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 September 30, 2000 or
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-28432
Boston Communications Group, Inc.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3026859
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sylvan Road, Woburn, Massachusetts 01801
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(Address of principal executive offices)
Registrant's telephone number, including area code: (617)692-7000
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(Former name, former address, former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of October 19, 2000, the Company had outstanding 16,872,700 shares of common
stock, $.01 par value per share.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Certain Factors That May Affect Future Results
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
September 30, December 31,
ASSETS 2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $32,005 $21,145
Short-term investments 8,071 9,091
Accounts receivable, net of allowance for billing
Adjustments and doubtful accounts of $1,987 in 2000 and $2,025 in 1999
18,484 18,546
Inventory 1,034 2,007
Deferred income taxes - 1,169
Prepaid expenses and other assets 1,106 819
Assets held for sale 3,758 3,819
----- -----
Total current assets 64,458 56,596
Property and equipment, net 43,194 39,365
Goodwill 2,399 2,854
Other assets 1,030 516
----- ---
Total assets $111,081 $99,331
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,227 $941
Accrued expenses 17,889 15,012
Income taxes payable 493 505
Current maturities of capital lease obligations 1,186 1,676
------- -------
Total current liabilities 20,795 18,134
Capital lease obligations, net of current maturities 1,046 1,828
Deferred income taxes 2,557 -
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, 16,967,040 and
16,699,874 shares issued in 2000 and 1999,
respectively 170 167
Additional paid-in capital 94,863 93,177
Treasury stock (101,420 shares, at cost) (673) (673)
Accumulated deficit (7,677) (13,302)
------- -------
Total shareholders' equity 86,683 79,369
--------- -------
Total liabilities and shareholders' equity $111,081 $99,331
========= =======
</TABLE>
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Prepaid wireless services $13,940 $9,115 $39,000 $26,718
Roaming services 4,556 5,956 13,952 17,124
System sales 4,803 2,673 13,113 8,329
Eliminations (3,450) (1,718) (9,806) (5,110)
------- ------- ------- - -------
19,849 16,026 56,259 47,061
Expenses:
Cost of service revenues 7,470 8,292 21,862 23,591
Cost of system revenues 449 728 1,570 2,326
Cost of system revenues-one-time charge - 1,824 - 1,824
Engineering, research and development 2,155 1,619 5,822 4,403
Sales and marketing 1,101 1,387 3,915 4,441
General and administrative 1,658 1,716 5,092 4,667
Depreciation and amortization 4,197 3,370 11,911 9,198
----- ----- ------ -----
Total operating expenses 17,030 18,936 50,172 50,450
------ ------ ------ ------
Operating income (loss) 2,819 (2,910) 6,087 (3,389)
Interest income 499 227 1,312 748
--- --- ----- ---
Income (loss) from continuing operations before income taxes
3,318 (2,683) 7,399 (2,641)
Provision (benefit) for income taxes 1,194 (598) 2,951 (512)
----- ----- ----- -----
Income (loss) from continuing operations 2,124 (2,085) 4,448 (2,129)
Income (loss) from discontinued operations 586 (129) 1,177 767
--- ----- ----- ---
Net income (loss) $2,710 $(2,214) $5,625 $(1,362)
====== ======== ====== ========
Basic net income (loss) per common share:
Continuing operations $0.13 $(0.12) $0.27 $(0.13)
===== ======= ===== =======
Net income (loss) $0.16 $(0.13) $0.34 $(0.08)
===== ======= ===== =======
Weighted average common shares
outstanding 16,803 16,575 16,715 16,506
====== ====== ====== ======
Diluted net income (loss) per common share:
Continuing operations $0.12 $(0.12) $0.26 $(0.13)
===== ======= ===== =======
Net income (loss) $0.15 $(0.13) $0.32 $(0.08)
===== ======= ===== =======
Weighted average common shares
outstanding 17,750 16,575 17,370 16,506
====== ====== ====== ======
</TABLE>
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
Nine months ended
September 30,
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Income (loss)from continuing operations $4,448 $ (2,129)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 11,911 9,198
Deferred income taxes 3,726 -
One-time charge - 1,824
Changes in operating assets and liabilities:
