<PAGE>
3,000,000 Shares
LOGO
Common Stock
------------
Of the 3,000,000 shares of Common Stock offered hereby, 2,775,000 shares are
being sold by Boston Communications Group, Inc. ("BCG" or the "Company") and
225,000 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. The Common Stock is quoted on the
Nasdaq National Market under the symbol "BCGI." On August 12, the last
reported sale price of the Company's Common Stock was $13.25 per share. See
"Price Range of Common Stock."
------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 HEREOF.
------------
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(1) COMPANY(2) SHAREHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................. $12.75 $0.725 $12.025 $12.025
- --------------------------------------------------------------------------------
Total(3)................... $38,250,000 $2,175,000 $33,369,375 $2,705,625
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting" for indemnification
arrangements with the Underwriters.
(2) Before deducting estimated expenses of $400,000, all of which will be
payable by the Company.
(3) The Company and certain Selling Shareholders have granted to the
Underwriters a 30-day option to purchase up to 450,000 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 the Company and Proceeds to Selling Shareholders
will be $43,987,500, $2,501,250, $36,075,000 and $5,411,250, 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
August 18, 1997.
Alex. Brown & Sons
INCORPORATED
Donaldson, Lufkin & Jenrette
SECURITIES CORPORATION
Furman Selz
THE DATE OF THIS PROSPECTUS IS AUGUST 13, 1997.
<PAGE>
[LOGO OF BOSTON COMMUNICATIONS GROUP, INC. APPEARS HERE]
PROVIDING INNOVATIVE SERVICES TO WIRELESS TELEPHONE CARRIERS.
[PICTURE OF MAP OF THE UNITED STATES INDICATING AREAS IN WHICH THE COMPANY'S
ROAMING SERVICES AND TELESERVICES ARE PROVIDED APPEARS HERE
LEGENDS TO THE MAP INCLUDE:
[COLOR] DENOTES: ROAMING SERVICES--SERVICE AREAS IN THE CONTINENTAL UNITED
STATES WHERE THE COMPANY PROVIDES ITS ROAMERPLUS(TM) SERVICE TO ONE OR BOTH OF
THE CELLULAR CARRIERS. THE COMPANY'S ROAMING SERVICE IS ALSO AVAILABLE IN
MEXICO CITY AND MAJOR MARKETS IN CANADA, ALASKA, HAWAII AND PUERTO RICO.
[COLOR] DENOTES: TELESERVICES--MARKETS FOR WHICH THE COMPANY PROVIDES CUSTOMER
SUPPORT SERVICES FOR WIRELESS CARRIERS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH
THIS OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE
OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN PERSONS PARTICIPATING IN THIS
OFFERING MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON NASDAQ IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE "UNDERWRITING."
<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. Unless otherwise indicated, all
information contained in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. 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.
THE COMPANY
Boston Communications Group, Inc. develops, markets and provides innovative
call processing and customer support teleservices and systems to wireless
telephone carriers. The Company's services and systems 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. The Company's principal service offerings include its ROAMERplus roaming
service, its customer support teleservices and its prepaid wireless 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 teleservices 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. The Company's prepaid wireless service, which
was introduced in early 1996 and offered in 72 U.S. markets as of June 30,
1997, enables wireless carriers to offer their services on a prepaid basis
using the Company's network of voice nodes (the "C/2/C Network"). The Company
has achieved significant growth in revenues over the past three years, with
revenues increasing from $18.3 million for the year ended December 31, 1994 to
$50.7 million for the year ended December 31, 1996.
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 wireless
subscribers in the United States increased from approximately 340,000 in
December 1985 to approximately 44 million in December 1996. 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. In addition, new revenue
opportunities, including the implementation of prepaid wireless services, are
expected to contribute to this growth. Industry sources have projected that the
number of prepaid wireless subscribers in the United States will grow to 9.4
million and that the total number of wireless 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 teleservices 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 1996 was being
used by approximately 80 cellular carriers that collectively hold licenses for
over 1,100 markets in the United
3
<PAGE>
States, Canada and Mexico, including nine of the 10 largest cellular carriers,
by number of subscribers, in the United States. Wireless carriers can offer
ROAMERplus service without significant additional investment in equipment,
technology or personnel. The Company introduced its teleservices in 1993 and
currently provides these services to 10 wireless carriers. The Company's
teleservices 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 pricing for teleservices a strategic and economic
choice for wireless carriers.
The Company is in the process of expanding its C/2/C Network, which uses
proprietary software, to support delivery of its prepaid wireless services. The
Company believes that this prepaid wireless service is attractive to wireless
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. The Company is expanding its C/2/C Network to
support a number of existing and pending contracts with wireless carriers in
the United States, including a proposed agreement with AT&T to provide prepaid
service in all wireless markets serviced by AT&T.
The BCG Systems Division sells systems for prepaid wireless calling on a
turn-key basis primarily to international customers and also sells systems for
voice mail, fax mail and other enhanced services.
RECENT DEVELOPMENTS
From July 1, 1996 through mid-July 1997, the Company significantly expanded
both the coverage of and subscribers served by its C/2/C Network. In that time,
the Company entered into contracts to provide prepaid wireless services with
five wireless carriers, increasing the total population located in areas
serviceable under the Company's prepaid wireless contracts to over 108 million.
The Company also has announced a pending contract with AT&T to provide prepaid
wireless service in all markets serviced by AT&T, which would increase the
total population located in areas serviceable under the Company's prepaid
wireless contracts to over 176 million. The contract with AT&T has yet to be
finalized and there can therefore be no assurance that such contract will
ultimately be concluded. Over the same period, the Company expanded the number
of operational C/2/C Network voice nodes to 27, and the number of U.S.
subscribers using the C/2/C Network increased to approximately 137,000.
In the second quarter of 1997, the Company entered into a letter of intent to
form a joint venture with Front-End Services Corporation to distribute prepaid
calling cards on behalf of wireless carriers at over 75,000 retail locations
nationwide. In addition, BCG is commencing a cooperative arrangement with Radio
Shack to facilitate Radio Shack's sale of prepaid wireless services provided by
carriers utilizing the Company's C/2/C Network. Under this arrangement, Radio
Shack is able to sell prepaid wireless services at its retail locations without
issuing a prepaid card. Each of these arrangements is in the initial stages of
implementation and requires the cooperation and participation of the applicable
local wireless carrier.
Since June 1996, the Company has devoted significant effort to developing its
presence in the Latin American market. The Company sold a prepaid system for
over $5.0 million to Telcel, the largest wireless carrier in Mexico. In
addition, the Company sold another prepaid system for $1.4 million to Cellstar,
a reseller of wireless services in Venezuela.
In July 1997, the Company and AT&T signed a letter of intent pursuant to
which holders of AT&T calling cards will be entitled to use those cards to pay
for calls made through the Company's ROAMERplus service.
The Company was organized as a Massachusetts corporation in August 1988. The
Company's principal office is located at 100 Sylvan Road, Woburn, Massachusetts
01801, and its telephone number is (617) 692-7000.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company....... 2,775,000 shares
Common Stock offered by the Selling Share-
holders.................................. 225,000 shares
Common Stock to be outstanding after the
offering................................. 15,644,362 shares(1)
Use of proceeds........................... For expansion of the C/2/C Network,
the purchase of the 20% minority
interest in Wireless America Corp.,
possible acquisitions and other
general corporate purposes,
including working capital
Nasdaq National Market symbol............. BCGI
</TABLE>
- --------
(1) Includes 10,000 shares of Common Stock issuable pursuant to options to be
exercised by a Selling Shareholder in connection with this offering.
Excludes 1,739,563 shares of Common Stock issuable upon the exercise of
options outstanding as of June 30, 1997 at a weighted average exercise
price per share equal to $5.94. See "Management--Executive Compensation--
Stock Plans."
This Prospectus contains certain forward-looking statements. For this
purpose, any statements contained in this Prospectus that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, statements such as "may," "will," "except," "believe,"
"anticipate," "estimate," or "continue" or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, and actual results may differ materially depending on a variety
of factors including those described in Risk Factors.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS
DATA:
Revenues:
Roaming services...... $ 6,275 $ 8,236 $16,004 $25,446 $32,234 $ 15,541 $ 15,060
Teleservices.......... -- 458 2,330 8,774 13,413 7,150 8,164
Prepaid wireless
services............. -- -- -- -- 312 69 2,303
System sales.......... -- -- -- -- 4,692 1,233 6,445
------- ------- ------- ------- ------- -------- --------
Total revenues...... 6,275 8,694 18,334 34,220 50,651 23,993 31,972
Operating income
(loss)................. 291 (269) 405 2,129 610 1,077 (120)
Income (loss) from
continuing
operations(1).......... 259 (332) 288 3,008 599 573 136
Income (loss) from
discontinued
operations............. (1,196) (92) 1,507 (165) -- -- --
Net income (loss)....... (937) (424) 1,795 2,843 599 573 136
Accretion of dividends
on redeemable preferred
stock.................. (1,030) (1,030) (1,016) (950) (451) (451) --
Net income (loss)
available to common
shareholders........... (1,967) (1,454) 779 1,893 148 122 136
Net income (loss)
available to common
shareholders per common
share(2):
Continuing
operations........... $ (0.26) $ (0.42) $ (0.08) $ 0.22 $ 0.01 $ 0.01 $ 0.01
Net income (loss)..... $ (0.65) $ (0.45) $ 0.09 $ 0.21 $ 0.01 $ 0.01 $ 0.01
Shares used in computing
net income (loss) per
share.................. 3,012 3,235 8,848 9,179 11,259 9,334 13,266
Supplemental net income
available to common
shareholders per common
share(3)............... $ 0.05
Shares used in computing
supplemental net income
per share.............. 12,427
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------
AS
ACTUAL ADJUSTED(4)
------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and short-term invest-
ments.................. $ 3,799 $ 36,817
Working capital......... 13,026 46,044
Total assets............ 54,382 87,400
Shareholders' equity.... 43,782 76,800
</TABLE>
- -------
(1) 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.
(2) See Note 2 of Notes to Consolidated Financial Statements.
(3) 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 the initial public offering price of the
Company's Common Stock of $14.00 per share were required to complete the
redemption of the Company's Redeemable Preferred Stock. Net income
available to common shareholders is increased by the dividends accreted in
1996 on the Redeemable Preferred Stock. See Note 2 of Notes to Consolidated
Financial Statements.
(4) Adjusted to give effect to the sale by the Company of 2,775,000 shares of
Common Stock offered hereby (at a public offering price of $12.75 per share
and after deducting underwriting discounts and commissions and estimated
offering expenses) and the application of the net proceeds therefrom.
Assumes the exercise of an option to purchase 10,000 shares of Common Stock
by a Selling Shareholder in connection with this offering.
6
<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 81.2%, 84.6%, 82.4% and 77.1% of
the Company's total revenues in 1994, 1995, 1996 and the first six months of
1997, respectively. Ameritech Cellular, Bell Atlantic NYNEX Mobile and
BellSouth Mobility accounted for approximately 14.8%, 12.3% and 11.4%,
respectively, of total revenues in 1996. Bell Atlantic NYNEX Mobile, Telcel
and Ameritech Cellular accounted for approximately 12.7%, 12.2% and 10.7%,
respectively, of total revenues in the first six months of 1997. In addition,
Ameritech Cellular and SNET Telecommunications, Inc. accounted for
approximately 40.4% and 26.1%, respectively, of the Company's teleservices
revenues in 1996. Ameritech Cellular, LA Cellular, Bell Atlantic NYNEX Mobile
and SNET Telecommunications, Inc. accounted for approximately 29.6%, 18.3%,
18.2% and 14.4%, respectively, of the Company's teleservice revenues in the
first six months of 1997. Further, system sales to one customer accounted for
60.3% of the Company's system sales for the first six months of 1997. This
concentration of customers can cause the Company's revenues and earnings to
fluctuate from quarter to quarter, based on the volume of call traffic
generated through these customers, the amount of services being performed
pursuant to teleservices programs and the level of system sales. 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, including its significant customers, are generally for periods of
one to two years and, except for certain teleservices and prepaid wireless
services 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."
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, variations in the level of system sales, 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 roaming services 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." Teleservices revenues
may be influenced by the requirements of one or more of the Company's
significant teleservice customers, including engagement of the Company for
implementing or assisting in implementing special projects of limited
duration. Revenues from system sales may be influenced by the timing of
purchase decisions by the Company's customers and variations in the Company's
sales cycle caused by factors such as the size of the transaction, customer
purchasing patterns, the timing of new product and service introductions and
general economic conditions. Although the Company was profitable during 12 out
of the last 13 quarters, the Company was not profitable in any period prior to
that time, and the Company experienced a significant reduction in its
profitability in 1996 and an operating loss in the first six months of 1997,
due to expenses associated with the development of its C/2/C Network. The
Company expects to continue to incur significant expenses in connection with
the expansion of its C/2/C Network to implement services to meet contractual
obligations. In particular, the
7
<PAGE>
Company is expanding its C/2/C Network in anticipation of entering into a
proposed agreement with AT&T to provide prepaid service in all wireless
markets serviced by AT&T. If that agreement is not ultimately consummated,
costs incurred in connection with the expansion of the C/2/C Network could
have a significant negative effect on the Company's results of operations.
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 on the Company's results of operations. In
addition, the Company hired a significant number of employees in 1996 and the
first six months of 1997, and expects to continue hiring additional sales,
customer service, teleservice, management, software development and technical
support employees during 1997 as it continues to develop and expand its
operations, including the C/2/C Network. This significant increase in its
workforce may negatively impact the Company's operating margins in the future,
particularly if either the Company's expansion of its prepaid wireless service
or its sales of prepaid systems are not successful.
The Company recently began selling systems for prepaid wireless service in
addition to providing prepaid wireless service under ongoing network-based
contracts. Some of the Company's prepaid wireless service contracts also grant
the carrier the option to purchase the system being used under the contract.
Because the timing of system sales is difficult to predict, variations in
system sales could result in significant variations in revenues between
quarters. Further, a significant increase in system sales in the United States
could decrease the Company's ability to generate recurring revenues from its
C/2/C Network. System sales to existing network customers would decrease the
Company's recurring revenues from its C/2/C Network and could adversely affect
the Company's business, financial condition and results of operations.
