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, 2002
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
-----------------------------
State or other jurisdiction of incorporation or organization)
04-3026859
--------------------------------------
(I.R.S. Employer Identification No.)
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 May 2, 2002 the Company had outstanding 17,235,571 shares of common stock,
$.01 par value per share.
18
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
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....................10
Certain Factors That May Affect Future Results......................13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................................16
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.................................................16
Item 6. Exhibits and Reports on Form 8-K....................................17
This Quarterly Report contains forward-looking statements that involve risks and
uncertainties, including without limitation, statements regarding the expected
increase in subscriber base, average minutes of use (MOU) and Prepaid Wireless
Services revenues, increase in MOUs resulting in increased volume discounts for
carriers, leveraging fixed costs to yield higher Prepaid Wireless Services gross
margins in 2002, reduction of unregistered roaming revenues, increases in
engineering, research and development expenditures, decreases in sales and
marketing expenditures, increases in depreciation and amortization and the
source of funds for capital investments. 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.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
March 31, December 31,
------------- -----------------
------------- -----------------
2002 2001
- ------------------------------------------------------------------------------------------------ ------------- -----------------
- ------------------------------------------------------------------------------------------------ ------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $34,591 $37,646
Short-term investments 20,578 22,607
Accounts receivable, net of allowance for billing adjustments and
doubtful accounts of $1,074 in 2002 and $1,169 in 2001 13,981 10,782
Inventory 862 1,036
Deferred income taxes 3,358 2,352
Prepaid expenses and other assets 1,682 1,490
- ------------------------------------------------------------------------------------------------ ------------- -----------------
Total current assets 75,052 75,913
Property and equipment:
Telecommunications systems & software 72,474 70,566
Furniture and fixtures 616 612
Leasehold improvements 1,905 1,895
Systems in development 6,189 3,027
- ------------------------------------------------------------------------------------------------ ------------- -----------------
- ------------------------------------------------------------------------------------------------ ------------- -----------------
81,184 76,100
Less allowance for depreciation and amortization 41,307 37,305
- ------------------------------------------------------------------------------------------------ ------------- -----------------
- ------------------------------------------------------------------------------------------------ ------------- -----------------
39,877 38,795
Goodwill, net of accumulated amortization of $3,212 1,641 1,641
Other assets 209 204
- ------------------------------------------------------------------------------------------------ ------------- -----------------
- ------------------------------------------------------------------------------------------------ ------------- -----------------
Total assets $116,779 $116,553
- ------------------------------------------------------------------------------------------------ ------------- -----------------
- ------------------------------------------------------------------------------------------------ ------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,437 $1,428
Accrued expenses 13,311 11,353
Deferred revenue 1,744 2,489
Income taxes payable 662 673
Current maturities of capital lease obligations 427 740
- ------------------------------------------------------------------------------------------------ ------------- -----------------
- ------------------------------------------------------------------------------------------------ ------------- -----------------
Total current liabilities 19,581 16,683
Commitments and contingencies
Deferred income taxes 3,040 3,040
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;
17,335,664 and 17,293,281 shares issued and outstanding in 2002 and 2001,
respectively 173 173
Additional paid-in capital 99,896 99,600
Treasury Stock (273,420 and 101,420 shares in 2002 and 2001, respectively ), at cost (2,131) (673)
Accumulated deficit (3,780) (2,270)
- ------------------------------------------------------------------------------------------------ ------------- -----------------
- ------------------------------------------------------------------------------------------------ ------------- -----------------
Total shareholders' equity 94,158 96,830
- ------------------------------------------------------------------------------------------------ ------------- -----------------
- ------------------------------------------------------------------------------------------------ ------------- -----------------
Total liabilities and shareholders' equity $116,779 $116,553
- ------------------------------------------------------------------------------------------------ ------------- -----------------
See accompanying notes.
