<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1996.
REGISTRATION NO. 333-4128
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
BOSTON COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
MASSACHUSETTS 4812 04-3026859
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
----------------
ONE MCKINLEY SQUARE,
BOSTON, MASSACHUSETTS 02109 (617) 476-3570
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
GEORGE K. HERTZ
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BOSTON COMMUNICATIONS GROUP, INC.
ONE MCKINLEY SQUARE
BOSTON, MASSACHUSETTS 02109
(617) 476-3570
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
MARK G. BORDEN, ESQ. R. W. SMITH, JR., ESQ.
THOMAS L. BARRETTE, JR., ESQ. PIPER & MARBURY L.L.P.
HALE AND DORR 36 SOUTH CHARLES STREET
60 STATE STREET BALTIMORE, MD 21201
BOSTON, MASSACHUSETTS 02109 (401) 539-2530
(617) 526-6000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] 333-
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_] 333-
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC.
Cross Reference Sheet Showing Location in Prospectus of Information Required
By Items in Part I of Form S-1
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND CAPTION LOCATION IN PROSPECTUS
--------------------------------------- ----------------------
<S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.. Outside Front Cover Page
2. Inside Front and Outside Back Cover Inside Front Cover Page; Outside
Pages of Prospectus..................... Back Cover Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges...... Prospectus Summary; Risk Factors
4. Use of Proceeds......................... Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price......... Underwriting
6. Dilution................................ Dilution
7. Selling Security Holders................ Principal and Selling
Shareholders
8. Plan of Distribution.................... Outside Front Cover Page;
Underwriting
9. Description of Securities to be
Registered.............................. Description of Capital Stock
10. Interests of Named Experts and Counsel.. Not Applicable
11. Information With Respect to the
Registrant.............................. Front Cover Page; Prospectus
Summary; Risk Factors; The
Company; Use of Proceeds;
Dividend Policy; Capitalization;
Dilution; Selected Consolidated
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Business;
Management; Certain Transactions;
Principal and Selling
Shareholders; Description of
Capital Stock; Shares Eligible
for Future Sale; Consolidated
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
MAY 14, 1996
3,825,000 Shares
[BCG LOGO APPEARS HERE]
Common Stock
--------
Of the 3,825,000 shares of Common Stock offered hereby, 3,500,000 shares are
being sold by Boston Communications Group, Inc. ("BCG" or the "Company") and
325,000 shares are being sold by the Selling Shareholders. See "Principal and
Selling Shareholders." The Company will not receive any proceeds from the sale
of shares by the Selling Shareholders. Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $11.00 and $13.00 per
share. See "Underwriting" for the factors to be considered in determining the
initial public offering price. Application has been made to list the Common
Stock on the Nasdaq National Market under the symbol "BCGI."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 6.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
- --------------------------------------------------------------------------------
Total(2).......................... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Before deducting estimated expenses of $975,000, all of which will be
payable by the Company.
(2) The Company and a Selling Shareholder have granted to the Underwriters a
30-day option to purchase up to 573,750 additional shares of Common Stock
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Shareholders will be $ , $
, $ and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1996.
Alex. Brown & Sons
INCORPORATED
Donaldson, Lufkin & Jenrette
SECURITIES CORPORATION
The Columbia Group
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
[LOGO OF BOSTON COMMUNICATIONS GROUP, INC. APPEARS HERE]
-------------
Providing Innovative Solutions to Wireless Telephone Carriers.
-------------
[PICTURE OF MAP OF THE UNITED STATES INDICATING AREAS IN WHICH THE COMPANY'S
SERVICES ARE OR WILL BE PROVIDED APPEARS HERE]
-------------
[LEGEND]
* ROAMERplus - Service areas in the United States where the Company provides
ROAMERplus service to one or both of the cellular carriers. The Company's
ROAMERplus service is also available in Mexico City and major markets in
Canada.
** Carrier Support - Markets for which the Company provides customer support
services for wireless carriers.
*** C2C (proposed) - Locations where the Company initially plans to install a
C2C Network voice made for its prepaid wireless service. Locations and
timing subject to change based on market conditions and other factors.
-------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
Roaming Services
- ----------------
[PICTURE OF ROADWAY APPEARS HERE]
Available in over 1,100 markets in the United States, Canada and Mexico, the
Company's ROAMER plus service enables carriers to cost-effectively generate
revenues from unregistered roamers not covered by traditional roaming
agreements.
---------
[PICTURE OF CELLULAR TELEPHONE APPEARS HERE]
<PAGE>
Carrier Support Services
---------
[PICTURES OF ONE OF THE COMPANY'S CALL CENTERS APPEARS HERE]
---------------
The Company's carrier support services enable wireless carriers to outsource all
or a portion of their customer service activities and are designed to help
wireless carriers retain subscribers, reduce costs and manage growth.
-------------
Prepaid Wireless Services
--------------
The Company's C/2/C/SM/ Network uses proprietary software and switching
technology to enable wireless telephone carriers to offer their services on a
prepaid basis.
------------
[PICTURE OF PREPAID WIRELESS CARD APPEARS HERE]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
THE COMPANY
Boston Communications Group develops, markets and provides innovative call
processing and customer support services to wireless telephone carriers. The
Company's services are designed to enable wireless telephone carriers to focus
internal resources on their core business activities, while increasing
revenues, improving service quality and reducing costs. To date, the Company's
principal service offerings have included its ROAMERplus calling service and
its carrier support services. The Company's ROAMERplus service provides
carriers with the ability to cost-effectively generate revenues from
subscribers who are not covered under traditional roaming agreements by
arranging payment for roaming calls and paying carriers for the air time used.
BCG is the leading provider of roaming services to the unregistered roaming
market. The Company's carrier support services allow wireless carriers to
outsource all or a portion of their customer service activities, and are
designed to help wireless carriers retain subscribers, reduce costs and manage
growth. In early 1996, BCG introduced its prepaid wireless service that will
enable wireless carriers to offer their services on a prepaid basis. The
Company is in the process of deploying its C/2/C Network to support delivery of
this service on a nationwide basis.
Wireless telephone service has been one of the fastest growing segments of
the telecommunications industry over the last ten years. The Cellular
Telecommunications Industry Association estimates that the number of cellular
subscribers in the United States increased from approximately 340,000 in
December 1985 to approximately 33.7 million in December 1995. Significant
growth in the wireless telephone market is expected to continue in the future,
particularly given the emergence of personal communications service ("PCS") as
a new form of wireless telephone service. Industry sources have projected that
the number of cellular and PCS subscribers will grow to 80 million by the end
of the year 2000.
BCG's objective is to be a leader in providing high-quality, innovative call
processing and customer support services to wireless telephone carriers. A key
element of the Company's strategy is to identify and develop additional value-
added services that wireless telephone carriers either have not identified or
have found difficult or uneconomical to provide on their own. The Company seeks
to establish and maintain long-term relationships with its carrier customers in
order to understand evolving customer needs and continue to develop new service
offerings. The Company believes that the experience, relationships and
knowledge of its management team provide it with a competitive advantage in
addressing the needs of wireless telephone carriers.
The Company's ROAMERplus service was introduced in 1991 and by 1995 was being
used by approximately 95 cellular carriers that collectively hold licenses for
over 1,100 markets in the United States, Canada and Mexico, including nine of
the 10 largest cellular carriers in the United States. Cellular carriers can
offer ROAMERplus service without significant additional investment in
equipment, technology or personnel. The Company introduced its carrier support
services in 1993 and currently provides these services to 12 cellular carriers.
The Company's carrier support services allow a carrier's subscribers to make
billing inquiries, initiate address and rate plan changes, obtain instructions
on roaming features and promotions and receive other customer assistance. The
experience, economies of scale and rapid response time that the Company brings
to meeting its customers' needs can make the Company's per-minute fee for
support services a strategic and economic choice for cellular carriers. The
Company believes that its ability to provide high quality carrier support
services may also be attractive to emerging PCS providers seeking to quickly
establish and service a subscriber base.
3
<PAGE>
The Company is in the process of deploying its C2C Network, which uses
proprietary software and switching technology, to support delivery of its
recently introduced prepaid and enhanced wireless services. The Company
believes that this prepaid service will be attractive to cellular carriers
seeking to cost-effectively penetrate untapped market segments, such as
subscribers who cannot or do not want to receive service under traditional
monthly billing arrangements. BCG recently completed a trial use of its prepaid
wireless service by the cellular division of one of the Regional Bell Operating
Companies ("RBOCs"). The Company has entered into a contract with that carrier
and expects commercial use of its prepaid service by that carrier to begin in
the second quarter of 1996. The Company has entered into contracts with three
additional cellular carriers and is in discussions with a number of other
carriers to provide its prepaid service to them.
The Company charges for its services primarily on a per minute or per call
basis, or a combination thereof. The Company receives payment for its
ROAMERplus service from cellular subscribers using the service and receives
payment for its carrier support services from the applicable carrier. The
Company has achieved significant growth in revenues over the past three years,
with revenues increasing from $8.7 million for the year ended December 31, 1993
to $34.2 million for the year ended December 31, 1995. This growth resulted
primarily from an increase in the number of the Company's carrier customers,
the introduction of carrier support services in 1993 and an increase in demand
for the Company's services due to the general growth in the cellular industry.
The Company was organized as a Massachusetts corporation in August, 1988. The
Company's principal office is located at One McKinley Square, Boston,
Massachusetts 02109 and its telephone number is (617) 476-3570.
As used in this Prospectus, the terms "BCG" and "the Company" refer to Boston
Communications Group, Inc. and its wholly-owned subsidiaries, Voice Systems
Technology Inc. and Cellular Express, Inc., unless the context otherwise
requires. Cellular Express is a registered trademark, and Boston Communications
Group, C/2/C, DEBITplus, REVENUEguard, ROAMalert, ROAMERcare and ROAMERplus are
trademarks of Boston Communications Group, Inc. All other trademarks or trade
names referred to in this Prospectus are the property of their respective
owners.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company....... 3,500,000 shares
Common Stock offered by the Selling Share-
holders.................................. 325,000 shares
Common Stock to be outstanding after the
offering................................. 12,223,812 shares(1)
Use of proceeds........................... For the redemption of Redeemable
Preferred Stock (including
accumulated dividends), investment
in the C/2/C Network infrastructure
and other general corporate
purposes, including working
capital.
Proposed Nasdaq National Market symbol.... BCGI
</TABLE>
- --------
(1) Excludes 984,741 shares of Common Stock issuable upon the exercise of
options outstanding as of April 15, 1996 at a weighted average exercise
price per share equal to $4.80. Also excludes 539,567 shares of Common
Stock issuable upon the exercise of options to be granted under the
Company's 1996 Stock Option Plan on the effective date of this offering,
all at an exercise price per share equal to the Price to Public shown on
the cover page of this Prospectus. See "Management--Executive
Compensation--Stock Plans."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA THREE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
------------------------------------------ ------------ --------------- ------------
1991 1992 1993 1994 1995 1995(1) 1995 1996 1996(1)
------- ------- ------ ------- ------- ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Service revenues:
Calling services....... $ 809 $ 6,275 $8,236 $16,005 $25,446 $25,446 $4,606 $ 7,214 $ 7,214
Carrier support
services.............. -- -- 458 2,329 8,774 8,774 1,312 3,847 3,847
System revenues......... -- -- -- -- -- 2,068 -- 92 248
------- ------- ------ ------- ------- ------- ------ ------- -------
Total revenues......... 809 6,275 8,694 18,334 34,220 36,288 5,918 11,153 11,309
Operating income
(loss)................. (1,216) 291 (269) 405 2,129 1,833 35 735 568
Income (loss) from
continuing
operations(2).......... (1,528) 259 (332) 289 3,009 2,674 17 429 303
Income (loss) from
discontinued
operations............. (2,750) (1,196) (92) 1,506 (166) (166) (166) -- --
Net income (loss)....... (4,278) (937) (424) 1,795 2,843 2,508 (149) 429 303
Accretion of dividends
on redeemable preferred
stock.................. -- (1,030) (1,030) (1,016) (950) (950) (237) (237) (237)
Net income (loss)
available to common
shareholders........... (4,278) (1,967) (1,454) 779 1,893 1,558 (386) 192 66
Net income (loss)
available to common
shareholders per common
share(3):
Continuing operations.. $ (0.51) $ (0.26) $(0.42) $ (0.08) $ 0.22 $ 0.19 $(0.02) $ 0.02 $ 0.01
Net income (loss)...... $ (1.42) $ (0.65) $(0.45) $ 0.09 $ 0.21 $ 0.17 $(0.04) $ 0.02 $ 0.01
Shares used in computing
net income (loss) per
share.................. 3,012 3,012 3,235 8,848 9,179 9,179 9,179 9,179 9,179
Supplemental net income
available to common
shareholders per common
share(4):
Continuing operations.. $ 0.29 $ 0.25 $ 0.04 $ 0.03
Net income ............ $ 0.27 $ 0.24 $ 0.04 $ 0.03
Shares used in computing
supplemental net income
per share.............. 10,503 10,503 10,523 10,523
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED(5)
------- --------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BAL-
ANCE SHEET DATA:
Cash............... $ 353 $22,305
Working capital.... 700 22,652
Total assets....... 18,787 40,739
Redeemable Pre-
ferred Stock...... 16,133 --
Shareholders' eq-
uity (deficit).... (6,489) 31,596
</TABLE>
- -------
(1) In February 1996, the Company acquired Voice Systems Technology Inc.
("VST") for Common Stock and cash with an aggregate value of approximately,
$2.5 million. The reduction in net income arising in the pro forma results
of operations is primarily attributable to a non-cash charge related to
amortization of goodwill arising from the acquisition. See unaudited Pro
Forma Condensed Consolidated Financial Statements.
(2) In 1995, the Company reversed the deferred tax asset valuation allowance,
resulting in a tax benefit of $1.8 million. In addition, in 1994 and 1995,
the Company realized benefits from net operating loss carryforwards of
$382,000 and $840,000, respectively. See Note 6 of Notes to Consolidated
Financial Statements.
(3) See Note 2 of Notes to Consolidated Financial Statements.
(4) Supplemental net income available to common shareholders per common share
reflects the use of proceeds to redeem Redeemable Preferred Stock. See Note
2 of Notes to Consolidated Financial Statements.
(5) Adjusted to give effect to the sale by the Company of 3,500,000 shares of
Common Stock offered hereby (at an assumed initial public offering price of
$12.00 per share and after deducting underwriting discounts and commissions
and estimated offering expenses) and the application of the net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
---------------
Unless otherwise indicated, all information contained in this Prospectus (i)
reflects the re-capitalization of the Company effected on April 26, 1996 (the
"1996 Recapitalization"); (ii) reflects the conversion of all outstanding
shares of the Company's Class A Convertible Preferred Stock and Series 1 and 2
Class B Convertible Preferred Stock (collectively, the "Convertible Preferred
Stock") into an aggregate of 5,004,608 shares of Common Stock upon the closing
of this offering; (iii) reflects a restatement of the Company's Articles of
Organization, to be filed upon the closing of this offering, to eliminate the
Company's existing series of Convertible Preferred Stock and Redeemable
Preferred Stock and to create a class of authorized but undesignated preferred
stock; and (iv) assumes no exercise of the Underwriters' over-allotment option.
See "Use of Proceeds," "Description of Capital Stock," "Underwriting," and
Notes 7, 8 and 11 of Notes to Consolidated Financial Statements.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus.
Reliance on Significant Customers. Historically, a significant portion of
the Company's revenues in any particular period has been attributable to a
limited number of customers. Net revenues attributable to the Company's ten
largest customers accounted for approximately 85.1%, 81.2%, 84.6% and 92.5% of
the Company's total revenues in 1993, 1994, 1995 and the first quarter of
1996, respectively. Ameritech Cellular Services, Inc. ("Ameritech Cellular"),
Bell Atlantic NYNEX Mobile and SNET Mobility, Inc. ("SNET Mobility") accounted
for approximately 15.0%, 13.9% and 11.9%, respectively, of the Company's total
revenues in 1995 and for 17.4%, 11.7% and 13.2%, respectively, of total
revenues in the first quarter of 1996. In addition, BellSouth Mobility
accounted for approximately 13.6% of total revenues in the first quarter of
1996. SNET Mobility and Ameritech Cellular accounted for approximately 41.9%
and 34.6%, respectively, of the Company's carrier support revenues in 1995 and
SNET Mobility, Ameritech Cellular and Comcast Cellular Communications, Inc.
accounted for approximately 35.4%, 35.0% and 17.2%, respectively, of carrier
support revenues in the first quarter of 1996. This concentration of customers
can cause the Company's revenues and earnings to fluctuate from quarter to
quarter, based on the volume of call traffic generated through these customers
or the amount of services being performed pursuant to carrier support
programs. The Company expects that revenues attributable to a relatively small
number of customers will continue to represent a significant percentage of its
total revenues for the foreseeable future. The terms of the Company's
contracts with its customers are generally for periods of one year and, except
for certain carrier support contracts, have no minimum payment obligations to
the Company. Therefore, although the Company believes it has good
relationships with its customers, there can be no assurance that any of the
Company's customers, including its major customers, will continue to utilize
the Company's services in amounts similar to previous years or at all. A
significant decrease in business from any of the Company's major customers,
including a decrease in business due to factors outside of the Company's
control, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business--
Customers."
Dependence on Cellular Market; Uncertain Acceptance of Prepaid Wireless
Service and PCS. The Company historically has provided its services, including
roaming services and carrier support services, exclusively to cellular
carriers and their subscribers. Although the cellular market, and in
particular, the roaming segment of the cellular 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 cellular carriers will
continue to use the Company's services. Because the Company's ROAMERplus
calling service is now being used by a substantial number of the cellular
carriers in the United States, any further growth in the Company's revenues
from the ROAMERplus calling service is more likely to be from general growth
of the roaming market, if any, than from the addition of new carrier
customers. Declines in demand for the Company's services, whether as a result
of competition, technological change, general economic conditions or other
factors, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's future operating results will depend in large part on the
emergence of the prepaid wireless and PCS markets, the acceptance and use by
cellular carriers of the Company's prepaid wireless service and the use of the
Company's services by PCS carriers. The prepaid wireless service and PCS
markets are in their initial stages of development, and if these markets do
not grow as expected or if the carriers in these markets do not use the
Company's services, the Company's business, financial condition and results of
operations could be materially and adversely affected. See "Business--Industry
Background" and "--Services."
6
<PAGE>
Rapid Industry Change. The Company's future success will depend on the
continued use of its existing services, the acceptance of new services in the
wireless industry and the Company's ability to develop new services or adapt
existing services to keep pace with changes in the wireless telephone
industry. Technological changes or developments in the cellular industry, such
as improved switching technologies or further industry consolidation, could
make cellular roaming easier and less costly and thereby reduce or eliminate
demand for the Company's roaming service. Further, a rapid shift away from the
use of cellular in favor of other services, such as PCS, could affect demand
for the Company's service offerings and could require the Company to develop
modified or alternative service offerings addressing the particular needs of
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 in a timely manner, or at all. If the Company is unable, due to
resource, technological or other constraints, to adequately anticipate or
respond to changing market, customer or technological requirements, the
Company's business, financial condition and results of operations will be
materially adversely affected. There can be no assurance that products or
services developed by others will not render the Company's services non-
competitive or obsolete. See "Business--Industry Background" and "--
Competition."
Development and Operation of C/2/C Network. The Company is currently
devoting significant resources to the development of its prepaid wireless
service, including deployment of its C/2/C Network. The Company recently
completed a trial of its prepaid service by the cellular division of one of
the RBOCs, however, commercial use of that service has not yet commenced.
Further, the Company is in the early stages of installing, at its own expense,
the voice nodes and other infrastructure required to support the C/2/C
Network. There can be no assurance that the Company will successfully complete
the development and deployment of the C/2/C Network or its prepaid service in
a timely fashion, that the market for the Company's prepaid service will
develop, or that the Company will be able to successfully operate the C/2/C
Network. If the Company is not successful in its development or deployment of
the C/2/C Network, if the market for prepaid services fails to develop or
develops more slowly than expected, or if the Company's prepaid service
becomes subject to significant competitive pressures, the Company's business,
results of operations and financial condition will be materially and adversely
affected. See "Business--Industry Background."
Potential Fluctuations in Quarterly Performance. The Company has experienced
fluctuations in its quarterly operating results and anticipates that such
fluctuations will continue and could intensify. The Company's quarterly
operating results may vary significantly depending on a number of factors,
including the timing of the introduction or acceptance of new services offered
by the Company or its competitors, changes in the mix of services provided by
the Company, changes in regulations affecting the wireless industry, changes
in the Company's operating expenses, personnel changes and general economic
conditions. In particular, the Company's calling service revenues are affected
by the frequency and volume of use of the Company's services, which may be
influenced by seasonal trends, as well as changes in demand during particular
periods due to a higher or lower incidence of temporary suspension of inter-
carrier roaming agreements in certain markets. See "Business--Industry
Background." Carrier support revenues may be influenced by the requirements of
one or more of the Company's significant carrier support customers, including
engagement of the Company for implementing or assisting in implementing
special projects of limited duration. Although the Company was profitable
during the last eight quarters, the Company was not profitable in any period
prior to that time. There can be no assurance that the Company's recent
profitability will continue in the future or that its levels of profitability
will not vary significantly among quarterly periods. Fluctuations in operating
results may result in volatility in the price of the Company's Common Stock.
Because a significant portion of the Company's operating expenses are
committed in advance based on anticipated revenue levels, the Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, unexpected revenue shortfalls can cause
significant variations in operating results from quarter to quarter and could
have a material adverse effect
7
<PAGE>
on the Company's results of operations. In addition, the Company hired a
significant number of employees in 1995 and the first quarter of 1996,
including a new chief executive officer, and expects to continue hiring
additional sales, customer service, management, software development and
technical support employees during 1996 as it continues to develop and expand
its operations, including the deployment of its C/2/C Network. This
significant increase in its workforce may negatively impact the Company's
operating margins in the future, particularly if the Company's commercial
introduction of its prepaid service is not successful.
The Company's largest source of revenue is currently its ROAMERplus service.
In providing that service, the Company processes calls made by unregistered
roamers and bears the collection risk, including chargebacks and other billing
adjustments. This arrangement requires the Company to estimate and reserve for
uncollectible ROAMERplus charges. The amount of these uncollectible charges
has historically averaged approximately 15% of gross revenues on an annual
basis, but has varied in particular quarters. A significant change in the
Company's experience with respect to, or a failure by the Company to properly
estimate and reserve for, uncollectible ROAMERplus charges in any period could
have a material adverse effect on the Company's results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 adversely affected.
Limited Operating History; Accumulated Deficit. The Company was founded in
1988 but did not introduce its ROAMERplus calling service until 1991, did not
introduce its carrier support services until 1993 and only recently introduced
its prepaid service. Accordingly, the Company has only a limited operating
history for the two services that comprised substantially all of its revenues
from continuing operations in 1993, 1994, 1995 and the first quarter of 1996.
Since its inception, the Company has been profitable only in 1994, 1995 and
the first quarter of 1996 and, as of March 31, 1996, the Company had an
accumulated deficit of $5.3 million. There can be no assurance that the
Company will be profitable on either a quarterly or annual basis in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Ability to Manage Growth. The Company has expanded its operations rapidly,
which has created significant demands on the Company's 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. The Company's future operating
results will depend on the ability of its officers and key employees to manage
changing business conditions and to continue to improve its operational and
financial control and reporting systems. The Company hired a new chief
executive officer in 1996 who has been involved only in the most recent
operating history of the Company. If the Company's management, including its
new chief executive officer, is unable to manage growth effectively, its
business, financial condition and results of operations could be materially
and adversely affected. See "Business--Employees" and "Management."
The success of the Company's business depends in part upon the Company's
ability to attract, train and retain a sufficient number of qualified
personnel commensurate with the expanding needs of the Company. The Company's
carrier support business is labor intensive and characterized by high
personnel turnover. An increase in the turnover rate among the Company's
employees would increase the Company's recruiting and training costs, and if
the Company were unable to recruit and retain a sufficient number of
employees, it could be forced to limit its growth or possibly curtail its
operations. Although the Company hired a significant number of employees in
1995 and the first quarter of 1996, there can be no assurance that the Company
will be successful in attracting, training and retaining the required number
of employees to support the Company's business in the future. See "Business--
Services."
8
<PAGE>
Competition. 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. Trends in the wireless telephone industry, including greater
consolidation and technological or other developments that make it simpler or
more cost-effective for wireless carriers to provide certain services
themselves, could affect demand for the Company's services and could make it
more difficult for the Company to offer a cost-effective alternative to a
wireless carrier's own capabilities. In addition, the Company anticipates
continued growth in the wireless carrier services industry, and consequently,
the entrance of new competitors in the future.
The Company believes that the principal competitive factors in the wireless
carrier services industry include the ability to identify and respond to
customer needs, quality and breadth of service offerings, price and technical
expertise. The Company believes that its ability to compete also depends in
part on a number of competitive factors outside its control, including the
ability to hire and retain employees, the development by others of products
and services that are competitive with the Company's products and services,
the price at which others offer comparable products and services and the
extent of its competitors' responsiveness to customer needs.
Many of the Company's current and potential competitors have significantly
greater financial, marketing, technical and other competitive resources, as
well as greater name recognition, than the Company. As a result, the Company's
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or may be able to devote greater
resources to the promotion and sale of their products and services. There can
be no assurance that the Company will be able to compete successfully with its
existing competitors or with new competitors. In addition, competition could
increase if new companies enter the market or if existing competitors expand
their service offerings. An increase in competition could result in price
reductions and loss of market share and could have a material adverse effect
on the Company's business, financial condition or results of operations.
To remain competitive in the wireless carrier services industry the Company
will need to continue to invest in engineering, research and development and
sales and marketing. There can be no assurance that the Company will have
sufficient resources to make such investments or that the Company will be able
to make the technological advances necessary to remain competitive. In
addition, current and potential competitors have established or may in the
future establish collaborative relationships among themselves or with third
parties, including third parties with whom the Company has a relationship, to
increase the visibility and utility of their products and services.
Accordingly, it is possible that new competitors or alliances may emerge and
rapidly acquire significant market share. If this were to occur, the Company's
business, financial condition or results of operations would be materially
adversely affected. See "Business--Competition."
Dependence on Proprietary Technology. The Company's success and ability to
compete is dependent in part upon its proprietary technology. The Company
relies primarily on a combination of statutory and common law copyright,
trademark and trade secret laws, customer licensing agreements, employee and
third-party nondisclosure agreements and other methods to protect its
proprietary rights. The Company limits access to, and distribution of, its
proprietary information, and has entered into confidentiality agreements with
certain of its employees, consultants, clients and potential clients. In
addition, the Company has recently instituted a policy requiring all senior
management and software development employees, consultants, clients and
potential clients to enter into confidentiality agreements in the future.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company's technology without authorization, or to
develop similar technology independently. If unauthorized copying or misuse of
the Company's technology were to occur to any substantial degree the Company's
business, financial condition and results of operations could be materially
adversely
9
<PAGE>
affected. There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology.
Some of the software used to support the Company's roaming services and
prepaid services is licensed by the Company from single vendors, which are
small corporations. There can be no assurance that these suppliers will
continue to license this software to the Company or, if any supplier
terminates its agreement with the Company, that the Company will be able to
develop or otherwise procure software from another supplier on a timely basis
and at commercially acceptable prices. See "Business--Proprietary Rights."
Although the Company has not received any notices from third parties
alleging infringement claims, there can be no assurance that third parties
will not assert infringement claims against the Company in the future or that
any such claims will not require the Company to enter into license
arrangements or result in protracted and costly litigation, regardless of the
merits of such claims. Such royalty or license agreements, if required, may
not be available on terms acceptable to the Company or at all.
