<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 June 30, 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.
---------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3026859
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sylvan Road, Woburn, Massachusetts 01801
--------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (617)692-7000
-----------------------------------------------------------------
(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 August, 2 1999 the Company had outstanding 16,561,020 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.........16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................19
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders....20
Item 6. Exhibits and Reports on Form 8-K.......................20
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,466 $ 18,523
Short-term investments 7,039 7,086
Accounts receivable, net of allowance for billing
adjustments and doubtful accounts of $2,531 in 1999
and $1,508 in 1998 23,163 18,432
Inventory 3,922 3,525
Deferred income taxes 880 1,564
Prepaid expenses and other assets 1,553 823
--------- ---------
Total current assets 54,023 49,953
Property and equipment, net 43,622 38,055
Goodwill, net 3,157 3,460
Other assets 361 292
--------- ---------
Total assets $ 101,163 $ 91,760
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,283 $ 884
Accrued expenses 13,866 10,124
Income taxes payable 464 496
Current maturities of capital lease obligations 1,943 1,052
--------- ---------
Total current liabilities 18,556 12,556
Capital lease obligations, net of current maturities 1,902 546
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, 16,642,240 and
16,436,028 shares issued in 1999 and 1998,
respectively 166 164
Additional paid-in capital 92,876 91,683
Treasury stock (101,420 shares, at cost) (673) (673)
Accumulated deficit (11,664) (12,516)
--------- ---------
Total shareholders' equity 80,705 78,658
--------- ---------
Total liabilities and shareholders' equity $ 101,163 $ 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 Six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Prepaid wireless services $ 9,731 $ 4,043 $ 17,603 $ 6,977
Teleservices 10,707 6,226 20,550 10,815
Roaming services 5,733 7,059 11,168 14,855
System sales 1,250 3,932 2,264 8,996
-------- -------- -------- --------
27,421 21,260 51,585 41,643
Expenses:
Cost of service revenues 17,067 12,899 32,538 24,940
Cost of system revenues 863 2,180 1,598 4,853
Engineering, research and
development 1,551 1,176 2,814 2,579
Sales and marketing 1,664 1,308 3,270 2,643
General and administrative 1,794 1,469 3,434 2,883
Depreciation and amortization 3,544 2,695 6,916 5,146
Impairment of long-lived assets -- 698 -- 698
-------- -------- -------- --------
Total operating expenses 26,483 22,425 50,570 43,742
-------- -------- -------- --------
Operating income (loss) 938 (1,165) 1,015 (2,099)
Interest income 247 326 521 712
-------- -------- -------- --------
Income (loss) before income taxes 1,185 (839) 1,536 (1,387)
Provision (benefit) for income taxes 523 -- 684 (208)
-------- -------- -------- --------
Net income (loss) per common share $ 662 $ (839) $ 852 $ (1,179)
======== ======== ======== ========
Basic net income(loss) per common
share $ 0.04 $ (0.05) $ 0.05 $ (0.07)
======== ======== ======== ========
Weighted average common shares
outstanding 16,502 16,269 16,472 16,262
======== ======== ======== ========
Diluted net income(loss) per common
share $ 0.04 $ (0.05) $ 0.05 $ (0.07)
======== ======== ======== ========
Weighted average common shares
outstanding 17,041 16,269 17,075 16,262
======== ======== ======== ========
</TABLE>
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income(loss) $ 852 $ (1,179)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 6,916 5,146
Impairment of long-lived assets -- 698
Deferred income taxes 684 --
Changes in operating assets and liabilities:
Accounts receivable (4,731) (3,624)
Inventory (397) (1,191)
Prepaid expenses and other assets (801) (147)
Accounts payable and accrued expenses 5,141 (9)
Income taxes payable (32) (260)
-------- --------
Net cash provided by (used in) operations 7,632 (566)
INVESTING ACTIVITIES
Purchases of property and equipment (9,305) (4,393)
Sales of short-term investments 9,963 12,119
Purchases of short-term investments (9,916) (8,129)
-------- --------
Net cash used in investing activities (9,258) (403)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and employee
stock purchase plan 1,195 74
Repayment of capital leases (626) (562)
-------- --------
Net cash provided by (used in) financing activities 569 (488)
-------- --------
Decrease in cash and cash equivalents (1,057) (1,457)
Cash and cash equivalents at beginning of period 18,524 23,601
-------- --------
Cash and cash equivalents at end of period $ 17,466 $ 22,144
======== ========
Supplemental disclosure of non-cash transactions:
Capital lease obligations $ 2,873
========
</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 audited consolidated financial statements 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 Company's audited consolidated financial statements,
including the footnotes, thereto 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 Six Months
Ended June 30 Ended June 30
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per
share:
Net income (loss) $662 $(839) $852 $(1,179)
- -----------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -
weighted average shares 16,502 16,269 16,472 16,262
Effect of dilutive securities:
Employee stock options 539 -- 603 --
- -----------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversion 17,041 16,269 17,075 16,262
- -----------------------------------------------------------------------------------------
Basic net income (loss) per common share $0.04 $(0.05) $0.05 $(0.07)
- -----------------------------------------------------------------------------------------
Diluted net income (loss) per common share $0.04 $(0.05) $0.05 $(0.07)
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
3. Inventory
Inventories consisted of the following at (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Purchased parts $3,197 $2,690
Work-in-process 725 835
Finished goods -- --
------ ------
$3,922 $3,525
====== ======
</TABLE>
4. Segment Reporting
Divisional Data
(in thousands, except for percentages)
<TABLE>
<CAPTION>
Prepaid
Wireless Roaming
Three months ended June 30, Services Teleservices Services Systems Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Revenues $9,731 $10,707 $5,733 $1,250 $27,421
Gross margin $6,104 $2,081 $919 $387 $9,491
Gross margin percentage 63% 19% 16% 31% 35%
Operating income (loss) $1,413 $475 $196 $(1,146) $938
Percentage of total revenues 15% 4% 3% (92)% 3%
1998
Revenues $4,043 $6,226 $7,059 $3,932 $21,260
Gross margin $1,396 $1,419 $1,614 $1,752 $6,181
Gross margin percentage 34% 23% 23% 45% 29%
Operating income (loss) $(2,785) $103 $793 $724 $(1,165)
Percentage of total revenues (69)% 2% 11% 18% (5)%
<CAPTION>
Prepaid
Wireless Roaming
Six months ended June 30, Services Teleservices Services Systems Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Revenues $17,603 $20,550 $11,168 $2,264 $51,585
Gross margin 10,847 4,137 1,799 666 17,449
Gross margin percentage 62% 20% 16% 29% 34%
Operating income (loss) 2,000 1,011 342 (2,338) 1,015
Percentage of total revenues 11% 5% 3% (103)% 2%
1998
Revenues $6,977 $10,815 $14,855 $8,996 $41,643
Gross margin 1,787 2,367 3,553 4,143 11,850
Gross margin percentage 26% 22% 24% 46% 28%
Operating income (loss) (5,861) (217) 1,899 2,080 (2,099)
Percentage of total revenues (84)% (2)% 13% 23% (5)%
</TABLE>
<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 29% from $21.3 million in the three
months ended June 30, 1998 to $27.4 million in the three months ended June 30,
1999 and increased 24% from $41.6 million in the six months ended June 30, 1998
to $51.6 million in the six months ended June 30,1999. During the six month
period, the growth was primarily attributable to a 141% increase in the
Company's principal business, prepaid wireless, and a 72% increase in
teleservices revenues. A 68% decline in systems revenues and an 19% decline in
roaming services revenues partially offset the growth in prepaid wireless and
teleservices.
