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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-4128
BOSTON COMMUNICATIONS GROUP, INC.
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(Exact Name of Registrant as Specified in its Charter)
MASSACHUSETTS 04-3026859
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
100 SYLVAN ROAD, SUITE 100, WOBURN, MASSACHUSETTS 01801
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(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (617) 692-7000
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The approximate aggregate value of the voting stock held by non-
affiliates of the registrant, computed by reference to the closing sales price
of such stock quoted on the Nasdaq National Market on March 3, 1998, was
$147,371,248.
The number of shares outstanding of the Registrant's common stock, $.01 par
value per share, as of March 3, 1998 was 16,261,655.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference in the following
part of this Form 10-K: information required by Part III (Items 10, 11, 12 and
13) of this Annual Report on Form 10-K is incorporated from the Proxy statement
relating to the 1998 Annual Meeting of Stockholders of the Company.
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ITEM 1. BUSINESS
BACKGROUND
GENERAL
Boston Communications Group provides innovative roaming services, prepaid
wireless services, teleservices and prepaid and voice systems to wireless
telephone carriers throughout North and South America. The Company's
ROAMERplus/TM/ roaming 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 airtime used. BCG is the leading provider of roaming services
to the unregistered roaming market. The Company's Teleservices Division provides
customer support teleservices to wireless carriers which allows them 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 Division provides carriers with prepaid wireless
services through its C2C(R) Network, which enables carrier subscribers to use
their wireless phone as if they were a post-pay subscriber, thereby expanding
service offerings to new and existing subscribers without the added billing
costs and collection risk. The Systems Division markets a voice processing
platform with enhanced features for providing prepaid wireless, voice messaging
and fax mail services to wireless and wireline carriers throughout North America
and South America. The Systems Division also manufactures prepaid systems which
are used to support the Company's C2C Network. In the fourth quarter of 1997 the
Company formally reorganized its corporate structure into four divisions,
Roaming Services, Teleservices, Prepaid Wireless Services and Systems.
Wireless telephone service has been one of the fastest growing areas of the
telecommunications industry over the last twelve 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 56 million in March 1998. This represents an
increase in market penetration from under 1% to over 20% of the United States
population. The CTIA also estimates that aggregate annual service revenues from
wireless subscribers grew from approximately $482.4 million in 1985 to
approximately $26.4 billion in 1996. A number of factors have contributed to
this growth, including the build-out of the wireless network infrastructure, the
decreasing cost of wireless telephones, the increasing mobility of the United
States population, technological improvements in the size and battery life of
wireless telephones and greater acceptance of wireless telephone use.
Significant growth in the wireless telephone market is expected to continue in
the future, particularly given the emergence of "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 94 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 annual services
revenue from wireless subscribers alone will be over $35 billion.
In August 1997, the Company completed a public offering and sold 3 million
shares of its common stock which raised net proceeds of approximately $35.8
million. The net proceeds will continue to be used for capital and other
expenditures in connection with the expansion of the C2C Network. In addition,
the Company purchased the remaining 20% of Wireless Americas Corporation (WAC)
for $1.4 million, bringing the Company's ownership to 100% of WAC's capital
stock. WAC was subsequently merged into Voice Systems Technology Inc. (VST).
The Company was organized as a Massachusetts corporation in August, 1988 and
introduced its ROAMERplus roaming service in 1991. The Company introduced
teleservices in 1993 and its prepaid wireless service in 1996. The Company's
systems were introduced in 1996 with the acquisition of VST. The Company's
principal office is located at 100 Sylvan Road, Suite 100, Woburn, Massachusetts
01801 and its telephone number is (617) 692-7000.
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DESCRIPTION OF BUSINESS
SERVICES
ROAMING SERVICES DIVISION
The Company's roaming service is being used by approximately 94 wireless
carriers that collectively hold licenses for over 1,100 markets in the United
States, Canada and Mexico. BCG services 9 of the 10 largest wireless carriers,
by number of subscribers, in the United States. 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.
In October, 1997 the Company finalized an agreement with AT&T to allow holders
of AT&T calling cards the ability to charge ROAMERplus calls to those cards. 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 switches. BCG pays for transport of the calls to
its facilities and for completion of the calls. Under its agreements with
carriers, which typically have a term of one year, BCG pays the serving carrier
for the airtime that the roamer uses and charges the roamer for the call. The
charge for the call appears directly on a telephone or credit card bill, with
BCG (typically, under the trade name "Wireless Roaming") 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 utilizing its own proprietary fraud control systems
as well as external systems, and validating the caller's credit before
completing the call.
TELESERVICES DIVISION
The Company designed and began providing teleservices in 1993 in response to
the industry's need for 24-hour, 365 day customer service. The Company's
teleservices program allows a carrier's subscriber to obtain 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 also assist carriers in billing and collections.
Most 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 to the provision of all of the carrier's customer
service activities. The Company currently provides teleservices to fifteen
wireless customers. Certain wireless carriers that have contracted for the
Company's prepaid wireless services have also engaged the Company to provide
teleservices for the carrier's prepaid subscribers.
The Company provides most of its teleservices from its service center in Woburn,
Massachusetts. The Company designed this facility 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 performance in a graphical format,
including information on call duration, compliance with contract standards and
operator performance.
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BCG has identified additional specific teleservices needs in the wireless
industry and has developed services to meet those needs. These services allow
the carriers to better manage the demands of hiring, training, managing and
retaining a large number of customer service representatives for specialized
service projects that often place significant increased demands on the capacity
of customer service centers. For example, BCG provides teleservice support to
carriers who are currently supporting prepaid subscribers on the C2C Network.
BCG's wireless-trained representatives are available to effectively answer
subscriber questions that are not handled by C2C's automated customer service
application. Additional specialized teleservices include LAWBUST, the Cellular
Telephone Industry Association's program developed by BCG and CTIA to assist law
enforcement officials and carriers in combating wireless fraud through on-line
access to the CTIA's proprietary database and other techniques. BCG also
provides special support services to carriers including dealer support, lead
management, phone number and NPA-NXX area code changes and third party
verification services.
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. BCG intends to continue to market and invest in its teleservices
technology in order to provide additional service offerings.
PREPAID WIRELESS SERVICES DIVISION
The Company introduced its C2C Network-based prepaid wireless service offering
in early 1996 and was offering the service in 153 U.S. Metropolitan Service
Areas (MSA's) as of December 31, 1997. The C2C Network permits a wireless
carrier to automatically switch a prepaid subscriber's call to the C2C 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 is
routed to the C2C Network and rated in real time based on the telephone number
called, carrier usage charges, taxes and applicable surcharges. When the
remaining balance is reduced to a minimal amount, the subscriber is able to
replenish the account by purchasing additional prepaid service from the carrier
with cash or a credit card. The C2C 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 compensate BCG for network usage by contracting at a per minute rate
for prepaid subscriber usage based on connection time between the carrier's
mobile switching center and the C2C Network voice node. The Company's existing
contracts to provide prepaid wireless services through the C2C Network are
generally two or three years.
The C2C 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 scaleable while remaining efficient
and cost-effective. The centralized database enables prepaid users to make calls
while roaming in other service areas where the C2C Network is in place.
During 1997, the Company deployed an additional 29 C2C nodes in various markets
across the United States, bringing the total number of C2C nodes deployed to 50
as of December 31, 1997. In that time the Company increased the total MSA's
commercially available and in use by prepaid subscribers to 153 from
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57 at December 31, 1996. Carriers are currently in the process of implementing
BCG prepaid systems in an additional 33 U.S. MSA's which, when combined with the
MSA's where prepaid service is now available, will cover over 70% of the U.S.
population.
In October, 1997 the Company entered into a Letter of Agreement with Rogers
Cantel, a Canadian wireless telephone carrier, for the provision of prepaid
wireless service in all of Rogers Cantel's Canadian markets. In September, 1997
the Company finalized an agreement with AT&T Wireless Services (AWS) to provide
wireless prepaid service in markets serviced by AWS. The Company currently
provides C2C to several other carriers, including AirTouch Communications, Bell
Atlantic Mobile, Bell South Cellular Corp., LA Cellular, Southern New England
Telephone Corp., Southwestern Bell Mobile Systems, Western Wireless' PCS
Division and Frontier Cellular in addition to several wireless resellers. The
Company is continuing to install, at its expense, the voice nodes and data links
that make up the C2C Network in order to support additional market areas under
existing carrier contracts and commitments. As of February 28, 1998 the
Company was supporting over 340,000 prepaid subscribers on behalf of carriers
who have deployed a BCG prepaid system in the United States and Canada.
SYSTEMS DIVISION
The Systems Division sells systems for prepaid wireless calling on a turn-key
basis primarily to international customers. It also markets systems for voice
messaging, fax mail and other enhanced service applications to Original
Equipment Manufacturers (OEM's) and wireless and wireline carriers throughout
North America. Since establishing this division, the Company has made
significant prepaid system sales in Mexico, Venezuela, Peru and Ecuador. To
support its systems and on-going sales efforts in Mexico, in 1997 the Company
established a Mexican subsidiary, BCG de Mexico, S.R.L which employs technicians
and other support staff throughout Mexico.
In October, 1997 the Company entered into a two-year agreement with Motorola,
Inc. through the Latin America Division of its Cellular Subscriber Sector for
the marketing and distribution by Motorola of the Company's systems in Central
America, South America and Puerto Rico.
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 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 Company has developed proprietary software to enable
its 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. The Company is developing a number of enhanced services
that it intends to make available to prepaid and traditional subscribers through
the C2C Network. These enhanced services will be designed to enable carriers to
generate additional sources of revenue from subscribers, in addition to
providing carriers with more extensive internal reporting capabilities.
The Company spent approximately $839,000, $3.2 million and $5.4 million on
engineering, research and development in 1995, 1996, and 1997, respectively.
The Company expects to continue to devote substantial resources to its
engineering, research and development activities in future years.
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SALES, MARKETING AND DISTRIBUTION
The Company's sales strategy is to establish and maintain long-term
relationships with its customers. The Company utilizes 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 teleservices and prepaid services.
The Company's sales force currently consists of 11 sales representatives
supervised by two senior sales executives. 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 typically 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 sales representatives are
supported by product specific account and service managers who also typically
have experience in the wireless industry and manage the accounts on a daily
basis after the completion of the initial sale. Most sales representatives are
strategically located in the carriers major geographic regions, however, the
Company's other sales, marketing and product management activities are supported
from its Woburn, Massachusetts facility, and from its Tulsa, Oklahoma Systems
Division location.
The Company's direct sales strategy is complemented by a marketing program that
includes participation in industry trade shows and advertising. 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.
Product and account management groups have been established for the prepaid
wireless and systems divisions. Each group focuses on understanding the prepaid
market and providing carriers with valuable information regarding prepaid
marketing and subscriber trends, distribution techniques and marketing success
factors. The Company works closely with the carriers and the industry to
disseminate and integrate this information into their prepaid programs to help
generate and retain prepaid subscribers. In addition, these departments focus
on identification of new features and functionality which drive incremental
prepaid business.
Distribution of prepaid services is a integral piece of the prepaid wireless
service business because it provides consumers with numerous channels to
purchase or replenish prepaid service. The Company continues to improve
distribution options for prepaid cards on behalf of the wireless carriers by
seeking arrangements with national distributors, retailers, resellers and
alternative channels to increase market penetration and exposure.
CUSTOMER BASE
The Company provides its services to wireless carriers of varying size,
expertise and capabilities. The Company currently provides one or more of its
services to approximately 94 wireless carriers in the United States, Canada and
Mexico, including 9 of the 10 largest cellular carriers in the United States.
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
84.6%, 82.4% and 74.5% of the Company's total revenues in 1995, 1996, and 1997,
respectively. Ameritech Cellular Services, Inc., Bell Atlantic Mobile,
Southwestern Bell Mobile Systems and Bell South Cellular Corp. accounted for
approximately for 14.8%, 12.3%, 6.4% and 11.4%, respectively, of total revenues
in 1996 and for 11.6%, 11.6%, 10.6% and 4.7%, respectively, of total revenues in
1997.
For the year ending December 31, 1997, the Company's Systems Division generated
$11.1 million in prepaid and voice system revenues. Of this revenue, 43.9%
represented sales to support prepaid service in several Mexican markets on
behalf of Tel-Cel, Mexico's largest wireless carrier and 41.5% of the revenue
represented system sales to three other customers.
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COMPETITION
The market for services to wireless carriers is highly competitive and subject
to rapid change. A number of companies currently offer one or more of the
services offered by the Company. In addition, many wireless carriers are
providing or can provide, in-house, the services that the Company offers. Trends
in the wireless telephone industry, including greater consolidation and
technological or other developments that make it simpler or more cost-effective
for wireless carriers to provide certain services themselves, could affect
demand for the Company's services and could make it more difficult for the
Company to offer a cost-effective alternative to a wireless carrier's in-house
capabilities. In addition, the Company anticipates continued growth in the
wireless carrier services industry, and consequently, the entrance of new
competitors in the future. BCG's principal competitor in unregistered roaming
market is National Telemanagement Corporation (NTC) and in the prepaid network
market, Brite Voice Systems, GTE Telecommunications Services, Inc. and NTC. In
the teleservices market, BCG competes with a variety of companies that have
inbound and outbound service centers. The Systems Division's principal
competitors in the voice processing systems market include Boston Technology,
Inc., Octel Communications Corp. and Centigram Communications Corp. The Systems
Division competes primarily with Atlas Telecommunications and Brite Voice
Systems in the turnkey prepaid system business.
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's 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. There can be no assurance that the Company
will be able to continue to compete successfully with its existing competitors
or with new competitors.
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 radio spectrum, including
entry, exit, rates and terms of operation. BCG presently neither operates any
facilities utilizing 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 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, a
deregulatory measure, may cause changes in the industry, including entrance of
new competitors and industry consolidation, which could in turn affect the
Company's cost of doing business or otherwise have a material effect on the
Company's business, financial condition and results of operations.
EMPLOYEES
As of December 31, 1997, the Company had a total of 860 full-time and part-time
employees. Of these employees, 616 serve in call center and related functions,
139 serve in technical support and technology development, 44 serve in sales,
marketing, product and account management and 61 serve in administration and
management. None of the Company's employees are represented by a labor union.
The Company believes that its employee relations are good.