Risk of System Failure or Inadequacy. The Company's operations are dependent
upon 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. Nearly all of the Company's
computer and telecommunications equipment is located at its sites in
Massachusetts, including the only switch used to handle the Company's
ROAMERplus business. Although the Company is in the process of enhancing its
back-up for its systems, these measures will not eliminate the risk to the
Company's operations from a natural disaster or system failure. From time to
time, the Company has suffered failure of its systems, which has resulted in
delays in the delivery or a reduction in the quality of its services to some
customers. In addition, the growth of the Company's customer base or a
significant increase in call volume may strain the capacity of its computers
and telecommunications systems and lead to degradations in performance or
system failure. 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. There can be no
assurance that the Company's property and business interruption insurance will
be adequate to compensate the Company for any losses that may occur in the
event of a system failure. See "Business--Services."
In addition to its own systems, the Company relies on certain equipment,
systems and services from third parties that are also subject to risks,
including risks of system failure. For example, in providing its unregistered
roaming service the Company depends on a single long distance carrier to
provide the long distance service that is required to transport a roamer's
call to the Company's facilities in Massachusetts. If the carrier was to fail
to provide such service due to a system failure or other reason, the Company
would be unable to service any unregistered roamers until the problem was
resolved or an alternative long distance carrier was in place. The Company
believes that it would incur significant expenses if it were required to
replace its long distance carrier on short notice. The Company is also
dependent on access to various credit information data bases to support its
unregistered roaming business. If, for any reason, the Company was unable to
access that data, the Company would be required either to cease providing the
service until it reached a resolution of the problem or would be required to
provide services without being able to manage the associated collection risk.
Dependence on Key Personnel. The Company's future success depends in large
part on the continued services of its key management, sales, engineering,
research and development and operational personnel and on its ability to
continue to attract, motivate and retain highly qualified employees in those
areas. Competition for such personnel is intense and there can be no assurance
that the Company will be successful in attracting, motivating and retaining
key personnel. The inability to hire and retain qualified personnel or the
loss of the services of key personnel could have a material adverse effect
upon the
10
<PAGE>
Company's current business and future business prospects. The Company does not
maintain any key man life insurance policies on any of its employees. See
"Business--Employees" and "Management."
Government Regulation and Legal Uncertainties. While most of the Company's
operations are not directly regulated, the wireless carriers that constitute
the Company's customers are heavily regulated at both the federal and state
levels. Such regulation may decrease the growth of the wireless telephone
industry, affect the development of the PCS market, limit the number of
potential customers for the Company's services or impede the Company's ability
to offer competitive services to the wireless telephone market or otherwise
have a material adverse effect on the Company's business, financial condition
and results of operations. At the same time, recently enacted legislation
deregulating the telecommunications industry may cause changes in the
industry, including entrance of new competitors and industry consolidation,
which could in turn subject the Company to increased pricing pressures,
decrease the demand for the Company's services, increase the Company's cost of
doing business or otherwise have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Government Regulation."
Control by Directors and Officers. Upon the closing of this offering, the
Company's officers and Directors, and their affiliates, will beneficially own
approximately 53.5% of the Company's outstanding Common Stock. As a result,
these shareholders, acting together, will have the ability to elect the
Company's directors and to determine the outcome of corporate actions
requiring shareholder approval, regardless of how other shareholders of the
Company may vote. This concentration of ownership may have the effect of
delaying or preventing a change in control of the Company. See "Management"
and "Principal and Selling Shareholders."
No Public Market; Possible Volatility of Stock Price; Dividend Policy. Prior
to this offering, there has been no public market for the Company's Common
Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price will be determined by negotiations among the
Company, the Selling Shareholders and the Representatives of the Underwriters.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. Factors such as the
announcement of operating results that differ from expectations, changes in
such expectations, quarter-to-quarter variations in operating results,
announcements of technological innovations or new products and services by the
Company or its competitors and market conditions for stocks of
telecommunications services companies in general could have a significant
impact on the future market price of the Common Stock. No dividends have been
paid on the Common Stock to date, and the Company does not anticipate paying
dividends in the foreseeable future.
In addition, in recent years the stock market in general, and the shares of
certain telecommunications-related companies in particular, have experienced
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock. See "Underwriting."
Immediate and Substantial Dilution. The Price to Public shown on the cover
page of this Prospectus is substantially higher than the net tangible book
value per share of the outstanding Common Stock. Investors purchasing shares
of Common Stock in this offering will therefore incur immediate and
substantial dilution. In addition, investors purchasing shares of Common Stock
in this offering will incur additional dilution to the extent outstanding
options are exercised and may incur additional dilution upon the exercise of
outstanding stock options and options that may be granted in the future
pursuant to the Company's 1996 Stock Option Plan and 1996 Employee Stock
Purchase Plan. Although the Company has no commitments, agreements or pending
negotiations with respect to any future acquisitions, it may make acquisitions
in the future using shares of Common Stock or Preferred Stock, which would
have the effect of reducing the percentage ownership of existing holders of
Common Stock. See "Dilution."
11
<PAGE>
Management's Discretion as to Use of Unallocated Net Proceeds. The Company
has not designated any specific use for a portion of the net proceeds from the
sale of Common Stock described in this Prospectus. Rather, the Company expects
to use a portion of the net proceeds for general corporate purposes, including
working capital. Consequently, the Board of Directors and management of the
Company will have significant flexibility in applying the net proceeds of this
offering. See "Use of Proceeds."
Payments to Affiliates. In connection with the Company's redemption, upon
the closing of this offering, of all outstanding shares of Redeemable
Preferred Stock, including the payment of accumulated dividends thereon, Paul
Tobin (Chairman of the Company's Board of Directors), BCG Investments, Inc.
(an entity whose sole shareholder is Mr. Tobin) ("BCG Investments"), Robert
Sullivan (a 5% shareholder of the Company), Highland Capital Partners, L.P.
(with whom James McLean, a Director of the Company, is affiliated)
("Highland"), and entities affiliated with Burr, Egan, Deleage & Co. (of which
Craig Burr, a Director of the Company, is a Managing General Partner) will
receive an estimated $399,000, $425,000, $166,000, $5.9 million and $7.4
million, respectively in their capacities as holders of Redeemable Preferred
Stock.
Shares Eligible for Future Sale; Registration Rights. Sales of the Company's
Common Stock in the public market following this offering could adversely
affect the prevailing market price of the Common Stock. Immediately after
completion of the offering, the Company will have 12,223,812 shares of Common
Stock outstanding, of which the 3,825,000 shares offered hereby (assuming no
exercise of the Underwriters' over-allotment option) will be eligible for sale
without restriction. Following this offering, 8,398,812 outstanding shares of
Common Stock (after giving effect to the conversion of all outstanding shares
of Convertible Preferred Stock) will be "restricted securities" as that term
is defined in Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), and under certain circumstances may be sold without
registration pursuant to Rule 144. Approximately 367,986 of these shares will
be eligible for sale in the public market pursuant to Rule 144(k) immediately
after this offering. Approximately 4,754,468 additional shares will be
eligible for sale in the public market pursuant to Rule 144 beginning 90 days
after the date of the final Prospectus. In addition, approximately 716,650
shares of Common Stock which may be acquired upon the exercise of outstanding
vested options or options that will vest upon the closing of this offering
would be eligible for sale in the public market pursuant to Rule 701 under the
Securities Act and Rule 144 beginning 90 days after the date of the final
Prospectus. Promptly after the date of this Prospectus, the Company intends to
register approximately 1,489,792 shares of Common Stock issuable under its
1996 Stock Option Plan and 1996 Employee Stock Purchase Plan. The holders of
approximately 8,398,812 shares of Common Stock (including 716,650 shares of
Common Stock that may be acquired pursuant to the exercise of options that
will be vested upon the closing of this offering held by them) have agreed not
to publicly offer, sell or otherwise dispose of such shares for 180 days after
the date of this Prospectus, without the prior consent of Alex. Brown & Sons
Incorporated.
The holders of approximately 8,231,051 shares of Common Stock are entitled
to certain piggyback and demand registration rights with respect to such
shares. By exercising their registration rights, such holders could cause a
large number of shares to be registered and sold in the public market. Such
sales may have an adverse effect on the market price for the Common Stock and
could impair the Company's ability to raise capital through an offering of its
equity securities. See "Description of Capital Stock," "Shares Eligible for
Future Sale" and "Underwriting."
Antitakeover Effect of Charter Provisions, By-Laws and Massachusetts
Law. The Company's Amended and Restated Articles of Organization and
Massachusetts law contain provisions that could discourage a proxy contest or
make more difficult the acquisition of a substantial block of the Company's
Common Stock. The Company's Amended and Restated By-laws and Massachusetts law
provide for a classified Board of Directors, and the Restated Articles of
Organization provide that members of the Board of Directors may be removed
only for cause upon the affirmative vote of holders of at least two-thirds of
the shares of capital stock of the Company entitled to vote. In addition, the
Company's Board of Directors is authorized to issue shares of Common Stock and
Preferred Stock without shareholder approval. Any
12
<PAGE>
such issuance could dilute and adversely affect various rights of the holders
of Common Stock and could be used to discourage an unsolicited attempt to
acquire control of the Company. These provisions, and other provisions of the
Restated Articles of Organization, may have the effect of deterring hostile
takeovers or delaying or preventing changes in control or management of the
Company, including transactions in which shareholders might otherwise receive
a premium for their shares over then current market prices. In addition, these
provisions may limit the ability of shareholders to approve transactions that
they may deem to be in their best interests. See "Description of Capital
Stock--Massachusetts Law and Certain Charter and By-Law Provisions."
USE OF PROCEEDS
The net proceeds to BCG from the sale of shares of Common Stock offered by
the Company hereby are estimated to be approximately $38.1 million, ($43.9
million if the Underwriters' over-allotment option is exercised in full)
assuming an initial public offering price of $12.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. The Company will not receive any of the net
proceeds from the sale of shares by the Selling Shareholders. See "Principal
and Selling Shareholders."
The Company intends to use approximately $16.3 million of the net proceeds
to redeem all outstanding shares of the Company's Redeemable Preferred Stock,
including the payment of accrued dividends on such stock. Mr. Tobin, BCG
Investments (an entity whose sole shareholder is Mr. Tobin), Mr. Sullivan,
Highland and entities affiliated with Burr, Egan, Deleage & Co., will receive
approximately $399,000, $425,000, $166,000, $5.9 million and $7.4 million,
respectively upon such redemption in their capacities as the holders of the
Redeemable Preferred Stock. See "Certain Transactions."
The Company anticipates that approximately $11.0 million of the net proceeds
will be used over the next 18 months for capital and other expenditures in
connection with the deployment of the C/2/C Network. In addition, the Company
currently anticipates that approximately $2.0 million of the net proceeds will
be used to repay amounts outstanding under its Account Purchase Agreement with
its outside billing agent. Borrowings under this facility bear interest at the
prime rate plus 1.5% per annum and ranged from zero to $1.9 million during
1995 and the first quarter of 1996. As of April 15, 1996, $1.5 million was
outstanding under the Account Purchase Agreement.
The Company expects to use the balance of the net proceeds from this
offering for general corporate purposes, including working capital. A portion
of the net proceeds may also be used for the acquisition of businesses,
products and technologies that are complementary to those of the Company. The
Company currently has no plans, commitments or negotiations with respect to
any such transactions. Pending such uses, the Company intends to invest the
net proceeds from this offering in short-term, interest-bearing, investment
grade securities.
DIVIDEND POLICY
Dividends on the Company's Redeemable Preferred Stock accrue at the rate of
$80.00 per share per annum. As of April 15, 1996, the amount accrued for such
dividends was $4.3 million. Dividends will continue to accrue on the
Redeemable Preferred Stock until such shares are redeemed upon the closing of
this offering.
Except for such payments, the Company has never declared or paid any cash
dividends on its capital stock. The Company currently intends to retain
earnings, if any, to support its growth strategy and does not anticipate
paying cash dividends in the foreseeable future. Future payment of dividends,
if any, will be at the discretion of the Company's Board of Directors after
taking into account various factors, including the Company's financial
condition, operating results, current and anticipated cash needs, plans for
expansion and other factors the Board of Directors may deem relevant.
13
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996, the actual
capitalization of the Company and the capitalization of the Company as
adjusted to reflect the issuance and sale by the Company of 3,500,000 shares
of Common Stock offered hereby at an assumed initial public offering price of
$12.00 per share and the application of the net proceeds therefrom as set
forth in Use of Proceeds. See "Use of Proceeds." This table should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Redeemable Preferred Stock, $1.00 par value, 13,000
shares authorized, 11,871 shares issued and
outstanding (actual); no shares issued and outstanding
(as adjusted)......................................... $16,133 $ --
Shareholders' equity (deficit):
Preferred Stock, $.01 par value, 2,000,000 shares
authorized, no shares issued and outstanding (actual
and as adjusted)..................................... -- --
Convertible Preferred Stock, par value $1.00, 1,325
shares authorized, 850 shares issued and outstanding
(actual); no shares authorized, issued and
outstanding (as adjusted) ........................... 1 --
Common Stock, $.01 par value, 35,000,000 shares
authorized; 3,719,204 shares issued and outstanding
(actual), 12,223,812 shares issued and outstanding
(as adjusted)(2)..................................... 37 122
Additional paid-in capital............................ 3,029 41,030
Accretion of dividends on Redeemable Preferred Stock.. (4,262) --
Accumulated deficit................................... (5,294) (9,556)
------- -------
Total shareholders' equity (deficit).................. (6,489) 31,596
------- -------
Total capitalization.................................. $ 9,644 $31,596
======= =======
</TABLE>
- --------
(1) Gives effect to (i) the conversion of all outstanding shares of
Convertible Preferred Stock into 5,004,608 shares of Common Stock upon the
closing of this offering and (ii) the filing of a Restated Articles of
Organization upon the closing of this offering creating a class of
authorized but undesignated Preferred Stock.
(2) Excludes 984,741 shares of Common Stock issuable upon the exercise of
options outstanding as of April 15, 1996 at a weighted average exercise
price per share equal to $4.80. Also excludes 539,567 shares of Common
Stock issuable upon the exercise of options to be granted under the
Company's 1996 Stock Option Plan on the effective date of this offering,
all at an exercise price per share equal to the Price to Public shown on
the cover page of this Prospectus. See "Management--Executive
Compensation--Stock Plans."
14
<PAGE>
DILUTION
The pro forma deficit in net tangible book value of the Company's Common
Stock as of March 31, 1996 was $9,021,578, or $1.03 per share. Pro forma net
tangible book value per share of Common Stock represents the amount of total
tangible assets (total assets less intangible assets) of the Company reduced
by the Company's total liabilities and the redemption value of the Redeemable
Preferred Stock, divided by the pro forma number of shares of Common Stock
outstanding assuming conversion of all outstanding shares of Convertible
Preferred Stock. After giving effect to the sale by the Company of 3,500,000
shares of Common Stock in this offering at an assumed initial public offering
price of $12.00 per share (and after deducting underwriting discounts and
commissions and estimated offering expenses), the pro forma net tangible book
value of the Company's Common Stock as of March 31, 1996 would have been
$29,063,422, or $2.38 per share. This represents an immediate increase in pro
forma net tangible book value of $3.41 per share of Common Stock to existing
shareholders and an immediate dilution to new investors purchasing Common
Stock in this offering of $9.62 per share of Common Stock. The following table
illustrates this dilution per share of Common Stock to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $12.00
Pro forma net tangible book value per share at March 31,
1996......................................................... $(1.03)
Increase per share attributable to new investors.............. 3.41
------
Pro forma net tangible book value per share after the offer-
ing(1)........................................................ 2.38
------
Dilution per share to new investors(1)......................... $ 9.62
======
</TABLE>
- --------
(1) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value would be approximately $2.74 per share,
resulting in dilution to new investors in this offering of $9.26 per
share. See "Underwriting."
The following table sets forth on a pro forma basis as of March 31, 1996,
after giving effect to the conversion of all outstanding shares of Convertible
Preferred Stock into 5,004,608 shares of Common Stock upon the closing of this
offering, the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price paid per share
by the existing shareholders and by the investors purchasing shares of Common
Stock offered hereby (at an assumed initial public offering price of $12.00
per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
shareholders(1)......... 8,723,812 71.4% $ 3,066,629 6.8% $ 0.35
New investors(1)......... 3,500,000 28.6 42,000,000 93.2 $12.00
---------- ----- ----------- -----
Total................... 12,223,812 100.0% $45,066,629 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Sales by the Selling Shareholders in this offering will cause the number
of shares held by existing shareholders as of March 31, 1996 to be reduced
to 8,398,812 shares or 68.7% of the total number of shares of Common Stock
outstanding after this offering, and will increase the number of shares
held by new investors to 3,825,000 or 31.3% of the total number of shares
of Common Stock outstanding after this offering. See "Principal and
Selling Shareholders."
The foregoing tables assume no exercise of shares of Common Stock issuable
upon the exercise of options outstanding at the date of this Prospectus. To
the extent that outstanding options or any options granted in the future are
exercised, there will be further dilution to new investors. See "Management --
Executive Compensation--Stock Plans."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to the
Company's consolidated statements of operations for the years ended December
31, 1993, 1994 and 1995 and with respect to the Company's consolidated balance
sheets as of December 31, 1994 and 1995 have been derived from the
Consolidated Financial Statements of the Company and Notes thereto included
elsewhere in this Prospectus and have been audited by Ernst & Young LLP,
independent auditors. The selected consolidated financial data set forth below
with respect to the Company's consolidated statements of operations for the
years ended December 31, 1991 and 1992 and with respect to the Company's
consolidated balance sheets as of December 31, 1991, 1992 and 1993 have been
derived from the Company's audited Consolidated Financial Statements, which
are not included herein. The selected consolidated financial data as of March
31, 1996 and for the three months ended March 31, 1995 and 1996 have been
derived from the unaudited consolidated financial statements of the Company.
The unaudited consolidated financial statements have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information set forth therein. The
results of operations for the three months ended March 31, 1996 are not
necessarily indicative of future operating results. The consolidated selected
financial data set forth below is qualified in its entirety by and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA THREE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
--------------------------------------------- ------------ -------------- ------------
1991 1992 1993 1994 1995 1995(1) 1995 1996 1996(1)
------- ------- -------- -------- ------- ------------ ------ ------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Service revenues:
Calling services....... $ 809 $ 6,275 $ 8,236 $ 16,005 $25,446 $25,446 $4,606 $7,214 $7,214
Carrier support
services.............. -- -- 458 2,329 8,774 8,774 1,312 3,847 3,847
System revenues......... -- -- -- -- -- 2,068 -- 92 248
------- ------- -------- -------- ------- ------- ------ ------ ------
Total revenues......... 809 6,275 8,694 18,334 34,220 36,288 5,918 11,153 11,309
Operating expenses:
Cost of service
revenues.............. 825 4,252 6,638 14,212 26,196 27,083 4,658 8,335 8,335
Cost of system
revenues.............. -- -- -- -- -- -- -- 37 105
Engineering, research
and development....... 54 96 152 270 839 929 99 419 496
Sales and marketing.... 72 290 504 1,268 1,934 2,320 398 558 621
General and
administrative........ 1,033 1,231 1,425 1,783 2,233 2,904 553 710 771
Depreciation and
amortization.......... 41 115 244 396 889 1,219 175 359 413
------- ------- -------- -------- ------- ------- ------ ------ ------
Total operating
expenses.............. 2,025 5,984 8,963 17,929 32,091 34,455 5,883 10,418 10,741
------- ------- -------- -------- ------- ------- ------ ------ ------
Operating income
(loss)................. (1,216) 291 (269) 405 2,129 1,833 35 735 568
Interest expense........ 312 30 41 64 150 204 16 6 15
------- ------- -------- -------- ------- ------- ------ ------ ------
Income (loss) from
continuing operations
before income taxes.... (1,528) 261 (310) 341 1,979 1,629 19 729 553
Provision (benefit) for
income taxes........... -- 2 22 52 (1,030) (1,045) 2 300 250
------- ------- -------- -------- ------- ------- ------ ------ ------
Income (loss) from
continuing
operations(2).......... (1,528) 259 (332) 289 3,009 2,674 17 429 303
Discontinued operations:
Income (loss) from
operations............ (2,625) (1,116) 232 104 (129) (129) (129) -- --
Gain (loss) on
disposal.............. (125) (80) (324) 1,402 (37) (37) (37) -- --
------- ------- -------- -------- ------- ------- ------ ------ ------
Income (loss) from
discontinued
operations............. (2,750) (1,196) (92) 1,506 (166) (166) (166) -- --
------- ------- -------- -------- ------- ------- ------ ------ ------
Net income (loss)....... (4,278) (937) (424) 1,795 2,843 2,508 (149) 429 303
------- ------- -------- -------- ------- ------- ------ ------ ------
Accretion of dividends
on redeemable preferred
stock.................. -- (1,030) (1,030) (1,016) (950) (950) (237) (237) (237)
------- ------- -------- -------- ------- ------- ------ ------ ------
Net income (loss)
available to common
shareholders........... $(4,278) $(1,967) $ (1,454) $ 779 $ 1,893 $ 1,558 $ (386) $ 192 66
======= ======= ======== ======== ======= ======= ====== ====== ======
Net income (loss)
available to common
shareholders per common
share(3):
Continuing operations.. $ (0.51) $ (0.26) $ (0.42) $ (0.08) $ 0.22 $ 0.19 $(0.02) $ 0.02 $ 0.01
======= ======= ======== ======== ======= ======= ====== ====== ======
Net income (loss)...... $ (1.42) $ (0.65) $ (0.45) $ 0.09 $ 0.21 $ 0.17 $(0.04) $ 0.02 $ 0.01
======= ======= ======== ======== ======= ======= ====== ====== ======
Shares used in computing
net income (loss) per
share.................. 3,012 3,012 3,235 8,848 9,179 9,179 9,179 9,179 9,179
Supplemental net income
available to common
shareholders per common
share(3):
Continuing operations.. $ 0.29 $ 0.25 $ 0.04 $ 0.03
======= ======= ====== ======
Net income............. $ 0.27 $ 0.24 $ 0.04 $ 0.03
======= ======= ====== ======
Shares used in computing
supplemental net income
per share.............. 10,503 10,503 10,523 10,523
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------- ------------
1991 1992 1993 1994 1995 1996
------- ------- -------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $ 1,235 $ 890 $ 681 $ 204 $ 253 $ 353
Working capital......... 876 372 695 1,098 2,082 700
Total assets............ 6,207 6,107 6,889 8,867 13,614 18,787
Redeemable preferred
stock.................. -- 13,901 14,930 14,947 15,896 16,133
Shareholders' deficit... (8,625) (9,916) (11,370) (10,591) (8,698) (6,489)
</TABLE>
- -------
(1) In February 1996, the Company acquired VST for Common Stock and cash with
an aggregate value of approximately $2.5 million. The reduction of net
income arising in the pro forma results of operations is primarily
attributable to a non-cash charge related to amortization of goodwill
arising from the acquisition. See unaudited Pro Forma Condensed
Consolidated Financial Statements.
(2) In 1995, the Company reversed the deferred tax asset valuation allowance,
resulting in a tax benefit of $1.8 million. In addition, in 1994 and 1995,
the Company realized benefits from net operating loss carryforwards of
$382,000 and $840,000, respectively. See Note 6 of Notes to Consolidated
Financial Statements.
(3) See Note 2 of Notes to Consolidated Financial Statements.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
BCG develops, markets and provides calling services and carrier support
services to cellular carriers and cellular subscribers in the United States,
Canada and Mexico. The Company was organized in 1988 and introduced its
ROAMERplus calling service in 1991. The Company introduced its carrier support
service in 1993 and its prepaid calling service in early 1996. The Company
primarily charges for its services on a per minute or per call basis, or a
combination thereof. The Company receives payment for its ROAMERplus service
from cellular subscribers using the service and receives payment for carrier
support services from the applicable carrier. Revenues are recognized at the
time the service is provided and are recorded net of estimated chargebacks and
other billing adjustments.
The Company has experienced a significant increase in revenues over the last
three years. Revenues grew from approximately $8.7 million in 1993 to $34.2
million in 1995. The Company's income (loss) from continuing operations before
income taxes for that same period increased from a loss of $310,000 in 1993 to
income of approximately $2.0 million in 1995. This growth resulted primarily
from an increase in the number of the Company's carrier customers, the
introduction of carrier support services in 1993 and an increase in demand for
the Company's services due to the general growth in the cellular industry.
The Company's ROAMERplus calling service is now being used by a substantial
number of the cellular carriers in the United States. Accordingly, the Company
believes that any further growth in revenues from its ROAMERplus calling
service is more likely to be from general growth of the cellular roaming
market than from the addition of new carrier customers for the Company's
ROAMERplus service. There can be no assurance that general growth in the
roaming market will continue at historical rates or at all.
The Company completed the design of the C/2/C Network in late 1995 and
recently completed a trial use of its prepaid service, which uses the C/2/C
Network, by the cellular division of one of the RBOCs. The Company has entered
into a contract with that carrier and expects commercial use of its prepaid
service by that carrier to begin in the second quarter of 1996. The Company
has entered into contracts with three additional cellular carriers and is in
discussions with a number of other cellular carriers to provide its prepaid
service to them. There can be no assurance, however, that additional carriers
will enter into commercial agreements for prepaid service from the Company.
The Company is in the initial stages of installing the voice nodes and
establishing the data links that will make up the C/2/C Network. The Company
intends to charge carriers for its prepaid service using the C/2/C Network on
a per minute basis. See "Business--Services."
In February 1996, the Company acquired Voice Systems Technology Inc. ("VST")
for stock and cash with an aggregate value of approximately $2.5 million. VST
has developed a product, now in commercial use, using proprietary technology
that is complementary to the technology used in the Company's C/2/C Network.
The Company accounted for the acquisition as a purchase and recorded
approximately $2.5 million of goodwill in connection with the transaction,
which will be amortized over a period of eight years.
The Company has sold three of its businesses since 1994 in order to focus on
its calling and carrier support services. The Company sold its cellular sales
and service business located in the mid-Atlantic region in March 1995 for
$573,000; its rural cellular business located in Massachusetts in October 1994
for $8.0 million; and its air-to-ground system business in March 1994 for
$150,000. Operating results of these businesses and the gain or loss on
disposal have been presented as discontinued operations.
17
<PAGE>
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship of certain statement of operations items to total revenues:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Service revenues:
Calling services............ 94.7 % 87.3% 74.4 % 77.8% 64.7%
Carrier support services.... 5.3 12.7 25.6 22.2 34.5
System revenues.............. -- -- -- -- 0.8
------- ------- ------- ----- -----
Total revenues............. 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of service revenues.... 76.4 77.5 76.5 78.7 74.7
Cost of system revenues..... -- -- -- -- 0.3
Engineering, research and
development................ 1.7 1.5 2.5 1.7 3.8
Sales and marketing......... 5.8 6.9 5.7 6.7 5.0
General and administrative.. 16.4 9.7 6.5 9.3 6.4
Depreciation and
amortization............... 2.8 2.2 2.6 3.0 3.2
------- ------- ------- ----- -----
Total operating expenses... 103.1 97.8 93.8 99.4 93.4
------- ------- ------- ----- -----
Operating income (loss)...... (3.1) 2.2 6.2 0.6 6.6
Interest expense............. 0.5 0.3 0.4 0.3 0.1
------- ------- ------- ----- -----
Income (loss) from continuing
operations before income
taxes....................... (3.6) 1.9 5.8 0.3 6.5
Provision (benefit) for in-
come taxes.................. 0.2 0.3 (3.0) -- 2.7
------- ------- ------- ----- -----
Income (loss) from continuing
operations.................. (3.8)% 1.6% 8.8 % 0.3% 3.8%
======= ======= ======= ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Service and system revenues. Total revenues increased 88.5% from $5.9
million in the three months ended March 31, 1995 to $11.2 million in the three
months ended March 31, 1996. Calling services revenues increased 56.6% from
$4.6 million in the three months ended March 31, 1995 to $7.2 million in the
three months ended March 31, 1996, due primarily to increased revenues
generated from existing carrier customers. The increase in revenues generated
from existing carrier customers resulted from the general growth in the number
of cellular subscribers, increased roaming by cellular subscribers and
increased frequency in the suspension of intercarrier roaming agreements
between cellular carriers. Carrier support services revenues increased 193.3%
from $1.3 million in the three months ended March 31, 1995 to $3.8 million in
the three months ended March 31, 1996. Of this increase, approximately $2.1
million was attributable to the addition of new carrier customers and the
balance was primarily attributable to increased services provided to existing
customers. System revenues of $92,000 represent revenues generated by VST in
March 1996, its first month of operations as a wholly-owned subsidiary of the
Company.