The Company generated operating income of $938,000 during the three months ended
June 30, 1999 compared to an operating loss of $1.2 million for the same period
in the prior year. For the six months ended June 30, 1999, the Company generated
operating income of $1.0 million compared to an operating loss of $2.1 million
for the six months ended June 30, 1998. The increases in 1999 resulted from an
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.
Prepaid Wireless Services Division
Prepaid Wireless Services Division revenues increased 141% from $4.0 million in
the three months ended June 30, 1998 to $9.7 million in the three months ended
June 30, 1999 and increased 152% from $7.0 million to $17.6 million for the six
month periods ended June 30, 1998 and 1999, respectively. 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 these increases in
revenues. As of June 30, 1999 there were approximately 1.36 million prepaid
subscribers on the C2C network, compared to 487,000 subscribers at June 30,
1998, an increase of 177%.
The revenue increase excluded amounts for outages experienced on the C2C network
that resulted in performance penalties and the inability to bill certain
revenues. The Company has put controls in place to helpidentify such future
outages in advance. These controls are designed to minimize the likelihood of
future outages. The Company also invested additional capital to improve system
redundancy 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.
<PAGE>
Gross margins for the Prepaid Wireless Services Division improved from 34% of
prepaid wireless services revenues in the three months ended June 30, 1998 to
63% in the three months ended June 30, 1999 and from 26% of prepaid wireless
services revenues for the six months ended June 30, 1998 to 62% for the six
months ended June 30, 1999. Because the costs associated with the prepaid
division are generally fixed, the increase in prepaid wireless services revenues
in 1999 did not have a corresponding increase in variable costs.
In the three months ended June 30, 1999, the Prepaid Wireless Services Division
generated operating income of $1.4 million, compared to an operating loss of
$2.8 million in the three months ended June 30, 1998 and operating income of
$2.0 million for the six months ended June 30, 1999 compared to an operating
loss of $5.9 million for the six months ended June 30, 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 72% from $6.2 million in the three
months ended June 30, 1998 to $10.7 million in the three months ended June 30,
1999 and increased 90% from $10.8 million for the three months ended June 30,
1998 to $20.5 million for the three months ended June 30,1999. The significant
increases in Teleservices revenues resulted primarily from 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 three months ended June 30, 1998 and increased to $4.0 million for the
three months ended June 30, 1999 and were $2.3 million and $8.6 for the six
months ended June 30, 1998 and 1999, respectively.
Gross margins for the Teleservices Division decreased from 23% of teleservices
revenue for the three months ended June 30, 1998 to 19% for the three months
ended June 30, 1999 and decreased from 22% for the six months ended June 30,
1998 to 20% for the six months ended June 30, 1999. Although the Division
experienced a the significant increase in revenues, gross margins for the three
and six month periods ended June 30, 1999 decreased due to increased upfront
costs incurred to support growth and expansion into new call centers. These
costs include labor and related costs to train new personnel and improve their
skills to appropriate levels. In addition, the Company has outsourced certain
teleservices programs to a third party and therefore costs that would typically
be incurred as general and administrative and depreciation expenses are charged
as costs of services, thereby reducing gross margin but not necessarily
operating income.
Operating income for the Teleservices Division increased from $103,000 in the
quarter ended June 30, 1998 to $475,000 in the quarter ended June 30, 1999 and
increased from an operating loss of $217,000 for the six months ended June 30,
1998 to operating income of $1.0 million for the six months ended June 30, 1999.
These improvements in operating income resulted from the increased
<PAGE>
revenue from the Teleservices Division, which absorbed more of the fixed sales,
administrative and depreciation costs in the quarter and six months ended June
30, 1999 compared to the same periods in 1998.
Roaming Services Division
Roaming services revenues decreased 19% from $7.1 million in the second quarter
of 1998 to $5.7 million in the second quarter of 1999 and decreased 25% from
$14.9 million in the six months ended June 30, 1998 to $11.2 million for the six
months ended June 30, 1999. The decreases in roaming services revenues in 1999
were primarily attributable to fewer suspensions of inter-carrier automatic
roaming agreements and roaming customers taking advantage of prepaid wireless
offerings in the marketplace. 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 23% of roaming
services revenues in the three months ended June 30, 1998 to 16% in the three
months ended June 30, 1999 and decreased from 24% of roaming services revenues
for the six month period ended June 30, 1998 to 16% for the six month period
ended June 30, 1999. The decreases were primarily the result of reduced roaming
services revenues that could not absorb the fixed costs associated with
operating this Division.
Operating income for the Roaming Services Division decreased from $793,000 in
the three months ended June 30, 1998 to $196,000 in the three months ended June
30, 1999 and decreased from $1.9 million for the six months ended June 30, 1998
to $342,000 for the same period in 1999. The decreases in 1999 were 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 68% from $3.9 million in the second quarter of 1998
to $1.3 million in the second quarter of 1999 and decreased 75% from $9.0
million for the six months ended June 30, 1998 to $2.3 million for the same
period in 1999. The decreases were due to the decline in 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 46% of systems revenues in
the June 30, 1998 to 31% in the three months ended June 30, 1999 and decreased
from 46% of systems revenues for the six months ended June 30, 1998 compared to
29% for the six months ended June 30, 1999. The decreases resulted from
decreased systems revenue for the period that could not absorb fixed
manufacturing overhead.
<PAGE>
Operating income for the Systems Division decreased from operating income of
$724,000 in the three months ended June 30, 1998 to an operating loss of $1.1
million in the three months ended June 30, 1999 and decreased from operating
income of $2.1 million for the six months ended June 30, 1998 to an operating
loss of $2.3 million for the six months ended June 30, 1999. The decreases in
1999 were primarily a result of the low sales volume that caused lower gross
margins and absorption of fixed operating, depreciation and amortization costs.
The Systems Division has generated losses during each of the last four quarters.
In an effort to improve the results of this division, the Company has hired a
new general manager with extensive wireless industry knowledge and international
experience. The Company believes that this new general manager will help the
Division in expanding its presence in the international market, while ensuring
that corporate exposure to the under-performance of the Division is minimized.
However, should these efforts not be successful, the Systems Division may incur
additional operating losses, asset impairment charges or other write-offs that
could materially and adversely affect the Company's business, operating results
and financial condition.