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BACKLOG
As of December 31, 1997, the Company's backlog of firm orders for its systems
was $640,000. 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.
ITEM 2. PROPERTIES
The Company leases space at its four principal locations: Burlington and Woburn,
Massachusetts, Tulsa, Oklahoma and Mexico City, Mexico. The Woburn location
serves as a service center operations facility 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 Company is in the
process of negotiating additional lease space in its Woburn location in order to
accommodate the additional direct and indirect personnel required to support the
growth and expansion of its teleservices and C2C businesses. The Burlington
site was utilized for service center operations for teleservices and ROAMERplus
services throughout 1997 and into early 1998. Its operations are expected to be
fully consolidated into the Woburn facility in the first half of 1998. It is
anticipated that unused portions of the Burlington location will be subleased.
The Tulsa facility is used for the manufacturing and assembly of systems and
related sales efforts. The Mexico City office serves as the headquarters of its
technical service operation in Mexico. The Company also has 30 other leased
facilities throughout the United States which are used to house the Company's
voice nodes and certain equipment for the C2C Network.
ITEM 3. LEGAL PROCEEDINGS
On November 20, 1997, AWS sent a letter to the Company stating that it believes
that it is entitled to indemnification from the Company in respect to a certain
claim presently pending in a case brought by Ronald A. Katz Technology
Licensing, L.P. and MCI Telecommunications Corporation against AT&T Corp. in the
United States District Court for the Eastern District of Pennsylvania. The
letter asserts that Count 13 of the complaint, which relates in part to prepaid
wireless service, gives rise to an obligation on the part of the Company to
indemnify AWS with respect to that count. The amount in question is
undetermined. The suit against AT&T Corp. was filed on July 8, 1997. The
contract between the Company and AWS pursuant to which the Company presently
provides prepaid services to AWS, and upon which AWS's claim for indemnification
is based, was not executed until October 15, 1997. For this and other reasons,
the Company believes that the claim is without merit. To date, no legal action
has been brought against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the
Company, through solicitation of proxies or otherwise, during the last quarter
of the year ended December 31, 1997.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages and positions are
as follows:
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<CAPTION>
Name Age Position
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<S> <C> <C>
Paul J. Tobin 54 Chairman of the Board
Brian E. Boyle 49 Vice Chairman
E.Y. Snowden 43 President & Chief Executive Officer, Director
Frederick E. von Mering 44 Vice President, Finance and Administration,
Director
</TABLE>
Mr. Tobin has served as Chairman of the Board of Directors of the
Company since February 1996. He also served as the Company's President and
Chief Executive Officer from March, 1997 to February, 1998 and from 1990 until
February 1996. Prior to joining the Company, Mr. Tobin served as President of
Cellular One Boston/Worcester from July 1984 to January 1990 and as a Regional
Marketing Manager for Satellite Business Systems, a joint venture of IBM, Comsat
Corp. and Aetna Life & Casualty from April 1980 to June 1984. Mr. Tobin received
his undergraduate degree in economics from Stonehill College and his M.B.A. in
marketing and finance from Northeastern University. Mr. Tobin also serves as a
member of the Board of Trustees at Stonehill College.
Mr. Boyle has served as Vice Chairman of the Company since February
1996 and as Chairman, New Wireless Services of the Company from January 1994 to
February 1996. From July 1990 to September 1993, Mr. Boyle served as Chief
Executive Officer of Credit Technologies, Inc., a supplier of customer
application software for the wireless telephone industry. Prior to 1990, Mr.
Boyle founded and operated a number of ventures servicing the telecommunications
industry, including APPEX Corp. (now EDS Personal Communications Division of EDS
Corporation, a global telecommunications service company) and Leasecomm Corp., a
micro-ticket leasing company. Mr. Boyle earned his B.A. in mathematics from
Amherst College and his B.S., M.S. and Ph.D. in electrical engineering and
operations research from M.I.T. Mr. Boyle is also a Director of Saville Systems
PLC, a provider of customized billing solutions to telecommunications providers,
as well as of several private companies.
Mr. Snowden has served as the Company's President and Chief Executive
Officer since February, 1998. Prior to joining the Company, Mr. Snowden served
as President and Chief Operating Officer of American Personal Communications,
L.P. d/b/a Sprint Spectrum where he oversaw the launch of the Nation's first PCS
network. From 1991 to 1994, Mr. Snowden was Area Vice President, Personal
Communication & Intelligent Network Services at Pacific Bell, Inc. From 1988 to
1990, Mr. Snowden was a Principal at Mehta Burkett & Company, Inc. a merchant
banking firm. From 1986 to 1988, Mr. Snowden was an executive at Universal
Optical Company, Inc. where he held the positions of Chief Executive Officer and
President & Chief Operating Officer. Prior to 1986, Mr. Snowden was employed by
various organizations including The Beta Group, Boston Consulting Group, Inc.
and Price Waterhouse LLP. Mr. Snowden earned his B.S. in Mathematical Sciences
from Stanford University and his M.B.A. from Harvard Graduate School of Business
Administration.
Mr. von Mering has served as the Company's Vice President, Finance and
Administration since 1989. Prior to joining the Company, Mr. von Mering served
as Regional Vice President and General Manager for the paging division of
Metromedia, Inc., a communications company, from 1980 to 1986. From 1975 to
1979, Mr. von Mering was employed at Coopers & Lybrand LLP. Mr. von Mering
earned his B.A. degree in accounting from Boston College and his M.B.A. from
Babson College.
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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
Boston Communications Group, Inc.'s Common Stock is traded on the
Nasdaq National Market, under the symbol BCGI. The following table reflects the
range of high and low selling prices of the Company's common stock for the
periods indicated since the date on which the Common Stock commenced trading.
<TABLE>
<CAPTION>
1996 1997
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HIGH LOW HIGH LOW
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<S> <C> <C> <C> <C>
First Quarter -- -- $ 7 1/8 $ 3 7/8
Second Quarter $ 17 $ 14 15 1/16 4 1/8
Third Quarter 14 1/4 12 17 1/4 12 1/4
Fourth Quarter 16 1/8 4 3/8 19 8 1/2
</TABLE>
HOLDERS
At March 16, 1998, there were approximately 5,100 holders of Common Stock.
DIVIDENDS
The Company has never paid a cash dividend on its Common Stock. The Company
currently intends to retain all of its earnings to finance future growth and,
accordingly, does not anticipate paying any cash dividends in the forseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
The following tables should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1993 1994 1995 1996(1) 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues $ 8,694 $ 18,334 $ 34,220 $ 50,651 $ 68,099
Operating income (loss) (269) 405 2,129 610 (2,389)
Income (loss) from continuing operations(2) (332) 288 3,008 599 (1,116)
Income (loss) from discontinued operations (92) 1,507 (165) -- --
Net income (loss) (424) 1,795 2,843 599 (1,116)
Net income (loss) available to common
shareholders (1,454) 779 1,893 148 (1,116)
Basic net income (loss) per common share(3): (0.56) 0.24 0.57 0.02 (0.08)
Diluted net income (loss) per common share(3): (0.56) 0.22 0.22 0.01 (0.08)
CONSOLIDATED BALANCE SHEET DATA:
Cash and short-term investments 681 204 253 21,421 33,704
Working capital 695 1,098 2,082 26,433 38,210
Property and equipment, net 1,262 2,699 4,884 12,906 38,087
Total assets 6,889 8,867 13,614 51,959 93,385
Redeemable preferred stock 14,930 14,947 15,896 -- --
Shareholders' equity (deficit) $(11,370) $(10,591) $ (8,698) $ 42,893 $ 80,104
Dividends per common share -- -- -- -- --
</TABLE>
(1) In February 1996, the Company acquired VST for Common Stock and cash with an
aggregate value of approximately $2.5 million.
-10-
<PAGE>
(2) In 1995, the Company reversed the deferred tax asset valuation allowance,
resulting in a tax benefit of $1.8 million. In addition, in 1994 and 1995,
the Company realized benefits from net operating loss carryforwards of
$382,000 and $840,000, respectively. See Note 6 of Notes to Consolidated
Financial Statements.
(3) See Note 2 of Notes to Consolidated Financial Statements
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The management's discussion and analysis of financial condition and
results of operations have been included as Appendix A to this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data have been included in
Appendix B to this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-11-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The sections entitled "Election of Directors" and Reports Under
Section 16(a) of the Exchange Act appearing in the Company's proxy statement for
the annual meeting of stockholders to be held on May 21, 1998, sets forth
certain information with respect to the directors of the Company and reports
filed by certain persons under Section 16(a) of the Exchange Act and are
incorporated herein by reference. Certain information with respect to persons
who are or may be deemed to be executive officers of the Company is set forth
under the caption "Executive Officers of the Company" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The sections entitled "Executive Compensation", "Employment Agreements
with Named Executive Officers" and "Report of the Compensation Committee"
appearing in the Company's proxy statement for the annual meeting of
stockholders to be held on May 21, 1998, set forth certain information with
respect to the compensation of management of the Company and are incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners
and Management" appearing in the Company's proxy statement for the annual
meeting of stockholders to be held on May 21, 1998, set forth certain
information with respect to the ownership of the Company's Common Stock and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections entitled "Executive Compensation", "Employment Agreements
with Named Executive Officers," and "Certain Transactions" appearing in the
Company's proxy statement for the annual meeting of stockholders to be held on
May 21, 1998, set forth certain information with respect to certain business
relationships and transactions between the Company and its directors and
officers and are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of Boston
Communications Group, Inc. are included as Appendix B attached hereto:
Consolidated Balance Sheets-December 31, 1997 and 1996.
Consolidated Statements of Operations-Fiscal years ended December 31, 1997, 1996
and 1995.
Consolidated Statements of Stockholders' Equity-Fiscal years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Cash Flows-Fiscal years ended December 31, 1997, 1996
and 1995.
Notes to Consolidated Financial Statements.
-12-
<PAGE>
(2) FINANCIAL STATEMENT SCHEDULES
Index to Consolidated Financial Statement Schedules
For the three years 1997, 1996 and 1995:
Schedule II - Valuation and Qualifying Accounts
All other Schedules have been omitted because the required information is shown
in the consolidated financial statements or notes thereto or they are not
applicable.
(3) The Exhibits listed in the Exhibit Index immediately preceding the
Exhibits are filed as part of this Annual Report on Form 10-K.
(B) REPORTS ON FORM 8-K
None
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 20/th/ day of March,
1998.
BOSTON COMMUNICATIONS GROUP, INC.
By: /s/ E.Y. Snowden
--------------------------
E. Y. SNOWDEN
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ E.Y. Snowden President, Chief March 20, 1998
- ------------------------------ Executive Officer
E. Y. Snowden and Director
/s/ Fritz E. von Mering Vice President, March 20,1998
- ------------------------------ Finance and
Fritz E. von Mering Administration,
Director (Principal
Financial and
Accounting Officer)
/s/ Paul J. Tobin Chairman of the March 20, 1998
- ------------------------------ Board of Directors
Paul J. Tobin
-14-
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Brian E. Boyle Vice Chairman of the March 20, 1998
- ------------------------------ Board of Directors
Brian E. Boyle
/s/ Jerrold D. Adams Director March 20, 1998
- ------------------------------
Jerrold D. Adams
/s/ Craig L. Burr Director March 20, 1998
- ------------------------------
Craig L. Burr
/s/ Paul R. Gudonis Director March 20, 1998
- ------------------------------
Paul R. Gudonis
/s/ Gerald Segel Director March 20, 1998
- ------------------------------
Gerald Segel
/s/ Mark J. Kington Director March 20, 1998
- ------------------------------
Mark J. Kington
-15-
<PAGE>
APPENDIX A
-16-
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
- --------
Boston Communications Group provides innovative roaming services, prepaid
wireless services, teleservices and prepaid and voice systems to wireless
telephone carriers throughout North and South America. The Company's Roaming
Services Division provides carriers with ROAMERplus/TM/ call processing services
which give carriers the ability to generate revenues from subscribers who are
not covered under traditional roaming agreements by arranging payment for
roaming calls and paying carriers for the airtime used. BCG is the leading
provider of roaming services to the unregistered roaming market. The Company's
Teleservices Division provides customer support teleservices to wireless
carriers which allow carriers to outsource all or a portion of their customer
service activities, and are designed to help carriers retain subscribers, reduce
costs and manage growth. The Company's Prepaid Division provides carriers with
its prepaid wireless service, C\\2\\C(R), which enables carrier subscribers to
use their wireless phone as if they were a post-pay subscriber, thereby
expanding service offerings to new and existing subscribers without the added
billing costs and collection risk. The Systems Division markets a voice
processing platform with enhanced features for providing prepaid wireless, voice
messaging and fax mail services to wireless and wireline carriers throughout
North America and South America. The Systems Division also manufactures prepaid
systems which are sold directly to carriers and are used to support the
Company's C\\2\\C network.
The Company has achieved significant growth in revenues over the past five
years, with total revenues increasing from $8.7 million for the year ended
December 31, 1993 to $68.1 million for the year ended December 31, 1997. Total
revenues for 1997 represent a 34.3% increase over the $50.7 million in revenues
generated in 1996. The increase in revenues in 1997 over 1996 was primarily the
result of higher revenues generated from prepaid wireless services and system
sales which together account for 78.2%, or $13.6 million of the year to year
increase. Operating loss for 1997 was $2.4 million, compared to 1996 operating
income of $610,000. The operating loss was primarily due to expenses associated
with the additional investment to support the expansion of the C\\2\\C network.
The expansion is in response to new carrier agreements, as well as existing
carrier customers who added new markets to the C\\2\\C network. To support
carrier agreements, the Company increased the number of nodes deployed for the
C\\2\\C network from 21 in 1996 to 50 at the end of 1997. However, revenues
generated from these new carriers and markets were not sufficient to offset the
costs associated with the expansion, including capital, telecommunications, and
personnel. The lag in revenues was due to both the timing of deployments as well
as delays in certain carrier marketing and distribution programs. The Company
expects that it will continue to incur additional capital and personnel costs to
support the C\\2\\C network due to continued expansion as well as ongoing
development to support enhancements and new features. These costs and other
costs to support the C\\2\\C network will continue to be a significant
percentage of revenue until the subscriber base and usage revenues grow
sufficiently to cover operating costs.
-17-
<PAGE>
In August 1997, the Company completed a public offering and sold 3 million
shares of its common stock, raising net proceeds of approximately $35.8 million.
