<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 10549
FORM 10-Q
(x) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999 or
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-28432
Boston Communications Group, Inc.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3026859
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sylvan Road, Woburn, Massachusetts 01801
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(Address of principal executive offices)
Registrant's telephone number, including area code: (617)692-7000
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_________________________________________________________________
(Former name, former address, former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of April 28, 1999 the Company had outstanding 16,594,456 shares of common
stock, $.01 par value per share.
<PAGE>
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets..............................3
Consolidated Statements of Operations....................4
Consolidated Statements of Cash Flows....................5
Notes to Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................8
Certain Factors That May Affect Future Results..........14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk....................................................18
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.......................................18
Item 6. Exhibits and Reports on Form 8-K........................18
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, December 31,
1999 1998
ASSETS ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,748 $ 18,523
Short-term investments 8,107 7,086
Accounts receivable, net of allowance for billing
adjustments and doubtful accounts of $2,150 in 1999
and $1,508 in 1998 20,470 18,432
Inventory 4,917 3,525
Deferred income taxes 1,403 1,564
Prepaid expenses and other assets 861 823
-------- --------
Total current assets 53,506 49,953
Property and equipment, net 38,938 38,055
Goodwill, net 3,309 3,460
Other assets 294 292
-------- --------
Total assets $ 96,047 $ 91,760
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,518 $ 884
Accrued expenses 11,893 10,124
Income taxes payable 464 496
Current maturities of capital lease obligations 1,095 1,052
-------- --------
Total current liabilities 15,970 12,556
Capital lease obligations, net of current maturities 390 546
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, 16,594,356 and
16,436,028 shares issued in 1999 and 1998
respectively 166 164
Additional paid-in capital 92,520 91,683
Treasury stock (101,420 shares, at cost) (673) (673)
Accumulated deficit (12,326) (12,516)
-------- --------
Total shareholders' equity 79,687 78,658
-------- --------
Total liabilities and shareholders' equity $ 96,047 $ 91,760
======== ========
</TABLE>
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Prepaid wireless services $ 7,872 $ 2,934
Teleservices 9,843 4,589
Roaming services 5,435 7,796
System sales 1,014 5,064
------- -------
24,164 20,383
Expenses:
Cost of service revenues 15,471 12,041
Cost of system revenues 735 2,673
Engineering, research and development 1,263 1,403
Sales and marketing 1,606 1,333
General and administrative 1,640 1,414
Depreciation and amortization 3,372 2,452
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Total operating expenses 24,087 21,316
------- -------
Operating income (loss) 77 (933)
Interest income 274 386
------- -------
Income (loss) before income taxes 351 (547)
Provision (benefit) for income taxes 161 (208)
------- -------
Net income (loss) per common share $ 190 $ (339)
======= =======
Basic net income(loss) per common share $ 0.01 $ (0.02)
======= =======
Weighted average common shares outstanding 16,442 16,255
======= =======
Diluted net income(loss) per common share $ 0.01 $ (0.02)
======= =======
Weighted average common shares outstanding 17,108 16,255
======= =======
</TABLE>
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income(loss) $ 190 $ (339)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,372 2,452
Deferred income taxes 161 -
Changes in operating assets and liabilities:
Accounts receivable (2,038) (3,942)
Inventory (1,392) 297
Prepaid expenses and other assets (41) (211)
Accounts payable and accrued expenses 3,403 660
Income taxes payable (32) (260)
------- -------
Net cash provided by (used in) operations 3,623 (1,343)
INVESTING ACTIVITIES
Purchases of property and equipment (3,915) (2,549)
Sales of short-term investments 5,946 5,976
Purchases of short-term investments (6,967) (6,157)
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Net cash used in investing activities (4,936) (2,730)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and employee
stock purchase plan 839 52
Repayment of capital leases (301) (278)
------- -------
Net cash provided by(used in) financing activities 538 (226)
------- -------
Decrease in cash and cash equivalents (775) (4,299)
Cash and cash equivalents at beginning of period 18,523 23,601
------- -------
Cash and cash equivalents at end of period $17,748 $19,302
======= =======
Supplemental disclosure of non-cash transactions:
Capital lease obligations $ 188
=======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by the
Company, without audit, and reflect all adjustments which in the opinion of
management, are necessary for a fair statement of the results of the interim
periods presented. All adjustments were of a normal recurring nature.