Accounts receivable 62 (7,198)
Inventory 973 1,343
Prepaid expenses and other assets (801) (495)
Accounts payable and accrued expenses 3,163 6,882
Income taxes payable (12) (10)
---- ----
23,470 7,591
Net income from discontinued operations 1,177 767
Adjustments to reconcile income from discontinued
operations:
Cash flow related to results of operations
61 746
--- -- ---
1,238 1,513
----- -----
Net cash provided by operations 24,708 9,104
INVESTING ACTIVITIES
Purchases of property and equipment (15,285) (12,273)
Sales of short-term investments 9,879 13,897
Purchases of short-term investments (8,859) (15,822)
------- --------
Net cash used in investing activities (14,265) (14,198)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and employee
stock purchase plan 1,689 1,497
Repayment of capital lease obligations (1,272) (1,070)
------- -------
Net cash provided by financing activities 417 427
--- ---
Increase (decrease) in cash and cash equivalents 10,860 (4,667)
Cash and cash equivalents at beginning of period 21,145 18,523
------ ------
Cash and cash equivalents at end of period $32,005 $ 13,856
======= ========
Supplemental disclosure of non-cash transactions:
Capital lease obligations 3,641
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared by
the Company, without audit, and reflect all adjustments, which in the
opinion of management are necessary for a fair statement of the results
of the interim periods presented. All adjustments were of a normal
recurring nature. Certain information and footnote disclosures normally
included in the annual consolidated financial statements, which are
prepared in accordance with generally accepted accounting principles,
have been condensed or omitted in accordance with rules of the United
States Securities and Exchange Commission. Accordingly, although the
Company believes that the disclosures are adequate to make the
information presented not misleading, the consolidated financial
statements should be read in conjunction with the footnotes to the
Company's audited consolidated financial statements contained in the
Company's Form 10-K for the fiscal year ended December 31, 1999.
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 per share (in thousands, except per share amounts):
<TABLE>
Three months ended Nine months ended
September 30, September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
------------------------------------------------------------------ -------------- -------------- -------------- --------------
Numerator for basic and diluted earnings per share:
Income (loss) from continuing operations $2,124 $(2,085) $4,448 $(2,129)
------------------------------------------------------------------ -------------- -------------- -------------- --------------
Income (loss) from discontinued operations $586 $(129) $1,177 $767
------------------------------------------------------------------ -------------- -------------- -------------- --------------
Net income $2,710 $(2,214) $5,625 $(1,362)
(loss)
------------------------------------------------------------------ -------------- -------------- -------------- --------------
Denominator:
Denominator for basic earnings per share - weighted average
shares 16,803 16,575 16,715 16,506
Effect of dilutive securities: Employee stock
options 947 - 655 -
-------------------------------------------------------------------------------- -------------- -------------- --------------
Denominator for diluted earnings per share - adjusted weighted 17,750 16,575 17,370 16,506
average shares and assumed conversion
-------------------------------------------------------------------------------- -------------- -------------- --------------
Basic net income (loss) per common share:
Income (loss) from continuing operations $0.13 $(0.12) $0.27 $(0.13)
Income (loss) from discontinued operations $0.03 $(0.01) $0.07 $0.05
------------------------------------------------------------------ -------------- -------------- -------------- --------------
Net income $0.16 $(0.13) $0.34 $(0.08)
(loss)
------------------------------------------------------------------ -------------- -------------- -------------- --------------
Diluted net income (loss) per common share:
Income (loss) from continuing operations $0.12 $(0.12) $0.26 $(0.13)
Income (loss) from discontinued operations $0.03 $(0.01) $0.06 $0.05
------------------------------------------------------------------ -------------- -------------- -------------- --------------