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 ROAMERplus 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.
Dependence on Cellular Market; Uncertain Acceptance of Prepaid Wireless
Service and PCS. The Company historically has provided its services, including
roaming services and teleservices, almost exclusively to cellular carriers and
their subscribers. Although 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 service is now
being used by a substantial number of the cellular carriers in the United
States, further growth in the Company's revenues from the ROAMERplus service
will need to be generated by general growth of the wireless roaming market, if
any, as opposed to the addition of new carrier customers. Demand for the
Company's ROAMERplus services has been, and may in the future be, adversely
affected by improved fraud programs under intercarrier roaming agreements and
the increase in the number of roaming calls subject to intercarrier roaming
agreements. Declines in demand for the Company's services or systems, whether
as a result of competition, technological change, general
8
<PAGE>
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
wireless carriers of the Company's prepaid wireless service and systems and
the use of the Company's services and systems 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."
Development and Operation of C/2/C Network and Prepaid Systems. The Company
is currently devoting significant resources to the expansion of its prepaid
wireless service and systems, including continued expansion of its C/2/C
Network. Further, the Company is in the process of installing, at its own
expense, the voice nodes and other infrastructure required to expand the C/2/C
Network to meet the requirements of existing and pending contracts. There can
be no assurance that the Company will successfully complete the expansion of
the C/2/C Network or its prepaid wireless service in a timely fashion, that
the market for the Company's prepaid wireless service will continue to
develop, that pending contracts will be implemented as expected, or that the
Company will be able to successfully operate the C/2/C Network. If the Company
is not successful in its expansion of the C/2/C Network, if the market for
prepaid wireless services develops more slowly than expected, if the existing
or pending contracts are not implemented as expected, or if the Company's
prepaid wireless service becomes subject to significant competitive pressures,
the Company's business, results of operations and financial condition will be
materially and adversely affected. In addition, the Company has only recently
begun selling prepaid wireless systems as well as offering prepaid wireless
services. The Company's experience in manufacturing, distributing, licensing
and selling advanced technological systems, particularly to international
customers, is limited. There can be no assurance that demand for the Company's
prepaid systems will develop, or that the Company will develop and manage a
distribution network for the sale of such systems successfully. See
"Business--Industry Background."
Rapid Industry Change. The Company's future success will depend on the
continued use of its existing services and systems, the acceptance of new
services in the wireless industry and the Company's ability to develop new
services and systems or adapt existing services and systems to keep pace with
changes in the wireless telephone industry. Technological changes or
developments in the wireless industry, such as improved switching
technologies, further industry consolidation or improved fraud prevention,
could make wireless 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 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 or systems 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."
Limited Operating History; Accumulated Deficit. The Company was founded in
1988 but did not introduce its ROAMERplus service until 1991, did not
introduce its teleservices until 1993 and introduced its prepaid wireless
service and systems in 1996. Accordingly, the Company has only a limited
operating history for the businesses that generated substantially all of its
revenues from continuing operations since January 1, 1994. The Company did not
become profitable until 1994, realized an operating loss in the first six
months of 1997 and, as of June 30, 1997, had an accumulated deficit of $9.5
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."
9
<PAGE>
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. In addition, the Company's Chief
Executive Officer resigned for personal reasons in April 1997. Paul Tobin, the
Chairman of the Company, is serving as the acting President and Chief
Executive Officer of the Company while the Company seeks a new President and
chief executive. If the Company's management 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
teleservices 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 1996 and the first six
months of 1997, 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 and
Employees."
Competition. The market for sales of services and systems to wireless
carriers is highly competitive and subject to rapid change. A number of
companies currently offer one or more of the services or systems 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 and product 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 be 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
10
<PAGE>
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 and 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 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. In
addition, the Company is expanding its operations, particularly system sales,
into markets outside of the United States. The laws of some foreign countries
do not protect proprietary rights to the same extent as do the laws of the
United States.
Some of the software used to support the Company's roaming services and
prepaid wireless services and systems 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 switch and the back-up switch used to handle the
Company's ROAMERplus business. Although the Company has recently enhanced 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
11
<PAGE>
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 databases 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.
Risks Associated with International Operations. The Company is expanding its
operations into markets outside the United States. In order to expand
international sales of services and systems in subsequent periods, the Company
must establish additional foreign operations and hire additional personnel.
This will require significant management attention and financial resources and
could materially adversely affect the Company's business, financial condition
and results of operations. In addition, there can be no assurance that the
Company will be able to maintain or increase international market demand for
the Company's services or systems. The Company's international sales are
primarily denominated in U.S. dollars. An increase in the value of the U.S.
dollar relative to foreign currencies could make the Company's products more
expensive and, therefore, potentially less competitive in those markets.
Currently, the Company does not employ currency hedging strategies to reduce
this risk. In addition, the Company's international business may be subject to
a variety of risks, including difficulties in collecting international
accounts receivable or obtaining U.S. export licenses, potentially longer
payment cycles, increased costs associated with maintaining international
marketing efforts, the introduction of non-tariff barriers and higher duty
rates and difficulties in enforcement of contractual obligations and
intellectual property rights. There can be no assurance that such factors will
not have a material adverse effect on the Company's future international sales
and, consequently, on the Company's business, financial condition and results
of operations.
Risks Associated with Strategic Relationships and Acquisitions. The Company
continually evaluates opportunities to acquire additional products,
technologies or businesses. Acquisitions may result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities, and amortization expense related to intangible assets acquired,
any of which could materially adversely affect the Company's financial
condition and results of operations. In addition, acquired businesses may be
experiencing operating losses, which may adversely affect the Company's
earnings. Acquisitions involve a number of risks, including difficulties in
the assimilation of the acquired company's operations and products, diversion
of management's resources, uncertainties associated with operating in new
markets and working with new customers, and the potential loss of the acquired
company's key employees.
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 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."
12
<PAGE>
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 systems, impede the
Company's ability to offer competitive services or systems 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."
Possible Volatility of Stock Price. The trading in the Company's Common
Stock has been and may continue to be subject to wide fluctuations in response
to 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.
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 "Price Range of Common 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 15,644,362 shares of Common
Stock outstanding, of which 7,428,350 (assuming no exercise of the
Underwriters' over-allotment option) will be eligible for sale without
restriction by persons who are not affiliates of the Company. Following this
offering, 8,216,012 outstanding shares of Common 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 5,233,466 of
these shares will be eligible for sale in the public market pursuant to Rule
144(k) immediately after this offering. The holders of approximately 2,693,705
shares of Common Stock have agreed not to publicly offer, sell or otherwise
dispose of such shares for 90 days after the date of this Prospectus, without
the prior consent of Alex. Brown & Sons Incorporated.
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 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.
13
<PAGE>
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 $33.0 million, ($35.7
million if the Underwriters' over-allotment option is exercised in full) at an
offering price per share of $12.75 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 anticipates that up to $15 million of the net proceeds will be
used over the next 18 months for capital and other expenditures in connection
with the expansion of the C/2/C Network. The timing and amount of the
expenditures for expansion of the C/2/C Network is dependent upon the timing
and extent of the roll-out of prepaid wireless services by the Company's
customers, including the roll-out under the Company's pending contract with
AT&T.
In addition, the Company intends to use $1.3 million of the net proceeds to
purchase the remaining 20% interest in Wireless America Corp. that it does not
currently own. See "Business--Litigation."
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
The Company has never declared or paid any cash dividends on its Common
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.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol "BCGI" since June 18, 1996. Prior to June 18, 1996, the
Common Stock was not publicly traded. The following table sets forth for the
periods indicated, the high and low sales price of the Common Stock as
reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- ----
<S> <C> <C>
1996
Second Quarter (June 18, 1996 to June 30, 1996)............. $16 1/2 $14
Third Quarter............................................... $18 1/4 $12
Fourth Quarter.............................................. $16 1/8 $ 4 3/8
1997
First Quarter............................................... $ 7 1/8 $ 3 7/8
Second Quarter.............................................. $15 1/16 $ 4 1/8
Third Quarter (July 1, 1997 to August 12, 1997)............. $17 1/4 $12 1/4
</TABLE>
On August 12, 1997, the last reported sale price of the Company's Common
Stock was $13.25 per share. On August 12, 1997, the Company had approximately
85 holders of record.
14
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1997 and the capitalization as adjusted to reflect the sale by the
Company of 2,775,000 shares of Common Stock offered hereby (at a public
offering price of $12.75 per share), after deducting underwriting discounts
and commissions and estimated offering expenses and application of the net
proceeds therefrom. This table should be read in conjunction with the
Company's Consolidated Financial Statements and related Notes thereto and
other financial information included in this Prospectus. See "Use of
Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------
AS
ACTUAL ADJUSTED(1)
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Shareholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares
authorized, no shares issued and outstanding (actual
and as adjusted)....................................... $ -- $ --
Common Stock, $.01 par value, 35,000,000 shares
authorized; 12,905,782 shares issued (actual),
15,690,782 shares issued
(as adjusted).......................................... 129 157
Additional paid-in capital.............................. 53,489 86,479
Treasury Stock (46,420 shares, at cost)................. (372) (372)
Accumulated deficit..................................... (9,464) (9,464)
------- -------
Total shareholders' equity............................ 43,782 76,800
------- -------
Total capitalization.................................. $43,782 $76,800
======= =======
</TABLE>
- --------
(1) Assumes the exercise of an option to purchase 10,000 shares of Common
Stock by a Selling Shareholder in connection with this offering and the
receipt by the Company of the proceeds therefrom. Excludes 1,739,563
shares of Common Stock issuable upon the exercise of options outstanding
as of June 30, 1997 at a weighted average exercise price per share equal
to $5.94.
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, 1994, 1995 and 1996 and with respect to the Company's consolidated balance
sheets as of December 31, 1995 and 1996 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, 1992 and 1993 and with respect to the Company's
consolidated balance sheets as of December 31, 1992, 1993 and 1994 have been
derived from the Company's audited Consolidated Financial Statements and Notes
thereto, which are not included herein. The selected consolidated financial
data as of June 30, 1997 and for the six months ended June 30, 1996 and 1997
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 six months ended June 30, 1997 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.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- -------- -------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues:
Roaming services ...... $ 6,275 $ 8,236 $ 16,004 $25,446 $32,234 $15,541 $15,060
Teleservices........... -- 458 2,330 8,774 13,413 7,150 8,164
Prepaid wireless
services.............. -- -- -- -- 312 69 2,303
System sales........... -- -- -- -- 4,692 1,233 6,445
------- -------- -------- ------- ------- ------- -------
Total revenues....... 6,275 8,694 18,334 34,220 50,651 23,993 31,972
Operating expenses:
Cost of service
revenues.............. 4,252 6,638 14,212 26,100 36,606 17,775 20,301
Cost of system
revenues.............. -- -- -- -- 2,576 590 3,735
Engineering, research
and development....... 96 152 270 839 3,221 1,163 2,197
Sales and marketing.... 290 504 1,268 1,934 2,949 1,196 2,293
Management fees........ -- 840 1,008 1,008 252 252 --
General and
administrative........ 1,231 585 775 1,321 2,328 1,103 1,473
Depreciation and
amortization.......... 115 244 396 889 2,109 837 2,093
------- -------- -------- ------- ------- ------- -------
Total operating
expenses............ 5,984 8,963 17,929 32,091 50,041 22,916 32,092
------- -------- -------- ------- ------- ------- -------
Operating income
(loss)................. 291 (269) 405 2,129 610 1,077 (120)
Interest income
(expense).............. (30) (41) (64) (151) 589 (81) 397
------- -------- -------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes.... 261 (310) 341 1,978 1,199 996 277
Provision (benefit) for
income taxes........... 2 22 53 (1,030) 600 423 141
------- -------- -------- ------- ------- ------- -------
Income (loss) from
continuing
operations(1).......... 259 (332) 288 3,008 599 573 136
Discontinued operations:
Income (loss) from
operations............ (1,116) 232 104 (129) -- -- --
Gain (loss) on
disposal.............. (80) (324) 1,403 (36) -- -- --
------- -------- -------- ------- ------- ------- -------
Income (loss) from
discontinued
operations............. (1,196) (92) 1,507 (165) -- -- --
------- -------- -------- ------- ------- ------- -------
Net income (loss)....... (937) (424) 1,795 2,843 599 573 136
------- -------- -------- ------- ------- ------- -------
Accretion of dividends
on redeemable preferred
stock.................. (1,030) (1,030) (1,016) (950) (451) (451) --
------- -------- -------- ------- ------- ------- -------
Net income (loss)
available to common
shareholders........... $(1,967) $ (1,454) $ 779 $ 1,893 $ 148 $ 122 $ 136
======= ======== ======== ======= ======= ======= =======
Net income (loss)
available to common
shareholders per common
share(2):
Continuing opera-
tions................. $ (0.26) $ (0.42) $ (0.08) $ 0.22 $ 0.01 $ 0.01 $ 0.01
======= ======== ======== ======= ======= ======= =======
Net income (loss)...... $ (0.65) $ (0.45) $ 0.09 $ 0.21 $ 0.01 $ 0.01 $ 0.01
======= ======== ======== ======= ======= ======= =======
Shares used in computing
net income (loss) per
share.................. 3,012 3,235 8,848 9,179 11,259 9,334 13,266
Supplemental net income
available to common
shareholders per common
share(2)............... $ 0.05
=======
Shares used in computing
supplemental net income
per share.............. 12,427
=======
<CAPTION>
DECEMBER 31,
---------------------------------------------
JUNE, 30
1992 1993 1994 1995 1996 1997
------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $ 890 $ 681 $ 204 $ 253 $21,241 $ 3,799
Working capital......... 372 695 1,098 2,082 26,433 13,026
Total assets............ 6,107 6,889 8,867 13,613 51,959 54,382
Redeemable preferred
stock.................. 13,901 14,930 14,947 15,896 -- --
Shareholders' equity
(deficit).............. (9,916) (11,370) (10,591) (8,698) 42,893 43,782
</TABLE>
- -------
(1) 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.