Operating Data
1999 1998
% of % of
Three months ended June 30, Total Total
($ in thousands) Total Revenues Total Revenues
- -------------------------------------------------------------------------------
Total revenues $27,421 100% $21,260 100%
Engineering, research and development 1,551 6% 1,176 6%
Sales and marketing 1,664 6% 1,308 6%
General and administrative 1,794 7% 1,469 7%
Depreciation and amortization 3,544 13% 2,695 13%
1999 1998
% of % of
Six months ended June 30, Total Total
($ in thousands) Total Revenues Total Revenues
- -------------------------------------------------------------------------------
Total revenues $51,585 100% $41,643 100%
Engineering, research and development 2,814 5% 2,579 6%
Sales and marketing 3,270 6% 2,643 6%
General and administrative 3,434 7% 2,883 7%
Depreciation and amortization 6,916 13% 5,146 12%
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 were 6% percentage of total
revenue for each of the quarters ended June 30, 1998 and 1999 and decreased from
6% to 5% for the six months ended June 30, 1998 and 1999, respectively. The
decrease for the six months primarily resulted from certain
<PAGE>
engineers devoting less time to developing and building out the C2C network
infrastructure than they had in the prior year. Since these engineers began to
support 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 6% for the three and six-month periods ended June 30, 1998 and 1999. The
increases in absolute dollars for the quarter and six months ended June 30, 1999
primarily related to new marketing and business development efforts for the
Company. The Company expects to continue 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 increased from $1.5 million in the three
months ended June 30, 1998 to $1.8 million in the three months ended June 30,
1999 and increased from $2.9 million to $3.4 million for the six month periods
ended June 30, 1998 and 1999, respectively, due to increased personnel and other
related costs to support the Company's growth. General and administrative
expenses as a percentage of total revenues remained consistent at 7% for the
three and six-month periods ended June 30, 1998 and 1999.
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 remained consistent at 13% of total revenues for the three
months ended June 30, 1998 and 1999 and increased from 12% of total revenues in
the six months ended June 30, 1998 to 13% of total revenues in the six months
ended June 30, 1999. The increase in 1999 was primarily 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 most of the Division's growth was facilitated through outsourced
call center facilities.
<PAGE>
Beginning in the fourth quarter of 1998, the Company has primarily supported 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 expenditures for
telecommunications hardware and software, primarily related to new C2C features
and functionality and the continued enhancement and expansion of the C2C
network.
Impairment of Long Lived Assets
During the quarter ended June 30, 1998, the Company recorded a pre-tax charge of
$698,000 for an additional impairment loss on equipment that had been removed
from operations.
Interest income
Interest income decreased from $326,000 for the quarter ended June 30, 1998 to
$247,000 in 1999 and from $712,000 to $521,000 for the six month periods ended
June 30, 1998 and 1999, respectively. Interest income was earned from
investments of the proceeds of the Company's public offerings and was offset by
interest expense from the Company's capital leases.
Provision (benefit) for income taxes
The income tax benefit for the six months ended 1998 yielded a 15% income tax
benefit. Income tax expense of $523,000 and $684,000 for the quarter and six
month period ended June 30, 1999 yielded a 44% and 45% income tax rate,
respectively, 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 decreased from $25.6 million
at December 31, 1998 compared to $24.5 million at June 30, 1999. Net cash
provided by operations of $7.6 million for the six months ended June 30, 1999
was primarily generated from $6.9 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 $5.1 million resulted from the timing of payments and was
offset by a $4.7 million increase in accounts receivable due to the increased
sales volume in 1999.
<PAGE>
The Company's investing activities utilized $9.3 million of net cash during the
six-month period ended June 30, 1999 for purchases of property and equipment. In
addition, $2.9 million in property and equipment was leased during the same
period. These capital additions include $9.1 million for telecommunications
systems equipment and software for expansion of the Company's C2C network. 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 $569,000 in net cash during the six
months ended June 30, 1999, due to proceeds from exercise of stock options,
partially offset by payments of capital lease obligations. In addition, the
Company entered into a lease for $3.5 million of which $2.7 million was funded
as of June 30, 1999 to acquire certain telecommunication systems equipment.
The Company believes that its cash and cash equivalents, short-term investments
and the funds anticipated to be generated from operations will be sufficient to
finance the Company's operations for at least the next 12 months.
Year 2000 Readiness Disclosure
The Company has implemented Y2K enterprise-wide projects and conducted tests 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 managing its readiness by:
1) Conducting and maintaining 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
resourcesmanage 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.
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 Year 2000 ready today. To
ensure Year 2000 readiness, the Company has upgraded these systems through
vendor-provided Year 2000 patches or purchases of new systems during the normal
course of business. Core business teams for all divisions have examined internal
and external support systems including facilities,
<PAGE>
finance and human resource components. The Company has completed a comprehensive
on-site physical inventory and upgraded all of its C2C nodes, of which Year 2000
readiness was a component. The remedial action required as a result of this
inventory was minimal and was completed before June 30, 1999. In addition, BCGI
has upgraded all servers for core services to be Year 2000 ready.
As of June 30, 1999 the Prepaid, Teleservices, Roaming and Systems Divisions
have successfully completed Year 2000 readiness testing of all systems and
applications owned and operated by the Company to provide core services. Many of
these tests were conducted in conjunction with some of the Company's major
customers and telecommunications vendors. The remaining administrative systems
and applications are currently being tested for Year 2000 readiness and expect
to be Year 2000 ready by September 30, 1999.
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. These telecommunications providers have
either announced their networks as currently Year 2000 compliant or will be by
September 1999. 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 to ensure
that its products and services are Year 2000 ready. In addition, during 1998 and
through June 30, 1999 the Company has incurred and expensed approximately
$710,000 in payroll, benefit and consulting costs for dedicated resources
related to Year 2000 issues. The Company currently estimates additional costs of
approximately $230,000 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.
<PAGE>
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, roaming
customers taking advantage of prepaid wireless offerings in the marketplace and
carrier marketing of one-rate registered roaming plans to reduce roaming service
revenues, expenditures 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
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. In addition, the Company's Systems Division has experienced
operating losses during each of the last four quarters due to fewer sales of
international prepaid systems. 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
<PAGE>
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 has recently taken steps in an attempt to improve the results of the
Systems Division, which has generated losses during each of the last four
quarters. However, should these efforts not be successful, the Systems Division
may incur additional operating losses, asset impairment charges or other
write-offs that could materially and adversely affect the Company's overall
business, operating results and financial condition.
The Company 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, roaming customers taking advantage of prepaid wireless
offerings in the marketplace 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.
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. Revenues from the Company's C2C network are dependent on
the ability to retain subscribers on the network (i.e. churn rate) and there can
be no assurance that the Company's
<PAGE>
churn rate will not increase which would result in reductions in related
revenues. 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 outsourced a 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
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
<PAGE>
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
ready, 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.
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
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders
The Company held the 1999 Annual Meeting of Shareholders (the
"Annual Meeting") on May 20, 1999. At the Annual Meeting, the
following actions were taken:
1. The shareholders elected Paul J. Tobin, E.Y. Snowden, and
Brian E. Boyle as Class III Directors of the Company to serve
3 year terms. The table below outlines the voting results:
Number of Shares/Votes
----------------------
For Withheld
--- --------
Paul J. Tobin 13,709,920 54,289
E. Y. Snowden 13,708,670 55,539
Brian E. Boyle 13,709,920 54,289
In addition, Fritz von Mering, Paul Gudonis, Mark Kington,
Craig Burr, Gerald Segel and Jerrold Adams are continuing
directors of the Company.
2. The shareholders ratified the appointment of Ernst & Young LLP
as the Company's independent auditors by a vote of 13,743,676
shares of Common Stock for, 8,561 shares of Common Stock
against and 11,972 shares of Common Stock abstained.
