
- -------------------------------------------------------------
Depreciation and amortization 3,866 20% 3,786 22%
- -------------------------------------------------------------
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 10% to 12% for the quarters ended March 31, 2000 and 2001,
respectively. This increase primarily resulted from additional resources devoted
to expanding and enhancing the features and functionality of the Company's IVSN
and transaction processing platform, in addition to resources devoted to the
Company's m-commerce initiatives.
Sales and marketing expenses
Sales and marketing expenses include direct sales, marketing and product
management salaries, commissions, travel and entertainment expenses, in addition
to the cost of trade shows, advertising and other promotional expenses. As a
percentage of total revenues, sales and marketing expenses remained consistent
at 8% for the quarters ended March 31, 2000 and 2001. Sales and marketing
expenses are expected to decrease in absolute dollars and as a percentage of
total revenues in the remaining quarters of 2001, as the Company continues to
focus on leveraging and managing expenses.
General and administrative expenses
General and administrative expenses include salaries and benefits of employees
and other expenses that provide administrative support to the Company. General
and administrative expenses as a percentage of total revenues decreased from 10%
to 9% for the quarters ended March 31, 2000 and 2001, respectively. The decrease
resulted from the ability of the Company to leverage its existing workforce and
cost infrastructure to support increased revenues. General and administrative
expenses are expected to decrease in absolute dollars and as a percentage of
total revenues in the remaining quarters of 2001, as the Company continues to
focus on leveraging and managing expenses.
Depreciation and amortization expense
Depreciation and amortization expense includes depreciation of
telecommunications systems, furniture and equipment and leasehold improvements
and amortization of capitalized software and goodwill. 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 decreased from 22% of total revenues in the first quarter of 2000 to 20%
of total revenues in the first quarter of 2001. Depreciation and amortization in
absolute dollars increased from $3.8 million in the first quarter of 2000 to
$3.9 million in the first quarter of 2001. The percentage decrease in 2001 was
primarily due to increased revenues while the absolute dollar increase in 2001
resulted from depreciation of additional technical equipment and software to
support the rapid expansion and enhancement of the Company's IVSN and
transaction processing platform. Depreciation and amortization expense is
expected to increase in absolute dollars during the remaining quarters of 2001
as additional equipment and software is placed in service to support the
Company's IVSN and transaction processing platform.
Interest income, net
Interest income increased from $357,000 for the quarter ended March 31, 2000 to
$756,000 for the quarter ended March 31, 2001. Interest income was earned
primarily from the increased cash generated from its operations and the sale of
the Company's Teleservices business. Despite an anticipated increase in cash
flow from operations, interest income may not grow at historical rates, as
interest rates earned on the Company's investments have decreased due to the
impact of the recent Federal Reserve rate reductions.
Provision for income taxes
Income tax expense of $1.2 million for the quarter ended March 31, 2001 yielded
a 40% income tax rate compared to $679,000 or a 43% rate for the quarter ended
March 31, 2000.
Income from discontinued operations
The Company's Teleservices business was sold in November, 2000 and has been
recorded as a discontinued operation for all periods presented. Income from
discontinued operations was $177,000 for the quarter ended March 31, 2000.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments decreased to $54.3 million at
March 31, 2001 compared to $54.6 million at December 31, 2000. Net cash provided
by operations of $2.5 million in the first quarter of 2001 resulted from $1.7
million in net income from continuing operations along with adjustments for
depreciation of $3.9 million. These amounts were offset by a decrease of $4.0
million in the Company's accounts payable and accrued expenses due to the timing
of payments.
The Company's investing activities utilized $5.1 million of net cash in the
first quarter of 2001. The Company expended $3.0 million in the first quarter of
2001 primarily for telecommunications systems equipment and software for
expansion of the Company's IVSN and transaction processing platform. The Company
also had $2.1 million in purchases of short-term investments, net of sales,
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 provided $231,000 in net cash during the quarter
ended March 31, 2001, due to proceeds from the exercise of stock options that
were 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.
Certain Factors That May Affect Future Results
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 minutes of usage
generated from these customers. A loss of business from any of the Company's
major customers, including a decrease in business due to factors outside the
Company control, would have a material adverse effect on the Company's business,
financial condition and results of operations.
Certain Prepaid Wireless services contracts have been extended beyond their
expiration dates or will expire in 2001 and beyond. There can be no assurances
that the Company will be successful in renewing any of these contracts. If any
of these contracts are not renewed, the Company's business, financial condition
and results of operations could be materially adversely affected. Also, when and
if each of the contracts is renewed, some contractual rates per minute will
likely be lower than in previous years. If subscriber levels and minutes of
usage begin to drop off, revenue and gross margins could be adversely affected
due to these lower rates. These contracts do not prevent the Company's customers
from offering wireless services like those offered by the Company in-house or by
the Company's competitors. One of the Company's former customers, Rogers AT&T,
did not renew its prepaid contract and brought its prepaid program in-house.
There can be no assurances that other customers will not follow suit and elect
not to use the Company's services to offer prepaid wireless services or that the
Company will be able to replace these subscribers with new subscribers.