(2) 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 the initial public offering price of the
Company's Common Stock of $14.00 per share were required to complete the
redemption of the Company's Redeemable Preferred Stock. Net income
available to common shareholders is increased by the dividends accreted in
1996 on the Redeemable Preferred Stock. See Note 2 of Notes to
Consolidated Financial Statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the consolidated financial
statements and notes thereto included elsewhere in this Prospectus.
OVERVIEW
Boston Communication Group, Inc. develops, markets and provides innovative
call processing and customer support teleservices and systems to wireless
telephone carriers. The Company's services and systems 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. The Company's principal service offerings include its ROAMERplus
roaming services, its teleservices and its prepaid wireless 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 teleservices 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. The Company's prepaid wireless services enable
wireless carriers to offer their services on a prepaid basis using the C/2/C
Network.
The Company introduced its ROAMERplus service in 1991 and introduced its
teleservices in 1993. BCG introduced its prepaid wireless service in early
1996 and began selling prepaid wireless systems, primarily to wireless
carriers outside the United States, in mid-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 wireless
subscribers using the service and receives payment for teleservices and
prepaid wireless services from the applicable carrier. Service revenues are
recognized at the time the service is provided and are recorded net of
estimated chargebacks and other billing adjustments. The Company recognizes
revenue from the sale of systems at the time systems are shipped.
The Company's ROAMERplus service is now being used by a substantial number
of the wireless carriers in the United States. Accordingly, further growth in
the Company's revenues from the ROAMERplus service will need to be generated
by general growth of the wireless roaming market, if any, as opposed to the
addition of new carrier customers. Recently, growth in the roaming market has
slowed significantly because, the Company believes, many of the new wireless
subscribers are lower-use, non-business consumers who are less likely to roam.
In addition, there has been a decrease in the frequency of the suspension of
intercarrier roaming agreements due to improved fraud controls implemented by
carriers. The Company does not expect, therefore, that its roaming services
revenues will continue to grow at historic rates and there can be no assurance
that those revenues will grow at all in the future.
The Company began offering its prepaid wireless services on a commercial
basis in the second quarter of 1996. Since initial implementation of the
network, the Company has entered into contracts to provide prepaid wireless
services for ten wireless carriers, increasing the total population located in
areas serviceable under the Company's prepaid wireless contracts to over 108
million. The implementation of this network resulted in significant up front
costs during 1996 and the first six months of 1997. These costs include
personnel and development costs associated with the implementation and
deployment of the C/2/C Network. Due to an increase in the number of
commitments and contracts in place to deploy the C/2/C Network in numerous
additional markets throughout the United States and the need to support future
development and enhancements, the Company expects that it will continue to
incur additional capital and personnel costs to support the C/2/C Network. As
a percentage of total revenues, these costs and other costs to support the
C/2/C Network will continue to be significant until the subscriber base and
usage revenues grow sufficiently to more fully absorb operating costs.
18
<PAGE>
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 voice processing platform with enhanced features for providing
prepaid cellular and enhanced services to cellular subscribers, which is now
in commercial use. VST's platform uses 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.
In June 1996, BCG completed an initial public offering and sold 3,918,555
shares of its Common Stock which raised net proceeds to the Company of
approximately $49.8 million. Approximately $16.3 million of the net proceeds
were used to redeem outstanding shares of the Company's Redeemable Preferred
Stock and accrued dividends on such stock. As of June 30, 1997, $3.5 million
of the proceeds were used to repay short-term and long-term borrowings and
approximately $14.8 million of the net proceeds were used for capital
expenditures in connection with the deployment of the C/2/C Network.
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>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------
1994 1995 1996 1996 1997
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues:
Roaming services.................... 87.3% 74.4% 63.6% 64.8% 47.1%
Teleservices........................ 12.7 25.6 26.5 29.8 25.5
Prepaid wireless services........... -- -- 0.6 0.3 7.2
System sales........................ -- -- 9.3 5.1 20.2
------- ------- ------- ----- -----
Total revenues..................... 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of service revenues............ 77.5 76.3 72.3 74.1 63.5
Cost of system revenues............. -- -- 5.1 2.5 11.7
Engineering, research and
development........................ 1.5 2.5 6.4 4.8 6.9
Sales and marketing................. 6.9 5.7 5.8 5.0 7.2
Management fees..................... 5.5 2.9 0.5 1.0 --
General and administrative.......... 4.2 3.8 4.6 4.6 4.6
Depreciation and amortization....... 2.2 2.6 4.1 3.5 6.5
------- ------- ------- ----- -----
Total operating expenses........... 97.8 93.8 98.8 95.5 100.4
------- ------- ------- ----- -----
Operating income (loss).............. 2.2 6.2 1.2 4.5 (0.4)
Interest income (expense)............ (0.3) (0.4) 1.2 (0.3) 1.2
------- ------- ------- ----- -----
Income from continuing operations
before income taxes................. 1.9 5.8 2.4 4.2 0.8
Provision (benefit) for income
taxes............................... 0.3 (3.0) 1.2 1.8 0.4
------- ------- ------- ----- -----
Income from continuing operations.... 1.6% 8.8% 1.2% 2.4% 0.4%
======= ======= ======= ===== =====
</TABLE>
19
<PAGE>
Comparison of Six Months Ended June 30, 1996 and June 30, 1997
Service and System Revenues
Total revenues increased 33.3% from $24.0 million in the six months ended
June 30, 1996 to $32.0 million in the six months ended June 30, 1997. Roaming
service revenues decreased 3.1% or $481,000 from the six months ended June 30,
1996 to the same period ended June 30, 1997. The decrease in roaming service
revenues resulted from declining trends in industry-wide cellular roaming and
the decrease in the frequency of the suspension of intercarrier roaming
agreements due to improved fraud controls implemented by carriers. Teleservice
revenues increased 13.9% or $1.0 million for the six month period ended June
30, 1997 compared to the same period in the prior year. The increase resulted
primarily from additional service programs provided to new carrier customers,
the expansion of services provided to existing customers and the addition of
teleservice programs for users of the Company's prepaid wireless services.
Revenues generated from prepaid wireless services for the six months ended
June 30, 1997 increased substantially from $69,000 in the six months ended
June 30, 1996 to $2.3 million in the six months ended June 30, 1997. This
increase was due to the increase in the number of markets where C/2/C prepaid
services were commercially available and increased usage in these markets. As
of June 30, 1997, thirty-three C/2/C Network switches were
deployed in various markets throughout the United States. Of these switches,
twenty-seven were fully operational and processing live transactions by the
end of the second quarter. System sales increased 433.3% or $5.2 million from
the six month period ended June 30, 1996 to the same period ended June 30,
1997. The increase resulted primarily from the sale of systems in Mexico and
South America.
Cost of Service Revenues
Cost of service revenues consists primarily of cellular network and landline
costs to support both roaming and prepaid wireless services in addition to the
direct labor and benefits associated with operator assisted roaming service
calls and teleservice calls. Cost of service revenues increased from 78.1% of
service revenues for the six months ended June 30, 1996 to 79.5% of service
revenues for the six months ended June 30, 1997. The increase in cost of
service revenues as a percentage of service revenues was primarily due to the
high initial operating costs as subscribers are added and usage is generated
on the C/2/C Network.
Cost of System Revenues
Cost of system revenues represents the cost of prepaid and voice systems
sold. Cost of system revenues increased from 47.9% of system revenues for the
six months ended June 30, 1996 to 58.0% of system revenues for the six months
ended June 30, 1997. The increase in cost of system revenues as a percentage
of system revenues for the six month period ended June 30, 1997 reflects the
lower margins generated from the sale of systems in the first quarter of 1997
to continue the expansion of a prepaid wireless system in Mexico and, to a
lesser extent, the full six months of operations of the systems division.
Engineering, Research and Development Expenses
Engineering, research and development expenses include primarily the
salaries and benefits for software development and engineering personnel
associated with the development, implementation and maintenance of existing
and new services. Engineering, research and development expenses increased
$1.0 million or 88.9% from the six months ended June 30, 1996 to the six
months ended June 30, 1997. The increase was principally due to the costs
associated with the Company's hiring of new personnel to support the
development, implementation and deployment of the C/2/C Network and, to a
lesser extent, additional personnel to support the expansion of teleservices.
Engineering, research and development expenses are expected to increase in
1997 as additional personnel are added to support the growth of the
C/2/C Network.
Sales and Marketing Expenses
Sales and marketing expenses include direct sales force salaries and
commissions, travel expenses, and the cost of trade shows, advertising and
other promotional expenses. Sales and marketing expenses
20
<PAGE>
increased $1.1 million or 91.7% from the six months ended June 30, 1996 to the
six months ended June 30, 1997. The increase in sales and marketing expenses
was due to additional salaries, benefits and other expenditures to support the
more sales-intensive prepaid wireless service business and concentrated sales
and marketing efforts related to teleservices. In addition, the acquisitions
of Voice Systems Technology Inc. (VST) and Wireless Americas Corp. (WAC) in
1996 resulted in the Company incurring increased expenditures to support
system sales globally.
General and Administrative Expenses
General and administrative expenses include salaries, benefits and other
expenses that provide administrative support to the Company. For the six
months ended June 30, 1997 general and administrative expenses increased
$118,000 or 8.7% from the same period in the prior year. The increase resulted
principally from the addition of staff to support the growth of the Company's
operations and to a lesser extent, the costs associated with being a publicly
traded company.
Depreciation and Amortization Expenses
Depreciation and amortization expense include depreciation of
telecommunications systems, furniture and equipment, leasehold improvements
and goodwill. The Company provides for depreciation using the straight-line
method over the estimated useful lives of the assets, which range from three
to seven years. Goodwill related to the acquisitions of VST and WAC is being
amortized over eight years. Depreciation and amortization expenses increased
$1.3 million or 162.5% during the six month period ended June 30, 1997
compared to the same period in the prior year. The increases were due
primarily to amortization of goodwill from the Company's two acquisitions and
depreciation of additional telecommunications equipment and software to
support the Company's roaming services, teleservices and prepaid wireless
services. In addition, the expansion of the Company's call centers and system
assembly facility resulted in increased depreciation of furniture and
equipment and leasehold improvements. Depreciation and amortization expenses
are expected to continue to increase due to a full year of goodwill
amortization from the VST and WAC acquisitions and increased depreciation of
telecommunications systems associated with teleservices and the expansion of
the C/2/C Network.
Interest Income (Expense), Net
Interest income (expense), net increased $478,000 for the six month period
ended June 30, 1997 as compared to the same period in the prior year. The
increase resulted primarily from interest earned on the short term investments
from the net proceeds of the Company's initial public offering in June 1996.
Provision for Income Taxes
The Company's effective income tax rate for the six month period ended June
30, 1997 reflects an increase from the prior year due to the non-deductibility
of goodwill amortization from the acquisitions of VST and WAC. The effective
income tax rate is expected to continue to be greater than 40% for the
remainder of 1997 due to the impact of non-deductible goodwill.
Comparison of Years Ended December 31, 1996 and December 31, 1995
Service and System Revenues. Total revenues increased 48.2% from $34.2
million in the year ended December 31, 1995 to $50.7 million in the year ended
December 31, 1996. Roaming services revenues increased 26.8% from $25.4
million in the year ended December 31, 1995 to $32.2 million in the year ended
December 31, 1996, due primarily to increased revenues generated by higher
call volumes from existing carrier customers. The increase in roaming services
revenues generated from existing carrier customers resulted from the general
growth in the number of wireless subscribers, increased roaming by wireless
subscribers and increased frequency in the suspension of inter-carrier roaming
agreements
21
<PAGE>
between wireless carriers due to greater incidents of cellular fraud.
Teleservices revenues increased 52.3% from $8.8 million in the year ended
December 31, 1995 to $13.4 million in the year ended December 31, 1996. This
increase was primarily attributable to new and additional services provided to
existing customers and new carrier customers. Prepaid wireless service
revenues in 1996 of $312,000 were generated in markets where C/2/C was
commercially available. As of December 31, 1996, twenty-one C/2/C Network
nodes were deployed in various markets throughout the United States. Of these
nodes, fifteen were fully operational and processing live transactions by the
end of the year. System sales revenues of $4.7 million in 1996 consist
principally of prepaid and voice systems sold by VST and WAC, both acquired by
the Company in 1996.
Cost of Service Revenues. Cost of service revenues increased as a percentage
of service revenues from 76.3% in 1995 to 79.7% in 1996. The increase in cost
of service revenues as a percentage of service revenues was primarily due to
the high initial operating costs as subscribers are added and usage is
generated on the C/2/C Network and, to a lesser extent, due to higher per
minute network charges for roaming service revenues. The Company expects that
cost of service revenues for C/2/C will continue to be a significant
percentage of revenue until the subscriber base and usage revenues grow
sufficiently to more fully absorb operating costs.
Cost of System Revenues. Cost of system revenues totaling $2.6 million
represent costs associated with systems sold in 1996.
Engineering, Research and Development Expenses. Engineering, research and
development expenses increased 281.4% from $839,000 in the year ended December
31, 1995 to $3.2 million in the year ended December 31, 1996 and increased as
a percentage of revenues from 2.5% in 1995 to 6.4% in 1996. This increase was
principally 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 wireless services, and to a lesser extent, additional
personnel to support the expansion of its teleservices. The Company intends to
continue to significantly increase its engineering, research and development
expenditures to support future development and enhancements of its prepaid and
other wireless services.
Sales and Marketing Expenses. Sales and marketing expenses increased 52.6%
from $1.9 million in the year ended December 31, 1995 to $2.9 million in the
year ended December 31, 1996, and increased as a percentage of revenues from
5.7% in 1995 to 5.8% in 1996. The increase in sales and marketing expenses was
due primarily to additional expenditures to support the more sales intensive
prepaid wireless services business and to support concentrated sales and
marketing efforts related to teleservices. 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.