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: August 11, 1999 By: /s/ Karen A. Walker
-------------------
Karen A. Walker
Vice President, Financial
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED March 31, 1999
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
10.50 Master Equipment Lease between Boston Communications Group and
Fleet Capital Corp. dated May 17, 1999
27 Financial Data Schedule
<PAGE>
Exhibit 10.50
MASTER EQUIPMENT LEASE AGREEMENT No. 32426
LESSOR: FLEET CAPITAL CORPORATION LESSEE: Boston Communications Group, Inc.
a Rhode Island corporation a Massachussets Corporation
Cellular Express, Inc.
a Massachussets Corporation
BCG Securities Corp.
a Massachussets Corporation
Address: 50 Kennedy Plaza Address: 100 Sylvan Road
Providence, Rhode Island Woburn, Massachusetts 01801
02903-2305
1. LEASE OF EQUIPMENT
Subject to the terms and conditions set forth herein (the "Master Lease")
and in any Lease Schedule incorporating the terms of this Master Lease (each, a
"Lease Schedule"), Lessor agrees to lease to Lessee, and Lessee agrees to lease
from Lessor, the items and units of personal property described in each such
Lease Schedule, together with all replacements, parts, additions, accessories
and substitutions therefor (collectively, the "Equipment"). As used in this
Lease, the term "Item of Equipment" shall mean each functionally integrated and
separately marketable group or unit of Equipment subject to this Lease. Each
Lease Schedule shall constitute a separate, distinct and independent lease of
Equipment and contractual obligation of Lessee. References to "the Lease," "this
Lease" or "any Lease" shall mean and refer to any Lease Schedule which
incorporates the terms of this Master Lease, together with all exhibits,
addenda, schedules, certificates, riders and other documents and instruments
executed and delivered in connection with such Lease Schedule or this Master
Lease, all as the same may be amended or modified from time to time. The
Equipment is to be delivered and installed at the location specified or referred
to in the applicable Lease Schedule. The Equipment shall be deemed to have been
accepted by Lessee for all purposes under this Lease upon Lessor's receipt of an
Acceptance Certificate with respect to such Equipment, executed by Lessee after
receipt of all other documentation required by Lessor with respect to such
Equipment. Lessor shall not be liable or responsible for any failure or delay in
the delivery of the Equipment to Lessee for whatever reason. As used in this
Lease, "Acquisition Cost" shall mean (a) with respect to all Equipment subject
to a Lease Schedule, the amount set forth as the Acquisition Cost in the Lease
Schedule and the Acceptance Certificate applicable to such Equipment; and (b)
with respect to any item of Equipment, the total amount of all vendor or seller
invoices (including Lessee invoices, if any) for such item of Equipment,
together with all acquisition fees and costs of delivery, installation, testing
and related services, accessories, supplies or attachments procured or financed
by Lessor from vendors or suppliers thereof (including items provided by Lessee)
relating or allocable to such item of Equipment ("Related Expenses"). As used in
this Lease with respect to any Equipment, the terms "Acceptance Date," "Rental
Payment(s)," "Rental Payment Date(s)," "Rental Payment Numbers," "Rental Payment
Commencement Date," "Lease Term" and "Lease Term Commencement Date" shall have
the meanings and values assigned to them in the Lease Schedule and the
Acceptance Certificate applicable to such Equipment.
2. TERM AND RENT
The Lease Term for any Equipment shall be as specified in the applicable
Lease Schedule. Rental Payments shall be in the amounts and shall be due and
payable as set forth in the applicable Lease Schedule. Lessee shall, in
addition, pay interim rent to Lessor on a pro-rata, per-diem basis from the
Acceptance Date to the Lease Term Commencement Date set forth in the applicable
Acceptance Certificate, payable on such Lease Term Commencement Date. If any
rent or other amount payable hereunder shall not be paid within 10 days of the
date when due, Lessee shall pay as an administrative and late charge an amount
equal to 5% of the amount of any such overdue payment. in addition, Lessee shall
pay overdue interest on any delinquent payment or other amounts due under the
Lease (by reason of acceleration or otherwise) from 30 days after the due date
until paid at the rate of 1 1/2% per month or the maximum amount permitted by
applicable law, whichever is lower. All payments to be made to Lessor shall be
made to Lessor in immediately available funds at the address shown above, or at
such other place as Lessor shall specify in writing. THIS IS A NOW CANCELABLE,
NON-TERMINABLE LEASE OF EQUIPMENT FOR THE ENTIRE LEASE TERM PROVIDED IN EACH
LEASE SCHEDULE HERETO.
3. POSSESSION; PERSONAL PROPERTY
No right, title or interest in the Equipment shall pass to Lessee other
than the right to maintain possession and use of the Equipment for the Lease
Term (provided no Event of Default has occurred) free from interference by any
person claiming by, through, or under Lessor. The Equipment shall always remain
personal property even though the Equipment may hereafter become attached or
affixed to real property. Lessee agrees to give and record such notices and to
take such other action at its own expense as may be necessary to prevent any
third party (other than an assignee of Lessor) from acquiring or having the
right under any circumstances to acquire any interest in the Equipment or this
Lease.
4. DISCLAIMER OF WARRANTIES
LESSOR IS NOT THE MANUFACTURER OR SUPPLIER OF THE EQUIPMENT, NOR THE AGENT
THEREOF, AND MAKES NO EXPRESS OR IMPLIED REPRESENTATIONS OR WARRANTIES AS TO ANY
MATTER WHATSOEVER, INCLUDING WITHOUT LIMITATION, THE MERCHANTABILITY OF THE
EQUIPMENT, ITS FITNESS FOR A PARTICULAR PURPOSE, ITS DESIGN OR CONDITION, ITS
CAPACITY OR DURABILITY, THE QUALITY OF THE MATERIAL OR WORKMANSHIP IN THE
MANUFACTURE OR ASSEMBLY OF THE EQUIPMENT, OR THE CONFORMITY OF THE EQUIPMENT TO
THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE ORDER RELATING THERETO, OR
PATENT INFRINGEMENTS, AND LESSOR HEREBY DISCLAIMS ANY SUCH WARRANTY. LESSOR IS
NOT RESPONSIBLE FOR ANY REPAIRS OR SERVICE TO THE EQUIPMENT, DEFECTS THEREIN OR
FAILURES IN THE OPERATION THEREOF. Lessee has made the selection of each item of
Equipment and the manufacturer and/or supplier thereof based on its own judgment
and expressly disclaims any reliance upon any statements or representations made
by Lessor. For so long as no Event of Default (or event or condition which, with
the passage of time or giving of notice, or both, would become such an Event of
Default) has occurred and is continuing, Lessee shall be the beneficiary of, and
shall be entitled to, all rights under any applicable manufacturer's or vendor's
warranties with respect to the Equipment, to the extent permitted by law.
If the Equipment is not delivered, is not properly installed, does not
operate as warranted, becomes obsolete, or is unsatisfactory for any reason
whatsoever, Lessee shall make all claims on account thereof solely against the
manufacturer or supplier and not against Lessor, and Lessee shall nevertheless
pay all rentals and other sums payable hereunder. Lessee acknowledges that
neither the manufacturer or supplier of the Equipment, nor any sales
representative or agent thereof, is an agent of Lessor, and no agreement or
representation as to the Equipment or any other matter by any such sales
representative or agent of the manufacturer or supplier shall in any way affect
Lessee's obligations hereunder.