Cost of service revenues. Cost of service revenues consist primarily of
cellular network and landline transmission costs and the personnel costs
associated with handling operator assisted ROAMERplus calls and carrier
support service calls. Cost of service revenues increased 78.9% from $4.7
million in the three months ended March 31, 1995 to $8.3 million in the three
months ended March 31, 1996, but decreased as percentage of revenues from
78.7% to 74.7% in the three months ended March 31, 1995 and 1996,
respectively. The decrease in cost of service revenues as a percentage of
revenues was caused by the
18
<PAGE>
relative increase in carrier support services as a percentage of total
revenues, which generally have a lower cost of services as a percentage of
revenues than calling services. This more than offset higher per minute
cellular network charges, which are a significant part of calling services
costs.
Cost of system revenues. Cost of system revenues represents the cost of voice
processing systems sold by VST. Cost of system revenues totaling $37,000
represents costs associated with systems sold in March 1996.
Engineering, research and development expenses. Engineering, research and
development expenses include primarily the salaries and benefits of software
development and engineering personnel associated with the development,
implementation and maintenance of existing and new services. Engineering,
research and development expenses increased 324.2% from $99,000 in the three
months ended March 31, 1995 to $419,000 in the three months ended March 31,
1996 and increased as a percentage of revenues from 1.7% to 3.8% in the three
months ended March 31, 1995 and 1996, respectively. This increase was due to
costs associated with the Company's hiring of new personnel to support the
development, implementation and deployment of the C/2/C Network for its prepaid
service, expansion of its carrier support services and continued development of
new calling services. The Company intends to continue to significantly increase
its engineering, research and development expenditures to continue development
of its prepaid and other enhanced wireless services.
Sales and marketing expenses. Sales and marketing expenses include direct
sales force salaries and commissions, travel and entertainment expenses, and
the cost of trade shows, advertising and other promotional expenses. Sales and
marketing expenses increased 40.2% from $398,000 in the three months ended
March 31, 1995 to $558,000 in the three months ended March 31, 1996, and
decreased as a percentage of revenues from 6.7% to 5.0% in the three months
ended March 31, 1995 and 1996, respectively. The increase in sales and
marketing expenses was due primarily to greater expenditures on existing and
new sales personnel, trade show expenditures and other sales and marketing
costs to support the more sales intensive carrier support services business and
to support concentrated sales and marketing efforts related to prepaid
services. The decrease in sales and marketing expenses as a percentage of
revenues was due to the overall increase in revenues, particularly increased
revenues attributable to calling services, for the Company's established
customers. The Company expects to increase expenditures on sales and marketing
in the future, particularly in connection with its prepaid service, and such
expenditures are expected to vary as a percentage of revenues.
General and administrative expenses. General and administrative expenses
include salaries and benefits, rent and other administrative expenses. General
and administrative expenses increased 28.3% from $553,000 in the three months
ended March 31, 1995 to $710,000 in the three months ended March 31, 1996, due
primarily to an increased number of employees and related expenses to support
the Company's growth. Total general and administrative expenses decreased as a
percentage of revenues from 9.3% to 6.4% in the three months ended March 31,
1995 and 1996, respectively. This decrease was attributable primarily to the
significant growth of revenues, which the Company was able to achieve without a
commensurate percentage increase in general and administrative expenses. The
Company anticipates that general and administrative expenses will continue to
increase as the Company hires additional personnel, although such amounts are
not expected to increase as a percentage of revenues.
Depreciation and amortization expense. Depreciation and amortization expense
includes depreciation of telecommunications systems equipment, furniture and
fixtures and leasehold improvements. The Company provides for depreciation
using the straight-line method over the estimated useful lives of the assets,
which range from three to seven years. Goodwill related to the acquisition of
VST is being amortized over eight years. Depreciation and amortization expense
increased 104.7% from $175,000 in the three months ended March 31, 1995 to
$359,000 in the three months ended March 31, 1996. This increase was due
primarily to depreciation of additional technical equipment to support the
19
<PAGE>
Company's calling and carrier support services and furniture and fixtures and
leasehold improvements to support expansion of the Company's call centers. The
Company expects depreciation expense to increase as the Company begins
commercial use of its C/2/C Network and depreciates the related capital costs.
Amortization expense will increase as the Company continues to amortize
goodwill associated with its acquisition of VST.
Interest expense. Interest expense decreased 63.6% from $16,000 in the three
months ended March 31, 1995 to $6,000 in the three months ended March 31,
1996. Interest expense results from interim period borrowings under the
Company's Account Purchase Agreement, which are sometimes necessary due to
variations in the timing of cash receipts from the Company's collection
sources. Borrowings during the three months ended March 31, 1996 ranged from
zero to $500,000 and averaged approximately $88,000.
Provision for income taxes. Income taxes increased from $2,000 in the three
months ended March 31, 1995, to $300,000 in the three months ended March 31,
1996. The increase in the effective tax rate from 12.4% to 41.2% was due
primarily to the Company's reversal of its valuation reserve in the fourth
quarter of 1995. As a result, income taxes beginning in the first quarter of
1996 will have a more normal relation to income.
Income (loss) from continuing operations. The Company recognized income from
continuing operations of $17,000 in the three months ended March 31, 1995 and
$429,000 in the three months ended March 31, 1996. This increase reflects
higher revenues achieved in the three months ended March 31, 1996 for all of
the Company's services and the general decline in expenses as a percentage of
revenues. Income from continuing operations was also negatively impacted in
the first three months of 1995 due to the expansion of operations at the
Company's Burlington call center and the commensurate increase in operating
expenses resulting from additional personnel and related expenses required to
operate that call center.
Income (loss) from discontinued operations. The loss of $166,000 from
discontinued operations in the three months ended March 31, 1995 represents
the net results of operations associated with the sale of net assets of the
Company's cellular sales and service business, and to a lesser extent, to the
loss on sale of that business.
YEARS ENDED DECEMBER 31, 1994 AND 1995
Service revenues. Total revenues increased 86.6% from $18.3 million in 1994
to $34.2 million in 1995. Calling services revenues increased 59.0% from $16.0
million in 1994 to $25.4 million in 1995, due primarily to increased revenues
generated from existing carrier customers. The increase in revenues generated
from existing carrier customers resulted from general growth in the number of
cellular subscribers, increased roaming by cellular subscribers and increased
frequency in the suspension of inter-carrier roaming agreements between
cellular carriers. Carrier support services revenues increased 276.6% from
$2.3 million in 1994 to $8.8 million in 1995. Of this increase, approximately
$3.7 million was attributable to the addition of a new carrier customer,
approximately $1.5 million was attributable to increased services provided to
an existing customer and the balance was primarily attributable to increased
services provided to other existing customers.
Cost of service revenues. Cost of service revenues increased 84.3% from
$14.2 million in 1994 to $26.2 million in 1995, but decreased as a percentage
of revenues from 77.5% in 1994 to 76.5% in 1995. The decrease in the cost of
service revenues as a percentage of revenues was caused by the relative
increase as a percentage of total revenues of carrier support services, which
generally have a lower cost of services as a percentage of revenues than
calling services. This more than offset higher per minute cellular network
charges, which are a significant part of calling services costs.
20
<PAGE>
Engineering, research and development expenses. Engineering, research and
development expenses increased 211.3% from $270,000 in 1994 to $839,000 in
1995, and increased as a percentage of revenues from 1.5% in 1994 to 2.5% in
1995. This increase was due to the Company's hiring of new personnel to
support the development of the C/2/C Network for its prepaid service,
expansion of its carrier support services and continued development of new
calling services.
Sales and marketing expenses. Sales and marketing expenses increased 52.5%
from $1.3 million in 1994 to $1.9 million in 1995, and decreased as a
percentage of revenues from 6.9% in 1994 to 5.7% in 1995. The increase in
sales and marketing expenses was due primarily to greater expenditures on
existing and new sales personnel, trade show expenditures and other sales and
marketing costs to support the more sales intensive carrier support business
and to initiate marketing efforts relating to prepaid services. The decrease
in sales and marketing expenses as a percentage of revenues was due to the
overall increase in revenues, particularly increased revenues attributable to
calling services for the Company's established customers.
General and administrative expenses. General and administrative expenses
increased 25.2% from $1.8 million in 1994 to $2.2 million in 1995, due
primarily to an increased number of employees and related expenses to support
the Company's growth. These expenses decreased as a percentage of revenues
from 9.7% in 1994 to 6.5% in 1995. This decrease was attributable primarily to
the significant growth of revenues, which the Company was able to achieve
without a commensurate percentage increase in general and administrative
expenses.
Depreciation and amortization expense. Depreciation and amortization expense
increased 124.2% from $396,000 in 1994 to $889,000 in 1995. This increase was
due primarily to depreciation of additional equipment and furniture acquired
during the period to support the Company's carrier support business.
Interest expense. Interest expense increased 135.5% from $64,000 in 1994 to
$150,000 in 1995. Borrowings under the Company's Account Purchase Agreement
during 1995 ranged from zero to $1.9 million and averaged approximately $1.1
million.
Provision (benefit) for income taxes. Income tax expense of $52,000 in 1994
and a benefit of $1.0 million in 1995 do not have a normal relationship to
pretax income because of the benefit of federal net operating loss
carryforwards and a reduction in deferred tax asset valuation reserves. In
1994 and 1995, the benefit from applying federal net operating loss
carryforwards to taxable income was $382,000 and $840,000, respectively. As a
result of having achieved a second year of profitability and expecting near
term profitability, the Company determined that the valuation allowance
recorded upon adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", was no longer necessary. Therefore, the Company
reversed the valuation allowance in 1995, which resulted in a tax benefit of
$1.8 million. At December 31, 1995, there were no additional unrecognized
federal net operating loss carryforwards for financial reporting purposes, and
the Company had $3.0 million of net operating loss carryforwards for federal
income tax purposes that begin to expire in 2003.
Income (loss) from continuing operations. The Company generated income from
continuing operations of $289,000 in 1994 and $3.0 million in 1995. This
increase reflects higher revenues achieved in 1995 for all of the Company's
services, the general decline in expenses as a percentage of revenues and the
tax benefit from the reversal of the valuation allowance relating to the
Company's net operating loss carryforwards.
Income (loss) from discontinued operations. Income of $1.5 million from
discontinued operations in 1994 was primarily attributable to the Company's
sale of its rural cellular telephone system. The loss of $166,000 from
discontinued operations in 1995 was primarily attributable to losses from the
operations of the Company's cellular sales and service business and, to a
lesser extent, to the sale of that business.
21
<PAGE>
YEARS ENDED DECEMBER 31, 1993 AND 1994
Service revenues. Total revenues increased 110.9% from $8.7 million in 1993
to $18.3 million in 1994. Calling services revenues increased 94.3% from $8.2
million in 1993 to $16.0 million in 1994, due primarily to increased revenues
generated from existing carrier customers and, to a lesser extent, from new
carrier customers. The increased revenues generated from existing carrier
customers resulted from general growth in the number of cellular subscribers,
increased roaming by cellular subscribers and, to a lesser extent, the
increased frequency in the suspension of inter-carrier roaming agreements
between cellular carriers. Carrier support services revenues increased 408.3%
from $458,000 in 1993 to $2.3 million in 1994. The Company commenced carrier
support services in 1993, and the increase in year to year revenues reflects a
full year of operations in 1994, the roll out of that service to customers in
place at the end of 1993 and the addition of new customers during 1994.
Cost of service revenues. Cost of service revenues increased 114.1% from
$6.6 million in 1993 to $14.2 million in 1994, and increased as a percentage
of revenues from 76.4% in 1993 to 77.5% in 1994. The increase in cost of
service revenues as a percentage of revenues reflects higher per minute
cellular network charges, which are a significant part of calling services
costs, partially offset by the relative increase as a percentage of revenues
of carrier support services, which generally have a lower cost of services as
a percentage of revenues than calling services.
Engineering, research and development expenses. Engineering, research and
development expenses increased 77.4 % from $152,000 in 1993 to $270,000 in
1994, but decreased as a percentage of revenues from 1.7% to 1.5%. The
increase in expenses was due primarily to the Company's hiring of new
personnel to support the expansion of its carrier support services and the
commencement of development by the Company in 1994 of new calling services.
The relative decrease in these expenses as a percentage of revenues was
primarily due to the growth of the Company's revenues from services which did
not require a commensurate increase in engineering expenditures in 1994.
Sales and marketing expenses. Sales and marketing expenses increased 151.5%
from $504,000 in 1993 to $1.3 million in 1994, and increased as a percentage
of revenues from 5.8% to 6.9%. The increase in sales and marketing expenses
was due primarily to greater expenditures on new and existing sales personnel,
trade show expenditures and other sales and marketing costs to support the
more sales-intensive carrier support business.
General and administrative expenses. General and administrative expenses
increased 25.1% from $1.4 million in 1993 to $1.8 million in 1994, due
primarily to an increased number of employees and related expenses to support
the Company's growth. These expenses decreased as a percentage of revenues
from 16.4% in 1993 to 9.7% in 1994. This decrease was attributable primarily
to the significant growth of revenues, which the Company was able to achieve
without a commensurate percentage increase in general and administrative
expenses.
Depreciation and amortization expense. Depreciation and amortization expense
increased 62.5% from $244,000 in 1993 to $396,000 in 1994. This increase was
due primarily to depreciation of additional equipment and furniture acquired
during the period.
Interest expense. Interest expense increased 57.7% from $41,000 in 1993 to
$64,000 in 1994 due to increased borrowings under the Company's Account
Purchase Agreement.
Provision (benefit) for income taxes. Income tax expense of $22,000 in 1993
and $52,000 in 1994 represents federal alternative minimum taxes and state
taxes. In 1993, given the cumulative losses incurred by the Company, the
Company established reserves for its deferred tax assets, including the
benefit of net operating loss carryforwards, and accordingly did not record
any benefit attributable to those deferred tax assets. In 1994, the Company
realized a benefit of $382,000 from utilization of net
22
<PAGE>
operating loss carryforwards to offset income tax expense. The Company
continued to provide an allowance for the deferred tax assets because of the
uncertainty that the Company's earnings pattern would continue.
Income (loss) from continuing operations. The Company realized a loss from
continuing operations of $332,000 in 1993 and income from continuing
operations of $289,000 in 1994. This increase reflects higher revenues
achieved in 1994 for all of the Company's services, the general decline in
expenses as a percentage of revenues and the recognition of a greater net
operating loss carryforward in 1994 as compared to 1993.
Income (loss) from discontinued operations. The loss from discontinued
operations in 1993 of $92,000 was attributable to the sale by the Company of
its air-to-ground business, partially offset by income from the operations of
other subsequently discontinued businesses which were still operating in 1993.
Income from discontinued operations in 1994 of $1.5 million was primarily
attributable to the Company's sale of its rural cellular telephone system.
23
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited quarterly results of
operations of the Company for the eight quarters in the two year period ended
March 31, 1996, including such amounts expressed as a percentage of revenues.
This quarterly information is unaudited, has been prepared on the same basis
as the audited Consolidated Financial Statements and, in the opinion of the
Company's management, reflects all necessary adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
information for the periods presented. The quarterly operating results are not
necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1995 1995 1995 1995 1996
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service revenues:
Calling services....... $3,688 $4,557 $4,785 $4,606 $6,579 $ 7,387 $ 6,874 $ 7,214
Carrier support
services.............. 458 598 952 1,312 1,934 2,706 2,822 3,847
System revenues......... -- -- -- -- -- -- -- 92
------ ------ ------ ------ ------ ------- ------- -------
Total revenues......... 4,146 5,155 5,737 5,918 8,513 10,093 9,696 11,153
Operating expenses:
Cost of service
revenues.............. 3,311 4,047 4,294 4,658 6,592 7,636 7,310 8,335
Cost of system
revenues.............. -- -- -- -- -- -- -- 37
Engineering, research
and development....... 37 57 117 99 168 321 251 419
Sales and marketing.... 262 268 489 398 475 532 529 558
General and
administrative........ 411 449 493 553 561 548 571 710
Depreciation and
amortization.......... 78 95 150 175 210 246 258 359
------ ------ ------ ------ ------ ------- ------- -------
Total operating
expenses.............. 4,099 4,916 5,543 5,883 8,006 9,283 8,919 10,418
------ ------ ------ ------ ------ ------- ------- -------
Operating income........ 47 239 194 35 507 810 777 735
Interest expense........ 19 26 8 16 35 46 53 6
------ ------ ------ ------ ------ ------- ------- -------
Income from continuing
operations before
income taxes........... 28 213 186 19 472 764 724 729
Provision (benefit) for
income taxes........... 3 26 23 2 63 100 (1,195) 300
------ ------ ------ ------ ------ ------- ------- -------
Income from continuing
operations............. $ 25 $ 187 $ 163 $ 17 $ 409 $ 664 $ 1,919 $ 429
====== ====== ====== ====== ====== ======= ======= =======
<CAPTION>
AS A PERCENTAGE OF SERVICE REVENUES
----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1995 1995 1995 1995 1996
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service revenues:
Calling services....... 89.0% 88.4% 83.4% 77.8% 77.3% 73.2% 70.9% 64.7%
Carrier support........ 11.0 11.6 16.6 22.2 22.7 26.8 29.1 34.5
System revenues......... -- -- -- -- -- -- -- 0.8
------ ------ ------ ------ ------ ------- ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Operating expenses
Cost of service
revenues.............. 79.9 78.5 74.8 78.7 77.4 75.7 75.4 74.7
Cost of system
revenues.............. -- -- -- -- -- -- -- 0.3
Engineering, research
and development....... .9 1.1 2.0 1.7 2.0 3.2 2.6 3.8
Sales and marketing.... 6.3 5.2 8.5 6.7 5.6 5.3 5.5 5.0
General and
administrative........ 9.9 8.7 8.6 9.3 6.6 5.4 5.9 6.4
Depreciation and
amortization.......... 1.9 1.8 2.6 3.0 2.5 2.4 2.7 3.2
------ ------ ------ ------ ------ ------- ------- -------
Total operating
expenses.............. 98.9 95.3 96.5 99.4 94.1 92.0 92.1 93.4
------ ------ ------ ------ ------ ------- ------- -------
Operating income........ 1.1 4.7 3.5 0.6 5.9 8.0 7.9 6.6
Interest expense........ 0.5 0.5 0.1 0.3 0.4 0.5 0.5 0.1
------ ------ ------ ------ ------ ------- ------- -------
Income from continuing
operations before
income taxes........... 0.6 4.2 3.4 0.3 5.5 7.5 7.4 6.5
Provision (benefit) for
income taxes........... 0.1 0.5 0.4 -- 0.7 1.0 (12.3) 2.7
------ ------ ------ ------ ------ ------- ------- -------
Income from continuing
operations............. 0.5% 3.7% 3.0% 0.3% 4.8% 6.5% 19.7% 3.8%
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
The Company has experienced fluctuations in its quarterly operating results
and anticipates that such fluctuations will continue and could intensify. The
Company's quarterly operating results may vary
24
<PAGE>
significantly depending on a number of factors, including the timing of the
introduction or acceptance of new services offered by the Company or its
competitors, changes in the mix of services provided by the Company, changes
in regulations affecting the wireless industry, changes in the Company's
operating expenses, personnel changes, and general economic conditions. In
particular, the Company's calling service revenues are affected by the
frequency and volume of use of the Company's services, which may be influenced
by seasonal trends, as well as changes in demand during particular periods due
to a higher or lower incidence of temporary suspension of inter-carrier
roaming agreements in certain markets. Carrier support revenues may be
influenced by the requirements of one or more of the Company's significant
carrier support customers, including engagement of the Company for
implementing or assisting in implementing special projects of limited
duration. In this regard, the Company's carrier support revenues were
favorably affected in the second and third quarters of 1995 by the Company's
implementation of a special project for one of its major carrier customers.
Because a significant portion of the Company's operating expenses are
committed in advance, the Company may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Accordingly,
unexpected revenue shortfalls could cause significant variations in operating
results from quarter to quarter and could have a material adverse effect on
the Company's results of operations. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as an indication of likely future
performance. See "Risk Factors--Potential Fluctuations in Quarterly
Performance."
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded operations to date primarily through private sales of
securities and cash flow from operations. Total proceeds from the sale of
Common Stock, Convertible Preferred Stock and Redeemable Preferred Stock
through March 31, 1996 were $13.0 million. As of March 31, 1996, the Company
had net cash of $353,000.
On February 29, 1996, the Company acquired the net assets of VST for Common
Stock and cash with an aggregate value of approximately $2.5 million. The cash
consideration was financed with the Company's existing credit facility
described below.
The Company has short-term financing available under an Account Purchase
Agreement with its outside billing agent. Amounts available under this
agreement are limited to the lesser of $2.8 million or 70% of eligible trade
receivables, which receivables amounted to $4.9 million as of March 31, 1996.
Borrowings are payable on demand and bear interest at the prime rate plus 1.5%
per annum. Borrowings under this facility during 1995 and the first quarter of
1996 ranged from zero to $1.9 million, and $1.5 million was outstanding as of
April 15, 1996. The Company intends to use a portion of the net proceeds of
this offering to repay any outstanding balances under this facility.
Net cash provided by operations increased from $442,000 in 1994 to $2.0
million in 1995, primarily due to improved operating results. In 1994, 1995
and the first quarter of 1996, the Company expended $2.2 million, $3.0 million
and $1.5 million, respectively, to purchase property and equipment to support
the expansion and growth of its business. These purchases consisted primarily
of telecommunications systems and office furniture and equipment primarily
related to the Company's carrier support service and, to a lesser extent,
equipment related to the Company's prepaid service. The Company anticipates
that its capital expenditures, including the development and commercial
deployment of the C/2/C Network for its prepaid service, will require an
investment of approximately $15 million over the next 18 months.
The Company's financing activities used net cash of $6.2 million in 1994 for
the repayment of long-term debt and the repurchase of Redeemable Preferred
Stock. Proceeds from the sale of the Company's discontinued businesses
generated $7.5 million of cash in 1994 and $1.1 million of cash in 1995.
The Company believes that the proceeds from this offering, together with
existing cash balances and funds anticipated to be generated from operations,
will be sufficient to finance the Company's operations for at least the next
18 months.
25
<PAGE>
BUSINESS
Boston Communications Group develops, markets and provides innovative call
processing and customer support services to wireless telephone carriers. The
Company's services are designed to enable wireless telephone carriers to focus
internal resources on their core business activities, while increasing
revenues, improving service quality and reducing costs. To date, the Company's
principal service offerings have included its ROAMERplus calling service and
its carrier support services. The Company's ROAMERplus service provides
carriers with the ability to cost-effectively generate revenues from
subscribers who are not covered under traditional roaming agreements by
arranging payment for the roaming calls and paying carriers for the air time
used. BCG is the leading provider of roaming services to the unregistered
roaming market. The Company's carrier support services allow wireless carriers
to outsource all or a portion of their customer service activities, and are
designed to help wireless carriers retain subscribers, reduce costs and manage
growth. In early 1996, BCG introduced its prepaid wireless service that will
enable wireless carriers to offer their services on a prepaid basis. The
Company is in the process of deploying its C/2/C Network to support this
service on a nationwide basis. As of April 1, 1996, BCG provided one or more
of its services to approximately 95 cellular carriers in the United States,
Mexico and Canada, including nine of the 10 largest cellular carriers in the
United States.
INDUSTRY BACKGROUND
The wireless telephone industry emerged in the early 1980's when the FCC
granted two cellular licenses in each of 734 geographic markets covering the
United States. The industry has subsequently undergone significant
consolidation as cellular carriers have sought to achieve greater market
coverage and economies of scale in operations, marketing, customer service and
support. Currently, a substantial number of cellular licenses are held by a
small number of companies, including: AT&T Wireless, AirTouch Communications,
Ameritech Cellular, Bell Atlantic NYNEX Mobile, BellSouth Mobility, GTE Mobile
Communications, Inc., Southwestern Bell Mobile Systems, Inc. ("Southwestern
Bell Mobile"), United States Cellular Corp. ("United States Cellular") and
U.S. West, Inc. The remaining cellular licenses are held by approximately 200
companies. The FCC recently completed its auction or sale of the first 102 of
a total of 2,074 PCS licenses, resulting in total proceeds of more than $7.0
billion, and is in the process of auctioning and issuing an additional 493
licenses with aggregate net bids totalling $10.2 billion. Eventually, there
are expected to be three to six PCS competitors in most markets across the
United States. Purchasers of licenses have started building the infrastructure
required to support PCS, and the service is currently available in a limited
number of markets.
Wireless telephone service has been one of the fastest growing areas of the
telecommunications industry over the last ten years. The Cellular
Telecommunications Industry Association ("CTIA") estimates that the number of
cellular subscribers in the United States increased from approximately 340,000
in December 1985 to approximately 33.7 million in December 1995. This
represents an increase in market penetration from under 1% to over 10% of the
United States population. The CTIA also estimates that aggregate annual
service revenues from cellular subscribers grew from approximately $482.4
million in 1985 to approximately $19.0 billion in 1995. A number of factors
have contributed to this growth, including the build-out of the cellular
network infrastructure, the decreasing cost of cellular telephones, the
increasing mobility of the United States population, technological
improvements in the size and battery life of cellular telephones and greater
acceptance of wireless telephone use. Significant growth in the wireless
telephone market is expected to continue in the future, particularly given the
emergence of PCS as a new form of wireless telephone service. Industry sources
have projected that the number of cellular and PCS subscribers will grow to 80
million by the end of the year 2000, representing an expected market
penetration of approximately 30% of the United States' population. Such
sources also estimate that the aggregate annual service revenues from cellular
subscribers alone at that time will be over $35.0 billion.
While the number of subscribers and the aggregate service revenue from
cellular subscribers have grown rapidly, the average revenue per subscriber
has been declining. This decline in average revenue
26
<PAGE>
per subscriber is due to an increased number of lower usage cellular
subscribers. PCS is expected to increase downward pressure on pricing and
therefore further decrease average revenues per subscriber, while increasing
the marketing costs and subscriber churn rate of cellular carriers. These and
other factors have caused cellular carriers to actively seek ways to increase
revenues per subscriber, attract new and retain existing subscribers and
contain costs.
An important source of revenue for cellular carriers comes from subscribers
who use their telephones outside of their home service area (generally known
as "roamers"). Calls made by roamers are estimated by the CTIA to have
generated over $2.5 billion in revenues in 1995, or an estimated 13% of the
aggregate service revenues from cellular subscribers. Over the last five years
roaming revenues have increased at a compounded annual rate of 41%, compared
to 33% for aggregate cellular service revenues. The primary method for
capturing these roaming revenues has been through roaming agreements between
cellular carriers. Under these agreements the "home" carrier bills its
subscribers on behalf of the "serving" carrier in whose territory the
subscriber is roaming. The home carrier often retains none of the revenues,
yet bears the collection and fraud risks associated with the call. In
addition, both the home and serving carrier bear the costs associated with
operating under and maintaining the inter-carrier roaming agreement, which
costs relate primarily to accessing and updating of authorized user databases
and to validation of roaming calls. Accordingly, while roaming agreements are
common, there are markets between which the level of roaming is such that it
does not make economic sense for the carriers to have and maintain such
agreements. This is typically the case in markets that are geographically
distant and in smaller markets where the limited amount of roaming traffic
does not justify the expense and risk of roaming agreements. In addition, the
increasing amount of fraud, estimated at over $400 million in 1995, has caused
some carriers to terminate roaming agreements with carriers in markets with
high incidences of fraud, either permanently or while fraud protection
procedures are implemented. As a result, a portion of the potential roaming
revenues are not captured under traditional roaming agreements.