Net income (loss) $0.15 $(0.13) $0.32 $(0.08)
------------------------------------------------------------------ -------------- -------------- -------------- --------------
</TABLE>
3. Inventory
Inventories consisted of the following at (in thousands):
September 30, December 31,
2000 1999
----- -----
Purchased parts $631 $ 1,356
Work-in-process 403 651
---- ----
$1,034 $ 2,007
====== =======
4. Segment Reporting
Divisional Data
(in thousands, except for percentages)
<TABLE>
Prepaid
Three months ended Wireless
September 30, Services Roaming Services Systems Eliminations Total
------------------------------------- --------------- ----------------- -------------- -------------------- --------------
<S> <C> <C> <C> <C> <C>
2000
Revenues $13,940 $4,556 $4,803 $(3,450) $19,849
Gross margin 10,190 836 2,246 (1,342) 11,930
Gross margin percentage 73% 18% 47% (39)% 60%
1999
Revenues $9,115 $5,956 $2,673 $(1,718) 16,026
Gross margin 5,677 1,102 (929) (668) 5,182
Gross margin percentage 62% 19% (35)% (39)% 32%
Prepaid
Nine months ended Wireless
September 30, Services Roaming Services Systems Eliminations Total
------------------------------------- --------------- ----------------- -------------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
2000
Revenues $39,000 $13,952 $13,113 $(9,806) $56,259
Gross margin 28,454 2,636 5,551 (3,814) 32,827
Gross margin percentage 73% 19% 42% (39)% 58%
1999
Revenues $26,718 $17,124 $8,329 $(5,110) $47,061
Gross margin 17,350 2,901 1,057 (1,988) 19,320
Gross margin percentage 65% 17% 13% (39)% 41%
</TABLE>
<PAGE>
5. Discontinued Operations
On November 1, 2000, the Company sold the assets of its Teleservices
Division for approximately $15 million, including a $13 million cash
payment and assumption by the acquirer of $2 million in liabilities. Under
the terms of the agreement, the Company will also receive additional cash
payments, totaling up to an additional $20 million over the next five
years, based upon achievement of predetermined revenue targets. As a
result of this sale, the Teleservices Division results have been recorded
as discontinued operations for all periods presented.
The assets held for sale include $4.1 million in equipment and software
and $1.8 million in prepaid assets and deposits, offset by $2.1 million in
liabilities.
The operating results from the discontinued operation were as follows:
<TABLE>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $7,528 $10,088 $22,050 $30,638
====== ======= ======= =======
Income (loss) before tax 916 (214) 1,953 1,279
Income tax (benefit) expense 330 (85) 776 512
--- ---- --- ---
Net income (loss) from
discontinued operations $586 $(129) $1,177 $767
==== ====== ====== ====
</TABLE>
6. One-Time Charge
In September 1999, the Company recorded a one-time charge of $1.8 million
as a result of the reorganization of the Systems Division. The charge
primarily relates to expenses associated with the reorganization of the
Systems Division including inventory write-downs and severance.
7. Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial
Statements. SAB 101 clarifies the SEC staff's views on applying generally
accepted accounting principles to revenue recognition in financial
statements. In March 2000, the SEC issued an amendment, SAB 101A, which
deferred the effective date of SAB 101. In June 2000, the SEC issued an
amendment, SAB 101B, which again deferred the effective date of SAB 101.
The Company will adopt SAB 101 in the fourth quarter of 2000 in accordance
with the amendment. The adoption of this SAB is not expected to have a
significant impact on the Company's financial statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Consolidated Results of Operations
The Company's total revenues increased 24% from $16.0 million to $19.8 million
for the three months ended September 30, 1999 and 2000, and increased 20% from
$47.1 million to $56.3 million for the nine months ended September 30, 1999 and
2000. During the three and nine month periods, the increases were primarily
attributable to 53% and 46% increases in prepaid wireless services revenues,
which were partially offset by decreases in roaming services revenues in both
periods. In 2000, for internal financial reporting purposes, the Company began
reporting interdivision sales from the Systems Division to the Prepaid Services
Division for voice nodes, known as V-nodes, and related equipment shipped during
the quarter. Prior year amounts have been reclassified to permit comparison.
