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, 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.
----------------------------------------------------------
(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 July 18, 2000 the Company had outstanding 16,742,109 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 4. Submission of Matters to a Vote of Security Holders
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>
ASSETS June 30,2000 December 31,1999
------------ ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $24,701 $21,145
Short-term investments 10,031 9,091
Accounts receivable, net of allowance for billing
adjustments and doubtful accounts of $2,351 in 2000 and $2,025 in 1999
19,165 18,546
Inventory 1,323 2,007
Deferred income taxes - 1,169
Prepaid expenses and other assets 2,143 1,758
----------- ---------
Total current assets 57,363 53,716
Property and equipment, net 47,218 44,995
Goodwill, net 2,551 2,854
Other assets 563 516
---------- -------
Total assets $107,695 $102,081
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,983 $941
Accrued expenses 16,133 15,012
Income taxes payable 545 505
Current maturities of capital lease obligations 1,933 2,378
------------ -------
Total current liabilities 20,594 18,836
Capital lease obligations, net of current maturities 2,956 3,876
Deferred income taxes 1,034 -
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, 16,843,079 and
16,699,874 shares issued in 2000 and 1999,
respectively 168 167
Additional paid-in capital 94,003 93,177
Treasury stock (101,420 shares, at cost) (673) (673)
Accumulated deficit (10,387) (13,302)
--------- -------
Total shareholders' equity 83,111 79,369
--------- -------
Total liabilities and shareholders' equity $107,695 $102,081
========= ========
<PAGE>
</TABLE>
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Prepaid wireless services $12,716 $9,731 $25,060 $17,603
Teleservices 6,857 10,707 14,522 20,550
Roaming services 4,589 5,733 9,396 11,168
System sales 1,563 1,250 1,954 2,264
-------- ------ ------- --------
25,725 27,421 50,932 51,585
Expenses:
Cost of service revenues 12,381 17,067 25,784 32,538
Cost of system revenues 687 863 1,121 1,598
Engineering, research and
development 1,860 1,551 3,667 2,814
Sales and marketing 1,437 1,664 2,985 3,270
General and administrative 1,989 1,794 3,983 3,434
Depreciation and amortization 4,554 3,544 9,004 6,916
-------- ------ -------- ---------
Total operating expenses 22,908 26,483 46,544 50,570
------- ------ -------- ---------
Operating income 2,817 938 4,388 1,015
Interest income 416 247 730 521
---------- ------- -------- ---------
Income before income taxes 3,233 1,185 5,118 1,536
Provision for income taxes 1,390 523 2,203 684
-------- -------- -------- --------
Net income per common share $1,843 $ 662 $2,915 $ 852
========= ========== ========= ========
Basic net income per common share $0.11 $ 0.04 $0.17 $0.05
========= ========= ========= ========
Weighted average common shares outstanding 16,714 16,502 16,671 16,472
========= ========= ========= ========
Diluted net income per common share $0.11 $0.04 $0.17 $0.05
========= ========= ========= ========
Weighted average common shares outstanding 17,351 17,041 17,187 17,075
========= ========= ========= ========
</TABLE>
<PAGE>
BOSTON COMMUNICATIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
Six months ended
June 30,
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $2,915 $852
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,004 6,916
Deferred income taxes 2,203 684
Changes in operating assets and liabilities:
Accounts receivable (619) (4,731)
Inventory 684 (397)
Prepaid expenses and other assets (432) (801)
Accounts payable and accrued expenses 2,163 5,141
Income taxes payable 40 (32)
------- -------
Net cash provided by operations 15,958 7,632
INVESTING ACTIVITIES
Purchases of property and equipment (10,924) (9,305)
Sales of short-term investments 5,942 9,963
Purchases of short-term investments (6,882) (9,916)
-------- -------
Net cash used in investing activities (11,864) (9,258)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and employee
Stock purchase plan 827 1,195
Repayment of capital leases (1,365) (626)
-------- -------
Net cash provided by (used in) financing activities (538) 569
Increase (decrease) in cash and cash equivalents 3,556 (1,057)
Cash and cash equivalents at beginning of period 21,145 18,523
-------- ---------
Cash and cash equivalents at end of period $24,701 $17,466
======== =======