Certain information and footnote disclosures normally included in the annual
consolidated financial statements which are prepared in accordance with
generally accepted accounting principles have been condensed or omitted in
accordance with rules of the United States Securities and Exchange
Commission. Accordingly, the Company believes that although the disclosures
are adequate to make the information presented not misleading, the
consolidated financial statements should be read in conjunction with the
footnotes to the Company's audited consolidated financial statements
contained in the Company's Form 10-K for the fiscal year ended December 31,
1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
1999 1998
---- ----
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Net income (loss) $ 190 $ (339)
- --------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -
weighted average shares 16,442 16,255
Effect of dilutive securities:
Employee stock options 666 --
- --------------------------------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed conversion 17,108 16,255
- --------------------------------------------------------------------------------
Basic net income (loss) per common share $ 0.01 $ (0.02)
- --------------------------------------------------------------------------------
Diluted net income (loss) per common share $ 0.01 $ (0.02)
- --------------------------------------------------------------------------------
</TABLE>
3. INVENTORY
Inventories consisted of the following at (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Purchased parts $4,289 $2,690
Work-in-process 141 835
Finished goods 487 -
------ ------
$4,917 $3,525
====== ======
</TABLE>
<PAGE>
4. Segment Reporting
Divisional Data
---------------
(in thousands)
<TABLE>
<CAPTION>
Prepaid
Three months ended Wireless Roaming
March 31 Services Teleservices Services Systems Total
-----------------------------------------------------------------------------------------------------------------
1999
----
<S> <C> <C> <C> <C> <C>
Revenues $ 7,872 $9,843 $5,435 $ 1,014 $24,164
Gross margin 4,743 2,056 880 279 7,958
Operating income (loss) 587 536 146 (1,192) 77
1998
----
Revenues 2,934 4,589 7,796 5,064 20,383
Gross margin 391 948 1,939 2,391 5,669
Operating income (loss) $(3,075) $ (320) $1,106 $ 1,356 $ (933)
</TABLE>
5. CONTINGENCIES
In 1997, the Company received a letter from AT&T Wireless Services (AWS)
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
against AWS. The letter asserts that the claim gives rise to an obligation on
the part of the Company to indemnify AWS. No legal action has been brought
against the Company and no amount of potential damages has been specified.
Management believes that the claim is without merit and that the outcome is
unlikely to have a material impact on the financial condition of the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
CONSOLIDATED RESULTS OF OPERATIONS
The Company's total revenues increased 19% from $20.4 million in the three
months ended March 31, 1998 to $24.2 million in three months ended March 31,
1999. The growth was primarily attributable to a 168% increase in the Company's
principal business, prepaid wireless, and a 114% increase in teleservices
revenues. A 30% decline in roaming service revenues and an 80% decline in
systems revenues partially offset the growth in prepaid wireless and
teleservices.
The Company generated operating income of $77,000 during the quarter ended March
31, 1999 compared to an operating loss of $933,000 for the same period in the
prior year. The increase in 1999 resulted from a significant improvement in the
operating results of prepaid wireless services and teleservices, partially
offset by a decline in operating income from the systems and roaming services
divisions. The specifics of each division's revenues and operating results are
discussed in greater detail below:
DIVISIONAL DATA
<TABLE>
<CAPTION>
Prepaid
Wireless Roaming
Quarter ended March 31, Services Teleservices Services Systems Total
- ----------------------------------------------------------------------------------------------------------------
1999
- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 7,872 $9,843 $5,435 $ 1,014 $24,164
Gross margin $ 4,743 2,056 $ 880 $ 279 $ 7,958
Gross margin percentage 60% 21% 16% 28% 33%
Operating income (loss) $ 587 $ 536 $ 146 $(1,192) $ 77
Percentage of total revenues 7% 5% 3% (118)% 0%
1998
- ----
Revenues $ 2,934 $4,589 $7,796 $ 5,064 $20,383
Gross margin $ 391 $ 948 $1,939 $ 2,391 $ 5,669
Gross margin percentage 13% 21% 25% 47% 28%
Operating income (loss) $(3,075) $ (320) $1,106 $ 1,356 $ (933)
Percentage of total revenues (105%) (7)% 14% 27% (5%)
</TABLE>
PREPAID WIRELESS SERVICES DIVISION
Prepaid Wireless Services Division revenues increased 168% from $2.9 million in
the first quarter of 1998 to $7.9 million in the first quarter of 1999. The
Company's carrier customers began to more aggressively price and market prepaid
services and also added many new markets to the C2C network to help stimulate
this increase in revenues. As of March 31, 1999 there were approximately 1.2
million prepaid subscribers on the C2C network, compared to 377,000 subscribers
at March 31, 1998, an increase of 218%. The revenue increase excluded more than
$1.0 million due to two outages experienced on the C2C network resulting in
performance penalties and the inability to bill certain revenues. The outages
were the result of third party vendor software bugs that have been corrected and
the Company has put controls in place to help identify any such future issues in
advance. The
<PAGE>
Company believes that these corrections and controls will minimize the
likelihood of future outages. The Company has also incurred additional capital
expenditures to further system redundancy in the near future that should
significantly reduce downtime if an unforeseen outage occurs. However, there can
be no assurances that additional outages will not occur or that any such outages
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
Gross margins for the Prepaid Wireless Services Division improved from 13% of
prepaid wireless services revenues in the first quarter of 1998 to 60% of
prepaid wireless services revenues in the first quarter of 1999. The
improvement resulted from the significant increase in prepaid wireless services
revenues in 1999, without a corresponding increase in variable costs.