The Company generated operating income of $2.8 million during the three months
ended September 30, 2000 compared to an operating loss of $2.9 million for the
same period in the prior year. For the nine months ended September 30, 2000, the
Company generated operating income of $6.1 million compared to an operating loss
of $3.4 million for the same period in 1999. The operating loss during the three
and nine months ended September 30, 1999 included the $1.8 million one-time
charge due to the reorganization of the Systems Division. The increases in
operating income resulted from improvements in the operating results of prepaid
wireless services and, to a lesser extent, to improvements in the Systems
Division. The specifics of each division's revenues and gross margins are
discussed in greater detail below.
Prepaid Wireless Services Division
Prepaid Wireless Services Division revenues increased 53% from $9.1 million to
$13.9 million for the three months ended September 30, 1999 and 2000, and
increased 46% from $26.7 million to $39.0 million for the nine month periods
ended September 30, 1999 and 2000. The increases were primarily due to increased
numbers of subscribers and greater minutes of use, partially offset by a
decrease in the average price per minute as carriers avail themselves of our
volume discounts. As of September 30, 2000, there were approximately 2.7 million
prepaid subscribers on the Company's Intelligent Voice Services Network, known
as the IVSN, compared to 1.5 million subscribers at September 30, 1999, an
increase of 80%. The Company expects the average price per minute to continue to
decline as carriers grow their subscriber bases and continue to utilize our
volume discounts.
Gross margins for the Prepaid Wireless Services Division improved from 62% to
73% for the three months ended September 30, 1999 and 2000, respectively, and
<PAGE>
from 65% to 73% for the nine months ended September 30, 1999 and 2000. The
improvement resulted from higher revenues compared to our relatively fixed cost
structure, along with continued management focus on effectively managing
expenses.
Going forward, we expect that the seasonal trends experienced in 1999 and 2000
for subscriber additions, churn and average minutes of use will continue, with
the growth in fourth and first quarters showing stronger usage and subscriber
trends than the slower seasons in the second and the third quarters. These
trends have typically resulted from increased carrier focus on holiday marketing
promotions.
Roaming Services Division
Roaming services revenues decreased 23% from $6.0 million to $4.6 million for
the three months ended September 30, 1999 and 2000, and decreased 18% from $17.1
million to $14.0 million for the nine months ended September 30, 1999 and 2000.
The decrease in roaming services revenues in 2000 was primarily attributable to
fewer suspensions of inter-carrier automatic roaming agreements and some
reduction of unregistered roaming use attributable to prepaid wireless growth.
In addition, demand for the Company's roaming service, whose premium rates are
essentially determined by the Company's carrier customers, has been adversely
affected by an increase in lower priced 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 at similar rates over time as compared to prior periods.
Gross margins for the Roaming Services Division decreased from 19% to 18% of
roaming services revenues for the three months ended September 30, 1999 and
2000, and increased from 17% to 19% of roaming services revenues for the nine
month period ended September 30, 1999 and 2000. The decrease in the three-month
period was due to lower revenues while the fixed costs associated with the
service remained. The increase for the nine-month period was primarily a result
of management's efforts to reduce costs. The Company anticipates that margins
will continue to decrease as revenues decline.
Systems Division
In 2000, the Company began reporting interdivision revenues (which are
eliminated in consolidation) to the Prepaid Services Division for V-nodes and
related equipment deployed during the year. Prior year amounts have been
reclassified to permit comparison. Systems revenues increased 78% from $2.7
million in the third quarter of 1999 to $4.8 million in the third quarter of
2000 and increased 58% from $8.3 million for the nine months ended September 30,
1999 to $13.1 million for the same period in 2000. The increase in revenues
reflects increased shipments of interdivision prepaid V-nodes along with higher
sales of systems and recurring services both domestically and internationally.
Interdivision revenues for the three and nine-month periods were significantly
higher in 2000 due to the continued build-out of the IVSN to support the
<PAGE>
Company's growth in prepaid, particularly related to the Company's agreement
signed in October, 2000 with Verizon Wireless to support their National Prepay
Wireless program.