Management Fees. Management fees of $1.0 million and $252,000 for the years
ended December 31, 1995 and 1996, respectively, represent the costs associated
with payroll and certain benefit costs of senior management personnel
responsible for the operations of the Company payable under the terms of a
Management Agreement with Boston Communications Capital Corporation. The
Management Agreement was terminated on March 31, 1996. As a result of the
termination, the entire payroll and related costs of these senior management
personnel now are being directly incurred by the Company and are primarily
recorded as general and administrative expenses.
General and Administrative Expenses. General and administrative expenses
increased 76.9% from $1.3 million in the year ended December 31, 1995 to $2.3
million in the year ended December 31, 1996. Total general and administrative
expenses increased as a percentage of revenues from 3.8% in 1995 to 4.6% in
1996. This increase was primarily attributable to an increased number of
employees and related expenses to support the Company's growth and to the
costs of senior management personnel that were classified as management fees
through March 31, 1996.
22
<PAGE>
Depreciation and Amortization Expense. Depreciation and amortization
expenses increased 136.2% from $889,000 in the year ended December 31, 1995 to
$2.1 million in the year ended December 31, 1996. This increase was due
primarily to amortization of goodwill from the Company's two acquisitions and
depreciation of additional technical equipment and software to support the
Company's roaming services, teleservices and prepaid wireless services. In
addition, the expansion of the Company's call centers and VST assembly
facility resulted in increased depreciation of furniture and equipment and
leasehold improvements.
Interest Income (Expense). Interest expense was $151,000 in the year ended
December 31, 1995 and interest income was $589,000 in the year ended December
31, 1996. Interest expense in 1995 resulted from interim period borrowings
under the Company's Account Purchase Agreement which was terminated in 1996.
Interest income was earned in 1996 from investments of the proceeds of the
Company's initial public offering (IPO) and was partially offset by interest
expense from the Account Purchase Agreement and capital leases.
Provision for Income Taxes. The income tax benefit of $1.0 million for the
year ended December 31, 1995 was attributable to the Company's reversal of its
valuation reserve. The income tax expense of $600,000 for the year ended
December 31, 1996 yielded a 50% income tax rate. The income tax rate in 1996
was due primarily to the non-deductibility of goodwill from the VST and WAC
acquisitions. The effective income tax rate is expected to continue to be
greater than 40% in 1997 due to the continued impact of non- deductible
goodwill.
Income from Continuing Operations. The Company recognized income from
continuing operations of $3.0 million in the year ended December 31, 1995 and
$599,000 in the year ended December 31, 1996. Income from continuing
operations in 1995 included a $1.8 million tax benefit resulting from the
reversal of a tax valuation allowance in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." In
addition, the decrease in income from continuing operations reflects the
increased depreciation, telecommunication costs and personnel costs associated
with the deployment of the C/2/C Network, amortization of goodwill associated
with the acquisition of VST and the expansion of the Company's facilities.
This decrease in income from continuing operations in 1996 was partially
offset by operating profit earned by VST from system sales.
Income (Loss) From Discontinued Operations. The loss of $165,000 from
discontinued operations in the year ended December 31, 1995 represents the
loss from operations of $129,000 associated with the Company's cellular sales
and service business and the loss on sale of that business of $36,000.
Comparison of Years Ended December 31, 1995 and December 31, 1994
Service Revenues. Total revenues increased 86.9% from $18.3 million in 1994
to $34.2 million in 1995. Roaming services revenues increased 58.8% 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 due to increased fraud. Teleservice revenues increased
282.6% 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 83.8% from
$14.2 million in 1994 to $26.1 million in 1995, but decreased as a percentage
of revenues from 77.5% in 1994 to 76.3% 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 teleservices, which generally
have a lower cost of services as
23
<PAGE>
a percentage of revenues than roaming services. This more than offset higher
per minute network charges, which are a significant part of roaming services
costs.
Engineering, Research and Development Expenses. Engineering, research and
development expenses increased 210.7% 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 wireless service,
expansion of its teleservices and continued development of new services.
Sales and Marketing Expenses. Sales and marketing expenses increased 46.2%
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 an additional $315,000 in
payroll costs for existing and new sales personnel, an additional $70,000 in
trade show expenditures and additional expenditures for other sales and
marketing costs to support the more sales intensive teleservices business and
to initiate marketing efforts relating to prepaid wireless 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 roaming services for the Company's established customers.
Management Fees. Management fees of $1.0 million in 1994 and 1995 represent
the costs associated with payroll and certain benefit costs of senior
management personnel responsible for the operations of the Company.
General and Administrative Expenses. General and administrative expenses
increased 67.7% from $775,000 in 1994 to $1.3 million in 1995, due principally
to an increased number of employees and related expenses to support the
Company's growth. These expenses decreased as a percentage of revenues from
4.2% in 1994 to 3.8% 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
expenses increased 124.5% 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 teleservices
business.
Interest Income (Expense). Interest expense increased 135.9% from $64,000 in
1994 to $151,000 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 $53,000 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 from Continuing Operations. The Company generated income from
continuing operations of $288,000 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.
24
<PAGE>
Income (Loss) from Discontinued Operations. Operating income from
discontinued operations decreased from $104,000 in 1994 to a loss of $129,000
in 1995. The 1995 loss was due solely to the Company's cellular sales and
service business whose operating results decreased from $262,000 of income in
1994 to $129,000 of losses in 1995 due to a significant decline in revenues
($9.5 million in 1994 compared to $1.0 million in 1995) partially offset by a
significant reduction in operating expenses ($9.2 million in 1994 compared to
$1.1 million in 1995). The loss from the sale of discontinued operations of
$36,000 in 1995 was attributable to the sale of the cellular sales and service
business in March 1995. The gain on disposal of $1.4 million in 1994 resulted
from the Company's sale of its rural cellular telephone system.
25
<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
June 30, 1997, 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
---------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Roaming services....... $7,387 $6,874 $7,214 $8,327 $8,873 $7,820 $7,012 $8,048
Teleservices .......... 2,706 2,822 3,847 3,303 3,272 2,991 3,789 4,375
Prepaid wireless
services.............. -- -- -- 69 42 201 790 1,513
System sales........... -- -- 92 1,141 1,726 1,733 4,028 2,417
------ ------ ------ ------ ------ ------ ------ ------
Total revenues......... 10,093 9,696 11,153 12,840 13,913 12,745 15,619 16,353
Operating expenses:
Cost of service
revenues.............. 7,612 7,286 8,311 9,465 9,763 9,067 9,419 10,882
Cost of system
revenues.............. -- -- 37 553 1,076 910 2,640 1,095
Engineering, research
and development....... 321 251 419 744 957 1,101 1,029 1,168
Sales and marketing.... 532 529 558 638 680 1,073 1,063 1,230
Management fees........ 252 252 252 -- -- -- -- --
General and
administrative........ 320 343 482 621 607 618 649 824
Depreciation and
amortization.......... 246 258 359 477 557 716 890 1,203
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 9,283 8,919 10,418 12,498 13,640 13,485 15,690 16,402
------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss)................. 810 777 735 342 273 (740) (71) (49)
Interest income
(expense).............. (46) (53) (6) (75) 341 329 262 135
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
continuing operations
before income taxes.... 764 724 729 267 614 (411) 191 86
Provision (benefit) for
income taxes........... 100 (1,195) 300 123 283 (106) 98 43
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
continuing operations.. $ 664 $1,919 $ 429 $ 144 $ 331 $ (305) $ 93 $ 43
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
---------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Roaming services....... 73.2% 70.9% 64.7% 64.9% 63.8% 61.4% 44.9% 49.2%
Teleservices........... 26.8 29.1 34.5 25.7 23.5 23.5 24.3 26.8
Prepaid wireless
services.............. -- -- -- 0.5 0.3 1.6 5.0 9.2
System sales........... -- -- 0.8 8.9 12.4 13.5 25.8 14.8
------ ------ ------ ------ ------ ------ ------ ------
Total revenues........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of service
revenues.............. 75.4 75.1 74.5 73.7 70.1 71.1 60.3 66.6
Cost of system
revenues.............. -- -- 0.3 4.3 7.7 7.1 16.9 6.7
Engineering, research
and development....... 3.2 2.6 3.8 5.8 6.9 8.7 6.6 7.1
Sales and marketing.... 5.3 5.5 5.0 5.0 4.9 8.4 6.8 7.5
Management fees........ 2.5 2.6 2.3 -- -- -- -- --
General and
administrative........ 3.2 3.5 4.3 4.8 4.4 4.9 4.2 5.0
Depreciation and
amortization.......... 2.4 2.7 3.2 3.7 4.0 5.6 5.7 7.4
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............. 92.0 92.0 93.4 97.3 98.0 105.8 100.5 100.3
------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss)................. 8.0 8.0 6.6 2.7 2.0 (5.8) (0.5) (0.3)
Interest income
(expense).............. (0.5) (0.5) (0.1) (0.6) 2.4 2.6 1.7 0.8
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
continuing operations
before income taxes.... 7.5 7.5 6.5 2.1 4.4 (3.2) 1.2 0.5
Provision (benefit) for
income taxes........... 1.0 (12.3) 2.7 1.0 2.0 (0.8) 0.6 0.2
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
continuing operations.. 6.5% 19.8% 3.8% 1.1% 2.4% (2.4)% 0.6% 0.3%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
26
<PAGE>
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 and products offered by the Company or its competitors, changes
in the mix of services and products provided by the Company, variations in the
level of system sales, changes in regulations affecting the wireless industry,
changes in the Company's operating expenses, personnel changes, and general
economic conditions. In particular, the Company's roaming services 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.
Teleservices revenues may be influenced by the requirements of one or more of
the Company's significant teleservice customers, including engagement of the
Company for implementing or assisting in implementing special projects of
limited duration. Revenues from system sales may be influenced by the timing
of purchase decisions by the Company's customers and variations in the
Company's sales cycle caused by factors such as the size of the transaction,
customer purchasing patterns, the timing of new product and service
introductions and general economic conditions. Also, the significant expenses
associated with the deployment and expansion of the C/2/C Network have had and
will continue to have, a negative effect on quarterly net income.
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 sales of
securities and cash flow from operations. In June 1996, the Company completed
its initial public offering of its Common Stock and received aggregate
proceeds therefrom of $49.8 million. As of June 30, 1997, the Company had
cash, cash equivalents and short-term investments of $3.8 million.
Net cash used in operating activities for the six months ended June 30, 1997
was $2.0 million and resulted from an increase of accounts receivable and
inventory partially offset by an increase in accounts payable and accrued
expenses. Accounts receivable increased due to the sale of systems to Latin
and South America. Inventory increased to support the increasing sales of
systems. Accounts payable and accrued expenses increased as a result of
increases in capital expenditures and costs associated with the overall growth
of the Company.
Net cash provided by investing activities was $1.2 million for the six
months ended June 30, 1997 which consisted primarily of $17.5 million from
sales of short-term investments, offset by capital expenditures of $16.3
million for the purchase of telecommunications equipment to support the
Company's C/2/C Network and the expansion of the teleservices business.
In July 1997, the Company entered into a Master Equipment Lease Agreement to
finance $5.5 million of telecommunications equipment to expand and enhance its
teleservices and prepaid wireless service
27
<PAGE>
businesses. The lease is a line of credit payable on demand bearing interest
at LIBOR plus one percent. Once the equipment has been fully financed the
lease will be converted into a three-year lease payable in equal monthly
installments at an interest rate of approximately 8.5% per annum.
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 and the expansion of
the C/2/C Network for at least the next 18 months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Standard No. 128, "Earnings Per Share" which
simplifies the calculation of earnings per share (EPS) and creates a standard
of comparability to the recently issued International Accounting Standard No.
33, "Earnings Per Share." Since early application is not permitted, the
Company will adopt this standard in the fourth quarter of 1997. Its adoption
does not have a material effect on the Company's financial position or results
of operations in the first quarter of 1997.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Both SFAS No. 130 and SFAS No. 131 are effective for fiscal
years beginning after December 15, 1997. The Company believes that the
adoption of these new accounting standards will not have a material impact on
the Company's consolidated financial statements.
28
<PAGE>
BUSINESS
Boston Communications Group, Inc. develops, markets and provides innovative
call processing services, teleservices, prepaid wireless services and prepaid
systems to wireless telephone carriers. The Company's services and systems 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. The Company's principal service offerings include
its ROAMERplus roaming service, its teleservices and its prepaid wireless
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
teleservices 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. The Company's prepaid wireless
service, which was introduced in early 1996 and offered in 72 markets as of
June 30, 1997, enables wireless carriers to offer their services on a prepaid
basis.
INDUSTRY BACKGROUND
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
wireless subscribers in the United States increased from approximately 340,000
in December 1985 to approximately 44 million in December 1996. This represents
an increase in market penetration from under 1% to over 16% of the United
States population. The CTIA also estimates that gross revenues from wireless
subscribers grew from approximately $482 million for the year ended December
1985 to approximately $26.4 billion for the year ended December 1996. A number
of factors have contributed to this growth, including build-out of the
wireless network infrastructure, the decreasing cost of wireless telephones,
the increasing mobility of the United States population, the technological
improvement in the size and battery life of wireless telephones and generally
greater acceptance of wireless telephone use. Significant growth in the
wireless market is expected to continue in the future, particularly given the
emergence of "personal communications services" ("PCS") as a new form of
wireless service. Industry sources forecast that the number of cellular and
PCS subscribers will grow to 80 million by the end of the year 2000,
representing a market penetration of approximately 30% of the United States
population, and estimate that the aggregate service revenues from cellular
subscribers alone will be over $35 billion.
While the number of subscribers and the aggregate service revenues from
wireless subscribers have grown rapidly, the average revenue per subscriber
per year has been declining. This decline in average revenue per subscriber is
due to the increased number of lower-usage subscribers using wireless
services. PCS is expected to increase downward pressure on pricing and
therefore further decrease per subscriber revenues, while increasing the
marketing costs and subscriber churn rate of wireless carriers. These and
other factors have caused most of the major wireless carriers to seek ways to
increase revenues, attract and retain subscribers and contain costs.