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 consolidated financial statements, which are
prepared in accordance with generally accepted accounting principles,
have been condensed or omitted in accordance with rules of the United
States Securities and Exchange Commission. Accordingly, the Company
believes that although the disclosures are adequate to make the
information presented not misleading, the consolidated financial
statements should be read in conjunction with the footnotes to the
Company's audited consolidated financial statements contained in the
Company's Form 10-K for the fiscal year ended December 31, 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 Six Months
Ended June 30 Ended June 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
---------------------------------------------------------------------- ------------- ------------ ------------- ------------
Numerator for basic and diluted earnings per share:
Net income $1,843 $662 $2,915 $852
---------------------------------------------------------------------- ------------- ------------ ------------- ------------
Denominator:
Denominator for basic earnings per share -
weighted average shares 16,714 16,502 16,671 16,472
Effect of dilutive securities:
Employee stock options 637 539 516 603
---------------------------------------------------------------------- ------------- ------------ ------------- ------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed conversion 17,351 17,041 17,187 17,075
---------------------------------------------------------------------- ------------- ------------ ------------- ------------
Basic and diluted net income per common share
$0.11 $0.04 $0.17 $0.05
---------------------------------------------------------------------- ------------- ------------ ------------- ------------
</TABLE>
3. Inventory
Inventories consisted of the following at (in thousands):
<TABLE>
June 30, December 31,
2000 1999
------- ------
<S> <C> <C>
Purchased parts $ 793 $ 1,356
Work-in-process 530 651
------- -------
$1,323 $ 2,007
====== =======
</TABLE>
4. Segment Reporting
Divisional Data (in thousands)
---------------
<TABLE>
Prepaid
Wireless Roaming
Three months ended June 30, Services Teleservices Services Systems Eliminations Total
---------------------------- -------------- ------------------- --------------- --------------- -------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
2000
Revenues $12,716 $6,857 $4,589 $5,950 $(4,387) $25,725
Gross margin 9,042 1,882 857 2,582 (1,706) 12,657
Operating income 3,127 12 114 1,270 (1,706) 2,817
1999
Revenues $9,731 $10,707 $5,733 $2,986 $(1,736) $27,421
Gross margin 6,104 2,081 919 1,062 (675) 9,491
Operating income (loss) 1,413 475 196 (471) (675) 938
Prepaid
Wireless Roaming
Six months ended June 30, Services Teleservices Services Systems Eliminations Total
---------------------------- -------------- ------------------- --------------- --------------- -------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
2000
Revenues $25,060 $14,522 $9,396 $8,310 $(6,356) $50,932
Gross margin 17,776 3,618 1,800 3,305 (2,472) 24,027
Operating income (loss) 6,038 (141) 275 688 (2,472) 4,388
1999
Revenues $17,603 $20,550 $11,168 $5,656 $(3,392) $51,585
Gross margin 10,847 4,137 1,799 1,985 (1,319) 17,449
Operating income (loss) 2,000 1,011 342 (1,019) (1,319) 1,015
</TABLE>
<PAGE>
5. Recent Accounting Pronouncements
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation (the Interpretation). This
Interpretation clarifies how companies should apply the Accounting Principles
Board's Opinion No. 25, Accounting for Stock Issued to Employees. The
Interpretation will be applied prospectively to new awards, modifications to
outstanding awards, and changes in employee status on or after July 1, 2000,
except as follows: the definition of an employee applies to awards granted after
December 15, 1998; the Interpretation applies to modifications that reduce the
exercise price of an award after December 15, 1998; and the Interpretation
applies to modifications that add a reload feature to an award made after
January 12, 2000. At the present time, there are no awards granted by the
Company which would result in an adjustment at July 1, 2000 as a result of this
Interpretation.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
Consolidated Results of Operations
The Company's total revenues decreased 6% from $27.4 million in the three months
ended June 30, 1999 to $25.7 million in the three months ended June 30, 2000 and
decreased 1% from $51.6 million in the six months ended June 30, 1999 to $50.9