The proceeds are being utilized to support expenditures associated with the
C\\2\\C network, including capital and other operating costs and 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 which
are complimentary to those of the Company. The Company currently has no plans,
commitments or negotiations with respect to any such transactions.
-18-
<PAGE>
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items in the Company's Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
YEAR ENDED DECEMBER 31,
1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Roaming services 47.7% 63.6% 74.4%
Teleservices 25.0 26.5 25.6
Prepaid wireless services 11.0 0.6 0.0
System sales 16.3 9.3 0.0
- ----------------------------------------------------------------
Total revenues 100.0 100.0 100.0
- ----------------------------------------------------------------
Expenses:
Cost of service revenues 64.9 72.3 76.3
Cost of system revenues 9.1 5.1 0.0
Engineering, research
and development 8.0 6.4 2.5
Sales and marketing 7.5 5.8 5.7
Management fees 0.0 0.6 2.9
General and administrative 5.1 4.5 3.8
Depreciation and
amortization 8.1 4.1 2.6
Impairment of long-lived
assets 0.8 0.0 0.0
- ----------------------------------------------------------------
Total expenses 103.5 98.8 93.8
- ----------------------------------------------------------------
Operating income (loss) (3.5) 1.2 6.2
Interest income (expense) 1.6 1.2 (0.4)
- ----------------------------------------------------------------
Income (loss) from continuing
operations before income taxes (1.9) 2.4 5.8
Provision (benefit) for
income taxes (0.3) 1.2 (3.0)
- ----------------------------------------------------------------
Income (loss) from continuing
operations (1.6) 1.2 8.8
Loss from
discontinued operations 0.0 0.0 (0.6)
- ----------------------------------------------------------------
Net income (loss) (1.6) 1.2 8.2
Accretion of dividends on
redeemable preferred stock 0.0 0.9 2.7
- ----------------------------------------------------------------
Net income (loss) available to
common shareholders (1.6)% 0.3% 5.5%
- ----------------------------------------------------------------
</TABLE>
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
Years Ended December 31, 1997 and 1996
Service and system revenues
- ---------------------------
Total revenues increased 34.3% from $50.7 million in the year ended December 31,
1996 to $68.1 million in the year ended December 31, 1997. Roaming services
revenues remained stable in 1997 at $32.5 million compared to $32.2 million for
the year ended December 31, 1996. Although there were fewer suspensions of
inter-carrier automatic roaming agreements by the carriers in 1997, BCG was able
to offset this decrease in unregistered roaming traffic by expanding its billing
options and maintaining its market presence. Teleservices revenues increased
26.9% from $13.4 million in the year ended December 31, 1996 to $17.0 million in
the year ended December 31, 1997. This increase was primarily attributable to
new and additional services provided to existing and new carrier customers.
Included in these additional revenues are billing inquiry services offered to
the carrier's C2C prepaid customers. Prepaid wireless service revenues increased
from $312,000 in the year ended December 31, 1996 to $7.5 million in the year
ended December 31, 1997. As of December 31, 1997, 50 C2C network nodes were
deployed in various markets throughout the United States compared to 21 as of
December 31, 1996. At the end of 1997, these nodes were processing calls for
approximately 290,000 subscribers. System revenues increased 136.2% from $4.7
million in 1996 to $11.1 million in the year ended December 31, 1997. The
increase in system revenues was attributable to prepaid systems sold to new and
existing customers in Mexico and South America in 1997.
Cost of service revenues
- ------------------------
Cost of service revenues consist primarily of wireless network and landline
transmission costs in addition to the personnel costs associated with operator
assisted roaming service calls, teleservice calls and C2C operations. Cost of
service revenues decreased as a percentage of service revenues from 79.6% to
77.5% in the years ended December 31, 1996 and 1997, respectively. The decrease
in cost of service revenues as a percentage of service revenues was primarily
due to significant increases in revenue generated by C2C to better absorb its
operating costs and, to a lesser extent, increased labor efficiencies in roaming
services and teleservices.
Cost of system revenues
- -----------------------
Cost of system revenues represent the cost of prepaid and voice systems sold by
the Systems Division. Cost of system revenues as of December 31, 1997 totaled
$6.2 million or 55.9% of system revenues and increased from $2.6 million or
54.9% of system revenues in the prior year. The reduction in the gross margin
resulted from a change in the mix of system sales towards international prepaid
sales which typically yield a lower margin.
Engineering, research and development expenses
- ----------------------------------------------
Engineering, research and development expenses primarily include the salaries
and benefits for software development and engineering personnel associated with
the development, implementation and maintenance of existing and new services.
Engineering, research and development expenses increased 68.8% from $3.2 million
in the year ended December 31, 1996 to $5.4 million in the year ended December
31, 1997 and increased as a percentage of revenues from 6.4% to 8.0% in the
years ended December 31, 1996 and 1997, respectively. This increase was
principally due to costs, including recruiting fees and other personnel costs,
associated with the Company's hiring of new personnel to support ongoing
development and enhancements, implementation and deployment of the C2C network,
and to a lesser extent, additional personnel and related costs to support the
expansion of teleservices and system sales. The Company intends to continue to
increase its engineering, research and development expenditures to support
future development and enhancements of its prepaid and other wireless services
and systems.
-20-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
Sales and marketing expenses
- ----------------------------
Sales and marketing expenses include direct sales and product management
salaries, commissions, travel and entertainment expenses, in addition to the
cost of trade shows, advertising and other promotional expenses. Sales and
marketing expenses increased 75.9% from $2.9 million in the year ended December
31, 1996 to $5.1 million in the year ended December 31, 1997, and increased as a
percentage of revenues from 5.8% to 7.5% in the years ended December 31, 1996
and 1997, respectively. The increase in sales and marketing expenses was due to
additional expenditures to support the concentrated efforts of the systems
division to expand internationally and the overall growth in the system sales.
These costs include additional sales and product management personnel,
commissions and other related expenses. Additional personnel, recruiting,
commissions and other personnel costs were also incurred to support sales and
marketing efforts in the prepaid service and teleservice divisions. The Company
expects to increase expenditures for sales, marketing and product management in
the future.
Management fees
- ---------------
Management fees of $252,000 for the year ended December 31, 1996, 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 recorded as
general and administrative expenses.
General and administrative expenses
- -----------------------------------
General and administrative expenses include salaries and benefits and other
expenses that provide administrative support to the Company. General and
administrative expenses increased 52.2% from $2.3 million in the year ended
December 31, 1996 to $3.5 million in the year ended December 31, 1997. General
and administrative expenses increased as a percentage of revenues from 4.5% to
5.1% in the years ended December 31, 1996 and 1997, respectively. The rise in
general and administrative expenses was primarily attributable to additional
employees and related recruiting expenses to support the Company's growth along
with a full year of costs associated with being a publicly traded company. In
addition, the increase relates to the costs of senior management personnel that
were classified as management fees through March 31, 1996.
Depreciation and amortization expense
- -------------------------------------
Depreciation and amortization expense includes depreciation of
telecommunications systems, furniture and equipment and leasehold improvements.
The Company provides for depreciation using the straight-line method over the
estimated useful lives of the assets, which range from three to seven years.
Goodwill related to acquisitions is being amortized over eight years.
Depreciation and amortization expense increased 162% from $2.1 million in the
year ended December 31, 1996 to $5.5 million in the year ended December 31,
1997. This increase was due primarily to the depreciation of additional
technical equipment and software to support the rapid expansion and continuing
development of the Company's prepaid wireless network. In addition, the
amortization of goodwill from the Company's acquisitions and depreciation of
technical equipment and software purchased for the teleservices business
resulted in greater depreciation and amortization expense in 1997. Depreciation
and amortization expense are expected to increase in 1998 due to increased
capital expenditures for telecommunications systems to support the continued
expansion and enhancement of the C2C network.
-21-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
Impairment of long-lived assets
- -------------------------------
The Company recognized a pre-tax charge of $569,000 in the year ended December
31, 1997 for a one-time write-down of assets that are no longer being used to
support the Company's operations.
Interest income (expense)
- -------------------------
Interest income increased from $589,000 in the year ended December 31, 1996 to
$1.1 million in the year ended December 31, 1997. Interest income was earned
from investments of the proceeds of the Company's public offerings and was
offset slightly by interest expense from the Company's capital leases.
Provision (benefit) for income taxes
- ------------------------------------
The income tax expense of $600,000 for the year ended December 31, 1996 yielded
a 50% income tax rate. The income tax benefit of $188,000 for the year ended
December 31, 1997 yielded a 14% income tax benefit. The higher rate in 1996 and
lower benefit in 1997 resulted primarily from the non-deductibility of goodwill
from the Company's acquisitions. The effective income tax rate is expected to
continue to be greater than 40% in 1998 due to the continued impact of non-
deductible goodwill.
The Company has recorded a net deferred tax asset for net operating loss
carryforwards based on management's assessment that it is more likely than not
that future results of operations will be sufficient to realize this asset.
Income (loss) from continuing operations
- ----------------------------------------
The Company recognized income from continuing operations of $610,000 in the year
ended December 31, 1996 and a loss of $2.4 million in the year ended December
31, 1997. The decrease in income from continuing operations reflects the
increased depreciation, telecommunication and personnel costs associated with
the deployment and operation of the C2C network. The additional expenditures
were greater than the increase in C\\2\\C revenue due to delays in the
carrier marketing and distribution of prepaid services.
-22-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
Years Ended December 31, 1996 and 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 service
revenues increased 26.8% from $25.4 million for the year ended December 31, 1995
to $32.2 million for the year ended December 31, 1996, due primarily to
increased revenues generated by higher call volumes from existing carrier
customers. The increase in roaming service 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 between wireless carriers
due to greater incidents of wireless fraud. Teleservices revenues increased
52.2% 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 attributed to new
and additional services provided to existing customers and new carrier
customers. Prepaid wireless services revenues in 1996 of $312,000 were generated
in markets where C2C was commercially available. As of December 31, 1996, 21 C2C
network switches were deployed in various markets throughout the United States.
Of these switches, fifteen were fully operational and processing live
transactions by the end of the year. System revenues of $4.7 million in 1996
consist principally of prepaid and voice systems sold by VST and Wireless
Americas Corporation (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% to 79.6% in the years ended December 31, 1995 and 1996, respectively. 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 C2C network and, to a lesser extent, due to higher per
minute cellular network charges for roaming service revenues.
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% to 6.4% in the years
ended December 31, 1995 and 1996, respectively. 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 C2C network for its
prepaid service, and to a lesser extent, additional personnel to support the
expansion of its teleservices.
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% to 5.8% in the years ended
December 31, 1995 and 1996, respectively. The increase in sales and marketing
expenses was due primarily to additional expenditures to support the more sales
intensive prepaid service business and to support concentrated sales and
marketing efforts related to teleservices.
-23-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
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.
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% to 4.5% in the years ended December 31, 1995 and 1996,
respectively. 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.
Depreciation and amortization expense
- -------------------------------------
Depreciation and amortization expense 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 Systems
assembly facility resulted in increased depreciation of furniture, 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 (benefit) 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.
Income (loss) from continuing operations
- ----------------------------------------
The Company recognized income from continuing operations of $2.1 million in the
year ended December 31, 1995 and $610,000 in the year ended December 31, 1996.
The decrease in income from continuing operations reflects the increased
depreciation, telecommunication costs and personnel costs associated with the
deployment of the C2C network 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.
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.
-24-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
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 December 31,
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
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
Revenues:
Roaming services $ 7,214 $ 8,327 $ 8,873 $ 7,820 $ 7,012 $ 8,048 $ 9,241 $ 8,160
Teleservices 3,847 3,303 3,272 2,991 3,789 4,375 4,369 4,476
Prepaid wireless services -- 69 42 201 790 1,513 2,571 2,665
System sales 92 1,141 1,726 1,733 4,028 2,417 1,852 2,793
- -----------------------------------------------------------------------------------------------------------------------
Total revenues 11,153 12,840 13,913 12,745 15,619 16,353 18,033 18,094
Expenses:
Cost of service revenues 8,311 9,465 9,763 9,067 9,419 10,882 11,954 11,925
Cost of system revenues 37 553 1,076 910 2,640 1,095 814 1,652
Engineering, research and
development 419 744 957 1,101 1,029 1,168 1,593 1,643
Sales and marketing 558 638 680 1,073 1,063 1,230 1,358 1,438
Management fees 252 -- -- -- -- -- -- --
General and
administration 482 621 607 618 649 824 833 1,164
Depreciation and
amortization 359 477 557 716 890 1,203 1,534 1,919
Impairment of long-lived
assets -- -- -- -- -- -- -- 569
- -----------------------------------------------------------------------------------------------------------------------
Total expenses 10,418 12,498 13,640 13,485 15,690 16,402 18,086 20,310
- -----------------------------------------------------------------------------------------------------------------------
Operating income (loss) 735 342 273 (740) (71) (49) (53) (2,216)
Interest income (expense) (6) (75) 341 329 262 135 254 434
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 729 267 614 (411) 191 86 201 (1,782)
Provision (benefit) for
income taxes 300 123 283 (106) 98 43 100 (429)
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations $ 429 $ 144 $ 331 $ (305) $ 93 $ 43 $ 101 $ (1,353)
=======================================================================================================================
</TABLE>
-25-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
AS A PERCENTAGE OF TOTAL REVENUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30 DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Roaming services 64.7% 64.8% 63.8% 61.4% 44.9% 49.2% 51.2% 45.1%
Teleservices 34.5 25.7 23.5 23.5 24.3 26.8 24.2 24.7
Prepaid wireless services -- 0.5 0.3 1.6 5.0 9.2 14.3 14.7
System sales 0.8 9.0 12.4 13.5 25.8 14.8 10.3 15.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Expenses:
Cost of service revenues 74.5 73.7 70.1 71.1 60.3 66.6 66.3 65.9
Cost of system revenues 0.3 4.3 7.7 7.1 16.9 6.7 4.5 9.1
Engineering, research and
development 3.8 5.8 6.9 8.7 6.6 7.1 8.8 9.1
Sales and marketing 5.0 5.0 4.9 8.4 6.8 7.5 7.5 8.0
Management fees 2.3 -- -- -- -- -- -- --
General and
administrative 4.3 4.8 4.4 4.9 4.2 5.0 4.6 6.4
Depreciation and
amortization 3.2 3.7 4.0 5.6 5.7 7.4 8.5 10.6
Impairment of long-lived assets -- -- -- -- -- -- -- 3.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 93.4 97.3 98.0 105.8 100.5 100.3 100.2 112.2
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 6.6 2.7 2.0 (5.8) (0.5) (0.3) (0.2) (12.2)
Interest income (expense) (0.1) (0.6) 2.4 2.6 1.7 0.8 1.4 2.4
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 6.5 2.1 4.4 (3.2) 1.2 0.5 1.2 (9.8)
Provision (benefit) for
income taxes 2.7 1.0 2.0 (0.8) 0.6 0.2 0.6 (2.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 3.8% 1.1% 2.4% (2.4)% 0.6% 0.3% 0.6% (7.5)%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-26-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
The Company has experienced fluctuations in its quarterly operating results and
anticipates that such fluctuations will continue and could intensify. The
Company's quarterly operating results may vary significantly depending on a
number of factors, including the timing of the introduction or acceptance of new
services offered by the Company or its competitors, changes in the mix of
services provided by the Company, changes in regulations affecting the wireless
industry, changes in the Company's operating expenses, personnel changes, and
general economic conditions. In particular, the Company's roaming services
revenues are affected by the frequency and volume of use of the Company's
roaming 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 teleservices customers, including engagement of the
Company for implementing or assisting in implementing special projects of
limited duration.