An important source of revenues for wireless carriers comes from subscribers
that 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 $2.7 billion in revenues in 1996, or an estimated 10.5% of the
aggregate service revenues from cellular subscribers. The primary method for
capturing these roaming revenues has been through inter-carrier roaming
agreements between wireless carriers. Under these agreements, the "home"
carrier bills its subscribers on behalf of the "serving" carrier in whose
territory the subscriber is roaming. While inter-carrier 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 geographically distant markets and
in smaller markets where call traffic does not justify roaming agreements. In
addition, the high cost of fraud
29
<PAGE>
associated with roaming, estimated at over $640 million in 1996, has caused
some carriers to terminate roaming agreements with carriers in high risk
jurisdictions, either permanently or while fraud protection procedures are
implemented. As a result, a portion of the potential roaming revenues are not
captured under the traditional inter-carrier roaming agreements. While the
roaming market is significant, the growth of this market has slowed
significantly in recent years, which, the Company believes, is the result of
new wireless subscribers being lower-use, non-business consumers who are less
likely to roam.
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. Wireless carriers increasingly are considering
outsourcing all or a portion of their customer service function in order to
focus internal resources on their core business activities.
In addition to exploring alternatives to increase revenues from existing
subscribers, wireless carriers are developing strategies to penetrate untapped
market segments, which include cash users and credit challenged subscribers.
Prepaid service provides carriers the opportunity to offer an alternative
payment approach to potential subscribers. Industry sources have projected
that the number of prepaid subscribers in the United States will grow to 9.4
million by the end of the year 2000. Factors contributing to this growth are
the ability to reach new customers, reduced credit and fraud risk and lower
operating and acquisition costs, as compared to traditional subscribers.
However, wireless carriers face technological and other challenges in
providing prepaid wireless service, including challenges related to monitoring
usage, inbound and outbound calling and roaming on a real-time basis, which
technologies require significant amounts of time and resources to develop.
Accordingly, wireless carriers are seeking ways to address these challenges,
including outsourcing the provision of prepaid wireless service.
The market for wireless telecommunications services internationally is
experiencing growth trends and business issues similar to the U.S. domestic
market. For example, industry sources project that the number of wireless
subscribers in Latin America will increase from approximately 6.5 million as
of December 1996 to approximately 22.5 million by the end of the year 2000.
This increase in subscribers represents a corresponding increase in market
penetration within Latin America from under 2% in 1996 to over 4% by the end
of the year 2000. Antiquated and overloaded public switched telephone networks
in developing markets are encouraging governments in such countries to auction
licenses for the provision of wireless telephone services. Many of these
licenses are being acquired by the large, U.S. based wireless carriers. These
markets, many of which have substantially lower income per capita than the
United States, may have even greater needs for prepaid wireless services than
the United States.
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 wireless 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. Wireless carriers can offer
ROAMERplus service without significant additional investment in equipment,
technology or personnel.
BCG also helps wireless carriers retain subscribers, reduce costs and manage
growth by providing a full range of high quality teleservices through its call
centers. The experience, economies of scale and
30
<PAGE>
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 wireless 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 teleservices also may be attractive to emerging PCS
providers seeking to quickly establish and service a subscriber base.
In early 1996, the Company introduced its prepaid wireless service and its
prepaid wireless systems, which enable wireless carriers to sell prepaid debit
cards for use with their subscribers' wireless telephones. The Company's
proprietary software and technology enable BCG to administer calls made,
monitor prepaid balances and, if necessary, interact with the customer through
a BCG call center. The Company's prepaid wireless services 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 roaming
services, teleservices, prepaid wireless services and prepaid systems 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
services, teleservices and prepaid services and systems 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 considering 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.
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
31
<PAGE>
aligns its interests with those of its carrier customers and maximizes the
potential benefit to those customers. The Company primarily provides its
roaming services, teleservices and prepaid wireless services, 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
teleservices 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 International Wireless Telephone Markets
BCG believes that there are significant opportunities to leverage its
experience in the wireless marketplace in North America in new international
wireless telephone markets. The Company believes that its reputation and
experience with the largest U.S. wireless carriers will help in marketing its
services and selling its prepaid systems internationally. The Company intends
to seek strategic relationships in international markets to assist it in
setting up sales, distribution and network operations in those markets.
SERVICES
Roaming Services
The Company introduced its unregistered roaming service, ROAMERplus, in
1991. By the end of 1996, approximately 80 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, by number of subscribers,
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 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
32
<PAGE>
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.
In July 1997 the Company and AT&T signed a letter of intent pursuant to
which holders of AT&T calling cards will be entitled to use those cards to pay
for calls made through the Company's ROAMERplus service. Because many
subscribers are more familiar with their calling card numbers than their
credit card numbers, the Company believes that this arrangement will make it
more convenient for subscribers to use the Company's ROAMERplus service.
Teleservices
The Company designed and began providing teleservices in 1993 in response to
the industry's need for 24-hour customer service. The Company's teleservices
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 teleservices 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. BCG primarily
bills carriers who use its teleservices on a per call or per minute basis,
subject in most cases to the Company meeting certain qualitative and
quantitative performance standards.
The Company currently provides teleservices to 10 wireless carriers under
teleservices contracts generally with terms of one year. In addition, wireless
carriers that have contracted for the Company's prepaid wireless services have
typically engaged the Company to provide teleservices for the carrier's
prepaid subscribers.
The Company has identified additional specific subscriber service needs in
the wireless 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, wireless 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. At the
request of the CTIA, the Company developed its LAWBUST program through which
the Company's service representatives assist law enforcement officials in
reducing wireless fraud through on- line access to the CTIA's proprietary
database and other techniques.
The Company provides its teleservices 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 monitoring
systems that allow floor supervisors to observe numerous aspects of the call
center's
33
<PAGE>
performance in a graphical format, including information on call duration,
compliance with contract standards and operator performance. As of July 1,
1997, the Company employed over 450 full- and part- time representatives to
provide teleservices 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 teleservices personnel, including instruction on a full
breadth of call handling techniques and service quality. In addition, carrier-
specific training allows the teleservices 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 Services
The Company introduced its C/2/C Network-based prepaid wireless service
offering in early 1996 and was offering the service in 72 U.S. markets as of
June 30, 1997. The C/2/C Network permits a wireless 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 is maintained. A
subscriber establishes 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 or credit card. The C/2/C Network can 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
receives 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 through the Company's
ROAMERplus service.
Carriers generally 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. The Company's existing contracts to provide
prepaid wireless services through the C/2/C Network are generally for two or
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. In addition, some of these
contracts permit the carrier to terminate services and acquire the system
which the Company is using to provide services to them.
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 is capable of
serving more than one carrier and consists of a computer controlled
telecommunications switch and an interactive voice response unit that provides
high quality personalized voice prompts. These voice nodes are 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 enables
prepaid users to make calls while roaming in other service areas where the
C/2/C Network is in place. From July 1, 1996 through mid-July 1997, the
Company expanded the number of operational C/2/C voice nodes to 27. The
Company has deployed 6 additional C/2/C voice nodes that are expected to be
operational by the end of 1997 and intends to deploy an additional 15 C/2/C
voice nodes through the end of 1997.
The Company believes that its prepaid service is attractive to wireless
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. The Company is expanding its C/2/C Network to
support a number of existing and pending contracts recently entered into by
the Company with wireless carriers in the United States, including a proposed
agreement with AT&T to provide prepaid service in all wireless markets
serviced by AT&T. There can be no assurance that the proposed agreement with
AT&T will ultimately be consummated and, if not, costs incurred in connection
with the expansion of the C/2/C Network could have a significant negative
effect on the Company's results of operations.
34
<PAGE>
SYSTEM SALES
The BCG Systems Division sells systems for prepaid wireless calling on a
turn-key basis primarily to international customers and also sells systems for
voice mail, fax mail and other enhanced services. Since establishing the
division, the Company has made significant prepaid system sales in Mexico and
Venezuela. While these sales will not result in the per minute revenues which
the Company's prepaid service contracts generate, under one of the contracts,
the Company provides on-going system management services for a monthly fee. To
support its systems and on-going sales effort in Mexico, the Company recently
established a Mexican subsidiary, BCG de Mexico, S.R.L.
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 wireless service will be the Company's ability to
provide, at competitive prices, more functionality and features than those
typically available in other competitive offerings. 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 C/2/C 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 spent approximately $270,000, $839,000, $3.2 million and $2.2
million on engineering, research and development in 1994, 1995, 1996 and the
first six months of 1997, respectively. As of June 30, 1997, BCG had 90
employees engaged in engineering, research and development activities.
SALES, MARKETING AND DISTRIBUTION
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 teleservice, prepaid wireless service
and system sales. A sale typically requires involvement of the Company's sales
personnel as well as its management and technical personnel.
The Company's sales force currently consists of ten sales representatives
supervised by three senior sales executives. 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 wireless
industry, either as former employees of wireless carriers or in selling
products and services to wireless 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.
The Company has formed a joint venture with Front-End Services Corporation
to distribute prepaid cards on behalf of wireless carriers at over 75,000
retail locations nationwide. In addition, BCG is commencing a cooperative
arrangement with Radio Shack to facilitate Radio Shack's sale of prepaid
wireless services provided by carriers utilizing the Company's C/2/C Network.
Under this arrangement,
35
<PAGE>
Radio Shack is able to sell prepaid wireless services at its retail locations
without issuing a prepaid card. Each of these arrangements requires the
cooperation and participation of the applicable local wireless carrier.
Since June 1996, the Company has devoted significant effort to developing
its presence in the Latin American market. The Company has sold a prepaid
system for over $5 million to Telcel, the largest wireless carrier in Mexico.
In addition, the Company sold another prepaid system for $1.4 million to
Cellstar for a reseller of wireless services in Venezuela.
CUSTOMERS
The Company provides its services to wireless carriers of varying size,
expertise and capabilities. As of June 30, 1997 the Company provided one or
more of its services to approximately 88 wireless 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 81.2%, 84.6%, 82.4% and 77.1% of the Company's total
revenues in 1994, 1995, 1996 and the first six months of 1997, respectively.
Ameritech Cellular, Bell Atlantic NYNEX Mobile and BellSouth Mobility
accounted for approximately 14.8%, 12.3% and 11.4%, respectively, of total
revenues in 1996. Bell Atlantic NYNEX Mobile, Telcel and Ameritech accounted
for approximately 12.7%, 12.2% and 10.7%, respectively, of total revenues in
the first six months of 1997. In addition, Ameritech Cellular and SNET
Telecommunications, Inc. accounted for approximately 40.4% and 26.1%,
respectively, of the Company's teleservices revenues in 1996. Ameritech
Cellular, LA Cellular, Bell Atlantic NYNEX Mobile and SNET Telecommunications,
Inc. accounted for approximately 29.6%, 18.3%, 18.2% and 14.4%, respectively,
of the Company's teleservice revenues in the first six months of 1997.
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, LA Cellular,
Southwestern Bell Mobile, SNET Telecommunications, Inc. and 360(degrees)
Communications, and for teleservices include Ameritech Cellular, Bell Atlantic
NYNEX Mobile, BellSouth Mobility, LA Cellular, Nextel and SNET
Telecommunications, Inc.
The Company's major customers for its prepaid wireless service include AT&T
Wireless, Bell Atlantic NYNEX Mobile, Southwestern Bell Mobile, BellSouth
Mobility, AirTouch, Frontier Cellular, SNET Telecommunications, Inc., Western
Wireless and LA Cellular.
COMPETITION
The market for sales of services and systems 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 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
36
<PAGE>
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
adverse 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
teleservices 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 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. 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
37
<PAGE>
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, including the source
code, from MDTelecom Inc. Under this license, BCG is restricted from
sublicensing the source code, BCG is not permitted to sell or otherwise
transfer the source code without MDTelecom's consent and BCG is not permitted
to use the source code after a merger, unless BCG is the surviving entity,
without MDTelecom's consent.
Cellular Express, Boston Communications Group and C/2/C are registered
trademarks, and REVENUEguard, ROAMalert, ROAMERcare and ROAMERplus are
trademarks of Boston Communications Group, Inc.
EMPLOYEES
As of June 30, 1997, the Company had a total of 921 full-time and part-time
employees. Of these employees, 28 serve in sales and marketing, 731 serve in
call center and related functions, 90 serve in technical support and
technology development, 32 in product and account management and 40 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.
BACKLOG
As of June 30, 1996 and June 30, 1997, the Company's backlog of firm orders
for its systems was negligible and $270,000, respectively. The Company
includes in backlog only those orders for which it has received completed
purchase orders and for which delivery has been specified within 12 months.
Most orders are subject to cancellation by the customer. Because of the
possibility of customer changes in delivery schedules, cancellation of orders
and potential delays in product shipments, the Company's backlog as of any
particular date may not be representative of actual sales for any succeeding
period.
PROPERTIES
The Company leases space at its five principal locations: Burlington and
Woburn, Massachusetts, Cherry Hill, New Jersey, Tulsa, Oklahoma and Coral
Gables, Florida. The Burlington and Woburn locations serve as service center
operations facilities for teleservices and ROAMERplus services. The Woburn
location also has separate facilities that house the Company's network
operations center as well as the Company's executive headquarters,
engineering, sales and finance personnel. The Tulsa facility is used for the
manufacturing and assembly of systems. Related sales efforts are in Cherry
Hill for U.S. and Canadian sales and Coral Gables for Latin American sales. As
of June 30, 1997, the Company also had 23 other leased facilities throughout
the United States which are used to house the Company's voice nodes and
certain equipment for the C/2/C Network.
LITIGATION
In April 1997, Robert Sproul filed suit against the Company and its 80%
subsidiary, Wireless America Corp. ("WAC") in the Circuit Court for Dade
County, Florida. Mr. Sproul owns the remaining 20% of WAC. The suit relates to
WAC's termination of Mr. Sproul's employment as the President of WAC in March
1997, pursuant to an employment contract that was to expire in 1998, and
relates to certain rights which Mr. Sproul may have to require the Company to
purchase his 20% interest in WAC. Mr. Sproul claimed the purchase price for
his 20% interest was in excess of $2.8 million. The Company and Mr. Sproul
have agreed in principle to settle all of the claims asserted by Mr. Sproul.
The terms of the agreement in principle require the Company to buy Mr.