million in the six months ended June 30, 2000. During the six month period, the
decline was primarily attributable to a 29% decrease in teleservices revenues
and a 16% decline in roaming services revenues offset by a 42% increase in the
Company's principal business, prepaid wireless services. 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 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 June 30, 2000 compared to operating income of $938,000 for the same period
in the prior year. For the six months ended June 30, 2000, the Company generated
operating income of $4.4 million compared to $1.0 million for the six months
ended June 30, 1999. The increases in operating income resulted from a
significant improvement in the operating results of prepaid wireless services,
partially offset by declines in operating results from the teleservices and
systems divisions. The specifics of each division's revenues and operating
results are discussed in greater detail below:
<PAGE>
Divisional Data
(in thousands except percentages)
<TABLE>
Prepaid
Wireless Roaming
Three months ended June 30, ................ Services Teleservices Services Systems Eliminations Total
------------------------------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
2000
Revenues ........................................ $ 12,716 $ 6,857 $ 4,589 $ 5,950 $ (4,387) $ 25,725
Gross margin .................................... $ 9,042 $ 1,882 $ 857 $ 2,582 (1,706) $ 12,657
Gross margin percentage ......................... 71% 27% 19% 43% (39)% 49%
Operating income (loss) ......................... $ 3,127 $ 12 $ 114 $ 1,270 (1,706) $ 2,817
Percentage of total revenues .................... 25% 0% 2% 21% (39)% 11%
1999
Revenues ........................................ $ 9,731 $ 10,707 $ 5,733 $ 2,986 $ (1,736) $ 27,421
Gross margin .................................... $ 6,104 $ 2,081 $ 919 $ 1,062 (675) $ 9,491
Gross margin percentage ......................... 63% 19% 16% 36% (39)% 35%
Operating income (loss) ......................... $ 1,413 $ 475 $ 196 $ (471) (675) $ 938
Percentage of total revenues .................... 15% 4% 3% (16)% (39)% 3%
Prepaid
Six months ended ..................... Wireless Roaming
June 30, ......................... Services Teleservices Services Systems Eliminations Total
------------------------------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
2000
Revenues ........................................ $ 25,060 $ 14,522 $ 9,396 $ 8,310 $ (6,356) $ 50,932
Gross margin .................................... 17,776 3,618 1,800 3,305 (2,472) 24,027
Gross margin percentage ......................... 71% 25% 19% 40% (39)% 47%
Operating income (loss) ......................... 6,038 (141) 275 688 (2,472) 4,388
Percentage of total revenues .................... 24% (1)% 3% 8% (39)% 9%
1999
Revenues ........................................ $ 17,603 $ 20,550 $ 11,168 $ 5,656 $ (3,392) $ 51,585
Gross margin .................................... 10,847 4,137 1,799 1,985 (1,319) 17,449
Gross margin percentage ......................... 62% 20% 16% 35% (39)% 34%
Operating income (loss) ......................... 2,000 1,011 342 (1,019) (1,319) 1,015
Percentage of total revenues .................... 11% 5% 3% (18)% (39)% 2%
</TABLE>
<PAGE>
Prepaid Wireless Services Division
Prepaid Wireless Services Division revenues increased 31% from $9.7 million in
the three months ended June 30, 1999 to $12.7 million in the three months ended
June 30, 2000 and increased 43% from $17.6 million to $25.1 million for the six
month periods ended June 30, 1999 and 2000, respectively. The increases were
primarily due to the increased number of subscribers and greater minutes of use,
offset by a decrease in the average price per minute. As of June 30, 2000 there
were approximately 2.6 million prepaid subscribers on the C2C network, compared
to 1.4 million subscribers at June 30, 1999, an increase of 86%. The company
expects the average price per minute to continue to decline as carriers continue
to leverage our volume discounts.
Gross margins for the Prepaid Wireless Services Division improved from 63% of
prepaid wireless services revenues in the three months ended June 30, 1999 to
71% in the three months ended June 30, 2000 and from 62% of prepaid wireless
services revenues for the six months ended June 30, 1999 to 71% for the six
months ended June 30, 2000. The improvement resulted from higher revenues,
reduced telecommunications costs and management's focus on effectively managing
cost of service expenses.