In the first quarter of 1999 the Prepaid Wireless Services Division generated
operating income of $587,000, compared to an operating loss of $3.1 million in
the first quarter of 1998. The operating losses incurred in 1998 were due to
costs associated with expansion of the C2C network, including personnel costs
and depreciation of telecommunications equipment and software. However, the
increases in revenues and gross margin in 1999 more than offset these costs that
are more fixed than variable, resulting in an operating profit.
TELESERVICES DIVISION
Teleservices Division revenues increased 114% from $4.6 million in the first
quarter of 1998 to $9.8 million in the first quarter of 1999. The significant
increase in Teleservices revenues resulted from new carrier customers,
additional services provided to existing carrier customers and increased revenue
generated from billing inquiry services provided to the Prepaid Division's
carriers. Teleservices revenues from prepaid billing inquiry services were $1.2
million for the quarter ended March 31, 1998 and increased to $4.0 million for
the quarter ended March 31, 1999.
Gross margins for the Teleservices Division were consistent for the quarters
ended March 31, 1998 and 1999. Despite the significant increase in Teleservices
Division revenues, the gross margin remained consistent due to increased costs
resulting from the Company's plan to support new business in the Teleservices
Division by leasing call center facilities, equipment and personnel from third
parties that are classified entirely in cost of services. In the first quarter
of 1998, a portion of these costs were classified as depreciation or general and
administrative expenses.
Operating income for the Teleservices Division increased from an operating loss
of $320,000 in the quarter ended March 31, 1998 to operating income of $536,000
in the quarter ended March 31, 1999. The increased revenue for the Teleservices
Division absorbed more of the fixed sales, administrative and depreciation costs
in the first quarter of 1999 compared to the same period in 1998.
ROAMING SERVICES DIVISION
Roaming services revenues decreased 30% from $7.8 million in the first quarter
of 1998 to $5.4 million in the first quarter of 1999. The decrease in roaming
services revenues in 1999 was primarily attributable to fewer suspensions of
<PAGE>
inter-carrier automatic roaming agreements and some cannibalization of
unregistered roaming use by prepaid wireless growth. In addition, demand for
the Company's roaming service, whose premium rates are set by the Company's
carrier customers, has been adversely affected by an increase in one-rate
registered roaming plans offered by some national carriers. The Company
anticipates that these trends will continue and, therefore, roaming services
revenues will continue to decrease over time as compared to prior periods.
Gross margins for the Roaming Services Division decreased from 25% of roaming
services revenues in 1998 to 16% in 1999. The decrease was primarily a result
of reduced roaming services revenues that could not absorb the fixed costs
associated with this Division.
Operating income for the Roaming Services Division decreased from $1.1 million
in 1998 to $146,000 in 1999. The decrease in 1999 was primarily a result of the
reduction in gross margin and lower absorption of fixed operating and
depreciation costs due to the decline in roaming services revenues.
SYSTEMS DIVISION
Systems revenues decreased 80% from $5.1 million in the first quarter of 1998 to
$1.0 million in the first quarter of 1999. The decrease was due to the decline
of orders for the Division's international prepaid systems. In addition, the
first quarter of 1998 included an unusually large sale to a wireless carrier
that was implementing prepaid wireless systems throughout South America.