BOSTON COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
2002 2001
- ---------------------------------------------------------------------- ----------------- -------------------
REVENUES:
Prepaid Wireless Services $12,139 $14,025
Roaming Services 1,583 3,341
Prepaid Systems 1,320 1,623
- ---------------------------------------------------------------------- ----------------- -------------------
15,042 18,989
EXPENSES:
Cost of Prepaid Wireless Services revenues * 3,869 3,934
Cost of Prepaid Wireless Services revenues - special charge 3,297 --
Cost of Roaming Services revenues * 1,452 2,894
Cost of Prepaid Systems revenues * 703 723
Engineering, research and development 1,973 2,273
Sales and marketing 1,129 1,444
General and administrative 1,418 1,719
Depreciation and amortization 4,128 3,866
- ---------------------------------------------------------------------- ----------------- -------------------
17,969 16,853
- ---------------------------------------------------------------------- ----------------- -------------------
Operating income (loss) (2,927) 2,136
Interest income, net 411 756
- ---------------------------------------------------------------------- ----------------- -------------------
Income (loss) before income taxes (2,516) 2,892
Provision (benefit) for income taxes (1,006) 1,156
- ---------------------------------------------------------------------- ----------------- -------------------
Net income (loss) $(1,510) $1,736
- ---------------------------------------------------------------------- ----------------- -------------------
Basic net income per common share:
Net income $(0.09) $0.10
Weighted average common shares outstanding 17,157 17,018
Diluted net income per share:
Net income $(0.09) $0.10
Weighted average common shares outstanding 17,157 17,695
- ---------------------------------------------------------------------- ----------------- -------------------
* exclusive of depreciation, which is shown separately below See accompanying
notes.
BOSTON COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended March 31,
2002 2001
- ------------------------------------------------------------------------------- --------------- ---------------
OPERATING ACTIVITIES
Net income (loss) ($1,510) $1,736
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,128 3,866
Deferred income taxes (1,006) 334
Non-recurring charge 3,297 --
Changes in operating assets and liabilities:
Accounts receivable (3,199) 422
Inventory 174 88
Prepaid expenses and other assets (197) 215
Accounts payable, accrued expenses and deferred revenue (75) (3,984)
Income taxes payable (11) (155)
- ------------------------------------------------------------------------------- --------------- ---------------
Net cash provided by operations 1,601 2,522
INVESTING ACTIVITIES
Purchases of property and equipment (5,210) (3,025)
Sales of short-term investments 2,962 3,111
Purchases of short-term investments (933) (5,200)
- ------------------------------------------------------------------------------- --------------- ---------------
Net cash used in investing activities (3,181) (5,114)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and employee stock purchase 296 518
plan
Purchase of treasury stock (1,458) ---
Repayment of capital leases (313) (287)
- ------------------------------------------------------------------------------- --------------- ---------------
Net cash provided by (used in) financing activities (1,475) 231
- ------------------------------------------------------------------------------- --------------- ---------------
Decrease in cash and cash equivalents (3,055) (2,361)
Cash and cash equivalents at beginning of period 37,646 50,499
- ------------------------------------------------------------------------------- --------------- ---------------
Cash and cash equivalents at end of period $34,591 $48,138
- ------------------------------------------------------------------------------- --------------- ---------------
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three month period ending March 31, 2002 are
not necessarily indicative of the results that may be expected for the
year ended December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 2001.
2. Special Charges
In the fourth quarter of 2000, the Company recorded a special charge of
$2.6 million to accrue for legal expenses in the defense of the Freedom
Wireless suit. In the third quarter of 2001, the Company recorded a
special charge of $3.6 million, primarily to accrue for legal expenses
estimated by the Company's outside counsel to be incurred in the defense
of a patent infringement suit brought by Freedom Wireless. In the first
quarter of 2002, the Company recorded a special charge of $3.3 million to
principally accrue for legal expenses estimated by the Company's outside
counsel to be incurred in the defense of a patent infringement suit
brought by Freedom Wireless, Inc. There can be no assurances that the
Company's expenses to defend the Freedom Wireless suit will not exceed
the Company's estimate. The Company believes that the claims made by
Freedom Wireless are without merit and is vigorously defending the
action. The components of the legal charges and payments are as follows
(in thousands):
Initial 12/31/00 Additional 12/31/01 Additional 3/31/02
charges Payments Balance charges Payments Balance charges Payments Balance
------- -------- -------- ---------- ------- -------- -------- ------- --------
Cash charges:
Legal fees primarily
for
Freedom Wireless $2,600 $114 $2,486 $3,629 $3,427 $2,688 $3,297 $800 $5,185
suit ====== ==== ====== ====== ====== ====== ====== ==== ======
3. Earnings Per Share
The following table sets forth the computation of basic and diluted net
income per share for:
For the months ended
March 31,
2002 2001