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.
During 1997, the Company made significant investments in personnel and
infrastructure to support the ongoing development and deployment of the C2C
network. These strategic investments have negatively impacted earnings and the
Company expects that these strategic investments will continue to negatively
impact earnings in the short-term.
Liquidity and Capital Resources
- -------------------------------
Cash, cash equivalents and short-term investments increased from $21.4 million
in 1996 to $33.7 million in 1997. The increase was due primarily to proceeds of
$35.8 million from the Company's public offering in 1997. Net cash provided by
operations was $4.4 million in 1997 due primarily to $5.5 million in
depreciation and amortization expense, resulting from a significant investment
in telecommunications systems and equipment, offset by a net loss of $1.1
million in 1997.
The Company's investing activities utilized $19.6 million of net cash in 1997.
The proceeds of the public offering were invested in short-term investments to
finance the growth of the business. In addition, $1.4 million was paid to
purchase the remaining 20% interest in WAC. The Company expended $28.6 million
to purchase property and equipment to support the expansion and growth of its
business. These purchases included $21.5 million of telecommunications systems
equipment and software to support the expansion of the Company's C2C network.
The Company anticipates that over the next 12 months significant capital
investments will be made to support service enhancements and additional nodes to
support the C2C network.
The Company's financing activities generated net cash of $37.9 million in 1997.
Through a public offering, the Company raised proceeds of $35.8 million, which
are being utilized for capital expenditures for the C2C network and for general
corporate purposes, including working capital. A portion of the net proceeds
may also be used for the acquisitions of businesses, products and technologies
which are complimentary to those of the Company. The Company currently has no
plans, commitments or negotiations with respect to any such transactions.
The Company entered into capital leases in 1997 to finance $3.2 million of
telecommunications equipment and software to expand and enhance teleservices and
prepaid wireless services.
The Company believes that its short-term investments and the funds anticipated
to be generated from operations will be sufficient to finance the Company's
operations for at least the next 18 months.
The Company has begun to review its computer systems for Year 2000 compliance
and has designed a plan to test whether their systems will conform to Year 2000
requirements. The Company is expensing all costs associated with these system
changes and does not anticipate that these costs will have a material impact on
its financial position or results of operations. Although management does not
expect Year 2000 issues to have a material impact on its business or results of
operations, there can be no assurance that there will not be interruptions of
operations or other limitations of system functionality.
-27-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
Certain Factors That May Affect Future Results
- ----------------------------------------------
This Annual Report contains forward-looking statements that involve risks and
uncertainties including statements regarding increased research and development
expenditures, costs of deploying and supporting the C2C network, increased
expenditures for sales and marketing and greater costs of depreciation and
amortization. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. A number of uncertainties
exist that could affect the Company's future operating results, including,
without limitation, technological changes in the Company's industry, the ability
of the Company to continue to successfully support its C2C network, the ability
of the Company's carrier customers to successfully market and sell C2C prepaid
wireless services, the Company's ability to retain existing customers and
attract new customers, increased competition and general economic factors.
Historically, a significant portion of the Company's revenues in any particular
period have been attributable to a limited number of customers. This
concentration of customers can cause the Company's revenues and earnings to
fluctuate from quarter to quarter, based on the volume of call traffic generated
through these customers, the services being performed for the teleservices
programs and the level of system sales. A significant decrease in business from
any of the Company's major customers, including a decrease in business due to
factors outside of the Company's control, would have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company historically has provided its services almost exclusively to
wireless carriers. Although the wireless telecommunications market has
experienced significant growth in recent years, there can be no assurance that
such growth will continue at similar rates, or at all, or that wireless carriers
will continue to use the Company's services. In addition, prepaid wireless and
PCS services are relatively new services in new markets, and if these markets do
not grow as expected or if the carriers in these markets do not use the
Company's services, the Company's business, financial condition and results of
operations would be materially and adversely affected.
The Company's future success depends, in large part, on the continued use of its
existing services and systems, the acceptance of new services in the wireless
industry and the Company's ability to develop new services and systems or adapt
existing services or systems to keep pace with changes in the wireless telephone
industry. Further, a rapid shift away from the use of wireless in favor of other
services, could affect demand for the Company's service offerings and could
require the Company to develop modified or alternative service offerings to
address the particular needs of the providers of such new services. There can be
no assurance that the Company will be successful in developing or marketing its
existing or future service offerings or systems in a timely manner, or at all.
The Company is currently devoting significant resources toward the enhancement
and deployment of its prepaid wireless services and systems, including continued
expansion of its C2C network. There can be no assurance that the Company will
successfully support and enhance the C2C network effectively, that the market
for the Company's prepaid service will continue to develop, or that the
Company's C2C network will successfully support current and future growth.
Furthermore, the Company has expanded significant amounts of capital to support
the C\\2\\C agreements it has secured with its carrier customers. Because
C\\2\\C revenues are principally generated by prepaid subscriber minutes of use,
the Company's C\\2\\C revenues can be impacted by the carrier's ability to
successfully market and sell prepaid services. In addition, teleservices
revenues associated with billing inquiry support for C\\2\\C customers are
becoming a more significant portion of teleservices revenues and therefore these
revenues are dependent upon the size and growth of the C\\2\\C subscriber base.
The Company has expanded its operations rapidly creating 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. If the Company's
management is unable to manage growth effectively, the quality of the Company's
services, its ability to retain key personnel and its business, financial
condition and results of operations could be materially and adversely affected.
-28-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
The market for services to wireless carriers is highly competitive and subject
to rapid change. A number of companies currently offer one or more of the
services offered by the Company. In addition, many wireless carriers are
providing or can provide, in-house, the services that the Company offers. In
addition, the Company anticipates continued growth and competition in the
wireless carrier services industry and consequently, the entrance of new
competitors in the future. An increase in competition could result in price
reductions and loss of market share and could have a material adverse effect on
the Company's business, financial condition or results of operations.
The Company's success and ability to compete is dependent in part upon its
proprietary technology. If unauthorized copying or misuse of the Company's
technology were to occur to any substantial degree, the Company's business,
financial condition and results of operations could be materially adversely
affected. In addition, some of the software used to support the Company's
services is licensed by the Company from single vendors, which are small
corporations. There can be no assurance that these suppliers will continue to
license this software to the Company or, if any supplier terminates its
agreement with the Company, that the Company will be able to develop or
otherwise procure software from another supplier on a timely basis and at
commercially acceptable prices.
The Company's operations are dependent on its ability to maintain its computer,
switching and other telecommunications equipment and systems in effective
working order and to protect its systems against damage from fire, natural
disaster, power loss, telecommunications failure or similar events. Any damage,
failure or delay that causes interruptions in the Company's operations could
have a material adverse effect on the Company's business, financial condition
and results of operations.
-29-
<PAGE>
APPENDIX B
-30-
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 23,601 $ 923
Short-term investments 10,103 20,498
Accounts receivable, net of allowance for billing adjustments and
doubtful accounts of $1,304 in 1997 and $1,242 in 1996 12,445 11,060
Inventory 1,550 1,189
Deferred income taxes 1,564 1,334
Prepaid expenses 630 495
- -------------------------------------------------------------------------------------------------------
Total current assets 49,893 35,499
Property and equipment:
Telecommunication systems 34,907 9,169
Furniture and equipment 5,739 3,359
Leasehold improvements 1,725 903
Systems in development 3,639 2,658
- -------------------------------------------------------------------------------------------------------
46,010 16,089
Less allowances for depreciation and amortization 7,923 3,183
- -------------------------------------------------------------------------------------------------------
38,087 12,906
Goodwill, net 4,067 3,159
Other assets 1,338 395
- -------------------------------------------------------------------------------------------------------
Total assets $ 93,385 $51,959
- -------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,786 $ 1,371
Accrued expenses 7,304 7,205
Income taxes payable 466 490
Current maturities of capital lease obligations 1,127 --
- -------------------------------------------------------------------------------------------------------
Total current liabilities 11,683 9,066
Capital lease obligations, net of current maturities 1,598 --
Commitments and contingencies
Shareholders' equity:
Preferred Stock, par value $.01 per share, 2,000,000 shares authorized,
0 shares issued and outstanding -- --
Common Stock, voting, par value $.01 per share, 35,000,000 shares authorized,
16,273,947 shares in 1997 and 12,725,749 shares in 1996 issued and outstanding 163 127
Additional paid-in capital 91,029 52,738
Treasury Stock (46,420 shares at cost) (372) (372)
Accumulated deficit (10,716) (9,600)
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity 80,104 42,893
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 93,385 $51,959
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
-31-
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Roaming services $32,461 $32,234 $25,446
Teleservices 17,009 13,413 8,774
Prepaid wireless services 7,539 312 --
System sales 11,090 4,692 --
- ---------------------------------------------------------------------------------------------
68,099 50,651 34,220
Expenses:
Cost of service revenues 44,180 36,606 26,100
Cost of system revenues 6,201 2,576 --
Engineering, research and development 5,433 3,221 839
Sales and marketing 5,089 2,949 1,934
Management fees -- 252 1,008
General and administrative 3,470 2,328 1,321
Depreciation and amortization 5,546 2,109 889
Impairment of long-lived assets 569 -- --
- ---------------------------------------------------------------------------------------------
70,488 50,041 32,091
- ---------------------------------------------------------------------------------------------
Operating income (loss) (2,389) 610 2,129
Interest income (expense) 1,085 589 (151)
- ---------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes (1,304) 1,199 1,978
Provision (benefit) for income taxes (188) 600 (1,030)
- ---------------------------------------------------------------------------------------------
Income (loss) from continuing operations (1,116) 599 3,008
Discontinued operations:
Loss from operations -- -- (129)
Loss on disposal -- -- (36)
- ---------------------------------------------------------------------------------------------
Loss from discontinued operations -- -- (165)
- ---------------------------------------------------------------------------------------------
Net income (loss) (1,116) 599 2,843
Accretion of dividends on redeemable preferred stock -- (451) (950)
- ---------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders $(1,116) $ 148 $ 1,893
- ---------------------------------------------------------------------------------------------
Basic net income (loss) available to common shareholders:
Continuing operations $ (0.08) $ 0.02 $ 0.62
Net income (loss) $ (0.08) $ 0.02 $ 0.57
Shares used in computing basic net income (loss) per share 14,007 8,352 3,336
Diluted net income (loss) available to common shareholders:
Continuing operations $ (0.08) $ 0.01 $ 0.24
Net income (loss) $ (0.08) $ 0.01 $ 0.22
Shares used in computing diluted net income (loss) per share 14,359 10,884 8,692
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
-32-
<PAGE>
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
-------------------------------------------------------------------
REDEEMABLE CONVERTIBLE
PREFERRED STOCK TREASURY STOCK PREFERRED STOCK COMMON STOCK
----------------------------------------------------------------------
SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 11,871 $ 14,946 -- -- 850 $ 1 3,335,985 $ 33
Accretion of dividends
on Redeemable
Preferred Stock -- 950 -- -- -- -- -- --
Net income -- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------
Balance at December 31,
1995 11,871 15,896 -- -- 850 1 3,335,985 33
Conversion of
Convertible
Preferred Stock -- -- -- -- (850) (1) 5,004,608 50
Accretion of dividends
on Redeemable
Preferred Stock -- 451 -- -- -- -- -- --
Redemption of
Redeemable
Preferred Stock and
Accreted Dividends (11,871) (16,347) -- -- -- -- -- --
Issuance of Common
Stock -- -- -- -- -- -- 4,183,928 42
Exercise of Common
Stock options -- -- -- -- -- -- 201,228 2
Treasury Stock
Purchase -- -- 46,420 (372) -- -- -- --
Net income -- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------
Balance at December 31,
1996 -- -- 46,420 (372) -- -- 12,725,749 127
Issuance of Common
Stock and options -- -- -- -- -- -- 3,000,000 30
Exercise of Common
Stock options -- -- -- -- -- -- 548,198 6
Net loss -- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------
Balance at December 31,
1997 -- $ -- 46,420 $(372) -- $-- 16,273,947 $163
- --------------------------------------------------------------------------------------------------
<CAPTION>
SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------
ACCRETIONS
OF DIVIDENDS
ADDI- ON REDEEM- SHARE-
TIONAL ABLE PRE- ACCU- HOLDERS'
PAID IN FERRED MULATED EQUITY
CAPITAL STOCK DEFICIT (DEFICIT)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ 1,016 $(3,075) $(8,566) $(10,591)
Accretion of dividends
on Redeemable
Preferred Stock -- (950) -- (950)
Net income -- -- 2,843 2,843
- -------------------------------------------------------------------------------
Balance at December 31,
1995 1,016 (4,025) (5,723) (8,698)
Conversion of
Convertible
Preferred Stock (49) -- -- --
Accretion of dividends
on Redeemable
Preferred Stock -- (451) -- (451)
Redemption of
Redeemable
Preferred Stock and
Accreted Dividends -- 4,476 (4,476) --
Issuance of Common
Stock 51,745 -- -- 51,787
Exercise of Common
Stock options 26 -- -- 28
Treasury Stock
Purchase -- -- -- (372)
Net income -- -- 599 599
- --------------------------------------------------------------------------------
Balance at December 31,
1996 52,738 -- (9,600) 42,893
Issuance of Common
Stock and options 35,769 -- -- 35,799
Exercise of Common
Stock options 2,522 -- -- 2,528
Net loss -- -- (1,116) (1,116)
- ------------------------------------------------------------------------------
Balance at December 31,
1997 $91,029 $ -- $(10,716) $ 80,104
- ------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
-33-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations $ (1,116) $ 599 $ 3,008
Adjustments to reconcile
net income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 5,546 2,109 888
Deferred income taxes (230) 466 (1,800)
Impairment of long-lived assets 569 -- --
Changes in operating
assets and liabilities,
excluding effects of
discontinued
operations and business
acquisitions:
Accounts receivable (1,385) (3,208) (2,655)
Inventory (361) (1,128) --
Prepaid expenses and other assets (151) (547) (51)
Accounts payable and accrued expenses 1,514 524 1,225
Income taxes payable (24) (297) 679
- --------------------------------------------------------------------------------------------------
4,362 (1.482) 1,294
Loss from discontinued operations -- -- (166)
Adjustments to reconcile loss from
discontinued operations:
Loss on disposal of discontinued operations -- -- 37
Cash flow related to results of operations until
disposal date -- -- 803
- --------------------------------------------------------------------------------------------------
-- -- 674
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) operations 4,362 (1,482) 1,968
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (1,398) (846) --
Purchase of short-term investments (12,976) (26,937) --
Sale of short-term investments 23,371 6,439 --
Purchase of property and equipment (28,552) (8,093) (2,993)
Net proceeds from sale of lines of business -- -- 1,074
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (19,555) (29,437) (1,919)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 2,528 28 --
Proceeds from issuance of stock 35,799 49,787 --
Repurchase of redeemable preferred stock -- (16,347) --
Purchase of treasury stock -- (372) --
Repayment of long-term capital leases (456) (1,507) --
- --------------------------------------------------------------------------------------------------
Net cash provided by financing activities 37,871 31,589 --
- --------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 22,678 670 49
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 923 253 204
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 23,601 $ 923 $ 253
- --------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
-34-
<PAGE>
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 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. 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,
1997 1996
- --------------------------------------------------
<S> <C> <C>
Corporate notes $10,103 $ 3,965
U.S. Treasury bills -- 16,533
- --------------------------------------------------
Total short-term investments $10,103 $20,498
==================================================
</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 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. The Company's prepaid wireless services provide
carriers, throughout the United States and Canada, 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 North and South America and Europe.