Gross margins for the Systems Division decreased from 47% of systems revenues in
the first quarter of 1998 to 28% in the first quarter of 1999. The decrease
resulted from decreased systems revenue for the period that could not absorb
fixed manufacturing overhead.
The operating income for the Systems Division decreased from operating income of
$1.4 million in the first quarter of 1998 to an operating loss of $1.2 million
in the first quarter of 1999. The decrease in 1999 was primarily a result of
the reduced gross margin and lower absorption of fixed operating, depreciation
and amortization costs due to the decline in systems revenue.
OPERATING DATA
<TABLE>
<CAPTION>
1999 1998
% OF TOTAL % OF TOTAL
($ in thousands) TOTAL REVENUES TOTAL REVENUES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $24,164 100% $20,383 100%
Engineering, research and development 1,263 5% 1,403 7%
Sales and marketing 1,606 7% 1,333 7%
General and administrative 1,640 7% 1,414 7%
Depreciation and amortization 3,372 14% 2,452 12%
</TABLE>
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
<PAGE>
development, implementation and maintenance of existing and new services.
Engineering, research and development expenses decreased as a percentage of
total revenues from 7% to 5% for the quarter ended March 31, 1998 and 1999,
respectively. This decrease primarily resulted from engineers devoting less time
to developing and building out the C2C network infrastructure than they had in
the prior year. Since these engineers are devoted to supporting the operations
of the existing network, beginning in 1999 they are classified in cost of
services.
SALES AND MARKETING EXPENSES
Sales and marketing expenses include direct sales, marketing and product
management salaries, commissions, travel and entertainment expenses, in addition
to the cost of trade shows, advertising and other promotional expenses. As a
percentage of total revenues, sales and marketing expenses remained consistent
at 7% for the quarters ended March 31, 1998 and 1999. The increase in absolute
dollars for the first quarter of 1999 related to new marketing and business
development efforts for the Company. The Company expects to increase
expenditures for sales, marketing and product management in the future to assist
carriers with more prepaid marketing and distribution efforts. Such
expenditures are expected to remain relatively consistent as a percentage of
total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include salaries and benefits of employees
and expenses for other administrative support services provided to the Company.
General and administrative expenses as a percentage of total revenues remained
consistent at 7% for the quarters ended March 31, 1998 and 1999. General and
administrative expenses increased from $1.4 million in the first quarter of 1998
to $1.6 million in the first quarter of 1999 due to increased personnel and
other related costs to support the Company's growth.
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 amortized over eight years. Depreciation and
amortization expense increased from 12% of total revenues in the first quarter
of 1998 to 14% of total revenues in the first quarter of 1999. The increase in
1999 was due to the depreciation of additional technical equipment and software
to support the rapid expansion and enhancement of the Company's prepaid wireless
network. This increase was partially offset by a decrease in depreciation as a
percentage of Teleservices revenues since the growth in that business did not
require significant new investments in technology. Rather, the growth was
supported by an investment made in call center technology during 1997 and the
change in the Company's plan to support the growth in Teleservices by leasing
call center facilities, equipment and personnel from third parties and
classifying those amounts entirely in cost of services. Although depreciation
and amortization expense is not expected to increase as a percentage of revenues
in 1999, these expenses are expected to increase in absolute dollars due to
increased capital
<PAGE>
expenditures for telecommunications hardware and software, primarily related to
new C2C features and functionality and the continued expansion of the C2C
network.
INTEREST INCOME
Interest income decreased from $386,000 for the quarter ended March 31, 1998 to
$274,000 in 1999. 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 benefit of $208,000 for the quarter ended March 31, 1998 yielded
a 38% income tax benefit. Income tax expense of $161,000 for the quarter ended
March 31, 1999 yielded a 46% income tax rate, as compared to the statutory rate
of 40%. The Company's effective income tax rate is greater than the statutory
rate due to the impact of non-deductible goodwill from the Company's
acquisitions. The Company's effective income tax rate may be greater than 40%
in future periods due to the continued impact of non-deductible goodwill.
