-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HtecNeaDpyuyh7c//zayiXdYljuE2Zb0D43+//XbyucZ3a9+C1+SABP/qxpL9yr4 shlxV0PV4O5yOjmT2pz8QQ== 0000927016-98-004005.txt : 19981116 0000927016-98-004005.hdr.sgml : 19981116 ACCESSION NUMBER: 0000927016-98-004005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOSTON COMMUNICATIONS GROUP INC CENTRAL INDEX KEY: 0001012887 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 043026859 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28432 FILM NUMBER: 98747160 BUSINESS ADDRESS: STREET 1: 100 SYLVAN RD STREET 2: STE 100 CITY: WOBURN STATE: MA ZIP: 01801-1830 BUSINESS PHONE: 6174763570 MAIL ADDRESS: STREET 1: 100 SYLVAN RD STREET 2: STE 100 CITY: WOBURN STATE: MA ZIP: 01801-1830 10-Q 1 FORM 10-Q 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, 1998 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 November 4, 1998 the Company had outstanding 16,271,908 shares of common stock, $.01 par value per share. INDEX PAGE NUMBER PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Balance Sheets........................ 3 Consolidated Statements of Operations.............. 4 Consolidated Statements of Cash Flows.............. 5 Notes to Consolidated Financial Statements......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 7 Certain Factors That May Affect Future Results..... 12 PART II. OTHER INFORMATION: Item 1. Legal Proceedings.................................. 14 Item 5. Stockholder Proposals.............................. 14 Item 6. Exhibits and Reports on Form 8-K................... 14 BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
December 31, September 30, 1997 1998 ------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 23,601 $ 20,858 Short-term investments 10,103 4,178 Accounts receivable, net of allowance for billing adjustments and doubtful accounts of $1,304 in 1997 and $1,289 in 1998 12,445 19,929 Inventory 1,550 3,595 Deferred income taxes 1,564 1,564 Prepaid expenses and other assets 630 1,030 -------- -------- Total current assets 49,893 51,154 Property and equipment, net 38,087 37,622 Goodwill, net 4,067 3,612 Other assets 1,338 279 -------- -------- Total assets $ 93,385 $ 92,667 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 2,786 $ 963 Accrued expenses 7,304 10,729 Income taxes payable 466 456 Current maturities of capital lease obligations 1,127 1,109 -------- -------- Total current liabilities 11,683 13,257 Capital lease obligations, net of current maturities 1,598 772 Shareholders' equity: Preferred Stock, par value $.01 per share, 2,000,000 Shares authorized, 0 share issued and outstanding - - Common Stock, voting, par value $.01 per share, 163 163 35,000,000 shares authorized, 16,273,947 and 16,343,328 shares issued in 1997 and 1998 respectively Additional paid-in capital 91,029 91,184 Treasury stock (46,420 and 101,420 shares in 1997 and (372) (673) 1998 respectively, at cost) Accumulated deficit (10,716) (12,036) -------- -------- Total shareholders' equity 80,104 78,638 -------- -------- Total liabilities and shareholders' equity $ 93,385 $ 92,667 ======== ========
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Three months ended Nine months ended September 30, September 30, 1997 1998 1997 1998 --------- --------- -------- --------- Revenues: Roaming services $ 9,241 $ 7,097 $24,301 $21,952 Teleservices 4,369 7,514 12,534 18,329 Prepaid wireless services 2,571 5,010 4,874 11,987 System sales 1,852 3,197 8,296 12,193 ------- ------- ------- ------- 18,033 22,818 50,005 64,461 Expenses: Cost of service revenues 11,954 13,684 32,255 38,624 Cost of system revenues 814 2,105 4,549 6,958 Engineering, research and development 1,593 1,426 3,790 4,005 Sales and marketing 1,358 1,387 3,651 4,030 General and administrative 833 1,572 2,306 4,455 Depreciation and amortization 1,534 2,908 3,627 8,054 Impairment of long-lived assets - - - 698 ------- ------- ------- ------- Total operating expenses 18,086 23,082 50,178 66,824 ------- ------- ------- ------- Operating loss (53) (264) (173) (2,363) Interest income 254 331 651 1,043 ------- ------- ------- ------- Income(loss) before income taxes 201 67 478 (1,320) Provision for income taxes 100 208 241 - ------- ------- ------- ------- Net income(loss) $ 101 $ (141) $ 237 $(1,320) ======= ======= ======= ======= Net income(loss) per common share $ 0.01 $ (0.01) $ 0.02 $ (0.08) ======= ======= ======= ======= Shares used in computing net income 15,148 16,277 13,752 16,267 (loss) per common share ======= ======= ======= =======
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine months ended September 30, 1997 1998 --------- -------- OPERATING ACTIVITIES Net income(loss) $ 237 $(1,320) Adjustments to reconcile net income(loss) to net cash used in operating activities: Depreciation and amortization 3,626 8,054 Impairment of long-lived assets - 698 Changes in operating assets and liabilities: Accounts receivable (3,983) (7,484) Inventory (1,159) (2,045) Prepaid expenses and other assets (724) (129) Accounts payable and accrued expenses 1,198 1,602 Income taxes payable 154 (10) -------- ------- Net cash used in operations (651) (634) INVESTING ACTIVITIES Acquisition of business, net of cash acquired (1,398) - Purchases of property and equipment (23,056) (7,044) Sales of short-term investments 20,817 15,113 Purchases of short-term investments (5,387) (9,188) -------- ------- Net cash used in investing activities (9,024) (1,119) FINANCING ACTIVITIES Proceeds from exercise of stock options 2,227 155 Proceeds from issuance of common stock 35,792 - Purchase of treasury stock - (301) Repayment of capital leases (168) (844) -------- ------- Net cash provided by(used in) financing activities 37,851 (990) -------- ------- Increase(decrease) in cash and cash equivalents 28,176 (2,743) Cash and cash equivalents at beginning of period 923 23,601 -------- ------- Cash and cash equivalents at end of period $ 29,099 $20,858 ======== ======= Supplemental disclosure of non-cash transactions: Capital lease obligations $ 3,182 ========