-35-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company has roaming, teleservice and prepaid wireless service agreements
with, and sells its systems to numerous carriers, 10 of which accounted for
84.6%, 82.4% and 74.5% of the Company's total revenues for the years ended
December 31, 1995, 1996 and 1997, 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,
1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Ameritech Cellular 11.6% 14.8% 15.0%
Bell Atlantic Mobile 11.6 12.3 13.9
Southern New England Telephone Corp. -- -- 11.9
Southwestern Bell Mobile Systems, Inc. 10.6 -- --
BellSouth Cellular Corp. -- 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 at December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------
<S> <C> <C>
Raw materials $1,114 $ 984
Work in process 127 129
Finished goods 309 76
- ---------------------------------
$1,550 $1,189
=================================
</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 between 3 and 5 years. Interest paid on funds borrowed to finance
the purchase of telecommunications systems is capitalized while in development.
During 1997, $46,000 in interest was capitalized.
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. During 1997, the Company
recorded an impairment loss of $569,000 for equipment which could no longer be
used in its business. The Company intends to sell these assets in 1998 and has
adjusted the net book value of the equipment to the estimated sales value of
$955,000.
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 and $786,000 as of December 31, 1996 and 1997, respectively.
Engineering, Research and Development
Costs associated with engineering, research and development are expensed as
incurred.
-36-
<PAGE>
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
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Pursuant to the previous requirements of the Securities and
Exchange Commission (SEC), common shares and common share equivalents issued by
the Company during the twelve-month period prior to the initial public offering
of the Company's common stock had been included in the calculations as if they
were outstanding for all periods prior to the offering in June 1996 whether or
not they were anti-dilutive.
In February 1998, the SEC issued Staff Accounting Bulletin 98 which, among other
things, conformed prior SEC requirements to Statement 128 and eliminated
inclusion of such shares in the computation of earnings per share. All earnings
per share amounts for all periods have been presented and where appropriate,
restated to conform to the Statement 128 and SEC requirements.
Accounting Pronouncements
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.
The results of the discontinued operations for the year ended December 31, 1995
are summarized below:
(In thousands)
- -----------------------------
Revenues $1,001
- -----------------------------
Operating loss $ (129)
- -----------------------------
Loss on disposal $ (36)
- -----------------------------
-37-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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:
<TABLE>
<CAPTION>
(in thousands)
- -----------------------------------------------
<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>
On January 31, 1996, the Company acquired 17.5% of the stock in WAC for $35,000.
WAC marketed and sold 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 December 31, 1996 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, 1996 1995
- ---------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Net revenues $51,873 $36,288
- ---------------------------------------------------
Net income available to
common stockholders $ 1 $ 1,558
- ---------------------------------------------------
Net income per common share $ 0.00 $ 0.17
===================================================
</TABLE>
In August 1997, the Company paid $1.4 million to purchase the final 20%
interest in WAC and recorded this amount as goodwill, which is being amortized
over eight years. WAC was subsequently merged into VST.
-38-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Billing adjustments and chargebacks $1,216 $1,240
Cellular airtime 1,544 2,447
Payroll 1,183 931
Telecommunication costs 779 442
Deferred revenue 426 105
Billing services 351 296
Other 1,805 1,744
- -------------------------------------------------------------------------------
$7,304 $7,205
===============================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 884 $ 712
Allowance for doubtful accounts, billing
adjustments and chargebacks 747 801
Minimum tax credit carryforwards 128 128
Accrued expenses and other 665 298
Asset impairment 200 ----
- ---------------------------------------------------------------------------
Total deferred tax assets 2,624 1,939
Deferred tax liabilities:
Tax over book depreciation and amortization expense (1,060) (605)
- ---------------------------------------------------------------------------
Total deferred tax liabilities (1,060) (605)
- ---------------------------------------------------------------------------
Net deferred tax assets $ 1,564 $1,334
===========================================================================
</TABLE>
-39-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
- -----------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ 51 $ 110
State 42 83 660
- -----------------------------------------------------------
42 134 770
Deferred:
Federal (209) 423 (1,530)
State (21) 43 (270)
- -----------------------------------------------------------
(230) 466 (1,800)
- -----------------------------------------------------------
Income tax provision (benefit) $(188) $ 600 $(1,030)
===========================================================
</TABLE>
The Company had fully reserved for its deferred tax assets through December 31,
1994. Based upon management's assessment that future operating results were
more likely than not to generate operating income to recognize the deferred tax
asset, a substantial portion of the valuation allowance was reversed.
The Company utilized $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 and $162,000 during 1995 and 1996,
respectively, due primarily to the utilization of net operating loss
carryforwards and to the reversal of a significant portion of the valuation
allowance.
At December 31, 1997, the Company has approximately $2.6 million of net
operating loss carryforwards for federal income tax return purposes available
for use in future years that expire beginning in 2006.
A reconciliation of the statutory rate to the effective rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal provision (benefit) at statutory rate (34)% 34% 34%
State income provision,
net of federal benefit (6) 6 6
Permanent differences 26 12 1
Change in valuation allowance -- -- (65)
Benefit of net operating loss (0) (2) (28)
- ----------------------------------------------------------------------------
(14)% 50% (52)%
- ----------------------------------------------------------------------------
</TABLE>
Income taxes paid were $68,000 in 1995, $352,000 in 1996 and $83,000 in 1997.
-40-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
Public Offerings
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.
In 1997, the Company sold in a public offering 3,000,000 shares of its common
stock yielding net proceeds of $35.8 million. The proceeds are being used for
capital and other expenditures in connection with the expansion of the C2C
network. In addition, the Company used $1.4 million of the net proceeds to
purchase the remaining 20% interest in WAC.
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 stockholders 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 355,738 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 1997 the Company's 1998 Stock Option Plan (the 1998 Plan) was adopted by the
Board of Directors, subject to the approval of the stockholders of the Company.
A total of 600,000 shares of common stock may be issued upon the exercise of
options granted under the 1998 Plan, which generally vest and become exercisable
over four or five years. No options were granted under this plan in 1997.
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.
-41-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 1996 and 1997: risk-free interest rates of 5.9% and 6.4%,
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.
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,
1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Pro forma net loss $(3,474) $(1,086)
- -------------------------------------------------------------
Pro forma net loss per share $ (0.24) $ (0.10)
- -------------------------------------------------------------
</TABLE>
Stock option information is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of year 1,666,359 $ 8.86 355,758 $ 0.14 324,629 $0.14
Granted 1,124,342 5.87 1,548,329 9.76 31,129 0.14
Exercised (538,630) 4.62 (201,228) 0.14 -- --
Canceled (834,417) 11.18 (36,500) 13.61 -- --
- --------------------------------------------------------------------------------------------------
Outstanding--end of year 1,417,654 $ 6.74 1,666,359 $ 8.86 355,758 $0.14
==================================================================================================
</TABLE>
The following table summarizes the stock options outstanding and exercisable as
of December 31, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------
OPTIONS OPTIONS EXERCISE
EXERCISABLE OUTSTANDING PRICE
- --------------------------------------------
<S> <C> <C>
-- 42,243 $ 0.14
362,224 1,054,378 4.88 - 7.00
24,691 88,691 9.38 - 12.50
31,000 232,342 $12.75 - 14.50
- --------------------------------------------
417,915 1,417,654
============================================
</TABLE>
-42-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
There are 91,859 options available for grant at December 31, 1997. There were
683,165 options exercisable at December 31, 1996 at a weighted-average exercise
price of $5.65. The weighted-average fair value of options granted during 1996
and 1997 was $4.69 and $3.44, respectively. The weighted-average contractual
life of options outstanding at December 31, 1996 and 1997 was 9.2 years.
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 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. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands) 1997 1996 1995
--------------------------
<S> <C> <C> <C>
Numerator for basic and fully diluted earnings per share:
Net income (loss) available to common shareholder:
Continuing operations $(1,116) $ 599 $2,058
- ----------------------------------------------------------- ------- ------- ------
Net income $(1,116) $ 599 $1,893
- ----------------------------------------------------------- ------- ------- ------
Denominator:
Denominator for basic earnings per share -
weighted average shares 14,007 8,352 3,336
- ----------------------------------------------------------- ------- ------- ------
Effect of dilutive securities:
Employee stock options 352 238 352
Conversion of preferred stock --- 2,294 5,004
------- ------- ------
Dilutive potential common shares 352 2,532 5,356
- ----------------------------------------------------------- ------- ------- ------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversion 14,359 10,884 8,692
- ----------------------------------------------------------- ------- ------- ------
Basic net income (loss) available to common
shareholder per common share:
Continuing operations $ (0.08) $ 0.02 $ 0.62
- ----------------------------------------------------------- ------- ------- ------
Net income (loss) $ (0.08) $ 0.02 $ 0.57
- ----------------------------------------------------------- ------- ------- ------
Diluted net income (loss) available to common
shareholder per common share:
Continuing operations $ (0.08) 0.01 0.24
- ----------------------------------------------------------- ------- ------- ------
Net income (loss) (0.08) 0.01 0.22
- ----------------------------------------------------------- ------- ------- ------
</TABLE>
-43-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Options to purchase 248,342 shares of common stock greater than $10.30 per share
were outstanding during 1997 but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price for the common shares and therefore the effect would be
antidilutive.
9. COMMITMENTS
The Company entered into a capital lease for $1.5 million in 1996 which was
fully repaid in 1996 and entered into a capital lease for $3.2 million in 1997.
The accumulated amortization of the assets under capital lease was $271,000 at
December 31, 1997. The Company also has non-cancelable operating lease
commitments for office space. Rent expense approximated $443,000 in 1995,
$881,000 in 1996 and $1.2 million in 1997. Future minimum payments under non-
cancelable capital leases and operating leases as of December 1997, are as
follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Year ending December 31, leases leases
- ----------------------------------------------
<S> <C> <C>
1998 $1,318 $1,246
1999 1,145 1,136
2000 562 778
2001 -- 198
2002 -- 38
- ----------------------------------------------
Total minimum
lease payments $3,025 $3,396
====== ======
Amounts representing
interest 300
------
Present value of net
minimum payments 2,725
Current portion 1,127
------
$1,598
======
</TABLE>
10. RELATED-PARTY TRANSACTIONS
Pursuant to a management agreement, the Company paid annual fees in the amount
of $1.0 million in 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 $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.
-44-
<PAGE>
Report of Ernst & Young LLP, 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, 1997 and 1996 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, 1997. Our audits also included the financial
statements schedule listed in the Index at Item 14(a). These financial
statements and schedule 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, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Boston, Massachusetts
February 6, 1998
-45-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*3.1 Restated Articles of Organization of the Company, as amended.
*3.3 Amended and Restated By-Laws of the Company.
*10.1 +1994 Stock Option Plan.
*10.2 +1996 Stock Option Plan.
*10.3 +1996 Employee Stock Purchase Plan.
**10.3.1 +Amendment Number 1, dated August 30, 1996, to 1996 Employee
Stock Purchase Plan
*10.5 Billing and Related Services Agreement dated April 19, 1995
between the Company and OAN Services, Inc. ("OAN").
*10.7 Software license Agreement dated March 30, 1995 between the
Company and Innovative Telecom Corporation ("ITC").
*10.8 Service Bureau Agreement dated April 7, 1995 between the Company
and ITC.
*10.9 BCG-ITC Strategic Partnership Agreement Addendum Dated March 31,
1996 between the Company and ITC.
*10.10 License Agreement dated April 23, 1996 between the Company and
MicroDimensions, Inc.
*10.11 Gateway Service Agreement dated June 5, 1995 between the Company
and SNET Diversified Group, Inc.
-46-
<PAGE>
**10.12 Frontier Service Agreement dated June 6, 1996 between the Company
and Frontier Communications of the West, Inc.