------------------------------------------------------------ --------------- ---------------
Numerator for basic and diluted earnings per share:
------------------------------------------------------------ --------------- ---------------
Net income (loss) ($1,510) $1,736
------------------------------------------------------------ --------------- ---------------
------------------------------------------------------------ --------------- ---------------
Denominator:
Denominator for basic net income (loss) per share 17,157 17,018
Effect of dilutive employee stock options -- 677
------------------------------------------------------------ --------------- ---------------
------------------------------------------------------------ --------------- ---------------
Denominator for diluted net income (loss) per share 17,157 17,695
------------------------------------------------------------ --------------- ---------------
------------------------------------------------------------ --------------- ---------------
Basic net income (loss) per common share ($0.09) $0.10
------------------------------------------------------------ --------------- ---------------
Diluted net income (loss) per common share ($0.09) $0.10
------------------------------------------------------------ --------------- ---------------
4. Inventory
Inventories consisted of the following at:
(in 000's) March 31, 2002 December 31, 2001
------------------------ ----------------------- ----------------------
Purchased parts $627 $130
Work-in-process 235 906
-------------------------------- ----------------------- ----------------
$862 $1,036
-------------------------------- ----------------------- ----------------
5. Segment Reporting
(in 000's except percentages)
Prepaid
Three months ended Wireless Roaming Prepaid Eliminations
March 31, Services Services Systems Total
-------------------------------- ------------ ------------ ------------ ------------------ ------------
2002
Revenues $12,139 $1,583 $2,447 ($1,127) $15,042
======= ====== ====== ======== =======
Gross margin (1) 4,973 131 994 (377) 5,721
===== === === ===== =====
Gross margin percentage (1) 41% 8% 41% 38%
=== == === ===
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%
=== === === ===
(1) The results for the three months ended March 31, 2002 include a
one-time charge of $3.3 million principally for estimated legal
expenses expected to be incurred in connection with the Freedom
Wireless patent infringement suit which is classified as a cost of
Prepaid Wireless Services.
6. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141 (FAS 141), "Business Combinations" and No. 142 (FAS 142) "Goodwill
and Other Intangible Assets," effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill is no longer amortized but
is subject to annual impairment tests in accordance with FAS 142.
The Company adopted the new rules on accounting for goodwill in the first
quarter of 2002. The Company has performed the first of the required
impairment tests of goodwill and determined that its goodwill was not
impaired upon the adoption of FAS 142. The goodwill is attributable to the
Prepaid Wireless Services segment. The effect of no longer amortizing
goodwill under FAS 142 is as follows:
(in 000's) March 31, 2002 March 31, 2001
------------------------------------ ------------------- ----------------
Reported net income (loss) $(1,510) $1,736
Goodwill amortization --- 151
------------------------------------ ------------------- ---------------
------------------------------------ ------------------- ---------------
Adjusted net income (loss) (1,510) 1,887
------------------------------------ ------------------- ---------------
------------------------------------ ------------------- ---------------
Basic earnings (loss) per share
------------------------------------ ------------------- ---------------
------------------------------------ ------------------- ---------------
Reported net income (loss) (0.09) 0.10
Goodwill amortization ------ 0.01
------------------------------------ ------------------- ---------------
------------------------------------ ------------------- ---------------
Adjusted net income (loss) (0.09) 0.11
------------------------------------ ------------------- ---------------
------------------------------------ ------------------- ---------------
Diluted earnings (loss) per share
------------------------------------ ------------------- ---------------
------------------------------------ ------------------- ---------------
Reported net income (loss) (0.09) 0.10
Goodwill amortization ------ 0.01
------------------------------------ ------------------- ---------------
------------------------------------ ------------------- ---------------
Adjusted net income (loss) $(0.09) $0.11
------------------------------------ ------------------- ---------------
In June, 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (FAS 143) which addresses accounting and reporting
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It also applies to legal
obligations associated with the retirement of tangible long-lived assets
that result from acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees.
The Company is required to adopt FAS 143 in the first quarter of fiscal
2003 and is currently in the process of evaluating the impact on its
consolidated financial statements.
In August, 2001, the FASB issued SFAS No. 144 (FAS 144), "Accounting for
the Impairment or Disposal of Long-Lived Assets", which addresses the
financial accounting and reporting for the impairment of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the
accounting and reporting provisions for the disposal of a segment of a
business of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
The Company adopted FAS 144 in January 2002, and there was no impact on its
consolidated financial statements.