Operating income for the Prepaid Wireless Services Division increased from $1.4
million in the three months ended June 30, 1999 to $3.1 million for the three
month period ended June 30, 2000 and increased from $2.0 million for the six
months ended June 30, 1999 compared to operating income of $6.0 million for the
six months ended June 30, 2000. The continued increase in revenue helped to
offset increases in operating costs that are more fixed than variable.
Going forward, management expects that the seasonal trends experienced in 1999
for subscriber additions, churn and average minutes of use will continue, with
the growth in fourth and first quarter showing much stronger usage and
subscriber trends than the slower seasons in the second and the third quarters.
Teleservices Division
In April 2000 the Company announced that it is exploring strategic business
alternatives for the Teleservices Division. This effort reflects the Company's
intention to focus its attention and resources on growing and enhancing its
prepaid wireless business.
Teleservices Division revenues decreased 36% from $10.7 million in the three
months ended June 30, 1999 to $6.9 million in the three months ended June 30,
2000 and decreased 29% from $20.5 million for the six months ended June 30, 1999
to $14.5 million for the six months ended June 30, 2000. The decreases in
Teleservices revenues primarily reflect the Company's previously announced
November 1999 closing of its Woburn, Massachusetts call center. In addition, the
decreases reflect the Company's strategy to provide its prepaid carrier
customers the option to insource their customer care.
Gross margins for the Teleservices Division increased from 19% of teleservices
revenue for the three months ended June 30, 1999 to 27% for the three months
<PAGE>
ended June 30, 2000 and increased from 20% for the six months ended June 30,
1999 to 25% for the six months ended June 30, 2000. These increases resulted
from efficiency gains as operations were terminated in two of the Company's
higher cost call centers. In addition, in October 1999, the Company cancelled
the facilities management contract for the Deland call center and acquired the
underlying leases for the call center facilities to achieve additional cost
savings. This buyout also had a positive effect on the gross margin for the six
months ended June 30, 2000, given that a portion of the related expenses are now
classified as depreciation or general and administrative expenses.
Operating income for the Teleservices Division decreased from $475,000 in the
three months ended June 30, 1999 to $12,000 in the three months ended June 30,
2000 and decreased from operating income of $1.0 million for the six months
ended June 30, 1999 to an operating loss of $141,000 for the six months ended
June 30, 2000. The operating loss in 2000 was primarily due to the reduction in
revenue resulting from the loss of two customers in 1999 and the related
restructuring of the Company's call centers, including the closing of the Woburn
call center and costs associated with transferring services to the Company's
call centers that had been previously outsourced to a third party.
Roaming Services Division
Roaming services revenues decreased 19% from $5.7 million in the three months
ended June 30, 1999 to $4.6 million in the three months ended June 30, 2000 and
decreased 16% from $11.2 million in the six months ended June 30, 1999 to $9.4
million for the six months ended June 30, 2000. The decrease in roaming services
revenues in 2000 was primarily attributable to fewer suspensions of
inter-carrier automatic roaming agreements and some cannibalization of
unregistered roaming use by prepaid wireless growth. In addition, demand for the
Company's roaming service, whose premium rates are 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 over time as compared to prior
periods.
Gross margins for the Roaming Services Division increased from 16% of roaming
services revenues in the three month and six month periods ended June 30, 1999
to 19% in the three month and six month periods ended June 30, 2000. The
increase was primarily a result of management's efforts to reduce the costs
associated with delivering unregistered roaming calls. The Company does not
anticipate that these margins will continue to improve as revenue is expected to
continue to decline.
Operating income for the Roaming Services Division decreased from $196,000 in
the three months ended June 30, 1999 to $114,000 in the three months ended June
30, 2000 and decreased from $342,000 for the six months ended June 30, 1999 to
$275,000 for the same period in 2000. The decreases in 2000 were primarily a
result of lower revenues for this division.
<PAGE>
Systems Division
In 2000, the Company began reporting interdivision revenues to the Prepaid
Services Division for voice nodes and related equipment deployed during the
year. Prior year amounts have been reclassified to permit comparison. Systems
revenues increased 97% from $3.0 million in the second quarter of 1999 to $5.9
million in the second quarter of 2000 and increased 46% from $5.7 million for
the six months ended June 30, 1999 to $8.3 million for the same period in 2000.