BOSTON COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. 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 with the exception of the write down of assets no longer being used in the business. 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 contained in the Company's Form 10-K for the fiscal year ended December 31, 1997. 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. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Both SFAS No. 130 and SFAS No. 131 are effective for the current year. The Company believes that the adoption of these new accounting standards will not have a material impact on the Company's consolidated financial statements. 2. Earnings Per Share In accordance with Financial Accounting Standards Board (FASB) Statement No. 128, Earnings per Share, the Company is required to calculate basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities and diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Basic and diluted earnings per share are the same for the Company for the three-month and nine month periods ended September 30, 1998 and 1997. 3. Inventory Inventories consisted of the following at (in thousands):
December 31, September 30, 1997 1998 ----------- ------------ Purchased parts $1,114 $3,283 Work-in-process 127 312 Finished goods 309 - ------ ------ $1,550 $3,595 ====== ======
4. Contingencies The Company received a letter from AT&T Wireless Services (AWS) stating that it believes that it is entitled to indemnification from the Company in respect to a certain claim presently pending in a case brought against AWS. The letter asserts that the claim gives rise to an obligation on the part of the Company to indemnify AWS. No legal action has been brought against the Company and no amount of potential damages has been specified. Management believes that the claim is without merit and that the outcome is unlikely to have a material impact on the financial condition of the Company. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - SEPTEMBER 30, 1997 AND 1998 - --------------------------------------------------- Service and system revenues - --------------------------- Total revenues increased 26.7% from $18.0 million for the three months ended September 30, 1997 to $22.8 million for the three months ended September 30, 1998 and increased 29.0% from $50.0 million for the nine months ended September 30, 1997 to $64.5 million for the nine months ended September 30, 1998. Roaming service revenues decreased 22.8% or $2.1 million from the three months ended September 30, 1997 compared to the same period ended September 30, 1998 and 9.5% or $2.3 million from the nine month period ended September 30, 1997 compared to the same period in 1998. The decrease in roaming service revenues reflects the suspension for the foreseeable future of the AT&T calling card as a billing option and the stabilization in the automatic roaming agreements between carriers versus prior periods in which revenues were enhanced by the temporary suspension of certain agreements. Teleservice revenues increased 70.5% or $3.1 million and 46.4% or $5.8 million, respectively, for the three-month and nine month periods ended September 30, 1998 compared to the same periods in the prior year. The increases resulted primarily from the increases in volume and service offerings for existing carriers in addition to new teleservices programs to support carriers utilizing the Company's prepaid wireless services. Revenues generated from prepaid wireless services (C2C) increased 92.3% or $2.4 million and 145% or $7.1 million, respectively for the three and nine month periods ended September 30, 1998 as compared to the same periods in the prior year. The increases were due to the increase in the number of markets where C2C prepaid services were commercially available, and an increase in subscribers and usage in existing markets. As of September 30, 1998, fifty-six C2C network switches were deployed in various markets throughout North America compared to forty-six as of September 30, 1997. These switches were processing calls for approximately 623,000 C2C subscribers as of September 30, 1998 compared to 197,000 subscribers as of September 30, 1997. System sales increased 68.4% or $1.3 million from the three-month period ended September 30, 1997 to the same period ended September 30, 1998 and increased 47.0% or $3.9 million from the nine-month period ended September 30, 1997 to the same period ended September 30, 1998. The increases resulted primarily from the sale of systems to continue the expansion of prepaid wireless systems throughout South America. Cost of service revenues - ------------------------ Cost of service revenues consist primarily of wireless network and landline transmission costs in addition to the personnel costs associated with operator assisted roaming service calls, teleservice calls and C2C operations. Cost of service revenues decreased from 74.1% of service revenues for the three months ended September 30, 1997 to 69.9% of service revenues for the three months ended September 30, 1998. Cost of service revenues decreased from 77.5% of service revenues for the nine months ended September 30, 1997 to 73.8% of service revenues for the nine months ended September 30, 1998. The decreases in cost of service revenues as a percentage of service revenues were primarily due to significant increases in revenues generated by C2C, which better absorbed its operating costs. In addition, cost