Sproul's 20% interest in WAC for a purchase price of $1.3
38
<PAGE>
million. The parties will also exchange full mutual releases and expect to
negotiate and execute other customary documents associated with the settlement
of litigation. The settlement of the suit is conditioned on the approval of
the Board of Directors of the Company and completion of definitive
documentation. There can be no assurance that the proposed settlement will be
finalized in accordance with the proposed terms.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
June 30, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul J. Tobin........... 54 Chairman of the Board, President and Chief Executive Officer
Brian E. Boyle.......... 49 Vice Chairman of the Board
Frederick E. von
Mering................. 44 Vice President, Finance and Administration, Director
Jerrold D. Adams(1)(2).. 57 Director
Craig L. Burr(1)........ 52 Director
Paul R. Gudonis(1)(2)... 43 Director
Gerald Segel............ 76 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Mr. Tobin has served as President and Chief Executive Officer of the Company
since April 1997, as Chairman of the Board of Directors of the Company since
February 1996 and 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 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., (now Lightbridge, Inc.) a
supplier of customer application software for the wireless telephone industry.
Prior to 1990, Mr. Boyle founded and operated a number of companies 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 is also a Director of Saville Systems PLC, as well as of several private
companies.
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. Adams has served as a Director of the Company since April 1996. Mr.
Adams has been President and Chief Executive Officer of AirNet Communications
Corporation since 1997. Mr. Adams served as President and Chief Operating
Officer of Iridium, Inc., an international consortium developing a worldwide
communications system for portable hand-held telephones, from 1991 to 1997.
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. 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 is a Director of several privately-held
companies affiliated with Burr, Egan, Deleage & Co.
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.
40
<PAGE>
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. Segel has served as a Director of the Company since October 1996. Prior
to his retirement in May 1990, Mr. Segel was Chairman of Tucker Anthony
Incorporated from January 1987 to May 1990. From 1983 to January 1987 he
served as President of Tucker Anthony Incorporated. Mr. Segel is also a
director of Litchfield Financial Inc., Hologic, Inc. and Vivid Technologies,
Inc.
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.
41
<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 June 30, 1997 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 and
executive officers, (iii) all directors and executive officers as a group and
(iv) 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
Paul J. Tobin (2)........... 824,331 6.4% 55,000 769,331 4.9%
c/o Boston Communications
Group, Inc.
100 Sylvan Road
Woburn, MA 01801
Frederick E. von Mering(3).. 593,464 4.6% 50,000 543,464 3.5%
c/o Boston Communications
Group, Inc.
100 Sylvan Road
Woburn, MA 01801
Brian E. Boyle(4)........... 393,425 3.1% 50,000 343,425 2.2%
c/o Boston Communications
Group, Inc.
100 Sylvan Road
Woburn, MA 01801
Jerrold D. Adams (5)........ 5,000 * 0 5,000 *
Craig L. Burr(6)............ 169,306 1.3% 0 169,306 1.1.%
Paul R. Gudonis(7).......... 5,000 * 0 5,000 *
Gerald Segel................ 6,500 * 0 6,500 *
All directors and executive
officers as a group
(7 persons)(8).............. 1,997,026 15.3% 155,000 1,842,026 11.7%
OTHER SELLING SHAREHOLDERS
Denise Archer-Allen(9)...... 216,128 1.7% 18,000 198,128 1.3%
Paul Senn(10)............... 55,256 * 10,000 44,256 *
Robert J. Sullivan(11)...... 602,535 4.7% 25,000 577,535 3.7%
Karen Walker(12)............ 29,082 * 10,000 19,082 *
Beverly Watts(13)........... 19,678 * 7,000 12,678 *
</TABLE>
- --------
* Less than 1% of the outstanding Common Stock.
(1) The number of shares of Common Stock deemed outstanding prior to this
offering includes 12,859,362 shares of Common Stock outstanding as of June
30, 1997 and shares of Common Stock issuable pursuant to options held by
the respective person or group that are exercisable within 60 days after
June 30, 1997 ("Presently Exercisable Options") as set forth below. The
number of shares of Common Stock deemed outstanding after this offering
includes an additional 2,775,000 shares of Common Stock that are being
offered for sale by the Company in this offering, plus 10,000 shares of
Common Stock to be issued to a Selling Shareholder upon the exercise of an
option in connection with 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.
42
<PAGE>
(2) Includes 424,331 shares held by Paul J. Tobin 1988 Trust and 400,000
shares held by the Margaret M. Tobin 1988 Trust. Mr. Tobin is the trustee
of the Paul J. Tobin 1988 Trust. Margaret M. Tobin, the spouse of Paul J.
Tobin, is trustee of the Margaret M. Tobin 1988 Trust.
(3) Includes 100,000 shares owned by Mr. von Mering's wife and an aggregate of
8,000 shares held in accounts for the benefit of Mr. von Mering's
children. Includes 130,654 shares issuable upon the exercise of Presently
Exercisable Options.
(4) Comprised of 359,750 shares owned by Sand Drift, Ltd. of which Mr. Boyle
is a limited partner, 18,675 shares owned by the Brian E. Boyle
Educational Trust II, a trust for the benefit of Mr. Boyle's children. Mr.
Boyle disclaims beneficial ownership of such shares, except to the extent
of his direct pecuniary interest therein. Also includes 25,000 shares
issuable upon the exercise of Presently Exercisable Options.
(5) Includes 3,000 shares issuable upon the exercise of Presently Exercisable
Options.
(6) Includes 55,549 shares owned by Craig L. Burr 1981 Children's Trust, a
trust for the benefit of Mr. Burr's children; 55,549 shares owned by
William P. Egan 1981 Children's Trust, a trust of which Mr. Burr is a
trustee; and 2,659 shares owned by Golden Coins N.V. Mr. Burr is a
principal of Burr, Egan, Deleage & Co., which is an advisor to Golden
Coins N.V. Mr. Burr disclaims beneficial ownership of all of the foregoing
shares, except to the extent of his direct pecuniary interest therein.
(7) Includes 3,000 shares issuable upon the exercise of Presently Exercisable
Options.
(8) Includes an aggregate of 161,654 shares issuable upon the exercise of
Presently Exercisable Options.
(9) Includes 3,000 shares issuable upon the exercise of Presently Exercisable
Options.
(10) Includes 25,000 shares issuable upon the exercise of Presently
Exercisable Options, 10,000 of which Mr. Senn will be exercising in
connection with this offering.
(11) Includes 325,000 shares owned in trust.
(12) Includes 2,400 shares issuable upon the exercise of Presently Exercisable
Options.
(13) Includes 8,558 shares issuable upon the exercise of Presently Exercisable
Options.
43
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company, as of June 30, 1997, consisted
of 35,000,000 shares of Common Stock, $.01 par value per share, of which
12,859,362 shares were outstanding and held of record by 95 shareholders, and
2,000,000 shares of Preferred Stock, none of which were outstanding.
COMMON STOCK
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 and any amounts payable to holders of Preferred Stock.
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
The Board of Directors is 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 of 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.
44
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), have severally agreed to
purchase from the Company and the Selling Shareholders the following
respective numbers of shares of Common Stock at the 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...................................... 1,000,000
Donaldson, Lufkin & Jenrette Securities Corporation.................. 1,000,000
Furman Selz LLC...................................................... 1,000,000
---------
Total.............................................................. 3,000,000
=========
</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 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 $.40 per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $.10 per share to
certain other dealers. After the public offering, the public offering price
and other selling terms may be changed by the Representatives of the
Underwriters.
The Company and certain Selling Shareholders have granted the Underwriters
an option, exercisable not later than 30 days after the date of this
Prospectus, to purchase up to 225,000 and 225,000 additional shares of Common
Stock, respectively, at the 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 3,000,000, and the Company and such
Selling Shareholders 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, if any, 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 3,000,000 shares of
Common Stock are being offered.
In connection with this offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq National Market
immediately prior to the commencement of sales in this offering in accordance
with Rule 103 of Regulation M. Passive market making consists of displaying
bids on the Nasdaq National Market limited by the bid prices of independent
market makers and making purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market maker on each day
are limited to a specified percentage of the passive market maker's average
daily trading volume in the Common Stock during a specified period and must be
discontinued when such limit is reached. Passive market making may stabilize
the market price of the Common Stock at a level above that which might
otherwise prevail and, if commenced, may be discontinued at any time.
Subject to applicable limitations, the Underwriters, in connection with this
offering, may place bids for or make purchases of the Common Stock in the open
market or otherwise, for long or short account, or cover short positions
incurred, to stabilize, maintain or otherwise affect the price of the Common
45
<PAGE>
Stock, which may be higher than the price that might otherwise prevail in the
open market. There can be no assurance that the price of the Common Stock will
be stabilized, or that stabilizing, if commenced, will not be discontinued at
any time. Subject to applicable limitations, the Underwriters may also place
bids or make purchases on behalf of the underwriting syndicate to reduce a
short position created in connection with this offering. The Underwriters are
not required to engage in these activities and may end these activities at any
time.
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,
2,693,705 shares of Common Stock and options to purchase 352,667 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 90 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 90-day period referenced in the preceding sentence.
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 LLP, Boston,
Massachusetts, and for the Underwriters by Piper & Marbury L.L.P., Baltimore,
Maryland.
EXPERTS
The consolidated financial statements (including the schedule incorporated
by reference) of Boston Communications Group, Inc. and its subsidiaries at
December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing and incorporated by reference
elsewhere herein and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission").
Such material filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and at 7 World
Trade Center, Suite 1300, New York, New York 10048; and copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. If
available, such material may also be accessed through the Commission's
electronic data gathering, analysis and retrieval system ("EDGAR") via
electronic means, including the Commission's web site on the Internet
(http://www.sec.gov). The Company's Common Stock is listed on the Nasdaq
National Market and reports, proxy and information statements and other
information concerning the Company can be inspected at the offices of the
National Association of Securities Dealers, Inc., Market Listing Section, 1801
K Street, N.W., 8th Floor, Washington, D.C. 20006.
46
<PAGE>
This Prospectus constitutes a part of a Registration Statement on Form S-3
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act. This Prospectus does not contain all of the information
set forth in such Registration Statement, certain parts of which are omitted
in accordance with the rules and regulations of the Commission. Reference is
made to such Registration Statement and to the exhibits relating thereto for
further information with respect to the Company and the Common Stock offered
hereby. Any statements contained herein concerning the provisions of any
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission or incorporated by reference herein are not necessarily
complete, and, in each instance, reference is made to the copy of such
document so filed for a more complete description of the matter involved. Each
such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, which have been filed with the Commission pursuant
to the Exchange Act, are incorporated herein by reference.
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(b) The Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1997 and June 30, 1997; and
(c) The description of the Company's Common Stock contained in its
Registration Statement on Form 8-A and any amendments or reports filed
for the purpose of updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act, subsequent to the date of this Prospectus and prior
to the termination of the offering of Common Stock shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from
the date of filing of any such document. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified by or superseded for purposes of this Prospectus to the extent
that a statement contained herein or therein or in any other subsequently
filed document which also is or is deemed to be incorporated by reference
herein or therein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
A copy of any document or part thereof incorporated by reference in the
registration statement of which this Prospectus constitutes a part (not
including exhibits to the information that is incorporated by reference unless
such exhibits are specifically incorporated by reference into the information
that the registration statement incorporates) shall be provided without charge
to each person, including any beneficial owner, to whom a copy of this
Prospectus is delivered, upon written or oral request made to the Company at
100 Sylvan Road, Woburn, Massachusetts 01801, Attention: General Counsel and
Clerk, (617) 692-7000.
47
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets at December 31, 1995, 1996 and June 30, 1997
(unaudited)............................................................. F-3
Consolidated Statements of Operations for the years ended December 31,
1994, 1995, 1996 and the six months ended June 30, 1996 and 1997
(unaudited)............................................................. F-4
Consolidated Statements of Redeemable Preferred Stock and Shareholders'
Equity for the years ended December 31, 1994, 1995, 1996 and the six
months ended June 30, 1997 (unaudited).................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995, 1996 and the six months ended June 30, 1996 and 1997
(unaudited)............................................................. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders Boston Communications Group, Inc.