7. Contingencies - Legal
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 has subsequently dropped the claim of tortious
interference with contract and added a claim of fraudulent
misrepresentation. The Supplier seeks damages in excess of $1 million. The
Company believes that the claim is without merit. Discovery has been
completed and motions for summary judgement are pending before the Court.
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. The Company has indemnification
obligations with respect to the other defendants. 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 suit is
currently in the discovery phase. 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.
On January 4, 2002, a carrier customer sent a letter to the Company stating
that it is entitled to indemnification from the Company in respect to
certain claims pending in a patent infringement case brought by Ronald A.
Katz Technology Licensing, L.P. against the carrier customer in the United
States District Court for the Eastern District of Pennsylvania. The
plaintiff claims infringement of 14 patents by the defendants in the case,
and seeks damages in an unspecified amount. The letter asserts that the
Company must indemnify the carrier customer to the extent any of the claims
in the complaint may relate to the services provided by the Company to the
carrier customer pursuant to the Prepaid Wireless Calling Service Agreement
and any other agreements between the carrier customer and the Company. The
Company is reviewing the matter and has engaged outside counsel to
represent it. At this stage it is not possible to determine whether there
is a valid claim for indemnification, or the likely outcome of such claim.
From time to time as a normal incidence of the nature of the Company's
business, various claims, charges and litigation are asserted or commenced
against the Company arising from, or related to, contractual matters,
patents, trademarks, personal injury, and personnel and employment
disputes. As to such claims and litigation, the Company can give no
assurance that it will prevail. However, the Company does not believe that
these matters (other than that disclosed) will have a material adverse
effect on the Company's consolidated financial position, although an
adverse outcome of any of these matters could have a material adverse
effect on the Company's consolidated results of operations or cash flows in
the quarter or annual period in which one or more of these matters are
resolved.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Results of Operations
The Company's total revenues decreased 21% from $19.0 million in the three
months ended March 31, 2001 to $15.0 million in the three months ended March 31,
2002. The decline was primarily attributable to a 53% decline in Roaming
Services revenue and a 13% decline in revenues from the Company's Prepaid
Wireless Services business.
Including the non-recurring charges, the Company generated an operating loss of
$2.9 million during the three months ended March 31, 2002 compared to operating
income of $2.1 million for the corresponding period in the prior year. Excluding
the effects of special charges in the three months ended March 31, 2002, the
operating income from operations was $370,000. The decrease in operating income
resulted primarily from decreased Prepaid Wireless Services revenue and gross
margin. The specifics of each segment's revenues and gross margins are discussed
in greater detail below.
Segment Data
(in thousands, except percentages)
Prepaid
Three months ended Wireless Roaming Prepaid Eliminations
March 31, Services Services Systems Total
-------------------------------- ------------ ------------ ------------ ------------------- ---------------
2002
Revenues $12,139 $1,583 $2,447 ($1,127) $15,042
======= ====== ====== ======== =======
Gross margin, excluding
special charge 8,270 131 994 (377) 9,018
===== === === ===== =====
Gross margin percentage,
excluding special charge 68% 8% 41% 60%
=== == === ===
Gross margin (1) 4,973 131 994 (377) 5,721
===== === === ===== =====
Gross margin percentage (1) 41% 8% 41% 38%
=== == === ===
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%
=== === === ===
(1) The results for the three months ended March 31, 2002 include a
special charge of $3.3 million principally for estimated legal
expenses expected to be incurred in connection with the Freedom
Wireless patent infringement suit which is classified as a cost of
prepaid wireless services.
Prepaid Wireless Services
Prepaid Wireless Services revenues decreased 13% from $14.0 million in the first
quarter of 2001 to $12.1 million in the first quarter of 2002. The revenue
decline compared to the prior year was primarily a result of the loss of Rogers
AT&T and AT&T Wireless, which loss was partially offset by increased average
minutes of use (MOUs) per subscriber from 49 at March 31, 2001 to 87 at March
31, 2002, representing a 78% increase. The increase in MOUs resulted primarily
from the Company's carrier customers promoting more competitively priced,
digital, full featured prepaid offerings. The Company expects that its
subscriber base, average MOUs and revenues will increase as existing and
prospective carrier customers aggressively market the Company's full-featured,
prepaid offerings which appeal to higher quality digital subscribers who tend to
talk more on their prepaid phones. The Company expects that the anticipated
revenue growth will be tempered, however, as carriers who generate higher MOUs
avail themselves of volume pricing discounts offered by the Company. The primary
reason for the decline in subscribers from 2.1 million at March 31, 2001 to 1.9
million at March 31, 2002 was the write off of 600,000 non-performing
subscribers at December 31, 2001.