Carriers can increase revenues by reducing subscriber churn rates, which
have historically been between 26% and 36% per year. An important factor in
subscriber satisfaction and retention is a carrier's ability to respond
promptly to subscriber inquiries regarding billing matters, rate plans,
service problems and other issues. Many carriers are also increasingly under
competitive pressures to provide 24 hour a day, seven day a week customer
service. However, the demands of hiring, training, managing and retaining a
large number of customer service representatives make it difficult to provide
high quality 24 hour service on a cost-effective basis. Furthermore,
specialized service projects such as the roll-out of new services often place
significant increased demands on the capacity of customer service centers.
Cellular carriers increasingly are considering outsourcing all or a portion of
their customer service activities in order to focus internal resources on
their core business activities.
In addition to exploring ways to increase revenues and retain existing
subscribers, cellular carriers are also developing strategies to penetrate
untapped market segments, which include lower usage subscribers or those who
cannot or do not want to become subscribers under traditional monthly billing
arrangements. Cellular carriers typically bill their subscribers at the end of
each month. Because of the relatively high cost of marketing and providing
cellular service, cellular carriers have generally accepted only subscribers
that are able to meet certain credit standards. In addition, the costs of
monthly billing arrangements reduce the profitability of servicing low-usage
subscribers. Further, traditional monthly billing arrangements are often not
practical for individuals who want cellular service only temporarily or for
cellular telephones with multiple users. Prepaid service, which is widely used
for wireline telephone services in Europe and Asia and is becoming a more
significant part of the United States long distance market, provides carriers
the opportunity to offer an alternative payment approach to potential
subscribers. Accordingly, wireless carriers are seeking ways to solve the
significant technological and other challenges in providing prepaid wireless
service, including challenges related to monitoring usage, inbound and
outbound calling and roaming.
27
<PAGE>
THE BOSTON COMMUNICATIONS GROUP SOLUTION
BCG draws on the extensive experience of its management team in the wireless
telephone industry and on its established customer relationships with leading
wireless telephone carriers to identify industry challenges and to design
services to meet the needs of its carrier customers. BCG's ROAMERplus service
enables cellular carriers to cost-effectively generate revenues from
subscribers roaming in a carrier's service area who are not covered under
traditional roaming agreements. These unregistered roamers attempting to place
calls in the serving carrier's territory are automatically switched to BCG,
which arranges payment for the calls, completes the calls and pays the serving
carrier based on the length of the call. Cellular carriers can offer
ROAMERplus service without significant additional investment in equipment,
technology or personnel.
BCG also helps cellular carriers retain subscribers, reduce costs and manage
growth by providing a full range of high quality carrier support services
through its call centers. The experience, economies of scale and rapid
response time that the Company brings to meeting the customers' needs often
make the Company's per-minute fee for support services a strategic and
economic choice for cellular carriers. The Company's call centers operate 24
hours a day, seven days a week. The Company believes that its ability to
provide high quality carrier support service also may be attractive to
emerging PCS providers seeking to quickly establish and service a subscriber
base.
The Company recently introduced its prepaid wireless service, which will
enable cellular carriers to sell prepaid debit cards for use with subscribers'
cellular telephones. The Company's proprietary software and switching
technology enables BCG to administer calls made using the card, monitor card
use and, if necessary, interact with the customer through a BCG call center.
The Company has completed the design of its prepaid service and is beginning
deployment of its proprietary C/2/C Network to handle prepaid and related
services. The Company's prepaid service will enable prepaid subscribers to
receive service substantially similar to subscribers using traditional billing
arrangements, including the ability to make outgoing and receive incoming
calls as well as to roam into other markets.
STRATEGY
The Company's objective is to be a leader in providing high-quality,
innovative call processing and customer support services to wireless telephone
carriers. The Company's strategy includes the following key elements:
Focus on the Wireless Carrier Services Industry
BCG is focused on developing, marketing and providing call processing and
customer support services to wireless carriers. The Company believes that
wireless telephone service will continue to be one of the fastest growing
segments of the telecommunications industry and that wireless carriers will be
under increasing competitive pressure. As a result, the Company believes there
will be significant opportunities to provide wireless carriers with services
that enable them to focus internal resources on their core business activities
while increasing revenues, improving service quality and reducing costs. BCG
believes that the experience, relationships and knowledge of its management
team provide it with a competitive advantage in addressing the needs of
wireless carriers.
Identify and Develop Additional Value-Added Services
BCG seeks to create innovative value-added services that wireless telephone
carriers either have not identified or have found difficult or uneconomical to
provide on their own. The Company is particularly focused on developing and
providing services that create incremental revenue and profits for wireless
carriers, such as its ROAMERplus service and prepaid wireless service. In
addition, the Company is developing a number of enhanced services that it
intends to offer through its C/2/C Network. The Company believes that such
services will be increasingly attractive to wireless telephone carriers
seeking innovative ways to respond to a highly competitive and evolving
industry.
28
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Develop and Maintain Long-Term Customer Relationships
BCG establishes and maintains long-term relationships with its customers to
enable the Company to understand customer needs and continue to develop new
service offerings to meet those needs. The Company regularly solicits feedback
from its wireless telephone carrier customers regarding the challenges they
face in order to identify potential new service offerings. The Company seeks
to build upon its existing customer relationships and distribution channels by
integrating and cross selling its different service offerings. The Company
believes that its focus on building long-term customer relationships is an
important factor in developing customer loyalty and expanding existing
customer relationships over time.
Provide Services on a Recurring Revenue Basis
BCG focuses on offering services that generate recurring revenues for the
Company and its wireless telephone carrier customers. The Company believes
that by providing services on an ongoing basis it aligns its interests with
those of its carrier customers and maximizes the potential benefit to those
customers. The Company currently provides its call processing and carrier
support services, and intends to provide its prepaid service, on a per minute
or per call basis or a combination thereof. This pricing methodology
facilitates a sales strategy that minimizes the up-front cost and focuses on
the revenue enhancement potential for the carrier customer.
Offer Premium Quality Services
BCG believes that providing high quality service is critical to its ability
to continue to successfully attract and retain customers. The Company's
carrier support services are designed to be indistinguishable from the
services provided by the cellular carrier's own customer support personnel.
The Company provides extensive in-house classroom and on the job training
programs for its personnel, including carrier-specific training programs
designed in conjunction with the applicable carrier.
Expand into New Wireless Telephone Markets
BCG believes there are significant opportunities to leverage its experience
in the cellular market in North America to penetrate new wireless telephone
markets. The Company believes there will be opportunities for it to provide
services to PCS carriers similar to those which it currently provides to
cellular carriers. In addition, the Company is exploring ways to expand into
new international markets, primarily through the establishment of joint
ventures and strategic alliances.
SERVICES
Roaming Services
The Company introduced its unregistered roaming service, ROAMERplus, in
1991. By the end of 1995, approximately 95 cellular carriers, that
collectively hold licenses for over 1,100 markets in the United States, Canada
and Mexico, including nine of the 10 largest cellular carriers in the United
States, were using this service. The Company's ROAMERplus service provides
carriers with the ability to generate revenues from unregistered roamers in
their service area. When an unregistered roamer places a call in the carrier's
service area, the carrier's mobile switching center forwards the call, at the
Company's expense, to the Company's proprietary digital call processing
system. The roamer may complete the call by charging the call to a telephone
calling card, a commercial credit card or as a collect call. A majority of all
incoming traffic is initially handled by an automated call processing system,
which prompts the caller for billing and calling information. The Company's
specially trained service representatives handle all remaining calls as well
as calls requiring additional operator assistance.
In order to implement the Company's ROAMERplus service, a carrier need only
make a minor software change in its mobile switching centers. BCG pays for
transport of the call to its facilities and for completion of the call. Under
its agreements with carriers, which typically have a term of one year, BCG
pays the serving carrier for the air time that the roamer uses and charges the
roamer for the call. The
29
<PAGE>
charge for a call using ROAMERplus typically includes a per call service fee
ranging from $1.25 to $1.95, depending on the level of operator assistance,
and a flat rate of $1.95 per minute. The charge for the call appears directly
on the caller's telephone bill (if the caller used a telephone calling card)
or the caller's credit card bill, with BCG (typically, under the trade name
"Cellular Express") as the vendor. ROAMERplus eliminates collection and fraud
risk for the carrier because BCG takes responsibility for collection from the
customer. The Company manages this collection and fraud risk by accessing
available databases, including the Company's own proprietary database, and
validating the caller's credit before completing the call. The Company's
experience has been that approximately 15% of the charges for completed
ROAMERplus calls are uncollectible.
The ROAMERplus network consists of a centralized computer-based
telecommunications switching system that utilizes proprietary software
developed by the Company. This system interfaces with the public switched
telephone network and a network of access circuits originating from mobile
switching centers throughout the United States, Canada and Mexico. The
ROAMERplus network also includes an automated voice response system, as well
as systems that provide monitoring, fraud control and sophisticated call and
usage reporting. In order to bill unregistered roamers using telephone calling
cards, BCG uses a central clearinghouse which, through agreements with local
exchange carriers, enables BCG's charges to appear on the roamer's telephone
bill. This clearinghouse collects payment from the local exchange carrier and
transmits the payment to BCG. The Company uses a similar procedure to bill
roamer's who use commercial credit cards.
Carrier Support Services
The Company designed and began providing carrier support services in 1993 in
response to the industry's need for 24-hour customer service. The Company's
carrier support program allows a carrier's subscribers to get information on
rate plans, phone operations and service center locations, as well as
instructions on roaming features and promotions. Subscribers also may make
billing inquiries, initiate address and rate plan changes, and obtain other
customer assistance. The Company's service centers can also assist carriers in
billing and collections. Most of the carriers using BCG's carrier support
services use these services for off-hours and overflow subscriber support.
However, the Company's services range from narrowly defined, short term
projects, such as assigning personal identification numbers ("PINs") to the
carrier's subscribers in order to reduce fraud (marketed by the Company as its
REVENUEguard program) to the provision of all of the carrier's customer
service activities. The Company currently provides carrier support services to
12 cellular carriers under contracts generally with terms of one year. BCG
bills carriers who use its carrier support services on a per call or per
minute basis, subject in most cases to the Company meeting certain qualitative
and quantitative performance standards.
The Company has identified additional specific subscriber service needs in
the cellular industry and has developed services to meet those needs. For
example, the Company's ROAMERcare service assists subscribers when they have
questions about roaming. Rather than incurring the costs of assigning
personnel to answer these calls, cellular carriers can retain BCG, which
installs a system to route inquires about roaming directly to BCG's
facilities, where specially trained personnel assist the caller. More
recently, the CTIA requested that the Company develop its LAWBUST program
through which the Company's service representatives assist law enforcement
officials in reducing cellular fraud through on-line access to the CTIA's
proprietary database and other techniques.
The Company provides its carrier support services from its call centers in
Burlington and Woburn, Massachusetts. The Company designed these facilities to
provide highly efficient, rapid customer response through the deployment of
state-of-the-art switching technologies with client/server architecture and
open, automatic call delivery platforms. Each customer service representative
utilizes database interfaces, customized for each carrier, to facilitate
subscriber inquiry response, technical problem resolution, program/feature
clarification, on-line follow-up and performance reporting. These customized
interfaces can be programmed to give the Company complete access to a
particular carrier's subscriber databases. Administration of call center floor
personnel is facilitated by the use of forecasting, scheduling and
30
<PAGE>
monitoring systems that allow floor supervisors to observe numerous aspects of
the call center's performance in a graphical format, including information on
call duration, compliance with contract standards and operator performance. As
of April 1, 1996, the Company employed over 370 full- and part-time
representatives to provide carrier support services on a 24 hour a day, seven
day a week basis.
The Company offers extensive in-house classroom and on-the-job training
programs for its personnel, including instruction on a full breadth of call
handling techniques and service quality. In addition, carrier-specific
training allows the carrier support staff to disseminate information on a
particular carrier's services, as well as to update and edit information in
the carrier's databases.
Prepaid Wireless Service
The Company began developing its prepaid wireless service in 1994. The
Company designed its initial prepaid wireless service, DEBITplus, to offer
international customers the ability to make prepaid wireless international
calls while traveling in the United States. The Company engaged in limited
marketing of this service during 1995. The Company used the experience gained
in offering its DEBITplus service to help develop its C/2/C Network-based
prepaid wireless service offering. The C/2/C Network will permit a cellular
carrier to automatically switch a prepaid subscriber's call to the C/2/C
Network where information regarding the status of that subscriber's prepaid
account will be maintained. The C/2/C Network will be able to complete the
call and debit the account automatically without requiring the subscriber to
enter a debit card number or other information. As a result, a prepaid
subscriber will receive service substantially similar to a subscriber using
traditional billing arrangements, including the ability to make outgoing and
receive incoming calls, as well as to roam into other markets.
The Company completed the design of the C/2/C Network service in late 1995
and recently completed a trial use of the prepaid service, which uses the
C/2/C Network, by the cellular division of one of the RBOCs. The Company has
entered into a contract with that carrier and expects commercial use of its
prepaid service by that carrier to begin in the second quarter of 1996. The
Company has entered into contracts with three additional cellular carriers and
is in discussions with a number of other cellular carriers to provide its
prepaid service to them. There can be no assurance, however, that additional
carriers will enter into commercial agreements for prepaid service from the
Company. The Company's existing contracts to provide prepaid service through
the C/2/C Network are all for three years (subject to termination by the
carrier on 180 days' notice) and provide for the carriers to pay the Company
based on the number of minutes used by the carriers' prepaid subscribers.
The C/2/C Network consists of a central computer database linked by a high
speed, wide area frame relay network to geographically distributed proprietary
call processing subsystems, called voice nodes. Each voice node will be
capable of serving more than one carrier and will consist of a computer
controlled telecommunications switch and an interactive voice response unit
that provides high quality personalized voice prompts. These voice nodes will
be linked to the carriers' mobile switching centers via dedicated telephone
facilities. The distributed node architecture is designed to be modular and
scalable while remaining efficient and cost-effective. The centralized
database will enable prepaid users to make calls while roaming in other
service areas where the C/2/C Network is in place. In addition, prepaid
subscribers will be able to use the Company's ROAMERplus service to make
roaming calls in service areas where the C/2/C Network is not yet in place.
A subscriber will establish an account with the wireless carrier by
prepaying a specific dollar amount to be credited toward future service.
Subsequently, each call that is initiated or received by the subscriber will
be routed to the C/2/C Network and rated in real time based on the telephone
number called, carrier usage charges, taxes and appropriate surcharges. When
the remaining balance is reduced to a minimal amount the subscriber will be
able to replenish the account by purchasing additional prepaid service from
the carrier using cash, credit card or bank transfer. It is expected that
carriers will compensate BCG for network usage by contracting at a per minute
rate for connection time between the carrier's mobile switching center and the
C/2/C Network voice node.
31
<PAGE>
The Company currently is in the initial stages of installing, at its
expense, the voice nodes and data links that will make up the C/2/C Network. A
voice node has been installed in Burlington, Massachusetts, and the Company
expects to install 8 to 11 additional nodes in various cities throughout the
United States during the balance of 1996. Upon completion, the Company expects
the C/2/C Network to consist of 20 or more nodes. Actual deployment of the
voice nodes could be delayed for a number of reasons, including variations in
carrier demand, delays in site location or development, equipment procurement
or other factors. Although more costly to the Company, service to a carrier
can be implemented without a local voice node through telephone links to the
Company's voice nodes in other markets, including the existing voice node in
Burlington.
To enter markets for prepaid service in Latin America and South America, the
Company entered into a Distribution Agreement with Wireless Americas Corp.
("WAC") in January 1996. Under that Distribution Agreement, the Company will
sell to WAC the equipment needed to establish a C/2/C Network in other
countries in Latin America and South America and will provide services to WAC
in connection with installing and operating that C/2/C Network. For the
services rendered by the Company, WAC will pay the Company a portion of the
per minute rate which the foreign carrier pays to WAC. The Distribution
Agreement has a term of five years subject to the right of termination by
either party with 180 days' prior written notice. If the Distribution
Agreement is terminated for any reason, BCG is obligated to provide services
with respect to accounts existing as of the termination date, and WAC is
obligated to pay BCG for such services as set forth in the Distribution
Agreement. In April 1996 WAC entered into a contract to provide prepaid
service to a cellular carrier in Mexico for the nine wireless service regions
in Mexico. The contract is for a three year term, subject to termination by
the carrier on 180 days' notice. See "Certain Transactions."
The Company acquired VST in February 1996. VST has developed a product, now
in commercial use, using proprietary technology that is complementary to the
technology used in the Company's C/2/C Network. In addition, the Company
believes that VST's substantial experience in prepaid wireless telephone
technology will be a significant resource for the on-going development of the
C/2/C Network and the Company's prepaid wireless service.
ENGINEERING, RESEARCH AND DEVELOPMENT
BCG believes that its future success will depend in large part on its
ability to enhance existing services and develop new services in response to
changing market, customer or technological requirements of the wireless
telephone industry. An important factor in the future success of the Company's
recently introduced prepaid service will be the Company's ability to provide,
at competitive prices, more functionality and features than those typically
available in other competitive offerings. The software for the C/2/C Network
was developed by the Company's internal engineering and development staff
based in part on technology licensed from Innovative Telecom Corp. ("ITC").
ITC provides call processing platforms for the wireline and traditional long
distance debit card market. The Company has developed proprietary software to
enable the ITC call processing platform to handle custom signaling interfaces
to various types of wireless switches, specialized call rating requirements of
prepaid wireless services, and interfaces to wireless administration and
management information systems. See "--Proprietary Rights."
The Company is developing a number of enhanced services that it intends to
make available to prepaid and traditional subscribers through the C/2/C
Network. These enhanced services will be designed to enable carriers to
generate additional sources of revenue from subscribers. The first such
enhanced service, ROAMalert, will enable cellular carriers to provide
information services to roamers entering their market and is expected to be
introduced during 1996.
The Company spent approximately $152,000, $270,000, $839,000 and $419,000 on
engineering, research and development in 1993, 1994, 1995 and the first
quarter of 1996, respectively. As of April 1, 1996, BCG had 20 employees
engaged in engineering, research and development activities.
32
<PAGE>
SALES AND MARKETING
The Company's sales strategy is to establish and maintain long-term
relationships with its customers. The Company employs a consultative sales
process to understand and define customer needs and determine how those needs
can be addressed by the Company's services. BCG seeks to build upon its
existing customer relationships by integrating and cross-selling its different
service offerings. The Company's sales cycle varies for different services and
can be up to 12 months for the Company's carrier support and prepaid service.
A sale typically requires involvement of the Company's sales personnel as well
as its senior executives and technical personnel.
The Company's sales force currently consists of eight sales representatives
supervised by a senior sales executive. The Company is in the process of
recruiting additional senior sales and marketing personnel. The Company's
sales representatives generally have significant experience in the cellular
industry, either as former employees of cellular carriers or in selling
products and services to cellular carriers. The Company assigns each sales
representative to a single group of wireless telephone carriers in order to
support the development and maintenance of long-term customer relationships.
The Company's direct sales strategy is complemented by a marketing program
that includes participation in industry trade shows, advertising and highly
targeted direct mail. Because the Company's customers are a readily
identifiable group, the Company seeks to gain wide exposure through carefully
selected events and activities specific to the wireless telephone industry.
CUSTOMERS
The Company provides its services to cellular carriers of varying size,
expertise and capabilities. As of April 1, 1996 the Company provided one or
more of its services to approximately 95 cellular carriers in the United
States, Canada and Mexico, including nine of the 10 largest cellular carriers
in the United States.
Net revenues attributable to the Company's 10 largest customers accounted
for approximately 85.1%, 81.2%, 84.6% and 92.5% of the Company's total
revenues in 1993, 1994, 1995 and the first quarter of 1996, respectively.
Ameritech Cellular, Bell Atlantic NYNEX Mobile and SNET Mobility accounted for
approximately 15.0%, 13.9% and 11.9%, respectively, of the Company's total
revenues in 1995 and for approximately 17.4%, 11.7% and 13.2%, respectively,
of total revenues in the first quarter of 1996. In addition, BellSouth
Mobility accounted for approximately 13.6% of total revenues in the first
quarter of 1996. SNET Mobility and Ameritech Cellular accounted for
approximately 41.9% and 34.6%, respectively, of the Company's carrier support
revenues in 1995 and SNET Mobility, Ameritech Cellular and Comcast Cellular
Communications, Inc. accounted for approximately 35.4%, 35.0% and 17.2%,
respectively, of carrier support revenues in the first quarter of 1996.
The Company's major customers for ROAMERplus include Airtouch
Communications, Ameritech Cellular Systems, Inc., AT&T Wireless, Bell Atlantic
NYNEX Mobile, BellSouth Mobility, Centennial Cellular, CommNet Cellular,
Southwestern Bell Mobile, SNET Mobility and United States Cellular, and for
carrier support include Ameritech Cellular, BellSouth Mobility, Comcast
Cellular Communications, Inc., SNET Mobility and Southwestern Bell Mobile.
Although the Company does not currently provide its services to any PCS
providers, it has initiated discussions with a number of PCS providers about
providing services to them.
COMPETITION
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.
Trends in the wireless telephone industry, including greater consolidation and
technological or other developments which make it simpler or more cost-
effective for wireless carriers to provide certain services themselves, could
affect demand for the Company's services and could make it more difficult for
the Company to offer a cost-effective alternative to a wireless carrier's own
capabilities. In addition, the
33
<PAGE>
Company anticipates continued growth in the wireless carrier services
industry, and consequently, the entrance of new competitors in the future.
The Company believes that the principal competitive factors in the wireless
carrier services industry include the ability to identify and respond to
customer needs, quality and breadth of service offerings, price and technical
expertise. The Company believes that its ability to compete also depends in
part on a number of competitive factors outside its control, including the
ability to hire and retain employees, the development by others of products
and services that are competitive with the Company's products and services,
the price at which others offer comparable products and services and the
extent of its competitors' responsiveness to customer needs.
Many of the Company's current and potential competitors have significantly
greater financial, marketing, technical and other competitive resources, as
well as greater name recognition, than the Company. As a result, the Company's
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or may be able to devote greater
resources to the promotion and sale of their products and services. There can
be no assurance that the Company will be able to compete successfully with its
existing competitors or with new competitors. In addition, competition could
increase if new companies enter the market or if existing competitors expand
their service offerings. An increase in competition could result in price
reductions and loss of market share and could have a material adverse effect
on the Company's business, financial condition or results of operations.
GOVERNMENT REGULATION
The Federal Communications Commission ("FCC"), under the terms of the
Communications Act of 1934, as amended, including the Telecommunications Act
of 1996, regulates interstate communications and use of the radio spectrum,
including entry, exit, rates and terms of operation. BCG presently neither
operates any facilities utilizing the radio spectrum nor has any facilities-
based services involving interstate communications. Consequently, it is not
required to and does not hold any licenses or other authorizations issued by
the FCC. However, the wireless carriers that constitute the Company's
customers are heavily regulated at both the federal and state levels. Such
regulation may decrease the growth of the wireless telephone industry, affect
the development of the PCS market, 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. At the same time, the
Telecommunications Act of 1996, which in large measure deregulated the
telecommunications industry may cause changes in the industry, including
entrance of new competitors and industry consolidation, which could in turn
affect the Company's cost of doing business or otherwise have a material
effect on the Company's business, financial condition and results of
operations.
The Telephone Operator Consumer Services Improvement Act of 1990 ("TOCSIA")
directed the FCC to require that operator services providers comply with a
series of provisions and make available certain information in order to
protect consumers from perceived abuses in the operator services industry. In
addition, operator services providers must submit to the FCC an informational
tariff detailing their charges for interstate communications services. BCG's
carrier support services involve the provision of operator services for
purposes of TOCSIA. BCG believes that it has taken appropriate steps to comply
with the terms of TOCSIA and the applicable FCC regulations, including having
filed an informational tariff with the FCC.
PROPRIETARY RIGHTS
The Company does not hold any patents and relies upon a combination of
copyright, trademark and trade secret laws to establish and maintain its
proprietary rights to its products. The Company believes that its success
depends on the knowledge, ability and experience of its employees, and that
legal protections for its services are less significant factors than the
quality, timeliness and cost of services provided. Access to proprietary
information is limited to those employees with a need to know.
The Company has entered into a license agreement with ITC that provides BCG
a world-wide non-exclusive license to use certain software products and
documentation commencing March 30, 1995. The
34
<PAGE>
Company has the right to modify and enhance the software, and any software
modifications relating to the wireless industry remain the property of BCG.
The parties have certain cross-license rights for any enhancements made during
the first three years of the license. Source code for the software has been
placed in escrow subject to release to the Company under certain conditions.
In consideration for the license, BCG agreed to pay royalty payments over a
period of three years after the commencement of the license arrangement, as
well as additional amounts equal to 10% of any net license fees received by
the Company from any sublicenses during the first five years of the license,
subject to a maximum license amount. ITC may only terminate the agreement upon
a failure of performance by or bankruptcy of BCG. The Company has granted to
ITC the right to use the C/2/C service mark in promotions to wireline
customers for a period of three years. The parties also have agreed to work
with each other to jointly develop distribution opportunities and to permit
co-location of equipment and telecommunication's facilities at each other's
sites.
The Company licenses certain software for its ROAMERplus service under a
non-exclusive, non-transferable fully paid-up license from MicroDimensions,
Inc. ("MicroDimensions"). In addition, in April, 1996 the Company entered into
a Source Code Release Agreement with MDTelecom, Inc. ("MDTelecom"), a company
that has agreed with MicroDimensions to acquire the software which the Company
licenses. Under the terms of the Source Code Release Agreement, the Company
will receive the source code upon its payment of $250,000 to MDTelecom. The
Company may credit toward this $250,000 a $100,000 investment which it made in
MDTelecom in April 1996 and may also credit any payments made by it to
MDTelecom under contractual arrangements with that company. If the source code
is released to BCG, BCG will be restricted from sublicensing the source code,
BCG will not be permitted to sell or otherwise transfer the source code
without MDTelecom's consent and BCG will not be permitted to use the source
code after a merger, unless BCG is the surviving entity, without MDTelecom's
consent. The source code has been placed in escrow at BCG subject to release
under the Source Code Release Agreement.
EMPLOYEES
As of April 1, 1996, the Company had a total of 684 full-time and part-time
employees. Of these employees, 14 serve in sales and marketing, 607 serve in
call center and related functions, 36 serve in technical support and
technology development and 27 serve in administration and management. None of
the Company's employees is represented by a labor union. The Company believes
that its employee relations are good.
PROPERTIES
The Company leases space at its six locations: Boston (two), Burlington and
Woburn, Massachusetts, Cherry Hill, New Jersey, and Tulsa, Oklahoma. The
McKinley Square office in Boston is the Company's headquarters; the executive
officers and key members of the marketing and financial teams are located in
this office. The other locations are used for development of products and for
carrier support and service operations.