reductions were realized from lower telecommunications costs due to the negotiation of lower rates and improved call flow efficiencies. The cost of service revenues as a percentage of service revenues is expected to continue to decrease as usage on the C2C network increases. Cost of system revenues - ----------------------- Cost of system revenues represents the cost of prepaid and voice systems sold by the Company's systems division. Cost of system revenues increased from 44.0% of system revenues for the three months ended September 30, 1997 to 65.6% of system revenues for the three months ended September 30, 1998. Cost of system revenues increased from 54.2% of system revenues for the nine months ended September 30, 1997 to 57.4% of system revenues for the nine months ended September 30, 1998. Significant increases in licensing costs for certain systems that had not been reflected in sales prices were absorbed during the three-month period ended September 30, 1998. These additional costs yielded an increase in cost of system revenues as a percentage of system revenues for the three and nine-month periods ended September 30, 1998. The Company intends to reflect these particular costs in systems sales prices in future periods. System sale margins can vary from period to period based on the size, type and installation requirements of the system sold. 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 and systems. Engineering, research and development expenses decreased $167,000 or 10.5% from the three-month period ended September 30, 1997 to the same period in 1998. The decrease in expenses resulted from engineers devoting more time to support the existing C2C infrastructure rather than developing and building out the infrastructure as they had in the prior year. Engineering, research and development expenses increased $215,000 or 5.7% from the nine months ended September 30, 1997 to the nine months ended September 30, 1998. The increase was principally due to the costs, including recruiting fees and other personnel costs, associated with the Company's hiring of new personnel to support ongoing development and enhancements, implementation and deployment of the C2C Network. Engineering, research and development expenses are expected to decrease in proportion to revenues as more engineers devote time to maintaining the existing C2C infrastructure. Sales and marketing expenses - ---------------------------- Sales and marketing expenses include direct sales force and product management salaries, commissions, travel expenses, in addition to the cost of trade shows, advertising and other promotional expenses. Sales and marketing expenses increased $29,000 or 2.1% from the three months ended September 30, 1997 to the three months ended September 30, 1998 and increased $379,000 or 10.4% from the nine months ended September 30, 1997 to the nine months ended September 30, 1998. The increases in sales and marketing expenses were primarily due to additional salaries, commissions, benefits and other expenditures to augment the growth of the prepaid wireless service and teleservice businesses. General and administrative expenses - ----------------------------------- General and administrative expenses include salaries, benefits and other expenses that provide administrative support to the Company. General and administrative expenses increased $739,000 or 88.7% from the three months ended September 30, 1997 to the three months ended September 30, 1998. For the nine months ended September 30, 1998, general and administrative expenses increased $2.2 million or 95.7% from the same period in the prior year. The increases resulted principally from the addition of staff to support the Company's growth and the organization of the Company into its four operating divisions. As a result of the divisional structure, certain senior management personnel changed their functional responsibilities from marketing and engineering to general management and oversight of the divisions. Depreciation and amortization expenses - -------------------------------------- Depreciation and amortization expenses include depreciation of telecommunications systems, furniture and equipment, leasehold improvements and goodwill. The Company provides for depreciation using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Goodwill is being amortized over eight years. Depreciation and amortization expenses increased $1.4 million or 93.3% and $4.5 million or 125%, respectively, during the three and nine-month periods ended September 30, 1998 compared to the same periods in the prior year. The increases were due primarily to depreciation of additional technical equipment and software to support the expansion and continuing development of the Company's prepaid wireless network. Depreciation and amortization expenses are expected to continue to increase in future periods due to increased capital expenditures for telecommunications systems to support the continued expansion and enhancement of the C2C Network. Impairment of Long Lived Assets - ------------------------------- During the quarter ended June 30, 1998, the Company recorded a pre-tax charge of $698,000 for an additional impairment loss on equipment that had already been removed from operations. This equipment was sold in September 1998. Interest income, net - -------------------- Interest income increased $77,000 and $392,000, respectively, for the three and nine-month periods ended September 30, 1998 as compared to the same periods in the prior year. Interest income was earned on the investment of proceeds from the Company's public offerings. The increases in interest income were generated from higher average cash and investment balances than in the prior year. Provision