The increase in sales reflects increased shipments of interdivision prepaid
voice nodes along with higher international system sales for the second quarter
of 2000.
Gross margins for the Systems Division increased from 36% of systems revenues in
the three months ended June 30, 1999 to 43% in the three months ended June 30,
2000 and increased from 35% of systems revenues for the six months ended June
30, 1999 compared to 40% for the six months ended June 30, 2000. The increases
resulted from increased systems revenue for the period that allowed for greater
absorption of fixed costs.
Operating income for the Systems Division increased from an operating loss of
$471,000 in the three months ended June 30, 1999 to operating income of $1.2
million in the three months ended June 30, 2000 and increased from an operating
loss of $1.0 million for the six months ended June 30, 1999 to operating income
of $688,000 for the six months ended June 30, 2000. The increases in 2000 are
primarily a result of the increased revenues for the three and six month
periods, coupled with reduced operating costs, which were a result of the 1999
restructuring.
Operating Data
<TABLE>
2000 1999
Three months ended June 30, % of Total % of Total
(in thousands) Total Revenues Total Revenues
------------------------------------------------------------- ----------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Total revenues $25,725 100% $27,421 100%
-------------------------------------------------------------
Engineering, research and development 1,860 7% 1,551 6%
-------------------------------------------------------------
Sales and marketing 1,437 6% 1,664 6%
-------------------------------------------------------------
General and administrative 1,989 8% 1,794 7%
-------------------------------------------------------------
Depreciation and amortization 4,554 18% 3,544 13%
-------------------------------------------------------------
2000 1999
-------------------------------------------------------------
Six months ended June 30, % of Total % of Total
(in thousands) Total Revenues Total Revenues
------------------------------------------------------------- ----------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Total revenues $50,932 100% $51,585 100%
-------------------------------------------------------------
Engineering, research and development 3,667 7% 2,814 5%
-------------------------------------------------------------
Sales and marketing 2,985 6% 3,270 6%
-------------------------------------------------------------
General and administrative 3,983 8% 3,434 7%
-------------------------------------------------------------
Depreciation and amortization 9,004 18% 6,916 13%
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
<PAGE>
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 as a percentage of
total revenue from 6% to 7% for the three months ended June 30, 1999 and 2000
and increased from 5% to 7% for the six months ended June 30, 1999 and 2000,
respectively. The increases primarily resulted from additional resources devoted
to expanding and enhancing the capabilities of the Company's prepaid system.
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, 1999 and 2000 but
decreased in absolute dollars 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 increased from 7% to 8% in the three and six
month periods ended June 30, 1999 and 2000, due to increased personnel and other
related costs to support the Company's growth.
Depreciation and amortization expense
Depreciation and amortization expense includes depreciation of
telecommunications systems, furniture and equipment and leasehold improvements.
The Company provides for depreciation using the straight-line method over the
estimated useful lives of the assets, which range from three to twenty years.
Goodwill related to acquisitions is amortized over eight years. Depreciation and
amortization expense increased from 13% to 18% of total revenues for the three
and six-month periods ended June 30, 1999 and 2000. The increase in 2000 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. 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 C2C features and functionality
and the continued enhancement and expansion of the C2C network.
Interest income
Interest income increased from $247,000 for the three month period ended June
30, 1999 to $416,000 for the same period in 2000 and from $521,000 to $730,000
<PAGE>
for the six month periods ended June 30, 1999 and 2000, respectively. Interest
income was earned from investments of the proceeds of the Company's secondary
public offering and increased cash flow and was offset slightly by interest
expense from the Company's capital leases. The Company's interest income
increased in 2000 due to additional cash flow generated from operations. This
increase was partially offset by interest expense generated from additional
capital leases entered into during the second half of 1999.