The following information is with regard to these leased facilities:
<TABLE>
<CAPTION>
LOCATION SQ. FOOTAGE LEASE EXPIRATION
-------- ----------- -----------------
<S> <C> <C>
One McKinley Square, Boston, MA.................. 3,952 April 30, 1999
265 Franklin Street, Boston, MA*................. 5,500 July 31, 1996
76 Blanchard Road, Burlington, MA................ 19,975 October 31, 1999
100 Sylvan Road, Woburn, MA...................... 38,693 February 28, 2001
1874 East Marlton Pike, Cherry Hill, NJ.......... 1,188 January 14, 1998
621-623 E. 4th Street, Tulsa, OK................. 15,436 December 31, 1997
</TABLE>
- --------
*Not being renewed
35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
April 1, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Paul J. Tobin........... 53 Chairman of the Board
Brian E. Boyle.......... 48 Vice Chairman
George K. Hertz......... 49 President and Chief Executive Officer, Director
Frederick E. von
Mering................. 43 Vice President, Finance and Administration, Director
Jerrold D. Adams(1)(2).. 56 Director
Craig L. Burr(1)........ 51 Director
James L. McLean(2)...... 35 Director
Paul R. Gudonis(1)(2)... 42 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Mr. Tobin has served as Chairman of the Board of Directors of the Company
since February 1996 and served as the Company's President and Chief Executive
Officer from 1990 until February 1996. Prior to joining the Company, Mr. Tobin
served as President of Cellular One Boston/Worcester from July 1984 to January
1990 and as a Regional Marketing Manager for Satellite Business Systems, a
joint venture of IBM, Comsat Corp. and Aetna Life & Casualty from April 1980
to June 1984. Mr. Tobin received his undergraduate degree in economics from
Stonehill College and his M.B.A. in marketing and finance from Northeastern
University. Mr. Tobin also serves as a member of the Board of Trustees at
Stonehill College.
Mr. Boyle has served as Vice Chairman of the Company since February 1996 and
as Chairman, New Wireless Services of the Company from January 1994 to
February 1996. From July 1990 to September 1993, Mr. Boyle served as Chief
Executive Officer of Credit Technologies, Inc., a supplier of customer
application software for the cellular telephone industry. Prior to 1990, Mr.
Boyle founded and operated a number of ventures servicing the
telecommunications industry, including APPEX Corp. (now EDS Personal
Communications Division of EDS Corporation, a global telecommunications
service company) and Leasecomm Corp., a micro-ticket leasing company. Mr.
Boyle earned his B.A. in mathematics from Amherst College and his B.S., M.S.
and Ph.D. in electrical engineering and operations research from M.I.T. Mr.
Boyle is also a Director of Saville Systems PLC, a provider of customized
billing solutions to telecommunications providers, as well as of several
private companies.
Mr. Hertz has served as Chief Executive Officer and President of the Company
since February 1996. From April 1988 to March 1996, Mr. Hertz served as
President of Advanced MobileCom, a wholly-owned subsidiary of Fidelity
Investment Corp., focusing on pursuing opportunities in the wireless
communications industry. Mr. Hertz also served as President of PhaseOne
Development Corporation, a communications and entertainment company, from 1984
to 1987 and in various capacities at Zip-Call, Inc., a paging company, from
1982 to 1983. Mr. Hertz received his B.A. and M.A. in political science and
public administration from the University of Massachusetts. Mr. Hertz is also
a Director of Pittencrief Communications, Inc.
Mr. von Mering has served as the Company's Vice President, Finance and
Administration since 1989. Prior to joining the Company, Mr. von Mering served
as Regional Vice President and General Manager for the paging division of
Metromedia, Inc., a communications company, from 1980 to 1986. From 1975 to
1979, Mr. von Mering was employed at Coopers & Lybrand LLP. Mr. von Mering
earned his B.A. degree in accounting from Boston College and his M.B.A. from
Babson College.
36
<PAGE>
Mr. Adams has served as a Director of the Company since April 1996. Mr.
Adams has been President and Chief Operating Officer of Iridium, Inc., an
international consortium developing a worldwide communications system for
portable hand-held telephones, since 1991. Prior to that, Mr. Adams served as
Director of PCN Operations in Europe of Motorola from 1990 to 1991, Senior
Vice President of McCaw Cellular, a national non-wireline cellular company,
from 1988 to 1990 and General Manager of Metro One, a New York non-wireline
cellular carrier, from 1986 to 1988. Mr. Adams received his B.A. from Coe
College and attended the Wharton School of Business and the University of
Illinois.
Mr. Burr has served as a Director of the Company since April 1993. Mr. Burr
has been a Managing General Partner of Burr, Egan, Deleage & Co., a venture
capital firm, since 1979. Mr. Burr received his A.B. from Harvard College and
his M.B.A. from Harvard Graduate School of Business Administration. Mr. Burr
is a Director of several privately-held companies affiliated with Burr, Egan,
Deleage & Co.
Mr. McLean has served as a Director of the Company since May 1995. Mr.
McLean has been a general partner of Highland Capital Partners, Incorporated,
a venture capital firm, since December 1994. From December 1993 to December
1994, he was an associate with Highland Capital Partners. Prior to that, Mr.
McLean was an associate with Accel Partners, a venture capital firm, from
October 1990 to December 1993. Mr. McLean received his S.B. from Harvard
University and his M.B.A. from the University of California, Berkeley.
Mr. Gudonis has served as a Director of the Company since April 1996. Mr.
Gudonis has been President and General Manager of BBN Planet, an internet
service provider, since November 1994. Mr. Gudonis is also a Corporate Vice
President of BBN Corporation, the parent corporation of BBN Planet. Mr.
Gudonis previously served from 1991 to November 1994 as General Manager of the
Communications Industry Group International division of EDS Corporation, and
as Senior Vice President and General Manager of APPEX Corp. from January 1989
until it was acquired by EDS Corporation in October 1990. Mr. Gudonis received
his B.S. from Northwestern University and his M.B.A from Harvard Graduate
School of Business Administration.
Certain of the current Directors of the Company were nominated and elected
in accordance with a Stockholders' Agreement. This agreement will terminate
upon the closing of this offering. See "Certain Transactions."
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the Directors and executive officers of
the Company.
BOARD COMPOSITION AND COMPENSATION
In accordance with Massachusetts law, the Company's Restated By-Laws divide
the Board of Directors into three staggered classes. The Board currently
consists of two Class I Directors (Messrs. Burr and McLean), three Class II
Directors (Messrs. Adams, Gudonis and von Mering) and three Class III
Directors (Messrs. Boyle, Hertz and Tobin) whose initial terms will expire
upon the election and qualification of Directors at the Annual Meeting of
Shareholders held following the years ending December 31, 1996, 1997 and 1998,
respectively. At each Annual Meeting of Shareholders, Directors will be
reelected or elected for a full term of three years to succeed those directors
of the same class whose terms are then to expire.
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee oversees actions taken by the Company's
independent auditors, recommends the engagement of auditors and reviews any
internal audits the Company may perform. The current members of the Audit
Committee are Messrs. Adams, Gudonis and McLean. The Compensation Committee
approves the compensation of executives of the Company, makes recommendations
to the Board of Directors with respect to standards for setting compensation
levels and administers the Company's 1994 Stock Option Plan, 1996 Stock Option
Plan and 1996 Employee Stock Purchase Plan. The current members of the
Compensation Committee are Messrs. Adams, Burr and Gudonis.
37
<PAGE>
Non-employee directors receive $1,000 per meeting attended for their
services as members of the Board of Directors and are reimbursed for their
expenses incurred in connection with attending Board and committee meetings.
Directors who serve on the Audit Committee or Compensation Committee receive
$500 for each such committee meeting attended. Each of the Company's non-
employee Directors will be granted an option to purchase 14,000 shares of
Common Stock on the date of this Prospectus at an exercise price per share
equal to the Price to Public shown on the cover page of this Prospectus.
Additional options may be granted to members of the Board of Directors in the
future under the Company's 1996 Stock Option Plan.
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth certain compensation
earned by the Company's Chief Executive Officer and the three other executive
officers of the Company during 1995 (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION(2)(3)
------------------
ANNUAL COMPENSATION(1) SECURITIES
NAME AND ---------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY BONUS OPTIONS(#) COMPENSATION
------------------ ----------- ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Paul J. Tobin........... $ 160,000 $ 60,000 -- --
Chairman of the Board
of Directors and former
President and Chief
Executive Officer
Brian E. Boyle.......... 150,000 -- -- --
Vice Chairman of the
Board of Directors
Frederick von Mering.... 150,000 40,000 -- --
Vice President, Finance
and Administration
</TABLE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted because such perquisites and other personal benefits
constitute less than the lesser of $50,000 or ten percent of the total
salary and bonus reported for the executive officer during the year ended
December 31, 1995.
(2) All amounts reflected in this table were paid to the Named Executive
Officers by Boston Communications Capital Corp. ("BCCC") for services
rendered by the Named Executive Officers on behalf of the Company,
pursuant to a Management Agreement between the Company and BCCC. This
Management Agreement terminated on March 31, 1996. See "Certain
Transactions."
(3) The Company did not grant any restricted stock awards or stock
appreciation rights during the year ended December 31, 1995. The Company
does not have any long-term incentive plan.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment letter agreement with George K.
Hertz, pursuant to which Mr. Hertz was made the President and Chief Executive
Officer and a Director of the Company. The agreement provides for an initial
base salary of $250,000, plus an annual performance-based bonus. In addition,
pursuant to the agreement, Mr. Hertz was granted (i) a non-qualified stock
option to purchase 522,624 shares of Common Stock at an exercise price of
$5.75 per share, vesting immediately upon the closing of this offering, and
(ii) a stock option which is in part an incentive stock option and in part a
non-qualified stock option to purchase 93,551 shares of Common Stock, at an
exercise price of $10.00 per share, vesting in three equal annual installments
commencing on the first anniversary of the date of grant.
38
<PAGE>
STOCK PLANS
1994 Stock Option Plan. The Company's 1994 Stock Option Plan (the "1994
Option Plan") was adopted by the Board of Directors and approved by the
shareholders of the Company in December 1994. The Company is authorized to
grant options to purchase a total of 355,758 shares of Common Stock under the
1994 Option Plan to employees and officers of the Company and its
subsidiaries. As of April 15, 1996, options to purchase an aggregate of
237,912 shares of Common Stock at a weighted average exercise price of $0.14
per share were outstanding, and options to purchase an aggregate of 117,846
shares of Common Stock had been exercised under the 1994 Option Plan. The
Board of Directors voted on April 25, 1996 to terminate the 1994 Option Plan
upon the effective date of this offering, and no further options may be
granted under the 1994 Option Plan after such date.
1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Option Plan") was adopted by the Board of Directors and approved by the
shareholders of the Company in March 1996. The 1996 Option Plan provides for
the grant of stock options to employees, officers and directors of, and
consultants or advisers to, the Company and its subsidiaries. Under the 1996
Option Plan, the Company may grant options that are intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") ("incentive stock options"), or
options not intended to qualify as incentive stock options ("non-statutory
options"). Incentive stock options may only be granted to employees of the
Company. A total of 1,264,792 shares of Common Stock have been reserved for
issuance under the 1996 Option Plan. The maximum number of shares with respect
to which options may be granted to any employee under the 1996 Option Plan
shall not exceed 200,000 shares of Common Stock during any calendar year.
The 1996 Option Plan is administered by the Compensation Committee of the
Board of Directors. Subject to the provisions of the 1996 Option Plan, the
Compensation Committee has the authority to select the employees to whom
options are granted and determine the terms of each option, including (i) the
number of shares of Common Stock subject to the option, (ii) when the option
becomes exercisable, (iii) the option exercise price, which, in the case of
incentive stock options, must be at least 100% (110% in the case of incentive
stock options granted to a shareholder owning in excess of 10% of the
Company's Common Stock) of the fair market value of the Common Stock as of the
date of grant, and (iv) the duration of the option (which, in the case of
incentive stock options, may not exceed ten years). The Compensation Committee
may, in its sole discretion, include additional provisions in any option or
award granted or made under the 1996 Option Plan, including without
limitation, restrictions on transfer, repurchase rights, commitments to pay
cash bonuses, to make, arrange for or guaranty loans or to transfer other
property to optionees upon exercise of options, or such other provisions as
shall be determined by the Compensation Committee, so long as such provisions
are not inconsistent with the 1996 Option Plan or applicable law. The
Compensation Committee may also, in its sole discretion, accelerate or extend
the date or dates on which all or any particular option or options granted
under the 1996 Option Plan may be exercised.
Payment of the option exercise price may be made in cash, shares of Common
Stock, a combination of cash or stock or by any other method (including
delivery of a promissory note payable on terms specified by the Compensation
Committee) approved by the Compensation Committee consistent with Section 422
of the Code and Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of
1934, as amended. Options are not assignable or transferable except by will or
the laws of descent and distribution and, in the case of non-statutory
options, pursuant to a qualified domestic relations order (as defined in the
Code).
As of April 1, 1996, the Company had approximately 684 employees and four
non-employee directors, all of whom were eligible to participate in the 1996
Option Plan. The number of individuals receiving stock options will vary from
year to year depending on various factors, such as the number of promotions
and the Company's hiring needs during the year, and thus the Company cannot
now determine award recipients.
39
<PAGE>
As of April 15, 1996, options to purchase an aggregate of 93,551 shares of
Common Stock at a weighted average exercise price of $10.00 per share had been
granted to George K. Hertz, the President and Chief Executive Officer of the
Company, and no options had been exercised under the 1996 Option Plan. On the
date of this Prospectus, the Company intends to grant options to its employees
(including its executive officers) and its non-employee directors to purchase
an aggregate of 539,567 shares of Common Stock under the 1996 Option Plan, all
at an exercise price per share equal to the Price to Public shown on the cover
page of this Prospectus. These options will vest at the rate of 20% per year
over five years, but may vest more quickly if certain stock price objectives
are met. Under this accelerated vesting provision, if the price per share of
Common Stock increases over the Price to Public set forth on the cover of this
Prospectus (the "Offering Price") 20% or more during the last six months of
the first 12 months that the option is outstanding, as measured by the average
price for any 20 consecutive trading days during those last six months, then
one-third of the options will vest at the end of the 12-month period.
Similarly, if the price per share during the last six months of the second 12-
month period after the grant of the options is 40% higher than the Offering
Price, as measured in the same manner, two-thirds of the total number of
originally granted options will vest at the end of the 12-month period, and if
the price per share during the last six months of the third 12-month period
after the grant of the options is 60% higher than the Offering Price, all of
the options will vest at the end of the 12-month period.
1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors and
approved by the shareholders of the Company in April 1996 and becomes
effective upon the closing of this offering. The Purchase Plan authorizes the
issuance of up to a total of 225,000 shares of Common Stock to participating
employees.
All employees of the Company who have been regularly employed by the Company
for a minimum of 18 months, including directors of the Company who are
employees, are eligible to participate in the Purchase Plan. Employees who
would own 5% or more of the total combined voting power or value of the stock
of the Company or any subsidiary immediately after a grant of Common Stock
under the Purchase Plan are not eligible to participate. As of April 15, 1996,
approximately 83 of the Company's employees would have been eligible to
participate in the Purchase Plan.
On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock
as follows: the employee may authorize an amount (up to a maximum of 10% of
such employee's regular pay) to be deducted by the Company from such pay
during the Offering Period. On the last day of the Offering Period, the
employee is deemed to have exercised the option, at the option exercise price,
to the extent of accumulated payroll deductions. Under the terms of the
Purchase Plan, the option price is an amount equal to 90% of the fair market
value per share of the Common Stock on either the first day or the last day of
the Offering Period, whichever is lower. In no event may an employee purchase
in any one Offering Period a number of shares which has an aggregate market
value (determined on the last day of the Offering Period) in excess of
$25,000. The Compensation Committee may, in its discretion, choose an Offering
Period of 12 months or less for each of the Offerings and choose a different
Offering Period for each Offering.
If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's
rights under the Purchase Plan terminate upon voluntary withdrawal from the
Purchase Plan at any time, or when such employee ceases employment for any
reason, except that upon termination of employment because of death, the
employee's beneficiary has certain rights to elect to exercise the option to
purchase the shares which the accumulated payroll deductions in the
participant's account would purchase at the date of death.
40
<PAGE>
CERTAIN TRANSACTIONS
On November 21, 1994, pursuant to a Securities Exchange Agreement, the
Company issued an aggregate of 12,870.954 shares of its Redeemable Preferred
Stock, 375 shares of its Class A Convertible Preferred Stock, 200 shares of
its Series 1 Class B Convertible Preferred Stock, 275 shares of its Series 2
Class B Convertible Preferred Stock, 2,630,433 shares of Common Stock and an
option to purchase 243,259 shares of Common Stock in exchange for an aggregate
of $13,545,954 in promissory notes, 3,785,158 shares of Common Stock and
options to purchase 5,658,096 shares of Common Stock. In connection with this
transaction (i) Paul Tobin, the Company's Chairman, received 412.433 shares of
Redeemable Preferred Stock, 7.5 shares of Series 2 Class B Convertible
Preferred Stock and 922,569 shares of Common Stock in exchange for $427,433 in
promissory notes and an option to purchase 1,983,045 shares of Common Stock;
(ii) Frederick von Mering, the Company's Vice President, Finance and
Administration and a Director, received 517,810 shares of Common Stock in
exchange for an option to purchase 1,113,542 shares of Common Stock; (iii)
entities affiliated with Burr, Egan, Deleage & Co., of which Craig Burr, a
Director of the Company, is a Managing General Partner, received an aggregate
of 5,991.823 shares of Redeemable Preferred Stock, 375 shares of Class A
Convertible Preferred Stock and 71.5 shares of Series 2 Class B Convertible
Preferred Stock in exchange for an aggregate of $6,134,823 in promissory notes
and 3,785,158 shares of Common Stock; (iv) Highland Capital Partners, L.P.
("Highland"), with which James McLean, a Director of the Company, is
affiliated, received 4,517.834 shares of Redeemable Preferred Stock, 275
shares of Series 1 Class B Convertible Preferred Stock, 58.5 shares of Series
2 Class B Convertible Preferred Stock in exchange for $4,909,861 in promissory
notes; (v) Robert Sullivan, a holder of more than 5% of the Company's Common
Stock, received 171.473 shares of Redeemable Preferred Stock and 703,735
shares of Common Stock in exchange for an option to purchase 1,513,043 shares
of Common Stock and $171,473 in promissory notes; and (vi) BCG Investments,
Inc. ("BCG Investments"), a company whose officers are Messrs. Tobin, von
Mering and Sullivan and whose sole shareholder and Director is Mr. Tobin,
received 440.116 shares of Redeemable Preferred Stock in exchange for $440,116
in promissory notes.
In October 1994, the Company paid approximately $1.0 million to repurchase
1,000 shares of its Redeemable Preferred Stock. In connection with this
redemption, Messrs. Tobin and Sullivan, BCG Investments, Highland and entities
affiliated with Burr, Egan, Deleage & Co., received $143,214, $59,543,
$152,827, $248,442 and $306,097, respectively.
The Company leases its facility at One McKinley Square in Boston from BCG
Enterprises Corp. under a lease due to expire April 30, 1999. Messrs. Tobin,
Sullivan, Boyle and von Mering are each Directors and 25% shareholders of BCG
Enterprises Corp. During the year ended December 31, 1995, the Company paid
rent in an aggregate amount of $68,000 to BCG Enterprises Corp. under this
lease.
The Company entered into a Management Agreement with Boston Communications
Capital Corporation ("BCCC") in December 1992, which was amended in March
1994. Pursuant to the Management Agreement, the Company retained BCCC to
provide management services by Messrs. Tobin, von Mering and Sullivan, among
others. The Company paid BCCC a monthly management fee ranging from $70,000 to
$84,000 per month in return for such services, which included the planning,
management and operations of the Company. All amounts set forth in the Summary
Compensation Table were paid by BCCC from these monthly fees. The Management
Agreement was terminated on March 31, 1996. See "Management--Executive
Compensation."
The Company intends to use a portion of the proceeds of this offering to
redeem its Redeemable Preferred Stock, including all accrued dividends
thereon. Messrs. Tobin and Sullivan, BCG Investments, Highland and entities
affiliated with Burr, Egan, Deleage & Co. are the holders of 269.219, 111.930,
287.289, 4,269.392 and 5,669.560 shares of Redeemable Preferred Stock,
respectively.
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<PAGE>
The Company purchased 17.5% of the capital stock of WAC in February 1996 for
a purchase price of $35,000. In addition, BCG has two options from the other
shareholder of WAC to purchase all remaining shares of WAC. Pursuant to one of
the options (the "First Option") BCG may purchase all, but not less than all,
of certain shares of capital stock representing a 20% interest in WAC. BCG may
exercise the First Option at any time during the period from November 1, 1998
to February 28, 2000. The purchase price for the shares is equal to their fair
market value as agreed upon by BCG and the other holder of the shares of WAC
subject to the First Option, or as determined by appraisal if the parties
cannot agree. Pursuant to the other option (the "Second Option"), which was
granted to BCG in May 1996, BCG may purchase all or any part of certain shares
of capital stock of WAC representing a 62.5% interest in WAC during the period
from November 1, 1997 to February 28, 2000. The purchase price for those
shares is equal to the lesser of $2.5 million or the fair market value of such
shares as agreed upon by BCG and the holder of the shares of WAC subject to
the Second Option, or as determined by appraisal if the parties cannot agree.
Prior to May 1996 Messrs. Tobin, Hertz, Boyle, von Mering, Sullivan and
certain other employees of the Company owned 62.5% of the capital stock of
WAC. In May 1996, certain of those individuals sold 62.5% of the capital stock
of WAC to the President of WAC for an aggregate purchase price of $500,000.
The President of WAC paid $4,808 in cash for such shares and will pay the
balance of the purchase price pursuant to promissory notes which bear interest
at the rate of 6.5% per annum, compounded annually, are payable in full in
four years, are secured by a pledge of the shares of stock purchased and are
non-recourse to the purchaser. In connection with this sale transaction, the
President of WAC granted the First Option described above to BCG and entered
into a Stockholders' Voting Agreement with BCG whereby he agreed to vote all
shares of WAC owned or controlled by him to set the number of members of the
Board of Directors of WAC at five and to elect three persons nominated by BCG
to WAC's Board of Directors.
The Company is party to a Stockholders' Agreement dated June 30, 1994, as
amended, with certain of its shareholders, including certain of its executive
officers and entities affiliated with certain of its directors, pursuant to
which such shareholders agreed to vote all securities of the Company owned by
them to elect as directors of the Company (i) one person nominated by entities
affiliated with Burr, Egan, Deleage & Co. (ii) one person nominated by Hancock
Venture Partners III, L.P. and (iii) three persons nominated by certain
members of the Company's management, including Messrs. Tobin, Boyle, von
Mering and Sullivan. The Stockholders' Agreement will terminate by its terms
upon the closing of this offering.
The Company is party to a Registration Rights Agreement dated March 9, 1994,
as amended, (the "1994 Registration Agreement") with certain of its
shareholders, including certain of its executive officers, directors and their
affiliates (the "Rightsholders"), who hold an aggregate of 7,965,678 shares of
Common Stock (the "Registrable Securities"). The 1994 Registration Agreement
provides that in the event the Company intends to register any of its
securities under the Securities Act the Rightsholders shall be entitled to
include Registrable Securities in such registration. However, the managing
underwriter of any such offering may, under certain circumstances, exclude
some or all of such Registrable Securities from such registration. In
addition, the Rightsholders are entitled, subject to certain conditions and
limitations, to demand the Company to register some or all of their
Registrable Securities under the Securities Act, provided, that such demand
may not be exercised more than once in any twelve month period or more than a
total of two times. The Company is generally required to bear the expenses of
all such registrations, except underwriting discounts and commissions.
The Company is also party to a Registration Rights Agreement dated February
29, 1996 (the "VST Registration Agreement") with certain of its shareholders
who were former shareholders of VST prior to the Company's acquisition of VST
(the "VST Rightsholders"). The VST Rightsholders hold an aggregate of
42
<PAGE>
265,373 shares of Common Stock. The VST Registration Agreement provides that
if the Company intends to register its securities under the Securities Act, it
shall use its best efforts to include such shares owned by the VST
Rightsholders, subject to certain limitations, including certain rights of the
Rightsholders under the 1994 Registration Agreement.
The Company and its principal shareholders have entered into an agreement
providing that if the Company does not complete an initial public offering on
or before August 31, 1996, the parties will take such action as may be
necessary to effect a recapitalization of the Company to reorganize the share
ownership of the Company among the shareholders to restore the capitalization
of the Company to substantially the position in effect before the 1996
Recapitalization. Any such recapitalization would create additional classes or
series of common and preferred stock and alter relative conversion and
liquidation rights, but would not increase the number of common shares and
common share equivalents or the aggregate liquidation preferences.
For a description of certain employment and other arrangements between the
Company and its executive officers, see "Management--Executive Compensation."
For a description of option grants to certain directors of the Company, see
"Management--Board Compensation."
The Company believes that the terms of the foregoing transactions were no
less favorable to the Company than could have been obtained from unaffiliated
third parties. The Company has adopted a policy, effective following the
consummation of this offering, that all material transactions between the
Company and its officers, directors and other affiliates must (i) be approved
by a majority of the members of the Company's Board of Directors and by a
majority of the disinterested members of the Company's Board of Directors and
(ii) be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties. In addition, this policy will require that any
loans by the Company to its officers, directors or other affiliates be for
bona fide business purposes only.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of April 15, 1996 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby by
(i) each person or entity known to the Company to own beneficially more than
5% of the Company's Common Stock, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers, (iv) all directors and executive
officers as a group and (v) each of the other Selling Shareholders.
<TABLE>
<CAPTION>
SHARES TO BE
SHARES BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO SHARES OWNED AFTER
OFFERING(1) OFFERED OFFERING(1)
NAME AND ADDRESS OF ----------------------- ------- -----------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER NUMBER PERCENT
- ------------------- ------------ ---------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
DIRECTORS, OFFICERS AND 5%
SHAREHOLDERS
Entities Affiliated with
Burr, Egan, Deleage &
Co.(2)..................... 2,497,235 28.6% 0 2,497,235 20.4%
One Post Office Square
Boston, MA 02109
Highland Capital Partners
L.P.(3).................... 1,963,573 22.5% 0 1,963,573 16.1%
One International Place
Boston, MA 02110
Paul J. Tobin............... 966,727 11.1% 91,000 875,727 7.2%
c/o Boston Communications
Group, Inc.
One McKinley Square
Boston, MA 02109
Robert J. Sullivan.......... 703,535 8.1% 66,000 637,535 5.2%
c/o Boston Communications
Group, Inc.
One McKinley Square
Boston, MA 02109
Frederick E. von Mering(4).. 648,464 7.3% 55,000 593,464 5.1%
c/o Boston Communications
Group, Inc.
One McKinley Square
Boston, MA 02109
George K. Hertz(5).......... 522,624 5.7% 0 522,624 4.1%
c/o Boston Communications
Group, Inc.
One McKinley Square
Boston, MA 02109
Brian E. Boyle(6)........... 476,425 5.5% 41,000 435,425 3.6%
c/o Boston Communications
Group, Inc.
One McKinley Square
Boston, MA 02109
Jerrold D. Adams............ 0 * 0 0 *
Craig L. Burr(7)............ 0 * 0 0 *
James L. McLean(8).......... 0 * 0 0 *
Paul R. Gudonis............. 0 * 0 0 *
All directors and executive
officers as a group (8
persons) (9)............... 7,075,048 75.5% 137,000 6,888,048 53.5%
OTHER SELLING SHAREHOLDERS
Robin Trovato............... 243,259 2.8% 16,000 227,259 1.9%
Denise Archer-Allen......... 229,128 2.6% 16,000 213,128 1.7%
Jeffry Timmons.............. 199,856 2.3% 12,000 187,856 1.5%
Michael Buchel.............. 108,981 1.2% 8,000 100,981 *
Zuyus Investment Co......... 108,981 1.2% 8,000 100,981 *
Cheryl Griebenow............ 88,939 1.0% 8,000 80,939 *
Clifford Tallman............ 43,403 * 4,000 39,403 *
</TABLE>
44
<PAGE>
- --------
* Less than 1% of the outstanding Common Stock.