for income taxes - -------------------------- In the quarter ended September 30, 1998, the Company recorded income tax expense of $208,000 that represents the reversal of the income tax benefit that was recorded in the first quarter of 1998. Accordingly, the Company has not recorded an income tax benefit for any net operating losses generated during 1998. This adjustment represents the Company's best estimate of its effective tax rate including the effect of any valuation allowance necessary for the year ending December 31, 1998. The Company's effective tax rate is negatively impacted by non-deductible goodwill and this is expected to continue in the foreseeable future. Liquidity and Capital Resources - ------------------------------- At September 30, 1998 the Company had cash, cash equivalents and short-term investments of $25.0 million as compared to $33.7 million at December 31, 1997. Net cash used in operating activities for the nine months ended September 30, 1998 was $634,000 and resulted from an increase in accounts receivable and inventory offset by increased depreciation expense. Accounts receivable increased $7.5 million primarily due to increased revenues from prepaid wireless services, teleservices and, to a lesser extent, extended payment terms granted for two large system sales in 1998. Inventory balances increased in order to meet customer demand for the Company's systems. These increases were offset by depreciation and amortization expense of $8.1 million primarily resulting from greater capital investment made in the Company's C2C network. Net cash used in investing activities was $1.1 million for the nine months ended September 30, 1998. Purchases of telecommunications systems equipment and software of $7.0 million were made primarily to support the expansion of the Company's C2C network. These purchases were partially offset by net proceeds of $5.9 million from sales of short-term investments. The Company anticipates that over the next 12 months, capital investments will continue to be made to support service enhancements and additional equipment to support the C2C network. Net cash used in financing activities for the nine months ended September 30, 1998 was $990,000 and consisted principally of capital lease payments and repurchases of the Company's common stock. On September 1, 1998 the Board of Directors of the Company authorized a program to repurchase up to two million shares of the Company's common stock. As of September 30, 1998, 55,000 shares had been repurchased for an aggregate price of $301,000. The Company believes that existing cash balances and funds anticipated to be generated from operations will be sufficient to finance the Company's operations and the expansion of the C2C Network for at least the next 12 months. YEAR 2000 - --------- The Company is currently implementing enterprise-wide project and test plans in order that all products, services and support systems can fully process date/time data before, during, and after midnight, December 31, 1999, recognize the year 2000 as a Leap Year and maintain existing interoperability and interfaces with other devices already in use without any modifications or changes in operations. The Company is assessing its readiness by: 1) Conducting comprehensive inventories of all hardware, software, telecommunications providers, and material third party relationships. This stage is nearly complete. 2) Seeking compliance certification from each vendor through direct communication. BCGI will conduct unit, regression, interoperability, and call flow tests wherever possible. Dedicated resources, including senior level management and paid consultants, manage this comprehensive effort which will continue into 1999. 3) Implementing test plans that are supported by doctorate level technical consultants and dedicated QA equipment and personnel that are examining multiple static and rollover date scenarios. Testing is projected to be completed by April 30, 1999. The assessment process follows a method to focus on vendors/products that are most significant to the Company's operations with the intent to maximize the lead time should any issues arise. For any systems that may need replacement, the Company will take the necessary steps to obtain, test and install qualified systems to ensure timely Year 2000 compliance. In June 1998, the Company completed the re-write, redesign and implementation of its C2C prepaid system. The Company's development team invested nearly a year to produce the necessary changes and included year 2000 compliance as part of this process. Additionally, desktop hardware and software, call distribution systems and customer service handling software are 90% compliant today. Core business teams for all divisions expect to examine all internal and external support systems including facilities, finance and human resource components. The Company is engaged in a comprehensive on-site physical inventory and upgrade of all of its C2C nodes, of which Year 2000 compliance is a component, that is projected to be completed by December 31, 1998. Any remedial action required as a result of this inventory is expected to be implemented by September 30, 1999. The Company licenses some of the software used to support the Company's services from only one source and these sources are small corporations. The Company is testing the software of such sources and expects to receive updates from these sources to achieve Year 2000 compliance. In the event that this compliance is not achieved by June 30, 1999, the Company will establish contingency plans to ensure that they will not adversely impact operations. BCGI has identified 23 UNIX servers that require upgrades; all necessary software has been obtained and the