We have audited the accompanying consolidated balance sheets of Boston
Communications Group, Inc. and subsidiaries as of December 31, 1996 and 1995
and the related consolidated statements of operations, redeemable preferred
stock and shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule 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, 1996 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, 1996, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
February 11, 1997,
except for Note 10, as to which
the date is July 22, 1997
F-2
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 253 $ 923 $ 837
Short-term investments......................... -- 20,498 2,962
Accounts receivable, net of allowance for
billing adjustments and doubtful accounts of
$884 in 1995, $1,242 in 1996 and $1,279 in
1997.......................................... 6,250 11,060 15,059
Inventory...................................... -- 1,189 2,434
Deferred income taxes.......................... 1,800 1,334 1,334
Prepaid expenses............................... 194 495 1,000
------- ------- -------
Total current assets......................... 8,497 35,499 23,626
Property and equipment:
Telecommunication systems...................... 4,312 9,169 16,441
Furniture and equipment........................ 1,123 3,359 7,263
Leasehold improvements......................... 225 903 1,310
Systems in development......................... 734 2,658 7,402
------- ------- -------
6,394 16,089 32,416
Less allowances for depreciation and
amortization.................................... 1,510 3,183 5,035
------- ------- -------
4,884 12,906 27,381
Goodwill, net.................................... -- 3,159 2,943
Other assets..................................... 232 395 432
------- ------- -------
Total assets................................. $13,613 $51,959 $54,382
======= ======= =======
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 1,277 $ 1,371 $ 3,294
Accrued expenses............................... 4,428 7,205 6,753
Income taxes payable........................... 710 490 553
------- ------- -------
Total current liabilities.................... 6,415 9,066 10,600
Redeemable Preferred Stock, non-voting, par value
$100 per share, 13,000 shares authorized, 11,871
shares issued and outstanding in 1995........... 15,896 -- --
Commitments and contingencies
Shareholders' equity:
Convertible Preferred Stock, $1.00 par value
per share, 1,325 shares authorized, 850 shares
issued and outstanding in 1995................ 1 -- --
Preferred Stock, $0.01 par value, 2,000,000
shares authorized, 0 shares issued and
outstanding................................... -- -- --
Common Stock, voting, par value $.01 per share,
35,000,000 shares authorized, 3,335,985 shares
in 1995, 12,725,749 shares in 1996 and
12,905,782 shares in 1997 issued.............. 33 127 129
Additional paid-in capital..................... 1,016 52,738 53,489
Treasury Stock (46,420 shares in 1996 and 1997,
at cost)...................................... -- (372) (372)
Accretion of dividends on Redeemable Preferred
Stock......................................... (4,025) -- --
Accumulated deficit............................ (5,723) (9,600) (9,464)
------- ------- -------
Total shareholders' equity (deficit)......... (8,698) 42,893 43,782
------- ------- -------
Total liabilities, redeemable preferred stock
and shareholders' equity.................... $13,613 $51,959 $54,382
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Roaming services............. $16,004 $25,446 $32,234 $ 15,541 $ 15,060
Teleservices................. 2,330 8,774 13,413 7,150 8,164
Prepaid wireless services.... -- -- 312 69 2,303
System sales................. -- -- 4,692 1,233 6,445
------- ------- ------- -------- --------
18,334 34,220 50,651 23,993 31,972
Operating expenses:
Cost of service revenues..... 14,212 26,100 36,606 17,775 20,301
Cost of system revenues...... -- -- 2,576 590 3,735
Engineering, research and
development................. 270 839 3,221 1,163 2,197
Sales and marketing.......... 1,268 1,934 2,949 1,196 2,293
Related party management fees
(see Note 9)................ 1,008 1,008 252 252 --
General and administrative... 775 1,322 2,328 1,102 1,474
Depreciation and
amortization................ 396 888 2,109 838 2,092
------- ------- ------- -------- --------
17,929 32,091 50,041 22,916 32,092
------- ------- ------- -------- --------
Operating income (loss)........ 405 2,129 610 1,077 (120)
Interest income (expense)...... (64) (151) 589 (81) 397
------- ------- ------- -------- --------
Income from continuing
operations before
income taxes.................. 341 1,978 1,199 996 277
Provision (benefit) for income
taxes......................... 53 (1,030) 600 423 141
------- ------- ------- -------- --------
Income from continuing
operations.................... 288 3,008 599 573 136
Discontinued operations:
Income (loss) from
operations.................. 104 (129) -- -- --
Gain (loss) on disposal...... 1,403 (36) -- -- --
------- ------- ------- -------- --------
Income (loss) from discontinued
operations.................... 1,507 (165) -- -- --
------- ------- ------- -------- --------
Net income..................... 1,795 2,843 599 573 136
Accretion of dividends on
redeemable preferred stock.... (1,016) (950) (451) (451) --
------- ------- ------- -------- --------
Net income available to common
shareholders.................. $ 779 $ 1,893 $ 148 $ 122 $ 136
======= ======= ======= ======== ========
Net income (loss) available to
common shareholders per common
share:
Continuing operations........ $ (0.08) $ 0.22 $ 0.01 $ 0.01 $ 0.01
======= ======= ======= ======== ========
Net income................... $ 0.09 $ 0.21 $ 0.01 $ 0.01 $ 0.01
======= ======= ======= ======== ========
Shares used in computing net
income (loss) per
common share.................. 8,848 9,179 11,259 9,334 13,266
======= ======= ======= ======== ========
Supplemental net income
available to common
shareholders per common
share......................... $ 0.05
=======
Shares used in computing
supplemental net income per
common share.................. 12,427
=======
</TABLE>
See accompanying notes.
F-4
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------------
ACCRETION
OF DIVI-
CONVERTIBLE DENDS ON TOTAL
REDEEMABLE PREFERRED ADDI- REDEEM- SHARE-
PREFERRED STOCK STOCK COMMON STOCK TIONAL TREASURY STOCK ABLE ACCU- HOLDERS'
---------------- -------------- ------------------ PAID-IN -------------- PREFERRED MULATED EQUITY
SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS CAPITAL SHARES DOLLARS STOCK DEFICIT (DEFICIT)
------- ------- ------ ------- ---------- ------- ------- ------ ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1994.. 12,871 $14,930 850 $ 1 2,630,432 $ 26 $ 1,023 -- $ -- $(2,059) $(10,361) $(11,370)
Issuance of
Common Stock... -- -- -- -- 705,553 7 (7) -- -- -- -- --
Repurchase of
Redeemable
Preferred Stock.. (1,000) (1,000) -- -- -- -- -- -- -- -- -- --
Accretion of
dividends on
Redeemable
Preferred
Stock.......... -- 1,016 -- -- -- -- -- -- -- (1,016) -- (1,016)
Net income...... -- -- -- -- -- -- -- -- -- -- 1,795 1,795
------- ------- ---- ---- ---------- ---- ------- ------ ----- ------- -------- --------
Balance at
December 31, 1994.. 11,871 14,946 850 1 3,335,985 33 1,016 -- -- (3,075) (8,566) (10,591)
Accretion of
dividends on
Redeemable
Preferred
Stock.......... -- 950 -- -- -- -- -- -- -- (950) -- (950)
Net income...... -- -- -- -- -- -- -- -- -- -- 2,843 2,843
------- ------- ---- ---- ---------- ---- ------- ------ ----- ------- -------- --------
Balance at
December 31, 1995.. 11,871 15,896 850 1 3,335,985 33 1,016 -- -- (4,025) (5,723) (8,698)
Conversion of
Convertible
Preferred Stock.. -- -- (850) (1) 5,004,608 50 (49) -- -- -- -- --
Accretion of
dividends on
Redeemable
Preferred
Stock.......... -- 451 -- -- -- -- -- -- -- (451) -- (451)
Redemption of
Redeemable
Preferred Stock
and Accreted
Dividends...... (11,871) (16,347) -- -- -- -- -- -- -- 4,476 (4,476) --
Issuance of
Common Stock... -- -- -- -- 4,183,928 42 51,745 -- -- -- -- 51,787
Exercise of
Common Stock
options........ -- -- -- -- 201,228 2 26 -- -- -- -- 28
Treasury
Stock purchase.. -- -- -- -- -- -- -- 46,420 (372) -- -- (372)
Net income...... -- -- -- -- -- -- -- -- -- -- 599 599
------- ------- ---- ---- ---------- ---- ------- ------ ----- ------- -------- --------
Balance at
December 31, 1996.. -- -- -- -- 12,725,749 127 52,738 46,420 (372) -- (9,600) 42,893
Issuance of
Common Stock
under stock
option and
stock purchase
plans.......... -- -- -- -- 180,033 2 751 -- -- -- -- 753
Net income...... -- -- -- -- -- -- -- -- -- -- 136 136
------- ------- ---- ---- ---------- ---- ------- ------ ----- ------- -------- --------
Balance at June
30, 1997
(unaudited)..... -- $ -- -- $-- 12,905,782 $129 $53,489 46,420 $(372) $ -- $ (9,464) $ 43,782
======= ======= ==== ==== ========== ==== ======= ====== ===== ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing
operations................... $ 288 $ 3,008 $ 599 $ 573 $ 136
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Depreciation and
amortization............... 396 888 2,109 838 2,092
Deferred income taxes....... -- (1,800) 466 525 --
Changes in operating assets
and liabilities,
excluding effects of
discontinued operations and
business acquisitions:
Accounts receivable......... (1,242) (2,655) (3,208) (4,252) (3,999)
Inventory................... -- -- (1,128) -- (1,245)
Prepaid expenses and other
assets..................... (140) (51) (547) (830) (566)
Accounts payable and accrued
expenses................... 1,152 1,225 524 1,595 1,471
Income taxes payable........ 31 679 (297) (400) 63
------- ------- -------- -------- --------
485 1,294 (1,482) (1,951) (2,048)
Income (loss) from
discontinued operations...... 1,506 (166) -- -- --
Adjustments to reconcile
income (loss) from
discontinued operations:
(Gain) loss on disposal of
discontinued operations.... (1,402) 37 -- -- --
Cash flow related to results
of operations until
disposal date.............. (148) 803 -- -- --
------- ------- -------- -------- --------
(44) 674 -- -- --
------- ------- -------- -------- --------
Net cash provided by (used
in) operations............. 441 1,968 (1,482) (1,951) (2,048)
INVESTING ACTIVITIES
Acquisition of businesses, net
of cash acquired............. -- -- (846) (497) --
Purchases of short-term
investments.................. -- -- (26,937) (110) --
Sales of short-term
investments.................. -- -- 6,439 -- 17,536
Purchase of property and
equipment.................... (2,215) (2,993) (8,093) (2,942) (16,327)
Net proceeds from sale of
lines of business............ 7,545 1,074 -- -- --
------- ------- -------- -------- --------
Net cash provided by (used in)
investing activities......... 5,330 (1,919) (29,437) (3,549) 1,209
FINANCING ACTIVITIES
Proceeds from exercise of
stock options................ -- -- 28 21 753
Proceeds from issuance of
stock........................ -- -- 49,787 44,490 --
Repurchase of redeemable
preferred stock.............. (1,000) -- (16,347) (16,347) --
Purchase of treasury stock.... -- -- (372) -- --
Proceeds from notes payable... -- -- -- -- --
Payment of long-term debt and
capital leases............... (5,248) -- (1,507) (70) --
------- ------- -------- -------- --------
Net cash provided by (used in)
financing activities......... (6,248) -- 31,589 28,094 753
------- ------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents......... (477) 49 670 22,594 (86)
Cash and cash equivalents at
beginning of year............ 681 204 253 253 923
------- ------- -------- -------- --------
Cash and cash equivalents at
end of year.................. $ 204 $ 253 $ 923 $ 22,847 $ 837
======= ======= ======== ======== ========
</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") develops, markets and
provides specialized roaming services, teleservices and prepaid wireless
services to the wireless telephone industry. The Company also manufactures and
assembles prepaid and voice system equipment.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company earns revenues by providing teleservices, processing prepaid
wireless calls and processing wireless 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 systems are shipped.
Principles of Consolidation
The financial statements include 100% of the accounts and operations of the
Company and all of its majority-owned subsidiaries. Minority interest
represents the minority owner's proportionate share of the equity in the 80%-
owned subsidiary. All intercompany accounts and transactions have been
eliminated.
Investments
The Company accounts for its marketable securities under the Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Instruments in Debt and Equity Securities." The Company has classified all of
its securities as available-for-sale, and are thus reported at fair market
value. Interest on all securities is reported as interest income.
Investments with maturities between three and twelve months are considered
short-term investments. The Company's short-term investments consist of debt
securities such as corporate notes and marketable direct obligations of the
United States Treasury. The following is a summary of available-for-sale
securities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
(UNAUDITED)
<S> <C> <C>
Corporate notes.............................. $ 3,965 $ --
U.S. Treasury bills.......................... 16,533 2,962
------- ------
Total short-term investments............... $20,498 $2,962
======= ======
</TABLE>
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, the
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 wireless calls
from service areas which are not covered by traditional roaming agreements.
These calls are forwarded by wireless carriers to the
F-7
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company for processing. Each transaction is small in size and the Company
minimizes credit risk by validating appropriate billing information.
Teleservices are provided to wireless carriers located throughout the country.
Prepaid wireless services include the Company's prepaid wireless service which
provides carriers, throughout the United States, with an alternative billing
facility for their wireless customers. Accounts are not activated until
payment is received by the carrier. The Company sells its voice systems in
North America and its prepaid systems in Latin America and Europe.
The Company has roaming, teleservice and prepaid wireless service agreements
with, and sells its systems to numerous carriers, 10 of which accounted for
81.2%, 84.6% and 82.4% of the Company's total revenues for the years ended
December 31, 1994, 1995 and 1996, respectively. The following table summarizes
sales in excess of 10% of total revenues, as a percentage of total revenues,
to major customers:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Ameritech Cellular................................ 16.0% 15.0% 14.8%
Bell Atlantic NYNEX Mobile........................ 11.7 13.9 12.3
SNET Telecommunications, Inc...................... -- 11.9 --
AT&T Wireless..................................... 15.6 -- --
BellSouth Mobility................................ -- -- 11.4
</TABLE>
Inventory
Inventory, which consists of computer hardware and electronic components, is
recorded at the lower of cost (first-in, first-out method) or market.
Inventory is categorized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
(UNAUDITED)
<S> <C> <C>
Purchased parts.............................. $ 984 $1,468
Work in process.............................. 129 699
Finished goods............................... 76 267
------ ------
$1,189 $2,434
====== ======
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciated 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 purchased hardware
and software to be used in switching equipment not yet placed into service and
will be depreciated over 5 years. In accordance with Financial Accounting
Standards Board No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long- Lived Assets to be Disposed Of," the Company reviews its long-
lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If it is
determined that the carrying amount of an asset cannot be fully recovered, an
impairment loss is recognized.
Goodwill
Goodwill represents the excess of cost of acquired businesses over the fair
market value of all net assets acquired. Goodwill is being amortized on a
straight-line basis over an eight year period. Accumulated amortization
totaled $296,000 as of December 31, 1996 and $512,000 as of June 30, 1997.
Engineering, Research and Development
Costs associated with engineering, research and development are expensed as
incurred.
F-8
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 initial public offering have been included in the
calculation as if they were outstanding for all periods presented prior to the
initial public offering 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 the initial public offering price of $14.00 were required
to complete the redemption of the Redeemable Preferred shares. Net income
available to common shareholders is increased by the dividends accreted in
1996 on the Redeemable Preferred Stock.
Unaudited Interim Consolidated Financial Statements
The consolidated balance sheet as of June 30, 1997 and the consolidated
statements of operations, redeemable preferred stock and shareholders' equity
for the six months ended June 30, 1997 and 1996 are unaudited and in the
opinion of management, include all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the Company's consolidated
financial position, consolidated results of operations and cash flows.
Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standard (SFAS) No. 128, "Earnings Per Share" which
simplifies the calculation of earnings per share (EPS) and creates a standard
of comparability to the recently issued International Accounting Standard No.