Including a special charge of $3.3 million for legal expenses, the gross margin
for Prepaid Wireless Services was 41% for the three months ended March 31, 2002.
Excluding special charges, gross margins decreased from 72% of Prepaid Wireless
Services for the three months ended March 31, 2001 to 68% of such revenues for
the three months ended March 31, 2002. The decrease resulted primarily from
lower revenues and, therefore, lower absorption of fixed costs. The charge for
legal expenses consists primarily of estimated probable fees the Company will
incur in the defense of the patent infringement suit brought by Freedom Wireless
and represents management's best estimate based upon the current facts and
circumstances. The Company expects that as subscribers and MOU grow, it will be
able to resume leveraging its fixed costs to yield higher gross margins in
subsequent quarters in 2002.
Roaming Services
Roaming Services revenues decreased 53% from $3.3 million in the first quarter
of 2001 to $1.6 million in the first quarter of 2002. The decrease in Roaming
Services revenues in 2002 was primarily attributable to consolidation in the
industry and advancements in handset technology that have improved registered
roaming capabilities. The Company anticipates that these trends will continue,
and therefore, Roaming Services revenues are expected to continue to decrease at
similar rates compared to prior periods.
Gross margins for Roaming Services decreased from 13% of Roaming Services
revenues in 2001 to 8% in 2002. The decrease primarily resulted from lower
revenues and the resulting lower absorption of fixed costs.
Prepaid Systems
Gross Prepaid Systems revenues remained flat in the first quarter of 2002
compared to the first quarter of 2001. Excluding inter-segment revenues, Prepaid
Systems revenues decreased 19% from $1.6 million in 2001 to $1.3 million in
2002. The decrease in Prepaid Systems revenues, excluding inter-segment
revenues, primarily resulted from a decrease in sales of voice mail systems that
were discontinued in December 2001.
Gross margins for Prepaid Systems, excluding inter-segment revenues, decreased
from 55% of Prepaid Systems revenues in the first quarter of 2001 to 47% in the
first quarter of 2002. The decrease resulted primarily from lower revenues
attributable to the discontinuance of voice mail sales, and to a lesser extent,
to lower recurring service revenues that typically yield higher margins.
Operating Data
Three months ended March 31,
2002 2001
- ------------------------------------------------------------- -------------------------- -----------------------------
% of Total % of Total
($ in thousands) Total Revenues Total Revenues
- ------------------------------------------------------------- ----------- -------------- ------------- ---------------
Total revenues 15,042 100% $18,989 100%
- -------------------------------------------------------------
Engineering, research and development 1,973 13% 2,273 12%
- -------------------------------------------------------------
Sales and marketing 1,129 8% 1,444 8%
- -------------------------------------------------------------
General and administrative 1,418 9% 1,719 9%
- -------------------------------------------------------------
Depreciation and amortization 4,128 27% 3,866 20%
- -------------------------------------------------------------
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 12% to 13% for the quarters ended March 31, 2001 and 2002,
respectively. This increase primarily resulted from the decrease in total
revenues. The decrease in absolute dollars resulted from increased
capitalization of costs as more efforts were focused on developing and deploying
new features and functionality. Although the Company intends to continue to
increase its engineering, research and development expenditures to support
ongoing and future development and enhancements of its prepaid and other
wireless services, the Company does not expect that engineering, research and
development expenditures will increase as a percentage of revenues.
Sales and marketing expenses
Sales and marketing expenses include direct sales and product management
salaries, commissions, travel and entertainment expenses, in addition to the
cost of trade shows, direct mail and other promotional expenses. Sales and
marketing expenses remained consistent at 8% of total revenues for the quarters
ended March 31, 2002 and 2001. In absolute dollars, sales and marketing expenses
decreased as the Company continued to effectively manage its costs. Since sales
and marketing expenses are typically higher in the first quarter compared with
other quarters due to incurring certain costs for trade shows that typically
occur during the quarter, sales and marketing expenses are expected to decrease
in absolute dollars and as a percentage of revenue for the remaining quarters of
2002.