project is expected to be completed by June 30, 1999. The Company is fully dependent on the services of multiple telecommunications providers. If these providers fail to deliver these services, BCGI would be vulnerable to serious service failures and be exposed to liability to customers and third parties, including the potential for significant lost revenue. BCGI is communicating with all providers in order to assess this risk. Additionally, the Company will evaluate contingency options in the event of a failure by such providers. The Company has not currently developed any contingency plans for their services. In the event that tests reveal failures that cannot be remedied within the Company's timetable for compliance, contingency plans will be established. The Company has spent significant amounts in research and development of its C2C prepaid service system to ensure its compliance for Year 2000. In addition, through September 30, 1998 the Company has incurred and expensed approximately $90,000 in payroll, benefit and consulting costs for dedicated resources related to Year 2000 issues. The Company currently estimates additional costs of approximately $1.2 million will be incurred to resolve Year 2000 issues. The Company anticipates that the amounts and resources utilized to achieve Year 2000 compliance will not delay or reduce the resources available to complete other projects. The costs of the project to complete Year 2000 analysis and remediation are based on management's best estimates, which have been determined through numerous assumptions about future events including the availability of resources and other factors. However, there can be no assurances that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that could generate significant negative consequences include undetected errors or defects of third party hardware and software utilized in the Company's operations, noncompliance of other providers (phone service, electricity, other utilities, etc.) and other uncertainties. Although management does not expect Year 2000 issues to have a material impact on its business or results of operations, there can be no assurance that there will not be interruptions or other limitations of system functionality. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS This Quarterly Report contains forward-looking statements that involve risks and uncertainties including statements regarding costs of deploying and supporting the C2C network, decreases in cost of service revenues as a percentage of service revenues, varying margins on system sales, greater costs of depreciation and amortization and the negative impact of non-deductible goodwill on the Company's effective income tax rate. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. A number of uncertainties exist that could affect the Company's future operating results, including, without limitation, technological changes in the Company's industry, the ability of the Company to continue to support its C2C Network, the ability of the Company's carrier customers to successfully market and sell C2C prepaid wireless services, the Company's ability to retain existing customers and attract new customers, increased competition and general economic factors. Historically, a significant portion of the Company's revenues in any particular period has 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 billing options available on the roaming services platform, the services being performed for the teleservice 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 experienced fluctuations in its quarterly operating results and anticipates that such fluctuations will continue and could intensify. The Company experienced an operating loss in 1997 and the first three quarters of 1998, primarily due to expenses associated with the development and expansion of its C2C Network. The Company's quarterly operating results may vary significantly depending on a number of factors including, the timing of the introduction or acceptance of new services offered by the Company or its competitors, changes in the mix of services provided by the Company, variations in the level of system sales, changes in regulations affecting the wireless industry, changes in the Company's operating expenses, the ability to identify, hire and retain qualified personnel and general economic conditions. Due to all of the foregoing factors, it is possible that in some future quarter the Company's results of operations will be below prior results or the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected. The Company historically has provided its services almost exclusively to wireless carriers. Although the wireless telecommunications market has experienced significant growth in recent years, there can be no assurance that such growth will continue at similar rates, or at all, or that wireless carriers will continue to use the Company's services. In addition, the prepaid wireless and PCS services are relatively new services in new markets, and if these markets do not grow as expected or if the carriers in these markets do not use the Company's services, the Company's business, financial condition and results of operations would be materially and adversely affected. The Company's future success depends, in large part, on the continued use of its existing services and systems, the acceptance of new services in the wireless industry and the Company's ability to develop new services and systems that 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 addressing the particular needs of providers of such new services. There can be no assurance that the Company will be successful in developing or marketing its existing or future service offerings or systems in a timely