Gross margins for the Systems Division increased from (35%) to 47% of systems
revenues for the three months ended September 30, 1999 and 2000, and increased
from 13% to 42% of systems revenues for the nine months ended September 30, 1999
and 2000. The increases resulted from management's continued execution on its
1999 reorganization to reduce costs and generate additional recurring revenue
allowing for greater absorption of fixed costs.
Operating Data
<TABLE>
2000 1999
------------------------------------------------------------
Three months ended September 30, % of Total % of Total
($ in thousands) Total Revenues Total Revenues
------------------------------------------------------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total revenues $19,849 100% $16,026 100%
------------------------------------------------------------
Engineering, research and development 2,155 11% 1,619 10%
------------------------------------------------------------
Sales and marketing 1,101 6% 1,387 9%
------------------------------------------------------------
General and administrative 1,658 8% 1,716 11%
------------------------------------------------------------
Depreciation and amortization 4,197 21% 3,370 21%
------------------------------------------------------------
2000 1999
------------------------------------------------------------
Nine months ended September 30, % of Total % of Total
($ in thousands) Total Revenues Total Revenues
------------------------------------------------------------ ------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues $56,259 100% $47,061 100%
------------------------------------------------------------
Engineering, research and development 5,822 10% 4,403 9%
------------------------------------------------------------
Sales and marketing 3,915 7% 4,441 9%
------------------------------------------------------------
General and administrative 5,092 9% 4,667 10%
------------------------------------------------------------
Depreciation and amortization 11,911 21% 9,198 20%
------------------------------------------------------------
</TABLE>
Engineering, research and development expenses
Engineering, research and development expenses primarily include the salaries
and benefits for software development and engineering personnel associated with
the development, implementation and maintenance of existing and new services.
Engineering, research and development expenses increased from 10% to 11% of
revenues for the quarters ended September 30, 1999 and 2000, and from 9% to 10%
of revenues for the nine months ended September 30, 1999 and 2000. The increases
primarily resulted from additional resources devoted to expanding and enhancing
the features and functionality of the Company's IVSN, in addition to resources
devoted to the Company's m-commerce initiatives.
Sales and marketing expenses
<PAGE>
Sales and marketing expenses include direct sales, marketing and product
management salaries, commissions, travel and entertainment expenses, as well as
the cost of trade shows and other promotional expenses. As a percentage of total
revenues, sales and marketing expenses decreased from 9% to 6% for the
three-month periods ended September 30, 1999 and 2000, and decreased from 9% to
7% for the nine month periods ended September 30, 1999 and 2000 as the Company's
sales organization was reorganized into one group to centralize efforts and
leverage resources.
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 decreased from 11% of total revenues for the
three months ended September 30, 1999 to 8% in the three months ended September
30, 2000. General and administrative expenses decreased from 10% to 9% of total
revenues for the nine-month periods ended September 30, 1999 and 2000. The
decreases resulted from a fairly consistent level of costs and personnel to
support the Company's operations while revenues were increasing.
Depreciation and amortization expense
Depreciation and amortization expense includes depreciation of
telecommunications systems, furniture and equipment, building 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
twenty years. Goodwill related to acquisitions is amortized over eight years.
Depreciation and amortization expense remained consistent at 21% of total
revenues for the three months ended September 30, 1999 and 2000 and increased
from 20% to 21% of total revenues for the nine months ended September 30, 1999
and 2000. The increase in absolute dollars for both periods was primarily due to
the depreciation of additional technical equipment and software to support the
rapid expansion and enhancement of the Company's IVSN. Depreciation and
amortization expenses are expected to increase in absolute dollars due to
increased capital expenditures for telecommunications hardware and software,
primarily related to new prepaid features and functionality and the continued
enhancement and expansion of the IVSN.
Interest income
Interest income increased from $227,000 to $499,000 for the three months ended
September 30, 1999 and 2000, and from $748,000 to $1.3 million for the nine
month periods ended September 30, 1999 and 2000. The Company's interest income
increased in 2000 due to significant increases in cash flow generated from
operations.