(1) The number of shares of Common Stock deemed outstanding prior to this
offering includes (i) 3,719,204 shares of Common Stock outstanding as of
April 15, 1996, (ii) an aggregate of 5,004,608 shares of Common Stock
issuable upon the conversion of all outstanding shares of Convertible
Preferred Stock and (iii) shares of Common Stock issuable pursuant to
options held by the respective person or group that are exercisable within
60 days after April 15, 1996 ("Presently Exercisable Options") as set
forth below. The number of shares of Common Stock deemed outstanding after
this offering includes an additional 3,500,000 shares of Common Stock that
are being offered for sale by the Company in this offering. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission that deem shares to be beneficially owned by any
person who has or shares voting or investment power with respect to such
shares. Presently Exercisable Options are deemed to be outstanding and to
be beneficially owned by the person or group holding such options for the
purpose of computing the percentage ownership of such person or group, but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person or group.
(2) Comprised of 2,083,813 shares, 212,860 shares, 177,028 shares, 22,327
shares and 1,207 shares held by Alta III Limited Partnership, C.V.
Sofinnova Partners Four, Gallion Partners III, Alta Jami Boston Ltd.
Partnership and Golden Coins N.V., respectively, each of which entity is
affiliated with Burr, Egan, Deleage & Co. Craig L. Burr, a Director of the
Company, is a Managing General Partner of Burr, Egan, Deleage & Co. and
may be deemed to beneficially own such shares. Mr. Burr disclaims
beneficial ownership of such shares, except to the extent of his direct
pecuniary interest therein.
(3) James L. McLean, a Director of the Company, is a general partner of the
general partner of Highland Capital Partners, L.P. and may be deemed to
beneficially own the shares of Common Stock held by Highland Capital
Partners, L.P. Mr. McLean disclaims beneficial ownership of such shares,
except to the extent of his direct pecuniary interest therein.
(4) Includes 130,654 shares issuable upon the exercise of Presently
Exercisable Options.
(5) Comprised solely of shares issuable upon the exercise of Presently
Exercisable Options.
(6) Comprised solely of shares held in trust for the benefit of Mr. Boyle's
children.
(7) Excludes an aggregate of 2,497,235 shares held by entities affiliated with
Burr, Egan, Deleage & Co. Mr. Burr is a Managing General Partner of Burr,
Egan, Deleage & Co. and may be deemed to beneficially own such shares. Mr.
Burr disclaims beneficial ownership of such shares, except to the extent
of his direct pecuniary interest therein.
(8) Excludes 1,963,573 shares held by Highland Capital Partners, L.P. Mr.
McLean is a general partner of the general partner of Highland Capital
Partners L.P. and may be deemed to beneficially own such shares. Mr.
McLean disclaims beneficial ownership of such shares, except to the extent
of his direct pecuniary interest therein.
(9) Includes an aggregate of 2,497,235 shares held by entities affiliated with
Burr, Egan, Deleage & Co., of which Mr. Burr is a Managing Director and
1,963,573 shares held by Highland Capital Partners, L.P., the general
partner of which Mr. McLean is a general partner. Messrs. Burr and McLean
disclaim beneficial ownership of such shares, except to the extent of
their direct pecuniary interest therein. Also includes an aggregate of
653,278 shares issuable upon the exercise of Presently Exercisable
Options.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company, as of April 26, 1996, consisted
of 35,000,000 shares of Common Stock, 850 shares of Class A Convertible
Preferred Stock, 275 shares of Series 1 Class B Convertible Preferred Stock,
200 shares of Series 2 Class B Convertible Preferred Stock and 13,000 shares
of Redeemable Preferred Stock of the Company, respectively. After conversion
of all of the Company's Convertible Preferred Stock and the redemption of all
outstanding shares of the Company's Redeemable Preferred Stock upon the
closing of this offering, as of April 15, 1996, there were 8,723,812 shares of
Common Stock outstanding, held of record by 29 shareholders.
COMMON STOCK
Upon the closing of this offering, the Company's Restated Articles of
Organization (the "Restated Articles") will authorize the issuance of up to
35,000,000 shares of Common Stock, $.01 par value per share. Holders of Common
Stock are entitled to one vote for each share held on all matters submitted to
a vote of shareholders and do not have cumulative voting rights. Accordingly,
holders of a majority of the shares of Common Stock entitled to vote in any
election of directors may elect all of the directors standing for election.
Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally
available therefor. Upon the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are,
and the shares offered by the Company in this offering will be, when issued
and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of any series of Preferred Stock which
the Company may designate and issue in the future. Upon the closing of this
offering, there will be no shares of Preferred Stock outstanding.
PREFERRED STOCK
Prior to this offering, 375 shares of Class A Convertible Preferred Stock,
275 shares of Series 1 Class B Convertible Preferred Stock, 200 shares of
Series 2 Class B Convertible Preferred Stock and 11,870.954 shares of
Redeemable Preferred Stock were outstanding. All outstanding shares of
Convertible Preferred Stock will be converted into an aggregate of 5,004,608
shares of Common Stock upon the closing of this offering and will no longer be
authorized, issued or outstanding. The Company will use approximately $16.3
million of the net proceeds of this offering to redeem all outstanding shares
of Redeemable Preferred Stock, including accumulated dividends thereon. After
such redemption, the Redeemable Preferred Stock will no longer be authorized,
issued or outstanding.
Upon the closing of this offering, the Board of Directors will be
authorized, subject to certain limitations prescribed by law, without further
shareholder approval, to issue from time to time up to an aggregate of
2,000,000 shares of Preferred Stock in one or more series and to fix or alter
the designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series thereof, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations
of such series. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change of control of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
MASSACHUSETTS LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to Chapter 110F of the Massachusetts General Laws. In
general, this statute prohibits a Massachusetts corporation with more than 200
shareholders from engaging in a "business
46
<PAGE>
combination" with an "interested shareholder" for a period of three years
after the date of the transaction in which the person becomes an interested
shareholder, unless (i) the interested shareholder obtains the approval of the
board of directors prior to becoming an interested shareholder, (ii) the
interested shareholder acquires 90% of the outstanding voting stock of the
corporation (excluding shares held by certain affiliates of the corporation)
at the time it becomes an interested shareholder or (iii) the business
combination is approved by both the board of directors and the holders of two-
thirds of the outstanding voting stock of the corporation (excluding shares
held by the interested shareholder). An "interested shareholder" is a person
who, together with affiliates and associates, owns (or at any time within the
prior three years did own) 5% or more of the outstanding voting stock of the
corporation. A "business combination" includes a merger, a stock or asset
sale, and certain other transactions resulting in a financial benefit to the
interested shareholder. The Company may at any time elect not to be governed
by Chapter 110F, by a vote of a majority of its shareholders, but such an
election would not be effective for twelve months and would not apply to a
business combination with any person who became an interested shareholder
prior to such election.
Massachusetts General Laws Chapter 156B, Section 50A generally requires that
publicly-held Massachusetts corporations have a classified board of directors
consisting of three classes as nearly equal in size as possible, unless those
corporations elect to opt out of the statute's coverage. The Company's Amended
and Restated By-laws (the "By-laws") contain provisions that give effect to
Section 50A.
The By-Laws require that a shareholder seeking to have any business
conducted at a meeting of shareholders give notice to the Company not less
than 60 days prior to the scheduled meeting, provided in certain circumstances
that a shareholder will have ten days within which to give such notice. The
notice from the shareholder must describe the proposed business to be brought
before the meeting and include information about the shareholder making the
proposal, any beneficial owner on whose behalf the proposal is made, and any
other shareholder known to be supporting the proposal.
The Company's By-Laws provide that a special meeting of shareholders may
only be called by the President or a majority of the Board of Directors, or by
the Clerk upon the written request of the shareholders holding at least 40% of
the voting power of the Company. The Company's By-Laws (including the
provisions described above pertaining to nominations and the presentation of
business before a meeting of the shareholders) may not be amended and no
provision inconsistent therewith may be adopted without the approval of either
the Board of Directors or the holders of at least 75% of the voting power of
the Company.
The Company's Articles of Organization include a provision that excludes the
Company from the applicability of Massachusetts General Laws Chapter 110D,
entitled "Regulation of Control Share Acquisitions." In general, this statute
provides that any shareholder of a corporation subject to this statute who
acquires beneficial ownership of 20% or more of the outstanding voting stock
of a corporation may not vote such stock unless the shareholders of the
corporation so authorize. (For purposes of the statute, a person is not deemed
to be a beneficial owner of shares as to which such person may exercise voting
power solely by virtue of a revocable proxy conferring the right to vote.)
The Company's Articles of Organization include provisions eliminating the
personal liability of the Company's directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the
Massachusetts Business Corporation Law. Additionally, the Company's Articles
of Organization provide that the Company shall indemnify each person who is or
was a director, officer, employee or other agent of the Company, and each
person who is or was serving at the request of the Company as a director,
trustee, officer, employee or other agent of another organization in which it
directly or indirectly owns shares or of which it is directly or indirectly a
creditor, against all liabilities, costs and expenses reasonably incurred by
any such person in connection with the defense or disposition of or otherwise
in connection with or resulting from any action, suit or other proceeding in
which they may be involved by reason of being or having been such a director,
officer, employee, agent or trustee, or
47
<PAGE>
by reason of any action taken or not taken in such capacity, except with
respect to any matter as to which such person shall have been finally
adjudicated by a court of competent jurisdiction not to have acted in good
faith in the reasonable belief that his or her action was in the best interest
of the Company.
The Company's Articles of Organization provide that certain transactions,
such as the sale, lease or exchange of all or substantially all of the
Company's property and assets and the merger or consolidation of the Company
into or with any other corporation, may be authorized by the approval of the
holders of a majority of the shares of each class of stock entitled to vote
thereon, rather than by two-thirds as otherwise provided by statute, provided
that the transactions have been authorized by a majority of the members of the
Board of Directors and the requirements of any other applicable provisions of
the Articles of Organization have been met.
Certain of the provisions of the Articles of Organization and By-Laws
discussed above would make more difficult or discourage a proxy contest or the
assumption of control by a holder of a substantial block of the Company's
stock. Such provisions could also have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
the Company, even though such an attempt might be beneficial to the Company
and its shareholders. In addition, since the Articles of Organization and By-
Laws are designed to discourage accumulations of large blocks of the Company's
stock by purchasers whose objective is to have such stock repurchased by the
Company at a premium, such provisions could tend to reduce the temporary
fluctuations in the market price of the Company's stock which are caused by
such accumulations. Accordingly, shareholders could be deprived of certain
opportunities to sell their stock at a temporarily higher market price.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. The effect, if any, of public sales of shares or the
availability of shares at prevailing market prices cannot be predicted.
Nevertheless, sales of substantial amounts of shares in the public market
could adversely affect prevailing market prices and could impair the Company's
future ability to raise capital through an offering of its equity securities.
RESTRICTED SHARES
Upon the closing of this offering, the Company will have 12,223,812 shares
of Common Stock outstanding (12,797,562 shares if the Underwriters' over-
allotment option is exercised in full). Approximately 367,986 of these shares,
as well as the 3,825,000 shares of Common Stock offered hereby, may be resold
without restriction or further registration under the Securities Act, unless
acquired by an affiliate of the Company, as that term is defined in Rule 144
under the Securities Act. Beginning approximately 90 days after the date of
this Prospectus, approximately 5,471,118 additional shares of Common Stock
(including approximately 716,650 shares covered by options exercisable within
the 90-day period following the date of this Prospectus) will become eligible
for immediate resale in the public market subject to compliance with
applicable provisions of Rules 144 and 701.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, a person (and persons whose shares must be aggregated with those
of such person), including an Affiliate, who has beneficially owned restricted
securities (as that term is defined in Rule 144) for at least two years from
the later of the date such securities were acquired from the Company or (if
applicable) the date they were acquired from an Affiliate is entitled to sell,
within any three-month period, a number of such shares that does not exceed
48
<PAGE>
the greater of 1% of the then outstanding shares of Common Stock
(approximately 122,238 shares immediately upon the closing of this offering)
or the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the filing of a notice of sale with the Commission
or, if no such notice is required, the date of sale. Sales under Rule 144 are
also subject to certain requirements as to the manner of sale and availability
of current public information about the Company. In addition, under Rule
144(k), if a period of at least three years has elapsed between the later of
the date restricted securities were acquired from the Company or (if
applicable) the date they were acquired from an Affiliate of the Company, a
shareholder who is not an Affiliate of the Company at the time of sale and has
not been an Affiliate of the Company for at least three months prior to the
sale is entitled to sell the shares immediately without compliance with the
foregoing requirements of Rule 144. A proposed amendment to Rule 144 would, if
adopted, reduce the two and three year holding periods referred to above to
one and two years, respectively.
OPTIONS
Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted under
the 1994 Option Plan and the 1996 Option Plan) are also restricted securities
and, beginning 90 days after the effective date of the Registration Statement
of which this Prospectus is a part, may be sold by shareholders other than
Affiliates of the Company subject only to the manner of sale provisions of
Rule 144 and by Affiliates under Rule 144 without compliance with its two-year
holding period requirement.
The Company intends to file registration statements on Form S-8 under the
Securities Act to register all shares of Common Stock issuable under the 1996
Option Plan and the Purchase Plan. The registration statements are expected to
be filed immediately after the effective date of the Registration Statement of
which this Prospectus is a part and will be effective upon filing. Shares
issued upon the exercise of stock options after the effective date of the Form
S-8 registration statements will be eligible for resale in the public market
without restriction, subject to Rule 144 limitations applicable to Affiliates
and the Lock-up Agreements noted above.
LOCK-UP AGREEMENTS
The Company, certain security holders, including the Selling Shareholders,
and all officers and directors of the Company, who in the aggregate will hold,
following this offering, approximately 8,398,812 shares of Common Stock and
options to purchase an aggregate of approximately 984,741 shares of Common
Stock, have agreed, pursuant to the Lock-up Agreements, not to directly or
indirectly sell, or otherwise dispose of any shares of Common Stock for a
period of 180 days after the date of this Prospectus without the consent of
Alex. Brown & Sons Incorporated, except that the Company may issue, and grant
options to purchase, shares of Common Stock under its current stock option and
purchase plans and other currently outstanding options. In addition, the
Company may issue shares of Common Stock in connection with any acquisition of
another company if the terms of such issuance provide that such Common Stock
shall not be resold prior to the expiration of the 180-day period referenced
in the preceding sentence.
REGISTRATION RIGHTS
At the closing of this offering, certain persons and entities (the
"Rightsholders") will be entitled to certain rights with respect to the
registration under the Securities Act of a total of approximately 8,231,051
shares (the "Registrable Shares") of Common Stock pursuant to the terms of an
agreement among the Company and the Rightsholders. See "Certain Transactions."
49
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and The Columbia Group Incorporated, have severally agreed to
purchase from the Company and the Selling Shareholders the following
respective numbers of shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.......................................
Donaldson, Lufkin & Jenrette Securities Corporation...................
The Columbia Group Incorporated.......................................
---------
Total............................................................. 3,825,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the initial public offering, the public
offering price and other selling terms may be changed by the Representatives
of the Underwriters.
The Company and a Selling Shareholder have granted the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to 519,750 and 54,000 additional shares of Common Stock,
respectively, at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus. To
the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased
by it shown in the above table bears to 3,825,000, and the Company and such
Selling Shareholder will be obligated, pursuant to the option, to sell such
shares to the Underwriters. The Underwriters may exercise such option only to
cover over-allotments made in connection with the sale of the Common Stock
offered hereby. If purchased, the Underwriters will offer such additional
shares on the same terms as those on which the 3,825,000 shares of Common
Stock are being offered.
50
<PAGE>
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain civil
liabilities, including liabilities under the Securities Act.
The Company and each of its directors and executive officers and certain of
its securityholders, who in the aggregate will hold, following this offering,
8,392,812 shares of Common Stock and options to purchase 984,741 shares of
Common Stock, have agreed that they will not directly or indirectly, without
the prior written consent of Alex. Brown & Sons Incorporated, offer, sell,
offer to sell, contract to sell, or otherwise dispose of any shares of Common
Stock for a period of 180 days after the date of this Prospectus, except that
the Company may issue, and grant options to purchase, shares of Common Stock
under its current stock option and purchase plans and other currently
outstanding options. In addition, the Company may issue shares of Common Stock
in connection with any acquisition of another company if the terms of such
issuance provide that such Common Stock shall not be resold prior to the
expiration of the 180-day period referenced in the preceding sentence. See
"Shares Eligible for Future Sale."
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiations among the Company, the Selling
Shareholders and the Representatives of the Underwriters. Among the factors to
be considered in such negotiations will be the prevailing market conditions,
the results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies which the Company
and the Representatives of the Underwriters believe to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant. Application
has been made to list the Common Stock on the Nasdaq National Market under the
symbol "BCGI."
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Hale and Dorr, Boston, Massachusetts,
and for the Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The consolidated financial statements of Boston Communications Group, Inc.
and subsidiaries and the related financial statement schedule at December 31,
1995 and 1994, and for each of the three years in the period ended December
31, 1995, and the financial statements of Voice Systems Technology Inc. at
February 29, 1996 and the eleven month period then ended appearing in this
Prospectus and Registration Statement included elsewhere in the Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
51
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement (which term
shall include all amendments, exhibits and schedules thereto) on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, to which Registration Statement
reference is hereby made. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such
reference. The Registration Statement and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
As a result of this offering, the Company will become subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended, and in accordance therewith will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
The Company intends to furnish to its shareholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports containing unaudited consolidated financial
statements for the first three quarters of each fiscal year.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
PAGE
----
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets at December 31, 1994, 1995 and March 31, 1996
(unaudited).............................................................. F-3
Consolidated Statements of Operations for the years ended December 31,
1993, 1994, 1995 and the three months ended March 31, 1995 and 1996
(unaudited).............................................................. F-4
Consolidated Statements of Redeemable Preferred Stock and Shareholders'
Deficit for the years ended December 31, 1993, 1994, 1995 and the three
months ended March 31, 1996 (unaudited).................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994, 1995 and the three months ended March 31, 1995 and 1996
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Consolidated Financial Statements
Introduction............................................................. F-15
Unaudited Pro Forma Condensed Consolidated Balance Sheet.................. F-16
Unaudited Pro Forma Condensed Consolidated Statement of Earnings for the
year ended December 31, 1995............................................. F-17
Unaudited Pro Forma Condensed Consolidated Statement of Earnings for the
three months ended March 31, 1996........................................ F-18
Unaudited Notes to Pro Forma Condensed Consolidated Financial
Statements............................................................... F-19
VOICE SYSTEMS TECHNOLOGY INC.
Report of Independent Auditors............................................ F-20
Balance Sheet at February 29, 1996........................................ F-21
Statement of Operations and Retained Earnings for the eleven-month period
ended
February 29, 1996........................................................ F-22
Statement of Cash Flows for the eleven-month period ended February 29,
1996..................................................................... F-23
Notes to Financial Statements............................................. F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Boston Communications Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Boston
Communications Group, Inc. and Subsidiaries as of December 31, 1994 and 1995
and the related consolidated statements of operations, redeemable preferred
stock and shareholders' deficit, and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Boston
Communications Group, Inc. and subsidiaries at December 31, 1994 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
February 29, 1996, except for
Notes 8 and 11 as to which
the date is April 26, 1996
F-2
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- ----------------
1994 1995 1996
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.............................. $ 204,227 $ 252,647 $ 352,948
Accounts receivable, net of
allowance for billing adjustments
and doubtful accounts of $545,637
in 1994, $883,692 in 1995 and
$909,330 in 1996................. 3,595,302 6,250,211 7,486,722
Inventory......................... 65,350
Net assets of discontinued
operations....................... 1,668,859
Deferred income taxes............. 1,800,000 1,545,000
Prepaid expenses.................. 140,995 194,590 392,905
------------ ----------- -----------
Total current assets........... 5,609,383 8,497,448 9,842,925
Property and equipment:
Telecommunication systems......... 2,484,316 4,312,516 5,075,810
Furniture and equipment........... 668,275 1,123,212 1,276,140
Leasehold improvements............ 122,352 224,911 280,082
Systems in development............ 126,922 733,762 1,395,523
------------ ----------- -----------
3,401,865 6,394,401 8,027,555
Less allowances for depreciation
and amortization.................. 702,375 1,510,209 1,824,745
------------ ----------- -----------
2,699,490 4,884,192 6,202,810
Goodwill, net...................... 2,419,238
Other assets....................... 312,910 232,467 321,557
Net assets of discontinued opera-
tions............................. 245,627
------------ ----------- -----------
Total assets................... $ 8,867,410 $13,614,107 $18,786,530
============ =========== ===========
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- ----------------
1994 1995 1996
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED
STOCK AND
SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable..................... $ $ $ 500,000
Accounts payable.................. 2,330,347 1,277,160 2,980,006
Accrued expenses.................. 2,150,238 4,428,272 5,123,332
Income taxes payable.............. 31,040 710,000 539,459
------------ ----------- -----------
Total current liabilities...... 4,511,625 6,415,432 9,142,797
Redeemable Preferred Stock, non-
voting, par value $100 per share,
13,000 shares authorized, 11,871
shares issued and outstanding (at
redemption value)................. 14,946,654 15,896,326 16,133,095
Commitments and contingencies
Shareholders' deficit:
Convertible Preferred Stock, $1.00
par value per share, 1,325 shares
authorized, 850 shares issued and
outstanding (aggregate liquida-
tion preference $1,050,000)...... 850 850 850
Common Stock, voting, par value
$.01 per share, 35,000,000 shares
authorized, 3,335,985 shares in
1994 and 1995 and 3,719,204
shares in 1996 issued and
outstanding...................... 33,360 33,360 37,192
Additional paid-in capital........ 1,016,121 1,016,121 3,028,587
Accretion of dividends on
Redeemable Preferred Stock....... (3,075,700) (4,025,372) (4,262,141)
Accumulated deficit............... (8,565,500) (5,722,610) (5,293,850)
------------ ----------- -----------
Total shareholders' deficit.... (10,590,869) (8,697,651) (6,489,362)
------------ ----------- -----------
Total liabilities, redeemable
preferred stock and
shareholders' deficit......... $ 8,867,410 $13,614,107 $18,786,530
============ =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ----------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Service revenues:
Calling service reve-
nues.................. $ 8,235,875 $16,004,667 $25,446,172 $4,606,282 $ 7,213,913
Carrier support service
revenues.............. 458,311 2,329,681 8,773,487 1,311,577 3,847,011
System revenues......... 91,714
----------- ----------- ----------- ---------- -----------
8,694,186 18,334,348 34,219,659 5,917,859 11,152,638
Expenses:
Cost of service reve-
nues.................. 6,638,486 14,211,517 26,195,332 4,657,897 8,334,615
Cost of system reve-
nues.................. 37,295
Engineering, research
and development....... 151,933 269,504 839,042 98,791 419,074
Sales and marketing.... 504,237 1,268,242 1,934,272 397,840 557,614
General and administra-
tive.................. 1,425,340 1,783,453 2,233,266 553,085 709,849
Depreciation and amor-
tization.............. 243,943 396,327 888,457 175,658 359,639
----------- ----------- ----------- ---------- -----------
8,963,939 17,929,043 32,090,369 5,883,271 10,418,086
----------- ----------- ----------- ---------- -----------
Operating income
(loss)................. (269,753) 405,305 2,129,290 34,588 734,552
Interest expense........ 40,594 64,023 150,746 15,904 5,792
----------- ----------- ----------- ---------- -----------
Income (loss) from
continuing operations
before income taxes.... (310,347) 341,282 1,978,544 18,684 728,760
Provision (benefit) for
income taxes........... 22,000 52,762 (1,030,000) 2,316 300,000
----------- ----------- ----------- ---------- -----------
Income (loss) from con-
tinuing operations..... (332,347) 288,520 3,008,544 16,368 428,760
Discontinued operations:
Income (loss) from op-
erations.............. 231,870 104,093 (128,904) (128,904)
Gain (loss) on dispos-
al.................... (323,707) 1,402,373 (36,750) (36,750)
----------- ----------- ----------- ---------- -----------
Income (loss) from
discontinued
operations............. (91,837) 1,506,466 (165,654) (165,654)
----------- ----------- ----------- ---------- -----------
Net income (loss)....... (424,184) 1,794,986 2,842,890 (149,286) 428,760
Accretion of dividends
on redeemable preferred
stock.................. (1,029,677) (1,016,347) (949,672) (236,769) (236,769)
----------- ----------- ----------- ---------- -----------
Net income (loss)
available to common
shareholders........... $(1,453,861) $ 778,639 $ 1,893,218 $ (386,055) $ 191,991
=========== =========== =========== ========== ===========
Net income (loss)
available to common
shareholders per common
share:
Continuing operations.. $ (0.42) $ (0.08) $ 0.22 $ (0.02) $ 0.02
=========== =========== =========== ========== ===========
Net income (loss)...... $ (0.45) $ 0.09 $ 0.21 $ (0.04) $ 0.02
=========== =========== =========== ========== ===========
Shares used in computing
net income (loss) per
common share........... 3,235,096 8,847,936 9,178,690 9,178,690 9,178,690
=========== =========== =========== ========== ===========
Supplemental net income
available to common
shareholders per common
share:
Continuing operations.. $ 0.29 $ 0.04
=========== ===========
Net income............. $ 0.27 $ 0.04
=========== ===========
Shares used in computing
supplemental net income
per common share....... 10,503,380 10,523,115
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED
STOCK SHAREHOLDERS' DEFICIT
--------------------- -------------------------------------------------------------------------------------
CONVERTIBLE ACCRETION OF
PREFERRED DIVIDENDS ON
STOCK COMMON STOCK ADDITIONAL REDEEMABLE TOTAL
------------- ----------------- PAID-IN PREFERRED ACCUMULATED SHAREHOLDERS'
SHARES DOLLARS SHARES AMOUNT SHARES DOLLARS CAPITAL STOCK DEFICIT DEFICIT
--------------------- ------ ------ --------- ------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1993............ 12,871 $ 13,900,630 850 $850 2,387,173 $23,872 $1,025,515 $(1,029,676) $ (9,936,302) $ (9,915,741)
Exercise of
Common Stock
options........ 243,259 2,432 (2,408) 24
Accretion of
dividends on
Redeemable
Preferred
Stock.......... 1,029,677 (1,029,677) (1,029,677)
Net loss........ (424,184) (424,184)
------- ------------ --- ---- --------- ------- ---------- ----------- ------------ ------------
Balance at
December 31,
1993............ 12,871 14,930,307 850 850 2,630,432 26,304 1,023,107 (2,059,353) (10,360,486) (11,369,578)
Issuance Common
Stock.......... 705,553 7,056 (6,986) 70
Repurchase of
Redeemable
Preferred
Stock.......... (1,000) (1,000,000)
Accretion of
dividends on
Redeemable
Preferred
Stock.......... 1,016,347 (1,016,347) (1,016,347)
Net income...... 1,794,986 1,794,986
------- ------------ --- ---- --------- ------- ---------- ----------- ------------ ------------
Balance at
December 31,
1994............ 11,871 14,946,654 850 850 3,335,985 33,360 1,016,121 (3,075,700) (8,565,500) (10,590,869)
Accretion of
dividends on
Redeemable
Preferred
Stock.......... 949,672 (949,672) (949,672)
Net income...... 2,842,890 2,842,890
------- ------------ --- ---- --------- ------- ---------- ----------- ------------ ------------
Balance at
December 31,
1995............ 11,871 15,896,326 850 850 3,335,985 33,360 1,016,121 (4,025,372) (5,722,610) (8,697,651)
Accretion of
dividends on
Redeemable
Preferred
Stock.......... 236,769 (236,769) (236,769)
Issuance Common
Stock.......... 265,373 2,654 1,997,346 2,000,000
Exercise of
Common Stock
options........ 117,846 1,178 15,120 16,298
Net income...... 428,760 428,760
------- ------------ --- ---- --------- ------- ---------- ----------- ------------ ------------
Balance at March
31, 1996
(unaudited)..... 11,871 $16,133,095 850 $850 3,719,204 $37,192 $3,028,587 $(4,262,141) $ (5,293,850) $ (6,489,362)
======= ============ === ==== ========= ======= ========== =========== ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ ---------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from con-
tinuing operations..... $ (332,347) $ 288,520 $ 3,008,544 $ 16,368 $ 428,760
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 243,943 396,327 888,457 175,658 359,639
Deferred income
taxes................ (1,800,000) 255,000
Changes in operating
assets and
liabilities,
excluding effects of
discontinued
operations
Accounts
receivable......... (965,044) (1,241,554) (2,654,909) (41,879) (1,175,539)
Inventory........... 800
Prepaid expenses and
other assets....... (112,971) (141,276) (51,692) (142,176) (303,400)
Accounts payable and
accrued expenses... 1,208,317 1,152,340 1,224,847 (918,270) 2,213,630
Income taxes
payable............ 31,040 678,960 (21,146) (170,541)
---------- ----------- ----------- -------- -----------
Net cash provided by
(used in) operating
activities from
continuing operations.. 41,898 485,397 1,294,207 (931,445) 1,608,349
(Income) loss from
discontinued
operations........... (231,870) (104,093) 128,904 128,904
(Gain) loss on
disposal of
discontinued
operations........... 323,706 (1,402,373) 36,750 36,750
Net cash provided by
(used in)
discontinued
operations........... (73,453) 1,462,990 508,095 204,732
---------- ----------- ----------- -------- -----------
Net cash provided by
(used in)
operations........... 60,281 441,921 1,967,956 (561,059) 1,608,349
INVESTING ACTIVITIES
Acquisition of business,
net of cash acquired... (497,137)
Purchase of property and
equipment.............. (269,551) (2,214,820) (2,992,536) (453,714) (1,527,209)
Net proceeds from sale
of lines of business... 7,544,184 1,073,000 164,500
---------- ----------- ----------- -------- -----------
Net cash provided by
(used in) investing
activities............. (269,551) 5,329,364 (1,919,536) (289,214) (2,024,346)
FINANCING ACTIVITIES
Proceeds from exercise
of stock options....... 24 70 16,298
Repurchase of Redeemable
Preferred Stock........ (1,000,000)
Proceeds from notes pay-
able................... 900,000 500,000
Repayment of long-term
debt................... (5,248,319)
---------- ----------- ----------- -------- -----------
Net cash provided by
(used in) financing
activities............. 24 (6,248,249) 900,000 516,298
---------- ----------- ----------- -------- -----------
Increase (decrease) in
cash................... (209,246) (476,964) 48,420 49,727 100,301
Cash at beginning of pe-
riod................... 890,437 681,191 204,227 204,227 252,647
---------- ----------- ----------- -------- -----------
Cash at end of period... $ 681,191 $ 204,227 $ 252,647 $253,954 $ 352,948
========== =========== =========== ======== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Company
Boston Communications Group, Inc. (the Company) (formerly Radio Telephone
Systems, Inc.) is a Massachusetts company which develops, markets and provides
specialized calling and carrier support services to the wireless telephone
industry.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company earns revenues by providing carrier support service for cellular
carriers and processing cellular calls for individuals who have roamed outside
of their service area. Revenue is recognized when the service is provided and
is recorded net of estimated chargebacks and other billing adjustments. The
Company recognizes revenue from the sale of systems at the time the system is
shipped.