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 remained consistent at 9% of revenues for the
quarters ended March 31, 2002 and 2001. In absolute dollars, general and
administrative expenses decreased as the Company continued to effectively manage
its costs. The general and administrative costs are expected to decrease as a
percentage of revenues in the remaining quarters of 2002.
Depreciation and amortization expense
Depreciation and amortization expense includes depreciation of
telecommunications systems, furniture and equipment and leasehold improvements.
The Company provides for depreciation using the straight-line method over the
estimated useful lives of the assets, which range from three to twenty years.
Goodwill related to acquisitions was amortized over eight years during 2001 but
is no longer being amortized in accordance with FAS 142. Depreciation and
amortization expense increased from 20% of total revenues in the first quarter
of 2001 to 27% of total revenues in the first quarter of 2002. The increase in
2002 was primarily due to decreased revenues and additional capital deployed to
support the Company's Prepaid Wireless Services. The Company expects that
depreciation and amortization will increase during the remaining quarters of
2002, as more capital is deployed to support the anticipated growth in Prepaid
Wireless Services and its investment in complimentary real-time transaction
processing features and services.
Interest income, net
Interest income decreased by 46% from $756,000 for the quarter ended March 31,
2001 to $411,000 for the quarter ended March 31, 2002. Interest income was
earned primarily from investments, as well as from the cash generated from
operations, the sale of the Teleservices business and the proceeds from the
Company's public offerings. The decline in interest income in 2002 resulted from
lower interest rates in the marketplace.
Provision for income taxes
The income tax benefit of $1.0 million for the quarter ended March 31, 2002
yielded a 40% income tax rate compared to income tax expense of $1.2 million or
a 40% rate for the quarter ended March 31, 2001.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments decreased to $55.2 million at
March 31, 2002 compared to $60.3 million at December 31, 2001. Net cash provided
by operations of $1.6 million in the first quarter of 2002 resulted from
depreciation and amortization of $4.1 million and non-recurring charges of $3.3
million. These amounts were offset by the net loss of $1.5 million for the
quarter and an increase of $3.2 million in the Company's accounts receivable due
to the increase in the Company's days sales outstanding for billing delays that
are anticipated to be corrected by the third quarter of 2002.
The Company's investing activities utilized $3.2 million of net cash in the
first quarter of 2002. The Company expended $5.2 million in the first quarter of
2002, primarily for telecommunications systems equipment and software for
expansion of the Company's IVSN and transaction processing platform, which was
primarily offset by $2.0 million in net sales of short-term investments. The
Company anticipates that over the next 12 months it will continue to make
significant capital investments for additional equipment and enhanced feature
capabilities to strengthen its Prepaid Wireless Services and other enhanced
services. The source of funds for these investments are expected to be from cash
flows anticipated to be generated from operations or the Company's short-term
investments. The Company's financing activities utilized $1.5 million in net
cash during the quarter ended March 31, 2002, principally due to the repurchase
of the Company's stock.
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.
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 are
recorded net of estimated billing adjustments. The Company recognizes revenue
from the sale of prepaid systems at the time the systems are shipped unless
there is acceptance criteria for which the Company does not recognize revenue
until acceptance occurs. Installation revenue is deferred until the entire
installation is complete. Maintenance revenue is deferred and recognized over
the term of the relevant maintenance agreement.
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. As discussed in Note 3 to the Consolidated
Financial Statements, the Company has accrued its best estimate of the probable
cost of current litigation. The estimate has been developed in consultation with
the Company's outside counsel who is handling the case. There can be no
assurances that the Company's expenses will not exceed the Company's estimate.
Research and Development, Software Development Costs and Costs
Capitalized for Internal Use
Research and development costs are charged to expense as incurred. However,
costs incurred for the development of computer software or deployment of assets
for internal use are capitalized in accordance with FASB 86 and SOP 98-1,
respectively. The direct labor and related overhead costs of development of
computer software are capitalized when technological feasibility has been
established. The direct labor, travel and related overhead costs to deploy
assets for internal use are capitalized until the asset is placed in service.
The capitalized costs are subject to an ongoing assessment of recoverability
based on anticipated future undiscounted net cash flows and changes in hardware
and software technologies.
Amortization of capitalized software development costs begin when the product is
made available for general release and amortization of internal use costs begins
when the related asset is first placed in service. These costs are amortized on
a straight-line basis over a three-year period.