*10.15 Commercial Lease dated January 24, 1996 between the Company and
Cummings Properties Management, Inc.
**10.15.1 Commercial Lease dated February 26, 1996 between the Company and
Cummings Property Management, Inc. (Amendment No. 1).
**10.15.2 Amendment No. 2, dated August 8, 1996, to the commercial lease
between the Company and Cummings Property Management, Inc.
**10.15.3 Amendment No. 3, dated February 5, 1997, to the commercial lease
between the Company and Cummings Property Management, Inc.
*10.16 Lease dated November 30, 1994, as amended, between the Company
and Teachers Realty Corporation.
*10.17 Commercial/Industrial Lease dated September 27, 1995 between
the Voice Systems Technology Inc. ("VST") and Schleuter
Properties.
*10.22 Agreement dated April 22, 1996 between the Company and MDTelecom,
Inc. ("MDT").
**10.23 Memorandum of Understanding dated January 1, 1997 between the
Company and Milcon Communications (Hong Kong) Ltd.
*10.24 Subscription and Sale Agreement dated April 23, 1996 between the
Company and MDT.
*10.25 Source Code Release Agreement dated April 23, 1996 between the
Company and MDT.
*10.26 End-User Purchase and License Agreement between the Company and
Teloquent Communications Corporation.
**10.27 Software License and Services Agreement dated October 30, 1996
between the Company and Oracle Corporation.
**10.28 Software License and Services Agreement dated September 24, 1996
between the Company and Oracle Corporation.
***10.30 Registration Rights Agreement dated February 29, 1996 between
the Company and Michael J. Buchel, Zuyus Investment Company,
Peter T. Zuyus, Jr., Joseph Giegerich, Terrence G Hare III, J.
Michael Looney and John M. Freese, Sr.
***10.31 Amendment, dated December 16, 1996, to the Registration Rights
Agreement, dated February 29, 1996.
***10.32 Amendment, dated December 16, 1996, to the Registration Rights
Agreement, dated February 29, 1996.
-47-
<PAGE>
****10.33 Commercial Lease dated April 1, 1997 between the Company
and Cummings Properties Management, Inc.
#10.34 Master Equipment Lease Agreement between Boston Communications
Group, Inc. and Fleet Capital Corp. dated August 20, 1997
#10.35 Distribution Rights Agreement between Voice Systems Technology
Inc. d/b/a Boston Communications Group and Motorola dated May
15, 1997
#10.36 Long Distance Service Agreement between Boston Communications
Group, Inc. and AT&T Corp. dated July 10, 1997
10.38 Billing and Related Services Agreement between the Company and
AT&T Corp. dated October 14, 1997
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedules.
* Incorporated by reference to the Company's Registration Statement on Form S-1
filed June 17, 1996 (File No. 333-4128)
** Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996.
*** Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1997.
**** Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1997.
# Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1997.
+ Management contract or compensatory plan or arrangement filed as an exhibit
pursuant to Item 14(c) of this Report.
-48-
<PAGE>
SCHEDULE II
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
----------- ------- ---------------------- ------ ------
ADDITIONS
----------------------
CHARGED TO
----------
BALANCE AT CHARGED TO OTHER
---------- ---------- -----
BEGINNING OF COSTS AND ACCOUNTS DEDUCTIONS BALANCE AT
------------ --------- -------- ----------- ----------
DESCRIPTION PERIOD EXPENSES DESCRIBE (1) DESCRIBE (2) END OF PERIOD
- ----------- ------------ --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for billing adjustments
and uncollectible accounts $1,242 -- $636 $574 $1,304
Year ended December 31, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for billing adjustments
and uncollectible accounts 884 30 896 564 1,242
Year ended December 31, 1995:
Reserves and allowances deducted
from asset accounts:
Allowance for billing adjustments
and uncollectible accounts 546 -- 642 304 884
</TABLE>
(1) Billing adjustments recorded as a reduction of revenue.
(2) Settlement of billing adjustments.
-49-
<PAGE>
AGREEMENT
This agreement (the "Agreement") is effective as of the 14 day of October
----
1997 (the "Effective Date,,) between the AT&T CORP., a corporation organized and
existing under the laws of the State of New York, on behalf of itself and its
affiliated companies (hereinafter "AT&T"), and BOSTON COMMUNICATIONS GROUP,
INC., a corporation organized and existing under the laws of the State of
Massachusetts on behalf of itself and its affiliated companies (collectively
"BCG").
RECITALS
WHEREAS BCG desires to purchase from AT&T and AT&T desires to provide
to BCG billing and collection services for BCG customers; and
WHEREAS AT&T desires to provide to holders of the AT&T Calling Card
the ability to charge BCG wireless airtime calls to the AT&T Calling Card;
NOW, THEREFORE, in consideration of the mutual benefits accruing to
each party, the parties hereby covenant and agree as follows:
Section 1. DEFINITIONS
-----------
As used in this Agreement and unless otherwise expressly indicated
herein, the following terms shall have the following meanings (such meanings to
be equally applicable to both the singular and plural forms of the terms
defined):
"AT&T Calling Card" - Those calling cards issued by AT&T displaying
-------------------
the AT&T name and logo, and an account number, which allow a customer to place
telephone calls and have the charges for such call billed to the customers.
This Agreement shall include calling cards issued by AT&T.
1
<PAGE>
"C&D" - The systems used to transfer exchange message interface
-----
("EMI") formatted billing data between BCG and other AT&T billing systems.
"Rated Message - A billing message which has been assembled and edited
--------------
by BCG, which shall include applicable BCG rates and charges, together with all
elements of an AT&T Calling Card billing number required for proper billing and
distribution by AT&T.
Section 2. USE OF AT&T NETWORK
-------------------
BCG shall, where such facilities are available, utilize the AT&T
Network in completing BCG Calls made with the AT&T Calling Card. This will
include access to AT&T's card database to obtain appropriate validation
responses.
Section 3. BILLING AND COLLECTION SERVICE DESCRIPTION
-------------------------------------------
AT&T shall provide or make available to BCG, and BCG shall purchase
through AT&T, billing and collection services ("Services") for BCG calls which
have been made using the AT&T Calling Card. Such Services shall consist of the
preparation of bills to BCG Customers, the mailing of statements of the amount
due for AT&T Calling Card calls, and the collection of monies due from BCG
Customers for such calls.
BCG shall submit billing data concerning calling made with the AT&T
Calling Card exclusively to AT&T, and shall not bill BCG Customers, directly or
otherwise, for BCG Calls made using the AT&T Calling Card.
Section 4. RATED MESSAGE PROCESSING BY BCG
-------------------------------
BCG shall deliver to AT&T Rated Message data concerning BCG Calls
which have been charged to an AT&T Calling Card. BCG shall provide such data at
least once per week (or more frequently, upon agreement of the parties) and in
the format specified by AT&T. AT&T shall reformat the Rated Message data into
an appropriate format and either bill such calls directly or transmit such data
to the appropriate billing agent for billing to BCG Customers.
2
<PAGE>
Section 5. PROCESSING AND BILLING
----------------------
Billing for BCG charges billed by AT&T will be rendered in accordance
with the normal billing cycles for AT&T bills. The total BCG charges billed by
AT&T shall be included in the customer's bill along with any other charges
billed by AT&T whenever possible.
Section 6. BILL FORMAT AND BILLING RESULTS INFORMATION
--------------------------------------------
To the extent possible, the format of the billing to be rendered to
BCG Customers pursuant to this Agreement shall include a designation for BCG as
the provider of service, together with message detail and amount due. AT&T
shall provide to BCG information concerning the results of billing performed on
behalf of BCG.
Section 7. CUSTOMER SERVICE
----------------
AT&T shall maintain a toll-free 800 telephone number to handle all
inquiries concerning billing for BCG Calls. AT&T shall provide sufficient
facilities and personnel, with respect to the customer service telephone
numbers, to handle all inquiries and complaints regarding billing for BCG Calls
in a reasonable and timely manner. All expenses associated with Customer service
shall be the responsibility of AT&T.
Section 8. SETTLEMENT AND PURCHASE OF RECEIVABLES
--------------------------------------
See attached Service Agreement.
Section 9. PAYMENT SCHEDULE TO BCG
-----------------------
AT&T shall pay to BCG the Purchase Price, computed in accordance with
Service Agreement, no later than 15 business days after the invoice date which
will be no later than 30 days after any calendar month. Payment will be made
via wire transfer to BCG's designated bank account. Payment to BCG will be
based on a review of the BCG invoice and the C&D report of billing records
received. Due to a continuous flow of a small percentage of billing records to
a recycle file, complete reconciliation is not possible. Therefore, AT&T agrees
to pay BCG the
3
<PAGE>
invoiced amount up to 105 % of the C&D report of billing records received. AT&T
and BCG agree to conduct a quarterly review of billing records for the purpose
of reconciling monthly discrepancies.
Section 10. SPONSORSHIP OF RATED MESSAGE
----------------------------
BCG represent and warrant to AT&T that the receivables for each and
every Rated Message with respect to which BCG shall deliver billing data to AT&T
under this Agreement is owned by BCG, free and clear of any and all liens or
claims by any third party, and that at the time of delivery of such Rated
Message data to AT&T the receivables for such Rated Message have not been
assigned, pledged, transferred, sold, exchanged, or otherwise conveyed or
encumbered.
Section 11. TAXES
-----
(A) Collection of Taxes. Except as set forth in Section 11 (D) and the
----------
attached Service Agreement, BCG is solely responsible for the determination of
the appropriate federal, state and local taxes and tax-associated rate elements,
including sales taxes and other taxes imposed on BCG Customers ("End-User
Taxes"). BCG hereby releases AT&T with respect to any and all liability arising
out of AT&T's compliance with BCG instructions and directions regarding the
imposition, computation and collection of End-User Taxes.
(B) Billing of Tax Returns. Except as set forth in Section 11 (D) and the
----------------------
attached Service Agreement, BCG shall file all required returns for all taxes
imposed with respect to BCG services, and shall pay or remit to the respective
taxing authorities all such taxes and any applicable interest or penalties.
(C) Indemnity. Except as set forth in Section 11 (D) and the attached
---------
Service Agreement, BCG agrees to indemnify and hold AT&T harmless from and
against any liability or loss resulting from any federal, state or local taxes,
including sales taxes, federal excise taxes and other taxes imposed on BCG
Customers, and including penalty, interest, additions to tax, surcharges or
other charges or expenses, including attorney's fees, payable or incurred as a
result of:
4
<PAGE>
(1) the delay or failure BCG to pay and federal state or local taxes,
or file any return or other information as required by law or this Agreement; or
(2) AT&T's compliance with this Agreement, or any determination by,
or advice of BCG, or AT&T's use of information provided by BCG in performing any
tax-related service hereunder; or
(3) any audit investigation or assessment by any goverrunental unit or
agency with respect to BCG calls billed by AT&T under this Agreement.
(D) BCG represents that, as of the date of execution of this Agreement no
state or local end-user taxes are due or collectable with respect to BCG calls.
The parties recognize that, on an interim basis, AT&T's billing arrangements may
result in the automatic computation, billing, collection, and remitting to
various state and local authorities of end-user taxes with regard to such calls.
AT&T wfll effect changes to its billing procedures as soon as practicable to
eliminate such billing. Until such time as changes are implemented, AT&T will be
solely responsible for the computation, imposition, collection and filing of
such federal, state and local End-User taxes and filing of related returns and
will indemnify and hold BCG harmless with regard to any liability resulting
therefrom.
Section 12. COLLECTION SERVICES
-------------------
AT&T shall process bills TO BCG Customers, including any adjustments
and allocations of aggregate amounts due, in a manner consistent with that
utilized by AT&T on its own behalf and in accordance with appropriate regulatory
requirements. AT&T shall utilize collection services pursuant to this Agreement
in a manner consistent with the process applied by AT&T on its own behalf. BCG
shall provide reasonable assistance to AT&T in connection with AT&T's collection
efforts.
Section 13. OTHER TERMS AND CONDITIONS
--------------------------
(A) Dispute Resolution
------------------
(1) The parties will attempt to settle all disputes, controversies or
claims, whether based
5
<PAGE>
in contract, tort, statute, fraud, misrepresentation or any other legal
theory, arising out of or relating to this Agreement and the Services
provided under this Agreement (hereinafter collectively "Disputes"),
through good faith negotiations. Except for Disputes that are subject to
the jurisdiction of the FCC and Disputes that are described in Section
13 (A) (3). Disputes not thus resolved shall be settled by final and
binding arbitration conducted in a mutually agreed location by 1 neutral
arbitrator, in accordance with this Agreement and the current Commercial
Arbitration Rules of the American Arbitration Association ("AAA"). The
arbitrability of Disputes shall also be determined by the arbitrator.
Each party shall bear its own expenses and the parties shall equally
share the filing and other administrative fees of the AAA and the
expenses of the arbitrator. Any award of the arbitrator shall be in
writing and shall state the reasons for the award. Judgment upon an
award may be entered in any Court having competent jurisdiction. The
arbitrator shall not have the power to award any damages in excess of
the dollar limits set forth in or excluded under the limitations of
liability contained in this Agreement nor to award punitive damages and
each party irrevocably waives any claim thereto. The arbitrator shall
not have the power to order prehearing discovery of documents or the
taking of depositions, but may compel attendance of witnesses and the
production of documents at the hearing. The Federal Arbitration Act, 9
U.S.C., Sections 1 to 14, shall govern the interpretation and
enforcement of this section 13(A).
(2) The parties, their representatives and participants and the arbitrator
shall hold the existence, content and the result of the arbitration in
confidence, except to the limited extent necessary to enforce a final
settlement agreement or to obtain or enforce a judgment on an
arbitration an award.
(3) Disputes relating to: (a) matters that are subject to the primary
jurisdiction of the FCC, a state Public Utility Commission or other
body, or (b) either parties compliance with the USE OF INFORMATION and
PUBLICITY AND MARKS Articles of this Agreement, a violation of which
would cause the INFORMATION
6
<PAGE>
or MARKS owners irreparable harm for which damages would be inadequate,
or ( c) billing disputes where the amount in controversy is less than
$50,000, shall be exempt from binding arbitration described in section
(1). As to Disputes described in subsections (a), (b) and (c ), the
claimant reserves the right to seek relief from a regulatory body having
primary jurisdiction or a court of competent jurisdiction, as
appropriate.