Principles of Consolidation
The financial statements include the accounts and operations of the Company
and its wholly-owned subsidiaries. The Company accounts for its 17.5%
investment in a subsidiary using the cost method of accounting. All
intercompany accounts and transactions have been eliminated.
Estimates
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 and
disclosure of contingent 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.
Concentrations of Credit Risk
The Company's roaming customers are individuals who place cellular calls
from service areas, which are not covered by traditional roaming agreements.
These calls are forwarded by cellular carriers to the Company for processing.
Each transaction is small in size and the Company minimizes credit risk by
validating appropriate billing information. Carrier support services are
provided to cellular carriers located throughout the country.
The Company has roaming and carrier support agreements with numerous
carriers, 10 of which accounted for 85.1%, 81.2% and 84.6% of the Company's
total revenues for the years ended December 31, 1993, 1994 and 1995,
respectively. Three carriers accounted for approximately 15%, 13.9% and 11.9%,
respectively, of the Company's total revenues in 1995.
Inventory
Inventory, which is comprised of computer hardware and electronic
components, is recorded at the lower of cost or market. The cost of inventory
is determined using the first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost and depreciation is provided on
a straight-line basis over the estimated useful lives of the assets, which
range from 3 to 7 years. Systems in development represent the cost of hardware
and software related to new and enhanced products and services not yet
available to customers.
F-7
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill
Goodwill is being amortized on a straight-line basis over an eight year
period. Accumulated amortization totaled $25,000 at March 31, 1996.
Engineering, Research and Development
Costs associated with engineering, research and development are expensed as
incurred.
Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," which establishes
criteria for the recognition and measurement of impairment of loss associated
with long-lived assets. The Company has adopted this standard in the first
quarter of 1996, and its adoption did not have a material impact on the
Company's financial position or results of operations.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its
stock-based compensation plans, rather than the alternative fair value
accounting method provided for under Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation," as this
alternative requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, since the
exercise price of options granted under these plans equals the market price of
the underlying stock on the date of grant, no compensation expense is
required.
Reclassifications
Certain amounts in the 1993 and 1994 financial statements were reclassified
to conform to 1995 presentation.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number of
common and dilutive common shares outstanding during each period. Common and
common equivalent shares issued during the twelve month period prior to the
initial filing date of the proposed public offering have been included in the
calculation as if they were outstanding for all periods presented using the
treasury stock method.
Supplemental Net Income Per Share
Supplemental net income per share is based on the weighted average number of
shares used in the calculation of net income per share increased by the number
of shares which at an assumed offering price of $12.00 would be required to
complete the redemption of the Redeemable Preferred shares. Net income
available to common shareholders is increased by the dividends accreted in
1995 on the Redeemable Preferred Stock.
Unaudited Interim Consolidated Financial Statements
The consolidated balance sheet as of March 31, 1996 and the consolidated
statements of operations, redeemable preferred stock and shareholders' deficit
and cash flows for the three months ended March 31, 1995 and 1996, are
unaudited and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation. The results of operations for the three months ended March 31,
1996 are not necessarily indicative of the results to be expected for the
entire year.
F-8
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. DISCONTINUED OPERATIONS
On March 31, 1995, the Company sold the net assets of its cellular sales and
service subsidiary for $573,000. On October 24, 1994, the Company sold the net
assets of its rural cellular phone system subsidiary for $8,000,000, including
a note receivable for $500,000 which was paid in 1995. In connection with this
sale, the Company repaid $5,000,000 of promissory notes and vendor
obligations. On March 15, 1994, the Company sold the net assets of its air-to-
ground system subsidiary for $150,000.
Interest expense of $552,000 in 1993 and $492,000 in 1994 has been allocated
to the discontinued operations of the rural cellular phone system subsidiary
as the borrowings were specifically associated with that business. The taxes
associated with the discontinued operations are not material.
The revenues of the discontinued operations are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1994 1995
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cellular sales and service....................... $ 7,556 $ 9,455 $ 1,001
Rural cellular phone system...................... 646 717
Air-to-ground system............................. 17
------- -------- -------
$ 8,219 $ 10,172 $ 1,001
======= ======== =======
</TABLE>
The operating income (loss) of the discontinued operations are summarized
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cellular sales and service.................... $ 205 $ 262 $ (129)
Rural cellular phone system................... 140 (158)
Air-to-ground system.......................... (113)
------- ------- --------
$ 232 $ 104 $ (129)
======= ======= ========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------- -----------
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Billing adjustments and chargebacks...... $ 297 $1,136 $1,295
Cellular airtime......................... 634 1,077 1,187
Payroll.................................. 280 391 698
Deferred revenue......................... 145 325 412
Telecommunication costs.................. 187 305 437
Billing services......................... 286 282 276
Other.................................... 321 912 818
------ ------ ------
$2,150 $4,428 $5,123
====== ====== ======
</TABLE>
F-9
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. SHORT-TERM FINANCING ARRANGEMENTS
The Company has short-term financing available under an Account Purchase
Agreement with its outside billing agent. Amounts available under the
Agreement are limited to the lesser of $2,800,000 or 70% of eligible trade
receivables, which are secured by related receivables amounting to
approximately $3,200,000, $4,700,000 and $4,900,000 at December 31, 1994 and
1995 and March 31, 1996, respectively. Borrowings are payable on demand and
bear interest at the prime rate plus 1.5%. No borrowings were outstanding at
December 31, 1994 and 1995 and $500,000 was outstanding at March 31, 1996.
Interest paid by the Company approximated interest expense for all periods
presented in the accompanying financial statements.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------- ---------
1994 1995 1996
------- ------ ---------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..... $ 2,575 $1,189 $ 934
Book over tax amortization and
depreciation expense................ 494 390 390
Allowance for doubtful accounts,
billing adjustments and
chargebacks......................... 301 775 809
Other................................ 44 49 49
------- ------ ------
3,414 2,403 2,182
Valuation allowance for deferred tax
assets.............................. (3,254) (162) (162)
------- ------ ------
Total deferred tax assets.............. 160 2,241 2,020
Deferred tax liabilities:
Tax over book amortization........... (281) (315)
Amortization of legal costs.......... (160) (160) (160)
------- ------ ------
Total deferred tax liabilities......... (160) (441) (475)
------- ------ ------
Net deferred tax assets................ $ 0 $1,800 $1,545
======= ====== ======
</TABLE>
F-10
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------- -------------
1993 1994 1995 1995 1996
---- ---- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal............................... $18 $ 110 $ 2 $ 8
State................................. $22 35 660 37
--- --- ------- ----- ------
22 53 770 2 45
Deferred:
Federal............................... (1,530) 217
State................................. (270) 38
--- --- ------- ----- ------
(1,800) 255
--- --- ------- ----- ------
Income tax provision (benefit).......... $22 $53 $(1,030) $ 2 $ 300
=== === ======= ===== ======
</TABLE>
At January 1, 1995, primarily as a result of the net operating losses, the
Company was in a net deferred tax asset position. The full amount of the
deferred tax asset was offset by a valuation allowance due to uncertainties
associated with the realization of the deferred tax benefit. Based on the
Company's ability to generate taxable income and its projections for 1997 and
1998, the Company has reduced the remaining valuation allowance to state the
net deferred tax asset at its net realizable value.
The Company utilized $635,000 in 1993, $1,177,000 in 1994 and $2,620,000 in
1995 of federal net operating loss carryforwards to offset taxable income. The
valuation allowance decreased $3,092,000 during 1995 due primarily to the
utilization of net operating loss carryforwards and to the reversal of a
significant portion of the valuation allowance.
At December 31, 1995, the Company has $3,000,000 of net operating loss
carryforwards for federal income tax return purposes available for use in
future years that expire beginning in 2003.
A reconciliation of the statutory rate to the effective rate is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------- ---------------
1993 1994 1995 1995 1996
---- ---- ---- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal provision (benefit) at statutory
rate.................................... (34)% 34% 34 % 34% 34%
State income provision (benefit), net of
federal benefit......................... (6) 6 6 6 6
Permanent differences.................... 2 1 1 1
Change in valuation allowance............ (65)
Carryforward (benefit) of net operating
loss.................................... 40 (27) (28) (29)
Other.................................... 7
--- --- --- ------ ------
7% 15% (52)% 12% 41%
=== === === ====== ======
</TABLE>
Income taxes paid were $17,000 in 1993, $36,000 in 1994, and $67,500 in 1995
and $8,000 and $240,000 for the three months ended March 31, 1995 and 1996.
F-11
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. REDEEMABLE PREFERRED STOCK
The Redeemable Preferred shareholders have the right to sell their shares to
the Company for $1,000 per share upon the earlier of (1) June 30, 1997, (2)
the sale of the ROAMERplus(TM) business, (3) the sale, merger or acquisition
of the Company whereby the common shareholders receive proceeds for their
Common Stock, or (4) the sale by the management shareholders of substantially
all of their common stock. The Company has the right to repurchase the
Redeemable Preferred shares for $1,000 per share upon the earlier of June 30,
1997 or the sale of the ROAMERplus(TM) business.
The holders of the Redeemable Preferred Stock are entitled to annual cash
dividends of $80 per share. These dividends shall accumulate and are payable
on the earlier of December 31, 1997 or the sale of substantially all of the
assets of the Company. Subsequent to December 31, 1997, these dividends shall
be payable annually on December 31 of each year. Undeclared and unpaid
dividends to the holders of the Redeemable Preferred Stock in the amount of
$3,075,700, $4,025,372 and $4,262,141 and have been accreted in stockholders'
equity at December 31, 1994 and 1995 and March 31, 1996, respectively. The
holders of the Series A Common Stock and the Convertible Preferred Stock are
entitled to receive dividends in such amounts and at such times as may be
determined by the Board of Directors.
8. CAPITAL STOCK
Common Stock
On April 26, 1996, the Company authorized 35,000,000 shares of a new class
of common stock and effected a recapitalization of the Company (the "1996
Recapitalization"). All outstanding shares of the Company's class A, B, C and
D common stock were exchanged for an aggregate of 3,335,985 shares of Common
Stock. In addition, the terms and conditions of the Company's three classes of
convertible preferred stock were modified. The convertible preferred shares
will automatically convert to 5,004,608 shares of Common Stock upon the
closing of an initial public offering. Preferred shares have voting rights
equivalent to the common shares into which they can be converted.
The Company and its principal shareholders have entered into an agreement
providing that, if the Company does not complete an initial public offering on
or before August 31, 1996, the parties will take such action as may be
necessary to effect a recapitalization of the Company to reorganize the share
ownership of the Company among the shareholders to restore the capitalization
of the Company to substantially the position in effect before the 1996
Recapitalization. Any such recapitalization would create additional classes or
series of common and preferred stock and alter relative conversion and
liquidation rights, but would not increase the number of common shares and
common share equivalents or the aggregate liquidation preferences.
Stock Option Plan
In 1994, the shareholders voted to adopt the 1994 Boston Communications
Group, Inc. Stock Option Plan (the Plan), which allows for the granting of
355,758 options to purchase Common Stock at a purchase price equal to the fair
value of the Company's stock. Stock options granted under the Plan generally
vest over four years. Stock option information is as follows:
F-12
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- -----------
1993 1994 1995 1996
-------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding at the beginning of period... 243,259 324,629 355,758
Granted ($0.14-$10.00 per share)......... 324,629 31,129 746,829
Exercised ($0.0001-$0.14 per share)...... (243,259) (117,846)
-------- ------- ------- --------
Outstanding at end of period............. 324,629 355,758 984,741
======== ======= ======= ========
Options available for grant.............. 31,129 517,963
======== ======= ======= ========
Options exercisable...................... 181,219 63,373
======== ======= ======= ========
</TABLE>
The options exercised in 1993 represent the remaining options that were
granted under a pre-existing stock option plan.
Shares sold to an employee are subject to a buy back option that lapses over
a two and a half year period ending December 1, 1996. At December 31, 1995,
158,794 shares of Common Stock were subject to this repurchase option by the
Company at $0.0001 per share.
In February and March 1996, the Company granted options to purchase 653,278
and 93,551 (see note 11) at exercise prices of $5.75 and $10.00, respectively,
which were deemed fair market value as determined by the Company.
9. LEASES
The Company has noncancelable operating lease commitments for office space.
Rent expense approximated $280,000, $399,000 and $442,500 for the years ended
December 31, 1993, 1994 and 1995, respectively, and $155,000 and $164,000 for
the three months ended March 31, 1995 and 1996, respectively. Future minimum
rental commitments, which include office space leased in February 1996, are as
follows:
<TABLE>
<S> <C>
Year ending December 31, 1996................................ $ 766,052
1997......................................................... 795,524
1998......................................................... 787,901
1999......................................................... 722,840
2000......................................................... 462,381
Thereafter................................................... 77,063
----------
$3,611,761
==========
</TABLE>
10. RELATED-PARTY TRANSACTIONS
The Company paid annual fees in the amount of $840,000 in 1993, $1,008,000
in 1994 and 1995 and $252,000 for the three months ended March 31, 1995 and
1996 to a management company affiliated with certain shareholders of the
Company, which represents the payroll and certain benefit costs of senior
management personnel responsible for the operations of the Company.
Additionally, the Company leases office space from another company affiliated
with certain shareholders of the Company under a leasing arrangement which
expires in April 1999. The Company recorded rent expense of $28,000 in 1994,
$68,000 in 1995 and $17,000 for the three months ended March 31, 1995 and 1996
in connection with this lease.
F-13
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS
In February 1996, the Company acquired the net assets of Voice Systems
Technology Inc. (VST) for approximately $2,500,000 ($500,000 cash and 265,373
shares of common stock). VST had revenues and net income for the 11 months
ended February 29, 1996 of approximately $2,100,000 and approximately $9,000
respectively. The acquisition has been accounted for under the purchase method
of accounting and the results of operations will be included in the Company's
results of operations from the date of acquisition.
On April 25, 1996, the Board of Directors voted to terminate the 1994 Stock
Option Plan upon the effective date of the initial public offering
contemplated herein.
The Company's 1996 Stock Option Plan (the 1996 Option Plan) was adopted by
the Board of Directors and approved by the stockholders of the Company in
March 1996. The 1996 Option Plan provides for the grant of stock options to
employees, officers and directors of, and consultants or advisors to, the
Company and its subsidiaries. Under the 1996 Option Plan, the Company may
grant options that are intended to qualify as incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code") ("incentive stock options"), or options not intended to qualify
as incentive stock options ("non-statutory options"). Incentive stock options
may only be granted to employees of the Company. A total of 1,264,792 shares
of Common Stock may be issued upon the exercise of options granted under the
1996 Option Plan. The maximum number of shares with respect to which options
may be granted to any employee under the 1996 Option Plan shall not exceed
200,000 shares of Common Stock during any calendar year.
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by the shareholders of the
Company in April 1996 and becomes effective upon the closing of the initial
public offering contemplated herein. The Purchase Plan authorizes the issuance
of up to a total of 225,000 shares of Common Stock to participating employees.
Certain employees of the Company who have been employed by the Company for a
minimum of 18 months, including directors of the Company who are employees,
are eligible to participate in the Purchase Plan. On the first day of a
designated payroll deduction period (the "Offering Period"), the Company will
grant to each eligible employee who has elected to participate in the Purchase
Plan an option to purchase shares of Common Stock as follows: the employee may
authorize an amount (up to a maximum of 10% of such employee's regular pay) to
be deducted by the Company from such pay during the Offering Period. On the
last day of the Offering Period, the employee is deemed to have exercised the
option, at the option exercise price, to the extent of accumulated payroll
deductions. Under the terms of the Purchase Plan, the option price is an
amount equal to 90% of the fair market value per share of the Common Stock on
either the first day or the last day of the Offering Period, whichever is
lower. In no event may an employee purchase in any one Offering Period a
number of shares which has an aggregate market value (determined on the last
day of the Offering Period) in excess of $25,000. The Compensation Committee
may, in its discretion, choose an Offering Period of 12 months or less for
each of the Offerings and choose a different Offering Period for each
Offering.
Upon the closing of the initial public offering contemplated herein, the
Board of Directors will be authorized, subject to certain limitations
prescribed by law, without further shareholder approval, to issue from time to
time up to an aggregate of 2,000,000 shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations, or restrictions of the shares of each series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series.
F-14
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS INTRODUCTION
On February 29, 1996, the Company acquired the net assets of Voice Systems
Technology Inc. (VST) for approximately $2,500,000 ($500,000 cash and 265,373
shares of common stock) in a non-taxable business combination. The cash
consideration was financed with an existing credit facility.
The following unaudited pro forma condensed consolidated balance sheet of
Boston Communications Group, Inc. (BCG) as of December 31, 1995 and VST as of
February 29, 1996, the unaudited pro forma condensed consolidated statement of
operations of BCG for the year ended December 31, 1995 and VST for the eleven
months ended February 29, 1996 and the unaudited pro forma condensed
consolidated statement of operations of BCG for the three months ended March
31, 1996 (which includes one month of VST's operations) and VST for the two
months ended February 29, 1996 give effect to the acquisition of the net
assets of VST by BCG. The pro forma information is based on the historical
financial statements of BCG and VST, giving effect to the proposed transaction
under the purchase method of accounting and the assumptions and adjustments in
the accompanying notes to the pro forma financial statements.
The pro forma statements have been prepared by BCG management based upon the
financial statements of VST, included elsewhere herein. These pro forma
financial statements may not be indicative of the results that actually would
have occurred if the combination had been in effect on the dates indicated or
which may be obtained in the future. The pro forma financial statements should
be read in conjunction with the audited financial statements and notes of BCG
and VST, contained elsewhere in this Prospectus.
F-15
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------------------- ----------------------------
BOSTON
COMMUNICATIONS
GROUP, INC. AND VOICE SYSTEMS
SUBSIDIARIES TECHNOLOGY INC.
DECEMBER 31, 1995 FEBRUARY 29, 1996 ADJUSTMENTS CONSOLIDATED
----------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................... $ 252,647 $ 2,863 $ 255,510
Accounts receivable,
net................... 6,250,211 60,972 6,311,183
Deferred taxes......... 1,800,000 1,800,000
Other current assets... 194,590 69,791 264,381
----------- -------- ---------- -----------
Total current assets.... 8,497,448 133,626 8,631,074
Property and equipment,
net.................... 4,884,192 105,945 4,990,137
Goodwill, net........... $2,494,705(1) 2,494,705
Other assets............ 232,467 232,467
----------- -------- ---------- -----------
$13,614,107 $239,571 $2,494,705 $16,348,383
=========== ======== ========== ===========
LIABILITIES, REDEEMABLE
PREFERRED STOCK AND
SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable.......... $ 500,000(1) $ 500,000
Accounts payable and
accrued expenses...... $ 5,705,432 $126,950 50,000(1) 5,882,382
Other current
liabilities........... 710,000 57,326 767,326
----------- -------- ---------- -----------
Total current liabili-
ties................... 6,415,432 184,276 550,000 7,149,708
Redeemable Preferred
Stock.................. 15,896,326 15,896,326
Shareholders' equity
(deficit):
Common Stock........... 85,268 4 2,653 (1)
(4)(2) 87,921
Additional paid-in
capital............... 965,063 2,411 1,997,347 (1)
(2,411)(2) 2,962,410
Accretion of dividends
on Redeemable
Preferred Stock....... (4,025,372) (4,025,372)
Retained earnings
(accumulated
deficit).............. (5,722,610) 52,880 (52,880)(2) (5,722,610)
----------- -------- ---------- -----------
Total shareholders' eq-
uity (deficit)......... (8,697,651) 55,295 1,944,705 (6,697,651)
----------- -------- ---------- -----------
$13,614,107 $239,571 $2,494,705 $16,348,383
=========== ======== ========== ===========
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
F-16
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------ ---------------------------
BOSTON
COMMUNICATIONS VOICE SYSTEMS
GROUP, INC. AND TECHNOLOGY INC.
SUBSIDIARIES ELEVEN MONTHS
YEAR ENDED ENDED FEBRUARY 29,
DECEMBER 31, 1995 1996 ADJUSTMENTS CONSOLIDATED
----------------- ------------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues................ $34,219,659 $2,068,611 $36,288,270
Expenses:
Cost of revenues....... 26,195,332 887,933 27,083,265
Selling,
administrative,
engineering and
depreciation.......... 5,895,037 1,164,512 $312,000 (4) 7,371,549
----------- ---------- --------- -----------
32,090,369 2,052,445 312,000 34,454,814
----------- ---------- --------- -----------
Operating income........ 2,129,290 16,166 (312,000) 1,833,456
Interest expense........ 150,746 53,000 (3) 203,746
----------- ---------- --------- -----------
Income from continuing
operations before
income taxes........... 1,978,544 16,166 (365,000) 1,629,710
Provision (benefit) for
income taxes........... (1,030,000) 7,154 (21,000)(5) (1,043,846)
----------- ---------- --------- -----------
Income from continuing
operations............. 3,008,544 9,012 (344,000) 2,673,556
Discontinued operations:
Loss from operations.. (128,904) (128,904)
Loss on disposal...... (36,750) (36,750)
----------- ---------- --------- -----------
Loss from discontinued
operations............. (165,654) (165,654)
----------- ---------- --------- -----------
Net income.............. 2,842,890 9,012 (344,000) 2,507,902
Accretion of dividends
on redeemable preferred
stock.................. (949,672) (949,672)
----------- ---------- --------- -----------
Net income available to
common stockholders.... $ 1,893,218 $ 9,012 $(344,000) $ 1,558,230
=========== ========== ========= ===========
Net income available to
common shareholders per
share.................. $ 0.21 $ 0.17
=========== ===========
Shares used in computing
net income per common
share ................. 9,178,690 9,178,690(6)
=========== ===========
Supplemental net income
per common share....... $ 0.27 $ 0.24
=========== ===========
Shares used in computing
supplemental net income
per common share....... 10,503,380 10,503,380(7)
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-17
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------- ---------------------------
BOSTON
COMMUNICATIONS VOICE SYSTEMS
GROUP, INC. AND TECHNOLOGY INC.
SUBSIDIARIES TWO MONTHS
THREE MONTHS ENDED ENDED FEBRUARY 29,
MARCH 31, 1996 1996 ADJUSTMENTS CONSOLIDATED
------------------ ------------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues................ $11,152,638 $156,664 $11,309,302
Expenses:
Cost of revenues....... 8,371,910 67,209 8,439,119
Selling,
administrative,
engineering and
depreciation.......... 2,046,176 204,900 $51,000 (4) 2,302,076
----------- -------- -------- -----------
10,418,086 272,109 51,000 10,741,195
----------- -------- -------- -----------
Operating income
(loss)................. 734,552 (115,445) (51,000) 568,107
Interest expense........ 5,792 9,000 (3) 14,792
----------- -------- -------- -----------
Income (loss) before
taxes.................. 728,760 (115,445) (60,000) 553,315
Provision (benefit) for
income taxes........... 300,000 (46,000) (4,000)(5) 250,000
----------- -------- -------- -----------
Net income (loss)....... 428,760 (69,445) (56,000) 303,315
Accretion of dividends
on redeemable preferred
stock.................. (236,769) (236,769)
----------- -------- -------- -----------
Net income (loss)
available to common
stockholders........... $ 191,991 $(69,445) $(56,000) $ 66,546
=========== ======== ======== ===========
Net income available to
common shareholders per
share.................. $ 0.02 $ 0.01
=========== ===========
Shares used in computing
net income per common
share ................. 9,178,690 9,178,690(6)
=========== ===========
Supplemental net income
per common share....... $ 0.04 $ 0.03
=========== ===========
Shares used in computing
supplemental net income
per common share....... 10,523,115 10,523,115
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-18
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to
the VST acquisition accounted for under the purchase method of accounting. The
Unaudited Pro Forma Condensed Consolidated Statements of Income have been
prepared giving effect to the acquisition as if it occurred on January 1,
1995. It combines the results of BCG's operations for the year ended December
31, 1995 with VST's results for the eleven months ended February 29, 1996. The
three months ended March 31, 1996 combine the results of BCG's operations for
the three months ended March 31, 1996, which includes one month of operations
of VST, with VST's results for the two months ended February 29, 1996. The
excess of purchase price over the fair value of the net assets acquired is
being amortized on a straight line basis over an eight year period.
Direct costs of the merger aggregating $50,000 have been reflected in the
condensed combined financial information. The condensed combined financial
information does not include any benefits from synergies that may result from
the acquisition.