Impairment of Long Lived Assets
The Company reviews the carrying value of its long-lived assets to assess the
recoverability of these assets in accordance with Financial Accounting Standards
Board Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. The Company records impairment losses when events and circumstances
indicate that the assets might be impaired, and the undiscounted operating cash
flows estimated to be generated by those assets are less than the carrying
amounts of those assets. The impairment loss is measured by comparing the fair
value of the assets to their carrying values. Fair value is determined by either
quoted market prices or the discounted cash flow method, whichever is more
appropriate under the circumstances involved.
Allowance for Bad Debts
The Company evaluates the collectability of its accounts receivable based on a
combination of factors. In circumstances where the Company is aware of a
specific customer's inability to meet its financial obligations (e.g. bankruptcy
filings, substantial downgrading of credit scores), the Company records a
specific reserve for bad debts against amounts due to reduce the net recognized
receivable to the amount the Company reasonably believes will be collected. For
all other customers, the Company recognizes reserves for bad debts based on the
length of time the receivables are past due and on historical experience. If
circumstances change (e.g. higher than expected defaults or an unexpected
material adverse change in a major customer's ability to meet its financial
obligations), the Company's estimates of the recoverability of amounts could be
adversely affected.
Certain Factors That May Affect Future Results
Historically, a significant portion of the Company's revenues in any particular
period has been attributable to a limited number of customers. This
concentration of customers can cause the Company's revenues and earnings to
fluctuate from quarter to quarter, based on the volume of minutes of usage
generated and the rates per minute paid to the Company by 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's control, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The market for services to wireless carriers is highly competitive and subject
to rapid change as new technologies are continually introduced in the wireless
marketplace. A number of companies currently offer one or more of the services
offered by the Company. Many wireless carriers are also providing, or can
provide in-house, the services that the Company offers or similar services that
are marketed to the same consumer base as the Company's services. 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 Services 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. In addition, if the Company does not continue to upgrade
its software and hosting environment as new wireless technologies evolve,
including 2.5G and 3G technologies, the Company could risk the loss of existing
and prospective customers.
Certain Prepaid Wireless Services contracts will expire in 2002 and beyond.
There can be no assurances that the Company will be successful in renewing any
of these contracts. Many wireless carriers are also providing, or can provide
in-house, the services that the Company offers or similar services that are
marketed to the same consumer base as the Company's services. 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
decline, revenue and gross margins could be adversely affected due to these
lower rates. These contracts are not exclusive and therefore do not prevent the
Company's customers from using competitors' prepaid platforms. In 2001, two of
the Company's former customers, AT&T Wireless and Rogers AT&T Wireless, did not
renew their prepaid contracts and brought their prepaid programs 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 and the Company
may not be able to replace these revenues.
Furthermore, the Company has expended significant amounts of capital to support
the agreements it has secured with its carrier customers. Because Prepaid
Wireless Services revenues are principally generated by prepaid subscriber
minutes of use, the Company's revenues can be impacted by the ability of
carriers to successfully market and sell prepaid services and the timing of when
such carriers promote prepaid services. Revenues from the Company's Prepaid
Wireless Services business are dependent on the Company's ability to retain
subscribers on the network and generate additional minutes of usage. However,
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 such
increase could result in reductions in related subscribers and therefore
revenues.
The Company is currently devoting significant resources toward the support and
enhancement of its Prepaid Wireless Services and systems to enhance system
reliability and expand its IVSN and hosting environment. 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. There can be no assurance that the Company will successfully support
and enhance its IVSN and transaction processing platform effectively to avoid
system outages and any associated loss in revenue or damage to the Company's
reputation. Nor can there be any assurances that the market for the Company's
Prepaid Wireless Services will continue to develop, or that the Company's IVSN
and transaction processing platform will successfully support current and future
growth. If the Company is not successful in supporting current and future
growth, if the market for the Company's Prepaid Wireless Services does not
continue to develop or if outages intensify either in frequency or duration,
there could be a material adverse effect on the Company's 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 prepaid subscriber additions, prepaid subscriber churn,
customer rates per minute 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, network outages, variations in the level of prepaid 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.
The Company historically has provided its services almost exclusively to
wireless carriers. Although the wireless telecommunications market has
experienced growth in recent years these growth rates have recently slowed.