Provision for income taxes
Income tax expense of $1.4 million and $2.2 million for the three and six month
periods ended June 30, 2000 yielded a 43% income tax rate, as compared to the
statutory rate of 40%. The Company's effective income tax rate is greater than
the statutory rate of 40% 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.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased to $34.7 million at
June 30, 2000 compared to $30.2 million at December 31, 1999. Net cash provided
by operations of $16.0 million for the six months ended June 30, 2000 resulted
primarily from $2.9 million of net income along with adjustments of $2.2 million
for deferred income taxes and $9.0 million for depreciation and amortization,
which resulted from the continued investment in telecommunications systems and
equipment. The increase in accounts payable and accrued expenses of $2.2 million
resulted from the timing of payments.
The Company's investing activities utilized $11.9 million of net cash during the
six-month period ended June 30, 2000, primarily for purchases of property and
equipment. These capital additions include $7.4 million for telecommunications
systems equipment and software for expansion of the Company's C2C network. The
Company also made $940,000 in purchases of short-term investments, net of sales,
during the six-month period. 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 utilized $538,000 in net cash during the six
months ended June 30, 2000, due to payments of capital lease obligations,
partially offset by proceeds from the exercise of stock options.
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 leverage volume
discounts, seasonal trends in Prepaid Wireless revenues, trend of decreased
suspensions of inter-carrier automatic roaming agreements, prepaid
cannibalization of unregistered roaming and carriers marketing one-rate
registered roaming plans that reduce unregistered roaming service revenues,
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.
The Company is currently in the process of exploring strategic business
alternatives relating to the Teleservices Division. The Company feels that this
type of transaction will allow management to focus on the core competencies and
further expand the prepaid wireless services business. However, there can be no
assurances that the Company will successfully identify a strategic partner, or
that the results of any successful strategic alliances would not have an adverse
affect on the Company's operations. Certain members of the Teleservices
management team have left the Company since the decision was made to explore
strategic alternatives and there can be no assurances that additional members of
the Teleservices Division management team will not leave the Company, either of
which could have a material adverse effect on the success of strategic
alternatives and the Company's operations.
The Company is exploring opportunities to utilize its prepaid network and
real-time rating engine for mobile and electronic 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, the services being performed for the teleservices
programs and the level of system sales. A significant decrease in business from
any of the Company's major customers, including a decrease in business due to
factors outside of the Company's control, would have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company has recently developed a distributed architecture that will enable
carriers to use the Company's proprietary software to deliver prepaid billing
inquiry in-house. To date, two customers have purchased this option. However,
<PAGE>
any revenues generated from this application will reduce the need for the
Teleservices Division to provide customer care services and therefore may reduce
Teleservices revenues in future quarters.
Certain Teleservices and Prepaid Division contracts are beyond their expiration
dates or will expire in 2000 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. 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 has experienced fluctuations in its quarterly operating results and
anticipates that such fluctuations will continue and could intensify. The
Company experienced operating losses during the first three quarters of 1998,
primarily due to expenses associated with the development and expansion of its
C2C network. During the quarter ended September 30, 1999, an operating loss was
also incurred due to the Systems Division one-time charge, system outages in the
Prepaid Division and a software problem in the Teleservices Division. In
addition, the Company's Systems Division has experienced operating losses,
excluding interdivision sales to the Prepaid Wireless Services division, during
each of the last eight 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
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 reduce the operating
expenses of the Systems Division, which has generated losses during each of the
last eight quarters, excluding interdivision sales to the Prepaid Wireless
Services division. A reorganization plan was implemented in September 1999 in an
effort to realign the division and reduce operating expenses. However, should
these reorganization 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
<PAGE>
agreements are suspended, prepaid cannibalization 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
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. 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 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 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. Teleservices
revenues associated with billing inquiry support for C2C carrier customers are a
significant portion of teleservices revenues and therefore these revenues are
dependent upon the size and growth of the C2C subscriber base. In addition, the
Company has enabled carrier customers to license software that enables C2C
customers to perform their billing inquiry in-house if they choose. This may
reduce the Company's Teleservices revenues significantly and reduce profits
accordingly.
The Company has expanded its operations rapidly, creating significant demands on
the Company's administrative, operational, development and financial personnel
<PAGE>
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. 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
are publicly traded in the U.S. All payments are received in U.S. dollars which
helps to protect the Company from the need to hedge against foreign currency
risk. While these provisions serve to protect the Company from accounts
receivable losses, there can be no assurances that systems sales to foreign
countries will not result in losses due to devaluation of foreign currencies or
other international business conditions outside of the Company's control.