The Company has recorded a net deferred tax asset for net operating loss carry
forwards and other temporary differences based on management's assessment that
it is more likely than not that future results of operations will be sufficient
to realize this asset.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments remained relatively consistent
at $25.9 million at March 31, 1999 compared to $25.6 million at December 31,
1998. Net cash provided by operations of $3.6 million in 1999 was primarily
generated from $3.4 million in depreciation and amortization expense, which
resulted from the continued significant investment in telecommunications systems
and equipment. The increase in accounts payable and accrued expenses of $3.4
million resulted from the timing of payments and was offset by increased
accounts receivable due to the increased sales volume in 1999 and increased
inventory. Inventory increased in the first quarter of 1999 due to the
significant reduction in systems sales.
The Company's investing activities utilized $4.9 million of net cash in 1999.
The Company expended $3.9 million in the first quarter of 1999, including $2.8
million for telecommunications systems equipment and software for expansion of
the Company's C2C network. The Company also made $1.0 million in net purchases
of short-term investments during the quarter. The Company anticipates that over
the next 12 months it will continue to make significant capital investments for
additional equipment and enhanced feature capabilities to strengthen prepaid
wireless services.
The Company's financing activities generated $538,000 in net cash during the
quarter ended March 31, 1999, mainly due to proceeds from exercise of stock
options, partially offset by payments of capital lease obligations.
<PAGE>
The Company believes that its cash and cash equivalents, short-term investments
and the funds anticipated to be generated from operations would be sufficient to
finance the Company's operations for at least the next 18 months.
YEAR 2000
The Company is currently implementing enterprise-wide project and test plans to
ensure that all products, services and support systems can fully process
date/time data before, during, and after midnight, December 31, 1999, recognize
the year 2000 as a Leap Year and maintain existing interoperability and
interfaces with other devices already in use without any modifications or
changes in operations. The Company is proactively managing its readiness by:
1) Conducting comprehensive inventories of all hardware, software,
telecommunications providers, and material third party relationships.
This stage is complete and the process will continue to be updated
during 1999.
2) Seeking compliance certification from each vendor through direct
communication. The Company is conducting unit, regression,
interoperability, and call flow tests wherever possible. Dedicated
resources, including senior level management and paid consultants,
manage this comprehensive effort.
3) Implementing test plans that are supported by doctorate level
technical consultants and dedicated QA equipment and personnel that
are examining multiple static and rollover date scenarios. Testing is
projected to be completed by June 30, 1999.
The assessment process follows a method to focus on vendors/products that are
most significant to the Company's operations with the intent to maximize the
lead-time should any issues arise. For any systems that may need replacement,
the Company will take the necessary steps to obtain, test and install qualified
systems to ensure timely Year 2000 compliance.
In June 1998, the Company completed the re-write, redesign and implementation of
its C2C prepaid system. The Company's development team devoted nearly one year
to produce the necessary changes and included Year 2000 readiness as part of
this process. Additionally, desktop hardware and software, call distribution
systems and customer service handling software are 95% Year 2000 ready today.
To ensure Year 2000 readiness, the Company intends to upgrade these systems
through vendor provided Year 2000 patches or purchases of new systems in the
normal course of business during 1999. Core business teams for all divisions
expect to examine all internal and external support systems including
facilities, finance and human resource components. The Company has completed a
comprehensive on-site physical inventory and upgrade of all of its C2C nodes, of
which Year 2000 readiness was a component. The remedial action required as a
result of this inventory is minimal and expected to be implemented by September
30, 1999. In addition, BCGI has identified 40 UNIX servers that require upgrades
to be ready for Year 2000, 10 of which have been updated and 3 that are
scheduled for decommissioning. All necessary software for the remaining 27 UNIX
servers has been obtained and the project is expected to be completed by June
30, 1999.
The Company licenses some of the software used to support the Company's services
from only one source and these sources are small corporations. The Company is
testing the software of such sources and continues to receive updates from these
<PAGE>
sources to achieve Year 2000 readiness. In the event that any of these sources
are not ready by June 30, 1999, the Company will establish contingency plans to
ensure there will be no adverse impact on operations. The Company has licensed
the source code from one such vendor to aid the Company in Year 2000 readiness
testing efforts for the ROAMERplus service.
In March 1999 the Company's Systems Division completed testing of its prepaid
platform in use in several international markets and found that it was Year 2000
ready with no failures.