<PAGE>
5. REPRESENTATIONS, WARRANTIES AND COVENANTS
Lessee represents and warrants to and covenants with Lessor that:
(a) Lessee has the form of business organization indicated above and is
duly organized and existing in good standing under the laws of the state listed
in the caption of this Master Lease and is duly qualified to do business
wherever necessary to carry on its present business and operations and to own
its property; (b) this Lease has been duly authorized by all necessary action on
the part of Lessee consistent with its form of organization, does not require
any further shareholder or partner approval, does not require the approval of,
or the giving notice to, any federal, state, local or foreign governmental
authority and does not contravene any law binding on Lessee or contravene any
certificate or articles of incorporation or bylaws or partnership certificate or
agreement, or any agreement, indenture, or other instrument to which Lessee is a
party or by which it may be bound; (c) this Lease has been duly executed and
delivered by authorized officers or partners of Lessee and constitutes a legal,
valid and binding obligation of Lessee enforceable in accordance with its terms;
(d) Lessee has not and will not, directly or indirectly, create, incur or permit
to exist any lien, encumbrance, mortgage, pledge, attachment or security
interest on or with respect to the Equipment or this Lease (except those of
persons claiming by, through or under Lessor); (e) the Equipment will be used
solely in the conduct of Lessee's business and will remain in the location shown
on the applicable Lease Schedule unless Lessor otherwise agrees in writing and
Lessee has completed all notifications I filings, recordings and other actions
in such new location as Lessor may reasonably request to protect Lessor's
interest in the Equipment; (f) there are no pending or threatened actions or
proceedings before any court or administrative agency which materially adversely
affect Lessee's financial condition or operations, and all credit, financial and
other information provided by Lessee or at Lessee's direction is, and all such
information hereafter furnished will be, true, correct and complete in all
material respects; and (g) Lessor has not selected, manufactured or supplied the
Equipment to Lessee and has acquired any Equipment subject hereto solely in
connection with this Lease and Lessee has received and approved the terms of any
purchase order or agreement with respect to the Equipment.
6. INDEMNITY
Lessee assumes the risk of liability for, and hereby agrees to indemnify
and hold safe and harmless, and covenants to defend, Lessor, its employees,
servants and agents from and against: (a) any and all liabilities, losses,
damages, claims and expenses (including legal expenses of every kind and nature)
arising out of the manufacture, purchase, shipment and delivery of the Equipment
to Lessee, acceptance or rejection, ownership, titling, registration, leasing,
possession, operation, use, return or other disposition of the Equipment,
including, without limitation, any liabilities that may arise from patent or
latent defects in the Equipment (whether or not discoverable by Lessee), any
claims based on absolute tort liability or warranty and any claims based on
patent, trademark or copyright infringement; (b) any and all loss or damage of
or to the Equipment; and (c) any obligation or liability to the manufacturer or
any supplier of the Equipment arising under any purchase orders issued by or
assigned to Lessor.
7. TAXES AND OTHER CHARGES
Lessee agrees to comply with all laws, regulations and governmental orders
related to this Lease and to the Equipment ancl its use or possession, and to
pay when due, and to defend and indemnify Lessor against liability for all
license fees, assessments, and sales, use, property, excise, privilege and other
taxes (including any related interest or penalties) or other charges or fees now
or hereafter imposed by any governmental body or agency upon any Equipment, or
with respect to the manufacturing, ordering, shipment, purchase, ownership,
delivery, installation, leasing, operation, possession, use, return, or other
disposition thereof or the rentals hereunder (other than taxes on or measured
solely by the net income of Lessor). Any fees, taxes or other lawful charges
paid by Lessor upon failure of Lessee to make such payments shall at Lessor' s
option become immediately due from Lessee to Lessor.
If any Lease Schedule is denominated as a "True Lease Schedule," then,
with respect to the Equipment set forth on such True Lease Schedule, Lessee
hereby covenants and agrees that Lessor shall be entitled to the following tax
benefits (the "Tax Benefits"), Lessor will be entitled to cost recovery
deductions under Section 168 of the Internal Revenue Code of 1986, as amended
(the "Code"), using a 200% declining balance method of depreciation switching to
the straight line method for the first taxable year for which such method will
yield larger depreciation deductions, and assuming a half-year convention and
zero salvage value, for the applicable recovery period for such Equipment as set
forth in the True Lease Schedule with respect to such Equipment. Lessee further
acknowledges and agrees that Lessor has entered into such True Lease Schedule on
the assumption that Lessor will be taxed throughout the Lease Term of the True
Lease Schedule at Lessor's federal corporate income tax rate existing on the
date of such Lease Schedule (the "Assumed Tax Rate"). If, for any reason
whatsoever, there shall be a loss, disallowance, recapture or delay in claiming
all or any portion of the Tax Benefits with respect to the Equipment, or there
shall be included in Lessor's gross income for Federal, state or local income
tax purposes any amount on account of any addition, modification or improvement
to or in respect of any of the Equipment made or paid for by Lessee, or if there
shall be a change in the Assumed Tax Rate (any loss, disallowance, recapture,
delay, inclusion or change being herein called a "Tax Loss"), then thirty (30)
days after written notice to Lessee by Lessor that a Tax Loss has occurred,
Lessee shall pay Lessor a lump sum amount which, after deduction of all taxes
required to be paid by Lessor with respect to the receipt of such amount, will
provide Lessor with an amount necessary to maintain Lessor's after-tax economic
yield and overall net after-tax cash flows at least at the same level that would
have been available if such Tax Loss had not occurred, plus any interest,
penalties or additions to tax which may be imposed in connection with such Tax
Loss. In lieu of paying such Tax Loss in a lump sum, Lessor may require, or upon
Lessee's request, may agree, in Lessor's sole discretion, that such Tax Loss
shall be paid in equal periodic payments over the applicable remaining Lease
Term with respect to such Equipment with each Rental Payment due and payable
with respect to such Equipment. A Tax Loss shall conclusively be deemed to have
occurred if either (a) a deficiency shall have been proposed by the Internal
Revenue Service or other taxing authority having jurisdiction, or (b) tax
counsel for Lessor has rendered an opinion to Lessor that such Tax Loss has so
occurred. The foregoing indemnities and covenants set forth in Sections 6 and 7
of this Master Lease shall continue in full force and effect and shall survive
the expiration or earlier termination of the Lease.
