10-Q 1 0001.txt 10-Q FILING FOR BOSTON COMMUNICATIONS GROUP, INC. 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. 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 BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) ASSETS June 30,2000 December 31,1999 ------------ ---------------- 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 ========= ========
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Three months ended Six months ended June 30, June 30, 2000 1999 2000 1999 ---- ---- ---- ---- 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 ========= ========= ========= ========
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six months ended June 30, 2000 1999 ---- ---- 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 =======
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): Three Months Six Months Ended June 30 Ended June 30 2000 1999 2000 1999 ---- ---- ---- ---- ---------------------------------------------------------------------- ------------- ------------ ------------- ------------ 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 ---------------------------------------------------------------------- ------------- ------------ ------------- ------------
3. Inventory Inventories consisted of the following at (in thousands): June 30, December 31, 2000 1999 ------- ------ Purchased parts $ 793 $ 1,356 Work-in-process 530 651 ------- ------- $1,323 $ 2,007 ====== =======
4. Segment Reporting Divisional Data (in thousands) --------------- Prepaid Wireless Roaming Three months ended June 30, Services Teleservices Services Systems Eliminations Total ---------------------------- -------------- ------------------- --------------- --------------- -------------------- ------------ 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 ---------------------------- -------------- ------------------- --------------- --------------- -------------------- ------------ 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
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: Divisional Data (in thousands except percentages) Prepaid Wireless Roaming Three months ended June 30, ................ Services Teleservices Services Systems Eliminations Total ------------------------------------------------- -------- -------- -------- -------- -------- -------- 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 ------------------------------------------------- -------- -------- -------- -------- -------- -------- 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%
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 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. 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 2000 1999 Three months ended June 30, % of Total % of Total (in thousands) Total Revenues Total Revenues ------------------------------------------------------------- ----------- -------------- ------------- --------------- 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 ------------------------------------------------------------- ----------- -------------- ------------- --------------- 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% ------------------------------------------------------------- -------------------------------------------------------------
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 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. 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, 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 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 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 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 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 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) INDEX TO EXHIBITS Exhibit No. Description 10.59 Boston Communications Group, Inc. 2000 Stock Option Plan 27 Financial Data Schedule