The market for services to wireless carriers is highly competitive and subject
to rapid change. A number of companies currently offer one or more of the
services offered by the Company. In addition, many wireless carriers are
providing or can provide, in-house, the services that the Company offers. In
addition, the Company anticipates continued growth and competition in the
wireless carrier services industry and consequently, the entrance of new
competitors in the future. An increase in competition could result in price
reductions and loss of market share and could have a material adverse effect on
the Company's business, financial condition or results of operations.
The Company's success and ability to compete is dependent in part upon its
proprietary technology. If unauthorized copying or misuse of the Company's
technology were to occur to any substantial degree, the Company's business,
financial condition and results of operations could be materially adversely
affected. In addition, some of the software used to support the Company's
services is licensed by the Company from single vendors, which are small
corporations. There can be no assurance that these suppliers will continue to
license this software to the Company or, if any supplier terminates its
agreement with the Company, that the Company will be able to develop or
otherwise procure software from another supplier on a timely basis and at
commercially acceptable prices.
The Company's operations are dependent on its ability to maintain its computer,
switching and other telecommunications equipment and systems in effective
<PAGE>
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
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
In December 1999, the Company was named as a defendant in a suit filed in United
States District Court for the Northern District of Iowa by a former supplier
(the "Supplier") of materials to a subsidiary of the Company. A purchase
contract for an unspecified number of components was signed in 1997 and the
Supplier became the Company's sole supplier for a certain system component in
1997 and early 1998. The suit alleges that the Company breached the
confidentiality clause of the contract, misappropriated the Suppliers' trade
secrets and interfered with actual and prospective contracts with other
customers. The Supplier has requested injunctive relief and seeks actual and
punitive damages for lost profits and damage to the supplier's reputation in
excess of $1 million. In July 2000, the Supplier filed a motion to amend the
complaint by dropping the trade secret claim and the request for injunction. The
Company believes that the claim is without merit.
In December 1999, the Company was named as a defendant in a suit filed in United
States District Court for the District of New Jersey by another supplier
("Supplier II") of materials to a subsidiary of the Company. The Company's
subsidiary and Supplier II signed a contract for the subsidiary to purchase up
to 1,000 units of a certain system component with a provision giving the Company
most favored nation pricing. In February 1999, the Company stopped shipments
from Supplier II. Supplier II then invoiced the Company for $437,000 to
compensate for components not shipped. Subsequently, the Company discovered that
Supplier II had not extended most favored nation pricing to the Company over the
entire contract period. The suit against the Company alleged breach of contract,
lost profits of $350,000 and fraudulent and unfair conduct. In June 2000, the
<PAGE>
matter was settled as the Company agreed to purchase additional equipment and
pay a penalty to Supplier II. The penalty did not exceed the reserve previously
recorded by the Company.
Please refer to other legal proceedings noted in the March 31, 2000 10-Q filed
with the SEC.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held the 2000 Annual Meeting of Shareholders (the
"Annual Meeting") on May 25, 2000. At the Annual Meeting, the
following actions were taken:
1. The shareholders elected Gerald Segel, Mark J. Kington, and Rajendra Singh
as Class I Directors of the Company to serve three year terms. The table
below outlines the voting results:
Number of Shares/Votes
For Withheld
Segel 13,529,521 40,916
Mark J. Kington 13,528,150 42,287
Rajendra Singh 13,529,934 40,503
In addition, Paul J. Tobin, E.Y. Snowden, Fredrick J. von Mering, Brian E.
Boyle, Paul R. Gudonis, and Jerrold D. 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 13,540,815
shares of Common Stock for, 15,361 shares of Common Stock against
and 14,261 shares of Common Stock abstained.
3. The shareholders ratified the adoption of the Company's
2000 Stock Option Plan by a vote of 11,833,868 shares of
Common Stock for, 1,703,866 shares of Common Stock
against, and 32,703 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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
<PAGE>
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 8, 2000 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>
INDEX TO EXHIBITS
Exhibit No. Description
10.59 Boston Communications Group, Inc. 2000 Stock Option Plan
27 Financial Data Schedule