The Company is fully dependent on the services of multiple telecommunications
providers. If these providers fail to deliver services because of Year 2000
issues or otherwise, the Company would be vulnerable to serious service failures
and be exposed to liability to customers and third parties, including the
potential for significant lost revenue. The Company is communicating with all
providers in order to assess this risk. Additionally, the Company will evaluate
contingency options in the event of a failure by such providers. The Company has
not currently developed any contingency plans for the services of these
providers. In the event that tests reveal failures that cannot be remedied
within the Company's timetable for readiness, contingency plans will be
established.
The Company has spent significant amounts in research and development of its to
ensure that its products and services are Year 2000 ready. In addition, during
1998 and through March 31, 1999 the Company has incurred and expensed
approximately $440,000 in payroll, benefit and consulting costs for dedicated
resources related to Year 2000 issues. The Company currently estimates
additional costs of approximately $420,000 will be incurred in 1999 to resolve
Year 2000 issues. The Company anticipates that the amounts and resources
utilized to achieve Year 2000 readiness will not delay or reduce the resources
available to complete other projects.
The costs to complete Year 2000 analysis and remediation are based on
management's best estimates, which have been determined through numerous
assumptions about future events including the availability of resources and
other factors. However, there can be no assurances that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that could generate significant negative consequences include
undetected errors or defects of third party hardware and software utilized in
the Company's operations, noncompliance of other providers (phone service,
electricity, other utilities, etc.) and other uncertainties. 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 or other limitations of system functionality.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report contains forward-looking statements that involve risks and
uncertainties, including without limitation, statements regarding the trend of
decreased suspensions of inter-carrier automatic roaming agreements, prepaid
cannibalization of unregistered roaming and carrier marketing of one-rate
registered roaming plans to reduce roaming service revenues, expenditures as a
percentage or total revenues for sales, marketing and product management,
greater costs of depreciation and amortization and an effective income tax rate
greater than 40%. The Company's actual results may differ significantly from the
results
<PAGE>
discussed in the forward-looking statements. A number of important factors 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 continue to 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.
A number of the Company's Prepaid, Teleservices and Systems Division contracts
have been extended beyond their expiration dates or will expire in 1999 and
beyond. There can be no assurances that the Company will be successful in
renewing any of these contracts. If these contracts are not renewed the
Company's business, financial condition and results of operations could be
materially adversely affected.
The Company has experienced fluctuations in its quarterly operating results and
anticipates that such fluctuations will continue and could intensify. The
Company experienced an operating loss in 1997 and the first three quarters of
1998, primarily due to expenses associated with the development and expansion of
its C2C network. The Company's quarterly operating results may vary
significantly depending on a number of factors including, the timing of the
introduction or acceptance of new services offered by the Company or its
competitors, changes in the mix of services provided by the Company, variations
in the level of system sales, changes in regulations affecting the wireless
industry, changes in the Company's operating expenses, the ability to identify,
hire and retain qualified personnel and general economic conditions. Due to all
of the foregoing factors, it is possible that in some future quarter the
Company's results of operations will be below prior results or the expectations
of public market analysts and investors. In such event, the price of the
Company's Common Stock would likely be materially and adversely affected.
The Company historically has provided its services almost exclusively to
wireless carriers. Although the wireless telecommunications market has
experienced significant growth in recent years, there can be no assurance that
such growth will continue at similar rates, or at all, or that wireless carriers
will continue to use the Company's services. The Company expects that demand
for its roaming services will continue to decline as fewer inter-carrier roaming
agreements are suspended, prepaid cannibalization of unregistered roaming use
increases and carriers more frequently offer one-rate roaming plans. 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.
<PAGE>
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 support and
enhancement of its prepaid wireless services and systems to maintain system
reliability and expand the C2C network. Several of the Company's carrier
customer contracts contain penalty clauses that provide for reductions in
revenue for certain network outages. There can be no assurance that the Company
will successfully support and enhance the C2C network effectively to avoid
system outages and any associated loss in revenue, 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 expended significant amounts of capital to support the C2C
agreements it has secured with its carrier customers. Because C2C revenues are
principally generated by prepaid subscriber minutes of use, the Company's C2C
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 C2C carrier customers are becoming a more
significant portion of teleservices revenues and therefore these revenues are
dependent upon the size and growth of the C2C subscriber base.