8. DEFAULT
Lessee shall be in default of this Lease upon the occurrence of any one or
more of the following events (each an "Event of Default"):
(a) Lessee shall fail to make any payment, of rent or otherwise, under any
Lease within 10 days of the date when due; or (b) Lessee shall fail to obtain or
maintain any of the insurance required under any Lease; or (c) Lessee shall fail
to perform or observe any covenant, condition or agreement under any Lease, and
such failure continued for 10 days after notice thereof to Lessee; or (d) Lessee
shall default in the payment or performance of any indebtedness or obligation to
Lessor or any affiliated person, firm or entity controlling, controlled by or
under common control with Lessor, under any loan, note, security agreement,
lease, guaranty, title retention or conditional sales agreement or any other
instrument or agreement evidencing such indebtedness with Lessor or such other
affiliated person, firm or entity affiliated with Lessor; or (e) any
representation or warranty made by Lessee herein or in any certificate,
agreement, statement or document hereto or hereafter furnished to Lessor in
connection herewith, including without limitation, any financial information
disclosed to Lessor, shall prove to be false or incorrect in any material
respect; or (f) death or judicial declaration of incompetence of Lessee, if an
individual; the commencement of any bankruptcy, insolvency, arrangement,
reorganization, receivership, liquidation or other similar proceeding by or
against Lessee or any of its properties or businesses, or the appointment of a
trustee, receiver, liquidator or custodian for Lessee or any of its properties
of business, or if Lessee suffers the entry of an order for relief under Title
11 of the United States Code; or the making by Lessee of a general assignment or
deed of trust for the benefit of creditors, or (g) Lessee shall default in any
payment or other obligation to any third party and any applicable grace or cure
period with respect thereto has expired; or (h) Lessee shall terminate its
existence by merger, consolidation, sale of substantially all of its assets or
otherwise; or (i) if Lessee is a privately held corporation, and more than 50%
of Lessee's voting capital stock, or effective control of Lessee's voting
capital stock, issued and outstanding from time to time, is not retained by the
holders of such stock on the date of this Lease; or (j) if Lessee is a publicly
held corporation, there shall be a change in the ownership of Lessee's stock
such that Lessee is no longer subject to the reporting requirements of the
Securities Exchange Act of 1934, or no longer has a class of equity securities
registered under Section 12 of the Securities Act of 1933; or (k) Lessor shall
determine, in its sole discretion and in good faith, that there has been a
material adverse change in the financial condition of the Lessee since the date
of this Lease, or that Lessee's ability to make any payment hereunder promptly
when due or otherwise comply with the terms of this Lease or any other agreement
between Lessor and Lessee is impaired; or (1) any event or condition set forth
in subsections (b) through (k) of this Section 8 shall occur with respect to any
guarantor or other person responsible, in whole or in part, for payment or
performance of this Lease; or (m) any event or condition set forth in
subsections (d) through (j) shall occur with respect to any affiliated person,
firm or entity controlling, controlled by or under common control with Lessee.
Lessee shall promptly notify Lessor of
<PAGE>
the occurrence of any Event of Default or the occurrence or existence of any
event or condition which, upon the giving of notice of lapse of time, or both,
may become an Event of Default.
9. REMEDIES; MANDATORY PREPAYMENT.
Upon the occurrence of any Event of Default, Lessor may, at its sole
option and discretion, exercise one or more of the following remedies with
respect to any or all of the Equipment: (a) cause Lessee to promptly return, at
Lessee's expense, any or all Equipment to such location as Lessor may designate
in accordance with the terms of Section 18 of this Master Lease, or Lessor, at
its option, may enter upon the premises where the Equipment is located and take
immediate possession of and remove the same by summary proceedings or otherwise,
all without liability to Lessor for or by reason of damage to property or such
entry or taking possession except for Lessor's gross negligence or willful
misconduct; (b) sell any or all Equipment at public or private sale or otherwise
dispose of, hold, use, operate, lease to others or keep idle the Equipment, all
as Lessor in its sole discretion may determine and all free and clear of any
rights of Lessee; (c) remedy such default, including making repairs or
modifications to the Equipment, for the account and expense of Lessee, and
Lessee agrees to reimburse Lessor for all of Lessor's costs and expenses; (d) by
written notice to Lessee, terminate the Lease with respect to any or all Lease
Schedules and the Equipment subject thereto, as such notice shall specify, and,
with respect to such terminated Lease Schedules and Equipment, declare
immediately due and payable and recov?r from Lessee, as liquidated damages for
loss of Lessor's bargain and not as a penalty, an amount equal to the Stipulated
Loss Value, calculated as of the next following Rental Payment Date; (e) apply
any deposit or other cash collateral or sale or remarketing proceeds of the
Equipment at any tim6 to reduce any amounts due to Lessor, and (f) exercise any
other right or remedy which may be available to Lessor under applicable law, or
proceed by appropriate court action to enforce the terms hereof or to recover
damages for the breach hereof, including reasonable attorneys' fees and court
costs. Notice of Lessor's intention to accelerate, notice of acceleration,
notice of nonpayment, presentment, protest, notice of dishonor, or any other
notice whatsoever are hereby waived by Lessee and any endorser, guarantor,
surety or other party liable in any capacity for any of the Lessee's obligations
under or in respect of the Lease. No remedy referred to in this Section 9 shall
be exclusive, but each shall be cumulative and in addition to any other remedy
referred to above or otherwise available to Lessor at law or in equity.
The exercise or pursuit by Lessor of any one or more of such remedies
shall not preclude the simultaneous or later exercise or pursuit by Lessor of
any or all such other remedies, and all remedies hereunder shall survive
termination of this Lease. At any sale of the Equipment pursuant to this Section
9, Lessor may bid for the Equipment. Notice required, if any, of any sale or
other disposition hereunder by Lessor shall be satisfied by the mailing of such
notice to Lessee at least seven (7) days prior to such sale or other
disposition. In the event Lessor takes possession and disposes of the Equipment,
the proceeds of any such disposition shall be applied in the following order:
(1) to all of Lessor's costs, charges and expenses incurred in taking, removing,
holding, repairing and selling or leasing the Equipment; (2) to the extent not
previously paid by Lessee, to pay Lessor for any damages then remaining unpaid
hereunder; (3) to reimburse Lessee for any sums previously paid by Lessee as
damages hereunder; and (4) the balance, if any, shall be retained by Lessor. A
termination shall occur only upon written notice by Lessor and only with respect
to such Equipment as Lessor shall specify in such notice. Termination under this
Section 9 shall not affect Lessee's duty to perform Lessee's obligations
hereunder to Lessor in full. Lessee agrees to reimburse Lessor on demand for any
and all costs and expenses incurred by Lessor in enforcing its rights and
remedies hereunder following the occurrence of an Event of Default, including,
without limitation, reasonable attorney's fees, and the costs of repossession,
storage, insuring, reletting, selling and disposing of any and all Equipment.
The term "Stipulated Loss Value" with respect to any item of Equipment
shall mean the Stipulated Loss Value as set forth in any Schedule of Stipulated
Loss Values attached to and made a part of the applicable Lease Schedule. If
there is no such Schedule of Stipulated Loss Values, then the Stipulated Loss
Value with respect to any item of Equipment on any Rental Payment Date during
the Lease Term shall be an amount equal to the sum of: (a) all Rental Payments
and other amounts then due and owing to Lessor under the Lease, together with
all accrued interest and late charges thereon calculated through and including
the date of payment; plus (b) the net present value of: (i) all Rental Payments
then remaining unpaid for the Lease Term, plus (ii) the amount of any purchase
obligation with respect to such item of Equipment or, if there is no such
obligation, then the fair market value of such item of Equipment at the end of
the Lease Term, as estimated by Lessor in its sole discretion (accounting for
the amount of any unpaid Related Expenses for such item of Equipment and, with
respect to any such item of Equipment that has been attached to or installed on
or in any other property leased or owned by Lessee, such value shall be
determined on an installed basis, in place and in use), all discounted to net
present value at a discount rate equal to the 1 -year Treasury Constant Maturity
rate as published in the Selected Interest Rates table of the Federal Reserve
statistical release H. 15(519) for the week ending immediately prior to the
original Acceptance Date for such Equipment.