manner, or at all. The Company is currently devoting significant resources toward the enhancement and deployment of its prepaid wireless services and systems, including continued expansion of its C2C Network. There can be no assurance that the Company will successfully support and enhance the C2C Network effectively, that the market for the Company's prepaid wireless services and systems will continue to develop, or that the Company's C2C Network will successfully support current and future growth. Furthermore, the Company has expended significant amounts of capital to support the C2C agreements it has secured with its carrier customers. Because C2C revenues are principally generated by prepaid subscriber minutes of use, the Company's C2C revenues can be impacted by the carrier's ability to successfully market and sell prepaid services. In addition, teleservices revenues associated with billing inquiry support for C2C customers have become a more significant portion of teleservices revenues and therefore these revenues are dependent upon the size and growth of the C2C subscriber base. The Company has 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, ensure the quality of the Company's services and retain key personnel, its business, financial condition and results of operations could be materially and adversely affected. 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 one source and these sources are small corporations. There can be no assurance that these suppliers will continue to license this software to the Company or, if any supplier terminates its agreement with the Company, that the Company will be able to develop or otherwise procure software from another supplier on a timely basis and at commercially acceptable prices. The Company's operations are dependent on its ability to maintain its computer, switching and other telecommunications equipment and systems in effective working order and to protect its systems against damage from fire, natural disaster, power loss, telecommunications failure or similar events. Any damage, failure or delay that causes interruptions in the Company's operations could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is actively addressing the concerns of its operations with respect to Year 2000 issues. Company management, with the assistance of consultants, is implementing an enterprise-wide project to identify systems, equipment, vendors and customers that may be affected by the Year 2000 issues and to develop a comprehensive plan to be in compliance with the Year 2000 issues prior December 31, 1999. The Company expects to make the necessary changes to be Year 2000 compliant, but there can be no assurances that the Company will adequately identify all Year 2000 issues and the associated costs and expenses in a timely manner. Also, there can be no assurance that such costs and expenses will not have a material adverse effect on the Company's business, financial condition and results of operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings On November 20, 1997, AT&T Wireless Services (AWS) sent a letter to the Company stating that it believes that it is entitled to indemnification from the Company in respect to a certain claim presently pending in a case brought by Ronald A. Katz Technology Licensing, L.P. and MCI Telecommunications Corporation against AT&T Corp. in the United States District Court for the Eastern District of Pennsylvania. The letter asserts that Count 13 of the complaint, which relates in part to prepaid wireless service, gives rise to an obligation on the part of the Company to indemnify AWS with respect to that count. The amount in question is undetermined. The suit against AT&T Corp. was filed on July 8, 1997. The contract between the Company and AWS pursuant to which the Company presently provides prepaid services to AWS, and upon which AWS's claim for indemnification is based, was not executed until October 15, 1997. For this and other reasons, the Company believes that the claim is without merit. No legal action has been brought against the Company. Item 5. Stockholder Proposals Proposals of stockholders intended to be presented at the Company's 1999 Annual Meeting of Stockholders must be received at the Company's principal executive offices not later than December 17, 1998 in order to be included in the Company's proxy statement and form of proxy relating to the 1999 Annual Meeting. Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange Act of 1934, as amended, if a stockholder who intends to present a proposal at the 1999 Annual Meeting of Stockholders does not notify the Company of such proposal on or prior to March 3, 1999, then management proxies would be allowed to use their discretionary voting authority to vote on the proposal when the proposal is raised at the Annual Meeting, even though there is no discussion of the proposal in the 1999 proxy statement. 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 5, 1998 By: /s/ Fritz von Mering -------------------- Fritz von Mering Vice President, Finance and Administration (Principal Financial and Accounting Officer and Duly Authorized Officer) BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 INDEX TO EXHIBITS ----------------- Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS DEC-31-1998 DEC-31-1998 JUL-01-1998 JAN-01-1998 SEP-30-1998 SEP-30-1998 20,858 20,858 4,178 4,178 19,929 19,929 1,289 1,289 3,595 3,595 49,590 49,590 37,622 37,622 0 0 92,667 92,667 13,257 13,257 0 0 0 0 0 0 163 163 78,475 78,475 92,667 92,667 22,818 64,461 22,818 64,461 15,789 45,582 23,082 66,824 0 0 0 0 (331) (1,043) 67 (1,320) 208 0 (141) (1,320) 0 0 0 0 0 0 (141) (1,320) (0.01) (0.08) (0.01) (0.08)
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