33, "Earnings Per Share." Since early application is not permitted, the
Company will adopt this standard in the fourth quarter of 1997. Its adoption
does not have a material effect on the Company's financial position or results
of operations in the first quarter of 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Both SFAS No. 130 and SFAS No. 131 are effective for fiscal
years beginning after December 15, 1997. The Company believes that the
adoption of these new accounting standards will not have a material impact on
the Company's consolidated financial statements.
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.
F-9
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest expense of $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. Income taxes associated with
the discontinued operations are not material.
The revenues of the discontinued operations are summarized below (in
thousands):
<TABLE>
<CAPTION>
1994 1995
------- ------
<S> <C> <C>
Cellular sales and service................................... $ 9,455 $1,001
Rural cellular phone system.................................. 717 --
------- ------
$10,172 $1,001
======= ======
</TABLE>
The operating income (loss) of the discontinued operations is summarized
below (in thousands):
<TABLE>
<CAPTION>
1994 1995
----- -----
<S> <C> <C>
Cellular sales and service.................................... $ 262 $(129)
Rural cellular phone system................................... (158) --
----- -----
$ 104 $(129)
===== =====
</TABLE>
The gain (loss) on the disposal of the discontinuations is summarized below
(in thousands):
<TABLE>
<CAPTION>
1994 1995
------ ----
<S> <C> <C>
Cellular sales and service..................................... -- $(36)
Rural cellular phone system.................................... $1,403 --
------ ----
$1,403 $(36)
====== ====
</TABLE>
Income taxes associated with the gain (loss) on the disposal of the
discontinued operations are not material.
4. ACQUISITIONS
In February 1996, the Company acquired the net assets of Voice Systems
Technology Inc. ("VST"), a company which develops and markets prepaid and
voice processing systems, for approximately $2.5 million ($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 $2.1 million and $9,000, respectively. The
acquisition has been accounted for under the purchase method of accounting and
the results of operations have been included in the Company's results of
operations from the date of acquisition. The allocation of the purchase price
is based on the fair market value of assets and liabilities acquired and the
excess over those amounts is accounted for as goodwill. The allocation of the
purchase price is as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment............................................... $ 106
Accounts receivable, net............................................. 51
Other current assets................................................. 68
Accounts payable and accrued expenses................................ (312)
Other current liabilities............................................ (59)
Goodwill............................................................. 2,683
------
$2,537
======
</TABLE>
F-10
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On January 31, 1996, the Company acquired 17.5% of the stock in Wireless
Americas Corporation ("WAC") for $35,000. WAC markets and sells prepaid
equipment in Latin America. On October 23, 1996, the Company acquired an
additional 62.5% of the stock of WAC for $916,500. The purchase has been
reflected in the Company's consolidated balance sheet. Results of WAC's
operations from the date of acquisition through June 30, 1997, have been
included in the Company's consolidated results.
The following unaudited pro forma information has been prepared assuming
that these acquisitions had taken place at the beginning of the respective
period. The unaudited pro forma information includes adjustments for interest
expense that would have been incurred to finance the purchase, amortization of
goodwill resulting from the purchase, elimination of the effect of
transactions between the Company and WAC and income taxes. There is no impact
to 1995 from the WAC transaction as WAC operations began in 1996. The
unaudited pro forma financial information is not necessarily indicative of the
results of operations as if the transactions had been effected on the assumed
dates (in thousands, except per share data):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
(UNAUDITED)
<S> <C> <C>
Net revenues................................................ $36,288 $51,873
------- -------
Net income available to common stockholders................. $ 1,558 $ 1
------- -------
Net income per common share................................. $ 0.17 $ 0.00
======= =======
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Billing adjustments and chargebacks................ $1,136 $1,240 $1,143
Cellular airtime................................... 1,077 2,447 1,502
Payroll............................................ 391 931 1,029
Deferred revenue................................... 325 264 196
Telecommunication costs............................ 305 442 523
Billing services................................... 282 296 304
Warranty........................................... -- 159 465
Uninvoiced receipts................................ -- 219 446
Other.............................................. 912 1,207 1,145
------ ------ ------
$4,428 $7,205 $6,753
====== ====== ======
</TABLE>
F-11
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
--------------
1995 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $1,189 $ 356
Book over tax amortization and depreciation expense...... 390 279
Allowance for doubtful accounts, billing adjustments and
chargebacks............................................. 775 801
Minimum tax credit carryforwards......................... 49 128
Accrued vacation and warranty............................ -- 154
Other.................................................... -- 142
------ ------
2,403 1,860
Valuation allowance for deferred tax assets.............. (162) --
------ ------
Total deferred tax assets.................................. 2,241 1,860
Deferred tax liabilities:
Tax over book amortization............................... (281) (366)
Amortization of legal costs.............................. (160) (160)
------ ------
Total deferred tax liabilities............................. (441) (526)
------ ------
Net deferred tax assets.................................... $1,800 $1,334
====== ======
</TABLE>
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------- JUNE 30,
1994 1995 1996 1997
------- ---------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal............................ $ 18 $ 110 $ 51 $111
State.............................. 35 660 83 30
------ ---------- ------- ----
53 770 134 141
Deferred:
Federal............................ -- (1,530) 423 --
State.............................. -- (270) 43 --
------ ---------- ------- ----
-- (1,800) 466 --
------ ---------- ------- ----
Income tax provision (benefit)....... $ 53 $ (1,030) $ 600 $141
====== ========== ======= ====
</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.
F-12
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company utilized $1.2 million in 1994, $2.6 million in 1995 and $2.0
million in 1996 of federal net operating loss carryforwards to offset taxable
income. The valuation allowance decreased $3.1 million during 1995 due
primarily to the utilization of net operating loss carryforwards and to the
reversal of a significant portion of the valuation allowance. The valuation
allowance decreased by $286,000 and $162,000 in 1994 and 1996, respectively.
At December 31, 1996, the Company has approximately $1.0 million 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>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -------------
1994 1995 1996 1996 1997
------- ------- ------- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal provision at
statutory rate.............. 34% 34% 34% 34% 34%
State income provision net of
federal benefit............. 6 6 6 6 6
Permanent differences........ 2 1 12 3 11
Change in valuation
allowance................... -- (65) -- -- --
Benefit of net operating
loss........................ (27) (28) (2) -- --
------- ------- ------- ----- -----
15% (52)% 50% 43% 51%
======= ======= ======= ===== =====
</TABLE>
Income taxes paid were $36,000 in 1994, $68,000 in 1995 and $352,000 in
1996, and $322,000 and $13,000 for the six months ended June 30, 1996 and
1997.
7. 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, without changing the total number
of shares of Common Stock into which the preferred stock can be converted. The
convertible preferred shares were converted to 5,004,608 shares of Common
Stock upon the closing of the initial public offering.
Initial Public Offering
In 1996, the Company sold in its initial public offering (IPO) 3,918,555
shares of its common stock yielding net proceeds of $49.8 million. The
proceeds were used to redeem preferred stock and to repay an existing line of
credit and capital leases.
Upon the closing of the IPO, the Company redeemed all 11,871 outstanding
shares of redeemable preferred stock at a redemption price of $1,000 per
share. In addition, the Company paid approximately $4.5 million in accreted
dividends on the redeemable preferred stock.
F-13
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Preferred Stock
The Board of Directors are 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.
Stock Option Plan
The Company's 1996 Stock Option Plan (the 1996 Plan) was adopted by the
Board of Directors and approved by the holders of the Company in 1996. The
1996 Plan provides for the grant of stock options to employees, officers and
directors, consultants and advisors to, the Company and its subsidiaries.
Under the 1996 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 Plan. The maximum
number of shares with respect to which options may be granted to any employee
under the 1996 Plan shall not exceed 200,000 shares of Common Stock during any
calendar year. The 1996 Plan replaces the 1994 Stock Option Plan which granted
355,758 options and was terminated in 1996. All options granted have 10 year
terms and generally vest and become exercisable over four or five years.
In 1996, the Company granted non-qualified options to purchase 653,278 and
93,551 at exercise prices of $5.75 and $10.00, respectively, which were deemed
fair market value as determined by the Company.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 7.1%
and 5.9%, respectively, no dividend yield, the volatility factor of the
expected market price of the Company's common stock was 0.5 and a weighted-
average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
F-14
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except for per share
information):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996
------ -------
<S> <C> <C>
Pro forma net income (loss)................................. $1,893 $(1,086)
Pro forma net income (loss) per share....................... $ 0.21 $ (0.10)
</TABLE>
Stock option information is as follows:
<TABLE>
<CAPTION>
1994 1995 1996 JUNE 30, 1997
---------------- ---------------- ------------------- -------------------
(UNAUDITED)
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding--
beginning of period.... -- 324,629 $0.14 355,758 $ 0.14 1,666,359 $8.86
Granted................. 324,629 $0.14 31,129 0.14 1,548,329 9.76 984,000 5.15
Exercised............... -- -- -- -- (201,228) 0.14 (177,316) 4.23
Cancelled............... -- -- -- -- (36,500) 13.61 (733,480) 11.94
------- ----- ------- ----- --------- ------ --------- -----
Outstanding--
end of period.......... 324,629 $0.14 355,758 $0.14 1,666,359 $ 8.86 1,739,563 $5.94
======= ===== ======= ===== ========= ====== ========= =====
Options available for
grant.................. 499,792 175,792
========= =========
</TABLE>
The following table summarizes the stock options outstanding and exercisable
as of June 30, 1997 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OPTIONS EXERCISE
EXERCISABLE OUTSTANDING PRICE
----------- ----------- --------
<S> <C> <C>
16,675 94,499 $ 0.14
632,124 1,430,178 4.75-7.38
34,686 39,686 9.69-10.00
31,000 175,200 12.50-14.00
------- --------- -----------
714,485 1,739,563 $ 5.94
======= ========= ===========
</TABLE>
In February 1997, the Company repriced 455,000 options by cancelling and
granting those options at fair market value. The repriced options retained
their vesting provisions.
There were 181,219 options exercisable at December 31, 1995 at a weighted-
average exercise price of $0.14. The weighted-average fair value of options
granted during 1995 and 1996 was $0.07 and $4.69, respectively. The weighted-
average contractual life of options outstanding at December 31, 1995 and 1996
was 9.0 years and 9.2 years, respectively.
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. 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 twelve months, including directors of the Company who are
employees, are eligible to participate in the
F-15
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
8. COMMITMENTS
The Company has noncancelable operating lease commitments for office space.
Rent expense approximated $399,000 in 1994, $443,000 in 1995 and $881,000 in
1996 and $410,000 and $535,000 for the six months ended June 30, 1996 and
1997, respectively. Future minimum rental commitments, which include office
space leased as of December 1996, are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31, 1997........................................ $ 875
1998................................................................. 844
1999................................................................. 765
2000................................................................. 496
2001................................................................. 83
------
$3,063
======
</TABLE>
The Company entered into capital leases of $1.5 million in 1996 which were
fully repaid in 1996.
9. RELATED-PARTY TRANSACTIONS
Pursuant to a management agreement, the Company paid annual fees in the
amount of $1,008,000 in 1994 and 1995 and $252,000 in 1996 to a management
company affiliated with certain shareholders of the Company. These amounts
represent the payroll and certain benefit costs of six senior management
personnel responsible for the operations of the Company.
The management agreement was terminated in March 1996 and the employees of
the management company became employees of the Company. The management fees
previously incurred by the Company under the management agreement closely
approximate the actual payroll and related benefits currently being directly
incurred by the Company, and the Company believes that these amounts are
reasonable and comparable to those that would have been incurred with an
unrelated third party. Additionally, the Company leased office space from
another company affiliated with certain shareholders of the Company under a
leasing arrangement which was terminated in August 1996. The Company recorded
rent expense of $28,000 in 1994, $68,000 in 1995 and $40,000 in 1996 in
connection with this lease. Another company, affiliated with certain
shareholders of the Company, received $462,000 in connection with the
repurchase of redeemable preferred stock of the affiliated company's
investment and its accreted dividends.
F-16
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SUBSEQUENT EVENTS
In July 1997, the Company entered into a Master Equipment Lease Agreement to
finance $5.5 million of telecommunications equipment to expand and enhance its
teleservices and prepaid wireless service businesses. The lease is a line of
credit payable on demand bearing interest at LIBOR plus one percent. Once the
equipment has been fully financed the lease will be converted into a three-
year lease payable in equal installments at an interest rate of approximately
8.5%.
In April 1997, Robert Sproul filed suit against the Company and its 80%
subsidiary, Wireless America Corp. ("WAC") in the Circuit Court for Dade
County, Florida. Mr. Sproul owns the remaining 20% of WAC. The suit relates to
WAC's termination of Mr. Sproul's employment as the President of WAC in March
1997, pursuant to an employment contract that was to expire in 1998, and
relates to certain rights which Mr. Sproul may have to require the Company to
purchase his 20% interest in WAC. Mr. Sproul claimed the purchase price for
his 20% interest was in excess of $2.8 million. The Company and Mr. Sproul
have agreed in principle to settle all of the claims asserted by Mr. Sproul.
The terms of the agreement in principle require the Company to buy Mr.
Sproul's 20% interest in WAC for a purchase price of $1.3 million. The parties
will also exchange full mutual releases and expect to negotiate and execute
other customary documents associated with the settlement of litigation. The
settlement of the suit is conditioned upon the completion of definitive
documentation.
F-17
<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............................................................. 7
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Price Range of Common Stock.............................................. 14
Capitalization........................................................... 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 29
Management............................................................... 40
Principal and Selling Shareholders....................................... 42
Description of Capital Stock............................................. 44
Underwriting............................................................. 45
Legal Matters............................................................ 46
Experts.................................................................. 46
Available Information.................................................... 46
Incorporation of Certain Information by Reference........................ 47
Index to Consolidated Financial Statements............................... F-1
</TABLE>
-----------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 Shares
LOGO
Common Stock
-----------
PROSPECTUS
-----------
Alex. Brown & Sons
INCORPORATED
Donaldson, Lufkin & Jenrette
SECURITIES CORPORATION
Furman Selz
August 13, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