Lessee is or may become indebted under or in respect of one or more
leases, loans, notes, credit agreements, reimbursement agreements, security
agreements, title retention or conditional sales agreements, or other documents,
instruments or agreements, whether now existing or hereafter arising, evidencing
Lessee's obligations for the payment of borrowed money or other financial
accommodations ("Obligations") owing to FCC, or to one or more affiliated
persons, firms or entities controlling, controlled by or under common control
with Lessor ("Affiliates"). If Lessee pays or prepays all or substantially all
of its Obligations owing to any Affiliate, whether or not such payment or
prepayment is voluntarily or involuntarily made by Lessee before or after any
default or acceleration of such Obligations, then Lessee shall pay, at Lessor's
option and immediately upon notice from Lessor, all or any part of Lessee's
Obligations owing to Lessor, including but not limited to Lessee's payment of
Stipulated Loss Value for all or any Lease Schedules as set forth in such notice
from Lessor.
10. ADDITIONAL SECURITY
For so long as any obligations of Lessee shall remain outstanding under
any Lease, Lessee hereby grants to Lessor a security interest in all of Lessee's
rights in and to Equipment subject to such Lease from time to time, to secure
the prompt payment and performance when due (by reason of acceleration or
otherwise) of each and every indebtedness, obligation or liability of Lessee, or
any affiliated person, firm, or entity controlling, controlled by, or under
common control with Lessee, owing to Lessor, whether now existing or hereafter
arising, including but not limited to all of such obligations under or in
respect of any Lease. The extent to which Lessor shall have a purchase money
security interest in any item of Equipment under a Lease which is deemed to
create a security interest under Section 1-201(37) of the Uniform Commercial
Code shall be determined by reference to the Acquisition Cost of such item
financed by Lessor. In order more fully to secure its rental payments and all
other obligations to Lessor hereunder, Lessee hereby grants to Lessor a security
interest in any deposit of Lessee to Lessor under Section 3(d) of any Lease
Schedule hereto. Such security deposit shall not bear interest, may be
commingled with other funds of Lessor and shall be immediately restored by
Lessee if applied under Section 9. Upon expiration of the term of this Lease and
satisfaction of all of Lessee's obligations, the security deposit shall be
returned to Lessee. The term "Lessor" as used in this Section 10 shall include
any affiliated person, firm or entity controlling, controlled by or under common
control with Lessor.
11. NOTICES
Any notices or demands required or permitted to be given under this Lease
shall be given in writing and by regular mail and shall become effective when
deposited in the United States mail with postage prepaid to Lessor to the
attention of Customer Accounts, and to Lessee at the address set forth above, or
to such other address as the party to receive notice hereafter designates by
such written notice.
12. USE; MAINTENANCE; INSPECTION; LOSS AND DAMAGE
During the Lease Term for each item of Equipment, Lessee shall, unless
Lessor shall otherwise consent in writing: (a) permit each item of Equipment to
be used only within the continental United States by qualified personnel solely
for business purposes and the purpose for which it was designed and shall, at
its sole expense, service, repair, overhaul and maintain each item of Equipment
in the same condition as when received, ordinary wear and tear excepted, in good
operating order, consistent with prudent industry practice (but, in no event
less than the same extent to which Lessee maintains other similar equipment in
the prudent management of its assets and properties) and in compliance with all
applicable laws, ordinances, regulations, and conditions of all insurance
policies required to be maintained by Lessee under the Lease and all manuals,
orders, recommendations, instructions and other written requirements as to the
repair and maintenance of such item of Equipment issued at any time by the
vendor and/or manufacturer thereof; (W maintain conspicuously on any Equipment
such labels, plates, decals or other markings as Lessor may reasonably require,
stating that Lessor is owner of such Equipment; (c) furnish to Lessor such
information concerning the condition, location, use and operation of the
Equipment as Lessor may request; (d) permit any person designated by Lessor to
visit and inspect any Equipment and any records maintained in connection
therewith, provided, however, that the failure of Lessor to inspect the
Equipment or to inform Lessee of any noncompliance
shall not relieve Lessee of any of its obligations hereunder; (e) if any
Equipment does not comply with the requirements of this Lease, Lessee shall,
within 30 days of written notice from Lessor, bring such Equipment into
compliance; (f) not use any Equipment, nor allow the same to be used, for any
unlawful purpose, nor in connection with any property or material that would
subject the Lessor to any liability under any state or federal statute or
regulation pertaining to the production, transport, storage, disposal or
discharge of hazardous or toxic waste or materials; and (g) make no additions,
alterations, modifications or improvements (collectively, "Improvements") to any
item of Equipment that are not readily removable without causing material damage
to such item of Equipment or which will cause the value, utility or useful life
of such item of Equipment to materially decline. If any such Improvement is made
and cannot be removed without causing material damage or decline in value,
utility or useful life (a "NonSeverable Improvement"), then Lessee warrants that
such Non-Severable Improvement shall immediately become Lessor's property upon
being installed and shall be free and clear of all liens and encumbrances and
shall become Equipment subject to all of the terms and conditions of the Lease.
All such Improvements that are not Non-Severable Improvements shall be removed
by Lessee prior to the return of the item of Equipment hereunder or such
Improvements shall also become the
<PAGE>
sole and absolute property of Lessor without any further payment by Lessor to
Lessee and shall be free and clear of all liens and encumbrances whatsoever.
Lessee shall repair all damage to any item of Equipment caused by the removal of
any Improvement so as to restore such item of Equipment to the same condition
which existed prior to its installation and as required by this Lease.
Lessee hereby assumes all risk of loss, damage or destruction for whatever
reason to the Equipment from and after the earlier of the date (i) on which the
Equipment is ordered or (ii) Lessor pays the purchase price of the Equipment,
and continuing until the Equipment has been returned to, and accepted by, Lessor
in the condition required by Section 18 hereof upon the expiration of the Lease
Term. If during the Lease Term all or any portion of an item of Equipment shall
become lost, stolen, destroyed, damaged beyond repair or rendered permanently
unfit for use for any reason, or in the event of any condemnation, confiscation,
theft or seizure or requisition of title to or use of such item, Lessee shall
immediately pay to Lessor an amount equal to the Stipulated Loss Value of such
item of Equipment. as of the next following Rental Payment Date.
13. INSURANCE
Lessee shall procure and maintain insurance in such amounts and upon such
terms and with such companies as Lessor may approve, during the entire Lease
Term and until the Equipment has been returned to, and accepted by, Lessor in
the condition required by Section 18 hereof, at Lessee's expense, provided that
in no event shall such insurance be less than the following coverages and
amounts: (a) Worker's Compensation and Employer's Liability Insurance, in the
full statutory amounts provided by law; (b) Comprehensive General Liability
Insurance including product/completed operations and contractual liability
coverage, with minimum limits of $1,000,000 each occurrence, and Combined Single
Limit Body Injury and Property Damage, $1,000,000 aggregate, where applicable;
and (c) All Risk Physical Damage Insurance, including earthquake and flood, on
each item of Equipment, in an amount not less than the greater of the Stipulated
Loss Value of the Equipment or (if availablel its full replacement value. Lessor
will be included as an additional insured and loss payee as its interest may
appear. Such policies shall be endorsed to provide that the coverage afforded to
Lessor shall not be rescinded, impaired or invalidated by any act or neglect of
Lessee. Lessee agrees to waive Lessee's right and its insurance carrier's rights
of subrogation against Lessor for any and all loss or damage.