Provision (benefit) for income taxes
<PAGE>
Income tax expense of $1.2 million and $3.0 million for the three and nine month
periods ended September 30, 2000 yielded a 36% and 40% income tax rate. The
Company's effective income tax rate for the three months ended September 30,
2000 is less than the statutory rate of 40% due the Company's reversal of a
valuation allowance against the deferred tax asset resulting from improved
profitability. The Company's effective income tax rate is expected to be
approximately 36% in the fourth quarter of 2000 and may be greater than 40% in
2001 and beyond due to the continued impact of non-deductible goodwill.
Income (loss) from discontinued operations
Income (loss) from discontinued operations increased from a loss of $129,000 for
the three months ended September 30, 1999 to income of $586,000 in the three
months ended September 30, 2000 and from income of $767,000 to $1.2 million for
the nine month periods ended September 30, 1999 and 2000. The increase in 2000
was due to improved cost management of the Teleservices business and to a
software problem that caused the loss in the three-month period ended September
30, 1999.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased from $30.2 million
at December 31, 1999 compared to $40.1 million at September 30, 2000. Net cash
provided by operations of $24.7 million for the nine months ended September 30,
2000 resulted primarily from $4.4 million of net income, along with adjustments
of $3.7 million for deferred income taxes and $11.9 million in depreciation and
amortization expense. The increase in accounts payable and accrued expenses of
$3.2 million resulted from the timing of payments.
The Company's investing activities utilized $14.3 million of net cash during the
nine-month period ended September 30, 2000, primarily for purchases of property
and equipment. These capital additions include $13.4 million for
telecommunications systems equipment and software for expansion of the Company's
IVSN. The Company also made $1.0 million in purchases of short-term investments,
net of sales, during the nine-month period. The Company anticipates that over
the next 12 months it will continue to make significant capital investments for
additional equipment, to improve redundancy and reliability, and enhanced
feature capabilities for the IVSN.
The Company's financing activities generated $417,000 in net cash during the
nine months ended September 30, 2000, due to proceeds from the exercise of stock
options, partially offset by payments of capital lease obligations.
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.
<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 continued
decline in Prepaid Wireless per minute rates as carriers grow their subscriber
bases and utilize volume discounts, seasonal trends in Prepaid Wireless
revenues, the trend of decreased suspensions of inter-carrier automatic roaming
agreements, prepaid services causing the reduction of unregistered roaming and
carriers marketing one-rate registered roaming plans that reduce unregistered
roaming service revenues, greater costs of depreciation and amortization,
increased interest income 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,
system outages that reduce revenues, technological changes in the Company's
industry, the ability of the Company to continue to successfully support its
IVSN, the ability of the Company's carrier customers to successfully continue to
market and sell prepaid wireless services, the Company's ability to retain
existing customers and attract new customers, increased competition and general
economic factors.
The Company recently announced that it has sold the assets of its Teleservices
Division. This transaction includes potential additional cash payments to the
Company of up to $20 million through 2005, based upon achievement of
predetermined revenue targets. There can be no assurances that the Company will
be successful in meeting the predetermined revenue targets or earning any of the
potential cash payments available.
The Company is exploring opportunities to utilize its IVSN and real-time rating
engine for mobile commerce applications. There can be no assurances that there
will be a market for the Company's network in the mobile and electronic commerce
arena. In addition, this market could be so highly competitive that the Company
may not be able to enter it.
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, 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.
Certain Prepaid Wireless services contracts are beyond their expiration dates or
will expire in 2000 and 2001. 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
<PAGE>
could be materially adversely affected. Also, when and if the contracts are
renewed, some contractual rates per minute will likely be lower than in previous
years. If subscriber levels begin to drop off, revenue could be adversely
affected due to these lower rates.
The Company's quarterly operating results may vary significantly depending on a
number of factors, including the timing of the introduction or acceptance of new
services offered by the Company or its competitors, changes in the mix of
services provided by the Company, variations in the level of system sales,
changes in regulations affecting the wireless industry, changes in the Company's
operating expenses, the ability to identify, hire and retain qualified personnel
and general economic conditions. Due to all of the foregoing factors, it is
possible that in some future quarter the Company's results of operations will be
below prior results or the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially and adversely affected.