(4) Any initial demand for arbitration pursuant to Section (1) and any legal
action pursuant to Section (3) must begin within two years after the
case of action arises.
(B) Limitation of Liability
-----------------------
Each Party's liability to the other for any loss, cost, claim, injury,
liability, or expense, including reasonable attorney's fees, relating to or
arising out of any negligent act or omission in its performance of this
Agreement (not involving knowing and willful misconduct) shall be limited to
the amount of direct damage actually incurred. Absent such knowing and
willful misconduct, neither Party shall be liable to the other for any
indirect, special or consequential damage of any kind whatsoever.
(C) Indemnification
---------------
Except as provided in Section 11, each Party (the "Indemnifying Party") will
indemnify and hold harmless the other Party (the "Indemnified Party") from
and against any loss, cost, claim, liability damage and expense (including
reasonable attorney's fees) to third parties, relating to or arising out of
negligence or misconduct by the Indemnifying Party in the Performance of
this Agreement.
In addition, the Indemnified Party will, to the extent of its negligence or
misconduct, defend any action or suit brought by a third party against the
Indemnified Party for any loss, cost, claim, liability, damage or expense
relating to or arising out of negligence or misconduct by the Indemnifying
party in the Performance of this Agreement, The Indemnified Party will
notify the Indemnifying Party promptly in writing of any written
7
<PAGE>
claims, lawsuits or demands by third parties which the Indemnffied Party
believes the Indemnified Party is responsible for under this Section, and
will render the defense of such claim, lawsuit or demand. The Parties will
cooperate in every reasonable manner with the defense or resolution of such
claim, lawsuit or demand. The Indemnifying Party will not be liable under
this Section for settlements by the indemnified Party of any claim, lawsuit
or demand unless notice has been tendered to the Indemnifying Party in
writing and the Indemnifying Party has failed promptly to undertake the
defense.
(D) Term and Termination
--------------------
The term of this Agreement shall be one (1) year from the date hereof, and
shall be renewed from year-to-year thereafter unless either Party gives
ninety (90) days written notice prior to the end of the term or any renewal
thereof that it wishes to terminate this Agreement. In the event of a
material default under this Agreement, the non-defaulting Party shall have
the right to terminate this Agreement if the default is not cured within
thirty (30) days of the date that written notice of such default is given by
the non-defaulting Party to the defaulting Party.
(E) Proprietary Information
-----------------------
Attached to this Agreement as the Service Agreement and incorporated hereto
by reference is the Parties' Agreement with respect to proprietary
information. The terms and conditions of this Agreement shall be considered
proprietary information covered by the terms of the Parties' proprietary
information agreement.
(F) Access to Records
-----------------
Each party shall provide the other party, or its designee, with reasonable
access to all records relating to performance under this Agreement.
(G) Amendments and Waiver
---------------------
This Agreement may be amended only by written agreement of the Parties. No
amendment
8
<PAGE>
or waiver of any provisions of this Agreement, and no consent to any default
under this Agreement, shall be effective unless the same shall be in writing
and signed by a duly authorized representative on behalf of the Party
against whom such amendment, waiver or consent is claimed. In addition, no
course of dealing or failure of any Party to enforce strictly any term,
right or condition of this Agreement shall be construed as a waiver of such
term, right or condition.
(H) Assignment
----------
Any assignment by either Party to any non-affiliated entity of any right,
obligation or duty, in whole or in part, or of any other interest hereunder
except to a purchaser of all or substantially all of the assets of that
party, without the written consent of the other Party shall be void. All
obligations and duties of any party under this Agreement shall be binding on
all successors in interest and assigns of such Party.
(1) Notice and Demand
-----------------
Any notices, demands or requests made by either Party to the other Party
shall be in writing and shall be deemed to have been duly given on the
date delivered in person or deposited, postage prepaid, in the United
States Mail via Certified Mail, Return Receipt Requested, and addressed
as follows:
To BCG:
-------
General Counsel
Boston Communications Group, Inc.
100 Sylvan Road, Suite 100
Woburn, MA 01801
To AT&T:
--------
AT&T Card Product Manager
American Telephone and Telegraph Company
295 North Maple Avenue
Basking Ridge, NJ 07920
9
<PAGE>
(J) Force Majeure
-------------
Neither Party shall be held responsible for any delay or failure in
performance of any partof this Agreement to the extent that such delay or
failure is caused by fire, flood, explosion, war, strike, embargo,
government requirement, civil or military authorities, Act of God or by the
public enemy, acts or omissions of carriers, or other causes beyond the
control of either Party. If any force Majeure condition occurs, the Party
delayed or unable to perform shall give immediate notice to the other Party.
During the pendency of the force Majeure condition, the duties of the
Parties under this Agreement shall be abated and shall resume without
liability thereafter.
(K) EEO
---
Each Party agrees and warrants that, in the performance of this
agreement it will not discriminate or permit discrimination in employment
against any person or group of persons on the grounds of sex, race, age,
religion national origin or handicap in any manner prohibited by the laws of
the United States of any state or local government having jurisdiction.
(L) Governing Law
-------------
This Agreement shall be governed by the internal laws of the State of New
York.
(M) Merger
------
This Agreement and all Exhibits and Attachments hereto constitute the
entire understanding between the Parties and supersedes all prior
understandings, oral or written representations, statements, negotiations
proposals and undertakings with respect to the subject matter hereof.
(N) Severability
------------
If any provision of this Agreement is held invalid, unenforceable or void,
the remainder of this Agreement shall not be affected thereby and shall
continue in full force and effect.
10
<PAGE>
(0) Headings
--------
The headings in this agreement are for convenience and shall not be
construed to limit any of the terms herein or affect the meanings or
interpretation of this Agreement.
IN WITNESS WHEREOF, the Parties have executed this Agreement.
AMERICAN TELEPHONE & TELEGRAPH COMPANY
By: /s/ Lou Delery
------------------------------------
Lou Delery
Director - Domestic Product Management
Date:10-10-97
-------------
BOSTON COMMUNICATIONS GROUP, INC.
By:/s/ Robert J. Sullivan
---------------------------------------
Printed Name: Robert J. Sullivan
-----------------------------
Title: Vice President
------------------------------------
Date: 10-14-97
-------------------------------------
By:
---------------------------------------
Printed Name:
-----------------------------
Title:
------------------------------------
Date:
-------------------------------------
11
<PAGE>
SERVICE AGREEMENT
-----------------
DEFINITIONS
-----------
DEFINITIONS.
- ------------
As used in this Agreement (including the Schedules attached to this Agreement),
the terms set forth below will have the following respective meanings and will
be equally applicable to both the singular and plural forms of the terms
defined:
"Accepted Billable Message Revenue" means revenue billed to End Users at BCG
wireless roaming rates (exclusive of messages rejected in the initial C&D
editing process).
"Billable Messages" means those Messages that (a) consist of telephone calls to
be billed to billing numbers issued by AT&T, and (b) have not been rejected by
AT&T during the editing, balancing, and formatting process.
"Billable Message Minutes" means the billed minutes associated with any Billable
Message from which the Billing Services Charges will be calculated. Billed
minutes will be based on whole minutes. Whole minutes represent the minutes
portion of the billable time field that have been rounded upward to the next
minute.
"Billing Services Charges" means the agreed upon per minute fees due to AT&T
from BCG (net of any uncollectible amounts or messages rejected in the initial
C&D editing process) which rate shall include (a) billing, collection and
related service fees (b) uncollectible amounts and (c) costs associated with
electronic record transfer.
"Business Day" means any day except a Saturday, Sunday, or other day on which
national banking associations are authorized or required by law to close.
"End User" means the ultimate customer of wireless airtime telephone calls
provided by BCG using an AT&T calling card.
"Message" means a call record for operator-assisted or automated voice response
system calls using AT&T calling cards and such other legally permitted telephone
calls and services as the parties may mutual agree upon, each of which was
originated by an End User through BCG.
"Purchase Price" means the amount that AT&T will remit to BCG to purchase
receivables for Accepted Billable Message Revenue.
12
<PAGE>
"Taxes" means all taxes, charges (including without limitation surcharges),
fees, levies, or other assessments (including without limitation any income,
gross receipts, excise, ad valorem, sales, occupation, use, service, service
use, license, payroll, franchise, transfer and recording taxes, fees, surcharges
and charges) imposed by any governmental authority, whether computed on a
separate, consolidated, unitary, or combined basis or in any other manner, and
includes any interest, penalties, assessments, deficiencies, and additions to
any such tax.
"Tax Returns" means returns, declarations, reports, claims for refund, and
informational returns or statements relating to Taxes, including any schedules
or attachments thereto.
13
<PAGE>
BILLING SERVICES
----------------
1. BILLING SERVICES.
-----------------
(a) Preliminary Processing and Delivery of Messages. BCG will acquire
-----------------------------------------------
Message data and will perform all of the preliminary processing of the Messages,
which will include ensuring that the charge for each Message has been computed,
arranging Message data in the Approved Message Format and providing the
applicable batch control totals, including the total number of Messages per
transmission, excluding any applicable Taxes, per submission. After such
preliminary processing has been completed, BCG will electronically transmit the
Message data, in a form or manner that is compatible with AT&T's Software. BCG
acknowledges that AT&T will have no obligation to accept for processing any
Message data that does not conform to the Approved Message Format.
(b) Billable Messages. AT&T will purchase Billable Messages. AT&T
-----------------
will provide the vendor providing the validation gateway service with a copy of
the billable card types. AT&T may revise the billable card types from time to
time and will provide the validation gateway with a copy of the revised billable
file, either in written form or on electronic media, as soon as reasonably
practicable.
(c) Approved Message Format. Upon receipt of a Message transmission
-----------------------
from BCG, AT&T will determine whether the Message data contained thereon is in
the standard exchange message interface format or another format that has been
chosen by AT&T (the "Approved Message Format"). BCG hereby acknowledges that
AT&T has provided it with the current Approved Message Format. AT&T may from
time to time revise the Approved Message Format based on reasonable business
needs (as determined in good faith by AT&T), or the requirements of any
governmental authority and will provide BCG with a copy of the revised Approved
Message Format. BCG will comply with such new format within 90 days after
receipt of a copy of the updated or revised Approved Message Format; provided,
---------
however, that BCG will comply with such new format within 30 days after receipt
- -------
of a copy of the updated or revised Approved Message Format if AT&T notifies BCG
that such new format was revised to comply with industry-standard formats.
(d) Editing, Balancing, and Formatting . If BCG's Message data is in
----------------------------------
the Approved Message Format, AT&T will edit, balance, and format such Messages
in accordance with the requirements of AT&T. If any of BCG's Message data is
not in the Approved Message Format or if such Message data is rejected by AT&T
or AT&T discovers other errors as the result of editing, balancing, or reviewing
the format (such Messages are referred to as "Rejected Messages"), AT&T will
send such Rejected Messages (in standard machine readable form) to the BCG
Representative within seven Business Days after the receipt of the Message type
from BCG.
Billing Transmissions. After editing, balancing, and formatting the
---------------------
Messages in conjunction with the transmission of a Billing Transmission to the
End User's AT&T bill, AT&T will record the amounts due to BCG with respect to
such Billing Transmission.
14
<PAGE>
(g) Returned Messages. If any of BCG's Billable Messages are returned
-----------------
as unbillable by AT&T, AT&T will return such Message data to BCG within seven
Business Days after AT&T's receipt of such Billable Messages, and BCG will use
its best efforts (i) to determine the reason for the return, (ii) to correct the
Billable Messages, and (iii) to resubmit them as appropriate to AT&T for
resubmission. When available, AT&T will provide information to BCG regarding
Returned Messages, including the reason for return, in machine readable form.
(h) Inspection of Reports and Settlements. BCG will inspect and
-------------------------------------
review all reports and Settlement information prepared by AT&T and will notify
AT&T of its rejection of any incorrect reports and Settlement information within
60 days after receipt thereof. Failure to so reject any such report or
information will constitute acceptance thereof.
2. Settlement and Purchase of Receivables
--------------------------------------
(a) Disbursement by AT&T. BCG will invoice AT&T monthly based on
---------------
total Accepted Billable Message Revenue, less the related Billing Service
Charges. The net amount invoiced (referred to herein as the "Purchase Price")
will be disbursed by AT&T to BCG by wire or electronic funds transfer to the
bank or other depository designated in writing by BCG. The Purchase Price will
be remitted to BCG each month within 15 business days of AT&T's billing cycle.
(b) Calculation of Purchase Price. The Purchase Price will be
-----------------------
calculated based on Billable Message Minutes of Approved Messages less Rejected
Messages (or "Billable Messages") transmitted to AT&T to be billed to End User,
less Billing Services Charges to be paid (retained) by AT&T.
(c) Billing Services Charges Calculation. Billing Services Charges
------------------------------------
are calculated based on minutes included in Billable Messages at the rate of
$____ per Billable Message Minute.
(d) Uncollectible Messages. BCG is not responsible for any Billable
----------------------
Messages that may not be collected by AT&T from End User. However, BCG will use
reasonable efforts to ensure that End Users understand charges and are
authorized AT&T users.
(e) Reports. AT&T will provide reports to BCG that reflect the
-------
accepted amounts and the results of Rejected Messages, Returned Messages and
other adjustments. AT&T will transmit the reports no later than one month after
the receipt of Message data from BCG and will transmit Settlement reports at the
time that AT&T remits the Purchase Price to BCG.
3. TAXES.
------
(a) Federal, State, and Local Taxes. AT&T will be responsible for
-------------------------------
calculating all
15
<PAGE>
Taxes applicable to each Message, will bill and collect all taxes from the End
Users and will prepare and file all tax returns until AT&T notifies BCG that it
will no longer be providing these services. AT&T will provide BCG at least 120
days prior notice in writing as to when AT&T will cease providing these
services. AT&T will be liable for all tax rating and ren-dttances to
governmental authorities for the time period in which AT&T is responsible for
calculating, filing and remitting taxes. At which time BCG assumes
responsibility for calculating and remitting taxes, taxes collected from End
---------
Users by AT&T will be ren-dtted to BCG in the monthly Disbursement.