There can be no assurance that the Company will successfully support and enhance
the IVSN and transaction processing platform effectively to avoid system outages
and any associated loss in revenue. Nor can there be any assurances that the
market for the Company's prepaid service will continue to develop, or that the
Company's IVSN and transaction processing platform will successfully support
current and future growth. Furthermore, the Company has expended significant
amounts of capital to support the agreements it has secured with its carrier
customers. Because prepaid revenues are principally generated by prepaid
subscriber minutes of use, the Company's revenues can be impacted by the
carrier's ability to successfully market and sell prepaid services. Revenues
from the Company's Prepaid Wireless Service business are dependent on the
Company's ability to retain subscribers on the network and generate additional
minutes of usage 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. Any increase in the Company's churn rate could result in reductions in
related revenues.
The Company has converted prepaid subscribers from certain Verizon Wireless
markets that were using in-house and non-BCGI outsourced prepaid solutions to
the Company's prepaid platform and expects to convert more markets and
subscribers. However, Verizon has not made contractual commitments to do so. If
Verizon does not convert additional markets or if the expected conversions are
delayed, the Company's expected subscriber and minutes of usage growth may be
adversely effected.
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 IVSN and transaction processing platform. The Company
has experienced network outages that have resulted in reductions in revenue due
to 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 could 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.
The Company announced in 2000 that it had sold the assets of its Teleservices
business to Teletech Holdings, Inc. for $15 million including the assumption of
certain liabilities, with potential additional cash payments to the Company of
up to $20 million through 2005, based upon achievement of predetermined revenue
targets. There can be no assurances that the Company will be successful in
meeting the predetermined revenue targets or earning any of the potential cash
payments available.
The Company continues to invest in additional technologies including BCGI
Wireless Wallet, Datascape, Inc., Conference Calling, an Intelligent Networking
(IN) prepaid wireless solution and other new applications to expand its Prepaid
Wireless Services business. There can be no assurances that there will be a
market for these technologies, that the Company will be successful in marketing
and selling these technologies in the marketplace or that the Company will be
able to leverage its existing infrastructure to provide these services in a cost
effective manner. In addition, the failure of any of these technologies may
result in 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 has experienced fluctuations in its quarterly operating results and
such fluctuations may continue and could intensify. The Company's quarterly
operating results may vary significantly depending on a number of factors
including variations in subscriber additions and minutes of use, 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, the loss of
customers, seasonal trends, variations in the level of system sales, 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.
In September 1999, a reorganization plan was implemented in an effort to realign
the Systems business and reduce operating expenses. The Company has reduced
operating expenses and stabilized the Systems business, however, a slowdown in
prepaid and voice system purchases 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 consolidation in the wireless
industry reduces the number of unregistered roamers and carriers offer more
national one-rate roaming plans. In addition, prepaid wireless services are
relatively new services in new markets. If the growth in prepaid services does
not materialize 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 industry.
Furthermore, 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 has expanded its operations rapidly, creating significant demands on
the Company's management, administrative, operational, development and financial
personnel and other resources. Additional expansion by the Company may further
strain the Company's management, financial and other resources. There can be no
assurance that the Company's systems, procedures, controls and existing space
will be adequate to support expansion of the Company's operations. If the
Company's management is unable to manage growth effectively, the quality of the
Company's services, its ability to retain key personnel and its business,
financial condition and results of operations could be materially and adversely
affected.
The Company's operations are supported by many hardware components and software
applications from third party vendors, sometimes licensed from single vendors,
which are sometimes small corporations. 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, 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. If the hardware and software do not
function as specified or if the Company can no longer license software from
certain vendors or otherwise obtain the software, 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 customers are multinational
corporations that are publicly traded in the U.S. All payments are received in
U.S. dollars that help 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 important factor in the future success of the
Company's prepaid wireless service will be the Company's ability to provide, at
competitive prices, more functionality and features than those typically
available in other competitive offerings. An increase in competition or the
inability of the Company to provide, at competitive prices, more functionality
and features 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 and its ability to protect such technology. The Company
continues to defend its proprietary technology against patent infringement
litigation, including the Freedom Wireless lawsuit. If patent infringement
judgments are entered against the Company or 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.
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.
Proposals to intensify or reduce government regulations continue to be discussed
at both the federal and state levels. Such changes may decrease the growth of
the wireless telephone industry, result in new competitors or industry
consolidation, limit the number of potential customers for the Company's
services or impede the Company's ability to offer competitive services to the
wireless market or otherwise have a material adverse effect on the Company's
business 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 of the Systems business' customers
are multinational corporations, which 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.
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
In December 1999, the Company was named as a defendant in a suit filed in United
States District Court for the Northern District of Iowa by a former supplier
(the "Supplier") of materials to a subsidiary of the Company. A purchase
contract for an unspecified number of components was signed in 1997 and the
Supplier became the sole supplier for a certain system component in 1997 and
early 1998. The Company subsequently changed suppliers. The suit alleges that
the Company breached the confidentiality clause of the contract and interfered
with actual and prospective contracts with other customers. The Supplier
initially claimed misappropriation of trade secrets and sought an injunction,
but it has since dropped these claims. The Supplier seeks damages for lost
profits and damage to the supplier's reputation in excess of $1 million. The
Company believes that the claim is without merit.
In March, 2000, a suit was filed by Freedom Wireless, Inc. 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.
Upon motion by the Company, the suit was transferred to the United States
District Court in Massachusetts in October, 2000 and is pending in that court.
The complaint has been amended to include a continuation patent. The Company
does not believe that it infringes these patents and believes that it has
meritorious defenses to the action.
Item 6. Exhibits and Reports on Form 8-K
.......a) Exhibits
NONE
.........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 9, 2001 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)