In September 1999 a reorganization plan was implemented in an effort to realign
the Systems Division and reduce operating expenses. The Company has reduced
operating expenses and stabilized the division, however there can be no
assurances that the Systems Division's operating losses (excluding
Interdivisional revenues) will not increase or that it may incur 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, prepaid services replacement of unregistered roaming
use increases and carriers offer more one-rate roaming plans. In addition,
prepaid wireless 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
<PAGE>
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 IVSN. The Company has experienced network outages
that result in reductions in revenue in accordance with penalty clauses
contained in certain of the Company's carrier customer contracts. If the
Company's future efforts to avoid outages are unsuccessful, such outages can
result in additional lost revenue for the Company and 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.
There can be no assurance that the Company will successfully support and enhance
the IVSN 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 IVSN will successfully support current and future growth.
Furthermore, the Company has expended significant amounts of capital to support
the prepaid agreements it has secured with its carrier customers. Because
prepaid revenues are principally generated by prepaid subscriber minutes of use,
these revenues can be effected by the carrier's ability to successfully market
and sell prepaid services. Revenues from the Company's IVSN are dependent on the
ability to retain subscribers on the network and there can be no assurance that
the Company's churn rate (percentage of total subscribers that terminate service
on the network) will not increase, which may result in reductions in subscriber
growth and related revenues.
The Company has expanded its operations rapidly, creating significant demands on
the Company's administrative, operational, development and financial personnel
and other resources. Additional expansion by the Company may further strain the
Company's management, financial and other resources. There can be no assurance
that the Company's systems, procedures, controls and existing space will be
adequate to support expansion of the Company's operations. If the Company's
management is unable to manage growth effectively, the quality of the Company's
services, its ability to retain key personnel and its business, financial
condition and results of operations could be materially and adversely affected.
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.
All products sold to international customers are priced in U.S. dollars. In
addition, many Systems Division customers are multinational corporations that
<PAGE>
are publicly traded in the U.S. All payments are received in U.S. dollars which
helps to protect the Company from the need to hedge against foreign currency
risk. While these provisions serve to protect the Company from accounts
receivable losses, there can be no assurances that systems sales to foreign
countries will not result in losses due to devaluation of foreign currencies or
other international business conditions outside of the Company's control.
The market for services to wireless carriers is highly competitive and subject
to rapid change. A number of companies currently offer one or more of the
services offered by the Company. In addition, many wireless carriers are
providing or can provide, in-house, the services that the Company offers. In
addition, the Company anticipates continued growth and competition in the
wireless carrier services industry and consequently, the entrance of new
competitors in the future. An increase in competition could result in price
reductions and loss of market share and could have a material adverse effect on
the Company's business, financial condition or results of operations.
The Company's success and ability to compete are dependent in part upon its
proprietary technology. In addition, the Company continues to defend its
proprietary technology against patent infringement litigation, including the
Freedom Wireless lawsuit. If patent infringement judgments are entered against
the Company or 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.
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
Item 3. Quantitative and Qualitative Disclosures About Market Risk
All products sold to international customers are priced 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
<PAGE>
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.
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
On March 30, 2000, Freedom Wireless, Inc. filed a complaint in the United States
District Court for the Northern District of California against the Company and a
number of wireless carriers, including customers and former customers of the
Company. The suit alleges that the defendants infringe a patent held by Freedom
Wireless, Inc. and seeks injunctive relief and damages in an unspecified amount.
The Company does not believe it infringes this patent and believes that it has
meritorious defenses to the action.
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
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: November 8, 2000 By: /s/ Karen A. Walker
-------------------
Karen A. Walker
Vice President, Financial
Administration and Chief
Financial Officer (Principal
Financial Accounting Officer and
Duly Authorized Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
10.60 Cummings Lease Amendment
27 Financial Data Schedule