4. AT&T'S VGN NETWORK.
-------------------
(a) AT&T's VGN Network. In connection with the provision of services
------------------
by AT&T pursuant to this Agreement, BCG has requested that AT&T provide BCG with
access to AT&T 's proprietary VGN Network System (the 'System") for the purpose
of electronically transmitting certain data to AT&T and otherwise communicating
electronically with AT&T. AT&T will provide BCG with access to the System, and
BCG will comply with the terms and conditions relating to such access, and in
accordance with the other terms and provisions of this Agreement.
(b) Confidential Information. BCG agrees and acknowledges that, as
------------------------
between BCG and AT&T, information available through use of the System, other
than BCG Data, constitutes confidential and proprietary information of AT&T
subject to the restrictions on disclosure thereof set forth in the
Confidentiality Section of this Agreement. In addition to such obligations, BCG
agrees to hold any user identification codes and/or passwords provided to BCG
for the purpose of utilizing the System in strict confidence and BCG will not
disclose such codes and/or passwords to any other Person except employees of BCG
who have a need to know such codes and/or passwords. BCG hereby agrees to
indemnify and hold harmless AT&T, its employees, agents, representatives,
directors, and officers from any and all losses, liabilities, costs, and
expenses (including, without limitation, reasonable attorneys' fees and
expenses) arising from, or relating to, BCG's failure to comply with the
provisions of this Section.
5. BILLING INQUIRY SERVICES.
-------------------------
(a) AT&T Billing Inquiry Services During the Term, AT&T will (a)
-----------------------------
establish, at its expense, toll-free '800" telephone numbers to be used by End
Users for the purpose of making inquiries regarding charges for Billable
Messages reflected on bills issued by AT&T to End User and (b) provide customer
service representatives to assist End Users in connection with such inquiries
(collectively, the "Billing Inquiry Services").
(b) BCG Billing Inquiry Assistance AT&T will be responsible for
------------------------------
handling all Billing Inquiry calls to assist in handling End User inquiries.
However, in connection with Billing Inquiry Services, BCG will make BCG Billing
Inquiry Specialists available for additional assistance as needed when an End
User has specifically requested to speak to a BCG representative, to answer
16
<PAGE>
non-standard End User questions or other reasonable instances. Assistance will
be available during normal Billing Inquiry operating hours, as agreed to by AT&T
and BCG.
6. VALIDATION OBLIGATIONS.
-----------------------
(a) BCG Validation Obligations During the Term, BCG will at all times
--------------------------
perform, or cause to be performed, call validation in a manner that meets at
least the minimum standards described below.
(b) AT&T Validation Services. AT&T shall provide the access to
------------------------
facilities from AT&T Databases to transmit BCG's Queries to such Databases.
AT&T shall inform BCG of any significant outage or severe degradation of Service
to the designated BCG contact. AT&T shall provide a report of any such outage
or degradation to BCG within twelve (12) hours of the return of normal service.
The Service shall be available for BCG's access except during scheduled
maintenance or service downtime. BCG is not responsible for any losses
associated with records in the Approved Message Format it attempted to query and
validate through AT&T Databases but could not access.
While AT&T does not warrant the accuracy, availability, frequency or
updates or any other aspect of the Databases with which the Service is
interconnected or the data stored in the Databases, AT&T shall use its best
efforts to pass through to BCG:
-the accuracy of such data,
-the availability of access to such data,
-the frequency of update to such data, -the fraud control processes
for such data.
7. CAP ON UNCOLLECTIBLES (BAD DEBT)
--------------------------------
(a) If the amount of uncollectibles during the Contract Year exceeds
___ percent (__%) of the gross receivables, then BCG shall pay to
AT&T, within thirty (30) days after the receipt of appropriate
notification and supporting documentation, an amount equal to all
uncollectibles in excess of __% of the gross receivables.
(b) Uncollectibles shall be defined as any billable message that was
not ultimately collected by AT&T within 180 days of the date the
call was placed. Uncollectibles include amounts not collected due
to fraud, bankruptcy or failure to pay for any related reason. In
order to minimize uncollectible amounts, AT&T will take reasonable
and prudent steps to maintain an up-to-date current validation
database. This includes updating the database for invalid card
numbers on a timely basis.
(c) The following items or amounts are not considered uncollectibles
and are therefore not included in the uncollectibles calculation:
-applicable taxes related to a call record
17
<PAGE>
-amounts adjusted or credited by AT&T's billing inquiry centers
including amounts credited for AT&T discount plans or customer
courtesy credits
-amounts rejected by AT&T in the initial C&D editing, balancing and
formatting process, including recycled amounts
-amounts not identified and reported to BCG as uncollectible until
after 240 days (uncollectibles must be identified and reported
between 180 and 240 days)
(d) Other considerations
AT&T and BCG will act in good faith and take reasonable steps to minimize
uncollectibles. AT&T will monitor uncollectibles and provide BCG with data
regarding uncollectibles on a regular basis (at least quarterly). Data provided
to BCG will include but is not limited to:
-call detail for rejected transactions from C&D including reason codes
-call detail on adjusted amounts processed by AT&T's billing inquiry
centers
-call detail on uncollectible calls including reason codes
-detailed reports supporting uncollectible percentages
AT&T will provide BCG with access (24 hours a day, 7 days a week) to AT&T's Card
Protection Center to provide a secondary validation point should BCG suspect
fraudulent usage on an AT&T Calling Card.
Additionally, AT&T and BCG agree to share any other information regarding
circumstances that may impact uncouectibles.
18
<PAGE>
PROPRIETARY RIGHTS, DATA AND AUDIT RIGHTS
-----------------------------------------
SAFEGUARDING AND RETENTION OF BCG DATA.
- ---------------------------------------
AT&T will maintain reasonable safeguards against the destruction, loss, or
alteration of the BCG Data in the possession of AT&T and will store information
containing the BCG Data, in a secure area.
BCG DATA.
- ---------
As between AT&T and BCG, the BCG Data will remain solely BCG's property. BCG
hereby authorizes AT&T to have access to and to make use of such of the BCG Data
as is appropriate for the performance by AT&T of its obligations under this
Agreement. AT&T will not utilize the BCG Data for any purpose other than
providing the Services; provided, that AT&T will have the right to retain copies
of any BCG Data that AT&T deems necessary or appropriate for the purpose of
performing any services under this Agreement including, without limitation, with
respect to settlement processing services performed in accordance with the
Agreement.
BCG'S MAINTENANCE OF BCG DATA.
- ------------------------------
BCG will establish at least 90 days' backup of the BCG Data submitted to AT&T
for billing and will keep backup data and data files in its possession;
provided, however, that AT&T will have such access to any such backup data and
- -------- -------
data files as is reasonably required by AT&T in connection with the performance
of the Services.
OTHER
-----
RELATIONSHIP OF PARTIES.
- ------------------------
Neither party will be considered or be deemed to be an agent, employee, joint
venture or partner of the other party, and no relationship other than
independent contractor is intended or created by and between AT&T and BCG.
CONFIDENTIALITY.
- ----------------
Except as otherwise provided in this Agreement, each of the parties agrees that
all confidential information and trade secrets communicated to it by the other
party, whether before or after the Effective Date, will be, and will be deemed
to have been, received in strict confidence and will be used only for the
purposes of carrying out the obligations of, or as otherwise contemplated by,
this Agreement. Without obtaining the prior written consent of the other party,
neither party will disclose any such information received from the other party;
provided, however, that this Section will not prevent a party from disclosing
- -----------------
any such information that: (a) was already in the possession of such party
without being subject to confidentiality obligations; (b) is or becomes
generally available to the public other than as a result, directly or
indirectly, of a disclosure of such information by such party or by other
persons to whom such party disclosed such information; (c)
19
<PAGE>
is or becomes available to such party on a nonconfidential basis from a source
other than the other party or its representatives, provided that such source is
not bound by a confidentiality agreement with the other party; (d) is
independently developed by such party without the use of the other party's
confidential information; (e) is required to be disclosed pursuant to an
arbitration proceeding, provided that such disclosure is made in accordance with
the approval and at the direction of an Arbitration Panel; (f) is required to be
disclosed pursuant to a requirement of any governmental authority or any
statute, rule, or regulation, provided that such party gives the other party
notice of such requirement prior to any such disclosure; or (g) is reasonably
necessary to be disclosed in connection with a billing inquiry by an End User.
FEES AND EXPENSES.
- ------------------
Except as otherwise provided in this Agreement, all fees and expenses (including
without limitation legal and accounting fees and disbursements) incurred by
either of the parties in connection with the negotiation and preparation of this
Agreement or any other of the transactions contemplated hereby will be borne
solely by the party incurring such fees and expenses.
MEDIA RELEASES.
- ---------------
All press and media releases, public announcements and public disclosures by
either of the parties relating to this Agreement or its subject matter,
including without limitation promotional or marketing material (but not
including any announcement intended solely for internal distribution by a party
to its directors, officers and employees or any disclosures required by legal,
accounting, regulatory or stock exchange requirements beyond the reasonable
control of such party) will be coordinated with and approved by both parties to
the release thereof.
AMENDMENT.
- ----------
This Agreement may not be modified or amended except by a written instrument
executed by or on behalf of each of the parties to this Agreement.
20
<PAGE>
Exhibit 10.38
BILLING AND RELATED SERVICES AGREEMENT
between
AT&T Corp.
and
BOSTON COMMUNICATIONS GROUP, INC.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
NAMES UNDER WHICH
PLACE OF INCORPORATION DOING BUSINESS
---------------------- ---------------------------
<S> <C> <C>
1. Voice Systems Technology Inc. Delaware Boston Communications Group
2. Cellular Express, Inc. Massachusetts Boston Communications Group
3. BCG Securities Corp. Massachusetts Boston Communications Group
4. BCG Foreign Sales Corp. U.S. Virgin Islands BCG Foreign Sales Corp.
5. BCG de Mexico, S.r.l. Mexico Boston Communications Group
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-11139) pertaining to the Boston Communications Group, Inc.
1996 Stock Option Plan, (Form S-8 No. 333-11191) pertaining to the Boston
Communications Group, Inc. Non-Qualified Stock Options Pursuant to Written
Option Agreements and (Form S-8 No. 333-11195) pertaining to the Boston
Communications Group, Inc. 1996 Employee Stock Purchase Plan of our report dated
February 6, 1998, with respect to the consolidated financial statements
and schedule of Boston Communications Group, Inc. included in the Annual Report
(Form 10-K) for the year ended December 31, 1997.
Ernst & Young LLP
Boston, Massachusetts
March 19, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 23,601
<SECURITIES> 10,103
<RECEIVABLES> 12,445
<ALLOWANCES> 1,304
<INVENTORY> 1,550
<CURRENT-ASSETS> 49,893
<PP&E> 46,010
<DEPRECIATION> 7,923
<TOTAL-ASSETS> 93,385
<CURRENT-LIABILITIES> 11,683
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 79,941
<TOTAL-LIABILITY-AND-EQUITY> 93,385
<SALES> 68,099
<TOTAL-REVENUES> 68,099
<CGS> 50,381
<TOTAL-COSTS> 70,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,085)
<INCOME-PRETAX> (1,304)
<INCOME-TAX> (188)
<INCOME-CONTINUING> (1,116)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,116)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> OCT-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 923 923
<SECURITIES> 20,498 20,498
<RECEIVABLES> 11,060 11,060
<ALLOWANCES> 1,242 1,242
<INVENTORY> 1,189 1,189
<CURRENT-ASSETS> 35,499 35,499
<PP&E> 16,089 16,089
<DEPRECIATION> 3,183 3,183
<TOTAL-ASSETS> 51,959 51,959
<CURRENT-LIABILITIES> 9,019 9,019
<BONDS> 0 0
0 0
0 0
<COMMON> 127 127
<OTHER-SE> 42,766 42,766
<TOTAL-LIABILITY-AND-EQUITY> 51,959 51,959
<SALES> 12,745 50,651
<TOTAL-REVENUES> 12,745 50,651
<CGS> 9,977 39,182
<TOTAL-COSTS> 13,485 50,041
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (329) (589)
<INCOME-PRETAX> (411) 1,199
<INCOME-TAX> (106) 600
<INCOME-CONTINUING> (305) 599
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (305) 148
<EPS-PRIMARY> (0.02) 0.02
<EPS-DILUTED> (0.02) 0.01
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 5,003 5,003
<SECURITIES> 21,243 21,243
<RECEIVABLES> 10,465 10,465
<ALLOWANCES> 1,130 1,130
<INVENTORY> 743 743
<CURRENT-ASSETS> 39,303 39,303
<PP&E>
<DEPRECIATION>
<TOTAL-ASSETS> 52,986 52,986
<CURRENT-LIABILITIES> 8,565 8,565
<BONDS> 0 0
0 0
0 0
<COMMON> 127 127
<OTHER-SE> 43,447 43,447
<TOTAL-LIABILITY-AND-EQUITY> 52,986 52,986
<SALES> 13,913 37,906
<TOTAL-REVENUES> 13,913 37,906
<CGS> 10,839 29,204
<TOTAL-COSTS> 13,640 36,556
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (341) (260)
<INCOME-PRETAX> 614 1,610
<INCOME-TAX> 283 706
<INCOME-CONTINUING> 331 904
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 331 453
<EPS-PRIMARY> 0.03 0.06
<EPS-DILUTED> 0.03 0.04
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 253 353
<SECURITIES> 0 0
<RECEIVABLES> 6,250 7,487
<ALLOWANCES> 884 909
<INVENTORY> 0 65
<CURRENT-ASSETS> 8,497 9,843
<PP&E> 6,394 8,028
<DEPRECIATION> 1,510 1,825
<TOTAL-ASSETS> 13,614 18,787
<CURRENT-LIABILITIES> 6,415 9,143
<BONDS> 0 0
0 0
15,897 16,134
<COMMON> 33 37
<OTHER-SE> (8,732) (6,527)
<TOTAL-LIABILITY-AND-EQUITY> 13,614 18,787
<SALES> 0 92
<TOTAL-REVENUES> 34,220 11,153
<CGS> 0 37
<TOTAL-COSTS> 26,195 8,372
<OTHER-EXPENSES> 5,895 2,046
<LOSS-PROVISION> 642 177
<INTEREST-EXPENSE> 151 6
<INCOME-PRETAX> 1,979 729
<INCOME-TAX> (1,030) 300
<INCOME-CONTINUING> 3,009 429
<DISCONTINUED> (165) 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,,893 192
<EPS-PRIMARY> 0.57 0.05
<EPS-DILUTED> 0.22 0.02
</TABLE>