There can be no assurance that wireless carriers will adopt prepaid programs
including the Company's Prepaid Wireless Services offering or that wireless
carriers will continue to use the Company's services. In addition, prepaid
wireless services are relatively new services in new markets. If the growth in
Prepaid Wireless 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 continues to invest in new features and additional technologies
including bcgi Wireless Wallet (m-commerce), Short Message Service (SMS)
billing, the Distribution Technology Partners Program and other new applications
to expand and enhance its real-time transaction processing 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 features or 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 expects that demand for its Roaming Services will continue to
decline as consolidation in the wireless industry reduces the number of
unregistered roamers and as handset technology continues to improve registered
roaming capabilities. Although the Company has been successful in reducing costs
to support roaming services and maintaining profitability, there can be no
assurance that the Company will be successful in reducing costs at a greater
rate than the decline in revenue going forward.
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.
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. Furthermore, a rapid shift away from the use of wireless
services in favor of other services could offset 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.
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 operational changes 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.
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 Prepaid Systems customers are
multinational corporations that are publicly traded in the U.S. or the United
Kingdom. All payments are received in U.S. dollars which protects the Company
from foreign currency fluctuations. 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. In addition, under the current economic conditions, many
corporations are reducing their capital budgets dramatically. Any such
reductions in the capital budgets of the Company's customers could reduce demand
for the Company's Prepaid Systems offerings.
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. There can be no assurances
that the Company's expenses to defend the Freedom Wireless suit will not exceed
the Company's estimate. Also, 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 has a number of patents pending to protect its proprietary
technology in the United States and internationally. If these patents are not
approved, the Company's technology may not be protected from infringement by
third parties and the Company may be subject to additional patent infringement
lawsuits or royalty payments to use the technology, which could have a material
adverse affect on the Company's business, financial condition and results of
operations.
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, computer viruses or similar
events. Although the Company has built redundancy into its network with its
Waltham, Massachusetts second data processing site and other redundant features,
there are still parts of the network that are not redundant at this time. In
addition, the Waltham site may not protect the Company from a natural disaster
within the greater Boston, Massachusetts area. 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.
On November 7, 2000 the Company 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 $15
million through 2005, based upon achievement of predetermined revenue targets.
In 2001, the Teleservices business did not achieve the predetermined revenue
targets nor did the Company earn any additional cash payments. There can be no
assurances that the Teleservices business will be successful in meeting the
predetermined revenue targets to help the Company earn any of the remaining
potential cash payments available.
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 maintains an investment portfolio in accordance with its Investment
Policy. The primary objectives of its Investment Policy are to preserve
principal, maintain proper liquidity to meet operating needs and maximize
yields. Although the Company's investments are subject to credit risk, the
Company's Investment Policy specifies credit quality standards for its
investments and limits the amount of credit exposure from any single issue,
issuer or type of investment. While the Company's investments are also subject
to interest rate risk and will decrease in value if market interest rates
increase, the Company typically holds all of its investments until maturity.
However, since the investments are typically held to maturity and are generally
conservative in nature and of relatively short duration, interest rate risk is
mitigated. The Company does not use derivative financial instruments for either
hedging foreign currency exposure risk or speculative trading purposes.
Accordingly, 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 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 has subsequently dropped the
claim of tortious interference with contract and added a claim of fraudulent
misrepresentation. The Supplier seeks damages in excess of $1 million. The
Company believes that the claim is without merit. Discovery has been completed
and motions for summary judgement are pending before the Court.
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.
The Company has indemnification obligations with respect to the other
defendants. 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 suit is currently in the discovery phase. 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.
On January 4, 2002, a carrier customer sent a letter to the Company stating that
it is entitled to indemnification from the Company in respect to certain claims
pending in a patent infringement case brought by Ronald A. Katz Technology
Licensing, L.P. against the carrier customer in the United States District Court
for the Eastern District of Pennsylvania. The plaintiff claims infringement of
14 patents by the defendants in the case, and seeks damages in an unspecified
amount. The letter asserts that the Company must indemnify the carrier customer
to the extent any of the claims in the complaint may relate to the services
provided by the Company to the carrier customer pursuant to the Prepaid Wireless
Calling Service Agreement and any other agreements between the carrier customer
and the Company. The Company is reviewing the matter and has engaged outside
counsel to represent it. At this stage it is not possible to determine whether
there is a valid claim for indemnification, or the likely outcome of such claim.
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 15, 2002 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)