In addition to the foregoing minimum insurance coverage, Lessee shall
procure and maintain such other insurance coverage as Lessor may require from
time to time during the Lease Term. All policies shall be endorsed or contain a
clause requiring the insurer to furnish Lessor with at least 30 days' prior
written notice of any material change, cancellation or non-renewal of coverage.
Upon execution of this Lease, Lessee shall furnish Lessor with a certificate of
insurance or other evidence satisfactory to Lessor that such insurance coverage
is in effect, provided, however, that Lessor shall be under no duty either to
ascertain the existence of or to examine such insurance coverage or to advise
Lessee in the event such insurance coverage should not comply with the
requirements hereof. In case of failure of Lessee to procure or maintain
insurance, Lessor may at its option obtain such insurance, the cost of which
will be paid by the Lessee as additional rentals. Lessee hereby irrevocably
appoints Lessor as Lessee's attorney-in-fact to file, settle or adjust, and
receive payment of claims under any such insurance policy and to endorse
Lessee's name on any checks, drafts or other instruments on payment of such
claims. Lessee further agrees to give Lessor prompt notice of any damage to or
loss of, the Equipment, or any part thereof.
14. LIMITATION OF LIABILITY
Lessor shall have no liability in connection with or arising out of the
ownership, leasing, furnishing, performance or use of the Equipment or any
special, indirect, incidental or consequential damages of any character,
including, without limitation, loss of use of production facilities or
equipment, loss of profits, property damage or lost production, whether suffered
by Lessee or any third party.
15. FURTHER ASSURANCES
Lessee shall promptly execute and deliver to Lessor such further documents
and take such further action as Lessor may require in order to more effectively
carry out the intent and purpose of this Lease. Lessee shall provide to Lessor,
within 120 days after the close of each of Lessee's fiscal years, and, upon
Lessor's request, within 45 days of the end of each quarter of Lessee's fiscal
year, a copy of its financial statements prepared in accordance with generally
accepted accounting principles and, in the case of annual financial statements,
audited by independent certified public accountants, and in the case of
quarterly financial statements certified by Lessee's chief financial officer.
Lessee shall execute and deliver to Lessor upon Lessor's request any and all
schedules, forms and other reports and information as Lessor may deem necessary
or appropriate to respond to requirements or regulations imposed by any
governmental authorities. Lessee shall execute and deliver to Lessor upon
Lessor's request such further and additional documents, instruments and
assurances as Lessor deems necessary (a) to acknowledge and confirm, for the
benefit of Lessor or any assignee or transferee of any of Lessor's rights, title
and interests hereunder (an "Assignee"), all of the terms and conditions of all
or any part of this Lease and Lessor's or Assignee's rights with respect
thereto, and Lessee's compliance with all of the terms and provisions hereof and
(b) to preserve, protect and perfect Lessor's or Assignee's right, title or
interest hereunder and in any Equipment, including, without limitation, such UCC
financing statements or amendments, corporate resolutions, certificates of
compliance, notices of assignment or transfers of interests, and restatements
and reaffirmations of Lessee's obligations and its representations and
warranties with respect thereto as of the dates requested by Lessor from time to
time. In furtherance thereof, Lessor may file or record this Lease or a
memorandum or a photocopy hereof (which for the purposes hereof shall be
effective as a financing statement) so as to give notice to third parties, and
Lessee hereby appoints Lessor as its attorney-in-fact to execute, sign, file and
record UCC financing statements and other lien recordation documents with
respect to the Equipment where Lessee fails or refuses to do so after Lessor's
written request, and Lessee agrees to r)ay or reimburse Lessor for anv filing,
recording or stamp fees or taxes arising from any such filings.
16. ASSIGNMENT
This Lease and all rights of Lessor hereunder shall be assignable by
Lessor absolutely or as security, without notice to Lessee, subject to the
rights of Lessee hereunder for the use and possession of the Equipment for so
long as no Event of Default has occurred and is continuing hereunder. Any such
assignment shall not relieve Lessor of its obligations hereunder unless
specifically assumed by the assignee, and Lessee agrees it shall not assert any
defense, rights of set-off or counterclaim against any assignee to which Lessor
shall have assigned its rights and interests hereunder, nor hold or attempt to
hold such assignee liable for any of Lessor's obligations hereunder. No such
assignment shall materially increase Lessee's obligations hereunder. LESSEE
SHALL NOT ASSIGN OR DISPOSE OF ANY OF ITS RIGHTS OR OBLIGATIONS UNDER THIS LEASE
OR ENTER INTO ANY SUBLEASE WITH RESPECT TO ANY OF THE EQUIPMENT WITHOUT THE
EXPRESS PRIOR WRITTEN CONSENT OF LESSOR.
17. LESSEE'S OBLIGATION UNCONDITIONAL
This Lease is a net lease and Lessee hereby agrees that it shall not be
entitled to any abatement of rents or of any other amounts payable hereunder by
Lessee, and that its obligation to pay all rent and any other amounts owing
hereunder shall be absolute and unconditional under all circumstances,
including, without limitation, the following circumstances: (i) any claim by
Lessee to any right of set-off, counterclaim, recoupment, defense or other right
which Lessee may have against Lessor, any seller or manufacturer of any
Equipment or anyone else for any reason whatsoever; 00 the existence of any
liens, encumbrances or rights of others whatsoever with respect to any
Equipment, whether or not resulting from claims against Lessor not related to
the ownership of such Equipment; or (iii) any other event or circumstances
whatsoever. Each Rent Payment or other amount paid by Lessee hereunder shall be
final and Lessee will not seek to recover all or any part of such payment from
Lessor for any reason whatsoever.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 17,466 17,466
<SECURITIES> 7,039 7,039
<RECEIVABLES> 23,163 23,163
<ALLOWANCES> 2,531 2,531
<INVENTORY> 3,922 3,922
<CURRENT-ASSETS> 54,023 54,023
<PP&E> 43,622 43,622
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 101,163 101,163
<CURRENT-LIABILITIES> 18,556 18,556
<BONDS> 0 0
0 0
0 0
<COMMON> 166 166
<OTHER-SE> 80,539 80,539
<TOTAL-LIABILITY-AND-EQUITY> 101,163 101,163
<SALES> 27,421 51,585
<TOTAL-REVENUES> 27,421 51,585
<CGS> 17,930 34,136
<TOTAL-COSTS> 26,483 50,570
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (247) (521)
<INCOME-PRETAX> 1,185 1,536
<INCOME-TAX> 523 684
<INCOME-CONTINUING> 662 852
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 662 852
<EPS-BASIC> 0.04 0.05
<EPS-DILUTED> 0.04 0.05
</TABLE>