The Company has experienced outages on the C2C network which have resulted in
performance penalties and unbilled revenue. Despite efforts to avoid outages in
the future, there can be no assurance that future outages will not occur. Such
outages can result in additional penalties and lost revenue for the Company. In
addition, outages could damage the Company's reputation. The occurrence of one
or more outages could have a material adverse effect on the company's business,
operating results and financial condition.
The Company has expanded its operations rapidly, creating significant demands on
the Company's administrative, operational, development and financial personnel
and other resources. In addition, the growth of the Company's Teleservices
Division is dependent on recruiting, training and retaining employees to perform
customer services responsibilities. Teleservices has also recently outsourced a
small portion of its call center operations to a third party vendor who is
responsible for certain operational functions, including hiring, training and
retaining employees. There can be no assurance that the vendor will continue to
be able to meet the Company's existing and future needs effectively. Additional
expansion by the Company may further strain the Company's management, financial
and other resources. There can be no assurance that the Company's systems,
procedures, controls and existing space will be adequate to support expansion of
the Company's operations. If the Company's management is unable to manage growth
effectively, the quality of the Company's services, its ability to retain key
personnel and its business, financial condition and results of operations could
be materially and adversely affected.
The Company's operations are supported by many hardware components and software
applications from third party vendors. There can be no assurances that these
<PAGE>
hardware components and software applications will function in accordance with
specifications agreed upon by the Company and its vendors. If the hardware and
software do not function as specified, the Company's business, financial
condition and results of operations could be materially and adversely affected.
The Company currently prices and sells all of its systems to international
customers in U.S. dollars. In addition, many Systems Division customers are
multinational corporations that are publicly traded in the U.S. All payments are
received in U.S. dollars which helps to protect the Company from the need to
hedge against foreign currency risk. While these provisions serve to protect
the Company from accounts receivable losses, there can be no assurances that
systems sales to foreign countries will not result in losses due to devaluation
of foreign currencies or other international business conditions outside of the
Company's control.
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.
The Company is actively addressing the concerns of its operations with respect
to Year 2000 issues. Company management, with the assistance of consultants, is
implementing an enterprise-wide project to identify systems, equipment, vendors
and customers that may be affected by the Year 2000 issues and to develop a
comprehensive plan to be in compliance with the Year 2000 issues prior December
31, 1999. The Company expects to make the necessary changes to be Year 2000
compliant, but there can be no assurances that the Company will adequately
identify all Year 2000 issues and the associated costs and expenses in a timely
manner. Also, there can be no assurance that such costs and expenses will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
The Company currently prices and sells all of its systems to
international customers in U.S. dollars. In addition, many Systems
Division customers are multinational corporations that are publicly
traded in the U.S. All payments are received in U.S. dollars which
helps to protect the Company from the need to hedge against foreign
currency risk. While these provisions serve to protect the Company
from accounts receivable losses, there can be no assurances that
systems sales to foreign countries will not result in losses due to
devaluation of foreign currencies or other international business
conditions outside of the Company's control.
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments
which would require disclosure under this item.
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
- ------- -----------------
On November 20, 1997, AT&T Wireless Services (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. No
legal action has been brought against the Company.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
a) Exhibits
The exhibits listed in the Exhibit Index are part of or included in
this report.
b) Reports on Form 8-K
NONE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Boston Communications Group, Inc.
- -------------------------------------
(Registrant)
Date: May 10, 1999 By: /s/ Karen A. Walker
------------------------------
Karen A. Walker
Vice President, Financial
Administration (Principal
Financial and Accounting
Officer and Duly Authorized Officer)
Date: May 10, 1999 By: /s/ Fritz von Mering
------------------------------
Fritz von Mering
Vice President, Corporate
Development
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 17,748
<SECURITIES> 8,107
<RECEIVABLES> 20,470
<ALLOWANCES> 2,150
<INVENTORY> 4,917
<CURRENT-ASSETS> 53,506
<PP&E> 38,938
<DEPRECIATION> 0
<TOTAL-ASSETS> 96,047
<CURRENT-LIABILITIES> 15,970
<BONDS> 0
0
0
<COMMON> 166
<OTHER-SE> 79,521
<TOTAL-LIABILITY-AND-EQUITY> 96,047
<SALES> 24,164
<TOTAL-REVENUES> 24,164
<CGS> 16,206
<TOTAL-COSTS> 24,087
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 274
<INCOME-PRETAX> 351
<INCOME-TAX> 161
<INCOME-CONTINUING> 190
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 190
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