(1) Adjustment to record the purchase of VST:
<TABLE>
<S> <C>
Fair value of Common Stock..................................... $2,000,000
Cash........................................................... 500,000
Estimated direct acquisition costs............................. 50,000
----------
Total purchase price........................................... 2,550,000
Fair value of net assets acquired.............................. 55,295
----------
Estimated goodwill............................................. $2,494,705
==========
</TABLE>
(2) To eliminate the stockholders' equity of VST.
(3) To record interest expense on the debt incurred to acquire VST.
(4) To record amortization of goodwill on the straight line basis over 8
years.
(5) To record the tax benefits of pro forma adjustments.
(6) Common Stock issued in connection with acquistion of VST is included in
weighted average shares outstanding of BCG pursuant to Staff Accounting
Bulletion (SAB) No. 83.
(7) Supplemental net income per share reflects the effect of redeeming the
Redeemable Preferred Stock with the proceeds of the offering.
F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Voice Systems Technology Inc.
We have audited the accompanying balance sheet of Voice Systems Technology
Inc. as of February 29, 1996, and the related statements of operations and
retained earnings and cash flows for the eleven-month period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Voice Systems Technology
Inc. at February 29, 1996, and the results of its operations and its cash
flows for the eleven-month period then ended, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
April 19, 1996
F-20
<PAGE>
VOICE SYSTEMS TECHNOLOGY INC.
BALANCE SHEET
FEBRUARY 29, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash................................................................. $ 2,863
Accounts receivable.................................................. 60,972
Inventory............................................................ 66,150
Prepaid expenses..................................................... 3,641
--------
Total current assets.................................................. 133,626
Property and equipment, net........................................... 105,945
--------
$239,571
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 88,495
Accrued expenses..................................................... 38,455
Deferred income...................................................... 57,326
--------
Total current liabilities............................................. 184,276
Commitment and contingencies
Shareholders' equity:
Common Stock, $.01 par value:
Authorized shares--1,500
Issued and outstanding shares--375.................................. 4
Additional capital................................................... 2,411
Retained earnings.................................................... 52,880
--------
Total shareholders' equity............................................ 55,295
--------
$239,571
========
</TABLE>
See accompanying notes.
F-21
<PAGE>
VOICE SYSTEMS TECHNOLOGY INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
ELEVEN-MONTH PERIOD ENDED FEBRUARY 29, 1996
<TABLE>
<S> <C>
Revenues............................................................ $2,068,611
Operating expenses:
Cost of revenue.................................................... 887,933
Selling, general, and administrative............................... 1,164,512
----------
2,052,445
----------
Income before provision for income taxes............................ 16,166
Provision for income taxes.......................................... 7,154
----------
Net income.......................................................... 9,012
Retained earnings at March 31, 1995................................. 43,868
----------
Retained earnings at February 29, 1996.............................. $ 52,880
==========
</TABLE>
See accompanying notes.
F-22
<PAGE>
VOICE SYSTEMS TECHNOLOGY INC.
STATEMENT OF CASH FLOWS
ELEVEN-MONTH PERIOD ENDED FEBRUARY 29, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 9,012
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation....................................................... 17,737
Changes in operating assets and liabilities:
Accounts receivable............................................... 19,812
Inventory......................................................... (66,150)
Prepaid expenses.................................................. 6,082
Accounts payable.................................................. 41,515
Accrued expenses.................................................. 11,594
Deferred revenue.................................................. 13,253
--------
Net cash provided by operating activities........................... 52,855
INVESTING ACTIVITIES
Expenditures for property and equipment............................. (54,508)
--------
Net cash used in investing activities............................... (54,508)
--------
Decrease in cash.................................................... (1,653)
Cash at March 31, 1995.............................................. 4,516
--------
Cash at February 29, 1996........................................... $ 2,863
========
SUPPLEMENTAL DISCLOSURE
Noncash acquisition of property and equipment in exchange for
extended maintenance agreement..................................... $ 30,000
========
</TABLE>
See accompanying notes.
F-23
<PAGE>
VOICE SYSTEMS TECHNOLOGY INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996
1. BUSINESS
Voice Systems Technology Inc. was incorporated in 1991 and is engaged
primarily in the development and marketing of voice processing systems
including telecommunication, voice mail, fax mail, and voice response
products. The Company markets its products to telephone and cellular telephone
companies primarily in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue from the sale of systems at the time the
system is shipped. Fees for extended maintenance agreements are deferred and
are recognized ratably over the term of the agreement. All maintenance
agreements extend for a period of 1 year or less.
Accounting for the Costs of Computer Software to be Sold
Software development costs incurred from the point that technological
feasibility is determined and the product is ready for market are capitalized
and amortized over the product life. At March 1, 1995, all computer software
product development costs capitalized have been fully amortized.
Property and Equipment
Depreciation and amortization are computed using the straight-line method
over a five- to seven-year estimated useful life.
Use of Estimates
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 and
disclosure of contingent 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.
INCOME TAXES
The Company accounts for income taxes under the liability method required by
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes."
INVENTORY
Inventory, which is comprised of computer hardware and electronic
components, is recorded at the lower of cost or market. The cost of inventory
is determined using the first-in, first-out (FIFO) method.
NEW ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." SFAS No. 121, which is required to be adopted for fiscal
years beginning after December 15, 1995, establishes accounting standards for
the impairment of long- lived assets, and certain intangible assets. The
Company does not expect that adoption of SFAS No. 121 will have a material
effect on its financial position or results of operations.
F-24
<PAGE>
VOICE SYSTEMS TECHNOLOGY INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT, AT COST
<TABLE>
<CAPTION>
FEBRUARY 29, 1996
-----------------
<S> <C>
Furniture and fixtures..................................... $ 18,384
Computer equipment......................................... 108,521
Leasehold improvements..................................... 5,000
--------
131,905
Less accumulated depreciation.............................. (25,960)
--------
$105,945
========
</TABLE>
Depreciation expense for the eleven-month period ended February 29, 1996 was
$17,737.
4. INCOME TAXES
The components of the provision for federal and state income taxes are as
follows:
<TABLE>
<S> <C>
State................................................................. $2,654
Federal............................................................... 4,500
------
$7,154
======
</TABLE>
The provision for income taxes differs from the amount of tax expense which
would result from using the federal tax rate of 34% for the following reasons:
<TABLE>
<CAPTION>
ELEVEN-MONTH
PERIOD ENDED
FEBRUARY 29,
1996
------------
<S> <C>
Computed at 34% of earnings before income taxes................. $ 5,496
State income taxes, net of federal tax benefit.................. 1,752
Permanent difference............................................ 5,666
Tax benefit of graduated tax rates.............................. (5,760)
-------
$ 7,154
=======
</TABLE>
The Company has no basis differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes as of February 29, 1996 and, accordingly, no deferred
taxes have been reflected.
Income tax payments amounted to $1,300 for the eleven-month period ended
February 29, 1996.
5. COMMITMENTS
Rent expense for the eleven-month period ended February 29, 1996 was
$27,480.
Future minimum payments under operating leases that have noncancelable terms
in excess of one year are as follows at February 29, 1996:
<TABLE>
<S> <C>
1997................................................................ $ 28,380
1998................................................................ 26,895
1999................................................................ 17,000
2000................................................................ 18,000
2001................................................................ 12,000
--------
$102,275
========
</TABLE>
F-25
<PAGE>
VOICE SYSTEMS TECHNOLOGY INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. SIGNIFICANT CUSTOMER
One of the Company's customers accounted for 10% of its revenues for the
eleven-month period ended February 29, 1996.
7. SUBSEQUENT EVENT
Effective February 29, 1996, all of the outstanding common stock of the
Company was acquired by Boston Communications Group, Inc.
F-26
<PAGE>
[PICTURE OF MAP OF THE UNITED STATES]
----------------------
Roaming Services
Carrier Support Services
Prepaid Wireless Services
----------------------
[PICTURE OF CELLULAR TELEPHONE]
----------------------
[BOSTON COMMUNICATIONS GROUP, INC. LOGO]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER TO SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 24
Management............................................................... 34
Certain Transactions..................................................... 38
Principal and Selling Shareholders....................................... 41
Description of Capital Stock............................................. 43
Shares Eligible for Future Sale.......................................... 45
Underwriting............................................................. 47
Legal Matters............................................................ 48
Experts.................................................................. 48
Additional Information................................................... 49
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,825,000 Shares
[BCG LOGO APPEARS HERE]
Common Stock
-----------
PROSPECTUS
-----------
Alex. Brown & Sons
INCORPORATED
Donaldson, Lufkin & Jenrette
SECURITIES CORPORATION
The Columbia Group
INCORPORATED
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates,
except for the Securities and Exchange Commission registration fee, the NASD
filing fee and the Nasdaq National Market Listing Fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 19,719
NASD Filing Fee................................................. 6,219
Nasdaq Listing Fee.............................................. 50,000
Blue Sky Fees and Expenses...................................... 20,000
Transfer Agent and Registrar Fees............................... 10,000
Accounting Fees and Expenses.................................... 200,000
Legal Fees and Expenses......................................... 300,000
Printing, Engraving and Mailing Expenses........................ 100,000
Miscellaneous................................................... 269,062
--------
Total....................................................... $975,000
========
</TABLE>
- --------
The Company will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 6 of the Company's Restated Articles of Organization provides that
the Company shall indemnify each person who is or was a director, officer,
employee or other agent of the Company, and each person who is or was serving
at the request of the Company as a director, trustee, officer, employee or
other agent of another organization in which it directly or indirectly owns
shares or of which it is directly or indirectly a creditor, against all
liabilities, costs and expenses reasonably incurred by any such persons in
connection with the defense or disposition of or otherwise in connection with
or resulting from any action, suit or other proceeding in which they may be
involved by reason of being or having been such a director, officer, employee,
agent or trustee, or by reason of any action taken or not taken in such
capacity, except with respect to any matter as to which such person shall have
been finally adjudicated by a court of competent jurisdiction not to have
acted in good faith in the reasonable belief that his or her action was in the
best interests of the Company. The provisions in the Company's articles
pertaining to indemnification may not be amended and no provision inconsistent
therewith may be adopted without the approval of either the Board of Directors
or the holders of at least a majority of the voting power of the Company.
Section 67 of Chapter 156B of the Massachusetts Business Corporation Law
authorizes a corporation to indemnify its directors, officers, employees and
other agents unless such person shall have been adjudicated in any proceeding
not to have acted in good faith in the reasonable belief that such action was
in the best interests of the corporation.
Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed
as Exhibit 1 hereto.
The Company maintains directors' and officers' liability insurance for the
benefit of its directors and certain of its officers.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this registration statement, the
Company has issued the following securities that were not registered under the
Securities Act of 1933, as amended. The following numbers give effect to the
re-capitalization of the Company effected on April 26, 1996. Further included
is the consideration, if any, received by the Company for such securities, and
information relating to the section of the Securities Act of 1933, as amended
(the "Securities Act"), or rule of the Securities and Exchange Commission
under which exemption from registration was claimed.
(a) Issuances of Capital Stock
On March 8, 1994, the Company issued an aggregate of 476,200 shares of
Common Stock to Brian Boyle at a price per share of approximately $.0001.
On November 21, 1994, pursuant to a Securities Exchange Agreement, the
Company issued an aggregate of 12,870.954 shares of its Redeemable Preferred
Stock, 375 shares of its Class A Convertible Preferred Stock, 200 shares of
its Series 1 Class B Convertible Preferred Stock, 275 shares of its Series 2
Class B Convertible Preferred Stock, 2,630,433 shares of Common Stock and an
option to purchase 243,259 shares of Common Stock in exchange for an aggregate
of $13,545,954 in promissory notes, 3,785,158 shares of Common Stock and
options to purchase 5,658,096 shares of Common Stock. In connection with this
transaction (i) Paul Tobin, the Company's Chairman, received 412.433 shares of
Redeemable Preferred Stock, 7.5 shares of Series 2 Class B Convertible
Preferred Stock and 922,569 shares of Common Stock in exchange for $427,433 in
promissory notes and an option to purchase 1,983,045 shares of Common Stock;
(ii) Frederick von Mering, the Company's Chief Financial Officer and a
Director, received 517,810 shares of Common Stock in exchange for an option to
purchase 1,113,542 shares of Common Stock; (iii) entities affiliated with
Burr, Egan, Deleage & Co., of which Craig Burr, a Director of the Company, is
a Managing General Partner, received an aggregate of 5,991.823 shares of
Redeemable Preferred Stock, 375 shares of Class A Convertible Preferred Stock
and 71.5 shares of Series 2 Class B Convertible Preferred Stock in exchange
for an aggregate of $6,134,823 in promissory notes and 3,785,158 shares of
Common Stock; (iv) Highland Capital Partners, L.P., with which James McLean, a
Director of the Company, is affiliated, received 4,517.834 shares of
Redeemable Preferred Stock, 275 shares of Series 1 Class B Convertible
Preferred Stock, 58.5 shares of Series 2 Class B Convertible Preferred Stock
in exchange for $4,909,861 in promissory notes; (v) Robert J. Sullivan, a
holder of more than 5% of the Company's Common Stock, received 171.473 shares
of Redeemable Preferred Stock and 703,735 shares of Common Stock in exchange
for an option to purchase 1,513,043 shares of Common Stock and $171,473 in
promissory notes; and (vi) BCG Investments, Inc., a company whose officers are
Messrs. Tobin, von Mering and Sullivan and whose sole shareholder and Director
is Mr. Tobin, received 440.116 shares of Redeemable Preferred Stock in
exchange for $440,116 in promissory notes.
On February 29, 1996, pursuant to an Agreement and Plan of Merger among the
Company, Boston Communications Group Subsidiary, Inc. and Voice Systems
Technology Inc. ("VST") dated February 29, 1996, the Company issued an
aggregate of 265,373 shares of Common Stock to the former shareholders of VST.
(b) Certain Grants and Exercises of Stock Options
From the adoption of the Company's 1994 Stock Option Plan to April 1995, the
Company has granted options to purchase an aggregate of 355,758 shares of
Common Stock at a weighted average exercise price of $0.14 per share under
such plan to certain of its officers, directors and employees. As of April 15,
1996, the Company had issued an aggregate of 117,846 shares of Common Stock
upon the exercise of such options, and options granted under the 1994 Stock
Option Plan to purchase an aggregate of 237,912 shares of Common Stock
remained outstanding.
In February 1996, the Company granted non-qualified stock options to
purchase an aggregate of 653,278 shares of Common Stock to certain of its
executive officers at an exercise price of $5.75 per share. As of April 15,
1996, none of these options had been exercised.
II-2
<PAGE>
The Company's 1996 Stock Option Plan was adopted by the Board of Directors
and the shareholders of the Company in March 1996. On March 28, 1996, the
Company granted an option to purchase 93,551 shares of Common Stock at an
exercise price per share of $10.00. As of April 15, 1996, this option had not
been exercised, and no additional options had been granted under the 1996
Stock Option Plan.
The Company's 1996 Employee Stock Purchase Plan was adopted by the Board of
Directors and the shareholders of the Company in April 1996. As of April 26,
1996, no shares of Common Stock had been issued under the 1996 Employee Stock
Purchase Plan.
No underwriters were engaged in connection with any of the foregoing sales
of securities. The shares of capital stock and securities issued in the above
transactions were offered and sold in reliance upon the exemption from
registration under Section 4(2) of the Securities Act or Regulation D or Rule
701 promulgated under the Securities Act, relative to sales by an issuer not
involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
**1 Form of Underwriting Agreement.
*3.1 Restated Articles of Organization of the Company, as amended.
*3.2 Form of Restated Articles of Organization of the Company.
*3.3 Amended and Restated By-Laws of the Company.
**4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of
the Company.
**5 Opinion of Hale and Dorr with respect to the validity of the
securities being offered.
*10.1 1994 Stock Option Plan.
*10.2 1996 Stock Option Plan.
*10.3 1996 Employee Stock Purchase Plan.
*10.4 Employment Letter Agreement dated February 6, 1996 between the
Company and George K. Hertz.
*10.5+ Billing and Related Services Agreement dated April 19, 1995 between
the Company and OAN Services, Inc. ("OAN").
*10.6+ Account Purchase Agreement dated September 15, 1992 between the
Company and OAN.
*10.7+ Software License Agreement dated March 30, 1995 between the Company
and Innovative Telecom Corporation ("ITC").
*10.8+ Service Bureau Agreement dated April 7, 1995 between the Company and
ITC.
*10.9 BCG-ITC Strategic Partnership Agreement Addendum Dated March 31, 1996
between the Company and ITC.
*10.10 License Agreement dated April 23, 1996 between the Company and
MicroDimensions, Inc.
*10.11+ Gateway Service Agreement dated June 5, 1995 between the Company and
SNET Diversified Group, Inc.
*10.12+ RCI Long Distance Term Plan Agreement dated November 21, 1994 between
the Company and RCI.
*10.13 Office Building Lease dated August 16, 1991 between the Company and
Takaji Kobayasi-II, Yoshio Yamashita and Takeshi Shiratori, Trustees
of STB Nominee Trust.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*10.14 Lease Agreement dated April 28, 1994 between the Company and BCG
Enterprises Corp.
*10.15 Commercial Lease dated January 24, 1996 between the Company and
Cummings Properties Management, Inc.
*10.16 Lease dated November 30, 1994, as amended, between the Company and
Teachers Realty Corporation.
*10.17 Commercial/Industrial Lease dated September 27, 1995 between the Voice
Systems Technology Inc. ("VST") and Schleuter Properties.
*10.18 Lease dated November 30, 1995, as amended, between VST and Society
Hill Office Park LTD.
*10.19 Master Lease Agreement dated April 11, 1996 between the Company and
Diversified Ventures, Inc.
*10.20 Option Agreement dated January 31, 1996 between the Company and WAC.
*10.21+ Distribution Agreement dated January 31, 1996 between the Company and
Wireless Americas Corp. ("WAC").
*10.22 Agreement dated April 22, 1996 between the Company and MDTelecom, Inc.
("MDT").
*10.23+ Memorandum of Understanding dated April, 1996 between the Company and
Milcon Communications (Hong Kong) Ltd.
*10.24 Subscription and Sale Agreement dated April 23, 1996 between the
Company and MDT.
*10.25+ Source Code Release Agreement dated April 23, 1996 between the Company
and MDT.
*10.26 End-User Purchase and License Agreement between the Company and
Teloquent Communications Corporation.
11 Statement re: Computation of Per Share Earnings.
*21 Subsidiaries of the Registrant.
**23.1 Consent of Hale and Dorr (included in Exhibit 5).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Ernst & Young LLP, Independent Auditors.
*24 Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Articles of
Organization and Amended and Restated By-Laws of the Registrant and the laws
of the Commonwealth of Massachusetts, or otherwise, the Registrant has been
advised that in the opinion of the
II-4
<PAGE>
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
(1) To provide the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to
each purchaser.
(2) That for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(3) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BOSTON,
COMMONWEALTH OF MASSACHUSETTS, ON THIS 14TH DAY OF MAY, 1996.
Boston Communications Group, Inc.
/s/ George K. Hertz
By:_____________________________
GEORGE K. HERTZ PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
President, Chief
/s/ George K. Hertz Executive Officer May 14, 1996
- ------------------------------------- (Principal
GEORGE K. HERTZ Executive Officer),
Director
Vice President,
* Finance and May 14, 1996
- ------------------------------------- Administration
FREDERICK VON MERING (Principal
Financial and
Accounting
Officer), Director
Chairman of the
* Board of Directors May 14, 1996
- -------------------------------------
PAUL J. TOBIN
Vice Chairman of the
/s/ Brian E. Boyle Board of Directors May 14, 1996
- -------------------------------------
BRIAN E. BOYLE
Director
* May 14, 1996
- -------------------------------------
JERROLD D. ADAMS
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Director
* May 14, 1996
- -------------------------------------
CRAIG L. BURR
Director
* May 14, 1996
- -------------------------------------
JAMES L. MCLEAN
Director
* May 14, 1996
- -------------------------------------
PAUL R. GUDONIS
/s/ George K. Hertz
*By ____________________________
GEORGE K. HERTZ
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
SCHEDULE II
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------------ --------------------- ------------ -------------
ADDITIONS
---------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS-- DEDUCTIONS-- BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- ----------- ------------ ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Reserves and
allowances deducted
from asset accounts:
Allowance for billing
adjustments and
uncollectible
accounts............ $545,637 -- $642,421(1) $304,366(2) $883,692
Year ended December 31,
1994:
Reserves and
allowances deducted
from asset accounts:
Allowance for billing
adjustments and
uncollectible
accounts............ 343,602 -- 449,508(1) 247,473(2) 545,637
Year ended December 31,
1993:
Reserves and
allowances deducted
from asset accounts:
Allowance for billing
adjustments and
uncollectible
accounts............ 235,253 -- 343,318(1) 234,969(2) 343,602
</TABLE>
- --------
(1) Billing adjustments recorded as a reduction of revenue.
(2) Settlement of billing adjustments.
S-1
<PAGE>
EXHIBIT INDEX
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
**1 Form of Underwriting Agreement.
*3.1 Restated Articles of Organization of the Company, as amended.
*3.2 Form of Restated Articles of Organization of the Company.
*3.3 Amended and Restated By-Laws of the Company.
**4.1 Specimen Certificate for shares of Common Stock, $.01 par
value, of the Company.
**5 Opinion of Hale and Dorr with respect to the validity of the
securities being offered.
*10.1 1994 Stock Option Plan.
*10.2 1996 Stock Option Plan.
*10.3 1996 Employee Stock Purchase Plan.
*10.4 Employment Letter Agreement dated February 6, 1996 between the
Company and George K. Hertz.
*10.5+ Billing and Related Services Agreement dated April 19, 1995
between the Company and OAN Services, Inc. ("OAN").
*10.6+ Account Purchase Agreement dated September 15, 1992 between the
Company and OAN.
*10.7+ Software License Agreement dated March 30, 1995 between the
Company and Innovative Telecom Corporation ("ITC").
*10.8+ Service Bureau Agreement dated April 7, 1995 between the
Company and ITC.
*10.9 BCG-ITC Strategic Partnership Agreement Addendum Dated March
31, 1996 between the Company and ITC.
*10.10 License Agreement dated April 23, 1996 between the Company and
MicroDimensions, Inc.
*10.11+ Gateway Service Agreement dated June 5, 1995 between the
Company and SNET Diversified Group, Inc.
*10.12+ RCI Long Distance Term Plan Agreement dated November 21, 1994
between the Company and RCI.
*10.13 Office Building Lease dated August 16, 1991 between the Company
and Takaji Kobayasi-II, Yoshio Yamashita and Takeshi Shiratori,
Trustees of STB Nominee Trust.
*10.14 Lease Agreement dated April 28, 1994 between the Company and
BCG Enterprises Corp.
*10.15 Commercial Lease dated January 24, 1996 between the Company and
Cummings Properties Management, Inc.
*10.16 Lease dated November 30, 1994, as amended, between the Company
and Teachers Realty Corporation.
*10.17 Commercial/Industrial Lease dated September 27, 1995 between
the Voice Systems Technology Inc. ("VST") and Schleuter
Properties.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
*10.18 Lease dated November 30, 1995, as amended, between VST and
Society Hill Office Park LTD.
*10.19 Master Lease Agreement dated April 11, 1996 between the
Company and Diversified Ventures, Inc.
*10.20 Option Agreement dated January 31, 1996 between the Company
and WAC.
*10.21+ Distribution Agreement dated January 31, 1996 between the
Company and Wireless Americas Corp. ("WAC").
*10.22 Agreement dated April 22, 1996 between the Company and
MDTelecom, Inc. ("MDT").
*10.23+ Memorandum of Understanding dated April, 1996 between the
Company and Milcon Communications (Hong Kong) Ltd.
*10.24 Subscription and Sale Agreement dated April 23, 1996 between
the Company and MDT.
*10.25+ Source Code Release Agreement dated April 23, 1996 between the
Company and MDT.
*10.26 End-User Purchase and License Agreement between the Company
and Teloquent Communications Corporation.
11 Statement re: Computation of Per Share Earnings.
*21 Subsidiaries of the Registrant.
**23.1 Consent of Hale and Dorr (included in Exhibit 5).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Ernst & Young LLP, Independent Auditors.
*24 Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
**To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- ------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Average common shares out-
standing.................... 2,610 3,218 3,336 3,336 3,336
Common stock equivalents
issued during 12 month
period prior to initial
public offering............. 625 625 625 625 625
Assumed conversion of
convertible preferred stock
upon initial public
offering.................... -- 5,005 5,005 5,005 5,005
Common stock equivalents..... -- -- 213 213 213
-------- -------- ------- --------- --------
Total...................... 3,235 8,848 9,179 9,179 9,179
======== ======== ======= ========= ========
Income (loss) from continuing
operations.................. $ (332) $ 289 $ 3,009 $ 16 $ 429
Accretion of dividends on re-
deemable preferred stock.... (1,030) (1,016) (950) (237) (237)
-------- -------- ------- --------- --------
Income (loss) from continuing
operations available to
common shareholders......... $ (1,362) $ (727) $ 2,059 $ (221) $ 192
======== ======== ======= ========= ========
Net income (loss)............ $ (1,454) $ 779 $ 1,893 $ (386) $ 192
======== ======== ======= ========= ========
Net income (loss) available
to common shareholders per
share:
Continuing operations...... $ (0.42) $ (0.08) $ 0.22 $ (0.02) $ 0.02
======== ======== ======= ========= ========
Net income (loss).......... $ (0.45) $ 0.09 $ 0.21 $ (0.04) $ 0.02
======== ======== ======= ========= ========
</TABLE>
Fully diluted earnings per share computations are the same as primary earnings
per share.
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 29, 1996, except for Notes 8 and 11 as to
which the date is April 26, 1996, in Amendment No. 1 to the Registration
Statement (Form S-1, No. 333-4128) and related Prospectus of Boston
Communications Group, Inc. for the registration of 4,398,750 shares of Common
Stock.
Our audit also included the financial statement schedule of Boston
Communication Group, Inc. listed in Item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts May 13, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report on the financial statements of Voice Systems Technology,
Inc. dated April 19, 1996 included in Amendment No. 1 to the Registration
Statement (Form S-1, No. 333-4128) and related Prospectus of Boston
Communications Group, Inc. for the registration of 4,398,750 shares of Common
Stock.
Ernst & Young LLP
Philadelphia, Pennsylvania
May 13, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 252,647 352,948
<SECURITIES> 0 0
<RECEIVABLES> 6,250,211 7,486,722
<ALLOWANCES> 883,692 909,330
<INVENTORY> 0 65,350
<CURRENT-ASSETS> 8,497,448 9,842,925
<PP&E> 6,394,401 8,027,555
<DEPRECIATION> 1,510,209 1,824,745
<TOTAL-ASSETS> 13,614,107 18,786,530
<CURRENT-LIABILITIES> 6,415,432 9,142,797
<BONDS> 0 0
0 0
15,897,176 16,133,945
<COMMON> 33,360 37,192
<OTHER-SE> (8,731,861) (6,527,404)
<TOTAL-LIABILITY-AND-EQUITY> 13,614,107 18,786,530
<SALES> 0 91,714
<TOTAL-REVENUES> 34,219,659 11,152,638
<CGS> 0 37,295
<TOTAL-COSTS> 26,195,332 8,371,910
<OTHER-EXPENSES> 5,895,037 2,046,176
<LOSS-PROVISION> 642,421 177,153
<INTEREST-EXPENSE> 150,746 5,792
<INCOME-PRETAX> 1,978,544 728,760
<INCOME-TAX> (1,030,000) 300,000
<INCOME-CONTINUING> 3,008,544 428,760
<DISCONTINUED> (165,654) 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,842,890 428,760
<EPS-PRIMARY> 0.21 0.02
<EPS-DILUTED> 0.21 0.02
</TABLE>
